March 14, 2019

Observations from Teaching Global Construction Law and Practice

Carl J. Circo, Ben J. Altheimer Professor of Legal Advocacy, University of Arkansas School of Law, Division 11

This past summer, I enjoyed teaching a course on global construction practice to a group of U.S. law students in a study abroad program at Downing College, Cambridge University. In the course, we often compared common U.S. domestic practices with alternative practices followed in other countries or in cross-border transactions with global participants. Along the way, I began to wonder why some practices common in global projects seem to be rarely used in the United States. While obvious differences in risks and circumstances explain many of the most striking distinctions, others seem to me much harder to dismiss on those bases alone.

When I first proposed writing on this topic, Tom Dunn, in his editorial capacity, most delicately pointed out that my idea seemed a bit heavy on scholarly ruminations and correspondingly light on the kinds of practical implications for which we know and love Under Construction. I must admit that, as an academic whose experience with international projects is both limited and aging, my fascination with the comparative features I covered over the summer reflects an interest more pedagogic than practical. Many of the distinctions offered new ways to explore with my students at Downing College the fundamental topics I regularly cover in the construction law course I teach back home. Drawing on a transnational perspective refreshed my teaching approach. Keeping in mind Tom’s admonition, however, I will divide my comments here into two segments—first, an abbreviated version of my purely academic observations and second, reflections on four global practices that strike me as potentially adaptable to domestic transactions. Forum colleagues who also teach construction law courses might find something useful in Part I, and perhaps some of that discussion will resonate with Division 8 members. My primary undertaking here, however, simply asks why selected global practices noted in Part II have not had much impact within the U.S. construction industry.

Part I – Ivory tower observations

In the spirit of keeping this segment tolerably brief, I begin by simply listing several considerations that received much attention in my summer course but that do not directly implicate specific domestic practices.[1] In the first place, we considered the forces that account for the ongoing globalization of the construction industry. This category covers such factors as competitive advantages of firms in different parts of the world, opportunities for multi-national firms and joint ventures, technical demands of ever-increasing complexity, advances in communications, and the impact of international lending institutions (we especially discussed the World Bank procurement guidelines). A related focus reviewed the effects of globalization, which include increased efficiencies for complex projects and greater standardization of contract terms and procurement procedures.[2] Some of the most striking observations concerned devices for managing political risks, currency problems, and other non-commercial risks peculiar to certain international projects.[3] These proved especially interesting to review with the students, but they have no practical applications for domestic projects. Naturally, we also spent some time on the U.S. Foreign Corrupt Practices Act and similar constraints under the laws of other countries and standards promoted by international-development agencies. Finally, we touched on some of the most relevant international treaties, conventions, and uniform laws. From a comparative law perspective, this was among the most interesting aspects of the course. There is, in effect, no body of international construction law, but several international organizations have promulgated guidelines, model laws, and other resources that govern, or at least influence, international and transnational contracts and the decisions of international arbitration and other dispute-resolution processes.

We studied other developments that appear both domestically and globally but that seemed noteworthy either because they are more prominent or more advanced in the international sphere. For example, public-private partnerships originated internationally and only became common in the United States much later. Global structures for P3s seem to still be in the forefront.[4] As traditional funding sources for many domestic infrastructure and other public projects continue to face challenges, it seems wise for participants in the U.S. construction industry to maintain an interest in the international P3 experience. A similar case exists for tracking international project financing practices. We also contrasted the civil law’s tolerance of contractual penalties for default to the common law’s more restrictive rules on liquidated damages.

Among the comparative assessments my students and I discussed this summer, I want to single out for special mention the contrasting perspectives on contract theory that distinguish two alternative approaches. This reflects, but is not necessarily confined to, the divide between common law and civil law traditions. In broad strokes, contract law as developed under the common law, and especially as applied in the United States, features a commitment to freedom of contract and encourages lawyers to negotiate relatively comprehensive contracts that attempt to anticipate and manage every foreseeable contingency. Contract law in civil law countries derives much more from codified controls over contract terms. Whereas our concept of contract encourages the parties to document express terms in great detail and merely tolerates relatively limited intrusions by way of legislatively and judicially implied duties and terms, the civil law of obligations reflects a more pervasive system of implied terms. Pedagogically, these alternative theoretical frameworks present an especially interesting comparative law opportunity in the classroom. For at least two reasons, however, I see little practical benefit in dwelling on this topic here. First, the common law perspective operates pervasively as an entrenched feature of contracting practices in the U.S. construction industry. No amount of comparative analysis will alter how U.S. lawyers negotiate and draft construction industry contracts or how U.S. courts and arbitrators interpret those contracts. Second, global practices seem, at least to some extent, to be moving toward the common law concept of contract.

Part II – Selected global practices with potential domestic applications

As I explored global construction law and practice with my students, four transnational features especially caused me to wonder about their potential for domestic projects. Each of these are known in the United States, but none has been incorporated into standard industry documents or customs. I do not mean to suggest that U.S. lawyers should promote any one of these as a routine matter. I simply ask whether participants in domestic projects might adopt or adapt one or more of them to advantage in certain limited circumstances. In the subsections below, I describe these practices at a conceptual level and briefly suggest why I think they may merit greater attention domestically. Because the precise form that any of these devices may take in the global construction industry may vary significantly depending on the location, project delivery system, or other circumstances involved, I deal with each only in a most general way, ignoring many variations and details that would be important to any particular situation. I offer each observation as nothing more than a thought experiment—what if we tried something like this as an alternative to traditional practice in the U.S?

On-demand performance security

The U.S. construction industry primarily relies on surety bonds to secure obligations of contractors and subcontractors. The surety backs up the principal’s obligations but is only liable if the principal defaults. Additionally, the surety can generally raise any defenses available to the principal. In international projects, contractors and key subcontractors often must provide letters of credit, bank guarantees, or other demand obligations that permit the owner (called the employer in some standard international contracts) or other beneficiary to call on the security simply by making a demand on the issuer.[5] Under one version, the beneficiary triggers the payment obligation merely by making a written demand. Under an alternative, the beneficiary must assert in writing that a default or other triggering event exists. In either case, even though a wrongful demand may constitute a breach of the underlying agreement for which the security was given, the issuer of the demand instrument must pay, leaving the substantive dispute for later proceedings between the parties to the underlying contract. This device could be attractive to owners with strong bargaining leverage because it provides a quicker and far more certain (even if temporary) remedy than a standard surety bond. What is just as important, a demand obligation may provide more cost-effective assurance from both parties’ perspectives because, at least as often used internationally, owners accept letters of credit or other demand obligations equal to a relatively small percentage of the total contract price (often as little as 5-10%) rather than for the full contract amount. Assuming a fair dispute-resolution process, some form of demand obligation could prove to be a superior method of providing security for at least some domestic projects.

Dispute adjudication boards

Over the years, both domestic and international practices have tended to refine and expand stepped ADR procedures by which the parties refer disputes to true neutrals (as contrasted to the project architect or engineer) as a condition precedent to arbitration or litigation. Domestically, especially in large, complex projects, the parties may designate in advance a dispute resolution board (DRB) to make a non-binding recommendation or advisory opinion on a dispute. Along these same lines, the AIA General Conditions provide the option to refer disputes to an “initial decision maker” agreed upon by the owner and the contractor in advance. These arrangements generally contemplate a relatively informal initial dispute resolution process, and each party retains the right to take the matter to arbitration following the recommendation or initial decision. Some standardized contracts used on international projects provide for a somewhat more robust variation on this structure using a decision-making body commonly called a dispute adjudication board (DAB).[6]  The DAB may have relatively broad powers (when compared to a DRB or an initial decision maker) to investigate and resolve disputes whenever they arise, including authority to require the parties to provide documents and information. The DAB may also have the right to establish such dispute-resolution procedures as the board deems appropriate, which may result in a hearing that is highly expedited yet relatively formal (sometimes including representation by legal counsel). Moreover, although a party dissatisfied with the decision may submit the matter to arbitration, the DAB’s decision is immediately binding on the parties, who must implement it unless and until changed by subsequent arbitration. Additionally, the contract may provide for the DAB’s decision to be used in any ultimate arbitration. Perhaps the most significant feature is that the process implies that the parties anticipate that a DAB decision will normally be final and binding.

Prior approval of subcontractors

Under some internationally accepted contracting standards and forms, the owner or the owner’s design professional routinely becomes involved with selecting subcontractors to a greater extent than in the U.S.[7] For example, one commonly used FIDIC form provides that the contractor must give notice to the project engineer of proposed subcontractors and requires the engineer’s consent before the contractor retains the subcontractors. Another approach calls for the contractor and an owner’s consultant to agree on a list of potential bidders for specialty work and establishes a process for collaboratively selecting subcontractors. By contrast, the more common approach in the U.S. merely permits the owner or the owner’s representative to raise reasonable objections to subcontractors the contractor selects. Owners who, on their own or through consultants, can assess the qualifications of key subcontractors may benefit from reviewing and approving proposed subcontractors before the general contractor makes its selections. U.S. contractors would, no doubt, raise legitimate objections to any practice along these lines. In the first place, to interject the owner or the owner’s agent into the process in this way challenges our notion of the contractor-subcontractor relationship. Moreover, contractors would either insist on having the owner’s approval before submitting a bid or proposal or would expect a contractual mechanism to adjust the contract price if the owner will only approve subcontractors more expensive than those the contractor wishes to use. Requiring the owner’s prior approval of subcontractors would present special challenges when the arrangement calls for lump-sum pricing at an early stage. But in other situations, and especially for owners with an appropriate level of experience and relative bargaining power, the practice may merit consideration.

The nominated subcontractor

The “nominated subcontractor” practice involves the owner in an even more significant way than the prior-approval process.[8]  This device allows the owner to select certain key subcontractors by directly negotiating with them for their services and then requires the contractor to engage the nominated subcontractors. Under another variation, the owner may even enter into contracts with specialty trades and then assign those contracts to the contractor. Among other things, this allows the owner to negotiate pricing, warranty, and other terms directly with subcontractors. As with the prior-approval process, the nominated subcontractor practice conflicts with our traditional concept of the contractor-subcontractor relationship. It would not, however, necessarily present the same pricing problems because the price the owner negotiated for the specialty work would be incorporated into the pricing under the owner-contractor agreement. I wonder whether nominated subcontractors might be attractive to the same kinds of owners who could also benefit from having prior-approval rights over subcontracts. The practice might be especially appropriate for owners who have significant experience or relationships with particular subcontractors or those who retain consultants qualified to provide advice on certain specialty trades. I note, however, that the nominated subcontractor practice seems to be used only on a relatively limited basis even in those countries where it is a recognized option. The practice apparently has fallen into some disfavor in the U.K., where it was once more common. I became especially interested in nominated subcontractors because I use a case study in my regular construction law class based on a lawsuit in which the general contractor unsuccessfully argued that the owner should be liable for significant delays attributable to subcontractors whom the owner pressured the general to use.[9]  

Conclusion

I am grateful for the opportunity I had to explore comparative construction law this summer. My students learned the fundamentals of construction law in an especially interesting context. The experience will enrich my teaching now that I am back home and preparing to offer my regular construction law course this coming semester. I would be grateful for feedback on any of these points from Forum colleagues who teach construction law or who practice internationally.

Endnotes

1.  For those interested in a general introduction to global construction practices, I recommend these resources: Julian Bailey, Construction Law (2d ed. 2016) (a three-volume set on U.K. construction law); Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner and O’Connor on Construction Law, Chapter 20 (Westlaw 2018); Steven G. M. Stein, Construction Law, Chapters 21 (including appendices) and 22 (Lexis 2018); and the Forum’s own publication, International Construction Law (Wendy Kennedy Venoit, et al. eds., 2009).

2. See generally Stein, supra note i, at ¶¶ 21.06 & 21.07.

3. See generally Bruner & O’Connor, supra note i, at § 20:2.

4. See Stein, supra note i, at ¶ 22.01.

5. See Stein, supra note i, at ¶22.04[3][e].

6. See Stein, supra note i, at ¶ 22.09.

7. See generally Stein, supra note i, at ¶ 22.07.

8. See generally Stein, supra note i, at ¶ 3.02.

9. Weitz Co. v. MacKenzie House, LLC, 665 F.3d 970 (2012).  This decision records the ultimate resolution of the dispute, but for my case study I use some of the pretrial and trial documents available on Westlaw.