The underlying legal relationships in Partnering Agreements

United Kingdom

Peter Long looks at underlying legal relationships in Partnering Arrangements

Introduction

Partnering is essentially a management approach. Its purpose is to
encourage the recognition of shared objectives, open behaviour and the
development of new ideas; to provide a framework for continuous improvements
in productivity and efficiency. Its great benefit lies in its flexibility
and in the dynamic nature of the relationship between the parties. This is
hardly the stuff of which the formality of legally binding contracts are
made. Lawyers enter here at their peril.

Charters and waivers
Nevertheless, the parties often wish to record their aims and objectives on
paper as a way of demonstrating their commitment to the partnering
philosophy. A 'charter' or 'mission statement' may be drawn up setting out
the principles to which the parties will work. For example

  • to work together in a spirit of trust and co-operation;
  • to use innovative engineering and project management techniques;
  • to strive constantly for continuous improvement in all areas.


Praiseworthy statements of intent these may be, but they are so generalised


and unspecific that if they were part of a legal agreement, their very


uncertainty could give rise to disputes.

In order to avoid this difficulty the parties often decide that the charter
principles should be contained in a non binding statement of intent, leaving
the underlying formal contracts unaltered. The theory is that in the event
that relationships deteriorated and the partnering arrangement collapsed,
the parties should be able to rely upon their strict legal rights under the
contracts. However, it is possible that in implementing the partnering
arrangement the parties may be taken to have waived their strict legal
rights under their contracts. The drawing up and signature of the charter
could lay the basis for just such a waiver. Although it would be prudent to
confirm in the charter that it is not intended to have any legal effect,
this in itself may not be sufficient.

Incentives

Nevertheless, there may, in some circumstances be a need for a legally
binding 'partnering agreement'. For example, the parties may wish to have
an agreement which would allocate between the parties an appropriate share
of financial gains and losses measured against targets set out in the
agreement. The targets set would need to be clearly defined and the
financial consequences of beating or exceeding those targets expressly spelt
out. The targets need not be purely financial ones; they may be time or
quality or safety related. The dates when an account will be taken and when
payments will actually be made should also be clearly specified.

If the incentives are appropriately structured they should help to encourage
the partnering approach. Further, if the parties wish to include in their
agreement the generalised statements of intent of the kind referred to
above, the agreement could state that the payment mechanism is the only way
in which the parties can have any financial rights or liabilities towards
each other in relation to the performance or otherwise of these general
statements of intent. This avoids the danger of allegations being made of
breach of the generalised statements which could result in the kind of
disputes which partnering intends to avoid.

Underlying contracts

If there is to be a partnering agreement it will be an 'umbrella' type
agreement which lies over one or more traditional contracts or consultancy
appointments. It is important to ensure that the interface between the
partnering agreement and the underlying contracts is consistent and
workable. Set out below are some specific areas where this arises.

Payments
A cost-reimbursable or open-book basis of payment is often regarded as most
appropriate to partnering. If this approach is used cost components will
need to be clearly identified in the contract and the client given the right
to audit such costs. Where rates are used the client will need to have
satisfied itself that these are both realistic and reasonable. There is no
reason in principle, however, why lump sum contracts cannot be used although
they tend to be associated with the adversarial relationships which
partnering is intended to avoid. If lump sum contracts are used the
dovetailing between payments under these and the incentive payments under
the partnering agreement will need to be looked at very carefully.

Liquidated damages

Most traditional construction contracts provide for liquidated damages to be
payable by the contractor if the works are not completed by the contractual
date for completion, as extended under the contract. Again, the dovetailing
of such a provision with the partnering agreement will be extremely
important. There are a number of possible approaches ranging from removal
of the liquidated damages and extensions of time clauses from the underlying
contract and dealing with delay issues by the payment terms in the
partnering agree-ment, to maintaining the contractual provisions with more
limited provisions included in the partnering agree-ment. It is essential
that the parties have a clear under-standing of the options before they
enter into contract.

Quality

In the context of quality, the role of the project management team in a
partnering arrangement, representing as it does all the parties to the
arrangement, can be crucial. The partnering agreement may identify the
members of the project management team and contain provisions setting out
the functions of the members and requiring regular meetings, reports etc.
If it does, the underlying construction contracts need to describe the
powers of the project management team. Will it be given power to instruct
rework, replacement of defective materials and testing of materials and
workmanship? Or will this power remain with the consultant under the
contract?

If the project management team are involved this may not only have cost and
time consequences which will need to be addressed but may also affect
liability issues. The client will obviously be concerned to ensure that
liability for defects is not blurred in any way as a result of the
partnering arrangement. For this reason, the partnering agreement may
contain a provision that notwithstanding the involvement of the project
management team each participant will be ultimately responsible for the
performance of its own contract which underlies the partnering agreement.
The construction contract itself may include a provision reflecting this
arrangement to the effect that the contractor remains responsible for
workmanship, materials etc notwithstanding any inspection by the project
management team.

Disputes

A key element in the flexibility of the partnering arrangement will be a
procedure for resolving differences of view. Consideration could be given
to including a mechanism for resolving disputes arising under both the
partnering agreement and the underlying contracts in the partnering
agreement itself. The procedure could provide for 'escalation' of problem
solving at different levels, for example starting at the first level
managers then going to senior management level and ending with board
directors. There would be a time limit within which the dispute had to be
resolved at each level failing which it would move up to the next level. If
this failed disputes requiring rapid resolution could be referred to an
expert to determine in an extremely short timescale, perhaps on an interim
basis, pending resolution by arbitration or in the courts.

The freedom of the parties to adopt such a dispute resolution procedure may
however be severely constrained by the effects of S.108 of the Housing
Grants, Construction and Regeneration Act 1996, which came into force on 1st
May last year. The Section stipulates that the parties to a 'construction
contract' (as defined) have a statutory right to refer a dispute under the
contract directly to adjudication.

The Section applies to most construction contracts and consultancy
appointments for construction projects but it does not apply to supply only
contracts. There is an exception for 'joint ventures' which it may be
possible to argue includes partnering agreements but many of the underlying
contracts will be caught by the Section.

Confidentiality versus free flow of information

Finally, partnering arrangements will not work unless there is a free flow
and exchange of information between participants. For example, the
'charter' may require the participants to disclose their management plans,
programmes, and technical and costs information relating to the project.
Some information may, however, be regarded as commercially confidential by
one of the parties. To avoid disputes as to disclosure, it will be
essential to identify as clearly as possible by category what information is
to be shared; and to encourage disclosure it will be important to seek to
protect disclosed information by including a confidentiality clause in the
partnering agreement.

Legal side-effects

Although partnering is seen as essentially a non-legal management matter, it
can have unexpected legal side effects. If the relationship between the
parties breaks down, they may find that they cannot fall back on their
traditional contracts as easily as they think. There may, in any event, be
some aspects of the partnering relationship which the parties do wish to
commit to in a legal sense. If there are, these will need to be set out in
a legal agreement which will have to be carefully dovetailed with the
underlying agreement.