legal matters regarding engineering agreements › sites › default › files › 20150323... ·...

September 2014

Legal Matters regarding Engineering AgreementsClive RumseyPartner - Head of Litigation

Hogan Lovells

Introduction – Legal Issues

• From a legal perspective I will canvass the following issues:-

1. The contracts that Engineers enter into with their clients;

2. The common problems as to why engineers end up in disputes; and

3. The procedures once disputes have arisen.

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1. Standard Form Contracts Applicable to Engineers

• PROCSA Civil Engineering Contract; and

• CESA Model Professional Services Agreement (latest issue August 2014)

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Important clauses in the PROCSA Civil Engineering Contract

– Definition of Scope of Work• "1.1.21 SCOPE OF WORK: The portion of the works for which the

consultant is required to provide services as stated in the schedule.

– Appointment• 3.1 The client appoints the consultant who accepts the

appointment to carry out the services for the scope of work stated in this agreement.

– Consultant's Obligations• 6.1 The consultant shall generally provide the services reasonably

required set out in Annexure B in relation to the scope of work in the schedule.

• 6.2 The consultant shall exercise reasonable professional skill, care and diligence in the performance of the obligations in terms of this agreement

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Clauses in PROCSA

– Professional Fees• 9.1 The client agrees to pay the consultant such professional fees

as stated and apportioned in the schedule for the services rendered in respect of the scope of work.

– Adjustment of Professional Fees and Disbursements• 12.1 The client and the consultant acknowledge and agree that the

professional fees and disbursements are based on the following parameters:

…• 12.1.2 Scope of work;• 12.1.3 Services;• Etc.

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Clauses in PROCSA

• Limitation of Liability– 7.1 Notwithstanding 6.0, the consultant shall specifically not be liable for

the following:

• 7.1.1 Acts or omissions of other consultants

• 7.1.2 Construction methods, techniques, sequences and procedures employed by the contractor(s)

• 7.1.3 Any material, component, system, specialist design or workmanship failing to perform according to the claims of manufacturers, suppliers, contractors or subcontractors

• 7,1.4 Reasonable deviations from any estimates of costs and/or budgets

• 7.1.5 Failure by the contractor or the client to perform in terms of the contract

• 7.1.6 Delays due to causes beyond the consultant's control

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Clauses in PROCSA

• Limitation of Liability (Continued)• 7.1.7 Acts or omissions of third parties

• 7.2 The maximum amount of compensation payable by the consultant to the client in respect of liability is limited to an amount selected in the schedule. If no selection is made in the schedule, then the maximum compensation shall be twice the fees payable by the client to the consultant in terms of 9.1. The client waives all claims against the consultant exceeding the stated maximum amount of compensation payable

• 7.3 The liability of the consultant shall be limited to defects notified within a period of five (5) years, which period shall commence on the earlier of:

• 7.3.1 Ninety (90) days after practical or other equivalent completion of the works

• 7.3.2 Completion by the consultant of the services

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Clauses in PROCSA

• Limitation of Liability (Continued)• 7.3.3 Suspension, postponement, expiry, cancellation or

termination of all the contracts• 7.3.4 Cancellation or termination of this agreement

• 7.4 The client hereby indemnifies the consultant against all claims by third parties which arise out of or in connection with services rendered under this agreement:

• 7.4.1 Which exceed the maximum amount of compensation in terms of 7.2 and,

• 7.4.2 for the full amount of any such claims after the period stated in 7.3

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Clauses in PROCSA

• 17.0 CANCELLATION AND SUSPENSION– 17.1 - Either party shall be entitled to terminate this agreement

should the other party be in breach of a material term of this agreement and provided written notice of such breach had been given demanding that the breach be remedied within fourteen (14) days and, despite such notice, the defaulting party remains in breach

– 17.2 - Notwithstanding 17.1, the client shall be entitled to cancel this agreement forthwith in the event of the consultant committing a breach in terms of 16.2

– 17.3 - The client may, without prejudice to its right to cancel, suspend the whole or part of the services. Prior to such suspension the client shall give the consultant fourteen (14) days written notice to suspend and to make arrangements to stop the services and to minimize further expenditure

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Clause in PROCSA

• 17.0 Cancellation And Suspension (Continued)– 17.4 - The consultant may, without prejudice to its rights

to cancel, suspend the whole or part of the services in the event where:• 17.4.1 - The client has failed to pay an invoice of the consultant

on due date and the consultant has given the client notice in terms of 17.1. or

• 17.4.2 - Services have been suspended under 17.3 and the period of suspension has exceeded six (6) or it is evident to the consultant that it will be unlikely or impractical to resume the suspended services before the period of suspension has exceeded six (6) months, or

• 17.4.3 - The consultant has given the client notice of a material breach in terms of 17.1

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Clauses in PROCSA

• Dispute Resolution– 18.1 Should any dispute whatsoever arise between the parties,

then either party hereto may declare a dispute by delivering notice of the details thereof to the other party, which dispute shall be referred to mediation prior to arbitration.

– 18.2 Prior to arbitration and should the parties so agree, the dispute shall be referred to a single mediator without the parties having legal representation. The mediator shall be selected by agreement between the parties within fourteen (14) days of agreeing to such mediation. Failing such agreement, the mediator shall be nominated on the application of either party by the entity named in the schedule. The mediator shall be appointed jointly by the parties

– 18.3 The mediator shall have absolute discretion in the manner in which the mediation proceedings shall be conducted

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Clauses in PROCSA

• Dispute Resolution (continued)– 18.4 - The mediator shall deliver a copy of his reasoned

opinion to each party within twenty one (21) days of his appointment

– 18.5 - The opinion so expressed by the mediator shall be final and binding on the parties unless either party within twenty one (21) days of the delivery of the opinion, notifies the other party of its unwillingness to accept the said opinion, in which event the dispute shall be referred to arbitration in terms of this agreement

– 18.8 - The mediation proceedings shall not prejudice the rights of the parties in any manner whatsoever in the event of the dispute proceeding to arbitration

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Clauses in PROCSA

• Dispute Resolution (continued)– 18 9 - Arbitration shall be by a single arbitrator who shall be selected

by agreement between the parties within fourteen (14) days of the rejection of the mediator's opinion in terms of 18.5. Failing such agreement, nominated on the application of either party by the entity named in the schedule. The arbitrator shall be appointed jointly by the parties, failing which by either one of the parties

– 18.10 - The arbitrator shall have power to open up, review and revise any opinion, decision, requisition or notice and to determine all matters in dispute which shall be submitted to him, and of which notice shall have been given as aforesaid, in the same manner as if no such opinion, decision requisition or notice had been given

– 18.11 - The arbitration shall be conducted according to the rules decided by the arbitrator

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IMPORTANT CLAUSES IN THE CESA MODEL PROFESSIONALSERVICES AGREEMENT DATED AUGUST 2014

• Definition– Services – Means the service or services to be performed by

the Consulting Engineer in accordance with the Agreement.• Obligations of the Consulting Engineer

– Duty of Care• The Consulting Engineer shall exercise reasonable professional skill,

care and diligence in the performance of the Services.– Exercise of Authority

• Where the Services include the exercise of powers to certify, decide or exercise discretion in terms of a Contract between the Client and any Third Party, provided that the details of such power and duties are acceptable to the Consulting Engineer and agreed in writing, then the Consulting Engineer shall act in accordance with that Contract and where required to perform this function he shall do so fairly between the Client and the Third Party not as an arbitrator but as a professional exercising his judgement with reasonable skill, care and diligence.

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Clauses in CESA Model Professional Services Agreement

• Liability and Insurance– Liability

• Neither party shall be liable to the other arising out of or in connection with this Agreement unless a breach of the obligations in terms of this Agreement is established against them. Neither Party shall have any separate delictual right of action against the other.

– Compensation• If it is established that either Party is liable to the other, compensation shall be

payable only on the following terms: -• (1) Such compensation shall be limited to the amount of reasonably

foreseeable loss and damage suffered as a result of such breach. Neither Party shall be liable for any indirect or consequential damages arising out of or relating to its performance or failure to perform under this Agreement save and except where the indirect or consequential loss is incurred as a result of the fraud, gross negligence or wilful, reckless or deliberate breach of the Agreement by a Party, its employees, agents or contractors.

• (2) If either party is considered to be liable jointly with Third Parties to the other, the proportion of compensation payable by that Party shall be limited to the proportion of liability which is attributable to his breach..

• (3) In any event, the amount of such compensation will be limited to the amount specified in Clause 6.5.

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– Duration of Liability• Notwithstanding the terms of the Prescription Act No 68 of 1969 (as

amended) or any other applicable statute of limitation neither the Client nor the Consulting Engineer shall be held liable for any loss or damage resulting from any occurrence unless a claim is made in terms of Clause 8 within the period stated in the Specific Data, or, where no such period is stated, within a period of three (3) years from the date of termination or completion of this Agreement.

– Limit of Compensation• The maximum amount of compensation payable by the Consulting

Engineer to the Client in respect of liability is limited to twice the amount of fees payable by the Client to the Consulting Engineer, unless a fixed amount is otherwise specified in the Specific Data.

• If either Party makes a claim for compensation against the other Party and this is not established, the claimant shall reimburse the other for his reasonable costs incurred as a result of the claim or if proceedings are initiated in terms of Clause 8 for such costs as may be awarded.

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– Insurance for Liability and Indemnity• The Consulting Engineer agrees to arrange and maintain

professional indemnity insurance cover in respect of the Services provided under this Agreement for the duration of the liability period in terms of clause 6.3, and in accordance with the details set down in the Specific Data.

• In the event of the Client electing to take out the necessary insurances, such will be specified in the Specific Data.

– Indemnity by the Client• The Client shall indemnify the Consulting Engineer against the

adverse effects of all claims by third parties which arise after the duration of liability period or which exceed the limit of compensation in clause 6.4.

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• Settlement of Disputes– Settlement

• The Parties agree that all disputes or differences whatsoever ("Dispute"), which may at any time arise between the Parties hereto concerning any matter specified in this Agreement, or its construction, validity, or either of them under or by virtue of this Agreement or otherwise or as to any other matter in any way connected with or arising out of or in relation to the subject matter of this Agreement shall be dealt with in accordance with the provisions of this Clause 8.

– Amicable Dispute Resolution• 8.2.1 If any Dispute arises, representatives of the Parties with authority to

settle the Dispute will, within fourteen (14) days of written notice from one Party to the other, meet in a good faith in an effort to resolve the Dispute.

• 8.2.2 If the Dispute is not resolved in accordance with clause 8.2.1, members of the board of directors of each Party will, within fourteen (14) days of written notice from one Party to the other, meet in good faith in an effort to resolve the Dispute. If the Dispute is not resolved at that meeting, the Parties may, but shall not be obligated to, attempt to settle it by mediation in accordance with clause 8.3.

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• Mediation– 8.3.1 Unless otherwise agreed between the Parties, the Parties

shall attempt to agree upon a neutral mediator. Should the Parties be unable to agree within fourteen (14) days of a notice from one Party to the other requesting mediation then either Party may request that a mediator be appointed by the President of Consulting Engineers South Africa. The appointment by the President shall be binding on the Parties unless they agree to another named mediator at any time.

– 8.3.2 When the mediator has been appointed on his terms and conditions of engagement, either Party can initiate the mediation by giving the other Party a notice in writing requesting a start to the mediation. The mediation will start not later than twenty one (21) days after the date of the notice.

– 8.3.3 The mediation shall be conducted in accordance with the procedures required by the appointed mediator.

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• Mediation (continued)– 8.3.4 All negotiations or discussions carried out in the

mediation shall be conducted in confidence and are not to be referred to in any concurrent or subsequent proceedings, unless they conclude with a written legally binding agreement. If the Parties accept the mediator's recommendations, or otherwise reach agreement on the resolution of the Dispute, such agreement shall be recorded in writing and, once signed by the designated representatives, shall be binding on the Parties.

– 8.3.5 If no agreement is reached, either Party may invite the mediator to provide to both Parties a non-binding opinion in writing on the Dispute. Such opinion shall not be used in evidence in any concurrent or subsequent proceedings, without the prior written consent of both Parties.

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• Mediation (continued)– 8.3.7 No Party may commence an arbitration of any Dispute

until it has attempted to settle the Dispute with the other Party by mediation and either the mediation has terminated or the other Party has failed to participate in the mediation, provided, however, that either Party may commence arbitration if the Dispute has not been settled within ninety (90) days of the giving of the notice under clause 8.3.2.

– 8.3.8 If the mediation fails then the Parties will attempt jointly to make a written record of those matters (if any) relating to the Dispute which have been agreed to by them, for submission in any later arbitration. The mediator's role will cease, at the latest, upon the commencement of any arbitration. The mediator will not be available to appear as a witness in the arbitration, nor to provide any additional evidence obtained during the. mediation.

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• Arbitration– 8.4.1 Either Party may at any time by written notice to the other refer

the Dispute to arbitration by a single arbitrator to be mutually agreed upon or, failing agreement, to be nominated by the President of the Consulting Engineers South Africa. The arbitration shall be in accordance with the provisions of the Arbitration Act of 1965 as amended and shall be conducted in accordance with such procedure as may be agreed between the Parties or, failing such agreement, in accordance with the Rules for the Conduct of Arbitrations published by the Association of Arbitrators Southern Africa current at the date the arbitrator is appointed.

– 8.4.2 Referral to arbitration shall take place within ninety (90) days of the date of notice from either Party declaring that the settlement negotiations under Clause 8.2 have failed, or, if mediation is agreed on, within ninety (90) days of the date of the mediator's opinion or the date upon which the mediator declares that the mediation has failed. Claims not brought within the time periods set out herein will be deemed to be waived.

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• Arbitration (continued)– 8.4.3 The decision of the Arbitrator shall be final and

binding on the Parties.– 8.4.4 The seat of the arbitration will be Johannesburg,

South Africa.– 8.4.5 Either Party is entitled to approach the High Court of

South Africa on an urgent or interim basis prior to the arbitrator being formally appointed.

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2. Common Problems as to why Engineers end up in Disputes

1. The Over Helpful Engineer1.1 Engineers taking on work which falls outside their area

of expertise in order to maintain the relationship with a client.

2. Marginal Design / Budget and Time Constraints2.1 Client pressure on the engineer to design within certain

budget parameters, which can cause an engineer to prepare a design which he is not comfortable with, but due to constraints placed by the client on the budget, is requested to design within a limited budget;

2.2 In addition, time pressure placed on the engineer and taking on more work than the engineer and its team are capable of handling.

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• Marginal Design / Budget and Time Constraints (continued)2.3 Engineers take on more work than they can handle, delegate it to those within their team who have less experience and experience difficulties finding the time to check and execute the work required, allowing it to be submitted without proper checking.

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3. Projects in terms of Standard Forms of Contract, for example FIDIC and NEC standard form without fully understanding the parameters of the contract, the application and administration thereof.

4. Conducting projects outside the borders of South Africa

4.1 In conducting projects outside the borders of South Africa, does the engineer fully understand the laws of the country in which they are contracting?

4.2 Has the engineer agreed to laws of another country, for example the laws of England and Wales, the laws of Australia, the laws of Canada?

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• Conducting projects outside the borders of South Africa (continued)4.3 Has the engineer agreed to the seat of the arbitration

being somewhere other than South Africa?4.4 Has the engineer made provision for the fact that, insofar as litigation develops in the project where a different law is applicable, the engineer may find itself in a different

jurisdiction where legal costs are substantially more than South Africa, and will the Professional Liability policy (being cost inclusive) be sufficient to cover a dispute that arises?

4.5 Contracts in foreign currencies and the damages claims associated therewith.

4.6 Different jurisdictions have different laws relating to issues of liability.

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5 Record Keeping5.1 When a partner leaves an engineering practice the

partner should ensure that all records are retained for a period of time as disputes may arise years later, and certain of the records may no longer be available.

5.2 Keeping of contemporaneous notes once a dispute arises are vital.

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3. The Process once Disputes have Arisen

• What is Alternative Dispute Resolution?– Alternative Dispute Resolution (ADR) denotes all dispute

resolution mechanism other than litigation through courts.– Thus ADR is an alternative to the court process.

• Different forms of ADR– Negotiation– Mediation– Adjudication– Arbitration

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Mediation

• Mediation – Negotiations involving the services of an acceptable, impartial and neutral third party to assist the parties in dealing with their disputes and to facilitate the reaching of an agreement between the parties.– Different forms of mediation:

• Mediation in strict sense – facilitation by an impartial third party of negotiations between parties.

• Mediation in the wide sense (normally used in construction agreements) – Can include a system where the impartial third party makes a non-binding recommendation to the parties for the settlement of their dispute (also referred to as conciliation).

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Adjudication

• Adjudication – usually provided for in the standard conditions of building and engineering contracts. a process whereby an appointed neutral and impartial person or panel of persons entrusted to take initiative to ascertain facts and law and reach decision within short period of time.– Adjudication in SA is not legislated (unlike in the UK) and thus the

process is determined by contract.– Adjudicator can sometimes be agent of employer (such as

engineer, architect, quantity surveyor or principal agent)– Adjudicator normally an expert in the field which forms the subject

matter of the adjudication, thus well placed to make quick decision.

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Adjudication (continued)

• Adjudication under:– NEC3 ECC (option W1) – adjudicator appointed by parties

at starting date.• Has an adjudication table setting out which disputes may be

referred by which party and when such disputes must be referred,• Adjudicator may:

– Review and revise any action or inaction of project manager or supervisor;

– Take initiative to ascertaining facts and law relating to dispute;– Instruct a party to provide further information;– Instruct a party to take any other action which he considers

necessary to reach his decision.• A dispute must first be referred to the adjudicator before referred to

the tribunal (arbitration)

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Different forms of ADR - Adjudication (continued)

• Adjudication under:– FIDIC – Dispute Adjudication Board (DAB) makes a

decision.• 56 days to 84 days to reach a decision depending on whether DAB

composed of 1 person or 3 persons• Adjudicator should be suitably qualified on topic of dispute.• May question parties, visit site, under certain circumstances

appoint experts/assessors/legal advisors.• Decision in writing, may be accompanied by reasons.• Binding on parties unless challenged within specific time and

varied in arbitration or litigation depending on contract.• If not challenged within specific time = final and binding.• Ad Hoc / Standing

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Arbitration

• Arbitration – parties enter formal agreement that an independent and impartial third party/-ies, chosen directly or indirectly by parties, will hear both sides and make an award which parties accept is final and binding.– Different rules which parties can agree on to apply to their

arbitration agreement:• Arbitrators Foundation of South Africa (AFSA)• Association of Arbitrators (AoA)• London Court of International Arbitration (LCIA)• International Chamber of Commerce (ICC)• United Nations Commission on International Trade Laws

(UNICITRAL)– The Arbitrations Act 42 of 1965 is applicable to all arbitrations

in South Africa (see section 40)

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Arbitration (continued)

• Administered v non-administered arbitration– Administered arbitration – agreement to refer dispute to arbitration in

accordance rules and procedures of an arbitration institution.• Similar to the registrar of courts• Disadvantages of administered arbitration:

– More expensive that ad hoc arbitration• Advantages:

– High level of credibility– Experience and procedural certainty.

– Non-administered (ad hoc) arbitration – agreement to refer future or existing disputes to arbitration without an arbitration institution being specified. Rules and procedures are provided by the parties in the arbitration agreement.• Advantages:

– Lower costs– Greater flexibility.

• Disadvantages:– No set rules and procedures to guide parties in procedural deadlock.

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• Seat of Arbitration– The seat of arbitration determines the law that would apply to

such arbitration proceedings. Thus if the seat is in South Africa, South African law applies.

• Applicable law– Common law– Arbitration Act 42 of 1965– Constitution of the Republic of South Africa, 1996– Recognition and Enforcement of Foreign Arbitral Awards Act 40

of 1977• Provides that foreign arbitral awards may be made an order of court;• Provides for and how application should be made for a foreign arbitral

award to be made an order of court;• Provides for when an order may be refused.

– Case law

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• Single/panel– Section 9 and 10 of the Arbitration Act provides for

appointment of arbitrator(s) by the parties.– Section 9 – Unless contrary intention expressed in the

agreement, reference shall be to single arbitrator

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• Advantages to arbitration:– Appointment of arbitrator with specialised knowledge– Time saving– Flexibility – more flexibility for parties to allow time

extentions, dates, etc.– Privacy– Finality – parties can agree that arbitration award be final

and binding thus court cannot hear the dispute after award granted

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• Disadvantages of arbitration:– Costs of arbitrator, venue, etc. covered by the parties (not

by state as in the case of litigation through the courts)– Parties not able to appeal arbitration award if arbitration

agreement does not make provision for same.– Arbitration does not allow for a third party joinder

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