Built on sand: problems of risk allocation and collaboration in port development contracts

Introduction 

The British Ports Association estimated in 2022 that there were £1.7bn of port projects in the pipeline, and investment in port infrastructure topped £1bn in 2021. There is pressure to deliver port upgrades to serve floating offshore wind projects (for which the UK is responsible for a fifth of the global pipeline), in addition to meeting the sector’s decarbonisation and environmental commitments, delivering modern infrastructure to facilitate international trade and growing regional economies. With that backdrop in mind, we consider some of the key contractual issues that arise in port projects, with a focus on the allocation of risk and how to improve collaboration between contracting parties to maximise the chances of a successful project.

Equipment

One of the major areas to consider is how equipment standby and maintenance downtime will be managed, and where the balance is to be struck between ensuring equipment remains available (particularly where there are shortages of specialist equipment capable of doing the works) and the potential for prohibitive costs of expensive equipment and support vessels lying idle in the event of significant project delay.

In principle, standby is intended to be for temporary situations, not for substantial periods of delay. From the perspective of an employer or main contractor, including contractual provision enabling instructions to be given for removal and demobilisation of a vessel where it is no longer needed or where a delay may be extensive is sensible, as is the inclusion of clear requirements to mitigate associated costs. Consideration should also be given to how standby will be calculated; agreeing rates up front rather than providing for recovery of costs can provide certainty, but even where an hourly rate is provided it does not necessarily follow that standby costs should be recoverable on a 24/7 basis or for the full extent of any period claimed.

A related issue is where risk sits in relation to maintenance downtime. The impact of an unexpected event on equipment - for example physical conditions which were not anticipated at contract stage - can be substantial in terms of unplanned maintenance requirements and replacement components. There may also be questions about the fitness of the equipment concerned to carry out the works contracted for in the event that maintenance requirements or repairs significantly exceed what was anticipated.

Weather

In projects in which battling the elements is a constant challenge, controlling who takes the risk of weather events and in what circumstances is of course a major factor to get right.

A key consideration though, is how the provisions for weather risk will actually operate in practice on a day to day basis. How and where are conditions to be measured? Has a location for measuring equipment been agreed which reflects the conditions in which the works are actually to be carried out? How do any provisions compensating for weather dovetail (if at all) with the authority of a vessel captain to determine that conditions are too poor to proceed with the works?

Risk management

It is important to make sure that the allocation of risk – including weather risk – is contained in the contract itself. It can cause significant confusion where risk management tools such as risk registers have been incorporated into the contract and certain risks marked as ‘belonging’ to the employer or the contractor. The issue of risk allocation in the contract should not be confused with on site responsibility for managing or mitigating a risk when it occurs. Problems can also be caused where a risk register undermines more carefully thought out provisions at the front end of the contract. Contracts will usually provide a hierarchy of documents or other mechanism to allow contradictions between documents to be resolved, but where provisions can be read together this will not apply, and can lead to unintended consequences.

Variations and delay

Major infrastructure projects are rarely completed on time or to budget. Changes in scope tops the list of reasons for this.^[1] For employers or main contractors, it is important to make sure that the document you are using to describe the works covers all the things you might want to instruct and that clear provision is made for how variations (including variations omitting works) will be dealt with, and their financial consequences. By way of example, if any plant or equipment is to come to site pre-fabricated, make sure both parties are clear at the outset on whether additional works will be required to assemble it once it arrives. The consequences of excavation or dredging volumes or material not being as anticipated will be different depending on what form of contract has been chosen, and this may lead to confusion about when – if at all – the contractor is to be compensated for this, and how that compensation is to be assessed.

It is also key to ensure that contractors and subcontractors cooperate in the provision of adequate programmes for their works; as the knock-on effects of delay and disruption in a water environment can be significant and more complex than land-based works, it is essential that an accepted programme is worked to, that this contains all the necessary detail to allow coordination with the main project programme, and that it is adjusted to reflect actual progress.

The programme should be a realistic reflection of the progress of the works, and the rejection of programmes because they reflect delays for which responsibility has not yet been agreed should be avoided. Failing to manage the programme can lead to overall management of the project being derailed, in addition to making it difficult further down the line to work out the causes of delay, compounding arguments about entitlement to compensation. The contract should include a mechanism for dealing with these kinds of issues contemporaneously, short of adjudication, such as a dispute avoidance board. Adjudication, while ostensibly speedy, costs significant time and money in preparation, generally lasts far longer than the 28 statutory minimum period in complex cases, and can entrench positions and damage relationships going forward.

Licensing and regulatory compliance

Harbour projects are carried out within a complex licensing and regulatory framework and it is important clearly to understand the terms of the licence and to put in place a detailed plan for compliance.  Seeking relaxations or amendments during the course of the project is likely to be time-consuming and expensive, and with no guarantee of success. In particular, it can cause significant problems if a contractor is brought on stream to carry out works that are held up by licensing issues.

One point which can arise in harbour projects is where the development project includes land works in addition to marine works – for example the construction of port terminal buildings and access roads, or wider development of port land. The onshore and offshore interface may not be straightforward, with the potential for different regulatory considerations to apply, and both sets of works will need to be joined up, particularly where space for storage of materials landside is at a premium.

Related to the change in regulatory landscape is the significant focus globally on how development projects can be made more sustainable in the marine space and investments in technology to support this, for example development of best practice recommendations for the use of sand/sediment in dredging projects, electrification of shore power etc. Such initiatives will likely broaden the range of stakeholders and regulatory authorities involved in projects, and lead to an increased focus on achievement of project objectives, monitoring and performance measures.

Collaborative contracting

Many larger projects will be delivered by joint ventures or consortiums, and a key consideration is ensuring that project partners and subcontractors cooperate to the benefit of the project as a whole.

Much is made of generic contractual provisions inviting parties to cooperate in the delivery of projects – such as an obligation to act in good faith and the NEC requirement to act in a spirit of mutual trust and cooperation- but these tend to be cited by the parties only in the event of a claimed breach. It has been held by the Scottish courts that such provisions have teeth^[2], although it remains unclear what that is likely to mean in practice, and relying solely on such provisions could lead to shutting the stable door after the horse has bolted; there are more practical ways to encourage cooperation contractually throughout a project.

For example, contracts can provide incentives to collaboration, such as a share in savings where actual costs are less than target costs, or reputation incentive payments based on environmental performance, rather than relying on goodwill and good faith, which can be in short supply once a project starts to go wrong. This kind of incentivisation can be particularly important when contractual terms are not back to back – this may well be the case, for example, where there is a very limited field of contractors who can carry out the works required, giving that field significant bargaining power.

Collaboration at a much earlier stage can also be of benefit – early contractor involvement (via mechanisms such as pre-construction services agreements or the NEC option X22) can help in determining the best approach to project delivery and assessment of physical conditions. This may assist to minimise the extent of changes required once a project is underway and/or devise ways in which these can be better managed, avoiding the additional cost and time that can be caused if such issues are only identified once works are being carried out.
 

^[1] Arcadis, 2022 Global Construction Disputes Report, Bent Flyvbjergand Gardner, 2023.

^[2] The valuation of omissions under the NEC – appellate guidance (cms-lawnow.com)