Chartered Institute of Arbitrators Summer Seminar

“Frameworks, Alliances and Term Contracts – Typical Pitfalls and New Solutions”

Friday 1 July 2016

Professor David Mosey

Director, Centre of Construction Law and Dispute Resolution

King’s College London

©David Mosey 2016

1

What is a framework agreement ?

An agreement governing a long-term relationship which

gives rise to a procedure for award of specific work under

supplementary contractual commitments

Frameworks may provide for a minimum volume of work

committed by the client or for no guarantee of work

whatsoever

Framework agreements are designed to create long-term

relationships which can be a basis to develop an agreed

joint strategy, joint cross-project activities, im[ropved

value and the capture of lessons learned

But frameworks are also used to exercise greater

commercial leverage without aligning expectations

And what is the difference between a framework and an

alliance?

Frameworks and alliances

A framework agreement is “an agreement between one

or more contracting authorities and one or more

economic operators, the purpose of which is to establish

the terms governing contracts to be awarded during a

given period, in particular with regard to price and, where

appropriate, the quantity envisaged” Public Contracts

Regulations 2015

“An alliance in general terms is a collaborative and

integrated team brought together from across the supply

chain. The team share a set of common goals aligned

with customer and client outcomes and work under

common incentives” Infrastructure Client Group

Alliancing Code of Practice, 2015

What is a term contract?

A term contract is a long-term contract that is not a

framework agreement, because it does not lead to other

contract awards

Instead it contains sufficient detail as to the nature and cost

of the works/services/goods covered to create a basis for

orders to be placed

Term contracts frequently used for responsive repairs,

cyclical maintenance and a programme of minor projects but

are increasingly linked to capital projects e.g. through BIM

Term contracts can provide a basis for a system of agreed

continuous improvement and shared rewards

But term contracts are also used to attract investment in

bids and mobilisation without that investment being

rewarded 4

Aligning differing commercial interests

MacNeil I.R.(1974) Southern California Law Review “The

Many Futures of Contracts”, identified “enterprise

planning” , namely agreed joint activities in place of

negotiation

Phelps S. (2012), in “Emergence of social networks via

direct and indirect reciprocity ”, considered the impact of

reciprocity created and sustained through “social

networks” , based on the parties’ wish to preserve a good

reputation

Trivers R. (1971), in“The Evolution of Reciprocal Altruism”

, described “social darwinism” by which both parties can

benefit from apparent altruism- if they have the information

that enables them to recognise a more profound view of

enlightened self-interest, making calculations that

“take the altruism out of altruism”

Good faith and good business Overriding duty of a company director to “act in a way

that he considers, in good faith, would be most likely to

promote the interests of his company” ,while also

fostering “business relationships” and “maintaining a

reputation for high standards of business conduct” -

Section 172.1 Companies Act 2006

Williamson O.E.(1985) “The Economics of Capitalism”-

the “subversion of morality for profit” -there is no

universal business morality to constrain economic

opportunism (as distinct from legitimate self-interest),

except through contracts, other binding legal obligations

and the shared principles of trade

Degrees of honesty ,calculations and optional gestures

are all variables which are subject to external influences

and also to the risks of error/misunderstanding

What legal rights do frameworks create? Unlikely to create unconditional entitlement to be awarded

work on a specific project-right of first refusal enforceable

and , if agreed compensation for non-award, not seen as a

penalty - Coneco v Foxboro Great Britain (1992)CA Con.

Law Yearbook 1994

Binding commitments of client and consultant/contractor to

observe agreed procedures under “tender contract” -

Blackpool and Fylde Aero Club v Blackpool BC [1990] 1

WLR 1195

Claims for inadequate framework rules- Henry Bros v

Department of Education N.I. [2011] NICA 59

Breach of a framework agreement can form the basis for

claim for loss of chance consequent on future expectation of

work - Allied Maples v Simmons & Simmons [1995] 1WLR

1602

“Effectiveness of frameworks”

Appendix G in UK pan-industry “Procurement/Lean Client Task Group” Report 2012 examined evidence taken from a range of Government frameworks, identified features of effective frameworks and commented on the problems arising on others

Concerns expressed where frameworks are:

implemented as a “short-cut to market” without “demonstrable business need”, or

are implemented by advisors/consultants not familiar with or committed to “collaborative partnering processes”, or

are implemented by “less expert clients” who believe lowest cost tendering equals best value, or

where clients do not understand the benefit of retaining certain risks on “more complex schemes”

8

Ministry of Justice new build alliance

frameworks

MoJ new build alliance frameworks

“Solid governance structure through a Strategic Core Group comprising representatives from the MoJ and the Alliance suppliers”

KPI information and cost analysis “made available to all schemes”

“Individual project appointments made via mini-competitions or by direct appointment” under a “standard two stage selection process”

“Standardised suite of processes and contract templates are used to ensure consistency and ease of use” plus “Early engagement of the supply chain is encouraged by the two stage approach”

Major benefits “include reduced operating costs estimated at £10m, reduced burden on industry tendering of around £30m and procurement risk mitigation of about £2m”

Total cost saving of £42m

10

Implied trust and confidence

L. B. Merton v Stanley Leach [1985] 32 BLR 51 - Vinelott

J.: “There is an implied contract by each party that he will

not do anything to prevent the other party from

performing a contract or to delay him in performing it”

and an implied “duty to do whatever is necessary in

order to enable a contract to be carried out ”

No special need for “trust and confidence” arising by

reason only of a long term relationship (e.g. for highway

maintenance and repair) Bedfordshire County Council v

Fitzpatrick [1998] 62 Con LR 64 (TCC)

But note also Yam Seng v ITC [2013] EWHC 111(QB) as

to relational contract (for distribution of branded

toiletries) “based on trust and confidence and

expectations of loyalty” that are “implicit in the parties’

understanding” and “necessary to give business

efficacy”

Trust and confidence under long-term

contracts

Compass Group v Mid-Essex Hospital NHS Trust [2012]

EWHC 781 (QB), where Court of Appeal restricted good

faith to the clause dealing with “efficient transmission of

information”

TSG Building Services v South Anglia Housing [2013]

1151 (TCC) , where Justice Akenhead held that good faith

clause did not create any constraint on the right of

termination at will in despite being part of a long –term

partnering contract

Success and collaboration under long-term contracts

depends on what the parties agree to do, not only on their

declarations and aspirations

12

Frameworks, alliances, term contracts

and “Supply Chain Collaboration”

Client(s), Tier 1

Contractor(s) and

Consultants agree scope

for achieving

savings/improved value

through improved mutual

commitments with Tier

2/3 Subcontractors and

Suppliers

Timetabled processes

led by Tier 1

Contractor(s) to obtain

and agree new

proposals from Tier 2/3

Subcontractors and

Suppliers

Improved mutual

commitments and

consequent savings/

improved value

captured in Supply

Chain Agreements

Scoping of Supply Chain

Collaboration

Supply Chain

Collaboration process

Decision to build

Supply Chain Collaboration case study

Hackney/Haringey- £200m housing programme

Early joint appointment of comprehensive

range of tier 1 contractors and SME tier 2

and tier 3 sub-contractors and suppliers

Substantial savings achieved firstly at main

contractor procurement (16%), and secondly

through joint working with Tier 1 and tier

2/tier 3 Supply Chain members (14%)

Reduced waste through lean programming,

value engineering and rationalised

specifications

Substantial time savings through new pricing

and mobilisation systems

New opportunities for SME subcontractors

and suppliers, and substantial employment

and skills improvements

Key features under two linked framework alliances :

Project Horizon - a local government call-

off contract and alliance

https://www.gov.uk/government/publications/procurement-

trial-case-study-report-highways-maintenance

Project Horizon- breakdown of savings Surrey County Council with Kier, Aggregate Industries and

Marshall Surfacing

“TPC2005” contract set out clear processes and timetable for

performance improvement and change

Team motivated by prospect of contract extension, plus client offer

of £100m of additional work subject to demonstrable delivery of

£115m of value

Agreed cost savings of 15% included breakdown offered by Tier

2/3 subcontractors/suppliers (against previously quoted rates) in

return for:

Greater involvement in planning work and developing continuity

of work - 2%

Agreed minimum annual volume of work - 5%

Agreed minimum size of individual works orders -2%

Prompt(er) payment by Tier 1 Contractor -1%

Storage facilities in available space at Client depot -2%

“Something in it for everyone”

Surrey gets £120m of work for £100m plus other

improved value

Kier, Marshall, A.I. get £100m of work and agreed

basis for savings

No savings if CPs not fulfilled by Surrey and Kier

Kier likely to get contract extension

Marshall and A.I. likely to share in extension

Surrey gets happy residents and councillors get

votes

17

What is FAC-1? FAC-1 Framework Alliance Contract integrates Alliance Members, including in-house or external Alliance Manager, under a single multi-party contract with:

agreed Objectives, Success Measures, Targets and Incentives linked to Improved Value

agreed Alliance Activities including Supply Chain Collaboration

gateways set out in a shared Timetable

creation of Project Contracts under Direct Award and/or Competitive Award Procedures

option to issue of Orders in advance of Project Contracts

engagement with Stakeholders and option of Additional Alliance Members

joint Risk Management, collaborative Core Group governance and non-adversarial dispute resolution

flexibility of Legal Requirements and Special Terms

FAC-1 framework alliance

Integration with Project Contract Conditions

Improved Value at strategic level achieved through agreed Alliance Activities and other collaborative systems that precede and accompany award and implementation of Project Contracts

FAC-1 is not itself a Project Contract form and is designed for use with any one or more sets of Project Contract Conditions.

Cross-reference to applicable Project Contract Conditions included in description of Template Project Documents

For example, FAC-1 is compatible with all and any combination of the following standard form Project Contract Conditions:

the FIDIC, ICC, JCT, NEC and PPC contract forms, sub-contracts and term contracts

the ACA, ACE, CIC, FIDIC, JCT, NEC, RIBA and RICS consultant appointments.

Alliance Activities/Supply Chain Collaboration

Alliance Activities under FAC-1:

agreement of improved, consistent working practices

improved links between Project Contracts

other agreed systems by which collaborative working may

achieve Improved Value.

Supply Chain Collaboration under FAC-1 enables Alliance

Members to:

revisit competitive proposals obtained when Alliance

Members are selected

seek improvements through new ways to engage with tier

2/3 Supply Chain members under a system monitored by

the Client

All Alliance Activities include agreed actions set out in

FAC-1 Timetable

FAC-1 Core Group

FAC-1 provides for a Core Group of named individuals or

agreed alternates who reach decisions unanimously by

Consensus of those members present at a meeting

Core Group supports collaborative implementation of FAC-1

and seeks an agreed course of action following Early

Warning, to be given by Alliance Members if any matter

adversely affects or threatens the Alliance or the Framework

Programme or any Alliance Member’s performance

FAC-1 also provides a range of options for non-adversarial

dispute resolution, including appointment of an Independent

Adviser to provide impartial and constructive advice/support

to the Core Group, or appointment of a Dispute Board or a

Conciliator

FAC-1 : what next?

FAC-1 developed and finalised to reflect consultation with over 120 organisations

FAC-1 available in hard copy from the Association of Consultant Architects - 01959928412, email-office @acarchitects.co.uk

FAC(S)-1 simplified version omitting provision for Additional Clients

FAC-1 early adopters have commenced procurement and more trials are under consideration

FAC-1 guide scheduled for publication 2016

TAC-1 Term Alliance Contract scheduled for publication and trialling 2016