Networked Knowledge - Law Lectures

Partnering – A Case Study

Author: Dr Robert N Moles

Contract Law Homepage
A state of Injustice - table of contents
Losing Their Grip - The Case of Henry Keogh - table of contents

Stockport Civil Engineering Adelaide, South Australia

We have already looked at the issue of good faith in terms of the performance of contracts, but now I want to step back a little and look at the issue of good faith in a broader context. At this stage of our course, we should be bringing all the principles we have discussed together, and finding that they fit harmoniously together like parts of a jigsaw puzzle. And yet we cannot help but be aware of the fact that some of the bits of the puzzle seem to have been taken from different boxes. In the earlier part of the course we talked about the way in which contracts were formed - and noted that in negotiations prior to the completion of contracts, each party can look to their own interests, and get the best bargain they can.

You are quite free to have a look at my car before you buy it, and if you do not happen to notice that the big end is gone, and the exhaust is held on with wire, then obviously, that is no-one’s fault but your own - provided, of course, that I don’t actually tell you anything to the contrary. Caveat emptor - "let the buyer beware" - sets buyer and seller against each other in a struggle to produce winners and losers. Your loss is my gain. And in business, the goal is to shift more risk on to you, at the lowest possible price to me.

Yet we know that when we look at these issues and attitudes in broader terms, they cannot be conducive to an efficiently operating economy. If your company gets pushed into arrangements which require you to operate uneconomically - which means that you are either operating at a loss, or with insufficient profit for reinvestment, then you will ultimately go out of business, and I will have to find someone else to contract with, with all the negotiations and uncertainty which are necessary when working with entirely new contractors.

Where a contractor is required to operate uneconomically, their desire for survival will also give them a pretty powerful incentive to cut corners. This will translate into a reduced quality of materials, or a reduced quality of work. I will then have to police the job much more closely, with consequent costs to my company and to the relationship with your company. One major civil engineering company reported to us that some years ago, they felt that they were required to "bid low" to get contracts, because of the underpricing from other contractors. This meant that they could expect to make little money from the basic contract price, and were therefore required to make a better margin on the variations which would inevitably be required. This often led to inevitable tensions between the principal and the contractor.

Given that many major contracts will have a sub-contracting component of some 80%, the "transaction costs" of caveat emptor and all that implies can be quite high. By transaction costs, we mean the costs involved in the exchanges between the parties which do not translate exactly into the doing of the work. This is the amount of time or money, for example, which I spend in supervising your work, or in dealing with the disputes between us, or in re-doing of unsatisfactory work. It has to be said of course, that lawyers to resolve disputes are regarded as "heavy duty transaction costs".

Whilst many of the cases which we have looked at seem to be premised on the conflict laden - adversarial approach to doing business, we should ask ourselves a question about what I said in my opening comments "In the earlier part of the course we talked about the way in which contracts were formed". Did we actually talk very much about the way in which contracts were - and are - formed - or did we just talk about the way in which a few very odd contracts had been formed? Odd, because they led to monumental disputes and ended up being reported in the law reports - at obviously huge cost to all involved.

When I think about the way in which some contracts are formed, I think of those sale of goods contracts where the store says that they will take back the goods and provide an exchange or refund - without you having to provide any of those terribly boring explanations about why they are unsatisfactory, or why they don’t work. John Lewis in the UK and David Jones in Australia? The Sale of Goods Acts will only require them to take back the goods if they are defective, but the store policy goes well beyond that minimal requirement.

Does this mean that they are soft or silly and not hard-nosed commercial players? I doubt it. They realise that increasing consumer confidence will lead to increased sales, and that very few of those will actually lead to consumers returning goods. They know more about the transaction costs to consumers than consumers would realise themselves. So in this way, good policy can also be good business.

But what about those large-scale building contracts where we are dealing with large commercial firms on both sides? They know all about their legal rights - and they surely know how to write very long contracts. Maybe they can be expected to home in on their legal rights in a more focussed manner. We thought that instead of focussing on cases involving smoke-balls, and some of the harsh 19th century shipping cases, we would go and speak to some of the people involved in construction cases - in this town to find out about how they do it.

We first approached Stockport Civil which is one of the major civil engineering companies in Adelaide. This is a company which has been involved in a number of large-scale projects in SA and Queensland - the development of golf courses, road building, estate development, airport development, large earthwork projects in constrained environments as part of town centre developments and mining projects. The industry, by and large has had significant difficulties to overcome, both in terms of the way in which they conducted business, and in terms of their public image. As a company, they made a policy decision in early 1997 to the effect that they would seek to improve the reliability of their terms of business, and also seek to elevate their area of the industry in terms of its professionalism and public standing.

Around this time they came across the "partnering" concept when Transport SA - the Govt Dept dealing with roads - required a commitment to it as part of their contracting process. Partnering had been developed by Charles Cowan during his period with the US Army Corps of Engineers and with the Arizona Department of Transportation as a way of improving productivity and reliability in their contractual arrangements. Mr Cowan had visited Australia in the early 1990’s at the invitation of the Master Builders Association to explain to senior practitioners in this industry how the strategy of partnering could assist them to achieve their goals.

We looked at the process, particularly as it related to the Adelaide airport runway extension, which was undertaken with Stockport Civil as the lead contractor. This is a project which was completed 6 months early. Given that the contract period was only for 12 months, this was proportionally, a very substantial saving in time, with consequent benefits to the operations and productivity of the airport, which are difficult to quantify. The direct saving to the client was of the order of some $0.5m. One of the mistaken assumptions underlying the old legalistic approach to contracting is that this is a zero-sum game. Your gain is my loss - that what is good for the contractor must necessarily be bad for the client, and vice-versa. But we will quickly see that by working together, significant savings can be made which can be to the benefit of both or all parties.

The traditional way of working is that the principle who is paying to get the job done, appoints a Superintendent to oversee the performance of the contract. In turn, the Superintendent appoints a representative who is to be on site during the construction and who is to make sure that the work gets done properly. As Stockport pointed out to us, one of the biggest problems which they have to deal with during the construction phase is with the design documentation. If it is poorly done, and problems have not been anticipated, then it leads to untold problems regarding who is to bear the cost of amendments or delays. What if power lines or underground cables are found to be in the way - what if required materials are not available from the anticipated source, or if the weather conditions make it inappropriate to put the concrete down?

Additional works, alternative sources of supply, delay all bring with them substantial additional cost. Where these have been anticipated, and the documentation spells out what is to be done and who is to pay for it, few problems arise. But where there is no formula or procedure in place, and the parties have to work something out between them, then each wants to shift the burden onto the other, with a view to maintaining their profitability. The Superintendent’s representative on-site is supposed to be relatively neutral as between the client and the contractor, and to ensure that the contract is completed according to the specification, but in a fair manner.

Some Superintendent Representatives see themselves as out to get the best that they can for the client, even if it is to the detriment of the contractor. In the case of the Adelaide Airport extension, the design documents were particularly good, and the Superintendent had two representatives on site who worked particularly well with contractors. Which goes to show that with a little more time and effort spent up-front, many of the problems which could otherwise arise might well be avoided. In many ways this is what the principle of partnering is all about.

One such issue was clearly an important factor with the airport runway. Stockport was ready to get the project going in early Spring. If it could be completed by the end of summer, then any potential problems associated with laying the concrete in the winter months - bad weather, delays resulting from frosts etc could be avoided. But to achieve this, they would have to work to an accelerated schedule which could only be described as "ambitious". This was a project which would really put partnering to the test.

The essence of partnering is to formalise what are thought to be common sense and good management practices.

Teamwork

To start with the idea is to get all of the interested parties, not just the contracting parties, together early on. In this case the people involved included the client - the Federal Airports Authority, the design team - Airplan Pty Ltd, contractors and sub-contractors, especially the materials providers (Boral). The cost of the materials for this contract was around 50% of the overall contract price, those responsible for air traffic movements - Air Services, the Department of Transport, because of a road re-alignment which became necessary, local councils in the immediate area affected by the vehicle movements bringing thousands of tonnes of quarry materials, owners of the nearby golf course, and the facilitator of the initial partnering meeting.

Avoid suspicion and distrust

The purpose of the initial partnering meeting is to build a sense of trust and mutual respect. In normal circumstances, neither the principal nor the contractor may think that they have the time to go to the local residents committee, or to the businesses in the area to explain about what is happening and how it will affect them. Or they may just be unclear about whose job this really is. When the local people see the signs going up however, they may become suspicious about how the project will affect their amenities, or house or business prices, and start telephoning the contractors or the airport, or their mp. Without knowing who to contact about their concerns, they will be bound to get on to someone who knows only that it has nothing to do with them, but equally does not know who is responsible. This will not only be frustrating to the local resident, but will also look like deliberate deception or prevarication. In this situation of uncertainty, hostility and alarm spread, and before you know it, everyone gets involved in putting out the bushfires, rather than getting on with the job.

The partnering alternative is to allow all of those who have an interest in the project, or who will be affected by it, to be represented at the initial meeting. One does not have to bring together all of the local residents, although that may happen elsewhere. But there is no reason not to bring in a representative of the residents, or businesses or, as in this case, the chairman of the adjacent golf club.

Build mutual trust - exchange information and concerns

By being included in the initial meeting, people have an opportunity to get reliable information about what is going on, and also to put on the table their concerns about how they will be affected. By being provided with information which is not otherwise public, the people involved feel that they are being trusted with something important. By being able to express their concerns they also feel that they are being respected. The outcome of this is that it engenders a positive attitude towards each other, and they quickly find that they are also providing information and ideas about how to solve problems which others have. This is not intended to be a public relations stunt - a sloppy feel-good session to keep the punters in line. This is a strategy which produces quantifiable economic and strategic benefits for the commercial players, and distinct social benefits for the others involved in the process.

Amongst the contextual factors of this particular project was the fact that the runway which was being extended was to remain in use throughout the project. The contractors’ vehicles, machinery and plant would be operating in close proximity to moving and landing aircraft and the related health and safety issues were seen to be of the utmost importance. The "localiser" which is used as part of the landing procedure involves equipment at the end of the runway which had to be moved temporarily during the contract works, and then to a new permanent location when they were finished. Any lack of coordination with airport control could lead to aircraft missing the runway, or landing in wet concrete.

One of the most striking examples of problem solving arose from the fact that some 800,000 cubic metres of quarry material were to be used, which would entail the trucks running day and night (6am to midnight). Everyone had the interest in minimising noise, dirt and traffic delays, but it was not entirely clear about how this might best be done. At one of the early meetings, it was mentioned that there was an internal private road running near the airport perimeter, which could give more direct access to the construction site. By breaking through the fence at the point closest to it, and constructing a temporary access point, the heavy trucks could then gain access to the site by travelling across private (and uninhabited airport land) as opposed to going round by the busy public road. This not only cut the distance involved, which was significant enough to reduce petrol and associated expenses, but also the public nuisance factor. There were obviously many people who would be affected by the contract works but who were not part of the contractual relations, but could impact on its performance, and many complex issues of technical, business, human and social nature which needed to be worked out.

The partnering workshop

It is thought that partnering should only be attempted by those that have a positive attitude to this approach, and that it should be supported by representatives of each interest represented at the highest levels - the CEO and senior managers or directors of the companies involved, for example. The process often commences with a full day workshop, led by a professional facilitator, and usually takes place on neutral territory - a conference or convention centre rather than the principal’s or contractor’s premises. The program goes through the issues of partnering, and its goals, with the objective of producing a Charter which will guide the relationships.

Commitment: The participants are invited to commit to working together in a positive way so as to minimise problems and maximise opportunities.

Goals and objectives: Each representative is invited to explain what their goals or objectives are, and what their major concerns are. These may include operating profitably, within budget, within schedule,

Prioritisation: The objectives and concerns are listed and prioritised, and the whole team then addresses the ways in which the concerns can be tackled.

Task assignment: The various tasks which have been put on the table are assigned to designated individuals to work on the problems.

Report back: The people who have been assigned tasks undertake to report back to the group within a designated timeframe.

Issue resolution: Each of the parties has to identify who it is within their organisation who will receive the initial notification of any problems or difficulties and then the people and time frames within which the rest of the procedures will work. For example, if the supervisor cannot resolve the problem within say half an hour, then it may go to the site manager to resolve it within say, 2 hours. After that it might go to the regional manager who will have half a day, to work on it, and failing that it will go to a director who will have 2 days. The main objective here is to have a procedure which is transparent, or open, and subject to known and agreed time frames. The obligation to make the procedure work is owed not just to the person who has raised the issue, but to the whole team. Any failure in this respect will no doubt be brought up at the monthly meeting.

Regular meetings: The team undertakes to meet on a regular basis - say monthly, and to complete a questionnaire on each occasion to indicate any outstanding problems, and their level of satisfaction or confidence about the way in which the job has been going, or will be going in the near future.

Is it really the partnering which makes the difference?

Some of those involved in the airport extension expressed doubt as to whether it was the partnering which contributed to the successful outcome, or whether it was the fact that they just happened to have a group of well motivated people. Maybe the outcome would have been just as good without the partnering? I see this as one of the crucial issues which we have to consider and explain. Suppose we were to have a group of well motivated and well informed people who get together to complete a complex contract or undertaking. How would they go about it?

Even if they had not heard about partnering before, one would hope that the processes that they would go through would be indistinguishable from the process which we have just discussed. And if they wanted to put a name to this new process - they could hardly do better than to call it "partnering". In fact, the people who have been involved in these projects often say that partnering is not just a process - it is a philosophy. They mean by that, that it is the manifestation of an attitude to their work and to their business and social relationships, which can be mutually supportive of each other.

However, the most important thing is not the processes themselves, but the underlying attitudes which drive them. In discussions with the Master Builders Association, I asked for copies of their documented procedures, and was surprised to be told that they didn’t have any. They have a brief 6 page "Introductory Guide", of general application, but otherwise they depend upon the parties working out the appropriate procedures for the particular projects which they are developing. How better to develop the sense of ownership or of commitment to the process? What people have developed and agreed to they will better support.

The parties, for example, might decide not to use a professional facilitator but to work out the issues for themselves. They might have more, or fewer people involved, and they might meet for longer or shorter periods. However, by way of overview, we can say that this methodology provides the opportunity to develop a shared conceptualisation of the relationships, and procedures, which act as a catalyst in the development of the relationships. It legitimises what otherwise might be questionable behaviour. It reduces risks and provides positive feedback as part of the process.

For example, whilst I might want to collaborate with others, if I inform them of shortcomings in the work which they have done, they might respond negatively, seeing it as "criticism". It might expose them or me to risks, in that the action complained of might become the basis for allegations or action for breach of contract. The adversarial legal framework discourages early, open or full disclosures. By contrast, partnering is designed to open up new channels of communication, and to ensure that all involved know what the appropriate channels are to deal with the different contexts within which they are working. Some general issues can be dealt with at the monthly meetings - others are dealt with through the issue resolution procedures. The main contractor would normally only talk to the principal, and interaction with third parties would then be done indirectly through the principal’s employees. However, because the principal, contractor and other third parties are all present at the initial meeting, it legitimates and facilitates direct communications between each of the parties. This in turn cuts down on the time and numbers of people involved in the communications, which no doubt reduces the possibility of mis-communications.

Experience indicates that the participants at the monthly partnering meetings indicate improved levels of satisfaction with work done, and of improved levels of optimism about future developments as the project progresses. The meetings cannot of course, even with the best of intentions, avoid all of the difficulties which crop up, but it provides a means for close monitoring of developments and early detection of things which can go wrong. The improved levels of confidence might well be due to the development of the project as much as to the development of the partnering process. But each should be seen like the strands of a rope - each of the strands has a mutually reinforcing effect on the others - and the rope (or project) is simply the collective name which we give to the collection of all the strands, and is not something set apart from any one of them. Partnering is not something over and above the relationships that the parties have, but the very relationships themselves.

Partnering is part of the performance of the contract, but an intention to partner is disclosed in the pre-contractual stage. Stockport have a corporate policy to partner where there are opportunities to do so, but clearly will still bid on contracts where this is not possible.

Summary

Partnering process - to be successful is much better than passing the blame for failure

Early and pre-contractual declaration of intent to partner - see local and national press

Partnering Workshop - facilitator - neutral premises

Commitment of all to the process - high level support from each organisation - focus on win-win

Statement of the goals of each party - within budget - within timelines

Statement of concerns of each party - safety - disruption - nuisance

Statement of ideas from each party - better ways to do things

Prioritisation of procedures to address concerns or test new methods of working

Allocation of responsibilities to group members with timelines

Issue resolution procedures for each entity with timelines at different levels

Monthly meetings to monitor progress - levels of satisfaction

Celebrate and publicise successful outcomes

Look for new opportunities - industry prize for project management - work with university team to educate business and law students, and write up background to legal issues.

A successful project, and the confidence it engenders, is the best way to win new contracts

Legal Implications of Partnering

"The Partnering concept is not a new way of doing business - some have always conducted themselves in this manner. It is going back to the way people used to do business when a person’s word was their bond and people accepted responsibility". Partnering - A Strategy for Excellence - MBA 1992

Anyone familiar with the insurance industry will know that at the beginning of the 19th century, people of substance used to meet in the coffee houses of London to accept risks on various ventures. The acceptance of the risk was undertaken by signing a slip of paper on which the venture was identified. The coffee houses grew into Lloyds of London - the people of substance became "Names" at Lloyds, and the process of risk acceptance by signing "the slip" continued until the present day. Some of the largest risks in the world have been insured and reinsured on this basis.

Partnering is not a contract, but a recognition that every contract includes what the Americans refer to [as] the implied covenant of "good faith and fair dealing". Partnering - A Strategy for Excellence - MBA 1992. It is often said that the contract establishes the legal relationship, and that the partnering charter develops a management strategy to focus on creative cooperation and to develop working relationships based on mutual respect, trust and integrity, with a view to win-win solutions arising from joint problem solving and synergistic teamwork.

In many ways, the motivation which underlies partnering is very closely allied to the motivation which underlies insurance. Insurance works because we all know that bad things will happen – it’s just that we cannot know in advance precisely who they will happen to. So all of those who are exposed to the risk get together and contribute to a common kitty (they pay premiums) so that when the inevitable occurs, they each contribute to the costs of putting it right. At least I can then be reassured that if the lightning or fire destroys my business, thousands of others who were in the same situation will contribute to the cost of rebuilding my business and maybe even covering my loss of profits in the meantime. Insurance enables cooperation and collaboration on a national and global scale.

Partnering is like insurance on a local basis. When 2 or 3, or 10 or 20 companies get together to undertake a complex task, we all know that something is bound to go wrong. It’s just that we do not know in advance precisely where or how. So instead of everyone just watching out for themselves, we all now agree to watch out for each other. As soon as a problem arises, we now have a whole team who will focus on putting it right as quickly as possible with minimum cost. "This requires changing traditional relationships to a shared culture without regard to organisational boundaries". Construction Industry Institute cited in Partnering - A Strategy for Excellence - MBA 1992.

When it is said that "partnering is not a contract, but a recognition that every contract includes what the Americans refer to [as] the implied covenant of "good faith and fair dealing" this is not quite correct. The provision is to be incorporated into the American contracts by virtue of the provisions of the Uniform Commercial Code Art1-203 which makes it an express term of the American contracts. A similar provision is contained within the French Code Civil, Art 1134. It is often said that the partnering process should not affect the legal relationship between the parties.

Of course, if the contracts of the MBA members include a specific provision to state that they include the covenant of good faith and fair dealing, then the partnering guide merely re-iterates what is to be found in those contracts. If the contracts however do not specifically incorporate that term, then the "partnering guide" could well be used as the basis for claiming that it is to be an implied term in those contracts. Whether it is to be implied "ad-hoc" or as a matter of law, being a necessary incident of a particular class of contract (as discussed by Finn J in Hughes v Air Services) is then an interesting question which we will look at elsewhere.

If on the one hand the partnering documentation was to say that:

partnering is not intended to change the legal relationships between the parties

and on the other hand, the partnering documentation was also to say that

"partnering recognises that every contract includes a covenant of good faith and fair dealing"

can we then use the partnering documentation as evidence of contractual intent? Or to take a slightly different situation; a Civil Engineering company has a framed certificate on the reception desk at its main office which is headed "Partnering Policy". It then goes on to say that the company formally endorses the partnering process, and that "it intends to complete all of its contracts in accordance with a covenant of good faith and fair dealing". Yet in the rest of its documentation it reiterates the point that partnering is not intended to change the legal relationships between the parties.

Hibbert and Moloney in "Good Faith in Commercial and Construction Contracts" whilst making passing reference to the concept of partnering, seem not to have noticed the extent to which the covenant of good faith is explicitly incorporated into contracts of this type. Indeed they say that "any debate about good faith may come as a surprise to some in the commercial community, as the doctrine of good faith might simply put into place expectations they already hold (perhaps, naively) that their contracting partners must act fairly and reasonably towards them. We would suggest that the belief, at least in Australia, far from being naive, arises from clear statements of intention which will become part of the contractual undertakings of the members of the Master Builders Association, unless specifically excluded in any individual contract.

Top of Page