Is common to consider the contracts a “thing for lawyers”. Clearly the legal support is im- portant, but it should not be forgotten that contracts are, especially and mainly, the organized reflection of the will of two or more parties. In short, the contract - as a written docu- ment - is what those who decide to contract, let's call them the "decision makers", have agreed.
As a consequence, it is important to take into account that contracts are mainly the respon- sibility of those who close the agreement, that is, the decision makers.
During the last 25 years I have worked basically in the engineering and construction sector, mainly in heavy industrial and high demand markets: mining, oil & gas, energy and large in frastructure.
“Construction activity is conflictive per se” was the title of an extremely interesting interview (El Comercio, August 26, 2015, B4) with Gustavo Paredes, founding partner of the NPG Abogados law firm, and he was not wrong. In that interview Paredes proposed that the cha- llenge was to prevent conflict and detailed how as a result the State was introducing dispu- te resolution boards, made up of experts who know the problem, within the new State con- tracting law.
Since, as Paredes related, “In its DNA, construction has the conflict, the claim, the dispute as part of the construction process.”, the dispute resolution boards would be a way to pre- vent and control the conflict.
It cannot be denied that dispute boards are a way to control conflict, but it is necessary to recognize that they are not really a way to prevent it. If we come to knock on the door of a dispute board, it is that we have already reached the conflict. Preventing the conflict in an economic way would be the remedy, the “gene therapy”, that the construction requires. Now, how can conflict be prevented?
To answer this question, it is necessary to analyze what a contract is. A contract - in the broad sense - is the agreement that two or more parties have reached and which is then reflected in a written document as clearly as possible. If we think about this, we find that the parties agree on rights and obligations, but they are also agreeing on risks. The parties are agreeing who takes what risk. Risk is here understood as the cost associated with con- trolling an occurrence.
Thus, it is usual for the contractor to cover the risks related to labor and materials, while the owner generally bears the risks of the ground and, if he supplied the design, also the errors of the project (of course said owner surely has a contract that protects him from his desig- ner for the latter's errors). My thesis is that the origin of the disputes is the incorrect distri- bution of risks.
It turns out that, as in almost any field, the most economical way to solve a problem is to entrust it to the person who has the best knowledge and means to achieve the solution. Perhaps the phrase "why me if that corresponds to ... (this or that area or person) sounds familiar to many?" when a complicated assignment is decided in a company.
When an owner seeks the contractor to bear responsibility for a design provided by the owner or a contractor wants the owner to bear the risk of labor, we are sowing conflict.
There are of course hundreds of examples and cases in which, by forcing the wording of the contract to carry a risk inefficiently, we sow conflict and the negotiators of the parties sit at the table in a belligerent attitude.
It also happens that some party presses for agreements that are excessively onerous. I have had clients who demanded that there be no limit of liability or that said limit be the entire value of the contract. What such clients were asking was that if a normal, bona fide mistake was made - nothing involving fraud or unacceptable mistakes usually called negligence - the culprit paid for everything no matter what it cost.
This may sound fairly logical, but if we put it in context we must take into account that, generally, the owners are much larger companies than the contractors. If a bona fide contractor error causes damage to mining equipment, the replacement value of that equipment may cost more than the entire contract of the contractor who entered the job expecting to
earn a percentage, just a fraction, of such a contract and ends up exposed to losing several times more than the expected winnings.
The "classic" solution is of course to agree on a reasonable limit for liability and to work with insurance to cover the cost of such contingencies, and the smartest solution I have seen is that the client is the one who contracts this insurance. Why is it the smartest I've ever seen? Well, because usually the client already handles large insurance packages and only needs to carry out the procedures to cover the risks of any contractor who enters to work within their premises, which is why they have the best costs and instruct the contractor not to consider such insurance costs in its price. Thus the total cost of the project is reduced.
It is this concept that I consider essential: the overall cost is reduced and this happens be- cause the party that is best prepared to bear the cost of controlling risk is the one that is left in charge of that risk.
Applying this concept we must understand that a project, whatever it may be, is a collabo- rative effort between two or more parties and success is to achieve its completion in the most economical way possible. The "economy" of course refers to both cost and time. This implies that the parties who sit at the table to negotiate a contract should not be seen as antagonists, but as partners with a common goal: to reach port at the highest speed and at the lowest cost. To this end, their objective should be to distribute the risks in such a way that they are assigned to whom better - faster and with less cost - can handle them; instead of looking to pass on all the trouble to the antagonist.
To the extent that all parties feel that they have been left in charge of risks for which they are prepared or, at least, better prepared than their counterparts, the germ of conflict is reduced. We will hardly be able to eliminate the conflict, but it is clear that we are mitigating it.
Returning to the thread of the first paragraphs of this article, if we consider that those res- ponsible for the contract are the decision makers of the agreement and we recognize that the legal areas are the specialized advisers, not those responsible, we will see that the ne- gotiation must be carried out by the aforementioned decision makers, since they are the ones who, simultaneously, have the best knowledge of the project and of their own organizations, which is why they are in the best position - the most economical - to define what risks each party should take.
Rule of thumb that I learned and have always maintained: never pass the contract to legal review without first having made the substantive review as a decision maker. The legal area has the right to receive the contract already discussed by the decision makers, so that their own contributions can be better focused and with less need for consultations or clarifica- tions. In short, we can also achieve savings in the use of the time of our legal advisors.
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