Terms like employer’s agent, construction manager, project manager and contract administrator are often used interchangeably, but the exact role performed by someone with any one of these labels can vary enormously.
The starting point for defining the responsibilities and liabilities of a contract administrator are the terms of engagement between that person and the employer, in conjunction with the construction contract. Only then can the body of case law which refines the contractual position be considered. Underpinning the contractual position are further duties to use reasonable skill and care and to act impartially.
The standard of care imposed on a professional at common law is to carry out its services with “reasonable skill and care”. The test is that of the ordinary skilled and competent practitioner in the relevant profession (Bolam v Friern Hospital Management Committee [1957] 1 WLR 582; [1957] 2 All ER 118). This is imposed regardless of whether it is specifically referred to in the appointment. The same standard is also imposed on the provider of services by the Supply of Goods and Services Act 1982, Section1. Alternative wording to “reasonable skill and care” is often proposed in non-standard professional services agreements. These phrases could impose a higher duty, for example: “the professional is a specialist in”.
The contract administrator is engaged by the employer to act as his agent to ensure the works are completed economically and efficiently. Failure to perform those duties properly may result in the employer suing him for damages. But in performing them he must act fairly and professionally in applying the terms of the construction contract. The seminal case was decided in 1974 by the House of Lords. Sutcliffe v Thackrah [1974] AC 727 established that an architect owes a duty of care towards his client, and the contractor, in the performance of all duties, including contract administration, and specifically certification, and could be liable for negligence in the performance of those duties. Negligent over or under certification would be an obvious example. In that case, Lord Reid stated: “The employer and the contractor make their contract on the understanding that in all matters where the architect has to apply his professional skill he will act in a fair and unbiased manner in applying the terms of the contract.” An architect is not an arbitrator but he has “two different types of function to perform. In many matters he is bound to act on his client’s instructions, whether he agrees with them or not; but in many other matters requiring professional skill he must form and act on his own opinion”.
It is such an unusual state of affairs for the employer himself to be the certifier and decision maker that this can only be achieved by an express term. This scenario was discussed in the case of Scheldebouw BV v St James Homes (2006) BLR 113. The employer, St James Homes, had removed Mace, their construction managers, and proposed themselves as the replacement. Scheldebouw objected. The contractor took the matter to court for a ruling on whether the employer was entitled to act in this way under the contract in question. The judge found that the construction manager fulfilled two different functions which could be described as the “agency function” (as in instructing variations) and the “decision-making function” (as in ascertaining loss and expense and granting extensions of time). The same of course is true of architects and engineers in most standard forms of contract. After referring to various cases, the judge reached the following conclusions:
- the precise role and duties of the decision-maker will be determined by the terms of the contract in question
- generally the decision-maker is not and cannot be regarded as an entity wholly independent of the employer
- when performing his decision-making function, the administrator (in this case a construction manager) is required to act in a manner which has variously been described as independent, impartial, fair and honest. These words connote that the decision-maker must use his skill and best endeavours to reach the right decision as opposed to a decision which favours the interests of the employer
- the contract did not allow the employer to appoint himself as construction manager. It was not envisaged that the role of the decision-maker should be exercised by the employer himself. The whole structure of the contract was that the decision-maker should be a separate entity from the employer
- the concept of the employer carrying out the functions of the independent decision-maker were so unusual that it would require express words in the contract to bring this about. There were no such words in this contract.
In every previous case before the courts in which the certifier was a direct employee of the employer, this fact had been known at the outset and the contractor had priced the works on that basis. This was not the case for Scheldebouw and they were therefore entitled to reject a situation in which St James unilaterally chose to act as its own construction manager.
A contract administrator may in some circumstances be liable in tort to a contractor or others. In Townsends Ltd v Cinema News, etc. Ltd [1959] 1 WLR 119 CA, there was a statutory duty upon the contractor to serve notice upon the sanitary authority before executing certain work, but there was proved to be a clear practice that the contractor “relies upon the architect to do all the work and give the notices and see that regulations are complied with”. The contractor relied in this case upon the architect serving the proper notice and seeing that the byelaws were complied with. The architect failed to carry out these tasks properly resulting in a breach of the byelaws causing loss to the employer, which he was entitled to recover from the contractor. In turn the contractor recovered this loss from the architect who, having undertaken a duty towards the contractor, was liable to him for its negligent performance although it was undertaken gratuitously. Consultants may also, in some circumstances, become liable to the contractor for loss caused by reliance on a negligent misstatement {Hedley Byrne v Heller & Partners [1964] AC 465, 503, 530 and 539 HL}, particularly in respect of an answer to some specific inquiry on a matter and in circumstances where the contractor reasonably relies upon the architect’s judgment or skill or his ability to make careful inquiry. But the consultant would probably not be liable if he expresses his statement to be given “without responsibility” or otherwise in such a way as to show that he does not accept a duty of care towards the contractor.
The employer’s agent is the employer’s representative and their relationship is governed by the law of agency, i.e. the employer’s agent must act as instructed by the employer and has no discretion. The employer’s agent has no duty to act fairly between the parties and has no duties to anyone save the employer. The employer’s agent should take great care to act within the terms of the authority given to him by the employer, so that conflicts of interest and disputes with the employer can be avoided. However, the employer is not at liberty to act in a completely unfettered fashion but is subject to an implied contractual obligation that it will not act unreasonably, dishonestly, or capriciously in withholding approval, or by extension instructing the employer’s agent to withhold approval This principle is longstanding and the authority cited in support is an old one: Dallman v King (1837) 7LJ CP 6. The court leans against a construction of the terms of the contract making the approval of the employer a condition precedent to payment, and prefers a construction making the promise to complete according to the employer’s approval, and the promise to pay, independent of one another. In such a case if the work does not meet with the employer’s approval he cannot refuse to pay under the contract, but can only seek a reduction in the contract price by way of set-off, or counterclaim for damages.
The employer’s agent is put in a difficult position where the employer is acting unreasonably, as there is an implied duty on the employer’s agent to act fairly and honestly as part of the general duty to look after the employer’s interests. Whether the employer’s agent is bound to do what the employer instructs depends on the function of the employer’s agent. As we have already seen, the leading authority on the duties of certifiers under construction contracts is Sutcliffe v Thackrah, which clearly established that the role of certifier is different to and separate from the role of the employer’s agent.
Summary
Traditionally employers have engaged professionals to manage construction and engineering contracts. While the scope of their duties depends on the terms of the particular contract, usually they perform two distinct roles. The first is as agent of the employer – for example in issuing instructions and ordering variations. The second is as a decision-maker – for example in certifying payments, assessing claims for loss and expense and in awarding extensions of time.
A contract administrator acting as a decision-maker has to act independently, impartially, honestly and fairly. He must not favour either contractor or employer. However, he does not have to apply the rules of natural justice when making his decisions.
Contractors and employers are entitled to expect that contract administrators will be fair in their decision-making. They cannot be independent in the (common) situation where they are engaged by the employer, but they can be expected to act impartially as between contractor and employer in their decision-making role, in the sense of favouring neither. The concept of acting independently is still relevant.
If the administrator negligently over-certifies in the contractor’s favour he can be held liable to the employer who engages him. In special circumstances he might also be liable to third parties, such as institutions lending money to the employer.
In normal circumstances an administrator who negligently under-certifies will not be liable to the contractor. However, if for example, he makes gratuitous representations to the contractor he may be found to have assumed a responsibility to him and be liable in negligence.
If the employer exerts pressure on the administrator so that he loses his impartiality and independence then the administrator’s certificate may be invalid and his decision ignored. Furthermore, if the employer knows that the administrator is not carrying out his functions properly then he may himself be liable to the contractor for breach of contract if he does not take steps to correct the position.
In principle, there is nothing to stop parties agreeing that the contract administrator should be an employee of the client/employer. In theory, the employer itself could act as contract administrator but this is unusual and potentially fraught with difficulty. The clearest express terms are needed to bring this about.
These principles have long been applied to ‘traditional’ construction and engineering contracts. Recent attempts to argue that they do not apply to decision-makers under new forms of contract have been rejected by the courts.
