Technical Specifications – Where the Trouble Starts

It is no secret that the source of most problems in a technology-centric contract is the specification.

(1) If the specification is vague, or mistakenly relies on the propensity of the reader to fill the gaps with the same assumptions as the writer, then each party will have a different understanding of what is to be delivered. This leads to two potential problems:

(a) The supplier delivers something different to what the purchaser actually requires; or

(b) The purchaser can continually use the ambiguity in the specification to deny payment or insist on endless rework.

Ultimately, each party will rely on its own interpretation and assert that the other party has breached the contract.

(2) If the specification turns out to be unworkable, there will need to be appropriate contractual mechanisms and an effective working relationship to resolve this. Without this:

(a) The purchaser will assert that the supplier is trying to deliver less than what was agreed to, or repudiating the contract; and

(b) The supplier will be burdened with the cost of rework or even abandoning the project.

The end result (if delivered) will likely struggle to fulfil the purchaser’s purposes for the project. Again, this difference in what each side had in mind when entering the contract provides fuel for disputes.

It is little wonder that most disputes come back to the specification, as it provides the baseline on which the major parts of a technology-centric contract rely:

(a) Payment terms rely on acceptance that certain features of the specification have been met;

(b) Warranty terms rely on answering whether the deliverables have failed to perform according to the specification;

(c) Maintenance and service level agreements rely maintaining or returning the deliverables to the requirements of the specification;

(d) Liquidated damages clauses will rely on determined whether certain aspects of the specification have been met by a certain date;

(e) Variation clauses rely on determining the extent to which a change request is a deviation from the agreed scope of work;

(f) Common law rights of termination and damages rely on discerning the disparity between what was delivered and what was required;

(g) The pricing of the contract relies on the interpretation of what is required to satisfy the specifications;

And ultimately, a failure to translate purchaser expectations into a specification, which, if delivered will satisfy them, risks the agreement ending in disputes and project failure.

The trouble with specifications is that they exist at the intersection of three project vulnerabilities:

(1) Specifications are often drafted by engineers, or other technical professionals. These professionals are accustomed to communicating using the jargon and terminology of their respective fields and not for the broader audience that a contract specification must communicate to. They risk drafting the specification in a manner that is riddled with numerous assumptions because in their mind those assumptions ‘go without saying’.

Unfortunately, any audience outside that area will apply their own assumptions to fill those gaps and arrive at a different interpretation of what is required. Furthermore, a non-technical audience (e.g. lawyers, managers and business people etc) will often be unable to traverse those assumption-gaps in the specification and struggle to read the document at all.

(2) The lawyers engaged by the parties to draft and negotiate the contract often lack the technical literacy to address shortcomings in the specification, don’t know the right questions to ask, and won’t want to concede that they don’t understand it. As a result they are likely to gloss over the specification and revert to risk-shifting clauses to pin the cost of eventual project issues on the other party. For those who desire to ‘leave the contract in the draw’ while administering the project, risk-shifting clauses provide little assistance.

(3) The more unique a project is the more difficult it is to predict all the issues that may arise. As the saying goes, ‘no plan survives first contact with the enemy’. The art in drafting specifications, is in providing adequate quality and performance goals, while allowing room to adapt to handle uncertainties as they occur during the life of the project.

For example, there may be known uncertainty at the outset about what exactly will be required, or whether certain performance levels can be guaranteed. Options to deal with this may include the use of a high level specification, with a more detailed specification to later be accepted or rejected against that high level specification once those unknown have been addressed; or the specification might provide room for the supplier to determine the best trade-off within specified tolerances.

The best way to keep a project on track is to avoid disputes from arising at all. The most fertile origin for disputes in a technology-centric contract is the specification. In the worst case, it will be a legally trained mind (i.e. a judge) that will finally determine the ‘proper’ meaning of the contract.

Therefore, the best means to de-risk a technology-centric contract is to engage professionals at the start who have the skills and expertise to critically analyse specifications from both a legal and technical standpoint. Engaging such expertise before signing the contract reduces the risk to all parties and ultimately, makes the project much more likely to succeed.

See also: How lawyers can serve engineers better

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Lawyers, how to choose them and how to use them to save you money

Business owners can often be apprehensive about engaging lawyers: they charge too much, they take too long, they don’t listen properly to what your priorities are, they don’t speak the language of your industry, they cause disputes to escalate rather than resolve, and signing a costs agreement can feel like writing a blank cheque. But this need not be the case.

If you know how to choose the right lawyer for you, and how to use them in the right way, they can actually save you a lot of money and help you move forward with confidence.

How to choose the right lawyer

Common experience

A great start is to look for a lawyer who has experience in your industry or situation. For example, my father, Peter Kelso, spent 13 years in foster care as a State ward. He now has a significant practice representing former State wards. Why? Because he speaks their language, he understands the challenges they face, and because he relates to them they know that he will go the extra mile for them.

Many excellent lawyers have come to the law having previously trained or worked in other industries. There are lawyers with backgrounds in medicine, psychology, engineering, building, small business, media, and the list goes on.

Lawyers love to fight for a cause, so look for a lawyer who relates to your situation and chances are they will go above and beyond for you.

Systematic methods

When you approach a lawyer about a problem they may not be able to give you a solution off the cuff. This is because legal issues usually involve too many variables – much like the ground conditions on a construction project, you can never know with certainty what you’re going to be up against until you start digging.

However, they should be able to give you an outline of how they will go about designing the strategy, executing it, and the usual milestones along the way. Lawyers who have a methodical, systematic, ‘project management’ approach to their work are far more likely to deliver on time and on budget.

Temperament

Employing the most aggressive or ‘alpha male’ lawyer in town can often work against you. The significant majority of disputes are now resolved by various forms of negotiation or mediation. These methods require a lawyer with emotional intelligence who can change gears and use a range of tactics, from the adversarial to the relational to the courteous diplomatic deal-maker. Using only aggressive tactics will put the other side on the defensive and leave them in no frame of mind to rationally consider the weaknesses of their own case.

A good indicator in choosing a lawyer is how well they engage with you when discussing the work you need them to do. Is the conversation focused on understanding your situation, your priorities, and how to achieve your objectives? If it’s all about them, or you don’t feel listened to, that’s not a good start.

How to use your lawyer

Prevention is cheaper than cure

A significant cause of the cost of engaging lawyers is that people often engage them only after things have gone pear-shaped. When you consider the losses you’ll have to wear, the disruption to your business, and the legal costs involved in litigation, there is significant money to be saved by engaging a lawyer early to help you weed out the risks and resolve disputes before they escalate. Engaging a lawyer in this way will make their fees affordable, and all the more so because you’ll be able to spend more time focused on running your business.

Mitigating the risk of disputes

The terms of the contracts you enter are a major source of disputes. If they are vague, incomplete, too ridged, impractically allocate the risks to parties who can’t control or contain them, rely on shaky assumptions, or are open to a variety of interpretations then this is fertile ground for disputes to arise.

If the contact has not yet been signed, your lawyer can negotiate amendments to mitigate these risks. If the contract has already been entered into, your lawyer can assist you to clarify the operation of the contract with the other party, and may be able to negotiate variations to head off potential issues. Your lawyer can also advise you on the systems, procedures and record-keeping needed to ensure that you are in a strong position should a dispute arise. (Being organised and following the contract procedures will also make a big difference to how much work your lawyer has to do to).

Resolving disputes before they escalate

Getting legal advice early can help see a dispute resolved in just a few emails. Your lawyer can assist you in responding to the other party in a way that leaves them uncertain about the strength of their position and far more willing to resolve the matter in a mutually suitable manner. While the standard threatening letter can cause things to escalate quickly, a skillful and persuasive response can help resolve the dispute and maintain the business relationship.

I recently had a matter where one well-worded email was able to achieve a written apology, the payment of several thousand dollars in previously disputed invoices, and an invitation to discuss further business. Disputes need not escalate to ‘lawyers at twelve paces’.

Appeals are expensive

The recent case of Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2) [2016] NSWCA 379 shows just how expensive things can get when disputes escalate. In that case, Shade Systems served a progress payment claim on Probuild for construction work. Probuild served a payment schedule on Shade Systems stating that no amount was payable because the liquidated damages cancelled out the value of the work claimed. The dispute when went to an adjudicator who misinterpreted the contract and awarded about $277,000 to Shade Systems. The matter then went to the Supreme Court who quashed the adjudicator’s decision, and then to the Court of Appeal who set aside the previous order.

Now, imagine the expense that could have been saved had the parties used lawyers who could communicate and resolve the disagreement over the interpretation of the liquidated damages clause without resorting to the adjudicator; or failing that, had Probuild provided persuasive submissions to the adjudicator to guide his/her interpretation of the contract. Sometimes (and perhaps in that case), the other side is determined to litigate, or a decision-maker will inexplicably decide against you anyway. However, on average, a lawyer who can anticipate the sticking points and resolve them with clear communication will save you a lot money.

When to contact your lawyer

Running a problem by your lawyer need not be big deal or a formal occasion. The sooner your lawyer is told about an issue the better the chance they can resolve it. If you’ve picked the right lawyer, you should feel free to email or pick up the phone for a casual conversation about the issue. A good approach can be to email an outline of the issue, and schedule a follow up phone call. This will give your lawyer a chance to think about the problem first, and the conversation should be more productive.

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Outline of the Building and Construction Industry Security of Payment Act

Regular cash flow is the lifeblood of any business. This is particularly so for those in the construction industry, which has led to the Building and Construction Industry Security of Payment Act 1999 (NSW). Similar legislation exists in most Australian jurisdictions:

  • Building and Construction Industry Payments Act 2004 (QLD)
  • Building and Construction Industry Security of Payment Act 2002 (VIC)
  • Building and Construction Industry Payments Act 2004 (WA)
  • Building and Construction Industry Security of Payment Act 2009 (TAS)
  • Building and Construction Industry Security of Payment Act 2009 (SA)
  • Building and Construction Industry (Security of Payment) Act 2009 (ACT)
  • Construction Contracts (Security of Payments) Act (NT)

The main purpose of these Acts is to ensure that progress payments on construction projects don’t get held up by disputes, which can easily lead to contractors going under. Litigation can quickly become a war of attrition, and meanwhile people have businesses to run and bills to pay.

The graphic below provides a general outline of the process of enforcing progress payments. The process is comparable in most jurisdictions, and the courts generally seek to interpret these Acts consistently with each other.

Due to the very limited scope for challenging an adjudicator’s determination, it is strongly recommended that you have the assistance of a lawyer throughout this process – as the saying goes ‘measure twice, cut once’ prevention is always less expensive than cure.

It is also good practice to seek legal advice on how to comply with the procedural requirements of the Security of Payment process for your particular project. This advice will be a very valuable addition to your contract management plan.

outline-of-building-and-construction-industry-security-of-payment-actNotes:

  • ‘Construction Work’ includes the supply of goods or services related to the completion of construction work.
  • ‘Reference Dates’ are the dates or events (or milestones) in the contract that trigger progress payments. If the contract does not specify these triggers then the reference date is the last day of each month, starting with the last date of the month in which the construction work was first carried out.
  • ‘Respondent’ is the party to the contract with the Claimant who has undertaken to pay for the Construction Work.
  • ‘Payment Claim’ is a claim for payment for Construction Work carried out on or before the Reference Date. (Note: there can only be one Payment Claim served per Reference Date, but you can claim for work that was included in a previous Payment Claim that the Respondent has not yet paid for).
  • ‘Payment Schedule’ sets out the amount that the Respondent considers is due and owing to the Claimant, and the reasons for withholding payment for work claimed by the Claimant in the Payment Claim.

AustraLaw can assist with all payment claim issues, including:

  • Advice on complying with the procedural requirements to enforce or respond to payment claims;
  • Preparation of Payment Claims and Payment Schedules;
  • Preparation of Adjudication Applications and Adjudication Responses;
  • Enforcement or challenging of Adjudicator Determinations.

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How engineers can get their projects approved

Let’s be frank, communication is a common problem in engineering. Engineers often encounter difficulty in selling their solutions to those with the power and money to make them happen. Were it otherwise we would not have had a number of presentations at the Australian Engineering Conference lamenting the sporadic (rather than integrated) approach to infrastructure projects in this country.

What is needed is to apply some basic principles of advocacy and persuasion:

Step 1: Get their attention

Step 2: Make them want it

Step 3: Help them justify it

Too often the first two steps are skipped to focus on the details. However, the following engineers knew the value of entertaining their audience and speaking to their self-interest. As a result they were successful in getting the political and financial capital they needed for their projects.

Examples of engineers who successfully had their projects approved

(1) Elon Musk built attractive demo models of his Tesla cars for the venture capitalists to test drive; he throws exclusive parties for the media at the Tesla factory to announce new features; and he uses the Tesla mission and aesthetic to win the will of the public.

(2) General Sir John Monash would invite superiors, politicians and royalty to inspect his troops. When they came he put on spectacular demonstrations that entertained them and played to their egos. He would also attend dinners and parties and charm the friends and peers of those whose approval he required to advance his plans.

(3) Nikola Tesla expressly set out to demonstrate his discoveries and inventions in a visually entertaining way. As he stated in his lecture delivered before the IEE in London in 1892 “It has been my chief desire this evening to entertain you with some novel experiments.” This approach earned him media attention and numerous invitations to present his work.

While it is natural for engineers to focus on the elegance and technical superiority of their projects, the above engineers knew to remember their audience. Big projects require the backing of political and financial capital, both of which are often held by those with non-technical backgrounds.

Such an audience has political or financial capital because they have focused on the pursuit of these things. So grab their attention by portraying your ideas in a visually entertaining way and show them how your project will help them further (or avoid harm to) their interests. Visually entertaining demonstrations will also help gain media attention which will amplify the reach of your message and gain the interest of the public.

This leads on to the final point – gaining political and financial capital is greatly assisted by having the support of the public. I can say from experience that politicians are far quicker motivated to action by a critical media, than by the receipt of detailed submissions or proposals. Your careful work will be of little priority, and easily abandoned by politicians, without the support of the public and the media. So feed the media and sell your projects on how they will relieve the frustrations of every-day people.

AustraLaw believes strongly in the importance of engineering projects. The work of engineers provides the physical and electronic infrastructure to drive the economy and improve the lives of everyday people.

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Interpreting legislation for Engineers

Engineering provides an excellent foundation from which to understand the interpretation of legislation and challenging of government decisions. With legislation invading nearly every aspect of a project, misunderstanding it has become a risk in itself – and you can’t manage what you don’t understand.

As most engineers will have learned some form of programming language at university, this provides a good framework for understanding the process.

A basic outline of creating legislation:

(1) The Parliament produces the legislation.

(2) The Executive (government departments) executes the legislation. Evidence and submissions are the inputs, and decisions are the outputs.

(3) Lawyers review the decisions for errors and unintended results.

(4) Courts correct the decisions and provide patches (in the form of precedents).

(5) The Parliament reviews the performance of the legislation from time to time and produces updates (in the form of amending legislation and regulations).

Legislation, like software, uses definitions and an ‘if this, then do this’ approach. Where legislation neglects to provide for a particular situation, or fails to define key terms, lawyers must draw on their knowledge of past cases and other legislation (such as the Interpretation Act 1987 (NSW)) to read between the lines.

When reviewing the decisions of government departments, lawyers are checking to see whether the decision-maker properly interpreted the legislation, relied on the correct inputs, and took a rational path to the decision. This is an area of law (Administrative Law) that can get particularly technical.

It is not uncommon for decision-makers to misinterpret legislation, or neglect to take important evidence into account. AustraLaw are experienced in keeping government decision-makers accountable, and advising on legislative requirements.

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How lawyers can serve engineers better

It was a very enjoyable and refreshing experience to attend the Australian Engineering Conference in November last year (2016). Despite having switched professions from engineering to law I’ve found that the engineering problem-solving mindset has remained thoroughly ingrained in me. As one delegate at the conference said to me ‘once an engineer, always an engineer’.

One of the great benefits of the Conference was to hear engineers speak frankly about their experiences with lawyers, and how we could serve them and their projects better.

How lawyers can be useful to engineers

(1) Technical literacy

A common concern amongst the engineers I spoke to was that their lawyers struggled to grasp the technical aspects of a dispute. This undermined the ability to focus negotiations directly on the root causes of the issues, as lawyers would often retreat via legalese back into their professional comfort zones.

Engineers were also concerned that litigation too often resulted in financially disappointing outcomes as important arguments, that would have been discovered by delving into the technical elements of the project, were not made.

An obvious advantage in having a technically trained lawyer is the greater role they can play in weeding ambiguity or unintended rigidity out of the description of the scope of work. As any project manager will agree, the scope of work is the root of much of the trouble on a project.

(2) Allocating risk to serve the project schedule

A major theme amongst engineers was the desire for risks, and disputes, to be handled in a manner that served the project schedule. It was remarked by one major construction firm during a presentation that despite instructing their lawyers to allocate the risks in the contract to the party best able to control or absorb them, the lawyers simply allocated the bulk of the risks to the other party (i.e. allocation according to least bargaining power). This meant having to send the contracts back for redrafting.

(3) Risk aversion

During one of the first presentations of the Conference the comment was made that lawyers are too risk adverse. Engineers do not want to be told not to do something because it is too risky. Instead, they see it as the lawyers’ role to advise them of the risks, and it is the engineers’ role to decide whether the risks can be managed.

(4) Public relations

There was an excellent presentation at the Conference by Andrew McNaughton on the High Speed Two (HS2) rail project in the UK. The talk focused on the public relations challenges involved in making major infrastructure project happen. Throughout the HS2 project, significant resources had to be dedicated to public engagement. A major part of this was the development of systematic methods for addressing challenges and proposals from the public and the media. It was noted that a project in Norway had neglected to apply the proper rigour and suffered a 2 year set back after losing a court challenge as a result. Lawyers have a clear role to play in assisting engineers to implement the systems required to manage the risks to their social licence to operate, and be prepared for potential legal challenges.

It is important to remember that engineers are professional problem-solvers. Risks are just problems to be solved or managed on the path to completing new and interesting projects. The satisfaction in engineering comes from solving the hard problems, experimenting with new methods, and the pride (or relief) in seeing a project completed.

Ashley Kelso MIEAust

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