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Alliance contracting: no blame, no fault

This is the third of a series of quarterly blog posts on alliance contracting and looks at the “no blame, no fault” provisions that are key to a number of alliancing contracts. It examines the meaning of these concepts in an alliance contract, the benefit to the contracting parties and, most importantly, whether such provisions are enforceable.

Probably the most alien characteristic of the alliance contracting model to both contracting parties and lawyers alike is the “no blame culture” that underpins the agreement. Essentially, this means that parties agree not to bring legal proceedings against each other, save in the event of “wilful default” or if an insolvency event occurs.

What does “no blame” really mean?

As any contractor or commercial lawyer will know, traditional forms of contract are usually drafted with the mentality that disputes are to be expected, and seek to provide for fault and risk allocation at the outset.

With alliance contracting, parties positively agree to move away from this combative and self-interested attitude and adopt a “best for project” approach. This involves committing to a “no blame, no fault” culture, in which the parties agree that in the event of an error or poor performance by one of the contracting parties, they will not attempt to assign blame, but will instead accept joint responsibility and its consequences. They also agree to proactively work together to find a remedy or solution that has the best interests of the project at heart.

An alliance contract will usually include a “no dispute” clause, which mutually releases the contracting parties from their liability to each other, including for breach of contract or negligence, except to the extent of “wilful default” or where an insolvency event occurs. The dispute resolution procedures in the contract aim to operate as a problem-solving framework, rather than an adversarial one.

Of course, just because parties agree not to bring legal action against each other does not mean that disagreements will not arise. It is the manner in which these disagreements are handled and resolved by the parties that sets the alliance contracting model apart.

What is “wilful default”?

What constitutes wilful default will be defined in the contract and will usually cover non-payment and intentional or reckless acts that are likely to have harmful consequences, or that breach one of the “alliance principles” specified in the contract.

In the event of wilful default, the potential consequences may include termination of the contact, exclusion from the alliance contract (if it can continue without the defaulting party) and also an uncapped indemnity to the non-defaulting parties.

Advantages of the “no blame” culture

The traditionally adversarial nature of the construction industry means that parties to a contract are often considering potential disputes or legal proceedings from the outset. This undoubtedly has a negative impact on their behaviour, as they tend to adopt a defensive standpoint, diverting their attention away from the project at hand.

With alliance contracts, the focus is on the effective resolution of disputes amicably and on a commercial basis. Disputes other than those involving wilful default have to be resolved on a unanimous basis, although sometimes an ultimate deadlock breaker is appointed. The theory is that an emphasis on finding a quick, cost-effective solution will save parties spending time and energy pointing the finger at each other and apportioning blame. It allows them to work co-operatively to overcome the problem, rather than reaching a stalemate where neither side is prepared to budge.

Further, to avoid disputes, parties have to invest in better and more frequent communication, which (in theory) means that they work much more closely as a team and are less competitive.

Is it realistic (or enforceable)?

While alliance contracts have been used for some time in the Australian market (around a third of public sector projects are procured using alliancing), they are still a relatively new concept in the UK. As such, there is significant legal uncertainty surrounding this novel form of contracting, including whether the arrangements are legally enforceable.

As it is so new, there is little precedent regarding whether the courts will enforce “no blame” clauses, or allow parties to waive their rights to bring legal proceedings for negligence or breach of contact. Alliance contracts purport to allow the parties to enforce their rights only in the event of wilful default or insolvency.

In Australia, there has been much debate around the enforceability of these clauses. Originally, the view was that the “no default” clause was not enforceable. In Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643 the clause was held to be void for seeking to subvert the court’s jurisdiction. However, a more advanced interpretation has been adopted more recently. In Kymbo Pty Ltd v Paxton management Pty Ltd [2001] NSW SC 972 the court stated that it was reluctant to hold void a provision that the parties intended to have legal effect.

In the UK at least, for alliance contracting to work effectively in practice, there needs to be a real change in the culture and behaviour of contracting parties. This cannot happen overnight, and it may be that it takes some years for parties to accustom themselves to these new “non adversarial” relationships. Only time will tell if there will be a shift away from parties using claims to maximise their recovery on projects and the underlying blame culture, that clearly does not help to identify a solution to problems.

The next post in this series considers different types of alliancing contracts in different sectors.

Hill Dickinson LLP Paul Walsh

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