UK: Contract Administrators: How to Ensure Independence

A contract administrator ("CA") is expected to act impartially and fairly between the employer and contractor in carrying out its "independent" functions under the building contract but the contractual arrangements between the employer and the CA – the CA is appointed by the employer, the employer is solely responsible for the CA’s fees and the CA may also be appointed to perform "employer specific" services – can undermine that independence. Whilst the CA when acting in its independent capacity has a duty to act impartially and fairly between the contractor and the employer in practice this can be as useful as a chocolate teapot to a contractor given that current case law dictates that a CA does not owe the contractor a duty of care in respect of its certifier role.

The concept of an independent certifier has found its way into PFI transactions where having to balance the needs of the private sector against the public sector has led to the developing practice of an "independent certifier" who will act fairly and impartially between the interests of all relevant parties. However, in dealing with the independence/duty of care issue referred to above PFI has taken a different approach to traditional and design and build contracting.

In PFI transactions, as the certifier’s statement on when the works are complete for the purposes of the project agreement can also trigger the commencement of payments from the public sector to the project company there are obvious reasons for the certifier to owe a duty of care to both the public sector client and the project company. This is achieved by either the project company and the public sector client jointly appointing the certifier, or the project company appointing the certifier and the certifier providing a collateral warranty to the public sector client. A working example of this is the NHS standard form PFI contract, which anticipates that the certifier is jointly appointed by the NHS trust and the project company.

It may also be agreed that the certifier’s decision on when the works are completed under the project agreement will also be effective for the purposes of determining practical completion under the building contract in which case it is recognised that it would be appropriate for the certifier also to owe the contractor a duty of care. This can be achieved by extending the joint appointment to include the contractor, or by the CA executing a collateral warranty in favour of the contractor.

Adopting the above PFI practice to traditional or design and build contracting as a solution to ensuring the CA’s independence and addressing the absence of a duty of care from the CA to the contractor for its certifier role is possible but can throw up difficulties. For example:

• under the joint appointment approach;
• distinguishing between those functions the CA might owe to the employer alone from those it owes jointly to the employer and the contractor, to avoid potential conflicts of interest;
• from a practical point of view identifying separate dedicated teams within the CA’s organisation to perform the different functions in order to avoid conflicts of interest;
• the split in responsibility/liability for fees;
• if the CA wants to cap its liabilities how the cap is divided between the employer and the contractor.

An alternative approach is to use the Contracts (Rights of Third Parties) Act 1999 (the "Act") to confer the benefit of the appointment on the contractor. In these circumstances, interested parties will need to consider carefully a variety of issues, for example, identifying the relevant third parties to avoid creating unintended third parties; the rights under the appointment enforceable by third parties; what variations or amendments to the appointment require third party approval.

Finally, whilst the general practice in professional appointments is to include a clause whereby the parties effectively contract out of the Act it is not uncommon that this clause is qualified by the words "unless otherwise provided" which could prove to be an unintended Trojan horse. A CA’s appointment requires it to perform the duties of the contract administrator under the building contract and often requires that where the CA’s discretion becomes exercisable between the employer and the contractor, it shall be exercised fairly and reasonably. The combination of these duties could be interpreted as conferring a benefit, as anticipated by the Act, on the contractor.

In conclusion, if there is any concern as to the CA’s ability to act impartially and fairly in performing its independent function or as to the extent of the CA’s duty of care to other interested parties the above illustrates how these issues may be addressed in differing ways without compromising the CA’s independence or other parties’ interests. Certainly the concept of a joint appointment of an independent professional is not limited to PFI transactions and is used successfully in other circumstances for example when professionals act as referee between several parties’ interests in adjudication or party wall proceedings.

Whatever approach is adopted, provided the CA’s role and duties are clear and its responsibilities to the employer and third parties defined, any one of the above arrangements should be capable of agreement by all interested parties including professional indemnity insurers.

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