Knowledge

Last Updated on 15.07.2023 (By Thanapat Yaemklin) 

In Thailand, the allocation of risks in public construction projects is arguably unbalanced, with a disproportionate amount of risks being unreasonably borne by the private sector. This article highlights key aspects of risk allocation in the standard-form construction contract used by the Thai government, which seem to not align with the principles of balanced risk allocation widely accepted in the construction industry.

1         Introduction to Thai Government Standard Form Contract

Public construction procurement in Thailand is generally governed by the Procurement and Supplies Management Act B.E. 2560 (2017) (PSMA) and its subordinate regulations. According to the PSMA, with certain exceptions, all Thai procuring agencies are required to use a standard form of construction contract prescribed by the Public Procurement and Supplies Administration Policy Commission, with the approval of the Office of Attorney-General of Thailand (Thai Government Standard Form Contract).

The Thai Government Standard Form Contract employs the traditional or construct-only procurement method. It should be noted that Thai government agencies are not permitted to use any project delivery methods (other than the traditional method) unless otherwise approved by the Cabinet.

2         Principles of Balanced Risk Allocation

When it comes to risk allocation in a construction project, the most acceptable approach is the principles of balanced risk allocation proposed by Max Abrahamson, commonly known as the “Abrahamson Principles”. According to Abrahamson, in order to achieve a fair and equitable risk allocation, a risk should be allocated to a party if:

(i)           the risk is in that party’s control;

(ii)         that party can transfer the risk (e.g., through insurance) and it is most economically beneficial to deal with the risk in this fashion;

(iii)       the preponderant economic benefit of controlling the risk lies with thar party;

(iv)       to place the risk upon that party is in the interests of efficiency, including planning, incentive, and innovation; and/or

(v)         if the risk eventuates, the loss falls on that party in the first instance and if it is not practicable, or there is no reason under the above principles, to cause expense and uncertainty by attempting to transfer the loss to another.

3         Unbalanced Risk Allocation in Thai Government Standard Form Contract

There are several aspects of risk allocation in the Thai Government Standard Form Contract that do not align with the Abrahamson Principles. However, in this article, the author wishes to particularly focus on three key risks in a construction project: (1) design risk; (2) delay risk; and (3) loss and damage risk.

3.1      Design Risk

Design risk is the risk that the design is found to have problems or deficiencies and either cannot be constructed or, if being constructed in accordance with the design, the work will not achieve its intended purposes.

Under Clause 14 of the Thai Government Standard Form Contract, if a design error is discovered during the course of construction, the contractor will be required to comply with any instructions given by the procuring agency without being entitled to an extension of time and compensation for any extra costs incurred. This clause was interpreted by the Office of Attorney General to mean that the contractor is responsible for addressing any design errors at their own costs and that complying with the employer's instructions in this situation will not be considered a variation. See, for example, the Ruling of the Office of Attorney General no. 226/2553 (2010).

3.2      Delay Risk

Delay risk is the risk that the work will not be completed within the agreed-upon timeframe, potentially resulting in financial loss for the contractor, the procuring agency, or both. Under Clause 17 of the Thai Government Standard Form Contract, the contractor is responsible for completing the work within the agreed-upon timeframe. If the contractor fails to do so, the contractor will be liable to pay the procuring agency a delay penalty (commonly known in common law jurisdictions as liquidated damages) at the agreed-upon rate, plus any further damages incurred by the agency (if any).

In this regard, Clause 21 of the Standard Form Contract nevertheless allows the contractor to claim an extension of time (EOT) in certain circumstances. The clause can be translated in English as follows:

“If there is any event due to a fault or mistake on part of the Employer or force majeure or any circumstance for which the Contractor is not responsible … which results in the Contractor being unable to complete the work within the time stipulated in this Contract, the Contractor must notify the Employer in writing of such event or circumstance to … request for an extension of time within 15 (fifteen) days from the date on which such event ceases to have effect”.

Here, it can be seen that, by permitting the contractor to claim an EOT in certain circumstances, Clause 21 has the effect of sharing the delay risk between the contractor and the procuring agency. When the time for completion has been extended pursuant to this clause, the contractor will not be liable to the agency for its failure to complete the work within the original timeframe, including the liability to pay the delay penalty as previously noted.

Having said that, however, the qualifying events in relation to which the contractor is entitled to an EOT under Clause 21 are not clearly specified. Rather, Clause 21 merely broadly describes those events as "any events due to a fault or mistake on the part of the Employer or force majeure or any circumstance for which the Contractor is not responsible". A question of whether or not a particular circumstance which the contractor encounters in the course of construction will give rise to its right to claim for an EOT therefore largely depends on how this clause is interpreted by a court or an arbitral tribunal in a particular case. This can put the contractor in a very uncertain position, especially when dealing with circumstances beyond their control, such as adverse site conditions and changes in law. As such, it may be very difficult for the contractor to make decisions about how to respond to the potential delay in question, including whether the acceleration of the work or any other steps will be required.

Closely related to the issue of EOT is the issue of delay costs. Even if the contractor is able to successfully claim an EOT under Clause 21 of the Thai Government Standard Form Contract, there is still no provision in the contract permitting the contractor to claim for additional costs incurred due to the delay. It seems that the only circumstance in which the contractor is expressly allowed to claim extra payment from the agency under the Thai Government Standard Form Contract is in the case of a variation under Clause 16 of the contract.

3.3      Loss and Damage Risk

Loss and damage risk is the risk that there is any loss or damage to the construction work. According to Clause 11 of the Thai Government Standard Form Contract, when there is any loss or damage to the work, the contractor is solely responsible for all the costs of rectifying such loss or damage, unless it is caused by the agency's fault. From the contractor's perspective, this position may be very unfair, especially in cases where the loss and damage is caused by a circumstance that is completely beyond the contractor's control but is difficult for the contractor to mitigate through insurance coverage.

4         Summary

In summary, in this article, the author has pointed out that the following aspects of risk allocation under the Thai Government Standard Form Contract appear to not align with the Abrahamson Principles:

(i)           the contractor is not entitled to an EOT and additional costs for complying with the employer's instructions regarding errors in the employer's design;

(ii)         there is uncertainty about whether the contractor may be entitled to an EOT in relation to circumstances such as adverse site conditions and changes in law;

(iii)       the contractor is not contractually permitted to claim extra costs for delays caused by the employer or other circumstances beyond the control of the contractor; and

(iv)       the contractor is responsible for rectifying any loss or damage to the construction work at its own cost in most circumstances, regardless of whether those circumstances are beyond the contractor’s control and can be covered by insurance.

In public construction procurement, where taxpayer money is involved, the terms of a construction contract are typically more favourable to the procuring agency than the contractor. While it may be unrealistic to expect the Thai Government Standard Form Contract to completely align with the Abrahamson Principles, this does not justify ignoring these principles entirely in public construction projects in Thailand. As a matter of fact, standard form construction contracts used in the public sector in other countries, such as Singapore's PSSCOC contract and Australia's NSW GC-21 contract, appear to significantly more closely align with the Abrahamson Principles when compared to the Thai Government Standard Form Contract. For the sustainability and well-being of the Thai construction industry, the author believes the Thai government should reconsider the current approach to risk allocation.