Partnership agreements are getting legal teeth. This may sound like a good idea in theory, but it is bound to cause confusion and undermine the worthy aims of the partnership ideal in practice.

It seems no time ago that partnering agreements were frequently met with a stifled snigger. The typical partnering agreement was rarely more than a vague statement conveying a warm and fuzzy feeling of goodwill: an assurance that everyone intended to act in a jolly decent manner. They were very often said to have no legal effect, but even without such a statement, they tended to be so nebulous as to make it almost impossible to prove a breach. Sometimes even accompanied by team T-shirts and ritualistic pre-meeting hugging (unfortunately, I am not joking), the concept was all very well for the Land of Have a Nice Day and cheesy-grinned waitresses, but it was just a bit much for us Brits to swallow. One Brit I know of refused point blank to hug.

However, the harmless, woolly statement is just one end of the spectrum. It seems that partnering agreements are now moving into a different league.

Tony Bingham in his article on 14 May 1999 examined the case of Birse Construction vs St David, where the court decided, rather perversely you might think, that even if the parties agree that a partnering agreement should have no legal effect, it can have just that. The court may use it to interpret or even establish the existence of a contract.

Additionally, Simon Lewis, in his article last week gave a most comprehensive account of how you can ensure that your partnering agreement is, indeed, legally binding, though I cannot help wondering whether legal teeth are not slightly at odds with the whole concept of trust and good faith. Quite apart from the fact that partnering agreements are now more likely to have legal effect, they are developing impressive muscles in another important respect: their content. We now see partnering agreements containing some pretty radical terms – all in honourable pursuit of fair dealing, you understand. They may demand an open-book policy, the deletion of liquidated damages provisions, or even a share of profit and loss. I would like to look briefly at such terms and consider just how realistic they are in their pursuit of the “fair dealing” rainbow.

Out in the open

The concept of an open-book policy is fine in principle, but signatories to an agreement will need to check that their insurers will cover them if they effectively aid the claimant’s case against them – particularly if that information would not have been available on disclosure. Is there not also the danger that parties may perhaps be less inclined to put comprehensive memoranda on file? Could this result in further problems arising?

What’s the damage?

Partnership agreements are sometimes accompanied by team T-shirts and ritualistic pre-meeting hugging

Moving on to the deletion of liquidated damages in building contracts, contractors may consider this a most laudable concept. However, before raising a toast, they should stop to consider the fact that they were never intended as some contractual baseball bat with which the client could bash the contractor about the head as a punishment for delay, although no doubt it often appears that way when on the receiving end. Liquidated damages are actually intended to benefit not only the client but also the contractor.

The fixed figure must never be so high that it amounts to a penalty. Moreover, it saves both parties from the time and expense of proving or defending a claim based on actual loss, a course that would be available to the client instead. Furthermore, liquidated damages are such an intrinsic part of the mechanics of most construction contracts that their elimination would inevitably cause ripples throughout the contract, with plenty of potential for confusion.

Shares of the spoils

The concept of shared profit and loss is perhaps the hardest to envisage working smoothly in practice. The idea is that the whole team, including the client, shares the cost of any rectification, regardless of who actually caused the problem, so that everyone works together to overcome any difficulties.

I do not wish to burst the blissful bubble of construction utopia, but how on earth is the cost of repair to be divided out? One cannot expect a party with a minor role and a concomitantly minor fee to pay an equal share, so presumably payment will be made in approximate proportion to the fee received. I appreciate that the incentive to the big players is a long-term business arrangement, but I still cannot see them falling over themselves for that deal. Also, does it encourage those with a more minor role to spend that extra time and effort checking they have made no mistakes? Finally, how is it to be insured? It would involve a radical change of policy for insurers to pay out on the basis of a pre-agreed allocation, to say nothing of the difficulty in assessing premiums in relation to the work of unknown third parties.

Latent defect insurance has been suggested by some as the solution, whereby the client takes out a single insurance to cover any defects that may arise in the building, regardless of who caused them. It is not possible to give a comprehensive account in the space allowed of the shortcomings of latent defects insurance but, although it is undoubtedly of benefit to the end-user of a building, who can recover for a “latent defect” without having to prove fault, most problems become apparent during construction and thus typically fall outside the ambit of a latent defects policy. On top of that, latent defects insurers frequently retain their rights of subrogation, enabling them to claim against the culpable party. For both these reasons, it is still necessary for all members of the team to maintain their own insurance and defences, bringing everybody right back to square one.