This master thesis examines the factors decisive for an efficient risk allocation in construction contracts, and in the light of the findings decides whether a re-allocation should be made. As the construction industry isn’t regulated by statute the construction contract constitutes the legal basis between the employer and the contractor (the parties). The contract is primarily based on a set of standard terms due to its adaption to the industry. Two standard forms of contracts is in focus in the thesis: the int. FIDIC ‘Yellow Book’ (FIDIC) and the Danish AB 92. The scope of the legal analysis has been to analyse differences and similarities in the risk allocation between the parties in the two standard forms of contracts. The risk allocation has been compared within three areas: risk and responsibilities, force majeure and insurance. The analysis of the risk allocation disproves the hypothesis saying that the risk allocation is more in favour of the employer in FIDIC compared to AB 92. Despite of the disproof the risk allocation in FIDIC still tends to favour the employer by putting the risk on the contractor in a considerable number of the (sub-)provisions. The economic analysis focuses on optimizing the risk allocation. Crucial for an efficient risk allocation is the parties’ ability to manage risk: assess the risk accurately, control the risk and manage its consequences if it happens. A risk allocation favouring the employer does therefore not necessarily create the most efficient allocation, as he might overcompensate the contractor for bearing the risk due to inefficient risk management. The cost of risk transfer must be taking into consideration when assessing the re-allocation’s economic savings, which are a condition for realizing the re-allocation. A re-allocation will not cause a Pareto improvement (PI), as the contractor becomes worse off by being imposed the risk. But as the re-allocation allots both parties a saving a PI is a reality, as the allocation makes none of the parties worse off. If the re-allocation is Pareto efficient as well, depends on the parties’ view on the level of information as efficiency presupposes full information. The winner compensating the looser makes the re-allocation Kaldor-Hicks efficient.
|Educations||MSc in Commercial Law, (Graduate Programme) Final Thesis|
|Number of pages||87|