Transcript Slide 1

Pursuing or Defending Claims under FIDIC Contracts –
Regionally & Internationally
By
Khalil T. Hasan
Construction Solutions (www.cspk.org)
Almost all construction projects, whatever the size, go through
changes which result in additional costs and/or an increased time
of the contract. Some examples are;
• The Employer (or owner) decides to change the original scope of
the works, such as, increase the covered area of a building etc.
• An action/inaction by either the Contractor or the Employer, such
as late mobilization of plant and equipment etc.
• Unforeseeable occurrence by the forces of nature, such as, an
earthquake etc.
• Majority of construction projects worldwide are administered
by the FIDIC forms of contract.
• FIDIC recognizes the effects of change and has provisions
which provide entitlements enabling the contractor to claim the
related costs and time. For example;
Sub-Clauses 8.4 & 20.1 (FIDIC 1999 Edition)
Clauses 44 & 53 (FIDIC 1987 Edition)
All Clause references in this
presentation, hereinafter,
are in respect of, unless
otherwise noted, the FIDIC
Red Book 1999 Edition.
Some additional FIDIC provisions which provide entitlements to
the contractor to claim for additional costs, either;
• with profit (e.g. Sub-Clause 1.9 Delayed Drawings or
Instructions) or,
• without profit (e.g. Sub-Clause 4.12 Unforeseeable Physical
Conditions) or,
• just ‘additional payment’ (Sub-Clause 20.1 Contractor’s Claims).
As a general rule, most of the provisions which entitle the
contractor to an Extension of Time (EOT) also provide
entitlement to additional costs (such as Prolongation Costs).
Notwithstanding the basis of entitlement, FIDIC stipulates (in SubClause 20.1) a procedure for claims and related notices, which must
be followed by contractors.
If the contractor does not comply with the stipulated procedures, a
contractor's legitimate claim may be rendered invalid and rejected
due to lack of procedural compliance.
Details in respect of such matters have already been discussed by
other colleagues and panelists and therefore these will not be
repeated.
ESTABLISHING THE CAUSE-EFFECT LINK (Slide 1)
Irrespective of the cause of action or basis of entitlement, a
contractor's claim request must clearly identify what actions or
inactions by the Employer (or his agents, including the Engineer)
caused the compensable or delay liability and which of the
entitlements bear a direct relationship to the financial loss or a
schedule impact.
This establishes the all-important cause-effect link that is necessary
to support a construction claim.
ESTABLISHING THE CAUSE-EFFECT LINK (Slide 2)
FIDIC forms typically specify contract clauses for variations,
extension of time, order-of-precedence for contract
documents, coordination, weather and employer’s risks etc.
Establishing causation in respect of the various contract
provisions is essential.
Additionally, all contractor claims must be supported by
contemporaneous project records and documentation which
create the cause-effect link.
For the specific case of a delay claim, the crucial element of
proof needed should be based on the project schedules used
to execute the work.
ESTABLISHING THE CAUSE-EFFECT LINK (Slide 3)
Too many projects are transformed from the best of
intentions into highly impacted projects that are out of
control and headed for claims and disputes.
Claims are most often initiated by contractors against
employers due to a multitude of employer actions or
inactions. Some of the typical employer actions or inactions
(causes) that can create cost and schedule impacts are listed
below:
Late Engineering and Design Information
Numerous and Late Design Changes
Late Delivery of Employer-Furnished Equipment
Defective Employer-Furnished Equipment
Impact from Other Contractors employed by the Employer
Late Approval of Contractor Submittals
Late Response to Contractor Requests for Information (RFls)
Unreasonable objections during work inspections by Employers
or their Agents (Engineers)
• Untimely Approval of Valid Contractor's requests for Changes
• Late Possession of Site
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ESTABLISHING THE CAUSE-EFFECT LINK (Slide 4)
A contractor must be able to demonstrate, through a cause-effect
analysis, how one or many of such causes resulted in a cost or schedule
impact to the contractor. In addition, it is also important to evaluate the
timing of causes as well as potential impacts to the critical path, if any.
For example, in one case, a contractor was claiming late drawings by the
Engineer as a reason of overall project delay.
Based on a programme analysis, it was confirmed that there was no
impact on any project activity which resulted in an overall delay of the
project milestones. Therefore, the contractor's claims were unsupported
and disapproved due to lack of a cause-and-effect analysis which
provided an evidence of the contractor’s contentions.
For obvious reasons, global claims are usually discouraged and difficult
to substantiate. For example, multitude of causes such as, design delays,
design errors, variations, poor project management decisions, late
possession of site etc. Whereas a direct causal link with particular items
of the losses is difficult to establish.
EMPLOYER’S CLAIMS (Slide 1)
Similar to the rights of the contractors, the employers are
also entitled to claim, from the contractors, any payment
which they consider is due to them by virtue of certain
defaults under or in connection with the contract. Some
examples are;
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Rejection and/or Retesting of the Works (Sub-Clause 7.5)
Remedial Works for defective Works (Sub-Clause 7.6)
Costs of recovery of delay by contractor (Sub-Clause 8.6)
Delay Damages (Sub-Clause 8.7)
Failure to Pass Tests on Completion (Sub-Clause 9.4)
Extension of Defects Notification Period (Sub-Clause 11.3)
Failure to Remedy Defects (Sub-Clause 11.4)
Termination by the Employer (Clause 15)
“Otherwise” in connection with the Works(Sub-Clause2.5)
Etc.
EMPLOYER’S CLAIMS (Slide 2)
In order for the Employer to be able to claim his entitlements,
FIDIC defines a procedure, under Sub-Clause 2.5, which the
employer needs to follow. This procedure requires that;
 A notice of an employer’s claim should be given to the
contractor as soon as practicable (unlike the 28-days limit
specified by Sub-Clause 20.1 for the contractor).
 Claim particulars must also be submitted to the contractor.
There is no time limit specified, but it can be argued that this
must also be as soon as is practicable.
 The notice (or particulars) may be given by the employer, or if
authorized by the employer, the Engineer may give such a
notice or submit such particulars.
 Similar to the contractor’s claims, the Engineer should carry
out a determination of the employer’s Claims under SubClause 3.5.
Best Practices for Claims Avoidance (Slide-1)
The preliminary focus of the parties to any contract should be to follow the
principles of claims avoidance. However, if necessary, claims should be,
especially those related to an extension of time, handled by experts and not
novices who end up manipulating the complexities thus resulting in front
of expensive dispute resolution forums.
Both parties generally want to avoid claims, but too frequently the contract
specifications and construction management practices actually work against
them. The key to successful claims avoidance, once the project has been
awarded, is to provide the project team with the tools they need to identify
problems quickly, measure impacts reliably, and price them fairly in order
to resolve changes as they arise and, thus, avoid claims.
Although many contracts are drafted with the
intention to avoid claims, in reality, some contribute
in creating more claims. Also, many widely used
construction management approaches actually
encourage claims. Both the contract and standard
practices can create a claims friendly environment.
Best Practices for Claims Avoidance (Slide-2)
Front end tasks should be carried out to eliminate or minimize the
possibility of claims and disputes arising from construction contracts and
some of these include:
 Review of contract documents to eliminate possible ambiguities,
inconsistencies, conflicts, errors and omissions.
 Claims and disputes frequently arise due to “gray” areas in the
Contract documents. These may be avoided by well-drafted
contract documents.
 Contract documents generally generate adversarial roles and
inhibit the development of teamwork between the parties. In
addition, the legal process focuses on blame and restricts problem
solving. Special conditions of contract must be drafted by experts
trained to resolve disputes.
 Building codes may be out-of-date, inapplicable, and non-uniform.
State-of-the-art codes should be used for the design of a project.
 Environmental considerations can result in delays. Tender
documents should clearly spell out such considerations, such that,
these may be taken into account by contractors in their bids.
Best Practices for Claims Avoidance (Slide-3)
Execution
stage
of
a
project
should
utilize
sound
contract
administration/management procedures to help a project team successfully
defend/win claims and avoid disputes. Some recommendations in this respect are:
 Regularly update project documentation, such as,
correspondence logs, daily reports, accurate minutes of
meetings, tracking of technical submittals like drawings
and progress photographs etc.
 There should be a record-keeping system that documents
progress and problems as they occur.
 Events which frequently form the basis of changes and
claims include, changes in method of performance due to
various reasons, out-of-sequence work and other causes as
listed earlier in this presentation. Such events can be
avoided by way of timely actions/inactions of all parties.
 Conflicts must be resolved contemporaneously (at the time
these occur) rather than wait till the end of the project.
 Project cost and schedule control systems are often not
sufficiently sophisticated or integrated.
Procedure for Settlement of Claims
The procedure for settlement of claims
specified by FIDIC is a multi-tier (or several
steps) process.
The higher tiers get more and more expensive.
Thus it suits both parties to resolve disputes as
early as possible.
Procedure for Settlement of Claims
Tier 1 – Engineer’s Determination
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Tier 1 of the procedure for settlement of claims is specified in Sub-Clause 20.1 titled Contractor’s Claims.
The procedure for contractor’s claims has been dealt at length by earlier panelists and therefore will not be
repeated here.
Sub-Clause 20.1 requires the Engineer to carry out an Engineer’s Determination of the contractor’s claims
pursuant to Sub-Clause 3.5.
Similarly employer’s claims (pursuant to Sub-Clause 2.5, as discussed earlier) should also be ‘Determined’ by
the Engineer pursuant to Sub-Clause 3.5.
Thus either party’s claims must be ‘Determined’ by the Engineer.
Although defined by FIDIC as the “Employer’s Personnel” and stipulated to “act on behalf of the Employer”,
the “Engineer” is expected to issue a “FAIR” Determination.
Referring party must comply with the respective specified procedures. Failing which, the request for a
Determination may be disapproved.
Once the Engineer issues a Determination, both parties (the Contractor and the Employer) shall give effect
thereto unless and until the same shall be revised by the higher tiers of the procedure for settlement of claims.
Procedure for Settlement of Claims
Tier 2 – Dispute Adjudication Board (DAB)
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Tier 2 of the procedure for settlement of claims (DAB) is specified in Sub-Clauses 20.2, 20.3 & 20.4.
Sub-Clause 20.2 stipulates a procedure for the appointment of a DAB, which shall be either a sole member or three members.
Sub-Clause 20.3 stipulates a procedure to overcome disagreements in respect of appointment of a DAB.
The DAB members should be independent and impartial.
Where a party disputes an Engineer’s Determination, the party may, pursuant to Sub-Clause 20.4, refer the dispute to the DAB for
its ‘Decision’.
The DAB will Adjudicate the dispute and within 84 days (or such period as may be agreed by the Parties and DAB) after receiving
the reference, a ‘Decision’ will be given by the DAB.
The Decision given by the DAB shall be binding and therefore both parties (the Contractor and the Employer) shall give effect
thereto unless and until the same shall be revised by the higher tiers of the procedure for settlement of claims.
Notwithstanding the case where a DAB Decision has been given in favour of the Employer, the Contractor shall, unless the
Contract has already been repudiated or terminated etc., continue to proceed with the Works with due expedition and without
delay.
Where a party is dissatisfied with the DAB’s Decision, then this party may, within 28 days after receiving the Decision, give a
notice, pursuant to Sub-Clause 20.4, to the other party of its dissatisfaction.
Where DAB has not given a Decision, the rights of the parties remain unaltered in respect of further remedies available under the
Contract. A notice of dissatisfaction must still be issued.
Where a Decision by the DAB has been given, and no notice of dissatisfaction has been given by either party, then the Decision
shall become final and binding.
Procedure for Settlement of Claims
Tier 3 – Amicable Settlement
Where a notice of dissatisfaction has been
given, both parties shall, pursuant to SubClause 20.5, attempt to settle the dispute
amicably before commencement of Arbitration
(Tier 4).
The Amicable Settlement process should
continue till 56-days after the notice of
dissatisfaction was given.
Where the parties agree, amicable settlement
process may be omitted. However, Arbitration
(Tier 4) may only commence after 56-days after
the notice of dissatisfaction was given.
Procedure for Settlement of Claims
Tier 4 – Arbitration
Unless settled amicably, any dispute in respect of the DAB’s Decision (if any) which has not
become final and binding, shall be finally settled by international arbitration (Sub-Clause
20.6).
Stipulated procedure by FIDIC, unless otherwise agreed by the parties, is to finally settle
disputes under the Rules of Arbitration of the International Chamber of Commerce.
Either party who is dissatisfied with the Decision given by DAB, may commence
Arbitration.
Arbitration may commence prior to or after the completion of the Works, provided that the
obligations of the Employer, the Engineer and the Contractor shall not be altered by reason
of the arbitration being conducted during the progress of the Works.
Generally all costs of arbitration shall initially be shared equally between the Parties, but
the Arbitral Tribunal shall have the right, when making its award, to allocate such costs
between the Parties as it shall so decide.
Wish List for future FIDIC
Updates (Slide-1)
The objective of this section is to bring to the
attention of the FIDIC Drafting Committee, the
experiences of the author in respect of recurring
disputes on a multitude of projects. This is in no way
to be implied as a criticism of the existing provisions
of the 1999 version of FIDIC forms.
It is acknowledged that the existing provisions have
been drafted after taking account of various factors
which may not be in the knowledge of the author and
the suggestions in the following slides are merely
meant to assist the drafting committee in arriving at
possible updates of some of the existing provisions.
The following wish list is limited to the subject of
this presentation - ‘Claims’ and their respective
settlement procedures.
Wish List for future FIDIC
Updates (Slide-2)
Time-bar provisions for claim notices under Sub-Clause 20.1
Time-bar provisions for a claim notice under Sub-clause 20.1 are a condition precedent for a claim to be
approved. Generally the contractors consider this provision to be punitive and in cases to be unfair.
The primary objective of time-bar on a notice is to ‘alert’ the other party such that the cause of notice may be
prevented, if possible. A secondary objective is to permit the evaluation of a claim contemporaneously, such
that memories are fresh and that this may actually be of help to the contractors.
Both objectives are important and should remain in place. However, a possible alternative could be an ‘early
warning’ notice as defined by the NEC3 Contract forms. The objective to timely ‘alert’ remains intact without
actually having punitive consequences for the contractors.
The time-bar on submission of claim particulars and on the period permitted to the Engineer for an assessment
and Determination should remain unchanged as these have obvious benefits for both parties.
Wish List for future FIDIC
Updates (Slide-3)
Conflicts of Time-bar provisions for claims under Sub-Clause 20.1
It is usually argued, in Islamic law countries, that the time-bar
provisions of Sub-Clause 20.1 conflict with the Islamic law,
which, in principle, does not time bar any remedies at law.
Pursuant to Sub-Clause 1.4, the Islamic Law may be the
governing law for a contract and may thus override SubClause 20.1.
For the sake of consistency worldwide and for elimination of
disputes on this matter, it is suggested to explicitly make 20.1
be the governing clause, such that this supersedes any other
conflicts.
Wish List for future FIDIC
Updates (Slide-4)
DAB discretion to override Time-bar provisions for claim notices in
the FIDIC Gold Book 2008
Sub-Clause 20.1 of the Gold Book, in respect of submission period of claim notices, stipulates;
“…However, if the Contractor considers there are
circumstances which justify the late submission, he
may submit the details to the DAB for a ruling. If the
DAB considers that, in all the circumstances, it is fair
and reasonable that the late submission be accepted,
the DAB shall have the authority to overrule the
relevant 28 day limit …”
Evidence of a justification for late submission of
claim notices, may itself be contentious and therefore
it is suggested that similar discretion may be avoided
in the updates of other FIDIC forms like the Red
Book etc.
Wish List for future FIDIC
Updates (Slide-5)
Replacement of the word ‘Payment’ under Sub-Clause 20.1
The word ‘payment’ under Sub-Clause 20.1 could be
replaced by the word ‘Costs” as defined under Sub-Clause
1.1.4.3. This should bring clarity that additional payment
claims must be based on incurred (with evidence), as
opposed to theoretical costs.
Wish List for future FIDIC
Updates (Slide-6)
EOT Particulars under Sub-Clause 20.1
Under Sub-Clause 20.1, for the case of an
Extension of Time (EOT) claim, the supporting
particulars should require the contractor to
submit a cause-and-effect programme analysis
prepared within the guidelines of industry
standards like the SCL Protocol.
Wish List for future FIDIC
Updates (Slide-7)
Extension of Time (EOT) Provisions of Sub-Clause 8.4
The most common construction claims worldwide relate to an Extension of Time (EOT).
FIDIC recognizes delay, however, the principles of how delay and related costs should be calculated
are not defined by FIDIC. This leads to issues; issues which are usually contentious due to various
'schools of thoughts' and varied interpretations existing worldwide.
If not explicitly made reference to, it is suggested that Sub-Clause 8.4 should be re-drafted to ensure
this takes account of the principles set out by the Society of Construction Law’s ‘Delay and
Disruption Protocol’ (SCL Protocol).
In this context, the suggested additional paragraphs at the end of Sub-Clause 8.4 could be in line with
the following;
“The Engineer's Determination of an EOT should be assessed such that each
cause is dealt independently of other causes; other causes, some of which may
be the liability of the Contractor. Other causes, even if some of these are due
to actions/inactions of the Contractor, should not reduce the Contractor's
entitlement to an EOT. Actions/inactions of the Contractor having a bearing
on the cause of delay under evaluation, should however be taken into account
in respect of its effect on the Time for Completion of the Works.
The Contractor's entitlement for the recovery of additional payments,
resulting from an extended Time for Completion of the Works, should be
assessed taking account of all causes (whichever Party may be liable for
these).”
Wish List for future FIDIC
Updates (Slide-8)
Mandatory Appointment of a DAB
The use of dispute boards (e.g. DAB’s) in the construction industry has over many years
significantly contributed to the avoidance and early resolution of disputes. The great benefit of
using a standing dispute board is that its members may be called upon as soon as a problem arises
and help the parties resolve their differences before they become polarized in their views.
The dispute avoidance role of a standing board should be emphasized: the DAB encourages the
parties to solve their own problems, creating an atmosphere where the parties communicate and
recourse to the advisory role of the dispute board. Resolving conflicts at an early stage, or even
before they arise, is an obvious benefit that greatly reduces costs such as legal fees, and reduces loss
of productive time and goodwill between the parties.
It is not uncommon that one of the parties will resist the appointment of a DAB. This may be to
avoid the costs associated with DAB or otherwise. With the obvious benefits of a DAB (especially
of a standing Board), it may be prudent to bind the parties to setup a DAB at the outset of a project.
Alternatively punitive deductions (or reimbursements, as the case maybe) could be linked thereto.
FIDIC and Construction Solutions
Thank you for your attendance
and contribution.
We wish you all Good Luck.
www.cspk.org
This Lecture was delivered by the Managing Partner of Construction Solutions
(www.cspk.org), Mr. Khalil Tayab Hasan. For any queries and clarifications,
please feel free to contact Mr. Hasan at;
[email protected] or [email protected]
+971 50 8861709 or +92 345 8500195
www.cspk.org