By Dr. Chandana Jayalath
The topicality of claims has been accentuated by the fact that contractors keep chasing extras, and clients keep pursuing cost savings, particularly in lump sum contracts where the majority has been locked into. The trend is that claims specialists are reported mobilize on such contracts even before construction commences, to locate loopholes in the documentation and look for lapses in the process of contract administration that will altogether facilitate ‘juicy’ claims. This situation has jerked the entire Gulf region into awareness on the importance of good contract administration and the supreme importance of documentation.
By and large, the system seems to work quite well but considering the giant size of the industry, there are also some giant sized claims. Much has been written and debated on claims that represent 90% contractual. Perhaps some claims are indeed inevitable for example justifiable extensions to avoid invalidating the contract. Now, the claims specialists have been busy with compiling claims for work suspended in recession. However, problems arise when the provision for claim is abused, for example by allegedly tendering at low prices with the objective of profiting out of others’ mistakes and on the other hand by aggressively suppressing legitimate claims. Needless to say, the vicious circles generated by such exaggerated actions and reactions definitely add to the avoidable costs of construction.
It is not far wrong to say that Gulf region is the gateway to claims. This is partly due to the fact that contracts documents have been drafted in one sided language biased towards the client as a result of cut and past exercise. Although they carry a taste of FIDIC, they are not real FIDIC but locally treated versions tilting the even allocation of risks. To mention a couple of examples, construction contracts often include ‘keep working provisions’ for the parties to perform their obligations, despite the existence of a prolonged dispute. Also, the employer requires the contractor to proceed with variations despite the time and cost consequences, not having been agreed in advance. In a fixed lump sum contract, the contractor may lodge a claim for variation, but the employer might deny upfront on the basis of ‘lump sum’ or pay half of the cost pending evaluation at a later stage. The engineer may ask the contractor to go ahead with the rates he deems suitable whenever the contractor has no option, because of his obligation to complete works on time. Although the contractor is supposedly responsible for quantity errors, in any typical lump sum contract where the quantities are said to be actual and correct, he will purposely keep silent in a windfall such as overestimated quantities that bring him money for nothing. Many contracts do not also have a mechanism to compensate the loss behind variations exceeding 10 or 15 percent and unprecedented price escalation, resulting in huge claims contractually or otherwise. Due to lack of essential terms such as how the parties should act upon in a price escalation, the tendency is to pay them on ex-gratia basis. An ex-gratia payment to a contractor is one not legally due under the contract but represents compensation on grounds of hardship or sympathy. This is one which is made without any legal obligation to do so and is entirely discretionary.
Anecdotally, contractors submit comparatively weak claims more as a basis for negotiation, and would frequently recover either an adequate portion of the claimed extension of time, or an award of time without money, and the parties would still continue their working relationship. These claims are not formal claims but statements of events, usually in a story-type text format without showing the link between cause and effect. Just a six page submission is enough to establish the ‘case’ for 680 Million dollar claim for instance. Consequently, whilst robust claims are not unheard, many contractors have become accustomed to ‘thin’ submissions in the aim of facilitating negotiations. Furthermore, few have experienced at first hand the bruising reality of demonstrating entitlement in tribunal proceedings. Contractors, who submit weak claims for additional payment frequently, gift the engineer or employer with many of the reasons they so desperately need to justify a refusal to make reasonable awards, more so in the many instances where the employer has the final ‘word’ on any determination by the engineer.
Million dollar disputes are ultimately settled over coffee shop, in the ‘majlis’ or in a red carpeted room. This relative ease with which a negotiated settlement is made possible has given rise to a culture, where the parties are not much serious in the content of the claim. For instance, forensic delay analysis has been often limited to such a smart label where there is no fundamental analysis as to how concurrent impacts did affect the critical path. The concepts such as prevention, best effort, apportionment or dominance in any typical delay claim have fallen into less cared, despite of their applications world over. A common mistake made by many contractors when attempting to demonstrate the cause and effect of an event is that they merely list in chronological order the pertinent exchanges of correspondence between the parties, which is anyway insufficient to satisfy the burden of proof. To demonstrate cause and effect, the context should be built up on the facts describing the effects of the events upon the works. This should include details of the planned works affected, referring to the planned sequence, durations, and methodology; the status of the works in relation to that planned at the time of the event; and, description of the changes to that plan as a consequence of the event. Frustratingly, the associated costs are not nearly as prohibitive as those that are wasted in failed ‘punts’ with weak submissions.
Once the client has decided to go ahead with the project; they are rightly impatient for a result which is typical in the Gulf region. They are very often led to believe that their financial commitment is fully established at least at the award of the contract. Against this background, it must be bewildering for some clients to discover as sometimes is the case, that progress on site has lapsed and there appears little that can be done about the situation. The completion date and the final cost are impossible to predict and that the final settlement is arrived even after years of frustration than by strict evaluation. Many claims within this context end up as a horse deal but the consultants have no authority to horse trade.
Generally within an extension of time clause, the contractor will be obligated to submit notices and detailed particulars within a specified time frame. For example, many contracts provide: “that the engineer is not bound to make any determination unless the contractor has (a) within 28 days after such an event has first arisen, notified the engineer with a copy to the employer, and (b) within 28 days, or such other reasonable time as may be agreed by the engineer, after such notification submitted to the engineer detailed particulars of any extension of time to which he may consider himself entitled in order that such submission may be investigated at the time.” Occasionally, submission of notice and detailed particulars will be expressed to be a condition precedent. The contractor’s failure to comply waives its entitlement to claim an extension of time and owner’s liability ceases. Although it is important to take cognisance and comply with the notice and detailed particular provisions expressed in the contract, this does not happen all the time and things have been usually passed onto the project completion. Amounts so accumulated due to claims pending resolution is usually a matter of final account.
A common claim is when often difficult to separate the delay and costs incurred following any delaying event. This is because there can be overlapping causes, such as variations to one part of the works issued at the same time that there are delays in providing drawings for a related part. Both the variation and the delay could allow a claim for an extension of time, but the exact length of the delay from each might be difficult to assess. Further it might be difficult to assess the precise cost consequences of them. The issues have been inextricably intertwined resulting in global claims, partly because of ignorance at their inception. On the other hand it can be presumed in some contracts but typical in the Gulf region are not in essence of time. The failure to meet scheduled completion does not therefore invalidate the contract, leaving parties to take undue advantage of time to resolve their claims.
Concurrent delay is also a complex and contentious topic in the Gulf region. Many theories abound as to what it really is and what the implications are. The law is unsettled and there is little authoritative guidance to rely on. Opinion is even divided over what concurrent delay really means. Typically those seeking to use concurrent delay as a contractual sword adopt a wide definition, whilst those using it as a contractual shield use a narrow definition. Where concurrent delay does exist, the disagreement arises over the consequences for entitlement to extension of time, exposure to liquidated damages and recovery of prolongation costs. Standard forms are silent as far as concurrent delay is concerned. Consequently, there are no principles that can be gleaned from case law in the Gulf region available to contractors and consultants.
The tendency is that a common sense resolution is the best that can be achieved and that depends upon the merits and facts of an individual case. Where true concurrent delay does exist, the author believes a common sense approach should be taken up. However in many contracts the tendency is to excuse the contractor from the period having concurrent impacts at no cost to contract, allowing loss to lie where it prevails.
Substantiation means to provide documentary evidence in support of the assertions made within the claim submission. However, if the contractors need a one hundred they claim three hundred and still better off, having clearly known that they are well beyond the mark up limits. A claim has become a disguised form of blackmail each other covering their own mistakes in a coffee shop deal. What employers’ need to finish everything’ either by hook or crook, keeping the reality little aside, of course exceptions are there. Construction professionals have up until recently relied extensively on ‘cheap and cheerful’ means of formulating and evaluating claims but such methods are scarcely cheap or cheerful as they understand that the old ways of dealing with claims are no longer fashionable with smart developers. This trend has gone to the extent where consultant or engineer fabricates his own case without addressing the contractor’s submission.
Consultants play a major role in avoiding avoidable claims and in mitigating the impacts of unavoidable claims. However the failure of some consultants to ascertain and appropriately articulate the clients’ requirements or to keep the client informed, make one wonder whether times have changed from when Michelangelo responded to the criticism of his design of St. Peter’s Cathedral in Rome, by telling the Cardinals, “I neither am nor will be obliged to tell your lordships or any other person what I intend or ought to do for this work; your office is to procure money…, the designs for the building you are to leave to my care…”