Contract Administration

Majority of new buildings do not follow building code – JEA

AMMAN – The vast majority of new buildings constructed in the Kingdom, excluding the capital, do not comply with the National Building Code (NBC), according to the Jordan Engineers Association (JEA).
Stressing that failure to follow regulations puts the safety of buildings at risk in the event of major earthquakes, Mahmoud Subhi, head of the JEA’s technical affairs and engineering supervision committee, told The Jordan Times in a recent interview that citizens are obligated to comply with the NBC. …

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Contract Administration

Negotiate, not bully

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by Conrad Egbert

Last week, following extensive chats with developers, contractors and suppliers, it was clear that most of the industry is renegotiating contracts to better suit the current market conditions. Now, even though this may seem like the best option (and it probably is) to kick-start the construction industry, a couple of things that Besix’s Philippe Dessoy and Arabtec’s Tom Barry pointed out, painted a different picture. …

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Contract Administration

The emergence of Asian construction contractors in the Middle East

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by Mark Raymont
In recent years, the Middle East has proved to be one of the most attractive construction and engineering markets in the world for international contractors. Notwithstanding the present global economic climate, parts of the Middle East continue to present significant opportunities and many global construction contractors are active in the region. Among the most prominent are construction contractors who are head-quartered in the Asia Pacific area, as is illustrated by some of the more high-profile projects in the Middle East, where construction contractor consortia have include many of the major Japanese and South Korean construction firms. …

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Contract Administration

Contractors are left guessing in the Gulf

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The Gulf’s construction clients are struggling to make up their minds. Governments may be busy issuing tenders for new projects, but few awards are following once bids come in. For contractors, this presents serious problems, as they do not know if or when they will get any new work.

In Abu Dhabi, for instance, the first tenders have been issued for the MGM development at Mina Zayed, and contractors have been told to submit bids in May for a new 60,000-seat stadium in the Capital City area. But at the same time, the tender for Tawam hospital has been cancelled and contractors and consultants have been waiting for months for awards on a sewage tunnel programme and a metro system. …

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Contract Administration

New decade, new development of the remoteness rule

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by Sarah Thomas

In this, the second of my New Year updates, I would like to discuss two interesting cases which have recently been decided by the UK courts. The first is the UK Court of Appeal upholding of a first instance judgment and the comments that the Court made on the recoverability of damages under English contract law.

The case is Supershield Limited v Siemens Building Technologies FE Ltd. As a reminder, the basic test under English law is that a party will recover losses flowing from the breach that (i) arise naturally, in the usual course of things, or (ii) are losses which the parties may reasonably be taken to have contemplated when entering into the contract (the “Hadley v. Baxendale” test, often known as the “remoteness” test). A previous recent development of this area resulted from the House of Lord’s decision in the Achilleas case which suggests that a defendant will not be liable for losses – even those which are not unusual and therefore potentially not too “remote” – which he cannot reasonably be regarded as having assumed responsibility for.

The facts of the Supershield case (whether Siemens could recover from its defaulting subcontractor the losses flowing from a series of failures in a water sprinkler system and in particular, the amount that Siemens had settled for a claim upstream with the main contractor) are not so important as what the Court said about the current interpretation of this remoteness rule. It held that Hadley v. Baxendale remains the standard rule and reflects “the expectation or intention reasonably to be imputed to the parties”. The Court went on to say that this can be interpreted so that “…if on the proper analysis of the Contract against its commercial background, the loss was within the scope of duty (i.e. what was within the contract breaker’s duty to prevent under the Contract) it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances”.

This means that under English law, a contract breaker can still be liable for damages even if those damages would have been considered unlikely by the parties when entering into the contract. Thus this judgment is important for its distinction between what “intention can be imputed between the parties” as to what damages should be covered and likelihood/foreseeability.

Another case, from a Scottish court, provides an interesting example of notice bars in a construction contract being strictly enforced in the UK. The case in question, Education 4 Ayrshire v South Ayrshire Council involved a contractor who had contracted to design and build six schools for the South Ayrshire Council under a PPP contract. During the works, asbestos that had not been revealed by a previous survey was discovered. This qualified as a “Works Compensation Event” under the contract, for which the Contractor might be entitled to an extension of time, payment of compensation and/or relief from its obligations but provided that the proper procedure was followed.
The Authority rejected the contractor’s claim for an extension of time and compensation on the basis that the contractor had failed to give the required notice in accordance with Clause 17 of the contract.
The judge agreed that the Contractor had not in fact complied with clause 17. He explained that once it is accepted that compliance with the notice clause is a condition precedent (and both parties agreed that it was), the question is simply, “what does the clause require?” In this case the clause required the Contractor to give notice of its claim. What the Contractor’s letter to the Authority about the delay actually said was “We will submit our full claim in accordance with clause 17.6 (…)”. This was held not to be valid notice under clause 17.6. A number of readers, particularly those from non-common law jurisdictions, will be surprised by this, as the Contractor had indeed flagged to the employer that a claim was being sought. But it just goes to show how strictly these notice provisions may be interpreted under English law and the need to follow ‘the letter of the contract’. You may recall that I answered a query on notices from a project manager recently (see Ask the Expert, February 2010) and warned of the need to check that the notice strictly complied with all formalities.
“But how is this equitable?” a number of you will cry. In the case, the judge said that the whole purpose of the clause is to give certainty – the Authority should not have to infer or assume from correspondence that a claim will be made. In this case, in accordance with the contractual notice provisions, the chief executive of the Authority was entitled to formal notification of a claim. The fact that those “on the ground” at the Authority may have been aware of the situation (the Authority was sent a copy of the survey report, attended a meeting to discuss its implications and had been provided with a copy of the Sub-Contractor’s claim against the Contractor in relation to the same event) was irrelevant.

Food for thought….

Please let me know if any of you have come across similar situations.

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Kluwer Construction Blog

Construction Law, Contract Administration

The Procurement Process in Canada after the Supreme Court of Canada Tercon Decision*

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by Joel Heard

The tendering and procurement process in Canada has traditionally been treated by the courts as a special area of contract law in which fairness and protecting the integrity of the tender process have been guiding principles. Courts have implied terms into contract “A” bid contracts that have obliged owners to act fairly, and wide discretionary clauses have been interpreted narrowly to ensure the integrity of the tendering process. …

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Construction Law, Contract Administration

When a ‘notice’ need not be ‘noticed’

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by Vincent Connor

Opening the mailbox at my Hong Kong apartment block brings the usual array of bills, more bills, flyers and…what appear to be ‘notices’ (usually from my landlord): but as we know from the world of construction law, often it is argued that what is intended to be a ‘notice’ fails to meet up to the strict requirements of the contract.

Yet, how many reported cases are there where the notice provision is strictly enforced? Most commentators struggle to point to a decision where a contractor was deprived of his ability to claim an extension of time solely on the basis of non-compliance with a notice provision. The point sometimes seems more of academic interest than practical application.

The good news for the academics is that this struggle may now be partially over. In the Scottish case of Education 4 Ayrshire Limited v South Ayrshire Council , a contractor tried to claim an extension of time due to the discovery of asbestos. This was a “neutral event”, outside the control of the parties, but one which entitled the contractor to bring a claim.

The court “was minded to dismiss” a claim by a contractor who got into a bit of a contractual and semantic muddle with its notices. (Instead of being actually dismissed, the case was “put out By Order”, a Scottish procedure whereby the case is “returned” to the parties for further consideration in light of the court’s decision.)

The contractual muddle arose in that the contractor gave notice under clause 17.1 of the relevant contract, when it should perhaps have given notice under clause 17.6.1 as well. In terms of semantics, the contractor said “we will submit our full claim in accordance with clause 17.6 of the project agreement”, instead of saying something along the lines of “we hereby give notice of our claim”.

It was accepted by both parties that compliance with the notice requirements was a condition precedent to the right to bring a claim.

The bad news for contractors is that the Judge held that this condition precedent had not been complied with, despite the clear intention of the contractor’s letter.

Most pieces on notices conclude with the usual sage advice about getting notices right. This piece is no exception. In Education 4 Ayrshire the parties accepted that the employer was fully aware of the position regarding the asbestos. He was sent a survey report and attended a meeting to discuss its implications. The employer was also aware that the sub-contractor had claimed an extension of time against the contractor as a result of the same event. Yet the Judge still held the contractor to a very exacting standard regarding the provision of notices.

This was despite the fact that the basic commercial intention of the notice provisions had been satisfied. The employer suffered no prejudice as result of any muddle which the contractor may have got into, semantic or otherwise. However, that did not change the outcome of the case. Just when we were getting our heads round the application of the UK (Technology & Construction Court’s) 2007 decision in Steria Limited v Sigma Wireless Communications Limited, it seems that we are back in the danger zone if there is not strict compliance with contract terms regarding notices’ provisions.

So, just how bad is the news for contractors? As mentioned above, this case concerned a “neutral event”. Had a court reached the same decision following a delay caused by an employer breach or act of prevention, the news for contractors would be worse. It would certainly be very bad news for contractors if decisions like this were handed down by those courts or tribunals in Hong Kong who deal regularly with construction matters. But surely, that would never happen. Or would it…?
With that thought, just as I’m discarding the detritus from my mailbox into the trashcan, I stop: maybe that carelessly-drafted note from my landlord does deserve greater scrutiny, after all…Or maybe on the strength of Education 4 Ayrshire I am safe to ‘bin’ it, with impunity?!

Kluwer Construction Blog

Contract Administration

A new year brings fresh thinking from FIDIC and new developments…

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by Sarah Thomas

I thought that I would hail in the new year with an update on some interesting construction developments. Put it down to a period of reflection over the Christmas break! As I want to cover a number of areas, I have split this update into 2 postings.

In this first update, I am going to cover the latest FIDIC news and the new Bribery Bill currently going through the UK parliament. In my next posting I will look at two recent construction cases in English law, the first covering recoverability of damages and the English “remoteness” rule, the second covering treatment of contractual notice bars for claims.

Firstly, on FIDIC. I presented at the annual FIDIC conference in London in December of last year and can report some interesting developments:

FIDIC have just published a new Subcontract form (termed the Conditions of Sub-Contract for Construction). This is specifically designed as a construction only subcontract – to be used by main contractors operating under either the 1999 FIDIC Conditions of Contract for Construction for Building and Engineering Works designed by the Employer (known as the “Red Book”) or the Multilateral Development Bank’s Harmonised Edition of these FIDIC Conditions of Contract. The subcontract is drafted very much on the basis of a “total pass down of risk”, although there are some interesting features (particularly from an English law perspective).

For example, the payment provisions are effectively tied to payment under the “Main Contract” and include “pay when paid” clauses (Sub-Clause 14.6 (c)) in that the Contractor can withhold monies where “the Employer has failed to make payment in full to the Contractor in respect of those amounts…”. Of course, this protection will not apply where the reason for non-certification under the Main Contract is because of Contractor default or the Employer’s insolvency. Whilst common in subcontracts in Europe, any construction contract signed in England and Wales is subject to the UK Housing Grants, Construction and Regeneration Act and this prohibits pay when paid provisions. It will be interesting to see how this plays out in the market – readers will no doubt be conscious of the current harsher market conditions for contractors generally – so this may be more palatable to subcontractors in these straitened times. What it means in practice is that subcontractors will have to take a good deal more notice of what the main contract says about payment, and certification of payments, to ensure they are comfortable with these risks flowing down into their subcontracts.

As for other key features,

• Whilst the underlying principle is direct risk pass down, there is no general provision (as appears in many “pass-down” subcontracts) saying, for example, that the Sub-Contractor shall carry out the Sub-Contract Works such that he does not put the Contractor in breach of the Main Contract.

• The Sub-Contract assumes that the Main Contract will be the FIDIC Red Book and directly refers to Main Contract Clauses. Of course, the numbering will not necessarily work if the Main Contract is either not FIDIC or is an amended form of FIDIC.

• Not surprisingly, there are provisions allowing for immediate termination where the Main Contract terminates (Clause 15). Where the Main Contract is terminated for default the Sub-Contractor only gets the value of work and documents produced up to the date of termination (less amounts recovered by the Employer and any other losses and damages incurred by the Contractor and, notably in my view, its other sub-contractors). If not in breach, the Sub-Contractor gets paid the value of works/documents to date, demobilisation and reasonable repatriation costs, any other costs “reasonably incurred” in expectation of completing the Sub-Contract Works plus loss of profit. This is all fairly standard, although I suspect a number of main contractors may wish to curb the ‘loss of profit’ claim. However, the biggest potential issue is I think Sub-Clause 15.6. This allows the Sub-Contractor to terminate where there would be a right to do so under the Main Contract. The clause simply refers to the termination events in the Main Contract equally applying to the Sub-Contract. I query whether this actually works or makes the Contractor’s other termination rights sufficiently clear. It would be preferable to spell them out for such an important clause.

FIDIC is also proposing to issue a new user guide to accompany the Design Build and Operate form (Gold Book). Just to remind readers, the current form (first published in September 2008) covers design, build and long term operation of facilities on green field sites. The new guide will include provisions allowing this to be used for brown field sites. No doubt FIDIC hope that this will lead to a much greater use of the Book as most DBO projects involve some element of upgrade of existing facilities alongside new build. However, as this form is still in its infancy I am yet to hear from anyone who has actually used this form (- readers please get in touch if you have), it remains to be seen whether this will lead to wholesale take up of this new form. I think one reason for the lack of use so far may be that the form has no provision for funding by the Contractor and so is not suitable for PPP projects.

At the same time, FIDIC are proposing a review of all the contract forms in their current “1999 Rainbow Suite” (i.e. principally the Red, Yellow and Silver Books) and plan to amend these in line with current business practices and in response to request for amendments over the last decade. For example, one likely amendment is to include the amendment FIDIC has already made to Sub-Clause 20.1 in the DBO form dealing with the procedure for Contractor’s claims. Just to recap, Sub-Clause 20.1 has always been a sticking point for contractors as it essentially precludes any entitlement to claim for time/money if the conditions of this clause are not strictly complied with. What the Gold Book has introduced is a slight relaxation of this absolute notice bar, allowing the Contractor to apply to the Dispute Adjudication Board for a ruling if he considers there are circumstances which justify the late submission of a notice. If the DAB agrees that in all the circumstances “it is fair and reasonable that the late submission be accepted”, it can overrule the 28 day notice limit.

FIDIC canvassed views at our London conference as to what other clauses should be amended. There were a number of requests for a review of the variations clause (Sub-Clause 13) and in particular to the right of the Contractor to payment for value engineering changes. Currently under all the forms, the Contractor bears the cost of any proposal and only if it is accepted by the Employer, does he then get remunerated. This has always been something of a disincentive to propose value added changes.

Before signing off on this first update, I would like to touch upon the Bribery Bill 2009 which is currently going through the UK Parliament. The reason this has been introduced is because the UK has come under foreign criticism from the Organisation of Economic Co-Operation and Development (OECD), amongst others, because of its perceived failure to carry out its obligations under the OECD Convention, which the UK ratified in 1998. The new Act, if it becomes law, will impact upon all commercial organisations seeking contracts with the public sector both in the UK and abroad.

Key features to watch out for if you are a UK contractor are the proposed new offences of bribing a foreign public official and the corporate offence of failure to prevent bribery by persons working on behalf of the business, including employees, agents and subsidiaries (whether domestic or foreign). The corporate offence applies to companies or partnerships which are either formed under UK law or which carry on business in any part of the UK – in other words, it could also impact on foreign companies doing business in the UK. The offence is punishable by an unlimited fine for the company whilst company individuals with responsibility for anti-corruption measures face personal criminal liability and up to 10 years’ imprisonment.

It will be a defence to the corporate charge for a company to show that “adequate procedures” to prevent corruption were in place at the time. The Bill does not detail what “adequate procedures” means but this month the Government agreed to add an amendment that will require the Secretary of State to provide guidance on this. All UK companies and overseas companies doing business in the UK should probably review their internal procedures carefully and update training, policies and contracts of employment to reflect the new law.

Some of you may ask whether there is sufficient parliamentary time to push this through before the UK election (which most commentators are forecasting in early May this year). The current view is that while the Bill is generally understood to have cross-party support, timing is very tight as there are a number of further stages that the Bill must complete in the House of Commons before it can be passed into law. If the Bill is not passed in time, it will need to be re-introduced in the next Parliament.

Any thoughts on the latest FIDIC development or indeed on the UK’s proposed anti corruption measures are of course always welcome!

Kluwer Construction Blog

Construction Law, Contract Administration

Let’s talk about it: is mediation a viable option in Dubai?

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by Melanie Grimmitt

Mediation has become established in the West as a useful alternative to more confrontational and adversarial forms of dispute resolution. Here in Dubai it is uncommon, but in our experience the number of disputes is on the increase, so could it, or should it, have a role to play?

Mediation is an alternative dispute resolution procedure that allows parties with a dispute to engage a neutral third party to facilitate communication between the parties, with the aim of resolving the dispute. As it is a voluntary and consensual process, parties must agree to mediate and are free to withdraw at anytime. Mediation is also non-binding and it may well not lead to a resolution of the dispute. However, if the parties do reach agreement on the dispute, they then record that agreement in writing and it then becomes enforceable in the usual way.

The pros

Mediation is inexpensive when compared with litigation and arbitration which are also far more time intensive, so there is a significant time and cost saving if the dispute is successfully resolved without reference to these more traditional dispute resolution methods It is also quicker: specifically in Dubai, arbitration can take up to two years and parties may face issues in relation to enforceability of arbitral awards in the local courts. Mediations usually last one or two days, although to ensure the greatest chance of success it is important that significant preparation is done in advance, and that perhaps a programme for the mediation is agreed, although flexibility on the day will be important.

Further, mediation, as with arbitration, should also be a confidential process. This is important so parties feel able to make concessions without fear of repurcussions. If everyone attends feeling that whatever they say may be used against them, then there will be little movement from entrenched positions. The confidentiality of proceedings and presence of an experienced mediator also allows a party to test out an argument and perhaps even get an opinion from the mediator as to its chances of success. This may make it more or less amenable to settlement.

Moreover mediation is often regarded as having a number of significant commercial benefits. More often than not, a contractor will wish to be seen as cooperative and will want to try and preserve, to the extent possible, a good relationship with its employer. As anyone who has been a party to litigation or arbitration will testify, it is very difficult to maintain even civil relations with the other side. Avoiding the loss of a business relationship is a benefit that surely cannot be overestimated in the market conditions facing contractors in Dubai and elsewhere

Culturally, mediation would seem to fit in Dubai and the Gulf where bargaining is an art form and where, in the construction industry, we see instinctive reluctance to take drastic action against an employer.

Cons

The most obvious down side with mediation is that neither party can force the other to use it, unlike litigation or abitration which once prescribed in a contract, must be adopted to resolve any disputes arising from that contract. However, the pros outlined above are in both parties interests and even if a party is convinced that right is on its side, it will still incur a degree of irrecoverable costs and considerable time expended if it brings or defends litigation or arbitration proceedings.

In addition, the increase in disputes in Dubai will inevitably lead to pressure on resources in the Dubai courts and the Dubai International Arbitration Centre, which may well lead to an increase in the time taken to litigate or arbitrate a dispute, thereby increasing the financial and human cost of these routes, which only benefits lawyers!

The current position

Dubai does have a mediation centre already for property disputes, which was established as a direct result of the high case load of the property court (only those of you living on another planet will not have heard about the downturn in the Dubai property market and the difficulties caused for investers and developers).

Within the construction industry, again, as has been covered extensively in the media, there has also been a considerable downturn resulting in projects being delayed or stalled (latest figures suggest over 300 stalled projects) and contractors and consultants are experiencing delays in payments and severe payment shortfalls. Only yesterday Lord Mandelson representing the British Government was in Dubai seeking to further the cause of British contractors and consultants still owed vast sums. Could this pressured situation be ripe for resolution of dispute by mediation?

It is probably important here to make a distinction between issues of non-payment and disputes about termination, defects etc. In the former case it is hard to see the benefit of mediation – the sum is owed, but the money is either not available or not being made available. Mediation will not advance the creditors position and a more definitive step is probably required. However, if a contractor does see some benefit in maintaining a business relationship with that employer, mediation may still have some value in allowing parties to consider more creative ways for the debt to be repaid.

Contrast issues of termination and defects where a mediation, if properly approached, may provide a genuine alternative to parties spending the next two years absorbed in and paying for resolution of such issues by litigation or arbitration.

Conclusion

Mediation is useful if there is a genuine dispute and/or relationship issues and certainly has a place in Dubai. The current increase in construction disputes enhances the case for mediation and probably the likelihood of its use increasing. However if faced with a non-payment claim where there is a lack of money or lack of willingness to pay undisputed sums and no ongoing relationship issues to be considered, a more definitive and enforceable approach is probably necessary.

Kluwer Construction Blog

Construction Law, Contract Administration

Debt Recovery in the UAE

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by Sachin Kerur

We are all still feeling the impact the global downturn is having on the construction sector in the UAE. Not only is it a challenge to find work in this market, increasing numbers of contractors and consultants are finding it difficult to recover payment for work they have already undertaken.

In the past many companies working in the region have been wary of pursuing their entitlements through formal dispute resolution processes, due to perceived cultural sensitivities, many now feel that they have no choice but to consider the available debt recovery options.

In many instances, the amounts owed are not disputed. However, in the current market some developers/contractors consider that they should not be obliged to pay their debts in full, and are attempting to avoid, defer, reduce and/or make piecemeal payments over a substantial period of time.

How to Recover Your Debts in the UAE?

Wherever you are from, outstanding payments can be frustrating, not to mention costly. However, a contractor will usually be aware of the tools available in its home jurisdiction in order to speed payment along.

When working overseas, however, the different cultural, legal and practical issues can make the whole process much more challenging. In the UAE, this challenge is in part due to the local civil legal system. Those instruments that common law practitioners are so used to wielding are not present in quite the same form.

The options available to pursue non-payment of due monies will depend on the dispute resolution mechanisms contained within the relevant contract. Typically, a contractor/consultant will have to litigate or arbitrate to recover payments.

In addition, there are a number of procedures available under local laws that could assist in the recovery of debts. Potential options available under UAE law include:

1. An Order of Payment

1.1 An order for payment within the UAE is a developing area of law. It can therefore often be hard to determine the likelihood of success before the UAE Courts when making such an application.

1.2 It is a procedure where a party applies to the Courts for summary judgment against a defendant for commercial debts, substantiated by a commercial instrument such as a bill of exchange, promissory note or cheque, which are valid, but not paid.

1.3 If a party has a successful application for an order for payment, the outcome would be a direction from the Courts for the outstanding debts to be paid by the debtor. Success is by no means guaranteed, but the mere threat of an order for payment can be a persuasive tool for the creditor, as an outstanding debt can bring with it considerable public embarrassment within the local community. This in turn can act as an incentive for the debtor to settle any outstanding debts.

2. Precautionary Attachment Order

2.1 A precautionary attachment order, if granted, essentially allows the Court to seize the assets in question at the claimant’s request prior to judgment/arbitral award in order to preserve those assets during the trial. It is as close to seeking injunctive relief as it gets in the UAE. The procedure, timing and effect of precautionary attachment orders can at times be somewhat unclear.

2.2 Precautionary attachment orders are made in absence of the other party and are ordinarily used as a tool to ensure that assets are not disposed of prior to receiving the court’s judgment/arbitration.

2.3 The order can be made against any assets in the UAE, including machinery, bank accounts, goods or other assets owned by the defendant and under his possession or owned by a defendant, but in the possession of a third party. It should be noted that the assets, money or material to be attached must be client specified before the application will be granted.

2.4 If a precautionary attachment order is granted, the substantive case must be filed at Court within eight days.

3. An Order for Sale

3.1 This is a procedure whereby a claimant applies to Court for an order that a property or part thereof be sold where a defendant has failed to pay for material and equipment supplied for that property.

4. An Order for a Lien Over Property:

4.1 In certain circumstances a contractor can exercise a form of lien over a property on which it is doing work until payment for that work is received.

Substantive Action

As discussed above, pursing substantive action is also a possibility, either through the local courts or via arbitration. Litigation in Dubai can be both costly and time-consuming. There are cases that continue for five years or more and only local advocates can appear and plead before the Courts. Arbitration might allow a claimant to remain within their common law comfort zone, however cases usually take at least a year to reach a decision and the costs are not insignificant.

Practical tips

(a) Examine the payment terms in the contract;
(b) Ascertain your entitlement to the outstanding debt and collate all the documentation in support of it;
(c) Review the dispute resolution mechanism in the contract, if any;
(d) Determine what assets the debtor owns and where these assets are held; and
(e) Review the amount in question and determine what is the best avenue for recovery.

Final thoughts

The road to debt recovery within the UAE, as in many countries, can be a protracted one. A supplier of services should, as far as possible, try to recover the amounts outstanding from the debtor before bringing any action for recovery through the Courts. A claimant needs to demonstrate clear and strong evidence of the outstanding debts if their application before the Courts is to be successful. With advocacy and court fees included, the process can be a long and costly one, so you should make sure that the amount outstanding will offset the cost. If you have an arbitration agreement then this can be a less costly mechanism for substantive recovery if the other avenues, such as the payment order, fail.

Kluwer Construction Blog

Contract Administration

Construction Claims

2 Comments

by Sarah Thomas

Question:
I am a project manager for the employer on a power plant project based in Europe. We have been on quite good terms with the contractor up until now. Last week the contractor sent us a claim for 12 weeks’ delay to the programme and for compensation costs (we are using the FIDIC Yellow Book (Plant and Design Build) 1999 form and English governing law). They are saying that dealing with contamination in the ground discovered in the last few weeks will cause a delay. We had a couple of site meetings with the contractor and sub-contractor about the programme and the potential delays, prior to the contractor sending the claim. I have two issues with the claim: firstly, we do not believe that the ground conditions will cause 12 weeks’ delay; our estimate would be closer to about 6 weeks. Secondly, the contractor’s written notice of claim is just a couple of lines in an email to me and I am not sure this counts as proper “notice”.
I do not want to jeopardise our relationship with the contractor, but obviously I am concerned to limit our exposure to any delay costs. I would appreciate any advice about how we can deal with this claim from our contractor.

Answer:
Let’s start by considering whether or not the contractor has given valid notice of the claim. In fact, even before we come onto that, I should just touch on whether or not the contractor has a claim in the first place. You do not say that you are disputing the existence of the pollution nor that it was “Unforeseeable” for the purposes of the contract (for the benefit of others reading this, “Unforeseeable” and “physical conditions” are defined in the FIDIC Yellow Book as not reasonably foreseeable by an experienced contractor by the date for submission of the tender and “physical conditions” means “natural physical conditions and man-made and other physical obstructions and pollutants which the contractor encounters at the Site when executing the Works”). Therefore as ground pollutants are expressly covered, I assume that you accept that the contractor has encountered unforeseeable physical conditions at the site which in principle give it the right to claim an extension of time and payment of costs under Sub-Clause 4.12.4 of the contract.
But Sub-Clause 4.12.4 makes that right to claim expressly subject to Sub-Clause 20.1. Sub-Clause 20.1 sets out strict time-limits for giving notice. Again, you do not say that the contractor’s notice was given late so I am assuming that you accept that it was given on time but I suggest that you check this carefully anyway. As a reminder, 20.1 requires the notice to be given as soon as practicable, and not later than 28 days after the contractor became aware, or should have become aware, of the event or circumstance giving rise to the delay. Note that this is days, not business days. You say that the pollution was discovered in the last few weeks so timing could be pretty tight. However, it is worth bearing in mind whether the Contractor has in fact given valid notice before the email. 20.1 talks about the notice needing to make a claim for extension of time and costs under Sub-Clause 20.1 and describe the event or circumstance giving rise to the claim. So the contractor can potentially fulfil this requirement in just a couple of lines and it is also not clear that he even has to issue this in a separate notice (i.e. separate from communications on other matters such as Programme, progress of Works, etc). Could any previous correspondence/documentation issued to the Engineer conceivably satisfy this requirement?
Also, significantly, I note that the email was sent to you. Was the Engineer copied in as well? Clause 20.1 actually requires the notice to be sent to the Engineer. You need to find out when, if at all, the Engineer received the notice and whether or not this was before the 28 day deadline. It is also worth checking whether your particular contract provides for notice formalities and whether this precludes email. FIDIC unamended simply says that notices shall be in writing and delivered by hand, mail or courier “or transmitted using any agreed system of electronic transmission as stated in the Appendix to Tender”. So you need to check this to see if email is allowed.
Sub-Clause 20.1.2 sets out quite clearly what is the effect of a failure to comply with this timescale: the contractor will not be entitled to any extension of time or costs and the employer will be discharged from all liability in connection with the claim.
In addition to the initial notice, the contractor must send to the Engineer a fully detailed claim which includes full supporting particulars of the basis of the claim and of the extension of time and/or additional payment claimed, in accordance with Sub-Clause 20.1.5. This must be sent within 42 days after the contractor became aware/should have been aware of the event or circumstances giving rise to the claim, unless any other period has been agreed between the contractor and the Engineer. The contractor is also obliged to keep such contemporary records as may be necessary to substantiate any claim (Sub-Clause 20.1.4). You will need to check whether or not these further obligations have been complied with in time.
Turning to your other issue with this claim – the length of the delay claimed by the contractor. As you know, the Engineer can respond with “disapproval” or with “detailed comments” if he considers that the delay claimed is too long. He can also request any necessary further information to help him assess the claim, but note that he must respond on the principles of the claim within the time limit set out in Sub-Clause 20.1.6, namely 42 days after receiving the claim or any other period he has agreed with the contractor. For that reason I am hoping that the Engineer’s assessment is well underway and even though there are queries about the validity of the claim, you need to make sure that this is the case.
Of course, he will also need to comply with Sub-Clause 3.5 (Determinations) which means he has to consult with both employer and contractor firstly to try and reach an agreement. This will be your opportunity to put forward your case for any notice non-compliances and regarding the length of delay impact. If the parties don’t agree he makes a “fair determination”. If at this point, you don’t agree with this determination it is always open to you to invoke the dispute resolution procedure and seek the decision of the Dispute Adjudication Board if there is one in your Contract.
To sum up, the contractor has to overcome several hurdles relating to the form, content and timing of the notice in order to benefit from its entitlements resulting from delays due to unforeseeable physical conditions. You will need to review the notice carefully against the contractual requirements referred to above and consider whether all the information has been provided in time, in the right format, to the right people. Given the clear language of Sub-Clause 20.1 it would be hard for the contractor to argue that compliance with clause 20.1.1 is not a condition precedent – i.e. if it does not comply, it cannot benefit from the relief. This strict approach was in fact adopted in a recent Scottish case. You may find that the contractor has not submitted a valid claim at all. Concurrently, the Engineer will need to continue his assessment of the claim and preparation of his response in relation to the length of delay.

Kluwer Construction Blog

Contract Administration

A fixed price may not always be fixed in China

1 Comment

by Hew Kian Heong

I bought a painting a couple of months ago which I really liked. I did not have a place to hang it at the time. The gallery owner was eager to make the sale and so agreed I could pick it up later when I had found a place to hang it. So I agreed a price with the gallery owner and paid her a 10% deposit. When I turned up to collect the painting recently, the gallery owner sheepishly asked if I could pay a little more for the painting. The reason she gave was that her landlord had increased her rent significantly and she was struggling to keep the gallery going. I had also driven a hard bargain on the price. I was a little annoyed by the request but agreed to pay 10% more as the gallery owner is a really nice lady and I knew it was true her landlord had increased her rent by a ridiculous amount.

Most employers like the certainty of a fixed price contract from their contractors for their construction projects. Usually, they are required to have fixed price contracts by their financiers. In return for keeping to a fixed price, contractors in theory are allowed to charge a premium for assuming greater risks. This does not however happen in practice very much. But contractors continue to sign up to fixed price contracts because competition for contracts in China is very keen and employers are generally in a much stronger bargaining position than contractors, at least at the tender stage.

However, contractors who find themselves in a position where the contract price is fixed but their costs have increased since signing the contract may have a possible way out. The Interpretation II on Several Issues Concerning the Application of the PRC Contract Law promulgated by the PRC Supreme Court on 13 May 2009 introduced a principle of “significant change of circumstances” into the law of contract in China. Under this principle, the court is entitled to vary a contract or declare a contract discharged if a significant change in the objective circumstances occurring after contract formation renders the fulfillment of the purpose of the contract impossible or the continued performance of the contract manifestly unfair to one party.

In the context of construction contracts, the rule of “significant change of circumstances” provides a potential ground for a contractor to apply to the court to increase the contract price on the basis that the circumstances upon which the fixed price was originally agreed have changed significantly since the signing of the contract. The contractor must however prove a number of things to the court.
Firstly, the contractor needs to show the court that the new circumstances do not constitute a “commercial risk”. The Interpretation does not define the term “commercial risk”. The Guidance Opinion of the Interpretation issued by the Supreme Court however requires the court to take into consideration the market conditions and the circumstances of a particular case together with the following important factors to differentiate a “commercial risk” from a “significant change of circumstances”. A new circumstance will not be a “commercial risk” if:

(a) it is generally not foreseeable in the view of the general public;

b) its effect is far beyond the contemplation of a reasonable man;

c) it is not capable of being prevented or controlled; and

d) the nature of the transaction in question is not one of high risk and high return.

Secondly, the contractor will need to prove that the continued performance of the contract will render the fulfillment of the purpose of the contract impossible or manifestly unfair to the contractor. It is not often that the purpose of a contract becomes impossible to fulfill due to a change of circumstances. It is likely that we will see more reliance on the “manifestly unfair” argument. In this regard, the overriding principle of “fairness” in Chinese contract law comes into play and it requires the rights and obligations of contracting parties to be agreed on the basis of “fairness”. What is “manifestly unfair” is not defined in the Interpretation but the courts in China generally have a wide discretion in determining what is fair or unfair.

I personally do not think that the Chinese courts will apply the principle of “significant change of circumstances” liberally to vary or discharge a contract. If the courts apply the guidelines of the Guidance Opinion strictly, I think it will be difficult for a contractor to be able to prove a “significant change of circumstances”. After all, an experienced contractor will find it difficult to prove that a circumstance or its effects, in particular price fluctuation of materials or labour, is not foreseeable or cannot be prevented or mitigated in some way. More often than not, the particular circumstance was foreseeable but the contractor had to under price to win the contract and therefore left no margin of error in his price. This is perhaps best reflected by the fact that for the contracting business in China, a profit margin of 1 to 3% is the norm.

Although the principle of “significant change of circumstances” is a useful argument to employ for a contractor seeking to vary a fixed contract price, it is likely that most contractors will continue to rely more on the overriding Chinese contract law principle of fairness to achieve the same objective. In conclusion, it is perhaps interesting to note that in the context of liquidated damages, the Supreme Court in a recent opinion said (roughly translated) “In the current more difficult market conditions in doing business faced by companies, with respect to the issue of the amount of an agreed penalty being significantly higher than the actual loss caused by a breach, the contract law principles of good faith and fairness should be applied, and the purpose of a penalty being mainly compensatory and secondarily punitive in nature adhered to, so as to prevent parties using party autonomy as a reason to agree excessive penalties”.

Kluwer Construction Blog