SUMMARY

The picture above shows a project in Malaysia that was abandoned for 12 years as the
developer ran into financial difficulties, leading to the termination of the contract by the
government. Situations such as these require Construction industry professionals
especially those working in the claims and dispute resolution fields to have a firm
knowledge of contract management, claims management and dispute resolution
techniques.

The FIDIC forms of contract are commonly used in construction projects throughout the
world. Due to the nature of construction projects, Claims are inevitable. This article
describes the clauses related to claims, and the obligations of the parties to the contract.
Due to the adversarial nature of construction industry, disputes between the parties may
also arise, and procedures for alternative dispute resolution techniques (ADR) such as
adjudication and arbitration are also briefly touched upon in the end.

This article refers to the Conditions of Contracts for Construction for Building and
Engineering Works Designed By Employer, also known as the FIDIC Red Book 1999
Edition. Other forms of contract like ICE, JCT & NEC etc have similar provisions, the
concepts being the same. This article is written specifically for engineers who have just
started in the field of Contracts and Claims. Experienced professionals will also benefit
from it as a concise and quick go to reference.

STRUCTURE OF THE BOOK

The Red Book is divided into three sections, namely:

1 - General conditions

2 - Guidance for the Preparation of Particular Conditions

3 - Forms of Letter of Tender, Appendix to Tender, Contract Agreement & Dispute

Adjudication Agreement

The clauses referred to in this article are from the general conditions, or standard form
of contract. These may be amended in particular conditions. It is advised to read the
contract’s particular conditions in conjunction with general conditions, and to read the
contract as a whole for better interpretation of the terms.
GENERAL RULES FOR CLAIMS
The following rules apply to all claims under the red book :

Claim Notices

Under Clause 20.1, the Contractor must give notice of any claim, whether for time or
money, not later than 28 days after the Contractor became aware, or should have
become aware, of the circumstances giving rise to the claim. If he does not comply with
this rule, he will not receive an extension of time, and he will not be entitled to
additional payment, and the Employer s discharged from all liability in connection with
the claim.

This clause applies to claims made under the Conditions, and claim made under the
general law, such as for breach of contract, or for negligence.

Particulars

Clause 20.1 requires the Contractor to follow up his notice with ‘a fully detailed claim
which includes full supporting particulars’ of the claim.

The contractor must submit this fully detailed claim within 42 days of the occurrence of
the circumstances giving rise to the claim, not within 42 days of giving the notice. This
means that if the contractor has submitted his notice of delay after 28 days of
occurrence of the delay event, then he must follow it up with a fully detailed claim after
14 days of the notice. This may be very difficult for the contractor, especially if the delay
analysis method employed by him is detailed and time consuming or if it’s a complex
project and has been ongoing for some time. Hence it is of utmost importance that the
contractor maintains good contemporaneous records of the project to help produce a
detailed claim rapidly.

The basic requirement for a claim to be successful is that is that it should be

particularized. If there are several different causes of delay, a period of delay should be
attributed to each cause. That is the basic requirement of linking cause and effect. The
figure below shows how such “cause and effect analysis” can be done.
Reference : PMI - An empirical study of schedule delay causes based on Taiwan's litigation
cases

In order to do this, the Contractor will have to go through and produce factual evidence.
It is a discipline, which will help him put his case, and helps the Engineer follow and
understand his arguments. The particulars should include anything that helps the
contractor put forward his case, and helps the engineer in following and understanding
the contractor’s arguments. These may include, but are not limited to correspondence,
meeting minutes, dated site photographs and other relevant documents.

Presentation is key. I have observed many times that claim submissions amount to
volumes of data, especially for the claims submitted after the project has been finished.
Even though attention to detail is an essential skill of the Forensic Delay Analyst/Claims
Consultant, the presentation should be coherent and easy to read and understand for
reviewer. There must be a claim narrative that refers to the documents presented and
explains the methodology and arguments of the contractor to reach to a conclusion.
Some interpretative information must be added in the form of schedules, graphs and
tables. The timeline below shows the chronological events that have occurred and the
expected impact of the delay event. Such visuals are very effective at presenting the
information in a clear and concise way.

TIME EXTENSION CLAIMS

Contractor’s Basic Entitlement

The basic Clause for the Contractor to claim an extension of time is Clause 8.4. It is there
to allow the Contractor to point out where he has been delayed by reasons beyond his
control. If he could not do this, and the Engineer did not have the power to give him an
extension of time, he would be liable for liquidated damages for delay.

Further, if the Contractor obtains an extension of time, he may be in a position to

recover his time-related costs of remaining on site longer. However, there is no natural
link between Clause 8.4 and money. It is a time Clause.

Delay Analysis

There are various methods of delay analysis used to assess the delays and their impacts.
The discussion of these is beyond the scope of this article.
In short, having a Clause 8.3 programme and its subsequent updates of sufficient quality
should form a good basis for assessing delays.

I will cover this topic in a future article. The table below shows different methods of
delays analysis and their suitability in different scenarios.

Reference : http://ramskillmartin.co.uk/article/delay-analysis-making-the-right-choice/

Grounds for Extensions of Time

According to the red book, the contractor can be granted an extension of time on the
following grounds :

1 - Variation

2 - A cause of delay referred to in the Conditions (see below)

3 - Exceptionally adverse climatic conditions

4 - Unforeseeable shortages of personnel or Goods, caused by epidemics or

governments

5 - A delay caused by the Employer or a party under his control

A cause of delay referred to in the Conditions

The following clauses are related to contractor and employer’s claims under the FIDIC
Red Book. Making such a list for the project you are dealing with can be very useful.
Unforeseen Conditions
Physical conditions are defined in Clause 4.12 as ‘natural physical conditions and man-
made and other physical obstructions and pollutants’. According to the definition in
Clause 1.1.6.8, the criterion for judging what is unforeseeable is what is ‘not reasonably
foreseeable by an experienced contractor by the date for submission of the Tender’.

The Engineer’s Obligations

By Clause 20.1, the Engineer is directed to respond with approval, or with disapproval
and detailed comments, and in any event, respond on the principles of the claim. In
making a determination of an extension, he must proceed in accordance with Clause 3.5.
That requires him to consult with the Contractor, to try to reach agreement. If it is not
possible to reach agreement, he must make a fair determination of the extension of
time.

The Engineer is the first-step adjudicator or arbitrator. However, he is an informed

adjudicator or arbitrator, unlike the tribunals who come on to the scene later on. The
Engineer is not there to reject claims, but to deal with them fairly. That does not mean
he has to allow unmeritorious claims. What it means is that, if the Contractor makes
valid points, the Engineer should look into them, and arrive at a reasoned conclusion.

Given that he is an informed adjudicator or arbitrator, the Engineer will have knowledge
of the facts. This means he should not put the Contractor to proof of absolutely
everything, in the way that a tribunal might expect. Note also that, under Clause 8.4, the
Engineer may make a number of determinations. When doing so, he must review, and
may revise, previous determinations. However, he may not decrease them.

The Engineer has to arrive at a decision on the claim. He cannot merely reject it, or deny
it completely for want of one or two pieces of paper. On the other hand, he is not there
to make the Contractor’s claim for him, or to certify payment due from the Employer in
a carefree manner. It can be a hard balance to strike.

If the Engineer receives a claim, he cannot put it on the shelf and leave it until the
project has finished. The Engineer’s duty is owed to the Contractor as well as to the
Employer. If the claim is paid later than it should have been, because the Engineer has
kept it on the shelf for months, the Employer may be liable for financing charges. And
he may sue the Engineer for them!
PROLONGATION COST CLAIMS
Procedures

The procedures governing claims for payment are the same as those described above in
the section “general rules for claims” (clause 20.1). In summary, the contractor must
Comply with the requirements of these provisions and fulfill his obligations by giving
notices of his intentions, keeping his records and submitting his particulars. The
Contractor is not entitled to payment if he does not comply with the procedural
requirements.

The real penalty for the Contractor is that, if the Engineer is not alerted to the
Contractor’s intention to claim, or the Contractor’s claim is late, or it is not adequately
substantiated, the Engineer may well not arrive at the sort of figure the Contractor is
looking for. In fact, Clause 20.1 does anticipate that the Contractor may take some time
to provide all of the information. It allows payment to him of claims, for which sufficient
particulars have been provided.

The requirements for particulars for each head of claim are given under the relevant
head below.

Contractor’s Basic Entitlement

The Contractor’s basic entitlement is summarized in Clause 12.1, which says that the
Works shall be measured and valued. The onus is on the Engineer to do this.

Variations

Clause 13.3 sets out the procedure for variations. It is easy enough to follow. The
valuation rules are contained in Clause 12.3. The onus is on the Engineer to measure and
value variations, but, in reality, the Contractor may well wish to claim more than the
Engineer’s valuation.

Other Claims Clauses

The genesis of claims lies in a number of Clauses throughout the Conditions, in addition
to variations. A claim under the variations Clause is to have work valued. Other claims,
such as those listed under the time claims Clauses, which also allow money claims, are
cost based. Some allow profit as well.
Claim Heads

The heads of claim would normally be, as a maximum:

1 - Direct Costs

2 - Indirect Costs (Overheads)

3 - Financing Charges

4 - Profit

5 - Loss of Profit

Direct costs are the site labour and plant. Contractors must keep record sheets to prove
who and what was on site. These may be in the form of daily site reports, or daily
manpower and equipment reports.

Indirect costs, often referred to as overheads can usually be proved by reference to

pricing information behind the tender, or by using the Contractor’s audited accounts. If
the accounts for years, other than those in which the Works were carried out, are used,
care should be taken to ensure that the attribution of overheads to the project is
appropriate, and not inflated.

Financing charges became a head of claim as a result of the case of F G Minter v. Welsh
Health Technical Services Organisation (1980). It established that there are two types of
financing charge. One is the loss of interest on capital which the Contractor has not
been paid, and been able to put into his bank account. The other type is the interest he
incurs by way of overdraft in using his own money to finance work, whereas he would
normally expect to use the money paid to him under the Contract.

Financing charges are a secondary cost. If his claim for costs fails, his claim for financing
will fall with it. If the primary cost claim succeeds, it can be inferred that he has incurred
financing charges. There is not usually anything to be gained by looking at bank
statements. They may show the Contractor had an overdraft, but that could be due to
any reason, not necessarily connected with the matters claimed.

In certain instances, profit is allowed on Cost. The level of profit should be comparable
to that in the Tender, which can be proved by reference to the Tender pricing
information, and the Contractor should be prepared to produce it. Loss of profit is
usually the expression used to describe the damage suffered when the Contractor is
kept on the project longer than anticipated, thereby losing the opportunity to earn
profit on another project. It is difficult to establish, and will almost certainly suffer from
being too remote.

Costs of preparing the claim, economic loss and consequential loss are generally not
allowable, and nor is cost which is remote (see loss of profit above). It must be noted
that the methods of delay analysis used to assess the impact of delays govern the costs
of preparing the claim. Since most contractors hire specialist delay analysts or claim
consultants to do this job, the cost of preparing the claim should be taken into account
by the contractor.

Recovery of Cost

what is the criterion for recovery of cost? The usual rule is that applied in the leading
case of Hadley v. Baxendale (1854).

The matters in respect of which claims for cost are made are breaches of contract. The
inclusion in the Conditions of the claims Clauses provides the Engineer and the
Contractor with the mechanism for agreeing damages, instead of the Contractor having
to sue for them. The cost recoverable by the Contractor must therefore follow the
common law damages rule. This relies on showing that the damage flows from the
breach, or the cost flows from the event complained of.

This is causation. The Contractor must link cause and effect. the Engineer must ask
himself if the cost flows from the event. There can be a temptation on the part of
contractors to include all costs in their claims, without any apparent attempt to link
cause and effect. The diagram below shows an example of such cause-effect analysis.
Such diagrams should be prepared and included in the claim narrative to establish cause
and link it with effect.

The measure of damage can be a difficult matter. The general rule is that damages
should put the claiming party back into the position he would have been in, had the
breach not taken place. That rule is given in the case of Robinson v. Harman (1848). It is
often helpful for the Engineer to ask himself, what would the Contractor have done, but
for the breach?
DISPUTE ADJUCIATION BOARDS (DAB) AND
ARBITRATION
Two commonly used alternative dispute resolution techniques are arbitration and
adjudication. They are briefly defined below:

Arbitration:

Arbitration is a procedure in which both sides agree to let an impartial third party, the
arbitrator, decide the case. The arbitrator may be a lawyer, or may be an expert in the
field of the dispute, or in some cases, an arbitration panel. The arbitrator’s decision,
known as an award, is legally binding and can be enforced through the courts; there is
no appeal. Arbitrators have the power to ascertain facts rather than just listen to
submissions, and to order costs.

Adjudication:

In adjudication, the decision is the responsibility of a third party adjudicator selected by

the parties to the dispute. Adjudication decisions are binding unless and until they are
revised by subsequent arbitration or litigation after practical completion, or by
agreement between the parties (hence the term 'pay now argue later'). There is no right
of appeal and limited right to resist enforcement. Generally, adjudicators do not have
the power to award costs (other than their own fees and expenses). Adjudication must
adhere to strict timescales.

In the FIDIC Red book, Clauses 20.2, 20.3, and 20.4, together with the General
Conditions of Dispute Adjudication Agreement and the annexed Procedural Rules, refer
to the phenomenon of the dispute adjudication board (DAB).

Beyond the DAB is the usual sanction of Arbitration in Clause 20.6. The two routes, of
the DAB and Arbitration, should be looked at together, as they are linked in an
important fashion. The red book also provides the Amicable Settlement route in Clause
20.5.

References :

1. Understanding & Negotiating Turnkey Contracts - Sweet & Maxwell

2. Construction Contract Claims - Reg Thomas
3. Claims Under The New Fidic Conditions of Contract - John Papworth
4. FIDIC - Conditions of Contracts for Construction for Building and Engineering
Works Designed By Employer - 1999 Edition
5. Designing Buildings Wiki (www.designingbuildingswiki.co.uk)