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FIDIC Claim Management Provisions and related Court Cases

By Rechtsanwalt Dr. Hök


Under FIDIC contracts claim management is one key to success in that claims shall compensate the claimant for losses incurred as a result of risk which has occurred. It is worth to note that both, Contractors and Employers, should comply with the management provisions as included in the FIDIC suite of Contracts 1999.

I. Contractor´s Claims

Sub-Clause 20.1 FIDIC 1999 provides that a Contractor who himself considers to be entitled to extension of Time for Completion and/or any additional payment shall give prompt notice thereof but not later than 28 days after he became aware of or should have become aware of the event or circumstance giving rise to the claim.

If the Contractor fails to do so, Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment and the Employer shall be discharged from all liability in connection with the claim. At the end of this Sub-Clause it is added that the requirements of this Sub-Clause  are in addition to those of any other Sub-Clause  which apply to a claim and that any failure to comply with this or another Sub-Clause in relation to any claim, any extension of time and/or additional payment shall take in account of the extent to which the failure has prevented or prejudiced proper investigation of the claim. Such claims usually arise from events or circumstances . The Conditions of Contract attempt to anticipate such events and circumstances in one or other of their clauses and it is one (or more) of these that needs to be quoted in support of any claim . Where no such provision covers the event or circumstances in question then one must seek some principle of [common] law which covers the matter . What particulars are to be stated depends on the cause of action on which the claimant relies. As a rule, under a FIDIC Contract a claim situation arises if and when FIDIC has identified that there is a need for either compensation or indemnification. Compensation is appropriate if performance becomes too onerous or burdensome because particular risk eventuates. Indemnification or damages are the consequence of failure to comply with the Contract. However, even though the Contract might have provided for a remedy and even though all elements of the legal theory are met the Contractor may fail to obtain something if he did not give a timely notice describing the event and if he did not keep contemporary records . This has given rise to criticism throughout the world which leads us to the question what is the very nature of a claim under a FIDIC Contract and how to understand the claim management requirements?

The very nature of a claim is such that a claim should not be confused with the term entitlement. A claim means the assertion of an entitlement. However, under FIDIC the assertion of a entitlement is a mere condition precedent of an entitlement. The Parties shall give a notice of an event or circumstance giving rise to a claim. If the Contractor fails to comply with the notice giving requirement within the period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. In addition to that the remainder of the provisions in Sub-Clause 20.1 shall apply.

II. Employer´s Claims

Sub-Clause 2.5 FIDIC 1999 provides that an Employer who himself considers to be entitled to any payment shall give prompt notice thereof after he became aware of or should have become aware of the event or circumstance giving rise to the claim. There is no express time bar Provision or sanction in respect of any Employer´s failure to give a prompt notice of a Claim. 

Compliance with the procedural rules in respect of Claims is important because non compliance will result in arguments to deny and defend claims. Thus, a good command of the FIDIC claim management rules is strongly required.

III. Case Law

Case law from all over the world helps to understand how judges will finally interpret and construe the relevant FIDIC clauses and provisions.

1. In Obrascon Huarte Lain SA v. Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC) HHJ Akenhead has explained:

Properly construed and in practice, the “event or circumstance giving rise to the claim” for extension must first occur and there must have been either awareness by the Contractor or the means of knowledge or awareness of that event or circumstance before the condition precedent bites. I see no reason why this clause should be construed strictly against the Contractor and can see reason why it should be construed reasonably broadly, given its serious effect on what could otherwise be good claims for instance for breach of contract by the Employer. Regard in the context of extension of time at least must be had to Clause 8.4 which identifies when and in what circumstances extension will be granted:

“The Contractor shall be entitled subject to Sub-Clause 20.1…to an extension of the Time for Completion if and to the extent that the completion for the purposes of Sub-Clause 10.1…is or will be delayed by any of the following causes…”

The entitlement to extension thus arises if and to the extent that the completion “is or will be delayed by” the various events, such as variations or “Unforeseeable” conditions. This suggests that the extension of time can be claimed either when it is clear that there will be delay (a prospective delay) or when the delay has been at least started to be incurred (a retrospective delay).

HHJ Akenhead has then provided the parties with the following hypothetical example in order to demonstrate his position:

(a) A variation instruction is issued on 1 June to widen a part of the dual carriageway well away from the tunnel area in this case.

(b) At the time of the instruction, that part of the carriageway is not on the critical path.

(c) Although it is foreseeable that the variation will extend the period reasonably programmed for constructing the dual carriageway, it is not foreseeable that it will delay the work.

(d) By the time that the dual carriageway is started in October, it is only then clear that the Works overall will be delayed by the variation. It is only however in November that it can be said that the Works are actually delayed.

(e) Notice does not have to be given for the purposes of Clause 20.1 until there actually is delay (November) although the Contractor can give notice with impunity when it reasonably believes that it will be delayed (say, October).

(f) The “event or circumstance” described in the first paragraph of Clause 20.1 in the appropriate context can mean either the incident (variation, exceptional weather or one of the other specified grounds for extension) or the delay which results or will inevitably result from the incident in question.

The Judge then concluded that the wording in Sub-Clause 8.4 is not: “is or will be delayed whichever is the earliest”. Finally the Judge points out that "the above interpretation does not in practice necessarily involve a difficult mental exercise on construction projects where, as here, a critical path programme, invariably electronic, is used which can determine when delay is actually being suffered".

FInally the Judge added:

Additionally, there is no particular form called for in Sub-Clause 20.1 and one should construe it as permitting any claim provided that it is made by notice in writing to the Engineer, that the notice describes the event or circumstance relied on and that the notice is intended to notify a claim for extension (or for additional payment or both) under the Contract or in connection with it. It must be recognisable as a “claim”. The notice must be given as soon as practicable but the longstop is 28 days after the Contractor has become or should have become aware. The onus of proof is on the Employer or GOG here to establish that the notice was given too late.

2. In National Insurance Property Development Company v. NH International (Claim Number CV2008-04998) the High in Trinidad and Tobago had the opportunity to look at the meaning of "contemporary records" as referred to in Sub-Clause 20.1 FIDIC 1999. His Honorable Madam Justice Judith Jones has said this in respect of the term:

I find that on a true interpretation of Sub-Clause 20.1 of the FIDIC CoC ‘contemporary records’ means records created, obtained or produced at the time of the event giving rise to the claim, whether by or for the Contractor or the Employer. In this regard I am in agreement with the primary view of the Arbitrator. 

Thus any type of document regardless of who is the author may form part of contemporary records to be kept by the Contractor and to be monitored by the Engineer. Failure to Keep the records may result in deisadvantage to the Contractor in accordance with Sub-Clause 20.1 para. 9. The Judge has concluded as follows:

It would seem to me therefore that while the clause [Sub-Clause 20.1] requires the Contractor to keep contemporary records to the satisfaction of the Engineer and have same available to the Engineer. It is not a requirement that the full supporting particulars comprise or be substantiated by contemporary records.

She then continues to say:

A failure to comply with the other requirements, that is, (a) the keeping of contemporary records; (b) allowing inspection of those records by the Engineer and (c) providing a detailed claim at least 14 days after the initial notice is only to be taken into consideration insofar as it may have prejudiced a proper investigation of the claim. In other words such breaches would only be relevant at the stage of an assessment of the claim. 

3. The English case MAN Enterprise SAL v. Al Waddan Hotel Ltd [2013] EWHC 2356 (TCC) gives guidance on how to proceed if there is no Engineer in place or if the Engineer refuses to act in accordance with the Contract. 

It is common place that under FIDIC the Engineer plays a very important role in the administration of the contract. In principle the failure to involve the Engineer may negatively affect jurisdiction of arbitral tribunals and courts (see for instance the Kenyan cases Jackson Biegon v. Charles Too [2005] eKLR; Patel v. EA Cargo Handling Services [1974] EA 75; Midroc Water Drillining Co Ltd v. Cabinet Secretary, Ministry Of Environment, Water & Natural Resources & 2 others [2013] eKLR). In the MAN case the Contractor referred a dispute to the Engineer under Clause 67.1 FIDIC 1987. The Engineer answered:

“We are in receipt of your letter … dated 10th of June 2012 and advise you that our services contract with our Client on this project has effectively expired on 31/12/2010, and hence we no more have capacity to assume any duties in relation and have already ceased to be the Engineer under the construction contract. 

Please be advised that accordingly we will not act on your aforementioned letter and draw your attention not to address us on this issue anymore.” 

HHJ Ramsey held:

On the material before me this is a case where there is a good arguable case that the provisions of clause 67 have been complied with. There is a good arguable case that the letter from the Engineer is in fact to be treated as a notice of decision. If that is wrong, there is a good arguable case on the construction of the Contract that clause 67 does not apply if, as is indicated by the Engineer’s letter of 19 June, there is no Engineer. Alternatively in circumstances where the Engineer is not acting, it is arguable that the absence of an Engineer’s decision is not a point which could be relied upon by the party who employed the Engineer.

Hence, the contractual machinery can be disregarded if it is not possible to follow it up. The South African case Compagnie Interafricaine de Travaux v. South African Transport Services and Others (680/89) [1991] ZASCA 16; 1991 (4) SA 217 (AD); [1991] 2 All SA 155 (A) (21.3.1991) confirms the above position.

4. The well known Gas Negara case from Singapore demonstrates the difficulties one may encounter in respect of DAB decisions which have not become final. While the first attempt of CRW to enforce the DAB decision failed because of lack of jurisdiction (CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33) the second attempt passed the jurisdiction test. In PT Perusahaan Gas Negara (Persero) TBK v. CRW Joint Operation (Indonesia) and another matter, [2014] SGHC 146 the Singapore High Court has enforced the interim arbitral award which was given in this respect. It concluded that the chosen "one dispute approach" was in line with the guidance previously given by the Court of Appeal in CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33.

The Details:

In 2011 CRW commenced the second arbitration. In the 2011 arbitration, CRW adjusted its approach specifically to meet PGN’s earlier argument. It did so by placing before the 2011 tribunal both the primary dispute and the secondary dispute. In response, PGN adjusted its argument to meet CRW’s new approach. This time, PGN argued that the parties’ arbitration agreement and Singapore’s international arbitration legislation do not permit an arbitral tribunal to compel PGN to comply promptly with the DAB decision unless the same arbitral tribunal– in the same award and not merely in the same arbitration – also hears and determines the primary dispute on the merits. In May 2013 the 2011 arbitral tribunal has, by a majority, rejected PGN’s argument. It has therefore issued an interim or partial award compelling PGN to comply with the DAB decision while the primary dispute on the merits was still pending.  

The High Court felt that it was bound to the guidance from the previous decision as given by the Court of Appeal in respect of the first arbitration and held that CRW had duly complied with this guidance.

It is worth to quote what the High Court concluded in respect of the FIDIC dispute resolution machinery: 

The [FIDIC] Red Book’s dispute-resolution regime is found in cl 20 under the heading “Claims, Disputes and Arbitration”. The heart of this regime is cll 20.4 to 20.7. These provisions have two objectives. First, they establish arbitration as the sole method for the parties to resolve their disputes with finality (or as cl 20.6 puts it, for those disputes to be “finally settled”). Second, they establish a contractual security of payment regime, intended to be available to the parties even if no statutory regime exists under the applicable law.

The Judge continued to say:

The central purpose of a security of payment regime is to facilitate the cash flow of contractors in the construction industry. Contractors invariably extend credit to their employer by performing services or providing goods in advance of payment. Contractors are also almost invariably the party in the weaker bargaining and financial position as compared to their employer. A payment dispute between an employer and a contractor takes time and money to settle on the merits and with finality. Doing so invariably disrupts the contractor’s cash flow. That disruption can have serious and sometimes permanent consequences for the contractor. That potential disruption gives the employer significant leverage in any negotiations between the parties for compromise. If the contractor’s payment claim is justified, that disruption and its consequences for the contractor are unjustified.

A security of payment regime addresses the imbalance between contractor and employer. Its driving principle is the aphorism “pay now, argue later”. When a dispute over a payment obligation arises, the regime facilitates the contractor’s cash flow by requiring the employer to pay now, but without disturbing the employer’s entitlement (and indeed also the contractor’s entitlement) to argue later about the underlying merits of that payment obligation

Meanwhile the Court of Appeal has confirmed and upheld the High Court decision (PT Perusahaan Gas Negara (Persero) TBK v. CRW Joint Operation, [2015] SGCA 30). Both Singapore cases expressly recognize one of the substantial aims of FIDIC contracts which is to ensure a continuous cash flow subject to the professional views of the Engineer and as the case may be of the DAB, thus enabling the Contractor to complete the works without cash flow problems. It is not surprising that the Courts give effect to this clear intention. Minor differences regarding the legal approach are not really important in this context. With regard to claim management it is merely important that merely binding DAB decisions can be enforced even without amending the current wording of Sub-Clause 20.6 and 20.7.

4. In National Insurance Property Development Company v. NH International the UK Privy Council has held on 6 August 2015 ([2015] UKPC 37) that the Employer´s failure to give claim notices promptly may result in the foreclosure of the claim. As held by the Privy Council the Employer is under the duty to give a prompt notice with particulars. In the view of the Privy Council the structure of Sub-Clause 2.5 is such that it applies to any claims which the Employer wishes to raise. The Privy Council decisions holds that first, “any payment under any clause of these Conditions or otherwise in connection with the Contract” are words of very wide scope indeed. Secondly, the clause makes it clear that, if the Employer wishes to raise such a claim, it must do so promptly and in a particularised form: that seems to follow from the linking of the Engineer’s role to the notice and particulars. Thirdly, the purpose of the final part of the clause is to emphasise that, where the Employer has failed to raise a claim as required by the earlier part of the clause, the back door of set-off or cross-claims is as firmly shut to it as the front door of an originating claim. The lesson learned is that also Employers need to comply with claim management requirements in order to avoid disadvantage and losses.

LAW OFFICE Dr. Hök, Stieglmeier & Kollegen
Contact: Advocate Dr. Götz-Sebastian Hök
Eschenallee 22,
14050 Berlin
Tel.: 00 49 (0) 30 3000 760-0
Fax: 00 49 (0) 30 3000 760 33
e-mail: kanzlei@dr-hoek.de

WARNING: the material contained in these notes is a simplified guide to some of the major topics in international and German construction law. It is not intended as a substitute for legal advice on individual transactions, and does not necessarily stand on its own. Whilst the contents are believed to be correct, the authors cannot accept any responsibility for errors or omissions.

 

Contribution online since Tuesday, August 26th, 2014     
Last updated Monday, December 14th, 2015     
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