FIDIC Claim Management
By Rechtsanwalt Dr. Götz-Sebastian Hök
FIDIC requires to manage claims with skill and care. Claims are aimed at the compensation of the Contractor or Employer for either breach of contract or risk which has eventuated.
As has been confirmed by Judge Sanders in Attorney General for the Falkland Islands v. Gordon Forbes Construction (Falklands) Limited, Falkland Islands Supreme Court 14 March 2003, FIDIC contracts are aimed at the early resolution of any queries at the time when the claim arises, with the likelihood that plant, manpower and witnesses are still on site (for a further construction of the relevant Sub-Clauses of the FIDIC 1999 edition see also High Court of Trinidad and Tobago, judgment from 21 October 2009 (Claim No CV2008-04881) in National Insurance Property Development Co Ltd v. NH International (Carribean) Ltd).
Also, the provisions in FIDIC forms of contract have the objective to establish a contractual security of payment regime, intended to be available to the parties even if no statutory regime exists under the applicable law. As confirmed by the High Court Singapore (PT Perusahaan Gas Negara (Persero) TBK v. CRW Joint Operation (Indonesia) and another matter  SGHC 146) such 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.
However, the FIDIC System is such that all entitlements are subject to an Engineer´s determination in accordance with Sub-Clause 3.5.
Thus claims have to be pursued in a detailed procedure provided by the FIDIC contracts in order to enable the Engineer to grant relief. In a summary this means:
to give notice (in time)
to give particulars of the claim (in time)
to wait for Engineer´s approval or disapproval
to negotiate and settle the claim
to wait for Engineer´s determination (in case of failure to reach settlement)
to refer a dispute to the DAB (in case of dissatisfaction)
Under FIDIC forms of Contract a claim is nothing more than a dream unless and until a claim notice was given in accordance with the Contract. If either Party considers to be entitled it shall become active. As the term "claim" means nothing else than the assertion of a right, either arising out of or in connection with the contract, it is strongly recommended to assess the whole Contract and to identify all of the claims stipulated therein as well as all relevant legal claims as provided for by the governing law (proper law of the contract). Both, Contractors and Employers, should have a clear view of the risk compensation features which can be found in the Contract and the governing law. A claim will only become an entitlement if the Contract parties strictly follow the procedures under the FIDIC Contract, which means in most cases:
to give a notice of a claim
to keep contemporary records
to submit particulars of claim
The Courts do not favour an overlegalistic approach. As to the 28 days´ delay there is authority from England that 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. HHJ Akenhead did not see a reason why Sub-Clause 20.1 FIDIC 1999 should be construed strictly against the Contractor. Rather he preferred a reasonably broad interpretation, given its serious effect on what could otherwise be good claims for instance for breach of contract by the Employer (Obrascon Huarte Lain SA v. Her Majesty’s Attorney General for Gibraltar  EWHC 1028).
FIDIC forms of contract provide for Cost claims, Cost and profit claims and extension of Time for Completion (EOT) claims. Cost is a defined term meaning all expenditure reasonably incurred (Sub-Clause 220.127.116.11) including overheads and similar charges but no profit. The meaning of the terms "expenditure" and "overheads" is not explained. This may lead to debate. It is submitted that "expenditure" should be read and understood in the sense of the English authorities (see Hadley v. Baxendale (1854) 9 Ex. 341). However, civil law practitioners may prefer to rely on the theory that if payment of the contratcor is not exactly defined in the Contract the Contractor should be entitled to a reasonable remuneration (see Compagnie Interafricaine de Travaux v. South African Transport Services and Others (680/89)  ZASCA 16; 1991 (4) SA 217 (AD); (21 March 1991). In that case the contract included the following Sub-Clause:
No claim by the Contractor will be considered on account of the materials, methods of construction and/or site conditions being different from those assumed by him in tendering for the contract, except in the case of adverse sub surface conditions which in the opinion of the engineer could not reasonably have been foreseen.
The governing law may also provide for claims. A contractor may for example prefer to rely on a Common Law misrepresentation claim instead of one under Sub-Clause 4.12. The Civil Law principle of good faith may also constitute a good basis for a claim. Under German law the site (which according to the courts has the nature of a free issue material) shall be "fit for the works" meaning that the contractor may be entitled to additional payment when the site is not "fit for the Works". In some countries where a contract for public works has the nature of an administrative contract (for example in France and purportedly in Egypt, Qatar and the UAE) the "imprévision" principle may give raise to claims. US courts have confirmed "constructive acceleration claims" and "loss of bonding capacity claims".
Anyway, if -under a FIDIC Contract- the Contractor considers himself to be entitled to a claim (whether under a clause of the Contract or in connection with the Contract), the first step is for him to give notice. This Notice is important because:
everyone involved becomes aware that there is an event or circumstance where extra time or payment may be owed to the Contractor
proper contemporary records must then be kept and agreed, to avoid future argument
alternative measures may also be possible to reduce the effects
the matter may possibly be resolved at an early date
if the event or circumstance turns out to be of insignificant effect, then it is not necessary to follow up the notice with a formal claim.
As a rule claims related to extension of time and/ of additional payment under any clause of the contract or otherwise in connection with the contract must be notified within a delay of 28 days after having become aware of the Event or circumstance giving rise to the claim. Thus the Contractor must provide to the Engineer a written notice of the claim for additional payment and time extension within 28 days after becoming aware of the occurrence of the event giving rise to claim (Sub-Clause 20.1). If the Contractor fails to comply with this notice requirement, his entitlement to the claim shall lapse. It should be emphasised that sometimes additional notices are required, such as under Sub-Clause 4.12 and 19.2. Beware that Sub-Clause 19.2 provides to give a notice within a short period of 14 days in the event of Force Majeure circumstances.
The claim notice must indicate basic details, in order to inform the Engineer about the scope of the claim and to enable him to give instructions, if necessary. The notice shall therefore meet the following requirements:
describe the event or circumstance
the notice need not state time or amount claimed or contractual basis of claim
notice shall comply with Cl 1.3, i.e. in writing and properly delivered
progress reports - Cl 4.21(f) - must list notices given
There is no immediate response required from the Engineer (Employer) - but a simple acknowledgement is normal.
To the extent that a third party to the contract, the Engineer, has been nominated and appointed to determine claims, the parties to the contract shall notify him of any claims to which they consider themselves to be entitled to though Sub-Clause 2.5 requires the Employer to give Claim notices to the Contractor with copy to the Engineer. In the event of Contractor´s claims the Engineer is then in charge of firstly approving or disapproving any claim and then to determine it, if necessary if the parties fail to settle the Claim amicably. If the Engineer is required to make a determination he shall do so with due regard to all relevant circumstances, which means that he will have to take into consideration all facts
reported in the monthly reports
reported in contemporary records
reported in labour reports
stated in the claim notification
obtained at site visits and inspections
reported in early warning notifications concerning probable future events which may effect progress of the works and the contract price
reported in the Programme
reported in its own records
and in accordance with the Contract.
In respect of Employer´s claims Sub-Clause 20.1 does not apply; thus no approval or disapproval will be required before making a determination on the Employer´s claim in accordance with Sub-Clause 3.5.
In order to ensure that the parties and the Engineer may reach reasonable, informed, and skilful decisions, FIDIC contracts provide a sophisticated system for communications and documentation of relevant facts, events and circumstances (Sub-Clause 1.3). This system and the resulting duties as to documentation and reporting have to be recognised and respected at all times, because Judge Sanders also concluded in the Falkland case that it would be perverse if a contractor who had failed to comply with the terms of the contract should then be allowed to produce non-contemporary records to support a claim, particularly as these could not properly be investigated by the employer at a later date. The rights of the employer to inspect the records at the time the claim arose were fundamental to the FIDIC procedure. Failure to comply with the reporting duties leads to the foreclosure of claims. It should be emphasised that contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose; such notice enables matters to be investigated while they are still current. Furthermore, such notice sometimes give the employer the opportunity to withdraw instructions when the financial consequences become apparent (Steria v. Sigma per HHJ Davies, 2007] EWHC 3454 (TCC)). Thus civil law practitioners should be reluctant to rely on the principle of good faith in order to evade the notice requirements and related delays.
By means of a notice of a claim the claim determination procedure becomes initiated, which is described in Sub-Clause 3.5. According to Sub-Clause 3.5 and 20.1 the following shall happen:
contemporary records shall be kept which may be inspected by the Engineer
a fully detailed claim must be submitted within 42 days of the event (or other agreed time)
provision for continuing claims and submittal of their details
within 42 days of receiving the claim with details the Engineer shall respond with approval, or with disapproval and detailed comments.
the Engineer shall determine under Clause 3.5 any time extension or additional payment to which the Contractor is entitled under the Contract.
each payment certificate shall include such amounts for any claim as have been reasonably substantiated.
any other specified requirements must also be satisfied (see Sub-Clause 19.2)
The Engineer may request any necessary further particulars, but shall nevertheless give his response on the principles of the claim (approval or disapproval) within 42 days. Thus there is a time limit imposed on the Engineer to reply to a Claim, albeit there is no particular requirement to make a determination within a specific period of time. However, once having approved or disapproved a claim the Engineer shall attempt to reach an amicable settlement. If he fails to reach an agreement he is obliged and entitled to determine the claim. Sub-Clause 1.3 requires the Engineer not to unreasonably delay or withhold any determination.
The question may arise whether a claim fails if the Contractor failed to keep contemporary records. Following the aforementioned Falkland case this has been sometimes suggested. However the High Court of Trinidad and Tobago recently held that the relevant clauses in the respective FIDIC 1987 and FIDIC 1999 edition are different from each other. Hence, the High Court of Trinidad and Tobago held on 21 October 2009 (Claim No CV2008-04881) in National Insurance Property Development Co Ltd v. NH International (Carribean) Ltd that with respect to ‘contemporary records’ Sub-Clause 20.1 FIDIC 1999, unlike clause 53.4 FIDIC 1987 in the Falklands case, does not specifically require a verification of the claim by contemporary records. With respect to contemporary records all clause 20.1 requires is that the contractor keep and have available for inspection by the Engineer these records. As per the Court the clause, is clear. A failure by a contractor to keep such records does not prevent recovery on the claim but is to be taken into account in its assessment insofar as it may have prejudiced or prevented a proper investigation of the claim. Hence the Court found that on a true construction of Sub-Clause 20.1 where there are no contemporary records the claim does not fail.
Any determination issued by the Engineer will be binding on the parties until revised by DAB or arbitration. Any agreement or determination must be notified to the parties. It is suggested that any settlement which failed to become notified according to Sub-clause 3.5 is not yet valid, even though the settlement was signed. Otherwise the danger arises that the Engineer will have no knowledge about the settlement. Moreover the notification requirement ensures that the day of validity of the settlement can be clearly identified. Each party shall give effect to each agreement or determination unless and until revised under Clause 20. Thus the date from which any agreement is binding must be clear.
The new FIDIC Gold Book has slightly changed the aforementioned claim management framework. Under a Gold Book a Contractor will not only give notice of a claim within 28 days after becoming aware of the relevant event or circumstance but also give particulars within 42 days in order to prevent the claim from becoming lapsed. Employer´s claims are now covered by Sub-Clause 20.2 and no longer by Sub-Clause 2.5. Also any dermination by the Employer´s Representative (who replaces the former Engineer) shall be followed by a notice of dissatisfaction in order to safeguard the way to the Dispute Adjudication Board.
Anyway, if the Contractor considers himself to be dissatisfied with any Engineer´s determination he may refer a dispute to the Dispute Adjudication Board (DAB). The DAB has power to open up and review any determination made by the Engineer. It has been held by the High Court of Dehli and New Dehli that under a FIDIC Contract the dispute resolution procedure stipulated therein is binding on the parties and the parties have to resort to that procedure. In other works, the Court may ask to do what has not been done. A court must first ensure that the remedies provided for in the Contract itself are exhausted (M/S SRI SAI EARTH WORKS PVT LTD v. ITALIAN THAI DEV. PUBLIC CO LTD, January 12, 2009 relying on a previous decision of the Supreme Court of India in the case of Northern Railway Administration v. Patel Engineering Company Ltd., 2008 (11) Scale 500 ). This position seems to be in line with published ICC awards (see below).
The further question which arises is, whether a party who obtained a "final and binding" decision from the DAB, which the other party fails to comply with, can refer such failure to arbitration (ICC cases No. 7910  and No. 3970 ) in order to enforce the DAB decision?
According to Sub-Clause 20.7 the failure to comply with a DAB decision may be referred to arbitration. Thus where one party had obtained a favorable decision from the DAB which the other party had not contested and which, therefore, became "final and binding”, the failure itself may be referred to arbitration. However, what does that mean? Could the aggrieved party refer such failure to arbitration in order to obtain an arbitral award in respect of such decision which could be enforced under the New York 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
The ICC award in case No. 7910  addressed this issue which became a dispute under FIDIC, 4th edition 1987. The arbitral court concluded that, where the claimant had submitted disputes to the Engineer under Clause 67 (FIDIC 4th edition 1987) and obtained decisions from the Engineer (who was a that time a quasi arbitrator) which had become final and binding because they was no notice of dissatisfaction by the defendant in due time, the arbitral court lacked jurisdiction with respect to such matters. Therefore the claimant's only remaining right of recourse was to seek to enforce the DAB or Engineer decision before the courts in the defendant's country.
This is not a satisfying result because the enforceability of a DAB decision is subject to the governing law. Thus, as a matter of fact even final and binding DAB decisions will often be unenforceable, in particular in countries where the feature of summary proceedings is not known. Hence the solution which was submitted in the earlier ICC case No. 3790 of 1983 (110 Clunet (1983), 910 et seq.) was welcomed. In that case the tribunal had to decide on a dispute between a Libyan and a French contractor which arose out of contract for public works based on FIDIC 4th edition 1987. The Engineer had issued certain payment certificates. However, the Employer did not pay on these certificates. He purported that the work for which the Engineer had issued the certificates were defective and he declared dissatisfaction with the Engineer´s certificates. However, he did not refer the dispute to the Engineer (as provided for by the contract) but directly to arbitration. The contractor on the other hand claimed for outstanding payments and submitted the dispute to ICC arbitration. The arbitral tribunal made an award in favour of the contractor. It decided that the employer was bound to pay on the certificate issued by the Engineer. Accordingly the ICC court awarded the contractor the amount of money claimed based on the final and binding Engineer´s decision. The ICC award in the case No. 7910  is in line with this decision.
Anyway, the issue raised by cases No. 7910 and 3970 was resolved by the FIDIC Conditions, 1st edition 1999. Sub-Clause 20.7 therein expressly provides that, where a decision has become final and binding, either party may, if the other party fails to comply with such decision, and without prejudice to any other rights it may have, refer the failure itself to arbitration. Consequently, a party can obtain an arbitral award in respect of such a decision, however subject to one qualification. According to Sub-Clause 20.1 any amounts shall be included in Payment Certificates. Accordingly it is submitted that the arbitral court should not award the amount of money claimed but impose the obligation on the Engineer to include the amount in the next Payment Certificate. Only if evidence can be shown that the Engineer is not willing to comply with Sub-Clause 20.1 the arbitral court may award the amount of money. The reason for this is that the Engineer shall certify the amounts which he believes being due (Sub-Clause 14.6). According to Sub-Clause 14.3 deductions for retention, calculated by applying the percentage of retention stated in Appendix to Tender to the Contract Price, shall be made.
There is authority from Singapore that an arbitral Tribunal misses jurisdiction to enforce a merely binding DAB decision if the claimant does not refer the dispute on the merits to arbitration together with the application for the enforcement of the DAB decision. Insofar the Court of Appeal Singapore has identified a gap in the current FIDIC wording (CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK  SGCA 33).
On April 1, 2013 FIDIC has published the FIDIC Guidance Memorandum to Users of the 1999 Conditions of Contract suggesting revised Sub-Clauses with regard to the enforceability of DAB decisions which adopt the approach as it is under the FIDIC Gold Book.
In PT Perusahaan Gas Negara (Persero) TBK v. CRW Joint Operation (Indonesia) and another matter,  SGHC 146, the High Court Singapore, has confirmed the practice as referred to in ICC case 10619 and the previous decision of the Singapore Court of Appeal (CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK  SGCA 33) that the arbitral tribunal may give effect to a merely binding (thus not yet final and binding) DAB decision.
For more detailed information about claims and claim management the new FIDIC Guide for Practitioners has been published. The authors are Axel-Volkmar Jaeger and Dr. Götz-Sebastian Hök. Further guidance on the interpretation of FIDIC Claim management provisions is available here.
LAW OFFICE Dr. Hök, Stieglmeier & Kollegen
Contact: Advocate Dr.Götz-Sebastian Hök
Tel.: 00 49 (0) 30 3000 760-0
Fax: 00 49 (0) 30 3000 760 33
The author is a fully accredited & licensed FIDIC trainer. Together with the former past Chairman of the FIDIC Contract Committee, Mr. Axel Volkmar Jaeger he is responsible for the German FIDIC training. Dr. Hök was also a friendly reviewer of the FIDIC Gold Book and the FIDIC Subcontract form. Dr. Hök is finally also a listed and assessed FIDIC Adjudicator (FIDIC President´s List). Since 2011 Dr. Hök advises the FIDIC Task Group for the Design & Build Subcontract as well as the ODB Task Group. Since 2013 is involved in the FIDIC Joint Venture Agreement Task Group work. He is the current Chair of the FIDIC Trainers´ Assessment Panel.
Dr. Hök is and was active as arbitrator, adjudicator and mediator in particular in road projects, irrigation projects, wastewater treatment plant projects and windmill farm projects and regarding consultancy agreements. He has specific experience as a member of Dispute Adjudication Boards in Armenia, Bosnia, Germany, Palestine and Tanzania.
Dr. Hök has conducted FIDIC courses in Austria, Bosnia, Botswana, Cameroon, Denmark, France, Germany, India, Indonesia, Kenya, Korea, Philippines, Oman, Qatar, Serbia, Tanzania, Uganda. He is a fully accredited FIDIC Trainer providing all common FIDIC Modules and Advanced courses as well. He is BOTA registered.