Claims and Counterclaims Management PDF

CLAIMS AND
COUNTERCLAIMS
MANAGEMENT
OCTOBER 2009
Euromatech - Claims and Counterclaims 1

Management
CLAIMS AND COUNTERCLAIMS
MANAGEMENT
October 2009 - Muscat
Peter Foreman
Senior Consultant

Management
Seminar outline
 While the object of international contracting is to write and manage contracts so as to
minimize disputes, some disagreements are inevitable. These can arise from failures by one
of the parties, but also often arise from misunderstandings as to obligations under the
contract.
 This programme will look at how claims (and counter claims) arise; how they should be
evaluated when received, or prepared when being delivered, and how to resolve disputes
arising from such claims. It will also, and most importantly, look at ways of avoiding disputed
claims in the first place.
 Once a dispute starts, it can usually be solved most effectively by negotiation between the
parties. However, if this does not prove effective, some sort of third party intervention is
required.
 Traditionally, this has tended to focus on either involving state courts (litigation) or the
equivalent private method of getting a third party to make a decision (arbitration). However,
there are now many more techniques available in the international market, including expert
determination, mini-arbitration, pendulum arbitration, adjudication, and other techniques
whereby a third party decides the matter for the parties. In addition, there are also
mediation, conciliation, hybrid solutions such as Arb/Med, where a third party facilitates the
settlement by the parties themselves, rather than imposing a decision. Many of these
techniques rely on looking at the parties’ interests, rather than their strict legal rights.
 All of these processes, and indeed, claims and counterclaims generally, become more
complicated when placed in an international context. This is particularly the case where a
foreign law and/or legal system is involved, with which you may not be familiar, and which
may include rules which conflict with those of your own country.
 The programme will deal with commercial disputes arising from Contracts written in the
English language, but will use techniques which have wide application to the resolution of
disputes.
Management
Main Seminar Contents
•DAY ONE
•How claims and counterclaims arise
•DAY TWO
•Types of claims and counterclaims
•DAY THREE
•Presenting and evaluation claims and counterclaims
•DAY FOUR
•Dispute resolution
•DAY FIVE
•Dispute resolution – Ethical concerns, avoidance and role-plays

Management
Course objectives
 Provide an understanding of how and why claims and counterclaims arise
 Explain the differences between claims and counterclaims
 Identify common causes of claims and disputes, and how to avoid them
 Discuss how to develop procedures to avoid disputes over claims and
counterclaims, while resisting unjustified claims
 Enhance understanding of basic negotiation techniques to be used when
resolving disputes
 Provide an understanding of some of the main methods of dispute resolution
involving third parties
 Develop an understanding of Traditional and Alternative Dispute Resolution
techniques, including different ways of resolving disputes without recourse to
courts or arbitration
 Provide strategies and tactics for negotiating during disputes
 Explain how to use contract provisions to reduce the risk of claims and disputes

Management
Course outline and slide index
 DAY 1 - How Claims and  DAY 2 - Types of Claims and
Counter Claims arise Counter claims
 Causes of typical claims 14  Types of claims, in construction and other
 Poor drafting of requirements 16 areas - and their distinctive features 81
 Lack of clarity in Scope of Work/Services  Re-measure disputes 82
17  Variations - disputes on valuation 85
 Misunderstanding of legal or technical  Variations - disputes as to whether
obligations 27 there is change 89
 Deliberate “misunderstanding”
33  Breaches of contract 92
 Counter claims - how they differ from claims  Quality of workmanship 96
 Rights of set-off 36  Re-work 99
 Rejection of goods
 Overview of main contractual provisions  Full rejection 102
relevant to claims and counter claims  Partial rejection 105
 Obligation to perform work 41  Liquidated damages and penalties 107
 Standards 45
 Warranty claims 112
 Programme 51
 Special issues with EPC/Turnkey
 Acceleration 55 contracts 115
 Variations 56  Interface problems - are these
 Extension of time 73 always the Contractor’s
Force majeure 75 responsibility? 116
 Tracking change where client
involvement is limited 120
 Special issues with
documentation in EPC and
turnkey contracts 122
Management
Course outline continued
 DAY 3 - Presenting and  DAY 4 - Dispute Resolution
Evaluating Claims and  What is a dispute? 205
Counter claims  Introduction to dispute resolution methods
 Requirements for claim presentation 124
and techniques 207
 Notices 125  Stage negotiation 212
 Timing, and time limits 130  Measures of success - win-win
 Are time limits binding? 133 negotiation 235
 Format 136
 Information 146  Negotiating “without prejudice” 239
 Supporting documents 147  Making offers 240
 Defining features of claims evaluation and management 148  Compromise 241
 Recognising the causes of claims 149
 Warning signs of disputes 150  Bargaining 242
 Recording claims 151  Interest-based negotiations 247
 Reviewing claims 152  Conflict and its resolution 253
 Requesting further information 178
 Realistic appraisal 179  Traditional dispute resolution 257
 When to make admissions - and denials  Litigation 259
 Offers of settlement 184
 Independent review 188  Arbitration 267
 Cumulative effects 190  Issues with evidence and
 Managing claims quickly and effectively to avoid production of documents 272
disputes 193
 Managing claims and disputes  Differences between alternative dispute
 Involving lawyers 196 resolution methods 274
 Managing the legal process 197
 Setting goals 198
 Decision trees 201
 Controlling costs - and including them in your
thinking 203

Management
Course outline continued
 DAY 5  Final wrap-up and questions
 Ethical concerns 286 296
 Audit trails 288
 Avoiding the suspicion of
unethical behaviour 289
 Problems with settlements based
on interests, not rights 290
 Applying the same anti-corruption
systems to claims as to tendering
291
 Avoidance is better than resolution
 Avoiding claims and counter
claims 292
 Avoiding disputes 293
 Avoiding litigation and
arbitration294
 Practical application of techniques
 Opportunities to role play a few
straightforward negotiation
scenarios involving typical
contractual claims, counter
claims and disputes 295

Management
Opening
 Health & Safety
 Ground rules
 Timings
 Introductions

Management
Presenter
 Peter Foreman
 Law Degree, King’s College, London 1972
 Admitted as an English Solicitor 1975 (currently non-practising)
 Lawyer in private practice in London 1972-82
 Administration Director of small electronics, property and construction group 1982 –3
 Legal & Commercial Director, Trafalgar House Offshore & Structural, later Kvaerner Oil &
Gas 1983 – 99 (Executive Vice President 1998 – 9)
 Chief Executive of consultancy company 1999 – date. Operating in the Middle East as a
Senior Consultant with Euromatech
 Accredited commercial mediator, Member of Chartered Institute of Arbitrators, Supporting
Member of the London Maritime Arbitrators Association Member of The Energy Institute,
Member of The Law Society, England & Wales, Fellow of the Council on Litigation
Management
 Wide experience as lawyer, project manager and project director in major oil & gas and other
engineering and construction projects around the world, including in the Middle East. Former
Director of company owning Cleveland Bridge fabrication yard in Jebel Ali. Recently
completed work on the largest naval shipbuilding project in Europe
 Vice Chairman Link Group (major social housing provider), Chairman of East Lothian
Education Trust and member of East Lothian Learning Partnership

Management
Memory Recall
100
75
50
25
time
1 day 1 week 1 month

Management
Hand, Eye & Brain Feedback Loop

Management
What constitutes a claim?
 Exercise
What do you think is a claim in a

contractual context?

Management
What causes claims? – Major
Contributory factors
 Poor drafting of requirements
 Lack of clarity in Scope of Work/Services
 Misunderstanding of legal or technical
obligations
 By client
 By contractor

Management
obligations
 By client
 By contractor

Management
Poor drafting of requirements
 This is the stage before we get to Scope of
Work or similar documents
 Here you are deciding what it is that you
actually want from the project – if this set of
requirements is too vague, or unrealistic, it
may lead to conflict later
 There is no great legal and contractual issue
here – you just need to be as precise as
possible

Management
obligations
 By client
 By contractor

Management
Lack of clarity in scope of
work/services
 Even where the Requirements are clear, the
detailed Scope document can cause
problems
 What is it you want?
 How much do you want?
 When?
 To what Standard?

Management
Example of problems with scope
of work
 “The Contractor is to
construct a ditch one
metre from the castle wall,
to a depth of two metres,
running the entire
circumference of the
castle”

Management
Exercise
 List the items you would want to see in a
Scope of Work for supply of new desktop
computers for your offices

Management
Exercise
 Do the same for the supply of consultancy
services to provide a report on your
company’s training needs, and
recommendations for action

Management
Exercise – wording – commercial
issues
 A contract stated that a landowner of a development site would receive
an “Additional Residential Payment” of “23.4% of the price achieved
for each Residential Unit in excess of the Minimum Guaranteed
Residential Unit Value, less the costs and Incentives”
 Assume the Minimum Guaranteed Residential Unit Value is 100, and
the sale price after deductions is 300
 Does this mean the landowner gets 46.8 (23.4% of the difference), or
 146.8 (the Minimum Value + 23.4% of the excess), or
 Nil (the amount by which 23.4% of the price exceeds the Minimum)
 100 (as the previous version, but with the Minimum being payable)
 This is a real case (Chartbrook –v- Persimmon) which went to the
highest court in the UK in 2009. The amount in dispute was around
$5m

Management
Standards
 The contract should
specify the standard to
which the work should
be performed
 Remember, the higher
the standard, the higher
the price – so specify
what you really need

Management
Possible standards
 Highest possible standards
 In accordance with generally accepted
standards
 All new
 In accordance with [name of industry] best
practice
 To the satisfaction of the Client
 To the reasonable satisfaction of the Client

Management
Exercise
 If the contract is silent as to the standard to
which the work is to be performed, what
standard applies?
 If you cannot agree what a standard means,
who decides?

Management
Case study - handrails
 One oil company
required full material
traceability on all steel
used in an offshore
platform
 This included tertiary
steel (handrails,
gratings etc)
 This meant that they
could trace any handrail
back to the individual
ingot of steel from
which it was made
Management
obligations
 By client
 By contractor

Management
Misunderstanding of obligations
 Even where the Scope of Work is reasonably
clear, there may still be genuine
misunderstandings
 These can be by either party (or, sometimes,
both!!)
 They can relate to technical or
legal/contractual issues

Management
Understanding your obligations
 Make sure you have read the contract carefully, particularly the
obligations imposed on the Client
 These may be fairly limited in number, but will include important
matters such as:
 Access to site
 Provision of drawings
 Provision of free issue material or equipment
 Provision of facilities or support
 Approval of drawings etc
 Payment

Management
Understanding the obligations of
the other party
 Do not assume that “they always have to do this”. Their
obligations are those set out in the contract
 Be cautious about concepts like “design development”
 Their obligations may be dependent on you performing your
obligations
 What is there are breaches by both parties at the same time?
 The Contractor may consider something to be a variation, which
you consider to be original scope

Management
Mistake
 Keenan –v- Barclays Bank (2009)
 Ms Keenan worked part-time for Woolwich Building Society,
earning £9,520 a year. Woolwich was taken over by Barclays,
who said they would review salaries and that there would be a
“significant” increase
 Ms Keenan received a letter saying her salary would be £17,000
a year
 Two years later, Barclays realised that this was the rate for a
full-time employee, and it should have been less than half that
stated
 They tried to claw back the overpayment

Management
Case Study - Broadgate
 Error in tender specification
 Not spotted by bidder
 Stair hangers loadings too
high by x10
 Client refused to trade
concession
 Contractor would have
traded some claims – as a
result of the Client’s refusal
to negotiate, everyone lost

Management
obligations
 By client
 By contractor

Management
Deliberate “misunderstanding”
 This is where someone
knows exactly what you
want, but “pretends” to
misunderstand – and
then claim extra money
for doing what was
always intended in the
first place

Management
Counterclaims
 These are claims raised to “counter” a claim
from the other party
 In principle, they are the same as a claim, but
the real issue is whether they have to be
looked at as a separate claim, or set off
against the other claim, so that only any net
sum remaining falls to be paid

Management
Set Off
 Sometimes called “contra”
 This allows the party raising the counterclaim
to reduce his liability under the original claim
by the amount of the counterclaim
 This is very important where one of the
parties is insolvent, or may become so before
the claims are resolved

Management
Bankruptcy issues
 Where bankruptcy or similar
laws apply, the company in
bankruptcy pursues all
claims it is owed
 However, it only pays out
what money it has, divided
equally (with some
exceptions) among its
creditors
 It set off does not apply, the
solvent party may have to
pay 100% of the claim
against it, but recover only a
fraction of their claim
Management
Set off – contract provisions
 While the general law allows 1. This will always include set
set off in most countries, it off within the contract
makes sense to include a 2. It can also cover set off
specific clause in the between different contracts
contract authorising this between the same parties
approach 3. In rare cases, it may include
set off between different
contracts between different
parties – but this is not
recommended, not least
because it is very
complicated!

Management
Set off – separate contracts
 Inveresk –v- Tullis Russell (2009)
 This is a dispute between two Scottish paper makers.
TR refused to pay under an asset transfer agreement
because Inveresk were said to owe them money
under a Service Agreement
 The Scottish courts refused to allow this, saying that,
by dividing the contract into two distinct documents,
there was a presumption of no right of set off

Management
Pay first - argue later
 Petroplus Marketing –v- Shell Trading International (2009)
 Petroplus sold 29 – 30,000 MT of high sulphur fuel oil and 1 –

2,000 MT of light cycle oil to Shell FOB Coryton (UK)
 Price to be at published market rates, and payment to be without
deduction, counterclaim or set off
 The shipment was made late, as a result of which the price had
risen. Shell said they would pay at the market price when
shipment should have been made
 Petrolplus obtained summary judgment for their claim, on the
basis that Shell’s deduction amounted to a counterclaim, and
the contract said that such a deduction could not be made

Management
Obligation to perform
 While fairly obvious, the contract must set
out, in reasonable detail, what goods,
services, etc are to be provided
 And when
 And where
 And to what quality

Management
Acceptance
 Third party certification
 Documentation
 Evidence of acceptance
 Right to reject

Management
Risk
 When does the risk
of damage to the
goods pass to the
client?
 Link with Title
(Ownership)

Management
Title
 Ownership, not
possession
 Link with Risk
 Retention of Title
clauses (Romalpa)

Management
Standards
 We have already looked at the need to specify
standards, but how might this be handled
contractually?
 International standards (e.g. ISO, API, EN)
 National standards (e.g. BS)
 Company standards
 Bespoke standards written for the project in question
 Where the standards are non-technical (e.g. some
consultancy or other service contracts) a general
statement linked to what is accepted in the business
area concerned may be the only practical solution
Management
Standards – cryogenic valves
 Large bore cryogencic
valves for the Dabhol LNG
plant in India
 To be built to a particular
British Standard (an
establishe dinternational
standard in this area)
 This specified the length of
the actuator column
 -- but did not say whether
you measured from the valve
body or the top of the
insulation……..

Management
Fit for Purpose
 This phrase appears in many contracts
around the world, although it actually comes
form the English Sale of Goods Act 1896 (no
longer in force)
 It is a fall back solution that a product must
actually do what it says it will do
 This comes into two main types:
 Fit for the purpose specified
 Fit for the usual purpose to which such goods
are put

Management
Intended purpose
 What if the supplier does not know the
purpose?
 What if the purpose is a trade or state secret?
 “Black box” solutions
 Consider restricting to supply in accordance
with the specified purpose

Management
Fitness for purpose
 Jewson Ltd –v- Kelly (2003)
 Mr Kelly was developing 12 apartments, and purchased central
heating boilers from Jewson (a well-known builders’ merchant)
 The boilers worked perfectly well, but were not efficient, and
reduced the energy ratings of the apartments, making them less
attractive in the marketplace
 The court held that they were fit for purpose (heating the
apartments), and Mr Kelly had never advised Jewson of any
special requirement that meant they had to meet a higher
standard

Management
Fitness for purpose – exercise
 A Ukrainian company issued
a tender for a large quantity
of carbon steel pipework for
a chemical plant. The
pipework was to be “fit for
purpose”.
 When questioned, the client
refused to specify the
purpose, stating that this
was a State Secret
 The plant was producing an
acidic product, and the
pipework should have been
stainless steel
 When the pipework started
to leak – who was
responsible?
Management
Programme
 The contract should provide
 An end date
 A start date (not always
quite as important)
 Intermediate milestone
dates (on more complex
projects
 In addition, there may be a
requirement to develop a
detailed programme showing
how the Contractor is going
to get from one date to the
next

Management
Levels of planning
 The programme can be developed to a specific level
of detail
 The common terminology is Level 1 up to 5, with the
higher numbers having greater detail
 Remember that detail costs money, and if the plan is
too detailed, it may prove virtually impossible to
manage.
 In addition, you should select the system to be used,
ensuring that, wherever possible, it is compatible with
the systems of both the client and the contractor, and
also any professional consultants or managers
involved

Management
Exercise
 What level of planning does your company
use?
 How often do you update programmes?
 What do you do when the job is moving
against the plan?

Management
Recovery clauses
 When a contractor falls behind, the contract should require them
to recover at their own costs
 It should also allow the Client to specifically instruct such
recovery.
 BUT - if such instructions are given when the Contractor is not in
default, then the Client will have to pay the costs incurred
 The Client can also give acceleration instructions when the
Contractor is not in default, but this is, effectively, a variation, to
which we shall return

Management
Acceleration
 If the cause of any delay is the
responsibility of the Contractor,
there is a duty to spend money to
pull this back
 The contract will also
usually provide that the
Client can order this
 If not, if the Contractor is ordered to
accelerate, or decides to take
reasonable steps to do so, he is
entitled to payment
 Again, the Client can order
this, but then it will be a
variation

Management
Variation clauses
 While changes to the
contract generally
require the consent of
both parties, Variations
clauses allow the Client
to make changes within
the scope of the clause,
and the signature of the
contract by the
Contractor amounts to
consent

Management
What if the contract is silent?
 Case study – IT systems
 A company agreed to supply an IT system, with associated
training. A single price was quoted for the whole package.
 During the course of the contract, the parties fell out, and the
buyer told the supplier he no longer wanted the training element.
He deducted a sum from the invoice which he considered
reflected the training
 The supplier said they were still prepared to do the training, and
sued for the whole amount
 The contract had no variations clause
 The supplier won – the court held that, in the absence of a
Variations clause, the client had no right to amend a contract
without the consent of the other party

Management
Variations and claims
 The basis of payment for  Changes/Amendments to
variations will usually be the actual contract usually
established in the contract require consent, but may
also give rise to a claim for
 That for claims arises from
extra money/time. This
the law of damages of the would normally be seen as a
country concerned. variation, but should be
addressed at the same time
as the Change itself

Management
Distinguishing variations and
claims
 VARIATIONS  CLAIMS
 Change to the scope of work  Arise from a failure by the
 Change to the timing or Client
order of the work  Or an outside event
 Change to the way the work
is performed
 Contractual right, no consent  Right arises from the general

is usually required law, and consent is irrelevant

Management
What is a Variation?
 Change in the Scope,
or
 Change in the way the
Scope is to be
performed

Management
How do Variations occur?
 Formal notice
 “suggestion”
 Verbal instruction
 Amended drawing
 Late delivery of free-
issue item
 Late access to site

Management
Types of change
 Scope increase or decrease
 Change in type or quality of scope
 Change in timing
 Change in order of work
 Change in method of working

Management
Exercise – LNG trains
A B C

Management
Causes of Change
 Error in definition of
product or service
 Error in definition of
project
 Value-adding change
 External event
 Change of mind

Management
Understanding consequences
 A developer was building a tower
block in New York
 The architect decided to add a
doughnut (torus) shaped mall at the
base
 The developer was delighted, as it
increased rents
 The steel fabricator had already
started to erect the structural steel
 The required removal and
replacement, and building a
massive cantilever
 The price rocketed, and the
developer lost the extra rent in
building costs

Management
Identifying and controlling change
 Recognise that change may
not arise through the correct
formal route
 Changed drawing
 Late materials
 Etc
 Influence factors which
create change
 Determine when change has
occurred

Management
Challenging change
 Be prepared to ask why change is needed
 What has happened since the original decision to require
something different?
 Is someone just re-opening an argument lost during the original
scope preparation?
 Is this “preferential engineering”?
 Even if there has been a change, can you live with the original
concept?
 UNCONTROLLED CHANGE IS ALMOST CERTAINLY THE
BIGGEST CAUSE OF PROJECT FAILURE

Management
Case Study – A tale of two projects
 SCOTTISH PARLIAMENT
BUILDING
 Original estimate £34m (c$65m)
 Contract award £65m (c$120m)
 Final out-turn £430m (>c$800m) –

over two years late
 Public enquiry revealed almost total
lack of change control, or any
realisation by the Client of the
impact of change on cost and delay

Management
Case Study – A tale of two projects
 PLAYFAIR PROJECT –
EXTENSION TO SCOTTISH
NATIONAL ART GALLERY
 About a mile from the

Parliament
 Built at the same time
 Client did not interfere
 Only two significant changes
(both caused by external
factors)
 On time
 On budget

Management
Delay and extension
 Client’s fault
 Extension
 Costs
 Contractor’s fault
 Acceleration
 Neither!
 Force majeure

Management
Link with planning
 When a delay occurs, it does not necessarily
mean that the party who suffers the delay is
entitled to an extension of time for the same
period as the delay
 The issue is whether the delay was on the
critical path on the plan

Management
Critical path
 This technique was
originally used by the
US Navy for the
construction of the
George Washington
class of missile
submarines
 It was essential to
ensure that all of a
complex mix of projects
came together at the
same time

Management
Extensions of time
 In what circumstances might a contractor be
entitled to an extension of time that is longer
than the actual period of delay complained
about?

Management
A point to remember
TIME = MONEY

Management
Force Majeure
 Outside the control of the
parties and
 Unanticipated and
 Prevents performance
 No formal definition in many
countries
 Suspends obligations –
possibly with an ultimate right
to terminate
 Extends time
 Stand-by costs may be paid in
some circumstances

Management
Force Majeure - examples
 War
 Terrorism
 Riot/civil disturbance
 Severe adverse weather

Management
Force Majeure examples, continued
 Earthquake, eruption, flood, tsunami etc
 Epidemics
 Strikes
 Nuclear contamination
 Pressure waves from supersonic aircraft
 Embargo
 Actions by environmental protesters

Management
Exercise – Suez Canal
 On 7th November 2004 the 89,000t Liberian
tanker Tropic Brilliance broke down in the
Suez Canal. Tugs were unable to move her,
and by 8th November 46 vessels were waiting
in the Mediterranean off Port Said, and a
further 20 in the Gulf of Suez.
 Is this force majeure for the waiting vessels?

Management
Exercise – Gulf of Aden
 You have chartered a ship to
sail from Rotterdam to
Kuwait via the Suez Canal
 The shipowner claims force
majeure applies because
piracy in the Gulf of Aden
means he will not risk his
crew or ship

Management
Contractors’ positions
 WHEN THEY ARE AT  WHEN THE CLIENT IS
FAULT AT FAULT
 Force majeure  Not force majeure

Management
Types of claims
 This section will touch on some of the
practical issues that arise from the legal and
contractual points already discussed,
together with some additional issues for
consideration
 There are, of course, many other ways in
which claims can arise, but this is intended to
cover some major areas

Management
Re-measure disputes
 Some of these are
relatively
straightforward, and
only involve agreeing
on a number (How
many bricks were laid?
How many cubic metres
of soil removed? How
many hours were
worked?)
 Others are more subtle

Management
Re-measurement issues - examples
 PIPEWORK  HOURS WORKED
 Do you measure round  Is travelling time
the outside or inside of included?
bends? Or down the  What about the time
centreline? going through security
 In large bore pipe over at the site each day?
long distances, this  Meal breaks?
can make quite a
difference  Holidays?
 Do you measure flange  Union meetings?
to flange or include  If a day rate is used,
“green” on the pipe how many hours in a
spools? day?
Management
Re-measurement issues - opinion
 Sometimes the matter
is not as clear cut as
measuring pipe lengths
or counting bricks
 If a room is being
painted, how do you
measure progress?

Management
Variations – disputes on valuation
 These issues tend to be very similar to re-
measure disputes
 However, there may be more opinion
elements where the original contract was no
on a re-measure basis, and there is no
agreed set of rates

Management
Valuation disputes - solutions
 Schedule of rates
 Include a schedule in
the contract to, in
effect, make the
variations re-measured
 Star rates
 Where there is not a
precise rate agreed,
the parties can
contract to use a rate
derived from an
agreed rate (often
called a star rate)

Management
Estimates
 Wherever possible, ask
the contractor for an
estimate, or, better still,
a formal quotation,
before agreeing to
proceed with the work
 This can convert the
variation into a mini-
lump sum contract
 BUT be careful and be
clear what you are
actually getting…

Management
Offers and quotations
 Megalift –v- Terminals (2009) - Australia
 Megalift issued a “quote” for discharging a 270t sphere onto Terminals’
land.
 In fact, the job required major excavation, and took much longer than
expected, and was much more expensive.
 The quotation was stated to be “for budgetary purposes only”, and
Megalift said it was not an offer capable of being accepted
 On the facts, it was held that there WAS a contract.
 Among the reasons were that the parties had been negotiating for
many months; other terms of the contract appeared to contradict the
statement that the quotation was budgetary; and when a formal
contract was signed later, it incorporated what was called a “revised
quotation”

Management
Has there been a change?
 We have touched on
this issue already, but it
is not always certain
that what has happened
DOES amount to a
change entitling the
contractor to extra
money and/or time

Management
Exercise
 On a fixed price, lump sum contract, are the
following changes (assuming there is a
Variation Clause)? If so, would the
Contractor get extra time and/or money?:
1. Changing the colour of the paint on a sign
2. Reducing the number of computers supplied
from 100 to 98
3. Delaying the start of the project by a month
4. Moving the position of a fire extinguisher
from one wall to another
Management
How do you reduce this risk?
 Serve notices where there IS a change
 Include a contractual requirement that the
Contractor gives notice promptly when he
considers there is an undocumented change
 Consider having an independent professional
decide whether a change has taken place (at
least on an interim basis)

Management
Breach of contract
In summary,
any failure to
keep a
promise made
in a contract is
a breach

Management
Hadley –v- Baxendale (1854)
 Where two parties have made a contract which one of
them has broken, the damages which the other party
ought to receive in respect of such breach of contract
should be such as may fairly and reasonably be
considered either (1) arising naturally, i.e. according to the
usual course of things, or (2) such as may reasonably be
supposed to have been in the contemplation of both
parties at the time they made the contract

Management
Exercise – Victoria Laundry
(1949)
 Victoria Laundry ordered some boilers from Newmans, which
were delivered late.
 It was accepted this was Newman’s fault, and there was no limit
on damages.
 At the time of the contract, Victoria had just won an order to clean
Army uniforms
 (this took place during World War II). Newmans were not aware of
this.
 What damages are due?

 Did they have to pay the profit lost on the Army contract?

Management
Are the following breaches of
contract?
 Not letting the contractor on site on the date agreed
 Taking 17 days to deal with a query on the design
 The contractor not starting on the day planned
 Delivering goods including components from a
country on your country’s banned list
 Not using the same staff to do the consultancy as
attended the tender presentation

Management
Quality of workmanship
 We have looked at the
issue of the appropriate
Standards, but how do
you address the quality
of what has to be
produced?
 Can you tolerate a
certain number of non-
conformances, or must
everything be perfect?
 Will you test every item,
or only a sample?

Management
Perfection?
 Some jobs do have to
be 100% right, but that
costs money (and takes
time)
 It could be cheaper to
order 105% of what you
want, and accept a
small failure rate
 However, you need to
be clear what that rate
is likely to be!

Management
Failure rates
 What level of failure
might you accept for:
 Cheap pens for office
use
 Stitching on T-shirts
 Nails
 Mobile phones
 Audits of quality
systems
 Welding on a nuclear
power station

Management
Rework/re-performance
 What has to be done
 How quickly
 At whose cost
 Who bears the knock-
on costs
 Impact on schedule

Management
Exercise
 Consider what changes you would
want to the rework clause on the next
slide if you were:
a) The Client
b) The Contractor

Management
Rework clause
 Notwithstanding approval by the Engineer of drawings, samples, patterns, models or
information submitted by the Contractor, the Contractor shall be responsible for all
errors, omissions or discrepancies therein unless they are due to incorrect drawings,
samples, patterns, models or information supplied by the Purchaser or the Engineer.
 The Contractor shall bear any costs he may incur as a result of the delay in providing
such drawings, samples, patterns, models or information or as a result of errors
omissions or discrepancies therein, for which the Contractor is responsible.
 The Contractor shall at its own expense carry out, or bear the reasonable cost of, any
alterations or remedial work necessitated by such errors, omissions or discrepancies
for which he is responsible and modify the drawings, samples, patterns or information
accordingly….”

Management
Product liability and defective
goods - Rejection
 Standard required
 Tests to be passed
 What is sufficient failure to
reject
 E.g. proportion of
products
 Can the supplier try and
rectify?

Management
Standards – a common solution
Fit for purpose

Fit for intended purpose
Fit for specified purpose

Management
Exercise
 When should you have a right to reject, and what
should be the consequences in each of these
cases?
 An office building
 Chemicals for use in a blending process
 Database software
 A report on your procurement process
 A Suezmax tanker

Management
Partial rejection
 If you reject part of a consignment, the
contract should state what happens next:
 Reduction in invoice
 Replacement of defective goods?
 Time for replacement?
 Damages?
 What happens if the goods are not replaced,
or are again defective?

Management
Abatement – Wembley Stadium
 This relates to the steelwork for
the new national football
stadium in London, and is one
of very many disputes on this
project!
 The issue was how you valued
the reduction in value where
defective steelwork was
supplied to the main contractor
 You cannot value a bit of a
stadium under construction
 The only way to look at this was
that the abatement in price was
the same as the cost of repairs

Management
Liquidated Damages
 “Genuine pre-estimate
of loss”
 Often a protection, not a
penalty
 Check the actual
triggers
 Can you get an
extension of time?
 Caps

Management
Exercise – liquidated damages triggers
 The contract provides for liquidated damages of
$1,000 per day for each day the goods are late.
Delivery is to be on 1st June. How much can be
claimed if actual delivery is at:
 23:00 on 1st June
 00:01 on 2nd June
 17:00 on 2nd June
 09:00 on 3rd June

Management
Penalties
 Not permitted under
English/Scots Law
 Quite acceptable in most
other jurisdictions if clearly
stated
 May be limited to a
“reasonable” sum (e.g.
Egypt)
 Risk of double-dips
 Penal and exemplary
damages – US jury trials

Management
Liquidated damages/penalties -
drafting
 What is covered?  Recovery from retentions,
 Sole remedy, or in bonds etc.
addition to actual losses?  Are interim penalties
 Proof of loss repayable if final date is
 Triggers met?
 Grace periods  Caps on periodic
 Set-off penalties
 Overall caps

Management
Exercise
 Consider in what circumstances
remedies other than a financial
remedy might be required

Management
Warranty
 When does it start?  Are there any exclusions?
 When does it end? (see next slide)
 What parts of the work are  Rolling warranties
covered?
 What are the obligations
of the supplier?

Management
Possible exclusions
X Fair wear and tear
X Operational spares
X Misuse
X Out of specification use
X Modifications

Management
Wear and tear
 Midland Mainline –v- Eagle Star (2004)
 This case arises from a fatal rail accident at Hatfield in England in 2000
when an express train derailed at speed because of fatigue cracking of
the track
 As a result of the accident (which did not involve Midland Mainline) rail
services in the country were subject to severe speed restrictions, which
caused loss to Midland Mainline, which they claimed on their insurance
 The insurance had a standard exclusion (see below for wording)
including wear and tear
 The court ruled that the speed restrictions were caused by the fatigue
cracking, which was itself wear and tear, and there was, therefore, no
cover

Management
EPC/Turnkey contracts – special
issues
 EPC (Engineering, Procure, Contract) and
similar contractual structures (EPIC, EPCM
etc) and turnkey contracts work on the
principle of a “one stop shop”
 The contract may be with one contractor, or a
joint venture of several contractors
 In either case, there is a single contract with
the client

Management
Traditional structure - example
CLIENT
Engineer/ Fabricator/ Commissioning

Installer
designer manufacturer contractor

Management
EPC/Turnkey structure - example
CLIENT
EPC CONTRACTOR
Engineer/ Fabricator/ Commissioning

Installer
designer manufacturer contractor

Management
Special issues – joint ventures
 JOINT VENTURE  CONSORTIUM
 All members are  Members do not

“jointly and severally” have joint and
liable several liability
 All are responsible for  All are responsible
100% of claims arising for 100% of claims
from their share of the arising from their
work AND 100% of the share of the work,
total claims but no more
NOTE THAT THESE ARE NOT FORMAL LEGAL DEFINITIONS IN ALL
COUNTRIES, AND THE TERMS GET USED INTERCHANGEABLY.
ALWAYS CHECK WHAT THE CONTRACT SAYS
Management
Interface issues - exercise
 On the face of it, the main purpose of an EPC
arrangement is that the interface issues
within the contract are all the responsibility of
the Contractor(s)
 In what circumstances might interface issues
not be their responsibility?

Management
Issues – tracking progress
 In traditional contracting, the
Client is closely involved with
the project as it progresses
 However, in EPC, and
particularly, in true Turnkey,
the Contractor is sometimes
just allowed to get on with
things
 This can mean the Client
loses the ability to spot
problems as they arise

Management
Issues – tracking change
 A similar problem arises
here, but probably more
one for the Contractor
 If changes are made,
the question that needs
to be asked is whether
they remain within the
original scope
(Contractor’s problem)
or are something new
(a Client variation)

Management
Documentation on EPC/Turnkey
 As with any contract, the requirements for
documentation should be clearly stated
 In reality, the issues are much the same as
for any lump sum contract, however, when we
come to look at the Format of a claim, this
area probably needs to have a section stating
why any claim arises from an issue that is not
within the responsibility of the Contractor

Management
Example
 An EPC contract is awarded covering (among other
things) the design and construction of an offshore oil
platform
 The job is running late
 The design office of company X writes to the Client to
say they are sorry for the delay, but the fabrication
yard don’t know what they are doing
 The fabrication yard of company X writes to the Client
to say they are sorry that they are late, but the
designers are running behind schedule
 The Client puts both letters on the table and says “not
my problem”
Management
Requirements for claim presentation
 Set these out in the contract
 Do NOT assume that you can merely state
“we require the claim in the following format”
if this was not made a contractual term
 It is not possible to impose such terms after
the event without agreement from the other
party

Management
Notices
 The contract should
specify timing and
method of service
 These clauses are often
not read, but need to be
understood, and
complied with to the
letter

Management
Issues on notices
 Is the method proposed
possible?
 For example – many
clauses still provide for
telex service
 How do you prove
service?
 P.O. Boxes
 Electronic
communications

Management
Notices
 How many days?
 What is a “day”?
 In what form?
 Who should sign them?
 To whom should they be sent?
 How should they be delivered?
 Is an acknowledgement needed?

Management
Sample clause (Consultants)
 All notifications and statements under this
Contract shall be written in the Arabic
language, and delivered to the other party at
the location indicated in the Contract with
acknowledgement of receipt given thereto.
Formal notices may, however, be sent to the
said address by registered mail, fax, cable or
telex as appropriate……

Management
Continued
 … provided that confirmation of such notice is
received. Change of Consultant’s local
address stated in the contract shall not be
accepted unless the new address is in the
Kingdom of Saudi Arabia and the Employer is
so notified at least 15 days prior to the
change of address.

Management
Exercise - Timing
 The Contract requires a notice to be given within 7 days of the
happening of an event
 Is this working or calendar days?
 If working, what happens is one of the days is:
 A Friday (in an Islamic country)
 A Sunday (in a Non-Islamic country)
 A Saturday in (i) Dubai (ii) Saudi Arabia
 A usual public holiday in the Client’s country
 A usual public holiday in the Contractor’s country
 A special holiday in the Client’s country (e.g for the death of a
ruler)
 A day when the Contractor’s business is usually closed for
annual works holidays

Management
Service of notices
 All notices should be required to be in writing, however, the
physical method of service needs to be defined:
 By hand
 By post
 By special type of post (recorded/registered etc)
 By fax
 By e mail
 By telex (which still appears in many contracts)
 Note that the majority of contracts do NOT allow service by e
mail, and a significant number do not allow service by fax

Management
Case study - notices
 The Scottish branch of a Norwegian-owned English
company contracted with a Dutch company to supply
services in South Africa. They subcontracted part of
the work to a South African company, who in turn
contracted with a Qatari company for the supply of
labour from India.
 The same notice clause was passed down through
the contracts. When it reached the South
African/Qatari contract, it required notices to be
served in a manner which was impossible in either
country.

Management
Timing and time limits
 It is common to require a party wanting to
make a claim to give notice within a fairly
limited period
 The contract often goes on to say that, if this
is not done, the right to present a claim is lost
 Since this clause is usually directed against
the contractor/supplier, it is a frequent cause
of dispute

Management
Time limits
 Make sure that any limit
imposed is realistic
 Distinguish between
warning of a claim (with
outline details) and
actually presenting full
financial amounts and
back-up

Management
Time limits – what happens if they are
missed?
 The contract states “no claim will be accepted by
the Client unless it is received within 14 days of the
date on which the Contractor should reasonably
have been aware that a claim for additional cost
and/or time would be made”
 What would you do if:
1. The document is delivered 15 days after the relevant
date
2. The document is delivered within 14 days of the date
when the Contractor was aware there would be a
claim, but 20 days after he should have been aware

Management
Format of claim
 While there is no
perfect format, it is
suggested that the
following slide gives a
good basis as to what
needs to be included

Management
A possible format
 Brief summary of the contract
 Statement of the facts leading to the claim
 Statement as to which contractual provisions
(or breach of which provisions) are stated to
give rise to the claim
 Details of the time and/or cost claimed
 A summary of any correspondence,
especially notices served
 A schedule of back-up information, cross-
referenced in the earlier sections
Management
A possible format
 Merely a statement as to the nature of the
contract, and any important features (e.g.
lump sum or re-measure)

Management
A possible format
 Again, this is a helpful scene-setting, and
should explain why the claimant considers
that there is any claim in the first place
 It is helpful if this is kept in an un-emotive
language as possible, but this is not always
the case!

Management
A possible format
 Statement as to which contractual provisions
(or breach of which provisions) are stated to
give rise to the claim
 This is the heart of the claim, and a point that
is not always included.
 Too many claims are along the lines of
“something terrible happened, it is all your
fault, please send lots of money”
 They should specify why a claim is permitted

Management
Examples
 The claim is presented on the basis that the
Client failed to provide access to the Site on
the agreed date, as provided by Clause 14.3
 The claim arises from a change in the
operational specification for the computer
system as set out in Notice 125H6 dated 14th
June 2008. Such a change entitles the
Contractor to a Variation in accordance with
Clause 21.1, but the Client refuses to issue a
Variation Notice as provided by Clause 21.3,
in breach of contract
Management
A possible format
 While time and cost are clearly related (and one
tends to produce the other), it helps to keep them
separate
 It may assist to present a bat chart illustrating time
claims, and a schedule of the costs incurred
 In English court cases, use is made of what is called
a Scott Schedule, which lists each sum claimed, with
details of what it is for, and why it is claimed. This
enable the judge to agree or strike out claims item by
item
 While not a requirement for many claims, it is,
nonetheless, a helpful tool in many cases

Management
A possible format
 A summary of any correspondence,
especially notices served
 A timeline is useful, together with a narrative
of the important correspondence, explaining
how the matter has developed. This should
quote relevant extracts from the more
important parts of letters etc

Management
A possible format
 A schedule of back-up information, cross-
referenced in the earlier sections
 By using cross-references in the claim
document, perhaps by footnotes, the reader
can flip to the schedule and review the
document in question.
 Back up should be sufficient, but should not
drown the other party in paper

Management
Format – what not to do
 Windglass Windows –v- Capital Skyline Construction
(2009)
 Claims were rejected with the following note:
 Our financial director has returned this application and
is not willing to process the amount due to insufficient
supporting information. Please note that our company
policy is such that each sub-contractor valuation must
be presented in a standard format, copy attached, and
authorised by the appropriate site manager before your
application can be processed. Could you kindly re-
submit your application with the correct supporting
information….
 This was not a requirement of the contract, and the
sub-contractor was allowed to proceed to claim their
money without amending the paperwork
Management
Supporting information
 While it reasonable to
require supporting
information, do not
demand more than you
actually need
 Remember that
everything costs money
to produce – money
that will be included in
the price that you pay

Management
Supporting documents - exercise
 When asking for supporting documents, do
you want to see originals or copies?
 Would you want any authenticated, and, if so,
by whom?
 What about translations of anything in foreign
languages?

Management
Principles of claims evaluation
 Review the main claims headings
 Are these factually correct?
 Statement as to which contractual provisions (or breach of which provisions) are
stated to give rise to the claim
 Are these correct?
 Have correct notices been served?
 In the correct time?
 Are there other relevant provisions?
 Are these mathematically correct?
 Do they relate to the facts relied on?
 What is their breakdown
 A summary of any correspondence, especially notices served
 Is this accurate?
 Has anything important been missed out?
 A schedule of back-up information, cross-referenced in the earlier sections
 Is anything else needed?

Management
Contributory factors (repeat)
obligations
 By client
 By contractor

Management
Anticipating disputes – warning
signs
 Progress = time  Slow payments
expended  Claims team in other
 Cost = value offices
 Weekly reports
 Manning below plan
unchanging
 Quality non-  Parent company has
conformances cash problems
 Changes in project  Discussions not open
management

Management
Recording claims - exercise
 How do you record claims when they are
received?

Management
Reviewing claims
 We will now look at some of the processes
needed to review a claim, starting with
analysing cost

Management
Evaluation - Types of contract cost
 Cost
 Direct
 Indirect
 Overhead
 Fixed
 Truly fixed
 “Variable fixed”
 Variable
 To convert to a Price or a sum claimed add -
 Profit
 Or Loss (if being supplied at less than cost)

Management
Pricing models
 There are numerous models, but can include:
 Simple lump sum for a product
 Rate per hour
 Rate per unit
 Risk and reward
 Fixed sum for a period of time
 Payment for results (performance based)

Management
Price and Cost analysis
 Price should be
direct costs +
indirect costs +
overhead + cost
of money +
profit

Management
Analysis of cost data
 Accuracy
 Back-up
 Make-up of rates and lump sums
 Allocated costs
 Overhead recovery methods
 Variation rates – volume related
 Dayworks

Management
Exercise
 Your supplier is going to use all of his Abu Dhabi
plant to supply products to your company
 He sells for $100 a unit, made up of –
 Cost of materials $50
 Labour costs $25
 Fixed overhead $5
 Variable overhead $5
 Profit $15
 The proposed variation rate for extra units is $100
per unit. Is this correct?

Management
Analysis – Direct Costs
Identifying direct materials and

subcontract pricing
Analysing direct labour costs
Determining and evaluating
other direct costs

Management
Analysis - Direct
 Material costs
 Materials,components etc
 Associated costs, e.g. freight
 Scrap or surplus
 Direct labour
 Other direct costs
 May include consumables

Management
Identifying direct materials and
subcontract pricing
Current
quotes
Historical
quotes
Inventory
pricing
Management
Analysing direct labour costs
Identify classifications
Estimate of man hours to be
used for each grade
Labour rates for each
classification (with details)

Management
Possible questions about labour
elements of claim #1
 Fit with manufacturing  Qualifications
plan  Overlap on tasks
 Volume necessary to
 Overlap on current
complete
contract
 Relevant skills?
 Overlap on other
 Classifications same as
for rest of company? contracts
 Appropriate  Consistent mix
classifications  New trades?

Management
Possible Questions #2
Direct/indirect comparisons
Industry/regional norms
Overtimes and shifts
Premium rates
Comparable rates

Management
Other direct costs
 Consumables  Royalties
 Special tooling and test  Preservation, packing
equipment and packaging
 Computer services  Start up or mobilisation
 Consultant services costs
 Travel  Demobilisation costs
 Taxes

Management
Analysis – Indirect Costs
How is overhead determined

Identifying overhead cost
categories
Ensuring fair allocation of
indirect costs
Analysing proposed rates
Management
Analysis - Indirect
 May include elements such
as -
 Material overhead
 Manufacturing overhead
 Engineering overhead
 Field service overhead
 Site overhead

Management
General & Administrative
Expenses (“G&A)
 Salary of executive
staff
 Overhead costs of
head office
 Legal, accounting,
PR, HR etc
 Selling and
marketing
 Transfer pricing

Management
Determining overhead rates
INDIRECT RATE = INDIRECT COST POOL

INDIRECT COST ALLOCATION
BASE

Management
Overhead cost categories -
examples
Material overhead Operations G & A Expense
overhead
Purchasing Indirect labour Executives
Transportation Perishable tooling Staff services
Indirect labour Indirect materials Selling
Employee expenses Fixed charges Head office
Receiving & handling Downtime R&D
Bids & proposals

Management
Fair Allocation – Possible
Allocation Bases
SALES - $100M DIRECT FACTORY COST
- $15M
Product A – 50% Product A – 30%

Product B – 30% Product B – 20%
Product C – 20% Product C – 50%

Management
Allocations bases - issues
 Are costs in the pool adding value to the
product?
 Are there contingency allowances?
 If so, are they realistic?

Management
Exercise - profit
 What is a reasonable %
profit for a company to
make?

Management
Profit motive
 Contractor stays in business
 Contractor wants to work for you again
 Contractor does not hide profit in cost
 Motivation for good performance
 Good personnel used
 Good relations
 Reputation enhanced in marketplace

Management
Profit – what is reasonable
 Assessment can be by :
 Benchmarking against
industry norms
 Assessment of resources
employed and risks taken
 On a claim or variation, what
was in the original contract
(if known)

Management
Time
 Remember that the person
making the claim has to
demonstrate that the delay:
1. Is not something for which
they are responsible
2. Entitles them to an
extension of time
3. HAS ACTUALLY CAUSED
the delay claimed
 The last point is very much
related to the question of
critical path analysis

Management
Planning –critical path
 It is not enough for the Contractor to show there has been a delay
 He must show that the delay impacted on the overall programme –
that is, that it caused a delay on the critical path
 Conversely, if the delay is on the critical path, the impact may be
disproportionate. For example, a delay of one week could push the
work out of a weather window, and cause a delay of several
months
 BUT if there is float in the plan, this may belong to the Contractor,
enabling him to claim an extension of time, even though he may be
able to absorb the delay

Management
Critical path -exercise
 How do you determine if an activity is on the
critical path?

Management
Requesting further information
 We have already looked at making sure that
you only ask for the information you actually
need
 However, you should also be careful to ask
for further information quickly and logically
 Drip-feeding requests can sour a negotiation

Management
Realistic appraisals
 It is worth making the point that it is not
helpful to ignore genuine claims
 THIS DOES NOT MEAN YOU SHOULD PAY
SUMS THAT ARE NOT DUE!!!!!
 However, where the point is small, it may
simply not be worth arguing over something
trivial
 Be realistic – many things are not 100% black
and white, much of the world is shades of
grey (gray if you are American)

Management
Global claims
 Commonly used in
complex engineering and
construction disputes
 They have a difficult legal

history, sometimes
accepted, sometimes not

Management
Global claims - issues
 It is the duty of the Contractor to demonstrate linkage between the
matter complained of (e.g. a variation or breach) and the damage
suffered. Global claims do not do this.
 The problem is that large projects are so complex that the general
rule is virtually impossible to apply in practice
 Global claims say “it is all down to the Client, so all the impacts are
payable”
 The risk for the Contractor is that if any element is found to have
been the Contractor’s responsibility, the whole claim may fail

Management
Responding to a global claim
 Invite the Contractor to
demonstrate cause and effect
 If they decline, ask them to list
all causes, and to confirm that
their case is that the
combination of these causes
caused the costs
 Identify any individual cause
where some or all of the
responsibility rests with the
Contractor
 Be realistic – they may be right,
and time and cost will be saved
by a little “horse trading”

Management
Payments on account
 If it is clear that money is owed,
an interim payment has the
effect of –
 Demonstrating good faith
 Assisting the Contractor’s cash
flow
 Reducing any claim for
interest/cost of money
 BUT, these can also be seen as
a sign of weakness

Management
Admissions and denials
 Admissions  Denials
 If the facts are clear, there is  Similarly, a clear, reasoned
rarely any harm in agreeing denial brings matters to a head
them  Merely saying you are thinking
 If the claim goes into dispute, about matters, when the reality
you will lose on this point is that the answer is “no” helps
anyway, so save cost and time nobody
with a concession
 This also gives more credibility
to your denials

Management
Offers of settlement
 If offering to settle a claim, it may be necessary to
use certain specific legal terms to prevent the offer
being used against you
 A common term is “without prejudice”
 This means “I still think you are not due any money,
but, without prejudice to that position, I will offer you
100,000 rials to get rid of this problem”
 If this is accepted, there is no problem. If it is
rejected, the claimant cannot produce the offer in
court as evidence that the Client admits that 100,000
rials is due, which is simply not the case
Management
Legal costs
 In those countries where the loser pays all or sum of
the costs of a court case or arbitration (and this is not
the position everywhere), the fact that a without
prejudice or similar offer has been made can
sometimes be disclosed to the judge or arbitrator
after the case is over, solely on the basis of
demonstrating that, had the offer been accepted, the
case would not have been needed
 In such cases, courts may either not award costs, or
even order the winner to pay all or part of the costs
wasted

Management
Offers of settlement – what does the
settlement mean?
 If a settlement is achieved, make sure it is
properly documented
 In particular:
 Does it settle everything (“full and final
settlement)?
 Does it include disruption from the extra work?
(See comments on cumulative effect later)
 Does it include rate increases?
 Can the rates agreed be used on any other
claims in the future?

Management
Independent review
 Where the claim is of
some complexity, or
there are major
disagreements,
consider a “cold eyes”
review
 This can be internal or
external, but should be
by someone who
understands the issues,
but has had no
involvement in the
project
Management
Advising on the result of a review
 After you have reviewed the
claim, whether with external help
or not, advise the Contractor of
your position
 If the you are rejecting all or part

of the claim, tell them why
 This is often best handled face to

face, but, in such a case, have
clear notes of what you are going
to say, and record what you
actually said

Management
Cumulative effects
 Where the project is
complex (and this is
particularly the case in
construction and
engineering), the impact
of a series of changes
or delays may be to
produce a disruptive
effect over and above
the extra work itself
 In other words 1 + 1
may equal >2

Management
Disruption -issues
 The usual analysis by a Contractor is based on reduced
productivity. Since this is a common effect of extra work, this is not
unreasonable in itself.
 However, it fails to assess:

 The extent to which the original productivity norm was
optimistic
 Whether the correct norms were used in the tender
 Whether some or all of the loss of productivity was going to
happen in any event, or for other reasons

Management
Exercise
 You have received a claim from a
construction Contractor, which includes an
element for disruption.
 What sort of questions would you ask

about this element of the claim?

Management
Managing claims quickly – why this is
important
 It is very tempting to leave
issues until the end of the
job, and sort them out then
 However, dealing with
means:
 The facts are clear
 People do not have time
to harden attitudes
 Individual problems can
be picked off involving
relatively small sums,
and, therefore, can often
be dealt with at a lower
level in the organisation
Management
Dealing with claims as they arise – a
contract point
 It is important to state in a contract that,
where there is a dispute, work must continue
while the dispute is resolved
 Without this, the Contractor has a very strong
negotiating lever to use to force a favourable
settelement

Management
Section1 of the Law of the Jungle
 Sometimes people do
not comply, even when
it is in the contract……

Management
Managing disputes
 Involve lawyers early
 BUT manage them
 Agree strategy and tactics
 Do what you can
yourselves, or with
cheaper support
 Don’t be greedy
 Feed costs into your
calculations

Management
Managing the legal process
 Lawyers are an important
asset, but just another
adviser
 Make sure they are
managed, and that costs are
controlled
 Many international disputes
lawyers are VERY expensive
 …and they employ a number
of expensive assistants for
whom you pay in addition

Management
Setting goals
 Be realistic
 Set goals for what is the
best you could achieve
 What is your
expectation
 What is the worst you
could accept (the “line
in the sand”)
 When you get what you
are looking for, take it
and move on
Management
Don’t be greedy
 Dispute over Australian
Submarines HMAS Orion and
Otama
 Case was 11 years old
 Only one witness was still
around
 Strategy
 £0.5 m reject
 £1m think about it
 £1.5m accept
 Opening offer £2.5m
 What do you do?

Management
HMAS Orion and Otama – what
actually happened
 The £2.5m was accepted
 There was criticism of the decision not to
press for £3m, BUT
 This was all profit
 The Client thought the shipyard was
commercially weak, and did not realise they
had left at least £1m “on the table”
 There was another bid to the Client pending…

Management
Decision trees
 In complex disputes,
consider drawing up a
decision tree
 This way, you know
what you will do
depending on the
reaction of the other
party
 Be flexible – the
decision tree will need
updating – but use it as
a tool

Management
Exercise – decision tree
 We will work through a simple exercise in
developing a decision tree based on a claim
from the other party for an extension of time
and extra costs

Management
Controlling costs
 Keep a regular check on
what you are spending
 Include internal costs where
appropriate
 Feed costs into your
calculations
 Include the deflationary
effect of time on any money
you are going to receive
(and the cost of interest, if
appropriate, on anything you
are going to pay out)

Management
Case Study – Manchester Central
Station – feeding in costs
 Dispute over castings
 Target settlement £1m
 Settled at £1.1m
 Success!
 In NPV terms, could have
settled on day one at £0.1m.
 Client had offered £0.25m
o Failure!

Management
Disputes
 Parties need to present
their respective
positions
 There is not a dispute
where, for example, one
party presents a claim,
but the other party has
not yet replied

Management
Exercise
 A contractor sends a letter to a client stating “We have
completed the project, but it is clear that costs will be vastly in
excess of our estimate. We consider this is because you have
failed in your duties to review changes properly and also to
provide answers to site queries on time. We, therefore, claim an
additional $1,346,229. If this is not paid within 7 days, we shall
proceed to arbitration”
 Is there a dispute?
 How would you reply if:
 You agree with what they say, but not the amount
claimed?
 You do not agree with any of what they say?

Management
Introduction to dispute resolution
methods
 Negotiation
 Third party involvement
 Mediation
 Other types of Alternative Dispute Resolution
 Litigation (courts)
 Arbitration
 IT IS USUALLY BETTER TO TRY AND FIX A
PROBLEM BY DISCUSSION AND
NEGOTIATION, WITHOUT INVOLVING
THIRD PARTIES
Management
What is negotiation?
 The first essential is that
there needs to be a dispute
or difference between two or
more parties
 Negotiation is the way to
resolve such differences by
discussion, without a third
party (such as a judge or
arbitrator) making a decision

Management
Types of Negotiation
 Communication between  Often conducted by
two parties to reach a agents
mutually satisfactory
solution  Can be the start of a long
 Adversarial relationship term relationship
between parties who have  Both analytical and
to work together
 Win-Win
psychological
 Verbal, written, and non-
verbal

Management
Exercise
 What are the things that you need to

consider when planning and
preparing for a negotiation?
 What do you need to consider during a negotiation to
create a win / win outcome?
 Think of people who you

feel are effective
negotiators, and what
makes them so good at it?
(i.e. skills they use)
Management
Exercise - Do you always have to
negotiate?
 Are there any
circumstances in which
it is appropriate to
refuse to negotiate?
 What happens if you
take this position?

Management
Stage Negotiation
 Multi-stage approach
 Pre-agree times for each stage
 Require these procedures to be concluded
before litigation
 BUT – include emergency procedures

Management
Three basic rules of negotiation
1. A quote is never a concrete number
2. The best prepared wins
3. Have many issues and a Best Alternative
To No Agreement (“BATNA”) position

Management

Management
Deltas
 There will almost always be
a gap between positions
 However, if the gap is too
large at the beginning,
neither side may see any
point in continuing the
discussion
 If it is too close, you may
have given too much away!

Management

Management
Key Elements of negotiation
Preparation Skills
Understanding
goals
Self Confidence

Management
Preparation
 Who are you meeting?
 Who is on your team?
 What will be discussed?
 What papers are needed?
 Why?
 Where?
 When?

Management
Your aims – re-visting the issue of
goals
 Define your preferred
outcome
 Best case
 Worst acceptable case
 Agree a line beyond which
you will not go AND STICK
TO IT
 Clear your authority limits

Management
What do you know about the other
party?
 What do they do?
 How are they performing financially?
 Recent orders/problems
 Who are their competitors?
 What is their position in the marketplace?
 What are their plans?
 What is important to them?

Management
Roles
 Negotiator  Scribe
Not necessarily the leader Control the Minutes

 Technical expert  Timekeeper
 Subject specialist
 Keep to agenda
 Commercial
 Watch time constraints
 Financial
 Decision maker
 Disclosed or undisclosed
 Level of authority
In many meetings you will have multiple roles

Management
Before the meeting
 Pre-meeting with your team
 Agree goals and roles
 Agree authority limits
 Set agenda
 Pre-agree agenda,
attendees and documents
needed
 Write down what you want
to achieve

Management
Agenda
 Not always relevant to brief
meetings? Outsourcing meeting
 Try and control 07/02/01
9:00
 Agree with other party Thistle Street
Meeting called by: Type of meeting:
 Include timings Facilitator:

Timekeeper:
Note taker:
 Include breaks Attendees:

Please read:
 State what is to be Please bring:
discussed; by whom; and ----- Agenda Topics -----
with reference to which

documents Other Information
Observers:
Resource persons:
Special notes:

Management
Arrival
 Location
 Take account of disabilities
 Get there first
 If possible, set the room the
way you want it
 Small talk – good or bad?
 Setting the agenda

Management

Management
Multiple issues
 Just as it is important to
set your opening
position so as to allow
some room for
negotiation, so it is also
useful to have a number
of issues to discuss;
some of which you may
be prepared to give
away

Management
BATNA
 Best  What is the best that
can happen if no deal is
 Alternative struck
 If this is still better than
 To what you are being
offered, you might as
 No well walk away
 Agreement  However, if it is not….

Management
BATNA – what might it be?
 Close a factory
 Buy from a more expensive supplier
 Sell to another buyer
 Go to court or arbitration
 Lose money on the project
 Lose your job (a personal, rather than
corporate issue, but still relevant)

Management
During the Meeting
 Try and keep to agenda
 Play back discussions
 Bank agreements
 Record issues
 “Park” problems
 Watch body language
 LISTEN
 Use breaks for updates

Management
Non-verbal Communication
 Of information
communicated
 10% through words
 40% through para-
language (nuance,
emphasis, irony etc.)
 50% through body
language

Management
Closing the meeting
 Revisit original goals
 Check all “parked” issues
have been addressed
 Run through points of
agreement or dispute
 Agree process
 Agree timetable
 Allocate actions
 Format for deliverables

Management
What to record
 Decisions, actions and
deliverables
 Times for action
 Who is responsible for
action?
 Basis on which decisions
were reached
 Agreed facts
 Outstanding issues
 Process

Management
Questions
 Ask open questions to elicit information
 Probe generalised statements
 Start to close the questions as you approach
an agreement
 Play-back agreements

Management
Interruptions
 Avoid them
 Unless you have
planned them
 How do you react to
interruptions by the
other party?

Management
Win - Win
 What is a “win”?
 Knowing what you want
to “win”
 How to promote win-win
thinking
 Is win-win always the
right answer?

Management
What is a win?
 Discuss some examples of what might be a
win for you, or the other party, that does not
involve paying, or not paying, money

Management
Mirror negotiation
 Assess what the other
side wants
 Can you give them
something without loss?
 What are their walk-
away points?

Management
Red Teams
 On complex disputes
(and also on
complicated tenders), it
may be worth assigning
one or two of your staff
to think like the other
party
 This is imperfect, but
can help to assess the
best approach

Management
Negotiating “without prejudice”
 We have discussed this issue already, but
this is intended as a reminder that it is usually
possible to make an offer than exceeds your
view of the strict legal position, in order to
dispose of a problem, without exposing
yourself

Management
Making offers
 Someone has to make
the first move…..
 Try testing the water –
make a small offer and
see if you get a
response
 Be bold, but be
prepared to pull back if
the other side do not
respond
 Do not negotiate with
yourself

Management
Compromise
 Not the same as surrender
 Recognise that if neither side moves, the matter will never
settle
 Test the water
 Be bold
 Document any settlement properly
 Timings for action
 Consequences for failure

Management
Bargaining
 The usual way a
negotiation works is that
the parties bargain
towards a range that
they can both live with
 The problem arises
when (as already
discussed) the delta is
too large

Management
Playing Hard to Get
 Do they need you more
than you need them?
 Do they think they need
you more than you
need them?
 Can you get leverage
by being helpful?

Management
Unequal bargaining positions
 Size  Reputation
 Technology  Retaining market share,
 Only one party available or keeping out
or willing to do the work competitors
 Other business  The position is not always
relationships (particularly what it appears on the
relevant to disputes) surface

Management
Possible results of
unequal bargains
 Other party feels
aggrieved
 Every effort is taken to
recover their position
 Lack of sympathy for
future problems
 Overall relationship
damaged

Management
Walking away
 Set authority limits
 Be prepared to walk, but
understand the
consequences
 What effect will walking
away have?
 Reputation management
 Keeping the door open

Management
Interest based solutions
 RIGHTS  INTERESTS
 What you are  What you
legally entitled require or want
to

Management
Rights
 Clearly it is always possible
to insist on 100% of your
rights
 Sometimes that is the correct
solution. However, it does
create some issues:
 You may think you have
certain rights, others may
disagree
 If the other side are not
prepared to agree (and
they may not believe you
are correct), a dispute is
inevitable
 The law may not be able
to give you the remedy
you actually seek
Management
Making the cake bigger
 Make big problems
smaller by putting them
in a larger context
 Think laterally
 Can you solve other
problems as well as
those being negotiated?

Management
Non financial solutions
 What type of solutions might you
use in a claim or dispute that did
not involve extensions of time or
payment of money?

Management
Long term business relationships
 Where you are likely to
have a long term
relationship with the
other party, consider
how resolving the
dispute could enhance,
rather than damage that
relationship

Management
Two true stories
 AMSTERDAM –  KUWAIT – LONDON
KUALA LUMPUR  Plane snowed in at
 Plane breaks down London
 Airline provide an  Replacement promised
alternative via but did not arrive
Singapore  After about 8 hours, told
 Total delay about 4 to make own
hours arrangements to get
 Bag routed direct to back
hotel about 12 hours  This was the day before
after arrival Eid
Management
Conflict
 Any dispute is, in a
sense, a conflict
 The trick is to stop the
dispute becoming
personal
 Remember IT IS
USUALLY ONLY
ABOUT MONEY

Management
Defusing conflict
 Avoid personal
comments
 Reframe criticism
 Remain calm
 Do not respond to
provocation
 Take breaks if matters
get heated
 Apologise if you say
something you regret

Management
Personality clashes
 What do you do when it
is clear that there is a
personality clash with
the negotiator on the
other side?

Management
Managing claims quickly – why this is
important - repeat
 It is very tempting to leave
issues until the end of the
job, and sort them out then
 However, dealing with
means:
 The facts are clear
 People do not have time
to harden attitudes
 Individual problems can
be picked off involving
relatively small sums,
and, therefore, can often
be dealt with at a lower
level in the organisation
Management
Dispute resolution
 We now look at what
happens if internal
negotiations fail

Management
Types of Dispute Resolution
 Litigation
 Arbitration
 Alternative Dispute
Resolution (“ADR”)
 Mediation
 Mini-Arbitration
 Conciliation
 Expert Determination etc.

Management
Litigation
 Formal proceedings through a state court
 Which courts have jurisdiction, and which law
is to apply (not always the same) should be
stated in the contract. If not, there are
complicated international rules, but this may
not give you the result you desired.

Management
Conflict of Laws – Choice of Law
 Law for interpretation of
contract
 Courts to have
jurisdiction
 Choice may be
restricted
 By local law
 By company policy

Management
Jurisdiction
 Novus Aviation –v- Onur Air (2009)
 Onur are a Turkish airline, and Novus (a company based in the
Bahamas) agreed to try and help them lease aircraft to Saudi Arabian
Airlines
 The agreement was stated to be governed by English Law, but did not
say where disputes should be heard
 A dispute arose as to whether the contract had been extended, and
whether Onur had breached it by dealing with Saudia direct
 Proceedings were issued in England, but permission was needed to
serve in Turkey, and this would only be granted if there was a
reasonable chance of success, and that England is the “proper place”
for the hearing
 The appeal court approached the question on a wide basis of where
the case should be heard, and said the position was “finely balanced”
but the judge had been entitled to find that England was the appropriate
venue

Management
Possible choice of law clause
This contract shall be

interpreted in accordance with
the laws of the State of Kuwait,
and any dispute shall be
referred to the Kuwaiti Courts

Management
Possible choice of law clause -
amended
 This contract shall be interpreted in accordance with
the laws of the State of Kuwait, and any dispute shall
be referred to the Kuwaiti Courts The Parties hereby
consent to the sole and exclusive jurisdiction of the
Kuwaiti Courts, and the Contractor hereby irrevocably
appoints the law firm of Ibn Battutah of 1, Coast
Road, Kuwait City to accept service of all
proceedings on its behalf

Management
Foreign courts - Issues to consider
 Service of  Are foreigners treated
proceedings fairly?
 Do the other party  Language
have to submit to
jurisdiction?  Are there processes
 Enforcement (e.g. awards of
interest) that may be
 Cost
a problem for you?
 Time

Management
Enforcement
 The orders of a court are generally only
directly enforceable in the jurisdiction of that
court
 Enforcement in another jurisdiction tends to
follow two routes:
 Treaty (either a direct bilateral arrangement, or
a wider regional deal)
 The judgment becomes evidence in a new
court case

Management
Enforcement of judgements and
awards
 Seizing goods
 Third party debts
 Freezing transactions
 Liquidating companies
 Deducting money from wages and salaries
 Imprisonment (in some countries)
 Frequently none of these are necessary, people pay their
debts
 Sometimes, none of them work

Management
Arbitration
 In effect, privatised litigation
 The dispute is finally resolved by one or more (often
three) arbitrators, sitting in private
 Awards can be enforced through the local courts in
many countries (especially those who have signed
the New York Convention, 1958), but there are a few
gaps in the Middle East (e.g. Yemen, Iraq,
Turkmenistan), Central Africa and the Pacific Islands

Management
Arbitration
 Advantages over litigation  Disadvantages
 Privacy  Often as costly
 But not total in  Often as slow
Australia, Sweden  Enforcement can be
and Texas more difficult
 Choice of arbitrators  Many remedies not
 Arbitrators can have available (e.g.
industry knowledge and injunctions)
experience  Cannot get law
 Language established (except in
 Location and timing of Australia, Sweden and
hearings Texas?)

Management
Comparison
 Litigation  Arbitration
 Good range of remedies  May need support of courts
 Reasonably certain for some remedies
 Public  Reasonably certain, but no
 Usually expensive precedent system
 Often slow  Private
 Risk of bias in some foreign  Can still be expensive, and,
courts sometimes, slow
 Lack of specialist expertise  Some ability to select
in field arbitrators, to increase
specialist knowledge, and
reduce national bias

Management
Arbitration
 DOMESTIC  INTERNATIONAL
 Within the country  Either between parties

concerned, and from different countries,
between two parties or involving work in
within that country different countries
 No foreign involvement  There must be a foreign
 Local arbitration law element
applies  Often international rules
(e.g. UNCITRAL Model
Law) applies
Management
Single or panel
 Arbitrations are sometimes
heard by a single arbitrator,
and sometimes a panel
(most commonly three)
 If the parties do not agree,
an outside body is generally
nominated to appoint
 On three person panels, the
parties may appoint a
“wingman” each, and these
two appoint a chairman

Management
Evidence and production of documents
 Note that each country has different rules as
to what is needed to prove a case
 In particular, the rules was to what documents
HAVE to be provided to the court and the
other side vary greatly
 Whatever you want
 Everything that supports your case
 Everything that supports OR CONTRADICTS
your case
 Everything

Management
Arbitration and litigation –
tarnished reputations?
Former Chief Justice of the USA: Warren Burger
“The obligation of our profession is … to serve as healers of human
conflict. To fulfill our traditional obligation means that we should
provide mechanisms that can produce an acceptable result in
the shortest possible time, with the least possible expense and
with the minimum of stress on the participants. That is what
justice is all about.”
Perhaps what justice should be about ….

Management
Alternative Dispute Resolution
 Mediation
 Med/Arb and Arb/Med
 Adjudication
 Expert Determination
 Early Neutral Evaluation
 Mini-arbitration
 Dispute Review Boards
 Pendulum arbitration

Management
Mediation
 Non-binding
 Deal is not imposed
 Efforts aimed at
interests, not rights
 Emphasis on future
relationships
 Quick and (relatively)
cheap

Management
Mediation - Comparison with
litigation/arbitration
 Litigation/arbitration  Mediation
 Decision made by third  Decision made by
party (judge or parties, assisted by
arbitrator) mediator
 Agreement is
 Decision enforceable
contractual, and can
(with some restrictions only be enforced in the
on arbitration) usual ways
 Range of remedies  “Remedies” are
(wider for courts) whatever the parties
want

Management
Relationship with courts
 English courts may penalise
parties who refuse mediation
 Dunnett –v- Railtrack
 Mediation clauses are
enforceable
 Cable & Wireless –v-
IBM
 Scottish courts keep saying they
will follow shortly, but with less
compulsion, but enthusiasm
appears limited to smaller cases
 South Africa has recently taken
the same line as England
 No great history yet in Middle
East, although the concept is
well established in non-
commercial areas

Management
Conciliation
 Similar to mediation, but the conciliator takes
a more proactive approach, and seeks to
promote particular settlements
 The disadvantage is that this goes some way
towards taking the decision-making out of the
hands of the parties

Management
Expert determination
 Particularly good for
technical issues
 The parties allow an
expert third party to
make a decision for
them
 Need to agree whether
this is to be final and
binding, or not.

Management
Early neutral evaluation
 A quick non-binding
review, often by a judge
(possibly retired)
 Quite successful in USA
(notably California)
 Tried in England, very
low take-up

Management
Pendulum arbitration
 Single arbitrator
 Both sides make written submissions
 One or the other must be accepted in total
 This tends to push parties towards a reasonable
position
 Used in Japanese labour relations disputes

Management
Case study – dispute resolution –
Hong Kong Airport
 Infrastructure projects (8)  Underground Line
 Engineer  Engineer
 Mediation  Mediation or arbitration
 Adjudication  Main airport
 Engineer (10 days)
 Project director (20)
 Dispute review board
 Arbitration

Management
Hong Kong airport - results
 Solved before mediation –  50.5%
63
 Solved during mediation –  33%
41
 Solved during adjudication  7%
–9
 Solved in arbitration – 7
 5.5%
 Pending - 5
 4%

Management
Disputes - What not to do
 Some types of self help
are generally frowned
upon 

Management
Good record keeping and notices
 Many disputes are won less by who has the
strongest case, then by who has the best
records, and has served all the necessary
contractual notices

Management
Ethical concerns
 Concerns in relation to business ethics tend
to be focused on tendering and the award of
contracts
 However, identical issues can arise where
claims are settled at inflated sums

Management
Examples
 “Pay me $500,000 and I will sign off all of
your Variation requests” (a true story)
 “Bid low, we will allow you to make it up in
inflated claims later”
 Expenses claimed several times for the same
thing, or with false back up (A KPMG director
in London, now in jail)
 “Allow me to claim overtime that was never
worked, and I will build you a swimming pool”

Management
Audit trails
 This type of unethical behaviour is made
more difficult if you maintain good records
and a proper audit trail on all decisions
 Decisions in major areas should be approved
by more than one manager

Management
Avoiding suspicion
 Be open
 Be transparent
 Do not do “side deals”
 Keep good records

Management
Problems with interest-based
settlements
 It is right to point out an issue with
settlements based on interests, rather than
rights
 It is relatively easy to say “our lawyers said
we would lose, so we settled”
 It is more difficult to say “our lawyers said we
would probably win, but we paid out in our
long-term business interests”

Management
Anti-corruption practices
 What processes do you use to reduce the risk
of corrupt or unethical behaviour when
dealing with claims and disputes?

Management
How to avoid claims
 Serve notices
 Keep on top of change management
 Deal with issues as they arise

Management
How to avoid disputes
 Be clear about what you are
doing and why
 Be open with other parties
 Understand the contract
requirements
 Serve notices
 Keep records

Management
How to avoid litigation and arbitration
 Repeat the previous two slides!
 Never rush into litigation or arbitration
 Use stage negotiation techniques
 Always work out what a dispute will cost you,
and develop a BATNA
 Remember winning will always cost you
money and time
 Only fight on principle when it is really
important
Management
Negotiation exercises
 We will now try out
some simple exercises
looking at some of the
different issues that
have been raised
 There are no prizes
 Just have some fun –
you can behave in any
way you like!

Management
Open forum
To complete the programme; do you have any questions or
clarifications?

Management
CLAIMS AND
COUNTERCLAIMS
MANAGEMENT
OCTOBER 2009

Management

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CLAIMS AND

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What do you think is a claim in a

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 Petroplus sold 29 – 30,000 MT of high sulphur fuel oil and 1 –

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 Contractual right, no consent  Right arises from the general

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