VU Claims for Additional Payment Under the Red, Yellow and Silver Books 1999 by Edward Corbett Corbett & Co, London Introduction Claims under the FIDIC contracts have been an integral part of the risk allocation philosophy for which the FIDIC contracts are renowned. The philosophy is to allocate risks to the party best able to control the risk or to cope with it should it arise, This is the basis for the “fair” reputation of these contracts and is true of both the old 4" Edition and the new Red and Yellow Books. The Silver Book takes a different approach, The secondary purpose of the claims provisions is to try to ensure that tender prices do not include large contingency figures for risks placed on the Contractor. The Employer trades the price certainty that might be delivered by a lump sum contract for a lower tender price and the chance ~ if risks do not eventuate — of a lower out-turn price. The result is that the Employer pays in full for risks that turn up rather then paying a premium whether or not the rises turn up. s0 asa natural part of the contracting process and It should therefore be appreciated that claims a should not be taken as the outbreak of hostilities between Engineer and Contractor, as is sometimes the perception Red Book Claims ‘The principal innovations of the Red Book could be itemised as follows © The Engineer now acts in the interests of the Employer and no longer has a duty of impartiality. Nevertheless, he has an obligation to be fair when dealing with most claims for payment by the Contractor;C © Employer's claims against the Contractor now have to be made under the terms of the contract; © Failure by the Contractor to give a 28-day notice is fatal to his claim; * The Engineer is obliged to respond to a claim within 42 days; * The Employer may claim an extension of up to two years of the Defects Notification Period. Much of the claims regime will, however, be familiar to those who have experience of the 1987 Red Book. Also familiar is the scattering of the claims provisions through the contract, The Graftsmen no doubt considered and rejected the approach adopted by the UK's Institution of Civil Engineers in their New Engineering Contract where the so-called “Compensation Events” are listed in one clause. e Role of the Engineer Under the Red Book the Engineer is not required to be impartial. On the contrary, Clause 3.1 (Engineer's Duties and Authority) states:- “Except as otherwise stated in these conditions: (a) whenever carrying out duties or exercising authority, specified in or implied by the Contract, the Engineer shall be deemed to act for the Employer”. ‘The principal (perhaps only) exception is Clause 3.5 whiich states as follows:- Determinations 3.5 ‘Whenever these Conditions provide that the Engineer shall proceed in accordance with this Sub-Clause 3.5 to agree or determine any matter, the Engineer shall consult with each Party in an endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances. ‘The Engineer shall give notice to both Patties of each agreement or determination, with supporting particulars, Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 [Claims, Disputes and Arbitration]Clause 3.5 is invoked in some 24 clauses. Whenever a financial issue arises, Clause 3.5 is invoked. The notable exceptions are Clause 8.4 (Extension of Time for Completion), Clause 14.6 (Issue of Interim Payment Certificates) and Clause 15.2 (Termination by Employer). ‘The Engineer is obliged to consult with each party to try to reach agreement. Failing agreement he has to make “a fair determination in accordance with the Contract”. ‘The first question that arises is whether impartiality and fairness are different. It might be said that impactiality is a question of approach whereas fairness concerns the result. An impartial Engineer is one who weighs the interests of Employer and Contractor evenly and who could, through a mistake, make an unfair decision. An Engineer or Project Manager working in the Employer's interest can nevertheless make a fair decision which might be defined as a decision of wiaich an independent Arbitrator would approve. ‘The next question is whether the Engineer in fulfilling his obligation “to endeavour to reach agreement” has authority to negotiate on the part of the Employer to achieve a compromise to resolve an issue. The answer appears to be negative because Clause 3.1 (Engineer's Duties and Anthorities) makes clear:-"“the Engineer shall have no authority to amend the Contract” and “(b) the Engineer has no authority to relieve either party of any duties, obligations or responsibilities under the Contract”. This is reinforced by the fact that in the absence of agreement the Engineer is obliged to make a fair determination “in accordance with the Contract". However, the Engineer is obliged to consult both parties when trying to achieve agreement and prior to making, a determination. This may enable him to obtain the Employer's specifi authority for a compromise which would otherwise offend the restrictions on the Engineer's authority under Clause 3.1 For the first time, the Engineer is now given a specific time for the performance of his functions in relation to claims for time and money. Under Clause 20.1 which is examined in more detail below, he is given six weeks to respond to claims following receipt of the Contractor's particulars. This is in contrast to the implied obligation under the previous contracis to respond, within a reasonable time, an obligation that was sometimes interpreted very liberally by some Engineers. Nor is the Engineer permitted to meet a Contractor's claim with a bland rejection. Detailed comments are required if a claim is to be disapproved. This higher degree of regulation is no doubt intended to replace the impartiality that was required of Engineers under the earlier forms,‘The Engineer has six weeks to approve or disapprove the claim. In the event of disapproval he must give detailed comments. He may not gain time by asking for further particulars because the clause requires a response in principle in any event within the six weeks. Contractor's 20.1 Claims Determination proceeds under Clause 3.5 (Deten Employer’s Claims Within 42 days after receiving a claim or any further particulars supporting a previous claim, or within such other period as may be proposed by the Engineer and approved by the Contractor, the Engineer shall respond with approval, or with disapproval and detailed comments, He may also request any necessary further particulars, but shall nevertheless give his response on the principles of the claim within sueh time, ations) as described above. Clause 2.5 (Employer's Claims) provides as follows: Employer's Claims2.5 If the Employer considers himself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract, and/or to any extension of the Defects Notif: ication Period, the Employer or the Engineer shall give notice and particulars to the Contractor. However, notice is not required for payments due under Sub-Clause 4.19 (Electricity, Water and Gas], under Sub-Clause 4.20 [Employer's Equipment and Free- Issue Material], or for other services requested by the Contractor. The notice shall be given as soon as practicable after the Employer became aware of the event or circumstances giving rise 10 the claim. A notice relating to any extension of the Defects Notification Period shall be given before the expiry of such period.QQ The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount and/or extension to which the Employer considers himself to be entitled in connection with the Contract. The Engineer shall then proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine (i) the amount {if any) which the Employer is entitled to be paid by the Contractor, and/or (ii) the extension (if any) of the Defects Notification Period in accordance with Sub-Clause 11.3 [Extension of Defects Notification Period). This amount may be included as a deduction in the Contract Price and Payment Certificates. The Employer shall only be entitled to set off against or make any deduction from an amount certified in @ Payment Certificate, or to otherwise claim against the Contractor, in accordance with this Sub-Clause. Employer's claims could be broadly categorised into liquidated damages, other claims specifically provided for by the contract and claims for damages for breach of contract by the Contractor. Under the 1987 Red Book, liquidated damages and general damages for breach of contract would not normally be certified by the Engineer by means of deductions on certificates. Only claims specifically provided for in the contract would bring about a reduction in the sum certified. Now, all three categories of claims are intended to be dealt with under the contract. Acclaim for “This is the significance of the words “or otherwise in connection with the Contract”. an extension to the Defects Notification Period must also follow the procedure under Clause 2.5. ‘The procedure starts with a notice by the Engineer or the Employer to the Contractor. In contrast with the 28-day limit for the Contractor’s claims notices, the Employer must give notice “ as soon as practicable after the Employer became aware of the event or circumstances". The notice must, however, include particulars and substantiation of the claim which may considerably increase the period of time within which it is “practicable” for such notice to be given. The Engineer then tries to agree the claim with the Contractor under Clause 3.5 or makes his fair determination. At that point some uncertainty creeps in following the determination, the amount of the Employer's claim “may be included as a deduction Contract Price and Payment Certificates”. ‘The “may” suggests that the Employer and the Engineer have choice, either to deduct thedetermined amount from the calculation of a Payment Certificate or to deduct it from a certified payment. The clause is not clear on this point. It appears that the Employer has three options following a determination: to ask the Engineer to deduct the amount in his calculation of the next payment certificate, to deduct the amount from a sum payable under a Payment Certificate or to make a separate claim against the Contractor for payment. Clause 14.3 (Application for Interim Payment Certificates) provide that the application by the Contractor for payment should include “(f) any other additions or deductions which may have become due under the Contract or otherwise”. ‘The Employer is obliged to pay the Contractor under Clause 14.7 (Payment) and sanctions are provided for non-payment under Clause 14.8 (Delayed Payment), Clause 16.1 (Contractor's Entitlement to Suspend Work) and Clause 16.2 (Termination by Contractor), Although the Employer appears to be entitled under Clause 2.5 to recover the determined amount of any claim by deduction from a sum certified by the Engineer, there appears to be some risk in doing so and he would be well advised to ask the Engineer to deduct the sum to which he is entitled from the next certificate. The final sentence of clause 3.5 endeavours to exclude any right to make deductions from sums otherwise payable, the common law's “set off”. Under the common law, a contract needs to use express and clear words if the common law right of set off is to be excluded. Christopher Seppala , the legal advisor to the draftsmen, takes the view that these words are clear enough to achieve that result and this author shares that view with some hesitation: we will have to wait and see. Table 1 to this paper is a list of the Employer's Claims or other rights of deduction, Contractor's = Red Book Table 2 is a list of all clauses under which the Contractor might make a claim. Table 3 is a list of other clauses which may entitle the Contractor to additional payments, Table 2 confirms that the clauses are scattered through the conditions,One of the first clauses is Clause 2.1 (Right of Access to the Site) which is in a typical format. If the Contractor suffers delay or incurs costs as a result of late possession of the site, he is to give notice to the Engineer and is entitled to additional time and money provided that he complies with Clause 20.1. The Engineer determines the entitlement under Clause 3.5 (Determinations). ‘The prineipal variation from clause to clause is whether the Contractor is entitled to “reasonable | profit” in addition to “Cost” which is defined as “all expenditure reasonably incurred (or to be incurred) by the Contractor, whether on or off the Site, including overhead and similar charges, but does not include profit”. ‘Some clauses have additional notice requirements to those set out in Clause 20.1 although it is not a free of doubt, itis this author's view that the expression “the Contractor shall give notice to the nee Engineer and shall be entitled subject to sub-clause 20.1 (Contractor's Claims) [additional time and money)" which is common to many of the claims clauses, does not require the Contractor to give any notice other than that provided for in Clause 20.1. Clause 20.1 (Contractor's Claims) starts as follows:~ Contractor's 20.1 If the Contractor considers himself to be entitled to any extension of Claims the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the the event or circumstance giving tise to the claim, The not be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the ‘event or circumstance. If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. Otherwise, the following provisions of this Sub-Clause shall apply. ‘The notice is to be given within 28 days of when the Contractor became aware or should have become S| aware of the relevant events. This is in contrast to the 1987 Red Book and Clause 53 where the timeran from the event itself. Often there will be no significant difference but there will be cases where there is vigorous debate over the precise moment when the 28 days began to run, The test is objective so it will always be open to the Employer to argue that the Contractor should have been aware of the event even if the Contractor insists that he was not actually aware of it. This debete will be particularly intense given the sanction, Whereas 53.4 of the 1987 Red Book provided an often insignificant sanction for late notification of in 28 days, he claims, Clause 20.1 takes the opposite approach, If a Contractor fails to give notice wi loses entirely his claim and the Employer is released from his liability. This sanction appears to apply also to variations which are instructed under Clause 13.1 (Right to Vary). Clause 13 provides no other notification regime. It may not be every legal system that would permit an Employer to have the benefit of additional work ordered as a variation without obliging him to pay for it. Any other failure to comply with a notice provision in a claims clause or other time limits within this Clause 20.1 has no particular consequence unless “the failure has prevented or prejudiced proper investigation of the claim”. ‘These words may appear to give scope for argument but in practice, if the initial 28 day notice has been given, it will rarely occur that the Employer is prejudiced by the lack of subsequent paperwork. ‘The remainder of the clause is less dramatic calling for records to be kept and for a fully detailed claim ‘with full supporting particulars to be provided in effect within 14 days of the initial notice. Unforeseeable physical conditions For those of us familiar with “Clause 12 claims” the draftsmen have thoughtfully numbered the ground conditions clause 4.12. The principal novelty about this clause is the ability of the Employer to set off against any ground conditions claim by the Contractor the savings that a Contractor may have made from unexpectedly good ground conditions. Thus if rock was found ‘where none was expected on one part of the site but soft material was found where rock was foreseen, the Contractor's claim may be discounted or eliminated entirely. The clause starts by defining “physical conditions”:~ Unforeseeable 4.12 -—_In this Sub-Clause, “physical conditions” means natural physical Physical conditions and man-made and other physical obstructions and Conditions pollutants, which the Contractor encounters at the Site when executing the Works, including sub-surface and hydrologicalconditions but excluding climatic conditions. The words “at the Site” limit the physical conditions to on-site problems. Although rare in practice, it was certainly possible for off-site problems to form the basis for a claim under the 1987 Red Book. ‘The central part of the clause is in familiar terms:~ “If the Contractor encounters adverse physical conditions which he considers to have been Unforeseeable, the Contractor shall give notice to the Engineer as soon as practicable.” “Unforeeseeable” is, for the first time, defined as “not reasonably foreseeable by an experienced Contractor by the date for submission of the Tender”. This definition appears to have been inserted as foreseeability is used elsewhere namely clause 4.6 (Co-operation), clause 8.4 (Extension of Time for Completion) at (d) “Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or Governmental actions” and Clause 8.5 (Delays caused by Authorities). This additional use of the concept of unforeseeability may be considered to be unfortunate, This is partly because there is always scope for argument as to what is foreseeable; it is also because the test is rarely if ever applied literally. Most experienced contractors can foresee almost anything if they put their mind to it. ‘The true test which is applied by Arbitrators in practice is whether the Contractor should not only have foreseen a particular contingency but should also have made some financial or practical allowance for that contingency. If the problem was foreseeable but it would be unteasonable for a Contractor to add to his tender price and/or to take some practical step to deal with the contingency, then most Arbitrators will support the Contractor's claim. ‘The Contractor is obliged to give notice as soon as practicable and is obliged to continue working. The clause makes clear that overcoming the physical condition is the Contractor’s, problem unless the Engineer chooses to intervene with an instruction. This resolves the difficulty in previous Red Books where Engineer and Contractor would both stand back expecting the other to solve the problem. ‘The netting-off provision will give rise to many arguments:-“However, before additional Cost is finally agreed or determined under sub-paragraph (ti), the Engineer may also review whether other physical conditions in similar parts of the Works (if any) were more favourable than could reasonably have been foreseen when the Contractor submitted the Tender. If and to the extent that these more favourable conditions were encountered, the Engineer may proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine the reductions in Cost which were due to these conditions, which may be included (as deductions) in the Contract Price and Payment Certificates. However, the net effect of all adjustments under sub-paragraph (b) and all these reductions, for all the physical conditions encountered in similar parts of the Works, shall nat result in a net reduction in the Contract Price.” The test for a discount is subtly different as it does not use the defined term “Unforeseeable” and therefore the “experienced Contractor” phrase does not apply, This suggests a more subjective testi. should this Contractor have foreseen the more favourable circumstances. Debate will also take place over what “more favourable conditions” means and in respect of what are * similar parts of the Works’ ‘There is of course an inherent dissimilarity between a part of the works containing adverse physical (ions and another part containing more favourable conditions. ‘The Employer is not allowed to gain overall so if the works are altogether more benign than could have been foreseen, he is still obliged to pay the full price. ‘The Contractor's notice is required to set out the reasons why the physical conditions were Unforeseeable. ‘The answer will often be that the physical conditions were not described in the site investigation report in the tender document. Clause 4.10 (Site Data) states:Site Data 4.10 The Employer shall have made available to the Contractor for his information, prior to the Base Date, all relevant data in the Employer's possession on sub-surface and hydrological conditions at the Site, including environmental aspects. ‘The Employer shall similarly make available to the Contractor all such data which come into the Employer's possession after the Base Date. The Contractor shall be responsible for interpreting all such data, ‘The obligation on the Employer is broader than in the 1987 Red Book. Now “all relevant data in the Employer's possession” must be made available whereas it was only data from relevant investigations that had to be disclosed in the past. Thus, for example, the Employer's files relating to other projects executed in the area may be relevant to physical conditions on the site but are not themselves investigations and would not have had to be disclosed previously. The important limitation on a tenderer’s investigation obligations is retained: such investigation must be done then “ to the extent which was practicable (taking account of cost and time)..." In summary, there is little in the Red Book that will reduce the broad scope for argument that is the traditional basis for many claims about unforeseen ground conditions. Resolution of Claims Clause 20 provides the dispute and resolution mechanism which will be dealt with in detail elsewhere. In outline, a dispute over the Engineer's determination of a claim is first referred to a Dispute Adjudication Board for its decision which is to be given within the twelve weeks. If either party issues a notice of dissatisfaction within four weeks of the decision, arbitration may be commenced but not before the expity of an eight week cooling-off period in which amicable settlement by negotiation or some other process may be attempted. Silver Book No Engineer. The Silver Book is intended as a two-party contract. There is no certification. Clause 3 is entitled “Employer's Administration” and permits the Employer to delegate to an Employer's Representative or to assistants,Clause 3.5 (Determinations) provides that agreement should be reached if possible in relation to claims and extensions of time but otherwise the Employer “shall make a fair determination in accordance with the Contract”. However, departing from the other forms, if the Contractor gives notice of dissatisfaction with the etermination within 14 days, he is not bound by it. Bither party may then refer the matter to the DAB. This will mean that the Contractor may be able to avoid the consequences of an adverse decision by the Employer for 14 weeks or more, while the DAB reaches its decision. Ground Conditions. Under clause 4.10 (Site Data), the Employer is to have handed over all relevant site data, “The Contractor shall be responsible for verifying and interpreting all such data. The Employer shall have no responsibility for the accuracy, sufficiency or completeness of such data, except as stated in Sub-Clause 5.1 [General Design Responsibilities].” Clause 4.12 (Unforeseeable Difficulties) states that “Bxcept as otherwise stated in the Contract: (a) the Contractor shail be deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the Works: (0). by signing the Contract, the Contractor accepts total responsibility for having foreseen all difficulties and costs of successfully completing the Works; and (©) the Contract Price shall not be adjusted to take account of any unforeseen difficulties or costs.” ‘This seems clear but there is an impossibility clause at clause 19.7 (Release from Performance under the Law) which discharges the Contractor from further performance “if an event or circumstance outside the control of the Parties .. arises which makes it impossible or unlaveful for either or both Parties to fulfil its or their contractual obligations .This provision may well come under pressure where ground conditions render the works impossible to achieve as intended. Clause 5.1 is referred to above in clause 4.10 [Site Data] and warrants being set out in full:- 5.1 General Design Obligations The Contractor shall be deemed to have scrutinised, prior to the Base Date, the Employer's Requirements (including design criteria and calculations, if any). The Contractor shall be responsible for the design of the Works and for the accuracy of such Employer's Requirements (including design criteria and calculations), except as stated below. The Employer shall not be responsible for any error, inaccuracy or omission of anty kind in the Employer's Requirements as originally included in the Contract and shall not be deemed to have given any representation of accuracy or completeness of any data or information, except as stated below. Any data or information received by the Contractor, from the Employer or otherwise, shall not relieve the Contractor from his responsibility for the design and execution of the Works. However, the Employer shall be responsible for the correctness of the following portions of the Employer's Requirements and of the following data and information provided by (or on behalf of) the Employer: (a) portions, data and information which are steted in the Contract as being immutable or the responsibilty of the Employer (0). definitions of intended purposes of the Works or any parts thereof, (0) criteria for the testing and performance of the completed Works, and (d) portions, data and information which cannot be verified by the Contractor, except as otherwise stated in the Contract. This clause places almost total design responsibility on the Contractor, whether the design originates from his own designers or from the Employer's team. The concept of this clause has the metit of certainty. The clause secks to remove all possible argument about responsibility for the resulting works. ‘The short list of exceptions was extended after criticism. The performance criteria to be achieved and the intended purpose are plainly the Employer's responsibility but are very unlikely to be “wrong” in any real sense, They are the basis of the contract. Exception (d) is vague and may be dangerous. This is not limited to the Employer's Requirements but extends to data and information provided. If it cannot be “verified” by the Contractor, it is the Employer’s risk. When should it have been verifiable? At tender stage or, asthe present tense “cannot” suggests, at any time thereafter? What does “verified” mean? To what degree of certainty should the data be capable of being verified? If, despite the responsibility for verifying the data, it is not possible to verify a site investigation short of executing the works and digging up the entire site, is the risk retumed to the Employer? A further site investigation by the Contractor could reduce the risk of error in the Employer's investigation but is this “verifying” it. Employers would be well advised to remove this loophole by removing (d) or stating clearly in the contract what che extent of (d) is intended to be. Other risk allocation. Perhaps surprisingly, the only claim present in the other major books but absent from the Silver Book relates to setting-out errors as setting-out is entirely the Contractor's responsibility (clause 4.7). Costs and delays resulting from early take-over by the Employer is not included because clause 10.2 prohibits early take-over without agreement. Conelusion FIDIC’s Red Book carries on the traditional FIDIC approach to the allocation of risk, The claims regime has been modernised and rationalised without losing the familiar fairness that made the 1987 Red Book so generally accepted. Eliminating all areas of potential dispute would not have been a realistic objective for the draftsmen and the conditions will not bring to an end the intemational claims industry. On the contrary, there will be much debate, particularly in relation to the 28-day time limit for claims and the favourable ground conditions concept. ECC