Contract Practice

Assessment Module BNV 6101 Contract Practice

Name of the Student P.G.G.C.N.Gangewaththa

University ID no. S18159019

Branch Kandy

Name of the Lecturer Mrs.Kanthie Pethiyagoda

Word count 4171

Date of Submission 16/06/2019

Table of Contents

Part Ⅰ Obligations of the Contractor and Sub-Contractor .................................................................. 2

No Damage for Delay Clause Enforced Against Contractor Claim ................................................ 2
Contractors responsibility for Injuries sustained by sub-contractor employee.............................. 3
Part Ⅱ Different methods of making payments to contractors under different form of contracts .. 5
Advance payment................................................................................................................................... 5
Interim payment ...................................................................................................................................... 6
Final Payment ......................................................................................................................................... 8
Retention ................................................................................................................................................. 9
Part Ⅲ-1 Avoidance of Disputes in Construction Projects................................................................. 11
Part Ⅲ-2 Alternative Dispute Resolution methods available in construction Industry................... 14
Negotiation ............................................................................................................................................ 14
Mediation ............................................................................................................................................... 15
Conciliation ............................................................................................................................................ 16
Arbitration .............................................................................................................................................. 17
References ................................................................................................................................................ 18

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Part Ⅰ Obligations of the Contractor and Sub-Contractor

Legal liabilities of each party engaged in a contract agreement can be defined as

contractual obligations. For a proper completion of exchange of an item or service of
value, between two parties, some expectations must be met. These expectations are
defined as terms of the contract. A breach of a contract may occur if either part fails to
meet these expectations. If there is a breach of contract occurred the damage is been
awarded to the non-breaching party.

Following are some case laws which regard to the given scenario,

No Damage for Delay Clause Enforced Against Contractor Claim

The contractor was constructing 3 buildings for a collage campus. The contractor’s work
fell behind schedule due to numerous errors, conflicts and omissions in the owner
provided design documents. The contractor couldn’t not request for a time extension
because in the contract it was agreed that there was no damage for the delays. And
also, in the contract it was mentioned if such delay occur contractor shall inform to the
Employer within 10 days after the occurrence. And an event of time extension the
contractor shall not be entitle for additional mitigation or compensation liquidated
damage for any delay. But the contractor didn’t make any written document stating an
extension of time. The owner revealed that the project could not be completed in time.
So, the Owner terminated the project and gave to a new contractor then the contractor
demanded the outstanding amount from the owner but the owner deducted the
procurement cost paid to the new contractor and also liquidated damage for 188 days.
So, in response to owner’s decision the contractor field suit seeking $3.4 million. In this
complain the contractor accepted the delays but claimed that those delays were caused
because of many errors, conflicts and omissions in the owner provided design
documents.

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In the trial court, case was assigned to an arbitrator. The arbitrator found that the delay
of the contractors could be justified because of the owners ' mistakes. And also, the
arbitrator concluded that the owner had breached the contractual duty and the
contractor is excused from the liquidated damages.

The arbitrator's decision was appealed to the Ohio Court of Appeal by the Ohio court of
claims. The Court of Appeal then reversed the trial court, and in the Ohio Supreme
Court, in the case of Dugan & Meyers Construction Company v. Ohio Dept. of Admin
Services, 113 Ohio St.3d 226, the court of appeal's decision to overturn the trial court
was confirmed.

In this case, the Ohio High Court refused to review and comment on the findings of the
trial court that the ‘plans contained many errors and inaccuracies and could not be built
as provided by the owner’. Instead, the court stated that, “the express language of the
no-damage-for –delay clause renders irrelevant the cause of the delay. But The
contractor failed to convince the court that the failure to request an extension of time
was harmless to the Owner. For these reasons, the court held against the contractor.
(Holland, n.d.)

Contractors responsibility for Injuries sustained by sub-contractor employee

The overall safety of the site of a project is a responsibility of the contractor. Which
include the responsible for the acts that cause injuries to contractor employees. In some
instance the contractor is responsible for the sub-contractor’s employees’ injuries even
though these injuries not directly caused by the Contractor. Some courts impose that
the contractor is viable of sub-contractor injuries while the other courts states that If the
contractor did not exercise effective control over the work of the sub-contractor the
contractor is not viable for sub-contractor injuries.

In McCarthy v. Turner Construction, 953 N.E. 2d 794 (NY 2011), The Court held that the
contractor did not have a general legal duty to compensate the project owner for the

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injuries suffered by the subcontractor because the contractor did not supervise or
control the subcontractor's work.

The contractor was building a tenant store (not the owner of the project) The contractor
took a sub-contractor for a particular job. A subcontractor employee fell off from a ladder
and got injured and the sub-contractor sued the owner for damages. The owner then
sued the contractor for contractual compensation, legal compensation and damages for
which the owner had been found vicariously liable under the state’s statutory law.

Even though the Contractor worked with the subcontractor whose employee was
injured, the court found that the contractor had no supervisory authority over the
subcontractor's work and that it did not provide any tools or ramps to subcontractors
who had worked on the site.

In the McCarthy v. Turner case, the court held that, since the contractor in this case "did
not supervise or direct the work of the injured plaintiff, [Contractor] is not required to
indemnify the real state owners under the common law. (ZurichNA, 2013)

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Part Ⅱ Different methods of making payments to contractors under different form
of contracts

Payments in the construction industry are granted in several stages. The advance
payment will be granted at the beginning of the project, Interim payments are paid for
the work done during the construction, the final payment is granted after completing all
the construction and snag works of the project and The Retention money is released
after ensuring the completed work within the agreed time period. In this task different
payment methods are compared with condition of contract document, FIDIC 1999 RED
Book, JCT 2011 and nec3 2013.

Advance payment

Advance payment can be called as an interest free loan from the Employer to the
contractor for the mobilization of the contractor.

According to FIDIC clause 14.2, The employer shall make an advance payment to the
contractor. The advance payment is deducted as instalments through percentage
deduct from the interim payment Certificate. The contractor must provide a performance
guarantee to the employer with a guarantee in the amounts and currencies that equals
payment in advance, and the contractor should ensure that the guarantee is valid until
the advance payment is repaid to the employer.

According to JCT Clause 4.6, The employer pays in advance to the contractor in the
date, and the advance payment is to repaid to the employer as described in the contract
particulars. If advance payment bond is stated in the contract particulars, the advance
payment shall only be paid to the to the contractor after providing the advance payment
bond to the Employer.

According to nec Option X14, The Employer should pay the stated amount of advance
payment to the contractor as set out in the contract data within four weeks of the date of
Contract and if advance bond is required within four weeks there after the Employer

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shall receive the advance payment bond. The Contractor should repay the advance
payment as installments to the employer until the total amount paid in advance payment
is repaid.

Interim payment

According to FIDIC clause 14.3, The Contractor shall provide the engineer with six
copies of the interim Payment certificate at the end of each month detailing the amount
that the contractor is entitled to with the approval of the engineers with supporting
documents containing the monthly progress report. The statement shall include,

a) Estimated value of work executed up to end of the month with necessary contractor
documents.
b) Any amount to be added or deducted from changes in legislation and cost.
c) Amount to be deducted for retention.
d) Any amount to be added or deducted for advance payment.
e) Any amount to be added or deducted for plant and machinery
f) Any other additions or the deductions that have become due under the contractor or
otherwise.
g) Deduction of the amount approved in all previous interim payment certificates.

According to JCT Clause 4.7,

a) Interim payment shall be made to the contractor by the employer as stage payments
or periodic payment.
b) Up to the due final payment date, monthly due date of interim payment is 7 days
after the relevant Interim payment Valuation date.
c) In relation to each interim payment, contractor shall make Interim payment
application stating the contractors considered to be due to the employer at the due
date where the interim payment certificate is received before the relevant Interim

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 valuation date. If the Interim payment certificate received later, the due date shall be
7 dates after the date of received by Employer.
d) Each Interim payment application shall be accompanied by the Employer’s
requirement.
e) The employer shall give a payment notice stating the amount due to the contractor
not later than 5 days after the due date to the contractor.

According to nec Clause 50.1 to 50.5 The project manager assesses the amount due
(price of work done to date) at each assessment date. Other amount to be paid to
contractor & the less amounts to be paid or retained by the contractor. Also, any law
involving taxes is to be paid by the employer to the contractor is include in amount due.
If there isn’t programmed in contract data, the project manager retained one quarter of
the price for the work done to date from the due amount unlit the contractor provides the
information required by the contract. The Project manager gives detail to the contractor
how the amount due has been assessed. Any wrongly assessed amount will be
corrected in later payment certificates by the project manager.

According to nec Clause 51.1 to 51.4 Payments will be certified by the project manager
within 1 week of each assessment date. The first payment is called the amount due and
the other payments are called the change in amount due since the last payment.
Certified payments will be paid to the contractor within 1 week of of assessment date or
within the period stated in the contract data. If any delay occurs in certifying due to the
project manager an interest is to be paid for the late time period. If the amount due is
corrected in later payment certificate by the project manager either in relation to the
mistake or following decision of the tribunal or the adjudicator. Here the interest of
corrected amount is to be paid from incorrect amount is certified until the corrected
amount is certified. The interest rate is calculated in daily basis.

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Final Payment

According to FIDIC clause 14.11, The contractor shall submit final payment certificate
with 6 copies including supporting documents within 56 days after receiving
performance certificate. This include the total value of work done and any further sums
which the contractor consider to be due. If the Engineer disagree with any part of final
statement it is require to make the changes with both parties’ agreement and then
prepare the agreed statement. If any changes are done with both parties’ agreement it
means there is a dispute.so the Engineer should submit the statement with agreed parts
to the employer. If the dispute is finally resolved, the contractor shall prepare and submit
a final statement to the employer.

According to JCT 2016, Clause 4.24 After practical completing all the works contractor
should submit the final statement with supporting documents. The final statement
should specify the adjustments made to the contract sum and sum of amount paid to
the contractor by the employer. In final payment there can be a due amount to be paid
to either to the contractor or the employer in such case details of all adjustments should
provide. The final statement is to be submitted within 3 months after practical
completion of the project if the contractor is unable to submit the final statement 2
months additional period is given to the contractor and if the contractor was unable to
submit the final statement during that time period too, the employer himself may issue
employers final statement. The due date of the final payment is dated one month after
the end of correction period, date state in the notice of completion or the date of
submission of final statement.

According to nec there is no provision for final payment. The payment method is
different when compare to the FIDIC & JCT 2016.All the payments are done at each
assessment date, where the amount due (Interim payment) is the price of work done to
date.

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Retention

According to FIDIC clause 14.9, First half of the retention shall be certified for the
payment to the contractor by the Engineer after issuing Taking over certificate to the
work. And if the Taking over certificate is issued to a complete section or a part, a
percentage of a retention money shall be certified & paid to the contractor. The
outstanding balance of retention shall be certified by the Engineer after expiry of the
notice of defect period. And if the Taking over certificate is issued to a section,
proportion of second half shall be certified and paid after expiring the Defect notification
period of that section. These proportion shall be two fifth (40%) this proportion is
calculated by dividing estimated contract value of section by the estimated final contract
price However, if the work works are not complete, the Engineer shall withhold the
estimated cost certificate until the work is completed.

According to JCT 2016, Clause 4.17 The contractor shall provide and maintain the
Retention bond in flavor of employer from a guarantee approved by the employer. If the
contractor is unable to provide or maintain the retention bond the retention deduction
shall apply in respect of interim payment issued after the failure date. And if the
contractor provides the required bond then any retention deduction during the period of
failure is due and to be released in next due date. If the retention amount that would
have been deducted exceed the total amount stated in retention bond, the contractor
must arrange the guarantee for the total amount equivalent to the amount not covered
by the bond which may be deducted as retention.

According to JCT 2016, Clause 4.18 During the period prior to issuance of the
completion notice, the retention which the employer has been deducted shall be the
percentage of total or potion of amount including in gross valuation for any interim
payment which is applicable for work, site materials & listed items. In some occasion
retention maybe deducted from total amount where the works haven’t completed or
from the potion of the total amount that relate to in completed works. Half of retention

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percentage shall be deducted where the practical completion of works has been done,
but the notice of completion has not been issued or if the portion of practical completion
have been done and haven’t issued notice of completion for that portion.

According to nec X 16.1 The retention is retained from each amount due until the
completion of entire work or up to the date Employer takes over whole work.

According to nec X 16.2 The amount retained is halved in the assessment made at
completion of whole work or after the date Employer takes over whole work. This
amount is retained until the defect certificate is issued.

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Part Ⅲ-1 Avoidance of Disputes in Construction Projects

According to the researchers conducted worldwide It has been identified that the failure
in following conditions of the contracts by the Employer, Engineer and the client is the
main reason for construction disputes. Several types of conditions of contract (COC) are
available which can be used in accordance with the type of project most commonly
used COC are FIDIC, JCT and nec. The most common COC used worldwide is FIDIC
because FIDIC contains many additions which is suitable for different types of project.

In FIDIC red book 1999-COC for construction, the areas where the responsibilities of
each party and the areas where a dispute might happen are explained. The main areas
which explains the disputes and responsibilities are explained in following sections,

FIDIC clause 1.9 Delayed drawings or instructions

Delays in drawings or instructions could cause project delays because without the
drawing or instruction the contractor cannot continue the work at site. And also, this will
cause to increase the cost of the project. As a result the contractor may ask for project
delay claims. So, if there is a delay occur in drawings or instruction a dispute may occur.
To avoid these types of disputes,

• The Engineer should be able to give the contractor the requires drawings and
instructions as soon as the contract begins.
• The contractor shall inform (by a notice) to the engineer that delay or dispute may
occur if the drawings and specifications did not receive on time. The notice shall
include the reasons and when the documents should issue.
• If such delay occur the engineer shall give the contractor an extension of time and a
reasonable cost-plus profit for the delay.
• The contractor should submit proper documents and submit without a delay to
Engineer. Because the error by the Engineer may cause due to a delays or errors in

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 contractor’s documents. In such cases the contractor should know extension of time
or cost-plus profit cannot be claim from the Engineer.

FIDIC clause 2.1 Right of access to the site

Granting contractor, the right access and possession of all parts of the site by the
employer to the contractor throughout the project is very essential because if there’s
any delay occurred in providing the right of access to the site it may cause to either
project delay or cost overrun. So, if there is an error occur in providing right of access to
the site a dispute may occur. To avoid these types of disputes,

• The Employer must be able to grant the contractor access to all parts of site and its
possession as soon as the contract is awarded.
• The contractor should give the Employer the contractor performance security as
soon as the contract is award because the Employer may hold such possession of
giving access to the site until he receives the performance security.
• The contractor shall inform (by a notice) to the engineer that if there is a delay in
granting access and possession of all parts of the site by the employer. The notice
shall include the reasons and when the documents should issue.

FIDIC clause 4.12 Unforeseeable physical conditions

In construction there are physical conditions such as natural physical conditions, man-
made physical conditions, physical obstructions and pollutants. Contractors may meet
with these types of physical conditions when carrying out the work at site. These
conditions can cause project delays and cost overrun. So, if there is an Unforeseeable
physical condition arises at site a dispute may occur if the contractor does not notice the
Engineer about these types of conditions. To avoid these types of disputes,

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• The contractor should inform (give notice) the Engineer as soon as if these types of
situations occurred in the site with the detail of the physical condition and why the
contractor consider them to be unforeseen.
• The engineer should give the contractor the instructions for such conditions as soon
as possible to avoid further delays.
• In these types of situations, the contractor shall ask for a time extension of the
project and payments for such costs. The Engineer shall determine to what extent
these physical conditions were unforeseen and give the contractor a fair solution.

FIDIC clause 14.7 Payments

In construction industry many disputes occur in relate with the payments. To avoid
disputes relating to the payments.

• The Employer shall pay the 1st installment of the advance payment within 21 days
after receipt of the letter of acceptance or within 42 days after the issuance of the
document to the contractor.
• The employer shall pay Interim payment certificates and final payment certificate
within 56 days after the Engineer has received the certificate with all the supporting
documents.

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Part Ⅲ-2 Alternative Dispute Resolution methods available in construction
Industry

Dispute arises

Not Conciliation/ Not

Negotiation Arbitration
settled Mediation settled
Settled Settled
Settled

Stop Stop
Stop

Figure 1: Flow diagram of Alternate Dispute Resolution application

Negotiation

Negotiation is the most familiar method in ADR. In Negotiation two parties discuss about
the dispute and discuss each other’s requirement and reach out to a solution that both
parties accept and settle the differences between both parties. This is a very common
method in Dispute Resolution (DR) because most of the time the negotiation take place
throughout the project time period mostly for different minor matters occur during the
construction.

In negotiation no party is forced to participate, negotiation can involve 2,3 or dozens of

parties, there is no prescribe rules in negotiation, the parties can negotiate either
privately or publicly and negotiation is very flexible where the scope of negotiation
depend on the choice of the parties.

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Advantages of Negotiation are,

• Negotiation is the most flexible DR. Only the parties and representatives with
interest to the matter are involve in this procedure.
• Many observers think that the negotiation has a higher probability of successful
outcome.
• This is a voluntary process where the people who wish not to participate can do so.
• There is no 3rd party involves in this process.
• The negotiation is bind only between the two parties involved in the process.
• Success negotiation may lead to a good relationship within two parties.
• This is less expensive and also the process time period is less.

Dis Advantages of Negotiation are,

• Negotiation can be dis-advantage for the weaker party.
• Without a 3rd party one party might take advantages from the other party.
• Negotiation may not be continued where any one may terminate from the process.
• This process cannot guarantee the trustworthy of any party.

Mediation

This is common method used in DR. Here there is a 3rd party involves which is known
as the mediator, who is an independent person. The mediator has no decision-making
power or to assist the dispute parties. He helps both parties to come to an agreement.

In Mediation no party is forced to use a mediator, the mediator only helps to make their
decision not to decide for the parties. Mediator helps both parties to come to an mutual
understanding.

Advantages of Mediation are,

• This is very useful process for the disputing party to continue the, if any ongoing
relationship between two party. (Business relationships)
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• Mediation settlements can be achieved quicker than litigation.
• Considerably less cost than litigation.
• Mediator helps two parties to come up a decision which is can be accepted by both
parties.
• The things happen in mediation are Private and confidential.

Dis-Advantages of Mediation are,

• Mediation cannot produce legal precedent as it is private and confidential.

• If both parties don’t come to an agreement the cost for the mediator will go futile and
the dispute will be remained unsolved.
• It may be an advantage for the other party if one party reveals an important matter
during mediation.

Conciliation

Conciliation is very much similar to mediation, there is a neutral 3rd party is involved in
the process. But not like in mediation here the conciliator plays a relatively direct role
and even suggests possible solutions for both parts to come to an agreement. Also, this
is not a legally blinded process.

Advantages of Conciliation are,

• Normally the conciliator is a legal expert.

• This is a private and confidential process.
• Cheaper than taking the dispute to the court.
• The parties have the right to go to court if they don’t come to a mutual agreement.
• This is an informal process.

Dis-Advantages of Conciliation are,

• This is not a legally blinded process.

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• The decisions taken in the process cannot be guaranteed.
• As the process is informal the parties wouldn’t take the matter seriously.

Arbitration

Arbitration is a process where 3rd party is involved, The Arbitrator. Sometimes there may
be a panel of Arbitrators. The Arbitrator may be a legal expert. Here the arbitrator has
the authority to take the decision. The decisions are done in accordance with the law
which is legally blinded and which can be enforced through court. The arbitrator issues
the award after the hearing from parties. The arbitrator process may be binding or non-
binding. If the process is binding the decision taken by the arbitrator is the final and can
be enforced by the court. And if the process is non-binding award is advisory which can
be final only if the both parties’ acceptance.

In Arbitration the parties should agree to arbitration in writing, the process is conducted
in private, this is a binding and the parties have option in choosing the arbitrator.

Advantages of Arbitration are,

• Arbitrator or Arbitrators can be selected by the parties.

• Arbitrator or Arbitrators can be selected in accordance with the relevant dispute.
• This is a private and confident process.
• This procedure can be either formal or informal with the party’s decision.
• There can be a great opportunity as the with the increase of control by the arbitrator
or Arbitrators.

Dis-Advantages of Arbitration are,

• The success of the arbitration is depending on the arbitrator(s) experience regarding

the dispute.
• Options against the arbitrator award is limited.
• With the lack of co-operation between parties the time and cost can be significant.
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References

Conditions of Contract for Construction(FIDIC Red book). (First edition 1999).

Design and Build Contracts(JCT). (2016).

Engineering and Construction Contract(nec 3). (2013).

Holland, K. (n.d.). Retrieved from www.constructionrisk.com:

https://www.constructionrisk.com/2011/07/no-damage-for-delay-clause-enforced-against-
contractor-claim/

ZurichNA. (2013). Retrieved from www.constructionrisk.com:

https://www.constructionrisk.com/2015/10/site-safety-responsibility/

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