This action might not be possible to undo. Are you sure you want to continue?
HAMMOND SUDDARDS EDGE
MANAGEMENT OF CONTRACT CLAIMS SEMINAR FOR THE OVERSEAS CONSTRUCTION ASSOCIATION OF JAPAN, INC
TOKYO, 26 FEBRUARY 2002
MANAGEMENT OF CONTRACT CLAIMS THE SPEAKERS
Tony Farrow Executive Director, Trett Consulting email@example.com
Tony Farrow is a Chartered Quantity Surveyor. Throughout his 25 year career he has been closely involved in the preparation, analysis and negotiation of claims arising from construction and engineering projects. These claims have included disputed final accounts, design-related problems, site labour disruption and prolongation claims. He was part of a team carrying out pioneering research investigating productivity and cost effects of accelerating the construction phase of a project and has published papers on the subject. Mr Farrow has undertaken extension of time analysis on major power generation schemes, infrastruction projects and process industry plants, utilising techniques such as critical path analysis, snap shot analysis and as-built reconstruction. Mr Farrow's international experience includes living in Japan for 2 years, where he was employed by Kobe Steel Limited. He has also lived or worked in the Oman, Australia, Indonesia, Hong Kong, Malaysia, Kuwait and Egypt. His work now mainly involves acting as an Expert Witness in construction and engineering arbitrations and court cases, where he has submitted over 50 reports. He is a Fellow of the Chartered Institute of Arbitrators, Fellow of the Academy of Experts and an eminent speaker at seminars and training courses concerned with claim and report preparation.
Mark Hilton Partner, Hammond Suddards Edge firstname.lastname@example.org
Mark Hilton is head of the Hammond Suddards Edge Construction unit in Leeds from where he advises a number of major national and international contractors and employers. He has over 15 years experience of advising the construction and engineering industry on major projects from shopping centres to power stations, particularly in relation to contentious matters and in recent
years mediation. Mark is a fellow of the Chartered Institute of Arbitrators, a TeCSA certified adjudicator and a CEDR accredited mediator.
Simon Palmer Partner, Hammond Suddards Edge email@example.com
Simon specialises in contentious matters, including ICC arbitrations, mediations, adjudications, and Technical and Construction Court litigation. He is a registered Foreign Lawyer in Hong Kong. He undertakes some non-contentious work, and is a Visiting Lecturer at the MSc in Construction Law and Arbitration in Leeds Metropolitan University. He is Honorary Secretary of the North East of England Branch of the Chartered Institute of Arbitrators and Regional Co-ordinator for the Society of Construction Law.
Jonathan Tattersall Solicitor, Hammond Suddards Edge firstname.lastname@example.org
Jonathan provides advice on both contentious and non-contentious matters for all sectors of the industry. Jonathan has regularly lectured to industry bodies and contractors both overseas and in the UK on international forms of contracts, dispute resolution and risk management. His experience lies in arbitration, litigation and forms of ADR including adjudication, mediation and conciliation. He has been involved in non-contentious drafting on standard forms, bespoke
engineering contracts, PFI projects, appointments and warranties.
Peter Philips LLM, LLB, FRICS, FCI Arb. Managing Director, Trett Consulting (Japan) Ltd Peter Phillips is Managing Director of Trett Consulting (Japan) Limited. He has been involved in commercial management and trouble shooting at pre and post contract stages on large international infra-structure, construction and engineering contracts for over 25 years. He has lived and worked in Japan as Chief Quantity Surveyor for a major Japanese plant-engineering contractor for the last 18 years. He is a Fellow of the Royal Institution of Chartered Surveyors
and Arbitrator and has experience in formal legal process and ADR as an expert witness and mediator. 4 .
B. A Case Study of a Claim A. C. Principles of Time Analysis Using Planning Techniques A. D. C. Claims relating to Time Claims relating to the Recovery of Money Making a successful claim Jonathan Tattersall Mark Hilton Mark Hilton Peter Phillips 2. Claims for Additional Money-Practical Issues Jonathan Tattersall 4. Questions and Answers 5 . Principles of Preparing Claims A. Presenting a Claim for Loss and Expense How to Resolve Claims using ADR Resolving a Claim by International Arbitration Jonathan Tattersall Mark Hilton Simon Palmer 5. B.MANAGEMENT OF CONTRACT CLAIMS AGENDA Welcome 1. Methods of Analysing Project Delays Practical Issues Tony Farrow Simon Palmer 3. Introduction to Case Study and Making a Claim for Extension of Time Tony Farrow B.
SESSION ONE 6 .
variations. most of the standard forms of contract include specific contractual machinery and clauses to allow for claims to be made.1 PREPARING CLAIMS Introduction 1. for this to be the case. project overruns and increased management and external consultant cost. These two claims are. one they would rather never come across. • There are many techniques which can be employed to establish delay entitlement. It is possible for claims to be dealt with sensibly. One of the most difficult hurdles a Contractor will have to overcome is to show a proper link between delay and the extra cost it has suffered. there could be many thousands of reasons for delay on a project. there is nothing wrong with making a justified claim. in a non-adversarial manner and to be successfully resolved without hindering project progress. for example. However. 7 . to the highly technical critical path analysis where each delay event is analysed on a computer model to demonstrate how that event impacted upon progress of the works and completion of the project. • It is often easy for a Contractor to demonstrate that it has spent additional cost and spent additional time by reason of delays. but a mis-conceived or unjustified claim will cause a great deal of trouble. late information. However. • The Employer only has to meet claims which can be tied back to the rights in the contract or an implied legal right.1 Employers do not like these seminars! There is no doubt that Employers view the word "claim" as a dirty word. • Simply because you are losing money on a project does not mean you are entitled to bring a claim.2 However. Indeed. delays in delivery down the supply change. 1. It must be based on fact and those facts give rise to an entitlement in law. 1. in truth. inefficiency. a feature of every construction project. It conjures up for them images of budgets being exceeded. a number of factors have to be borne in mind: • It is easy to bring a claim. ranging from a simple bar chart with periods of delay overlaid.3 This seminar deals with claims for time and money.
1.4 Is there such a thing as the perfect claim? I don't think so. I do believe that if Contractors adopt good practices. follow the principles and methodologies we are going to explore today and look upon the claims they prepare from an objective viewpoint. 8 . well prepared and successful claims will be the product. You must all be familiar with the Employer who considers that the amount of the final account should never exceed the contract price unless the Employer has instigated the change. That Employer always forgets that it has undertaken the risk with regard to unforeseen ground conditions and problems with design for example. However. because it is impossible to benchmark such a statement.• A lack of understanding on the Employer's part is often one of the biggest obstacles to be overcome. and those risks will be seen in the end cost of the project.
in negligence. but rather than for breach of express terms in the contract. provide the machinery to process the claim and how it should be resolved. Quantum Meruit is effectively translated as "as much as he has earned". This is not really a good definition. Before we move on to the more advanced legal and practical issues. In practical terms. What we are considering here is a category of claims which are still for breach of contract. If work proceeds on a letter of intent. it may be that no contract has come into existence between the parties although the Contractor has done substantial amounts of work based on that letter of intent.1 TYPES OF CLAIM As a lawyer. it is often difficult to give a precise 9 .2 Contractual claims are various which arise out of express provisions of a particular contract. I will always want you to come back fundamental starting points when considering how to advance a claim. Contractual Claims 2. A quantum meruit claim is a remedy for a Contractor who has carried out work where no price has been agreed or where the original contract has been substituted by a new one and payment is claimed for work done under that new contract. for example. All contractual claims depend upon relating events to specific contract conditions and include.4 One of the historical problems with law is that English speaking lawyers still have to use some Latin phrases. are based on breaches of implied terms or breach of some other aspects of the law. loss and expense claims and extension of time claims. One often finds this type of claim where a Contractor is claiming for work done on a letter of intent.3 These are sometimes called 'ex contractual' or 'extra contractual' claims in the construction industry. Quantum Meruit 2. An example would be breach of an implied term on the part of the Employer not to hinder a Contractor's progress. additional work claims. The claim which succeeds without a grounding in law is almost unknown.2 2. it is worthwhile taking time for a short piece of revision and a quick review of the four major types of claims that may be made by Contractors against Employers. Common law claims 2. Those of you who know Employers or Funders who are prepared to give you more money or more time without asking you to prove your entitlement are very lucky indeed. for example. The express terms in the contract define the circumstances in which a claim may be made.
In practice.meaning to quantum meruit. The latest cases decided by the Courts suggest that it should be a fair commercial rate which would allow some profit and overhead. Ex gratia means 'out of kindness'. This takes us back to the position of an Employer who decides out of the kindness of his heart to pay a Contractor money in respect of a claim which he has no legal obligation to meet. Perhaps an example I can give is where an Employer may make a payment to a Contractor to avoid a Contractor entering into an insolvency when it would cost the Employer more than the sum it was paying to the Contractor to employ another Contractor to finish the work should the Contractor be insolvent. ex gratia payments are very rarely met unless there is a benefit for the Employer in making the payment. 10 . Ex gratia 2.5 More Latin.
4 At common law. People often. Therefore. 3. and the Contractor's obligation is merely to complete the works within a reasonable time. The same issues often come up. a Contractor is entitled to recompense for the period. In this situation. disputes centre round whether or not the Contractor is entitled to an extension of time or otherwise. time is said to be 'at large'. These provisions cater for delays which are neither the fault nor the responsibility of the Contractor or for risks the Employer has taken. In order to ascertain what is 'reasonable'. if the Engineer issues an instruction which increases the amount of work to be done. Do liquidated damages apply? What happens if there is concurrent delay? Who is entitled to use the float? Extensions of Time 3. 3. 3.5 The importance of a fixed date is that a Contractor who has caused part of the delay is still liable to pay general damages for the delay. Whilst as I have said that such provisions benefit the Contractor in removing liability for damages for delay during the period for which time is validly extended. a Contractor's obligation to complete the works by the specified date is removed if the Employer delays the Contractor in execution of the works. However. this will simply mean that the amount of delay for which the Employer is responsible will be added to the old completion date. Best practice is that applications for extensions of time should be made and dealt with as close in time as possible to the delay event that gives rise to the application. all the circumstances of the particular project must be taken into account. incorrectly.3 3. the power to extend time is also for the Employer's benefit. the main effect of an extension of time is merely that the Contractor is relieved from its liability for liquidated damages during the period of the extension. or is late in giving the Contractor necessary instructions. but is not liable for various liquidated 11 . the specified completion date no longer applies. Whilst it may be that under other terms of the contract.3 Most construction contracts contain express provisions under which the period allowed for the Contractor to undertake and complete the works can be extended.1 TIME CLAIMS As often as not. think that an entitlement to extension of time automatically carries with it an entitlement to compensation for prolongation costs which have been incurred during the period for which time has been extended. in practical circumstances.2 An extension of time only relieves a Contractor of liability for liquidated damages for any period prior to the extended contractual completion date.
This brings out problems with 'float' which we will investigate later. an Employer cannot simply discount this and claim liquidated damages for the remainder.6 A basic point to consider is that the period for completion of a project can only be extended where the contract allows for this and then only in strict accordance with the contractual provisions. Unforeseeable shortages in the availability of personnel or goods caused by epidemic or governmental actions. The liquidated damages provision will not succeed at all. or the Employer's other Contractors on site. As such it is of great benefit for an Employer who has caused delay to have the power to extend time in order to preserve its entitlement to liquidated damages from the revised completion date. (e) Any delay. If the delay is caused by something which is outside the contract.7 Something which is often forgotten is that extensions of time can only be granted in respect of events which are likely to delay completion. impediment or prevention caused by or attributable to the Employer. In such circumstances. 3.] or other substantial change in the quantity of an item of work included in the contract. the grounds for an extension of time are: (a) A variation […….8 What are grounds for extending time? By way of example.damages. 3. Even where the delay caused by the Employer is a very small part of the overall delay. 12 . the Employer faces the same difficulties in proving his claim as the Contractor does. the Contractor cannot claim an extension nor can the Employer grant one. (b) A cause of delay giving an entitlement to extension of time under a sub-clause of these conditions. under FIDIC 5th Edition. the Employer's Personnel. As such is likely to be the case that since it is almost always the Contractor who claims an extension of time. the Contractor will have the responsibility for proving that a delay has been caused by an event for which an extension can be granted. It is often worth bearing this in mind when agreeing and amending contracts and recognise that it is helpful for a Contractor to have a provision whereby the Engineer or the Employer can extend time retrospectively. (c) (d) Exceptionally adverse climatic conditions. 3.. ie after completion has been achieved. or. The Employer can only claim for those losses resulting from the delay which can actually be proved.
For example. 3. As a liquidated damages clause relieves the beneficiary of it having to prove their actual loss the courts are quick to hold it will not be effective if it is not strictly followed. 3. The most common example is a requirement that the Contractor pay the Employer a fixed sum of money for each day/week/month etc it is late in completing the contracted works beyond the contractual completion date. We shall come onto notices later. everyone knows where they stand. Who can say if the landlord would have been able let the space quickly or if it would have remained vacant for a long period of time? 3. Make sure you know what is required of you under each Liquidated damages 3.1".11 Why do construction contracts almost without exception contain provisions for liquidated damages? The main reason is certainty.13 It is extremely important that the liquidated damages clause is properly drafted to take account of the nature of the works and that it is properly complied with. "if the Contractor considers himself to be entitled to an Extension of Time for Completion. However.3. the Contractor shall give notice to the Engineer in accordance with sub-clause 20. Whilst a Contractor may find itself facing a large liquidated damages claim if it is in delay. particular contract. it can be difficult to calculate the lost rent. However. This of course works the other way in that the Employer may be entitled to liquidated damages in excess of its actual loss. 13 . you must remember that extension of time clauses always contain notice requirements eg. the golden rule is that you should never allow your right to an extension of time to be prejudiced by poor contract administration. The Employer wants the works completed by the contracted date. in fact the liquidated damages may be only a fraction of the actual loss sustained by the Employer. if the building is built as office accommodation and the Employer only intends to obtain tenants on completion and not before. they are difficult and expensive to prove. Often this loss is difficulty to calculate.9 These grounds are pretty standard and are seen in one form or another in the majority of contracts.12 Although these kinds of losses can be estimated. and litigation to recover such losses can be prolonged.10 I imagine that you are all familiar with the concept of liquidated damages. If the works are not completed by then the Employer will suffer some loss. that is liquidated damage clauses require that the Contractor pays to the Employer a fixed predetermined amount of compensation should a particular event happen. Liquidated damages have the advantage that as they prevent these losses having to be calculated and proven.
for liquidated damages to be claimed for delay the contract must make it clear when the Contractor will be in delay. in order to maintain a right to liquidated damages. even if it is very high. Where the Employer finds itself in this situation then the amount of the actual 14 . As a result it is often useful to choose a liquidated damages clause which allows the Employer to either set off liquidated damages against payments due to the Contractor or to require the Contractor to pay liquidated damages to the Employer. this sometimes happens.3. 3. or if this certification is given too late. the Employer needs an extension of time clause. However. As we saw above. If the extension of time clause is complied with and an extended date for completion is set then the right to liquidated damages will run from that extended completion date. If the contract only allows for one method of payment and the Employer fails to follow that then again the right to liquidated damages will be deemed to be waived and the Employer will be restricted to claiming for actual damages. In these cases the Employer's actions could prevent the Contractor from completing the work by the contract date.16 In some cases it will be hard to even begin to estimate the likely loss of the delay. 3. If it is not clear when the Contractor should complete works by the court will not insert such a date and any claim for liquidated damages will fail as liability cannot be established.14 Firstly.18 Equally if the payment of liquidated damages is subject to an architect's or engineer's certificate then failure by the architect or engineer to make the certification required. 3. in many circumstances some of the delay may be due to the Employer. the Employer will be limited to a claim for actual damages. The obvious starting point is that the contract must state the date by which the works should be completed. It may be in the Employer's and Contractor's interests to keep the Contractor afloat until the end of the project and therefore the Employer may not wish to set off liquidated damages but rather seek payment of what can be recovered at the end of the project.15 However. 3. example the Employer may delay giving the Contractor access to the site or vary the work to be done by the Contractor or require the Contractor to carry out additional work not in the contract.17 Although every Employer wishes to avoid contracting with a Contractor which is in financial difficulties. provided the amount of liquidated damages is genuine estimate of the potential loss it will not be a penalty. As I have outlined there are numerous ways in which the right to claim liquidated damages can be extinguished and the Employer limited to a claim for the actual loss sustained. 3.19 A final word of warning needs to be given in relation to the subject of liquidated damages. For.
23 The term "concurrent delay" is often used to describe a situation where two or more delay events arise at different times but the effects of them are felt in whole or in part at the same time. Concurrency 3. there are many differences about the meaning of concurrency itself. For example. (If the actual losses are less than the liquidated damages the Employer will be able to recover his actual losses). Firstly. highly unlikely that a true concurrent delay will exist. there is also an absence of clear guidance from the drafting bodies as to how extension of time provisions should be administered in these circumstances.20 Without doubt. concurrency is one of the most difficult issues to deal with. 3. It is in truth. then the Employer will only be able to claim liquidated damages up to £100.000 per week up to a total of £1million however great its actual losses may be. The debate rages notwithstanding the extension of time clauses upon which it is based appear in the standard forms in daily use. one of which is an Employer Risk Event and the other a Contractor Risk Event. 15 . a true concurrent delay may exist at commencement date where the Contractor fails to give access to the site but the Contractor has not mobilised his resources to carry out any work in any event.24 The issue usually arises in this way: the Contractor claims an extension of time because of delays which were the fault of the Employer.22 True concurrent delay is where two or more delay events occur at the same time.000 per week to a maximum of £1million. The Employer denies the extension of time on the basis that the Contractor would have been delayed anyway because of reasons that were not the fault of the Employer. the Contractor's concurrent delay should not as a matter of course reduce any extension of time due. Secondly. there are different views on the correct approach to concurrency when analysing an extension of time. 3. 3. Therefore if the contract provided for liquidated damages of £100. My view is that where Contractor delay to completion occurs concurrently with Employer delay to completion. It is extraordinary that this issue.21 Concurrency is such a contentious issue for two reasons. Programmers or schedulers more correctly call this the concurrent effect of sequential delay events. which arises in virtually every construction dispute. Remarkably. is consistently hard fought and gives rise to dogmatic views either way. 3.damages that the Employer will be able to recover is probably capped at the level of the amount of liquidated damages it could have claimed under the contract.
They include such methods as "first cause retrospective delay analysis" and the "ultimate retrospective delay" analysis. the building could only be completed in 60 weeks anyway. 3.e. starting point for any consideration must be the words of the contract itself.26 The key elements of the generic extension of time will cause I will address are these: (a) The Contractor is required to notify the Engineer forthwith upon it becoming reasonably apparent that the progress of the works is being or is likely to be delayed by relevant event.3. The variation may not have delayed the works up to practical completion (because of the Contractor's own delays) but it has delayed the works beyond the completion because of the variation they could not have been completed earlier than 55 weeks.27 The important words which are often misconstrued are those which require an extension of time to be awarded in circumstances where the completion of the works is likely to be delayed beyond the completion date. These range from the "dominant cause" theory to the "adverse principle" theory. If he is of the opinion that any of the events stated in the Contractor's notice are relevant events and that the completion of the contract is thereby to be delayed beyond that completion date as defined in the contract.e. because of delays by the Contractor. These important words are often misconstrued as being 'up to the date of substantial completion or taking over'. The various delay methodologists will be addressed in the next session.25 This is one way of looking at matters. To take the example 16 . 3. and (b) Upon receipt of the notification the Engineer is under an obligation to act i. However.28 When looking at concurrency. 3. we have to remember that extension of time clauses relate to liquidated damages provisions in the contract. suppose a building is to be clad in marble and to be completed in 50 weeks. to allow the recovery of damages that it would not otherwise have suffered. We have to remember that the purpose of liquidated damages is not to provide the Employer with a windfall benefit i. he must award such extension of time as he considers to be fair and reasonable. he must form an opinion. By way of example. However. Midway through the project the Employer varies the contract so that the building is now to be clad in granite such that the contract can now only be completed in 55 weeks. Many theories have been advanced as to how to tackle extension of time applications in the circumstances of concurrent delay. In the circumstance the Contractor would be entitled to a five week extension of time. That is not the same as beyond the completion date. We will take the example of a standard extension of time clause which fits most circumstances where a Contractor is entitled to an extension of time in the event that the works delay beyond the completion date as defined in the contract.
the Contractor happened to be late through its own fault at the same time. namely to award an extension of time in the event that the works are likely to be delayed beyond the completion date by the relevant events. conversely. the Employer would suffer no loss for the five weeks caused by its own delay. (ii) Where there are two concurrent causes of delay.once because he suffers liquidated damages and twice because he also bears his own prolongation costs. and on this basis was denied an extension of time the Employer would receive a windfall if it were allowed to recover liquidated damages for that period. the Engineer must extend the period for completion by the amount of the further delay. and (d) It results in a windfall for the Employer and penalises the Contractor twice . how much. If because. the Employer's delay overruns the Contractor's delay then the Contractor will receive an extension of time for the extra over.above. It is considered that this approach is in error for the following reasons: (a) It fails to recognise the approach the Engineer is to adopt under the mechanism set out above. Having done so. quite luckily from the Employer's perspective. and if so.29 It is sometimes said that the approach outlined above fails to recognise the importance of the completion date. one of which entitles the Contractor an extension of time (a Relevant Event) and the other does 17 . It also looks at the question of the Contractor's entitlement to an extension of time by saying but for the Contractor's delay by how much would the contract have been delayed? If the answer is 'not at all because the Contractor's delay runs beyond the Employer's delay' then it would be said that the Contractor is not entitled to an extension of time at all. (b) It involves a test which is grossly unfair and commercial unrealistic. The latest cases that have been considered by the English Courts have come to the following conclusions: (i) The objective of the Architect or Engineer in assessing an extension of time is to decide whether the relevant event causing further delay when a Contractor is already in culpable delay as indeed cause further delay to the progress of the works. (c) It fails to recognise the fact that delay would in any event have occurred as a consequence of matters which are the responsibility of the Employer. It results in the Employer receiving a windfall simply because the Contractor was fortunate to have been in delay for reasons of his own making at the same time. 3. If. if the works would have been delayed anyway because of delays which were the Employer's responsibility.
30 In short. However. This is an example which has been used by Tony Farrow in the past as illustrating the problems faced. the only way to deal with concurrency is to undertake a proper analysis of the actual causes of delay. The date in question may be the overall completion date for the works. Float 3.32 This issue is probably best looked at by use of an example. the Contractor would be entitled to an extension of time for the period of delay caused by the Relevant Event. most of you would argue that the Contractor owns the float because the Contractor in planning or putting forward the programme to carry out the works. 3. it may well be a sectional completion date or an interim milestone. The Contractor submits the following programme: 18 . 'Total float' is the time by which an activity may be delayed or extended without affecting the total project duration. 3. the Contractor will argue that it is entitled to an extension of time. we are not tying ourselves to project This is irrespective of the completion date. as Tony will explain different analyses can give rise to different results. There are two sub definitions which are used. The point that I want to bring out here is the argument over 'ownership of the float' which is inevitably in dispute when the parties are arguing over an extension of time. If the Contractor is right to say that it owns the float and there is any delay to the Contractor's progress for which the Contractor is not responsible.not.33 There is a simple project involving two sequential activities. even if the delay to progress does not delay the overall completion date but merely takes some of the Contractor's float. ' Free float' is often used to describe the time by which an activity may be delayed or extended without affecting the start of any succeeding activity. 3. However. I am sure if I took a vote here today.31 Float is the amount of time by which an activity or group of activities may be shifted in time without causing delay to a contract completion date. will have allowed some additional or float time to give itself flexibility in the event that it cannot carry out the works as quickly as it had planned. concurrent effects of the other event. each taking a month and the Contractor allowing three months to complete the work. When we are looking at float.
35 During activity two. The reason for this conclusion is that the Employer 'got to the float first' and at the end of the day. the Employer delays the works by one month (eg by failure to delivery necessary free issue materials). The adjusted programme becomes: Week Month 1 2 1 3 4 5 6 2 7 8 9 10 11 12 13 14 15 16 17 18 19 20 3 4 5 ACTIVITY 1 Employer Delay ACTIVITY 2 Contractual Completion Date 3.Week Month 1 2 1 3 4 5 6 2 7 8 9 10 11 12 13 14 15 16 17 18 19 20 3 4 5 ACTIVITY 1 ACTIVITY 2 FLOAT Contractual Completion Date 3. From the end of month two. most Contractors did not like the idea of the Employer being able to take what they view as the Contractor's float.34 During activity one. the Contractor delays the works by one month (eg because he has to replace some defective work).36 One of the conclusions to this exercise is that the Contractor is obliged to pay the Employer four weeks liquidated damages in month four and the Employer is obliged to pay the Contractor four weeks loss and expense during months one and two (weeks two to five). the only reason the project was late was due to the Contractor's delay. As you can imagine. the Contractor was still in a position to complete the works by the completion date. The final as built programme is: Week Month 1 2 1 3 4 5 6 2 7 8 9 10 11 12 13 14 15 16 17 18 19 20 3 4 5 ACTIVITY 1 Employer Delay ACTIVITY 2 Contractor Delay Contractual Actual Completion Date Completion Date 3. 19 .
37 What status does the programme actually have? The general obligation is for Contractors to complete the works on or before the completion date and within the period for completion. When. we must remember that there are cases where an Employer causes a delay and the Contractor's entitled to money but no extension of time and vice versa. the Contractor intended to complete his works within two months. However. the Contractor has to go back to remedy its own work. I would argue that the Contractor should be allowed that period of time to complete the works. the answer that Courts and Arbitrators around the world find is that the Contractor owns the float. It must be remembered that when an Employer causes a delay. under most standard forms of contract this leads to a consideration of whether or not an extension of time should be given.Generally. The recovery of any costs would be not as a result of the extension of time being granted. You must remember that an Employer delay does not automatically lead to an extension of time. it will be an Employer delay which should allow in most contracts an extension of time. The alternative position is that the Contractor should not be given an extension of time because at the end of month two. there is no reason to suppose that the Contractor should not be able to complete his works prior the completion date. nearly always varies depending on if the issue is considered at the time. 3. 20 . The Contractor's argument is that it would have completed all its works within the three month period before the contractual completion date had it not been for the Employer's default. in our example the Employer issues materials late. the Contractor's contractual obligation is to achieve completion within three months. The one month delay by the Employer must fairly entitle the Contractor to a one month extension of time. As such could the answer probably be: (i) The Contractor is entitled to a one month extension of time by reason of the Employers' delay. or whether the matter is considered retrospectively. Further. but rather costs that the Contractor incurs by reason of the Employer's breach of contract.38 Of course what has happened in our example is that within month three. but is it not possible to argue that the Contractor should be given an extension of time of one month? The Contractor originally had two months within which to complete his works and has been deprived by the Employer's delay of that extra month. Both the answer to whether there is an entitlement and to how much that entitlement is. 3. In our example. The one month delay appears to take the float. The Contractor would have to be responsible for the prolongation costs it has incurred during the period of the remedial work. The Contractor must of course remember to issue the requisite notices.
The sub contract period was 27 weeks but Ascon had completed 10 weeks late and received no extension of time. it is worthwhile considering the difficulties that Contractor's face with regard to float Ownership as against their sub Contractors. 3. tried to hold Ascon liable for the whole delay to the project. Ascon made an extension of time and damages for delay and acceleration claim. The Judge considered various issues which were relied upon by Ascon for its extension of time claim and awarded 14 days delay to the sub contract works. These are the brief facts.40 As such the Judge gave Ascon credit for the extension already awarded and decided that Ascon was only liable for one and a half weeks delay to the whole project from the remaining maximum of eight weeks.' The main contract programme had a float of five weeks and McAlpine argued that it could use that period to cancel out any delays of its own or other sub Contractors. but he cannot use that float to deny the entitlement of Sub Contractors to that float in the event they get there first. Coincidentally the Main Contractor was 10 weeks late and had apparently suffered liquidated damages of £175. McAlpine made a counterclaim. McAlpine Construction Isle of Man Limited. The Main Contractor. a small island to the west of the UK. McAlpine. When the Judge came to consider McAlpine's counterclaim. McAlpine was the Main Contractor and Ascon the Sub-Contractor. The right to allocate the float does not belong to the Main Contractor. This is the case of Ascon Contracting Limited v. The judge said that if six sub-contractors caused one week's delay in a contract programme where there is six week's float. The main contract was for a development on the sea front in the Isle of Man. If the period was five weeks. leaving the remainder chargeable to Ascon. 3. 21 . they should equally share the burden. I will give you an example of a case from the English Technology and Constructions Courts from last year.39 That being an illustration of the difficulties that Ownership of the float causes between Contractor and Employer.000.41 So what is the answer for you? I think the conclusion must be that the Contractor owns the float. The argument was rejected. McAlpine was relying on a term of the sub contract which said 'the sub Contractor shall carry out and complete the sub contract works reasonably and in accordance with the progress of the works.(ii) The Contractor is entitled to the one month prolongation damages caused by the Employer's breach of contract 3. They share equally in the benefit of the float. they will have caused no loss. The sub contract was for reinforced concrete beginning with the slap and perimeter walls at basement level. he decided it was a question of fact whether Ascon affected later trades and delayed practical completion of the works as a whole.
there will be no sustainable claim for prolongation costs. examples would be a events such as prevention of work on site for the full daily hours period in the 22 . if the reason for the delays is fault of the Contractor. plant and materials. There is no absolute link between an entitlement for an extension of time and the entitlement for compensation for that additional or prolongation cost.1 MONEY CLAIMS Having undertaken a review of the basic principles entitling a Contractor to additional time or otherwise. this next section of today's lecture is aimed at providing a view of some of the common issues that arise on construction contracts where one party wishes to recover from the other compensation for additional time and/or resources it has taken or used to complete the project.3 Without doubt in my experience one of the biggest misconceptions in the construction industry is the belief that if a Contractor is entitled to an extension of time on a particular project. These being claims which arise in essence from the extended use of time-related resources. Rather. Moreover. For example. 4. a prolongation claim made by a Contractor will be based on the Contractor's increased use of time-related resources together with such other types of recoverable loss the contract may allow. This is not the case. you must also bear in mind that an entitlement to an extension of time does not automatically result in entitlement to compensation for the same period. Of course. under FIDIC 5th Edition.4 whereas the Contractor's entitlement to claim appears under clause 20.5 Prolongation costs may be caused by any kind of Employer Risk Event. or at all. Principles of Recovery 4. Prolongation Compensation 4. However. in other words labour.4 4. Whether that cost can be recovered by a Contractor depends primarily on the terms of the particular contract and the factual question of whose fault it is the contract is in delay.2 I do not intend to deal here with the question of valuing the direct costs of change to or a variation of the works. if the delay and prolongation arises from what may be called an 'Employer Risk Event'. 4.4 It also goes without saying that delay causes prolongation of the contract which can cause increased cost. we saw earlier that the grounds for an extension of time are set out in clause 8. then it is also automatically entitled to be compensated for the additional time that it has taken to complete the contract. I intend to concentrate on the Contractor's claims for prolongation costs and disruption. Standard form contracts make this clear by divorcing the entitlement to time and compensation between different clauses.
4.7 Most construction contracts and certainly all the major standard forms make provision for compensation to be paid by the Employer or Purchaser in the event of the Contractor or Supplier being put to expense as a consequence of anticipated possible events. or it arises from a breach of that contract generally. seeing as concurrency is such a contentious issue when looking at extensions of time. These provisions do not cover all possible occurrences and in some instances where there is no provision for compensation then the Contractor or Supplier may have to claim damages for breach of contract. we will look at methodologies you can employ to avoid this shortfall in recovery. would be liable to compensate the Contractor. Yet whether the cause of the prolongation claim is that it arises under a specific provision of the particular contract. The Employer. 4.contract. although in fact the amount of money a party might recover under either head could be exactly the same. it is also one of the most difficult issues to deal with when trying to resolve the issue of prolongation costs. in the ordinary course of events. The most difficult position for the Contractor is when it has to separate out the costs which flow from the Employer's fault and the costs which flow from its own breach. Concurrency of prolongation 4. or unforeseen ground conditions. This compensation can be separated into that element which relates to the value of additional work which is capable of measurement.6 Unsurprisingly.9 It is because Construction Contracts are likely to involve changes during the course of a project that there is specific provision for contractual compensation in most forms of standard contract. a variation. the Contractor still has the same obstacles to overcome: the Contractor must show that it has actually suffered the loss and/or expenses claimed before it becomes entitled to compensation.8 It is therefore very important to distinguish between damages for breach of contract on one hand and contractual compensation on the other. The Contractor will be entitled to prolongation costs if it can prove that the additional costs it incurred result from the Employer's delay. Who bears the cost in these circumstances? The answer is always a factual one in practice. [In the next session. normally arising as a 23 . but the Contractor was late in carrying out its own work. The practical result of this problem is that the Contractor only usually succeeds in obtaining compensation for the period by which the Employer's delay exceeds its own delay.] Damages and Compensation 4. The difficulty arises in this way: consider the situation we looked at earlier.
For instance: • FIDIC provides for recovery of "Cost" which is defined as: "all expenditure reasonably incurred by the Contractor. Common law also dictates that the contractor can only recover those losses if they were: • Reasonably foreseeable at the time of the contract being entered into. ICE 6th Edition calls this "loss" and. There was a power failure and Scottish Power was held to be in breach of contract.11 Common law forms the basis of the law of many countries including the United States and the UK and is a rule of law which is often followed in international contracts." • • • The World Bank Form refers to "loss and damage". 4.result of variations and that element which arises from different defined circumstances which is given different names in different contracts. It may be helpful if I give an example of this. The facts were as follows. but does not include profit. That is to say they are losses which the parties could have contemplated as naturally arising from an event at the time they entered into the contract.10 What can be recovered under the headings which I have just outlined will depend upon the particular words and phraseology of the particular contract. It was at fault. Balfour Beatty 24 . The JCT family of contracts including The Hong Kong Standard Form of Building Contract refers to this as "loss and expense". Under common law there is a further distinction which needs to be looked at when considering the recoverability of damages. In essence however the contractor or claiming party will need to prove an actual loss and will be entitled to actual losses incurred as a direct consequence of the event complained of and actual expenditure as a direct linked consequence of this event. whether on or off the site. In an English case which involved Balfour Beatty a substantial main contractor and Scottish Power which was an electricity generating company. including overhead and limited charges. • Damages which whilst not necessarily being foreseeable were for whatever reason predicted by the parties as possibly arising and accordingly were predicted and in the contemplation of the parties at the time the contract was entered into. 4. Scottish Power agreed to supply temporary power for Balfour Beatty's concrete batching plant. As I have said previously the contractor can only recover actual losses and expenses incurred.
These are supposed to prevent the type of unforeseeable damage which I have mentioned in the case referred to above. 25 . This case was between the parties of Deepak and Davy. One of the issues which had to be decided was whether a clause excluding direct and consequential damages prevented Deepak claiming against Davy over and above the cost of reconstructing the plant.1 Many Contractors simply do not put enough effort into the formulation and preparation of their claims and consequently achieve poor results or returns. Deepak sued Davy.was constructing an acquaduct by continuous concrete pour and as a result of the power failure had to demolish what had been constructed and start all over again. and enough detail when it comes to turning that time into money. Many claims which should in principle be successful actually fail because the Contractor fails to put forward proper substantiating evidence and/or fails to make a direct link between the delaying event and its consequence with regard to time. 4. Balfour Beatty claimed the cost of this as damages. 5 MAKING A SUCCESSFUL CLAIM Principles 5. After the plant had been operating for some four months Deepak gave Davy a letter of acceptance. It was held that Scottish Power did not and were not presumed to have known of the practice of construction by continuous concrete pour and the claim therefore failed. Davy contracted to sell Deepak a process. The Court concluded that the damages were not foreseeable. The plant was built between 1988 and 1991 and commissioned in 1992.13 More recently a case which took place in India demonstrates how contractor's need to be careful. construction. or any fault. failure or defect in any materials or goods supplied by the contracting party. Were Deepak entitled to claim for loss of profits? The decision of the Courts was that loss of profits and overhead expenses thrown away were not indirect and consequential damages but were direct and natural as a result of destruction of the plant. 4. license. operation and maintenance of a 300 metre tonne per day low pressure methanol plant in India. Some months later the plant exploded. design and know how in relation to the design. The moral from this is do not rely on consequential damages exclusion clauses unless they spell out precisely what is being excluded.12 Construction Contracts sometime have clauses which seek to limit any liability for consequential loss or damage caused by for example late supply.
If you have to go to arbitration or litigation to pursue your claim. Provide all necessary substantiating evidence to justify the entitlement. When in the progress of the works was it necessary to carry out the variation. You need to bear in mind the fact that you need to prove your legal entitlement but you also need to persuade the Employer of the merits of your case. 26 . 5. need to strike an appropriate balance in terms of evidence required for successful and cost effective resolution of claims. close to the contract and grounded in facts and evidence as possible. 5. you will have to leave the Tribunal concluding at least 51% to 49% that you are correct. How much proof is required for such a conclusion? It is difficult to be sure. The problem with excitable language is that it tends to suggest to the Employer that the claim is not really as strong as the Contractor would like it to believe. you should be seeking to prove the following: (a) That a variation/change instruction was validly given under the contract and that variation has been complied with. Make the claim as concise. If you wish to make a claim for direct loss and expense arising from a variation. 5. State the contract term under which the entitlement arises.5 Let us take an example to illustrate the point. (c) (d) What work was carried out. You will therefore. In the same way. one of the major issues you will face is deciding exactly how much proof will be needed to persuade the Employer's key decision makers as to the validity of your claim and to make an acceptable offer of settlement. State and show that any conditions precedent have been complied with. the vast majority of you will always wish to settle claims and the same questions arise.2 There are simple guidelines for any Contractor to follow in making what should be a successful claim: • • • • State the facts which given rise to the entitlement.3 Remember when drafting your claim that it is best not to use emotional language.4 There is a heavy burden upon a Contractor to provide evidence in support of its claim. (b) When that variation was issued and when the Contractor complied with the variation. In determining what is going to be the settlement strategy you follow.5.
original programme. the general rule is that more proof is required. Yet this often proves one of the most difficult tasks and the records provided as evidence are so incomplete that even a 27 . 5. the regular progress of the works was affected. drawing/information issue dates.10 Averages and generalisations will not do. Many fail to link cause of the delay with the effect of that and to provide evidence that there is a direct cost consequence which can clearly be shown in cost records. to convince an Arbitrator that the larger claims are not worth the amounts claimed. 5. if you decide to cut back on small items you can create problems. This is unusually because there are more competing causes and to make a successful claim your factual and methodological analysis needs to be strong and substantiated.9 Many of the claims I see from Contractors are lacking in supporting evidence.8 If you are preparing a complex claim. not only with the small items.6 You have to base the proof level in the context or the nature of the claim you are actually making: 5. Full details of the costs incurred as a direct result of the variation. It is sometimes possible for an Employer by showing that a large proportion of the small claims are unsubstantiated and over-claimed. planned delivery dates. but also on the knock-on effect on your larger claim items. amongst others in order to build as complete a picture as possible of the project.(e) (f) (g) (h) That in carrying out the variation. That contractually required notices were given in respect of the effects of the variation. Obviously you are not going to want to spend many thousands of dollars proving something which is only worth a few hundred. Types of substantiation 5. Someone new looking at the project for the first time would undoubtedly ask to see the tender records. What is required is actual loss and actual expense.7 The amount of time and money you are prepared to spend on proving your losses should reflect the amount of money at stake. 5. The general tone of the claims is 'injustice' and they are filled with wide-ranging statements about how the Contractor has been hard done to by the Employer or its design team or how it has suffered substantial disruption without actually giving any facts. original contract. This can only be achieved by detailed and accurate records. However. Records are the prime source of evidence. What was the actual effect on the progress of the Works.
The more detailed and accurate these are (particularly in the case of supervisory staff) the better your claim will be. which is not uncommon. Without firm facts recorded at the time. and where. 5. but they will not bring in the money. disputes arise over what people can remember or thought happened without anything concrete to back them up. provocative or mischievous.dispute acknowledged as reasonable by all concerned cannot be supported and fails. Contract and Notices 5.15 However. managers are often reluctant to do so because they fear they will be interpreted thereby as aggressive. but the majority seem prone to argument or at least a measure of uncertainty. and the timing and manner of their submission. Contractual notices stem from the duty to mitigate damages. Cost Records 5. though it should be remembered that the duty to do so exists whether notices are specified or not.11 The original and updated contract programmes are a starting point for Contractors. 5. Thus it can often be prudent to issue a notice in circumstances where one is not specifically required. So start as you mean to continue. have to be preferred.13 Conditions of Contract almost invariably include provisions for the issue of assorted notices by each party to the other. uncooperative. with a sensible understanding of the mutual benefit notices afford . is intended to discourage the submission of notices upon the generally erroneous conviction that if they are not submitted. The point you should bear in mind is that cost records should be clearly referenced or referable to the particular delay event or consequence claimed for. even though the notice is issued for the sole benefit of the recipient.12 What is meant here is time and allocation sheets. Allocation sheets which show who was doing what.14 The purpose of notices is to warn the recipient of a forthcoming event or situation so that he can prepare for it. The particular requirements may vary. Progress Schedules 5.compliance with contract requirements and advance warning and agreement on their uninhibited submission. In order to substantiate a money claim you should use a schedule which shows the planned progress and actual progress demonstrating the effect the delaying work had on progress. Such a reaction. their formality. then the relevant claim cannot be sustained. This will form part of our second session. as do the contractual and commercial significance of the notices. 28 .
It is inhibition which usually delays the timely submission of a notice, which at an early stage may be felt to refer to a minor matter, until the matter has grown out of all proportion and a notice, now obviously overdue, would be too late either to comply with contract conditions or to have any beneficial or mitigating effect. So get the notice in early, and invite discussion. It is much easier to withdraw or overlook a redundant notice than to validate one that is overdue.
To comprise a “notice under the contract” the communication does not have to follow a prescribed form, though it must be in writing and delivered to the recipient. Proof of posting or “I gave it to Mr Tanaka” are inadequate. However, if the notice is clearly referenced to the appropriate clause, its relevance is more likely to be appreciated by the recipient, and there is less likely to be subsequent argument as to whether the notice was properly given.
Beware, though, as a recipient, that due notice could be given you by way of minutes of a meeting, within the chatty content of a more general letter, in a progress report or even on a drawing. Sensible agreement at the beginning of a contract should reduce that risk. A warning that is concealed, of course, is a nonsense, but may nevertheless fulfil the particular requirements of the Contract, and may be a deliberate ploy for devious, certainly dubious, reasons.
Be wary of the difference between mandatory notices (those which comprise a condition precedent) and those which are not, and that standard Conditions of Contract may be subtly changed in that regard. If a Contract provides for notices which are mandatory, then mandatory they are, unless that condition is waived by both parties to the Contract. The fact that the intended recipient knew of the event through other channels, or discussed it with you at length in his boardroom or in front of a shareholders meeting is no substitute for a written notice. But be sensible, if in the absence of written notice warning has been clearly given, can be shown to have been given, and mitigating action has been taken in consequence, then you would be ill advised to ignore the consequences.
Contractual claims are subject to procedures set out in the contract documents, and these procedures will prescribe when notices are to be provided and by whom. Apart from simply complying with the intentions inherent in such procedures, as discussed earlier, a claim which purports to be founded upon the conditions and provisions of the contract will be more credible if it shows that the claimant, at least, has conscientiously complied with them. All claims relate to events, and we have stressed that events must be confirmed by evidence. Proper submission of notices goes a long way towards
ensuring that proper records of events are made at the time and can be agreed.
It can be a useful exercise to tabulate the notices required for a new Contract, together with any time limitations relevant thereto, and to ensure staff are fully aware of them. Who is responsible for which Notice? Similarly, ensure incoming notices are properly dealt with and that you take full advantage of the warning they give. Make sure that you respond to them.
Notices, both by their presence and absence, are often a source of contention. Understood and properly used they can be of substantial benefit to both sender and recipient. They are a vital element of any claim.
Records/Minutes of Meeting 5.23 These are useful supporting evidence. However, remember that they are usually
produced by one party without reference to the other. It is good practice to check the minutes on receipt and challenge any inaccuracies at the time of correspondence. If you do not, it does become more difficult to challenge the minutes later as inaccurate records of what actually happened. Remember also that most minutes of meetings have good progress reports. Site diaries 5.24 These are useful (but occasionally embarrassing!) records of progress, yet requiring good discipline if they are to be relied upon. The evidence in the diary can be of great importance if there is no other evidence available.
Global claims 5.25 If the Contractor has made and through good practice and procedures, maintains accurate and complete records throughout the project, the Contractor should be able to establish the causal link between the Employer's Risk Event and the resultant loss and expense, without having to resort to what is known as a 'global claim'. A global claim is quick and simple approach but one which is not contractually supportable, providing no cause and effect. criticality. It ignores other delays occurring at the same time and ignores
In its simplest form a global claim is a claim for the difference between
tendered and out-turn cost based on many allegedly but not particularised disruption events.
In general, it is necessary for the Contractor to establish each and every head of claim by means of supporting documentation and other evidence. It is not enough to show a financial shortfall. The UK courts have made the following pronouncements in relation to global claims: (a) The global approach is only justified in cases where it is difficult or impossible to make an accurate apportionment; (b) Where elements of the claim can practicably be isolated, the decision maker must make individual awards; (c) The approach is one of last resort and cannot be used to lump all delaying events together to justify a total overrun or financial shortfall.
A Contractor may, of course, put forward its claim in any way it chooses. However, putting forward a global claim will undoubtedly present evidential difficulties most apparent in the failure to identify a clear connection between the alleged breach of contract and the alleged consequential cause of delay or damage. summary
In summary a Contractor's claim should: (a) Set out in intelligible form what is the loss, why it has occurred and why the Employer has an obligation to compensate the Contractor for that loss. (b) the claim should tie the breaches of contract relied upon to the terms of the contract and identify those terms. (c) the cause of the loss and the effect (ie the loss) should be carefully explained with a clearly identifiable link. (d) If it is not possible to link every single break to every single cost, some causative event must be established and the link for those events demonstrated.
If you follow these guidelines, you should be a long way towards achieving successful resolution of valid claims.
SESSION TWO 32 .
what delay to completion did the employer’s events cause. ie those people who investigate project delays. excessively inclement weather. or disruptive delay. but it can be difficult to distinguish between each type. when did the rate of progress decline. Ultimately. these clauses remain valid only if the employer can extend the contract completion date when he has caused delay.5 There are three primary reasons why one might want to analyse delay: to establish lines of investigation. air conditioning etc).e. That is. Hence. which concerns issues of productivity. That is to say.6 An investigation of a construction project will involve consideration of a wide variety of issues. 1. late information. morale and other consequential effects of project change. 1. Analysts also investigate programme disruption. remedial works and the hundreds of other delay causing circumstances that arise on construction projects.2 The reason we need to carry out Time Analysis is because construction contracts have liquidated damages clauses and.4 Analysts. This aspect is not considered in this paper. Time Analysis in this context is really about Delay Analysis i. poor performance.1 Time analysis refers to a forensic investigation into the issue of what has caused a project to run late. acceleration. I prefer the term ‘Delay Analysis’ as a title and I will refer to it from now. if the employer causes delay and there is no extension of time clause.3 So Time analysis is really concerned with measuring the impact of employer events on the progress of the works and this impact is measured in terms of delay to the programme. as explained in the earlier paper.1 TIME ANALYSIS – METHODS Introduction 1. delay to the completion of work or contract milestones caused by the time impact of events such as variations. roof. steelwork. To help establish lines of investigation 1. These include where the delays occurred (which part of the project – was it in the foundations. 33 . 1. to demonstrate entitlement and to present the case one is seeking to prove. the former delaying the project’s completion date and the latter affecting progress but not overall completion. 1. fatigue. congestion. distinguish between critical and non-critical delay. we need to identify those events causing critical delay for evaluating extensions of time. the liquidated damages clause becomes invalid.
line-graphs. (b) Analysing the databased records by linking related data together where relevant (eg drawing numbers linked to activity progress). actual start and finish dates. such as programme activities. material deliveries. plant deliveries.9 The graphs or charts produced in this way are working documents. drawing registers and so on. notices of delay. insufficiency of resource. reductions in productivity etc) and differences 34 . lack of design information. Also. I have compared the planned manhours with actual manhours on a project and I am interested to know why there was no labour expended in weeks 6 and 7. by trade etc). in that their purpose is to identify changes or variances (such as peaks and troughs in resource levels. daywork sheets. progress schedules. chainage progress. labour allocation sheets. drawing registers and so on. (c) Graphing the results of the analysis using barcharts. For this work we would use standard database software such as Microsoft access.where did late information or materials cause delay. actual start and finish dates. delays or disruptions arose. where they occurred on the project and which programme activities were affected. failure to progress. In the slide. by gang. trends (indicating where delays arose. chainage progress. sorting/grouping data by different variables (eg progress by floor. progress schedules. design information.7 Such an investigation requires a forensic review of project records involving three stages: (a) Databasing relevant project records. such as programme activities. notices of delay. progress achieved per month etc) and selecting or filtering data of particular interest. by ‘system’. overall productivity etc). and 13 to 16. plant deliveries.8 Analysis of project information in this way can help to highlight when events. weld records. weld records. where events and delays occurred at the same time. Databasing relevant project records. instances of competing delays. why did the labour increase so much in weeks 19 and 20? 1. aggregating or summing together quantities (eg numbers of drawings per week. material deliveries. daywork sheets. 1. histograms. how extensive they were. excessive rainfall and so on. poor productivity. 1. tables etc. For this work we would use standard database software such as Microsoft access. labour allocation sheets.
10 This kind of working data analysis can be raw and involves ‘slicing and dicing’ the project records in order to discover where the effects appear to exist and where the problems probably arose. the analyst hopes to identify those issues. the tribunal (i. In general. and form its own views.(such as illustrating that certain floors/trades/systems were not affected INTRODUCTION others were). This can be aided by visual pictures (primarily graphs and charts) and these can be produced using IT tools used by the delay analyst. I use the phrase ‘to demonstrate entitlement’ with caution as it may imply that the delay analysis using one of the methodologies is the demonstration (that is. To demonstrate entitlement 1. how do we demonstrate the amount of delay caused by an employer’s event and so what extension of time are we entitled to. which is the spiky red line.12 Having interrogated the project records and analysed the delays. relevant case law. but requires a free format and versatile data analysis and graphics software tools.11 This is the main subject of this paper i. The delay analysis methodologies do not provide the ultimate answer in a case concerning extensions of time. The methodologies are tools for assisting in describing or analysing complex sets of facts. which represent when the employer handed over lengths of railway track for the contractor to lay. who has to consider and weigh up all the competing evidence and form an opinion.e. this implication is mythology. 1. arbitrator. I contrasted the planned duration which is in green. However. or ultimately an arbitrator or a judge. I tried to explain why laying a railway line was delayed. as well as considering analytical exercises such as delay analysis. The delay analysis exercise will assist in this process but it will only be part of the evidential matrix. it is necessary to convince the opposing party. witness evidence. We call this a heart-beat chart because the amount of labour on site is represented by the vertical scale of the red line. adjudicator) has to weigh up the terms of the contract. contemporary records such as photographs. it discharges the party’s burden to prove the consequences of a set of events upon the progress of the works). That is to say.e. In the case in the slide. From this investigation. such analysis does not rely on a delay methodology. Judge. What the chart shows is that the provision of labour by the contractor is directly related to the 35 . To present the case 1. Underneath the red line are events. It is the engineer or architect. time periods or construction elements that require a more detailed study. with the as-built duration.
the actual based methods approach the analysis by seeking to measure how actual progress differed from what was planned. rather than on showing what in fact occurred. or types. Delay analysis methodologies 1.14 Theoretical based methods is perhaps a better definition. 36 . of delay analysis methodology. this is not achieved by identifying its actual impact from recorded facts. a contractor’s entitlement to an extension of time is derived from the terms of the contract. the employer’s delay being offset by simple corrective action by the contractor) and the programming changes actually implemented by the contractor. but this is not an ideal description since it can be confused with contractual entitlement.16 The theory based methods all approach the issue of entitlement to extension of time by first focussing on the delay event and then seeking to determine what delay may have resulted. The first category is often referred to as entitlement based methods. However. 1. since each methodology is based on establishing a programming model of the project and then influencing it by the application of project events or constraints. as-built.17 On the other hand. 1. They focus on how the works progressed. the effects of mitigation (that is. Another definition of this group could be model based methods. the as-planned impacted and the as-built but for methods. 1. since they seek to demonstrate what actually occurred on a project and the analyst investigates what caused the project delay. 1. since these methods rely on demonstrating the theoretical impact of the consequences of delaying events. In this theory based grouping are the global and the net impact methods. where the contractor has a problem of his own). whereas entitlement here is derived from the results of a delay analysis methodology (ie it is methodological entitlement). These methods include the as-planned vs. The two are clearly different. the as-planned but for. but by theoretical analysis of what the effect ought to have been. the delay is caused by late delivery of track.13 Turning now to Delay Analysis. Hence. how activities were actually delayed and only thereafter seek to ascertain what delay event(s) caused this delay.15 The second group is called the actual based methods. the window/snap-shot and the impact/update methods. For example. there appear to be two groups. not delay by the contractor. These methods tend to favour the contractor’s position because matters such as culpable delay (that is. tend to be considered only as secondary issues.employer handing over the track. if at all.
• • • • programme float or risk contingency. which involves increasing the rate of production by employing more resources or working longer hours. and acceleration. 1.19 One feature that all the methodologies have in common. I believe. This is because each analyst will have to consider and challenge a wide variety of related issues and each analyst will apply different degrees of personal experience and judgement. concurrency of events (two events imposed at the same time). However.22 The point. is this. however. the actual based methods also rely on models and theory.18 I would emphasise that the two groups do have common features and cannot be distinguished in absolute terms. issues affecting the analysis using any methodology require subjective assessments and it is these assessments that undermine the analytical or clinical nature of the process. 1. 1. the sequence and logic of the planned programme of work. An element of work took two men four weeks instead of two weeks. In addition. the sufficiency of resources provided by the contractor to carry out the works. If different analysts investigated the same project.1. but less so than the entitlement or theory based methods. applying the same method and using the same facts. they would be unlikely to arrive at the same conclusion.20 These related issues include: • • • • the sufficiency of the planned durations. being the determination of those activities influencing progress at each stage. The delay analysis methodologies each provide a set of rules for examining project delay. The contractor claims that the weather caused the delay. is the subjectivity involved in the entire delay analysis process. For example. The employer asks why did the contractor not employ four men? Opinions will differ. criticality.21 To take a very simple case. the rules of the methodologies 37 . 1. not only between contractor and employer. dominance theory (which event was the major contributor to delay). but also between analysts. Throughout the period the weather was dreadful.
The cause of this delay has been shown in the next slide. and this again increases the level of subjectivity. the ‘answer’ that a methodology provides is only as good as the accuracy of the base information. 1.D and B is not a critical path because activities C and D can be delayed by up to two weeks without delay to completion.C and D. We have 4 delay-causing events. D2 is additional work (variations). That is to say.can be ill defined or require judgement in applying them. This is a really important aspect to appreciate. some more than others. D3 is a contractor-caused delay and so would not give rise to an extension of time. Note.23 In summary. There are two planning paths.26 Note that the actual overall duration was 10 weeks. because activity A has a one week float before the commencement of activity B. 1. D1 is inclement weather. that the as-built critical path runs through activities C. 1. apart from how the techniques are different. Path C. I have produced a simple project. The critical path runs through activities A and B. This is important to recognise if you are employing delay analysis to assist in presenting your client’s case. Theoretical-based methods 1. Global impact method Note that the overall 38 . On the slide in blue we have four activities. because there is no float on this path and any delay on activities A and B will cause delay to completion. and C. Each methodology indicates that different events cause the delay and for different periods of time. however. so there has been delay.25 The next slide indicates the as-built programme in red. subjective assessment and theoretical projection. the assumptions inherent in the methodology and the reasonableness of the subjective decisions made by the analyst. none of the methodologies I will explain are perfect because they all include an element of assumption. duration of the programme is 7 weeks. D and B. For this reason. D2 and D4 are events which would give rise to an extension of time. is to note how each method produces a different answer. D3 is late information from the employer and D4 is lack of resources by the contractor. What I would like you to concentrate on.24 In order to explain the various Delay Analysis techniques. 1. A and B. A. the critical path has changed between the plan being prepared and the works being completed.27 I am now going to explain each of the techniques.B. D and B. So note the events D1.
Despite the criticisms. So in this case. the amount of work the contractor has to carry out) doubles due to variations and so the duration of the relevant activity is doubled. resulting in entitlement to week 11. to arrive at an entitlement to extension of time. the claimant sought to demonstrate its delay case by arguing that every day worked on particular variations equated to a day’s delay to the project (the argument was not accepted!). we add D1.29 The global approach is quick and simple but never contractually supportable and provides no cause and effect. concurrency or dominance of delays. to arrive at a period of delay to the project.30 This method has also been repeatedly criticised by the courts because it fails to consider the fundamental issue of criticality (that is. It ignores other delays occurring at the same time and does not consider timing. An example of a global approach is where the work scope (that is. whether the works were delayed or not) and ignores reality. we would exclude it from the analysis. Hence. hence he is due a full extension of time. D2 and D4 on to the end of week 7 to indicate an entitlement to a completion date of week 12.28 The global impact method is a rough and ready way of indicating what the potential impact of a delay causing event has been. In that the contractor finished in week 10 indicates that a full extension of time is due. In the English case of McAlpine Humberoak1. as well as the contractor’s duty to mitigate. 1. The contractor actually finished in week 10. ie 4 weeks. Net impact method 1. 1. the overall entitlement is D1 + D4.1)(1992) 58 BLR 1 39 . It also ignores any actual delays caused by the contractor. the global method is still widely used by contractors in an endeavour to demonstrate their case. the employer-caused delay periods are added on to the end of the planned completion date. 1. only five days is taken as delay to the works rather than the total of ten days. where there are two concurrent delays each of say five days. For example.1. 1 McAlpine Humberoak v McDermott International (No. In this case. Another example of a global claim arises when you indicate the date of a variation and measure the difference between the planned start or finish date of the relevant programme activity with the date of the variation. because delay event D2 runs concurrently in week 4 with event D1.32 In this case.31 This is essentially the same as the global method but with the refinement that the issue of concurrency of delays is considered. as would be the case with the global method.
delayed finish or prolonged duration) is individually impacted onto the planned programme. this method has little to commend its use.1. or of the contractor’s delays. Finally. As-planned impacted method 1. 1. The first step is an assessment of the likely critical delaying effect of each delay event in the schedule. 1. It analyses the theoretical effect of impacting delay events onto the original baseline (ie planned) programme and projecting the completion date using the original sequence and timing of remaining activities. or be based on evidence of the actual delay experienced on the project.33 The advantages and disadvantages of the global impact method also apply to this approach. That is to say. Secondly.36 In our example. 1. we add in event D4 but this causes no further delay to completion. 1. or of both together.39 In conclusion. in chronological order and the project completion date re-analysed. D1 causes a one week completion delay because of the 2 week float on the path C. In this case. for each delay event. event D1 causes a 3 week delay on activity C but only a 1 week delay to overall completion. This process continues until all of the delays have been impacted. 40 . because event D3 is a contractor-caused delay. the 3 week delay is allocated between events D1 and D3 and the contractor receives a 1 week extension of time and the employer receives 2 week liquidated damages.38 The next delay event is D3 and this causes a further 2 week delay to completion because activity D is on the critical path. 1.35 The prerequisites of this method are a baseline critical path programme that represents the contractor’s intent and a schedule of delay events.40 What is important to note with this method is that if events are added to the planned programme in a different order. It can be used to show the theoretical delaying effect of the employer’s delays. the effect (such as a delayed start.34 This method is also known as the entitlement method.D.B. 1. we take the planned programme and insert event D1 on to it. then you will get a different result.37 We then add event D2 on to the planned programme and because activity A is not on the critical path anymore it causes no delay completion delay. This can be estimated using norms and experience. In summary.
The impacted completion date is then compared with the as-built completion date (that is. all the other employer-caused delays contributed to the 3 week delay and the contractor should receive a full extension of time. there are two principle weaknesses of this method.for the contractor-caused delay. but this means it is a theoretical investigation.41 The strength of this method is that the process avoids the need to analyse actual progress records in detail because the key elements of the methodology are the original baseline programme and a schedule of delay events. No completion delay occurs because of the 2 week float on activities C and D. 1. these events delay completion by 2 weeks extension of time. D2 and D4. If it can be shown that a delay event. the original baseline programme may not be a realistic model on which to base the whole analysis (because the works were probably carried out in a different sequence and at a different time from that originally planned). we take the as-planned programme and add in the contractor-caused delay.46 1. since actual progress is not considered. 1. is to add in the employer-caused events. then the methodology will lose credibility.42 However. As-planned but for method 1.43 For this method. 1.45 The alternative way for this analysis. this method does not demonstrate what actually caused delay to the works. when the project was actually completed) and the difference is said to be how much earlier the project could have finished ‘but for’ all the other delay events (imposed by the other party) but which have not been analysed. depending on which set of events have been analysed. that is D1. so we conclude that but . could not have actually caused delay (for example. The period between the analysed date and the actual completion date is said to represent either the contractor’s entitlement to an extension of time or the employer’s entitlement to deduct liquidated damages.44 In this case. relied upon in the analysis. the analyst impacts the planned baseline programme with the assessed implications of the events a party considers it is responsible for and the combined influences of these are analysed. However. 1. which is event D3. 41 . Firstly. the employer is entitled to receive 1 week’s liquidated damages.1. as there is no need to consider actual progress of the works or the timing of events. the project would have been completed on time. Secondly. On this basis. if it can be shown that alleged late information was received well in advance of the actual progress of the works). The advantage of this method is that it is reasonably quick. Hence.47 Note that both approaches produce a different conclusion.
D1 and conclude that but . ‘but for’ the additional painting. and so starts off as a fact based analysis. The very last excusable delaying event on the critical path is removed and the model is reanalysed. For example. but in reverse.49 Although this methodology adopts a model of the as-built programme for analysis.48 This method also relies upon the planned model for carrying out the works and ignores the fact that the actual critical path would more than likely be different. the programme could have finished five days earlier.52 The accuracy of the analysis will depend on the quality of the information on which it is based. The process can also be applied by removing all the excusable events together. it is still a theoretical analysis of delay. the model no longer represents the real as-built programme but is only a simulation of what the as-built programme could have been had the delay events not occurred. a start delay.for event D1. We delete the first employercaused event. D1 caused a 1 week delay and an extension of time is due. Whatever the approach. 1.51 In our example case. we start with the as-built critical path. the programme is able to finish five days earlier. This becomes the model to be analysed. each invariably produces a different answer! Once the analysis is underway. or by grouping similar excusable events together and removing each group individually. the project would have been complete in week 9. a finish delay or an activity prolongation). if the last activity in the project happens to be a five day painting variation. Thus. Therefore.1. including a measure of their impact (for example. The difference in the overall programme duration before and after this removal is said to represent the period of critical delay caused by the particular delay item removed. The as-built programme is first constructed and linked together into a critical path network. The greater the amount of information that can be provided in support of any 42 . therefore. As-built but for method 1. sometimes referred to as the simulated asbuilt programme. This is because a planned programme is an early projection of intentions and the contractor will change the sequence and timing of activities when the works are in progress.50 This process is then continued until all excusable delays have been removed and the model has been fully collapsed (the method is also referred to as the collapsed as-built method). The approach is similar to the as-planned impacted method. The model is. A schedule of delaying events is created. when this excusable delay is removed. 1. 1. the exercise is repeated for employer-caused events D2 and D4 and we conclude that a full extension of time is due.
for example. in whatever form they exist. 1. the results of an as-built but for analysis are often impossible to defend because they do no relate to what actually happened on the project. This may require a more sophisticated methodology. the fact that it considers what changed in terms of planned intentions. since the method is based on the as-built programme. we would try and explain why activity A finished 2 weeks late. and the importance of accuracy. and that it is a ‘visual’ methodology with no manipulation (in contrast with the as-built but for method). It is dependant on subjective logic links that were never set down and which were never agreed in any contemporaneous programme. For most complex project disputes. This method is ideal for those projects where it is easy to identify where the main delays arose. This methodology also lends itself to the analysis of relatively small programmes (say up to 50 activities) which can be considered on one page and so viewed altogether.55 This is probably the most common method and it compares the original programme intent and the as-built programme to enable an assessment of where delays occurred in any particular period of time. 1.54 These methods are characterised by the fact that they focus on determining the delay periods and then assessing which event(s) caused that delay. the next stage is to establish which delay events caused the particular delay periods. As-planned vs. In summary. why activity C took 3 weeks longer and why activity D was 2 weeks late. Actual-based methods 1. So in our exercise. from a high level barchart comparing as-planned v as-built activities. it appears to have a thread of truth about it. removing delay events (and logic links) retrospectively does not reflect the actual way the works were progressed. Also. Such information will generally be gained from site records. It is a relatively low cost 43 . as-built method 1. this methodology does not appear to be an appropriate one for most standard forms of contract. Hence. how these delay events competed with other concurrent events and whether the delay periods were critical at the time. this method is only useful for an initial pass.assumptions made.57 The main advantages of this method are its simplicity. completeness and reasonable logic cannot be over stressed. its application is not. It is open to criticisms of bias on the part of the analyst.56 Having identified delay periods. however.53 Although the principles of this methodology are straightforward. However. the more credible the results. 1.
we hope to explain. The difference between the end date from this analysis. with competing delay events and large numbers of activities. In practice. Having identified a period of delay or mitigation in the period in question. period by period. why the work was delayed. This can be done in a variety of ways.60 The as-planned and as-built programmes are first established. the increments coincide with the frequency of the progress reporting cycle. or time periods.58 The main disadvantage is that for complex projects. represents the period of delay or mitigation which arose in the current window. or with major milestone events. such as completion of foundations. delay and indeed mitigation. 1.methodology and is particularly useful in identifying where the main delay periods probably arose.62 In our example case. 1. The overall project duration is then divided into periods in order to make the analysis more incremental. The model is then time analysed. that is considering when and where actual delays were incurred. the duration. 1. We then investigate why activity C was not completed by week 2 and check if activity A is on program at the end of week 3. these should also be introduced into the model. 1. 1. say monthly. The main refinement is that critical path analysis is used to assess criticality. impacting and analysing sub-nets (which are small critical paths that model a single programme activity in greater detail). completion of roof etc. It produces a result which cannot be 44 .63 The strength of this approach is that it forces the analyst to consider actual progress and revised programme intent in a logical manner.59 This method is a more rigorous version of the as-planned vs. as-built method but follows the same basic philosophy. are then logically linked so that they become critical path programmes. by creating. the remaining task is to assess the causative event or events. the method may not be rigorous enough. we break the programme down into 3 windows. In this way. progress and logic of the work actually carried out in that month are imposed onto the as-planned model.61 For each time period or ‘window’. The as-planned programme becomes the model. If any major planned programme revisions were made in that period. and the end date from the previous window or snap-shot. We then repeat the exercise for window 2. and finally window 3. Windows/snap-shot or update method 1. by detailed visual inspection. The end date is the result of actual progress achieved to date (ie up to the end of the window) and planned durations and logic for the remaining work.
easily rejected as contrived because it is practical rather than theoretical. a final step is to assess 45 . The resultant project end date at the end of the window will reflect the notional entitlement. at that time. This will allow for excusable delay events. to an extension of time. the delay events that are alleged to have arisen in the period in question are impacted on the planned model and time analysed.64 This method is an enhancement of the previous method. Impact/update method 1. Whereas the window/update method establishes delay in each window period and leaves the assessment of what caused the delay as a separate debate. compensable delay events. The resultant project end date will reflect the additional delay. In the chart we have a planned programme in green. 1. in terms of culpable delay or mitigation. Issues such as mitigation. The programme finishes in month 15. The resulting end date will represent the overall delay to completion actually occurring in that window period. The contractor-caused delay events that are alleged to have arisen in the period in question may also be impacted on the model and time analysed. this method applies events to the as-planned model on a month by month basis (the windows) to derive the monthly entitlement but then considers the actual monthly production.65 A delay schedule is drawn up before the analysis proceeds and this will list the delay events alleged to give rise to contractual entitlement. That is to say. concurrency. the analyst is provided with information on causation which can then be debated as to dominance. 1. 1. 1. ie to contrast the contractor’s actual performance. but is very similar to it.66 Following analysis. I have had to change the example.67 From these two exercises (the planned model time-analysed with delay events and the planned model analysed with actual progress).in this case there is a projected 2 month delay. the impact/update method introduces the events into the delay analysis. However. the progress records are imposed on the planned model and the programme analysed again. if any.68 To explain this approach. culpable delay events and contractor’s mitigation due to changes in programme or faster progress. caused by the contractor in that month. For each of the window periods. mitigation and so on. concurrency and dominance are all taken into account in a transparent manner. The delay events occurring in period 1 are inserted on to the programme to assess the new completion date . leading to better understanding of what occurred and the circumstances at the time. criticality.
(b) The second approach is the ‘but for’ methods. The entitlement one based on the as-planned impact approach and the actual one based on the as-built programme.71 Having described the various methods under the two headings of theoretical-based and actual-based. allows for matters of concurrency. Furthermore. the weakness in the method is that it can be expensive to carry out and requires good as-built records. and based on critical path analysis. I suggest that the methods fall into four basic groups. It considers actual progress and revised programmes.the actual progress at the end of month 1 and establish what the actual delay is at that time. ignoring how the project was actually constructed. In most applications. these methods produce incorrect answers. by using the window/update or impact/update 46 . as-built method. the courts have implied that the assessed time impact of early delays could diminish later on in the programme. and actual events are imposed on the model to see how they may have influenced the end date. If the employer had not imposed this event or constraint on the contractor’s performance. is the as-planned vs. In many applications.70 However. 1. The analyst then has two indications of delay. which create models of planned intentions or the as-built project and seek to address causation on the basis of assumption. A model of what was planned is produced. and limits the degree of initial subjectivity to the logic links within the model. 1. which historically has been the most widely used and from my experience. Two models of the project are overlaid on each other and the analyst seeks to explain the causes of the variance. is what the lawyers prefer. (c) The third approach. the event or constraint was imposed and the standard forms of contract ask for the consequences of it. dominance and mitigation to be debated. (d) The final approach is to re-live the life of the project by considering the programme in incremental stages.69 This is probably the preferred method of analysis due to it being more practical. this is incorrect. Any extended completion date is said to give rise to an entitlement to an extension of time. The methods contrasted 1. identified by the approach: (a) The first approach applies to most of the theoretical methods. when would the works have been completed? The fact is. balanced.
47 . These update methods are probably the most robust and extensive analyses.72 A key point to note from this paper is that each Method of Delay Analysis is likely to produce a different answer. What these methods are attempting to do is consider events at the time they arose and consider what was the likely entitlement at each month. 1. This is one reason why extension of time claims are argued over so much. as-built method which seeks to justify the overall plan with the overall as-built in one step. This can be contrasted with the as-planned vs.methods.
consider using two approaches. the contractor will have to show what actual resources were on site during the actual delay period. However. an approach based on what actually happened is warranted. This is important to note if writing method statements for delay analysis. methodology is often affected by the available software. In fact. the nature of the project or claim. often influence the approach to be taken. For example. Artemis is a powerful package with an integrated database for forensic analysis of project records. or the case one is seeking to explain. one costs £250.000. not some theoretical resource level during some notional delay period. Power Project and Pertmaster are critical path analysis tools but require other software packages for processing data.3 Secondly. Primevera is said to be a very good forward planning tool and although it can be used for analytical purposes by itself. 2.2 TIME ANALYSIS . instead of analysing your case by one method. Microsoft Project only requires a few hours of hands-on learning before it can be used.PRACTICAL ISSUES Choosing A Method 2. the more theoretical methods (particularly those relying on critical path analysis) are helpful. Such approaches 48 . Therefore.4 Thirdly. particularly when using critical path analysis. 2. each delay analysis methodology may have to be applied in a different way. 2. However. Artemis requires specialist training courses and years of experience. A common example is the introduction of additional work by increasing the appropriate activities by a proportional amount equivalent to the extra work. a slight but unjustifiable adjustment to logic links can be difficult to identify but can produce the appropriate result for one party.5 The fourth issue to note is that delay analysis. Where the case is primarily concerned with justification of time. is fraught with manipulation. a sign of a potentially weak case is the adoption of a theoretical methodology that does not rely at all on a more factually based presentation. Note also that each software package has its own procedures. Another typical manipulation is the manner in which events are analysed. In addition. Microsoft Project. For example. it is said to be cumbersome. if the claim is for money as well.2 Firstly. They should not be written around one specific package. the other £5. rules and methods of operation. 2.1 What factors may affect the selection of a particular Delay Analysis method? There are four factors. For example.
but not by activity.8 An alternative situation is where the planned programme provides insufficient detail to enable proper analysis of the actual circumstances. which analyse in greater detail the manner in which certain aspects of the works would have been constructed and the sequence and timing. the as-planned vs. consider a ten storey building with ten planned activities per floor. This certainly applies when one is considering the as-built situation.usually exaggerate the case. 2. the approach taken in delay analysis is dependent on the status of the party’s records. In these situations. as-built comparison which is to the highest level of available consistent detail. advisable.6 Quite often. as-built comparison would be by floor. this can be investigated by seeking to develop the events on the ten activities by reference to other records. In this case. On a fairly large project. possibly rightly so. how many programme activities should you review? Although this issue is case specific. 2. experience also indicates that programmes with many hundreds or thousands of activities are far too complex to analyse sensibly and produce unrealistic or unreliable results. which is.7 Another point to note is that there needs to be equality between the level of activities being analysed and the progress details available to measure progress. The As-Planned Programme 2. I would attempt to analyse up to 100 activities. a more intensive analysis is only carried out during those periods where the high level analysis indicates that deeper investigation is warranted. It is not necessary to produce the entire plan or the entire as-built in greater detail. more often than not. Progress has been monitored per floor.9 Developing the as-planned programme in greater detail usually results in the cry of ‘foulplay’. it is normal to develop sub-nets of the planned programme. In fact. Depth of Investigation 2. For example. but where delay is apparent on any particular floor. or lack of them. In this way. There is no point in seeking to measure the progress of a thousand activities on a planned programme if records were only kept of a hundred. Hindsight is a wonderful gift of the delay analyst and one can always come up with a sound argument to justify the sequence in which a particular 49 . In this case. my experience is that ten activities are too few and many hundreds of activities too many. This affects the level of detail for the analysis. For example. the approach to take is to produce an as-planned vs. Another example is the sequence in which delays are entered onto the programme.
The Legal Perspective 2. 2. as well as its duration. The first point to note is that there is often no certain answer to a given set of facts.13 A third point to note is that extension of time clauses in contracts are not prescriptive. 2.element of unplanned work would have been carried out. the more hindsight that is applied to your methodology. if not impossible.11 Just a few points to note.14 Case law can be helpful in deciding how to approach delay analysis but often it is so case specific that the facts on your project never quite relate to the decided case. we demonstrate a delay caused by an event which is the other side’s responsibility. think twice about developing a very complex plan years after the project was started. Of 50 Each set of facts produces different . conclusions. that one has to analyse project delays based on two sets of asserted facts. it is still necessary to justify the reasonableness of the plan. only an optimistic plan! This is a point missed from many delay claims. as well as being inexact. Consequently.12 Another point to recognise is that construction contracts frequently throw up the most complex set of related circumstances and to disentangle these into a clear chronology and logic can be difficult. an alleged delay can be challenged on the basis that there was no delay. They are drafted in a general way and it is not industry practice to pre-determine how delays should be analysed. hey presto. Hence it is the norm. Otherwise. Even if clauses were more prescriptive. the facts of the case would still be argued over. the greater the opportunity for challenge on the grounds of bias or unreliability. This is then compared to what actually occurred and. Available records only tell part of the story and memory has to fill in the gaps. Not only should the claim rely upon the planned intent. However. but detailed method statements should be used to justify it.10 I have noted above that the most common approach to delay analysis is to contrast the as-planned with the as-built programme and seek to explain the variance. either in terms of methodologies or in dealing with such factors as float and concurrency. 2. Applying the same facts to the different methodologies results in different allocations between excusable and inexcusable delay. rather than the exception. 2. If you do not have an as-planned programme in sufficient detail. This is partly because the theories and principles upon which we build our case are incompletely developed. but opposing parties have contrary recollections of the facts.
given a set of circumstances and a particular contract. there are those who say that. but won the issue they considered they would lose. how can we maintain a critical attitude towards the case. If the methodology holds good for both situations (ie it produces sensible. one technique is to employ what has been referred to as the extreme case rule. I do not think my colleague’s experience is unique. does the impact change? For this type of test. if small changes are made to the programme logic. Such changes may demonstrate a weak methodology. In this test.18 Another test is the small change rule.16 Firstly. either in methodology or law. you must test its robustness. For example. I am sure many have similar experiences. A delay analysis using the global or net methods will produce a result that is closer to mythology than fact. He said to the delay expert: ‘I hear what you say about the results of your analysis. if applied properly. have you tested your methodology?’ The point being made was that. It is necessary to acknowledge. 51 . that in delay analysis there is often no clear solution. therefore. appreciate that the methodologies do have an order of merit. logical answers) it can be more confidently relied upon as being robust.17 A second important step is exemplified by the comment of a judge in a recent case in England. particularly when some members of the team hold clear and unambiguous views? recommended measures. but. small changes are made to the methodology or the analysis to see what happens to the results of the delay impact. 2. if you amend the order in which delays are entered on to the analysis. whereas the impacted/updated programme methods. This rule is used by some arbitrators when weighing up the parties’ alternative approaches. standing back from the facts of this case. one is looking to identify significant changes in the results arising from minor changes to the methodology or the analysis. This can be carried out in several ways. I would There are a number of suggest that the order of merit is as set out in these notes. Testing your Case 2. and the other side are clearly wrong! However. at the time. certain answer and outcome.15 So.course. there is only one definite. but note that I have introduced them in reverse order! 2. if your analysis is built on a particular methodology. For example. Apply extreme conditions or circumstances to the analysis. 2. are preferred as they seek to address what occurred/or should have occurred. do you get significant changes to the completion dates? Or. one of my colleagues often tells the story of an arbitration case where they lost the issue they knew they would win.
21 There is no preferred delay analysis methodology suitable for all cases. methodology is defined as a body of practices. how are delays to be notified. what are the obligations in regard to updated programmes. The more theoretical the methodology. although some methodologies are more robust than others. but if a contractor has failed to register its entitlements.20 To conclude. this may well affect the prosecution of its delay claim or its defence of the liquidated damages claim. That said. is there a condition precedent clause? Very simply. 52 . It is always better to demonstrate what actually occurred.2. There are many related issues that influence the analysis and these involve the application of personal experience and judgement. The delay analysis methodologies in use today each contain a set of rules which in themselves can be applied in a subjective way. in terms of contractual liability. were delays notified. Hence. 2. there may be a very strong case in fact. theoretical approaches can be helpful (particularly for the issues of mitigation and acceleration) but the results should be tested. delays and extensions of time. it is important to emphasise that the starting point of delay analysis is the parties’ contract and the contract terms relating to programme.19 Finally on critical views. 2. what is the base case programme.22 The methodologies do not tell you what the results mean. It is not difficult to manipulate a methodology to arrive at the ‘required’ answer. In my view. For example. Remember also that delay analysis is only part of the evidential matrix. progress. for example. it is not as precise a science as some suggest. it is as much an art as a clinical. analytical study. 2. Conclusion 2. procedures or rules used to engage in an inquiry. the weaker the analysis. one analyst's view of a given set of facts will result in a different conclusion from another analyst's. were particulars provided. is there an agreed programme.23 Although I believe that delay analysis can be an extremely important aspect of many cases. The extreme case or small change rules are useful techniques for testing the methodology. It is necessary to interpret the meaning of the results.
TIME INTO MONEY – PRACTICAL ISSUES Introduction
An entitlement to time is one thing. Turning that entitlement into yen or dollars is quite another. We have spent the morning focusing on delay methodologies and claim
principles. This afternoon, we are going to look at various money claims in theory first and second, how they can best be pursued in practice. 1.2 Records allow for successful monetary recovery. Whilst 'holes' in documentary evidence regarding factual events on site can sometimes be fixed by witness evidence, an Employer will want to see actual evidence that the money claimed has in fact been spent. 2 2.1 VARIATIONS Variations or changes are a factor in every construction contract. Maybe you know a project when completion which was identical to the last nut and bolt with the original design. I am not aware of one. 2.2 Every competently drafted contract contains a procedure which enables an Employer to vary or change the works being carried out by the Contractor by way of addition to, substitution for, or deletion, there should then of course, follow a mechanism for determining the point of the variation or change. Many standard forms of contract
contain working which enables the parties to agree in advance of carrying out the varied work exactly how much that work will cost. In many cases this is a preferred way of contracting. 2.3 If you are entering into a design and construct form of contract such as the FIDIC Orange Book, you should have an agreed list of rates and prices which are to be needed in the event that the Employer wishes to change its requirements. 2.4 Normally, variation clauses provide that where the varied work is of a similar character and executed under similar conditions of the original work, the tendered contract rates should be used. Where the work is either not of a similar character or not executed under similar conditions, the tendered contract rates can be used, but adjusted to take account of the slightly different circumstances. If the work is quite different in character and undertaken in different conditions, reasonable or fair rates and prices are to be
determined. Fair or reasonable rates will generally be reasonable direct costs plus a reasonable allowance for overheads. 2.5 How should you deal with loss and/or expense aspects of variations? Under some standard form of contracts, any loss and/or expense caused by an adverse effect on the progress of the works as a result of acts or omissions of the Employer is to be ascertained separately from the direct loss and associated overheads of a variation. However, under other standard forms, particularly civils works forms, prolongation compensation arising from variations is to be valued as part of the variation at or on the basis of the rates and prices in the bill of quantities or schedule of rates, or on the basis of a fair valuation. 2.6 What is to be preferred? My preference is for "whole cost" variations which include the consequent disruption and prolongation elements within the price of the variation. Leaving the prolongation and disruption elements of a number of variations to be compensated as a separate portion of the final account often leads to Contractors presenting global claims. Of course, it is not always practically possible to agree in advance (or immediately after execution of the varied works) the exact amount for prolongation and disruption to be included. However, it would always prefer to keep the whole cost variation account separate from any general claims as the method of choice is providing successful claims. 3 3.1 COMMON HEADS OF LOSS Earlier, we looked at the general legal principles which are employed in making claims. Now we will look at some of the practical difficulties encountered in pursuing some of the most common heads of claim. Before starting this review, however, I should remind you of the measure against which all your claims are going to be judged. If you are the 'wronged' party in the contract, the damages you are entitled to are those damages which would put you back in the position you would have been in had the breach of contract not occurred. Disruption 3.2 This morning we reviewed the basis of a prolongation claim in the context of our review of 'time issues'. Prolongation is the first of the two major forms of general claims a Contractor may make. The second major form is a disruption claim. A disruption claim is not related to the contractual completion date for the work – disruption (as distinct from delay) is disturbance, hindrance or interruption to a Contractor's normal working methods
the Contractor will have to rely on breach of an implied term. but it may have a disruption claim for the reduced efficiency at which its work force was able to progress the works. If there is no specific clause in the contract to rely upon. 3.which results in lower efficiency. such as breach of a term that the Employer will not prevent or hinder the Contractor in carrying out its works. 3. It is relatively common for work to be disrupted by the Employer but the Contractor is still able to finish his works by the Contractual Completion Date. we noted the importance of cause and effect analysis. It does not follow that simply because events on site did not occur as the Contractor had planned that there is a valid disruption claim. it may entitle the Contractor to compensation either under a specific form of the contract or as general damages for breach of contract. After all.3 Disruption is often wrongly talked about in the construction industry as if it is the same thing as delay. In these circumstances. If the disruption is caused by the Employer.4 One of the major obstacles any contractor faces is pursuing a disruption claim in that most standard forms do not expressly provide for disruption. Disruption has to be established in exactly the same manner. This is equally relevant here.6 What are the most common heads of disruption? The ones we see most often are: (i) (ii) (iii) (iv) (v) Premature moves between activities Out of sequence working Congested working areas with 'stacking' of trades Increased size and number of working gangs Increased number or lengths of shifts leading to decreased productivity. disruption can only be recovered to the extent that it is actually unused by the Employer. the Contractor may not in fact have a claim for an extension of time. There is no disruption clause.7 How do you prove a disruption claim? The starting point is again your records. but not necessarily so. 3. 3.5 In looking at time issues. What you must show the Employer is which work was carried out and when and using what resources. 56 . 3. It is not and is quite distinct. Disruption to construction work may lead to late completion of the work.
3. problems with supervision etc should be removed from the claim. I will look at some breakdowns of potential claim items within a disruption claim and look at the type of evidence you may wish to use to support the claim: Higher labour costs per hour (a) Causes (i) A greater-than-planned amount of work performed in increased wage rate periods Unanticipated overtime or shift premiums when (A) (B) Overtime is ordered by the owner or design professional Overtime is essential in order to complete on schedule (constructive acceleration) Evening or weekend work is ordered or required to permit use and occupancy of the premises prior to completion. Many bodies have undertaken such studies eg MCAAI (Mechanical Contractors Association of America Inc).9 Remember that a successful and well-presented disruption claim will remove the issues which have affected productivity but are not the Employer's responsibility. In so doing you will be able to show a man-hours comparison and a work product comparison.3. you may have to rely upon statistics from other comparable projects you have undertaken or industry norms. Further. you may be unlucky enough to be in the position where there are no unaffected sections to the project. 3. If the Contractor's programme was unrealistic or its works inefficient account should be taken.10 What you should aim to present is an accurate claim based on the actual reasonable costs incurred as a consequence of Employer responsibility disruptive events. (ii) (C) (b) Proof of Damages 57 . If this is the case. plant problems.11 By way of example. Bad weather. This would be a last resort as they need to be relevant and comparable to the same type of work the Contractor is undertaking in order to be of value in proving your claim.8 I would suggest that one of the better methods is to show progress as a comparable and unaffected part of the project as against the disrupted part of the works. based on site records which can be exhibited and cross-referenced. such as model productivity curves and factors. But this only works if you can truly compare like with like. 3.
This may be done in conjunction with the CPM and other progress schedules as well as through using graphical visual aids Carrying out extensions of the labour hours and wage rates (when adjusted for premium time) yields planned base labour expenditures and actual labour costs The difference between the two represents total wage escalation Does the "pre-impact" labour distribution coincide with what was planned? If so. congestion in work areas Inefficient use of work forces while waiting for preceding work to be completed. Remember. The difference between the total "planned" overtime and the actual premium time per the contractor's payroll records represents additional overtime due to the delay and subsequent acceleration. for beginning-of-job delays. 58 . (ii) (iii) Loss of productivity due to stacking of trades.(c) Wage escalation can be determined by comparison of anticipated labour distribution with the actual labour distribution. (d) (e) (f) (g) (h) (i) (j) (k) (ii) (iii) Loss of productivity (inefficiency) (l) Causes (i) Substandard productivity per manhour due to fatigue. the actual labour expenditures will initially be lower than what was planned but will later greatly exceed the anticipated labour. poor morale and other factors during extensive periods of scheduled overtime. To establish additional overtime attributable to delay (and to resultant acceleration): (i) From payroll records show actual premium costs paid in the "pre-impact" period and establish "typical" monthly premium figure from which you can calculate a total planned overtime for the original contract period Caveat: the anticipated overtime costs together with the planned base labour costs should be consistent with the contractor's total planned labour estimate. Use the contractor's bid estimate to construct an as-planned labour distribution schedule Use payroll records to construct the actual labour disruption Use the report of an expert to establish the reasonableness of the planned distribution. this indicates the reasonableness of the contractor's estimate and tends to show that subsequent aberrations in labour distribution were due to the impact of particular delays or disruptions.
selection. establish that the contractor's anticipated productivity was reasonable. This can be 59 (ii) (iii) . hiring and training of new. Next best method (which may be used in combination with the foregoing) involves the use and comparison of job records showing the rate of performance during the time the work is inefficiently performed compared with periods during which the work was performed under normal circumstances. additional workers not accustomed to the job Necessity of retaining less productive workers to have enough manpower Inefficient use of manpower while "working around" work for which change proposals have been made but no final action has been taken Loss of momentum due to shifting. While such a standard may vary from job to job or from crew to crew. if an inefficiency claim is asserted by the contractor. retraining and under-utilisation of crews Loss of worker morale and incentive in a disorderly and confused working environment Unexpected amount of work performed under unfavourable conditions following owner or tenant occupancy Cost of hiring and breaking in new crews and regaining momentum following partial or total suspension and lay-off of previous crews More work than planned during periods of adverse weather Wasted manpower when equipment breaks down due to lack of maintenance during acceleration or due to use of equipment in adverse weather Limited site accessibility costs (eg not being able to follow normal routines. such cost data would be of great worth in proving the reasonableness of a contractor's manpower estimates. Through the use of the estimate and expert testimony. Thereafter. such as rolling scaffolds or hoists) Piecemeal workers Savings lost by not being able to have labourers engaged in repetitive job operations because of disruptions to the normal flow and sequence of work (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) (xiv) (xv) (m) Proof of damages – alternatives (i) Best method is if contractor has kept and retained accurate job performance records by trade on previous projects. there is a corporate database showing normal performance under a given set of job conditions.(iv) Delays and costs of recruiting.
lighting. a Contractor must be able to show that it had other work which could have done during the period of delay. trade congestion. there will be some consequential increase in direct head office administrative costs.13 Generally. 3. adverse weather conditions. If there was no other work. Head Office Overheads 3. 3. they are generally recoverable as a foreseeable cost from resulting from prolongation. 60 . Contractor has to be able to show that because of the Employer's Risk Event. 3. etc. the Contractor was prevented from taking on other overhead earning work.16 In so doing the Contractor has to be able to show that it has: (a) Not been able to recover the overheads it would have expected to have recovered during the delay period.15 It is important to distinguish between these two types of overhead. covering both the delay period but also increased management costs in dealing with that delay. (iv) Industry studies and trade publications are also available which provide statistical analyses based on empirical evidence of the adverse effects on productivity of various trades and activities resulting from such factors as sustained overtime. 3. other contracts would not be contributing to the cost of the head office during the period. heating. Unless the terms of the contract do not allow a Contractor to recover unabsorbed overheads. in making a claim for additional head office overheads. and (b) Been unable to recover those overheads because its workers were tied up dealing with the Employer Risk Events.12 It seems likely that on any contract where there has been some delay and disruption.14 It is convenient to divide head office overheads into: (i) 'dedicated overheads' costs which can be attributed to the specific Employer Delay (ii) 'unabsorbed overheads' salaries. The costs such as rent. etc.corroborated by once again plotting anticipated manhour expenditure and distribution versus actual manhour expenditure and distribution (on the base contract) and determining whether significant deviation only occurred upon the onset of acceleration and/or the various impacts previously mentioned. office equipment.
18 The best known formulae. the Contractor's existing labour and plant may be under used or even stand idle. double recovery through a separate profit claim should not be allowed. Contractors also have to remember that if the prolongation claim contains profit on that extra work.20 Under the standard forms. Loss of Profit 3. In any event. you should be aware that recovery will be limited to account for the fact that there is no risk involved in 'earning' that profit. it should only be used after an accurate delay analysis has been performed to establish the period of delay. divides it by the original contract period and multiplies the result by the period of contract overrun: HO/Profit percentage x Contract Sum 100 Contract Period x Period of delay (weeks) 3. are not good methods in a recession. If it does allow profit recovery.19 There is a major criticism of this formula in that it allows for double recovery of overhead in that the contract sum already includes the overhead figure. 61 . is not generally recoverable. profit on other contracts which a Contractor alleges it was prevented from earning because of an Employer Risk Event. formulae are a last resort which will only prove successful where backed up by supporting evidence. it is possible to rely on one of a number of formulas. In similar fashion to Head Office overhead. or alternatively. for example. whether or not a loss of profit claim is successful may depend on the economics climate at the time. If you cannot do this.21 How does a labour and plant claim come about? A Contractor may have to employ additional labour and plant. 3. The formulae assume a healthy construction industry and that the Contractor does not have enough resource to take on other work.17 You will be required to show through your records the head office overheads you claim you have been unable to recover. Labour & Plant 3.3. But be careful. Formulae therefore. is called Hudson's formula which takes the allowance made by the contractor for head office overheads and profit in his original tender.
25 In most circumstances. The danger is that without proof. 3. in trying to show that your tender allowances were not inaccurate. he will recover a nominal amount. it is possible to claim interest as damages if you can show that you have in fact suffered that loss and the loss was in the contemplation of the parties at the time the contract was entered into. you should be able to identify your planned use of those resources based on your original programme. Some statutes also give a right to interest in certain circumstances. etc. Form this base. histograms and tender. you should be able to establish actual costs incurred.23 If the Contractor has hired-in plant. The head of claim is in truth. 3. but there is usually a multiplicity of disruptive events. that has suffered that loss and the Employer would have 62 . matters are more straightforward: the amount claimable is the amount actually incurred. 3. The major difficulties arise where the claim relates to the Contractor's own plant. 3.3. it is possible to pursue financial charges by way of interest as a head of claim.26 The parties to a contract can agree in that contract a rate of interest and when and if interest will become payable. It is rare to find a Contractor who keeps such detailed cost records which allow the actual cost to be referred back to the particular disruptive event relied upon. it will be entitled to recover that money. repair and fuel costs. Perhaps the answer is to follow the comparable period method explained earlier in relation to general disruption. if he cannot. the rate will not be enforceable if it is so high so as not to be a genuine pre-estimate of loss. If you are following good record keeping procedures. as above. This is hard enough in relation to one event. Interest or Financial Charges 3. Most standard form contracts do in fact contain express contractual rights to interest. many of which may be concurrent. Further problems are faced.22 The difficulty a Contractor faces is in proving the actual amount of additional expenditure it has occurred. Remember that as with liquidated damages. therefore. however. What one would be looking for is invoice or contractor internal records documenting additional maintenance.27 It is also the case that interest on bank borrowings (overdraft) or the lost opportunity to earn interest on bank deposits is quantifiable as damages where the Contractor can show that. normally reflecting depreciation in the value of the assets. The normal result is that if the Contractor can demonstrate the actual costs.24 Some contracts make provision for the payment of interest. Further. the Contractor will pursue global or total cost claims which are likely to be unsuccessful. compensation for the loss of use of the money to which you were entitled.
it is usual to have to either peg the rate to a standard. If the Contractor would have invested the money. it will be a matter of fact to decide how much of the delay is in fact the fault of the Contractor. If the Contractor is operating an overdraft. it will have to show how it normally invests money and the rate of return it would generally expect. The position is most difficult where the Contractor is in credit and in debit during the period it is deprived of the money.30 The Contractor may have to prove what is the applicable rate of interest to be applied. 3. 2% above the base rate of the Bank of Tokyo Mitsubishi. I have to say. What should be the position where a Contractor makes an application in very vague terms. Employers always argue that interest should run from the date when the Contractor provided it with all the information the Employer needs to satisfy it that the Contractor has incurred that expense. Should it be from the date when the Contractor first incurred the expenditure? Should it be from the date the Contractor first made its application and the Employer was first aware of the claim. 3. 3. Claim Preparation Costs 3. supported by documentary 63 . eg. This second limb is an easy hurdle in fact. I would advise that a particular line is followed: take an average. However. most provide that the Contractor can only recover the cost. the Employer makes a clear request for supporting particulars and the Contractor then takes weeks to provide that information? Should the Employer bear the interest as it has had the benefit of the money in its pocket. loss and/or expense that it has actually incurred.contemplated that the consequence of its breach would cause the Contractor that loss. or should the Contractor bear the risk as it was too slow in providing the required information? Most of the time. In those circumstances.32 Most standard forms of construction contracts do not allow a Contractor to recover costs incurred in preparing the claim.31 In providing the rate. its bankers will be able to evidence the cost of borrowing. 3. or for the Contractor to provide an auditor's or banker's certificate in support of the rate it is actually paying or receiving interest upon. It must always be the case that Employers know that Contractors will suffer loss if they are deprived of money to which they are actually entitled.29 The situation may well best be looked at from the perspective of an example. the answer is that the Contractor bears the brunt.28 A different issue is the question as to the date from which interest on a Contractor's claim should start to run.
evidence.38 Claims for acceleration may arise where an Employer wishes to have the work completed earlier than the projected completion date. The subsequent agreement to accelerate the works should either be by way of a variation to the terms of the original contract or as a separate agreement.34 Acceleration can best be defined as the execution of the planned scope of work in a shorter time than anticipated or the execution of an increased scope of work within the original planned duration. Therefore. siting together with the existing contractual arrangements. a Contractor is entitled to claim its costs. fees paid to claims specialists or to independent quantity surveyors or other professional advisors are not recoverable. 3.35 The following are the most likely variables to be claimed by a Contractor who has been required to accelerate his works: (a) (b) (c) (d) 3. 3. once in delay for which he can receive an extension of time. I think an important point for any Employer to consider when deciding whether or not to induce a Contractor to accelerate his works is 64 . if the Employer wants to achieve earlier completion. What is likely to be Included in the Cost of Acceleration? 3.33 Where matters are different is where a claim proceed to litigation or arbitration.36 working additional hours.37 The best course of action for both parties to take is to enter into some form of collateral agreement which. providing additional or different equipment. and advancing the date of delivery of manufactured items. 3. is not contractually required to make up any of the delay he has incurred. unless the Contractor can show that it has been put to additional cost as the result of the Employer's unreasonable actions or inactions dealing with its claim. providing additional labour. This will be explained later by Mark and Simon. make it clear exactly what is covered by the agreement to accelerate. As such. The position with many standard forms of contract is that the Contractor. Here. he must secure the agreement of the Contractor. Acceleration 3.
This is usually demonstrated by reference to a This is known as recognised study and applied by way of a percentage addition to the basic hourly rate. There is a real danger for Employer's that an open-ended acceleration agreement can simply amount to a very large contractor claim. 3. and therefore the need for him to accelerate the works. for accelerating the works. 3. how to calculate the extra resources you have employed and how to evaluate their individual expense. By its very nature. In the first instance. the most difficult issue for Employers is in trying to determine the likely costs of acceleration and how costs should be established. 65 . 3. Obviously. there are guidelines you should follow. is a ground by which he can seek reimbursement from the Employer under the terms of the contract. Without doubt.42 This can lead to problems. acceleration is an unknown quantity. the Contractor is held to be entitled to an extension of time. it has to bring in labour from overseas.43 If you have to make a claim for acceleration. 3. • A contractor may claim for increased labour costs if in order to meet the accelerated programme.39 An issue which frequently arises is whether there has been a constructive or implied acceleration instruction. 3. probably financially.whether or not the costs of acceleration are less than the amount that could be recovered for early use of the building.44 (a) The cost factors which offers need to be considered are: Labour • A contractor may seek premium time.40 This may arise in the situation where an extension to a contract is denied and the Contractor is required to work to the original completion date. in such a situation. However. the Contractor would be rewarded. subsequently. express or constructive. you need to identify the heads of cost. "constructive acceleration". 3.41 A contract may entitle the Employer to require the Contractor to accelerate the carrying out of the works so as to make up for any delay caused by the Employer's default or delays resulting from unforeseen events. for example. ie non-productive nature payments arising from having to work a longer week. The Contractor may be tempted to try and say that the cause of any delay.
• To the extent that the acceleration requires a greater commitment from Head Office. it does not have to carry out any variation more efficiently than it is carrying out the original works. it does not have to spend money to alleviate the effects of what is in fact an Employer's Risk Event. If it does have to introduce additional resources. for example. 66 . a Contractor may make a claim for the reduction in the level of productivity.• If the accelerated programme requires a larger labour force. • It is likely that a Contractor's supervisory staff costs will increase during a period of acceleration. the Employer is responsible for that additional cost. For example. it is possible to rely on research studies and statistics to support your claim. The larger labour force will probably 4 4. a Contractor should do all it reasonably can to avoid. a Contractor is not required to go too far. That is to say. 4. overcome or reduce delay and the financial consequences of that delay. Further. • If sub-contractors and suppliers have to increase the pace of supply. However. require more cabin and site office space. If you do not keep this sort of record. This is best shown by Contractor records which monitor how productivity has been affected by the accelerated programme. but contemporaneous records have to be preferred. working more hours and in different sequences. a Contractor will seek to recover the extra resources it will require to meet the acceleration programme.2 Most standard forms of construction contracts include a requirement that the Contractor has to do all it can to avoid. for example. there may be a claim for a greater margin on overheads and profit than would be expected when pricing variations.1 MITIGATION You should remember the duty you have to mitigate losses you suffer. overcome or reduce delay. (b) (c) Preliminaries In addition to additional labour costs. • There will usually be a claim for an increase in the amount of plant and tools associated with a larger labour force. there will be a claim for priority payments for example.
You as a contractor do not have a duty to reduce the natural effect of an Employer default.4. 67 .3 Bear in mind that some contracts actually make compliance with mitigation provisions a condition precedent to recovering loss. but you may not recover compensation if the losses could have been avoided.
SESSION FOUR 68 .
there is a 3 months overrun. given that the programme float is used up as well. 1. the Access Gantry is to be erected by the Main Contractor. 1. Finally. 1. 1. 1.THE CASE STUDY This session introduces the example project which we will use to explain a claim for an extension of time and a claim for prolongation. The building comprises a steel structure which supports the external walls and the roof. The Walls and Roof are constructed by the Main Contractor. 1.e. There is an Access Gantry constructed just outside the building.2 The project is the construction of a small building which is to house switchgear. 69 . who intends to use a 200T crane to perform the operation.7 There is a 4 month delay by the Main Contractor delivering his crane which is required to erect the Access Gantry. The switchgear inside the building is to be manufactured and installed by Sub-Contractor ‘B’.1 SESSION 4A .6 The causes of delay are as follows:(a) The steel frame is two months late due to slow progress by Sub-Contractor A.3 The Main Contractor’s programme has 4 activities. (c) A design fault is discovered which will prevent the commencement of the Access Gantry work by 2 months. but the contract completion date is at the end of month 10 i. In fact. The erection of the Steel Frame.5 The actual project takes longer to construct than planned. which is to be carried out by Sub-Contractor ‘A’. to month 13.1 1. Then we will consider how to resolve various types of disputes on the project using different dispute resolution methods.4 The work is expected to take 9 months. although the total delay is 4 months. (b) Sub-Contractor B advises that the switchgear will be 4 months late being delivered. The switchgear is installed within the building. there is a one month float in the programme.
the Employers design fault. In this case. 2. if we leave it at this. month 10. the impact is to push the completion date out to month 11.2 If we adopt the ‘as-planned impacted’ method of analysis. (If the project had been actually completed in month 11.since we only claim an extension of time for the actual period of project delay).6 We need to review the contract we are operating under and look for the following type of clauses:(a) The obligation to complete by a given date. 70 . However. 2. Consequently. For example. which would mean a 1 month extension of time. we now want to make a claim on behalf of the Main Contractor for a 2 month extension of time due to Delay 3 . Step 1 .3 However. 2. the clause will say that the Contractor must complete the Works by a date set out in an Appendix to the Contract. the Employer will be entitled to receive payment of a sum of money. Usually.4 In summary.The Contract 2. the Employer benefits from the Main Contractor’s float i. I want to concentrate on the delay caused by the design fault Delay 3. The design fault prevents Activity 4 starting for 2 months. the Main Contractor would want to claim the benefit of the programme float. (c) In order to maintain the validity of the liquidated damages clause when there are certain types of delay. he could claim against Sub-Contractor A or Sub-Contractor B resulting from their delays. the Appendix will say the completion date is the last day of month 10. then there would be no need to claim this extra month .1 MAKING A CLAIM FOR EXTENSION OF TIME CLAIM There are various claims that could be made by the Main Contractor. there will be an extension of time clause. 2. Consequently. usually expressed as a sum of money per day.2 2. we identify that the design fault affects Activity 4. (b) There will be a liquidated damages clause which will explain that if the Contractor does not complete the work by the completion date.5 I have identified 6 steps for making an extension of time claim.e.
71 . is by constructing a Scott Schedule. a contract clause will require the Contractor to provide particulars of the event and its consequences.(d) This clause will identify excusable events. we have to show that the event we are claiming . will excuse the Contractor of any delay caused by the event. STEP 3 . In this case.9 Having explained the facts of the event.10 A very popular way in which the details of the claim are summarised. In our case study. STEP 5 . STEP 4 . which are those events which. which is the need to maintain records. what the programme was for erecting it.7 The provision of particulars of the claim brings us on to the second step. when the design fault was discovered and what it was and what had to be changed. Contractors need to be very aware of these clauses because sometimes you loose the right to make a claim if no notice is given. These include progress records. we would submit a programming analysis which shows which activities were affected and how the event delayed the overall project completion. In this case. labour records. In most claims. STEP 2 . In this case. the statement will explain how the Access Gantry was designed in the Contract. drawing schedules etc. it will set out when the new design was received from the Employer and so when the Access Gantry work was able to start.8 Based on the project records. the CAUSE of the delay.RECORDS 2.say 14 days from the date of the event. there will be many events which the Contractor will be relying upon and so the schedule is quite long.THE FACTS 2. photographs. (f) Finally. the Contractor should provide a detailed statement of the facts of the case. if they arise.the design fault fits in with one of the excusable events in the contract.THE SCOTT SCHEDULE 2. (e) All contracts require the Contractor to give written notice of the delay. it is necessary to demonstrate its EFFECT. It is really important to keep records.e. Also.THE TIME ANALYSIS 2. i. some contracts require written notice within a given period of time . cost records.
Anyway. that the event was notified in good time and setting out a statement of how long the extension of time requested is.there is only one event.e. which is obviously artificial. the Scott Schedule should set out the following information in relation to each event:• • • • • • • description of the event factual details relating to the history and nature of the event clause giving the right to extension of time details of the notice given relevant documents to evidence the event and its related facts programme activities affected period delay claimed i.THE STATEMENT OF CLAIM 2. 72 .11 Finally. the delay to completion caused by the event STEP 6 . the Contractor’s claim should include a clear statement which confirms that:• • • • • in accordance with a particular contract clause an extension of time is requested arising out of a particular event relevant to the extension of time clause.
3 In a moment. he will assist the Employer's representative who has to read the claim and decide whether there are grounds for payment to be made against the claim. so as to ensure that he obtains the necessary information and sets it out in coherent form.1 Using a formulaic approach as to how you present your claim for money can have many benefits.4 Remember that your claim will have to succeed in law. 3. 3. The first is that if the Employer does not pay.3 SESSION 4B – PRESENTING CLAIMS FOR LOSS AND EXPENSE Introduction 3. If you are relying on the contract. first let us come back to some principles.2 Any claim should be prepared with litigation or arbitration in mind. litigation or arbitration is the final recourse. If you are relying on an implied term. For example. Remember what you are trying to prove. It can provide a very useful discipline for the person who is preparing the claim. There are two reasons for this. (c) The date and details of the Contractor's application for loss and expense in respect of the late information. we are going to look at the format of presenting money claims. if you are making a claim in respect of the late delivery of information from the Employer's design team you should state: (a) The date when the Contractor applied in writing for the information. (b) The date when the Contractor actually received that information. state the clause you are 'relying' upon. 73 . 3. However. The second reason is that it will save time and money if the claim has been sufficiently well prepared that it can be used in the preparation of a statement of case. state what that implied term is and how it is alleged that (a) It is implied and. (d) Sufficient details and information regarding that loss and expense. In so doing.
simply remember the golden rule that there must be a sufficient particularisation of the causal connection between the quantum of damages claimed and the breach alleged.6 There are two ways in which to set out a monetary claim. the second schedule (or Scott schedule) form. state what term you are alleging has been breached. 3. 3.(b) How that implied term has been breached. There is no one method to be preferred. see Appendix) – 380 x 12 Fitter travel expenses 2 Plant Non utilisation of dedicated plant 51 S 4. with the facts are and the consequences of the breach. refer to the relevant documents. The first is in what may be called narrative form. Whatever way you choose. or the term of the contract under which the claim arises or other allegations of liability. on other occasions it is not.7 The example set out below fits the patter of explaining quantum in narrative form with supporting appendices " $ Supporting Appendices 1 Site Labour Recorded standing time and salvage works Extent: from site records sheet – 380 hours Cost: At $12/hr (from wage sheets. If you have a general breach of contract claim. Sometimes a schedule is the best way of presenting the evidence.5 In all cases. and we will explore both. Example One – Quantum in Narrative Form 3. You need to set out exactly what the monetary claim is and how it has been calculated.650 Q A 74 .
F S D S 2.361 S 4 Overheads.309 R Supporting Appendices The following documents are referred to in the text and comprise the evidence upon which the Claim is based. Starred items are included in the appendix hereto.729 R 5 Add profit @ 7 ½ % on turnover Total Due 580 8. (A) (B) (C) Labour allocation sheets Wages sheets Plant allocation sheets * * 75 . HO Charges Tendered @ 5% on site costs 368 7.Hired Plant: Air winch – 1 Wk @$50 Internal Plant: Boring machine – 1Wk Depreciation @ $1000/Mth 3 Establishment – 14 days delay Agent Foreman Engineer Huts (depreciation) Van (hired @ invoice cost) Services Insurances 50 250 D S E.500 7. all others are available on demand.
defences. I used the phrase "Scott Schedule". It allows for clear presentation of the quantum of your claims. 76 . often has the effect of bringing parties together to settle small issues. Programmes Labour cost build-up Tender overhead/profit provisions Sundry " * * * (excerpts * (excerpts) * * * (excerpts) * (excerpts) * Example Two – In Schedule Form A little earlier.(D) (E) (F) (G) (H) (I) (J) (K) (L) (M) (N) (O) (P) (Q) (R) (S) Plant invoices Staff allocation sheets Staff costing Progress reports Site diary . I would advise that using this form of schedule is a good discipline to follow. There is no set form and the heading can be changed to suit the particular circumstances. A true Scott Schedule (named after an English Judge) has the aim of stating all the allegations. and sums claimed in tabular form. Minutes of Meetings Correspondence Photographs Notices Weather reports . and makes clear the contractual clause or breach which is being relied upon. Its benefits are that it prevents confusion arising and when completed. requires you to tie event directly to money claimed.
In the case study Tony introduced to you it is intended that the Contractor has decided to make an application for an extension of time for two months due to delay 3. eg a change order. etc. it is usual to include a reference number. 6. the period of duration of the disruption and the dates between which the disruption occurred. Case Study 3. 3. clause 17.3. in litigation or arbitration. identifying the trades and activities affected.4. We are not concerned with this today so I will not address a full schedule. the Scott Schedule will have columns for the Defendant and the Judge to fill in. should state whether the delay was critical or not. 3. 4. late access.9 We shall first look at a schedule for presentation of a Contractor's claim for delay and disruption: No 1 Relevant Event 2 Basis of Claim 3 Delay 4 Disruption 5 Quantum 6 1. If there has been any disruption. Here you should explain the basis of the claim. you should set out what has been suffered.1. Having prepared a delay analysis for the two month extension. Here you should set out a full description of the event you are relying upon.10 Here you should detail the loss attributable to each event. we will now look at the steps required to turn the time period into a claim for additional cost. You 5. the Employer's design fault. In the first column. Here you should provide full details of what happened as a consequence of the event at number 2. Step 1 – The Contract 77 . additional works.8 In its full form. 2. If it is a claim under a contract term for payment you should state the clause. eg. You should identify what activities were affected together with what delay was suffered and between which dates.
78 .3 above results in loss or damage to the Works. We are also ignoring any issues of concurrency.14 Identify the particular delaying event which has caused the additional cost.3(g) design of any part of the Works by the Employer's Personnel or by others for whom the Employer is responsible".3. Activities ID40693 and ID50267E were affected. if completion is or will be delayed. and the platform floor sub-contractor. Step 2 3.13 We will need to insert these clauses into the schedule. In the case of sub-paragraphs (f) and (g) of SubClause 17. The right to apply for an extension of time is contained within clause 8. we are keeping time separate from money here.15 You should now explain what the consequence was in time e. Wall Co. "4. under Sub-Clause 8. the Contractor shall promptly give notice to the Engineer and shall rectify this loss or damage to the extent required by the Engineer. Goods or Contractor's Documents. 3.4 (Employer's Risks) "17.1 [Contractor's Claims] to: (a) an extension of time for any such delay. 17. Inc. the Contractor shall give a further notice to the Engineer and shall be entitled subject to Sub-Clause 20. which shall be included in the Contract Price.3(g) and 17. 338 confirmed Employer design defect which delayed progress to activity 4 for two months".3 [Employer's Risks]. 3. For example "RFI 42 and CVI's 207.12 The contractual clauses we must rely upon in these circumstances are 17. reasonable profit on the Cost shall also be included.16 Remember to state whether the delay was critical or not. 236. If the Contractor suffers delay and/or incurs Cost from rectifying this loss or damage.4 If and to the extent that any of the risks listed in Sub-Clause 17. However. Platfloor Ltd. Step 3 3." 3.11 I am working from the premise that FIDIC 5th Edition is the form of contract we are using.g.4.4 [Extension of Time for Completion]. The delays affected the progress of the partition walling sub-contractor. and (b) payment of any such Cost.2 weeks commencing on 8 January 2002 and finishing on 31 January 2002.
00 $ 96. including repeat and aborted visits.18 Now include the monetary element of the Claim.25 5% = $ 5.000.166. our summary schedule might look like this: 79 .25 6.00 (Sub-contractors x.416. y and z) to work in a piecemeal fashion. y and z) (Breakdown allocation sheets at Appendix B) $105. it could be: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) 3.5% 7.17 Set out what the disruptive effect suffered was.000 per week for 8 weeks = (See Appendix 4 for full breakdown) Disruption costs 450 hours @ $20 per hour = $ 9. Step 5 3.250.000. In our example it could be "2 month delay required the following trades (x.Step 4 3.000.19 "Prolongation Costs (extended site preliminaries) $12. There was stacking of trades in months 9 and 10 with activities ID50893 and ID60241 having to be undertaken at the same time".00 In our case study therefore. In our case.00 Head office overheads (see Appendix C) Profit (see Auditor's statement at Appendix D) TOTAL $117.
17. trades in months 9 and 10 with activities ID50893 and ID60241 being undertaken at the same time. 338 confirmed Employer's design defect which Clauses 17. There was stacking Prolongation Disruption Head office o'head Profit $96.4 and 20.1 2 months (8 weeks) delay commencing on 1/6 31/7. 80 . delays affected the progress on activities ID400933 and ID 50267. This delay was critical.25 delayed progress to activity 4 for two months. y & z) to work in a piecemeal fashion.000 $5.250.166. Details of the repeat and aborted visits are to be found in Appendix 5.00 $9. including repeat and aborted visits.416. and ending The on 2 month delay required the following trades (x.Item Numbers A1 Relevant Event Basis of Claim Delay Disruption Quantum RFI 42 and CVI's 207.3(g).00 $7.25 $117.000. 236.
Leave him unable to criticise the methodology adopted and the logical procession from event to money. Guide him through the events. Missing out steps along the way will simply reduce your chances of recovery.1 SUMMARY Your aim is to present all the relevant information in a readily accessible and understandable fashion. 81 . and explain where the back up can be found. Remember the reader will be (in all probability) looking at the events of your claim for the first time.4 4.
5. With lawyers experts and arbitrators the cost of an arbitration can easily run to many thousands of dollars per day and that figure does not include the costs of preparing for the hearing. 5. An ICC Arbitration can be very expensive.5 5. Not only are the Arbitrators themselves expensive but the ICC itself charges a large administration fee. because Arbitrations are now generally run by lawyers the process has become very like that before the Courts and can be procedurally drawn out. was initially thought to be cheaper and more flexible than litigation. That is no longer the case. There is concern in some cases as to the independence of the courts and whether they are open to outside influences and in other cases there is concern as to the length of time which matters can take to be resolved. arbitration. That being said I should of course emphasise that ICC Arbitrations are generally expected to be concluded within six months of the terms of reference being agreed. Arbitrators have to be paid by the parties to a dispute. The traditional forms of dispute resolution are litigation. in other words proceedings through the courts of whichever country is chosen or alternatively and most often the case in international construction projects.4 Furthermore. 5. It is not unheard of for a full blown construction arbitration to go on for seven or eight years and incur costs of much more than the amount which was originally in dispute.5 While there are benefits with both arbitration and litigation. not by the state. Unfortunately in a small proportion of cases negotiation on its own does not succeed and it is necessary to look to other methods of resolving differences. as a consequence of the growing realisation that they were disproportionately expensive. 5. That position is not the same in many other jurisdictions.6 These alternative forms of dispute resolution originally came out of the United States primarily because under the legal system of that country costs in litigation are not recoverable. which in certain circumstances make them the most appropriate forms of dispute resolution. Inevitably it is also seen as expensive.1 ALTERNATIVE FORMS OF DISPUTE RESOLUTION Most disputes are settled by negotiation. for instance under 82 . in the late 1980's and throughout the1990's there was a growth in what is now known as ADR.2 Litigation is not popular with many companies which operate on an international basis. Such has been that growth that in a number of jurisdictions mediation is now a condition precedent to pursuing claims before the courts and that principle has been carried over into the construction industry. 5. That is the ordinary way of doing business and the most sensible way of bringing disputes to an end. which has the distinct benefit of being confidential. which stands for Alternative Dispute Resolution.3 Arbitration.
8 Expert determination.10 It is important to recognise the difference between expert determination which I am going to consider in some detail and something very similar but not the same which is "early neutral evaluation".11 Expert determination works like this.7 I am today going to consider three forms of Alternative Dispute Resolution which might be applicable to the case study which has been looked at previously. 5. Nevertheless the perceived success and advantages of Alternative Dispute Resolution have led to an increased use on the international scene and its incorporation into international construction contracts. which forms the basis of many legal systems throughout the world. This effectively gives the parties the opportunity the take a view before the problem has developed into a full blown dispute. Mediation. The matter in issue between the parties is put to an independent "expert" whose decision on the subject the parties agree to accept. A decision of a Dispute Adjudication Board. whilst there may exist some procedural hurdles which need to be overcome and there may be stringent restrictions on 83 . Those methods It is important to recognise that there are a number of other types of ADR which can be used these include but are not limited to : conciliation. In most cases the agreement in relation to expert determination makes that decision final and unappealable even if the decision is completely wrong.12 This contrasts with litigation and arbitration where. adjudication and mini trials Expert Determination 5. 5.English law. are: • • • 5. the winner recovers costs. In some contracts provision is made by the parties for either of them to have the right to seek a neutral non binding opinion from a neutral third party at a very early stage. It may encourage or discourage a party from pursuing a dispute but has the advantage of providing a neutral view at an early stage before the Parties have become entrenched in their positions. 5. 5. med/arb.9 One of the quickest and most speedy forms of Alternative Dispute Resolution is that of Expert Determination. The precise procedure to be adopted in expert determination is something that the parties have to work out between themselves either in anticipation of a dispute or once a dispute has arisen.
there is nevertheless normally some recourse if the decision is completely and absolutely nonsensical. There could be a claim that the project was delayed because of late design information.17 In my experience expert determination normally works best where the parties agree to that course of action voluntarily after a dispute has arisen and such agreement normally takes place if the parties are seriously working towards resolution of their dispute. responsibility for a defect including as to whether or not it is one of design or workmanship than for instance getting an expert to give a decision on a claim for loss and expense running into many millions of dollars. 5. The decision to rely upon expert determination may arise as a consequence of sensible negotiations between the parties or an agreement from the outset that an expert be appointed with a mechanism for choosing him in the event of disagreement. which as I have stated is not necessarily 84 . There could be a claim based upon bad workmanship or a claim as to the programming or scheduling effects of a variation. Normally what happens. An engineer might be an appropriate expert to give a view on design or workmanship but not on scheduling effects.18 There is no set procedure for expert determination. some professional bodies have procedural rules in place but these are not fixed.rights.16 It is much easier to find an expert who can deal with one specific distinct issue. It does happen and often the parties stay on good terms. 5. for instance. However even engineers have specialities: for example. fundamental difficulties. 5. That may be appropriate but has considerable risks because it is not always possible to anticipate precisely the nature of the dispute which may arise and therefore to anticipate an appropriate form of expert. a civils engineer could not properly be considered an expert in relation to mechanical and electrical matters.13 In some contracts provision is made from the outset for there to be determination of issues by an expert. 5.15 For this reason experts are often not identified from the outset in contracts. If both parties have a will to resolve the issue then they will need to agree and identify the experts for the particular issue. If there is not a genuine wish to resolve the issue then it may not work and no agreement will be reached. 5. 5. It is also important to ensure that expert This is one of the processes determination is applicable only to appropriate disputes. It is therefore very important that the parties have faith in the expert they chose to determine the issue. is that once an expert has been agreed between the parties.14 In a construction project a dispute may arise because of any number of reasons.
Because it has a flexible procedure and the Expert will be expected to investigate the role of lawyers is greatly reduced although not normally dispensed with entirely. nothing to stop the parties agreeing that the expert's decision should be appealable and only an interim solution.19 Expert determination is rarely appropriate where the dispute is about complex legal issues although in certain circumstances this can be appropriate. • Method 3 was based on industry norms (which the Contractor favours).22 If one refers to the case study mentioned previously one can envisage circumstances where the parties agree that the question of what mark up our Contractor should recover on rates charged by its Sub-Contractors. It can be very quick and costs considerably less than other forms of dispute resolution. however.23 It would be necessary if this was to happen for the issues to be clearly defined and the scope of the expert's role and authority clarified. 5. 5. 85 . whether such a procedure has any real benefit.25 Assuming the parties commenced negotiations but were not able to resolve this issue and they determined to have it resolved by expert determination. One has to question. and. They can be oblivious to views other than their own and as such many parties are reluctant to submit to them.straightforward. the parties have been arguing over three possible ways of valuing the mark up. Experts do get it wrong and often are unable to think outside the confines of their own expertise.24 In the case study. to the expert who will after a period of time give his determination. There is. then their first task would be to agree on an appropriate expert. • Method 1 was based upon an allowance derived from the tender (which the Employer favours). should be referred to expert determination. The expert may carry out his own investigations but essentially will be able to make his decision based upon his own experience and what he finds rather than being restricted by the submissions which are made to him. 5.20 I indicated previously that it is usually the case that the expert's determination is considered final and unappealable. 5. then each party will submit its written case in relation to the issues between them. 5. 5. 5.21 Not everything about expert determination is good. however. • Method 2 was based on an allowance based on the actual company figures (which the Contractor favours).
He will need to be questioned about any potential conflicts.29 The expert needs to make his mark from the outset and once appointed should after consultation with the parties set the procedure and stick to it. He will require an All of these factors may be agreement binding both parties and setting out the scope of his role. In many countries there are professional bodies where members are trained in this type of ADR and who should accordingly be able to give the determination required. Clearly the individual would need to have experience of the industry so that he could make a decision in relation to industry norms and furthermore that the individual who it was proposed should be an expert needs to understand figures and costings in relation to claims of this nature. Normally one would anticipate the parties agreeing on the nature of the individual to be chosen before actually choosing the individual. 5. 5.28 Usually after the parties to a dispute have "agreed" an expert he needs to be approached to see if he can act. however in my experience parties are often unable to agree on the nature of an expert never mind his actual identity. respected by both parties being appointed as an appropriate expert. Lawyers usually need to be involved at this initial stage for the protection of the parties. As the decision of an expert tends to be binding without any right of appeal the scope of the issues which the expert is being asked to determine needs to be very clearly defined.5. relevant in determining whether to use him.30 In the example from the case study if one assumes a quantity surveyor was appointed he would make a decision based upon submissions put forward by both parties. 5.31 In most instances where there is expert determination there is not a hearing in front of the expert although the expert can call for further information as a consequence of his reading the papers submitted by both parties. 5. One could envisage in these circumstances a Quantity Surveyor or Cost Engineer. his availability and the timescale within which he can operate. He would also no doubt ask questions and demand information. On the other hand there is little point having an expert who does not understand at least the basic consequences of what he is being asked to do. 86 . Once the expert feels that he has investigated and understood the issues involved he should publish his decision which will in most circumstances bind the parties. If it is not then the parties may find that the expert extends his brief and reaches a decision on a matter which one or the other parties had no wish for him to consider.26 Precisely who would be an appropriate expert is not necessarily certain.27 The Expert approached needs to be one who is familiar with the process. 5.
87 .32 In the case study.36 Either of these boards can be asked to give a decision on a matter in dispute. are not final decisions but are ones which can be overturned. In these circumstances he could put in his own alternative rate which would bind the parties or indeed conclude that no mark up would be appropriate. It is often difficult to agree an appropriate expert. There may be difficulties in making it compulsory. or a Dispute Resolution Board ("DRB") as it is called in the World Bank Form of contract. therefore.33 In summary so far as Expert determination is concerned: • • • • • • It is quick.5. 5. and Care needs to be taken with defining the scope of the experts jurisdiction.37 In most instances Adjudication Boards' decisions or the like.34 Expert determination may work. but for various reasons it may not be appropriate to deal with all disputes or alternatively the parties may not be able to agree identity of an expert. On the other hand as I have said earlier an expert is entitled to rely upon his own expertise and knowledge and could therefore conclude that non of the three methods which have been postulated are in fact appropriate. Dispute Adjudication Boards 5. it would not be inappropriate to envisage that if the question of the appropriate rate of mark up was sent to an expert for determination he could make a decision based upon the industry norm thereby the appropriate figure would 12. which may occur in other contracts. 5. 5. It is most appropriate to deal with technical issues where the facts are agreed.35 A further alternative is for a dispute to be referred to a Dispute Adjudication Board ("DAB") as it is called in the FIDIC form of contract. 5.5%. if found completely unsatisfactory by arbitration or litigation. This is the procedure which is envisaged by the two forms of contract I have referred to earlier although there are differences between the procedures powers and make up of the two. Often however it proves to be the case that neither party wishes to take a decision of a Board any further even if they are dissatisfied with that decision. It is cheap.
40 If the Contractor does not make a claim for an extension of time within 28 days then it will not be entitled to do so.45 Boards can have permanent or floating members and the methods by which the constituent members are chosen varies from contract to contract.46 In some cases there is a pool of individuals who are identified in the contracts and in the event of a dispute the initiating party picks an individual. 5. This is a strict requirement of clause 20 and there is little point in a Contractor failing to comply with this time limit and then seeking to get around it by going to the DAB 5.38 In the case study which we have been considering the parties are not able to agree the extension of time sought by the Contractor.44 Boards are not.42 Provision is also made in relation to the remuneration of the Board and methods of resolving disputes as to the identity of the Board. Variations on this method can include larger panels of individuals but usually there is an odd number so that a majority decision can be made. 5.39 In order for a matter to proceed in that way it is necessary for the appropriate procedural steps to have been taken in relation to the claim. It is unlikely that a dispute of this nature would be referred to an expert for determination and therefore assuming the FIDIC 1999 terms apply the parties would proceed to a DAB. as I indicated earlier exclusively a FIDIC concept. 88 . 5.43 The contract also makes provision for replacing members of the DAB if appropriate and takes account of the possibility of there being a list of eligible experts identified in the contract 5. 5. 5.5. 5. If there is only one individual then he becomes an adjudicator rather than a board.41 The FIDIC Form of Contract specifies how a DAB is set up and there is an element of flexibility as to whether or not the Board should consist of one or three people. In FIDIC clause 20 of the General Conditions makes it clear that if a Contractor wishes to make a claim for instance for an extension of time the appropriate notices must be given within pre described time limits in order for that claim to proceed. In many cases the conditions of contract specifically determine how and what constitutes a dispute which can then be referred to a DAB. They have been used worldwide and vary in their nature and make up from contract to contract. the responding party another and those two then pick the third. The Contractor seeks an extension of time for a period of two months.
All that is left is for them is to have a good lunch and return home until the next time they are due to meet! 5.49 It follows that in many some cases the Board has arranged to meet but have nothing to give a decision on.54 The FIDIC rules made clear that the DAB is not a panel of Arbitrators but must nevertheless come up with a reasoned award. 5. The contract provides that a decision of the Board should be reached within 84 days of a dispute being referred to it. 5. They are still obliged to meet and be paid. 5.51 Based on FIDIC any party to dispute can refer a dispute to the DAB for a decision. This is the procedure envisaged by the World Bank Form. which is often the case. 5. Significantly however they do not need to follow the strict procedural requirements that Arbitrators do and can determine themselves how to deal with issues that arise. That is to say that the body of the award should give the reasons for the decision being made 5. 5. If the Contractor referred the dispute to a DAB and the DAB felt that the information it needed to reach a decision would take more then 84 days to renew and reach a decision on it can ask the parties for an extension.55 In reality a DAB is very similar in many ways to a panel of Arbitrators despite what the FIDIC conditions state.50 With regard to the case study I am going to assume that the parties agreed the identity of the DAB.47 Individuals are appointed to the board by various methods but the intent is that at the end of the day the Board forms an independent body which will give a decision on a dispute which is referred to it.53 Once the DAB has been constituted it will set the procedure and time limits for dealing with the dispute which is referred to it and can have access to site and information as it requires.52 There is however provision for that period of time to be extended if necessary. This is likely to be given if it is reasonable in the circumstances of the particular case. It is a kind of rough and ready justice. In some cases the Board has a fixed and permanent membership from the outset and they agree to meet on specified days in advance of being aware of any disputes so that they can deal with them if they arise.48 The procedure for a Board will also depend on the form of contract used. 5.5. 89 . Boards do get it wrong from time to time – but the general view is that they get it right more often than not and in any event the parties have the right to have the decision set aside if they so wish. prior to the commencement of the contract.
59 Alternatively if either party is dissatisfied with an award given then it can also refer it to arbitration provided.60 Referring back to the case study which was mentioned earlier you will recall that one of the issues was the question of an extension of time. the Contractor is not satisfied and does not think that the DAB properly understood the case. 5. 90 . Notices are served strictly in accordance with the contractual position but the engineer fails to grant an extension of time at all. 5. It gives reasons for its decision but putting it simply. To summarise DAB: • • • • Offer a quick solution. 5. If it does not do so then the decision of the DAB becomes final and binding upon the parties and there can be no reference to arbitration or appeal elsewhere. May provide only an interim solution. 5.62 In the case study we are considering one can assume it does exactly that.61 5. The DAB investigates the claim seeks information which it is entitled to do and publishes a decision after 75 days indicating that it considers the contractor is entitled to one months extension of time. The Contractor then refers the matter in writing to the DAB for its decision.5. Unless it wishes to be bound by the decision the Contractor needs to issue a notice of dissatisfaction within 28 days otherwise that is the end of the matter. and this is an absolute imperative. 5.56 The intent is that there is a practical decision which is accepted by both parties although inevitably once a decision on a dispute is reached it is likely that one party will be disappointed.58 FIDIC provides that the DAB should publish its decision within 84 days and if it does not do so then there is provision for either party to give notice of dissatisfaction and then refer the matter to arbitration. Can provide the wrong result. One can imagine circumstances whereby the contractor makes an application for an extension of time for a period of two months. that it serves it notice of dissatisfaction within 28 days of receiving the DAB decision.57 One thing that differentiates a DAB from Arbitration is its speed the second is that recourse to the Courts or full blown arbitration in the event of an unsatisfactory decision is anticipated and not prohibited. Can be cheap and will certainly be less expensive than arbitration.
He might therefore wish to consider mediation which is now one of the most popular forms of Alternative Dispute Resolution.63 Are currently in fashion. 91 . 5. He has also received an award from the DAB of one month's extension of time with which he is dissatisfied and has sent in the appropriate Notice of Dissatisfaction to enable him to overturn the decision of the DAB if appropriate. 5.67 Mediators tend to be experts in their field or lawyers.• • Mediation 5. 5. 5. probing and exploring weaknesses and strengths of each parties case to help the parties move towards a consensual settlement. If the parties do not reach agreement then the dispute is not resolved. no decision is made and the parties are left to proceed to arbitration or to resolve their disputes in some other way. The 5. 5.68 Good mediators are well known and sought after.70 If mediation is a success then the parties will resolve their differences or some of their differences and sign a binding agreement to that effect which will form a contract and cannot be set aside.66 The facilitator or mediator does not reach a decision which in any way binds the parties nor does he seek to pressurise the parties into coming to a decision rather he seeks by testing.64 It would not however be unreasonable of the contractor to be somewhat wary of entering into a lengthy and complex arbitration being conscious of the substantial costs that can be incurred.69 Lawyers are generally involved in mediations and there are specific skills which need to be utilised by them which are very different to those they might otherwise require 5. They are not cheap but if their success rate is high then they will be in demand and generally worth paying for. dispute is still very much alive. The vast majority undergo professional training to become recognised as a mediator and are often affiliated to a group of mediators who will be responsible for training and the allocation of disputes to appropriate mediators as well as publicising that individual mediator and ensuring that standards are maintained. and Can be appealed or set aside if there is dissatisfaction with them At this time the Contractor has received a decision from an expert in relation to mark up which is binding.65 Mediation is a consensual non binding process whereby the parties seek to resolve their disputes with the aid of what is effectively a facilitator.
76 The mediator's role is not to see that there is a fair result or to be concerned that he agrees with the result if there is one.71 One of the fundamental concepts of a mediation is that either party can walk away from it at any time without any penalty in the knowledge that anything said during the course of the mediation cannot be used against that party or referred to in open terms outside the mediation.but not the other side . If that occurs then the mediation is a success. The mediator may ask some general questions but then they split up and the mediator meets separately with the parties on the basis that he will not divulge one parties case to the other. 5. which the other side are obliged to listen to without interrupting. Alternatively the mediator may bring the process to a an end if he realises settlement is not going to take place in any circumstances. figures suggest that somewhere between 70 and 85% of disputes referred to mediation are resolved either at the mediation itself or shortly thereafter. as I have indicated earlier have very good prospects of success. 5. Because a party goes to a mediation it does not mean that it intends to settle its dispute at all costs but merely to explore the possibilities for settlement in a rational well thought out arena with the benefit of a third 92 . His role is to try and get the matter settled. The parties will sign up to an agreement and the dispute is over.74 The underlying principle about mediation is that the mediator gains the trust of both parties and they feel able to talk to him in the knowledge that he will not divulge anything to the other party without their express permission. Mediation has.5.72 Parties are encouraged by a mediator to be open to him .77 Mediation is not the same as submission. 5. This process allows a mediator to make suggestions and assist the parties in resolving their disputes. therefore. 5. 5.about weaknesses in their case and significantly to explore alternative methods of settlement of disputes outside the strict confines of the contract upon which they are all working. before the parties go to a full arbitration hearing. 5. It is a process which normally takes two or three days and can.75 Usually a mediation commences with the parties all siting in one room together with the mediator and making short opening statements. very good prospects of success. He may go backwards and forwards for day after day until either the case resolves itself or the mediation breaks down with one party concluding that settlement just will not take place.73 Despite initial misgivings concerning the process of mediation in the United Kingdom and the US.
Often this is very clear but it is something to bear in mind. Is quick. and Is nearly always worth trying 5. It allows the flexibility of commercial solutions which none of the other methods I have considered today do. Is not giving in .81 In summary mediation: • • • • • • Has a very good chance of success. despite his best efforts. If the mediator cannot do this and is for instance felt by one party to be siding with the other party then in all probability that mediation will fail. That body does so. 5. Must be voluntary.82 In the case study with which we are concerned let us assume that the parties agree to refer all matters to mediation.80 Finally before summarising mediation I should mention that it allows the parties to reach a settlement which goes outside the strict confines of the dispute which they are concerned with . 93 . They are unable to agree upon the identity of a mediator and therefore agree to approach one of the bodies of professional mediators and ask that body to appoint an independent mediator. 5.79 I indicated earlier that one of the essentials of mediation is that the mediator gains the trust of both parties. Is less expensive than traditional forms of resolution. Also if one party is completely inflexible then it may be pointless proceeding further. Attempts have been made but unfortunately in this instance mediation has failed and in those circumstances it would appear that the only step left is for the matter to be referred to arbitration for which purpose I hand over to Simon.party who may be able to make suggestions and assist in resolution. Unfortunately the mediator appointed by the professional body fails at the meeting to gain the trust of the contractor. The Contractor declares after a three and a half hour meeting that he sees no point in pursuing the matter further and is so enraged by the attitude of the mediator and the other side that he determines to refer the matter to arbitration. does not always work.78 Unfortunately it One also needs to be wary of mediation being used by one party to a dispute to delay arbitration or use it as a means of testing the other side's case. 5. 5.
The first is the nature of arbitration.2 This presentation has three main sections. They have the same effect as a Court Judgement. The second is "what is the effect of arbitration?". It arises out of a contractual agreement between the parties to resolve any disputes between them by arbitration.6 Having summarised the nature of arbitration. The third covers the very important question of proof and evidence in relation to international arbitrations. The first is "what is arbitration?". The only avenue open to the Contractor now is to commence an international arbitration. which will include the advantages and disadvantages of the process. Therefore. They can be enforced internationally under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958.1 This part of today's lecture explains practice and procedure of resolving claims by formal international arbitration. 94 . However. The parties agree in their contract that they will abide by the decision of an independent Arbitrator or Arbitrators (the "Tribunal"). it is worthwhile looking at its advantages and disadvantages. THE NATURE OF ARBITRATION 6. What is arbitration? 6. INCLUDING THE MEANING OF LEGAL "PROOF" INTRODUCTION 6. What is the effect of arbitration? 6. our Contractor has never been involved in such an arbitration. 6.5 The Awards issued by the Tribunal are binding upon the parties. In our case study matters have taken a turn for the worse.3 In analysing the nature of arbitration there are two major questions for us to consider. this next section looks at aspects of arbitration and how the process operates. The second is a detailed look at relevant arbitration rules. The parties may also agree in their contract the specific procedural rules which will apply to the conduct of that arbitration.4 Arbitration is a private and building dispute resolution process. The parties decided to mediate the dispute but were unable to reach a successful resolution. 6.6 THE PRACTICE AND PROCEDURE OF INTERNATIONAL ARBITRATION. largely based on the International Commercial Arbitration Rules of 1998.
This causes more delay than is often expected to the arbitration process.Advantages of International Arbitration • The process is private and confidential. • The flexibility gives reduced cost. • The procedure is flexible. the arbitration process. electrical engineers. geo-technical engineers. Disadvantages of International Arbitration • There can be brought into the proceedings no third parties. No one outside that arrangement is aware of the dispute. the rules of the London Chamber of 95 . all the time. architects. Largely because of the speedier and more flexible procedures. no unwilling third party who is not a party to the contract can be brought into those proceedings. • There can be restricted availability of Arbitrators. This means that it is often difficult to obtain appointments with Arbitrators to push the proceedings along. • The Tribunal consists of a specialised Arbitrator or Arbitrators. for example. international arbitration is in general terms cheaper than the equivalent proceedings in Court.7 The parties are able to agree the arbitration rules which will apply to their arbitration. • The flexibility give speed. and can therefore be tailored to suit any dispute that arises. and can instruct specialists in particular fields relevant to the particular dispute. Only the contracting parties that have agreed to the process are involved. international arbitrations are brought to a conclusion much earlier than they would have been in the Courts. simple or complex. That can mean a series of many arbitrations. large or small. The most commonly used rules are UNCITRAL. Because arbitration is borne out of a contractual relationship. In general terms. structural engineers. INTERNATIONAL ARBITRATION PROCEDURE AND PRACTICE Rules 6. any evidence or documents arising from the process or the Award. rather than all the disputes and all the parties being consolidated into one set of proceedings as can happen in the Courts. Arbitrators are very busy. The parties are able to select the Arbitrator or Arbitrators they wish to deal with their dispute.
the appropriate rules of law and the applicable language of the arbitration. The other rules to which I have referred follow. how the proceedings should be conducted. specifically identifying their choice of Arbitrator by name the applicable. the nature of the Award and costs.International Arbitration and the rules of the International Chamber of Commerce ("ICC"). As the FIDIC rainbow forms refer to the ICC rules. Below is a summary of the ICC Rules following those general topics. The Request 6.11 The Request must contain the following information: • • • • • the name.8 These Rules are specifically designed for international arbitrations. the arbitration agreement. ICC Rules of Arbitration 1998 (the "ICC Rules") Introduction 6. The ICC Rules to which I refer are those in force as from 1 January 1998. It does so via the International Court of Arbitration (the "ICC Court") which is attached to the ICC. a summary of the relief sought and the amounts claimed. similar stages other than those relating to the Terms of Reference. description and address of the parties.9 The published ICC Rules deal with such matters as commencing the arbitration.10 A party wishing to commence an ICC arbitration (the "Claimant") against another party (the "Respondent")submits a Request for Arbitration (the "Request") to the Secretariat. in general. It is the ICC Court's function to ensure the ICC Rules are applied. the Claimants' submissions relating to the number of Arbitrators. the constitution of the Tribunal. The Secretariat notifies the Claimant and Respondent that it has received the Request. I will explain those in some detail. 96 . a description of the nature and circumstances of the disputes. and the date of receipt is the date of commencement of the arbitration proceedings. 6. 6. The ICC Court does so by operating through its Secretariat. The ICC provides assistance for the resolution of disputes using its Rules.
it must file those with its Answer providing: • • 6. but good practice is to include: • • The Claimant's comments on the nature and circumstances of the Counterclaims.17 A description of the nature and circumstances of the dispute.12 The Secretariat sends a copy of the Request and documents annexed to it to the Respondent so that it can prepare its Answer to the Request and any Counterclaims. The Secretariat then sends to the Claimant a copy of the Answer.6.16 If the Respondent has any Counterclaims. the Secretariat may grant an extension of time to the Respondent to file its Answer if the Respondent applies to the Secretariat for such an extension. 6. The Claimant's responses to the relief sought in relation to the Counterclaims. Its response to the relief sought by the Claimant.13 Within 30 days of receiving the Request from the Secretariat. the appropriate rules of law and the appropriate language of the arbitration. the Respondent must file an Answer to that Request (the "Answer"). 97 .15 Provided that the latter point is covered. if the Claimant applies for such an extension. specifically identifying the Respondent's choice of Arbitrator by name. the Claimant must send to the Secretariat a Reply.14 That must contain the Respondent's name. 6. A statement of the relief sought including amounts claimed. 6. Answer to the Request and Counterclaims 6. description and address. • • • Its comments on the nature and circumstances of the dispute. This time period can be extended by the Secretariat. any Counterclaims and all documents attached. Any comments it has on the Claimant's suggestions as to the number of Arbitrators.18 Within 30 days of receiving any Counterclaims. Reply to any Counterclaims 6. There is no detail in the ICC Rules as to what the Reply should contain.
The ICC Court will consider those submissions. there are several factors that the ICC Court should take into account when selecting the Arbitrators.21 Where the parties agree that it should be one Arbitrator. and representations from any other interested 98 .22 Where the parties cannot agree whether there should be one or three Arbitrators.23 In order for arbitration to be successful as a process. the Arbitrators' availability. all this information and these documents are held by the Secretariat. it must quickly make an application to the Secretariat in writing stating the grounds for its challenge. Challenge of Arbitrators 6. 6. Number of Arbitrators in the Tribunal 6. the Arbitrator or Arbitrators are known as the Tribunal. Indeed it is only in these documents that the parties have first identified their suggested Arbitrators. each party has now set out its case in writing in some detail. the Arbitrators' residence. Whether it is one or three. then they must nominate one Arbitrator each. If they cannot agree. the Arbitrators' ability to conduct the arbitration under the ICC Rules. who will act as Chairman of the Tribunal.19 To summarise the process up to this stage. Choosing the Arbitrators: factors the ICC should take into account 6. and therefore they have not been involved in the process at all at this stage. the ICC Court will make the decision.6. However. the ICC Court will make that decision and appoint those Arbitrators itself if the parties are not able to agree on who should be appointed. and seen to be independent by the parties. are appropriately selected and are independent. In order to ensure this. 6. they are also free to agree who that person should be. and has commented on the allegations made against it.20 The parties are free to agree either a sole Arbitrator or three Arbitrators.24 If one party is not happy with the selection of an Arbitrator. I list some of them below: • • • • the Arbitrators' nationality. If the parties agree three Arbitrators. The ICC Court will then nominate the third Arbitrator. it is vitally important that the Arbitrators are of a very high standard. Arbitrators have not yet been appointed.
Language of the Arbitration 6. In most nations the procedural law and the substantive law are designed to work together to achieve justice. it will only do so if the parties have jointly made a payment on account to the ICC of the Tribunal's and the ICC's administration costs. including the Arbitrator himself.29 The parties are free to agree which rules of law the Tribunal should use when deciding the justice of the case. and can begin to become involved in the actual dispute itself. If the parties cannot agree. Place of the Arbitration 6. At this stage the Secretariat will transfer the file of papers.26 To summarise at this stage. If they cannot agree. and then make a decision as to confirming or overturning the appointment of the Arbitrator. taking account of the language of the contract. 6. 99 . In most circumstances it is advantageous to have the same choice of procedural law as of substantive law applicable to the contract. Answer and any Reply.party. Applicable Substantive Rules of Law 6.25 This happens when an Arbitrator is replaced because of a challenge. the ICC Court will decide. containing the Request. taking into account the provisions of the contract and trade practice. Replacement of Arbitrators 6. to the Tribunal. It is the law of the place of the arbitration which governs the procedural law applicable to the arbitration process. It would be an unfortunate situation where the procedural law of one country applied to the substantive law of another.28 The parties are free to agree this. the Tribunal decides. The parties should be very careful to include a clause in their contract which makes it clear as to the place of the arbitration. the Tribunal is now formed. This position has often not been reached until two or three months after the Claimant initially filed its Request with the Secretariat. If they cannot. However. The place of any hearings in the proceedings can be agreed by the parties. If they cannot. It is important to remember that the process of administration of justice by arbitration is a business like any other. the Tribunal will decide. he resigns or he dies. The importance of this provision is often lost. the Tribunal will decide. This would increase the risk of delay and confusion in the arbitration process.27 The parties are free to agree this.
The Tribunal must forward to the ICC Court those Terms of Reference signed by the parties within two months. The two month time limit can be extended by the ICC Court. it must draw up the Terms of Reference which sets out clearly all the disputes between the parties.31 Once the Tribunal has received the file of papers from the Secretariat. particularly if one party has refused to sign. It must decide whether or not to hear witnesses and whether to receive statements from them.6. It must also decide whether or not to hear experts and have reports submitted by them.32 Names and descriptions of the parties. If one of the parties will not sign. A summary of the Claimant's claims. The place of the arbitration. Details of the Arbitrators. Procedural Timetable 100 .30 Please see my comments above in relation to the place of the arbitration. The Tribunal may decide to appoint its own experts.33 It is important to note that once the Terms of Reference have been drawn up. It is only given in unusual circumstances. It may decide to make a decision based on an oral hearing. relief sought and amounts claimed.34 The Tribunal is required by the ICC Rules to establish the facts as soon as possible. or simply proceed on a "documents only" basis. relief sought and amounts claimed. Addresses for service of documents. It may decide to require each of the parties to exchange relevant documents between themselves. the Terms of Reference can be approved by the ICC Court. Terms of Reference 6. which constitutes deemed signature. it is not open to the parties to add any further claims at all unless the Tribunal agrees. A party should always work on the basis that this approval will not be given. 6. Establishing the facts 6. A summary of the Respondent's Counterclaims. It must include: • • • • • • 6.
The Respondent will be required to set out its Response and Counterclaims in a Counter-Memorial. and which relate to the claims set out in the Terms of Reference. the Tribunal sets out its provisional timetable for the conduct of the proceedings.39 Please note that the following section in relation to Proof and Evidence will cover these matters in more detail. • 6. and be limited to calling as oral witnesses those whose statements have been disclosed.36 As soon as the Terms of Reference have been drawn up. 6. The Respondent to serve its Counter-Memorial. The Claimant to serve its Response to the Counter-Memorial.35 The Tribunal will require the parties to set out their cases in more detail than included in the Request. The appropriate dates are inserted by the Tribunal. • The parties will exchange witness statements. and be limited to calling at the oral hearing those experts whose reports have been disclosed. 6.38 A hearing lasting four weeks will be commenced on X date. The Tribunal takes a very dim view of parties failing to meet their deadlines and can punish a party who fails to do so by awarding costs against them in relation to that aspect of the case. and will set out any directions in relation to disclosure of documents. The parties will exchange lists of the categories of all documents upon which they intend to rely. • The parties will exchange experts reports. In extreme circumstances. The Claimant will then be required to serve a Response to the Counter-Memorial.37 A typical set of directions is set out below: • • • • The Claimant to serve its Memorial. 6. the Answer and the Reply. Hearings 101 . It will discuss this matter with the parties. failure to comply with a procedural timetable may cause damage to the merits of a party's case. The Claimant will be required to set out its case in a Memorial. exchange of witness statements and the hearing date.6.
An ICC Award is final. 6. or non compliance by a party with a direction.47 In relation to the ICC and the Arbitrators' costs.40 The Tribunal can decide how many hearings it requires.41 If there are emergencies which arise during the course of the proceedings.43 Where there are three Arbitrators. the Award is given by a majority decision. the Tribunal has to submit it to the ICC Court in draft form for the ICC Court's approval.000. The ICC Court can extend the six month period if the Tribunal makes an appropriate application to the ICC Court. No Award shall be issued or is effective until it has achieved the ICC Court's approval. 6. but in most circumstances it is only necessary to have one major hearing at the end of the proceedings.500 and a maximum of $50.000. The Award must state the reasons that the Tribunal has reached its decision. Where the Claims and 102 .42 Once the trial hearing has ended. The ICC Court will review the Award both in terms of form and substance. The Award 6. a dispute where the Claims and Counterclaims are worth $5. the Tribunal will decide which of the parties should bear the total of these costs. be it an Arbitral body or the Courts of any nation. 6. 6.000.6.45 However.48 By way of example.000.46 The Award is binding on the parties and is fully enforceable. Costs 6. 6. As part of the Award.44 If the parties reach a settlement. At this the parties call their witnesses to give evidence and explain to the Tribunal their own case and their views on the other party's' case. before signing the Award. such as in relation to the preservation of physical evidence. 6. the Tribunal must begin preparing its Award. the administration fee would be $10. The Award must be finalised and sent to the ICC Court within six months from the date the Terms of Reference was signed. the Tribunal is able to conceive short hearings. and the Arbitrator's costs would be a minimum of $12. One important point to note is that there is no appeal from an ICC arbitration to any other body. there is a sliding scale for charges based on the size of the Claim and Counterclaims. then the Tribunal is able to issue an agreed Award made by the consent of the parties. The parties will have had to have paid fees on account prior to the file being transferred to the Tribunal earlier in the proceedings.
The Respondent must prove its Counterclaims.4 In order to be successful. it may start at a negative figure because the other party will be trying to disprove precisely what the party is trying to prove. each party must martial its evidence very carefully and thoroughly.000 and a maximum of $100.3 However. This involves three sources of evidence: • • • 7. In relation to the practice in international arbitration. the burden of proof lies with each party to establish its own case.2 In order to do so. 7. there is no power for the Tribunal to make an Award in favour of either party that it should pay the other side's legal costs and expenses. 7. Indeed. 7. Evidence Documentary Evidence 103 . The test to be passed.1 In summary. then that is sufficient for the claim to succeed. It must be remembered that in attempting to achieving the 51% necessary. the parties must convince the Tribunal that what it is saying is correct. is that the Tribunal must believe the case on the balance of probabilities. That is a matter of the procedural law governed by the place of the arbitration.Counterclaims total $100.49 It is worth noting that under the ICC Rules. Witnesses of fact.000.000. 6.5 Documentary evidence. provided that it is convinced on a "51/49%" test that the claim made is correct. The Claimant must prove its Claims. the administration fee would be $75. I will cover each of those matters in the following sections. Even if the Tribunal does have some doubt.000. Expert opinion. this should not be seen as an easy test. 7 PROOF AND EVIDENCE Proof 7. each party will start at 0%.800 and the Arbitrator's costs would be a minimum of $20. Another way of putting this test is that the Tribunal must believe what the party is alleging is more likely than not to be correct.
including referring to any relevant documents.9 This is one of the most time consuming aspects of any arbitration. Witnesses of Fact 7.7 In most international arbitrations. Giving a view on what the witness personal recollects about those matters. The witnesses are then cross-examined by the legal representatives for the opposing party who try to prove that the statements they are making are untrue.11 These witness statements form the basis of the witnesses' evidence in the final arbitration hearing. there is a great deal of time required to consider the documents received from the other side which will reveal a great deal about the strengths and weaknesses of the parties' respective cases. 7.7. The taking and keeping of records is one of the major keys to success of any case. and responding to the other side's request. one of the directions that will be given by the Tribunal is that the parties must disclose all documents upon which they rely. is an extremely time consuming task for both the advisors and the clients themselves. Identifying the issues in dispute to which that person can personally speak. It is much more convincing for the Tribunal to consider the documents that were prepared at the time and which support the allegation in question. but is a key to success. These witness statements must deal with the following matters: • • • Identifying the person making the statement.10 The Tribunal in most international arbitrations is very keen to reduce the time spent in listening to witnesses of fact in the final arbitration hearing. Following that. In most circumstances what is preferred is that the parties take witness statements from their own witnesses which are exchanged and provided for the Tribunal to consider before the hearing. 7. 7. 104 . 7. This has already been explained by Jonathan. provided that such requests are reasonable and that the documents requested are strictly relevant to the matters in dispute.6 It is vitally important that as much as possible of a party's case can be proved by documentary evidence. It is also possible that the Tribunal will allow each party to request specific categories of documents from each other.8 Preparing such a request.
just before the final arbitration hearing. • Set out what his opinion is on the relevant matters in dispute. and it is clearly all consuming from the experts point of view. Indicate what he has been instructed to cover. Expert Opinion 7. Give his experience. if untruths are being told. It is the responsibility of each party to try to cast doubt in the Tribunal's mind on the truthfulness of the statements being made by the witnesses. and are more often than not over 50 pages long. appointing and paying the experts. The cross-examination process in the hearing itself is unpleasant. the Tribunal will order that the reports are exchanged. then it is important that they are exposed so that the truth can be established. giving an independent and professional opinion. A good deal of time is then involved in each party analysing what the 105 . 7. They can run to hundreds of pages. and what documents and witness statements he has seen.15 This involves an expert being instructed to produce a report dealing with all the relevant issues within his scope of expertise and which relate to the matters in dispute. Once the report has been prepared. However. It is only in that way that the Tribunal will be convinced by his views.14 In the vast majority of international arbitrations it is an important part of the parties' cases that they have expert opinion evidence upon which they can rely. each party is very anxious to see what the other side's witnesses are saying and how it can disprove those statements in crossexamination. the expert must act as an independent professional. 7.17 Preparing experts reports is a less time consuming exercise for the parties than for the experts. When the witness statements are exchanged. including an explanation of how those opinions have been formed and reached. he will have no credibility with the Tribunal.13 The process of taking and serving witness statements is time consuming but vital. However.7. A good deal of time is spent in preparing the witness statements in the first place. An expert report must cover the following: • • • Identify the expert and his expertise.12 Witness statements can be extremely lengthy. It does involve some legal input. 7. If the expert is seen to be partisan. 7.16 The expert reports are usually produced towards the end of the procedure. The parties are responsible for instructing.
The benefits of flexibility and confidentiality are great advantages. 7. that is not to say that international arbitrations can be approached lightly.18 When the experts are in the final arbitration hearing.20 Where negotiations have failed.other's experts have said. Thorough preparation is required in order to 106 . international arbitrations are in general the best way of resolving international construction and engineering disputes. The Tribunal may also order that the experts should meet with each other to identify areas of common ground and those particular areas where there is a clear technical dispute. they give much more credence themselves to documentary evidence. provide the best chances of success. CONCLUSION 7. they are subject to the same crossexamination regime as are the witnesses of fact. it is very important that the experts have good records to work from when forming their views. and cannot give factual evidence. However. 7. As they are independent.19 To repeat earlier points.
APPENDIX 1 'Contractual Structure of PFI Transactions' 107 .
the paper will focus on the contractual structure of the main project agreement between the public sector and the private sector and summarise the other relevant documents. 3. In a paper of this nature it is clearly impossible to go into the many and varied issues which PFI raises. Nevertheless. the general understanding of which again helps to understand the commercial drivers in the contractual negotiations. which will naturally lie at the heart of the PFI transaction • • Compensation and relief events The concept of change and the provisions for dealing with change in legislation during the course of the contract • • Termination and the importance of these provisions particularly to the funders The dispute resolution procedure. Equally. PFI transactions are no different to ordinary 108 . there are certain key principles which if understood lead to a much greater understanding of the commercial drivers and risk allocation of PFI transactions as reflected in the principal contract. The paper then deals with six features of the project agreement as follows: • • Duration of the contract Payment and deductions. participants need to understand how it can be distinguished from traditional property development. 2. This paper also includes a short précis of the tender process.Contractual Structure of PFI Transactions Hammond Suddards Edge Introduction 1. Problems will arise and they need to be dealt with quickly and effectively. an understanding of which leads to greater comprehension of the specific terms and conditions in the principal contract. It is first of all necessary to understand what is PFI and why has it developed. This short paper is intended to give an overview of the contractual structures of PFI transactions. Having discussed the background issues. developments in this regard. Five basic principles are then identified.
In many cases it is not a substitute for a traditionally procured and financed project. schemes have ranged from around £2m capital costs upwards. The PFI was launched by the UK government in 1992. There is no doubt that PFI has grown in popularity and overcome some of the hurdles that have been placed in its way because it is a politically expedient solution. office accommodation. a point which will be referred to later in this talk. It is referred to as a Unitary Payment because it is a payment for the total costs of the services. which is an abbreviation for "Public Private Partnership". the channel tunnel link is essentially a PFI project. referred to as the "Unitary Payment". In the last four years there is little doubt that PFI has established a market place although it should be emphasised that it is not a "cure all" and there are often more appropriate procurement methods. For the purpose of this paper. PFI is the supply of an asset for the provision of services to the public sector. Outside the construction sector. roads. The essential feature is that the project is funded by the private sector and the public sector pays a service charge for the provision of services. Why PFI? 8. Synonymous with this is the term "PPP". hospitals. there were numerous and well publicised early difficulties. There is not a separate payment for the construction of the capital asset. Although there were some successful bridge schemes and. Essentially. Whilst there may be debate about the size of projects for which PFI is properly viable. Finally. PPP and PFI can be regarded as "one and the same".4. It is about services not construction. Firstly some basic terminology. PFI projects include the provision of IT equipment and other services sometimes without the provision of a capital asset in order to provide the service. 6. lightrail etc. of course. the paper concludes with a brief summary of the contractual structure and hopefully the paper will lead to a greater understanding of the principal aspects of a PFI contract. Typically it is about providing services which were historically. 7. PFI allows 109 . Essentially PFI was not kick started until it was adopted by the in-coming Labour Party following the UK May 1997 election. it should be made clear that PFI is not about "mega projects". or at least in the last 50 years. prisons. What is PFI? 5. PFI stands for the "Private Finance Initiative". There have certainly been a number of schemes successfully completed in the range £5-10m and there are a large number of schemes in the £10-20m value. Right at the outset. provided by the public sector. Examples of PFI projects include schools.
Schemes involving significant disposal of surplus land or third party income are often referred to PPP schemes as opposed to PFI schemes. Development : Comparison 10. not least the time and costs of the bidding process. The private sector PFI company takes the value of the land disposed and uses it to reduce the amounts of the service charge or Unitary Payment and. Indeed. As the threshold for the provision of Works to the public sector is just over £4m at present. As PFI projects are led by the public sector they are caught by the EU Public Procurement Rules as incorporated into English Law. for example. Nevertheless. it should be clear that PFI in providing for the provision of services and not an asset which is financed by the private sector. Similarly. the edges can be blurred as frequently PFI schemes will provide for the disposal of surplus land by the public sector. As explained previously. it will be evident that practically all PFI contracts will be caught by the EU Procurement Rules. Again similar principals have been applied to traditional property development schemes. it will remain for the foreseeable future a politically expedient solution in the important area of the delivery of public sector assets such as hospitals and schools and for that reason alone it is "here to stay". Such a scheme would not be dissimilar to lands for property development projects.00 in respect of the provision of services arguably applies to PFI as opposed to the threshold in respect of 110 .the public sector to deliver infrastructure development without increased borrowing and therefore the cost of the schemes does not increase the Public Sector Borrowing Requirement. There is no doubt that PFI is here to stay. the Unitary Payment could be nil. despite some criticism which is voiced. Undoubtedly there are problems which need to be addressed. is fundamentally different in this respect from traditional development. The essential feature is that because the services are being provided as opposed to the procurement of an asset. in an extreme case. the public sector may allow the private sector as part of the PFI scheme to obtain the benefit of income generated opportunities created by the PFI scheme. However.435. Tender Process : Overview 11. As will be seen later. in order for a PFI scheme to proceed it will generally need to receive a financial audit that it is indeed off balance sheet in accordance with the FRS5 accountancy standard. 9. this impacts on a number of the contractual terms. Even from the brief outline already given. Indeed. PFI vs. income from tenants or the use of facilities. it is important to understand the tender process because it inevitably impacts upon the negotiation of the contractual terms. the threshold of £104. the transaction can be treated off balance sheets.
The ITN will contain details of the projects and. This is merely advanced notice of the formal OJEC advertisement. the restricted procedure and the negotiated procedure. That said. as it relates to single stage tender where anyone can bid. No earlier than 40 days from the date of the Notice the public sector must issue the information memorandum and pre-qualification questionnaire to all potential bidders who expressed interest. After short listing. the preferred bidder is appointed whether or not a BAFO is utilised. the draft project agreement and the output specification. Finally. The open procedure. in particular. The public sector then receives responses to the ITN and can negotiate with 2 or more bidders in order to obtain a "Best and Final Offer" ("BAFO"). I believe most if not all PFI contracts closed to date have utilised the negotiated procedure. Under the restricted procedure the minimum number of bidders is 5 and the maximum 20. 12. The open procedure is not applicable. When the formal OJEC advertisement is placed. experience has often demonstrated that a BAFO does not distinguish the bidders and indeed results in closer bids and many authorities dispense with a BAFO (which is permitted under the Procurement Rules). 111 . In the negotiated procedure the minimum number of bidders is generally 3. It is by no means certain that the Rules will be changed and a number of banks and others have expressed concerns over the uncertainty this has created. However. as PFI is about the provision of services (although such a debate would depend upon the details of the particular project) and on this basis all PFI contracts would be caught by the Rules.works. 13. there is a difficulty : under EU Procurement Rules the negotiated procedure is intended to be used in extremely limited circumstances and there are currently representations by the UK Government to Brussels regarding a change in the Procurement Rules to reflect UK PFI practice. typically three to six months and in some cases longer until the contract is signed. The restricted procedure and the negotiated procedure are essentially the same save for the important distinction that the negotiated procedure allows for negotiations with a preferred bidder prior to finalising the contract. There are three procedures in the Rules. Negotiations continue with the preferred bidder often for a considerable period of time. Basic procedure requires the placing of a PIN notice as soon as the public sector becomes aware of the project. that is the procedure which is almost inevitably used in PFI transactions. any party wishing to bid for the scheme must be allowed at least 37 days in which to place an expression of interest from which a long list is drawn up by the public sector. Frequently in PFI schemes 4 bidders are short listed following receipt of the pre-qualification documents. the public sector issues the Invitation to Negotiate (ITN). However. Thereafter the public sector receives responses to the information memorandum and prequalification questionnaire and draws up a short list. As I am sure many of you will be aware.
the challenge is to postpone as much of the bid cost as possible to the preferred bidder stage. Often the public sector will try to ensure that each of the bidders provide a complete mark-up of the project agreement. 15. can last 12 months. 14. One possibility which is open to the private sector bidders is to procure bid cost insurance which provides cover in the event that the public sector does not proceed with the project after the preferred bidder stage. However. However. because until details of each bidders scheme is known. they will wish to ensure that the responses at ITN stage are as complete as possible. but inevitably many of the issues cannot be tackled until the details of the specific scheme are known and developed further. In addition to the principal contract documents referred to in the Contractual Structure. as experience has shown that most projects which proceed to the preferred bidder stage will reach financial close. The cost can be significant and from a bidder's perspective. Clearly the preferred bidder is in a stronger negotiating position and certainly much of the legal cost can often be postponed to after preferred bidder stage. It is readily apparent that the tender process is complicated and even on the simplest scheme. It is on this that the bank will permit draw down from the funds subject to satisfying any conditions precedent in the contract.often referred to as "financial close". On 112 . that can be very difficult in practice. Contractual Structure C o n tra c tu a l S tru c tu r e P u b lic S e c to r " A u th o r ity " P R O J E C T A G R E E M E N T D IR E C T A G R E E M E N T F u n d e r C R E D IT A G R E E M E N T S P V " C o n tr a c to r " S H A R E H O L D E R S A G R E E M E N T B U IL D IN G C O N T R A C T O P E R A T IN G C O N T R A C T E q u ity In v e s to r s B u ild in g C o n tra c to r P R O F E S S O N A L A P P O IN T M E N T S U B -C O N T R A C T O p e r a tin g C o n tra c to r S U P P L Y C O N T R A C T S D e s ig n e r S u b c o n tra c to r s H a r d F M S o ft F M Subsidiary Contract Documents 16. there are many details which impact upon the negotiations which cannot be resolved. from the Authority's perspective. there are a multitude of other documents which are associated with any PFI scheme. Some of the more complex projects have lasted 3 or 4 years.
as will be explained later. 17. It should be pointed out that this is not a method of making a "super profit" without the Authority's knowledge. there would be a multitude of equity documents in relation to the setting up of the Contractor and investments (if any) by third parties. who has a direct agreement with the Building Contractor under which it can pursue any deductions which it believes arise from defects in the building for which the Building Contractor is responsible under the Building Contract. the Authority will be entitled to make deductions from the Unitary Payment. there were somewhere in the region of 90 documents which were executed or initialled at financial close. Finally. Essentially any deductions made by the Authority are immediately passed on to the Operations Contractor.a recent scheme which we were involved with. The cause of the problem could either be failure by the Operations Contractor to provide the services properly or some defect in the building. In particular. 18. A Parent Company Guarantee should not be given to the Authority as this cuts across the PFI principle in the project agreement. A key document in a PFI transaction is the Co-operation Agreement between the Building Contractor and the Operations Contractor. the bank will not allow the Contractor to take the risk of payment deductions whilst a dispute is resolved as to whether the cause of a problem is defective building or poor services. The principal subsidiary contract document will be as follows: • • Direct Agreement between the Authority and the Fund Sub-contract Warranties to the Fund. Similarly one would expect the Building Contractor to give a Performance Bond to the Contractor with the benefit assignable to the Fund. the bank will not allow it to take any significant cashflow risk. The Authority will be looking for the best value for money and accordingly will want to be satisfied that the Contractor has adopted the most 113 . In the event of a dispute during the services phase. Inevitably there will be design warranties from the Building Contractor's design team to the Fund and the Contractor (in the same way as the Sub-contract Warranties). The negotiations with the Authority will be entirely open book including the rates of return which the Contractor seeks to make. the Contractor and the Authority (the extent of these will depend upon the particular project) • Parent Company Guarantee from the Building Contractor and the Operations Contractor to the Contractor and to the Fund. together with documents reflecting the tax structure designed to reduced the Contractor's tax liability. As the Contractor is a "shell company" with no assets.
There ought to be no need for the Authority to monitor. It is not a construction contract. if there are substantial problems. Indeed. Accordingly. As briefly explained. This is a point which will be discussed later. PFI is a form of "limited recourse lending". that the contract will be terminated and that it can recover its investment following a termination. in terms of affordability the scheme will not proceed unless it offers better value than the Public Sector Comparitor ("PSC"). 114 . Its security is the income stream from the public sector. as in traditional development. Arguably this is the flip side of risk transfer. Accordingly. many of the provisions typically found in building contracts will not be found in the Project Agreement. Accordingly. The bank does not. Bank Security 23.efficient tax structure so that the Contractor's costs are reduced and it can make its projected rate of return with a lower Unitary Charge. which is a financial model of the scheme over its whole life if it were procured in a traditional manner with financing by the public sector with allowance for occurrence of the relevant risk. the Authority pays only for services properly provided. risk should not be transferred to the Contractor if that does not represent value for money or would make the scheme unaffordable. Once again. the contract is about the provision of services. The principles are as follows: Risk Transfer 20. Provision of Services 22. the provisions should reflect the fact that the Authority is procuring a service and that there is reduced liability on the public sector. the bank and its due diligence advisors will wish to ensure that there is a satisfactory income stream in order to repay the debt and. The Authority must demonstrate value for money and that the scheme is affordable. in particular. an understanding of the basic contractual principles is essential to comprehend and fully understand the drafting and negotiation of the key contractual provisions in the Project Agreement. As explained previously. Essentially. have a charge over the project. Accordingly. supervise or check the Contractor in the same way that it would under a traditional contract. Value for Money/Affordability 21. the Authority should not be procuring capital asset our incurring liability which would be on the balance sheet. Basic Contractual Principles 19.
for example. the assets will generally revert to the public sector. for the private sector to use a prison or a school for some other purpose. However. Again.Residual Value 24. it should not be confused with an obligation to keep the asset in good repair in the lifetime of the contract as this issue should be dealt with by way of the incentive to properly provide the services and the imposition of deductions in the even that the services are not properly provided as a result of some defect in the asset. Nevertheless. it will generally revert to the public sector on expiry or termination. It is impossible. where there is no alternative use. In some circumstances. Where the asset is transferred at nil value to the public sector on expiry or termination. change in law. a terminal payment can help to ensure that the Contractor properly maintains the assets during the lifetime of the contract. I would now like to turn to 6 specific areas of the Project Agreement: • • • • • • duration of the contract. Accordingly. although the public sector will not generally own the asset during the lifetime of the project (otherwise it would be "on balance sheet"). there are generally provisions to ensure that it has been properly maintained. and not allowed to run down. Accordingly. dispute resolution procedure. payment and deductions. most public sector facilities can only be used by the public sector. on expiry of the PFI contract. That need not be the case and this will depend upon the particular circumstances of the project. termination. it will all depend upon the particular circumstances of the project as to whether or not a terminal payment is the most cost effective means of financing the project. 25. compensation and relief events. We have already mentioned on a number of occasions that PFI is about the provision of services as opposed to the construction of an asset. However. there can be a terminal payment by the public sector upon expiry (or termination) to reflect the transfer of the asset. Such a payment may well reduce the Unitary Payment during the contract term. Duration of Contract 115 .
dictated by a number of factors. The Unitary Charge is intended to cover The service period will be 116 . That is not always the case. the contract is of no effect. generally referred to as the Expiry Date. the contract is then effective as from the Effective Date. 28. typically: • • • • • • the Authority's requirements. PFI is about the provision of service for which the Contractor receives the Unitary Charge. A typical simple PFI will involve a construction phase. The service period is generally somewhere in the range of 15-35 years. the contract term is dictated by the service period. where the new asset is constructed. As explained previously the contract commences upon financial close. The Contract will proceed until the end of the service period. and whether or not it might be feasible to extend the contract term with the existing PFI contractor. Once the pre-conditions are satisfied. Payment: the Heart of PFI 29. alternative use or residual value considerations. 27. As should be becoming very familiar. Until the pre-conditions are satisfied. However. and a service is phased during which the services are provided.26. the project may involve the construction of various assets as well as the provision services to existing assets resulting in a variety of phased services: full services may not be provided for a considerable period until all construction work is complete. Generally speaking. affordability reflected by the economic life of the assets. Often there are various pre-conditions (such as planning) which have not been concluded prior to financial close and it is common place for the Project Agreement to be conditional upon satisfaction of these pre-conditions. the services are provided to existing assets immediately following financial close or the Effective Date. and bidders need to be aware of schemes whereby delays during the construction period could result in a reduced service period (and therefore a reduced income earning period). so that any delay or prolongation of the construction period would result in an overall increased period. with 20-25 years being common place. on some projects. The only exception to this is in the event of termination prior to expiry. Furthermore. life cycle replacement issues. debt repayment period.
often at 5 year intervals. of course. One of the key issues in considering payment is the question of demand risk. This will vary from scheme to scheme. Clearly. there will always be 600 patients. if the Contractor is taking demand risk this will affect significantly the payment mechanism as to a certain extent it inheritantly takes into account deductions in the event that services are not provided (whether due to default or demand risk). Availability Deductions 117 . there are provisions in the Project Agreement requiring bench marking and market testing. Because the project is being provided over a substantial period. life cycle replacement costs and the equity return. as part of the "off balance sheet" treatment. Furthermore. The paper will explain later the basis of these two deductions. there are provisions attempting to deal with the recent Best Value legislation (although this still appears to be causing a certain degree of confusion on some schemes and further guidance is being sought from DETR). student prisoners etc.repayment of the debt (which will principally fund the construction costs). 31. Typically on a PFI project the value of services are 3 to 4 times that of the capital cost although that will obviously depend upon the nature of the project. that over the 25 year period. Furthermore. 32. provision needs to be included for indexation. which can result in adjustments to the Unitary Charge. for example. The monthly payment is thus the Unitary Charge for that month less the availability deduction and the performance deduction. an identifiable charge in respect of the construction of the asset. in order to ensure that the Unitary Charge is reflecting current practice. this is a commercial issue of paramount importance. debt repayment will be fixed at financial close and will not be affected by inflation (the Contractor should remove the interest rate threat by fixing the interest rate at financial close under a hedging agreement: this is standard PFI practice). Sometimes the demand risk is shared and on some schemes the risk is borne entirely by the Authority. it should not be possible for the Authority in contractual terms to be able to break the Unitary Charge down to its constituent elements so that there is. Nevertheless. for example. That is not to say that under the financial model and the payment mechanism the Authority will not be anxious to fully understand the basis upon which the Unitary Charge has been calculated to ensure that it is receiving value for money. As explained previously. The Unitary Charge is generally paid by monthly or quarterly instalments subject to deductions. However. Does the Contractor take the risk. the element of the Unitary Charge in respect of the debt should not be subject to indexation as. the operation costs. 30.
For example.33. The quality of the services would generally be monitored by the Contractor itself (subject to quality assurance and random checks by the Authority). could be caused by the Authority's own failure. there are mechanisms to escalate the deduction depending upon the length of time or the number of areas which are unavailable. Performance Deduction 34. the contract would generally provide for termination. As referred to previously. These are deductions which are dependent on the quality of the service delivery as opposed to the availability of the assets. Furthermore. There will generally be some form of scoring system against which financial deductions are linked. the Contractor should not be exposed to both availability deductions and performance deductions in respect of the same event. it is considered to be unavailable. the value of the Unitary Charge is apportioned to each area and the deduction generally reflects the apportioned value of the Unitary Charge. In the event that there are substantial amounts of availability deductions or performance deductions. the payment mechanism will generally provide for performance deductions. As with availability. In addition to availability deductions. Finally. the deduction is generally reduced if the Contractor can provide alternative accommodation or if the Authority is able to use the relevant unavailable area. The availability deduction is intended to reflect the part of an asset which is not capable of providing the service. Deductions: General Issues 35. there is no performance deductions (unless the Contractor is paid the full amount of the Unitary Charge subject to any other deductions which the Authority is entitled to make). 36. if a room is not usable because it is not weather tight. Under the payment mechanism. there are generally availability deductions and performance deductions from the Unitary Charge. This is important to the 118 . Accordingly. They tend to be more subjective criteria. there are sometimes provisions limiting the amount of availability deduction and clearly this will be of real concern to the fund anxious to ensure that there will be sufficient capital in the Contractor in order to repay the debt. It will be readily apparent that the cause of an unavailability or service failure could be outside the Contractor's control and. to ensure that such areas are repaired quickly (as the value of a one off deduction may be very small). there will generally be provisions for escalation of the performance deductions at a limitation on liability. the payment mechanism should include a list of "excusing events" in the event that the particular incident of unavailability is caused by such an excusing event. or it is too cold because the heating has failed. indeed. However. Certainly.
the payment mechanism will be of paramount importance to the bank who will be concerned to protect its income stream and ensure there is sufficient capital in the Contractor. Qualifying Change in Law will be dealt with later but it will be seen that during the construction period this is an extremely narrow ground (Qualifying Change in Law are certain types of change in legislation which would entitle the Contractor to compensation). capital Qualifying Change in Law and Authority Change. these further payment provisions are in respect of Changes (the PFI equivalent of "variations") and compensation events. in the final analysis. Compensation Events 39. The list of compensation events is extremely narrow. that is its sole remedy in respect of a particular event or circumstance. Authority change will also be dealt with later and in effect represents changes instructed by the Authority. Many of the events and circumstances which give rise to deductions under the contract would constitute breaches of contract or give some other right to the Authority to recover its loss from the Contractor. the likely Authority Changes is much less than would be the case on a traditional development project. Compensation events are events which occur prior to service commencement (ie during the construction period) which are at the Authority's risk under the Project Agreement and which. However the Contractor will be entitled to compensation reflecting 119 . there are extremely limited grounds for further payment under the Project Agreement. Essentially. a great deal of attention is played to the so called "sole remedy" which essentially provides that insofar as the Authority's remedy is by way of deduction. and the lack of involvement by the Authority in the design and construction of the assets. Accordingly. for example. it would be inequitable and "double recovery" if the Authority could make deductions and at the same time. Given the nature of PFI projects. this could result in termination (and thus the fund recovering the debt by way of the compensation payable on termination: which will be explained later). pursue the Contractor for breach of contract in respect of a defective building. entitles the Contractor to compensation. therefore. the Authority breach is unlikely (the most likely cause of such a breach would be a failure to give access or some act of prevention). 38.funder who will wish to ensure that in the event of serious non-compliance by the Contractor they can step in to the contract and take over performance of the services or. TTF recommends only Authority breach. As briefly discussed above. Apart from payment of the Unitary Charge for the performance of the services. 37. Bearing in mind the obligations of the Authority are extremely limited. Clearly. Its due diligence advisors will therefore need to look very closely at the availability and performance deductions and how these link with termination.
The Contractor should be entitled to an extension of the long stop date and the planned services commencement date (and thus the overall income stream should not be affected). the Authority may suffer a loss (by way of. As emphasised previously. The general principle is that the Contractor should take the cost risk associated with such events but they shouldn't lead to termination. generally. Depending on the particular circumstances. strikes. both the Contractor and the bank will be anxious to ensure that the equity returns are not affected (the bank's indirect interest in equity returns is to ensure that there is an incentive on the Contractor to properly perform the services and thus receive the income stream and repay the debt). they should not be accepted as a right. there should be no liquidated damages. interference by statutory undertakers and difficulties in access to the site (other than default by the Authority). in some circumstances. The bank will be particularly concerned to ensure that the senior debt loan life ratio remains the same to ensure that the Contractor will be receiving sufficient income in order to repay the debt. This is because if such an event occurs during the service period. This is because the Authority is paying for the provision of services and if commencement of those services are delayed. increased operating costs if it is still required to provide those services from some other facility) and in those circumstances some project agreements do contain provisions for liquidated damages. Relief Events 42. However. The principle is that the Contractor is "kept hold". Certain events which are outside the Contractor's control (so called "no fault events") will not be compensation events yet could impact upon the provision of the assets and/or the services. then the Authority simply does not pay until such time as they are provided. the compensation could be payable either by a lump sum or by an increase in the Unitary Charge. 120 .the increased costs whether or not the compensation event results in delay to the construction works. Generally speaking under PFI contracts. However. compensation events do not apply in respect of the provision of the services. In the event that a compensation event is delaying the Contractor then there will be an adjustment to the service works commencement date and. Thus relief events are relief from termination. No compensation is payable in respect of relief events. to the long stop date. The financial model is annexed to the Project Agreement and this will be re-run to ensure that the Contractor is "no better or no worse" as a result of the occurrence of the compensation event. Similarly. 41. These are typically events such as fire. it should be an excusing event thus entitling the Contractor to full payment of the Unitary Charge without deductions. 40. for example.
on the Authority to accept any contractor change. some relief events may well be excusable events. Both can be changes to the Works and/or the services. With Contractor Changes. There is a detailed procedure which in effect requires pre agreement of Authority Changes in respect of the amount payable and the effect on the programme. legislation could change substantially and have 121 . however.43. Many relief events will be circumstances or occurrences in respect of which the Contractor has insurance cover. there should not be a significant number of changes. As part of the required insurances. For example such a change may impact upon service provision or reduce the planned equity returns. Change 44. the Contractor will be required to procure Advanced Loss of Profit (ALOP) and Business Interruption (BI). 45. As mentioned previously. the procedure is very similar. There is no obligation. Careful consideration needs to be given to the inter relationship between the excusing events (which prevent the Authority making deductions from the Unitary Payment) and with relief events. it should be noted that for the project policies to cover ALOP or BI there will need to be material damage to the assets and furthermore there may well be significant excesses on these policies. This is obviously an incentive to ensure that the Contractor is proactive in looking for savings during the lifetime of the project. However. Change in Law 46. in most projects. given the nature of the projects and the limited involvement of the Authority. the Business Interruption insurance. change is the PFI equivalent of variations. as mentioned previously. except there is a mechanism for sharing any savings in the Unitary Charge which result from the Contractor Change. Unlike compensation events. You have seen that the contract term for a typical PFI contract is typically in the region of 20-25 years. Depending on the circumstances of the project. With Authority Changes. There are different provisions dealing with Authority Changes and Contractor Changes. there is often a negotiation on restrictions to the type of Changes which the Authority can propose. during this period. Also. where in the final account stages there are lengthy negotiations about alleged variations issued during the course of the project. Clearly. the loss of income is protected by. unlike in many traditional development projects. It is not intended that the parties get into the situation common in building contracts. for example. Thus. There is also a close tyre between relief events and insurance. there will remain a financial risk in respect of the occurrence of relief events but these should not lead to termination. relief events apply both during the development period and the services period. Thus if there is a delay to the project in respect of a fire.
a significant impact upon the income stream. Accordingly, detailed provision needs to be made for changes in law. PFI contracts introduced the concept of a Qualifying Change in Law. This is a change in the legislation which will entitle the Contractor to compensation. The first point to make, therefore, is that not all changes of law will entitle the Contractor to compensation. In other words, some of the risk of change of law is with the private sector. However, this needs to be viewed in the light of the provisions for bench marking and market testing which will entitle the Contractor to increased payment to the extent that changes in legislation which are not Qualifying Changes in Law but which have had an effect upon market prices generally. 47. Essentially a Qualifying Change of Law consists of three particular categories of change in law. The first is a discriminatory change of law. This is a piece of legislation which discriminates against the specific project and not other projects, the Contractor and not other contractors, and PFI contractors generally and not other persons. The second category is a specific change of law, which is a change of legislation which affects the provision of services similar to those being provided under the PFI contract or the holding of shares in companies whose main business is providing a service the same or similar to the services. The third category is a general change of law. This is any change in legislation which occurs during the service period. The corollary of this is that the
Contractor is entirely responsible for any general change of law which occurs during the development period. There is a further requirement that each of these categories of change of law must not be foreseeable at the date of the contract. 48. As mentioned above, discriminatory changes of law and specific changes of law are dealt with as compensation events during the development period. In the service period, the Contractor would be entitled to an adjustment of the Unitary Payment and this would be dealt with in a similar way to an Authority Change. General changes of law which are qualifying changes of law are dealt with differently. Firstly, there must be a requirement for the Contractor to incur Capital Expenditure. If such a general change of law merely results in increased service costs, that will be the Contractor's risk. To the extent that the Contractor incurs Expenditure as a result of a general change of law during the service period which was not foreseeable, then there is a formula for sharing the increased Capital Expenditure between the Contractor and the Authority. Generally speaking in PFI contracts, the Contractor is expected to take the first two to 5% by value of the capital cost of the works. 49. Changes in tax law do no entitle the Contractor to compensation for change in law with the exception of VAT. Any changes in VAT are passed on directly to the Authority. Termination: General
As mentioned previously, in any PFI contract, termination assumes a much greater importance than it does under traditional construction and development contracts. It will be of particular concern to the banks and to the Authority who may be required to make a substantial payment by way of compensation. As far as the banks are concerned the provisions in respect of termination and compensation on termination reflect their security for the debt. As explained, the bank has no charge over the asset and the debt is a form of limited recourse debt finance.
The contract will contain a strict procedure dealing with termination and compensation on termination. Accordingly, it is necessary to exclude common law rights of termination so there is complete clarity. The contract will thus set out the specific grounds which will lead to termination. The banks are particularly concerned to ensure there are no "hair triggers" which could result in termination at short notice on the occurrence of some minor event. The banks will be concerned to ensure that there are sufficient warnings and a gradual escalation in the procedure so that there is sufficient time to ensure that either the Authority or the Contractor remedies the particular default and, in some circumstances, the bank has the opportunity to step into the contract to put right the particular default. Indeed, it is a matter of PFI policy generally that the procedures are designed to encourage the bank to step in rather than to allow the project to collapse with all the impact that will have on the provision of public services.
Another important general provision is that even when a notice of termination is served, the contract should provide for rectification by the Contractor. In other words, where it is possible to remedy a particular default or breach, the Contractor must be given the opportunity to do so before the contract is terminated. Termination: Grounds
There are 5 grounds of termination found in PFI contracts. They are as follows: Authority Default
There are three types of Authority Defaults which constitute grounds for termination. Non payment of an amount due over a specified period of time following services of various notices, a substantial breach by the Authority which frustrates the purpose of the PFI contract and the sequestration of assets belonging to the Contractor by the public sector. Apart from non payment, the two other grounds are extremely narrow. In reality, it is extremely unlikely that the contract would be terminated for Authority Default given the consequences to the Authority. Contractor Default
There are a number of events which could give rise to contractor default. Clearly the negotiation of these is extremely important. First type of default is a material breach by the Contractor. It should be borne in mind that the Contractor will, if a notice of
termination is served, be given the opportunity to rectify such material breach (assuming it can be remedied). Second category is persistent breach. This is a minor breach which is repeated over a considerable period of time (generally over 12 months) and requires the service of various notices. This is intended to prevent the Contractor refusing to perform some minor part of its obligations. Obviously the occurrence of any insolvency type event will constitute a Contractor default. Any attempt by the Contractor to assign the contract to an unapproved body or to pass on ownership of Contractor to an approved body constitute Contractor default, as would employing certain categories of employee. PFI contracts are for the public sector and for social and political reasons there will be certain excluded classes of persons who may be involved in the project. Another ground of contractor default is abandonment of the project. This is intended to cover abandonment during the Construction period. An important Contractor default
event is failure to complete the Works by the long stop date. As previously mentioned, continued poor performance of the Services resulting in the accumulation of significant Availability Deductions and all Performance Deductions will also result in termination, and the Contract will set out the criteria for such deductions resulting in termination. On the one hand these do not want to be too low to avoid termination for relatively minor performance issues, but equally the bank and the Authority will not want them to be too high, such that the Authority must suffer poor performance over a considerable period, and the bank will be concerned that the Contractor will continue to take availability deductions and all performance deductions and be unable to service the debt. Finally if the Contractor fails to maintain the necessary insurances this could result in termination, unlike tradition contracts perhaps, insurance forms very much a part of the risk analysis and the way in which the project is funded and therefore maintenance of the appropriate insurances is vital as part of the overall security package. Voluntary 56. The Authority has the right to terminate the contract at any time as well. Obviously there are substantial cost consequences if it elects to do so. Nevertheless, for political and commercial reasons it is essential that the Authority has this right. Corrupt Gift and Fraud 57. As PFI Contracts are in the public sector, there are provisions dealing with corrupt gift and fraud, breach of which could lead to termination. There are still no universally
established guidelines as to the detailed mechanism and in particular where the corrupt
concerned with. Clearly this would represent a substantial windfall to the Authority. as previously explained. is committed by a subcontractor or employee of the subcontractor. Furthermore. Furthermore. It is important to understand that compensation on termination is not intended to be a penalty. There should not be an additional penal element. If the contract is terminated. it should be recalled that PFI is about payment for services delivered. one would expect the contractor to be given the opportunity to replace the relevant subcontractor or employee. on termination the Authority will take the asset. Another important principal is that. terrorism. The summary provisions are as follows: Authority Default 63. to the Contractor to maintain the asset in a good condition. 60.gift or fraud. Essentially it covers the so called "accepted risk" (i.e. This is war. so far as possible. such events must have prevented performance of Services for a period likely to be in excess of 6 months. Accordingly. those risks which it is traditionally impossible to obtain insurance cover for). this is an issue which the bank will be payable to the Contractor on termination should reflect the value of assets as an incentive during the period prior to termination. 62. the Authority no longer pays those services. In other words all outstanding amounts due under the loan agreement will be replaced. the Contractor will be entitled to full equity return. Unlike many contracts. Again. Accordingly. There is full pay out of senior debt. The amount of compensation will depend upon the type of default leading to termination. the definition of Force Majeure in PFI is extremely narrow. The first important factor is. It can be debated as to the precise method of calculation but the general principal is that the Contractor should at 125 . if termination were to occur in the first months of the service period the Authority would receive the entire completed asset without making any significant payment. nuclear risk and sonic bangs. any compensation Again. including the cost breaking any hedging agreement. Generally. Compensation on Termination 61. Compensation on Termination: General Principals 59. the provisions on compensation on termination are intended to avoid such a windfall. Force Majeure 58.
Clearly.least receive the planned equity return in respect of the period following the date of termination to the expiry date. the value of the capital sum should be sufficient to extinguish at least most of the senior debt. Generally speaking. In respect of surplus sites. the remaining portion of the PFI contract is re-tendered and the bidders tender a capital sum reflecting the value of the remaining portion of the PFI contract and the income stream. the risk profile will change during the lifetime of the project and from the bank's perspective. on a termination. will result in a result in a reduced capital sum from a bidder. it is doubtful whether there will be a genuine liquid market. The bank's due diligence advisers will be particularly anxious to ensure that there is a workable definition of liquid market and there is a sufficiently robust and detailed re-tendering procedure. A detailed procedure has developed for the re-tendering process. but this is not guaranteed. For the reasons already outlined. the principle of "market value" has been generally accepted. referred to as the "no retender procedure" in the situation where there is no liquid market. Finally. This effectively requires independent third parties to try and estimate a fair value for the remaining portion of the PFI contract. this will be of particular concern to the banks. This is perhaps the most important area. 65. That capital sum is then paid subject to the sum deductions column to the Contractor. Issues can also be raised regarding surplus sites which no doubt the Contractor will have sold on to a developer and also to third party income. is at its highest around completion of construction before the income stream has commenced and the first debt repayments made. However. as it is the most likely cause of termination. depending upon the stage the project was at as at the date of termination. Contractor Default 64. the Contractor should also receive the cost of breaking the various subcontracts and any redundancy costs it incurs. In certain situations and on certain projects. The upshot of all this is that the capital sum generated should repay most of the debt. 66. the future right of third party income should serve to increase the amount which a bidder is prepared to tender for the remaining portion of the PFI contract. Following much discussions between the public and private sectors and with the bank. 126 . In effect. the capital sum which the Contract will have realised by a sub-sale to a developer will in effect reduce the unitary payment which. and for that reason PFI contracts also have a dispute procedure. and assuming there is genuine competitive market. The main issue is to ensure there is a genuine liquid market so that the amount bid by the successful bidder reflects true market value. It is generally accepted this provides a reasonably equitable solution to a difficult problem.
by formal proceedings. alternative dispute resolution followed. In 127 . as with any other project. On a voluntary termination. the principal PFI contracts are excluded from the Housing Grants Construction and Regeneration Act 1986. 71. However. there will be substantial commercial pressure on both parties to resolve disputes as PFI contracts generally require a partnership approach and it becomes very difficult to provide the services against the backdrop of a substantial dispute. that is not so in the subsidiary contracts (specifically the building contract) to ensure that the Contractor has "back to back" arrangements with the Authority and the building contractor. if absolutely necessary. In addition. it is desirable that they are resolved quickly and equitably.Voluntary 67. it is standard market practice that the bank receives full pay out of senior debt. there is no requirement for adjudication of the principal contracts. Accordingly. Accordingly. there is no payment in respect of equity returns or in respect of amounts payable to subcontractors. The Contractor is entitled to repayment of the equity less the returns made up to the date of termination. even though this is not strictly needed. hopefully. Upon termination for force majeure. as many of you will be aware. it is common practice for the principal contract to contain adjudication provisions which are consistent with the Housing Grants Construction and Regeneration Act 1986. the provisions for compensation on termination are as for authority default. However. As will. It is recognised that termination for corrupt gifts and fraud will not involve the bank and accordingly there is a full pay out of senior debt for termination for this reason. problems will arise and the PFI project. Force Majeure 69. However. be apparent from the discussions to date. Corrupt Gifts and Fraud 68. the Contractor is entitled to the costs of termination sub contracts and redundancy of any of its employees. both the Contractor and the bank are put in the position that they are "no better nor worse" than they would have been if they had not entered into the PFI contract. Accordingly. Dispute Resolution Procedure 70. There is generally a hierarchy of dispute resolution procedures commencing with some form of disputes panel. PFI contracts should reflect the fact that problems will occur which need to be resolved. Inevitably.
a dispute concerning the construction works between the Authority and the Contractor. the co-operation agreement between the building contractor and the operations contractor will provide for disputes during the services period when there may be uncertainty as to whether. the Contractor will be reliant on the building contractor (as there will be. Such disputes should be resolved at sub contract level directly between the building contractor and the operations contractor and the banks will not generally permit the Contractor to become involved in any such dispute. a deduction made for unavailability is caused by poor service provision or a defect due to a breach of the building contract. 128 .addition. for example. for example. Similarly and as briefly explained previously. there will frequently be provisions for joinder and what amounts to "name borrowing" so that. an identical dispute under the building contract which should be back to back with the Project Agreement). in reality. because of the requirement for the arrangements to be "back to back" so that minimal risk remains in the Contractor. no doubt.
APPENDIX 2 'Adverse Physical Conditions' 129 .
when submitting a tender for works for a particular site. and the materials necessary for constructing and completing the works. sub-soil and the general water conditions relating to the site. Therefore. 1. issues of risk arise and most importantly it has to be decided who will bear the cost of such risk. 1. This can be carried out under a letter of intent prior to the signing of the construction contract itself. the Contractor may experience the following types of unforeseen ground conditions: (a) a soil collapse which was not foreseeable. the Contractor. both heavy rainfall and floods are excluded. These are known as unforeseen ground conditions. or the Employer for whom he is carrying out the work. 1.1 ADVERSE PHYSICAL CONDITIONS A frequent problem Contractors face is the financial loss which arises through unforeseen ground conditions on site. Most importantly.1 1. the Contractor must have looked at the following three points before he submits his tender for the work: (a) (b) (c) The ground. how those persons working on the site will be accommodated and the manner in which the site will be accessed. 1.2 These factors are the Contractor's responsibility to predict and expect.3 The important point to appreciate is that the distinction is unclear between those matters that the contractor is expected to predict.5 As I mentioned before. and the way in which communications will operate on the site. and those that it is impossible for him to expect. as you will appreciate. 130 . In the majority of contracts. he may wish to carry out his own site investigations before he takes the risk onboard. artificial obstructions (such as buried items which were not discovered as a result of a reasonable inspection) and unforeseeable subsidence. Therefore. The Employer may pay for such investigative work. it is the Contractor's responsibility to have inspected and examined the site and the area surrounding it. (b) weather conditions or conditions due to weather conditions cannot be regarded as "unforeseen".4 By way of example. If a Contractor is to bear the risk for condition of the site. the most important issue to consider is that of risk. Of course there will be other influences that will impact on the site and the contractor's works which he cannot predict or forecast.
it is the Employer's responsibility to make available to the Contractor before submission of the tender all information relating to the ground and sub soil 131 . The crucial test that will be applied by arbitrators as judges when looking at the clause is "whether it is reasonable to expect a particular contractor. assuming him to be experienced.9 In sum therefore. Key to understanding its operation is the relationship between clauses 11 &12. Relevant to Issues of Unforeseen Ground Conditions 1. Its use enables parties to have the best chance of achieving a common understanding for issues at risk. Conclusion 1. The Contractor is also able to claim for extensions of time arising as a result of the unforeseen conditions. 1. or could or should have obtained from his own investigations. but that have impacted on the works and led to him incurring additional costs. It enables a contractor to seek extra payment from the employer for unforeseen events in relation to the ground that were not the contractor's responsibility to predict. to have foreseen a particular condition or obstruction". This means any examination that the Contractor is responsible for must not just be limited to the surface of the site. These are often to be the Employer's risk because even a detailed site survey may not reveal their presence and therefore the Contractor cannot be expected to take responsibility for them. Obviously central to this "reasonably foreseeable" test is the information that the Contractor was provided with by the employer.8 The basics are as follows: (a) Clause 11 states generally speaking that. the main effect of the clause is to place responsibility on the contractor for examining the site properly and being satisfied with the accuracy and completeness of the information he has gathered. (b) Clause 12 places the risk of unforeseen conditions on the employer.1.6 Any "ground conditions clause" that the contract contains will probably provide for special treatment of man made obstructions.7 The FIDIC form of contract does cater for issues of unforeseen ground conditions. It also allows a contractor to claim for costs incurred as a result of insufficient or unreliable information that it was the employer's duty to provide to him. Also. the contractor "takes the risk in the ground and the sub-soil".
132 .including items such as pipes and cables. It is then the Contractor's responsibility to interpret this information in the correct way for the purposes of constructing the works. 2 Most importantly the Contractor has the additional responsibility of satisfying himself that he has taken account of all the matters that are necessary for him to satisfy the reasonably foreseeable test which will ultimately determine who the risk relating to any unforeseen ground conditions lies with.
APPENDIX 3 'Professional Indemnity Insurance and the Designer' 133 .
Demolition of the unsafe structure and clearance of the site. the liability in damages for that alone could run into millions of pounds. • The building may damage other buildings when it collapses causing them to be unsafe and creating similar losses in respect of them. 3.4 Assume a design error is made in a large building causing it to collapse. Employer's loss of revenue whilst the building can not be occupied. Rebuilding or repairing the structure. • Damages in relation to people who may be injured or killed if they are in the building or in the vicinity of it when it collapses. and although they have been improved by the use of computer technology. these checks are not infallible. Methods of Recovery 134 . Some mistakes go unnoticed. In this section the focus will be on mistakes in design. Loss of profits and loss of property of businesses which may occupy the building. Systems for carrying out checks to ensure mistakes do not go unnoticed exist. Additional costs for those businesses in relocating/finding alternative short term accommodation. In either stage the effect of a small mistake can range from being inconsequential to catastrophic.3 PROFESSIONAL INDEMNITY INSURANCE AND THE DESIGNER Introduction 3.1 3.3 In construction such mistakes are likely to occur either in the design or construction stages. 3. 3. The cost consequences of this may be immense – some of the potential costs are detailed below: • • • • • • Making the structure safe in the short to medium term.2 Why is professional indemnity insurance important? Everyone involved in the building profession is human and that means that they make mistakes.5 Even if only a couple of people were seriously injured when the building collapsed.
The contractor will be liable for the engineer's error as the engineer is his employee.10 Firstly the employer may have employed them directly to design the building and then directly employed a separate company to build the building. In simplified terms. if the foundations are inadequate it could be foreseeable that the building might collapse and injure someone. For example these statutes provide that in certain circumstances an occupier of a property will be liable for the injuries sustained by people whilst they are on that property. The first is to bring a claim under a contract. 3. 3. all the claimant has to show is that the defendant owed a duty of care to the claimant. This is only any good if the person suffering the loss has a contract under which they can claim against the person responsible for the loss.8 The third way is a statutory claim. 3. Under English law there are three ways in which such losses can be pursued. and as a result of that breach of duty of care the claimant suffered some harm or loss which was foreseeable as a result of the breach of the duty of care.12 Finally the employer may have employed a contractor to design and build the building. Here no contractual relationship is required. The employer will be able to sue the designer under the contract for the costs it has incurred due to the building collapsing due to the design being defective. 3. 3.11 Secondly the employer may have employed a contractor to both design and build the building and the engineer may be employed by the contractor as a member of the contractor's normal staff. However. Some statutes create statutory causes of action.9 So how does this effect the engineer or designer? Typically the person or organisation responsible for the defective design will not be the same as the employer and will have become involved in the project in one of three ways. For example an engineer has a duty to the employer and users of a building to design a building with suitable foundations. In this case the contractor could claim against its engineer employee for the loss it incurs as a result. Here the employer will have a contract with the designer.7 The second route is to bring a claim in negligence. the defendant breached that duty of care. Here the engineer is an independent subcontractor and not an employee of 135 . The employer will have a contract with the contractor and will be able to claim under the terms of the contract for the loss that it has sustained as a result of the building collapsing. Each case will turn on its own circumstances. 3. the contractor may have subcontracted with the engineer to carry out the design work.6 Everyone is going to want to recover the losses they incur as a result of the building collapsing.3. though it is rare for this to happen.
the contractor. resulting in third parties not being compensated for their losses. the employer can also claim against the engineer in negligence for its loss. 3.13 In this final situation it is also likely that the employer will have insisted on a warranty from the engineer and if so the employer will also be able to seek to recover its losses from the engineer directly under the warranty agreement. They may also have a claim against the occupier of the building under a statute.16 There has to be someone pick up the loss. Finally. The rule on the employer not recovering its losses twice also applies here. 3.14 In all three situations any third party which suffered foreseeable loss as a result of the building collapsing would be able to bring a claim in negligence against the engineer. A contractor will typically require subcontractors to agree to identical terms regarding insurance to the contractual provisions on insurance subsisting between the contractor and the employer. from the engineer under the contract between it and the engineer. Set out below are some of the key points that should be considered when choosing a professional insurance policy.18 What should be considered in taking out insurance? Although many of the professional indemnity policies are similar. though the employer will not be able to recover more than a nominal amount if he has recovered all his losses from the contractor.15 Very few organisations are sufficiently financially secure that they can survive the financial burdens of the amount and size of claims that would result from such a catastrophic error. There will be a contract between the employer and the contractor and a separate contract between the contractor and the engineer. care should be taken when choosing a policy. The employer can claim for its losses under the contract between it and the contractor. 3. If the engineer becomes insolvent as a result of such a claim. As a result employers typically make it a contractual requirement that engineers or contractors carry professional indemnity insurance to cover losses which could arise from their errors. even where the engineer is a subcontractor any warranty between the engineer and the employer will usually contain an identical insurance requirement.17 3. The contractor can in turn claim its losses. What is covered will depend on the wording of the individual policy and any endorsements to it. 3. However. including the damages it has had to pay to the employer. This could in turn make the employer insolvent. Slight differences in wording may mean that one policy will exclude a risk another policy covers. the employer will be left to pick up the loss. 136 . Professional Indemnity Insurance 3.
21 When can a claim be made on a policy? Many policies will provide cover for one year and will require any claim made under the policy to made during the year of cover.e. the nationalities of the parties and the location of the works allow for claims to be made outside the UK or Japan. If the engineer only has a policy requiring a claim to be made in the first year of cover they may lose the protection afforded by the insurance if they change policies and do not renew the original policy. However. Liability for such errors can last for twelve years after completion of the building. As explained above. 3. 3.23 Another complicating factor may arise in international contracts where one or more of the parties to the project works may not be a national of the country of the insurer. The engineer will be responsible for claims which are below the excess limit and to the extent that they exceed the cap. 137 . Does the policy provide that amount of cover against each claim made or is it against all claims made in a year? If it is against all claims made in a year then if one or two large claims were made on the policy in a year the holder may find that it has to meet the cost of any additional claims itself as the cover could have been used up.but at a price. If liability for claims under these contracts is to be covered by the policy will often need to be expressly amended to include this.22 What claims can be made under the policy? Many insurance contracts will seek to limit the insurer's liability to paying for claims arising due to the policy holder's negligence – i. 3. The lower the excess and the higher the cap the higher the premium will be. This leaves the engineer policy holder exposed in relation to claims under contracts. Usually the contract will stipulate the amount of insurance that must be held and but this will be subject to such insurance being available at a reasonable market rate. some serious design errors may not manifest themselves until several years after the building has been completed.20 It must be considered what this cover includes. Equally a policy which only covers litigated claims is little use if the contract provides for claims to be arbitrated or for them to go to adjudication. Any amount of insurance can be acquired . Where could proceedings be commenced against the policy holder? An insurance policy which only covers claims made in the UK or Japan for example may be of little use if the contracts. although often the engineer will not be employed by the employer it will enter into contracts with the contractor and will contract with the employer directly by giving a warranty to the employer. they seek to limit liability to claims in tort for negligence. Consideration needs to be given to any geographical or other restrictions on the insurance policy. Usually policies will have an excess and an upper cap.3. 3.19 The first thing that has to be considered is how much insurance is required.
to use their own solicitors. This needs to be considered in the policy. arbitration etc does not conflict with the provisions of the building/design contracts. For example. particularly if they lose the case. For good reasons many engineers do not want to get caught up in litigation. to make all decisions and the policy holder will be expected to co-operate completely with the insurer and do as it is told. The engineer recovers £1 million from the third party. subject to consultation with the insurer and obtaining the insurer's agreement to certain key decisions. litigation. expensive. Another common limitation that is often sought by the policy holder is that the insurer shall not be able to require the policy holder to bring 138 . assume a design defect is partly responsible for the employer incurring losses of £2 million.Subrogation 3. It is also wise to check that the form of proceedings – eg. 3. Other insurers may take a more active role in proceedings.25 At the very least subrogation will be assumed to include a duty on the policy holder to act in good faith in any proceedings. to take proceedings to reduce the insurer's loss if requested and a duty to account to the insurer for any monies recovered from a third party in connection with the insurance claim. to allow the insurer to bring proceedings in the policy holders name if the policy holder does not take that step itself. wanting to have complete control over them. such as whether to settle and if so. The actual scope of the subrogation rights may vary enormously from policy to policy and the way in which they are exercised may also vary.26 What if the policy holder does not want to bring or defend proceedings? This is a real issue. The engineer must pay this £1 million to the insurance company.24 What rights does the policy give the insurer? Most policies give the insurer a right to subrogation. The insurer pays out say £2 million on a claim under the policy held by the engineer and proceedings are brought by the engineer policy holder (whether at the insurer's request or not) against a third party who is also partly to blame for the employers loss. The engineer can not retain the money and make a windfall out of its negligence. For example. 3. many policies will contain clauses saying that the insurer can only bring proceedings in the policy holder's name if it has obtained legal advice from a very senior lawyer and their advice is that there is a good chance of winning such proceedings. It is time consuming. for how much. In simple terms this allows the insurer to step into the policy holders shoes and defend or bring proceedings in the policy holders name. the insurer may require the policy holder to defend proceedings but may take a role that essentially lets the policy holder run its defence itself. for the insurance company to set off against its payment under the policy. For example. and the publicity can be devastating.
3. There are a number of pitfalls. Other considerations 3.proceedings against its individual employees who are at fault.28 What else is there to consider? Finding a policy that suits an engineer's needs is only part of the process. If the applicant deliberately withholds information or provides false information then not only is the insurer entitled to avoid the policy. 3.30 So what does this obligation involve? Basically it means that the person seeking the insurance policy has to tell the insurer about any facts or information it has. Most of the information required to be disclosed to the insurer will be requested in an application form. If the engineer has concerns about the insurer's financial situation and believes that the company could be unable to make a payment under a policy. 139 . A wish not to bring proceedings despite such advice from a senior lawyer is dealt with below. which need to be considered. However. Failure to comply with certain obligations and the terms of the policy could result in the insurer avoiding the policy and not having to make a payment under it. it is also not obliged to return the premium. If the applicant fails to provide information or the information provided is not correct then the insurer may be able to avoid the policy. This obligation arises because in deciding whether to agree to issue an insurance policy and where to price the premiums for the insurance policy the insurer will often be almost entirely dependent on the information provided to it by the engineer/policy holder.27 Finally. may require that the professional indemnity policy is with a particular insurance company or a one of a number of insurance companies. then they may wish to give some thought to ensuring there is some reinsurance in place should their fears be realised. It cannot lie and it must not withhold information either. is the insurance company financially sound? National laws in some countries.29 The first thing to remember when entering into an insurance policy is that it what is known in English law as a "contract of good faith". (either within its knowledge or which it could establish from reasonable enquiries) which may effect the insurer's decision whether or not to issue the policy or on what terms. which the insurer will require the engineer to complete before issuing the insurance policy. the applicant is aware of other information that the insurer might want then this should also be provided. This means that the applicant must disclose information which may be adverse to it. or at the very least the applicant should ask the insurer if they require the additional information and provide it if asked. or the contract. both in entering into an insurance policy and also in complying with it. This means that there is an obligation on each party to provide the other party with all the information that they might require. 3.
As a result. which the policy holder must take considerable care to ensure that it and its employees are aware of and comply with. its employees.34 There is one other provision. agents etc do not do or say anything at all in relation to a potential claim which could be seen as either an acceptance of liability or an offer to settle. then. However.32 It is vital that the policy holder complies exactly with the terms of the policy – right down to the procedures set out in the policy. it is vitally important to ensure that the policy holder does not give the insurer a reason to avoid its policy. However. 3. This provision is connected to the insurer's rights of subrogation. This provision is one. Failure to do so will allow the insurer to avoid the policy leaving the policy holder without cover. and the obligation will continue for the life of the policy. it is vitally 140 . Therefore. where everyone knows each other and gets on well. This is something which can be extremely difficult to ensure on a site.31 So how long does this duty to provide information to the insurer continue? Basically it is an ongoing obligation and exists at least until the insurance policy is issued. if the policy states that potential claims must be notified to Mr X at the insurer in writing as soon as the policy holder becomes aware of them then potential claims MUST be notified to Mr X at the insurer in writing as soon as the policy holder becomes aware of them. which almost every insurance policy will contain which merits mention. where several parties may be working together. it must be remembered that insurance is a business and insurers do not make their profits by paying out under policies. Non-compliance with policy terms is probably the most given reason by insurers for avoiding insurance policies. Such an admission will usually result in the insurer avoiding the policy. provided such advice has been given by a senior lawyer and the insurer has requested the policy holder to bring proceedings against a third party then the policy holder MUST bring those proceedings. Some insurers will not automatically avoid policies for minor occasions of non-compliance and will sometimes waive their right to avoid a policy in limited circumstances. many policies contain a term requiring the policy holder to advise the insurer of any material facts or changes to these as soon as it becomes aware of them. This is a provision that the policy holder. Equally if the policy provides that the policy holder must bring proceedings against a third party at the insurer's request provided a senior lawyer advises that there is a good chance of those proceedings succeeding.3. 3. 3. In particular the policy holder will be required to inform the insurer as soon as it becomes aware of even a possibility that a claim may be made against the policy holder – often whether or not this will result in a claim being made under the policy. Every time they have to pay out under a policy it cuts into their profits.33 So for example.
then professional advice and assistance should be sought early. or dealing with what needs to be done in the event of a potential claim.important that there are procedures on site for problems to be reported. whether it be at the stage of choosing a policy. which you are not familiar with. but very difficult to achieve. Conclusion 3. a small group of people within each organisation should be allowed to develop the expertise needed. It is not something that should be rushed into. Ideally. for certain people only to be responsible for dealing with such problems and a clear understanding that nobody else should discuss them with or comment on them to a third party. 141 . maintaining compliance with it. particularly if it is something. Insurance is an incredibly complex area of English law. if any there are any questions or concerns. This is very easy to say.35 This appendix is only an outline of some of the more common pitfalls and considerations that apply to professional indemnity insurance for designers. Obtaining insurance and complying with policy terms is something that needs to be carefully considered. Nobody wants to have to make a claim on their professional indemnity insurance. but if they have to it is important that the policy not just meets their needs but also that they have not done and do not do anything to allow it to be avoided. However.