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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.
MANAGEMENT OF CONTRACT CLAIMS AGENDA Welcome 1. Principles of Preparing Claims A. B. C. Claims relating to Time Claims relating to the Recovery of Money Making a successful claim Jonathan Tattersall Mark Hilton Mark Hilton Peter Phillips
Principles of Time Analysis Using Planning Techniques A. B. Methods of Analysing Project Delays Practical Issues Tony Farrow Simon Palmer
Claims for Additional Money-Practical Issues
A Case Study of a Claim A. Introduction to Case Study and Making a Claim for Extension of Time Tony Farrow
B. C. D.
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
Questions and Answers
Introduction 1.1 Employers do not like these seminars! There is no doubt that Employers view the word "claim" as a dirty word, one they would rather never come across. It conjures up for them images of budgets being exceeded, project overruns and increased management and external consultant cost. 1.2 However, there is nothing wrong with making a justified claim. Indeed, most of the standard forms of contract include specific contractual machinery and clauses to allow for claims to be made. 1.3 This seminar deals with claims for time and money. These two claims are, in truth, a feature of every construction project. It is possible for claims to be dealt with sensibly, in a non-adversarial manner and to be successfully resolved without hindering project progress. However, for this to be the case, a number of factors have to be borne in mind: • It is easy to bring a claim, but a mis-conceived or unjustified claim will cause a great deal of trouble. • The Employer only has to meet claims which can be tied back to the rights in the contract or an implied legal right. • Simply because you are losing money on a project does not mean you are entitled to bring a claim. It must be based on fact and those facts give rise to an entitlement in law. • It is often easy for a Contractor to demonstrate that it has spent additional cost and spent additional time by reason of delays. However, there could be many thousands of reasons for delay on a project, for example, delays in delivery down the supply change, variations, late information, inefficiency. 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 are many techniques which can be employed to establish delay entitlement, ranging from a simple bar chart with periods of delay overlaid, 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.
A lack of understanding on the Employer's part is often one of the biggest obstacles to be overcome. 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, and those risks will be seen in the end cost of the project. 1.4 Is there such a thing as the perfect claim? I don't think so, because it is impossible to benchmark such a statement. However, 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, well prepared and successful claims will be the product.
TYPES OF CLAIM As a lawyer, I will always want you to come back fundamental starting points when considering how to advance a claim. The claim which succeeds without a grounding in law is almost unknown. 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. Before we move on to the more advanced legal and practical issues, 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. Contractual Claims 2.2 Contractual claims are various which arise out of express provisions of a particular contract. The express terms in the contract define the circumstances in which a claim may be made, provide the machinery to process the claim and how it should be resolved. All contractual claims depend upon relating events to specific contract conditions and include, for example, additional work claims, loss and expense claims and extension of time claims. Common law claims 2.3 These are sometimes called 'ex contractual' or 'extra contractual' claims in the construction industry. This is not really a good definition. What we are considering here is a category of claims which are still for breach of contract, but rather than for breach of express terms in the contract, are based on breaches of implied terms or breach of some other aspects of the law, for example, in negligence. An example would be breach of an implied term on the part of the Employer not to hinder a Contractor's progress. Quantum Meruit 2.4 One of the historical problems with law is that English speaking lawyers still have to use some Latin phrases. Quantum Meruit is effectively translated as "as much as he has earned". 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. One often finds this type of claim where a Contractor is claiming for work done on a letter of intent. 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. In practical terms, it is often difficult to give a precise
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 2.5 More Latin. 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. In practice, ex gratia
payments are very rarely met unless there is a benefit for the Employer in making the payment. 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.
TIME CLAIMS As often as not, disputes centre round whether or not the Contractor is entitled to an extension of time or otherwise. The same issues often come up. Do liquidated
damages apply? What happens if there is concurrent delay? Who is entitled to use the float? Extensions of Time 3.2 An extension of time only relieves a Contractor of liability for liquidated damages for any period prior to the extended contractual completion date. People often, incorrectly, 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. Whilst it may be that under other terms of the contract, a Contractor is entitled to recompense for the period, 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. 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. 3.3 Most construction contracts contain express provisions under which the period allowed for the Contractor to undertake and complete the works can be extended. These
provisions cater for delays which are neither the fault nor the responsibility of the Contractor or for risks the Employer has taken. 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, the power to extend time is also for the Employer's benefit. 3.4 At common law, 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. Therefore, if the Engineer issues an instruction which increases the amount of work to be done, or is late in giving the Contractor necessary instructions, the specified completion date no longer applies. In this situation, time is said to be 'at large', and the Contractor's
obligation is merely to complete the works within a reasonable time. In order to ascertain what is 'reasonable', all the circumstances of the particular project must be taken into account. However, in practical circumstances, this will simply mean that the amount of delay for which the Employer is responsible will be added to the old completion date. 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, but is not liable for various liquidated
Even where the delay caused by the Employer is a very small part of the
overall delay, an Employer cannot simply discount this and claim liquidated damages for the remainder. The liquidated damages provision will not succeed at all. The Employer can only claim for those losses resulting from the delay which can actually be proved. In such circumstances, the Employer faces the same difficulties in proving his claim as the Contractor does. 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. 3.6 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. If the delay is caused by something which is outside the
contract, the Contractor cannot claim an extension nor can the Employer grant one. 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. 3.7 Something which is often forgotten is that extensions of time can only be granted in respect of events which are likely to delay completion. This brings out problems with 'float' which we will investigate later. 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, ie after completion has been achieved. 3.8 What are grounds for extending time? By way of example, under FIDIC 5th Edition, the grounds for an extension of time are: (a) A variation [……..] or other substantial change in the quantity of an item of work included in the contract; (b) A cause of delay giving an entitlement to extension of time under a sub-clause of these conditions; (c) (d) Exceptionally adverse climatic conditions; Unforeseeable shortages in the availability of personnel or goods caused by epidemic or governmental actions, or; (e) Any delay, impediment or prevention caused by or attributable to the Employer, the Employer's Personnel, or the Employer's other Contractors on site.
These grounds are pretty standard and are seen in one form or another in the majority of contracts. However, you must remember that extension of time clauses always contain notice requirements eg, "if the Contractor considers himself to be entitled to an Extension of Time for Completion, the Contractor shall give notice to the Engineer in accordance with sub-clause 20.1". We shall come onto notices later. However, the golden rule is that you should never allow your right to an extension of time to be prejudiced by poor contract administration. particular contract. Make sure you know what is required of you under each
Liquidated damages 3.10 I imagine that you are all familiar with the concept of liquidated damages, that is liquidated damage clauses require that the Contractor pays to the Employer a fixed predetermined amount of compensation should a particular event happen. 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. 3.11 Why do construction contracts almost without exception contain provisions for liquidated damages? The main reason is certainty. The Employer wants the works completed by the contracted date. If the works are not completed by then the Employer will suffer some loss. Often this loss is difficulty to calculate. For example, if the building is built as office accommodation and the Employer only intends to obtain tenants on completion and not before, it can be difficult to calculate the lost rent. 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? 3.12 Although these kinds of losses can be estimated, they are difficult and expensive to prove, and litigation to recover such losses can be prolonged. Liquidated damages have the advantage that as they prevent these losses having to be calculated and proven; everyone knows where they stand. Whilst a Contractor may find itself facing a large liquidated damages claim if it is in delay, in fact the liquidated damages may be only a fraction of the actual loss sustained by the Employer. This of course works the other way in that the Employer may be entitled to liquidated damages in excess of its actual loss. 3.13 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. 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.
Firstly, for liquidated damages to be claimed for delay the contract must make it clear when the Contractor will be in delay. 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. The obvious starting point is that the contract must state the date by which the works should be completed. 3.15 However, in many circumstances some of the delay may be due to the Employer. For, 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. In these cases the Employer's actions could prevent the Contractor from completing the work by the contract date. As we saw above, in order to maintain a right to liquidated damages, the Employer needs an extension of time clause. 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. 3.16 In some cases it will be hard to even begin to estimate the likely loss of the delay. However, provided the amount of liquidated damages is genuine estimate of the potential loss it will not be a penalty, even if it is very high. 3.17 Although every Employer wishes to avoid contracting with a Contractor which is in financial difficulties, this sometimes happens. 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. 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. 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. 3.18 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, or if this certification is given too late, the Employer will be limited to a claim for actual damages. 3.19 A final word of warning needs to be given in relation to the subject of liquidated damages. 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. Where the Employer finds itself in this situation then the amount of the actual
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. Therefore if the contract provided for liquidated damages of £100,000 per week to a maximum of £1million, 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. (If the actual losses are less than the liquidated damages the Employer will be able to recover his actual losses). Concurrency 3.20 Without doubt, concurrency is one of the most difficult issues to deal with. My view is
that where Contractor delay to completion occurs concurrently with Employer delay to completion, the Contractor's concurrent delay should not as a matter of course reduce any extension of time due. 3.21 Concurrency is such a contentious issue for two reasons. Firstly, there are different views on the correct approach to concurrency when analysing an extension of time. Secondly, there are many differences about the meaning of concurrency itself. 3.22 True concurrent delay is where two or more delay events occur at the same time, one of which is an Employer Risk Event and the other a Contractor Risk Event. It is in truth,
highly unlikely that a true concurrent delay will exist. For example, 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. 3.23 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. Programmers or schedulers more correctly call this the concurrent effect of sequential delay events. 3.24 The issue usually arises in this way: the Contractor claims an extension of time because of delays which were the fault of the Employer. 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. It is extraordinary that this issue, which arises in virtually every construction dispute, is consistently hard fought and gives rise to dogmatic views either way. The debate rages notwithstanding the extension of time clauses upon which it is based appear in the standard forms in daily use. Remarkably, 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.
This is one way of looking at matters. 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. Many theories have been advanced as to how to tackle
extension of time applications in the circumstances of concurrent delay. These range from the "dominant cause" theory to the "adverse principle" theory. They include such methods as "first cause retrospective delay analysis" and the "ultimate retrospective delay" analysis. The various delay methodologists will be addressed in the next session. However, starting point for any consideration must be the words of the contract itself. 3.26 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; and (b) Upon receipt of the notification the Engineer is under an obligation to act i.e. he must form an opinion. 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, he must award such extension of time as he considers to be fair and reasonable. 3.27 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 important words are often misconstrued as being 'up to the date of substantial completion or taking over'. That is not the same as beyond the completion date. By way of example, suppose a building is to be clad in marble and to be completed in 50 weeks. 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. However, because of delays by the Contractor, the building could only be completed in 60 weeks anyway. In the circumstance the
Contractor would be entitled to a five week extension of time. 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. 3.28 When looking at concurrency, we have to remember that extension of time clauses relate to liquidated damages provisions in the contract. We have to remember that the purpose of liquidated damages is not to provide the Employer with a windfall benefit i.e. to allow the recovery of damages that it would not otherwise have suffered. To take the example
above, if the works would have been delayed anyway because of delays which were the Employer's responsibility, the Employer would suffer no loss for the five weeks caused by its own delay. If because, quite luckily from the Employer's perspective, the Contractor happened to be late through its own fault at the same time, 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. 3.29 It is sometimes said that the approach outlined above fails to recognise the importance of the completion date. 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. If, conversely, the Employer's delay overruns the
Contractor's delay then the Contractor will receive an extension of time for the extra over. 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, 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. (b) It involves a test which is grossly unfair and commercial unrealistic. 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. (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; and (d) It results in a windfall for the Employer and penalises the Contractor twice - once because he suffers liquidated damages and twice because he also bears his own prolongation costs. 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, and if so, how much. Having done so, the
Engineer must extend the period for completion by the amount of the further delay. (ii) Where there are two concurrent causes of delay, one of which entitles the Contractor an extension of time (a Relevant Event) and the other does
not, the Contractor would be entitled to an extension of time for the period of delay caused by the Relevant Event. concurrent effects of the other event. 3.30 In short, the only way to deal with concurrency is to undertake a proper analysis of the actual causes of delay. However, as Tony will explain different analyses can give rise to different results. Float 3.31 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. There are two sub definitions which are used. ' 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. 'Total float' is the time by which an activity may be delayed or extended without affecting the total project duration. When we are looking at float, we are not tying ourselves to project This is irrespective of the
completion date. The date in question may be the overall completion date for the works. However, it may well be a sectional completion date or an interim milestone. 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. I am sure if I took a vote here today, 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, 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. 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, the Contractor will argue that it is entitled to an extension of time, even if the delay to progress does not delay the overall completion date but merely takes some of the Contractor's float. 3.32 This issue is probably best looked at by use of an example. This is an example which has been used by Tony Farrow in the past as illustrating the problems faced. 3.33 There is a simple project involving two sequential activities, each taking a month and the Contractor allowing three months to complete the work. The Contractor submits the following programme:
10 11 12 13 14 15 16 17 18 19 20 3 4 5
Contractual Completion Date
During activity one, the Employer delays the works by one month (eg by failure to delivery necessary free issue materials). The adjusted programme becomes:
10 11 12 13 14 15 16 17 18 19 20 3 4 5
Contractual Completion Date
During activity two, the Contractor delays the works by one month (eg because he has to replace some defective work). The final as built programme is:
10 11 12 13 14 15 16 17 18 19 20 3 4 5
Contractual Actual Completion Date Completion Date
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 reason for this conclusion is that the Employer 'got to the float first' and at the end of the day, the Contractor was still in a position to complete the works by the completion date. From the end of month two, the only reason the project was late was due to the Contractor's delay. As you can imagine, most Contractors did not like the
idea of the Employer being able to take what they view as the Contractor's float.
Generally, 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. You must remember that an Employer delay
does not automatically lead to an extension of time. Both the answer to whether there is an entitlement and to how much that entitlement is, nearly always varies depending on if the issue is considered at the time, or whether the matter is considered retrospectively. Further, 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. 3.37 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. In our example, the Contractor intended to complete his works within two months. However, the Contractor's contractual obligation is to achieve completion within three months. I would argue that the Contractor should be allowed that period of time to complete the works. When, in our example the Employer issues materials late, it will be an Employer delay which should allow in most contracts an extension of time. The Contractor must of course remember to issue the requisite notices. The one month delay appears to take the float, 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. 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. 3.38 Of course what has happened in our example is that within month three, the Contractor has to go back to remedy its own work. 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. The one month delay by the Employer must fairly entitle the Contractor to a one month extension of time. The recovery of any costs would be not as a result of the extension of time being granted, but rather costs that the Contractor incurs by reason of the Employer's breach of contract. The
Contractor would have to be responsible for the prolongation costs it has incurred during the period of the remedial work. 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.
The Contractor is entitled to the one month prolongation damages caused by the Employer's breach of contract
That being an illustration of the difficulties that Ownership of the float causes between Contractor and Employer, it is worthwhile considering the difficulties that Contractor's face with regard to float Ownership as against their sub Contractors. I will give you an example of a case from the English Technology and Constructions Courts from last year. This is the case of Ascon Contracting Limited v. McAlpine Construction Isle of Man Limited. These are the brief facts. The main contract was for a development on the sea front in the Isle of Man, a small island to the west of the UK. The sub contract was for
reinforced concrete beginning with the slap and perimeter walls at basement level. McAlpine was the Main Contractor and Ascon the Sub-Contractor. The sub contract period was 27 weeks but Ascon had completed 10 weeks late and received no extension of time. Coincidentally the Main Contractor was 10 weeks late and had apparently
suffered liquidated damages of £175,000. The Main Contractor, McAlpine, 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. McAlpine made a counterclaim. 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. When the Judge came to
consider McAlpine's counterclaim, he decided it was a question of fact whether Ascon affected later trades and delayed practical completion of the works as a whole. 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.' 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, leaving the remainder chargeable to Ascon. The argument was
rejected. The judge said that if six sub-contractors caused one week's delay in a contract programme where there is six week's float, they will have caused no loss. They share equally in the benefit of the float. If the period was five weeks, they should equally share the burden. The right to allocate the float does not belong to the Main Contractor.
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.
So what is the answer for you? I think the conclusion must be that the Contractor owns the float, but he cannot use that float to deny the entitlement of Sub Contractors to that float in the event they get there first.
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.
I do not intend to deal here with the question of valuing the direct costs of change to or a variation of the works, in other words labour, plant and materials. Rather, I intend to concentrate on the Contractor's claims for prolongation costs and disruption. These being claims which arise in essence from the extended use of time-related resources.
Principles of Recovery 4.3 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, then it is also automatically entitled to be compensated for the additional time that it has taken to complete the contract. This is not the case. There is no absolute link between an entitlement for an extension of time and the entitlement for compensation for that additional or prolongation cost. Standard form contracts make this clear by divorcing the entitlement to time and compensation between different clauses. For example, under FIDIC 5th Edition, we saw earlier that the grounds for an extension of time are set out in clause 8.4 whereas the Contractor's entitlement to claim appears under clause 20. Moreover, 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, or at all. Prolongation Compensation 4.4 It also goes without saying that delay causes prolongation of the contract which can cause increased cost. 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. Of course, if the reason for the delays is fault of the
Contractor, there will be no sustainable claim for prolongation costs. However, if the delay and prolongation arises from what may be called an 'Employer Risk Event', 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. 4.5 Prolongation costs may be caused by any kind of Employer Risk Event; examples would be a events such as prevention of work on site for the full daily hours period in the
contract, a variation, or unforeseen ground conditions. Yet whether the cause of the prolongation claim is that it arises under a specific provision of the particular contract, or it arises from a breach of that contract generally, 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. Concurrency of prolongation 4.6 Unsurprisingly, seeing as concurrency is such a contentious issue when looking at extensions of time, it is also one of the most difficult issues to deal with when trying to resolve the issue of prolongation costs. The difficulty arises in this way: consider the situation we looked at earlier. The Employer, in the ordinary course of events, would be liable to compensate the Contractor, but the Contractor was late in carrying out its own work. Who bears the cost in these circumstances? The answer is always a factual one in practice. The Contractor will be entitled to prolongation costs if it can prove that the additional costs it incurred result from the Employer's delay. 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. 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. [In the next session, we will look at methodologies you can employ to avoid this shortfall in recovery.] Damages and Compensation 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. 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. 4.8 It is therefore very important to distinguish between damages for breach of contract on one hand and contractual compensation on the other, although in fact the amount of money a party might recover under either head could be exactly the same. 4.9 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. This compensation can be separated into that element which relates to the value of additional work which is capable of measurement, normally arising as a
result of variations and that element which arises from different defined circumstances which is given different names in different contracts. For instance: • FIDIC provides for recovery of "Cost" which is defined as: "all expenditure reasonably incurred by the Contractor, whether on or off the site, including overhead and limited charges, but does not include profit." • • • The World Bank Form refers to "loss and damage". ICE 6th Edition calls this "loss" and, The JCT family of contracts including The Hong Kong Standard Form of Building Contract refers to this as "loss and expense". 4.10 What can be recovered under the headings which I have just outlined will depend upon the particular words and phraseology of the particular contract. 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. 4.11 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. Under common law there is a further distinction which needs to be looked at when considering the recoverability of damages. As I have said previously the contractor can only recover actual losses and expenses incurred. 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. 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; • 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. It may be helpful if I give an example of this. In an English case which involved Balfour Beatty a substantial main contractor and Scottish Power which was an electricity generating company. The facts were as follows. Scottish Power agreed to supply
temporary power for Balfour Beatty's concrete batching plant. There was a power failure and Scottish Power was held to be in breach of contract. It was at fault. Balfour Beatty
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. Balfour
Beatty claimed the cost of this as damages. 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. The Court concluded that the damages were not foreseeable. 4.12 Construction Contracts sometime have clauses which seek to limit any liability for consequential loss or damage caused by for example late supply, or any fault, failure or defect in any materials or goods supplied by the contracting party. These are supposed to prevent the type of unforeseeable damage which I have mentioned in the case referred to above. 4.13 More recently a case which took place in India demonstrates how contractor's need to be careful. This case was between the parties of Deepak and Davy. Davy contracted to
sell Deepak a process, license, design and know how in relation to the design, construction, operation and maintenance of a 300 metre tonne per day low pressure methanol plant in India. The plant was built between 1988 and 1991 and commissioned in 1992. After the plant had been operating for some four months Deepak gave Davy a letter of acceptance. Some months later the plant exploded. Deepak sued 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. 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. The moral from this is do not rely on consequential damages exclusion clauses unless they spell out precisely what is being excluded.
MAKING A SUCCESSFUL CLAIM
Principles 5.1 Many Contractors simply do not put enough effort into the formulation and preparation of their claims and consequently achieve poor results or returns. 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, and enough detail when it comes to turning that time into money.
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. State the contract term under which the entitlement arises. State and show that any conditions precedent have been complied with. Provide all necessary substantiating evidence to justify the entitlement.
Remember when drafting your claim that it is best not to use emotional language. 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. Make the claim as concise, close to the contract and grounded in facts and evidence as possible.
There is a heavy burden upon a Contractor to provide evidence in support of its claim. 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. If you have to go to arbitration or litigation to pursue your claim, 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. In the same way, the vast majority of you will always wish to settle claims and the same questions arise. In determining what is going to be the settlement strategy you follow, 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. You will therefore, need to strike an appropriate balance in terms of evidence required for successful and cost effective resolution of claims.
Let us take an example to illustrate the point. If you wish to make a claim for direct loss and expense arising from a variation, 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. (b) When that variation was issued and when the Contractor complied with the variation. (c) (d) What work was carried out. When in the progress of the works was it necessary to carry out the variation.
(e) (f) (g) (h)
That in carrying out the variation, the regular progress of the works was affected. What was the actual effect on the progress of the Works. Full details of the costs incurred as a direct result of the variation. That contractually required notices were given in respect of the effects of the variation.
You have to base the proof level in the context or the nature of the claim you are actually making:
The amount of time and money you are prepared to spend on proving your losses should reflect the amount of money at stake. Obviously you are not going to want to spend many thousands of dollars proving something which is only worth a few hundred. However, if you decide to cut back on small items you can create problems, not only with the small items, but also on the knock-on effect on your larger claim items. It is
sometimes possible for an Employer by showing that a large proportion of the small claims are unsubstantiated and over-claimed, to convince an Arbitrator that the larger claims are not worth the amounts claimed. 5.8 If you are preparing a complex claim, the general rule is that more proof is required. 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. Types of substantiation 5.9 Many of the claims I see from Contractors are lacking in supporting evidence. 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. 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. 5.10 Averages and generalisations will not do. What is required is actual loss and actual expense. This can only be achieved by detailed and accurate records. Records are the prime source of evidence. Someone new looking at the project for the first time would undoubtedly ask to see the tender records, original contract, original programme, planned delivery dates, drawing/information issue dates, amongst others in order to build as complete a picture as possible of the project. Yet this often proves one of the most difficult tasks and the records provided as evidence are so incomplete that even a
dispute acknowledged as reasonable by all concerned cannot be supported and fails. Without firm facts recorded at the time, disputes arise over what people can remember or thought happened without anything concrete to back them up. Progress Schedules 5.11 The original and updated contract programmes are a starting point for Contractors, but they will not bring in the money. 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. This will form part of our second session. Cost Records 5.12 What is meant here is time and allocation sheets. The more detailed and accurate these are (particularly in the case of supervisory staff) the better your claim will be. 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. Allocation sheets which show who was doing what, and where, have to be preferred. Contract and Notices 5.13 Conditions of Contract almost invariably include provisions for the issue of assorted notices by each party to the other. The particular requirements may vary, as do the contractual and commercial significance of the notices, their formality, and the timing and manner of their submission, but the majority seem prone to argument or at least a measure of uncertainty. 5.14 The purpose of notices is to warn the recipient of a forthcoming event or situation so that he can prepare for it. Contractual notices stem from the duty to mitigate damages, though it should be remembered that the duty to do so exists whether notices are specified or not. Thus it can often be prudent to issue a notice in circumstances where one is not specifically required. 5.15 However, even though the notice is issued for the sole benefit of the recipient, managers are often reluctant to do so because they fear they will be interpreted thereby as aggressive, uncooperative, provocative or mischievous. Such a reaction, which is not uncommon, is intended to discourage the submission of notices upon the generally erroneous conviction that if they are not submitted, then the relevant claim cannot be sustained. So start as you mean to continue, with a sensible understanding of the mutual benefit notices afford - compliance with contract requirements and advance warning and agreement on their uninhibited submission.
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.
TIME ANALYSIS – METHODS
Introduction 1.1 Time analysis refers to a forensic investigation into the issue of what has caused a project to run late. That is, delay to the completion of work or contract milestones caused by the time impact of events such as variations, late information, excessively inclement weather, poor performance, remedial works and the hundreds of other delay causing circumstances that arise on construction projects. 1.2 The reason we need to carry out Time Analysis is because construction contracts have liquidated damages clauses and, as explained in the earlier paper, these clauses remain valid only if the employer can extend the contract completion date when he has caused delay. That is to say, if the employer causes delay and there is no extension of time clause, the liquidated damages clause becomes invalid. 1.3 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. Hence, Time Analysis in this context is really about Delay Analysis i.e. what delay to completion did the employer’s events cause. I prefer the term ‘Delay Analysis’ as a title and I will refer to it from now. 1.4 Analysts, ie those people who investigate project delays, distinguish between critical and non-critical delay, the former delaying the project’s completion date and the latter affecting progress but not overall completion. Ultimately, we need to identify those
events causing critical delay for evaluating extensions of time, but it can be difficult to distinguish between each type. Analysts also investigate programme disruption, or
disruptive delay, which concerns issues of productivity, acceleration, congestion, fatigue, morale and other consequential effects of project change. This aspect is not considered in this paper. 1.5 There are three primary reasons why one might want to analyse delay: to establish lines of investigation, to demonstrate entitlement and to present the case one is seeking to prove. To help establish lines of investigation 1.6 An investigation of a construction project will involve consideration of a wide variety of issues. These include where the delays occurred (which part of the project – was it in the foundations, steelwork, roof, air conditioning etc); when did the rate of progress decline;
where did late information or materials cause delay; instances of competing delays; poor productivity; insufficiency of resource; lack of design information; failure to progress; excessive rainfall and so on. 1.7 Such an investigation requires a forensic review of project records involving three stages: (a) Databasing relevant project records, such as programme activities, progress schedules, actual start and finish dates, labour allocation sheets, daywork sheets, notices of delay, material deliveries, plant deliveries, weld records, chainage progress, drawing registers and so on. For this work we would use standard database software such as Microsoft access. Databasing relevant project records, such as programme activities, progress schedules, actual start and finish dates, labour allocation sheets, daywork sheets, notices of delay, material deliveries, plant deliveries, weld records, chainage progress, drawing registers and so on. For this work we would use standard database software such as Microsoft access. (b) Analysing the databased records by linking related data together where relevant (eg drawing numbers linked to activity progress), sorting/grouping data by different variables (eg progress by floor, by gang, by ‘system’, by trade etc), aggregating or summing together quantities (eg numbers of drawings per week, progress achieved per month etc) and selecting or filtering data of particular interest. (c) Graphing the results of the analysis using barcharts, histograms, line-graphs, tables etc. In the slide, 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, and 13 to 16. Also, why did the labour increase so much in weeks 19 and 20? 1.8 Analysis of project information in this way can help to highlight when events, delays or disruptions arose, how extensive they were, where they occurred on the project and which programme activities were affected. 1.9 The graphs or charts produced in this way are working documents, in that their purpose is to identify changes or variances (such as peaks and troughs in resource levels, design information, overall productivity etc), trends (indicating where delays arose, where events and delays occurred at the same time, reductions in productivity etc) and differences
INTRODUCTION others were). 1.10 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. In general, such analysis does not rely on a delay methodology, but requires a free format and versatile data analysis and graphics software tools. From this investigation, the analyst hopes to identify those issues, time periods or construction elements that require a more detailed study. To demonstrate entitlement 1.11 This is the main subject of this paper i.e. how do we demonstrate the amount of delay caused by an employer’s event and so what extension of time are we entitled to. 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, it discharges the party’s burden to prove the consequences of a set of events upon the progress of the works). However, this implication is mythology. 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. It is the engineer or architect, or ultimately an arbitrator or a judge, who has to consider and weigh up all the competing evidence and form an opinion. The delay analysis exercise will assist in this process but it will only be part of the evidential matrix. That is to say, the tribunal (i.e. Judge, arbitrator, adjudicator) has to weigh up the terms of the contract, relevant case law, witness evidence, contemporary records such as photographs, as well as considering analytical exercises such as delay analysis, and form its own views. To present the case 1.12 Having interrogated the project records and analysed the delays, it is necessary to convince the opposing party. This can be aided by visual pictures (primarily graphs and charts) and these can be produced using IT tools used by the delay analyst. In the case in the slide, I tried to explain why laying a railway line was delayed. I contrasted the planned duration which is in green, with the as-built duration, which is the spiky red line. We call this a heart-beat chart because the amount of labour on site is represented by the vertical scale of the red line. Underneath the red line are events, which represent when the employer handed over lengths of railway track for the contractor to lay. What the chart shows is that the provision of labour by the contractor is directly related to the
employer handing over the track. Hence, the delay is caused by late delivery of track, not delay by the contractor. Delay analysis methodologies 1.13 Turning now to Delay Analysis, there appear to be two groups, or types, of delay analysis methodology. The first category is often referred to as entitlement based methods, but this is not an ideal description since it can be confused with contractual entitlement. For example, a contractor’s entitlement to an extension of time is derived from the terms of the contract, whereas entitlement here is derived from the results of a delay analysis methodology (ie it is methodological entitlement). The two are clearly different. 1.14 Theoretical based methods is perhaps a better definition, since these methods rely on demonstrating the theoretical impact of the consequences of delaying events, rather than on showing what in fact occurred. Another definition of this group could be model based methods, 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. In this theory based grouping are the global and the net impact methods, the as-planned but for, the as-planned impacted and the as-built but for methods. 1.15 The second group is called the actual based methods, since they seek to demonstrate what actually occurred on a project and the analyst investigates what caused the project delay. These methods include the as-planned vs. as-built, the window/snap-shot and the impact/update methods. 1.16 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. However, this is not achieved by identifying its actual impact from recorded facts, but by theoretical analysis of what the effect ought to have been. These methods tend to favour the contractor’s position because matters such as culpable delay (that is, where the contractor has a problem of his own), the effects of mitigation (that is, the employer’s delay being offset by simple corrective action by the contractor) and the programming changes actually implemented by the contractor, tend to be considered only as secondary issues, if at all. 1.17 On the other hand, the actual based methods approach the analysis by seeking to measure how actual progress differed from what was planned. They focus on how the works progressed, how activities were actually delayed and only thereafter seek to ascertain what delay event(s) caused this delay.
I would emphasise that the two groups do have common features and cannot be distinguished in absolute terms. For example, the actual based methods also rely on models and theory, but less so than the entitlement or theory based methods.
One feature that all the methodologies have in common, however, is the subjectivity involved in the entire delay analysis process. If different analysts investigated the same project, applying the same method and using the same facts, they would be unlikely to arrive at the same conclusion. 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.
These related issues include: • • • • the sufficiency of the planned durations; the sequence and logic of the planned programme of work; the sufficiency of resources provided by the contractor to carry out the works; criticality, being the determination of those activities influencing progress at each stage; • • • • programme float or risk contingency; concurrency of events (two events imposed at the same time); dominance theory (which event was the major contributor to delay); and acceleration, which involves increasing the rate of production by employing more resources or working longer hours.
To take a very simple case. An element of work took two men four weeks instead of two weeks. Throughout the period the weather was dreadful. The contractor claims that the weather caused the delay. The employer asks why did the contractor not employ four men? Opinions will differ, not only between contractor and employer, but also between analysts.
The point, I believe, is this. The delay analysis methodologies each provide a set of rules for examining project delay. However, 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. In addition, the rules of the methodologies
can be ill defined or require judgement in applying them, and this again increases the level of subjectivity. 1.23 In summary, none of the methodologies I will explain are perfect because they all include an element of assumption, subjective assessment and theoretical projection, some more than others. For this reason, the ‘answer’ that a methodology provides is only as good as the accuracy of the base information, the assumptions inherent in the methodology and the reasonableness of the subjective decisions made by the analyst. This is important to recognise if you are employing delay analysis to assist in presenting your client’s case. Theoretical-based methods 1.24 In order to explain the various Delay Analysis techniques, I have produced a simple project. On the slide in blue we have four activities, A,B,C and D. There are two
planning paths, A and B, and C, D and B. The critical path runs through activities A and B, because there is no float on this path and any delay on activities A and B will cause delay to completion. Path C,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. duration of the programme is 7 weeks. 1.25 The next slide indicates the as-built programme in red. Note, however, that the as-built critical path runs through activities C, D and B, because activity A has a one week float before the commencement of activity B. That is to say, the critical path has changed between the plan being prepared and the works being completed. 1.26 Note that the actual overall duration was 10 weeks, so there has been delay. The cause of this delay has been shown in the next slide. We have 4 delay-causing events. D1 is inclement weather; D2 is additional work (variations), D3 is late information from the employer and D4 is lack of resources by the contractor. So note the events D1, D2 and D4 are events which would give rise to an extension of time; D3 is a contractor-caused delay and so would not give rise to an extension of time. 1.27 I am now going to explain each of the techniques. What I would like you to concentrate on, apart from how the techniques are different, is to note how each method produces a different answer. Each methodology indicates that different events cause the delay and for different periods of time. This is a really important aspect to appreciate. Global impact method Note that the overall
The global impact method is a rough and ready way of indicating what the potential impact of a delay causing event has been. An example of a global approach is where the work scope (that is, the amount of work the contractor has to carry out) doubles due to variations and so the duration of the relevant activity is doubled. In the English case of McAlpine Humberoak1, 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!). 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, to arrive at a period of delay to the project. In this case, the employer-caused delay periods are added on to the end of the planned completion date, to arrive at an entitlement to extension of time. So in this case, we add D1, D2 and D4 on to the end of week 7 to indicate an entitlement to a completion date of week 12. In that the contractor finished in week 10 indicates that a full extension of time is due. 1.29 The global approach is quick and simple but never contractually supportable and provides no cause and effect. It ignores other delays occurring at the same time and does not consider timing, concurrency or dominance of delays. It also ignores any actual delays caused by the contractor. 1.30 This method has also been repeatedly criticised by the courts because it fails to consider the fundamental issue of criticality (that is, whether the works were delayed or not) and ignores reality, as well as the contractor’s duty to mitigate. Despite the criticisms, the global method is still widely used by contractors in an endeavour to demonstrate their case. Net impact method 1.31 This is essentially the same as the global method but with the refinement that the issue of concurrency of delays is considered. For example, where there are two concurrent
delays each of say five days, only five days is taken as delay to the works rather than the total of ten days, as would be the case with the global method. 1.32 In this case, because delay event D2 runs concurrently in week 4 with event D1, we would exclude it from the analysis. Hence, the overall entitlement is D1 + D4, ie 4 weeks, resulting in entitlement to week 11. The contractor actually finished in week 10, hence he is due a full extension of time.
McAlpine Humberoak v McDermott International (No.1)(1992) 58 BLR 1 39
The advantages and disadvantages of the global impact method also apply to this approach. In summary, this method has little to commend its use. As-planned impacted method
This method is also known as the entitlement method. 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. It can be used to show the theoretical delaying effect of the employer’s delays, or of the contractor’s delays, or of both together.
The prerequisites of this method are a baseline critical path programme that represents the contractor’s intent and a schedule of delay events. The first step is an assessment of the likely critical delaying effect of each delay event in the schedule. This can be
estimated using norms and experience, or be based on evidence of the actual delay experienced on the project. Secondly, for each delay event, the effect (such as a
delayed start, delayed finish or prolonged duration) is individually impacted onto the planned programme, in chronological order and the project completion date re-analysed. This process continues until all of the delays have been impacted. 1.36 In our example, we take the planned programme and insert event D1 on to it. In this case, D1 causes a one week completion delay because of the 2 week float on the path C,D,B. That is to say, event D1 causes a 3 week delay on activity C but only a 1 week delay to overall completion. 1.37 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. 1.38 The next delay event is D3 and this causes a further 2 week delay to completion because activity D is on the critical path. Finally, we add in event D4 but this causes no further delay to completion. 1.39 In conclusion, 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, because event D3 is a contractor-caused delay. 1.40 What is important to note with this method is that if events are added to the planned programme in a different order, then you will get a different result.
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.
However, there are two principle weaknesses of this method.
Firstly, 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). Secondly, since actual progress is not considered, this method does not demonstrate what actually caused delay to the works. If it can be shown that a delay event, relied upon in the analysis, could not have actually caused delay (for example, if it can be shown that alleged late information was received well in advance of the actual progress of the works), then the methodology will lose credibility. As-planned but for method 1.43 For this method, 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. The impacted completion date is then compared with the as-built completion date (that is, 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. 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, depending on which set of events have been analysed. 1.44 In this case, we take the as-planned programme and add in the contractor-caused delay, which is event D3. No completion delay occurs because of the 2 week float on activities C and D, so we conclude that but - for the contractor-caused delay, the project would have been completed on time. Hence, all the other employer-caused delays contributed to the 3 week delay and the contractor should receive a full extension of time. 1.45 The alternative way for this analysis, is to add in the employer-caused events, that is D1, D2 and D4. On this basis, these events delay completion by 2 weeks extension of time. However, the employer is entitled to receive 1 week’s liquidated damages. 1.46 1.47 Note that both approaches produce a different conclusion. The advantage of this method is that it is reasonably quick, as there is no need to consider actual progress of the works or the timing of events, but this means it is a theoretical investigation.
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. 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. As-built but for method
Although this methodology adopts a model of the as-built programme for analysis, and so starts off as a fact based analysis, it is still a theoretical analysis of delay. The approach is similar to the as-planned impacted method, but in reverse. The as-built programme is first constructed and linked together into a critical path network. This becomes the model to be analysed. A schedule of delaying events is created, including a measure of their impact (for example, a start delay, a finish delay or an activity prolongation). The very last excusable delaying event on the critical path is removed and the model is reanalysed. 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. For example, if the last activity in the project happens to be a five day painting variation, when this excusable delay is removed, the programme is able to finish five days earlier. Thus, ‘but for’ the additional painting, the programme could have finished five days earlier.
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 process can also be applied by removing all the excusable events
together, or by grouping similar excusable events together and removing each group individually. Whatever the approach, each invariably produces a different answer! Once the analysis is underway, 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. The model is, therefore, sometimes referred to as the simulated asbuilt programme. 1.51 In our example case, we start with the as-built critical path. We delete the first employercaused event, D1 and conclude that but - for event D1, the project would have been complete in week 9. Therefore, D1 caused a 1 week delay and an extension of time is due. the exercise is repeated for employer-caused events D2 and D4 and we conclude that a full extension of time is due. 1.52 The accuracy of the analysis will depend on the quality of the information on which it is based. The greater the amount of information that can be provided in support of any
assumptions made, the more credible the results. Such information will generally be gained from site records, in whatever form they exist, and the importance of accuracy, completeness and reasonable logic cannot be over stressed. However, since the
method is based on the as-built programme, it appears to have a thread of truth about it. 1.53 Although the principles of this methodology are straightforward, its application is not. It is dependant on subjective logic links that were never set down and which were never agreed in any contemporaneous programme. It is open to criticisms of bias on the part of the analyst. Also, removing delay events (and logic links) retrospectively does not reflect the actual way the works were progressed. Hence, this methodology does not appear to be an appropriate one for most standard forms of contract. In summary, 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. Actual-based methods 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. As-planned vs. as-built method 1.55 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. This method is ideal for those projects where it is easy to identify where the main delays arose, for example, from a high level barchart comparing as-planned v as-built activities. 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. For most complex project disputes, however, this
method is only useful for an initial pass. 1.56 Having identified delay periods, the next stage is to establish which delay events caused the particular delay periods, how these delay events competed with other concurrent events and whether the delay periods were critical at the time. This may require a more sophisticated methodology. So in our exercise, we would try and explain why activity A finished 2 weeks late, why activity C took 3 weeks longer and why activity D was 2 weeks late. 1.57 The main advantages of this method are its simplicity; the fact that it considers what changed in terms of planned intentions; and that it is a ‘visual’ methodology with no manipulation (in contrast with the as-built but for method). It is a relatively low cost
methodology and is particularly useful in identifying where the main delay periods probably arose. 1.58 The main disadvantage is that for complex projects, with competing delay events and large numbers of activities, the method may not be rigorous enough. Windows/snap-shot or update method 1.59 This method is a more rigorous version of the as-planned vs. as-built method but follows the same basic philosophy, that is considering when and where actual delays were incurred. The main refinement is that critical path analysis is used to assess criticality, delay and indeed mitigation. 1.60 The as-planned and as-built programmes are first established, are then logically linked so that they become critical path programmes. The as-planned programme becomes the model. The overall project duration is then divided into periods in order to make the analysis more incremental. In practice, the increments coincide with the frequency of the progress reporting cycle, say monthly, or with major milestone events, such as completion of foundations, completion of roof etc. 1.61 For each time period or ‘window’, the duration, progress and logic of the work actually carried out in that month are imposed onto the as-planned model. If any major planned programme revisions were made in that period, these should also be introduced into the model. The model is then time analysed. 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. The difference between the end date from this analysis, and the end date from the previous window or snap-shot, represents the period of delay or mitigation which arose in the current window. Having identified a period of delay or mitigation in the period in question, the remaining task is to assess the causative event or events. This can be done in a variety of ways; by detailed visual inspection, by creating, impacting and analysing sub-nets (which are small critical paths that model a single programme activity in greater detail). 1.62 In our example case, we break the programme down into 3 windows, or time periods. 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. We then repeat the exercise for window 2, and finally window 3. In this way, we hope to explain, period by period, why the work was delayed. 1.63 The strength of this approach is that it forces the analyst to consider actual progress and revised programme intent in a logical manner. It produces a result which cannot be
easily rejected as contrived because it is practical rather than theoretical. Issues such as mitigation, criticality, concurrency and dominance are all taken into account in a transparent manner, leading to better understanding of what occurred and the circumstances at the time. Impact/update method 1.64 This method is an enhancement of the previous method, but is very similar to it. Whereas the window/update method establishes delay in each window period and leaves the assessment of what caused the delay as a separate debate, the impact/update method introduces the events into the delay analysis. That is to say, 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, ie to contrast the contractor’s actual performance, in terms of culpable delay or mitigation. 1.65 A delay schedule is drawn up before the analysis proceeds and this will list the delay events alleged to give rise to contractual entitlement. For each of the window periods, the delay events that are alleged to have arisen in the period in question are impacted on the planned model and time analysed. The resultant project end date at the end of the window will reflect the notional entitlement, at that time, to an extension of time. 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. The resultant project end date will reflect the additional delay, if any, caused by the contractor in that month. 1.66 Following analysis, the progress records are imposed on the planned model and the programme analysed again. The resulting end date will represent the overall delay to completion actually occurring in that window period. This will allow for excusable delay events, compensable delay events, culpable delay events and contractor’s mitigation due to changes in programme or faster progress. 1.67 From these two exercises (the planned model time-analysed with delay events and the planned model analysed with actual progress), the analyst is provided with information on causation which can then be debated as to dominance, concurrency, mitigation and so on. 1.68 To explain this approach, I have had to change the example. In the chart we have a planned programme in green. The programme finishes in month 15. The delay events occurring in period 1 are inserted on to the programme to assess the new completion date - in this case there is a projected 2 month delay. However, a final step is to assess
the actual progress at the end of month 1 and establish what the actual delay is at that time. The analyst then has two indications of delay. The entitlement one based on the as-planned impact approach and the actual one based on the as-built programme. 1.69 This is probably the preferred method of analysis due to it being more practical, balanced, and based on critical path analysis. It considers actual progress and revised programmes, allows for matters of concurrency, dominance and mitigation to be debated, and limits the degree of initial subjectivity to the logic links within the model. 1.70 However, the weakness in the method is that it can be expensive to carry out and requires good as-built records. Furthermore, the courts have implied that the assessed time impact of early delays could diminish later on in the programme. The methods contrasted 1.71 Having described the various methods under the two headings of theoretical-based and actual-based, I suggest that the methods fall into four basic groups, identified by the approach: (a) The first approach applies to most of the theoretical methods. A model of what was planned is produced, ignoring how the project was actually constructed, and actual events are imposed on the model to see how they may have influenced the end date. Any extended completion date is said to give rise to an entitlement to an extension of time. In most applications, this is incorrect. (b) The second approach is the ‘but for’ methods, which create models of planned intentions or the as-built project and seek to address causation on the basis of assumption. If the employer had not imposed this event or constraint on the contractor’s performance, when would the works have been completed? The fact is, the event or constraint was imposed and the standard forms of contract ask for the consequences of it. In many applications, these methods produce incorrect answers. (c) The third approach, which historically has been the most widely used and from my experience, is what the lawyers prefer, is the as-planned vs. as-built method. Two models of the project are overlaid on each other and the analyst seeks to explain the causes of the variance. (d) The final approach is to re-live the life of the project by considering the programme in incremental stages, by using the window/update or impact/update
methods. 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. This can be contrasted with the as-planned vs. as-built method which seeks to justify the overall plan with the overall as-built in one step. These update methods are probably the most robust and extensive analyses. 1.72 A key point to note from this paper is that each Method of Delay Analysis is likely to produce a different answer. This is one reason why extension of time claims are argued over so much.
TIME ANALYSIS - PRACTICAL ISSUES Choosing A Method
What factors may affect the selection of a particular Delay Analysis method? There are four factors.
Firstly, the nature of the project or claim, or the case one is seeking to explain, often influence the approach to be taken. Where the case is primarily concerned with
justification of time, the more theoretical methods (particularly those relying on critical path analysis) are helpful. However, if the claim is for money as well, an approach based on what actually happened is warranted. For example, the contractor will have to show what actual resources were on site during the actual delay period, not some theoretical resource level during some notional delay period. 2.3 Secondly, instead of analysing your case by one method, consider using two approaches. In fact, 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. 2.4 Thirdly, methodology is often affected by the available software. For example, Microsoft Project, Power Project and Pertmaster are critical path analysis tools but require other software packages for processing data. Primevera is said to be a very good forward planning tool and although it can be used for analytical purposes by itself, it is said to be cumbersome. Artemis is a powerful package with an integrated database for forensic analysis of project records. However, Microsoft Project only requires a few hours of hands-on learning before it can be used; Artemis requires specialist training courses and years of experience. In addition, one costs £250, the other £5,000. Note also that each software package has its own procedures, rules and methods of operation. Therefore, each delay analysis methodology may have to be applied in a different way. This is important to note if writing method statements for delay analysis. They should not be written around one specific package. 2.5 The fourth issue to note is that delay analysis, particularly when using critical path analysis, is fraught with manipulation. For example, a slight but unjustifiable adjustment to logic links can be difficult to identify but can produce the appropriate result for one party. Another typical manipulation is the manner in which events are analysed. A common example is the introduction of additional work by increasing the appropriate activities by a proportional amount equivalent to the extra work. Such approaches
usually exaggerate the case. Another example is the sequence in which delays are entered onto the programme. Depth of Investigation 2.6 Quite often, the approach taken in delay analysis is dependent on the status of the party’s records, or lack of them. This affects the level of detail for the analysis. For example, how many programme activities should you review? Although this issue is case specific, my experience is that ten activities are too few and many hundreds of activities too many. On a fairly large project, I would attempt to analyse up to 100 activities. In fact, 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. 2.7 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. This certainly applies when one is considering the as-built situation, which is, more often than not, advisable. 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. In these situations, the approach to take is to produce an as-planned vs. as-built comparison which is to the highest level of available consistent detail. For example, consider a ten storey building with ten planned activities per floor. Progress has been monitored per floor, but not by activity. In this case, the as-planned vs. as-built comparison would be by floor, but where delay is apparent on any particular floor, this can be investigated by seeking to develop the events on the ten activities by reference to other records. 2.8 An alternative situation is where the planned programme provides insufficient detail to enable proper analysis of the actual circumstances. In this case, it is normal to develop sub-nets of the planned programme, which analyse in greater detail the manner in which certain aspects of the works would have been constructed and the sequence and timing. In this way, 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. The As-Planned Programme 2.9 Developing the as-planned programme in greater detail usually results in the cry of ‘foulplay’, possibly rightly so. 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
element of unplanned work would have been carried out, as well as its duration. This is then compared to what actually occurred and, hey presto, we demonstrate a delay caused by an event which is the other side’s responsibility. Consequently, the more hindsight that is applied to your methodology, the greater the opportunity for challenge on the grounds of bias or unreliability. If you do not have an as-planned programme in sufficient detail, think twice about developing a very complex plan years after the project was started. 2.10 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. However, it is still necessary to justify the reasonableness of the plan. Otherwise, an alleged delay can be challenged on the basis that there was no delay, only an optimistic plan! This is a point missed from many delay claims. Not only should the claim rely upon the planned intent, but detailed method statements should be used to justify it. The Legal Perspective 2.11 Just a few points to note. The first point to note is that there is often no certain answer to a given set of facts. This is partly because the theories and principles upon which we build our case are incompletely developed, as well as being inexact. Applying the same facts to the different methodologies results in different allocations between excusable and inexcusable delay. 2.12 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, if not impossible. Available records only tell part of the story and memory has to fill in the gaps, but opposing parties have contrary recollections of the facts. Hence it is the norm, rather than the exception, that one has to analyse project delays based on two sets of asserted facts. conclusions. 2.13 A third point to note is that extension of time clauses in contracts are not prescriptive. They are drafted in a general way and it is not industry practice to pre-determine how delays should be analysed, either in terms of methodologies or in dealing with such factors as float and concurrency. Even if clauses were more prescriptive, the facts of the case would still be argued over. 2.14 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. Of
Each set of facts produces different
course, there are those who say that, given a set of circumstances and a particular contract, there is only one definite, certain answer and outcome, and the other side are clearly wrong! However, one of my colleagues often tells the story of an arbitration case where they lost the issue they knew they would win, but won the issue they considered they would lose. I am sure many have similar experiences; I do not think my colleague’s experience is unique. It is necessary to acknowledge, therefore, that in delay analysis there is often no clear solution, either in methodology or law. Testing your Case 2.15 So, how can we maintain a critical attitude towards the case, particularly when some members of the team hold clear and unambiguous views? recommended measures. 2.16 Firstly, appreciate that the methodologies do have an order of merit. A delay analysis using the global or net methods will produce a result that is closer to mythology than fact, whereas the impacted/updated programme methods, if applied properly, are preferred as they seek to address what occurred/or should have occurred, at the time. I would There are a number of
suggest that the order of merit is as set out in these notes, but note that I have introduced them in reverse order! 2.17 A second important step is exemplified by the comment of a judge in a recent case in England. He said to the delay expert: ‘I hear what you say about the results of your analysis, but, standing back from the facts of this case, have you tested your methodology?’ The point being made was that, if your analysis is built on a particular methodology, you must test its robustness. This can be carried out in several ways. For example, one technique is to employ what has been referred to as the extreme case rule. Apply extreme conditions or circumstances to the analysis. If the methodology holds good for both situations (ie it produces sensible, logical answers) it can be more confidently relied upon as being robust. This rule is used by some arbitrators when weighing up the parties’ alternative approaches. 2.18 Another test is the small change rule. In this test, small changes are made to the
methodology or the analysis to see what happens to the results of the delay impact. For example, if small changes are made to the programme logic, do you get significant changes to the completion dates? Or, if you amend the order in which delays are
entered on to the analysis, does the impact change? For this type of test, one is looking to identify significant changes in the results arising from minor changes to the methodology or the analysis. Such changes may demonstrate a weak methodology.
Finally on critical views, it is important to emphasise that the starting point of delay analysis is the parties’ contract and the contract terms relating to programme, progress, delays and extensions of time. For example, is there an agreed programme; what are the obligations in regard to updated programmes; what is the base case programme; how are delays to be notified; were delays notified; were particulars provided; is there a condition precedent clause? Very simply, there may be a very strong case in fact, but if a contractor has failed to register its entitlements, this may well affect the prosecution of its delay claim or its defence of the liquidated damages claim. Conclusion
To conclude, methodology is defined as a body of practices, procedures or rules used to engage in an inquiry. The delay analysis methodologies in use today each contain a set of rules which in themselves can be applied in a subjective way. It is not difficult to manipulate a methodology to arrive at the ‘required’ answer. There are many related issues that influence the analysis and these involve the application of personal experience and judgement. Hence, one analyst's view of a given set of facts will result in a different conclusion from another analyst's.
There is no preferred delay analysis methodology suitable for all cases, although some methodologies are more robust than others. The more theoretical the methodology, the weaker the analysis. It is always better to demonstrate what actually occurred. That said, theoretical approaches can be helpful (particularly for the issues of mitigation and acceleration) but the results should be tested. The extreme case or small change rules are useful techniques for testing the methodology.
The methodologies do not tell you what the results mean, for example, in terms of contractual liability. It is necessary to interpret the meaning of the results. Remember also that delay analysis is only part of the evidential matrix.
Although I believe that delay analysis can be an extremely important aspect of many cases, it is not as precise a science as some suggest. In my view, it is as much an art as a clinical, analytical study.
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
which results in lower efficiency. If the disruption is caused by the Employer, it may entitle the Contractor to compensation either under a specific form of the contract or as general damages for breach of contract. 3.3 Disruption is often wrongly talked about in the construction industry as if it is the same thing as delay. It is not and is quite distinct. Disruption to construction work may lead to late completion of the work, but not necessarily so. 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. In these circumstances, the Contractor may not in fact have a claim for an extension of time, but it may have a disruption claim for the reduced efficiency at which its work force was able to progress the works. 3.4 One of the major obstacles any contractor faces is pursuing a disruption claim in that most standard forms do not expressly provide for disruption. There is no disruption clause. After all, disruption can only be recovered to the extent that it is actually unused by the Employer. If there is no specific clause in the contract to rely upon, the Contractor will have to rely on breach of an implied term, such as breach of a term that the Employer will not prevent or hinder the Contractor in carrying out its works. 3.5 In looking at time issues, we noted the importance of cause and effect analysis. This is equally relevant here. Disruption has to be established in exactly the same manner. 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. 3.6 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. 3.7 How do you prove a disruption claim? The starting point is again your records. What you must show the Employer is which work was carried out and when and using what resources.
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. In so doing you will be able to show a man-hours comparison and a work product comparison. But this only works if you can truly compare like with like. Further, you may be unlucky enough to be in the position where there are no unaffected sections to the project. If this is the case, you may have to rely upon statistics from other comparable projects you have undertaken or industry norms, such as model productivity curves and factors.
Many bodies have undertaken such studies eg MCAAI (Mechanical Contractors Association of America Inc). 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. 3.9 Remember that a successful and well-presented disruption claim will remove the issues which have affected productivity but are not the Employer's responsibility. If the
Contractor's programme was unrealistic or its works inefficient account should be taken. Bad weather, plant problems, problems with supervision etc should be removed from the claim. 3.10 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, based on site records which can be exhibited and cross-referenced. 3.11 By way of example, 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.
Proof of Damages
Wage escalation can be determined by comparison of anticipated labour distribution with the actual labour distribution. 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 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, 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. Remember, for beginning-of-job delays, the actual labour expenditures will initially be lower than what was planned but will later greatly exceed the anticipated labour. 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. 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.
Loss of productivity (inefficiency) (l) Causes (i) Substandard productivity per manhour due to fatigue, poor morale and other factors during extensive periods of scheduled overtime. (ii) (iii) Loss of productivity due to stacking of trades, congestion in work areas Inefficient use of work forces while waiting for preceding work to be completed.
Delays and costs of recruiting, selection, hiring and training of new, 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, 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 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
Proof of damages – alternatives (i) Best method is if contractor has kept and retained accurate job performance records by trade on previous projects. Thereafter, if an inefficiency claim is asserted by the contractor, there is a corporate database showing normal performance under a given set of job conditions. While such a standard may vary from job to job or from crew to crew, such cost data would be of great worth in proving the reasonableness of a contractor's manpower estimates. 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. Through the use of the estimate and expert testimony, establish that the contractor's anticipated productivity was reasonable. This can be
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. (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, trade congestion, adverse weather conditions, etc.
Head Office Overheads 3.12 It seems likely that on any contract where there has been some delay and disruption, there will be some consequential increase in direct head office administrative costs, covering both the delay period but also increased management costs in dealing with that delay. 3.13 Generally, in making a claim for additional head office overheads, a Contractor must be able to show that it had other work which could have done during the period of delay. If there was no other work, other contracts would not be contributing to the cost of the head office during the period. 3.14 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, office equipment, etc. 3.15 It is important to distinguish between these two types of overhead. Unless the terms of the contract do not allow a Contractor to recover unabsorbed overheads, they are generally recoverable as a foreseeable cost from resulting from prolongation. The costs such as rent, lighting, heating,
Contractor has to be able to show that because of the Employer's Risk Event, the Contractor was prevented from taking on other overhead earning work. 3.16 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; and (b) Been unable to recover those overheads because its workers were tied up dealing with the Employer Risk Events.
You will be required to show through your records the head office overheads you claim you have been unable to recover. If you cannot do this, it is possible to rely on one of a number of formulas. But be careful, formulae are a last resort which will only prove successful where backed up by supporting evidence. The formulae assume a healthy construction industry and that the Contractor does not have enough resource to take on other work. Formulae therefore, are not good methods in a recession.
The best known formulae, for example, is called Hudson's formula which takes the allowance made by the contractor for head office overheads and profit in his original tender, 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)
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. In any event, it should only be used after an accurate delay analysis has been performed to establish the period of delay. Loss of Profit
Under the standard forms, profit on other contracts which a Contractor alleges it was prevented from earning because of an Employer Risk Event, is not generally recoverable. If it does allow profit recovery, you should be aware that recovery will be limited to account for the fact that there is no risk involved in 'earning' that profit. In similar fashion to Head Office overhead, whether or not a loss of profit claim is successful may depend on the economics climate at the time. Contractors also have to remember that if the prolongation claim contains profit on that extra work, double recovery through a separate profit claim should not be allowed. Labour & Plant
How does a labour and plant claim come about? A Contractor may have to employ additional labour and plant, or alternatively, the Contractor's existing labour and plant may be under used or even stand idle.
The difficulty a Contractor faces is in proving the actual amount of additional expenditure it has occurred. The danger is that without proof, the Contractor will pursue global or total cost claims which are likely to be unsuccessful. If you are following good record keeping procedures, you should be able to establish actual costs incurred. Form this base, you should be able to identify your planned use of those resources based on your original programme, histograms and tender. Further problems are faced, however, in trying to show that your tender allowances were not inaccurate. Perhaps the answer is to follow the comparable period method explained earlier in relation to general disruption.
If the Contractor has hired-in plant, matters are more straightforward: the amount claimable is the amount actually incurred. The major difficulties arise where the claim relates to the Contractor's own plant. 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. What one would be looking for is invoice or contractor internal records documenting additional maintenance, repair and fuel costs, etc. This is hard enough in relation to one event, but there is usually a multiplicity of disruptive events, many of which may be concurrent. The normal result is that if the Contractor can demonstrate the actual costs, it will be entitled to recover that money; if he cannot, he will recover a nominal amount, normally reflecting depreciation in the value of the assets. Interest or Financial Charges
Some contracts make provision for the payment of interest. Some statutes also give a right to interest in certain circumstances. Further, 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. 3.25 In most circumstances, therefore, it is possible to pursue financial charges by way of interest as a head of claim. The head of claim is in truth, compensation for the loss of use of the money to which you were entitled. 3.26 The parties to a contract can agree in that contract a rate of interest and when and if interest will become payable. Most standard form contracts do in fact contain express contractual rights to interest. Remember that as with liquidated damages, the rate will not be enforceable if it is so high so as not to be a genuine pre-estimate of loss. 3.27 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, as above, that has suffered that loss and the Employer would have
contemplated that the consequence of its breach would cause the Contractor that loss. This second limb is an easy hurdle in fact. 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. 3.28 A different issue is the question as to the date from which interest on a Contractor's claim should start to run. 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. 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. 3.29 The situation may well best be looked at from the perspective of an example. What should be the position where a Contractor makes an application in very vague terms, 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, or should the Contractor bear the risk as it was too slow in providing the required information? Most of the time, I have to say, the answer is that the Contractor bears the brunt. However, it will be a matter of fact to decide how much of the delay is in fact the fault of the Contractor. 3.30 The Contractor may have to prove what is the applicable rate of interest to be applied. If the Contractor is operating an overdraft, its bankers will be able to evidence the cost of borrowing. If the Contractor would have invested the money, 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. In those circumstances, I would advise that a particular line is followed: take an average. 3.31 In providing the rate, it is usual to have to either peg the rate to a standard, eg, 2% above the base rate of the Bank of Tokyo Mitsubishi, 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. Claim Preparation Costs 3.32 Most standard forms of construction contracts do not allow a Contractor to recover costs incurred in preparing the claim; most provide that the Contractor can only recover the cost, loss and/or expense that it has actually incurred, supported by documentary
evidence. As such, fees paid to claims specialists or to independent quantity surveyors or other professional advisors are not recoverable, 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. 3.33 Where matters are different is where a claim proceed to litigation or arbitration. Here, a Contractor is entitled to claim its costs. This will be explained later by Mark and Simon. Acceleration 3.34 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. What is likely to be Included in the Cost of Acceleration? 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) 3.36 working additional hours; providing additional labour; providing additional or different equipment; and advancing the date of delivery of manufactured items.
The position with many standard forms of contract is that the Contractor, once in delay for which he can receive an extension of time, is not contractually required to make up any of the delay he has incurred. Therefore, if the Employer wants to achieve earlier completion, he must secure the agreement of the Contractor. 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. 3.37 The best course of action for both parties to take is to enter into some form of collateral agreement which, siting together with the existing contractual arrangements, make it clear exactly what is covered by the agreement to accelerate. 3.38 Claims for acceleration may arise where an Employer wishes to have the work completed earlier than the projected completion date. I think an important point for any Employer to consider when deciding whether or not to induce a Contractor to accelerate his works is
whether or not the costs of acceleration are less than the amount that could be recovered for early use of the building. Without doubt, the most difficult issue for
Employers is in trying to determine the likely costs of acceleration and how costs should be established. By its very nature, acceleration is an unknown quantity. There is a real danger for Employer's that an open-ended acceleration agreement can simply amount to a very large contractor claim. 3.39 An issue which frequently arises is whether there has been a constructive or implied acceleration instruction. 3.40 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. However, subsequently, the Contractor is held to be entitled to an extension of time. "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. Obviously, in such a situation, the Contractor would be rewarded, probably financially, for accelerating the works. 3.42 This can lead to problems. The Contractor may be tempted to try and say that the cause of any delay, and therefore the need for him to accelerate the works, is a ground by which he can seek reimbursement from the Employer under the terms of the contract. 3.43 If you have to make a claim for acceleration, express or constructive, there are guidelines you should follow. In the first instance, you need to identify the heads of cost, how to calculate the extra resources you have employed and how to evaluate their individual expense. 3.44 (a) The cost factors which offers need to be considered are: Labour • A contractor may seek premium time, ie non-productive nature payments arising from having to work a longer week. 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. • A contractor may claim for increased labour costs if in order to meet the accelerated programme, it has to bring in labour from overseas, for example.
If the accelerated programme requires a larger labour force, working more hours and in different sequences, for example, a Contractor may make a claim for the reduction in the level of productivity. This is best shown by Contractor records which monitor how productivity has been affected by the accelerated programme. If you do not keep this sort of record, it is possible to rely on research studies and statistics to support your claim, but contemporaneous records have to be preferred.
It is likely that a Contractor's supervisory staff costs will increase during a period of acceleration.
Preliminaries In addition to additional labour costs, a Contractor will seek to recover the extra resources it will require to meet the acceleration programme. • There will usually be a claim for an increase in the amount of plant and tools associated with a larger labour force. require more cabin and site office space. • If sub-contractors and suppliers have to increase the pace of supply, there will be a claim for priority payments for example. • To the extent that the acceleration requires a greater commitment from Head Office, there may be a claim for a greater margin on overheads and profit than would be expected when pricing variations, for example. The larger labour force will probably
MITIGATION You should remember the duty you have to mitigate losses you suffer. That is to say, a Contractor should do all it reasonably can to avoid, overcome or reduce delay and the financial consequences of that delay.
Most standard forms of construction contracts include a requirement that the Contractor has to do all it can to avoid, overcome or reduce delay. However, a Contractor is not required to go too far. For example, it does not have to carry out any variation more efficiently than it is carrying out the original works. Further, 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, the Employer is responsible for that additional cost.
Bear in mind that some contracts actually make compliance with mitigation provisions a condition precedent to recovering loss. You as a contractor do not have a duty to reduce the natural effect of an Employer default, but you may not recover compensation if the losses could have been avoided.
SESSION 4A - 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. Then we will consider how to resolve various types of disputes on the project using different dispute resolution methods.
The project is the construction of a small building which is to house switchgear. The building comprises a steel structure which supports the external walls and the roof. There is an Access Gantry constructed just outside the building. The switchgear is installed within the building.
The Main Contractor’s programme has 4 activities. The erection of the Steel Frame, which is to be carried out by Sub-Contractor ‘A’. The Walls and Roof are
constructed by the Main Contractor. The switchgear inside the building is to be manufactured and installed by Sub-Contractor ‘B’. Finally, the Access Gantry is to be erected by the Main Contractor, who intends to use a 200T crane to perform the operation. 1.4 The work is expected to take 9 months, but the contract completion date is at the end of month 10 i.e. there is a one month float in the programme. 1.5 The actual project takes longer to construct than planned. In fact, there is a 3 months overrun, to month 13, although the total delay is 4 months, given that the programme float is used up as well. 1.6 The causes of delay are as follows:(a) The steel frame is two months late due to slow progress by Sub-Contractor A. (b) Sub-Contractor B advises that the switchgear will be 4 months late being delivered. (c) A design fault is discovered which will prevent the commencement of the Access Gantry work by 2 months, 1.7 There is a 4 month delay by the Main Contractor delivering his crane which is required to erect the Access Gantry.
MAKING A CLAIM FOR EXTENSION OF TIME CLAIM There are various claims that could be made by the Main Contractor. For example, he could claim against Sub-Contractor A or Sub-Contractor B resulting from their delays. However, I want to concentrate on the delay caused by the design fault Delay 3.
If we adopt the ‘as-planned impacted’ method of analysis, we identify that the design fault affects Activity 4. The design fault prevents Activity 4 starting for 2 months. Consequently, the impact is to push the completion date out to month 11, which would mean a 1 month extension of time.
However, if we leave it at this, the Employer benefits from the Main Contractor’s float i.e. month 10. Consequently, the Main Contractor would want to claim the benefit of the programme float. (If the project had been actually completed in month 11, then there would be no need to claim this extra month - since we only claim an extension of time for the actual period of project delay).
In summary, we now want to make a claim on behalf of the Main Contractor for a 2 month extension of time due to Delay 3 - the Employers design fault.
I have identified 6 steps for making an extension of time claim.
Step 1 - The Contract 2.6 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. Usually, the clause will say that the Contractor must complete the Works by a date set out in an Appendix to the Contract. In this case, the Appendix will say the completion date is the last day of month 10. (b) There will be a liquidated damages clause which will explain that if the Contractor does not complete the work by the completion date, the Employer will be entitled to receive payment of a sum of money, usually expressed as a sum of money per day. (c) In order to maintain the validity of the liquidated damages clause when there are certain types of delay, there will be an extension of time clause.
This clause will identify excusable events, which are those events which, if they arise, will excuse the Contractor of any delay caused by the event. In this case, we have to show that the event we are claiming - the design fault fits in with one of the excusable events in the contract.
All contracts require the Contractor to give written notice of the delay; some contracts require written notice within a given period of time - say 14 days from the date of the event. Contractors need to be very aware of these clauses because sometimes you loose the right to make a claim if no notice is given.
Finally, a contract clause will require the Contractor to provide particulars of the event and its consequences.
STEP 2 - RECORDS 2.7 The provision of particulars of the claim brings us on to the second step, which is the need to maintain records. These include progress records, labour records,
photographs, cost records, drawing schedules etc. It is really important to keep records. STEP 3 - THE FACTS 2.8 Based on the project records, the Contractor should provide a detailed statement of the facts of the case. In this case, the statement will explain how the Access Gantry was designed in the Contract, what the programme was for erecting it, when the design fault was discovered and what it was and what had to be changed. Also, it will set out when the new design was received from the Employer and so when the Access Gantry work was able to start. STEP 4 - THE TIME ANALYSIS 2.9 Having explained the facts of the event, i.e. the CAUSE of the delay, it is necessary to demonstrate its EFFECT. In this case, we would submit a programming analysis which shows which activities were affected and how the event delayed the overall project completion. STEP 5 - THE SCOTT SCHEDULE 2.10 A very popular way in which the details of the claim are summarised, is by constructing a Scott Schedule. In most claims, there will be many events which the Contractor will be relying upon and so the schedule is quite long. In our case study,
there is only one event, which is obviously artificial.
Anyway, 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.e. the delay to completion caused by the event
STEP 6 - THE STATEMENT OF CLAIM 2.11 Finally, 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, that the event was notified in good time and setting out a statement of how long the extension of time requested is.
SESSION 4B – PRESENTING CLAIMS FOR LOSS AND EXPENSE
Introduction 3.1 Using a formulaic approach as to how you present your claim for money can have many benefits. It can provide a very useful discipline for the person who is
preparing the claim, so as to ensure that he obtains the necessary information and sets it out in coherent form. In so doing, 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. 3.2 Any claim should be prepared with litigation or arbitration in mind. There are two reasons for this. The first is that if the Employer does not pay, litigation or
arbitration is the final recourse. 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. 3.3 In a moment, we are going to look at the format of presenting money claims. However, first let us come back to some principles. Remember what you are trying to prove. For example, 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; (c) The date and details of the Contractor's application for loss and expense in respect of the late information; (d) Sufficient details and information regarding that loss and expense. 3.4 Remember that your claim will have to succeed in law. If you are relying on the contract, state the clause you are 'relying' upon. If you are relying on an implied term, state what that implied term is and how it is alleged that (a) It is implied and;
How that implied term has been breached.
If you have a general breach of contract claim, state what term you are alleging has been breached, with the facts are and the consequences of the breach. 3.5 In all cases, refer to the relevant documents. You need to set out exactly what the monetary claim is and how it has been calculated. 3.6 There are two ways in which to set out a monetary claim. The first is in what may be called narrative form, the second schedule (or Scott schedule) form. There is no one method to be preferred. Sometimes a schedule is the best way of presenting the evidence, on other occasions it is not. Whatever way you choose, and we will explore both, 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, or the term of the contract under which the claim arises or other allegations of liability. Example One – Quantum in Narrative Form 3.7 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, see Appendix) – 380 x 12 Fitter travel expenses 2 Plant Non utilisation of dedicated plant 51 S 4,650 Q A
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
S D S 2,500 7,361 S
Overheads, HO Charges Tendered @ 5% on site costs 368 7,729 R
Add profit @ 7 ½ % on turnover Total Due
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, all others are available on demand. (A) (B) (C) Labour allocation sheets Wages sheets Plant allocation sheets * *
(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 . Minutes of Meetings Correspondence Photographs Notices Weather reports . Programmes Labour cost build-up Tender overhead/profit provisions Sundry " * * * (excerpts * (excerpts) * * * (excerpts) * (excerpts) *
Example Two – In Schedule Form A little earlier, I used the phrase "Scott Schedule". A true Scott Schedule (named after an English Judge) has the aim of stating all the allegations, defences, and sums claimed in tabular form. Its benefits are that it prevents confusion arising and when completed, often has the effect of bringing parties together to settle small issues. There is no set form and the heading can be changed to suit the particular circumstances. I would advise that using this form of schedule is a good discipline to follow. It allows for clear presentation of the quantum of your claims, requires you to tie event directly to money claimed, and makes clear the contractual clause or breach which is being relied upon.
In its full form, in litigation or arbitration, the Scott Schedule will have columns for the Defendant and the Judge to fill in. We are not concerned with this today so I will not address a full schedule.
We shall first look at a schedule for presentation of a Contractor's claim for delay and disruption:
Relevant Event 2
Basis of Claim 3
In the first column, it is usual to include a reference number. Here you should set out a full description of the event you are relying upon, eg a change order, late access, additional works, etc.
Here you should explain the basis of the claim. If it is a claim under a contract term for payment you should state the clause, eg, clause 17.1.4.
Here you should provide full details of what happened as a consequence of the event at number 2. You should identify what activities were affected together with what delay was suffered and between which dates. should state whether the delay was critical or not. You
If there has been any disruption, you should set out what has been suffered, identifying the trades and activities affected, the period of duration of the disruption and the dates between which the disruption occurred.
6. Case Study 3.10
Here you should detail the loss attributable to each event.
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, the Employer's design fault. Having prepared a delay analysis for the two month extension, we will now look at the steps required to turn the time period into a claim for additional cost. Step 1 – The Contract
I am working from the premise that FIDIC 5th Edition is the form of contract we are using. The right to apply for an extension of time is contained within clause 8.4. However, we are keeping time separate from money here. We are also ignoring any issues of concurrency.
The contractual clauses we must rely upon in these circumstances are 17.3(g) and 17.4 (Employer's Risks) "17.3(g) design of any part of the Works by the Employer's Personnel or by others for whom the Employer is responsible"; 17.4 If and to the extent that any of the risks listed in Sub-Clause 17.3 above results in loss or damage to the Works, Goods or Contractor's Documents, the Contractor shall promptly give notice to the Engineer and shall rectify this loss or damage to the extent required by the Engineer. If the Contractor suffers delay and/or incurs Cost from rectifying this loss or damage, the Contractor shall give a further notice to the Engineer and shall be entitled subject to Sub-Clause 20.1 [Contractor's Claims] to: (a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and (b) payment of any such Cost, which shall be included in the Contract Price. In the case of sub-paragraphs (f) and (g) of SubClause 17.3 [Employer's Risks], reasonable profit on the Cost shall also be included."
We will need to insert these clauses into the schedule. Step 2
Identify the particular delaying event which has caused the additional cost. For example "RFI 42 and CVI's 207, 236, 338 confirmed Employer design defect which delayed progress to activity 4 for two months". Step 3
You should now explain what the consequence was in time e.g. "4.2 weeks commencing on 8 January 2002 and finishing on 31 January 2002. The delays affected the progress of the partition walling sub-contractor, Wall Co. Inc. and the platform floor sub-contractor, Platfloor Ltd. Activities ID40693 and ID50267E were affected.
Remember to state whether the delay was critical or not.
Step 4 3.17 Set out what the disruptive effect suffered was. In our example it could be "2 month delay required the following trades (x, y and z) to work in a piecemeal fashion, including repeat and aborted visits. There was stacking of trades in months 9 and 10 with activities ID50893 and ID60241 having to be undertaken at the same time". Step 5 3.18 Now include the monetary element of the Claim. In our case, it could be: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) 3.19 "Prolongation Costs (extended site preliminaries) $12,000 per week for 8 weeks = (See Appendix 4 for full breakdown) Disruption costs 450 hours @ $20 per hour = $ 9,000.00 (Sub-contractors x, y and z) (Breakdown allocation sheets at Appendix B) $105,000.00 Head office overheads (see Appendix C) Profit (see Auditor's statement at Appendix D) TOTAL $117,416.25 6.5% 7,166.25 5% = $ 5,250.00 $ 96,000.00
In our case study therefore, our summary schedule might look like this:
Item Numbers A1
Basis of Claim
RFI 42 and CVI's 207, 236, 338 confirmed Employer's design defect which
Clauses 17.3(g), 17.4 and 20.1
2 months (8 weeks) delay commencing on 1/6 31/7. and ending The on
2 month delay required the following trades (x, y & z) to work in a piecemeal fashion, including repeat and aborted visits. There was stacking
Prolongation Disruption Head office o'head Profit
$96,000.00 $9,000 $5,250.00 $7,166.25 $117,416.25
delayed progress to activity 4 for two months.
affected the progress on activities ID400933 and ID 50267. This delay was critical.
trades in months 9 and 10 with activities ID50893 and ID60241 being undertaken at the same time. Details of the repeat and aborted visits are to be found in Appendix 5.
SUMMARY Your aim is to present all the relevant information in a readily accessible and understandable fashion. Remember the reader will be (in all probability) looking at the events of your claim for the first time. Guide him through the events, and explain where the back up can be found. Leave him unable to criticise the methodology adopted and the logical procession from event to money. Missing out steps along the way will simply reduce your chances of recovery.
ALTERNATIVE FORMS OF DISPUTE RESOLUTION Most disputes are settled by negotiation. That is the ordinary way of doing business and the most sensible way of bringing disputes to an end. 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. 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, arbitration. 5.2 Litigation is not popular with many companies which operate on an international basis. 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. Inevitably it is also seen as expensive. 5.3 Arbitration, which has the distinct benefit of being confidential, was initially thought to be cheaper and more flexible than litigation. That is no longer the case. Arbitrators have
to be paid by the parties to a dispute, not by the state.
An ICC Arbitration can be very
expensive. Not only are the Arbitrators themselves expensive but the ICC itself charges a large administration fee. 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. 5.4 Furthermore, because Arbitrations are now generally run by lawyers the process has become very like that before the Courts and can be procedurally drawn out. 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. 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. 5.5 While there are benefits with both arbitration and litigation, which in certain
circumstances make them the most appropriate forms of dispute resolution, as a consequence of the growing realisation that they were disproportionately expensive, in the late 1980's and throughout the1990's there was a growth in what is now known as ADR, which stands for Alternative Dispute Resolution. 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. 5.6 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. That position is not the same in many other jurisdictions, for instance under
English law, which forms the basis of many legal systems throughout the world, the winner recovers costs. 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. 5.7 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. are: • • • 5.8 Expert determination; A decision of a Dispute Adjudication Board; Mediation. 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; med/arb; adjudication and mini trials
Expert Determination 5.9 One of the quickest and most speedy forms of Alternative Dispute Resolution is that of Expert Determination. 5.10 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". 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. This effectively gives the parties the opportunity the take a view before the problem has developed into a full blown dispute. 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. 5.11 Expert determination works like this. The matter in issue between the parties is put to an independent "expert" whose decision on the subject the parties agree to accept. 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. In most cases the agreement in relation to expert determination makes that decision final and unappealable even if the decision is completely wrong. 5.12 This contrasts with litigation and arbitration where, whilst there may exist some procedural hurdles which need to be overcome and there may be stringent restrictions on
rights, there is nevertheless normally some recourse if the decision is completely and absolutely nonsensical. It is therefore very important that the parties have faith in the expert they chose to determine the issue. It is also important to ensure that expert This is one of the processes
determination is applicable only to appropriate disputes. fundamental difficulties. 5.13
In some contracts provision is made from the outset for there to be determination of issues by an expert. 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. 5.14 In a construction project a dispute may arise because of any number of reasons. There could be a claim that the project was delayed because of late design information. There could be a claim based upon bad workmanship or a claim as to the programming or scheduling effects of a variation. An engineer might be an appropriate expert to give a
view on design or workmanship but not on scheduling effects. However even engineers have specialities: for example, a civils engineer could not properly be considered an expert in relation to mechanical and electrical matters. 5.15 For this reason experts are often not identified from the outset in contracts. 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. 5.16 It is much easier to find an expert who can deal with one specific distinct issue, for instance, 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. 5.17 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. If
both parties have a will to resolve the issue then they will need to agree and identify the experts for the particular issue. It does happen and often the parties stay on good terms. If there is not a genuine wish to resolve the issue then it may not work and no agreement will be reached. 5.18 There is no set procedure for expert determination, some professional bodies have procedural rules in place but these are not fixed. Normally what happens, is that once an expert has been agreed between the parties, which as I have stated is not necessarily
straightforward, then each party will submit its written case in relation to the issues between them, to the expert who will after a period of time give his 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. 5.19 Expert determination is rarely appropriate where the dispute is about complex legal issues although in certain circumstances this can be appropriate. 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. It can be very quick and costs considerably less than other forms of dispute resolution. 5.20 I indicated previously that it is usually the case that the expert's determination is considered final and unappealable. There is, however, nothing to stop the parties
agreeing that the expert's decision should be appealable and only an interim solution. One has to question, however, whether such a procedure has any real benefit. 5.21 Not everything about expert determination is good. Experts do get it wrong and often are unable to think outside the confines of their own expertise. They can be oblivious to views other than their own and as such many parties are reluctant to submit to them. 5.22 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, should be referred to expert determination. 5.23 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. 5.24 In the case study, the parties have been arguing over three possible ways of valuing the mark up. • Method 1 was based upon an allowance derived from the tender (which the Employer favours); • Method 2 was based on an allowance based on the actual company figures (which the Contractor favours); and, • Method 3 was based on industry norms (which the Contractor favours). 5.25 Assuming the parties commenced negotiations but were not able to resolve this issue and they determined to have it resolved by expert determination, then their first task would be to agree on an appropriate expert.
Precisely who would be an appropriate expert is not necessarily certain.
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. One could envisage in these circumstances a Quantity Surveyor or Cost Engineer, respected by both parties being appointed as an appropriate expert. Normally one would anticipate the parties agreeing on the nature of the individual to be chosen before actually choosing the individual, however in my experience parties are often unable to agree on the nature of an expert never mind his actual identity. 5.27 The Expert approached needs to be one who is familiar with the process. 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. 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. 5.28 Usually after the parties to a dispute have "agreed" an expert he needs to be approached to see if he can act. He will need to be questioned about any potential conflicts, his availability and the timescale within which he can operate. relevant in determining whether to use him. 5.29 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. 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. 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. 5.30 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. He would also no doubt ask questions and demand information. 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. 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.
In the case study, therefore, 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 12.5%. 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. 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.
In summary so far as Expert determination is concerned: • • • • • • It is quick; It is cheap; It is most appropriate to deal with technical issues where the facts are agreed; There may be difficulties in making it compulsory; It is often difficult to agree an appropriate expert; and Care needs to be taken with defining the scope of the experts jurisdiction.
Dispute Adjudication Boards 5.34 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. 5.35 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, or a Dispute Resolution Board ("DRB") as it is called in the World Bank Form of contract. 5.36 Either of these boards can be asked to give a decision on a matter in dispute. 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. 5.37 In most instances Adjudication Boards' decisions or the like, which may occur in other contracts, are not final decisions but are ones which can be overturned, if found completely unsatisfactory by arbitration or litigation. 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.
In the case study which we have been considering the parties are not able to agree the extension of time sought by the Contractor. The Contractor seeks an extension of time
for a period of two months. 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. 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. In many cases the conditions of
contract specifically determine how and what constitutes a dispute which can then be referred to a DAB. 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. 5.40 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. 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 5.41 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. If there is only one individual then he becomes an adjudicator rather than a board. 5.42 Provision is also made in relation to the remuneration of the Board and methods of resolving disputes as to the identity of the Board. 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 5.44 Boards are not, as I indicated earlier exclusively a FIDIC concept. They have been used worldwide and vary in their nature and make up from contract to contract. 5.45 Boards can have permanent or floating members and the methods by which the constituent members are chosen varies from contract to contract. 5.46 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, the responding party another and those two then pick the third. 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.
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.
The procedure for a Board will also depend on the form of contract used. 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. This is the procedure envisaged by the World Bank Form.
It follows that in many some cases the Board has arranged to meet but have nothing to give a decision on. They are still obliged to meet and be paid. 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!
With regard to the case study I am going to assume that the parties agreed the identity of the DAB, prior to the commencement of the contract, which is often the case.
Based on FIDIC any party to dispute can refer a dispute to the DAB for a decision. The contract provides that a decision of the Board should be reached within 84 days of a dispute being referred to it.
There is however provision for that period of time to be extended if necessary.
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. This is likely to be given if it is reasonable in the circumstances of the particular case. 5.53 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. 5.54 The FIDIC rules made clear that the DAB is not a panel of Arbitrators but must nevertheless come up with a reasoned award. That is to say that the body of the award should give the reasons for the decision being made 5.55 In reality a DAB is very similar in many ways to a panel of Arbitrators despite what the FIDIC conditions state. 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. It is a kind of rough and ready justice. 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.
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.
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.
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.
Alternatively if either party is dissatisfied with an award given then it can also refer it to arbitration provided, and this is an absolute imperative, that it serves it notice of dissatisfaction within 28 days of receiving the DAB decision. 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.
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. One can imagine circumstances
whereby the contractor makes an application for an extension of time for a period of two months. Notices are served strictly in accordance with the contractual position but the engineer fails to grant an extension of time at all. The Contractor then refers the matter in writing to the DAB for its decision. 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. It gives reasons for its
decision but putting it simply, the Contractor is not satisfied and does not think that the DAB properly understood the case. 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. 5.61 5.62 In the case study we are considering one can assume it does exactly that. To summarise DAB: • • • • Offer a quick solution; Can be cheap and will certainly be less expensive than arbitration; May provide only an interim solution; Can provide the wrong result;
• • Mediation 5.63
Are currently in fashion; 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. 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. dispute is still very much alive. The
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. He might therefore wish to consider mediation which is now one of the
most popular forms of Alternative Dispute Resolution. 5.65 Mediation is a consensual non binding process whereby the parties seek to resolve their disputes with the aid of what is effectively a facilitator. 5.66 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, probing and exploring weaknesses and strengths of each parties case to help the parties move towards a consensual settlement. 5.67 Mediators tend to be experts in their field or lawyers. 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. 5.68 Good mediators are well known and sought after. They are not cheap but if their success rate is high then they will be in demand and generally worth paying for. 5.69 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 5.70 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. 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.
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.
Parties are encouraged by a mediator to be open to him - but not the other side - 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.
Despite initial misgivings concerning the process of mediation in the United Kingdom and the US, figures suggest that somewhere between 70 and 85% of disputes referred to mediation are resolved either at the mediation itself or shortly thereafter, before the parties go to a full arbitration hearing. Mediation has, therefore, very good prospects of success.
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. This process allows a mediator to make suggestions and assist the parties in resolving their disputes. It is a process which normally takes two or three days and can, as I have indicated earlier have very good prospects of success.
Usually a mediation commences with the parties all siting in one room together with the mediator and making short opening statements, which the other side are obliged to listen to without interrupting. 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. 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. Alternatively the mediator may bring the process to a an end if he realises settlement is not going to take place in any circumstances.
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. His role is to try and get the matter settled. If that occurs then the mediation is a success. The parties will sign up to an agreement and the dispute is over.
Mediation is not the same as submission. 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
party who may be able to make suggestions and assist in resolution. does not always work. 5.78
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. Often this is very clear but it is something to bear in mind.
I indicated earlier that one of the essentials of mediation is that the mediator gains the trust of both parties. 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. Also if one party is completely inflexible then it may be pointless proceeding further.
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 . It allows the flexibility of commercial solutions which none of the other methods I have considered today do.
In summary mediation: • • • • • • Has a very good chance of success; Must be voluntary; Is not giving in ; Is quick; Is less expensive than traditional forms of resolution; and Is nearly always worth trying
In the case study with which we are concerned let us assume that the parties agree to refer all matters to mediation. 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. That body does so. Unfortunately the
mediator appointed by the professional body fails at the meeting to gain the trust of the contractor, despite his best efforts. 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. 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.
INCLUDING THE MEANING OF LEGAL "PROOF" INTRODUCTION 6.1 This part of today's lecture explains practice and procedure of resolving claims by formal international arbitration. In our case study matters have taken a turn for the worse. The parties decided to mediate the dispute but were unable to reach a successful resolution. The only avenue open to the Contractor now is to commence an international arbitration. However, our Contractor has never been involved in such an arbitration. Therefore, this next section looks at aspects of arbitration and how the process operates. 6.2 This presentation has three main sections. The first is the nature of arbitration, which will include the advantages and disadvantages of the process. The second is a detailed look at relevant arbitration rules, largely based on the International Commercial Arbitration Rules of 1998. The third covers the very important question of proof and evidence in relation to international arbitrations. THE NATURE OF ARBITRATION 6.3 In analysing the nature of arbitration there are two major questions for us to consider. The first is "what is arbitration?". The second is "what is the effect of arbitration?". What is arbitration? 6.4 Arbitration is a private and building dispute resolution process. It arises out of a
contractual agreement between the parties to resolve any disputes between them by arbitration. The parties agree in their contract that they will abide by the decision of an independent Arbitrator or Arbitrators (the "Tribunal"). The parties may also agree in their contract the specific procedural rules which will apply to the conduct of that arbitration. What is the effect of arbitration? 6.5 The Awards issued by the Tribunal are binding upon the parties. They have the same effect as a Court Judgement. They can be enforced internationally under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. 6.6 Having summarised the nature of arbitration, it is worthwhile looking at its advantages and disadvantages.
Advantages of International Arbitration
The process is private and confidential.
Only the contracting parties that have
agreed to the process are involved. No one outside that arrangement is aware of the dispute, the arbitration process, any evidence or documents arising from the process or the Award.
The procedure is flexible, and can therefore be tailored to suit any dispute that arises, large or small, simple or complex.
The Tribunal consists of a specialised Arbitrator or Arbitrators. The parties are able to select the Arbitrator or Arbitrators they wish to deal with their dispute, and can instruct specialists in particular fields relevant to the particular dispute, for example, electrical engineers, structural engineers, geo-technical engineers, architects.
The flexibility give speed. In general terms, international arbitrations are brought to a conclusion much earlier than they would have been in the Courts.
The flexibility gives reduced cost. Largely because of the speedier and more flexible procedures, international arbitration is in general terms cheaper than the equivalent proceedings in Court.
Disadvantages of International Arbitration
There can be brought into the proceedings no third parties. Because arbitration is borne out of a contractual relationship, no unwilling third party who is not a party to the contract can be brought into those proceedings. That can mean a series of many arbitrations, rather than all the disputes and all the parties being consolidated into one set of proceedings as can happen in the Courts.
There can be restricted availability of Arbitrators. Arbitrators are very busy, all the time. This means that it is often difficult to obtain appointments with Arbitrators to push the proceedings along. This causes more delay than is often expected to the arbitration process.
INTERNATIONAL ARBITRATION PROCEDURE AND PRACTICE Rules 6.7 The parties are able to agree the arbitration rules which will apply to their arbitration. The most commonly used rules are UNCITRAL, the rules of the London Chamber of
International Arbitration and the rules of the International Chamber of Commerce ("ICC"). As the FIDIC rainbow forms refer to the ICC rules, I will explain those in some detail. The other rules to which I have referred follow, in general, similar stages other than those relating to the Terms of Reference. The ICC Rules to which I refer are those in force as from 1 January 1998. ICC Rules of Arbitration 1998 (the "ICC Rules") Introduction 6.8 These Rules are specifically designed for international arbitrations. The ICC provides assistance for the resolution of disputes using its Rules. It does so via the International Court of Arbitration (the "ICC Court") which is attached to the ICC. It is the ICC Court's function to ensure the ICC Rules are applied. The ICC Court does so by operating through its Secretariat. 6.9 The published ICC Rules deal with such matters as commencing the arbitration, the constitution of the Tribunal, how the proceedings should be conducted, the nature of the Award and costs. Below is a summary of the ICC Rules following those general topics. The Request 6.10 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. The Secretariat notifies the Claimant and Respondent that it has received the Request, and the date of receipt is the date of commencement of the arbitration proceedings. 6.11 The Request must contain the following information:
• • • • •
the name, description and address of the parties; a description of the nature and circumstances of the disputes; a summary of the relief sought and the amounts claimed; the arbitration agreement; the Claimants' submissions relating to the number of Arbitrators, specifically identifying their choice of Arbitrator by name the applicable, the appropriate rules of law and the applicable language of the arbitration.
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. Answer to the Request and Counterclaims
Within 30 days of receiving the Request from the Secretariat, the Respondent must file an Answer to that Request (the "Answer").
That must contain the Respondent's name, description and address; • • • Its comments on the nature and circumstances of the dispute; Its response to the relief sought by the Claimant; Any comments it has on the Claimant's suggestions as to the number of Arbitrators, specifically identifying the Respondent's choice of Arbitrator by name, the appropriate rules of law and the appropriate language of the arbitration.
Provided that the latter point is covered, 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.
If the Respondent has any Counterclaims, it must file those with its Answer providing:
A description of the nature and circumstances of the dispute; A statement of the relief sought including amounts claimed.
The Secretariat then sends to the Claimant a copy of the Answer, any Counterclaims and all documents attached. Reply to any Counterclaims
Within 30 days of receiving any Counterclaims, the Claimant must send to the Secretariat a Reply. This time period can be extended by the Secretariat, if the Claimant applies for such an extension. There is no detail in the ICC Rules as to what the Reply should contain, but good practice is to include:
The Claimant's comments on the nature and circumstances of the Counterclaims; The Claimant's responses to the relief sought in relation to the Counterclaims.
To summarise the process up to this stage, each party has now set out its case in writing in some detail, and has commented on the allegations made against it. However, all this information and these documents are held by the Secretariat. Arbitrators have not yet been appointed, and therefore they have not been involved in the process at all at this stage. Indeed it is only in these documents that the parties have first identified their suggested Arbitrators. Number of Arbitrators in the Tribunal
The parties are free to agree either a sole Arbitrator or three Arbitrators. Whether it is one or three, the Arbitrator or Arbitrators are known as the Tribunal.
Where the parties agree that it should be one Arbitrator, they are also free to agree who that person should be. If they cannot agree, the ICC Court will make the decision. If the parties agree three Arbitrators, then they must nominate one Arbitrator each. The ICC Court will then nominate the third Arbitrator, who will act as Chairman of the Tribunal.
Where the parties cannot agree whether there should be one or three Arbitrators, 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. Choosing the Arbitrators: factors the ICC should take into account
In order for arbitration to be successful as a process, it is vitally important that the Arbitrators are of a very high standard, are appropriately selected and are independent, and seen to be independent by the parties. In order to ensure this, there are several factors that the ICC Court should take into account when selecting the Arbitrators. I list some of them below:
• • • •
the Arbitrators' nationality; the Arbitrators' residence; the Arbitrators' availability; the Arbitrators' ability to conduct the arbitration under the ICC Rules.
Challenge of Arbitrators 6.24 If one party is not happy with the selection of an Arbitrator, it must quickly make an application to the Secretariat in writing stating the grounds for its challenge. The ICC Court will consider those submissions, and representations from any other interested
party, including the Arbitrator himself, and then make a decision as to confirming or overturning the appointment of the Arbitrator. Replacement of Arbitrators 6.25 This happens when an Arbitrator is replaced because of a challenge, he resigns or he dies. 6.26 To summarise at this stage, the Tribunal is now formed, and can begin to become involved in the actual dispute itself. This position has often not been reached until two or three months after the Claimant initially filed its Request with the Secretariat. At this stage the Secretariat will transfer the file of papers, containing the Request, Answer and any Reply, to the Tribunal. However, 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. It is important to remember that the process of administration of justice by arbitration is a business like any other. Place of the Arbitration 6.27 The parties are free to agree this. If they cannot, the ICC Court will decide. The place of any hearings in the proceedings can be agreed by the parties. If they cannot agree, the Tribunal will decide. The importance of this provision is often lost. It is the law of the place of the arbitration which governs the procedural law applicable to the arbitration process. The parties should be very careful to include a clause in their contract which makes it clear as to the place of the arbitration. In most circumstances it is
advantageous to have the same choice of procedural law as of substantive law applicable to the contract. In most nations the procedural law and the substantive law are designed to work together to achieve justice. It would be an unfortunate situation where the procedural law of one country applied to the substantive law of another. This would increase the risk of delay and confusion in the arbitration process. Language of the Arbitration 6.28 The parties are free to agree this. If they cannot, the Tribunal decides, taking account of the language of the contract. Applicable Substantive Rules of Law 6.29 The parties are free to agree which rules of law the Tribunal should use when deciding the justice of the case. If the parties cannot agree, the Tribunal will decide, taking into account the provisions of the contract and trade practice.
Please see my comments above in relation to the place of the arbitration. Terms of Reference
Once the Tribunal has received the file of papers from the Secretariat, it must draw up the Terms of Reference which sets out clearly all the disputes between the parties. It must include:
• • • • • •
Names and descriptions of the parties; Addresses for service of documents; A summary of the Claimant's claims, relief sought and amounts claimed; A summary of the Respondent's Counterclaims, relief sought and amounts claimed; Details of the Arbitrators; The place of the arbitration.
The Tribunal must forward to the ICC Court those Terms of Reference signed by the parties within two months. If one of the parties will not sign, the Terms of Reference can be approved by the ICC Court, which constitutes deemed signature. The two month time limit can be extended by the ICC Court, particularly if one party has refused to sign.
It is important to note that once the Terms of Reference have been drawn up, 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. It is only given in unusual circumstances. Establishing the facts
The Tribunal is required by the ICC Rules to establish the facts as soon as possible. It must decide whether or not to hear witnesses and whether to receive statements from them. It must also decide whether or not to hear experts and have reports submitted by them. The Tribunal may decide to appoint its own experts. It may decide to require each of the parties to exchange relevant documents between themselves. It may decide to make a decision based on an oral hearing, or simply proceed on a "documents only" basis. Procedural Timetable
The Tribunal will require the parties to set out their cases in more detail than included in the Request, the Answer and the Reply. The Claimant will be required to set out its case in a Memorial. The Respondent will be required to set out its Response and
Counterclaims in a Counter-Memorial. The Claimant will then be required to serve a Response to the Counter-Memorial. 6.36 As soon as the Terms of Reference have been drawn up, the Tribunal sets out its provisional timetable for the conduct of the proceedings. It will discuss this matter with the parties, and will set out any directions in relation to disclosure of documents, exchange of witness statements and the hearing date. 6.37 A typical set of directions is set out below:
• • • •
The Claimant to serve its Memorial; The Respondent to serve its Counter-Memorial; The Claimant to serve its Response to the Counter-Memorial; The parties will exchange lists of the categories of all documents upon which they intend to rely, and which relate to the claims set out in the Terms of Reference;
The parties will exchange witness statements, and be limited to calling as oral witnesses those whose statements have been disclosed;
The parties will exchange experts reports, and be limited to calling at the oral hearing those experts whose reports have been disclosed;
A hearing lasting four weeks will be commenced on X date.
The appropriate dates are inserted by the Tribunal. 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. In extreme
circumstances, failure to comply with a procedural timetable may cause damage to the merits of a party's case. 6.39 Please note that the following section in relation to Proof and Evidence will cover these matters in more detail. Hearings
The Tribunal can decide how many hearings it requires, but in most circumstances it is only necessary to have one major hearing at the end of the proceedings. 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.
If there are emergencies which arise during the course of the proceedings, such as in relation to the preservation of physical evidence, or non compliance by a party with a direction, the Tribunal is able to conceive short hearings. The Award
Once the trial hearing has ended, the Tribunal must begin preparing its Award. The Award must be finalised and sent to the ICC Court within six months from the date the Terms of Reference was signed. The ICC Court can extend the six month period if the Tribunal makes an appropriate application to the ICC Court.
Where there are three Arbitrators, the Award is given by a majority decision. The Award must state the reasons that the Tribunal has reached its decision.
If the parties reach a settlement, then the Tribunal is able to issue an agreed Award made by the consent of the parties.
However, before signing the Award, the Tribunal has to submit it to the ICC Court in draft form for the ICC Court's approval. The ICC Court will review the Award both in terms of form and substance. No Award shall be issued or is effective until it has achieved the ICC Court's approval.
The Award is binding on the parties and is fully enforceable. One important point to note is that there is no appeal from an ICC arbitration to any other body, be it an Arbitral body or the Courts of any nation. An ICC Award is final. Costs
In relation to the ICC and the Arbitrators' costs, there is a sliding scale for charges based on the size of the Claim and Counterclaims. The parties will have had to have paid fees on account prior to the file being transferred to the Tribunal earlier in the proceedings. As part of the Award, the Tribunal will decide which of the parties should bear the total of these costs.
By way of example, a dispute where the Claims and Counterclaims are worth $5,000,000, the administration fee would be $10,000, and the Arbitrator's costs would be a minimum of $12,500 and a maximum of $50,000. Where the Claims and
Counterclaims total $100,000,000, the administration fee would be $75,800 and the Arbitrator's costs would be a minimum of $20,000 and a maximum of $100,000. 6.49 It is worth noting that under the ICC Rules, 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. That is a matter of the procedural law governed by the place of the arbitration.
PROOF AND EVIDENCE Proof
In summary, the burden of proof lies with each party to establish its own case. The Claimant must prove its Claims. The Respondent must prove its Counterclaims.
In order to do so, the parties must convince the Tribunal that what it is saying is correct. The test to be passed, is that the Tribunal must believe the case on the balance of probabilities. 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. Even if the Tribunal does have some doubt, provided that it is convinced on a "51/49%" test that the claim made is correct, then that is sufficient for the claim to succeed.
However, this should not be seen as an easy test.
It must be remembered that in
attempting to achieving the 51% necessary, each party will start at 0%. Indeed, it may start at a negative figure because the other party will be trying to disprove precisely what the party is trying to prove. 7.4 In order to be successful, each party must martial its evidence very carefully and thoroughly. This involves three sources of evidence:
• • •
Documentary evidence; Witnesses of fact; Expert opinion.
In relation to the practice in international arbitration, I will cover each of those matters in the following sections. Evidence Documentary Evidence
It is vitally important that as much as possible of a party's case can be proved by documentary evidence. This has already been explained by Jonathan. The taking and keeping of records is one of the major keys to success of any case. 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.
In most international arbitrations, one of the directions that will be given by the Tribunal is that the parties must disclose all documents upon which they rely. It is also possible that the Tribunal will allow each party to request specific categories of documents from each other, provided that such requests are reasonable and that the documents requested are strictly relevant to the matters in dispute.
Preparing such a request, and responding to the other side's request, is an extremely time consuming task for both the advisors and the clients themselves. Following that, 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.
This is one of the most time consuming aspects of any arbitration, but is a key to success. Witnesses of Fact
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. 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. These witness statements must deal with the following matters:
• • •
Identifying the person making the statement; Identifying the issues in dispute to which that person can personally speak; Giving a view on what the witness personal recollects about those matters, including referring to any relevant documents.
These witness statements form the basis of the witnesses' evidence in the final arbitration hearing. 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.
Witness statements can be extremely lengthy. They can run to hundreds of pages, and are more often than not over 50 pages long.
The process of taking and serving witness statements is time consuming but vital. A good deal of time is spent in preparing the witness statements in the first place. When the witness statements are exchanged, 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 cross-examination process in the hearing itself is unpleasant. 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. However, if untruths are being told, then it is important that they are exposed so that the truth can be established. Expert Opinion
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.
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. The parties are responsible for instructing, appointing and paying the experts. However, the expert must act as an independent professional, giving an independent and professional opinion. It is only in that way that the Tribunal will be convinced by his views. If the expert is seen to be partisan, he will have no credibility with the Tribunal.
The expert reports are usually produced towards the end of the procedure, just before the final arbitration hearing. An expert report must cover the following:
• • •
Identify the expert and his expertise; Give his experience; Indicate what he has been instructed to cover, and what documents and witness statements he has seen;
Set out what his opinion is on the relevant matters in dispute, including an explanation of how those opinions have been formed and reached.
Preparing experts reports is a less time consuming exercise for the parties than for the experts. It does involve some legal input, and it is clearly all consuming from the experts point of view. Once the report has been prepared, the Tribunal will order that the reports are exchanged. A good deal of time is then involved in each party analysing what the
other's experts have said. 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. 7.18 When the experts are in the final arbitration hearing, they are subject to the same crossexamination regime as are the witnesses of fact. 7.19 To repeat earlier points, it is very important that the experts have good records to work from when forming their views. As they are independent, and cannot give factual
evidence, they give much more credence themselves to documentary evidence. CONCLUSION 7.20 Where negotiations have failed, international arbitrations are in general the best way of resolving international construction and engineering disputes. The benefits of flexibility and confidentiality are great advantages. However, that is not to say that international arbitrations can be approached lightly. provide the best chances of success. Thorough preparation is required in order to
'Contractual Structure of PFI Transactions'
Contractual Structure of PFI Transactions Hammond Suddards Edge Introduction 1. This short paper is intended to give an overview of the contractual structures of PFI transactions. In a paper of this nature it is clearly impossible to go into the many and varied issues which PFI raises. Nevertheless, 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. 2. It is first of all necessary to understand what is PFI and why has it developed. Equally, participants need to understand how it can be distinguished from traditional property development. This paper also includes a short précis of the tender process, the general understanding of which again helps to understand the commercial drivers in the contractual negotiations. 3. Having discussed the background issues, 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. Five basic principles are then identified, an understanding of which leads to greater comprehension of the specific terms and conditions in the principal contract. The paper then deals with six features of the project agreement as follows: • • Duration of the contract Payment and deductions, 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. Problems will arise and they need to be dealt with quickly and effectively. developments in this regard. PFI transactions are no different to ordinary
Finally, 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.
What is PFI? 5. Firstly some basic terminology. PFI stands for the "Private Finance Initiative".
Synonymous with this is the term "PPP", which is an abbreviation for "Public Private Partnership". For the purpose of this paper, PPP and PFI can be regarded as "one and the same". Essentially, PFI is the supply of an asset for the provision of services to the public sector. It is about services not construction. Typically it is about providing
services which were historically, or at least in the last 50 years, provided by the public sector. Examples of PFI projects include schools, hospitals, prisons, office
accommodation, roads, lightrail etc. Outside the construction sector, 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. Right at the outset, it should be made clear that PFI is not about "mega projects". Whilst there may be debate about the size of projects for which PFI is properly viable, schemes have ranged from around £2m capital costs upwards. 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. 6. 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, referred to as the "Unitary Payment". It is referred to as a Unitary Payment because it is a payment for the total costs of the services. There is not a separate payment for the construction of the capital asset, a point which will be referred to later in this talk. 7. The PFI was launched by the UK government in 1992. Although there were some
successful bridge schemes and, of course, the channel tunnel link is essentially a PFI project, there were numerous and well publicised early difficulties. Essentially PFI was not kick started until it was adopted by the in-coming Labour Party following the UK May 1997 election. 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. In many cases it is not a substitute for a traditionally procured and financed project. Why PFI? 8. 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. PFI allows
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. The essential feature is that because the services are being provided as opposed to the procurement of an asset, the transaction can be treated off balance sheets. Indeed, 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. As will be seen later, this impacts on a number of the contractual terms. 9. There is no doubt that PFI is here to stay, despite some criticism which is voiced. Undoubtedly there are problems which need to be addressed, not least the time and costs of the bidding process. Nevertheless, 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". PFI vs. Development : Comparison 10. Even from the brief outline already given, it should be clear that PFI in providing for the provision of services and not an asset which is financed by the private sector, is fundamentally different in this respect from traditional development. However, the edges can be blurred as frequently PFI schemes will provide for the disposal of surplus land by the public sector. 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, in an extreme case, the Unitary Payment could be nil. Such a scheme would not be dissimilar to lands for property development projects. Similarly, 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, for example, income from tenants or the use of facilities. Again similar principals have been applied to traditional property development schemes. Schemes involving significant disposal of surplus land or third party income are often referred to PPP schemes as opposed to PFI schemes. Tender Process : Overview 11. As explained previously, it is important to understand the tender process because it inevitably impacts upon the negotiation of the contractual terms. As PFI projects are led by the public sector they are caught by the EU Public Procurement Rules as incorporated into English Law. As the threshold for the provision of Works to the public sector is just over £4m at present, it will be evident that practically all PFI contracts will be caught by the EU Procurement Rules. Indeed, the threshold of £104,435.00 in respect of the
provision of services arguably applies to PFI as opposed to the threshold in respect of
works, 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. 12. There are three procedures in the Rules. The open procedure, the restricted procedure and the negotiated procedure. The open procedure is not applicable, as it relates to single stage tender where anyone can bid. 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. As I am sure many of you will be aware, that is the procedure which is almost inevitably used in PFI transactions. However, 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. 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. That said, I believe most if not all PFI contracts closed to date have utilised the negotiated procedure. 13. Basic procedure requires the placing of a PIN notice as soon as the public sector becomes aware of the project. This is merely advanced notice of the formal OJEC advertisement. When the formal OJEC advertisement is placed, 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. 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. Thereafter the public sector receives responses to the information memorandum and prequalification questionnaire and draws up a short list. Under the restricted procedure the minimum number of bidders is 5 and the maximum 20. In the negotiated procedure the minimum number of bidders is generally 3. Frequently in PFI schemes 4 bidders are short listed following receipt of the pre-qualification documents. After short listing, the public sector issues the Invitation to Negotiate (ITN). The ITN will contain details of the projects and, in particular, the draft project agreement and the output specification. 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"). However, 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). Finally, the preferred bidder is appointed whether or not a BAFO is utilised. Negotiations continue with the preferred bidder often for a considerable period of time, typically three to six months and in some cases longer until the contract is signed,
often referred to as "financial close". It is on this that the bank will permit draw down from the funds subject to satisfying any conditions precedent in the contract. 14. It is readily apparent that the tender process is complicated and even on the simplest scheme, can last 12 months. Some of the more complex projects have lasted 3 or 4 years. The cost can be significant and from a bidder's perspective, the challenge is to postpone as much of the bid cost as possible to the preferred bidder stage, as experience has shown that most projects which proceed to the preferred bidder stage will reach financial close. 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. However, from the Authority's perspective, they will wish to ensure that the
responses at ITN stage are as complete as possible. However, that can be very difficult in practice, because until details of each bidders scheme is known, there are many details which impact upon the negotiations which cannot be resolved. Often the public sector will try to ensure that each of the bidders provide a complete mark-up of the project agreement, but inevitably many of the issues cannot be tackled until the details of the specific scheme are known and developed further. 15. 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. 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
S o ft F M
Subsidiary Contract Documents 16. In addition to the principal contract documents referred to in the Contractual Structure, there are a multitude of other documents which are associated with any PFI scheme. On
a recent scheme which we were involved with, there were somewhere in the region of 90 documents which were executed or initialled at financial close. The principal subsidiary contract document will be as follows: • • Direct Agreement between the Authority and the Fund Sub-contract Warranties to the Fund, 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. A Parent Company Guarantee should not be given to the Authority as this cuts across the PFI principle in the project agreement. Similarly one would expect the Building Contractor to give a Performance Bond to the Contractor with the benefit assignable to the Fund. 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). 17. A key document in a PFI transaction is the Co-operation Agreement between the Building Contractor and the Operations Contractor. In the event of a dispute during the services phase, as will be explained later, the Authority will be entitled to make deductions from the Unitary Payment. The cause of the problem could either be failure by the Operations Contractor to provide the services properly or some defect in the building. As the
Contractor is a "shell company" with no assets, the bank will not allow it to take any significant cashflow risk. In particular, 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. Essentially any deductions made by the Authority are immediately passed on to the Operations Contractor, 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. 18. Finally, there would be a multitude of equity documents in relation to the setting up of the Contractor and investments (if any) by third parties, together with documents reflecting the tax structure designed to reduced the Contractor's tax liability. It should be pointed out that this is not a method of making a "super profit" without the Authority's knowledge. The negotiations with the Authority will be entirely open book including the rates of return which the Contractor seeks to make. 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
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. Basic Contractual Principles 19. As briefly explained, 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. The principles are as follows: Risk Transfer 20. As explained previously, the Authority should not be procuring capital asset our incurring liability which would be on the balance sheet. Accordingly, the provisions should reflect the fact that the Authority is procuring a service and that there is reduced liability on the public sector. Value for Money/Affordability 21. Arguably this is the flip side of risk transfer. The Authority must demonstrate value for money and that the scheme is affordable. Accordingly, risk should not be transferred to the Contractor if that does not represent value for money or would make the scheme unaffordable. Indeed, in terms of affordability the scheme will not proceed unless it offers better value than the Public Sector Comparitor ("PSC"), 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. Provision of Services 22. Once again, the contract is about the provision of services. It is not a construction contract. Accordingly, many of the provisions typically found in building contracts will not be found in the Project Agreement. There ought to be no need for the Authority to monitor, supervise or check the Contractor in the same way that it would under a traditional contract. Essentially, the Authority pays only for services properly provided. Bank Security 23. PFI is a form of "limited recourse lending". The bank does not, as in traditional
development, have a charge over the project. Its security is the income stream from the public sector. Accordingly, 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, in particular, if there are substantial problems, that the contract will be terminated and that it can recover its investment following a termination. This is a point which will be discussed later.
Residual Value 24. 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. Nevertheless, most public sector facilities can only be used by the public sector. It is impossible, for example, for the private sector to use a prison or a school for some other purpose. Accordingly, where there is no alternative use, on expiry of the PFI contract, the assets will generally revert to the public sector. That need not be the case and this will depend upon the particular circumstances of the project. Accordingly, although the public sector will not generally own the asset during the lifetime of the project (otherwise it would be "on balance sheet"), it will generally revert to the public sector on expiry or termination. In some
circumstances, 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. Again, 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. However, a terminal payment can help to
ensure that the Contractor properly maintains the assets during the lifetime of the contract. Where the asset is transferred at nil value to the public sector on expiry or termination, there are generally provisions to ensure that it has been properly maintained, and not allowed to run down. However, 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. 25. I would now like to turn to 6 specific areas of the Project Agreement: • • • • • • duration of the contract; payment and deductions; compensation and relief events; change in law; termination; dispute resolution procedure.
Duration of Contract
As explained previously the contract commences upon financial close. 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. Until the pre-conditions are satisfied, the contract is of no effect. Once the pre-conditions are satisfied, the contract is then effective as from the Effective Date.
A typical simple PFI will involve a construction phase, where the new asset is constructed, and a service is phased during which the services are provided. However, on some projects, the services are provided to existing assets immediately following financial close or the Effective Date. Furthermore, 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. 28. The Contract will proceed until the end of the service period, generally referred to as the Expiry Date. The only exception to this is in the event of termination prior to expiry. The service period is generally somewhere in the range of 15-35 years, with 20-25 years being common place. Generally speaking, the contract term is dictated by the service period, so that any delay or prolongation of the construction period would result in an overall increased period. That is not always the case, 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). dictated by a number of factors, typically: • • • • • • the Authority's requirements; alternative use or residual value considerations; affordability reflected by the economic life of the assets; life cycle replacement issues; debt repayment period; and whether or not it might be feasible to extend the contract term with the existing PFI contractor. Payment: the Heart of PFI 29. As should be becoming very familiar, PFI is about the provision of service for which the Contractor receives the Unitary Charge. The Unitary Charge is intended to cover The service period will be
repayment of the debt (which will principally fund the construction costs), the operation costs, life cycle replacement costs and the equity return. As explained previously, as part of the "off balance sheet" treatment, 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, for example, an identifiable charge in respect of the construction of the asset. 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. 30. One of the key issues in considering payment is the question of demand risk. Does the Contractor take the risk, for example, that over the 25 year period, there will always be 600 patients, student prisoners etc. Clearly, this is a commercial issue of paramount importance. Sometimes the demand risk is shared and on some schemes the risk is borne entirely by the Authority. This will vary from scheme to scheme. Nevertheless, 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). 31. The Unitary Charge is generally paid by monthly or quarterly instalments subject to deductions. The monthly payment is thus the Unitary Charge for that month less the availability deduction and the performance deduction. The paper will explain later the basis of these two deductions. 32. Because the project is being provided over a substantial period, provision needs to be included for indexation. However, the element of the Unitary Charge in respect of the debt should not be subject to indexation as, of course, 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). Furthermore, in order to ensure that the
Unitary Charge is reflecting current practice, there are provisions in the Project Agreement requiring bench marking and market testing, often at 5 year intervals, which can result in adjustments to the Unitary Charge. Furthermore, 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). 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. Availability Deductions
As referred to previously, there are generally availability deductions and performance deductions from the Unitary Charge. The availability deduction is intended to reflect the part of an asset which is not capable of providing the service. For example, if a room is not usable because it is not weather tight, or it is too cold because the heating has failed, it is considered to be unavailable. Under the payment mechanism, the value of the Unitary Charge is apportioned to each area and the deduction generally reflects the apportioned value of the Unitary Charge. However, to ensure that such areas are
repaired quickly (as the value of a one off deduction may be very small), there are mechanisms to escalate the deduction depending upon the length of time or the number of areas which are unavailable. Furthermore, the deduction is generally reduced if the Contractor can provide alternative accommodation or if the Authority is able to use the relevant unavailable area. Finally, 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. Performance Deduction 34. In addition to availability deductions, the payment mechanism will generally provide for performance deductions. These are deductions which are dependent on the quality of the service delivery as opposed to the availability of the assets. They tend to be more subjective criteria. The quality of the services would generally be monitored by the
Contractor itself (subject to quality assurance and random checks by the Authority). There will generally be some form of scoring system against which financial deductions are linked. As with availability, there will generally be provisions for escalation of the performance deductions at a limitation on liability. Certainly, the Contractor should not be exposed to both availability deductions and performance deductions in respect of the same event. Deductions: General Issues 35. It will be readily apparent that the cause of an unavailability or service failure could be outside the Contractor's control and, indeed, could be caused by the Authority's own failure. Accordingly, 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, 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. In the event that there are substantial amounts of availability deductions or performance deductions, the contract would generally provide for termination. This is important to the
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, in the final analysis, 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). 37. 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. Clearly, it would be inequitable and "double recovery" if the Authority could make deductions and at the same time, for example, pursue the Contractor for breach of contract in respect of a defective building. Accordingly, 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, that is its sole remedy in respect of a particular event or circumstance. 38. As briefly discussed above, 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. Its due diligence advisors will therefore need to look very
closely at the availability and performance deductions and how these link with termination. Compensation Events 39. Apart from payment of the Unitary Charge for the performance of the services, there are extremely limited grounds for further payment under the Project Agreement. Essentially, these further payment provisions are in respect of Changes (the PFI equivalent of "variations") and compensation events. 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, therefore, entitles the Contractor to compensation. The list of compensation events is extremely narrow. TTF
recommends only Authority breach, capital Qualifying Change in Law and Authority Change. Bearing in mind the obligations of the Authority are extremely limited, 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). 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). Authority change will also be dealt with later and in effect represents changes instructed by the Authority. Given the nature of PFI projects, and the lack of involvement by the Authority in the design and construction of the assets, the likely Authority Changes is much less than would be the case on a traditional development project. However the Contractor will be entitled to compensation reflecting
the increased costs whether or not the compensation event results in delay to the construction works. The principle is that the Contractor is "kept hold". 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. Depending on the particular circumstances, the compensation could be payable either by a lump sum or by an increase in the Unitary Charge. 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. Similarly, 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). 40. In the event that a compensation event is delaying the Contractor then there will be an adjustment to the service works commencement date and, generally, to the long stop date. Generally speaking under PFI contracts, there should be no liquidated damages. This is because the Authority is paying for the provision of services and if commencement of those services are delayed, then the Authority simply does not pay until such time as they are provided. However, in some circumstances, the Authority may suffer a loss (by way of, for example, 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. However, they should not be accepted as a right. 41. As emphasised previously, compensation events do not apply in respect of the provision of the services. This is because if such an event occurs during the service period, it should be an excusing event thus entitling the Contractor to full payment of the Unitary Charge without deductions. Relief Events 42. 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. These are typically events such as fire, strikes, interference by statutory
undertakers and difficulties in access to the site (other than default by the Authority). The general principle is that the Contractor should take the cost risk associated with such events but they shouldn't lead to termination. Thus relief events are relief from
termination. No compensation is payable in respect of relief events. 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).
Unlike compensation events, relief events apply both during the development period and the services period. 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. Depending on the circumstances of the project, some relief events may well be excusable events. There is also a close tyre between relief events and insurance. As part of the required insurances, the Contractor will be required to procure Advanced Loss of Profit (ALOP) and Business Interruption (BI). Many relief events will be circumstances or occurrences in respect of which the Contractor has insurance cover. Thus if there is a delay to the project in respect of a fire, the loss of income is protected by, for example, the Business Interruption insurance. However, 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. Thus, in most projects, there will remain a financial risk in respect of the occurrence of relief events but these should not lead to termination. Change
As mentioned previously, change is the PFI equivalent of variations. Also, as mentioned previously, given the nature of the projects and the limited involvement of the Authority, there should not be a significant number of changes, unlike in many traditional development projects. There are different provisions dealing with Authority Changes and Contractor Changes. Both can be changes to the Works and/or the services. With Authority Changes, there is often a negotiation on restrictions to the type of Changes which the Authority can propose. For example such a change may impact upon service provision or reduce the planned equity returns. 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. It is not intended that the parties get into the situation common in building contracts, where in the final account stages there are lengthy negotiations about alleged variations issued during the course of the project.
With Contractor Changes, the procedure is very similar, except there is a mechanism for sharing any savings in the Unitary Charge which result from the Contractor Change. This is obviously an incentive to ensure that the Contractor is proactive in looking for savings during the lifetime of the project. There is no obligation, however, on the Authority to accept any contractor change. Change in Law
You have seen that the contract term for a typical PFI contract is typically in the region of 20-25 years. Clearly, during this period, legislation could change substantially and have
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
gift or fraud, is committed by a subcontractor or employee of the subcontractor. Generally, one would expect the contractor to be given the opportunity to replace the relevant subcontractor or employee. concerned with. Force Majeure 58. Unlike many contracts, the definition of Force Majeure in PFI is extremely narrow. Essentially it covers the so called "accepted risk" (i.e. those risks which it is traditionally impossible to obtain insurance cover for). This is war, terrorism, nuclear risk and sonic bangs. Furthermore, such events must have prevented performance of Services for a period likely to be in excess of 6 months. Compensation on Termination: General Principals 59. The first important factor is, as previously explained, on termination the Authority will take the asset. Accordingly, 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. Clearly this would represent a substantial windfall to the Authority. Accordingly, the provisions on compensation on termination are intended to avoid such a windfall. Another important principal is that, so far as possible, any compensation Again, 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, to the Contractor to maintain the asset in a good condition. 60. It is important to understand that compensation on termination is not intended to be a penalty. Again, it should be recalled that PFI is about payment for services delivered. If the contract is terminated, the Authority no longer pays those services. There should not be an additional penal element. Compensation on Termination 61. 62. The amount of compensation will depend upon the type of default leading to termination. The summary provisions are as follows: Authority Default 63. There is full pay out of senior debt. In other words all outstanding amounts due under the loan agreement will be replaced, including the cost breaking any hedging agreement. Furthermore, the Contractor will be entitled to full equity return. It can be debated as to the precise method of calculation but the general principal is that the Contractor should at
least receive the planned equity return in respect of the period following the date of termination to the expiry date. Finally, the Contractor should also receive the cost of breaking the various subcontracts and any redundancy costs it incurs. Contractor Default 64. This is perhaps the most important area, as it is the most likely cause of termination. Following much discussions between the public and private sectors and with the bank, the principle of "market value" has been generally accepted. In effect, 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. That capital sum is then paid subject to the sum deductions column to the Contractor. Generally speaking, and assuming there is genuine competitive market, the value of the capital sum should be sufficient to extinguish at least most of the senior debt, depending upon the stage the project was at as at the date of termination. It is generally accepted this provides a reasonably equitable solution to a difficult problem. 65. 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. In respect of surplus sites, the capital sum which the Contract will have realised by a sub-sale to a developer will in effect reduce the unitary payment which, on a termination, will result in a result in a reduced capital sum from a bidder. However, 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. 66. A detailed procedure has developed for the re-tendering process. For the reasons
already outlined, this will be of particular concern to the banks. 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. 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. In certain situations and on certain projects, it is doubtful whether there will be a genuine liquid market, and for that reason PFI contracts also have a dispute procedure, referred to as the "no retender procedure" in the situation where there is no liquid market. This effectively requires independent third parties to try and estimate a fair value for the remaining portion of the PFI contract. The upshot of all this is that the capital sum generated should repay most of the debt, but this is not guaranteed. Clearly, the risk profile will change during the lifetime of the project and from the bank's perspective, is at its highest around completion of construction before the income stream has commenced and the first debt repayments made.
Voluntary 67. On a voluntary termination, the provisions for compensation on termination are as for authority default. Corrupt Gifts and Fraud 68. 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. However, there is no payment in respect of equity returns or in respect of amounts payable to subcontractors. Force Majeure 69. Upon termination for force majeure, it is standard market practice that the bank receives full pay out of senior debt. The Contractor is entitled to repayment of the equity less the returns made up to the date of termination. Accordingly, 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. In addition, the Contractor is entitled to the costs of termination sub contracts and redundancy of any of its employees. Dispute Resolution Procedure 70. Inevitably, problems will arise and the PFI project, as with any other project, it is desirable that they are resolved quickly and equitably. As will, hopefully, be apparent from the discussions to date, 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. 71. Accordingly, PFI contracts should reflect the fact that problems will occur which need to be resolved. There is generally a hierarchy of dispute resolution procedures
commencing with some form of disputes panel, alternative dispute resolution followed, if absolutely necessary, by formal proceedings. However, as many of you will be aware, the principal PFI contracts are excluded from the Housing Grants Construction and Regeneration Act 1986. Accordingly, there is no requirement for adjudication of the principal contracts. However, 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, it is common practice for the principal contract to contain adjudication provisions which are consistent with the Housing Grants Construction and Regeneration Act 1986, even though this is not strictly needed. In
addition, because of the requirement for the arrangements to be "back to back" so that minimal risk remains in the Contractor, there will frequently be provisions for joinder and what amounts to "name borrowing" so that, for example, a dispute concerning the construction works between the Authority and the Contractor, in reality, the Contractor will be reliant on the building contractor (as there will be, no doubt, an identical dispute under the building contract which should be back to back with the Project Agreement). Similarly and as briefly explained previously, 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, for example, a deduction made for unavailability is caused by poor service provision or a defect due to a breach of the building contract. 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.
'Adverse Physical Conditions'
ADVERSE PHYSICAL CONDITIONS A frequent problem Contractors face is the financial loss which arises through unforeseen ground conditions on site. In the majority of contracts, when submitting a tender for works for a particular site, it is the Contractor's responsibility to have inspected and examined the site and the area surrounding it. Most importantly, the Contractor must have looked at the following three points before he submits his tender for the work: (a) (b) (c) The ground, sub-soil and the general water conditions relating to the site; and the materials necessary for constructing and completing the works; and the way in which communications will operate on the site, how those persons working on the site will be accommodated and the manner in which the site will be accessed.
These factors are the Contractor's responsibility to predict and expect. Of course there will be other influences that will impact on the site and the contractor's works which he cannot predict or forecast. These are known as unforeseen ground conditions.
The important point to appreciate is that the distinction is unclear between those matters that the contractor is expected to predict, and those that it is impossible for him to expect. Therefore, as you will appreciate, issues of risk arise and most importantly it has to be decided who will bear the cost of such risk, the Contractor, or the Employer for whom he is carrying out the work.
By way of example, the Contractor may experience the following types of unforeseen ground conditions: (a) a soil collapse which was not foreseeable; artificial obstructions (such as buried items which were not discovered as a result of a reasonable inspection) and unforeseeable subsidence. (b) weather conditions or conditions due to weather conditions cannot be regarded as "unforeseen". Therefore, both heavy rainfall and floods are excluded.
As I mentioned before, the most important issue to consider is that of risk. If a Contractor is to bear the risk for condition of the site, he may wish to carry out his own site investigations before he takes the risk onboard. The Employer may pay for such
investigative work. This can be carried out under a letter of intent prior to the signing of the construction contract itself.
Any "ground conditions clause" that the contract contains will probably provide for special treatment of man made obstructions. 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. Relevant to Issues of Unforeseen Ground Conditions
The FIDIC form of contract does cater for issues of unforeseen ground conditions. Its use enables parties to have the best chance of achieving a common understanding for issues at risk. Key to understanding its operation is the relationship between clauses 11 &12.
The basics are as follows: (a) Clause 11 states generally speaking that, the contractor "takes the risk in the ground and the sub-soil". This means any examination that the Contractor is responsible for must not just be limited to the surface of the site. Also, 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. 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, to have foreseen a particular condition or obstruction". Obviously central to this "reasonably foreseeable" test is the information that the Contractor was provided with by the employer, or could or should have obtained from his own investigations. (b) Clause 12 places the risk of unforeseen conditions on the employer. 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, but that have impacted on the works and led to him incurring additional costs. 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. The Contractor is also able to claim for extensions of time arising as a result of the unforeseen conditions. Conclusion
In sum therefore, 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
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.
'Professional Indemnity Insurance and the Designer'
PROFESSIONAL INDEMNITY INSURANCE AND THE DESIGNER
Introduction 3.1 3.2 Why is professional indemnity insurance important? Everyone involved in the building profession is human and that means that they make mistakes. Systems for carrying out checks to ensure mistakes do not go unnoticed exist, and although they have been improved by the use of computer technology, these checks are not infallible. Some mistakes go unnoticed. 3.3 In construction such mistakes are likely to occur either in the design or construction stages. In either stage the effect of a small mistake can range from being
inconsequential to catastrophic. In this section the focus will be on mistakes in design. 3.4 Assume a design error is made in a large building causing it to collapse. 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; Demolition of the unsafe structure and clearance of the site; Rebuilding or repairing the structure; Employer's loss of revenue whilst the building can not be occupied; Loss of profits and loss of property of businesses which may occupy the building; Additional costs for those businesses in relocating/finding alternative short term accommodation; • The building may damage other buildings when it collapses causing them to be unsafe and creating similar losses in respect of them; • 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. 3.5 Even if only a couple of people were seriously injured when the building collapsed, the liability in damages for that alone could run into millions of pounds. Methods of Recovery
Everyone is going to want to recover the losses they incur as a result of the building collapsing. Under English law there are three ways in which such losses can be
pursued. The first is to bring a claim under a contract. 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. 3.7 The second route is to bring a claim in negligence. Here no contractual relationship is required. In simplified terms, all the claimant has to show is that the defendant owed a duty of care to the claimant, the defendant breached that duty of care, 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. For example an engineer has a duty to the employer and users of a building to design a building with suitable foundations, if the foundations are inadequate it could be foreseeable that the building might collapse and injure someone. Each case will turn on its own circumstances. 3.8 The third way is a statutory claim. Some statutes create statutory causes of action. 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. 3.9 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. 3.10 Firstly the employer may have employed them directly to design the building and then directly employed a separate company to build the building. Here the employer will have a contract with the designer. 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. 3.11 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. The contractor will be liable for the engineer's error as the engineer is his employee. 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. In this case the contractor could claim against its
engineer employee for the loss it incurs as a result, though it is rare for this to happen. 3.12 Finally the employer may have employed a contractor to design and build the building. However, the contractor may have subcontracted with the engineer to carry out the design work. Here the engineer is an independent subcontractor and not an employee of
the contractor. There will be a contract between the employer and the contractor and a separate contract between the contractor and the engineer. The employer can claim for its losses under the contract between it and the contractor. The contractor can in turn claim its losses, including the damages it has had to pay to the employer, from the engineer under the contract between it and the engineer. However, the employer can also claim against the engineer in negligence for its loss, though the employer will not be able to recover more than a nominal amount if he has recovered all his losses from the contractor. 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. 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. They may also have a claim against the occupier of the building under a statute. Professional Indemnity Insurance 3.15 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. If the engineer becomes insolvent as a result of such a claim, the employer will be left to pick up the loss. This could in turn make the employer insolvent, resulting in third parties not being compensated for their losses. 3.16 There has to be someone pick up the loss. 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. 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. Finally, even where the engineer is a subcontractor any warranty between the engineer and the employer will usually contain an identical insurance requirement. 3.17 3.18 What should be considered in taking out insurance? Although many of the professional indemnity policies are similar, care should be taken when choosing a policy. Slight differences in wording may mean that one policy will exclude a risk another policy covers. What is covered will depend on the wording of the individual policy and any endorsements to it. Set out below are some of the key points that should be considered when choosing a professional insurance policy.
The first thing that has to be considered is how much insurance is required. Any amount of insurance can be acquired - but at a price. Usually policies will have an excess and an upper cap. The engineer will be responsible for claims which are below the excess limit and to the extent that they exceed the cap. The lower the excess and the higher the cap the higher the premium will be. 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.
It must be considered what this cover includes. 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.
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. However, some serious design errors may not manifest themselves until several years after the building has been completed. Liability for such errors can last for twelve years after completion of the building. 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.
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.e. they seek to limit liability to claims in tort for negligence. This leaves the engineer policy holder exposed in relation to claims under contracts. As explained above,
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. If liability for claims under these contracts is to be covered by the policy will often need to be expressly amended to include this. 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. Consideration needs to be given to any geographical or other restrictions on the insurance policy. 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, the nationalities of the parties and the location of the works allow for claims to be made outside the UK or Japan. 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.
Subrogation 3.24 What rights does the policy give the insurer? Most policies give the insurer a right to subrogation. 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 actual scope of the subrogation rights may vary enormously from policy to policy and the way in which they are exercised may also vary. For example, 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, subject to consultation with the insurer and obtaining the insurer's agreement to certain key decisions, such as whether to settle and if so, for how much. Other insurers may take a more active role in proceedings, wanting to have complete control over them, to use their own solicitors, to make all decisions and the policy holder will be expected to co-operate completely with the insurer and do as it is told. 3.25 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 allow the insurer to bring proceedings in the policy holders name if the policy holder does not take that step itself, 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. For example, assume a design defect is partly responsible for the employer incurring losses of £2 million. 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 recovers £1 million from the third party. The engineer must pay this £1 million to the insurance company, for the insurance company to set off against its payment under the policy. The engineer can not retain the money and make a windfall out of its negligence. 3.26 What if the policy holder does not want to bring or defend proceedings? This is a real issue. For good reasons many engineers do not want to get caught up in litigation. It is time consuming, expensive, and the publicity can be devastating, particularly if they lose the case. This needs to be considered in the policy. For example, 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 also wise to check that the form of proceedings – eg. litigation, arbitration etc does not conflict with the provisions of the building/design contracts. 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
proceedings against its individual employees who are at fault.
A wish not to bring
proceedings despite such advice from a senior lawyer is dealt with below. 3.27 Finally, is the insurance company financially sound? National laws in some countries, or the contract, may require that the professional indemnity policy is with a particular insurance company or a one of a number of insurance companies. 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, then they may wish to give some thought to ensuring there is some reinsurance in place should their fears be realised. Other considerations 3.28 What else is there to consider? Finding a policy that suits an engineer's needs is only part of the process. There are a number of pitfalls, which need to be considered, both in entering into an insurance policy and also in complying with it. 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. 3.29 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". This means that there is an obligation on each party to provide the other party with all the information that they might require. 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. 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, (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. This means that the applicant must disclose information which may be adverse to it. It cannot lie and it must not withhold information either. If the applicant fails to provide information or the information provided is not correct then the insurer may be able to avoid the policy. If the applicant deliberately withholds information or provides false information then not only is the insurer entitled to avoid the policy, it is also not obliged to return the premium. Most of the information required to be disclosed to the insurer will be requested in an application form, which the insurer will require the engineer to complete before issuing the insurance policy. However, the applicant is aware of other information that the
insurer might want then this should also be provided, or at the very least the applicant should ask the insurer if they require the additional information and provide it if asked.
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. However, 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, and the obligation will continue for the life of the policy. 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.
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. Non-compliance with policy terms is probably the most given reason by insurers for avoiding insurance policies. 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. However, it must be
remembered that insurance is a business and insurers do not make their profits by paying out under policies. Every time they have to pay out under a policy it cuts into their profits. Therefore, it is vitally important to ensure that the policy holder does not give the insurer a reason to avoid its policy. 3.33 So for example, 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. 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, then, 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. Failure to do so will allow the insurer to avoid the policy leaving the policy holder without cover. 3.34 There is one other provision, which almost every insurance policy will contain which merits mention. This provision is one, which the policy holder must take considerable care to ensure that it and its employees are aware of and comply with. This provision is connected to the insurer's rights of subrogation. This is a provision that the policy
holder, its employees, 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. This is something which can be extremely difficult to ensure on a site, where several parties may be working together, where everyone knows each other and gets on well. Such an admission will usually result in the insurer avoiding the policy. As a result, it is vitally
important that there are procedures on site for problems to be reported, 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. This is very easy to say, but very difficult to achieve. Conclusion 3.35 This appendix is only an outline of some of the more common pitfalls and considerations that apply to professional indemnity insurance for designers. Insurance is an incredibly complex area of English law. Obtaining insurance and complying with policy terms is something that needs to be carefully considered, particularly if it is something, which you are not familiar with. It is not something that should be rushed into. Ideally, a small group of people within each organisation should be allowed to develop the expertise needed. However, if any there are any questions or concerns, whether it be at the stage of choosing a policy, maintaining compliance with it, or dealing with what needs to be done in the event of a potential claim, then professional advice and assistance should be sought early. 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.
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