ANANDA RANASINGHE

BScEng(Hons), PGD, MTech, AIStructE, FIE(SL), MICE , MIE(Aust)

Chartered Civil & Structural Engineer, Attorney-at-Law
Email ara@sltnet.lk

CONSTRUCTION CLAIMS

1. A claim is a request within an existing contract for additional payment or time

in which to complete a task which is additional to the work agreed by the
parties in a contract and where the existing contract does not make provision
for this item.

2. Therefore if a claim is made by the contractor, generally the employer wishes

to turn down as it would cost either a cost overrun or a time overrun of the
project. However, claims are inescapable component in a contract since there
are various reasons in a contract where the project may not be able to complete
within the estimate cost and the planned contract duration.

3. In contracts when a party makes a claim he must ensure that the claim is
submitted within the framework of the Conditions of Contract. For e.g. if
parties have entered into a contract in terms of the FIDIC (Federation
International of Engineering Councils) Conditions of Contract and if there is a
dispute between the parties regarding a claim, the matter has to be resolved in
accordance with Clause 67.1 of the said Condition of Contract.

4. Clause 67.1 states that – “If a dispute of any kind whatsoever arises between the
Employer and the Contractor in connection with, or arising out of, the Contract or the
execution of the Works, whether during the execution of the Works or after their
completion and whether before or after repudiation or other termination of the
Contract, including any dispute as to any opinion, instruction, determination,
certificate or valuation of the Engineer, the matter in dispute shall, in the first
place, be referred in writing to the Engineer, with a copy to the other party.
Such reference shall state that it is made pursuant to the Clause 67.1. No later
than the eighty fourth day after the day on which he received such reference
the Engineer shall give notice of his decision to the Employer and the
Contractor. Such decision shall state that it is made pursuant to this Clause”.

5. Therefore, at the first instance if the contractor is of the opinion that there is a
legitimate claim, firstly he has to refer the claim to the Engineer. The dispute
resolution procedure is stated in detail in Clauses 67.2 and 67.3. The
importance of these clauses are that the parties can impose their rights only
within the agreement and therefore they have to follow the procedure laid
down in the Conditions of Contract. Otherwise the entire exercise might be
futile.

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6. Clause 67.2 of the condition of contract describes how the matter could be
settled by arbitration. Our arbitration process is governed by Arbitration Act
No. 11 of 1995. According to section 32(1)(a)(ii) an arbitral award made in an
arbitration held in Sri Lanka may be set aside by the High Court if the party
making the application was not given proper notice of the appointment of an
Arbitrator or the arbitration proceedings or was unable to present his case.

7. There are instances where after lengthy arbitration proceedings the decisions
have been set aside by High Court or Supreme Court purely on the ground of
not giving sufficient notice. To obtain an arbitration award quite often it might
take more than one year and a fair amount of expenditure. The important
thing that the claimant should know is that the procedures have to be followed
to the letter for the award to be effective as the whole exercise will be a waste
of time and money if the procedure is challenged and found improper by the
Courts.

8. Clause 70.2 of the Condition of Contract states the effects of subsequent

legislation. “If after the date of 28 days prior to the latest date for submission of
tenders for the Contract there occur in the country in which the Works are being or are
to be executed changes to any National or State Statute, Ordinance, Decree, Law,
Regulation or Bye-Law which cause additional or reduced cost to the Contractor, other
than under Sub-Clause 70.1, in the execution of the Contract, such additional or
reduced cost shall, after due consultation with the Employer and the Contractor, be
determined by the Engineer and shall be added to or deducted from the Contract Price,
and the Engineer shall notify the Contractor accordingly, with a copy to the
Employer.”

9. Therefore, if a local authority imposes an additional condition after

commencing the contract and if this additional condition causes the contractor
additional cost, can the contractor claim this expenditure under the
aforementioned clause? The aforementioned clause clearly states that such
additional cost for introduction of a statute, ordinance, etc. shall be paid to the
contractor. If the additional condition does not come under Statute or
Ordinance or Bye Law, one has to be cautious about contractor’s entitlement
for additional payment.

10. Furthermore, the contractor may be entitled to claim additional cost from the
employer for the imposed condition under some other clause of the Conditions
of Contract. However, the contractor may not be entitled to claim additional
cost under the aforementioned clause. Therefore, when claiming extras and
recommending extra payment to the contractor, one has to ensure that it falls
within any clause of the Conditions of Contract applicable to the Contract.

11. Clause 53.1 of the Condition of Contract deals with the procedure of claims.
Clause 53.1 states that “Notwithstanding any other provision of the Contract,

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 if the Contractor intends to claim any additional payment pursuant to any
Clause of these Conditions or otherwise, he shall give notice of his intention to
the Engineer, with a copy to the Employer, within 28 days after the event
giving rise to the claim has first arisen.

12. Most of the standard forms of main contract and subcontract require the
contractor and subcontractor to give notice when delays occur to the progress
or completion of the works. A question often asked is whether in the absence
of notice the contractor or subcontractor loses his rights to have the completion
date extended. In other words, is the service of notice a condition precedent to
the right to an extension of time?

13. The matter was considered by the House of Lords in the case of Bremer
Handelsgesellschaft mbh v. Vanden Avenue-Izegem (1978) which arose out of a
dispute over the sale of soya bean meal. Lord Salmon, referring to how the
rights of the parties were affected by the lack of proper notice, had this to say:

14. “In the event of shipment proving impossible during the contract period, the it
requires the seller to advise then buyers without delay of the impossibility and the
reasons for it. It has been argued by the buyers that this is a condition precedent to the
sellers’ rights under that clause. I do not accept this argument. Had it been a
condition precedent, I should have expected the clause to state the precise time within
which the notice was to be served and to have made plain by express language that
unless the notice was served within the time the sellers would lose their rights under
the clause.”

15. From what Lord Salmon has said it seems clear that, for notice to be a
condition precedent to a right for more time, the wording of the clause would
need to be such that a failure to serve notice would result in loss of rights.

16. When the contractor makes a claim from the employer, it is important to
investigate that how the risks are being shared in the Conditions Of Contract.
Clause 20.4 of the FIDIC Conditions Of Contract describes the employer’s risk.
Therefore any matter which falls under the employer’s risks has to be borne by
the employer.

17. Clause 20.4 has been qualified by Clause 20.3 which states that “In the event any
such loss or damage happening from any of the risks defined in Sub-Clause 20.4 or in
combination with other risks, the Contractor shall, if and to the extent required by the
Engineer, rectify the loss or damage and the Engineer shall determine an addition to
the Contract Price in accordance with Clause 52 and shall notify the Contractor
accordingly, with a copy to the Employer. In the case of a combination of risks causing
loss or damage any such determination shall take into account the proportional
responsibility of the Contractor and the Employer.”

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18. Therefore, other than the employer’s risks, the contractor has to include in his
tender price the probable risks that he has to bear.

19. It is logical and inevitable that most of the work concerning claims must be
done by the contractor. It is in the contractor’s interest that claims are
recognised, presented and settled. It is the contractor who loses if they are not
settled and contractors are well aware that increased costs, if not reimbursed
by successful claims, can reduce profits even to the extent that an otherwise
satisfactory contract can result in financial loss.

20. The engineer has duties to supervise the work and to authorise changes, but
will not devote any time to claims, unless so prompted by the contractor. It is
the contractor, therefore, who must identify any obligation which appears to
him to be additional to his contractual duties. If the contractor has any doubts
about claim validity or value, he should, nevertheless, report them or at least
discuss them with the engineer. It is to be expected that some claims will be
judged to be not valid, or not wholly so, but such doubts can be resolved later.
It is better to report and rescind than fail to report and regret a lost
opportunity.

21. All variations referred to in Clause 51 and any additions to the Contract Price
which are required to be determined in accordance with Clause 52 (for the
purposes of this Clause referred to as “varied work”), shall be valued at the
rates and prices set out in the Contract if, in the opinion of the Engineer, the
same shall be applicable. If the Contract does not contain any rates or prices
applicable to the varied work, the rates and prices in the Contract shall be used
as the basis for valuation so far as may be reasonable, failing which, after due
consultation by the Engineer with the Employer and the Contractor, suitable
rates or prices shall be agreed upon between the Engineer and the Contractor.

22. In the event of disagreement the Engineer shall fix such rates or prices as are,
in his opinion, appropriate and shall notify the Contractor accordingly, with a
copy to the Employer. Until such time as rates or prices are agreed or fixed,
the Engineer shall determine provisional rates or prices to enable on-account
payments to be included in certificates issued in accordance with Clause 60.

23. Any possibility that extra or changed work which may be held to go outside
the scope of this clause will have to be ordered should be avoided since the
Contractor is entitled to refuse to do such work and obviously in a position to
hold out for his price because of the expense of bringing another contractor on
the site. If and only when if an omission is outside the power to vary, the
Contractor is entitled to damages, which normally will be the amount of profit
he would have made on the omitted work. It may be necessary to warn the
employer that his right to change the work after the contract is made is not
unlimited.

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24. The greatest danger is that variations outside this clause may be ordered by
the Engineer unwittingly. If that happens and the work is done by the
Contractor without fixing a price in advance, then (since the work falls outside
the contract) normally he will be entitled to reasonable prices without any
reference to the contract rates or prices, provided, of course, he can prove that
the Engineer had authority to order the work. And such work may not be
merely additional to the contract works but may involve complete
transformation of the original contract plan, so that no original contract work
can fairly be traced in the work carried out to be priced at the contract rates.

25. The parties will then be taken to have abandoned their original contract and to
have impliedly made a new contract for the new works. In that case, unless a
price is specially fixed in advance, the whole of the new works actually carried
out must be paid for by measure and value at reasonable prices without any
regard to the original contract rates and prices, and whatever the form (even
pure lump sum) of the original contract. A complete transformation of the
works sufficient to produce this result will be very rare.

26. The Contractor may not lead the Employer into a trap – if he carries out work
which he realises does not fall within the right of variation in the original
contract without claiming for payment outside the contract when the work is
ordered, and accepts interim certificates under the original contract including
payment for the new work, he may be held to have impliedly agreed that the
work will be done on the terms of the original contract and at the original
contract rates.

27. In view of all this, if the engineer considers that the nature of the project may
be changing he must explain what is involved to the employer, and preferably
negotiate a supplemental agreement with the contract, fixing a price or rates
for the new works in advance.