Construction Contracts v1.0

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Construction Contracts Laws and Cases NISHANTH R K (PGP-26160) PRAVEEN APURI (PGP-26161) SANJAY B K (PGP-26165) SIDDHARTH BHAT (PGP-26172) VINAYAK RAKKASAGI (PGP-26188) BHARADWAZ YAGALLA (PGP-26190)

Transcript of Construction Contracts v1.0

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Construction Contracts

Laws and Cases

NISHANTH R K (PGP-26160)PRAVEEN APURI (PGP-26161)

SANJAY B K (PGP-26165)SIDDHARTH BHAT (PGP-26172)

VINAYAK RAKKASAGI (PGP-26188)BHARADWAZ YAGALLA (PGP-26190)

Contents

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CONTENTS................................................................................................................................ 2

ABSTRACT................................................................................................................................ 3

1. INTRODUCTION................................................................................................................ 4

1.1 PURPOSE...........................................................................................................................41.2 SCOPE...............................................................................................................................41.3 BACKGROUND....................................................................................................................51.4 TYPES OF CONTRACTS..........................................................................................................61.5 ESSENTIALS OF CONTRACT VALIDITY........................................................................................81.6 BREACH OF CONTRACT.........................................................................................................81.7 MAIN PARTIES OF THE CONTRACT...........................................................................................9

2. FIDIC – GUIDELINES........................................................................................................ 11

2.1 SERVICES.........................................................................................................................112.2 ACTIVITIES.......................................................................................................................112.3 FIDIC CONDITIONS OF CONTRACT – TYPES OF MANUALS.........................................................12

3. FIDIC: CONDITIONS OF CONTRACT FOR CONSTRUCTION.................................................14

3.1 THE EMPLOYER.................................................................................................................143.2 THE ENGINEER..................................................................................................................163.3 THE CONTRACTOR.............................................................................................................173.4 FORCE MAJEURE...............................................................................................................19

4. CASE DISCUSSIONS.........................................................................................................21

4.1 WALTER LAWRENCE AND SON LTD VS. COMMERCIAL UNION PROPERTIES (UK) LTD (1984)..........214.2 IN PACIFIC ASSOCIATES V. BAXTER AND HALCROW (1988).......................................................214.3 FALKLAND ISLANDS V GORDON FORBES CONSTRUCTION (FALKLANDS) LIMITED.............................22

5. References............................................................................................................................25

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Abstract

A construction project is continuous in nature usually spread over number of years. The problems that arise in the working of the projects are sometimes not foreseeable or even if they are foreseeable, their magnitude may not be foreseeable before or during the execution of the contract. In the Construction contract, where huge money is involved, an early and inexpensive dispute resolution is required otherwise the project will overrun in time resulting into the huge losses of money, idling of manpower and machineries. This is facilitated by the construction contract laws. At the global level the FIDIC guidelines form a good reference where as from the point of view of India, the Indian Contract Act, 1872 and various industry specific traditions, trade practices, sector specific usages form part of the entire domain of law. We also look at few of the FIDIC guidelines and some cases that were resolved using these guidelines.

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1. Introduction

1.1 PurposeThe purpose of the report is to analyze the construction contract laws at the global level as well as from Indian perspective. In connection with the construction contracts at the global level, the FIDIC guidelines are pertinent whereas from the point of view of India, the Indian Contract Act, 1872 and various industry specific traditions, trade practices, sector specific usages form part of the entire domain of law.

1.2 Scope In India there is no specific law with respect to construction contracts per se except for the states Gujarat and Tamil Nadu where they have passed laws with respect to infrastructure. Hence we refer to the guidelines issued by Fédération Internationale Des Ingénieurs-Conseils (the International Federation of Consulting Engineers) (FIDIC) through its various books – “Red”, “Green”, “Silver” etc. For our purpose we restrict ourselves and omit the turnkey based construction contracts. We also limit ourselves to small construction contracts. For this purpose we use the FIDIC Red Book as a reference. We refer to popular cases that are judged based these guide lines. We also cover topics of arbitration that acts as an Alternative Dispute Resolution mode. We define and explain various terminologies used in construction contracts.

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1.3 Background A construction project is continuous in nature usually spread over number of years. The problems that arise in the working of the projects are sometimes not foreseeable or even if they are foreseeable, their magnitude may not be foreseeable before or during the execution of the contract. Since the number of the parties involved in the construction contract is high it is oblivious that the disputes will arise between them if one party failed to perform their obligation in terms of the contract.

In the Construction contract, where huge money is involved, an early and inexpensive dispute resolution is required otherwise the project will overrun in time resulting into the huge losses of money, idling of manpower and machineries.

Disputes can be resolved either through litigation or through alternative disputes resolution mechanism, which includes Mediation, Conciliation and Arbitration. In India where the courts are already heavy burdened with the backlog of cases, the dispute hangs over for years. Litigation is expensive as well as time consuming. If litigation is resorted for every problem, then, such problems will likely increase rather than to resolve the tension generated by the emergence of such problems.

Though Mediation and Conciliation is very inexpensive mode of dispute resolution mechanism but the decision of the Mediator and Conciliator are not enforceable. Due to this reason the Mediation and conciliation fails in most of the cases. Arbitration is also one of the Alternative Dispute Resolution modes, which is more successful than mediation and conciliation because the Award passed by the Arbitrator is as good as the decree passed by the Civil Court Construction Law deals with all legal issues relating to the construction process from land acquisition and project financing to post-construction claims settlement. These include such matters as, building contracts, bonds and sureties, construction and builders' liens, tendering, and construction claims, which affect all participants in the construction industry, including lender financial institutions, architects, general contractors, subcontractors, suppliers, builders, owners, planners, designers, developers and engineers.

It covers legal issues and disputes arising from building and improvements of all sizes and complexity from basic, residential work (private projects), to large, complex projects such as: government or commercial and industrial projects,

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including high-rise buildings, light-rail transit systems, nuclear and fossil fuel power plants, hospitals, business office complexes, nursing homes, schools, shopping malls, historic renovations, bridge and highway construction, prisons, steel mills, continuous galvanizing lines, hydroelectric projects, sports and entertainment facilities, ships, cogeneration and alternative energy projects, development communities, and water and wastewater treatment plants.

In addition, there are host of other laws which are also pertinent to construction contract law in India. Apart, depending upon the subject matter of construction, in addition to the above, some other laws like Labour Law, Tort Law, (law relating to civil wrongs like negligence, etc.,) Tax Law, Intellectual Property Rights law, Insurance and Arbitration Law are also relevant. For example, if the construction activity revolves around laying of Highways or building of fly-over, then land acquisition laws (both Central and State) play a significant role. Similarly, if government is a party to a Construction Contract, then Constitutional law is applicable. Particularly, in connection with Tendering, Black Listing, etc., the aggrieved party is entitled to invoke appropriate fundamental rights as against the governmental authorities assailing their decision making.

1.3.1 Definition of a construction contract

The term Contract used in the Construction management can be defined as: “An agreement entered into by two parties under the terms of which one party agrees to perform a specific job for which the other party agrees to pay. Contract documents attached to and/or stated in the agreement form integral parts of the contract”. [1]

1.4 Types of ContractsWe now discuss the various types of contracts that are applicable to construction contracts.

1.4.1 Lump sum contract:

With this kind of contract the engineer and/or contractor agrees to do a described and specified project for a fixed price. It is also named "Fixed Fee Contract". A Fixed Fee or Lump Sum Contract is suitable if the scope and schedule of the project are sufficiently defined to allow the consulting engineer to estimate project costs.

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1.4.2 Item rate or unit price contract:

This kind of contract is based on estimated quantities of items included in the project and their unit prices. The final price of the project is dependent on the quantities needed to carry out the work.

It is only suitable for construction and supplier projects where the different types of items, but not their numbers, can be accurately identified in the contract documents.

1.4.3 Percentage rate contract

This kind of contract is common for engineering contracts. Compensation is based on a percentage of the construction costs.

1.4.4 Cost Plus Contract

It is a contract agreement wherein the purchaser agrees to pay the cost of all

labour and materials plus an amount for contractor overhead and profit (usually

as a percentage of the labour and material cost). The contracts may be specified

as

Cost + Fixed Percentage Contract

Cost + Fixed Fee Contract

Cost + Fixed Fee with Guaranteed Maximum Price Contract

Cost + Fixed Fee with Bonus Contract

Cost + Fixed Fee with Guaranteed Maximum Price and Bonus Contract

Cost + Fixed Fee with Agreement for Sharing Any Cost Savings Contract

These types of contracts are favoured where the scope of the work is indeterminate or highly uncertain and the kinds of labour, material and equipment needed are also uncertain. Under this arrangement complete records of all time and materials spent by the contractor on the work must be maintained.

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1.5 Essentials of Contract validity The parties to the contract must be competent, and legally capable of

playing their intended part. The law cannot enforce the agreement on someone who has not the legal capacity to enter into an agreement. This could be due to infancy, lunacy, drunkenness, or being restricted from entering into such agreement by a prior in date agreement or scope of authority.

The subject matter of the contract must be lawful and definite in respect of requirements and duties of each party. For example a contract violating municipal regulation is not binding and is void in courts. Also uncertainty in respect of the what is wanted may result in the contract being not enforceable by law

Proposal and acceptance: There must be a proper proposal by one party and its absolute and unqualified acceptance by the other party. The proposal is not binding without a clear acceptance and is not binding beyond its date of validity

Free consent of parties to the contract: Consent is said to be free when it is not caused by force, or undue influence or fraud or misrepresentation

1.6 Breach of ContractBreach of Contract is the failure to perform it. However, not every failure to perform an obligation amounts to a true breach, as there are a number of excuses for non-performance. When a contract has been broken without sufficient excuse or justification, the party who suffers by such breach is entitled to receive from the party in default, a compensation for any loss or damage caused by such breach.

A Contract may be terminated or brought to an end in either of the following ways:

Full and satisfactory performance by both parties to their obligations under the contract.

Breach of contract, when the default of one party releases the other party from the contractual obligations.

Mutual agreement of the parties to terminate the contract.

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Unforeseen circumstances beyond the control of either party render it impossible to perform his duties or obligations stated in the contract.

Operation of law to terminate a void contract.

1.7 Main parties of the contract1. The Employer

2. The Engineer

3. The Contractor

1.7.1 Who is a Contractor?

Most commonly, the term ‘contractor’ is used to describe an expert in the construction industry who hires skilled and unskilled workers to actually construct a financed project. A contractor must be licensed by an examining board before he or she can bid on the project. This bid is based on the estimated cost of the building materials, the wages of subcontractors and labourers and the contractor’s fee for coordinating the project.

Although a contractor’s main concern is hiring qualified subcontractors (specialized craftsmen paid by the contractor), he or she may also perform some of the construction work as well. Most contractors develop good working relationships with other construction specialists, so they often hire the same specialized companies and workers for each contracted project. The contractor is ultimately responsible for the quality of the work performed by subcontractors, so it doesn’t always pay to hire unknown entities to cut down on expenses.

During the bidding process, a contractor may have to work with the building’s architect to discuss potential problems with a design element. A good contractor understands that the success of the project depends on his or her ability to hire the right independent subcontractors and follow the wishes of the client.

1.7.2 Who is a subcontractor?

Subcontractor is a person or a company hired by a general contractor to perform part of the work of a construction job. For example, a contractor might be building

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a house, but might hire a firm or a person specializing in electrical engineering to install the electrical systems needed in the house. Generally the subcontractor will either relieve the main contractor of part of the building work, or will be able to perform work at lower expense or at a greater skill level than the general contractor could.

Frequently, though, hiring a subcontractor, or several, is a way to avoid problems in construction. Specialized workers like plumbers, electricians, or people who install heating and cooling devices, often called HVAC workers, tend to have more knowledge and training in their given field. While simply building something requires training and knowledge, people who are specialists better perform certain types of work.

A subcontractor often holds licenses in his or her specialty field. He or she might hold a general license to conduct work in a state, and also hold advanced licensing. Such licensing implies a certain amount of hours practicing his or her trade and knowledge regarding state building codes.

1.7.3 Major Weakness:

The major weakness of simple cost-reimbursable contract is the lack of knowledge of financial commitment by the Employer and lack of incentive for the Contractor to control costs. Both may make it difficult for publicly accountable.

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2. FIDIC – Guidelines

The acronym FIDIC stands for Fédération Internationale Des Ingénieurs-Conseils, a French acronym which when translated reads the International Federation of Consulting Engineers. The founding member countries of the FIDIC were Belgium, France and Switzerland. It was established in 1913. Its headquarters is located at the World Trade Centre in Geneva, Switzerland

2.1 ServicesFIDIC aims to represent globally, the consulting engineering industry by promoting the business interests of firms supplying intellectual services based on technology for the built environment and the natural environment. Run mostly by volunteers, FIDIC is well known in the consulting engineering industry for its work in defining Conditions of Contract for the Construction Industry worldwide.

Companies and organizations belonging to FIDIC national member associations are encouraged to announce themselves as FIDIC members and use the FIDIC logo.

2.2 ActivitiesFIDIC organizes conference, seminars and training courses. The FIDIC training manual Guide to Practice - the business of a professional services firm is well known throughout the profession of consulting engineering. FIDIC also runs a bookshop and publishes international contracts and business practice documents which are used as guides and templates the world over.

FIDIC is best known for its range of Standard Conditions of Contract for Construction, Plan and Design-build, EPC/Turnkey Projects and Design, build and operate projects. Details are available in the FIDIC Bookshop. FIDIC also publishes the Client/Consultant Model Services Agreement together with the Sub-Consultancy Agreement and the Joint Venture Agreement. FIDIC publishes the MDB Harmonised Edition of the Construction Contract that is used by Multinational Development Banks including the World Bank for their projects.

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Until 2002, FIDIC was responsible for FIDICdirect, the International Directory of Consulting Engineers. This printed and online directory listed international construction companies including engineers, contractors, architects, surveyors and their professional advisors including banks, lawyers, risk managers and security from the fields of infrastructure, development and environmental projects worldwide. In 2002 this service was transferred to a new website, ICONdirect.

2.3 FIDIC Conditions of Contract – Types of Manuals

In the contract for international engineering projects, the function of Conditions of Contract is of greatest importance providing the rights, obligation and responsibility for the parties concerned in the Contract execution. During the past half century, the International Federation of Consulting Engineers (FIDIC) has devoted itself to the compilation of management documents for all kinds of projects, among which the FIDIC Conditions of Contract are of the highest influence and are the most popular application.

The first edition of FIDIC Conditions of Contract for Works of Civil Engineering Construction (use “Red Book” in the following) was compiled in 1957, and later its second, third, and fourth edition were issued in 1963, 1977, and 1987 respectively.

But these editions were mostly compiled in the reference of the related documents of the Institution of Civil Engineers (ICE). The FIDIC and European International Contractors (EIC) entrusted the University of Reading in 1966 to summarize the experience and to draw lessons from the application of the former documents.

With the investigation of the governments, employers, contractors and consulting engineers all over the world about their application of the “Red Book”, 204 findings reports were returned. According to the findings, the FIDIC Contract Committee organized a group of experts to compile the new Contract Condition models to be applied in the 21st century.

The new models of FIDIC include:

FIDIC Conditions of Contract for Construction, the (New Red Book)

FIDIC Conditions of Contract for Plant and Design/Build, the

(New Yellow Book)

FIDIC Conditions of Contract for EPC Turnkey Projects, the (Silver Book)

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FIDIC Short Form of Contract, the (Green Book)

The test edition of these models was published in 1998, and FIDIC solicited opinions throughout the world for additional time to publish the official texts in 1999. Now FIDIC condition of contract has been applied worldwide, especially in the projects invested by World Bank, Asia Development Bank, Africa Development Bank etc.

The following are the various books which contain guidelines to different circumstances involved in the construction contract. They have been colour coded and hence are referred to as the Red Book, Green Book etc.

2.3.1 FIDIC “New Red Book”:

This contains details regarding “Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer”

2.3.2 FIDIC “New Yellow Book”:

Conditions of Contract for Plant Design – Build

This contains details regarding “Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor”

2.3.3 FIDIC “New Silver Book”:

This contains details regarding “Conditions of Contract for EPC (Engineering, Procurement and Construction)/ Turnkey Projects”

2.3.4 FIDIC “New Green Book” – the “Mini-Red Book”:

This contains details regarding “Short Form of Contract”

The contract types differ mainly in the nature of the work for which they are to be used. Thus, the use of the Red Book is suitable for projects where the client provides the essential planning that has Yellow Book contrast to projects where the main contractor to provide the planning. The Silver Book is ideal for key construction; the Green Book is to be used eventually if it is simpler construction with low order volumes and relatively short construction period.

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3. FIDIC: Conditions of Contract

for Construction

3.1 The Employer

3.1.1 Right of access to site

The employer shall give the contractor right of access to, and possession of, all parts of the site within the time (or times) stated in the Appendix to Tender. The right and possession may not be exclusive to the Contractor. If, under the contract, the employer is required to give (to the contractor) possession of any foundation, structure, plant or means of access, the Employer shall do so in the time and manner stated in the specification. However, the Employer may withhold any such right or possession until the Performance Security has been received.

If the contractor suffers delay and/ or incurs cost as a result of failure by the employer to give any such right or possession within such time, the contractor shall give 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 plus reasonable profit, which shall be included in the contract price.

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3.1.2 Permits, Licences or Approvals

The employer shall (where he is in a position to do so) provide reasonable assistance to the contractor at the request of the contractor:

(a) by obtaining copies of the laws of the country which are relevant to the contract but are not readily available, and

(b) for the contractor’s applications for any permits, licences or approvals required by the laws of the country.

3.1.3 Employer’s Personnel

The Employer shall be responsible for ensuring that the employer’s personnel and the employer’s other contractors on the site:

Co-operate with the contractor’s efforts under sub-clause 4.6 [Co-operation] and take actions similar to those which the contractor is required to take under sub-paragraphs (a), (b) and (c) of sub-clause 4.8 [Safety Procedures] and under Sub-Clause 4.18 [Protection of the Environment].

3.1.4 Employer’s Financial Arrangements

The Employer shall submit, within 28 days after receiving any request from the contractor, reasonable evidence that financial arrangements have been made and are being maintained which will enable the employer to pay the contract price {as estimated at that time} in accordance with Clause 14 [Contact Price and Payment]. If the employer intends to make any material change to his financial arrangements, the employer shall give notice to the contractor with detailed particulars.

3.1.5 Employer’s Claims

If the employer considers himself to be entitled to any payment under any clause of these conditions or otherwise in connection with the contract, and/or to any extension of the Defects Notification Period, the employer or the engineer shall give notice and particulars to the contractor. However, notice is not required for payments due under Sub-Clause 4.19 [Electricity, Water and Gas], under Su-Clause 4.20 {Employer’s Equipment and Free-issue Material} or for other services requested by the contractor.

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3.2 The Engineer

3.2.1 Engineer’s Duties and Authority

The Employer shall appoint the engineer who shall carry out the duties assigned to him in the contract. The engineer’s staff shall include suitable qualified engineers and other professionals who are competent to carry out these duties.

The Engineer shall have no authority to amend the contract.

The Engineer may exercise the authority attributable to the Engineer as specified in or necessarily to be implied from the contract. If the Engineer is required to obtain the approval of the Employer before exercising a specified authority, the requirements shall be as stated in the particular conditions. The Employer undertakes not to impose further constraints on the Engineer’s authority, except as agreed with the contractor.

However, whenever the Engineer exercises a specified authority for which the employer’s approval is required, then (for the purposes of the contract) the employer shall be deemed to have given approval.

Except as otherwise stated in these conditions:

a) Whenever carrying out duties or exercising authority, specified in or implied by the contract, the engineer shall be deemed to act for the employer.

b) The engineer has no authority to relieve either party of any duties, obligations or responsibilities under the contract; and

c) Any approval, check, certificate, consent, examination, inspection, instruction, notice, proposal, request, test or similar act by the engineer (including absence of disapproval) shall not relieve the contractor from any responsibility he has under the contract, including responsibility for errors, omissions, discrepancies and non-compliances

3.2.2 Delegation by the Engineer

The engineer may from time to time assign duties and delegate authority to assistants and may also revoke such assignment or delegation

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3.2.3 Instructions of the Engineer

The engineer may issue to the contractor (at any time) instructions and additional or modified drawings which may be necessary for the execution of the works and the remedying of any defects, all in accordance with the contract.

3.2.4 Replacement of the Engineer

If the employer intends to replace the engineer, the employer shall, not less than 42 days before the intended date of replacement, give notice to the contractor of the name, address and relevant experience of the intended replacement engineer. The employer shall not replace the engineer with a person against whom the contractor raises reasonable objection by notice to the employer, with supporting particulars.

3.2.5 Determinations

Whenever these conditions provide that the engineer shall proceed in accordance with this sub-clause 3.5 to agree or determine any matter, the engineer shall consult with each party in an endeavour to reach agreement. If agreement is not achieved, the engineer shall make a fair determination in accordance with the contract, taking due regard of all relevant circumstances. The engineer shall give notice to both parties of each agreement or determination, with supporting particulars. Each party shall give effect to each agreement or determination unless and until revised under clause 20 [Claims, Disputes and Arbitration].

3.3 The Contractor

3.3.1 Contractor’s General Obligations

The contractor shall design {to the extent specified in the contract}, execute and complete the works in accordance with the contract and with the engineer’s instructions, and shall remedy any defects in the works

The contractor shall provide the Plant and contractor’s documents specified in the contract, and all contractor’s personnel, Goods, consumables and other things and services, whether of a temporary or permanent nature, required in and for this design, execution, completion and remedying of defects.

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The contractor shall be responsible for the adequacy, stability and safety of all site operations and of all methods of construction.

The contractor shall, whenever required by the engineer, submit details of the arrangements and methods which the contractor proposes to adopt for the execution of the works.

Prior to the commencement of the tests on completion, the contractor shall submit to the engineer the “as-built” documents and operation and maintenance manuals in accordance with the specification and in sufficient detail for the employer to operate, maintain, dismantle, reassemble, adjust and repair this part of the works.

a) Performance Security: The contractor shall obtain (at his cost) a performance security for proper performance, in the amount and currencies stated in the appendix to tender.

b) Contractor’s Representative: The contractor shall appoint the contractor’s representative and shall give him all authority necessary to act on the contractor’s behalf under the contract

c) Subcontractors: The contractor shall not subcontract the whole of the works.

d) Co-operation: The contractor shall, as specified in the contract or as instructed by the engineer allows appropriate opportunities for carrying out work to:

a. The employer’s personnelb. Any other contractors employed by the employer, andc. The personnel of any legally constituted public authorities

Who may be employed in the execution on or near the site of any work not included in the contract.

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3.4 Force Majeure

3.4.1 Definition of Force Majeure

In this clause, “Force Majeure” means an exceptional event or circumstance:

(a)    Which is beyond a party’s control.

(b)   Which such party could not reasonably have provided against before entering into the contract

(c)    Which, having arisen, such party could not reasonably have avoided or overcome, and

(d)   Which is not substantially attributable to the other party

3.4.2 Notice of Force Majeure

If a party is or will be prevented from performing any of its obligations under the contract by force majeure, then it shall give notice to the other party of the event or circumstances constituting the Force Majeure and shall specify the obligations, the performance of which is or will be prevented.

3.4.3 Duty to Minimise Delay

Each party shall at all times use all reasonable endeavors to minimize any delay in the performance of the contract as a result of Force Majeure

3.4.4 Consequences of Force Majeure

The Contractor 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) If the event or circumstance is of the kind described in sub-paragraphs (i) to (iv) of Sub-Clause 19.1 [Definition of Force Majeure] and, in the case of subparagraphs (ii) to (iv), occurs in the Country, payment of any such Cost.

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3.4.5 Optional Termination, Payment and Release

If the execution of substantially all the Works in progress is prevented for a continuous Payment and Release period of 84 days by reason of Force Majeure of which notice has been given under Sub-Clause 19.2 [Notice of Force Majeure], or for multiple periods which total more than 140 days due to the same notified Force Majeure, then either Party may give to the other Party a notice of termination of the Contract. In this event, the termination shall take effect 7 days after the notice is given, and the Contractor shall proceed in accordance with Sub-Clause 16.3 [Cessation of Work and Removal of Contractor's Equipment]

3.4.6 Release from performance under the law

Notwithstanding any other provision of this Clause, if any event or circumstance Performance outside the control of the Parties (including, but not limited to, Force Majeure) arises under the Law which makes it impossible or unlawful for either or both Parties to fulfill its or their contractual obligations or which, under the law governing the Contract, entitles the Parties to be released from further performance of the Contract, then upon notice by either Party to the other Party of such event or circumstance:

a. the Parties shall be discharged from further performance, without prejudice to the rights of either Party in respect of any previous breach of the Contract, and

b. the sum payable by the Employer to the Contractor shall be the same as would have been payable under Sub-Clause 19.6 [Optional Termination, Payment and Release] if the Contract had been terminated under Sub-Clause 19.6.

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4. Case Discussions

4.1 Walter Lawrence and Son Ltd vs. Commercial Union Properties (UK) Ltd (1984)

In the case of Walter Lawrence and Son Ltd v. Commercial Union Properties (UK) Ltd (1984) where a contractor was suing for returning of amounts deducted as liquidated damages. Held that:

“….. When considering an extension of time under FIDIC 1999 Edition clause 8.4(c), on the ground of “exceptionally inclement weather” the correct test for the architect to apply is whether the weather itself was “exceptionally inclement” so as to give rise to delay and not whether the amount of time lost by the inclement weather was exceptional ….. “

4.2 In Pacific Associates v. Baxter and Halcrow (1988)

In Pacific Associates v. Baxter and Halcrow (1988) the Court of Appeal took a different view. Pacific entered into a contract with the Ruler of Dubai for the dredging of a lagoon in the Persian Gulf. Halcrow was appointed as the engineer. The contract incorporated the FIDIC conditions (2nd Edition, 1969). Condition 86 of the contract provided as follows:

`Neither any member of the Employer's staff nor the Engineer nor any of his staff, nor the Engineer's representative shall be in any way personally liable for the acts or obligations under the contract, or answerable for any default or omission on the part of the Employer in the observance or performance of any of the acts matters or things which are herein contained.'

The work was delayed because of the presence of hard materials. Pacific made claims for extensions of time and additional expenses which were rejected by Halcrow. Pacific then made a formal submission in accordance with condition 67 for the decision of Halcrow. When this too was rejected Pacific referred its claims to the ICC for arbitration in accordance with condition 67. The proceedings were compromised when the Ruler of Dubai agreed to pay Pacific some £10m in full

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and final settlement of its claims against him. In March 1986Pacific issued a writ claiming £45 m from Halcrow, being the unrecovered balance (including interest) of its claim against the Ruler of Dubai.

The Court of Appeal held:

(1) In considering whether a duty of care existed it was relevant to look at all the circumstances and these included the contract between the Ruler of Dubai and Halcrow.

(2) There had been no `voluntary assumption of responsibility' by Halcrow relied upon by Pacific sufficient to give rise to a liability to Pacific for economic loss in circumstances in which there was an arbitration clause. The position might well have been otherwise if the arbitration clause or some provision for arbitration had not been included in the contract.

SUMMARY

It would seem from the decision in Michael Salliss & Co Ltd v. Calil (1987) that architects and engineers could have a liability to a contractor if they fail to act fairly.

4.3 Falkland Islands v Gordon Forbes Construction (Falklands) Limited

Judgment: Attorney General for the Falkland Islands v Gordon Forbes Construction (Falklands) Limited, Falkland Islands Supreme Court 14 March 2003

The Issue: Whether witness statements prepared for the purpose of arbitration or litigation can be used to supplement the contemporary records of a claim.

Implication: Where a contract expressly requires the contractor to keep contemporary records to support claims for additional monies, that requirement will generally be strictly applied. Witness statements will not be admitted to remedy gaps in the contemporary records, except to the extent that the statements are used to identify or clarify existing records.

Forbes had entered into contract with the Falkland Islands government for the construction of the infrastructure of the East Stanley Housing Development in the Falkland Islands. The contract was based upon the FIDIC Conditions of Contract for Works of Civil Engineering Construction, 4th Edition.

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Disputes arose between the parties and these were referred to arbitration. During the course of arbitration an issue arose as to the meaning of clause 53 of the FIDIC Conditions. Clause 53 sets out a procedure which the contractor must follow in the event that he intends to make a claim.

Briefly, Clause 53 requires that if the contractor intends to claim any additional payment under the contract, he is required to give notice of his intention to the Engineer within 28 days of the event giving rise to the claim. The contractor is then duty bound to keep such contemporary records as may reasonably be necessary to support any claim he subsequently makes. The Engineer is given rights to inspect those records and to call for further contemporary records. The contractor is then to send to the engineer an account giving detailed particulars of the amount claimed and the grounds upon which the claim is based.

Clause 53(4) concludes by saying that if the contractor fails to comply with any of these provisions, his entitlement to payment is restricted to such amounts as the Engineer assesses the claim to be worth based upon whatever contemporary records are available.

The entire purpose of clauses such as FIDIC Clause 53 is to provide a disciplined way of dealing with claims for additional payment. Claims have to be notified at the time they arise and contemporary records have to be kept and regular accounts rendered. The whole contractual system is aimed at the early resolution of any queries at the time the claim arises, with the likelihood that plant, manpower and witnesses are still on site.

The obligations of Clause 53 fall almost entirely on the shoulders of the contractor and the wording of the contract is mandatory, the contractor "shall" do these things. The essential substance of such clauses is therefore that if there is no contemporary record to support the claim, the claim fails. Unsurprisingly, both the Falkland Islands government and Forbes Construction agreed this interpretation. Forbes was keen, however, that the court should agree with a clarification. They wanted to produce witness statements which would help to fill in the gaps in any situation where there was a shortfall in the contemporary records.

Before answering that question, Judge Sanders felt it appropriate to clarify what was meant by the term "contemporary record". The term is not defined in FIDIC and it has not been the subject of judicial guidance previously. Judge Sanders concluded the contemporary records meant original or primary documents or copies thereof, produced or prepared at or about the time giving rise to the claim, whether by or for the contractor or employer. The making of the record does not have to be instant, and whether or not a record was to be regarded as contemporary would depend on the facts surrounding the making of that record.

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It would however be exceptional if any record could be regarded as contemporary if made more than a few weeks after the event.

Judge Sanders concluded that it would be perverse if a contractor who had failed to comply with the terms of the contract should then be allowed to produce non-contemporary records to support a claim, particularly as these could not properly be investigated by the employer at a later date. The rights of the employer to inspect the records at the time the claim arose were fundamental to the FIDIC procedure. This fairly strict interpretation leaves little room for contractors to manoeuvre. The requirement to keep good records of activities on site in the event of a claim remains paramount. Judge Sanders confirmed that there is however exceptions where witness statements may be brought into play.

If contemporary records are in some way ambiguous or unclear, it would be acceptable for the tribunal to take into account witness statements which seek to resolve that ambiguity or lack of clarity. Judge Sanders also commented that a valid claim might exist, despite the absence of direct contemporary records, where inferences could be drawn from the existing contemporary records to show that otherwise unsupported parts of a claim were valid.

An example of this would be where the contractor claimed four weeks work by labourers but the available contemporary records only supported a claim for weeks 1, 2 and 4. It may be reasonable for the tribunal to infer from these records that the contractor continued to provide work for all four weeks and witness statements may be admitted in support of that contention. The tribunal would need to bear in mind however that the burden of proof in all such matters rested with the contractor.

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5. References

1. FIDIC Red Book 1999

2. 150 Contractual problems and their solutions, Roget Knowles, 2003

3. Falkland Islands v Gordon Forbes Construction (Falklands) Limited http://www.brewerconsulting.co.uk/cases/CJ0318CL.htm

4. Liquidated damages and extensions of time in construction contracts, Brian Eggleston 1997

5. Civil Engineering Blog, http://civilengineerblog.com

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