Finance Charges on Late Payments

James WoodClaims Manager & Head of Quantity Surveying & Quantum Department

Finance Charges on Late Payments

James WoodClaims Manager & Head of Quantity

Surveying & Quantum Department

Assessing damages in construction contracts: Establishing causation and the concept of direct and indirect losses in Romanian law

Corina DragotaSenior Lawyer

Contracting in Romania – Risks, advantages, constraints, contract management, construction law and guidance, best practices, disputes and arbitration 5

to the contractor as a consequence of delays on a project that stem from such Employer Risk Events, and this month we are going to consider the impact of late or no payment of sums due to the contractor and how the contractor may redress this.Such an entitlement may arise under a number of exemplified circumstances, as follows:· Engineer certifies monies due yet the Employer fails to pay; · Engineer certifies monies due yet the Employer pays late;· E n g i n e e r f a i l s t o c e r t i f y a n d consequently the Employer fails to pay;· Engineer delays the certification and the Employer pays late or fails to pay; and· No Engineer available to certify and consequently the Employer fails to pay.The Contractor's entitlement to financing c h a r g e s a r i s e s a u t o m a t i c a l l y ; t h e Contactor is not required to serve any n o t i c e , n o r t h i s r e q u i r e a f o r m a l certification.The terms that govern when payments should be made to the Contractor are covered under Sub-Clause 14.7 of the General Conditions of Contract of the FIDIC suite of Contracts, and we often find that there are amendments to these provisions in the Particular Conditions for specific Projects. Such amendments are usually intended to be helpful by reflecting the accounting processes that both the Employer and Contractor may have to follow to facilitate payment, such as the agreement of a Certified amount followed by the raising of an appropriate invoice by the Contractor.

In times of economic down-turn, the ability to receive payment for work executed or other monies that may be due and payable to a contractor, becomes increasingly more difficult to achieve as Employers and Engineers alike become more resistant to doing things in accordance with the terms and conditions of the contract. There may be valid reasons why Employers and Engineers believe that they are entitled to withhold money, but most circumstances seem to arise from ill-informed and somewhat naïve stances being taken by these parties.As part of our approach to claims, we always have to consider what entitlement the Contractor may have accrued due to circumstances beyond its control for which the Employer takes responsibility and carries the risk under the contract. In previous Newsletters, we have given consideration to the calculation of additional Site Overheads and Head Office Overheads that become due and payable

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collecting and processing the input data.Consideration should also be given to local legal provisions which may impact further upon the nature of the calculation of this head of claim. For example, in accordance with the legal provisions regulating the application of financing charge payments in Romania, any payment ultimately received form the Employer in respect of the payments in question in such head of claim, should be first considered as payment towards the financing charges t h a t a r e d u e a n d p a y a b l e t o t h e Contractor. Any residual amounts can then be used to fund the payment towards the original principal amount that was due for payment. This is often misunderstood by Employers, who, once a payment has been made of consider that the debt of the principal has been settled. This is not the case and has been upheld by tribunals and courts in the country.In conclusion, the Contractor should: · Know your entitlement; · Issue timely notices; · Issue timely invoices, and · Understand how to calculate the amounts of finance charges due.

to issue any form of notice in respect of the application of its entitlement under Sub-Clause 14.8. Deviation from this principle could be found in the Particular Conditions where the Contractor loses its rights to receive financing charges to the unpaid amounts if it does not issue an invoice for the amount of financing charges it considers to be due. Despite this, it is always good practice for the Contractor to issue a letter to the Employer, advising him that payment has in fact not been received and notifying that financing charges shall be applied to the unpaid amounts. For practical reasons, the Contractor should include the financing charges it considers to be due to it in each Statement as part of the interim payment procedures.In some jurisdictions, we find that Sub-Clause 14.8 is quite often heavily amended through the Particular Conditions, and it is often the case that such amendments are poorly drafted resulting in confusion as to what, how and from when the financing charges are to be applied.Once any anomalies from the Particular Conditions have been addressed, the calculation of the financing charges is a relatively simple affair, and involves

Irrespective of the amendments that may be made in this context, and as reflected in the General Conditions of Sub-Clause 14.7, the Employer would ordinar i ly be expected to make a payment to the Contractor within a certain number of days following a triggering event, whether this be the issue of a Payment Certificate as anticipated by the General Conditions, or an invoice date as is often the case in Particular Conditions.Where payment is not made by the Employer in accordance with the timing provis ions of Sub-Clause 14.7, the subsequent Sub-Clause provides the mechanics for determining the rights of the Contractor to apply financing charges to the unpaid amounts. The standard drafting contained within the FIDIC contracts is quite simple in its intention, in that monthly compounding of finance charges are to apply to the unpaid amounts during the period of delayed payment. The reference rate for the calculation is also legislated for in the standard drafting.It is important to note that the standard drafting of this Sub-Clause expressly excludes the necessity for the Contractor

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business who, at the time of the conclusion of the contract, could have foreseen the consequences of non-performance in the ordinary course of events and in the particular circumstances of the contract.

By exception, the debtor shall also be liable for unforeseeable loss whenever its actions constituted wilful misconduct and gross negligence (this is the case of tortious liability).

2. The concept of direct and indirect losses

Consequential or indirect losses, which are a feature of the FIDIC Suite of Contracts (Sub-Clause 17.6), are not expressly provided for in the Romanian Civil Code and have a different meaning.

In common law, these losses arise out of specia l c i rcumstances not ordinar i ly foreseeable, rather than arising naturally in the ordinary course of events (such as direct losses). They still result directly from the breach, but may not be noticeable to one of t h e p a r t i e s i n a d v a n c e w i t h o u t communication of the other party's special circumstances. They are recoverable in English Law, under the second limb of Hadley

3v Baxendale.

Under Romanian law, there is no such express qualification for the recovery of losses. According to Article 1533 of the New Civil Code, the recoverable losses are only those which are a 'direct and necessary consequence of non-performance'.

Corina DragotaSenior Lawyer

Assessing damages in construction contracts: Establishing causation and the concept of direct and indirect losses in Romanian law

1. Causation – The Foreseeability Test

One of the prerequisites of being awarded damages under Romanian law is for the claimant to establish the causation between the unlawful act (or breach) and the loss incurred. Further, it is for the courts to assess whether and to what extent the loss claimed was a direct and necessary consequence of the breach and to award the appropriate damages to the claimant. It has been argued

1by the doctrine that, when evaluating the extent of the loss, the court should not take into account any other element of civil liability, such as the magnitude of the unlawful act and the degree of fault.

In order to put the aggrieved party in the position it would have been in had the breach not occurred and ensure full recovery, R o m a n i a n l a w s e t t h e t e s t a s t h e foreseeability of the loss, unlike in English law

where the test is that of remoteness, set by 2the famous case of Hadley v Baxendale . The

foreseeability test is provided by Article 1533 of the New Civil Code:

'The debtor is liable only for the loss which it foresaw or could have foreseen at the time of the conclusion of the contract as being likely to result from its own non-performance, except the case in which the non-performance is due to its wilful misconduct or to its gross negligence. Even in the latter case, damages do not comprise anything else than what is the direct a n d n e c e s s a r y c o n s e q u e n c e o f n o n -performance.' [Emphasis added]

According to the above, the rule is that only the loss foreseen or foreseeable at the date of the contract can be recovered. It is thus assumed that the parties undertook to perform only those obligations whose consequences they could have foreseen at the time of concluding the contract. The standard of foreseeability is abstract and, in construction contracts, is that of a diligent person/professional in the construction

1 I.M Anghel, Fr.Deak and M.Popa, Raspunderea civila, Stiintifica Publishing, 1970, pp.273-274.2 [1854] 9 Ex 341. Two type of damages are recoverable according to this law: (i) general damages or direct damages, according to which the parties are taken to foresee loss which is not unlikely to happen as a result of a breach of contract in the ordinary course of things. This type of loss is known as "first limb" loss. The standard is that of a reasonable person that is assumed to know information in the "ordinary course of things."; and (ii) special damages or consequential/indirect damages aimed to recover loss which arises from the actual knowledge or special circumstances that the parties had at the time they entered into the contract; they are additional damages other than those deriving from ordinary course of things. This is known as "second limb" loss.3 [1854] 9 Ex 341.

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circumstances, caused the loss. This means that in a construction contract, one should analyse the causal link in an objective manner and from the acts which occurred prior to the loss, choosing only those which caused the damage to a smaller or bigger extent. The judge should decide the recoverable law based on the general rule that the loss should be a direct and necessary consequence of the non-performance.

Applying the rationale mentioned above, the general approach of Romanian law is that the ' indirect losses' are a lso r e c o v e r a b l e p r o v i d e d t h a t t h e y unequivocally result from the non-performance (presumably this situation could also cover the other party's notice), as opposed to those indirect losses that a r e n o t a d i r e c t a n d n e c e s s a r y consequence of the breach, as they fail the foreseeability test.

to pay the debt and the alleged loss of the creditor to pay interest on the agreements for financing the creditor's current activity, being unforeseeable, and dismissed the

7creditor's request.

1. Conclusions

Proof of causation is usually an essential ingredient to finding liability. Thus, it is generally incumbent upon the claimant to show not only the fact of the damage itself but also that it is causally connected to the m a t t e r c o m p l a i n e d o f (t h e n o n -performance lato sensu).

The causation is decided based on the vague test of foreseeability, and there are no special provisions in the Civil Code to ass ist the court to determine the causation.

A judge must enquire into the cause-phenomenon which, in the complex

Hence, the debtor shall be liable only for losses that result directly from the

4unlawful act. Certain Romanian scholars have qualified these recoverable losses as 'direct losses'. However, it has been counter-argued that this legal provision not only covers the direct losses, but also implies the recovery of indirect and n e c e s s a r y l o s s e s , i . e . l o s s e s t h a t undoubtedly resulted from the non-

5 6performance . Furthermore, the doctrine explained that the direct loss is different than the loss caused directly, as the direct loss may include not only the loss caused in a direct manner, but also the loss caused in an indirect manner.

As a result of the above rule, one can certainly argue that the debtor shall not be liable for indirect damages which are not a necessary consequence of the non-performance. Applying this principle, the Supreme Court of Justice decided that there is no causal link between the failure

4Fl. Baias and others, Noul Cod Civil. Comentariu pe articole, C.H. Beck Printing, 2012, p.1247.5D.E.Singeorzan, Raspunderea contractuala in materie civila si comerciala, Hamangiu Printing, 2009, p.39.6C.Jugastru, Prejudiciul. Repere romanesti in context european, Hamangiu Printing, 2013, p.45 quoting M.Eliescu, Raspunderea civila delictuala, Academiei Publishing, 1972, p.97.7Supreme Court of Justice, Decision no.1117/1998 of the, in Commercial Law Review no.3/1999.

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Contracting in Romania – Risks, advantages, constraints, contract management, construction law and guidance, best practices, disputes and arbitration

We pride ourselves in being invited by the Association of Spanish Companies in Romania (ASEMER), to organise the workshop on “Contracting in Romania nowadays – Risks, advantages, constraints, contract management, construction law and guidance best practice. Disputes and arbitration”, which took place on 29 November 2016 at the Crowne Plaza Hotel, with guest speaker Mr. Laurentiu Plosceanu, the President of the Romanian Association of Construction Contractors. Engaging and inspiring experts from Techno Engineering & Associates such as James Wood (Claims Manager & Head of Quantity Surveying and Quantum Department), Clive Horridge (Senior Contracts Advisor) and Marius Teodorescu (Senior Lawyer & Deputy Head of Legal Department), together with our President and Senior Partner, Giovanni Di Folco gave informative presentations, advising on issues faced by International Contracting companies involved in major infrastructure projects in Romania. The workshop agenda included Risks, Constraints, Integrated Contract Management, Construction Law and guidance on best practice in the construction industry. The event was considered very successful, attracting senior representatives of various international contractors from countries outside of Romania including Spain, Portugal, Germany, Israel and Greece, either already operating in Romania, or intending to take on projects in the country. The presentations attracted fruitful discussions in an atmosphere of lively interactive debate, and our experts shared their experiences and know-how of the Romanian construction market, presenting the advantages of doing business in the construction sector in Romania, the constraints that exist, and how they could be surpassed by applying world best practice of Integrated Contract Management to the whole construction process, from bid to completion. After all is said and done, we at Techno Engineering & Associates wish to share our experiences by communicating what we know and the experience that we have gained. We have a very special team of professionals with backgrounds in project and contract management, claim preparation, as well as construction professionals. Combined, they can provide you with exceptional knowledge which will enable your next project to be conducted as safely and securely as possible. We feel that the International Contractors actively involved in Romanian projects need to be represented with a common voice, to better face the challenges that are evident in the construction business environment in Romania. We understand the difficulties in the sector and it is our mission to keep you up-to-date with the latest best practices and guidance that you will need to be as prepared as possible to safeguard your projects as much as possible. Thinking ahead, we shall be participating at special events coming up in 2017. For instance, our President and Senior Partner, Mr. Giovanni Di Folco will be the main speaker at a seminar on the 11th of January 2017 in the capital of Serbia, Belgrade, the subject being “Adequate management of claims and dispute resolution under FIDIC's suite of Conditions of Contract, First edition 1999, and the operation of Clause 20 therein following international expert and construction law best practice”. Renowned teachers from the Faculty of Construction Management, Belgrade will join the seminar. We will very soon reveal all the details of this informative event. Stay tuned!

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We hereby kindly inform you that Techno Engineering & Associates

will be closed for the winter holidays from 24th of December 2016

to 2nd of January 2017.