Using claims can avoid disputes
STUART JORDAN* highlights how including mechanisms for making claims in contracts can help prevent problems on projects.
01 October 2014
DELAY in projects isn’t good and neither is extra cost. But since these things happen, the mechanisms in construction contracts to deal with them are helpful to both parties. The interesting point is that these provisions are not always operated in the Gulf.
Time and money claims are contractor claims, using the contract processes, for extensions of time and for “loss and expense” – or monetary compensation for delay and disruption to work progress. Of course, these are common in the region but they are not as often the basis of disputes as we see elsewhere. On the face of it, this looks like a good thing if parties in this region are doing better at avoiding these disputes. On a closer look, however, this might simply be fuelling other problems.
From our experience, Middle East disputes (in arbitration, litigation or other process) are often about defects, withholding of payment, late completion, and summary cancellation or termination of contracts. Some of these involve quite catastrophic contractor performance problems, not just a few tests or inspections failed or late by a few days. Project owners tend to react in equally extreme ways. The complaints are usually about both the contractor’s performance and about the owner’s reaction to it. This is normal life across the construction world. The interesting feature in the region is that the contractor has sometimes not made any attempt to use the contract mechanisms for claiming extensions of time or “loss and expense” arising from events which may have delayed and disrupted the progress of work. This has been a surprise, coming from a background where contractors will make such claims as soon as the entitlement has arisen – and sometimes when it has not!
There is a link, in my view, between this reluctance to use the claims apparatus, and the disaster scenarios mentioned above. Without making such claims, contractors continue to be hampered by events which should allow more time and money; they become delayed and make technical mistakes in trying to work around these problems. At that point, the contractor cannot turn back the clock, make the claims retrospectively and present the situation as being the owner’s risk. For a start, many forms of contract – including Fidic (International Federation of Consulting Engineers) and the NEC/ECC (Engineering and Construction Contract) forms – include time bars which disqualify claims made after a certain time beyond the event which gave rise to it. Secondly, if the contractor has made technical mistakes – albeit in good faith to try to work around the problem – he has become responsible for entirely new problems which are not the owner’s risk or fault.
So what are the reasons for the (relative) reluctance here to make such claims? Without pretending an expert view, I can only offer the following, from my and others’ experience:
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Jordan ... defining contracts. |
Some contractors believe that these claims mechanisms are effectively optional because in the end, the prevailing local law will require equality and overall fairness of outcome, which will recognise these problems suffered by the contractor. Helpfully, some owners share this view and will accommodate this in the final accounting for the project – and so there is no dispute. If they do not share the view, this might not be a safe approach to take. Certainly, where the contract provides that disputes are to be resolved in international arbitration, it is only seen that arbitrators read and interpret the contract as it is written, on contractor claims.
Some contractors appear to be culturally averse to raising time and money claims. This is seen more with East Asian contractors, and more so with those new to the region. When problems arise, their reaction is to keep quiet about it, not make a fuss, not highlight any kind of failure (even if it is not their fault), work harder and try to overcome it. This is admirable and it is difficult to criticise if it works – and maybe it often does, in which case people don’t get to hear about it. But of course, if it doesn’t work, it ends up in the disaster situation mentioned earlier. This approach is also taken by contractors (again, those new to international forms of contract) who simply do not understand that the contract terms include claims mechanisms like this.
This cultural aversion is not unique to East Asian contractors. Across the Middle East – indeed everywhere – there is a widespread view that contractual claims for extensions of time and for “loss and expense” are confrontational; themselves amounting to a dispute. This is ironic because the purpose of such provisions is almost the opposite. It is worth recounting that the intention of these provisions is to recognise certain implementation risks as being so fundamental to the initial bargain made by the parties, that they should be recognised as entitling the contractor to an agreed adjustment to the contract price and/or the time for completion. Change management is a fundamental benefit to the project; it is co-operative rather than confrontational and has the added benefit of bringing problems to the surface early on, to give owners the chance to manage them proactively.
In the same way, we should remember that time extension provisions are there largely for the benefit of the owner and not the contractor. Without the ability to shift the completion date, any breach or interference by the owner which causes delay to completion would result in the owner not being able to insist on completion by the agreed date – and would also remove his right to claim liquidated damages for delay. Likewise, the provisions for “loss and expense” formalise and delimit what would otherwise be contractor claims for general compensation. These provisions are supposed to bring clarity and certainty of outcome, thus avoiding disputes.
However, the reality of this should also be acknowledged: despite the good intentions, a great many contractual claims for time and money do become actual disputes. This might be because the parties themselves are determined to fight about it: for instance, if a contractor has under-priced the works and needs to raise claims regardless, or if an owner is determined to refuse even good claims.
In those cases, the fight is unavoidable but there is another main contributor to time and money disputes which is avoidable: too often the contracts themselves are incomplete and unclear on contractor entitlement. Deficiencies like this will always produce disputes even where the parties are not looking for one. We recently analysed the time extension provisions of eight major published forms of contract asking basic questions about how they provide for this to be worked out, such as:
• Does a claim trigger on delay to completion or just delay to progress?
• How much extension is to be calculated; what is the relationship between the delay event and the extension?
• When is this assessment to be made: when the claim is made or when the impact has been fully observed?
• Is entitlement to be based on a projection, regardless of actual impact later being known to be different, or is it subject to a review?
• What about the contractor’s own delay?
• What is the relevance of the contractor’s programme/schedule?
• What if the claim is about events occurring after the required completion date?
• What evidence is used to decide the claim?
• Is the claims process mandatory: is a claim disqualified by failure to follow it?
None of the standard forms expressly provides the answers to all of these questions. This wasn’t a surprise, of course. This is one of many areas in which standard form contracts are routinely amended. The best of them do provide reasonably clear principles of entitlement from which many of the answers could be deduced. Some of them, however, are completely inadequate, lacking any real directions about how to work out the time extension in real-life situations. They seem to be almost designed to turn contractual claims into disputes.
In order to cut that connection, contracts need to be better drafted, following basic objectives of creating clarity and certainty of outcome:
• Set a clear basis for assessing whether entitlement has arisen, and how much; cover for as many situations as possible.
• Clarify the claim and assessment process; state the consequences of failure to follow it.
• Make sure the facts are available – by maintaining of records and programmes/schedules – including format, content, intervals and method of updating them.
• Agree a method of how to analyse the delay, which is consistent with the first requirement mentioned above.
Without these features, it is no wonder that parties associate contract claims with disputes. It looks perfectly rational that parties here and elsewhere might be reluctant to engage with the claims processes. We need to do better with the contracts.
*Stuart Jordan is partner and co-head construction for the international law firm King & Wood Mallesons SJ Berwin (KWM SJB). Based largely in Dubai, UAE, he specialises in engineering and construction matters, cross border, both front end and disputes.
The firm recently entered into an exclusive association with the Law Office of Majed Almarshad to open an office in Riyadh, marking the first time that a global law firm headquartered in Asia has established a permanent presence in Saudi Arabia.
