Contractual Claims

BINNINGTON COPELAND & ASSOCIATES

UNDERSTANDING CONTRACTS:PRACTICAL AND CHALLENGING ASPECTS

CLAIMS

sem\ucm6001r.ucd - 167 - © Binnington Copeland & Associates (Pty) Ltd (2006)

CLAIMS

WHAT IS A CLAIM?

It is a misconception to believe that claims are a substitute for a well prepared tender and willcompensate a contractor for the deficiencies on his bid. Neither will a claims approach put acontractor back into a position of positive cashflow where he has deliberately pitched hisprice at a sub-economic level in order to keep his resources occupied. All too frequentlycontractors see claims as being methods of compensation for situations where it is thecontractor who has placed himself in a position of uneconomic contracting. A claim is mostdefinitely not the difference between what you thought the job would cost and what itactually cost. Many experienced contractors still seem to believe in this definition.

Neither should employers expect to finish the contract for the price of the contractor's bid,more particularly where the conditions of contract provide a mechanism for variations to beinstructed by the principal agent and for extensions of time to be granted for a variety ofdifferent circumstances.

If employers want the lump sum price without the possibility of changes affecting the contractprice then far more care needs to be taken in the period leading up to tender, and the extent towhich the design is complete will have a fundamental bearing on the ultimate price outcome.

It is not unusual for the employer's professional team to spend months preparing thedocumentation for tender and then giving the bidders unreasonable time periods within whichto respond. Alternatively, significant areas of the work are unspecified at the time of tenderand a provisional sum or, worse still, no allowance at all is made and the employer isultimately taken by surprise when the final price significantly exceeds the tender sum.

Contracting is not, and never will be, a claims free environment. Claims must be seen to bewhat they are - fair compensation within the terms of the contract for a situation which iscontemplated within the contract alternatively, where not contemplated and where the risklies other than with the contractor, compensation as the law provides.

CLAIMS PROCEDURE AND TIME BARS

There is nothing in the common law regulating extension of time claims, time bars and thelike. In each case the grounds for claiming an extension of time, as well as the procedures tobe followed, must be found in the contract. These matters are always contract specific. Consider the following clauses:

M FIDIC Conditions of Contract for Construction (from the "New" FIDIC Suite)Clause 20.1: Contractor's Claims:

"If the Contractor considers himself to be entitled to any extension of the timefor completion and/or any additional payment, under any clause of theseconditions or otherwise in connection with the Contract, the Contractor shall



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give notice to the Engineer, describing the event or circumstance giving rise tothe claim. The notice shall be given as soon as practicable, and not later than28 days after the Contractor became aware, or should have become aware, ofthe event or circumstance.

If the Contractor fails to give notice of a claim within such period of 28 days,the Time for Completion shall not be extended, the Contractor shall not beentitled to additional payment, and the Employer shall be discharged from allliability in connection with the claim. Otherwise, the following provisions ofthis Sub-Clause shall apply. ...";

M FIDIC Conditions of Contract for Works of Civil Engineering Construction (The "OldRed Book"):

M Clause 53.1: Notice of Claims:

"Notwithstanding any other provision of the Contract, if theContractor intends to claim any additional payment pursuant to anyclause of these Conditions or otherwise, he shall give notice of hisintention to the Engineer, with a copy to the Employer, within 28 daysafter the event giving rise to the claim has first arisen.";

M Clause 53.4: Failure to Comply:

"If the Contractor fails to comply with any of the provisions of thisClause in respect of any claim which he seeks to make, his entitlementto payment in respect thereof shall not exceed such amount as theEngineer or any arbitrator. ... Assessing the claim considers to beverified by contemporary records (whether or not such records werebrought to the Engineer's notice as required under Sub-Clauses 53.2and 53.3).";

M National Construction Contract:

"26.0 VARIATION OF TIME FOR COMPLETION

26.1 Upon it becoming reasonably apparent that the progress of the Worksis likely to be delayed beyond Completion Date or beyond any timepreviously fixed under this clause due to the following event(s):

(a) by Employer's risk defined under sub-clause 21.1 (c) of theseconditions,

(b) by reason of any exceptionally inclement weather, or

(c) by reason of Architect’s instructions issued under clause 3,



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sub-clauses 13.1, 24.2 or 39.2 of these conditions,

(d) by reason of the Contractor not having received in due timenecessary instructions, drawings, details or levels from theArchitect for which he specifically applied in writing on a datewhich having regard to the Completion Date or to anyextension of time fixed under this clause was neitherunreasonably distant from nor unreasonably close to the dateon which it was necessary for him to receive the same, or

(e) by delay on the part of artists, tradesmen or others engaged bythe Employer in executing work not forming part of thisContract, or

(f) by reason of the opening up for inspection of any work coveredup or of the testing of any of the work materials or goods inaccordance with sub-clause 8.3 of these Conditions (includingmaking good in consequence of such opening up or testing), unless the inspection or test showed that the work, materials orgoods were not in accordance with this Contract, or

(g) by the Contractor's inability for reasons beyond his control andwhich he could not reasonably have foreseen at the date of thisContract to obtain delivery upon the Works such goods ormaterials which are essential to the proper carrying out of theWorks, or

(h) by delay caused in compliance to sub-clause 6.1 of theseConditions, or

(I) by delay caused by the Employer in failing to hand over thewhole of Site on the Date for Possession of Site named in theAppendix of these Conditions,

(j) or by delay caused by Employer in failing to pay theContractor's certificate in a stipulated time,

then within 30 days after such event(s) has first arisen the Contractorshall give a written notice to the Architect. Provided always that theContractor shall use constantly his best endeavour to prevent delaysand shall do all that may reasonably be required to the satisfaction ofthe Architect to proceed with the Works.

26.2 The Architect shall within 30 days of his receipt of detailed particularsof the claim for extension of time subject to sub-clause 26.3 of thisclause determine in writing a fair and reasonable extension of time for



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completion of the Works. Provided that if the Architect shall fail togive a decision on the Contractor's application of extension of timewithin the stipulated 30 days then the time applied by the Contractorshall be deemed to have been accepted by the Architect as being fairextension of time for completion of the Works.

26.3 The Architect is not bound to make any determination pursuant tosub-clause 26.2 of this clause unless the Contractor shall, within 30days after his notice under sub-clause 26.1 of this clause has beengiven, submit to the Architect detailed particulars of any extension oftime to which he considers himself entitled in order that suchsubmission may be investigated at the time.

26.4 Provided also that when an event has a continuing effect such that it isnot practicable for the Contractor to submit detailed particulars withinthe period of 30 days referred to in sub-clause 26.3 of this clause, heshall nevertheless be entitled to an extension of time provided that hehas submitted to the Architect interim particulars at intervals of notmore than 30 days and final particulars within 30 days of the end ofthe effects resulting from the event. On receipt of such interimparticulars, the Architect shall determine an interim extension of time and, on receipt of the final particulars, the Architect shall review allthe circumstances and shall determine an overall extension of time inregard to the event. No final review shall result in a decrease of anyextension of time already determined by the Architect. Provided alsothat the time stipulations for the Architects action and theconsequences thereof under sub-clause 26.1 of this clause shall beobserved.

26.5 If for the reason of Architect's instruction issued under sub-clause 13.2or 24.2 of these Conditions the scope of the Works has been reducedand to the opinion of the Architect the time for which the completion ofthe Works stated in Appendix or fixed under sub-clause 26.1 of theseConditions is likely to be or has been affected then the Architect shallforthwith make in writing a fair and reasonable reduction of time forcompletion of the Works.

27.0 LOSS AND EXPENSE CAUSED BY DISTURBANCE OFREGULAR PROGRESS OF THE WORKS

27.1 In the event that the Contractor has been involved in direct loss and/orexpense for which he would not be reimbursed by a payment madeunder any other clause in this Contract by reason of the regularprogress of the Works or of any part thereof having been materiallyaffected by:



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(a) the Contractor not having received in due time necessaryinstructions, drawings, details, or levels from the Architectwhich he specifically applied in writing on a date which havingregard to Completion Date stated in the Appendix to theseConditions was neither unreasonably distant from norunreasonably close to the date on which it was necessary forhim to receive the same, or

(b) the opening up for inspection of any work covered up or thetesting of any of the work, materials or goods in accordancewith sub-clause 8.3 of these Conditions (including making goodin consequence of such opening up or testing) unless theinspection or test showed that the work, materials, or goodswere not in accordance with this Contract, or

(c) any discrepancy in or divergence between the ContractDocuments, or

(d) delay on the part of artists, tradesmen or others engaged by theEmployer in executing work not forming part of this Contract,or

(f) Architect's instruction issued in regard to the postponement orany work to be executed under the provisions of the Contract,or

(g) delay caused by the Employer in failing to handover the wholeor part of the Site on the Date of Possession of Site named inthe Appendix of these Conditions,

(h) the supply by the Employer of materials and goods which theEmployer has agreed to provide for the Works or the failure soto supply, or

(I) by reason of increase or decrease of scope of Works certifiedby the Architect under sub-clause 13.1 of these Conditions,

then he shall give the Architect a notice of his intention to make such aclaim within 30 days after the event giving rise to the claim has firstarisen.

27.2 Within 30 days, or such other reasonable time as may be agreed by theArchitect, giving notice under sub-clause 27.1 of this clause theContractor shall send to the Architect an account giving detailedparticulars of the claim and the grounds upon which the claim isbased. Where the event giving rise to the claim has a continuing effect,



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such account shall be considered to be an interim account and theContractor shall at such intervals as the Architect may reasonablyrequire, send further interim accounts giving the accumulated amountof the claim and any further grounds upon which it is based. In casewhere interim accounts are sent to the Architect, the Contractor shallsend a final account within 30 days of the end of the effects resultingfrom the event. The Contractor shall if required by the Architect so todo, copy to the Employer all accounts sent to the Architect pursuant tothis sub-clause.

27.3 If the Contractor fails to comply with any of the provisions of thisclause in respect of any claim which he seeks to make, his entitlementto payment in respect thereof shall not exceed such amount as theArchitect or any Arbitrator(s) appointed pursuant to clause 40 of theseConditions assessing the claim considers to be verified bycontemporary records.

27.4 Any amount from time to time so ascertained shall be added to theContract Sum, and if an interim certificate is issued after the date ofascertainment any such amounts shall be added to the amount whichwould be otherwise stated as due in such certificate.".

QUESTION 2

How do these contracts approach the issue of time barring?

O



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As discussed above, the issue of time barring is always contract specific. The contract willprovide whether a failure to serve notices timeously constitutes a bar to a claim or whetherthe contractor still has a claim (albeit reduced), notwithstanding his failure to serve the propernotices in the proper time.

QUESTION 3

What if the contract is silent on the consequences of a failure to serve noticestimeously?

O



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WHAT SHOULD THE CONTRACTOR DO IF HE FINDS HIMSELF UNABLE TO SERVE THE

REQUIRED NOTICES

CASE STUDY 24

The contract requires that the contractor provide the following notices when he wishesto claim for additional time or money:

Notice that a circumstance has arisen to be provided within seven days of thecircumstance;

Details of the amount of time or money claimed within fourteen days of thecircumstance arising.

Both of these notices constitute full time bars in that the contract states:

"... failing which no claim shall be entertained.".

The contractor is delayed by rain. He serves the first notice within the seven days. Atthe end of the thirteen days, however, he finds himself unable to quantify the extent ofhis claim. He therefore serves the following notice on the agent:

"I find myself unable to calculate a precise quantification of my claim at thisstage. I therefore reserve my right to do so at a later stage and will send yousuch quantification as soon as I am able to provide same.".

Is the contractor still entitled to claim or has he lost the right to do so?

Note: Assume, for the purposes of this case study, that this is not an ongoing delay but israther an isolated event.

O



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O



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CASE STUDY 25

The contract requires that the contractor provide the following notices when he wishesto claim for additional time or money:

Notice that a circumstance has arisen to be provided within seven days of thecircumstance;

Details of the amount of time or money claimed within fourteen days of thecircumstance arising.

Both of these notices constitute full time bars in that the contract states:

"... failing which no claim shall be entertained.".

The agent has attended a training programme on project management where he wasadvised of the dangers of unexpected surprises and the importance of proper planning. He therefore puts up, at the beginning of each site meeting, a slide on the overheadprojector. This slide stays up for the entire meeting. It reads:

"Any delays? Any circumstances which could cause a delay? Anything weneed to know about?".

At these meetings various matters are discussed. At the third meeting the partiesdiscuss numerous issues. The contractor states that he is concerned that he will fallbehind if he does not receive drawings from the agent soon. The agent replies:

"No problem. I'll see to it.".

At the fourth site meeting a copy of the minutes from the third meeting is distributed. All of those attending the meeting glance over the minutes and sign them. Included inthese minutes are the following words:

"The contractor pointed out his concerns regarding delays in the issue ofdrawings. He stated that he could fall behind if he did not receive thedrawings soon. Action - Agent".

At the fifth site meeting the contractor raises the issue of a claim for late delivery ofdrawings. The agent argues that the contractor has failed to provide notice in terms ofthe contract and that he is therefore barred from claiming. The contractor argues thatnotice was given and he points to the minutes of the meeting as notice.



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Has proper notice been given?

O



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O



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EARLY WARNING

The concept of early warning was first introduced in the NEC contract and has subsequentlybeen imported into a number of other forms of contract, including the new FIDIC Short Form. An important aspect of the NEC philosophy is that this contract is more than a list of shallsand shall nots. It aims at providing more than a statement of the rights and obligations of theparties and providing, instead, a project management tool that facilitates streamlinedmanagement of the project by all parties. One of the mechanisms used to encourage soundproject management is the early warning procedure.

Early Warning Under NEC

The NEC contract provides a mechanism for either the contractor or the project manager togive an early warning of time, cost or works performance problems (this last beingparticularly applicable where design is being undertaken by the contractor). This innovativeprovision allows either the project manager or the contractor to actually instruct the otherparty to attend an early warning meeting for the purpose of discussing the problem. Either theproject manager or the contractor may also instruct other people to attend subject to theagreement of the other party.

The early warning meeting is intended to allow open discussion and to advance proposals andseek solutions, as well as to determine what actions would subsequently be taken arising outof the discussion. The responsibility for recording any proposals and decisions given remainthose of the project manager, who is obliged to give a copy of his record to the contractor.

The concept of early warning is an integral part of the NEC approach to contracting andillustrates the emphasis on sound project management. Matters should not be allowed toescalate but should rather be handled promptly, in a spirit of co-operation and at the lowestpossible cost.

M Clause 16 places a positive duty on both the contractor and the project manager togive early warning as soon as either becomes aware of a matter which could:

M Increase the total of the prices;

M Delay completion; or

M Impair the performance of the works.

M Either the contractor or the project manager may call an "early warning meeting" andmay call on others to attend.

M At the early warning meeting the parties are obliged to co-operate in finding solutionsto the potential delay/increase in cost/impaired performance.

M Any decisions taken or solutions found are recorded by the project manager who then



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gives a copy to the contractor.

If the contractor fails to give early warning of an event, the payment due to him for thecompensation event is reduced. Clause 63, which regulates the assessment of compensationevents, provides that, where the contractor has failed to give an early warning, hiscompensation will be assessed as what he would have received had timeous warning beengiven. Thus, if the effect of a compensation event could have been mitigated by timeouswarning, the contractor will be paid the reduced sum.

If the project manager fails to give early warning of an event, he will have breached thecontract and failed to maximise the employer's interests.

Early Warning Under FIDIC

The new FIDIC Short Form of Contract has introduced the concept of early warning inClause 10.3 which provides as follows:

"A Party shall notify the other as soon as he is aware of any circumstance which maydelay or disrupt the Works, or which may give rise to a claim for additional payment. The Contractor shall take all reasonable steps to minimise these effects.

The Contractor's entitlement to extension to the Time for Completion or additionalpayment shall be limited to the time and payment which would have been due if hehad given prompt notice and had taken all reasonable steps.".

PREPARING THE CLAIM SUBMISSION

There is no point whatsoever in dumping on the principal agent's desk a box of papers with acovering letter stating the amount of compensation which the contractor requires.

Irrespective of the size of the claim, if it is worth making then it is worth submitting in properformat. Good claims have received short shrift on many occasions because the submission ofthe claim has been shoddy. Equally some dubious claims have succeeded where they havebeen professionally set out and well presented.

The format for a claim submission is suggested as being as follows:

M Introduction

This will state the basic details of the contract and the reasons behind the claimsubmission. It will, if there are a number of claim heads, constitute an executivesummary and should state what is being claimed in general terms (ie. the sum of R4mtogether with an extension of time of six weeks);



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M Introduction - Executive Summary

M Index

The documentation will fall into several sections and should be indexed andpaginated appropriately;

M Contractual Summary

The contract details (contract data) will be set out and the essential clausesreferred to;

M History of Events

A synopsis of the key events giving rise to the claim, set out in chronologicalorder, cross-referencing key documents which documents will be annexed tothe submission;

M Claim Heads

Each of the heads of claim should be set out individually. It would beexpected that Section 3 would already have set out the generalities giving riseto the overall claim situation, but the heads under the situation will amplifySection 4 and will include the quantification and supporting documentation,either separately annexed and cross-referenced or included under theindividual head of claim;

M Annexed Documents

These should form part of the general pagination but might be sub-dividedinto, for example, correspondence, minutes, programmes etc.;

M General Comments

The claim should be written as if it was being addressed to a person with noknowledge of the contract. Similarly, even where documentation is obviouslyin the hands of the people to whom the claim is addressed, it should beincluded in the claim for ease of reference.

Emotive language should be avoided. Irrespective of the situation whichdeveloped on the site, a claim will have a far better chance of success if it isseen to be presented from a balanced point of view.

Do not include claims which have no basis in contract or law with theintention of using them as throwaway items during a negotiation. Theinclusion of claims having no substance will impact upon the credibility of



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those claims of substance. Similarly, do not over quantify claims in order tohave a negotiating margin. Whilst some margin is acceptable, the inclusion ofsignificant sums will again impact on the credibility of the substantive claim.

Finally, remember that if the negotiations fail and the claims have to moveforward into dispute resolution procedures, whether formal or ADR, the claimsubmission will have been made with prejudice and will be available to thetribunal, even if it has been superseded by another document. The samecomments apply regarding claim credibility. Thus, if the submission todispute differs radically from that to the agent, a full explanation must beincluded to avoid the suspicion that the claims are being manufactured.