Preparing and Submitting Claims-PSI

An Introduction

Into

Successfully Preparing

And

Submitting Contract Claims

Prepared for

By

Malcolm R. Davis

November 2001

75/33 RICHMOND BUILDING 12 FL. SUKHUMVIT SOI 26, SUKHUMVIT RD.

KLONGTON, KLONGTOEY BANGKOK 10110, THAILAND

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Created by Malcolm Davis Page 2 of 42 Preparing and Submitting Claims-PSI.doc

Index Page

Description Construction Contract Claims and Disputes Four Conditions of a Contract Peculiarities of Construction Projects The Parties to a Construction Project What is a Claim? "Entitlement + Quantum" Basic Principles of Equitable Adjustments Causation and Linkage Burden Of Proof General Rule of Damages Construction contracts - Variations Orders Procedures for Variations Valuation of Variations Direct Cost Direct Overheads Indirect Overheads and Net Profit Delay Disturbance and Loss of Productivity Summary of Basis of Valuation Valid claims may be rejected Timely notice and claims Following contract procedures Keeping records The claim essentials Constructive Acceleration Liaising with the engineer Proving the claim Documenting disputed claims Being Professional Construction Case Law in Accordance with English Law

Estoppel Notices of claims Claims for head office overheads and profit Claims for delay and disruption Formulating the cost of delay Implied terms in subcontracts The meaning of consequential loss Fair valuation Description of Appendices Appendix I - Master Filing Systems Appendix II - Principles and Policies in Delay Analysis

Page Number

3 3 4 4 5 5 6 6 7 8 11 12 12 13 13 14 15 15 16 16 17 17 18 18 21 22 23 23 24 25 27 29 31 33 35 37 39 42 - -



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Introduction Construction Contract Claims and Disputes Because of their inherent complexity, construction projects generate claims and disputes, which usually result from disagreements over contract requirements. It is characteristic of the construction process that contingencies routinely upset the delicate balance of coordination and timing necessary for a smooth-running project. Provisions are made in most contracts for the contractor to receive both additional compensation and time extensions when these contingencies occur. Such provisions are designed to shift the primary risk of such contingencies to the owner, thereby reducing overall project costs because the contractor doesn’t have to make provision for them in his bid. However, the mere presence of such provisions in the contract does not automatically eliminate disputes, since issues of fact regarding application of the clause, costs, and the like must still be resolved.

In a competitive environment, bidding pressure forces contractors to interpret requirements at the minimum level possible, in fear that if they do otherwise, the work will be lost to a competitor. Main Contractor’s personnel and private owners on the other hand, interpret the contract requirements to call for the highest possible standard of performance, because that is what will benefit them.

Thus, for these reasons, the parties are pulled in opposite directions by these forces. And, when the built-in tension cannot be resolved by mutual agreement, the result will be the submission of a claim and possibly litigation if agreement still cannot be reached. The simple fact is that the Contractor is placed in a position opposite that of the Owner, with the Contractor’s goal being to complete the project on time and make a profit. Whereas the Owner’s goal is to complete the project and hold costs to a minimum. Four Conditions of a Project Basically, controversies arise out of the performance of a construction contract because of four conditions, which are a part of virtually every project; they are:

the multitude of activities

the technical nature of these activities

the protracted performance period

the involvement of numerous parties with varying and often conflicting

interests.

The interaction of these four conditions gives rise to disputes, which must then be settled in one of three ways negotiation, arbitration, or litigation. Coordination of these four conditions so that disputes are avoided is the challenge to all parties to the construction project.



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Peculiarities of Construction Projects Contracts are complex documents, involving a maze of clauses, special conditions, detailed specifications and performance standards. Many of the applicable documents will not be attached to the contract but merely mentioned or listed in it. The parties involved in any construction project frequently have conflicting interests. Perhaps such conflicts are most apparent in the case of the buyer or owner when he assumes his role as arbiter of disputes. Many construction contracts provide that the design professional shall act as final arbiter of certain enumerated types of disputes between the owner and his prime contractor. In such a role, the architect or engineer is acting in a quasi-judicial role and his impartiality is presumed. A recurring Engineer / Contractor conflict of interest situation arises where the Engineer’s fee is based on a “cost-plus a fixed-fee” basis, while administering the performance of a Contractor that is performing under a “fixed-price” construction contract. Here the Engineer’s desire to generate a large fee must be balanced against a duty of trust, which obligates him to keep the costs of the total project, including those of the Contractor, at reasonable levels. The Parties To A Construction Project The construction cast of characters is large. Those involved in the typical construction project include:

The Owner

The Design Professionals

The Prime Contractor

The Subcontractor

The Supplier

The Surety

The Consultant



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What is a Claim? “Entitlement + Quantum” A construction claim consists of two major parts: (1) the entitlement section, which typically includes a detailed description of the actions or inactions of the party from whom relief is sought, entitling the claimant to compensation; and (2) the damages section, which sets forth the calculations and support for the compensation claimed. The two parts are equally important because without entitlement, damages cannot be recovered, and without damages, proving entitlement is of little value. The damages section of most claims is often given inadequate explanation, analysis, presentation and backup, and as a result, otherwise valid construction claims are often rejected during the negotiation phase of the dispute or are substantially undervalued. Damages that are calculated even to the smallest degree of detail are of no value, however, if the damages are not causally linked to the entitlement claimed. When analysing construction claims it is necessary to continually reflect on the claimed entitlement to make sure that the damages claimed actually flow from the entitlement event asserted. Well prepared, damage claims should contain explanations of how they are linked to the entitlement claimed. When defending against a claim, the causal link or lack thereof between damages claimed and entitlement asserted provides a basis upon which to attack the claim. Construction contract claims are provided for in private and public sector contracts. Definition:- A Claim is a demand or assertion by one of the parties seeking, as a matter of right,

adjustment or interpretation of Contract terms, payment of money, extension of time or other relief with respect to the terms of the Contract. The term “Claim” also includes other disputes and matters in question between the Owner and Contractor arising out of or relating to the Contract. Claims must be initiated by written notice. The responsibility to substantiate Claims shall rest with the party making the Claim.

Basic Principles of Equitable Adjustments Construction contracts frequently contain provisions that are procedural means for a contractor to request additional payment. The use of an equitable adjustment clause provides for an administrative means by which compensable problems can be remedied. Further, the intent is to place the contractor in the same position had there been no problem. The primary purpose of an equitable adjustment is to keep a contractor whole when he complies with a change order. The purpose is not to favour a contractor by bailing him out of an improvident bid, nor does to favour the Owner by permitting it to recoup with respect to any prices it deem on hindsight, to have been too high. In essence, the purpose of a monetary equitable adjustment is to adjust equitably for any increase or decrease in his cost of performing the contract work varied pursuant to the pertinent ‘Variations’ clause”



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Causation and Linkage Entitlement is a prerequisite of equitable adjustment. Therefore, before the issue of the amount can rise, there must be a contract change, ordered or constructive, for the Owner or the Contractor to be entitled to an equitable adjustment. Linkage between causation and damages is absolutely necessary for an equitable adjustment. As a result, when analysing damages, it is necessary to examine the causation carefully to be sure that the proper link has been asserted. When linking the entitlement, it is important to determine if the actions have affected the entire project or just certain portions of the project. If only specific portions of the project have been affected, these portions should be isolated and shown to be either the only ones affected by the actions asserted, or the ones most affected. The affected portions can be identified either by time period or by type or phase of work. To prove causation, a contractor is required to show that an act or omission by the owner (or one for whose acts the owner is responsible) affected the contractor to his detriment. Burden Of Proof The contractor pursuing a claim has the burden of proving every element of its case including the damages that flow from the alleged injury, including the burden of proving both the existence and the amount of the damages incurred.



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General Rule of Damages In a civil action for breach of contract the objective of the trier of fact is to place the claimant as near as possible in the same financial position he would have been in had the breach complained of not occurred. All that is necessary in order to charge the defendant with the particular loss is that the loss be one which ordinarily flows from the breach of such a contract in the usual course of events, or that reasonable men in the position of the parties would have foreseen the loss as a probable result of the breach. In the case of Hadley v. Baxendale, 9 Exchequer 341 (1854), it was held that damages for breach of contract must be “such as may fairly and reasonably be considered arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable breach of it.” Damages, which naturally arise from the breach are referred to as general or direct damages, and those which may not naturally flow from the breach but which may reasonably have been in the contemplation of the parties at the time of the contracting are referred to as indirect or consequential damages. If damages are determined to be direct, they are compensable. If damages are determined to be consequential, they are compensable only if it is determined that the special circumstances were within the contemplation of both contracting parties. A claimant need not prove his damages with absolute certainty or mathematical exactitude. It is sufficient if he furnishes the court with a reasonable basis for computation, even though the result is only approximate. Yet this leniency as to the actual mechanics of computation does not relieve the Contractor of his essential burden of establishing the fundamental facts of liability, causation, and resultant injury.



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Construction contracts – Variations Orders Scope of Variations An engineer cannot, without express authority, vary the contract between the owner and/or buyer and the contractor, or otherwise bind the owner and/or buyer, or make a new contract, or incur costs. Doing so would be purporting to be an agent of the owner and/or buyer, and in the absence of the necessary authority the engineer would be liable if the owner and/or buyer did not accept responsibility. The variation (change order) clauses in a contract allow the engineer to vary the works, but not the terms of the contract. For example, in many conditions of contract, the main provisions will allow for the engineer to order variations. “The Engineer may order any Variations to the Contract Works within the scope of the contract which:

Increase or decrease any quantity of work;

Omit any work;

Change the character or quality of any material or work;

Require additional work to be done;

Change the level, line, position, or dimension of any part of the Contract

Works.”

Note that there is a limit on the power to order variations, which if too extensive would be regarded as work outside the scope of the contract. Except with the consent of the contractor, variations cannot be ordered after the issue of the Certificate of Practical Completion. Also, the power to omit work cannot be used in order to have it carried out by another contractor. Work can only be omitted when it is no longer intended to be carried out. There are many other situations, which may give rise to variations, in terms of the contract, they include:

significant discrepancy in the contract documents

any clear omission by error from the schedule of prices

ambiguity or lack of clarity in the contract documents, for which the

contractor could not reasonably have foreseen the explanation or instruction

late issue of any instructions, documents or drawings

failure to enter into a subcontract or repudiation or significant default by a

nominated subcontractor

delay in giving possession of the site or any portion of the site



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the activity of separate contractors, not otherwise provided for in the contract

documents

the repair of any loss or damage to the contract works or materials to the

extent that its necessity arises from an excepted risk

rectification of any error in the position, level or dimensions of the works, to

the extent it arises out of incorrect information supplied by the engineer

unforeseen costs or delays arising from compliance with conditions attached

to licences, consents or approvals

physically locating or altering or protecting or offsetting or reinstating any

utility which is either not indicated or not substantially in the position

indicated in the contract documents

protecting and disposing of any fossils, coins, articles of value or antiquity

and other remains of geological or archaeological interest discovered on the

site

late supply of any materials, services or work required to be provided by the

owner and/or buyer

The providing of additional samples or making and reporting of extra tests,

except where the work or materials are found to be not in accordance with

the contract requirements

failure of the engineer to carry out inspection, recording, measurement and

testing within a reasonable time

the opening up or pulling down, reconstructing and reinstating of any work

required to be opened up or exposed or tested by the engineer but

subsequently found to comply with the requirements of the contract

documents

failure of the engineer to issue a certificate of practical completion or a

defects liability certificate within the time provided for in the contract

documents

suspension of the work by the engineer, unless due to default on the part of

the contractor



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the engineer directing or changing the order in which the work is to be

carried out

acceleration of the work, with the agreement of the contractor, to avoid or

minimise an extension of time – (not called a “variation”, but valued as one)

searching for and remedying any defect, at the direction of the engineer,

unless the defect is one which the contractor is liable to rectify

work covered by a Provisional Sum or Prime Cost Sum or contingency sum

– note however that any work carried out by a nominated subcontractor

under a provisional sum and any supply of materials under a prime cost sum,

are not “variations”, but are valued as such.

Many of these do not require any written instruction or variation order from the engineer. They arise because of the circumstances involved. They are risks for which the owner and/or buyer agrees contractually, to bear the time and price consequences as variations.



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Procedures for Variations The contract procedures to be followed in notifying and claiming for variations should be adhered to carefully. For example, the giving of required notice or the receiving of instructions may be a condition precedent to any additional payment. Where an order in writing from the engineer is required, anything in writing which confirms that instructions were given, may be sufficient to satisfy this requirement. It should also be noted that once the engineer orders a variation, the contractor is entitled to receive the drawings and other information required to carry out varied or new work within a reasonable time. The contractor is required to show the value of each variation in claims. The engineer must assess each of these claims for compliance with the terms of the contract. The engineer’s representative may do the valuing of variations, only if he or she is expressly authorised to do so in writing by the engineer. Where possible, variations should be valued by agreement between the contractor and the engineer. Where practicable, they should be valued before the work is commenced. Where full agreement is not possible, the contractor and the engineer should still endeavour to agree as far as possible; eg as to which schedule rates are applicable, or whether derived rates are appropriate, and as to the appropriate rates for particular items. Where measurement is required, it is to be carried out by the engineer. The engineer and the contractor are to exchange their respective estimates of value, and the evidence required to establish the correctness of all the relevant quantities and costs and the effect on the programme. It is not sufficient for one to wait until receipt of the other’s estimate, and then to accept those parts of it, which appear favourable while attacking those which appear unfavourable or vulnerable. The contractor and the engineer are each expected to make a genuine estimate, and then to discuss both estimates after they have been exchanged with a view to arriving at what is in total a fair figure. The emphasis on trying to reach agreement does not mean that the engineer is to try to negotiate the lowest price possible for the owner and/or buyer. It means that the engineer and the contractor will pool their information, listen to each other, and seek to reach agreement on a fair valuation, which is consistent with the methods provided for in the contract. It is important that proper job records are maintained to substantiate and evaluate variations. These may include time sheets, dockets and invoices, diary records, reports, photographs, etc. The contractor is also entitled to be paid for processing each variation, whether or not the variation proceeds. This will be paid at a percentage of the price of the variation (if this percentage is required to be nominated in the tender or if so agreed), or if there is no such provision or agreement by reimbursing the contractor’s reasonable cost (there is no allowance for profit recovery if so assessed). In the absence of better information, a nominal figure such as 2.5% of the value of the variation might be assumed. Where the engineer fixes the value of a variation at a figure different from that proposed by the contractor, the engineer is required to give reasons for the valuation.



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Valuation of Variations The object of valuation is to arrive at a figure, which fairly compensates the contractor, in a manner consistent with its contract price, for the extra work involved and for the impact of the variation on the contractor’s costs. Most construction contracts, spell out a detailed methodology for valuing variations, these should be studied carefully. Before getting into the specific methodology of a contract, it is helpful to understand the cost structure and economics of priced construction contracts generally. A contractor pricing proposed work on a particular project must first make an estimate of its “direct cost”. To this direct cost will need to be added an element of contribution to the “indirect overhead” expenditure of the entire enterprise as well as to “net profit”. These terms need further consideration. Direct Cost Direct cost is the total of all the expenditure incurred specifically for the contract in question. It includes both the cost of the work itself and any directly identifiable overhead costs, whether incurred on or off the site. Whether referring to the contract as a whole or to a specific variation, a clear and logical subdivision of total direct cost is essential, as follows:

Work-related costs – i.e. the labour, plant, materials and subcontracts directly involved in required work-processes. They increase or decrease with changes in quantity or amount.

Time-related costs – i.e. costs directly affected by time. Whether or not an

event will produce time-related costs will usually depend on whether it extends the time required for the contract as a whole (ie is on the critical path).

Value-related costs – ie costs directly affected by the total value of the work.

Fixed costs – i.e. costs which are independent of quantity or time or total

value. These different categories of cost do not necessarily correspond with the descriptions given to the items in the schedule of prices. A single item may need to be subdivided into all four categories. For example, when plant is used, there may be a fuel element (work-related), a hire element (time-related), a project financing element (value-related), and a transportation element (fixed), all to be found in the one item.



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Direct Overheads Some contracts provide for part of the direct costs to be nominated as a separate percentage for “on-site overheads”. It includes the total cost of management, administration, routine field engineering and surveying, procurement and supervisory staff assigned to the contract, excluding working foremen and leading hands. Also included are insurance and bond premiums. Also the normal provision, operation and maintenance of site and temporary works facilities of office and shelter buildings, office communications, on-site water supply, drainage, roads, fencing, electrical supply, and ablution facilities, required for the contract works as originally specified. These are mostly time related, but nevertheless they are required to be applied as a percentage to the work-related costs, whether or not there is any time extension. Indirect Overheads and Net Profit The various items and categories making up direct cost must be clearly distinguished from costs which are not incurred specifically for the contract, and which will not be increased or reduced by events occurring on the contract. Thus the salaries of head office personnel, the rent and maintenance charges for the head office, etc, will all be items of indirect overhead expenditure for which a contractor must also receive a contribution from individual contracts. The indirect overhead expenditure can also be referred to as “off-site overheads” or “head office overheads” or “fixed overheads”. If the company is so substantial that its design staff is not likely to be increased or decreased by reason of the work on one particular contract, their salary costs may be regarded as being in the indirect overhead category. On the other hand, if additional staff have to be taken on, or overtime worked, that is a job-related item of cost attributable to the contract in question, and therefore part of its direct overheads. Net profit, or pure profit, is the financial dividend for which the contractor is in business. It is the ultimate measure of its expertise. Net profit must be sufficient to justify investment in the contracting business (instead of in a bank) and facing the associated risks (which may increase pro-rata to turnover). From knowledge of the company’s total fixed overhead expenditure and its relationship to turnover, and its profit expectation, the contractor will usually evolve a single composite percentage to be applied as a mark-up or margin to cover the two requirements of indirect overheads and net profit. In assessing a reasonable percentage for net profit, it should not be necessary to examine the particular contract’s profitability – contractors may lose money on some of their contracts but make exceptional profits on others. What is more significant is the average performance of the enterprise as a whole, from its various contracts experienced over a sufficient length of time for a reasonable judgement to be made. The same composite percentage (ie the mark-up) for indirect overhead and net profit contribution that would be used for tendering may generally be applied to the total costs (ie direct costs and direct overheads) involved, in order to obtain an appropriate value for a variation for which there are no reasonably applicable items in the schedule of prices. Where suitable background financial information is not forthcoming from the contractor, a figure such as 10% (or some other figure considered appropriate for the industry at that point of time) might reasonably be assumed for the mark-up.



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Delay Some variations will involve time extensions, but with little or no additional value of work. In these cases of delay, indirect overhead and net profit contribution are still potential elements of the claim. Both depend upon precisely the same rationale – the delayed return of the contract team and equipment to earn indirect overhead and profit contribution for the business as a whole. The amount for indirect overhead and net profit contribution might be assessed as follows. The estimated amount for indirect overhead and net profit contribution from the original contract sum is divided by the original contract period in weeks (or days), so as to produce a weekly (or daily) figure for indirect overhead and profit earning capacity; that figure applied to the period of delay (ie the time extension) will represent the total return obtainable elsewhere had the contractor not been delayed by the variation; from that must be deducted any indirect overhead and net profit contribution which have already been allowed for in valuing the actual work involved in the variation. Other elements of the claim can arise from any time-related or value-related components of the schedule items or for additional fixed costs. This discussion is based on looking at one variation in isolation. In practice, it may be appropriate to look at the net effect of several variations to assess the cost effect of delays. Some contracts provide for tenderers to nominate a “rate per working day in compensation for time-related Cost and Profit incurred in relation to an extension of time”. This rate is used to determine the amount to which the contractor is entitled for delay (for which a time extension has been granted). From this amount, any allowance made for off-site overheads and profit and on-site overheads is deducted. Hence, tenderers should be careful what they include in their assessment of any daily sum nominated for time-related costs, or they will be deprived of part of the legitimate value of variations when the deductions are made. The rate should include allowance for the daily amounts (based on the period of the contract) for off-site overheads, profit and on-site overheads. It may also be wise to include any time-related components of the schedule items (in case they are not allowed in addition to the daily rate), and note them as such to avoid duplication.



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Disturbance and Loss of Productivity Even where overall delay is not involved, there may still be disturbance of the contractor’s internal program. Labour cannot be suddenly hired or fired, specific tasks cannot be suddenly hired or fired, specific tasks cannot be suddenly stopped and restarted, and labour and plant cannot be moved backwards and forwards across the site, without loss of productivity. This will express itself in increased labour and plant expenditure, relative to actual work done. This may result from the particular plant and labour force being engaged for a longer period, or from the recruitment of additional plant and labour to avoid or recover delay. The assessment of loss of productivity claims is difficult. It may require a close analysis of any programmes, and cost correlations with records of labour and plant and work output. The most convincing basis of all will be comparisons of actual hours and output during a period known to be unaffected, with those for the affected period. Summary of Basis of Valuation Where there is an applicable rate in the schedule, that rate is to be used provided it is appropriate to the circumstances and nature of the work. In other cases it may be possible to derive a new rate from the rates in the schedule. These rates include overheads and profit, unless expressly stated and provided for as separate items in the schedule. Note however that day works are only intended for minor work that can be done concurrently, so day works rates do not include on-site overheads. Where appropriate rates are not available or able to be derived, the valuation is to be based on net cost. This means the actual or assessed cost to the contractor, after deduction of trade discounts and exclusive of the contractor’s on-site overheads, off-site overheads and profit. Allowances for overheads and profit are then made according to any nominated percentages, or reasonable percentages if clearly inequitable or if none have been nominated. Additional allowance for delay is made at the nominated daily rate, or a reasonable rate, for the delay caused by that variation. Additional compensation is to be paid, if reasonable, where a variation delays part of the works to a greater extent than the delay to the works as a whole. From these allowances is deducted any overheads and profit already included in the valuation. Processing costs can also be added on the aggregate value of additions, deductions, overheads and profit, whether or not the variation proceeds.



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Valid claims may be rejected Construction contracts anticipate that the contractor will, in certain circumstances, be entitled to extra payment and/or time extensions. The contractor seeks these entitlements by making claims to the engineer. The contractor’s objective is to obtain the payment or relief which it believes it is entitled to, whether under the contract or otherwise. It often happens that claims that might otherwise be valid are rejected because:

timely notice was not given

the claim is late

contract procedures were not followed

proper records were not kept

the claim does not establish any valid entitlement under the contract

inadequate information is available or provided to verify the claim or support

its quantification

Timely notice and claims Failure to notify promptly a potential claim situation may deny the engineer the opportunity to:

observe and investigate the conditions

modify the design to suit

review the relevant circumstances and merits of the claim

take any corrective action that might be possible to minimise the problem

warn the owner and/or buyer, so that financial, timing, political or legal

provisions can be made.

Late claims are rightly viewed with a degree of suspicion. The proper time to apply is when it first becomes apparent that there will be additional cost or delay, in circumstances, which provide grounds for a claim. Failure to make a timely claim may therefore result in it being declined.



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Following contract procedures The contract procedures to be followed in notifying and making claims should be adhered to carefully. For example, the giving of required notice or the receiving of instructions may, be an essential step before obtaining any additional payment or time extension. Where an order in writing from the engineer is required, the contractor must have something in writing, which confirms that the notice or instruction was in fact given. If the instruction is given orally and is not confirmed in writing, the contractor should itself confirm it in writing. Keeping records It is important that proper job records are maintained to substantiate and evaluate claims. These may include:

time sheets

delivery notes and invoices (if applicable)

diary records

reports

photographs

records of labour

records of plant on site, and its utilisation

weather, and its effect on progress

progress of the construction

instructions

difficulties

A job diary should record a summary of the day’s events and conditions, together with important phone calls and conversations. Photographs should be taken regularly, and marked with dates and locations. All these records, including personal diaries, will be available in the event of any dispute. Minutes of all formal meetings should be prepared by the engineer and agreed with the contractor. If the contractor does not agree with the minutes, or any other communication, then that disagreement should be advised in writing promptly. The job records need to identify the actual costs and delays associated with each claim. Hence, it may be necessary to set up specific codes for cost and time allocation from the outset. The contractor must be able to establish that the additional cost or delay was actually caused by the event that is being relied on for the claim.



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The claim essentials It is essential that for every claim, the contractor provide to the engineer a properly documented and verifiable claim, which sets out:

the name and brief description of the claim

the provisions of the contract on which the claim is based (and which provide

for it to be a risk allocated to the owner and/or buyer requiring additional

payment and/or extension of time)

details of any additional work undertaken or costs incurred

valuation of the claim, supported by sufficient details (and proof if required)

details of any delay and time extension due (see Constructive Acceleration)

Constructive Acceleration Acceleration occurs when the contractor is compelled by the owner to complete the project ahead of schedule. But, it comes at a price to the owner. Changes in contract time, whether delay or acceleration, increase the contractor’s cost and often become the subject of a claim. Constructive acceleration occurs in the absence of an owner directed acceleration, such as where the owner has refused a valid request for time extensions or threatened other action which requires the contractor to accelerate its work to avoid liquidated damages, or other loss or risk of loss. The classic case is when a request for a time extension for excusable delay is denied and the contract provides liquidated damages for late completion. The law construes this as an order by the owner to complete performance within the originally specified completion date, a shorter period at higher cost than provided for in the contract. The constructive acceleration doctrine allows recovery for the additional expenses the contractor can establish. Case law has identified five elements normally required to establish a claim for constructive acceleration. Those elements are as follows:

An excusable delay must exist; Timely notice of the delay and a proper request for a time extension must have been

given; The time extension must have been postponed or refused; The owner must have ordered (either by coercion, direction or some other manner)

the project completed within its original performance period; and The contractor must actually accelerate its performance, thereby incurring excess

costs. Excusable delay means that the contractor is entitled to an extension of time under the contract. It is important for the contractor to be able to demonstrate the reasonableness of the schedule and its status at the time of the acceleration order. One way to show that the excusable delay affected the project completion date is for the contractor to add the period of excusable delay to its current planned



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schedule updated at the time of the delay and calculate a new completion date. The updated schedule should include all delays whether they are the responsibility of the contractor, owner, or neither (such as weather). If the new calculations indicate that additional time is necessary to complete the project, the claimant will have demonstrated its entitlement to a time extension due to excusable delay. The contractor must give the appropriate notice of the delay and request an extension of time in order to recover any additional costs of acceleration. It is important, especially when the contractor believes acceleration is occurring without a specific order to accelerate, that the contractor advise the owner that any efforts undertaken by the contractor to accelerate its performance are not being taken voluntarily, and further, that the contractor will demand and expect the owner to pay the additional costs incurred. This notice to the owner of “forced” acceleration will assist the contractor greatly in recovering damages. This notice is not absolutely necessary if (a) the acceleration has been expressly directed; (b) the owner has indicated no time extensions will be permitted; or, (c) the owner has waived the need for notice. Moreover, if the owner has specific knowledge of excusable delays and unequivocally orders the contractor to complete on the contract completion date without regard to excusable delays, the notice requirement is satisfied. Additionally, it is important that the contractor give detailed information on the delay to the owner, so that the owner can determine the reasonableness of the time extension. It is imperative that the contractor, carefully and fully, documents all delays and other factors, which will aid in proving its entitlement to damages. Courts and Arbitration boards are willing to find for the contractor on constructive acceleration claims, but if not carefully documented, the damages may not be recovered. In M.S.I. Corporation, the contractor appealed a decision of the owner denying its claim for an equitable adjustment for an alleged acceleration of the contract work ordered by the Owner. The Board held that the contractor was entitled to an equitable price adjustment because it was directed by the Owner to accelerate the work. The Owner had insisted on completion of the contract by its original completion date without regard to excusable delays, which required the contractor to accelerate a substantial part of the work and consequently, substantially increased the contractor’s costs. The refusal to grant a time extension can be expressed either by a clear rejection of a time extension or by the postponement of a decision concerning the request. The owner owes a duty to the contractor to timely respond and grant or deny the request. By failing to respond to the request, or even putting off the decision until the completion of the contract, the owner puts the contractor in a precarious position. If the contractor acts as if the time extension will be granted and continues at a pace that will complete the work after the completion date, and the time extension is not granted, liquidated damages may be incurred. If the contractor acts as if the time extension will not be granted and accelerates in order to complete the work at the completion date, the contractor incurs additional expenses that might not be recovered. The contractor’s updated schedule showing the contractor’s reasonable expectations at the time of the request become especially important to support the decision to accelerate. Damages are recoverable even if acceleration is to avoid risk of liquidated damages. The owner eventually pays the cost created by postponing its decision on time extensions. The case of Constructors-Pamco is a good example of a situation where constructive acceleration had occurred. The Board found that the Owner had made it abundantly clear that work had to be completed without any extensions of time by: (1) the use of language in the contract to the effect that the contract date would be strictly enforced; (2) the use of language in the contract to the effect that liquidated damages would be imposed on late-completed work; (3) the refusal to grant a time extension for a blizzard which was an obviously excusable delay; (4) the refusal to respond to the contractor’s request



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for instructions on how to proceed after it had complained about delays and extra costs; and (5) the daily communications with contractor personnel that no time extensions would be permitted. The Board found that the contractor was required to accelerate performance of the work and to work under adverse conditions by direction of the Owner. A constructive change occurred entitling the contractor to an equitable contract price adjustment.



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Liaising with the engineer The first and most important step is to send a simple letter to the engineer, identifying the situation and the possibility that it may lead to a claim. This will alert the engineer. The initial letter should be followed up by further information and estimates of the costs and delays involved, as and when they become available. Good communication will help the engineer to make allowances and changes, and keep the owner and/or buyer informed. The contractor (and the engineer) should keep separate files for each claim and, if possible, agree on a numbering or other identification system to facilitate correspondence and access to information in the future. The degree of supporting information required will depend on the specific circumstances. The contractor should co-operate with the engineer to ensure that the information is adequate (but not unnecessarily detailed or voluminous) and identify those claims, or aspects of claims, that can be agreed between them. The engineer’s response will also help the contractor decide which claims should be dropped or amended or pursued. Where there is genuine doubt, a claim might best be compromised and settled, so as to deal with it and get on with the job. Alternatively, some claims might best be acknowledged and put aside for review at a later stage, when more information and time is available. Unless it affects the contractor’s ability to progress the work, the contractor should not press for a formal decision too soon, because it will prevent the engineer from reviewing it later. The contractor also has a responsibility to mitigate the conditions that lead to claims. Good project management and administration, in consultation with the engineer, are therefore essential. The contractor must also act reasonably in the circumstances. By stating clearly, and as soon as possible after the difficulty has arisen, how it intends to deal with it, the contractor avoids a possible allegation that it has failed to mitigate the loss or act reasonably. In particular, it avoids the risk that the engineer may, with the wisdom of hindsight; claim that some method other than the contractor’s proposal should have been adopted. By clarifying its proposals, the contractor invites approval or variation of those proposals and avoids a charge that some other method should have been used that would have reduced the amount of the claim. Where the engineer fails or refuses to check or agree the contractor’s information, that fact should be recorded. Where the contractor’s records are accurate, any such failure would count for the contractor in any subsequent arbitration.



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Proving the claim Evidence is needed to establish the correctness of all the relevant quantities and costs and the effect on the programme. Seeking agreement on the basic information will save time and cost, even if the validity of the claim itself is disputed. A written submission should be prepared, to summarise the claim for the engineer and relate the evidence to the contract provisions and the law. It is the contractor’s responsibility to prove the merits and quantum of the claim. Facts must be proved from reliable documents or by persons with direct knowledge of those facts (this is called factual evidence). The claim must be quantified by providing evidence of the relevant schedules of rates or quantities of labour and materials and services involved, as appropriate. Unless the engineer agrees to these figures, detailed evidence will be needed to justify the claim. For example, it is not sufficient to merely say that a job took a certain number of hours – justification is needed in the form of the evidence of someone directly involved, time sheets, diary entries, etc. Records made at the time are the most persuasive. If it is possible that someone directly involved might be unavailable at a later stage, his or her evidence should also be preserved in the form of an affidavit (a sworn statement). Interpretation of the facts must be proved by technical opinions from those qualified, by training or experience – this is called expert evidence. It should be recorded in written statements or reports. The onus of proof rests on the contractor, who is the claimant. The legal maxim “he who asserts must prove” applies. The standard of proof is the same as that in civil litigation and arbitrations; ie “on the balance of probabilities”. This means that there is more in favour of the claim than there is against it.



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Documenting disputed claims Preparation by the contractor for a disputed claim should involve putting together a more comprehensive claim dossier, containing:

an executive summary of the claim

an explanation of how the events giving rise to the claim relate to rights in

the contract, making reference to the specific contract clauses, etc, which

apply

a factual narrative, which references the significant documents (e.g. contract

and specification provisions, minutes, instructions, claims, substantiation

provided, correspondence, etc) and refers to the events which led to the

claim

copies of these significant documents

drawings, photographs, investigation results, expert opinion, and other like

evidence which is available to substantiate the claim

a summary of the facts and opinions agreed to by the parties, including any

statements or figures presented by the other party with which you agree

calculations and justification for the amounts claimed

a summary of steps taken to mitigate the situation that resulted in the claim

a discussion of the applicable legal principles and contentions (with

authorities) supporting the claim

details of the payments, extensions of time, damages, etc, being sought.

It may be helpful to put all the documentation for the claim into an arch file, containing dividers for the various categories of information. Photographs should preferably be mounted on punched A4 sheets, and titled with the name of the photographer, date taken, location and explanation. Being Professional In making and progressing successful claims, the contractor should be tactful. Strong words, accusations and finger-pointing will not be helpful. In fact, such actions are likely to be counter-productive and force the parties into arbitration. A more amicable – yet still factual – approach may resolve the matter in less time and expense. Those involved in making and negotiating claims therefore need to have appropriate interpersonal and communication skills.



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Construction Case Law in Accordance with English Law The following pages contain actual reported case law results of construction contract claims dealt with in either the Civil Courts or the Technology and Construction Courts of the United Kingdom. These case law results have been included in this document as they bear similarity to many of the difficulties faced by Doosan at the Hoping Power Station Project. Doosans contract with Alstom is, in all matters, to be construed in accordance with English Law.



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Case One – Technology Construction Court Judgment: London Borough of Lewisham –v- Shephard Hill Engineering, TCC 30 July 2001 The Issue: Whether representations not to deduct delay damages may amount to an estoppel against the Employer’s contractual rights” Estoppel In 1877, in the case of Hughes –v- Metropolitan Railway, Lord Cairns provided a definition of the doctrine of “estoppel” which stands to this day. He said that if one party leads the other “to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties.” These words were used once again in the recent case between the London Borough of Lewisham and Shephard Hill Civil Engineering, where Shephard Hill argued that Lewisham were estopped from deducting some £550,000 liquidated damages for delay. Shephard Hill had been engaged to undertake various improvements to the town centre of Lewisham. The contract was based upon the Institution of Civil Engineers 6th Edition, and provided for completion of the works in sections. In the event that any section of the works was not completed by the due date, Shephard Hill would be required by the terms of the contract to pay liquidated damages. A considerable number of disputes arose between Shephard Hill and Lewisham, and eventually these were referred to arbitration. Following a lengthy arbitration process, the arbitrator issued his award on questions of liability and quantum. Included within the award were the arbitrator’s decisions concerning the fact that Shephard Hill had completed two of the sections of the works late. Shephard Hill had sought extensions of time for these sections, whereas Lewisham counter-claimed for the payment of liquidated damages for the entire period of delay for each section. Shephard Hill had countered that Lewisham were “estopped” from recovering liquidated damages by virtue of various representations made by Lewisham or the Engineer acting on its behalf. It contended that throughout the contract period, it had been assured that no liquidated damages would be deducted. Shephard Hill had relied upon those assurances when settling the final accounts of its sub-contractors, and therefore did not set-off any damages for late completion against sums due to the sub-contractors. Counsel for Shephard Hill argued that Lewisham’s counterclaim for liquidated damages was wholly inconsistent with everything that was said to Shephard Hill during the project and represented a wholesale contradiction of all the assurances received by Shephard Hill. In support of these alleged representations, Shephard Hill identified five documents that it intended to rely on. Lewisham did not make any request for further particulars of when it was to be said that it had represented it would not deduct delay damages. In the event, the arbitrator held that the two sections of work had been completed 28 and 22 weeks late. This resulted in a potential liability upon Shephard Hill for liquidated damages of some £550,000.



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The arbitrator then dealt with the question of estoppel. He noted that the Engineer’s final determination of extension of time due to Shephard Hill had not been made until nearly two years after the date of substantial completion. Moreover, the question of claiming for liquidated damages had not arisen until after the commencement of the arbitration. This, he felt, was compelling evidence that up to that date, Lewisham had not had any intention to levy liquidated damages. The arbitrator also noted that he considered Shephard Hill to be a company that operated on what one might term an astute commercial basis. He could not imagine that Shephard Hill would have made payments to sub-contractors without assurances from Lewisham. He commented that “commercially astute contractors, particularly those with financial difficulties which Shephard Hill had, do not part with their money unless they absolutely have to”. For all these reasons, and notwithstanding the lack of particulars to support the representations alleged, the arbitrator found on the balance of probabilities that Lewisham did represent to Shephard Hill that liquidated damages would not be applied. Shephard Hill had relied upon that representation to its detriment. These findings placed Lewisham approximately £550,000 out of pocket. Accordingly, it sought to challenge the arbitrator’s decision on appeal to the court. First and foremost, under Section 69 of the Arbitration Act, Lewisham sought permission to appeal on the basis that the arbitrator had erred in law. His Honour Judge Richard Seymour QC refused permission, and in accordance with established practice, did not give any reason for his decision. Lewisham therefore challenged the arbitrator’s decision on the basis that the arbitrator lacked substantive jurisdiction under Section 67 of the Arbitration Act, or that there had been a serious irregularity affecting the tribunal under Section 68 of the Arbitration Act. Judge Seymour noted that the real question, which arose under Section 67 of the Act was whether the particular matters decided by the arbitrator had been submitted to him. Judge Seymour concluded that the question of whether Lewisham was estopped from claiming liquidated damages was clearly within the scope of the matters originally referred to the arbitrator. Accordingly, the application to overturn the arbitrator’s award under the provisions of Section 67 of the Act failed. Similarly, the contention that there had been serious irregularity in the conduct of the arbitration did not hold water. The application to overturn the decision of the arbitrator was refused. Having promised Shephard Hill that it would not deduct delay damages, Lewisham could not later change its mind. Despite the arbitrator’s finding that Shephard Hill had completed sections of the works late, it would not be required to pay delay damages. Judgment London Borough of Lewisham –v- Shephard Hill Engineering, TCC 30 July 2001. The Issue Whether representations not to deduct delay damages may amount to an estoppel against the

Employer’s contractual rights. Implication An estoppel will occur where one party represents that it does not intend to enforce its legal rights

and the other party acts in reliance upon that representation.



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Case Two – Queens Bench Division, London The Issue: Claims notification provisions Notices of claims

It is a common feature in construction contracts that where a contractor intends to make a claim for additional time or money, the contractor must first notify the employer or its representatives of the facts, which may give rise to the claim as soon as they become apparent. The underlying objective behind these provisions is to provide the employer with an early warning of likely problems such that steps might be taken to reduce or eliminate their impact upon the progress of the works. Certain forms of contract, notably the New Engineering Contract, develop these provisions further such that the notice requirements are followed by steps which guide the manner in which the parties must manage the issues giving rise to the claim by, for example, convening meetings to develop solutions. It is often questioned whether clauses which provide for the giving of a notice in this manner can form the basis of a defence to the claim in the event that the contractor has failed to give the required notice. This question is often put another way. Is the service of the notice a condition precedent to the remedy sought? Alternatively it is thought that the failure to give notice is itself a breach of contract, which may give rise to a cross-claim for damages if a claim should be brought. These matters were recently considered in the case of Alfred McAlpine –v- BAI (Run-Off) Ltd. McAlpine as main contractor had obtained judgment against a subcontractor in respect of an accident causing physical injury to a workman on site. Before settlement the subcontractor became insolvent and accordingly McAlpine claimed against BAI, as statutory assignee under an insurance policy, which had been held by the subcontractor. The insurance policy contained a term as follows: “in the event of any occurrence which may give rise to a claim under this Policy, the insured shall as soon as possible give notice thereof to the Company in writing, with full details and as far as practicable there shall not be any alteration or repair until the company have had an opportunity of inspecting.” Such a requirement has much in common with the notice provisions of claims clauses in construction contracts. The first notification of the accident was not given to the insurer until over a year after the accident had occurred. The court was required to determine whether compliance with the notification clause was a condition precedent to the liability of the insurer.



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Case Two (continued) Mr Justice Coleman considered that it was unnecessary that express words should be used referring to the term as a condition precedent, since this might be inferred from the context and other provisions of the contract. Firstly he questioned whether the lack of notice would have a prejudicial effect on the ability of the underwriters to manage and defend the claim. In addition, he noted that the insurer would have a remedy in damages for breach of the contract notice provisions, providing the insurer could establish that if it had been advised at the proper time, it could have taken steps which would have altogether avoided a judgment against the assured, or at least substantially reduced the assured’s liability for damages. Taking all these considerations into account, it was held that it was unlikely that the parties had intended that the notice provision should be condition precedent to the insurer’s liability. This approach clearly reflected the decision in the case of Stanley Hugh Leach –v- The London Borough of Merton in 1985 in the context of claims notices under JCT contracts. Justice Coleman also considered that it was now generally the practice to insert a term in insurance policies to the effect that: “the due observance and fulfilment by the assured of all the terms, provisions, conditions and endorsements of the policy insofar as they relate to anything to be done or complied with by the assured is to be a condition precedent to any liability of the insurers to make payment under the policy”. In the view of Justice Coleman, the absence of such a term pointed to a conclusion that neither party had intended such a provision. It must be noted however that it cannot be said that such provisions are commonplace in construction contracts. Another pointer to interpretation of the contract would be where compliance with the claims notification clause is not specifically stated to be a condition precedent to the insurer’s liability, yet other particular policy terms are so expressed. Justice Coleman considered that the omission to include such express provisions in the claim notification clause was a strong indication that it was not the mutual intention of the parties that it should be a condition precedent. In conclusion Justice Coleman was clear that in the event of non-notification, whilst the insurer may be able to establish a cross-claim for damages amounting to a complete set-off where it could prove quantifiable loss in an amount equal to the claim, he could not accept that proof of prejudice to the insurer’s could itself operate as a complete defence in the absence of express words to that effect. Implication Unless the contract expressly so provides, a claims notification provision will not amount to a condition precedent

to the remedy sought under the contract, but may instead give rise to a cross-claim where the delay in notification can be shown to have given rise to loss.



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Case Three Judgment: City Axis Ltd –v- Daniel P Jackson ORB 11 February 1998 The Issue: Payment of off-site overheads and profit in the event of delay Claims for head office overheads and profit The law in relation to the payment of a contractor’s off-site overheads and profit in the event of delay to a project has been closely examined from almost every angle in recent years. The effect of these cases has been to gradually curtail the manner in which a contractor may make such a claim, and this was further confirmed by the most recent decision given on 11 February 1998 between City Axis Ltd –v- Daniel P Jackson. There are eight judgments which appear to be the most commonly cited whenever this question comes before the courts. In the Canadian case of Ellis-Don –v- The Parking Authority of Toronto (1978) the contractor succeeded in recovering a weekly sum in respect of the costs of overheads and loss of profit, calculated by reference to a tender figure of 3.8%. Two assumptions had to be satisfied before such an approach would be acceptable. Firstly, that the contractor did not habitually underestimate his costs when pricing so that the percentage could be shown to be a realistic one, and secondly, that there was thereafter no change in the market so that work of at least the same level of profitability would have been available to the contractor at the end of the contract period. Such an approach was to be contrasted with the decision in Tate and Lyle –v- The GLC (1983) where the contractor claimed 2% on prime costs for managerial time. Here the Judge accepted that such a head of claim was admissible but refused to award any sum as he considered that the quantum was approached by way of pure speculation. In Whittle Builders Co Ltd –v- Chester Le-Street District Council (1985) the contractor was successful in its claim for off-site overheads and profit on the basis of an average percentage earned by the contractor on his turnover as shown in its accounts. In J F Finnegan –v- Sheffield County Council (1988) this approach was also followed. In that judgment it was said “it is generally accepted that, on principle, a contractor who has been delayed in completing a contract due to the default of his employer may properly have a claim for head office or off-site overheads during the period of delay on the basis that the work force, but for the delay, might have had the opportunity of being employed on another contract, which would have had the effect of funding the overheads during the overrun period.” In Babcock Energy –v- Lodge Sturtevant (1994) Babcock was in a strong position in that it had kept very good records of the additional hours spent by head office staff in connection with the delayed matters. Babcock had also produced evidence to show that its order book was full, that work had been farmed out and that agency staff had been employed. This was good enough for the Official referee. Turning the argument around in favour of the contractor he said: “The plaintiffs might have provided an alternative quantification by reference to the additional cost to them of employing others, but I do not consider that they are obliged to do so if they can satisfactorily demonstrate the cost to them of time unnecessarily spent and therefore lost. It is for the defendants to show that the losses prima facie incurred are not the correct measure of damage and this (the defendants) failed to do”.



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Case Three (continued) The high water mark of such contractor’s claims came in the case of Alfred McAlpine –v- Property and Land Contractors (1995). Again the formula approach to the assessment of quantum was accepted and it was confirmed that the reimbursement of unabsorbed head office overheads would be permissible where under recovery was occasioned by delay and the contractor had no means of reducing these costs as a result of the events giving rise to the delay. The difficulty with this case was that Property and Land was an unusual contractor in that it generally worked on one project at a time. This meant that it was in a special position. Its dedicated approach to its client meant that it was not in a position to replace turnover during a stoppage or delay in its current contract activity. In St Modwen Developments –v- Bowmer and Kirkland (1996) this distinction was further highlighted. Again the formula approach to the calculation of head office overheads was approved but it was clarified that this would only be acceptable where the contractor was able to prove a constraint upon its resources and lost opportunity. Critically the Judge commented that this latter qualification would be more difficult for the contractor to overcome in times of recession. In Amec Building Ltd –v- Cadmus Investment Company (1996) this thinking was developed further. The Court upheld an arbitrator’s decision that the delays in construction caused on the project were not such as would deter a building contractor of the size and standing of Amec from tendering for work elsewhere. Thus the general state of the market and the size and standing of the contractor would be factors militating against the award of damages for unabsorbed off-site overheads and profit. This was reflected in the eleventh edition of Hudson where the author comments “paradoxically it may be the small local builder in constant demand who in more recent times may be in a better position to establish this type of loss.” In the most recent case, City Axis were unable to give direct evidence of work that it might have turned away or of specific projects which it had been unable to bid for successfully, as a consequence of having resources tied up on the disputed project. The evidence, which it gave was described as “statistical and inconclusive” and thus the claim was rejected by the court. Implication Except where direct evidence can be produced of off-site resources expended as a consequence of a period of

delay, in normal circumstances a contractor will be unable to recover off-site overheads and profit without direct evidence of lost business opportunity.



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Case Four – Technology and Construction Court Judgment: Ascon Contracting Limited –v- Alfred McAlpine Construction Isle of Man Limited TCC 19 October 1999 The Issue: Analysis of delay and disruption claims between sub-contractor and main contractor Claims for delay and disruption Claims for delay and disruption between a main contractor and sub-contractor are generally not easy matters to deal with. Aside from the complexity of the factual basis of the claim, there are often many matters of principle which require to be handled: How are concurrent delaying factors dealt with? How should programme float be taken into account? By what means should liquidated damages imposed by the client be passed down to a sub-contractor? In what manner can so-called ‘acceleration costs’ be recoverable? What approach should be adopted to prove delay? Many of these matters were covered in the recent case of Ascon –v- Alfred McAlpine. McAlpine was the main contractor for erection of a five-storey building on the sea front in Douglas, Isle of Man. Ascon was McAlpine’s reinforced concrete sub-contractor for the development, responsible in particular for floor slabs, basement perimeter walls, and columns between floors. Practical completion of the sub-contract works was granted just over 9 weeks late and Ascon claimed an extension of time of approximately 7 weeks. McAlpine’s counterclaim included for recovery of £170,000 of liquidated damages which it alleged it had paid to the employer and which it argued derived entirely from Ascon’s late completion of the sub-contract works. One of the first heads of claim concerned the allegation that McAlpine had failed to keep the site free from inundation from tidal sea water. His Honour Judge Hicks QC found McAlpine to be in breach of its obligations in this regard. Ascon claimed 22 days extension of time for this matter. Judge Hicks awarded only 6 days, 3 of those based upon a concession by McAlpine. Ascon’s approach had been to show 22 days delay to its programme and infer that this delay was the result of the water ingress. This approach failed to consider that any of the delay may have been caused by Ascon itself. Ascon also argued that since McAlpine had established no other cause for the delay, Ascon’s explanation was the only one which could be accepted. Judge Hicks was clear that such an approach reversed the burden of proof. There was a failure by Ascon, on whom the onus lay, to identify and prove a causative link between particular occasions of water ingress and specific periods of consequent delay. A further complaint by Ascon concerned an alleged failure by McAlpine to make available the foundations of a lift pit. It was argued that the lift pit was on the critical path and that it required to precede the basement slab construction, which in turn preceded frame construction.



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Case Four (continued) It is a common feature of construction claims that such arguments are often made too simplistically. Judge Hicks was unimpressed. Whilst completion of the lift pit might be necessary before completion of the subsequent elements, the sub-contractor nonetheless owed a duty to mitigate any potential delays. Adopting an entirely practical approach he held that whilst the lift pit was unavailable, the basement slab and columns could be continued. The area of slab around the pit, which would have to be left undone was small. In Ascon’s favour however, was Judge Hicks’ approach to the question of acceleration. Having established that the non-availability of the lift pit caused some delay, it was not open to McAlpine to argue that no extension of time was due since future acceleration by Ascon could have eliminated the delay. That would have amounted to imposing on Ascon an obligation to incur expense in order to mitigate the consequences of McAlpine’s breaches of contract. Such approval did not however extend to acceptance of Ascon’s claim for acceleration costs. Judge Hicks noted that acceleration tends to be bandied about as if it were a term of art, with a precise technical meaning. He found nothing to persuade him that this was the case. Ascon’s case was not that it had received any instructions to accelerate, but that it had generally been under pressure from McAlpine to complete earlier and had employed additional resources to that end. Ascon contended that the work was indeed completed sooner than it would have been in the absence of its accelerative measures. Judge Hicks held that it was plain that there cannot be both an extension of time to the full extent of delay with damages on that basis, and also damages in the form of expense incurred by way of mitigation, unless it could be proved that the mitigation or acceleration measures were reasonable yet ineffective. Since Ascon did not argue its case for acceleration costs on this basis, its claim must fail. Lastly of general interest was Judge Hicks’ approach to the question of programme float. McAlpine argued that its programme for main contract works contained a float of 5 weeks. It argued that it had a discretion as to which sub-contractor might benefit from this float and accordingly that it might disregard such float in assessing the delay for which Ascon would be held responsible. Judge Hicks held that such an argument was misconceived. Not having suffered any loss, the main contractor cannot recover from its sub-contractors a hypothetical loss it would have suffered had the float not existed. The issues in any claim against the sub-contractor in such circumstances remained simply breach, loss and causation. Implication A case which emphasises that it is the claimant’s burden to prove the effect in delay terms of the various

causative event it claims when arguing for an extension of time



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Case Five – Arbitration

Judgment: St Modwen Developments Ltd –v- Bowmer and Kirkland Ltd. 20 August 1996 The Issue: “Reimbursement of head office overheads and profit during period of delay” Formulating the cost of delay

There are a number of reported cases where the courts have approved the reimbursement of head office overheads and profit ‘lost’ by a contractor during a period of project delay. Nevertheless, the matter remains contentious and the recent case of St Modwen Developments Limited –v- Bowmer and Kirkland presents an opportunity to clarify the issue. In September 1990 St Modwen entered into a contract under the JCT 80 form with Bowmer and Kirkland for the construction of an office block at a business park near Manchester. The project was delayed and a number of claims ended up in front of an arbitrator. Last week I dealt with one of these claims which concerned the payment of profit and attendance on domestic subcontractors following instructions to expend provisional sums. On this issue, the arbitrator had awarded the contractor: “the sum of £ 57,549.00 for shortfall in the recovery of company overhead requirements due to the prolongation of the construction period with financial charges and simple interest.” The employer appealed this part of the award. Before deciding the matters, the judge reviewed previous decisions and relevant guidance. In the Canadian case of Ellis-Don Ltd –v- The Parking Authority of Toronto, the contractor was entitled to recover as damages for delay resulting from breach of contract, a weekly sum in respect of the costs of site overheads and loss of profit calculated by reference to the tender figure of 3.8%. An earlier Canadian case of Shore and Horwitz –v- Franki similarly recompensed the contractor for overheads and profit denied from being earned elsewhere as a consequence of delay. There it had been argued that since only a proportion of the labour force was directly employed and the remainder, were provided by labour only subcontractors who had made no claim against the main contractor, the damages under this head should be proportionately reduced. This was rejected on the grounds that actual loss was not involved, but instead a claim to fund overheads from overall turnover. Of particular interest are also the passages dealing with overheads and profit claims in Hudson’s Eleventh Edition, starting at page 8.182: “The formula assumes the existence of a favourable market when an adequate profit and fixed overhead percentage will be available to be earned during the delay period. [It] also assumes an element of constraint – that is to say the contractor’s resources will be limited or stretched so that he will be unable to take on work elsewhere if it offers itself until his working capital and site organisation have been released from the delayed contract. For these reasons this type of claim may be difficult to establish by evidence in the more recent recessionary climate in the United Kingdom.”



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Case Five (continued) Alfred McAlpine –v- Property and Land Contractors (see Contract Journal dated 1 February 1996) was also considered, but it seems, misunderstood. This complicated judgment must be taken to support the formulae approach, albeit of the more sophisticated ‘Eichleay’ method. Also considered was the Tate and Lyle –v- GLC case in 1982 where the contractor claimed 2½% on prime costs for managerial time. Here the judge accepted that such a head of claim was admissible but refused to award any sum as he considered that the quantum was approached by way of pure speculation. In Babcock Energy –v-Lodge Sturtevant Judge Lloyd also held that it was perfectly reasonable to expect a contractor to keep accurate records and that percentage assessments would be unsatisfactory. What these latter two cases emphasise is that where the claim is for recovery of additional overheads directly expended during a period of delay, a formula method of calculation will generally be unacceptable. The contractor will be required to demonstrate and prove actual loss. Where however the contractor is able to demonstrate a loss of opportunity to use resources on other sites it has been readily accepted that a formula approach might be applied. Two such cases for this proposition are Whittal Builders –v- Chester-le-Street and J F Finnegan –v- Sheffield City Council. Clearly the arbitrator was well versed in these subjects. In his award he said: “I am not sure that Ellis-Don really assists the employer except insofar as it cautions against the automatic application of a formula approach without evidence to establish there was a genuine loss and that there was work available on which the contractor could have earned a return to contribute towards his overheads and profit, but for his prolonged involvement in the contract in question.” In the event the court upheld the arbitrator’s award. They were satisfied that the factual evidence relied upon by the arbitrator was extensive in support of the contention that opportunity loss had been incurred by the contractor. It had been accepted by the employer that the construction industry was buoyant at the material time. These were precisely the conditions in which a formula approach would be acceptable. Implication Formula approach will be acceptable providing the contractor can prove constraint upon its own resources and

lost opportunity in the form of alternative business foregone.



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Case Six – Sheriffs Court, Scotland Judgment: Scottish Power Plc –v- Kvaerner Construction (Regions) Ltd Outer House 6 March 1998 The Issue: Duty of a main contractor to fix commencement dates and to provide continuity of subcontract works” Implied terms in subcontracts Subcontractors continue to have a rough time of it in the construction industry. Few main contractors would enter into contract where the employer was free to dictate the start and completion dates for the works on site. Fewer still would allow the employer to interrupt their sequence of working or to require that the works be suspended without any right of the main contractor to recover its costs. Subcontractors on the other hand routinely enter into such contracts. The case of Scottish Power Plc –v- Kvaerner Construction (Regions) Ltd, decided in the Outer House of the Court of Session in Scotland on 6 March 1998, considered these matters and questioned whether the subcontractor could rely on implied terms to improve the contractual framework for its benefit. Kvaerner were employed by Strathclyde Regional Council for the design and construction of three water treatment works. Scottish Power were engaged as subcontractors for the design, supply and installation of M&E services. The subcontract contained a particularly onerous clause F concerning the subcontractor’s obligation to carry out the works. “The subcontractor will start on site when instructed by the main contractor and will then proceed diligently with the subcontract works, conforming to the main contractor’s requirements. In particular, without prejudice to the foregoing generality, no guarantee of continuous work is given by the main contractor and the subcontractor shall carry out the subcontract works in accordance with any timetable specified in the said Appendix, and in such stages and sequences as the main contractor may from time to time require.” A pre-contract questionnaire had been appended to the subcontract which stated that the time for completion of the work on site was “mid November 1993 to end April 1994”. There was some doubt about the contractual effect of this phrase. The parties were agreed that elsewhere in the subcontract it was stated that the subcontract works should be completed in 24 weeks. The court was asked to consider the effect of these provisions. After having examined the subcontract carefully the Judge concluded that the dates for commencement and completion of the subcontract works were not fixed in a contractually binding way. The term “mid November” was too vague to be treated as a commencement date. This view was reinforced by a consideration of the general circumstances. The Judge stated “The main contractor must deal with the employer, the engineer, other subcontractors, contingencies beyond their control such as inclement weather, and other interruptions to the orderly progress of the works. It seems to me that, with such considerations to bear in mind, it is unlikely that the main contractor would commit themselves six months in advance, and at a time when the design of the subcontract works was not finalised, to a fixed commencement date and a corresponding completion date.”



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Case Six (continued) More importantly the court highlighted the provisions of clause F, which contemplated that the subcontractor would start on site, not on a contractually predetermined commencement date, but “when instructed by the main contractor”. The court then had to consider the effect of the subcontract period of 24 weeks in the context of clause F. Once again the subcontractors faced a harsh interpretation. If the main contractor was entitled to demand that the subcontractors complete the subcontract works within 24 weeks, the corollary to this would be that the subcontractors were entitled to demand that they be given 24 weeks in which to do so. The impact of clause F however was to qualify that proposition. This meant that the main contractor was entitled to demand completion of the subcontract works within an aggregate period of 24 weeks, subject to such interruption to its continuity as the main contractor required. In other words the subcontractors were not entitled to demand that the 24 weeks form a single continuous period. In an attempt to mitigate the effect of these decisions, the subcontractor sought to imply a term into the subcontract to the effect that the main contractor owed a duty not to hinder or prevent them from carrying out their obligations in accordance with the terms of the subcontract. Such an implied term has readily been accepted in construction contracts, such as in the case of London Borough of Merton –v- Stanley Hugh Leach Ltd in 1985. The main contractor argued that its powers under clause F to dictate when and in what order, and subject to what interruption that the subcontracts were carried out, precluded the implication of such a term. The court held, however, that clause F could not be interpreted such that the main contractor would be wholly free to obstruct or disrupt the regular and orderly execution of the subcontract works. Accordingly the implied term would be held to apply, but it must yield to the proper exercise of the main contractor’s powers under clause F. Similarly the subcontractor sought the implication of a term to the effect that the main contractor would take all reasonable steps to enable the subcontractor to discharge its obligations under the subcontract in a regular and orderly manner. The court held that such a term would also be subject to the main contractor’s powers to regulate the timing and continuity of the subcontract works in accordance with clause F. Implication Express terms in subcontracts will readily be given effect where they regulate the access of the subcontractor to

the subcontract works.



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Case Seven – Court of Appeal, London Judgment: British Sugar Plc –v- NEI Power Plant Projects Ltd CA 8th October 1997 The Issue: Definition of consequential loss The meaning of consequential loss What do the words consequential loss mean? Are they different from direct loss and if so how? When a contract excludes liability for consequential loss, as many construction contracts do, what exactly is being excluded? It seems the words “consequential loss” are frequently referred to in the construction industry but often with only a very vague understanding of their true meaning. In April 1997 in Contract Journal I reported the case of British Sugar Plc –v- NEI Power Plant Projects Ltd. This case has more recently been taken to the Court of Appeal and the decision of the lower court upheld. The judgment of the Court of Appeal, however, perhaps offers a clearer and more certain definition of the words “consequential loss”. The draft contract between British Sugar and NEI had included a clause which provided that the seller, NEI, “will be liable for any loss, damage, cost or expense incurred by the purchaser arising from the supply by the seller of any such faulty goods or materials not being suitable for the purpose for which they are required.” NEI were concerned about this apparent unlimited liability and wrote saying “the company’s terms of business trading is that our liability is limited to the value of the contract, and as such we cannot depart from this policy. We regret, therefore, that we cannot accept your proposal for consequential loss.” In due course British Sugar appeared to accept this proposal and it was agreed that the contract clause in question would be amended to the effect that “the seller will be liable for any loss, damage, cost or expense incurred by the purchaser arising from the supply by the seller of any such faulty goods or materials not being suitable for the purpose for which they are required, save that the seller’s liability for consequential loss is limited to the value of the contract.” The contract value was £106,000, but as a consequence of alleged design and installation failures, British Sugar sought damages in excess of £5m. Whether they would be entitled to such damages depended on the effect of the limitation introduced by the revised clause, and thus the meaning of the words “consequential loss”. Once again in the Court of Appeal it was considered that the proper way to examine this question was by reference to the 1854 case of Hadley –v- Baxendale. The rule firmly established by Hadley and Baxendale is as follows:



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Case Seven (continued) “Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either:

(1) arising naturally, ie according to the usual course of things from such breach of contract itself; or

(2) such as may reasonably be supposed to have been in the contemplation of both parties at the

time they made the contract as the probable result of the breach of it.” The position of British Sugar was simple. The £5m damages they claimed fell properly within the first limb of Hadley and Baxendale and was therefore not consequential loss. It was therefore not subject to the limitation imposed by the contract clause. NEI sought to argue differently. They argued that the term consequential loss had less to do with “forseeability” (the general concern of Hadley and Baxendale) and more to do with the nature of the loss itself. Thus they argued that consequential loss meant “all loss other than the normal loss which might be suffered as a breach of contract, the normal loss being the difference between the value of the goods and services transferred under the contract, and the value for what would have been transferred but for the breach.” The Court of Appeal confirmed the decision of the lower court in rejecting this argument. They held that on a proper reading of the clause in question an obligation was being placed on NEI to pay such damages as flowed naturally and directly from any supply of faulty goods or materials. The limitation was to be imposed in relation to some other type of loss which did not flow so directly. For example, damage which might flow from special circumstances coming within the second limb of Hadley and Baxendale. In conclusion the Court of Appeal stated “it seems to me that the judge was right and that on the true construction of this contract the parties simply agreed to limit the defendant’s liability for loss or damage not directly and naturally resulting from the defendant’s breach of contract, to an amount equal to the value of the contract.” Implication Where a contract includes a term limiting liability for consequential loss, this will not have the effect of limiting

recovery of damages arising naturally as described in the first limb of the rule in Hadley –v- Baxendale.



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Case Eight – Technology and Construction Court Judgment: Weldon Plant Limited –v- The Commission for the New Towns TCC 14 July 2000 The Issue: Inclusion of overheads and profit in “fair valuation” for varied works”> Fair valuation The recent case of Weldon Plant Limited –v- The Commission for the New Towns considered the manner of which a “fair valuation” should be established in respect of varied work. Weldon Plant entered into a contract with The Commission for the New Towns for the construction of Duston Mill Reservoir based on ICE 6th Edition form of contract. The contract included for the excavation of clay and gravel. Since Weldon were to be able to sell the gravel, the contract rate for gravel removal was a negative sum of minus £3.60/m³. The clay however was to be carted to an off-site tip for which the rate was £3.66/m³. The contract made provisions for Weldon, at its own risk, to excavate below the design level for the bed of the reservoir to obtain more gravel, which it would also be entitled to sell. The Engineer however issued an instruction, which required Weldon to excavate all the gravel below the bed and to back fill with clay to the design level. Weldon notified that this instruction would give rise to a claim. In the event disputes arose when the Engineer valued the additional gravel extraction and clay back fill at the bill rates. Weldon argued that these rates were inappropriate having regard to the rules set out in clause 52 (1) of the ICE Conditions. I reviewed these rules when I reported the recent case of Henry Boot Construction –v- Alstom Combined Cycles. For convenience the Court broke the clause down into three rules.

Rule 1:- Where work is of similar character and executed under similar conditions to work priced in the Bill of Quantities, it shall be valued at such rates and prices contained therein as may be applicable.

Rule 2:- Where work is not of a similar character or is not executed under similar conditions or

is ordered during the defects correction period, the rates and prices in the Bill of Quantities shall be used as the basis for valuation so far as may be reasonable.

Rule 3:– Failing, which a fair valuation shall be made.



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Case Eight (continued) The matter came before an arbitrator who concluded that the instruction was to be treated as a variation under clause 51 of the ICE Conditions, for which a “fair valuation” under clause 52 should be made. In arriving at this decision the arbitrator did not however agree with Weldon’s approach to the inclusion of amounts for overheads and profit. The Commission for the New Towns argued that Weldon was not entitled to any additional overheads. They argued that an overhead allowance was not evident elsewhere in the tender and hence it must be assumed that the contractor’s rates and prices were gross and that it would have recovered its overheads on other work. The arbitrator agreed with this argument and refused to include any sum in respect of additional overheads. He took the same approach when it came to considering profit. These matters came before the Court on appeal. Weldon submitted that the arbitrator’s reasoning was erroneous in law. The arbitrator had approached the valuation of overheads and profit as if they had been part of a claim for loss and expense under the JCT form of contract. Weldon argued that the claim was for a fair valuation of varied work carried out within the contract period and no prolongation element was sought. Relying upon the Henry Boot case, Weldon noted that a fair valuation “generally means a valuation which will not give the contractor more than his actual costs reasonably and necessarily incurred plus similar allowances for overheads and profit”. Weldon also made a compelling argument as to the operation of clause 52. It was submitted that the use of contract rates and prices for the purposes of valuing variations under rules 1 and 2 necessarily meant that the contractor would recover overheads and profit since they would be an integral part of the contract rates and prices. Weldon argued that a fair valuation under rule 3 could not omit any element, which would be a necessary part of the compilation of a contract rate or price such as overheads and profit. A valuation under rule 3 which did not include such elements would not be a fair valuation for the purposes of the contract. In the judgment of his Honour Judge Humphrey Lloyd QC, Weldon were correct in this submission. Any other interpretation of clause 52 would be inconsistent with the many other provisions of the ICE Conditions where the clear intention is that in circumstances for which the contractor is not responsible, the contractor is entitled to additional payment inclusive of profit. Moreover, clause 1(5) specifically determines that cost should include overheads. Judge Lloyd considered that in most cases it is to be assumed that expenditure of costs inevitably attracts ordinary overhead charges, since such expenditure cannot be made by a contractor without ancillary work being done or office and other resources being deployed.



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Case Eight (continued) In his judgment a fair valuation must include something on account of each of the elements which are ordinarily to be found in a contract rate or price; elements for the cost of labour, the cost of plant, the cost of materials, and the cost of overheads and profit. Whilst time related overheads might require to be proved, Judge Lloyd considered that it would not always be necessary to prove that other overheads were actually incurred for the purposes of a “fair valuation”. Implication Under clause 52 of the ICE Conditions, a fair valuation will normally include cost plus an appropriate allowance for

overheads and profit



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Description of Appendices

Appendix I (Master Filing Systems)

This gives an outline on what a typical filing system should consist of. The sample has been based on how the Hoping filing system should have been structured. In addition to the general heads of individual files, additional files need to be added each time Doosan consider that a claim may exist. These requirements and the content have already been described elsewhere in this document.

Appendix II (Principles and Policies in Delay Analysis) pickavance.pdf

This copyright document (© Pickavance Consulting 2001) is, without doubt, the best document of its kind ever to have been published. The analytical approach used in demonstrating how to deal with delays is unequalled in any other document that is publicly available.



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Appendix I

Master Filing Systems



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Appendix II

Principles and Policies in Delay Analysis

Documents

Preparing and Submitting Claims-PSI