Analysis of Claims Based on Provisions in 4th Edition of FIDIC Contracts

Dr C.S.Suryawanshi, Sr Techno Legal Consultant Mumbai

Claims and Counter Claims in all Construction Contracts play an important role in the Contractual relation ship between employer and contractor. Generally Claim is reckoned in practice as “an assertion for additional monies due to a party or for extension of time for completion. This interpretation is construed from a wording of the Contractual provision. Arbitrations on the claim matters are on its rise. Engineer arbitrators interpret the provisions of Standard Contract Forms in the traditional way- & legal personnel interpret in the legal sense.

This paper discusses some of the principles as regards basis of claims and clarifies the provisions pertaining to “Variations “as embodied in the present day Standard Contract Forms, of FIDIC.

Introduction

Typical sources of disputes and claims are worth noting, before we consider its Analysis. Theoretically, any clause in the contract can become the basis of a claim. Indeed, it is a wonder that contracts have not become much simpler on this account alone. However, we are governed by explicit law, expressed by a profession whose major product is more words! Generally, disputes may be identified as arising from any one of the following main groups:
  1. Changed conditions. Conditions different from that represented by the contract documents, or known at the time of bidding for the work, such as different soil conditions, or unknown obstructions etc.
  2. Additional work. Disputes over the pricing and timing of additional work required, or even whether a piece of identified work is in the contract or not. Beware particularly of omissions in the design documents, requiring changes to make a system work, especially if they appear in a subtle way through the shop-drawing review and approval process. This is always very embarrassing for the designers, who would like to see them incorporated for free! Beware also of changes requested by the users (as distinct from the owners) of the project.
  3. Delays. These refer to delays strictly beyond the contractor’s control. They may be caused by the owner directly, or by one of his agents. A prime example is failure to give access to the site of the work in a timely way. Or equipment promised by the owner is not delivered on time. More frequently, working drawings are not provided in time to suit the work, or shop drawings are not reviewed in a timely manner.
  4. Contract time. Disputes over a contractor’s request for time extension on account of changed conditions, required changes to the contract, or owner caused delays. Disputes may also arise over instructions to accelerate the work. Such instructions may not necessarily be explicit. For example, instructions to incorporate additional work without a corresponding time extension especially if the work is on the critical path, is tantamount to an instruction to accelerate in order to meet the contract completion date.
The construction contract is unique in that it seeks to provide for a specific remedy in the event of any breach of the terms and conditions within its framework and/or for a contractual entitlement in respect of specified events. Therefore, it is essential that the parties and those who represent them fully comprehend the terms of the contract and the remedies available to them under it.

Claim

Curiously, for such a fundamental aspect of the contract, no express definition appears in the typical standard form of construction contract and it is rare to find a definition of ‘a claim’ in reference texts or authorities on construction contracts. A claim is defined in The Oxford Companion to Law as a general term for” the assertion of a right to money, property, or to a remedy.” Strictly speaking then, whenever for example the contractor applies for his monthly interim payment for the original scope of the works, or whenever for example the employer writes to the contractor requiring him to remedy defective work, it would be a claim under this definition.

In construction contracts, in traditional way, a claim is generally taken in practice to be an assertion for additional monies due to a party or for extension of the Time for Completion. This interpretation of ‘a claim’ is borne out by the wording of the contractual provisions relating to claims. For example, clause 44 of the Fourth Edition of the Red Book provides for an entitlement to ‘an extension of the Time for Completion of the Works or any Section or part thereof (emphasis added), albeit that the word ‘claim’ appears nowhere in this clause; and sub-clause 53.1 includes the words ‘..if the Contractor intends to claim any additional payment. . .’ (emphasis added). However, nowhere is there a reference to an assertion for a declaration, although such a claim is frequently made.

Then it is clear that the form of contract seems to ignore claims arising from anything other than the assertion for an entitlement to payment or time extension.

Counter Claim

A counterclaim is defined as an assertion made by a respondent party which can conveniently be examined and disposed of in an action originally initiated by the claimant party. It is not necessarily a defence, but a substantive claim against the claimant which could have grounded an independent action. The concept of convenience referred to here signifies that the background of the counterclaim is similar to that of the claim and results from the same set of facts and events. For instance, a party might be precluded from bringing a counterclaim in arbitration either because the claim is not subject to arbitration (i.e. arising from another contract or a different event) or by virtue of the conditions prescribed by the contract initiating an entitlement to claim. Furthermore, in the sense that the word is used, it would not include a defence where that defence does not itself give rise to an actionable claim against the claimant.

Broad Basis of the Claims

In number of cases, Claims as we see to day arise from:
  1. documentation
  2. in connection with execution of the work
  3. concerning payment provisions
  4. concerning time
  5. default, determination etc
  6. Compound claims
Essentially, other than claims under statutory law, claims in construction contracts may be based on legal concepts and non-legal concept. Therefore, if a claim is required to be categorised, and it is suggested that it should be, the categorisation could be done in accordance with the following five categories:
  1. A claim under the contract:
    The first category relates to a claim under the contract between the parties based on the grounds that should a certain event occur, then a claimant would be entitled to a remedy that is specified under a particular provision of the contract, subject to the effect of the applicable law. Such an event may be one of two types.
    1. First, it may be a specified event under the contract, which might or might not occur, where in certain defined circumstances the employer or the contractor is entitled to claim a designated remedy. For example, the contractor is entitled to claim an additional payment under the Red Book for tests in accordance with the provisions of sub-clause 36.4.
    2. Secondly, the specified event may be a breach of a particular provision in the contract entitling a claimant to a designated remedy if the terms of such provision are not, or are only partially, complied with. If the claim is successful, the particular provision in the contract would apply and the remedy could be in the form of a payment of a sum of money, or an extension of time, or some other benefit, or a combination of all three.
    For example, it is stipulated in the Red Book that failure by the’ contractor to complete the works on a specified date would entitle the employer to deduct liquidated damages at a specified rate per day or week. In this connection, the provisions of the applicable law must be taken into consideration, for instance whether such damages are in effect a penalty, and if so, whether or not this can be treated as a valid claim.
  2. A claim arising out of or in connection with the contract:
    The second category relates to a claim arising not under, but out of or in connection with, the contract, where the remedy is not designated in the contract and the claimant needs to invoke a provision of the applicable law to obtain a remedy. Therefore, if the claim is valid, the remedy lies under the provisions of the applicable law of the contract, for example a claim for a breach of contract. Under English law, the remedy for a breach of contract would be under the principles governing damages, including those laid down in the Hadley v. Baxendale. The remedy in this case may extend to consequential damages, if foreseeable at the time of contracting, unless excluded by the contract. Furthermore, if the breach is of a serious nature, the aggrieved party might be entitled to cancel the contract and, if the breach amounts to the communication of an intention not to abide by the terms of the contract, such conduct could amount to a repudiation which would be open to acceptance by the innocent party.

    Furthermore, if the employer terminates the contract, the contractor might have a lien over the works, depending on the terms of the contract, which would act as security for the payment of any money owed to it arising from the work performed pursuant to the contract.

    Another example of a claim arising in connection with the contract, but not under it, is where one of the parties has misrepresented certain important facts in negotiations leading to the formation of the contract. In such case, the other party may use this as a basis for cancelling the contract or for claiming damages. However, the terms of the contract may exclude the right to cancel for a serious breach or misrepresentation. If, however, such misrepresentation constitutes fraud, the party making the representation would not be allowed to rely upon such an exemption clause.
  3. A claim under the principles of the applicable law:
    The third category relates to a claim arising under the application of the principles of the applicable law, either by the parties to the contract or against third parties. This could lead to a claim under the law of tort, or delict as it is referred to in some jurisdictions.

    The law applicable to a claim in tort/delict is not necessarily the same as the governing law of the contract. If the claim is successful, the remedy would typically be an award of general damages, the amount being dependent upon the particular circumstances of the case.

    Depending on the applicable law, the parties may have concurrent claims arising from the contract and from tort/delict. Although the result will often be the same, the measurement of the loss is, in principle, different. Complicated questions arise between contracting parties as to the implementation of terms limiting the aggrieved party’s entitlement to a claim brought in tort/delict. This might even apply to rights of action to persons who are not privy to the contract.

    For example, a party might wish to bring a claim in tort/delict rather than in contract because of time limitations; where there is an arbitration clause imposed by a contract; where there is an insurance policy covering particular claims; or where notice provisions under the contract affect the aggrieved party’s entitlement to claim.
  4. A claim arising out of the principle of quantum meruit:
    The fourth category comprises claims where no contract exists between the parties, or if one existed, it is deemed to be void. It is based on the principle that an individual has the right to be paid a reasonable remuneration for work done. This is referred to in some legal systems as quantum meruit or ‘as much as one has earned’ and has been often equated to a claim for undue enrichment. The principles of quantum meruit have also been applied to cases where there is a contract in existence but the price is not stipulated; instead the contract expressly provide that the amount to be paid will be based on a reasonable sum or the price will be agreed from time to time. In Hudson’s Building and Engineering Contracts, it is stated:

    ‘. . . quantum meruit is frequently employed . . . where a true contractual situation exists, in the sense of a request to do work accompanied by an intention to pay for it, and so supported by consideration, but where the price may not have been fixed at all, or with sufficient precision, by the contract, so that a promise to pay a reasonable price requires to be implied to give practical effect to the parties’ intentions.

    The case of Constable Hart & Co. Ltd v. Peter Lind & Co. Ltd is one example where the court applied this principle. If the claim is successful, payment is assessed on the basis of a reasonable recompense of the cost of the work carried out by the contractor and may, although not necessarily, depending on the principles of the applicable law, include an element of overhead and profit.

    Generally, the remedy for all the four categories of claims set out above would be sought through an action in arbitration or litigation unless the claim is settled amicably. Such action would usually necessitate the employment of lawyers and the outlay of large expenditure
  5. A claim for ex gratia payment:
    Finally there is the claim for an ex gratia payment (meaning out of kindness). Although claims for ex gratia payments are not claims which arise by virtue of a contractual entitlement, they are sometimes entertained by employers and engineers as a matter of expedience to avoid arbitration or litigation and, indeed, to maintain the goodwill necessary to complete the project successfully. There is no applicable legal basis for such payments, but rather some commercial sense or benefit in reaching a settlement between the parties without acceptance of liability.
Only the first two categories of claim are considered here, i.e. those which are made under the contract or which arise out of the contract, as the other categories of claim are beyond the provisions of the Red Book.

An analysis of “Variation” Claims

Variation Claims under the contract are presented, in the first place, to the engineer who should determine, impartially, the entitlement of the claimant in principle and in quantum. Such determination, if unacceptable to either the employer or the contractor, may be ‘opened up, reviewed or revised as provided in Clause 67’ (Settlement of Disputes).

(See sub- clause 2.6 of the Red Book).

A claim under the contract and based on its provisions

As previously stated, the Red Book regulates the rights and obligations of the parties to the contract. Its provisions specify what should be done by the two parties or their agents and servants and the consequence if what ought to be done is either not done, or if done, is not done within the time specified.

Claims will very often arise in a traditional construction contract because it is perhaps the only contract where the price of the end result is defined before the process of ‘production’ even starts. Accordingly, in the competitive atmosphere of tendering which accompanies such a contract, little or no margins are left for future unknowns in a long and complex period of construction. Furthermore, as the rates and prices have to be based on certain assumptions which are, in turn, based on the provisions of the Conditions of Contract, any change between what was assumed and what actually happens may form a seed for a claim.

As already stated, claims under this category may be divided into:
  1. claims as a result of certain anticipated and specified events and for which a remedy is designated in the contract; and
  2. claims as a result of an event where a certain term of the contract is breached and for which a remedy is designated in the contract.

Meaning of the term “Access to Site”

“Access to Site” may have a number of meanings in a construction contract. It may refer to the means and availability of the approach to the Site area, whether by land, sea or air. It may also mean the ability to occupy the site area. The second sense is usually referred to as “possession of the site”, although terms such as “access to site” and “use of site” are also used. The first meaning of “Access to Site” is examined below.

Access to the site in which the works are being constructed is necessary to allow transport and delivery of materials, plant and equipment as well as to allow services and the workforce to reach the site. In order to be effective the access must be suitable for the type of transport required and must be available to the contractor at the appropriate time. Even if access is physically available local permissions and custom clearances may be necessary to allow legal use of access.

Apportionment of Responsibility

The extent of any responsibility for providing the required access across adjacent property and buildings, obtaining the necessary permissions and the apportionment of risk for events which prevent the required access, will depend upon the terms of the contract. Generally, if it is necessary for one party to cooperate in order for the other to carry out the work, then a term will be implied (in the absence of express terms) requiring that party to do all that is necessary for him to do to complete the works-London Borough of Merton v Leach (1988) 32BLR51. The extent of the obligation to provide access and obtain permissions will depend upon the type of work involved, the extent of possession and/or control of adjacent areas by that party and all the circumstances. Even if a term is implied that such physical access is to be provided by one party, the term may not extend to requiring that party to take responsibility for the adequacy of the access for the transport of plant and equipment for the works.

General Case Law

Two decisions of the courts one Canadian and one English, demonstrate the principles involved in apportioning responsibility for providing access to site.

In the Canadian case of Penvidic Contracting Co Ltd v International Nickel Co. of Canada Ltd [1975]53 DLR 748 the contract involved the laying of track and top ballasting on a railroad. Penvidic was the contractor and work was constantly delayed by the failure of other contractors to properly grade and sub-ballast the right of way in front of its machinery. In addition the International Nickel Co failed to obtain the necessary way leaves and permissions to cross various hydro lines and highways. It was held that the extent of possession or access provided by an Employer would vary with the nature of the work and the circumstances. In the case of a new project the main contractor would normally be entitled to exclusive possession of the entire site in the absence of express terms to the contrary. A term would normally be implied that the site would be handed over within a reasonable time and, in most cases, with a sufficient uninterrupted possession to allow the contractor to carry out his obligations by the method of his choice. It was held that International Nickel Co had failed to do so and that this was a breach of contract entitling Penvidic to damages.

In LRE Engineering Services Ltd v Otto Simon Carves Ltd [1981] 24BLR131 Simon Carves was the contractor for building works at steelworks at Port Talbot. LRE were subcontractors and had completed a very substantial proportion of the works when a steel strike broke out. The activities of pickets at the site prevented LRE completing the work until some considerable time later, causing them to incur considerable additional costs. LRE maintained that Simon Carves was in breach of contract in that it had an absolute obligation to see that there was available entry to the site at all times. This was not accepted. It was held instead that the term “access” had more than one meaning in the relevant Clause 24. In one part of the clause it meant “physical means of access” since that part also referred to the condition of the access. Another part of Clause 24 placed an obligation on Simon Carves to “afford access” to LRE. This meant that Simon Carves undertook that at the relevant time there would be a physical means of access and also that LRE would be given the opportunity to enter the site by means of that access. On this interpretation it was held that there was no breach of contract. Simon Carves had provided LRE with the opportunity of entering the site by the required means of access. The fact that they were prevented from doing so was not a breach of contract.

Standard Forms

The standard forms generally expressly state the responsibilities for access to Site, in terms which reflect the type of work envisaged and the expected use of the forms.

FIDIC 1998

The FIDIC Red, Orange and Yellow Forms 1999 place the main responsibility for access on the Contractor and reflect the international and civil/mechanical type of works envisaged.

Clause 2.2 only requires the Employer to provide reasonable assistance, and then only at the Contractor’s request, for the Contractor’s application for permits, licences or approvals including clearance through customs and export of the Contractor’s Equipment when removed from Site. Clause 4.13 makes the Contractor responsible for special and/or temporary rights of way including those for Access to the Site.

Under Clause 4.15 it is for the Contractor to satisfy himself as to the suitability and availability of access to the Site, and is responsible for obtaining permissions to use the route and signs. Clause 4.15 expressly provides that the Employer does not guarantee the suitability or availability of particular access routes.

The remedy in both of these types of claim is designated in the contract and the claim may include the following:
  1. An assertion for financial compensation in respect of:
    1. variations which include alterations, additions and omissions, as well as a change in any specified sequence or timing of construction of any part of the works;
    2. measurement changes;
    3. adverse physical conditions;
    4. the employer’s risks;
    5. compliance with statutes, regulations, price fluctuations, currency and other economic causes;
    6. defects and unfulfilled obligations;
    7. failure to commence, critical or non-critical delays, suspension of work, release from performance, default and termination; and
    8. other miscellaneous specified events.
  2. An assertion for an extension of the time for completion of the contract works
  3. An assertion for other benefit.

Variations

The nature of variations, the responsibility for them and their valuation are discussed in this section.

Nature of variations

Although some claims can be avoided by proper planning and risk management, claims for variations, as indeed claims in general are inevitable since it is practically impossible to foresee every event that might occur during the construction period and to plan in advance for the consequences of such events. If that concept is accepted, then it is necessary to incorporate into the contract a mechanism for implementing changes which are found to be necessary or desirable during the construction period. These changes are permitted to be made to the works but not to the contract.

Clauses 51 and 52 in the Red Book provide for such a requirement by authorising the engineer to vary the works or any part thereof. They also regulate the rights and obligations of the parties in the event of such variations. The wording of sub-clause 51.1 confines this authority to make variations to the engineer. The first sentence of sub-clause 51.2 is in fact more specific in this respect in that the contractor is prevented from making such a variation without an instruction from the engineer. The engineer’s authority in this respect is extremely wide extending to the ‘form, quality or quantity of the Works or any part thereof. However, in the case of additional work, such authority is explicitly restricted in paragraph (e) of sub-clause 51.1 to ‘any kind necessary for the completion of the Works’. Accordingly, the engineer’s authority to add further work to the contract is restricted so that it does not include work alien to the original concept of the contract or work which is not necessary for its completion.

An instruction is required from the engineer to the contractor to initiate a variation and such an instruction is required to be in writing in accordance with sub-clause 2.5, or, if given orally, then it should be confirmed in writing as provided for in that sub-clause. Some commentators have suggested that a drawing may constitute an instruction in writing if it is issued showing a change from previous drawings and the change may be defined as a variation. Of course, it would always be preferable to issue the drawing accompanied by a specific communication as to the nature of any contemplated variation. What is and what is not a variation is a major source of dispute in many projects and a frequent issue in arbitral proceedings.

Sub-clause 51.1 also provides that the engineer may vary the works or any part thereof if for any reason, other than it being necessary, and he finds it appropriate to:
  1. increase or decrease the quantity of any work included in the contract but an instruction for such variation is not required if the actual quantities of the work envisaged at the time of tendering prove, on remeasurement, to be different from those recorded in the bill of quantities, see sub-clause 51.2. The effect of such a variation must then be taken into account in determining whether or not the provisions of sub-clause 52.3 apply;
  2. omit such work provided it is not to be carried out by the employer or by another contractor;
  3. change the character or quality or kind of any such work;
  4. change the levels, lines, position and dimensions of any part of the works;
  5. execute additional work of any kind necessary for the completion of the works;
  6. change any specified sequence or timing of construction of any part of the works. ~
Paragraph (f) of sub-clause 51.1 which is a new provision under the Fourth Edition assumes that some specified sequence or timing of construction had already been made in the contract documents. It adds a new dimension to the meaning of a variation from previous editions of the Red Book in that it encompasses the timing of construction and its programme. Any change from the specified sequence or timing stated in a programme submitted by the contractor under clause 14 and instructed by the engineer under clause 51 would therefore qualify as a variation. Such a change may be in the form of a requirement to accelerate the work or to vary its timing.

Sub-clause 51.1 of the Red Book also provides that any variation instructed by the engineer should not vitiate or invalidate the contract. It has been suggested that as a matter of business efficacy, this provision must be subject to an implied limitation of reasonableness in so far as instructions cannot stray ‘outside the Contract’. Extras, therefore, must not be of a certain value and type and must not be instructed at a time which would render the contract inapplicable.

Responsibility for variations

The allocation of liability for the value of any variation instructed by the engineer is dependent upon whether or not the necessity for it is due to some default of or breach of contract by the contractor. Accordingly, any additional costs attributable to a variation necessitated by some default of or breach of contract by the contractor are to be borne by him; see sub-clause 51.1.

Valuation of variations

Valuation of the variations referred to above is provided for under clause 52 of the Red Book which provides the rules for such valuation. In essence, they are:
  1. Within 14 days of the date of an instruction to vary the works in accordance with clause 51, and before commencement of such work, a notice is required to be given either:
    1. by the contractor to the engineer of his intention to claim extra payment or a varied rate or price; or
    2. by the engineer to the contractor of his intention to vary a rate or price.
    It is clear by including this notice requirement in the provison of clause 52.2 that a valid notice of intention to claim is a condition precedent to any additional payment. The importance of this condition can only be evaluated in the light of the provisions of the applicable law of the contract. Furthermore, in general terms, the treatment of this topic under civil law jurisdictions differs significantly from that under the common law. In England, the relevance of such notice was highlighted by the Court of Appeal in 1965 in the Tersons case when it was held that a notice need only indicate the intention to make a claim and identify in general terms the & additional work to which the claim will relate. It is noteworthy that the wording of the clause in question in that case is different from that in the Fourth Edition of “‘ the Red Book from the point of view of the period within which it had to be served. The words of the clause in the Tersons case were: ‘as soon after the date of the order as is practicable’, as against the period of 14 days specified in the Red Book.
  2. Such notice is not required to be given where the variation entails an instruction to omit work.
  3. Varied work is valued in one of four different ways.

    The first is where the variation is valued at the rates and prices set out in the contract if, in the opinion of the engineer, these rates and prices are applicable to the items of varied work. In considering the applicability of the rates and prices in the contract to the varied work, the engineer would have to take into account the nature and amount of the varied work in addition to, presumably, the preliminary items which may be affected, the time when the variation is ordered, the method of its construction and its physical location compared with the other work under the contract.
  4. The second way in which a variation may be valued is where there are no applicable rates and prices in the contract, then the contract rates and prices are to be used as the basis for valuation so far as may be reasonable.
  5. The third way in which a variation may be valued applies if the contract rates and prices cannot be used as a basis for valuation; then the engineer is required to agree new suitable rates and prices through the procedure of ‘due consultation’ with the employer and the contractor.

    Where no agreement is reached between the engineer and the contractor, then the engineer is required to fix such rates and prices as are, in his opinion, appropriate. Having done so, the engineer is required to notify the contractor accordingly with a copy to the employer.

    Whilst no time limit is imposed on such agreement on suitable rates or prices, or any subsequent requirement to fix such rates or prices, in case of disagreement, the engineer is required under sub-clause 52.1 to determine provisional rates or prices for the purposes of on-account payments in any certificate issued under clause 60.

    Sub-clause 60.2 provides that ‘the Engineer shall . . . certify. . . the amount of payment to the Contractor which he considers due. ..’. It may, therefore, be taken that whatever is certified under the monthly payment will have to incorporate properly assessed rates and prices for the various items of work executed and incorporated in the monthly statements of the contractor pursuant to sub-clause 60.1 ‘to which the Contractor considers himself to be entitled’.

    Under the heading of applying new suitable rates or prices, sub-clause 52.2 provides for the possibility of changing the rates or prices of items of the works, other than varied work. It provides that if, in the opinion of the ‘engineer, the nature or amount of any varied work relative to that of the whole of the works, or to any part thereof, is such that the rate or price contained in the contract for any item of the works, is rendered inappropriate or inapplicable, then a suitable new rate or price is to be agreed upon between the engineer and the contractor. This provision extends, therefore, to the rates or prices for ‘any item of the works’ and affects the rates or prices which are influenced by variations due to time delay, out of sequence working, changes in the method of execution and to a large extent the preliminary items of the bill of quantities, if any are included. For a proper adjustment of the rates and prices of these items, if such adjustment is found to be necessary, reliable knowledge and understanding of the make-up of these rates and prices is essential.

    Once again, agreement on new suitable rates or prices is to be attempted under the provisions of sub-clause 52.2 after ‘due consultation’ by the engineer with the employer and the contractor. In the event of disagreement, the engineer is required to fix such other rate or price as is, in his opinion, appropriate in the particular case. The engineer is then required to notify the contractor accordingly with a copy to the employer. As previously required under sub-clause 52.1, until such time as rates or prices are agreed or fixed, the engineer should determine provisional rates or prices to enable on-account payment to be included in any certificate issued under clause 60.
  6. The fourth way in which a variation may be valued applies where it is to be found, on the issue of the taking-over certificate for the whole of the works, that the value of varied work together with all adjustments upon measurement of the estimated quantities is in excess of 15 per cent of the ‘Effective Contract Price’. The ‘Effective Contract Price’ is defined in sub-clause 52.3 of the Red Book as ‘the Contract Price, excluding Provisional Sums and allowance for dayworks, if any’.

    Then, a sum is required to be added or deducted from the contract price as may be agreed between the engineer and the contractor. There is no guidance in the Red Book as to how this sum should be calculated. It is, however, apparent that the target of such adjustment is the bill of preliminary items which forms part of the contract price.

    On page 117 of the Guide, referred to in Reference at srl. no 12, there is reference to the purpose of this sub-clause where it is explained that ‘in preparing a tender, a contractor may distribute his on-costs and profit in various ways,...’, and an adjustment of these is necessary where the amount of work under the contract is varied beyond the specified percentage. For an accurate adjustment, however, it is imperative that the engineer should obtain details of the contractor’s internal price make-up of these on-costs and profit items.
  7. Sub-clause 52.3, which deals with the situation where the value of variations exceeds 15 per cent of the effective contract price, defines the value of varied work and all adjustments upon measurements of the estimated quantities in the following manner:
    1. varied work is defined in paragraph (a) of sub-clause 52.3 as all varied work valued under sub-clauses 52.1 and 52.2. This definition removes the confusion which existed in previous editions of the Red Book as to whether or not changes of quantity arising from measurements, in accordance with clause 56, should be included in the calculation of the value of the varied work. It is now clear that only varied work in accordance with sub-clause 52.1 and 52.2 should be included;
    2. all adjustments upon measurement of the estimated quantities is defined in paragraph (b) of sub-clause 52.3 as those adjustments which are ‘set out in the Bill of Quantities, excluding Provisional Sums, day works and adjustments of price made under Clause 70’.

      This definition also clarifies in precise terms the value of additions to or deductions from the ‘Effective Contract Price’, or in other words from ‘the Contract Price, excluding Provisional Sums and allowance for dayworks, if any’;
    3. agreement between the engineer and contractor is once again based on the new concept of ‘due consultation’ by the engineer with the employer and the contractor. Where no such agreement can be reached, the sum to be added to or deducted from the contract price is required to be determined by the engineer having regard to the contractor’s site and general overhead costs of the contract. The engineer, having determined such sum, is required to notify the contractor accordingly with a copy to the employer;
    4. finally, sub-clause 52.3 provides that the sum to be added to or deducted from the contract price is to be based only on the amount by which such additions or deductions are in excess of 15 per cent as fixed in sub-clause 52.3. This provision answers the question which was left unanswered in the previous editions of the Red Book. It is now clear that the adjustment to the contract price should be related only to the margin below or above the 15%. Therefore, if for example, there is a reduction of 20% in the contract price due to the valuation of variations under sub-clauses 52.1 and 52.2, the ‘losses’ sustained by the contractor due to this reduction should only be related to the margin between 20% and 15 per cent, i.e., 5 per cent and not the whole of the 20 per cent.
  8. Sub-clause 52.4 deals with the situation where the engineer requires certain varied work to be carried out on a daywork basis. Daywork is usually covered by a pro- visional sum in the bill of quantities which may then be used for additional items for which no bill item is applicable. Where such a provisional sum is included in the bill of quantities, a daywork schedule of rates and prices is appended to the bill for pricing by the contractor. The procedure for payment in respect of daywork is set out in sub-clause 52.4.
Therefore, in setting out comprehensively the manner in which variations are to be valued, the Red Book provides a remedy in the form of financial compensation in the anticipated event of a change to the works being instructed by the engineer, on behalf of the employer.

Conclusions

It is expected that the Arbitrators will find the above analysis useful in interpreting the provisions than searching the meaning from the similar Standard Forms of Contracts.

Though other clauses of the contracts are equally important but this paper is confined to only such clauses which are often a matter of debate before the Arbitrators and the Courts.

Bibliography

  • Suryawanshi C.S (Dr) 2009, “Construction Claims their Basis/Grounds,” Indian Highways Journal Sept 2009.
  • Suryawanshi C.S (Dr) 1992, “Legal Implications of Oral Change Orders in Construction Practice”.
  • Raftery, J., (1994), “Risk Analysis in Project Management, E & FN Spoon, London.
  • Shen, Y.J. and Walker, D.H.T., (2001), “Integrating OHS, EMS and QM with Contract Manager Principles when Construction Planning - A Design and Construct project case study,” The TQM Magazine, vol. 13 no. 14, pp. 247-259.
  • Ashworth, A., (1991), “Contractual Procedures in the Construction Industry”, 2nd edition, Longman, London.
  • Corbett, E.C., (1991), “FIDIC 4th -A Practical Legal Guide, Sweet and Maxwell, London.
  • Corbett, E.C., (1999), “FIDIC’s New Rainbow, The Red, Yellow”, Silver and Green 1st Editions, Corbett & Co., London.
  • Harris, F. and McCaffer, R., (2001), “Modem Construction Management”, 5th edition, Blackwell Science Ltd., Oxford.
  • Kwakye, A.A., (1997), “Construction Project Administration in Practice”, Longman, London.
  • Halesbury’s Laws of England 4th Edition,
  • Conditions of Contract for Construction for Works of Civil Engineering Construction (FIDIC) Fourth Edition 1987
  • Guide to FIDIC
  • Hudson Building and Engineering Contracts: 10th Edition
  • Keating on Building Contracts: 7th Edition
  • Various Case Laws from Supreme Court of India.

NBMCW November 2010

Benefits of Project Management in Developing India’s Infrastructure

During the past couple of years, India has enjoyed the privilege of being amongst the most favored investment destinations of the world. With the sharp vision of Prime Minister Narendra Modi and compelling Read More ...

Arbitration and Conciliation (Amendment) Ordinance 2015 Provisions & Legal Issues

In a significant development for Indian arbitration law, the President of India has formally adopted the Arbitration and Conciliation (Amendment) Ordinance 2015 (the "Ordinance"), which will bring about major and long-awaited reforms to arbitration in India. The Ordinance amends Arbitration and Conciliation Act 1996 and seeks in particular to eliminate Read More ...

Redefining India – Accelerating Infrastructure Projects Through Project Management

Raj Kalady
In the last two decades, India has emerged as one of the fastest-growing economies in the world. According to a Citi group report, following the reforms undertaken by Government of India, the GDP is Read More ...

A Study of Constructability Issues Related to Various Stages of Design and Construction Process

The increasing levels of competition and the introduction of manufacturing concepts within the industry led to specialization. Such specialization led to the separation of design and construction facilities. The increasing complexity of many projects makes it more and more difficult for the designers to be fully aware of all the implications of their Read More ...

Model for Processing Construction Claims

Construction Claims
With growing standards, advanced technologies, and owner-desired additions and changes, construction projects are becoming more and more complex, while the successful completion of projects has been thought to depend mainly Read More ...

Obligations of Parties & Provisions of Claims in Modern Construction Contracts

Construction contracts usually contain notice-of-claim provisions. The contractor must, within a stated period of time, notify the project owner in writing of any occurrence which may give rise to a claim for additional compensation under the contract. The policy behind these requirements is sound. Owners should have the opportunity to respond to Read More ...

Termination of Contract Under Old FIDIC

Termination of Contract
Most commercial construction contracts include provisions allowing either party to terminate a contract for cause (also referred to as a termination for "default"). Unlike terminations for convenience, Read More ...

Position of Engineer & Independent Engineer In Standard Forms of Contracts

The engineer is generally responsible for issuing the completion certificates and supervising any tests that have been contractually agreed as well as establishing that payments to the Contractor can be made, in funded Read More ...

Study on Project Schedule and Cost Overruns - Expedite Infrastructure Projects

The KPMG in India – Project Management Institute (PMI) study was initiated on the request of MoSPI, which highlights the major reasons for schedule and cost overruns across major sector's infrastructure Read More ...

PPP Audit of Infra Project - Importance and Implication

Purnima Bajpai, Reliance Infrastructure, Pune.A contentious issue in the context of PPP arrangements and their audit relates to the scope of audit by Supreme Audit Institutions (SAI), in Read More ...

Modern Data Collection Techniques for Management of Road Assets

It is now well established that decision on maintenance, rehabilitation and upgradation/ improvement measures needs to be based on an objective assessment (with an analytical approach) to Read More ...

Management of Quality Quantity and Speed

Management is the need of today. Management has been included in various specialised fields now like environment, tourism, hotel, information technology etc. apart from traditional courses like finance, human resource, operation and marketing. In the management concept, management sets the goals based on quantities for individuals and performance Read More ...

An Innovative Tool to Teach and Train

The world is expanding and indeed expanding at a breath neck pace, Expansion of our world requires construction of new Industries and Production process from commissioned industries. No Read More ...

Infrastructure Projects Through Project Management

India is only second among the emerging economies next to China. With an average GDP rate of 7.5% and upside, the demand to improvise infrastructure is magnanimous. The average spending capacity Read More ...

Safety Planning and Administration

Theoretically Safety means the absence of danger at work which is made possible by eliminating hazards that create danger. ILO, in one of their documents, state "A thing is provisionally categorized as safe if the risks are deemed known, and in the light of that knowledge, judged to be acceptable. However, generally, safety is adjudged in terms of an Read More ...

A Legal Analysis of Some Clausal-Related Disputes in Construction Contracts

The contractor under a construction contract is invariably required to carry out and complete the project by a specified date. This requirement is often accompanied by an obligation to produce a construction programme and to keep it up to date. There may be a contract administrator with powers to approve the programme. This paper identifies matters in relation Read More ...
NBM&CW

New Building Material & Construction World

New Building Material & Construction World
MGS Architecture

Modern Green Structures & Architecture

Modern Green Structures & Architecture
L&ST

Lifting & Specialized Transport

Lifting & Specialized Transport
II&TW

Indian Infrastructure & Tenders Week

Indian Infrastructure & Tenders Week