Obligations of Parties & Provisions of Claims in Modern Construction Contracts

C. S. Suryawanshi, Former Chief Engineer & Joint Secretary (P.W.D) Senior Consultant Mumbai.

Introduction

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 problems as promptly as possible while options are available and costs can be mitigated.

The contracts attempt amongst many other things to provide a frame work with in which to effectively manage the ever increasing pace and complexity of modern construction projects, where claims for delay and cost have become common place and almost anticipated from the onset.

The process of giving "notice" is crucial to the change and claims process in both triggering the contract mechanisms that allow the contractor, to pursue additional contractual entitlement (time and cost) based upon the known circumstances at the time the formal notice was issued as well as persevering the contractors rights to recover for any unforeseen but related impacts that may arise at a later date.

Accordingly, when an impact or claim event occurs, the party against whom the claim is being made must have the opportunity to review and investigate the related circumstances and facts in a timely manner, certainly while the issue remains fresh and contemporaneous, and to provide the basis of a suitable response, which could involve mitigating actions to avoid the impact or claim.

The concept of being able to mitigate potentially adverse and costly problems through receipt of timely notice and prompt actions is of key importance as to the reasons for inclusion of notice provisions and is often forgotten factor when both parties become embroiled in a contentious claim situation.

The paper also aims at
  • To examine time bar provision in FIDIC and similar other Forms of Contracts
  • Consider the judicial mechanisms and legal tools used to challenge their operations, focussing on jurisprudential conflict between such clauses and so called "prevention principle" and
  • Not the real issue for construction contractors, "the tension between time bar clause and prevention principle", but between such a clause and the doctrine of freedom of contract.
Contract Requirements

Most standard forms of contract require the contractor to give notice when he:-
  • becomes aware of an event or events which have caused or are likely to cause delay to completion; and
  • intends to claim additional payment.
In addition to item (i) the contractor is usually required to provide detailed particulars of the cause, effect and extent of the delay to the completion of the works and to keep records of the effects of the delaying events which were the subject of the notice.

Sometimes the notice provisions refer to the issue of a notice within a number of days of an event and sometimes introduce time bars and/or conditions precedent.

Time Frame Constraints in FIDIC

In these forms of contract, Engineer has also to carry out the duty of contract administration. [In this paper, Engineer is referred to as Project Manager/Contract administrator.]

The 1987 and 1999 editions of the FIDIC standard form contain a number of requirements that shall be done within a set period of time.

The FIDIC 1987 Redbook

The Conditions of Contract impose specific time restraints on the Contractor in relation to EOTClaims:

Sub-Clause 44.1 In the event of:
  1. the amount or nature of extra or additional work, or
  2. any cause of delay referred to in these Conditions, or
  3. any delay, impediment or prevention by the Employer, being such as fairly to entitle the Contractor to an extension of the Time for Completion of the Works, or any Section or part thereof, the Project Manager shall, after due consultation with the Engineer and the Employer and the Contractor, determine the amount of such extension as soon as reasonably practicable and in any event within 56 days from either of (whichever is the latter)
  4. receipt by the Project Manager of detailed particulars pursuant to Sub-clause 44.2 or (as the case may be) Sub-Clause 44.3 hereof, or
  5. cessation of the circumstances giving rise to a request for an extension of the Time for Completion of the Works provided that detailed particulars have been received by the Project Manager pursuant to Sub-clause 44.2 or (as the case may be) Sub-Clause 44.3 hereof, and shall notify the Contractor accordingly, with a copy to the Employer. Nothing in this clause shall prevent the award of interim extension(s) of time in accordance with clause 44.3.
Sub-Clause 44.2 Provides that –

the Engineer is not bound to make any determination unless the Contractor has
  1. within 28 days after such event has first arisen notified the Engineer with a copy to the Employer, and
  2. within 28 days, or such other reasonable time as may be agreed by the Engineer, after such notification submitted to the Engineer detailed particulars of any extension of time to which he may consider himself entitled in order that such submission may be investigated at the time.
Sub-Clause 44.3 Provided also that where an event has a continuing effect, such that in the determination of the Engineer, it is not practicable for the Contractor to submit detailed particulars within the period of 28 days referred to in Sub-Clause 44.2, he shall nevertheless be entitled to an EOT provided that he has submitted to the Engineerinterim particulars at intervals of not more than 28 days and final particulars within 28 days of the end of the effects resulting from the event. On receipt of such interim particulars, the Engineershall, assoon as reasonably practicable and in any event within 56 days thereafter, make an interim determination of whether, in principle, an EOT should be granted and, on receipt of the final particulars, the Engineer shall review all the circumstances and shall determine an overall EOT in regard to the event.

In both such cases the Engineer shall make his determination after due consultation with the Contractor, and the Employer and the Engineer, and shall notify the Contractor of the determination, with a copy to the Employer."

The aim of such clauses is to promote proper management of the event by both parties and to enable the employer to make informed decisions to avoid or mitigate the effects. The above provisions provide clear detailed timeframes, which are to be observed by both the Contractor and the Engineer. Although not expressly stated as in the 1999 FIDIC Redbook, it is implied that the contractor's failure to comply with the detailed procedure and timeframes waives his entitlement to claim an EOT and the employer's liability ceases.

Other Clauses
  • Clause 51- Dealing with claims arising out of carrying out variation works.
  • Clause 53 - Dealing with procedure for claims for additional payments. And Clause 53.4
  • Clause 47.1 – Dealing with claim for damages due to delay in completion.
  • Clause 27.1 – Dealing with claim for reimbursements of costs which may be incurred by
contractor while dealing with fossils, coins, antiquities or articles of value.

Contribute to the effect of Notice.

Clause 53: The intention of the clause generally is to set out a disciplined manner of dealing with claims which will be of advantage to both the Employer and the Contractor. Claims are certain to provoke differences particularly if the claim is established long after the work (giving rise to the claim) has been completed.

Frequently in the past claims have been made when the project has been completed and the workforce has been dispersed and then both the Employer and the Contractor are dependent upon incomplete records and inevitably regard their memories of the events as being indisputable. As their respective memories were rarely identical it is understandable that they were both dissatisfied with the outcome. The fourth edition of FIDIC has introduced a claims procedure which places time limits for the notification and substantiation of claims and requires contemporary records to be kept. If such records are not kept, the Contractor may be limited in his entitlement.

Notice of Claims 53.1

Notwithstanding any other provisions of the Contract, if the Contractor intends to claim any additional payment pursuant to any Clause of these Conditions or otherwise, he shall give notice of his intention to the Engineer, with a copy to the Employer, within 28 days after the event giving rise to the claim has first arisen.

This Sub-Clause requires the Contractor to give notice to the Engineer "within 28 days after the event giving rise to the claim has first arisen". This is a practical requirement and not difficult to comply with. Contractors will generally maintain a Site diary and will have noted therein when the event first arises. Note that the Sub-Clause does not require the Contractor to make his claim then - it requires him to give notice of his intention to make a claim.

The words 'or otherwise' are intended to encompass claims made on some legal ground (e.g. under the law governing the Contract) and not made pursuant to any Clause of these Conditions.

Failure to Comply 53.4

This Sub-Clause deals with the situation where the Contractor fails to comply with any of his obligations under Sub-Clause 53.1, 53.2 or 53.3 and defines the extent of his entitlement under such circumstances.

If the Contractor does not comply with the procedure laid down in the Conditions his entitlement to payment may be limited. It is considered that failure by the Contractor to make a claim in accordance with the provisions of Sub-Clauses 53.1, 53.2 or 53.3 should not bar the Contractor from receiving remuneration for any work which the Contractor can substantiate from contemporary records.

This Clause has been subsequently deleted by various nations through COPA.

The FIDIC 1999 Redbook

The provisions of Cl 53.4 have been deleted in the 1999 edition. Further, such interpretation is supported (which has clarified the ambiguities of the 1987 form) by including a condition precedent notice provision.

Sub-clause 20.1 of the new version states:

"If the Contractor considers himself to be entitled to any extension to the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstances giving rise to the claim. The notice shall be given as soon as practicable as and not later than 28 days after the Contractor became aware or should have become aware of the event or circumstances.

If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended. The Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. Otherwise, the following provisions of this Sub-clause shall apply."

Similar to Sub-clauses 44.1, 44.2 of the 1987 FIDIC Redbook, Sub-clause 20.1 then goes onto reiterate the timeframes for the submission of the detailed particulars and the response of the Engineer.

Why the Time bar clause so important?

The primary aim of the time bar clause is to alert the Employer/contract administrator to the contractors claim, allow swift evaluation under sub-clause 3.5 and to prevent the stockpiling of the claims.

However, there is a much more fundamental reason why time bar clauses are so important. If such a clause is held to be ineffective, then in the absence of any EOT award the time for completion is "at large", such that the employer will loose its 'automatic' right to liquidated damages against the contractor.

This can be summarized succinctly
  1. The contractor is bound to complete the work by the date for completion stated in the contract. If he fails to do so, he will be liable for liquidated damages to the employer.
  2. The employer is not entitled to liquidated damages if by his acts or omissions he has prevented the contractor from completing his work by the completion date.
In the simplified way it means, in the field of construction law, one consequence of the prevention principle is that the employer cannot hold the contractor to a specified date, if the employer has by act or omission prevented the contractor from completing by that date. Instead, time becomes at large and the obligation to complete by the specified date is replaced by an implied obligation to complete within a reasonable time. The employer's right to liquidated damages for delay is therefore replaced by a right to unliquidated damages based on a new 'reasonable time' completion date.

Reasonable time has to be judged as at the time when the question arose in the light of all relevant circumstances

Legal Validity

However, in common parlance it is known that, the giving of notice under such clauses is generally not a condition precedent to the right to an EOT.

This position was confirmed by the House of Lords in the case of

Bremer Handelsgesellschaft mbh -v-Vanden Avenne-Izegem(1978) 2 LLR 109, where Lord Salmon had this to say:

"Had it been a condition precedent, I should have expected the clause to state the precise time within which the notice was to be served and to have made plain by express language that unless the notice was served within the time, the sellers would lose their rights under the clause."

So why is it that most forms of contract do not contain the explicit wording necessary for the notice provisions to be a condition precedent?

Key Difference

The key difference between the 1987 version of FIDIC and the 1999 version in respect of notice requirements is that Sub-clause 20.1, is a clear condition precedent whereas the provisions of the 1987 version do not expressly state that the contractor will not be entitled to a claim where he has failed to adhere to the timeframes.

One could therefore argue that the purpose of Sub-clause 20.1 is to clarify any ambiguity in respect of the strict adherence to time frames set out in the 1987 version.

If one is therefore to rely on Sub-clause 20.1 and interpret clauses 44.1, 44.2 and 44.3 in terms of a condition precedent, the Employer has a complete defence to any claim for time by the contractor had not started in the required time frame.

Agree To Disagree

With regards to the strict wording of the 1987 FIDIC Conditions of Contract, and the further support of the conditions precedent in the 1999 FIDIC Conditions of Contract, one could imply that contractual timeframes should be adhered to, in order to entitle the contractor to claim for any EOT. Nevertheless, one cannot dismiss the requirements of good faith outlined in the Contract Act and laying at the heart of the Indian commercial practice.

It seems therefore, the everlasting argument over the inflexible grasp of the law versus the realities of commercial practice, once again rears its head. However, can they both simply not agree to disagree?

Surely a claim submitted 28 days outside of the permitted timeframe cannot be painted with the same brush as one delayed by three days? It is then that the provisions of "good faith" under the Contract Act should be applied to minimise any unjust consequences which may occur on the strict adherence to the FIDIC conditions? For example, if the technicalities of the timeframes would mean the contractor would suffer serious financial loss; or where the delay in submitting a valid EOT claim did not cause any substantial loss to the Employer would it still be fair to strike out a claim for an EOT?

Although in theory the use of the concept of good faith to fill in the gaps of the FIDIC technicalities seems like the most practical solution – this may not necessarily clarify the situation but may in fact give rise to one of the most discussed legal "grey areas"; what is a reasonable amount of delay?

Common Notions/Misunderstandings

It is a common misunderstanding in the construction industry that EOT are primarily for the benefit of contractors, by providing more time for them to complete the contract works and reducing their exposure to liquidated damages if there is a delay to completion caused by an excusable delaying event. However, an appropriately drafted EOT clause preserves the employer's entitlement to deduct liquidated damages should the contractor cause delay to the completion of the contract works after the occurrence of an excusable delaying event?.

Such type of clauses include general provisions for EOT for what are called "excusable delays", i.e. delays caused by acts of prevention or breach of contract by the employer or his appointed contract administrator (Architect or Engineer), and for delays caused by neutral events for which the employer has agreed to accept the risk in respect of time. Hence, one effect of the contract administrator extending the time for completion is that it preserves the contractor's obligations to complete the works within a defined period which, if the contractor fails to do so, may cause him to become liable to liquidated damages.

A further common misunderstanding is that a notice given under the requisite provisions represents the contractor's application or claim for an EOT. This is clearly not the case as, under most forms of contract, the contractor has an obligation (and not an option) to give written notice, as identified by the frequently drafted wording:

"The Contractor shall give notice…" (underlining added for emphasis).

It is the consequential duty, or obligation, of the employer or the contract administrator, to then consider if the contractor is fairly entitled to an EOT for the completion of the works.

There is nothing particularly difficult or onerous requiring the contractor to make its notice/application with in the general or specific time scale. This finally establishes, that the requirement to make a timely and written application as set out above is a condition to the recovery of loss and/expense.

Purpose of Notices of Delay

The common misunderstanding of EOT provisions, is most likely promoted by the construction of such clauses which put the onus on the contractor to 'get things started' by the issue of a notice, or notices, and the association of EOT with claims for additional payment.

One of the reasons for requiring the contractor to issue a notice is to forewarn the employer or the contract administrator, at an early stage that a particular event has occurred which is likely to cause delay to the completion of the works. If the event was the issue by the contract administrator of an instruction or variation then, after receipt of a notice from the contractor in respect of such an event, the employer or the contract administrator may consider the consequences of the instruction or variation in order that they may review it and decide if it should either be withdrawn or amended.

It could be argued, however, that the contract administrator should know whether or not an instruction or variation would be likely to cause delay before the introduction of such an event. However, it is often the contractor that possesses more experience and awareness to perceive likely problems that result from such events and the actions that are required to be taken once such an event is introduced by the employer or the contract administrator.

All of the claims, which arise out of the contract, are in principle already given if and when the related event occurs. The role of the Engineer is only to determine the consequences of the event. In other words he determines whether there is under the terms of the Contract and subject to the applicable law, an event giving rise to a claim for additional time or money. Thus all of the claims are subject to his determination. It is not his role to create claims or to accept claims beyond the express conditions of the contract. However the Engineer also has the powers to give instructions and to initiate variations. This element of his task may create additional entitlements to payment.

To some extent he is a form of instance of control and the centre of contract administration. In the former FIDIC forms of contract the works had to be to the satisfaction of the Engineer which made of him a quasi-arbitrator. Today the Engineer's powers are strictly described and limited by the contract. He has to act in accordance with the contract. The contract is not only the law of the parties but also the law of the Engineer. This is what the parties have promised to each other.

Civil law contractors and employers should not ignore the original legal background of FIDIC conditions. By contrast common law contractors and employers should not believe that the use of a FIDIC form of contract will enable them to escape from the particularities of the proper law of the contract.

Timing of a Notice

Most common standard forms of contract require the contractor to give written notice in a timely manner and/or within a specific number of days after the commencement of an event.

Such timing may be amended (usually reduced) by specific clauses included within Special Conditions that are frequently used to amend standard forms of contract.

No-Prejudice Rule

The strict application/compliance of this particular clause has become commonly known as "no-prejudice rule" because the owner doesn't have to prove prejudice (loss or financial harm) as a result of the contractor's failure to comply with the notice provisions to deny the contractors claim, irrespective of any actual proof of loss that the contractor has incurred, and even where the claim is completely meritorious. Exclusionary terminology may refer to "waiver of notice "or "constructive notice" and in many international venues "notice as a condition precedent to entitlement to reimbursement of loss or expense"

Some strictly apply the provisions irrespective of merit while others adopt a more liberal approach on a "fairness demands" basis.

The Function and Contractual Status of Notices

The function of contractual notices could be said to depend upon your perspective. For a Contractor, a precise and unambiguous notice provision may assist by making it clear what the Contractor must do if it hits problems such as delay and needs to extend the completion date or claim additional money. Equally, a Contractor may likely perceive notices as an Employer's tool for suppressing otherwise legitimate claims for additional time and payment, and resulting in no more than an unnecessary burden on its project team's time and resources.

For an Employer, notices are an essential means of managing finances and budget. Notices assist the Employer with making informed decisions about whether, for instance, to proceed with a variation, a course of action that may cause delay or disruption or a course of action in order to mitigate such effects. Notices afford the Employer more time to react to problems.

The starting point for contractual treatment of notice provisions is that a failure to comply constitutes a breach of contract for which damages are payable. The local courts and, by extension, arbitrators adopt a pragmatic approach to notices– namely that a notice provision constitutes a term of the contract, to be observed and complied with like any other, and, failing compliance, the innocent party should be compensated for breach. Further, a key legal principle, embodied firmly in local law, is that remedy for breach of contract is monetary damages, the purpose of which is to compensate the injured party for the loss sustained. In short, compensation cannot exceed the innocent party's actual proven loss. This is critical to the subject of notices: it is rare, in practice, that an Employer can prove significant, if any, actual loss flowing from its Contractor's failure to observe a notice provision, particularly in the case of ancillary notice requirements such as providing detailed particulars. Consequently, notice givers generally have little incentive contractually to comply with the terms of notice provisions, as the risks of failing to do so can be relatively small.

Employers soon wised up and various measures have been devised to counter this reasoning, which have generally been incorporated into the majority of construction conditions in some form or another. These measures fall into two discreet categories: (1) express provision for the consequences of a failure to comply; and (2) making a valid notice a condition precedent (namely a contractual term that requires compliance with a defined obligation as a precondition to a right or an entitlement arising) to a right to time or money. There is a subtle but important distinction between the two approaches which has consequences for the challenges that can be advanced by a Contractor in response to these efforts to evade the compensation principles applied by local courts which shall be discussed below.

Eluding the Contractual Notice Regime

There are several arguments available, pursuant to a contract and/ or local law, to a Contractor that is found, as a matter of fact, to fall foul of a particular set of contractual notice requirements.

1. Breach of contract only

As stated earlier, failure to comply with a notice provision constitutes a breach of contract, for which compensatory damages become payable. Notwithstanding the fact that the FIDIC Conditions prescribe, in some instances of such failure, consequences that are far harsher than compensatory damages, the "compensatory principle" is still an important weapon for a Contractor. It is therefore always worth checking whether the consequences of a failure to comply are specified or whether this is left to be determined by the "compensatory principle". Notice provisions often comprise many elements. The notice must be given, but it must also be given within the requisite time, to a certain party/ parties, include certain details and in many cases, be followed by further particulars. A time barring mechanism may not cover these ancillary requirements and therefore, a failure to comply with any or all of these components parts may not be fatal to the claim, and may be merely a breach of contract the remedy for which should be a claim for damages alone.

2. Onerous obligations/ Penalty

In accordance with the substantive law parties shall be bound by the terms they have agreed (provided such provisions are not contrary to public morals or mandatory provisions of local law) unless exceptional, unforeseen circumstances make performance of a particular obligation substantially onerous. Therefore, where the loss of an entitlement to claim is disproportionate to the loss suffered by the party to whom notice ought to be given, a court or tribunal is entitled to construe the notice clauses against the party seeking to rely on them. There might arguably be little or no loss resulting for an Employer from a late or "incomplete" notice, for instance.

By extension, whilst parties are free under local law to agree compensation in advance, the courts retain discretion to amend the compensation to reflect actual loss. If the effect of the notice provision is to act as a penalty for a failure to serve notice, local law provides a mechanism whereby judges and arbitrators can adjust the effect in order to match the consequences of the failure to give notice to the actual loss suffered by the Employer.

3. Unclear provisions

Where it is arguable that the terms of a contract are unclear or ambiguous, a court or tribunal applying local law has a discretion to "look behind the terms of the contract" in order to assess the intentions of the parties. Guidance on interpretation of contracts with ambiguous terms provides, "if there is a case for interpreting the contract, the common intention of the contracting parties must be examined without being restricted to the literal meanings of the terms...." Thus, if compliance with a particular notice provision entails an element of ambiguity as to when and how a Contractor must give notice, a discretionary approach may be applied and the notice provision in question may be subject to an interpretation that does not suppress a Contractor's claim entitlement.

4. Notice in Writing?

As set out above, the FIDIC Conditions stipulate that all notices must be given in writing, with "writing" defined as any hand-written, typed-written or printed communication. The question is what actually amounts to notice in writing and what are the consequences of a failure to comply?

The FIDIC Conditions as discussed above do not specify that notice be given in writing. That is because of the "catch-all" requirement at GCC1.3 that requires that where notice is required, this must be in writing. However, GCC-1.3 does not specify the consequences of a failure to give notice in writing. Therefore, giving notice in some other form arguably merely constitutes a breach of contract (for which compensatory damages are payable) but is not, necessarily, fatal to a claim.

Further, there are certain forms of notice that are less obvious than the letters or faxes that one generally thinks of when faced with a "written notice" requirement and that should not be overlooked:
  • minutes of meeting, particularly if these must be signed and returned to the Engineer (GCC1.3 does not specify who must create the communication);
  • material submittals, on which comments and notes are often written and which are exchanged between the parties;
  • priority lists circulated amongst the parties, that indicate which issues, from a Contractor's perspective, the Engineer should treat as priority so as to prevent delay to the impacted works;
  • a statement on completion; and/ or
  • interim payment applications which may include an amount for variations or other financial claims arising during the period covered.
In short, any documented evidence of an event giving rise to a claim that is sent, given or otherwise produced to the Engineer or Employer may be argued to constitute written notice.

Conflicts with local law

Where a contract is governed by local law, thought should be given as to whether there are any general, overriding provisions that can be used to a Contractor's advantage.

It may be argued, for instance, that an Employer is not entitled to deny a Contractor its claim on grounds of lack of notice in circumstances where to do so would be a breach of the requirements. The circumstances in which this might apply vary and may be limited in scope. By way of example, in the context of an EOT claim, it may be a breach of the requirement of good faith and/ or an abuse of rights for an Employer to deny the Contractor an EOT in circumstances where the Employer and/ or the Engineer knew, or ought to have known, that the Contractor's progress had been delayed by matters for which the Employer was contractually responsible.

In the perspective of Indian Law-
In Sujir Ganesh Nayak case deals with an identical situation where a contract contained a provision prescribing a period of limitation shorter than that prescribed by the Limitation Act, it was held that the contractual provisions was not hit by Section 28 as the right itself had been extinguished, by agreement of both parties.

The Supreme Court accepted this position of law in National Insurance Co. Ltd. v Sujir Ganesh Nayak17 wherein the Court observed,

"the legal position that emerges is that an agreement which in effect seeks tocurtail the period of limitation and prescribes a shorter period than that prescribed by law would be void as offending section 28 of the Contract Act.

That is because such an agreement would seek to restrict the party from enforcing his right in Court after the period prescribed under the agreement expires even though the period prescribed by law for the enforcement of his right has yet not expired. But there could be agreements which do not seek to curtail the time for enforcement of his right but which provide for the forfeiture or waiver of the right itself if no action is commenced within the period stipulated by the agreement. Such a clause in the agreement would not fall within the mischief of section 28 of the Contract Act. To put it differently, curtailment of the period of limitation is not permissible in view of the section

28 but extinction of the right itself unless exercised within a specified time is permissible and can be enforced."

"the Clause says that if the claim is not pressed within twelve months from the happening of any loss or damage, the Insurance Company shall cease to be liable. There is no dispute that no claim was made nor was any arbitration proceeding pending during the said period of twelve months. The clause therefore has the effect of extinguishing the right itself and consequently the liability also." (emphasis supplied)

Reluctance to give Notice

In some instances, it is noticed, contractor though fully aware of the contractual provisions, a claim event clearly occurred and potential time and cost issues are at stake he decides not to issue a compliant notice or infact any form of notice at all. There are a number of reasons, all of which are flawed and ultimately can and should be avoided.

Contractors may argue:-
  1. He decided to not to issue a notice of delay because he was anxious to avoid a situation where things got contractual
  2. He did not wish to make an already adversarial situation worse and/or
  3. The owner is one of his best clients and he did not want to upset them. He expects to get many more projects from them in near future. He can make up the loss on the next project.
By serving a notice of an impact event a contractor is unlikely to exacerbate an existing awkward or conflicted situation, as the owner is far more likely to be less upset about being notified of a potential claim and having the opportunity to discuss and perhaps mitigate the situation as opposed to having a unexpected claim and /or negative project impact appear out of nowhere.

There is no reason why the content of the notice should be confrontational or argumentative nor should be this ever be the case. The notice should simply serve to articulate the event in question to provide a starting point where by each party can consider and evaluate their respective positions

Legal Significance

Contractors typically attempt to raise defenses and excuses for non-compliance with notice provisions by alleging "substantial compliance" with the terms, or that the owner waived the requirement, orally directed the work, or that the owner otherwise knew of the conditions.

As the cases below illustrate, courts are becoming even more reluctant to excuse failure to comply, especially in the context of government contracts.

Court Cases

i) ILM Systems, Inc. v. Suffolk Constr. Co. is a recent decision underscoring the need to provide timely, definitive notice of claims, as well as the importance and impact of signing typical releases for payment requests during the course of the project. The contract between the subcontractor and contractor required that the subcontractor give notice of all "claims (including disputes over the scope of work) . . . in writing within ten (10) business days (unless a shorter period is specified in the Contract Documents) after the occurrence of the event giving rise to such claim, or the claim shall be considered abandoned by the Subcontractor." Delays plagued the project, and the subcontractor sent letters and notices of claims to the contractor starting in April 1998 through August 1999. Only one letter in November 1998, however, had sufficient detail to obtain additional payments from the owner so that the contractor could compensate the subcontractor. Except for that one letter, the court found that the letters provided insufficient detail under the contract. The subcontractor cleverly presented evidence that the contractor was late in responding to change order requests and that the contractor impeded the subcontractor's ability to comply with the notice provisions. Finding a potential factual dispute, the court denied the motion for summary judgment on this point, but required the subcontractor to prove that the contractor impeded the subcontractor's ability to comply with the notice provisions by failing to fully and timely respond to the change order requests.

With respect to the form releases signed as part of the progress payment procedure, the court found that the broad language of the form release barred the subcontractor's claim of over $544,000 in delay damages. The court rejected the subcontractor's claims that the form releases were never intended to bar delay damages that were the subject of the "notice" letters, finding that the broad release language was unambiguous with "respect to all claims based on labor, materials and/or equipment furnished through the date [of the release]."

ii) Garofalo Electric Co., Inc. v. New York University also illustrates the importance of strictly complying with contractual notice provisions to preserve a claim. The contract required the general contractor to send notice and documentation of any changes to the owner, architect, and construction manager. The contractor performed additional work, claiming that the construction manager's failure to properly coordinate work caused delays. The general contractor disregarded the strict contractually-required notice provisions, on the basis that the construction manager directed it to deal exclusively with it, and not to correspond with the owner or the architect.

When it wasn't paid for the extra work, the contractor sued. The court barred its claim, ruling that the contract's notice and documentation requirements were conditions precedent to recovery, and therefore the contractor's noncompliance barred its claims. The court rejected the plaintiff's argument that its failure to comply was excused because the construction manager had orally abandoned, waived, or modified the notice requirement. The court found that because the construction manager's authority was clearly and unambiguously limited by the express terms of both the contract and the construction manager's agreement, it lacked authority to waive or modify the notice and documentation requirements.

iii) As the court in Heckler Electric Company, Inc. v. City of New York illustrated, the failure to strictly comply with the notice provisions can be fatal even when the owner has actual notice of the contractor's intent to seek delay damages. In this case, an electrical contractor sued the City of New York and its transit authority for delay damages. Under the contract, when the City allegedly caused damages, the contractor had a limited number of days to give the City a written statement of the nature, details, and amount of the claim. While the contractor did not comply with this provision, it did comply with another contract provision that required contemporaneous notice of delays. The contractor argued that its claim should be allowed because by sending letters to the owners that informed them of its intent to seek delay damages and of some items of damage, it had substantially complied with the notice provision.

The court rejected that argument. In granting the City's motion for summary judgment, the Court noted that "it is well settled that strict compliance is required with contract provisions requiring notice and itemization of damages" and that "it has been expressly held that compliance with a [provision requiring contemporaneous notice of fact of damages but not amount] is not a substitute for compliance with the separate requirements of a provision …regarding notice of the amount of the damages."

Time at Large

If the EOT provisions do not adequately provide for "acts of prevention by the employer" and the contract administrator cannot grant an EOT in respect of such acts, then it is possible that time may become "at large".

If time becomes 'at large', it means that a contractor has to complete the works within a reasonable time taking into consideration all of the circumstances, including the effects of the act(s) of prevention by an employer.

Under such circumstances, an employer's entitlement to deduct liquidated damages would become unenforceable, however, it may be entitled to recover general damages if a contractor failed to complete within a reasonable time.

Therefore, even when time is "at large," a contractor should continue to issue notices of excusable and referred delaying events and maintain adequate records so that it can substantiate that it completed within a reasonable time.

Methods of Challenging time-bar clauses

The provisions can be challenged on the following grounds-

1. Interpretative arguments
The first issue is to, decide regardless of what the FIDIC drafter intended, whether compliance with a standard form time bar clause is a condition precedent to a valid claim.

There is no direct authority (either in English law, Indian law or otherwise) on this question in relation to Clause 20.1 of the FIDIC form. However there is an English authority for proposition that, for a notice requirement clause to rank as a condition precedent, the clause must state the precise time for service and make it plain by express language that unless the notice is served within that time, the party required to give notice will loose its rights under that clause.

On this basis, Clause 20.1 appears likely to be viewed as a condition precedent. This is because it makes clear reference to four week (28) time limit following 'becoming aware or should have become aware of the event or circumstance' and expressly states that rights/entitlement will be lost; if the time-limit is not observed.

2. Prevention principle arguments
This principle is based upon the established common law rule that no person can take advantage of the non-fulfilment of a condition, the performance of which he has hindered.

Whether the prevention principle will defeat a properly drafted condition precedent clause has been examined in a number of cases. The Australian case of Gaymark Investments v Walter Construction is often cited as an example where the court held that the prevention principle presented a 'formidable barrier' to an employer's claim for delay damages, where events which might have given rise to an entitlement to an EOT were ignored as a consequence of the contractor's failure to issue timely notices.

Court Cases

i) Such an approach has been questioned by the courts in the UK. [Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No. 2) [2007] EWHC 447 (TCC)]

Court said
"Contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose.

Such notice enables matters to be investigated while they are still current.

Furthermore such notice sometimes gives the employer the opportunity to withdraw the instructions when the financial consequences become apparent."

The court rejected the contractor's 'prevention principle' defence on the basis that it was always open to the contractor to protect its interests by giving the relevant notices of delay. Since the Multiplex case, the courts have shown increasing favour towards conditions precedent as an instrument of practical contract administration, including the recent case of WW Gear Construction v McGee Group [WW Gear Construction Ltd v McGee Group Ltd [2010] EWHC 1460]

An employer has numerous obligations towards the contractor under FIDIC's Red Book, including, for e.g. an obligation to give the contractor 'a right of access to and possession of all parts of the site with in a time (or times) stated in the appendix to Tender.' In the event that this obligation is breached and the contractor is delayed and suffers loss, he or she may be entitled to claim time and loss. In such circumstances will the employer be relieved from paying the contractor its losses?- and will the employer retain his entitlement to deduct liquidated damages-if the contractor fails to give a clause 20.1 notice.? In such circumstances it is interesting to go through the details of similar court cases.

ii) In respect of Turner Corp Ltd v AustotelPty.Ltd.(1997)13 BCL 378, court held that a failure by the contractor to give the required notice disqualified the contractor from taking advantage of the prevention principle so as to render time at large. Rather, as Cole J stated, party to a contract cannot rely upon preventing conduct of the other party where it failed to exercise a contractual right which would have negated the effect of that preventing conduct.

iii) The Hong Kong court followed this decision in a similar case in the case of Dragagesettravaux Publics V Hong Kong Chinese Insurance Co Ltd.

As a result of the indications given by the courts that they would uphold the provisions in contracts, the FIDIC Forms of contract were amended to make the giving of notice a condition precedent to the award of an EOT and additional money.

iv) In the recent Scotland case, City Inn Ltd, the same case arose the contract was amended by the parties so that giving of a notice of claim was a condition precedent to a claim for either additional time or money. The court upheld the amendment and stated that the contractor had elected not to give the notice and was therefore, not entitled to either time or money.

The so called 'Prevention principle' provides as explained above, that where one party [contractor] to a contract has failed to perform a condition of that contract [e.g. reach completion by the completion date]the other party [the employer]cannot rely on its on-performance if it was caused by his own wrongful act.

On the other hand there are other cases that while not engaging directly with right to the previous authorities, reinvigorate the peak conception of the prevention principle and its potential to deprive the employer of any liquidated damages.

v) In Gaymark Investments Pty Ltd V Walter Construction Group [2000] 16BCI449 the Arbitrator held that delays to construction were due to acts of prevention caused by the employer. The arbitrator further held that the contractor had failed to give the requisite notices for an EOT and concluded that the acts of prevention by the employer rendered time at large.

3. Equity principle arguments
In some jurisdictions, contracts may also be interpreted to avoid commercial absurdity, and in other jurisdictions the court will strike down unconscionable bargains. There is also a doctrine which is applied in many jurisdictions, that: 'No one can obtain an advantage by his own wrong'. It is sometimes described as a Principle of equity' and expressed in the maxims: 'ex injuria non oriturjus'or 'the clean hands theory'.

The rationale of this approach is found in the definition of the prevention principle. The principle is 'no one should benefit from his/her own wrong. Where the employer has caused delay, then its benefit is its claim for liquidated damages/ general damages. The employer obtains no additional benefit simply because the contractor fails to claim time or money.

Claims Procedure

Submission of Detailed Particulars
Clause 20.1 of New FIDIC requires the contractor, to submit

"…as soon as practicable as and not later than 28 days after the contractor became aware of the event or circumstance"

"The contractor shall also submit any other notices which are required by the contract

Even if not specifically required by the contract, it is advisable for a contractor to submit interim particulars of the delaying events as soon as reasonably possible, even if the effects of such delaying events continue to be ongoing. Further and better particulars, in the form of further interim, or full and final, details may be submitted, or may be required to be submitted, at a later date.

Claims for additional time frequently result in a claim for additional payments, which under the FIDIC conditions must be submitted as a separate claim.

All claims for additional time or money must follow the procedures of clause 20.1 which require a notice to the Engineer as soon aspracticable as and in any event not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstances. If the Contractor fails to give notice of a claim under this clause he shall not be entitled to additional payment and the Employer shall be discharged from all liability in connection with the claim. The Contractor is also under an onerous obligation to keep contemporary records as may be necessary to substantiate the claim.

In general the sequence of procedures for the submission of claims in accordance with Clause 20 and other clauses may be summarised as follows:
  1. The Contractor notifies that he is aware of a situation in which may give rise to a problem
  2. The Contractor gives notice that he considers himself to be entitled to additional time or additional payment
  3. The Contractor gives notice when he actually suffers delay or additional costs
  4. The Contractor keeps contemporary records
  5. The Contractor submits his fully detailed claim with supporting particulars
  6. The Engineer responds to approve or disapprove the claim
  7. The Engineer then certifies interim payments
  8. The Engineer proceeds in accordance with clause 3.5 to determine any EOT or additional payments
  9. If the Contractor does not agree with the Engineer the claim becomes a dispute and the procedures of clause 20.4 are followed
The definition of a "dispute" under Clause 20.4 is wider than the requirement for a notice under Clause 20.1. For example if the Contractor objects to an instruction by the Engineer then the Contractor is obliged to comply with the instruction under clause 3.3, but there may be a dispute which could be referred directly to the DAB under clause 20.4. In any event the Contractor is obliged under Clause 8.1 to proceed with the works with due expedition and without delay.

Disputes concerning additional time or money must follow the procedures of clause 20.1. This procedure could take several months before the problem could be referred to the DAB unless both sides to agree to ask the DAB for an opinion under clause 20.2.

The various requirements for the submissions of claims could result in parallel procedures and more than one referral to the Engineer under Clause 3.5 from the same situation. In some circumstances it may be desirable for the Engineer to proceed under Clause 3.5 as quickly as possible after the situation has arisen, in order to avoid further argument, or at least establish clear boundaries of any difference of opinion.

Clause 8.3 also includes a general requirement for the Contractor on to promptly give notice to the Engineer of specific probable future events or circumstances which may adversely affect the work, increase the contract price or delay the execution of the works.

When submitting a claim the Contractor should include reference to all clauses which may be relevant. Some claims situations are covered by more than one clause and Contractor's entitlements may vary depending upon which clauses are used as the justification for the claim.

Way out
In the event of non-compliance with contractual notice provisions, there are several arguments available to a Contractor both under contract and pursuant to local law. However, ultimately, much will depend upon the sympathy received from a judge or arbitrator and the skill of the Contractor's legal representatives.

The best policy is clearly, therefore, to know your contract and comply with the letter and spirit of its contractual notice provisions. It is, undoubtedly risky and at the least, time consuming and expensive to have to repair the damage of a failure to comply at a later stage. Sit up and take notice of your contractual notice provisions from the outset.

From the foregoing, the correct approach, as author suggests that would be, where a contractor fails to give a clause 20.1 notice, it should be prohibited from claiming time and money. However where the case of delay was due to an act of prevention by the employer, the employer should be precluded from claiming liquidated damages.

It is even clearer from the Gear case that when contractors are faced with properly drafted clauses, they must be prudent and put in place sufficient commercial and contract management resources to ensure they do not fall foul of these provisions, irrespective of the merits of their case, for want of following the procedure.

There is therefore nothing inherently wrong with clause 20.1 where it prevents the contractor claiming additional monies if no notice is given.

Conclusions

Notice provisions in construction contracts can be simple, complex poorly written, confusing and sometimes draconian. What they cannot and should not be ignored. It is crucial for each of the parties to understand the language and framework of the provisions in their specific construction contract with regard to familiarity with the time, manner and necessary substance of each provision.

In global market where information is readily accessible to all willing to take the time and trouble to find it, there is no excuse for contracting parties not to be better informed about notice provisions and not to be generally aware of the traps and pitfalls that can occur and how to avoid them. The essential element of compliance construction notice is geographical.

Contractors must now become aware that failure to give timely notices of delay caused by excusable or neutral delaying events for which the contract provides redress in the form of EOT may and the better answer is simply to prohibit the employer claiming the L.D, for that period of delay that is due to its fault. However to do this would involve re-writing or at least manipulating the contract.

References:

  1. Federation Internationale des Ingenieurs Conseils (FIDIC). (1992). Condition of contract for works of civil engineering construction and 1999 Edns
  2. Semple, C., Hartman, F. T., and Jergeas, G. (1994). ''Construction claims and disputes: causes and cost/time overruns.'' J. Constr. Eng. Manage.,120(4), 785–795.
  3. Suryawanshi C.S (Dr.) 2013 "Analysis of Claims Based on Clausal Provisions in 4th Edition of FIDIC Contracts"
  4. Thomas, H. R., Smith, G. R., and Wright, D. E. (1990). ''Resolving disputes over contract notice requirements.'' J. Constr. Eng. Manage.,116(4), 738–755.
  5. Thomas, H. R., Smith, G. R., and Mellott, R. E. (1994). ''Interpretation of construction contracts.'' J. Constr. Eng. Manage., 120(2), 321–336.
Case laws from International Contracts
  1. Bremer v Handelgelsellschaft mbH v Vanden Avenne Izegem P.V.B.A [1978] 2 LLR 109
  2. City Inn v Shepherd Construction (2003) CILL 2009
  3. Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No. 2) [2007] EWHC 447 (TCC)
  4. Gaymark Investments Pty Ltd v Walter Construction Group [1999]
  5. WW Gear Construction Ltd v McGee Group Ltd [2010] EWHC 1460
  6. Chartbrook Ltd -v- Persimmon Homes Ltd and Another ChD [2007] EWHC 409
  7. London Borough of Merton v Stanley Hugh Leach (1985) 32 BLR 51
  8. ILM Systems, Inc. v. Suffolk Constr. Co252 F.Supp.2d 151 (2002)August 1, 2002.
  9. National Insurance Company Ltd. vs. Sujir Ganesh Nayak& Company AIR 1997 SC 2049.

NBMCW October 2014

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