Kluwer Construction Blog » Contractor

Hitch “Inn” Time?

Sarah Thomas — Fri, 06 Aug 2010 16:01:39 +0000

by Sarah Thomas

Whilst interest in the recent UK judgment in the case of City Inn v Shepherd Construction may be confined to these shores, it is sufficiently important in the UK construction arena to warrant a mention on this Blog. The level of interest generated by this case initially may seem disproportionate to the complexity of issues and the amounts of money at stake. But ever since the option to adjudicate became compulsory for all UK based “construction contracts” in 1996 (Under the Housing Grants, Construction & Regeneration Act – see opsi), there has been a distinct lack of relevant construction UK case law on matters such as causation and delay – as parties choose the quicker, cheaper option of adjudication to settle disputes. If you also take into account the duration of this dispute (the project in question was completed in 1999) you can start to see why everyone (at least in the UK) is looking at the latest City Inn judgement.

This judgment from the Inner House of the Scottish Court of Session is therefore very useful as an indication of the UK Courts’ current approach to causation of delay and extensions of time. Of course, this may not be the end of the story as City Inn still has the chance to lodge an appeal to the Supreme Court.

Key Elements

The dispute centred on a late-running project to build a hotel in the city of Bristol. Shepherd was employed by City Inn to carry out this project under an amended version of the 1980 edition JCT contract (a UK standard form of building contract with Quantities). The adjudications which followed the late finish resulted in Shepherd being awarded a 9 week extension of time (”EoT“) made up of 4 weeks awarded by the Architect and a further 5 weeks from the Adjudicator. City Inn was unhappy with this result and took the matter to the Outer House of the Scottish Court of Session. They applied for various orders including
a declaration that Shepherd were not entitled to an EoT; a reduction of the Architect’s award of 4 weeks EoT; and an order for payment of outstanding liquidated damages for delay.

Shepherd counterclaimed for a further 2 weeks EoT and for consequent loss and expense. The matter eventually proceeded to trial and was heard by Lord Drummond Young.

The main elements of the case were a bespoke clause covering entitlement to an EoT (clause 13.8), and the cause of the delay, taking into account the multiple delaying factors which occurred and the extent of their impact.

On the first issue, Lord Drummond Young found that clause 13.8 could not logically apply to instructions which caused delay just because they were in themselves late. Lord Drummond Young also noted that City Inn had not referred to their clause 13.8 rights until this juncture, and that neither of the parties appeared to take the clause into account when acting.

On the second – and more interesting – issue, causation and delay, Lord Drummond referred back to another contract clause (clause 25) to give his judgement. He said that under clause 25 the architect was to exercise his judgment and fix a “fair and reasonable” completion date. He held that an apportionment exercise may be necessary where there is concurrency or no dominant event.

The parties had been unable to locate an electronic, logic linked version of the original programme and so had to use a basic programme showing the activities and durations of the project. Lord Drummond rejected City Inn’s expert evidence which tried to establish, retrospectively, a critical path which led to the conclusion that Shepherd was not entitled to any EoT at all. Instead, he favoured Shepherd’s expert who said that he had attempted to establish a critical path, but that it was impossible to do so accurately. Lord Drummond preferred this common sense approach and found that, using this analysis, Shepherd was entitled to 9 weeks EoT.

City Inn appealed unsuccessfully with most of the judgment concurring with Lord Drummond’s reasoning. The majority opinion was set out by Lord Osborne, and contains five principles relating to the evaluation of a delay and loss plus expense claim. Of course, the Court was examining these issues under clause 25 of the JCT form. However, I think these general principles would have relevance to most construction contracts and illustrate the likely approach that would be adopted by the UK Courts:

1. For an EoT claim to succeed the relevant event must be shown to be likely to cause delay or have caused delay.

2. Whether or not a relevant event causes delay is a matter for common sense.

3. It is for the decision maker to decide what evidence to use in forming his conclusion. This may or may not include a critical path analysis. What matters is that the evidence used is sound, whatever form it takes.

4. If there is one dominant cause, all other causes will be disregarded. The dominant cause must be a relevant event for a claim to succeed.

5. It is for the decision-maker to apportion the delay to completion of works in a “fair and reasonable way” where there are two (or more) causes of delay, but only one of which is a relevant event and neither is dominant.

Although Lord Calloway dissented from the ‘apportionment’ reasoning, all three judges concurred in the result and on the critical path analysis being relevant but not necessary to decide the outcome of an EoT claim.

Implications for future cases

I should have of course stressed that this was a Scottish Judgment. What this means is that the decision is binding on the lower courts of Scotland but not so on the English courts – although given that it is an appeal court decision it will at least be persuasive in England.

What is most striking is that all the judges leaned heavily towards the arguments for being guided by principles of fairness, reasonableness and common sense. Many of the arguments put forward centred on the true meaning and consequences of events being concurrent. However, Lord Osborne stated that the important question was not whether events were truly concurrent, but rather the effects on the completion date of the events. In a similar spirit, Lord Carloway talks about the Architect applying “professional judgment” and “using his and not a lawyer’s common sense“.

In terms of implications for future cases in the UK, the judgment must not be considered an approval of the use only of common sense and fairness at the expense of a critical path analysis. In this case the critical path analysis presented was not considered sound and so was not used to form the judgement. However, that is not to say it may never be used to determine EoT claims, but rather it is up to the decision-maker as to whether he uses the critical path analysis in his “fair and reasonable” decision-making process.

And what of its implications further afield – in the international arena? I think the judgment and the arguments employed would be useful to anyone involved in disputes on causation and EoT’s where there are concurrent events and particularly where there is no critical path analysis or such evidence is flawed.

FIDIC talks about the Engineer making a “fair determination” whenever required to determine any matter under the Contract [Sub-Clause 3.5] and the provision dealing with extensions of time [Sub-Clause 8.4] refers to an extension of time “if and to the extent that completion……..is or will be delayed by any of the [specified] causes“. So the same arguments about causation, apportionment and concurrency could run under a FIDIC based contract.

Similarly, the NEC construction form NEC3, which treats delay events as “Compensation Events”, requires the Project Manager (who has to act “as stated in this contract and in a spirit of mutual trust and co-operation”) to assess “the length of time that, due to the compensation event, planned Completion is later than planned Completion” [Core Clause 63.3]. Interestingly, in NEC, assessment of the impact of the event includes “risk allowances for cost and time for matters which have a significant chance of occurring and are at the Contractor’s risk under this Contract” [Core Clause 63.6].

And, of course, I cannot sign off without mentioning that Pinsent Masons acted for Shepherd Construction on this case!

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Ten years of Project Delivery in Australia

Julie Whitehead — Wed, 04 Aug 2010 05:54:14 +0000

by Julie Whitehead

Perhaps because we live ‘Down Under’, Australians have always been somewhat contrarian. We like our beer cold, for example, and play our favourite game of football with a pointy ball instead of a round one.

So while the past ten years have provided an interesting economic backdrop for players in the construction industry – with the world economy moving from boom to near bust to (hopefully) better times ahead – for most of those years Australia’s construction industry simply surged ahead, even during the global economic downturn of 2008/2009.

Nonetheless, changes in the economy did lead to changes in how projects are delivered in Australia. Which begs the question – how has project delivery evolved in Australia over the past decade and how will the abundance of upcoming construction work across the country be delivered going forward?

The short answer to the first part of that question is that owners and contractors have worked together to develop contracting models that are more sustainable for both parties, by considering movements in the economic climate and the best management of risk allocation.

Ten years ago, the contracting models used for projects were the ‘traditional’ form of contracts – an allocation of risk for an agreed fixed lump sum. Popular contract models included EPC, design and construct, and construct only contracts, with contractors being appointed following a competitive tender process.

This process was costly for all involved. In difficult times, contractors would accept a high level risk with only small contingencies, which led to a claims-focussed culture. In less difficult times, contractors would either accept a high level of risk (with a price tag to match) or a low level of risk and again revert to focusing on claims if any of the owner’s risks came to pass.

By 2003/2004 contractors had become more selective about the projects they bid for, and they began to avoid high risk delivery models. Owners were therefore forced to critically assess traditional procurement processes and to become innovative in order to attract the best contractors and engineering resources.

The most dramatic change to project delivery models came with the development in Australia of “alliancing”.

Alliances involve an owner and one or more service providers (designer, builder, supplier) coming together to work as an integrated team to deliver a specific project under a contractual framework where the commercial interests align with the actual project outcome.

One of the significant drivers for the parties to ensure the project is successful is that most risks and rewards are shared jointly. Put simply, in the first phase of an alliance, the parties work together to finalise a scope of work and prepare a target cost estimate (TCE) of the cost to complete the project. That TCE is locked in, and phase 2 (the actual construction) commences.

During phase 2 the parties endeavour to complete the project for less than the TCE. If they do so, they share in the savings. If they exceed the TCE, then they share in the cost overruns (although, typically, the service providers’ share of risk is capped at their profit, so they always receive their actual costs).

The use of alliances peaked in Australia in about 2006. They are particularly suited for project delivery where the risks are not known at the time the service providers are introduced to the project. In a heated market, however, they were used across a very wide range of projects.

One criticism of alliances, not necessarily well founded, is that TCEs have become ‘too high’ – that is, the parties have ensured that the TCE will never be exceeded. There was also concern that service providers are paid all of their direct costs, regardless of how well (or poorly) the project performs.

With the onset of the GFC in late 2008 the focus of owners shifted. What they looked for was cost certainty that did not involve significant contingencies but equally recognised that, in order to attract the best contractors and engineers, contractors needed to have sufficient involvement with the project to identify risks and price the works accurately.

This balancing act resulted in what is now described as the Early Contractor Involvement model (ECI).

ECI extended the first stage of alliancing from identifying risks and establishing a TCE for the project works to identifying the risks, allocating responsibility for those risks and determining an overall hard dollar figure for the project works based on that risk allocation.

ECI is seen as an appropriate middle ground. The ‘best of both worlds’, it uses a soft dollar approach to the first stage (avoiding some of the difficulties associated with a traditional D&C) and then a hard dollar approach with a traditional lump sum contract at the point where all risks can be accurately identified and priced, creating greater cost certainty through the fixing of the price (potentially with incentives).

In the last year of the decade, and as the market steadies from the effects of the GFC, we see increased use of the ECI model for all kinds of projects – small, medium and large. Like alliancing, it works well where a project needs to be fast tracked, or where the design is complex or where there is significant risk that cannot be quantified at the time of tender.

Although alliancing will remain important in project delivery in Australia, ECI is the way of the future.

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A New Hurdle When Defending a Liquidated Damages Assessment

Andrew Ness — Mon, 02 Aug 2010 14:44:26 +0000

by Andrew Ness

When an Owner comes after the Contractor for liquidated delay damages (LDs) after a project is completed late, the Contractor’s only substantive defense is to argue that the delay was excused by force majeure or Owner actions (naturally there may be procedural defenses, like timeliness). However, a recent decision by the United States Court of Federal Appeals for the Federal Circuit has erected a new requirement that the Contractor must first fulfill before it can assert its substantive defense. The decision in question is M. Maropakis Carpentry, Inc. v. United States, ___ F.3d ____, No. 2009-5024 (June 17, 2010). It holds that in order to dispute the basis for an LD assessment by the U.S. Navy, the Contractor first had to submit a certified claim for a time extension. No time extension claim = no defense to LDs.

After finishing the project 467 days late, Maropakis had sent letters asking for a time extension but failed to turn them into a formal, certified claim. Maropakis then brought a claim against the Navy for the unpaid contract balance, which the Navy had withheld as partial payment for claimed LDs. The Navy counterclaimed for the full 467 days of LDs. The court granted summary judgment on the Navy’s counterclaim, on the basis that since Maropakis had never formally sought (in the form of a certified claim) a time extension, the court had no jurisdiction to consider such a claim in defense of the LD assessment. The trial court agreed, as did the Federal Circuit on appeal.

The Federal Circuit’s ruling on appeal was as follows: “we hold that a contractor . . . must meet the jurisdictional requirements and procedural prerequisites of the CDA [Contract Disputes Act-the U.S. law that requires claims to be certified before they can be litigated], whether asserting the claim against the government as an affirmative claim or as a defense to a government action.” The Court saw no reason to distinguish between affirmative claims and matters of defense to government claims in applying the requirement for a certified claim prior to litigation, at least when the defense would involve an adjustment to the contract terms, as in the case of a time extension.

The dissenting opinion argued in vain that there is a clear distinction between presenting an affirmative claim for relief, where claim certification is required, and simply defending against a government claim, where no affirmative relief is sought.

The simple lesson of Maropakis is that whenever completing a U.S. government contract late, it is vital to submit a formal claim for a time extension so as to preserve your right to dispute a possible LD assessment (which may not come for several years). There are also two broader concerns. First, this is another brick in the wall of recent decisions by the Federal Circuit hostile to the position of Contractors. Contractors should be learning that they are not dealing with a tribunal at all inclined to give them the benefit of the doubt. Second, developments in the law relating to U.S. government contracts frequently spread to the U.S. private sector. Where private contracts require some sort of formalities associated with asserting a claim, the Owner may raise similar arguments, seeking to bar any ability to dispute its later assessment of LDs when the claim formalities were not followed to seek a time extension.

Andrew Ness
Christian Henel

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Brazil opens bid for a bullet train: a US$ 20 billion project

Júlio César Bueno — Wed, 14 Jul 2010 17:49:00 +0000

by Júlio César Bueno

The Brazilian bullet train project

On July 13th 2010 Brazilian Federal Government launched bidding documents regarding the concession regime and procedures for implementation and operation of the High-Speed Rail (TAV – Trem de Alta Velocidade) that will connect the cities of Rio de Janeiro, São Paulo and Campinas. The project, the most ambitious infrastructure project under the country’s Program to Accelerate Growth (PAC – Programa de Aceleração do Crescimento), specifies that the construction, operation, and maintenance will be granted to the consortium that provides the lowest fare for service.

The concession contract establishes the limit of six years to complete the entire stretch Campinas – São Paulo Rio de Janeiro. The final schedule calls for the railway to be completed by 2017, although the Brazilian Federal Government anticipates the line will be partially open before the 2016 Summer Olympics in Rio de Janeiro.

TAV is worth US 20 billion. The Brazilian Federal Government will invest, through a new state-run entity, US$ 1.5 billion in the project and extend loans worth 60% of the total cost by the Brazilian Development Bank (BNDES – Banco Nacional de Desenvolvimento Econômico e Social).

Potential customers in the parcels market can be classified into two main groups:

- existing logistics companies, interested in moving consolidated loads, using rail as part of the chain – principal players in this field are the Brazilian National Post Office (Correios – Empresa Brasileira de Correios e Telégrafos) and Courier Companies; and

- end users, such as businesses, or individuals.

The construction of TAV will create a very large site, which will directly require numerous professional skills and directly or indirectly generate employment upline and downline The commissioning of the railway and, in particular, the development of land traffic and associated commercial zones served by the railway will create jobs in a progressive manner during the first 10 years’ of operation.

It is estimated that the railway will generate around 30,000 jobs throughout the area affected within about 10 years after commissioning. In addition a further 30,000 jobs could be generated by around 2050 in response to more fundamental shifts in the regional economy.

The choice of consortia contractor by the end of 2010

The Brazilian Federal Government will pick the contractor for the TAV in December 2010. Competitors must submit their proposals before November 29 and the winner will be announced on December 16 at the headquarters of Sao Paulo Stock Exchange (BOVESPA – Bolsa de Valores de São Paulo). Term of the concession is 40 years.

The line will be built and run on a concession basis and the government will rank bids based on the lowest fare, with a maximum permitted price of US$ 0.28 per kilometre. That would translate into economy class ticket fares up to US$ 115.00 for the 430 kilometres (270 miles) stretch between Rio and Sao Paulo.

International interest

The bidding is open to both Brazilian and foreign firms. News report that several countries and international companies have expressed interest in participating of the project:

- Austria;

- China (China Railway Materials);

- France (Alstom);

- Germany (Siemens);

- Italy (Ansaldobreda);

- Japan (Hitachi, Kawasaki, Mitsui & Co, Mitsubishi and Toshiba);

- Spain;

- South Korea (Hyundai and Samsung); and

- United Kingdom.

A new company called ETAV

Federal Government also proposed the creation of the Company of High Speed Rail (ETAV – Empresa de Transporte Ferroviário de Alta Velocidade), With the objective of planning and promoting the development of other high-speed rail lines in the country.

ETAV will be linked to the National Agency of Terrestrial Transports (ANTT – Agência Nacional de Transportes Terrestres) and will be also responsible for managing the technology used by the contractor that wins the High Speed Rail bidding process, in addition to monitoring the project’s deadlines.

Speed, locations and planned route

TAV proposal calls for trains to run at speeds of up to 350 kph (217 mph) and the trip between São Paulo and Rio de Janeiro is expected to last 93 minutes. Seven mandatory stations are be built on the line:

- City of Rio de Janeiro downtown area;

- Rio de Janeiro International Airport;

- City of Aparecida, State of São Paulo;

- São Paulo/Guarulhos International Airport;

- City of São Paulo downtown area;

- Campinas/Viracopos International Airport; and

- City of Campinas downtown area.

The planned route will include 90.9 km tunnels and 103 km bridges and viaducts. An extension to Campinas, 70 kilometres from Sao Paulo was planned with the purpose of reaching the heartland of Brazil’s richest manufacturing and farming state.

The planned route is as follows:

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Levy of VAT on Sale of Flats in India

Sujjain Talwar — Wed, 23 Jun 2010 09:59:30 +0000

by Sujjain Talwar

The activity of construction is liable to Value Added Tax (“VAT”) on “the transfer of property in goods involved in the execution of a Works contract”, under the extended definition of Sale, pursuant to introduction of Article 366(29A) by the 46th Amendment in the Constitution of India.

This blog considers the issues arising when a person goes and buys a flat or a commercial property from a builder; is it a “Sale”, and can the activity be amenable to a levy of VAT? The controversy emanates from the decision of the Hon’ble Supreme Court in K. Raheja Development Corporation [141 STC 298 (S.C)], wherein, it was held that if the Agreement is entered into after the flat or unit is already constructed, there would be no Works Contract, but so long as the Agreement is entered into before the construction is complete, it would be a Works Contract.

In the K. Raheja case, the facts were that there were two contracts, one for sale of undivided interest in land and another for construction of the flat after the land sold to the buyer. The decision of the Hon’ble Supreme Court has led to a series of demand notices being issued by the VAT Authorities contending that even in case of an Agreement for Sale of a Flat per se, there is a liability to VAT, as the builder is constructing the property on behalf of the purchaser / buyer.

The charging Section under most of the VAT laws provides for a levy of VAT on every Dealer for Sale of goods. The term “Sale” is defined to mean a Sale of goods made within the State for cash or deferred payment or other valuable consideration …” .The term “goods” is defined to mean “every kind of moveable property….” When a builder buys a flat or any other property from the builder, the Agreement is with respect to a Sale of flat per se, which is an immovable property. The obligation under the Agreement is with respect to sale and purchase of flat and the buyer is nowhere concerned with the fact as to how the builder gets the flat constructed.

The Hon’ble High Court in Assotech Realty Pvt. Ltd. vs. State of UP and Another [Order dated 23.03.2007] held that taking into consideration the terms and conditions of the letter of allotment, the petitioner continues to remain the owner of the apartments/flats including all construction until the sale deed is executed and registered in favour of the prospective allottees/purchasers. The payment of installments by the prospective allottees/purchasers does not transfer any right, title or interest in the construction undertaken by the petitioner. Thus, the construction undertaken by the petitioner cannot be said to have been undertaken by it for and on behalf of the prospective allottees/purchasers. The decision has distinguished the decision of K. Raheja (above) on the ground that in K. Raheja’s case there was a separate contract for construction on the undivided portion of land which was already sold to the buyer.

It would also be pertinent to analyse the issue with the help of an example. Let’s say Builder A is constructing a residential property with 20 Flats. The construction of the property is 3/4th completed and no sale has been made for any of the Flats. It is very clear that the activity of construction is carried out by the builder on his own account. The activity has already resulted in creation of some immovable property. At this stage, say 15 flats are sold to the buyer and the buyer enters into an Agreement of Sale with the builder and pays the relevant stamp duty. The buyer makes payment to the extent of completed construction. Can it be said that in respect of the consideration received, there is a liability to VAT?

It is a settled position in law that in respect of Works Contract, the transfer of property takes place by the theory of accretion i.e. at the time when the goods are incorporated into the Works Contract (See State of Andhra Pradesh & Ors. Vs. Larsen & Tubro & Ors [Civil Appeal No. 5239 of 2008] and Builders Association of India and others vs. Union of India and others [(1989) 73 STC 370]. At the point in time when the goods are being incorporated in the Works Contract, there is no buyer in existence.

The fact that the Agreement is entered into either before or after the flat or unit is already constructed is inconsequential in determining whether the activity can be treated as a Works Contract for the purpose of levying VAT. What is required to be analysed is that whether the Agreement / contractual obligation is for a Sale / purchase of Flat per se or is it for construction of a flat as per a buyer’s requirements and specifications. In cases where the Agreement is clearly for Sale of Flat, it is a Sale of chattel as a chattel and being immovable property, outside the purview of VAT. The latter is however a contract of work and labour and hence, will be liable to VAT. Based on the aforesaid finding, the Hon’ble Supreme Court in Larsen & Tubro vs. State of Karnataka [2008 (12) S.T.R. 257 (S.C.)] has held that the decision in K. Raheja (Supra) requires re-consideration.

Therefore, to the extent there is an attempt to levy VAT on Sale of Flat, an immovable property, that attempt is ultra vires Article 366(29A) and Article 246 (2) of the Constitution of India and may be challenged by way of filing of a Writ petition under Article 226 of the Constitution of India. In fact, Writ Petitions have already been filed challenging the levy of VAT on Sale of flats and it will be interesting to see how many more are filed in the future.

By Sujain Talwar and Ritesh Kanodia

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Record what happened, when it happened – the importance of ‘contemporary records’

Sachin Kerur — Tue, 08 Jun 2010 14:02:52 +0000

by Sachin Kerur

A large part of the administration of a construction contract comprises a contractor seeking genuine contractual entitlements for additional time and costs and the determination and award or rejection of those claimed entitlements by the engineer/employer. As a result, contractor’s claims for extensions of time and additional costs are also often the subject of arbitral proceedings and litigation.

Under both the contractual process and subsequent formal dispute resolution proceedings, contemporary records form a critical part of the evidence to be utilised in evaluating the contractual entitlement. The importance of good record keeping – by both contractors and employer’s agents or engineers—cannot be overstated.

The maintenance of ‘contemporary records’ is an important risk management strategy under any form of contract or subcontract. Under the FIDIC suite of contracts, the failure to maintain contemporary records can severely prejudice or completely extinguish a contractor’s entitlement to additional time or cost.

Sub-clause 53.2 of the FIDIC Conditions of Contract 1987 (the ‘old Red Book’) provides that ‘the Contractor shall keep such contemporary records as may reasonably be necessary to support any claim he may subsequently wish to make.’ Of course, in the event that a contractor subsequently seeks to make a claim, the ‘contemporary records’ are often insufficient or are supplemented by subsequent evidence, such as witness statements from site staff, prepared a long time after the event and in contemplation of the claim.

The issue of what constitutes ‘contemporary records’ and whether or not ‘contemporary records’ can be supplemented by further evidence was considered in the often cited case of Attorney-General for the Falkland Islands v Gordon Forbes Construction (Falklands) Limited (No 2), before the Falklands Islands Supreme Court.

In this case, the court was asked to decide whether or not a witness statement prepared for formal dispute resolution proceedings (significantly after the event giving rise to the claim) could be used to prove a claim under an old Red Book contract where no contemporary records existed. In the judgement on this issue, the court stated that ‘contemporary records’ meant:

‘original or primary documents…prepared at or about the time giving rise to a claim, whether by or for the contractor or employer.’

The court also said that contemporary records does not include witness statements produced after the event, as such documents cannot be said to be original or primary documents prepared at the time. In so doing, the court confirmed the fear of the contractor – no contemporaneous documents means no entitlement.

The judgement in this case stands as a stark reminder of the criticality of ‘contemporary records.’

The situation under the FIDIC Conditions of Contract 1999 (’the new Red Book’) may not be as desperate as under the old Red Book, but contemporary records remain critically important and the failure to maintain such records still has the capacity to seriously affect the contractor’s rights of recovery.

The new Red Book contains a similar obligation under sub-clause 20.1 as was imposed under sub-clause 53.4 of the old Red Book. Sub-clause 20.1 states, in part, that:

‘the Contractor shall keep such contemporary records as may be necessary to substantiate any claim…’ Sub-clause 20.1 also states that ‘if the Contractor fails to comply with this or any Sub-Clause in relation to any claim, any extension of time and/or additional payment shall take account of the extent (if any) to which the failure has prevented or prejudiced proper investigation of the claim…’

While the Gordon Forbes case is authority for the proposition that failure to maintain contemporary records under the old Red Book may extinguish the contractor’s entitlement, failure to maintain contemporary records under the new Red Book may also prejudice the contractor’s rights or ability to recover. It is worth noting that the emphasis and value of witness evidence will of course be different from jurisdiction to jurisdiction. In civil law jurisdiction such as the UAE, for example, witness evidence may be more compelling than in common law jurisdictions. These differences do not affect the importance of maintaining contemporary records.

So at the risk of labouring the point, the moral is simple – record what happened, when it happened. While the tasks of maintaining a site diary, staying on top of correspondence, and keeping minutes of meetings may appear to be an inefficient use of site staff and managerial resources, such ‘contemporary records’ can be the key to securing contractual entitlements.

By Sachin Kerur and William Marshall

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Tests on Completion under the FIDIC Yellow Book

Sarah Thomas — Wed, 14 Apr 2010 11:19:32 +0000

by Sarah Thomas

I am a contractor working on a wastewater project in Eastern Europe, using the FIDIC Yellow Book –Design & Build. Vol.3 of our contract contains the following clause:

“Tests on Completion

The test on completion duration shall be 90 days.

The first 30 days shall be a monitoring period during which the Contractor sets up the operation of the plant and conducts his own water quality tests to confirm that the final effluent consent has been met. At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.”

We have met the final 30 consecutive days successfully and want taking over. The Employer says we must complete the 90 days which takes us outside of the construction period and hence delay damages are being threatened.

I say we have satisfied the contract at the end of the 30 consecutive days and we should get Take Over even though it is not 90 days.

Have you any idea if we are right in our assessment?

Answer:
Firstly, a couple of brief provisos. I assume that you have made no amendments to the Yellow Book that affect this issue. I’m also assuming that, as you say, otherwise the works have indeed all been completed in accordance with the Contract.

Have the Tests on Completion been passed and are the Works ready for Taking Over?

Obviously your argument is that having satisfied the first 30 day monitoring period and then completed the further 30 consecutive day period and having notified the Engineer that the plant is complete and meeting the Process Guarantee, you have therefore satisfied the requirements for completion and Take Over.

Clause 10 – which deals with Taking Over – says that the Works must have been completed in accordance with the Contract and that a Taking-Over Certificate must have been issued. The Employer must issue such certificate within 28 days of an application if the Works are substantially complete in accordance with the Contract (i.e. apart from minor outstanding work and defects not substantially affecting the Works); otherwise the certificate is deemed to have been issued.

Crucially, “completion” for these purposes includes:

• achieving the passing of the Tests on Completion; and
• “completing all work which is stated in the Contract as being required for the Works to be considered completed for the purposes of taking over”.

So it all comes down to (1) what is required to achieve passing of the Tests on Completion and (2) what the Contract states needs to be completed to achieve take over.

Under the Yellow Book, “Tests on Completion” means “those tests which are specified in the Contract or agreed by both Parties…and which are carried out under Clause 9 [Tests on Completion] before the Works…are taken over by the Employer”.

Clause 9 goes on to spell out the process for carrying out these tests, which falls into 3 stages – pre-commissioning tests, commissioning tests and trail operation – the latter which is intended to show that the plant is operating reliably.

Ambiguous provisions

I think that the Engineer/Employer will forcefully argue that waiting for the 90th day to elapse is part of the “trial operation” and is required for you to pass the Tests on Completion. I agree that there is some ambiguity in the wording in Volume 3 of the Contract as it states: “At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.” However, my own view is that the drafting of the full testing period is clear and explicit – “The test on completion duration shall be 90 days“. Bearing in mind that FIDIC explicitly states “The documents forming the Contract are to be taken as mutually explanatory of one another” I do not think that this wording is actually inconsistent with the words: “which then shall be met by a further 30 consecutive days before Taking Over can take place”. In my view, all the Contract is saying is that the actual commissioning tests period is 30 days but there is then a further 30 day trial operation period to ensure the plant is operating reliably. This is also consistent with the description of Tests on Completion (and the 3 stages) described in Clause 9.1.
Of course, it is open to you to request clarification on this point from the Engineer. Clause 1.5.2 of the General Conditions provides that: “If an ambiguity or discrepancy is found in the documents, the Engineer shall issue any necessary clarification or instruction.”

You do not mention if the Engineer in this case is an independent engineer or is part of the Employer organisation. Whichever is the case, he may well come to the same view as the Employer and, in my opinion, this would be consistent with:

• the express wording (”The test on completion duration shall be 90 days“);
• interpreting the documents as mutually explanatory of each other; and
• the 3 stage process of Tests on Completion which includes a “trial operation”.

Whether or not the Engineer is truly independent, Clause 3.5 applies when a party asks the Engineer for clarification and provides that he must consult with each party in an endeavour to reach agreement. If agreement is not reached, “the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.”

The Engineer must give notice to both parties of the determination with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 (Claims, Disputes and Arbitration).

What do you do now?

Whilst I think that the correct interpretation is that the testing period is the full 90 days, I am conscious that complying with this period will put you in delay and at risk of liquidated damages for delay. Therefore in practical terms, I think that you should at least make the argument that you have already substantially completed. I think that there is sufficient ambiguity in the Volume 3 wording to argue that the Tests on Completion have been completed and that you are entitled to issue of the Taking-Over Certificate. Therefore you should apply for issue of this certificate if you haven’t already done so (although if you haven’t already done so you will still have to wait at least 28 days before the Engineer is obliged to issue the certificate or you can argue that it is deemed to be issued).

Under Clause 10.1 [Taking Over of the Works and Sections], the Engineer is deemed to have issued a Taking Over Certificate if he fails either to issue a TO Certificate or rejects the Contractor’s application for a TO Certificate within a period of 28 days after receiving the Contractor’s application.

You have not said whether or not the Engineer has rejected the application. If he has not, and more than 28 days has elapsed since you issued it, then the TO Certificate will be deemed to have been issued on the last day of the 28-day period.

Of course, if you applied for the TO Certificate right before the end of the 30+30 days, then the Engineer has up to 28 days to issue or reject, and you are almost in the same position as if your completion test phase was 90 days. If you applied substantially earlier than that then it will make a bigger difference and might be the difference between completing on time or late.

If you are late, then there probably is no harm in making the application for a Taking-Over Certificate. Note that in accordance with Clause 10.1.3(b) of the General Conditions, if the Engineer wishes to reject the application, he has to give reasons and specify the work that is required to be done by the Contractor to enable the TO Certificate to be issued. Even if the Engineer has purported to reject your application, you might be able to argue that he has not done so in accordance with the contract, because he has not specified the work that is required to be done in order to enable the TO Certificate to be issued. Of course in my view, he is likely to simply point to the further 30 day trail operation period under the Contract.

Delay to Testing

Whilst I do not think you have a basis of claim (as my interpretation of the Contract is that you have not yet fully passed the Tests on Completion), if the Employer’s insistence on you waiting until the end of 90 days after the start of the testing period is not permitted under the Contract, there is potentially the right to claim for delay. Clause 7.4.5 provides that “If the Contractor suffers delay and/or incurs Cost … as a result of a delay for which the Employer is responsible, the Contractor shall give notice to the Engineer and shall be entitled to claim both an extension of time and “payment of any such Cost plus reasonable profit, which shall be included in the Contract Price” (Clause 7.4.5(b)). Equally there is the ground in Clause 8.4.1 (e), being “any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s Personnel, or the Employer’s other contractors on the Site.” The Employer’s Personnel, as defined, includes the Engineer.

Any right to claim will be subject to strict compliance with FIDIC’s notice provisions in Sub-Clause 20.1 (Contractor’s Claims)). I have previously stressed the importance of getting your notice exactly right in the previous Q&A; click here to read more. After receiving this notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 (Determinations) (see above) to agree or determine these matters.

One final note

Finally, do you have any minutes or notes of any discussions with the Employer about completion testing? If you do, have a look at them to see whether they clarify the position. Obviously it will be helpful if you have evidence that you and the Employer intended the tests to consist of the 30-day monitoring period plus the second consecutive 30-day period only. It is worth noting that FIDIC Yellow Book does not include an “entire agreement” clause precluding extra contractual documents/negotiations in interpreting the Contract. If you have clear evidence that the parties both intended the completion tests to last for 30 days plus 30 days (only) then you may be able to claim successfully that the figure 90 was inserted into the contract by mistake instead of 60, in the event that the dispute goes to arbitration.

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Getting into the Greenbacks: Hurdles in Competing for U.S. Government Construction Work

Andrew Ness — Fri, 05 Mar 2010 17:15:43 +0000

by Andrew Ness

Non-U.S. companies frequently ask whether they are eligible to compete for U.S. Government construction and renovation projects, whether within the U.S. or on U.S.-owned facilities abroad. The answer is a simple “yes” in the great majority of cases, unless the project requires access to secure or classified information. Much of the work on U.S. Embassies, for example, requires such access (and some is restricted to only U.S. firms). To work on a secure/classified project, the contractor must possess an Industrial Facility Clearance (FCL), issued in accordance with the National Industrial Security Program Operating Manual (NISPOM). So let’s consider the requirements for that.

To be eligible for an FCL, a company must: (1) need access to the classified information; (2) be organized under the laws of the United States; (3) have a reputation for integrity and lawful conduct; and (4) “not be under foreign ownership, control, or influence (FOCI) to such a degree that the granting of the FCL would be inconsistent with the national interest.” NISPOM ¶ 2-102. Factors considered here include the amount of foreign ownership, the type and sensitivity of information that will be accessed, and the company’s record of compliance with U.S. laws and regulations. NISPOM ¶ 2-301.

Translated, this means that the contractor needs to be a U.S. corporation, but that corporation can be foreign-owned or controlled (that is, a U.S. subsidiary), so long as it complies with the FOCI mitigation rules.

The FOCI mitigation rules are security measures to mitigate the extent of foreign control. One of the most commonly used measures is a Special Security Agreement (SSA). NISPOM ¶ 2-303(c). An SSA allows the foreign owner to maintain inside directors on the Board of the U.S. subsidiary/contractor, while excluding them from all decisions affecting the firm’s classified work. A Government Security Committee of independent, outside directors, approved by the U.S. government, oversees and ensures the proper handling of classified materials. What this means as a practical matter is that the foreign parent can have no influence or control over any decisions relating to the secure/classified project. For example, during the bidding phase the costs of the potential project can be discussed generally with the foreign parent, but the parent cannot be told of the security issues or the potential costs to comply with the security issues. Similarly, during performance, the parent can be told in general terms how the project is going, but cannot be told about a specific issue such as a blast-proof security wall that is causing a project delay.

Another mitigation method sometimes used is the establishment of a Proxy Agreement (PA) or Voting Trust Agreement (VTA). NISPOM ¶ 2-303(b). Under a PA or VTA, the voting rights regarding the foreign-owned stock of the U.S. subsidiary are vested in cleared U.S. citizens approved by the U.S. government. These Proxy Holders or Trustees become the directors of the corporation, to act independently from the foreign parent. Although the Proxy Holders must obtain approval from the foreign parent for major decisions, such as the sale of corporate assets or a corporate merger, the Proxy Holders or Trustees otherwise retain complete control, but the foreign parent still gets the financial benefit of its subsidiary’s operations.

Approval of FOCI mitigation measures is at the discretion of the government agency letting the contract, so there is no sure-fire guarantee of success. But by working with the government and being willing to implement those FOCI mitigation measures the government suggests, it usually is possible to obtain an FCL and compete for secure/classified U.S. Government projects.

Barbara Werther
Andrew Ness

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U.S. Crackdown is Raising the Price of Corruption

Andrew Ness — Wed, 24 Feb 2010 18:31:21 +0000

by Andrew Ness

The principal weapon of the U.S. government to combat corruption in international business dealings is the Foreign Corrupt Practices Act (FCPA). To say that the U.S. is now aggressively pursuing FCPA cases is an understatement. In the past year, we have seen billions of dollars of fines, sting operations, and the pursuit of individuals around the world. Here are some of the latest FCPA headlines:

 Hefty penalties are the order of the day – In the past year, companies have settled with regulators to the tune of billions of dollars in penalties, fines and disgorgement.

• Halliburton/KBR paid $600 million;
• Siemens paid $1.6 billion;
• BAE paid $450 million; and
• It is reported that Daimler will pay an estimated $200 million.

Not factored in here is the cost of these investigations. Technip recently reported a charge of approximately $500 million related to government investigations into its involvement in the TSKJ joint venture in Nigeria (the Halliburton/KBR settlement). By contrast, investment in a comprehensive compliance program and FCPA due diligence on agents and consultants looks like an inexpensive way to protect a healthy bottom line.

 Sting operations – In a very aggressive move, the US Dept. of Justice’s sting operation in conjunction with the UK authorities caught everyone by surprise. In tactics often reserved for crime syndicates, the DOJ and UK police arrested 22 individuals who allegedly attempted to make improper payments to FBI agents posing as representatives of procurement officers for a top minister of an African country. The improper payments were intended to obtain the award of contracts to sell military and law enforcement supplies. In an unusual twist, no actual foreign officials were involved.

 Intergovernmental cooperation – On February 5, 2010, BAE settled with both the DOJ and the UK’s Serious Fraud Office. In addition to pleading guilty to one count of conspiracy to making false statements to the U.S. government, BAE also pled guilty to a charge that it failed “to keep reasonably accurate accounting records in relation to its activities in Tanzania.” BAE’s settlement included a payment of $400 million to the US and £30 million to the Crown Court (with a designated use to benefit the people of Tanzania). The Siemens settlement of $1.6 billion included a payment of approximately $560 million to the Munich Public Prosecutors Office for corporate failure to supervise officers and employees.

The February 11, 2009 Halliburton/KBR settlement only resolved issues with U.S. regulators, and investigations by French, British and Nigerian authorities remain unresolved. Additionally, as mentioned above, the FBI and City of London Police coordinated efforts in the January 19, 2010 sting operation that captured 22 individuals.

According to public reports, the US SEC made over 750 requests for assistance from foreign regulators in fiscal 2009, an increase of almost 200 requests from the prior year. Geographic and economic boundaries have all but dissolved, making it more difficult to hide corrupt payments in offshore entities and far flung subsidiaries.

 Individual prosecutions and more litigation – The U.S. government has also sent a clear signal that it is willing to go after individuals and to litigate when necessary. Regulators are pursuing the middlemen and agents (as in the Siemens and Halliburton investigations) who conceal the corrupt payments to government officials. 2009 alone saw three FCPA trials against four individuals. That equals the total number of trials in the prior seven years.

 Increased scrutiny on agents and consultants – Companies subject to the FCPA need to exercise due diligence to ensure that they form business relationships with responsible and qualified agents and consultants. The DOJ has provided companies with a list of “red flags” which, if present, should trigger heightened scrutiny. Red flags include unusual payment patterns, high commissions, a refusal by the agent or consultant to provide FCPA certifications, a lack of qualifications or expertise to perform the services being offered, and a referral to the agent or consultant by an official of a potential governmental customer. As highlighted in the Siemens, Halliburton and BAE settlements, failure to conduct comprehensive due diligence, or turning a blind-eye to any one of these “red flags” can be highly damaging to a company’s reputation and bottom line.

Multinational construction companies take note – enforcement of the FCPA is here to stay!

Fiona Philip
Andrew Ness

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New Tort Law Firms up Liability for Tofu Buildings

Hew Kian Heong — Wed, 24 Feb 2010 02:11:43 +0000

by Hew Kian Heong

On 26 December 2009, the PRC Tort Liability Law (the “Tort Law”) was promulgated following a seven-year period of discussions and debate. The law will enter into effect on 1 July 2010.

The Tort Law marks a milestone in PRC legislative history, and will have myriad implications for diverse areas of private and commercial activity.

As a construction lawyer, I am particularly interested in Article 86 of the Tort Law concerning liability for loss and damage caused by collapse of construction works.

Although the Tort Law has been in planning for some time, it seems to have been influenced by some very recent events. Much attention has been focused on the recent milk scandals as a catalyst for the product liability aspects of the legislation. But it is also widely speculated that Article 86 was driven by the recent case of a building collapse in Shanghai in June 2009. The collapse of a 13-floor building at Shanghai’s “Lotus Riverside” apartment complex was perhaps one of the top 10 local news events of 2009 in Shanghai. The accident killed one worker on site and left 489 home buyers without their expected homes (in many cases, costing all of their life savings). The collapse has been blamed on improper construction methods.

Quality problems have long plagued the construction industry in China. “Tofu Building” is the cheeky term used by the local press to describe such shoddy construction projects. Clearly, to some extent, this situation reflects a failure of the current legal and regulatory regime. Hence, there is little humor in this situation for Chinese policymakers.

Although there are administrative sanctions and contractual remedies for poor construction quality, tort legislation has been less than robust. Tort protections are especially important in addressing harm to innocent third parties who would not be entitled to compensation as a matter of contract.

No doubt in recognition of this, the Tort Law has clearly placed liability for collapse of construction works on the contractors and developers who are best able to avoid them in the first place.

Since 1987, Article 126 of General Principles of Civil Law (”GPCL”) has provided that:

“If a building or any other installation or an object placed or hung on a structure collapses, detaches or drops down and causes damages to others, its owner or manager shall bear civil liability, unless he can prove himself not a fault.”

GPCL Article 126 creates a rebuttable presumption that the current property owner or manager is liable in these cases. But these are quite disparate cases – there is a potentially immense difference between the types of causation involved in items falling from a building and in a building itself collapsing. In cases where the building itself collapses, the current owners or managers would have very little opportunity to prevent the harm. Hence, there seems to be little reason to hold them primarily liable. On the other hand, the original contractor and developer, the parties best situated to prevent catastrophic building collapse, are not included (even secondarily) as potentially liable persons here.

To remedy this and other issues in relation to personal injury liability under the GPCL, in 2003 the Supreme People’s Court issued an interpretation (”Interpretation”) that, among other things, clarified the application of GPCL Article 126. Specifically, Article 16 of the Interpretation clarified that, if the collapse is caused by design or construction defects, the responsible designer and contractor can also be held directly liable to injured parties.

Article 86 of the Tort Law deals only with collapse, providing:

”Where any building, structure or facility collapses, causing any harm to another person, the construction employer and contractor shall be liable jointly and severally. After making compensation, the construction employer or contractor shall be entitled to be reimbursed by other liable persons if any.

Where the collapse of any building, structure or facility, which causes any harm to another person, is attributed to any other liable person, the other liable person shall assume the tort liability.”

With this new Article 86, we have a new bright-line rule for primary liability in the case of construction collapse. Article 86 rests primary liability for building collapse squarely with the employer and contractor. In place of the previous rebuttable presumption of fault for current owners / managers, there is now strict liability for employers and contractors. We also have a broader and more objective rule of reason in relation to secondary or contributory liability, insofar as any other person contributing to the collapse, whether contemporaneous, upstream or downstream to the original employer/contractor, can also be held liable.

Although the Tort Law has changed the formal statutory liability rules in relation to collapse of construction works in China, in the final analysis, the formal and practical significance of this change may not be very great.

Formally, the Supreme People’s Court has long since clarified that the original employers and contractors could be liable in building collapse. Practically, those parties are the most obvious targets for liability in the event of building collapse, and under current practice the employer and contractor are already joined whenever possible, even without the new rule. But, since most developers in practice usually use special purpose vehicles (SPVs) to carry out their projects, dissolving the SPVs on completion, recourse to the original developing parties may be less available than the Tort Law seems to assume. It therefore appears that the contractors may well end up being the easiest targets at the end of the day.

Hence, while Article 86 represents a rationalization and refinement of the liability rules in this area, it will no doubt take much more than this marginal formal change to begin to reverse the deeply entrenched incentives causing the proliferation of Tofu Buildings in China.

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