The following questions, related to contractual issues arising from COVID-19, were posed during our ninth Construction Clinic, held in May 2020. Andy Hewitt’s responses have been summarized from the original. The entire webinar may be viewed on-demand on YouTube.

Question 1

Question: For a contract that has been terminated by the Employer and the amount due a termination is in dispute and goes to arbitration under the UNCITRAL rules. What is the interest rate to be applied if the FIDIC Yellow Book 1987 allows for the Bank of the Contractor’s residence plus 3%?

Answer: It’s a difficult question because once things go to arbitration, the arbitrators would look at the issue; why the interest should be applicable; how it should be calculated. I am not a lawyer and the arbitrators will make decisions based on all of the facts. That being said, unless there are reasons why they shouldn’t do so, I don’t really see any problems if the contract says how interest shall be calculated and the arbitrators want to apply the same rules.

Question 2

Question: Under the contract, and if the MDB contract, the Contractor failed to complete the work on time, even after an extension of time. The Contractor is working on-site and has already paid the delay damages up to the maximum. The Contractor has not shown any such dissatisfaction with the delayed damages. The work is nearly at the finishing stage and the contractor is willing to finish the works now.

So the question is, will the contract be alive and count the contract to work on site after paying the maximum delay damage? If so, what will be the completion date as per the contract?

[Andy’s Note: The Multilateral Development Bank contract is very similar to the Red Book. The development banks insist on some additional clauses, such as antislavery, open-book contract when it comes to looking at accounts, and a lot of stringent anti-corruption clauses. Otherwise, it’s the Red Book.]

Answer: The contract remains alive until the Contractor has finished all his obligations, which I will talk about in a second. Can the Contractor work on site after paying the maximum delay damages? Well, yes. He is obliged to complete the works and fulfill all his obligations.

What will be the completion date as per the contract? Now, again, I think we’re getting a little bit mixed up here. The completion date does not exist under FIDIC. This is a phrase that we use quite often, but it is not a defined term.

There are two stages in completion. FIDIC defines the first stage as the date of taking over. So this is when the Contractor has finished his work to a point where we can hand it over to the Client. There may be some minor works or finishing works to be completed at this time.

The Client or the Engineer issues a Taking Over Certificate. The date shown on that certificate is when the Contractor ceases to be responsible for the safe-keeping and operations of the project. Such responsibilities now transfer to the Employer, and he can start to use the Works for whatever it was designed to do. When the project is handed over to the Employer and that is taking over, not the completion date.

The next major completion stage is after the defects notification period is finished, which is usually 12 months. This is when the Contractor’s dealt with any defects that have arisen, finished off any minor outstanding works, any administrative matters, possibly the completion of the as-built drawings, the completion of the O&M manuals, etc.

At this point, a further certificate is issued – the Performance Certificate, and that is the point when the Contractor’s obligations cease. So, there isn’t a completion date, there’s a taking over and there is the performance certificate. I hope that clarifies things for people.

{Editor’s Note: If you would like to read more about Taking Over vs Performance Certificates, please read Mark Watson’s post.]

Question 3

Question: The next question is regarding FIDIC 1999 Red Book and it’s concerning Sub-clause 20.1 (Contractor’s claims).

[Andy’s Note: FIDIC Sub-clause 20.1 states the contract requires the Engineer to give his response to the principles of a claim within 42 days after receiving the claim and the options that FIDIC give are: to respond to the Contractor with approval or with disapproval with detailed comments.

I think there’s also a third one that is implicit in this clause, which is that “We accept your claim in principle, but we think you’re claiming for too much” (with detailed comments).]

Q3 continued: Does this 42-day timeframe apply if the claim is interim and subject to further interim claims at monthly intervals? How best should the Engineer respond to an interim claim that is continuing to evolve? For example, due to COVID-19.

Answer: We are working on several projects on behalf of the Contractor, where we are preparing extension of time claims. These have to be interim because we still don’t know when the delays are going to end. It doesn’t make any difference under FIDIC between responding to a final claim or an interim plan. The Engineer is obliged to follow the same advice, whether it’s an interim or a final claim: i.e. issue a response.

The Engineer should be awarding interim extensions of time when the claims come in. If it can tick all the boxes and say, yes, the Contractor is entitled; yes, it’s a reasonable prediction of the effect; yes, yes, yes. Or, he might disapprove the claim because, for example, in this particular contract COVID-19 is not an event that gives you entitlement to claim.

In FIDIC, the Engineer needs to respond to each and every claims submission. In this case, I don’t think it really needs to be an absolutely detailed response, until you get the final claim and you get down to the nitty-gritty of dotting the I’s and crossing the T’s on the delay analysis, which will demonstrate the amount of the extension of time.

I hope that answers your questions.

The questions covered in this blog were answered by ICCP Executive Officer and Fellow, Andy Hewitt

If you would like to learn more about claims, check out our training partner, Claims Class.

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