The following questions, related to contractual issues arising from COVID-19, were posed during our eighth 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: (part 1 of 2): The first question relates to the FIDIC Silver Book. Due to COVID-19, our project was suspended. Initially, the Employer informed us that they ceased all inspections. This later led to suspension, because without receiving any approvals subject to inspections, the Contractor is unable to continue with the project.

Since we did not have a written instruction to suspend, we, the Contractor, issued a letter informing the Employer that the project had been suspended upon their instructions.

So going on as per Sub-clause 8.9 (Suspension), which states that after receiving the Notice, the Employer shall proceed in accordance with Sub-clause 3.5 (Determinations) to agree or determine the matters. Should the Employer communicate in writing to the Contractor if there is any disagreement to the issued Notice?

Two weeks after seizing the inspections, the Employer requested to suspend works, after the Contractor issued a Notice of claim quoting Sub-clauses 8.9 (Force Majeure; Andy’s note: wrong clause) and 20.1(Contractor’s Claims).

The Employer is now saying that they didn’t mean to suspend the works, only cease the inspections. He’s also asking the Contractor under which Sub-clause the Contractor wishes to claim: whether it is under 19.4 (Force Majeure) or 8.9 (Suspension).

The Employer is saying that every action should be under 19.4 (Force Majeure) so that financial claims would be avoided.

Please advise how the Contractor should react in such a situation.

Answer: Well first, make sure you understand cause and effect. This is not a suspension. This was the Employer and his agent, the Engineer, not doing their job. It doesn’t matter what the reasons were; they were not doing their job.

Only the Engineer can instruct suspension in the FIDIC-defined definition. This is not actually suspension. It’s actually a delay caused by the failure of the Employer/ his consultants to do their job. Whatever the reasons, it’s a failure to issue instructions, directions, etc. The Contractor has been delayed because of the lack of those instructions. He obviously can’t pour concrete without the requisite inspection, etc.

So, this is not actually a suspension. Therefore, the Notice that the Contractor sent in this case was incorrect in that it’s not a suspension.

The Contractor should have first given a Notice that delay was being suffered and he was incurring costs through having people stood about doing nothing under Sub-clause 1.9 (Failure to Issue Drawings or Instructions). Then second, given Notice under Sub-clause 20.1 that he, the Contractor, intends to make a claim.

Now, how do you get out of this? Well, I would try to ignore the fact that you’ve submitted the wrong Notices when you submit your claim and in your claim, demonstrate your entitlement to time and/ or costs by using the correct clauses.

Unfortunately, Contractors often do not understand the contract or what their obligations are. They don’t understand the importance of submitting Notice under the right clauses with the right information in it, and they get themselves in a mess.

If you put your claim in based on the wrong clause, the Engineer will be quite within his rights to say you don’t have an entitlement because we didn’t instruct you to suspend.

If we actually look at FIDIC, Sub-clause 8.4 (Extensions of Time) gives you entitlement to an extension of time for an epidemic that delays the project. One could argue that the lack of inspections and responses to submittals were caused by COVID-19. So I think you can tick that box, but you’ve not quoted that clause.

Sub-clause 1.9 (Failure to Issue Drawings or Instructions) gives you entitlement to claim for full time and cost. So if I was the Contractor, that’s the clause that I would be relying on.

A Notice should be a simple statement of fact so they can be nothing to disagree with. For example, “Dear Mr. Employer, No suspensions are taking place. You are not responding to our materials approvals or drawing submittals. We are therefore suffering delay and incurring costs.”

The Employer cannot disagree with that. So there’s nothing to respond to.

And if you don’t have anybody on your project that knows the contract inside out, upside down, and backwards, get a consultant on board early. A consultant can, in a couple of hours, advise a Contractor on which clause, how to draft their Notice, even drafting it on their behalf and make sure you’re not going down the wrong route. That prevents the claim being rejected.

Question 2

Question: (Part 2 of 2): Moving on to the second part of the question, which is about financing charges for delayed payment. FIDIC allows the Contractor to claim for financing charges if the Employer delays the payment of the interim payment certificates. The question is: I’m on a project that has the payments are made in US dollars. FIDIC says the financing charges should be calculated based on the discount rate of the central bank in the country of payment.

Should that be the USA? Additionally, sometimes the rate varies within the month; in such situations, should the average be used or should we calculate each section separately?

Answer: Well, the currency is dollars, the US dollar. So, yes, it would be the central bank in the US. As for calculating the rate, if you’ve got ten days at this percentage and four days at this percentage, that would be the correct way.

But, in real terms, it’s going to make very little difference to the amount of financing charges that you will be claiming. So go for the cheapest one and hopefully you’ll get your deal if you’re the Contractor.

Question 3

Question: My next question is about FIDIC Red Book. The Contractor has chosen to engage the majority of its suppliers and subcontractors from overseas. Most could have been engaged within the country but the Contractor elected not to do so, which is his option.

The impact of COVID-19 has had a very significant effect on this overseas supply chain and is continuing, but within the country, the COVID-19 impact is minimal. Whose risk is it and is the Employer liable to play for any time and cost?

Answer: Sub-clause 8.4 (Extensions of Time), under FIDIC, allows for an extension of time in a case of a mass epidemic, to the extent that the delays delay the time of completion. COVID-19 is obviously a mass epidemic. So there’s your entitlement to claim for an extension of time.

The Contractor was delayed due to a massive epidemic, therefore is entitled to an extension time.

We’ve talked about this before and there is a paper available to ICCP members, in order to claim costs, we’ve got to look at force majeure. FIDIC says if the force majeure event happens outside the country, which it does in this case, costs aren’t going to be claimable.

I hope that answers your questions.

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

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