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Sample Essay 3: Sample Case

von Holger Langer, LL.M.

In the course of a dredging contract incorporating the FIDIC conditions (1999 edition – “Red Book”), the Contractor encounters a historic wreck which had not been shown on the contract drawings. As a result it incurs considerable extra costs (US $1.5 million) and loses time (8 weeks) in having to get instructions as to how it should be dealt with. A further 4 weeks is spent in overcoming the problem. The Engineer decides that the wreck was a risk which the Contractor has to bear as it was “foreseeable” and “your responsibility under the contract”. He also decides that (1) the Contractor did not comply with the contract in giving notices and submitting claims on time; (2) the Contractor was running late and was not entitled to any extension of time; (3) the delay was not on the critical path as the Contractor had to finish another section of the work before completing the contract.

The Contractor is puzzled by parts of the decision as the existence of the wreck was immediately notified in writing and, in the Contractor’s monthly statements, estimates of the future costs were given in round numbers and were later replaced by estimates of the costs as they were actually being incurred. The actual costs were recorded at the time and the records submitted to the Engineer’s Representative even though they were sent back on every occasion as “I have no authority”. The Contractor then resubmitted them to the Engineer. In addition the reason why the other section was late was because the necessary dredger was needed on the site of the wreck.

The Contractor nevertheless has no option but to refer the disputes to arbitration which is duly done. The ensuing proceedings are conducted under the ICC Rules.

In its defence the Employer does little more than adopt the Engineer’s decisions and adds that it will rely on “all other relevant contract conditions”.

1. What are the likely issues?

2. Advise the Contractor

a. as to what it should do to prove its case in the arbitration    and

b. what more it might or should have done during the course of the works and

c. what, if anything, it can do now to make good any non-compliance with the contract.

 

1. What are the likely issues?

The Contractor claims that it has been at all times in compliance with its contractual obligations. In particular it alleges that the discovery of the wreck was not foreseeable and was immediately notified in writing and the additional costs included in the monthly statements as estimated future costs. In addition, records of the actually incurred costs were later submitted to the Engineer’s Representative and later on to the Engineer. As to the question of delay, the Contractor alleges that the only available dredger was needed at the site of the wreck. The Contractor therefore claims to be entitled to have the additional work measured and valued as set out in the monthly statements submitted to the Engineer according to clause 4.12 (b) or clause 4.24 (b) FIDIC 1999 (Red Book) as the case may be. It also claims to be entitled to an extension of time of the agreed construction period in accordance with clause 8.4 (b) in connection with clause 4.12 (a) or 4.24 (a) FIDIC 1999 (Red Book) as the case may be.

The Employer answers that the Contractor is not entitled to additional payment, by alleging that the encounter of the wreck was foreseeable and therefore included in the Contractor’s obligations under the contract. Equally, the Contractor is not entitled to an extension of time, for the delay was not due to the discovery and removal of the wreck. In addition, the Contractor failed to give timely and adequate notice of the differing conditions and the corresponding claims it considered itself entitled to.

Likely issues in the arbitration will therefore be, whether the Contractor is entitled to be awarded payment of the amounts it claims in respect of the additional work and whether, accordingly, the Employer / the Engineer was bound to certify these claims. The arbitral tribunal, therefore, will have to determine, whether the condition falls under clause 4.12 or clause 4.24 FIDIC 1999 (Red Book), and – if clause 4.12 is applicable – whether the historic wreck constituted an unforeseeable physical condition on the part of the Contractor that goes beyond its mere contractual obligations and whether the Contractor was in compliance with any contractual notice procedures. Concerning the alleged delay, the arbitral tribunal will have to decide, whether the delay was due to the discovery of the wreck, entitling the Contractor to an extension of time.

 

2. (a) What should the Contractor do to prove its case in arbitration?

Under clauses 4.10 and 4.11 FIDIC 1999 (Red Book), the Contractor will be expected to have itself satisfied with all relevant information in regard of the Site conditions, including sub-surface data, cf. clause 4.10 (a) FIDIC 1999 (Red Book). Beyond the data that was made available to the Contractor by the Employer prior to the tender, the Contractor is deemed to have obtained all necessary information and to have inspected and examined the Site. This is in accordance with the general principle laid down in clause 4.1 FIDIC 1999 (Red Book) according to which it is the Contractor’s primary obligation to carry out the works. However, clause 4.12 FIDIC 1999 (Red Book) states one important exception to this general principle. Wherever unforeseeable physical conditions obstruct the execution of the works, clause 4.12 allocates this risk to the Employer as the person who was initially in control over the risk by selecting the site and being responsible for the design and the investigation prior to the invitation of the tenders. In these cases, the Contractor might be entitled to a compensation of costs and an extension of time. To prove its case in the arbitration, the Contractor would have to concentrate on two basic requirements for these claims.

First of all, the Contractor would have to prove that the encountered obstacle was a physical condition in the sense of clause 4.12, which is in the case at hand unproblematic. In addition, the Contractor would, however, have to prove that this condition was “unforeseeable”. To determine what was unforeseeable, there has to be a rational basis of what could have been foreseen at the time of tender. The problem is that under clause 4.10 the Contractor is deemed to have obtained all information which is necessary for the execution of the work. The Employer (and the Engineer) will therefore be eager to show that at the time of tender there existed some information that the Contractor was or ought to have been aware of and which would have rendered the obstruction foreseeable (cf. also clause 4.12 at the end). For that reason, the Contractor should  concentrate on showing that there was no such information made available in the tender documents and, furthermore, that it was impracticable (especially with regard to the nature of the contract, i.e. dredging work) to perform further extensive sub-surface investigations. The Contractor could also argue the other way around in order to weaken the position of the Engineer and attempt to show that if the conditions were foreseeable by an experienced Contractor, they should have also been foreseen by the Engineer and accordingly included in the design of the works. On this basis, the Contractor could argue that, if the conditions were foreseeable, the Engineer should have more positively exposed these conditions in his plans and specifications. If they were on the other hand not foreseeable for an experienced Engineer, the Contractor could argue that they were equally not foreseeable for an experienced Contractor. To prove unforeseeability, the Contractor can first of all rely on the tender documents and the information given herein. In addition, he can call witnesses and experts to give evidence that even an experienced Contractor could not have foreseen such conditions as the ones encountered.

Subsequently, the Contractor would have to prove that he acted in compliance with the notification procedure. He would have to prove that he gave timely notice and that the information given was adequate to point out the unforeseen condition, so as to enable the other side to take reasonable measures against it. As to the timely notice, clause 4.12 states that notice shall be given “as soon as practicable”. The given facts set out that the Contractor had notified immediately after the encounter of the wreck. In the course of arbitration, he would have to give evidence about this by issuing supporting documents or copies thereof and hearing witnesses that were involved in the notification procedure.

As to the adequacy of the notice, it is essential that the notice is given in writing according to clauses 4.12, 1.2, which has in this case been duly done. The absence of a notification in writing would be difficult to overcome in an arbitration, since the other side would plead that it did not have adequate knowledge about the physical conditions, but merely oral expressions of concern by the Contractor.

A far more favourable way in the proceedings would be not to rely on unforeseeability, since it was shown how difficult it might turn out to prove this. It has to kept in mind that the Engineer expressly alleged the conditions to be the Contractor’s responsibility under the Contract, and that the Employer relied on this view and added that it will rely on all other relevant conditions of the contract. Such a relevant condition might be clause 4.24 under which items of archaeological interest – such as the historic wreck – become the sole responsibility of the Employer. The procedure is almost the same as the one in clause 4.12, i.e. the Contractor promptly has to give notice, the Engineer has to give instructions on how to deal with the finding, and the Contractor might be entitled to an extension of time and payment of costs if he suffers delay and additional costs in overcoming the problem. However, the need to prove unforeseeability will be left out, since the Employer will be deemed to be responsible for these conditions irrespective of any foreseeability.

 

2. (b) Advise the Contractor what more it might or should have done during the course of the work

The notification due under clause 4.12 / 4.24 shall enable the Engineer to investigate the conditions in order to reach a decision resulting in an instruction on how to overcome the problem. The notification does not, however, entitle the Contractor to suspend the work. On the contrary, clause 4.12 stipulates that “the Contractor shall continue executing the Works, using such proper and reasonable measures as are appropriate for the physical conditions”. In the case at hand, the Contractor, however, obviously did interrupt the work on other sections in order to overcome the problem caused by the wreck. He must have known beforehand that the dredging work at the wreck site will require an additional dredger. In the eight weeks he spent to receive an instruction by the Engineer, he could have taken reasonable precautions in regard of the later work on the wreck. He could, for example, have made arrangements for an additional dredger in order to work on both sections. Since it was obvious from the beginning that the work on the wreck site will require a dredger, he could have used this eight week period to finish – at least as far as possible – any other dredging work at the site that is now running late. His claim for extension of time might therefore fail, since it was to a certain extent his own fault in planning the situation and taking reasonable precautions and not, as required under clause 4.12 (b) or 4.24 (b) as the case may be, “due to these conditions”.

As to the submission of claims (according to clauses 4.12, 4.21, 14.3 FIDIC 1999 (Red Book)), it might also be questionable whether the Contractor complied with the required procedure. The claims were submitted to the Engineer’s Representative, who is generally permitted to take submissions by the Contractor. However, according to clause 3.2, the authority to determine any matter under clause 3.5 shall not be delegated to the Representative. Since the claims for an extension of time for delay and payment of additional cost are contingent to such a determination, the Contractor could have been aware of the fact that the Representative was possibly not authorized to decide on these claims. The wording “on every occasion” in the facts suggests that the Contractor repeatedly disregarded the Representatives self conceded lack of authority to decide upon the Contractor’s claims. The Contractor would have therefore been well advised, if he submitted the claims immediately to the Engineer, so as not to take any risk of being in non-compliance with the notification procedure.

 

2. (c) Advise the Contractor what, if anything, it can now do to make good any non-compliance with the contract

As far as the Contractor will be deemed to be in non-compliance with the Contract, e.g. for delay of completion of the works, he can only try to take reasonable measures to finish the work as soon as possible. Since the situation was due to faulty conduct on both sides, it might be reasonable to grant the arbitral tribunal the power to act as amiable compositeur in order to reach a settlement between the parties. As far as money is concerned, it might be a proper solution in this case to weigh the Contractor’s claim for additional costs against the Employer’s claim for damages for delay in order to reach such an agreement.

 

Essay evaluation: 75 % (distinction)