VARIATIONS AND CLAIMS PROCEDURE: PRACTICAL ISSUES

A paper given at the SCL (Gulf) Conference

in Dubai on 20th March 2011

Ellis Baker and Professor Anthony Lavers

March 2011

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Variations and claims procedure: practical issues

by Ellis Baker, White & Case, London

and Professor Anthony Lavers, White & Case, London

INTRODUCTION

The purpose of this paper is to consider certain practical issues arising from the variation powers1 in

construction and engineering contracts and also the procedure for claims. Reference will be made to

the provisions of the FIDIC Red Book2 4th Edition3 and, where appropriate, comparisons made with

the current Red Book4. These will be abbreviated to FIDIC 4th and 1999 Red Book respectively.

VARIATIONS

FIDIC 4th Clause 51.1 gives the Engineer power to make any variation of the form, quality or quantity of the Works by requiring the Contractor to5:

(a) increase or decrease the quantity of any work included in the Contract

(b) omit any such work .

(c) change the character or quality or kind of any such work

(d) change the levels, lines, position and dimension of any part of the works

(e) execute additional work of any kind necessary for the completion of the Works or

(f) change any specified sequence or timing of construction of any part of the Works.

These provisions and their equivalents in other standard form contracts raise a number of serious

practical issues for the parties, and for the Engineer.

This section considers the Contractors entitlement to additional payment where the variation power is exercised and specifically what may be the effect of substantial increases or decreases of quantity of

work or substantial changes in character or quality of work.

What does and does not constitute a variation for purposes of a claim

It is sometimes assumed that any work not expressly specified will give rise to a variation for which

the Contractor is entitled to additional payment. FIDIC 4th makes reference to All variations being referred for valuation by the mechanism provided. But it should not be assumed automatically that an

instruction to carry out work must be treated in this way.

1 The subsection in FIDIC 4th is entitled Alterations, Additions and Omissions. 2 Conditions of Contract for Works of Civil Engineering Construction of the Fdration Internationale

des Ingnieurs Conseils. 3 1987. 4 FIDIC Conditions of Contract for Construction First Edition 1999. 5 For a general treatment of these provisions, see E.C. Corbett, FIDIC 4th - A Practical Legal Guide,

(London 1991) pp. 295-304

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Classic authorities in a number of common law jurisdictions distinguish between work which does

and does not form part of the original contract.

In the South African Supreme Court decision of Alfred McAlpine Pty Ltd v Transvaal Provincial

Administration6, where a contractor building a freeway over 30 months claimed entitlement to extra

payment for alterations, Rumpff ACJ held that it must be accepted that a contract to complete a particular work at an agreed price can be altered right from the outset .

The changes that the Employer requests may, or may not, entitle the contractor to additional payment.

Keating7 lists four requirements which the contractor must be prepared to prove in order to assert a

claim. Two of these are procedural: that any agent who ordered the work was authorised to do so, and that any condition precedent to payment imposed by the contract has been fulfilled.

However, two are substantive: namely that what is ordered actually is extra and not included in the work for which the contract sum is payable and that there is a promise express or implied to pay for the work. Whether these can be shown cannot be assumed. Not all requests or requirements by the employer will comprise extra work giving rise to an entitlement to extra payment. The language of

modern contracts, such as FIDIC, can sometimes create the impression that every such

communication would lead to an entitlement.

Clause 52.1 All variations referred to in Clause 51 shall be valued at the rates and prices set out in the Contract. The early cases, often on rudimentary bespoke forms, have long established that, in the common law countries, an agreement to achieve a particular result may include the obligation to do

what is necessary, whether or not expressly stated, for that purpose.

Thus in Wilson v Wallace8, the defenders, the employers, had asked the contractor to quote prices for

the supply of metal tanks to certain specifications: their basic dimensions, with quarter-inch plates

and a stay or bolt through the centre; each to withstand a quantified head pressure of water. Three

bolts would be inserted in a place to be pointed out. The contractor claimed for the costs of executing

the work in a particular way, notably inserting an additional stay, which the contractor argued

constituted an extra. The Lord President9 rejected this claim: The substance of the evidence is that the contractor did nothing more than was necessary to make these tanks of the quality, power and

strength necessary to sustain the pressure that he was told was to be upon them and which by the

general words of the contract he was bound to make them capable of sustaining. If anything for that

purpose was required to be done that was not in the specification, it was the [contractors] duty to supply it.

This is really consistent with the basic idea in Williams v Fitzmaurice10, quoted in both Hudson and

Keating, that the contractor could not recover the cost of floorboards which were needed. This was so

because, although they had been omitted from the specification it was clearly to be inferred from the language of the specification that the (contractor) was to do the flooring. These explanatory words are crucial. The distinction between what should be regarded as included and what excluded (and so

constituting extra work with the implication of financial entitlement) was highlighted in Patman &

Fotheringham v Pilditch11. Under a lump sum contract, the contractor undertook to build a block of

flats according to the plans, invitation to tender, specification and bills of quantities which were signed by the contractor. Channell J held that the quantities formed part of the contract; the

contractors were therefore entitled to recover for all work done by them in completing the contract which had been omitted from or understated in the bills of quantities. Keating12 notes that the judge

6 [1974] 3 SALR 506. 7 Keating on Construction Contracts 8th ed 2006 ed S. Furst QC and the Hon V. Ramsey p. 116. 8 (1859) 21 D Court of Session 507. 9 At p. 508. 10 [1858] 3 H&N 844. 11 [1904] Hudsons Building Contracts 4th ed Vol 2 p. 324. 12 op cit p. 120.

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expressly excluded from this statement Things that everybody must understand are to be done, but which happen to be omitted from the quantities. These would be treated in the same way as the excluded items in Williams v Fitzmaurice.

The following possible scenarios can be envisaged:

1. What is expressly stated in the specification. The contractor is both obliged to comply with

this and entitled to rely upon it, except where it is inconsistent with the contractors overriding duty e.g. to achieve fitness for purpose.

2. What is not expressly stated in the specification but would be understood to be part of the task

which the contractor has undertaken, e.g. to achieve fitness for purpose.

The contractor would be obliged to undertake such work and would be unable to claim for the

cost, following Wilson v Wallace and Williams v Fitzmaurice. This is more likely in cruder

contracts than under a sophisticated form of contract like FIDIC, although the learned authors

of Keating remark13 that Even in an exactly defined contract there is usually room for the implication of some obligations by the contractor so that their performance is not extra work.

3. What is not expressly stated in the specification and would not be understood to be part of the

task which the contractor has undertaken to achieve fitness for purpose. The contractor can

claim payment for this: Patman & Fotheringham v Pilditch. As Keating remarks14: the greater the detail used in the bill of quantities or other contract documents to describe the

obligation for which the lump sum is payable, the less scope there is for (the implication of

the contractors obligation to do the work).

4. Work ordered expressly by the client as a change to that specified but still within the contract.

The contractor must do it but cannot claim payment for it: Alfred McAlpine v Transvaal.

These propositions are reasonably straightforward and can be stated as generally applicable, at least in

common law jurisdictions. As indicated above, they nevertheless bear repetition because of the

tendency of some protagonists in construction projects to regard all changes as creating automatic

entitlement.

There are, however, more complex scenarios.

5. Work ordered expressly by the client as a change to that specified but not within the original contract is such a scenario. Of course, it occurs frequently. The starting point is that the

contractor must do it but can claim payment for it. This can be derived from general law:

Rumpff ACJ in Alfred McAlpine The employee may receive and accept instructions which cannot be regarded as falling under the original contract the employee is entitled to fair remuneration for that work or from contract provisions, as under FIDIC 4th Clause 52. But the scenario can become more extreme, in terms of the departure from the original agreement.

The scope of the operation of the variation provision is then less straightforward and so is the

issue of entitlement of the contractor to remuneration.

As Murdoch and Hughes15 observe, It must be borne in mind that the existence of a variations clause does not entitle the employer to make large scale and significant changes to the nature of the works as

these are defined in the recitals to the contract. In particular, variations that go to the root of the

contract are not permissible. The authors contrast two English cases to make the point. In Blue

13 op cit p. 121. 14 op cit p. 121. 15 J. Murdoch and W. Hughes Construction Contracts Law and Management 3rd ed 2006 p. 203.

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Circle Industries Plc v Holland Dredging Co (UK) Ltd16, the client dock owner purported to instruct

the contractor not to deposit into a lake fill material from dredging as specified but instead to

construct an artificial island with it. This was held to be beyond the scope of the original contract and

so was not a variation.

By contrast, in McAlpine Humberoak v McDermott International17, an oil and gas case, the

construction of a drilling platform went from the 22 engineers drawings on which the claimants tendered to 161 drawings, as a result of a stream of design changes: The trial judge ruled that these changes were so significant as to amount to a new contract, but the Court of Appeal held that they

could be accommodated within the contractual variations clause.18

Changing the character or quality or kind of work is contemplated by FIDIC 4th19 as one of the types of variation which can be ordered. However, even where there is contractual provision for variation,

the extent of it has been challenged. The case of Sir Lindsay Parkinson v Commissioners of His

Majestys Works20 is regarded as a leading example of the impact of volume of changes exceeding the capacity of the variation provisions.

The contractors had agreed to build a factory for the (state) employer for an estimated cost of 3.5

million with provision for a further 300,000 of extras. It is worth observing here that FIDIC 4th21

contemplates a figure of 15% of value, not as a maximum of permitted variations, but as a threshold at

which the provisions for remuneration of the contractor change. This was the issue in the Sir Lindsay

Parkinson case. The extra work ordered by the Employer had been so extensive that the total cost

was almost 7 million, an increase in the region of 100%. The Court of Appeal held that they were

amply justified in implying a term that the Commissioners should not be entitled under the contract to order work materially in excess of the agreed sum The additional work called for and executed later was something outside the contemplation of the partiesthe contractors executed it at the request of the Commissioners and they are entitled to be paid a reasonable profit or remuneration

in respect of it.

This case has been widely accepted as positing a maximum of increases in quantity of work beyond which the contractor cannot be required to go within the constraints of the existing agreement, with

major compensation implications if he nevertheless agrees to all the increases.

It is therefore worth setting against this acceptance the view of Richard Wilmot Smith QC22 that the

case was demonstrably wrongly decided. His reasoning was as follows: Because textbooks take the case at face value, it is necessary to take a little space making this good. In that case, the

employer, the Ministry of Works, contracted with Parkinson for the construction of a munitions

factory under a standard form of contract which permitted the ordering of variation and their valuation

in the ordinary way. So they entered into a fresh agreement with Parkinson which provided for

Parkinson to accelerate and work uneconomically so as to complete the work. The contract provided

that the estimated value of that work was 5m and it was further agreed that there would be payment

of profit on top of cost in a range of between 3 and 6% of the 5m, namely 150,000 to 30,000. A

great deal of extra work was ordered at a cost of 6.68m and the Ministry said that Parkinson was

entitled only to the profit of 150,000 to 300,000 as agreed. Parkinson claimed a quantum meruit on

the profit element. the objection the Court of Appeal had was to the contention that a contractor would agree to take on an infinite amount of work for a fixed and unvaried profit. The case can be

explained on the facts on the basisthat the additional work did not fall within any power to vary the

16 [1987] 37 BLR 40. 17 [1992] 58 BLR 1. 18 Nael G. Bunni, The FIDIC Forms of Contract, 3rd edition, Oxford 2005. 19 Clause 51.1. 20 [1950] 1 All ER 28. 21 Clause 52.3. 22 R. Wilmot Smith QC Construction Contracts: Law and Practice 2nd edition 2010 p. 85.

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work. However, the contract did contain within it the power to vary the work. It is hard to see how,

in principle, that power can apply to some variations and not others unless there truly is a principle

that additional work to a volume beyond that which is contemplated is to be rewarded on a quantum

meruit. However, there is no such principle.

Another uncertain scenario is that which occurs when the contractor is requested to carry out work in

a particular way not contemplated in the initial contract. The crucial question here will whether the

request is consistent with the original obligations, in which case it could be brought under the

McAlpine v Transvaal principle, or whether it is a departure. In Costain Civil Engineering v Zanen

Dredging23, subcontractors were requested by the main contractors to perform works which were not

authorised variations, i.e. not those which the main contractor was entitled to make to achieve the purpose of the main contract. The reason behind the method of working requested by the main

contractor was that it had covertly entered into an agreement with the client for the clients own commercial purposes, unknown to the sub-contractor. The Building Law Reports Editors in their

Commentary on the case describe this24 as a dramatic departure from the contractually envisaged solution Accordingly, Zanen was entitled to be paid for these works on a quantum meruit, which would take into account the commercial value of the benefit to the client.

Deletion of work by variation

Thus far the scenarios considered have been of the ordering of additional work or the different

performance of existing work.

There are serious practical issues also, however, in the use of the variation power to omit work. This

is expressly contemplated by FIDIC 4th25 omit any such work.

The first issue is the reverse of the Sir Lindsay Parkinson point. The variation power enables the

employer to order extra work, but if that extra work reaches a particular quantum, and/or changes the

character of the contract at least so the interpretation of that case goes there are consequences, notably financial consequences. The reverse of this is the deletion of work. In principle, it should be

treated in the same way and to some extent, it is.

The deletion of work has, at least in the United States, been subject to application of the cardinal change doctrine by which cumulative changes to the scope of work create an entitlement in the contractor who is subject to them, once a certain quantum is reached. However, the matter is by no

means as simple as that, since the contractors entitlement may itself be subject to deduction. US commentators Professor Justin Sweet and Marc Schneier have posed the question26 Suppose the change reduces the work. Does deductive change require that overhead and profit also be deducted

for deleted work?

The answer, at least in the US courts, appears to be that it does. The authors conclude that, while use

of the American Institute of Architects form of contract would probably lead to no deduction, Section

7.3.8 appears to preclude reduction of overhead and profit if work is deleted the opposite would apply more generally, citing the federal procurement decision of Algernon Blair Inc27, which held that

The same principles used in pricing additive changes apply generally to deductive changes. The authors conclude that overhead and profit would be deducted when work is deleted. Similarly, in the case of Sante Fe Engineers28, the US Armed Services Board of Contract Appeals held that In

23 [1996] 85 BLR 77. 24 p. 81. 25 Clause 51.1(b). 26 J. Sweet and M. Schneier Legal Aspects of Architecture, Engineering and the Construction Process 2008 p. 470. 27 (1965) ASBCA No. 10738. 28 (1991) ASBCA No. 31762 91-1 BCA 23.

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measuring deductive change adjustments, we are guided by the principle that the equitable adjustment

should not increase a contractors loss, nor decrease it at the Governments expense.

In principle, if the Sir Lindsay Parkinson case is correctly decided, or, if not, if a more restricted

version of its findings should apply, the reverse should also be true of deletion of work by variations.

In other words, deductive change could also transform the nature of the contract, for instance, if there

was only a tiny percentage remaining of the works originally contracted for.

But there is one major point of distinction between positive and negative variation. The common law

courts have repeatedly intervened to prevent the use of variation powers to delete work in order that it

shall be executed by another, typically by another contractor who will do the work more cheaply.

Although the Zanen case29 is an exception, it is uncommon for judicial scrutiny of the purposes for

which extra work is ordered. But it is so clearly established that this is not a legitimate use of an

ordinary variation power, that the FIDIC contracts recognise the fact with a provision in line with this

prohibition. Thus the power30 to instruct the contractor under the variation clause to omit any such work is qualified by the words but not if the omitted work is to be carried out by the Employer or by another contractor.

The original authorities in this area were principally Australian. Thus in Carr v JA Berriman Pty

Ltd31, the High Court of Australia had to consider a situation where the contract works had included

provision for the fabrication and supply of structural steel by the contractor. This element was

subsequently deleted from the specified works by way of a variation, in order to allow the employer to

enter into a contract with a third party to supply the steel, the consequence of which was a substantial

decrease in the original contract sum. Fullagar J held that a power in an architect to hand over at will any part of the contract to another contractor would be a most unreasonable power, which very clear

words would be required to confer. In Commissioner for Main Roads v Reed & Stuart Pty Ltd32, the public authority employer had agreed with the engineering contractors under a road construction

contract that, if sufficient topsoil for laying on embankments could not be obtained, the employers engineer could direct the contractor to obtain it, an estimated quantity and price already having been

given for topsoil. The amount directed by the engineer to be obtained was approximately 50% of the

estimated quantity. Stephen J in the High Court of Australia reviewed the exercise of the variation

power under the contract and held that What it clearly does not permit is the taking away of a portion of the contract work from the contractor so that the proprietor may have it performed by some other

contractor.

The English courts have adopted a similar approach in Amec Building Ltd v Cadmus Investments Co

Ltd33. A contract had been made for the construction of a shopping centre, including a food court

covered by certain provisional sums in the original contract sum. The food court element was

withdrawn from the provisional sums. The court, following expressly Carr v JA Berriman, held that

this was not a proper exercise of the variation power under the contract; it was not permissible to

arrange for the omitted work to be carried out by a third party.

This aspect of contractual variations has, it may be noted, influenced the law relating to exercise of

termination powers. In the case which makes explicit this important connection in the English

Technology and Construction Court Abbey Development Ltd v PP Brickwork Ltd34, His Honour Judge

Humphrey LLoyd indirectly confirmed the principles supporting the position on variations: Just as the approach to variations clauses must be one which respects a contractors right to complete the works which it has undertaken to do, and therefore clear words are required for an intrusion, so too

29 Supra at note 21. 30 51.1(b). 31 [1953] 27 ALJR 273. 32 [1974] 48 ALJR 461. 33 [1996] 51 Con LR 105. 34 [2003] Adj LR 07/04.

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with termination provisions. If they are to take away the contractors right to finish the work, they themselves not only must be read clearly and carefully, but if they are to be operated, they must be

plainly and carefully operated.

In Carr v Berriman, the court stopped short of holding that variation provisions could never permit

deleted work to be awarded elsewhere. Such a result could only be achieved with careful and very

explicit wording, which would be read contra proferentem. Even, then, the manner of the operation of

the variation power for the purpose of deleting work will be subject to judicial scrutiny if challenged.

That FIDIC chose to exclude expressly use of the power to omit parts of the work to be carried out by

others is indicative of the extent to which this reflects market perception of what is acceptable. The

exclusion has been carried over into the 1999 Red Book Each Variation may include omission of any work unless it is to be carried out by others.35

CLAIMS PROCEDURE

Enforceability of Conditions Precedent

The purpose of the claims procedure in FIDIC 4th and other construction and engineering contract

forms is to impose a discipline for the submission of claims, to ensure that they are made in a regular

and manageable form. To encourage the Contractor to maintain the discipline, it is usual for non-

observance to be attended by some consequences. This part of the paper concerns the crucial issue as

to whether these are expressed as conditions precedent, failure to observe which results in the claim

being denied. FIDIC 4th can be regarded as at the softer end of the spectrum, indeed, some would not regard its claims procedure as subject to a condition precedent, in the sense that the claim is not

lost for non-observance.

Sub-Clause 53.1 (Notice of Claims)36 states: Notwithstanding any other provision of the Contract, if the Contractor intends to claim any additional payment pursuant to any Sub-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. Sub-Clause 53.3 (Substantiation of Claims)

37 states: Within 28 days, or such other reasonable time as may be agreed

by the Engineer, of giving notice under Sub-Clause 53.1, the Contractor shall send to the Engineer an

account giving detailed particulars of the amount claimed and the grounds upon which the claim is

based. These are the requirements but the consequence of non-compliance in Sub-Clause 53.4 (Failure to Comply) is only that entitlement to payment is limited to the amount which the Engineer or

arbitral tribunal assessing the claim considers to be verified by contemporary records.

In Her Majestys Attorney General for the Falkland Islands v Gordon Forbes38, the contract in question was subject to standard FIDIC 4th provisions. A dispute arose between the parties which

was referred to arbitration. The Employer later obtained permission to make an application for

interpretation of the phrase contemporary records. The arbitrator had to decide to what extent, if at all, a Contractor would be able to rely upon witness evidence set down in witness statements in

making a claim for additional payment under the FIDIC Conditions of Contract. Both the arbitrator

and the Supreme Court of the Falkland Islands agreed that a witness statement prepared after the

currency of the works could not amount to a contemporaneous record. Whilst each case would turn

on its own facts, contemporary records had to be original or primary documents made with a sufficient nexus between that which is to be recorded and the act of recording. The words of Sub-

35 Clause 13.1 (d). 36 FIDIC 4th Edition 1987. 37 Ibid. 38 Her Majestys Attorney General for the Falkland Islands v Gordon Forbes Construction (Falklands) Limited [2003], BLR 280.

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Clause 53 were clear, and no claim without contemporary records could succeed. Witness statements

could not stand as alternatives to contemporary records, and could be used only in so far as they were

able to identify or to clarify extant contemporary records. While this could be regarded as a condition

precedent in establishing certain entitlements to payment, it falls short of constituting a condition

precedent by which an entire claim is automatically lost.

In contrast to FIDIC 4th, Sub-Clause 20.1 of the 1999 Red Book includes actual conditions precedent

that the Contractor needs to meet in order to be able to claim extension of Time for Completion and/or

additional payment. Sub-Clause 20.1 of the Red Book39 states: If the Contractor considers himself to be entitled to any extension of 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 circumstance giving rise to the claim. The notice shall

be given as soon as practicable, and not later than 28 days after the Contractor became aware, or

should have become aware, of the event or circumstance. 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.

Before the FIDIC rainbow of contracts was published in 1999, the FIDIC contracts included general provisions for dealing with claims for additional payment by the Contractor and then separate

provisions for claims for extension of time. The current FIDIC forms now harmonise these

procedures so that only one procedure, set out in Sub-Clause 20.1, applies to the Contractors claims for both extensions of time and additional payment. Now, there is a strict notice obligation on the part

of the Contractor. If he fails to comply with this notice provision, it is intended that he forfeits his

right to the claim.40

According to Christopher Seppl: After much reflection, the conclusion of the FIDIC drafting committee was that there must be a notice of claim within 28 days for there to be a valid claim so that

all involved are aware that there is an event or circumstance where extra payment or time may be due

to the Contractor. Twenty-eight days appeared to them to be a reasonable period. International

Contractors tend to be fairly large companies, or consortia companies, that employ a staff that is

experienced in claims and therefore is fully capable of recognising a claim situation when it arises.

Consequently, if the Contractor indeed has a bona fide claim, there would seem to be no good reason

why an experienced Contractor should not be required, under pain of forfeiture, to give a notice of

claim within 28 days (or four weeks) of the event or circumstance giving rise to the claim.41

In addition, it seems that the FIDIC Task Group were influenced by the fact, that in their view,

Contractors are usually in a better position to, and more pro-active in, identifying matters to claim

than the personnel of the Employer.42

By contrast: If the Contractor fails to comply with this notice provision, it is intended that he forfeits his right to that claim. On the other hand, in all the Books apart from the MDB, the Employer or

contract administrator is only required to give a similar notice43 as soon as practicable. There is also no sanction in any of the Books if the Employer (or contract administrator) fails to comply with

this requirement. The international contractors group EIC (European International Contractors) considers that this unequal treatment of the Parties demonstrates the unfair balance between the

39 FIDIC Conditions of Contract for Construction First Edition 1999. 40 Ellis Baker, Ben Mellors, Scott Chalmers and Anthony Lavers FIDIC Contracts: Law and Practice,

(London, 2009), pp. 310-311. 41 Christopher R. Seppl, Contractors Claims under the FIDIC Contracts for Major Works (2005) 21(4) Const LJ 278 at 287. Mr. Seppl is Legal Advisor to the FIDIC Contracts Committee. 42 Christopher Wade, Chairman of the FIDIC Contracts Committee 1999 to 2006, Claims of the Employer, a presentation given at the ICC-FIDIC Conference in Cairo in 2005, wwwl.fidic.org/resources/contracts/wade_emp_claims_2005.pdf). 43 Notice (G).

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obligations carried by the Employer and the Contractor.44 The EIC further considers that The penalty for [the Contractors] failure to comply with a purely technical requirement to give notice of a claim is unduly harsh, particularly when it would also apply to when the event or circumstance giving rise to the claim is caused by the Employer, for example, under suspension under Sub-Clause

8.9.4546

As to enforceability, although conditions precedent in claims procedure are sometimes seen as wholly

beneficial to the Employer, which is the view of contractors organisations such as EIC, the reality is more complex. A further development in the new 1999 FIDIC forms is the introduction of a similar

(but, in key ways, different) claims procedure by the Employer. This procedure is set out in Sub-

Clause 2.547. It sets out not only the procedure for the Employers claims but is also intended to regulate the Employers right to withhold payment or to set off from certified amounts. This was an entirely new provision as compared with FIDIC 4th.48 However: It was considered that, if the Employer had to give notice within a specified period calculated from the date when the Employer

was aware of the event or circumstance giving rise to his claim, such date might be regarded as being

when observant Employers Personnel should have been aware of a default by the Contractor, thus unfairly relieving the Contractor of liability.49

The main authority determining the issue of conditions precedent under English law is CJ Sims Ltd v

Shaftesbury50 where the Contractors were entitled under a letter of intent (comprising a contract) to

recover their costs and overheads all of which must be substantiated in full to the reasonable satisfaction of our quantity surveyor. The contractors sought to claim 1 million and the court had to try as a preliminary issue whether the claim was barred because the contractors had not complied with

this requirement.

The High Court judge referred to the House of Lords authority of Bremer51, where Lord Wilberforce

said: Whether this clause is a condition precedent or a contractual term of some other character must depend on (i) the form of the clause itself, (ii) the relation of the clause to the contract as a whole, (iii)

general considerations of law.52

44 EIC, EIC Contractors Guide to the FIDIC Conditions of Contract for Construction (2002, European International Contractors), p.20. 45 Ibid., p. 19. 46 Ellis Baker, Ben Mellors, Scott Chalmers and Anthony Lavers FIDIC Contracts: Law and Practice,

(London, 2009), p. 311. 47 Sub-Clause 20.2 in the Gold Book 48 Ellis Baker, Ben Mellors, Scott Chalmers and Anthony Lavers FIDIC Contracts: Law and Practice,

(London, 2009), p. 310. 49 FIDIC Guide, p.80. 50 CJ Sims Ltd v Shaftesbury plc [1991] 60 BLR 94. 51 Bremer Handelgesellschaft mbH v Vanden Avenne-Izegem [1978] 2 Lloyds Reports 109. 52 Ibid. at p. 113.

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CJ Sims v Shaftesbury illustrates factors for and against condition precedent status:

Factors For / Against Condition Precedent Status53

For Against

1. The prominence of the requirement in the sentence together with the mandatory must pointed strongly to the existence of a condition

precedent.

Payment ought to be made for completed work.

As a generalisation, the greater the practical

prejudice likely to result from a failure to give

notice, the more likely a condition precedent

interpretation, while absence of any real prejudice

may suggest the contrary.

2. If it were not such a condition then there would be little sanction in practice against the

Contractor ignoring the requirement. There might

be a cross-claim for damages for breach of the

requirement but that would not be easy to

establish, since it would require the Employer to

prove what specific damage flowed from the

failure of the Contractor to submit the costs for

substantiation.

In the CJ Sims case, the clause was not expressed

to be a condition precedent. The words which

usually signify such effect (provided that; only if; not until; subject to) are absent. The use of the word must is not enough.

3. The ostensible purpose of the clause was to provide for payment by a method (substantiation

by the quantity surveyor) which was unqualified.

Where the words are not clear, they should be

construed contra proferentem.

Judge Newey decided between the factors above54 as follows: In view of the authorities it is clear that in deciding the meaning of the last part of the statement, the width of its application and whether

it creates a condition precedent, I must consider its wording, the surrounding circumstances when the

contract of which it forms part was made and what was its object.

1. wording- words were peremptory i.e. must be substantiated in full.

2. the surrounding circumstances when the contract of which it forms part was made procedure for submission of claims for verification was in line with industry practice.

3. what was its object the object of the last part is to ensure that the (contractors) submit a detailed claim with supporting documents, upon which the (clients) quantity surveyor can advise them, and they, if appropriate, make payment, so hopefully avoiding resort to

litigation.

Judge Newey concluded: I think that the last part (of the clause) does create a condition precedent. I reach that conclusion because of the mandatory nature of the words used, the practice in the industry

and because the last part could not lead to settlement of the (contracts) claims and avoidance of legal

proceedings unless it operated as a condition precedent.

Judge Newey commented on the alternative of a breach of contract: A right conferred upon the defendants to claim damages for being put to extra expense in investigating the (Contractors) claim

53 The points in the table originate from the Building Law Reports Commentary. 54 CJ Sims Ltd v Shaftesbury plc [1991] 60 BLR 94 at pp 100-101.

12

would be a poor substitute for them being able to investigate the claim easily and form a sensible view

of it.

Other common law jurisdictions appear to have dealt with conditions precedent to payment in ways

similar, through not identical, to the English law position:

Canada o Jack Bradley (Maritimes) Ltd v Modern Construction [1996] 59 DLR (2d) 519, where

a building contract gave a procedure for changes and for settlement of disputes by

arbitration. The contractor claimed payment for changes in litigation but it was held

on appeal that the procedure for valuation of changes and arbitration was a condition

precedent which had not been satisfied: the court observed that it should not lightly

interfere with breach of contract.

o MacDougall & Co. v Penticon [1914] 7 WWR 486, where the parties had agreed to refer all claims to the Engineer. His estimate and decision was to be a condition

precedent both to the right of the Contractor to receive any money and to the right of

the Contractor to commence any action. The appeal court held that it was the

intention of the parties in the contract that all matters, including payment, should be

adjudicated and determined by the Engineer. It was not open to the Contractor to go

straight to arbitration and the right to action had been lost by non-fulfilment of the

condition precedent.

South Africa an appeal case - Alfred McAlpine & Son (Pty) Ltd v Transvaal Provincial Administration [1974] (3) SA 506, where Corbett AR commented obiter very negatively on

the condition precedent argument: I incline to the view that Clause 51 was intended not to create an absolute bar to the Contractors right of payment but merely a monthly claims procedure.

Australia:

o Wormald Engineering Pty Ltd v Resources Conservations Co. International [1988], which concerned a Contractors failure to give notice of its claim for additional payment within the procedure of Clause 40 of the sub-contract. Chief Justice Rogers

asked: was it a condition precedent to entitlement to payment that notices should have been given by the Contractor pursuant to the last two clauses of Clause 40? His answer was decisive: the regime prescribed will not necessarily work to give complete satisfaction every time. Nonetheless, it is the best machinery that could be

devised to accommodate the intended purpose If I accede to the argument for the appellant and hold that compliance with the requirement for exchange of notices was

not a condition precedent to the entitlement of the Contractor to claim payment, what

recourse would a principal have in the event of breach? An action for damages for

breach of the Contractors obligations is to me not a satisfactory solution. Quantifying the damage suffered would be a matter of no little difficulty.

o Opat Decoratin Service v Hansen Yuncken [1995] Building and Construction Law 360 in The Supreme Court of South Australia, where the decision followed Wormald.

Beyond this, there are particular types of legal system, where enforceability of such clauses has been

questioned by commentators; such doubts need to be treated seriously.

For example, in his article on the ICC Model Contract for major project, Marwan Sakr considers

whether time limitation and time-barring clauses would be enforceable under the laws and public

13

policy rules of jurisdictions within the Arab world.55 It should be emphasised that these opinions

cannot be accepted uncritically, but the questions raised provide a useful focus for discussion.

The time-barring clauses contained in Sub-Clauses 53.1 and 53.3 of the FIDIC 4th Edition of the Red

Book56 are an illustration of such provisions, which Sakr suggests may be subject to challenge under

the laws of certain Arab countries. Unlike the 1999 FIDIC Contracts, the ICC Model Contract does

not utilise numerous time limitation and time-barring clauses.

Generally as Sakr observes, when a party is barred from raising a claim due to the elapsing of a

certain period of time, this period of time may be analysed under civil law systems (including Arab

legal systems) either as a Statute of Limitations or preclusion period.57 While the Statute of

Limitations (prescription period) extinguishes the right of action itself, the preclusion period limits in time the exercise of that right of action (or remedy) by its holder. The consequence of the

distinction is that the Statute of Limitations in Arab law systems is set out in the legislation itself and

may not be extended or reduced by the agreement of the parties being of a public policy nature. Some

preclusion periods may be modified by agreement of the parties. In Arab Civil Codes that are

influenced by the Sharia (for example Jordan, UAE, Saudi Arabia) the effect of the Statute of

Limitations is only to bar the remedies and the claim but not the substantive right itself. This is a

general rule of Islamic law pertaining to public policy and is similar to common law rules in this

respect. It should be observed that the reported common law cases on conditions precedent do not

deal with prescription periods. Civil Codes of these jurisdictions in connection with the Statute of

Limitations (forbidding their modification by parties agreement) are likely to apply. The law will forbid the parties to reduce or increase the limitation period provided for in the law, in conformity

with the principles of Sharia. Article 53.1 of the Model Contract states that: Neither Party shall be entitled to claim from the other Party for any loss or damages howsoever caused more than ten years

after Taking-Over.

This provision seems to apply to all kinds of liabilities referred to in chapter 9 of the Model Contract.

The enforcement of this provision, however, has different outcomes from one Arab country to another

depending on the general prescription period set out in the respective Arab legislation and whether the

local rules forbid or allow the reduction by contract of the general prescription period.58 The

principles of Sharia do not allow any modification by the parties of the prescription period set forth in

the legislation. This prohibition is usually repeated in codifications of Arab civil laws. This could

provide an obstacle to the implementation of Article 53.1 in Arab jurisdictions, although it is by no

means certain that it would be the view of any given court, since it cannot be assumed that conditions

precedent in claims procedures are intended to, or do, alter the statutory limitation period.

In concluding this section, it should be noted that, at least in the common law countries, the

prevention principle can provide a further complication, where conditions precedent are attached to

the procedure for claims for extension of time (EoT).59 Far from being solely beneficial to the

Employer, excessively harsh conditions precedent in the procedure for claiming EoTs could

jeopardise the Employers entitlement to liquidated damages. Although it may not be the position in certain jurisdictions such as the UAE, in general, it is in the Employers interest to ensure that the provisions are properly drafted and operated, just as it is then in the Contractors interest to ensure

55 Marwan Sakr, Turnkey Contracting Under the ICC Model Contract for Major Projects: A Middle

Eastern Law Perspective, The International Construction Law Review, [2009], Vol. 26, Part 2,

pp. 146-160. 56 Edward Corbett, FIDIC 4th, A Practical Legal Guide, commentary under cl. 53; Nael Bunni, The

FIDIC Form of Contract, the 4th ed. of the Red Book (2nd ed., Blackwell Sciences, 1997), para.

16.4.1, pp. 334-335. 57 Supra at note 55. 58 Ibid. 59 Ellis Baker, James Bremen and Anthony Lavers, The Development of the Prevention Principle in

English and Australian Jurisdictions, The International Construction Law Review, [2005], Vol. 22,

Part 2, pp. 197-212.

14

that they are observed to avoid compromising its entitlement.

Conclusion

Most standard forms and bespoke forms of contract provide a mechanism whereby the Employer can

order changes to the work to be done. This is usually defined as a variation to the quantity or quality

of the work to be done, by way of addition, omission or variation. The power to order varied work,

once enshrined in the contract, becomes a right to do so. This right is usually used frequently by

employers who have not had all their requirements sorted out at the time of the letting of the contract.

It is a rare contract which proceeds from commencement to completion without the Employer

invoking its right to order variations to the work.60 FIDIC 4th, like other sophisticated contract forms,

anticipates and provides for this need. However, two points should be observed. First, not all

construction contracts, especially bespoke contracts, have equally proven provisions, so assumptions

cannot be made as to their effects, for example, in terms of the Contractors financial entitlement. Second, and related to the first point, contract provisions cannot anticipate every eventuality in the

project. Large scale additions, deletions, or changes in the character of the work may not be clearly

covered by the variation powers. It is one of the conclusions of this paper that automatic assumptions

cannot safely be made as to whether such changes will, or will not, be regarded as giving rise to

compensation entitlement within, or without, variation provisions, or indeed to any such entitlement.

So far as claims procedure is concerned, the inclusion of conditions precedent can be an emotive

subject. The movement from the FIDIC 4th provisions to those in the 1999 Red Book (and other

rainbow forms) is an example of this. Contractors can perceive them as showing aggressive intent on

the part of an Employer. It is, however, incorrect to see the inclusion of conditions precedent in

claims procedure as automatically beneficial to the Employer. This paper has referred to some of the

genuine doubts which exist concerning enforceability, with examples from common law and Middle

East jurisdictions. As a device to frustrate otherwise valid claims, conditions precedent make an

uncertain contribution to claims procedure. If they can be made to work, they can provide an orderly

framework within which the Contractor can have its claims resolved efficiently, while avoiding

excessive burden on the Employer and its professional team.

Ellis Baker MA LL.M (Cantab) Solicitor is a Partner and Head of the Construction & Engineering

Practice Group in the London office of White & Case LLP. He is lead author of FIDIC Contracts:

Law and Practice (Informa, 2009).

Professor Anthony Lavers LL.B M.Phil Ph.D D.Phil FRICS, Barrister is Counsel in the Construction

& Engineering Practice Group in the London office of White & Case LLP and former Chairman of

the UK Society of Construction Law.

The authors wish to record their thanks to Laura Teodorescu MA (Oxon), Solicitor, Associate at

White & Case LLP, London for her assistance in preparing this paper.

60 Richard Wilmot Smith QC, Construction Contracts Law and Practice, 2nd edition 2010