Good contracts for construction works pre-define mutual liability claims for the compensation of both parties, in particular, those that may arise from a delay or disruption in performance under the contract. Sound contracts also include a procedure that describes how to make and enforce a claim. Common examples of potential ‘claim’ situations may include the project site being handed over later than foreseen at the tender stage, the tender documentation containing errors, and unforeseeable physical conditions leading to prolongation of construction. To avoid potential disputes, a contractual process of ‘mutual claiming’ should be set up and observed.
An additional cost or delay (if any) caused by the employer, can become an additional payment to the contractor for performance under the contract (if claimed by the contractor). Examples include an extension of the insurance and the performance bank guarantee and unabsorbed time-related site and headquarters overhead cost (such as rentals for the project team offices). On the other hand, lack of standard or contractor’s delay can lead to damage compensation or delay damages claimed by the employer.
The bases of claims are as various as construction projects are. For example, in developing countries, claims that are not common in more developed countries may be encountered. In the ICC case no. 10847 (2003) (ICC, 2012), the contractor argued that the employer breached its obligation to provide a telephone connection in time and that, when it did provide one, the telephone system gave a poor quality and unreliable service. The contractor claimed additional costs and an extension of time on these accounts. While the tribunal agreed that the employer was late in supplying a telephone system and that this would have caused disruption to the contractor, the tribunal held that the contractor could not expect service on a par with that in Western Europe or the USA. Consequently, the tribunal denied the contractor an extension of time and costs on account of the quality of the telephone service.
In the same case, the contractor further claimed that throughout the period of the works it suffered power outages which caused disruption and delayed completion. The contractor claimed that the employer was responsible for the same. The tribunal found that the power outages that occurred were worse than could have reasonably been expected and that, while the contractor had not shown the actual effect of such outages on the progress of the works, they adversely affected the contractor’s progress and awarded the contractor an extension of time.
Mutual claiming is, in fact, a way to resolve mutual damages compensations while the project is still ongoing. A contractually prescribed assessment is used to estimate the costs; the contractor and the employer notify the claims to the contract administrator (to the engineer as per FIDIC) or to each other for further handling of them. Ideally, these claims should be quantified, submitted and invoiced on an ongoing (monthly) basis. The method of quantification should be described in the contract or agreed to by the parties.
To demonstrate that construction damages are a difficult area of the law, His Honour Ramsey (2006) commented on this subject as following:
Burden of proof in any claim for damages usually rests with the party making the claim, the problems of establishing delay and disruption damages in international construction arbitration are felt most acutely by the contractor or, in the case of a sub-contract, by the sub-contractor. They may have suffered loss and expense, or may feel that they have, as a result of occurrences outside of their control or contractual responsibility. They may even consider that the employer is responsible for the delay. Nevertheless unless they can satisfy the applicable requirements of procedural and substantive law, they cannot recover compensation. So far as this goes, this may seem like a statement of the obvious; unless the claim can be established, it cannot succeed. But making out a claim for delay and disruption damages under a construction contract can be problematic.
According to the FIDIC forms, a claim implies a specific requirement raised by either of the contracting parties. Based on pre-defined situations in a particular clause or otherwise in connection with the contract, such a requirement must be notified to the engineer (or in some cases to the other party). The contract sets out a procedure for making a claim that must be followed for successful enforcement of the claim. On the contractor’s side, the requirement is usually to extend the time for completion or to increase the price of work via an additional payment from the employer. The employer, on the other hand, usually requires an extension of the defects notification period or to decrease the price of the work via an additional payment from the contractor. A ‘claim’ is a specific contractual procedure, distinct from a purely legal definition. However, entitlements to payment or damage compensation do inevitably overlap with the principles of the governing law. The actual legal status of a claim has to be evaluated on a case-by-case basis and stage of enforcement. This, however, does not relieve the contracting parties of the duty to follow contractual procedures whenever making a claim.
In the narrow sense, the word ‘claim’ in the context of a common law construction contract is the assertion made by a party to a contract of an entitlement pursuant to the express provisions of the contract in question. However, in many countries, the word ‘claim’ is interpreted to mean a civil action brought before a court of law.
In a construction project, it is important for the contractor to make the contract administrator and the employer familiar with a problem or with subsequent requirements to extend time for completion or increase in the price of the work as soon as possible to allow a fair and quick decision to be made. This helps to protect the employer, which then has more control over project costs and is able to make necessary adjustments to budget and use contingencies. The agenda as a whole comes from the contractual risk allocation to construction project participants. The ability to distinguish between the risks borne by the contractor and the employer further helps to avoid disputes.
It is also argued that the purpose of a claim is to provide the contractor with defensive mechanisms against arbitrary employer behaviour, should the contractor’s legitimate demands be refused. The employer is usually protected by time limits (and by related particular processes described below) within which the claim must be notified. An unwritten, traditional rule was that the contractor is subject to stricter and more formal claim procedures because the contractor is usually the best equipped (particularly in terms of human resources) for more aggressive enforcement of its requirements. Recent trends demonstrate the need to establish the same contractual rules and conditions of claim management for both the employers and the contractors. This trend is confirmed by the establishment of time bars for employer claims in the newest FIDIC, NEC and further forms to deal with ‘on-site realities’. For example, where aggressive employer’s claim management has put contractors (being the weaker party) in ‘take it or leave it’ type situation in public procurement projects.
A claim is not a dispute. In fact, it is a method of avoiding disputes. Notice of a claim or of any requirement in general (whether by the employer or the contractor) cannot be perceived as an attack that must inevitably evoke a defence. It is an obligatory contractual requirement to be negotiated by the construction project participants. It is usually the employer who chooses this system as a part of the project management conditions by way of contract. If the contractor accepts this system, they are obliged to use it. In other words, the aim is to ensure that the significant issues which often lead to a price increase or extension of time are addressed and solved immediately (during the realization) and not after project completion.
Contractors frequently perceive claim procedures as unfair and unnecessary. The reason is that the contractor carries the burden of notifying, quantifying, documenting and proving the claims even if the claims arise out of events beyond their control. However, based on common law tradition, a notice of claim is a condition precedent for an additional payment or extension of time.
A notice of claim is ideally done via a letter signed by an empowered representative and delivered to the contract administrator (the engineer) in the form and by the period stated in the contract. In the recent case (under FIDIC P&DB/1999 Yellow Book) Obrascon Huarte Lain SA -v- Her Majesty’s Attorney General for Gibraltar  EWHC 1028 (TCC) the judge dealt with the form of a claim notice and established minimal requirements for a valid claim in the following way. The claim is (i) made by notice in writing to the engineer, (ii) the notice describes the event or circumstance relied on, (iii) the notice is intended to notify a claim for extension of time (or for additional payment or both) under the contract or in connection with it, and (iv) it is recognisable as a ‘claim’. If the relevant information is transmitted from the empowered representative to the contract administrator (the engineer) and this can be proved, a notice of claim can be part of a record made at a meeting, if signed by the empowered representative and the contract administrator (the engineer). In some situations, a formal notice is not necessary as was held in the ICC case no. 10847 (2003) (ICC, 2012). In this case, the contractor claimed an extension of time and additional costs arising from a significant general increase in quantities which resulted from the contractor’s purported acceleration of works. The tribunal considered that, while no formal notice of claim had been given, the notice provision to have been satisfied because the contract administrator (the engineer) would have been aware of the increase in quantities at the time they were incurred and had contemporary records of them.
Claim management is an integral part of project management in large construction projects worldwide. Contractors from European jurisdictions must understand that timely notices of claims are a necessary aspect of their routine work whenever FIDIC and similar forms are used. A situation may arise where the claims are not resolved ‘in time’ according to the contract and may become time-barred. Late notice can lead to refusal to deal with claims by the contract administrator (or the employer) who can advise the contractor to initiate adjudication, litigation or arbitration for failure to follow formal procedures.
Compliance with claim management procedures will help to ensure that project participants cooperate. This will reduce the adverse impacts of all project-related risks (of the realized hazards) on the participants, as much as possible, and allow the project to be considered ‘successful’ once completed. Claims are not positive things, but they can be efficiently avoided—particularly at the project preparation phase. In cases of ill-prepared projects, claims will become an unfortunate, daily routine. Most claims can be avoided by preparing clearly understandable and precise contractual documents.
The term ‘anti-claim management’ is sometimes encountered. Following on from previous paragraphs, the primary ‘phase’ allowing the use of anti-claim management is the tender preparation phase. Some countries have legal regulations dealing with claim management. For example, Germany uses the DIN 69905 Standard and the USA has The False Claims Act (31 U.S.C. §§ 3729–3733). The latter is also referred to as the ‘Lincoln Law’. This is an American federal law that imposes liability upon persons and companies (typically federal contractors) who defraud government programmes.
The listing of potential claims in the contract will facilitate claim management to reflect the original risk allocation. It is a general rule that if a risk of a specific hazard is allocated to one party, the other party can usually claim additional payment and/or an extension of time for completion after risk realization.
The general definition of ‘claim procedure’ is provided in Sub-Clause 20.1 of the FIDIC forms. Procedures for claims for extensions of time for completion and/or for additional payment are laid down there. In general, contractor claims can be subdivided into two categories:
- those listed in the contract (ex contractu)—foreseeable events with corresponding article(s) in the contract; and
- others connected with the contract.
Claims for extensions of time for completion are defined specifically at Sub-Clauses 8.4 and 8.5. The option to raise a time claim is anticipated (under FIDIC CONS/1999 Red Book) where there is a variation to or other substantial change in the quantity, a cause of delay giving an entitlement to extension of time for completion under a particular Sub-Clause, exceptionally adverse climatic conditions, unforeseeable shortages of personnel or goods caused by an epidemic or governmental actions or any delay caused by the employer or authorities (meaning public administration authorities).
The general definition of ‘claim procedure’ is provided at Sub-Clause 2.5. The claim is foreseen in the form of payment and/or an extension of the defects notification period. The employer’s claims can also be subdivided into two categories:
- those listed in the contract (ex contractu)—foreseeable events with corresponding article(s) in the contract; and
- others in connection with the contract.