Disputes and How to Resolve Them

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5  Disputes and How to Resolve Them

5.1 Introduction

In construction projects, parties often make claims of one kind or another against other parties. A contractor, for example, might assert that he is entitled to an additional payment from an employer for extra work done, or to more time within which to carry out or complete the works. An employer, on the other hand, might assert an entitlement to payment for some obligation not properly performed by the contractor (the work is defective or incomplete, for example), or to an extension to a contractual period.

In this part of the Handbook we consider the different kinds of claim that might be made by one party to a construction contract against another, and the various ways in which disputes between the parties may be resolved.

In Appendix I we illustrate some of the points we have discussed by looking at each of the steps in an international arbitration about a chemical plant in Belgium.

5.2 Legal aspects of a construction project

Before we look at the different types of claim, however, it will be helpful to consider in general the legal aspects of a construction project. There are six main features that should be considered:

5.2.1 The terms of the construction contract

Earlier in this Handbook, we saw how a construction contract will often be a complex document, setting out in detail the rights and obligations of each party to the contract. So a contractor will typically have an obligation to carry out the works with reasonable diligence, for example, and an employer will have an obligation to value and pay for the works at certain intervals and in a prescribed manner. If an event occurs which causes one of the parties to the contract to suffer some detriment, the construction contract will often be the first place such a party will search to see if there is any basis on which it might be compensated by the other party or parties to the contract.

5.2.2 The law which governs the construction contract

Like any other contract, a construction contract cannot be seen in isolation from the law that governs it. When people talk about the law governing a contract, they mean the body of law according to which the rights and liabilities of the parties to the contract are to be understood. Different countries have different bodies of law associated with them – China, for example, has a body of law that is different from Russian or English law. If a contract is governed by Chinese law it will be read and understood in accordance with the principles and rules of Chinese law, which, in relation to a particular question, might not be the same as the principles and rules of another body of law. This could make a big difference in some cases. For example, if the words used in the contract are not clear, then Chinese law might produce a result different from that which would have been produced had a different governing law applied to the contract. In another example, one party might try to advance a claim against another party which Chinese law does not recognise but which might be recognised by another body of law.

The governing law of the contract is often stated in the contract documents; often, it is included in the tender documents, and may be difficult to negotiate. The choice of law will normally depend on the employer’s preference, or sometimes that of whoever is providing the project finance. Sometimes, the law of the location of the project will require that the contract be governed by local law.

5.2.3 The terms of the construction contract relating to the resolution of disputes between the parties

Construction contracts, as well as stating in detail the substantive rights and obligations of the parties to them, also typically contain terms that relate to the steps to be taken if a dispute arises between the parties which cannot be resolved straightaway by agreement. Such terms might provide for a claim to be made and considered initially by an engineer or other consultant appointed by the employer, and for a number of steps to be taken should one or other party be discontent with the initial decision. If the dispute cannot be resolved any earlier, these steps could lead to an arbitration. We consider in detail what is involved in an arbitration later in this part of the Handbook. In an international construction project, involving parties from different parts of the world, it is very usual for the construction contract to contain terms referring disputes to arbitration if they cannot be resolved at an earlier stage.

5.2.4 The law of the process for resolving a dispute

As well as the governing law of the contract, which applies to determine the substantive rights and liabilities of the parties to it, there is also a body of law which applies to the process, or procedure, for making claims arising from, and deciding disputes concerning, such rights and liabilities. So if, for example, a contract contains a term which refers disputes concerning the contract to arbitration, then the law of the process will be:

• the law that applies to determine the time limits for commencing an arbitration claim;
  
• rules for the conduct of the arbitration;
  
• whether the party who loses an arbitration can appeal to a court against the decision;
  
• whether a party can challenge an arbitration award which is made by (for example) a biased tribunal; and, generally,
  
• the control to be exercised over arbitration proceedings and the parties’ basic rights in relation to them.

Generally speaking, the law of the process or procedure will be the law of the place of the arbitration, even if the governing law of the contract is the law of another country (perhaps the law chosen by the parties). Thus a construction contract might be governed by the law of England, but because the parties had agreed to refer any disputes about the contract to arbitration in Stockholm, Swedish procedural law could apply.

5.2.5 Rights and liabilities that might arise independently of any contract

Rights and liabilities might arise in connection with a project independently of any contract. This could happen in two main types of case:

• First, where works are carried out on the basis of a letter of intent or similar basis but no contract is ever actually concluded. In such a case, it could be difficult to determine which law applies to the parties’ transaction; depending on the applicable law and the facts of the case, however, the party carrying out the work could be entitled to be paid by the party requiring or authorising it.
  
• Second, where a third party, not in any way involved in the project, causes damage or loss to a party to the project, or suffers loss as a result of some act or omission of such a party. For example, a person who causes the electricity supply to a project to be interrupted could be liable to the contractor or employer or both; or the owner of land adjacent to the project works might be entitled to compensation from one or other of the parties to a project if the works cause his land to become flooded.

5.2.6 The law which applies to a project by virtue of its location

This is an important feature of construction projects. The law of the country in which the project is to be carried out will typically include provisions ­concerning such matters as construction standards and health and safety of workers engaged on the project, and environmental controls. These provisions are often contained in highly complex sets of rules and regulations, and will often require specialist guidance. They arise independently of the ­contract and may even be at variance with the terms of the contract.

5.3 Kinds of claim

Against the above background, let us now consider the different kinds of claim that might be made by one party to a construction contract against another. We can think of such claims as falling into two broad categories:

• claims for which the contract specifically provides; and
  
• claims for which the contract does not specifically provide, but which ­nevertheless arise under or in connection with the contract.

5.3.1 Claims for which the contract specifically provides

A construction contract for a project of any size will normally specify circumstances in which a party might make a claim against another party to the ­contract. A useful example is provided by the FIDIC Red Book clauses 15.2 (b) and (c), which provide that, if the Contractor fails to comply with his obligations by abandoning the works or without reasonable excuse failing to carry them out expeditiously, then the Employer may, on giving 14 days’ notice to the Contractor, terminate the contract. In that event, the Employer may employ others to complete the work and recover the cost of doing so from the Contractor (clause 15.4). Moreover, he could recover those sums without ­prejudice or in addition to any other rights he might have against the Contractor, whether under the contract or otherwise (clause 15.2). This means the Employer could, depending on the governing or proper law of the contract, seek additional compensation from the Contractor beyond what the contract specified.

5.3.2 Claims for which the contract does not specifically provide

The above example of the FIDIC clauses points to a type of claim which is not specifically identified by the contract, but nevertheless arises under or in connection with it.

Here is an example: Suppose two parties are negotiating a civil engineering contract. The negotiations take place under pressure as the employer has only a limited time before the works must begin. He tells the other party, the main contractor, that the ground conditions meet certain load-bearing requirements for the envisaged works; he has had geotechnical surveys carried out, he says, by reputable consultants, and is prepared to assure the contractor that the ground conditions will bear the loads required by the works.

The employer then provides the contractor with these geotechnical reports; the contractor has had no time to conduct his own surveys and enters into the contract relying on the information provided. Suppose also that the construction contract itself contains a term recording the provision of the geotechnical information by the employer and stating that this information is accurate and can be relied on by the contractor.

The contractor then commences work, but finds on digging for the pile foundations that the ground conditions are wholly inadequate for the required loads. He looks again at the geotechnical reports on which he relied; on investigation, he discovers that critical data in the reports had been substituted for data in geotechnical reports which had been carried out on an adjacent site that the employer was also developing; and that this substitution resulted from the carelessness of the employer’s project management team. As a result of this carelessness, the work so far carried out by the contractor is abortive and he has suffered substantial loss.

In this imaginary case, there is no provision in the contract which specifically says that the contractor is entitled to compensation for his loss; but he could still be able to make a claim for compensation against the employer.

Let us suppose the employer is a UK company and has agreed with the contractor, a Russian corporation, that English law will apply to the contract. Then in English law the following claims could arise:

• A claim to be compensated for the employer’s breach of the term of the contract which contains the statement (or ‘warranty’) that the geotechnical information which the employer has provided is accurate. Note that this claim is one which arises by reason of the terms of the contract but is not one for which the contract specifically provides; it is instead a claim to be compensated for a breach of the construction contract which is recognised by the general or governing law of the contract.
  
• A claim to be compensated for a careless misrepresentation, or misstatement, made by the employer through his project team in the course of the contractual negotiations, on which the contractor relied in entering into the contract. This claim would not itself be a claim made by reference to any term of the contract; it could be made even if the contract did not include the statement or warranty that the geotechnical data were accurate. It arises outside the contract, but in connection with it, because the careless statements made induced the contractor to enter into it. This type of claim may be particularly important where there are lengthy and detailed pre-contractual negotiations but where the terms of the executed contract itself do not contain every important detail.

The above examples highlight the importance of considering carefully all of the circumstances if you are a party to a construction contract and suffer some detriment for which another party to the contract may be responsible. In particular, you should never assume that just because the detriment you have suffered, or the circumstances giving rise to it, are not specifically covered by the terms of the contract that you have no claim available against the other party. You might in fact have a claim.

5.4 Making a claim

We shall now consider how, in general, a party to a construction contract might make a claim against another party. This topic breaks down into three main questions:

• Do I have a claim?
  
• If so, when do I make it?
  
• How do I make my claim?

5.4.1 Do I have a claim?

We saw above how claims can be of different kinds; and we saw that you cannot assume that you do not have any claim available to you just because the terms of the contract do not specifically provide for a claim which fits your particular situation or circumstances. Often, however, particularly if the construction contract is a sophisticated one such as one of the family of FIDIC contracts, the first place to look will be the terms of the contract. If the contract does not specifically provide for a claim which matches your situation then, as we discussed above, you will need to examine carefully whether you might have another basis of claim.

5.4.2 If I have a claim, when do I make it?

This is a very important question, and the answer depends broadly on two things: first, the particular terms of the construction contract and, second, the law which applies to the process for bringing a claim.

Contractual time limits

The terms of the construction contract may set out certain steps which have to be taken before a claim can be pursued, and time limits for taking those steps.

Suppose you are a contractor under the FIDIC Yellow Book and you encounter unforeseeable physical conditions which, by clause 4.12 of the contract, would entitle you to additional money and time. Before you can make a claim under this clause, you must, as we have seen, give notice to the Engineer describing the physical conditions and why they were unforeseeable within 28 days after you became aware or ought to have become aware of the circumstances giving rise to the claim.

This example shows how important it is to adhere to any time limits specified by the contract.¹

Limits imposed by the law of the process

In addition, however, to such contractual time limits, the law applying to the process for bringing a claim could also impose time limits for doing so. Many countries have laws that provide for a limit to the time within which a claim can be made. English law, for example, says that if the claim concerns a breach or breaking of a contract then, with some exceptions, it must be made within six years of the date of the breach. This means you must bring your claim in, for example, the High Court within that time limit.

The law of other countries where a party might wish to bring a claim could permit contract-based claims to be made later than this and some could require them to be made earlier. The important point to remember is that, if you think you have a basis for making a claim, you should ensure that you actually make it within the time limited by the terms of the contract and the time prescribed by the law which applies to the process for bringing your claim.

5.4.3 How do I make my claim?

The answer to this question depends, again, on both the terms of the particular construction contract and the provisions of the law applying to the process for bringing a claim.

A construction contract may say that a claim should be made in a particular form; that is, it should contain information of a particular type or types set out in a particular way. So the FIDIC contracts, by clause 20.1, require the Contractor to notify a claim by giving a description of the event or circumstance giving rise to it within 28 days; but the Contractor has 42 days within which to provide full details of the claim thus notified.

As well as the contract, the applicable law of the process may prescribe how a claim is to be made. If there is an arbitration agreement, for example, then the applicable law may provide that to bring a claim a party must either follow the steps set out in the agreement or, if there are no such steps, send the other party a notice containing certain information or requirements. Legal advice should always be obtained to ensure that these requirements are all met.

5.4.4 Summary

It is very important for the parties to a contract to understand not only when a claim arises, but also any conditions that have to be fulfilled before a claim can be made. In this connection, both the terms of the contract and the ­applicable law of the process have to be considered, in order to see what requirements are imposed as to the time, form and content of a claim.

5.5 Who decides whether to accept a claim?

Claims are finally decided either by a court of law or by an arbitrator or panel of arbitrators. These ways of deciding a claim are the result of formal legal proceedings, which we examine in some detail shortly.

Many construction contracts, however, provide for a mechanism or procedure for accepting or rejecting a claim before the parties resort to such ­proceedings. Such a procedure does not usually produce a final decision in relation to a claim; but much expense and time could be saved, and less ­damage caused to the parties’ commercial relationship, by going through a non-final, preliminary procedure than if formal proceedings were immediately resorted to.

Such a non-final procedure will vary from contract to contract, but sometimes it will have two stages.

First, if an engineer or other consultant has been appointed to administer the contract, the claiming party could seek an initial decision from him; the FIDIC Yellow Book, as we have seen, provides by clause 3.5 for the Engineer to make an initial determination of claims after consulting with the parties.

If a party is dissatisfied with such an initial determination then, as the second stage, he may submit his claim to review or further consideration by a person or persons appointed by the parties. In the FIDIC family of contracts, the Dispute Adjudication Board constitutes such a second stage.

The following are typical aspects of such a second-stage procedure:

• The person or persons appointed are independent of the contracting parties.
  
• Whether one person or more than one is or are appointed depends on the complexity of the claim, the parties’ resources and their ability to agree on a single person. The time at which the appointment is made (whether at the start of the project or only after a dispute arises) will also need to be considered.
  
• The appointed person or persons will normally have suitable technical expertise and, if at all possible, be agreed by all the parties concerned with the disputed claim. This will increase the likelihood of the parties’ accepting the decision and not proceeding to an arbitration or other legal process.
  
• The procedure is flexible and less formal than a court or arbitration. Whatever procedure is adopted, it should ensure that each side is given an opportunity to put its case fairly and fully before any decision is reached.
  
• The procedure should be as speedy as possible. A timetable should be established at the outset. If a party delays unreasonably, the appointed person or persons should be prepared to make a decision on the claim without his contribution.
  
• The decision should be interim, in the sense that it will not prevent either party from proceeding to an arbitration or court proceedings; but, in order to produce greater certainty, the parties should consider including in the contract a term to the effect that they will be bound by the decision unless within a stipulated time either party gives the other notice that it intends to begin arbitration or other proceedings.
  
• The costs of the process should either be borne by each side itself, with the appointed persons’ costs being equally borne by the parties, or the appointed persons should have a power to decide which party is to bear their fees and expenses. It is suggested that there should not be any power to award a ­party’s costs against another party, as this is more suited to legal or arbitral proceedings than to an informal, quick and provisional ­procedure.

5.6 The FIDIC Dispute Adjudication Board