Monday, July 19, 2010

Alternative Dispute Resolution - Contractual Claims

Arbicon’s Alternative Dispute Resolution - Contractual Claims

It is not uncommon in construction contracts for circumstances to change, varying what was originally agreed between the parties to a contract. When circumstances change it can carry a cost implication, which the parties can agree.

However, in some circumstances, changes can be very significant and end up in a dispute. The disputed change may or may not be the fault of one of the parties or as is often the case, due to a third or multiple parties. Examples of such cases are delays and the consequences of delays, shortfalls in design or defective work. Add to that an Employer, Consultants, Main Contractor, Sub-Contractor and Sub-Sub-Contractor, it is easy to see how complex disagreements can potentially take place.

Where a party refuses to acknowledge responsibility for causing a problem and the other wishes to rectify their position of loss as a result, a contractual claim is required, which must be prepared to “adjudication standard”, so that if the matter remains unresolved it can be immediately adjudicated.

In order to achieve “adjudication standard” the contract and evidence relating to the dispute needs to be analysed so that the claim can be compiled with the correct contractual assertions and best arguments to achieve success. This requires a legally qualified Chartered Quantity Surveyor with experience of adjudication and with construction law expertise. This distinction provided by Arbicon is not provided by many claims consultancies.

Where issues leading to claims or potential claims arise, it is very important that the issues are managed properly so as to provide contemporaneous evidence. This would include good accurate records, prompt and accurate correspondence, meeting minutes and the preservation of evidence. The evidence can then be used to prosecute or defend a claim effectively, if required. It is important for the risk manager to understand what constitutes valid evidence and how to compile it. Arbicon provide seminars on this important subject area.

We set out below, not exhaustively, typical example areas of claim and how Arbicon are essential in the management of those claims.

Extension of Time and Loss and/or Expense Claims
When a project suffers delay and does not complete on time, the stakes can be high. If the Employer blames the Main Contractor, he may wish to levy damages for non-completion. The Main Contractor may take the opposite view and blame the Employer for the delays and charge loss and expense. It is easy to see that it is often the case that disputes relating to time can involve a big financial difference between contracting parties.

Unlike normal variation claims, the evaluation of additional time and how the valuation of the losses associated is a very complex process. It requires special expertise including advanced legal input and an appropriate delay analysis in order to succeed. If a time and expense claim is not prepared properly it is easy to defeat, thus advice from Arbicon is essential.

Extension of Time Claims
If the completion date is not met and there is a Liquidated and Ascertained Damages (LAD’s) clause in the contract, the Employer is likely to be entitled to Liquidated Damages with service of the appropriate notice. The onus is on the Contractor to demonstrate why more time was necessary.

The primary reason for an extension of time claim is therefore to negate the imposition of LAD’s by the Employer.

The value of LAD’s, if correctly incorporated into a contract do not require evidential proof, where the liability for time is established, LAD’s are difficult to defend. However, there are some instances when a valid legal defence can be made resisting the deduction of LAD’s. For example, where time is at large, if the LAD’s are a penalty or it is a condition precedent to deduction that a valid non-completion notice is served. Arbicon can advise on the validity of LAD’s and the entitlement to deduct them.
The onus being on the Contractor to prove, means it is therefore essential for a Contractor or Sub-Contractor to keep good records in time slices of what happened on site and why, plus serve timely any delay notices required by the contract. Using a circulated weekly programme and progress report are examples of such records. Records should show the causes of delay, concurrent delays and neutral events, showing the position and effect on the critical path. Records should also be kept showing what steps are or have been taken to mitigate or reduce delays and what additional resources have been engaged.

Arbicon can advise on:
Entitlement to extension of time
Critical path and delay analysis
Service of valid delay and claims notices (potential condition precedent)
Service of valid completion or non-completion notices
Compilation of contemporaneous evidence (Progress reports, emails, correspondence, meetings, etc)
Rights and Remedies (Contractual and common law rights)
Programmes (legal status, acceptance of, contract document, float, etc.)
Imposing or defending claims for Liquidated Damages and Un-liquidated Damages
Loss and/or Expense Claims
Most standard forms of building contract contain loss and/or expense clauses, which provide a contractual equitable remedy for breaches of contract by the Employer, without giving such breaches that label. There is often a reluctance to pay such costs and the standard of proof is higher, as actual costs linked to the offending event must be proved. Where there is no such clause the claim can be made using common law as a remedy for damages for breach of contract.

Loss and expense claims are often associated with delays but can be for any event where the Contractor incurs loss due to the failure of the Employer. It is essential that if there are contract terms relating to loss and expense, especially amended terms, that these are understood fully. The claim can fail for example, due to defective notices and any stipulated condition precedent. Arbicon can advise on such matters.

Familiar causes, by example of loss and expense are delays, variations, suspension of work on site, prevention, default or act of the Employer and/or his consultants. Such causes can lead to the Contractor incurring acceleration costs, disruption costs, head office costs, loss of profit, finance charges and additional site labour, plant and overhead costs.

The burden of proof is on the Claimant, thus again it is essential that good records of actual costs are kept and their link to an offending event such as a delay. For example, recording labour and plant time and costs wasted, specifically identifying the offending event on a daywork type sheet and submitting the same to the Employer, is good evidence. If a submission made in the form of a daywork payment application is ignored by the Employer the evidential burden of proof shifts to the Employer, thus highlighting the importance of such contemporaneous evidence.

Arbicon can advise on:
Analysis and reporting on entitlement to loss and/or expense (establish the case merits and contractual or common law rights and remedies)
Loss recovery from delays, disruption and acceleration
Service of valid claims notices (form, communication of and any condition precedent)
Compilation of contemporaneous evidence (Record keeping, burden of proof)
Mitigation of loss and “Global” claims
Linking cause and effect and calculation of Quantum
Submitting or defending a claim to ADR proceedings, if required
Defects Claims
When a construction project reaches completion and the final account and final payment must be considered, it is not uncommon for the paying party to withhold sums against what they consider to be defective works. Most standard forms of contract contain mechanisms for dealing with defects, normally in the form of a procedure which includes a notice that practical completion has been reached, a defects liability period and a notice of making good of defects. It is important that the contractual procedure is understood so that any rights to claim are not lost.

The types of issue that arise under the heading of defects, relate to withholding payment on the grounds of defective work, pursuit of due retention or pursuit of damages for defective work including latent defects. It is also not unusual for one party to consider an item a defect and the other a variation, the latter of which does not have to be carried out after practical completion. It is easy to see that this could lead to a set off argument if others are employed to carry out the work. Sewn into the financial remedies pursued will also be arguments in respect of what constitutes practical completion, valid service of notices and failures to carry out timely defects inspections. If not defined in the contract, there is no hard and fast rule as to what constitutes practical completion. This can lead to issues regarding LAD’s and defects. It is not unusual for paying parties to accuse the Contractor or Sub-contractor of non-completion for minor outstanding works, whilst taking possession of the building, which in the absence of a definition is likely to constitute practical completion.

Pursuit of the final account and final payment including retention can be difficult when set off and defects are argued, Arbicon’s team understand the law and rights of parties in respect of these matters and the best commercial way of tackling such issues. Arbicon are experts in resolving problem final accounts and collecting outstanding retentions.

Insolvency Claims
Unfortunately, when insolvency occurs to either the Employer, Contractor or Sub-contractor, the remaining parties in the contractual chain can be exposed to losses.

It is important to understand what happens if insolvency occurs contractually and how to protect one’s self from losses that can happen. For example, the Employer may be relentlessly pursued for final payment by the Contractor’s administrator, the Employer needs to know what his rights to set off are, his rights to assign the contract to a new Contractor and how to manage the insolvent contract. If the Employer becomes insolvent and if the Contractor suffers a shortfall in payment, it is important to know how to deal with the costs not covered and what rights there are to assets on site. The Sub-Contractor likewise needs to know what materials he can take back from site and what payment is due to him, it is possible to lose the right to all of this if it says so in the contract.

Prudent contractual preparation and effective management of an insolvent site are all within the expertise of Arbicon’s experienced team.

Claims against Consultants
It is not uncommon for consultants to be blamed for design problems, late production of information causing delay, disruption and costs. There are many cases where consultants have had a supervisory role and have failed in this role. Issues in construction contracts are generated by unforeseen circumstances and human failures, thus consultants such as Architects, Project Managers and Engineers do take a share of such failures.

Where a consultant produces the design, which is defective, there is a higher duty of care than that of the builder who merely constructs what is asked of him. It is however not that straightforward, as a competent builder may by implication, take responsibility for not recognising or pointing out a fault. There are also considerations to take account of if the Employer was notified or insisted on a particular product that fails in design.

Each case, as all cases have to be, taken on their merits. There is much law on this area of conflict, which Arbicon’s team are experienced in dealing with.

Arbicon ADR Limited, St George's House, George Street, Huntingdon, Cambridgeshire, PE29 3GH
T: 01480 426560 F: 01480 426561 E:

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