Under existing contracts, an employer will not want to pay more for the works. But forcing a contractor to perform works that are unprofitable or causing a massive loss is unlikely to be in the best interests of the project. It may result in the insolvency of the contractor forcing the employer to abandon the contract or re-let it, probably at a premium.

In new contracts, contractors are demanding protection from unpredictable price fluctuations. If a contractor feels exposed, it might only bid on projects with short construction programmes which give costs less time to increase. Or the contractor might seek to start work under a letter of intent on a cost-plus basis which then never crystalises into a full contract.

Is a mechanism for cost adjustment, such as FIDIC 1999 Sub-Clause 13.8 ⁱ[Adjustments for Changes in Costs], an answer?

Type of contract

The type of contract usually informs as to which party takes the risk of price fluctuations.

• In reimbursable or cost-plus contracts, the employer takes the risk. The contractor is reimbursed the actual cost, plus allowances for overheads and profit. If the contractor’s actual costs increase, the contract price will increase also.
• In remeasurement contracts and fixed price/lump sum contracts the contractor usually takes the risk unless there is a mechanism for cost adjustment.

In remeasurement contracts (such as the FIDIC Red Book – For Building and Engineering Works Designed by the Employer) the contract price is based on approximate quantities and a schedule of rates and prices. But, if the rates and prices can be adjusted where price fluctuations occur, the contract price is recalculated using the new rates and prices and the final agreed quantities. The actual work done is remeasured when the works are completed.

In fixed price/lump sum contracts (such as the FIDIC Yellow Book – Plant and Design Build) the contractor provides an overall figure, ‘a lump sum’, for all the works that are agreed to be carried out under the contract. But, if the amounts due to the contractor can be adjusted where price fluctuations occur, the contract price is recalculated.

Legal principles

It is a basic principle of law that agreements must be kept. The Latin term for this is pacta sunt servanda. Therefore, unless there is a mechanism for cost adjustment, the contractor in a remeasurement contract or fixed price/lump sum contract may have a problem. In such circumstances, there are some legal arguments which might be deployed depending upon the governing law of the contract and local legal advice.

Fundamental change of circumstance

Some legal jurisdictions will allow a contract to be modified where it becomes inapplicable because of a fundamental or extraordinary change of circumstances. For example, under:

• the legal doctrine of rebus sic stantibus (meaning ‘things thus standing’ ⁱⁱ) which is sometimes described as an ‘escape clause’ to the principle of pacta sunt servanda;
• or the French doctrine of imprévision (meaning ‘lack of foresight’) ⁱⁱⁱ

Impossibility

A contractor might seek to argue that a contract has become impossible to perform; it is so different to the original bargain that it is frustrated so as to discharge the parties’ obligations.

Under the FIDIC 1999 editions, Sub-Clause 19.7 provides a remedy when any ‘event or circumstance outside the control of the Parties (including, but not limited to, Force Majeure) arises which makes it impossible or unlawful for either or both Parties to fulfil its or their contractual obligations…’

There is similar wording at Sub-Clause 18.6 of the FIDIC 2017 editions. However, economic unprofitability is unlikely to make it impossible or unlawful for the contractor to fulfil its contractual obligations. Just because something costs more to build does not make it impossible to build.

Force majeure

A contractor might seek to rely on force majeure, either under the governing law or in accordance with the contract conditions.

For an event to qualify as ‘Force Majeure’ under the FIDIC 1999 editions, five requirements must be met:

• it must be an exceptional event or circumstance;
• which must be beyond the parties’ control;
• which such a party could not have reasonably provided against before entering into the contract;
• which having arisen such party could not have reasonably avoided or overcome; and
• which was not attributable to the other party.

There is similar wording at Sub-Clause 18.1 of the FIDIC 2017 editions. However, the term Force Majeure is not used. The term Exceptional Events is used instead, although the definition does not actually require the event or circumstance to be exceptional.

Both Covid and the Russia-Ukraine war might fall within the FIDIC definition of Force Majeure. But to be entitled to an extension of time (or, in the case of the Russia-Ukraine war, Cost ^iv, the contractor must be ‘prevented’ from performing any of its obligations under the contract by Force Majeure (and is subject to giving the prescribed notice). This means a physical or legal prevention. Economic unprofitability will not normally suffice. The mere fact that the cost of performance has increased is insufficient for prevention. So, whilst the Force Majeure clause may give the contractor extra time to procure materials that were prevented from being procured on time because of Covid or the Russia-Ukraine war, it is unlikely to assist a contractor who is merely obliged to pay higher prices than originally estimated.^v

Good faith

A contractor might seek to rely on the principle of good faith which, under some legal jurisdictions, may be implied into the contract. Good faith arguments are usually raised as a matter of last resort.

Escalation clauses

A mechanism for cost adjustment is, potentially, a more reliable way to limit the contractor’s risk.

In the FIDIC 1999 editions the escalation clause is at Sub-Clause 13.8, and in the FIDIC 2017 editions it is at Sub-Clause 13.7. Sometimes the escalation clause is
deleted or modified.

Sub-Clause 13.8 of the FIDIC 1999 editions (or Sub Clause 13.7 in the FIDIC 2017 editions) is an ‘opt-in’ clause. It applies only if:

• Under the FIDIC Red and Yellow Books 1999 – a table of adjustment data is included in the Appendix to Tender.
• Under the FIDIC Silver Book 1999 – provided for in the Particular Conditions.
• Under the FIDIC 2017 forms – a Schedule(s) of cost indexation is included in the contract.

The table of adjustment data or Schedule(s) is a complete statement of the adjustments to be made to the cost of labour, Goods and other inputs to the Works (for example, fuel). Any other rises or falls in the Costs are deemed to be included within the Accepted Contract Amount. No adjustment is applied to work valued on the basis of Cost or current prices.

Where it applies:

• Under the FIDIC 1999 editions – the amounts payable to the contractor are adjusted for both rises and falls ‘in the cost of labour, Goods and other inputs to the Works’ by adding or deducting amounts calculated in accordance with a prescribed formula (in the FIDIC Red and Yellow Books) or as set out in the Particular Conditions (in the FIDIC Silver Book).
• Under the FIDIC 2017 editions – the amounts payable to the contractor are adjusted for both rises and falls ‘in the cost of labour, Goods and other inputs to the Works’ by adding or deducting amounts calculated in accordance with the Schedule(s).

In the FIDIC Red and Yellow Books 1999 a formula is set out, but this may be amended as the parties choose. The wording states: ‘The formulae shall be of the following general type’. The formula is as follows:

The FIDIC Yellow Book Guidance suggests that in a plant contract formulae which are more directly related to the timing of costs incurred by the manufacturers be adopted.

The FIDIC Silver Book 1999 and the FIDIC Gold Book 2008 do not set out a formula. The FIDIC Silver Book Guidance suggests that the wording for provisions based on the cost indices in the FIDIC Yellow Book be considered.

The FIDIC 2017 editions do not set out a formula either. The Guidance states: ‘It is recommended that the Employer be advised by a professional with experience in construction costs and the inflationary effect on construction costs when preparing the contents of the Schedule(s) of cost indexation’.

It is recognised that the formula set out above to calculate the adjustment multiplier (Pn), which is to be applied to the estimated contract value, is crude, but it is a fast and reasonably credible way of calculating and reimbursing fluctuations in costs.

The formula relies on:

• A fixed element (a), representing the nonadjustable portion in contractual payments, which is fixed at the time of Contract. FIDIC suggests 10% in the Appendix to Tender or Guidance.
• The weighting of the resources (b) (c) (d), which is determined at the time of contract. For example, a road project might be 20/40/40 for labour, equipment and materials.
• Cost indices for the current ‘now’ value (n) and the original value (o) for each of, for example, labour (L), equipment (E) and materials (M), which need to be updated frequently (preferably monthly rather than quarterly or annually, but that will depend upon the cost indices chosen).

Fixed element (10%)

Where there is contractor compensable delay which pushes the project into a period of inflation, it seems unfair that this portion is non-adjustable. Perhaps, it might be claimed as a prolongation cost as it falls squarely within the definition of ‘Cost’. The author is not aware of any precedent on this.

Weightings

In the FIDIC Red and Yellow Books 1999 (but not the FIDIC Silver Book 1999 or the FIDIC 2017 editions), the weightings may be adjusted if they have been rendered unreasonable by way of Variation to the Works.

The last paragraph of Sub-Clause 13.8 of the FIDIC Red and Yellow Books 1999 states: ‘the weightings for each of the cost factors stated in the table(s) of adjustment data will only be adjusted if they have been rendered unreasonable, unbalanced or inapplicable, as a result of Variations’.

Therefore, the claiming party would need to demonstrate that the original contract weightings were correct at the time of contract and that a Variation had rendered them unreasonable, unbalanced or inapplicable. Inflation alone would be insufficient.

This provision does not apply simply where the original contract weightings fail to reflect the actual contract weightings. Sub-Clause 4.11 of the FIDIC 1999 editions states: ‘The Contractor shall be deemed to have satisfied himself as to the correctness and sufficiency of the Contract Price. … Unless otherwise stated in the Contract, the Contract Price covers all the Contractor’s obligations under the Contract (including those under Provisional Sums, if any) and all things necessary for the proper design, execution and completion of the Works and the remedying of any defects.’. The FIDIC 2017 editions have similar wording.

Cost indices

Cost indices provide a simple way to relate the original value to a corresponding cost now. Unfortunately, cost indices are not an accurate reflection of the actual costs, but they are easy and reasonably credible.

The choice of cost indices is important, and when choosing them it is necessary to understand, for example.

• Exactly what they measure. Many indices are intended to reflect only general building construction.
• In which location. The indices ought to align with the source of materials. Changes might be needed to the indices if there is a change in supplier or country of origin for the supply of materials, for example because of sanctions.
• In which currency. The currency of the cost indices and the currency for payment ought to align, otherwise there may be scope for further adjustment when the currency of the cost indices is converted into the currency of payment.

The categories of the cost indices are usually broad and not necessarily linked to specific items in the bill of quantities. Therefore, they do not work well with bespoke construction elements.

After the Time for Completion

Under the FIDIC Red and Yellow Books 1999 and the FIDIC 2017 editions, if the contractor fails to complete within the Time for Completion (meaning the time for completing the Works including any extension of time due to the contractor), further price rise risk is allocated to the contractor, and the benefit of any falling prices is allocated to the employer.

Adjustments to prices after the Time for Completion are made using the most favourable to the employer of:

• the index or price applicable from the date 49 days (i.e. 7 weeks) before the expiry of the Time for Completion; or
• the current index or price.

Procedure

Under both the FIDIC 1999 and 2017 editions, an application for an Interim Payment Certificate under Sub-Clause 14.3 must include any amounts to be added or deducted for changes in cost under Sub-Clause 13.8. The contractor is not obliged to give notice under Sub Clause 20.1 of the FIDIC 1999 editions.

Other options

There are also practical things which the parties might consider in order to manage the risk of escalating construction costs in a smarter way.
During the tender process:

• The employer might give the contractor more flexibility when procuring materials by being less prescriptive in the specifications, for example in respect of the identity of the supplier and/or the type of material.
• The employer might encourage value engineering and permit alternative products where previously specified materials have dramatically increased in price.
• Provisional sums might be used for specific defined materials, to allow for greater price flexibility.
• The contractor might date limit its pricing for specific materials, therefore limiting its period of risk.
• The contractor might procure goods locally, where possible, in order to reduce transportation costs.
• The contractor might build closer and more collaborative relationships with suppliers.

During the works:

• The employer might agree to vary the contract to take into account some of the suggestions above.
• The contractor (or the employer) might identify capacity in the supply chains, buy price volatile goods, equipment and materials in advance and negotiate a delayed delivery or stockpile them.<a href=”#vi”>^vi</a> The contractor might need to do this in any event because of excessive lead in times.
• The employer might agree to pay more in a supplemental agreement <a href=”#vii”>^vii</a>

Conclusion

Contractors are demanding protection against escalating construction costs.

Although not without criticism, a mechanism for cost adjustment such as FIDIC 1999 Sub-Clause 13.8 is a reasonably credible way to limit the contractor’s risk if professional advice is sought on the correct cost indices to apply when preparing the contract documents.

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If an Employer sets off a sum of money in a way that it is not entitled to do, it is likely to impact on the Contractor’s cash flow and may give the Contractor a right to suspend or reduce the rate of working. In extreme circumstances, it may also entitle the Contractor to terminate.

Unfortunately, under the FIDIC Red and Yellow Books 1999, the right of an Employer to set off from an amount already certified in a Payment Certificate but unpaid is inexplicit.

Once the Employer has a Sub-Clause 3.5 determination, it may ask the Engineer to deduct the amount determined from the next Payment Certificate. This is clear.

But rather than rely on the Engineer, can the Employer instead, itself, deduct by way of set off from an amount already certified in a Payment Certificate but unpaid? This is not clear.

Sub-Clause 2.5 states:

“The amount [determined under Sub-Clause 3.5] may be included as a deduction in the Contract Price and Payment Certificates. The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this Sub-Clause”.

What does this wording mean and why does it matter?

Why does it matter?

It matters to the Contractor because it may impact on cash flow.

It matters to the Employer because under the FIDIC Red and Yellow Books 1999, if the Employer sets off against, or makes any deduction, when it is not entitled to do so, then this will be treated as non-payment of a sum due under the Payment Certificate and will (if the non-payment is not remedied in time) give the Contractor the right to suspend or reduce the rate of working under SubClause 16.1.

It might even entitle the Contractor to terminate under Sub-Clause 16.2.

Further, the Employer may be liable to pay damages for breach of contract.

What does it mean?

The wording of Sub-Clause 2.5 is imprecise, and leaves open the question of whether an Employer is, or is not, entitled to set off from an amount already certified in a Payment Certificate but unpaid.

Position 1: The Employer cannot itself set off from an amount certified in a Payment Certificate.

Position 1 is that an amount of money determined by the Engineer (under Sub-Clause 3.5) to be due to the Employer, can be included by the Engineer as a deduction in the next Payment Certificate but cannot be set off by the Employer from an amount already certified in a Payment Certificate but unpaid.

In other words, besides the Contract Price, only a Payment Certificate can be used for making a deduction from an amount certified. This can only be done by the Engineer and not by the Employer.

The rationale is that it is, for the Engineer, to administer the Contract and to record such deductions in the Payment Certificates.

There should be no risk to the Employer. If the Engineer has determined that an amount of money is due, then it ought to have no cause not to include it as a deduction in the next Payment Certificate.

It has been noted that although the wording of SubClause 2.5 states that (with emphasis added):

“The Employer shall only be entitled to set off against … from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with … [Sub-Clause 2.5]”,

there is, in fact, no provision in Sub-Clause 2.5 giving the Employer an express right of set off beyond the Engineer’s power to include deductions in the Payment Certificates ⁱ.

Professor Nael Bunniⁱⁱ appears to support this position. He states:

“There are four options that may apply after a determination. These are as follows:

1. The employer could ask the engineer to deduct the amount in his calculation of the next payment certificate.
2. The employer could ask the engineer to deduct the amount from a sum payable under a payment certificate.
3. The employer could ask the engineer to make a separate claim against the contractor for payment.
4. Either party may contest the determination”.

Option (1) applies if a Payment Certificate has not yet been issued.

Option (2) applies if a Payment Certificate has already been issued which should have had a deduction made but did not. Then the Engineer should issue a corrected Payment Certificate showing the necessary deduction. The Engineer may do so under the final paragraph of Sub-Clause 14.6 of the FIDIC Red and Yellow Books 1999, which deals with corrections and modifications to previous Payment Certificatesⁱⁱⁱ.

The FIDIC Contracts Guide^iv commentary on SubClause 2.5 (with emphasis added) says:

“In the case of a payment having been claimed [by the Employer], the Engineer may include it as a deduction in Payment Certificates. Under Sub-Clause 14.7, the Employer is required to pay the amount certified (namely, incorporating this deduction), but is not entitled to make any further deduction. If the Employer considers himself to be entitled to any payment under or in connection with the Contract, he is thus required to follow the procedure prescribed in Sub-Clause 2.5, and is not entitled to withhold payment whilst awaiting the outcome of these procedures”.

The FIDIC Contracts Guide commentary on SubClause 14.6 continues:

“The Employer is […] bound by the Certificate, and must make payment in full, irrespective of any entitlement to compensation arising from any claim which the Employer may have against the Contractor. If the Employer considers himself entitled to claim against the Contractor, notice and particulars must first be submitted under Sub-Clause 2.5. The Employer’s entitlement is then to be agreed or determined, and incorporated as a deduction in a Payment Certificate”.

Sub-Clause 14.7 expressly requires the Employer to pay to the Contractor: “the amount certified in each Interim Payment Certificate…”. There is no express right of set off in Sub-Clause 14.7 (although, as highlighted under Position 2, nor is there any express exclusion of such).

Sub-Clause 14.8 gives the Contractor the right to receive financing charges if it does not receive payment in accordance with Sub-Clause 14.7. There is no express right of set off in Sub-Clause 14.8 (nor express exclusion of such).

Sub-Clause 16.1 gives the Contractor the right to suspend work (or reduce the rate of work) if the Employer fails to comply with Sub-Clause 14.7. There is no express right of set off in Sub-Clause 16.1 (nor express exclusion of such).

Sub-Clause 16.2 entitles the Contractor to terminate if (with emphasis added): “(c) the Contractor does not receive the amount due under an Interim Payment Certificate … (except for deductions in accordance with Sub-Clause 2.5 [Employer’s Claims])”. But this simply takes the reader back to the ambiguous wording of Sub-Clause 2.5.

Of course, the rights of set off are often dependant on the applicable Laws (including the governing
law). Under English law, set off is a defence and a general right unless expressly excluded or reduced – although a clear intention is required before a contract can be properly interpreted as excluding set off^v.

The wording at Sub-Clause 2.5 is such an express exclusion. One legal text states^vii:

“The authors consider the draftsman intended that any rights of set off that may exist under the governing law would be excluded by operation of Sub-Clause 2.5 (20.2(G)). For example, Sub-Clause 2.5 of the Red, MDB and Yellow Books provide: “The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate … in accordance with this Sub-Clause”.

In the FIDIC 2017 editions, Sub-Clause 20.2.7 is very similar:

“The Employer shall only be entitled to claim any payment from the Contractor and/or to extend the DNP, or set off against or make any deduction from any amount due to the Contractor, by complying with this SubClause 20.2”.

In FIDIC 2017 A Practical Legal Guide by Corbett & Co^vii, Gabriel Mulero Clas writes:

“The purpose of this provision is to exclude the right of set off a Party will normally have under the governing law of the Contract”.

Another legal text ^viii says this wording in the FIDIC 2017 forms is:

“a general failsafe mechanism to ensure that the Employer does not make unauthorised deductions from the payments due to the Contractor”.

Position 2: The Employer can itself set off from an amount certified in a Payment Certificate.

Position 2 is that an amount of money determined by the Engineer (under Sub-Clause 3.5) to be due to the Employer, can be set off by the Employer from an amount already certified in a Payment Certificate but unpaid.

In essence, if the Engineer has determined that the amount is due (under Sub-Clause 3.5), why can’t the Employer just take its money? Why must it rely on the Engineer to first make the deduction in the Payment Certificate?

The point has been made^ix that as the wording in Sub-Clause 2.5 refers not to a deduction in a Payment Certificate, but to a deduction from an amount certified in a Payment Certificate, it may be said that FIDIC intended for the Employer to have a right to set off against the amounts certified by the Engineer, which is different to the Engineer’s power to include deductions in a Payment Certificate.

Another legal text states ^x:

“The Employer cannot make any deduction by way of set off or any other claim unless it is in accordance with the Engineer’s Determination”,

suggesting that an amount of money which is determined by the Engineer to be due to the Employer, may be set off by the Employer from an amount certified in a Payment Certificate, although it

does not explicitly say so. Sub-Clause 14.7 expressly requires the Employer to “pay” to the Contractor: “the amount certified in each Interim Payment Certificate…”. The obligation to “pay” does not exclude payment by way of set off.

Set off is recognised in the termination Sub-Clause 16.2(c) through its reference to: “deductions in accordance with Sub-Clause 2.5”. But, as stated above, this takes the reader back to the ambiguous wording of Sub-Clause 2.5. Might it be argued that, because of this wording, set off is permissible in the event of termination but not in the event of suspension under Sub-Clause 16.1 or payment under Sub-Clauses 14.7 and 14.8?

There is case law to suggest that Sub-Clause 2.5 is not an express exclusion to the general right of set off. In the case of NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago)^xi the arbitrator took the view that Sub-Clause 2.5 could not prevent an employer raising a set off to any claim by the contractor. The arbitrator stated:

“I agree ….that clear words are required to exclude common law rights of set off and/or abatement of legitimate cross-claims, and in my view such set off/abatement should be taken into account in the final reckoning following the termination. The terms of clause 2.5 do not prevent this” ^xii.

The arbitrator found that Sub-Clause 2.5 did not bar the employer’s counterclaims, because the words of Sub-Clause 2.5 were not sufficiently clear to exclude common law rights of set off. That decision was upheld in the High Court of Trinidad and Tobago and the Court of Appeal. However, the Privy Council took a different view, finding that the clause was effective to bar the Employer from setting off its cross claims.

In an Interim Award in ICC Case 11813 (London, 2002), a claim was made against an Employer for unpaid certified sums under the FIDIC Yellow Book Test Edition 1998. The Employer raised, as a defence, a claim for liquidated damages and asserted that as a matter of English law (particularly the principle enunciated in Gilbert-Ash^xiii), it was entitled to raise a defence of set off except where such rights were expressly excluded. The arbitral tribunal found that there was nothing within the contract that excluded the Employer’s right to set off. The wording of Sub-Clause 2.5 in the FIDIC Yellow Book Test Edition 1998 had omitted the key sentence: “The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate … in accordance with this Sub-Clause”. In the circumstances, the arbitrator permitted the Employer to advance its set off claim.

Conclusion

The wording of Sub-Clause 2.5 is ambiguous and the right of an Employer to set off from an amount already certified in a Payment Certificate but unpaid is unclear.

If you are an Employer, you may wish to amend the provisions of Sub-Clause 2.5 so that nothing within Sub-Clause 2.5 shall be construed as preventing any right of set-off or cross-claim; and to maximise your protection, you must get advice before setting-off from an amount certified in a Payment Certificate.

If you are a Contractor, you may be entitled to suspend or terminate, and/or have a claim for damages for breach of contract.

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The changes include:

• The errata issued in December 2018;
• The additional errata issued in June 2019; and further errata and new amendments made in November 2022 (and said to be effective from 1 January 2023) which FIDIC states are ‘improvements & clarifications in response to industry feedback + to support the increased use of 2017 contracts’.

This article written by Victoria Tyson, a Director at Corbett & Co. And a regular speaker at Cornerstone Seminars, draws your attention to 10 of the key areas of change in respect of the FIDIC Red Book 2017 including the definition of Claim, matters to be agreed or determined, the definition of Dispute and Exceptional Events.

It is unlikely that the Parties will amend their existing FIDIC contracts to incorporate these changes retrospectively or prospectively (none are significant enough to justify the effort), but it will be interesting to see how the changes are used in the interpretation of the original
2017 edition.

FIDIC 2022 Reprints: 10 Key Areas Of Change In The FIDIC Red Book 2017

1. Definition of Claim

At Sub-Clause 1.1.6, the definition of Claim has been amended so that it now excludes matters to be agreed or determined under Sub-Clause 3.7 (a). This means that a Claim is clearly distinguished from the matters to be agreed or determined which are listed in Sub-Clause 3.7 (a). This is a welcome clarification.

2. Agreement or Determination

Under Sub-Clause 3.7, matters or ‘Claims’ which require an Engineer’s agreement or determination must comply with a specified procedure. In the 2022 reprints, matters and Claims are separated into sub-paragraphs (a) and (b). Under sub-paragraph (a) matters are now limited to those provided for in 13 specific sub-clauses which each identify the date of commencement of the time limit for agreement. The list of 13 specific sub-clauses is not expressed to be exclusive and therefore the list is, perhaps, unnecessary.

The Guidance states: ‘ It should also be noted that if there is a matter that is specifically required to be agreed or determined, as referred to in [Sub-Clause 3.7 (a)] (which, in turn, refers to specific listed Sub-Clauses that each expressly states that the particular matter is to be agreed/determined), then such a matter is not included in the definition of “Claim”. It follows, therefore, that the express and detailed provisions in Clause 20 do not apply to the matter. Instead, it is stated in each of such listed Sub-Clauses that the Engineer […] is obliged to proceed with the agreement/determination of the matter. Each such listed Sub-Clause expressly states what date shall be “the date of commencement of the time limit for agreement ” under [Sub-Clause 3.7.3] and, thereafter, [Sub-Clause 3.7.5] addresses the situation where a Party may be dissatisfied with the determination of a particular matter.’

3. Definition of Dispute and deemed Disputes

At Sub-Clause 1.1.29 there is a new and simpler definition of Dispute. It now requires:

(a) a Claim, or a matter to be agreed or determined under Sub-Clause 3.7 (a);
(b) an Engineer’s determination rejecting in whole or in part (i) the Claim (or a deemed rejection if the determination is not given within the time specified in Sub-Clause 3.7.3) or (ii) the Party’s assertion(s) in respect of the matter; AND
(c) a NOD from either Party.

This distinguishes a Claim from a matter to be agreed or determined, and both (together with a NOD) are required to fall within the definition of Dispute.

Replacing ‘claim’ with ‘Claim’ means that a Dispute will be confined to disputes between the Parties. It will not include claims against third parties.

In certain circumstances, a Dispute may now be fast-tracked. At Sub-Clause 21.4, wording has been added to identify certain situations in which a Dispute shall be deemed to have arisen, and which may be referred directly to a DAAB for a decision (i) without the need of a Sub-Clause 3.7 agreement or determination and NOD, and (ii) without being subject to the time bars at Sub-Clause 21.4.1 (a). Broadly, these situations are non-payment of a Payment Certificate, non-payment of financing charges, and termination.

It is worth noting that, as in the original 2017 edition, a Dispute is not required for dispute avoidance.

It is very likely that the amendments in the 2022 reprints will cause the Engineer’s workload to increase as more formal determinations are required. It will also curtail the DAAB’s power to award provisional relief (under Procedural Rule 5.1 (j)) promptly, because an Engineer’s determination and NOD would first be required.

To continue reading this analysis please click on the link below for the full version.

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