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Volume 3 - September 2009

SRI LANKAN QUANTITY SURVEYORS

SLQS

JOUR

NAL

SLQS JournalThe Forum of Sri Lankan Quantity Surveyors Across the Globe

Volume 3 – September 2009

Editorial Committee

Ajantha Premarathna FRICS, FIQS(SL), ACIArb.

Dhammika T. Gamage NDT(Civil Eng.), ICIOB, ACIArb, AAIQS, MIIE(SL), IEng, FACostE, FCInstCES

Kamal Paranawithana BSc (Hons), MRICS, ACIArb

Lakshman Gunatilake MCInstCES, MACostE, ACIArb, MIIE(SL), IEng,

Ranjith Disanayaka BSc(QS) Hons, MRICS, MCIArb

Editorial Policy

We, the editorial committee reserve the right to select, reject, edit, and excerpt articles at our sole discretion. We will publish no article which, in the opinion of the editorial committee, can be reasonably interpreted as insulting or offensive to any individual or group. We will not return unsolicited manuscripts. The opinions expressed in articles contained in the SLQS Journal are the opinions of individual authors and not necessarily those of the SLQS Journal editorial committee. Articles are provided for the general interest of the quantity surveying and contract administration community, but the

information contained therein does not constitute legal advice and should not be relied on as such. Neither the SLQS nor the individual authors assume any responsibility for the accuracy of information reported.

The editorial committee assumes no responsibility for failure to report any matter inadvertently omitted or withheld from it. The mode of citation utilised within the articles and for the bibliography would be the Chicago method.

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CONTENTS

Editorial

The Quantity Surveyor and the LawEdward Jayathunga AAIQS

Facilities Management – An IntroductionW B Elmo F J Fernando FRICS, FIE(Aust), CPEng, F.ASCE, MCIArb, FIQS (SL)

Application of Cost Engineering Techniques during the Global Recession Gamini Dayaratne MACostE, AACE

Tender Procedure- Criterion Influencing the Decision to Tender Ranjan Dommanige TCInstCES, HND(QS)

Is the Regional Engineer Fair Enough in Dealing with Variations?Prabash Miriyagalla M.Sc., Dip. in Eng.

Implementation of Knowledge Management Processes and Practices in Construction IndustryVijitha Disaratna BSc.(Hons)QS, MBA, MRICS, ACIArb

Time for Completion in Construction Contracts Senerath Wetthasinghe LL.M, AAIQS, FCIArb, MQSi, ACIOB

Arbitration and its Development in the UAE Construction IndustryE.A.Thusitha P. Edirisinghe B Sc (Hons)QS, MCIArb, CCE, Pg Dip (Arb & Const. Law)

Is FIDIC-99 Contractor Friendly? Ajantha Premarathna FRICS, FIQS(SL), ACIArb

Sri Lanka’s Ombudsman SchemesDr. Wickrema Weerasooria LLB(Ceylon), PhD(London), Attorney-at-Law Sri Lanka, Barrister and Solicitor Australia

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Editorial Dear Sri Lankan Quantity Surveyors

I am writing this editorial the day after the most successful Continuing Professional Development event in the history of Sri Lankan Quantity Surveying, the programme, Variations and Valuation of Variations under the ICTAD and FIDIC Forms of Contract, conducted by Prof. Indrawansa Samaratunga, held at the BMICH- Colombo, on 31 August, 2009, with over 600 participants. This most pleasurable event was the beginning of the commemoration of the Silver Jubilee of the SLQS UAE get-together.

We wish to thank all those of you who were behind the overwhelming response of instructive, high-quality articles to our request; all of those articles were a tremendous pleasure to read. Also, it was with great satisfaction that we observed the outpouring of interest generated by the participants of the recent training course conducted by SLQS-UAE, ‘Sound Contract Administration’, by providing many articles which will be published in future issues.

In the last journal, from the readers’ perspective, one of the most noteworthy articles was ‘Construction Contract Arbitration’ by Renchen Perera, due to its rich content blended with simplified language. Likewise and also of timely necessity, Ajantha Premarathna’s article of ‘Is FIDIC 99- Contractor-Friendly ?’ would be considered of similar rank.

We trust that it is essential to remind you that this journal is designed to encourage interest in all matters relating to contract administration, with an emphasis on matters of theory and on-board issues arising from the relationship of contract administration to other disciplines in the construction industry. The subject matter of the articles will consist mainly of, but not be limited to contractual matters.

Also, questions were raised on the appropriate length of the articles. We should say that as we have many submissions of high quality than we may be unable to accommodate within one volume, the ideal length is less than 5,000 words. There have been concerned about the size of the print (fonts). Due to various constraints, we restrict the number of pages we can print and if we increase the font size, we would be forced to reduce the number and length of the articles.

The topics written upon in this journal are those submitted by your peers and various highly experienced and qualified industry professionals and academics of today. Articles included in this journal, which have been arriving from the very large number of Sri Lankan quantity surveyors living and working across the globe, are those felt to be relevant to our entire readership, either personally or professionally.

We eagerly anticipate future articles from you, our readers, for our forthcoming journal, the Silver Jubilee special edition.

On behalf of the editorial committee,Dhammika T. Gamage

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Edward Jayathunga AAIQSEdward attached Bond Communications as Chief Quantity Surveyor since 2008, prior to that he served Gardiner and Theobold International as a Senior Quantity Surveyor over a period of ten years leading the Electromechanical quantity surveying team

The Quantity Surveyor and the Law

Introduction: Quantity Surveyor (QS) in practice deals with his/her employer, the employer’s clients, and different parties when performing his/her duties. His/her involvement for the project may vary from the concept design stage by preparing conceptual cost estimate to the settlement of disputes of the project. This includes preparing of preliminary cost plan, Bills of Quantities, tender evaluation, project financial and contractual administration, disputes resolution etc. When proceeding in the above long and complicated processes, QS would have to make many important decisions and measures in terms of commercial, financial, or contractual nature and that affects many other parties in their business. This perhaps could decide whether a party wins or loses a project, and also it may affect the party’s existence in the business or its exit! It is therefore, very important that the Quantity Surveyor must always be without prejudice, be knowledgeable and be up dated with all aspects of modern practice in the profession regularly and apply this knowledge in his regular practice; act impartially, and his decisions must be neutral, fair and reasonable always to both the parties in the contract. It is obvious that there is a party who pays for the QS for his/her service. However; he/she should not act in an unfavorable and un-lawful manner towards the pay master who will be influenced similarly in return. It is also very important for the QS to maintain integrity at any cost. Therefore, it is very important to understand how the law affects the QS in practice. Quantity Surveyors very often deal in the following areas. Contract/Employment agreement: Professionals may some times find themselves in difficulty by undertaking or assigning work to others by means of verbal/gentlemen agreements, or upon incomplete

written agreements. If the agreement or the contract is not a clearly worded document, or contains ambiguities, the parties will be in a situation that would lead to disputes in a future day when the agreement or the contract is in process or after the completion of the process. Thus, it is very important first of all, to have a properly and specifically worded agreement in place. Appointment of the QS is normally made directly by the employer or on the advice of the architect or by any other agent with the knowledge of the principles. It was held in Waghorn vs. Wimbledon Local Board that the architect was instructed by the client to call for tenders; however, without having quantities it was not possible for the architect to call tenders and accordingly, the architect was advised to appoint a QS under the standard terms of the RICS (since this is mentioned for the first time, it’s better to spell it out.). There is no legal requirement to have a written agreement between the QS and his/her employer. However, in the event of a dispute, the relationship between the parties has to be established for the litigation and it is very important for the courts to understand the clear intention of the worrying parties where, written agreement or recorded contemporaries bring a strong impact on the case. The nature and the existence of the agreement has to be established by using standard form of appointment, form of agreement, terms and conditions of appointment etc, that are published by the Royal Institute of Chartered Surveyors (RICS) or any other standard methods which are in practice today. Whatever the way we contracted, the important thing is to ensure that a valid, comprehensive and adequately evidenced contract must exist between the parties. This is very important as many people are regretting that their verbal and even written agreements not having an opportunity to revert once agreed and

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many gentle agreements are breached by not delivering as promised. When professional services are provided, the intention is clear that the professional body or the person must be paid for the service provided. In the example, H. M. Key & Partners vs. M. S. Gourgey and others (1984) in the UK, it was said: “the ordinary presumption is that a professional man does not expect to work unpaid for his services”. Given that all relevant terms are settled and agreed, incorporated in a formal contract, the intention of the parties may still be frustrated by a failure to express the terms clearly.

Who are the parties a QS is involved with when performing his/her routine duties? The first party is the employer or the paymaster of the QS, with whom he is having an agreement of employment and who assigns duties to him. His duties and responsibilities must comply with the terms and conditions of the employment agreement, codes and conducts of the organization, moral and cultural understandings of the organization and fellow co-workers etc. Then the QS deals with the employers, contractors, sub contractors, consultants, local authorities, insurance agents, banks, material suppliers etc. at the work place and with relevant professional institutions and their ethics, professional codes and conducts. The following (figure 1) illustrates patterns of contractual relationships and links existing between various parties of design and procurement teams.

Under the English law, it should be noted that only the parties in the main contract, namely the employer and the contractor might be sued. According to the JCT-1998 form of contract, the contracts between the employer and professional services are based on standard professional agreements formed by respective institutions. However, there should be collateral warranty, which would permit the employer to sue a subcontractor or a supplier directly. Not withstanding the absence of a contractual link, the employer’s professional advisers could become liable to the contractor in tort. Therefore, if the architect was to exceed the limitations of his authority without the knowledge of the contractor, the contractor could recover any loss suffered as a result of the actions of the architect.

In terms of negligence, similar to the many other professionals, Quantity Surveyor too has responsibilities and duty of care towards his/her client to carry out his work with due diligent, proper care and skill as per signed agreement. Where the law is concerned, negligence usually consists either of a careless course of conduct or such conduct coupled with further circumstances, sufficient to transform it into the tort of negligence itself.

In the English law, this requirement is clearly interpreted under Supply of Goods and Services act 1982. Accordingly, if a QS fails to fulfill his/her duties deliberately or due to negligence, the liabilities come into effect and he must

Figure 1- Contractual relationship of the QS

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pay the damages. As discussed above, Quantity Surveyor’s duties and responsibilities as well as the liabilities and consequences in the event of the failure, must be stated as a part of their service agreement. In the case of lack of care in delivering or discharging his contractual duties the QS can always be held responsible and is in breach of contract as per the 1982 act. For this reason, it is very important for the QS to perform with diligence and due care. For further protection however, it is advisable to have a Professional Indemnity Insurance Policy (PI) in place to cover any negligence.

What is the indemnity policy and its coverage? Professionals are advised to have some method to cover the liabilities for loss or damage in the event of any negligence caused by them. PI has become more popular in these days than before, as it can share the liabilities for possible losses. Such a policy will provide an indemnity in respect of legal liability for errors and omissions done or committed by professionals. PI is compulsory in many professional organizations; the RICS has introduced a compulsory PI to be effective for its members since January 1986. However, freedom of choice is with the members, and where to place such insurance remains open. Generally, all professionals must seriously consider the importance of this in today’s complicated market conditions, and in particularly to those who are willing to start their own businesses.

As discussed and shown in figure 1 above, the contractual link is very important and effects for claims or suing against negligence. Liability is considered independently. If there is no contractual link between the parties, a third party can sue only in the tort of negligence. However, plaintiff suing in negligence has to show that:

• The defendant had a duty of care to the plaintiff• The defendant was in breach of that duty• The plaintiff suffered damage due to the breach of

that duty and kind which is recoverable

In line with the above, in the case Junior Books Ltd vs. The Veitchi Co. Ltd (1982), the House of Lords held that a specialist flooring subcontractor was liable in negligence for defective flooring to the employer with whom a subcontractor had no contractual link or relationship. There are not much cases of law concerned with the negligence of Quantity Surveyors. However, it is advisable to have a PI cover which may limit the risk involved. According to the RICS code of conduct, a surveyor should never accept

work on ad hoc basis, but should always seek to formalize the process in some way.

For a QS, it is very important to identify and have a thorough knowledge of the contract documents. The contract should very clearly, unambiguously state and include which documents are forming a part of the contract. In construction industry, this may include the following among others: • The Contract Agreement (if completed)• The Letter of Acceptance• The Tender• Conditions of Contract • The Specifications• Contract Drawings• Bill of Quantities (BOQ)• Any other document forming part It is important to state the language or languages, in which the contract documents are written. In the event of more than one language is used in the contract document, the “ruling language” and who is interpreting etc, must be stated. Further, there are several documents in the forming part of the contract, and it is inevitable to have ambiguities because of different documents and accordingly, the priority order for documents (which shall take precedence) shall be given unless stated otherwise. Following cases illustrates how important the contract documents are in a construction contract: In a lump sum contract the contractor is liable to complete the project complying with drawings and specifications. In Williams vs. Fitzmaurice (1858), a lump sum contract to build a house was awarded to the contractor and he agreed to complete the works with supplying all materials as necessary. However, it was found later that flooring was omitted in the specification and accordingly, the contractor has demanded additional payment to do the flooring. It was held that the flooring was necessary to complete the work despite mentioning it or not in the specification.

In Davis Contractors vs. Fareham UDC (1956), the contractor had signed the agreement to built 78 houses in eight (8) months for a fixed price, subject to the adequate supply of labour in the market. However, this qualification was in a separate letter, which was not forming a part of the agreement. In the process of the work, there was an unexpected labour shortage in the market and delayed the project causing an additional cost of £ 17,000.00

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to the contractor for the prolonged period. It was held that the contractor himself should absorb this additional cost because the aforesaid letter of qualification was not forming a part of the agreement.

Quantifying of project scope is a fundamental duty of QS and therefore, a measurement of work is very important and this is to be done in accordance with Standard Methods of Measurements published by widely accepted international professional institutions like Royal Institute of Chartered Surveyors. When following an internationally accepted (standard) method by all parties, it is acceptable and clear to all users how and what work has been measured as parties are talking in the same language. Therefore, a professional QS must follow these standard methods of measurements in practice. Following are widely accepted methods currently in use:

• SMM 7 -Standard Method of Measurements by RICS• POMI -Principles of Measurements (International) by

RICS• CESMM 3 – Civil Engineering Standard Method of

Measurements by Institute of Civil Engineering UK

Bill of Quantities (BoQ) is another standard and important document that is used in the industry, and this provides a basis for estimating, price comparison, budget control, and contract administration guides. This is a very important and useful controlling tool at the tender stage as it provides uniformity for quantities for all tendering parties. In measured (re-measurable) contract (JCT 05, ICE 7), quantities are considered as approximate and shall be measured at the completion of the works, whilst JCT standard is for quantities, not required to re-measure. In a lump sum contract, quantities are not subject to be changed under normal circumstance and rates given in the BOQ are used to asses the progress of work for payment and pricing of variations.

Standard forms of contract are general and very important for all types of projects and parties use them very familiarly with the contents of the form of contract; by using widely used standard contract conditions, the contractor and the employer are aware of their common obligations and responsibilities towards the contract from the initial stage to the settlement of final accounts. The contract administration is the core function of the QS, where he/she has to apply internationally accepted contract conditions; RIBA, JCT, NEC, GC/wks/1, FIDIC etc, are some of

them. However, some countries and different authorities perhaps in the same country follow their own contract conditions. Most of them had modified standard contract conditions to suit their local/domestic requirements e.g. ICTAD in Sri Lanka. Dubai Municipality, Dubai Civil Aviations, Dubai Properties, Nakheel etc, in the UAE, are having their own contract conditions and thus heading to a complicated situation according to the writer’s personal view. Therefore, it is very important for professionals in practice to follow standard contract conditions not only to mitigate or/and resolve disputes but also to keep the profession in a greater position. Notwithstanding different forms of contract being used amongst many, there are some common clauses experienced day to day in the construction industry, particularly by Quantity Surveyors:

• Performance Security Bond - If the employer requires, the contractor shall provide a valid performance bond by using standard formats within an agreed period (as per FIDIC, this is 28 days after receipt of the Letter of Acceptance), in order to assure the proper and timely performance of the contract scope. This is for the employer to allow recovery of monies from the contractor in the event of breaching the contract by contractor. It is worth to read the following two cases to understand how effectively the law is playing in two different ways for two similar incidents.

Case-1: Trafalgar House vs. General Surety (1995), the House of Lords reversed an unwelcome decision of the Court of Appeal that a conditional bond was to be treated as an on-demand bond. Default by the contractor has to be demonstrated. However, in Perar vs. General Surety (1994) the Court of Appeal came to another surprising decision. The defendant had provided a bond by which they agreed to pay damages in case of contractors default. The contractor went into administrative receivership, and his employment was automatically determined. The Court held that ‘default’ meant breach of contract and that insolvency did not constitute as default. Therefore, bond provided no protection in precisely the circumstances in which it was needed.

Case-2: De Vere Hotels Ltd vs. Aegon Insurance Co Ltd (1998) is an attempt by a contractor to escape from his liabilities; the bond in that case stated that the contractor was to be released from his liability on issue of certificate of completion. However, before completing the work,

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contractor who provided the bond became insolvent and his employment was terminated automatically. Prior to issuing the certificate of completion, the employer had brought in another party to complete the work and the certificate of completion was issued after that. The plaintiffs made a claim on the bond, but the defendants refused to pay on the basis that their liability ceased on issue of the certificate. The intention had been that the bond should remain in force to protect the employer until the original contractor had completed the work. This had not happened because of its insolvency. The purpose of the bond was precisely to guard against such an event. The court therefore held that the bondsman is liable and the contractor could not escape from paying the damage to the employer.

• Programme - For the execution of the work, the contractor must give a programme using standard forms, and the method he proposes to adopt to execute the work. The contractor has to comply with the programme and he is liable for any failure in completing the programme due to reasons within the limits of his control. In such a situation the contractor has to pay liquidated damages and other consequences associated.

• Possession – The date or dates (if more than one) by which the contractor is to be given possession of the site enabling him to commence the work; liabilities and consequences are given for either party in the event of failure to give or take the possession.

• Completion and delay – In the Appendix to the tender, a particular time for completion of the work is to be stated for whole or parts of the work as appropriate and this may be extended by the contract administrator/employer under certain acceptable circumstances. In the event that the contractor fails to complete the work by this date (original or extended completion date), the contractor has to pay compensation for liquidated damage to the employer and if there is a delay from the employer’s part requiring an extension of time, the costs are to be awarded to the contractor by employer.

• Liquidated damages (LD) - This must represent a genuine pre-estimated value of the losses that will be suffered by the employer due to the non-completion of the work by the contractor on time. Courts usually do not uphold this pre-estimated figure of LD.

• Defects Liability - Defects for which the contractor is liable under the terms of the contract to be rectified by the contractor. Failure to do so will result the employer in bringing a third party to complete the work and the cost to be deducted from the monies due to the contractor. However, the employer should not prevent the contractor from rectifying the defects for unfair advantages or benefits because then his rights to recover the costs from the contractor under the contract may cease.

• Variations – This could be any addition or omission to the contract scope, or changing of quality, changing of levels perhaps, or this could even be changes to time. All the variation to the contract must be authorized by the contract administrator/employer prior to the contractor commencing the varied works; otherwise the contractor shall be at a risk for the entitlement of payment for varied work. Most contracts state that variations must be in writing. Whilst some forms of contracts do not permit verbal instructions for variations, some are permitted subject to confirmation in writing within a certain period of time. Under the common law of contract the contractor is still entitled for payment for varied works even if the employer argued on the pretext that there is no written instruction. This is because there is an implied promise to pay for varied works, as illustrated in Molloy vs. Leibe (1910). However, the situation is different, if it is an express term of the contract which says that, precedent to payment for extra work an instruction in writing is a condition. There is no payment due without having a written instruction (Nixon vs. Taff Railway – 1848).

• Payment – Progress of the work must be paid usually by monthly installments on the basis if the contract will take more than 44 days to complete( unclear- rephrase); if this is less than that period, payment will be given upon completion of the whole work. Employer is liable to pay the contractor on time as per contract under normal circumstances. Delaying of payment by the employer shall face consequences and perhaps the contractor may terminate the contract and leaving the project. An employer’s contract administrator (QS) has no contract with the contractor and it is impossible for contractor to sue the QS under the contract but the employer. Additionally, as he does not owe a duty of care, under the tort law it is also not possible to sue the QS (Leon Engineering and Construction Co.

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vs. Ka Duk Investment Co. Ltd 1989). However, it is the contract administrator’s moral duty to recommend correct representation of the work progress in a timely manner for payment to the contractor; remember the employer can take action against the QS for his/her delay in recommending payment on time for the contractor.

• Retention – The entire interim amount certified for

progress of the work including materials at site is subject to deduct retention by the employer in order to protect himself, if the work is incomplete or defective. The contractor has to rectify his defective or incomplete work in order to get the retention money. Normally, the retention is 10% of the certified value. First half (first moiety) of this will be released with the issuing of completion certificate (or Taking Over Certificate) and the rest will be released after the issuing of Defects Liability Certificate.

• Determination - Either party in the contract need to

determine their rights under the contract or provide some method to reserve their rights. The contract administrator shall consult the employer and the contractor before determining the amount or time of such a right.

• Disputes- Most probably disputes occur when more

than one party is involved in a business; in the construction industry also there are many disputes during the progress of the work. Therefore, there must be some methods to resolve these disputes. It may be resolved by Conciliation, Mediation, Adjudication, Amicable settlements, and Arbitration which are some common alternative methods for resolution of disputes over the litigation.

Alternative Methods of Disputes Resolution: Disputes occur very commonly when dealing with multi cultural or multi national societies and that will be further fueled by applying of non-standard contract documents in the construction industry. This is further heightened by current recession. The construction industry is heavily affected in numerous ways. Knowledge, ethics, discipline, and different interests of the parties also affect disputes. Standard methods, and accepted norms exist to handle these issues and the QS must be aware of those. In resolving construction related disputes, Quantity Surveyor plays a major role. In most of the cases, the Quantity Surveyors

in different capacities are responsible for activities such as keeping all relevant contemporary records, time and cost related information, identifying the disputes, preparing and presenting the case, acting as adjudicator, arbitrator and representing as members of the tribunal panel of the arbitration etc. This is because, the QS who has the contractual, commercial, constructional and perhaps, legal knowledge of the construction industry is better than the other professionals in the industry in handling such issues. Few alternative methods of dispute resolution are briefly explained below as they are internationally accepted.

Mediation: Both the worrying parties come together, select and accept a third party to act as a mediator to resolve their dispute. The mediator has no power to impose a decision but witness the solution agreed by the parties and document it to accept for both the parties.

Conciliation: This is also almost the same as mediation but the third party (Conciliator), has more power than the Mediator, as he can suggest possible solutions for the parties to agree.

Ombudsmen: Large organizations like banks, finance companies, insurance companies etc. apply this method by selecting a neutral person to investigate their complaints. This person (Ombudsman) has to have an independent office for public to bring their complaints about any malpractice of public or private organizations. Most ombudsmen can only recommend solutions; very few can make legally enforceable decisions.

Arbitration: Here the parties agree to present their dispute to an independent and well-reputed third party to bring a decision, which can bind the parties. This is a private method for dispute resolution and is widely accepted by many countries with the exception of criminal disputes. Parties can appoint arbitrators. Both litigation and arbitration consume more time and cost, but compared to litigation, the arbitration is better in terms of cost and time. Also arbitration is more flexible compared to litigation. Importantly, as arbitration is not open for public, the parties can avoid unwanted publicity and keep their confidentiality.

As discussed above, there are many reasons behind rises to disputes and it is important to get them resolved in a fair and reasonable manner for the acceptance of all the relevant parties within a reasonable cost and minimum time. Nevertheless, litigation and arbitrations are mostly

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accepted methods to resolve disputes; both are very costly and consume lengthy time in an unacceptable manner. Following are important factors to be reviewed prior deciding to go for arbitration:

• Amount disputed will remain unpaid till the dispute is resolved

• Cost of arbitration is very high and that is an additional burden

• Contract perhaps should be completed or abandoned some years before the award

• Interest for the money withheld and losing future opportunities may occur

• This could badly affect the reputation of the company name

• In the worst case, companies may face bankruptcy or declare insolvency prior to the award

Looking at all the given reasons, it is better not to encourage parties to go for above methods but for other alternative methods of dispute resolution. Goodwill of the parties and proper coordination and communication are important at this point to bring the worrying parties for an amicable settlement.

Conclusion: Quantity Surveyor’s role in the construction industry is vital. Starting from preparing of conceptual cost proposals stage to the settlement of final accounts, he plays a major and an invaluable role covering many different and important disciplines. In early seventies, work of the Quantity Surveyor is defined by the Royal Institute of Chartered Surveyors (RICS) as “Ensuring that the resources of the construction industry are utilized to the best advantage of society by providing, Inter alia, the financial management for projects and a cost consultancy service to the client and designer during the whole construction process.” However, the above classification and role can’t be used as it is today, because the industry and the profession have changed, developed rapidly during the past three decades and are more complicated now. In 1980s, a survey conducted by RICS revealed that the role of Quantity Surveyor has been expanded based on skills, knowledge, expertise provided by the QS and that could be provided both inside and outside of the construction industry based on clients’ requirement. The changes we have referred to above have mainly been identified by a survey carried out by Davis Langdon in the year 2000 and that are; changes in market, changes in the construction industry, changes in clients’ need, and

changes in the profession in line with globalization. The traditional QS had a very limited scope according to the situation and requirement of the time. However; today this has changed rapidly due to the reasons discussed above and can be classified as follows:

• Investment appraisal • Advice on cost limits and budgets• Whole life costing• Value management• Risks analysis• Insolvency services• Cost engineering services• Sub contract administration• Environmental services measurements and costing• Technical auditing• Supply chain management• Products and projects life cycle• Planning and supervision• Valuation for insurance purposes• Project management• Facilities management• Time management• Advice on contractual disputes (Arbitration)• Planning supervisor• Employers’ agent These changes should be focused mainly on following areas: business world, customers, projects, skills and information and communication technology (ICT).In view of the above, isn’t it obvious that the Quantity surveying profession is highly innovated, becoming more complicated and competitive? In order to have a smooth flow of function, the profession has to be more standardized and simplified on one hand and in the other hand, Quantity Surveying professionals must be updated to comply with the above requirements. What is the key for simplifying of complicated areas as above? Without doubt, it is the law. Each and every single area of above is linked with the law. Therefore, it is very important for QS to learn the law at least in the area related to the profession in order to succeed in the future; this is a challenge which can be turned into an opportunity.

Bibliography:Willis’s Practice and Procedures for Quantity Surveyor (12th edition) 2007, Construction Construction and Regeneration act 1996 in the UK, Arbitration Law in Sri Lanka (second Edition), Evolved role circa (2006)


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W B Elmo F J Fernando FRICS, FIE(Aust), CPEng, F.ASCE, MCIArb, FIQS (SL)is a Chartered Professional Engineer and a Chartered Quantity Surveyor. He has a vast experience in Project Management and Facilities Management. He was elected by RICS to represent Asia in Project Management in RICS International Board UK from 2000 to 2003 and in Facilities Management in RICS International and Asia Pacific Boards from 2000 to 2008

Facilities Management – An Introduction

For the last three decades, Facilities Management (FM) has developed faster than almost any other professional discipline. FM provides property and related services to enable businesses to optimise its working conditions. Its rapid rise has outpaced criticism that it is simply a marketing platform, or an attempt to exaggerate the importance of the group of specialist middle managers. The facilities management movement is gathering pace in a truly international sense: from its North American origins, it has now spread to Europe, Australasia and all eastern countries such as Japan Hong Kong, Singapore, Thailand, Malaysia, Indonesia and the Middle Eastern countries. The role of the facilities manager is recognized as something more pro-active than that of the traditional Premises, Building, or Maintenance Manager.

So what is facilities management? It is the structuring of building plant and contents to enhance the creation of the end product, which in other words is to get the best out of the facility. As with all systems it is the generated benefit to the business or activity that matters, not the system itself. The end product can, in this case, be a tangible manufactured item or a service. Well designed, well built, well operated buildings/facilities are a pleasure for the inhabitants and the owners. In the best circumstances they enrich the environment of the people who use these facilities. The best facilities are the ones whose operations are not noticed because they run so well. When analyzed, the life cycle entails two major sectors. Those are the Project Cycle and the rest is the economic real Life Cycle of the Building or the Facility. Ideally, the Facility Manager should take over the Building or the Facility at the tail end of the Project Management.

Facilities Management Improves Business Performance

The Integrated Strategy

Each modern organisation is complex and highly individual, so it is vital to understand how its various parts fit together in the jigsaw and how these parts interact with each other. The organisation’s individual parts must be effectively managed if performance is to be maximised.

The facilities manager has a very important role to play in this by understanding a broad range of aspects: acquiring and setting up suitable premises; managing staff moves into space; the workplace environment; health/safety; fire precautions; insurance; churn (i.e. office change); thus, organising all the support services and infrastructure in a timely manner to ensure Quality, Cost and Performance to achieve BEST VALUE FOR MONEY is necessary.

To ensure the ideal balance, it requires an integrated approach by a professional with the necessary breadth of knowledge and skills – and a realistic, practical ability to implement changes smoothly. A combination of high level specialist expertise with an emphasis on flexibility is essential.

Cost EffectivenessThe cost of facilities represents a significant element of most organisations’ outlay. Ensuring that the facilities provided are appropriate and delivered at best cost will benefit the organisation at every level.

By offering a full understanding of the way these elements interact, the facilities manager will not only ensure that specifications for the support services are appropriate,

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but will go on to ensure that services are monitored, service levels maintained and budgets adhered to. The balancing of facility cost and service quality is crucial to an organisation’s effectiveness.

Performance measurement One important aspect of FM is the comparison of costs and techniques with similar businesses. But these techniques can also offer the realisation that better ways of doing things do exist out there, and that the employment of new techniques can make a huge difference to the effectiveness of an organisation. A good facilities manager will be aware of best practice in the facilities industry and be able to integrate new methods into an organisation.

OutsourcingMany organisations have been looking at outsourcing as a way of saving cost. But is this a good solution? How does any one select the right supplier, get the right services, deal with problems and endure that standards are kept?

While outsourcing may often offer a solution, there are many alternative routes to consider, each with its own advantages and disadvantages. Organisation needs to consider all the issues, and decide how the solution will be managed within the organisation. A vital balance comes into play here; enough control must be retained for the organisation to stay at the helm, yet enough must be outsourced for the arrangement to be worthwhile.

The scope of the Facilities Management is extremely wide and varied. The following list indicates the range of services covered in Facilities Management

Business Management• Business Planning• Strategic Advice• Business process re-engineering• Disaster recovery planning

Real Estate• Property Reviews• Asset Management• Property Management• Maintenance and Repair• Rent Reviews• Lease Negotiations• Acquisition & Disposals• Service Charges

Security • Security Systems and Managements• Risk Management

Support Services• Catering Vending• Cleaning and Refuse Disposal• Building Services and Equipment

Project Management• Change Management• Construction Management

Financial• Preparing Operating Budgets• Operating and Reporting Cost Analysis

Workplace• Space Planning• IT & Telecommunications Infrastructure• Energy Management and Conservation• Post Occupancy Evaluations

Health & Safety• Health & Safety Law• Fire Safety Requirements and Procedures

Procurement• Tendering of Goods & Services• Assessment of Goods and Services• Contract Administration

Operations• Managing Operational Services• Analysis of Requirements• Preparing Specifications• Benchmarking

The economic principles and the business objectives which apply to any organization that receives funding through income, grants or proceeds of sales should balance that income with its expenditure.

The most beneficial cost controlling activities within facilities management are:• Space Planning and Costing.• Asset Tracking.• Maintenance.• Life Cycle Costing.

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The space, like time, costs money. The provision, servicing and maintenance of accommodation are large costs for many organisations. Without efficient space management the resources tied up in property are not used to the company’s best advantage.

Asset tracking may not be instantly recognizable as an activity, but it is a logical development and replacement of traditional inventories. Companies dependent on external funding of working capital through banks, venture capitalists or shareholders are deeply interested in the net asset valuation of their work; it is the basis of much bank-based financial support and together with profit/dividend potential earnings sets the level of share value in a floating market. A strong net asset value gives confidence in long-term stability which, together with a strong share value, presents one of the least costly funding routes for raising development or expansion capital.

Maintenance and life cycle costing are interrelated with maintenance planning, which is often thought to be the facilities manager’s principal task. Reality is not quite the same, for in fact the facilities manager’s task, if properly developed, covers a wide range of activities relating to the provision and use of buildings and contents. Maintenance should be reviewed with references to total quality management (TQM). But experts have observed that ‘periodic maintenance allows the Building capability to be recovered to a level comparable with the Building’s initial condition. However a gap continues to emerge throughout the Building’s life because user expectations increase and indeed change in nature & Technology’ and this was seen as a technological and functional driver of Facilities Management. Also, Life Cycle Costing needs to be examined and monitored throughout in order to balance cost against life expectancy.

Facilities Management is not just about controlling cost; there are several significant services that can be managed through FM systems to ensure the smooth operation of a company or organization. These services are:

• Health and safety monitoring (no full stop)• Component specifications• Systems and software• Services

Property is a finite resource that needs to repay the capital cost of its creation on an investment basis. Those

buildings that serve a public need but cannot satisfy the investment return principle can only be funded with grant, government or other non-commercial assistance. Buildings have a value cycle whereby they are developed to satisfy current and perceived future demand. If the developer makes the correct judgement the building will grow in investment value, driven by demand. Progress, however, changes demand and in time most buildings will have matured to their peak value and will slip into decline. The application of active facilities management that studies the use of the building and adjusts it and the occupation to best match current demands will slow down the value decline. Refurbishment, alteration and even change of use all prolong the life of the building. Most cities have easily recognizable examples of fine architectural buildings that have changed use. This all helps to preserve heritage, as well as conserve building stock.

Some buildings will have a defined lifespan and will be constructed accordingly; here the facilities manager’s task is different. In this case the objective is to extract the maximum benefit from the property over its planned life, without incurring excessive cost in keeping it running towards the end of the period and therefore, life cycle costing is very relevant to any manager in this position. The ultimate conclusion for any building at the end of its economic life is demolition, which then releases a site for a new development, thus starting the cycle over again.

The facilities manager, while dealing with day-to-day occupational demands, has a long-term influence on property economics.

The economic benefits of facilities management results in improved productivity, better product quality and overhead control. The control of overheads generates a return to the organisation year after year, but engaging a full-time facilities manager or even setting up a department adds directly to the overhead. It is important therefore, to ensure that the financial benefits more than justify the cost of a full-time, in-house service.

The use of a professional facilities management consultant can sometimes solve these problems by supporting an over-stretched in-house manager on specific projects like market testing outsourced support services, or for system development, in order to add more management functions or update records and technology. However difficult the

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generalisations remain, a common thread binds facilities managers together and reinforces their contribution to overall business performance. For as coordinators of such a wide range of technical skills, facilities managers are in a unique position to set and maintain quality standards in the working environment, and to help improve briefing and decision-making by providing data on how their buildings are performing. They also have an increasing important role to play in terms of accountability for safety standards and for ensuring that staff and occupants are protected from potential health hazards, and that the building is not a ‘Sick Building’.

The profession of facilities management is gaining respectability through the interest of various professional bodies and educational establishments. The Royal Institution of Chartered Surveyors has a skills panel and a separate faculty on the subject and there are bodies like the British Institute of Facilities Management formed out of the amalgamation of the Association of Facilities Managers with the Institute of Facilities Managers where membership leads to an interchange of current views.

The most encouraging sign that this is evolving into a recognised professional discipline must be the creation of structured study and examinations leading to degrees and corporate membership of several recognised professional bodies.

Facilities Management - By Chartered SurveyorsThe Royal Institution of Chartered Surveyors (RICS) is the world’s leading professional body concerned with the management of property and construction and it has a Facilities Management Faculty representing over 9000 members worldwide.

Chartered Surveyors are educated to degree level and then trained to develop practical skills necessary to manage complex property and construction related issues. They are educated and trained to take ‘the wider view’ of the issues to ensure their clients get sound advice about the range of choices available to them.

The development of Facilities Management education and training has been driven by demands primarily at graduate level and University of Moratuwa, Sri Lanka, has initiated timely action in introducing a four year BSc Degree programme in Facilities Management, which is accredited by RICS. The first batch of graduates will take up their position as FM professionals when they pass out in June 2010.

RICS is now offering alternate designation or the status, ‘Chartered Facilities Management Surveyor’, for these professionals who could demonstrate stipulated criteria of this global professional body.

Chartered Surveyors recognise the importance of facilities management to business today and RICS Facilities Managers ensure their clients receive consistently a high standard of professional advice and the world class support demanded in today’s global economy. Many Chartered Surveyors practice and companies provide facilities management services globally. Clients have found that their expert professional knowledge and practical management skills are unrivalled in this field, enabling them to reduce their facilities costs and enhance the productivity of their business.

Viking Grain Storage v T H White Installation (1980)

The contract concerned the supply of grain silos. The grain developed mould whilst stored, due to inadequate ventilation.

Held that the defendants were liable for not provideding goods fit for their purpose.


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Gamini Dayaratne MACostE, AACEis holding memberships with The Association of Cost Engineers, U.K. and AACEI, U.S.A. He has been employed by British International Construction companies for the past 18 years in Sultanate of Oman and U.A.E. Presently working as a Assistant Commercial Manager, Al Futtaim Carillion LLC, Dubai

Application of Cost Engineering Techniques During the Global Recession

SummaryIt is now confirmed that the world economy is in recession since late 2008. It has affected businesses and organizations in varying degrees and proportions depending on their exposure to the global financial system. In this Technical Paper, an attempt has been made to understand the effects of global economic crisis on the parties involved in the construction industry, (i.e. The Client, Project Manager and other Consultants, Contractor and Suppliers) and find ways and means in minimizing the effects in relation to Cost Engineering principles. The major conclusions and recommendations of the paper relate to the effective use of Cost Engineering Techniques in minimising the effects of the global economic crisis by these parties. These include:

• The effective use of Engineering Economics and Cost-Benefit Analysis by Clients

• How Earned Value Management could help Project Managers to accurately advise their Clients on their projects

• What costs may not be recoverable by Contractors? What remedies they may have in the wake of project cancellations?

• How the Suppliers could protect themselves from the sudden price fluctuations in the market – theories of Risk Management, Hedging and Insurance

• Silver lining in the dark clouds – Positives suggested during the period of recession

What is the role of a Cost Engineer?The Cost Engineer’s role in a project could be compared with that of a navigator of a ship. He does not really control the actual progress of the ship, but, he is constantly evaluating its status, comparing with the plan,

helping the skipper stay on course. In order to accomplish this ‘navigation’, the Cost Engineer must know exactly what the scope of the job is, what the conditions are, the present status of the job and how to forecast the future. If, based on the present, the future is not assuring, the Cost Engineer must inform the Project Manager so that corrective action can be taken immediately. Cost control will make sure that the ship will stay on course; cost forecasting tells what will happen if the ship continues its present course. That is why timely corrective action is required if the trend is not as planned. Otherwise, the ship will follow the dominant currents and winds, and may land hundreds of miles away from its destination and many days behind – if it does not crash on some rocks on the way1 .

Introduction to the global economic crisis in 2008In 2008, a global economic crisis was suggested by several important indicators of economic downturn worldwide. These included high oil prices, which led to both high food prices and global inflation; a substantial credit crisis leading to the bankruptcy of large and well established investment banks as well as commercial banks in various nations around the world. This in turn contributed to increased unemployment and the possibility of global recession2.

The rise and fall of the oil prices during 2008 also is largely seen as consequential to the same phenomenon. Oil prices, which were zooming to all-time highs have crashed. Oil prices had crossed the $100-mark for the first time in 2008. The prices further zoomed to $147 in July. There were even predictions that oil would hit the $200 mark. The surge in oil prices was alarming. The fall in the dollar rates was one of reasons for the rise in oil prices. A weaker American currency tends to increase the

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How it affects the construction industry

a) ClientThe term ‘Client’ in this report refers to the individual or company who owns or invests in the project. In today’s world of business organizations, most clients depend on global financial institutions for financing their projects. Since late 2008, in the wake of the global financial crisis, banks in most countries have adopted credit control measures creating a huge impact on the availability of funds for the new projects. With the increasingly tight financial regulations being introduced by their banks, the clients are forced to revise their programmes and budgets of their ongoing projects while the new projects are put on hold or cancelled. Some clients may be forced to revise their project budgets by measures such as reducing the scope of works, revision of finishes (from luxury to ordinary) and so on.

The Economic Analysis techniques in Cost Engineering such as net present worth method, capitalized cost method, annual cash flow analysis, rate of return analysis, benefit–cost ratio analysis and payback period analysis shall provide clear guidelines to Clients in making important decisions with regard to the economic viability of projects. Many economic problems we face today have more than one possible solution or alternative. The concept of ‘equivalence’ in Engineering Economics could be used to compare the cash flows of the alternatives available at different points in time. Equivalence is based on the time value of money. The cash flows of the alternatives can be converted to similar lump-sum values or uniform series at a particular interest rate and at any given time using the principles of Economic Analysis.

Cost-Benefit Analysis (CBA) is a powerful, widely used and relatively easy tool for deciding whether to make a change or not. This method involves the simple

Chart No. 1 – The rise and fall of crude oil prices in 2008

demand for dollar-denominated oil as it becomes cheaper for buyers using stronger currencies. Oil prices also rose as investors saw it as a safe investment amid fears of rising inflation and a US recession. However, demand for oil started slowing down drastically in the wake of the recession in developing countries. The downslide of oil prices began3. (See Chart No.1)

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comparison between benefits and costs of a proposed action. Benefits are placed in the numerator and costs are placed in the denominator. If the ratio of benefits to costs is greater than one, the project is viable. Comparisons can be made between many projects to select those projects with the highest B/C ratio. Costs are generally one-off, or may be ongoing. Benefits are most often received over time. We build this effect of time into our analysis by calculating a payback period. This is the time it takes for the benefits of the change to repay its costs. In the case of deciding whether or not to cancel a project all the costs associated with the cancellation need taken into account. These may include the following:

• Costs associated with preliminary surveys• Consultant’s fees• Design costs• Setting-up of temporary facilities• Possible procurement costs• Costs associated with penalties as prescribed in the

Contract agreement in case of cancellation• Opportunity costs (cost of the alternative lost due to

cancellation)

The following information provided by the Cost Engineer will provide a good platform for the Client to take important decisions with regard to his projects:

• ROS – Return On Sales (Ideal tool for property developers to monitor over a period of time to judge where their businesses are heading)

• The Cost-Benefit analysis• The current status of the project financially, in

comparison with the cost plan• Details on cost over-runs if any, and it’s cause and

effect • Point out unfavourable trends based on the available

data and make recommendations for future actions, if any

• Forecast the cost to completion based on the costs foregone and projected future costs

• Recommend corrective actions to be taken, if any

b) Project Manager (and his team of Consultants that the Client hires for the execution of the project )Project Manager organises and manages the project on behalf of the Client. In addition to co-ordinating client’s decisions among various parties involved in the project

(eg: Architect, Structural Consultant, QS Consultant /Cost Engineer, MEP Consultant, Main Contractor etc.) , it is the Project Manager who updates the Client with the feedback from all these parties. At the time of the global economic slowdown, Project Manager plays a significantly important role in assisting the Client to make important decisions with regard to the commencement of a new project or continuity of an ongoing project. This may be in the form of presentations on the financial viability of a new project based on current trends in the global market and reports on actual against planned progress(idea not clear), current cost versus budgeted costs and so on for an existing project. The Cost Engineer’s role is quite significant here as all the important decisions with regard to project finance will be taken by the Client with the use of financial reports prepared by the Cost Engineer. For instance, the decision to go ahead with a new project or purchase of a particular plant/equipment for the project at a certain juncture will be taken by the Client after studying the cost analysis prepared by the Cost Engineer using his knowledge in the principles of ‘Economic Costs’.

Another Cost Engineering technique the Project Managers can utilise within the current economic turmoil is the Earned Value Management (EVM). Earned Value Management is the process of integrating the project costs and the project schedule in order to measure actual performance and forecast future performance against an established baseline. With proper implementation of EVM, accurate measurement can occur at anytime throughout the project lifecycle. However, accuracy requires that a thorough Earned Value Management System is in place and is being utilized consistently throughout the project.

Project Managers are required to demonstrate to the Client that they effectively manage project costs. Through Earned Value Management they can answer the Client’s question, “What am I getting for the money being spent?”

Utilizing EVM techniques does not prevent project costs overruns, but it does provide project managers with data for more effective cost and risk management, which has become increasingly important in today’s scenario. Risks that are identified through the use of EVM provide early warning signals that imminent project risks exist4 .

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C) Contractors (and subcontractors)In the ‘Tsunami’ of global economic meltdown, the Contractors could be the hardest hit in terms of lost revenue, reduced profit margins and loss of skilled manpower.

The first line of fire the Contractor receives is from his beloved Client in the form of cancellation of the project awarded a few months ago with no prior notice whatsoever. The reason we hear most often is common; ‘due to global financial crisis’. All the effort that the Contractor puts into the project over the past few months in the form of planning, procurement, recruitment, setting-up of offices etc. will be shot down with that powerful letter from the Client. The Client might promise that the works already carried out will be jointly recorded, evaluated and properly reimbursed, but, still the Contractor will end up on the losing side due to other indirect costs such as;

a) Recruitment costs – The cost spent on recruiting specialist personnel may not be fully recovered. It could be that the Contractor may have to terminate the employment contracts of some of these new recruits with a penalty payout for early termination.

b) Procurement costs – The Contractor may have placed an order for the full quantity of steel for the project just after the project’s award, which could be a few months before the meltdown began. That time the general conception in the market was that the price of a barrel of oil will exceed $200 and the prices of other commodities will also follow suit. The unit price (per tonne) the Contractor agreed with the steel supplier could well be more than what he allowed in his tender which must have been submitted a good six months before the steel price shot up in the world market. By the time the Contractor receives the letter of cancellation of the project from the Client, the steel price in the world market has plummeted to as low as 25% of the price in peak. (Refer Chart No. 2 – Global steel price graph)

If the Client agrees to takeover all the steel delivered to site at the LPO price, then the Contractor’s woes are minimised. But this is very unlikely as most of the Contracts now demand for ‘just-in-time’ deliveries of major materials, plant and equipment.

Global Steel price graph.

Chart No. 2 – The rise and fall of world steel prices in 2008

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c) Opportunity cost – i.e. The cost of the jobs foregone. It could be that the Contractor has declined to submit tenders for a number of other projects offered by reliable clients with secured finances a few months ago, simply because he/she was so keen on this multi million dollar project he/she was concentrating on at that time. All his/her estimators were busy pricing this big project with such a prestigious Client which was finally won and awarded to the Contractor with much fanfare and announcements in the press. A few months into the project, the letter of cancellation arrives from the Client. The poor Contractor has no chance now to secure those smaller projects.

The second attack also comes from the beloved Client. This time in the form of non-issue of cheques by his finance department for the work already carried out and properly certified by the Consultants. The effect of this second line of fire will have a ‘domino effect’. The subcontractors and suppliers will be lining up at the Contractor’s office until their payments are released. The company will look into all the possible means of cost reduction techniques that may include scrapping of bonuses, increments, advertisement and reduction of overtime hours and so on. Depending on the severity of the financial situation many workers will also be made redundant.

In light of the current economic downturn, contractors will have little legal recourse if payments for on-going projects get delayed, legal experts say. According to a legal consultant in the United Arab Emirates, “Payments getting delayed will be a common feature in the market over the next six months. If the money isn’t there, there is very little a contractor can do about it. It is a risk they have taken. It is possible that certain contractors have taken payment security in the form of bonds or letters of credit, but that is extremely rare. Under UAE law a contractor can claim property against his/her unpaid dues. But, it is extremely difficult to get to that position as it requires a court order. The bottom line is that a contractor is left to chase the assets of the owner. Unfortunately, we will soon find out that insolvency laws are under-developed in the UAE. There is a huge inequality between a contractor and developer - if a contractor defaults, the employer has the ability to get the money from the bondsmen or the bank, conversely if the employer has to pay, there is no similar mechanism for the contractor5.”

d) SuppliersIn the Global financial crisis, the suppliers of materials and

services also suffer in varying proportions. The suppliers who rely on the Contractors for their businesses may affect in two ways. One, when the Contractor receives the letter of cancellation of the projects from the Client, he/she will pass it down the line to his subcontractors and suppliers, often cancelling the orders placed with them. Two, the loss a supplier (who is a stockist of materials such as Bar reinforcement in bulk quantities) will incur due to the falling of prices of major materials in the world market. The Cost Engineering principles of Economic Order Quantity (EOQ) and Re-order Point (RP) are handy tools for the supplier to manage his purchases efficiently which is a key to offering competitive prices in the market.

The principles of Risk Management in Cost Engineering provide a consolation for suppliers caught in this type of uncertain market conditions. Every major supplier must have a risk planning procedure in place with regard to his/her business. Broadly, the risk management procedure should include external, internal, strategic and tactical risks identified assessment criteria for occurrence and impact, analysis approaches and general mitigation strategies6.

Once a risk is identified and assessment criteria defined, a mitigation technique is to be chosen. In the example of the steel supplier losing money due to sudden reduction of prices in the world market could be mitigated by techniques such as ‘hedging’ or ‘insurance’.

Hedging is a specialized part of transfer where the risk of price fluctuations is assumed by a speculator through the purchasing and selling of futures contracts. It is assumed the commodity futures contracts are covered by an organized exchange, such as Chicago Board of Trade.Insurance is a part of transfer but by companies that indemnify parties against specific losses in return for premiums7.

‘Silver lining in the dark cloud’ – What are the positive alternatives which could be implemented during the economic crisis?

The different parties discussed in this article could draw a lot of positives from the global economic downturn surrounding the world today.

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• Clients could make use this opportunity to promote sustainable alternatives which are environmental friendly and having a smaller carbon footprint. According to an expert at the Reuters Global Environment Summit, “The current financial downturn could spur demand for sustainably designed buildings and communities. The heart of sustainability is conserving and not wasting, and this idea of getting clients to think about projects that are actually less expensive rather than more expensive and still sustainable these days gets a lot of good traction. It’s the environmental opportunity of a lifetime and if we don’t use it now as an opportunity to make the sustainable movement not just make progress, but gallop ahead, we’ve lost our chance8.”

• Project Managers, Architects, other Consultants and Contractors’ main aim during this period should be to control and reduce costs. They need to look at the scope for reducing costs, addressing which overheads are fixed (bills that will continue to fall due even if there is no work coming in) and which are variable (most significantly staff costs). Savings are likely to mean a reduction in staff, but they need to remember that redundancy is expensive (payout of gratuity etc.) and so is re-recruitment. Sharing resources with another practice could give a bit more flexibility during the difficult times.

Since Clients are also struggling with the same economic pressures, Consultants could give a thought to how to create value for them in the way that the service is delivered. i.e. “How do we get buildings up at minimum cost and maximum value?”

Another good idea may be, If possible, keep investing in training, research and development, and plan for the medium and long terms. Markets could bounce back any time and with different demands. It is necessary therefore to be ready to respond to those differences in the face of ever-growing competition on both quality and price.

• In the case of Suppliers, this could be the best time to re-evaluate their strategies. If the companies who purchase materials from the supplier is in a financial mess (may be due to not receiving due payments from Clients) there is a chance that the supplier may not get his payments for the materials already supplied. In such cases a little open dialogue and honesty can go a long way. It may be worth offering discounts or

renegotiating terms for the existing orders so that the chance of receiving overdue payments could be high. This would help them regaining the confidence of the Contractor who may continue business with them in the future. It will also be beneficial for them to review their insurance policies to avoid future losses in similar scenarios. It is also worth to study the option of hedging if such a cover does not currently exist for their supplies.

ConclusionsIn this technical paper the writer has attempted to identify and analyse how the different parties involved in a Project are affected during the global economic crisis. It further develops into identifying the Cost Engineering techniques that could be used by the different parties to minimise the risks to their organizations during this era of economic uncertainty. Further, an attempt has been made to look into the possibilities of obtaining positive results based on sustainable development of the industry with the use of environmental friendly techniques. Based on the suggestions made by the writer in the section titled ‘Silver lining in the dark cloud’, a follow-up study in detail could be beneficial for the future of the industry in general.

Bibliography1 Abstract from the book ‘Construction Cost Engineering

Handbook’ by Anghel Patrascu, C.C.E.. Published by CRC Press, 1988.

2 Abstract from ‘Economic crisis of 2008’ - www.wikipedia.com and slightly modified.

3 Abstract from the URL : http://specials.rediff.com/money/2008/oct/17slide1.htm

4 Abstract from the report titled ‘Utilizing Earned Value Management During Economic Downturn’

By Kevin L. Smith, MBA, PMP, and slightly modified to suit the subject.

5 Abstract from the article titled ‘UAE Laws do not favour Contractor’ by Shikha Mishra from the website www.arabianbusiness.com.

6 Abstract from Chapter 31 – Risk Management by Allen C. Hamilton, CCE from book Skills and Knowledge in Cost Engineering, 5th Edition Revised page 31.2

7 Abstract from Chapter 31 – Risk Management by Allen C. Hamilton, CCE from book Skills and Knowledge in Cost Engineering, 5th Edition Revised page 31.6

8 Abstract from a news item from website http://www.futurefuelsme.com/news/2008/news_08_472.html


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Ranjan Dommanige TCInstCES, HND(QS)Ranjan is a Technical Member of the Chartered Institution of Civil Engineering Surveyors and holder of High National Diploma in Quantity Surveying & Building Economics, and having over 20 years diversified experience in the construction industry in various projects in Sri Lanka and United Arab Emirates. He is currently working as a Consultant Quantity Surveyor for Dubai branch of Aurecon International Pvt Ltd.

Tender Procedure- Criterion Influencing the Decision to Tender

Evaluation and identification of the criteria in the tender documents including the form of invitation to tender and their influence on decision to tender

Invitation to TenderInvitation to tender is an important document containing valuable information which could influence the decision to submit the tender. The information contained in the tender invitation will reflect whether open tendering or selective tendering will be used in the tender procedure. Generally the information provided can be identified as follows;

The ClientThe details of the client is vital as much can be learnt about credibility, attitude towards releasing payments, financial stability etc. by investigation. The necessary information will be readily available in case the tenderer has previous experience of working with a particular client. Furthermore, knowledge of client’s practices with regard to dealing with variations claims or any contractual disputes will be quite useful and will influence the tender.

Type of ProjectThe type of work is another important factor that the Tenderer has to consider. He/she should be satisfied that he/she has the capacity and the competency to undertake the work defined by the scope of work.Generally projects can be categorized into several fields as follows:• Commercial • Industrial • Residential• Healthcare

• Transportation• Marine• Educational• Water supply & drainage

The identification of the project category would assist the Tenderer to evaluate the availability of suitable resources such as managerial & technical staff, plant & equipment of suitable type and capacity, skilled and unskilled workmen, special materials, specialist sub contractors etc. He/she has to take account of availability of his/her own resources and consider other arrangements such as hiring, procurement and leasing of items that are not available. He/she also has to consider any special requirements or conditions associated with construction of the specific type of the project. A project with many specialized items of work involving high level of technical expertise could be beyond the tenderer’s capacity. The magnitude of the project and the period of construction dictate the scale of financing of the project and the tenderer should have a proven plan of funding. Location of the Project Factors related to the location of the project are numerous and should be observed and investigated by a site visit.

• Locality of the site such as urban, rural or isolated and details of nearest town, shops, hospital, police etc.

• Physical site conditions such as subsoil data, level of ground water table, terrain, proximity to rivers, lakes, sea etc., presence of nearby structures or obstructions.

• Availability of services such as electricity, telephone, water etc.

• Presence of highways, railways, airports, harbours and the distances to the nearest bus or rail terminals.

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• Access to the site and the presence of bridges, tunnels or other highway structures restricting transport of equipment and material to site.

• Information on whether the site is situated within any restricted zone such as military or defense services etc. requiring working times, noise level etc. to be controlled, the need for personnel working within to be screened and issued with entry passes. Other types of special precautions may be necessary for working within airports where use of certain type of equipment and tools may be limited.

Time available to tender Time available for a tender affects the accuracy and the quality of the bid. During the tender period the Tenderer has to collect lot of information relevant to the project. Mainly, if it is a Lump Sum Contract, the Tender has to verify the accuracy of quantities of major items in the BOQ involving re-measurement of quantities from drawings. In instances where special materials are unavailable in the local market, it will be necessary to obtain overseas quotations for importation. In addition, quotations will be obtained from local suppliers and sub contractors and be scheduled for determination of lowest quotations. The normal practice in construction industry is to allocate a period of two to three weeks for tender submission. Tenderers can request for an extension of the closing date of the tender, if the given time is rendered insufficient due to the nature of work, magnitude of the project, or other valid reasons. Employer may consider the Tenderer’s request and extend the tender closing date if they realize that the request is reasonable and would yield a realistic bid. But some times this may not be possible in case of a fast-track project depending on the type of tendering and the end users requirement.

The Consultant The Consultant is the representative or agent of the Employer. Consultant and his supervisory staff play a major role during project implementation. Information on consultant’s performance with regard to quality of contract documents and working relationship with contractors could be used by the management in finalizing a tender. Many a contractor would favour working with a friendly and professional consultant.

Tender queriesDuring the tender period tenderers may submit queries to the consultant to obtain clarifications on ambiguities

and inadequate details. The consultant may send notices to tenderers clarifying the issues raised by the queries and other important information related to the tender. These notices should be distributed among all the tenderers to ensure uniformity of the bids and will help in reduction of post tender disputes. All such notices and amendments should be incorporated in the Contract Document. During the construction period these correspondence may become useful in resolving disputes related to pre-tender issues. Sometimes a pre-bid meeting is held well before the closing time but after sufficient time has elapsed for tenderers to study the documents. Contractor’s queries are discussed and an attempt is made to resolve whatever possible during the meeting. Minutes of this meeting together with answers to outstanding queries are circulated among all tenderers.

Other participants of the tenderThe competitiveness of a tender depends on the climate of the construction industry. The other participants will price their bids depending on their work load and how badly they require a particular project. An understanding of their work load may help in submitting a successful bid. It is a good practice to maintain a record of tender results which can be used in identifying the bidding patterns of various competitors.

Tender Documents

Instruction to TenderersInstruction to tenderers provides important information about preparation of the bid, packaging and submission. Closing time of tender, place and mode of submission, opening time if applicable, amount of bid bond if any, number of copies to be submitted etc. are given in this document. Therefore, the tenderer should carefully read and understand all the important information given in it, so that the tender may not be rejected due to carelessness. As per the FIDIC Conditions of Contract it is not a contractual document.

Method of measurement The method of measurement governs the mode of pricing items in the BOQ. Normally in UAE ‘POMI’ or ‘SMM7’ is used for Building projects, while in civil engineering, projects are based on ‘CESSM3’. A working knowledge of the relevant method of measurement is essential to price a tender properly. For instance, under SMM7, a margin is allowed as working space for excavation whereas in

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CESSM3 it is measured net. So that in pricing an item for excavation under CESSM3, the allowance for working space should be included in the rate. Amount of tender bond A tender bond of a certain amount which is valid over a period of normally 3 or 6 months is sometimes stipulated in the tender. The value of this bond could be a fixed sum or a percentage of the tender sum. This bond will be forfeited if the successful tenderer refuses to accept the tender. Some Employers insist that the tender bond be obtained from a specified bank of their choice. Tenderer may face difficulties in such a situation if he does not have any relationship with that bank and may be required to secure the amount of the bond in cash or another guarantee. Bank commission for the tender bond usually depends on the tenderer’s relationship with the bank.

Number of copies to be submittedThe number of copies of bid documents to be submitted is specified in the instruction to tenderers.

Documents to be submitted with the tender • The Tender Document Issued to the Tenderer with

priced BOQ• The Form of Tender• The Tender Bond• The Tender Appendix completed by the Tenderer• Schedules of Subcontractors and Suppliers• Schedule of Plants and Equipment• Current Valid Trade License• Schedule of Authorized Signatory• Work Programme for proposed project• Method statement• Names and Qualifications of Key Personnel• Statement of Site Visit / Inspection of Drawings• Additional Information related to tender

(Optional)• Alternative Tender proposals (Optional)• Notices to Tenderers and Addenda

Location and closing time of tender The tender has to be submitted to the specified location on or before the closing time indicated in the instruction to tenderers. Care should be taken not to delay the submission and risk the rejection of the tender. Delivery should be planned in advance considering the distance to be traveled, mode of transport, traffic and weather conditions etc.

Appendix to tender Generally appendix to tender includes applicable Clauses related to Insurance, performance bond, liquidated damages and its maximum limit, minimum amount of monthly interim valuation, percentage value of the material on site payable, percentage for Provisional Sums, time for issue of notice to commence, time period for completion of the works, defects liability period, names of Engineer and the Employer.

Form of tenderTenderer has to mentioned final value including markup in this form, get it signed by the person authorized by the origination and put the company stamp on that form. Then only it becomes a valid legal document according to Contract.

Milestone datesThe milestone dates indicated are to be strictly taken into consideration by the tenderer in pricing the tender. The costs associated in fulfilling all his obligations to complete the project including the costs of carrying out maintenance during the Defects Liability Period as stated in the appendix to the tender, should be included in the tender. It should be noted that the maintenance certificate for the whole project will be issued on completion of the defects liability period of the last milestone as stated in the Appendix to the tender.

Tender and Conditions of ContractThe Tenderer should be familiar with the general conditions of contract and study in detail the particular conditions of contract prior to pricing of the tender. Normally in UAE conditions of contract FIDIC 4th Edition or other locally/internationally accepted Conditions of Contract are used in contracts.There are two parts in Conditions of Contracta. Part I – General Conditions of Contractb. Part II – Conditions of Particular Application

The Part II – Conditions of particular application takes precedence over the general conditions of contract. The contents and their true meaning should be grasped for proper interpretation of these conditions and their effect on the tender. It may contain some clauses beneficial to the employer. The financial impact on the tender arising from these conditions should be considered in the pricing of the tender

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Tenderer should be fully aware of the Conditions of Contract for the particular project and especially those related to following commonly used Clauses:

• Extension of time• Payments • Liquidated damages• Fluctuation• Variations• Dispute Resolution• Defects Liability period• Materials at Site• Nominated sub contractors• Retention• Provisional sums & prime cost sums• Insurance

SpecificationsThis section can be divided in to two parts.A. General SpecificationB. Particular Specification

General SpecificationClassified into four major elementsi. Site Regulation, Safety and Securityii. Generaliii. Design, Supervision & Contractor’s Drawingsiv. Deliverables from the Contractor

Particular SpecificationThis section needs careful attention. Particular specifications deal with special technical requirements, special construction techniques, special materials etc. Proper understanding of these specifications is essential in preparing a realistic bid. Often much time will be required to obtain pricing information related to items covered by these particular specifications

Bills of QuantitiesFor a specimen BoQ format, the sections of the BoQ based on ‘CESMM3’ shall consists of following parts:i. Principal quantitiesii. Preambleiii. Day work scheduleiv. Measured work items (Grouped in to parts)v. Grand summary

The pricing preamble is one of the most important & critical sections in the BOQ. It provides information on

the method of measurement, details of items deviating from the standard method of measurement, details on pricing general & preliminary items and guide lines for pricing certain items. Proper understanding of this section will provide a tenderer with an opportunity to identify items that could become variations whilst executing the contract and the pricing of which need not be included in the tender.

DrawingsA list of Tender Drawings issued with the tender is included in the tender documents. In general, it may contain the following drawings.

a. Location Planb. Site Planc. Detail Plansd. Sectionse. Elevationsf. Any special features

Tenderer should be satisfied that the issued Drawings are sufficient for the purpose of pricing the respective items in the BOQ. Tenderer is at liberty to request required additional details in order to respond to a tender query from the Engineer when the drawings do not give adequate details.

Current Work Load in the Estimating DepartmentA first step in the tendering process is to study the feasibility of submitting a bid. This involves understanding of details of other tenders under preparation, any tenders that may be issued in the immediate future, expected profitability of the tenders in hand etc. This information will help the management to select tenders that offer better returns and will be in the best interest of the organization.

Current Workload in the Construction DepartmentEvaluating the current construction work load is also a part of the feasibility study mentioned in the previous section. This study should include the work load of the respective construction divisions, availability of managerial & technical staff, availability of plant, machinery etc. Based on this information a decision will be taken by the management about taking part or declining to take part in the tender.

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Conclusion and RecommendationThe client, the conditions of contract, type of project, value of project, project duration, works in hand, current situation in the construction industry as well as current workload in the organization should be considered before submitting a tender. In practice, the circumstances will not always be favourable to the contractor for submitting a particular tender, but an experienced contractor will use his/her judgment in taking a decision.

Bibliography

• “Contract and Tender procedure” book provided by International College of Business and Technology

• The Surveyors’ Construction Handbook – by RICS• Contractual Procedures in the Construction

Industry – by Allan Ashworth• Various web site relevant to the subject• Various journals on the subject

Caparo Industries Plc -v- Dickman and others [1990]

The plaintiffs sought damages from accountants for negligence. They had acquired shares in a target company and, relying upon the published and audited accounts which overstated the company’s earnings, they purchased further shares.

Held: The purpose of preparing audited accounts was to assist company members to conduct business, and not to assist those making investment decisions, whether existing or new investors in the company. The auditors did not owe a duty of care to the plaintiffs. Liability for economic loss for negligent mis-statement should be limited to situations where the statement was made to a known recipient for a specific purpose of which the maker was aware, and upon which the recipient had relied and acted upon to his detriment. The law has moved towards attaching greater significance to the more traditional categorisation of distinct and recognisable situations as guides to the existence, the scope and the limits of the varied duties of care which the law imposes. The House laid down a threefold test of foreseeability, proximity and fairness and emphasised the desirability of incremental development of the law. The test was if “the court considers it fair, just and reasonable that the law should impose a duty of a given scope upon the one party for the benefit of the other”. Lord Bridge of Harwich: “What emerges is that, in addition to the foreseeability of damage, necessary ingredients in any situation giving rise to a duty of care are that there should exist between the party owing the duty and the party to whom it is owed a relationship characterised by the law as one of ‘proximity’ or ‘neighbourhood’ and that the situation should be one in which the court considers it fair, just and reasonable that the law should impose a duty of a given scope upon the one party for the benefit of the other.”

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Prabash Miriyagalla (M.Sc., Dip. in Eng.)Project Quantity Surveyor – Blair Anderson Ltd

“Is the Regional Engineer Fair Enough in Dealing with Variations?”

A regional construction project usually runs into a large number of variations due to numerous reasons. Some of the major factors are incomplete design, changes due to Employer’s requirements, and practical problems due to buildability of complex designs, and local authority’s requirements and also due to Contractor’s own faults.

The construction industry within this region is often faced with claims and disputes which are related to variations. According to industry professionals, clause 51 and clause 52 of the FIDIC 4th are root causes for disputes in the region. Two major concerns dealing with these clauses are, the non availability of price fluctuation clause and the non availability of clear provision linking with clause 14 programme to deal with problems in valuation of variations which arise due to late instruction of works.

As per Nael G Bunni ‘The adjustment of rate should be done considering

the time delay, out of sequence of working, change of method of execution and extend of preliminaries affected’. (Nael G Bunni 2000, p.305)

The clause 52.1 has given the authority to the Engineer to fix the rates in an event of disagreement. Whenever the Contractor disagrees with the Engineer’s decision there is no remedy for the Contractor other than going for a dispute resolution method for settlement which has higher cost involvement, effort and time in the regional dispute resolution mechanism like arbitration. Such situation will render the regional Contractors helpless and tend to agree to the Engineer’s decision incurring losses rather than challenging them.

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The objective of this article is to discuss the issues related to “Valuation of Variations” under FIDIC 4th Edition in the regional industry (United Arab Emirates), and also to examine the powers and impartiality of the “Engineer” under the standard form of FIDIC 4th. Several major contractual issues such as deactivation of price fluctuation clauses, non availability of relationship between clause 14 programme and clause 52, non availability of material procurement information related to clause 52 have been considered.

As per the professionals in the region and also the outcome of the research revealed that the problems encountered in dealing with clause 52.1 were mainly due to:

• Lack of awareness of the FIDIC conditions • Mistrust among the parties to the Contract• Incorrect interpretation of clauses • Incorrect implementation of clauses

The behaviour of some regional professionals related to clauses in FIDIC have caused considerable difficulties in the administration of project works.

It is necessary to look at clause 52.1 by the industrial professionals and should alleviate necessary concerns for sound contracts administration in the region. Most contracts disputes can be eliminated with small improvements to the clause 52.1 which all the parties involved in the industry will be pleased to accept.

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34.29%

45.71%

10.48%

9.52%

Figure -1 The availability of Price Fluctuation clause in regional Contracts

the same period would minimize most of the related issues. By inclusion of the above referenced Clauses, the Contractors’ risk could have been determined when pricing projects. The specific period to which the rates are limited, should be clearly mentioned in the agreement.

Most of the people in the region believe that the regional Employers get advantage in “variations” by omitting the price fluctuation provision in contract.

Figure 2 below (next page) shows that the majority (60%) agreed that the Employers get advantages (irrespective of the scale of the advantages) from deactivating the price fluctuation clause. In this situation, whenever the

variations are instructed Contractors have to do those additional works as per the rates in the Contract. If the material prices go up in unpredictable manner Contractors may have to suffer the extra cost. As a precaution all the Contractors in the region add large amounts of money in their tender bids considering price fluctuation risk.

Reg Thomas in his book Construction Contract Claims (1993) explained the issue as follows:

‘In practice, most variations have some effect on the progress of the works and the method of executing the work. Where it is possible, each variation should be valued taking into account all of delaying and

It was found that a majority of the disputes were due to Engineer’s impartial decisions, especially in valuation of variations and administering the instructions. Since there is no price fluctuation mechanism practised within the region, the problems could have been alleviated if there is a clear provision provided with in the FIDIC linking clause 14 programme and the time of the Engineer’s instructions to vary the works.

The most identified modification in regional Contracts is the deactivation or deletion of price fluctuation clause and it has become a very common practice, refer figure 1 below;

The volatility of the market condition experienced in the recent past has created serious difficulties for Contractors in forecasting material prices when tendering in the absence of suitable price fluctuation clauses. The cement and steel price hikes (at the time the research was carried out) in the recent past can be given as a good example to this effect. This uncertainty in forecasting material price not only created difficulties for the Contractors but also for the Employers in procuring Contractors.

Considering the unfair and unreasonable methods adopted to deal with price fluctuation clause in the region, it is evident that if the term the “Contract Period” is defined in FIDIC, and the Contract rates limits to

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34.29%

45.71%

10.48%

9.52%

Figure 2 The effect for the Employer due to lack of price fluctuation clause

34.29%

45.71%

10.48%

9.52%

Figure 3 Necessity of a relationship between “clause 14 programme” for “valuation of variations”

disruptive elements which are directly related to the variation’. (Reg Thomas, 1993, p116)

Usually the Contractors prepare their material procurement schedule in the early stage of the project. This schedule is in accordance with the clause 14 programme and also coordinates with their cash flow. Any instruction which requires procurement of material out of this procurement schedule will incur additional money which would not have been envisaged.

Under normal circumstances the Contractor would have recovered the additional cost of those works incurred, if the clause 52.1 administers them in fair and reasonable

manner. Whenever the Engineer administers the changes impartially and with rigid attitude the Contractors face difficulties in recovering the additional cost incurred. This problem could have been avoided if there is a clear link provided in FIDIC between clause 14 programme and the timing of the issuing variations.

The time related to the construction activities of the project is explained in the clause 14 programme of the FIDIC 4th. Whenever the works affect the work in progress, the impacted programme shows the actual time needed to complete those works. The programme is prepared by the Contractor showing how he/she intends to do the works and it should clearly show the beginning

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8.74%

39.81%

33.98%

17.48%

4.90%

42.16%

11.76% 23

.53%

17.65%

Figure 4 Payments for affected “sequence of works”

and the end of each construction activity. When the variations are instructed those works need to be included and impacts are shown in revised programmes ( unclear / rephrase).

Figure 3, above illustrates that 70% of the regional professionals in the industry prefer to have a formula for price adjustments in the process of “valuation of variations”, with a relationship to clause 14 programme. However, the FIDIC 4th edition does not have such a provision included.

There is a provision in FIDIC 4th for additional cost consideration for the case of out of sequence works as described under clause 51.1(f ). However, the prevailing contract administration practise in the region shows that the Contractors are not always compensated for the additional cost incurred for the out of sequence works.

The figure 4 below illustrates how often Contractors are getting paid for “out of sequence” of work in the UAE region.

When the Works out of sequence are specified as variations, according to clause 51.1 those works need to be paid with extra consideration. However, noticeably in this region it has become a custom to neglect those out of sequence works for extra payments. This particular issue also has

not been mentioned in any part of the FIDIC 4th. The clause 52.1 should address this issue as a separate part of the valuation process. If it is written in the Contract, people will comply with the clause and at least consider those provisions.

Even though the Contract professionals are aware that the prevailing practice is questionable since there is no clear mechanism in FIDIC 4th to deal with the problem the administrators in the region tend to ignore the professional practice and opt not to pay for additional cost due to out of sequences work.

Introducing valuation of variations using invoices as an alternative method is a good solution subject to high degree of transparency in the process. Greater care should be taken to avoid misusing invoices if this method is going to be implemented.

According to lump sum contract procedure, the rates are fixed for the Contract period. However the term “Contract Period” is an undefined term in FIDIC. People have argued in several ways defining the Contract Period as the original Contract duration, including the extension of time period until taken over and some interpret the “Contract Period” to include the defect liability period. So it is better to agree, what is meant by the “Contract Period” in the Contract before agreeing to the rates for

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39.81%

33.98%

17.48%

4.90%

42.16%

11.76% 23

.53%

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Figure 5 Fairness of use BoQ rates in Extension of Time period

the period.

Most of the construction projects get delayed due to various reasons. Non availability of such clarifications about the “Contract Period” generates a lot of disputes in the final stage of the projects. Especially when the parties deal with price fluctuations and ad hock variations issued in the later part of the project, the situation destroys the relationships and most of the times they could end up following the dispute resolutions procedure.

When a project is extended due to additional works instructed by the Employer, how are the additional works being paid? There are a number of construction projects in the region having these issues and what should be the correct methodology to administrate the issues?Should it be fair for the Contractor to be paid on BOQ rates during the “Extension of Time” period granted due to client’s delays?

According to the survey results illustrated in figure 5 above, It is very interesting that 4.9% of people in the sample think that the costs should be absorbed by the Contractor. It is arguable why the Contractor needs to do so, thus compensating Employers requirements.

42% of the sample prefers to use the BOQ rates but additional costs need to be covered from the EOT claim. It means that this particular group thinks that there

should be a compensation for those rates.

All other three groups together (52.94%) are saying that the payment using BOQ rates is unfair. However in the FIDIC 4th there is no clear explanation on how the rates should be revised or how to add the price fluctuations when the EOT is granted. Especially when the modified Contracts in the region deactivate the price fluctuation clause there should simultaneous be amendments to the clause 52 on how to value the variations in those period.

The suspicious nature among the parties (Employer, Consultant and Contractor) in construction projects in the region has hindered building up sound and friendly background for construction when carrying out day today construction work. This has created untrustworthy environment for the construction which is not accepted in any environment, by any standard. The above environment can generate disputes between the parties which have always found difficult to arrive at agreement. All the time each party tries to get the advantage over the others’ weaknesses rather than providing fair and reasonable service to the industry.

It can be seen that most of the disputes created in the regional industry relate to the behaviour of individuals involved in the construction field. Those who have arrived in the region with different cultural backgrounds, without proper contractual knowledge and experience

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8.74%

39.81%

33.98%

17.48%

4.90%

42.16%

11.76% 23

.53%

17.65%

Figure 6 General view about the “Clause 52.1”

8.74%

39.81%

33.98%

17.48%

4.90%

42.16%

11.76% 23

.53%

17.65%

Figure 7 Contractor representatives’ views about the clause

in administering FIDIC contracts are the root cause for disputes in the industry.

Moreover these professionals are always under extreme pressure due to fast track nature of projects currently being carried out in the region that have restricted their ability to perform their duties diligently and with in-depth investigations.

Most of the Employers in the region expect their employees to safe guard his/her own interests rather than serving in fair and reasonable manner. The Engineer is the Employer’s representative in a working project that is paid by the Employer. When the regional Employers expect such nature from person who should behave fair and reasonable way to both parties, other party (the Contractor) is always positioned in danger of missing

their rights. This is not a very healthy environment for the regional construction industry.

The regional professionals believes that the clause is drafted satisfactorily and need a few improvements for sound contract administration in the regional construction industry while very few professionals appreciated the existing clause as a perfectly drafted clause which does not require any improvements.

Figure 6 above shows that only 14% of the professionals recommend that the clause does not need any changes while another 2% say that the clause has been poorly drafted. All other 86% have emphasised the necessity of improvements where majority (77%) of them recommended few improvements. It is interesting that the majority from the above 86% is working as consultants

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Figure 8 Consultant representatives’ views about the clause

(Engineer) in the industry.

As a summary the clause 52.1 has problems and those problems increase due to administering of the FIDIC 4th by the professionals in the regional industry.

Improvements It is true that most of the expatriates in the regional construction industry have come together from different countries bringing their own experiences in different types of contracts. Thorough understanding of the regional contracts in used essential before practising as Contract Administrators in the regional industry.

The situation can be improved easily by providing proper training and conducting workshops in contract administration under FIDIC standard form of contracts to regional construction professionals who lack experience. Some of the misinterpretations also can be eliminated by adopting the strategy of in-house training programmes for the new comers to join the industry.

It is highly recommended to pay special attention to make aware of the professionals in dealing with the major concerns such as issue of variations, valuation of variations, delays, extension of time, prolongation costs and also dispute resolution before practicing as Contract Administrators in the regional industry. Getting a clear understanding and learning of the correct procedures of the FIDIC 4th will mitigate the ambiguities and misunderstandings in the industry and the contracts can be administered more efficiently.The Engineer and his/her team should be well experienced,

qualified and trained with an ability to deliver their duties in a fair and reasonable manner to safe guard the interests of the Employer as well as the Contractor. Impartial, independent construction professionals with a fair knowledge and maintaining professional ethics can be a better solution to deal with the prevailing issues in the region.

Special attention should be given regarding the clause 51 and clause 52 by the regional experts in the construction industry where the powers of the Engineer need to be re- examined.

The misuse of the powers given to the Engineer under clause 51.1 and 52.1 of the FIDIC, by some of the Engineers in the regional construction industry should be avoided. While issuing the necessary and appropriate changes as variations under clause 51.1 and also fixing of rates under clause 52.1, FIDIC needs to be reviewed by the regional experts to rectify the situation. It is suggested to form a professional body which can be used for resolving minor disputes such as the ageing of rates.

It is also important that the understanding of the role of the Engineer by the regional Employers to be an impartial person who has to carry out his duties in a fair and reasonable manner to both the Employer and the Contractor. Even though the Engineer is appointed by the Employer, the Employer should not use his powers to drive the Engineer to safeguard his interests by letting the Contractor into difficulties.

Adding the term “Contract Period” to FIDIC under

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the “Definitions and Interpretation” section by which the rates can be fixed for the duration of the Contract. Maintaining price indices or any other cost indices can be used for adjusting the price fluctuations in the region. Under present situation the regional Employers are facing the risk of the price fluctuations included in the tender even though the material prices may remain unchanged during the Contract duration.

Alternative mechanism has been introduced by the Abu Dhabi government. It is a remarkable development to compensate the price escalations by the Employer taking into consideration of the material procurement schedule prepared in accordance with the clause 14 programme. The Contractor should give the material procurement schedule together with the clause 14 programme. Implementation of this method in the region in valuation of variation process can be an excellent solution to the disputes in valuation of variations.

The alternative procurement routes and alternative forms of contracts can be tested as alternative methods while there are some Employers who have already started “GMP” Contracts and also “Partnering Contracts” in the region

which have different mechanisms than the traditional procurement methods. The use of Partnering Contracts is becoming popular in the regional industry and it can be seen that the projects carried out under this arrangement are running smoothly and effectively. However those alternative procurements need to be proven in the region where the parties always have suspicious nature among them. Finally it is highly recommended to maintain the standards of the professionals and professional ethics for fair and reasonable practise by all the professionals in the regional industry.

Finally if all the parties understand their responsibilities and liabilities under FIDIC standard form of Contract and if all the parties worked diligently and ethically in fair and reasonable manner most of the identified issues in the region can be mitigated. It is essential to work with a mutual understanding in the professional environment for the development of the industry, for the satisfaction of all the parties involved and for higher returns for the stakeholders.

White, Frost and others -v- Chief Constable of South Yorkshire and others [1999]

The House considered claims by police officers who had suffered psychiatric injury after tending the victims of the Hillsborough tragedy.

Held: An employer has a duty to protect his employees from physical but not psychiatric harm unless there was also a physical injury. A rescuer, not himself exposed to physical risk by being involved in a rescue was a secondary victim, and as such not entitled to claim. Primary victims are ‘victims who are imperilled or reasonably believe themselves to be imperilled by the defendant’s negligence’. Lord Steyn: “(T)he law on the recovery of compensation for pure psychiatric harm is a patchwork quilt of distinctions which are difficult to justify … In my view the only sensible general strategy for the courts is to say thus far and no further. The only prudent course is to treat the pragmatic categories as reflected in [case law] as settled for the time being, but by and large to leave any expansion or development in this corner of the law to Parliament. In reality there are no refined analytical tools which will enable the courts to draw lines by way of compromise solution in a way that is coherent and morally defensible. It must be left to Parliament to undertake the task of radical law reform.”


Vijitha Disaratna, BSc(Hons)QS, MBA, MRICS, ACIArbIs Quanity Surveyor graduated from the University of Moratuwa in 1993. Passed licentiate part 1 & 2 and professional part 1 examinations conducted by the Institute of Chartered Accountants of Sri Lanka. Com-pleted MBA in Construction & Real Estate course conducted by the University of Reading and compiled a research dissertation on ‘Implementation of Knowledge Management Processes and Practices in UAE Con-struction Industry.’ This article is based on part of literature review carried out for the MBA dissertation.

Implementation of Knowledge Management Processes and Practices in Construction Industry

Definitions Awad and Ghaziri (2008:28) identified sixteen alternative definitions of Knowledge Management (KM) provided by various writers and organisations. Therefore, it is evident that there is no universal definition for KM.

The Oxford Advances Learner’s Dictionary defines ‘process’ as: ‘a series of actions or tasks performed in order to do,

make or achieve something.’

The same defines ‘practice’ as: ‘the actual doing of something; action as contrasted

with idea.’

For the purpose of this article, ‘KM processes and practices’ are defined as ‘processes and practices designed to identify, capture, structure, value, leverage and share knowledge’ and this definition of KM was adapted from a definition given in businessdictionary.com.

KM in Construction IndustryIntroductionA client investing in a construction project expects the project to be completed on time, with specified quality and at agreed cost (or agreed budget). However, the general perception of the industry is that most projects fail to achieve these project objectives due to various reasons. Egan (1998: 7) admits the unpredictability of projects in terms of delivery on time, to be within budget and to the standards of the quality expected.

Construction industry is predominantly a project based industry. The construction industry and construction projects traditionally operated in an adversarial manner. The design was done by the Architect and other consultants and the contractors were expected to construct on site what

was designed as aforesaid. The contractors were selected using the traditional procurement system generally on a project by project basis and in turn the contractors selected the sub-contractors also on the same basis. The whole process consisted of transactional episodes and the parties were attempting to maximize their own profit at the expense of the others. The goodwill, trust and co-operation between the parties were minimal. Due to the transactional nature of the industry, opportunities for repeat business were less. The traditional way the construction industry operated provided less incentive / opportunity for the industry to continuously learn from the process, build relationships, the integration of skills and innovation. The clients are generally dissatisfied as the projects fail to achieve their objectives in terms of time, cost and quality. This sequential nature and the culture of the industry identified above acted as a barrier to use the skill and knowledge of suppliers and contractors in the design and planning of the projects. The knowledge gained on many project were lost due to break down of the project team once a project was complete.

Egan report (1998) prepared with a view to investigate the extent to which the quality and efficiency in UK construction could be improved by re-engineering the construction process, suggested that the construction industry has to learn to do the things differently and believed that the industry has to rethink the process through which it delivers the projects in order to achieve continuous improvement in its performance and products.

The report further identified that contrary to the common view that every project is unique, products such as houses are repeat products. Moreover, the process of construction itself is repeated from project to project and these products and the processes can be repeatedly improved.

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Therefore, Egan report recommended that the industry should create an integrated project process around the four key elements of product development, project implementation, partnering the supply chain and production of components. It defines integrated project process as ‘a process that utilizes the full construction team, bringing the skills of all the participants to bear on delivering to the client and is explicit and transparent, and therefore easily understood by the participants and their clients.’

A key requirement of this process is that teams of designers, contractors and suppliers work together through a series of projects, continuously developing the products and the supply chain, eliminating waste in the delivery process, innovating and learning from experience. It emphasizes that both the clients and industry must change.

Egan further recommends that the construction industry requires substantial changes in its culture and structure in order to achieve its full potential. The recommendations include building long term relationships based on trust, sustained improvement in quality, good human relations practices and sharing learning etc. Proper implementation of Egan’s recommendations involves challenging the status quo in the construction industry. However, this will enable the industry to integrate the untapped capabilities of their intellectual capital and to provide innovative solutions by managing their knowledge to satisfy the client’s demands whist gaining competitive advantage.

Latham (2006: vii) states that ‘lessons learned on many construction projects are often lost at the end of a project and the parties move on to new projects.’ He further states that post project reviews carried out to capture the lessons learned are usually carried out in a haphazard and untimely manner and without providing sufficient time. Therefore, Latham (2006: vii) proposes that KM is essential for improving the project delivery system.

Challenges/Problems Associated with the Implementation of KM Processes and Practices in Construction IndustryCarrillo et al. (2000) identified that the barriers/problems to successfully implement KM within a construction enterprise include:

1) Lack of time Construction projects always work on tight deadlines.

KM requires additional efforts that may be considered by the project staff as less important within a tight construction programme.

2) Trying to solve large problems KM involves various complex stages. It is easy to

implement KM as small projects in practice. Instead organizations attempt to tackle it at a large scale.

However, Awad and Ghaziri (2008:37) have reservations on this approach and state that ‘a company should start with a strategy and a champion, with a focus on a worthwhile, high profile project that can set the tone for the rest of the organization.’

Therefore, combining both the views it can be said that it is important to have a strategy and to select an appropriate project to start with to suit its circumstances when KM processes and practices are implemented by a company.

3) Converting knowledge Traditionally construction industry has a culture

which does not promote knowledge sharing. KM in a project environment requires capturing the knowledge of employees from different organizations and converting their tacit knowledge into explicit knowledge within a reasonable period at an acceptable cost, which is a difficult task.

4) Large number of small to medium enterprise (SMEs) For SMEs, KM is of less concern as they have other

pressing concerns. They also have no commitment or resources to undertake KM.

5) Multi-Disciplinary teams Project teams involve multi-disciplinary teams from

different organizations or divisions, who work towards the agenda, set by the organization or division. KM within such a team in a project of short duration is difficult.

6) Unique projects Traditional view of construction industry is that it

comprises of unique projects even though attempts are made recently to identify the common processes within projects. People having unique project views

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are of the opinion that KM in a project will be wasted as the next project may be quite different.

7) Lack of learning The unwillingness of people to learn from past mistakes

having the view that projects are unique and therefore attempting to learn from past mistakes is futile.

8) Lengthy time period KM is long term and takes time to reap its benefits

and to reflect the effectiveness in the organizational performance.

9) Loss of faith Even though KM is a long term process employees

may expect immediate benefits from a KM system and may lose faith when it is not happening.

10) Information Technology support Many KM systems rely on Information Technology.

Connecting construction project offices which may be of temporary portacabins located in isolated environments with inadequate infrastructure can be a barrier in implementing KM.

As identified above the traditional culture of the construction industry having an adversarial nature, sequential nature and traditional procurement systems as integral parts of the culture provides very less incentive / opportunity for the industry to continuously learn from the process, build relationships, the integration of skills and innovation and therefore does not promote KM.

Anumba et al. (2006: 216) identify some mechanisms / solutions that can address these problems as follows:1) Establish the KM problem prior to investing in KM

processes and practices2) Establish the characteristics of knowledge that needs

to be managed as these have implications on the approach to be adopted

3) Assess organizational culture and take steps to move towards a sharing culture if the current culture is an authoritative one

4) Identify the location knowledge is required to be managed and the constraints involved when devising KM processes and practices

5) Establish how the knowledge is to be acquired (formal courses or by informal interaction between knowledge owners)

6) Identify and involve all stakeholders who may be affected by a KM initiative

7) Select a manageable size business unit or a process initially and implement KM rather than implementing across the whole organization at once

8) Be clear on knowledge that is required to be shared and that is required to be retained within the organization

9) Devise means of measuring the effectiveness of KM Implementation of KM Processes and Practices in the Construction Industry

Egbu and Robinson (2006:36) state that there are three aspects of knowledge that need to be managed in construction context:1) Products or project types2) Processes3) People.

They recognize technology which supports connectivity as an enabler that supports the KM processes.

Product-based factors relate to the characteristics of the services or goods to be produced, whether standardized, mature or innovative (Hansen et al., 1999 as cited in Egbu & Robibson 2006 : 36).

Egbu and Robinson (2006:36-38) further states that the construction organizations are characterized by the types of projects or the products they deliver. They state that the process-based factors relate to the technical and management systems required for the delivery of products. They further state that the people-based factors relate to skills, problem-solving abilities and the characteristics of teams.

Egbu and Robinson (2006:36-38) recognise that the ‘end products’ required by the clients are often different and therefore may require different technical and management processes which have implications on the processes and knowledge to be managed during design and construction . Therefore, they recognize that highly skilled individuals and competent teams are vital in the construction process. They highlight the need for problem-solving creative people with tacit knowledge for innovative projects that are often vaguely defined and complex to implement.

Al-Ghassani et al. (2006: 83-89), Egbu and Robinson (2006:39-46), Sheehan et al. (2006: 53-60), Siemieniuch

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and Sinclair (2006: 65-79) and Kamara et al. (2006: 112-113), identify the KM process and practices that are in use in the construction industry as follows: • Post project reviews• Active involvement of top level to KM initiatives• Availability of a Knowledge Manager, Chief

Knowledge Officer or a similar position to deliver the knowledge management strategy.

• Non-traditional procurement methods• Training and development of staff, coaching and

mentoring• Apprenticeship programmes• Promotion of Life Long Learning• Use of Information Technology to capture, amplify

and disseminate knowledge within the organization and to ‘know who knows.’

• Proper archiving practices including effective means of retrieving

• Standard construction products• Promotion of e-business approaches• Promotion of a culture of organizational learning and

sharing and actively seeking to apply new learning• Organisation structures promoting KM• Team stability via use of same people working together

project after project• Research and development• Use of partnerships, alliances, joint ventures,

framework agreements• Effective networks with the members of supply chain• Identification of experts, empowering them and

encouraging them to share• Facilitate ‘Communities of Practice’ within the

organization• Motivational practices related to KM such as linking

KM to appraisal system, team based rewards.• Face to face meetings• Brainstorming sessions• Job rotation• Quality circles• Reports and project summaries• Bulletin boards• Best practice documents.• Policies to retain staff to avoid knowledge drain

Egbu and Robinson (2006:43-44) state that construction industry is increasingly aware of the knowledge sharing through networks and identify knowledge sharing networks such as Construction Best Practice Programme

(CBPP), Construction Productivity Network (CPN), Movement for Innovation (M4I), Co-operative Network for Building Researchers (CNBR) as examples. They also point out the formation of a number of benchmarking clubs following Egan (1998) recommendations.

Egan (2002), the follow on report to Egan (1998) states that teams that only construct one project learn on the job at the client’s expense and recommends continuous improvement of performance for the industry to become more successful. Three main drivers to secure a culture of continuous improvement are: the need for the client leadership, need for the integrated teams and the need to address people issues to secure a culture of continuous improvement (CEM, 2007:55). The client through action can create an environment conducive for KM in the project by facilitating integrated teams and addressing the people issues related to the project. The client leadership becomes more important when a client is having repeat business or a portfolio of projects.

The Movement for Innovation’s Working Group (2000) attempts to find effective and practical ways for the construction industry to radically improve its performance on people issues. It states that there is a strong business case for such improvements as the firms who fail to improve their attitude and performance towards respecting people will fail to recruit and retain the best talent and business partners. It identified six action themes, namely diversity, site welfare, health, safety, lifelong learning, and off-site welfare. The working group developed a set of toolkits in the form of checklists for each of these themes and also proposed a framework of performance measures. They recommend that the implementation of proper people practices will yield benefits such as better standard of work, more cost effective projects, fewer delays and expensive mistakes, reduced staff turnover, earlier completion dates, competitive advantage and more repeat business. People are the core in KM. Proper people practices make it possible to gain total commitment from them in order to implement effective KM processes and practices that will yield these benefits.Office of Government Commerce (2006) illustrates how best practices have been adopted in practice to achieve excellence in construction projects focusing on the approach taken toward the supply chain. The case study focuses on selecting the team, changing the culture and knowledge shared between the parties among others.

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Conclusions1) Knowledge Management (KM) in construction can

improve the project delivery system.

Egan (1998) recommends that the construction industry requires substantial changes in its culture and structure in order to achieve its full potential. The recommendations include building long term relationships based on trust, sustained improvement in quality, good human relations practices and sharing learning etc.

Latham (2006) states that ‘lessons learned on many construction projects are often lost at the end of a project and the parties move on to new projects.’ He further states that post project reviews carried out to capture the lessons learned are usually carried out in a haphazard and untimely manner and without providing sufficient time. Therefore, Latham (2006) proposes to implement KM for improving the project delivery system.

2) There are problems associated with the implementation of KM processes and practices in the construction industry.

Carrillo et al. (2000) and Egan (1998) identified the problems associated with the implementation of KM processes and practices in the construction industry.

3) There are mechanisms / solutions to problems associated with the implementation of KM processes and practices in the construction industry.

Anumba et al. (2006: 216) identified the mechanisms that can address the problems associated with the implementation of KM process and practices in the construction industry.

ReferencesAl-Ghassani A M, Anumba C J, Carrillo P M and Robinson H S (2006) ‘Tools and Techniques for Knowledge Management’ in Anumba C J, Egbu C and Carrillo P Knowledge Management in Construction, Blackwell Publishing, pp.83-102 ISBN 1-4051-2972-7

Anumba C J, Egbu C and Carrillo P (2006) ‘Concluding Notes’ in Anumba C J, Egbu C and Carrillo P Knowledge Management in Construction, Blackwell Publishing, pp.213-217 ISBN 1-4051-2972-7

Awad E M, Ghaziri H M (2008) Knowledge Management (2nd

Edition), Dorling Kindersley (India) Pvt. Ltd., ISBN 978-81-317-1403-4

BusinessDictionary.com knowledge management definition, Available from: http://www.businessdictonary.com/definition/knowledge-management.html [Accessed 2 May 2008]

Carrillo P, Anumba C J and Kamara J M (2000) Knowledge Management Strategy for Construction: Key IT and Contextual Issues, Department of Civil and Building Engineering, Loughbourough University Available from: http://itc.scix.net/data/works/att/w78-2000-155.content.pdf [Accessed 11 April 2008]

CEM (2007) The Real state Development Process (Paper 3575V8-0)

Egan J (1998) Rethinking Construction, Department of Trade and Industry, ISBN 1851120947

Egan J (2002) Accelerating Change, Construction Industry Council, ISBN 1898671281

Egbu C O and Robinson H S (2006) ‘Construction as a Knowledge-Based industry’ in Anumba C J, Egbu C and Carrillo P Knowledge Management in Construction, Blackwell Publishing, pp.31-49 ISBN 1-4051-2972-7

Hansen M T, Nohria N and Tierney T (1999) ‘What’s your strategy for managing knowledge?’ Harvard Business Review. March-April, pp106-117 cited in Egbu C O and Robinson H S (2006) ‘Construction as a Knowledge-Based industry’ in Anumba C J, Egbu C and Carrillo P Knowledge Management in Construction, Blackwell Publishing, pp.31-49 ISBN 1-4051-2972-7

Kamara J M, Anumba C J and Carrillo P M (2006) ‘Cross-Project Knowledge Management’ in Anumba C J, Egbu C and Carrillo P Knowledge Management in Construction, Blackwell Publishing, pp.103-120 ISBN 1-4051-2972-7

Latham M (2006) ‘Foreward’ in Anumba C J, Egbu C and Carrillo P Knowledge Management in Construction, Blackwell Publishing, pp.vii-viii ISBN 1-4051-2972-7

Office of Government Commerce (2006) DWP Jobcentre Plus roll-out Integrated Supply Chain, OGC Case Study Available from: http://www.ogc.gov.uk/documents/DWPJobcentrePlusSupplyChainCaseStudy.pdf [Accessed 25 September 2008]

Sheehan T, Poole D, Lyttle I and Egbu C O (2006) ‘Strategies and Business Case for Knowledge Management’ in Anumba C J, Egbu C and Carrillo P Knowledge Management in Construction, Blackwell Publishing, pp.50-64 ISBN 1-4051-2972-7

Siemieniuch C E and Sinclair M A (2006) ‘Organisational Readiness for Knowledge Management’ in Anumba C J, Egbu C and Carrillo P Knowledge Management in Construction, Blackwell Publishing, pp.65-82 ISBN 1-4051-2972-7


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Senerath Wetthasinghe LL.M, AAIQS, FCIArb, MQSi, ACIOB Senior Contract Administrator - Dar Al Handasah Consultants in Dubai

Time for Completion in Construction Contracts

1. Overview

“Time is Money1” is an immemorial adage used to indicate that time is a very valuable commodity. Therefore, to be successful and competitive in any business venture, time needs to be managed efficiently. Construction, being a business very complex in nature and which employs multifarious trades and disciplines, requires more stringent time management techniques than other businesses to ensure that construction projects are completed within their prescribed times for completion. In construction contracts, it is the contractor’s obligation to ‘complete’ the works specified in the contract by the date for completion stated therein. Failure to comply with this obligation amounts to a breach of a condition or a warranty depending upon the construction of such terms2. If the obligation is a condition the innocent party can repudiate the contract3. Otherwise, that party has a remedy in damages — liquidated if so specified in the contract, or un-liquidated4. Therefore, it is important to investigate the precise meaning of ‘completion’.

2. Meaning of Completion

Construction contracts, by their construction, can be divided into two categories:

• Entire contracts (frequently referred to as lump sum contracts), and

• Severable contracts5.

The term ‘completion’ as used in construction contracts can have different meanings depending on to which category a particular contract falls and the judicial interpretation thereof.

As a general rule, in an entire (lump sum) contract, complete fulfilment of obligations of a party to a contract is a condition precedent to the other party exercising its obligations under the contract6. This means that failure by one party to complete its obligations entirely under the contract creates justifiable grounds for the other party to rescind the contract7. Further, it also means that failure to comply with the terms and conditions of the contract, despite the obligations under the contract being fully completed, but not in full compliance with the requirements of the contract, the defaulting party can recover nothing8. Thus, ‘completion’ under entire contracts implies ‘absolute completion’ of the obligations of the parties. The harshness of this concept can be illustrated by the case of Cutter v Powell 9, where the widow of the deceased seaman was refused even part of the agreed payment, which was agreed to be paid ten days after the arrival at the port of destination, as the seaman could not complete the voyage.

From the judgements delivered by the courts on disputes as to the meaning of the term ‘completion’ in construction contracts, it can be seen that the courts have adopted a similar approach in interpreting the meaning of ‘completion’ under an entire contract.

In Appleby and Another v Myers10, the plaintiff who agreed to erect machinery on the defendant’s premises under an entire contract could not complete the works as the portion of the completed works together with the building was destroyed by an accidental fire. The court held that the plaintiff was not entitled to recover payment for the portion of the completed works. While delivering the judgment in Appleby Blackburn J said11:

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“[t]here is nothing to render it either illegal or absurd in the workman to agree to complete the whole, and to be paid when the whole is complete, and not until then...”

Further, in Sumpter v Hedges12, where the plaintiff was contracted to construct a building under an entire contract, apart from the cost of materials left on site which had been used by the defendant to complete the works, the plaintiff could not recover any money from the defendant for the part of the works completed, either on proportional basis or on quantum meruit in the absence of any evidence of a “new contract” to pay such a sum, as the plaintiff abandoned the contract without completing it due to lack of funds.

Similar judgements have been delivered in the following old and contemporary cases akin to meaning of ‘completion’ under entire contracts:

• Ellis v Hamlen13 • Jackson v Eastbourne Local Board 14

• Lucas v Drummoyne Borough15 • Edward and Webster v Coley16

• Ibmac Ltd v Marshall (Homes) Ltd 17

• Update Construction Pty Ltd v Rozelle Child Care Centre Ltd 18

• Semour Segnit v Christopher Cotton19 • Morse Group Ltd v Cogniesis Ltd 20

• Safe Safe Homes Ltd v Massingham21 It is evident from the judgements of many of the above cases that the ‘entire performance’ rule conferred the owner an undeserved benefit at the expense of the contractor. The inequity of this system led to the emergence of the doctrine of ‘substantial performance23. The inception of this doctrine is usually credited to the judgement promulgated in Dakin & Co. v Lee24, albeit the courts have evolved this doctrine much earlier than Dakin24.

Under this doctrine a contractor who achieves ‘substantial completion’ of its obligations under a contract — in contrast to ‘absolute completion’ — is eligible for payment. Some of the many cases in which this doctrine had been upheld in their judgements are as follows:

• Cutler v Close25 • H Dakin & Co Ltd v Lee26 • Jacob and Banners v Kent27

• Hoenig v Isaacs28 • Kiely & Sons Ltd v Medcraft29

The Law Commission — paragraph 2-11 of 19th Annual Report (1983-1984) — of England and Wales has recommended the removal of the ‘entire performance’ rule from contracts, subject to certain limitations, preferring that the party in breach of the contract should be entitled to the value of the works it has completed, up to the occurrence of the breach, if such completed works have bestowed a benefit to the other party30.

Most of the present day construction contracts have adopted the ‘substantial performance’ doctrine instead of ‘entire performance’ rule by allowing owners to accept or take-over the works once they have achieved ‘practical completion’ or ‘substantial completion’ — terms used in JCT forms of contracts and ICE and FIDIC forms of contracts respectively.

Further, provision made in present day construction contracts for ‘interim payments’ to be paid to contractors as works progress, has alleviated cash flow problems akin to entire contracts. In the United Kingdom, legal assent to such interim payments is conferred by sections 109 and 110 of the Housing Grants, Construction and Regeneration Act31, provided that the agreement is in writing.

Under UAE law, Article 247 of the Civil Code32 provides for the performance of contracting parties’ obligations. The Article stipulates:

In contracts binding upon both parties, if the mutual obligations are due for performance, each of the party may refuse to perform his obligation if the other contracting party does not perform that which he is obliged to do.

Thus, if a contracting party does not perform its obligations under a contract, the other party may [emphasis added] refuse to perform its obligations under the contract. Although the provisions of this article, prima facie, indicate that the Civil Code33 promulgates entire contracts, the word ‘may’ used in the wording makes such refusal an option. Further, Articles 258 and 265 of the Civil Code34 provide that the intention of the parties is the main criterion when interpreting the wording of any contract and clauses thereof. As the bespoke forms

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of contract used in Dubai provide for ‘substantial completion’ of the works, it is highly unlikely that the term ‘completion’ would be interpreted by the courts in the UAE in any other way than to mean ‘substantial completion’. The above proposition can be supported by the decision given by the Federal Supreme Court (Court of Cassation) of Abu Dhabi in a case35 related to partial completion of a contract. There, the court held that if the contractor did not complete all the agreed work and only completed part of it, it should be entitled to payment in proportion to the work it had completed and the value of essential work required for the contract work. This means that, even if the contractor has not achieved ‘substantial completion’ of the works, it is entitled for payment provided the employer is benefited from the completed portion of the works.

In a typical construction contract, the term ‘completion’ may be used in at least four separate senses36.

The first is ‘practical’ or ‘substantial’ completion. The second, which may be called ‘works’ completion, occurs when all the actual physical work has been finished; this may or may not coincide with ‘practical’ or ‘substantial’ completion. The third is ‘defects’ completion, which is achieved when all defects appearing during the Defects Liability Period have been made good. The fourth is ‘legal’ completion, which occurs when the contractor has provided all information necessary for the preparation of the final account and the employer has made his final payment, so that in legal sense the contract has been ‘performed’ on both sides37.

Even though, the meaning of ‘completion’ akin to latter three scenarios can be comprehended, the meaning of ‘practical’ or ‘substantial’ completion is not apparent.

Although there is no judicial interpretation of the term ‘completion’ promulgated by the UAE courts, such term has been judicially interpreted in several occasions by the courts in the United Kingdom. From the interpretations given by the courts for ‘practical completion’, in the context of JCT standard form contracts, it is clear that once all the necessary construction works specified in the contract are performed the works can be considered to be ‘practically completed’ for the purposes of such provisions in the JCT form38. In Westminster City Council v J Jarvis

& Sons Ltd39, Viscount Dilhorne said: “... a practical completion certificate can be issued

when owing to latent defects, the works do not fulfil the contract requirements and that under the contract works can be completed despite the presence of such defects. Completion under the contract is not postponed until defects which became apparent only after the work had been finished have been remedied.”

Conversely, in H W Neville (Sunblast) Ltd v William Press & Sons Ltd40, it was held that, if it was apparent that defects exist in the works, practical completion could not be said to have occurred unless those defects were so trifling as to be classified as ‘de minimus’.

A more convincing analysis of the term ‘practical completion’ is given in Keating on Construction Contracts41: Practical Completion is perhaps easier to recognise than to define … It is submitted that the following is the correct analysis:

(a) the Works can be practically complete notwithstanding that there are latent defects;

(b) a Certificate of Practical Completion may not be issued if there are patent defects. The Defects Liability Period is provided in order to enable defects not apparent at the date of Practical Completion to be remedied;

(c) Practical Completion means the completion of all the construction work that has to be done; and

(d) However, the Architect is given a discretion to certify Practical Completion where there are very minor items of work left incomplete, on “de minimis” principles.

The absence of a definition for ‘substantial completion’ is a conspicuous omission from the FIDIC Red Book42, on which all of the bespoke forms43 considered in this paper are modelled. It is opined that ‘substantial completion’ is generally taken to refer to a state of the works which would allow the employer to take beneficial use of such works44.

Reference to ‘substantial completion’ is made in clauses 48.1 – Taking-Over Certificate, 48.2 – Taking-Over of Sections or Parts, 48.3 – Substantial Completion of Parts, and 49.1 – Defects Liability Period of the FIDIC Red Book and all of the bespoke forms.

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Clauses 48.1 and 48.2 provide that when the whole of the Works, or sections or parts of the Works (if sectional or partial completions are allowed) are substantially completed the contractor has to notify the engineer of such completion with a written undertaking to finish any outstanding works during the defects liability period and request the engineer to issue a taking-over certificate thereof. Within 2145 days of receiving such notification from the contractor, the engineer must, either issue a taking-over certificate for such works stating the date on which such works, in its opinion, are substantially completed to its satisfaction including passing of all the prescribed tests, or instruct the contractor specifying all the work, which in the engineer’s opinion, is required to be completed before the issue of a taking-over certificate.

From the above provisions, it is evident that the state of ‘substantial completion’ of the works is solely a matter of interpretation of that state by the engineer by observing the state of the works and applying its professional judgment thereof46. It is important to note that as per the above provisions, it is mandatory for the engineer to arrive at its decision as to the state of the works and issue a certificate or notification to the contractor within the prescribed period. Failure to comply with that provision would amount to a breach of a warranty by the employer which may lead to claiming damages therefore by the contractor.

Out of the bespoke forms, DCA Standard Conditions of Contract47 provides a definition for ‘substantial completion’. In this form the term ‘substantial completion’ is defined as:

the stage when the Works are completed as evidenced by:

i. there not being any legal impediment (for which the Contractor is responsible) to the Employer’s use or occupation of the Works and there are no defects or outstanding work or any matter which could prevent the Works from being used for their intended purpose;

ii. all tests required to be obtained by the Contractor in accordance with the Contract have been carried out and passed to the satisfaction of the Engineer;

iii. all documents and information required from the Contractor for the use, occupation and maintenance of the Works and as stated in the Contract, having been supplied to the Employer;

iv. all warranties, guarantees and service agreements required by the Contractor having been complied with, supplied and assigned to the Employer by the Contractor;

v. all services or facilities having been certified by the Engineer as having been correctly installed and/or having performed to specification; and

vi. the Works and Site being clean, free from refuse and rubbish.

From the wording of the above definition, it is arguable that the legal interpretation of the term ‘substantial completion’ as promulgated by the case authorities discussed above can be construed. The wording “...there are no defects or outstanding work or any matter which could prevent the Works from being used for their intended purpose” in paragraph i above, implies ‘absolute completion’ rather than ‘substantial completion’. Further, paragraphs ii and v of this definition are redundant in the light of the provision for testing made in clause 48 and the wording of paragraph i, whereby the contractor is required to complete the works, which include the services referred to in paragraph v.

The meaning emanating from the above definition can be distinguished with the meaning ascribed to ‘practical completion’ — equivalent term for ‘substantial completion’ used in JCT forms — by clause 2.30 in JCT 200548. Accordingly the ‘practical completion’ is said to have occurred when:

• in the opinion of the architect/contract administrator, practical completion — albeit, the term ‘practical completion’ is not defined — of the works is achieved;

• the contractor has complied sufficiently with clause 2.40 (supply of As-build drawings);

• the contractor has complied sufficiently with clause 3.25.3 (health and safety file).

From the above it can be seen that sufficient compliance with the above provisions of the contract by the contractor and architect’s / contract administrator’s unhindered opinion on the state of the works are the sole requirements necessary to issue a practical completion certificate.

The provisions of bespoke forms require the engineer or, in the case of Nakheel forms, the employer’s representative

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to consult the employer before issuing a taking-over certificate or a notification. Hence, it is clear that the employer’s perception as to the state of the works will directly influence the interpretation of the engineer of such state. Further, apart from the DCA form of contract, all the other forms, by provisions of clause 2.1, have made it mandatory for the engineer to obtain specific approval of the employer to issue a taking-over certificate.

In the author’s experience, such provisions in the bespoke forms have burdened the engineer’s interpretation of ‘substantial completion’ and many a time delays have occurred in notifying the contractor of the engineer’s opinion due to the time taken by the employer in granting approval for the engineer’s requests.

Adverting to severable contracts, a severable contract is defined as a contract comprising two or more separately enforceable promises49, which relieves the promisor of breach of the entire contract if it fails to complete any one of the promises . In some of the major building and engineering contracts provisions are made to complete the works in stages with payment made for each completed stage. Such a contract can be interpreted as a severable contract as the contractor is paid for each stage completed irrespective of whether the whole of the works is completed. An analogy for such an arrangement can be found in the case Collin Bay Rafting and Forwarding Co v New York and Ottawa Railway Co50 . In this case the plaintiff was contracted to remove two spans from a wrecked bridge over a river for a contract price of $25,000 with a contractual arrangement of payment of $5,000 upon removal of one span, a further $5,000 upon it was placed ashore and the balance on completion. Only one span was removed and placed ashore by the plaintiff. The court held that the plaintiff could recover its entitlement of $10,000 for the completed stages from the defendant.

3. Completion within a Specified Time Invariably, all modern construction contracts have a time for completion of the obligations of the parties and all the standard form contracts (JCT, ICE, NEC, FIDIC etc.) provide for the works to be completed within a prescribed time. Similarly, all bespoke forms of contract (DM, RTA, DP, and Nakheel forms) considered herein have such provision. Clause 43.1 – Time for Completion, stipulates that the whole of the Works or any part or section thereof, as the case may be, should be completed within

the period stated in the Appendix to Tender subject to other provisions contain therein. Failure to complete the Works by the Time for Completion due to its own faults, the contractor would be liable to pay liquidated damages as per the stipulations of clause 47.1 – Liquidated Damages for Delay. In all of the bespoke forms, clause 47.1 is referred to as Penalty for Delay in line with the terminology used in the UAE Civil Code51.

FIDIC Red book Clause 14.1 – Programme to be Submitted, provides for the contractor to submit a programme for the execution of the Works(rephrase/repetition and unclear) — depicting the sequence, arrangements, and methods the contractor proposes to adopt — for the engineer’s consent within the time specified in Part II conditions. Usually this programme is produced using an approved software package52, which supports CPM analysis and it will be in a form and will contain such details as prescribed by the engineer.

Even though there is no explicit provision in FIDIC Red Book or in the bespoke forms that the contractor should proceed with the works as per the consented program, the obligations to proceed with the works with ‘due care and diligence’ (clause 8.1) and ‘due expedition and without any delay’ (clause 41.1) require the contractor to follow a properly formulated sequence as depicted in the consented programme in executing the works. This fact is corroborated in West Faulkner Associates v London Borough of Newham53, where the court held, among other things, that the contractor had to “… progress the works steadily towards completing substantially in accordance with the contractual requirements as to time, sequence, and quality of works”. A properly formulated programme is an invaluable tool to monitor the progress of the works and to evaluate delays to time for completion.

Clause 8.1 of all bespoke forms, inter alia, provides that:

The Contractor shall, with due care and diligence, ….., execute and complete the Works ....

therein in accordance with the Contract …..

Further, clause 41.1 provides that:

The Employer shall fix the date by which the Contractor is to commence execution of the Works on Site …………….. Thereafter, the Contractor shall proceed with the Works with due expedition and without delay.

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It is clear from the above stipulations of the bespoke contracts that the contractor has two important responsibilities to carry out apart from completing the works within the time for completion. Accordingly the contractor is required to:

1. execute the Works diligently as per the contract — This means that the contractor has to carry out the works in a meticulous manner, thoroughly in accordance with the contract using specified material and adhering to specified execution procedures. Failure to comply with such requirements may render the completed works not substantially completed and the contractor may not be able to recover its entitlement. An analogy can be drawn from Bolton v Mahadeva54, where, despite completing installation of the central heating system the plaintiff could not recover its entitlement as the appeal court held that the contract was not substantially performed due to major defects in the completed system.

2. proceed with the Works with due expedition and without any delay — Under this provision, the contractor is required to proceed with the works expeditiously mitigating any delay. Therefore, the contractor does not have any grounds to slow down the works anticipating catching up with the delayed work later. As reasoned earlier the contractor has to adhere to the consented programme of works to achieve such requirements. Clause 46.1 – Rate of Progress, provides for the engineer to notify the contractor if the rate of progress is too slow, in the engineer’s opinion, to comply with the Time for Completion. Provisions are made in the bespoke forms55 empowering the employer to terminate the contract when it is inevitable that the time for completion would be delayed due to the contractor’s failure to proceed with the works expeditiously and diligently despite receiving notice for slow rate of progress from the employer. Such provisions override the common law inference that the contractor is entitled to proceed with the works at its own pace, provided the time fixed for completion in the contractor is met. This proposition was discussed in West Faulkner56, where the court had to decide whether the contractor was required to ‘proceed regularly and diligently’ as per the terms of the contract. The court affirmed that the contractor was required to proceed so. In contrast, if such provision is not an expressed term of the

contract, the contractor is required to complete the works within the time for completion at its own pace. The question of whether the term ‘due diligence and expedition’ could be implied into a contract, when it was not a requirement therein, was considered in Greater London Council v Cleveland Bridge and Engineering Co Ltd 57 . The court at first instance held that in the absence of expressed term in the contract, the contractor had the right to plan and execute the works as he/she wished, provided he/she finished the works by the time fixed in the contract.

The stipulations of Article 874 of the Civil Code58 of the UAE make it mandatory to provide the particulars of the time for completion for a “muqawala” contract — “contract to make a thing or to perform a task”59 . This Article, inter alia, states: In a muqawala contract ... particulars must be given of

... the period over which it is to be performed ... Although the provisions of Article 874 do not provide explicitly for submission of a programme of works as stipulated in clause 14.1 or to adjust the completion period explicitly as in clause 43.1 — where it allows adjusting the time for completion with extensions thereof granted under clause 44 — or to proceed with the works ‘diligently with due expedition and without delay’, it can be said that such additional provisions will be implied into the provisions of Article 874 as the word ‘particulars’ therein is broad enough to encompass such provisions, as Article 877 provides that the contractor must complete the work in accordance with the conditions of the contract, and as the provisions of Articles 258 and 265 grant priority to the intention of the parties when interpreting the contract.

The issue of a taking-over certificate for the works triggers the following provisions of the contract, which relieve the contractor from some of its obligations: On the date of issue of the taking-over certificate;

• care of the Works (clause 20.1) passes on to the employer,

• responsibility for insurance of the Works (clause 21.1) passes on to the employer,

• the contractor can remove the construction equipment from the site (clause 33.1), and

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• the contractor is entitled to the first moiety of retention (clause 60.3).

On the ‘substantial completion’ date stated in the taking-over certificate;

• the contractor is relived from the imposition of liquidated damages/penalties for delay (clause 47.1), and

• the Defects Liability Period (clause 49.1) starts.

Therefore, the employer is required to arrange the necessary insurance to cover the completed works as the responsibility for care of the works passes on to the employer once the works are taken over by him/her. According to the provisions of FIDIC Red Book and all of the bespoke forms, a contract cannot be treated as completed until a Defects Liability Certificate is issued to the contractor under the provisions of clause 62.1, which stipulates, inter alia, that:

The Contract shall not be considered as completed until a Defects Liability Certificate shall have been signed the Engineer60 and delivered to the Employer with a copy to the Contractor, stating the date on which the contractor shall have completed his obligations to execute and complete the Works and remedy any defects therein to the Engineer’s61 satisfaction ….

Accordingly, an issue of a Defects Liability Certificate indicates the ‘full completion’ of works under the contract and it is issued once the contractor completes whole of the works including remedying any defects found in the Defects Liability Period, which is normally one year.

However, according to the mandatory provisions of Article 880 of the Civil Code, both the designer (architect or engineer) and the contractor are jointly liable for a period of ten years, from the date of taking over the construction, to compensate the employer for any total or partial collapse of the construction they have constructed or installation they have erected, and for any defect which threatens the stability or safety of the construction. Therefore, despite the completion of the contract upon issue of a Defects Liability Certificate, the contractor will be liable to the employer for major defects discovered within the said period of ten years.

To deal with this issue, all of the bespoke forms contain a ‘Decennial Liability’ clause. Such liability of the consultants (architects/engineers) is covered in respective consultancy agreements.

It is noteworthy that such liability arises only in the event of total or partial collapse or discovering any defects that threatens the stability or safety of the construction due to acts or omissions of the designer and the contractor. In a case62 heard at the Federal Supreme Court (Court of Cassation) of Abu Dhabi, it was held that both the engineer and the contractor were not liable for the defects discovered that affected the stability of the structure as such defects were linked to subsidence of the ground under the foundations occurred due to deep excavation carried out for a sewage pipeline construction in close proximity to the structure without proper earthwork supports.

4. Completion where Time is not Specified

Although the modern standard form contracts and bespoke form of contracts considered herein provide for time for completion, there are instances where contracts have been entered into without specifying a particular time to complete the works. The courts have generally ruled that in such instances works have to be completed within a reasonable time63.

In Startup v Macdonald 64, the court decided that as the contract did not specify the time within which delivery of goods had to be completed, and agreement to complete such delivery within a reasonable time was implied and therefore, the delivery had to be completed within a reasonable time. As to the question of reasonableness of time, the court, in the case of Hick v Raymond and Reid 65, held that reasonable time for completion would be determined taking into consideration the circumstances existed at the time.

Further, there are instances where the specified time has become inapplicable due to an agreement between the parties to that effect, or a waiver, or the employer preventing the contractor from completing the works within the agreed time66. The courts, as in the above cases, have held that in such instances the works have to be completed within a reasonable time. In Bruno Zornow (Builders) Ltd v Beechcroft Development Ltd 67 the agreed preliminary works, which had a specific date to complete, were subsequently varied to include the remainder of the

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works without agreeing a date for completion of such varied works. The court held that, for reasons of business efficacy, the parties must be presumed to have intended that the contract, as varied, would continue to have a fixed date for completion. 5. Completion when Time is of the EssenceUnder normal circumstances, if the contractor fails to comply with the time provision in the contract, it is in breach of contract and is liable for damages under the terms of the contract68. However, if the terms of the contract as to time have made time is of the essence (unclear/ rephrase), then breach of that condition by one party will discharge the other party from its obligations under the contract69. This proposition was upheld by the court in the case of United Scientific Holdings Ltd v Burnley Council70. Further, in Lombard Plc v Butterworth , Mustill LJ said71: “Where a breach goes to the root of the contract, the injured party may elect to put an end to the contract. Thereupon both sides are relieved from those obligations which remain unperformed ... A stipulation that time is of the essence, in relation to a particular contractual term, denotes that timely performance is a condition of the contract. The consequence is that delay in performance is treated as going to the root of the contract, without regard to the magnitude of the breach.”

Generally, in construction contracts, time will not be of essence in the absence of expressed wording making it so. In Lucas v Godwin72, referring to an obligation to complete building work by a specific date, Tindal CJ said:

“It was not a condition, but a stipulation, for non-observance of which the defendant may be entitled to recover damages; but, even if a condition, it does not go to the essence of the contract, and is no answer to the plaintiff’s claim for the work actually done. It never could have been the understanding of the parties, that if the house were not done by the precise day, the plaintiff would have no remuneration; at all events, if so unreasonable an engagement had been entered into, the parties should have expressed their meaning with precision which could not be mistaken73.”

It has been stated that the time will not be of the essence unless74:

1. the parties expressly stipulate that conditions as to time must be strictly complied with; or

2. the nature of the subject-matter of the contract or the surrounding circumstances show that time should be considered to be of the essence75; or

3. a party who has been subject to unreasonable delay give notice to the party in default making time of the essence76.

As held in Gibbs v Tomlinson77, a mere discussion between the employer and the contractor wherein the employer emphasises the importance of completion of the works by a particular date will not suffice to make time is of the essence (unclear/rephrase).

Further, as held in Lowther v Heaver78, making time is of the essence of the contract; by the mere insertion of the words to that effect will not have any effect if they are inconsistent with the other terms of the contract.

It is said that in the presence of provisions for:

a) granting extension of time79, b) payment of Liquidated Damages80, orc) payment of bonus for expedition,

in a contract, time therein will not be treated as essence81.

Thus in Lamprell v Billericay Union82, Rolf B. said:

“Looking to the whole of the deed, we are of opinion that the time of completion was not an essential part of the contract; first, because there is an expressed provision made for a weekly sum to be paid for every week during which the work should be delayed after June 24, 1840; and secondly, because the deed clearly meant to exempt the plaintiff from the obligation as to the particular day in case he should be prevented by fire or other circumstances satisfactory to the architect; and here, in fact, it is expressly found by the arbitrator that delay was necessarily occasioned by the extra work.”

To determine the status of time — whether it is of the essence or not — in a contract, it is important to scrutinize whether time provision in the contract can be categorised as; a condition — a mere breach of which entitle the innocent party to be excused from

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all subsequent performance under the contract; or an innominate or intermediate term — a breach of which, depending on its extensiveness, allow the innocent party to claim damages if the consequences of the breach are less serious, or otherwise the innocent party has the same remedy as in the case of a breach of condition; or a warranty — a breach of which entitles the innocent party to claim damages83.

In Anglia Commercial Properties Ltd v North East Essex Building Co Ltd84, it was held that the failure of the defendant to develop the site of the plaintiff’s company within the four year period as stipulated in the contract was a mere breach of warranty and the plaintiff was entitled only to recover damages for the contemplated cost of the delay. In the standard form contracts85 as well as in the bespoke forms, a delay in the time for completion is primarily remedied by a claim for liquidated damages or penalty86. Such provisions are underpinned by the elaborate provisions made in these forms for granting extensions to the time for completion87.

As reasoned earlier, in the presence of the above provisions in standard and bespoke forms, the time in these forms will not be of essence. However, the notice issued to the contractor under the provisions of clause 46.1 – Rate of Progress, which empowers the engineer to notify the contractor that the progress of the works is too slow to comply with the time for completion, makes time is of essence. This allows the employer to terminate the contract under clause 63.1(b)ii, which stipulates that the employer may, after giving 14 days’ notice to the contractor, terminate the contract, if the contractor without reasonable excuse has failed to proceed with the Works, or any section thereof, within 28 days after receiving notice pursuant Sub-Clause 46.1.

Reference1 For the origin, refer to The Phrase Finder on

http://www.phrases.org.uk/bulletin_board/10/messages/570.html.

2 Wallace, I.N. Duncan. (1970). Hudson’s Building and Engineering Contracts – 10th Edition. Sweet & Maxwell. p604.

3 Ibid.4 Capper, P. (1996). Emden’s Construction Law - 8th

Edition. Butterworth, p172.

5 Capper, P. op. cit. p138.6 Ibid.7 Ibid.8 Capper, P. op. cit. p139. 9 (1795) 6 Tem Rep 320.10 (1867) L.R. 2 C.P. 651.11 Wallace, I.N. Duncan. op. cit. p246.12 [1898] 1 QB 673, CA. 13 (1810) 3 Taunt 52.14 (1886) 2 Hudson’s BC (4th Edition) 81, HL.15 (1895) 16 NSWLR 55.16 (1954) 104 L.J. 844.17 (1968) 208 Est. Gaz. 852.18 (1990) 20 NSWLR 251.19 1999 WLR 1111819.20 [2003] EWCH 1076.21 [2007] EWCH 2556.22 Wilmot-Smith, R. (2006). Construction Contracts,

Law & Practice. Oxford University Press, p216.23 [1916] 1 K.B. 566.24 Wallace, I.N. Duncan. op. cit. p245. See also Cutler

v Close (1832) 5 C & P 337.25 (1832) 5 C & P 337.26 [1916] 1 K.B. 566, CA.27 (1921) 129 NY 889.28 [1952] 2 All ER 176, CA.29 (1965) 109 Sol Jo 829.30 Stevens, R. & McFarlane, B. (2002). In Defence of

Sumpter v. Hedges. Law Quarterly Review.31 Housing Grants, Construction and Regeneration

Act, 1996.32 The UAE Federal Law No. 5 of 1985 with revisions

made by law no. 2 of 1987.33 Ibid.34 Ibid.35 Case No. 39-16 dated 12.06.199436 Thompson, T. (2004). Practical completion in

building contracts: a legal definition?. Construction Law Journal.

37 Ibid.38 Capper, P. op. cit. p173.39 [1970) 1 All ER 943.40 (1981) 20 BLR 78.41 Furst, S & Ramsey V. (2006). Keating on

Construction Contract 8th Edition. Thomson, Sweet & Maxwell. Paragraph 19-113, p774.

42 Conditions of Contract for Civil Engineering Construction. (1987 -1991). 4th Edition. Federation Internationale Des Ingenieurs-Conseils.

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43 Dubai Municipality (DM) Conditions of Contract for Works of Civil Engineering Construction – 1991, Department of Civil Aviation (DCA) Standard Conditions of Contract – Revision 2, October 2002, Road Transport Authority (RTA) Conditions of Contract for Works of Civil Engineering Construction – January 2006, Dubai Properties (DP) Conditions of Contract for Building & Civil Engineering Construction, Re-measure and Lump Sum – January 2006, and Nakheel General Conditions of Contract (Re-measure and Lump Sum) – January 2003.

44 Corbett, E.C. (1991). FIDIC 4th – A Practical Legal Guide. Sweet & Maxwell, p275.

45 Period stated in FIDIC Red Book. All of the bespoke forms provide for 28 days.

46 Nestor, J. (2004). ‘Completion’ is The Key to Liquidated Damages: But What is Completion? Paper D48. Society of Construction Law, UK.

47 See note 43.48 JCT Standard Building Contract With Quantities

2005, published by the Joint Contract Tribunal.49 Garner, B.A. (1999). Black’s Law Dictionary, 8th

Edition. Thomson West, p348.50 (1902) 32 SCR 216.51 See note 32.52 Either Primavera Project Planner or Microsoft

Projects.53 (1994) 71 BLR 1.54 [1975] QB 326.55 Clause 63.1(b)ii of the bespoke contracts.56 See note 53.57 (1984) 34 BLR 50.58 See note 32.59 Refer to Article 872 of Civil Code for the

definition.60 In the case of Nakheel forms – Employer’s

Representative.61 Ibid.62 Case No. 529-22 dated 09/10/200163 Capper, P. op. cit. p175A.64 (1843) 6 Man & G 593.65 [1893] A.C. 2266 Wallace, I.N. Duncan. op. cit. p606.67 [1990] 51 BLR 16.68 Furst, S & Ramsey V. op.cit. Paragraph 9-002,

p305.69 Ibid.70 [1977] 2 W.L.R. 806, HL.71 [1987] Q.B. 527, at 535, CA.72 (1837) 3 Bing NC 737.73 Ibid at 744.74 Furst, S & Ramsey V. op.cit. Paragraph 9-002, p305

& 306.75 Boris Homes Ltd v Oakcliff Investment Corpn.

[1994]BLM (June) 5.76 British and Commonwealth Holding Plc v Quadrex

Holding Inc [1989] 3 All ER 492. See also Charles Rickards Ltd. V Oppenheim [1950] 1 K.B. 616.

77 (1992) 35 Con LR 86.78 (1889) 41 ChD 248, CA.79 Bespoke forms of contract – clause 44.1.80 Ibid clause 47.1.81 Capper, P. op. cit. p175B.82 (1849) 3 Ex. 283.83 Capper, P. op. cit. p175C.84 (1982) 266 EG 1096.85 JCT, ICE, NEC, FIDIC etc.86 Clause 47.1 of the bespoke contracts.87 Clause 44.1 of the bespoke contracts.

Sauter Automation Ltd v Goodman (Mechanical Services) Ltd (1840)

A sub-contractor’s quotation was expressed as ‘subject to our standard terms and conditions’ which included a retention of title clause. The main Contractor sent an order stating ‘terms and conditions in accordance with the main contract’. The Sub-contractor, without further communication, delivered the goods.

Held that this amounted to an acceptance by them of the main Contractor’s counter offer.


50

E.A.Thusitha P. Edirisinghe, B Sc (Hons)QS, MCIArb, CCE, Pg Dip (Arb & Const. Law) is a quantity surveyor graduated from University of Moratuwa in 2000, currently studying for MSc. in Arbi-tration and Construction Law in the Robert Gordon University of Scotland, Dubai Campus.

Arbitration and its Development in the UAE Construction Industry - an Overview

“The arbitration in the United Arab Emirates is still young compared to most European countries. Still there is no arbitration law implemented in the country. Most of the international investors are still reluctant to enter into the country to invest due to the uncertainties existing in the law and, specially, the lack of international standards in dispute resolution methods…”

AbstractUnited Arab Emirates is one of the emerging countries in the region heading towards development. Currently there are massive construction projects being carried out including the world’s tallest tower, green cities, man-made islands and many experimental constructions. This has attracted different investing parties entering into the country including companies from domestic and international property developers, consultants and contractors. Many of the projects are based on ‘fast-track’ construction methods; therefore the construction activities have become critical when delivering a good quality product on time to the clients. Eventually, this has created many disputes among the parties involved in the industry.

Arbitration is the most preferred course of action to resolve the disputes in the industry. Almost every contract includes an arbitration clause enabling the parties to refer their disputes to the arbitration since arbitration has its inherent advantages over litigation and other dispute resolution techniques.

The purpose of this article is to investigate the development of the arbitration procedure in the United Arab Emirates and to observe its role in the challenging economic boom existing in the construction industry.

The introduction deals with defining the arbitration, the requirement to arbitrate and certain important aspects in the arbitration mechanism. The article focuses on the evolvement of the arbitration in the United Arab Emirates from its conception. It also focuses on certain interesting features in arbitration in the country. Then the discusses various institutional laws existing in the country including a brief role in respect to the construction. It also discusses key conventions/treaties ratified in relation to the arbitration in the country. Finally it concentrates on the future of the arbitration in the country.

IntroductionThe arbitration in the United Arab Emirates is still young compared to most of the European countries. Most of the international investors are still reluctant to enter into the country for the investments due to the uncertainties existing in the law and, specially, the lack of international standards in dispute resolution methods. This promoted me to write this article so as to find out the evolvement of arbitration in the United Arab Emirates and its role in construction industry in particular.

There are attempts that have been taken by professionals and experts in the field to investigate on the subject. This includes texts, seminars, discussion forums and conferences. However, more analytical and detailed investigations are required to the subject to understand the demands from the various parties in the industry so that the arbitral awards can be recognized and enforced fairly simply and quickly.

1.1 The Arbitration1.1.1 The Definition Arbitration can be described as resolving of disputes

arisen between the contractual parties. As the

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procedure may vary from case to case, jurisdiction to jurisdiction and region to region, there is no common definition that can be given. This has been pointed out by the authors of the book “Arbitration of Commercial Disputes” as:

“There is no universal definition of Arbitration…each jurisdiction may apply its own ‘spin’ in deciding what may and what may not be arbitrated, who may arbitrate, and how the arbitral process be conducted1…”

Another attempt to define the arbitration has been made by a Scottish Author, Professor DM Walker:

‘The adjudication of a dispute or controversy on fact or law or both outside the ordinary civil courts, by one or more parties to whom the parties who are at issue refer the matter for a decision2”

The main principle in arbitration is the “agreement” to arbitrate, a dispute, a third party reference (an arbitrator) and finding a resolution to the dispute by that third party. It is important to mention that arbitration does not itself directly provide the solution to the dispute; they set out the procedure to be followed in resolving it.

1.1.2 Reasons to Arbitrate There are many advantages in arbitration. The key

benefits are discussed below.

• The court procedure takes its established time framework. This cannot be changed by the parties. Also the fees for the lawyers/solicitors are very high and may have to be paid for several times. Therefore, the arbitration is considered cheaper and quicker than lengthy litigation procedure.

• Arbitration is more flexible than litigation since the parties can decide where arbitration is held and who their arbitrators are. Also the parties may agree upon time limits so that it can be completed fairly quickly.

• Arbitration can be conducted in private premises. Therefore, the parties can keep their privacy. In most occasions, litigation is open to the public attendance thus no privacy is reserved in litigation.

• The skilled and knowledgeable input can be obtained to resolve the disputes. The reason is that the court judges are not often the experts in the subject matters.

This leads to the satisfaction of each parties and a fair decision could be received.

• Arbitration is preferred by many parties especially in complex international commercial disputes. The reason is that the parties outside the place of arbitration are unfamiliar with jurisdiction and languages. There is a tendency towards being bias and unfair in certain countries. Even the arbitration can be held outside the region where the dispute has taken place.

• Finally, the decision of the arbitrator is final and binding and is enforceable in law similar to a decision of the court.

1.1.3 The Arbitration Award The arbitration award is a decision of the arbitrator

given for that dispute after the proper submission by the parties. Also the award can be an oral one or a written one; however, oral awards are rare. On the other hand, mostly the parties prefer to have their awards in writing in case it is so required by certain legislations in the country. Also the party may have to present it to the courts if there is a failure from the other party to comply with the arbitral award.

Another purpose of an award is to record the arbitrator’s decision, which is final and binding, so that the parties are informed about the decision. An award may be a payment of money, order a rectification, order to do or refrain from doing something or a specific performance.

1.1.4 Characteristics of Arbitration1.1.4.1 Agreement to arbitrate There should be a valid agreement to arbitrate in

order to have a valid Arbitration between the parties. The absence of this causes the arbitration to fail. This is a fundamental requirement in arbitration. The reason is that the arbitration agreement is considered as another agreement. Similarly, the recognition and enforcement of an arbitration award should be established in the concerned jurisdiction though courts order, if applicable under the conventions3 (when international parties are involved) where the arbitration takes place. Also an arbitration agreement can form a part of a main contract or a separate agreement. When it takes a role of a separate agreement, it is considered as an ‘ad-hoc’ agreement.

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1.1.4.2 The judicial nature of Arbitration An arbitrator has more freedom than a court judge

due to the flexibility in the arbitration procedure as discussed earlier. However, they (arbitrators) cannot discard the basic principles of justice. A party can, however, challenge a decision given by an arbitrator in the court in very limited provisions such as a bias or incompetent act to resolve the matter. It is worth mentioning that, challenging (appealing) an arbitral decision could be more difficult than appealing against a court decision. Therefore, arbitration award has more power in enforcement than most of other alternate dispute resolution methods.

Unless the parties have agreed, there are no fixed rules in the arbitration process. Arbitrators may implement case base approach to arrive at a resolution based on the submissions of the parties. The submissions are not usually disclosed unless otherwise required to do so.

1.1.4.3 The Award is final and binding As mentioned in chapter 1.1.4.2, an Arbitral Award is

usually final and binding. However, in some countries, it is questionable whether an Award is final and binding. For example, in United States, the use of non-binding arbitration by the courts in domestic disputes is not uncommon4. However, this feature attracts many parties to choose arbitration. Also, it is important to note that, once the arbitration is commenced, parties cannot quit from the proceedings.

2.1 The Development of Arbitration in the UAE Construction Industry

2.1.1 Introduction The Emirates, specially Dubai and Abu Dhabi,

have become the world‘s leaders in construction related projects over the past 10 years. Most of the projects are ‘fast track’, and the projects need to be completed within a very short period of time without compromising quality and cost. However, this goal has been challenged due to the complexity of commercial transactions made between international companies and local enterprises and it creates more disputes among the parties. Main reasons for such disputes are; the sudden inflation in the region due to the high demand for the supplies, major changes to the designs, delay in carrying out the projects and increase of labor wages in line with the current global economic recession.

In the recent past, foreign companies were reluctant to invest in this challenging industry as they are unfamiliar with the law and jurisdiction, specially the accessibility and fairness of the UAE courts and, in particular, the arbitration process. Currently there is no formal legislation in the Emirates exclusively for the use of arbitration which is similar one to England and Wales5, thus it is at present governed by the UAE Civil Procedure Code.

2.1.2 Arbitration and the UAE Courts – some key features

2.1.2.1 Arbitration Agreement The courts in United Arab Emirates recognize a

decision made by both the parties to refer their differences (disputes) to the arbitration under the Federal Law No. (11) of 19926. No parties can request a court decision before the arbitration in the event of a dispute if there is an agreement to refer to arbitration. Also the parties can refer their matters to the arbitration any time during the litigation.

The courts must certify all arbitration decisions in the emirate. Also the courts can invalidate any arbitral decision based on the procedural considerations which will be discussed in detail later in the article. This provision allows the parties to appeal for the certification which may prolong the award indefinitely. This is a disadvantage in the system and vitiates the purpose of setting a limit for an arbitrator for his/her award.

2.1.2.2 The Arbitral Tribunal In the Emirates, the appointment of the arbitrators

is not generally restricted to the nationality, gender or religion. This is the case in most Arab countries in the region as well as in other countries in the world. The only restriction in this regards is found in the Article 206 of the Civil Procedure Law, which is; an arbitrator must not be a minor, under guardianship or deprived of his civil rights7.

The arbitral tribunal may be appointed by the parties in the following manner. Each party may appoint their arbitrators according to their own will, and then the two arbitrators will jointly appoint the third arbitrator who acts as a panel judge. Otherwise, the arbitrators may be appointed in accordance with the institutional rules provided that the partied have

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agreed. There are powers and restrictions granted by the law for the tribunal, which is outside of the scope of this article.

Here, an interesting point is that, the law expressly obliged the tribunal to comply with the arbitration agreement made by the parties. This provision gives the parties to appeal (challenge) against the award/tribunal on the grounds in addition to the other provisions such as the tribunal is being bias. Another point in the Emirates law regarding the arbitration is that, any arbit

6 months from the date of the first arbitration session subject to the extension can be granted to this by an agreement by the parties or by a court order. If an arbitral award is not granted within the stipulated time, either party can refer to the dispute to the court.

It is also important to ‘formally establish’ the extension to the time limit. In one of the cases held in Abu Dhabi Supreme Court in 2002, the main consideration of the courts was to find out whether or not there was a valid agreement to extend the time limit between the parties. It could have been more advantageous if the parties had formalized their agreement to extend the time bar. Since there was no valid agreement, it was held that the award was invalid. However, as previously noted, the main purpose of such a dead line is to push the parties to the arbitration. Otherwise there is a danger of parties delaying the proceedings and finally appealing to invalidate the award based on the time bar. Also there are some critics about the time limit as to its sufficiency since more complex commercial disputes need more time to arrive at a resolution.

2.1.2.3 Enforcement of an Arbitral Award Prior to the New York Convention, the enforcement of

foreign arbitral awards was not certified automatically in the country. The parties, especially internationally, had many difficulties in relation to their desires to enter into the country. Until the New York Convention (refer chapter 2.1.4.1), the enforcement of foreign arbitral awards were enforced by the provisions of the Civil Procedure Law as discussed earlier.

Article 235 of the Civil Procedure Law sets out, in order to enforce a foreign award, the Courts must

ratify the awards. Once an award is made, the parties need to request from the Courts to ratify it. The Courts will ratify it only where the followings are satisfied:

1. That the State courts do not have jurisdiction in the dispute which the judgment/award has been given or the order made, and that the foreign courts which issued it have jurisdiction therein under the international rules for legal jurisdiction prescribed in their law;

2. That the judgment or order has been issued by a court having jurisdiction under the law of the country in which it was issued;

3. That the opposing parties in the case in which the foreign judgment has been given have been summoned to appear and have duly been approved;

4. That the judgment or order has acquired the force of a fait accompli under the law of the court which issued it;

5. That it does not conflict with a judgment or order previously issued by a court in the state and contains nothing in breach of public morals or order of the state.

2.1.3 Key Arbitration Institutes in the United Arab Emirates There are several institutes existing in the Emirates

which provide sets of procedural arbitration rules. Most of these rules are based on the United Nations Commission on International Trade Laws (UNCITRAL) or Civil Procedure Law of the country.

The advantage of having arbitral institutes is that the parties can agree to refer by reference to these rules so that there will be a body which exercises an administrative and supervisory functions more efficiently. However, as there is no proper arbitration law yet been developed and implemented, arbitration procedure exhibits somewhat complicated as pointed out earlier in chapter 2.1.2

2.1.3.1 Dubai International Arbitration Centre (DIAC) In 1993, the Abu Dhabi Chamber of Commerce

Industry established the Abu Dhabi Commercial Conciliation and Arbitration Centre to settle commercial disputes through conciliation or

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arbitration. However, the most popular establishment is the Dubai Chamber of Commerce and Industry Conciliation and Arbitration Centre (known as Dubai International Arbitration Centre or DIAC) established in 19948.

DIAC was first established 1994 as a Centre for Commercial Conciliation and Arbitration. The primary objectives were to provide extensive facilities to conduct commercial arbitrations, promoting parties to settle their disputes in arbitration and practicing arbitrators for international arbitration. In addition to the local experts and qualified lawyers, DIAC has a connection with the network of international law firms in various countries so that they provide their services to the international parties.

The Rules of Commercial Conciliation and Arbitration of 19949 has been replaced by DIAC Arbitration Rules 2007 which are to be applied to all disputes referred for arbitration since 199410 . These new rules provide comprehensive set of procedures in conducting arbitration such as appointment of the tribunal, place and language of arbitration, defense, hearing, witness statement, and the enforcement of the award.

2.1.3.2 Dubai International Financial Centre (DIFC) Dubai International Financial Centre (DIFC) and

London Court of International Arbitration (LCIA) have jointly established the new DIFC Arbitration rules in September 2008. Although the objective of the establishment of DIFC arbitration law is to conduct dispute resolution in connection with DIFC Authority11, the DIFC LCIA Arbitration Centre is open to any parties who have agreed to have their deputes settled with the Centre. This is the second arbitration centre established in Dubai after Dubai International Arbitration Centre.

The new DIFC Arbitration rules are based on the United Nations Commission on International Trade (UNCITRAL) Model Law on International commercial Arbitration. Since the DIFC Court judgments will be enforced through the Dubai Court, it is necessary to obtain DIFC Court judgment for the DIFC Arbitration awards which is then enforced through the Dubai Courts. Then the arbitration award

is enforceable in UAE and in the Gulf Cooperation Council (GCC) under the 1983 Riyadh Convention. Further, DIFC Courts have been established based on Common Law of system which gives more flexibility with comparing to United Arab Emirates’ civil jurisdiction.

Compared to Dubai International Arbitration Centre (DIAC) rules which handle primarily construction related disputes, DIFC has an advantage of attracting international commercial arbitrations with one or both the parties being outside the UAE.

The records of Dubai International Arbitration Centre shows that there were 77 new arbitration cases referred to the Centre in 2007 and 80% of them were related to the construction industry. In this year, so far in total 55 cases have been reported12.

2.1.4 The Conventions/Treaties in the United Arab Emirates

2.1.4.1 The New York Convention The UAE has become the 137th member of the

United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards: The New York Convention has been ratified by the UAE Federal Decree no. 43 and the convention entered in to force internationally for the UAE on 19th

November 2006. (Foreign arbitral awards in the UAE have been dealt with in the same manner as foreign judgments under Articles 235 – 246 UAE Federal Law 11 – Civil Procedure Code)

Under this convention, any award made in any state, whether that state is a member of the convention or not, will be recognized and enforced by any other state that was a party, so long as the award satisfied the basic conditions set out in the Convention.

Article 1 of the Convention provides: “1. This convention shall apply to the recognition and

enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in the State where recognition and enforcement are sought.”

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Article 2 requires the “Arbitration Agreement in writing.” The term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letter or telegrams13. Therefore, the need for documentation of terms of contract is an important step in commercial transactions in the region.

Article 3 of the Convention requires each Contracting party to recognize the arbitral award as binding and will be enforced in accordance with the rules of the territory.

Also the Convention provides the provision for the refusal of enforcement under certain limited conditions. The main provisions include; when the arbitration agreement is invalid, when the party was not given proper notice, where the dispute is not the one that an arbitrator was given, the appointment of an arbitrator or arbitration procedure was not in accordance with the agreement, and finally when the enforcement of the award would be contrary to the public policy if the country. It is difficult to refuse an arbitral enforcement condition other than the above.

2.1.4.2 The Riyadh Convention On 17th June 1996, the Emirates ratified the Riyadh

Convention. As of to date, Gulf countries have ratified the Convention. Article 37 deals with the enforcement of arbitral awards made between the member countries in relation to civil, commercial, administrative and personal status disputes. As in other occasions, the Convention takes precedence over the country’s Civil Procedure Law.

In Addition to the above, the United Arab Emirates have signed up to two bilateral treaties with France and India in relation to the enforcement of foreign judgments and awards.

2.2 The Future of Arbitration in United Arab Emirates As mentioned earlier, no arbitration law has been

enforced in the Emirates. However, the Ministry of Economy and Commerce, in coordination with Ministry of Justice, has recently finalized a draft federal legislation on arbitration14.

More care has been taken to suit the law into the existing economic and trade rules while creating provisions for domestic and international arbitration. The new draft law is based on the Model Law of the United Nations Commission on International Trade Laws (UNCITRAL). The new law will enforce the arbitral awards domestically and internationally in consistent with various conventions/treaties including the New Your Convention. It is also an objective of the new law to establish an arbitration office to monitor the international developments in arbitration and make recommendations for improving the law further.

3 ConclusionThe Arbitration has its inherent advantages over the other dispute resolution methods. Especially in construction arbitration, due to the complex nature of the disputes, most parties prefer the arbitration as a dispute resolution method. The key advantages of arbitration are; the final and binding nature of arbitral awards, flex ibility of the procedure, more input expertise that can be used, and that it is quick and cheaper than litigation.

The Arbitration in the United Arab Emirates is still in the initial stage. The requirement for an arbitration law has been identified by the government. As a result, a draft arbitration law has already been drafted and now opens for the comments by the experts in the field. The arbitration draft law will soon come into force. However, the absence of a proper arbitration law has caused some drawbacks and international parties are reluctant to invest in the country. There are several institutes operating in the United Arab Emirates to provide procedural arbitration rules for the parties in dispute. The advantage of having arbitral institutes is that the parties can agree to be referred by these rules so that there will be a body which exercises administrative and supervisory functions more efficiently. The Dubai International Arbitration Centre and Dubai International Financial Centre are the primary governmental bodies which provide procedural arbitration rules.

The United Arab Emirates had ratified significant conventions and treaties for recognizing and enforcing arbitration awards made locally and internationally. The New York Convention and the Riyadh Convention are the important conventions ratified by the government.

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Certainly, the future of arbitration in the country will be very successful if the draft arbitration law is well established.

Specific references1 Tweedale A, and Tweedale K, 2007, Arbitration of Commercial

Disputes, Oxford, P34.2 Refer fn.1 above.3 A Convention or a treaty is a contract signed between governments

e.g. New York Convention-See chapter 2.1.4.14 A federal court will have no jurisdiction to enforce an arbitration

award where the parties have not consented in the agreement to allow the judgment to be entered upon award by the court. See The US Arbitration Act, Chapter 1, s9. This rule applies only to domestic cases.

5 The Arbitration Act 1996 (England).6 www.diac.ae7 Refer Article 206, Civil Procedure Law of UAE for more details8 Michelle N, Masons G, Dispute Resolution in the Middle East;

Highlights of the Middle East Construction Industry, 2006, SCL.9 These are the rules that the Dubai Chamber of Commerce &

Industry has established with the aim of settling commercial disputes through conciliation and arbitration.

10 The new rules have been issued by Decree No. (11) 2007 in the Official Gazette, no. 321 - year (41) on May 2007.

11 DIFC Authority has been established by the Dubai Law No. 9 of 2004 and DIFC Courts have been established to have exclusive jurisdiction in civil and commercial matters in DIFC.

12 ALB legal news; http://www.asia.legalbusinessonline.com13 Article 2 – Para 1 – New York Convention.14 Refer http://www.uae.gov.ae/Ministries/moec.htm and www.uae.gov.ae/moia

Bibliography of other relevant materialsLegislationsFederal Decree no. 43, 2006, Regarding the United Arab Emirates Joining the Convention of New York on Recognition and Enforcement of Foreign Arbitral Award, Article I to XVI.The UAE Civil procedure Code, Federal Law No. (11) of 1992, cp 3, article 203 to 218.

Text BooksHarris B, Planterose R & Tecks J, 1996, The Arbitration

Act 1996, 4th edition, Blackwell, UK.Turner R, 2006, The Arbitration Awards: A Practical Approach, Blackwell, UK.Tweedale A, and Tweedale K, 2007, Arbitration of Commercial Disputes, Oxford, UK.

ArticlesDewey & LeBoeuf,2008, ‘DIFC new Arbitration Law’, www.dl.com.Nelson M, Galadari M, 2006, ‘Dispute Resolution in The Middle East’ International Conference 2006, Society of Construction Law, Dubai, UAE.Subak. M,2008, ‘Managing Construction Related Disputes in the Middle East’, Viewpoint, US.UAE Construction Law and Dispute Resolution, Al Tamimi & Company: Advocates and Legal Consultants, UAE.

Internet SourcesAME Info, ‘UAE Ministry of Economy completes draft federal law on arbitration’, <http://www.ameinfo.com/cgi-bin/cms> accessed on 17/11/2008. Dubai International Arbitration Centre,<http://www.diac.ae> accessed on 11/11/2008.International Chamber of Commerce, ‘New York Convention now in force in the United Arab Emirates’, <http://www.iccwbo.org/collection34/folder258/id9740 accessed on 11/05/2008> accessed on 05/11/2008.Keeting Chambers, ‘An Introduction to Arbitration in the Middle East’, <http://www.keatingchambers.co.uk/resoursec/publications/> accessed on 05/11/2008.Keeting Chambers, ‘UAE Construction Arbitration: Time for a Revolution?’, <http://www.keatingchambers.co.uk/resoursec/publications/> accessed on 05/11/2008.Society of Construction Law, ‘The DIFC Courts-jurisdiction and arbitration with specific reference to banking and construction disputes’, <http://www.scl-uae.org/news.php> accessed on 06/11/2008.

Gillies Ramsay Diamond v PJW Enterprices Ltd (2003)

A claim for professional negligence against Diamond, who had provided general consultancy services in relation to a building project, was referred to adjudication. It was found that these services included arranging construction operations for others and/or contract administration and therefore the matter could referred to adjudication, despite the absence of an adjudication clause in the contract.


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Ajantha Premarathna FRICS, FIQSSL, ACIArbContracts Advisor-Dubai Martime City

Is FIDIC-99 Contractor Friendly?

1.0 BACK GROUND

The FIDIC conditions or its amended versions are the most popular forms of contract used widely in the construction industry in international construction contracts. The International Federation of Consulting Engineers (Federation Internationale des Ingenieurs Conseils or FIDIC) has issued five editions of such forms of contracts since 1957. The latest edition was issued in 1999 after 12 years of successful practice since its previous edition in 1987. The 1999 edition with its 20 clauses, compared to the 72 clauses in 1987 edition, has addressed several contentious issues and some new concepts to deal with in the ever evolving construction industry. Most of those new concepts addressed in 99 editions are benefiting to both the employer and the contractor to safe guards their respective rights. Further, this version has taken every effort to keep the balance of risks between the contracting parties. In the following sections of this paper, it has analyzed in details to what extent FIDIC-99 is contractor friendly (or not).

When you focus closely on some of the key clauses, such as priority of documents, signing of contract agreement within a specified time period, demand for financial arrangement of the employer for the project, formulae for price fluctuation, new rate for increase of BoQ quantity, wide range of possibility to claim extension of time and additional payments, entitlement for loss of profit and release of performance security upon termination by the contractor, introduction of dispute adjudication board, it can be considered to be contractor friendly.

At the same time, from the employer’s point of view number of concepts such as no access to the site shall be made without submission of the performance security,

employer’s entitlements to claim extension of time for defects notification period and additional payments, removal of FIDIC -87 clause which is related to that the engineer act impartially, claim against performance security without prior notice to the contractor, payments to the contractor within 56 days instead of 28 days in FIDIC-87, in case of no notices for extension of time or for the additional payments claims from the contractor the employer has no liability for them, entitlement to terminate for convenience can be considered to be the employer friendly.

Further to foregoing, it can be concluded that FIDIC-99 is a standard form of contact fair to both parties. It has kept the risk fair between the both parties.

2.0 INTRODUCTION

Several contracts are signed or entered into at a daily basis. These contracts may have an agreement or may not have an agreement. All the contracts should have an agreement but all the agreement may not fall under the contract. Out of all these contracts, the construction contracts are peculiar and they have their own characteristics, in terms of the form of the contracts upon which parties sign an agreement, and duration of contracts, etc. The duration of construction contracts generally takes a longer period compared with the other commercial contracts. In addition to the main two parties to the contract it would have domestic sub contractors, nominated sub-contractors, domestic suppliers, nominated suppliers, design and supervision consultants, project manager, local authorities, project financer etc. To deal with this complex nature of construction contracts, in particular in the international construction contracts, it needs sophisticated and well drafted conditions of contract

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to execute the contract until the final account has been signed or until all the disputes have finally been resolved. To deal with this, several international conditions of contract have been issued by various professional institutions, world bodies, and financial institutions etc. Few of them are:

• The International Federation of Consulting Engineers (Federation Internationale des Ingenieurs Conseils, (FIDIC),

• Institute of Civil Engineers, (ICE) in Great Britan , • World Bank,• United Nations, etc.

The meaning of international construction contracts may have different forms; (i). the law of the country where the contract is made differs to one party, or (ii). the project is constructed in a different country from another party, (iii) two different nationals signed a contract for a construction. Following the formation of FIDIC with

three national associations of consulting engineering in Europe in 1913, FIDIC has invented its first Conditions of Contract (International) for Works of Civil Engineering Construction in August 1957. Since then for the last 41 years FIDIC has issued five such editions; second edition in July 1969, the third in March 1977, fourth edition in September 1987, and the current edition in 1999 to be used in the international constructions contracts. The fourth edition in 1987 has not been revised for 12 years until the new version was issued in 1999. The fourth edition, unlike other first editions, has been used extensively in the international construction industry. With the issuance of the 1999 edition, industry professionals, and employers were in a dilemma when selecting the form of contracts that should be used for their developments. FIDIC 1999 has published four new standard forms of contract designating from the designers point of view. The FIDIC 4th edition in 1987 has also published four forms of contracts. The table-1 below gives the forms of these two editions.

FIDIC 1987 FIDIC 1999

Conditions of Contract for Works of Civil Engineering Construction – 4th edition (Commonly referred as the Red Book).

Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer. (Commonly referred as the Red Book).

Conditions of Contract for Electrical and Mechanical Works – 3th edition (Commonly referred as the Yellow Book).

Conditions of Contract for Electrical and Mechanical Plant, and for Building and Engineering Works Designed by the Contractor (Commonly referred as the Yellow Book).

Conditions of Contract for Design-Build and Turnkey – 1st edition in 1995 (Commonly referred as the Orange Book).

Conditions of Contract for Engineering, Procurement, and Construction and Turnkey (Commonly referred as the Silver Book).

Works of Civil Engineering - Subcontract- 1987 Conditions of Contract for Short Form of Contract (Commonly referred as the Green Book).

Table 1 Forms of Contract in FIDIC 1987 and 1999

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For this paper, the Conditions of Contracts for Construction of Engineering Work Designed by the Employer (red book) issued in 1999 is selected. It has attempted to explore to what extent this conditions of contract are friendly to the parties to the contract. The exploration has been specifically carried out with reference to the FIDIC 1987 and generally with New Engineering Contracts, Third Edition, (NEC-3) which is commonly used in the international construction contracts. The arguments have been compiled in general aspects and on the specific core areas of the industry as follows: • General aspects • Variations• Payments• Extension of time• Suspension and termination • Claims and disputes The conclusion to “Is FIDIC 99 Contractor Friendly?” may be subjective depending on the parties to the contract. The strength of arguments will depend on how other forms of contract share, or allocate the risk between the parties. The distribution of risk of the parties and user friendliness of the conditions of contract to the parties would be the central pivot of the final tender sum. Therefore, every effort has been made to have an independent approach to the subject matter in view of reaching an open conclusion.

3.0 GENERAL ASPECTS

3.1 DefinitionsThe key words used throughout a form of contract give consistency to the meaning of such words. It gives a standard meaning to all parties to the contract. In order to assist the user to understand the document more readily and more clearly and to use easily, definitions have been selected as groups of heading/ topic in FIDIC-99. The FIDIC-87 also has listed out such definitions in a manner of group forms but without separating as distinct group heading or topic. FIDIC-99 has six headings/topics and 58 definitions whereas FIDIC-87 has seven headings/topics with 32 definitions. This is an increase of 82% over the FIDIC-87 (26 new definitions). This is a fair increase after 12 years of industry development since 1987. The industry has faced a number of disputes due to lack of contractual definitions in the contact for some commonly used key words.

New definitions like Letter of Tender would emphasize the fundamentals of Offer and Acceptance theory of the law of contracts with the definition of Letter of Acceptance. The other major shift in the FIDIC-99 definitions is identifying the issues related to disputes and addressing them in the definitions. In this context new definitions like DAB, Base Date, Force Majeure, Unforeseeable, and Variation would give advantage to the both parties.

The definition for contract sum is classified in two forms; Accepted Contract Amount, and Contract Price. This has cleared the issue related to the final contract sum at the submission of the final statement. According to FIDIC-99 the definition of the Accepted Contract Amount is similar to the definition of Contract Price in FIDIC-87 which is the sum stated in the letter of acceptance and it is a fixed sum. However, the definition of Contract Price in FIDIC-99 is a variable price until the agreement at the final certificate upon submission of final statement by the contractor.

NEC-3 has identified 19 definitions under General core clause 11(Identified and defined terms). Most of such definitions are similar to FIDIC versions except sub-clause 11.2. (14) The Risk Register. This is a new feature compared to the FIDIC version.

3.2 Priority of DocumentsIn a situation of contractual disputes or ambiguities in a contract, the hierarchy between various documents which form the contract documents would greatly help to resolve disputes or ambiguities in an amicable manner to both parties. Identification of more documents in the forms of contract would provide more clarity of order of precedence in the documents that are forming the contract. The FIDIC-99 has clearly identified eight such documents and FIDIC-87 has five such documents, whereas NEC-3 has not identified such a list of priority of documents. NEC-3 has included a core sub-clause 17.1, Ambiguities and Inconsistencies from which the Project Manager has been empowered to resolve such ambiguity or inconsistency. In this situation, the contractor would not have an opportunity to assess the order of precedence of the tender documents and subsequent contract documents until and unless they found ambiguity or inconsistency during the post contract stage. The table-2 below, illustrates the priority of documents set out in both FIDIC-87 and 99. Further the illustration in table 2 reflects that it has cleared the debate in the industry on the order of precedence of specifications and drawings after 12 years.

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3.3 Contract AgreementLate signing of contract agreement or in some cases no contract agreement being signed at all by the parties, is a common failure by the parties in construction contracts. Following issuance of the letter of acceptance, parties take their own time to finalize the contract agreement and prolong due to various issues. In many instances, the contractors are taking very negative approach to finalize the contract agreement and sign the same. Most of the standard forms of contract have not given any remedial actions to this issue or a time frame to sign the agreement.

The FIDIC-99, sub-clause 1.6, Contract Agreement, states that 28 days after the contractor receives the letter of acceptance, parties shall enter into a contract agreement. This placed both the parties to fulfill an expressed contractual obligation within a set time limit. In FIDIC-87 sub-clause 9.1, Contract Agreement, does not have such a time period. According to the same, the contractor shall only enter into and execute contract agreement if employer is called upon to do so. This leaves the desecration on the employer and the contractor would be in a vulnerable situation. The provision in FIDIC-99 has relieved the contractor from an open risk.

3.4 Possession of SiteAccording to FIDIC-99, sub-clause 2.1, Right of Access to the Site, has placed some restriction to the contractor’s right to access the site. This is a new development towards the employer’s benefit. The employer may withhold access

to the site or possession until the contractor submits the performance security. Thereby, employer can make sure his works have a security in case of early default by the contractor. There is no such prerequisite for possession of site in FIDIC-87, sub-clause 42.1, Possession of Site and Access to Thereto, nor in NEC-3, core clause 33.1, Access to and Use of the Site.

3.5 Employers’ Financial Ability In the construction industry the majority of employers are the government sector, multinational companies and major property developers. With these influential employers, the contractors have little or no bargaining power. The contractors’ have no clue of the financial ability of the employers or their financial arrangement to the project on which the contractors have committed contractually. No standard forms of contract have addressed this vital matter in the contract. FIDIC-99 sub-clause 2.4, Employer’s Financial Arrangements, has given rights to the contractor to request reasonable evidence of financial arrangement made to pay the contract price. The employer shall submit such evidence within 28 days after receiving any such request from the contractor. This is a very positive provision towards the contractor and would increase the confidence among the contract parties.

3.6 Engineer’s duty and AuthorityUnlike FIDIC-87, sub-clause 2.6, Engineer to Act Impartially, FIDIC-99 has not given reference to the engineer required to exercise the discretion granted to him/her under the contract impartially within the

FIDIC 1987 – Clause 5.2 Priority of Contract Documents FIDIC 1999 – Clause 1.5 Priority of Documents

(1) The Contract Agreement (if completed);(2) The Letter of Acceptance;(3) The Tender;(4) Part II of these Conditions;(5) Part I of these Conditions; and(6) Any other document forming part of the Contract.

(a) the Contract Agreement (if any),(b) the Letter of Acceptance,(c) the Letter of Tender(d) the Particular Conditions(e) these General Conditions(f ) the Specifications(g) the Drawings, and(h) the Schedules and any other documents forming part

of the Contract.

Table 2- Priority of Documents

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terms of contract. The engineer is deemed to act for the employer unless expressly stated in particular applications of conditions.

This is somewhat a wide variance from the original concept of engineer’s impartial role in the contract administration. This might expose the contractor to an unknown risk while pricing the tender during the post contract stage.

3.7 Replacement of the EngineerThis is a new provision in the FIDIC-99 form of contract. The engineer has a major role in the contract administration. Similarly, depending on the status, and credibility of the engineer, it has a considerable impact on the tender price of the contractor. Therefore, any subsequent replacement of the engineer may have an impact on the contract price. The sub-clause 3.4, Replacement of the Engineer, provides a fair and reasonable compromise between the parties. If the employer intends to replace the engineer, the contractor must receive 42 days notice with details of the newly nominated engineer. Further, it has given the opportunity for the contractor to notify his/her reasonable objection for such a replacement.

3.8 Performance SecurityIn a construction contract, the employer may anticipate the potential problems related to the performance of the contractor and possible default by the contractor. It is a common requirement of the employer to request a performance security from an approved and recognized bank or financial institution. FIDIC-99 sub-clause 4.2, FIDIC-87 sub-clause 10, and NEC-3 Optional clauses X13 have identified the requirement of Performance Security and Performances Bond respectively. NEC-3 has identified insurer as an institute to provide a performance bond. The FIDIC-99 has specifically identified that the employer shall not make a claim under the performance bond/security except at a defined event in the sub-clause. This gives sufficient time to the contractor to remedy any default. Further according to FIDIC-99, the employer shall return the performance security within 21 days after receiving a copy of the performance certificate whereas according to the FIDIC-87 the employer shall return the performance security within 14 days after of the issue of the defects liability certificate. In accordance with the sub-clause 10.3 of FIDIC-87, Claims under Performance Security, prior to making a claim the employer shall notify the Contractor stating the nature of the default. No such provisions have been made in both FIDIC-99 and NEC-3.

In overall, both the clauses have their own merits and demerits with regards to apportion of risks towards to the contractor. One of a salient feature in FIDIC 99 is that it does not require giving prior notice to the contractor for claims under performance security. In the meantime, the employer is not entitled to claim against security unless in specified events in the sub-clause. The events which are entitled to claim against the security are not specified and it is open to the employer’s discretion. Considering these aspects, FIDIC-99 provision is more moderate and the risk has been identified to an extent which can be assessed by the contractor.

3.9 Records of Contractor’s Personnel and Equipment In order to facilitate the evaluation of the claims and variations, it is necessary to have established a basic contemporary record-keeping from the commencement date of the contract. In accordance with the FIDIC-99 sub-clause 6.10, Records of Contractor’s Personnel and Equipment, the contractor shall keep-on submitting such records in each calendar month until the completion of all snags works and until the issuance of the taking over certificate. FIDIC-87 is less rigorous on this requirement. The Sub-clause 35.1, Returns of Labour and Contractors’ Equipment, needs to be delivered from time to time if required by the Engineer. Further, as per the FIDIC-99, no period for payment stated in sub-clause 14.7, Payment, commences until the relevant report is submitted under sub-clause 4.21, Progress Report, including the records of contractor’s personnel and equipments as described in sub-clause 6.10.

Sub-clause 6.10, of FIDIC-99 has imposed onerous work on the contractor in order to comply with the site records submitted to the Engineer. No such requirement had been placed with the engineer.

3.10 Force MajeureMost of the countries don’t recognize the force majeure for the contract parties to relieve from their contractual obligations. In the meantime, most of the standard forms of contract have not specified the provision of force majeure. FIDIC-87 has identified some risks from which both parties, in particularly, the contractor is released from his/her obligations. Most of the special risks identified in FIDIC-87 under sub-clause 65.2, Special Risks, and, 65.4, Projectile, Missile have been recognized as force majeure in the FIDIC-99 clause 19.1, Force Majeure.

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This is a positive step to address the industry ambiguity in respect of force majeure. The parties now are aware of the circumstances to which their risks are exposed under the pretext of force majeure. A part of employer’s risks stated in FIDIC-87 sub-clause 20.4, Employer’s Risks, also are categorized as force majeure. It has however qualified that events leading to force majeure beyond the clause 19.1 stated in the sub-contractor’s agreement does not fall under the clause 19.1.

There is no defined force majeure clause in NEC-3. However, similar events which leads to the force majeure defined in FIDIC-99 have been identified in core clause 80.1, Employer’s Risks, which is somewhat similar to the provision set-out in FIDIC-87.

Clearly defined force majeure under sub-clause 1.1.6.4 and identifying events leading to force majeure, describing its limitation for application and procedure to be applied in sub-clause 19.1 of FIDIC-99 give an easy opportunity to the contractors to assess their risks whilst the tender is being priced.

4.0 VARIATIONSUnlike most of the forms of contracts, FIDIC-99 has defined variations under sub-clause 1.1.6.9. This is a constructive step to avoid the ambiguities and disputes that frequently arise between the parties. The boundaries of the variations have always been debatable. Variations are frequently a source for potential disputes in a contract. Therefore, the employers have no choice but include a variation clause to the contract in order to change the works and to add additional work to the project from time to time during the project period as they wish.

Similar to FIDIC-87 clause 51, Variations and 52, Valuation of Variations FIDIC-99 has compiled two clauses. Under the clause 12, Measurement and Evaluation variations are evaluated and under clause 13, Variations and Adjustments variations can be instructed. The events and circumstances leading to the variations are almost similar in both FIDIC editions. FIDIC-99 has elaborated in a more comprehensive manner the events leading to variations. Under sub-clause 13.1, Right to Vary, of FIDIC-99, the Engineer can either instruct variation or request a proposal from the Contractor. Unlike FIDIC-87, the contractor can serve notice to the engineer in case he/she is unable to carry out the variation instruction or proposal. In that case engineer shall cancel, confirm, or vary the instruction.

A further improvement of FIDIC-99 is the inclusion of clause 13.3, Variation Procedure. The parties, in particular the contractors are fully aware of the procedure to be adopted for the variation instructions and variation proposals unlike in an ad-hoc procedure adopted for the other situations. Under sub-clause 13.2, Value Engineering, contractor can also submit proposals which could ultimately construe as variation if the proposal is accepted by the Engineer. The valuations of variations are defined in clause 12.3, Evaluation and it has been listed along with the provisions given in FIDIC-87 in the table 3 below with some emphasize.

Sub-clause 13.5, Provisional Sum, permits the process to be adopted for the use of provisional sums. This described process is similar to the one in the FIDIC-87. The major difference is that provisional sums are categorized under variations. This will facilitate to classify the final adjustment of provisional sums under variation section of the final account statements.

The sub-clause 13.8, Adjustments for Changes in Cost in FIDIC-99, and sub-clause 70.1, Increase or Decrease of Cost in FIDIC-87, deals with the fluctuation of costs of the project. FIDIC-87 has not elaborated the methods or means of calculation of such rises or falls in the costs of labour, goods and other inputs to the works. It is left to the part II of the conditions to deal with them in an ad-hoc manner. The sub-clause 13.8 of the FIDIC-99 has comprehensively illustrated the method and procedure to be followed by the parties in case of fluctuation of costs. As the formula for adjustment of fluctuation cost is given in the sub-clause itself it will relieve both parties in a potential dispute to agree in method calculation.

The secondary option clause X1, Price Adjustment for Inflation of NEC-3 has given a fairly detailed mechanism for the adjustment of contract price in case of fluctuation of cost of work.

In overall, the dealing of variations has been addressed in a balance manner in the FIDIC-99. Introducing of value engineering, variation procedure, adjustment of contract rates in case of quantity variance, definition to variations, formulae for adjustment of cost of fluctuations are to be considered as positive steps and most of these steps have created an ambiguity free environment for the contract administration to all parties.

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FIDIC 1987 Clause 52 –Valuation of Variation FIDIC 1999 Clause 12.3 Evaluation

1 At the rates and prices set out in the contract. (contracted rates and prices)

At the rates and prices set out in the contract. (contracted rates and prices)

2 If the contract does not contain any rates and prices applicable to the varied work, rates and prices set out in the contract shall be used as the basis for the valuation. (pro-rata to the contract rates and prices)

If the contract does not contain any rates and prices applicable to the varied work, rates and prices set out in the contract shall be used as the basis for the valuation. (pro-rata to the contract rates and prices)

3 Failing to above 1 and 2, the engineer with due consultation with the employer and the contractor, suitable rates or prices shall be agreed upon between the engineer and the contractor.

If above 1 and 2 is failed, a new rate or price shall be appropriate for an item of work if;(a) (i) the measured quantity of the item is changed by

more than 10% from the quantity of this item in the bill of quantities or other schedules,

(ii) this change in quantity multiplied by such specified rate for this item exceeds 0.01% of the accepted contract amount,

(iii) this change in quantity directly changes the cost per unit quantity of this item by more than 1%, and

(iv) this item not specified in the contract for as a “fixed rate item”

Or(b) (i) the work is instructed under clause 13, Variations

and Adjustments,(ii) no rate or price is specified in the contract for this

item, and (iii) no specified rate or prices is appropriate because

the item of work is not of similar character , or is not executed under similar conditions, as any item in the contract.

4 In the event of disagreement to above item 3, the engineer shall fix such rates and prices as are, in his opinion, appropriate and shall notify the contractor with copy to the employer.

If no rates or prices are relevant for the derivation of a new rate or price, it shall be derived from the reasonable cost executing the work, together with reasonable profit.

5 If the nature or amount of any varied work relative to the nature or amount of whole of the Work or any part thereof, in the opinion of the engineer, the rate or prices contain in the contract rendered inappropriate or inapplicable, with due consultation by the engineer with the employer and the contractor, a suitable rate or price shall be agreed upon between the engineer and the contractor subject to serve notice by either party as described in the sub-clause 52.2.(a) and (b).

Table 3Valuation of Variation in FIDIC- 87 and 99

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5.0 PAYMENTS

5.1 Advance PaymentThe sub-clause 14.2, Advance Payment, has clearly identified the requirement of advance payment and a comprehensive procedure for the process of advance payment. Annex E of the FIDIC-99 has given a specimen form of advance payment guarantee. The recovery of the advance payment mechanism has been clearly laid down in the sub-clause. Frequent uncertainty for the requirement of performance guarantee prior to the advance payment has now been clarified explicitly and in detail in the sub-clause. The expressed provision of advance payment requirement has not been addressed in the FIDIC-87.

In the core clause 5, Payment, of NEC-3 there is no provision given for the advance payment. However, in

the secondary optional clause X14, Advance Payment to the Contractor, has given the provision for the advance payment. However, the mechanism and the procedure set out in the FIDIC-99 can be considered to be superior.

5.2 Interim Payment CertificateThe term “interim payment certificate’, very commonly refers to the contractor’s payment mechanism compared to monthly statements referred in FIDIC-87. The contractor him/herself shall include those additions and deductions which may be applicable to the interim payment unlike FIDIC-87. In the case of FIDIC-87 the contractor shall include only the items for which payments are due to him. The table-4 below illustrates the comparison of both sub-clause 14.3, Application for Interim Payment Certificate of FIDIC-99 and sub-clause 60.1, Monthly Statement of FIDIC-87.

FIDIC 1987 Clause 60.1 Monthly Statements FIDIC 1999 Clause 14.3 Application for Interim Payment Certificates

(a). the value of the Permanent Work executed (a). the estimated contract value of the Works executed and the Contractor’s Documents produced up to the end of the month including Variation.

(b). any other items in the Bill of Quantity including those for Contractor’s Equipment, Temporary Works, dayworks and the like,

(b). any amount to be added and deducted for changes in legislation and changes in cost.

(c) the percentage of the invoice value of listed materials and Plant delivered to the Site for incorporation in the Permanent Work but not incorporated in such Works,

(c). any amount to be deducted for retention.

(d ) adjustment under Clause 70, Changes in Cost and Legislation

(e) any other sum to which the Contractor may be entitled under the Contract or otherwise,

(d). any amount to be added and deducted for advance payment and repayment

(e). any amount to be added and deducted for Plant and Materials intended for the Works

(f ). any other addition or deduction which may have become due under the Contract or otherwise including Claims.

(g). the deduction of amounts certified in all previous Payment Certificates.

Table 4Interim Payment Certificates in FIDIC 87 and 99

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Unlike FIDIC-87, the contractor shall submit the payment statements with supporting documents and this shall include the report on the progress of the work of that particular month. Further, the employer shall pay to the contractor the amount certified in the interim certificates within 56 days after the engineer receives the statement and supporting documents (not from the date receipt by the employer). Whereas in FIDIC-87, the payment shall be made within 28 days after such interim payment certificates delivered to the employer by the engineer. The onerous of application for interim payment in terms of degree of information to be provided (in FIDIC-87, it was five items and in FIDIC-99, it has seven items, refer table 4 above), supporting documents to be submitted and payment period compared to FIDIC-87 is now on the Contractor’s side. In a way, this will facilitate the engineer to certify the interim payment based upon the submitted information and supporting documents. Further it is a practically difficult task for an employer who has internal bureaucracy to settle an interim payment certificate within 28 calendar days which is nearly 20 working days. Therefore, the increase to 56 days is a reasonable step towards the practicability provided that engineer has certified it within less than 28 days.

Most of the Contractors are concerned about receiving payment within due date. In the case of delayed payments, there should be a remedy for the same. Both FIDIC-87 and 99 have provided the remedy for the delayed payments. FIDIC-87 has not specifically stated the rate of interest in the general condition but has stated to insert in the appendix to tender. However, FIDIC-99 has spelled-out the ways and means to calculate the applicable rate for finance charges. In case no such rate has been specified, an annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment would be taken to claim finance charges for delayed payments. Further, the sub-clause has strengthened the contractor’s rights stating that the contractor shall be entitled to this payment without formal notice or certification, and without prejudice to any other right or remedy. This is a remarkable improvement in the payment related clauses where most of the time the contractors are suffering from delayed payments from the employers.

6.0 EXTENSION OF TIME

The both editions of 87 and 99 of FIDIC have clauses related to the extension of time to the time for completion.

However, there are significant differences of application in both versions as to the notices procedure, and events leading to extension of time. With regard to the notices procedure, under sub-clause 44.2, Contractor to Provide Notification and Detailed Particulars, of FIDIC-87, the engineer is not bound to make any determination unless the contractor has served the notices within 28 days after such event has first arisen. This is commonly a debatable clause as it has been worded in way that the engineer has been given enormous discretion in case of failure to comply by the contractor. Whereas, FIDIC-99, sub-clause 20.1, Contractor’s Claim, has expressly stated that if the contractor fails to give notice of claim for extension of time within such period of 28 days, the time for completion shall not be extended and the contractor shall not be entitled to additional payments and further, the employer shall be discharged from all liability in connection with the extension of time claim. This is a considerable improvement in condition precedence for the notices requirement for extension of time in FIDIC-99. This has benefited both parties; it will safeguard the risks and liability of the employer to avoid ambush by claims from the contractors. At the same time, it has removed the engineer’s discretion over the notice procedure. Consequently, contractors will pay more attention to extension of time claim notices and would employ competent contract administrators to deal with such cases. The events leading to extension of time claims have been increased in FIDIC-99 compared to the 87 editions as illustrated in the table -5 below.

The sub-clause 8.4.(d) is a new invention in FIDIC-99 (refer Table 5) which would greatly reduce the contractors’ risk and would consequently reduce the tender sum as well. Sub-clause further has explicitly stated that the total of all extension of time cannot subsequently be decreased. This is so even if many omissions are instructed as variations. This is a positive move in FIDIC-99 to clear some grey area of this aspect.

The sub-clause 8.5, Delay Caused by Authorities, is another new clause and it has categorically identified the means and ways to deal with such delays occurred due to Authorities, which is very common in the construction industry. The ambiguity as to who is responsible for such delays has now been cleared to the parties, thus the risk to the contractor and impact to the final tender sum are also reduced.

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The table-6 below lists the provisions relevant to extension of time and its financial implication. There are 12 instances in FIDIC-99 from which the contractor can claim for extension of time and out of which seven have explicitly

stated the instances where the contractor entitlement for reasonable amount of profit. FIDIC-87 has expressly identified seven instances where the contractor is entitled for the extension of time.

FIDIC 1987 – FIDIC 1999 –

Sub-clause 44.1 – Extension of Time for Completion

(a) the amount or nature of extra or additional work,(b) any cause of delay referred to in these conditions,(c) exceptionally adverse climatic conditions,(d) any delay, impediment or prevention by the employer,

or(e) other special circumstances which may occur, other

than through a default or breach of contract by the contractor or for which he is responsible.

Sub-clause 8.4 – Extension of Time for Completion

(a) a variation or other substantial change in the quantity of an item of work

(b) a cause of delay giving an entitlement to extension of time under a sub-clauses of these conditions

(c) exceptionally adverse climatic conditions(d) unforeseeable shortage in the availability of personnel

or goods caused by epidemic or governmental action, or

(e) any delay, impediment or prevention caused by or attributable to the employer, the employer’s personnel, or the employer’s other contractors on the site.

Table 5Extension of time clauses

Sub-clause Sub-clause Costs Profits Remarks

1.9

2.1

4.74.124.247.48.4

8.5

Delayed Drawings or InstructionsRight to Access to the SiteSetting outUnforeseeable Physical ConditionsFossilsTestingExtension Time for Completion

Delays Caused by Authorities

Costs

Costs

CostsCostsCostsCosts-----

Profits

Profits

Profits------Profits---- Contractor may claim extension time

under this sub-clause.Contractor may claim extension time under this sub-clause, and no mention of the financial consequences. It may be depend upon the particular circumstances.

Table 6Extension of time and its financial implication – FIDIC-99

Table 6 contd.

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Sub-clause Sub-clause Costs Profits Remarks

8.910.3

13.7

16.1

17.4

19.4

Consequences of SuspensionInterface with Tests on CompletionAdjustments for Changes in LegislationContractor’s Entitlement to Suspend WorksConsequences of Employer’s Risks

Consequences of Force Majeure

CostsCosts

Costs

Costs

Costs

Costs for sub-clause 19.1 . (i) to (iv)

---Profits

---

Profits

Profits for sub-clause 17.3.(f ) & (g) only

7.0 SUSPENSION AND TERMINATION

The suspension has been addressed in sub-clause 8.8, Suspension of Works, of FIDIC-99. Unlike FIDIC-87, it has not identified the reasons for which the employer is not responsible for extension of time and its associated costs due to suspension. However, in accordance with the sub-clause 8.8, the engineer may notify the cause for the suspension. If and to the extent that the cause is notified and to the cause he may not get extension of time and cost is similar to the provisions in FIDIC-87. This has been further emphasized in the sub-clause 8.9, Consequences of Suspension. FIDIC-87 has not clearly identified the contractor’s entitlement for other costs as a result of suspension other than the associated cost of extension of time. In FIDIC-99, under sub-clause 8.10, Payment for Plant and Materials in Event of Suspension, has clearly identified the contractor’s entitlement for payment.

Both FIDIC-87 and 99 have given opportunity for contractor’s entitlement to suspend the work. In accordance with sub-clause 16.1, Contractor’s Entitlement to Suspend Work, of FIDIC-99 and sub-clause 69.4, Contractor’s Entitlement to Suspend Work, of FIDIC-87 it has described the procedure to be followed and events leading to suspension. The FIDIC-87 has identified only one reason for the contractor’s entitlement to suspend the work which is due to delayed payment by the employer. Whereas, FIDIC-99 has identified three reasons: i. if the

engineer fails to certify in accordance with sub-clause 14.6 - Issue of Interim payment Certificates, ii. or the employer fails to comply with sub-clause 2.4 - Employer’s Financial Arrangements or iii sub-clause 14.7 - Payments which entitles the contractor to suspend or reduce the rate of progress of the work. According to the FIDIC-99 it should give lesser notice period of 21 days compared to 28 days in FIDIC-87. This will give some seven day early relief to the contractor to reduce his sufferings.

The termination clause in both version of FIDIC-87 and 99 is almost similar except a new sub-clause is added in 99 editions. The sub-clause 15.5, Employer’s Entitlement to Termination, establishes that the employer is entitled to terminate the contract at any time for his/her own convenience by giving notice of such termination to the contractor provided that no such work was carry out by him/herself or someone else. However, such termination shall not be effective unless the employer returns the performance security to the contractor. There is no such provision of termination on convenience given to the contractor. However, express provision has been given for compensation due to such termination under sub-clause 16.3, (Cessation of Works and Removal of Contractor’s Equipment) and vide sub-clause 19.6 (Optional Termination, Payment and Release).

The termination of contract by the contractor has been addressed in both FIDIC-87 and 99 under different

Table 6 contd.Extension of time and its financial implication – FIDIC-99

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headings. The FIDIC-87, under sub-clause 69.1, Default of Employer, and FIDIC-99 under sub-clause 16.2, Termination by Contractor have described the ways and means which entitles the contractor to terminate the contract. FIDIC-99 has identified seven such reasons whilst FIDIC-87 has identified four reasons leading to termination of the contract by the contractor as illustrate in the table 7 below with added emphasize.

After giving 14 days notice to the employer, contract can be terminated by the contractor. However, no notice is required for sub-clause 16.2.(f ), and (g) of FIDIC-99, for which the contractor may by noticed the termination of the contract immediately. There are no such provisions like sub-clause 16.1.(a), (b), (d), and (e) in FIDIC-87. However, in FIDIC-87 there is a provision that contractor is entitle to terminate the contract under sub-clause 69.1 (b), Employer interfering with or obstructing or refusing any required approval to the issue of any certificate, and sub-clause 69.1.(d), Employer giving notice to the contractor that for unforeseen economic reasons it is impossible for him to continue to meet his contractual

obligation. These two provisions are vital to both the parties to continue the contract. Nevertheless, FIDIC-99 has identified more practical grounds which influence the contractor’s entitlement to terminate the contract.

Further, in accordance with the sub-clause 16.4, Payment on Termination, after the expiry of notice for termination given by the contractor under sub-clause 16.2 (Termination by Contractor) the employer returns the performance security to the contractor. This is a new positive move taken in FIDIC-99. This has cleared the long time ambiguity with regard to the fate of contractor’s performance security following the termination of the contract by the contractor. The sub-clause 16.4, Payment on Termination has further specifically identified that the contractor is entitled for any loss of profits or other loss or damage sustained as a result of termination of contract by the contractor or in other word, due to default of the employer. These specific clarifications would avoid the lengthy disputes and save time and money of the contacting parties to concentrate on their other core activities.


Sub-clause 69.1 – Default of Employer

(a) Employer failing to pay the certified amount by the Engineer within the specified time to the Contractor,

(b) Employer interfering with or obstructing or refusing any required approval to the issue of any certificate,

(c) Employer becoming bankrupt or, being a company, going into liquidation, other than for the purpose of a scheme of reconstruction or amalgamation, or

(d) Employer giving notice to the contractor that for unforeseen economic reasons it is impossible for him to continue to meet his contractual obligation

Sub-clause 16.2 – Termination by Contractor

(a) The contractor does not receive the reasonable evidence within 42 days after giving notice under sub-clause 16.1(Contractor’s Entitlement to Suspend the Work) in respect of a failure to comply with sub-clause 2.4 (Employer’s Financial Arrangements),

(b) The Engineer fails, within 56 days after receiving a statement and supporting documents, to issue the relevant payment certificate.

(c) The contractor does not receive the amount due under an interim payment certificate within 42 days after the expiry of the time stated in sub-clause 14.7 (Payment),

Table7

Termination of Contract due to default of the Employer

Table 7 contd.

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(d) The employer substantially fails to perform his obligations under the contract,

(e) The employer fails to comply with sub-clause 1.6 (Contract Agreement) or sub-clause 1.7 (Assignment),

(f ) Prolonged suspension affects the whole of the work as described in sub-clause 8.11(Prolonged Suspension), or

(g) The employer becomes bankrupt or insolvent, goes into liquidation

8.0 CLAIMS, AND DISPUTES

The claims are one of the most contentious areas of the construction industry. Most of the industry professionals have made their prime efforts to avoid claims in the construction sector, thereby minimize the disputes and lengthy arbitration and even litigation. Well defined form of contract with equally and appropriately shared risks between parties can minimize the claims, disputes and arbitration in the construction industry.

Both FIDIC versions of 1987 and 1999 have taken tremendous effort to achieve above described objectives in their previous editions. In this context, FIDIC-99 has introduced several positive measures, most of which are discussed in the previous sections of this paper, to treat the contracting parties equally. Compared to 17 sub-clauses relating to contractor’s entitlement to claim in FIDIC-87 edition, there are 22 potential sub-clauses upon which the contractor would be able to submit claims under 99 Edition. Further sub-clause 20.1, Contractor’s claim, has expressly stated that if the contractor fails to give notice for a claim, either for extension of time or for additional payments, as soon as practicable, and not later than 28 days after the contractor becomes aware of such claims, the contractor shall not be entitled to the claim and the employer shall be discharged from all liability in

connection with such claims.

In a similar manner, Employer also can submit claims to the contractor. This new provision of FIDIC-99 has been given in sub-clause 2.5, Employer’s Claims. Except to claim for extent defect notification period, notices shall be given before the expiry of the defects notification period. No other onerous restriction of notices has been placed on the employer’s claims.

The “Engineer’s Decision” is one of the effective and mostly debated provisions in the settlements of disputes in sub-clause 67.1 of FIDIC-87 as it has challenged the impartiality of the engineer’s role. The Engineer, who has a separate contractual agreement with the employer as the employer’s professional advisor/consultant on the same project, his/her role as an independent dispute resolution agent has been questioned in many forums. This has now been effectively addressed in FIDIC-99 by abolishing the engineer’s role in settlement of dispute under the Engineer’s Decision. The provision of Engineer’s Decision is replaced with sub-clause 20.2, Appointment of the Dispute Adjudication Board. Unlike the Engineer’s Decision, the process of adjudication has a legal back ground through the Construction, Housing Grant and Re-generation Act, 1996.

Table 7 contd.

Table 7 contd.

Termination of Contract due to default of the Employer

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9.0 CONCLUSION

The analysis above shows that most of the new clauses introduced in FIDIC-99 has taken maximum care to maintain the balance between the parties. However, some of the new clauses directly benefit the contractor or employer. Summarized below are some of those key clauses identified in terms of how they affect the parties.

9.1 Towards Contractor Friendly

(i) Sub-clause1.1 Definitions There are 58 definitions compared to 32 in FIDIC-

87. The definitions like Accepted Contract Amount and Contract Price provide clear distinction between original contract sum and final contract sum. Further newly added definitions of Variations, Unforeseeable, Force Majeure, and Contractor’s Documents, etc. iron out the ambiguity existing in FIDIC-87. To an extent the employer too would however benefit from a considerable number of definitions in the contract.

(ii) Sub-clause 1.5 Priority of Documents FIDIC-99 has identified and prioritized eight

documents compared to six in FIDIC-87. More importantly, the order of priority of Specifications and Drawings is identified. This was always an ambiguity to the parties and lead to disputes. To an extent the employer too would however benefit from this new detailed priority.

(iii) Sub-clause 1.6 Contract Agreement This sub-clause has given 28 days for the contractor

to upon receive the letter of acceptance entered into a contract agreement. This places both parties to fulfill an expressed contractual obligation within a set time limit. According to the FIDIC-87 clause 9.1, Contract Agreement, the contractor shall only enter into and execute contract agreement if employer is called upon to do so.

(iv) Sub-clause 2.4 Employer’s Financial Arrangements The Sub-clause has given rights to the contractor to

request reasonable evidence of financial arrangements made to pay the contract price. The employer shall submit such evidence within 28 days after receiving any such request from the contractor.

(v) Sub-Clause 4.2 Performance Security The employer shall not make a claim under the

performance bond/security except in a defined event in the sub-clause.

(vi) Variations Variations are dealt in two different clauses, clause

12, Measurement and Evaluation, and clause 13, Variations and Adjustments. These clauses have identified several positive steps which are in friendlier to the contractor. Introduction of variation procedure, a definition for variation, value engineering, formulae for price fluctuation etc. are few of them. Further classifying the provisional sums under variation too is a positive step and it will simplify the preparation of final account.

In the case of quantity of the BoQ changed, contractor may be entitled to a new rate for the respective items. Further, contractor can serve notice to the engineer in the case him/her being unable to carry out the variation instruction or proposal. In such cases, engineer shall cancel, confirm, of vary the instruction.

(vii) Payments A new detailed clause for advance payment has

been included to the conditions with a specimen for advance payment guarantee. The contractor has to prepare and submit his/her payment statement in a fully comprehensive manner identifying the deductions. Further, in the case of delayed payment by the employer, the applicable rate of finance has been given in the sub-clause 14.8, Delayed Payment.

. (viii) Extension of Time Following establishing the conditions precedence

for the notices for extension of time, it has diluted engineers’ discretionary on the determination of extension of time in case no notices submitted by the contractor. Under sub-clause 8.4.(d), contractor is now entitled to claim extension of time in the case of unforeseeable shortage in the availability of personnel or goods caused by epidemic or governmental action. Further, in accordance with the sub-clause 8.5, Delays Caused by Authorities, the ambiguity is cleared in terms of the responsibility of the contractor when a delay is caused by the authorities. It is further expressly stated that no reduction of time from the time for completion.

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FIDIC-99 has expressly identified 12 events leading to the entitlement of extension of time by the contractor whereas in FIDIC-87 there are seven events. Further, it has expressly stated in seven instances that the contractor is entitled for a reasonable amount for profits.

(ix) Suspension and termination In accordance with sub-clause 16.1, Contractor’s

Entitlement to Suspend the Work of FIDIC-99, suspension can be enforced based upon three events by giving 21 days notice whereas FIDIC 87 has only one event by giving 28 days notice. Further, it is expressly stated that the contractor’s entitlement in case of suspension.

The contractor is entitled to terminate the contract based upon seven events whereas as per FIDIC-87 it has only four events upon which the contractor is entitled to terminate the contract. In such cases employer shall return the performance security and the contractor is entitled for loss of profits.

(x) Claims and Disputes Under FIDIC-99, there are 22 expressed instances to

which the contractor is entitled to claim additional payments compared to 17 such expressed instances in FIDIC-87. FIDIC-99 has abolished the “Engineer’s Decision” and has introduced Dispute Adjudication Board.

9.2 Towards Employer Friendly

(i) Sub-clause 2.1 Right to Access to the Site The employer may withhold access to the site

or possession until the contractor submits the performance security. Thereby, employer can make sure his/her works have a security in case of early default by the contractor.

(ii) Engineer’s duty and Authority The engineer is deemed to act for the employer

unless expressly stated in particular applications of conditions.

(iii) Sub-clause 3.4 Replacement of the Engineer Unlike FIDIC-87, under this sub-clause the employer

is able to replace the engineer.

(iv) Sub-clause 4.2 Performance Security The employer shall return the performance security

within 21 days after receiving a copy of the performance certificate whereas according to the FIDIC-87 it is 14 days after of the issuance of the defects liability certificate. Unlike FIDIC-87, there is no requirement to notify the contractor prior to making a claim against the performance security.

(v) Sub-clause 6.10 Records of Contractor’s Personnel and Equipment

The contractor shall keep-on submitting such records in each calendar month until the completion of all snags works upon issuance of the taking over certificate. No period for payment stated in sub-clause 14.7, Payment, commences until the relevant report is submitted.

(vi) Payments In accordance with clause 14.7.(c) the employer shall

pay to the contractor within 56 days after receiving of the interim payment and final payment certificates from the engineer unlike 28 days specified in FIDIC-87.

(vii) Extension of Time FIDIC-99, sub-clause 20.1, Contractor’s Claim, has

expressly stated that if the contractor fails to give notice of claim for extension of time within such a period of 28 days, the time for completion shall not be extended and further, the employer shall be discharged from all liability in connection with the extension of time claim.

(viii) Suspension and termination In accordance with the sub-clause 15.5, Employer’s

Entitlement to Termination, the employer is entitled to terminate the contract at any time for the employer’s convenience by giving notice to the contractor.

(ix) Claims and Disputes Unlike FIDIC-87, the FIDIC-99, sub-clause 20.1,

Contractor’s Claim, has expressly stated that if the contractor fails to give notice of claim for additional payments within such a period of 28 days, the contractor shall not be entitled to additional payments and further, the employer shall be discharged from all liability in connection with the claim for additional payments.

In accordance with sub-clause 2.5, Employer’s

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Claims, if the employer considers he/she is entitled for payments or extension of the defects notification period, the employer or the engineer shall give notice and particulars to the contractor.

10 ConclusionThe above would conclude that both the contractor and the employer are benefited fairly from the new edition of the FIDIC-99. It has addressed all the contentious issues faced in FIDIC-87 during the last 12 years since 1987 in FIDIC-99 edition. Following a close focus on some of the key clauses such as priority of documents, signing of contract agreement within a specified time period, demand for financial arrangement of the employer for the project, formulae for price fluctuation, new rate for increase of BoQ quantity, a wide range of possibility to claim extension of time and additional payments, entitlement for loss of profit and release of performance

security upon termination by the contractor, introduction of dispute adjudication board can be considered to be contractor friendly.

From the Employer’s point of view a number of concepts such as no access to the site shall be made without the submission of the performance security, employer’s entitlements to claim extension of time for defects notification period and additional payments, removal of clause related to that engineer act impartially, claim against performance security without prior notice to the contractor, payments to the contractor within 56 days instead of 28days in FIDIC-87, in case of no notices for extension of time or additional payments from the contractor no liability for them, entitlement to terminate at his convenience can be considered to be employer friendly.

Caparo Industries Plc -v- Dickman and others [1990]

The plaintiffs sought damages from accountants for negligence. They had acquired shares in a target company and, relying upon the published and audited accounts which overstated the company’s earnings, they purchased further shares.

Held: The purpose of preparing audited accounts was to assist company members to conduct business, and not to assist those making investment decisions, whether existing or new investors in the company. The auditors did not owe a duty of care to the plaintiffs. Liability for economic loss for negligent mis-statement should be limited to situations where the statement was made to a known recipient for a specific purpose of which the maker was aware, and upon which the recipient had relied and acted upon to his detriment. The law has moved towards attaching greater significance to the more traditional categorisation of distinct and recognisable situations as guides to the existence, the scope and the limits of the varied duties of care which the law imposes. The House laid down a threefold test of foreseeability, proximity and fairness and emphasised the desirability of incremental development of the law. The test was if “the court considers it fair, just and reasonable that the law should impose a duty of a given scope upon the one party for the benefit of the other”. Lord Bridge of Harwich: “What emerges is that, in addition to the foreseeability of damage, necessary ingredients in any situation giving rise to a duty of care are that there should exist between the party owing the duty and the party to whom it is owed a relationship characterised by the law as one of ‘proximity’ or ‘neighbourhood’ and that the situation should be one in which the court considers it fair, just and reasonable that the law should impose a duty of a given scope upon the one party for the benefit of the other.”


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Dr. Wickrema WeerasooriaDr Weerasooria has written over 15 textbooks on Banking and Credit. His Australian book on Banking Law is titled Weerasooria’s Banking Law of Australia. He also continues his academic lectures and writ-ing work and teaches Business Law and Banking, Finance and Administration Law at the Postgraduate Institute of Management (PIM) in Sri Lanka. Presently serve Insurance Ombudsman of Sri Lanka

Sri Lanka’s Ombudsman Schemes

I am happy to contribute this article on the above topic in the SLQS journal. As a legal academic and teacher for over thirty years I realize the value of developing into legal education, curricular of practical value which keep abreast of changing issues in Society Alternate Dispute Resolution (ADR) and mediation as apposed to litigation, is one such important area and for Sri Lanka, the Ombudsman Schemes are the newest entry to ADR. No one has yet published a comprehensive account of the country’s Ombudsman Schemes, their origin, development, current position and assessment. Hence, my selection of this topic.

Ombudsman schemes are now to Sri Lanka and many Sri Lankans – including some lawyers – are unaware of all the ombudsman schemes operating in the country. For instances, only a few weeks ago, a lawyer asked this writer “what is an Ombudsman and what does he do”.

The dictionary meaning of the term Ombudsman is “a government official appointed to investigate complaints made be individuals against the government or public bodies”. According to the dictionary meaning, the origin of the word is Swedish-from umboth (commission) plus mathr (man). Thus, the term “ombudsman” can mean a “One-man Commission”

Historically, the modern office of “Ombudsman” can be traced to the establishment of such an office in Sweden in 1809. From Sweden, the Ombudsman concept was copied in other Scandinavian countries like Finland. Denmark and Norway and over the last two hundred years Ombudsman Schemes came to be established globally in most developed countries.

In Sri Lanka, during the reign of the Sinhalese Kings,

it is said that there was a senior and trusted official in the King’s palace called “The Dukganna Rala” which in translation means “The person who receives or hears complaints”. However, it is generally believed that this high listened to and provided whatever relief he could only to the complaints and requests of the King and not his subjects. It is also said that the King’s complaints to the “Dukganna Rala” mainly concerned the problems the King had with his wife – the Queen. Thus, it appears that the office of ‘Dukganna Rala” was not meant for the average citizen.

Sri Lanka’s Parliamentary OmbudsmanIn modern times, Sri Lanka’s first Ombudsman was established by the 1978 Constitution. Article 156 of the Constitution established “the office of the Parliamentary Commissioner for Administration (Ombudsman)”.

Since 1978, two legislative enactments were made relating to the office of the Parliamentary Ombudsman. These were as follows –

i) Parliamentary Commissioner for Administration Act No.17 of 1981, and

ii) Parliamentary Commissioner for Administration (Amendment) Act No.26 of 1994.

Under the law now applicable, the Parliamentary Ombudsman is appointed by the President and can continue in office until he reaches 68 years unless he resigns or is removed by the President on account of illness or mental incapacity. Like in the case of a Supreme Court Judge, he can also be removed by an address in Parliament. Thus, the Parliamentary Ombudsman’s independence is assured.

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The Parliamentary Ombudsman’s functions and powers are contained in the two Acts of Parliament referred to above. His main duty is:

To investigate and report upon complaints or allegations of the infringement of fundamental rights and other injustices by public officers or public corporations, local authorities and other like institutions, in accordance with and subject to the provision of law.

The world ‘injustice’ is defined broadly in the legislation to include any injustice caused by any decisions / recommendation (including a recommendation to a Minister) or by any act or omission and the infringement of any right recognized by the Constitution.

Matters excluded from Parliamentary Ombudsman’s purview

The Parliamentary Ombudsman is not entitled under the legislation to investigate any matter relating to:a) Members of the Armed Forces or Policeb) The appointment, transfer, dismissal or disciplinary

control of public officersc) The Auditor General and the Commissioner of

Elections.

As will be seen above, the Parliamentary Ombudsman can only inquire into complaints relating to public sector and local government sector bodies and institutions. Also, his decision or award lacks implementation effect unless the institution or official to whom it is directed decides to comply with it, The first feature is a limitation on his jurisdiction. The second feature is a limitation on the effect of his award. His report is however tables in Parliament and Parliament, if it so deems fit, can take steps to ensure that an ignored award is honoured.

Other Sri Lankan Ombudsman SchemesApart from the parliamentary Ombudsman, currently there are only three other Ombudsman Schemes operating in Sri Lanka. This is the Financial Ombudsman which commenced in December 2003, the Insurance Ombudsman of which commenced in February 2005, and more recently the Tax Ombudsman who was appointed by the Ministry of Finance in mid 2005. All the above three schemes are not statutory schemes but are modeled on similar schemes operating in developed countries.

1. Financial OmbudsmanThe Financial Ombudsman was set-up in December 2003 with the approval of the Central Bank, by the banking industry and other financial institutions supervised by the Central Bank like the finance companies, the leasing companies and the primary dealers. They incorporated a company under the Companies Law called the Financial Ombudsman. Sri lanka (Guarantee) Ltd. This Company selects and employs the Financial Ombudsman. The Ombudsman is selected on an open advertisement in the newspapers. The first Financial Ombudsman is Mr.Walter Ladduwahetty a respected retired Judge. Much of the success of the scheme is due to him.

Origin of the SchemeThis writer is indeed proud that he was closely associated with the establishment of this scheme. On my return to Sri Lanka in 2002 after teaching for several years at Monash University in Australia, he was asked and accepted office as a Consultant in Legal Reforms to our Central Bank. At that time from 2000 onwards, the Government had set-up a Financial Sector Reforms Committee (FSRC) chaired by the Central Bank Governor. I was a member of that Committee. I proposed to the Committee that we set-up a Banking Ombudsman scheme similar to the one established in several other countries. As an academic at Monash University I had worked closely with the Australian Banking Ombudsman scheme. While the idea gained favour, the heads of our banks were not overtly enthusiastic about such an Ombudsman. But then, the Government enacted the Consumer Affairs Authority Act No.9 of 2003. Under that Act, all banking and financial transactions, were also subjected to inquiry and investigation by the Consumer Affairs Authority. To overcome this problem, the banking industry quickly agreed to establish the Banking Ombudsman scheme so that any complaints can be handled by the Ombudsman rather than by the Consumer Affairs Authority. That is how the Sri Lankan Banking Ombudsman scheme came to be established. Just before the scheme started to function in December 2003, other financial institutions like the finance companies, leasing companies and primary dealers also wanted to join the scheme. Hence, the name was changed from Banking Ombudsman to Financial Ombudsman.

The Financial Ombudsman’s power and functions are laid down in the Memorandum and Articles of Association of the Company Limited by Guarantee. Generally speaking

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the Financial Ombudsman can inquire into complaints by customers of the banks and other financial institutions who are members of the scheme and those institutions will be bound by his decisions and awards. Like in other Ombudsman schemes in foreign countries, the Financial Ombudsman is not bound or restricted by rules relating to the laws of evidence or legal procedures which govern a normal court of low. Nor can lawyers appear before the Ombudsman. The object of freeing the Ombudsman from having to observe legal rules and preventing lawyers appearing before him is to enable him to decide disputes without delay. All that is required is that he must be reasonable, fair and just in arriving at this decisions and awards. This is how Ombudsman schemes in foreign countries also operate and the Financial Ombudsman of Sri Lanka will be guided by the foreign schemes.

Ombudsman’s Powers The powers of the Financial Ombudsman are contained in Article 43 of the Articles of Associations incorporating the Financial Ombudsman, Sri Lanka (Guarantee) Limited. Article 43 states that the Ombudsman can entertain any complaint relating to the following matters:

(a) Non-payment/inordinate delay in payment or collection of cheques, drafts, bills etc.

(b) Non-issue of drafts to customers and others.(c) Non-adherence to prescribed working hours. (d) Failure to honour Guarantee/Letter of Credit

commitments by Banks. (e) Claims in respect of unauthorized or fraudulent

withdrawals from deposit accounts, current accounts, savings accounts.

(f ) Fraudulent encashment of a cheque/bank draft.(g) Complaints by customers pertaining to the operations

in any customer accounts maintained with the financial institution.

(h) Complaints from export customers on the mishandling of export bills, collection of bills and delays in receipt of export proceeds.

(i) Complaints from non-residents having accounts in Sri Lanka in relation to their remittances to Sri Lanka and operations in their accounts.

(j) Complaints relating to the violation of directives of the Central Bank of Sri Lanka in relation to financial services.

(k) Complaints in respect of charges/interest and fees levied. In relation to charges/interest and fees, the complaints shall be restricted to situations where the

actual rates charged are different to the published rates prescibed by the member financial institution.

(l) The Financial Ombudsman may also deal with any such other relevant matters as may be specified by the Central bank from time to time.

In the middle of 2004, the above powers of the Ombudsman were enlarged because the scheme was providing a success. Now the Ombudsman can also inquire into complaints made by persons other than individuals such as companies and partnership who are customers of banks and financial institutions. He can also inquire matters relating to special debt recovery procedures used by banks as “ parate execution” procedures. As a result of enlarging the Ombudsman’s powers more complaints are coming in.

The banks and the other financial institutions that are members of this scheme are giving their full support and co-operation to the Financial Ombudsman. Sometimes, the Ombudsman’s decision or the relief he awards is against the bank or the financial institution and they may not be happy. However, up to date no bank or financial institution has challenged a decision or Award given by the Ombudsman. This alone proves that the scheme is a success. Many people who have gone to the Ombudsman have written very complimentary letters about the prompt and courteous, manner they have been treated at his office which is situated at No. 143 A, Vajira Road, Colombo 5. Each of the banks and financial institutions who joined the scheme have also appointed Complaints Resolution Officers in each of the institutions to liaise with the Ombudsman’s office. These officers also should be complimented for having made the scheme a success. Everything about the scheme is found on its Website which is www.financialombudsman.lk.

2. Insurance OmbudsmanThis scheme is a replica of the financial Ombudsman scheme. If was set up by the insurance industry which today consists of fifteen private sector companies and the scheme has the concurrence and approval of the Insurance Board of Sri Lanka which is the state regulatory body for insurance. The following matters are within his jurisdiction.

(i) A complaint on any one of the following grounds alleging deficiency in respect of general insurance or long-term insurance service, may be lodged with the Ombudsman;

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a) Non-settlement or delay in the settlement of a claim b) Inequitable interpretation or application of the terms

and conditions of the insurance policy with regard to the following:

• Claims including maturities of long-term insurance policies

• Premium payable and premium refunds

(i) Other benefits payable in terms of the insurance policy

(ii) Any complaint by a policy-holder against an insurance agent relating to an insurance policy.

(iii) Any complaint by an insurance agent or broker against an insurance company in relation to an insurance policy.

(iv) Any matter referred to the Ombudsman by the Insurance Board of Sri Lanka (IBSL)

(v) Any matter referred to the Ombudsman by the Consumer Affairs Authority of Sri Lanka (CAA)

Any decision or award of the Insurance Ombudsman upto Rs. 500,00/- is binding on the insurance company but not on the complainant who can proceed to arbitration or litigation etc. Above Rs. 500,000/- the award is not binding on the insurer but the Ombudsman decision can be made available to an arbitrator or to the court if the insurer contests it in that manner.

This writer was appointed as Sri Lanka’s first Insurance Ombudsman in February 2005. In the eyes of the insurance companies which are now all in private sector hands and the insurance policy holders – the possible complainants – the insurance ombudsman scheme is working successfully.

3. Tax OmbudsmanThe Tax Ombudsman scheme which was established by the Ministry of Finance and Planning in mid-2005 is an administrative arrangement designed to look into and redress grievances of the taxpaying public. It is established in terms of a Cabinet decision.

The Ombudsman will inquire into complaints of any injustice arising in consequence of any mal-administration on the part of any officers of the Department of Inland

Revenue. Mal-administration in this context is defined to include;

(a) A decision, process, recommendation, act of commissioner or omission of which appears to;

i. be a departure from established practices;ii. be arbitrary, unreasonable or discriminatory;iii. have been given on irrelevant ground; or iv. Involve the exercise of powers, or the failure or refusal

to do so, for corrupt or improper motives or as administrative excesses.

(b) Neglect, inattention, delay, incompetence, inefficiency and ineptitude in the administration or discharge of duties and responsibilities;

(c) Repeated notices, unnecessary attendance or prolonged hearings while deciding cases concerning.

i. Determination of income or value;ii. Assessment of liability to taxes or levies administered

by the Inland Revenue Department.iii. Classification or valuation of goods;iv. Settlement of claims of refunds or rebate; or v. Determination of fiscal and tax concessions or

exemptions.

(d) Willful errors in the determination of refunds or rebates;

(e) Deliberate withholding or non-payment of refunds or rebates already determined;

The Ombudsman will entertain any complaint made –

(i) directly by the person aggrieved (ii) in writing and addressed to Tax Ombudsman(iii) within a period of six (6) months from the date on

which the complainant had first notice of the injustice complained of (The period may in appropriate circumstances be extended)

The Ombudsman may, where he considers it appropriate to do so, conduct an inquiry into any complaint. Every such inquiry shall be held in private; the complainant is entitled to appear before it either in person or by a representative.

On the conclusion of every inquiry the Ombudsman will submit a report to the Commissioner General of Inland Revenue, setting out his findings and recommendations.

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Where the Ombudsman decides not to conduct an inquiry he will communicate such decision to the complainant together with reasons therefore, such communication shall be treated as the conclusion of such complaint.

Every complaint with or without any inquiry being conducted will be dealt with to a finish within a period of ninety (90) days from the date on which the complaint is received.

The Press Complaints Commission of Sri Lanka The only other non-statutory mediation/dispute resolution scheme in operation in Sri Lanka which bears some resemblance to an Ombudsman Scheme is the Press Complaints Commission of Sri Lanka (PCCSL). The PCCSL which commenced operation in October 2003 is a self-regulatory body which (like the Financial Ombudsman scheme) is incorporated under the Companies Law of Sri Lanka.

The PCCSL will act through Council consisting of eleven persons representing civil society and the media. The Council will receive, inquire into and make findings on complaints from the public on any matter published in the Press. The Council will also inquire into any breaches of the Code of Practice of the Editors Guild of Sri Lanka which the PCCSL has now adopted. This Code of Practice was compiled to provide a balance between press freedom and social responsibility. In public awareness advertisement, the PCCSL states that “our main objective is to ensure a free and responsible press in Sri Lanka. We will adjudicate complaints on a free, fast and fair basis”.

Assessment of Dispute Settlement by Ombudsman Schemes Except for the Parliamentary Ombudsman Scheme which commenced in 1978, the other Ombudsman Schemes in Sri Lanka are of very recent origin. Hence, it’s too early to pass judgment on their effectiveness and value. However as an individual who helped to set up the Financial Ombudsman and the Insurance Ombudsman schemes, this writer is of the view that the Ombudsman schemes have been a success and we should set up more such schemes. They need not be set up by the state or by an Act of Parliament, in which case the operation of the scheme would be a burden on the Consolidated Fund and ultimately the taxpayer. Voluntary, industry established schemes such as the Financial and Insurance Ombudsman are quite sufficient and their operation is

not a financial burden on the State.

Having functioned as the Insurance Ombudsman for almost two years from January 2005, I have however noticed a few main shortcomings of voluntary Ombudsman schemes. The first is that unless the industry that sets up the scheme fully supports it and is prepared to go the extra mile to support it – the public for whose benefits the scheme was set up will ultimately lose confidence in it. Bluntly put, the industry that set up the scheme – whether it be the bankers or the insurance companies – must fully abide by any awards or decisions made by the Ombudsman. This must be so even if in a few individual cases that particular bank or insurance company finds it difficult, embarrassing or uncomfortable to accept the award or decision. It is better for the sake of the concept of Ombudsman to accept a few difficult decisions rather than to oppose or reject a decision and create an impression that the ombudsman is not to be taken seriously if his decision is not to the liking of the institution concerned.

The other feature that needs improvement for all Ombudsman schemes – voluntary or State established – is to publicise them more. Many members of the Sri Lankan public are not aware that there are Ombudsmen appointed to investigate complaints into financial, insurance, tax and media matters. The Press Complaints Commission gets fair publicity because the newspapers, being part of the scheme carry media advertisements about it. But this is not so with the Parliamentary, Financial, Insurance and the Tax Ombudsman. All of them have websites and email addresses but these are not resorted to by the average Sri Lankan. Hence, more media publicity about the Ombudsman schemes is required.

Another shortcoming is that apart from the Parliamentary Ombudsman, the annual reports of the other Ombudsmen are not published and therefore not available for public scrutiny and comment. In most other countries annual reports by Ombudsman are not only compulsory but they must be published and accessible for public comment and criticism if any. A similar procedure should be followed in Sri Lanka.