Common Claims in the Construction Industry

Overview

As a natural consequence of the goals set by all governments comprising the Gulf Cooperation Countries (GCC) for the achievement of Vision 2030, the region has witnessed rapid expansion in terms of urban development, which has inevitably led to growth in the construction sectors and predictably, an increase in construction disputes over the last 10 to 15 years.

Claims arising in construction disputes are generally categorised as either employer or contractor related. From the employer’s perspective, the most common claims relate to liquidated damages, whereas contractor claims are typically categorised as time related or design related claims which include claims for variation.

Both contractors and developers are much more inclined to adopt the standard form contracts developed by the International Federation of Consulting Engineers (FIDIC). As a result, industry professionals must take it upon themselves to familiarise themselves with the provisions of FIDIC contracts as well as the guidelines and commentary issued by FIDIC in respect of each form of contract.

This Practice Note will discuss common construction claims in Bahrain and the legislative framework by which such claims are determined. The Practice Note will also cover common evidentiary challenges faced by employers, contractors and consultants when advancing claims.

Definitions

• EOT: Extension of time.
• FFP: Fitness for Purpose.
• FIDIC: Fédération Internationale des Ingénieurs-Conseil (Federation of Consulting Engineers).
• GCC: Gulf Cooperation Countries.

Practical Guidance

Common contractor claims

1. Extension of time

Overview

Extension of Time (EOT) claims arise where a contractor is unable to complete the works within the time for completion stipulated within the contract for reasons beyond the contractor’s control. In such case, the contractor may be entitled to an extension of the contract period to complete the works and additional payment of associated costs (see prolongation claims below).

EOT claims are typically triggered if delays are caused as a result of the below mentioned circumstances. These are covered in sub-clause 8.4 of the FIDIC General Conditions 1999 Edition ¹ and referenced below for convenience:

• A variation (unless an adjustment to the time for completion has been agreed under sub-clause 13.3 (variation procedure)) or if substantial change in the quantity of an item of work is included in the contract.
• A cause of delay giving an entitlement to an EOT under a sub-clause of the General Conditions (e.g., sub-clause 4.12 (unforeseeable physical conditions), sub-clause 4.24 (fossils), sub-clause 8.8 (suspension by engineer)).
• Exceptionally adverse climatic conditions.
• Unforeseeable shortages in the availability of personnel or goods caused by epidemic or governmental actions.
• Any delay, impediment or prevention caused by or attributable to the employer, the employer’s personnel, or other contractors on the site.

In order for the contractor to claim additional time and/or money, the following conditions are generally imposed in construction contracts (in the FIDIC 1999 General Conditions these are covered under sub-clause 20.1):

• Contractor must give notice to the engineer of any time and money claims, and within a fixed number of days after the date on which the contractor became aware, or should have become aware, of the relevant event or circumstance.
• Claim to time or money will be time barred if the notice is not served within such fixed period, however such time bar provisions rarely render legitimate claims inadmissible in practice.
• The contractor should submit supporting particulars with the claim and maintain contemporary records as may be necessary to substantiate any claim.
• The contractor should submit a fully particularised claim within a fixed number of days after becoming aware of the relevant event or circumstance or such other period mutually agreed between the contractor and engineer.
• The engineer to respond within an equal period after receiving a fully detailed claim.
• Further interim updated claims are to be submitted monthly.
• A final claim is to be submitted, unless agreed otherwise, within a pre-agreed period following the end of the claim event.
• Upon receipt of the final claim, the engineer or employer’s representative is obliged to consult with both parties with a view to agreeing any entitlement within a fixed period. If agreement is not reached within such period, the engineer is obliged to issue a fair determination on the matter within 42 days after expiration of the period for reaching agreement.

Parties may agree to vary the particulars of each condition as appropriate given the nature and circumstances of the project.

Typical evidentiary challenges

Claimants must establish three key elements for any successful claim, namely, fault, causation, and harm. In the context of projects which tend to involve many moving parts and multiple interested parties working together, a multitude of evidentiary challenges may arise such as follows:

• Poor contract administration often leads to difficulties in extraction of information and evidence from poorly organised project records.
• Distinguishing critical from non-critical delays in a project comprising many contractors and subcontractors performing works simultaneously.
• Failure to establish a cause-and-effect relationship accurately, namely concurrent delays i.e., how other parties’ actions or lack thereof impacted the progress of the works.
• Producing substantiated and particularised delay analysis which is time intensive work with specialist expertise in the field of delay analysis. Such analysis comes under heavy scrutiny by opposing parties and the quality of such analysis is always subject to the quality of the contractor’s records.

Legislative framework

Whilst the agreed terms and conditions comprising a contract will govern the contractual relationship between parties, such agreements are interpreted within the applicable legislative framework. Parties may draw on a number of different sources of law including:

• Substantive laws found in Bahrain Decree-Law No. 19/2001 On the Issuance of the Civil Law.
• Government regulation governing the relevant standards of practice.
• Laws of civil procedure for the notification, registration and evidencing of claims.

The general rules of interpretation and construction as codified in Bahrain Decree-Law No. 19/2001 (also referred to as the Bahrain Civil Code) apply to all construction agreements governed by the laws of Bahrain. Accordingly, parties are required to observe the underlying principles of contract during performance of any undertaking or obligation.

Depending on the nature and circumstances of each claim, a number of different provisions of law may be triggered to support the legal basis for entitlement. Such provisions are referenced to support contractual remedies such as EOT entitlement. By way of example, the following articles of Bahrain Decree-Law No. 19/2001 establish principles that are often relied upon when advancing or contesting EOT claims:

• Article 28(c) of Bahrain Decree-Law No. 19/2001, which provides that the exercise of rights is unlawful where the benefit of the rights is disproportionate to the harm caused to another party.
• Articles 182-183 of Bahrain Decree-Law No. 19/2001 concerning unjust enrichment.
• Article 58 of Bahrain Decree-Law No. 19/2001, which provides the court the discretion to modify arbitrary conditions in a contract or relieve the adhering party of the obligation to perform these arbitrary conditions in line with equitable principles.
• Articles 125-128 of Bahrain Decree-Law No. 19/2001 which discuss the rules of interpretation and construction of contracts.
• Article 129 of Bahrain Decree-Law No. 19/2001, requiring parties to execute their contracts in accordance with the principle of good faith.
• Article 150 of Bahrain Decree-Law No. 19/2001, which affords parties the right to abstain from the performance of obligations where mutual obligations are not fulfilled.
• Article 166 of Bahrain Decree-Law No. 19/2001, which provides that if the wrongful act of a person contributed with the fault of the aggrieved person in causing the injury, they will not be liable except to the extent of the effect of their fault to the occurrence of the injury in proportion to the fault of the injured person.
• Articles 216-227 of Bahrain Decree-Law No. 19/2001, which covers the award of compensation for breach of contract including liquidated damages (often claimed by Employers in the event of untimely completion of works).
• Article 589 of Bahrain Decree-Law No. 19/2001, which provides that the contractor will perform the work in accordance with the conditions set out in the agreement and for the agreed period of time.

2. Prolongation cost claims

Overview

Prolongation cost claims are advanced for the recovery of additional time related costs that have been properly incurred due to compensable delay(s) to the completion of the works. Compensable delay events give rise to an entitlement to extension of time to the project completion date and entitlement to recovery of prolongation costs.

Compensable delay events are distinguishable from excusable delay events which equally give rise to EOT entitlement (and relief in respect of liquidated damages) but not necessarily an entitlement to prolongation costs. Excusable delays typically arise in the event of concurrent delays by both employer and contractor occurring simultaneously, or in the event of neutral delay events such as force majeure (in which case both parties bear their own costs). Prolongation cost claims should only be advanced on the basis of compensable delay(s) to completion of the works e.g., as a result of order for variation or occurrence of employer’s risk event or breach.

The standard form FIDIC Contracts (2017) regulate prolongation cost claims under sub-clauses 8.3 and 8.5, whereas the specific procedures for the administration of claims is dealt with under clause 20. If parties opt to enter into bespoke agreements, they must ensure that the recoverability of prolongation costs is adequately dealt with, otherwise courts will have discretionary power to determine any such entitlement and apportion liability.

Typical evidentiary challenges

• Identifying and distinguishing critical delays from non-critical delays as the basis for prolongation cost entitlement.
• Demonstrating compliance with all procedural requirements and pre-conditions including issuance of written notices.
• Demonstrating the mitigation measures adopted to reduce negative impact of any particular delay event(s).
• Establishing sufficient causational link between fault or breach of contract and resulting costs incurred with evidence.
• Quantification of loss of off-site overheads and loss of profit incurred or reasonably anticipated by reference to one of a number of formulas commonly relied upon in construction disputes including the Hudson, Emden, and Eichleay formulae.
• Extracting adequate records of costs relating to labour, equipment, and plant and materials etc.
• Accurately identifying the impact of a particular delay event giving rise to any entitlement to prolongation costs.
  Claimants often exaggerate the impact of a delay event (attributable to their counter party) to extend to all other site activities that may have been entirely unaffected or subject to an alternative delay event.

Legislative framework

There are no provisions in Bahrain Decree-Law No. 19/2001 which deal directly with the principle of prolongation costs in construction contracts. However, where entitlement to extension of time arises as a result of a particular breach of contract by the employer such as employer culpable delay, act of impediment or prevention attributable to the employer, then contractors may recover additional costs for delay and or disruption as damages for breach of contract.

In such case, the court will exercise wide discretionary power for the assessment of damages in the form of time related costs incurred. The relevant guidance for the assessment of damages or compensation in lieu of performance is found at articles 216- 228 of Bahrain Decree-Law No. 19/2001.

Pursuant to article 226 of Bahrain Decree-Law No. 19/2001, courts are granted power to fix the amount of damages payable by the employer to ensure such damages are proportionate to the actual loss incurred as a result of such breach of contract or harmful act.

In determining such damages, the court may consider the extent to which each party contributed to the loss in order to apportion liability as per article 217 of Bahrain Decree-Law No. 19/2001.

3. Disruption claims

Overview

Disruption claims arise in circumstances where one or more events impact cost incurred by the contractor but do not necessarily trigger any entitlement to extension of time to the completion date and therefore do not give rise to prolongation costs.
The impact on cost is the result of the loss in productivity during execution of the project. Such loss in productivity translates to additional cost and expense over and above that which would have been incurred were it not for the disruption event. The difference between disruption and delay is that the latter relates to lateness as opposed to productivity.

Disruption claims typically arise in the following cases:

• late issuance of information and or drawings relating to design; and/or
• delayed access to parts of the site.

Under the FIDIC suite of contracts, disruption claims will need to be advanced by administering sub-clause 20.1 and sub- clause 20.2 (as applicable).

Generally, contractors can pursue a claim for additional costs against the employer in the event the following disruption events, amongst others, take place:

Typical evidentiary challenges

Unlike EOT and prolongation cost claims, for which the starting point for evaluation of such claims is found in the terms of the contract, disruptions tend to be more difficult to prove and quantify. The contractor must:

• Evidence the extent to which progress of the works has been disrupted.
• Identify which element of the works and construction trades have been disrupted and how such disruption led to additional costs.
• Quantify the additional costs incurred as a result of the disruption.
• Establish the breach of contract that resulted in disruption.

Disruption claims are particularly challenging because contractors are often not in a position to detect disruption until after it has occurred. Moreover, isolating the loss of productivity to the cause of disruption can be very difficult when the cause of disruption may coincide with several other factors, or the effect of disruption may be hidden by other factors.

The assessment of costs arising from disruption is often performed by adopting one of three methods including:

• Measured mile analysis which compares actual labour performance between two periods i.e., the normal measured mile period and the impacted period.
• Baseline productivity analysis which produces a more conservative estimate of loss arising from disruption and is often relied upon when an unimpacted section of works cannot be isolated.
• Earned value analysis which compares the amount and cost of works that was planned to be completed by a particular stage and the amount of work that has actually been completed and cost thereof.

Legislative framework

As with prolongation cost claims, Bahrain Decree-Law No. 19/2001 does not contain provisions that offer specific guidance as to the recoverability of costs arising from disruption. Such claims are treated as claims for damages resulting from breaches of contract (including for example acts of prevention). Entitlement is subject to the claimant satisfying the burden of proof in respect of the causal link between such breach and the resulting loss incurred. The claimant is always expected to take reasonable measures to mitigate the impact of any events giving rise to disruption. Accordingly, articles 216-227 of Bahrain Decree-Law No. 19/2001 are relevant for the assessment of damages and the courts are granted discretion to fix the amount of damages as they deem appropriate on a case-by-case basis.

4. Variation claims

Overview

Variation claims typical arise where the design, method or conditions of construction are varied by the employer in accordance with the relevant contractual mechanism governing any such instruction. The omission of works from the original scope can also qualify as a variation.

Under the FIDIC General Conditions, variations may include:

• Changes to quantities of any item of work included in the contract. Changes to the quality and other characteristics of item works.
• Changes to the levels, positions and/or dimensions of any part of the works. Omission of works, unless it is to be carried out by others.
• Changes to the sequence or timing of the execution of the works.
• Additional work, plant, materials or services necessary for permanent works including any required tests on completion and other testing and exploratory works.

Variations may be initiated by the engineer at any time before issuance of the taking-over certificate for the works. Once instructed, the contractor will be bound by each variation and must execute the works without delay.

As a matter of procedure, the employer or engineer is normally required to issue an instruction in writing to the contractor which the contractor is expected to respond to as soon as practicable, either by giving reasons as to why he cannot comply or by submitting:

• A description of the proposed works to be performed and a programme for its execution.
• A proposal for any necessary modifications to the programme and to the Time for Completion.
• A proposal for evaluation of the variation.

Once received, the engineer is required to evaluate such proposal and respond as soon as practicable.

Under the 2017 FIDIC Contract, the contractor is required within 28 days of receiving the engineer’s instruction to submit detailed particulars in a similar manner to those set out in the 1999 Edition. The 2017 contracts go as far as setting out adjustment to the contract price by valuating the variation in accordance with clause 12 (measurement and valuations). Following which, the engineer is able to agree or determine either an EOT and/or adjustment to the contract price.

The 2017 FIDIC Contract also allows the engineer to request a proposal, before instructing a variation, by giving notice (describing the proposed change) to the contractor. Following which the contractor is required as soon as practicable to submit a proposal or give reasons why he cannot comply.

The most common sources of evidence relied upon to substantiate a variation claim include:

• Instructions from employer’s agents. Correspondence.
• Minutes of meeting.
• Extracts from contract documents. Contract drawings.
• Registry of revisions issued by date. As-built drawings.
• Photographs.
• Daily site reports.
• Time sheets.
• Cost data for incurred expenditure. Subcontractor accounts.
• Invoices.
• Programme updates.

Typical evidentiary challenges

• Ensuring that the requisite documentation evidencing the instruction, drawing revision, change in legislation or act of prevention is well documented and issued by a person with authority to do so.
• Where changes in legislation trigger variation claims, the contractor must demonstrate the design development required to bring contract drawings in line with new standards.
• Identifying and valuing the changes arising from the varied works by reference to detailed calculations to substantiate. This is particularly challenging from a technical standpoint if the works are complex and extensive.
• Ensuring that all costs arising from the variation are covered in the variation order including any additional indirect costs such as management time, engineering time, design time, temporary works, specialist plant and equipment etc.

Legislative framework

As per article 613 of Bahrain Decree-Law No. 19/2001, contractors are not entitled to increase a lump sum price if the increase arises from execution of the original works. As such, it is implied that the contractor’s lump sum includes all elements of the work necessary to complete the project in question.

In the absence of explicit contractual provisions dealing with variations in re-measured contracts, article 612 of Bahrain Decree-Law No. 19/2001 provides the legal basis for contractors claiming additional costs for varied works. Such right is subject to the contractor giving adequate notice to the employer of any anticipated increase in price. Without such notice, the contractor risks forfeiting its right to recover additional expenses in excess of the original estimate provided at the time of contract.

Common employer claims

1. Delay liquidated damages claim

Overview

Such damages are designed to reflect the pre-estimated or ascertained cost to be incurred by the employer in the event of untimely completion of the project. Such damages are reasonably anticipated to arise as a result of the employer not having access or beneficial use of the works by the time for completion. Therefore, the primary purpose of liquidated damages is to compensate for loss where specific performance is no longer possible.

Parties will normally pre-agree the liquidated damages to be levied in the event of untimely completion. Typically, provisions for liquidated damages impose a fixed penalty payable by the contractor for each day of delay incurred following the agreed time for completion up to the point of completion of the works (normally upon issuance of the taking-over certificate). Such damages can also be capped at a maximum percentage of the final Contract Price.

Typical evidentiary challenges

• Parties failing to agree the baseline programme prior to the execution of the works and repeatedly modify the same during the course of the project.
• Failing to identify causes of delay caused by the contractor versus those caused by external factors beyond the contractor’s control. Delay damages will not be recoverable if delays are caused by external factors like unforeseen site conditions.
• Failing to establish entitlement to damages. This will require a detailed account of the of costs incurred as a result of the delay and any additional costs required to complete the project.
• Failing to determine the quantum of damages. Typical challenges include the respondent challenging the claimant’s methodology or assumptions of the cost assessment of the delay.
• Record keeping with explanation why the the amount of the delay damages was capped at the recorded rate, and why it represents a reasonable and proportionate protection of the parties’ legitimate commercial interests.

Legislative framework

As a starting point, article 216 of Bahrain Decree-Law No. 19/2001 provides that where specific performance by the contractor is no longer possible or they are late in the performance of their obligations, the contractor is liable to pay compensation for damages caused to the employer for such failure. Such compensation will not be payable by the contractor insofar as it may be established that the impossibility of performance or late performance arose for reasons beyond the contractor’s control.

Whilst parties are free to fix the value of such damages, article 223 of Bahrain Decree-Law No. 19/2001 protects contractors by ensuring that the level of compensation fixed as liquidated damages is not greater than that which could have reasonably been foreseen at the time of entering into the contract.

Article 217 of Bahrain Decree-Law No. 19/2001 provides that the court may reduce the amount of damages if the employer, by their own fault, contributed to the cause of loss together with the contractor. Such provision demonstrates the court’s interest in apportioning liability fairly. Article 226 of Bahrain Decree-Law No. 19/2001 goes a step further by granting the court discretionary power to amend a liquidated damages clause to reflect the actual loss incurred by the party seeking to enforce such provision. The courts are only willing to exercise such power in circumstances where the actual damage suffered is grossly disproportionate to the liquidated damages prescribed by contract.

Liquidated damages provisions are generally agreed on the basis of pre-estimated damages that are reasonably anticipated, having regard to any revenue generating mechanisms specific to the project, if one party does not gain access or beneficial use of the Works by the agreed time for completion. As a result of this presumption of loss, article 226 prescribes that the burden of proof lies with the contractor to establish that there was no loss or that the agreed damages exceed the actual loss, as opposed to the employer proving the extent of damage or loss incurred.

2. Fitness for purpose claims

Overview

A fitness for purpose (FFP) claim is commonly advanced by an employer where the works (inclusive of design) is not fit for purpose i.e., does not meet the employer’s requirements as prescribed under the contract.

Fitness for purpose claims under FIDIC

Application of FFP provisions is a matter prescribed by contract.

Under the FIDIC suite of contracts, sub-clause 4.1 of the Yellow Book (Design and Build) and Silver Book (EPC / Turnkey Projects), it specifically provides that on completing the works, the works will be fit for the purpose(s) for which they are intended as defined in the employer’s requirements.

Typical evidentiary challenges

• Depending on the extent of the employer’s requirements, the exact ‘purpose’ may be difficult to identify or show to the tribunal/court.
• Depending on the contractual drafting, it may be difficult to distinguish a FFP obligation from one imposing reasonable skill and care on a contractor.
• Careful drafting so as to avoid obligations which meet subjective requirements as these can be grounds for a dispute.
• Proving liability is appropriately passed down the contractual chain, whether to design consultant or subcontractors. It is important to reflect clearly defined purposes in the documents appended to the design and build contracts and subcontracts. Merely stating that works should be fit for purposes may not be sufficient to a court or arbitrator.

Legislative framework

Typically, the application of FFP provisions in Bahrain (and across the GCC) is determined as a matter of contract and assessed by courts on a case-by-case basis. Save for matters of strict liability such as decennial liability imposed on contractors, architects and engineers for the structural integrity and safety of buildings, the extent to which parties are deemed to have complied with FFP provisions is determined by reference to the specific requirements prescribed within the contract in question.

The minimum level of duty of care prescribed by statute under article 241 of Bahrain Decree-Law No. 19/2001 may not necessarily relieve a contractor from their obligations to meet any FFP obligations set in the contract. Given that article 241 of Bahrain Decree-Law No. 19/2001 recognises the parties right to contract out of the minimum level of duty of care, contractors should be cautious to accept ambiguous FFP provisions.

Where the wording of the FFP provisions is clear, the court is unlikely to depart from the meaning of the terms by way of interpretation (article 125 of Bahrain Decree-Law No. 19/2001). Accordingly, the courts will likely uphold the FFP provisions without considering whether the contractor exercised reasonable skill and care.

Where a contract is silent on a FFP obligation or to the extent the terms are ambiguous, courts will consider the intention of the parties as deduced from the contract itself, the transaction at hand, custom and practice and the view that agreements are based on the principle of good faith.

Related Content

Legislation

• Bahrain Decree-Law No. 19/2001 On the Issuance of the Civil Law

International Regulations

• FIDIC Conditions of Contract for Construction for Building and Engineering Works designed by the Employer, 1999 Edition. ¹

Notes

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_conditions_of_contract_for_construction_for_building_and_engineering_works_designed_by_the_employer_(1999).pdf

This article was first published by LexisNexis