FIDIC Conditions, 2d ed. / Dispute between Contractor and Employer / Damages due to late payment of advance payment

Damages due to late payment of advance payment / Method of valuation of damages / Contractor put in the same position as if advance payment made on time / Commercial value of capital vs losses suffered by reason of inability to spend capital earlier towards fulfilment of contractual obligations / Foreseeable extra expenditures and liabilities incurred due to breach of contract / Deduction for productive work performed during advance payment delay period / Quantum of damages / Claims relating to losses suffered by sub-contractors / Tribunal unable to make satisfactory findings on quantum of such losses or liability of Claimant in respect thereof

The background and facts are set out in the Partial Award. <b>[link to AW_0121]</b>

'Introduction

13. The remaining subject matter of this ICC Arbitration No. 5948 consists of Claim 1 and Claim 2 advanced by the Claimant, and the defences (in particular by way of set-off) to those Claims invoked by the Defendant. It is convenient to begin by first examining those Claims on the assumption that no set-offs are available to the Defendant.

14. Claims 1 and 2 are essentially claims for alleged additional costs incurred by the Claimant during extended contract periods. In respect of neither Claim 1 nor Claim 2 it is suggested by the Claimant that any work done by it during the relevant periods has not been paid for. In the case of Claim 1 additional costs are claimed for a period of 247 days, during which the Defendant allegedly prevented or hindered progress from being made with the contract work. The prevention is said to be due to a breach of Contract-late payment of the Advance Payment. In the case of Claim 2 additional costs are claimed for a period of 193 days due to alleged variations in the work and other factors beyond the Claimant's control. In the case of Claim 2 the basis for recovery must presumably be a claim for re-evaluation of variations so as to compensate for the extra time-related costs of executing such variations.

Claim 1-Applicable principle

15. The Advance Payment was certified by the Engineer on 3 August 1982. We find no basis in the Contract or otherwise to treat this certificate as an Interim Certificate. By 3 August 1982 the revised Performance Bond and Advance Payment Guarantee had been furnished in accordance with the Contract and accepted by the Defendant. The next day the formal Agreement was signed, and under Clause 60(9)(a) of the Contract, the Advance Payment fell due. It was not paid until 22 February 1983, i.e. with a delay of 202 days. Claim 1 is a claim for damages for late payment of the amount involved. The delay to be compensated is for 202 days.

16. In theory, the Claimant should be put in the same position as if the Advance Payment had been made on time. It should thus in principle recover on one of the following two alternative bases:

(A): The commercial value at the relevant time of the right to use for 202 days a sum of money equal to the Advance Payment. This would prima facie be measured by applying a fair commercial rate of interest over that period.

or

(B): Approach (A) above focuses on the commercial value, for the notional period of delay, of the capital the payment of which was delayed. In that sense it would restore to the Claimant the fair value for the period in question of the cash of which it was temporarily deprived. But the Claimant is entitled to frame its claim, not for loss of the market value of the right to use such a sum for 202 days, but for the consequential losses suffered by it by reason of its inability to spend such money 202 days earlier in furthering the Contract works. It cannot have both, for if the money had thus been spent at once it would have earned no interest, and if the full amount of the money had been borrowed at interest from a third party by the Claimant there would (interest apart) have been no consequential loss. Hence the alternative approach (B) would recognize that such capital would in any case have had to be spent without delay by the Claimant in performance of the contract, and focus on any revenue lost, or expenditures increased, by reason of the breach. No revenues were lost-the Claimant's right to payments under the Contract was in no way diminished by the Defendant's late payment of the Advance Payment. As to expenditures, some may even have been reduced.

17. Nevertheless in principle, and consistently with the law of obligations of the Employer's State, the Claimant should be able to recover any net extra expenditures and liabilities incurred by it which

(1) were caused by the breach of Contract (i.e. were rendered abortive by the lateness of the Advance Payment or would not have been incurred at all but for that lateness); and

(2) were a reasonably foreseeable consequence of that breach.

18. We have referred above to extra "liabilities incurred" by the Claimant by reason of the breach. These would include liabilities of the Claimant to its Subcontractors (as adjudged or reasonably compromised) satisfying Para 17 (i) and (ii) above. But the Claimant in this arbitration is the Claimant alone, and there can be no question of the Claimant recovering alleged losses of third parties as some kind of trustee or agent. It must be established that the Claimant itself has suffered losses or incurred liabilities falling within headings Para 17 (i) and (ii) above.

19. We are satisfied that the Claimant was throughout largely dependent upon the prompt effectuation of Contract payment obligations by the Defendant to enable the work to be funded and proceed in accordance with the programme. We find that it was from the outset reasonably foreseeable, and in truth foreseen, by the Defendant that any failure on its part to make payments when legally due was quite likely to result in delay to the work, and in increased outlays by the Claimant arising from the consequent need to devote resources to their task over a lengthier duration and with impaired economic efficiency. There is no doubt that this is what, to an appreciable extent, occurred.

20-24. But the burden is on the Claimant to establish with reasonable particularity the nature and extent of the losses it claims to have suffered. The Arbitral Tribunal cannot simply assume that the Claimant was unable to do any productive work at all during the 202 days, or that a 202 day delay in effecting the Advance Payment caused as much loss to the Claimant as if every subsequent contractual payment had also been deferred by 202 days. Moreover on any view the amount recoverable as damages would not include the value of work performed which earned remuneration under the Contract.

We have approached the evaluation of Claim 1 on the following lines: Firstly, we have assessed the total costs incurred over the period of 202 days. Secondly, from that amount we have deducted our assessment of costs allocable to productive work, performed in that period. The balance forms the basis for our Award for Claim 1.

. . . . . . . . .

As previously stated, we find that the length of the compensable period is 202 days and our computations will be made accordingly. Moreover we believe that The Claimant did achieve some productive work during the delay period of 202 days between 4 August 1982 and 22 February 1983 and that an appropriate deduction for this productive work should be made from the costs incurred during that delay period (Para 25 below).

The Arbitral Tribunal turns to the determination of the quantum of Claim 1 under the following sub-heads with respect to the Contractor (Claimant): (a) home office overheads-yes, (b) staff salaries- yes, (c) medical insurance-yes, (d) staff expenses-yes, (e) postage & DHL-yes, (f) air fares-yes, (g) sundry expenses-yes, (h) hotel accounts-yes, (i) visa fees-yes, (j) bonds-yes, (k) insurance-yes, (l) site electricity-yes, (m) telephone and telex-yes, (n) depreciation of capital assets-no, (o) underutilization of capital-yes, (p) late release of retention money-yes. The Tribunal then goes on to reject the sub-heads of claim made on behalf of the sub-contractors:

The Claimant has advanced monetary claims additional to the foregoing for losses suggested to have been suffered by these two Subcontractors. It submitted that such losses could be recovered by the Claimant on behalf of those Subcontractors in the present arbitration. We had no testimony from those Subcontractors, and the Claimant in the circumstances necessarily was severely handicapped in discharging the burden of proof resting upon it in respect of these items. Even if such alleged losses could as a matter of law afford a possible cause of action to the Claimant, we are totally unable on the material before us to make any satisfactory findings either as to the quantum of any such losses or the liability of the Claimant in respect thereof.

Deduction for productive work done

25. In respect of the subheads of Claim relating to the Claimant's losses the Defendant advanced the argument that not all the costs claimed by the Claimant were abortive and that productive work was achieved during the Advance Payment delay period. While the Claimant accepted this argument, the parties differ as to the basis and the percentage to be applied for productive work.

The Claimant considers that a credit for productive work should be based on the mobilization portion of the work, 15% of which was allegedly completed as of the week ending 24 February 1983 and that the value of the productive work should not exceed XXX. Depreciation, underutilization of capital and late release of retention should be excluded from any such calculation of the value of non-abortive work.

The Defendant claims that the major part of the costs claimed by the Claimant were productive.

No evidence was presented by either party in respect of any calculation for the value of productive work. Thus any finding in this respect can be based on the custom in the industry (according to the law of the Employer's State). Such custom is the following:

Upon the Award of a Contract, the main activities of a contractor concern preparatory work. These are not limited to mobilization only, but also comprise the logistics for the entire project whereby special emphasis lies on the site installation, the recruitment of personnel, the purchasing of plant, equipment and materials and their transport to the site.

Although the preparatory work as such can be used when the project starts at a later date, the costs of such activities become abortive to the extent that the personnel in charge of the project is no longer in a position to achieve productive work, but cannot be dismissed or directed to other projects in view of the expectation that the works may actually continue at any time.

The period of the Advance Payment delay was ultimately of such length that most of the personnel and other time-related costs became abortive.

In view of these considerations we find that a percentage of 20% of the allowable costs for home office overheads, staff salaries, medical insurance, staff expenses, postage and DHL, air fares, sundry expenses, hotel accounts, visa fees, site electricity and telephone/telex was not abortive and 20% thereof should be deducted as the value of productive work.

. . . . . . . . .

Claim 2-Applicable principle

27. Unlike Claim 1, this Claim is not a claim for alleged breach of Contract. The Claimant in its 28 April 1985 letter requested an extension "with all the cost implications" to 31 October 1985, based upon changes to the works ordered up to 28 April 1985 (Bulletins 1-168).

By letter dated 4 November 1985 the Claimant, after having received a request for 13 additional changes (Bulletin Nos 169-181), requested an extension of time until 31 January 1986 to complete the works. On 6 November 1985, the Claimant again wrote to the Defendant and requested, pursuant to Clause 44 of the Contract, a time extension to 31 January 1986. In response the Defendant wrote a letter on 6 November 1985 to the Claimant and stated that based upon an analysis of the time implications of the Bulletins issued to date, the Claimant was entitled to a 193-day time extension until 31 October 1985.

We view Claim 2 as a claim for the time-related costs of the matters giving rise to the extension of 193 days granted by the Defendant's 6 November 1985 letter, extending the date for completion from 21 April 1985 to 31 October 1985.

We find that the extension thus granted was appropriate. It appears to be common ground that the direct costs with respect to these changes have been agreed by the parties but that the time-related costs for the 193 days have not. The Claimant accordingly seeks to recover the latter as the unpaid balance of value due by reason of Bulletins Nos. 1-181.

Viewing the matter broadly, we have approached the evaluation of Claim 2 by seeking to assess the Claimant's time-related costs for the 193 days.

This approach effectively revalues the sums already certified for the relevant variations in the works, so as to include an element to cover the extra time-related costs of executing such variations. This assessment is the basis for our Award under Claim 2.

Claim 2-Quantum

. . . . . . . . .

Unlike Claim 1 Claim 2 is not a Claim for breach of Contract. The method of calculation adopted by using the alleged time-related costs over the entire contract period is not correct for a Claim under Clause 51 of the Contract concerning the time-related cost of the extended Contract period.

We find that only the cost of the extended Contract period can be taken into account. Therefore, whenever costs for the period between 22 April 1985 and 31 October 1985 are available and such costs do not exceed the amount claimed, such costs are taken as the basis of our calculation.

The objection raised by the Defendant in respect of most heads of claim concerns the point that 57% of the amounts claimed should be treated as productive ("job-related") cost and that the Claimant has not established any costs in respect of overheads.

In respect of this argument we note that the total value of the direct costs of all variations i.e. the value of the additions to and omissions from the works reached about 50% of the original Contract price. Yet the net value of the Contract at the end of October 1985 was approximately the same as the original contract price.

The disruptive effect of the total of these variations throughout the period from 22 February 1983 until 31 October 1985 had the consequence that although productive and varied work was performed during the entire period, the respective time-related cost and overheads could not be recovered in full through the productive work achieved. Instead of additional costs for the under-recovery of time-related costs and overheads during the (revised) original Contract period and deducting cost for productive work during the extended Contract period we find it justified to allow the full time-related costs of the extended Contract period (including overheads both on and off-site) and to make no further deduction therefrom for productive work performed during the extended Contract period.'