Expert: Peter M. Elliott - 2/1/2012

Question
QUESTION: Peter,
We were the main Contractor on a FIDIC 1999 Redbook contract which we terminated for non-payment under the provisions set out under sub-clause 16.2(c). We are now seeking to recover all that we are owed under the conditions set out in sub-clause 16.4 [Payment on Termination] and 19.6 [Optional Termination, Payment and Release].

The questions I have are these:
1. What are we entitled to recover from the Employer under these circumstances?
2. Are we entitled to have ALL of our retention returned immediately? The retention limit is currently at the maximum 5% of contract value which is currently being held by the Employer.
3. Sectional completion certificates have been issued for approximately 30% of the the works by value, are we still bound to honour the defects notification period on both the complete and incomplete parts of the works or are we released from all obligations under the contract?
4. Can the Engineer continue to issue contract notices to us to attend to defects for both complete and incomplete parts of the works?

I am eagerly awaiting your response. Thanks in anticipation.

Keith

ANSWER: Dear Keith,

1. Clause 16.4 states what you can recover from the Employer, but you have to prove any loss to be recovered under clause 16.4 c.
2. Clause 16.4 a states that the Performance Security is to be returned, so, by analogy, any retention must be returned.  
3. The Contract is terminated so you have no further obligations under the Contract, but you do have obligations under the applicable law with regard to non-compliant materials or workmanship.  
4. The Engineer can issue notices, but do you have to respond to them?  It depends on the reasons for the defects.  If they are due to non-compliant workmanship or materials, then I think that you are obliged to correct them.  

---------- FOLLOW-UP ----------

QUESTION: Peter,
Thank you for your clear and concise response.

In relation to the question 1 "What are we entitled to recover", can you give an opinion on whether we are entitled to recover:

A. the "lost anticipated profit" because of termination under 16.2(c)?
B. a contribution to non-direct overhead costs?

In relation to question 2, can you provide the FIDIC contract and/or English Law justification for the position you put forward supporting the return of the retention as an extension of the explicit requirement for the return of the Performance Security (re 16.4(a))?

The contract appears to silent on the time scales for the Engineer's determination of the value of the works done and the issue of a payment certificate to the Contractor under sub-clause 19.6. Are the timescales involved the same as those set out under sub-clause 14.6, and 14.7 for payment by the Employer, or some other period?

How much time is the Employer allowed before the Performance Security and Retention should be returned/repaid?

Thank you for taking the time to share your experience and expertise.

Regards
Keith

Answer
Dear Keith,

My apologies for the delayed response.  I have been seeking justification for my advice.  Unfortunately, I have not found any case law neither for nor against.  I will continue looking.  If anything turns up, then I will send a supplementary answer.

With regard to lost anticipated profit and overhead recovery, you have the right to recover any losses, BUT you have to prove those losses.  Generally, profits have to be proved through audited accounts, not what you included for profit in your offer.  Have a look at this document http://www.icoste.org/ZACK.pdf for different ways of calculating overhead costs.  If you have managed to reallocate your resources to another contract, it could be difficult to prove either case.  

With regard to payment, there are the requirements of sub-clauses 14.10, 14.11, 14.12 & 14.13 to be considered.  It all depends on how quickly you can submit (agree) your final statement.  
Realistically, it might take longer to issue and pay the payment certificate, because of the quantity of work involved and the potential for Employer's Claims.