Construction Law/advance payment and termination by the contractor
QUESTION: Dear sir,
Our road project contract is based on FIDIC 4th Edition 1987, Employer agreed to give 20% mobilization advance payment. Due to budget constraint Employer didn't pay for two months from issue of request for advance payment. In due course parties discussed and employer promised contractor to compensate for elapsed time as EOT until 70% advance is paid. The contractor just after one month of receiving 69% of the advance gave notice for termination as per clause 69.1 without any prior notice of intent to claim or suspend or retard progress; just arguing full advance is not paid.
Employer rejected the notice of unilateral termination since Employer has already paid and contractor received and committed himself , as well as clause 69.1, as per FIDIC 1987 edition, refers to Interim payment of accomplished work not for interest free LOAN Mobilization Advance Payment from the Employer. Moreover, the contract agreement only stated advance payment in the particular under sub clause 67.0 as payment to be paid under separate certification and it will not be subjected to any interest for late payment. These two qualifications make it to stand by itself and could not be defined as INTERIM Certificate payment. The definition given for INTERIM Payment Certificate under Clause 1.1 (e)(iii) of FIDIC 1987 couldn’t serve this qualification.
However, the contractor, after waiting 14 days , notified that he has proceeded his termination and as per 69.2 he started de-mobilizing equipment and as per 69.3 to claim loss or damage.
Now the Employer is to give notice to breach of contract, call advance guarantee, call performance security and apply clause 54.1 even though contractor wants to solve the case amicably. What do you advice?
ANSWER: Dear Jamal Ali,
If I understand correctly, the Employer was due to pay 20% advance, agreed to pay 70% of 20% (14%), but paid only 69% of 20% (13.8%). You do not mention how long it took for the Employer to pay 70% of the Advance Payment. The difference is small, but indicative of poor financial control and bad faith on the part of the Employer. I guess that the clauses, to which you refer, are in Part II, as they do not appear in my copy of FIDIC 4.
I think that since the Employer caused the problem, that he should walk gently and do his best to rebuild trust with the Contractor. The best way to rebuild trust is to pay the outstanding amount, grant a suitable extension of time, and pay promptly in future. Once the Employer starts down the road of breach of contract and calling guarantees and securities, there will be no amicable settlement, only arbitration and court cases, which the Employer will lose. It will cost the Employer a lot of money for lawyers and he will lose in the end. To add insult to injury, he will have to pay for the Contractor's legal fees. Life is about to get very expensive for everyone, and the local people and economy will have to wait years to get a road.
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QUESTION: Thanks Peter for enlightening answer. As I told it takes two months to pay the 69%. Now the argument is (1) Advance payment is NOT Interim payment so the contractor couldn't use clause 69.1 to TERMINATE even though ha has the right to terminate without giving reasons but the contractor should be ready to be accountable. (2) The contractor declared termination after one month of taking 69% payment and according to Ethiopian Civil Code the contractor violates "Good Faith". The total work done value at the time of termination is less than 1% of the contract price or 20% of the paid advance payment. The employer expected improvement on the project progress with the paid advance -even if it is delayed- but the contractor preferred to take the money and terminate. if the the no(1) above holds true then the contractor is in BREACH Of contract- according to the Employer and the Engineer for whom I working. Is give sense brother?? Thanks-Jemal Ali
Dear Jamal Ali,
You must keep emotion out of contractual discussions or you have lost.
You said earlier that the Employer did not pay the advance payment for two months and in due course discussions began. I assumed that the discussions started after two months and that there was further delay before 69% of 20% was paid. You are not giving me the details of what is included in Part II with regard to definition of IPC's etc. I am good but not telepathic.
The Employer is in breach of contract, and "good faith", because he has not paid the advance payment in the manner specified in the Contract. How was the advance payment certified for payment if it was not through an IPC? Yes, the advance payment is treated as an interest free loan, but it must be paid for it to be a loan.
Two breaches do not make a right, but the arbitrator and the court will lean towards the Contractor rather than the Employer. Your supervisor may not wish to argue with the Employer for fear of losing his job, but he is doing the Employer no favours by giving bad or incorrect advice. Termination of the Contract by the Employer is difficult until the time for completion has expired. The contractor's first defence will be temporary non-conformity.
I suggest that you sit down with the Contractor and uncover his real reason for slow progress and wishing to terminate the Contract. Once the hidden agenda is known, then progress towards a solution is possible.
As I said above, Life is going to get very expensive for everyone. The lawyers will eat well and the local economy will suffer due to the lack of roads. Remember! the objective is to build a road, not to be proven right and get a pyrrhic victory.