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Construction Law/Employer's fails to cover his share funding


Dear Gerry,
I'm currently working on behalf of the Engineer on a Highway project under Yellow FIDIC (1999) at Eastern Europe.
We're long since hearing various "whispers" about problems related to the funding of the Project on behalf of Employers' side. The Project is funded from EIB (almost 80%) and the rest of National resources. Before two days the Employer has noticed both the Engineer and the Contractor a letter, writing that he can't give any amount for the funding of the Project for all 2013.
Furthermore writes that every Work to be executed from now on won't be taken over (by the Engineer) and no payment can be claimed (both from Engineer and the Contractor).
The Contractor hasn't answered yet and additionally continues to execute Works. My question is, if the Employer has the right to act like this (while this is not described in the Contract). Of course has the right to terminate the project, but I believe not in this way. It seems so fuzzy notice without clear instructions or decisions.
Since the Engineer is legally committed through a contract to administrate and supervise the Contract, I think that Employer's action is absolutely wrong.

Kindly regards
Konstantinos S.

Gerry Sverdlin
Gerry Sverdlin  
Dear Konstantinos S. (Ilfoy, Romania)
Thank you for your inquiry, for this one is a very interesting.  I would agree with you that such a mode to “terminate” the project is absolutely not acceptable – and not only under FIDIC-99-Yellow Book (or “Design-Build”) – but under any other known set of contract conditions.  Here is why.  
While the main / primary obligations of the Contractor is to deliver the work product (§4.1, §8.6), and that of the Engineer to supervise the compliance with the Owner / Employer’s requirements, the main responsibility of the Owner/Employer under any contract conditions is (1) to make the site available for Contractor to work, and (2) to PAY ON TIME under the payment provisions §§14.3 – 14.8.
There is a proper way to terminate any project for the Owner’s convenience and, like it or not, this includes the anticipatory repudiation of the contract by the Owner.  Simply speaking, if Owner anticipates problems with funding, there is a way to either temporarily suspend the delivery of the project under §§ 8.8 – 8.11, or terminate the project under §15.5 - Employer's Entitlement to Termination, for cause(s) not arising out of Contractor’s default, say, impracticality to Employer to continue with the Works, or frustration.

On the other hand, if the Owner states that s/he is experiencing problems with project funding, the Contractor is entitled to either suspend the work under §16.1 - Contractor's Entitlement to Suspend Work, or, in the alternative, terminate the contract under §16.2 -  Termination by Contractor, for a stated cause arising out of inability of the Owner to continue to pay for the work. (see also §§ 16.3 – 16.4).

This is where your inquiry gets very interesting.  Under §  2.4 -  Employer’s Financial Arrangements, the Owner has to provide evidence to the Contractor at the beginning of the project that s/he has secured sufficient funding to meet its payment obligations during the course of performance.  In the States, majority of the Contractors – or rather their lawyers – often make sure that this evidence is rigorously verified and placed in the project file.  However, in your case, it seems that either the contractor’s personnel missed the boat and did not veryfy sufficient funding, or the Employer changed its funding posture – e.g. through embezzlement or fraud, among other reasosn – and failed to inform the Contractor in due course, which, by the way constitutes not only a material – i.e. actionable – breach of contract, but may also rise to the level of fraud on the innocent party(ies) – Contractor and, derivatively, the Enginner.  

Knowing a little bit about the levels of corruption existing on many Eastern European projects plagued with bribery and conversions first-hand, I am somehow not surprised.  But it appears that both the Contractor and the Engineer, in your case, may have legitimate cause(s) of action to pursue their respective contractual remedies for outstanding payments through arbitration provisions embedded in the contract §20.6 or litigate issues in court(s).

I hope my answer is responsive to your inquiry and help you understand the framework better.

Gerry Sverdlin, PE, Esq.

Construction Law

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Gerry Sverdlin


Questions I can answer or provide assistance to reflect the following subjects: contract terms and conditions, interpretation of ambiguity, construction management and practices, claims for costs and time, variation / change orders, disputes, dispute resolution techniques and organizations, claims for extra work or materials, delay analysis, disruption or interference, defective design and negligent supervision, construction risks and mitigation, warranties and insurance. Questions I can NOT answer: too numerous to list here.


Mr. Sverdlin provided over 20 years of services in dispute resolution and expert opinion of complex construction claims for extra work, delay & acceleration, defective design & installation, unauthorized deviations, differing site conditions, productivity loss, labor & material shortage, owner’s interferences, force majeure, bonding, warranties and insurance coverage. Mr. Sverdlin participated in dispute resolution proceedings regarding 10 mile sub-aqueous outfall tunnel at Deer Island Treatment Plant – Boston Harbor Project, and claims arising out of construction of the South Boston / South Bay Interchanges for the Central Artery/Tunnel Project in Boston, Massachusetts, USA, and multiple proceedings Middle East. Specialties: Mr. Sverdlin established expertise in construction contract preparation under EJCDC, AIA, FIDIC and agency-specific bespoke contract frameworks: procurement administration, resolving defects in scope of work coverage, specification and estimates, change order processing, project controls & cost recovery. Engineering practice encompasses design & procurement management of highway & rail transportation systems, wastewater treatment and drainage networks, key performance indicator regimen.

2011 - CIArb Member Grade 1999 - Attorney at Law – Massachusetts Bar, BBO # 642980 1992 - Registered Professional Engineer - PE: Lic. MA-36839 - Civil Affiliated Memberships: MBA - Massachusetts Bar Association DRBF - Dispute Review Board Foundation TASA - Technical Advisory Service for Attorneys

2010 - 2011 - American University in Dubai -Grad. Sch. of Business Administration Construction Contracts, Means & Methods, Claims & Changes, Project Controls March 2009 - Chamber of Commerce, Colombo, Sri Lanka – Construction Management Seminar Changes & Claims, EOT/Delay Damages, Loss of Productivity – Measured Mile 2000- 2007– Boston Architectural Ctr & Wentworth Inst. of Technology - Construction Law 1991- 1993 - Northeastern University, Boston, MA – Land Surveying, Sewage Disposal System Numerous continuing education specialty courses Suffolk University Law School - Juris Doctor, law -1993 – 1997 Northeastern University - MS, Construction / Public Works Management - 1993 Polytechnic University - BS, Civil Engineering 1982 – 1985

Past/Present Clients
Representative Projects Dubai International Airport UAE Muscat & Salalah Int'l Airports Oman South River Dredging Mechanical Scituate, MA Permitting / Boundary Dispute (Title V) Worcester, MA Hazardous Material Site Assessment New Bedford, MA Groundwater Pollution Monitoring Burlington - Woburn, MA Hazardous Material Disposal - Site Clean-up Wrentham, MA Sewer Rehabilitation Project – STEP Abu Dhabi, UAE Dubai Metro - Road & Transportation Authority, Dubai, UAE Boston Harbor Project - Deer Island MWRA - BHP Winthrop, MA 1,200 MGD Waste-Water Treatment Plant Doha North Sewerage Treatment Works Ashghal, Doha, Qatar 254K m3/d STP, 25-km triple force mains, 33-km Interceptor Sewers 10,000 l/s PS Central Artery / Tunnel Project - MHD / MTA Boston, MA 116 lane-miles Old Colony Railroad - Commuter Rail (Boston, MA 70+ mi) Cherry St. Reconstruction Full-Depth Bridgewater, MA 2.1 mi Scenic Roads Reconstruction Town-wide Wayland, MA 8.7 mi Strawberry Hill Rd Reconstruction Full-Depth Concord, MA 1.7 mi Craigsville Beach Rd Reconstruction Full-Depth Hyannis, MA 3.4 mi Water Main Replacement Southborough, MA EMAAR – Gulf III Towers, Dubai, UAE Mixed-Use Hi-Rise Peabody Properties Residential Hi-Rise Lynn, MA Bristol Properties Shopping Mall Attleboro, MA May Institute (children w/special needs) Institutional Randolph, MA Bear Hill Executive Park Commercial Waltham, MA Prospect Hill Executive Park Commercial Waltham, MA Residential Community Subdivision 128 lots Hopkinton,MA Retirement Community Subdivision Residential – 126-lots Warren,MA Independence Mall Retail Kingston, MA Mashnee Village Subdivision Residential – 54-lots Buzzards Bay, MA Hyannis Industrial Park Heavy Commercial

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