Construction Law/Price Adjustment

Advertisement


Question
QUESTION: Dear Mr.Sir,

I’m working as engineer for Supervising Consulting Company.

Please give me your comments on fallowing issue.
We are working under FIDIC 2006 ( MDB Harmonized ).
To calculate Price Adjustment using Pn formula Contractor has to use statistical data provided by State Agency for Statistics.
Recently Client have forwarded a letter from State Agency for statistics, where it says that all previously data has to be changed since they were not correctly calculated. New data issued.
Now Client wants to recalculate all previously certified IPCs.
State Agency for Statistics explains situations as follows: “the Agency calculated indices based on the Data provided by companies which are involved in Project and companies manipulated situation to their advantage. Having understood this lately the  Agency now decided to recalculate indices using data provided by neutral companies not involved the Project.”
Now Contractor put a Claim against Client for changing indices, specially Base Indices entrenched in Contract.
But in my opinion Client is not responsible for  statistical data.
To me it looks like both parties are suffering from occurred situation and its beyond control of both parties, none of them can predict such a situation.
I think it is necessary to mention that Client and State Agency for Statistics are part of government but Client has no direct influence on State Agency for Statistics.

Could you kindly help me to find answers to following questions ?
1)   Can Contractor put a Claim against Client in such a situation?
2)   Is Sub clause 19.1 of FIDIC ( Force Majeure ) 2006 applicable in such situation?
( I believe that all items of Sub clause 19.1 of FIDIC 2006  a,b,c,d are applicable to that situation.)
3)   Who is final cost bearer in such situation?
4)   Client insisting that overpaid Price Adjustment must be recovered from the Contractor, knowing this from last IPA Contractor  is not applying Price Adjustment. Client is saying that Engineer has to calculate PA himself and then include to IPC & recover. Is this ok ?

Best Regards,

Aslan Sembayev

ANSWER: Dear Aslan Sembayev

Thanks for the question. I will summarize your question as follows:

1. Price indices are based on statistical data provided by a State Agency
2. During the currency of the Contract at a later stage the State Agency has changed the  indices.
3. The Client (Employer) wants the Engineer to re compute all the Increase or decrease in cost          which were previously allowed to the Contractor and have been paid.
4. The Contractor is not happy with the situation and has stopped applying for price adjustment

You have asked whether the Contractor can put a claim and whether Clause 19 (Force Majeure) is applicable or not.

I will try answer the above questions.

Your Client and the Statistical agency are two government agencies but they have no control over each other in deciding these matters, therefore your client is right in asking for such action of recomputing the whole exercise.

You have not mentioned whether your tender documents show an amount as index against a specified material without any reference to statistical data or has also referred to the index mentioned in the statistical data 28 days prior to the Bidding date. If it is a referral to that data and the agency has changed both the indices prior and after the tender date, then the same will be applicable as the contractor can not claim anything based on assumed data. If this is not the case, then you have to provide further information on this account to reach a conclusion.

What the Contractor can do in this case is to find out the reason why the agency has changed the indices. Whether the reason is the supply of false information on which the indices are based or is it the change in certain factors for computing an index. In later case, the contractor may claim under clause 13.7 'Adjustment on change in legislation'.

I do not think that Clause 19 (Force Majeure) applies to the the situation you are in. Clause 19 (Force Majeure) is applicable where a situation mentioned in 19.1 prevents a party from performing its substantial obligations under the Contract. I am sure that the above situation does not fall in this category.

I hope your question is answered. In case you have something more to add, or if something is not clear then please free to ask.

Abdul Majid Khan         

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

QUESTION: Dear Abdul Majid Khan,

Can you read once again, I think I have forgatten to put an important details.Please give me your comments.

I’m working as engineer for Supervising Consulting Company.
Please give me your comments on fallowing issue.

We are working under FIDIC 2006 ( MDB Harmonized ).

To calculate Price Adjustment using Pn formula Contractor getting statistical data provided by State Agency for Statistics and as per Client(which has to be checked), Contractor is free to use any source of statistical data.

There is contract between Contractor and State Agency for Statistics for providing information and there is a clause according to which all disagreements and disputes are to be solved in accordance of Law of Land .
Recently Client have forwarded a letter from State Agency for statistics, where it says that all previously data has to be changed since they were not correctly calculated. New data issued.

Now Client wants to recalculate all previously certified IPCs.

State Agency for Statistics explains situations as follows: “the Agency calculated indices based on the Data provided by companies which are involved in Project and companies manipulated situation to their advantage. Having understood this lately the Agency now decided to recalculate indices using data provided by neutral companies not involved the Project.”

Now Contractor put a Claim against Client for changing indices, especially Base Indices entrenched in Contract.
But in my opinion Client is not responsible for statistical data.
To me it looks like both parties are suffering from occurred situation and its beyond control of both parties, none of them can predict such a situation.

I think it is necessary to mention that Client and State Agency for Statistics are part of government but Client has no direct influence on State Agency for Statistics.

Could you kindly help me to find answers to following questions?
1)   Can Contractor put a Claim against Client in such a situation?
2)   Can Client use Sub clause 19.1 of FIDIC (Force Majeure) 2006 to defend himself?
         19.1 Definition of Force Majeure:
         “ In Clause , “Force Majeure” means an exceptional event or circumstance:
         a)   Which is beyond a Party’s Control, (neither  Client nor Contractor cannot control data of State Agency for Statistics);
         b)   Which such Party could not reasonably have provided against before entering into Contract,
         c)   Which, having arisen, such Party could not reasonably have avoided or overcome, and
         d)   Which is not substantially attributable to the other Party.
         Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions    
         (a) to (d) above are satisfied:………”
         ( I believe that all items of Sub clause 19.1 of FIDIC 2006  a,b,c,d are applicable to that situation.)
3)   Should Contractor go against State Agency for Statistics under Law of Land?
4)   Who is final cost bearer in such situation?
5)   Client insisting that overpaid Price Adjustment must be recovered from the Contractor, knowing this from last IPA Contractor  is not applying Price Adjustment. Client is saying that Engineer has to calculate PA himself and then include to IPC & recover. Is this ok ?
Best Regards,
Aslan Sembayev

Answer
Dear Aslan Sembayev

Thanks for details which you have provided now.It transpires that your contractor is one of those (if not the only one) who provided information to the Statistical Agency, for publishing the price indices. The Agency blamed the contractor for providing misleading information to gain benefits and this is why the Agency had to withdraw all the previous data and issued new data based on the information supplied by the neutral informers.

Your Client, as I have mentioned earlier, is bound by the Contract to follow these indices issued by the Agency from time to time. As I explained earlier if there is a reference to these indices for both the pretender and post tender scenario, then the instructions issued by your client is in accordance with the Contract.

Now we come to your questions one by one:

1. Yes the contractor can put a claim against the Employer for changing the indices but the Employer will have a strong defense that the Contract refers to the indices issued by the state Agency and that the Employer was still following it by sticking to its instructions.

2. I will again say that sub clause 19.1 must be read with its following sub clauses 19.2 and onward. These clauses determine that any event under 19.1, to qualify for a Force Majeure event, must be such that it prevents a party from fulfilling its obligations under the Contract.  In the current situation, although 19.1 a to d are applicable yet the event does not prevent the Contractor from fulfilling its obligations under the Contract and therefore would not be considered an event of Force Majeure. So my answer to this question is 'No'.

3. The Contractor has every right to go against the State Agency under the Law of the Land for blaming the contractor for providing misleading information which favoured the contractor. And if the Contractor is confident enough to have provided correct data then he can also ask for the losses incurred by him due to the action of the State Agency.

4. The final cost bearer in case of the Contract is the Contractor, but if he wins his case against the State Agency then he will be compensated by the Agency by again revising the indices or paying the losses. My gut feeling is that the Contractor will not go against the State Agency. The Agency has taken a very bold step and it must be based on some solid evidence.

5. The client is contractually correct in asking you to recompute the Price Adjustment and recover it.

I hope the question is answered. Please feel free to ask further.

Abdul Majid Khan  

Construction Law

All Answers


Answers by Expert:


Ask Experts

Volunteer


Abdul Majid Khan

Expertise

I am interested in questions related to time Extension, Liquidated Damages,variations, price adjustments,payments, disputes and Dispute Board under FIDIC IV, FIDIC 1999 and FIDIC 2006 Harmonized Documents.

Experience

I have been heading the Construction Management Division and Contract Divisions of National Engineering Services Pakistan (PVT) Limited, NESPAK, the largest Consulting Engineering Firm in Pakistan, for more than seven years and two years respectively. I have also worked as "The Engineer" on a number of projects. I have been working in Saudi Arabia for about seven years on a road projects. Additionally I worked as Arbitrator and am member of few Dispute Boards in individual capacity on Asian Development Bank funded projects.

Organizations
Inland and in Middle East. I have worked with National Engineering Services Pakistan (Pvt) Limited (NESPAK)as my Employer for more than 27 years in Pakistan. In Saudi Arabia I worked for Rashid Engineering, Consulting Engineers during 80s. After retirement I provided advisory services to NESPAK on technical and contractual matters to its various divisions and lately I was appointed as Advisor to Managing Director NESPAK on Technical and Contractual matters. Currently I work as Free Lance Contract Specialist on Fidic Form of Contracts.

Education/Credentials
I am a graduate with a B.E (Civil Engineering) degree. My year of graduation is 1970.

Awards and Honors
A few appreciation Letters and Honorariums during my service in NESPAK. I remained member of Administrative Committee and Board of Management of NESPAK. I had been part of the Management Committee in the absence of Managing Director.

Past/Present Clients
Most of the Clients used to be Government Departments, Corporations and Authorities. In Saudi Arabia the Client was Ministry of Communications. As Arbitrator and Dispute Board (DB) member, I provide services to various Government Departments and Contractors.

©2016 About.com. All rights reserved.