Construction Law/Financing charges

Advertisement


Question
Dear Sir,  
My question is related to the relevant exchange rate, applied in case of financing charges. The Contract is administered under FIDIC 1999 Red Book.
The payments of IPCs are distributed into 79% for foreign currency portion (in USD) and 21% in Local currency portion. The issue is the applicable month of interest, published by the 6 monthly USD LIBOR for financing charges under Sub-Clause 14.8 [Delayed Payment], for the foreign currency portion (USD).  The agreed annual rate of interest in the Contract for calculating financing charges is 6 monthly USD LABOR +3%.
According to Sub-Clause 14.7 of GCC, the Contractors becomes entitled to receiving financing charges, if the due payment is not made within 56 days, after the submission of the Interim Payment Application (IPA).
Now I would illustrate my case as follows:
Suppose the date of submission of IPA No. 10 is 1/2/2015
Suppose, IPC No. 10 issued by the Engineer on 25/3/2015 (within 28 days, as stipulated under Sub-Clause 14.6 of GCC)
After 56 days of the IPA submission, the due date for payment for the amount of IPC No. 10 will be 28/3/2015 (but the payments are not made on this date by the Employer) and the Contractor becomes entitled to financing charges.
Our interim certificates are prepared and submitted on bi-monthly basis as agreed in the Contract MoU.
Now the Engineer calculates the financing charges for the delayed payment of IPC No. 10 in the next IPC No. 11 (suppose bi-monthly IPA No. 11 submitted on 5/4/2015, and certified by the Engineer on 30/4/2015, 25 days after IPA submission). The Engineer considers that the interest rates published by the 6 months USD LIBOR for the month of March 2015 according to the due date 28/3/2015 (due date for payment) shall be used for calculating the financing charges, whereas the Contractor considers that the interest rate of the month of April 2015 according to the date of the calculations (i.e. 30/4/2015, the issue date of next IPC No. 11) shall be used for calculating the financing charges.
The 6 monthly USD LIBOR interest rates are published for each month.
Summarizing my issue, I would seek your guidance, whether we shall use the interest rate of the month, when the payments become due (last date for payment, 56 days after submission of IPA) or the interest rate of the month of the next IPC, when the financing charges for the previous IPC are calculated in the next IPC. The FIDIC 1999 Red Book, Sub-Clause 14.8 is silent in this regard.
Looking forward to your valuable advice.
Regards.

Answer
Dear Muhammad,

The relevant clause 14.8 stipulates that" If the Contractor does not receive payment in accordance with Sub-Clause 14.7, the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay. This period shall be deemed to commence on the date for payment specified in Sub-clause 14.7...

Unless otherwise stated in the Particular Conditions, these financing charges shall be calculated at the annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment, and shall be paid in such currency.

The Contractor shall be entitled to this payment without formal notice or certification, and without prejudice to any other right or remedy. "

Therefore the Contractor's financing charge starts at day 57, and covers the period till payment received. However above clause clarify annual rate, compounded monthly, therefore monthly variations may be described in your Particular Conditions and calculation of interest rate should be based on the relevant month, where entitlement starts and your first assumption is right.

Best Regards

IRVALI

Construction Law

All Answers


Answers by Expert:


Ask Experts

Volunteer


ALI IRVALI

Expertise

FIDIC, Arbitration Procedures, Claim Management, Project Management.

Experience

I have experience of working at 6 countries in MENA region (algeria, Libya, Saudi Arabia, Oman, Pakistan)as the Regional Director and General Manager of a construction company. I have experience on various applications of FIDIC and construction law, arbitration procedures, claim management, project management.

Organizations
CEO of TURCON Construction presently. www.turcon.com.pk

Education/Credentials
M.S. Civil Engineer, Various Courses on Project Management, Seminars on FIDIC.

Past/Present Clients
National Highway Authorities of various countries, Water and Power Development Authorities, Karachi Port Trust, etc.

©2016 About.com. All rights reserved.