Construction Law/APPLICATION OF PRICE ADJUSTMENT FORMULA
QUESTION: We signed a contract with the employer for road construction based on FIDIC, 1987 reprint 1992 version.
The base price index for equipment is agrred to be from US DEPARTMENT OF Labor,
The currency of payment is agreed to be Birr, which is currency of the employers country (Ethiopia)
The employer is effecting price adjustment payments using the agreed index from USA but without applying conversion factor for exchange rate of DOLLAR TO BIRR. This has resulted distorted output due to periodic change of exchange rates.
The reason given by the employer is that no explanatory note was included under the formula in relation to the issue of converting currency of index to currency of payment.
We are claiming ont the fact that the contract is silent about using correction factor for the indices can not restrict us from getting correct adjustment of price and to see the case based on the applicable law of the contract. What is your opinion?
ANSWER: Dear Hagos,
I understand that you have fixed exchange rate of Dollar to Birr and you are getting either certain percentage or whole amount by applying such conversion factor as indicated in Sub-clause 72.1.
The Sub-clause 70.1, Increase or Decrease of Cost stipulates that There shall be added to or deducted from the Contract Price such sums in respect of rise or fall in the cost of labour and/or materials or any other matters affecting the cost of the execution of the Works as may be determined in accordance with Part II of these Conditions. As you may see from above that it refers to Part II, Particular Conditions of Contract.
Part II., Particular Conditions advise following modification which stipulates that; All payments to the Contractor by the Employer shall be made:
(a) in the case of payment(s) under Sub-Clause(s) 70.2 and (insert number of any
other applicable Clause), in (insert name of currency/ies);
(b) in the case of payments for certain provisional sum items excluded from the
Appendix to Tender, in the currencies and proportions applicable to these items
at the time when the Engineer gives instructions for the work covered by these
items to be carried out; and
(c) in any other case, including Increase or Decrease of Costs under Sub-Clause
70.1, in the currencies and proportions stated in the Appendix to Tender as
applicable to such payment provided that the proportions of currencies stated in
the Appendix to Tender may from time to time upon the application of either
party be varied as may be agreed.
It is very clear from above that fixed exchange rate with currencies are applicable to Clause 70.1 payments.
Furthermore, it is also referred that Appendix to Tender has to specify percentage of payments as stipulated; The currency of account shall be the (insert name of currency) and all payments made in accordance with the Contract shall be in (insert name of currency). Such (insert name of currency), other than for local costs, shall be fully convertible. The percentage of such payments attributed to local costs shall be as stated in the Appendix to Tender.
Missing details in your particular conditions does not prevent your contractual and legal rights to claim payment of change of cost in foreign currency.
Also, the change of Cost (price adjustment) may be required for imported material, plant and equipment which involves foreign currency portion, therefore you need to demonstrate and justify your foreign currency requirement to claim it.
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QUESTION: Thank you for the explanation you gave me. May I clarrify some ambiguities in my question as your answer is given with assumptions not in our contract.
The price adjustment formula is
Pn = A + b (Fn/Fo) + c(Sn/So) + d(Cn/Co) + e(En/Eo), where
Fn/Fo is the current index/base index or reference price of Fuel
Sn/So is the current index/base index or reference price of steel reinforcement
Cn/Co is the current index/base index or reference price of Cement
En/Eo is the current index/base index or reference price of Equipment
The source of all indices is Ethiopia, except the index for Equipment. The source Equipment index is US DEPARTMENT OF LABOR, as expressed in the Appendix to Bid.
The appendix to Bid is silent about currency of inices and about exchange rate of currencies, except mentioning their source.
ALL PAYMENTS ARE AGREED TO BE PAID only IN LOCAL CURRENCY (Birr). The price adjustment formula has no explanatory note for adjusting the equipment index by the correction factor Zo/Zn, whcih is a conversion rate from Dollar to Birr that correspond to the time of issuing the current/base index from USA.
The question is about our request to adjust En/Eo by Zo/Zn as the payment is effected only through local currency while the source of equipment index is USA, which implies the currency of the equipment index is US Dollar. Hence computing the price adjustment without converting currency of the index to currency of payment will result in distorted result due to fluctuation of exchange rate in different times.
I, therefore, request your opinion whether demanding adjustment of the equipment index for fluctuation of exchange rate is acceptable despite the fact that the special conditions of the contract has no any explanatory note about the issue.
Your Particular Conditions of Contract is not very clear about escalation payment however it is specified that one of the indices indicated as a source of Foreign Currency. The Contract is not limiting the Contractor to get escalation on fixed exchange rate for foreign component. Therefore, you need to demonstrate price fluctuations and cost increase and if you can not get it through, then you need to decide to make it dispute or not.