Construction Law/Contractor's claim
QUESTION: Dear Sir, I hope you are doing well. Thanks for the mentioning of the reasons for no reply initially. This is a resubmission of the same question, as advised by the expert in public statusI Question is: I would like to receive your advice on the issue of Contractors entitlement for the change in the value of local currency against the USD. The issue is that the Contract was awarded in May 2010 in Sudan and the country was separated into North and South Sudan in July 2011, leading to the division of the oil resources for both the countries, such that 75% oil reserves (located in the South Sudan area after separation) became the property of the South Sudan and 25% of the North Sudan. Such a separation and division of oil reserves (the main sources of income for the united Sudan) resulted into weakening the economy of North Sudan after separation and thus affecting the value of the local currency against the USD. Now in this case, as the payment of the Contractors certified amount is 79% in USD and 21% in local currency (SDG). The value of the executed works is calculated in USD and then proportioned @ 79% and 21% in USD & SDG respectively. The 21% USD proportion is converted into SDG at the contract conversion rate of the 1 USD=2.2406SDG as mentioned in the Contract in 2010. Now the current official conversion rate is almost 6 SDG = 1 USD. Such an official conversion rate was announced by the Governor of State Bank in June 2012, with the argument that such an action is taken so as to control the black market effect on hard currency (USD) and to strengthen the national economy of North Sudan in foreign reserves. Making this announcement of the Governor Of State Bank of Sudan as the basis of our entitlement, we submitted a claim notice under Sub-Clause 20.1 and 13.7 of GCC (FIDIC 1999 Red Book for the said contract) within 28 days and the claim cost for reimbursement (within 42 days), equal to the difference between the conversion rate (for each IPC) and the based date conversion rate of the SDG against USD.
e.g. the value of the executed works in a certain IPC = 5000 USD
then 21% of this amount to be paid in SDG (according to contract agreement) = 1050 USD
According to the Contract, if no change in exchange rate, we are supposed to receive = 1050*2.2406= 2352.63 SDG
Suppose, due to devaluation of the local currency, the exchange rate for that IPC is IUSD = 6 SDG (at the time when the IPC was certified),
Then our claim is = 1050 * (6-2.2406) = 3947.37 SDG (instead of 2352.63 SDG), to cover the devaluation.
My question is:
Should I claim it
i. under Sub-Clause 13.7, considering this announcement of the governor of the Central Bank of Sudan for the official confirmation of such a devaluation of local currency as equivalent to the legislation as required under Clause 13.7 of FIDIC 1999 Red Book and applying the claim notice and cost claim within the stipulated time of 28 days and 42 days respectively after that date (12th June 2012), ignoring the previous IPCs. Is the announcement of the Governor od Sudan Central Bank falls within the ambit of definition legislation under 17.3?.
ii. or under Sub-Clause 19.2 (ii) (Force Majeure) of FIDIC 1999 Red Book, as the separation was not under any parties control and it was a sort of revolution. But the stipulated time under this clause for notice is 14 days and at that time of separation the difference was not so significant and it was not sure that the local economy will become so weak after some time. In that case as required under Sub-Clause 19.2, the notice shall be given within 14 days, which at that time in July 2011 was impossible?
iii. Or under Sub-Clause 17.3 [Employers Risks] (b) [revolution], but the next Sub-Clause 17.4 [Consequences of Employers Risk] associates such an entitlement of the Contractor to the loss or damage of the works, goods or documents etc., whereas in our case there was no such resulting loss but some financial loss due to devaluation of local currency (complex situation) Still is this an appropriate Clause for the submission of notice and submission of cost claim?
We have submitted notice under Sub-clause 20.1 and cost claimed under 13.7 in June 2012, when we realized that significant change in devaluation of local currency against USD in June 2012 (one year after the separation, the separation was in July 2011) has financially affected the Contractor. This claim was neither pursued under sub-clause 17.3 (because it was not a direct loss of works and goods and documents) nor under Sub-clause 19.2 (because the 14 days requirement under this clause had already passed).
Please advise me as which one is the most relevant provision under FIDIC 1999 Red Book First Edition [Conditions of Contract for Construction] for such a situation to compensate the Contractor, where the economy depending on such oil reserves depletes due to separation and affecting the contractor local purchases for the project.
Please for understanding the situation, note that the Engineer has given his determination and rejected our claim, stating that the announcement of the governor of Central bank of Sudan is not a legislation (though I had provided the relevant Bank act, showing the status of such an announcement as the authority of the governor) and secondly stating that this is not the relevant clause from FIDI for claiming this entitlement.
Please note that my question is only to clear my concept. This claim has been waived by the Contractor through some mutual adjustments/compromises with the Employer and will not be raised again in this Contract.
Waiting for your valuable response, Regards
ANSWER: Dear Muhammad,
Inflation is usually covered by clause 13.8 and fluctuating exchange rates are rarely included in the formula. If no indices were included, then inflation is a contractor risk, so I do not think that you have a valid basis for a claim. Of course, if you need more local currency than that allowed in the Contract, you will benefit from the fluctuating exchange rate.
---------- FOLLOW-UP ----------
QUESTION: Sir, thanks a lot for your response, however I would like to elaborate my question a bit more, so as to clearly communicate to you, what I intend to know and understand.
I would like to mention that the total value of executed works in each IPC is bifurcated in 79% as foreign currency portion and 21% as local currency portion for payment to the Contractor. Your statement that Sub-Clause 13.8 of GCC covers inflation, however, in this contract, for that purpose of compensation to the Contractor under this clause, the FIDIC general formula has been changed in the Contract Memorandum of Understanding and only indices for four imported items, including cement, steel reinforcement, structure steel and steel plates for hydromechanical works are given to cover inflation and the amount of such price adjustment under Sub-Clause 13.8 is paid to the Contractor according to 79% in USD as Foreign Currency and 21% in SDG as Local Currency. As mentioned in the preceding question that the 21% LC is paid on the Contract exchange rate (1 USD=2.2406 SDG) and not on the current market or commercial exchange rate of USD to SDG both for the value of the executed works and for the inflation, therefore the Contractor cannot benefit from the fluctuating exchange rate as stated in your response. Inflation on Fuel (diesel) is paid only in local currency (SDG) as the actual difference between the base price and the current price of diesel. However there is no compensation for the manpower (local and expatriate), as provided for in the GCC formula. Also this change in the FIDIC formula gives an amount which is added to the value of the executed works (for this project) and does not provide a multiplier, applied to the value of the executed works for that specific period of any IPC.
The Contractor also understands that the Employer will never agree to a change in the Contract exchange rate of USD to SDG (1 USD=2.2406SDG at the time of signing the Contract), but actually the Contractor has to spent a lot due to inflation in the local market for the purchase of local services, rents, local manpower salaries (e.g. salaries of local workers have been raised by 100% during this contract period), transportation of goods/material etc. which is not covered for compensation in the Contract.
Therefore I would request you to advise me, if:
i. The Contractor has the entitlement for such a claim
ii. Which Clause of FIDIC 1999 Red Book shall be applicable
iii. Is this devaluation of the local currency due to separation of South Sudan falls under Sub-Clause 13.7 [Adjustment for Changes in Legislation], taking into account the announcement of the Governor of Sudan Central Bank or
iv. Sub-Clause 17.3 (b) [Employers Risk] or
v. 19.1 (a) [Force Majeure] and 19.2 and 19.4 of GCC.
Looking forward to your precious opinion. Regards
ANSWER: Dear Muhammad,
ii None, unless covered by clause 13.8
iii possibly 13.7, but not due to the announcement of the Governor of Sudan Central Bank. 17.3 (b) does not apply as there was no rebellion or revolution, merely a peaceful parting of the ways.
v. Force Majeure does not apply as neither party is prevented from performing their duties under the Contract.
The intention of clause 13.8 is to spread the risk of inflation, not to recompense the Contractor for the full effects of inflation, so it would not be expected to cover all items, merely the major ones. Exchange rate fluctuations are a Contractor's risk, unless covered by clause 13.8. In order to have a valid claim, you have to prove that you have unexpected expenses, which are not covered by your risks. I suggest that the original estimate of 21% for local currency would not have covered all your local costs. Thus you would have budgeted for converting some foreign currency to local currency. Are you converting as much foreign currency as you expected? I guess not. So you are ahead.
---------- FOLLOW-UP ----------
QUESTION: Thanks for your reply, I would like to follow up the issue for further seeking your advice, that what shall be the solution to such loss of the Contractor in case of an abnormal devaluation of local currency and its subsequent inflation effects on the Contractors purchasing power?. Does the Contractor have the option to argue for an amendment to the Contract exchange rate of USD to SDG (Contract payments are 79% in USD and 21% in local currency and the Contract exchange rate is IUSD= 2.2406 SDG). Is this a reasonable approach to cover the Contractors actual losses?.Also as inquired in your previous response, please note that the Contractor actually spends more local currecny than the converted 21% agreed portion of the IPC. Repeated again that the Particular Conditions of Contract has also changed the FIDIC general formula under Sub-Clause 13.8, exlcuding the coverage for lcoal and expartiate workers. Looking for to your guidance. Regards
There is very little case law concerning FIDIC Conditions of Contract. However, you could look at this link www.pinsentmasons.com/PDF/DirectIndirectLoss.pdf.
Inflation is a contractor risk unless there is something specific included in the Contract. Some times you are dealt a bad hand and you just have to bite the bullet and deal with it.