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The commentary of this article is limited to the FIDIC Red Book – The 1999 edition of the International Federation of Consulting Engineers’ Conditions of Contract for Construction for building and engineering works designed by the Employer.
In the realm of FIDIC contracts, both contractors and employers are vested with the right to lodge claims against each other. These claims can pertain to extensions of project timelines or financial compensations grounded in the contractual agreement. For employers, the procedural route for claim submission is outlined in Clause 2.5, while contractors must adhere to the directives of Clause 20.1 of the contract.
Under Clause 2.5, the Employer must notify the Contractor of any claims for payment or extension of the Defects Notification Period, providing detailed substantiation based on specific clauses. This excludes certain utility and material costs. The Engineer assesses these claims, determining any owed payment or extension, which can be deducted from the Contract Price in Payment Certificates. The Employer’s right to deductions or claims is confined to the terms of this provision.
Under Clause 20.1, a Contractor must notify the Engineer within 28 days of an event to claim an extension of time or additional payment. Failure to notify within this period results in the forfeiture of the claim and the Employer’s release from liability. The Contractor must provide detailed claims with supporting evidence within 42 days of recognizing the event. If the event has ongoing effects, interim and final claims are required. The Engineer must respond to claims within 42 days after receiving the claims. Non-compliance with these procedures can affect the validity and investigation of the claim.
In general, these clauses require that a claim be initiated through a formal notice that painstakingly specifies the nature of the grievance and its basis in the contractual conditions. When such a claim is received, the engineer directed by Clause 3.5, initiates a process targeted at fostering mutual agreement. When agreement cannot be reached, the engineer is responsible for making an unbiased decision on the topic. This decision is legally binding until either side contests it, which could result in legal actions.
In FIDIC contracts, the term “Engineer” refers to a key role that is primarily responsible for administering the construction contract. This role is often filled by a professional engineering consultant or a firm hired by the project owner (often referred to as the Employer in FIDIC contracts).
A focal point of contention in many FIDIC contract disputes, particularly those revolving around project timelines or financial settlements, hinges on the obligatory nature of the claims process. The key question here is whether parties are required to seek resolution through the contract’s specified claim processes before resorting to litigation. In this context, Vietnamese courts have demonstrated a variety of interpretations, showing a broad judicial perspective on this procedural requirement.
1. The perspective on the non-mandatory nature
In one prominent legal case, an employer launched arbitration procedures against a group of contractors for a building project governed by a contract based on the FIDIC Red Book 1999. The conflict centered on unpaid obligations that the investor alleged the contractors had failed to pay.
The arbitration, which was handled by a reputable arbitration center, ended in a verdict that mostly favored the employer, requiring the contractors to resolve the outstanding claims. The contractors, on the other hand, contested the ruling, claiming that it breached fundamental principles of contractual freedom and voluntary commitment. They claimed that the employer had not followed the contract’s specified claim processes, rendering their right to claim contractor violations null and void.
The matter was brought before Ho Chi Minh city court for review. In their assessment, the court found that the lack of a specific clause preventing the filing of claims meant that the right to highlight contractor violations was not inherently forfeited. Furthermore, there was no evidence to show that the employer’s entitlement to payment had been terminated. As a result, the court rejected the contractors’ claim that the arbitral tribunal violated basic contract law rules. This decision quietly indicates the court’s perspective on the non-mandatory nature of the claim procedure before proceeding to legal action.
2. The perspective on the mandatory nature
In a significant legal decision, the Supreme People’s Court reviewed a case involving a subcontracting agreement related to a major construction project. The subcontract, mirroring the FIDIC Subcontract provisions, was between a subcontractor and the principal contractor, with the project being developed by a third party.
Following completion of their contractual obligations and receipt of the acceptance certificate, the subcontractor claimed payment from the principal contractor in accordance with the terms of their agreement. They also tried to hold the project owner (the employer) liable for these payments if the principal contractor failed to perform.
The subcontractor initiated legal proceedings to enforce this payment obligation against both the main contractor and the employer. The subcontractor was awarded joint payment by the principal contractor and the employer after the first-instance court found in his favor. This verdict, however, was challenged.
Upon appellate review, it was highlighted that, according to the contract, direct payment from the employer to the subcontractor was contingent on a specific condition: confirmation from the engineer that the principal contractor had defaulted on payment obligations (excluding retention money). The Supreme People’s Court observed that there was no documented confirmation from the engineer regarding the main contractor’s failure to pay, leading to the conclusion that the subcontractor’s claim against the principal contractor and the engineer was unsubstantiated.
This cassation decision underscores the court’s position on the procedural necessity of involving the engineer in claim validation. It implies that for a claim to be recognized under the court, the parties are required to seek resolution through the contract’s specified claim processes before resorting to litigation
3. Key Takeaways
A review of numerous legal opinions issued by Vietnamese courts reveals a complex environment in interpreting claim procedures under FIDIC contracts. The discernible difference between the two above-mentioned courts’ rulings highlights the variety in judicial approaches. While the Supreme People’s Court highlights the need of routing requests through the engineer, the decision of the latter court implies that, while such a procedural step is available, it is not always required.
Given this judicial unpredictability, parties to FIDIC contracts in Vietnam are encouraged to strictly follow the stipulated claim processes. This alignment not only protects their interests but also aligns with the FIDIC standards.
For contractors, it is imperative to understand that under Clause 20.1, timely notification is crucial and acts as a prerequisite for the right to lodge a claim, particularly for requests related to time extensions or additional payments. Clause 20.3 further accentuates this, indicating that failure to comply with the notification timeframe effectively relinquishes the contractor’s right to lodge a claim.
Conversely, the employer’s claim process under Clause 2.5, though relatively more flexible due to the absence of a strict notification timeline, still necessitates adherence to established protocols. Employers are expected to submit a formal claim and await the engineer’s decision before asserting any contractual rights. This distinction, though subtle, is critical in ensuring that both parties navigate the claim processes effectively, mitigating the risk of unfavorable legal interpretations or outcomes.
