Claims and Counterclaims Preparation, Analysis, Assessment and Successful Settlement of Disputes II

Claims and Counterclaims Preparation, Analysis, Assessment and Successful

Settlement of Disputes

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Contract CloseOut


Overview of discussion

What is a contract closeout and its purpose?

When is a contract completed and contractor submit the NOC?

When is a contract ready for closeout? What are some specific issues that can

occur during a contract closeout? Contract closeout checklist


Purpose of Contract Closeouts

1. To verify that both parties fulfilled their contractual obligations.

2. To assess the success of the contract and lessons learned for future contracting.


What is a contract closeout?

It is usually a simple, but detailed administrative procedure agencies should perform after the contract is completed.


A Contract is completed When:

All goods and services have been received and accepted;

All reports have been delivered and accepted; All administrative actions have been accomplished; All agency-furnished equipment and material have

been returned; And final payment has been made to the contractor.


When is A contract ready for closeout? All services have been satisfactorily performed, and all products have been

delivered and accepted by the agency ;

Final payment has been made;

All property, inventory, and ownership issues are resolved including disposition of any equipment or licenses purchased under the contract;

Contractor is aware of and is in compliance with records retention requirements and a plan has been developed for contract file maintenance;

Any deficiencies found as part of the closeout process are documented and communicated to all appropriate parties


Performance and Payment Bonds A performance bond is a surety bond issued by

an insurance company or a bank to guarantee satisfactory completion of a project by a contractor.

A payment bond is a surety bond posted by a contractor to guarantee that his subcontractors and material suppliers on the project will be paid.


Payment withholding or Retainage Retainage is a portion of the agreed upon contract

price deliberately withheld until the work is substantially complete to assure that contractor or subcontractor will satisfy its obligations and complete a construction project.

This usually occurs in construction contracts where a 10% retainage is typically withheld and not due until the work is substantially complete.


Transition to new vendor Establishing a new contract creates a range of issues and potential

risks that need to be managed. Transition Plan

Executive Summary Transition Approach Team Organization Work Execution Subcontractors Property Knowledge Transfer Schedule Handover and Acceptance


Vendor performance tracking system Any deficiencies found as part of the closeout process are

documented and communicated to all appropriate parties Vendor Performance Tracking System

Exceptional performance Unethical business practices Repeated delivery and performance issues

Report vendor performance on purchases $25,000 or greater

The scope & accuracy of the data collected is dependent upon the participation of agencies.

Contract closeout checklist All products or services required were provided to the buyer. Documentation adequately shows receipt and formal acceptance of

all contract items. No claims or investigations are pending on this contract. Any buyer-furnished property or information was returned to the

buyer. All actions related to contract price revisions and changes are

concluded. All outstanding subcontracting issues are settled. If a partial or complete termination was involved, action is complete. Any required contract audit is now complete.


Change Orders may be processed for Approval after NOC Change Order Work must be performed prior to Substantial Completion Payment Applications for Change Orders processed after the

NOC has been filed will be paid 100% (no Retention withheld)

Undisputed Retention will be released with existence of a Punchlist Punchlist should contain corrective items, NOT unperformed

scope


Requirements for Substantial Completion

100% Completion of the “Work of Improvement” All Change Order work performed

Also includes*, but not limited to: Operation/Maintenance instructions Preliminary Warranties/Guarantees All manuals, spare parts and extra materials Final Cleanup/ Removal of tools, construction equipment ,etc. Owner Orientation/Training completed Testing & Inspection of all equipment and systems completed Continuous flushing of the building HVAC system for 14 days

following testing and inspection of equipment*See Contract Closeout Checklist


Contract Date ofSubstantial Completion

Substantial Completion date establishes the following: Establishes “Completion” of the “Work of Improvement” 60-day clock start to release Retention Contractor responsibility for site ends Starts OWNER

responsibility for the Project End Date for OWNER provided Builder’s Risk Start Date of District insurance Start of Warranty/Guarantee period End Date for Liquidated Damages


Occupancy (or Partial Use) vs. Substantial Completion

Substantial Completion NOT necessary to take Occupancy To achieve Occupancy (or Partial Use)

Contractor inspect areas to be occupied Record/document status of Completion (i.e. punchlist)


Case study



Definition of “Punchlist” Items

1. Items listed on Punchlist are MINOR

2. CORRECTIVE in nature, not unperformed scope

3. Punchlist Items are required to be resolved in the TIMEFRAME established in the Contract and Certificate of Substantial Completion (30 days)


Notice of Completion (NOC)

NOC must be filed within 10 days of Substantial Completion (California Civil Code section 3093)

Fax copy of Certificate of Substantial Completion to:Veronica VillavicencioFacilities Construction ContractsFax No: (213) 413-4853(w/ instructions to file the Notice of Completion)

FCC prepares Completion of Contract Memo for Director of Contracts signature; files NOC with the County

A copy of the NOC can be found online at www.laschools.org


What Does Notice of Completion “Trigger” ?

30 day Sub Contractor period to file Stop Notices

120 day period for Contractor to resolve outstanding Stop Notices

180 day period for Labor Claims resolution


Release of Retention

Release of Retention is initiated by the OAR using the Release of Retention Authorization Form plus required attachments: Copy of the NOC filed Conditional/Unconditional Waiver and Release

Form Punchlist (including $ values x 150%) All relevant Withholds/Releases


Release of Retention

If Contractor invoices for Retention, simply attach the Release of Retention Authorization form and submit both for processing

Retention is paid ONE time

Remaining monies retained are for specific obligations to withhold (i.e. stop notices, labor claims, etc.)


Releases remaining retainage on the Contract; except for specific obligations to withhold

Allows withholds for: Potentially Disputed items (after date of SC) Stop Notices Labor Compliance withholds Amount not yet invoiced for by the Contractor Pending Credit Change Orders

Release of Retention Authorization form


• Disputed items to be withheld from Retention release

Date:

To: Facilities Contract Invoice Unit (FCIU) Invoice Number:

Project/School Name: Project Number:

Contractor: Contract Number:

Substantial Completion Date:

$ 20,000.00 $ 5,000.00

$ - $ - All required agency permits & fees received/paid

Other (Please specify)

Indicate amounts to be withheld for Assessments listed below in accordance with the General Conditions of the Contract

25 days X $1,000.00 $ 25,000.00 Other Assessments

Owner training $ -

$ 25,000.00

Warranties and Guarantees Spare parts $ -

(A) Subtotal Disputed Items Withholds (to Line N) $ -

Required DSA verfiied reports $ -

$ 25,000.00

Waste, equip & temp facilities removed from site

(B) Subtotal Assessments Withheld (to Line N )

Big Contractor 021021

Test and Balance Reports $ - Operation/Maintenance Manuals

Indicate amounts to be withheld for disputed items listed below in accordance with the Public Contract Code Section 7107, including 150% of the value of the disputed items.

$ -

PURPOSE: To release undisputed retention after Substantial Completion in accordance with Section 7107 of the Public Contract Code. Form completed by the OAR no later than 30 days past Substantial Completion date.

Westside Learning Center

Corrective Items Record Drawings (As-Builts)

11/11/2005

RETN

11/14/2005

55.01234

Liquidated Damages:

$ -

RELEASE OF RETENTION AUTHORIZATION

Using the Form!


• First you calculate what is currently retained

(C) Contract Amount to Date (includes Approved Change Orders)

(D) Completed & Stored to Date (from last Application for Payment)

(E) Current Retention Amount Retained (contact FCIU for current Retention amount)

(F) Amount Previously Withheld (Stop Notices / Labor Claims / OAR)

(G) Current Total Amount Withheld (E + F)

99.00%49,500,000.00$ 50,000,000.00$

2,475,000.00$ 5.00%

Contract Financial Status

100,000.00$

2,575,000.00$ 5.15%

(H) Amount Previously Withheld (Stop Notices / Labor Claims / OAR)

(I) New Withholds Amount (Stop Notices / Labor Claims / OAR)

(J) Releases Since Last Payment (Stop Notices / Labor Claims / OAR)

(L) Pending Credit Change Orders(M) Amount Not Invoiced for by Contractor to Date (C - D) 1.00%(N) Disputed Items / Assessments Amount (A + B) 0.10%

(O) Amount to be Withheld (K + L + M + N)

(P) Amount to be Released (G - O)

635,000.00$ 1.27%

0.01%

80,000.00$

500,000.00$

50,000.00$

0.16%

3.88%1,940,000.00$

100,000.00$

Retention Release Calculator

(K) Current Amount of Obligations to Withhold (H + I - J)

5,000.00$

10,000.00$

30,000.00$

• Then release Retention while withholding for obligationsRevised and Expanded Owner Assessment Summary

Using the Form!


APPROVALS

FAX form to: Facilities Construction Contracts (FCC) at (213) 413-4010 for Escrow Releasescc: Regional Director/LDPM Attachments: Copies of Withholds/Release Notices

Inspection Section Copy of Notice of CompletionFacilities Construction Contracts (FCC) Copy of PunchlistContractor Conditional/Unconditional Waiver and Releases

{Insert Name} , Owner Authorized Representative (OAR) OAR Signature Date

{Insert Name} , Regional Director/RPMD Date

Date{Insert Name} , FCIU Supervisor FCIU Signature

Signature

Using the Form!


Withholds Released(After Release of Retention)

Utilize the Withhold Release Authorization form for all releases after Retention payment

Currently in use by FCS to release Stop Notice and Labor Compliance after NOC has been filed and Retention released

OAR should use the Withhold Release Authorization to release monies withheld for resolved Punchlist items and monies assessed


Punchlist Resolution by Alternate Contract Methods

Job Order Contracting (JOC) Defined unit prices for most common Punchlist items Contact Facilities Contracts Services

Informal Contracts (A&B) For Contracts under $15,000 Contact Facilities Contracts Services

M&O Work Orders Coordinate with M&O Contact Facilities Contracts Services


FIDIC


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What is FIDIC?• FIDIC stands for Fédération Internationale des Ingénieurs-

Conseils or International Federation of Consulting Engineers• Formed in 1913, now a global organisation with members from

70 plus countries and secretariat based in Switzerland• FIDIC Forms of Contract are widely used forms (i.e. model

contracts) for engineering, construction, provision of mechanical and electrical works in international projects

• FIDIC introduced the concept of Dispute Board into its Orange Book contract in 1995

• In November 1996 FIDIC introduced the procedure into Clause 67 of its Red Book

V. Introduction to FIDIC and its Dispute Resolution Provisions (1)


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• In 1999, FIDIC revised its Forms of Contract

• The four FIDIC Forms of Contract are:

− Conditions of Contract for Construction (New Red Book)

− Conditions of Contract for Plant and Design-Build (New Yellow Book)

− Conditions of Contract for EPC Turnkey Projects (Silver Book)

− Short Form of Contract (Green Book)

(Note that FIDIC will be launching its Design, Build and Operate (DBO) Contract (Gold Book) in mid 2008)

Note that these are just model contracts. The parties are expected to adapt them to their own projects


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• FIDIC Dispute Resolution provision is set out in Clause 20 of the New Red, New Yellow and Silver Books

• Approach used by FIDIC is the Dispute Adjudication Board (DAB) which issues a decision, as opposed to Dispute Review Board which issues a recommendation

• The FIDIC DAB provisions apply whenever a FIDIC contract is used unless parties delete the provision

• FIDIC DAB decisions are immediately binding and parties are obliged to comply with the decision pending other stages of the dispute resolution procedure, e.g. revised by amicable settlement or arbitral award

• New Red (Construction Contract) and New Yellow (Plant and Design-Build Contract) Books provide for Engineer to act as adjudicator and DAB. Silver Book (EPC Contract) has no Engineer, so disputes under Silver Book must be handled by DAB.


Professional Services AgreementsFIDIC publishes model agreements for professionals services:

- Client/Consultant- Joint Venture- Sub-Consultant- Representative


Works Contracts – Rainbow Collection

FIDIC publishes internationally recognized forms of contract for infrastructure works as well as for industry investments. Hard Copies, soft copies, e-book……

More than 40,000 copies supplied each year


Works Contracts – Red book spin-offs

Originating from the Construction-only (Red Book): • The 2010 Multi-Lateral

Bank (MDB) Harmonized Red Book (Pink Book);

• The 2011 Subcontract for Construction-only contract form.


Works Contracts – Silver book spin-offs

Originating from the 1999 EPC/Turnkey (Silver book)• The 2008 Design, Build

and Operate form (The Gold book).


FIDIC Contracts - Advantages

Essential clauses.Detailed definitions.Consistent structure.

Risk allocated to party best placed to control it, bear it, and deal with it.

Drafted by consulting engineers who design and manage projects.

Range covers most needs.Readily adaptable to fit requirements.

Positive FIDIC image.World-wide acceptanceTested for more than 50 years.

CLEAR, COHERENT

FAIR, EQUITABLE

THIRD PARTY

COMPLETE, FLEXIBLE

RECOGNISED


Procurement & Business Practice – Work in Progress

Contracts & Agreements in progress

• Design, Build and Operate 1st edition 2008 (Gold Book) form, additional updates, Retention Guarantees and ICC ref.;

• Client / Consultant 4th edition 2006 update;

• Joint Venture 1st edition 1992 update;

• Sub-Consultant 1st edition 1992 update;

• Short form (Green Book), Construction (Red Book), Plant and Design-Build (Yellow Book), EPC/Turnkey (Silver Book), 1st edition 1999 (Rainbow Suite) update;

• Dredging and Reclamations, 1st edition 2006 update;

• Sub-Contracts forms for Yellow and Silver Books, first release;

• Tunnelling Contract form, first release;

• Operate, Design and Build (ODB) Contract form, first release.


Range of the FIDIC Contracts FIDIC contracts are at the heart of infrastructure

projects all over the world. This is in part because of the range of FIDIC

standard forms available. ‘Red Book’ (Construction) Employer design Measurement Basis Engineer Even-handed Balance of Risk


‘MDB Red Book’ (Multilateral Development Banks Harmonised Edition) May 2005, revised March 2006 Standardised form where project MDB financed ‘Yellow Book’ (Plant and Design-Build) Contractor Design Lump Sum Price Engineer Even-handed Balance of Risk


‘Gold Book’ (Design-Build-Operate) Contractor Design/Operation Lump Sum Price Employer’s Representative Even-handed Balance of Risk

‘Silver Book’ (EPC/Turnkey) Contractor Design Lump Sum Price No Engineer Contractor Risk


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FIDIC Procedure for Contractor’s Claims

28 day Notice of Claim to Engineer

42 day “Fully Detailed Claim”to Engineer

“Final Claim” 28 days after end of effects

42 days after receipt of claim Engineer’s Response

Clause 3.5 Engineer to“Agree or Determine”

Clause 20.1Contractor’s Claims

Clause 3.5Determinations

28 day Notice of Claim to Employer

42 day “Fully Detailed Claim”to Employer

“Final Claim” 28 days after end of effects

42 days after receipt of claim Employer’s Response

Clause 3.5 Employer to“Agree or Determine”

Given effect unlessContractor’s Notice of Dissatisfaction

14 days of receipt

New Red/Yellow Books

Silver Book

Agreement/Determination given effect unless revised under Clause 20


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FIDIC Procedure for Contractor’s Claims

Reference to Dispute Adjudication Board (DAB) (1 or 3 people)

DAB Decision within 84 days of reference

“Amicable Settlement” stage

ICC Arbitration within 56 days after Notice of Dissatisfaction

Clause 20.2

Clause 20.4

Clause 20.5

Clause 20.6

No Notice of Dissatisfaction within 28 days of Decision

Notice of Dissatisfactionwithin 28 days after 84 days of reference

No DAB Decision within 84 days of reference

Notice of Dissatisfaction within 28 days of Decision

DAB Decision final and binding


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FIDIC Procedure for Employer’s Claims New Red/Yellow Books

Silver Book

Employer or Engineer gives notice and particulars to Contractor

Employer gives notice and particulars to Contractor

Clause 3.5 Engineer to “Agree or Determine”

Clause 3.5 Employer to “Agree or Determine”

Clause 2.5Employer’s Claims

Clause 3.5Determinations

Reference to Dispute Adjudication Board (DAB) (1 or 3 people)

“Amicable Settlement” stage

ICC Arbitration within 56 days after Notice of Dissatisfaction

Clause 20.5

Clause 20.6

Clauses 20.2 and 20.4 (See previous diagram for full Clause 20.4 procedure)

Agreement/Determination given effect unless revised

under Clause 20

Given effect unlessContractor’s Notice of Dissatisfaction

14 days of receipt


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• Procedural Rules for DAB are set out in Annex to Dispute Adjudication Agreement

• DAB shall visit site at intervals of not more than 140 days but not less than 70 days at request of either Employer or Contractor

• DAB to use site visits to become and remain acquainted with progress of the Works and actual/potential problems or claims

• DAB to produce a report after each site visit• DAB may conduct hearings and request exchange of

statements• DAB can adopt an inquisitorial procedure and refuse admission

to hearings or grant audience to any persons other than parties’ representatives

• DAB can open up, review and revise any certificate, decision, determination, instruction, opinion or valuation of the Engineer


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A Typical ICC Arbitration Procedure

Application forInterimRelief

Request forArbitration

Answer to Requestand Filing of

Counterclaims

HearingsPost-HearingSubmissions

Exchange of Written

Submissions

Constitution ofArbitral Tribunal

Terms of Referenceand Procedural

Timetable

Limited Discovery(Exchange ofDocuments)

Final Award & Costs Typical duration: 15-24 months

VI. Conduct of a Typical International Arbitration (1)


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Four phases of the typical international arbitration• Introductory phase: exchange of outline initial

submissions and constitution of tribunal.• Written phase: exchange of longer written pleadings and

evidence.• Hearing phase: witness hearings and hearings of

argument.• Award phase: arbitrators deliberate and draft their

award.



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General remarks about international arbitration procedure

• Often an international hybrid of common and civil law procedures.

• Examples: IBA guidelines on evidence and conflicts.• More informal than courts (no wigs, advocates usually sit)…• … but equally adversarial.• Often fascinating and difficult cultural clashes (e.g. document

production, preparation of witnesses…).



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International arbitration personnel• Worldwide arbitration community/mafia. Centred in

Europe, especially France, Switzerland and the UK. Paris probably still the headquarters of international arbitration (seat of the ICC). But now a growing pool of international arbitrators from Asia and based in Asia.

• Increasingly two groups: arbitrators (older, academics, barristers, and in boutique firms) and counsel (younger, in larger firms). The former often graduate from the latter. Some overlap between the two groups.

• Case for specialisation: arbitration procedures and personnel increasingly distinct from those of local courts. What you know and who you know are both important.



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• If the owner in an international construction project is a sovereign state instead of a private company, a contractor with a claim may be able to start investment treaty arbitration instead of following contractual dispute resolution procedures

• Or if state interferes with a contractor’s project with a private owner, contractor may still have a claim against the state under an investment treaty

• Typical claims under investment treaties are based on interference by the state in the project, including by action of the legislature, the courts, local government, tax authorities etc

• Investment treaty arbitration can be better than “normal” arbitration as it gives access to neutral, offshore proceedings, and international law remedies that may not be available under contract or in the courts

• Can be very powerful, especially as China has concluded over 100 BITs, with new (and effective) second generation treaties now replacing first generation (less effective) treaties

VII. Investment Treaty Arbitration and Construction Disputes (1)

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• An investment treaty is an agreement concluded by two or more states to promote and protect investment by investors of those states in the territory of other states party to the treaty. Example:

State XInvestment

TreatyChina

Chinese Investor State X

Investment

Protection

and

Promotion

State X

Investor

Investment

Protection

and

Promotion

China



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• BITs cover investments by an investor of one country in the territory of the other country

• “ Investor of a Contracting State” is usually defined to include:

− Individuals who are nationals of the State; and

− Companies organised under the laws of the State• Indirectly controlled investments are often covered• “Investment” is usually broadly defined to include any kind of

asset, which can include any claim to money or to performance under contract

• So definition of covered investment is very wide, far beyond traditional conception



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• Question – are construction projects considered an “investment” in the context of investment treaty arbitration?

• See Salini v Morocco (2001) – two Italian contractors filed for ICSID arbitration against Morocco over a dispute arising under a contract for construction of a highway. The contract provided for resolution of disputes in domestic courts. Claimants alleged that Morocco’s failure to pay was a violation of the “fair and equitable treatment and protection against indirect expropriation” in the Morocco-Italy BIT. Morocco raised jurisdictional objection that dispute was not in relation to investment under Art. 25(1) of ICSID Convention and Art 1 of the Morocco-Italy BIT.

• Held: Contract for construction of a highway was an investment under both treaties. Tribunal upheld jurisdiction over the investors' claims.


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• See also R.F.C.C. v Morocco, Bayindir v Pakistan (both highway construction projects), Impregilo v Pakistan (construction of a dam) and Saipem v Bangladesh (pipeline construction project)

• In all cases, the construction projects were held to be investments covered by investment treaty in question and the ICSID Convention. The contractors could therefore all proceed with their claims in neutral, offshore international arbitration regardless of the dispute resolution provision in their contract

• So, if you have a dispute with a state or state agency, think about investment treaty arbitration even if you have an arbitration or litigation clause in your contract, or even if you have no contract



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• Consider interim dispute resolution mechanism, as can be advantageous to contractors

• Final mechanism should be arbitration in most cases

• Resist temptation to overdraft, keep dispute resolution provisions simple: use model institutional clauses or standard form contracts (easily available online) as the basis

• Caution with carve-out clauses, e.g. sending some disputes to court/expert and the rest to arbitration

VIII. Advice on Drafting International Construction Dispute Resolution Provisions (1)


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• Resist temptation to limit pool of arbitrators, e.g. by requiring arbitrator to have esoteric experience

• Don’t forget the governing law clause; and if you are using a standard form contract, choose governing law that is compatible with the contract

• Consider consolidation/joinder for supplier/subcontractor contracts

• If consolidation/joinder impossible, try to get the dispute resolution clauses as similar as possible, e.g. same arbitration rules, governing law provisions


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• Ideally, make sure that dispute resolution clauses in performance bonds are identical with main contract dispute resolution provisions

• No language stating that contractor must wait until after completion before commencing final dispute resolution proceedings

• Ask for courts or (more realistically) arbitration in your home jurisdiction as a starting point

• Agree to an arbitration friendly place of arbitration if home jurisdiction not available, e.g. Hong Kong, Singapore, London, Paris

• If in doubt, seek specialist advice

• Keep enforcement considerations in mind, e.g. location of other party’s assets


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• For China-related arbitration, consider:

− That PRC Arbitration Law is currently interpreted by many as not permitting in China either ad hoc arbitration or arbitration administered by institutions based outside China

− Specifying that arbitration administered by selected institution, rather than merely referring to selected arbitration rules

− Providing for appointment of arbitrators other than those on the institution’s panel

− Providing that sole/presiding arbitrator not being the same nationality as the parties

− Avoiding two languages (e.g. English and Chinese) as the languages of the arbitration: keep it to only one language


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• Before a dispute arises:

− Establish sound, dedicated policies and procedures for correspondence, other documentation and claims handling

− Keep supporting documents and contemporaneous evidence well, e.g. diaries, photographs, maps, drawings (preferably electronically)

− Maintain a set of programmes which are regularly updated throughout the course of the project so that the delay experts will be able to prepare their report in the event of a delay claim

IX. Advice on Preparing for and Conducting International Construction Disputes (1)


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• When a dispute arises:

− Keep a close eye on notice provisions and other conditions precedent to claims in your contract, and time limitations for bringing claims and defences

− Gather facts and seek legal and expert advice early

− Take care in what you write and don’t write to the opposing party (do protest, don’t make unintended concessions)

− Evaluate chances of success early, and act upon that evaluation

− Carefully explore all settlement options, especially ADR (e.g. mediation)

− Look at exposure of performance bonds


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• During arbitration or litigation:

− Set up dedicated internal team to maximise efficiency and minimise disruption to project

− Work with specialist external lawyers, arbitrators and experts,

− Work together with your external team, don’t just let them get on with it

− Prepare and monitor realistic litigation budgets

− Get management commitment to ensure cooperation of project participants

− Always keep settlement and ADR possibilities in mind


The End
