Liquidated damages

Extension of Time
Termination of Contract
Dispute Settlement

Dinker Sharma
Baisakh 20, 2070

12/10/2017 1
Liquidated Damages
or
Delay Damages

2
 Liquidated Damages
Liquidated Damages are remedies available
to any contracting party to compensate for the
financial loss suffered as the result of a
proven breach of contract.
Liquidated Damage acts as a deterrent to the
contractor not to take the contract works
casually.
In Common Law Countries, it is known as
Liquidated damages in Civil Law Countries, it
is known as Contractual Penalties.

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Liquidated Damages conti
The third term General Law Damages also
exist which is the same as above but requires
to demonstrate the loss incurred upon breach.
Liquidated damages are agreed, determined
in advance, by the parties to the contract, and
included as a provision in the contract.
Normally for the contractor bonus may be
provided for early completion. Liquidated
damage is not intended to earn revenue for
the Employer.

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 Liquidated Damages conti
Liquidated Damages are set in advance with the
following legal principles
It is an amount of damage set out in the contract
It is a pre estimated, pre determined, agreed in
advance amount of damages for a particular
breach
The parties committing the breach shall be liable
to pay the other party a fixed or an ascertainable
sum. Parties agree in advance on an amount
payable
For each day/week or delay
For each percentage point by which the
performance requirements are not met
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Liquidated Damages conti
The party suffering from the breach only
has to prove that a breach occurred, no
proof of the loss is required.
The agreed amount of damages shall be
payable whether the loss actually
suffered is greater, smaller or even nil
It is the duty of the injured party to
mitigate his loss using all reasonable
efforts
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Liquidated Damages VS Penalties
Liquidated Damages are not enforceable by
Law if the sum recoverable is a penalty
The word penalty in the contract provision
should be avoided
In Construction contract the breach addressed
by Liquidated Damages is normally for late
delivery and should satisfy following Criteria:
Is the breach readily identifiable, for
example, late delivery or shortfall in
performance?
Is the method and criteria for determining
whether a breach has occurred capable of
being defined?
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 Liquidated Damages VS Penalties

Are the losses reasonably foreseeable and

can be quantified?
Is it possible to set up an effective
monitoring of performance and means of
claiming Liquidated Damages?
Is the performance of the contract by the
Contractor entirely within his control?
Is the amount recoverable as damages
significant enough to justify any margin in
the contract price?
The answers to all these should be yes.
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 Ceilings on Liquidated Damages

Contracts normally provide following ceilings

on Liquidated Damages
5 to 10 % for delay
5 to 10 % for not meeting performance
requirements
If the ceiling is reached and delivery or
completion is still not achieved the Entity may
terminate the contract.
Liquidated Damages are not applicable if:
Delay in giving possession of site.
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 Ceilings on Liquidated Damages
Interfering in carrying out works
Ordering extra items/ increase in scope of
works
Essential instruction
Example for imposition of Liquidated Damages
For work delays
Liquidated damage to be indicated in the
contract data
Generally 0.05% per day of the contract
value of each milestones.

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Extension of Time
EOT

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 Project Delays

Contracts have completion dates - Bonus and

Liquidated Damages are tied to completion date
Delay by the Employer can frustrate Liquidated
Damages clauses
Delay by the Contractor can result in Termination
of Contract
Also leads on to financial matters

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 Extension of Time
Time is essence of the contract
Obtain program from the contractor in the form
specified in the contract
Revise program from time to time. Assess and
compare program achieved against original program
Obtain monthly or biweekly program
To monitor the actual progress of the work
To check that escalation is not claimed for work
done later
To take actions and resolve issues in time
To assess the effect of variations on completion of
the Project. 13
Major causes that have Implication on Time

Variations that involve time and

additional cost
Design change
Scope of work is changed
Time lag between project preparation
and implementation
Unrealistic estimate
Incompetent contractors
Improper plant and equipment
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Major causes that have Implication on Time

Litigation
Slack in supervision
Slow decision making
Absence of fund flow
Delay in Land Acquisition
Local Law and problems
Delay in shifting of utilities

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Termination of Contract
 Termination of Contract
A contract can be brought to an end
When no further action is required
By breach
By mutual agreement
By frustration
The contract is said to be frustrated if an event occur
that Destroys the basis of the contract, which is not
the fault of either party. Both the parties are excused
from further performance and neither is liable to the
other in damages.
By convenience
Note: Termination is an extreme action and as far as
possible must be avoided unless otherwise.
Terminating by Contracting Parties

Termination by the Employer

On account of Contractors default
(breach)
-Employers Convenience
Termination by Contractor
On account of Employers default
(breach)
 Terminating by the Employer

Consider following prior to terminating the

contract
Upheld the interest of the Project foremost
All efforts and actions upon reasonable options
to salvage the situation should be exhausted
Think carefully of all associated legal,
commercial and other aspects to avoid
complication at later stages
Ensure that all specified procedures for
termination of the contract have been adhered
to ( eg. Serving the notice of Default) etc.
 Termination by the Employer on account of
Contractors default
Termination may be made under following circumstances
Poor Performance of the Contractor
For reasons attributable to the Contractor, despite
repeated reminders and warnings, if the contractor fails
to
-commence the work with due diligence
-perform the work within the specified time schedule
and quality parameters
The Contractor deserts the site without prior permission
The Contractor does not respond to communication
The Contractor becomes bankrupt or insolvent
The Contractor transfers the Contract or any rights
without prior consent of the Employer
Termination by the Employer on account of
Contractors default

Engagement in corrupt and fraudulent practices

Corrupt : Offering, giving, receiving or
soliciting of any thing of value to
influence the action of public officials
Fraudulent: Misrepresentation of the facts in
order to influence the execution of
contract, collusive practice
Termination by the Employer on
account of Convenience
The Employer may at any time terminate the
Contract for any reason by giving notice of
termination to the Contractor referring to the
appropriate clause under the Contract
 Termination Procedure
Engineers Responsibility
Engineer certifies to the Employer to take
action to terminate the contract on the
following reasons
Failed to commence the work
Failed to proceed with the works or any section
of works within 28 days after receiving the notice
for slow progress
Failed to rectify or remove materials not to the
specifications
Failed to comply with Engineers instructions
persistently
Has sublet the work without approval of
Engineer/ Employer
 Termination Procedure
Employers Responsibility
Employer to issue notice to the Contractor citing his
failure as notified by the Engineer.
After 14 days of issue of notice the Employer may
enter the site and the works and expel the
Contractor
Upon receipt of such termination, the Contractor
shall:
Cease all works
Terminate all subcontracts
Assign all rights, title and benefit of the works
executed
Deliver all drawings, specifications and other drawings
 Payment upon Termination

Engineer then shall fix, determine and certify

Amount earned by the contractor at the time of termination on the
actual work done
Value of unused or partially used materials if any
Contractors equipment
Temporary works if any
Employer shall arrange to pay such sums after deducting
Costs of execution of balance works
Remedying the defects if any
Liquidated Damages
Other expenses incurred by the Employer
If the amount due is less than the above amounts, the
contractor on demand shall pay to the Employer the
amount of such excess
 Termination by Contractor

Termination of the Contract may be

made under following circumstances
Employer has failed to pay the
Contractor any sum due under the
contract within specified period
The Contractor is unable to carry out
any of its obligations under the
Contract due to reason attributable to
the Employer
Termination by Contractor - Termination Procedure

The Contractor to give notice to the Employer

stating the reasons
If the Contractor is still unable to carry out any of
its obligations under the Contract then the
Contractor may terminate forthwith by giving a
notice of termination to the Employer referring to
the relevant clause of Contract
Upon termination the contractor shall cease all
works as under Termination Procedure
Payment Procedure shall be the same as during
Termination of Contract for Employers
convenience.
Disputes and Arbitration

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Projects without Disputes

Fantasy or Fact?

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 Major Players in Contract Implementation

Consultant Contractor

Employer

12/10/2017 29
Are Disputes good for Construction

In an engineering and construction

industry dispute gives impression
about:

Cost in time, money and lost

opportunities
Image & uncertainty
Behavior
Employment and Cash Flow
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 Cost in time

Waste of senior management time

Every executive should be forward
looking. In disputes backwards focused
(arguing about what has been done)
Often requires expensive advisers
Claim consultants
Lawyers
Image and Uncertainty

Conveys a bad impression to

customers
Financial outcome unknown;
often for some years after the
end of a contract
Difficult to plan for the next job
Senior personnel still committed
 Behaviour

Some clients regard contractor

bashing as a sport; even a right
Often said. Clients deserve the
contractors they get
Some contractors rely on a good
dispute to make up for an under-
priced contract
Employment and cash flow

Subcontractors go bankrupt
whilst waiting for dispute
settlement
Skilled people lost to the industry
Things go worse due to lack of
cash flow
Origin of Disputes

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 Compensation Events

1) Compensation event: cause to

increase or decrease the contract price.

2) Compensation occurs when there a

Breach of Contract

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Failure to comply is a breach of contract

Express Terms: Follow contractual

procedures if there is a breach of an express
term and claim contractual entitlements

Implied Terms: If there is a breach of an

implied term, there is a potential claim for
damages and party must act reasonably and in
accordance with general damage law
 CLAIMS
Cause Effect Relationship

ENTITLEMENT/ OBLIGATION
CAUSE

GIVES RISE TO ENTITLEMENT/ BREACH

EFFECT
[THE BURDEN OF PROOF] 38
 CLAIMS

Achieving a Common Understanding

lead to settlement
Achieving no Understanding
lead to: 39
Disputes

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The Processes available to resolve
disputes

Adjudication or Dispute
Resolution/
Arbitration /
Litigation
These processes are known as
ADR
Alternative Dispute Resolution
 Benefits

Fair
Quick
Cost Effective
Alternate Dispute Resolution Mechanism

Dispute settlement in the Court is time

consuming, formal and costly
A contract therefore has an Alternate
Dispute Resolution Mechanism (ADR)
It is a Third Party intervention
Amicable Settlement/ Mediation Adjudication
DRB ( Dispute Resolution Board )/ DRP
(Dispute Resolution Panel) Arbitration

Court 44
Dispute Settlement through Adjudication

Provision in the contract but starts after

dispute arises
More informal and flexible
Cheaper as expenditure starts only after
dispute
Time consuming as they have to know the
past details
Decision does not have legal backing
For Contracts less than Nrs 100 million
worth (PPA 2063)
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Dispute Settlement through Resolution Board (DRB)

Proactive
DRB is organized before construction starts.
They meet at the job site periodically
Members are provided with contract document
Familiar with project procedures, contracting
parties, progress, site conditions etc.
Help the parties to solve the problems before
they escalate into major disputes
Party can proceed to arbitration if decision is not
acceptable
DRB only recommend
For value exceeding NRs 100 million (PPA 2063)
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 Dispute Settlement through
Arbitration/ Litigation

More formal options for dispute resolution

expensive
Most forms of contract will have an arbitration
clause
Some contracts, however, may not have an
arbitration clause, or may in fact exclude
arbitration in favour of litigation. In either
case, the procedure would be litigation.
Decision has legal backing
Provisions in the PPA 2063/ PPR 2064
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Dispute Settlement through Arbitration
Arbitration preferred:
Because of its speed, quality, informality,
confidentiality and cost effectiveness
Types
Institutional and Ad-hoc
Domestic and International
Ingredients of arbitration
A written Agreement
Claims
Disputes
Provision of appeal
Reference to arbitration
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 Arbitration in procurement of Works
If after the period as stipulated in the contract the
parties have failed to resolve their disputes,
either party may give notice of its intention to
commence arbitration.
Purchaser may wish to consider UNCITRAL
rules/The rules of conciliation and arbitration of
ICC/Rules of the London court of International
arbitration/ ICE or NEPCA
In case of Contractor from Nepal dispute shall be
referred to (Adjudication or Arbitration) as per the
law of Nepal.
Indicate the place of arbitration in the Contract
Document.
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 Arbitration Act, 2005
Act. Incorporates basic principles of
UNCITRAL Model law.
Provides supremacy of the contracting
parties in the appointment of arbitrators,
applicable law, venue of arbitration,
language and procedure followed by the
arbitrators.
Provide time frame to reduce delay in court
procedures.
Arbitration is guided as per the conditions of
contract.
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 Arbitration Act, 2005
The no. of arbitrators, unless otherwise
stated in the contract, will be three.
Unless and otherwise stated in the contract
two arbitrators will be appointed by each
party and third will be appointed by both
appointed members, the third member will
work as the principal arbitrator.
If there is no provision regarding the
appointment of arbitrators in the contract or
failed to appoint arbitrator, either party may
apply to Appellate Court for the appointment
of the arbitrator.
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Arbitration Act, 2055
Arbitration Experience in Nepal
Proceedings conducted in the manner similar to
the procedure adopted in the courts.
Respondent normally tend to be passive.
Decisions normally tend to be awarded to
Contractors.
Documentation and presentation of statements of
claims and defense are weak.
Heavy representation by lawyers dominates the
proceedings and prolong the process.
Very few experienced arbitrators in the country.
Post award litigation through petition has been
common and is extremely time consuming
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Thank You

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