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CLAIMS AND COUNTERCLAIMS MANAGEMENT

OCTOBER 2009

Euromatech - Claims and Counterclaims Management

CLAIMS AND COUNTERCLAIMS MANAGEMENT


October 2009 - Muscat

Peter Foreman Senior Consultant

Euromatech - Claims and Counterclaims Management

Seminar outline

While the object of international contracting is to write and manage contracts so as to minimize disputes, some disagreements are inevitable. These can arise from failures by one of the parties, but also often arise from misunderstandings as to obligations under the contract. This programme will look at how claims (and counter claims) arise; how they should be evaluated when received, or prepared when being delivered, and how to resolve disputes arising from such claims. It will also, and most importantly, look at ways of avoiding disputed claims in the first place. Once a dispute starts, it can usually be solved most effectively by negotiation between the parties. However, if this does not prove effective, some sort of third party intervention is required. Traditionally, this has tended to focus on either involving state courts (litigation) or the equivalent private method of getting a third party to make a decision (arbitration). However, there are now many more techniques available in the international market, including expert determination, mini-arbitration, pendulum arbitration, adjudication, and other techniques whereby a third party decides the matter for the parties. In addition, there are also mediation, conciliation, hybrid solutions such as Arb/Med, where a third party facilitates the settlement by the parties themselves, rather than imposing a decision. Many of these techniques rely on looking at the parties interests, rather than their strict legal rights. All of these processes, and indeed, claims and counterclaims generally, become more complicated when placed in an international context. This is particularly the case where a foreign law and/or legal system is involved, with which you may not be familiar, and which may include rules which conflict with those of your own country. The programme will deal with commercial disputes arising from Contracts written in the English language, but will use techniques which have wide application to the resolution of disputes.
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Main Seminar Contents


DAY ONE How claims and counterclaims arise

DAY TWO
Types of claims and counterclaims DAY THREE Presenting and evaluation claims and counterclaims DAY FOUR Dispute resolution DAY FIVE

Dispute resolution Ethical concerns, avoidance and role-plays

Euromatech - Claims and Counterclaims Management

Course objectives

Provide an understanding of how and why claims and counterclaims arise Explain the differences between claims and counterclaims Identify common causes of claims and disputes, and how to avoid them Discuss how to develop procedures to avoid disputes over claims and counterclaims, while resisting unjustified claims Enhance understanding of basic negotiation techniques to be used when resolving disputes Provide an understanding of some of the main methods of dispute resolution involving third parties Develop an understanding of Traditional and Alternative Dispute Resolution techniques, including different ways of resolving disputes without recourse to courts or arbitration Provide strategies and tactics for negotiating during disputes Explain how to use contract provisions to reduce the risk of claims and disputes

Euromatech - Claims and Counterclaims Management

Course outline and slide index


DAY 1 - How Claims and DAY 2 - Types of Claims and

Counter Claims arise

Counter claims

Causes of typical claims 14


Poor drafting of requirements 16 Lack of clarity in Scope of Work/Services 17 Misunderstanding of legal or technical obligations 27 Deliberate misunderstanding 33

Counter claims - how they differ from claims

Rights of set-off 36

Overview of main contractual provisions relevant to claims and counter claims


Obligation to perform work 41 Standards 45 Programme 51

Acceleration 55

Variations 56 Extension of time 73 Force majeure 75

Types of claims, in construction and other areas - and their distinctive features 81 Re-measure disputes 82 Variations - disputes on valuation 85 Variations - disputes as to whether there is change 89 Breaches of contract 92 Quality of workmanship 96 Re-work 99 Rejection of goods Full rejection 102 Partial rejection 105 Liquidated damages and penalties 107 Warranty claims 112 Special issues with EPC/Turnkey contracts 115 Interface problems - are these always the Contractors responsibility? 116 Tracking change where client involvement is limited 120 Special issues with documentation in EPC and turnkey contracts 122
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Course outline continued


DAY 3 - Presenting and DAY 4 - Dispute Resolution

Evaluating Claims and Counter claims

Requirements for claim presentation 124 Notices 125 Timing, and time limits 130

Are time limits binding? 133

Format 136 Information 146 Supporting documents 147 Defining features of claims evaluation and management 148 Recognising the causes of claims 149 Warning signs of disputes 150 Recording claims 151 Reviewing claims 152

Requesting further information 178 Realistic appraisal 179 When to make admissions - and denials Offers of settlement 184 Independent review 188

Cumulative effects 190 Managing claims quickly and effectively to avoid disputes 193 Managing claims and disputes

Involving lawyers 196 Managing the legal process 197 Setting goals 198 Decision trees 201 Controlling costs - and including them in your thinking 203

What is a dispute? 205 Introduction to dispute resolution methods and techniques 207 Stage negotiation 212 Measures of success - win-win negotiation 235 Negotiating without prejudice 239 Making offers 240 Compromise 241 Bargaining 242 Interest-based negotiations 247 Conflict and its resolution 253 Traditional dispute resolution 257 Litigation 259 Arbitration 267 Issues with evidence and production of documents 272 Differences between alternative dispute resolution methods 274

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Course outline continued


DAY 5

Final wrap-up and questions

Ethical concerns 286 Audit trails 288 Avoiding the suspicion of unethical behaviour 289 Problems with settlements based on interests, not rights 290 Applying the same anti-corruption systems to claims as to tendering 291 Avoidance is better than resolution Avoiding claims and counter claims 292 Avoiding disputes 293 Avoiding litigation and arbitration294 Practical application of techniques Opportunities to role play a few straightforward negotiation scenarios involving typical contractual claims, counter claims and disputes 295

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Opening
Health & Safety

Ground rules
Timings Introductions

Euromatech - Claims and Counterclaims Management

Presenter

Peter Foreman

Law Degree, Kings College, London 1972 Admitted as an English Solicitor 1975 (currently non-practising) Lawyer in private practice in London 1972-82 Administration Director of small electronics, property and construction group 1982 3 Legal & Commercial Director, Trafalgar House Offshore & Structural, later Kvaerner Oil & Gas 1983 99 (Executive Vice President 1998 9) Chief Executive of consultancy company 1999 date. Operating in the Middle East as a Senior Consultant with Euromatech Accredited commercial mediator, Member of Chartered Institute of Arbitrators, Supporting Member of the London Maritime Arbitrators Association Member of The Energy Institute, Member of The Law Society, England & Wales, Fellow of the Council on Litigation Management Wide experience as lawyer, project manager and project director in major oil & gas and other engineering and construction projects around the world, including in the Middle East. Former Director of company owning Cleveland Bridge fabrication yard in Jebel Ali. Recently completed work on the largest naval shipbuilding project in Europe Vice Chairman Link Group (major social housing provider), Chairman of East Lothian Education Trust and member of East Lothian Learning Partnership

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10

Memory Recall
%
100

75

50

25

time
1 day 1 week 1 month
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Hand, Eye & Brain Feedback Loop

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What constitutes a claim?


Exercise

What do you think is a claim in a contractual context?

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What causes claims? Major Contributory factors


Poor drafting of requirements

Lack of clarity in Scope of Work/Services


Misunderstanding of legal or technical

obligations

By client By contractor

Deliberate misunderstanding

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What causes claims? Major Contributory factors


Poor drafting of requirements

Lack of clarity in Scope of Work/Services


Misunderstanding of legal or technical

obligations

By client By contractor

Deliberate misunderstanding

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Poor drafting of requirements


This is the stage before we get to Scope of

Work or similar documents Here you are deciding what it is that you actually want from the project if this set of requirements is too vague, or unrealistic, it may lead to conflict later There is no great legal and contractual issue here you just need to be as precise as possible
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What causes claims? Major Contributory factors


Poor drafting of requirements

Lack of clarity in Scope of Work/Services


Misunderstanding of legal or technical

obligations

By client By contractor

Deliberate misunderstanding

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Lack of clarity in scope of work/services


Even where the Requirements are clear, the

detailed Scope document can cause problems What is it you want? How much do you want? When? To what Standard?

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Example of problems with scope of work


The Contractor is to

construct a ditch one metre from the castle wall, to a depth of two metres, running the entire circumference of the castle

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Exercise
List the items you would want to see in a

Scope of Work for supply of new desktop computers for your offices

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Exercise
Do the same for the supply of consultancy

services to provide a report on your companys training needs, and recommendations for action

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Exercise wording commercial issues


A contract stated that a landowner of a development site would receive

an Additional Residential Payment of 23.4% of the price achieved for each Residential Unit in excess of the Minimum Guaranteed Residential Unit Value, less the costs and Incentives Assume the Minimum Guaranteed Residential Unit Value is 100, and the sale price after deductions is 300 Does this mean the landowner gets 46.8 (23.4% of the difference), or 146.8 (the Minimum Value + 23.4% of the excess), or Nil (the amount by which 23.4% of the price exceeds the Minimum) 100 (as the previous version, but with the Minimum being payable) This is a real case (Chartbrook v- Persimmon) which went to the highest court in the UK in 2009. The amount in dispute was around $5m

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Standards
The contract should

specify the standard to which the work should be performed Remember, the higher the standard, the higher the price so specify what you really need

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Possible standards
Highest possible standards

In accordance with generally accepted

standards All new In accordance with [name of industry] best practice To the satisfaction of the Client To the reasonable satisfaction of the Client
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Exercise
If the contract is silent as to the standard to

which the work is to be performed, what standard applies? If you cannot agree what a standard means, who decides?

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Case study - handrails


One oil company

required full material traceability on all steel used in an offshore platform This included tertiary steel (handrails, gratings etc) This meant that they could trace any handrail back to the individual ingot of steel from which it was made
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What causes claims? Major Contributory factors


Poor drafting of requirements

Lack of clarity in Scope of Work/Services


Misunderstanding of legal or technical

obligations

By client By contractor

Deliberate misunderstanding

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Misunderstanding of obligations
Even where the Scope of Work is reasonably

clear, there may still be genuine misunderstandings These can be by either party (or, sometimes, both!!) They can relate to technical or legal/contractual issues

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Understanding your obligations


Make sure you have read the contract carefully, particularly the

obligations imposed on the Client These may be fairly limited in number, but will include important matters such as:

Access to site Provision of drawings Provision of free issue material or equipment Provision of facilities or support Approval of drawings etc Payment

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Understanding the obligations of the other party


Do not assume that they always have to do this. Their

obligations are those set out in the contract Be cautious about concepts like design development Their obligations may be dependent on you performing your obligations What is there are breaches by both parties at the same time? The Contractor may consider something to be a variation, which you consider to be original scope

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Mistake
Keenan v- Barclays Bank (2009) Ms Keenan worked part-time for Woolwich Building Society,

earning 9,520 a year. Woolwich was taken over by Barclays, who said they would review salaries and that there would be a significant increase Ms Keenan received a letter saying her salary would be 17,000 a year Two years later, Barclays realised that this was the rate for a full-time employee, and it should have been less than half that stated They tried to claw back the overpayment

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Case Study - Broadgate


Error in tender specification Not spotted by bidder Stair hangers loadings too

high by x10 Client refused to trade concession Contractor would have traded some claims as a result of the Clients refusal to negotiate, everyone lost

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What causes claims? Major Contributory factors


Poor drafting of requirements

Lack of clarity in Scope of Work/Services


Misunderstanding of legal or technical

obligations

By client By contractor

Deliberate misunderstanding

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Deliberate misunderstanding
This is where someone

knows exactly what you want, but pretends to misunderstand and then claim extra money for doing what was always intended in the first place

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Counterclaims
These are claims raised to counter a claim

from the other party In principle, they are the same as a claim, but the real issue is whether they have to be looked at as a separate claim, or set off against the other claim, so that only any net sum remaining falls to be paid

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Set Off
Sometimes called contra

This allows the party raising the counterclaim

to reduce his liability under the original claim by the amount of the counterclaim This is very important where one of the parties is insolvent, or may become so before the claims are resolved

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Bankruptcy issues
Where bankruptcy or similar

laws apply, the company in bankruptcy pursues all claims it is owed However, it only pays out what money it has, divided equally (with some exceptions) among its creditors It set off does not apply, the solvent party may have to pay 100% of the claim against it, but recover only a fraction of their claim
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Set off contract provisions


While the general law allows 1. This will always include set

set off in most countries, it makes sense to include a specific clause in the contract authorising this approach

off within the contract 2. It can also cover set off between different contracts between the same parties 3. In rare cases, it may include set off between different contracts between different parties but this is not recommended, not least because it is very complicated!

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Set off separate contracts


Inveresk v- Tullis Russell (2009)

This is a dispute between two Scottish paper makers.

TR refused to pay under an asset transfer agreement because Inveresk were said to owe them money under a Service Agreement The Scottish courts refused to allow this, saying that, by dividing the contract into two distinct documents, there was a presumption of no right of set off

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Pay first - argue later


Petroplus Marketing v- Shell Trading International (2009) Petroplus sold 29 30,000 MT of high sulphur fuel oil and 1

2,000 MT of light cycle oil to Shell FOB Coryton (UK) Price to be at published market rates, and payment to be without deduction, counterclaim or set off The shipment was made late, as a result of which the price had risen. Shell said they would pay at the market price when shipment should have been made Petrolplus obtained summary judgment for their claim, on the basis that Shells deduction amounted to a counterclaim, and the contract said that such a deduction could not be made

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Obligation to perform
While fairly obvious, the contract must set

out, in reasonable detail, what goods, services, etc are to be provided And when And where And to what quality

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Acceptance
Third party certification

Documentation
Evidence of acceptance Right to reject

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Risk
When does the risk

of damage to the goods pass to the client? Link with Title (Ownership)

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Title
Ownership, not

possession Link with Risk Retention of Title clauses (Romalpa)

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Standards
We have already looked at the need to specify

standards, but how might this be handled contractually?


International standards (e.g. ISO, API, EN) National standards (e.g. BS) Company standards Bespoke standards written for the project in question

Where the standards are non-technical (e.g. some

consultancy or other service contracts) a general statement linked to what is accepted in the business area concerned may be the only practical solution
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Standards cryogenic valves


Large bore cryogencic

valves for the Dabhol LNG plant in India To be built to a particular British Standard (an establishe dinternational standard in this area) This specified the length of the actuator column -- but did not say whether you measured from the valve body or the top of the insulation..
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Fit for Purpose


This phrase appears in many contracts

around the world, although it actually comes form the English Sale of Goods Act 1896 (no longer in force) It is a fall back solution that a product must actually do what it says it will do This comes into two main types:

Fit for the purpose specified Fit for the usual purpose to which such goods are put
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Intended purpose
What if the supplier does not know the

purpose? What if the purpose is a trade or state secret?

Black box solutions

Consider restricting to supply in accordance

with the specified purpose

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Fitness for purpose


Jewson Ltd v- Kelly (2003)
Mr Kelly was developing 12 apartments, and purchased central

heating boilers from Jewson (a well-known builders merchant) The boilers worked perfectly well, but were not efficient, and reduced the energy ratings of the apartments, making them less attractive in the marketplace The court held that they were fit for purpose (heating the apartments), and Mr Kelly had never advised Jewson of any special requirement that meant they had to meet a higher standard

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Fitness for purpose exercise


A Ukrainian company issued

a tender for a large quantity of carbon steel pipework for a chemical plant. The pipework was to be fit for purpose. When questioned, the client refused to specify the purpose, stating that this was a State Secret The plant was producing an acidic product, and the pipework should have been stainless steel When the pipework started to leak who was responsible?
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Programme
The contract should provide

An end date A start date (not always quite as important) Intermediate milestone dates (on more complex projects In addition, there may be a requirement to develop a detailed programme showing how the Contractor is going to get from one date to the next

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Levels of planning
The programme can be developed to a specific level

of detail The common terminology is Level 1 up to 5, with the higher numbers having greater detail Remember that detail costs money, and if the plan is too detailed, it may prove virtually impossible to manage. In addition, you should select the system to be used, ensuring that, wherever possible, it is compatible with the systems of both the client and the contractor, and also any professional consultants or managers involved
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Exercise
What level of planning does your company

use? How often do you update programmes? What do you do when the job is moving against the plan?

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Recovery clauses
When a contractor falls behind, the contract should require them

to recover at their own costs It should also allow the Client to specifically instruct such recovery. BUT - if such instructions are given when the Contractor is not in default, then the Client will have to pay the costs incurred The Client can also give acceleration instructions when the Contractor is not in default, but this is, effectively, a variation, to which we shall return

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Acceleration

If the cause of any delay is the responsibility of the Contractor, there is a duty to spend money to pull this back

The contract will also usually provide that the Client can order this

If not, if the Contractor is ordered to accelerate, or decides to take reasonable steps to do so, he is entitled to payment

Again, the Client can order this, but then it will be a variation

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Variation clauses
While changes to the

contract generally require the consent of both parties, Variations clauses allow the Client to make changes within the scope of the clause, and the signature of the contract by the Contractor amounts to consent
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What if the contract is silent?


Case study IT systems A company agreed to supply an IT system, with associated

training. A single price was quoted for the whole package. During the course of the contract, the parties fell out, and the buyer told the supplier he no longer wanted the training element. He deducted a sum from the invoice which he considered reflected the training The supplier said they were still prepared to do the training, and sued for the whole amount The contract had no variations clause The supplier won the court held that, in the absence of a Variations clause, the client had no right to amend a contract without the consent of the other party

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Variations and claims


The basis of payment for Changes/Amendments to

variations will usually be established in the contract


That for claims arises from

the law of damages of the country concerned.

the actual contract usually require consent, but may also give rise to a claim for extra money/time. This would normally be seen as a variation, but should be addressed at the same time as the Change itself

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Distinguishing variations and claims


VARIATIONS Change to the scope of work Change to the timing or CLAIMS Arise from a failure by the

order of the work Change to the way the work is performed


Contractual right, no consent

Client Or an outside event

Right arises from the general

is usually required

law, and consent is irrelevant

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What is a Variation?
Change in the Scope,

or Change in the way the Scope is to be performed

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How do Variations occur?


Formal notice

suggestion
Verbal instruction Amended drawing

Late delivery of free-

issue item Late access to site

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Types of change
Scope increase or decrease

Change in type or quality of scope


Change in timing Change in order of work Change in method of working

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Exercise LNG trains

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Causes of Change
Error in definition of

product or service Error in definition of project Value-adding change External event Change of mind

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Understanding consequences

A developer was building a tower block in New York The architect decided to add a doughnut (torus) shaped mall at the base The developer was delighted, as it increased rents The steel fabricator had already started to erect the structural steel The required removal and replacement, and building a massive cantilever The price rocketed, and the developer lost the extra rent in building costs

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Identifying and controlling change


Recognise that change may

not arise through the correct formal route


Changed drawing Late materials Etc

Influence factors which

create change Determine when change has occurred

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Challenging change
Be prepared to ask why change is needed What has happened since the original decision to require

something different? Is someone just re-opening an argument lost during the original scope preparation? Is this preferential engineering? Even if there has been a change, can you live with the original concept? UNCONTROLLED CHANGE IS ALMOST CERTAINLY THE BIGGEST CAUSE OF PROJECT FAILURE

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Case Study A tale of two projects

SCOTTISH PARLIAMENT BUILDING Original estimate 34m (c$65m) Contract award 65m (c$120m)

Final out-turn 430m (>c$800m) over two years late Public enquiry revealed almost total lack of change control, or any realisation by the Client of the impact of change on cost and delay

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Case Study A tale of two projects


PLAYFAIR PROJECT

EXTENSION TO SCOTTISH NATIONAL ART GALLERY


About a mile from the

Parliament Built at the same time Client did not interfere Only two significant changes (both caused by external factors) On time On budget

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Delay and extension


Clients fault Extension Costs Contractors fault Acceleration Neither! Force majeure

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Link with planning


When a delay occurs, it does not necessarily

mean that the party who suffers the delay is entitled to an extension of time for the same period as the delay The issue is whether the delay was on the critical path on the plan

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Critical path
This technique was

originally used by the US Navy for the construction of the George Washington class of missile submarines It was essential to ensure that all of a complex mix of projects came together at the same time
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Extensions of time
In what circumstances might a contractor be

entitled to an extension of time that is longer than the actual period of delay complained about?

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A point to remember

TIME =

MONEY

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Force Majeure
Outside the control of the

parties and Unanticipated and Prevents performance No formal definition in many countries Suspends obligations possibly with an ultimate right to terminate Extends time Stand-by costs may be paid in some circumstances
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Force Majeure - examples


War

Terrorism
Riot/civil disturbance Severe adverse weather

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Force Majeure examples, continued


Earthquake, eruption, flood, tsunami etc

Epidemics
Strikes Nuclear contamination

Pressure waves from supersonic aircraft


Embargo Actions by environmental protesters

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Exercise Suez Canal


On 7th November 2004 the 89,000t Liberian

tanker Tropic Brilliance broke down in the Suez Canal. Tugs were unable to move her, and by 8th November 46 vessels were waiting in the Mediterranean off Port Said, and a further 20 in the Gulf of Suez. Is this force majeure for the waiting vessels?

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Exercise Gulf of Aden


You have chartered a ship to

sail from Rotterdam to Kuwait via the Suez Canal The shipowner claims force majeure applies because piracy in the Gulf of Aden means he will not risk his crew or ship

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Contractors positions
WHEN THEY ARE AT WHEN THE CLIENT IS

FAULT Force majeure

AT FAULT Not force majeure

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Types of claims
This section will touch on some of the

practical issues that arise from the legal and contractual points already discussed, together with some additional issues for consideration There are, of course, many other ways in which claims can arise, but this is intended to cover some major areas

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Re-measure disputes
Some of these are

relatively straightforward, and only involve agreeing on a number (How many bricks were laid? How many cubic metres of soil removed? How many hours were worked?) Others are more subtle
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Re-measurement issues - examples


PIPEWORK Do you measure round HOURS WORKED Is travelling time

the outside or inside of bends? Or down the centreline?

In large bore pipe over long distances, this can make quite a difference

Do you measure flange

to flange or include green on the pipe spools?

included? What about the time going through security at the site each day? Meal breaks? Holidays? Union meetings? If a day rate is used, how many hours in a day?
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Re-measurement issues - opinion


Sometimes the matter

is not as clear cut as measuring pipe lengths or counting bricks If a room is being painted, how do you measure progress?

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Variations disputes on valuation


These issues tend to be very similar to re-

measure disputes However, there may be more opinion elements where the original contract was no on a re-measure basis, and there is no agreed set of rates

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Valuation disputes - solutions


Schedule of rates Include a schedule in the contract to, in effect, make the variations re-measured Star rates Where there is not a precise rate agreed, the parties can contract to use a rate derived from an agreed rate (often called a star rate)
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Estimates
Wherever possible, ask

the contractor for an estimate, or, better still, a formal quotation, before agreeing to proceed with the work This can convert the variation into a minilump sum contract BUT be careful and be clear what you are actually getting
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Offers and quotations


Megalift v- Terminals (2009) - Australia Megalift issued a quote for discharging a 270t sphere onto Terminals

land. In fact, the job required major excavation, and took much longer than expected, and was much more expensive. The quotation was stated to be for budgetary purposes only, and Megalift said it was not an offer capable of being accepted On the facts, it was held that there WAS a contract. Among the reasons were that the parties had been negotiating for many months; other terms of the contract appeared to contradict the statement that the quotation was budgetary; and when a formal contract was signed later, it incorporated what was called a revised quotation

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Has there been a change?


We have touched on

this issue already, but it is not always certain that what has happened DOES amount to a change entitling the contractor to extra money and/or time

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Exercise
On a fixed price, lump sum contract, are the

1. 2. 3. 4.

following changes (assuming there is a Variation Clause)? If so, would the Contractor get extra time and/or money?: Changing the colour of the paint on a sign Reducing the number of computers supplied from 100 to 98 Delaying the start of the project by a month Moving the position of a fire extinguisher from one wall to another
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How do you reduce this risk?


Serve notices where there IS a change

Include a contractual requirement that the

Contractor gives notice promptly when he considers there is an undocumented change Consider having an independent professional decide whether a change has taken place (at least on an interim basis)

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Breach of contract
In summary,

any failure to keep a promise made in a contract is a breach


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Hadley v- Baxendale (1854)


Where two parties have made a contract which one of

them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either (1) arising naturally, i.e. according to the usual course of things, or (2) such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract

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Exercise Victoria Laundry (1949)


Victoria Laundry ordered some boilers from Newmans, which

were delivered late. It was accepted this was Newmans fault, and there was no limit on damages. At the time of the contract, Victoria had just won an order to clean Army uniforms (this took place during World War II). Newmans were not aware of this.
What damages are due? Did they have to pay the profit lost on the Army contract?

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Are the following breaches of contract?


Not letting the contractor on site on the date agreed

Taking 17 days to deal with a query on the design


The contractor not starting on the day planned Delivering goods including components from a

country on your countrys banned list Not using the same staff to do the consultancy as attended the tender presentation

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Quality of workmanship
We have looked at the

issue of the appropriate Standards, but how do you address the quality of what has to be produced? Can you tolerate a certain number of nonconformances, or must everything be perfect? Will you test every item, or only a sample?
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Perfection?
Some jobs do have to

be 100% right, but that costs money (and takes time) It could be cheaper to order 105% of what you want, and accept a small failure rate However, you need to be clear what that rate is likely to be!
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Failure rates
What level of failure

might you accept for:


Cheap pens for office use Stitching on T-shirts Nails Mobile phones Audits of quality systems Welding on a nuclear power station
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Rework/re-performance

What has to be done How quickly At whose cost Who bears the knockon costs Impact on schedule

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Exercise

Consider what changes you would want to the rework clause on the next slide if you were:
a) b)

The Client The Contractor

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Rework clause

Notwithstanding approval by the Engineer of drawings, samples, patterns, models or information submitted by the Contractor, the Contractor shall be responsible for all errors, omissions or discrepancies therein unless they are due to incorrect drawings, samples, patterns, models or information supplied by the Purchaser or the Engineer. The Contractor shall bear any costs he may incur as a result of the delay in providing such drawings, samples, patterns, models or information or as a result of errors omissions or discrepancies therein, for which the Contractor is responsible. The Contractor shall at its own expense carry out, or bear the reasonable cost of, any alterations or remedial work necessitated by such errors, omissions or discrepancies for which he is responsible and modify the drawings, samples, patterns or information accordingly.

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Product liability and defective goods - Rejection


Standard required

Tests to be passed
What is sufficient failure to

reject

E.g. proportion of products

Can the supplier try and

rectify?

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Standards a common solution


Fit for purpose Fit for intended purpose

Fit for specified purpose

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Exercise

When should you have a right to reject, and what should be the consequences in each of these cases? An office building Chemicals for use in a blending process Database software A report on your procurement process A Suezmax tanker

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Partial rejection
If you reject part of a consignment, the

contract should state what happens next:


Reduction in invoice Replacement of defective goods? Time for replacement? Damages? What happens if the goods are not replaced, or are again defective?

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Abatement Wembley Stadium


This relates to the steelwork for

the new national football stadium in London, and is one of very many disputes on this project! The issue was how you valued the reduction in value where defective steelwork was supplied to the main contractor You cannot value a bit of a stadium under construction The only way to look at this was that the abatement in price was the same as the cost of repairs

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Liquidated Damages
Genuine pre-estimate

of loss Often a protection, not a penalty Check the actual triggers Can you get an extension of time? Caps

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Exercise liquidated damages triggers


The contract provides for liquidated damages of

$1,000 per day for each day the goods are late. Delivery is to be on 1st June. How much can be claimed if actual delivery is at:

23:00 on 1st June 00:01 on 2nd June 17:00 on 2nd June 09:00 on 3rd June

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Penalties
Not permitted under

English/Scots Law Quite acceptable in most other jurisdictions if clearly stated May be limited to a reasonable sum (e.g. Egypt) Risk of double-dips Penal and exemplary damages US jury trials

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Liquidated damages/penalties drafting


What is covered? Sole remedy, or in Recovery from retentions,

addition to actual losses? Proof of loss Triggers Grace periods Set-off

bonds etc. Are interim penalties repayable if final date is met? Caps on periodic penalties Overall caps

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Exercise
Consider in what circumstances

remedies other than a financial remedy might be required

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Warranty
When does it start? When does it end? What parts of the work are Are there any exclusions?

(see next slide) Rolling warranties

covered? What are the obligations of the supplier?

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Possible exclusions
X Fair wear and tear X Operational spares X Misuse

X Out of specification use


X Modifications

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Wear and tear


Midland Mainline v- Eagle Star (2004)
This case arises from a fatal rail accident at Hatfield in England in 2000

when an express train derailed at speed because of fatigue cracking of the track As a result of the accident (which did not involve Midland Mainline) rail services in the country were subject to severe speed restrictions, which caused loss to Midland Mainline, which they claimed on their insurance The insurance had a standard exclusion (see below for wording) including wear and tear The court ruled that the speed restrictions were caused by the fatigue cracking, which was itself wear and tear, and there was, therefore, no cover

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EPC/Turnkey contracts special issues


EPC (Engineering, Procure, Contract) and

similar contractual structures (EPIC, EPCM etc) and turnkey contracts work on the principle of a one stop shop The contract may be with one contractor, or a joint venture of several contractors In either case, there is a single contract with the client

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Traditional structure - example


CLIENT

Engineer/ designer

Fabricator/ manufacturer

Installer

Commissioning contractor

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EPC/Turnkey structure - example


CLIENT

EPC CONTRACTOR
Engineer/ designer
Fabricator/ manufacturer

Installer

Commissioning contractor

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Special issues joint ventures


JOINT VENTURE

CONSORTIUM

All members are jointly and severally liable All are responsible for 100% of claims arising from their share of the work AND 100% of the total claims

Members do not have joint and several liability All are responsible for 100% of claims arising from their share of the work, but no more

NOTE THAT THESE ARE NOT FORMAL LEGAL DEFINITIONS IN ALL COUNTRIES, AND THE TERMS GET USED INTERCHANGEABLY. ALWAYS CHECK WHAT THE CONTRACT SAYS
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Interface issues - exercise


On the face of it, the main purpose of an EPC

arrangement is that the interface issues within the contract are all the responsibility of the Contractor(s) In what circumstances might interface issues not be their responsibility?

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Issues tracking progress


In traditional contracting, the

Client is closely involved with the project as it progresses However, in EPC, and particularly, in true Turnkey, the Contractor is sometimes just allowed to get on with things This can mean the Client loses the ability to spot problems as they arise

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Issues tracking change


A similar problem arises

here, but probably more one for the Contractor If changes are made, the question that needs to be asked is whether they remain within the original scope (Contractors problem) or are something new (a Client variation)
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Documentation on EPC/Turnkey
As with any contract, the requirements for

documentation should be clearly stated In reality, the issues are much the same as for any lump sum contract, however, when we come to look at the Format of a claim, this area probably needs to have a section stating why any claim arises from an issue that is not within the responsibility of the Contractor

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Example
An EPC contract is awarded covering (among other

things) the design and construction of an offshore oil platform The job is running late The design office of company X writes to the Client to say they are sorry for the delay, but the fabrication yard dont know what they are doing The fabrication yard of company X writes to the Client to say they are sorry that they are late, but the designers are running behind schedule The Client puts both letters on the table and says not my problem
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Requirements for claim presentation


Set these out in the contract

Do NOT assume that you can merely state

we require the claim in the following format if this was not made a contractual term It is not possible to impose such terms after the event without agreement from the other party

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Notices
The contract should

specify timing and method of service These clauses are often not read, but need to be understood, and complied with to the letter

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Issues on notices
Is the method proposed

possible?

For example many clauses still provide for telex service

How do you prove

service? P.O. Boxes Electronic communications

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Notices
How many days?

What is a day?

In what form? Who should sign them?

To whom should they be sent?


How should they be delivered? Is an acknowledgement needed?

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Sample clause (Consultants)


All notifications and statements under this

Contract shall be written in the Arabic language, and delivered to the other party at the location indicated in the Contract with acknowledgement of receipt given thereto. Formal notices may, however, be sent to the said address by registered mail, fax, cable or telex as appropriate

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Continued
provided that confirmation of such notice is

received. Change of Consultants local address stated in the contract shall not be accepted unless the new address is in the Kingdom of Saudi Arabia and the Employer is so notified at least 15 days prior to the change of address.

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Exercise - Timing
The Contract requires a notice to be given within 7 days of the

happening of an event Is this working or calendar days? If working, what happens is one of the days is:

A Friday (in an Islamic country) A Sunday (in a Non-Islamic country) A Saturday in (i) Dubai (ii) Saudi Arabia A usual public holiday in the Clients country A usual public holiday in the Contractors country A special holiday in the Clients country (e.g for the death of a ruler) A day when the Contractors business is usually closed for annual works holidays

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Service of notices
All notices should be required to be in writing, however, the

physical method of service needs to be defined: By hand By post By special type of post (recorded/registered etc) By fax By e mail By telex (which still appears in many contracts) Note that the majority of contracts do NOT allow service by e mail, and a significant number do not allow service by fax

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Case study - notices


The Scottish branch of a Norwegian-owned English

company contracted with a Dutch company to supply services in South Africa. They subcontracted part of the work to a South African company, who in turn contracted with a Qatari company for the supply of labour from India. The same notice clause was passed down through the contracts. When it reached the South African/Qatari contract, it required notices to be served in a manner which was impossible in either country.

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Timing and time limits


It is common to require a party wanting to

make a claim to give notice within a fairly limited period The contract often goes on to say that, if this is not done, the right to present a claim is lost Since this clause is usually directed against the contractor/supplier, it is a frequent cause of dispute

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Time limits
Make sure that any limit

imposed is realistic Distinguish between warning of a claim (with outline details) and actually presenting full financial amounts and back-up

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Time limits what happens if they are missed?

The contract states no claim will be accepted by the Client unless it is received within 14 days of the date on which the Contractor should reasonably have been aware that a claim for additional cost and/or time would be made What would you do if:
1.

2.

The document is delivered 15 days after the relevant date The document is delivered within 14 days of the date when the Contractor was aware there would be a claim, but 20 days after he should have been aware

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Format of claim
While there is no

perfect format, it is suggested that the following slide gives a good basis as to what needs to be included

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A possible format
Brief summary of the contract Statement of the facts leading to the claim Statement as to which contractual provisions

(or breach of which provisions) are stated to give rise to the claim Details of the time and/or cost claimed A summary of any correspondence, especially notices served A schedule of back-up information, crossreferenced in the earlier sections
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A possible format
Brief summary of the contract

Merely a statement as to the nature of the

contract, and any important features (e.g. lump sum or re-measure)

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A possible format
Statement of the facts leading to the claim

Again, this is a helpful scene-setting, and

should explain why the claimant considers that there is any claim in the first place It is helpful if this is kept in an un-emotive language as possible, but this is not always the case!

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A possible format
Statement as to which contractual provisions

(or breach of which provisions) are stated to give rise to the claim This is the heart of the claim, and a point that is not always included. Too many claims are along the lines of something terrible happened, it is all your fault, please send lots of money They should specify why a claim is permitted
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Examples
The claim is presented on the basis that the

Client failed to provide access to the Site on the agreed date, as provided by Clause 14.3 The claim arises from a change in the operational specification for the computer system as set out in Notice 125H6 dated 14th June 2008. Such a change entitles the Contractor to a Variation in accordance with Clause 21.1, but the Client refuses to issue a Variation Notice as provided by Clause 21.3, in breach of contract
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A possible format
Details of the time and/or cost claimed While time and cost are clearly related (and one

tends to produce the other), it helps to keep them separate It may assist to present a bat chart illustrating time claims, and a schedule of the costs incurred In English court cases, use is made of what is called a Scott Schedule, which lists each sum claimed, with details of what it is for, and why it is claimed. This enable the judge to agree or strike out claims item by item While not a requirement for many claims, it is, nonetheless, a helpful tool in many cases
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A possible format
A summary of any correspondence,

especially notices served A timeline is useful, together with a narrative of the important correspondence, explaining how the matter has developed. This should quote relevant extracts from the more important parts of letters etc

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A possible format
A schedule of back-up information, cross-

referenced in the earlier sections By using cross-references in the claim document, perhaps by footnotes, the reader can flip to the schedule and review the document in question. Back up should be sufficient, but should not drown the other party in paper

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Format what not to do


Windglass Windows v- Capital Skyline Construction

(2009) Claims were rejected with the following note:

Our financial director has returned this application and is not willing to process the amount due to insufficient supporting information. Please note that our company policy is such that each sub-contractor valuation must be presented in a standard format, copy attached, and authorised by the appropriate site manager before your application can be processed. Could you kindly resubmit your application with the correct supporting information.

This was not a requirement of the contract, and the

sub-contractor was allowed to proceed to claim their money without amending the paperwork
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Supporting information
While it reasonable to

require supporting information, do not demand more than you actually need Remember that everything costs money to produce money that will be included in the price that you pay

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Supporting documents - exercise


When asking for supporting documents, do

you want to see originals or copies? Would you want any authenticated, and, if so, by whom? What about translations of anything in foreign languages?

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Principles of claims evaluation

Review the main claims headings

Brief summary of the contract Statement of the facts leading to the claim

Are these factually correct?

Statement as to which contractual provisions (or breach of which provisions) are stated to give rise to the claim

Are these correct? Have correct notices been served? In the correct time? Are there other relevant provisions? Are these mathematically correct? Do they relate to the facts relied on? What is their breakdown Is this accurate? Has anything important been missed out? Is anything else needed?

Details of the time and/or cost claimed


A summary of any correspondence, especially notices served


A schedule of back-up information, cross-referenced in the earlier sections

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What causes claims? Major Contributory factors (repeat)


Poor drafting of requirements

Lack of clarity in Scope of Work/Services


Misunderstanding of legal or technical

obligations

By client By contractor

Deliberate misunderstanding

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Anticipating disputes warning signs


Progress = time

expended Cost = value Manning below plan Quality nonconformances Changes in project management

Slow payments Claims team in other

offices Weekly reports unchanging Parent company has cash problems Discussions not open

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Recording claims - exercise


How do you record claims when they are

received?

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Reviewing claims
We will now look at some of the processes

needed to review a claim, starting with analysing cost

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Evaluation - Types of contract cost


Cost

Direct Indirect
Fixed

Overhead

Truly fixed Variable fixed Variable To convert to a Price or a sum claimed add

Profit Or Loss (if being supplied at less than cost)

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Pricing models
There are numerous models, but can include:

Simple lump sum for a product Rate per hour Rate per unit Risk and reward Fixed sum for a period of time Payment for results (performance based)

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Price and Cost analysis


Price should be

direct costs + indirect costs + overhead + cost of money + profit

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Analysis of cost data


Accuracy

Back-up
Make-up of rates and lump sums

Allocated costs
Overhead recovery methods Variation rates volume related Dayworks
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Exercise
Your supplier is going to use all of his Abu Dhabi

plant to supply products to your company He sells for $100 a unit, made up of

Cost of materials Labour costs Fixed overhead Variable overhead Profit

$50 $25 $5 $5 $15

The proposed variation rate for extra units is $100

per unit. Is this correct?

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Analysis Direct Costs


Identifying direct materials and

subcontract pricing Analysing direct labour costs Determining and evaluating other direct costs

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Analysis - Direct
Material costs
Materials,

components etc Associated costs, e.g. freight Scrap or surplus


Direct labour Other direct costs
May

include consumables

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Identifying direct materials and subcontract pricing Current quotes Historical quotes Inventory pricing
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Analysing direct labour costs


Identify classifications Estimate of man hours to be

used for each grade Labour rates for each classification (with details)

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Possible questions about labour elements of claim #1


Fit with manufacturing Qualifications

plan Volume necessary to complete Relevant skills? Classifications same as for rest of company? Appropriate classifications

Overlap on tasks
Overlap on current

contract Overlap on other contracts Consistent mix New trades?

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Possible Questions #2
Direct/indirect comparisons Industry/regional norms Overtimes and shifts Premium rates Comparable rates

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Other direct costs


Consumables Royalties

Special tooling and test


Preservation, packing

equipment Computer services Consultant services Travel Taxes

and packaging Start up or mobilisation costs Demobilisation costs

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Analysis Indirect Costs


How is overhead determined Identifying overhead cost

categories Ensuring fair allocation of indirect costs Analysing proposed rates


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Analysis - Indirect
May include elements such

as Material overhead Manufacturing overhead Engineering overhead Field service overhead Site overhead

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General & Administrative Expenses (G&A)


Salary of executive

staff Overhead costs of head office Legal, accounting, PR, HR etc Selling and marketing Transfer pricing

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Determining overhead rates

INDIRECT RATE = INDIRECT COST POOL

INDIRECT COST ALLOCATION


BASE

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Overhead cost categories examples


Material overhead Purchasing Transportation Indirect labour Employee expenses Receiving & handling Operations overhead Indirect labour Perishable tooling Indirect materials Fixed charges Downtime G & A Expense Executives Staff services Selling Head office R&D Bids & proposals

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Fair Allocation Possible Allocation Bases


SALES - $100M Product A 50% Product B 30% Product C 20% DIRECT FACTORY COST - $15M Product A 30% Product B 20% Product C 50%

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Allocations bases - issues


Are costs in the pool adding value to the

product? Are there contingency allowances? If so, are they realistic?

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Exercise - profit
What is a reasonable %

profit for a company to make?

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Profit motive
Contractor stays in business

Contractor wants to work for you again


Contractor does not hide profit in cost Motivation for good performance

Good personnel used


Good relations Reputation enhanced in marketplace

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Profit what is reasonable


Assessment can be by : Benchmarking against

industry norms Assessment of resources employed and risks taken On a claim or variation, what was in the original contract (if known)

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Time

1. 2. 3.

Remember that the person making the claim has to demonstrate that the delay: Is not something for which they are responsible Entitles them to an extension of time HAS ACTUALLY CAUSED the delay claimed The last point is very much related to the question of critical path analysis

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Planning critical path


It is not enough for the Contractor to show there has been a delay He must show that the delay impacted on the overall programme

that is, that it caused a delay on the critical path Conversely, if the delay is on the critical path, the impact may be disproportionate. For example, a delay of one week could push the work out of a weather window, and cause a delay of several months BUT if there is float in the plan, this may belong to the Contractor, enabling him to claim an extension of time, even though he may be able to absorb the delay

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Critical path -exercise


How do you determine if an activity is on the

critical path?

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Requesting further information


We have already looked at making sure that

you only ask for the information you actually need However, you should also be careful to ask for further information quickly and logically Drip-feeding requests can sour a negotiation

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Realistic appraisals
It is worth making the point that it is not

helpful to ignore genuine claims THIS DOES NOT MEAN YOU SHOULD PAY SUMS THAT ARE NOT DUE!!!!! However, where the point is small, it may simply not be worth arguing over something trivial Be realistic many things are not 100% black and white, much of the world is shades of grey (gray if you are American)
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Global claims
Commonly used in

complex engineering and construction disputes


They have a difficult legal

history, sometimes accepted, sometimes not

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Global claims - issues


It is the duty of the Contractor to demonstrate linkage between the

matter complained of (e.g. a variation or breach) and the damage suffered. Global claims do not do this. The problem is that large projects are so complex that the general rule is virtually impossible to apply in practice Global claims say it is all down to the Client, so all the impacts are payable The risk for the Contractor is that if any element is found to have been the Contractors responsibility, the whole claim may fail

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Responding to a global claim


Invite the Contractor to

demonstrate cause and effect If they decline, ask them to list all causes, and to confirm that their case is that the combination of these causes caused the costs Identify any individual cause where some or all of the responsibility rests with the Contractor Be realistic they may be right, and time and cost will be saved by a little horse trading

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Payments on account
If it is clear that money is owed,

an interim payment has the effect of Demonstrating good faith Assisting the Contractors cash flow Reducing any claim for interest/cost of money BUT, these can also be seen as a sign of weakness

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Admissions and denials


Admissions If the facts are clear, there is Denials Similarly, a clear, reasoned

rarely any harm in agreeing them If the claim goes into dispute, you will lose on this point anyway, so save cost and time with a concession This also gives more credibility to your denials

denial brings matters to a head Merely saying you are thinking about matters, when the reality is that the answer is no helps nobody

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Offers of settlement
If offering to settle a claim, it may be necessary to

use certain specific legal terms to prevent the offer being used against you A common term is without prejudice This means I still think you are not due any money, but, without prejudice to that position, I will offer you 100,000 rials to get rid of this problem If this is accepted, there is no problem. If it is rejected, the claimant cannot produce the offer in court as evidence that the Client admits that 100,000 rials is due, which is simply not the case
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Legal costs
In those countries where the loser pays all or sum of

the costs of a court case or arbitration (and this is not the position everywhere), the fact that a without prejudice or similar offer has been made can sometimes be disclosed to the judge or arbitrator after the case is over, solely on the basis of demonstrating that, had the offer been accepted, the case would not have been needed In such cases, courts may either not award costs, or even order the winner to pay all or part of the costs wasted
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Offers of settlement what does the settlement mean?


If a settlement is achieved, make sure it is

properly documented In particular:


Does it settle everything (full and final settlement)? Does it include disruption from the extra work? (See comments on cumulative effect later) Does it include rate increases? Can the rates agreed be used on any other claims in the future?
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Independent review
Where the claim is of

some complexity, or there are major disagreements, consider a cold eyes review This can be internal or external, but should be by someone who understands the issues, but has had no involvement in the project
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Advising on the result of a review

After you have reviewed the claim, whether with external help or not, advise the Contractor of your position If the you are rejecting all or part of the claim, tell them why This is often best handled face to face, but, in such a case, have clear notes of what you are going to say, and record what you actually said

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Cumulative effects
Where the project is

complex (and this is particularly the case in construction and engineering), the impact of a series of changes or delays may be to produce a disruptive effect over and above the extra work itself In other words 1 + 1 may equal >2
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Disruption -issues
The usual analysis by a Contractor is based on reduced

productivity. Since this is a common effect of extra work, this is not unreasonable in itself.
However, it fails to assess:

The extent to which the original productivity norm was optimistic Whether the correct norms were used in the tender Whether some or all of the loss of productivity was going to happen in any event, or for other reasons

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Exercise
You have received a claim from a

construction Contractor, which includes an element for disruption.


What sort of questions would you ask

about this element of the claim?

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Managing claims quickly why this is important


It is very tempting to leave

issues until the end of the job, and sort them out then However, dealing with problems as they arise means: The facts are clear People do not have time to harden attitudes Individual problems can be picked off involving relatively small sums, and, therefore, can often be dealt with at a lower level in the organisation
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Dealing with claims as they arise a contract point


It is important to state in a contract that,

where there is a dispute, work must continue while the dispute is resolved Without this, the Contractor has a very strong negotiating lever to use to force a favourable settelement

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Section1 of the Law of the Jungle


Sometimes people do

not comply, even when it is in the contract

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Managing disputes

Involve lawyers early BUT manage them Agree strategy and tactics Do what you can yourselves, or with cheaper support Dont be greedy Feed costs into your calculations

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Managing the legal process


Lawyers are an important

asset, but just another adviser Make sure they are managed, and that costs are controlled Many international disputes lawyers are VERY expensive and they employ a number of expensive assistants for whom you pay in addition

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Setting goals
Be realistic

Set goals for what is the

best you could achieve What is your expectation What is the worst you could accept (the line in the sand) When you get what you are looking for, take it and move on
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Dont be greedy
Dispute over Australian

Submarines HMAS Orion and Otama Case was 11 years old Only one witness was still around Strategy

0.5 m reject 1m think about it 1.5m accept

Opening offer 2.5m What do you do?

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HMAS Orion and Otama what actually happened


The 2.5m was accepted There was criticism of the decision not to

press for 3m, BUT


This was all profit The Client thought the shipyard was commercially weak, and did not realise they had left at least 1m on the table There was another bid to the Client pending

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Decision trees
In complex disputes,

consider drawing up a decision tree This way, you know what you will do depending on the reaction of the other party Be flexible the decision tree will need updating but use it as a tool
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Exercise decision tree


We will work through a simple exercise in

developing a decision tree based on a claim from the other party for an extension of time and extra costs

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Controlling costs
Keep a regular check on

what you are spending Include internal costs where appropriate Feed costs into your calculations Include the deflationary effect of time on any money you are going to receive (and the cost of interest, if appropriate, on anything you are going to pay out)

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Case Study Manchester Central Station feeding in costs


Dispute over castings Target settlement 1m Settled at 1.1m

Success!

In NPV terms, could have

settled on day one at 0.1m. Client had offered 0.25m


o

Failure!

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Disputes
Parties need to present

their respective positions There is not a dispute where, for example, one party presents a claim, but the other party has not yet replied

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Exercise
A contractor sends a letter to a client stating We have

completed the project, but it is clear that costs will be vastly in excess of our estimate. We consider this is because you have failed in your duties to review changes properly and also to provide answers to site queries on time. We, therefore, claim an additional $1,346,229. If this is not paid within 7 days, we shall proceed to arbitration Is there a dispute? How would you reply if: You agree with what they say, but not the amount claimed? You do not agree with any of what they say?

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Introduction to dispute resolution methods


Negotiation Third party involvement Mediation Other types of Alternative Dispute Resolution Litigation (courts) Arbitration IT IS USUALLY BETTER TO TRY AND FIX A

PROBLEM BY DISCUSSION AND NEGOTIATION, WITHOUT INVOLVING THIRD PARTIES


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What is negotiation?
The first essential is that

there needs to be a dispute or difference between two or more parties Negotiation is the way to resolve such differences by discussion, without a third party (such as a judge or arbitrator) making a decision

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Types of Negotiation
Communication between

two parties to reach a mutually satisfactory solution Adversarial relationship between parties who have to work together Win-Win

Often conducted by

agents Can be the start of a long term relationship Both analytical and psychological Verbal, written, and nonverbal

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Exercise
What are the things that you need to consider when planning and preparing for a negotiation?
What do you need to consider during a negotiation to create a win / win outcome? Think of people who you feel are effective negotiators, and what makes them so good at it? (i.e. skills they use)
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Exercise - Do you always have to negotiate?


Are there any

circumstances in which it is appropriate to refuse to negotiate? What happens if you take this position?

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Stage Negotiation
Multi-stage approach

Pre-agree times for each stage


Require these procedures to be concluded

before litigation BUT include emergency procedures

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Three basic rules of negotiation


A quote is never a concrete number 2. The best prepared wins 3. Have many issues and a Best Alternative To No Agreement (BATNA) position
1.

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Three basic rules of negotiation


A quote is never a concrete number 2. The best prepared wins 3. Have many issues and a Best Alternative To No Agreement (BATNA) position
1.

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Deltas
There will almost always be

a gap between positions However, if the gap is too large at the beginning, neither side may see any point in continuing the discussion If it is too close, you may have given too much away!

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Three basic rules of negotiation


A quote is never a concrete number 2. The best prepared wins 3. Have many issues and a Best Alternative To No Agreement (BATNA) position
1.

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Key Elements of negotiation

Preparation

Understanding goals

Skills

Self Confidence

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Preparation
Who are you meeting? Who is on your team? What will be discussed? What papers are needed? Why?

Where?
When?

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Your aims re-visting the issue of goals


Define your preferred

outcome Best case Worst acceptable case Agree a line beyond which you will not go AND STICK TO IT Clear your authority limits

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What do you know about the other party?


What do they do?

How are they performing financially?


Recent orders/problems Who are their competitors?

What is their position in the marketplace?


What are their plans? What is important to them?

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Roles
Negotiator Scribe

Not necessarily the leader Technical expert Subject specialist Commercial Financial Decision maker Disclosed or undisclosed Level of authority

Control the Minutes Timekeeper Keep to agenda Watch time constraints

In many meetings you will have multiple roles


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Before the meeting


Pre-meeting with your team Agree goals and roles Agree authority limits Set agenda Pre-agree agenda,

attendees and documents needed Write down what you want to achieve

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Agenda
Not always relevant to brief

meetings? Try and control Agree with other party Include timings Include breaks State what is to be discussed; by whom; and with reference to which documents

Outsourcing meeting
07/02/01 9:00 Thistle Street
Meeting called by: Facilitator: Timekeeper: Attendees: Please read: Please bring: Type of meeting: Note taker:

----- Agenda Topics -----

Other Information
Observers: Resource persons: Special notes:

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Arrival
Location Take account of disabilities Get there first If possible, set the room the

way you want it Small talk good or bad? Setting the agenda

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Three basic rules of negotiation


A quote is never a concrete number 2. The best prepared wins 3. Have many issues and a Best Alternative To No Agreement (BATNA) position
1.

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Multiple issues
Just as it is important to

set your opening position so as to allow some room for negotiation, so it is also useful to have a number of issues to discuss; some of which you may be prepared to give away

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BATNA
Best Alternative To No Agreement
What is the best that

can happen if no deal is struck If this is still better than what you are being offered, you might as well walk away However, if it is not.

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BATNA what might it be?


Close a factory

Buy from a more expensive supplier


Sell to another buyer Go to court or arbitration Lose money on the project Lose your job (a personal, rather than

corporate issue, but still relevant)

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During the Meeting


Try and keep to agenda Play back discussions Bank agreements Record issues Park problems

Watch body language

LISTEN
Use breaks for updates

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Non-verbal Communication
Of information

communicated

10% through words 40% through paralanguage (nuance, emphasis, irony etc.) 50% through body language

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Closing the meeting


Revisit original goals Check all parked issues

have been addressed Run through points of agreement or dispute Agree process Agree timetable Allocate actions Format for deliverables

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What to record
Decisions, actions and

deliverables Times for action Who is responsible for action? Basis on which decisions were reached Agreed facts Outstanding issues Process

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Questions
Ask open questions to elicit information

Probe generalised statements


Start to close the questions as you approach

an agreement Play-back agreements

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Interruptions
Avoid them

Unless you have

planned them How do you react to interruptions by the other party?

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Win - Win
What is a win?

Knowing what you want

to win How to promote win-win thinking Is win-win always the right answer?

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What is a win?
Discuss some examples of what might be a

win for you, or the other party, that does not involve paying, or not paying, money

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Mirror negotiation
Assess what the other

side wants Can you give them something without loss? What are their walkaway points?

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Red Teams
On complex disputes

(and also on complicated tenders), it may be worth assigning one or two of your staff to think like the other party This is imperfect, but can help to assess the best approach

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Negotiating without prejudice


We have discussed this issue already, but

this is intended as a reminder that it is usually possible to make an offer than exceeds your view of the strict legal position, in order to dispose of a problem, without exposing yourself

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Making offers
Someone has to make

the first move.. Try testing the water make a small offer and see if you get a response Be bold, but be prepared to pull back if the other side do not respond Do not negotiate with yourself
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Compromise
Not the same as surrender

Recognise that if neither side moves, the matter will never

settle Test the water Be bold Document any settlement properly Timings for action

Consequences for failure

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Bargaining
The usual way a

negotiation works is that the parties bargain towards a range that they can both live with The problem arises when (as already discussed) the delta is too large

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Playing Hard to Get


Do they need you more

than you need them? Do they think they need you more than you need them? Can you get leverage by being helpful?

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Unequal bargaining positions


Size Reputation

Technology
Only one party available

Retaining market share,

or willing to do the work Other business relationships (particularly relevant to disputes)

or keeping out competitors The position is not always what it appears on the surface

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Possible results of unequal bargains


Other party feels

aggrieved Every effort is taken to recover their position Lack of sympathy for future problems Overall relationship damaged

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Walking away
Set authority limits Be prepared to walk, but

understand the consequences What effect will walking away have? Reputation management Keeping the door open

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Interest based solutions


RIGHTS What you are INTERESTS What you

legally entitled to

require or want

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Rights
Clearly it is always possible

to insist on 100% of your rights Sometimes that is the correct solution. However, it does create some issues: You may think you have certain rights, others may disagree If the other side are not prepared to agree (and they may not believe you are correct), a dispute is inevitable The law may not be able to give you the remedy you actually seek
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Making the cake bigger


Make big problems

smaller by putting them in a larger context Think laterally Can you solve other problems as well as those being negotiated?

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Non financial solutions


What type of solutions might you

use in a claim or dispute that did not involve extensions of time or payment of money?

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Long term business relationships


Where you are likely to

have a long term relationship with the other party, consider how resolving the dispute could enhance, rather than damage that relationship

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Two true stories


AMSTERDAM KUWAIT LONDON

KUALA LUMPUR Plane breaks down Airline provide an alternative via Singapore Total delay about 4 hours Bag routed direct to hotel about 12 hours after arrival

Plane snowed in at

London Replacement promised but did not arrive After about 8 hours, told to make own arrangements to get back This was the day before Eid
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Conflict
Any dispute is, in a

sense, a conflict The trick is to stop the dispute becoming personal Remember IT IS USUALLY ONLY ABOUT MONEY

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Defusing conflict
Avoid personal

comments Reframe criticism Remain calm Do not respond to provocation Take breaks if matters get heated Apologise if you say something you regret
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Personality clashes
What do you do when it

is clear that there is a personality clash with the negotiator on the other side?

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Managing claims quickly why this is important - repeat


It is very tempting to leave

issues until the end of the job, and sort them out then However, dealing with problems as they arise means: The facts are clear People do not have time to harden attitudes Individual problems can be picked off involving relatively small sums, and, therefore, can often be dealt with at a lower level in the organisation
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Dispute resolution
We now look at what

happens if internal negotiations fail

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Types of Dispute Resolution


Litigation Arbitration Alternative Dispute

Resolution (ADR) Mediation Mini-Arbitration Conciliation Expert Determination etc.

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Litigation
Formal proceedings through a state court

Which courts have jurisdiction, and which law

is to apply (not always the same) should be stated in the contract. If not, there are complicated international rules, but this may not give you the result you desired.

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Conflict of Laws Choice of Law


Law for interpretation of

contract Courts to have jurisdiction Choice may be restricted


By local law By company policy

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Jurisdiction
Novus Aviation v- Onur Air (2009) Onur are a Turkish airline, and Novus (a company based in the

Bahamas) agreed to try and help them lease aircraft to Saudi Arabian Airlines The agreement was stated to be governed by English Law, but did not say where disputes should be heard A dispute arose as to whether the contract had been extended, and whether Onur had breached it by dealing with Saudia direct Proceedings were issued in England, but permission was needed to serve in Turkey, and this would only be granted if there was a reasonable chance of success, and that England is the proper place for the hearing The appeal court approached the question on a wide basis of where the case should be heard, and said the position was finely balanced but the judge had been entitled to find that England was the appropriate venue

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Possible choice of law clause


This contract shall be

interpreted in accordance with the laws of the State of Kuwait, and any dispute shall be referred to the Kuwaiti Courts

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Possible choice of law clause amended


This contract shall be interpreted in accordance with

the laws of the State of Kuwait, and any dispute shall be referred to the Kuwaiti Courts The Parties hereby consent to the sole and exclusive jurisdiction of the Kuwaiti Courts, and the Contractor hereby irrevocably appoints the law firm of Ibn Battutah of 1, Coast Road, Kuwait City to accept service of all proceedings on its behalf

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Foreign courts - Issues to consider


Service of Are foreigners treated

proceedings Do the other party have to submit to jurisdiction? Enforcement Cost Time

fairly? Language Are there processes (e.g. awards of interest) that may be a problem for you?

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Enforcement
The orders of a court are generally only

directly enforceable in the jurisdiction of that court Enforcement in another jurisdiction tends to follow two routes:

Treaty (either a direct bilateral arrangement, or a wider regional deal) The judgment becomes evidence in a new court case
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Enforcement of judgements and awards


Seizing goods

Third party debts


Freezing transactions Liquidating companies Deducting money from wages and salaries Imprisonment (in some countries) Frequently none of these are necessary, people pay their

debts Sometimes, none of them work

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Arbitration
In effect, privatised litigation

The dispute is finally resolved by one or more (often

three) arbitrators, sitting in private Awards can be enforced through the local courts in many countries (especially those who have signed the New York Convention, 1958), but there are a few gaps in the Middle East (e.g. Yemen, Iraq, Turkmenistan), Central Africa and the Pacific Islands

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Arbitration
Advantages over litigation

Disadvantages

Privacy But not total in Australia, Sweden and Texas Choice of arbitrators Arbitrators can have industry knowledge and experience Language Location and timing of hearings

Often as costly Often as slow Enforcement can be more difficult Many remedies not available (e.g. injunctions) Cannot get law established (except in Australia, Sweden and Texas?)

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Comparison
Litigation

Arbitration

Good range of remedies Reasonably certain Public Usually expensive Often slow Risk of bias in some foreign courts Lack of specialist expertise in field

May need support of courts for some remedies Reasonably certain, but no precedent system Private Can still be expensive, and, sometimes, slow Some ability to select arbitrators, to increase specialist knowledge, and reduce national bias

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Arbitration
DOMESTIC Within the country INTERNATIONAL Either between parties

concerned, and between two parties within that country No foreign involvement Local arbitration law applies

from different countries, or involving work in different countries There must be a foreign element Often international rules (e.g. UNCITRAL Model Law) applies
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Single or panel
Arbitrations are sometimes

heard by a single arbitrator, and sometimes a panel (most commonly three) If the parties do not agree, an outside body is generally nominated to appoint On three person panels, the parties may appoint a wingman each, and these two appoint a chairman

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Evidence and production of documents


Note that each country has different rules as

to what is needed to prove a case In particular, the rules was to what documents HAVE to be provided to the court and the other side vary greatly

Whatever you want Everything that supports your case Everything that supports OR CONTRADICTS your case Everything
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Arbitration and litigation tarnished reputations?


Former Chief Justice of the USA: Warren Burger The obligation of our profession is to serve as healers of human conflict. To fulfill our traditional obligation means that we should provide mechanisms that can produce an acceptable result in the shortest possible time, with the least possible expense and with the minimum of stress on the participants. That is what justice is all about. Perhaps what justice should be about .

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Alternative Dispute Resolution


Mediation Med/Arb and Arb/Med Adjudication Expert Determination Early Neutral Evaluation Mini-arbitration Dispute Review Boards Pendulum arbitration

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Mediation
Non-binding

Deal is not imposed


Efforts aimed at

interests, not rights Emphasis on future relationships Quick and (relatively) cheap

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Mediation - Comparison with litigation/arbitration


Litigation/arbitration Decision made by third party (judge or arbitrator) Decision enforceable (with some restrictions on arbitration) Range of remedies (wider for courts) Mediation Decision made by parties, assisted by mediator Agreement is contractual, and can only be enforced in the usual ways Remedies are whatever the parties want

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Relationship with courts


English courts may penalise

parties who refuse mediation

Dunnett v- Railtrack
Cable & Wireless vIBM

Mediation clauses are

enforceable

Scottish courts keep saying they

will follow shortly, but with less compulsion, but enthusiasm appears limited to smaller cases South Africa has recently taken the same line as England No great history yet in Middle East, although the concept is well established in noncommercial areas
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Conciliation
Similar to mediation, but the conciliator takes

a more proactive approach, and seeks to promote particular settlements The disadvantage is that this goes some way towards taking the decision-making out of the hands of the parties

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Expert determination
Particularly good for

technical issues The parties allow an expert third party to make a decision for them Need to agree whether this is to be final and binding, or not.

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Early neutral evaluation


A quick non-binding

review, often by a judge (possibly retired) Quite successful in USA (notably California) Tried in England, very low take-up

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Pendulum arbitration
Single arbitrator

Both sides make written submissions


One or the other must be accepted in total This tends to push parties towards a reasonable

position Used in Japanese labour relations disputes

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Case study dispute resolution Hong Kong Airport


Infrastructure projects (8)

Underground Line

Engineer Mediation Adjudication

Engineer Mediation or arbitration Engineer (10 days) Project director (20) Dispute review board Arbitration

Main airport

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Hong Kong airport - results


Solved before mediation 50.5% 33% 7% 5.5% 4%

63 Solved during mediation 41 Solved during adjudication 9 Solved in arbitration 7 Pending - 5

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Disputes - What not to do


Some types of self help

are generally frowned upon

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Good record keeping and notices


Many disputes are won less by who has the

strongest case, then by who has the best records, and has served all the necessary contractual notices

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Ethical concerns
Concerns in relation to business ethics tend

to be focused on tendering and the award of contracts However, identical issues can arise where claims are settled at inflated sums

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Examples
Pay me $500,000 and I will sign off all of

your Variation requests (a true story) Bid low, we will allow you to make it up in inflated claims later Expenses claimed several times for the same thing, or with false back up (A KPMG director in London, now in jail) Allow me to claim overtime that was never worked, and I will build you a swimming pool
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Audit trails
This type of unethical behaviour is made

more difficult if you maintain good records and a proper audit trail on all decisions Decisions in major areas should be approved by more than one manager

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Avoiding suspicion
Be open

Be transparent
Do not do side deals Keep good records

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Problems with interest-based settlements


It is right to point out an issue with

settlements based on interests, rather than rights It is relatively easy to say our lawyers said we would lose, so we settled It is more difficult to say our lawyers said we would probably win, but we paid out in our long-term business interests

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Anti-corruption practices
What processes do you use to reduce the risk

of corrupt or unethical behaviour when dealing with claims and disputes?

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How to avoid claims


Serve notices

Keep on top of change management


Deal with issues as they arise

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How to avoid disputes


Be clear about what you are

doing and why Be open with other parties Understand the contract requirements Serve notices Keep records

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How to avoid litigation and arbitration


Repeat the previous two slides!

Never rush into litigation or arbitration


Use stage negotiation techniques Always work out what a dispute will cost you,

and develop a BATNA Remember winning will always cost you money and time Only fight on principle when it is really important
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Negotiation exercises
We will now try out

some simple exercises looking at some of the different issues that have been raised There are no prizes Just have some fun you can behave in any way you like!

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Open forum
To complete the programme; do you have any questions or clarifications?

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CLAIMS AND COUNTERCLAIMS MANAGEMENT

OCTOBER 2009

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