Money claims in international construction projects

Out-Law Guide | 24 Nov 2020 | 10:36 am | 4 min. read

There are some significant differences to the way in which contractual money claims in international projects should proceed depending on whether the jurisdiction is a civil law or a common law one.

Codified civil law systems generally allow parties to approach issues and bring or defend claims by reference to principles found in the codes. In common law systems, where the law is generally, but not exclusively, developed via the court system, parties may instead have to develop arguments by relying on historical precedent in the form of reported case law, where the facts may not always align.

Parties will therefore have to understand whether the relevant legal system imposes additional duties and requirements into the contract in question, which in turn impact on both the formulation and potential defence of claims for money.

Approaches to contractual money claims

Money claims on energy and infrastructure projects happen when one party to a contract alleges it has suffered a loss or incurred an expense for which it is not accountable, and in respect of which it seeks compensation from the responsible party.

Money claims can be advanced ‘under’ a contract, relying on express terms providing for compensation if certain events happen; or as a claim for damages for breach of contract if a contractual obligation is broken. Some examples include:

  • liquidated damages - pre-agreed rates at which the contractor will be liable to the employer for the loss the employer sustains by the contractor failing to complete works by the contractually agreed date;
  • prolongation costs - costs incurred by the contractor as a result of having to be on site longer due to critical delays that it is not responsible for under the contract;
  • acceleration costs - costs incurred by the contractor as a result of having to speed up the works and carry them out at a faster pace than originally planned due to a critical delay that is not the contractor’s responsibility under the contract;
  • disruption costs - costs incurred by the contractor due to having to work less efficiently because of critical and non-critical delay events.

Both common law and civil law jurisdictions require the claiming party to establish an event, associated with a contractual obligation of the defaulting party, the occurrence or breach of which has caused the claiming party to suffer loss. Both systems of law often then also require that event to be identified in a ‘notice’ before a determination on consequences will be made.

The most commonly contested aspects of contractual money claims are the extent to which the notice requirements impact the entitlement; and how much is actually recoverable.

Notice requirements

Common law systems may consider notice requirements - for example, Clause 20.1 of the FIDIC contractual suite - a ‘condition precedent’ for the contractual entitlement to arise. In practice, what this means is that unless the condition of serving a notice is satisfied, varied or waived, there can be no money recovery.

The position is different in some civil law systems. When tested in courts, the notice requirement may lose its importance when combined with a particularly relevant argument based on ‘good faith’. Furthermore, in some Middle Eastern jurisdictions, parties often argue that a requirement to serve notice or lose the right to a valid claim is invalid on the basis that the statutory limitation period in the civil code is mandatory and overrides such clauses.

Amount recoverable

A more obvious distinction between civil and common law legal systems can be seen in relation to claims for liquidated damages, where the parties have fixed an agreed rate of damages that must be paid by a party if that party fails to meet a contractual obligation - usually to complete by a contractually required date or within a contractually required period.

The position in many common law jurisdictions is that, to be enforceable, the liquidated damages must be a genuine commercial pre-estimate of likely loss and must not amount to a penalty. In most civil law jurisdictions, however, the focus is different. Here, a balance is found by codified principles - for example, in the Middle East, where contractually agreed damages can be reduced if the party levying the damages did not suffer damage to the full amount claimed.

In other civil law jurisdictions, the scope for damages is wider because civil law systems often entail an additional obligation to those expressly set out in the contract - the obligation to perform contracts in good faith. Common law systems have also recognised the principle of ‘good faith’, albeit to varying degrees of importance.

Approaches to claims for damages

Claims for damages typically involve the identification of a breach of contract. In both common law and civil law jurisdictions, the essential ingredients of an actionable claim are:

  • breach;
  • loss; and
  • causal link between the breach and the loss.

Both types of legal system have requirements regarding remoteness or ‘foreseeability’ of the damages suffered - that is, the damages must not have been too remote; must have been in the contemplation of the parties; or must be a natural consequence of the breach.

Although some civil law jurisdictions do not prescribe the requirement to mitigate the loss suffered as a result of a breach of contract, others specifically do.

Approaches to global claims

A global claim is one in which the contractor expresses its entitlement to a sum of money based on a series of events without showing the causal link between each and every individual event identified and the loss suffered as a result.

Global claims are widely resisted in common law jurisdictions, unless a unique set of circumstances exist. These were most recently set out in the English case of Walter Lilley v Mackay.

In practice, global claims are often less successful because by their nature the claiming party does not undertake the usually rigorous process of linking the amount of damages claimed satisfactorily to the delays or other issues complained of - thus, on the face of it at least, not meeting the burden of proof requirement in the relevant legal system. However, they are not impossible to pursue, provided the claiming party does a suitably rigorous job of describing and quantifying the claim.

The term ‘global claim’ is generally unfamiliar to judges tasked with determining liability in civil law jurisdictions, with some minor exceptions. However, if followed, the principles expressed in the Walter Lilley case would be equally persuasive in civil law jurisdictions as they have been shown to be in common law systems.