International Contract Law

The Contractor (a company registered in Spain) undertook to construct a road in the Republic of Toupee under a contract incorporating the FIDIC Red Book (1999 Edition). The contract sum was US$50 million, of which 50% was payable in Toupean Follicles (TF) and 50% in US$. (At the date of the contract 1 US $ = 50,000TF). The Employer is the Ministry for Communications. The Engineer is the Chief Engineer of the Roads Department of that Ministry. The road was required to link the capital with the new airport and to be ready by 31 May 2009, just in time for the celebrations of the thirtieth anniversary of the President coming to power on 1 July 2009. Delay damages are set in the contract at US$350,000 per week. The road was financed as part of a scheme to improve access to and from the country’s only seaport (some 20 km away) and villages near the capital. However it will also be a secondary road to the airport. The country’s main river lies between the sea and airport and the capital. Unknown to the contractor the road was only instigated by the President for use when he needs to fly. On 1 April 2008, i.e. one month after the start of work, the Contractor finds that if it followed the details on the Engineer’s drawings the surface of the road would be liable to seasonal flooding from the country’s only main river. Under the contract the Contractor has undertaken to design the bridge across the river and the ramps on either side of it. It therefore needs to know whether the level of the road is to be raised, as it will affect the design. The precise level of the road was only shown on drawings issued after the contract was signed by a local branch of a company of international consulting engineers which acts as the Resident Engineer (RE). The RE has been given authority by the Engineer under clause 3.2 to exercise every power of the Engineer (other than under clauses 3.5 or 20). The Contractor therefore writes to the RE asking for instructions. In its letter it suggests that the new road should be built higher so that it would be above flood level. On 1 May 2008 the RE replies stating that the risk of flood is the Contractor’s and it must do as it thinks fit and refers to a provision in the specification which says that on completion the works are to be left in a good and perfect condition. The Contractor says that it will not raise the road or alter the ramps (which will be quite steep if the road is unchanged) without an order from the Engineer. On 1 June 2008 the RE issues modified drawings that increase the height of the road but in a covering letter the RE says that although the Contractor must build the road in accordance with the revised drawings they are being issued under clause 3.3 and not under clause 13. He adds that the drawings are issued without prejudice to the right to argue that they were never needed as it was the Contractor’s responsibility under the contract to solve the problem since the bridge would not be fit for its purpose if it could not be reached safely. Before complying, the Contractor writes a letter to the Engineer on 8 June 2008, warning of the likely additional cost (US$500,000) and of the additional time (three months) that the new work will take. The Contractor says that (1) raising the height of the road will cost at least $300,000 and will add three weeks to the duration of the project; (2) it will now be necessary to revise the design of the bridge and the ramps and that will take three weeks to complete and cost $100,000 in staff time (3) it will then take another four weeks to order and obtain new steel and reinforcement etc which cost another $100,000 more (4) at least two weeks extra will be needed to construct the bridge and the ramps to the revised design. It says therefore that it will do the work only on the basis that he will be paid for the changes in US$ and given an extension of time until the end of August 2009. The Engineer acknowledges the letter on 15 June 2008 and says that he wants the work to be done as soon as possible since the road must be finished by 31 May 2009. The next day the Contractor got a letter from the Permanent Secretary to the President saying that “there will be a lot of trouble for everybody and I cannot guarantee your safety should the people realize that they are being blackmailed into paying an exorbitant amount and that if there was delay their popular and spontaneous celebrations in honor of our Great and Mighty Leader might not be pleasing to him and might also turn nasty towards you”. The Contractor is also told (but not in writing) that the President might wish to use the road before or at the time of the celebrations to get to the airport “should the need arise”. The actual cost of the change in height and its consequences is very large (US$2 million). The Contractor worked night and day as it treated the letters as a request to reduce the three month forecast. Once it was known that it was under pressure all the local suppliers of materials raised their prices three fold and it had also to go far away to get more. It had to pay even more to get the suppliers and its labor force to work overtime. As a result of the steady devaluation of the TF so that it was now about 75,000TF = 1 US$, everybody (except the contractor’s own staff) had to be paid in US$. The six weeks overrun cost the Contractor $150,000 per week in prolongation costs. Nevertheless completion of the work is delayed by only six weeks. Although the road surface was complete by 1 July 2009 and the road itself was used by the President satisfactorily, he was very displeased. He had been worried beforehand that his route to the airport could be imperiled. On the day itself, he was most unhappy since the safety barriers had not been finished as a result the people were able to get too close to his motorcade. He saw this as a conspiracy by the contractor and ordered the Employer to deduct delay damages and to act under clause 15. The Engineer therefore deducted US$ 4 million (as a result of using a calculation supplied to him by the President’s office). The Contractor might have been paid US$ 3 million plus 150,000 million TF. However as a result of the celebrations and the steps that the President had taken to secure such reserves as it had (by placing them in foreign accounts controlled by him) the country was suffering a "temporary liquidity hiatus" it would have not got paid at all. The Contractor’s expatriate personnel decide that they should go home. On arrival at the airport they are told by officials of the Ministry of Communications (which also runs the airport) that exit visas have been required with effect from 1 June 2008 (in order to control the departure of expatriates in essential occupations who might be needed during the celebrations). The Justice Ministry (which issues visas) says from that date that exit visas are only obtainable by expatriates on personal application to a Toupean consulate outside the country and that they ought to have been secured before arrival in Toupee. Question . (a) At each stage, explain the Contractor’s position under the contract, referring to all the relevant clauses. If you think that the Contractor, or the RE, or the Engineer, or the Employer has acted unwisely, point out what ought to have happened under the contract. ?80% . (b) What are the claims of the Employer? Are there any difficulties facing them? What are they? Will the Employer be able to overcome them, and if so, how? 20%