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Delay Penalty to Main contractor

14 replies [Last post]
Fri, 2009-01-30 13:22
Deepak Sharannavar
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Dear Friends,

I need your valuable inputs for the following issue:

We are main contractors for a project.Our contract has a delay penalty of 300,000 per day upto a max limit of 10% of contract value = approx 25 million. We have a nominated subcontractor who was nominated on time and within budget allocated in BOQ. He is currently under a delay of completing his scope of works and thus the overall project. I have completed all my scope of work. I have entered into a subcontract agreement with him as per FIDIC 1987 GC of contract. His contract with us is only 20 million, accordingly in agreement his delay penalty is 20,000 per day with a max limit of 10 % of contract value = 2 million. Now if the engineer puts a delay penalty on me i cannot recover full amt of this loss! and we will encounter huge losses for his delayed completion of works.
I want to know what are available options to me. Also in future what should be my course of action to cover myself against such risk.

Dear Friends please go ahead and give solutions available in other forms of contracts also.

Thanks,

Deepak.
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Replies

Wed, 2009-03-25 13:27
#1
toh michael
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Hi all,
Just to raise some doubt . Shouldn,t the .NSC be the owner risk as well when come to performances and ability to complete the job of the NSC ? I believe main contractor only get a limitation of profit and attendance on the NSC which contractualy is only sufficient to cover for the usual preliminary item in providing full support and to control and monitor NSC work in accordance to the work phase . In short all the NSC performance and the quality of work still categories as OWNER risk.

If really there is LD being impose then it should be imposed directly to the NSC to the limitation of the NSC contract . As long as the main contractor show all proof and evidance on the NSC delay and pin them down.

Advice needed .

Cheers



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Sun, 2009-03-08 10:23
#2
David Wallace
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Deepak,

Don’t forget that here in the UAE we can also look to Civil Code & Sharia’a for guidance.

Look for ’Unjust Enrichment’, but at the same time, why-oh-why did you let your subbie run away with your time?

Davie.
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Fri, 2009-03-06 13:02
#3
Deepak Sharannavar
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Dear Ken,

Thanks for your valuable inputs. I have checked the S/c aggrement and we have included the indemnity clauses for damages and loss and expense. But further to that in one of the clauses regarding the program of works i have also included the max value of LD to be 10% of contract value so am still in confusion as to which caluse is more suitable.

Deepak
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Fri, 2009-02-20 07:58
#4
Ameya Kulkarni
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Hi,

Thanks a lot for clearing my doubt,Sir.

Regards,

Ameya
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Fri, 2009-02-20 07:28
#5
Ken Sadler
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Hi Ameya - welcome to the forum!

It would not have been necessary to have a formal indemnity clause in the subcontract agreement, but I would have argued that the level of LADs in the subcontract should have mirrored those in the main contract. This would have seemed excessive to the subcontractor and he may or may not have been prepared to enter into contract.

That being the case I would have gone back to the Employer/Engineer and said "your chosen subcontractor won’t agree to your level of damages. What do you want me to do?"

1 Tell me of another subcontractor who will accept the level of LADs?

2 Agree to waive the damages if a delay is caused by the subcontractor?

3 Get the subcontractor to agree a higher price (recoverable) to take account of hs greater risk?

Which ever option is chosen, its not the main contractor’s concern. Its not his subcontractor!!

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Tue, 2009-02-17 05:13
#6
Ameya Kulkarni
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Hi Everyone,

I am new to this website so kindly excuse my if i put some silly questions as per you.

Mr. Ken,

By saying,’he should have agreed to indemnify you to that extent’, do you mean that the Sub Contract Agreement should have a Indemnity Clause which i beleive is absent in Deepak’s Case?
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Sun, 2009-02-01 15:14
#7
Ken Sadler
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Gosh - some varied bits of advice for you there!!!

Your first issue is the nomination of the sub-contractor himself. Was the nomination done correctly with the proper instruction and documentation?

Secondly, why do you say "accordingly his delay penalty is 20,000 per day" Why should this be so? If you have the risk of LDs at 300,000 per day and the sub-contractor causes the delay, he should have agreed to indemnify you to that extent. It should not matter to you as main contractor that this amount would seem unfair - after all, it was not you who chose this sub-contractor - it was the Employer / Engineer.

I note your contract is older than the 1999 version infront of me so you would have to check but clause 5.2 allows the main contractor to object to the nomination of a sub-contractor if the subcontractor is not prepared to indemnify the main contractor from consequences of his failure to perform his obligations. This is exactly what has happened, he has not indemnified you, BUT, you let him get away with it and you did not raise an objection when you should have.

So I’m afraid you are too late to rectify this problem which is your own making. You should look to whoever drew up the sub-contract or gave you advice, and try not to make the same mistake again.

You should think hard before terminating the sub-contractor’s employment - chances are he will have at least some reason why he is delayed and that being the case, your termination will be unlawful and your liability to him will could be considerable.

Your best course of action is to assist the sub-contractor to make up the delay, and at the same time ask the Engineer to consider a reduction in the damages but if he does so,it will be on an ex-gratia basis.

Finally, LDs in the UAE are not as rigidly held as in other jurisdictions and the courts are sometimes willing to amend them to reflect the actual damage suffered. However, this means a trip to court, with its attendant time and cost, and in order to ask the court to increase the damages, you would have to have a better reason than "I messed up when I wrote the contract"

Ignorance is no defence.

Good luck
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Sat, 2009-01-31 15:35
#8
Samer Zawaydeh
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Dear Deepak,

You have to make sure that you hand over the 80% of the work that is completed. The amount of LDs is reduced by an approximately equivalent amount per the Engineer evaluation. This is the standard contract.

If this is possible in your case, your LDs problem might be solved and your LDs with your Subcontractor might be equivalent to the LDs with your Employer.

Best Regards,

Samer
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Sat, 2009-01-31 11:52
#9
Deepak Sharannavar
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Thank you all for good advices. Now let us see from consultants view. As per FIDIC condtions of contract the definition of NSC says that once we get into a S/c agreement with them they are deemed to be S/c to main contractor. May be consultant will reduce the amt of delay but even then the i cannot recover it fully coz he is such a small S/c.

please give your comments also on the care to be taken in future contracts.
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Sat, 2009-01-31 11:12
#10
Hady Mohamed
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Dear Deepak,

I would strongly advise against uprooting the S/C from the site and taking over the work yourself. If your company was a specialist in executing that kind of work, the work may not have subcontracted to start with. In addition, contracting a new S/C to finish the work may prove to be a more expensive option, and does not necessarily guarantee that the job will be finished on time.

Support the S/C with all you’ve got. Get them to crash their schedule and work more shifts. If they are lacking in resources help them, and backcharge from their invoices.

Meanwhile you have to acquire professional advice on the liability of the Client to their nominated S/C’s performace, or lack thereof.

Good Luck
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Sat, 2009-01-31 10:45
#11
Samer Zawaydeh
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Dear Deepak,

Since you are the main Contractor, I would suggest that you support every activity of your subcontractor with Supervisors from your staff. I would also recommend that you select the best Project Manager you have and give him complete charge of the job site with 24 hours access.

It is essential the the management/ owner of the Subcontractor be available at site on a daily basis more than 12 hours per day.

Usually for critical projects, upper management will take over in these cases. What you need is to spend your time in the filed completing the job.

Make sure that you support all your decisions with the necessary notifications. Review all the activities, note where the subcontractor is late and support him with your manpower and let him pay the extra expenses.

Good luck,

Samer
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Sat, 2009-01-31 03:53
#12
Trevor Rabey
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It is surprising (or maybe not) that a $250M project receives such bad legal advice as to sign the contract in the first place. Perhaps you can sue your own lawyers.

For future contracts it’s easy. If those terms are in there, don’t sign it.

Having LD capped at 10% does not necessarily exclude any other common law rights that you may have to sue for specified damages. It depends on the contract.

Does your client intend to play hard ball and collect every dollar that this swindle entitles him to, or will he realise that the nominated sub-contractor is the cause of the delay, ie a client delay?

Can you refuse to pay the LD on the grounds that the nominated sub-contractor is the cause of the delay?

Or does the client just deduct LDs from progress payments?
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Fri, 2009-01-30 15:26
#13
Deepak Sharannavar
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Dear Sameer,

He is a specialist contractor and the job is a special kind of building. Even if i terminate him its going to take a long time to appoint a new s/c and get all approvals and then procure the materials and comlete the job. He has already completed around 80% of job. but his balance 20% may just take another month to complete for which i may have to pay a heavy price!!. I have been sending him delay notices but the issue remains that i cannot recover from him more than 10 % of his contract price for liquidated damages.

The issue again remains how can we tackle such risk transfer issues in future contracts.
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Fri, 2009-01-30 13:29
#14
Samer Zawaydeh
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Dear Deepak,

The best solution is to take over his works and complete it yourself. I would assume that he is a specialist subcontractor.

Of couse you can find someone better and stronger and substracting the cost of the new entity from his contract. Since you have a FIDIC contract, please start issuing him delay notices immediately, and I would start using Clause 15 (Terminiation by Employer) which is you in this case.

In all events, the cost of this will be less than the cost of the delay penalties. This requires high level decision making from your Company. Unless you make an agreement with the Engineer to accept the delayed work without delay penalties, if it is not very important to the commissioning of the project.

Best Regards,

Samer
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