Determination of Subcontractor’s Claims Resulting from Variations and the Roles of Contractor and Engineer

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Reference: FIDIC Yellow Book 2019 Conditions of Subcontract for Plant and Design-Build & FIDIC Yellow Book 1999 Conditions of Contract for Plant and Design-Build

When a Subcontractor submits a Notice of Claim resulting from a variation instructed by the Engineer, questions often arise regarding who is responsible for determining that claim and how it fits within the contractual framework of the FIDIC contracts. Specifically, you’re asking:

Who determines the Subcontractor’s claim—the Engineer or the Contractor?
Does the Contractor forward the claim to the Engineer for determination?
Is the Contractor allowed to make the determination?
Does the Employer’s role in payment affect this process?
Do the Main Contract (MC) conditions provide sufficient time for the Contractor to submit the Subcontractor’s claim to the Engineer and obtain a determination?

Answering these questions requires an understanding of the interplay between the Subcontract and Main Contract clauses, particularly those related to claims and variations.

Table of Contents

1. Who Determines the Subcontractor’s Claim?

Under the Subcontract, the Contractor is responsible for determining the Subcontractor’s claim, not the Engineer. This is explicitly stated in:

Clause 13.2 [Valuation of Subcontract Variations]:
- “If agreement is not reached, the Contractor shall make a fair decision as to the appropriate and applicable adjustment(s) to the Subcontract Price and the Subcontract Schedule of Payments…”
Clause 20.2(d):
- “The Contractor shall…make a fair decision, having due regard to the Subcontractor’s submissions, the extent to which his claim for additional payment and/or extension of time has been substantiated, and all other relevant circumstances…”

Therefore, the Contractor is both permitted and obligated to make the determination regarding the Subcontractor’s claim if an agreement cannot be reached through consultation.

2. Does the Contractor Forward the Claim to the Engineer for Determination?

The Contractor is not required to forward the Subcontractor’s claim to the Engineer for determination. However, the Contractor may need to submit a corresponding claim to the Engineer under the Main Contract if:

The Subcontractor’s claim affects the Contractor’s obligations or entitlements under the Main Contract.
The Contractor seeks to recover the cost or time impacts from the Employer.

Clauses Relevant to This Process:

Clause 20.1 [Notices]:
- “Whenever the Contractor is required by the terms of the Main Contract to give any notice or other information to the Engineer or to the Employer…the Subcontractor shall give a similar notice or other information in writing to the Contractor…”
Clause 14.6 [Contractor’s Application for Interim Payment Certificate]:
- “The Contractor shall make appropriate provision for the amounts set out in each Subcontractor’s interim statement in the Contractor’s next Statement under Main Contract Clause 14.3…”

Therefore, while the Contractor manages and determines the Subcontractor’s claim, they are responsible for including the relevant amounts in their applications to the Engineer under the Main Contract. This allows the Contractor to seek certification and payment from the Employer for amounts that include the Subcontractor’s entitlements.

3. Is the Contractor Allowed to Make the Determination?

Yes, the Contractor is allowed—and required—to make the determination if no agreement is reached with the Subcontractor.

Clause 13.2 [Valuation of Subcontract Variations] and Clause 20.2(d) give the Contractor the authority to make a fair decision.

The Contractor must act fairly and reasonably, considering all relevant information provided by the Subcontractor.

4. Role of the Employer and Payment Flow

Clauses 14.6 and 14.7 highlight the relationship between the Contractor’s receipt of payment from the Employer and the payment to the Subcontractor.

Contractor’s Obligations:

Include Subcontractor’s Amounts in Applications:
- “The Contractor shall make appropriate provision for the amounts set out in each Subcontractor’s interim statement in the Contractor’s next Statement under Main Contract Clause 14.3…” (Clause 14.6)
Advise Subcontractor of Payment Status:
- Upon request, the Contractor must inform the Subcontractor about:
  - The submission date of the Contractor’s Statement to the Engineer.
  - The date the Interim Payment Certificate was received from the Engineer.

Contractor’s Right to Withhold or Defer Payment (Clause 14.7):

The Contractor may withhold or defer payment of sums in a Subcontractor’s interim statement under certain conditions:

(b) Non-Certification by the Engineer:
- “The amounts included in the Subcontractor’s interim statement are not certified by the Engineer…”
(c) Non-Payment by the Employer:
- “The Employer has failed to make payment in full to the Contractor in respect of these amounts…”
Limitations on Withholding Payment:
- The Contractor cannot withhold payment under sub-paragraph (c) if the Employer’s failure to pay is due to:
  - (i) Any act or default of the Contractor under the Main Contract.
  - (ii) The Employer’s bankruptcy or insolvency.

Implications:

Payment to the Subcontractor is Affected by the Engineer’s Certification and Employer’s Payment:
- The Contractor’s obligation to pay the Subcontractor may be contingent upon receiving certification and payment under the Main Contract.
Contractor’s Obligation to Notify:
- The Contractor must notify the Subcontractor within 70 days, providing reasons and substantiating documentation if they intend to withhold or defer payment.

5. Does the Main Contract Provide Sufficient Time for Submission and Determination?

Yes, but the Subcontractor must act promptly.

Under the Main Contract, the Contractor has specific timeframes to submit claims to the Engineer:

Main Contract Clause 20.1 [Contractor’s Claims]:
- Notice of Claim: Within 28 days.
- Detailed Claim: Within 42 days.

Subcontractor’s Obligations:

Clause 20.1 [Notices]:
- The Subcontractor must give notice and information “in good time to enable the Contractor to comply with these terms of the Main Contract“.

Therefore, the Subcontractor must submit notices and claims promptly to ensure the Contractor has sufficient time to submit corresponding claims to the Engineer.

6. Summary of Roles and Processes

Subcontractor’s Claim Determination:

Determined by the Contractor under the Subcontract.

Contractor’s Role:

Determines the Subcontractor’s claim fairly.
Includes relevant amounts in applications to the Engineer under the Main Contract.
May submit a corresponding claim to the Engineer to recover amounts from the Employer.

Engineer’s Role:

Determines the Contractor’s claims under the Main Contract.
Does not directly determine the Subcontractor’s claim.

Employer’s Role:

Pays the Contractor for certified amounts under the Main Contract.
Indirectly affects payment to the Subcontractor through payment to the Contractor.

7. Practical Steps for the Subcontractor

Provide Timely Notices and Claims:

Under Clause 20.2 [Subcontractor’s Claims]:
- Notice of Claim: Within 21 days after becoming aware.
- Detailed Claim: Within 35 days after becoming aware.

Assist the Contractor:

Provide necessary information to support the Contractor’s claim under the Main Contract.
Communicate any direct instructions from the Employer or Engineer to the Contractor promptly.

Monitor Payment Status:

Request updates from the Contractor per Clause 14.6.
Be aware of any reasons for withholding or deferring payment under Clause 14.7.

8. Challenges and Solutions

Challenge: Payment to the Subcontractor is delayed due to non-certification or non-payment.

Solution: Ensure all claims are properly documented and justified to facilitate certification.
Engage with the Contractor to understand any issues affecting payment.

Challenge: Contractor’s determination is perceived as unfair.

Solution: Utilize the consultation process under Clause 13.2 and Clause 20.2(d).
If unresolved, refer the dispute to the Subcontract Dispute Adjudication Board (DAB) under Clause 20.4.

Challenge: Tight timeframes for claims submission.

Solution: Implement internal procedures to identify and notify claims promptly.
Maintain detailed records to support claims.

9. Conclusion

The Contractor determines the Subcontractor’s claims under the Subcontract, acting fairly and reasonably.
Payment to the Subcontractor may be contingent upon the Engineer’s certification and the Employer’s payment, as per Clauses 14.6 and 14.7.
The Subcontractor must provide timely notices and detailed claims to enable the Contractor to comply with the Main Contract.
Open communication and cooperation between the Subcontractor and Contractor are essential.
Dispute resolution mechanisms are available if disagreements arise over determinations or payments.