When notice has to be given of a claim for adjustment of pay under clause 20.1 FIDIC | In Principle

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When notice has to be given of a claim for adjustment of pay under clause 20.1 FIDIC

Not all claims relating to performance of a contract are subject to clause 20.1. This clause provides for a severe penalty of expiry of a claim for not giving notice of a claim within 28 days. Above all, most claims for adjustment of pay are not covered by this clause.

Supreme Court judgments on the nature of the time limit for giving notice of a claim

Clause 20.1 of the FIDIC standard contractual conditions provides that the claim expires if the contracting authority is not given notice of the claim within 28 days of the grounds for the claim arising. The consequences of this time limit applying in contracts governed by Polish law have been a topic of discussion in Polish legal literature and case law for a long time. The definitive judgment in this issue is the relatively recent  Supreme Court judgment of 23 March 2017 (V CSK 449/16). To support its standpoint, it pointed out explicitly the distinction between contractual and statutory rights of parties to a contract. The effectiveness of the 28-day time limit for giving notice of a claim in fact depends on the type of right (contractual or statutory) on which the claim is based.

Contractual claim

In the Supreme Court’s view, the penalty described is effective with respect to claims based on contractual rights. For these rights, the 28-day time limit provided for in clause 20.1 is an absolute contractual time limit, and time limits of this kind are effective under Polish law. The Supreme Court has stated that this time limit can be compared to the statutory time limit for complaints and an act of diligence envisaged in provisions on exercise of rights under the statutory warranty in the case of a sale agreement, as well as in other provisions. These provisions require the buyer to give the seller notice of a defect within one month of the defect being detected, failing which its rights expire.

For this reason, notice of a claim for adjustment of pay is required according to the procedure provided for in clause 20.1 if the claim arises under a contract. Clauses 13.7 and 13.8 of the FIDIC conditions of contract are examples of contractual provisions of this kind in adjustment clauses.   The first provides for the prerequisites for adjustment of pay due to changes in law, while the second specifies rules for adjustment of pay to account for changes in costs. In addition, regardless of whether the contract is based upon FIDIC conditions of contract, more and more frequently the parties include contractual clauses providing for the mechanism for adjustment of pay in certain circumstances.

If the contractor wishes to formulate a claim based on the contractual clauses described above, it has 28 days to give the contracting authority notice of the claim, and the claim for adjustment of pay expires if the time limit is not observed.

Statutory claim

More frequently, contractors seek adjustment of pay due to them by amendment of a contract in court; requests for amendment of a contract on the basis of the contract provisions are less common. The main reason for this is the mandatory nature of the judgment, and, in the case of public procurement, legal sanction of disbursement of funds in excess of the amount established during the tender. Statutory adjustment clauses such as Art. 3571, Art. 3581 § 3 and Art. 632 § 2 of the Civil Code are grounds for seeking adjustment of pay.

The penalty of expiry of a contractor’s claim under clause 20.1 does not apply to claims based on statutory rights. In the judgment described above, the Supreme Court found that according to the wording of clause 20.1, the clause does not exclude liability of the contracting authority under general applicable laws.  Exclusion in this way is possible under Art. 473 of the Civil Code, but it must be explicit and unambiguous. Therefore, for the claim to be effective (raised in fact in court) the contractor is not required to inform the contracting authority of the grounds for the claim within the time limit prescribed in clause 20.1. The prevailing view in case law, supported in legal literature and by practitioners, is similar.

A different stance has been taken, which I consider incorrect, for instance by the Warsaw Appeal Court in a judgment of 4 July 2016 (VI ACa 569/15). This judgment states that notice under Art. 3571 or Art. 632 § 2 of the Civil Code of a claim for adjustment “falls under clause 20.1 in terms of subject matter, because the intention is adjustment of the amount of the remuneration and in fact payment (extra payment)”.

Is it worth giving notice of a statutory claim?

Once it has been established that failure to serve notice of a statutory claim as required under clause 20.1 does not clause the right to seek statutory adjustment of pay to expire, the question is whether informing the contracting authority of discontent with the amount received might be advisable in order to protect the contractor’s interests.

Court judgments might be issued that interpret not informing the contracting authority that the contractor considers the received amount to be too low to be acceptance of the received amount. This thus constitutes an argument against the contractor in court proceedings. This argument cannot determine the outcome of a case regarding increase of the contractor’s remuneration, because, as pointed out, this standpoint has no basis in law. However, in a case regarding adjustment of pay, evidentiary issues play a significant part. Informing the contracting authority that the contractor considers an amount paid to the contractor over time (for example as successive interim payment certificates are issued) to be insufficient is of value as evidence with respect to the intention to seek an adjustment of pay and with respect to the amount being sought (calculated precisely during the court proceedings).

Thus, with respect to a statutory claim for adjustment of pay, making it known to the contracting authority that a claim exists is not so much a condition for that claim to be effective as a particular means of laying the groundwork for possible court proceedings later (if no arrangement is reached regarding adjustment of pay by amending the contract out of court).

Hanna Drynkorn, Infrastructure, Transport, Public Procurement & PPP practice, Wardyński & Partners