A recent decision of the Hong Kong High Court has considered the effect of claims notification provisions which require a contractor to state the contractual basis of a claim. Such a requirement now forms part of the standard FIDIC claims notification procedure across all its 2nd Edition forms. The Hong Kong High Court has found that such provisions limit the grounds on which subsequent dispute resolution proceedings can be brought, ruling out any which are not specified in the relevant notice.
FIDIC 2nd Edition Claims Procedure
The FIDIC 2nd Edition contracts released in late 2017 contained significant revisions to their standard claims notification procedure. For a full analysis of the revised procedure, please see our Law-Now following the release of the 2nd Edition here. In summary, two notices are required: a first within 28 days detailing the event or circumstance giving rise to the Claim and a second within a further 56 days giving full details of the Claim including "statement of the contractual and/or other legal basis of the Claim".
Failure to serve either notice can result in the barring of a Claim. In such circumstances, the Engineer (or Employer under the Silver Book) may give a notice asserting the operation of the time bar. This may be challenged by the contractor and the late submission of either notice may be excused depending on the circumstances, including any reasons for the delay and any prejudice caused to the Employer.
It is unclear whether the Contractor's statement of the contractual and/or other legal basis of a Claim is intended to limit the scope of any subsequent referral to the Dispute Avoidance and Adjudication Board ("DAAB") and thereafter to arbitration. The procedure does, however, require the Engineer (or Employer under the Silver Book) to determine the Claim as put forward in the Contractor's two notices. It is this determination which is then to be referred to the DAAB and then to arbitration. It may be open for the Employer to argue that any new legal basis for the claim is either time barred or must first be the subject of a further round of notices and a determination by the Engineer / Employer as to whether delay in submitting those notices is to be excused.
Maeda Corporation v Bauer Hong Kong Ltd
Similar issues were considered in a recent case arising from the construction of the Hong Kong to Guangzhou Express Rail Link connecting Hong Kong to mainland China. Maeda were appointed Main Contractor for the tunnelling aspects of the project and subcontracted certain diaphragm wall work to Bauer. During the course of the works, Bauer encountered unforeseen ground conditions and claimed additional payment from Maeda. Bauer initially claimed that the additional work required to overcome the conditions amounted to a variation under the subcontract. By the time the claim had reached arbitration, Bauer had expanded its grounds of claim to an unforeseen ground conditions clause in the subcontract as well the variation clause.
The claims notification provision under the subcontract required Bauer to give a notice of claim within 14 days of the event, occurrence or matter giving rise to the claim. A further notice, described as a condition precedent to entitlement, was to be given 28 days later setting out the "contractual basis together with full and detailed particulars and the evaluation of the claim". The subcontract also made clear that Bauer would have no right to any additional payment unless the claims notification procedure had been "strictly complied with".
It was common ground that Bauer's initial notices of claim only referred to the variation provisions of the subcontract. Maeda argued that Bauer's claim under the unforeseen ground conditions clause was therefore barred. The arbitrator rejected this challenge, noting that it was unrealistic to expect a party to finalise its legal case within the periods provided for notification of a claim. It was sufficient in his view for the factual basis of a claim to be communicated. As the arbitrator had rejected Bauer's case under the variation clause, this finding was crucial to the success of Bauer's claim (under the unforeseen ground conditions clause).
The Hong Kong High Court overturned the arbitrator's decision on this issue. Given the notice provisions were to be strictly complied with and were expressly designated as conditions precedent, Bauer's initial notices limiting the contractual basis of its claim to the variation provision were binding. As such, Bauer "should have no right to the additional extra payment, loss and expense claimed" under the unforeseen ground conditions clause. As regards any unfairness in requiring Bauer to finalise its legal case within the short period required by the notification provisions:
"[Bauer] had 42 days from the event or occurrence giving rise to the claim to serve the notice required under Clause 21.2. That is not an unrealistic timeframe to identify the contractual basis of a claim."
Conclusion and implications
There are evident parallels between this case and the claims notification procedure under the FIDIC 2nd Edition. Both require a second notice setting out the contractual or legal basis for a claim. Both also contain language barring claims which do not comply with this requirement. The FIDIC procedure permits non-compliance to be excused in certain circumstances, but the decision in this case would appear to remain relevant in circumstances where any non-compliance is not excused.
One argument which does not appear to have been considered by the arbitrator or the Hong Kong court in this case is why the second notice should need to set out an exhaustive statement of legal basis. Provided that a legal basis is stated, it might be argued that the requirements of the notice provision have been satisfied and need not impose any restriction on broadening the legal basis at a later date. On the other hand, the close linkage in the FIDIC procedure between the notices of claim, the subsequent determination by the Engineer / Employer, and the referral of that determination to the DAAB or to arbitration, may provide arguments in support of a stricter interpretation.
Given that notices of claim are often submitted by project teams without legal input, the issue considered in this case is likely to arise with frequency on projects let under the FIDIC 2nd Edition forms. As we noted after the release of the new edition, those parties who find themselves subject to the new claims notification procedure will need to be well prepared and adequately resourced to manage the new provisions. Those who are not may find that entitlements have been unwittingly lost.
Maeda Corporation v Bauer Hong Kong Ltd  HKCFI 916