John FFF O’Brien of John Farage O’Brien Dispute Resolution Consultants casts a critical eye over the Office of Public Procurement’s recent draft letter of agreement that deals with ex gratia payments from Employers to Contractors.
“Covid-19: PWC & ‘Ex Gratia’ Payments The Oxford dictionary online defines ‘ex gratia’ as something that is ‘given or done as a gift or favour, not because there is a legal duty to do it’…”
Covid-19 Public Works Contract
Private Contractors on public works contracts do not get gifts or favours from the Government. For this reason, the publishing by the Office of Government Procurement (OGP) of a draft letter of agreement dealing with ‘ex gratia payments from Employers’ to Contractors, can only be cautiously welcomed.
For reasons that I am sure you are well aware, which include, inter alia, the indemnity provided by Employers’ for negligence causing illness or death under Clause 3.5, this action by the OGP is not unexpected. However, you can be sure that these ex gratia payments will not cover the full extent of Employers’ liability to Contractors now, or for the many months to come long after 4th May 2020 when the country, slowly and progressively, gets back to work – which will certainly not be under the same conditions that the work was tendered or contracted upon.
As a general point, I am minded to conclude that this move by the Government, to offer any ex gratia payment, is the genesis of setting an acknowledgement (or dare I say) precedent in paying compensation to contractors of their actual prolongation losses, which is in contrast to the normal denial under the controversial tendered schedule 2D daily delay rate.
With regard to the specifics of the OGP’s Model Form Supplemental Agreement, entitled Public Works Contracts Covid-19 Ex-Gratia Payment By The Employer Letter Agreement v1.0, published 23rd April, I comment as follows:
Entitlement to Delay Costs
I disagree with the Employer’s assertion at Paragraph 4 that the Contract does not provide an entitlement for the Contractor to recover costs associated with the delay arising from the closure of the site in the circumstances contemplated by the Public Health Measures.
If the Employer was correct in their assertion in this regard, then the Employer’s position would simply be, that the Covid-19 pandemic is a Part 1 Schedule K Event 15 and would give time but no money. Hence, any payment would be a genuine ex gratia gift.
There exists a very important aspect that does not make this pandemic a Part 1 Schedule K Event 15, [which carries a Yes/No designation to delay & compensation] and this is that the Office of the Taoiseach decided that each Employer [public and private] had to decide for themselves, [not the Government nor not by any act or law] whether their site/project was essential or non-essential and whether to remain open or not.
Therefore, if the site was to remain open, then it could only do so under the disruption of social distancing constraints, (which could not be denied by the Employer under the risk of the indemnity given under clause 3.5), and a change in the manner of how works are to be executed and a requisite EoT would apply by way of change order Part 1 Schedule K Event 1, which carries a Yes/Yes designation to delay & compensation.
Or, if the site was to be closed, then the works could only be suspended under Part 1 Schedule K Event 3, which carries a Yes/Yes designation to delay and compensation.
That being so, this ex gratia payment is a welcome gift but will be offset against the actual costs that Contractors will seek to claim and should claim.
Opening the Kimono
Paragraph 3(a) (i) & (ii) needs to be and will be, approached with extreme caution by contractors.
For the purposes of the Employer [or the party nominated on its behalf] determining the amount of ex gratia payment the Contractor has to:
- Provide a full and complete breakdown of the contract preliminaries on a transparent and “open book” basis; and [represent and warrants that]
- Have made “all its records”, supporting and vouching material available.
While a claim for prolongation loss and expense is generally the remedy for critical delay caused by an Employer culpable event under a standard form, to put the contractor back into the financial position it was in before the event or breach occurred, even in arbitration, disclosure or discovery is not carried out on an “open book” basis to prove such loss. Supervised inspection of agreed categories of discovery or relevant categories directed by an arbitrator is the norm, but not an open-ended free for all for opposing parties to indulge.
Open book is a completely undefined term in the supplemental agreement letter, and if signed by a Contractor, then the definition would come down to whatever the Employer required in order to satisfy its curiosity.
All its records is another completely undefined term in the supplemental agreement letter, and if signed by a contractor, it could expose it to the whims of overeager ER.
Furthermore, the OGP Update 1 dated 14 April 2020, Section 4 ‘Calculating Ex-gratia Payments’ sets down a completely obscure formula that in no way produces a figure, which would compensate the Contractor for its actual losses as a result of Covid-19.
Unacknowledged future costs
At Paragraph 3 (c) the employer seeks to limit his exposure to liability with regard to the denying of any ex gratia claim/payment for supervisors (individuals) who have left employment in connection with the works, or have been laid off since 28th March 2020. While this might be the employer’s prerogative to do so as he is the one, issuing a gift, the cost of a supervisor or any individual that had to be laid off or made redundant; and the consequential costs of re-employing individuals [which may include an increase from a price fluctuation in wages], may very well form part of the substantive claim for compensation which the contractor will be entitled.
Payments are “final and binding”
Paragraph 4 states that the decisions of the Employer, relating to the ex gratia payment “including the amount and make-up of it are final and binding”; Is final and binding forever, or just until [for example] the Employer decides they have paid too much ex gratia under paragraph 7?
To me, this seems to be a moot point since any sums that Contractors do not recover through the ex-gratia payment will likely form part of a claim under the Contract. The nature of the ex gratia payment being final and binding is therefore partially irrelevant.
Site Closure Costs
At Paragraph 6 – the Employer expressly distances itself from any liability or responsibility in respect of “Site Closure Costs”. These costs and their relationship with the Contract are kept deliberately vague. In particular, the relationship between Site Closure Costs and compensation under a suspension pursuant to Part One schedule K Event 3 is entirely avoided. This is a glaring absence.
By the Contractor signing up to the supplemental letter (purportedly extending the entire-agreement) are they now essentially accepting that the ex gratia payment (gift) is in fact the Site Closure Costs? When in fact, they most certainly cannot be – especially in the manner in which the employer calculates the ex gratia payments, under Section 4 of the OGP Update 1 dated 14 April 2020.
Claims, Maintaining Entitlements and Claw-backs
Paragraph 7 states:
“If the Contractor makes any claim under the contract or otherwise against the Employer in connection with the ‘Public Health Measures’ or the Regulations, and is successful in such claim, the amount payable to the Contractor as a consequence of such claim shall be reduced by the amount of the ex gratia payment.”
This clause is interesting in that it acknowledges explicitly the ability of Contractors to make additional claims for money on top of whatever is agreed as an ‘ex gratia’ payment. In order that Contractors maintain their entitlements so that they can pursue such claims, I would advise all Contractors to raise 10.3 notices now in respect of their actual costs [and or notify the ongoing costs] – to protect themselves from any attempt at an Employer time bar further down the road.
Public Health Measures, while published by gov.ie, do not change the fact that the Covid-19 pandemic has not been classified nor does it meet the criteria of a Part One Schedule K Event 15, and it is for the Employer [the Government] under a Public Works Contract, to either suspend the works under an Event 3 or to instruct continuance at social distancing and or other imposed constraints on the manner in which the works are executed under Event 1 – both circumstances entitling the contractor time and compensation.
I see a potential sting in the scorpion’s tail of the supplemental agreement (letter) in the second part of Paragraph 7, which states:
“And in the event that the ex gratia payment exceeds the amount determined is due to the contractor in connection with such claim, the contractor shall pay to the Employer the amount of such excess within 10 days of such amount being demanded.”
If the Employer determines [wrongly in my view] that any such other claim in connection with the Public Health Measures, that the Schedule 2D [where a contractor has tendered a €Zero daily rate] applies, will the contractor then have to give the entire ex gratia payment back to the Employer?
Private Contractors, on public works contracts, do not get gifts or favours from the Government.
(John FFF O’Brien 28th April 2020)
John FFF O’Brien is principal of John Farage O’Brien Dispute Resolution and Legal Support Consultants. He has been engaged in resolving construction disputes for more than 19 years, and his firm recently passed a significant milestone, handling disputes involving €3 billion worth of contracts. More details at www.johnfarageobrien.ie
Also By John FFF O’Brien: COVID-19: Key Issues for Contractors Operating under Public Works Contracts to Consider