RIAA defeats FIDIC price adjustment claim for major Karachi water infrastructure project

RIAA secured a decisive victory for a leading public sector entity before a Dispute Board established under a FIDIC Red Book 2010 construction contract for the Greater Karachi Bulk Water Supply Scheme (K-IV Phase I). The FIDIC contract dispute involved defeating a Joint Venture Contractor’s price adjustment claim with major implications for Pakistan’s infrastructure sector.

The Contractor challenged the Engineer’s determination before the Dispute Board, a mandatory prerequisite to arbitration under Clause 20.6. The Contractor sought upward price adjustment under Clause 13.7 (Adjustments for Changes in Legislation), arguing a Sindh Revenue Board tax exemption issued after contract execution constituted a “change in law” event.

The Contractor claimed the exemption rendered its input tax unrecoverable, whereas at contract execution it could adjust input tax against output tax. The Contractor argued this effectively increased costs, warranting price adjustment under the contract’s change in law provisions.

We dismantled this argument by demonstrating that the Contractor had misclassified its services under the Sindh Sales Tax on Services Act 2011. Construction services fell under Tariff Heading 9824.0000, attracting 5% rather than the claimed 13%. This misclassification meant the Contractor’s premise about increased costs was fundamentally flawed.

We successfully argued the SRB exemption did not constitute a “change in law” triggering Clause 13.7. They established the employer maintained all required financial arrangements. The Contractor’s notice threatening work reduction violated contractual procedures.

The Dispute Board dismissed all claims and upheld the public entity’s position entirely. The decision is binding on both parties pending any arbitration. Under Clause 20.4, the decision must be promptly implemented unless revised through amicable settlement or arbitral award. The ruling confirmed contractors cannot claim price adjustments in FIDIC contract dispute proceedings based on tax classification errors.

“This decision reinforces the importance of precision in tax classification within commercial transactions and fortifies the position of public entities engaged in major infrastructure projects across the country,” said Hasnain Naqvee, Senior Partner at RIAA Barker Gillette.

The ruling clarifies how change in law provisions operate in FIDIC contract disputes in the context of sales tax on services.

The matter was led by Saffi-Ul-Hassan (Senior Associate & Litigation Head – Lahore) under the guidance of Hasnain Naqvee (Senior Partner – Pakistan).

For assistance with complex infrastructure contract disputes, contact Hasnain Naqvee today.

This article is not legal advice; it provides information of general interest about current legal issues.

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RIAA Barker Gillette is Pakistan’s premier law firm, with an on-the-ground presence in three major cities in Pakistan: Karachi, Islamabad and Lahore, and affiliated offices in Dubai (DIFC) and London. 

The firm practices in all areas of corporate, commercial and dispute resolution law. Leading international legal directories consistently recognise the firm as a top-tier law firm in Pakistan.

RIAA Barker Gillette is the exclusive member firm in Pakistan for Lex Mundi, the world’s leading network of independent law firms with in-depth experience in over 125 countries worldwide.