If an Employer sets off certified but unpaid sums without following Sub-Clause 2.5, it may breach contract terms under FIDIC 1999. This article explores whether Employers can bypass the Engineer’s role and why the clause’s wording is crucial to both Contractors and Employers.

Introduction

If an Employer sets off a sum of money in a way that it is not entitled to do, it is likely to impact on the Contractor’s cash flow and may give the Contractor a right to suspend or reduce the rate of working. In extreme circumstances, it may also entitle the Contractor to terminate.

Unfortunately, under the FIDIC Red and Yellow Books 1999, the Employer’s right to set off from an unpaid amount, which has already been certified in a Payment Certificate, is inexplicit.

Once the Employer has a Sub-Clause 3.5 determination, it may ask the Engineer to deduct the amount determined from the next Payment Certificate. This is clear.  

But rather than rely on the Engineer, can the Employer instead, itself deduct by way of set off from an amount already certified in a Payment Certificate but unpaid? This is not clear.

Sub-Clause 2.5 states:  

“The amount [determined under Sub-Clause 3.5] may be included as a deduction in the Contract Price and Payment Certificates. The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this Sub-Clause”.

What does this wording mean and why does it matter?

Why does it matter?

It matters to the Contractor because it may impact on cash flow.

It matters to the Employer because, under the FIDIC Red and Yellow Books 1999, if the Employer sets off against or makes any deduction when it is not entitled to do so, then this will be treated as non-payment of a sum due under the Payment Certificate and will (if the non-payment is not remedied in time) give the Contractor the right to suspend or reduce the rate of working under Sub-Clause 16.1. It might even entitle the Contractor to terminate under Sub-Clause 16.2. Further, the Employer may be liable to pay damages for breach of contract.

What does it mean?

The wording of Sub-Clause 2.5 is imprecise, and leaves open the question of whether an Employer is, or is not, entitled to set off from an amount already certified in a Payment Certificate but unpaid.

Position 1: The Employer cannot itself set off from an amount certified in a Payment Certificate

Position 1 is that an amount of money determined by the Engineer (under Sub-Clause 3.5) to be due to the Employer, can be included by the Engineer as a deduction in the next Payment Certificate but cannot be set off by the Employer from an amount already certified in a Payment Certificate but unpaid.

In other words, besides the Contract Price, only a Payment Certificate can be used for making a deduction from an amount certified. This can only be done by the Engineer and not by the Employer.

The rationale is that it is for the Engineer to administer the Contract and to record such deductions in the Payment Certificates.

There should be no risk to the Employer. If the Engineer has determined that an amount of money is due, then it ought to have no cause not to include it as a deduction in the next Payment Certificate.

It has been noted that the wording of the Sub-Clause 2.5 states that (with emphasis added):

“The Employer shall only be entitled to set off against … from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with [Sub-Clause 2.5]”

Despite this wording, there is in fact no provision in Sub-Clause 2.5 giving the Employer an express right of set off, beyond the Engineer’s power to include deductions in the Payment Certificates.^[1]

Professor Nael Bunni^[2] appears to support this position. He states:

“There are four options that may apply after a determination. These are as follows:

1. 1. The employer could ask the engineer to deduct the amount in his calculation of the next payment
   2. The employer could ask the engineer to deduct the amount from a sum payable under a payment
   3. The employer could ask the engineer to make a separate claim against the contractor for
   4. Either party may contest the determination”.

Option (a) applies if a Payment Certificate has not yet been issued.

Option (b) applies if a Payment Certificate has already been issued which should have had a deduction made but did not. Then, the Engineer should issue a corrected Payment Certificate showing the necessary deduction.

The Engineer may do so under the final paragraph of Sub-Clause 14.6 of the FIDIC Red and Yellow Books 1999, which deals with corrections and modifications to previous Payment Certificates.^[3]

The FIDIC Contracts Guide^[4] commentary on Sub-Clause 2.5 (with emphasis added) says:

“In the case of a payment having been claimed [by the Employer], the Engineer may include it as a deduction in Payment Certificates. Under Sub-Clause 14.7, the Employer is required to pay the amount certified (namely, incorporating this deduction), but is not entitled to make any further deduction. If the Employer considers himself to be entitled to any payment under or in connection with the Contract, he is thus required to follow the procedure prescribed in Sub-Clause 2.5 and is not entitled to withhold payment whilst awaiting the outcome of these procedures”.

The FIDIC Contracts Guide commentary on Sub-Clause 14.6 continues:

“The Employer is […] bound by the Certificate, and must make payment in full, irrespective of any entitlement to compensation arising from any claim which the Employer may have against the Contractor. If the Employer considers himself entitled to claim against the Contractor, notice and particulars must first be submitted under Sub-Clause 2.5. The Employer’s entitlement is then to be agreed or determined and incorporated as a deduction in a Payment Certificate”.

Sub-Clause 14.7 expressly requires the Employer to pay to the Contractor “the amount certified in each Interim Payment Certificate…”. There is no express right of set off in Sub-Clause 14.7 (although, as highlighted under Position 2, nor is there any express exclusion of such).

Sub-Clause 14.8 gives the Contractor the right to receive financing charges if it does not receive payment in accordance with Sub-Clause 14.7. There is no express right of set off in Sub-Clause 14.7 nor in Sub-Clause 16.1 (nor express exclusion of such).

Sub-Clause 16.1 gives the Contractor the right to suspend work (or reduce the rate of work) if the Employer fails to comply with Sub-Clause 14.7. There is no express right of set off in Sub-Clause 16.1 (nor express exclusion of such).

Sub-Clause 16.2 entitles the Contractor to terminate if (with emphasis added): “(c) the Contractor does not receive the amount due under an Interim Payment Certificate … (except for deductions in accordance with Sub-Clause 2.5 [Employer’s Claims])”. But this simply takes the reader back to the ambiguous wording of Sub-Clause 2.5.

Of course, the rights of set off are often dependant on the applicable Laws (including the governing law). Under English law, set off is a defence and a general right unless expressly excluded or reduced – although a clear intention is required before a contract can be properly interpreted as excluding set off.^[5]

The wording at Sub-Clause 2.5 is such an express exclusion. One legal text states:^[6]

“The authors consider the draftsman intended that any rights of set off that may exist under the governing law would be excluded by operation of Sub-Clause 2.5 (20.2(g)). For example, Sub-Clause 2.5 of the Red, MDB and Yellow Books provide: “The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate … in accordance with this Sub-Clause”.

In the FIDIC 2017 editions, Sub-Clause 20.2.7 is very similar:

“The Employer shall only be entitled to claim any payment from the Contractor and/or to extend the DNP or set off against or make any deduction from any amount due to the Contractor, by complying with this Sub- Clause 20.2”.

In FIDIC 2017: A Practical Legal Guide,^[7] Gabriel Mulero Clas writes:

“The purpose of this provision is to exclude the right of set off a Party will normally have under the governing law of the Contract”.

Another legal text^[8] says this wording in the FIDIC 2017 forms is:

“a general failsafe mechanism to ensure that the Employer does not make unauthorised deductions from the payments due to the Contractor”

Position 2: The Employer can itself set off from an amount certified in a Payment Certificate

Position 2 is that an amount of money determined by the Engineer (under Sub-Clause 3.5) to be due to the Employer, can be set off by the Employer from an amount already certified in a Payment Certificate but unpaid.

In essence, if the Engineer has determined that the amount is due (under Sub-Clause 3.5), why can’t the Employer just take its money? Why must it rely on the Engineer to first make the deduction in the Payment Certificate?

The point has been made^[9] that, as the wording in Sub-Clause 2.5 refers not to a deduction in a Payment Certificate, but to a deduction from an amount certified in a Payment Certificate, it may be said that FIDIC intended for the Employer to have a right to set off against the amounts certified by the Engineer, which is different to the Engineer’s power to include deductions in a Payment Certificate.

Another legal text states:^[10]

“The Employer cannot make any deduction by way of set off or any other claim unless it is in accordance with the Engineer’s Determination”.

This suggests that an amount of money which is determined by the Engineer to be due to the Employer may be set off by the Employer from an amount certified in a Payment Certificate, although it does not explicitly say so.

Sub-Clause 14.7 expressly requires the Employer to “pay” to the Contractor “the amount certified in each Interim Payment Certificate…”. The obligation to “pay” does not exclude payment by way of set off.

Set off is recognised in the termination Sub-Clause 16.2(c) through its reference to “deductions in accordance with Sub-Clause 2.5”. But, as stated above, this takes the reader back to the ambiguous wording of Sub-Clause 2.5. Might it be argued that, because of this wording, set off is permissible in the event of termination, but not in the event of suspension under Sub-Clause 16.1, or payment under Sub-Clauses 14.7 and 14.8?

There is case law to suggest that Sub-Clause 2.5 is not an express exclusion to the general right of set off. In NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago)^[11] the arbitrator took the view that Sub-Clause 2.5 could not prevent an employer raising a set off to any claim by the Contractor. The arbitrator stated:

“I agree …. that clear words are required to exclude common law rights of set off and/or abatement of legitimate crossclaims, and in my view, such set off/abatement should be taken into account in the final reckoning following the termination. The terms of clause 2.5 do not prevent this.”^[12]

The arbitrator found that Sub-Clause 2.5 did not bar the employer’s counterclaims, because the words of Sub-Clause 2.5 were not sufficiently clear to exclude common law rights of set off. That decision was upheld in the High Court of Trinidad and Tobago and the Court of Appeal. However, the Privy Council took a different view, finding that the clause was effective to bar the Employer from setting off its cross claims.

In an Interim Award in ICC Case 11813 (London, 2002), a claim was made against an Employer for unpaid certified sums under the FIDIC Yellow Book Test Edition 1998. The Employer raised as a defence a claim for liquidated damages and asserted that, as a matter of English law (particularly the principle enunciated in Gilbert-Ash)[13], it was entitled to raise a defence of set off, except where such rights were expressly excluded. The arbitral tribunal found that there was nothing within the contract that excluded the Employer’s right to set off. The wording of Sub-Clause 2.5 in the FIDIC Yellow Book Test Edition 1998 had omitted the key sentence:

“The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate … in accordance with this Sub-Clause”.

In the circumstances, the arbitrator permitted the Employer to advance its set off claim.

Conclusion

The wording of Sub-Clause 2.5 is ambiguous, and the right of an Employer to set off from an amount already certified in a Payment Certificate but unpaid is unclear.

If you are an Employer, you may wish to amend the provisions of Sub-Clause 2.5 so that nothing within Sub-Clause 2.5 shall be construed as preventing any right of set off or cross claim; and to maximise your protection, you must get advice before setting- off from an amount certified in a Payment Certificate.

If you are a Contractor, you may be entitled to suspend or terminate, and/or have a claim for damages for breach of contract.

Please get in touch at victoria.tyson@howardkennedy.com with your thoughts or to discuss any concerns.

[1] Ellis Baker, Ben Mellors, Scott Chalmers, Anthony Lavers, FIDIC Contracts: Law and Practice (Routledge 2009), page 340 paragraph 6.307.

[2] Nael G. Bunni, The FIDIC Forms of Contract, Third Edition (Blackwell Publishing 2005), pages 521-522.

[3] See also Sub-Clause 14.3 (g) of the FIDIC Red and Yellow Books 1999 which demonstrates the implications of any deduction made in a Previous Certificate on Sub-Clause 14.3 if the Contractor does not agree with that deduction.

[4] International Federation of Consulting Engineers, The FIDIC Contracts Guide: Conditions of Contract for Construction, Conditions of Contract for Plant and Design-Build, Conditions of Contract for EPC/Turnkey Projects (International Federation of Consulting Engineers 2000).

[5] Gilbert Ash v Modern Engineering [1974] AC 689; NEI Thompson v Wimpey Construction UK (1987) 39 BLR 65; Acsim v Danish Contracting (1989) 47 BLR 55.

[6] Ellis Baker, Ben Mellors, Scott Chalmers, Anthony Lavers, FIDIC Contracts: Law and Practice (Routledge 2009), page 435, paragraph 8.148.

[7] Corbett & Co, FIDIC 2017: A Practical Guide (Corbett & Co, 2020), page 522.

[8] Ben Beaumont, FIDIC Red Book: A Commentary (Informa Law from Routledge, 2019), page 333.

[9] Ellis Baker, Ben Mellors, Scott Chalmers, Anthony Lavers, FIDIC Contracts: Law and Practice (Routledge 2009), page 340, paragraph 6.307.

[10] Jeremy Glover, Understanding the New FIDIC Red Book: A Clause-By-Clause Commentary (Sweet & Maxwell 2006), page 52, paragraph 2-040.

[11] See NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago) [2015] UKPC 37 (6 August 2015) at [36-38].

[12] Paragraph 53.4.3.

[13] [1974] AC 689.

Clause 12 covers Tests after Completion, often required for process and power contracts. Tests are conducted by the Employer, with significant changes including competent staff requirement, testing per Employer’s Requirements and O&M Manuals, and new provisions for test timing and notice.

Clause 12 deals with Tests after Completion

It is more common overall for Tests on Completion to be the final test required rather than Tests after Completion. However, Tests after Completion are commonly required for process and power contracts. There may, for example be a requirement for a “reliability” test during a period of initial functioning. Sometimes the tests are required to be carried out in different seasons of the year to test functioning under different conditions – whether from weather or load.

Thus, by definition the Plant is likely to be under the control of the Employer by the time the Tests are to be carried out. The Yellow Book thus assumes that the tests will be carried out by the Employer, although the results may potentially lead to obligations being imposed on the Contractor.

There are few changes from the 1999 Edition, but these few are significant.

• There is a new obligation for the Employer’s staff who carry out the test to be both competent and able to carry out the tests properly. This is significant.

By the time these tests are carried out, the relevant element of the Works will have been completed and operational and obviously any tests carried out by people who do not meet these qualifications may be of doubtful value. This is a serious issue where the Works include complex Plant, because, at least immediately after the time of taking over, it is quite possible that the Employer’s staff (probably those who will eventually run the Plant) may not be sufficiently experienced to meet the requirements. If they are not, they may not be able to operate and thus test it to its required efficiency and the test results will be misleading. Indeed, if they are the same people who have been running the plant for some time, their lack of competence may have contributed to any short-fall in performance.

In the event that the Contractor disagrees with the results and can identify any lack of competence on the part of the Employer’s testing team, it will be able to take issue with the results of the Tests. Since the competence of the testing staff is an element of the requirement for testing, the mere fact that the Employer’s testing staff do not meet the standard required ought to be sufficient argument to say that the Employer is not entitled to rely on the tests. This is even without proving that the Plant would, if properly tested, have met the required standards.

• A further and sensible new provision requires that the tests be carried out in accordance with the Employer’s Requirements and the O&M Manuals to which the Engineer has given (or “deemed to have been given”[sic]) a Notice of No-Objection under Clause 7.
• The tests are (as before) to be carried out in the presence of the Contractor if the Employer or the Contractor so
• There is a new provision enabling the timing of Tests after Completion to be provided for in the ER’s and for the Engineer (previously the Employer) to provide the Contractor with notice of the date and a programme for the timing. Given that the tests are to be carried out by the Employer, not by the Engineer, and the Engineer is not expected to be present, it is not clear why the Engineer has replaced the Employer in this provision.

Delayed Tests (12.2)

There are no changes.

Re-Testing (12.3)

The previous provision regarding Re-Testing (Clause 12.3) is now said to be subject to Sub-Clause 12.4 [Failure to Pass Tests after Completion]. Clause 12.4 allows for the imposition of Performance Damages or for the Contractor to remedy the non-performance discovered in the tests. The effect of making 12.3 subject to 12.4 appears to be quite significant, as it now seems to be possible for the Employer to bypass the Contractor’s right and obligation under Sub-Clause 11.1 to remedy defects and simply levy Performance Damages.

Should the Employer not choose to go straight to a demand of damages there is another anomaly. Sub-Clause 12.4 gives the Contractor an option to remedy defects. The conditions under which an 11.1 remedy has to be carried out are different from those under 12.4. Under the latter (which is especially designed to deal with the situation where the Employer is in occupation and operating) the Employer is entitled to delay access to accommodate its operational requirements. There is no equivalent provision in 11.1.

If the Employer required a remedy under Sub-Clause 11.1 [Defects Liability], the 1999 provision allowed either party to request repeated tests under 12.1 – i.e. as a Test on Completion and thus carried out by the Employer. The new provision now provides that the repeated testing provisions in Clause 11.6 shall apply instead. Although 11.6 requires tests to be carried out in accordance with Clause 12, notices are given not by the Employer, but by the Engineer and are directed to the Contractor, not to the Employer (who will carry out the tests).

Failure to Pass Tests after Completion (12.4)

One of the options under the equivalent 1999 Sub- Clause was for the Contractor to pay any prescribed non-performance damages. He would then be released from any obligation to remedy the discovered shortfall in performance. The redrafted Sub-Clause gives the Employer the option as to whether or not to demand this payment. Thus, the previous escape route for the Contractor to avoid having to carry out remedial works may be closed off.

The process for the Employer to seek payment of the Performance Damages requires a Claim under Clause 20.2. This is a very significant change from the previous position because the claim is now subject to the 28-day condition precedent. Once the Employer knows the tests have failed, he must make his claim, otherwise he will lose the right to Performance Damages altogether.

As noted above, the provision for re-testing is subject to Clause 12.4 and it seems arguable that the 28-day period for claiming Performance Damages may start as soon as the failure to pass the test under 12.3 is apparent, even if the Employer decides to insist on a remedy under 11.1. Although (as noted below) Sub-Clause 12.4 goes on to give the Contractor the option to seek to remedy any deficiencies, such a request by the Contractor may not give the Employer further time to make his claim for Performance Damages.

Payment of Performance Damages is said to lead to the result that the works are deemed to have passed the Tests after Completion.

The second part of Sub-Clause 12.4 is unchanged from the 1999 Edition, but it is necessary to discuss the implications of the change to the first part of the Sub-Clause. When payment of Performance Damages was a Contractor option, it was logical to provide (as an alternative) that the Contractor could proceed to remedy any issues at its own expense. This is what the second part envisages. Since the choice of whether or not to claim Performance Damages is now that of the Employer, it is much more difficult to see how the Sub-Clause works. If the Employer does not claim Performance Damages (whether accidentally or deliberately), the Contractor will remain liable under the general principles of damages for default, to meet the Employer’s resulting losses. Thus, what was previously a choice now becomes an obligation and, unless the Contractor prefers to face a general damages claim[1], it will be obliged to remedy the defects.

Please get in touch at victoria.tyson@howardkennedy.com with your thoughts or to discuss any concerns.

[1] Since Performance Damages are a liquidated sum, it would be possible, at least under English law, to argue that they provide a cap on liability for damages, even though the Employer no longer seeks them.

Clause 16 addresses suspension and termination by the Contractor, including rights to suspend work, grounds for termination, cessation of work, and payment on termination. It specifies notice periods, conditions for immediate termination, and entitlements following termination.

Clause 16 deals with suspension and termination by the contractor.

• Sub-Clause 16.1 deals with the Contractor’s right to suspend work, in the event that the Engineer fails to certify in accordance with Sub-Clause 14.6 [Payment Certificates], or the Employer fails to comply with Sub-Clause 2.4 [Employer’s Financial Arrangements] or Sub-Clause 14.7 [Payment]. Prior to the Contractor suspending work it must give 21 days’ notice. The right to suspend does not affect the Contractor’s entitlement to terminate or claim financing charges. In the event that the Contractor suffers delay or cost as a result of suspension, it must give notice under Sub-Clause 20.1 [Contractor’s Claims].
• Sub-Clause 16.2 deals with the Termination by the Contractor. There are seven grounds specified. In most cases the Contractor may give 14 days’ notice if it intends to terminate the contract; however, where there has been a prolonged suspension under Sub-Clause 8.11 [Prolonged Suspension] or, inter alia, bankruptcy, liquidation, insolvency, or receiving or administration orders have been made against the Employer, then the Contractor may, by notice, terminate immediately.
• Sub-Clause 16.3 deals with Cessation of Work by the Contractor and Removal of the Contractor’s Equipment. This Sub-Clause applies where the termination takes place under Sub-Clause 15.5 [Employer’s Entitlement to Termination]; Sub-Clause 16.2 [Termination by Contractor]; or Sub-Clause 19.6 [Optional Termination, Payment and Release].
• Sub-Clause 16.4 deals with Payment on Termination. Once termination under Sub-Clause 16.2 [Termination by Contractor] has taken effect then the Contractor is entitled to the return of the Performance Security; payment in accordance with Sub-Clause 19.6 [Optional Termination, Payment and Release] and loss of profit or other loss and damage sustained by the contractor as a result of termination.

a)      Origin Of Clause

Clause 16 of FIDIC 1999 had its origins in Clause 69 of the FIDIC 4^th Edition. The right to suspend as well as terminate was included in the 4^th Edition.

b)       Cross-References

Reference to Clause 16 is found in the following Clauses:

• Sub-Clause 11 [Prolonged Suspension]
• Sub-Clause 3 [Extension of Defects Notification Period]
• Sub-Clause 2 [Advance Payment]
• Sub-Clause 5 [Employer’s Entitlement to Termination]
• Sub-Clause 6 [Limitation of Liability]
• Sub-Clause 6 [Optional Termination, Payment, and Release]

Sub-Clause 16.1 – Contractor’s Entitlement to Suspend Work

The Contractor has the right under the Contract to suspend in only 3 circumstances, and in each of these circumstances the right only comes into effect once the Contractor has given notice to the Employer (N.B. not to the Engineer). The right is then to suspend work or reduce the rate of work.

The Sub-Clause is rather unclear on what is intended by the reduction of the rate of work. The concept covers a wide range of changes – from a slight “go slow” to a virtual cessation. Nor is it clear how proportional the reduction of the rate of work must be. If the breach justifying the reduction is minimal, can the Contractor slow to virtual crawl, or must the breach be quite substantial in order to justify such a major reduction?

In cases of termination, the courts have construed fault Clauses in a commercial way so as to exclude reliance on trivial breaches. This stems from the often-followed approach of Lord Diplock in Antaios Compania Naviera SA v Salen Rederierna AB.[1] Similarly, Akenhead J. in the English High Court, when considering the FIDIC Red Book, stated “The parties cannot sensibly have thought (objectively) that a trivial contractual failure in itself could lead to contractual termination.”[2] There is no reason why these principles should not be equally applicable to suspension.

A Contractor who does not act proportionately bears the risk of being accused of being in breach of Sub-Clause 15.2 (demonstrating an intention not to continue performance of his obligations under the contract) and facing a termination notice from the Employer. Even if the Employer does not go this far, it may well later argue that any delay was caused not by the suspension but by the Contractor’s unjustifiable slowing down of the Works and that there should therefore be no extension of time.

The three situations where the right to suspend occurs are:

14. if the Engineer fails to certify in accordance with sub-Clause 14.6 (Issue of Interim Payment Certificates).
15. If the Employer fails to comply with Sub-Clause 2.4 [Employer’s Financial Arrangements]
16. The Employer fails to comply with Sub-Clause 14.7 (Payment).

a) if the Engineer fails to certify in accordance with Sub-Clause 14.6 (Issue of Interim Payment Certificates)

Sub-Clause 14.6 sets out the complex arrangements for certification which are the pre-requisites for the Employer’s obligation to pay. The process is described in the commentary on Sub-Clause 14.6. As can be seen, there is plenty of scope for the Engineer to delay issue of Interim Payment Certificates without failing to follow the contractual procedures. The question therefore is: what is the Contractor’s position if the Engineer fails for good reason or, at least for an arguable reason, to issue the IPC?

The right to suspend arises if the Engineer simply “fails” to issue the IPC, so it may be arguable that any failure to issue an IPC entitles the Contractor to give notice of suspension. It would be a brave Contractor who proceeded on this basis: failure of the Contractor to proceed with the Works is a ground for Employer termination under Clause 15(2)(c)(i).

However, the Engineer should not delay issuing a Payment Certificate, however much he may consider he needs more information once it is clear that the Contractor intends to exercise his right to suspend. The Payment Certificate need be for no more than the Engineer fairly determines to be due.

b)     If the Employer fails to comply with Sub-Clause 2.4 [Employer’s Financial Arrangements]

As noted under Sub-Clause 2.4, there is no limit to the number of requests that a Contractor can make under this provision, nor need the Contractor be reasonable in making his requests. A Contractor who wishes to irritate the Employer is given a very good opportunity to do so: the Employer dare not ignore such requests for fear of giving the Contractor the right to suspend or reduce the rate of work.

Sub-Clause 2.4, moreover, contains two Employer obligations: the first is to provide reasonable evidence that financial arrangements have been made (and are being maintained) that will enable the Employer to pay the Contract Price; the second is to give detailed particulars to the Contractor if he intends to make any material change to his financial arrangements.

The consequences of the Employer being in breach of the first provision are clear; although what amounts to “reasonable evidence” is a matter of fact.[3] They are not so clear in respect of the second. If, for example, the Employer has at some stage in the Contract formed an intention to make a material change to his financial circumstances but has failed to notify the Contractor and has then gone ahead with the change, it will be impossible for him to remedy the breach – he can no longer give notice once the material change has taken place. So long as the new financial arrangements enable him to meet his financial obligations under the Contract, he will have no difficulty complying with a Contractor’s notice under Sub-Clause 2.4, but he still cannot give the notice required of his intention to change.

It is unclear whether Sub-Clause 16.1 is intended to deal with this situation, as it provides that any notice of suspension or intention to reduce work is conditional on the Employer providing reasonable evidence under Sub-Clause 2.4. In the situation described above, the Employer can never provide “reasonable evidence”. Does this mean that the Contractor has no right to suspend, or that the Employer can do nothing to prevent him having the right to suspend? The Sub-Clause provides no clear answer.

c)      The Employer fails to comply with Sub-Clause 14.7 [Payment].

Sub-Clause 14.7 obliges the Employer to make payments 28 days (in the case of the advance payment), or 56 days after the Engineer receives the Statement and supporting documents. As explained in the discussion of Sub-Clause 14.7, this Sub-Clause can potentially prove to be unfair to the Employer. Under Sub-Clause 14.7, the amount the Employer is obliged to pay is that certified in the Interim or Final Payment Certificate, but he is obliged to make that payment 56 days after the Engineer receives the Statement and supporting documents.

In circumstances where the Statement and supporting documents contain errors, which the Engineer asks the Contractor to correct before issuing the Interim Payment Certificate, the Employer’s obligation to pay and the Contractor’s right to suspend can come into effect before the Interim Payment Certificate can be issued.

If the statement is correctly completed and there is no problem with the supporting documents, but the Engineer has not certified within 56 days of receipt of the Statement and supporting documents, the Employer will need to pay the full amount claimed by the Contractor in the statement in order to avoid the Contractor taking advantage of the right to suspend where the Engineer has still failed to certify correctly.  Any overpayment can be recovered in the next interim payment.

d)     The Notice of Suspension or Reduction of Rate of Work

The notice under Sub-Clause 16.1 is a clear condition precedent to the Contractor’s right to suspend. The Contractor has no right to use a breach by the Employer which might otherwise give rise to a right to suspend as an excuse for suspending or slowing progress unless he has given notice as required. There is no special form required for the notice. However, it must:

• Be addressed to the Employer
• State whether it is intended to suspend or to reduce the rate of work
• Describe the basis for the intended suspension or reduction of the rate of work
• State specifically what the Contractor needs to have or to see before he resumes work
• Give not less than 21 days’ notice

e)      Consequences of Notice

On the expiry of the notice the Contractor is entitled to suspend work or reduce the rate of work as specified in the notice.

Once the notice is complied with the Contractor is required to resume work “as soon as is reasonably practicable.” How long this will take will depend on the circumstances – the extent of the suspension or reduction in rate, the time it has lasted for, the logistics of resuming work and any circumstances which have occurred in the meantime.

f)       Care of the Works Must Continue During Suspension

Under Sub-Clause 17.2, the Contractor has full responsibility for the care of the Works, from the Commencement Date until the issue of the Taking-Over Certificate. During this period, the Contractor is responsible for rectifying any loss or damage at his own cost. (See commentary on the effect of Clause 17.2 on the Contractor’s obligations under Clause 19.2 [Force Majeure]). The consequence is that suspension under Clause 16.1 does not give the Contractor the right to abandon the Site. Indeed, a failure to care for the Works during a period of justified suspension might give the Employer the right to terminate under Sub-Clause 15.2 (b).

g)      Notice of Claim

In order to claim an extension of time, cost or profit the Contractor must give notice under Sub-Clause 20.1. The time when the Contractor became aware or should have become aware of the event or circumstance will be when the suspension or reduction in work rate period commences.  The Contractor  should not be required to give notice  earlier because, although he will be aware as soon as the circumstances which give him  the right to give notice under Sub-Clause 16.1 that he might become entitled to suspend   or reduce the rate of work, he cannot be certain that such a right has come into existence until the Employer has failed to comply with the notice.

Sub Clause 16.2 – Termination by the Contractor

When the Contractor exercises its rights under this Sub-Clause, it can expect to have to justify its position at least before a DAB and probably in arbitration. A ground for termination, which may seem clear at the time notice is given, may seem not so clear once the whole situation has been considered in the greatest detail by a tribunal, following detailed work by lawyers for both sides. Contractors need to be cautious when using their rights to terminate. Even though there may be a fundamental ground for terminating, it is good tactics, and reduces the risk of the process, for the Contractor to identify as many grounds as possible under the terms of Clause 16.2.

Some grounds are clearer than others. Where the basis of termination is a matter of opinion (for example an allegation that the Employer has failed to perform one or more of his obligations), the risk is higher than if the ground can be objectively measured (for example failure on the part of the Engineer to issue a Payment Certificate within the time allowed).

It is very common for a Contractor’s notice of Termination to be followed immediately by an Employer’s notice of Termination or for the notices to be given the other way round. Sometimes there is a race to terminate. In such circumstances, both parties will be relying on much the same facts as the basis for their termination arguments: what the Employer calls the Contractor’s abandonment of the Works may termed by the Contractor as the Employer’s failure to fulfil his obligation to provide an instruction, thereby making it impossible for the Contractor to continue.

When there is such a clear clash of reasoning, one side is bound to lose the argument. It seems obvious to say that it is dangerous to rely on an argument which the other side can counter; both Employers and Contractors often make this mistake and fail to bolster their termination case by relying, not just on the contentious issues, but by adding as many other issues as possible. The Contractor will only need to succeed in one argument to make his case for termination: the more arguments he advances the better.

A general issue which arises under this Sub-Clause is whether a breach by the Engineer might qualify as a breach by the Employer and justify termination in those circumstances where an Employer breach would justify termination. Under Sub-Clause 3.1 (a) the Engineer when carrying out his duties under the Contract is “deemed to act for the Employer.” This would seem to suggest that if the Engineer acts in a positive way in breach of the Contract, his breach is to be treated as that of the Employer.

More commonly, however, the Contractor’s complaint against the Engineer is one of failure to perform his obligations under the Contract, such as failure to certify, failure to make a Determination fairly, or failure to provide designs or other documents on time. When failing to act as appropriate, is the Engineer still carrying out his duties under the Contract and therefore acting for the Employer? The answer is probably no. However, whenever the Employer is mentioned in the discussion below, it is also necessary to consider whether the reference should be to the Employer or Engineer alone or to the Employer and the Engineer.

There are seven grounds for Termination by Contractor specified. Six are considered below.

a)      the Contractor does not receive the reasonable evidence within 42 days after giving notice under Sub-Clause 16.1 in respect of a failure to comply with Sub- Clause 2.4 [Employers Financial Arrangements]

See the commentary on Sub-Clause 16.1 above.

Sub-Clause 16.1 is a pre-requisite to the Contractor exercising its rights to suspend but is also the pre-requisite to the Contractor exercising its rights to terminate under this provision. The Clause was probably drafted with the thought in mind that the Contractor would give a 21-day notice of suspension, then suspend and then, after a further 21 days have the right to terminate. In fact, there is nothing to stop the Contractor giving a 42-day notice of suspension under Sub-Clause 16.1, then (if the required certificate is not given) immediately giving notice of termination as well as suspending.

As noted above, there is no limit on the number of requests a contractor can make under Sub-Clause 2.4, nor any requirement of reasonableness – thus a Contractor could use the provision to harass and annoy an Employer to the point where he stops responding to the requests. Since Sub-Clause 16.1 requires a minimum notice period of 21 days, a cunning Contractor who has been looking for an excuse to terminate might decide to give the Employer 43 days’ notice to provide evidence, with the expectation that the Employer will wait for the last day to provide the evidence. By the time the Employer had responded, the Contractor’s right to terminate would have come into effect.

b)     The Engineer fails within 56 days after receiving a Statement and supporting documents, to issue the relevant Payment Certificate

See the commentary on Sub-Clauses 14.6 and 16.1 for the problems this requirement may cause the Employer, even if the Engineer believes that he has not received all the documentation necessary to enable him to issue a Payment Certificate.

In order to protect the Employer’s position, the Engineer must not delay more than 56 days before issuing his Payment Certificate, however inadequate he believes the justification. The Certificate need only be for the amount the Engineer fairly considers to be due.

c)      The Contractor does not receive the amount due under an Interim Payment Certificate within 42 days after the expiry of the time stated in Sub-Clause 14.7 [Payment] within which payment is to be made (except for deductions in accordance with Sub-Clause 2.5 [Employer’s Claims])

The expiry of time under Sub-Clause 14.7 for Advance Payments is 42 days after the issuing of the Letter of Acceptance or 21 days after receipt of the required documents (See Sub-Clause 14.7(a)). For other payments, it is 56 days after the Engineer receives the Contractor’s Statement and supporting documents.

See the commentary on Sub-Clauses 14.7 and 16.1 for guidance on the possible problems between the obligation for the Employer to receive a Payment Certificate before making payment and the possible right of the Engineer to delay issuing such a Certificate. If the Engineer has not issued a Payment Certificate (however right he may be in not doing so), it may be necessary for the Employer to pay the amount demanded in the Contractor’s Statement in order to avoid the Contractor having the right to terminate.

The final words in brackets carry a warning for the Employer. The Employer cannot recover amounts due to him except by following the procedure set out in Sub-Clause 2.5: i.e. giving notice of claim and then waiting for the Engineer’s Determination. If he does recover by reducing a payment in breach of this procedure, the Contractor gains the right to terminate.

Moreover, and more dangerously for the Employer, if the Engineer’s Determination is later challenged before the DAB and the DAB sets it aside in whole or in part, the DAB’s decision will be binding immediately and, until the Employer pays the balance of the relevant IPC, the Contractor has the right to terminate. This right will apply immediately once the DAB’s decision is given.

This is a highly dangerous situation for an Employer who is aware that the Contractor is looking for a way to escape its contractual obligations. Thus, if an Employer has made a deduction following an Engineer’s Determination and the Contractor challenges the claim before a DAB, the Employer needs to consider reimbursing the Contractor at least in the interim before the DAB gives its decision. If the decision then goes in the Employer’s favour, it can deduct the amount due from the next following Interim Payment Certificate.

d)     The Employer substantially fails to perform his obligations under the Contract.

This provision is not the mirror image of the Employer’s right to terminate under Sub- Clause 15.2(b). The nearest equivalent, which instead requires the Employer to show that the Contractor has “plainly demonstrated his intention not to continue performance of his obligations under the Contract.” Nor does the Contractor have the right of the Employer to cement in place a right to terminate by giving a notice to correct, as permitted under Sub-Clause 15.1.

The Sub-Clause is not entirely clear. Is the requirement that the Employer substantially fails to perform an obligation, several obligations, or all obligations?

The meaning may depend on what the adverb “substantially” qualifies. Does it qualify only the verb “fails” or does it qualify the compound verb “fails to perform”. If the only requirement is for the Contractor to show that the Employer has substantially failed in one respect, then the right would come into play when the Employer had substantially failed to meet an individual obligation. If the requirement is that the Contractor shows that the Employer has substantially failed to perform his obligations, the right to terminate would only come into effect when the substantiality is applied to the whole package of obligations under the Contract.

There was no equivalent provision in the 4^th Edition of FIDIC, so there is no experience as to how this may be interpreted. Under the 4^th Edition, the equivalent provision (Clause 63.1), giving the Employer the right to terminate the Contractor, referred “to persistently or flagrantly neglecting to comply with any of his obligations under the Contract.”

This has been generally interpreted as giving the right to terminate when the Contractor had failed to perform any single obligation, though again it could be interpreted to come into effect when the Contractor was not performing any obligations at all. Since the interpretation of this Clause has tended to recognise that persistent or flagrant failure to comply with an individual obligation gives rise to a right to terminate, it might be tempting to assume that the substantially in Sub-Clause 16.2(d) qualifies only “failure”, and not “failure to perform his obligations”, and would therefore apply even if there was one substantial breach.

However, it seems more likely that the provision was intended to apply only where the Employer was effectively demonstrating that it had no intention of performing all its obligations under the Contract, rather than one obligation under it. The following reasons point in this direction:

• The other provisions of Sub-Clause 16.2 provide adequate reasons for termination in most circumstances. There is no good policy reason to allow a termination for a breach, however substantial, of what might be quite a minor contractual obligation. For example, Sub-Clause 16.2(e) (see below) would be entirely unnecessary if Sub-Clause 16.2 allowed termination for a substantial breach of any single
• If the provision applied to any single obligation, it would be possible for there to be a substantial breach of some obligation which was not in itself in any way significant. For example, the Employer is required to give notice of his intention to replace the Engineer. If he entirely fails to give notice but in fact appoints someone properly qualified and acceptable, he could be said to have substantially failed to meet his notice requirements. It is unlikely that the draftsman intended that a breach of this nature, which has no real effect, entitles the Contractor to terminate – yet that is the effect Sub-Clause 16.2(d) would have if substantial failure to comply with any single obligation gave the Contractor the right to
• Sub-Clause 15.1 [Notice to Correct] provides a means by which a breach can be turned into a ground justifying termination by the Employer. However, this requires that the Contractor be given the opportunity to correct the breach before he can be
• The nearest equivalent provision in Sub-Clause 15.2 (Sub-Clause 15.2(b)) gives the right to the Contractor to terminate where the Contractor “plainly demonstrates his intention not to continue performance of his obligations under the Contract” and this is tied to circumstances where the Contractor abandons the Works.

In this context, it is clear that the failure to continue performance of the obligations is a reference to the collective of obligations, not an individual obligation. It is unlikely that it was intended that the Contractor could terminate for a failure to comply with a specific single obligation when the Employer could only terminate when the Contractor demonstrated a general intention not to perform.

This is a provision which may be breached by the Engineer on the Employer’s behalf. In this case it is very clear that a failure to meet obligations is the foundation of the right to terminate. However, it is only when he is carrying out duties or exercising authority that the Engineer is deemed to act for the Employer under Sub-Clause 3.1. A failure by the Engineer to act therefore probably does not entitle the Contractor to terminate.

e)      The Employer fails to comply with Sub-Clause 1.6 [Contract Agreement] or Sub- Clause 1.7 [Assignment].

Sub-Clause 1.6 incorporates two obligations – for the Parties to enter a Contract Agreement within 28 days after the Letter of Acceptance, and for the Employer to bear any costs of stamp duty etc.

Fortunately, the Sub-Clause is easily complied with – the consequences for breach are extraordinarily draconian. In normal circumstances, the submission of a tender and the letter of acceptance would constitute a contract, and the signing of the Contract Agreement would only be confirmation of a contractual relationship. The draftsman obviously assumes this is the case, otherwise the Contractor would never get to the point of being able to rely on the terms of Clause 16.2 in order to terminate the Contract. So, although there will be a Contract in the absence of a Contract Agreement, the Contractor has the right to terminate if this formality is not complied with. By the time the 28 days have expired, it will be too late for the Employer to remedy the situation.

However, despite this, the Contractor probably does not retain his right to terminate for the duration of the contract. Once he continues to perform though aware of this breach, he will probably be prevented under the principles of estoppel, in common law legal systems, and good faith, in civil law legal systems, from taking advantage of the situation.

Sub-Clause 1.7 is clear, but Employers undergoing corporate reorganisation will need to take care to ensure that no assignment takes place without the agreement of the other party.

g)      The Employer becomes bankrupt or insolvent, goes into liquidation, has a receiving or administration order made against him, compounds with his creditors, or carries on business under a receiver, trustee, or manager for the benefit of his creditors, or if any act is done or event occurs which (under applicable Laws) has a similar effect to any of these acts or events.

This is a mirror image of the equivalent provision in Sub-Clause 15.2 – see commentary under that Clause.

Once one of these events has occurred the Contractor has the right, upon giving 14 days’ notice (or on a notice having an immediate effect in the case of (f) and (g)) to the Employer, to terminate the Contract.

The language here is identical to that under Sub-Clause 15.2 and the interpretation of the Clause will be the same.

Once the event giving rise to the right to terminate has occurred, there is nothing in the Clause which seems to prevent the Contractor holding the threat of termination over the Employer indefinitely thereafter. Used in this way, a petty failure of compliance with Sub-Clause 1.6 [Contract Agreement] would effectively give the Contractor a right to terminate at will, with all the financial consequences at any time thereafter. A tribunal sympathetic to an Employer could however imply a requirement that the Contractor act reasonably promptly, or not at all, unless the Employer’s default was a continuing one. In this connection, see Mvita Construction Co. Ltd. v Tanzania Harbours Authority[4] and the decision of the Tanzanian Court of Appeal that although the words “then the Employer may…terminate” do not mean “at that time” but “in that event“, the Employer must terminate within a reasonable time of the Engineer’s notice “to avoid a change of the circumstances certified [under that Contract] by the Engineer”. Under a system of law which imposes an obligation of good faith on the Parties, a much-delayed termination would probably not be treated as effective.

Sub-Clause 16.3 – Cessation of Work and Removal of Contractor’s Equipment

This provision applies in all those circumstances where the termination is not the result of Contractor fault. Upon termination under Sub-Clause 15.5 [Employer’s Entitlement to Termination]; Sub-Clause 16.2 [Termination by Contractor]; or Sub-Clause 19.6 [Optional Termination, Payment, and Release] the Contractor shall promptly:

1. “cease all further work, except for such work as may have been instructed by the Engineer for the protection of life or property or for the safety of the Works,
2. hand over Contractor’s Documents, Plant, Materials, and other work, for which the Contractor has received payment, and
3. remove all other Goods from the Site, except as necessary for safety, and leave the Site.”

Under 16.3(b), the Contractor is required “to hand over Contractor’s Documents, Plant, Materials, and other work, for which the Contractor has received payment.” It may not be clear what, amongst these items, the Contractor has been paid for.

The term “Contractor’s Documents” is defined in Sub-Clause 1.1.6.1 to include the documents of a technical nature (including computer programs and software and models) supplied by the Contractor under the Contract.

The cost of these is unlikely to be separately mentioned in the payment provisions of the Contract – if the contract has Bills of Quantity, payment for them may be included in the Preliminaries, in which case it will still be hard to tell whether they are paid for. More likely there will be a provision that the cost of such items is included in the rates or prices for physical items of work. The Contractor will probably expect to recover the cost of these items over the term of the contract within the rates or prices for other items.  Thus, where there is a premature end to the Contract, it will be arguable whether they have been paid for.

There should be no such problem with Plant and Materials which are defined as items to be incorporated into the Permanent Works.

It is not clear what is intended by the expression “other work”. It could easily include Temporary works, (defined in Sub-Clause 1.1.5.7), which are not normally specifically paid for, but the cost of which is included in the rates or prices for the Permanent works.

If the issue of what the Contractor is required to hand over causes arguments because of the above issues, this ought ultimately to be capable of being resolved under Sub-Clause 16.4 or Sub-Clause 19.6, which deal with payment on termination. However, these provisions by no means deal with all payment obligations following a termination which is not the Contractor’s fault.

Under Sub-Clause 16.3(c), the Contractor is required to “remove all other Goods from the Site, except as necessary for safety, and leave the Site.” If the termination is disputed, the Employer may seek to prevent the Contractor from removing its equipment. In such a case the Contractor’s claim against the Employer would be one in tort for trespass to goods. In Final Award in Case 6216,[5] an ICC arbitral tribunal had to consider whether it had jurisdiction to deal with a claim which arose out of a tort. The tribunal held that the FIDIC dispute resolution provisions were sufficiently wide enough to allow them to resolve the tort claim, applying English law.

Sub-Clause 16.4 – Payment on Termination

If the Contractor terminates under Sub-Clause 16.2 [Termination by Contractor], the Employer is required to promptly:

1. “return the Performance Security to the Contractor,
2. pay the Contractor in accordance with Sub-Clause 19.6 [Optional Termination, Payment and Release], and
3. pay to the Contractor the amount of any loss of profit or other loss or damage sustained by the Contractor as a result of this termination.”

In the context of Sub-Clause 16.3, Sub-Clause 19.6 raises several problems.

Under Sub-Clause 16.3(b), the Contractor will have handed over only the items for which he has received payment. However, under Sub-Clause 19.6(a), he is entitled to be paid for work done, and under Sub-Clause 19.6(b), to be paid for Plant and Materials ordered for the Works. He is then required to hand over anything paid for by the Employer. Thus, it is possible that the Contractor will, under Sub-Clause 16.3, be required to take away certain Plant and Materials, but under Sub-Clause 19.3, be entitled to be paid for them and required to return them. Employers should therefore not assume that because the Contractor has removed any Goods from the Site – as required under Sub-Clause 16.3, they will not be obliged to pay for them.

Sub-Clause 16.4 (c) requires the Employer to pay the “loss of profit or other loss, or damage sustained by the Contractor as a result of this termination“. In this it contrasts with a termination under Sub-Clauses 15.5 and 19.6, under which only cost is paid. From an Employer’s point of view, a termination under Sub-Clause 15.5 (which is always the Employer’s right), or Clause 19.6 (which is possible though unlikely), or of course Sub-Clause 15.2, will be substantially preferable to a Contractor’s termination under Clause 16.2. This may open an interesting strategy for the Employer, of which the Contractor needs to be cautious.

If an Employer realises it is in a position where the Contractor intends to terminate and good grounds exist for a Contractor’s termination under Sub-Clause 16.2, the Employer may save himself considerable expense by terminating under Sub-Clause 15.5. This is a practical strategy recognised in the MDB Harmonised Edition, which expressly forbids termination under Sub-Clause 15.5 for this reason, and which also requires an Employer who terminates under Sub-Clause 15.5 to pay the Contractor in accordance with Sub-Clause 16.4 (c) – i.e. for loss of profit or other loss or damage.

This issue was recently addressed by the English High Court in TSG Building Services PLC v South Anglia Housing Ltd.[6] In this case, there was a clause which provided that the parties should work together in “the spirit of trust, fairness, and co-operation…within the scope of their agreed roles, expertise, and responsibilities….and in all matters governed by the Contract they shall act reasonably” (Clause 1.1).   It was argued that this Clause prevented one party from terminating at convenience in an unreasonable way. The judge held that the provision of “reasonableness” did not apply to the termination at convenience Clause. The court concluded that either party could terminate for any or no reason.

The clause provided an “unconditional and unqualified right”, meaning that termination under the contract was properly effected by South Anglia, with no compensation payable to TSG Building Services. The court also found that Sub-Clause 1.1 should be interpreted narrowly, to apply only to matters within the context of that clause, so that good faith did not extend to the whole contract. In countries where there is an express statutory requirement of good faith, it may still be possible to run an argument that an Employer faced with termination for default cannot terminate at convenience to avoid paying additional losses to the contractor.

The type of “loss of profit or other loss or damage sustained by the Contractor” was considered in the case NI Property Development Company Ltd v NH (International) Caribbean Ltd.[7] In this case, an issue arose about whether the Claimant could recover overheads on work not executed at the time of termination of the Contract. The arbitrator found that the Claimant was not entitled to overheads on works not executed, holding that if the contract had intended the contractor to recover this type of loss, it would have said so in its terms. The High Court of Tobago agreed with the arbitrator’s reasoning.

“Other loss or damage” is a vague term which may have different meanings in different jurisdictions. Under most common law jurisdictions, they will be limited to losses which were within the contemplation of the parties at the time that the contract was entered into, and will exclude losses which are too remote. However, it is likely to cover the Contractor’s direct and indirect losses caused by the need to terminate the contract early. Payment under Sub-Clause 16.4 is excluded from the limitation of liability provisions in Sub- Clause 17.6 [Limitation of Liability] and payment under this Sub-Clause is not intended to form part of the Contract Price.[8]

Please get in touch at victoria.tyson@howardkennedy.com with your thoughts or to discuss any concerns.

[1] [1985] AC 191 at 201D.

[2] Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC) at [321].

[3] See NH International (Caribbean) Ltd v National Insurance Property Development Co. Ltd [2015] UKPC 37.

[4] (1988) 46 BLR 19

[5] ICC International Court of Arbitration Bulletin Vol.13, No 2, p.58.

[6] [2013] EWHC 1151 (TCC).

[7] (2008) High Court of Trinidad and Tobago.

[8] Bouygues SA & Herve Pomerleau Int. Inc v Shanghai Links Executive Community Ltd [1998] 4 HKC 206 and see Sub-Clause 14.1 [The Contract Price].

Clause 9 covers Tests on Completion, requiring the Contractor to give notice when ready to carry out Tests on Completion, addressing delays by either party, retesting after failure, and handling failures to meet contract requirements after retesting.

Clause 9 deals with the Tests on Completion (which are a defined term at Sub-Clause 1.1.3.4):

• Sub-Clause 9.1 requires the Contractor to give notice when it is ready to carry out the Tests on Completion.
• Sub-Clause 9.2 deals with delayed testing caused by either the Employer or the Contractor.
• Sub-Clause 9.3 deals with retesting after a failure to pass the Tests on
• Sub-Clause 4 deals with a failure to meet the requirements of the contract after retesting.

Origin Of Clause

There is no clause similar to Clause 9 of FIDIC 1999 within the FIDIC 4^th Edition; although there was a reference in the definition section to Tests on Completion – Clause 1.1(d)(i) and Clause 37 of FIDIC 4^th Edition dealt with inspection and testing.

Cross-References

Reference to Clause 9 or to the Tests on Completion is found in the following clauses:

• Sub-Clause 1.3.4 [Definitions: “Tests on Completion]
• Sub-Clause 1 [Contractor’s General Obligations]
• Sub-Clause 2 [Time for Completion]
• Sub-Clause 1 [Taking Over of the Works and Sections]
• Sub-Clause 2 [Taking Over of Parts of the Works]
• Sub-Clause 3 [Interference with Tests on Completion]
• Sub-Clause 1 [Right to Vary]

Sub-Clause 9.1 – Contractor’s Obligations

Tests on Completion are defined by the Contract as tests that have been specified, agreed, or instructed by the Engineer and are carried out before Taking Over.

They are intended to include any type of tests which the Contractor is required to carry out prior to or at completion. Their purpose is to show to the Employer that the Works (or a Section) has reached a stage where it can be Taken Over under Clause 10. Before it is possible for the Contractor to test whether the Works or a Section have passed any Tests on Completion, it must first provide to the Engineer the complete, specified as-built documents and operation and maintenance manuals required under Sub-Clause 4.1(d). The Contractor must then provide everything necessary to conduct the Tests on Completion efficiently and observe all the detailed obligations regarding attendance, notice, and timing of these tests given in Sub-Clause 7.4 [Testing].

The Sub-Clause makes no reference to “additional” testing that may be required, in contradistinction to retesting. Such additional testing would form part of the Tests on Completion as the phrase ‘Tests on Completion’ is defined in Sub-Clause 1.1.3.4 as including additional tests “instructed as a Variation.” The consequence of failing to meet an additional testing requirement, which has been instructed as a Variation, is not spelt out. There appears to be a tension between Sub-Clause 8.4(a) and Sub-Clause 7.5, which deals with the rejection of testing. Under Sub- Clause 8.4(a) the Contractor could argue that the Variation has led to the delay, and it is entitled to an extension of time and consequential costs. However, Sub-Clause 7.5 states that if the Employer incurs additional costs as a result of a failure to pass the testing, the Contract shall pay these costs.

The Contractor must give 21 days’ advance notice of his readiness to start each Test on Completion. The test should then be completed within 14 days after that, on the day(s) instructed by the Engineer.

The Engineer must consider whether the Employer’s use of the Works has affected the performance of the Works under test.

Immediately when the Works have passed the Tests on Completion, the Contractor shall certify the results to the Engineer. Typically, Tests on Completion are specified in detail within the Contract and therefore the report, required by the last sentence of the Sub-Clause, is usually necessary. They are not, however, used in every type of contract. Their main use is where the contract requires the provision of, for example, a process plant or power-generation plant. In such cases, the requirement for performance testing is central to the purpose of the contract. In road building contracts or other similar types of works there may not be a requirement for any Tests on Completion. All the required testing may have been carried out as the works progressed.

Sub-Clause 9.2 – Delayed Tests

This Sub-Clause deals with two situations. The first relates to delays caused by the Employer. The second relates to delays caused by the Contractor.

Delays Caused by the Employer

Sub-Clause 9.2 states that if the Tests on Completion are being unduly delayed then Sub-Clause 7.4 [Testing] (fifth paragraph) and Sub-Clause 10.3 [Interference with Tests on Completion] become applicable.

Sub-Clause 7.4 [Testing] (fifth paragraph) deals with the consequences of additional time and Cost resulting from delayed testing for which the Employer is responsible. The Sub-Clause states that, subject to Sub-Clause 20.1, if completion is or will be delayed, the Contractor is entitled to claim an extension of time and payment of such Cost and reasonable profit. Given that the Tests on Completion are the final step before Taking Over of the Works it is almost inevitable that any delay caused by the Employer at this stage will lead to an extension of time claim. However, this must be read with Sub-Clause 10.3 [Interference with Tests on Completion].

Sub-Clause 10.3 is dealt with in more detail when considering Clause 10. In summary, Sub-Clause 10.3 states that, where the Contractor is prevented for more than 14 days from carrying out the Tests on Completion, then the Employer shall be deemed to have Taken-Over the Works or Section (as the case may be) and the Engineer is then required to issue a Taking-Over Certificate. An extension of time and Cost plus reasonable profit may then be claimed. The words “unduly delayed” in Sub-Clause 9.2 must therefore refer to a delay which is more than 14 days.

Delays Caused by the Contractor

Given that the Contractor must give 21 days’ notice that it is ready to carry out the Tests on Completion, it will be unusual for the Tests on Completion to be delayed by the Contractor. However, if this does occur, perhaps because a piece of plant breaks down and needs to be replaced, and the Tests on Completion are unduly delayed, then the Engineer may give notice requiring the Contractor to carry out tests within 21 days after receiving the notice.

The FIDIC Guide states that the Contractor should first be given the opportunity to rectify his default, in accordance with the second paragraph of the Sub-Clause. If the Contractor then fails to carry out the Tests on Completion within the 21 days, then these may be carried out by the Employer’s Personnel. It is deemed that the Tests on Completion are carried out in the presence of the Contractor who is required to accept the results of the Tests.

The Employer’s Personnel are not obliged to carry out these Tests and may consider that it would be unwise to do so.

Undue Delay

Within Sub-Clause 9.2 reference is made to the Tests on Completion being “unduly delayed“. This reference arises in relation to both the rights that the Contractor has to claim time and Cost and the Employer’s rights in carrying out the Tests through the Employer’s Personnel. Simply delaying the Tests on Completion appears not to give either party a right to claim; the Tests must be delayed ‘unduly’. In Lichfield Securities Ltd, R (on the application of) v Lichfield District Council & Anor[1], the English Court of Appeal addressed what was meant by undue delay. Sedley LJ stated as follows:

“I believe that the question of undue delay is to be approached more, rather than less, objectively than the earlier question of promptness. Perhaps some analogy is to be found in the concept of inordinate delay developed in the authorities governing the striking out of actions for want of prosecution. Inordinate delay means materially longer than the time usually regarded by the profession and courts as acceptable. It falls to be judged objectively. Why should undue delay be judged differently? If one has delayed inordinately, surely one has delayed unduly.”

Sedley LJ then stated at para 37:

“But promptness, like undue delay, is not to be gauged simply by locating the earliest practicable opportunity and adding a short time for lawyers to advise and launch proceedings. It is crucially affected by the potential or actual effects of the passage of time on others.”

Factors that the parties may have regard to when considering whether there has been an undue delay are:

• the level of delay damages,
• the losses that might be caused to the Employer,
• how these impacts on follow on trades, and
• the purpose of the project.

It seems evident that the Tests on Completion will be considered to be unduly delayed even a short time after when they ought to have been carried out. The specific reference to a 14-day period in Sub-Clause 10.3 makes this abundantly clear.

Sub-Clause 9.3 – Retesting

If the Works or a Section fails to pass the Tests on Completion, Sub-Clause 7.5 shall apply and the Engineer or the Contractor may require that the Tests be repeated. Sub-Clause 7.5 states that the Engineer may reject the Plant, Materials, or workmanship and the Contractor shall then promptly make good the defect and make sure that the rejected item complies with the Contract. Sub-Clause 7.5 also repeats in similar terms what is stated in Sub-Clause 9.3; i.e. that any repeated tests shall be carried out under the same terms and conditions.

If the rejection and retesting cause the Employer to incur additional costs, the Contractor shall, subject to Sub-Clause 2.5, pay these costs to the Employer. There are potentially two types of loss that the Employer may incur. The first relates to delay related costs. However, it is less than clear whether the delay damages cap would apply to this type of loss. There is one view that the delay damages clause is an exclusive remedy for delay[2] and on ‘all obligations that bite on delay’.

However, there is another view that when construing a contract, which includes other specified heads of loss, it cannot have been intended to create an exclusive remedy.[3] Furthermore, the delay damages clause does not specifically refer to this breach. The second head of loss relates to the additional costs of re-testing; for example, additional costs of people attending Site or reviewing the results.[4] These losses will be recoverable.[5]

The FIDIC Guide states:

“If tests are repeated after the cause of previous failures has been remedied, and it seems likely that other (related) work may have been affected by the remedial work, that other work may therefore need to be retested.”

The clause is silent about Works where the Employer has provided free issue material for the project. If it is the free issue material that is the cause of the failure to the Tests on Completion, then the Contractor will be entitled to an extension of time and may also argue that unless the Employer remedies these defects within 14 days, there should be a deemed Taking Over under Sub- Clause 9.2. In order to overcome this problem, the parties in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co Kg (Uk Productions)[6] agreed that there would be an assumption that performance of free issued items would be sufficient to test the elements of contractor’s scope of supply together with a provision that, if those items were insufficient to test the elements of contractor’s scope of supply (i.e. to enable the contractor to pass the Tests), the test would be based on the maximum throughput allowed by the free issued items.

Sub-Clause 9.4 – Failure to Pass Tests on Completion

Where the works fail to pass the repeated Test on Completion the Engineer is provided with three choices:

• Order further tests under Sub-Clause 9.3.
• If the failure deprives the Employer of substantially the whole benefit of the Works or Section, reject the Works and terminate the
• Permit a Taking-Over Certificate to be issued.

The FIDIC Guide suggests that there is no limit on the number of repetitions which may be ordered, because after any Test it may appear that only minor remedial work will be required to overcome the apparent reasons for the failure.

Sub-paragraph b) has been described as:

“some sort of nuclear weapon newly granted to the Employer in relation to alleged defects and is found in all three books of the new rainbow. Under the normal principles of English contract law, it is inconceivable that an Employer could have any such rights. He would be entitled to damages under the normal measure of foreseeable damages under the rules in Hadley & Baxendale[7] and Victoria Laundry[8] and the measure of those damages would be subject to his obligation to mitigate his loss.”[9]This issue is discussed in more detail under Clause 11 as is the meaning of the phrase ‘substantially the whole benefit.’

Sub-paragraph c) allows for the issue of a Taking-Over Certificate. Where this occurs, the Contractor is still obliged to complete all its obligations under the Contract, including completing all the Works (see Sub-Clause 8.2(b)). If the Contractor cannot carry out the remedial work, the Employer may issue a notice to correct under Sub-Clause 15.1 or seek agreement to a reduction in the Contract Price. In such circumstances the Employer is likely to first indicate the reduction it would require and seek the Contractor’s agreement prior to the issue of a Taking-Over Certificate. If agreement cannot be reached prior to the issue of the Taking-Over Certificate under sub-paragraph (c), then sub-paragraphs (a) or (b) could be applied.

Please get in touch at victoria.tyson@howardkennedy.com with your thoughts or to discuss any concerns.

[1] [2001] EWCA Civ 304.

[2] Temloc Ltd v Errol Properties Ltd (1987) 39 BLR; and Biffa Waste Services Ltd v Maschinenfabrik [2008] EWHC 6.

[3] See Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689.

[4] Scottish Coal Company v Kier Construction Ltd [2005] CSOH, where the judge took a divisible approach to the obligation to complete by the Time for Completion and other obligations.

[5] Decoma UK Ltd v Haden Drysys International Ltd [2005] EWHC 2948.

[6] [2008] EWHC 1087.

[7] Hadley & Anor v Baxendale & Ors [1854] EWHC Exch J70.

[8] Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528.

[9] Robert Knutson: An English Lawyer’s View of the New Fidic Rainbow – Where is the Pot of Gold?

Clause 6 is similar to the 1999 version but adds Key Personnel, strictly regulated by the Engineer. Other changes include clearer employment laws, notice for work outside normal hours, enhanced health and safety roles, and improved record-keeping.

The 2017 Clause 6 is largely the same as its 1999 counterpart. However, it contains some notable additions and differences, the most glaring of which is the addition of a new type of staff/labourer to the Contractor’s Personnel called Key Personnel in Sub-Clause 6.12.

It only applies if such personnel are specified in the Employer’s Requirements and the important aspect of this provision is not what this type of personnel does but that their appointment and presence is strictly regulated.

They are named in the Tender and substitutions and dismissals need the Engineer’s consent. They also need to be based on Site for the whole period of the Works. This is perhaps to avoid too much change of important employees of the Contractor and to ensure that their focus is on the project at hand.

Other changes include:

• The 1999 edition prohibited the Contractor from hiring of the Employer’s Personnel in Sub[1]Clause 6.3 and the 2017 edition has imposed the same obligation on the Employer and the Engineer vis-à-vis the Contractor.
• The Contractor’s obligation to follow employment laws including wages and working hours has become clearer.
• If work needs to be carried out outside normal workdays and working hours, the Contractor now needs to give Notice to this effect.
• The role of the health and safety officer (accident prevention officer in FIDIC 1999) has been slightly emphasised.
• The importance of fluency in the language of communications has been reinforced.
• The Engineer now has the added right to request the removal of personnel who have engaged in corruption or fraud or who have been employed from the Employer.
• The Contractor’s obligations to maintain records have been enhanced and include Personnel, Equipment, Plant, Materials and Temporary Works and must specify work activity, location and day of work.

Article Author: Gabriel Mulero Clas

Clause 6 – Staff and Labour