The 1999 FIDIC forms of contract contain a number of obligations and/or conditions precedent that require: a party to give notice of a claim (Sub-Clauses 20.1 and 2.5); refer the claim to the Engineer (Sub-Clauses 20.1 and 3.5); and submit

The 1999 FIDIC forms of contract contain a number of obligations and/or conditions precedent that require:

• a party to give notice of a claim (Sub-Clauses 20.1 and 2.5);
• refer the claim to the Engineer (Sub-Clauses 20.1 and 3.5); and
• submit the dispute to a Dispute Adjudication Board (“DAB”) (Sub-Clause 20.4).

If either party gives a notice of dissatisfaction relating to the DAB’s Decision, Sub-Clause 20.5 provides that:[1]

“Where a notice of dissatisfaction has been given under Sub-Clause 20.4 above, both Parties shall attempt to settle the dispute amicably before the commencement of arbitration. However, unless both Parties agree otherwise, arbitration may be commenced on or after the fifty-sixth day after the day on which notice of dissatisfaction was given, even if no attempt at amicable settlement has been made.”

There has been some question whether the above clause creates two distinct obligations or whether it creates a single obligation. The two distinct obligations may be stated as:

1. an obligation to attempt to settle the dispute amicably; and
2. an obligation to wait 56 days before commencing arbitration.

Those who consider Sub-Clause 20.5 as creating two obligations acknowledge that the obligation to negotiate is not a condition precedent to arbitration, but assert that the obligation to wait 56 days is. Those who take the view that there is a single obligation consider that the 56-day period is simply part of the obligation to negotiate amicably and that, as negotiation clauses are generally unenforceable, so is the obligation to wait 56 days before commencing arbitration. This was shown in the recent case of Emirates Trading Agency Llc v Sociedade de Fomento Industrial Private Ltd,[2] where the arbitral tribunal held that a time-related amicable settlement clause did not create a condition precedent to arbitration and that the arbitral tribunal had jurisdiction, even though one of the parties had commenced the arbitration prematurely.

A Condition Precedent

Sub-Clause 20.5 of the FIDIC forms is not drafted as a condition precedent:

“It is not essential that the very words ‘condition precedent’ be used … Other words can be used, if they are clear”.[3]

In Bremer Handelsgesellschaft MBH v Vanden Avenne Izegem PVBA,[4] the House of Lords held that a notice provision was unlikely to be a condition precedent, unless it prescribed a specific time for delivery of the notice and made plain the consequences of the failure to serve the notice. The principles set out in Bremer v Vanden should equally apply to amicable settlement clauses; however, there is little case law on this issue.

Sub-Clause 20.5 of the FIDIC 1999 contracts does not state the consequences of a failure to negotiate for a period of 56 days; i.e. it does not state that any arbitration commenced before the 56-day period shall be void or invalid. It may therefore be argued that the presumption should be that Sub-Clause 20.5 does not create a condition precedent. The obligation to negotiate for a limited period of time is better described as a procedural obligation, the breach of which sounds in damages (if appropriate) or can be sanctioned by an adverse costs order – see Hillas v Arcos.[5] If the FIDIC drafters had intended that Sub-Clause 20.5 should have the consequences of preventing a party from commencing arbitration, then this could have easily been spelt out by them in the same way as they spelt out the consequences of not issuing a Sub- Clause 20.1 notice.

The alternative view, however, is that the intention is clear enough. As Edward Corbett explains[6], a failure by a party to attempt to settle the dispute amicably would appear not to be a breach of contract. However, the right to commence arbitration “…must be subject to clause 67.2 and the 56-day amicable settlement period provided for there.” Like many other commentators, Edward Corbett considers the 56-day time period a distinct obligation and one which is intended to be binding on the parties. These commentators consider this type of clause to be no different from a clause which prevents arbitration from being commenced until after practical completion of the works or delivery of goods.

Good Faith Negotiation Clauses – the Historical Position

In the 1970s the position under English law was well established and amicable settlement or good faith negotiation clauses were considered to be non-binding on the parties. This was still the position in the early 1990s when in Walford v Miles,[7] Lord Ackner concluded that good faith negotiation clauses were not binding under English law and held:[8]

“The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty…A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party. It is here that the uncertainty lies. In my judgment, while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a ‘proper reason’ to withdraw. Accordingly, a bare agreement to negotiate has no legal content.”

The position was no different in arbitration proceedings. Contractual clauses which sought to impose on parties an obligation to negotiate prior to arbitration were regularly disregarded.

Historically, amicable settlement clauses and mediation clauses have been held to be different from clauses which require a party to take certain specified steps as a condition precedent to commencing arbitration. While the courts upheld clauses that required a formal procedure as a condition precedent to arbitration, they did not uphold clauses which merely required the parties to attempt to settle their disputes. Therefore, contracts which required a dispute to be first submitted to an Engineer for an assessment,[9] or to an adjudicator[10] or an expert[11] have been upheld as conditions precedent to the commencement of the arbitration.

A Change in Attitude

The English courts in the late 1990s began to question the orthodoxy that mediations clause had “no legal content”. In 1997, in Bernhard’s Rugby Landscapes v Stockley Park[12], HHJ Lloyd QC recognised a change in attitude to ADR and stated that: “There is now a tide running in favour of alternative forms of dispute resolution prior to recourse to litigation.” In 2002, Colman J (as he then was) approached the question of whether a mediation clause was enforceable by reference to three criteria. His lordship found that:

• there must be an intention to be bound by the clause;
• that there was sufficient certainty in the procedure that the parties had agreed upon; and
• that there were public policy considerations.[13]

Similarly, in Holloway & Anor v Chancery Mead Ltd,[14] Ramsey J re-affirmed that a mediation clause would be enforceable if certain criteria were met. This reasoning of Ramsey J has subsequently been approved by the Court of Appeal and is now considered the orthodox view.

In the recent case of Emirates Trading Agency Llc v Prime Mineral Exports Private Ltd,[15] the English High Court re-considered the question of whether an amicable settlement clause was a condition precedent. Clause 11.1 of the contract stated:

“11.1 In case of any dispute or claim arising out of or in connection with or under this LTC including on account of a breaches/defaults mentioned in 9.2, 9.3, Clauses 10.1(d) and/or 10.1(e) above, the Parties shall first seek to resolve the dispute or claim by friendly discussion. Any party may notify the other Party of its desire to enter into consultation to resolve a dispute or claim. If no solution can be arrived at between the Parties for a continuous period of 4 (four) weeks, then the non- defaulting party can invoke the arbitration clause and refer the disputes to arbitration.” [emphasis added]

Teare J examined in depth the decision of Alsopp P in United Group Rail Services v Rail Corporation New South Wales.[16] This Australian case considered a contract for the design and build of rolling stock which contained a dispute resolution clause that provided that the parties should “meet and undertake genuine and good faith negotiation with a view to resolving the dispute“. Alsopp P. stated:[17]

“a promise to negotiate (that is to treat and discuss) genuinely and in good faith with a view to resolving claims to entitlement by reference to a known body of rights and obligations, in a manner that respects the respective contractual rights of the parties, giving due allowance for honest and genuinely held views about those pre-existing rights is not vague, illusory or uncertain.”

Alsopp P further held that such an approach met with public policy requirements, which promoted efficient dispute resolution and encouraged approaches by, and attitudes of, parties conducive to the resolution of disputes without expensive litigation or arbitration.[18] Teare J, in Emirates Trading, applied the reasoning of Alsopp P. His lordship proceeded to state that in conducting negotiations there must be imported an obligation to seek to do so in good faith.[19]

One of the main issues addressed in Emirates Trading[20] related to the 4-week period in which the negotiations were to take place. The claimant’s counsel argued that the 4-week period created a condition precedent to be satisfied before the arbitrators would have jurisdiction to hear and determine the claim. The condition precedent was “a requirement to engage in time limited negotiations“. That requirement was not fulfilled, because there had not been “a continuous period of 4 weeks of consultations to resolve the claims” which were the subject of the notice of termination.[21] Teare J considered this provision important because the reference to a period of 4 continuous weeks ensures that a defaulting party cannot postpone the commencement of arbitration indefinitely. In conclusion, Teare J. held:[22]

“There is, it seems to me, much to be said for the view that a time limited obligation to seek to resolve a dispute in good faith should be enforceable. Such an agreement is not incomplete.”

Having reviewed the good faith negotiation clause in detail, and in particular the use of the word “shall”, Teare J held:[23]

“I accept that the first part of clause 11.1 provides that before a party can refer a claim to arbitration there must be friendly discussions to resolve the claim. Such friendly discussions are a condition precedent to the right to refer a claim to arbitration.”

Conclusion

It now seems to be settled that an English court would find an amicable settlement clause, such as Sub-Clause 20.5 of the FIDIC forms, to be a condition precedent to the commencement of arbitration. The High Court in Emirates Trading was clear that a good faith negotiation clause, coupled with a time limited obligation, was a condition precedent which needed to be complied with prior to the commencement of arbitration. The English courts are now in line with the courts in Australia, Singapore, the United States, and many civil law countries. Similarly, there appear to be more arbitrations where arbitral tribunals are finding that they lack jurisdiction where the parties have not gone through an amicable settlement process, such as Sub-Clause 20.5 of FIDIC.

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

[1] This provision is found in the Red, Yellow and Silver Books.

[2] [2015] EWHC 1452.

[3] Eagle Star Insurance Company Ltd. v Cresswell & Ors [2004] EWCA Civ 602.

[4] [1978] 2 Lloyd’s Rep 109.

[5] [1932] Lloyd’s List LR 359, 369.

[6] Corbett E., FIDIC 4th A Practical Legal Guide, Sweet and Maxwell (1991) at page 449.

[7] [1992] 1 All ER 453.

[8] Ibid at 460.

[9] J T Mackley & Company Ltd v Gosport Marina Ltd [2002] EWHC 1315 (TCC) (03 July 2002). In Al-Waddan Hotel Ltd v Man Enterprise SAL (Offshore) [2015] EWHC 4796 at [29-30] HHJ Raeside QC referred to it being trite law that the referral to an Engineer under clause 67.1 of FIDIC 4th contract was a condition precedent to arbitration.

[10] Cape Durasteel Ltd v. Rosser and Russell Building Services Ltd [1995] 46 Con LR 75, and [2007] EWHC 1584 (TCC).

[11] Cott UK DGT Steel and Cladding Ltd v Cubitt Building and Interiors Ltd. v. FE Barber Ltd. [1997] 3 All ER 540.

[12] 82 BLR 39 at 57.

[13] Colman J stated, “For the courts now to decline to enforce contractual references to ADR on the grounds of intrinsic uncertainty would be to fly in the face of public policy as expressed in the CPR and as reflected in the judgment of the Court of Appeal in Dunnett v. Railtrack.”

[14] [2007] EWHC 2495 (TCC) at para 84.

[15] [2014] EWHC 2104.

[16] [2009] 127 Con LR 202.

[17] [2009] 127 Con LR 202 at [74].

[18] Ibid at [80].

[19] Ibid at [51].

[20] [2014] EWHC 2104.

[21] Ibid at [4].

[22] Ibid at [52].

[23] Ibid at [26].

Opinions on enforcing 'binding' DAB decisions vary. Some arbitrators support enforcement, while others, including the Singapore Court of Appeal, oppose it. This article considers case law addressing both sides of the argument and the issues that they raise.

Published in Construction Law International

Are ‘binding’ DAB decisions enforceable?

Four say YES:

• The arbitral tribunal in ICC Case 10619 considered that it was simply the law of the contract.
• This reasoning appears to have been followed in the DBF case.
• A sole arbitrator in ICC Case 16948/GZ, said a final award was acceptable (this is contrary to the Court of Appeal in Singapore’s guidance).
• A sole arbitrator in ICC Case 15751/JHN considered that a party should be required to pay that sum decided by the DAB and interest from the date when payment was due by way of damages for breach.

Three say NO:

• The Court of Appeal in Singapore (CRW v PGN) say no in relation to a final award (and upheld the High Court’s decision to set aside the arbitral tribunal’s award, which was enforced by way of a final award) but obiter suggest that as long as the merits are placed before the arbitral tribunal, in principle, an interim or partial award enforcing should be possible.
• A sole arbitrator in ICC Case 16119/GZ suggests that a partial final award and consequently also a final award are inappropriate devices to allow enforcement but suggests obiter that an interim award might be effective.
• The sole arbitrator in ICC Case 16949/GZ concluded that damages could not include the sum adjudged as due by the DAB and so declined to enforce.

The problem

The fourth paragraph of Sub-Clause 20.4 of the FIDIC 1999 Red Book provides:

‘The [DAB’s] decision shall be binding on both Parties who shall give effect to it unless and until it shall be revised in an amicable settlement or an arbitral award.’

If no notice of dissatisfaction (‘NOD’) is issued under Sub-Clause 20.4 within 28 days of receiving the DAB’s decision, that decision becomes ‘final and binding’. The General Conditions make express provision via a referral to arbitration for the enforcement (specific performance) of DAB decisions that are final and binding in Sub-Clause 20.7.

By contrast, the ‘General Conditions’ make no provision permitting the enforcement of binding DAB decisions, that is DAB decisions where a notice of dissatisfaction has been given by a party. Professor Nael Bunni identifies this as a gap in the contract conditions in his article ‘The Gap in Sub-Clause 20.7 of the 1999 FIDIC Contracts for Major Works’[1] and suggests that:

• there is no remedy offered by Clause 20 of the 1999 FIDIC Red Book, other than that of treating the non-compliant party as being in breach of contract and, accordingly, liable for damages; and
• Sub-Clause 20.7 of the 1999 FIDIC Red Book is of no assistance to the aggrieved party in this scenario, as it applies only to DAB decisions that have become final and binding.

Singapore Court of Appeal

On 13 July 2011, the Singapore Court of Appeal dismissed an appeal of the decision of the High Court in the case of CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK[2].

The case concerned a pipeline project under the FIDIC 1999 Red Book. Various disputes arose that were referred to the DAB. The DAB decided inter alia that the employer owed the contractor a sum of money. The employer issued an NOD and failed to pay the sum determined as due by the DAB. The contractor applied directly to the ICC arbitral tribunal for a final award enforcing the DAB’s decision on the basis that there had been a breach of the fourth paragraph of Sub-Clause 20.4. The contractor did not first refer the failure to pay as a second dispute to the DAB, nor did the contractor refer the merits to arbitration.

A majority of the arbitral tribunal gave a final award finding the sum awarded by the DAB to be due without considering the merits. The contractor applied to set aside the arbitral award. The High Court set aside the award on the basis that failure to pay (the second dispute) did not go to the DAB prior to arbitration. Other obiter comments were also made by Judge Ean in relation to whether the arbitral tribunal could enforce without a consideration of the merits. The contractor appealed to the Court of Appeal and the appeal was dismissed on the basis that:

‘There appears to be a settled practice, in arbitration proceedings brought under sub-cl 20.6 of the 1999 FIDIC [Red Book], for the arbitral tribunal to treat a binding but non-final DAB decision as immediately enforceable by way of either an interim or partial award pending the final resolution of the parties’ dispute. What the Majority Members did in the Arbitration – viz, summarily enforcing a binding but non-final DAB decision by way of a final award without a hearing on the merits – was unprecedented and, more crucially, entirely unwarranted under the 1999 FIDIC [Red Book].’

The Court of Appeal reasoned that:

• A reference to arbitration under Sub-Clause 20.6 in respect of a binding DAB decision is in the form of a rehearing so that the entirety of the parties’ dispute(s) can finally be resolved afresh.
• Sub-Clause 20.6 requires the parties finally to settle their differences in the same arbitration, both in respect of the non-compliance with the DAB decision and in respect of the merits of that decision. In other words, Sub-Clause 20.6 contemplates a single arbitration where all the existing differences between the parties arising from the DAB decision concerned will be resolved. This observation is consistent with the plain phraseology of Sub-Clause 20.6, which requires the parties’ dispute in respect of any binding DAB decision that has yet to become final to be ‘finally settled by international arbitration‘.
• Sub-Clause 20.6 clearly does not provide for separate proceedings to be brought by the parties before different arbitral panels even if each party is dissatisfied with the same DAB decision for different reasons.

Four more ‘binding’ DAB enforcement cases

The author’s firm has dealt with four other ICC cases in which the contractor pursued the employer in arbitration for the sums ordered by the DAB to be paid to it.

• Two sole arbitrators concluded that the sum determined to be due by the DAB was due as damages for breach of Sub-Clause 20.4.
• Two sole arbitrators declined to award any monetary sum concerning the DAB’s binding decision.

All four cases are unreported, were determined by different sole arbitrators and were under the FIDIC 1999 Red Book. In all four, one or both parties issued a valid NOD and the employer failed to pay the sums adjudged to be due by the DAB. The failure to pay was taken to the DAB prior to applying to the arbitral tribunal for enforcement in all cases apart from ICC Case 16119/GZ.

In two of the cases (ICC Case 16948/GZ and ICC Case 16949/GZ), the contractor opted to seek a final award (ie the merits were not for determination by the arbitral tribunal). In the first case, the sole arbitrator made a final award and, in the second, a different sole arbitrator concluded that there should be no enforcement of the DAB’s decision.

• In ICC Case 16948/GZ, the sole arbitrator, in a final award, ordered the employer to make an immediate payment of the sums determined to be due by the DAB plus interest and costs on the basis that ‘the Employer was liable for all damages resulting from or in connection with the failure to perform on time or in accordance with the terms of the agreement or not to perform at all [the employer’s breach of the fourth paragraph of Sub-Clause 20.4]… the Claimant has the right to receive the amount which the DAB considered was due‘ (paragraph 134).
• In ICC Case 16949/GZ, the sole arbitrator declined to make a final award (the merits were not in front of him) on the basis that ‘though non-compliance with DAB decisions No 2 and 3 would amount to a breach of contract, the consequences of such breach would hardly be a claim for damages of the same amounts already awarded’. The arbitrator then went on to admit under Article 19 of the ICC Rules the introduction of a new claim – namely the merits that were not initially placed before the arbitral tribunal. The arbitrator would then proceed in the final award to determine what payment was due to the claimant.

In the other two cases (ICC Case 16119/GZ and ICC Case 15751/JHN), the contractor sought a partial final award (and specifically not an interim award) with the merits of the DAB decisions to be finally adjudicated in a final award. In the first of these cases, the sole arbitrator declined to make a partial final award enforcing an order to pay. In the second, the sole arbitrator did make a partial final award enforcing an order to pay.

• In ICC Case 16119/GZ, the sole arbitrator declined to order payment of the sums adjudged to be due by the DAB for the following reasons:

‘Failure to comply with the DAB’s decisions is a breach of contract. The appropriate method of enforcing a DAB’s decision is therefore by way of an action for breach of contract. The DAB decisions are binding as a matter of contract (fourth paragraph of Sub-Clause 20.4) although they are not final as notices of dissatisfaction have been submitted by both Parties. The DAB decisions enjoy this binding character unless and until revised by the final award. As the DAB decisions are binding, the sums recognized under those decisions are due and payable until the revision of those decisions in the Final Award. Whilst the decisions are binding, they are not final. The DAB decisions are not final and any payment awarded by those decisions may be revised and reversed. Therefore, the Sole Arbitrator cannot issue any final award ordering the payment of the sums decided by the DAB. By necessity, the payment ordered should be provisional or temporary. The partial award requested cannot definitively determine the payment issues and, consequently, any order for payment at this stage must be provisional. It goes against the essence of a final award to make an order that could be revisited and reversed in a further award.… In conclusion the payments awarded under the DAB’s decision will be revisited by the Sole Arbitrator and cannot be the subject of a final partial award and again the subject of the final award.’

• In ICC Case 15751/JHN, the sole arbitrator determined that:

‘it seems to me that the better solution in an appropriate case is that if a Party is obliged to pay a sum of money under a Decision of a DAB in respect of which an NOD has been served and he has failed to do so in breach of Sub-Clause 20.4, that party should be required to pay that sum and interest from the date when payment was due by way of damages for breach of Sub-Clause 20.4, not by way of enforcement of the decision nor by way of pre-judging the underlying substantive dispute. I consider the present to be an appropriate case and will so order.’

For convenience, see below for the reasoning in ICC Case 10619:

‘the question now arises as to whether and on what legal basis this Tribunal may adjudicate the present dispute by an interim award… there is no reason why in the face of such a breach the Arbitral Tribunal should refrain from an immediate judgment giving the Engineer’s decisions their full force and effect. This simply is the law of the contract. In this respect, this Tribunal wishes to emphasise that neither the provisions of Article 23 of the ICC Rules, nor the rules of the French NCPC relating to the référé provision are relevant. For one thing, the judgment to be hereby made is not one of a conservatory or interim measure, strictu sensu but rather one of giving full immediate effect to a right that a party enjoys without discussion on the basis of the Contract and which the parties have agreed shall extend at least until the end of the arbitration. For the second thing, the will of the parties shall prevail over any consideration of urgency or irreparable harm or fumus boni juris which are among the basics of the French référé provision.’

Difficult Issues

The difficult issues that these cases raise include the following:

1. Should an arbitral tribunal make an interim, partial, or final award enforcing a DAB’s decision?
2. Should the basis of the award be breach of contract or specific performance?
3. Should there be a single arbitration – that is, should the merits be placed before the arbitral tribunal?
4. Does the failure to pay need to go to the DAB first?

As can be seen from the cases above, arbitral tribunals and courts have taken different approaches and there is still no clear guidance on the best way to plug the gap. A detailed consideration of all of these issues is not possible in this short article.

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

[1] [2005] ICLR 272 .

[2] [2011] SGCA 33.

If the parties to a FIDIC contract cannot agree on a suitable DAB member and they have selected FIDIC as their appointing entity, they may request FIDIC to appoint that DAB member. However, FIDIC’s present procedures seem less than ideal.

If the parties to a FIDIC contract cannot agree on a suitable DAB member and they have selected FIDIC as their appointing entity, they may request FIDIC to appoint that DAB member. However, FIDIC’s present procedures seem less than ideal. They increase the prospect of rejection of the candidate nominated by FIDIC in the first instance and correspondingly the need to repeat the exercise. They could also result in an appointment unacceptable to one or both parties. This article posits that they should be revised.

Obligation Under the Contract to Consult

Recent court decisions from England and Switzerland have highlighted the difficulties caused when the parties to a FIDIC contract are unable to agree on the appointment of a DAB.[1] Lack of agreement may be genuine. However, we have seen cases where it is part of one party’s attempt to stymie the DAB, or even the entire dispute resolution process. Whatever the cause, when the parties do need to turn to the appointing entity under the Contract for assistance, it is vital that the appointment procedures are reasonable and fit for purpose.

FIDIC’s 1999 edition of the Red, Yellow and Silver Book contracts provides at Sub-Clause 20.3 for the appointment of a DAB member, namely if any of the following conditions apply:

• the Parties fail to agree the appointment of the sole member of the DAB by the date stated in the first paragraph of Sub-Clause 20.2;
• either Party fails to nominate a member (for approval by the other Party) of a DAB of three persons by such date;
• the Parties fail to agree upon the appointment of the third member (to act as chairman) of the DAB by such date; or
• the Parties fail to agree upon the appointment of a replacement person within 42 days after the date on which the sole member or one of the three members declines to act or is unable to act as a result of death, disability, resignation or termination of appointment,

then,

“the appointing entity or official named … shall, upon the request of either or both of the Parties and after due consultation with both Parties, appoint this member of the DAB. This appointment shall be final and conclusive”

Note that the appointing entity’s prior “due consultation” with both parties is obligatory under the FIDIC contract. Anything less could rightly be regarded as contravening the principles of natural justice which include the duty to act with procedural fairness. But as to the form that this “due consultation” should take, the contract is silent.

The meaning of “due consultation”

The Oxford Dictionary of English defines the word “consult” as to “seek information or advice from (someone) …” and to “have discussions with (someone), typically before undertaking a course of action.”

The phrase “due consultation” (without definition) is found in many clauses in the earlier FIDIC 4th edition of the Red Book, obliging the Engineer to consult with both Contractor and Employer prior to making an assessment or determination. In his work The FIDIC Forms of Contract, Dr. Nael Bunni refers to commentators having expressed the view that those words should be interpreted there as a consultation appropriate to the circumstances. Similarly, in relation to the appointment of a DAB member by an appointing entity or official under the 1999 editions of the Red, Yellow and Silver Books, Dr. Bunni opines that it means “consultation with both parties to the extent required by the nature of the difficulty encountered.”[2]

So, as one might expect, the detail of the procedures for due consultation with both parties is a matter for the appointing entity or official to determine in accordance with the complexity or difficulty of the particular circumstances. As long as its procedures are fair and balanced and sensitive to circumstance, they should withstand objection.

FIDIC’s Procedures for Consultation, Nomination and Appointment

Turning to the procedures currently in use by FIDIC, its website[3] provides an information checklist for those submitting a request for appointment of a DAB member. Surprisingly, a request for information or the applicant’s views (or even joint applicants’ views) regarding the preferred attributes of the candidate member does not feature.

FIDIC’s website[4] sets out the procedure it will then follow, once it has received a request, as follows:

“FIDIC shall discharge this obligation by notifying both parties to the contract that “the President/official named is considering appointing Mr/Ms A.N. Other to the DAB…” and that Mr/Ms Other’s CV is attached.

Should either party have reasons why Mr/Ms Other is unsuitable for appointment to the DAB such reasons should be communicated to the FIDIC secretariat within 48 hours of the receipt of this notification and, in the event that FIDIC, in its sole discretion, considers that such reasons justify a reselection, this will be undertaken, and the parties notified accordingly.

Objections to Mr/Ms Other that are of a general nature rather than specifically related to his or her suitability for this particular appointment are unlikely to result in reselection.

If no objections are received or if those that are received are not considered to disqualify Mr/Ms Other from undertaking the appointment …, FIDIC formally notifies the parties and Mr/Ms Other of the appointment.

In the event that objections are considered to warrant reselection, FIDIC notifies Mr/Ms Other that he will not be nominated (without giving reasons) and proceed to progress the next highest Candidate on the shortlist.

This procedure is repeated until an appointment is made.

Potential Problems with FIDIC’s Procedures

Several points emerge from a review of FIDIC’s procedures above:

• By its initial submission checklist, FIDIC misses an early opportunity to obtain information on the preferred attributes of the appointee as regards basic matters, such as nationality, language, capability, profession, qualifications, experience, and the like.
• Following receipt of the request, FIDIC will then proceed to identify and notify the parties of a candidate DAB member that FIDIC thinks might be suitable – without first having canvassed the views of the parties. It is of course the parties’ own dispute. They are closest to it and are likely already to have formed their own views on the future appointee’s preferred attributes such as those referred to above. A perception that the parties’ views have little importance to FIDIC could easily arise.
• The suggested meaning of “due consultation” referred to above, whereby the extent of the consultation is sensitive to the difficulties involved, does not sit easily alongside a provisional decision on a disputed matter which is made without having first heard from the parties and subject only to limited right of objection later.
• FIDIC leaves the parties just 48 hours in which to make their first submission on the desirable characteristics of the DAB member – by way of objection. It is conceivable that a party will feel that there is no realistic prospect of overturning FIDIC’s provisional decision within such a short timescale and before it becomes “final” under Sub-Clause 20.3. This could arise simply because the circumstances in which a party finds itself at that time do not permit a rapid response in the timescale demanded by FIDIC.
• So here also there is scope for the parties to feel that there has been procedural unfairness in the appointment. If there were already a perception that the parties’ views were of little importance, it could easily be compounded by the sense of having been afforded no reasonable opportunity to research FIDIC’s proposed appointee and then make a considered response to FIDIC on the question of suitability. All of this does nothing to engender confidence in the DAB whose appointment may then follow. Furthermore, it could generate a challenge to the validity of that appointment, and potentially to the validity of a DAB decision that results.
• If a reasonable objection to the suitability of FIDIC’s candidate follows from one or both of the parties, for example one relating to the profession or experience of FIDIC’s proposed appointee, and this results in FIDIC’s withdrawal and reselection of the candidate, then FIDIC’s original research and administrative effort will all have been wasted for want of prior consultation; so also will the time and costs of the parties have been wasted.

Suggested Solution

In any review of its DAB appointment procedures, FIDIC might consider the following scheme:

• After receipt of an application to appoint, which should set out the applicant’s views on the desirable attributes of the DAB member, FIDIC should first copy the application to the other party and invite further submissions on the desirable attributes of the DAB member from each party within a suitable period of, for example, seven days.
• FIDIC might take the opportunity here to remind the parties that it proposes DAB members only from its own finite President’s List of well-qualified and approved persons. There will inevitably be restrictions on the availability of some of those persons and their particular skill sets at any one time. Thus, it may not be possible for FIDIC to comply in every respect with the wishes of the parties.
• After having considered any such submissions, FIDIC should inform both parties of its proposed appointee, whose appointment will automatically come into effect after a short further period of, for example, five days, unless FIDIC has received from either or both parties’ objections with reasons on why the proposed member is unsuitable.
• FIDIC informs the parties that objections to a proposed DAB member, which are of a general nature, rather than specifically related to his or her suitability for this particular appointment, are unlikely to result in reselection.
• In the event that FIDIC, at its sole discretion, considers that such reasons do justify a reselection, that reselection will be undertaken and the parties notified of the new proposed member. The reselected proposed member’s appointment will be subject to the same right of objection with reasons.
• However, if FIDIC considers that the reasons given for a proposed member’s unsuitability do not justify a reselection, the appointment will be expressly confirmed by FIDIC.

Conclusion

Even minor changes to the content and timing of FIDIC’s published procedures would be sufficient to ensure that they do not offend the principles of natural justice. A DAB appointment under such improved procedures would serve to increase the level of confidence that the parties to a dispute have in their DAB and in its eventual decision. Those improved procedures should also avoid the prospect of wasted costs.

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

[1] Peterborough City Council v Enterprise Managed Services Ltd [2014] EWHC 3193 (TCC) (10 October 2014) (bailii.org)

[2] Third edition, 2005, Blackwell Publishing, pp 616-7.

[3] http://fidic.org/node/2552.

[4] http://fidic.org/node/816.

Two decades ago, unjust enrichment was described as “the Cinderella of law, barely 10 years old but growing up rapidly. Until recently unrecognised and overshadowed by the ugly sisters, Contract and Tort, Cinderella’s day has arrived.” In England a claim for unjust enrichment was initially referred to as a claim in ‘quasi contract’. This language has now been abandoned and unjust enrichment has a strong foothold in the landscape of commercial law and its role and limits are becoming more clearly defined. Despite this, it is only infrequently pleaded in construction cases and when argued it is often set out in broad terms where the facts do not support such a claim. However, this is cause of action that should not be overlooked by a contractor or employer – especially if they have claims that fall outside the four corners of their construction contract.

Two decades ago, unjust enrichment was described as “the Cinderella of law, barely 10 years old but growing up rapidly.  Until recently unrecognised and overshadowed by the ugly sisters, Contract and Tort, Cinderella’s day has arrived.”[1]   In England a claim for unjust enrichment was initially referred to as a claim in ‘quasi contract’.  This language has now been abandoned and unjust enrichment has a strong foothold in the landscape of commercial law and its role and limits are becoming more clearly defined.  Despite this, it is only infrequently pleaded in construction cases and when argued it is often set out in broad terms where the facts do not support such a claim. However, this is cause of action that should not be overlooked by a contractor or employer – especially if they have claims that fall outside the four corners of their construction contract.

The Principle of Unjust Enrichment

The principle of unjust enrichment under English law^[2] is that no one should receive a benefit at another person’s detriment without being required to pay a reasonable value for that benefit. The court needs to ask itself four questions: (a) Has the Defendant been enriched? (b) Was the enrichment at the Claimant’s expense? (c) Was the enrichment unjust? (d) Are there any defences available to the Defendant?   In the recent case of Bank of Cyprus UK Limited v Menelaou^[3] the Supreme Court applied these principles to a claim by a bank that it should have a charge over a property where the bank had lent money for the purchase of that property but had not exercised a valid charge against the owner.

The Defences

There are a number of defences to a claim for unjust enrichment.  The first, and perhaps the most significant, is that the parties’ rights and remedies are set out within a contract.  If the parties have agreed to a contract then they will be bound to the terms and conditions of that contract and the law will not permit a claim for unjust enrichment to be used to avoid the consequences of that contract.  The second defence is where restitution would be impossible; for example, where goods have been destroyed.^[4]  The third defence is where one party has changed its position following his enrichment;^[5] for example, where a party has spent the monies it received in good faith.^[6]  The fourth defence is that of illegality.

Unjust Enrichment and Construction Contracts

As stated above, a claim for unjust enrichment will fail where the rights and remedies of the parties are determined by a valid contract.  So, for example, where a variation to a contract occurs, the contractor must claim under the variation provisions of the contract.  Only in cases where there are no variation provisions in the contract or the variation falls outside of the variation provisions may a claim for unjust enrichment succeed.

In cases where there is no contract,^[7] or where the contract is subsequently held to be illegal, a claim for unjust enrichment may be successful.^[8]  However, while the construction industry is notorious for carrying out works where contracts have not been signed or where there is a letter of intent, it does not follow that there will be no contract.  Recent case law has shown that the courts are ready to construe that a contract has come into existence by conduct, even where not all terms are agreed.  In the recent case of Reveille Independent LLC v Anotech International^[9] the Court of Appeal held that there was a contract, despite the fact that a written document stated that a contract would not come into existence until the document was signed, which the parties never did.  In this case the acceptance of the contract was evidenced by the clear performance of the obligations under the contract that showed that the parties intended to be bound by the contract.

In the case of ISG Retail Ltd v Castletech Construction Ltd^[10] the court had to consider whether a claim for unjust enrichment could succeed where there had been a total failure of consideration by one party.  In this case one party was claiming back by way of restitution a deposit paid where the other party had failed to provide any consideration under the contract.  The court held that “restitution is based on unjust enrichment, and that that is a different cause of action from breach of contract… But… there is a type of breach of contract (total non-performance) that can give rise to an alternative remedy by way of restitution. There is nothing in the Scheme [for Construction Contracts] that deprives an adjudicator of the power to grant relief by way of restitution if that is an available remedy for the breach of contract in question.”

However, although claims for unjust enrichment rarely succeed where a contract is in place, the use of unjust enrichment is becoming more relevant to the construction industry.  There are a number of situations that can arise where one party may be unjustly enriched.  The first example relates to where an adjudicator or DAB awards a sum to one party which is greater than the actual loss incurred.  The recovery of the money paid can be claimed by way of unjust enrichment.  The second example is where a call is made on a bond and where the amount paid under the bond is more than the loss incurred.

Unjust Enrichment and Adjudication

Claims for unjust enrichment have been successfully made in cases relating to an overpayment made under an adjudicator’s decision.  In the case of Aspect v Higgins^[11] the Supreme Court held that a claim for the recovery of monies paid under an adjudicator’s decision could be advanced by “contractual implication or, if not, then by virtue of an independent restitutionary obligation.”   Here the claim is not being made under the construction contract but under the terms of the adjudication agreement which requires or infers that a party is entitled to re-payment if he proves that the adjudicator awarded more than was due.

In Kitt & Anor v The Laundry Building Ltd & Anor^[12] the court considered what the cause of action was where one party paid an adjudicator for its decision and that party was subsequently awarded the costs of the adjudication.   The court suggested that a claim could be made under the adjudication agreement but that if there was no contractual remedy a claim could be advanced for unjust enrichment.  The court stated that an adjudication agreement creates a tripartite contract between the parties to the adjudication and the adjudicator in respect of the latter’s fees. “The parties will therefore have agreed that, if the decision required one rather than the other party to pay the adjudicator’s fees, that party would pay those fees. Although both parties are jointly and severally liable to the adjudicator in respect of those fees, and, therefore, the adjudicator could sue either party for those fees, in logic, and in law, it must follow that, where the adjudicator has felt it necessary to sue the party which has not been ordered to pay his fees by virtue of the decision, that party must have a legal entitlement pursuant to the tripartite agreement, contractually, to recover what it has been required to pay the adjudicator.”  The court then proceeded to set out an alternative position that where two parties owe a common liability and the party who is not primarily liable to pay discharges that liability, then the paying party is entitled to reimbursement by way of a claim for restitution so as to avoid unjust enrichment.^[13]

Unjust Enrichment and Bonds

Where a party (for example, an Employer) makes a call on a performance bond which is paid by the bank then the question arises whether the other party (the Contractor) can claim part of the monies back from the Employer under the basis of unjust enrichment if it can show that the losses incurred by the Employer were less than the monies paid under the bond.  It is well established that a claim can be made under an implied term that the beneficiary will account to the other party where it has been overcompensated.^[14]  As Staughton LJ stated in the Cargill case: “The general situation as to performance bonds is that they provide that the bank or the other party giving the bond has to pay forthwith, usually on demand. But subsequently there has to be an accounting between the parties to the commercial contract.”  Recently in Wuhan Guoyu Logisitics Group Co Ltd v Emporiki Bank of Greece^[15]  Tomlinson LJ held that, in addition to a right to claim under an implied term, there was also a right to claim based on equitable principles of restitution to prevent unjust enrichment.

However, it may be beneficial for a contractor to formulate its claim based on an implied term to account rather than as a claim for unjust enrichment.  In many construction contracts there are often caps on liability; for example, a cap on delay damages.  In cases where the Employer’s losses exceed the cap then a claim for unjust enrichment may fail where the Employer can show that its actual losses exceed the cap and therefore it has not been unjustly enriched by the calling on the bond.^[16]  In such a case the contractor will be better of framing its claim as an implied term to account having regard to the terms of the underlying contract.

Conclusion

Twenty years ago unjust enrichment was seen as the new Cinderella of the law.   Twenty years on unjust enrichment has developed her own place in the law but remains in the shadows of tort and contract.  More recently unjust enrichment has been used to fill gaps in the law where no remedy previously existed. It is an equitable right which prevents a person profiting unjustly from another’s loss.  Unjust enrichment is a cause of action which should not be overlooked especially where there are no express contractual rights or remedies or where there has been a total failure of consideration by one of the parties.

¹Unjust Enrichment, Davenport and Harris (1997) at page 1
²Benedetti v Sawaris [2013] UKSC 50 at para 10
³[2015] UKSC 66
⁴Arnold v National Westminster Bank [1989] 1 Ch 63 at 67.
⁵Lipkin Gorman v Karpnale Ltd [1991] 2 AC 58
⁶Niru Battery Manufacturing Co v. Milestone Trading Ltd [2003] EWCA Civ 1446.
⁷Claymore Services Ltd v Nautilus Properties Ltd [2007] EWHC 805
⁸Referenced in The Doctrine of Unjust Enrichment, Long R. & Avalon A., Long International Inc at p.2
⁹[2016] EWCA Civ 443
¹⁰[2015] EWHC 1443
¹¹[2015] UKSC 38
¹²[2014] EWHC 4250
¹³Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2) [2004] EWCA Civ 487, paras 66-72
¹⁴Cargill International SA v Bangladesh Sugar and Food Industries Corp. [1998] 1 WLR 461 (CA)
¹⁵[2012] EWCA Civ 1629
¹⁶See The Law of Guarantees, Andrews & Millett, Sweet & Maxwell 6th edn (2011) at page 682

FIDIC is arguably the most widely used standard form of international construction contract but reported FIDIC cases are rare. Is it time for an increased publication of FIDIC cases? There are three categories of decisions arising out of FIDIC dispute resolution provisions: 1. Decisions of the Engineer or the Dispute Adjudication Board (DAB), which will generally not be published or reported to anyone other than the parties involved in the dispute. 2. Decisions of arbitral tribunals, which are not usually made public although this is subject to certain exceptions. 3. Decisions of national courts, which are a relatively rare occurrence for the reasons discussed below.

FIDIC is arguably the most widely used standard form of international construction contract but reported FIDIC cases are rare.  Is it time for an increased publication of FIDIC cases?

There are three categories of decisions arising out of FIDIC dispute resolution provisions:

1. Decisions of the Engineer or the Dispute Adjudication Board (DAB), which will generally not be published or reported to anyone other than the parties involved in the dispute.
2. Decisions of arbitral tribunals, which are not usually made public although this is subject to certain exceptions.
3. Decisions of national courts, which are a relatively rare occurrence for the reasons discussed below.

FIDIC-related arbitral cases 

Although there are some publicly available FIDIC-related decisions, FIDIC itself does not maintain a public library of them.  The International Chamber of Commerce (“ICC”) is perhaps the most prolific publisher of FIDIC cases, which is not that surprising given that most FIDIC disputes will be finally settled by ICC arbitration. Over the years, extracts, anonymous summaries and translations of various ICC decisions and awards dealing with FIDIC contracts have been published by the ICC and in legal journals.  The extracts published by the ICC are always confidential.  There is no published guidance from the ICC about how or why it decides to publish extracts in certain cases and not others.  Instead, it seems that the ICC considers the extracts that it publishes to be informative examples.  The extracts cover different substantive areas including construction as well as procedural topics including interim measures, jurisdiction and multi-tiered dispute resolution.  In 2015, the ICC published extracts from a further 17 decisions or awards issued by ICC arbitral tribunals relating to the multi-tiered dispute resolution provisions in FIDIC contracts and, in particular the DAB process, with commentary from Christopher Seppälä, in its inaugural “Dispute Resolution Bulletin”.  Awards dating from as recently as 2014 were included.  This is a marked shift away from the ICC’s previous position not to publish awards until three years after the case has been closed.

Although the ICC has for many years published extracts from FIDIC-related arbitral awards, Christopher Sepp lä applauded this most recent publication describing it as “an event of considerable importance, for two main reasons.  First, DABs have become the preferred method for resolving international construction disputes under such contracts (rather than having them settled by the Engineer or international arbitration).  Second, the awards are relatively recent – they were all issued between 2008 and 2014 – and all but two relate to the latest suite of FIDIC construction contracts for major works published in 1999 [the Red and Yellow 1999 Books].”[1]

The extracts from FIDIC cases published by the ICC are important for a number of reasons:

• Generally, they show the sorts of disputes being addressed by ICC arbitral tribunals, and the questions they are deciding, be they procedural, substantive, legal or factual.
• The extracts can give guidance to parties facing similar issues, showing the reasoning of previous arbitral tribunals, what issues of fact, contract, law or procedure were considered, and how the arbitral tribunal decided particular questions.
• The extracts reveal the arguments raised by the parties to the dispute which may be a source of inspiration for other parties.
• The extracts may inform the decisions of future arbitral tribunals deciding similar questions. Arbitral tribunals may find reassurance or inspiration in the reasoning of previous arbitral tribunals faced with similar questions.  However, they will not be bound by these previous decisions.

The extent to which the ICC’s extracts contribute to a body of FIDIC case law is necessarily limited, however, because:

• They are only extracts. It has been pointed out that “[w]hen extracts, digests or summaries are published, there is usually no way to ascertain their accuracy.  If they have been translated into another language as well, this may only enhance the risk of error.”[2]
• They are anonymous. Parties seeking guidance from them do not always know the governing or procedural law and therefore the extent to which, if at all, the legal framework of the decided dispute is similar to their own.  They do not always know all the procedural or factual issues, some of which may have been key to the decision-making process.  They do not know the identity of the arbitral tribunal or its experience and legal background which may have influenced each individual arbitrator’s position or thinking on certain issues.
• In sum, it is not always possible to get a feel for the “correctness” of the award.

National court decisions 

Very few FIDIC cases are considered by national courts.  This is because FIDIC contracts usually contain an arbitration clause and the majority of arbitral awards are complied with voluntarily.  National courts hear such cases in limited circumstances, such as if one party wants to remove an arbitrator or set aside or enforce an award.  The paucity of decisions by national courts on FIDIC contracts means that, when a national court does decide a FIDIC related issue, there is great interest.  This has been seen recently with, for example, the decisions of the Singapore High Court and Court of Appeal in the “Persero” cases relating to the enforcement of DAB decisions[3] and in Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar relating to issues arising under the FIDIC 1999 Yellow Book (the Howard Kennedy International Construction team (formerly Corbett & Co.) acted for the Government of Gibraltar).[4]  This interest does not, however, necessarily equate to a requirement that arbitral tribunals or even other national courts follow the decisions.

Howard Kennedy International Construction team research into published FIDIC cases

Research by our International Construction team has identified approximately 130 reported or published court decisions and published extracts of decisions or awards by arbitral tribunals concerning or mentioning FIDIC contract disputes in the period 1974 to 2015.  In addition to these cases, there are other arbitral awards relating to FIDIC contracts that are referred to, anonymously, in textbooks and articles in legal journals and elsewhere.  Of the approximately 130 decisions we have identified, 61 are ICC arbitral awards or decisions (we have not found any published non-ICC arbitral decisions or awards) and 66 are court decisions.  The majority of the court decisions come from England and Wales.  Others come from India, South Africa, Trinidad and Tobago, Singapore and Australia as well as several other jurisdictions.[5]  We are publishing its list with this newsletter.

It is safe to assume that there are many unreported FIDIC-related arbitral awards in existence.  By way of example, we have been involved in a significant number of international arbitrations relating to FIDIC contracts which resulted in decisions or awards that have not been published and remain confidential.  Almost all of these were ICC arbitrations.  The ICC deals with many construction and engineering arbitrations each year (in 2014, 21% of the ICC Court’s total case load came from construction and engineering disputes[6]).  A fair percentage of these are likely to relate to FIDIC contracts.

The pros and cons of publishing more FIDIC-related arbitral awards 

So, should more FIDIC-related arbitral awards be published and, if so, how?  We want your views.

The benefits of having a body of published, accessible, full arbitral awards (not extracts, not anonymous) dealing with FIDIC-related disputes would include:

• Transparency in the final settlement of FIDIC related disputes.
• The development of a body of case law relating to FIDIC contracts, even if arbitral awards in commercial arbitration do not constitute binding precedent, and even if some awards are better reasoned than others.
• Such case law would assist with the development of consistent rules for recurring issues. In turn, this would assist with predictability in the administration of FIDIC contracts and the equal treatment of parties to those contracts.
• The better understanding by FIDIC users of the arbitral process.
• The assessment by FIDIC users of potential arbitrators through access to their published awards.
• The improvement of the quality of awards because of increased exposure and competition.

On the other hand:

• As noted by English judges in respect of the impact on the common law system of a huge volume of unreported cases deriving from the growing number of computerised databases: “… there is no pre-selection. Large numbers of decisions, good and bad, reserved and unreserved, can be accessed.  Lawyers frequently feel that they have an obligation to search this material.  Anything which supports their client’s case must be drawn to the attention of the court …”.[7] In other words, without any selection, there may be a torrent of published cases, and the usefulness of previous decisions might be neutralised as lawyers would eventually find support in previous decisions for any argument they care to run!
• Full publication would come at the price of confidentiality which, according to recent surveys,[8] remains important to many users.
• How could an increased publication of FIDIC-related decisions come about? Suggestions include amending national arbitration laws, amending the rules of arbitral institutions, amending FIDIC contracts to permit publication of arbitral awards and encouraging parties to FIDIC contracts and arbitration to agree to publication of awards.
• Who would publish the complete awards? If it was FIDIC, parties would have to send them to FIDIC for publication.  If it was the arbitral institutions, they may have to amend their rules.  If it was an independent body, for example a FIDIC users committee, it would have to rely on parties sending awards for publication.

Conclusion

• National court decisions relating to FIDIC projects will continue to appear sporadically and may give guidance but will not necessarily be binding on other courts or arbitral tribunals.

• The routine publication of complete, un-redacted arbitral awards on FIDIC disputes is unlikely. This is because parties would have to forgo confidentiality which, on the basis of recent surveys, they are unwilling to do.

• It is unclear who would be in charge of this publication exercise and how, practically, it would come about.

• Although such publication would be welcome for the sake of transparency, it may simply leave parties and arbitral tribunals swamped with a large volume of contradictory arguments and decisions.

• Publication by the ICC of anonymous extracts of FIDIC-related arbitral awards is valuable because the ICC has sifted and analysed the awards and the extracts comprise the only constant source of information on FIDIC awards. However, the extracts can do no more than what has already been described by the ICC, which is to inform, enlighten and contribute to greater transparency in the dispute resolution process.

[1] See the “ICC Dispute Resolution Bulletin 2015 No 1” available from the ICC Dispute Resolution Library at www.iccdrl.com.  See also the FIDIC commentary on this development at http://fidic.org/node/8818.

[2] Christopher Seppälä “The development of a case law in construction disputes relating to FIDIC contracts”, ICLR [2009] 105.

[3] The series of cases involving PT Perusahaan Gas Negara (Persero) TBK and CRW Joint Operation.

[4] Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC) and [2015] EWCA Civ 712 (Court of Appeal).

[5] Including Northern Ireland, Tanzania, the Falkland Islands, Jamaica, Papua New Guinea, New Zealand, Botswana, the Philippines, Malaysia, Nairobi and Switzerland.

[6] Source: “2014 ICC Disputes Resolution Statistics” available at http://www.iccdrl.com.

[7] Per Laddie J in Michaels v Taylor Woodrow [2001] Ch 493 and quoted by Lord Carnworth of Notting Hill JSC in his address for the NMLR Annual Lecture Series in 2012 “Judicial Precedent – Taming the Common Law”.

[8] Such as the 2010 and 2015 International Arbitration Surveys by White & Case LLP and Queen Mary, University of London.

On 27 May 2015, the 160-page reserved judgement of the Singapore Court of Appeal (“CA”) was handed down in Persero 2 - PT Perusahaan Gas Negara (Persero) TBK (“PGN”) v CRW Joint Operation (“CRW”)[1]. It will be regarded a triumph for contractors wishing to enforce DAB decisions. The CA ruled that the interim award issued by the arbitral tribunal ordering enforcement of the DAB’s decision should stand. Using the concept of an “inherent premise”, the CA made two important findings: 1) it was not necessary for the Contractor to refer the failure to pay (the secondary dispute) back to the DAB; and 2) it was not necessary for him to refer the merits (the primary dispute) in the same single arbitration as his application to enforce.

On 27 May 2015, the 160-page reserved judgement of the Singapore Court of Appeal (‘CA’) was handed down in Persero 2: PT Perusahaan Gas Negara (Persero) TBK (‘PGN’) v CRW Joint Operation (‘CRW’)[1]. It will be regarded a triumph for contractors wishing to enforce DAB decisions. The CA ruled that the interim award issued by the arbitral tribunal ordering enforcement of the DAB’s decision should stand. Using the concept of an “inherent premise“, the CA made two important findings:

• it was not necessary for the Contractor to refer the failure to pay (the secondary dispute) back to the DAB; and
• it was not necessary for the Contractor to refer the merits (the primary dispute) in the same single arbitration as his application to enforce.

The 64-page judgement of Chief Justice Sundaresh Menon (with whom Justice Quentin Loh agreed) forms the majority judgement of the CA (‘CA Majority’). Justice Chan Sek Keong (‘CA Dissenting Judge’) delivered a 96-page dissenting judgement. The CA Majority upheld:

• the interim award ordering PGN to pay CRW c.US$17m (‘the Adjudicated Sum’); and
• the lower court’s order granting CRW leave to enforce the interim award in the same manner as a court judgement.

By way of background, the DAB in November 2008 made a decision ordering PGN to pay CRW the Adjudicated Sum. PGN served a notice of dissatisfaction (‘NOD’). In 2009, CRW sought to enforce the Adjudicated Sum without referring the merits to arbitration. The arbitral tribunal, by a majority, issued a final award enforcing the Adjudicated Sum. The High Court set aside the award and the Court of Appeal upheld that judgement with an endorsement that it would be permissible to enforce provided the merits were also referred in the same arbitration. In 2011, pursuant to the CA’s guidance in Persero 1, CRW started arbitral proceedings again, this time seeking to enforce the DAB’s decision in an interim award as well as referring the merits to arbitration. Again, there was a majority award enforcing the DAB’s decision. This time, both the High Court and the CA Majority agreed with the arbitrators.

Interpretation of Sub-Clause 20.4 of the 1999 Red Book

The CA Majority emphasised that “it may be vital that parties promptly comply with a DAB decision” and that “it is of general importance that contractors are paid promptly where the contract so provides“. It summarised its interpretation of the effect of a NOD on a DAB decision by holding:

• a DAB decision is immediately binding once it is made;
• the parties are obliged to give effect to it promptly until such time as it is overtaken or revised by either an amicable settlement or a subsequent arbitral award;
• a NOD does not and cannot displace the binding nature of a DAB decision or the parties’ concomitant obligation to promptly give effect to and implement it.

These conclusions were also reached by the South Gauteng High Court in South Africa in two recent cases.[2] While this author agrees with all three points, they do not help with the next stage of enforcing that decision nor with resolving the issues in Persero 2 or any other similar situation.

Point 1: Is it necessary to refer the secondary dispute back to the DAB?

In order to get around the drawn out process of the necessity of a re-referral to the DAB (which arguably arises as a result of the first sentence of Sub-Clause 20.6), the CA Majority drew upon two strands of support:

• an article written by Christopher Seppälä[3] (one of FIDIC’s contract draftsmen) and
• the FIDIC Guidance Memorandum[4] dated 1st April 2013 (‘FIDIC Guidance’).

The CA Majority concluded that:

• there was an inherent premise embedded within a DAB decision that a sum to be paid was payable forthwith; and
• here the dissatisfaction expressed in the NOD inherently extends to the requirement that payment of the Adjudicated Sum be made forthwith and so there is nothing further to be referred back to the DAB.

Whilst at first sight the concept seems an ingenious and neat mechanism to avoid the nonsense, there are some difficulties with the logic underlying it. Both the FIDIC Guidance and the publications by Mr Seppälä explain that it was FIDIC’s intention that “binding” but not “final” DAB decisions should be capable of reference to arbitration under Sub- Clause 20.6 – without Sub-Clauses 20.4 [Obtaining a DAB’s decision] and 20.5 [Amicable Settlement] being applicable. The author considers that to be irreconcilable with the “black and white” of the 1999 Red Book contract, because the only clause in the General Conditions concerning the enforceability of DAB decisions which disapplies Sub-Clauses 20.4 and 20.5 is Sub-Clause 20.7.

The author considers that, properly analysed, neither of the above strands relied upon by the CA Majority support their judgement. Whatever was intended by FIDIC is irrelevant. It is the wording of the contract itself that needs to be interpreted by reference to the intentions of the parties at the time of entering into the contract.

So where does the concept of an inherent premise come from?

The CA Majority have not adequately explained the concept of the “inherent premise“. It is not clear whether this is a rule of law or construct particular to Singapore. Is it akin to an implied contract term at common law? In England, there will be no implied term unless that term is necessary and would have been obviously so to an independent observer at the time when the parties entered into their contract.

There are said to be two inherent premises – one in the DAB’s decision and one in the NOD. Is that something that both parties would have assumed to be so at the time of entering the contract? Are they so obvious that they should be implied? This author believes that the answer is no. The CA Majority’s concept that the inherent premise is generated at the time of the DAB decision therefore appears to be entirely novel.

However, a much more cogent objection to the CA Majority’s finding is the fact that Sub-Clause 20.4 expressly requires that the NOD shall set out the matter in dispute and the reason(s) for the party’s dissatisfaction. If the NOD does not do so with respect to the payment term, then no inherent premise should be implied.

Point 2: Is it necessary for there to be a single arbitration dealing with both the merits and non-payment of the DAB’s decision?

In Persero 1, the CA held that the 1999 Red Book:

“requires the parties to finally settle their differences in the same arbitration, both in respect of the non-compliance with the DAB’s decision and in respect of the merits of that decision…consistent with the plain phraseology of Sub-Clause 20.6 which requires the parties” disputes in respect of any binding DAB decision which has yet to become final to be “finally settled by international arbitration”. Sub-Clause 20.6 clearly does not provide for separate proceedings to be brought by the parties before different arbitral panels even if each party is dissatisfied with the same DAB decision for different reasons.”

The CA Majority, disagreeing with the CA in Persero 1, found that a paying party’s failure to comply with a binding but not final DAB decision is itself capable of being directly referred to a separate arbitration under Sub-Clause 20.6. The Majority CA reasoned that as the NOD (through the implied premise above) addressed the need to make prompt payment of that sum:

“the dispute over the paying party’s failure to promptly comply with its obligation to pay the sum that the DAB finds it is liable to pay is a dispute in its own right which is capable of being “finally settled by international arbitration”.

In order to resolve this issue, it is necessary in the first place to resolve the issue of whether enforcement of a binding but non-final decision can be “finally settled” by arbitration. In this author’s 2012 paper “Mind the Gap“[5], it was argued that following a NOD, a DAB decision will amount only to interim relief because the decision must be referred to arbitration to finally resolve the dispute. This author further argued that it follows that an arbitral tribunal should not issue a final award in relation to interim relief. Accordingly, this author disagrees with the judgement of the CA Majority that it is appropriate for a final award to be given (for the purposes of enforcement only) in a separate arbitration.

The Dissenting Judgment

The CA Dissenting Judge considered that the interim award should have been set aside because:

• The secondary dispute is not a dispute that was referable to arbitration under 20.6;
• The arbitrators had no mandate to issue the interim award;
• Even if they did have the mandate, the interim award was, and was intended to be, a provisional award that fell outside the ambit of an “award” as defined in s.2 of the Singapore International Arbitration Act (‘IAA’) and therefore was not enforceable under s.19 of the IAA in the same manner as a judgement.

The length of this article does not permit a detailed examination of this extensive but minority judgement.

Conclusion

The international construction community most likely agrees that, as a matter of policy, it is desirable for a DAB’s decision to be enforceable. Many commentators have gone into print with arguments to fit this policy desire. The CA Majority have clearly been influenced by much of this literature. Whilst those same commentators (and indeed anybody wishing to enforce a DAB’s decision) may be rejoicing, this author finds that Persero 2 offers a CA Majority judgement that lacks intellectual rigour. Whilst it may be the last word from Singapore; it certainly does not represent the last word in this debate.

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

[1] [2015] SGCA 30.

[2] Esor Africa (Pty) Ltd/Franki Africa (Pty) Ltd JV v  Bombela Civils JV (Pty), SGHC Case No. 12/7442 which was then affirmed in the case of Tubular Holdings (Pty) Ltd v DBT Technologies (Pty) Ltd, Case No. 06757 / 2013.

[3] “Sub-Clause 20.7 of the FIDIC Red Book does not justify denying enforcement of a ‘binding’ DAB decision” (2011) 6(3) CLInt 17

[4] FIDIC Guidance Memorandum to Users of the 1999 Conditions of Contract dated 1st April 2013

[5] 5 [2012] Int ALR 4 153.

How long have you got to challenge the adjudicator’s decision? The English Court of Appeal has decided: 1) the claimant who considers the adjudicator awarded too little must challenge before the original limitation period for his claim expires; and 2) the defendant who considers he paid too much has a new limitation period starting on the day he paid the adjudicator’s decision. Is it unfair that the loser may have years longer than the winner? That question will soon be answered by the Supreme Court of the United Kingdom. Their decision will be of interest to anyone involved with FIDIC DABs anywhere in the world.

How long have you got to challenge the adjudicator’s decision? The English Court of Appeal has decided that:

• The claimant who considers the adjudicator awarded too little must challenge before the original limitation period for his claim expired.
• The defendant who considers he paid too much has a new limitation period starting on the day he paid the adjudicator’s decision.

Is it unfair that the loser may have years longer than the winner? That question will soon be answered by the Supreme Court of the United Kingdom. Their decision will be of interest to anyone involved with FIDIC DABs anywhere in the world.

Introduction

In a couple of months, the highest court in the land, the Supreme Court, will for the first time be wrestling with the complexities of adjudication law. The case in question is Aspect Contracts (Asbestos) Ltd v Higgins Construction Ltd[1] (“Aspect“). The Supreme Court’s judgement will hopefully dispel much of the confusion surrounding the Court of Appeal’s controversial decision on the application of limitation rules to matters decided by an adjudicator.

The concept of “temporary finality”, as it has become known, is a central feature of UK statutory adjudication. Although an adjudication decision is binding, either party can later seek a final determination of the matters to which it relates. This will be done either through the courts or arbitration, depending upon the parties’ agreement.

In cases involving payment of money, such as an award of damages for breach of contract, either party might invoke the final determination option. The party receiving payment might consider that the amount awarded by the adjudicator was inadequate. Conversely, for the paying party, the issue might be that the sum awarded by the adjudicator was excessive, in which case the claim would involve recovery of the amount of the perceived over-payment.

The Aspect case concerned a claim for recovery of a perceived overpayment. It arose out a dispute between a contractor, Higgins, and its specialist consultant, Aspect, which it engaged to carry out an asbestos survey to determine the amount of asbestos on a site that was to be redeveloped.

The Facts

First, it should be mentioned that the limitation period for claims in this case was six years, running from the date of the relevant breach of contract. Otherwise, the facts of the Aspect Case are refreshingly straightforward:

In April 2004 Aspect carried out its survey and reported to Higgins.

Higgins then entered into the development contract with the housing authority and engaged a subcontractor, Falcon, for asbestos removal and demolition.

Falcon encountered a much higher volume of contaminated material than was identified in Aspect’s report. Higgins maintained that it therefore had to pay much more than anticipated to Falcon and there were 17 weeks of critical delay to the project.

It was not until June 2009 that Higgins commenced adjudication proceedings against Aspect, claiming damages representing the losses which it suffered as a result of Aspect’s failure to provide an accurate survey.

In July 2009, the Adjudicator awarded Higgins over £650,000 as damages, which was duly paid by Aspect in the following month.

Three years later, in February 2012, Aspect commenced court proceedings in the Technology and Construction Court in England (TCC) for the final determination of its liability to Higgins.

In May 2012, Higgins served its defence and counterclaim in the court proceedings in which it sought to offset further losses against Aspect’s claim, which it now said it had suffered as a result of Aspect’s breaches. However, its right to do so was challenged by Aspect, who contended that Higgins’ counterclaim was time-barred.

One of the puzzling features of this case was the remarkably slow speed at which the dispute unfolded. Indeed, it is an object lesson in the perils of leaving disputes to fester. For instance, why did it take Higgins approximately four years to starts an adjudication to recover the substantial losses it had suffered? Even more oddly, having had to pay such a substantial sum to Higgins, why did Aspect then leave it another three years to take the necessary steps to recover what it claimed was a substantial over-payment?

How the limitation issue arose

Perhaps unwittingly, and somewhat ironically, it was Aspect’s challenge to Higgins’ defence and counterclaim on limitation grounds that precipitated Higgins’ application for permission to amend its case by introducing a limitation argument regarding Aspect’s own claim for recovery of the alleged over-payment.

If the date when time began to run for Aspect’s claim was the date when it advised Higgins about asbestos on the site – and it was that advice that had led to Higgins’ claim and the resulting award against Aspect – then Aspect’s court proceedings would be time-barred. Conversely, if, as Aspect alleged, time ran from when it had complied with the adjudicator’s decision by making the alleged over-payment, then the court proceedings would have been commenced well within the six-year limitation period.

It was those matters relating to limitation on which Higgins asked the court to issue a binding declaration. At first instance in the TCC, Akenhead J decided the matter in Higgins’ favour, declaring that Aspect’s claim was indeed time-barred and that both Aspect’s claim and Higgins’ counterclaim should be dismissed. Aspect took the case to the Court of Appeal and Longmore LJ delivered a unanimous judgment overturning Akenhead J’s decision.

How the limitation issue arose

As one might expect, the contract contained no express obligation upon a successful party in adjudication proceedings to repays monies awarded where it is later shown in final determination proceedings that it was not entitled to those monies. Therefore, the central issue, both at first instance and in the Court of Appeal, revolved around defining that obligation.

Central to Aspect’s position was the argument that, because of the absence of any such duty in either the primary or secondary legislation which imposed adjudication in construction contracts,[2] or in contracts such as the one in this case, it was clearly appropriate for the court to imply a term to that effect. If such a term were to be implied, it would follow that the relevant duty to repay would arise when the losing party paid the monies pursuant to the adjudication decision. Crucially, for Aspect’s purposes, it would then follow that the relevant breach would in this case have occurred well within the six-year limitation period.

Akenhead J had not been impressed by Aspect’s arguments for the implication of this sort of term into the contract. In dismissing those arguments, he applied the long-established rule governing the implication of terms – which is whether it is necessary to imply the term relied upon in order to make business sense of the agreement. He decided that the test had in this case not been satisfied.

Akenhead J departed from the earlier TCC decision of HHK Stephen Davies in Jim Ennis Construction Ltd v Premier Asphalt Ltd,[3] in which the judge held that a term should be implied in these circumstances. Akenhead J considered that not only was it not necessary to imply a right into the contract to recover over-payment resulting from compliance with an adjudicator’s decision, but that it would be positively undesirable to do so. This is because the resulting cause of action would in practice considerably extend the amount of time during which the underlying dispute could be litigated or arbitrated, and then only by the party who had made the over-payment.

In rejecting the necessity argument advanced by Aspect, the Judge also relied heavily on the fact that Aspect could, at any time after it had provided its report, have made an application to the court seeking a “negative declaration” of liability to Higgins for the work carried out.

As regards the all-important limitation question, it would follow from Akenhead J’s findings on the legal issues that the cause of action available to the paying party (Aspect) arose all the way back when it provided its report in 2004. The limitation period had therefore expired approximately two years before Aspect commenced the court proceedings which were time-barred.

However, the Court of Appeal fundamentally disagreed with both the Judge’s approach and his conclusion. Longmore LJ delivered the unanimous judgement of the three-man appellate tribunal. Firstly, and most importantly, Longmore LJ observed that it did not really matter whether one classified the task here as implication of terms or construction of the contract. What was crucial was the fact that the contract incorporated the statutory Scheme for Construction Contracts which clearly envisaged the possibility of an over-payment. Although the Scheme does not expressly require the over-payment to be repaid, in Longmore LJ’s mind, “it is as close to be explicit as it possible to be.”

Nor was the Court of Appeal persuaded by the argument that, in order to avoid the complications that had arisen in this case, the paying party could at any time have applied to the court for a negative declaration confirming that it was not liable to pay further monies. Longmore LJ considered firstly that the juridical basis of such a step was questionable. Secondly, he thought it was unrealistic and counter-intuitive to expect a party who denies liability to take the initiative and himself start legal proceedings. These departures from Akenhead J’s approach to the problem, although not entirely convincing in a number of respects, were fatal to Higgins’ case, and Aspect’s appeal was allowed.

The restitution issue

One of the most tantalising features of the Aspect case is the treatment by both Courts of the alternative claim advanced by Aspect for repayment of the monies based on the law of restitution and, more specifically, the principle of unjust enrichment. Aspect argued that the circumstances of this case were comparable to a case where a court judgement requiring the payment of monies is overturned on appeal. In that situation, the law of restitution imposes an equitable duty upon the recipient of those monies to pay them back and gives rise to an enforceable cause of action against him.

Akenhead J was not impressed by this argument and held that no claim in restitution could lie in these circumstances. He also commented upon the fact that it was unclear how UK legislation on limitation applies to restitution.

It appears from the Court of Appeal’s judgement that Aspect’s alternative claim in restitution was not argued at that level, possibly due to Aspect’s success on its primary claim based upon the law of contract. However, as we understand it, the judges of the Supreme Court have rather surprisingly stipulated that the restitution point should be argued before them when they hear the Aspect Case. It may be dangerous to reading anything into this. It may be that the Supreme Court simply wishes its review of the law in this area to be as comprehensive as possible. But it is also possible that the Supreme Court will decide that the answer lies in the application of restitutionary principles. We shall soon see.

Conclusion

Right now, English law says that a claim for a refund arises when the adjudicated amount is paid. A new limitation period starts on the date of payment.

Advantage now lies with the original paying party. He may leave taking steps to recover his alleged over-payment until as late as possible and certainly long after any claim relating to the parties’ performance would be time-barred by limitation. All cross-claims may thus be shut out and this opens the door to potential unfairness.

Review by the Supreme Court is, however, imminent. It is likely that if the Supreme Court does reinstate Akenhead J’s approach, it will precipitate a number of cases being launched in the courts or arbitration for final determinations to avoid the limitation risk in the circumstances similar to the Aspect Case.

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

[1] At first instance the reference is [2013] EWHC 1322 (TCC). For the Court of Appeal, the reference is [2013] EWCA Civ 1541.

[2] The primary legislation that applied to this case was the Housing Grants, Construction and Regeneration Act 1996 and the secondary legislation was the Scheme for Construction Contracts.

[3] [2009] EWHC 1906 TCC.

If there is no DAB appointed by parties to a FIDIC 1999 contract, may disputes be referred directly to arbitration under Clause 20.8? This issue has troubled many in the industry – and has now been considered in English and Swiss courts.

If there is no DAB appointed by the parties to a FIDIC 1999 contract, may disputes be referred directly to arbitration under clause 20.8? This issue has troubled many in the industry – and has now been considered in English and Swiss courts.

Background to the issue

Regular users of FIDIC contracts will be aware that the 1999 Red Book makes provision for a ‘standing’ DAB and the 1999 Yellow and Silver Books make provision for an ad-hoc DAB. In the Red Book, the pro forma appendix to tender provides the default position that the standing DAB should be constituted 28 days after the commencement date. In the Yellow and Silver books, the DAB is to be appointed by the date 28 days after one party gives notice to the other of its intention to refer a dispute to a DAB.

It seems clear that it was intended by the drafters of all 1999 FIDIC books that a dispute, once crystallised, should be referred to the DAB prior to amicable settlement/arbitration under Sub-Clauses 20.5 and 20.6. However, in circumstances where this is not possible (e.g. if a party refuses to sign the dispute adjudication agreement (DAA) and the DAB is not ‘in place’), it was also intended by the drafters that the parties could rely on Sub-Clause 20.8 to bypass that process.

In the author’s experience, it is common for parties to enter into a 1999 Red Book contract but fail to constitute the DAB in the time set out in the Appendix to Tender. It is also common in projects involving a Yellow or Silver Book contract to find that one party does not want to refer the matter to a DAB. That party might procrastinate in the DAB appointment process and, even if an appointment is eventually made by the appointing body under Sub-Clause 20.3, that party may then refuse to sign the DAA.

There are conflicting views on whether an appointment under Sub-Clause 20.3 renders the signature of a DAA unnecessary. The author’s view has always been that only when the DAA is actually signed can a DAB be said to be ‘in place’. If that view is correct then (absent any ability by a court to rectify a refusal to sign – see below) it follows that Sub-Clause 20.8 can be relied upon and the dispute referred directly to arbitration. This view is supported by the FIDIC Contracts Guide Commentary on Sub-Clause 20.8:

“There may be “no DAB in place” because of a Party’s intransigence (e.g., in respect of the first paragraph of P&DB/EPCT 20.2), or because the DAB’s appointment had expired in accordance with the last paragraph of Sub-Clause 20.2. If a dispute arises thereafter, either Party can initiate arbitration immediately (subject to the first paragraph of P&DB/EPCT 20.2), without having to reconvene a DAB for a decision and without attempting amicable settlement. However, the claimant should not disregard the possibility of settling the dispute amicably.

Under P&DB or EPCT, the first paragraph of Sub-Clause 20.2 requires a DAB to be appointed within 28 days after a Party gives notice of intention to refer a dispute to a DAB, and Sub-Clause 20.3 should resolve any failure to agree the membership of the DAB. The Parties should thus comply with Sub-Clauses 20.2 and 20.3 before invoking Sub-Clause 20.8. If one Party prevents a DAB becoming ‘in place’, it would be in breach of contract. Sub-Clause 20.8 then provides a solution for the other Party, which is entitled to submit all disputes (and this breach) directly to arbitration.”

If one party is simply not prepared to co-operate with what is intended to be a consensual DAB process, particularly in light of the difficulties that are now recognised with the enforcement of binding but not final DAB decisions, then it makes sense for the power in Sub-Clause 20.8 to be available and exercised.

The courts of both England and Switzerland have had to consider these issues recently and both courts proceeded on the basis that there is a tension between:

• the opening wording of Sub-Clause 20.2 which uses mandatory language for the parties to refer their dispute to the DAB; and
• the wording in Sub-Clause 20.8 which provides that if a DAB is not ‘in place whether by expiry … or otherwise’ the parties can bypass the DAB.

This tension is particularly apparent in the Yellow and Silver Books where the parties are to constitute an ad hoc DAB when a dispute has arisen. However, a literal reading of Sub-Clause 20.8 in isolation allows a party to bypass the DAB in favour of arbitration because necessarily no DAB will be ‘in place’ at that point.

The English case: Peterborough City Council (“the Council”) v Enterprise Managed Services Limited (“EMS”)[1]

The parties entered into a FIDIC Silver Book 1999 contract with amendments to Sub-Clause 20.6 which provided that the English courts would be substituted for arbitration. The Council opted to bring court proceedings without referring the matter to the DAB, relying on Sub-Clause 20.8. EMS applied for a stay of the court proceedings relying on Sub-Clause 20.2. Mr Justice Edwards-Stuart granted the stay for the parties to resolve their dispute in accordance with the contractual machinery i.e. to enable the dispute to be referred to the DAB.

Counsel for EMS, Ms Anneliese Day QC, relied on the opening words of Sub-Clause 20.2 and pointed out that if the wording in Sub-Clause 20.8 were interpreted literally, it would render Sub-Clauses 20.2 to 20.5 redundant.

Counsel for the Council, Ms Fiona Sinclair QC, relied on the words “or otherwise” in Sub-Clause 20.8 to argue that it could refer the matter to court in any circumstances where no DAB was ‘in place’. Counsel argued that the source of the DAB’s authority was the DAA (an important point that the judge agreed with); that without a signed DAA the DAB could not be ‘in place’; that because the parties had failed to sign the DAA, the route to arbitration under Sub-Clause 20.8 was open. To support her position that the court should allow court proceedings under Sub-Clause 20.8 (as opposed to insisting on reference to a DAB under Sub-Clauses 20.2 to 20.4), Ms. Sinclair argued that Sub-Clauses 20.2 to 20.4 were unenforceable anyway for lack of certainty as a result of the ‘gap’ identified in the FIDIC General Conditions by commentators.

The judge considered the difficulties that exist in relation to the enforceability of binding DAB decisions as raised by Ms Sinclair. They had been set out in two articles on the “gap”. One was written by Professor Nael Bunni. The other was the present author’s own article entitled Mind the gap: Analysis of cases and principles concerning the ability of ICC tribunals to enforce binding DAB decisions under the 1999 FIDIC Conditions of Contract [2012] Int ALR 145. The judge summarised the issues set out in: “Mind the gap” as follows:

“limitations on the powers of the arbitrators…(in particular whether or not they could order specific performance), the type of award (interim, partial or final) that is or may be appropriate if the DAB’s decision is to be enforced and the whole question of delay that would be involved in resorting to arbitration”.

The judge considered that although this “may be arguable in the context of the standard FIDIC red books which include an arbitration clause, it loses force where the arbitration clause has been removed – as in the present case.” His rationale was that an English court has the power of specific performance and so would have no difficulty in using that power in relation to the enforcement of a DAB decision.

The judge turned to the potential problem of a failure by the parties to agree on an adjudicator’s fees for insertion in the DAA. He found that there was an implied term that the adjudicator would be entitled to his reasonable fees and expenses which the court could readily assess in default of agreement. In practice, however, it is usual for the DAB to propose its own fees. If one party considered that the fees were reasonable and the other thought they were excessive and therefore refused to sign the DAA, it is unlikely that the court could impose a lesser fee than that requested by the DAB because in those circumstances, it is likely that the DAB would simply refuse to act.

The judge dealt with the situation where one party refused to sign the DAA. He ruled that again, the court could exercise its power of specific performance to compel the refusing party to sign. Indeed, if all of the terms of the DAA were clear and accepted, and/or the court felt able to imply reasonable fees in the absence of agreement, the possibility of compelling a party to sign might be appropriate. However, in circumstances where, for example, the DAB wished to propose additional terms to its DAA (which is quite common in practice) and one party rejected those terms, it is questionable whether a judge would have the power to compel the parties to sign in the face of such disagreement.

It is interesting to note that the judge considered that the DAB is ‘in place’ from the moment that the member(s) of the DAB has/have been appointed, whether under Sub-Clause 20.2 or 20.3. He considered that “the effect of incorporating the Appendix to the Conditions as the terms of the Dispute Adjudication Agreement was that all the relevant terms of that agreement would be in place save for agreement of the adjudicator’s fees”. The advantage of the judge’s analysis is that if there is an interval (which might be substantial) between the date of appointment and the date on which a party ultimately signs the DAA (following an order by the Court that it is compelled to sign), any work carried out by the DAB in this period will be within its jurisdiction. Conversely, if the date when the DAB is ‘in place’ is the date of signature of the DAA, any work carried out in the interval before date of signature would arguably be a nullity.

The judge’s construction fits the facts of the Peterborough case because he concluded that he could rectify the issues set out above (failure to agree terms/fees/refusal to sign). However, his construction would not necessarily be correct in circumstances where those issues could not be rectified by the court or by an arbitral tribunal. The judge correctly concluded that the source of the DAB’s authority is the DAA. If specific performance is not a power available to the arbitral tribunal or if the nature of the issue is simply not amenable to the exercise of such a power, then the judge’s analysis is questionable.

Swiss Federal Supreme Court Case dated 7 July 2014[2]

The Parties entered into a FIDIC 1999 contract – the court did not specify which Book. Following a dispute the parties spent some 15 months unsuccessfully trying to form a DAB despite some input from the President of FIDIC. It is difficult from the judgment to establish the precise sequence of events. In the end, one party refused to sign the DAA and issued arbitration proceedings. As a preliminary issue, the arbitral tribunal was asked to determine whether it had jurisdiction over the dispute referred to it. The tribunal, seated in Geneva, issued a partial award upholding jurisdiction. The losing party sought annulment of the partial award in the Swiss courts, under ss. 190-192 PILA, the Swiss law on international arbitration. The Swiss Federal Supreme Court published its redacted judgment in French on 20 August 2014. It rejected the application for annulment upholding the arbitral tribunal’s partial award. This article relies on an unofficial translation of the judgement.

Reasoning

The following points mentioned in the judgment are of interest:

• Reference to the DAB is mandatory subject to exceptions.
• What was contemplated by Sub-Clause 20.8 was exceptional (for a standing DAB situation), namely there is a time-period for the duration of the DAB which then expires. In such circumstances, the DAB is no longer ‘in place’.
• The strict interpretation of Sub-Clause 20.8 “would ultimately turn the alternate dispute resolution mechanism devised by FIDIC into an empty shell” (the same point made by counsel for EMS in the English case above).
• The intransigence of a party was an example of circumstances that justify omitting the DAB.
• “Special circumstances, whether objective or not, must be reserved in which resorting to pre-arbitration DAB procedure could not be imposed upon the party wishing to submit the dispute with its contractual counterpart to arbitration. Considered from the opposite perspective, the exception is a case in point of the principle of good faith, which governs the procedural behaviour of the parties as well. Depending on the circumstances, the principle will therefore prevent one of them from objecting on the basis of the absence of a DAB decision. Yet, saying in advance and once and for all when it may be applied is impossible because the answer to the question depends upon the facts germane to the case at hand.”
• Under Clause 2, first paragraph, of the General Conditions of the DAA, the DAA takes effect when the project owner, the contractor and each member of the DAB have signed it. On the facts of this case, as the DAA had not been signed, the DAB was not ‘in place’. In circumstances where a DAB is not ‘in place’, it is permissible to refer the dispute directly to arbitration under Sub-Clause 20.8.
• “[I]t is indeed impossible to blame the Respondent for losing patience and finally skipping the DAB phase despite its mandatory nature in order to submit the matter to arbitration.”

It seems, therefore, that the Swiss court considered that Sub-Clause 20.8 was the exception rather than the rule. However, in the author’s view, that fact should not present a particular hurdle to its operation. If one party is faced with intransigence of another in the setting up of a DAB, it should not be necessary for him to waste further time proving that he did all he could to refer the matter to the DAB. The Swiss court did not give any guidance as to how long a party has to try for before it can resort to 20.8. Certainly, there was no endorsement of the 28-day time limit in 20.2 (which permits a party to apply to FIDIC) as the moment when 20.8 applies. The author suggests that as soon as the other party’s refusal to co-operate and therefore his breach of contract becomes clear, the first party should be free to refer the matter to arbitration. Necessarily at that point there will be no DAB ‘in place’ and so the mechanism in Sub-Clause 20.8 will be available. The Swiss court held that a refusal to sign the DAA meant there was no DAB ‘in place’ and so Sub-Clause 20.8 could be relied on. That decision must be correct even if the court left it unclear for how long such a refusal should last.

Conclusion

Both the English and the Swiss judgments support the existence of the DAB as the centre-piece for dispute resolution in the FIDIC contract. In England, the judge went so far as to treat the DAB process as a mandatory pre-condition to arbitration. The court felt able to rectify all the difficulties arising on the facts of that case by using its extensive powers to ensure that the DAB was ‘in place’. However, on other facts, even if an English court were substituted for arbitration, it is questionable whether it will always be possible to rectify a lack of agreement and/or signatures of the DAA. It is difficult to see how arbitrators could do so. Accordingly, it seems to the author that those who are prevented from referring a dispute to DAB by an uncooperative party may go directly to arbitration by relying on Sub-Clause 20.8. Those who would prefer to skip the DAB stage may not do so without first attempting to set up a DAB.

In the second editions of the 1999 forms, FIDIC should consider making it clear that a failure by one party to sign the standard DAA with a DAB member agreed by the parties or appointed by FIDIC will not prevent the DAB giving valid decisions. To make this work, perhaps FIDIC could publish a range of fees deemed reasonable by any party signing a FIDIC contract. One way or another, the success of the DAB project depends on it being seen as a means of quick, straightforward, and enforceable dispute resolution. We are not there yet.

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

[1] [2014] EWHC 3193 (TCC). http://www.bailii.org/ew/cases/EWHC/TCC/2014/3193.html.

[2] 4A_124/2014. http://www.servat.unibe.ch/dfr/bger/140707_4A_124-2014.html.

As disputes under the FIDIC forms of contract are normally resolved in private Dispute Adjudication Board (“DAB”) proceedings or confidential arbitration proceedings, reported FIDIC cases are rare and often of considerable precdential value either formally or informally. In this article, originally published in The International Construction Law Review, Victoria Tyson considers one such recent decision which was transferred from the Gibraltar courts.

As disputes under the FIDIC forms of contract are normally resolved in private Dispute Adjudication Board (“DAB”) proceedings or confidential arbitration proceedings, reported FIDIC cases are rare and often of considerable precedential value either formally or informally. This article considers one such recent decision which was transferred from the Gibraltar courts specified in the  particular conditions of the contract (in lieu of arbitration) to the more specialised Technology and Construction Court of England and Wales by the agreement of the parties during the pre-action protocol process.

The case was Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar1 and concerned a dispute arising out of a £30 million contract for design and construction work to the  Gibraltar Airport (“the contract”). The contract incorporated the FIDIC Conditions of Contract for Plant and Design Build for Electrical and Mechanical Plant, and for Building and Engineering  Works, designed by the Contractor, 1st Edition 1999, commonly known as the Yellow Book.

Under the current arrangements, the road to the Spanish border (the Winston Churchill Avenue) traverses the airport runway so that the road must be closed when the runway is in use. In an  attempt to relieve the congestion caused by the frequent closure of this road, the works included the construction of a new dual carriageway road and a twin bore tunnel under the eastern end of the  airport runway, known as the Frontier Access Road.

The contract was entered into in November 2008 and works commenced in December 2008. After over two-and-a-half years of work on the two- year project, when little more than 25% of the work  had been done, the contract was terminated. The large Spanish civil engineering company 1 Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC);  [2014] BLR 484 Obrascon Huarte Lain (“OHL”) was the contractor. It commenced proceedings against the employer, the Government of Gibraltar 2 . Although Gibraltar is famous for its rock and  despite the airport site’s historic military use, the contractor argued inter alia that it had encountered more rock and contaminated material in the ground excavated on the site than would have been  reasonably foreseeable by an experienced contractor at the time of tender. The contractor also argued that as a result of a report it had commissioned, which concluded that airborne contamination  on the site posed a serious risk to the health of those working in the tunnel, it was necessary to suspend the tunnel excavation works and re-design the tunnel. There followed very little activity by the  contractor between 20 December 2010 (the date of the report) and 28 July 2011 (the date of the employer’s notice of termination). During this period of inactivity the contractor suggested a new  budget of some £98 million (over three times the original contract price) would be needed to complete the works.

The court disagreed with the contractor’s arguments and found, inter alia, that the contractor had failed to proceed with the design and execution of the works with due expedition and without delay.  It awarded the contractor just one day extension of time from the 660 days originally claimed (reduced to 474 days in the amended particulars of claim submitted during the trial itself). The  court was especially critical of the report heavily relied upon by the contractor to support its suspension of the works and redesign of the tunnel, which it described as “palpably and obviously inept,  was clearly worked on by OHL and cannot have been considered by OHL to be independent or competent”.

The main issue revolved around the termination of the contract. The court found that the contractor was responsible both in law and fact for the termination and that the employer had lawfully  terminated the contract. In determining responsibility for the termination of the contract, the court considered the following matters which are discussed in this article:

1. Was the engineer entitled to issue notice to correct on 16 May 2011
   and/or 5 July 2011 under clause 15.1?
2. Was the employer entitled to terminate the contract under clause

15.2? In particular:
(a) Did the contractor fail to comply with the notice to correct pursuant to clause 15.2(a)? 2 The Howard Kennedy International Construction team (formerly Corbett & Co.) acted on behalf of the Government of Gibraltar in this case. 3 Paragraph 332.© Informa UK  plc 2014 a commercially sensible construction and one to be encouraged; the construction industry would not benefit from trivial contractual failures giving rise to notices to correct, which if not  complied with, would in turn lead to contractual termination. Mr Justice Akenhead supported his view with reference to various authorities 4 . He emphasised that what is trivial and what is  significant or serious, will depend on the facts and gave the example that one day’s culpable delay on a 730-day contract or 1m² of defective paintwork out of 10,000m² good paintwork would not, if  reasonable and sensible commercial persons had anything to do with it, justify termination even if the contractor did not comply with the clause 15.1 notice. Nonetheless, despite this very well- reasoned guidance, it cannot be ignored that on its face the express wording “any obligation” in clause 15.1 is very broad indeed. It perhaps remains open to argument in other forums and  jurisdictions that a failure to carry out any obligation need not be an important or material obligation. There is also no express time limitation, so in theory it might be possible for the notice to  correct to deal with a failure which occurred months or years earlier and which then had, and still has, no significant impact on the contractor’s operation (provided that it can still be remedied).  Hopefully, the next edition of the FIDIC Yellow Book will resolve any ambiguity.

Mr Justice Akenhead’s second point was that the specified time for compliance within the clause 15.1 notice must be reasonable in all the circumstances prevailing at the time of the notice. He gave  the example that if 90% of the workforce had gone down with cholera at that time, the period given for compliance would need reasonably to take that into account, even if that problem was the  contractor’s risk. He said that it may well be relevant to take into account whether the clause 15.1 notice is coming out of the blue or if the subject-matter has been raised before and the contractor has  chosen to ignore what it has been told. He emphasised that what is reasonable is fact sensitive 5 .

His third point was that clause 15.1 is designed to give the contractor an opportunity and a right to correct its previous and identified contractual failure.

His final point was that given the potentially serious consequence of non-compliance, clause 15.1 notices need to be construed strictly but may be construed against the surrounding facts 6 . 4 Lord  Diplock in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201D; [1984] 2 Lloyd’s Rep 235; [1984] 3 WLR 592; [1984] 3 All ER 229, Hudson’s Building and Engineering  Contracts , 12th Edition, paragraph 8.056, Lord Steyn in Mannai Investment Co Ltd v Eagle Star Assurance Company Ltd (HL) [1997] UKHL 19; [1997] AC 749; [1997] 2 WLR 945; [1997] 3 All ER  352. 5 See, for example, Shawton Engineering Ltd v DGP International Ltd (t/a Design Group Partnership) (CA) [2005] EWCA Civ 1359 at paragraph 69. 6 Mannai Investment Co Ltd v Eagle Star  Assurance Company Ltd [1997] UKHL 19 per Lord Steyn.

WAS THE EMPLOYER ENTITLED TO TERMINATE THE CONTRACT UNDER CLAUSE 15.2?

The court then reviewed clause 15.2 the contract, which states:
“15.2. The Employer shall be entitled to terminate the Contract if the Contractor:

(a) fails to comply … with a notice under sub-clause 15.1 …
(b) … plainly demonstrates the intention not to continue performance of his obligations under the Contract,
(c) without reasonable excuse fails:
(i) to proceed with the Works in accordance with clause 8 … or;
(ii) to comply with a notice issued under sub-clause 7.5 …

In any of these events or circumstances, the Employer may, upon giving 14 days’ notice to the Contractor, terminate the Contract and expel the Contractor from Site.”

The employer served a notice of termination on 28 July 2011 on the grounds set out in clauses 15.2(a), (b) and (c).

Clause 15.2(a)

The court was asked to decide whether, as at 28 July 2011, the employer was entitled to serve a notice of termination under clause 15.2(a) of the contract by reason of the contractor’s failure to  remedy the defaults notified in notices to correct issued by the engineer on 16 May 2011 and/or 5 July 2011. Mr Justice Akenhead found that the employer was so entitled to serve a notice of  termination on 28 July 2011 on the basis that the contractor had failed to comply with the clause 15.1 notices to correct. He was clear that the contractor’s right to re-design the tunnel did not  outweigh its obligation to get on with the works 7 .

Clause 15.2(b)

In respect of clause 15.2(b) the court was asked to decide whether, as at 28 July 2011, the employer was entitled to serve a notice of termination pursuant to clause 15.2(b) of the contract because the  contractor had demonstrated an intention not to continue with the performance of its obligations under the contract. Mr Justice Akenhead found that the employer was entitled to serve a notice of  termination pursuant to clause 15.2(b) of the contract because the contractor had plainly demonstrated an intention not to continue with the performance of its obligations under the contract. He  drew a verbal and contractual distinction between an intention to continue performance and an intention to continue performance of the contractual obligations. He said that a clear avowed  intention to perform, but not by reference to important contractual terms, could demonstrate such an intention. The demonstration can be judged by reference not only to the words used but also to  the actions. On the other hand, a simple disagreement between parties about what the contract meant, or disagreement about whether the contractor had some claim entitlement, would in itself not  demonstrate such an intention 8 .

The court was also asked to decide whether any entitlement which the contractor might have had, as at 28 July 2011, to an extension of time for the completion of the works, would mean that the  employer was no longer entitled to serve a notice of termination pursuant to clause 15.2(b) of the contract. Mr Justice Akenhead found that as the contractor was entitled to only one day’s extension  of time as at 28 July 2011, such limited entitlement did not mean that the employer was no longer entitled to serve a notice of termination pursuant to clause 15.2(b) of the contract.

Clause 15.2(c)

In respect of clause 15.2(c) the court was asked to decide whether, as at 28 July 2011, the employer was entitled to serve a notice of termination pursuant to clause 15.2(c)(i) of the contract. Mr  Justice Akenhead found that the employer was entitled to serve a notice of termination pursuant to clause 15.2(c)(i) of the contract because the contractor had failed to proceed with the works with  due expedition and without delay and had therefore failed to proceed in accordance with clause 8.1, such as to give the employer an entitlement to terminate the works, and the contractor had no  “reasonable excuse” for such failure. He was critical of the contractor who had “consciously and with its eyes open wrongly and wrongfully suspended the work … and within a few weeks had  embarked on a wholly unnecessary re-design of the tunnel” 9 .

He further stated that the fact that liquidated damages (in this case Delay Damages) are permitted for the failure by the contractor to complete on time, does not qualify the right to terminate under  clause 15.2 for failure to proceed with due expedition and without delay. The parties must be taken to have known that these were both remedies, albeit on its proper construction minor or  insignificant breaches of the progress obligations would not justify termination under clause 15 10 .

Finally, in respect of both clauses 15.2(b) and (c), Mr Justice Akenhead gave two basic points of principle which are useful for general application 11 .
8 Paragraph 360.
9 Paragraph 357.
10 Paragraph 325.
11 Paragraph 356

Firstly, he said the test must be an objective one in relation to the grounds in both sub-paragraphs. So, if the contractor privately intended to stop work permanently but continued openly and  assiduously to work hard at the site, this would not of itself give rise to a plain “demonstration” of intention not to continue performance. Similarly, the fact that the contractor was, and had for many  months been, doing no work of any relevance without contractual excuse could, without more, objectively judged, give rise to a conclusion that it had failed to proceed in accordance with  clause 8 for the purpose of clause 15.2(c)(i).

Secondly, he again emphasised that the grounds for termination must relate to significant and more than minor defaults on the part of the contractor on the grounds that it cannot mutually have  been intended that a (relatively) draconian clause, such as a termination provision, should be capable of being exercised for insignificant or insubstantial defaults.

Therefore, he said a few days’ delay in the context of a two-year contract would not justify termination under clause 15.2(c)(i) and an unwillingness, or even refusal, to perform relatively minor  obligations would not justify termination under clause 15.2(b).

In summary, he found that the contract was lawfully terminated by the employer on 20 August 2011 pursuant to clause 15.2 of the contract.

MUST THE BREACH OF CONTRACT WHICH IS  RELIED UPON TO TERMINATE THE CONTRACT BE ANALOGOUS TO A REPUDIATORY BREACH OF CONTRACT?

The wording in clause 63.1 of the old FIDIC Red Book 1987 expressly permitted the employer to terminate the employment of the contractor where the engineer certified to the employer, with a copy  to the contractor, that in its opinion the contractor had “repudiated the Contract” but this wording was deleted from the FIDIC 1999 editions.

Nonetheless, the contractor argued (with reference to various authorities) that, where “a contract contains a provision such as clause 15.2 which entitles an employer to terminate by reason of a  failure to remedy a breach of contract which has been the subject of a clause 15.1 notice (or to terminate by reason of a breach of contract such as one of those of the type identified in clause 15.2(b)  and (c)) the breach of contract that is relied upon must be serious and one which is analogous to a repudiatory breach of contract” 12 . Mr Justice Akenhead disagreed with the contractor’s argument.  He stated that any suggestion that the breach of contract relied upon is analogous to a repudiatory breach of contract goes too far (at least as a general proposition) for a number of  reasons.

12 Paragraph 322.

Firstly, he said it is necessary to consider each contract, whether it is a lease, leasehold development, construction or other commercial contract, on its own terms. For example, if the termination  clause allows for termination “for any breach of contract no matter how minor”, the meaning is clear and does not require some repudiatory breach.

Secondly, most of the authorities referred to did not involve contracts like the contract in this case. The contract lists grounds on which termination can take place including clause 15.2(b) (where the  contractor “plainly demonstrates the intention not to continue performance of his obligations under the Contract”) which is not unlike the test for English common law repudiation. This ground can  be, and is, contractually distinguished from the other grounds, such as clause 15.2(c)(i) (failure “to proceed with the Works in accordance with clause 8”, that is in effect often a failure to proceed with  “due expedition and without delay”). He queried why the contract would have both the “intention not to continue performance of [contractual] obligations” as well as failure to proceed with due expedition and without delay unless they are, or can be, two separate grounds.

Thirdly, the cases relied upon by the contractor in its submissions had a relatively simple right to terminate (for a, or any, breach). In this contract under clause 15.2(a) (failure “to comply … with a  notice under sub-clause 15.1”) there was a warning mechanism whereby termination could be avoided by the contractor’s compliance with the clause 15.1 notice. In that sense, the contractor is given  the chance to avoid termination whilst the simple termination for any breach can come out of the blue. Commercial parties would sensibly understand that this contractual chance is a warning as  well to the contractor and the remedy is in its hands in that sense.

Finally, Mr Justice Akenhead accepted that the editors of Hudson’s Building and Engineering Contracts13 have properly set out the correct proposition that determination clauses such as this one  will generally be construed as permitting termination for significant or substantial breaches as opposed to trivial, insignificant or insubstantial ones. He stated that this accords with commercial common sense.

WILL TERMINATION OCCUR IF THE CONTRACTOR HAS BEEN PREVENTED OR HINDERED FROM REMEDYING THE FAILURE FOR WHICH THE NOTICE TO CORRECT
IS GIVEN UNDER CLAUSE 15.1?

Although there was no suggestion that the employer had hindered or prevented the contractor, Mr Justice Akenhead was clear that termination could not legally occur if the contractor has been  prevented or hindered 13 Hudson’s Building and Engineering Contracts , 12th Edition, paragraph 8.056 from remedying the failure for which the notice is given under clause 15.1 14 .

He stated that clauses 15.1 and 15.2(c) must, as a matter of common sense, pre-suppose that the contractor is given the opportunity by the employer actually to remedy the failure of which it is given  notice under clause 15.1. In that context, termination could not legally occur if the contractor has been prevented or hindered from remedying the failure within the specified reasonable time. This  stems from a necessarily implied term under English law that the employer shall not prevent or hinder the contractor from performing its contractual obligations; there is also almost invariably an  implied term of mutual co-operation. Therefore, if the engineer has served a clause 15.1 notice to remedy a breach of contract, and the employer hinders or prevents the contractor from remedying  the breach, the employer may not rely on the contractor’s failure in order to terminate the contract. This is because the employer should not be entitled to rely on its own breach to benefit by  terminating 15 . He gave the example of an employer who, following the service of a clause 15.1 notice, denies site access to the contractor to enable it to put right the notified failure.

WAS THE NOTICE OF TERMINATION DATED 28 JULY 2011 A VALID AND EFFECTIVE NOTICE PURSUANT TO CLAUSE 15.2 BECAUSE IT WAS NOT SERVED AT THE ADDRESS FOR  SERVICE OF THE CONTRACTOR AS STATED IN THE APPENDIX TO TENDER?

Clause 3.1 stated how communications were to be made:
“Wherever these Conditions provide for the giving or issuing of approvals, certificates, consents, determinations, notices and requests, these communications shall be:
(a) …
(b) Delivered, sent or transmitted to the address for the recipient’s communications as stated in the Appendix to Tender. However:
(i) If the recipient gives notice of another address, communications shall thereafter be delivered accordingly; and …”
The clause 15.2 notice of termination dated 28 July 2011 was sent by the employer to the contractor’s site office rather than to the contractor’s Madrid office, which was the address specified in the Appendix to Tender.
The contractor argued that it was therefore invalid and ineffective, and on 3 August 2011 wrote stating that this amounted to a repudiatory breach of the contract and purported to accept such  repudiation. 14 Paragraph 324.
15 See for example, Alghussein Establishment v Eton College [1988] 1 WLR 587

The court was asked to decide whether the notice of termination dated 28 July 2011 was a valid and effective notice pursuant to clause 15.2 of the contract because it had not been sent to the address  for service of the contractor as stated in the Appendix to Tender. It concluded that the employer’s notice of termination dated 28 July 2011 was a valid and effective notice pursuant to clause 15.2 of  the contract.

Although the Madrid office was given in the Appendix to Tender, Mr Justice Akenhead noted that throughout the project, correspondence (including the clause 15.1 notices to correct) had been sent  to the contractor’s site office without any objection. The project was being run by the contractor from the site office with this office handling the vast bulk of the correspondence, including letters,  emails, and technical documentation such as method statements etc. The project manager, with very substantial authority, was based there. He found that in these circumstances, in effect and in  practice the parties operated as if the site office was an appropriate address at which service of notices could be effected.

Relying on various authorities, 16 Mr Justice Akenhead drew the following conclusions when finding that service of the 28 July 2011 termination notice to the wrong address was not fatal.

His first conclusion was that termination of the parties’ relationship under the terms of such contracts is a serious step. There needs to be compliance with the contractual provisions to achieve an  effective contractual termination.

Secondly, as a general rule, where notice has to be given to effect termination, it needs to be in sufficiently clear terms to communicate to the recipient clearly the decision to exercise the contractual  right to terminate.

Thirdly, it is a matter of contractual interpretation, (i) as to the requirements for the notice, and (ii) whether each and every specific requirement is an indispensable condition without compliance  with which the termination cannot be effective. He said that this interpretation needs to be tempered by reference to commercial common sense.

Fourthly, in the contract in this case, neither clause 1.3 nor clause 15.2 used words such as would give rise to any condition precedent or making the giving of notice served only at the contractor’s  Madrid office a pre-condition to an effective termination. He said that the key elements of the notice procedure involve securing that the contractor is actually served with a written notice and  receives the notice and, it being clear and unambiguous, that the notice is one being served under 16 Bremer HandelsGesellschaft MBH v Vanden (HL) [1978] 2 Lloyd’s Rep 109, Worldpro Software  Ltd v Desi Ltd [1997–98] TLR 279, Rennie v Westbury Homes (Holdings) Ltd (CA) [2007] EWCA Civ 1401, PHRJ Newbold and Others v The Coal Authority (CA) [2013] EWCA Civ 584; [2014] 1  WLR 1288 clause 15.2, namely that 14 days’ notice of termination is being given by the employer to the contractor, such as to enable it to expel the contractor from the site.

Fifthly, he said the primary purpose of clause 1.3 is to provide an arrangement whereby notices, certificates and other communications are effectively dispatched to, and received by, the contractor.  The primary purpose of a clause 15.2 termination notice is to ensure that the contractor is made aware that its continued employment on the project is to be at an end.

His final conclusion was that the service of a clause 15.2 notice at the contractor’s Madrid office as such was not an indispensable requirement either of clause 15.2 or clause 1.3. Provided that service  of a written clause 15.2 notice was actually effected on the contractor’s affiliates at a sufficiently senior level, then that would be suffi cient service to be effective. Mr Justice Akenhead stated that  these conclusions applied both in relation to termination clauses in commercial and thus engineering and building contracts in general and specifically in relation to the contract in this case.

DID THE SERVICE OF THE TERMINATION NOTICE TO THE “WRONG” ADDRESS AMOUNT TO A REPUDIATION?

The contractor sought to argue that the service of the notice of termination dated 28 July 2011 to the wrong address was ineffective and thus amounted to a repudiation of the contract by the  employer which it elected to accept on 3 August 2011, such that the contract was terminated on that date. Although Mr Justice Akenhead concluded that it was not necessary for him to decide this  issue, 17 he stated that his findings would have been that the service of an otherwise valid and actually well-founded termination notice at the technically wrong address could not in law and on the  facts of this case, amount to repudiation (with reference to various authorities 18 ).

Therefore, the contractor was not entitled to treat what was otherwise a legally and factually proper clause 15.2 termination notice as a repudiation (as it purported to do). Consequently, he found  that the contractor itself repudiated the contract by the terms of its letter dated 3 August 2011 by wrongfully treating the contract as at an end, even though it was not accepted as such by the  employer.
17 Paragraph 375.
18 Freeth v Burr (1874) LR 9 CP 208; [1874–80] All ER 751, Ross T Smyth & Co Ltd v T D Bailey, Son & Co
(HL) (1940) 67 Ll L Rep 147; [1940] 3 All ER 60; [1940] 56 TLR 825 and Eminence Property Developments
Ltd v Heaney [2011] 2 All ER 223