There is a substantial difference between the payment provisions of the FIDIC 1999 Red and Yellow Books compared with the Silver Book. This article explores how a court in Queensland (Australia) dealt with the Silver Book’s provision. Contractors have good

There is a substantial difference between the payment provisions of the FIDIC 1999 Red and Yellow Books compared with the Silver Book. This article explores how a court in Queensland (Australia) dealt with the Silver Book’s provision. Contractors have good cause to be wary.

Role of Interim Payment Certificate

In Dawnays Ltd v F G Minter and Trollope & Colls Ltd,[1] the English Court of Appeal judge, Lord Denning, expressed the view that: “an interim certificate is to be regarded virtually as cash, like a bill of exchange.” This bold statement was however quickly rejected by the higher English courts.

Viscount Dilhorne of the House of Lords held in Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd[2] that there was “no scintilla of authority” for Lord Denning’s opinion. Viscount Dilhorne went on to say that treating a certificate as conclusive could easily cause injustice. Lord Diplock added that, although a correctly issued interim certificate does create a debt due from the employer to the contractor, it does not stop the employer from raising a set-off or cross claim to the sum due.

The Irish judiciary was equally dismissive. In John Sisk & Son v Lawter Products BV[3] the Irish High Court disagreed with Lord Denning’s “dogmatic proposition” and considered that the correct approach was to ascertain whether the terms of the particular contract were inconsistent with the exercise of a right of set-off by the employer.

The position in England has since changed with the introduction of the payment provisions within the Housing Grants, Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009. Now a paying party must pay the notified sum unless it has served a “Pay Less Notice”. In summary, the payer must now give notice of what it intends to set off and loses its right of set off if the notice is not given. FIDIC’s Silver Book has a very different regime.

Set-Off and Deduction Under FIDIC

The payment provisions in FIDIC’s Red and Yellow Books are dealt with in Clause 14. The contractor submits an application for payment and the engineer, under Sub-Clause 14.6, “fairly” determines what is due. Sub-Clauses 14.6 (a) and (b) allow the engineer to make certain deductions where the work done is not in accordance with the Contract, or the contractor has failed to perform its obligations. Under Sub-Clause 14.7, the employer is required to pay the amount certified in each Interim Payment Certificate.

Under FIDIC’s 1999 Silver Book the contractor submits an application for payment and the employer is required to give notice to the contractor within 28 days of any item which he disagrees with. Similar to the Red and Yellow Books, Sub-Clauses 14.6(a) and (b) allows the employer to make certain deductions where the work done is not in accordance with the Contract or the contractor has failed to perform its obligations. Sub-Clause 14.6 then states, “Payments due shall not be withheld“.

Silver Book’s ‘Payment Due’ Provisions Under Court Scrutiny

In Sedgman South Africa (Pty) Ltd and Ors v Discovery Copper Botswana (Pty) Ltd,[4] the Supreme Court of Queensland analysed the meaning of Sub-Clause 14.6 of FIDIC’s Silver Book and, in particular, what was meant by the words “payments due”.

The facts of Sedgman were that Sedgman contracted to design and construct parts of the Boseto Copper Project in Botswana for Discovery Copper. The contract was under an amended FIDIC Silver Book. Sedgman applied for an interim payment of USD 20 million. Sub-Clause 14.6 (as amended) required Discovery Copper to give notice within seven days if they disagreed with any items in the application for payment. Discovery Copper failed to give the notice within seven days and did not contest the application until fourteen days later. Sedgman applied to the Court for payment of the sum claimed.

Discovery Copper challenged Sedgman’s right to payment on three grounds:

• The claim was not served in the format specified by the contract.
• According to the proper interpretation of the contract, the absence of a specific notice within seven days challenging the claim did not automatically entitle the applicants to the amount claimed.
• The application to the Court for payment should be stayed to arbitration as the contract contained an arbitration clause.

Sedgman sought to argue that it was clear that they were entitled to payment and that there could be no genuine dispute over the sum claimed.

Only payments ‘due’ need be paid

The Court dismissed Sedgman’s application for payment, holding that there was a genuine dispute which was apt for determination under the dispute resolution provisions and that Sedgman’s interpretation of the contract was incorrect. The Court held that:

“This contract did not entitle the applicants to be paid the sum which they now claim, simply from the fact that there was no response to their interim claim within the period of seven days stipulated in the contract.”

McMurdo J in his judgment considered the words “payments due shall not be withheld” at Sub-Clause 14.6 of the contract. The Judge stated that these words were “different from saying that a payment will become due if a notice of disagreement is not given,” as Sedgman contended. The Judge then held:

“The alternative view of Sub-Clause 14.6 is that it does not make a payment due. Rather, it governs payments which, by the operation of another term or terms, have [already] become due.”

The Judge stated in his reasoning that that operation of the various clauses of the contract to determine claims and variations could otherwise be displaced by the operation of Sub-Clause 14.6, if Sedgman were correct. If the contractor included a claim in his application for payment which was inconsistent with, for example, a DAB’s determination, and the employer did not give notice of disagreement, the outcome would be that the DAB’s determination would be displaced.

The conclusion reached by McMurdo J was that Sub-Clause 14.6 had to be read in the context of the whole contract. He fundamentally disagreed with the assertion by Sedgman that if the notice of disagreement was not given within seven days, then “everything that had occurred between the parties about these components of the present claim was made irrelevant.” The Judge therefore rejected the idea that claims which may have been disallowed or in contention between the parties could become debts simply because the notice was not given on time.

Silver Book payment provisions favour the employer

There is therefore a substantial difference between the payment provisions of the Red and Yellow Books compared with the Silver Book. While Sub-Clause 14.6 of the Red and Yellow Books obliges the employer to pay to the contractor the “amount certified in each interim payment certificate”, the Silver Book only requires the employer to pay “the amount which is due in respect of each statement.” The amount which is due is not the sum claimed by the contractor, but the sum which is determined by applying all the provisions relating to payment. The sum claimed is therefore open to dispute.

Conclusion

The decision in Sedgman has a number of practical consequences. One example relates to termination. Under Sub-Clause 16.2(c) of the Red and Yellow Books, a contractor may terminate the contract where it does not receive the amount due under an Interim

Payment Certificate. Under Sub-Clause 16.2 (b) of the Silver Book, the contractor may terminate where it does not receive the amount due in the period which payment is to be made.

However, a contractor must now be extremely careful because the amount due can only be determined by applying all the provisions relating to payment. Under the Silver Book, an employer is in a much stronger position if it wishes to withhold money. There is no quick way for the contractor to get paid without going through the dispute resolution provisions. If, as stated by Lord Denning, “cash flow” is the very “lifeblood” of the construction industry, then a contractor needs to be wary of the Silver Book’s payment provisions.

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

[1] [1971] 1 WLR 1205.

[2] [1973] 3 All ER 195.

[3] [1976-1977] 204.

[4] [2013] QSC 105.

Clause 1.15, previously in Sub-Clause 17.6 (1999 Edition), is now separated from Risk and Responsibility. It exempts parties from liability for loss, including loss of use, profit, or contracts, with exceptions for certain sub-clauses, notably Sub-Clauses 8.8 and 13.3.1(c).

The substance of this provision was already in Sub-Clause 17.6 in the 1999 Edition and has now been separated from other provisions dealing with Risk and Responsibility.

As before it generally exempts parties from liability to the other for “loss of use of any Works, loss of profit, loss of any contract or any indirect or consequential loss” except in respect of a list of identified Sub-Clauses. The list has been extended and several of the changes are very significant. It also limits liability to certain levels in some circumstances. Finally, it excludes parties from cover by the exemption and limits in certain circumstances. All three elements have changed.

Two additions are particularly noteworthy. The interaction between this Sub-Clause and Sub-Clause 8.8 insofar as it relates to the liability- limiting effect of Delay Damages is confusing, and it is very unclear what the final result should be taken to mean. There is also a similar lack of clarity in the way in which the Sub-Clause applies the exemption to Sub-Clause 13.3.1(c) (proposals for valuation of variations).

Exceptions to exemption from liability to the other party for loss of use of any Works, loss of profit, loss of any contract or any indirect or consequential loss

The list of exceptions to the exemptions from liability in the 1999 Edition extended to only 2 items (Payment on Termination and Indemnities). It is now extended to some additional items.

It should be noted that the wording of the Sub- Clause goes further than merely to negate the exemption from of liability for these items. It says that “neither party shall be liable for loss of profit” etc. … “other than under…”. Thus, if the party can show such loss, it confers an express right to claim such loss. Normal rules of the underlying law of the contract (unless mandatory) are thus excluded. Where the Sub-Clause to which the exception applies clearly sets out the loss

or damage which this exclusion from exemption refers to this does not raise an issue. However, there are issues in respect of the cross reference to Sub-Clauses 8.8 and 13.3.1(c).

The new items are:

• Sub-Clause 8.8 [Delay Damages]
• Sub-paragraph (c) of Sub-Clause 13.3.1 [Variation by Instruction]
• Sub-Clause 15.7 [Payment after Termination for Employer’s Convenience]
• Sub-Clause 16.4 [Payment after Termination by Contractor]
• Sub-Clause 17.3 [Intellectual and Industrial Property Rights]
• Limit on Total Liability
• Exclusion from Limits on Liability

Sub-Clause 8.8 [Delay Damages]

Sub Clause 8.8 already states that

“this Sub-Clause shall not limit the Contractor’s liability for Delay Damages in any case of fraud, gross negligence, deliberate default or reckless misconduct by the Contractor.”

Thus, if the Contractor is guilty of one of these types of misbehaviour, it will not be able to take advantage of the cap on Delay Damages. The lifting of the limitation in the Sub-Clause partly duplicates the last paragraph of Sub-Clause 1.15. This paragraph also lifts the limit in such circumstances, but goes further in allowing the general limit of liability under the Contract to be exceeded.

As noted above, Sub-Clause 1.15 is divided into two parts. The first lifts the exclusion of liability for loss of profit etc. The second lifts the limits of liability under the Contract.

The reference to Sub-Clause 8.8 in Sub-Clause 1.15 is under the first part and thus is intended to remove the exemption from liability for losses of profit when applying Delay Damages. Since Sub-Clause 8.8 provides that Delay Damages are the only damages due from the Contractor for failure to meet the Completion Date, except in the event of Termination under Sub-Clause 15.2 [Termination for Contractor’s Default] it would therefore seem that the exclusion is intended to prevent arguments that Delay Damages incorporate loss of profits and to allow for the possibility of loss of profit claims in the event that the Contractor is terminated for cause. If the latter were the case, one would have thought that Sub-Clause 1.15 would include Sub- Clause 15.2 (or more correctly Sub-Clause 15.4) in the list. There may however be an argument that an Employer is now entitled to claim loss of profit following termination for cause.

Sub-paragraph (c) of Sub-Clause 13.3.1 [Variation by Instruction]

13.3.1(c) is the provision which requires the Contractor, when carrying out a Variation instruction, to provide the Engineer with a proposal for adjustment of the Contract Price. It specifically sets out the right to include any costs resulting from the omission of any work. In particular it allows the Contractor to claim loss of profit, and other losses or damage it suffers, when it has agreed that work should be omitted to be carried out by others.

A simple reading would say that the exception to the normal exclusion is only intended to apply to the Contractor’s rights following an agreed omission in circumstances where the omission was ordered so that the work could be carried out by others. However, the exception is more widely expressed. It does not seem possible to read it down to prevent the Contractor claiming for loss of profit etc. as part of the costs it incurs in the case of any omission.

However Sub-Clause 13.3.1(c) does not only cover omissions. It also covers all adjustments to the Contract Price following variations. It would thus seem arguable that the Contractor is entitled to include loss of profit etc. in all its Variation valuation proposals, if there is a basis for it in the circumstances. For example, a very substantial Variation, which the Contractor is required to carry out on the basis of rates which cause it a loss, or which forces it to use resources that might have been more profitably employed elsewhere, might open the door to a claim for the loss of profit etc.

It is doubtful that it was FIDIC’s intention to open the door to such arguments. However, the reading of the Contract which leads to this conclusion is a reasonable one, and it is altogether possible that a tribunal confronted with the issue will reach this conclusion.

See comment on the last paragraph of 1.15 below for the consequences as regards non-consensual omissions intended to allow the Employer to have the work completed by others.

Sub-Clause 15.7 [Payment after Termination for Employer’s Convenience]

Sub-Clause 15.6 in the new Edition is a significant departure from the 1999 Edition, in that it gives the Contractor entitlement to claim “loss of profit and other losses and damages suffered by the Contractor as a result of this termination”. Sub-Clause 15.7 only refers to the obligation to pay the amount certified under Sub-Clause 15.6. The exception ought to have referred to Sub-Clause 15.6, though the intention is obvious. It is notable that 15.6 only refers to “loss of profit and other losses and damages”, whereas 1.15 allows claims for “loss of profit, loss of any contract or any indirect or consequential loss”. Thus, Sub-Clause 1.15 appears to have the effect of expanding the categories of loss which might have been claimable on a reading of Sub-Clause 15.6 standing alone.

Sub-Clause 16.4 [Payment after Termination by Contractor]

Sub-Clause 16.4 already includes a right to payment of loss of profit although it also refers only to “loss of profit or other losses or damages”. As with Sub-Clause 15.7, there may be scope for a wider claim.

Sub-Clause 17.3 [Intellectual and Industrial Property Rights]

Under Sub-Clause 17.3, the Employer and the Contractor each indemnify the other against any claims which may arise where the other faces a claim resulting from a breach of intellectual or industrial property rights caused by the other. The purpose of this exception is presumably to overcome any suggestion that the costs the indemnified party faces are excluded as indirect or consequential.

Limit on Total Liability

This provision was in the 1999 Edition and is to the same effect.

Exclusion from Limits on Liability

This provision prevents the parties escaping from liability in the case of fraud, gross negligence, deliberate default or reckless misconduct. The term “gross negligence” has been added to the 2017 Edition version.

This may have substantially different results depending on which Law applies to the contract.

In an interesting treatment of the subject recently presented to the Society for Construction Law in London,[1] the authors quoted a passage from the Court of Appeal in Armitage v Nurse[2] :

“It would be very surprising if our law drew the line between liability for ordinary negligence and liability for gross negligence. In this respect English law differs from civil law systems, for it has always drawn a sharp distinction between negligence, however gross, on the one hand and fraud bad faith and wilful misconduct on the other… we regard the difference between negligence and gross negligence as merely one of degree … civil systems draw the line in a different place. The doctrine is culpa lata dolo aequiparatur [gross negligence is equal to fraud]; and although the maxim itself is not Roman the principle is classical. There is no room for the maxim in the common law.”[3]

However as far as the English Law is concerned, the Courts will recognise an express contractual agreement that gross negligence (rather than mere negligence) will attract liability.

The distinction between ordinary and gross negligence is not easy to define in abstract terms, and the authors of the SCL paper after considering numerous authorities have suggested the following set of tests.

“52. However, where the term is not defined (which seems to be more usual), then we suggest the authorities identify the following seven factors as relevant to determining whether “gross” negligence has occurred:

1. Was the nature of the error serious, involving a high degree of risk?
2. Was the conduct undertaken with an appreciation of the risks, but with a blatant disregard of or indifference to an obvious risk?
3. That disregard or indifference need not be conscious, or deliberate; it is sufficient that the reasonably competent professional in the defendant’s position would have considered the action or inaction to amount to a blatant disregard of or indifference to the relevant risk. Conscious disregard/recklessness will however be a likely aggravating factor, and more likely to led to a finding of gross negligence.
4. Were the potential consequences of the action or inaction serious? The more serious the consequences, the more likely the negligence will be gross.
5. Had the same or similar consequences arisen out of the same or similar action or inaction before? In other words, was it a repeat error?
6. How likely was it that the consequence would occur? Again, the more objectively likely it was to occur, the more likely a finding of gross negligence.
7. What precautions were taken (if any) to prevent the consequence occurring? The more obvious and modest the steps, and the greater and more likely the risk, the more likely it is that the conduct in question will veer towards gross negligence.”

Thus, the test to be applied under common law systems before deciding whether a party can escape from liability differs considerably from that under civil systems. In the former, a high degree of negligence will make a party liable, but in the latter, only fraud will enable them to escape. It may well be that some common law and civil systems apply a different test, and parties will need to take local legal advice before deciding what the limitation on exclusion means in practice.[4]

Apart from this surprising change, it should be noted that the exclusion probably does not prevent a Contractor faced with a non-consensual omission by the Engineer to allow the Employer to have the works carried out by others from claiming loss of profit. Such an omission is forbidden under Sub-Clause 13.1, unless the Contractor agrees. It would therefore be a breach of contract on the Employer’s part: any loss would be recognised in damages. Since the breach would be deliberate, the Employer would not be entitled to protection from a claim for loss of profit.

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

[1] Exclusions from Immunity: Gross Negligence and Wilful Misconduct, James Pickavance and James Bowling SCL October 2017.

[2] [1997] EWCA Civ 1279, [1997] 2 All ER 705, [1997] 3 WLR 1046.

[3] Armitage v Nurse Note 14 [1997] 3 WLR 1046 para [254].

[4] In the Guidance included in the 2017 Edition FIDIC notes that “under a number of legal systems (notably in some common law jurisdictions) the term ‘gross negligence’ has no clear definition and, as such, is often avoided in legal documents.” In the general commentary on the definitions, it is suggested that a typical additional definition might be “Gross Negligence means any act or omission of a party which is contrary to the most elementary rules of diligence which a conscientious employer or contractor would have observed in similar circumstances, and /or which show serious reckless disregard for the consequences of such an act or omission. It involves materially more want of care than mere inadvertence or simple negligence.” Although one might wonder what the difference is between “serious reckless disregard” and “reckless disregard”, it would seem to be sensible to include a definition of what is meant by “gross negligence” and this definition has the benefit of improving the level of certainty.

Clause 14 outlines payment, certificates, and release from liability. While the methodology remains unchanged, procedural adjustments may delay payments but aim for prompt claim resolution. Some changes benefit contractors: e.g. claims are addressed during or shortly after the contract period.

This important clause sets out the method of payment, certificates, and release from liability.

The overall methodology has not changed, but there are several procedural adjustments and some inconsequential tidying. Some of the procedural changes will be welcomed by Contractors, but several will entail further delay in payment to the Contractor. There is a determined effort to ensure that all claims are dealt with during the contract period or very shortly thereafter.

Sub-Clause 14.2 – Advance Payment Guarantee

There is a new sub-clause specifically dealing with Advance Payment Guarantees. The most significant change (a very useful one for the Employer) is that where a guarantee has to be extended and the Contractor fails to do so, the Employer may call it in to the extent that any part of the advance payment has not been repaid.

The Advance Payment is to be made within 35 days of the Contractor’s providing their application together with the Performance Guarantee and Advance Payment Guarantee. This contrasts with 42 days under the 1999 Edition.

Sub-Clause 14.3 – Interim Payments

The 1999 Edition referred to applications for interim payment certificates (‘IPC’). This terminology is now gone. Now there is a Statement, which is then followed by the IPC (the term ‘IPC’ is used throughout).

The statement was formerly required in 6 paper copies. Only 1 hard “original” is now required, coupled with an electronic copy.

There then follows a list of the items which have to be included in the Statement. These have been expanded to include Provisional Sums, any release of Retention Money and the amount which the Employer is entitled to be paid for use of Temporary Utilities.

Presumably because Sub-Clause 21.4.3 requires that any money awarded by a DAAB shall be paid without the requirement for any certification or Notice, there is (in contrast to the 1999 Edition) no specific reference to such amounts in the list of items which are to be included in the Statement. Nonetheless, Contractors should include such amounts, as this will bring into effect the right to interest under Sub-Clause 14.8, running from the date of the decision. There is no provision for payment of interest unless a DAAB award is included in this way.

A new requirement has been added to the detail that the Contractor is required to provide. This is stated as “sufficient detail for the Engineer to investigate these amounts”. While this is obviously a useful and sensible requirement it has significant implications.

For the first time, an element of subjectivity is included in the requirements. It is quite possible that the Engineer and the Contractor will disagree about what is “sufficient” or what the Engineer needs to investigate any amounts claimed.

Should there be such a disagreement and the Engineer demands additional information, the time for payment under Sub-Clause 14.7 does not start to run until the relevant information has been received (there will arguably be a short-fall in the supporting documents). Not only may the Contractor be paid later than it would otherwise be entitled, it will also be limited in any claim for financing charges under Sub-Clause 14.8. Unfortunately, it is not uncommon for Engineers to be slow in issuing IPCs, especially when the Employer is having payment difficulties. The Contractor would be very unwise not to comply with any demands for additional information, even if it considers the demands unreasonable, but even then, there may be a consequent delay in payment.

It will be difficult for the Contractor to do anything to speed payment in these circumstances (a Notice under Sub-Clause 16.1 would be a drastic but possible remedy) but it will have the basis of a claim for Financing Charges. To gain these it will need to initiate a dispute under Sub-Clause 20.2 – a time-limited right, so notice needs to be given within 28 days of the Engineer wrongly refusing to accept additional information as sufficient for it to investigate.

However, it should be noted that Sub-Clause 14.6.2 requires the Engineer to issue an IPC even in the absence of such information, while making a suitable deduction to reflect his concerns (see also the discussion under 14.7).

Sub-Clause 14.4 – Schedule of Payments

Under the 1999 Edition, the Engineer was entitled to revise a payment schedule only if progress was less than expected. Now he may amend it if it “differs”. This opens the way to bringing payments forward if the Contractor is making better than expected progress. Unfortunately, there is no provision for the Contractor to trigger this correction process. However, the trigger date for the purposes of the Engineer’s Sub-Clause 3.7 process is when the difference is first “found by the Engineer”. Presumably the Contractor can tell the Engineer and thus makes sure he/she “finds” it.

Under Sub-Clause 3.7 however, the time allowed to the Engineer to make its decision is 42 days. The decision only starts the payment process, so it may be up to 70 days before a change takes effect.

Where the Engineer decides to invoke the process (most likely when progress is slower than that on which it considers the Schedule of Payments was based) the Contractor at least has the advantage that it is entitled to be consulted and that the Engineer must act neutrally and fairly.

There will be a question of how the Engineer can determine that progress differs from that on which the Schedule of Payments was based. If the Schedule simply provides for fixed payments on a monthly basis there will be the possibility of a dispute as to what progress was assumed in the Schedule of Payments. The Contractor’s principal obligation is to complete on time, not necessarily to conform to the programme. It is arguable that if the Contractor decides to change the way in which it will achieve timely completion, this does not mean that the agreed Schedule of Payments is inappropriate.

Where there is a Schedule of Payments, payments for Plant and Materials intended for the Works (see the next section on Sub-Clause 14.5) is disapplied. There is no equivalent provision in the 2017 Silver Book, and it is difficult to see how Sub-Clause 14.5 can work in this situation.

Sub-Clause 14.5 – Plant and Materials Intended for the Works

Like the 1999 Edition, the 2017 Edition allows the parties to agree that Plant and Materials may be paid for when shipped or delivered. The Contractor simply provides the evidence in his application for payment and the amount should then eventually be included in the IPC. Under the 1999 Edition, the term “determination” was used without cross reference to the (then) Clause 3.5. Once that determination was made the amount could be included. Presumably in the interests of clarification the clause now refers to Clause 3.7 [Determination].

This has the consequence that the Engineer has up to 84 days to make a decision, which previously would have been made immediately, and it will no longer be possible to include the amount in the next IPC. Even then there will be another 56 days delay before payment. In addition, the amount to be included in the IPC is only 80% of the value of the items.[1] It is thus probable that by the time the application is dealt with under Sub-Clause 3.7, the items will have been installed so this causes further cash-flow issues. The provision was intended to give the Contractor some early payment, but as amended, it achieves the opposite.

In a sensible and practical change, the requirement for a bank guarantee before the Engineer proceeds to determine a payment has been replaced with a promise of a guarantee, but with eventual payment being conditional on the guarantee being provided.

Note that (even if the parties have agreed to apply this provision) Sub-Clause 14.4 excludes its operation when payment is made against a Schedule of Payments rather than against measured interim payments.

Sub-Clause 14.6 – Issue of IPC

The Clause now provides, as a condition precedent, that the Contractor has appointed the Contractor’s Representative.

Sub-Clause 14.6.1 – Content of IPC

The Contractor is now entitled to a copy of each IPC and it is specified that the Engineer must explain any differences between the amount applied for and the amount Certified. Contractors will be very pleased to have an entitlement to this information.

It is interesting to note that the requirement for the Engineer remains to issue the Final Payment Certificate (‘FPC’) for such amount as he “fairly” considers due, so that while Sub- Clause 3.7 has moved from “fair” to “neutral”, the halfway house of fairness remains in place here. (Clause 14.13 includes the same requirement for issue of the FPC.

Sub-Clause 14.6.2 – Withholding (amounts in) an IPC

A further welcome addition from the point of view of Contractors is that the Engineer is now obliged to explain why amounts are withheld.

Where Engineers find significant errors or discrepancies in the Statement, they now have a right to adjust the amount certified to take account of the extent to which this has prejudiced or prevented a proper investigation. This does not amount to a licence simply not to include amounts in respect of items where there may have been such an error. All the Engineer is entitled to do is “take account” of the error. This must be something other than simply failing to consider material which contains errors. Presumably this is not intended to detract from the obligation to act fairly, but exactly what it will mean in practice remains to be seen.

The IPC also includes any amounts determined under Sub-Clause 3.7. Although there is no specific statement to this effect here, this provision in fact reflects another considerable improvement from the Contractor’s point of view. Virtually all employer claims now pass through the Sub-Clause 3.7 procedure, so the situation which prevails under the 1999 Edition (where a deduction is sometimes made for an Employer claim before the Contractor has the opportunity to argue the point) has now been remedied.

Sub-Clause 14.6.3 – Correction or modification of IPC

There is a welcome new provision setting out in detail what the Contractor is entitled to do if he does not agree with the IPC. Following the Contractor’s submissions, the Engineer has an opportunity to include corrections in the IPC. If he does not do so, or the Contractor still remains unhappy, he is entitled to entitled to ask the Engineer to deal with the matter under Sub-Clause 3.7. There is no time-limit on the Contractor making this request.

Although the 3.7 process is lengthy in the context of payment, the clear right for a Contractor to pursue this procedure in the face of a difficult Engineer will be welcomed by Contractors.

Sub-Clause 14.7 – Payment

As before the Employer’s time for payment runs from when the application is made by the Contractor. This is 56 days for all IPCs except the FPC. Confusingly the Sub-Clause includes two separate time limits for payment under IPCs – 56 days after Engineer receipt for normal ones and 28 days after Employer receipt where the IPC is issued as result of a Partially Agreed Final Statement under Clause 14.13. The FPC is payable 56 days after its receipt by the Employer.

Sub-Clause 14.8 – Delayed Payment

As before, interest is due on late payment. The rate is calculated at 3% above variously defined base rates which have been re-defined. Formerly the base was the discount rate of the central bank of the country of currency of payment. It is now based on the rates charged to borrowers at the place for payment or, if there is no such rate, the rate in country of the currency of payment (there may be some debate about what rate should be paid where the currency of payment is the Euro).

Payment is now to be made without any requirement for a notice from the Contractor of any sort. There is no time limit expressed and no provision for interest on late payment of such interest. Contractors who fear late payment of interest may be wise to include a claim in their next Statement for inclusion in an IPC.

Sub-Clause 14.9 – Release of Retention Money

This new provision marks a considerable negative change as far as Contractors are concerned. Under the 1999 Edition, payment was certified by the Engineer outside the normal IPC process and should have been made immediately. It is now to be included in a Statement for an IPC. This inevitably means at least a 56 day delay in refund.

Sub-Clause 14.10 – Statement at Completion

This has always been required to include any amounts the Contractor considers to be due. The particular categories are now spelled out in detail – including claims still being considered by the Engineer and the DAAB. These are only given as examples, but the list contains considerable gaps – for example, amounts where a NOD is likely to be issued, and amounts which are about to be challenged in arbitration.

Sub-Clause 14.11 – Draft Final Statement, Agreed Final Statement and Partially Agreed Final Statement

There are now three sub-clauses covering what was previously one, referring to the application for a Final Payment Certificate. As before the Sub-clause envisages a process under which the Engineer and the Contractor attempt to agree on the figures for the FPC.

The significant change is the introduction of the concept of a Partially Agreed Final Statement (PAFS). This is a Statement prepared by the Contractor identifying amounts which (after discussions with the Engineer) are agreed and those which are not agreed. This is a sensible additional provision to avoid the situation where there is disagreement over the content of the Final Statement and the Engineer is forced to make a decision as to what he includes in the FPC.

As with as Agreed Final Statement, the consequence of a PAFS is that the Engineer proceeds to issue an FPC (14.13). However, the payment consequences are different. In the case of an FPC, Clause 14.7 requires payment 56 days after receipt by the Employer. A PAFS does not lead to an FPC, but to an IPC which is to be paid 28 days after receipt by the Employer.

Sub-Clause 14.12 – Discharge

The 1999 Edition provided for a full and final discharge by the Contractor, which only took effect once all outstanding claims had been satisfied. This has now been limited in that the discharge covers all agreed amounts but can only exclude limited elements of the Contractor’s claims.

The excluded items may only be items in respect of which a DAAB or arbitration is “in progress”. Thus, claims still being dealt with by the Engineer under Clause 3.7 cannot be excluded, nor can those which, while still live, have not yet been made the subject of a DAAB or arbitration (notice not yet given, proceedings not yet commenced, etc). Contractors ought to be very reluctant to issue such a discharge, but it is a condition precedent to issue of the Final Payment Certificate. The discharge will be deemed to have been submitted and will be effective even if the Contractor fails to provide it so long as the amount certified in the Final Payment Certificate has been paid and the Performance Security returned.  Given that the FPC cannot be issued until the discharge is provided this provision is unworkable.

Sub-Clause 14.13 – Issue of FPC

The FPC is issued 28 days after the Final Statement or Partially Agreed Final Statement. This is as in the 1999 Edition, but the content of the statement now includes credit for any amounts paid under the Performance Security and any balance due from the Employer.

The Sub-Clause now contains additional wording to deal with the situation where there is a Partially Agreed Final Statement (or the Engineer considers that the draft final Statement submitted is in fact a Partially Agreed Final Statement).

Unfortunately (perhaps due to a drafting error) there are two alternative approaches included, with no indication as to which is to apply.

The opening words provide that following a Partially Agreed Final Statement, a Final Payment Certificate is to be issued.

However, the final paragraph provides that in the same case, no FPC is to be issued, but there is to be another IPC. As noted above, if this approach is followed, this IPC (unlike other IPCs) is to be paid 28 days after receipt by the Employer, rather than 56 days after its receipt by the Engineer.

Sub-Clause 14.14 – Cessation of Employer’s Liability

As in the 1999 Edition, the Employer’s liability is limited by reference to what is included in the Final Statement, unless something new arises after the work is completed.

The 2017 Edition contains an additional exemption for the Employer. Unless reference has been made in the Final Statement or Partially Agreed Final Statement, the Employer is absolved from any amounts which the Contractor might wish to claim, unless he makes a claim under 20.2 within 56 days of receiving the Final Payment Certificate. Under the 1999 Edition, no such cut-off was provided. Contractors will have to be sure to start all their claims immediately.

As with the 1999 Edition, the cessation of the Employer’s liability does not apply in the case of his indemnification obligations, or in case of fraud, deliberate default, or reckless misconduct. “[G]ross negligence” has now been added to this list (to the Contractor’s possible advantage) .

The addition of “gross negligence” may have substantially different results depending on which Law applies to the contract.

In a very interesting treatment of the subject recently presented to the Society for Construction Law in London,[2] the authors quoted a passage from a Court of Appeal case Armitage v Nurse[3] as follows:

“It would be very surprising if our law drew the line between liability for ordinary negligence and liability for gross negligence. In this respect English law differs from civil law systems, for it has always drawn a sharp distinction between negligence, however gross, on the one hand and fraud bad faith and wilful misconduct on the other

“… we regard the difference between negligence and gross negligence as merely one of degree … civil systems draw the line in a different place. The doctrine is culpa lata dolo aequiparatur [gross negligence is equal to fraud]; and although the maxim itself is not Roman the principle is classical. There is no room for the maxim in the common law.”[4]

On this basis it seems that, in common law jurisdictions, all significant negligence prevents parties from escaping from liability, and under civil systems, only fraud will enable them to escape.

Sub-Clause 14.15 – Currencies of Payment

This adds two provisions to those in the 1999 Edition. One provides for the way in which currencies are to be allocated in valuing variations (there is a comment on this in our treatment of Clause 13). The other deals with the currencies in which Performance Damages are to be paid.

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

[1] Note that under Sub-Clause 7.7 property in Materials and Plant does not pass until they are fully paid for, so this 80% provision means that the Contractor retains ownership far longer than one might expect.

[2] Exclusions from Immunity: Gross Negligence and Wilful Misconduct, James Pickavance and James Bowling SCL October 2017.

[3] [1997] EWCA Civ 1279, [1997] 2 All ER 705, [1997] 3 WLR 1046.

[4] Armitage v Nurse Note 14 [1997] 3 WLR 1046 para [254].

Clause 13 clarifies the Engineer’s power to vary, allowing contractors to object to unforeseeable variations. Significant limitations include objections for health, safety, and environmental impacts. Variations must align with Employer’s Requirements, and supplemental agreements may be needed for significant changes.

While the process of ordering a variation has not changed dramatically, the 2017 Edition substantially clarifies (although some may say “additionally limits”) the limits on the Engineer’s power to vary.

Under the 1999 and all earlier Editions, the power to vary was expressed in open-ended terms and it was left to the underlying law to say whether or not this power was limited. Most legal systems do recognise that variations cannot depart significantly from the original scope of the contract. Under English Law there is probably an implied term, based on the concept of business efficacy, that instructions should be reasonable and not stray “outside the Contract”. However, this was not spelled out and always left room for argument.

In a change which will be welcome to Contractors, they are now given an express right to object when the varied work was “Unforeseeable having regard to the scope and nature of the Works described in the Employer’s Requirements.” This is a provision that is capable of dramatically changing the concept of what may be the subject of a Variation under the contract. “Unforeseeable” is defined in Sub-Clause 1.1.87 as “not reasonably foreseeable by an experienced contractor by the Base Date”. “Base Date” is the date 28 days before submission of tender. Sub-Clause 13.3.1 adds the additional gloss that regard must be had to the scope and nature of the Works as described in the Employer’s Requirements.

While an experienced contractor will assume that there will be some variations during the course of the Works, he would have to be possessed of extraordinary foresight to know what each one of these would be. By definition, a variation is likely to be something which the Employer, advised (hopefully) by an experienced engineer, also did not foresee. It is difficult to see how any variation at all could fail to be caught by this test.

Two significant limitations, now expressed for the first time, allow the Contractor to object where the variation may adversely affect its ability to meet health and safety and environmental protection obligations.

The final provision may also have unexpected consequences. This is set out in Sub-Paragraph 13.1(e) which allows the Contractor to object where the variation “may adversely affect the Contractor’s obligation to complete the Works so that they shall be fit for the purpose(s) for which they are intended in accordance with Sub-Clause 4.1 [Contractor’s General Obligations].” Sub-Clause 4.1 imposes on the Contractor the obligations:

• To execute the Works in accordance with the Contract. This would normally require obedience to VO’s, but Sub-Paragraph 13.1(e) creates an exception.
• To ensure that “when completed the Works shall be fit for the purposes for which they are intended as defined and described in the Employer’s Requirements”.

The language here is different from that used in the 1999 Edition and, in the context of Variations, this has important consequences. The 1999 Edition required the Works, when completed, to be fit for the purposes “as defined in the Contract”. As a Variation changed the effect of the Contract, the fitness for purpose obligation adjusted accordingly. It can be seen that under the 2017 Edition, a Variation would have to specifically amend the Employer’s Requirements if it were intended to impact the purpose for which the Works are intended. In the absence of a change to the Employer’s Requirements, a change which affects the ability of the Contractor to achieve the purpose intended as in the Employer’s Requirements, is grounds to refuse to comply with the Variation instruction.

Thus, where the Engineer is faced with an objection under Ground (e), one way of dealing with it would be to vary the Employers’ Requirements so that the Contractor, while carrying out the Variation, can still comply with them.

Sub-Clause 1.1.33 [Employer’s Requirements] defines the term and includes the document included in the Contract and “any additions and modifications to such documents in accordance with the Contract.”

However, Sub-Clause 3.2 prevents the Engineer from amending the Contract or “to relieve either Party of any duty, obligation or responsibility under or in connection with the Contract.”

There is a question as to whether a Variation can override Sub-Clause 3.2 by empowering the Engineer to vary the Employer’s Requirements, which in this case would have the effect of relieving the Contractor of one of its obligations under the Contract.

There is nothing in Sub-Clause 13 which says this, and it therefore must be assumed that the Engineer cannot amend the Employer’s Requirements.

In order to overcome this difficulty, the Employer will need to attempt to reach an agreement with the Contractor and enter a supplemental agreement. This puts great bargaining power into the Contractor’s hands and may mean in practice that a variation requiring a change to the Employer’s Requirements is not possible.

Objections by the Contractor

There is also a new and clarified procedure for objection by the Contractor. Unusually for the 2017 Edition, there are no clear time limits for this process. The Contractor must give notice “promptly” and the Engineer must also respond “promptly”.

Some of the value for the Contractor is taken out of the provision as the Engineer is given the option to cancel confirm or vary the instruction which will then be treated as a Variation, even if it in fact continues to exceed the Engineer’s powers.

If the Engineer chooses to cancel, there is clearly no problem. If he chooses to vary and the Contractor still finds there is an objection, there seems to be no reason why the Contractor cannot again give notice. However, if the Engineer chooses to confirm the instruction, this effectively means that it is rejecting the Contractor’s assertions. There will be a dispute between the parties as to whether or not the Contractor’s complaint is valid.

As the right to refuse is an absolute one, a brave Contractor might continue to refuse to perform the Variation. The safer course will be to continue and carry out the Variation instruction. In those circumstances, the Contractor will certainly have put the Engineer on notice that the Variation is likely to be costly and/or cause significant delay, or that the adequacy of the final product will be adversely affected unless the Contractor makes other changes in order to achieve safety, its guarantees, or fitness for purpose obligations, for the Cost of which it intends to claim.

The additional cost may arguably be included as part of the valuation of the Variation (see below) or may only be claimable on the basis of an allegation that the Engineer has exceeded his authority. It is particularly important for the Contractor to take care in these circumstances. As will be seen below, the valuation of a Variation takes place without the need for the Contractor to give a notice under Sub-Clause 20.2. However, a claim for breach of contract does require a Sub-Clause 20.2 Notice. Thus, if a Contractor has given notice and the Engineer has confirmed the instruction, the Contractor should immediately give notice under Sub-Clause 20.2 (repeating what it has said in its notice under the present Sub-Clause and adding any additional relevant information) to set the basis for a claim for additional payment and an extension of time, if the Engineer later declines or fails to include the additional costs in its valuation of the VO.

Variation as an Instruction

There is a linkage with Sub-Clause 3.5 [Engineer’s Instructions]. This is because a Variation is one form of instruction. 3.5 now contains a welcome clarification (in this case probably more welcome to the Employer than to the Contractor) of what the Contractor may do if he considers that an instruction, which the Engineer does not call a Variation, does in fact amount to a variation. In that case he must, immediately and before commencing work, give notice to the Engineer; the Engineer has 7 days to confirm, reverse or vary the instruction.

The requirement of “before commencing work” may be hard to comply with in practice, particularly in the common situation where a co-operative Contractor begins work on an urgent Variation on the basis of a promise by the Engineer that a formal VO will follow. As with Sub-Clause 13.1, it is not clear what is to happen if the Engineer confirms an instruction as not being a Variation when it should have been a Variation.

Where an instruction is not stated to be a Variation, Sub-Clause 3.5 also adds additional rights to objection to those in Sub-Clause 13.1 – the Contractor can object on the basis that the instruction does not comply with applicable Laws or is technically impossible. Quite why these grounds of objection are not also applied to Variations is unclear. There will be some interesting arguments to come on the consequence of this omission from the limits on the power to vary.

The Process of Variation

The 1999 Edition provided that VOs could be commenced by either a direct instruction or by a request for proposal followed by instruction. The 2017 Edition follows the same model.

Valuation of Variations

Following an instruction to vary, the Contractor is required to provide details of his planned resources and methods, an execution programme, any need for an extension time, and its proposal for adjustment to the Contract Price.

Price Proposal – to be taken into account?

The obligation to submit a price proposal is set out in Sub-Clause 13.3.1(c). This Sub-Clause is one of the few in the contract which is said by Sub-Clause 1.15(b) to leave open liability on the part of the Employer for loss of profit, loss of any contract, or any indirect or consequential loss or damage. It would seem therefore that the Contractor is entitled to include such losses and damages in its proposal.

This is therefore one way in which a Contractor can seek compensation for a loss caused to it by an Unforeseeable variation or any other abuse by the Engineer of its power to vary. However, the right goes further than that. As will be seen below, the valuation methods open to the Engineer are very restrictive and do not, in some instances, allow it to take into account price increases which may have occurred since the Tender. Even a legitimate VO may be costly to the Contractor in ways beyond the direct cost of the work itself – for example if it has to use resources which it would otherwise have deployed more profitably elsewhere.

If the Engineer is required to take the proposal into account in making its valuation, this opens the door to some very substantial claims from contractors. However, the remainder of Sub-Clause 13.3.1 does not explicitly answer the question as to whether the Engineer is required to take account of costs included in the proposal in its eventual evaluation. The answer as to whether or not the Engineer has this obligation is perhaps found again in Sub- Clause 1.15(b). If a proposal does not create a liability, why would there be a need to exclude it from the general prohibition on imposing liability for loss of profit etc.? It seems that the assumption is that the Employer will be required to take the proposal into account.

Further support for this position comes from the fact that Sub-Clause 13.3.1(c) is the only place where the Contractor’s right to compensation in the case of an agreed omission is to be found and, if it were not to be taken into account in the valuation, it would be meaningless.

Method of Valuation

The 1999 Edition was notably vague about how the Engineer was to go about valuing the variation and this often led to argument. One approach under the 1999 (and earlier Editions) would have been to assess the value using the tender as a comparator.

Alternatively, the new work could have been valued on the basis of Cost plus profit. The new Edition sets out two methodologies. One applies where there is no schedule of rates and prices (not unusual in a D&B contract) and one where there is. In the former case, valuation is on a Cost plus basis. In the latter, the rates are to be used unless there is no relevant item, in which Cost plus again applies.

The new valuation methodology, where there are no rates and prices, comes as a surprise, as it ties the Engineer’s hands to a method which may substantially favour one party or the other when tendered prices would previously have been used as the basis.

The valuation of the variation is (as before) fixed by an Engineer’s Determination. This may have what is probably an unintended consequence when Cost plus has to be applied. Under the new time limits set out in Sub-Clause 3.7 [Engineer’s Determinations], the Engineer has a maximum of 84 days to give his determination. However, these 84 days may have expired before the Cost plus information necessary to make the determination is available.

The Engineer may be faced with the impossible dilemma of whether to issue a determination without the necessary information, or to fail to make a determination at all.  In either case, the issue may then become a dispute to be referred to the DAAB. It is not clear whether the DAAB has the power to take into account the Cost information which may have finally become available before it, in turn, is obliged to reach a decision. Indeed, in the case of a major Variation, it is quite possible that the DAAB itself will not have enough information, even assuming it can take into account the information which has become available in the meantime. The same problem continues into the arbitration process.

These problems can be resolved by the Engineer by making demands for further information before a decision is given or by an agreement of the parties to extend the time limits for determination. Time only starts to run once all requested information has been received from the Contractor (a real incentive for the Contractor to respond promptly). However, Engineers will need to be alert to the need to demand full particulars of actual costs, to avoid time starting to run for their determinations.

The Engineer is obliged to assess a provisional rate for interim payments pending agreement or determination. This is a new provision which is welcome and at least ensures that the Contractor will receive some of his entitlement.

In this situation, there is one specifically relevant consequence of the new-found “neutrality” of the Engineer in reaching determinations. Unlike the situation under the 1999 and previous Editions, the valuation is no longer made by the Engineer acting as agent of the Employer. Thus, for the first time, the Employer has equivalent rights to the Contractor to challenge a valuation of a variation made by the Engineer.

There is a provision of Clause 14 which might have been better placed in Clause 13 and of which Engineers need to be aware. Sub-Clause 14.15(b) provides that where a variation is valued, the amount to be paid in different currencies must be specified; this must be done by reference to the expected currency proportions of the Cost of the varied work.

This is a sensible provision in principle, but assumes that valuation can be done before the actual work has been carried out and that all Variations are valued on Cost (which, as noted above, they are not).

Notices

There is now no requirement for the Contractor to give notice under Sub-Clause 20.2 if it wishes to seek an extension of time consequent on a Variation. This has always been the case for valuations, but is now expressly stated for time as well. It should be noted, however, that this exemption from the requirement to give notice does not apply to the other provisions of Clause 13 [Provisional Sums, Daywork, Adjustments for Changes in Laws].

Under these latter provisions it may be arguable that the Contractor is obliged to give notice, even to get its entitlement for cost adjustments. It is certainly required for applications for extensions of time. This could be a trap for the unwary Contractor, who may be lulled into a false sense of security by the lack of a need for such notice for Variations proper.

Prolongation and Disruption arising from Variations

As with the 1999 Edition, there is no provision for compensation for prolongation or disruption costs arising from variations. It therefore remains arguable that in the absence of specific provision, these costs will not be compensable. Indeed, if there was any room for argument under the earlier edition, this is now removed by the prescriptive provisions about the way in which variations are to be valued.

Omissions

As with the 1999 Edition, the Engineer is not permitted to use a Variation Order to omit work which is to be carried out by others. The new Edition clarifies this by making it impermissible for work to be omitted where the intention is for the Employer himself to carry out the same work.

There is now express provision for the parties to agree on the omission of work. In these circumstances, the Contractor is entitled to propose an amount of compensation for loss of profit or other compensation for the omission. There is some doubt as to what will happen if the Contractor fails to include such a proposal. Indeed, there is no direction to the Engineer to consider this element of the proposal. Rather unfortunately, where there is no agreement on the omission there is no express right to propose such an amount. However, an omission to carry out the works by someone else would be a deliberate breach of contract, and under Sub-Clause 1.15, would be excluded from the general prohibition on claims for loss of profit and indirect or consequential loss.

Variation by Request for Proposal

The 1999 Edition gives the Engineer the option to ask for a proposal prior to instructing a variation. The new procedure is spelled out more clearly, but does not change the process significantly. As before, there is no general provision for compensation for the Contractor to be compensated for the (possibly considerable) cost of preparing a proposal.

However, there is now an exception to this in the situation where the Engineer does not give consent to a proposal. Contractors should note that, unlike the right to evaluation of payment, this right is not exempt from the requirement for a Sub-Clause 20.2 Notice.

Value Engineering

Value engineering under the Yellow and Silver Books was thankless under the 1999 forms. Under the Red Book, the Contractor could earn 50% of the net benefit. Here, all the forms leave it to the Special Provisions to set out any sharing of “the benefit, costs and/or delay”. However, even where these are set out, the Engineer is not obliged to take them into account, only to “include consideration” of them when he issues a Variation. This is very vague language. If the Engineer’s “consideration” leads it to not include any sharing in its ultimate valuation, there seems to be no basis for a change either through the Sub-Clause 3.7 procedure or through a DAAB.

Provisional Sums

There is new provision allowing the Engineer to require the Contractor to produce quotations from suppliers.

Daywork

The process for dealing with quotations is usefully spelled out in more detail.

Daywork is described in the Sub-Clause as a Variation and the cost consequences (though not time) in cases of disagreement are, for the first time, to be determined under Clause 3.7.

Whereas the Contractor is entitled to have the value and time consequences of other variations determined under Sub-Clause 3.7 without the requirement for a notice under Sub-Clause 20.2, there is no such exception in the case of Dayworks. Contractors are should be very careful to ensure that they adapt to the new procedure by giving Sub-Clause 20.2 notices whenever they need to have dayworks valued and/or require an extension of time.

Sensibly (and in contrast to the procedure for other Variations), time for the Sub-Clause 3.7 determination starts to run from when any disputed dayworks are completed and their value can easily be determined.  However, there is no special provision dealing with the start of the 28-day period for giving Notice under Sub-Clause 20.2. The effect appears to be that the Engineer’s time for considering any disputed valuations will be truncated by the time the Contractor takes to issue his Sub-Clause 20.2 Notice. In the case of applications for extensions of time, time may start at a different point, so the Engineer’s time limits may expire on different days.

Adjustments for Changes in Law

As under the 1999 Edition, the Contractor may be entitled to compensation in money or time for the consequences of changes in law.

The scope of what may be considered Changes in Law is expanded beyond what was included in the 1999 Edition and now includes:

• The Laws of the Country.
• Not only judicial or government interpretation of such Laws but also their implementation.
• Permits, permissions, licenses or approval obtained by the Employer or the Contractor. These are not limited to those of the Country.

The last of these may be the most significant, as it will extend to planning and environmental requirements and may potentially apply to matters arising outside the Country. In addition, in an international project, the Contractor is as likely to be affected in another country as in the country where the Works are actually being performed: much of the manufacture may be taking place off-shore and materials, and labour, which may be procured elsewhere, may be affected by regulatory requirements off-shore. The application of this provision to such permits, licenses, or approvals, thus represents a potentially significant change to the balance of risk.

It should be noted that permits obtained by the Employer are at the expense of the Contractor (Sub-Clause 1.13(b)). The Contractor will need to be vigilant to check whether a permit may be the result of a change of law and the cost thus reimbursable.

In contrast to the 1999 Edition, the Employer is now given the right (subject to a Sub-Clause 20.2 Notice) to recover any benefit which the Contractor may have received as a result of any changes in Laws.

Unlike in the case of Variations, there is no waiver of the requirement to give Notice under Sub-Clause 20.2 when seeking time or money compensation. Finally, there is a new provision which enables either the Contractor or the Engineer to trigger a Variation where a change in Laws requires an adjustment to the execution of the Works. There is no fixed time limit for giving such notice. The term used is “promptly”, but the starting point for such “prompt” notice may be subject to some controversy. Nothing is said about what happens if a party fails to trigger such a Variation; it may well be that the general right for the Contractor to be compensated in Cost and time for such changes will mean that (subject to timely notices) the Contractor will be entitled to compensation even if it does not trigger a Variation.

Adjustment for Changes in Cost

The 1999 Edition included detailed methodology for the calculation of such changes. This is now omitted, and the parties are expected to include their methodology in a schedule to the Contract (without which the right to adjustment will not apply).

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

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

Clause 12 deals with Tests after Completion

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

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

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

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

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

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

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

Delayed Tests (12.2)

There are no changes.

Re-Testing (12.3)

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

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

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

Failure to Pass Tests after Completion (12.4)

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

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

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

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

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

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

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

Clause 11 has been clarified, with detailed provisions for notices and periods, DNP for Parts, and clearer time limits. Changes include risk allocation, compensation for denied access, and limited liability for Plant damage. Some cross-references may cause confusion.

While the general shape of Clause 11 has been left unchanged, it has been substantially elaborated upon. Many of these changes do increase its clarity, but some of the interfaces with other changed Clauses in the Contract produce outcomes which were perhaps not intended.

The positives

• In several Sub-Clauses where the 1999 Edition was not specific about the needs for notices and periods, detailed provisions have been included.
• There is reference to a DNP for Parts.
• A suspension which is the fault of the Contractor no longer prevents the extension of the DNP.
• The consequences of failure to remedy have been elaborated and, from the Contractor’s point of view, slightly ameliorated.
• There are clearer time limits and there are provisions to deal with delay or failure to meet time limits on the Employer’s part.

Change of risk allocation

• Delay by Employer may entitle the Contractor to Costs plus Profit.
• Liability for loss or damage to Plant is now limited to 2 years after expiry of DNP.
• The Employer is entitled to recover the cost of reinstating and cleaning the Site, if the Contractor fails to do so.
• The Contractor is for the first time entitled to compensation where it is denied timely access to the Site to carry out repairs.
• Suspension of work on erection of Plant or delay in delivery of materials no longer gives a right to the Employer to an extension of the DNP where the fault is that of the Employer.

The negatives

• There is a cross-reference to Sub-Clause 7.5 [Defects and Rejection] to make it apply when defects or damage have occurred and there is a need to remedy. Sub-Clause 7.5 is not well adapted to this
• The allocation of cost when the loss or damage is not the Contractor’s responsibility now cross-refers to Clause 13.3.1 [Variation by Instruction]. This may cause some confusion and raises the possibility of undermining the previously unrestricted Employer right during the DNP to have defects and damage remedied and resolve any costs consequences later.
• The previous position that the contract could be terminated, and the cost recovered by the Employer where a part of the Works could not be used for its intended purpose is now dealt with as though it were an omission, but the consequences of this are (in light of Sub-Clause 13.3.1)
• The provisions allowing the Employer to omit or terminate where the works do not perform as intended do not clarify what the intention is. This contrasts with the re-worded definition of Fit for Purpose in Sub-Clause 1.
• There are some examples of unclear drafting which may open the meaning to dispute.

Sub-Clause 11.1 [Completion of Outstanding Works and Remedying of Defects]

In wording which effectively adopts the same intent as the 1999 equivalent provision, the Contractor may be required by the Employer to remedy all defects or damage occurring during the DNP. Whereas previously this only referred to the DNP for the Works or a Section, it now sensibly includes the DNP for a Part.

However, although the language in Sub-Clause 11.1 appears to be unequivocal, a provision in Sub-Clause 11.2 (see below) may limit this obligation in a way which did not previously apply.

This Sub-Clause is elaborated on by setting out a procedure when the Employer discovers a defect or Damage. This requires a joint inspection, a proposal by the Contractor, and then a process for remedying the defect by cross-reference to Sub-Clause 7.5 [Defects and Rejection]. The 1999 Edition merely required the Employer to notify the Contractor and later provisions (which have been largely duplicated in the 2017 Edition) then dealt with the Contractor’s obligations and what would happen if the Contractor failed to abide by them.

The notification and joint inspection provisions are useful additions, but the cross-reference to Sub-Clause 7.5 merely creates confusion.

Sub-Clause 7.5 provides for a proposal to be Reviewed by the Engineer. It should be noted that “Review” is a defined term and refers to a procedure carried out by the Engineer.

Thus, Sub-Clause 7.5 gives powers to the Engineer (which is of course appropriate where the Works are still underway) but does not give powers to the Employer, who is in charge during the DNP. Presumably the intent is that “Employer” be substituted for “Engineer” (both in Sub-Clause 7.5 and in the definition of “Review”, but this is not spelled out.

The result is therefore, arguably, that the Sub-Clause 7.5 procedure (despite being cross-referred to) cannot be applied. It would have been better if Sub-Paragraph 11.1 had said that, for this purpose “Engineer” should be read as “Employer” under Sub-Clause 7.5 and “Review” should be read as review by the Employer. As a result, an elaboration of procedure which ought to have been helpful now creates a confusion which was not previously present.

However, even this would not have entirely solved the problem. The relevant paragraphs of Sub-Clause 7.5 rely for their workings on the power of the Engineer to instruct (a power which the Contract gives exclusively to the Engineer (see Sub-Clause 3.5)) under Sub-Clause 7.6 [Remedial Work] and creates rights for the Contractor to claim compensation in the case the need for the remedial work is caused by the Employer or Exceptional Events. In contrast, Sub-Clause 11.2 provides for such compensation where the cause is “other” than the list included (all faults of the Contractor). Thus, the compensation rights under Sub-Clause 7.6 may be more limited than under 11.2. It is not clear which will apply.

Further under Sub-Clause 7.5, where a Contractor does not follow an Engineer’s instruction, the Employer has the right to have the work carried out at the cost of the Contractor. It is not clear why it is necessary to cross-refer to Sub-Clause 7.5 for this purpose as later provisions of Clause 11 cover the same ground.

The paragraphs imported into Sub-Clause 11.1 from Sub-Clause 7.5 also allow the Engineer, following a proposal from the Contractor, to reject by Notice the design, Plant Materials, or workmanship. The paragraph refers back to Sub-Clause 11.4(a). This allows the Employer to remedy the defects at the Contractor’s cost. This cross-reference works.

Finally, the Sub-Clause 7.5 power requires the Contractor to carry out any subsequent re-testing, whereas Sub-Clause 11.4(a) allows the Employer to do the re-testing. It may be that the requirement that the Contractor only carry out the re-testing where it has done the remedial work, but this is not clear.

In summary, the use of the cross-reference to Sub-Clause 7.5 creates considerable confusion. It would have been much clearer if, rather than relying on a remedial provision drafted to deal with a situation which occurred during the carrying out of the Works, Sub-Clause 11.1 had incorporated its own bespoke procedure. An attempt to avoid confusion by setting out a more elaborate procedure and, at the same time, to save words by cross-referencing has failed.

Sub-Clause 11.2 [Cost of Remedying Defects]

The sense of this Sub-Clause generally remains as before. However, there is one deliberate change and one which results (again) from ill thought through cross-referencing. As noted above, the interface between Sub-Clause 7.5 and Sub-Clause 11.1 also raises a doubt as to whether the circumstances in which the Contractor is required to bear the cost may have been modified.

The deliberate change is that the final circumstance under which the Contractor is said to be responsible for the cost of remedying defects has been changed from “failure by the Contractor to comply with any other obligation” to “failure by the Contractor to comply with any other obligation under the Contract.”

This potentially reduces the Contractor’s risk.

The accidental change results from the changes to Sub-Clause 13.3.1 [Variation by Instruction]. The 1999 Edition simply cross-referred to the variation procedure to deal with the situation where the remedial work was not to be carried out at the Contractor’s cost. Now the cross-reference is to the Variation instruction procedure. In this case it is a deeming provision – it is to be treated “as if such work had been instructed by the Engineer.”

This is workable under Sub-Clause 13.3.1. However, Sub-Clause 13.1 limits the power to give a variation instruction (see commentary on Clause 13) and some of the new limits are quite likely to impact here, allowing the Contractor to refuse to carry out the quasi-variation. For example, the limitation on the right to instruct Unforeseeable varied work is very likely to apply. How can a Contractor be expected to foresee that the Employer will damage the works during the DNP?

It may be arguable that the unqualified obligation under Sub-Clause 11.1(b) to remedy all defects or damage overrides the right to object to a variation, but this is by no means clear. Thus, what seems on the face of it to be an unqualified right for the Employer to have the Contractor remedy all defects and damage, may in fact be limited.

The way this cross-reference has been worded is in contrast to Sub-Clause 11.4 (c) which instead of requiring that Sub-Clause 13.3.1 be applied, states that it shall be deemed to have been applied and the consequences of that are to follow. This would have been a better approach.

Sub-Clause 11.3 [Extension of Defects Notification Period]

Whereas the 1999 Edition allowed an extension wherever the defects or damage affected the Works, the provision has now been critically altered so as to only allow the Employer an extension where the defect or damage is the result of one of the acts of the Contractor listed in Sub-Clause 11.2(a)-(d).

It is also made clear that the extension of a DNP may not extend more than 2 years beyond the expiry of the DNP stated in the Contract data.

By reference to Sub-Clause 1.1.27, which defines DNP, that period is either as stated or 1 year. Thus, unless a general provision is inserted in the Contract stating that the DNP for any Part will be the same as for a Section or the Works, it can be assumed that the DNP for a Part (which by definition does not exist at the time the Contract Data is written) will be 1 year, even if the Works or Section in which it is included had been agreed to be longer.

As with the 1999 Edition, a period of suspension is not to have the effect of lengthening the DNP period. It starts when it would otherwise have started. However, this has now been qualified so that a suspension which was the fault of the Contractor no longer has this effect. The starting date has also been modified. Whereas previously it was the date on which the DNP for any particular Plant or Materials would have expired, now it is the date on which the DNP for the Works would have expired. Thus, Sections and Parts have been overlooked and a suspension which only applies to a Part or a Section may no longer fail to extend the DNP if the Works as a whole have not been suspended.

Sub-Clause 11.4 [Failure to Remedy Defects]

This Sub-Clause provides for what happens if the Contractor unduly delays remedying any defect or damage. It has moved in favour of the Contractor because, under the 1999 Edition, it could have been read to apply whatever the cause of the delay.

A Notice has to be provided by the Employer and the reasonable time given must now take account of all relevant circumstances.

The consequence of failing to meet this demand has now been modified as follows:

1. Where the Employer chooses to accept the damaged or defective work
   1. If there any retesting required, this will be carried out by the Employer at the Contractor’s costs.
   2. The previous right for the Employer to require the Engineer to agree or determine a reasonable reduction in the Contract Price has been replaced by a right under Sub-Clause 20.2:
      1. To claim Performance Damages (if these are included in the Contract).
      2. If there are no Performance Damages to claim for the price to be reduced. The amount of the reduction is now said to be “in full satisfaction of this failure only” and the amount shall be only “as appropriate to cover the reduced value to the Employer as a result of the failure“.
   3. Where the Employer chooses not to accept the damaged or defective work.
      13. The Employer may “require the Engineer to treat any part of the Works which cannot be used for its intended purpose(s) under the Contract … as an omission as if such omission had been instructed under Sub-Clause 3.1.”

The reference to “cannot be used for its intended purpose(s)” is unfortunate. It will be remembered that this was the wording of Sub-Clause 4.1 in relation to fitness for purpose under the 1999 Edition, and that the 2017 Edition now defines intended purpose by reference to the Employer’s requirement and ordinary purposes. This welcome clarification has, for some reason, not been incorporated here. The same problem relates to the alternative remedy of termination as discussed below.

This is another cross-reference to Sub-Clause 13.3.1, so one must refer to that Sub-Clause to see what it means. The provision, in this case does not require a variation order, but only requires the Engineer to act as though there had been a variation order.

Cross-referring to Sub-Clause 13.3.1, it needs to be remembered that an omission made in order to enable the Employer to carry out the Works is not permitted. Thus, the right to apply the present provision cannot apply where this is the Employer’s intention. Should the Employer not intend to remedy the omission itself, the only element of Sub-Clause 13.3.1 which expressly deals with omissions is that relating to the Contractor’s proposal. As noted in the commentary on Clause 13, it is not clear whether the Engineer is obliged to consider this in setting a valuation. If the Engineer is so required, the Contractor is entitled to some compensation for the omission which would be offset against any reduction in the price.

15. Alternatively, the Employer may terminate the Contract as a whole with immediate effect “if the defect or damage deprives the Employer of substantially the whole benefit of the Works.” The normal termination procedure under Sub-Clause 15.2 is bypassed. As with the 1999 Edition, the Employer is then entitled to a refund plus other costs. The new provision departs significantly from the 1999 Edition in that the right to terminate then applied if a major part of the Works could not be used and also gave a right to terminate the Contract in respect of the part which could not be used.

Thus, as a result of this new combination of remedies, the Employer’s right to terminate is limited, but a new right to treat part of the Works as omitted largely fills the gap. In principle, this is a welcome change and introduces an element of workable flexibility.

Unfortunately, the wording of the omission provision leaves some doubt about precisely how it is intended to work. It is particularly unfortunate that no yard-stick for “intended purpose” or “whole benefit” has been introduced here.

Sub-Clause 11.5 [Remedying of Defective Work Off Site]

The Sub-Clause (like that in the 1999 Edition) allows the Contractor, with the Employer’s consent, to carry out some remedial work on Plant off-site. The policy of this Sub-Clause remains unchanged, with one exception. Without departing from policy, but in a useful procedural requirement, it introduces a Notice requirement when the Contractor wishes to remedy off site.

The change to policy is that the notice can now be given if “the Contractor considers” it necessary. Previously the right was to be judged objectively, but this seems to give the Contractor more influence over the decision.

The Notice now required to be given includes details of what needs to be done, where it will be done, how it will be transported, proposals for inspections and testing, and how long the process will take. Although it is likely the Employer would have asked for all this information anyway before giving consent, it provides a useful check-list.

Sub-Clause 11.6 [Further Tests after Remedying Defects]

While the previous provision required the Engineer to decide whether any tests needed to be repeated, this Sub-Clause is now limited to Tests on Completion and Tests After Completion, and now requires the Contractor to provide a Notice setting out proposed tests. Thus, there is no reference to the tests which may be required under Sub-Clause 7.4. This may leave a gap. For example, if there has been physical damage to a structure which has been repaired during the DNP, there is unlikely to be a Test on Completion or Test After Completion, but there might be tests specified elsewhere in the Contract. The Engineer can either agree or give its own instructions.

These instructions may be for any tests which demonstrate that the Works comply with the Contract and may thus fill the gap mentioned above. However, the Engineer will be required to give these instructions without the prior proposal from the Contractor.

There is a default provision allowing the Engineer to give the instruction if the Contractor fails to provide the proposal.

Sub-Clause 11.7 [Rights of Access After Taking Over]

Again, this follows the policy of the 1999 Edition, but elaborates with one minor change and one substantial one and some detailed procedural requirements.

The minor change is that the Contractor’s right of access now extends to 28 days after issue of the Performance Certificate, whereas before it expired on issue of the PC.

The major change is that the Contractor is now entitled to claim Cost plus Profit if the Employer delays access.

The Notice requirements require reasonable advance notice with details of what is required. The Employer is entitled to propose a reasonable alternative date, but is deemed to give consent to the Contractor’s requested date if it does not propose an alternative within 7 days.

Sub-Clause 11.8 [Contractor to Search]

This is again similar to that in the 1999 Edition, but with a procedural addition and a remedy for the Employer if the Contractor fails to meet its obligation.

Under the 1999 Edition the Engineer could “request” a search for causes of defects. Now the Engineer “instructs”. This instruction will include a date which, in the absence of agreement, must be complied with.

If the Contractor does not carry out the instructed search, the Employer may do so and recover its reasonable costs.

Sub-Clause 11.9 [Performance Certificate]

The Performance Certificate is to be issued when the Contractor has “fulfilled the Contractor’s obligations” under the Contract. The 1999 Edition equivalent stated the test as “completed his obligations”. It is not clear what difference the change in wording means.

The PC now has to be issued not only to the Contractor and Employer but also to the DAAB. Whereas, previously, it was only a precondition that all Contractor’s Documents had been supplied, it is now also a requirement that the Engineer has given a Notice of No-objection to the as-built records.

There is now a provision deeming that the Performance Certificate has been issued if the Engineer has not done so within 28 days after the DNP is complete and the relevant documents supplied. The deemed Performance Certificate only comes into effect after a further 28 days.

Sub-Clause 11.10 [Unfulfilled Obligations]

Like the equivalent 1999 provision, both parties remain liable after the issue of the PC for any unfulfilled obligations.  However, this is now limited to 2 years for Plant after the end of the DNP for that Plant, unless this is prohibited by law or in case of fraud, gross negligence, deliberate default, or reckless misconduct.

Presumably the reference to “prohibited by law” is intended to catch situations where the law provides for a mandatory period of liability.

Sub-Clause 11.11 [Clearance of Site]

This Sub-Clause extends the 1999 version by including an obligation to reinstate and clean. In view of this extension, the Employer is given the right to recover the cost of reinstatement and cleaning if the Contractor does not do so.

The right to sell items left on the Site is now limited to those situations where this is “permitted by the applicable law”. It is not clear what is meant here. It would have been clearer to say, “not prohibited by mandatory law”.

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

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

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

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

Origin Of Clause

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

Cross-References

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

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

Sub-Clause 9.1 – Contractor’s Obligations

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

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

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

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

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

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

Sub-Clause 9.2 – Delayed Tests

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

Delays Caused by the Employer

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

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

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

Delays Caused by the Contractor

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

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

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

Undue Delay

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

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

Sedley LJ then stated at para 37:

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

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

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

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

Sub-Clause 9.3 – Retesting

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

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

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

The FIDIC Guide states:

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

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

Sub-Clause 9.4 – Failure to Pass Tests on Completion

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

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

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

Sub-paragraph b) has been described as:

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

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

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[1] [2001] EWCA Civ 304.

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

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

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

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

[6] [2008] EWHC 1087.

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

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

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