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

Introduction

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

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

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

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

Sub-Clause 2.5 states:  

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

What does this wording mean and why does it matter?

Why does it matter?

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

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

What does it mean?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Another legal text states:^[10]

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[12] Paragraph 53.4.3.

[13] [1974] AC 689.

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

Clause 12 deals with Tests after Completion

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

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

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

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

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

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

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

Delayed Tests (12.2)

There are no changes.

Re-Testing (12.3)

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

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

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

Failure to Pass Tests after Completion (12.4)

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

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

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

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

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

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

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

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

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

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

Origin Of Clause

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

Cross-References

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

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

Sub-Clause 9.1 – Contractor’s Obligations

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

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

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

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

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

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

Sub-Clause 9.2 – Delayed Tests

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

Delays Caused by the Employer

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

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

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

Delays Caused by the Contractor

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

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

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

Undue Delay

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

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

Sedley LJ then stated at para 37:

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

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

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

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

Sub-Clause 9.3 – Retesting

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

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

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

The FIDIC Guide states:

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

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

Sub-Clause 9.4 – Failure to Pass Tests on Completion

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

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

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

Sub-paragraph b) has been described as:

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

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

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

[1] [2001] EWCA Civ 304.

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

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

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

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

[6] [2008] EWHC 1087.

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

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

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