Up until the spring of 2020, a FIDIC 1999 Sub-Clause 13.7 [Adjustments for Changes in Legislation][1] claim was just one of many issues to be resolved, for example, in a delay and disruption claim or a Cost claim. However, the focus it receives in the context of Covid-19 is drastically different. Many in the industry are using the changes in legislation provision to seek financial compensation in a situation that would otherwise potentially only attract an extension of time.[2] Awarding Cost for Covid-19 events regardless of the circumstances may seem to some (Contractors mostly, though there are Employers and Engineers who agree) like the appropriate thing to do, but whether it is correct according to the Contract is a different question.

Up until the spring of 2020, a FIDIC 1999 Sub-Clause 13.7 [Adjustments for Changes in Legislation][1] claim was just one of many issues to be resolved, for example, in a delay and disruption claim or a Cost claim. However, the focus it receives in the context of Covid-19 is drastically different.

Many in the industry are using the changes in legislation provision to seek financial compensation in a situation that would otherwise potentially only attract an extension of time.[2] Awarding Cost for Covid-19 events regardless of the circumstances may seem to some (Contractors mostly, though there are Employers and Engineers who agree) like the appropriate thing to do, but whether it is correct according to the Contract is a different question.

What causes the Covid-19 measures?

It used to be that a Country would make a new law (for whatever reason) and a Contractor would claim that the new law was made after the Base Date and increased Cost and/or somehow caused delay to the Works. For example, a new tax would be applied to the purchase of materials[3] or new restrictions would be placed on their transportation. The Contractor would have priced the works based, amongst other things, on the laws as they were before the Base Date and the FIDIC forms assign the risk of increases in that price caused by changes in legislation to the Employer. Accordingly, the Contractor would notify a Sub-Clause 13.7[4] claim and the story would then carry on as prescribed in that Sub-Clause and in Clause 20.[5]

Insofar as the mechanics are concerned, the application of the provision has not changed much with the pandemic. However, the complexity of the event or circumstance has amplified: in countries around the world, measures at various levels of government are being implemented in response to the pandemic. The impact of such measures can be quite dramatic and at least some of the measures are of the type that Contractors have, would have or should have applied anyway. With this, a question that arises when examining the validity of a Sub-Clause 13.7[6] claim is: what about causation?

Those who understand that if Covid-19 is left unchecked, it can wreak havoc, also understand that wearing a face mask, socially distancing, getting tested and quarantining are necessary measures that prevent infection. Companies will (or at least should) in many cases apply such measures in their organisations regardless of whether the law compels it. At the same time that governments were getting to grips with lockdowns, companies around the world dusted off their contingency plans and put to the test the very same measures with which we are all now very familiar. In fact, contracts, such as the FIDIC forms, already impose obligations on the Contractor regarding the protection of its workforce that may apply to the pandemic.[7] At times, measures were implemented even before governments made them wide-ranging. In this scenario, would Sub-Clause 13.7[8] apply to a new law that requires certain measures against Covid-19? The answer to this question depends on the interpretation given to the Sub-Clause.

If a Contractor understands that a Covid-19 outbreak on Site will cause personnel to fall ill or to be fearful of coming to work, then that Contractor should implement the measures needed to protect its workforce if it wants to avoid any delay and disruption caused by lack of personnel. For example, it should purchase masks for its employees, install sanitising stations or checkpoints, implement social distancing, etc. In such a scenario, the cause of the increased Cost and/or delay and disruption that results from the implementation of such measures is Covid-19, it would appear. That Contractor may potentially be able to claim an extension of time (though not additional payment) under Sub-Clause 19.4 (a) [Consequences of Force Majeure].[9]

What came first, the virus or the law?

Would a law compelling the Contractor to purchase those masks, install those sanitising stations or checkpoints, implement social distancing, etc. change that causal link? From one point of view, arguably not.

Sub-Clause 13.7[10] applies to increases and decreases in Cost resulting from a change in legislation which affects the Contractor in its performance of its obligations under the Contract. A Sub-Clause 13.7[11] claim is only available where the Contractor suffers (or will suffer) delay and/or loss as a result of changes in legislation. In the scenario above, the Contractor would implement the necessary measures regardless of whether a new law requiring them comes into force. Also, had the coronavirus not emerged, the new law would have never existed. That is, the two events are not independent from each other because the pandemic caused the relevant new law to come into force. Therefore, insofar as a new law compels the Contractor to do something that the Contractor would have done regardless (of the coming into force of such new law and of the legal implications of non-compliance), then such new law, it may be argued, does not cause the increases in Cost and/or delay that result from the implemented measures.

In other words, the new law fails the “but for” test. This test is used to determine the cause of a loss as a matter of fact. In the context of this article, the test is: would the loss or delay have happened but for the occurrence of an act or event? Put another way: if the act or event had not occurred, would the loss or delay have been suffered? As such, if the loss or delay hinge on the act or event (e.g., the new law), it passes the test in that the act or event is a proven cause in fact of the loss or delay. However, if the loss or delay would have been suffered even without the act or event (such as in the scenario above), it fails the test. Therefore, under the interpretation above, Sub-Clause 13.7[12] would not apply.

As a result, the Contractor would not be able to claim time and money via Sub-Clause 13.7[13] but may perhaps still be entitled to time, for example, under Sub-Clause 19.4 (a)[14]. In the scenario above, Covid-19 would pass the “but for” test. Therefore, subject to meeting all other requirements for a Sub-Clause 19.4 (a)[15] claim,[16] if the Contractor can prove that it has suffered delay by reason of a Covid-19 event or circumstance, it should be entitled to an extension of time.

Perhaps a different scenario would put this into more perspective. If a Contractor were building a pier in the Caribbean and a hurricane was imminent, would it wait for the government to tell everyone to seek shelter before closing operations and sending everyone home? Of course not. That would be irresponsible. Some may argue that this situation is different because most Caribbean countries have had laws for decades that allow them to order businesses to close down if a hurricane is imminent and therefore Sub-Clause 13.7[17] would never apply. However, the relevant question for the purposes of this analogy is not whether a law is new. As mentioned before, the issue is causation and, in that sense, the hurricane scenario is no different from the pandemic scenario.

Also consider the scenario where a Contractor purchases surgical masks to protect its personnel on Site from Covid-19 and they are used before the legislature of the Country makes a new law that requires the use of masks. In this situation, the masks are purchased and used before the law comes into force. Therefore, the Cost incurred in the purchase of such masks could not be said to have resulted from the change in legislation.

However, once the law comes into force, questions arise:

1. Would the Cost of the masks purchased before the law coming into force but used thereafter be covered by Sub-Clause 13.7[18]?
2. Would the Cost of more masks purchased after the law coming into force be covered by Sub-Clause 13.7[19]?

According to the interpretation presented above, it may be arguable that, in either case, the cause of the purchase and use of the masks does not change insofar as Covid-19 continues to be a threat in the eyes of the Contractor. In fact, the Contractor’s purchase of the masks prior to the enactment of the new law may indicate that the Contractor would continue purchasing the masks regardless of the existence of a new law requiring them.

To make matters more complex, the legislature of a Country may have different views on what constitutes appropriate measures. It may pass new laws that go beyond what a Contractor considers necessary. For example, the new law may require the masks to be type KN95 but the Contractor intended to purchase the less expensive surgical masks. According to the interpretation presented above, in such a scenario, the Contractor may have an arguable case under Sub-Clause 13.7[20] but, it is suggested, only to the extent of the difference in Cost between the KN95 masks and the cheaper masks, not for the entire Cost of the KN95 masks. That is, the increase in Cost that results from purchasing the KN95 masks would arguably be caused by the new law and the Contractor may be able to claim the difference in Cost between the two types of masks.

Is causation really the issue?

In contrast, there is a more liberal interpretation of Sub-Clause 13.7[21] that may allow a claim in the scenarios explored above. A DAB/DAAB or arbitral tribunal may be sympathetic to a Contractor who argues that the effect of the words “resulting from”, “which affect” and “as a result of” in Sub-Clause 13.7[22] is that they simply give the claiming Party a contractual peg on which to hang its claim regardless of the existence of an alternative causal link.

According to this argument, the implementation of Covid-19 measures by the Contractor results from the pandemic itself, but also from the new law. That is, Covid-19 and any new laws that result from it would each be considered effective causes. As such, it would be argued, Sub-Clause 13.7[23] would apply to all of the Cost increases and/or delay caused by the implementation of the measures required in the new law.

Pre-existing obligations trump the claim

Many countries already had laws that required Parties to address the pandemic in one way or another. According to the World Health Organization (“WHO”), the last influenza pandemic happened in 2009-2010[24] and epidemics that affect entire regions are ever more frequent, faster and wider-reaching.[25] Countries that have had to deal with such issues may have already had laws to address an event such as the coronavirus.[26] Parties, Engineers, DABs/DAABs and arbitral tribunals must take such laws into consideration when assessing whether a change in legislation under Sub-Clause 13.7[27] has actually occurred.

As mentioned above, the FIDIC 1999 and 2017 forms also contain provisions that may arguably be applicable to the question of whether a Contractor had a pre-existing obligation with respect to the pandemic, for example, Sub-Clause 4.1 [Contractor’s General Obligations], Sub-Clause 4.8 [Safety Procedures] in 1999 or [Health and Safety Obligations] in 2017, Sub-Clause 6.4 [Labour Laws] and Sub-Clause 6.7 [Health and Safety] in 1999 or [Health and Safety of Personnel] in 2017. Applicable provisions may also be found in other documents of the Contract.

Where a law or a Contract obligation already exists that requires the Contractor to implement the types of measures that a new Covid-19 law provides, there may be an argument that the new law did not in fact change the law and/or that it does not actually affect the performance of obligations under the Contract. In such cases, Sub-Clause 13.7[28] may be inapplicable.

In conclusion, who bears the risk?

Whether a Contractor is entitled to Cost under Sub-Clause 13.7[29] in Covid-19 scenarios will depend on many issues, including the presence of pre-existing obligations and the interpretation given to whether the complexities in the causal link are relevant to its application.

However, at the end of the day, what really matters is not why a Contractor or an Employer take care of the health and safety of the personnel on Site during the pandemic, but that they do so quickly and effectively insofar as they possibly can to avoid the worst of the effects of the virus on the people who come to work. Questions of who is at risk for any Cost and delay suffered are to be dealt with when time allows (though within the timeframes in Clause 20 and other relevant Clauses).

When that time arrives, Parties, Engineers, DABs/DAABs and arbitral tribunals should give serious thought to the particular facts of each claim and how they relate to questions of causation, risk and pre-existing obligations in light of the relevant Contract provisions and the law, old and new.

[1] Partially reworded in FIDIC 2017 to [Adjustments for Changes in Laws] and renumbered to Sub-Clause 13.6.

[2] In the context of FIDIC 1999/2017, this may potentially be Sub-Clause 8.4/8.5 [Extension of Time for Completion], Sub-Clause 8.5/8.6 [Delays Caused by Authorities], and Sub-Clause 19.4 (a)/18.4(a) [Consequences of Force Majeure/an Exceptional Event].

[3] See National Highways Authority of India v Som Datt Builders-NCC-NEC (JV), Delhi High Court, Case No. OMP No. 40/2011 (25 April 2014), see https://indiankanoon.org/doc/92242211/ (accessed 24 August 2021) and National Highways Authority of India v M/S JSC Centrodorstroy, Supreme Court of India, Civil Appeal No. 2530 of 2016 (18 April 2016), see https://indiankanoon.org/doc/121392918/ (accessed 24 August 2021).

[4] Or Sub-Clause 13.6 under FIDIC 2017.

[5] Court cases and arbitral awards about Sub-Clause 13.7 are scarce and there are very few commentators that delve into the Sub-Clause to any depth, such as: Ellis Baker et al, FIDIC Contracts: Law and Practice, ¶ 2.160-2.163 at pp 74-75 and ¶ 4.95-4.103 at pp 169-70; George Rosenberg and Andrew Tweeddale, ‘Clause 13’, FIDIC 1999 Books Clause Commentaries (2016), pp 24-26, see https://internationalconstructionknowledgehub.com/knowledge-hub-fidic-1999-book-clause-commentaries/ (accessed 24 August 2021); and George Rosenberg, ‘Clause 13 Variations and Adjustments’, FIDIC 2017 A Practical Legal Guide (2020), pp 340–42.

[6] Or Sub-Clause 13.6 under FIDIC 2017.

[7] For example, FIDIC 1999 and 2017 include: Sub-Clause 4.1 [Contractor’s General Obligations], Sub-Clause 4.8 [Safety Procedures] in 1999 or [Health and Safety Obligations] in 2017, Sub-Clause 6.4 [Labour Laws] and Sub-Clause 6.7 [Health and Safety] in 1999 or [Health and Safety of Personnel] in 2017. Also, applicable provisions may also be found in other documents of the Contract.

[8] Or Sub-Clause 13.6 under FIDIC 2017.

[9] Or Sub-Clause 18.4 (a) [Consequences of an Exceptional Event] under FIDIC 2017.

[10] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[11] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[12] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[13] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[14] Or Sub-Clause 18.4 (a) under FIDIC 2017.

[15] Or Sub-Clause 18.4 (a) under FIDIC 2017.

[16] Such as, for example, (1) proving that the Covid-19 event or circumstance is a Force Majeure event or circumstance under FIDIC 1999 or an Exceptional Event under FIDIC 2017, (2) proving that the Covid-19 event or circumstance prevented the Contractor from performing its obligations under the Contract, and (3) submitting the required notices.

[17] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[18] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[19] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[20] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[21] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[22] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[23] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[24] WHO, ‘Pandemic influenza’, see https://www.euro.who.int/en/health-topics/communicable-diseases/influenza/pandemic-influenza (accessed 24 August 2021) (“The most recent pandemic occurred in 2009 and was caused by an influenza A (H1N1) virus.”); WHO, ‘Past pandemics’, see https://www.euro.who.int/en/health-topics/communicable-diseases/influenza/pandemic-influenza/past-pandemics (accessed 24 August 2021) (“The first influenza pandemic of the 21st century occurred in 2009–2010 and was caused by an influenza A(H1N1) virus.”).

[25] WHO, ‘Managing epidemics: Key facts about major deadly diseases’, Geneva (2018), p 9, download from https://www.who.int/publications/i/item/managing-epidemics-key-facts-about-major-deadly-diseases (accessed 24 August 2021) (“Epidemics of infectious diseases are occurring more often, and spreading faster and further than ever, in many different regions of the world.”).

[26] WHO, ‘Pandemic influenza’, see https://www.euro.who.int/en/health-topics/communicable-diseases/influenza/pandemic-influenza (accessed 24 August 2021) (“For this reason, countries develop multi-sectoral preparedness plans describing their strategies and operational plans for responding to a pandemic.”); WHO, ‘Past pandemics’, see https://www.euro.who.int/en/health-topics/communicable-diseases/influenza/pandemic-influenza/past-pandemics (accessed 24 August 2021) (“It was the first pandemic for which many Member States had developed comprehensive pandemic plans describing the public health measures to be taken, aimed at reducing illness and fatalities.”).

[27] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[28] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

[29] Or Sub-Clause 13.6 (a) & (b) under FIDIC 2017.

In March 2019, in the English Court of Appeal, Sir Rupert Jackson upended the orthodox approach to the operation of liquidated damages clauses in commercial contracts. Sir Rupert had suggested that where the contractor fails to complete the project, general

In March 2019, in the English Court of Appeal, Sir Rupert Jackson upended the orthodox approach to the operation of liquidated damages clauses in commercial contracts. Sir Rupert had suggested that where the contractor fails to complete the project, general damages at common law may be a more logical remedy than liquidated damages up to the date of termination, with general damages thereafter. Order has been restored in the UK Supreme Court, which recently held in Triple Point Technology, Inc v PTT Public Company Ltd[1]  that liquidated damages for delay were payable in respect of work which had not been completed before the contract was terminated. To follow the reasoning of the Court of Appeal ‘would be to render the liquidated damages clause of little value in a commercial contract. To use an idiomatic phrase, the interpretation accepted by the Court of Appeal in effect threw out the baby with the bathwater.’[2]

Background

PTT engaged Triple Point to replace an existing commodities trading system and develop it to accommodate new types of trade. The project was structured in two phases. Phase 1 involved replacing PTT’s existing software system. Phase 2 involved developing the Triple Point system for new types of trade. Triple Point was to be paid by reference to milestones. The contract was subject to the law of England and Wales.

Triple Point fell into delay during the Phase 1 works and never completed the works for Phase 2. Following a dispute concerning the payment of invoices, PTT terminated the contract. Triple Point issued proceedings for the recovery of outstanding sums. PTT denied that any further payments were due and counterclaimed liquidated damages for delay and damages due upon termination of the contract.

Paragraph 3 of Article 5 ‘Schedule of Services’ (‘Article 5.3’) of the contract provided for liquidated damages to be paid at a rate of 0.1% of ‘undelivered work per day of delay from the due date of delivery up to the date PTT accepts such work’.

At first instance,[3] the court held that PTT was entitled to recover liquidated damages for delay pursuant to Article 5.3 up to the date of termination.

In the Court of Appeal,[4] Sir Rupert Jackson found that PTT was only entitled to liquidated damages arising out of works which had been completed (i.e., Phase 1). This was on the basis that, under Article 5.3, PTT’s acceptance of the work was a precondition to PTT’s entitlement to liquidated damages. If the works had not been accepted, liquidated damages were not due. Damages were instead held to be at large and to be assessed on ordinary principles.

Sir Rupert Jackson identified in past authorities three different approaches to the application of liquidated damages clauses post-termination:[5]

1. the clause does not apply – general damages have to be proved[6];
2. the clause applies up to termination of the first contract (the ‘orthodox analysis’)[7];
3. the clause continues to apply until the second contractor achieves completion[8].

Regarding category 2) he stated:

‘If a construction contract is abandoned or terminated, the employer is in new territory for which the liquidated damages clause may not have made provision. Although accrued rights must be protected, it may sometimes be artificial and inconsistent with the parties’ agreement to categorise the employer’s losses as £x per week up to a specified date and then general damages thereafter. It may be more logical and more consonant with the parties’ bargain to assess the employer’s total losses flowing from the abandonment or termination, applying the ordinary rules for assessing damages for breach of contract.’[9]

The Supreme Court

The Supreme Court held that the Court of Appeal fell into error in its approach to the liquidated damages clause, ‘which failed to take account in the process of interpretation of the legal incidents and function of such clauses.’[10]

The key reasoning comes from the judgment of Lady Arden:[11]

‘The difficulty about this approach is that it is inconsistent with commercial reality and the accepted function of liquidated damages. Parties agree a liquidated damages clause so as to provide a remedy that is predictable and certain for a particular event (here, as often, that event is a delay in completion). The employer does not then have to quantify its loss, which may be difficult and time-consuming for it to do. Parties must be taken to know the general law, namely that the accrual of liquidated damages comes to an end on termination of the contract (see Photo Production Ltd v Securicor Transport Ltd [1980] AC 827, 844 and 849). After that event, the parties’ contract is at an end and the parties must seek damages for breach of contract under the general law. That is well-understood: see per Recorder Michael Harvey QC in Gibbs v Tomlinson (1992) 35 Con LR 86, p 116. Parties do not have to provide specifically for the effect of the termination of their contract. They can take that consequence as read. I do not, therefore, agree with Sir Rupert Jackson when he holds in the second sentence of para 110 of his judgment that “If a construction contract is abandoned or terminated, the employer is in new territory for which the liquidated damages clause may not have made provision.” The territory is well-trodden, and the liquidated damages clause does not need to provide for it.’

The force of the reasoning concentrated on commercial reality and the generally understood legal position. It also referred to the protection of accrued rights.[12]

Delay Damages in FIDIC 2017

To test whether the ‘orthodox analysis’ was really reflective of commercial reality, Lord Leggatt asked counsel for Triple Point whether they could give an example of a standard form of contract which provides that liquidated damages for delay will be payable only if the contractor actually completes the work.[13]

Counsel gave as an example the 2017 FIDIC Yellow Book. However, Lord Leggatt rightly noted that Sub-Clause 15.4(c) of those conditions provides that where the contract is terminated for the contractor’s default, liquidated damages are payable for every day that has elapsed between the due date for completion of the works and the date of termination, i.e., an example of the ‘orthodox analysis’.

Sub-Clause 15.4(c) provides as follows:

‘After termination of the Contract under Sub-Clause 15.2 [Termination for Contractor’s Default], the Employer shall be entitled subject to Sub-Clause 20.2 [Claims For Payment and/or EOT] to payment by the Contractor of:

…

(c) Delay Damages, if the Works or a Section have not been taken over under Sub-Clause 10.1 [Taking Over the Works and Sections] and if the date of termination under Sub-Clause 15.2 [Termination for Contractor’s Default] occurs after the date corresponding to the Time for Completion of the Works or Section (as the case may be). Such Delay Damages shall be paid for every day that has elapsed between these two dates.’

Sub-Clause 15.4(c) was therefore not an example of a standard form of contract which provides that liquidated damages for delay will be payable only if the contractor completes the work.

Lord Leggatt concluded that ‘The fact that no standard clause could be found which falls into Sir Rupert Jackson’s category (i) reinforces my view that such a clause is not one which parties to a commercial contract would think it sensible to choose.’[14]

Delay Damages in FIDIC 1999

It is debateable whether counsel for Triple Point could have pointed to the FIDIC 1999 conditions as an example of Sir Rupert’s category 1).

At first blush, the wording of Sub-Clause 8.7 mimics the liquidated damages provision in Triple Point:

‘If the Contractor fails to comply with Sub-Clause 8.2 [Time for Completion], the Contractor shall subject to Sub-Clause 2.5 [Employer’s Claims] pay delay damages to the Employer for this default… [the delay damages] shall be paid for every day which shall elapse between the relevant Time for Completion and the date stated in the Taking Over Certificate.’

It is followed by the wording: ‘These delay damages shall be the only damages[15] due from the Contractor for such default, other than in the event of termination under Sub-Clause 15.2 [Termination by Employer] prior to completion of the Works.’

This clause can be read in two ways: (1) the delay damages are the only damages due for delay to completion, other than in the event of termination, in which case the Employer shall be entitled to delay damages before termination and general damages for delay afterwards; or (2) the delay damages are the only damages due for delay to completion, other than in the event of termination, in which case the Employer shall be entitled to general damages for delay only.

This is to be read against the Contract termination provisions in Sub-Clause 15.2 whereby ‘The Employer’s election to terminate the Contract shall not prejudice any other rights of the Employer, under the Contract or otherwise’.

Given the Supreme Court’s judgment in Triple Point, it is suggested that under English law, Sub-Clause 8.7 of the 1999 FIDIC conditions should be interpreted according to the orthodox position, i.e., liquidated damages are recoverable up until termination, with general damages thereafter. Accrued rights should be protected, following a Sub-Clause 15.2 termination.

Conclusion

The UK Supreme Court judgment is likely to be welcomed by both employers and contractors who will benefit from the certainty of liquidated damages provisions. Although the 2017 FIDIC contracts expressly provide for the recovery of delay damages even in the event of an Employer termination, many standard form construction contracts do not, including the 1999 FIDIC forms. While a decision of the UK Supreme Court is of course not binding in other jurisdictions, Triple Point may well restore orthodoxy both in the UK and in the interpretation of FIDIC forms internationally.

[1] [2021] UKSC 29

[2] Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29 [48]

[3] Triple Point Technology, Inc v PTT Public Company Ltd [2017] EWHC 2178 (TCC)

[4] Triple Point Technology, Inc v PTT Public Company Ltd [2019] EWCA Civ 230

[5] Triple Point Technology, Inc v PTT Public Company Ltd [2019] EWCA Civ 230 [106]

[6] British Glanzstoff Manufacturing Co. Ltd v General Accident, Fire and Life Assurance Co. Ltd 1913 SC (HL) 1; Chantall Investments Ltd v F.G. Minter Ltd 1976 SC 73; Gibbs v Tomlinson (1992) 35 Con LR 86

[7] Greenore Port Ltd v Technical & General Guarantee Company Ltd [2006] EWHC (TCC); Shaw v MFP Foundations and Pilings Ltd [2010] EWHC 1839 (TCC); LW Infrastructure PTE Ltd v Lim Chan San Contractors PTE Ltd [2011] SGHC 163; [2012] BLR 13; Bluewater Energy Services BV v Mercon Steel Structures BV [2014] EWHC 2132 (TCC)

[8] Hall and another v Van Der Heiden (No 2) [2010] EWHC 586 (TCC) and GPP Big Field LLP v Solar EPC Solutions SL (Formerly Prosolia Siglio XXI) [2018] EWHC 2866 (Comm)

[9] Triple Point Technology, Inc v PTT Public Company Ltd [2019] EWCA Civ 230 [110]

[10] Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29 [6]

[11] Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29 [35]

[12] Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29 [36] and [37]

[13] Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29 [82]

[14] Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29 [82]

[15] The term ‘delay damages’ is not defined in FIDIC 1999.

This article looks at recent changes in arbitration rules, including new LCIA, DIFC-LCIA, and ICC rules, the Seoul Protocol on Video Conferencing, the Africa Arbitration Academy Protocol on Virtual Hearings, and revisions to the IBA Rules on Taking Evidence.

The last year or two has seen changes in arbitration rules and procedures, caused in no small part by the COVID-19 pandemic. There are new LCIA, DIFC-LCIA, and ICC arbitration rules. The Seoul Protocol on Video Conferencing in International Arbitration is being regularly used and the Africa Arbitration Academy Protocol on Virtual Hearings has been issued. There have also been revisions to the IBA Rules on Taking Evidence in International Arbitration. This short update looks at the key takeaways from these changes.

LCIA Arbitration and Mediation Rules and the DIFC-LCIA Rules

The LCIA revised its Arbitration and Mediation Rules on 1 October 2020. This was a general updating of the Rules, which also addressed modern practices as a result of the COVID-19 pandemic. The LCIA explained the most notable changes to the Rules as follows:[1]

• “Additional tools allowing arbitrators to expedite proceedings, including by introducing an explicit reference to the possibility of early dismissal determination;
• refinement and expansion of the provisions accommodating the use of virtual hearings, also supporting arbitrations taking place in the new normal;
• confirming the primacy of electronic communication with the LCIA and in the arbitration, as well as confirming the facilitation of electronically signed awards;
• inclusion of explicit provisions addressing the role of tribunal secretaries;
• broadening of LCIA Court and Tribunal power to order consolidation and concurrent conduct of arbitrations;
• explicit consideration of data protection and regulatory issues.”

The arbitral tribunal is given the power under Article 22.1 (viii) to summarily dispose of unfounded claims and defences that manifestly lack merit at a preliminary stage of an arbitration. Such powers are not new and can be found in other rules, including the ICC Expedited Procedure, the 2017 Arbitration Rules of the Stockholm Chamber of Commerce, and the 2016 Arbitration Rules of the Singapore International Arbitration Centre. The ICC 30 October 2017 Note to the Parties and Arbitral Tribunal on the Conduct of Arbitrations also stated that:

‘applications for expeditious determination of manifestly unmeritorious claims or defences may be dealt with within the broad scope of Article 22 [of the ICC Arbitration Rules]’.

Historically, in England, there was doubt whether an arbitral tribunal possessed the power to give summary judgment because of the requirement for due process. However, in the case of Travis Coal Restructured Holdings LLC v Essar Global Fund Limited (formerly known as Essar Global Limited),[2] the English High Court expressly stated that summary judgment does not “necessarily amount to a denial of due process“.[3] Blair J. found that the arbitration procedure was conducted “in an expeditious and cost-effective manner,” that the tribunal “gave each party a fair opportunity to present its case” and that “the procedure fell within [the arbitration clause]“. Blair J. therefore concluded there was not a “realistic prospect of showing that the Tribunal exceeded its powers in the procedure.“[4]

In the wake of the changes made to the LCIA Rules, the DIFC-LCIA Arbitration Centre in Dubai updated their Arbitration Rules on 1 January 2021 to mirror the changes made to the LCIA’s Arbitration Rules.

ICC Arbitration Rules

The new ICC Arbitration Rules came into force on 1 January 2021. The changes are relatively minor and are intended to reflect current practice and provide clarification.

Like the LCIA Rules, the new ICC Arbitration Rules promote virtual hearings. A hearing must be held if requested by any of the parties, but the arbitral tribunal may decide whether that hearing should be conducted with physical attendance or remotely by videoconference, telephone, or other appropriate means of communication (Article 26(1)).

The ICC Arbitration Rules also allow for the giving of an additional award. This now permits the arbitrator to issue a further award where the arbitral tribunal has omitted to decide something which has been referred to it (Article 36(3)). This brings the ICC Arbitration Rules in line with normal international practice.

One significant deletion made to the 2017 ICC Arbitration Rules relates to the Emergency Arbitrator Provisions. Under the 2017 ICC Rules the Emergency Arbitrator Provisions did not apply when the parties had agreed to another pre-arbitral procedure that provides for the granting of conservatory, interim or similar measures. It was therefore thought that the Emergency Arbitrator Provisions would not apply to a FIDIC Contract which included a DAB, as the procedural rules for the DAB gave it the power to order provisional relief such as interim or conservatory measures.

The new ICC Arbitration Rules now permit a reference to the Emergency Arbitrator even if the contract contains a DAB provision that allows the DAB to order interim remedies.

Other changes include:

• a new option for a party to request joinder of an additional party after the confirmation or appointment of any arbitrator. The additional party must accept the constitution of the arbitral tribunal and agree the Terms of Reference where applicable. In deciding whether to permit the joinder, the arbitral tribunal must take account of all relevant circumstances, including the timing of the request, the jurisdiction of the arbitral tribunal and any conflicts of interest (Article 7(5));
• a broader power to consolidate of arbitrations (Article 10);
• requirement that parties disclose any third-party funding (Article 11.7);
• a power allowing the ICC Court to appoint each member of the arbitral tribunal in “exceptional circumstances” (Article 12(9)); and
• an increase to $3 million in the amount covered by the Expedited Procedure Rules (Appendix VI Article 1(2) and Article 30(2)).

IBA Rules on the Taking of Evidence in International Arbitration

The IBA adopted a revised set of Rules on the Taking of Evidence in International Arbitration on 17 December 2020. The purpose of these Rules is to fill gaps within the institutional rules regarding the conduct of the proceedings.

The new IBA Rules include a definition of ‘Remote Hearing’, which is described as a hearing in whole or in part conducted using teleconference, videoconference, or similar technology. Article 8 deals with evidentiary hearings, including remote hearings. Where a Remote Hearing is ordered, the arbitral tribunal and the parties are required to establish a protocol for that hearing which should deal with:

1. the technology to be used;
2. advance testing of the technology or training in use of the technology;
3. the starting and ending times considering, in particular, the time zones in which participants will be located;
4. how Documents may be placed before a witness or the Arbitral Tribunal; and
5. measures to ensure that witnesses giving oral testimony are not improperly influenced or distracted.

The other amendments are relatively minor but include issues of cybersecurity (Article 2(2)(e)), responding to objections to produce documents (Article 3 (5)), rules on translating documents disclosed and submitted to the arbitral tribunal (Article 3(12)), and dealing with new factual matters or developments in witness statements and expert report (Article 4(6) and Article 5(3)).

The Seoul Protocol on Video Conferencing in International Arbitration

The Seoul Protocol on Video Conferencing was not a result of the COVID-19 pandemic, but as a result of developments in technology. In 2018 a survey conducted by White and Case showed that 43% of people answering used videoconferencing in arbitrations frequently and 89% said that it should be used more often. The Seoul Protocol was introduced in November 2018. The key features of the Seoul Protocol are:

• a requirement for due process:

The videoconference will be terminated if the arbitral tribunal deems the videoconference so unsatisfactory that it is unfair to either party (Article 1.7).

There are provisions relating to the prevention of coaching of witnesses offscreen (Article 3.1). However, a witness may have with them interpreters, paralegals to assist with the documents and representatives from each party’s legal team on a watching brief.

there is a requirement for transparency by requiring that all documents that will be referred to by a witness be clearly identified and made available to the witness (Article 4.1).

• a requirement for confidentiality and security:

There are provisions relating to possible security breaches and a requirement for the parties to use their best efforts to ensure security (Article 2.1 and 2.2).

There are provisions relating to the identification of witnesses and participants (Article 3.1)

There are prohibitions on recording the arbitration without the leave of the arbitral tribunal (Article 8)

• back-up plans and testing:

There are provisions for testing the video-conference equipment at least twice (Article 6.1)

There is a requirement for the parties to advise of any backup plans in case of communication or technological breakdowns (Article 9.4)

Africa Arbitration Academy Protocol on Virtual Hearings

The Africa Arbitration Academy Protocol on Virtual Hearings covers the same matters as the Seoul Protocol but is more comprehensive. For example, the Africa Protocol includes specific requirements for participants to mute when not speaking (Article 5.3) and for allocating time to housekeeping matters and unexpected events (Article 3.2.6).

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

[1] https://www.lcia.org/lcia-rules-update-2020.aspx.

[2] [2014] EWHC 2510 (Comm).

[3] Ibid at [44].

[4] Ibid at [50].

This article examines the 'subject to contract' label in English law, its use to avoid premature binding agreements, and its interpretation in two recent court cases, highlighting that its effect depends on the specific circumstances.

‘Subject to contract’ in English law

Parties who are negotiating a contract may use the label ‘subject to contract’ to ensure that they do not enter into a binding agreement before they are ready to do so. This can be particularly important in English law when a binding agreement can be reached (with a few exceptions) without any particular formalities. However, the label is not unassailable and whether it has the required effect will always depend on the circumstances.

The English Court of Appeal has explained the meaning of ‘subject to contract’ as follows:

‘What it means is that (a) neither party intends to be bound either in law or in equity unless and until a formal contract is made; and (b) that each party reserves the right to withdraw until such time as a binding contract is made.’[1]

Parties may make their contract negotiations ‘subject to contract’ but then – deliberately or otherwise – waive their reliance on this so that they are bound despite the absence of a formal written agreement. On this, the English Supreme Court has stated:

‘Whether in such a case the parties agree to enter into a binding contract, waiving reliance on the ‘subject to [written] contract’ term or understanding will again depend upon all the circumstances of the case, although the cases show that the court will not lightly so hold.’[2]

In construction contracts, issues may arise where a contract is being negotiated ‘subject to contract’ but work begins before a formal contract is executed. On this, the English Supreme Court has stated:

‘… in a case where a contract is being negotiated subject to contract and work begins before the formal contract is executed, it cannot be said that there will always or even usually be a contract on the terms that were agreed subject to contract. That would be too simplistic and dogmatic an approach. The court should not impose binding contracts on the parties which they have not reached. All will depend upon the circumstances.’[3]

The circumstances were examined in the two cases considered below. As will be seen, in both cases the ‘subject to contract’ protection was ultimately upheld.

Joanne Properties Ltd v Moneything Capital Ltd [2020] EWCA Civ 1541

The Court of Appeal had to decide whether the parties had entered into a binding settlement agreement in written communications passing between their respective solicitors.

The communications reflected negotiations regarding the allocation of proceeds from the sale of land. They were variously headed ‘subject to contract’, ‘without prejudice and subject to contract’ and ‘without prejudice save as to costs’.

Eventually, Moneything sent to Joanne a written document headed ‘subject to contract’ setting out terms for the allocation of these proceeds. Some of these terms had not been previously discussed. Joanne did not reply. Moneything applied to the court for an order in those terms. Joanne replied that there had been no binding settlement because the negotiations had been ‘subject to contract’.

The judge at first instance decided that there had been a binding settlement despite the words ‘subject to contract’. One reason for this was the judge’s view that, although there remained certain administrative matters to be agreed, they were not material for the purposes of the settlement.

The Court of Appeal did not agree. It found that there was no binding settlement. It noted in particular that ‘parties could get rid of the qualification of ‘subject to contract’ only if they both expressly agreed that it should be expunged or if such an agreement was necessarily to be implied’.[4]

The Court of Appeal found that there was no express agreement that the ‘subject to contract’ qualification should be expunged and no reason why such an agreement should be implied. It found that the label ‘subject to contract’ had been used at various stages in the discussions by the parties’ solicitors who must have known the meaning of these words.

The Court of Appeal also considered that the judge at first instance had undervalued the force of the ‘subject to contract’ label; the judge had focused on whether the agreed terms were sufficiently complete to amount to an enforceable contract but this was the wrong question. The correct question was whether the parties intended to enter into a legally binding arrangement at all.

The Court of Appeal concluded ‘As the cases show, where negotiations are carried out ‘subject to contract’, the mere fact that the parties are of one mind is not enough. There must be a formal contract, or a clear factual basis for inferring that the parties must have intended to expunge the qualification. In this case there was neither.’[5]

Aqua Leisure International Limited v Benchmark Leisure Limited [2020] EWHC 3511 (TCC)

The English High Court had to decide (among other things) whether the parties had agreed to enter into a binding settlement agreement without the need for all terms to be reduced to writing.[6]

A dispute had arisen between the parties in respect of the construction of a waterpark and this dispute was the subject of an adjudicator’s award. The sums awarded did not however represent the full amount due to Aqua and so the parties met to discuss settlement of the entirety of their dealings. The settlement discussed would essentially comprise Benchmark making a series of payments to Aqua, the parent company of Benchmark providing a guarantee to Aqua, and Aqua carrying out some warranty work.

After those discussions, Aqua sent Benchmark an email recording a ‘payment resolution’ which was expressed to be ‘without prejudice and subject to contract’. The email ended with the words ‘please confirm your agreement to this settlement by return’. Benchmark replied with the single word ‘agreed’ and Aqua replied ‘meantime we will contact our lawyer to draft the settlement and guarantee wording … which [we] will forward to you as the binding agreement once signed by all the parties’.

Following this, Benchmark paid Aqua certain sums. Some of these payments were made on dates which complied with the ‘payment resolution’ and other payments were made but not on compliant dates. Benchmark did not pay all of the sums set out in the ‘payment resolution’. Aqua started warranty work.

After some, but before all, of these payments had been made, Aqua sent Benchmark a ‘deed of settlement and payment guarantee’ for Benchmark’s ‘review and completion’. In the deed of settlement, Aqua gave Benchmark credit for payments already made.

In the following five months, Aqua chased Benchmark for payment six times. Eventually, Benchmark replied to say that it would not provide a guarantee from its parent company. Benchmark had by that time not paid all of the adjudicator’s decision or all of the sums set out in the ‘payment resolution’.

The question the court had to decide was ‘whether there is a reasonable prospect of establishing at trial that the parties agreed to enter into a binding contract (a new contract) without the need for all terms to be reduced to writing.’[7]

Aqua argued that the compromise agreement was expressly made in the context that it would not become binding until it was reduced to writing (‘subject to contract’). As it was not reduced to writing, it was never binding.

Benchmark argued that the ‘subject to contract’ proviso was waived because both parties ‘obviously considered’ themselves bound by the ‘payment resolution’ and conducted themselves in reliance on that common understanding and their conduct indicated a waiver of the ‘subject to contract’ condition so that a new contract was entered into.

The judge found nothing that allowed him to conclude that a new contract had been made. He found that this was ‘a paradigm example of why the court “will not lightly hold” that negotiations and agreements are “subject to contract” had been superseded’; that the parties had agreed that there would be no binding contract until the terms were reduced to writing and signed off; the presence of an agreement that was acted on was not without more enough to indicate that the parties intended to be bound; and fundamentally ‘everything that happened during the course of the parties’ dealings with one another [including payments being made and work being performed] happened at a time when the ground rules applied [i.e., that the agreement was ‘subject to contract’].’[8]

Accordingly, there was no agreement which barred the right to enforcement of the adjudicator’s award.

A contract may require a party giving notice of a claim to specify the contractual or legal basis of that claim in the notice (or the supporting particulars). What if that party states a contractual or legal basis for the claim but later (perhaps with the benefit of additional information or because of advice from its lawyers) changes its mind or wants to include further contractual or legal bases? This was considered by the Hong Kong Court of Appeal in Maeda Corporation and China State Construction Engineering (Hong Kong) Limited v Bauer Hong Kong Limited [2020] HKCA 830. It found that a subcontractor could not change the contractual basis for its claim once the time period for providing such notice had expired. What, if any, impact will this decision have on the FIDIC forms of contract?

BACKGROUND

The Maeda case related to the construction of tunnels for the Hong Kong to Guangzhou Express Rail Link. The Main Contractor was Maeda and China State in joint venture (the “JV”). The Sub Contractor was Bauer Hong Kong Limited (“Bauer”).

The Sub-Contract was not a standard FIDIC form of contract. It contained a condition precedent clause that required Bauer to state the contractual basis, together with full and detailed particulars and evaluation, of its claim within 28 days after giving its initial notice (Clauses 21.2 and 21.1 respectively of the Sub-Contract).

Sub-Clause 21 is set out in full below (with emphasis added):

“21.1      If the Sub-Contractor intends to claim any additional payment or loss and expense pursuant due to:

21.1.1    any circumstances or occurrence as a consequence of which the Contractor is entitled to additional payment or loss and expense under the Main Contract;

21.1.2    any alleged breach of the Sub-Contract, delay or prevention by the Contractor or by his representatives, employees or other sub-contractors;

21.1.3    any claim for discrepancy between Sub-Contract Drawings and documents pursuant to Clause 8.4;

21.1.4    any claim under Common Law, statute laws or by-law;

21.1.5    any extension of time granted to the Sub-Contractor with exception to those cases which the delay are caused by typhoon signal no. 8 and/or force majeure etc.

21.1.6    any Variation or Sub-Contract Variation, as a condition precedent to the Sub-Contractor’s entitlement to any such claim, the Sub-Contractor shall give notice of its intention to the Contractor within fourteen (14) days after the event, occurrence or matter giving rise to the claim became apparent or ought reasonably to have become apparent to the Sub-Contractor.  For the avoidance of doubt, the Sub-Contractor shall have no entitlement to any additional payment or any additional loss and expense and no right to make any claim whatsoever for any amount in excess of the Sub-Contract Sum in respect of any event, occurrence or matter whatsoever unless this Sub-Contract sets out an express right to that additional payment, additional loss and expense or claim.

21.2        If the Sub-Contractor wishes to maintain its right to pursue a claim for additional payment or loss and expense under Clause 21.1, the Sub-Contractor shall as a condition precedent to any entitlement, within twenty eight (28) Days after giving of notice under Clause 21.1, submit in writing to the Contractor:

21.2.1    the contractual basis together with full and detailed particulars and the evaluation of the claim;

21.2.2    where an event, occurrence or matter has a continuing effect or where the Sub-Contractor is unable to determine whether the effect of an event, occurrence or matter will be continuing, such that it is not practicable for the Sub-Contractor to submit full and detailed particulars and the evaluation in accordance with Clause 21.2.1, a statement to that effect with reasons together with interim written particulars.  The Sub-Contractor shall thereafter, as a condition precedent to any entitlement submit to the Contractor at intervals of not more than twenty eight (28) Days (or at intervals necessary for the Contractor to comply with his obligations under the Main Contract, whichever is shorter) further interim written particulars until the full and detailed particulars are ascertainable, whereupon the Sub-Contractor shall as soon as practicable but in any event within twenty eight (28) Days (or as necessary for the Contractor to comply with his obligations under the Main Contract, whichever is shorter) submit to the Contractor full and detailed particulars and the evaluation of the claim;

21.2.3    details of the documents and any contemporary records that will be maintained to support such claim; and

21.2.4    details of the measures which the Sub-Contractor has adopted and proposes to adopt to avoid or reduce the effects of such event, occurrence or matter which gives rise to the claim.”

21.3        The Sub-Contractor shall have no right to any additional or extra payment, loss and expense, any claim for an extension of time or any claim for damages under any Clause of the Sub-Contract or at common law unless Clauses 21.1 and 21.2 have been strictly complied with.”

Bauer gave notice of its claim on time and provided full and detailed particulars within 28 days, submitting the contractual basis of its claim to be a Variation and/or Sub-Contract Variation for unanticipated ground conditions and naming specific clauses in the Sub-Contract.

The dispute between the JV and Bauer escalated to arbitration.

In the arbitration, Bauer also pursued an alternative contractual basis for its claim. This was a “like rights” claim, based on the main contractor’s entitlement under the provisions of the main contract, under different clauses of the Sub-Contract. This had not been included within the information provided within the 28 days (despite the wording of Sub-Clause 21.1).

The arbitrator (Sir Vivian Ramsey Q.C.) rejected Bauer’s variation claim on the basis that “the changed ground conditions do not, in themselves, give rise to payment as a Variation or Sub-Contract Variation, in the absence of an instruction”. This left the “like rights” claim. The arbitrator had to consider “whether the contractual basis of the claim made under Clause 21.2 had to be the same as the contractual basis of the claim made in the arbitration”. He decided that it did not, placing significance on the commercial purpose of the condition precedent clause.

The Court at First Instance disagreed with the arbitrator, finding that “there can be no dispute, and no ambiguity, from the plain and clear language used in Clause 21, that the service of notices of claim in writing referred to … are conditions precedent, must be “strictly” complied with, and failure to comply with these conditions will have the effect that [Bauer] will have “no entitlement” and “no right” to any additional or extra payment, loss and expense”. The judge, M Chan J, placed reliance on the English court cases of Rainy Sky SA v Kookmin Bank [2011] [1] and Arnold v Britton [2015] [2].

THE COURT OF APPEAL

Bauer appealed and (unsuccessfully) made a number of arguments including the following:

• Bauer had submitted notice. The issue was not whether such notice had been given but whether such notice complied with Sub-Clause 21.2.1.
• Sub-Clause 21.2.1 does not require Bauer to identify the contractual basis upon which its claim for additional payment or loss and expense ultimately succeeded in the arbitration. Had this been the intention of the parties, this would have had to have been expressed clearly.
• Sub-Clause 21.2.1 does not expressly state, nor can it be inferred, that Bauer was precluded from amending or substituting a contractual basis or that the effect of such an amendment or substitution would nullify the entitlement of Bauer to additional payment.
• Sub-Clause 21.2.1 was at the least ambiguous as to whether the notice needed to state the contractual basis upon which the claim ultimately succeeded or whether a party is precluded from pursuing a claim on a different contractual basis from that stated in the notice.  As such, it should have been construed narrowly.
• Sub-Clause 21.2.1 referred to “contractual basis” in the singular, rather than the plural. It could not be “strictly complied with” as stipulated in Sub-Clause 21.3, because the factual basis for Bauer’s claim provided not one but two contractual bases – as Variations or Sub-Contract Variations, and as a “like rights” 
• A party should not be prevented from advancing a claim after the expiry of a time bar merely because it placed a different legal label in the notice submitted when the substance of which was presented in time.
• The arbitrator said that, “to expect a party to finalise its legal case within the relatively short period and be tied to that case through to the end of an arbitration is unrealistic”. This was a finding of fact and as such is unimpeachable as a matter of law. The Court of First Instance was wrong to ignore this finding of fact.
• Clause 21, when read as a whole, contemplates and provides for a developing understanding of the factual causes or events for which notification is required, and this in turn informs the contractual basis or bases of the claim.  Where there is a developing state of affairs and there is provision for interim written particulars under Sub-Clause 21.2, it is manifest that the stated contractual basis under Sub-Clause 21.2 may be amended or substituted to reflect the understanding at that time.
• The arbitrator said that, “what is important from the point of view of the Contractor is to know the factual basis for the claim so that it can assess it and decide what to do”. This was a correct statement of the law, having regard to the commercial purpose of the notification clause.   The important commercial purpose of Sub-Clause 21.2 is whether the receiving party is able to make a proper evaluation of the claim as presented, not whether all the relevant boxes have been ticked.
• The finding in the Court of First Instance that “there is commercial sense in allocating risks and attaining finality by designating strict time limits for claims to be made and for the contractual basis of claims to be specified” just restated the purported effect of the clause.  The judge erroneously relied on case law and applied the concept of finality dogmatically and with no regard to the commercial purpose of the clause.

The Court of Appeal held that Bauer had failed to give proper notice under Sub-Clause 21.2 and that the arbitrator’s decision was wrong in law. Bauer was not entitled to bring a claim in the arbitration on a different contractual basis than the one notified. This was for a number of reasons, including the following:

• There was no dispute that for a “like rights” claim, the notice provisions in Sub-Clause 21.2 must be strictly complied with as conditions precedent to any entitlement to a claim for additional payment under Clause 21.
• Under Sub-Clause 21.2, the notice would need to be given within 28 days after the giving of the original notice.  In the notification served by Bauer within that period, Bauer made its claim on the contractual basis of a Variation or Sub-Contract Variation and there was no mention of a “like rights” claim, which is a different contractual basis.
• According to the plain wording of Sub-Clause 21.2, the notice or submission that is required to be given within 28 days of the notice of intention to claim must cover three things: (i) the contractual basis; (ii) full and detailed particulars; and (iii) the evaluation of the claim. 
• The full and detailed particulars and the evaluation of the claim: Sub-Clause 21.2 allows for submissions to be made at subsequent periods, where an event, occurrence or matter has a continuing effect or where the Sub-Contractor is unable to determine if an event, occurrence or matter will be continuing, such that it is not practicable to comply with Sub-Clause 21.2.1. Under Sub-Clause 21.2.2, the developing understanding of the factual causes or events is permitted to have an impact only on the provision of full and detailed particulars and the evaluation of the claim.  The allowance to make subsequent submissions does not extend to the obligation to state the contractual basis.
• The “contractual basis”: The wording of Sub-Clause 21.2 is clear and unambiguous. Within the stipulated time, the Sub-Contractor is required to give notice of the contractual basis, not any possible contractual basis which may turn out not to be the correct basis.  The reference to the contractual basis would not preclude identifying more than one basis in the alternative or stating more than one basis in the notice or serving more than one notice each stating a contractual basis.  
• Interpretation: There is no justification in giving Sub-Clause 21.2.1 a narrow construction or strained interpretation.
• Contra proferentem: There was no ambiguity in Sub-Clause 21.2.1 that needed to be resolved by invoking the contra proferentem
• Finding of fact: The arbitrator did not make a finding of fact that the time stipulated is unrealistically short. What he said about this was a statement of opinion, rather than a finding of fact.
• Developing facts: Reliance on a developing understanding of the factual events was not considered to be a valid argument. Bauer gave notice in August 2011 stating the contractual basis as Variation or Sub-Contract Variation under Sub-Clause 21.1.6.  It could have given notice of a “like rights” claim under Sub-Clause 21.1.1, whether alternatively or cumulatively, within the stipulated time.  Under Sub-Clause 21.1, the period of 42 days only commences “after the event, occurrence or matter giving rise to the claim became apparent or ought reasonably to have become apparent to the Sub-Contractor”.
• Commercial purpose: Apart from providing the factual basis for the claim so that the receiving party is able to access the claims validity at a time when the facts giving rise to the claim are still fresh, there are two further commercial purposes for identifying the contractual basis within the stipulated period: first, finality and second, in a chain contract situation, the Contractor may need to know whether the Sub-Contractor’s claim would have to be passed up the line. The arbitrator’s interpretation may prejudicially affect this commercial purpose.
• If the only purpose of Clause 21 was to inform the JV of the factual basis for the claim so it could investigate the claim in time, it would have been worded in a similar way to certain clauses in the Main Contract.  But that is not how Clause 21 was worded and it is not permissible to interpret Sub-Clause 21.2.1 in such a manner as to re-write the plain language of the provision.

FIDIC

Some clauses in the FIDIC forms of contract also require a party giving notice of a claim to specify the contractual or legal basis of the claim in the notice or the supporting particulars as a condition precedent of that claim. What impact, if any, will this decision have on the FIDIC forms of contract?

The FIDIC Yellow Book 1999

The FIDIC Yellow Book 1999 separates Employer and Contractor claims.

Employer’s Claims

Sub-Clause 2.5 requires “notice” (to be given as soon as reasonably practicable after the Employer became aware of the event or circumstance giving rise to the claim), and “particulars”.  In the case of NH International (Caribbean) Limited v National Insurance Property Development Company Limited [2015][3] the Privy Council said that the wording of Sub-Clause 2.5 “makes it clear that, if the Employer wishes to raise such a claim, it must do so promptly and in a particularised form”.

The particulars must “specify the Clause or other basis of the claim” as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim. Sub-Clause 2.5 does not specify what will happen if the Employer subsequently changes the Clause or other basis of the claim. Compliance with Sub-Clause 2.5 is a condition precedent. 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 [Sub-Clause 2.5]”. The Guidance states (with emphasis added), “In order to be effective, the particulars should include the basis of the claim, with relevant Clause number(s), and detailed substantiation of the extension and/or payment being claimed”. Therefore, it would appear that a failure to give the correct particulars is not intended to render the notice invalid.  Further, as the obligation is to give particulars specifying the Clause or other basis of the claim “as soon as reasonably practicable”, arguably, there is more flexibility in changing the Clause or other legal basis of the claim than in the Maeda case which had a strict 28-day deadline.

Note too that Sub-Clause 2.5 distinguishes the “Clause” from the “basis of claim”. Therefore, the basis of claim may be much wider that a mere clause of the contract. Perhaps, it could be expressed as: (i) a claim under the contract; (ii) a claim for breach of contract; (iii) a claim in tort; (iv) a claim under the governing or other applicable law etc.  However, there is no reliable authority on this, and it would be dangerous to place so much reliance on the word “or”. Consequently, it would be wise for an Employer to note each and every clause that could possibly be implicated as well as any basis of claim for breach of contract, in tort, and under the governing or other applicable law etc.

Contractor’s Claims

Firstly: Sub-Clause 20.1 requires “notice” to be given no later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance. The Guidance states (with emphasis added), “Generally, there is no need for this notice to indicate how much extension of time and/or payment may be claimed, or to state the Clause or other contractual basis of the claim”. Therefore, it need only be a bare notice. The notice is a condition precedent. If the Contractor fails to give such notice within 28 days “the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim”.

Secondly: A fully detailed claim including “supporting particulars of the basis of the claim” is also required within 42 days after the Contractor became aware (or should have become aware) of the event or circumstance giving rise to the claim, or within such other period as may be proposed by the Contractor and approved by the Engineer. Sub-Clause 20.1 does not specify what will happen if the Contractor subsequently changes the basis of the claim and the Guidance does not assist. A failure to give the correct supporting particulars does not render the notice of claim lapsed or invalid but might affect the quantum of the claim: “Unless and until the particulars supplied are sufficient to substantiate the whole of the claim, the Contractor shall only be entitled to payment for such part of the claim as he has been able to substantiate”. This is a key difference from the Maeda case, which said that a failure to give a statement of the “contractual and/or other legal basis of the Claim” would render the notice of claim lapsed or invalid. On this basis, it is arguable that the decision in the Maeda case ought not apply to this clause.

The FIDIC Gold Book 2008 is different. In this form, Sub-Clause 1.3 provides that a Notice must include reference to the Clause under which it is issued, and Sub-Clause 20.1 (c) states that if the Contractor fails to provide the “contractual or other basis of the claim” within the required time, the Notice of claim is considered to be invalid. This has the same effect as if no Notice had been given in the first place so that the Employer has no liability in respect of the claim. Therefore, the decision in the Maeda case might be applied. If more time is required to establish the correct contractual or other basis of claim the Contractor might ask the Employer’s Representative for an extension of time or, failing that, there is specific wording in the FIDIC Gold Book for the DAB to be asked to overrule the given 42-day limit.

As stated above, the basis of claim may be much wider that a mere clause of the contract.

The FIDIC Yellow Book 2017

The FIDIC Yellow Book 2017 combines Employer and Contractor claims (Sub-Clause 20.2).

Firstly: Sub-Clause 20.2.1 requires “Notice” to be given no later than 28 days after the claiming Party became aware, or should have become aware, of the event or circumstance. This Notice is a condition precedent. If the claiming party “fails to give a Notice of claim within this period of 28 days, the claiming party shall not be entitled to any additional payment , the Contract Price shall not be reduced (in the case of the Employer as the claiming Party), the Time for Completion (in the case of the Contractor as the claiming Party) or the DNP (in the case of the Employer as the claiming Party) shall not be extended, and the other Party shall be discharged from any liability in connection with the event or circumstance giving rise to the Claim”. As above, this need only be a bare notice. Under Sub-Clause 1.3 (b) it must be identified as a Notice but does not need to include reference to the provision(s) of the Contract under which it is issued.

Secondly: Sub-Clause 20.2.4 requires a fully detailed claim including, among other things, “(b) a statement of the contractual and/or other legal basis of the Claim” (i) within 84 days after the claiming party became aware, or should have become aware, of the event or circumstance giving rise to the claim, or (ii) within such other period as may be proposed by the claiming party and approved by the Engineer. It is a condition precedent to state the contractual and/or other legal basis of the claim: “If within this time limit the claiming Party fails to submit the statement under sub-paragraph (b) above, the Notice of Claim shall be deemed to have lapsed, it shall no longer be considered as a valid Notice, and the Engineer shall, within 14 days after this time limit has expired, give a Notice to the claiming Party accordingly”. In other words, a failure to specify the contractual and/or other legal basis of the Claim will render the Notice of Claim lapsed (and the Claim potentially time-barred). As with the FIDIC Gold Book 2008, if further time is needed to establish the contractual or legal basis of the claim a party may seek an extension of time from the Engineer (or ask the DAB for the additional time, if time permits).

Sub-Clause 20.2.4 does not specify what will happen if the claiming party subsequently changes the contractual and/or legal basis of the claim, and the Guidance does not assist, but the risk of doing so appears greater in the FIDIC 2017 editions than the FIDIC 1999 editions. Having lawyers available (on Site) to analyse each and every claim and accurately establish the correct contractual and/or other legal basis within 12 weeks of a party becoming aware (or ought to have become aware) of the event or circumstances giving rise to the claim will be undesirably burdensome and costly.

Again, the contractual and/or other legal basis of claim may be much wider that a mere clause of the contract.

Arbitration

Sub-Clause 20.6 of the FIDIC Yellow Book 1999 and Sub-Clause 21.6 of the FIDIC Yellow Book 2017 states: “Neither Party shall be limited in the proceedings before the arbitrator(s) to the evidence or arguments previously put before the [DAB / DAAB] to obtain its decision…”.

This suggests that a party may change its legal arguments, at least, in arbitration proceedings. Does this include the contractual and/or other legal basis of claim in its notice, particulars, or fully detailed claim? Is the freedom to change arguments to be construed within the confines of the clauses notified? Such an argument appears not to have been considered in the Maeda case. 

1] UKSC 50.

[2] AC 1619.

[3] UKPC 37.

Airports Authority of Trinidad and Tobago v Jusamco Pavers Ltd[1] is an under reported FIDIC Yellow Book 1999 case. It considers: (1) delay in commencing arbitration, (2) replacement of the Engineer, and (3) whether an Engineer’s determination is a pre-requisite

Airports Authority of Trinidad and Tobago v Jusamco Pavers Ltd[1] is an under reported FIDIC Yellow Book 1999 case. It considers: (1) delay in commencing arbitration, (2) replacement of the Engineer, and (3) whether an Engineer’s determination is a pre-requisite to commencing arbitration.

Background

The parties entered into a FIDIC 1999 Yellow Book contract for the £165 million rehabilitation of the airport in Trinidad and Tobago and an upgrade of the Perimeter Road and Fence. The Employer was the Airports Authority of Trinidad and Tobago (AATT) and Jusamco Pavers Limited (JPL), the Contractor. Unusually, the Engineer named in this contract, Mr Varma Joadsingh, was an employee of AATT’s.

In November 2011, Mr Joadsingh appointed Mr Derek Hamilton of C&H Associates Limited as the resident engineer, pursuant to clause 3.2 of the Contract.  Mr Joadsingh suddenly left AATT’s employ shortly thereafter. JPL recognised the authority of the resident engineer, Mr Hamilton as the de facto Engineer in Mr Joadsingh’s absence.

A taking over certificate for part of the works was handed to AATT on 31 January 2012 and the remaining works were taken over on 18 April 2012. The Defects Notification Period was 365 days from the taking over of each part.

On 12 March 2013, AATT notified the Contractor, Jusamco Pavers Ltd (JPL), of defects on the asphalt paving works. Although it was the Engineer’s duty to notify JPL of any defects, these were accepted by JPL two weeks later, on 26 March 2013, without any question of AATT’s authority to notify JPL of them. JPL said it was fully committed to rectifying its defects.

Unusually, the retentions were released shortly afterwards on 3 May 2013, but despite the ostensible completion of both parties’ contractual obligations, the parties continued to work together to fix the defects between March 2013 and October 2015.

The Turning Point

There was a turning point in October 2015. AATT was advised to commence arbitration proceedings to preserve its contractual rights, although it wished to continue negotiation with JPL. AATT sent a letter of claim to JPL on 6 October 2015 which was followed two days later by a notice of arbitration.[1]

In response, JPL changed its position and stated that its obligations to rectify defects were limited and that most of the items which AATT wanted rectified were not its responsibility, despite having accepted responsibility for them earlier.

In late August 2015, AATT engaged Trintoplan to replace Mr Joadsingh as the Engineer, pursuant to clause 3.4 of the Contract, as Mr Hamilton had not been involved with the project following the taking over of the works.  In November 2015, after service of the notice of claim and the notice of arbitration, AATT asked Trintoplan to make a clause 3.5 determination in relation to the notices of claim and arbitration.

JPL contested Trintoplan’s authority, stating that the appointment had not been made properly and that the Contract had been completed in any event. Nevertheless, a draft determination was released by Trintoplan in November of 2016, with JPL again contesting Trintoplan’s authority and stating that Mr Joadsingh had not been properly replaced and so remained the true Engineer.

Trintoplan issued its final determination in December 2016, finding that there were defects and that JPL was liable for them. An addendum followed in February 2017, setting out the quantum. In mid-2017, a replacement contractor carried out the works.

AATT decided it had to proceed to arbitration and in early October 2017, asked JPL to agree on an arbitrator. By reply, JPL reiterated that Trintoplan did not have authority and that it did not recognise AATT’s belated claim. It also alleged that there was no recognised dispute.

AATT applied to the Court for the appointment of an arbitrator. JPL contested the application, claiming (amongst other arguments which have not been covered in this article) that AATT had inordinately delayed in pursuing the claim, that the Engineer’s determination had to be produced before a notice of arbitration was served and that regardless, the Engineer had not been correctly appointed.

The application was heard by Justice James Aboud.

Delay in Commencing Arbitration

JPL argued that delay, whether inordinate or not, must be a factor in determining whether or not to grant a discretionary remedy, relying on a passage from Commonwealth Affairs v Percy Thomas Partnership and Kier International Limited.[2] It argued that in this instance, the delay caused prejudice because the notice of arbitration was served in October 2015, more than 4 years after AATT took over the runway works in September 2011, meaning it could no longer pursue its subcontractors for sums owed to AATT. The limitation period in Trinidad and Tobago is 4 years from the date on which the action accrues.

The Court ultimately found that there was no inordinate delay, principally because the parties were attempting to amicably resolve matters for years and in particular, the fact that JPL had appeared to accept responsibility for the defects. Aboud J pointed out that between 2013 and October 2015, JPL voluntarily agreed to do the work, lessening any urgency for AATT to act.

 In relation to the 4-year limitation and any prejudice caused to JPL, Aboud J doubted that any prejudice had been caused, stating that JPL had not contacted any of its subcontractors, tried to pursue any claims or call any witnesses. He pointed out that if JPL had been carrying out remedial work for three years, it would be well aware of what its costs were.

Perhaps contractors alleging prejudice caused by an inability or difficulty in recovering sums from other parties should submit evidence that they have attempted to recover such monies, rather than merely pointing out the fact that it could be an issue.

Replacement of the Engineer

Clause 3.4 of the Contract says that when replacing an Engineer, at least 42 days’ notice must be given to the Contractor with details of the name, address, and relevant experience of the intended replacement Engineer. The clause then goes on to say that if the Contractor raises a reasonable objection as to the new Engineer’s appointment, the Employer cannot appoint that person. The clause is silent as to the position if the Contractor raises an unreasonable objection as to the new Engineer’s appointment.

In this case, AATT advised that Trintoplan would replace Mr Joadsingh, giving JPL only 14 days to agree, or confirm disagreement. JPL disagreed with the appointment within 7 days but did not raise any concerns or issues about Trintoplan’s qualifications, a point which was noted by the Court.

Aboud J voiced strong scepticism as to JPL’s reasons for contesting the appointment, believing that JPL likely suspected that the Engineer had been appointed as a precursor to arbitration, and that this was the reason it contested Trintoplan’s appointment. He even said that JPL would probably have objected to a report from Mr Hamilton as well, simply to avoid such a report.

Although he does not make a binding ruling, preferring to leave this issue to the arbitrator to determine, Aboud J makes it clear that he considers that in the event an unreasonable objection is made, it is open to the Employer to engage the new Engineer, notwithstanding that objection. 

Is the Engineer’s Determination a Pre-requisite to Bringing a Claim?

JPL further argued that clause 3.5 [Engineer’s determination] of the Contract is a precondition to issuing a notice of arbitration. That is, JPL argued that following the Employer’s claim in accordance with clause 2.5 [Employer’s Claims], an Engineer’s determination had to be issued in respect of that claim before the right to proceed to arbitration arises. 

In no uncertain terms, Aboud J rejected this argument, stating that it is not a condition precedent to have the Engineer’s determination before commencing arbitration. The Engineer’s determination is a temporary fix for the dispute and would be superseded by the arbitration determination anyway.

Although this case indicates that there is no reason for waiting for Engineer’s determination before proceeding to arbitration, in an earlier case from Trinidad and Tobago[3], it was found that it was necessary to comply fully with clause 2.5 [Employer’s Claims] or risk “the back door of set-off or cross claims [being] as firmly shut to it as the front door of an originating claim.” In that case, it was suggested that an Employer has no claim at all until all parts of clause 2.5 have been complied with – that is, the notice, the particulars and also the Engineer’s 3.5 determination. Employers would be well advised to complete the 2.5 process before advancing claims or counterclaims.

Covid-19 has had huge consequences around the world and unfortunately this looks set to continue. In this article we consider the protection and entitlements (for Force Majeure and otherwise) which may be available to parties under FIDIC contracts for the

Covid-19 has had huge consequences around the world and unfortunately this looks set to continue. In this article we consider the protection and entitlements (for Force Majeure and otherwise) which may be available to parties under FIDIC contracts for the pandemic and its consequences. We focus on the 1999 forms but briefly consider differences in the 2017 forms. We also consider the role that applicable laws may play and what parties should be aware of going forward.

Force Majeure under FIDIC 1999

Under the FIDIC 1999 forms of contract, if either Party is prevented from performance of its obligations by Force Majeure (‘FM’) then, subject to giving notice, it may be excused performance of those obligations. The Contractor may also be entitled to an extension of time and Cost.

Definition of FM

Clause 19.1 contains a definition of FM. It is ‘an exceptional event or circumstance (a) which is beyond a Party’s control, (b) which such Party could not reasonably have provided against before entering into the Contract, (c) which, having arisen, such Party could not reasonably have avoided or overcome, and (d) which is not substantially attributable to the other Party.’ For the definition to be met, these five criteria (‘exceptional’ plus the criteria (a) to (d)) must be satisfied.

Clause 19.1(i) to (v) contains a list of example events or circumstances which, if they otherwise satisfy the definition, could constitute FM. If an event does not appear on the list, this does not mean that it may not otherwise satisfy the definition. The list does not include ‘epidemic’ or ‘pandemic’ but it is likely that the Covid-19 pandemic and many of its consequences will otherwise satisfy the definition of FM.[1]

Protection that may be available to the Employer for FM

If the Employer is prevented from performing any of its obligations by FM it may, subject to giving notice, be excused performance of these obligations.

The key Employer obligation that might be prevented because of Covid-19 and its consequences is the obligation to give the Contractor access to and possession of the Site (clause 2.1). This prevention may occur, for example, where governments have imposed Site closures to prevent spread of the virus.[2] Other obligations that might be prevented include the provision of free issue materials or Employer’s Equipment, the obtaining of licences or approvals, co-operation and the obligations which the Engineer has under the Contract. If the Engineer or its personnel are unable to supervise the Works, progress will come to a halt.

If an Employer is prevented from performing any of its obligations by FM and wishes to be excused performance, it should give notice under clause 19.2. This notice should specify the event or circumstances constituting the FM and the obligations whose performance is or will be prevented. It should be given within 14 days after the Employer became aware, or should have become aware, of the relevant event or circumstance constituting FM.

As a result of giving the clause 19.2 notice, the Employer is excused performance of the prevented obligations for as long as the FM prevents it from performing them. However, performance by the Employer of its payment obligations is not excused.

In principle, the Employer should give notice under clause 19.2 to prevent its non-performance being a breach of contract. However, this notice will constitute an admission and an assertion by the Employer that it is prevented from performing an obligation that otherwise it should be performing. Therefore, the Employer should only give this notice if it is certain that the FM is preventing it from performing its obligations in an important way.

The Employer should be aware that once FM has been notified under clause 19.2, the door is open to a potential termination of the Contract under clause 19.6. This provides that either Party may terminate the Contract if the execution of substantially all the Works in progress is prevented for a continuous period of 84 days, or for multiple periods which total more than 140 days, by reason of FM in respect of which a clause 19.2 notice has been given. It is possible that some Contractors will take this opportunity to terminate the Contract if, for example, prior to Covid-19 the Contract had become loss-making.

If the Employer gives notice under clause 19.2, it is required under clause 19.3 to use all reasonable endeavours to minimise delay in the performance of the Contract as a result of the FM and to give notice to the Contractor when it ceases to be affected by the FM.

Protection that may be available to the Contractor for FM

Just like the Employer, if the Contractor is prevented from performing any of its obligations by FM it may, subject to giving notice, be excused performance of these obligations.

Key Contractor obligations which may be prevented because of Covid-19 and its consequences include the Contractor’s obligation to proceed with the Works with due expedition and without delay (clause 8.1) and to complete the Works within the Time for Completion (clause 8.2). In some countries where lockdowns are imposed, the Contractor’s Personnel may be prevented from travel to and work at the Site and Goods may be prevented from reaching Site.

If a Contractor is prevented from performing any of its obligations by FM and wishes to be excused performance it should, like the Employer, give notice under clause 19.2.

As mentioned above, this notice opens the door for a potential termination under clause 19.6 and, like the Employer, the Contractor is required under clause 19.3 to minimise delay and to give notice when it ceases to be affected by the FM.

Extension of time and Cost for FM

Under clause 19.4(a), if the Contractor is prevented from performing obligations by FM for which it has given notice under clause 19.2, and suffers delay by reason of the notified by FM it may, subject to giving notice under clause 20.1, be entitled to an extension of time.

Similarly, under clause 19.4(b), if the Contractor is prevented from performing obligations by FM for which it has given notice under clause 19.2, and incurs Cost by reason of the notified FM it may, subject to giving notice under clause 20.1, be entitled to payment of this Cost. This entitlement only arises if the FM is an event or circumstance of the kind listed in clauses 19.1(i) to (iv) and, for some of these events, only if they occur in the ‘Country’.[3]

The events listed in clauses 19.1(i) to (iv) can loosely be described as ‘man-made’ (war, rebellion, riot, etc) although some (ionising radiation for example) are not necessarily ‘man-made’. ‘Natural catastrophes’ (which appear in clause 19.1(v)) are not compensated with Cost. Parties signing up to FIDIC contracts must be aware of this risk allocation.

Covid-19 does not fall within the events listed in clauses 19.1(i) to (iv) since epidemic, or pandemic, do not feature. If anything, Covid-19 would most likely be categorised as a ‘natural catastrophe’, for which Cost is not compensated.

Accordingly, it seems that the Contractor will only be entitled to Cost for Covid-19 if the consequences of the pandemic fall within the limited circumstances listed in clauses 19.1(i) to (iv). So, for example, if a consequence of the pandemic is the assumption of military power[4] to enforce a lockdown, or riots[5] in case of dire shortage of food or medicine, the Contractor may be entitled to Cost. Contractors may try to argue that a lockdown equates to ‘lockout’[6] although, as this appears by ‘strike’, it was presumably intended to refer to labour conflict and (it is suggested) the list would need to be given a broad interpretation for this argument to succeed.

The limited circumstances in which Cost is compensated may seem ‘unfair’ to the Contractor in the context of Covid-19. Some DABs or arbitral tribunals may, in due course, sympathise with the Contractor’s position and may feel encouraged to do so by guidance issued by some governments.[7] However, what may be ‘fair’ in a given situation may not reflect the parties’ pre-agreed allocation of risk and may raise difficult questions about the perspective from which ‘fairness’ is to be judged.

Other provisions in FIDIC 1999

The Contractor may be entitled to time or money in respect of Covid-19 and its consequences under other provisions, even where there is no FM, or in addition to FM. Entitlement is always subject to giving notice under clause 20.1.

These clauses are:

• Clause 8.4 (FIDIC 1999 Red and Yellow Books). Under this clause, the Contractor may be entitled to an extension of time if it is or will be delayed by Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions. There is no equivalent provision the FIDIC 1999 Silver Book. ‘Unforeseeable’ means not reasonably foreseeable by an experienced contractor by the date for submission of the Tender. Although Covid-19 is classed by the WHO as a pandemic this, it is suggested, is analogous here to an epidemic. The pandemic, or governmental actions in respect of Covid-19 including the implementation of measures to try to stop the virus spreading, are likely to cause Unforeseeable shortages in personnel or Goods.
• Clause 8.5. Under this clause, the Contractor may be entitled to an extension of time where it has diligently followed procedures laid down by public authorities in the Country, but those authorities delay or disrupt the Contractor’s works and this delay or disruption was Unforeseeable. This may apply to action taken by the government or authorities in the Country in respect of Covid-19 which delays or disrupts the Contractor, for example, imposing a lockdown.
• Clause 13.7.[8] Under this clause, the Contractor may be entitled to an extension of time or Cost if the Contractor suffers delay or incurs Cost as a result of changes in the ‘Laws of the Country’ or changes to the interpretation of those Laws. ‘Laws’ is widely defined. In some countries, measures to deal with Covid-19 have been introduced under existing Laws or those existing Laws have not been interpreted any differently than before. In these cases, clause 13.7 may not apply. In other countries, new Laws have been introduced to deal with Covid-19, so clause 13.7 may apply.

FIDIC 2017

Exceptional Events

In the 2017 forms, FIDIC abandons the term ‘Force Majeure’, possibly because it has a defined meaning in some civil law systems, and instead uses the term ‘Exceptional Events’, which are dealt with in clause 18. As a result, the requirement for the event or circumstance to be ‘exceptional’ no longer features in the definition. Strikes and lockouts are separated from the ‘riot’ item in the list of events in clause 18.1. As in the 1999 forms, the events on this list may give entitlement to Cost except for the last item which is still ‘natural catastrophes’. In the 2017 forms, if the Exceptional Event has a continuing effect, the affected Party must give notice under clause 18.2 describing the effect every 28 days after giving the first notice.

Advance warning

Clause 8.4 contains a new requirement for a Party or the Engineer to give advance warning about ‘any known or probable future events or circumstances’ which may adversely affect (essentially) the outcome of the Works. This obligation to give advance notice will likely occur before the moment from which time starts running for the clause 18.2 notice of an Exceptional Event.

Unforeseeable shortages

Clause 8.5 (Red and Yellow Books) gives the Contractor entitlement to an extension of time in case of Unforeseeable shortages in the availability of personnel or Goods or Employer-Supplied Materials caused by epidemic or governmental actions. In the Silver Book, the equivalent entitlement only arises in case of an Unforeseeable shortage of Employer-Supplied Materials.

Applicable Laws

Parties should keep in mind that, in addition to the Contract, the applicable Laws may give protection in respect of Covid-19 and its consequences or may give the Contractor entitlement to time or cost. In some jurisdictions, legislation has been enacted specifically to give parties relief from the consequences of non-performance of contracts because of the pandemic.[9] In other jurisdictions, governments have declared that the pandemic is a force majeure event for all contracts.[10] Parties to FIDIC contracts should ensure that they are informed of such measures and should be aware of potential conflicts between this sort of legislation or decree and the provisions of their contracts which may otherwise apply.

Evolving situation

The consequences of Covid-19 are constantly evolving. Some countries remain in full lockdown while others are slowly easing out of lockdown. Further lockdowns remain a possibility in case of future spikes of the virus.

It is possible that some FIDIC contracts will be terminated because of continued prevention (clause 19.6) or that parties may be discharged from further performance because of impossibility (clause 19.7). As lockdowns ease, parties may no longer be prevented from performing their obligations but, instead, the Works may be more costly, delayed, or less efficient, especially where supply chains are involved. Claims for delay, disruption and additional cost as a result of the pandemic therefore seem likely. It is important that parties maintain full and accurate records of prevention, delays and disruption that may have been caused as a result of the pandemic.

Parties may be trying to cooperate and to act as responsibly and fairly as they can in the current conditions. This may be required by law in some jurisdictions, for example, those that require parties to act in good faith. In other jurisdictions, governments may intervene to introduce measures requiring cooperation where the pandemic is concerned or they may issue guidance notes to encourage this.[11]

Conclusion

Although applicable Laws or government interventions as a result of Covid-19 may affect FIDIC contracts throughout the world, in many cases the parties’ strict contractual rights and obligations, which reflect their earlier decisions regarding risk allocation, are likely to remain in place. It is therefore important that parties undertake careful periodic reviews of their contracts in light of the evolving Covid-19 situation to ensure that they are fully aware of these rights and obligations and that they continue to give appropriate notices to protect their positions.

[1] That said, there is an argument that the pandemic itself (as opposed to its consequences) is not ‘exceptional’ because pandemic flus have occurred before. 

[2] Scotland, for example.

[3] ‘Country is defined as the country in which the Site, or most of it, is located where the Permanent Works are to be executed.

[4] ‘Military … power’ is listed in clause 19.1(ii). The English version of the FIDIC forms refers to ‘military or usurped power’ whereas the Spanish version refers to ‘usurpación del poder o asunción militar de esté’ which roughly translates as ‘usurpation of power or military assumption of power’ and the French version refers to ‘putsch militaire ou usurpation de pouvoir’ which roughly translates as ‘military putsch or usurpation of power’. So, whereas the English version covers a military or other coup d’état as well as the use of military power by the incumbent government, the Spanish and French versions do not seem to allow for the latter.

[5] ‘Riot’ is listed in clause 19.1(iii).

[6] ‘Lockout’ is listed in clause 19.1(iii).

[7] For example, on 7 May 2020 the UK government published non-statutory guidance to parties to contracts impacted by the Covid-19 emergency entitled ‘Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency’. At paragraph 15, this ‘strongly encourages’, among other things, ‘responsible and fair behaviour’ in relation to ‘requesting, and allowing, extensions, substitute or alternative performance and compensation, including compensation for increased cost or additional performance.’

[8] Arguably clause 13.7 requires notice to be given under that clause as well as a clause 20.1 notice.

[9] For example, in Singapore the ‘COVID-19 (Temporary Measures) Act 2020’.

[10] For example, in Iraq. 

[11] For example, the UK government’s publication referred to above entitled ‘Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the COVID-19 emergency’.  

FIDIC is concerned about its image. It says that heavily amending the FIDIC forms of contract impacts upon the FIDIC brand and that this is damaging FIDIC’s reputation. It seeks to address this with the introduction of five Golden Principles. But the Golden Principles are merely aspirational; they are not binding and have no contractual effect. Does this render them a pointless gesture ‘trying to hold back the tide’?

FIDIC is concerned about its image. It says that heavily amending the FIDIC forms of contract impacts upon the FIDIC brand and that this is damaging FIDIC’s reputation. It seeks to address this with the introduction of five Golden Principles. But the Golden Principles are merely aspirational; they are not binding and have no contractual effect. Does this render them a pointless gesture ‘trying to hold back the tide’?

Introduction: why has FIDIC issued its Golden Principles?

In the FIDIC 1999 suite of contracts (Red, Yellow and Silver Books) the Conditions of Contract comprise:

• The Particular Conditions; and
• The General Conditions.

In the FIDIC 2017 suite of contracts (Red, Yellow and Silver Books) the Conditions of Contract comprise:

• The Particular Conditions Part A – Contract Data;
• The Particular Conditions Part B – Special Provisions; and
• The General Conditions.

In both the 1999 and 2017 suites, amendments to the General Conditions themselves are not recommended. They are FIDIC copyright and cannot legally be reproduced or amended without FIDIC’s permission. FIDIC does not offer an editable ‘Word’ version. It is intended that the Particular Conditions will make the Contract both Site and project specific.

The Particular Conditions Part A – Contract Data in the FIDIC 2017 forms is essentially a table setting out the unique requirements of the Contract. It is the equivalent of the Appendix to Tender in the FIDIC 1999 Red and Yellow Books. It includes blanks for things such as the Employer’s name and address, the Engineer’s name and address, Time for Completion, the Defects Notification Period, etc. It should not be complicated to complete and is relatively uncontroversial.

The Particular Conditions Part B – Special Provisions in the FIDIC 2017 forms are more complicated. They are the equivalent of the Particular Conditions in the FIDIC 1999 Red, Yellow and Silver Books. They add to, or modify, the General Conditions.  It is intended that they comprise limited Site and project specific modifications, and those which are necessary to comply with the mandatory local law.  Sample ‘special provision’ clauses are included in the Guidance section of both the 1999 and 2017 suites, but it is acknowledged that the parties (in particular, the Employer) may wish to tailor the General Conditions with their own ‘special provision’ clauses, and that this is not necessarily bad practice.

FIDIC thinks that heavy or poor amendments are changing their contracts to such an extent that they are no longer recognisable as FIDIC forms.  Indeed, it is rare to see a FIDIC contract used in the manner originally intended by FIDIC.

Therefore, FIDIC ‘strongly recommends that the Employer, the Contractor and all drafters of the Special Provisions take all due regard of the five FIDIC Golden Principles’ [1]. FIDIC say they are fundamental to the FIDIC philosophy. They are listed in the Guidance section of the FIDIC 2017 forms of contract and have been explained in ‘The FIDIC Golden Principles’ (First Edition 2019)[2] .

Although introduced in the FIDIC 2017 editions, FIDIC would like to see these Golden Principles considered when drafting amendments to both the FIDIC 1999 and 2017 books. 

The Golden Principles: what are they?

GP1: The duties, rights, obligations, roles and responsibilities of all the Contract Participants must be generally as implied in the General Conditions and appropriate to the requirements of the project.

The role etc. of Employer, Contractor, Engineer, Employer’s Representative, DAAB, Subcontractor etc. should not be significantly changed from that which is ‘generally as implied’ in the General Conditions.  This wording is vague and subjective.  FIDIC suggests:

• Removing the Engineer’s obligation to consult with both parties before making a determination would not be compliant with GP1.
• Requiring an Engineer to obtain the Employer’s approval before making a determination, or granting an extension of time, would not be compliant with GP1.
• Removing the Engineer’s obligation to provide supporting particulars when giving notice of an agreement or determination would not be compliant with GP1.

The role etc. of Employer, Contractor, Engineer, Employer’s Representative, DAAB, Subcontractor etc. must also be ‘appropriate to the requirements of the project’. Again, this wording is vague and subjective.  FIDIC suggests:

• Requiring the Contractor to assume the risk of Unforeseeable physical conditions under the FIDIC Red, Pink or Yellow Books would not be compliant with GP1.
• Leaving insufficient time for tenderers to scrutinise and check the Employer’s Requirements under the FIDIC Silver Book would not be compliant with GP1.

GP2: The Particular Conditions must be drafted clearly and unambiguously.

A deleted General Condition must be replaced with a Particular Condition that covers the same scope, and must not leave any roles, duties, obligations, rights and risk allocation undefined; nor must it disturb the integrity and consistency of the General Conditions.

Any changes to the General Conditions must include specific reference to the relevant sub-clause numbers. The Particular Condition must clearly state whether the change is an addition to the original text, an omission of the original text, a replacement of the original text, or an amendment to the original text etc.

Clarifications and tenderers’ inquiries made during the Tender period must be expressly included in the precedence of Contract documents. They must be well-organised, consistent and refer specifically to the Contract documents.

Agreements and understandings reached between the Employer and Contractor during the Tender period must also be expressly included in the precedence of Contract documents. They must be recorded and incorporated into the Contract by Addenda and referred to in the Letter of Acceptance and/or the Contract Agreement.  FIDIC suggests: 

• Deleting a general condition and writing ‘not used’ would not be compliant with GP2.
• Failing to provide a clear statement as to how a Particular Condition relates to a General Condition by way of addition, omission, replacement or amendment would not be compliant with GP2.
• Documenting modification to the Contract during the Tender negotiations in emails would not be compliant with GP2.

Note: whilst the Golden Principles seek to prevent contracts that are unclear or ambiguous, local law will apply when construing the wording of contracts that are unclear or ambiguous.

GP3: The Particular Conditions must not change the balance of risk/reward allocation provided for in the GCs.

This overlaps with GP1 as changing roles etc. will inevitably alter the fair and balanced risk/reward allocation.

Construction contracts are sensitive to a large matrix of hazards and risks.  FIDIC adopts a fair and balanced risk/reward allocation in the General Conditions.  It says this complies with the Abrahamson Principles  as refined by Nael Bunni : i.e. (i) which party can best control the risk and/or its associated consequences, (ii) which party can best foresee the risk, (iii) which party can best bear that risk and (iv) which party ultimately most benefits or suffers when the risk eventuates.

It is true that, whilst it is unlikely that the parties will ever truly agree what is a fair and reasonable balance of risk, it would short-sighted to simply ‘off-load’ the risk on to the party with the weakest bargaining power.  Such an approach will rarely achieve the greatest value for money.  However, what if the Contractor has equal bargaining power and is genuinely willing to take a greater risk (for example, in respect of Unforeseeable physical conditions) in exchange for more money? Should commercial parties not be free to negotiate risk/reward as they choose?  FIDIC suggests:

• Requiring the Contractor to design the majority of the Works under the FIDIC Red Book (or FIDIC Pink Book) would not be compliant with GP3.
• Requiring the Contractor to assume the risk of Unforeseeable physical conditions under the FIDIC Red, Pink or Yellow Books would not be compliant with GP3.
• Requiring the Contractor to be responsible or liable for the Works carried out by its Subcontractors would not be compliant with GP3.
• Omitting the Contractor’s entitlement for time and/or money for the Employer’s failure to give access to, and possession of, the Site (within the prescribed period) would not be compliant with GP3.

GP4: All time periods specified in the Contract for Contract Participants to perform their obligations must be of reasonable duration.

FIDIC prescribes balanced time limits in the General Conditions. FIDIC suggests modifications may be made to ‘default time periods’ by agreement, i.e. those which are qualified by the phrase ‘unless otherwise agreed’, but that modifications ought not to be made to ‘fixed time periods’, i.e. those not so qualified.  In fact, there are very few default time periods: for example, in the Yellow Book 1999 (sub-clauses 9.1, 12.1 and 20.2) and still fewer in the Yellow Book 2017 (sub-clauses 12.1 and 21.1).

Where modifications are made, durations must not be increased or decreased excessively. Any changed period must be reasonable and proportionate to the obligation. This is, of course, subjective and may give rise to disagreement.  FIDIC suggests:

• Requiring a Contractor to give notice of an event or circumstance that might give rise to a claim within 7 days after the Contractor became aware, or should have become aware, of the event or circumstance (rather than the 28 days prescribed in the General Conditions) would not be compliant with GP4.
• Requiring a Contractor to give 3 months’ notice of an intention to suspend the Works (rather than the 21 days prescribed in the General Conditions) would not be compliant with GP4.

GP5: Unless there is a conflict with the governing law of the Contract, all formal disputes must be referred to a Dispute Avoidance/Adjudication Board (or a Dispute Adjudication Board, if applicable) for a provisionally binding decision as a condition precedent to arbitration.

The Contract must include a DAAB or DAB (unless incompatible with the local mandatory law).  FIDIC suggests:

• Deleting all the clauses that refer to the DAAB/DAB would not be compliant with GP5.
• Precluding Engineer’s determinations from being referred to DAAB/DAB would not be compliant with GP5.

This is controversial because in many jurisdictions (particularly in the Middle East) it remains common for the DAB or DAAB provisions to be deleted from FIDIC-based contracts.

It is also worth noting that the Golden Principles appear to devalue arbitration. For example, there is no requirement for the seat of arbitration to be a neutral country or one that is recognised under the New York Convention so that the award is enforceable. Nor is there any requirement to use an internationally acceptable law of arbitration. This may be, in part, because there is no provision for these things in the Contract Data / Appendix to Tender.

Conclusion: status and enforceability

Although FIDIC describes the Golden Principles as ‘inviolable and sacrosanct’, they are merely aspirational; they are not binding and have no contractual effect. They do not fall within the definitions of Contract or Contract Documents and are not included in the priority of documents provision in either the FIDIC 1999 or the 2017 editions.  If the Golden Principles are not honoured, the FIDIC licence permitting use of the Contract will not be jeopardised, and compliance is unlikely to be made a condition of lending by the multilateral development banks.  The best that FIDIC can suggest is that the parties may not advertise that the project is based on a FIDIC form; but how is FIDIC going to enforce that?

Even if they were made enforceable, the Golden Principles are vague and any breach of them subjective. Potentially, they risk driving Employers into using other forms of contract.

What they do highlight is that the balance of power may be slowly changing. It is becoming less acceptable for the Employer to impose ridiculously onerous contract terms on the Contractor. Good EPC contractors are an endangered species. Some have gone out of business and a good number still in business cannot continue to sustain significant losses; that situation is stark and real.

[1] FIDIC 2017, Red, Yellow and Silver Books

[2] http://fidic.org/sites/default/files/_golden_principles_1_12.pdf

The recent English case Sumitomo Mitsui Banking Corporation Europe Limited v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm) highlights that where an on demand bond is assigned and a demand then made under that bond, the beneficiary will need to be sure not only that the demand is compliant with the terms of the bond but also that the assignment was effective in the first place.

The recent English case Sumitomo Mitsui Banking Corporation Europe Limited v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm) highlights that where an on demand bond is assigned and a demand then made under that bond, the beneficiary will need to be sure not only that the demand is compliant with the terms of the bond but also that the assignment was effective in the first place.

On demand bonds

A construction contract will often require the contractor to provide security to the employer in the form of bonds or guarantees. 

On large international projects, payment under these bonds is almost always ‘on demand’, meaning that – always depending on the wording of the bond – the security provider (typically a bank, specialist surety or insurance company) is required to pay the employer a specified sum of money on the occurrence of a particular event or presentation of a particular document.

If the employer requests payment under the bond (known as a ‘demand’ or ‘call’) the security provider will generally not be obliged or entitled to obtain information about the underlying construction contract or circumstances to determine whether it should make a payment. Instead, the bond will set out the formalities with which the employer must comply before the security provider will pay the bond amount. It may even include a pro forma letter of demand the terms of which are negotiated by the parties before the bond is provided. A simple demand issued by the employer may be all that is required but, usually, a statement that the contractor is in breach of its obligations is also required. 

Absent fraud (or, in some jurisdictions, unconscionability) the security provider will be required to make payment if a compliant demand is made. The courts often require that a demand strictly complies with the bond because this is the only protection afforded to the security provider. The extent to which strict compliance is required depends on the interpretation of the bond in question.

Assignment

In English law, contractual assignment usually involves the transfer of the benefit of contractual rights from a contracting party (the assignor) to a third party (the assignee). The assignee may enforce the rights that have been assigned against the other contracting party.

There are a number of reasons why contractual rights may be assigned. In a construction context, an employer may assign its rights under the project documents – the construction contract, appointments of the professional team and any security provided by the contractor, etc – to its funder by way of security.

The right to assign a contract may be excluded altogether or qualified. A contract may provide that only one of the parties may assign, that only certain rights may be assigned, it may limit the right to assign to a class of third parties, or it may make assignment conditional upon the other contracting party giving consent. Provisions like this may appear not just in the construction contract but also in security provided by the contractor such as performance or retention bonds.

The Sumitomo case

In Sumitomo the English High Court had to consider whether purported assignments of a performance bond and a retention bond were effective and whether demands made by the assignee on both bonds were valid.

Facts

Resource Recovery Solutions Derbyshire Ltd (RRS) entered into a contraction contract with Interserve Construction Ltd (ICL) for a waste treatment facility in England. Interserve PLC (Interserve) was the guarantor. ICL provided two bonds to RRS, both issued by Euler Hermes (EH).

The first was a performance bond to protect RRS including for an ‘Insolvency Default’ of ICL or Interserve. In such event, a demand for payment of the bond should be ‘signed by a director of the Employer’. The bond defined RRS as the ‘Employer’ and provided that this term included ‘all permitted assignees under this Bond’. Pursuant to clause 8 of the bond, RRS was to repay to EH any payment in respect of a claim under the bond which was held by a court to be higher than the corresponding liability of ICL. Assignment of the bond was permitted by clause 9 ‘subject to the assignee confirming to [EH] in writing its acceptance of [RRS’s] repayment obligation’.

The second was a retention bond to protect RRS including upon the occurrence of an ‘event’ which included the appointment of administrators to Interserve. It required a demand for payment of the bond to ‘bear the signature of a duly authorised officer of the Employer’. The retention bond defined RRS as the ‘Employer’ but there was no provision that this term was to include assignees. Assignment was permitted under clause 6 but there was no restriction regarding the repayment obligation like there was in the performance bond.

RRS entered into a borrower debenture with Sumitomo Mitsui Banking Corporation Europe Ltd (SMBCE) on the same date as the performance bond. By this debenture, RRS assigned the benefit of the performance bond and the retention bond to SMBCE and gave SMBCE a power of attorney to perform any act in RRS’s name and on its behalf.

RRS sent EH for each of the performance bond and the retention bond a ‘notice of assignment and acknowledgement of receipt’. EH signed and returned the notice for the performance bond (it did not sign or return the notice for the retention bond but nothing turned on this).

Interserve subsequently entered into administration. It was not in dispute that this constituted an ‘Insolvency Default’ under the performance bond and an ‘event’ under the retention bond.

As a consequence, and shortly before expiry of the performance bond, SMBCE served demands on EH under both the performance bond and the retention bond. A director of SMBCE signed each demand twice; the first signature was for and on behalf of SMBCE and the second was for and on behalf of RRS as its attorney.

EH refused to pay the bond amounts and SMBCE brought proceedings in respect of payment.

The performance bond

In respect of the performance bond, EH argued that there had not been an effective assignment. Although the performance bond permitted assignment of the benefit of the bond, this was ‘subject to the assignee confirming to [EH] in writing its acceptance of [RRS’s] repayment obligation’ (clause 9 of the bond). SMBCE had not accepted this repayment obligation prior to the purported assignment or any time after. Moreover, EH had not agreed in writing to an assignment to SMBCE in the absence of such a confirmation.

SMBCE argued that it was not required to accept the repayment obligation before an assignment was effected. This was anyway impossible because the assignment took place on the same date as the performance bond so at that date there was neither an assignee nor a bondsman for the purposes of clause 9. Moreover, the ‘notice of assignment and acknowledgement of receipt’ which EH had signed for the performance bond was either an agreement that there was an effective assignment or a waiver of the requirement to accept the repayment obligation.

The judge rejected SMBCE’s arguments. This meant that there was not an effective assignment vis-à-vis EH and that SMBCE did not become a ‘permitted assignee’.

SMBCE therefore had to rely on its alternative case. This was that if there was no effective assignment, it was RRS which could make the claim on the performance bond and RRS had done just that, because the demand was signed by SMBCE as attorney for RRS pursuant to the power of attorney.

The judge found that the requirement in the performance bond that a demand is ‘signed by a director of the Employer’ covered a case where there was a signature by a director of a company which held a valid power of attorney from the Employer where such power of attorney extended to the execution and delivery of the notice. The demand on the performance bond by RRS through SMBCE as the holder of a power of attorney was therefore valid. Presumably, an order for payment of the performance bond to RRS could be made if RRS was joined to the proceedings.

The retention bond

In respect of the retention bond, there was no restriction on assignment comparable with that in the performance bond. It was not in dispute that the retention bond had been effectively assigned to SMBCE. The issue was instead that the retention bond did not include an express extended definition of ‘Employer’ to include permitted assignees. The question was therefore whether a demand signed by the officer of an assignee could count as a duly authorised officer of the Employer.

The judge found that it could. The retention bond specifically contemplated that it may be assigned. It must therefore have been contemplated that, post-assignment, the assignee may potentially make a demand on the bond. The retention bond was accordingly a valid demand by SMBCE as assignee. The fact that the demand was also signed by a director of SMBCE as attorney for RRS meant in any event that there was a signature of a duly authorised officer of RRS.

Conclusion

The failure to comply with the terms of the performance bond in respect of assignment would have been fatal to SMBCE’s recovery under the bond were it not for the ‘belt and braces’ approach taken by SMBCE in signing the demand on its own behalf and also on behalf of RRS under the power of attorney.

With the commercial and financial pressures of today’s world, we can expect to see more challenges to bond calls. Great care should be taken to comply with the terms of the bond both in respect of assignment and demands for payment.

In some cases, it may be possible to cure a defective demand by issuing a fresh one. However, if the bond is close to its expiry, as was the performance bond in Sumitomo, it may too late by the time the defect is discovered.

In all construction contracts, one of the central principles is the Employer’s obligation to pay the contract price. The Contractor will be wary about the Employer’s financial standing and ability to pay and concerned to ensure that payments are made on time and that effective remedies are available in case of late or non-payment. The FIDIC standard forms of contract contain provisions dealing with these aspects.

In all construction contracts, one of the central principles is the Employer’s obligation to pay the contract price. The Contractor will be wary about the Employer’s financial standing and ability to pay and concerned to ensure that payments are made on time and that effective remedies are available in case of late or non-payment. The FIDIC standard forms of contract contain provisions dealing with these aspects.

Security for payment by the Employer
The FIDIC forms do not require the Employer to provide security for its payments to the Contractor and it is unusual for the Employer to provide such security. That said, the Guidance for the Preparation of Particular Conditions, included within each FIDIC book, contains example provisions which contemplate some form of Employer payment guarantee in two circumstances. 

The first (which appears in the 1999 RB and SB and is a provision that may be required by a financing institution) may provide that any portion of the contract value which is to be paid directly by the Employer upon shipment of items of Plant is to be made by an irrevocable letter of credit issued by the Employer in favour of the Contractor. The second (which appears in the 1999 and 2017 RB, YB and SB) may apply if the Contractor is prepared to arrange interim finance for the project. In this case, the Contractor may require a payment guarantee by the Employer in respect of payments which the Employer is (eventually) required to make. These editions include at Annex G an example Employer payment guarantee in the form of an on-demand bond, although the entity issuing the security may of course use its own form.

Evidence of Employer’s financial arrangements
The FIDIC forms contain at clause 2.4 provisions intended to reassure the Contractor about the Employer’s ability to comply with its payment obligations.

There will potentially be detailed negotiations about clause 2.4, especially if financing institutions are involved. They may seek to amend the clause to limit the Contractor’s rights or to require the Employer to make payments from its own resources if funds under the financing arrangements are insufficient to meet the payments due to the Contractor. It may be the case that financing institutions will not pay for significant variations or additional costs incurred as a result of Employer-caused delay or disruption, in which case the Contractor will need to satisfy itself that the Employer has funds from other sources to pay these amounts. 

1999 editions

In the 1999 editions, the Contractor may request the Employer to provide ‘reasonable evidence’ that financial arrangements have been made and are being maintained which will enable the Employer to pay the Contract Price, as estimated at that time, in accordance with clause 14.  The Employer must provide this evidence within 28 days of the request. If the Employer intends to make any material change to its financial arrangements, it is required to give notice to the Contractor with detailed particulars.

Clause 2.4 does not explain what ‘reasonable evidence’ is or whether this is a subjective or objective test, nor does it state who should carry out the estimate of the Contract Price. These are potential areas of disagreement.

If the Employer fails to comply with clause 2.4, the Contractor may (after giving notice) suspend work or reduce the rate of work under clause 16.1, ‘unless and until’ it receives the ‘reasonable evidence’. It therefore appears that only an Employer’s failure to give ‘reasonable evidence’, and not a failure to give notice of an intention to change financial arrangements, gives the Contractor a right to suspend. If the Contractor does not receive the ‘reasonable evidence’ within 42 days after giving notice under clause 16.1, the Contractor is entitled to terminate under clause 16.2 after giving further notice. Notwithstanding the above, protection of the Contractor is limited because there is nothing it can do if the Employer notifies an adverse change in its financial arrangements.

2017 editions

Clause 2.4 is amended in the 2017 editions. 

The Employer must now provide in the Contract Data details of its financial arrangements. If the Employer intends to make any material change to these arrangements affecting its ability to pay the Contract Price remaining to be paid at that time, as estimated by the Engineer (RB and YB) or Employer (SB), or if it has to do so because of changes in its financial situation, the Employer must give immediate notice to the Contractor with detailed supporting particulars.  

The Contractor may still request the Employer to provide ‘reasonable evidence’ of its financial arrangements but this is no longer a general right and is restricted to three situations: (i) if the Contractor receives a Variation with a price greater than 10% of the Accepted Contract Amount (YB and RB) or Contract Price (SB); (ii) if the Contractor does not receive payment in accordance with clause 14.7; and (iii) if the Contractor becomes aware of a material change in the Employer’s financial arrangements which has not already been notified under clause 2.4. If the Employer receives this request it must provide the ‘reasonable evidence’ within 28 days. There is still no explanation about what may constitute ‘reasonable evidence’.

If the Employer fails to provide the ‘reasonable evidence’ in accordance with clause 2.4 and such failure constitutes a material breach of the Employer’s obligations under the Contract, the Contractor may (after giving notice) suspend work or reduce the rate of work under clause 16.1. The requirement for the failure also to constitute a material breach is new and raises the threshold for the Contractor’s suspension under this clause. If the Contractor does not receive the ‘reasonable evidence’ within 42 days of giving notice under clause 16.1, the Contractor is entitled to give a notice of intention to terminate under clause 16.2.1(a).

Although the 2017 editions should help to ensure transparency about the Employer’s financial arrangements from the outset by requiring details to be inserted in the Contract Data, there is still no protection for the Contractor if the Employer notifies an adverse change in its financial arrangements, and the Contractor’s protection is curtailed because the 2017 editions limit the situations during the running of the project in which it may require evidence of the Employer’s arrangements.

Late or non-payment
In case of late or non-payment by the Employer, the Contractor has three remedies under these FIDIC forms.

First, the Contractor is entitled under clause 14.8 to financing charges (interest) if the Contractor does not receive payment in accordance with clause 14.7 on payment. This is an important practical remedy which applies during the running of the Contract, assuming payment of interest is permissible in the relevant jurisdiction. The Contractor is entitled to (under 1999 editions) or may request (under 2017 editions) these financing charges without formal notice or certification and remains entitled during the period of delayed payment.

Second, the Contractor is entitled under clause 16.1 to give notice and then reduce the rate of work or suspend work (and if this causes delay/Cost the Contractor may also be entitled to an extension of time/Cost plus profit). A reduction in or suspension of work should act to focus the Employer on the need to rectify the payment situation. 

Third, the Contractor is entitled under clause 16.2 to terminate if it does not receive payment of interim amounts within 42 days after expiry of the time stated in clause 14.7. The precise language here is different depending on the book and the edition. The Contractor may terminate upon giving 14 days’ notice (1999 editions) or after giving notice of intention to terminate, followed 14 days later by a second notice to immediately terminate (2017 editions). Clause 17.6 (1999 editions), clause 1.14 (2017 SB) and clause 1.15 (2017 RB and YB) exclude liability for loss of profit and indirect loss (etc) but expressly do not apply to payment on termination under clause 16.4. Therefore, the Employer may have unlimited liability to the Contractor for loss of profit or other loss or damage sustained by the Contractor as a result of termination under clause 16.2.

Employer insolvency
If the Employer becomes bankrupt or insolvent or similar, the Contractor is entitled to terminate the Contract (clause 16.2). The precise wording differs between the 1999 and 2017 editions. Different jurisdictions have different procedures in respect of companies in financial difficulty. It may be problematic to determine whether a particular procedure falls within the wording of this clause. If a Contractor terminates under clause 16.2, the same consequences apply as for termination for non-payment by the Employer.

Employer termination for convenience
An Employer in financial difficulty may try to terminate the Contract for convenience because it wishes to complete the Works itself or has found another contractor willing to complete the Works at a lower cost.

The 1999 RB, YB and SB permit the Employer to terminate at any time for the Employer’s convenience by giving notice to the Contractor (clause 15.5). The Employer is however prohibited from terminating to execute the Works itself or to arrange for the Works to be executed by another. After termination under clause 15.5, the Contractor is to be paid in accordance with clause 19.6.  Essentially this means that the Contractor is entitled to payment for all work carried out plus removal/repatriation costs but not lost profit.

Under clause 15.5 of the 2017 RB, YB and SB the Employer is no longer prohibited from terminating in order to execute the Works itself or to have others do so, although it may do this only after the Contractor has received payment of the amount due on termination. That amount is to be valued under a new clause 15.6 which makes it clear that the Contractor is entitled to loss of profit or other loss and damage suffered by the Contractor as a result of this termination. Clause 15.7 requires the Employer to pay the amount certified by the Engineer (RB and YB) or agreed or determined by the Employer’s Representative (SB) within a defined period. Clause 1.14 (2017 SB) and clause 1.15 (2017 RB and YB) exclude liability for loss of profit and indirect loss (etc) but expressly do not apply to payment after termination for Employer’s convenience. Therefore, the Employer may have unlimited liability to the Contractor for loss of profit or other loss or damage sustained by the Contractor as a result of such termination.

Payment of DAB/DAAB decision
Much has been written about employers failing to pay sums awarded by the DAB under the 1999 RB, YB and SB. 

In the 2017 editions, in which the DAB is replaced with the DAAB, the Contractor has the right under clause 16.1 to give notice and then reduce the rate or work or suspend work and under clause 16.2 to give notice of intention to terminate, if the Employer fails to comply with a decision of the DAAB and such failure also constitutes a material breach of the Employer’s obligations under the Contract. The requirement that failure must also constitute a material breach presumably is intended to prevent suspension or termination for a failure to perform a trivial part of the contract. One can easily imagine parties disagreeing about whether a failure to pay a small sum awarded by the DAAB in the context of a very large overall contract price constitutes a material breach. Overall, however, these revisions are welcome because they should encourage parties to comply with DAAB decisions.

Further encouragement is given by clause 21.7 which permits a party to refer a failure by the other party to comply with a DAAB decision directly to arbitration without first obtaining a DAAB decision for that failure or going through the amicable settlement procedure. There is no requirement here that the failure to comply with the DAAB decision also constitutes a material breach. The arbitral tribunal is given the power, by way of summary or expedited procedure, to order the enforcement of the DAAB decision. Again, this revision is welcome because it reinforces the binding status of a DAAB decision and the requirement that parties shall promptly comply with it.

Conclusion
The FIDIC forms provide a range of protection and remedies to the Contractor in respect of Employer payment risks and failures. They include obligations on the Employer to provide information regarding its financial arrangements and they give the Contractor the right to reduce or suspend work or terminate if the Employer fails to provide reasonable evidence of those arrangements or pays late or fails to pay. The 2017 editions also entitle the Contractor to loss of profit if the Employer terminates the Contract for convenience and give rights to the Contractor if the Employer fails to pay a DAAB award. Ultimately, the Contractor’s remedy for non-payment (including if the Employer is bankrupt or insolvent or similar) is termination but this is a drastic step with serious consequences which the Contractor should not take without first obtaining legal advice.

Clause 17 covers risk and responsibility, indemnities, liability limitations, and intellectual property rights. The Contractor bears risk during execution and defect remedy periods, with risk transferring to the Employer upon issuing the Taking-Over Certificate. Risk allocation depends on governing law.

Summary

Although Clause 17 is titled ‘Risk and Responsibility’, it also sets out other provisions relating to indemnities, limitation of liability and, unusually, the specific topic of intellectual and industrial property rights. The Clause provides that the Contractor assumes responsibility and bears the risk for the care of the works during execution and for remedying any defects during the Defects Notification Period. On issue of the Taking–Over Certificate to the extent of works defined as being completed, risk transfers to the Employer.

Generally, in construction contracts ‘risk’ is understood to mean an event or circumstance which causes delay, loss, or damage to the Works. A risk can be said to be Employer-caused, Contractor-caused or neutral. The purpose of risk allocation is to determine which party bears the risk for such events. The Contractor may be required to remediate the damage at his own cost, or the Employer may be required to pay for the damaged works. It has been stated that the “FIDIC standard forms are generally recognised as being well balanced because both parties bear parts of the risks arising from the project.”[1]

The structure of Clause 17 has been criticised, as indemnities are dealt with before risk.[2] It has been suggested that Clause 17 ought to start with Sub-Clause 17.3 for the provision regarding risk and that Sub-Clause 17.1 for indemnities should follow after Sub-Clause 17.2. In respect of indemnities, the insurance provisions at Clause 18 closely relate to Clause 17 and should be considered together to ascertain the scope of indemnities for losses which are not covered by insurance (or otherwise non-recoverable). Further specific indemnity provisions are provided elsewhere in the contract which must be considered together with Clause 17. These are found at:

• Sub-Clause 1.13 [Compliance with Laws]
• Sub-Clause 4.2 [Performance Security]
• Sub-Clause 4.14 [Avoidance of Interference]
• Sub-Clause 4.16 [Transport of Goods]
• Sub-Clause 5.2 [Objection to Nomination]

Risk allocation must be considered against the governing law of the contract. In civil law countries, risk may be allocated by the applicable Civil Code. However, in common law countries, the risk is allocated by the terms of the contract (express or implied), subject to any statutory prohibitions.[3] Where the contract fails to set out who bears the risk of loss, then the substantive law of the contract must be considered. Civil law courts are more likely than common law courts to interfere with the risk allocation, which may then disrupt or displace the agreed balance of risks.[4] The English courts tend to uphold the contractual agreed terms for allocation of rights and obligations.[5]

A term will be implied if certain criteria are met in a common law system. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings[6], the court stated that for a term to be implied:

‘(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that ‘it goes without saying’

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the contract.’

This statement has been approved recently by the English Supreme Court and Privy Council.[7]

Origin of Clause

The FIDIC Red Book 4th Edn dealt with the topics of risk, responsibility, liability, and indemnity for damage, loss, and injury at Clauses 20, 21, 22, 24 and 65. The Red Book 4th Edn followed the illogical sequence of ICE Form 5th Edition. Clauses 20, 22 and 24 allocate responsibility to the Contractor. Sub-Clause 21.3 deals with the Contractor’s responsibility for losses not recovered by insurance. These clauses are interwoven with various Sub-Clauses providing terms for insurance requirements with the general insurance requirement at Clause 25.

The Red Book 4th Edn provisions were re-organized within FIDIC 1999 so that terms for risk, responsibility and indemnity are predominantly found at Clause 17, which then leads to the separate insurance obligations for the indemnities in Clause 18. By segregating insurance topics under FIDIC 1999, it is simpler to use and understand.

The Employer’s indemnity provisions at Sub-Clause 17.1 originated from Sub-Clauses 20.1, 22.2 and 22.3 of the Red Book 4th Edn. The Employer risks at Sub-Clause 17.3 were found at Sub-Clause 20.3 of the Red Book 4th Edn.

Cross-References

Reference to Clause 17 is found in the following Sub-Clauses:

• Sub-Clause 18.2 [Insurance for Works and Contractor’s Equipment]
• Sub-Clause 18.3 [Insurance against Injury to Persons and Damage to Property]

Reference to Risk which is construed as either a Contractor or Employer risk is found in the following Sub-Clauses:

• Sub-Clause 4.13 [Rights of Way and Facilities]
• Sub-Clause 4.19 [Electricity, Water and Gas]
• Sub-Clause 4.20 [Employer’s Equipment and Free-Issue Material]
• Sub-Clause 8.6 [Rate of Progress]
• Sub-Clause 9.2 [Delayed Tests]
• Sub-Clause 11.2 [Cost of Remedying Defects]
• Sub-Clause 11.6 [Further Tests]
• Sub-Clause 15.2 [Termination by the Employer]
• Sub-Clause 18.2(d) [Insurance for Works and Contractor’s Equipment]
• Sub-Clause 19.6 [Optional Termination, Payment and Release]

Reference to Responsibility which is construed as either a Contractor or Employer responsibility is found in the following Sub-Clauses:

• Sub-Clause 3.1 [Engineer’s Duties and Authority]
• Sub-Clause 4.6 [Co-operation]
• Sub-Clause 6.7 [Health and Safety]
• Sub-Clause 7.3 [Inspection]
• Sub-Clause 8.8 [Suspension of Work]
• Sub-Clause 10.2(b) [Taking Over of Parts of the Works]
• Sub-Clause 11.4(a) [Failure to Remedy of Defects]

Reference to ‘indemnify’, ‘indemnification’ or ‘indemnified’, which is expressed as either a Contractor or Employer obligation, is found in the following Sub-Clauses:

• Sub-Clauses 1.13(a) and (b) [Compliance with Laws]
• Sub-Clause 4.2 [Performance Security]
• Sub-Clause 4.14 [Avoidance of Interference]
• Sub-Clause 4.16 (c) [Transport of Goods]
• Sub-Clause 5.2 [Objection to Nomination]
• Sub-Clause 14.14 [Cessation of Employer’s Liability]
• Sub-Clause 18.4 [Insurance for Contractor’s Personnel]

Reference to ‘liable’, ‘liability’ or ‘liabilities’ is found in the following Sub-Clauses:

• Sub-Clause 1.14 [Joint and Several Liability]
• Sub-Clause 4.5 [Assignment of Benefit of Subcontract]
• Sub-Clause 4.20 [Employer’s Equipment and Free-Issue Material]
• Sub-Clause 5.2(c) [Objection to Nomination]
• Sub-Clause 10.2(b) [Taking Over of Parts of the Works]
• Sub-Clause 11.6 [Further Tests]
• Sub-Clause 11.10 [Unfulfilled Obligations]
• Sub-Clause 14.14 [Cessation of Employer’s Liability]
• Sub-Clause 18.1 [General Requirements for Insurances]
• Sub-Clause 18.2 [Insurance for Works and Contractor’s Equipment]
• Sub-Clause 18.3 [Insurance against Injury to Persons and Damage to Property]
• Sub-Clause 18.4 [Insurance for Contractor’s Personnel]
• Sub-Clauses 19.6(b) and (c) [Optional Termination, Payment, and Release]

Sub-Clause 17.1 – Indemnities

Under Sub-Clause 17.1 the responsibility of the risk for certain types of claims (summarised below) is allocated by way of indemnities so that each party indemnifies the other for the consequence of such claim:

• Personal injury;
• Damage to personal or real property (other than the Works); and
• Other specific matters for which the Employer indemnifies the Contractor.

The Contractor is required to give a wide indemnity against “all claims, damages, losses and expenses” in respect of these types of damage. The indemnity would include legal fees. The indemnity is not subject to any exclusion of liability for loss of profit, loss of contract or other indirect losses under Sub-Clause 17.6.

The Contractor is obliged to indemnify not only the Employer but also the “Employer’s Personnel and respective agents”. This covers any personnel who have been ‘notified’ to the Contractor by the Employer or Engineer and assistants delegated with authority by the Engineer pursuant to Sub-Clause 3.2 (see Sub-Clause 1.1.2.6). Visitors on site or any specialist advisors must be notified to the Contractor to ensure that the indemnity covers such persons.

Similarly, the Employer has the equivalent obligation to indemnify the Contractor and the “Contractor’s Personnel and their respective agents” in respect of claims, damages, losses, and expenses for death and personal injury and specific matters which may be excluded from insurance cover. This captures any personnel ‘assisting’ with the works, however, the difference here is that there is no requirement to notify the Employer of such persons. The Employer indemnity will therefore capture those falling within the category.

This Sub-Clause has been developed from Clause 22 of Red Book 4th Edn. Sub-Clause 17.1 introduces a new term of “hold harmless” to the indemnity obligation. Specifically, each party is required to give an “indemnity and hold harmless” the other party. Courts in different jurisdictions are likely to have different conclusions over the meaning and usage “hold harmless“. It may introduce uncertainty. In the Scottish case of Farstad Supply AS v Enviroco Ltd,[8] the Supreme Court considered the meaning of these terms[9]. It was held:

‘the word ‘indemnity’ is capable of having a wide meaning but, even assuming that by itself it might (depending upon the context) have a narrow meaning, it does not stand alone in the clause. The owner must “defend … and hold harmless” the charterer, not only against liabilities and causes of action, but also against “all claims, demands” and proceedings…

‘the obligation to hold harmless goes further than the obligation to reimburse because they are words of exception. In some contexts the words “indemnify” and “hold harmless” have the same meaning… The word “indemnify” can sometimes mean indemnify a third party. As ever, all will depend upon the context. Here the context is plain.

‘The expression “defend, indemnify and hold harmless” is wide enough to include the exclusion of liability for loss incurred by the owner or charterer…[and] is wide enough both to provide a defence for one party to claims made by the other party and to provide an indemnity in respect of the claims of third parties.’

The Ontario Superior Court of Justice in Stewart Title Guarantee Company v. Zeppieri[10] considered the same terms and held:

‘This language imposes two obligations on Stewart Title with respect to a member of the LSUC—to “indemnify” that member, and to “save harmless” that member from claims arising under a title insurance policy. The contractual obligation to save harmless, in my view, is broader than that of indemnification… the obligation to “save harmless” means that a LSUC member should never have to put his hand in his pocket in respect of a claim covered by the terms of the 2005 Indemnity Agreement.’[11]

This indicates that the indemnity obligation is to indemnify a party fully and completely. The interpretation of the indemnity provision is affected by the governing law of the contract.

The Extent of the Indemnity Provisions

The indemnity provisions relate to personal injury and damage to property.

Personal Injury

Both Contractor and Employer are responsible for claims relating to personal injury (bodily injury, sickness, disease, or death). The indemnity obligation applies to personal injury caused to any persons, which may include each Party’s personnel. The insurance procured in accordance with Sub-Clause 18.3 will provide cover for this type of loss, where personal injury is caused to persons other than the Contractor’s Personnel, and under Sub-Clause 18.4, where personal injury is caused to the Contractor’s Personnel.

For losses not recoverable under a particular policy, the Contractor bears the risk by way of its indemnifying obligation for personal injury claims which may arise “out of or in the course of or by reason of the Contractor’s design (if any), execution and completion of the Works and the remedying of any defects”. The Contractor’s indemnifying obligation is therefore limited to the Works, as it is not drafted in the widest possible terms (such as ‘howsoever caused’).

– The terms “any person whatsoever”

The Contractor’s indemnity obligation for personal injury relies on wide language and in particular extends to injury caused to “any person whatsoever”. The effect is that in addition to personal injury to the Employer’s personnel and agents, personal injury to the Contractor’s Personnel or agents, visitors, and the public is also captured.

– “unless attributable to”

The Contractor’s obligation to indemnify for personal injury losses is excluded where such losses are caused by the negligence, wilful act, or breach of contract of the Employer (its personnel or agents). The use of the words by any “negligence, wilful act or breach” illustrates that there must be a factual connection relating to the conduct (act or omission) of the Employer (its personnel or agents) which caused the injury sustained, so that the injuries are attributable to the Employer’s fault.

The provision is silent on whether the personal injury must be attributable in whole to the Employer’s negligence, wilful act, or breach of contract or whether attribution in part would suffice for the exclusion clause to apply. In Central Asbestos Co. Ltd v Dodd[12] Lord Pearson examined the meaning of “attributable to” in the context of “attributable to that negligence, nuisance or breach of duty.” In contrast, under Sub-Clause 17.1 the words used are “attributable to any negligence, nuisance or breach of duty“. Lord Pearson held that the words “attributable to”:

‘refers to causation but it has to cover cases of dual or multiple causation and perhaps another element of responsibility in the case of contributory negligence… In such cases there would have to be an apportionment of the responsibility, and in the case of contributory negligence the apportionment would take into account degrees of blameworthiness as well as causative potency. If this involves another element additional to causation, it is aptly covered by the phrase ‘attributable to’…’

It is submitted that the position in England for use of the words “if any” has the meaning that the Contractor will be liable to provide the full indemnity less any apportionment for personal injury which is attributable to the fault of the Employer (its personnel or agents). The Contractor is not exempt from providing an indemnity where the Employer is less than 100% at fault for the resulting injury. The Contractor is obliged to provide an indemnity for resulting injury for the proportion not attributable to fault of the Employer (its personnel or agents).

Specifically, Sub-Clause 17.1 provides that the Contractor is responsible “unless” the personal injury is due to Employer fault. The meaning and effect of the word “unless” varies across different jurisdictions. In some jurisdictions the use of the word “unless” will result in a total exclusion of Contractor indemnity where there is some negligence resting on the Employer irrespective of whether some (or most) fault is due to the Contractor. Elis Baker et al suggest[13] that where the governing law follows the total exclusion interpretation, and where parties intend merely a narrow carve out from the Contractor’s indemnity obligation, so that the Contractor remains liable to provide an indemnity where some fault does rest on the Contractor (i.e. by way of contributory negligence), then Sub-Clause 17.1 should be amended to add “except to the extent that” in replacement of “unless“. This would then allow for the indemnity to be assessed according to proportionate liability of each party for the damage, loss, or injury.

– The Employer’s Indemnity Obligation

The Employer’s indemnity obligation is narrow, specifically limiting the indemnity obligation to injury caused by the Employer (or its personnel or agents). However, it is doubtful whether the Employer’s liability to third parties can be restricted by the contract where the issue is likely to be governed by local laws. Provided that the claim is not the fault of the Employer, the Contractor’s responsibility extends to all personal injury claims which arise and even to those claims arising without any act or negligence (see FIDIC Guide 1999). The result is that the Contractor will be liable to indemnify the Employer for a third-party personal injury claim against the Employer which may exist in law even if there is no negligence, wilful act, or breach of contract by the Employer (or its personnel and agents) or the Contractor. For example, injury sustained to an employee as a result of a defective product used in the construction (Product Liability claims).

Damage to Property

Similar to the indemnity obligation for personal injury claims, the Contractor is required to indemnify the Employer (and Employer’s personnel and agents) for claims for loss or damage to real or personal property other than the Works. The corresponding insurance obligation is provided under Sub-Clause 18.3 [Insurance Against Injury to Works and Property Damage].

Similar to the personal injury indemnity obligation, the Contractor’s indemnity obligation for property damage is also limited to such loss and damage arising during the course of the Works.[14] The difference here is that the caveat exists to limit the Contractor’s indemnity obligation to Contractor faults. The Contractor will not be liable for such damage and loss unless “to the extent” that it is attributable to any negligence, wilful act or breach of contract by the Contractor (its personnel and agents). This is a newly introduced restriction by way of Sub-Clause 17.1(b)(ii). Under Sub-Clause 22.1 of the Red Book 4th Edn the Contractor’s indemnity was based on his legal liability as a whole and was not limited. Nael Bunni[15] identifies that neither the Contractor nor the Employer benefits from this change and that insurers are the only beneficiary to provide cover for non-negligence to cover this gap. For a consistent Contractor’s indemnity obligation for both property damage and personal injury then Sub-Clause 17.1(b)(i) should include the terms “unless and to the extent that any such damage or loss is attributable to the negligence, wilful act or breach of contract by the Employer [its personnel and agents]“. This is adopted in FIDIC MDB Harmonised Edition 2010.[16]

The Contractor’s indemnity obligation under Sub-Clause 17.1(b)(ii) is far reaching as it extends to loss or damage attributable to Contractor Personnel, their respective agents or “anyone directly or indirectly employed by any of them”. These terms are not used elsewhere in FIDIC 1999. In contrast, the Employer’s indemnity obligation is limited to the damage caused by its personnel and agents only. An indirect employee not captured within the definition of Contractor’s Personnel is likely to include appointed professional advisors, material suppliers and manufacturers.

The Employer’s Indemnity – Specific Matters

The Employer’s obligation to indemnify extends only to the Contractor, its personnel and agents. The obligation relates only to the matters discussed below.

Personal Injury

The Employer’s indemnity obligation for personal injury is explained above. It is important as it includes injury attributable by the Employer’s Personnel, or any of their respective agents. Injury caused by the Engineer’s design is therefore covered. It has undergone substantial re-drafting from its origin at Sub-Clause 22.2(d) the Red Book 4th Edn, where there was an express provision to provide an indemnity to be apportioned between the Employer and Contractor according to the proportion of any contributory negligence.[17]

Property

The Employer gives an indemnity to the Contractor for third party property damage and third-party injury for certain claims which are allocated as Employer responsibility or risk. The wording of this indemnity in not as clear as it should be and can be interpreted in a number of ways.

“the matters for which liability may be excluded from insurance cover, as described in sub-paragraphs (d)(i), (ii) and (iii) of Sub-Clause 18.3.”

The intention of this wording appears to be that only where certain risks have been excluded from the insurance cover will the Employer’s indemnity obligation arise. The use of the word “may” recognises that insurance may be available for some of these risks on commercially reasonable terms. However, the use of the word “may” rather than “have” leads to some confusion. One could argue that if any insurance cover relevant to the events described in sub-paragraphs (d)(i), (ii) and (iii) of Sub-Clause 18.3 proved to be ineffective the indemnity obligation would then kick in. However, this is clearly not the intention.

Sub-Clause 18.3(d)(i), (ii) and (iii) list the matters which may be excluded from insurance cover. These are:

‘Liability to the extent that it arises from:

• the Employer’s right to have the Permanent Works executed on, over, under, in or through any land, and to occupy this land for the Permanent Works,
• damage which is an unavoidable result of the Contractor’s obligations to execute the Works and remedy any defects.
• a cause listed in Sub-Clause 17.3 [Employer Risks], except to the extent that cover is available at commercially reasonable terms.’

Sub-Clause 18.3(d)(i) is similar to Sub-Clause 22.2(a) and (b) of the Red Book 4th Edn. Sub-Clause 18.3(d)(ii) is similar to Sub-Clause 22.2(c) of the Red Book 4th Edn. EC Corbett, in FIDIC 4^th: A Practical Legal Guide, gives examples of the claims which could arise such as reduced property value caused by the construction activity or injunctions brought over boundary disputes which bring works to a halt.

A question arises as to whether the excluded matters must be read alongside the opening words of Sub-Clause 18.3, which refer to “any loss, damage, death or bodily injury which may occur to any physical property (except things insured under Sub-Clause 18.2 [Insurance for Works and Contractor’s Equipment]) or to any person (except persons insured under Sub-Clause 18.4 [Insurance for Contractor’s Personnel]), which may arise out of the Contractor’s performance of the Contract“? The words restrict the scope of the indemnity to third party losses. On balance, one takes the view that a restrictive interpretation ought to be placed on the Employer’s indemnity provisions.

“damage which is an unavoidable result of the Contractor’s obligations to execute the Works and remedy any defects.”

The FIDIC 1999 Guide states that this does not extend to any other damage which is a result of the particular arrangements and methods which the Contractor elected to adopt in order to perform his obligations. Here the Contractor would remain responsible for the risk and the Contractor should adopt appropriate arrangements and methods to minimise claims from third parties due to its performance of contractual obligations.

“a cause listed in Sub-Clause 17.3 [Employer Risks], except to the extent that cover is available at commercially reasonable terms.”

The Employer’s indemnity obligation is therefore for all third party[18] loss, damage, death, or bodily injury arising from “a cause listed in Sub-Clause 17.3, except to the extent that insurance cover is available at commercially reasonable terms“. Sub-Clause 17.1, read together with Sub-Clause 17.3 and 18.3(d)(iii), shows that the Employer is generally allocated responsibility for Sub-Clause 17.3 matters where it is not insurable.

The FIDIC 1999 Guide does not define what constitutes “commercially reasonable“, although it mentions that it may be a matter of opinion, given that the scope of cover required may have been clarified by early agreement of terms. The meaning of commercially reasonable terms is likely to lead to conflict as it is an imprecise concept, although the phrase “commercially reasonable” has recently been considered by the English courts.[19] In the Particular Conditions parties should define which risks are to be covered by indemnity. If insurance is available for a particular risk under Sub-Clause 17.3 on commercially reasonable terms which has not been effected, then the Employer will not be liable to provide an indemnity if the Contractor is the insuring Party. Here, the Contractor would then be in breach of its obligation to insure, and would be liable for all or part of the resulting loss.

The FIDIC Guide recognizes that although the Sub-Clause 17.1 indemnities may apply widely, they do not necessarily cover every type of claim, and so there may be claims for which neither Party is entitled to an indemnity under this Sub-Clause.

Sub-Clause 17.2 – Contractor’s Care of the Works

This provision sets out the Contractor’s responsibility for the care of the Works. The clause originated from Sub-Clause 20.1 and 20.2 of the Red Book 4th Edn. The Contractor assumes full responsibility for the “care of” the Works and Goods. The insurance requirement for these risks is set out at Sub-Clause 18.2. “Goods” include items such as Contractor’s Equipment, Materials and Plant. Employer’s Equipment[20] does not fall within the definition of Works and Goods and so the Contractor does not assume responsibility for the Employer Equipment which is identified in the Specification. Also, the Contractor does not assume responsibility for Plant taken over by the Employer. The Contractor remains responsible for the acts or defaults of any Subcontractor or its agents and employees pursuant to Sub-Clause 4.4 [Subcontractors].

The Contractor’s responsibility runs from the Commencement Date (and the execution of the Works commence as soon as is reasonably practicable thereafter) and ends on issue or deemed issue of the Taking-Over Certificate for the Works, Section or part of the Works under Sub-Clause 10.1 and Sub-Clause 10.2, as the Works are then completed.

The expression adopted by FIDIC for “care of the Works” may lead to some misunderstanding across different jurisdictions. Axel-Volkmar Jager et al.[21] refer to civil law jurisdictions where “care of the works” is understood to mean the risk of accidental damage to the Works.[22] The German Civil Code provides that the contractor bears the risk until the work is ‘accepted’. In Civil Law countries, it is considered that the risk for the care of the Works shifts to the Employer when the Engineer issues the Performance Certificate, rather than on issue of the Taking-Over Certificate, as provided in the contract. French law is similar and where this applies, parties should understand that issue of the Taking-Over Certificate does not mean “acceptance of the works“. This is only achieved on issue of the Performance Certificate. Under Romanian law[23], the Taking-Over Certificate is considered to have the effect of provisional acceptance.[24]

Sub-Clause 17.2 expressly provides that responsibility passes to the Employer when the “Taking- Over Certificate is issued (or is deemed to be issued under Sub-Clause 10.1 [Taking Over of the Works and Sections])”. Under Sub-Clause 10.1, the Engineer in issuing the Taking-Over Certificate will state the date that the Works or Section was completed. The Taking-Over Certificate may therefore record that the Works or Section was completed on an earlier date than the issue date of the Certificate. Given that under Sub-Clause 17.2 liability does not pass to the Employer until the issue date (or deemed issue date), the Contractor may, in certain circumstances, remain responsible for the Works during the gap between the actual taking over date and the date of issue of the relevant Taking-Over Certificate or deemed issue.

For insurance purposes, it is the issue of the Taking-Over Certificate and not the date stated in the certificate which is relevant. The FIDIC 1999 Guide suggests that insurance to provide cover for the Employer risks for the Works should become effective by the date of issue of the Taking-Over Certificate.

It is important to clearly define what constitutes a Section (or part of the Works). The FIDIC 1999 Guide suggests that precise geographical definitions are set out in the tender documents for each Section or part of the Works, as opposed to merely defining a Section by way of construction milestones.

Contractor Responsibility for Outstanding Works

Following the issue of the Taking-Over Certificate (for Works, Section or part of the Works) the burden of care for the works remains on the Contractor for any outstanding minor works and defects to be carried out under Clause 11 [Defects Liability]. The Sub-Clause provides that:

‘the Contractor shall take responsibility for the care of any work which is outstanding on that date stated in the Taking-Over Certificate, until this outstanding work has been completed‘.

These outstanding works are then executed and completed by the Contractor during the Defects Notification Period, which commences on issue of the relevant Taking-Over Certificate. The Contractor remains responsible and therefore liable for loss and damage until the outstanding work is completed. This is when responsibility for the outstanding works then passes to the Employer.

Risk Allocation for Loss and Damage to the Works

Before a Taking-Over Certificate is issued, or the deemed Taking-Over occurs, the Contractor is responsible for the care of Works, Goods, and Contractor’s Documents. The Contractor will, however, not be liable for loss or damage caused by any event or circumstance which is expressly allocated to the Employer under Sub-Clause 17.3 [Employer’s Risks] so far as they cause loss or damage to the Works (Sub-Clause 17.4 [Consequences of Employer’s Risks]). The Contractor must, however, rectify the loss or damage if required by the Engineer.

If the loss or damage is caused by an event, other than one covered by Sub-Clause 17.3, then the Contractor is liable to rectify that loss and damage at his risk and cost.[25] It should be noted that the preceding provisions of Sub-Clause 17.2 do not refer to Contractor Documents. Specifically Sub-Clause 17.2 is silent on the Contractor’s responsibility for the care of the Contractor’s Documents. This obligation is found under Sub-Clause 1.8 [Care and Supply of Documents], which provides that the care of Contractor Documents does not pass to the Employer until they are taken over.

Dominant Cause

There is nothing within Sub-Clause 17.2 which deals with the situation where damage is caused by multiple events – one being a Contractor’s risk and one being an Employer Risk. The Employer’s liability is not expressed to be limited ‘to the extent that’ loss or damage is caused by an Employer risk, which would then allow for split liability between the parties. In practice a split liability will rarely occur unless it is an Employer risk falling within Sub-Clause 17.3 (f), (g) or (h).

Loss and Damage after Taking-Over Certificate

On the issue of a Taking-Over Certificate the responsibility for the care of the Works passes to the Employer, except for outstanding works and defects. However, Sub-Clause 17.2 confers liability on the Contractor after the issue of the Taking-Over Certificate for “any” loss and damage:

• caused by any actions performed by the Contractor after issue of the Taking-Over Certificate (and therefore actions carried out during the defects notification period).
• occurring after issue of the Taking-Over Certificate and which arose from a previous event for which the Contractor was liable (such as latent defects or poor workmanship).

This liability is consistent with the insurance obligation for Contractor risks at Sub-Clause 18.2 [Insurance for Works and Contractor’s Equipment].

There is no express provision that the Contractor must rectify the loss or damage to the Works. The Employer, who has care of the Works at this stage, may execute such works itself or arrange for the works to be carried out by another contractor and recover such costs from the Contractor.

Sub-Clause 17.3 – Employer’s Risks

Sub-Clause 17.3 must be considered in conjunction with Sub-Clause 17.2. These two Sub-Clauses deal with risk allocation between the parties and liability for loss and damage. However, these are not the only clauses dealing with risk and regard must be had to Sub-Clauses 17.1, 8.4 and also the clauses specifically dealing with risk as identified above in the section ‘Cross-References’.

The Contractor is not responsible for the risks identified in Sub-Clause 17.3, so far as they result in loss and damage to the Works, Goods or Contractor’s Document. Generally Sub-Clause 17.3 is an amalgamation of risks which the Contractor has no control over or, more usually, are beyond the control of both the Contractor and the Employer. They are risks which directly affect the execution of the work.

Overlap with Clause 19 [Force Majeure]

The four categories of force majeure events at Sub-Clause 19.1(d)(i) to (iv) are identical to the Employer Risks listed at Sub-Clause 17.3(a) to (d). There is therefore a complete overlap between these four provisions and these clauses should be read together. The FIDIC Guide mentions that Sub-Clause 17.3 (a) to (d) [Employer Risks] may constitute a force majeure event depending on the severity and adverse consequence of the risk event.

Sub-Clause 17.3 is relevant when an event has caused loss or damage to the Works, Goods or Contractor’s Documents, whereas Clause 19 is relevant where an exceptional event prevents performance of obligations and causes a delay. This distinction is important. The Contractor will have no right to claim additional time or Cost arising from a Sub-Clause 17.3 event except where it causes loss and damage to the Works, Goods or Contractor’s Document. For example, if war occurs and the Contractor is prevented from carrying out the Works, but there is no damage to the Works, Sub-Clause 17.3 will not assist the Contractor. In order to recover time and cost the Contractor will have to rely on Clause 19.

Sub-Clause 17.3 risks may cause the Contractor delay or result in additional costs for the Contractor. Under Sub-Clause 17.4, the Employer bears the risk for rectifying loss and damage which occurred to the Works, Goods or Contractor Documents as a result of the Sub-Clause 17.3 risks. Pursuant to Sub-Clause 17.4 the Contractor may claim (following the Sub-Clause 20.1 procedure) for additional Cost to ‘rectify’ the loss or damage for Sub-Clause 17.3 risks. Similarly, under Sub-Clause 19.4 the Contractor can claim (under Sub-Clause 20.1) the ‘additional Cost’ for cost incurred as a result of force majeure events. The difference is that, for a force majeure event, all damages may be recovered from the Employer whereas under Sub-Clause 17.3 the Employer’s liability to remunerate the Contractor is limited to repair of the Works to the extent that the Employer instructs repair.

The loss or damage which results, such as personal injury or property damage, is insurable.[26] The FIDIC Guide recognizes that the risks at Sub-Clause 17.3 are generally uninsurable on general insurance cover.[27] These risks are summarized below:

• War and acts of foreign enemies;
• Terrorism or civil war;
• Riot and disorder (by persons other than the Contractor or Contractor’s Personnel);
• Explosives and radioactivity; and
• Pressure waves caused by aircraft and other aerial devices

Sub-Clauses 17.3(c), (d) and (e) add the restriction of “within the Country”. This restriction is absent under the corresponding Clause 19 [Force Majeure] provision.[28] Terrorism or riots occurring in countries where the Works are not carried out could affect the progress of Works by the Contractor. It is possible that destruction or seizure of equipment or materials manufactured in other countries may occur during a civil war. It therefore seems that where such events arise outside the country then it will not fall within a risk at Sub-Clause 17.3(b). It may then be captured under the provision for force majeure at Clause 19 where the Contractor is prevented from performing its obligation as a result. However, where the Contractor is not prevented from performing its obligations (i.e. the Contractor obtains the equipment and materials from another country) but incurs cost as a result of the equipment or materials seized then the liability for the risk will rest with the Contractor – see for example the decision in ICC Case No 20930/TO Partial Award[29], where the Tribunal held that disturbances caused by the Arab Spring did not necessarily constitute a force majeure event where the materials which had to be supplied were readily available from other countries.

As a result of changes to the global society some additions to FIDIC 1999 have been made since its predecessor at Clause 20.4 of Red Book 4th Edn. Sub-Clause 17.3(b) now includes the event of terrorism. Under Sub-Clause 17.3(c) the restriction of “…and arising from the conduct of the Works” has been removed. The effect is that the Employer does not bear the risk for any riots, commotions, or disorder which is attributable to the Contractor (or its personnel), and therefore the Contractor bears the risk for such events.[30]

The event of munitions of war and explosive materials is added to Sub-Clause 17.3(d) whilst the description for matters constituting contamination by radioactivity has been removed, widening this category, (see Clause 20.4(c) of Red Book 4th Edn). Terms are also added at Sub-Clause 17.3(d) to exempt or restrict the Employer’s liability for risks arising due to Contractor fault. The words used for the exemption are “…except as may be attributable to the Contractor’s use of such [munitions, explosives, etc.]”. This drafting is similar to that found at Sub-Clauses 17.1(a) and 17.1(b)(ii) where the provision is silent on whether the loss or damage to the Works (Goods or Contractor Documents) must be attributable in whole or in part to the Contractor’s fault for the use of those materials.

The term “may be” means ‘might be’ or ‘could be’ attributable to the Contractor. It is submitted that under English law the phrase “except as may be attributable” will exempt the Employer’s liability for the proportion of the loss and damage which is attributable to the fault of the Contractor. The meaning and effect of this phrase is likely to differ across different jurisdictions. The terms “may be” could result in a total exclusion of Employer liability even in circumstances where the Contractor is less than 50% responsible for the loss and damage as a result of the Sub-Clause 17.3(d) risk. The position under the governing law of the contract must be considered especially where the parties do not intend a full exclusion interpretation for the Employer liability for this risk. Where parties intend to adopt the apportionment approach according to each party’s proportion of liability, the terms should be amended to “except to the extent attributable” to avoid ambiguity and to recognize and apply split liability.

Sub-Clause 17.3(d) does not expressly exempt the Employer from liability where the loss and damage results from the Contractor’s Personnel or its agents for the use of such materials. English courts are unlikely to construe this provision to include Contractor Personnel as some of the other provisions under Sub-Clause 17.3 expressly refer to “Personnel“. Given that the “Contractor” is defined as the person named as contractor in the letter of tender (see Sub-Clause 1.1.2.3), the Employer will then be liable for the Sub-Clause 17.3(d) risk where the loss and damage arises from personnel whom the Contractor utilizes on site such as staff, labour, other employees, and other personnel assisting the Contractor and for each Subcontractor. It is unlikely that this is what FIDIC intended. Sub-Clause 17.3(d) should be amended to add “Contractor Personnel” to the exception. Care is required for drafting in respect of Subcontractors which the Employer retains responsibility for. For such Subcontractors (where the Contractor has little or no responsibility) the Employer should retain liability for the risk.

The Employer Risks at Sub-Clause 17.3(f), (g) and (h), which are considered below, are not captured as a force majeure event under Clause 19 as they involve an element of party default.

Use or Occupation by the Employer of any part of the Permanent Works.

This is relevant for loss and damage where the Contractor has retained responsibility for the care of the Works under Sub-Clause 17.2 either (i) prior to Taking-Over or (ii) for the outstanding works and defects at post Taking-Over. This Employer risk will apply irrespective of whether the Employer’s use or occupation of the permanent works is minor or temporary. This is a contentious point as disputes are likely to concern what constitutes use or occupation especially where the Employer has more than one contractor on Site. In contrast, under Sub-Clause 10.2 [Taking Over of Part of the Works] the Employer is permitted to use part of the Works as a temporary measure unless and until it is Taken-Over. Where the Employer uses a part of the Works for purposes other than a temporary measure then that part of the Works is deemed to have been Taken Over (and therefore the Contractor’s responsibility and liability ceases).

Design of any part of the Works by the Employer’s Personnel or by others for whom the Employer is responsible.

This Sub-Clause makes the Employer responsible for damage to the Works or the Goods caused by the design of the Works, which has been undertaken by the Employer’s Personnel or others for whom he is responsible. The design must have caused the loss or damage to the Works or Goods. In most cases under a Red Book form of contract the Employer will have responsibility for the design of the works except to the extent specified in the Contract (see Sub-Clause 4.1). Problems may arise where it is unclear how the damage to the Works or Goods has been caused. Where there are concurrent causes then, similar to the Red Book 4th Edn, each party is liable to the extent that their error in design (or workmanship) is causative of the loss.

Any operation of the forces of nature which is Unforeseeable or against which an experienced contractor could not reasonably have been expected to have taken adequate preventative precautions.

This Sub-Clause makes the Employer responsible for damage to the Works or Goods in two situations. First, where the damage is caused by the operation of the forces of nature which is Unforeseeable. Second, where the damage is caused by the operation of the forces of nature which an experienced contractor could not prevented by using adequate preventative precautions.

Unforeseeable Events

Sub-Clause 1.1.6.8 defines “Unforeseeable” to mean “not reasonably foreseeable by an experienced contractor by the date for submission of the Tender“. The FIDIC Guide gives some guidance on whether a natural event of a force of nature is Unforeseeable. It is suggested that this could be determined by consideration of historic statistical records for the frequency of the occurrence of various events against the period of time to be taken to complete the works:

‘if the Time for Completion is three years, an experienced contractor might be expected to foresee an event which occurs (on average) once in every six years, but an event which occurs only once in every ten years might be regarded as Unforeseeable.’

EC Corbett refers to civil law and highlights that for exceptional and unforeseen events which render the Contractor’s obligation onerous resulting in excessive loss then under French law (Théorie de l’imprévision) such loss may be reduced by way of compensation by the Employer. This doctrine has wider application in Egypt as the Contractor is completely relieved of responsibility.

Where the Employer risk under Sub-Clause 17.1(h) (operation of forces of nature) falls within the risk at Sub-Clause 19.1(v) for natural catastrophes then it may still be treated as an Employer risk regardless of where it occurs in the world. The risk under Sub-Clause 17.1(h) is not limited to occurrence in the Country where the Site is located.

Foreseeable Events against which an experienced Contractor could not have taken adequate preventative precautions

The Employer will also bear the risk for loss or damage to the Works or Goods in cases where the forces of nature were foreseeable but where it would not have been reasonable to expect an experienced contractor to take adequate preventative precautions. There will be many borderline cases. This risk is insurable under Sub-Clause 18.3(d).

The terms adopted of “experienced“, “could not reasonably” and “adequate preventative precautions” introduce ambiguity into the Contract. “…[A]dequate preventative precautions” is a new term. It has been included to place an express duty on the Contractor to mitigate any resulting loss.

Sub-Clause 17.4 – Consequences of Employer’s Risks

Sub-Clause 17.4 sets out a procedure which the Contractor must follow when loss or damage is caused by one of the Employer risks listed at Sub-Clause 17.3.

Procedure – First Notice

Sub-Clause 17.4 provides for a two-stage notice procedure which the Contractor must follow. For the first notice, the Contractor is required first to give ‘prompt’ notice to the Engineer in compliance with requirements under Sub-Clause 1.3 [Communications] that loss and damage has been caused by a Sub-Clause 17.3 risk. Specifically, the notice should (1) identify and define the Employer’s risk and (2) define the resulting loss or damage to the Works, Goods, and/or Contractor’s Documents.[31]

The giving of ‘prompt’ notice is not defined, although its natural meaning is that notice should be given without delay. Jackson J. in Multiplex Construction v Honeywell Control Systems [2007][32] explains the reasons for giving prompt notice:

‘…serve a valuable purpose, such notice enables matters to be investigated while they are still current. Furthermore, such notice sometimes gives the employer the opportunity to withdraw instructions when the financial consequences become apparent’.

The aim of giving prompt notice of an event under Sub-Clause 17.4 is to allow the finding of a prompt solution and to allow the Engineer to investigate the facts of any potential claim and the resulting financial outcome whilst the event is still recent, current, and existing. Indirectly, prompt notice acts as a medium to notify the Engineer (and Employer) of any consequential foreseeable amendments to the Contract Sum.

English courts will construe the contract as a whole and are likely to treat the giving of notice “promptly” as directory and not mandatory. The notice requirement under Sub-Clause 17.3 is not a condition precedent as there is no sanction attached to this provision if the Contractor fails to give “prompt” notice – see Aspen v Pectel[33] (which concerned notice requirements in an insurance policy), where the Court held that giving ‘immediate notice’ meant “with all reasonable speed considering the circumstances of the case.” Similarly, in SHV Gas Supply and Trading SAS v Naftomar Shipping & Trading Co Ltd Inc[34] the court decided that notice had to be given within a reasonable time after the occurrence to give notice has arisen. Here, time begins to run from when loss or damage occurs to the Works (Goods or Contractor Documents) as a result of a Sub-Clause 17.3 risk. It is an objective evaluation of the facts known to the Contractor to determine when the duty to provide such notice commences.

Engineer’s Instruction to Rectify

Having issued the notice, the Engineer may require the Contractor to rectify the loss or damage to the Works or Goods. It is noted that there is no express obligation placed on the Engineer to give an instruction to the Contractor either “promptly” or at all. If the Engineer does not issue an instruction, then the Contractor ought to request an instruction under Sub-Clause 1.9. It should also be noted that the FIDIC Guide states that the Contractor may have an obligation to repair the Works under the applicable law or other contract provisions.

If the Engineer does give an instruction to the Contractor to rectify the loss or damage to the Works, then the Contractor is required to comply with that instruction. In the event that the Contractor incurs delay or Cost it must then give notice of its claim under Sub-Clause 20.1.

Further Notice pursuant to Sub-Clause 20.1

Where the Contractor is instructed by the Engineer to rectify loss or damage to the Works or Goods caused by a Sub-Clause 17.3 risk, and the Contractor suffers delay or incurs loss as a result of the rectification work, then the Contractor is entitled to the type of remedy specified at Sub-Clause 17.4(a) and (b).

The reliefs expressed at Sub-Clause 17.4(a) and (b) are consistent with the reliefs which the Engineer has power to grant under Sub-Clause 20.1 in conjunction with Sub-Clause 3.5 namely an extension of time and payment of such Cost, respectively. The Sub-Clause 20.1 notice must be given “as soon as practicable, and not later than 28 days…” after the Contractor became aware (or should have become aware) of the event or circumstance. Sub-Clause 17.4 shows that the relevant ‘event or circumstance’ is the delay and/or additional cost suffered as a result of the instructed rectification work to the loss and damage caused by a Sub-Clause 17.3 risk event. When read in conjunction with Sub-Clause 20.1 the Contractor does not give notice unless the Contractor considers himself to be “entitled” to claim for an extension of time or additional cost. The ‘entitlement’ to claim is not subject to the opinion of another (such as the Employer or Engineer).

Unlike the first notice, this 28-day requirement for giving the second notice is a condition precedent. There is a sanction attached which discharges the Employer from “all liability in connection with the claim” and bars the contractor from its claim where the notice period is not complied with. This limitation provision is therefore expressed to extinguish the claim by failure to serve the notice within the prescribed time. The law governing the contract should be considered on this issue – see narrative of Clause 20. The notice should state that it is given under Sub-Clause 17.4 and Sub-Clause 20.1. The FIDIC Guide recommends that the further notice refers back to the earlier notice.

Claim for Additional Cost

Although the Sub-Clause 17.3 Employer risks overlap (to some extent) with Clause 19 [Force Majeure] they have a specific purpose. Sub-Clause 19.4 deals with the Contractor’s prevention from performing, and so an extension of time or additional cost may be granted, whereas Sub-Clause 17.4 deals with loss or damage to the Works as a result of an Employer risk event under Sub-Clause 17.3, with the result that additional profit may be granted in specific circumstances.

The Employer’s liability is limited to compensate the Contractor for the payment of ‘Cost’ incurred from ‘rectifying’ the loss or damage (the rectification cost) which is attributable to any of the Sub-Clause 17.3 Employer risks. The Employer is therefore not wholly liable for ‘all’ the consequences of these risk events. The burden rests on the Contractor to prove that the loss or damage falls within the extent of the Employer’s liability.

Sub-Clause 1.1.4.3 defines Cost as follows:

‘means all expenditure reasonably incurred (or to be incurred) by the Contractor, whether on or off the Site, including overhead and similar charges, but does not include profit.’

Reasonable financing costs will be captured within the definition of Cost. The Contractor may need to borrow funds as a result of carrying out the rectification work. The Cost recoverable will only include costs attributable to the relevant event or circumstance and not those costs which are not attributable.

For the Employer risks at Sub-Clause 17.3(f) or (g) which relate to Employer default (Employer use of the Works and employer design issues) the Contractor is entitled to claim Cost plus additional ‘reasonable’ profit. FIDIC Guide 1999 explains that the reason for this is that the Employer is regarded as being directly responsible and at fault for these two risks. The Contractor is therefore entitled to recover reasonable profit where the Employer is in breach of contract.

Where the Employer is not at fault, the risk is shared, and the Contractor gives up any entitlement to profit. The parties may wish to specify the amount of profit recoverable. If so, an amendment may be included at Sub-Clause 1.2 [Interpretation] to provide that “Cost plus reasonable profit means profit to be at [5%] of this Cost”. Under the MDB version the term “reasonable” is deleted so that the Contractor is entitled to profit.

Claim for Extension of Time

The Contractor is entitled to claim for an extension of time for delay to complete, whether completion has been delayed or will be delayed as a result of compliance with the instruction to carry out rectification works. The entitlement for relief relates only to rectification of the loss and damage. It does not relate to any other “incidental” delay or loss incurred as a result of the Employer risk. However, the Contractor may still have an entitlement to claim an extension of time or payment for Cost for these “incidental” claims under Sub-Clause 8.4 [Extension of Time for Completion] or Sub-Clause 19.4 [Consequences of Force Majeure].

Sub-Clause 17.5 – Intellectual and Industrial Property Rights

This Sub-Clause deals with Employer and Contractor respective responsibilities for ‘claims’ arising out of ‘infringement’ of intellectual property rights relating to the Works and the indemnity obligations for each Party against certain claims. Sub-Clause 17.5 is an expansion of Clause 28.1 of the Red Book 4th Edn. The title of this Sub-Clause, “Intellectual and Industrial Property Rights“, has changed from its predecessor of “Patent Rights“.

Claims made by third parties is defined to mean either a claim alleging infringement of such intellectual or industrial property rights, or which concern the proceedings pursuing such a claim. Under Sub-Clause 17.5 the term ‘other Party’ is usually (not always) used to describe the party who is entitled to an indemnity under this Sub-Clause.

Indemnities

Earlier editions of FIDIC provided for a Contractor indemnity obligation only. Clause 28.1 of the Red Book 4th Edn introduced protection in favour of the Contractor to narrow the Contractor’s indemnity obligation to the Employer for infringement of patent rights. Specifically, Clause 28.1 provided an express exclusion of claims (from the Contractor’s indemnity obligation) where the infringement results from the Contractor’s compliance with design or specification provided by the Engineer.[35] Sub-Clause 17.5 of FIDIC Red Book 1999 developed this further by introduction of an Employer indemnity obligation. There are separate indemnities for the Employer and the Contractor for claims made against a Party by a third-party alleging infringement of their rights.

Unlike the indemnities provided under Sub-Clause 17.1, the indemnities under Sub-Clause 17.5 do not expressly provide for legal fees and expenses of the innocent party. The scope of the indemnity obligation under Sub-Clause 17.5 is also narrower than its predecessor. Under Clause 28.1 of the Red Book 4th Edn the indemnity was for “…costs, charges and expenses whatsoever…”, whereas under Sub-Clause 17.5 each Party’s obligation is to indemnify and hold harmless the other Party “against and from any claim”.[36]

The FIDIC Guide recommends each Party consider specialist legal advice for third party claims alleging infringement. There is a defined list of specific matters constituting an infringement or an alleged infringement as set out below. The items identified in bold text are also specifically referred to in the Red Book 4th Edn. The other items are new additions in FIDIC 1999:

• Patent;
• Registered design;
• Copyright;
• Trademark;
• Trade name;
• Trade secret;
• Other intellectual property right or other industrial property right “relating to the Works”.

This sweep up provision also appeared under Clause 28.1 of the Red Book 4th Edn, although it was expressed to limit the Contractor indemnity for items “used for or in connection with or for the incorporation in the Works…”

Sub-Clause 17.5 deals with many types of infringement; however, the FIDIC Guide recognizes that this Sub-Clause does not cover all types of infringement and for those claims neither party will be entitled to an indemnity under Sub-Clause 17.5.

Employer’s Indemnity Obligation

The Employer’s indemnity obligation is for any claim alleging an infringement which was an unavoidable result of the Contractor executing the Works in compliance with the contract or as a result of the Employer’s improper use of the Works. The Employer’s improper use is either:

• for a purpose not provided in the contract or reasonably inferred from the contract; or
• in conjunction with anything not supplied by the Contractor (unless such use was disclosed to the Contractor in the Contract or prior to the Base Date).

Contractor Indemnity Obligation

The Contractor has a limited indemnity obligation to the Employer. The Contractor is required to indemnify the Employer for claims “arising out of or in relation to“:

• “the manufacture, use, sale, or import of any ‘Goods'”. “Goods” means the contractor equipment, materials, plant, and temporary works used for execution and completion of the works to include the remedy of defects (see sub-clause 1.1.5.2).
• “any design for which the Contractor is responsible“. These terms confer a narrower indemnity obligation on the Contractor than in comparison to its predecessor. Under the Red Book 4th Edn, the risk remained with the Contractor unless if shown that the infringement resulted from the Contractor’s compliance with the design provided by the Employer/Engineer. At Sub-Clause 17.5 the default position for responsibility and liability rests with the Employer, unless it is proven that the infringement results from a design for which the Contractor is responsible.

Management of Claims

The Parties must co-operate where claims arise which are being contested by the indemnifying Party. The indemnifying party may conduct negotiations to settle the claim or deal with any litigation or arbitration which may arise and against which it is liable to indemnify the other Party.

The other Party, including its Personnel, must assist in contesting the claim. The indemnifying Party is liable for the costs incurred by the other Party in assisting it to contest the claim. The other Party (and its Personnel) will be in breach of contract if they make any admission which might be “prejudicial” to the indemnifying Party without the consent of the indemnifying Party. The exception to this is where the other Party requests the indemnifying Party to take over conduct of any negotiations, litigation, or arbitration, but the indemnifying Party fails to do so.

Notice Provision and Waiver

A Party receiving the claim must give notice to the other Party within 28 days of that claim. A Party failing to give notice of the claim is deemed to have waived ‘any’ right to an indemnity under Sub-Clause 17.5. The purpose of the sanction is to provide a strong incentive for the indemnifying Party to inform the other Party in good time so as to enhance the opportunity for the other Party to defend and assist in contesting the claim.

There is no time limit on the indemnity obligations. For example, the obligation is not limited for infringements in existence at the date of agreement (such a restriction has been criticized previously as being unusual and unjustified) or to correspond to a time limit for contractors” liability for defects.

Sub-Clause 17.6 – Limitation of Liability

Introduction and origin of the Sub-Clause

FIDIC has introduced a new Sub-Clause into all three 1999 Books which limits the parties’ liability to each other under certain circumstances. The FIDIC Guide explains that the rationale for the Sub-Clause is to maintain a reasonable balance between differing objectives of the parties, each of whom will wish to limit his liability whilst maintaining his right to full compensation in the event of default on the part of the other. As with most other forms of contract nowadays one of the purposes of the introduction of this Sub-Clause appears to be to assist the parties to appraise their risks at the contract negotiation stage. On a practical level it is presumably intended to enable the parties to identify and insure (so far as they can) their potential liabilities under the contract.

Previous incarnations of the Sub-Clause appear in the old Yellow Book (for E&M works) at Sub-Clause 4.2.1 and 4.2.2 and Sub-Clause 17.6 of the old Orange Book (for Design-Build and Turnkey Contracts), but it does not appear at all in the Red Book 4th Edn.

Explanation and function of the Sub-Clause

The Sub-Clause is in three parts; the first substantive part states that neither Party shall be liable to the other for certain types of loss, i.e., loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract (other than under Sub-Clauses 16.4 and 17.1, i.e., in the event of payment on termination and where indemnities are provided). These clauses will generally be upheld.[37] It should be noted that loss of Works, loss of profit and loss of contract may include both direct and consequential losses.

The second part goes on to limit the Contractor’s liability to the Employer under or in connection with the Contract (save in four situations, namely where Sub-Clauses 4.19, 4.20, 17.1, and 17.5 apply) to the sum inserted in the Particular Conditions or, if that sum is not stated, to the Accepted Contract Amount. Note that the Accepted Contract Amount is defined in Sub-Clause 1.1.4.1 as the amount accepted in the Letter of Acceptance for the execution and completion of the Works and the remedying of any defects. There is no similar restriction on the Employer’s liability to the Contractor.

The way in which this part of the Sub-Clause operates will therefore be different for each party. One can see, for example, that where an Employer’s notice of termination takes effect under Sub-Clause 15.2 (following one of the Contractor defaults set out there), Sub-Clause 15.4 would allow the Employer to recover any losses and damages incurred by him and any extra costs of completing the Works, but Sub-Clause 17.6 is triggered to limit the Contractor’s liability in this scenario. On the other hand, in the event that the Employer defaults and termination is effected by the Contractor under Sub-Clause 16.2, payment by the Employer to the Contractor will not be limited and the Contractor will, under the provisions of Sub-Clause 16.4, be entitled to loss of profit or other loss and damage sustained by him as a consequence of the termination. The provisions of the FIDIC 1999 Red Book do allow the Contractor to recover profit in addition to cost in the event of an Employer default but the text of the relevant clause should be carefully checked. Profit is not in any event recoverable for events which are regarded as ‘neutral’ i.e.; the fault of neither party.

The third and last part of the Sub-Clause speaks for itself. In the event of fraud, deliberate default, or reckless misconduct by the party in default the Sub-Clause will not apply to limit its liability.

Direct and Indirect and Consequential Loss and Damage

In the seminal case of Hadley v Baxendale[38] the English House of Lords stated:

‘Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such a breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, [The first limb] or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. [The second limb]’

Direct losses are therefore those losses which flow naturally from the breach of contract. Indirect losses are those which may reasonably be supposed to have been in the contemplation of the parties, at the time when they made the contract, as a probable result of the breach. The distinction is easy to demonstrate. In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd[39] it was held that the direct losses arising from a five month delay to provide an industrial washing machine would include lost profits from contracts which the claimant would normally carry out as part of its business. In contrast, the loss of a special contract for the army was an indirect loss, the losses of which would only be recoverable if the defendant was aware of the existence of that contract at the time it entered into the contract with the claimant.

It has been stated that the phrase ‘consequential loss’ is not very illuminating, as all damage is in a sense consequential per Atkinson J. in Saint Line Ltd v Richardsons Westgarth & Co[40]. Atkinson J. proceeded to state that an exemption clause referring to ‘consequential loss’ does not exclude direct losses; i.e. losses that flow naturally from the breach.[41] In the case of British Sugar plc v Projects Ltd[42] it was argued that loss of profits were consequential losses. The argument was advanced that to a reasonable businessman ‘consequential loss’ would include loss of profits. However, the Court of Appeal held that it was bound by authority and that loss of profits would usually be a direct loss and therefore not covered by the phrase ‘consequential loss’. The Court of Appeal confirmed this in Hotel Services Ltd v Hilton International (Hotels) Ltd[43] and stated that loss of profits were a natural consequence of the faulty equipment “and therefore untouched by the exemption clause which (since all recoverable loss is literally consequential) plainly uses “consequential” as a synonym for “indirect”.” Therefore, the traditional approach of the English courts has been to treat the words ‘consequential loss’ as being synonymous with ‘indirect loss’.

The traditional approach was questioned in Caledonia North Sea v British Telecommunication[44] and Transocean Drilling v Providence Resources.[45] Both Lord Hoffman and Moore-Bick LJ considered whether the traditional line of cases, which had considered the words ‘consequential loss’ to be synonymous with ‘indirect loss’, would be decided in the same way now. In the recent case of The Star Polaris[46], the High Court had to consider an arbitrator’s award which concluded that the words ‘consequential or special losses’ had a wider meaning than simply being limited to indirect losses (i.e. the second limb of Hadley v Baxendale). The High Court considered two recent Supreme Court cases on contractual interpretation – Chartbrook v Persimmon Homes[47] and Arnold v Britton[48]. The High Court found that the exemption clause had to be construed having regard to the parties’ intentions and against the relevant factual matrix. The court concluded that despite the line of authorities supporting the traditional approach, “the well-recognised meaning was not the intended meaning of the parties and that the line of authorities is therefore nothing to the point.” The court therefore held:

‘…as in the judgment of the Arbitrators, “consequential or special losses, damages or expenses” does not mean such losses, damages or expenses as fall within the second limb of Hadley v Baxendale but does have a wider meaning of financial losses caused by guaranteed defects, above and beyond the cost of replacement and repair of physical damage.’

The recent Supreme Court case of Wood v Capita Insurance Services[49] also supports the view that when construing a contract, the court may find on the facts that the parties’ objective intentions were to give the words ‘consequential loss’ a broader meaning than just simply ‘indirect loss’. The court, when construing a contract, has to look at the contract as a whole. The court must analyse both the language of the contract (a textual analysis) and the factual background and implications of the rival constructions (a contextual analysis). As Lord Hodge stated:

‘The extent to which [textualism or contextualism] will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type.’

Other Jurisdictions

In Australia there has been a significant departure from the approach taken by the English courts to the interpretation of the words ‘consequential loss’. In Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd[50] the court stated that consequential loss would include any loss which did not “naturally and ordinarily” flow from the breach of contract and therefore would include loss of profits. This approach has been adopted and extended by other courts in Australia: Alstom Ltd v Yokogawa Australia Pty Ltd (No 7)[51]. In the Alstom case it was held that an exemption clause prohibiting claims for consequential losses would include all types of loss except for claims for liquidated damages and damages associated with performance guarantee payments, which were expressly provided for in separate clauses of the contract.

The issue of what is covered by the phrase ‘consequential loss’ was recently considered again in Regional Power Corporation v Pacific Hydro Group Two Pty Ltd[52]. In this case the court held that the Hadley v Baxendale and the Peerless approach were both wrong. The court stated that the words in the exclusion clause had to be given their “natural and ordinary meaning, read in light of the contract as a whole.” In this case the court found that the losses which had been suffered were direct losses and not consequential losses and therefore were not covered by the exclusion clause.

The approach taken by some American courts also differs from the English approach. In Jay Jala v DDG Construction[53] the court followed a similar approach to that taken in the Peerless case. In this case the court stated:

‘Direct damages are the costs of getting what the contracting party was supposed to give – the costs of replacing [the Defendants] performance. Other costs that may not have been incurred [but for the breach of contract], but that are not part of what [the Claimant] was supposed to get from [the Defendant], are consequential or a secondary consequence.’

Loss of profit or loss of income would therefore be classed as a consequential loss applying the principles in the Jay Jala case. In other countries it has been suggested that indirect losses are economic losses (i.e. non-physical) that are a consequence of a defect.[54]

Effectiveness of Exclusion Clauses under English Law

Under English law an exclusion or limitation of liability clause will not apply in every circumstance. An exclusion clause that seeks to exclude all liability might be considered as ineffective.[55] In the case of A.Turtle Offshore SA Assuranceforeningen Gard-Gjensidig v Superior Trading Inc[56] the court considered the situation of an abandonment of the Works. The court stated that despite the wide wording of the exclusion clause there were some breaches of duty against which the exclusion clause cannot have been intended to provide protection.[57] The court referred to the opinion of Lord Wilberforce in Suisse Atlantique[58] where his lordship stated that there was a principle that a “total breach of the contract” disentitled a party to rely on exceptions clauses. In A.Turtle Offshore the court found that not all contracts must be construed literally. Teare J stated:

Teare J. then stated that despite this, a strained construction should not be placed on exclusion clauses where the words were clearly written.

In Swiss Bank v Brink’s Mat[59] Bingham J. held at paragraph 93 that the words “under no liability whatsoever howsoever arising” were susceptible of one meaning only. However, he went on to find that despite this wide wording the words were not intended to apply where there was a wilful default.

In the recent case of Motortrak v. FCA Australia Pty Ltd[60], the High Court considered an exclusion clause that was similar to that in Sub-Clause 17.6. The Contract was wrongfully rescinded by Employer. The Employer thereafter failed to pay the Supplier and the Supplier claimed that this failure was itself a repudiatory breach of contract. The Supplier therefore terminated the Contract and claimed, amongst other things, loss of profit against the Employer. The Employer argued that it had no liability for such losses because of the exclusion clause. The Supplier argued that the exclusion clause only applied where loss of profits arose in connection with the performance of the Contract and not where the Employer simply refused to perform the Contract. The Supplier argued that the Employer’s interpretation of the exclusion clause would result in a breach of the Employer’s obligations having no contractual remedy. Moulder J. rejected the Supplier’s argument and therefore rejected the Supplier’s claim for loss of profits. His Lordship stated:

129. ‘…although Motortrak on the defendant’s construction, would be left without a claim for loss of profits, the clause does not preclude a claim for wasted costs arising out of the repudiation of the contract. It is a feature of Motortrak business that the revenue to be earned from this particular contract was largely, if not wholly, profits but there is no evidence that this was part of the factual matrix against which this agreement was concluded. Accordingly (adopting the approach of Carr J in Fujitsu) it cannot be said that FCAA”s construction would deprive the contract of all contractual force.

130. The court has to balance the indications given by the literal interpretation of the words used and the provisions of the contract against the factual background and the implications of the rival constructions. In my view in this case there is nothing in the factual background or the contract as a whole to override the language used in Sub-Clause 9.5. The commercial consequences, whilst adverse to Motortrak are not in my view such as to have the effect that the court can find that the objective meaning of the language of subclause 9.5 is other than as it appears on its face. It is a clear exclusion in the context of a clause which taken as a whole appears to have been drafted with some precision from the perspective of Motortrak and in relation to subclause 9.5, to the mutual benefit of both parties. As stated in Wood the court has to be alive to the possibility that one side may have agreed to something which in hindsight did not serve his interest.”

Loss of Profit

Under Sub-Clause 17.6, both direct and indirect loss of profit claims are excluded from liability. However, the Sub-Clause then provides exceptions to the exclusion clause; that the loss occurs under Sub-Clauses 16.4 or 17.1. Therefore, following a termination by the Contractor, the Contractor is entitled to claim loss of profit. The Contract does not provide the Employer with a similar exception in the event that it terminates the Contract under Clause 15.

Fraud, Deliberate Default and Reckless Misconduct

Fraud

There is no definition of ‘fraud’ within the FIDIC contracts. Fraud may encompass many different types of action, both criminal and civil. Under the criminal law in England, for example, fraud is committed under the Fraud Act 2006 where there is:

• a fraudulent representation;
• a failure to disclose information when there is a legal duty to do so; or
• fraud by abuse of position.

In each case a party’s conduct must be dishonest and his/her intention must be to make a gain or cause a loss or the risk of a loss to another.

There is no single cause of action for civil, or commercial, fraud. What may loosely be defined as ‘fraud’ is a set of heads of claim at common law and in equity. Each of these claims will have their own distinct elements which need to be pleaded and proved. Fentem and Walker provide some examples of “fraud”, which include:

‘claims in fraudulent misrepresentation or deceit, the economic torts of conspiracy and inducing breach of contract, bribery, certain breaches of fiduciary duty and claims founded on secondary liability for breach of trust in dishonest assistance and knowing receipt, as well as claims for wrongful or fraudulent trading and for transactions defrauding creditors made in the context of the Insolvency Act 1986.’[61]

‘Fraud’ will be defined by the substantive law of the contract. Under some laws, where fraud is proven, a party may be entitled to punitive damages. The laws of the USA, India, and the Philippines allow awards of punitive damages. Under English law a claim for punitive or exemplary damages is limited to a few cases and will not be successful for a breach of contract.[62] The laws of France, Germany, Japan, Korea, Taiwan and Switzerland do not permit claims for punitive damages. There is then the question of whether a DAB or an arbitrator is entitled to award punitive damages – see, for example, Garrity v. Lyle Stuart, Inc.[63]^, [64]^. This again raises jurisdictional issues.

Deliberate Default

The phrase ‘deliberate default’ has now been considered by the English courts on a number of occasions. In Astra Zeneca UK Ltd v Albermarle International Corp and Another,[65] the court had to consider whether or not the stoppage of a shipment was a deliberate breach of contract. Flaux J. found that the person involved had a mistaken view of the terms of the supply agreement and was therefore not entitled to act in the way that he did. He was in breach of contract. However, the judge went on to find that it was not a deliberate breach of contract because the individual was acting on the advice of US attorneys and had wrongly believed that he was entitled to do as he was doing.

In De Beers UK Limited v Atos Origin IT Services[66] the court held that deliberate default means:

‘a default that is deliberate, in the sense that the person committing the relevant act knew that it was a default (i.e. in this case a breach of contract).’

This has been recently confirmed by the High Court in Mutual Energy Ltd vs Starr Underwriting Agents Ltd & Anor[67] where Coulson J., as he then was, reviewed the authorities on the meaning of the phrase deliberate default. Coulson J held that:

‘There is plenty of authority to the effect that the use of the word “deliberate”, in the context of a “breach” or “default”, means an intentional act; in other words, a breach or default which the relevant party knew at the time that it committed the relevant act was a breach or default. …

‘[Counsel] expressly accepted that the “deliberate…breach” referred to in the proviso would require, not only a breach of contract or warranty on the part of MEL, but a breach which MEL knew, at the time of the relevant act or omission, was a breach of the term or warranty. Only then would the Insurers be entitled to avoid for deliberate breach. …I find (for the same reasons) that a “deliberate misrepresentation” must also involve the knowledge that what is being said or not said is a misrepresentation (and therefore a breach of duty).’

Reckless Misconduct

There is a difference between ‘wilful misconduct’ and ‘reckless misconduct’. Wilfulness means that a party intended to cause harm. Recklessness means the person knew or should have known that his action was likely to cause harm. Under English law ‘wilful misconduct’ will include ‘reckless misconduct’.[68] However, it does not follow that the words ‘reckless misconduct’ are broad enough to cover intent.

In PK Airfinance SARL & Anor v Alpstream AG & Ors[69] the court examined the phrase wilful misconduct. The court stated that this would include recklessness and would occur where a party was “indifferent to whether their actions were right or wrong and as to whether loss would result.” This has been often described as closing one’s eyes to an obvious risk (R v Parker[70]) or not caring what the results of one’s carelessness would be (Forder v Great Western Railway Co)[71]. In De Beers UK Limited v Atos Origin IT Services[72], the court expressed its opinion of recklessness in similar terms and stated that a party would be reckless where it acted “not caring whether or not he commits a breach of duty.”[73]

In Standard Chartered Bank v Pakistan National Shipping Corp & Ors[74], the court considered that where a party raised either intentional or reckless misconduct, as well as negligence, this might give rise to the defence of contributory negligence at common law.

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

[1] Dr. Götz-Sebastian Hök; Risk allocation in the FIDIC Conditions of Contract (1999) for Construction (Red Book) and the FIDIC Conditions of Contract (1999) for EPC / Turnkey Projects (Silver Book) from the perspective of a German lawyer.

[2] Nael Bunni – Third edition – see at pages 530-531.

[3] See, for example, the Unfair Contract Terms Act 1997 which prohibits certain exclusion clauses that seek to pass risk.

[4] Axel-Volkmar Jaeger et al – see at Chapter 19, page 335.

[5] Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601, 609.

[6] (1977) 180 CLR 266, 282-283.

[7] See Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd and another [2015] UKSC 72 [15] and A-G of Belize v Belize Telecom Ltd [2009] UKPC 10 and BDW Trading Ltd (t/a Barratt North London) v JM Rowe (Investments) Ltd [2011] EWCA Civ 548..

[8] [2010] UKSC 18.

[9] The agreement provided that “the owner shall defend, indemnify and hold harmless the charterer… from and against any and all claims, demands, liabilities, proceedings and causes of action resulting from loss or damage in relation to the vessel (including total loss) or property of the owner…irrespective of the cause of loss or damage including where such loss or damage is caused by, or contributed to, by the negligence of the charterer…”.

[10] [2009] O.J. No. 322.

[11] See http://www.adamsdrafting.com/2009/05/10/revisiting-indemnify-and-hold-harmless/ for case Stewart Title Guarantee Company v. Zeppieri [2009] O.J. No. 322 (S.C.J.) Ontario Superior Court of Justice.

[12] [1972] 3 W.L.R. 333.

[13] Elis Baker et al see at page 361, paragraph 7.67.

[14] Sub-Clause 17.1(b)(i) specifically provides “out of or in the course of or by reason of the Contractor’s design (if any), execution and completion of the Works and the remedying of any defects”.

[15] Nael Bunni – third Edition – see at page 532.

[16] See at Sub-Clause 17.1(b).

[17] See Sub-Clause 22.2(d) of the Red Book 4th Edn…”injury or damage was contributed to by the Contractor, his servants or agents, such part of the said injury or damage as may be just and equitable having regard to the extent of the responsibility of the Employer, his servants or agents or other contractors for the injury or damage”.

[18] Those events which are not covered by Sub-Clause 18.2 or Sub-Clause 18.4.

[19] Lehman Brothers Special Financing Inc v National Power Corporation & Anor [2018] EWHC 487 and Barclays Bank Plc v Unicredit Bank Ag & Anor [2014] EWCA Civ 302.

[20] See Sub-Clause 1.1.6.3 [Employer’s Equipment], 1.1.5.2 [Goods] and 1.1.5.1 [Contractor’s Equipment].

[21] Axel-Volkmar Jaeger, Gotz-Sebastian Hok “FIDIC – A Guide for Practitioners” at page 341.

[22] A similar definition was also given in the English case of Skanska Construction Ltd v Egger [Barony] Ltd [2002] EWCA Civ 310 at [18].

[23] Law 10/1995 and GD 273/1994

[24] Axel-Volkmar Jaeger, Gotz-Sebastian Hok “FIDIC – A Guide for Practitioners” at page 329.

[25] Sub-Clause 17.2 specifically provides “If any loss or damage happens… during the period when the Contractor is responsible for their care, from any cause not listed in Sub-Clause 17.3 [Employer Risks], the Contractor shall rectify the loss and damage at the Contractor’s risk and cost…”.

[26] Nael Bunni – third edition – see at Page 531. These risks are identified as being insurable.

[27] See Ellis Baker et al ‘FIDIC Contracts Law and Practice’ at page 345 and footnote 13 which refers to the FIDIC Contract Guide (1st Edition, 2000).

[28] However, in order for a party to recover Cost the event must have occurred in the Country – Sub-Clause 19.4(b).

[29] Unreported.

[30] see Clause 19 and the case of Rumdel Cape v South Africa Roads Agency Soc Ltd (234/2015) [2016] ZASCA 23 where this issue was considered in relation to a force majeure claim.

[31] See FIDIC Guide 1999.

[32] EWHC 447 (TCC), see paragraph 103.

[33] [2008] EWHC 2804 (Comm).

[34] [2005] EWHC 2528 (Comm), see paragraph 37.

[35] Nael Bunni ‘The FIDIC Forms of Contract’ – see at page 144.

[36] see commentary at Sub-Clause 17.1 which addresses use of the term ‘hold harmless’.

[37] Persimmon Homes Ltd v Over Arup & Partners [2017] EWCA Civ 373.

[38] [1843-60] All ER Rep 461; (1854) 9 Exch 341, 354.

[39] [1949] 2 KB 528.

[40] [1940] 2 KB 99.

[41] See also Croudace Construction Ltd v Cawoods Concrete Products Ltd (1978) 87 BLR 20.

[42] (1997) 87 BLR 42.

[43] [1998] EWCA Civ 1822 [8].

[44] [2002] BLR 139 (HL).

[45] [2016] BLR 360 (CA).

[46] [2016] EWHC 2941.

[47] [2009] 1 AC 1101.

[48] [2015] AC 1619.

[49] [2017] UKSC 24.

[50] [2008] VSCA 26.

[51] [2012] SASC 49.

[52] [2013] WASC 356.

[53] [2016] (US District Court of Pennsylvania).

[54] See www.ibanet.org/Forum – Thread: FIDIC 17.6 Limitation of Liability.

[55] However, see Motortrak v. FCA Australia Pty Ltd [2018] EWHC 990 (Comm) below where the court held that it would uphold the exclusion clause that severely limited a party’s remedies.

[56] [2008] EWHC 3034 (Admlty).

[57] Ibid at [99]; see also The Cap Palos [1921] P. 458. at p. 471-2.

[58] [1967] 1 AC 361 at p. 432.

[59] [1986] 2 Lloyd’s Rep.79.

[60] [2018] EWHC 990 (Comm).

[61]http://www.guildhallchambers.co.uk/files/Civil_Fraud_Back_to_basics_RossFentem&LucyWalker_ November_2012.pdf

[62] Final Award in Case 6216 (2002) ICC International Court of Arbitration Bulletin Vol. 1. No. 2 at 58.

[63] 353 N.E. 2nd 793 (N.Y. 1976).

[64] See further Werner J., Punitive and Exemplary Damages in International Arbitration (2006) Dossier of the ICC Institute of World Business Law: Evaluation of Damages in International Arbitration at page 101.

[65] [2001] EWHC 1574 (Comm).

[66] [2010] EWHC (TCC) at [206].

[67] [2016] EWHC 590 (TCC) at [28-29].

[68] National Semiconductors (UK) Ltd v UPS Ltd [1996] 2 Lloyd’s Law Rep. 212.

[69] [2015] EWCA Civ 1318.

[70] (1976) 63 CAS 211.

[71] [1905] 2 KB 532.

[72] [2010] EWHC (TCC) at [206].

[73] See also National Semiconductors (UK) Ltd v UPS Ltd [1996] 2 Lloyd’s Law Rep. 212 at 214 and the Court of Appeal in Lacey’s Footwear (Wholesale) Ltd. v Bowler International Freight Ltd [1997] 2 Lloyd’s Law Rep. 369 at 374 per Beldam LJ.

[74] [2000] EWCA Civ 230.

Clause 8 covers the start of works, time for completion, delays, extensions, and suspension of works. It includes provisions for commencement, completion, progress, delay damages, and suspension, with updates from the 4th Edition Red Book.

Summary

Clause 8 contains all the fundamental provisions relating to:

• the start of the Works;
• the Time for Completion;
• delays and the entitlement of the Contractor to an Extension of Time and of the Employer to delay damages; and
• the circumstances in which a suspension of the Works can occur and the implications for the Parties.

Origin of Clause

Sub-Clause 8.1 deals with the Commencement of the Works and is based on Clause 41 of the 4th Edition Red Book. The wording has now been changed; it is the “execution of the Works” which must be commenced as soon as “reasonably practicable”. The previous requirement was for the Contractor to start as soon as “reasonably possible”.

Sub-Clause 8.2 deals with the Time for Completion and is derived from Clause 43 of the 4th Edition Red Book. The wording differs but in essence, the requirement is for the Contractor to complete in the time finally arrived at as the extended date for completion, i.e. including any Extension of Time granted.

Sub-Clause 8.3 sets out the requirements for a Programme and has a different emphasis from Clauses 14.1 and 14.2 in the 4th Edition Red Book.

Sub-Clause 8.4 deals with the Extension of Time for Completion and is derived from Clause 44 of the 4th Edition Red Book. Significant changes are that the clause now omits the reference to “other special circumstances” which previously appeared, and a new provision is added at d) for “unforeseeable shortages“.

Sub-Clause 8.5 relates to delays caused by authorities and is derived from Clause 31.2 of the 4th Edition Red Book.

Sub-Clause 8.6 deals with the Rate of Progress and is derived from Clauses 14.2 and 46 of the 4th Edition Red Book.

Sub-Clause 8.7 sets out the Employer’s right to delay damages and is derived from Clause 47 of the 4^th   Edition Red Book. It was previously called “Liquidated Damages for Delay”.

Sub-Clauses 8.8 to 8.12 are derived from Sub-Clauses 40.1, 40.2 and 40.3 of the 4th Edition Red Book. These deal with the suspension of work by the Engineer and the consequences of the suspension, including payment for Plant and Materials. These clauses also deal with prolonged suspension and the resumption of work following suspension.

Cross-References

Reference to Clause 8 is found in the following clauses:

• Sub-Clause 1.3.2 [Definitions Commencement Date]
• Sub-Clause 1.3.3 [Definitions – Time for Completion]
• Sub-Clause 9 [Delayed Drawings or Instructions]
• Sub-Clause 1 [Right of Access to the Site]
• Sub-Clause 7 [Setting Out]
• Sub-Clause 12 [Unforeseeable Physical Conditions]
• Sub-Clause 24 [Fossils]
• Sub-Clause 4 [Testing]
• Sub-Clause 10 [Ownership of Plant and Materials]
• 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 3 [Extension of Defects Notification Period]
• Sub-Clause 3 [Variation Procedure]
• Sub-Clause 7 [Adjustment for Changes in Legislation]
• Sub-Clause 2 [Termination by Employer]
• Sub-Clause 1 [Contractor’s Entitlement to Suspend Works]
• Sub-Clause 2 [Termination by Contractor]
• Sub-Clause 4 [Consequence of Employer’s Risks]
• Sub-Clause 4 [Consequences of Force Majeure]
• Sub-Clause 1 [Contractor’s Claims]

Sub-Clause 8.1 – Commencement of Work

This Sub-Clause defines when the construction works will commence. The Engineer (Red Book) and Employer (Silver Book) are required to give the Contractor not less than 7 days’ notice of the Commencement Date (which is defined as the date notified under this Sub-Clause). Unless otherwise provided for, the Commencement Date must be within 42 days of the Letter of Acceptance. Thereafter, the Contractor must commence as soon as reasonably practicable.

“Works” are defined narrowly and mean the Permanent and Temporary Works. It is this which must be started as soon as reasonably practicable. The definition of “Contractor’s Equipment” and “Temporary Works” supports the view that the “Works” may not cover all aspects of mobilisation, although the definition of ” Temporary Works” would cover the setting up of the site camp, laboratories, etc.

If the Engineer or Employer failed to give notice of the Commencement Date, such an act would be a breach of contract and the Contractor might be entitled to claim an Extension of Time and Costs under Sub-Clause 8.4. The Sub-Clause should be read together with Sub- Clause 2.1 [Right of Access to the Site]. Access for the Contractor must be given from commencement, in accordance with the prescribed time in the Appendix to Tender (Red and Yellow Books) or Particular Conditions (Silver Book). If no time is prescribed, then the Employer must make sure that such parts of the Site are made available so that the Contractor can pursue the intended sequence and methods he set out in the Programme submitted under Sub-Clause 8.3. It should be noted that in many instances, there will be no need for the Contractor to have access to all parts of the Site at once.

Under English Law, there would be implied into the contract a term that the Employer will provide the Site to the Contractor in order that he may carry out his obligations. This may not be the case in other jurisdictions. The FIDIC Guide advises that the Employer should not enter into a binding contract unless he is in a position to comply with Sub-Clause 2.1.

Failure to give access to the Site would no doubt trigger a Claim for Extension of Time and Costs under Sub-Clause 8.4 as being a “delay, impediment, or prevention” to completion of the Works. It is to be noted that there is, in English law, a doctrine of prevention, which might apply if the Engineer has refused to award an Extension of Time when he should have done so, and the Employer commits an act of prevention; a common example would be failing to give access to the Contractor. In such a situation, the Extension of Time mechanism and the damages for delay provisions fall away, and the Contractor must complete in a reasonable time: Peak Construction (Liverpool) Limited v McKinney Foundations Limited.[1]

Once on Site, the Contractor must “proceed with the Works with due expedition and without delay“. This wording is exactly the same as in the 4th Edition. The FIDIC Guide states that the importance of this last sentence should not be overlooked. In the case of Obrascon Huarte Lain SA v HM Attorney General for Gibraltar[2], Jackson LJ. held that this clause was not directed at every task on the contractor’s to-do list. It was principally directed at activities which are or may become critical. Jackson LJ then referred to the case of Sabic UK Petrochemicals Ltd (formerly Huntsman Petrochemicals (UK) Ltd) v Punj Lloyd Ltd (a company incorporated in India)[3] to support this statement.

However, the Sabic case appears to be concerned with the obligation of “due diligence” rather than “due expedition“.

The phrase “due diligence and without delay” may be interpreted in the light of the other obligations outlined elsewhere within the Contract; for example, Clause 15 [Termination by Employer]. A breach by a Contractor of the last sentence of Sub-Clause 8.1; i.e. due expedition and without delay, is not a specific ground for termination by the Employer. However, Sub-Clause 15.2 does allow an Employer to terminate if the Contractor without reasonable excuse fails to “proceed with the Works in accordance with Clause 8″. Clause 8 goes on to set out stringent requirements as to Programme (see Sub-Clause 8.3, not least as to the order in which the Works will be carried out, procurement, manufacture and delivery of plant, and details of estimated personnel and equipment.) Furthermore, see the requirements on a Contractor as to Rate of Progress (Sub-Clause 8.6).

Reading Clause 8 as a whole, it is suggested that the meaning of “proceed with the Works with due expedition…” must be interpreted as more than merely to start and keep going, but rather to proceed in accordance with the programming and resourcing details already submitted by the Contractor, insofar as this is critical to the completion of the Works.

In the case of Wunda Projects Australia P/L[4], the District Court of South Australia commented that a construction programme is dynamic, and if there is lack of progress, the programme must changed.

Whether a Contractor is proceeding with “due expedition” is to be measured against the updated and not the superseded programme. See below as to the particular obligations of the Contractor to provide updated programmes under Sub-Clause 8.3.

It is suggested that the addition of the words “without delay” must mean without a delay for which an Extension of Time is provided for elsewhere in the contract.

Sub-Clause 8.2 – Time for Completion

This is the Contractor’s paramount time-related obligation: he must complete the whole of the Works and, if applicable, each Section of the Works within the time required by the Contract, subject to any extensions of time to which he may be entitled. The time within which the Works must be completed is to be found in the Appendix to Tender and is calculated from the Commencement Date. The Time for Completion is defined at Sub-Clause 2.1 as the time for completing stated in the Appendix, with any extension to it. Owing to the nature of the claims process generally, and indeed the specific time scales set out in Sub-Clause 20.1 for making claims, there may be a period of uncertainty as to the actual date for completion and this could well be a lengthy period.

The reference to the “whole of the Works” means the passing of Tests on Completion and all work required to be completed for the purposes of issuing a Taking- Over Certificate, save for minor outstanding works and defects which will not substantially affect the use of the Works or their intended purpose.

Sub-Clause 8.3 – Programme

The Contractor is required to provide a detailed Programme within 28 days of the receipt of the Notice of Commencement. It is to be revised whenever it is inconsistent with actual progress or the Contractor’s obligations. There are stipulations in Sub-Clause 8.3 as to what the Programme shall include. The Contractor is obliged to proceed in accordance with it, unless the Engineer informs him of its non-compliance within 21 days, in which case the Contractor is obliged to revise it.

Generally, Sub-Clause 8.3 has a different emphasis from the previous Sub-Clauses 14.1 and 14.2 in the FIDIC 4^th Red Book, where the Engineer’s consent to the Programme submitted was required, and the onus was on the Engineer to request such information. Further, the obligation on the Contractor to revise a non-conforming programme was also at the Engineer’s request.

The FIDIC Guide explains that Sub-Clause 8.3 does not empower the Engineer either to give or withhold approval, only to notify if the Programme does not comply with the Contract. Thus, it is suggested, neither party can misuse the Programme to obtain an unfair advantage. The Guide envisages a situation where an over–optimistic Programme has been submitted – perhaps in terms of productivity, and advises that, since there can be no approval, such a Programme could not be used as the basis for the unquestionable validation of a claim for an extension of the Time for Completion. This matter was considered in England in the case of Glenlion v Guinness Trust[5], where it was decided that just because a Contractor has proposed a programme achieving early completion, he could not thereby impose obligations on the designer that the design should be ready earlier than was necessary to complete in accordance with the completion date, only that the Contractor should not be hindered in achieving the completion date.

However, the situation might be different if the Programme were a contract document. There is, in English law, some authority that an inability to work in accordance with a programme or method could give rise to a claim for a variation and costs – see Yorkshire Water Authority v Sir Alfred McAlpine[6]. Although the ‘Letter of Tender’ is now defined separately from ‘Tender’, which comprises the Letter of Tender and all other documents which the Contractor submitted with the letter of Tender, care should still be taken to exclude the tender programme.

The requirement to provide detail as to timing and methods that must be included in the Programme may make it easier to identify when there has been a breach of this Sub-Clause. Note that the Silver Book for EPC/Turnkey Projects also contains broadly the same requirements as to the content of the programme. One might consider that an Employer should not be concerned about methods and timing, provided the end result is supplied on time, unlike the traditional situation which requires careful monitoring by the Engineer of both quality and progress. If the Contractor is to bear the risk inherent in the Silver Book, then it is suggested that he should be left to carry out the project unfettered by interference from the Employer.

The Contractor must proceed with the Programme he has submitted in the absence of notice from the Engineer that it is non-compliant. The Employer’s Personnel (defined by Sub-Clause 1.1.2.6 as including the Engineer and his staff) are entitled to rely on the Programme for the planning of their activities. In practical terms, the Engineer can rely on the Programme in preparation of his detailed design. In particular he will want to rely on the details included regarding procurement, manufacture of plant, delivery and erection, and testing. The Employer will want to be able to rely on it for the purposes of giving possession of the Site. Failure to give possession of the Site may give the Contractor entitlement to Extension of Time and Cost under the provisions of Sub-Clause 8.4(e).

The Contractor is required to give notice of probable future events which may adversely affect or delay the actual execution of the Works. This means any event, not just events which may affect the contractual Time for Completion.

Whilst it is no doubt good practice for the Contractor to revise or update his Programme, he is now expressly obliged to revise it:

• whenever the current Programme is inconsistent with actual progress or with his obligations;
• by the last sentence of Sub-Clause 3, in the event that he gives notice of specific probable future events or circumstances, which may adversely affect or delay the execution of the Works; or
• if the Employer gives him notice that the Programme fails to comply either with the Contract or is inconsistent with actual progress and the Contractor’s stated

Sub-Clause 8.4 – Extension of Time for Completion

This Sub-Clause sets out the mechanism by which an Extension of the Time for Completion may be determined. The starting point is that any delay must affect completion of the Works for the purposes of Sub-Clause 10.1. A distinction is therefore made between non-critical delays and critical delays. Critical delays give an entitlement to an Extension of Time, and this follows common law principles. In Kane Constructions Pty Ltd v Sopov[7], Warren CJ stated that “any delay that does not affect practical completion is irrelevant.”

The Engineer must grant an extension if the Contractor is entitled to one by reason of the causes listed in sub-paragraphs a) to e). Note that at b), an extension of the Time for Completion is to be granted for a cause of delay giving entitlement under another Sub-Clause of the Contract. For these – see the table below.

The Contractor must comply with the procedure set out at Sub-Clause 20.1,[8] and the Engineer must make a fair determination in accordance with the Contract. Although the Engineer may review previous extensions given, he is not empowered to decrease the total Extension of Time.

Generally, the clause seems to be intended to balance the rights of both parties – the Contractor’s right to have further time for an event for which he is not responsible, and the Employer’s right to delay damages for a delay for which he is not culpable. The FIDIC Guide states that the clause is for the benefit of both parties.

The Contractor must comply with the claims notification procedure under Sub-Clause 20.1. The words “if and to the extent that completion for the purposes of Sub-Clause 10.1… is or will be delayed by…” make it clear that it is a delay to completion, as provided for by Sub-Clause 10.1 which is to be compensated for by the Extension of Time, and not merely disruption to progress attributable to a qualifying cause.

Each of the qualifying causes listed are as follows:

• a “Variation” or “other substantial change in the quantity of an item of work”;
• “a cause of delay giving an entitlement to Extension of Time under a Sub-Clause of these Conditions”;
• “exceptionally adverse climatic conditions”;
• “unforeseeable shortages …of personnel or Goods caused by epidemic or Governmental actions.”; or
• “any delay, impediment or prevention…”

A “Variation” or “other substantial change in the quantity of an item of work”

Clause 13 makes it clear that Variations may include a) changes to quantities, d) omission of any work, e) any additional Work, Plant, Materials or services, and f) changes to the sequence and timing of the Works. The latter has become more significant in light of the rigorous requirements for the Programme set out under Sub-Clause 8.3. In the Red Book 4th Edition, an issue arose from the wording which referred to “the amount or nature of extra or additional work“, which could be seen as inconsistent with the description of Variations in Clause 51, not all of which were extra or additional. The change in wording has removed this anomaly.

In the event that a change was ordered which caused a delay to the Works, but which did not fall within the description of what a Variation may include by Sub-Clause 13.1, the likely position under English law would be that Peak Construction (Liverpool) Limited v McKinney Foundations Limited[9] would apply: time would be at large and the Employer’s right to delay damages would fall away also.

“a cause of delay giving an entitlement to Extension of Time under a Sub-Clause of these Conditions”.

In the 4th Edition, it was unclear whether the Sub- Clause that was being referred to was intended to mean one dealing with events which might be a cause of delay (but which did not necessarily qualify for an Extension of Time). The wording in FIDIC 1999 has now removed any ambiguity in that it now expressly refers to a Sub-Clause which gives entitlement to an Extension of Time. Express references to entitlement to Extension of Time elsewhere in the Conditions can be found in the following table. Most, but not all, also deal with the Contractor’s entitlement to money.

“exceptionally adverse climatic conditions”.

The wording is retained from the 4th Edition Red Book. The FIDIC Guide suggests that a way of establishing whether such climatic conditions have in fact occurred, would be to consider the frequency with which similar adverse conditions have occurred at the Site in light of the length of the Contract period (e.g. for a two-year contract), conditions which occurred 4 or 5 times the length of the contract period (e.g. once every 8-10 years) might be exceptionally adverse.

In order to qualify for an Extension of Time the climatic conditions (these need not necessarily be restricted to weather but could arguably include site conditions) must be “exceptionally adverse“. This does not mean both exceptional and adverse: for example, if a Contractor experienced a flood as a result of heavy rain, he would not have to show that the rain was both unusual and heavy but that it was particularly heavy.

“unforeseeable shortages …of personnel or Goods caused by epidemic or Governmental actions.”

“Unforeseeable” is defined at Sub-Clause 1.1.6.8 in the Red and Yellow Books as “not reasonably foreseeable by an experienced contractor by the date for submission of the Tender“. This definition is now applied to the availability of labour or goods.

“any delay, impediment or prevention…” caused by the Employer, his Personnel, or other contractors.

The quoted words are retained from the 4th Edition. English Law requires clear words in a contract in order for an Extension of Time to be granted for a breach by an Employer. It is suggested that these words are indeed clear enough to cover an act of delay or prevention by the Employer and would not fall foul of the rule in Peak Construction (Liverpool) Limited v McKinney Foundations Limited,[10]  with the consequence that the Extension of Time mechanism would fail and time would be considered at large.

Under English law an Employer cannot, in the absence of an express clause to the contrary, delay the progress of the works, by Variation or otherwise, and then claim delay damages. This is often referred to as the ‘prevention principle’. This principle was set out in Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board:[11]

“It is well settled that in building contracts – and in other contracts too – when there is a stipulation for work to be done in a limited time, if the other party by his conduct – it may be quite legitimate conduct, such as ordering extra work – renders it impossible or impracticable for the other party to do his work within the stipulated time, then the one whose conduct caused the trouble can no longer insist upon strict adherence to the time stated. He cannot claim any penalties or liquidated damages for non-completion in that time.”

The prevention principle operates by reason of implied term and therefore an express term to the contrary will override it. In North Midland Building Limited v Cyden Homes Limited[12] the English Court of Appeal held that parties to a construction contract were free to allocate the risk of concurrent delay.

Therefore, if there are both contractor delays and employer delays, the contractor will not be entitled to an Extension of Time. The court found that if the drafting of such a clause is sufficiently clear, the prevention principle will not invalidate a clause in which it allocated risk in this way. The procedure for the Contractor to notify any claims for Extension of Time is set out at Sub-Clause 20.1.

Causation and Concurrent delay

A concurrent delay has been defined as “a period of project overrun which is caused by two or more effective causes of delay which are of approximately equal causative potency” – see Concurrent Delay by John Marrin QC.[13] This definition has subsequently been approved in Adyard Abu Dhabi v Sds Marine Services[14] and in North Midland Building Ltd v Cyden Homes Ltd.[15]

Sub-Clause 8.4 does not address the situation where concurrency occurs. Consider the situation where the Contractor has been delayed by the Employer’s failure to give possession of certain parts of the Site: however, some or all of that delay would have occurred anyway, due to either neutral factors or an event for which the Contractor is responsible. Does the Contractor get an Extension of Time for all the period of delay? Should any Extension of Time be apportioned according to responsibility for the delay? Should any money payable also be apportioned?

The analysis used by parties in determining the true cause of delay has come under much consideration by the English and other Commonwealth courts. The ‘dominant cause’ approach has been approved in certain cases: namely that, if an event which is the Employer’s responsibility is the dominant cause of loss, that is sufficient for liability, notwithstanding other concurrent causes. Another approach has been the ‘but for’ test: in other words, but for the delay complained of, would the delay have occurred.

Neither of these tests have been entirely satisfactory when applied in the context of a construction project. In the recent case of De Beers UK Ltd v Atos Origin It Services UK Ltd,[16] Edwards-Stuart J stated what he considered to be the test when concurrent events occurred:

“The general rule in construction and engineering cases is that where there is concurrent delay to completion caused by matters for which both employer and contractor are responsible, the contractor is entitled to an Extension of Time but he cannot recover in respect of the loss caused by the delay. In the case of the former, this is because the rule where delay is caused by the employer is that not only must the contractor complete within a reasonable time but also the contractor must have a reasonable time within which to complete. It therefore does not matter if the contractor would have been unable to complete by the contractual completion date if there had been no breaches of contract by the employer (or other events which entitled the contractor to an Extension of Time), because he is entitled to have the time within which to complete which the contract allows or which the employer’s conduct has made reasonably necessary.”

Whatever approach is adopted, however, the courts have recently stated the importance of establishing causation: Adyard Abu Dhabi v SDS Marine Services. The Court rejected an attempt to argue that notional or theoretical delay would suffice in establishing a right to an Extension of Time.

In Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd,[17] the Court accepted the principle that a Contractor would be entitled to an Extension of Time for the whole of the period of delay in circumstances where there was another, concurrent delay. Dyson J stated:

“… if there are two concurrent causes of delay, one of which is a relevant event, and the other is not, then the contractor is entitled to an Extension of Time for the period of delay caused by the relevant event notwithstanding the concurrent effect of the other event. Thus to take a simple example, if no work is possible on a site for a week not only because of exceptionally inclement weather (a relevant event), but also because the contractor has a shortage of labour (not a relevant event), and if the failure to work during that week is likely to delay the works beyond the completion date by one week, then if he considers it fair and reasonable to do so, the architect is required to grant an Extension of Time of one week. He cannot refuse to do so on the grounds that the delay would have occurred in any event by reason of the shortage of labour.”

This approach was adopted by Akenhead J in the case of Walter Lilly & Company Ltd v Mackay & Anor.[18] In this case, Akenhead J stated:

“I am clearly of the view that, where there is an Extension of Time clause such as that agreed upon in this case and where delay is caused by two or more effective causes, one of which entitles the Contractor to an Extension of Time as being a Relevant Event, the Contractor is entitled to a full Extension of Time.”

In contrast it was held by the Scottish Court of Appeal in the decision of City Inn Ltd v Shepherd Construction[19] that an apportionment could be possible on delays where the events causing delay were both in operation at the same time with a single consequence, and the Court was concerned with the application of a common sense approach to the assessment. However, this case is to be treated cautiously and in Adyard Abu Dhabi v Sds Marine Services,[20] the Court held that the approach adopted in City Inn “does not reflect English law.”

The Engineer is required by Sub-Clause 20.1 to determine an Extension of Time (in the absence of agreement after consultation) in accordance with Sub- Clause 3.5 [Determinations]. This requires him (after consulting with each Party to try to reach agreement) then to “make a fair determination in accordance with the Contract.” Similarly to the Red Book 4th Edition, he is obliged not only to consider the causation of the delay but the fairness of his determination where time is concerned.

On the question of prolongation costs which may have been suffered as a result of the delay, note that the clauses giving Cost and how that is to be determined should all be considered individually. The provisions giving an entitlement to Cost cross-refer to Sub-Clause 3.5, while the provisions providing for payment and Variations do not – namely Sub-Clauses 11.2, 13.2,

15.5 and 16.4. Where Cost is to be determined, it is to be made in accordance with Sub- Clause 3.5: i.e., the determination is to be fair. This is different to the 4th Edition where the Engineer is not asked to consider fairness in relation to Cost, only causation.

Consider the situation where a Contractor has suffered delay as a result of an error in the setting out of levels on a road project, and he has shown that he could not reasonably have discovered it and avoided the delay and/or Cost, but he has also had problems with a defaulting Sub-Contractor, for which he was responsible. Under Sub-Clause 4.7 [Setting Out], he will be entitled to both time (under Sub-Clause 8.4, assuming compliance with Sub-Clause 20.1) and thus relief from payment of delay damages, and Cost, to be determined in accordance with Sub-Clause 3.5.

It is suggested that the sensible and fair result in many instances of concurrent delay would be for the time, but not the money, to be given to the Contractor (unless the Contractor can identify costs which are solely attributable to the Employer-caused delay) and the addition of the requirement of fairness in determining Cost goes some way to enabling the Engineer to make such a decision. Where the Engineer refuses an Extension of Time, the payment of delay damages must follow: see Sub- Clause 8.7 below.

The last part of Sub-Clause 8.4 requires the Contractor to give Notice to the Engineer in accordance with Sub- Clause 20.1. Sub-Clause 20.1 now requires that the Contractor gives Notice of a claim within 28 days of becoming aware of the event giving rise to delay and particulars are to be provided within 42 days. It is worth highlighting here that there is a clear departure from the position in the 4th Edition, in that failure to comply with the provisions of Sub-Clause 20.1 will now expressly bar the claim.

Sub-Clause 8.5 – Delays Caused by Authorities

This Sub-Clause provides that unforeseeable delay or disruption caused to a Contractor by a public authority will give entitlement to an Extension of Time. It is expressly provided that such delay or disruption will fall within Sub-Clause 8.4 b) for the purposes of entitlement to time. However, it is difficult to see how the reference to “disruption” can be reconciled with the wording set out in Sub-Clause 8.4, which is perfectly clear: it must be a delay to completion for the purposes of Sub-Clause 10.1, which will trigger a right to an Extension of Time. Mere disruption to progress as distinct from delay to the completion date would not be sufficient. This point is specifically highlighted in the FIDIC Guide in the commentary to Sub-Clause 8.4, and there seems to be no clear reason for the inconsistency.

Sub-Clause 8.6 – Rate of Progress

This Sub-Clause provides the basis for the Engineer to monitor progress by reference to the Programme submitted by the Contractor under Sub-Clause 8.3, and to require a Contractor who is in delay for reasons which are his responsibility under the Contract, to provide a Programme describing how he will accelerate to ensure completion within the Time for Completion (which is to include any Extension of Time granted). The Contractor shall adopt the methods described and the Employer can claim his costs incurred.

This Clause should be read together with the provisions set out in Sub-Clause 8.3.

The Sub-Clause only operates when the causes of delay are not ones which fall within Sub-Clause 8.4, thus giving relief to the Contractor by means of an Extension of Time. Whether the delay qualifies for an Extension of Time or not will be the first major question which arises, and is beset with problems. The process of determining the actual entitlement of the Contractor could well be a lengthy one. Several applications for further time may be made which overlap. Since the Sub-Clause suggests that it is to be used when the Engineer has gone through the process of determining any Extension of Time, in practice therefore a Contractor could frustrate and prevent the use of the Sub-Clause by keeping the Engineer busy considering his claim(s). If the Contractor has applied for one or more extensions of time, the Engineer will have to determine them. If, for example, he has determined that the Contractor is entitled to only part of the claimed Extension of Time, then this Clause will operate for the period of delay for which relief has not been given.

A problem for the Contractor is that if, when claiming that the delay warrants further time for completion, he refuses to act on the Sub-Clause 8.6 Notice, he might put himself at risk of a possible Employer termination under Sub-Clause 15.2 as having “abandoned the Works or otherwise plainly demonstrated the intention not to continue performance” or “failing… to proceed with the Works in accordance with Clause 8.” What constitutes a failure to proceed will be decided on the facts. See the detailed commentary on Clause 15 for further details.

On the other hand, if a Contractor complies with the Sub-Clause 8.6 Notice and it is subsequently found that the delay did indeed entitle him to an Extension of Time, the Employer will argue that he should not have complied and further that any costs of the compliance (i.e. the costs of the measures taken by the Contractor to complete on time) should not be met by him. It is suggested that the Contractor is likely to take the prudent course and comply and then argue his case later. He may then well say that he has been requested to accelerate by implication: this is not an uncommon argument in practice and there may well be many examples of correspondence between the parties on the topic, which may build a picture of the facts on which the parties will rely in a dispute.

However, simply because the Engineer (in error as it turned out) refused to grant an Extension of Time, this is unlikely to amount to an implied acceleration agreement. However, if the Contractor can show that he had no real alternative but to accelerate in light of the serious risk of termination, it is suggested that a DAB or Arbitrator may have some sympathy with that position.

The General Conditions contain no express mechanism for the Contractor to be instructed to complete ahead of the Time for Completion, although the addition of the Value Engineering Clause at 13.2 does allow the Contractor to submit a proposal for acceleration and reduction of cost and improvements to the efficiency or value of the Works. As indicated above, it is difficult to demonstrate an implied instruction to accelerate. The FIDIC Guide advises that the parties should reach a separate agreement.

What happens if the Engineer fails to determine an Extension of Time? If the Engineer (or the Employer in the Silver Book) fails to operate the contractual procedure for determining an extension in accordance with the contract provisions, it would be open to the Contractor to argue that there would be no Time for Completion and that time was at large (at least under English Law). The Contractor would be obliged to complete in a reasonable time and be paid his reasonable costs. Note however that there would be a distinction between failure to operate the mechanism set out in the contract and simply disagreeing with the Contractor, in which case the Contractor would have to operate the procedure for disputes under Clause 20.

Sub-Clause 8.7 – Delay Damages

This is the Sub-Clause which sets out the amount, up to the maximum stated in the Appendix (for the Red and Yellow Books) and Particular Conditions (for the Silver Book) which can be paid by the Contractor to the Employer in the event of late completion of the Works or any Section, if applicable. The Employer is required to comply with the provisions in Sub-Clause 2.5 [Employer’s Claims]. The Employer is not entitled to recover his actual losses save for where he has terminated the Contract. For the effect here, see the Clause 15 commentary.

The payment of damages for delay, previously called “Liquidated Damages for Delay“, was dealt with in the 4th Edition Red Book at Clause 47. The requirement for the Employer to comply with his claims procedure (Sub-Clause 2.5) is new. The words in the 4th Edition “…and not as a penalty…” have been removed. The express power given to the Employer in the 4th Edition to deduct such damages from monies due or to become due to the Contractor has been removed.

However, despite these changes, the overall concept of capped damages has been retained in the new forms, and thus the parties agree a mechanism for a sum to be paid in the event of delay. The Contractor knows in advance the likely level of his risk in the event of delay, and the Employer has some certainty as to his recovery levels in the event of delay, and avoids the hurdles involved in proving his actual loss.

Historically, under English law, a liquidated damages provision had to be a genuine pre-estimate of loss. However, in Cavendish Square Holding BV v Talal El Makdessi (Rev 3),[21] the Supreme Court held that it was unhelpful to ask the question since the fact that the clause is not a pre-estimate of loss does not automatically mean it should be regarded as a penalty. The Supreme Court held that there might be other reasons to uphold the clause, and the key question was whether the clause is penal, not whether it was a pre-estimate of loss. In assessing whether a liquidated damages provision was penal in nature, the clause in question had to be considered including evidence of the commercial background.

Further, when considering the penal nature of a clause, the court or arbitrator must ask:[22]

“whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.”

The penalty may therefore be considered as a security for performance of the primary obligation. However, although the English courts may strike down a liquidated damages clause if the amount is “out of all proportion to any legitimate interest of the innocent party“, it will not increase the amount.[23] The parties may agree a limited loss if they choose to do so and indeed can insert ‘nil’ per week as the specified loss, and in English Law this will be upheld: Temloc v Errill Properties Limited.[24]

The Sub-Clause is triggered when the Contractor fails to comply with the Time for Completion in Sub-Clause 8.2, and the Works are not complete in accordance with that Clause. The complicated references in the Red Book 4th Edition to Clauses 48 and 43 in that contract have been removed: the clause is simpler and better for it.

The delay damages are stated to be the only damages due from the Contractor to the Employer for “such default“; i.e. for the failure to comply with the Time for Completion, save in the event of termination under Sub-Clause 15.2. It is to be noted that the clause maintains the last sentence that the Contractor is not relieved of his “…obligation to complete the Works, or from any other duties, obligations or responsibilities which he may have under the Contract.” In some jurisdictions, these words might give an Employer a potential argument as to recovery of damages for other defaults. This point was debated in Biffa Waste Services Ltd & Anor v Maschinenfabrik Ernst Hese GmbH and Ors[25].

Ramsey J. rejected an argument by Biffa that similar wording opened up a claim for unliquidated damages. He said that the words were to be read in context as a reminder of the other obligations under the contract. There were other rights of the Employer under the contract in relation to rates of progress and termination, but Ramsey J. found that the provisions of the clause could not be construed to draw a distinction between simple failure to complete and failure to complete caused by a breach of another obligation. Biffa could not recover damages for delay caused by breaches of the contract, other than the liquidated damages.

The limitation of liability under Sub-Clause 17.6 poses a real conflict with the provisions of this Sub-Clause, and is wholly inconsistent with the Employer’s right to recover delay damages. It expressly excludes liability of the Contractor to the Employer for loss of use of the Works (permanent or temporary) even if that loss of use is caused by the Contractor’s failure to comply with the Time for Completion and otherwise delay damages would be triggered. Upon termination by the Employer under Clause 15, the position is different as the provisions for delay damages do not operate anyway. It is unclear how these clauses are to be reconciled, and the FIDIC Guide does not currently assist on the matter.

Clauses 8.8-8.12: Suspension of Work, Consequences and Resumption of Work

Sub-Clause 8.8 empowers the Engineer (in the Red and Yellow Books) and the Employer (in the Silver Book) to instruct the Contractor to suspend part or all of the Works. If this occurs, the Contractor must protect the Works against damage. The Employer may inform the Contractor of the reason for the suspension, but is under no obligation to do so. If he does and the reason is the Contractor’s responsibility, the provisions contained in Sub-Clauses 8.9, 8.10 and 8.11 will not apply.

If the suspension is not due to the Contractor’s default, there is a procedure for the parties to follow set out in Sub-Clauses 8.9 and 8.10. In the event of a prolonged suspension, Sub-Clause 8.11 allows the Contractor to ask permission to proceed and if permission is declined, he may notify an omission for the purposes of Clause 13 or may give notice of termination under Sub-Clause 16.2.

The Engineer can instruct a suspension at any time. There would seem to be no restriction on his power to do so and there is no advice on this in the FIDIC Guide. For example, the Engineer could instruct a suspension in the event that the Employer is having funding difficulties. The Engineer is of course obliged to carry out his duties generally in accordance with Sub-Clause

3.1, in that he shall be deemed to act for the Employer.

In making determinations, however, such as the one he makes under Sub-Clause 8.9, he is to proceed in accordance with Sub-Clause 3.5: i.e., to make a fair determination taking regard of relevant circumstances, but this requirement does not apply to the giving of the initial instruction under Sub-Clause 8.8 (see Sub-Clause 3.3). In the example given above, where the Employer asks the Engineer to suspend to allow him to deal with financing difficulties, it is suggested that there would be no major injustice if the Engineer then exercised his power to grant time and cost under Sub-Clause 8.9. The FIDIC Guide does suggest that the reason for the instruction to suspend is given to the Contractor to clarify the applicability of the provisions of Sub-Clause 8.9 which he may invoke.

Sub-Clause 8.8 requires the Contractor to “protect, store and secure such part or the Works against any deterioration, loss or damage.” Any Cost which the Engineer may determine under Sub-Clause 8.9 would no doubt include the cost of the secure storage of the Works or part of the Works.

The Contractor must comply with the notification requirements in Sub-Clause 8.9 when claiming that the instruction to suspend caused him delay and/or Cost. He is required to give notice to the Engineer (or to the Employer for the Silver Book). Sub-Clause 8.9 sensibly provides that a Contractor will not be entitled to recover time or Cost if he is responsible for making good his own faulty design or workmanship or materials, nor his failure to comply with the safe protection provisions in Sub-Clause 8.8.

Where the suspension has been for work on Plant or delivery of Plant/Materials for more than 28 days, and the Plant/Materials have been marked as the Employer’s property, Sub-Clause 8.10 provides for the Contractor to be paid the value of Plant and Materials which have not been delivered to Site.

Sub-Clause 8.11 provides for what happens in the event of a prolonged suspension: if the suspension under Sub-Clause 8.8 has continued for more than 84 days then the Contractor may ask for “permission” to proceed. If the Engineer (or Employer) declines to so do within 28 days, the Contractor may notify that the suspension is an omission under Clause 13 in respect of the affected part of the Works, to be valued in accordance with Clause 12. There is no requirement that this notice should be given in accordance with and comply with the provisions of Sub-Clause 20.1. If the whole of the Works is affected, then the Contractor may terminate the Contract under Sub- Clause 16.2(f).

Sub-Clause 8.12 then goes on to refer to the “permission or instruction to proceed” being given. It is not clear what the difference is between permission and instruction, as neither term is defined. If the Engineer does give either permission or an instruction to proceed, then the parties are to examine the Works, Plant, and Materials jointly, and the Contractor is obliged to make good any damage, if it has occurred during the suspension period. On resumption of work, Sub-Clause 8.9 expressly provides that the Contractor will be entitled to both time and Cost, not only for complying with the suspension instruction under Sub-Clause 8.8, but also for resuming work under Sub- Clause 8.12.

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

[1] (1976) 1 BLR 114.

[2] [2015] EWCA Civ 712 (09 July 2015) at [132].

[3] [2013] EWHC 2916 (TCC).

[4] [2010] SADC 96 (29 July 2010).

[5] (1988) 39 BLR 89.

[6] (1985) 32 BLR 114.

[7] [2005] VSC 237 at 661.

[8] Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No. 2) [2007] EWHC 447 [103].

[9] (1976) 1 BLR 114.

[10] (1976) 1 BLR 114.

[11] [1973] 1 WLR 601 at 607.

[12] [2018] EWCA Civ 1744.

[13] (2002) 18 Const LJ No. 6 436.

[14] [2011] EWHC 848 (Comm).

[15] [2018] EWCA Civ 174.

[16] [2010] EWHC 3276 (TCC).

[17] (1999) Con LR 32.

[18] [2012] EWHC 1773 [370].

[19] [2010] BLR 473.

[20] [2011] EWHC 848 (Comm).

[21] [2015] UKSC 67.

[22] Ibid at [32].

[23] The position is different in a number of Civil law jurisdictions.

[24] [1987] 39 BLR 30.

[25] [2008] EWHC 6 (TCC)(11 January 2008).

MT Højgaard is an important English case, considering fitness for purpose obligations in design-and-build contracts. This article examines the Supreme Court’s analysis of a fitness for purpose obligation in Højgaard and whether it would be applied to FIDIC’s Yellow Book contracts.

MT Højgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd & Anor ^[2]   is an important English case because it considered a fitness for purpose obligation in a design and build contract. In FIDIC’s Yellow Book contracts (1999 and 2017) there are also fitness for purpose obligations. This article examines the Supreme Court’s analysis of a fitness for purpose obligation in the Højgaard case and whether it would be applied to FIDIC’s Yellow Book contracts.

The Højgaard case concerned the foundation structures of two offshore wind farms that Højgaard had designed and installed.  These foundations failed shortly after completion of the project and the remedial costs were €26.25 million. The contract incorporated E.ON’s “Technical Requirements” which made reference to an international design standard – J101.  This standard contained an error which meant that the strength of the foundation structures would be substantially over-estimated.  The Technical Requirements also required that the foundations be designed to have a design lifetime of twenty years and contained a requirement (clause 8.1(x)) that the contractor carry out the works so that they were “fit for its purpose”.  This was defined in a way that it included adherence to the Technical Requirements and thus J101.  These obligations were also stated to be minimum requirements.

 At first instance the High Court found that the contractor was liable for the defects, as the contract required that the foundations would be designed to have a lifetime of twenty years, which they did not.  The Court of Appeal overturned the decision and found that there was an inconsistency in the contract between the fitness for purpose obligation (and the design lifetime of 20 years) and clause J101.  As Højgaard had designed the foundations in accordance with J101, the Court of Appeal decided that there was “too slender a thread upon which to hang a finding that MTH gave a warranty of 20 years life for the foundations.” ^[3]

The matter went before the Supreme Court ^[4]  where Lord Neuberger found that when interpreting a contract with an inherent inconsistency the normal principles of contract interpretation would be applied.^[5]   Lord Neuberger stated that while each contract will turn on its own facts, where the contract contains a term that imposes a prescribed criteria then the courts would give effect to that prescribed criteria even if the customer has specified or approved the design.  Looking at the contract as a whole, Lord Neuberger decided that a clause imposing an obligation to build the foundations with a 20 year design life was not too slender a thread to impose liability and held the contractor liable for the repair costs.

The Supreme Court’s decision restates the normal principles of Contract interpretation and sets out the principles on which a contractor takes on liability for errors in a design. However, as Lord Neuberger stated, “each case must turn on its own facts”.

Principles of Contract Interpretation

Where there is an ambiguity or inconsistency in the contract then normal principles of contract interpretation will apply. These principles were stated in Wood v Capita Insurance Services Ltd^[6]  where it was held that the court’s task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement.  This did not require that a literalist exercise be undertaken which focussed solely on the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its views to that objective meaning.^[7]

In Rainy Sky SA v Kookmin Bank^[8]  the court stated that where there are rival meanings, the court can give weight to:

• the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense;
• the quality of drafting of the clause;
• the possibility that one side may have agreed to something which with hindsight did not serve its interest; and
• the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms.

The Contractor’s Liability for Errors in the Design

The Supreme Court then examined the applicable principles of law where a contractor accepts a contract for construction works. Where a contractor takes on works it gives a warranty that it is capable of building the works as designed.  Where the contractor encounters difficulties in executing the works in accordance with any design requirements of the employer then this warranty may expose the contractor to a liability if it fails to carry out and complete the works.

Lord Neuberger in the Højgaard case referred to Thorn v The Mayor and Commonalty of London^[9]  where the court held that a contractor who bids on the basis of a specification only has himself to blame if he does not check the practicability of building to the specification and the specification turns out to be defective.  Similarly, in Tharsis Sulphur & Copper Co v M’Elroy^[10], where a contractor takes on work but wishes to change the specification because the construction of the works is proving difficult, the contractor will not be entitled to an additional payment.  In the Tharsis case Lord Blackburn noted that this was not a case of impossibility, which may have given the contractor a release from performance under Scottish law.  Lord Neuberger then referred to Lord Wright’s speech in Cammell Laird and Co Ltd v The Manganese Bronze and Brass Co Ltd ^[11]:

“[i]t has been laid down that where a manufacturer or builder undertakes to produce a finished result according to a design or plan, he may still be bound by his bargain even though he can show an unanticipated difficulty or even impossibility in achieving the result desired with the plans or specification.”

Lord Neuberger concluded, based on the wording of the contract, that where two clauses imposed differing or inconsistent standards or requirements the correct analysis was that the more rigorous of the two standards should be applied because the less rigorous standard should be construed as a minimum requirement. ^[12]

Lord Neuberger’s approach can be contrasted with the case of Turriff Ltd v Welsh National Water Development Authority.^[13]  The case concerned a contract under the fourth edition of the ICE Conditions. The contractor was required to construct joints between rectangular pre-cast concrete segments of a sewer to an exacting one sixteen of an inch tolerance.  In summary, clause 13 required that the contractor construct the works in strict accordance with the contract except where legally or physically impossible.  Counsel for the contractor argued that the word “impossible” in clause 13 of the ICE contract should not mean “absolutely impossible”.  HHJ Stabb QC agreed and held that impossibility was to be interpreted in a practical or commercial sense.  He stated: “It was not, plainly, absolutely impossible to manufacture the units to the required dimensions and tolerance, but in the ordinary competitive commercial sense, which the parties plainly intended, I am satisfied that it was quite impossible…”  Further, in the Turriff case the judge placed great significance on the fact that there had been extensive pre-contract studies by the employer on the pre-cast units.  HHJ Stabb QC found this to be part of the contractual matrix and therefore relevant to the interpretation of the contract.

The main difference between the Højgaard case and the Turriff case is that in Højgaard the Contractor was responsible for the design of the foundations and gave warranties as to fitness for purpose and for the design life.  Further, in the various cases referred to by Lord Neuberger, the contractor had given warranties or guaranties as to the finished works; for example, guarantees that the works would achieve some particular output or requirement.  In a standard form of building contract with no contractor’s design obligations the contractor usually warrants that the works will be built in accordance with architect’s or engineer’s design and in a proper and workmanlike manner.

Therefore before any contractor takes on a “fitness for purpose” obligation it should be aware of all that it entails. Contractors who therefore propose value engineering solutions, for example under Sub-Clause 13.2 of FIDIC’s Red Book, should note that they take on a fitness for purpose obligation for the design that they are proposing (see Sub-Clause 4.1(c)).

There are some similarities but also a number of differences between the contract in the Højgaard case and the FIDIC Yellow Books. In terms of similarities both contracts contain a fitness for purpose obligation.  However, in the Højgaard case the stated requirements of the employer were expressed as being a minimum.  Further, there was an express design life of 20 years.  Such terms are not found in an un-amended FIDIC Yellow Book unless they are added as Particular Conditions.  Most importantly, however, in FIDIC’s Yellow Book there are express terms dealing with errors, faults or defects in the Employer’s Requirements.

Sub-Clause 5.1 of the FIDIC Yellow Book 2017 contains an obligation on the Contractor to review the Employer’s Requirements on receiving a Notice to commence and “If the Contractor discovers any error, fault or other defect in the Employer’s Requirements, Sub-Clause 1.9 [Errors in the Employer’s Requirements] shall apply…” Sub-Clause 1.9 provides that the Contractor should give a Notice to the Engineer of the error, fault or defect within the time stated in the Contract (or 42 days from the Commencement Date if no date is stated). The Engineer is then required under Sub-Clause 3.7 [Agreement or Determination] to determine:

(a) whether there is in fact an error, fault or defect   in the Employer’s Requirements;

(b) whether or not (taking account of cost and time) an experienced contractor exercising due care would have discovered the error fault or other defect when examining the Site and the Employer’s Requirements before submitting the Tender; and

(c) what measures the Contractor should take (if any) to rectify the fault, error or defect.

Sub-Clause 1.9 then proceeds to state that if an experienced contractor would not have discovered the error, fault or other defect when examining the Site and the Employer’s Requirements before submitting the Tender then it will be entitled to a Variation and, subject to giving Notice, additional time and Cost Plus Profit. In the event that the error, fault or defect is found at a later time, the Engineer must also ask whether this error, fault or defect should have been found earlier when the Contractor scrutinised the Employer’s Requirements under Sub-Clause 5.1.

Conclusion

On the assumption that no Contractor would have discovered an error in the calculations of an international standard, such as J101, it follows that if the contract in the Højgaard case had been on an un-amended FIDIC Yellow Book then a different conclusion may have been reached by the court. The contractor would not have been liable for the error in the Employer’s Requirements and may have been entitled to additional time and Cost Plus Profit. The FIDIC forms of contract are intended to apportion risk fairly as between the Parties. Under the FIDIC Yellow Book forms the drafters have adopted a fairer and more equitable approach to apportionment to that applied by the English common law courts.

___________________________________________________________________

[2] [2017] UKSC 59 (3 August 2017)

[3] [2015] EWCA Civ 407

[4] [2017] UKSC 59 (3 August 2017)

[5] Ibid at [37] and [48]

[6] [2017] 2 WLR 1095

[7] Ibid at para 10

[8] [2011] 1 WLR 2900 at para 11

[9] (1876) 1 App Cas 120

[10] [1878] UKHL 777 (4 June 1878)

[11] [1934] AC 402, 425

[12] [2017] UKSC 59 at [45]

[13] [1994] Const LY 122

Much has already been written concerning the new FIDIC forms of contract published in December 2017. They are approximately 50 % longer and sought to set out the various procedure in much greater detail with the object of both encouraging good practice and reducing the scope for disputes. Numerous minor amendments have also been made. The purpose of this article is to look in more detail at the provisions dealing with Variations, these being amongst the most frequently scrutinised in practice.

Introduction

Much has already been written concerning the new FIDIC forms of contract published in December 2017. They are approximately 50 % longer and sought to set out the various procedure in much greater detail with the object of both encouraging good practice and reducing the scope for disputes. Numerous minor amendments have also been made.

The purpose of this article is to look in more detail at the provisions dealing with Variations, these being amongst the most frequently scrutinised in practice.

Definition of ‘Variation’

In the previous 1999 Yellow Book, a ‘Variation’ is defined as any change in the Works or in the Employer’s Requirements which is instructed or approved on behalf of the Employer pursuant to other provisions in the Conditions^[1]. Accordingly, if the Employer were to wish to change, for example, the performance criteria for the Works, he could do so by means of an appropriate change in the Employer’s Requirements.

The position under the 2017 Yellow Book is less straightforward. The definition of “Variation” simply refers to changes in “the Works”, the reference to the Employer’s Requirements being omitted^[2]. “The Works” are defined as the Permanent Works and the Temporary Works or either of them.^[3] The Permanent Works are in turn defined as being those of a permanent nature which are to be executed by the Contractor ^[4], the Temporary Works being those which are required on the site for the execution of the Works ^[5]. Both of these definitions therefore appear to restrict “the Works” to activities which take place on the site.

A definition of’ Variation’ solely by reference to changes in “the Works” has the potential to pose difficulties in the case of a design and build contract such as the Yellow Book since the precise nature of much of the Works will, subject to the Employer’s Requirements and approval by the Engineer, be at the discretion of the Contractor. Such a definition enables the Engineer on behalf of the Employer to instruct changes to “the Works” to the extent that these are specified in the Contract, probably in the Employer’s Requirements.

What the Engineer may wish to do in such circumstances is to change the performance criteria with which the completed works must comply or the basis on which that performance is measured. There is now, however, scope for doubt as to whether under the 2017 form the right of the Employer to vary includes making these kind of changes as opposed simply to ordering changes to the Works themselves.

The Right to Object to a Variation

The 2017 Yellow Book provides for the Engineer to initiate a Variation at any time before the Issue of a Taking-Over Certificate. ^[6]  This may be done by means of an instruction pursuant to Sub-Clause 13.3.1 or a request to the Contractor for a proposal in each case issued by the Engineer. ^[7]

In most cases, a Variation will be regarded by the Contractor as a welcome development. There may be cases, however, in which the Contractor may wish to oppose the Variation because, for example, it might be difficult to implement or might have a detrimental effect on the performance of his other obligations under the Contract.

In the case of a Variation by means of an instruction, the Contractor is bound by the Variation instructed unless the Contractor promptly gives a notice contesting the Variation with detailed particulars on certain specific grounds. These differ from those found in the 1999 Yellow Book and are also more extensive.^[8]

The grounds for objection in the 2017 Yellow Book are as follows:

(a) that the varied work was Unforeseeable having regard to the nature and scope of the work described in the Employer’s Requirements. “Unforeseeable” is defined as being unforeseeable by an experienced contractor as at the Base Date which, in turn, is defined as being a date 28 days before the latest date for the submission of the tender.^[9] This has no equivalent in the Yellow Book 1999. If the proposed Variation is of a kind which could not have been foreseen as a realistic possibility at the Base Date, the objection will have been made out;

(b) that the Contractor cannot readily obtain the Goods required for the purpose. There is a similar provision in the 1999 Yellow Book. ^[10] “Goods” are widely defined. ^[11]The effect of this wide definition is in broad terms that, if the Contractor cannot readily obtain any item required to execute the proposed Variation, this ground of objection will have been made out. The question of whether the Contractor cannot readily obtain the item in question may depend on the amount of time required to obtain the item, the amount of time normally required, the efforts which the Contractor will need to make to secure the item and the likely effect of these factors on the overall progress of the execution of the Variation and the Works;

(c) that the proposed Variation will adversely affect the Contractor’s ability to comply with its health and safety obligations^[12] under the Contract and those relating to the protection of the environment^[13]. There is a corresponding provision in the 1999 Yellow Book^[14] but the new provision is in considerably wider terms. This ground of objection is largely self – explanatory. It should be noted is the Contractor would need to demonstrate that compliance with these obligations has become significantly more difficult or risky but not that such compliance would become impossible;

(d) that the proposed Variation will have an adverse impact on the achievement of the Schedule of Performance Guarantees. There is an almost identical provision in the 1999 Yellow Book.^[15] Again, this ground envisages that the achievement of the Performance Guarantees would be rendered more difficult by the proposed Variation rather than completely impossible.

(e) that the proposed Variation may adversely affect the Contractor’s obligation contained in Sub-Clause 4.1 to complete the Works so that they will be fit for the purpose(s) for which they are intended as defined in the Employer’s Requirements.^[16]

It should be noted that, in contrast to the grounds in sub-paragraphs (c) and (d) above, the Contractor does not need to demonstrate that the proposed Variation will render the performance of the Contractor’s obligation under Sub-Clause 4.1 more difficult but merely that it may do so. This difference is presumably because the Contractor’s obligation as to fitness for purpose is of such fundamental importance that even the risk of increased difficulty is sufficient to justify an objection.

The Engineer’s Response

The fourth paragraph of Sub-Clause 13.1 of the 2017 Yellow Book requires the Engineer, promptly after receipt of the Contractor’s Notice and supporting particulars, to respond by cancelling, confirming or amending the Variation instruction. If the Engineer considers the Contractor’s objection to be factually incorrect, he will confirm the instruction. If, on the other hand, he regards the objection as justified in whole or in part, he will either cancel the instruction or, if possible, vary it so as to accommodate the grounds of the objection.

In some cases at least, the Contractor will wish to challenge the decision of the Engineer either to confirm a Variation instruction or to modify it in ways which the Contractor regards as unsatisfactory. At that point, consideration will need to be given to the provisions of the Yellow Book 2017 dealing with the resolution of disputes.

Variation or Not?

There may be instances in which the Contractor considers that what purports to be simply an instruction issued by the Engineer is in fact a Variation. In these circumstances, the 2017 Yellow Book introduces a new procedure for resolving this kind of dispute^[17]. The Contractor must immediately and before commencing work on the instruction give a notice to the Engineer of his position with reasons. The Engineer must respond within seven days of the notice confirming, varying or reversing the instruction. If he fails to do so, the Engineer will be deemed to have revoked the instruction. Otherwise, the Contractor is bound by the Engineer’s response and must comply with the instruction.

Nothing is stated expressly in Sub-Clause 3.5 as to the basis on which the Engineer is to make his decision but the intention plainly is that, if the Engineer is satisfied that the Contractor’s challenge to the instruction is well founded in fact, he is to either to reverse or vary the instruction.

Variation Procedure

The procedure immediately following the issue of a Variation instruction in the 2017 Yellow Book [18]does not differ markedly from that in the 1999 Yellow Book. In each case, the Contractor must supply a description of the varied work including (in the case of the 2017 Yellow Book) details of the resources and methods to be adopted, a programme for the execution of the Variation and the Contractor’s proposals for the modification of the overall project programme and the completion date for the project. The last of these may well, of course, involve a claim for an extension of time. Most importantly, the Contractor must also produce a proposal for the adjustment of the Contract Price with supporting particulars.

The 1999 Yellow Book requires all of this information to be produced as soon as practicable. The 2017 Yellow Book is more specific by stipulating a period of 28 days of the instruction or such other period as may be proposed by the Contractor and agreed by the Engineer.

Valuation of Variations

The 1999 Yellow Book contained little guidance on the valuation of Variations and numerous arguments and disputes arose. This deficiency is made good in the 2017 Yellow Book^[19] which provides for alternative bases of valuation depending on whether or not a Schedule of Rates and Prices (‘Schedule’) forms part of the contract.

If a Schedule is included, the rate or price for an item in the Schedule, will be that for the same item forming all or part of the Variation. If there is no rate or price for an item in the Schedule, the rate or price for similar work will apply. This is however subject to the qualification that a new rate or price may be applied if no rate or price for an item is specified in the Schedule and no rate or price is appropriate because the work in question is not of a similar character or is not executed under similar conditions as any item in the Contract.

If a new rate or price is required, then this is derived from any relevant item in the Schedule with reasonable adjustments taking into account “all relevant circumstances”.  If there is no relevant rate or price, then these are derived from the Cost Plus Profit of executing the Work. ‘Cost’ is defined as all costs reasonably incurred in undertaking the work whether on or off site together with overheads, taxes and similar charges.^[20] ‘Profit’ is defined as the percentage stated in the Contract Data or five per cent in default.^[21]

A further welcome new provision is to be found in the final paragraph of Sub-Clause 13.3.1 of the 2017 Yellow Book. This requires the Engineer to assess a provisional price or rate for the varied work for the purpose of including a sum on account of the value of the Variation in interim payments pending final resolution of that value by agreement or determination.

Finally, it should be borne in mind that, under the 2017 Yellow Book, the Engineer no longer acts on behalf of the Employer (as under the 1999 Yellow Book) but instead adopts a neutral position between the parties.^[22] As a result, it is now open to the Employer to challenge the Engineer’s valuation of a Variation, if so minded.

Notices

The Yellow Book 2017 makes it clear that the Contractor is entitled to an extension of time and an adjustment to the Contract Price for a Variation without giving formal notice of his claim to the Engineer pursuant to Sub-Clause 20.2. It should be noted, however, that certain other claims under Clause 13 do require a formal notice. Thus payment of the Contractor’s cost of preparing a proposal for a Variation at the request of the Engineer which has been subsequently rejected by the Engineer requires a formal notice under Sub-Clause 20.2.^[23] The same is true of claims by the Contractor for additional time and money as a result of changes in Laws.^[24]

Omissions

The Yellow Book 1999 made it clear that the Employer was not allowed to omit work so that it could be undertaken by others. The 2017 Yellow Book contains a provision in similar terms but expressly provides for an agreement between the Employer and the Contractor to the contrary. In the event of a contrary agreement, there is an express provision for the Contractor to include a claim for loss of profit and/or damages suffered or to be suffered as a result of the omission. This would be part of the details particulars of the Variation required by Sub-Clause 13.3.1. The particulars including this information are considered by the Engineer and the issue resolved either by agreement or the Engineer’s determination.

Variation by Request for Proposal

The 1999 Yellow Book gave the Engineer the option of seeking a proposal from the Contractor before instructing a Variation. The 2017 Yellow Book contains a similar process but with more detailed provisions

The Contractor is not entitled to a separate payment for the cost of the preparation of the proposal except in circumstances in which the proposal is not accepted. As mentioned, a formal notice of claim under Sub-Clause 20.2 is required as a precondition to entitlement.

Value Engineering

The 1999 Yellow Book provides for the Contractor to prepare (at his own expense) a proposal for a variation which would accelerate Completion, reduce the cost of executing the Works or operating and maintaining the completed plant, improve the efficiency or value of the Works or otherwise benefit the Employer.^[25]

There is however no provision for any sharing of the benefit of such proposal between the Employer and the Contractor so that the incentive for the Contractor to take the initiative in preparing the proposal was limited.

The equivalent provisions in the 2017 Yellow Book^[26] are very much more elaborate and expressly provide that the Engineer, when proceeding under Sub-Clause 3.7 to value the Variation, must give consideration to any provision for the sharing of the benefit of the Variation between the Employer and the Contractor contained in the Particular Conditions.^[27]

Adjustments for Changes in Laws

Both editions contain a right for the Contractor to be compensated for additional cost or time resulting from changes in Laws. However, the scope of such changes has been widened in the 2017 edition to include within ‘Laws’ permits, permissions and licences obtained by either the Employer or the Contractor. These are not restricted to those permissions etc. required under the law of the jurisdiction in which the project is situated.^[28] Although in many cases the cost of these licences etc. is payable by the Contractor,^[29] the Contractor will need to remain alert to the possibility that the cost of any change to the licence etc., as a result of a change in Laws, will be recoverable from the Employer. In contrast to the position concerning Variations generally, the Contractor is required to give notice of any claim under Sub-Clause 20.2. It should also be noted that the Employer in the 2017 edition is entitled to recover any benefit which the Contractor may have received as a result of changes in Laws.

There is a separate provision dealing with adjustments to the execution of the Works as a result of any changes in Laws. If this occurs, either the Contractor or the Employer must give notice to the other as soon as practicable. Thereafter, the Engineer must commence the Variation procedure either by means of an instruction or a request to the Contractor for a proposal.

Adjustments for Changes in Cost

The 1999 Yellow Book included a complex formula for the calculation of any such changes.^[30] This provision has been removed from the 2017 edition but the parties have the option of including Schedules of cost indexation in the Contract setting out their own choice of formula. This change may reflect the fact that these provisions are not common in current economic conditions.

Conclusion

The Variation provisions in the 2017 Yellow Book are considerably lengthier and more prescriptive than those in the 1999 Yellow Book. That approach has much to be commended in that it provides considerably greater certainty in an area in which dispute and disagreement are common.

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[1] Sub-Clause 1.1.1.5

[2] Sub-Clause 1.1.88

[3] Sub-Clause 1.1.89

[4] Sub-Clause 1.1.65

[5] Sub-Clause 1.1.82

[6] Sub- Clause 13.1

[7] Sub–Clause 13.3

[8] See Sub-Clause 13.1, Sub-paragraphs (a) – (e)

[9] Sub-Clause 1.1.87

[10]Sub-Clause 13.1 Second Paragraph Sub -paragraph (i)

[11] Sub-Clause1.1.44

[12] Sub-Clause 4.8

[13] Sub-Clause 4.18

[14] Sub-Clause 13.1 Second Paragraph Sub-Paragraph (ii).

[15] Sub-Clause 13.1 Second Paragraph Sub-Paragraph (iii).

[16] Sub-Clause Sub-Clause 4.1(first paragraph)

[17] Sub-Clause 3.5

[18] Sub-Clause 13.3.1

[19] Sub-Clause 13.3.1

[20] Sub-Clause 1.1.19

[21] Sub-Clause 1.1.20 – Definition of ‘Cost Plus Profit’

[22] Sub-Clause 3.7 – first paragraph.

[23] Sub-Clause 13.3.2 (last paragraph).

[24] Sub-Clause 13.6

[25] Sub-Clause 13.2

[26] Sub-Clause 13.2

[27] Sub-Clause 13.2 (ii)

[28] Sub-Clause 13.6

[29] Sub-Clause 1.13(b)

[30] Sub-Clause 13.8.

FIDIC’s 2017 editions introduced a new Claims management system in clause 20 that channels Claims through two very different procedures. One of them is very simple and involves almost no risk whereas the other will require investment of significant project resources, will take the parties a considerable amount of time to resolve and carries fatal consequences if not followed properly. It has therefore become a priority for anyone handling this Claims management system to understand how clause 20.1 sorts the different types of Claims and to recognise that the classification scheme is not as straightforward as the wording of the Contract suggests, as explored in this article.

FIDIC’s 2017 editions introduced a new Claims[1] management system in clause 20 that channels Claims through two very different procedures. One of them is very simple and involves almost no risk whereas the other will require investment of significant project resources, will take the parties a considerable amount of time to resolve and carries fatal consequences if not followed properly.

It has therefore become a priority for anyone handling this Claims management system to understand how clause 20.1 sorts the different types of Claims and to recognise that the classification scheme is not as straightforward as the wording of the Contract suggests.

FIDIC’s press release[2] explained that their intention was to differentiate time and money Claims, which would follow the more formal procedure in clause 20.2, from any other type of Claim, which would follow the simpler procedure. Unfortunately, despite their intentions, the language used in clause 20.1 suggests that not all money Claims may need to follow the more formal procedure.

The Three Types of Claim

Clause 20.1 governs the birth of certain Claims arising between the Parties and classifies them as set out below:

“A Claim may arise:

(a) if the Employer considers that the Employer is entitled to any additional payment from the Contractor (or reduction in the Contract Price) and/or to an extension of the DNP;

(b) if the Contractor considers that the Contractor is entitled to any additional payment from the Employer and/or to EOT; or

(c) if either Party considers that he/she is entitled to another entitlement or relief against the other Party. Such other entitlement or relief may be of any kind whatsoever (including in connection with any certificate, determination, instruction, Notice, opinion or valuation of the Engineer) except to the extent that it involves any entitlement referred to in sub-paragraphs (a) and/or (b) above.”

The first two types are defined by who makes the claim and what entitlement may be claimed whereas the third type is a catch-all category that covers any other entitlement.

The Two Procedures

Types (a) and (b) follow the procedure contained in clause 20.2 which includes, amongst other things, the submission of a written Notice of Claim, a subsequent fully detailed Claim document including evidence and updates to the Claim, formal content requirements for each document, obligations to maintain contemporary records, precise time bar provisions for each submission after which the claiming Party may lose their entitlement and follow up procedures in case of disagreements on the timeliness of the submissions.

Type (c) Claims follow the procedure at paragraph 20.1 (3). The claiming Party first requests the entitlement or relief against the other and the other Party or the Engineer must then disagree. There is no extraordinary formality on either of these other than following the basic requirements of communications under sub-clause 1.3 (e.g., being in writing, etc.) ^[3] and no specific time requirement. Once the disagreement is established, the claiming Party need only serve a simple Notice with details of the case and the disagreement to refer the matter to the Engineer. There is no specific time bar provision, update requirements, etc.

Therefore, the correct classification of a Claim is important because it may result in a more time-consuming procedure and the risk of loss of contractual rights.

Classification Scheme

Type (a) and (b) Claims relate exclusively to four entitlements only one of which is common to both:

Type (c) Claims are for any other entitlement or relief of any kind whatsoever except for the four entitlements in (a) and (b). The list of what these Claims may relate to (e.g., certificates, instructions, etc.) is not exhaustive and does not limit or qualify the types of entitlements or reliefs that fall within type (c).^[4] In other words, type (c) is for any Claim that is not for one of the four entitlements in types (a) and (b).

Clause 20.1 does not provide clear examples of a type (c) Claim. However, at the very least, any claim that does not relate to time or money would fall within the category. For example, a Contractor’s request for a declaration that the Engineer issue a Taking Over Certificate is not strictly about time and money. This event or circumstance may have time and money implications but the request for the declaration itself is not a claim for time and money. The Guidance of the 2017 editions confirms that declarations are type (c) and also mentions ambiguities or discrepancies in the Contract documents and access to Site issues as other examples.

On this basis, it may first appear that type (c) only includes Claims other than for time and money. However, the Guidance stops short of reaching this conclusion; it only provides a list of items that may fall within the category. ^[5] More importantly, there is nothing in the wording of clause 20.1 that makes it absolutely clear that no money claims may fall within type (c). As a result, the wording of type (c) has scope for money claims to fall within this category as long as they are not for additional payment from the other Party or reduction in the Contract Price.

Entitlements to Additional Payment

It should not escape anyone that the entitlement for additional payment is about money. However, the word additional limits the scope of the entitlement. As some commentators have already asked, what are these payments additional to? ^[6]

Bunni mentions that “a claim is generally taken in practice to be an assertion for additional monies due to a party” [emphasis of the author]. ^[7] Otherwise, claims would include Contractors’ payment applications for the original scope of works. ^[8]

Jaeger & Hoek have taken a more straightforward approach: additional payments comprise those that are “over and above [payments] which are already included in the accepted contract amount”.^[9] Accepted Contract Amount (ACA) is a defined term that effectively means the sum agreed by the Parties in the Letter of Acceptance. Anything other than that is additional. Therefore, payments made for works carried out under the Contract are not additional.

As Jaeger & Hoek put it “claims are nothing more than the crystallisation of an anticipated, not yet specified, part of the Contract Price”.^[10] This is consistent with the definition in clause 14.1 and the obligations in sub-clauses 3.7.4, 14.6.1 and 20.2.7 of the Yellow Book 2017. The Contract Price is the ACA subject to additions and/or reductions. These additions include entitlements to additional payment under clause 20 that may only become due pending or resulting from an Engineer’s determination. ^[11] In other words, additional payments are not part of the Contract Price from the moment the Contract is signed, only from the moment they become due which is sometime after the Notice of Claim is served.

Therefore, additional payment is any payment that is additional to the sum that the Parties originally agreed for the works when the Contract was signed and what has been added or reduced by the time the Claim arises. In other words, the payment is additional if it is not payable out of the Contract Price as adjusted by the time of the event or circumstance of the Claim.

Another point of view was that implied in the ICC Final Award 19581. ^[12] Whilst considering whether a claim for the return of a Retention Money Guarantee requires notice, the Arbitral Tribunal stated that the guarantee “does not constitute a consideration given in exchange of the works performed by Claimant or another form of “additional payment”.” [emphasis added] The use of the word another conflates payments given in exchange of the Works covered by the Contract Price and payments additional to that. It suggests that payments pursuant to the Contract Price and any other payment are one and the same so that the phrase additional payment is interchangeable with the phrase any payment. This view is incorrect. It leads to the misconception that additional means additional to zero or additional to what has been paid by the time the Claim is made whether or not the payment is anticipated as part of the Contract Price. One consequence would be that any request for money, including, as Bunni warns, ^[13] applications for payment of the works would effectively fall within the category. It would also render the word additional superfluous. The FIDIC forms are standardised contracts the result of decades of trial and error and painstaking drafting from a variety of professionals and the phrase has been included in previous versions of the FIDIC forms. Also, the commentators that have analysed the word additional in widely used books have been expressly acknowledged in the second edition as special advisers to the Contracts Committee or as having reviewed drafts. Therefore, the assumption should be that the use of the word additional has been carefully weighed and may not be ignored. This would be consistent with the principle of contract interpretation whereby each part of the contract should be given effect. ^[14]

The word should also be interpreted in the context of the entire clause. There should be no doubt that an EOT is an amount of time that is additional to the Time for Completion provided in the Contract Data. Also, clause 20.1 (a) entitles the Employer to either additional payment or a reduction in the Contract Price. Therefore, the baseline for any change to the sums that pass between the Parties is the Contract Price at the time the Claim arises.

Type (c) Claims for Payment of Unpaid yet Certified Work

An example of a type (c) money claim is a request for payment of a payment certificate for works carried out under the Contract that the Employer has failed to pay.

A Contractor’s claim for payment of an unpaid certificate is essentially a claim for a debt that results from the Employer’s non-payment in breach of clause 14.7 of the second edition. The Contract already provides the following remedies for this breach: financing charges (clause 14.8), suspension (clause 16.1) and termination (clause 16.2). However, there is no contract clause that specifically provides for the most obvious remedy: payment of the certified amount. Therefore, these claims rely on the law of the contract for payment of the unpaid sums. Consequently, this type of claim arises out of or is in connection with the Contract. According to sub-clause 1.1.5, a Claim is defined as under, in connection with and/or arising out of the Contract or its execution. Therefore, a claim for the sums of an unpaid certificate fits into the contractual definition of a Claim and may be subject to clause 20.1.

As explained above, the type (c) category is a catch-all provision that covers any entitlement other than the four entitlements of types (a) and (b), e.g., it covers entitlements for payments that are not additional. If the certificate covers work carried out under the Contract then such sums are payable out of the Contract Price. They are therefore Claims for another entitlement that is not additional payment and, as such, are not type (b). Also, type (c) expressly provides that the other entitlements may be in connection with any certificate or valuation of the Engineer, i.e., payment certificates are within its scope. As a result, these Claims should be classified as type (c).

The result of this classification is that a Contractor may be forced to refer to the short procedure in paragraph 20.1 (3) in order to obtain payment of certified work that has not been paid in the time allotted in the Contract.

short procedure. A mistake in categorising a Claim may result in, at worst, losing the right to a Claim and, at best, wasting valuable resources on a long and drawn out procedure.

Unintended Consequences

The second edition’s classification scheme is not as straightforward as it first seems. FIDIC’s press release about the 2017 edition makes it clear that the intention was for types (a) and (b) to cover all Claims for time and money and type (c) to cover Claims that are not.[15] However, this is not clear enough in the Contract itself. Most money Claims should be easily categorised under types (a) and (b). However, some may fall outside of these categories and must follow the type (c) procedure. The word additional results in some money Claims such as those for payment of an unpaid payment certificate for works carried out under the Contract to fall outside the remit of type (b). By phrasing type (c) so openly, it covers any entitlement whatsoever other than the four of types (a) and (b) including an entitlement for payment of unpaid certified works.[16]

Contractors, Employers and Engineers handling the new Claims management system should not immediately conclude that if the Claim is for time and money it goes through the long procedure and if it is non-monetary or non-temporal it follows the short procedure. A mistake in categorising a Claim may result in, at worst, losing the right to a Claim and, at best, wasting valuable resources on a long and drawn out procedure.

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[1] A defined term in the second edition.

[2] Published by FIDIC here, page 9.

[3] According to clause 1.3, requests and other communications similar to those listed in the clause shall be in writing.

[4] According to paragraph 1.2 (h), the list at paragraph 20.1 (c) that follows the word including is not exhaustive and does not limit or qualify the complete list of entitlements or reliefs.

[5] Even if the Guidance is not necessarily part of the contract, its language should be interpreted on the basis of paragraph 1.2 (h), i.e., this list is not exhaustive and should not be interpreted as limiting or qualifying the complete list of entitlements or reliefs.

[6] Ellis Baker, et al, FIDIC Contracts: Law and Practice, 2009, paragraph 6.189 at page 313.

[7] Nael Bunni, The FIDIC Forms of Contract Third Edition, 2005, pages 294-295.

[8] Bunni, page 294.

[9] Axel-Volkmar Jaeger and Goetz-Sebastian Hoek, FIDIC – A guide for Practitioners, 2010, page 365.

[10] Jaeger and Hoek, page 365.

[11] The discussion of when that occurs is beyond the scope of this article but, according to sub-clause 20.2.7, it may be before the clause 3.7 agreement or determination is issued.

[12] Award rendered in August 2014 and seat was an Eastern European jurisdiction.

[13] Bunni, pages 294 and 295.

[14] Richard Calnan, Principles of Contractual Interpretation, 2013, paragraphs 3.42 to 3.46 at pages 37-38.

[15] Published by FIDIC here, page 9.

[16] Some entitlements that may be interpreted as types (a) or (b) have special provisions setting out their own procedure and expressly precluding the application of clause 20.2. For example, the process for variations is set out in clause 13.3 which channels time and money issues directly to clause 3.7 and clause 14.8 entitlements to financing charges require only that they be requested. Similarly, there are other payment entitlements that may be interpreted as type (c) but that also have special provisions particularising their own procedures. For example, sub-clause 14.6.3 provides mechanisms to correct or modify an interim payment certificate. There is a question of whether, on the basis that a payment certificate correction or modification may be interpreted as type (c) but the sub-clause 14.6.3 procedures do not preclude paragraph 20.1 (3), the two provisions are complementary and, therefore, the formalities of paragraph 20.1 (3) should somehow apply to sub-clause 14.6.3. However, this is outside the scope of this article.

FIDIC has launched the Second Editions of the Red, Yellow, and Silver Books, now over 50% longer than the 1999 forms. Key updates include more prescriptive processes, new time-bars, enhanced Dispute Boards, and a separate chapter on Disputes and Arbitration.

In London December 2017, FIDIC launched its Second Editions of the Red, Yellow and Silver Books. They are big, weighing in at almost a kilo each. The general conditions cover 106 pages with more than 50,000 words, over 50% longer than the 1999 forms.

• 1987 4th Edition – 23,600 words

• 1999 1st Edition – 30,400

• 2017 2nd Edition – 50,000+

The additional words are spread through just 7 more clauses – 174 compared to the 167 of 1999.

The word used most often at the launch conference was “prescriptive” as the drafters tried to set out in detail every step in every process. Controversially, new time-bars have been added to enforce more of these processes.

Many improvements have been made, addressing issues that have emerged since 1999. Fans of Dispute Boards will be pleased to see that all three books now have standing boards with more emphasis on dispute avoidance; and that appointment of DB members and enforcement of their decisions have been made easier. Disputes and Arbitration are now dealt with in a separate chapter 21.

Here are the most interesting changes to the 2017 Suite.

Chapter 1 – Lots of definitions, including “Notice”, “Claim” and “Dispute”

There are now 88 defined terms, including “year means 365 days” for those users in doubt on the subject.

• A “Notice” is called for in some 80 clauses. It has to call itself a notice and comply with the specified form of communication. It does not have to identify the clause under which notice is being given.
• A Notice of No-objection has been introduced to replace approvals and consents. It has not been abbreviated to NONO, sadly.
• “Claim” and “Dispute” are defined and then re-addressed in cl.20.1.
• Reasonable profit has become “Cost Plus Profit” which is defined by default at 5%.
• “shall” and “may” are to be interpreted as mandatory and optional respectively.
• “include” is stated to be non-exhaustive resolving doubt such as that created by 13.3 of the 1999 Red Book which said that variations “may include” (a) to (f): it was debated whether variations had to fit into one of the listed items.
• The Particular Conditions now comprise Contract Data and Special Provisions, the latter being the amendments to the FIDIC conditions.

Errors in the Employers Requirements continue to be dealt with at cl.1.9 rather than in the more logical place, Chapter 5 Design. The good news is that the two 1999 provisions at 5.1 and 1.9 have now been combined. The effect is largely the same.

For some reason, the limitation of liability clause is now at 1.15 rather than at 17.6 as before. It is in similar, very broad terms but “gross negligence” has been added to the list of exceptions.

Another strange addition is at 1.16, dealing with an aspect of termination. A short clause tries to deal with the arguments in some countries that termination can only take place with the approval of the courts. It says that unless reference to the courts is mandatory law, the contract mechanisms are enough to end the contract.

Chapter 2 – Less Proof of Ability to Pay

Under cl.2.4, Employers will set out their financial arrangements in the Contract Data and these may not be questioned unless variations reach 30%, there is non-payment or a material change to the funding.

Chapter 3 – Determinations and Time-bars

FIDIC wants Engineers making determinations to do so freely. Cl.3.2 says that the Employer may not require the Engineer to obtain prior approval for determinations. Cl.3.7, the determinations clause, requires the Engineer to act “neutrally”, a good new word. The Engineer is the Employer’s agent at all times other than under cl.3.7.

Cl.3.7 covers three pages and is at times very difficult to understand, particularly regarding time-limits. There is a strange power for the Engineer to correct agreements arrived at and signed off by the Employer and Contractor.

The new time-bar requires a NOD (Notice of Dissatisfaction) to be given by either party within 28 days of the determination, failing which it is final and binding. Unlike the claims Notices (see Chapter 20 below), this time-bar is not waivable. No explanation has been given as to why not. However, as a determination must state that it is a “Notice of the Engineer’s Determination”, there should be little room for doubt as to when the 28-day period starts and finishes. This NOD then starts a further time-bar: unless the dispute is referred to the DAAB within 6 weeks, the NOD lapses, the determination becomes final and binding and the claim is lost. Again, no waiver.

Some curiosities at cl.3.5: if the Engineer issues an instruction which the Contractor thinks is a Variation, he gives Notice immediately and before complying. If the Engineer does not respond within 7 days, the instruction is deemed to be withdrawn. The Engineer’s answer does not need to address the Variation question, it just needs to confirm, alter or withdraw the instruction.

Is cl.3.5 a time-bar clause? It provides an “immediately” obligation on the Contractor but does not say what happens if the variation is claimed later. The 1999 editions omitted any notice requirement for payment for variations (although time was covered by cl.8.4). This clause appears to be the correction of that omission.

Chapter 4 – Fit for Purpose?

This chapter appears to make few significant changes but does spell out procedures at great length. One gap has been filled in relation to fitness for purpose. The purpose had to be defined which was impossible in practice as no one is going to define the purpose of every wall, item of plant and door-handle. Cl.4.1 now says that if no purpose is defined and described, it must be fit for its “ordinary purpose(s)”. Good but the drafters then ruined the improvement by saying not just that the Works had to be fit for purpose but “the Works, Section or major item of plant”. When it referred to the Works, it would be interpreted as being the Works and every part of the Works, big or small. The new language suggests a limitation to major items only.

The performance security under cl.4.2 can now be increased if variations exceed 20%. There is a decrease provision for omissions of 20% but this is likely to be redundant as the Employer’s consent to the reduction is required.

Chapter 5 – Design development

“Review” has been defined as part of an effort to get away from approval. No-objection or deemed no-objection is given in the 21-day Review period provided in cl.5.2. The drafting seems to say pretty much the same as 1999 5.2 but at far greater length.

The scope for no-objection with comments, allowing work to proceed but subject to the obligation to comply with comments, has been needlessly restricted. Instead of an A/B/C system, where B was approval with comments and C was rejection, we now have A and C. A no-objection can be accompanied by “comments concerning minor matters which will not substantially affect the Works”. This seems like a recipe for argument and pointless delay.

Chapter 8 – Times they are a-changing

Advance warning clause 8.4 requires both parties to advise of known or probable future events or circumstances which could delay or disrupt or impact the performance of the completed work. This gives the obligation, previously buried in 1999 8.3 its proper prominence. There is no time limit nor an explicit sanction for failing to warn.

EOT clause 8.5 has the same list of grounds but defines exceptionally adverse weather as conditions which are Unforeseeable having regard to data provided by the Employer or published locally. (Incidentally, the defined Unforeseeable is used in 6 clauses in the 2017 edition.)

Concurrency is addressed in cl.8.5 only by referring to any rules set out in Special Provisions. The Guidance section gives little help other than referring to the SCL Protocol and recommending that the Employer takes advice. For more on concurrency, see Chapter 17 below.

Delay Damages will not be capped in any case of “fraud, gross negligence, deliberate default or reckless misconduct by the Contractor”: cl.8.8. In other words, a Contractor who has maxed out the delay damages must keep going or risk uncapped liability.

Chapter 10 – Good in Parts

A part becomes a Part when it is deemed to be taken-over due to use by the Employer: cl.10.2. It is a pity that no clarity has been given to what use is permitted without taking-over, a problem area where other contractors or traffic makes use of partly completed work. A Part now has its own DNP expiry date, something missing from 1999.

However, a part is not a Part if the Employer does what he is supposed to do and issues a TOC prior to use. This is presumably unintentional and will lead to odd results.

Chapter 11 – Lengthy repairs

The 1999 had 2.5 pages for defects liability; 2017 has doubled this without covering any significant new ground. An often important issue of when repairs may be carried out is not addressed, leaving the well-known conflict of interest between a contractor often wanting to repair as soon as possible; and an owner who may want to await a scheduled shut-down.

A new limitation period has been introduced for Plant in cl.11.10: no liability after DNP + 2 years unless there has been fraud, gross negligence, deliberate default or reckless misconduct.

Chapter 13 – Important Variations

Cardinal change has arrived (sort of)! The Contractor can now object that “the varied work was Unforeseeable having regard to the scope and nature of the Works described” in the ERs. This presumably is intended to mean where the variation is well beyond the original scope. The trouble is that even if the test is satisfied, the Engineer can confirm the Variation. So the objecting Contractor is worse off than if nothing had been said.

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”. No entry in the Contract Data is provided for.

Provision for the valuation of variations was scanty in the 1999 Yellow Book. The main improvement is that where there is a Schedule of Rates and Prices, it is to be used for valuing variations. The glaring omission is that the contracts still do not state clearly that the valuation should include for prolongation and disruption if those are caused by the variation.

Cl.13.7, the escalation clause, is actually shorter than its 1999 counterpart. A rare example.

Chapter 14 – Paying the Price

The Engineer no longer fairly determines what is due in an IPC; instead he fairly considers. This removes an ambiguity. However, if the Contractor is unhappy with the IPC, he can demand that they be included in the next IPC. If that does not happen, he can ask for a cl.3.7 determination.

There is no explicit requirement in cl.14.6 that the Engineer certify the amounts decided by the DAAB; but see how suspension and termination can follow non-compliance under cl.15 and 16 below.

Chapter 15 – Termination by the Employer

The Notice to Correct mechanism in cl.15.1 has been changed for no apparent reason. The Engineer no longer specifies what remedial action is required but nevertheless has to specify a reasonable time. It is left to the Contractor to respond to the Notice “immediately … describing the measures the Contractor will take to remedy the failure”. So whereas the requirement of the Engineer is currently certain and argument usually revolves around whether the time for compliance is reasonable, the argument under the 2017 edition will be whether the remedial steps proposed by the Contractor to be done in the specified time are good enough. Termination just became even more risky and difficult.

Non-compliance with a DAAB decision by the Contractor is a new ground.

Maxing out the Delay Damages has also been added as a ground for termination. This raises the thorny question: if the Contractor claims an EOT and it is granted by a DAAB or arbitrator after termination so that the Delay Damages are reduced below the cap, is the termination then unlawful? No answer is provided.

Cl.15.2 makes clear that termination requires two notices, not just one; and that remedying the default within the 14 days removes the right to terminate. This resolves ambiguities in the 1999 version.

Contractors will be pleased to read cl.15.6 which gives them loss of profit following termination for convenience under cl.15.5. They will be less happy to see that the Employer is now entitled to terminate for convenience and give the work to another contractor. The restrictions on this are firstly the liability for profit to C1 which may make a switch too expensive; and secondly that C2 may not start work until C1 has been paid. The second restriction may not work in practice.

Chapter 16 – Stopping work

Finally, the Contractor can suspend or terminate if the DAAB’s decision is not paid. This is regardless of whether it is interim binding or final and binding. This should give a significant boost to enforcement of DAAB decisions, not least by removing any argument that a NOD removes the obligation to comply.

However, the ground of non-compliance is qualified: the failure has to be a “material breach of the Employer’s obligations under the Contract”. Perhaps some DB decisions have included trivial matters which should not found a termination. These must be rare. We can expect argument about what is a “material breach”.

Chapter 17 – Taking Care

“Employer’s Risks” are no more. This is a good move as many users were misled by 1999 cl.17.3. The risk allocation seems to be the same but the drafting is now clearer.

Concurrency is addressed again in cl.17.2. Instead of ducking the issue with a reference to Special Provisions, this time a combination of an Employer-risk event and a cause of damage for which the Contractor is liable, gives the Contractor an entitlement to “a proportion of EOT and/or Cost Plus Profit to the extent that any of the above events have contributed to such delays and/or Cost”. The losses are somehow apportioned, in other words.

Chapter 18 – Exceptional drafting

Force majeure has been replaced with Exceptional Event. This should enable users who have the doctrine of force majeure in their national law to read the clause without preconceptions. The risk allocation remains the same.

Chapter 19 – Cover up

The insurance chapter has been placed after the risk allocation clauses for good, logical reasons. It spells out in more detail the cover required. This now includes professional indemnity cover for the Contractor’s design.

Chapter 20 – Symmetrical Claims

Claims and Dispute resolution are now separated and this seems entirely sensible. The incorporation of Employer’s Claims into the claims chapter also makes sense. However, cl.20 dealing only with claims is now longer than 1999 cl.20 which dealt with both claims and disputes.

Did we need an elaborate explanation of how a Claim may arise? The utility of cl.20.1 may be doubted.

Many people will see the fairness in the Employer being subject to the same time limits and the same time-bars as the Contractor in the claims process. There are two time-bars: the familiar 28-day notice and a new one for the statement of the basis of claim.

The drafters have not fixed any of the well-known issues and ambiguities that have complicated the 1999 cl.20.1 notice regime. The gap in the 1999 forms in relation to notice for payment for variations is not resolved in cl.20 but see cl.3.5 above.

Cl.20.2.4 contains this gem: “If the Engineer does not give such a Notice within this period of 14 days, the Notice of Claim shall be deemed to be a valid Notice. If the other Party disagrees with such deemed valid Notice of Claim the other Party shall give a Notice to the Engineer which shall include details of the disagreement.” So the deeming can then be un-deemed, presumably.  (Incidentally, the 2017 form contains a lot of deeming: 7 definitions and 51 other clauses in the Yellow Book have deeming provisions. This increase from 0 definitions and 26 clauses in the 1999 forms is not good.)

The second time-bar for the fully detailed claim only applies if the contractual or legal basis of claim has not been stated within 12 weeks. One result of this appears to be that if the initial claim notice specifies the clause that the claim arises under, the time-bar will not apply.

These two time-bars can be waived by the Engineer who may consider prejudice and any prior knowledge of the receiving party. Any waiver by the Engineer can be challenged at DAAB and even at arbitration. (As noted above, these two time-bars can be waived; three others – NOD with a determination, start of DAB and NOD with DAAB decision – cannot be waived.)

Chapter 21 – Avoidance and Resolution

Avoidance of disputes gets greater emphasis. The DAB has become the DAAB or Dispute Avoidance/Adjudication Board whose first stated objective at Procedural Rule 1.1 is “to facilitate the avoidance of Disputes”. The trouble is that cl.21.3, the main provision dealing with avoidance starts “If the Parties so agree …”.

Perhaps this reflects the fact that the dispute avoidance function of the Dispute Board is rather intangible and does not lend itself well to legal definition. Often, the mere fact that the Board will arrive on site and meet with the parties causes them to behave reasonably and resolve problems. Sometimes, the airing of issues and grievances with the Board can relieve tensions between project participants.

It is for this reason that the decision to have standing boards for all of the 2017 suite is to be welcomed.

Also welcome are the efforts to tackle the difficulties with appointment of DBs and the enforcement of their decisions. Three signatures on the Dispute Adjudication Agreement are no longer necessary as cl.21.2 states that the parties are deemed to have signed the DAA

Enforcement of DAAB decisions is boosted in clauses 15 and 16 by making non-compliance a ground for suspension by the Contractor or termination by either party.

Much less welcome is the unwaivable time-bar if the referral of the Dispute to the DAAB is not made within 42 days of a NOD with an Engineer’s determination. It cannot be good for a project to force the parties to switch focus to DAAB proceedings within an arbitrary period rather than at a time of their own choosing. The parties could agree to suspend or defer the referral but agreement can be rare in dispute situations.

The ability of the DAAB to make payment of a decided amount conditional on the provision of “appropriate security” seems wrong in principle, even if it only applies where the ability of the payee to repay is in real doubt. If a DB has decided that a sum is payable, it should already have been paid under the contract or by way of damages. Why should the liable party be better off as a result of failing to pay the sum due?

The time for amicable settlement has been halved to 28 days. ICC arbitration remains in place.

Conclusion from First Impressions

There are many good things buried in the mass of new wording. The question remains: could these good things have been added to the 1999 form in far less than 20,000 words? Plainly, yes.

Have all these prescriptive procedures and time-bars really made it easier for FIDIC users? Or does this really only make sense for more sophisticated parties who are very familiar with the conditions? In my view – and many at the launch conference said the same – there will be a lot of users, particularly those with English as a second language, who will struggle with such a massive and complex document.

Will the 2017 editions be adopted or will the 1999 forms remain the market favourite? There was interest at the conference in the Green Form and in some new “Red book lite” as a reaction to the size and complexity of the new forms. However, some speakers from the MDBs said that their Banks would adopt the new suite. So we have to wait and see. This could take some years as it did with the 1999 forms.

If FIDIC were to produce a mid-sized contract for mid-sized projects written in simple language, it is clear that there would be a lot of interest.

Clause 19 covers Force Majeure and release from performance, with broader definitions than typical laws. It prescribes detailed insurance requirements, reducing flexibility. The Contractor bears most obligations, necessitating careful amendments and professional advice to avoid misunderstandings and ensure proper incorporation into contracts.

The insurance requirements both in Clause 19 and the related tender information in the Contract Data are now considerably more prescriptive.

The positive aspect may be that this will lead to a more careful consideration of what is, in many applications, a key aspect of the Contract.

Against that, there is a concern that the requirements here are now too prescriptive and do not allow more flexibility against the known potentially wide and varied applications of these forms. The use of the term “insuring Party” in Clause 18 of the 1999 Edition, allowed for flexibility in the allocation of insurance obligations as between the Parties. At the same time those obligations applied with equal effect, depending on the Party to which the obligations were assigned.

The new provisions in what is now Clause 19 have done away with the “insuring Party” approach; almost all the obligations are on the Contractor. In applications where that is not to be the intended position, it will now mean careful amendment to Clause 19 itself.

Furthermore, the earlier flexible approach also allowed for the terms of what was then Clause 18 to be overridden by specific insurance terms agreed between the Parties before the date of the Letter of Acceptance. That further flexibility is also now lost, at least within the new Clause 19. The mechanism now lies in adding “memoranda” to the Letter of Acceptance; see the asterisked footnote against the heading on the form of the Letter of Acceptance which incorrectly refers to Sub-Clause 1.1.51. It should refer to the defined term of “Letter of Acceptance” which is at Sub-Clause 1.1.50, and which does refer to the possibility of including, “annexed memoranda comprising agreements between the Parties”. Hardly the language of clarity.

There is a concern that even where the Parties essentially remain within the outline of the Clause 19 terms, many typical insurance policies may not match the now much more specific requirements within Clause 19. What remains to be seen is whether or not those Parties will correctly react and go down the memorandum/addendum route. Failing that, the Clause 19 terms will apply: the scope for misunderstandings to arise is very real. It seems a pity that the earlier, more fail-safe way of dealing with this has now been lost.

In going to a more prescriptive basis, it is perhaps a missed opportunity that Clause 19 did not at least address the insurance requirements and implications against the possibility of:

• Joint names insurance cover extending to all parties for their Site interests, particularly Subcontractors of any tier and other contractors of the Employer, as may be applicable.
• The Works forming a part of a larger project, all at or about the Site.
• The presence of significant existing property of the Employer at or about the Site.

To the extent applicable via the Contract Data, the new requirements relating to professional indemnity insurance in Sub-Clause 19.2.3 will deserve careful review by a tendering Contractor with his professional insurance advisor. Various factors are likely to be problematic, such as:

• the basis of the required cover;
• the absence of the usual protection where such cover is no longer available at reasonable market rates; and
• the requirement to extend such professional indemnity insurance to fitness for purpose.

Conclusion

In summary, the more extensive and prescriptive nature of Clause 19 and the associated Contract Data is a positive development, if the outcome is that Parties will consider the requirements carefully and take the necessary professional insurance advice.

The potential downsides are twofold:

• the provisions of Clause 19 may well need amending even where the Parties intend to remain within its structure; and
• the route to ensuring that such amendment is properly incorporated into any Contract is now not so clear and lacks the earlier and more fail-safe provision to allow amendments specifically agreed between the Parties to prevail over what is now Clause 19.

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

English courts have historically held 'consequential loss' to be synonymous with 'indirect loss'. However, a recent case questions this position. It is also worth nothing that courts in different countries interpret 'consequential loss' differently from English courts.

Sub-Clause 17.6 of FIDIC’s Red, Yellow, and Silver Books is an exemption clause and provides in the opening paragraph that:

‘Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract…’

The phrase “indirect or consequential loss or damage” has been examined by the English courts on numerous occasions. Historically the words ‘consequential loss’ were held to be synonymous with ‘indirect loss’. However, a recent case questions whether this will be correct in all cases. It is also of note that the courts in different countries interpret the words ‘consequential loss’ differently to the way that the English courts interpret them.

Direct and Indirect Losses

In the seminal case of Hadley v Baxendale,[1] the English House of Lords stated:

‘Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such a breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, [The first limb] or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. [The second limb]’.

Direct losses are therefore those losses which flow naturally from the breach of contract. Indirect losses are those which may reasonably be supposed to have been in the contemplation of the parties, at the time they made the contract, as a probable result of the breach. The distinction is easy to demonstrate. In Victoria Laundry (Windsor) Ltd v Newman Industries Ltd,[2] it was held that the direct losses arising from a five month delay to provide an industrial washing machine would include lost profits from contracts which the claimant would normally carry out as part of its business. In contrast, the loss of a special contract for the army was an indirect loss, which would only be recoverable if the defendant was aware of the existence of that contract at the time it entered into the contract with the claimant.

Indirect and Consequential Losses – The Traditional Approach

It has been stated that the phrase ‘consequential loss’ is not very illuminating, as all damage is in a sense consequential, per Atkinson J., Saint Line Ltd v Richardsons Westgarth & Co.[3] Atkinson J. proceeded to state that an exemption clause referring to ‘consequential loss’ does not exclude direct losses; i.e. losses that flow naturally from the breach.[4] In the case of British Sugar plc v Projects Ltd,[5] it was argued that loss of profits were consequential losses.

The argument was advanced that to a reasonable businessman ‘consequential losses’ would include loss of profits. However, the Court of Appeal held that it was bound by authority and that loss of profits would usually be a direct loss and therefore not covered by the phrase ‘consequential loss.’ The Court of Appeal confirmed this in Hotel Services Ltd v Hilton International (Hotels) Ltd[6] and stated that the loss of profits was a natural consequence of the faulty equipment “and therefore untouched by the exemption clause which (since all recoverable loss is literally consequential) plainly uses ‘consequential’ as a synonym for ‘indirect’.” Therefore, the traditional approach of the English courts has been to treat the words ‘consequential loss’ as being synonymous with ‘indirect loss’.

Indirect and Consequential Losses – A New Approach?

The traditional approach was questioned in Caledonia North Sea v British Telecommunication[7] and Transocean Drilling v Providence Resources.[8] Both Lord Hoffman and Moore-Bick LJ considered whether the traditional line of cases, which had considered the words ‘consequential loss’ to be synonymous with ‘indirect loss,’ would be decided in the same way now.

In the recent case of The Star Polaris[9] the High Court had to consider an arbitrator’s award which concluded that the words “consequential or special losses” had a wider meaning than simply being limited to indirect losses (i.e. the second limb of Hadley v Baxendale). The High Court considered two recent Supreme Court cases on contractual interpretation – Chartbrook v Persimmon Homes[10] and Arnold v Britton.[11] The High Court found that the exemption clause had to be construed having regard to the parties’ intentions and against the relevant factual matrix. The court concluded that despite the line of authorities supporting the traditional approach “the well-recognised meaning was not the intended meaning of the parties and that the line of authorities is therefore nothing to the point.” The court therefore held:

‘…as in the judgment of the Arbitrators, ‘consequential or special losses, damages or expenses’ does not mean such losses, damages or expenses as fall within the second limb of Hadley v Baxendale but does have a wider meaning of financial losses caused by guaranteed defects, above and beyond the cost of replacement and repair of physical damage.’

The recent Supreme Court case of Wood v Capita Insurance Services[12] also supports the view that when construing a contract, the court may find on the facts that the parties’ objective intentions were to give the words ‘consequential loss’ a broader meaning than just simply ‘indirect loss’. The court, when construing a contract, has to look at the contract as a whole. The court must analyse both the language of the contract (a textual analysis) and the factual background and implications of the rival constructions (a contextual analysis). As Lord Hodge stated:

‘The extent to which [textualism or contextualism] will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. …’

Other Jurisdiction

In Australia, there has been a significant departure from the approach taken by the English courts to the interpretation of the words ‘consequential loss’. In Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd[13] the court stated that consequential loss would include any loss which did not “naturally and ordinarily” flow from the breach of contract and therefore would include loss of profits. This approach has been adopted and extended by other courts in Australia: Alstom Ltd v Yokogawa Australia Pty Ltd (No 7)[14]. In the Alstom case it was held that an exemption clause prohibiting claims for consequential losses would include all types of loss except for claims for liquidated damages and damages associated with performance guarantee payments, which were expressly provided for in separate clauses of the contract.

The issue of what is covered by the phrase ‘consequential loss’ was recently considered again in Regional Power Corporation v Pacific Hydro Group Two Pty Ltd[15]. In this case the court held that the Hadley v Baxendale and the Peerless approach were both wrong. The court stated that the words in the exclusion clause had to be given their “natural and ordinary meaning, read in light of the contract as a whole.” In this case the court found that the losses which had been suffered were direct losses and not consequential losses and therefore were not covered by the exclusion clause.

The approach taken by some American courts also differs from the English approach. In Jay Jala v DDG Construction,[16] the court followed a similar approach to that taken in the Peerless case. In this case the court stated:

‘Direct damages are the costs of getting what the contracting party was supposed to give – the costs of replacing [the Defendants] performance. Other costs that may not have been incurred [but for the breach of contract], but that are not part of what [the Claimant] was supposed to get from [the Defendant], are consequential or a secondary consequence.’

Loss of profit or loss of income would therefore be classed as a consequential loss applying the principles in the Jay Jala case. In other countries it has been suggested that indirect losses are economic losses (i.e. non-physical) that are a consequence of a defect.[17]

Summary

The phrase ‘consequential loss’ is not helpful because all losses are to some extent consequential upon a breach. Given that the courts have in some countries interpreted the words ‘consequential loss’ so as to exclude direct losses it is important to be clear how the substantive law will construe the meaning of this phrase. Employers, in particular, should be concerned about this phrase because in many cases, for example where plant or infrastructure is being built, their losses will primarily be economic losses arising from the non-operability of the plant or the infrastructure.

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

[1] (1854) 9 Exch 341, 354.

[2] [1949] 2 KB 528

[3] [1940] 2 KB 99.

[4] See also Croudace Construction Ltd v Cawoods Concrete Products Ltd (1978) 87 BLR 20.

[5] (1997) 87 BLR 42.

[6] [1998] EWCA Civ 1822 [8].

[7] [2002] BLR 139 (HL).

[8] [2016] BLR 360 (CA).

[9] [2016] EWHC 2941.

[10] [2009] 1 AC 1101.

[11] [2015] AC 1619.

[12] [2017] UKSC 24.

[13] [2008] VSCA 26.

[14] [2012] SASC 49.

[15] [2013] WASC.

[16] [2016] (US District Court of Pennsylvania).

[17] See www.ibanet.org/Forum – Thread: FIDIC 17.6 Limitation of Liability.

English law recognises different types of mistake and permits various equitable remedies in case of mistake, as illustrated by the two English court decisions examined in this article.

English law recognises different types of mistake and permits various equitable remedies in case of mistake, as illustrated by the two English court decisions examined in this article.

Mistake in English law

English law recognises three types of mistake: (1) common mistake where the mistake is shared by both parties, (2) mutual mistake where the parties are at cross purposes with each other, and (3) unilateral mistake where one party is mistaken.

English courts may grant the following equitable remedies for mistake:

• Voiding the contract: if a contract is voided it is unenforceable from the outset.

• Specific performance: a court may order a contract to be performed but only if damages would not be an adequate remedy.

• Rescission: this is where the contract is set aside and the parties are returned to the position in which they were before the contract was made.

• Rectification: this is where the court corrects mistakes made in recording the parties’ agreement.

• The court may order recovery of monies paid or property transferred by mistake.

The cases below examine claims and defences for (1) rectification and (2) recovery of monies paid by mistake.

Rectification

In The Council of the Borough of Milton Keynes v. Viridor (Community Recycling MK) Limited [2017] EWHC 239 (TCC) the English Technology and Construction Court had to determine whether payment provisions in a contract for waste recycling between Milton Keynes and Viridor should be rectified because of mistake.

The parties contracted for Viridor to provide waste recycling services to the Council for a 15-year period.  The contract recognised that waste recycling is a profitable business and so required Viridor to make fixed and variable payments to the Council.  The fixed payment related to an existing recycling facility owned by the Council and was sometimes referred to as rent.

The documents that Viridor had to provide in its tender bid included an Income Generating Payment Mechanism (“IGPM”) in which Viridor proposed the fixed payment should be £500,000 per annum “indexed for inflation”.  Due to a late-night error by the Council’s consultants and lawyers, the final contract documents included an early version of the IGPM which had gaps and no reference to indexation, rather than the version of the IGPM completed by Viridor which stated that the fixed payment should be £500,000 per annum “indexed for inflation”.

The Court made a finding of fact that neither party spotted this error until after the contract was signed.

The Council sought rectification of the contract because of common, alternatively unilateral mistake so that the earlier, erroneous version of the IGPM would be replaced with the later, correct version, including its reference to indexation.

Viridor raised various arguments in defence including (1) arguments on the facts, (2) that the contract should not be rectified because it contained an entire agreement clause, (3) the defence of laches or delay by the Council in seeking rectification which meant that rectification would be unjust to Viridor, and (4) the defence of acquiescence according to which the Council acquiesced in the proposition that indexation would not be charged on the fixed payment.^[1]

The Court rejected all Viridor’s arguments.

On common mistake, the Court noted that the party seeking rectification must show (as set out in Swainland Builders Limited v. Freehold Properties Limited [2002] EWCA Civ 560) that:

• The parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified.

• There was an outward expression of accord.

• The intention continued at the time of the execution of the instrument sought to be rectified.

• By mistake the instrument did not reflect that common intention.

Applying the law to the facts, the Court found that:

• The parties had a common intention that, at the time Viridor’s tender was accepted, the fixed payment was to be £500,000 “indexed for inflation”.

• There was an outward expression of accord because the fixed payment indexed for inflation was part of Viridor’s tender which was expressly accepted by the Council.

• The common intention continued at the time of execution of the contract (Viridor argued that there was no continuing common intention claiming that the parties had continued to negotiate indexation after acceptance of the tender but before execution of the contract but the Court dismissed this argument).

• There was a common mistake. The court’s finding of fact that neither party spotted the error until after the contract was signed meant that both parties signed off on a version of the contract which, because of the late-night error, included the wrong IGPM.

• All the ingredients were therefore in place to permit rectification.

On the alternative claim for unilateral mistaken, the Court noted that party seeking rectification must show (as set out in Thomas Bates & Son Limited v Wyndham’s (Lingerie) Limited [1981] WLR 505, 516A-516C) that:

• Party A erroneously believed that the document sought to be rectified contained a particular term or provision or did not contain a particular term or provision which, mistakenly, it did contain.

• Party B was aware of the omission or the inclusion and that it was due to a mistake on the part of party A.

• Party B had omitted to draw the mistake to the notice of party A.

• The mistake was calculated to benefit party B.

The Court found that, if the finding of fact as to when the parties spotted the error was wrong and Viridor in fact spotted the error before the contract was signed, this would mean that, in order to gain financial advantage, Viridor failed to draw it to the attention of the Council.  On this basis, the alternative claim for unilateral mistake was made out.

The Court dismissed Viridor’s argument that because there was an entire agreement clause (which provided that the contract “constitutes the entire agreement and understanding between the parties … and supersedes, cancels and nullifies any previous agreement between the parties …”) the contract should not be rectified.  The Court noted that an entire agreement clause may show that the parties intended to be bound by the document in material respects regardless of prior or other intentions.^[2] However where, as in this case, there is a strong case for rectification, the “entire agreement” is to be found in the contract as rectified and not in the contract in fact executed because the latter does not reflect the true intention or agreement of the parties.^[3]  The Court therefore found that the entire agreement clause was immaterial.

Having found mistake, the Court had to determine whether the defences of laches or acquiescence “trumped” the equitable remedy of rectification but easily dismissed these defences on the facts.  Before doing so, however, the Court noted that the merits were firmly with the Council. Viridor had originally offered an indexed fixed price and it was possible to view some of the events as an attempt by Viridor to avoid its obligations.  Also, the commercial reality of a non-indexed fixed price meant that Viridor would have a 15-year lease of the existing recycling facility with no break clause and no opportunity for the Council to increase the rent.

The Court ordered rectification of the contract on the basis of common mistake or, in the alternative, unilateral mistake so that the correct IGPM would replace the incorrect IGPM.

Recovery of monies paid by mistake

In Graham Leslie v. Farrar Construction Limited [2016] EWCA Civ 1041 the English Court of Appeal had to determine whether an overpayment made allegedly because of mistake should be repaid.

Mr Leslie and Mr Farrar (the principal of Farrar Construction Limited or “FCL”) reached an oral agreement to develop a number of residential property projects.  Mr Leslie would acquire suitable sites, FCL would design and construct housing on the sites to an agreed scheme design and budget, Mr Leslie would pay FCL its “build costs” expended on the development and, on completion, the open market value of the development would be agreed, the acquisition and build costs would be deducted and the resultant profit share divided equally.

The parties proceeded amicably to complete five developments but eventually a dispute arose.  Mr Leslie brought proceedings in the English Technology and Construction Court for repayment of sums he claimed he had overpaid FCL and FCL raised counterclaims for additional sums it claimed it was owed by Mr Leslie.  The dispute centred on the definition of “build costs” and the Court’s decision on this point meant that FCL had been overpaid by 22%.

The Court then had to determine Mr Leslie’s claim for recovery of the overpayment. Mr Leslie argued that the overpayment had been made (1) by mutual mistake because both parties wrongly believed that the monies claimed and paid were covered by the arrangement between the parties when they were not (in other words, the parties were at cross purposes), or (2) by Mr Leslie in the mistaken belief that sums were properly payable and FCL accepted payment which should not have been made (in other words, a unilateral mistake).^[4]

The Court rejected Mr Leslie’s claim and he appealed to the Court of Appeal arguing that the judge ought to have allowed recovery of the overpayment as monies paid under mistake.

The Court of Appeal noted the general principle that a claimant who pays money which is not due to a defendant as a result of mistake is entitled to recover that money unless one of the recognised defences applies. It reviewed English court decisions over two centuries which refined that principle and concluded that, if party A voluntarily makes a payment to party B knowing that it may be more than he owes but chooses not to ascertain the correct amount due, party A cannot ordinarily recover that overpayment (except if there is fraud or misrepresentation which was not claimed by Mr Leslie).

Applying this to the facts, the Court of Appeal:

• Noted that the overcharges levied by FCL resulted from the parties’ different understanding of what “build costs” meant in the context of their agreement.

• Dismissed Mr Leslie’s claims of mistake. It found that Mr Leslie made final payments to FCL not acting on the basis of a mistake or under the influence of an erroneous assumption but because he had taken a conscious decision to pay the sums requested by FCL without investigation as that suited his purpose; he was a busy man with many business interests who was making a profit on the developments and did not wish to devote further resources to grinding through the figures with an accountant or lawyer.

• Found that Mr Leslie made the overpayment voluntarily after choosing not to ascertain the correct amount; he agreed the final payment to “close the transaction”.

• Found that, as a result, Mr Leslie was not entitled to recover the overpayment and rejected his appeal.

Conclusion

In the Milton Keynes case, the Council claimed that there had been a common or unilateral mistake which entitled it to rectification of the contract to include the correct IGPM. The Court agreed and ordered replacement of the IGPM. In the Leslie case, Mr Leslie claimed that there had been a mutual or unilateral mistake which entitled him to recover an overpayment.  FCL successfully defended the claim on the basis that, to “close the transaction”, Mr Leslie had voluntarily made the overpayment choosing not to ascertain the correct amount. As a result, Mr Leslie could not recover the overpayment.

The key point from these cases is of course to ensure that the contract is correct; once a mistake has been made, it will always be difficult to correct it. The remedies available for mistake are equitable and will therefore only be permitted in certain circumstances.  In particular, the party claiming an equitable remedy must do so with “clean hands”. Entire agreement clauses may prevent rectification unless there is a strong case for rectification. If a party “sleeps on its rights” and fails to seek to have a mistake corrected within a reasonable period (laches) and/or if a party acquiesces to an infringement of its right, that party may lose the right to have the mistake corrected.   

[1] There were other arguments, including an alleged breach of the Public Contract Regulations, which are not addressed in this article.

[2] The Court referred here to Phillips Petroleum Co. UK Limited v Snamprogetti Limited [2001] 79 Con LR 80.

[3] The Court referred here to LSRF III Wight Limited v Mill Valley Limited [2016] EWHC 466 (Comm).

[4] There was a third ground (no consideration) which is not addressed in this article.

Clause 15 covers Termination by the Employer, including notices to correct, grounds for termination, valuation at termination, payment after termination, and the Employer's entitlement to terminate at will with 28 days' notice.

Clause 15 deals with Termination by the Employer. In summary:

• Sub-Clause 15.1 deals with a Notice to Correct. This permits the Engineer to issue a Notice to the Contractor about a failure to carry out any obligation under the Contract. The Engineer can require that the Contractor make good the failure and remedy it within a specified reasonable time.
• Sub-Clause 15.2 deals with Termination by the Employer. There are six grounds specified. In most cases the Employer may give 14 days’ notice if it intends to terminate the contract; however, where the Contractor has become bankrupt or insolvent etc. under Sub-Clause 15.2(e) or gives a bribe, gift, inducement or reward etc. under Sub-Clause 15.2(f) then the Employer may by notice terminate immediately. The Contractor must then leave Site and deliver any required Goods, all Contractor’s Documents and other design documents made by or for him to the Engineer.
• Sub-Clause 15.3 deals with valuation at the date of Termination. When termination has taken effect the Engineer is required to determine the value of the Works, Goods and Contractor’s Documents, and any other sums due to the Contractor for work executed in accordance with the Contract.
• Sub-Clause 15.4 deals with Payment after Termination. Once termination under Sub-Clause 15.2 [Termination by Employer] has taken effect then the Employer may proceed in accordance with Sub-Clause 2.5; withhold further payments to the Contractor; and recover from the contractor any losses and damages incurred by the Employer and the extra costs of completing the Works.
• Sub-Clause 15.5 deals with the Employer’s Entitlement to Terminate. This is a termination at will provision that allows the Employer to terminate the Contract by giving 28 days’ notice, so long as the Employer does not intend to have the Works executed by himself or another contractor. In the event that termination occurs under this Sub-Clause then the Contractor is paid under Sub-Clause 19.6 [Optional termination, Payment and Release].

Click through to read our helpful commentary on FIDIC 1999 book – Clause 15

The Engineer is deemed to act for the Employer and is essentially the Employer’s agent under the FIDIC Red Book 1999. He is not a wholly impartial intermediary, unless such a role is specified in the Particular Conditions, and there is no general obligation under the FIDIC Red Book 1999 for the Engineer to act independently or impartially. However, when he is required to make a determination under Sub-Clause 3.5, he is obliged to make it a fair determination and when he is obliged to issue an Interim Payment Certificate under Sub-Clause 14.6, or a Final Payment Certificate under Sub-Clause 14.13, he must fairly determine the amount due.

The Engineer is deemed to act for the Employer and is essentially the Employer’s agent under the FIDIC Red Book 1999. He is not a wholly impartial intermediary, unless such a role is specified in the Particular Conditions, and there is no general obligation under the FIDIC Red Book 1999 for the Engineer to act independently or impartially. However, when he is required to make a determination under Sub-Clause 3.5, he is obliged to make it a fair determination and when he is obliged to issue an Interim Payment Certificate under Sub-Clause 14.6, or a Final Payment Certificate under Sub-Clause 14.13, he must fairly determine the amount due1.

But, what does “fair” and “fairly” mean and does it compromise the Engineer’s role as Employer’s agent?

The key things to note about the Engineer

• The Engineer is appointed by the Employer.

• The Engineer is paid for by the Employer.

• The Engineer is deemed to act for the Employer.

• The Engineer may be one of the Employer’s salaried employees.

• The Employer may replace the Engineer (without giving reasons)².

• The Engineer must carry out the duties assigned to him in the Contract.

• If the Engineer fails to perform his duties, this may be a breach of the Employer’s obligation under the Contract to have appointed an appropriate person.

• The Employer may impose a requirement that the Engineer obtains specific approval before exercising a particular power.

• Whenever the Engineer exercises a particular power for which the Employer’s approval is required, then the Employer shall be deemed to have given approval.

The Engineer is the Employer’s Agent

Agency occurs where a party is authorised to act as the representative of another. An agent may be appointed either expressly or impliedly by consent. Under Sub-Clause 3.1 of the 1999 FIDIC forms of contract, the Engineer is deemed to act for the Employer and thus authorised to act as the Employer’s representative, i.e. he is the Employer’s agent.

Therefore, (unless there is a Particular Condition to the contrary), when an Engineer makes a “fair determination” under Sub-Clause 3.5 or “fairly determines” the amount due in an Interim Payment Certificate under Sub-Clause 14.6, or Final Payment Certificate under Sub-Clause 14.13, he remains the Employer’s agent.

This is supported in the FIDIC’s Contract Guide (1st edition, 2000) which states (with emphasis added): “Under [the FIDIC Red Book 1999] or [the FIDIC Yellow Book 1999], the Employer is required to appoint the “Engineer”, who is to be named in the Appendix to Tender. The Engineer does not represent the Employer for all purposes. The Engineer is not authorised to amend the Contract, but he is deemed to act for the Employer as stated in subparagraph (a). The role of the Engineer is thus not stated to be that of a wholly impartial intermediary, unless such a role is specified in the Particular Conditions. If [the FIDIC Red/Yellow Book 1999’s] Engineer is an independent consulting engineer who is to act impartially, the following may be included in the Particular Conditions: At the end of the first paragraph of Sub-Clause 3.5, insert: “The Engineer shall act impartially when making these determinations.””

In the FIDIC Red Book 1999, FIDIC removed the express requirement for the Engineer to act impartially found in the previous form, and made a conscious and deliberate attempt to distance itself from the Anglo-Saxon concept that the Engineer’s duty to be impartial should be implied to reflect the fair and unbiased role of the Engineer as explained in the English House of Lords decision of Sutcliffe v Thackrath³ (considering the R.I.B.A. standard form of contract). This concept has been followed in subsequent English decisions such as those of Mr Justice Jackson in Costain v Bechtel⁴ (considering the N.E.C.2 form of contract) and Scheldebouw v St. James Homes (Grosvenor Dock) Ltd⁵. However, it is a concept that is not thought to be well understood or accepted internationally. In civil jurisdictions it is often asked how someone paid by one party (and therefore not independent) can act impartially as between Employer and Contractor.

Determinations

So, under the FIDIC Red Book 1999, must the Engineer maintain his role as the Employer’s agent when making a “fair determination” under Sub-Clause 3.5 or when he “fairly determines” the amount due in an Interim Payment Certificate under Sub-Clause 14.6 or Final Payment Certificate under Sub-Clause 14.13 and, if so, how? What do the words “fair” and “fairly” mean and do they compromise the Engineer’s role as Employer’s agent?

“Fair” is defined widely in the Oxford English Dictionary and includes (with emphasis added) at number 14(a): “Of conduct, actions, methods, arguments, etc.: free from bias, fraud, or injustice; equitable; legitimate, valid, sound.”

“Fairly” is also widely defined and includes (with emphasis added):“1. In a fair manner, so as to be fair….4. (a) By proper or legal means; legitimately; in accordance with rules or laws… (b) In accordance with what is right or just; equitably; without bias, impartially. Also: with good reason, rightfully….5. In a proper or suitable manner; appropriately, fittingly; (also) proportionately…6. Clearly, distinctly, plainly; frankly, openly….”

Reference is made to the Oxford English Dictionary as it is a well-regarded and accepted authority on the English language, which is the official language of the FIDIC forms of contract. Obviously, not everyone will accept this source. However, from these definitions, it is logical to conclude that the Engineer is obliged to act without bias and impartially when making determinations under Sub-Clauses 3.5, 14.6 and 14.13, notwithstanding his role as Employer’s agent.

This conclusion is supported in other parts of the FIDIC Red Book 1999 General Conditions of Contract. If it were not the case:

• Why would the Engineer (as Employer’s agent) need to consult with both parties before reaching a determination?

• Why would the Employer be entitled to dispute the Engineer’s determination and refer it to the Dispute Board under Sub-Clause 20.4 (particularly if the Employer’s specific approval has been sought prior to issuing the determination)?

• How could the determination be disputed under the FIDIC form if the Contractor and the Engineer (as Employer’s agent) agreed? Ordinarily, if a principal does not like something his agent has done which was properly within the agent’s authority, the principal would take it up with the agent under the agency agreement.

The conclusion is also supported in the FIDIC Code of Ethics which states: “The consulting engineer shall: – Be impartial in the provision of professional advice, judgement or decision…”

The wording of the FIDIC Contracts Guide might be interpreted to compliment such a view. On one reading, the phrase “The role of the Engineer is thus not stated to be that of a wholly impartial intermediary…” could allow room for the Engineer to act as an impartial intermediary in limited situations, such as when making fair determinations under Sub-Clauses 3.5, 14.6 and 14.13.

An Engineer’s professional codes of conduct could also be relevant in establishing the way in which he is expected to behave. For example, the Guidance Notes on the Interpretation and Application of the Rules of Professional Conduct of the Institution of Civil Engineers state (with emphasis added): “Rule 1: All members shall discharge their professional duties with integrity and shall behave with integrity in relation to all conduct bearing upon the standing, reputation and dignity of the Institution and of the profession of civil engineering. The manner in which members can fulfil this Rule includes, but is not limited to, the following: -Carry out their professional duties with complete objectivity and impartiality.”

The FIDIC White Book 2006 goes further and refers to independence, although the obligation is not mandatory. Sub-Clause 3.3.2 states: “Where the Services include the exercise of powers or performance of duties authorised or required by the terms of a contract between the Client and any third party, the Consultant may: … (b) if authorised to certify, determine or exercise discretion to do so fairly between the Client and third party not as an arbitrator but as an independent professional exercising his judgement with reasonable skill, care and diligence;…”

The problem has been recognised in the pre-release version of the FIDIC Yellow Book 2017. In Sub-Clause 3.2 of the FIDIC Yellow Book 2017 (as in Sub-Clause 3.1 of the FIDIC Yellow Book 1999), the Engineer is still deemed to act for the Employer, i.e. he remains the Employer’s agent, except as otherwise stated in the Conditions. However, to remove any ambiguity as to how the Engineer should act when brokering agreements or making determinations, Sub-Clause 3.7 states, “The Engineer shall act neutrally between the Parties when carrying out duties under this Sub-Clause”. Siobhan Fahey of the FIDIC Contract Committee acknowledges that the words “fair” and “fairly” are causing problems around the world and she hopes that the new obligation on the Engineer to act “neutrally”, when making a fair determination under Sub-Clause 3.7, will resolve this issue. However, there is a risk that neutrally may be seen as a synonym for impartially used in previous editions which could see the opening up of old arguments⁶.

Note also that in the pre-release version of the FIDIC Yellow Book 2017, Sub-Clause 14.6.1 obliges the Engineer to issue an Interim Payment Certificate (“IPC”) stating the amount which he “fairly considers to be due” to the Contractor (and not the amount which he “fairly determines to be due” as in the FIDIC Red Book 1999). A similar change has been made in Sub-Clause 14.13 in respect of the Final Payment Certificate (“FPC”). This takes the issue of IPCs and FPCs outside the scope of Sub-Clause 3.7 and the Engineer’s obligation to act neutrally in the first instance. However, if the Contractor is not satisfied with an IPC, he may refer it to the Engineer for a determination. There seems to be no corresponding provision in respect of FPCs.

Unfortunately, the pre-release version of the FIDIC White Book 2017 is difficult to reconcile with the pre-release version of the FIDIC Yellow Book 2017 as it obliges the Engineer to act independently. Mandatory language is now used. Sub-Clause 3.9.3 states, “…If the Consultant is authorised under the Works Contract to certify, determine or exercise discretion in the discharge of its duties then the Consultant shall act fairly as go between [sic] the Client and the [C]ontractor, exercising independent professional judgement and using reasonable skill, care and diligence”.

Employer’s approval

The position is further complicated where the Engineer is obliged to obtain the Employer’s approval before, for example, agreeing or determining an extension of time and/or additional costs, or issuing Variations (under the FIDIC Red Book 1999 Particular Conditions or as set out in Sub-Clause 3.1 of the FIDIC Pink Book 2010). Under Sub-Clause 3.5 the Engineer is obliged to make a fair determination, but if the Employer does not approve that fair determination, the Engineer cannot make it. This leaves the Engineer in a very difficult position. He should not make a determination he thinks unfair but as the Employer’s agent he ought to do as he is told by his principal.

In practice, what appears to happen is that the Engineer does nothing and the matter is referred to the Dispute Board to resolve where a Dispute Board is provided for. Sub-Clause 20.1 of the FIDIC Pink Book 2010 states that “If the Engineer does not respond within the timeframe defined in this Clause⁷, either Party may consider that the claim is rejected by the Engineer and any of the Parties may refer to the Dispute Board in accordance with Sub-Clause 20.4”.

However, it is arguable that, by failing to approve the fair determination, the Employer has interfered with, or prevented, the Engineer from carrying out the duties assigned to him in the Contract .  If done unreasonably, this may be considered a breach of contract by the Employer.  Further, if the contract machinery for extending time for Employer risk and shared risk events is rendered inoperable by such an act of prevention, time may be set at large, entitling the Contractor to a reasonable time within which to complete the Works and defeat any claim for liquidated damages.  This may happen if, for example, there is no recourse to a Dispute Board because one has not been appointed by the date stated in the Appendix to Tender (under the FIDIC Red Book 1999) or Contract Data (under the FIDIC Pink Book 2010).

Conclusion

The lack of clarity concerning the Engineer’s role in the FIDIC form has been criticised since 1999, and it is obvious to see why. Employers generally wish to have full control over their agents, whilst Contractors are concerned that the Engineer’s determinations will naturally favour the Employer. As currently drafted, this can cause problems for all concerned. Whilst the problems have been recognised in the pre-release version of the FIDIC Yellow Book 2017, the requirement upon the Engineer to act “neutrally” when making a determination is likely to raise many more questions. Further, an increase in payment disputes is to be predicted where the Engineer is obliged to issue Interim Payment Certificates and Final Payment Certificate fairly but not neutrally.

¹There is no express obligation of fairness in any other contractual provision including, for example, Taking-Over under Sub-Clause 10.1.
²Although the Employer may not replace the Engineer with a person against whom the Contractor raises reasonable objection.
³[1974], AC 727. Lord Reid at page 737: “The building owner and the contractor make their contract on the understanding that in all such matters the [Engineer] will act in a fair and unbiased manner and it must therefore be implicit in the owner’s contract with the [Engineer] that he shall not only exercise due care and skill but also reach such decisions fairly, holding balance between his client and the contractor”. Lord Morris at pages 740-741: “Being employed and paid by the owner [the Engineer] unquestionably has in diverse ways to look after the interests of the owner. In doing so he must be fair and he must be honest. He is not employed by the owner to be unfair to the contractor”.
⁴[2005] EWHC 1018 (TCC).
⁵[2006] EWHC 89 (TCC).
⁶“Neutral” is defined in the Oxford English Dictionary as “Not belonging to, associated with, or favouring any party or side”.  “Impartial” is defined similarly in the Oxford English Dictionary as “Not partial; not favouring one party or side more than another; unprejudiced, unbiased, fair, just, equitable. (Of persons, their conduct, etc.)”.
⁷42 days.
⁸Roberts v Bury Improvement Commissioners [1870] L.R. 5 C.P. 310 – Blackburn J. “…it is a principle very well established at common law, that no person can take advantage of non-fulfilment of a condition the performance of which has been hindered by himself …; and also that he cannot sue for a breach of contract occasioned by his own breach of contract…”.

Contractors are sometimes concerned about the politics of their FIDIC 1999 Sub-Clause 20.1 notices. Some Contractors may consider that serving Sub-Clause 20.1 notices may send the wrong message, particularly in the honeymoon period when the works have just begun. However, the consequences of failing to serve a timely claim notice are so dire that doubtless the issue is regularly on every Contractor’s mind. The case of Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar1 in the Technology and Construction Court of England and Wales provided some welcomed relief to many Contractors worldwide who may now attempt to rely on its finding on the timing of claim notices when postponing service of these crucial notices.

Contractors are sometimes concerned about the politics of their FIDIC 1999 Sub-Clause 20.1 notices. Some Contractors may consider that serving Sub-Clause 20.1 notices may send the wrong message, particularly in the honeymoon period when the works have just begun. However, the consequences of failing to serve a timely claim notice are so dire that doubtless the issue is regularly on every Contractor’s mind.

The case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar1 in the Technology and Construction Court of England and Wales provided some welcomed relief to many Contractors worldwide who may now attempt to rely on its finding on the timing of claim notices when postponing service of these crucial notices.

Mr Justice Akenhead decided that the notice may be served “either when it is clear that there will be delay (a prospective delay) or when the delay has been at least started to be incurred (a retrospective delay).”² He relies on the wording of Sub-Clause 8.4 which states that entitlement to an extension of time (“EoT”) under Sub-Clause 20.1 arises when completion “is or will be delayed” by any of the listed causes. He observed that Sub-Clause 8.4 did not expressly say “is or will be delayed whichever is the earliest,” meaning that the question is not which of these two moments arises first. He also argued that the “serious effect on what could otherwise be good claims” is reason enough to interpret Sub-Clause 20.1 broadly.

The judgment uses the following example to illustrate its point: a variation is instructed in June but it is not until October that the Contractor becomes aware that it will cause delay to completion and then not until November that there is actual delay. Based on this, the Contractor does not have to serve the notice until the delay is actually incurred although it may serve the notice before when it becomes aware of any future delays to completion.³

However, the Obrascon judgment is only binding in England and Wales and, albeit authoritative, it is merely persuasive in other jurisdictions where the use of FIDIC standard forms is extensive. Consequently, a word of caution should be advanced to all Contractors hoping to rely on claim notices served after the 28 days period from the moment they become aware of a delay; there is an alternative argument to the judgment that, if well presented, may persuade a DAB, an arbitral tribunal or a local judge to decide differently.

Purposive justification for narrow interpretation

The purpose of the Sub-Clause 20.1 notice regime whereby the notice serves as a condition precedent to the claim is to deter Contractors from submitting notices late in the game, in particular, where there are potential time and cost repercussions that could result from these notices. The incentive to serve timely notices works as a contract administration tool with teeth. That is, a system that provides the parties with certainty as to the time and cost implications of the project. The inclination towards certainty is found in Sub-Clause 8.4 which allows the entitlement to an EoT to arise prospectively.

However, the Obrascon case stretches the meaning of Sub-Clause 20.1 thereby watering down the incentive. If, for instance, the timeframes in the judgment’s example are stretched further so that the time between the moment the Contractor becomes aware and the moment the delay is incurred is longer, by say 6, 9 or 12 months, the benefits of having an early warning system would be lost. The purpose of the 28 day notice period in Sub-Clause 20.1 is not to serve as a trap for Contractors’ claims but to serve as a mechanism for maintaining certainty and finding quick solutions to problems as soon as they first show up. Lots could be achieved by the Employer working with the Contractor in these 6, 9, 12, etc. months in order to mitigate the impending delay. That time may be wasted if the notice is served when the delay actually occurs.

Contractual justification for narrow interpretation: entitlement

The logic behind the Obrascon decision relies on the proposition that entitlement pursuant to Sub-Clause 8.4 may arise twice, that is, when the Contractor reasonably believes that there will be delay and then again when the delay occurs.⁴ The alternative argument is that entitlement only arises once per event or circumstance because, the fact that the moment when a Contractor becomes aware of a delay and the moment of its resulting delay may be separated in time does not mean that they are each also two different moments that entitle the Contractor to a claim.

In other words, whereas entitlement to an EoT may arise either when completion will be delayed or when completion is delayed, this does not mean that there are two different moments in time when entitlement may arise for each time a Contractor suffers delay, i.e., a prospective moment and a retrospective moment. There is only one delay. A delay to completion, whether it lasts days, weeks, months, etc., is the event or circumstance in respect of which entitlement arises. It therefore follows that entitlement to an EoT arising from that event or circumstance can arise only once.

For the avoidance of doubt, the situation where there are continuing on-going delays may be different. A Contractor in such circumstances may not be barred from claiming future delays even if the Contractor fails to serve the notice within 28 days of the first day of delay. In those situations, the Contractor only becomes aware of the delay on each of the days it is delayed from executing the works due to, for instance, lack of access. In the scenario discussed in the Obrascon case, the Contractor becomes aware of the delay before the delay is actually incurred.

The Obrascon judgment mentions that Sub-Clause 8.4 does not expressly state that, between the prospective and retrospective options, it should be the earliest. However, the acknowledgement of these two options merely responds to the fact that some delays will be foreseen and others will not and the draftsman intended to include the prospective option for the same reason that there is a 28 day timeframe to notify it, because the contract attempts to solve delay problems as quickly and economically as possible, i.e., the earlier the better.

In situations where delay is prospective, i.e., time for completion “will be delayed”, entitlement arises when the Contractor foresees the delay to completion. Mr Justice Akenhead’s example is one of these situations, i.e., the Contractor became aware of the delay to completion in October. In situations where delay is not foreseen, entitlement arises when the delay actually occurs. But for both of these situations, entitlement arises only once and a Contractor’s entitlement arises either prospectively or retrospectively, but not both.

Contractual justification for narrow interpretation: the 28 day period

The first part of the relevant sentence in Sub-Clause 20.1 states that “[t]he Notice shall be given as soon as practicable.” This responds to the purpose of the strict Sub-Clause 20.1 notice regime whereby the intention is that the Employer is informed of a potential claim as soon as reasonably possible.

The second part of the relevant sentence in Sub-Clause 20.1 states that “[t]he Notice shall be given … not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance.” The Sub-Clause provides a starting point and an end point for the period of time within which the Contractor must comply with the condition precedent. It also provides one single period of no more than 28 days for the Contractor to comply. The exactness of this period is illustrated by the first sentence of the second paragraph of Sub-Clause 20.1 which states the Contractor will lose its entitlement if it does not send the notice within a period of 28 days.

The starting point is when the Contractor becomes aware or should become aware of the event or circumstance. Even in a situation where the incident and the delay are separated in time, the Contractor can become aware (or should become aware) only once. The Contractor cannot become aware (or should become aware) twice of the certainty that time for completion will be delayed. The text in FIDIC does not expressly state “whichever is the earliest” because, as mentioned above, it is implied that entitlement arises only once.

The end point is therefore 28 days from this moment. One of the complications to which the Obrascon judgment’s ruling gives rise is that, if there are two moments when the Contractor can become entitled, then there are two 28 day periods within which the Contractor can serve its notice of claim. If a Contractor becomes aware of the fact that the incident will cause delay to completion in October but can serve the notice either in a 28 day period starting in October or another 28 day period starting from November, the period of time becomes one of 56 days. Furthermore, this would also mean that, if the prospective position and the retrospective position are separated by months, i.e., in October the Contractor becomes aware that the incident will cause delay in March of the following year, the Obrascon interpretation would allow a 28 day period starting in October followed by a period of about 4 months when the Contractor will be time bared from serving the notice but then followed by another 28 day period during which the time bar is somehow lifted. It is arguable that this odd result is not what the Sub-Clause 20.1 regime could have intended. There is only one 28 day period in respect of the entitlement that results from the relevant delay to completion.

This interpretation should not be the cause of any additional trouble for the Contractor. The Contractor should be quite capable of sending a Sub-Clause 20.1 notice the moment when it becomes aware that there will be delay, for example, because an updated programme has put the delay on the critical path. Furthermore, the notice itself is not a complex document that could be seen as requiring any extensive research and drafting. Notices are usually one or two pieces of paper containing, as the judgment prescribes,⁵ (1) some description of the event or circumstance and (2) that the purpose of the notice is to notify the Engineer of a claim under the Contract arising out of an event or circumstance. Furthermore, at the moment when the Contractor becomes aware that completion will be delayed, it will already have all the elements needed to allow it to send the notice. Finally, the Contractor is not even required to follow up with a claim if it later chooses not to.

Conclusion

Therefore, whereas the Obrascon argument rightly responds to the dire consequences that may follow late service of a notice of claim, the interpretation may be perceived as contravening the main commercial purpose that lies behind the strict notification regime in Sub-Clause 20.1. That is, in order to allow a more controlled administration of the contract, provide certainty to the Employer, and help the parties solve any delay difficulties with as much anticipation as possible, the Contractor must serve its notices as soon as practicable. Furthermore, the language used in the provisions of Sub-Clauses 8.4 and 20.1 support this view as it is implied that entitlement to a claim can arise only once and the Contractor can only become aware of this entitlement once. Therefore, in circumstances where the Contractor becomes aware of a delay that will happen in the future, the Contractor would be required to serve the Sub-Clause 20.1 notice within 28 days from this moment and cannot wait for the moment when the delay occurs for a second 28 day period.

Consequently, the possibility of this argument being used for contracts governed by laws other than that of England and Wales results in a real risk that, if the Contractor for political reasons sits on a notice of claim, it will then be time barred from claiming the intended extension of time.

^[1] [2014] EWHC 1028 (TCC) (16 April 2014).
^[2] Obrascon, paragraph 312.
^[3] Obrascon, paragraph 312(e).
^[4] Obrascon, paragraph 312(e), explains that notice may be served at either of these moments.
^[5] Obrascon, paragraph 313.