How do you establish whether a notice provision is really a condition precedent (or time bar)? In Tata Consultancy Services Ltd v Disclosure and Barring Service,[1] Mr Justice Constable reviewed the key authorities[2] on conditions precedent and provided 7 "relevant

How do you establish whether a notice provision is really a condition precedent (or time bar)?

In Tata Consultancy Services Ltd v Disclosure and Barring Service,^[1] Mr Justice Constable reviewed the key authorities^[2] on conditions precedent and provided 7 “relevant matters” to consider. In this article we look at how FIDIC’s claims procedures measure up against Constable J.’s 7 points.  Although Tata is an English law case, it could be cited as persuasive authority in any FIDIC condition precedent arguments formed globally.

The case

Tata Consultancy Services Limited (‘TCS’) was a company supplying business process outsourcing and IT services. TCS was retained by Disclosure Barring Service (‘DBS’) to:

• take over the manually intensive business-as-usual DBS processes from the incumbent supplier, Capita (R0), and
• build a new system to modernise DBS’ processes, replacing its previous paper-based processes with digital ones in parallel (R1).

The modernisation project did not go well. TCS blamed DBS (and others) for delay and claimed more than £110m in delay damages. DBS blamed TCS’s software development and testing and counterclaimed £108m (later reduced) in damages for delay and defects. Constable J. rejected most of TCS’s delay claim, awarding it just £2.4m^[3] (later reduced to £1.3m^[4]). DBS was awarded £4.6m^[5] (which had been agreed by the parties in a prior settlement agreement) for TCS risk delays.

TCS’s obligations

In accordance with Clause 5 of the contract, TCS was required to:

• notify DBS “as soon as reasonably practicable” after becoming aware of any delay or potential delay, and
• submit a “draft Exception Report” within 5 working days of such notice, detailing the reasons for the delay, actions being taken to avoid or mitigate the delay, consequences of the delay, and if the delay was caused by DBS why this was so.

The contract expressly stated that DBS would not be liable to compensate TCS for delay unless TCS fulfilled the two obligations. TCS’s notice obligations and entitlement to relief were clearly drafted with conditionality and express wording as to the consequences of not providing a notice and a draft Exception Report. However, Constable J. concluded that both parties were working on the basis that the 5 working day condition precedent had “fallen by the wayside”, and DBS was estopped from arguing that TCS was not entitled to compensation for delay.^[6]

DBS’s obligations

In accordance with Clause 6 of the contract, DBS was required to issue a Non-Conformance Report “if” a milestone was not achieved due to TCS’s default. The contract expressly stated that “then” DBS could require that TCS pay a sum for delay^[7]. Constable J. construed this to be a condition precedent. He recognised that the notice obligation on the employer was worded differently than that on the contractor, in particular it did not include the sentence regarding loss of entitlement if notice was not provided.  He said^[8]:

“It is true that the parties have chosen to express the condition precedent nature of compliance with Clause 5.1 to 5.3 in a different way, in the context of TCS’s entitlement to relief.  This is potentially a factor weighing against construing Clause 6.1 as a condition precedent…However, it could equally be said with justification that when the delay provisions are considered as a whole, the existence of some symmetry in relation to the requirement upon both parties to provide a form of notice/information to the (other) party responsible for the delays as a condition of claiming compensation weighs in favour of TCS’s construction. This is particularly so where the rationale for the imposition of a notice regime as a condition precedent is to know where a party stands contemporaneously, and to allow the defaulting party to rectify its default. Whilst it is right that the parties will know when a Milestone has not been achieved, the Non-conformance Report must, in circumstances where the Milestone has passed but no Testing has been carried out, set out (insofar as within the knowledge of DBS) the non-conformances which have prevented Testing and any other reasons the Milestone has not been achieved…In these circumstances, the conditionality created by the clear ‘If…then’ language attaching to the Non-conformance Report serves a useful purpose.”

The 7 relevant matters for consideration

Constable J. said (with emphasis added)^[9]:

“Any attempt to articulate an exhaustive checklist of factors to consider when considering whether a particular clause in a particular contract is a condition precedent will inevitably be futile.  However, the following can be distilled from the foregoing authorities as obviously relevant matters I should, and do, have well in mind in the present case when considering whether the relevant clauses should be construed as a condition precedent:

• whether it is necessary for a party to comply with one or more stated requirements in order to be entitled to make a claim for money or relief will ultimately turn on the precise words used, set within their contractual context;
• there is nothing as a matter of principle which prevents parties freely agreeing that the exercise of a particular right to payment or relief is dependent on compliance with a stated procedure, but parties will not be taken to have done so without having expressed that intention clearly;
• the language of obligation in relation to procedure to be complied with (e.g. ‘shall’) is necessary, but not sufficient;
• the absence of the phrase ‘condition precedent’ or an explicit warning as to the consequence of non-compliance is not determinative against construing the regime as one of condition precedent;
• however, the absence of any language which expresses a clear intention that the right in question is conditional upon compliance with a particular requirement is likely to be, at the very least, a powerful indicator that the parties did not intend the clause to operate as a condition precedent;
• the requisite ‘conditionality’ may be achieved in a number of different ways using different words and phrases when construed in their ordinary and natural meaning;
• the clearer the articulation, purpose and feasibility of the requirement to be complied with (in terms of substance and/or timing), the more consistent it will be with the conclusion that, depending on the rest of the language used, the requirement forms part of a condition precedent regime.”

Application to FIDIC

The various FIDIC forms of contract require (i) a notice of claim, (ii) sometimes, within a prescribed period, (iii) sometimes, in a prescribed form, and (iv) sometimes, delivered in a prescribed way.

In the remainer of this article we look at how FIDIC’s claims procedures in each of (i) FIDIC 1999 Sub-Clause 2.5 [Employer’s Claims], (ii) FIDIC 1999 Sub-Clause 20.1 [Contractor’s Claims], and (iii) FIDIC 2022 reprint Sub-Clause 20.2 [Claims for Payment and/or EOT] measure up against to Constable J.’s 7 relevant matters.

FIDIC 1999: Sub-Clause 2.5 [Employer’s Claims]

1. Under the precise words of an unamended Sub-Clause 2.5 (and subject to their contractual context) is it necessary for the Employer to comply with one or more stated requirements in order to be entitled to make a claim for money or relief?

Yes. The entitlement to make a claim arises separately under any Clause or otherwise in connection with the Contract. In the applicable Clauses, entitlement is often expressed to be subject to Sub-Clause 2.5. For example, Sub-Clause 8.7 [Delay Damages] states (with emphasis added):

“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.”

Sub-Clause 2.5 then explains how to make the claim if so entitled:

“If the Employer considers himself entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract … the Employer or the Engineer shall give notice…”.

There is no prescribed period to give such notice in the FIDIC Red, Yellow and Silver Books 1999, but there is in the FIDIC Pink Book 2010.

In the Tata case, Constable J. recognised that the notice obligation on the employer was worded differently than that on the contractor: in particular, it did not include the sentence regarding loss of entitlement if notice was not provided (see above).

In the FIDIC 1999 forms of contract, the Employer’s notice obligations are also worded differently to the Contractor’s notice obligations. In the FIDIC 2022 reprints, the Employer and Contractor’s claims (and related notice obligations) are treated together in one clause.

Commentators on the FIDIC 1999 forms of contract construe Sub-Clauses 2.5 and 20.1 separately and generally hold the view that, in principle, the giving of notice under Sub-Clause 2.5 is not a condition precedent under the FIDIC Red, Yellow and Silver Books 1999 or the FIDIC Pink Book 2010, but that it remains good project management to do so.^[10]

2. Is there a clearly expressed intention that the exercise of a particular right to payment or relief is dependent on compliance with a stated procedure?

No.  Unlike Sub-Clause 20.1 no sanction is specified if the Employer or Engineer fails to give notice to the Contractor within a specified time. Even though a fixed period for giving notice is stated in the FIDIC Pink Book it is unlikely to be construed as a condition precedent^[11].

Possibly, there is an exception in relation to set-off, abatement or deductions by the Employer from amounts that the Engineer has already certified, as follows:

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

However, it is more likely that this wording was intended to restrict the Employer from circumventing the contractual mechanism and availing itself of self-help remedies, rather than creating a separate and distinct condition precedent.

The FIDIC Contracts Guide^[12] commentary on Sub-Clause 2.5 says:

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

3. Is obligatory language used (e.g. shall)?

Yes: “…the Employer or Engineer shall give notice…”, but Constable J. states that this is not sufficient.

4. Is the phrase ‘condition precedent’ used or an explicit warning as to the consequence of non-compliance?

No, the phrase ‘condition precedent’ is not used, but Constable J. states that this is not determinative. Nor is there any explicit warning as to the consequence of non-compliance except (possibly) in relation to set-off, abatement or deductions by the Employer from amounts that the Engineer has already certified. See 2 above.

5. Is there an absence of any language which expresses a clear intention that the right in question is conditional upon compliance with a particular requirement?

Yes, except (possibly) in relation to set-off, abatement or deductions by the Employer from amounts that the Engineer has already certified. See 2 above.

6. ‘conditionality’ may be achieved in a number of different ways using different words and phrases when construed in their ordinary and natural meaning

“if … then …” is the simplest language of conditionality. Synonyms for conditional include contingent, dependent, provisional, subject to, limited, restrictive, qualified, tentative, constrained and hypothetical. No such words are to be found in Sub-Clause 2.5 (although “subject-to” is used in Sub-Clause 8.7 [Delay Damages] and other similar clauses).

7. How clear is the articulation, purpose and feasibility of the requirement to be complied with (in terms of substance and/or timing)?

Sub-Clause 2.5 has often been debated for its lack of clarity. As Sub-Clause 20.1 provides more guidance in respect of Contractor claims (in particular, in relation to time frames and claim particulars), there is an argument that Sub-Clause 2.5 lacks parity and it can be vague in practical application.

FIDIC 1999: Sub-Clause 20.1 [Contractor’s Claims]

1. Under the precise words of an unamended Sub-Clause 20.1 (and subject to their contractual context) is it necessary for the Contractor to comply with one or more stated requirements in order to be entitled to make a claim for money or relief?

Yes. The entitlement to make a claim arises separately under any Clause or otherwise in connection with the Contract. In the Clauses, entitlement is often expressed to be subject to Sub-Clause 20.1. For example, Sub-Clause 1.9 [Delayed Drawings or Instructions] states (with emphasis added):

“If the Contractor suffers delay and/or incurs Cost as a result of a failure of the Engineer to issue the notified drawing or instruction within a time which is reasonable and is specified in the notice with supporting details, the Contractor shall give a further notice to the Engineer and shall be entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to:

(a)    an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and

(b)    payment of any such Cost plus reasonable profit, which shall be included in the Contract Price.”

Sub-Clause 20.1 then explains how to make the claim if so entitled:

“If the Contractor considers himself entitled to any extension of the Time for Completion and/or any additional payment under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice…no later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance….”

2. Is there a clearly expressed intention that the exercise of a particular right to payment or relief is dependent on compliance with a stated procedure?

Yes.  Sub-Clause 20.1 states:

“If the Contractor fails to give notice of a claim within such period of 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”.

There is no express wording to allow discretion as to the 28-day period.

Commentators on the FIDIC 1999 forms of contract generally hold the view that, in principle, the giving of notice under Sub-Clause 20.1 is a condition precedent under the FIDIC Red, Yellow and Silver Books 1999 and the FIDIC Pink Book 2010^[13].

3. Is obligatory language used (e.g. shall)?

Yes: “…the notice shall be given …”, but Constable J. states that this is not sufficient.

4. Is the phrase ‘condition precedent’ used or an explicit warning as to the consequence of non-compliance?

No, the phrase ‘condition precedent’ is not used but Constable J. states that this is not determinative. However, there is explicit warning as to the consequence of non-compliance. See 2 above.

5. Is there an absence of any language which expresses a clear intention that the right in question is conditional upon compliance with a particular requirement?

No, there is a clearly expressed intention. See 2 above.

6. ‘conditionality’ may be achieved in a number of different ways using different words and phrases when construed in their ordinary and natural meaning

As above. No such words are to be found in this Sub-Clause (although “subject-to” is used in Sub-Clause 1.9 [Delayed Drawings or Instructions] and other similar clauses).

7. How clear is the articulation, purpose and feasibility of the requirement to be complied with (in terms of substance and/or timing)?

Sub-Clause 20.1 is widely considered to be relatively clear and detailed, especially when compared to the corresponding Employer claims process under Sub-Clause 2.5. Whilst the strict 28-day time frame is clear, in complex projects it can be challenging to identify the exact date that the Contractor became aware or should have become aware of the event or circumstance giving rise to the claim[14].

FIDIC 2022 reprints: Sub-Clause 20.2 [Claims for Payment and/or EOT]

1. Under the precise words of an unamended Sub-Clause 20.2 (and subject to their contractual context) is it necessary for a party to comply with one or more stated requirements in order to be entitled to make a claim for money or relief?

Yes.  In the first paragraph of Sub-Clause 20.2 the entitlement to make a claim arises separately under any Clause or otherwise in connection with the Contract. For example, Sub-Clause 18.4 [Consequence of an Exceptional Event] states (with emphasis added):

“If the Contractor is the affected Party and suffers delay and/or incurs Cost by reason of the Exceptional Event of which he/she gave a Notice under Sub-Clause 18.2 [Notice of an Exceptional Event], the Contractor shall be entitled subject to Sub-Clause 20.2 [Claims For Payment and/or EOT] to:

(a)    EOT; and/or

(b)    if the Exceptional Event is of the kind described in sub-paragraphs (a) to (e) of Sub-Clause 18.1 [Exceptional Events] and, in the case of sub-paragraphs (b) to (e) of that Sub-Clause, occurs in the Country, payment of such Cost.”

Sub-Clause 20.2 then explains how to make the claim if so entitled:

“If either Party considers that he/she is entitled to any additional payment by the other Party …and/or to EOT … or an extension of the DNP … under any Clause of these Conditions or otherwise in connection with the Contract … the following Claim procedure shall apply…”

It continues:

“The claiming Party shall give a Notice to the Engineer … no later than 28 days after the claiming Party became aware, or should have become aware, of the event or circumstance…”

2. Is there a clearly expressed intention that the exercise of a particular right to payment or relief is dependent on compliance with a stated procedure?

This is arguable. Sub-Clause 20.2.1 states:

“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… the Time for Completion … or the DNP … 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.”

But Sub-Clause 20.2.5 obscures the initial clarity with the wording:

“The agreement or determination of the Claim shall include whether or not the Notice of Claim shall be treated as a valid Notice taking account of … why late submission is justified …”

Then setting out the circumstances that the Engineer may take into account in respect of late submission, including to what extent the other Party would be prejudiced by acceptance or a later submission, any evidence of the other Party’s prior knowledge of the event or circumstance giving rise to the Claim, and any evidence of the other Party’s prior knowledge of the contractual and/or other legal basis of the Claim.

Sub-Clause 20.2.7 further clouds the position with the wording (with emphasis added):

“The requirements of this Sub-Clause 20.2 are in addition to those of any other Sub-Clause which may apply to the Claim. If the claiming Party fails to comply with this or any other Sub-Clause in relation to a Claim, any additional payment and/or any EOT…or extension of the DNP…, shall take account of the extent (if any) to which the failure has prevented or prejudiced proper investigation of the Claim by the Engineer”.

Sub-Clause 20.2.7 adopts similar wording to Sub-Clause 2.5 of the FIDIC 1999 forms to seek to restrict the Employer from circumventing the contractual mechanism and availing itself of self-help remedies, and states:

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

Commentators on the FIDIC 2022 reprints generally form the view that, in principle, the giving of a Notice of Claim within the prescribed period is a condition precedent which is, essentially, rebuttable in the right circumstances^[15].

3. Is obligatory language used (e.g. shall)?

Yes: “The claiming Party shall give a Notice…”, but Constable J. states that this is not sufficient.

4. Is the phrase ‘condition precedent’ used or an explicit warning as to the consequence of non-compliance?

No, the phrase ‘condition precedent’ is not used but Constable J. states that this is not determinative. Whilst there is explicit warning as to the consequence of non-compliance, this is compromised somewhat by the wording of Sub-Clause 20.2.7. See 2 above.

5. Is there an absence of any language which expresses a clear intention that the right in question is conditional upon compliance with a particular requirement?

This is arguable. See 2 above.

6. ‘conditionality’ may be achieved in a number of different ways using different words and phrases when construed in their ordinary and natural meaning

As above. No such words are to be found in this Sub-Clause (although “subject-to” is used in Sub-Clause 18.4 [Consequence of an Exceptional Event] and other similar clauses).

7. How clear is the articulation, purpose and feasibility of the requirement to be complied with (in terms of substance and/or timing)?

Sub-Clause 20.2 is more detailed than in the earlier FIDIC forms. But in endeavouring to make the notice provisions stricter, has the complexity compromised lucidity and practicality?

Conclusion

The Tata case is unlikely to seismically shift the current views on notice provisions operating as conditions precedent or time bars under the FIDIC forms of contract. Much will continue to depend upon the governing law of the Contract. But it serves as a useful reminder of the matters to contemplate when analysing whether a notice provision operates as a condition precedent (or time bar).

Best practice is to avoid the time and expense of such analysis in the first place, simply by issuing a contractually compliant notice as a matter of good project management.

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

[1] Tata Consultancy Services Ltd v Disclosure and Barring Service [2024] EWHC 1185 (TCC) (17 May 2024)

[2] The authorities Mr Justice Constable considered included: Scottish Power UK PLC v BP Exploration Operating Company Ltd [2016] All ER 536; Bremer Handelsgesellscheft Schaft v Vanden-Avenne Izegem PVBA [1978] 2 Lloyd’s Rep 109; London Borough of Merton v Stanley Hugh Leach Ltd (1985) 32 BLR 51; WW Gear Construction Limited v McGee Group Limited [2010] EWHC 1460 (TCC); Steria Limited v Sigma Wireless Communications Limited [2007] EWHC 3454 TCC; Yuanda (UK) Company Limited v Multiplex Construction Europe Limited & Others [2020] EWHC 468 (TCC).

[3] Paragraph 410.

[4] [2024] EWHC 2025 (TCC) (01 August 2024)

[5] Paragraph 412. “The parties are agreed that, pursuant to discussions in 2015 leading to a draft CCN 041, the parties agreed to settle liability at £4,559,439 for the delays up to September 2015 in exchange for revised Go-Live dates, the Milestones were adjusted and the parties in fact worked to the new Milestones. There is no dispute between the parties that that sum is payable by TCS to DBS as part of the overall accounting which will be determined by this litigation.”

[6] Paragraphs 162-163. “Applying these facts to the test of estoppel, it is clear that the parties were subjectively in agreement.  It is objectively obvious that TCS considered that it had had a de facto extension to provide the Exception Report, notwithstanding the absence of a formal response to their request, because of the way DBS was conducting itself in discussions and negotiations.   It is also clear, on DBS’s own evidence, that it also considered that the 5 Working Day requirement had ‘fallen by the wayside’. It would have been obvious to DBS that TCS was engaging in the project in a way, to DBS’s benefit, that it may not have done faced with a denial of entitlement to compensation based on the 5 Working Day point. Insofar as it is necessary for me to do so, I also find in the specific circumstances known to the parties (and in particular as set out in (1) to (4) above), a reasonable person in TCS’s position would have expected DBS acting responsibly would have put TCS on notice that its position was that (without prejudice to the ongoing commercial negotiations) it considered that TCS had entirely forfeited its right to compensation for delay (see Ted Baker Plc v Axa Insurance UK Plc [2017] EWCA Civ 4097).”

[7] Paragraph 94.

[8] Paragraph 92.

[9] Paragraph 74.

[10] This is supported by Ellis Baker, Ben Mellors, Scott Chambers and Anthony Lavers, in FIDIC Contracts: Law and Practice (2009), para 6.296 at page 338.

[11] This is supported by Ellis Baker, Ben Mellors, Scott Chambers and Anthony Lavers, in FIDIC Contracts: Law and Practice (2009), para 6.296 at page 338.

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

[13] In Obrascon Huarte Lain SA v Attorney General for Gibraltar [2014] BLR 484, para 311 at page 514, Sub-Clause 20.1 of the FIDIC Yellow Book 1999 was found to be a condition precedent.

[14] There are conflicting views under Obrascon Huarte Lain SA v Attorney General for Gibraltar [2014] BLR 484 and Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC [2022] DIFC CA 016.

[15] This is supported by Christopher R Seppälä, in The FIDIC Red Book Contract: An International Clause-by-Clause Commentary (2023), at pages 1130-1131.

Employers avoid paying more under existing contracts, but forcing unprofitable work risks contractor insolvency. Contractors now seek protection from price fluctuations, preferring short projects or cost-plus letters of intent. Cost adjustment mechanisms, like FIDIC 1999 Sub-Clause 13.8, may help.

Construction costs are escalating

Under existing contracts, an employer will not want to pay more for the works. But forcing a contractor to perform works that are unprofitable or causing a massive loss is unlikely to be in the best interests of the project. It may result in the insolvency of the contractor forcing the employer to abandon the contract or re-let it, probably at a premium.

In new contracts, contractors are demanding protection from unpredictable price fluctuations. If a contractor feels exposed, it might only bid on projects with short construction programmes which give costs less time to increase. Or the contractor might seek to start work under a letter of intent on a cost-plus basis which then never crystalises into a full contract.

Is a mechanism for cost adjustment, such as FIDIC 1999 Sub-Clause 13.8[1] [Adjustments for Changes in Costs], an answer?

Type of contract

The type of contract usually informs as to which party takes the risk of price fluctuations.

• In reimbursable or cost-plus contracts, the employer takes the risk. The contractor is reimbursed the actual cost, plus allowances for overheads and profit. If the contractor’s actual costs increase, the contract price will increase also.
• In remeasurement contracts and fixed price/lump sum contracts the contractor usually takes the risk unless there is a mechanism for cost adjustment.
  • In remeasurement contracts (such as the FIDIC Red Book – For Building and Engineering Works Designed by the Employer) the contract price is based on approximate quantities and a schedule of rates and prices. But, if the rates and prices can be adjusted where price fluctuations occur, the contract price is recalculated using the new rates and prices and the final agreed quantities. The actual work done is remeasured when the works are completed.
  • In fixed price/lump sum contracts (such as the FIDIC Yellow Book – Plant and Design Build) the contractor provides an overall figure, ‘a lump sum’, for all the works that are agreed to be carried out under the contract. But, if the amounts due to the contractor can be adjusted where price fluctuations occur, the contract price is recalculated.

Legal principles

It is a basic principle of law that agreements must be kept. The Latin term for this is pacta sunt servanda. Therefore, unless there is a mechanism for cost adjustment, the contractor in a remeasurement contract or fixed price/lump sum contract may have a problem. In such circumstances, there are some legal arguments which might be deployed depending upon the governing law of the contract and local legal advice.

Fundamental change of circumstance

Some legal jurisdictions will allow a contract to be modified where it becomes inapplicable because of a fundamental or extraordinary change of circumstances. For example, under:

• the legal doctrine of rebus sic stantibus (meaning ‘things thus standing’[2]) which is sometimes described as an ‘escape clause’ to the principle of pacta sunt servanda; or
• the French doctrine of imprévision (meaning ‘lack of foresight’)[3].

Impossibility

A contractor might seek to argue that a contract has become impossible to perform; it is so different to the original bargain that it is frustrated so as to discharge the parties’ obligations.

Under the FIDIC 1999 editions, Sub-Clause 19.7 provides a remedy when any ‘event or circumstance outside the control of the Parties (including, but not limited to, Force Majeure) arises which makes it impossible or unlawful for either or both Parties to fulfil its or their contractual obligations…’.

There is similar wording at Sub-Clause 18.6 of the FIDIC 2017 editions.

However, economic unprofitability is unlikely to make it impossible or unlawful for the contractor to fulfil its contractual obligations. Just because something costs more to build does not make it impossible to build.

Force majeure

A contractor might seek to rely on force majeure, either under the governing law or in accordance with the contract conditions.

For an event to qualify as ‘Force Majeure’ under the FIDIC 1999 editions, five requirements must be met:

• it must be an exceptional event or circumstance;
• which must be beyond the parties’ control;
• which such a party could not have reasonably provided against before entering into the contract;
• which having arisen such party could not have reasonably avoided or overcome; and
• which was not attributable to the other party.

There is similar wording at Sub-Clause 18.1 of the FIDIC 2017 editions. However, the term Force Majeure is not used. The term Exceptional Events is used instead, although the definition does not actually require the event or circumstance to be exceptional.

Both Covid and the Russia-Ukraine war might fall within the FIDIC definition of Force Majeure. But to be entitled to an extension of time (or, in the case of the Russia-Ukraine war, Cost[4]), the contractor must be ‘prevented’ from performing any of its obligations under the contract by Force Majeure (and is subject to giving the prescribed notice). This means a physical or legal prevention. Economic unprofitability will not normally suffice. The mere fact that the cost of performance has increased is insufficient for prevention. So, whilst the Force Majeure clause may give the contractor extra time to procure materials that were prevented from being procured on time because of Covid or the Russia-Ukraine war, it is unlikely to assist a contractor who is merely obliged to pay higher prices than originally estimated.[5]

Good faith

A contractor might seek to rely on the principle of good faith which, under some legal jurisdictions, may be implied into the contract. Good faith arguments are usually raised as a matter of last resort.

Escalation clauses

A mechanism for cost adjustment is, potentially, a more reliable way to limit the contractor’s risk.

In the FIDIC 1999 editions the escalation clause is at Sub-Clause 13.8, and in the FIDIC 2017 editions it is at Sub-Clause 13.7. Sometimes the escalation clause is deleted or modified.

Sub-Clause 13.8 of the FIDIC 1999 editions (or Sub-Clause 13.7 in the FIDIC 2017 editions) is an ‘opt-in’ clause. It applies only if:

• Under the FIDIC Red and Yellow Books 1999 – a table of adjustment data is included in the Appendix to Tender.
• Under the FIDIC Silver Book 1999 – provided for in the Particular Conditions.
• Under the FIDIC 2017 forms – a Schedule(s) of cost indexation is included in the contract.

The table of adjustment data or Schedule(s) is a complete statement of the adjustments to be made to the cost of labour, Goods and other inputs to the Works (for example, fuel). Any other rises or falls in the Costs are deemed to be included within the Accepted Contract Amount. No adjustment is applied to work valued on the basis of Cost or current prices.

Where it applies:

• Under the FIDIC 1999 editions – the amounts payable to the contractor are adjusted for both rises and falls ‘in the cost of labour, Goods and other inputs to the Works’ by adding or deducting amounts calculated in accordance with a prescribed formula (in the FIDIC Red and Yellow Books) or as set out in the Particular Conditions (in the FIDIC Silver Book).
• Under the FIDIC 2017 editions – the amounts payable to the contractor are adjusted for both rises and falls ‘in the cost of labour, Goods and other inputs to the Works’ by adding or deducting amounts calculated in accordance with the Schedule(s).

In the FIDIC Red and Yellow Books 1999 a formula is set out, but this may be amended as the parties choose. The wording states: ‘The formulae shall be of the following general type’. The formula is as follows:

The FIDIC Yellow Book Guidance suggests that in a plant contract formulae which are more directly related to the timing of costs incurred by the manufacturers be adopted.

The FIDIC Silver Book 1999 and the FIDIC Gold Book 2008 do not set out a formula. The FIDIC Silver Book Guidance suggests that the wording for provisions based on the cost indices in the FIDIC Yellow Book be considered.

The FIDIC 2017 editions do not set out a formula either. The Guidance states: ‘It is recommended that the Employer be advised by a professional with experience in construction costs and the inflationary effect on construction costs when preparing the contents of the Schedule(s) of cost indexation’.

It is recognised that the formula set out above to calculate the adjustment multiplier (Pn), which is to be applied to the estimated contract value, is crude, but it is a fast and reasonably credible way of calculating and reimbursing fluctuations in costs.

The formula relies on:

• A fixed element (a), representing the non-adjustable portion in contractual payments, which is fixed at the time of Contract. FIDIC suggests 10% in the Appendix to Tender or Guidance.
• The weighting of the resources (b) (c) (d), which is determined at the time of contract. For example, a road project might be 20/40/40 for labour, equipment and materials.
• Cost indices for the current ‘now’ value (n) and the original value (o) for each of, for example, labour (L), equipment (E) and materials (M), which need to be updated frequently (preferably monthly rather than quarterly or annually, but that will depend upon the cost indices chosen).

Fixed element (10%)

Where there is contractor compensable delay which pushes the project into a period of inflation, it seems unfair that this portion is non-adjustable. Perhaps, it might be claimed as a prolongation cost as it falls squarely within the definition of ‘Cost’. The author is not aware of any precedent on this.

Weightings

In the FIDIC Red and Yellow Books 1999 (but not the FIDIC Silver Book 1999 or the FIDIC 2017 editions), the weightings may be adjusted if they have been rendered unreasonable by way of a Variation to the Works.

The last paragraph of Sub-Clause 13.8 of the FIDIC Red and Yellow Books 1999 states: ‘the weightings for each of the cost factors stated in the table(s) of adjustment data will only be adjusted if they have been rendered unreasonable, unbalanced or inapplicable, as a result of Variations’.

Therefore, the claiming party would need to demonstrate that the original contract weightings were correct at the time of contract and that a Variation had rendered them unreasonable, unbalanced or inapplicable. Inflation alone would be insufficient.

This provision does not apply simply where the original contract weightings fail to reflect the actual contract weightings. Sub-Clause 4.11 of the FIDIC 1999 editions states: ‘The Contractor shall be deemed to have satisfied himself as to the correctness and sufficiency of the Contract Price. … Unless otherwise stated in the Contract, the Contract Price covers all the Contractor’s obligations under the Contract (including those under Provisional Sums, if any) and all things necessary for the proper design, execution and completion of the Works and the remedying of any defects.’. The FIDIC 2017 editions have similar wording.

Cost indices

Cost indices provide a simple way to relate the original value to a corresponding cost now. Unfortunately, cost indices are not an accurate reflection of the actual costs, but they are easy and reasonably credible.

The choice of cost indices is important, and when choosing them it is necessary to understand, for example:

• Exactly what they measure. Many indices are intended to reflect only general building construction.
• In which location. The indices ought to align with the source of materials. Changes might be needed to the indices if there is a change in supplier or country of origin for the supply of materials, for example because of sanctions.
• In which currency. The currency of the cost indices and the currency for payment ought to align, otherwise there may be scope for further adjustment when the currency of the cost indices is converted into the currency of payment.

The categories of the cost indices are usually broad and not necessarily linked to specific items in the bill of quantities. Therefore, they do not work well with bespoke construction elements.

After the Time for Completion

Under the FIDIC Red and Yellow Books 1999 and the FIDIC 2017 editions, if the contractor fails to complete within the Time for Completion (meaning the time for completing the Works including any extension of time due to the contractor), further price rise risk is allocated to the contractor, and the benefit of any falling prices is allocated to the employer.

Adjustments to prices after the Time for Completion are made using the most favourable to the employer of:

• the index or price applicable from the date 49 days (i.e. 7 weeks) before the expiry of the Time for Completion; or
• the current index or price.

Procedure

Under both the FIDIC 1999 and 2017 editions, an application for an Interim Payment Certificate under Sub-Clause 14.3 must include any amounts to be added or deducted for changes in cost under Sub-Clause 13.8. The contractor is not obliged to give notice under Sub-Clause 20.1 of the FIDIC 1999 editions.

Other options

There are also practical things which the parties might consider in order to manage the risk of escalating construction costs in a smarter way.

During the tender process:

• The employer might give the contractor more flexibility when procuring materials by being less prescriptive in the specifications, for example in respect of the identity of the supplier and/or the type of material.
• The employer might encourage value engineering and permit alternative products where previously specified materials have dramatically increased in price.
• Provisional sums might be used for specific defined materials, to allow for greater price flexibility.
• The contractor might date limit its pricing for specific materials, therefore limiting its period of risk.
• The contractor might procure goods locally, where possible, in order to reduce transportation costs.
• The contractor might build closer and more collaborative relationships with suppliers.

During the works:

• The employer might agree to vary the contract to take into account some of the suggestions above.
• The contractor (or the employer) might identify capacity in the supply chains, buy price volatile goods, equipment and materials in advance and negotiate a delayed delivery or stockpile them[6]. The contractor might need to do this in any event because of excessive lead in times.
• The employer might agree to pay more in a supplemental agreement[7].

Conclusion

Contractors are demanding protection against escalating construction costs.

Although not without criticism, a mechanism for cost adjustment such as FIDIC 1999 Sub-Clause 13.8 is a reasonably credible way to limit the contractor’s risk if professional advice is sought on the correct cost indices to apply when preparing the contract documents.

I’d be interested to hear about your experiences and how you are addressing escalating construction costs in current and future projects.

Please call me, Victoria Tyson on +44 (0)20 3755 5733 or email Victoria.Tyson@howardkennedy.com to discuss your specific situation.

[1]   FIDIC 2017 Sub-Clause 13.7.

[2]   For example, under Polish law.

[3]   Article 1195 of Ordonnance No 2016-131 of 10 February 2016, enforceable in contracts concluded after 1 January 2016, states: “Where a change of circumstances that was unforeseeable at the time of the contract’s conclusion renders performance exceedingly onerous for a party that has not accepted to assume such risk, the party may ask the other party to renegotiate the contract”

[4]  War is payable under Sub-Clause 19.4(b) but Covid Is not. Natural catastrophes are excluded. For Cost, the event or circumstance must be of the kind listed in sub-paragraphs (i) to (iv) of Sub-Clause 19.1, and in the case of sub-paragraphs (ii) to (iv) occur In the Country.

[5]   Further, there is no entitlement to Cost in respect of natural catastrophes, and to be entitled to Cost in respect of the other specified categories, the force majeure must have occurred within the Country unless the force majeure arises out of “wars, hostilities (whether war be declared or not), invasion, act of foreign enemies”.

[6]   This will require up-front payment and security in relation to such payments.

[7]   For example, in the English case of Williams v Roffey Bros [1990] 2 WLR 1153 a contractor realised it had priced the works too low and would be unable to complete at the originally agreed price. It approached the employer who had recognised that the price was particularly low and was concerned about completing the contract on time. The employer agreed to pay the contractor more.

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.

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.

Is FIDIC’s new Emerald Book overly contractor-biased or does it offer pragmatic risk allocation for underground works? This article compares its benefits and risk distribution with the unamended FIDIC Yellow Book, especially regarding employer risks in claim-prone areas.

It has been suggested that FIDIC’s new Emerald Book may be “a contractors’ charter for riches” [1]. This article examines whether this new form of contract for underground works by FIDIC and the International Tunnelling and Underground Space Association is too contractor-biased or whether it provides a sensible and pragmatic risk allocation process, in an area of construction and engineering which is well known for claims. If more risks are placed on the Employer in this form of contract, what are the benefits of the contract compared to, for example, an unamended FIDIC Yellow Book?

The Contract

The Emerald Book is the first internationally recognized form of contract specifically drafted for tunnelling. It is based on the FIDIC Yellow Book 2017, although it is a few millimeters thicker with approximately sixty clauses and sub-clauses which deviate from the Yellow Book. It must therefore be considered in its own right.

Underground Works

The Notes to the Emerald Book state that Underground Works are predominantly characterized by three features:

“- the method of excavation and ground support are major factors for the successful realization of the project, and therefore part of the Works; 

– physical access to the Works is often limited to just a few locations or even a single location, which places serious constraints on construction logistics and the environment;

– the land, beneath which the Works are to be constructed, typically belongs to a number of third parties.”

The fact that it may not always be possible to ascertain the subsurface conditions means that there will always be a risk that the Contractor will encounter unforeseeable ground conditions.  There may also be limits on the methods which the Contractor must adopt for the underground works, having regard to the environment, location and surface conditions.

Risk Allocation

It is for the Employer at the outset to describe as far as possible the subsurface conditions for the project.  This obviously makes sense as the Employer is the only person who can carry out an analysis of the subsurface conditions prior to the date of tendering.  The information which the Employer produces will create an expectation of what the Contractor is likely to encounter.  The Emerald Book requires that this information be placed into Geotechnical Baseline Report (“GBR”), which provides a single contractual source of risk allocation related to the subsurface physical conditions.  All subsurface physical conditions not addressed in the GBR will be considered Unforeseeable.  The definition of the GBR refers to it as the document:

“…that describes the subsurface physical conditions to serve as the basis for the execution of the Excavation and Lining Works, including design and construction methods, and the reaction of the ground to such methods.  The GBR sets out the allocation of risk between the Parties for such subsurface physical conditions.”

The Guidance Notes to the Emerald Book set out the purpose of the GBR, recommendations for the content of the GBR and an example of Table of Contents for the GBR.

Sub-clause 4.10.2 [Use of the Geotechnical Baseline Report] provides that the Contactor will be deemed to have based its Tender and the Contractor’s Proposals for the Excavation and Lining Works on the information described in the GBR.  This deeming provision applies even in the event of a discrepancy or ambiguity in any of the other site data provided by the Employer.  This is important because otherwise an argument could be raised by the Employer that the conditions encountered were foreseeable, if some of the other data provided suggested ground conditions which might be different to those stated within the GBR.

Unforeseeable Conditions

The definition of “Unforeseeable” at clause 1.1.101 includes the following: “all subsurface physical conditions described in the GBR are deemed to be foreseeable, and all subsurface physical conditions outside the scope of the conditions defined in the GBR are deemed to be Unforeseeable.”  This definition apparently offers a very simple way of determining what are and what are not Unforeseeable subsurface physical conditions.  However, clause 4.12 [Unforeseeable Physical Conditions] approaches the definition of Unforeseeable physical conditions in a different way.  In the author’s view this has led to a contradiction in the contract.

Claims for unforeseeable physical conditions which fall outside the limits of the GBR are covered by clause 4.12. Claims for subsurface physical conditions which are within the GBR are dealt with by clause 13.8 [Measurement of Excavation and Lining Works and Adjustment of Time for Completion and Contract Price]. [2]

A Contractor, when encountering unexpected conditions, must therefore ascertain whether or not the subsurface physical conditions fall within or are outside the GBR.  This is important because the requirements for making claims are different.

Unforeseeable Physical Conditions – Clause 4.12

Unforeseeable physical conditions which are encountered and fall outside the limits of the GBR will be dealt with under clause 4.12.

A Notice must be given as soon as practicable and in good time to allow the Engineer the opportunity to inspect the conditions.  The Notice must also describe the conditions, how they will have an adverse effect on progress or increase Cost and set out the reasons why the Contractor considers them Unforeseeable.   If the Contractor suffers delay and/or Cost, having complied with the Notice provision in sub-clause 4.12.1 and any instruction from the Engineer (as required by sub-clause 4.13.3), it must give a notice under clause 20.2 if it requires an EOT or Cost. 

The clause proceeds to state that the Engineer, when considering a claim under clause 20.2.5 or 4.12.4, “shall include consideration of whether and (if so) to what extent the physical conditions were Unforeseeable”.  The sub-clause is therefore at odds with the deeming provision in sub-clause 4.10.2 (see above) and the definition of Unforeseeable.  The Engineer must then take into account any evidence of the physical conditions foreseeable by the Contractor; however, the Engineer is not bound by such evidence. 

The sub-clause becomes even more convoluted because the Engineer can consider the effect of more favourable conditions, but not more favourable conditions which are covered by sub-clause 13.8.3 [Adjustment of Time for Completion].  The sub-clause then states that the net effect of all additions and reductions under this sub-clause shall not result in a reduction to the Contract Price. 

The drafters of the Contract have asserted that the provisions of the Emerald Book provide balanced risk, in particular to the subsurface conditions.  However, the provisions relating to Unforeseeable physical conditions are drafted so obtusely that any well-advised Employer should consider amending the General Conditions to add clarity.

Measurement of Excavation and Lining Works – Clause 13.8

This clause is a radical addition to a standard Yellow Book 2017.  The Excavation and Lining Works are subject to remeasurement.  Adjustments to the Time for Completion and the Contract Price are not subject to any of the Notice requirements of clause 20.2.  Similarly, the extension of time provisions in clause 8.5 do not apply to adjustments of the Time for Completion of the Excavation and Lining Works.  The clause contains its own extension of time provisions at sub-clause 13.8.3. The wording of the first two paragraphs make no distinction between changes to the Excavation and Lining Works which fall within or outside the GBR.  However, the third sub paragraph of clause 13.8 states that physical conditions which fall outside the limits described in the GBR will be subject to clause 4.12.

Extensions of Time

The Time for Completion may be adjusted because of the subsurface conditions, and this can result in it being extended or reduced under sub-clause 13.8.3.  This idea of risk sharing is not new. It has been around for two decades and was developed from systems used in Norway, where it is seen as a way to avoid disputes.

The time allowed in the Completion Schedule or Programme is adjusted using the production rates provided by the Contractor to the measured quantity of each item of work or activity in the Schedule of Baselines.

If the assessment impacts the Time for Completion, Section or other Milestones then an adjustment to the Time for Completion based on the “logical sequential links provided in the Completion Schedule and/or Programme” needs to be made.   This makes the Completion Schedule or Programme a fundamental tool in assessing the Time for Completion.

In summary, if more difficult ground conditions are encountered then the Time for Completion can be extended but conversely if easier ground conditions are encountered with faster production rates then the Contractor may need to complete before the Time for Completion.

Adjustments of the Contract Price

The Excavation and Lining Works undertaken are subject to re-measurement using the rates and prices in the Bill of Quantities.  For time-related items in the Bill of Quantities, this is adjusted by any change in the Time for Completion.  Adjustments both upwards and downwards can therefore be made to the Contract Price.

Conclusion

In a tunnelling contract the party with the greatest amount of knowledge is likely to be the Contractor who specialises in this type of work.   However, it is the Employer that produces the GBR.   If there are errors in the GBR or if the Employer has made conservative estimates regarding certain types of ground conditions, these errors can be exploited by the Contractor who can load certain rates.  There have been criticisms of the Emerald Book, in particular from lawyers who advise employers.  The argument is that employers who want certainty of time and costs should never sign up to the Emerald Book and that a standard FIDIC Yellow Book would be a better option.  However, the new Emerald Book has also received some support.   This is an area of engineering where disputes are common.  While the Employer may have to give up some certainty as to time and cost, the contract is likely to result in there being less disputes because the Contractor will be paid a fair amount and given a reasonable time for the work.

This type of contract has been popular in Norway because of the perception that the “risk sharing” approach avoids disputes.  On the one hand the Contractor should not be penalised by risks it cannot properly assess or foresee.  On the other hand, the Contractor is also able to take advantage where the GBR provides little more than a guess at the type of ground conditions that could be encountered.  In this regard it can be seen as a contractors’ charter for riches.  An employer, at the outset, will need to ascertain what are its primary aims.  If completing the project within a specific timeframe is the employer’s main concern, the Emerald Book may not be the ideal contract.

In the author’s opinion the drafters of the contract made a fundamental error in starting with a Yellow Book 2017 form of contract and then expanding it.  The FIDIC Yellow Book 2017 has received criticism for being too long and too prescriptive.  It is made worse in the Emerald Book by the almost incomprehensible changes to clause 4.12.  What is clear is that if disputes arise under this contract it will be a lawyers’ charter for riches.

[1] ‘FIDIC Issues “Emerald Book” for Underground Works’, Lal H., International Arbitration Alert, 20 July 2019.  The phrase was first coined in the article ‘A Charter of Riches for the Contractor’, Akroyd T., New Civil Engineer, 5 July 1973, London

[2] Clause 4.12 sub-paragraph 3

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.

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.

_____________________________________________________________________

[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.

The new Clause 20 distinguishes between main Claims, which follow a strict procedure, and other Claims, which are determined by the Engineer without strict procedural requirements, starting from the disagreement between parties and requiring only a Notice of Claim.

The 1999 Clause 20 has now been divided into Clauses 20 and 21 whereby Clause 20 refers to Claims and Clause 21 refers to Disputes and Arbitration. Another main upgrade is that Employer’s Claims now need to follow the same procedure. The main list of Employer’s and Contractor’s Claims is as follows:

1. Additional payment;
2. Reduction in the Contract Price;
3. Extension of the DNP; and
4. Extension of time.

Another main difference is the express distinction between the Claims listed above and any other Claim (Sub-Clause 20.1 (c)). The other Claims still need to be determined by the Engineer under Sub- Clause 3.7, though they do not need to follow the strict requirements of the Claims procedure explained below. The starting point of the other Claims is not the event or circumstance, but the disagreement between the parties. The Notice only needs to be given as soon as practicable from this point and contain details of the Party’s case and the disagreement. The Notice is the only requirement for the Engineer to issue its agreement or determination under Sub-Clause 3.7.

On the other hand, the main Claims must follow a Claims procedure (Sub-Clause 20.2) consisting of a Notice of Claim, a fully detailed Claim, and the Engineer’s agreement or determination (pursuant to Sub-Clause 3.7). This has not changed from the 1999 edition but the details of this procedure have. More importantly, the content requirements that carry time-bar implications are rather specific.

These requirements are:

If the Party fails to serve either the Notice of Claim or the contractual/legal basis in the fully detailed Claim within the allotted time, the Notice will be deemed invalid and the Claim is time-barred. For the time-bar to bite, the Engineer must give Notice to the claiming Party within 14 days of (a) receiving the Party’s Notice or (b) the lapse of the 84 days for the fully detailed Claim. If the Engineer fails to give either Notice, the Party’s Notice of Claim shall be deemed valid. Nevertheless, the other Party may, in turn, give a subsequent Notice disagreeing with the deemed validity, in which case, the Engineer shall review the issue in its determination. More importantly, if the Engineer issues its Notice deeming the Notice of Claim invalid, the claiming Party may include in its fully detailed Claim details of its disagreement or justification of the late submission. Even if a 14-day Notice has been issued, the Engineer shall nevertheless agree or determine the substance of the Claim pursuant to Sub-Clause 3.7 and include a determination on the validity of the Notice.

Therefore, the 2017 edition has added a time-bar on the fully detailed Claim but has tempered this with the opportunity for the claiming Party to object to the time-bar. The claiming Party can either argue that the Notice of Claim or the fully detailed Claim were served within their time limits or submit a justification for its delay. The Engineer may consider prejudice to the other Party and prior knowledge by the other Party. However, considering that the content requirements for either the Notice of Claim or the fully detailed Claim are so simple, it is hard to think of a justifiable reason why anyone would be late apart from the usual difficulty of identifying the start of the period. It will probably be easier to argue that the Notice was not in fact served late, perhaps by basing the argument on Mr Justice Akenhead’s Obrascon judgement.

Also, the Notice does not need reference to the Sub- Clause on which it is based. However, as mentioned above, the fully detailed Claim requires a statement of contractual/legal basis. With such scant content requirement at each stage, it is arguable that the fully detailed Claim is little more than a second Notice of Claim. An Engineer will struggle to reach a determination of a claim based solely on a light description of the event or circumstance and the contractual/legal argument behind it. On most claims, the Engineer will need more details of the cause and the effect of the Claim in order to reach a sensible determination. Therefore, the 2017 edition may give rise to Parties submitting scant Notices and Claims followed by requests from the Engineer for additional particulars.

Furthermore, Sub-Clause 21.6 states that Parties will not be limited in the arbitration “to the evidence or arguments previously put before the DAAB […] or to the reasons for dissatisfaction given in the Party’s NOD […]” Therefore, it appears that in the arbitration stage the Parties can change the contractual/legal basis of their Claims. Could the other Party argue that it may be prejudiced if the contractual/legal basis is changed? Surely not if the arbitrator can decide on the Claim based on arguments that have not been put forth at the DAAB stage. Therefore, it is difficult to see why specifying the contractual/legal basis at the fully detailed Claim stage is so important.

Other items:

• Contemporary records – Parties are ordered to keep contemporary records of the Claim, and the Engineer may monitor and inspect these records and instruct the Contractor to keep additional records.
• Additional particulars – Additional particulars are requested by way of Notice describing them and the reasons for requiring them. The Engineer must issue a response on the contractual/legal arguments within 42 days and then its agreement or determination once it receives the additional particulars.
• Continuing effect – For Claims with continuing effect, the fully detailed Claim is interim and the Party must serve further interim particulars at monthly intervals. These interim particulars are not subject to the time requirements that apply to the first fully detailed Clam.
• IPC – Until a Claim is agreed or determined, IPCs must include the amount that has been reasonably substantiated as due.
• Set-off – Employers can only set off against or make any deduction from amounts due to the Contractor if they follow the claims

Clause 20 – Employers and Contractors Claims by Gabriel Mulero Clas.

Clause 18 replaces "Force Majeure" with "Exceptional Events," aiming for clarity in civil law jurisdictions. Strikes and lockouts are now distinct from riots. The clause maintains natural catastrophes and clarifies that invoking it results in contract termination.

“Exceptional Events” has replaced “Force Majeure” and the provision is now clause 18 rather than clause 19, but otherwise little has changed.

FIDIC appear to have decided that the term “force majeure” brought with it too much baggage for those using it in civil law jurisdictions. Many users have pre-conceptions about what force majeure is and is not and perhaps did not consider what FIDIC meant by the term. With the new term, users should approach the provision with a more open mind.

One result of the change in term is that the word “exceptional” no longer features in the definition: Force Majeure meant an exceptional event or circumstance. Of course, it would seem perverse to argue that an Exceptional Event did not have to be exceptional; but it is also true that a defined term means what it is said to mean, not whatever the chosen term implies.

One improvement introduced into 18.1 is that strikes and lockouts have been separated out. As these might properly be regarded as the most common form of event that entitle the Contractor to both time and money, it is right that they are not buried in the more exotic “riot” item.

The anomaly of having a list of events, all of which give rise to time and money except for one remains. The natural catastrophes item is still on the list. Was there any real doubt that earthquakes, tsunamis, volcanic activity, hurricanes and typhoons were force majeure?

Clause 18.6 is Release from Performance under the Law. The question in relation to the equivalent clause of the 1999 form was whether it relieved a contractor of individual obligations that were legally or physically impossible; or only of the Contract as a whole. It seems clearer that this is an all-or-nothing clause: if it is invoked, the result is termination of the Contract.

Clause 18 – Exceptional Events by Edward Corbett.

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

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

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

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

Other changes include:

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

Article Author: Gabriel Mulero Clas

Clause 6 – Staff and Labour

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.

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.

Earlier this year, the English High Court considered a heavily amended FIDIC Yellow Book 1999. Whilst the case is specific to the particular contractual amendments it is worth review. The case is J Murphy & Sons Ltd v Beckton Energy Ltd. It proceeded in court and on an expedited basis as a matter of some urgency because a bond was about to be called for non-payment of delay damages. The Contractor claimed the call would affect his commercial reputation, standing and creditworthiness, and may well need to be disclosed in future tenders. He had not paid the delay damages because there had been no agreement or determination of the entitlement to such by the Engineer under Sub-Clauses 2.5 and 3.5.

Earlier this year, the English High Court considered a heavily amended FIDIC Yellow Book 1999.  Whilst the case is specific to the particular contractual amendments it is worth review.  The case is J Murphy & Sons Ltd v Beckton Energy Ltd,[1].  It proceeded in court and on an expedited basis as a matter of some urgency because a bond was about to be called for non-payment of delay damages. The Contractor claimed the call would affect his commercial reputation, standing and creditworthiness, and may well need to be disclosed in future tenders.  He had not paid the delay damages because there had been no agreement or determination of the entitlement to such by the Engineer under Sub-Clauses 2.5 and 3.5.

The key facts

• The case concerned an amended FIDIC Yellow Book 1999.

• The Works were delayed. The Contractor (J Murphy & Sons Ltd.) failed to reach a Milestone and no extension of time was granted by the Engineer (Capita Symonds).

• The Employer (Beckton Energy Ltd.) notified the Contractor of its entitlement to delay damages with express reference to Sub-Clause 2.5.

• The Employer, who was in financial difficulties at the time, then gave 23 days’ notice of his intention to call on the bond for the Contractor’s failure to pay the delay damages within 30 days as required by a heavily amended Sub-Clause 8.7.

• The Contractor sought a declaration from the Court that (i) the Employer was not entitled to delay damages under the amended Sub-Clause 8.7 without agreement or determination by the Engineer under Sub-Clauses 2.5 and 3.5, and that (ii) any call on the bond by the Employer would be fraudulent (for which injunctive relief would then be sought).

Employer’s claims generally

Sub-Clause 2.5 was largely un-amended and sets out the procedure to be adopted where the Employer considers himself entitled to payment under any clause of the contractual conditions or otherwise in connection with the Contract (for example, for breach of contract).  It is drafted widely, and one would ordinarily read it to include any claim for payment for delay damages under Sub-Clause 8.7.

It stated (with emphasis added):

“2.5    Employer’s Claims

 If the Employer considers himself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract … the Employer or the Engineer shall give notice and particulars to the Contractor…The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount and/or extension to which the Employer considers himself to be entitled in connection with the Contract.  The Engineer shall then proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine (i) the amount (if any) which the Employer is entitled to be paid…This amount may be included as a deduction in the Contract Price and Payment Certificates…”

The Employer’s entitlement to delay damages

Unfortunately, Sub-Clause 8.7 was so heavily amended that it is unrecognisable.  It was badly done, with the interchangeable use of the terms delay damages and liquidated damages, and most crucially the deletion of the terms that the obligation to pay delay damages be “subject to Sub-Clause 2.5”.  Better drafting would almost certainly have avoided the litigation.  As mentioned above, Sub-Clause 2.5 expressly states that it applies where the Employer considers himself entitled to payment under any clause of the contractual conditions, but in the absence of any clear wording to the contrary would Sub-Clause 2.5 still apply (autonomously) where express reference to it in a particular clause has been deleted?  The situation was so confusing that the Employer gave notice under Sub-Clause 2.5 despite later asserting that Sub-Clause 2.5 did not apply.

The un-amended Sub-Clause 8.7 states:

“8.7     Delay Damages

 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…”

As amended, it stated:

“8.7     Delay Damages and Bonus

 8.7.1    If the Contractor fails to:

 a) achieve the ROC Acceditation Milestone by the ROC Accreditation Date the Contractor shall pay or allow to the Employer liquidated damages for such delay at the daily rate of £4,000 for each day commencing from the ROC Accreditation Date until the earlier of the achievement of i) the ROC Accreditation Milestone or ii) 31 March 2015; and

 b) achieve the ROC Accreditation Milestone by the ROC Eligibility Change Date the Contractor shall pay or allow to the Employer a Bullet Payment; and

 c) achieve the Taking-Over Date for the Works within the Time for Completion,

 the Contractor shall pay or allow to the Employer liquidated damages for delay. Such liquidated damages shall be payable at the daily rate of £23,000 for each day after the Time for Completion for the Works up to and including the Taking-Over Date for the Works…

 8.7.4    Delay damages due pursuant to this Sub-Clause 8.7 shall be deducted from the next applicable Notified Sum following the end of the month in which such delay occurred or where no such Notified Sum is applicable or is disputed, shall be payable within 30 days of the end of the week in which such delay occurred.”

The “Notified Sum” was another amendment to the standard form contract and was simply a sum stated by the Contractor with no reference to the Engineer.

The Employer’s entitlement to call the bond

Sub-Clause 4.2 was also heavily amended and also deleted reference to Sub-Clause 2.5.  Apparently, the Employer’s lender had insisted on a non-negotiable procedure whereby any claim on the bond would not be subject to any kind of restriction or procedure that would give rise to delay in payment under it.

The un-amended Sub-Clause 4.2 states:

“4.2     Performance Security

 The Employer shall not make a claim under the Performance Security, except for amounts to which the Employer is entitled under the Contract in the event of … (b) failure by the Contractor to pay the Employer an amount due, as either agreed by the Contractor or determined under Sub-Clause 2.5 [Employer’s Claims] or Clause 20 [Claims, Disputes and Arbitration], within 42 days after this agreement or determination …”

As amended, it stated:

“4.2     Performance Security…

 4.2.5    The Employer shall give …23 days’ prior written notice to the Contractor of its intention to make a demand under the [Bond] stating the breach the Contractor has committed, during which period and without prejudice to the Employer’s entitlement and discretion to claim under the relevant Performance Security at the expiry of the said 23 days, the Contractor may seek to remedy the relevant default and/or breach… .

4.2.6    If and to the extent i) the Employer was not entitled to make a claim under the Performance Security and/or ii) amounts recovered under any claim under the Performance Security exceed the entitlements and/or otherwise exceed the losses suffered and recoverable by the Employer under the Contract, the Employer shall be liable for and reimburse the Contractor such excess amounts.”

Findings

Mrs Justice Carr found that while, on its face, Sub-Clause 2.5 was drafted in the widest possible terms[2], in this case the right to delay damages under Sub-Clause 8.7 (as amended) was not subject to the Engineer’s determination under Sub-Clauses 2.5 and 3.5 for the following reasons:

• The wording “subject to Sub-Clause 2.5” had been deleted from the amended Sub-Clause 8.7. Objectively assessed on the facts, this selected deviation from the standard form was consistent with the parties’ intention being not to make the Employer’s right to delay damages subject to Sub-Clauses 2.5 and 3.5.
• The amended Sub-Clause 8.7 set out a self-contained regime for the trigger and payment of delay damages.
• There were important and substantive differences between Sub-Clause 2.5 and the amended Sub-Clause 8.7, which were resolved if the amended clause was not subject to Sub-Clause 2.5. For example, amended Sub-Clause 8.7 referred to payment by way of deduction from the Notified Sum, whereas Sub-Clause 2.5 referred to payment by way of deduction from Payment Certificates.
• As Sub-Clause 2.5 appeared not to have been properly thought out in the full context of the Contract (viz the reference to Payment Certificates not the Notified Sum), this undermined the weight to be attached to it.
• The tension that existed between Sub-Clause 2.5 and the amended Sub-Clause 8.7 did not exist between Sub-Clause 2.5 and other sub-clauses.

The fact that the Employer had given notice in accordance with Sub-Clause 2.5 was not a point of substance as there was no suggestion of any relevant waiver, estoppel or election.

Mrs Justice Carr also found that under the amended Sub-Clause 4.2, the bond was a conventional on-demand bond.  Any call on the bond to recoup the delay damages would not be fraudulent provided the Employer simply believed that it was entitled to delay damages under the amended Sub-Clause 8.7 even though there had been no agreement or determination of that entitlement under Sub-Clauses 2.5 and 3.5.

Commentary

An Employer’s notice under Sub-Clause 2.5 is expressly required in some 14 different sub-clauses of the un-amended FIDIC Yellow Book.  As a result of this decision, where reference to Sub-Clause 2.5 in a sub-clause has been omitted and the Employer believes he is entitled to payment or an extension of the Defects Notification Period, the Employer may now not need to give notice under Sub-Clause 2.5 despite its wide wording “If the Employer considers himself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract”, and the desirability of the notice.  This is consistent with the normal principles of freedom to contract where there are commercial parties of roughly equal bargaining strength.  The English courts will not re-write a contract.

Comparisons might be drawn with the Contractor’s notice under Sub-Clause 20.1 which is expressly required in some 18 sub-clauses of the un-amended FIDIC Yellow Book.  If reference to Sub-Clause 20.1 in a sub-clause has been omitted and the Contractor believes he is entitled to additional time or money, would the Contractor not need to give notice under Sub-Clause 20.1?  Under English law, it will depend upon the parties’ intention by reference to what a reasonable person (having all the background knowledge which would have been available to the parties) would have understood the parties to be using the language in the contract to mean[3]. In the case of a clear and irreconcilable discrepancy, more weight will be given to the particular or amended conditions over the general standard form printed conditions[4].

Where Sub-Clause 20.1 has been (i) omitted, or (ii) where there has never been reference to Sub-Clause 20.1 in a sub-clause (for example in the variation provisions at Sub-Clauses 13.1 to 13.6), and the Contractor believes he is entitled to additional time or money, one would still ordinarily recommend that notice be given under Sub-Clause 20.1 because of the wide wording of Sub-Clause 20.1 “If the Contractor considers himself to be entitled to any …additional payment, under any Clause of the Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer….”, and the obvious desirability of notice of alleged variations.  However, the Howard Kennedy International Construction team (formerly Corbett & Co.) does have experience of a Dispute Adjudication Board refusing to dismiss a variation claim for want of a Sub-Clause 20.1 notice.

It is probably right that notice regimes ought only to be applied where they are very clear, given the serious effect they may have on what could otherwise be good claims.  This is a philosophy reflected by Mr Justice Akenhead in Obrascon Huarte Lain SA -v- Her Majesty’s Attorney General for Gibraltar[5].

Conclusion

In summary, Sub-Clauses 8.7 in its un-amended FIDIC Yellow Book form is expressly subject to Sub-Clause 2.5, so that the Engineer will agree or determine the delay damages payable by the Contractor to the Employer.  Similarly, Sub-Clause 4.2(b) in its un-amended FIDIC Yellow Book form is expressly subject to Sub-Clause 2.5, so that in order to claim under the Performance Security for amounts due an Engineer’s determination may be required.  Provided these clauses have not been amended there is no ambiguity.

Whilst this case is specific to the particular contractual amendments, it does serve as a warning to anyone involved in amending the standard form FIDIC contracts or considering a claim under an amended standard form FIDIC contract to consider closely the interplay between the contractual provisions.

[1] [2016] EWHC 607 (TCC).
[2] See: NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd [2015] KPC 37.
[3] Assessed using the six factors set out in Arnold v Britton [2015] UKSC 36 namely: (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions, (iii) the overall purpose of the clause and the contract, (iv) the facts and circumstances known or assumed by the parties at the time that contract was made, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.
[4] Homburg Houtimport BV v Agrosin Private Ltd (the ‘Starsin’) [2003] UKHL 12.
[5] [2014] EWHC 1028 (TCC).

What relief does FIDIC provide when bank accounts are frozen as a result of war, hostilities, rebellion, terrorism etc.? Maybe not as much as you think. Tensions in Africa and the Middle East have seen the implementation of numerous international financial sanctions. While these sanction regimes vary in execution and enforcement they often freeze assets and prevent financial transactions. These restrictions may impact on the Employer’s performance of its payment obligations under the Contract. This can have serious consequences where the Contractor is entitled to suspend or terminate on notice for non-payment. Many parties automatically assume that financial sanctions will be recognised as force majeure. However, this may not be the case.

What relief does FIDIC provide when bank accounts are frozen as a result of war, hostilities, rebellion, terrorism etc.? Maybe not as much as you think.

Tensions in Africa and the Middle East have seen the implementation of numerous international financial sanctions. While these sanction regimes vary in execution and enforcement they often freeze assets and prevent financial transactions. These restrictions may impact on the Employer’s performance of its payment obligations under the Contract. This can have serious consequences where the Contractor is entitled to suspend or terminate on notice for non-payment. Many parties automatically assume that financial sanctions will be recognised as force majeure. However, this may not be the case.

Contractual definition of Force Majeure

“Force Majeure” as defined under the FIDIC form of contract is strictly prescribed.

Sub-Clause 19.1 defines a Force Majeure event or circumstance as one which is “exceptional” and:

“(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.”

One might assume that financial sanctions resulting from war, hostilities, rebellion, terrorism etc. would generally meet these requirements. However, Sub-Clause 19.2 expressly excludes from the definition of Force Majeure any payment obligations between the parties. It states:

“Notwithstanding any other provision of this Clause, Force Majeure shall not apply to obligations of either Party to make payments to the other Party under the Contract”.

Therefore, it would appear that financial sanctions preventing the payments under the Contract are not covered by Force Majeure as defined in Sub-Clause 19.1. This could have serious consequences, as the Contractor would be entitled to suspend or terminate on notice for non-payment under Sub-Clauses 16.1 and 16.2.

Does Sub-Clause 19.7 (Release from Performance under the Law) offer a solution?

Sub-Clause 19.7 applies to events or circumstances outside of the control of the Parties (which render contractual performance impossible or unlawful) regardless of whether or not they fall within the definition of Force Majeure laid out under the Contract. It states (with emphasis added):

“Notwithstanding any other provision of this Clause, if any event or circum­stance outside the control of the Parties (including, but not limited to, Force Majeure) arises which makes it impossible or unlawful for either or both Parties to fulfil its or their contractual obligations or which, under the law governing the Contract, entitles the Parties to be released from further performance of the Contract, then upon notice by either Party to the other Party of such event or circum­stance:

(a) the Parties shall be discharged from further performance, without prejudice to the rights of either Party in respect of any previous breach of the Contract, and

(b) the sum payable by the Employer to the Contractor shall be the same as would have been payable under Sub-Clause 19.6 [Optional Termination, Payment and Release] if the Contract had been terminated under Sub-Clause 19.6.”

The imposition of financial sanctions will almost certainly be outside of the Parties’ control, and may well render performance of the Employer’s payment obligations impossible, so it is worth studying the Sub-Clause in more detail.

Impossible or Unlawful

The use of the words “impossible or unlawful” under Sub-Clause 19.7 suggests a higher threshold is intended than, for example, mere “prevention” under Sub-Clause 19.2. Therefore, when claiming that performance has been rendered impossible or unlawful it may not be enough for a party to establish that new circumstances have rendered its contractual performance merely more onerous or uneconomic. On the basis that the Sub-Clause should not be invoked lightly given its severe consequences, many will argue that it has to be actually and absolutely impossible or unlawful for the event or circumstance to excuse non-performance. So, if there was any way that a diligent party could have still performed its obligations then this clause will not apply. Although there is no precedent in relation to Sub-Clause 19.7 on this specific point known to the author, there is authority relating to the common law doctrine of frustration, which is closely connected and arguably analogous to contractual impossibility. It is generally considered that in order for a contract to become frustrated an event which renders performance radically different must have occurred after the formation of the contract (the “radical change in obligation” test[1]). In Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2] the Court of Appeal in Singapore recently examined the test and held that in order for a contract to become frustrated literal impossibility of performing the contract is not required. It is sufficient that the obligation has become “radically or fundamentally different” from the one agreed to. Thus, it found that although a mere increase in cost will not result in a frustrating event, an astronomical increase might. It is not clear from the judgment whether the judges considered the earlier case of Tsakiroglou & Co Ltd v Noblee Thorl GmbH[3] where the House of Lords held that a contract was not frustrated when performance became more difficult and expensive by the closure of the Suez canal but not impossible. This is an area of law yet to be tested openly in the context of FIDIC and we would be interested to hear your views on it.

In any event, Parties affected by financial sanctions resulting from war, hostilities, rebellion, terrorism etc. should still consider whether other measures could be taken that would allow performance under the Contract. It might be possible to circumvent the sanctions in some lawful way. For example, depending on the sanction regime the sanctions may not apply to various branches and subsidiaries. Also, some countries (including the United Kingdom and the United States) have procedures in place for companies to request exemptions from the sanction regime. Further, some sanction regimes may exclude from their scope contractual obligations created before the conflict began. Finally, it may be possible to agree variations to the Contract to remedy the situation.

Of course, financial sanctions are often intended to apply for a limited time, and therefore the Employer’s performance of its payment obligations under the Contract is not likely to be impossible permanently, only temporarily so. This raises two questions:

1. is a temporary impossibility sufficient for the purposes of Sub-Clause 19.7; and
2. if so, is there a temporary fix available?

In order to establish whether contractual performance has been rendered impossible or unlawful the courts will look at all the facts of the case including the degree and duration of the impossibility. If the event or circumstance is of a temporary nature it may not be considered by an adjudicator, arbitrator or judge to be sufficiently impossible or unlawful to permanently discharge the Parties from performance. However, it is worth noting that this is by no means a foregone conclusion. Under the common law doctrine of frustration (mentioned earlier) events and circumstances causing temporary disruption, such as war, have regularly frustrated contracts thus bringing them to an end[4].

In respect of the second question, it is unfortunate that Sub-Clause 19.7 does not make express provision for a temporary fix to the temporary impossibility of the Employer’s performance of its payment obligations under the Contract. The only solution provided is a permanent discharge from further performance and not mere suspension. However, if performance of the obligation could reasonably be suspended or deferred until the sanctions were lifted, a practical approach would be to excuse (by agreement) a party of the obligation temporarily from any liability for non-performance, as long as the sanctions are in place. Sub-Clause 14.8 could compensate the Contractor for non-payment in financing charges.

Contractual Obligations

The next consideration is whether all of a party’s “contractual obligations” must be impossible or unlawful to fulfil for Sub-Clause 19.7 to apply or whether just one or more will suffice, i.e. is it sufficient for the Employer merely to be unable to fulfil its payment obligations under the Contract?

There is commentary which says that “the provisions in clause 19.7 are expressly applicable to all obligations and can therefore be evoked where, for example, the employer’s payment obligations are impeded by causes which fulfil … 19.7”.[5]

The view that not all contractual obligations need to be impossible or unlawful is supported in the case of Codelfa Construction Pty Limited v SRA of New South Wales[6] where the court held that the contract had been frustrated by an injunction against night time working which restricted the contractor’s ability to perform his time obligations under the contract (where time was made of the essence).

This approach is also favoured by others. For example, the ICC Force Majeure Clause 2003 (a standard form clause drafted by the ICC for express incorporation into contracts by the parties) excuses a party from contractual performance and relives that party of any liability in damages “where a party to a contract fails to perform one or more of its contractual duties” because of an impediment outside of its control.

Under the Governing Law of the Contract

The words “under the law governing the Contract” in Sub-Clause 19.7 indicate that the governing law of the Contract may itself allow the Parties to be released from further performance under the Contract quite independently from the Contract. This is more common in civil law jurisdictions than common law jurisdictions.

Shall be Discharged from Further Performance

Only when all the particular circumstances are met does Sub-Clause 19.7 envisage that (upon notice) the Parties will be “discharged from further performance” of the Contract. Read with Sub-Clause 19.6 it seems likely that this means that the parties are discharged from all further performance including that which has not been affected by the impossibility or unlawfulness.

The Sum Payable by the Employer to the Contractor

Where the Parties are discharged from performance, “the sum payable by the Employer to the Contractor shall be the same as would have been payable under Sub-Clause 19.6”. This means that the Employer must still find a way to pay the Contractor for the work done and the debts owed. Essentially, the Employer is left with the same problem, he has no money with which to pay.

Conclusion

Where an Employer’s bank accounts are frozen as a result of financial sanctions resulting from war, hostilities, rebellion, terrorism etc. there is a risk that the Contractor may suspend or terminate on notice for non-payment, and claim interest on the unpaid sums. An Employer would be wrong to assume that Force Majeure will excuse him from his respective payment obligations under the Contract. Sub-Clause 19.7 may discharge him from further performance, thus ending the Contract, but that will not complete the project and he will still be left with the debts for the work done or the sums owed under Sub-Clause 19.6. In summary, FIDIC, as it is currently drafted, provides little or no relief.

[1] Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696

[2] [2014] SGCA 35

[3] [1962] AC 93

[4] See for example, Avery v Bowden (1856) 5 E & B 714 and Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32.

[5] Samuelsson and Iwar, FIDIC an analysis of international contracts (2005) Kluwer International Law at pp. 298-299.

[6] (1982) 149 CLR 337.

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

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

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

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

FIDIC-related arbitral cases 

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

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

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

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

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

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

National court decisions 

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

Howard Kennedy International Construction team research into published FIDIC cases

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

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

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

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

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

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

On the other hand:

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

How important is it for an Employer to give a Sub-Clause 2.5 notice of a set-off or cross-claim under the FIDIC Red Book form of contract? Very, according to the Privy Council in NH International (Caribbean) Limited v National Insurance Property Development Company Limited . It found that: o Sub-Clause 2.5 applies to any claims the Employer wishes to make. o The Employer must make such claims promptly and in a particularised form. o Where the Employer fails to raise a claim as required, the back door of set-off or cross-claims is firmly shut. The case also serves as a warning to Employers who take a relaxed view towards their obligation under Sub-Clause 2.4 to provide reasonable evidence of the financial arrangements they have made and are maintaining to pay the Contract Price. It doesn’t matter how wealthy or important the Employer is (it may be a Government, company or individual with very substantial funds) detailed financial information must still be provided.

How important is it for an Employer to give a Sub-Clause 2.5 notice of a set-off or cross-claim under the FIDIC Red Book form of contract?  Very, according to the Privy Council in NH International (Caribbean) Limited v National Insurance Property Development Company Limited[1].  It found that:

• Sub-Clause 2.5 applies to any claims the Employer wishes to make.
• The Employer must make such claims promptly and in a particularised form.
• Where the Employer fails to raise a claim as required, the back door of set-off or cross-claims is firmly shut.

The case also serves as a warning to Employers who take a relaxed view towards their obligation under Sub-Clause 2.4 to provide reasonable evidence of the financial arrangements they have made and are maintaining to pay the Contract Price.  It doesn’t matter how wealthy or important the Employer is (it may be a Government, company or individual with very substantial funds) detailed financial information must still be provided.

The key facts

• The case concerned two appeals from the Court of Appeal of the Republic of Trinidad and Tobago.
• On 6 March 2003 a contract based on the FIDIC Red Book for the construction of a hospital in Tobago had been entered into by National Insurance Property Development Company Limited (the “Employer”) and NH International (Caribbean) Limited (the “Contractor”) for an original Contract Price of TT$118 million.
• The works commenced in March 2003 with an original completion date of March 2005.
• The Contractor first suspended work in September 2005 and then terminated the contract in November 2006.
• The disputes were referred to arbitration.
• Dr Robert Gaitskell QC was appointed as sole arbitrator in October 2005 and made five awards.
• Two issues were challenged (i) the Contractor’s entitlement to terminate (which was decided in his second award), and (ii) quantum (which was decided in his third award).

The Contractor’s entitlement to terminate

Sub-Clause 2.4 states:

“The Employer shall submit within 28 days after receiving any request from the Contractor, 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 [Contract Price and Payment]….”.

As the works were executed the cost of the project was rising and so in September 2004 the Contractor quite sensibly requested that the Employer provide evidence of its financial arrangement under Sub-Clause 2.4 of the contract, and this further evidence was provided in December 2004.  A further request was made by the Contractor in April 2005 and this was provided in July 2005 but on a rather unusual “without prejudice” basis.  The Contractor understandably queried the “without prejudice” nature of the response and asked whether the Employer had obtained Cabinet approval for payment of the sums under the contract (as other contracts showed that Cabinet approval was needed, for public policy reasons, before money could be paid).  No response was received and so the Contractor suspended work in September 2005.

In October 2006 (over a year later) the Employer wrote stating that it would meet the contractual financial requirements for completion of the project. The Contractor patiently requested confirmation that the Cabinet had approved the funds but again no response was received.  So, in November 2006 the Contractor terminated the contract for a failure by the Employer to provide reasonable evidence that financial arrangements had been made and maintained. The Employer disputed the termination.

In April 2007, the arbitrator found that the Contractor had been entitled to terminate as there was no “reasonable evidence that financial arrangements had been made and maintained” to pay the sums referred to in the documentation provided.  Of Sub-Clause 2.4 the arbitrator wrote in his second award:

“The mere fact than an Employer is wealthy is inadequate for the purpose of Sub-Clause 2.4.  Similarly, the mere fact than an Employer has good reasons for wanting a project completed does not itself mean he has made and maintained the necessary financial arrangements.  Accordingly, the evidence given at the hearing to the effect that the [Employer] has very substantial funds is, prima facie, insufficient by itself for satisfying 2.4. Does the mere fact that the [Employer] has funds in general mean it has “made arrangements” enabling it to pay? The answer emerging from the evidence … as regards the significance of cabinet approval, is that (quite properly, and for very good public policy reasons) the [Employer] cannot pay large sums of public money in respect of cost overruns on construction contracts unless cabinet approval is given in advance or, perhaps, retrospectively. The issue of cabinet approval cannot simply be ignored. It is, at some point, an essential element of any “arrangement” to pay.

What was required was evidence of “positive steps” on the part of the Employer which show that financial arrangements had been made to pay sums due under the contract.

The High Court[2] agreed but the Court of Appeal[3] did not on the basis that the arbitrator had been demanding the “highest assurance” of evidence rather than mere “reasonable evidence” and accused the arbitrator of giving too little weight to certain evidence.

However, the Privy Council found that the arbitrator had made no error in law.  The arbitrator’s conclusion that insufficient evidence had been provided was one of fact not law, and therefore it was not open to a court to interfere with, or set aside, his conclusions on such an issue.  It stated:

“Where parties choose to resolve their disputes through the medium of arbitration, it has long been well established that the courts should respect their choice and properly recognise that the arbitrator’s findings of fact, assessments of evidence and formations of judgment should be respected, unless they can be shown to be unsupportable. In particular, the mere fact that a judge takes a different view, even one that is strongly held, from the arbitrator on such an issue is simply no basis for setting aside or varying the award. Of course, different considerations apply when it comes to issues of law, where courts are often more ready, in some jurisdictions much more ready, to step in.”

The Contractor’s termination for the Employer’s breach of Sub-Clause 2.4 was therefore upheld.

As an aside, the obligation under Sub-Clause 2.4 relates to the Contract Price which is defined as “the price defined in Sub-Clause 14.1 [the Contract Price], and includes adjustments in accordance with the Contract”.  Often the Employer and Contractor will have differing views on the amount of the Contract Price, as is apparent in this case where the Contractor requested evidence of the ability to pay TT$286 million, and the Employer wrote back with reference to its estimate of TT$224 million.  The Privy Council agreed with the Court of Appeal who ruled that TT$224 million was the correct sum as this had been certified by the Engineer and ultimately verified by an Independent Quantity Surveyor.

Financial claims

Whilst the matter of the termination was being appealed the arbitrator heard submissions on quantum and issued his third award.

The Contractor claimed its financial losses arising out of the termination; in response the Employer submitted various counterclaims.  The Contractor argued that the Employer’s counterclaims were barred for a lack of notice under Sub-Clause 2.5.  In fact, the first the Contractor had heard of the counterclaims was during the arbitration proceedings!

Sub-Clause 2.5 states:

“If the Employer considers itself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract … the Employer or Engineer shall give notice and particulars to the Contractor… 

The notice shall be given as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim …

The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount … to which the Employer considers himself to be entitled.  The Engineer shall then proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine (i) the amount (if any) which the Employer is entitled to be paid by the Contractor …

This amount may be included as a deduction in the Contract Price and Payment Certificates.  The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this sub-clause”.”

In November 2008 the arbitrator found that notice was not required for the Employer’s counterclaims because “clear words are required to exclude common law rights of set-off and/or abatement of legitimate cross-claims and” and (by implication) the words of Sub-Clause 2.5 were not clear enough.  The High Court[4] and the Court of Appeal[5] agreed with the arbitrator.

The Privy Council took a different view.  It found the words of Sub-Clause 2.5 couldn’t be clearer.

• Sub-Clause 2.5 applies to any claims the Employer wishes to make (whether or not they are intended to be relied on as set-offs or cross-claims).
• The Employer must make such claims “as soon as practicable” and in a particularised form. If the Employer can rely on claims which were first notified well after that, there would be no point to the first two parts of Sub-Clause 2.5.  Further, if the Employer’s claim is allowed to be made late, there is no method by which it could be determined, as the Engineer’s function is linked to the particulars, which in turn must be contained in a notice, which in turn has to be served “as soon as practicable”.
• Where the Employer fails to raise a claim as required, the back door of set-off or cross-claims is firmly shut in accordance with the final words of the Sub-Clause which read “The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this sub-clause”.

However, with reference to Hobhouse LJ in Mellowes Archital Ltd v Bell Products Ltd.[6] the Privy Council did concede that Sub-Clause 2.5 does not preclude the Employer from raising an abatement – e.g. that the work for which the contractor is seeking a payment was so poorly carried out that it does not justify any payment, or that it was defectively carried out so that it is worth significantly less than the contractor is claiming.

The third award was therefore remitted to the arbitrator with a recommendation that any sums which (i) were not the subject of appropriate notification complying with the first two parts of Sub-Clause 2.5 and (ii) cannot be characterised as abatement claims as opposed to set-offs or cross-claims, must be disallowed.

Conclusion

In summary, there is no excuse for poor contract administration.  Employers should ensure that notices are given on time and, when asked to do so, provide evidence that financial arrangements to pay the Contract Price have actually been made and are being maintained.  If there is in any doubt about the Contract Price ask the Engineer to certify the sum and if necessary seek an independent opinion.

[1] [2015] UKPC 37

[2] Claim No. CV2007-02224

[3] C.A. No. 281 of 2008

[4] Claim No. CV2008-04998

[5] Civil Appeal No. 246 of 2009

[6] [1997] 58 Con LR 22, 25-30

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

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

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

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

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

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

Interpretation of Sub-Clause 20.4 of the 1999 Red Book

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

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

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

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

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

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

The CA Majority concluded that:

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

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

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

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

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

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

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

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

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

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

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

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

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

The Dissenting Judgment

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

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

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

Conclusion

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

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

[1] [2015] SGCA 30.

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

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

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

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

A summary of contributions from around the world from members of the Cornerstone FIDIC Group on LinkedIn.

A summary of contributions from around the world from members of the Cornerstone FIDIC Group on LinkedIn.  Click here to view.

The Judgment of Sir Robert Akenhead has been upheld and OHL’s appeals have been dismissed. The judgment was a rare excursion by the TCC into the FIDIC contract and considered unforeseen ground conditions, termination and notice under cl.20.1.

The Judgment of Sir Robert Akenhead has been upheld and OHL’s appeals have been dismissed. The judgment was a rare excursion by the TCC into the FIDIC contract and considered unforeseen ground conditions, termination and notice under cl.20.1. The Howard Kennedy International Construction team (formerly Corbett & Co.) acted for the Government of Gibraltar.

To read the full Court of Appeal judgment please click here.

Rumour reaches us that the Multilateral Development Banks (MDBs) behind the Pink Book, FIDIC’s harmonised version of the 1999 Red Book, will discontinue the experiment. Should we be sorry to see the back of the Pink Book? We think not.

Rumour reaches us that the Multilateral Development Banks (MDBs) behind the Pink Book, FIDIC’s harmonised version of the 1999 Red Book, will discontinue the experiment. Should we be sorry to see the back of the Pink Book? We think not.

The idea would be to return to the Red Book with each MDB developing its own particular conditions.

The fragile consensus between the banks was already unravelling: the 2010 edition already had six bank-specific versions of clauses 15.6 to 16.2 on the subject of bribery and corruption.

The creations of committees are notoriously odd. The more independent and strong-willed the representatives of the committees, the odder will be the result. MDBs – and there were nine of them involved in the first version in 2005 – can be notoriously stubborn. So it would be no surprise to learn that their amendments to the Red Book produced some oddities.

However, to be fair, the Pink Book also gave birth to some interesting ideas which FIDIC would do well to consider when drafting the 2^nd editions of the Red, Yellow and Silver Books, a process now under way.

Below we consider a sample of both MDB oddities and also some it its good ideas.

Oddity #1: Contractor Control of the Commencement Date

The “stand-out” oddity relates to the Commencement Date. The amendments to clause 8.1 effectively put the Contractor in charge of when both work and the Time for Completion start. The Commencement Date can only be given when both parties have agreed that four precedent conditions have been fulfilled. Two of these are under the control of the Contractor, namely the signature of the Contract Agreement by the Contractor and the payment of the advance payment which depends on the provision by the Contractor of the advance payment guarantee.

The result is that if it benefits a Contractor to delay the start date – for example to give himself additional mobilisation time or in order to avoid a winter period – he can do so simply by delaying provision of the guarantee.

Better still for the unscrupulous, if the notice and instruction to commence are not provided within 180 days, the Contractor can terminate for Employer default and claim his lost profit on the job! This is apparently so even if the delay was due to the Contractor withholding his guarantee.

Of course, legal systems would resist this extraordinary result. Good faith doctrines would no doubt be mobilised in the civil law world to try to prevent a windfall result. Prevention principles might help out the Employer.

The question is: what were the draftsmen thinking when they added this to the MDB form? It was not in the original 2005 edition. And: who was lobbying the MDBs on behalf of contractors? They plainly did a very good job.

Good Idea #1: Define the Term “Profit”

The Pink Book defines as 5% the profit to which the Contractor is entitled as part of “Cost plus profit”. This avoids the 10 instances of “reasonable profit” that appear in the Red Book with all the accompanying room for uncertainty and argument. (Should “reasonable profit” be based on any profit figures in the contract, or the Contractor’s tender calculations, or current market profit levels or the Contractor’s own average historical profitability or indeed the profitability of the particular project?)

There are 71 “reasonables” and “reasonablys” plus two “unreasonablys” still left to argue about but the MDBs have taken a step in the right direction.

Oddity #2: The Contractor Chooses his Bonding Bank

The contractors’ lobby appears to have succeeded regarding bonds and guarantees. Clauses 4.2 and 14.2 have been amended so that contractors can provide performance and advance payment guarantees from any “reputable bank or financial institution selected by the Contractor”. The same applies to retention bonds which, by clause 14.9, the Contractor is entitled to substitute for a cash retention on taking-over.

As the MDBs know better than most, the value of bonds does not depend only on the repute of the bank but also on the attitude of the courts. The courts appear to be very willing to intervene on behalf of a contractor to block payment. Other countries have the same problem – or safeguards – depending on your point of view.

The fact is that if the point of the bond is to provide security nearly equivalent to cash in hand, or at least security obtainable “on demand”, then it matters where it comes from. Employers should be careful to ensure that the bond will be readily cashable. These amendments effectively prevent that. It is particularly odd that amendments made by funders for their client Employers should insist on bonds in lieu of cash retention; and then undermine the value of those bonds.

Good Idea #2: A Timescale for the Engineer’s Determination

The obligation on the Engineer to make determinations promptly is specified in clause 3.5. He has 28 days. The consequence of not making a determination in relation to a claim within 42 days is spelt out in clause 20.1: the claim may be treated as rejected and the matter may be referred to the dispute board. This is a welcome clarification: it was generally understood that silence could be treated as a rejection; but there was much room for argument as to the required length of the silence and the effect of a late determination.

Oddity #3: Contractor Receives Profit if Project Cancelled

It is odd that the MDBs should volunteer that Employers who cancel the project and terminate for convenience under clause 15.5 should have to compensate contractors for their lost profit as if the termination were a default.

The 1999 editions – and, I would imagine, the 2^nd editions will do the same – require Employers to refund to Contractors their costs and pay for their demobilisation but they do not award profit. It was accepted that Contractors signing FIDIC contracts took the risk that their clients might cancel the project for one reason or another. An omission is a cancellation of part only of the project: however, here the Pink Book does not award lost profit on the omitted work.

Clause 16.4 no longer refers expressly to loss of profit but there can be little doubt that a right to be paid “the amount of any loss or damage suffered by the Contractor as a result of this termination” would include profit.

Good Idea #3: Time Limit for Employer’s Claims

The Red Book imposes tough time-limits and draconian sanctions on Contractor claims; but imposes neither on the claims of Employers. It seems right and a little more balanced to impose a time-limit on the Employer’s notices of claim. Even though there is no express sanction attached to a failure to notify, the 28-day obligation reduces the contrast between the regimes applying to Contractors and Employers.

Conclusion

Whether the Pink Book continues to a new edition or not, it has certainly produced some good ideas as well as some curiosities. Harmony may be desirable in general but perhaps not when it comes to standard forms.

For a full list of the differences between the Red Book 1999 and the Pink Book 2010,click here

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

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

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

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

Introduction

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

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

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

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

The Facts

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

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

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

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

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

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

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

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

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

How the limitation issue arose

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

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

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

How the limitation issue arose

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

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

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

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

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

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

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

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

The restitution issue

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

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

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

Conclusion

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

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

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

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

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

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

[3] [2009] EWHC 1906 TCC.

Read the full article here.

Read the full article here.

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

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

Background to the issue

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reasoning

The following points mentioned in the judgment are of interest:

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

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

Conclusion

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

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

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

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

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

Even if a claimant has achieved complete success in litigation, it remains exceptionally difficult to recover legal costs on an indemnity basis, as this case demonstrates. Costs will most likely be recovered on the standard basis – at least in the absence of bad conduct during the litigation itself. This case also indicates that the court will generally limit an interim payment of costs to two-thirds of an approved costs budget.

Even if a claimant has achieved complete success in litigation, it remains exceptionally difficult to recover legal costs on an indemnity basis, as this case demonstrates. Costs will most likely be recovered on the standard basis – at least in the absence of bad conduct during the litigation itself. This case also indicates that the court will generally limit an interim payment of costs to two-thirds of an approved costs budget.

In the recent case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC) [1] the Howard Kennedy International Construction Team (formerly Corbett & Co.) acted for the Government of Gibraltar (GoG). In April 2014, the Technology and Construction Court of England & Wales found that GoG had successfully terminated its £30 million FIDIC Yellow Book contract with Obrascón Huarte Laín SA (‘OHL’) for design and construction work to Gibraltar Airport, which principally involved the creation of a tunnel beneath the airport runway. As the successful party, GoG returned to Court in June 2014 to claim its legal and other costs of the proceedings. In particular, GoG sought the recovery of indemnity costs and an interim payment of those costs. As a general rule costs are not awarded on an indemnity basis. However, the Court’s discretion to award indemnity costs under Part 44.3 of the Civil Procedure Rules is wide.

The basis of costs

GoG requested costs on an indemnity basis due to OHL’s conduct. OHL accepted that it must pay GoG’s costs but asserted that it should do so on a standard basis only.

GoG referred to the cases of Excelsior Commercial and Industrial Holdings Ltd v Salisbury Hammer Aspden and Johnson [2002] EWCA Civ 879 [2]and Three Rivers District Council v Bank of England [2006EWHC 816 (Comm) [3] as authority that a party seeking indemnity costs must establish some conduct or circumstance to take a case ‘out of the norm’. GoG asserted that OHL’s conduct indeed took the Gibraltar case out of the norm, in particular by OHL’s reliance on a report by a consultant whom it had engaged. That report was put forward to support OHL’s suspension of the works and redesign of the tunnel and also to put commercial pressure on GoG. In his judgment of April 2014 the judge had said this report was ‘palpably and obviously inept, was clearly worked on by OHL and cannot have been considered by OHL to be independent or competent’.

GoG also identified similarities in OHL’s conduct to that of the defendant in the case of Amoco (UK) Exploration Company v British American Offshore [2001] EWHC 485 (Comm).[4] In Amoco the defendant’s conduct had involved a deliberate policy calculated to exert unfair commercial pressure on the other party, the prioritisation of commercial interests over the rights and wrongs of the situation and a constantly changing case. It ultimately led to a resounding defeat at trial and the rejection of evidence put forward in support. The court had awarded indemnity costs in those circumstances.

OHL denied that its conduct bore any similarity to that of the defendant in the Amoco case. It instead asked the Court to consider the case of Courtwell Properties Ltd v Greencore PF (UK) Ltd [2014] EWHC 184 (TCC)[5] (a case heard by the same judge) where, although the defendant had been unsuccessful at trial, its position was nevertheless arguable and its conduct in the litigation had not been unreasonable.

Decision: costs on standard basis

The judge observed that the Gibraltar case was ‘many layered’ although primarily concerned whether the termination was lawful. He pointed out that there were other substantive and important issues such as ground/soil and water contamination, design processes, rock, suspension and re-design which had all been properly raised by OHL. He distinguished the Amoco case, and said that the primary question in present circumstances was whether a particular case was fought on a basis that took it out of the norm. Although highly sceptical of OHL’s tactics in the commissioning and drafting of the much criticised consultant’s report, the judge said that primarily the costs here were concerned with the costs of the litigation itself. OHL had run a large number of issues at trial and the fact that it had lost resolutely did not mean that GoG would automatically receive indemnity costs. OHL had not thereby taken the case out of the norm. This was not a case for indemnity costs, although the judge considered it was certainly not unreasonable for GoG to have requested them in present circumstances. OHL was ordered to pay the costs of the issues tried to date on the standard basis, to be the subject of a detailed assessment if not agreed.

Interim payment of costs: how much?

Early in the proceedings, at the case management conference, both parties had agreed cost budgets each in excess of £6 million and these had also been approved by the Court in a costs management order. Following judgment in April 2014, the parties had agreed that GoG was entitled to an interim payment of its costs, but disputed the size of that payment. GoG requested an interim payment of £5.5 million (approximately 80% of the budget previously approved by the Court) and OHL offered it only £4 million (approximately 58% of the approved budget).

GoG argued that its approved costs budget was ‘reasonable and proportionate’ and that its recoverable costs (after a detailed assessment) were unlikely to be much less. It relied on the case of The Board of Trustees of National Museums and Galleries on Merseyside v AEW Architects and Designers Limited -and- PIHL UK Limited and Galliford Try Construction Limited (in joint venture) [2013] EWHC 2403 (TCC).[6] There an interim payment of 70% had been made.

OHL argued that the fact that a costs management order had been made for the full agreed costs budget should not lead the Court to award more than would normally be paid on account. OHL referred to the cases of Henry v News Group Newspapers Ltd [2013] EWCA Civ 19 [7]and Troy Foods v Manton [2013] EWCA Civ 615[8] and claimed that the approved costs budget ‘does not act as a rubber stamp for claims up to that amount’. OHL said that GoG would still need to demonstrate in a detailed assessment that the costs it had incurred were proportionate and reasonable. It suggested that questions might arise in such a detailed assessment over the reasonableness of the approved costs budget. For example, OHL suggested there might have been some duplication in the involvement of two QCs and two law firms on the part of GoG (despite this point never having been raised before).

The judge remarked that the case was a relatively complex piece of litigation involving international parties, five disciplines of experts, and had been conducted in a short period of time, all of which meant that preparation for the trial had to be more focused. Although the costs budgets had been approved at the case management conference, the judge had not been asked to cast a critical eye over them at the time. They had not been criticised by the opposing parties nor did they seem out of the ordinary for a case of this nature.

The judge said that the purpose of an interim payment is to reflect the fact that there is a winning party entitled to substantial costs and to ensure that that party is not kept out of those costs. Whilst the agreed costs budget set a likely upper limit at this stage on what GoG is likely to recover in costs, it does not set out figures on a standard or detailed assessment. The judge confirmed that unless GoG’s costs could be agreed between the parties, there would have to be a detailed costs assessment process.

Decision: Interim payment of two-thirds of the approved costs budget

The judge considered that a costs assessment on a standard basis commonly, but not always, reduces the claimed sum to two-thirds (higher on an indemnity basis). Therefore, an interim payment should not represent more than could be recovered on a standard assessment. OHL was ordered to pay two-thirds of the approved costs budget i.e. £4.5 million on account of GoG’s costs. A time for payment was agreed between the parties.

Conclusion

Unless a losing party has behaved particularly badly during the litigation process itself, the winning party is unlikely to recover legal and other costs on an indemnity basis. The winning party can expect only to recover those costs on the standard basis even after an outright victory. The size of an interim payment is also likely to be capped at two-thirds of an approved costs budget. However, there is no absolute rule in this. In an even more recent case – (1) Peter Kellie and (2) Kelly Kellie -v- Wheatley & Lloyd Architects Limited [2014] EWHC 2886 (TCC)[9] – the court took a more generous approach. There almost all of the approved costs budget was ordered to be paid on account of costs. The facts of a particular case always have the potential to influence the outcome of an application for an interim payment.

http://www.bailii.org/ew/cases/EWHC/TCC/2014/1028.html

http://www.bailii.org/ew/cases/EWCA/Civ/2013/615.html

http://www.bailii.org/ew/cases/EWHC/TCC/2014/2886.html

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Clause 15.2(a)

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

Clause 15.2(b)

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

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

Clause 15.2(c)

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

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

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

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

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

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

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

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

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

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

12 Paragraph 322.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The English Court considers termination and notice provisions under the FIDIC Yellow Book 1999. How are clause 15.1 notices to correct limited? Do termination events have to be repudiations? Is it fatal to serve notice of termination on the ’wrong’ address? When does the 28-day period under clause 20.1 start to run? Mr Justice Akenhead offers guidance to the industry.

The English Court considers termination and notice provisions under the FIDIC Yellow Book 1999.

• How are clause 15.1 notices to correct limited?
• Do termination events have to be repudiations?
• Is it fatal to serve notice of termination on the ’wrong’ address?
• When does the 28-day period under clause 20.1 start to run?

Mr Justice Akenhead offers guidance to the industry.

Introduction

Reported FIDIC cases are rare as disputes under these forms of contract are normally resolved in private Dispute Adjudication Board or confidential arbitration proceedings.  Consequently, they are often of considerable precedential value either formally or informally. One recent case is Obrascon Huarte Lain SA -v- Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC) which was transferred from the Gibraltar Courts to the specialist expertise of the Technology and Construction Court of England and Wales by agreement of the parties.

The case concerned a dispute arising out of a £30 million contract for design and construction work to Gibraltar Airport. The contract incorporated the FIDIC Conditions of Contract for Plant and Design Build for Electrical and Mechanical Plant, and for Building and Engineering Works, designed by the Contractor, First Edition 1999, commonly known as the Yellow Book.

Currently, the road to the Spanish border traverses the airport runway so that it must be closed when the runway is in use. With a view to relieving the congestion caused by its frequent closure, the works included the construction of a new dual carriageway and tunnel under the eastern end of the airport runway.

The contract was entered into in November 2008 and works commenced the following month. After over 2½ years and with only 25% of the work done the contract was terminated by the employer, the Government of Gibraltar. The Spanish contractor Obrascon Huarte Lain (‘OHL’) commenced proceedings for extension of time and costs.

Although Gibraltar is famous for its rock and despite the airport site’s historic military use, the contractor argued that it had encountered more rock and contaminated material than would have been reasonably foreseeable by an experienced contractor at the time of tender.  The contractor also argued that a report it had commissioned, which concluded that airborne contamination posed a health and safety risk, meant that it was necessary to suspend the excavation works and    re-design the tunnel.

The Court disagreed with the contractor’s arguments and found inter alia that the contractor had failed to proceed with the design and execution of the works with due expedition and without delay. The contractor was awarded just 1-day extension of time from the 660 days originally claimed. The Court was especially critical of the report heavily relied upon by the contractor to support its suspension of the works and redesign of the tunnel, which it described as ‘palpably and obviously inept, was clearly worked on by OHL and cannot have been considered by OHL to be independent or competent’¹.

The Court found that the contractor was responsible for the termination and that the employer had lawfully terminated the contract. The Court was not asked to consider quantum which was left for a later date.

How are clause 15.1 notices to correct limited?

In determining who was responsible for the termination, the Court first reviewed clause 15.1 the contract, which states:

“15.1 If the Contractor fails to carry out any obligation under the Contract, the Engineer may by notice require the Contractor to make good the failure and to remedy it within a specified reasonable time.”

The judge found that the engineer was entitled to issue the clause 15.1 notices to correct and made some general points on their limits:

1. He adopted a commercially sensible construction, stating that clause 15.1 relates only to more than insignificant contractual failures by the contractor (such as a health and safety failure, bad work or serious delay on aspects of the work), which he said must be an actual failure to comply with the Contract rather than something that may have not yet become a failure. Whilst his approach is to be encouraged it cannot be ignored that, on its face, the express wording ‘any obligation’ is very broad indeed and it may remain open to argument in other forums and jurisdictions that a failure to carry out any obligation need not be an important or material obligation.
2. The time specified for compliance in the clause 15.1 notice must be reasonable in all the circumstances at the time of the notice. The judge gave the example that if 90% of the workforce had gone down with cholera at that time, the period given for compliance would need to take that into account, even if that problem was the contractor’s risk. He said that whether the notice came of the blue or if the subject matter had been raised before and the contractor had chosen to ignore what it has been told might also be relevant.
3. The contractor is given an opportunity and a right to correct any previous and identified contractual failure under clause 15.1.
4. Clause 15.1 notices must be construed

strictly but may be construed against the surrounding facts given the potentially serious consequence of non-compliance.

Had the employer been right in terminating the contract under Clause 15.2?

The Court then reviewed clause 15.2 the contract, which states:

“15.2 The Employer shall be entitled to terminate the Contract if the Contractor:

(a) fails to comply…with a notice under Sub-Clause 15.1…

(b) …plainly demonstrates the intention not to continue performance of his obligations under the Contract,

(c) without reasonable excuse fails:

(i) to proceed with the Works in accordance with Clause 8…or;

(ii) …

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

The employer served a notice of termination on the grounds set out in clauses 15.2(a), (b) and (c), and the judge concluded that the Contract was lawfully terminated by the employer on these grounds.

Clause 15.2(a)

The judge found that the employer was entitled to serve a notice of termination under clause 15.2(a) because of the contractor’s failure to remedy the defaults notified in the clause 15.1 notices to correct. The contractor’s right to redesign the tunnel (if it so wanted) did not outweigh its obligation to get on with the works.

Clause 15.2 (b)

The judge found that the employer was entitled to serve a notice of termination under clause 15.2(b) because the contractor had plainly demonstrated an intention not to continue with the performance of its obligations under the contract. He distinguished between an intention to continue performance and an intention to continue performance of the contractual obligations. A clear intention to perform, but not by reference to important contractual terms, could demonstrate such an intention. Whilst this can be judged by reference to both words and actions, a simple disagreement between parties about what the contract meant, or disagreement about whether the contractor had some claim entitlement, would in itself not demonstrate such an intention.

Clause 15.2(c)

The judge found that the employer was entitled to serve a notice of termination under clause 15.2(c)(i) because the contractor had failed to proceed with the works with due expedition and without delay and had thus failed to proceed in accordance with clause 8.1 without reasonable excuse.

Additionally, the fact that liquidated damages are permitted for the failure by the contractor to complete on time, does not qualify the right to terminate under clause 15.2 for failure to proceed with due expedition and without delay, as these are two separate remedies.

Finally, in respect of clauses 15.2(b) and (c), the judge said that:

1. The test must be objective. So, if the contractor privately intended to stop work permanently but continued openly and assiduously to work hard at the site, this would not of itself give rise to a plain demonstration of intention not to continue performance. Similarly, if the contractor was, and had for many months been doing no work of any relevance without contractual excuse, this could give rise to a conclusion that it had failed to proceed with due expedition and without delay.
2. The grounds for termination must relate to significant and more than minor defaults on the part of the contractor.

Do termination events have to be repudiations?

The wording in clause 63.1 of the old FIDIC Red Book 1987 expressly permitted the employer to terminate the employment of the contractor where the engineer certified to the employer, with a copy to the contractor, that in its opinion the contractor had ‘repudiated the Contract’. However, this wording was deleted from the FIDIC 1999 editions and did not apply to this contract.

Nonetheless, the contractor argued that, where ‘a contract contains a provision such as clause 15.2 which entitles an employer to terminate by reason of a failure to remedy a breach of contract which has been the subject of a clause 15.1 notice (or to terminate by reason of a breach of contract such as one of those of the type identified in clause 15.2(b) and (c)) the breach of contract that is relied upon must be serious and one which is analogous to a repudiatory breach of contract’².  The judge disagreed and said that this goes too far for a number of reasons:

1. Each contract must be considered on its own terms. For example, if the termination clause allows for termination ’for any breach of contract no matter how minor’, the meaning is clear and does not require some repudiatory breach.
2. The contract lists grounds on which termination can take place including clause 15.2(b) which is not unlike the test for English common law repudiation. This ground is different from the other grounds, such as clause 15.2(c)(i). The contract would not include both, unless they are or can be, two separate grounds.
3. The cases relied upon by the contractor had a relatively simple right to terminate, where termination might come out of the blue. Under clause 15.2(a) there was a warning mechanism whereby termination could be avoided by the contractor’s compliance with the clause 15.1 notice. Therefore, the contractor has the chance to avoid termination.
4. The correct proposition that determination clauses will generally be construed as permitting termination for significant or substantial breaches and not trivial, insignificant or insubstantial ones is set out in Hudson’s Building and Engineering Contracts³.

What if the contractor is prevented or hindered from remedying its failure?

Although there was no suggestion that the employer had hindered or prevented the contractor, the judge stated that clauses 15.1 and 15.2(c) must, as a matter of common sense, give the contractor an opportunity to remedy the failure of which it is given notice.

Therefore, termination could not legally occur if the contractor has been prevented or hindered from remedying the failure for which the notice is given within the specified reasonable time.  The judge gave the example of an employer who, following the service of a clause 15.1 notice, denies site access to the contractor to enable it to put right the notified failure. The employer should not be entitled to rely on its own breach to benefit by terminating.

Is it fatal to serve notice of termination on the ‘wrong’ address?

Clause 3.1(b) provided that notices were to be:

‘Delivered, sent or transmitted to the address for the recipient’s communications as stated in the Appendix to Tender.’

The clause 15.2 notice of termination was sent by the employer to the contractor’s site office rather than to the contractor’s Madrid office, which was the address specified in the Appendix to Tender. The contractor argued that it was therefore invalid and ineffective, and wrote stating that this amounted to a repudiatory breach of the contract and purported to accept such repudiation.

The judge disagreed and concluded that the employer’s notice of termination was a valid and effective notice. Although the Madrid office was given in the Appendix to Tender, he noted that throughout the project, correspondence (including the notices to correct) had been sent to the contractor’s site office without any objection. The project was being run from the site office which was handling the bulk of the correspondence, and the project manager, with very substantial authority, was based there. In these circumstances the parties operated as if the site office was an appropriate address at which service of notices could be effected.

The judge drew the following conclusions when finding that service of the termination notice to the wrong address was not fatal:

1. Termination of the parties’ relationship under such contracts is a serious step. The contractual provisions need to be complied with to achieve an effective contractual termination.
2. As a general rule, where notice has to be given to effect termination, it needs to be in sufficiently clear terms to communicate to the recipient clearly the decision to exercise the contractual right to terminate.
3. It is a matter of contractual interpretation tempered with commercial common sense (i) as to the requirements for the notice, and (ii) whether each and every specific requirement is an indispensable condition without compliance with which the termination cannot be effective.
4. Neither clause 1.3 nor clause 15.2 used words which would give rise to any condition precedent or making the giving of notice served only at the contractor’s Madrid office a pre-condition to an effective termination. The key is to ensure that the contractor is actually served with a written notice, receives the notice, it is clear and unambiguous and that it is being served under clause 15.2.
5. The primary purpose of clause 1.3 is to provide an arrangement whereby notices, certificates and other communications are effectively dispatched to, and received by, the contractor. The primary purpose of a clause 15.2 notice is to ensure that the contractor is made aware that its continued employment on the project is to end.
6. The service of a termination notice at the contractor’s Madrid office was not an indispensable requirement either of clause 15.2 or clause 1.3. Provided that service of a written clause 15.2 notice was actually effected on the contractor’s affiliates at a sufficiently senior level, then that would be sufficient service to be effective.

Did the service of the termination notice to the ‘wrong’ address amount to a repudiation?

The judge said that the service of an otherwise valid and actually well-founded termination notice at the technically wrong address could not in law and on the facts of this case, amount to repudiation. Therefore, the contractor was not entitled to treat what was otherwise a legally and factually proper termination notice as a repudiation (as it purported to do).  Consequently, the contractor had itself repudiated the contract by wrongfully treating the contract as at an end, even though it was not accepted as such by the employer.

However, by choosing to re-deliver the notice of termination via courier to the contractor’s Madrid office, the employer elected to treat the contract as continuing. Thus, had this redelivered notice had been necessary, the contract would have been terminated 14 days later contractually, as opposed to an accepted repudiation.

The judge found that given the employer took the contractual route of termination it was not entitled to elect to accept the contractor’s repudiatory conduct.

When do the 28 days under clause 20.1 start to run?

Clause 20.1 states:

 ‘If the Contractor considers himself to be entitled to any extension of the Time for Completion…under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim.  The notice shall 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.

If the Contractor fails to give notice of a claim within such period of 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. Otherwise, the following provisions of this Sub-Clause shall apply…’

The judge said that properly construed and in practice, the ‘event or circumstance giving rise to the claim’ for an extension of time must first occur and there must, second, have been either awareness by the contractor or the means of knowledge or awareness of that event or circumstance before the condition precedent bites. Given the potential serious effect on what could otherwise be good claims for instance for breach of contract by the employer, he did not believe that the clause should be construed strictly against the contractor but that it should be construed reasonably broadly.

In considering when the event or circumstance giving rise to the extension of time claim arose, regard was had to clause 8.4 which identifies when and in what circumstances such extension of time will be granted:

 ‘The Contractor shall be entitled subject to Sub-Clause 20.1…to an extension of the Time for Completion if and to the extent that the completion for the purposes of Sub-Clause 10.1…is or will be delayed by any of the following causes…’

This led the judge to conclude that the entitlement to an extension of time arises if, and to the extent that, the completion ‘is or will be delayed’ by the various events. He said that the extension of time can be claimed either when it is clear that there will be delay (a prospective delay) or when the delay has at least started to be incurred (a retrospective delay).

He explained (through the use of an example) that the wording in clause 8.4 is not ‘is or will be delayed whichever is the earliest’ so that notice does not have to be given for the purpose of clause 20.1 until there is actually delay although the contractor may give notice with impunity when it reasonably believes that it will be delayed. Determining when delay is actually suffered should not be difficult where a critical path programme is used.

His view on this point favours the contractor and may not be shared by employers. If a contractor is ‘clear that the Works overall will be delayed’ and considers it will be entitled to an extension of time, why should that contractor refrain from giving notice until there is actual delay? Clause 20.1 expressly states that notice be given ‘as soon as reasonably practicable, and not later than 28 days after the Contractor became aware, or should have become aware of the event or circumstance’. Arguably, knowing that delay will occur but waiting until it has actually been incurred runs contrary to this requirement and will defeat the advantages to the employer of the early warning.

The judge was considering an extension of time claim but the logic would seem to apply equally to the money: the event or circumstance can mean either the incident or the incurring of cost which results or will inevitably result from the incident. Where an incident gives rise to both delay and cost which occur at different times would notice have to be given within 28 days of the occurrence of whichever came first? If that opportunity was missed, would a notice when the second consequence occurred save the contractor’s ability to claim in relation to the second consequence, both consequences, or neither?

Clause 20.1 does not stipulate any particular form and the judge said one should construe it as permitting any claim provided that it is (i) made by notice in writing to the engineer, (ii) the notice describes the event or circumstance relied on, (iii) the notice is intended to notify a claim for extension of time (or for additional payment or both) under the contract or in connection with it, and (iv) it is recognisable as a ‘claim’. It is worth noting here that under the express wording of clause 20.1 the notice is of the contractor’s entitlement to time and/or money with a description of the event or circumstance giving rise to the claim. It is not the claim itself which follows later.

Conclusion text

This case is a useful reminder of the powers available to employers under the FIDIC Yellow Book to terminate the contracts of contractors who drag their feet. It gives common sense advice on the address for service of notices and provides useful, albeit brief and possibly controversial, guidance on clause 20.1 notices.

It is to be hoped that more foreign parties will bring their disputes to the specialist expertise of the Technology and Construction Court for resolution in the future.

² Paragraph 322.

³ Twelfth Edition at para 8.056.

A previous article proposed that difficult questions arose from recent cases on the enforceability of Dispute Adjudication Board (DAB) decisions, including the correct basis of the award and the appropriate type of order. This article offers answers to these questions.

A previous article proposed that difficult questions arose from recent cases on the enforceability of Dispute Adjudication Board (DAB) decisions, including the correct basis of the award and the appropriate type of order. This article offers answers to these questions.

In the October 2011 edition of CLInt (pp 13–16), this author considered the case law concerning the enforceability of binding DAB decisions and identified, at the conclusion of the article, some of the difficult issues that the cases present. This article explores the answers to three questions (a summary of the answers put forward in this article follows in italics):

• Should the basis of the award be breach of contract or specific performance?

Specific performance is the correct route.

• Does the failure to pay need to go to the DAB first?

No, if specific performance is sought. Yes, if damages are sought.

• Should an arbitral tribunal make a ‘final’, ‘interim’, ‘provisional’ or ‘partial’ award/order ‘enforcing’ a DAB’s decision?

The appropriate form of award is a provisional order.

This article seeks to demonstrate that, in relation to each of these questions, the competing arguments are finely balanced. It is no coincidence, therefore, that there is an almost equal number of courts and tribunals willing to enforce to those unwilling to enforce ‘binding’ DAB decisions.

To recap, the problem concerns the inadequate wording in the FIDIC 1999 books to deal with the ‘enforceability’ of ‘binding’ DAB decisions. Sub-Clause 20.7 provides clear words enabling a party to enforce a DAB decision that is final and binding. There is no clear route (described by Professor Bunni as ‘the gap’) to enforce a binding DAB decision (i.e. a decision that has had a notice of dissatisfaction registered against it) set out in the contract.

Issue 1: damages v specific performance

Should the DAB winning party be asking the arbitral tribunal specifically to enforce the fourth paragraph of Sub-Clause 20.4 (which provides that the parties should give prompt effect to the DAB’s decision), or should it be seeking damages for breach of the same provision of the contract?

It is well known that in common law systems, specific performance is deemed to be an equitable form of relief (and as such an exceptional remedy, available only in situations where damages do not provide an adequate remedy) but that, in civil law jurisdictions, specific performance is not a discretionary extraordinary remedy but the general rule.

Specific performance (enforcement)

As the contract does not expressly provide the power to grant specific performance (Sub-Clause 20.7, which is a power to grant specific performance of a final and binding DAB decision, does not cover binding decisions), an arbitral tribunal would have to be satisfied that either the ICC Rules or the applicable law expressly or impliedly conferred it.

It might be argued (although the author has his doubts as to this argument) that the ICC Rules give the arbitral tribunal an inherent power to grant specific performance. Under the 1988 ICC Rules, there was no express authority to make awards or issue orders for interim measures but Craig, Park, and Paulsson nevertheless opined in the second edition of their seminal International Chamber of Commerce Arbitration that ICC arbitrators did indeed have an inherent power to make interlocutory orders. However, an examination of the 1988 Rules might have led many to conclude that such an inherent power was difficult to reconcile with those Rules.

An express power to grant specific performance might be found in the applicable law. In England, for example, section 48 of the Arbitration Act 1996 does provide a power to the arbitral tribunal to order specific performance of a contract. It is arguable, however, that this section was conceived with the final award in mind (as opposed to a provisional order).

If a power is conferred on an arbitral tribunal to grant specific performance, then, unlike under Sub-Clause 20.7, the arbitral tribunal must determine whether to enforce the binding DAB decision by the exercise of its discretion.

An analysis of the decisions of the courts and tribunals shows as follows:

• In the author’s opinion, ICC Case 10619 is predicated on the basis that the arbitrator does have a power to order specific performance (‘giving the Engineer’s decisions their full effect’) of a binding DAB decision. While the thinking behind ICC Case 10619 is not spelt out, it may be that the arbitral tribunal considered it had an inherent power specifically to enforce ‘the law of the contract’.
• It appears that Christopher Seppälä does not consider the ICC Case 10619 award to be based on a cause of action for damages for breach of contract, as he recognises in his article ‘An Engineer’s/Dispute Adjudication Board’s Decision is Enforceable by an Arbitral Award’ (White & Case, December 2009) that the tribunal in ICC Case 10619 could also have taken this alternative approach:

‘The Tribunal could have held merely that the Employer was in breach of contract and required the Employer to pay damages for such breach, represented by interest on the amount of the unpaid decisions. But, instead, the Tribunal ordered the Employer to pay the amount of the Engineer’s decisions on the ground that “this is simply the law of the Contract”. In the author’s [Mr Seppälä’s] view, this is the right approach.’

It is unfortunate that the ‘the law of the contract’ solution put forward in ICC Case 10619 is not explained. It is not clear where in the law of the contract a power is given to an arbitral tribunal to enforce an engineer’s (or DAB’s) decision. Ordinarily, an arbitral tribunal (unlike a court) will not have the power to award specific performance unless that power is expressly bestowed on it by the parties. In certain circumstances, the contract may do that (for example, Sub-Clause 20.7). In other circumstances, the applicable law may provide the solution (eg section 48 of the English Arbitration Act 1996).

Damages for breach of contract

The winning party could argue that the employer’s failure to pay amounts to a breach of the fourth paragraph of Sub-Clause 20.4 (ie a failure on the employer’s part promptly to give effect to the binding DAB’s decision).

There are two alternative views concerning the question as to what loss flows from the breach to promptly give effect to a DAB decision (‘the loss argument’).

The first view is that the loss includes the principal sum adjudged as due by the DAB:

• Two sole arbitrators in unreported cases reached the conclusion that damages do consist of the principal sum.
• Frederic Gilli on in his article ‘Enforcement of DAB Decisions under the 1999 FIDIC Conditions of Contract: A recent development: CRW Joint Operation v PT Perusahaan Gas Negara (Persero) TBK’ ([2011] International Construction Law Review 388) also supports this view. He asserts that ‘the correct measure of damages for a breach by the losing party of its obligations under sub-clause 20.4 to give prompt effect to a DAB decision is… for payment of the amount awarded by the DAB, and not simply interest’. His reasoning is that ‘in most jurisdictions, the basic principle of damages for breach of contract is to put the claimant into the same financial position in which he would have been had the contract been properly performed‘. His conclusion is that ‘… if the losing party had promptly given effect to the DAB decision, the other party would have received the amount awarded by the DAB’.

The second view is that any claim for damages would be limited to a claim for recovery of losses that the claimant had incurred as a consequence of the respondent’s non-compliance with the DAB’s decision (ie losses caused by the breach, which are not likely to be anything other than interest). This view is supported as follows:

• In ICC Case 16949/GZ, the sole arbitrator suggests that damages for breach of contract ‘would hardly be a claim for damages of the same amounts already awarded’.
• Judge Ean in the High Court of Singapore also saw this as a potential issue when she issued the following note of caution in the PT Perusahaan case: ‘Suing in contract for breach may not be the best practical move for the winning party, especially when the decision only relates to payment of money. The winning party may need to prove damages, which may be no more than a claim for [interest] on the sum owing.’
• Mr Seppälä in his 2009 article noted above recognises that the tribunal in ICC Case 10619 could have taken this approach as set out in the extract reproduced above but chose not to.
• Edwin Peel makes a distinction under English law (at paragraph 21-001 of Treitel on the Law of Contract (12th edn, Sweet & Maxwell, 2007) between an action for a price and an action for damages. He considers that an action for an agreed sum differs from a claim for damages not only in its nature, but also in its practical effects. The former is a claim for specific enforcement of the defendant’s primary obligation to perform what he has promised. The latter arises where the agreed sum is not paid and the claimant suffers additional loss. In these circumstances, he may be entitled to bring both the action for the agreed sum and an action for damages.

Conclusions on issue 1

The author considers that the relief that a winning party is seeking, properly framed, is the ‘enforcement’ of the DAB’s decision. In other words, the winning party wishes the arbitral tribunal to order the defaulter to comply with the obligation set out in the contract promptly to give effect to the DAB’s decision.

In the author’s opinion, it is arguable that if the arbitral tribunal does not have a power to order specific performance in relation to a binding DAB decision under the:

• General Conditions of the FIDIC contract (which is clear); or
• ICC Rules (which is doubtful); or
• applicable law,

it follows that the winning party has no ability to enforce the DAB’s decision.

The author considers that, if the winning party is seeking damages for breach of contract, the correct position, under English law at least, is that, as a matter of principle, such a claim cannot include the sum contained within the DAB decision itself.

The author considers that a winning party would be best advised to ‘ride both horses’ in the alternative (ie seek both specific performance and damages for breach of contract). An arbitrator would then have the task of determining:

1. whether there was a power for specific performance and, if so, whether to exercise it; and, if not
2. whether to find in favour of the contractor on the loss argument.

The author considers that there will be cases in which arbitrators (with defensible justification) will take the view that neither ‘horse’ has the legal stamina to ‘reach the finishing line’.

Issue 2: Does the failure to pay need to go to the DAB first?

To introduce this issue, it is necessary to understand the three routes to arbitration under the FIDIC books.

1. The first route is contained in Sub-Clause 20.6 and arises if:

• the contractor has referred a dispute to the DAB;
• the DAB has given a reasoned, timely decision (or failed to give a decision);
• either or both of the parties is/are dissatisfied with the DAB’s decision (or failure to make a decision); and
• either or both parties issue(s) a notice of dissatisfaction (‘NOD’) within 28 days of receipt of the decision and the 56-day period for amicable settlement discussions to take place (20.5) has expired.

The arbitral tribunal will then embark on a de novo consideration of the merits of the dispute that has been referred to the DAB. The DAB’s decision in these circumstances remains ‘binding’.

2. The second route to arbitration is contained in Sub-Clause 20.7 and arises if neither of the parties gives a valid notice of dissatisfaction in relation to the DAB’s decision (that is, within 28 days of receipt of the DAB’s decision or, if applicable, within 28 days of the expiry of the 84-day period in the event that a DAB fails to make a decision). In this case, the DAB’s decision becomes ‘final and binding’. Sub-Clause 20.7 can then be utilised to enforce the DAB’s final and binding decision in arbitration without a requirement for the arbitrator to consider the merits of the dispute.
3. The third route to arbitration, provided for in Sub-Clause 20.8, allows the arbitral tribunal to be seized in circumstances in which, for any reason, the DAB is not in place. In such circumstances, if there is a dispute between the parties, the dispute can be referred directly to the arbitral tribunal and the parties will not need to go through the processes in Sub-Clauses 20.4 (DAB) or 20.5 (amicable settlement).

It is plain from the analysis of the contractual scheme above that the FIDIC General Conditions of Contract have been drafted on the basis that a party aggrieved by the DAB’s decision should simply issue a NOD and take the dispute to arbitration for a resolution on the merits. It may have been thought it was unnecessary or undesirable to have an express mechanism to enforce a ‘binding’ DAB decision; alternatively, and more likely, the issue was simply overlooked.

If the winning party is seeking specific performance, the author suggests that there should be no need for an arbitral tribunal to refer back to the DAB the issue of the failure to pay simply because that party is not pursuing a claim under route 1 as noted above: the winning party is relying on either a power bestowed on it by the ICC Rules or applicable law. In fact, in these circumstances, if the winning party does refer the matter to the DAB, the DAB would be bound to decline jurisdiction over the issue as the DAB, so far as its previous referral is concerned, would be functus officio (its power has been discharged). The author suggests that, while the procedural rules provide that a DAB has the power to grant interim measures, it is highly unlikely that such measures would include the power to order specific performance as the idea that a DAB has the power to enforce its own decisions is absurd.

If the winning party seeks damages for breach of contract, then the author suggests that it is mandatory for that party to refer the issue of damages to the DAB first as route 1 of the contract is being pursued: the winning party is arguing that there is a dispute that is to be referred to arbitration. The only way this can be done is via route 1. A failure to do so would amount to a failure to comply with the multi-tier dispute resolution process in the contract.

This was also the conclusion reached by the High Court of Singapore in the PT Perusahaan case. The DAB and subsequently the arbitral tribunal will have to wrestle with the loss point set out above and whether to grant a provisional order or an interim, partial, or final award as discussed below.

Conclusions on issue 2

The winning party does not need to go to the DAB first if the relief sought is specific performance, but does if the relief sought is damages for breach of contract.

Issue 3: should an arbitral tribunal make a ‘final’, ‘interim’, ‘provisional’ or ‘partial’ award/order ‘enforcing’ a DAB’s decision?

A Final Report on Interim and Partial Awards from the working party on dissenting opinions and interim and partial awards of the ICC Commission on International Arbitration, chaired by Martin Hunter in 1990, proposes the following definitions:

• an ‘interim award’ is ‘a general term used to describe any award made prior to the last award in a case’;
• a ‘partial award’ can be enforced like any other award, produces a res judicata effect and is ‘a binding determination, in the form of an award, on one or more (but not all) of the substantive issues’; and
• an ‘interlocutory decision’ (akin to a provisional order – note not award) is ‘one, which, not necessarily in the form of an award, is made prior to the last or sole award’.

This report concluded (and the author agrees) that it is impossible to find a terminology acceptable to everyone in different countries concerning the divergent uses of the terms ‘interim’, ‘partial’ and ‘interlocutory’ but that for the purposes of the report the above definitions are adopted.

Fouchard, Gaillard and Goldman (… on International Commercial Arbitration) explain that a ‘final award’ is used to mean very different things, but the better interpretation is that ‘an award is a decision putting an end to all or part of the dispute, it is therefore final with regard to the aspect or aspects of the dispute that it resolves.‘

Lew, Mistelis and Kroll (in Comparative International Commercial Arbitration) explain that:

‘according to the working group preparing the Model Law an interim or interlocutory or provisional award is an award which does not definitively determine an issue before the tribunal. The definition is in line with the general meaning of the term “interim” as opposed to “final”. However, the definition was not adopted in the final text of the Model law. One of the reasons was that in practice the term “interim award” is often used interchangeably with that of “partial awards”.’

Whatever the language adopted, in principle, it is suggested that there is a distinction between:

• an award that finally disposes of a matter and is enforceable (‘species 1’); and
• a decision that does not finally dispose of a matter and is not enforceable (‘species 2’).

Purists might argue that all awards are, by definition, final and so species 2 decisions should never be described as awards as such. The article makes the distinction between a species 1 award and species 2 decision so as to avoid confusion in terminology. In the author’s view, as developed below, an arbitral tribunal should not give a species 1 award if it agrees with the author’s view that the relief sought by a contractor, properly analysed, is not final relief.

These issues raise a number of sub-questions, which may be dealt with as follows.

Can an arbitral tribunal issue a partial (final) award concerning a binding DAB decision, as to do so would mean that this would be a determination of this issue finally?

It seems to the author that there are two competing views:

1. The first view is that by its nature a binding DAB decision concerning sums of money is not final as a notice of dissatisfaction has been issued. As a binding decision may be reviewed and revised by an arbitral tribunal in a final award, it is inappropriate for an arbitral tribunal to issue a partial (final) award concerning the sums found to be due in that binding DAB decision. To do so would have the effect of rendering final and binding (a partial final award is a final and binding award) a decision that was always only intended to have binding status. In other words, it is inappropriate for an arbitral tribunal to issue a partial (final) award concerning sums owed as the effect of such an award would be finally to resolve an issue that is yet to be resolved. The final entitlement of a party to money can only be resolved in arbitration by the arbitral tribunal in its final award. This was the winning argument run by the author as counsel in ICC Case 16119/GZ.
2. The second view, advanced by Frederic Gillion, is that the winning party should seek a partial final award. His analysis is that such an award would:

‘simply be one giving full immediate effect to the winning party’s right to have a DAB decision complied with promptly in accordance with Sub-Clause 20.4 or to damages in respect of the losing party’s breach of sub-clause 20.4. That award will be final in that it will dispose of the issue of the losing party’s failure to give prompt effect to the DAB decision, which is a substantive claim distinct from the underlying dispute covered by the DAB decision.’

The author considers the second view to be fallacious, as a partial final award pertaining to the sums ordered as due by the DAB does not solely represent a final resolution of the issue of non-payment. Such an award goes further and finds that the sums fall due in an enforceable species 1 award. The contractor’s entitlement to those sums has not been finally resolved and so should not be the subject of a final award.

If the second view is correct, the winning party would be granted a species 1 award for sums that can be – and, indeed, are likely to be – revised in arbitration.

In these circumstances, there would then be two potentially conflicting awards when the final award is given. For this reason, the author prefers the first view and considers that only a species 2 decision should be made.

Can an arbitral tribunal issue a species 2 decision concerning the binding DAB decision?

If the arbitral tribunal is empowered to give provisional relief (as it is under Article 23 ICC Rules), it is not objectionable, as a matter of principle, for it to issue a species 2 decision concerning the binding DAB decision.

It is arguable that, if a party involved in ICC proceedings wishes to enforce the DAB’s decisions, this could be construed as an application for provisional payment, which, in turn, could take the form of an application for an interim and conservatory measure under Article 23 ICC Rules.

If that were the case, then the law of the forum will spell out the circumstances or criteria that must exist before the court can grant interim or conservatory measures: for example, prima facie establishment of a case, urgency, and irreparable harm, or serious or actual damage, if the measure requested is not granted (see, for example, section 44 of the English Arbitration Act 1996). Some still cite the traditional grounds of ‘periculum in mora’ (danger in delay) and ‘Fumus boni iuris’ (presumption of sufficient legal basis).

It is submitted that, in the typical case concerning a binding DAB decision, it will be difficult to persuade the arbitral tribunal that the necessary circumstances or criteria set out in the preceding paragraph will be fulfilled to justify an arbitral tribunal issuing interim or conservatory relief. Ordinarily, it is suggested that there will be no urgency or real risk of irreparable harm or serious or actual harm if the contractor is not paid the sums ordered by the DAB pending a final determination of these matters by the arbitral tribunal as interest is an adequate remedy. Furthermore, even if a species decision were to be made, it would not be enforceable under the New York Convention.

According to Lew, Mistelis and Kroll, the prevailing position in relation to the enforcement of interim awards dealing with interim relief (referred to in this article as ‘species 2 decisions’) is dealt with by a decision of the Supreme Court of Queensland, Australia (Resort Condominiums International Inc (USA) v Ray Bolwell and Resort Condominiums (Australasia) Pty Ltd (Australia)).[1] The court held that an interim award is not enforceable under the New York Convention or Australian law. They stated that:

‘the “Interim Arbitration Order and Award” made by the arbitrator… is not an “arbitral award” within the meaning of the Convention nor a “foreign award”… it does not take on that character simply because it is said to be so’.

Should an arbitral tribunal issue a final award?

This question envisages the winning party referring, as a sole issue, the issue of non-payment of the binding DAB decision (ie the merits are not put before the arbitral tribunal). Again, there may be two views:

1. For precisely the same reasons as set out above in the context of the possible issue of a partial award (namely, that a final award would finally resolve an issue that is yet to be resolved), it would be equally inappropriate to issue a final award.
2. If the only issue before the tribunal is the enforcement of the DAB decision, then necessarily the award sought is a final award as there is nothing else to determine.

The trouble with the latter argument is that the employer still has the right to bring to arbitration the merits and so he will need to bring separate arbitration proceedings concerning this. Ultimately, when those proceedings are concluded, there may be two separate and potentially conflicting awards. This cannot have been the intention of the drafters of the General Conditions.

The Court of Appeal in the Singapore case gives clear guidance to contractors not to refer the sole issue of the enforcement of a DAB decision to an arbitrator for a final award but instead to ensure that the merits are also before the arbitrator.

Conclusions on issue 3

In the author’s opinion:

• Legally and conceptually, it would be most appropriate for a winning party to seek a species 2 decision (provisional order) enforcing the DAB’s binding decision. Practically, however, it may not be a winning solution owing to the difficulties in persuading an arbitral tribunal that it would be appropriate under Article 23 ICC Rules and the law of the forum. Further, a contractor that obtains a species 2 decision may not be able to enforce it, and so the objective of obtaining enforcement of a DAB’s binding decision may not be met.
• A partial final award (a species 1 award) has recently become the most popular solution to fill the gap, but it is suggested that it is the wrong choice and does not sit with the leading commentators’ view on the meaning of a partial award: a partial award is a final award and the issue to be determined is not final.
• A final award is also likely to be the wrong choice for the same reasons as a partial award is the wrong choice. For different reasons, the Singapore Court of Appeal also reached this decision.

The future

The FIDIC Gold Book includes – and it is understood that the next editions of the 1999 FIDIC forms will include – in the equivalent of the existing Sub-Clause 20.7 the ability to ‘enforce’ both binding and ‘final and binding’ DAB decisions. While this will eliminate issues 1 and 2 discussed above, issue 3 may well remain a live issue under the new books.

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

[1] (1994) 9(4) Mealey’s IAR A1 (1995).