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).

In this article Corbett & Co. Director Andrew Tweeddale addresses whether sub-clause 20.5 is a condition precedent to the commencement of an arbitration or whether it is an obligation, the breach of which will not affect the jurisdiction of the arbitral tribunal to resolve the dispute.

This article addresses whether sub-clause 20.5 is a condition precedent to the commencement of an arbitration or whether it is an obligation, the breach of which will not affect the jurisdiction of the arbitral tribunal to resolve the dispute.

Click here to read the full article originally published in The International Construction Law Review in 2016.

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