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.

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.