The English Supreme Court has ruled that losers in adjudications have six years to challenge an adjudicator’s decision from the payment date, while winners' rights to seek improvement end with the original claim's limitation period. This article considers the implications.

How long do you have to challenge an adjudicator’s decision?

Controversially, the English Supreme Court has now ruled as follows:

• If you were the loser and required to pay monies, you will have the full limitation period, typically six years, to bring your claim to recover those monies starting from when you were required to make payment to the winner; whereas

• If you were the winner, your right to seek an improvement of the result will come to an end at the same time as the limitation period for the original claim.

In our last issue we discussed the background to the then forthcoming Supreme Court’s decision in the Aspect v Higgins case (“the Decision”).

If I had been forced to lay my cards on the table then about which way the Decision might go, I would have predicted that Aspect would succeed and the Court of Appeal’s decision would be upheld. That would have been a fairly unpopular opinion since many considered this would be not just an unfair result but one that would seriously undermine the adjudication process.

We are now going to see how prophetic those views turn out to be because the five members of the Supreme Court, with Lord Mance delivering the single judgment, have unanimously found in favour of Aspect. [1]

The Key Facts

The rather complicated factual background of this case can be summarised as follows:

• In April 2004 Higgins engaged Aspect to provide asbestos advice on a project;
• In July 2009 Higgins obtained an adjudicator’s decision condemning Aspect’s advice and awarding damages of approximately £658,000 which Aspect duly paid in August 2009;
• By August 2010 the six-year limitation period had expired for any claim that Higgins might have brought against Aspect;
• Subsequently, Aspect issued proceedings at first instance in the Technology and Construction Court to recover the full £658,000 which it had paid to Higgins in complying with the adjudicator’s decision, claiming it had been an over-payment;
• Higgins defended the proceedings by arguing that Aspect’s claim was time-barred;
• At first instance, before Akenhead J, Aspect’s claim was indeed held to be time-barred [2];
• That decision was overturned by the Court of Appeal. [3]

The nature of Aspect’s Case for Recovery of the Monies

Readers will recall that, both at first instance and in the Court of Appeal, Aspect had pursued a two-pronged case against Higgins.

Firstly, Aspect had based its claim upon a term which should be implied into the Scheme for Construction Contracts (which itself takes effect as a series of implied terms), giving a party who is required to pay monies under an adjudication decision the right to recover any over-payment (“the Contract Argument”).

Secondly, Aspect pursued an alternative claim based upon restitutionary principles and more specifically unjust enrichment (“the Restitution Argument”).

The Nature of Higgins’ Case Against Aspect

Before examining how the Supreme Court approached these two arguments, it is worth reminding ourselves of the thrust of Higgins’ case against Aspect at first instance and before the Court of Appeal because it was here that the battle-lines for the Supreme Court were really drawn.

It was central to Higgins’ case that Aspect’s position was inherently unfair and, if supported by the courts, would seriously undermine adjudication as we have come to know it. Higgins contended that the facts of this case showed precisely why that was so.

Instead of seeking a final determination of the underlying dispute, as it had been entitled to, Aspect had just sat back and done nothing until the limitation period had expired for any claim that Higgins might have wished to advance. This meant that, in any subsequent action for recovery of monies which Aspect might pursue, Higgins would be unable to pursue any set-offs or counterclaims in relation to these matters.

Such a result, Higgins contended, was clearly unfair and, by potentially doubling the limitation period for such claims, would undermine the intended finality and therefore the efficacy of the adjudication process itself. Those propositions have received much support from commentators ahead of the Supreme Court’s judgment in this matter.

In the Decision, Lord Mance described Higgins’ complaint about the Court of Appeal’s approach to limitation as being that it “gives Aspect a one-way throw and undermines finality”.  However, he had a simple but, in his view, complete answer to that complaint:-

“That consequence follows, however, from Higgins’s own decision not to commence legal proceedings within six years from April 2004 or early 2005 and so itself to take the risk of not confirming (and to forego the possibility of improving upon) the adjudication award it had received. Adjudication was conceived, as I have stated, as a provisional mechanism, pending a final determination of the dispute. Understandable though it is that Higgins should wish matters to lie as they are following the adjudication decision, Higgins could not ensure that matters would so lie, or therefore that there would be finality, without either pursuing legal or arbitral proceedings to a conclusion or obtaining Aspect’s agreement.”

One gets the feeling that if ever there was a case where the merits, whichever way they are perceived, seem to be dictating both popular opinion and judicial outcome, then this is surely that case.

In any event, having reached that view on the “merits” of this case, the precise route that the Supreme Court adopted to arrive at the appropriate conclusion almost seems superfluous. Nevertheless, in summary, we explore below how the Supreme Court arrived at its conclusions.

The Contract Argument

Their Lordships had no real hesitation in deciding the following, which was central to Aspect’s arguments:

“[I]t is a necessary legal consequence of the Scheme implied by the 1996 Act into the parties’ contractual relationship that Aspect must have a directly enforceable right to recover any overpayment to which the adjudicator’s decision can be shown to have led, once there has been a final determination of the dispute.”

In reaching that conclusion, the Supreme Court agreed with the Court of Appeal’s analysis that the legal basis for that right is an implied term arising from the Scheme which provided a positive “right to recover an alleged over-payment”.

Furthermore, since the right was in essence a right to recover an over-payment that had been made, their Lordships considered that it was obvious that the right would accrue as and when the payment in question had taken place.  It followed that, for limitation purposes, a claim based upon that right could be brought at any time within six years from that date.

It also followed from that relatively straightforward analysis of the situation that Aspect had been perfectly within its rights to bring the claim when it had done.

Readers will recall that the contractual analysis advanced by Higgins, with which Akenhead J at first instance had agreed, was very different. There was no room or necessity, Higgins had argued, to imply a term of the sort accepted by the Court of Appeal and now also the Supreme Court.

Instead, Higgins argued, Aspect did have an appropriate right, which it should have exercised within six years from when the contract had been performed, and that was to obtain a negative declaration confirming that it was not liable for the monies which Aspect claimed.

The Supreme Court had little hesitation in rejecting this “negative declaration” approach, Lord Mance commenting:-

“It ignores a core ingredient of and the immediate trigger to Aspect’s current claim, which is that it has been ordered to make and has made a large payment in 2009. It is artificial to treat a claim to recover that sum as based on an alleged cause of action accruing in 2004 or early 2005. To treat Aspect’s remedy as being to seek a declaration, and then to invite the court to use its alleged consequential powers in order to grant relief which is the true object of the proceedings, is equally artificial.”

Lord Mance helpfully clarified that, in providing for the final determination of matters decided in adjudication, “what the Scheme contemplates is the final determination of the dispute referred to the adjudicator, because it is that which determines whether or not the adjudicator was justified in his or her assessment of what was due under the contract”.

This process will involve the court or tribunal in reviewing the “substantive merits of the original dispute”, in his Lordship’s words, although limitation will be irrelevant. The Decision is not entirely clear regarding the extent to which matters occurring after the adjudicator’s decision can be relied upon in the final determination process and this will need clarification in future court decisions.

Lastly, in the context of final determination, Lord Mance confirmed that, in defending its position, Higgins would be entitled to advance all matters upon which it relied in the adjudication, including any set-offs which the adjudicator may have rejected, given that the adjudicator’s reasoning would have “no standing” in the process. This softens the blow somewhat for successful parties facing final determination in these circumstances.

The Restitution Argument

The Restitution Argument had been raised, without really going anywhere, at first instance. The Court of Appeal disposed of the appeal from Akenhead J’s decision on the basis of the Contract Argument without feeling it necessary to look into restitutionary issues.

However, in giving Higgins permission to appeal, the Supreme Court went to the lengths of stating that it might require the parties to address it on “the legal position regarding restitution”.

As it happens, the Supreme Court, like the Court of Appeal before it, felt it unnecessary to look into the Restitution Argument in any great detail in the Decision.  What Lord Mance did say, in considering the limitation position, was the following:

“Since Aspect’s cause of action arises from payment and is only for repayment, it is, whether analysed in implied contractual or restitutionary terms, a cause of action which could be brought at any time within six years after the date of payment to Higgins, i.e. after 6 August 2009. For this purpose an independent restitutionary claim falls to be regarded as “founded on simple contract” within section 5 of the Limitation Act…”

The fate of the Restitution Argument therefore remains slightly unclear. However, the reality is that it would only really have come into play had Aspect failed on the Contract Argument or if there had been limitation issues about it in circumstances where the position in restitution would have been more favourable for Aspect.

The Consequences of the Decision

Much has already been made about the damaging effect that the Decision will have on the adjudication process. My own view is that these concerns are exaggerated and that the Decision’s future impact on a user can be summarised as follows:

• The law is now settled regarding the steps that a party must take if he believes that the adjudicator has required him to make an over-payment; he should commence proceedings to seek final determination of the matters in issue; he will have six years to do so from when the payment was actually made;

• In the final determination proceedings, although the successful party will be able to defend itself by relying on all matters that it raised in the adjudication, what it will not be able to do is to counterclaim in respect of any of its own claims if they have become time-barred on the basis of the application of the normal rules;

• It may be that a losing party in adjudication who has been required to pay out monies to the successful party will seek to “do an Aspect” by deliberately holding off from taking any steps to recover an over-payment; however, this would only make any sense where the successful party has its own claims which might become time-barred by the time the final determination proceedings have to be commenced; such cases are going to be relatively rare;

• We may well see a number of cases where successful parties in adjudication do take pre-emptive action to prevent themselves from falling into the same position in which Higgins has ultimately found itself but I think those cases are also going to be rare; I suspect it is more likely that in such cases a deal will be done to achieve finality, but successful parties would be well-advised to consider the limitation position in any cases where they have been paid monies on the back of an adjudicator’s decision;

• It would be prudent for professional advisers who have assisted parties in such cases also to address the potential implications of the Decision in the context of the matters with which they were involved.

[1] Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2015] UKSC 38 (17 June 2015) http://www.bailii.org/uk/cases/UKSC/2015/38.html

[2] Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2013] EWHC 1322 (TCC) (23 May 2013) http://www.bailii.org/ew/cases/EWHC/TCC/2013/1322.html

[3] Aspect Contracts (Asbestos) Ltd v Higgins Construction Plc [2013] EWCA Civ 1541 (29 November 2013)  http://www.bailii.org/ew/cases/EWCA/Civ/2013/1541.html

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.

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.

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