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).

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

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

Background to the issue

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reasoning

The following points mentioned in the judgment are of interest:

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Clause 15.2(a)

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

Clause 15.2(b)

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

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

Clause 15.2(c)

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

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

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

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

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

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

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

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

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

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

12 Paragraph 322.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mr Justice Akenhead offers guidance to the industry.

Introduction

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

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

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

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

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

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

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

How are clause 15.1 notices to correct limited?

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

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

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

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

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

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

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

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

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

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

(c) without reasonable excuse fails:

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

(ii) …

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

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

Clause 15.2(a)

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

Clause 15.2 (b)

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

Clause 15.2(c)

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

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

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

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

Do termination events have to be repudiations?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Clause 20.1 states:

 ‘If the Contractor considers himself to be entitled to any extension of the Time for Completion…under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim.  The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance.

If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. Otherwise, the following provisions of this Sub-Clause shall apply…’

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

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

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

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

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

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

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

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

Conclusion text

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

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

² Paragraph 322.

³ Twelfth Edition at para 8.056.