Authors: Charles Lockwood and Owen Chio
Two recent cases in the UK illustrate the tricky issues Employers and Contractors have to grapple with in defining the responsibilities of contractors involved in the construction of offshore wind projects.
Read MoreBy Kevin Greene, Inga K. Hall, Nicola J. Ellis, Camilla de Moraes, and Sarah A. Drinkwater
By Matthew E. Smith, Inga K. Hall, and Sarah A. Drinkwater, K&L Gates, London
Introduction
FIDIC has long been renowned for its flexible suite of standard forms of contract for use on international construction and engineering projects. FIDIC is the “contract of choice” for international infrastructure and process plant projects, particularly in Eastern Europe, Africa, the Middle East, and Asia.
Two of the key strengths, or attractions, of the FIDIC suite of contracts are, firstly, that they are capable of use across a diverse range of legal systems and, secondly, that they have been pro-actively updated and added to over time to respond to the needs of the industry.
By way of background to this last point, FIDIC produced a core ‘Rainbow Suite’ of 4 contracts in 1999: the Red Book (for Building and Engineering Works), the Yellow Book (Plant and Design-Build), the Silver Book (EPC/Turnkey Projects) and the Green Book (short form contract). Additional forms have subsequently been added to the Rainbow Suite, including the White Book consultant’s appointment in 2006 and the Design-Build-Operate Gold Book form in 2008. In early 2016, FIDIC formed a working group to focus on updating its existing suite of contracts and to add entirely new forms of contract (including sector-specific tunnelling and renewables forms); with intentions to release such new and updated contracts over the course of the next two years.
Following the FIDIC International Contract User’s Conference in December 2016, at which K&L Gates partners, Matthew Smith, Kirk Durrant and Rafal Morek, spoke on trends in amending FIDIC contracts, attendees were able to obtain a copy of the much anticipated “special pre-release version” of the 2nd Edition of the Yellow Book (2017) and the 5th Edition of the White Book (2017).
This Alert provides a high-level overview of the changes which will be made to the Yellow Book, its first update in over 15 years. The 2017 Yellow Book 2nd edition changes are likely to have wide-reaching impact as the Yellow Book remains the most commonly used contract in the Rainbow Suite. Some of these provisions reflect innovations introduced in the Gold Book 2008 which are now being integrated into the new versions of the ‘1999 suite’ (Red, Yellow and Silver) but many other changes are completely new.
One thing that is clear is that the changes are very extensive indeed, both in terms of length and effect, and whether you are an Employer or Contractor or an Engineer or another consultant, it is essential that you are fully aware of these changes when the final versions of the new contracts are issued this year.
In due course we will be releasing more detailed commentaries on the ‘new’ Yellow Book and the other forms which are due for release this year as well as conducting workshops on the use of the new forms. If you are not already on our mailing list and wish to be informed of these, please contact Matthew Smith (matthew.smith@klgates.com) or Rich Paciaroni (richard.paciaroni@klgates.com).
By Camilla de Moraes, K&L Gates, London
The English courts have recently considered a number of cases involving the FIDIC suite of contracts (see here, here, and here for our previous blog posts). The most recent case of J Murphy & Sons Ltd v Beckton Energy Ltd [2016] EWHC 607 (TCC)arises out of a contract based on 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 (FIDIC Yellow Book) with amendments.
The court was required to consider the relationship between two clauses in the Contract, namely Sub-Clause 2.5 (Employer’s Claims) and Sub-Clause 8.7 (Delay Damages and Bonus) with reference also to Sub-Clause 3.5 (Determinations) and 4.2 (Performance Security). The issue in dispute was whether determination by the Engineer of the contractor’s liability for liquidated damages was a pre-requisite to recovery of liquidated damages by the Employer. The court held that the clause entitling the Employer to liquidated damages operated outside of the regime in Sub-Clause 2.5 and therefore the Engineer’s determination was not a pre-requisite to the Employer’s entitlement. This case also confirms the traditionally held view that obtaining injunctive relief preventing a beneficiary from calling on a performance bond will rarely be possible.
By Mike R. Stewart, Mary E. Lindsay, and Nita Mistry, K&L Gates, London
A Privy Council case last year provided some important guidance on the provisions in the FIDIC Red Book in relation to Employer’s financial arrangements and claims. Whatever your perspective might be, when negotiating or managing a contract based on the FIDIC Books, employers and contractors should be aware of the Privy Council’s findings in NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago) [2015] UKPC 37.
The Contract
National Insurance Property Development Company Ltd (Trinidad and Tobago), the Employer, employed NH International (Caribbean) Ltd, the Contractor, to construct a hospital in Tobago under a contract in the form of the FIDIC Red Book.
On 2 November 2006, the Contractor terminated the contract pursuant to Clause 16.2. The Employer did not agree the termination was valid but the parties proceeded as if the contract had been terminated. A number of issues arose during the Engineer’s assessment of the work to the date of termination and these matters, including the validity of the termination, were referred to arbitration.
The arbitrator’s decisions in relation to Clauses 2.4 and 2.5 and Clause 16.1 were later appealed first to the High Court and the Court of Appeal in Tobago and then to the Privy Council.
By Alexander Brightman, K&L Gates, Doha
Introduction
Although “freedom of contract” is a concept that is recognised in both the common law and civil law jurisdictions, the codified and prescriptive nature of a civil law system means that the relevant provisions of the Civil Code may even be implied into robustly drafted contracts, including standard forms. As set out below, such implied provisions could have the undesirable effect of delaying termination whilst a court order is obtained or exposing the terminating party to a claim for breach of contract (and compensation) for unlawful termination. In this article, I will be discussing suspension and termination rights under the FIDIC Contract (Red and Yellow Books), before examining the position under the Qatar Civil Code. In a follow-up blog post, I will look at suspension and termination under the UAE Civil Code.
By Mike R. Stewart and Mary E. Lindsay, K&L Gates, London
We wrote recently on the case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC). The case provided welcome clarity on the interpretation of Sub-Clauses 4.12 (Unforeseeable Physical Conditions) and 20.1 (Contractor’s claims) and Clause 15 (Termination). The matter was appealed and dismissed unanimously in Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2015] EWCA Civ 712 (http://www.bailii.org/ew/cases/EWCA/Civ/2015/712.html).
The dispute arose out of the design and construction by Obrascon Huarte Lain SA of a road and tunnel under the runway of Gibraltar airport. The contract was an amended form of 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; the Yellow Book.
In the first instance case, Mr Justice Akenhead was required to consider whether the employer was entitled to terminate.
In addition, the judgment clarified that, under Sub-Clause 20.1 of the FIDIC Conditions (Contractor’s Claims), time does not start running for the Contractor to give notice until the date on which he is aware (or should have been aware) of the delay resulting from a particular event or circumstance. The court only considered Sub-Clause 20.1 in relation to the extension of time, but the same principle is expected to apply to claims for additional payment made pursuant to the same provision.
The contractor appealed on the grounds that the court had incorrectly found that contamination encountered was foreseeable, failed to find that documents provided by the engineer constituted variations and failed to find that the employer had invalidly terminated the contract. The contractor’s appeal against Mr Justice Akenhead’s decision was unanimously dismissed by the Court of Appeal. The appeal judgment provides contractors with some helpful explanation in respect of each of these grounds of appeal.
(i) What would constitute unforeseeable physical conditions under Clauses 1.1.6.8 and 4.12?
In this respect, the Court of Appeal was reluctant to overturn findings of fact made at the first instance, particularly in the case of appeals from a specialist court such as the English Technology and Construction Court (the TCC).
However, the Court of Appeal did note that Mr Justice Akenhead had “held that an experienced contractor would make its own assessment of all available data. In that respect the judge was plainly right. Clauses 1.1 and 4.12 of the FIDIC conditions require the contractor at tender stage to make its own independent assessment of the available information. The contractor must draw upon its own expertise and its experience of previous civil engineering projects. The contractor must make a reasonable assessment of the physical conditions which it may encounter. The contractor cannot simply accept someone else’s interpretation of the data and say that is all that was foreseeable.”
(ii) Had the Engineer issued instructions which varied the Works?
Again, on some points, the Court of Appeal was reluctant to interfere in the findings of the TCC.
The Court of Appeal found that the documents referred to it did not amount to instructions to vary the contract. They were either matters which were the contractor’s obligations in any case, concessions by the employer which could be withdrawn and were not contractual or matters which the contractor had not, in fact, acted upon.
The analysis here (at paragraphs 101 to 112) of the judgment gives some indication of the Court’s interpretation of a variation instruction.
(iii) What would give rise to a failure to proceed with the works under Clause 8 and so justify termination pursuant to Clause 15.2?
The first instance court had summarised the relevant legal principles. These were not challenged but the contractor appealed the court’s application of the principles.
The Court of Appeal first addressed the contractor’s claim that it was undertaking a re-design of the works with which the employer and contractor had elected. However, the Court of Appeal found “it is clear that neither GoG nor the Engineer made an election which committed them to adopting the re-design and rejecting the original design of the tunnel. The Engineer made it plain that the original design was perfectly satisfactory and capable of being constructed without any risk to health or safety. The Engineer was simply considering the re-design as a modification put forward by OHL”.
In addition, when the engineer considered the contractor’s design under Clause 5.2, he was considering whether the design was technically acceptable and whether, if the design was implemented, the completed works would accord with the contract. If the re-design is satisfactory in all those respects, it is not for the Engineer to reject the design because he thinks it will take too long to build as the contractor claimed.
The Court of Appeal then considered termination under Clauses 15.2(b) and 15.2(c)(i) and the obligation under Clause 8 of the FIDIC Conditions to “proceed with the works with due expedition and without delay”. The Court decided that the obligation under Clause 8 is not directed to every task on the contractor’s to-do list. Rather it is directed to activities which “are or may become critical”.
The Court of Appeal then considered whether there was a “reasonable excuse”, within the meaning of clause 15.2(c), for the contractor’s failure to proceed with the works. On examination of the facts, it found there was no reasonable excuse.
As we have said, the appeal was unanimously rejected and agreed that the employer had validly terminated the contract. The decision provides helpful clarity and reasoning to understand the FIDIC Conditions and should, combined with the first instance judgment, provide some welcome guidance in the areas considered.
By Mike R. Stewart and Camilla A. de Moraes, K&L Gates, London
Case law on the FIDIC form of contract has to-date been scarce, particularly in respect of Sub-Clause 20.1.
The recent case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar [2014] EWHC 1028 (TCC) gives an interesting judicial insight into the interpretation of Sub-Clause 20.1 as well as Sub-Clauses 4.12 (Unforeseeable Physical Conditions) and 15 (Termination).
The case was brought by the Contractor, Obrascon Huarte Lain (OHL), who was engaged to undertake the design and construction of a road and tunnel under the runway of Gibraltar airport. Subject to some minor amendments, the contract was based on the FIDIC Yellow Book.
The main issue for the court to determine related to the validity of the termination of the contract by the Employer, the Government of Gibraltar. The court also considered the Contractor’s compliance with Sub-Clause 20.1 in respect of extension of time claims brought for the discovery of rock and exceptionally adverse weather (pursuant to Sub-Clause 4.12).
Sub-Clause 20.1
Sub-Clause 20.1 must be complied with where the Contractor “considers himself to be entitled to any extension of the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract…”
The requirement is that the Contractor must notify the engineer, describing the event or circumstance giving rise to the claim “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.” [emphasis added]
If the Contractor fails to give notice of a claim within the 28-day period, he shall not be entitled to an EOT or any additional payment and the Employer shall have no liability in respect of such claim.
The 28-day period referred to within Sub-Clause 20.1 does not run from the occurrence of the event or circumstance giving rise to the claim. Instead, it runs from when the Contractor “became aware, or should have become aware, of the event or circumstance” giving rise to the claim.
Less clear is whether the 28-day period starts running when the Contractor is aware (or is deemed to be aware) of (i) the event or circumstance or (ii) the fact that the event or circumstance is to have time and/or cost consequences such that he is entitled to an EOT or additional payment.
In his judgement, Mr Justice Akenhead saw no reason why Clause 20.1 should be construed strictly against the Contractor, especially given the serious consequences of such an approach, namely that the Contractor would lose entitlement to what otherwise might be a good claim against the Employer.
Mr Justice Akenhead, in reaching his decision, made reference to Sub-Clause 8.4 of the FIDIC conditions, which sets out the circumstances in which the Contractor is entitled to an extension of time. Sub-Clause 8.4 states that:
“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…” [emphasis added]
The judge placed particular emphasis on the words identified in bold in the paragraph above. He stated that the entitlement to an extension clearly arises either when it is clear that there will be a delay (a prospective delay) or when the delay has at least started to be incurred (a retrospective delay). From this, he concluded that notice does not have to be given until there actually is a delay.
Whilst of course the Contractor can give notice when it reasonably believes that it will be delayed, it is not required to do so. Sub-Clause 8.4 grants the Contractor the choice by virtue of the word “or” between “is” and “will be.” If the Contractor was required to give notice on the earlier date, the wording of Sub-Clause 8.4 would have read “is or will be delayed whichever is the earliest” [emphasis added].
Further, the judge held that whilst there is no particular form of notice required pursuant to Sub-Clause 20.1, it must be recognisable as a “claim”. In this case, OHL had tried to rely on a monthly progress report which stated that “The adverse weather condition (rain) have [sic] affected the works” to constitute the requisite notice for an extension of time. In the judge’s view, this was “clearly nowhere near a notice under Clause 20.1.”
Mr Justice Akenhead confirmed that the onus is on the Employer to establish that a notice is not given in time. In any event, in this particular case, OHL failed to give notice of the exceptionally adverse weather within the 28-day period and, therefore, was only entitled to a one-day extension to the Time for Completion.
Sub-Clause 4.12 (Unforeseeable Physical Conditions)
The court, in determining whether OHL had encountered unforeseeable physical conditions, was required to consider the ground conditions that were reasonably foreseeable by an experienced Contractor at the date of the submission of the tender. OHL had been provided with site data, and had been told to allow for a substantial volume of contaminated material, but had not done so.
The court held that OHL should have carried out “some intelligent assessment and analysis” of why the site was contaminated and what the real risk was of encountering more contaminated material than had been envisaged at the tender stage. OHL had failed to do so and, therefore, its claims were rejected.
Sub-Clause 15 (Termination)
The court also had to consider whether the Employer had lawfully terminated the contract with OHL. Sub-Clause 15 provides that the Employer is entitled to terminate the contract if the Contractor (having been given notice) does not rectify a failure to carry out any obligation under the contract. The court held that Sub-Clause 15 is generally to be construed as permitting termination for significant or substantial breaches, rather than trivial or insignificant ones, but rejected OHL’s argument that the breach relied upon must be equivalent to a repudiatory breach of contract.
The court ultimately found in the Employer’s favour with regards to the lawfulness of the termination. Amongst other things, this was on the basis that OHL failed to progress the Works with due expedition, thereby breaching Clause 8.1 of the Contract. This allowed the Employer to terminate under 15.2(c) and recover all costs associated with the termination and completion costs, insofar as the same exceeded OHL’s original contract price. The award is likely to be the largest ever awarded to the Government of Gibraltar and will, therefore, have significant economic consequences, not least that it should be able to finalise the works commenced by OHL and have a working tunnel under the runway.
Conclusion
This recent case provides welcome clarity with respect to a number of matters.
Most importantly it highlights that, under Sub-Clause 20.1 of the FIDIC conditions, the clock does not start running for the Contractor until the date on which he is aware (or should have been aware) of the delay resulting from a particular event or circumstance. Although the court only considered Sub-Clause 20.1 in respect of an extension of time, the same principle is expected to apply to claims for additional payment made pursuant to this provision.
Claims made pursuant to Sub-Clause 20.1 must be identifiable as claims, with a description of the event or circumstance relied on, and must state that the notice is intended to notify a claim for an extension of time or additional payment under the contract. A passing reference to a particular event will not, on its own, be sufficient. However, it is important to note that whilst this judgment is likely to be viewed as positive for Contractors, it is certainly not carte blanche for the Contractor to disregard the notice provisions all together. He still has to comply with the 28-day period; it simply starts a little later.
On 15 May 2014, K&L Gates presented an interactive workshop in Doha based around a real-life construction scenario to a group of owners, developers, contractors and professional consultants involved in construction in Qatar and the GCC.
Topics covered included:
To download a copy of the presentation, click here.
For more information, please contact Matthew Walker.
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