In this edition we report on two decisions regarding the FIDIC forms of contract. These cases provide helpful guidance on important aspects of the forms and are particularly helpful because of the limited occasions on which the common law Courts have the opportunity to provide guidance on these widely used forms of contract.
Can A Contractor Under FIDIC Plough On Without Notifying Its Employer Of Delay Events?
Recently, Mr Justice Akenhead in the TCC was asked to determine the time period within which a contractor may give notice of a delaying event under a FIDIC contract.
The Government of Gibraltar appointed a contractor under the 1999 FIDIC Conditions of Contract for Plant and Design-Build, better known as the Yellow Book, to design and construct a road and a tunnel under Gibraltar Airport’s runway. The two-year project was only a quarter completed after 30 months.
As a result of the delay, the Government sent to the contractor a notice to correct, as provided for in the Yellow Book. This informed the contractor of its breaches of contract, including its obligation to proceed with due expedition and without delay, and the steps and timeframe necessary to remedy the breaches. The Government also warned the contractor that failure to remedy would entitle the Government to terminate the contract. Around two months later, the Government notified the contractor that it was terminating the contract, citing the contractor’s demonstration of an intention not to continue to perform the contract and its failure to comply with the notices and proceed diligently with the works.
The contractor argued that the Government had wrongfully terminated the contract and claimed extensions of time and additional payment under the contract due to adverse weather and unforeseen physical conditions, such as the unexpected levels of rock and contamination encountered at the site.
Clause 8.4 of the Yellow Book sets out events in relation to which a contractor will be entitled to claim for an extension of time. This is subject to clause 20.1 which provides:
“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 [giving rise to the claim]”.
The court considered that the contractor had failed to satisfy clause 20.1 which constituted a condition precedent requiring the timely giving of notice. One aspect of this determination was that the contractor’s notice fell short of the Yellow Book’s notice requirements. These are not contractually prescribed but the judge held the notice had to be in writing, describe the event relied on, notify a claim for an extension and be recognisable as a claim. In this case, the contractor had merely submitted monthly weather reports, this was considered inadequate.
The contractor’s notice in relation to the unexpected levels of rock was considered valid. In arriving at this conclusion the court was required to consider whether the 28-day window in clause 20.1 commenced when a contractor realises the event will lead to delay or when the delay starts to be incurred. The judge construed the clause broadly and held that because invalidating a party’s contractual right to a claim is serious, provisions ostensibly doing this should be construed strictly against the employer. On the specific wording, an extension of time can therefore be claimed either when it is clear there will be delay as a result of a particular event (prospective delay) or when that event has in fact started delay to be incurred (retrospective delay). This is because clause 20.1 does not speak of “the earlier of 28 days after the Contractor became aware, or should have become aware…”.
This ruling means a contractor may notify at either point. As a result an employer must either change the drafting in clause 20.1 or to make sure they armed with sufficient evidence to prove that the notice was sent outside the 28-day period, as, for example, the Government was in this case in relation to the adverse weather claim. Whilst this broad interpretation was limited by the judge to claims for extensions of time, contractors may well try to apply this reading of the clause when claiming for additional costs.
The unamended forms of the FIDIC Red, Pink, Silver and Gold Books contain the same wording as clauses 8.1 and 20.1 in the Yellow Book and so it is likely that the clause construction adopted in this judgment will be put forward by parties in similar situations.
A Crystal Clear Dispute Resolution Provision
Fresh from its decision in the Gibraltar Airport case, the TCC also tackled the effect of the FIDIC dispute resolution provisions in Peterborough City Council v Enterprise Managed Services Ltd EWHC 3193 (TCC).
The Council engaged EMS under the FIDIC Conditions of Contract for Design-Build and Turnkey, often referred to as the Silver Book, to design, supply, install and commission a solar energy plant on the roof of a Council property. The plant was to generate sufficient electricity for the Council to benefit from the higher tariff payable under a government scheme. Clause 20.2 of the Silver Book states that “disputes shall be adjudicated by a DAB (Dispute Adjudication Board) that has been jointly appointed by the Parties”. The contract also incorporated FIDIC’s standard adjudication agreement. Clause 20.8 allows a party not wishing to resolve the dispute by adjudication to refer the dispute directly to court and clauses 20.4 to 20.7 describe the procedure for giving a notice of dissatisfaction with a DAB’s decision. The Silver (and Yellow) Books allow for an ad hoc DAB (appointed after a dispute arises), whereas the other FIDIC main contract commonly encountered, the Red Book, allows for a standing DAB to be named in the contract which, it is intended, is appointed at the outset for the duration of the project.
As EMS’s solar energy plant failed to achieve the required output of electricity, the Council sought to gain a price reduction that it could recover as a debt. EMS disagreed and the Council immediately referred the matter to court. EMS claimed that the Council should have referred the dispute to a DAB first, pursuant to clause 20.8. The Council claimed that clause 20.8 offered a necessary opt-out because if an unsuccessful party refused to comply with the DAB’s decision, the only remedy for a successful party would be to refer the dispute caused by the refusal to adjudicate which would result in a perpetual state of non-compliance with DAB decisions and no adequate remedy. Moreover, the Council argued that adjudication was unsuitable because the issues in the dispute were complex and extensive.
Mr Justice Edwards-Stuart of the TCC found that clause 20.8 only applied where the contract provided for a standing DAB, rather than an ad hoc DAB. Therefore, it did not give the Council a unilateral right to opt out of adjudication. Further, perpetual non-compliance could be addressed by the court ordering specific performance of the obligation to comply with a decision of the DAB. Finally, the effect of incorporating the adjudication agreement was that it created relevant and necessary terms of the contract with an adjudicator and even though it did not specify fees, there was an implied contract that the adjudicator would be entitled to reasonable fees and expenses.
The judge stayed the Council’s action on the basis of the established presumption in favour of leaving parties to resolve their disputes as provided for in their contracts. The parties in this case were aware of the complexity of potential disputes and their contractual agreement to refer such matters to adjudication should therefore be enforced by the court.
Both of these decisions serve to emphasise the importance of obtaining a full understanding of contractual obligations relating to process in addition to substance and implementing a proactive project management policy.
For further information, please contact:
Timothy Hill, Partner, Hogan Lovells
Damon So, Partner, Hogan Lovells
Terence Wong, Partner, Hogan Lovells
Alex Wong, Partner, Hogan Lovells
Paul Teo, Partner, Hogan Lovells
Joseph Kim, Partner, Hogan Lovells
Patric McGonigal, Partner, Hogan Lovells
Mark Crossley, Hogan Lovells