Interpreting time bars, notices and termination provisions in FIDIC
Eversheds Sutherland (International) LLP
United Kingdom February 12 2016
Parties to the FIDIC form of contract typically resolve disputes by reference to confidential dispute adjudication board or arbitration proceedings; seldom do we see reported decisions on FIDIC cases. However, 2014 and 2015 gave us a rare and helpful glimpse as to how certain FIDIC provisions will be enforced by the courts and in this paper we will consider the interpretation of the time bar, notice and termination provisions of the FIDIC form of contract in light of this case law and ask how this impacts on contract drafting and the conduct of the parties during the project.
The FIDIC forms
The 'Fédération Internationale des Ingénieurs-Conseils', translated as International Federation of Consulting Engineers and commonly known as FIDIC, was founded in 1913. It is a non-profit organisation and has as its strategic objective to 'globally represent the consulting engineering industry by publishing and promoting best practice tools, guidelines and procedures'. FIDIC published its first standard form of contract in 1957 for civil engineering works on international projects. Since that time, the FIDIC suite of contracts has grown dramatically in both number and colour and has become one of the most commonly used standard form contracts for international construction projects, being officially translated in at least 12 languages.
The 1999 suite of contracts comprises three books for major works and one for minor works:
Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (the "Red Book");
Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed by the Contractor (the "Yellow Book");
Conditions of Contract for Engineering Procurement and Construction/Turnkey Projects (the "Silver Book"); and
Short Form of Contract (the "Green Book").
Since 1999, FIDIC has introduced a number of additional standard form contracts:
Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer, for bank-financed projects only (the "Pink Book");
Conditions of Contract for Design, Build and Operate Projects (the "Gold Book");
Dredgers Contract, based on the Short Form of Contract (the "Blue Book");
Consultant Model Agreements, for appointing a professional consultant (the "White Book");
Conditions of Subcontract for Construction for Building and Engineering Works Designed by the Employer, First Edition 2011 (the 2011 Sub-contract), primarily intended for use with the Red Book or the Pink Book; and
FIDIC Model Representative Agreement, First Edition, 2013, intended for use where a professional consultant is appointing a local representative, outside of that professional consultant's usual (or licensed) geographical operational area (the "Purple Book").
Each book provides a structured and largely logical form of contract that can be tailored to suit any project. As the names suggest, each 'book' serves a different purpose and has been drawn up with a particular type of project in mind. As a starting point then, it is vital to ensure that the appropriate 'book' is adopted for the project at hand. For example, if one considers a project where design is complete before construction, the Employer carries the design risk, and certainty of final costs is not so important one would use the Red Book. Conversely, if the Contractor is to design and carry the design risk, and some certainty of final costs is required, then one would use the Yellow Book. Once the particular 'book' is selected of course, one can amend it to suit any project specific requirements.
With this background in mind, we will consider three issues which have arisen in recent case law and how this impacts upon (if at all) our approach to particular terms of the FIDIC standard forms. Let us consider:
time bars and extension of time;
termination; and
notices.
Time bars and extensions of time
FIDIC standard approach
Whilst the FIDIC approach to contracting places emphasis on risk allocation, circumstances or unforeseen events can, and do, arise during the life of a project that have the potential to cost both employers and contractors additional time and money.
FIDIC recognises this and, in certain circumstances, provides a means of allowing contractors to claim additional time and where applicable, additional payment. Should a contractor wish to claim for an extension of time and/or additional payment, it must comply with Clause 20.1 which is a condition precedent included in a number of standard form FIDIC contracts. Clause 20.1 specifies a procedure which must be followed by a contractor wanting to make a claim and reads as follows:
"20.1 If 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 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…" (emphasis added)
There is general consensus that, as a condition precedent, this clause is a strict time bar in favour of the employer, providing an easy defence to an extension of time claim. If the contractor failed to comply with the time limits imposed, its right to an extension of time and/or money was lost. The case of Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar[1], provides useful guidance on how this clause, and the closely associated clause 8.4, is to be interpreted.
Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar ("Obrascon")
One must look at this case in more detail to understand its implications. On 21 November 2008, Obrascon Huarte Lain SA ("OHL") contracted with the Government of Gibraltar ("GoG") to design and construct a road around the perimeter of Gibraltar Airport including a tunnel under the east end of the runway. The contract incorporated the FIDIC Yellow Book Conditions, with minor amendment. The Commencement Date under the contract was 1 December 2008 and the Time to Completion was 24 months (ie 30 November 2010). The project fell behind schedule and in December 2010/January 2011, OHL stopped work and proposed to re-design the tunnel because of excessive and unforeseeable contamination. In July 2011, GoG served notice terminating the contract, essentially because of OHL's lack of progress and non-compliance with a notice to correct. OHL maintained that GoG had thereby repudiated the contract. Issues arose as to who was responsible (both legally and factually) and at risk for the state of affairs which led to the termination. The case came before the Court of Gibraltar before being transferred, by agreement of the parties, to the Technology and Construction Court of England and Wales. The court at first instance found in favour of GoG for several reasons. Mr Justice Akenhead's ruling at first instance was appealed to the Court of Appeal and, in a decision handed down on 9 July 2015, the Court of Appeal unanimously upheld the decision at first instance[2].
Analysis of clause 20.1 and clause 8.4
On the wording of clause 20.1, Mr Justice Akenhead accepted that this clause was a condition precedent but in order for a contractor to bring a claim, 'the "event or circumstance giving rise to the claim" for extension must first occur and there must have been either awareness by the Contractor or the means of knowledge or awareness of that event or circumstance before the condition precedent bites'[3]. He went on to state 'I see no reason why this clause should be construed strictly against the Contractor and can see reason why it should be construed reasonably broadly, given its serious effect on what could otherwise be good claims…'[4]. In his analysis, Mr Justice Akenhead referred to clause 8.4 of the contract (which was in an unamended form) which identifies the circumstances in which an extension will be granted:
"8.4 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)[5]
Mr Justice Akenhead distinguished this wording from an hypothetical scenario where the wording might read "is or will be delayed whichever is the earliest" and found that the wording in clause 8.4 suggests that the extension of time can be claimed either when it is clear that there will be a delay or when the delay has been at least started to be incurred.
So whilst clause 20.1 is an accepted condition precedent, the courts appear to approach the question of when the condition precedent bites more broadly. The decision in Obrascondemonstrates an interpretation of the standard FIDIC extension of time clause which is favourable to contractors; the contractor may give notice of its intention to claim as soon as it becomes aware that there will be a delay but may also abstain from giving a notice until an actual delay has occurred. Arguably, this will defeat any benefit an employer may glean from being given an early warning of a prospective delay, potentially bringing 'knock on' effects for other contractors and further costs being incurred by the employer or its representatives.
To address this, and of course depending upon the nature of the project and its specific requirements, an employer may seek to amend the standard wording at clause 8.4 such that the contractor is required to notify as soon as it becomes aware that a delay will be incurred and not give the option for the contractor to wait until that delay actually happens. This of course would give greater certainty as to when delays should be notified and alleviate any uncertainty following this case.
Termination clauses
As noted above, the court in Obrascon was asked to consider who was responsible (both legally and factually) and at risk for the state of affairs which led to the termination. In view of this, Mr Justice Akenhead provided very helpful guidance as to the termination provisions at clause 15 of the Yellow Book (which is identical to the Red Book).
What does clause 15 provide?
Clause 15 provides the employer with the contractual right to terminate the contract on several grounds. GoG in Obrascon relied on a number of grounds for termination, including:
"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,
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."
Sub-clause 15.1 is also worth recording in full here. Clause 15.1 provides as follows:
"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."
Analysis of clause 15
On clause 15.1, the judgment very clearly states that this relates only to more than insignificant contractual failures by the contractor and the employer will need to establish that there has been an actual failure to comply with the contract rather than a prospective failure. Furthermore, the specified time for compliance with the clause 15.1 notice must be reasonable in all the circumstances prevailing at the time. Mr Justice Akenhead also emphasised the need for a "commercially sensible construction"[6] of this clause (and indeed clause 15.2), noting that "The parties can not [sic.] sensibly have thought (objectively) that a trivial contractual failure in itself could lead to contractual termination."[7] Whether something is trivial or significant will be fact dependant.
Additionally, the court recognised that with regard to clauses 15.1 the contractor "must as a matter of common sense…[be] given the opportunity by the Employer actually to remedy the failure of which it is given notice under Clause 15.1."[8]
As to clause 15.2(b), Obrascon confirmed that one must distinguish between an intention to continue performance and an intention to continue performance of the contractual obligation. Whilst a contractor may by words or conduct demonstrate an intention to perform, if that intention is without reference to important contractual terms then this may demonstrate an intention not to continue performance in accordance with clause 15.2(b). This, of course, would be fact dependant.
The very helpful analysis provided by Mr Justice Akenhead provides a clear overview of how the terms of clause 15 will be interpreted and one must be alive to the fact that, when considering termination, the parties must act in a "commercially sensible" way, that minor or insignificant breaches will not give rise to a right to terminate and that the employer must allow an opportunity to remedy any breach before terminating the contract. Whilst turning on the facts of a particular case, when considering an intention to perform, this must relate to an intention to continue performance of contractual obligations and not merely an intention to perform. Of course, parties to any contract are free to amended standard wording to reflect project specific requirements but the judgment in Obrascon does not create a scenario whereby amendment would be deemed necessary to address any perceived short-comings in the standard drafting arising from the judgment.
Form of notice to be given pursuant to clause 20.1
Clause 20.1 does not, of itself, prescribe the form of notice to be given in respect of an entitlement to any extension of the Time for Completion and/or any additional payment. In Obrascon, Mr Justice Akenhead provided useful guidance on the form of notice to be given under clause 20.1. The contractor's notice must be: in writing; describe the event or circumstance relied on; and identify that it is intended to notify a claim for extension and/or additional payment. If the notice fails to meet the required criteria, the contractor's claim will be invalid and can be "rejected on the basis of lack of procedural compliance" [9]. However, the onus of proving the notice is invalid or out of time falls upon the employer.
Also, it is perhaps worth noting that FIDIC has of itself recognised the gap in the notice requirements under clause 20.1 and in a more recent publication[10], has provided for a more prescriptive form of notice to be given. The use of the recommended wording would allow both parties to have a clearer understanding of what is required, and such notices could be easily identified at a later stage. Perhaps we will see FIDIC amendments to the other "books" in this regard too.
Validity of the termination notice pursuant to clause 15.1
During the case, OHL made great play of the fact that the GoG letter, which GoG considered to be its termination notice pursuant to clause 15.2, was sent to OHL's site office rather than its Madrid Head Office in accordance with clause 1.3 of the contract (which required all notices called for in the conditions of contract to be delivered to OHL's Madrid office).
On this, Mr Justice Akenhead considered issues of law and fact and observed that throughout the project, correspondence and indeed other notices under clause 15.1, had frequently been sent to OHL's site office without objection from OHL. The project manager was also based at the site office. In view of the facts, he concluded that "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."[11] With regard to case law in this area, Mr Justice Akenhead acknowledged that the courts have "been slow to regard non-compliance with certain termination formalities including service at the "wrong" address as ineffective, provided that the notice has actually been served on responsible officers of the recipient."[12] He concluded that the wording used in both clauses 1.3 and 15.2 does not give rise to any condition precedent nor does it make the giving of notice to the Madrid office a pre-condition to an effective termination. He went on "Provided that service of a written Clause 15.2 notice is actually effected on OHL personnel at a sufficiently senior level, then that would be sufficient service to be effective."[13]
One must therefore remember that, whilst on the face of it there may be a clear failure to comply with the notice provisions of a contract (as was the case in Obrascon) it does not necessarily follow that this will invalidate a notice. If, on the facts of the case, a notice has been served at an address used for correspondence during the project and personnel at sufficient seniority have received it then it is likely that service will have been effected validly.
Ineffective service giving rise to repudiation
OHL argued that the ineffective termination notice given by GoG amounted to repudiation which it accepted. Mr Justice Akenhead acknowledged that, in view of his decision that the notice of termination was valid, he did not need to consider this. Nonetheless, in obiter, 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 the facts of this case amount to repudiation."[14]
What one must take from this is that when considering whether another party has committed a repudiatory breach, one must exercise caution in electing to accept that perceived repudiation.
Cases before the court involving FIDIC are a rare occurrence; when judgments are handed down it is important that we seek to learn lessons from them and ensure that parties understand, and contract drafting reflects, case law in this area.
The case of Obrascon serves as an indicator that the courts will approach interpretation of FIDIC standard terms with commercial common sense. Negotiating parties should take time and additional care when drafting contracts at the outset of the project, to ensure that terms accurately reflect the parties intention so as to limit any unforeseen consequences giving rise to increased cost and greater time being expended. During the conduct of the contract, parties must pay careful regard to the terms of the contract, in particular the requirements of time bars and notice provisions and should exercise caution to ensure that, if terminating, all of the correct steps are taken and the grounds for doing so are valid.
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Eversheds Sutherland (International) LLP - James Pickavance
Arbitration & ADR
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