FAQs

The following FAQs are addressed below:

  • Are there ways around the condition precedent?
  • How does the employer make a claim under the FIDIC form?
  • What can an employer claim under the FIDIC Red book? What does subclause 2.5 cover?
  • In what circumstances can a contractor make a claim?
  • What happens if the contractor misses the 28-day deadline? Is subclause 20.1 a condition precedent?
  • What does the requirement in clause 4.1 that any design produced by the contractor must be 'fit for its purpose' mean?
  • Why must a contractor provide detailed progress reports?
  • Why is the clause 15.1 Notice to Correct so important?

Are there ways around the condition precedent?

Is there the possibility that a court/arbitral tribunal might decline to construe the time bar as a condition precedent, having regard to the particular circumstances of the matter before it and the impact of the applicable law?

The Scottish case of City Inn Ltd v Shepherd Construction Ltd [2007] CSOH suggests there may be. The dispute related to the construction of a hotel under a contract incorporating the JCT Standard Form (Private Edition with Quantities) 1980 as amended. The core element of the dispute was whether or not the contractor was entitled to an extension of time of 11 weeks and consequently whether or not the employer was entitled to deduct LADs. Clause 13.8 contained a time bar clause, requiring the contractor to provide details of the estimated effect of an instruction within ten days. Lord Drummond Young characterised the clause thus:

'I am of opinion that the pursuers' right to invoke clause 13.8 is properly characterized as an immunity; the defenders have a power to use that clause to claim an extension of time, and the pursuers have an immunity against that power if the defendants do not fulfil the requirements of the clause.' (para 146)

However, the Judge also felt that an immunity can be the subject of a waiver. The architect and employer have the power, at least under the JCT Standard Forms, to waive or otherwise dispense with any procedural requirements. This was what happened here. While the employer (in discussions with the contractor) and the architect (by issuing delay notices) both made it clear that the contractor was not getting an extension of time, neither gave the failure to operate the condition precedent at clause 13.8 as a reason. The purpose of clause 13.8 is to ensure that any potential delay or cost consequences arising from an instruction are dealt with immediately.

The point made by the Judge is that while clause 13.8 provides immunity, that immunity must be invoked or referred to. At a meeting between contractor and employer, the extension of time claim was discussed at length. Given the importance of clause 13.8, the Judge felt that it would be surprising if no mention was made of the clause unless the employer, or architect, had decided not to invoke it. Significantly, the Judge held that both employer and architect should be aware of all of the terms of the contract. employers and certifiers alike will need to pay close attention to their conduct in administering contracts in order to avoid the potential consequences of this decision.

In a construction context:

  • parties should take care when concluding contracts to check any time bar clauses governing claims they might make;
  • parties should appreciate the risks they then run of not making a claim (even if to maintain goodwill) unless the other party agrees to relax the requirements or clearly waives them. Of course, time bar clauses, if cautiously operated, may generate a proliferation of claims, which may test the partnering ethos of forms such as the NEC3;
  • the courts see the benefits of time bar provisions and support their operation. A tribunal might bar an entire claim for what seems like a technical reason (by which time it will usually be too late to make a new, compliant, claim); and
  • it may be that non-compliance with a specific requirement (e.g. that a notice should be 'communicated separately from other communications', as per the NEC3 form) would not be so minor that it might be ignored. Nor should claimants necessarily rely upon the other party already having the information they are required to provide.

How does the employer make a claim under the FIDIC form?

Subclause 2.5 of the FIDIC Conditions of Contract for Construction provides details as to how the employer is to make a claim. The key features of this subclause are:

  • if the employer considers him or herself entitled to either any payment or an extension of the Defects Notification period under the contract, the employer or engineer shall give notice and particulars to the contractor;
  • the notice relating to payment should be given as soon as practicable after the employer has become aware of the event or circumstance which gives rise to the claim;
  • any notice relating to the extension of the defects notification period should be given before the expiry of that period;
  • the employer must also provide substantiation including the basis of the claim and details of the relief sought;
  • once notice has been given, the engineer shall make a determination in accordance with subclause 3.5;
  • any amount payable under subclause 2.5 may be included as a deduction in the contract price and payment certificates;
  • the employer cannot make any deduction by way of set-off or any other claim unless it is in accordance with the engineer's determination; and
  • notice is not required for payments due to the employer for services under subclause 14.19 or equipment under subclause 4.20.

Subclause 2.5 is a new 'contractor-friendly' clause which is designed to prevent an employer from summarily withholding payment or unilaterally extending the defects notification period. One particularly important feature can be found in the final paragraph which specifically confirms that the employer no longer has a general right of set-off. The employer can only set-off sums once the engineer has agreed or certified any amount owing to the contractor following a claim.

The employer should remember that in accordance with subclause 14.7, he or she must pay any amount certified, even if he or she  disagrees with the engineer's decision. By subclause 14.8, were the Dispute Adjudication Board to decide that the employer had not paid the amount due, the contractor would be entitled to finance charges. Unless the employer follows the procedure laid down by this subclause, the employer cannot withhold or otherwise deduct any sums due for payment to the contractor. The notice must be in writing and delivered in accordance with the requirements of subclause 1.3. It is unclear as to whether the particulars are required to be provided at the same time as the notice is served. The subclause does not require that the particulars are provided at the same time as no time limit or frame is imposed on either.

The employer must give notice 'as soon as practicable' after becoming aware of a situation which might entitle him or her to payment. Therefore unlike subclause 20.1, where a contractor has 28 days to give notice, there is no strict time limit within which an employer must make a claim, although any notice relating to the extension of the defects notification period must of course be made before the current end of that period. In addition it is possible that the applicable law might just impose some kind of limit.

Under subclause 3.5 of the Construction and Design-Build Conditions, the engineer must first try and agree the claim. Under the EPC/Turnkey Conditions, the primary onus to agree or determine any claims lies with the employer. If either party is not satisfied with the determination made by the engineer under subclause 3.5, then the resulting dispute could be referred to the Dispute Adjudication Board under clause 20. An employer would therefore be advised not to deduct the amount to which the employer believes he or she is entitled, before any such determination of the Dispute Adjudication Board, as to do so would leave the employer liable to a claim from the contractor.

What can an employer claim under the FIDIC Red book? What does subclause 2.5 cover?

There are a number of different clauses throughout the contract which provide the employer with a right to claim payment from the contractor. These include:

  • Subclause 4.19 – Electricity, water and gas;
  • Subclause 4.20 – Employer's equipment and free-issue material;
  • Subclause 7.5 – Rejection;
  • Subclause 7.6 – Remedial work;
  • Subclause 8.1 – Commencement of works;
  • Subclause 8.6 – Rate of progress;
  • Subclause 8.7 – Delay damages;
  • Subclause 9.4 – Failure to pass tests on completion;
  • Subclause 10.2 – Taking over of parts of the works;
  • Subclause 11.3 – Extension of defects notification period;
  • Subclause 11.4 – Failure to remedy defects;
  • Subclause 13.7 – Adjustments for changes in legislation;
  • Subclause 15.3 – Valuation at date of termination;
  • Subclause 15.4 – Payment after termination;
  • Subclause 17.1 – Indemnities; and
  • Subclause 18.1 – General requirements for insurances.

In what circumstances can a contractor make a claim?

A different set of rules apply to the contractor than to the employer. Under clause 20.1, the contractor has a duty to notify the employer of an entitlement to additional time or money. The key features of subclause 20.1 are that:

  • the contractor must give notice to the engineer of time or money claims, as soon as practicable and not later than 28 days after the date on which the contractor became aware, or should have become aware, of the relevant event or circumstance;
  • any claim to time or money will be lost if there is no notice within the specified time limit;
  • supporting particulars should be served by the contractor and the contractor should also maintain such contemporary records as may be needed to substantiate claims;
  • the contractor should submit a fully particularised claim after 42 days;
  • the engineer is to respond, in principle at least, within 42 days;
  • the claim shall be an interim claim. Further interim updated claims are to be submitted monthly. A final claim is to be submitted, unless agreed otherwise, within 28 days of the end of the claim event;
  • payment certificates should reflect any sums acknowledged in respect of substantiated claims; and
  • contrary to the old FIDIC books (In the Orange book (1995), subclause 20.1 only sets a notification deadline in respect of claims for additional payment. However, similar provisions in respect of time-related claims can be found at subclause 8.6.) the notice to be served under subclause 20.1 relates to claims for an extension of time as well as claims for additional payment.

The 28-day deadline does not necessarily start on the date of the claim event itself but on the date the contractor objectively should have become aware of the event.

While it is relatively easy to identify the claim event in the case of a single event such as the issuing of engineers' instructions or the receipt of borehole tests indicating unforeseen ground conditions, when, however, the claim event is a continuous event, such as unforeseeable weather over a certain period of time, it can become extremely difficult to pinpoint the exact start of the 28-day period. The contractor also needs to remember that where the effects of a particular event are ongoing then, rather unusually, the contractor is specifically required to continue submitting notices at monthly intervals.

What happens if the contractor misses the 28-day deadline? Is subclause 20.1 a condition precedent?

Subclause 20.1 is a condition precedent and potentially provides the employer with a complete defence to any claim for time or money by the contractor not started within the required time frame.

Generally, in England and Wales, the courts will take the view that timescales in construction contracts are directory rather than mandatory, so that the contractor should not lose its right to bring its claim if such a claim is not brought within the stipulated timescale. In the case of Bremer Handelgesellschaft mbH v Vanden Avenne Izegem nv 1978] 2 Lloyd's Rep. 113, (HL) per Lord Salmon, however, the House of Lords held that a notice provision should be construed as a condition precedent, if:

  • it states the precise time within which the notice is to be served; and
  • it makes plain by express language that unless the notice is served within that time the party making the claim will lose its rights under the clause.

Subclause 20.1 plainly fulfils both these conditions as:

  • the notice of claim must be served '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', and
  • '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.'

Subclause 20.1 was thus clearly drafted as a condition precedent. However, there is always a possibility that a court/arbitral tribunal might decline to construe it as a condition precedent, having regard to the particular circumstances of the matter before it and the impact of the applicable law.

Note that the courts have generally stated their approval for condition precedents, provided they fulfil the conditions laid out in the Bremer case. In the case of Multiplex Construction v Honeywell Control Systems [2007] EWHC 447 (TCC), where Mr Justice Jackson held that:

'Contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose; such notice enables matters to be investigated while they are still current. Furthermore, such notice sometimes gives the employer the opportunity to withdraw instructions when the financial consequences become apparent.'

Judge Jackson's words were endorsed by HHJ Davies QC in the case of Steria Ltd v Sigma Wireless Communications Ltd [2008] CILL 2544 who said that:

'In my judgment an extension of time provision confers benefits on both parties; in particular it enables a contractor to recover reasonable extensions of time whilst still maintaining the contractually agreed structure of a specified time for completion (together, in the majority of cases, with the contractual certainty of agreed liquidated damages, as opposed to uncertain unliquidated damages). So far as the application of the contra proferentum rule is concerned, it seems to me that the correct question to ask is not whether the clause was put forward originally by Steria or by Sigma; the principle which applies here is that if there is genuine ambiguity as to whether or not notification is a condition precedent, then the notification should not be construed as being a condition precedent, since such a provision operates for the benefit of only one party ...'

What does the requirement in clause 4.1 that any design produced by the contractor must be 'fit for its purpose' mean?

The general rule under English jurisdictions, is that a contractor who agrees to be responsible for both design and build of a structure assumes a duty to ensure that it will be fit for its purpose as communicated to that contractor. The fitness for purpose duty is stricter than the ordinary responsibility of an architect or other consultant carrying out design where the implied obligation is one of reasonable competence to 'exercise due care, skill and diligence. This duty is absolute. In Greaves v Baynham Meikle [1975] 1 WLR 1095, Lord Denning said this of the fitness for purpose obligation:

'Now, as between the building owners and the contractors, it is plain that the owners made known to the contractors the purpose for which the building was required, so as to show that they relied on the contractors skill and judgement. It was therefore, the duty of the contractors to see that the finished work was reasonably fit for the purpose for which they knew it was required. It was not merely an obligation to use reasonable care, the contractors were obliged to ensure that the finished work was reasonably fit for the purpose.'

Further, in Viking Grain Storage v T.H. White Installations Ltd (1986) 33 BLR, Judge John Davies said:

'The virtue of an implied term of fitness for purpose is that it prescribes a relatively simple and certain standard of liability based on the 'reasonable' fitness of the finished product, irrespective of considerations of fault and of whether its unfitness derived from the quality of work or materials or design.'

Where an employer can be seen to rely on a contractor for the design, the contractor's legal responsibility is to produce (in the absence of express provision in the contract) a final work which is reasonably suitable for its purpose. Given that there is express provision in the FIDIC conditions, the absence of negligence in the design, will not therefore be a defence for the contractor.

The obligation to provide Works that are fit for their purpose will only be effective if elsewhere in the documentation the purpose of the plant has been clearly made known to the contractor. It is not enough for a contractor to assume from the Tests on Completion which may need to be carried out under clause 9 that it knows what the employer requires.

A contractor should ensure that he or she has been provided with a general description of any outputs that the employer intends to achieve, or an indication of how the employer expects the plant to perform in a given number of years.

 

Why must a contractor provide detailed progress reports?

Clause 4.21 spells out in some detail the information a contractor is required to provide.

A contractor may not be entitled to payment if the reports are not provided. Clause 14.3 notes that payment will only be made within 28 days of receipt of the application for payment and the supporting documents. The progress report makes up part of the supporting information that has to be provided with every interim application for payment.

 

Why is the clause 15.1 Notice to Correct so important?

The engineer is empowered to issue a notice requesting that the contractor remedy any default under the contract. This is a short, simple subclause which gives the engineer the right to issue a notice to the contractor requesting that it rectifies poor performance under the contract. The importance of the clause is that it is a potential pre-cursor to termination. Under subclause 1.3, the notice must be in writing. Although the giving of a notice potentially has a very significant effect, the requirement on the engineer is an optional one. He or she does not have to issue such a notice.

Nevertheless as the notice (and the failure to comply with any such notice) is one of the pre-cursors to termination, the FIDIC Guide recommends that the notice should:

  1. state that it is a notice under subclause 15.1;
  2. describe clearly the nature of the failure; and
  3. specify what constitutes a reasonable time to rectify the failure.

All 3 recommendations are sensible. The reason for including an actual reference to subclause 15.1 is to avoid disputes as to the nature of notice. For example, the engineer can issue instructions under subclause 3.3 requiring the remedying of defects or serve a notice under subclause 7.5 rejecting works carried out by the contractor. The second item adds similar clarity, while the third is already a requirement of the subclause.

The subclause refers to a failure to carry out 'any' obligation under the contract. Given the fact that minor defects by themselves would be unlikely to amount to a sufficient breach of contract to justify termination, there might be thought to be a question mark over whether the failure to remedy a minor defect will empower the employer to exercise its right to terminate under subclause 15.2. The legal principle 'de minimis non curat lex' - the law does not concern itself with trifles - applies both at common law and to most civil codes. However it is not the nature of defect itself which becomes relevant but the failure of the contractor to remedy the effect when requested to do so.

At common law the non-compliance with such a term after receipt of notice may amount to repudiation regardless of the contractual effect set-out in subclause 15.2. In the case of Hong Kong Fir Shipping Co. v Kawasaki Kisen Kaisha [1962] 2 QB 26. the charterer argued that it had had the right to terminate the charterparty on the basis that the incompetence of the engine room staff was in breach of an implied term that the ship would be seaworthy. This claim was rejected. However Sellers LJ suggested an alternative way in which the claim could have been made:

'It would be unthinkable that all the relatively trivial matters which have been held to be unseaworthiness could be regarded as conditions of the contract or conditions precedent to a charterer's liability and justify in themselves a cancellation or refusal to perform on the part of the charter. If, in the present case, the inadequacy and incompetence of the engine-room staff had been known to them, the charterers could have complained of the failure by the owners to deliver the vessel at Liverpool in accordance with clause 1 of the chaterparty ... have given the shipowners a week in which to bring the engine room staff into suitable strength and competency for the vessel's 'ordinary cargo service'. If the shipowners had refused or failed so to do, their conduct and not the unseaworthiness would have amounted to a repudiation of the charterparty and entitled the charterers to accept it and treat the contract as at an end.

This is exactly the type of situation the subclause is attempting to deal with. It is not the defect itself but the conduct in failing to remedy the defect that is important.