The Privy Council’s recent judgment in NH International (Caribbean) Limited v National Insurance Property Development Company Limited (Trinidad and Tobago)[1] provides a rare example of a common law court interpreting specific clauses in a FIDIC[2] construction contract. The judgment underlines two risks to an Employer of contracting under an unamended FIDIC standard form contract: first, the risk of suspension and termination by the Contractor following a failure by the Employer to provide detailed information about its financial arrangements upon request of a Contractor; and second, the risk of forfeiting a right to counter-claim or set-off following a failure by the Employer to promptly notify the Contractor of such counter-claim or set-off in a sufficiently detailed manner.
Facts
In 2003, National Insurance Property Development Company Ltd (“NIPDEC”) engaged NH International (Caribbean) Ltd (“NHIC”) to construct a new hospital in Tobago, pursuant to a contract subject to the FIDIC General Conditions of Contract for Construction, First Edition 1999 (the “FIDIC Red Book”). Some disputes arose among the parties, and NHIC suspended work in September 2005 and sought to terminate the contract in November 2006. The dispute proceeded to arbitration, and subsequently through the High Court and the Court of Appeal of Trinidad and Tobago to the Privy Council as the parties appealed two of the five arbitration awards.
Under Sub-Clause 2.4 of the FIDIC Red Book[3], the Employer shall submit, within 28 days after receiving any request from the Contractor, “reasonable evidence that financial arrangements have been made and are being maintained to pay” the sums due under the contract. Sub-Clause 16.1 of the FIDIC Red Book[4] gives the Contractor a right to suspend work (or reduce the rate of work), by giving 21 days’ notice, in the event of the Employer’s failure to provide such reasonable evidence. Sub-Clause 16.2 of the FIDIC Red Book[5] gives the Contractor a right to terminate the contract if it has not received such reasonable evidence within 42 days of exercising its right of suspension for such failure.
Sub-Clause 2.5 of the FIDIC Red Book[6] provides that if the Employer considers itself to be entitled to “any payment under any clause of these Conditions or otherwise in connection with the Contract,” it shall give notice and particulars to the Contractor “as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim.” Sub-Clause 2.5 of the FIDIC Red Book[7] further provides that the particulars of the Employer’s claim shall include the Clause or other basis of its claim and substantiation of the amount claimed.
On 3 September 2004, NHIC sent a request to NIPDEC for reasonable evidence of financial arrangements under Sub-Clause 2.4, and NIPDEC replied on 20 December 2004, stating that the Cabinet had approved additional funding for the project in the amount of $59.1 million. On 28 April 2005, NHIC sent another request to NIPDEC under Sub-Clause 2.4, to which the Permanent Secretary of the Project Administration Unit of the Ministry of Health (the “Ministry”) replied, stating that it advises “without prejudice” that funds are available to meet the estimated final cost ($286,992,070) for the project. NHIC wrote again on 8 July 2005, expressing concern about the phrase “without prejudice” and asking whether the Cabinet had approved the sums due under the contract, to which NIPDEC did not respond. NHIC subsequently suspended work on the project on 23 September 2005 (having already reduced its rate of work on 23 June 2005). More than a year later on 19 October 2006, the new Permanent Secretary of the Ministry stated in a letter dated 6 October 2006 to NHIC that the project is “of the highest priority” and that the current estimate for the work was $224,129,801.99, and such amount is available for disbursement to NIPDEC for transfer to NHIC or direct payment to NHIC. The letter further stated that the Government “stands fully behind project…and will meet the contractual financial requirements for completion of the project.” On 27 October 2006, NHIC wrote to NIPDEC asking if the Cabinet had approved the funds. Having received no such confirmation, NHIC terminated the contract on 3 November 2006.
First Issue: Termination
The first issue on appeal was whether NHIC had validly terminated the agreement on 3 November 2006. This issue turned on the question of whether NIPDEC had given to NHIC reasonable evidence of it having made and maintained financial arrangements to pay the sums mentioned in the letters. The arbitrator decided that NIPDEC did not give such reasonable evidence, as merely stating that the Employer is able to pay a sum is not sufficient, but the Employer must show evidence of “positive steps” it took to make “financial arrangements” to pay the sums due. Thus, the arbitrator concluded that NHIC was entitled to suspend work on 23 September 2005 and subsequently terminate the agreement on 3 November 2006.
Although NIPDEC presented evidence that it sought Cabinet approval after it received NHIC’s letter dated 27 October 2006 and that, already as of 3 October 2006, the evidence showed that ministerial and prime ministerial consents to the payment of money under the agreement would be approved by the Cabinet, the arbitrator rejected such evidence because NIPDEC never communicated the process of Cabinet approval to NHIC. The Privy Council agreed with the arbitrator’s conclusion and analysis and rejected the Court of Appeal’s conclusion to the contrary. The Privy Council also added that this issue is a question of fact and such decision should be deferred to the arbitrator as the parties intended contractually.
Second Issue: NIPDEC’s set-off and cross-claims
The second issue on appeal was whether the Employer was entitled to set off or counter-claim against the Contractor under Sub-Clause 2.5 of the FIDIC Red Book. The arbitrator concluded that NIPDEC could set off or raise counter-claims against NHIC under Sub-Clause 2.5, as the provision only makes an exception of amounts certified in a Payment Certificate and would enable the Employer to raise any other claims that are not excluded by the provision, as “clear words are required to exclude common law rights of set-off and/or abatement.” Such arbitrator’s conclusion was upheld by both the High Court and the Court of Appeal of Trinidad and Tobago.
The Privy Council disagreed and stated that the Employer’s right to set-off or counter-claim is still subject to the requirement of giving notice to the other party “as soon as practicable.” Although the Privy Council recognised that the wording in Sub-Clause 2.5, “any payment under any clause of these Conditions or otherwise in connection with the Contract,” covers a broad range of potential claims by the Employer against the Contractor, the Employer must raise such claim “promptly and in a particularised form.” If the Employer fails to meet the notice requirements for a claim under Sub-Clause 2.5, the “back door of set-off or cross-claims is firmly shut.”
The Privy Council found support for its conclusions in the judgment of Mellowes Archital Ltd v Bell Products Ltd (1997) 58 Con LR 22, but also noted with reference to such judgment that the requirements of Sub-Clause 2.5 do not preclude the Employer from raising an abatement claim against the Contractor, i.e. that the work for which the Contractor seeks payment was of such poor quality that it does not justify payment, or the work was carried in a defective manner such that it is worth significantly less than claimed by the Contractor. However, the sums not notified in accordance with Sub-Clause 2.5 could not be characterised as abatement in this case. The Privy Council remitted the relevant sums to the arbitrator for final determination.
Recommendations
To avoid disputes over requests for financial information and the adequacy of such information, we recommend the Employer in FIDIC Red, Yellow and Silver Book contracts delete the FIDIC language in Sub-Clause 2.4 requiring such information and the related rights of suspension and termination in Sub-Clauses 16.1 and 16.2, respectively. Instead, the parties should address this issue at the negotiation stage by agreeing precisely the required evidence of financial arrangements and stating this in the contract. In project financed construction contracts, we recommend that the Employer agree to provide scans of the commitment and signature pages of their loan agreements. Contractors should take necessary confidence from the provision of such evidence.
With respect to claims and counter-claims, the Employer has two options: properly and diligently administer its contract to ensure that it makes all claims “as soon as practicable” with sufficient particulars as required by Sub-Clause 2.5; or replace the final sentence of Sub-Clause 2.5 - “the Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor in accordance with this Sub-Clause” – with a right to deduct amounts from the Contract Price and Payment Certificates along with clarification that Sub-Clause 2.5 does not affect the Employer’s common law rights of set off.
[1] NH International (Caribbean) Limited v National Insurance Property Development Company Limited (Trinidad and Tobago) [2015] UKPC 37.
[2] FIDIC is the acronym for "Fédération Internationale Des Ingénieurs-Conseils", or International Federation of Consulting Engineers.
[3] Sub-Clause 2.4 of the FIDIC Yellow and Silver Books contains the same requirement.
[4] Sub-Clause 16.1 of the FIDIC Yellow and Silver Books gives the same suspension right.
[5] Sub-Clause 16.2 of the FIDIC Yellow and Silver Books gives the same termination right.
[6] Sub-Clause 2.5 of the FIDIC Yellow and Silver Books makes the same provision.
[7] Sub-Clause 2.5 of the FIDIC Yellow and Silver Books makes the same provision.
