Termination and set-off risks for employers under the FIDIC Red Book
This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
The recent judgment of the Privy Council in NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago) [2015] UKPC 37 (6 August 2015) serves as a timely reminder to employers in common law jurisdictions of the risks in not amending and poorly administering the termination, suspension and set-off provisions in the FIDIC Red Book (1999), as well as the Yellow and Silver Books.
This judgment concerned a consideration of two appeals on points of law from two of five arbitration awards in relation to the construction of a hospital in Trinidad and Tobago.
Was the contractor entitled to terminate the contract?
The contractor requested financial information from the employer under Sub-Clause 2.4 [Employer’s Financial Arrangements], which provides that the employer shall submit within 28 days of the contractor’s request reasonable evidence that financial arrangements have been made to enable the employer to pay the contract price. The Privy Council upheld the arbitrator's decision that this was not submitted by the employer and that the contractor was subsequently entitled to have suspended work under Sub-Clause 16.1 [Contractor's Entitlement to Suspend Work] and validly terminated the contract in accordance with Sub-Clause 16.2 [Termination by Contractor].
In this case, the evidence submitted by the employer fell short of this requirement because it did not contain Cabinet approval for payment of the sum due under the contract or confirm that Cabinet approval was being sought, which was the normal procedure in these circumstances for money to be paid, but rather only contained a confirmation that funds were available on a "without prejudice" basis followed by assurances that the Government was committed to the project.
The employer's set-offs and counterclaims
The arbitrator also addressed the financial consequences of finding that the contract had been validly terminated by the contractor, which included counterclaims from the employer. The Privy Council disagreed with the arbitrator's findings and held that Sub-Clause 2.5 [Employer's Claims] clearly prohibited the employer from making any claims, counterclaims or set-offs against the contractor outside of the contractual framework. To be successful, the employer's claims must have been made in compliance with this sub-clause, namely by prior notice being given to the contractor "as soon as practicable" and in a particularised form. However, the Privy Council held that operation of Sub-Clause 2.5 [Employer's Claims] did not prevent the employer from raising an abatement argument, for example "that the work for which the contractor is seeking a payment was so poorly carried out that it does not justify any payment, or that it was defectively carried out so that it is worth significantly less than the contractor is claiming".
Recommendations
This judgment from the Privy Council highlights two significant risks to employers of contracting on these FIDIC standard forms without amendment:
- the obligation to provide detailed financial information promptly to the contractor; and
- promptly notifying the contractor of any intention to set off or otherwise claim under the contract.
Employers can mitigate these risks during negotiations with contractors by seeking to make and agree the following amendments through the particular conditions:
- deleting Sub-Clause 2.4 [Employer's Financial Arrangements];
- deleting the final paragraph in Sub-Clause 2.5 [Employer’s Claims] and replacing it with a comparable right to deduct amounts from the contract price and payment certificates and a new right to claim amounts from the contractor as a debt, without prejudice to the employer’s common law rights;
- deleting Sub-Clause 16.1 [Contractor’s Entitlement to Suspend Work] for projects in applicable jurisdictions, leaving payment disputes to be resolved in accordance with the contract's dispute resolution procedures, or at the very least, deleting the contractor’s right to suspend work on account of a breach by the employer of Sub-Clause 2.4 [Employer’s Financial Arrangements]; and
- deleting Sub-Clause 16.2(a) [Termination by Contractor].
Otherwise, employers (or their engineers) must manage these risks through diligent and timely contract administration.
