The recent Technology and Construction Court decision in J Murphy & Sons Ltd -v- Beckton Energy Ltd [2016] EWHC 607 (TCC) provides a useful illustration of the approach to Employer’s claims under the FIDIC Conditions under English law.

The judgment will be of particular interest to users of the FIDIC suite who adopt English law as the applicable law and will be of wider interest to practitioners involved in advising and drafting specific amendments to standard form construction contracts. Moreover, the judgment serves as a reminder of the difficulties associated with restraining calls against ‘on-demand’/performance bonds.

Background

The Employer, Beckton, entered into a contract with the Contractor, Murphy, for the design, construction, testing and commissioning of a power plant in East London. The Contract was based on the FIDIC 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”).

The parties agreed to specific amendments to Yellow Book clause 8.7, which provided for the deduction of delay damages from the next applicable payment cycle if Murphy failed to achieve various accreditation milestones and Taking-Over within prescribed periods.

In addition, the contract contained an unamended version of clause 2.5 of the FIDIC Yellow Book (which also appears in the Red Book). Clause 2.5 requires the Employer to give notice and particulars, as soon as practicable, to the Contractor and for the Engineer to proceed to agree or determine the amount, if any, which is due from the Contractor, before the Employer is entitled to set-off, make any deduction or otherwise claim against the Contractor.

Following significant delays in the progress and completion of the Works, disputes arose as to the responsibility for such delays, with Beckton seeking to deduct delay damages and Murphy seeking to obtain an extension of time and additional payment.

During the course of correspondence Beckton intimated to Murphy that it considered it was entitled to delay damages of circa £8 million. As such, Beckton gave notice of its intention to make a demand under the performance bond that was being maintained in accordance with an amended version of clause 4.2 of the Yellow Book. This clause was substantially different to the equivalent Yellow Book provision, as the express link between the Employer’s right to call on the bond and a clause 2.5 determination had been deleted.

In the circumstances, Murphy sought urgent declaratory relief in respect of the following issues:

  1. Whether the Employer’s ability to deduct delay damages was subject to compliance with the procedure under clause 2.5? and
  2. If so, whether a call on the performance bond could be restrained on the ground that it was fraudulent?

Decision

Issue 1: whether the Employer’s ability to deduct delay damages was subject to an Engineer’s determination in accordance with clause 2.5?

In determining this issue, the Court was required to address the apparent conflict between clauses 2.5 and 8.7.

In doing so, it set out the general principles that were relevant to identifying the parties’ intentions which included, among other things, the natural and ordinary meaning of the clause, any other relevant provisions, the overall purpose of the clause and the contract, the factual matrix and commercial common sense.

As part of this assessment, the Court noted that, on the one hand, clause 2.5 was in the ‘widest terms’ and provided a clear procedure which applied if the Employer considered itself entitled to any payment under the contract or otherwise. The Court highlighted the remarks of Lord Neuberger in the recent Privy Council judgment of NH International (Caribbean) Ltd -v- National Insurance Property Development Company Ltd [2015] UKPC 37 in which he emphasised that “where the Employer fails to raise a claim as required…, the back door of set-off or cross claims is firmly shut”.

However, against that backdrop, the Court had regard to the following:

  1. Clause 8.7 provided a self contained regime for the entitlement to make deductions in respect of delay damages and included an unqualified right to pay.
  2. The standard version of Clause 8.7 had been amended by deleting the qualifying words “subject to clause 2.5”, which, objectively assessed, was consistent with the parties’ intention that clause 2.5 would not apply in relation to the operation of clause 8.7.
  3. The inconsistencies between clauses 2.5 and 8.7 could be resolved by construing clause 8.7 as providing an independent regime in respect of delay damages, while clause 2.5 would continue to have effect in relation to the Employer’s claims under, for example, clauses 7.6 [Remedial Work], 8.6 [Rate of Progress], 11.4 [Failure to Remedy Defects] and 15.4 [Payment after Termination by Employer] of the Yellow Book.

On balance, and in seeking to give effect to both clauses, the Court concluded that, on a proper construction the right to deduct delay damages was not subject to the clause 2.5 claims mechanism.

Issue 2: fraudulent demand?

Notwithstanding the findings in relation to the validity of the proposed deduction of delay damages, the Court proceeded to consider whether a demand which was founded upon a failure to comply with clause 2.5 would engage the fraud exception to the on-demand nature of performance bonds i.e. on the basis that there could not have been an honest belief in the validity of the demand.

The Court addressed this issue in short order, noting that the Employer’s failure to obtain a clause 2.5 determination would not mean that the Contractor had no liability to account for delay damages, and that such failure did not cut across the Employer’s entitlements that had accrued under clause 8.7.

Rather, it was the Employer’s belief in its entitlement which triggered the performance bond and it was permissible for the Employer to assert its claim under the bond in good faith.

The Court also noted that it was in the nature of a performance bond that there would need to be a form of accounting in the light of a subsequent determination of the parties rights and as such it was not relevant that the sum demanded may differ from an amount which is finally determined.

In the circumstances, it was not possible to restrain the call on the performance bond.

Comment

While this judgment reinforces the Privy Council’s judgment in NH International, which was seen to provide a fair balance between the competing interests of an Employer and Contractor, it provides a useful illustration as to how contracting parties may circumvent the effect of the default wording of clause 2.5 of the FIDIC suite and thus to enable an Employer to make deductions without requiring an Engineer’s determination.

Of wider interest to practitioners is the Court’s approach to interpreting deleted words from a standard form contract in ascertaining the parties’ intentions. Further, particularly in light of the effect of the amendments to clause 4.2, this case serves as a stark reminder of the risks associated with amending a standard form without an appreciation of the implications on the contract as a whole.