In this newsletter we report on the recent case of NH International v National Insurance1 where the Privy Council ruled on the operation of certain provisions in the FIDIC Red Book2, namely Sub-Clause 2.4 'Employer's Financial Arrangements' and the contractor's corresponding termination right in Sub-Clause 16.2(a); and whether the Employer is entitled to exercise a right of set-off in circumstances where it has not followed the requirements of Sub-Clause 2.5 'Employer's Claims'.

The facts

The dispute concerned an agreement for the construction of a hospital in Tobago (the "Agreement"), which was subject to the FIDIC Red Book. NHIC (the contractor) issued a request to NIPDEC (the employer) under Sub-Clause 2.4 of the FIDIC Red Book, requesting reasonable evidence that financial arrangements had been made to enable NIPDEC to pay the contract price.

The Ministry which was funding the project responded saying that "without prejudice" funds were available in a sum equal to the final estimated cost of the work under the Agreement. NHIC responded expressing concern about the term "without prejudice", and queried whether there had been the necessary Cabinet approval for payment of the sums due under the Agreement. It did not receive a response to its request, and proceeded to suspend the work under Sub-Clause 16.1.

Over a year later, NHIC received a letter from the Ministry confirming that the completion of the project was of the highest priority, and that the government would meet the financial requirements for the completion of the project. NHIC wrote to  NIPDEC requesting confirmation that the Cabinet had approved the funds, but no such confirmation was provided. NHIC issued a notice of termination under Sub-Clause 16.2. NIPDEC claimed that NHIC did not have the right to terminate the Agreement and therefore that it had not been validly terminated.

A separate issue arose when the engineer later proceeded to assess the value of the work done up to the date of termination, with NIPDEC claiming that it was entitled to exercise a right of set-off against any sums due and payable to NHIC. NHIC argued that, as NIPDEC had not given proper notice of its claims to NHIC in accordance with Sub-Clause 2.5, the last paragraph of that provision operated to exclude those claims.

Decisions

Arbitrator's awards

Termination of the Agreement: The arbitrator found that Sub-Clause 2.4 required more than showing that the employer was able to pay or that it was enthusiastic about the project. It required evidence of positive steps on the part of the employer which showed that financial arrangements had been put in place. In this case, the use of the words "without prejudice" in the Ministry's first letter, and the absence of any confirmation of Cabinet approval, entitled the contractor to suspend work under Sub-Clause 16.1. The subsequent termination under Sub-Clause 16.2 was  similarly justified.

NIPDEC's set-off: In a separate award, the arbitrator also considered whether NIPDEC's right of set-off was excluded on account of the fact that it had not satisfied the requirement under Sub-Clause 2.5 to give adequate notice of its claims to NHIC. The arbitrator found that "clear words" were required to exclude common law rights of set-off and abatement and (by implication) Sub-Clause 2.5 was not clear enough. Therefore, the claim for set-off could be maintained.

Court of Appeal

Termination of the Agreement: The Trinidad and Tobago Court of Appeal overturned the decision, reasoning that the arbitrator had sought the "highest standard" of assurance rather than "reasonable evidence". It should be noted that the Court did not suggest anywhere that the arbitrator had wrongly interpreted the provisions of the FIDIC Red Book. The Court's conclusion was therefore one of fact rather than of law.

NIPDEC's set-off: The Court upheld the arbitrator's decision as to NIPDEC's rights of set-off under Sub-Clause 2.5.

Privy Council

Termination of the Agreement: The Privy Council rejected the Court of Appeal's conclusions. It held that courts should respect the arbitrator's findings of fact, assessments of evidence and formations of judgment, unless they were shown to be unsupportable. This was based on the reasoning that the parties had mutually agreed to have the issue determined by an arbitrator, and that the Court should not therefore substitute its judgment for that of the arbitrator. In this case, there was no basis for interfering with the arbitrator's conclusion that the termination of the Agreement had been valid.

NIPDEC's set-off: The Privy Council disagreed with the Court of Appeal on this point. It noted that the purpose of Sub-Clause 2.5 was to ensure that the employer's claims should be the subject of a notice, which must be given "as soon as practicable". Any claims must be raised promptly, and in a particularised form, and late notices were not permitted. However, abatement arguments – e.g. that performance was so poor/defective that it does not justify any payment, or deserves reduced payment – could still be raised. The award was remitted to the arbitrator for him to reconsider the sums awarded as any of those sums which (i) were not the subject of appropriate notice under Sub-Clause 2.5, and (ii) could not be characterised as abatement arguments as opposed to set-offs or cross-claims, must be disallowed.

Comment

The Privy Council's decision (especially as it comes from five members of the UK Supreme Court) is one of importance to contractors and employers. The case provides useful guidance on what is required of an employer in order to comply with Sub- Clauses 2.4 and 2.5 of the FIDIC Red Book:

  • It highlights that an employer may be required to provide relatively clear and detailed financial information demonstrating its ability to pay the estimated contract price. It will not be sufficient to show merely that the employer is enthusiastic about the project, or even that the employer is wealthy.
  • Employers intending to raise set-off or counterclaims should do so as soon as practicable, and in accordance with the terms of the contract.