Last year we reported on a decision of the Privy Council (in NH International v NIPDC) dealing with the requirement for Employers to notify claims under clause 2.5 of the FIDIC form of contract (see our original Law-Now here). The Privy Council’s decision supported a robust approach to clause 2.5 and was seen as creating a much more level playing field for both Employer and Contractor claims under clauses 2.5 and 20 alike. A recent TCC decision has taken a more restrictive approach to clause 2.5 on the basis of bespoke amendments made by the parties elsewhere in their contract, allowing the Employer to claim liquidated damages without satisfying the formal requirements of clause 2.5.
J Murphy & Sons Ltd v Beckton Energy Ltd
Beckton (the Employer) and Murphy (the Contractor) entered into an amended FIDIC Yellow Book 1999 contract in respect of a Combined Heat and Intelligent Power Plant.
Beckton gave Murphy notice that it was going to make a call on Murphy’s on-demand performance bond because Murphy had failed to pay liquidated damages. Murphy argued that it was not obliged to pay liquidated damages pursuant to clause 8.7 of the Contract (concerning delay damages) because there had been no agreement or determination of the amount to be paid to the Employer as required by clauses 2.5 and 3.5 of the Contract (dealing with Employer’s claims.) Murphy therefore applied to the court for a declaration to this effect and also an injunction preventing Beckton from making a demand on the bond until there had been an agreement or determination by the Engineer.
The court was asked to address the inconsistency between clauses 2.5 and 8.7 and decide the following issues:
- Could Beckton recover liquidated damages from Murphy under clause 8.7 without an agreement or determination by the Engineer under clauses 2.5 and 3.5?
- If Beckton succeeded on issue 1, would a call by Beckton on the bond be fraudulent?
Murphy relied on the NH International decision and argued that clause 2.5 was very widely drafted and that because clause 8.7 is not listed as one of the limited exceptions to clause 2.5, clause 2.5 must apply. Beckton had also expressly notified its entitlement to delay damages pursuant to clause 2.5. The contract provided checks and balances through the role of the Engineer and one would expect there to be clear words if its provisions were to be outside of the regime in clause 2.5.
Beckton on the other hand relied on clause 8.7 and argued that the obligation to pay liquidated damages arose independently of clauses 2.5 and 3.5, and was not therefore contingent on the Engineer’s determination. Beckton argued that the court should take into account a number of factors including that clause 8.7 was drafted specifically by the parties for the purposes of the contract whereas clause 2.5 was unamended from the FIDIC Yellow Book. Furthermore, the absence of the words “subject to Clause 2.5” which appear in the standard Yellow Book clause 8.7 suggested that the parties did not intend for their bespoke clause 8.7 to be subject to clause 2.5 and 3.5. The parties had also deleted the requirement in clause 4.2 of the Yellow Book for any claim on the bond for sums due under the contract to first be supported by a decision of the Engineer under clause 2.5.
The court dismissed Murphy’s claims for declaratory and injunctive relief. In reaching its decision, the court set out a number of principles of interpretation and stated that agreements should be “read as a whole and construed as far as possible to avoid inconsistencies between different parts on the assumption that the parties had intended to express their intentions in a coherent and consistent way.”
The court acknowledged that clause 2.5 was very widely drafted and was clearly applicable here where Beckton considered itself to be entitled to a payment under the contract. However, in this instance, the court said that Beckton’s right to claim liquidated damages under clause 8.7 was not subject to the mechanism in clauses 2.5 and 3.5. This meant that Beckton could recover liquidated damages without an agreement or determination by the Engineer. In reaching this decision, the court emphasised that the words “subject to sub-clause 2.5” had not been kept from clause 8.7 of the standard form, which was indicative of the parties’ intentions that clause 2.5 was not meant to apply.
Given the court’s decision on the first issue, it did not have to consider whether Beckton’s call on the bond was fraudulent or whether injunctive relief should be granted. However, the court did briefly address the issue and stated that even if clause 2.5 applied to Beckton’s claim, it would not have been fraudulent for Beckton to make a call on the bond in the absence of or contrary to a decision by the Engineer under clause 2.5 and 3.5. This was because all that was required to trigger payment under the bond was a written demand signed by two directors stating that Murphy was in breach of contract, with particulars and the amount claimed as a consequence of the breach. An unfavourable decision by the Engineer could not make such a demand fraudulent because Beckton would be entitled to challenge the Engineer’s decision through adjudication or litigation.
Conclusion and implications
This case is of interest as an example of one way in which Employers might seek to overcome the effect of the NH International decision. In that case the Privy Council had considered the interpretation of an identically worded clause 2.5 in the FIDIC Red Book and found that it was so widely drafted that it applied to any claim made by the Employer. The Employer was therefore precluded from making a claim for set-off at termination because it had not satisfied other formal requirements of clause 2.5. In applying a robust interpretation to clause 2.5, the Privy Council’s decision was seen as providing a more level playing field between Employer and Contractor claims under clauses 2.5 and 20 alike.
In the present case, the court was prepared to remedy inconsistencies between clause 2.5 and 8.7 by construing clause 8.7 as providing an independent regime outside the scope of clause 2.5 for the trigger and payment of liquidated damages. It is also of note that the court was prepared to look to the words of the standard form to interpret the meaning of the amended clause 8.7, particularly as the amended clause was entirely different from the original. The case is also a useful reminder of the difficulties which can arise when some clauses are amended and others are not in a standard form contract. In this instance, the parties had to resort to litigation to resolve the inconsistencies.
The court’s decision in relation to the relevance of an Engineer’s decision under clause 2.5 to an Employer’s entitlement to call under an on-demand bond is also of interest. In the absence of the usual clause 4.2 wording expressly making a call under the bond subject to an Engineer’s decision, it was not sufficient for Murphy to show merely that clause 2.5 would apply. In such circumstances, Beckton would have remained entitled to call on the bond based on its own belief as to sums due to it, even in the face of a contrary decision from the Engineer.