Since disputes under the International Federation of Consulting Engineers (FIDIC) form of contract are usually resolved through adjudication, reportable FIDIC cases are rare and often have precedential value.
The decision of Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar concerned a dispute arising out of a £30 million contract for the design and construction work to the Gibraltar Airport which incorporated the commonly known FIDIC Yellow Book.
After over two and a half years of work on the two year project, the employer terminated the contract, after which the contractor commenced proceedings against it. The contractor argued, inter alia, that it had encountered more rock and contaminated material in the excavated site than would have reasonably been foreseeable by an experienced contractor at the time of tender. As a result of a report it had commissioned, it had to suspend tunnel excavation works and re-designed the tunnel.
The main issue revolved around contract termination. In determining responsibility for termination, Mr Justice Akenhead considered the following:
Was the engineer entitled to issue notices to correct on 16 May 2011 and/or 15 July 2011 under Clause 15.1?
Mr Justice Akenhead found that the engineer was entitled to issue the Clause 15.1 notices to correct on 16 May 2011 and/or 5 July 2011 in relation to various Clause 8 breaches, including the suspension of tunnel excavation works.
He noted that Clause 15.1 related only to more than insigniﬁcant contractual failures by the contractor. That the construction industry would not beneﬁt from trivial contractual failures giving rise to notices to correct, which if not complied with, would lead to termination. He noted that the time for compliance must be reasonable in all circumstances prevailing at the time of notice, and that given the potentially serious consequences of non-compliance, Clause 15.1 notices need to be construed strictly but also against the surrounding facts.
Was the employer entitled to terminate the contract under Clause 15.2?
Mr Justice Akenhead found that the employer was entitled to serve a notice of termination pursuant to Clause 15.2(a), on the basis that the contractor had failed to comply with the Clause 15.1 notice to correct, and made it clear that the contractor's right to re-design the tunnel did not outweigh its obligation to get on with the works.
Furthermore, that the employer was entitled to serve a notice of termination pursuant to Clause 15.2(b) because the contractor had demonstrated an intention not to continue with the performance of its obligations under the contract.
Lastly, that the employer was entitled to serve a notice of termination pursuant to Clause 15.2(c)(i) of the contract because the contractor had failed to proceed with the works with due expedition and without delay and the contractor had no 'reasonable excuse' for such failure.
Must the breach of contract relied upon to terminate the contract be analogous to a repudiatory breach?
Mr Justice Akenhead noted that each contract must be considered on its own terms. If the termination clause allows for termination 'for a, or any, breach of contract', the meaning is clear and does not require repudiatory breach. In casu, there was a warning mechanism whereby termination could be avoided by the contractor's compliance with the Clause 15.1 notice. The remedy is therefore in the contractor's hands.
Will termination occur if the contractor has been prevented from remedying the failure for which the notice to correct is given?
Mr Justice Akenhead stated that Clauses 15.1 and 15.2(c) must, as a matter of common sense, pre- suppose that the contractor is given the opportunity by the employer to remedy the failure of which it is given notice, since the employer should not be entitled to rely on its own breach to beneﬁt by terminating.
The court disagreed with the contractor's arguments and found, inter alia, that the contractor had failed to proceed with the design and execution of the works with due expedition and without delay, was responsible both in law and fact for the termination, and the employer had lawfully terminated the contract.
This case highlights the powers available to employers under the FIDIC Yellow Book to terminate the contracts of contractors who fail to comply with notices to correct pursuant to Clauses 15.1 and 15.2(a), abandon the works or otherwise plainly demonstrate the intention not to continue performance of their obligations under the Contract pursuant to Clause 15.2(b), or (without reasonable excuse) fail to proceed with the works with due expedition and without delay pursuant to Clause 15.2(c)(i).