Introduction
Mr Justice Akenhead's judgment in the case of Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar[2014] EWHC 1028 (TCC) provides judicial guidance on the interpretation of certain key terms in the International Federation of Consulting Engineers' (FIDIC) Yellow Book form of contract. Many experts in the projects community regard the FIDIC Yellow Book, along with the other members of the FIDIC family of contracts, as the leading standard-form construction contract for energy, infrastructure, and other projects the world-over. Judicial decisions relating to FIDIC contracts come along infrequently and, for that reason, this judgement will attract close attention throughout the projects community. The project itself, however, resembled a classic construction project tale-of-woe, commencing with a contract awarded to the lowest priced tenderer whose pre-contract due diligence and aspirational pricing subsequently proved inadequate as the project ran into severe cost-overruns and delays, and ending with a fault-based termination and the works incomplete.
Facts
The judgement ostensibly concerns the operational and technical facts of a project where contractor Obrascon Huarte Lain SA ("OHL") and the Government of Gibraltar ("GoG") entered into a contract for the design and construction of a dual-carriageway and road-tunnel passing underneath the Gibraltar airport runway (the "Contract"). The Contract comprised of FIDIC Yellow Book conditions of contract together with other standard appendices and schedules. These schedules and appendices included an environmental statement prepared by GoG and given to OHL (and other tenderers) during the tender process (the "Environmental Statement"). The project site was located in close proximity to a fuel farm and had a well-known history as a rifle range and centre for other military activities. OHL quickly ran into a number of difficulties but the overwhelming issue causing delay was the discovery of large deposits of contaminated ground during the excavation works. The Environment Statement recommended that OHL should make assumptions for encountering certain quantities of contaminated ground during excavations, but the actual quantities encountered by OHL significantly exceeded those assumptions. As the parties sought to establish the nature and extent of the contaminated ground and agree how to extract, treat and remove the contaminated ground from the site, the works fell further and further into delay. OHL, facing huge losses and exposure to delay damages, pleaded with GoG to redress the 'economic balance of the contract' and ultimately suspended the tunnelling works pending a re-design of the works, which it considered a necessary result of the contaminated ground. In the end GoG reached the conclusion that its differences with OHL were irreconcilable and terminated the Contract on a number of grounds expressly permitted by the Contract, including that GoG's conduct demonstrated "the intention not to continue performance of his obligations under the Contract".
Unforeseeable Ground Conditions
Whilst the case involves various fundamental FIDIC concepts, such as the meaning of "Unforeseeable" ground conditions and a contractor's entitlement to extensions of time, this article rather focuses on what Mr Justice Akenhead described as "the single most important issue in the case": termination. However, before focussing on the issue of termination it seems remiss not to mention the court's finding with respect to OHL's discovery of large deposits of contaminated ground and whether or not it constituted "Unforeseeable" ground conditions. The FIDIC Yellow Book defines "Unforeseeable" as "not reasonably foreseeable by an experienced contractor by the date for submission of the Tender". In the circumstances, Mr Justice Akenhead concluded that the contaminated land encountered by OHL, although significantly exceeding the assumed quantities in the Environmental Statement, did not satisfy the Unforeseeable criteria. At the risk of over-simplification, the court's reason for this conclusion was that OHL had apparently placed blind reliance on the Environmental Statement and made no material independent enquiries into the site conditions, despite actual knowledge that the site's history was chequered with potential sources of contamination. In the circumstances, Mr Justice Akenhead decided that an experienced contractor would not have limited itself to reliance on the geotechnical data provided during the tender process and that doing so was unrealistic. Consequently, at the date of termination OHL was 730 days in delay and the court concluded that it was entitled to only a single day extension of time.
Termination
GoG purported to terminate the Contract on three separate, but related, grounds expressly set out in the conditions of contract. The court considered each ground in detail. The relevant terms were set out in Sub-Clause 15.2 of the conditions of contract, which permitted GoG to terminate the Contract, on giving 14 days' notice to OHL, in the following circumstances:
if the Contractor:
fails to comply…with a notice under Sub-Clause 15.1[Notice to Correct] (Sub-Clause 15.1 of the conditions of contract permitted the Engineer to give notice the Contractor requiring the Contractor to make good any failure to carry out an obligation under the Contract within a specified reasonable time);
abandons the Works or otherwise plainly demonstrates the intention not to continue performance of his obligations under the Contract;
without reasonable excuse fails:
i. to proceed with the Works in accordance with Clause 8 [Commencement, Delays and Suspension], or
ii. to comply with a notice issued under Sub-Clause 7.05 [Rejection].
Sub-Clause 15.2(a) – Failure to Correct a Failure to Perform
As a preliminary matter to deciding whether or not OHL had actually failed to comply with the Engineer's 'notice to correct', Mr Justice Akenhead considered, amongst other things, the question of materiality of the original failure to perform. Taking a "commercially sensible" approach, he reaffirmed the principles from an existing body of law, including the decision in Antaios Compania Naviera SA v Salen Rederierna AB [1985]AC 191, that a clause purporting to allow termination for any breach or failure to perform does not permit termination for minor breaches or insignificant contractual failures. He rejected, however, OHL's argument that Sub-Clause 15.2(a) applied only to serious breaches and those analogous to a repudiatory breach of contract. The judge gave three reasons for rejecting OHL's argument:
An analysis must consider each contract and clause on its own merits. If the express wording of a clause clearly permits termination for minor breaches, then the court will recognise the intention of parties.
Sub-Clause 15.2(b) was, of itself, similar to the English common law test for repudiation, so the parties could not intend Sub-Clause 15.2(a) to apply to essentially the same circumstances.
Sub-Clause 15.2(a) hinges on the cure period granted through the Sub-Clause 15.1 notice to correct. As such "the Contractor is given a chance to avoid termination" and the court should not therefore set the bar for termination too highly.
The first of these given reasons is somewhat confusing because, at this point, the judge was not answering a question as to whether the Contract permitted termination for minor breaches but rather whether the Contract limited termination to major breaches Nevertheless, the court's rationale still provides helpful guidance that English courts will recognise a right for a party to a contract to terminate for a minor breach, provided the wording of the contract clearly contemplates such a right. As an aside, whilst the judge noted that Sub-Clause 15.2(b) was, of itself, similar to the English common law test for repudiation, it is worth noting that this common law test may still permit a party to a contract to terminate for a minor breach, provided that the breach relates to a condition of the contract (i.e., a term that 'goes to the root of the contract'), albeit that in complex projects, such as this, the parties cannot always easily establish individual terms of that nature. In any event, the second and the third reasons endorse the commercially sensible approach of the English courts and provide sound reasoning as to why the court should not construe this Contract as limiting termination to major breaches. The Judge ruled that any cure period must be reasonable based on the circumstances prevailing at the time of giving such notice. He noted that the reasonableness of any such period is fact sensitive, and the onus lies on the party granting it to establish the reasonableness of the period.
On the facts, GoG issued a global 'notice to correct' itemising various alleged failures, including the failure to proceed with excavation works, the failure to proceed with the dewatering of the site with due expedition and without undue delay, and the failure to commence sheet piling, amongst others, each subject to a separate cure period. Whilst Mr Justice Akenhead did not find grounds for termination under Sub-Clause 15.2(a) in respect of all alleged failures, in many cases he decided that the alleged failure existed, continued following the expiry of the respective cure period in the notice to correct, and that the failures were sufficient and serious enough to justify termination under Sub-Clause 15.2(a).
Sub-Clause 15.2(b) – Abandonment of the Works
On the facts, Mr Justice Akenhead did not deem it necessary to determine whether or not OHL had abandoned the works or demonstrated the intention not to continue performance of his obligations under the Contract, having already established grounds for termination under Sub-Clause 15.2(a). He nevertheless set out certain useful principles relevant to the interpretation of this term. In particular, he remarked that:
The court must judge the contractor's conduct objectively. If the contractor demonstrates an intention not to continue with the performance of its obligations under the contract then it is irrelevant that it actually intends to fully discharge its contractual obligations.
Again, the grounds for termination must relate to significant and more than minor breaches. The contractor demonstrating an intention not to continue with the performance of a minor or immaterial obligation under the contract should not, of itself, allow the employer to terminate the contract.
The court must draw a "verbal and contractual distinction" between a failure to perform, on the one hand, and a failure to perform contractual obligations, on the other. In other words, the contractor cannot rely on continued performance as a defence to this ground for termination if such performance was not in respect of the contractor's contractual obligations.
The third of these principles may seem a somewhat obvious point, but in complex projects the distinction between performance, on the one hand, and performance of contractual obligations, on the other, often becomes nuanced and subtle. Mr Justice Akenhead's point being that where a contractor continues to perform work to a specification that does not conform to the contractual specification, then the court should not construe such performance as continued performance of the contractor's contractual obligations. In any event, Mr Justice Akenhead concluded that OHL's suspension of the permanent work, without contractual justification, its apparent unwillingness to recommence the permanent works, and the lack of any indication that it would carry out any further excavation work short of a new commercial deal from GoG, constituted a clear demonstration not to continue with the performance of its obligations under the Contract and therefore grounds for termination under Sub-Clause 15.2(b).
Sub-Clause 15.2(c) – Failure to Proceed with the Works
Given the manner in which OHL had gone about the project Mr Justice Akenhead did not dwell in coming to the conclusion that "OHL failed, almost from start to finish of this project" to proceed the works in accordance with the Contract and, therefore, that GoG was entitled to terminate the Contract under Sub-Clause 15.2(c).
Interestingly, Mr Justice Akenhead noted that the fact that an employer may have an entitlement to liquidated damages in the event of delay does not qualify the employer's right to terminate on grounds of the contractor's failure to proceed with due expedition and without undue delay. Without sight of the full Contract it is impossible to know whether or not Mr Justice Akenhead correctly considered the 'exhaustive remedy' status of liquidated damages. Under contracts subject to English law, in the absence of clear contractual wording to the contrary, the courts normally construe a liquidated damages provision as an exhaustive remedy in respect of the breach to which the liquidated damages apply.[1] As such, an English court would not allow an employer to recover liquidated damages and exercise a right to terminate in respect of the same breach (often, a contractor delay). Employers should not assume that they would have a right to terminate on grounds of delay in addition to the recovery of delay damages, unless the contract expressly permits this.
Effectiveness of Termination Notice
One final interesting question of law arose with respect to the validity of GoG's termination notice. Sub-Clause 1.3 of the conditions of contract required GoG to deliver all notices by hand, mail or courier to OHL's head office in Madrid. In fact, GoG delivered a termination notice letter to OHL's site office. An OHL employee accepted the termination notice by recorded delivery and promptly sent it to OHL's head office in Madrid. During the course of the project GoG had frequently sent correspondence to OHL's site office and OHL had acquiesced in this. In the circumstances, OHL claimed that GoG's termination notice was ineffective because it was not delivered to the correct address. OHL regarded GoG's 'ineffective' notice of termination as a repudiatory breach of contract by GoG and purported to accept this repudiatory breach, bringing the Contract to an end.
The question which the court had the answer was, in effect, whether strict compliance with the contractual notice provision constituted a condition precedent to the validity of the notice of termination. Relying on the judgment inRennie v Westbury Homes (Holdings) Limited [2007] EWCA Civ 1401, Mr Justice Akenhead noted that, in certain cases, the court may construe a strict notice requirement as an "indispensable condition". The court's description of an indispensable condition appears conceptually very similar to a condition precedent, the distinction appears to relate to the nature of the underlying condition. For example, whilst a condition precedent may concern a substantive requirement (such as the actual giving of a notice), an indispensable condition appears to concern purely matters of procedural compliance, such as the delivery of a notice to the correct address. Either case will depend on the facts, and a number of recent English cases have confirmed that a requirement to give notice prior to exercising a particular contractual entitlement shall not constitute a condition precedent to such entitlement, unless clearly framed as such. The facts of this case meant that the court did not consider whether the requirement to provide a contractual notice within a given time frame constituted a condition precedent or indispensable condition.
According to Mr Justice Akenhead, whether each and every specific requirement of a notice provision constitutes an indispensable condition is a matter of contractual interpretation, which interpretation should utilise commercial common sense. It follows that the court would not need to consider the status of such a clause if a contract expressly set out the consequences of non-compliance with the relevant notice clause. On the facts, Mr Justice Akenhead concluded that the contractual notice provisions did not use any words which made the giving of notice to the correct address a pre-condition to effective termination and that the delivered notice achieved its "primary purpose" of making OHL aware that GoG was bringing to an end OHL's continued employment on the project. As such, he did not construe the requirement to serve notices at OHL's Madrid office as an indispensable condition and concluded that GoG had given effective notice of termination.
Conclusion
In many respects, this case does not really break any new ground. The FIDIC conditions of contract were balanced and certain. The principles relating to foreseeability, termination for breach, and notice requirements and, more generally, contractual interpretation each draw upon an established body of law. Sadly, OHL apparently failed to appreciate the conditions of contract and apparently often sought to perform the works as it saw fit, looking for solace in the black letter of the contract when things were going wrong. The English court, however, was prepared to take a commercially sensible approach to contract interpretation and look past technical breaches of contract where the obligor of the relevant term had discharged the relevant obligation in accordance with its primary purpose. GoG could have used much more employer-friendly conditions of contract, which the court would have upheld provided they were drafted with certainty. Had GoG used contract terms with a greater employer-bias, then conceivably OHL could have ended up in an even worse situation. Perhaps there is a salutary lesson in that.
