Notices serve many important functions on construction projects. They are the means by which employers (usually acting through a contract administrator) issue instructions for matters such as variations, and the way contractors are able to claim for extensions of time and additional cost. They are also, crucially, the means by which either party may seek to terminate the contract. As part of the termination process, the question as to whether or not a notice has to strictly comply with contractual requirements is an important one. A recent case in the Technology and Construction Court (TCC) in England has shed some light on this question in the context of the 1999 FIDIC Yellow Book, with potentially some quite welcoming results for those looking to terminate.
The major FIDIC forms of contract (the 1999 Red, Yellow and Silver Books) contain almost identical provisions on notices. Clause 1.3 sets out that all notices must be in writing and delivered by hand (against receipt), or sent by mail, courier or by e-mail (if email is specified in the contract). The notice must be sent to the address specified in the contract, unless either the recipient gives notice of another address or sends a request for approval or consent from a new address (this might occur, for example, if the contractor sends a request from a different email address). Clause 15 deals with termination by the Employer. This provision allows the Employer to terminate for contractor default, insolvency and for convenience. Where Contractor default is alleged, the Employer is required to first issue a “notice to correct” prior to issuing a notice of termination.
In Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar  EWHC 1028 (TCC), the Employer did not comply with all the requirements of clause 1.3 when issuing the clause 15 correction notice and the termination notice to the Contractor, Obrascon Huarte Lain SA (“OHL”). Instead of issuing these notices to the address specified in the Contract, which was OHL’s head office in Madrid, it issued the notices to the site office in Gibraltar. It subsequently re-served the notices, but the Contractor argued that the initial failure to comply amounted to a repudiation of the contract by the Employer.
The Employer, the Government of Gibraltar, had engaged OHL, a Spanish civil engineering contractor, under a substantially un-amended FIDIC Yellow Book to design and construct a road and tunnel near and under the Gibraltar Airport runway. The project encountered severe delays, mainly as a result of contaminated ground conditions, which the Contractor unsuccessfully argued were due to unforeseeable adverse physical conditions. The project was meant to be completed within two years, but after two and a half years, only 25% had been completed. The Government of Gibraltar took the view that these delays constituted a failure by OHL to carry out its obligations under the contract, and thus was a ground for termination.
The judgment, in addition to providing fresh guidance on the concept of “unforeseeable adverse physical conditions”, provides a useful interpretation of the notice provisions under the FIDIC forms of contract, particularly in the context of termination. One of the questions before the court was whether the notice had been effective or not, or in other words, was the failure to comply fully with clause 1.3 fatal to the termination? Substantive compliance The Judge, Mr Justice Akenhead, reviewed a string of cases which had looked at the question as to whether “strict compliance” was necessary to make a notice effective. The wording of the clause was vital: did it expressly set out that the notice needed to comply with clause 1.3 to be valid? The answer was no: under the FIDIC Yellow Book, clause 15 and clause 1.3 do not contain words that make strict compliance a “condition precedent” to termination. The Judge was keen to stress that in answering this question in the context of building and engineering contracts, commercial realities need to be taken into account, including what was the “primary purpose” of the clause. If the purpose could be achieved without strict compliance, as was the case here, then strict compliance was not necessary.
However, the Judge was also keen to stress that termination was a “serious step” and that there “needs to be substantive compliance with the contractual provisions to achieve an effective contractual termination”. This required the notice to be given in sufficiently clear terms, and served on a person with appropriate seniority within the company. In this case, the notice had been served on OHL’s Project Manager at the site office where many other communications had been sent and received, and therefore this requirement was satisfied.
Having decided that the notice had been validly served, Mr Justice Akenhead did not need to deal with the issue of repudiation. However, he took the opportunity to observe that the technical deficiencies in the notice would not amount to a repudiation of the contract by the Employer. Relying on past authorities, he held that the service of a “valid and actually well-founded termination notice at the technically wrong address” could not constitute a repudiation of the contract. It was therefore the Contractor who had repudiated the contract and not the Employer, when erroneously treating the contract as being at end on the grounds of ineffective service. Further, the Judge noted that the subsequent issue of a conforming notice would in any event have “cured” the initial deficiencies.
This judgment provides some comfort to those wishing to terminate: it is clear that under the FIDIC forms of contract a “commercially realistic interpretation” needs to be taken, and that strict compliance is not necessary in order for a termination notice to be effective. That said, in all cases it will be necessary to show that the notice has actually been served, and the easiest way to do this of course will be to comply with the contractual provisions
In short, many of these issues can be avoided. Time invested at the outset of a project in thoroughly drafting or reviewing the terms of a contract and getting it right is time well spent. Adopting even simple measures will go a long way.