A significant new case on the FIDIC form

Case law on the FIDIC form of contract has until now been sparse. However, the case of Obrascon Huarte Lain SA v. Attorney-General for Gibraltar decided by the UK Technology and Construction Court on 16 April 2014, relates to a substantial contract for infrastructure works in Gibraltar carried out under the FIDIC Yellow Book 1999 edition. Although much of a very lengthy judgment relates to the particular factual circumstances of the case, it contains some interesting points in relation to unforeseeable physical conditions, notices of claim and termination issues.

The contractor claimed that he had encountered unforeseeable physical conditions and was therefore entitled to claim an extension of time and costs under clause 4.12 of the Contract Conditions. Under this clause, the ground conditions that were reasonably foreseeable by an experienced contractor at the date of submission of the tender must be considered.

Some information was made available to the contractor at tender, including in particular, an environmental statement, a site investigation report and a contaminated land desk study. By clause 4.10 the contractor was responsible for interpreting such data.

The court considered the content of the material provided and concluded that the contractor had been told to allow for a substantial volume of contaminated material, but had not considered this to be a real risk. The court said that the contractor should have carried out “some intelligent assessment and analysis” of why the contamination was present and what the prospects were of encountering more than had been revealed by the pre-contract site investigation.

He should have been particularly alert to ascertaining what the site had previously been used for. Had he done this, he would have anticipated substantial quantities of contaminated material, (which were actually found) and would have made an appropriate allowance within the tendered price for dealing with such material. The contractor did not do so and the court rejected his claim under clause 4.12.

A similar approach was taken to most of the other claims for unforeseeable physical conditions put forward by the contractor in relation to contamination of water and rock.

The court also considered the contractor’s obligation to make a timely claim under clause 20.1 for an extension of time. The relevant part of clause 20.1 is worth quoting in full and is to be found in a number of FIDIC Contracts, including the EPC, Silver Book. Clause 20.1 says “If the Contractor considers himself to be entitled to any extension of the Time for Completion…under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance.

If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. Otherwise, the following provisions of this Sub-Clause shall apply…”

The court had no difficulty saying that complying with clause 20.1 was a condition precedent to the contractor making claims and, therefore, if the claims were not submitted in accordance with clause 20.1 they would fail.

The court considered that this condition precedent bites once there is either awareness by the contractor or the means of knowledge or awareness of the event or circumstances justifying a claim. The clause is not to be construed strictly against the contractor but rather “reasonably broadly", given its serious effect on any potential claim.

Clause 8.4 provides that the contractor is entitled to an extension of time if completion is delayed by the causes specified which include unforeseeable physical conditions. An extension of time can therefore be claimed either when it is clear there will be delays (prospective delays) or when the delay has at least started to be incurred (retrospective delays). However, in a key observation the court said that for the purposes of the 28 day time limit in clause 20.1 the “event or circumstance"  in the appropriate context “can mean either the incident (variation, exceptional weather or one of the other specified grounds for extension) or the delay which results or will inevitably result from the incident in question”. This may be of fundamental importance in cases where there is a lag between when an event occurs, and when the delay flowing from that event is felt.

Further, the court held that that there was no particular form called for in clause 20.1, but only that the notice should be in writing, describe the event or circumstances relied on and notify a claim for an extension. The onus of proof is on the employer to establish that the notice was given too late.

In the circumstances, the court found that one of the contractor’s claims (in relation to adverse weather) was time barred since the delay in question had occurred more than 28 days before notice was given.

The court also examined whether the employer was entitled to terminate the contract under clause 15. This provides that the employer is entitled to terminate the contract if the contractor fails to comply with a notice to make good his failure to carry out any obligation under the contract. The contractor’s employment may also be terminated if he plainly demonstrates an intention not to continue the performance of his obligations under the contract, or without reasonable excuse fails to proceed with the works in accordance with clause 8, that is to say with due expedition and without delay.

The court considered this clause and held that it must relate to more than insignificant contractual failures by the contractor and those which are actual rather than prospective. The period for a notice to comply must be reasonable in all the circumstances. The contractor argued that the breach of contract relied upon must be serious and one which is equivalent to a repudiatory breach of contract. The court rejected this argument and decided that termination clauses of this type are generally to be construed as permitting termination for significant or substantial breaches as opposed to trivial, insignificant or insubstantial ones. It commented that “this accords with commercial common sense”.

The court also observed that termination could not legally occur if the contractor had been prevented or hindered by the employer from remedying the failure within the specified time, since a party cannot rely on its own wrong.

In the circumstances, the court found that the employer was entitled to terminate the contractor’s employment when it did, in particular in light of its continual lack of expedition during the course of the contract which had led to a two year delay on a two year contract as against which there was a minimal entitlement to an extension of time.

This decision should be helpful in enabling parties to understand the practical effect of various clauses in the FIDIC contract which have not previously been the subject of judicial consideration. Whilst termination of employment of contractors will generally remain a last resort for employers, it appears in this case that the Court considered the contractor’s performance to fall well below the standards reasonably to be expected of him and therefore to justify termination once delay had become substantial without reasonable excuse.