Article

An abridged version of this article first appeared in the annual Construction Law Review for 2016, published by the Chartered
Institution of Civil Engineering.

Employer’s financial arrangements and claims under

FIDIC forms of contract
Introduction instrument, crafted for the particular project
required. However, there is a considerable
We live in challenging times. The fall in
attraction to standard form contracts; both
commodity prices and geopolitical risks
repeat and one-off clients may feel more
(including the Brexit)1 combine to create
comfortable with a standard form and such
strong head winds affecting business
forms are also familiar to the supply side of the
confidence and the appetite to invest in the Jonathan Hosie
market.
development of long term assets. Working Partner, Construction and
against these head winds is the relentless The FIDIC forms of construction contract are Engineering Group, London
march of urbanisation and associated amongst the most widely used of standard E: [email protected]
industrialisation, particularly in emerging form contracts used internationally4 . FIDIC T: +44 20 3130 3343
economies eager to develop and improve the contracts started out life with a focus on the
living conditions of their citizens.2 The global European market and initially, with a focus on
trend of urbanisation creates a need for large civil engineering projects. Nowadays, FIDIC
scale investment in infrastructure on an contracts are promoted globally and
international scale, be it power generation encountered in many jurisdictions beyond
assets,3 transport, water treatment facilities, Europe, including South America, China, the
sea ports or airports, all of which require the Far East and Africa and in sectors from civil
construction of physical assets. engineering infrastructure to process
engineering and power generation.
It is perhaps an obvious point but delivery of
the built asset will require a contract to Disputes in commercial relationships are an
regulate its provision. The construction inevitable fact of life. However, when there are
contract will be used to specify the design and economic tensions between those procuring
performance characteristics of the asset as assets and those supplying them, the
well as containing provisions to regulate how likelihood of disputes arising increases. These
the cost and time to complete are to be tensions are prevalent in the international
calculated and assessed. The contract can be market currently, due to the cancellation or
(and in many cases is) drafted as a bespoke postponement of billions of dollars of projects
by major oil and mining companies, in reaction
1 British Exit from the European Union. to the price downturn in oil and commodities
2 Raising global growth to deliver better living
standards and quality jobs has been the G20’s
4 There are other standard form contracts used
highest priority over the past year, with the
internationally including those prepared by the
“Global Infrastructure Initiative”. However, this
Engineering Advancement Association of Japan
has identified a funding gap in infrastructure
(“ENNA”); the Institution of Chemical Engineers
investment of around USD 15 to 20 trillion over
(“IChemE”); the Institutions of Mechanical
the next 15 years.
Engineers and Engineering & Technology
3 Two out of three people in subSaharan Africa lack
(“IMechE”); and the New Engineering Contract
access to electricity. Tony Blair’s Africa
(“NEC”).
Governance Initiative is working with President
Obama’s Power Africa initiative to help drive
access to electricity across the continent.
EMPLOYER’S FINANCIAL ARRANGEMENTS
AND CLAIMS UNDER FIDIC FORMS OF CONTRACT

and in many cases, the need to re-build The Judicial Committee of the
balance sheets. This has led to significant Privy Council
over-capacity on the contracting side in many
The Judicial Committee of the Privy Council
international markets, with too many
originated as the highest court of civil and
contractors chasing too little work. This
criminal appeal for the British Empire. It now
imbalance between supply and demand has
fulfils the same purpose for many current and
the tendency to produce contractors
former Commonwealth countries, as well as
tendering for works at costs which are barely
the United Kingdom’s overseas territories,
economic, with the sole purpose of
Crown dependencies and military sovereign
supporting the continued existence of the
base areas. The most common work of the
contracting organisation. This mentality can
Court is the hearing of Commonwealth
also lead to contractors seeking to make up
appeals, typically from the Court of Appeal of
for their loss-making or slender margins
various jurisdictions in the Caribbean and
through the advancement of claims. Under-
West Indies5 as well as Jersey, Gibraltar,
funded Contractors can cause significant
Mauritius and New Zealand. A judgment of the
problems to Employers developing their
Privy Council is made by Judges who sit on the
assets. Taken together, this produces a potent
UK’s Supreme Court.
cocktail of problems and disputes.
One third of the world’s population live in
FIDIC forms of contract recognise disputes
common law countries and because of the
and claims as a fact of life and they are unique
system of precedent, the decisions of the
amongst standard form construction
Privy Council on appeal from one common law
contracts, in containing set procedures for
jurisdiction, will be relevant when considering
the administration of claims by one party
similar legal questions in all other common law
against the other. Much has been written
jurisdictions. A judgment handed down by the
about claims made by contractors under the
Privy Council is therefore an important judicial
FIDIC forms (given the strict claims machinery
pronouncement; it is binding in the
of Sub-Clause 20.1) but until recently, not
jurisdiction to which it relates and has
much attention appears to have been focused
persuasive authority in all other common law
on the administration of Employers’ claims.
jurisdictions, including England, Wales and
This brief article seeks to redress that balance
Northern Ireland.
and to do so in light of a recent and important
Court decision. It is therefore significant when the Privy Council
comes to consider both the Employer claims
This is a decision of the Judicial Committee of
machinery and the provisions concerning
the Privy Council and it also addressed the
Employer’s financial arrangements of the
provision of security for payment by the
widely used FIDIC form of contract as it did in
Employer; another unique feature of FIDIC. It
2015. This is particularly so given that these two
is therefore important for parties using FIDIC
provisions of the FIDIC form had not been
forms of construction contract
considered judicially before and the Privy
internationally for the development of their
Council is such a senior court.
infrastructure, process and energy plants.

5 Antigua and Barbuda, Anguilla, the Bahamas,

Belize, Bermuda, the British Virgin Islands, the
Cayman Islands, Jamaica, Montserrat, St
Christopher and Nevis, Trinidad and Tobago, Turks
and Caicos Islands.

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EMPLOYER’S FINANCIAL ARRANGEMENTS
AND CLAIMS UNDER FIDIC FORMS OF CONTRACT

The NIPDEC case obligations under the contract (Issue No.1).

The second aspect of the Arbitrator’s award
The case of NI International (Caribbean)
which was challenged related to certain
Limited v National Insurance Property
financial claims which he had to resolve. This
Development Company Limited (No. 2) (2015)6
concerned the requirements for NIPDEC to
is a judgment of the Privy Council, on appeal
commence and maintain its claims against the
from a decision of the Court of Appeal of the
Contractor (Issue No.2). It may be convenient
Republic of Trinidad and Tobago. The
to address each issue in turn.
judgment was delivered by Lord Neuberger
(who also serves as President of the UK’s
Employer’s financial arrangements
Supreme Court) in a judgment handed down
– a mixed question of fact and law
on 6 August 2015. The case concerns disputes
(Issue No.1)
between the Employer (NIPDEC) and the
Contractor (NHIC) arising out of a contract As noted earlier, FIDIC is unique amongst
for the construction of the new Scarborough standard form international construction
Hospital in Tobago. The contract was based contracts in containing a provision requiring
upon the FIDIC General Conditions of the Employer to provide satisfactory evidence
Contract for Construction, First Edition 1999, that it is able to discharge its payment
also known as the Red Book. The terms of the obligations under the contract. Sub-Clause
Red Book as considered by the Court in the 2.4 states:
NIPDEC case are identical to those found in “The Employer shall submit within 28 days
the FIDIC Yellow and Silver Books.7 This after receiving any request from the
decision is therefore of widespread Contractor, reasonable evidence that
application for international projects which financial arrangements have been made and
use FIDIC Red, Yellow or Silver Book terms as are being maintained which will enable the
the basis of the construction contract. Employer to pay the Contract Price (as
Following disagreements between the parties, estimated at that time) in accordance with
NHIC suspended works on the project and Clause 14 [Contract Price and Payment] ...”
some time later purported to exercise its right The facts in the NIPDEC case works provide a
to determine the contract. The parties then salutary lesson in the application of this
referred a number of differences to provision and the effect of non-compliance.
arbitration under the terms of the contract. The works commenced in March 2003 and
The Arbitrator (Dr Robert Gaitskell QC) were subject to an original Contract Price of
issued a number of awards. Two of the issues some TT$118,185,069.8 As they progressed,
determined by the Arbitrator were then the cost of the works increased and in
challenged. These two issues were connected. September 2014, the Contractor requested
The first issue was the Arbitrator’s decision that the Employer provide evidence of its
that the Contractor, NHIC, was entitled to financial arrangements under Sub-Clause 2.4
terminate the contract. This arose from a sufficient to satisfy the projected increased
question as to whether the Employer, NIPDEC, Contract Price, which was estimated to be in
had met the threshold for giving financial excess of TT$286 million;9 an increase of over
security for performance of its payment 140%.

6 [2015] UK PC 37.
7 Yellow Book Conditions of Contract for Plant and 8 Approximately US$ 17.6m.
Design-Build (ISBN 2-88432-023-7) and Silver 9 Approximately US$ 42.6m.
Book Conditions of Contract for EPC/Turnkey
Projects (ISBN 2-88432-021-0), both First
Editions, 1999.

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EMPLOYER’S FINANCIAL ARRANGEMENTS
AND CLAIMS UNDER FIDIC FORMS OF CONTRACT

The Privy Council judgment gives outline facts Moreover, in applying the law to the facts any
as to the extent to which the Employer sought wrongful conclusion or wrongful inference of
to satisfy the evidential threshold under fact is also reviewable as an error of law.”13
Sub-Clause 2.4. For the full story, you need to
One might, as a first impression, conclude that
go to the Trinidad and Tobago Court of Appeal
there was nothing wrong with the Court of
judgment.10 The Court of Appeal judgment
Appeal reviewing the facts afresh. After all, that
was delivered on 20 December 2013 and sets
was what the appellant Employer was asking the
out the text of the relevant exchange of letters
Court of Appeal to do, in deciding whether the
between the parties and the financial security
Employer had in fact satisfied the “reasonable
assurances given by the Office of the
evidence” threshold of financial arrangements
Permanent Secretary of the relevant Ministry.
under Sub-Clause 2.4. On this basis, the Court of
It is not necessary to recite the full exchanges
Appeal reasoned that the Arbitrator had been
between the parties but it is sufficient to note
wrong to conclude on the evidence that the lack
that the Contractor was concerned that
of formal Cabinet approval of the increased
without formal Cabinet Approval from the
budget for the works did not satisfy the
Government of Trinidad and Tobago, any
threshold of “reasonable evidence” of financial
assurances would be of limited value.
arrangements under Sub-Clause 2.4. In the
In approaching this question, the Court of judgment and reasoning of the Court of Appeal:
Appeal found that “reasonable evidence” of
Clause 2.4 speaks of “reasonable” evidence. It
financial arrangements under Sub-Clause 2.4
does not require the best or purest form of
was a mixed question of law and fact, quoting
evidence. Reasonableness for the purposes
Hudson’s Building and Engineering Contracts11:
of clause 2.4 depends on the nature of the
“… it has long been recognised that some evidence. Cabinet approval is no doubt the
questions of law depend upon applying what best form of evidence of financial
have been called primary facts to a legal arrangements. Thus the evidence of Cabinet
proposition itself containing a factual approval would easily have satisfied the
element … sometimes described as a requirement of “reasonable” evidence in
question of mixed law and fact or simply as a clause 2.4, as did the December 2004 letter.
secondary finding of fact. Classical examples But the absence of Cabinet approval would
would be a finding that, on primary facts not necessarily have breached it, if the
found, a contract had been frustrated or that assurance of the Employer’s ability to pay
a particular period constituted a reasonable came from the Permanent Secretary. The
time within which service of required notice lack of Cabinet approval does not render any
was to take place.”12 other evidence “not reasonable”. That must
turn on the nature of the evidence. NHIC by
However and crucially, the Court of Appeal
its insistence on Cabinet approval was asking,
allowed itself to get involved in the factual
not for reasonable evidence, but for an
aspect of the question:
absolute guarantee or assurance of payment.
“Similarly, in this case the assessment of the I struggle to comprehend how the letters of
evidence is a question of fact. Whether that the Permanent Secretary can be regarded as
evidence is “reasonable” is a question of law. It anything but reasonable evidence and to such
is an objective standard. Since it is an objective an extent that an entire project is shut down
test, it is reviewable by a Court of law. by a private contractor after millions of
dollars of public funds have been spent.”14

10 C .A. No. 281 of 2008. H.C.C. No. CV2007-02224.

13 Paragraph 81 CA judgment.
11 Volume 2, 11th Edition.
14 Paragraph 91 CA judgment.
12 Paragraph 80 CA judgment.

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EMPLOYER’S FINANCIAL ARRANGEMENTS
AND CLAIMS UNDER FIDIC FORMS OF CONTRACT

However, this was an appeal against the On this basis, the Contractor had been entitled
decision of an Arbitrator. This was found by initially to suspend and ultimately to terminate
the Privy Council to be a critical factor and the contract by reason of the Employer’s breach.
fatal to the integrity of the Court of Appeal’s
As a result of the decision in NIPDEC, it is likely
judgment because its approach involved
that the issue of “Employer’s financial
substituting the Court’s judgment for that of
arrangements” under Sub-Clause 2.4 of FIDIC
the Arbitrator on a matter which was
will receive a greater focus from parties on both
pre-eminently for the Arbitrator to determine.
sides of the contract. Contractors will want to
The Privy Council found that the Court of
retain the provision, as it provides a valuable
Appeal had allowed itself to take over the
protection to the effect that it will be paid for its
fact-finding role of the Arbitrator, which was
endeavours and, if “reasonable evidence” of
something it was not permitted to do.
satisfactory financial arrangements is not
NIPDEC is therefore a good illustration of the forthcoming, the Contractor can suspend or
Court’s policy to upholding arbitral awards. terminate. This is a powerful tool in the hands
Where the parties agree to refer their of the Contractor, which is also found in the
disputes to the decision of an Arbitrator, they FIDIC Yellow and Silver Books. It is also a tool
do so to the exclusion of the Court. Only in that can be used throughout the currency of
limited circumstances, is it permissible to the project, whenever the Contract Price
overturn an Arbitrator’s award. However, in appears likely to be subject to a material
the NIPDEC case, the Privy Council found increase. In this regard, the final sentence of
that there was no basis for interfering: Sub-Clause 2.4 is worth noting. This states:

“Where parties choose to resolve their “If the Employer intends to make any material
disputes through the medium of arbitration, change to his financial arrangements, the
it has been long established that the courts Employer shall give notice to the Contractor
should respect their choice and properly with detailed particulars.”
recognise that the arbitrator’s findings of
This means that where the financial
fact, assessments of evidence and formations
circumstances the Employer or economic
of judgment should be respected unless they
conditions change during the construction
can be shown to be unsupportable”15 .
execution phase, necessitating a need to
re-negotiate terms with its lenders, joint
Impact of the Privy Council
venture partners or off-takers (for instance)
decision in NIPDEC (Issue No.1)
this may well constitute “any material change
The effect of the Privy Council decision on Issue
to his financial arrangements.” In these
No.1 (Employer’s financial arrangements) was
circumstances, the Employer must notify the
that the Arbitrator’s award stood undisturbed, in
Contractor and if the Contractor is
determining that the Employer had failed to
concerned, it can then trigger the
satisfy the threshold of “reasonable evidence” of
requirement in the first part of Sub-Clause 2.4
satisfactory financial arrangements under
and require the Employer to provide
Sub-Clause 2.4. This was important because
“reasonable evidence that financial
non-compliance by the Employer with its
arrangements have been made and are being
obligations under Sub-Clause 2.4 gave rise to the
maintained which will enable the Employer to
right of suspension (Sub-Clause 16.1) and
pay the Contract Price.”
termination (Sub-Clause 16.2) by the Contractor.

15 NIPDEC judgment of Privy Council at paragraph 29.

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EMPLOYER’S FINANCIAL ARRANGEMENTS
AND CLAIMS UNDER FIDIC FORMS OF CONTRACT

The NIPDEC decision may also cast doubt as to arrangements are to be detailed in a “Financial
the bankability of certain projects which use the Memorandum” which is intended to detail the
FIDIC form of contract for the construction Employer’s financial arrangements and should
execution phase but which are dependent on be attached to the contract. This gives the
third party finance. If the debt service cover opportunity for the Employer to mandate (if
ratio is impaired due to the fall in the price of the that is its wish) that its financial arrangements
commodity being processed for sale by the are deemed acceptable by the Contractor.
plant or there has been a major cost blow-out However, Employers under the Gold Book will
(the latter being the case in the NIPDEC case), still need to exercise caution and consider
the project sponsor may find itself bound to further specific amendments, as Sub-Clause
notify the Contractor of material change in its 2.4 contains a similar final sentence as the
financial arrangements. If the Employer is then versions in the Red, Yellow and Silver Books.
unable to provide “reasonable evidence” of Thus, if the Employer under a long-term design,
satisfactory financial arrangements, the build and operate contract based on the FIDIC
Contractor can suspend or terminate. Where Gold Book intends to make any material
the project is still in the execution phase, this changes to its financial arrangements or finds
would leave Lenders on a project financed that it must do so because of changes to its
transaction with little choice but to step-in and financial or economic situation (which could
complete the project themselves. Lenders may well occur during the extended operational
baulk at the prospect of that risk. phase), it must give notice to the Contractor.
This brings with it the same obligation as was
Accordingly, it may be expected that
faced by the Employer in the NIPDEC case.
Employers using FIDIC forms will look to
amend or remove the provisions of Sub- In this commentator’s view, Employers (and their
Clause 2.4 altogether. The FIDIC Guide has funders) are more likely, post NIPDEC, to require
this to say on the subject: the wholesale deletion of Sub-Clause 2.4.

“If the Employer anticipates that (because

Employer’s claims under FIDIC
of the Contract’s duration, for example) he
(Issue No.2)
will not be able to submit evidence in
respect of the whole Contract Price, he The other significant issue decided in NIPDEC
would presumably have limited his concerns Sub-Clause 2.5 of the FIDIC form and
obligations by an appropriate amendment notices of claim by the Employer. Again, this
in the Particular Conditions.”16 provision appears in each of the Red, Yellow
and Silver Books in near identical language and
What that amendment may be is, of course, a is therefore of wide application on
matter for the Employer to determine and international projects which utilise the FIDIC
ultimately will be an issue to agree or standard form conditions.
negotiate with the Contractor.
It may be helpful to break the clause down into
It should be noted that the FIDIC Gold Book17 its constituent parts. In common with the
differs from the Red, Yellow and Silver Books drafting style of FIDIC, a number of separate
on this issue and points to one alternative. points are located within a single Sub-Clause.
Sub-Clause 2.4 of the Gold Book (Employer’s Sub-Clause 2.5 commences with the following:
financial arrangements) provides that such
“If the Employer considers himself to be
16 The FIDIC Contracts Guide (ISBN 2-88432-022-
entitled to any payment under any Clause of
9), First Edition 2000. these Conditions or otherwise in connection
17 Conditions of Contract for Design, Build and with the Contract ... he shall give notice and
Operate Projects (ISBN 978-2-88432-052-8) First
Edition 2008. particulars to the Contractor...”

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EMPLOYER’S FINANCIAL ARRANGEMENTS
AND CLAIMS UNDER FIDIC FORMS OF CONTRACT

This opening provision requires the Employer This involves the Engineer (under the Red and
to take the initiative and give a notice to the Yellow Books) making a Determination of
Contractor. It is a mandatory requirement, whether and if so how much is due to the
denoted by use of the word “shall”. It follows Employer.18 Thus, these details to be provided
that if the Employer fails to give notice, it will by the Employer are also necessary so that the
be in breach of contract. However, any such Engineer can do his job.
failure will have other serious consequences,
as we shall see. Notice requirements for
Employer’s claims as a condition
Another important provision within Sub-
precedent to entitlement
Clause 2.5 deals with the time for giving notice,
and provides: The sting in the tail of Sub-Clause 2.5 was
identified by the Privy Council in NIPDEC as
“The notice shall be given as soon as practicable being significant. This states:
after the Employer became aware of the event
or circumstances giving rise to the claim.” “The Employer shall only be entitled to set
off against or make any deduction from an
The interesting point to note here is the amount certified in a Payment Certificate, or
contrast with the requirements for the giving to otherwise claim against the Contractor, in
of notice required from the Contractor when accordance with this Sub-Clause.”
giving notice of its claims against the
Employer, under Sub-Clause 20.1 of the FIDIC This also provides a point of contrast with the
form. In the case of the Contractor “notice regime for Contractor’s claims under
shall be given as soon as practicable, and not Sub-Clause 20.1. As noted above, that requires
later than 28 days after the Contractor became a longstop period of 28 days for the
aware, or should have become aware, of the Contractor to give notice. Sub-Clause 20.1
event or circumstance”. In contrast, there is also includes express language which spells
no long-stop date for Employer’s claims. This out the consequences of non-compliance
might appear to suggest a less strict regime with the notice provisions:
for the Employer in the provision of such “If the Contractor fails to give notice of a claim
notices but there is a sting in the tail of within such period of 28 days, the Time for
Sub-Clause 2.4, as we shall see below. Completion shall not be extended, the
As to details of the claim to be given, Sub- Contractor shall not be entitled to additional
Clause 2.5 provides: payment, and the Employer shall be discharged
from all liability in connection with the claim.”
“The particulars shall specify the Clause or
other basis of the claim, and shall include In common law jurisdictions, most
substantiation of the amount and/or extension commentators would regard the drafting of
to which the Employer considers himself to be Sub-Clause 20.1 of the FIDIC form as making
entitled in connection with the Contract.” due notice from the Contractor a condition
precedent to its entitlement to pursue recovery
Clearly, the intention here is that the of its claims. The House of Lords has given
Contractor is given sufficient details to be able
to assess and respond to the Employer’s claim.

It should also be noted that under FIDIC,

18 Under the Silver Book, where there is no independent
Employer’s claims are subject to the Engineer engaged to administer the contract, the
Determination machinery of Sub-Clause 3.5. Employer determines the validity and quantum its
own claims, albeit the Contractor may give notice of
dissatisfaction of any such Determination within 14
days.

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EMPLOYER’S FINANCIAL ARRANGEMENTS
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guidance on the necessary ingredients for an “Its purpose is to ensure that claims which an
effective condition precedent clause under employer wishes to raise, whether or not they
English law. The reference point is the dictum are intended to be relied on as set-offs or
of Lord Salmon in Bremer Handelsgesellschaft cross-claims, should not be allowed unless they
mbH v Vanden Avenne-Izegem PVBA [1978]:19 have been subject of a notice, which must have
been given ‘as soon as practicable.”21
“In the event of shipment providing impossible
during the contract period, the second “...the natural effect of the closing part of
sentence of cl. 21 requires the sellers to advise clause 2.5 is that in order to be valid, any claim
the buyers without delay of the impossibility by an Employer must comply with the first two
and the reasons for it. It has been argued by parts of the clause , and that this extends to,
buyers that this is a condition precedent to the but, in the light of the word ‘otherwise’ is not
sellers’ rights under that clause. I do not accept limited to, set-offs and cross claims”22 .
this argument. Had it been intended as a
The Privy Council looked at the purpose of the
condition precedent, I should have expected
provision and identified that under FIDIC, the
the clause to state the precise time within
claims machinery applicable to Employer’s
which the notice was to be served, and to have
claims leads directly into the Determination
made plain by express language that unless the
process under Sub-Clause 3.5. As noted under
notice was served within that time, the sellers
Sub-Clause 2.4:
would lose their rights under the clause.”
“The particulars shall specify the Clause or
Thus, the ingredients for an effective
other basis of the claim, and shall include
condition precedent are often said to be that a
substantiation of the amount and/or extension
precise period of time is stated within which
to which the Employer considers himself to be
notice must be given and the consequences of
entitled in connection with the Contract.”
any non-compliance with that time period are
spelt out expressly. The language of Sub- Immediately after the provision of such
Clause 20.1 appears to satisfy these particulars, the linkage with the
requirements, with the effect that if the Determination process is found:
Contractor fails to give notice within the
“The Engineer shall then proceed in
prescribed period, it forfeits its claim. Indeed,
accordance with Sub-Clause 3.5
this interpretation was found to apply by Mr
[Determinations] to agree or determine (i) the
Justice Akenhead in Obrascon [2014]20, a case
amount (if any) which the Employer is entitled
decided under a contract based on the FIDIC
to be paid ...”
Yellow Book terms.
Thus, in NIPDEC (Issue No.2) the Court
This gives rise to the question as to whether
observed:
the requirements of Sub-Clause 2.5 for
Employer’s claims contain the necessary “If an Employer’s claim is allowed to be made
ingredients for an effective condition late, there would not appear to be any method
precedent, at least in common law by which it could be determined as the
jurisdictions. Thanks to the Privy Council in Engineer’s function is linked to the particulars,
NIPDEC, we now have an answer and it is not which in turn has to be served as soon as
good news for Employers. Lord Neuberger practicable”23
said this of Sub-Clause 2.5:

19 [1978] 2 Lloyd’s Rep 109 (HL) at 128, col 2. 21 Paragraph 38 of Privy Council Judgment.
20 Obrascon Huarte Lain SA v Attorney General for 22 Paragraph 39 of Privy Council Judgment.
Gibraltar [2014] EWHC 1028 (TCC). 23 Paragraph 38 of Privy Council Judgment.

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EMPLOYER’S FINANCIAL ARRANGEMENTS
AND CLAIMS UNDER FIDIC FORMS OF CONTRACT

NIPDEC is therefore persuasive authority for the and importantly, it will be noted that Sub-
proposition that if there is no valid Employer’s Clause 2.5 is concerned with “entitlement to
claim under Sub-Clause 2.5, there can be no payment” and the giving of notices to this
Determination under Sub-Clause 3.5. So even effect. Sub-Clause 2.5 does not preclude the
with what may otherwise be a valid claim by an Employer from raising an abatement
Employer, if it is notified later than “as soon as argument, namely that the work for which the
practicable”, it cannot proceed under Sub- contractor is seeking payment was poorly
Clause 2.5. This could affect Employer’s claims to carried out such that it does not justify any
deduct liquidated damages or to recover costs payment or is worth materially less than the
incurred where it rectifies itself defective works unit rate or lump sum price in the contract.
which the Contractor has failed to rectify.
The case was remitted to the Arbitrator to
The Court did not provide any definition of how disallow sums which (i) were not subject of
long a period is envisaged by the words “as soon notification in accordance with Sub-Clause 2.5
as practicable”. Clearly, that will depend on the and (ii) could not be characterised as abatement
facts in each particular case. However, it may claims. Not good news for the Employer.
be observed that the approach of the Privy
A recent decision of Mrs Justice Carr, in the
Council in NIPDEC does not strictly satisfy Lord
Technology & Construction Court in London,
Salmon’s guidance in Bremer v Vanden as to an
provides a further level of analysis concerning
effective condition precedent clause being
the Employer’s claim machinery under FIDIC:
expected “to state the precise time within
J Murphy & Sons Ltd v Beckton Energy Ltd
which the notice was to be served”
[2016]. 25
This also leads to the surprising conclusion
In the Beckton Energy case, the contract
that the absence of a 28 day (or any) longstop
which gave rise to the dispute was based on
in Sub-Clause 2.4, means that the requirement
the FIDIC Yellow Book. Murphy was seeking a
for an Employer’s claim notice has the
declaration that the Employer first had to
potential to be more demanding than that for
obtain a Determination of the Engineer in its
a Contractor’s under FIDIC forms; “as soon as
favour under Sub-Clause 3.5 before it could
practicable” may well expire sooner than 28
lawfully deduct liquidated damages for delay.
days after the Employer considers himself to
The liquidated damages claim of the Employer
be entitled to any payment.
was substantial, amounting to some £8.274m.

Not all Employer complaints are Sub-Clauses 2.5 and 3.5 of the contract in the
time barred Beckton Energy case were unamended from
The decision in NIPDEC is also persuasive the FIDIC standard form. Following NIPDEC,
authority for the proposition that where the one might therefore have expected the
Employer fails to notify a claim in accordance declaration to be granted in favour of Murphy.
with Sub-Clause 2.5: However, the Court found that the obligation
to pay liquidated damages under the Sub-
“the back door of set off or cross- claims is Clause 8.7 arose independently of Sub-Clauses
as firmly shut to it as the front door of an 2.5 and 3.5 and was not contingent upon an
originating claim.”24 Engineer’s Determination. Importantly in this
Thus, non-compliance with Clause 2.5 means regard, the contract in Beckton Energy had
that the Employer cannot use set-off to been amended. In Sub-Clause 8.7, the words
reduce its exposure to the Contractor’s claims “subject to Sub-Clause 2.5”, qualifying Murphy’s
or to any cross claims separately. However obligation to pay liquidated damages, had been

24 Paragraph 40 of Privy Council Judgment. 25 J Murphy & Sons Ltd v Beckton Energy Ltd [2016]
EWHC 607

mayer brown 9
EMPLOYER’S FINANCIAL ARRANGEMENTS
AND CLAIMS UNDER FIDIC FORMS OF CONTRACT

deleted. Rather, the bespoke drafting of Impact of the common law

Sub-Clause 8.7 meant that the obligation to pay
Thanks to the common law doctrine of
liquidated damages for delay was contingent
precedent, cases such as NIPDEC have the
only on the Contractor failing to achieve the
potential to affect the conduct of parties and
required milestone date for completion.
their approach when negotiating FIDIC forms
Similarly, in the Beckton Energy case the of contract globally. Employers and their
standard form of FIDIC bond wording had funders will likely remove Sub-Clause 2.4
been rejected. That FIDIC wording expressly (Employer’s financial arrangements) in light of
limited the Employer’s right to calling the NIPDEC decision.
Bond only when the Engineer had made a
Cases such as Beckton Energy serve to
Determination. That provision was removed,
emphasise the importance of clarity when
thereby providing the Court with another
drafting amendments to FIDIC (and other
indicator that the parties did not intend the
standard form) contracts and may also
Employer’s right to deduct liquidated
encourage those advising Employers to make
damages to be contingent on the use of the
amendments to the FIDIC terms so that even if
Employer’s claim machinery.
the Employer is found not to have complied
The Court in Beckton Energy found that the with the claims machinery in Sub-Clause 2.5,
deletion of words from the FIDIC standard form its right to deduct liquidated damages remains
was “only context and by no means intact.
determinative” but it was nevertheless “relevant
The Privy Council decision in NIPDEC applies
background” which the Court was entitled to
common law principles to two important
take into account in determining the objective
provisions found in some of the main forms of
intention of the parties and interpreting the true
FIDIC contract used on projects
meaning of the particular provisions in issue.
internationally. However, where the
The decision in Beckton Energy therefore governing law of the FIDIC contract is based
illustrates the importance of bespoke on another legal system, such as civil law or
amendments to the FIDIC forms of contract. Sharia law, the same result as was found to
The Court in Beckton Energy commented that apply in NIPDEC may not prevail. Even so, with
the amendments had not been fully thought the world’s population in 2016 estimated to be
through, noting the NIPDEC decision and the approaching 7.5 billion, 26 by my calculations
tension between Sub-Clause 2.5 and the the common law still applies to about 2.5
liquidated damages deduction provision in billion people. Not all of them will be involved
Sub-Clause 8.7, even had the words in the in the construction sector but many will be
FIDIC standard form not been deleted. affected by the assets built under FIDIC forms.
However and on balance, the Court found that
the right to deduct liquidated damages in
Jonathan Hosie
Sub-Clause 8.7 (with its bespoke amendment)
Partner, Construction and Engineering Group
created a self-contained and separate right of
Mayer Brown International LLP
the Employer to make deductions against or
require payment from the Contractor, The views expressed in this paper are
independent of the Employer’s claim personal and should not be attributed to
machinery in Sub-Clause 2.5 or the Mayer Brown or any of its clients.
Determination machinery in Sub-Clause 3.5.
It is unlikely that this would be the case in an
unamended FIDIC contract, applying the
reasoning in NIPDEC. 26 www.geohive.com/earth/

10 mayer brown
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