UK: Taking-Over Under FIDIC

Last Updated: 17 December 2013
Article by Jeremy Glover

It is not often that the FIDIC form of contract comes before the English courts. The primary reason for this is that almost all disputes, if they arise, are settled through arbitration. The case of Doosan Babcock Ltd v Comercializadora de Equipos y Materiales Mabe Limitada1 is one exception.

Why did the court have jurisdiction?

The reason it came before the courts was because Doosan had applied to the Technology and Construction Court ("TCC") asking that the TCC grant relief under section 44(3) of the 1996 Arbitration Act. Section 44 of that Act deals with the court's powers that may be exercisable in support of arbitral proceedings. Under sub-clause 44(3), unless otherwise agreed by the parties, the court has the same power of making orders for the purposes of and in relation to arbitral proceedings as it has for the purposes of and in relation to legal proceedings:

"(3) If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets."

The Judge applied the reasoning of Clarke LJ in the Court of Appeal case of Cetelem SA v Roust Holdings2 and held that there was no reason why an order should not be made for the purpose of the preservation of a right if its effect is to preserve the value of that right. As Mr Justice Edwards- Stuart noted, a contractual right is not preserved if a failure to give effect to it would destroy much or all of its value. Therefore provided the requirements of urgency and necessity were met, the court would have the power to grant an injunction under section 44(3).

The performance guarantee

Here the case was said to be of some urgency because Doosan feared that Mabe might make a call under the performance guarantee. The situation was as follows. Doosan had contracted to supply two boilers to Mabe for a power plant in Brazil. In accordance with the Contract, Doosan arranged performance guarantees. The guarantees entitled Mabe to payment on demand and were to expire upon the issue by Mabe of Taking-Over Certificates ("TOCs") or by 31 December 2013, whichever was earlier. By the terms of the guarantees the provider of the guarantee undertook to pay Mabe:

"on receipt of your first demand on us in writing stating that [the Claimant] has not performed its obligations in conformity with the terms of the Contract".

As Mr Justice Edwards-Stuart noted:

"This wording could hardly be wider ... the bank giving the guarantee is concerned only with the terms of the demand, not with the question of whether or not it is justified."

Taking-Over under the contract

Sub-clause 10.2 of the FIDIC Contract included the following provisions: "The Engineer may, at the sole discretion of the Employer, issue a Taking-Over Certificate for any part of the Permanent Works.

The Employer shall not use any part of the Works (other than as a temporary measure which is either specified in the Contract or agreed by both Parties) unless and until the Engineer has issued a Taking-Over Certificate for this part. However, if the Employer does use any part of the Works before the Taking- Over Certificate is issued:

(a) the part which is used shall be deemed to have been taken-over as from the date on which it is used,

(b) the Contractor shall cease to be liable for the care of such part as from this date, when responsibility shall pass to the Employer, and

(c) if requested by the Contractor, the Engineer shall issue the Taking-Over Certificate for this part."

It was also relevant that the standard FIDIC sub-clause 9.1 had been deleted in its entirety. That clause, of course, provides that the Tests on Completion include precommissioning and commissioning tests and trial operation. It was relevant because Mabe were to argue that completion, or taking-over by Mabe, was only to occur after the Tests on Completion (including the Performance Tests) had been satisfactorily completed.

Taking-Over

During July 2013 Doosan requested that Mabe issue the TOCs on the grounds that the boilers had been taken into use in November 2012 and May 2013 respectively. Mabe refused and relied upon a provision in the Contract permitting it to withhold the TOCs if the boilers were only put into use as a "temporary measure".

During August 2013 Mabe notified a claim for US$57m for delayed supply and defects in the boilers. In reply Doosan requested that Mabe undertake to not make any demand on the guarantees without giving at least 7 days' notice. Mabe refused to give the undertaking so Doosan applied to the TCC for an interim injunction, contending that in refusing to issue the TOCs, Mabe was in breach of the Contract and was relying upon this breach to enable a demand for payment. At the first hearing on 4 October 2013 the Judge agreed with Doosan that the court had jurisdiction to grant relief under section 44(3) of the 1996 Arbitration Act and listed the matter for a return date in two weeks' time in order to allow the parties time to prepare evidence as to whether or not the boilers were operating on a "temporary measure" basis.

At the restored hearing, Doosan maintained that the boilers were in commercial use, relying upon press releases indicating that the boilers had exported over 7,500 hours of power to the grid since installation. Doosan submitted that where Mabe was relying upon its own breaches of the Contract to facilitate a call on the guarantees, it could show a strong case, entitling the court to grant interim relief. Mabe argued that Doosan did not have a strong case because it had misconstrued the contractual requirements for performance tests prior to the issue of the TOCs. Given that the Contract provided for arbitration, the Judge made it clear that the court had no jurisdiction to make final findings on the facts or to finally determine the proper meaning of the Contract.

On the facts the Judge found that Mabe had taken the boilers into commercial use. He also found that Mabe had not complied with the contractual requirements to show that use of the boilers as a "temporary measure" was in accordance with the terms of the Contract or as agreed by the parties. Further, it seemed to the Judge to be clear that some, if not all, of these performance tests could only be carried out once the units had been put into use.

Would the court grant interim relief?

In deciding whether to grant an interim injunction, the Judge recognised the principles set out in the American Cyanamid case and more recently in Simon Carves v Ensus UK (Legal Briefing, 12 of 2011) where Mr Justice Akenhead said that a claimant must show that it has a strong case that the terms of the underlying contract, in relation to which the bond had been provided by way of security, clearly and expressly prevented the beneficiary from making a demand under the bond. If so, the beneficiary could be restrained by the court from making such a demand. Unsurprisingly, the court recognised that any call, especially an unjustified one, would be likely to damage the commercial and financial reputation of a contractor.

The Judge rejected Mabe's argument that Doosan had misconstrued the Contract. He concluded that Doosan's factory tests were sufficient and that whilst any failure to achieve the performance tests would create a liability for liquidated damages, it would not justify non-issue of the TOCs. The Judge therefore agreed that Doosan had demonstrated a strong case. In granting Doosan interim relief, the Judge drew an analogy with the Simon Carves case where the parties had agreed expressly that the beneficiary's right to make a demand on the guarantee was either qualified or would be extinguished if certain events occurred.

Applying the principle set out by the House of Lords in Alghussein Establishment v Eton College, Mr Justice Edwards-Stuart made an alternative finding that interim relief could also be granted on the basis that Mabe should not be permitted to benefit from its own wrong. Doosan had a strong case that Mabe's refusal to issue the Taking-Over Certificates was a breach of contract. It was as a result of that breach, and only that breach, that Mabe was in a position to make a call on the guarantees. If Mabe had issued the certificates, the guarantees would have expired and so there would be no guarantee on which to make a call.

The courts will usually refuse to restrain a bank from making payment under an ondemand instrument unless there is clear evidence of fraud. Doosan submitted that it could not show fraud as Mabe had not yet made a call on the guarantees but that it should not have to because the position was different where it could dispute the validity of Mabe's right to make a call. Here, the right to make a call under an ondemand guarantee was qualified by the terms of the underlying contract.

Conclusions

The (interim and not binding3) conclusion on the question as to whether the works had been taken-over or not might, in light of the fact that the boilers had already exported some 7,500 hours of power, seem on the reported facts to have been an obvious one for the court to reach. However, disputes as to whether or not works are ready for takeover or have actually been taken-over are an all too common feature of large international projects and any court decision that discusses the issue is always of interest.

This was a case relating to a broadly drawn on-demand guarantee and it should be noted that Mr Justice Edwards-Stuart, in applying previous case law, made it clear that to obtain interim relief, the claimant would have to show that it had a "strong case".

Finally, the TCC has provided clear support for the arbitration process by recognising that, as the application was one to preserve the value of a contractual right, it fell within the scope of section 44(3) of the 1996 Arbitration Act. The speed with which the court reacted may also be of some significance, as the changes to the ICC Rules, which came into place at the beginning of 2012, mean that a party may have an alternative route to obtaining interim relief through the use of the Emergency Arbitrator Rules.

1. [2013] EWHC 3010 (TCC), [2013] EWHC 3201 (TCC)

2. [2005] EWCA Civ 618

3. A point that the court took some care to make clear.

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