UK: Termination By The Employer Under The FIDIC Form Of Contract

Last Updated: 28 July 2014
Article by Jeremy Glover

Termination is a serious step and is never one to be taken lightly. It is important that determination provisions are followed precisely. If a dispute arises, those procedures will usually be carefully considered and strictly applied. These issues recently came before the TCC in London, in the case of Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar1 where Mr Justice Akenhead had to consider whether or not the Employer, in a tunnel project at Gibraltar airport, was entitled to terminate the contract. The contract was the FIDIC Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed by the Contractor, 1st edition, 1999 (better known as the "Yellow Book").

Sub-clause 15.1 states that: "If the Contractor fails to carry out any obligation under the Contract, the Engineer may by notice require the Contractor to make good the failure and to remedy it within a specified reasonable time."

Sub-clause 15.2 lists the circumstances in which an Employer may terminate upon the giving of 14 days' notice, including if the Contractor:

"(a) fails to comply ... with a notice under Sub-Clause 15.1 ...
b) ... plainly demonstrates the intention not to continue performance of his obligations under the Contract,
(c) without reasonable excuse fails:
(i) to proceed with the Works in accordance with Clause 8."

Sub-clause 15.1: notice to correct

First of all, the Judge considered subclause 15.1, noting that the following:

(i) Sub-clause 15.1 related to "more than insignificant contractual failures" by the Contractor, for example a health and safety failure, bad work or a serious delay on aspects of the work. Given the potentially serious consequence of non-compliance, the notices need to be construed strictly, and the Judge noted that "generally in relation to termination for fault clauses, courts have often construed them in a commercial way so as to exclude reliance on trivial breaches". 2

(ii) The specified time for compliance with the sub-clause 15.1 notice must be reasonable in all the circumstances prevailing at the time. What is reasonable is fact sensitive.

(iii) Sub-clause 15.1 is designed to give the Contractor an opportunity and a right to put right its previous, identified contractual failure.

(iv) The Judge noted with approval the comments of the editors of Hudson's Building and Engineering Contracts (12th edition) at para 8.056:

"Termination clauses occasionally allow termination on the ground of 'any breach' or 'any default'. Although in principle, parties may agree whatever they wish, the courts will generally be reluctant to read such wording literally. 'Default' will be read as meaning a default relevant to the contract, and the courts will treat matters which are not a breach of contract as excluded from the meaning of default. 'Any breach' will be held to refer only to important breaches, to exclude minor breaches, and to include only such breaches as are of substantial importance."

(vi) The FIDIC contract has a warning mechanism whereby termination could be avoided by the Contractor's compliance with the sub-clause 15.1 notice:

"Commercial parties would sensibly understand that this contractual chance is a warning as well to the Contractor and the remedy is in its hands in that sense."

Further, termination could not legally occur if the Contractor has been prevented or hindered from remedying the failure within the specified reasonable time. Under English law, there is an implied term that the Employer shall not prevent or hinder the Contractor from performing its contractual obligations and usually an implied term of mutual cooperation. If after a notice has been served, the Employer hindered or prevented the Contractor from remedying the breach, the Employer could not rely on the Contractor's failure in order to terminate the Contract.

The project sub-clause 15.1 notices

Two sub-clause 15.1 notices were served, one on 16 May 2011 and one on 5 July 2011. The Judge noted that prior to the first notice, for the preceding 5 months, no critical, substantive or permanent work had been done by OHL, the Contractor. Under the notice, OHL was called upon to "resume tunnel excavation work" and "proceed with the cropping and repairs to the diaphragm walls unaffected by standing water" by 30 May 2011. The Judge considered the time given to rectify the breach was reasonable, especially as the detailed design was approved sufficiently and the relevant approval forms were provided in a timely fashion well within this initial 14-day period. If they had not been, it might have been more arguable that there was some prevention on the part of the Employer.

The next failure alleged was that OHL had failed "to commence temporary sheet piling of the subway". Here the Judge was not satisfied that OHL was by 16 May 2011 in breach of Clause 8 in respect of the alleged failure to start sheet piling for the subway. The work was not on the critical path and it was therefore difficult to find that a deferment of the sheet piling until later would necessarily have led to any overall delay to the project. This meant that it could not be said that there was a failure to proceed without delay.

The next complaint was regarding a failure to start underwater trenching and ducting work. Here the Judge concluded that OHL was in breach of Clause 8.1 in that it was not and had not been proceeding with due expedition and without delay. Indeed the Contractor was already in culpable delay as from about October 2009 when the work could and should have been completed. However, the Judge was not satisfied that the time given to start this work (3 weeks) had been established as being reasonable. The onus was on the Employer to establish this.

A notice was also served in respect of OHL's failure to provide acceptable method statements which OHL proposed to adopt for tunnel excavation work. This was a breach of sub-clause 8.1, as an acceptable method statement was a prerequisite to starting the excavations for and in connection with the tunnel. There was no evidence that there was any good excuse or even explanation as to why an acceptable method statement had not been produced by 16 May 2011. Here, following the service of the notice, OHL submitted an unacceptable revised method statement late which was duly rejected 21 days later. Accordingly, OHL did not comply with the notice.

The next item on the 16 May 2011 Clause 15.1 notice was the failure "to proceed with the dewatering of the site with due expedition and without delay". Even on OHL's programme, it should have been operational by 16 May 2011. It was, in the view of the Judge, perfectly reasonable to require that the dewatering commenced by 30 May 2011. However, there was a continuing breach and non-compliance with the notice as no dewatering actually started by or even on 30 May 2011.

A further notice was issued on 5 July 2011, relating to the exposure of some panels. It was suggested that this notice was part and parcel of a long-established strategy by the Employer to terminate the Contract. The Judge considered that the second notice was intended in effect "as a test to encourage OHL to get on and do some work". The sub-clause 15.1 notice was issued when no work had been done to comply with an Instruction. The Judge thought that the motivation of the Employer was not relevant, unless it was shown to be in bad faith. It would not be bad faith to issue any such notice if it was justified under the Contract, even if it was issued in circumstances in which the Engineer and the Employer believed that it would not be complied with and, if not, termination might, could or would follow thereafter. On the facts, the Engineer was entitled to issue the second notice as not only had OHL not complied with the relevant instruction, but also it had shown no real intention of complying with it.

Next the Judge had to consider the extent to which the sub-clause 15.1 notices were or were not complied with. The Judge found that nothing was done by OHL with regard to the cropping of the diaphragm walls and the related excavation works. There was no good reason why OHL did not resume this work. Further, no adequate explanation was offered as to why an appropriately revised method statement could not have been provided. There was continued non-compliance up to the date of termination in this regard. The real reason for, and indeed the true cause of, the continuing delay was in fact that OHL was unable to secure a sign off on the design because there was a very real problem with the stability of the revised tunnel design. However, this was the risk and the fault of OHL.

The position with the diaphragm panels was somewhat different: work started on 13 July 2011 (albeit 8 days after the notice) and continued until 21 July 2011. The precise detail of compliance was not fully investigated at the trial and the Judge noted that had this been the only item upon which the termination was based, he would not have found that there was sufficiently significant non-compliance with the scope of the instruction. For example, the Engineer actually instructed, whilst these works were going on, various changes to the original instruction. However, there was clearly noncompliance with the time period given in the second sub-clause 15.1 notice and there was no good reason why it was not complied with within the 7-day period referred to in the notice; OHL had had some 2½ weeks to comply with EI 20 and had not done so, and there was physically no good reason why they had not got on with and completed the instructed works within 7 days of the second notice. The relevance of this is that it was further evidence that OHL was not committed to pursuing work with any expedition or at best that it was in effect committed to doing the minimum that it thought it could get away with.

Notice of termination – sub-clause 15.2

Having concluded that there were continuing grounds of non-compliance by OHL with the sub-clause 15.1 notices after the times given for compliance had expired, the Judge went on to consider whether OHL had by 28 July 2011, the date of the termination letter, "plainly demonstrate[d] the intention not to continue performance of these obligations under the Contract" or "without reasonable excuse fail[ed] ... to proceed with the Works in accordance with Clause 8", within the meaning of Clauses 15.2(b) and (c). Again, whilst noting that this must be primarily a matter of fact and degree, the Judge set out some basic points of principle:

(i) The test must be an objective one. If OHL privately intended to stop work permanently but continued openly and assiduously to work hard at the site, this would, objectively not give rise to a plain "demonstration" of intention not to continue performance. Similarly, the fact that OHL was, and had been for many months, doing no work of any relevance without contractual excuse could, if judged objectively, give rise to a conclusion that it had failed to proceed in accordance with Clause 8. (ii) The grounds for termination must relate to significant and more than minor defaults on the grounds that it cannot mutually have been intended that a (relatively) draconian clause such as a termination provision should be capable of being exercised for insignificant or insubstantial defaults. For example, a few days' delay in the context of a 2-year contract would not justify termination on the Clause 8 ground and an unwillingness or even refusal to perform relatively minor obligations would not justify termination on the "intention not to continue" ground.

The decision

The Judge was, on the facts, wholly satisfied that OHL had failed, almost from start to finish of this project, to proceed in accordance with Clause 8.1 of the Contract Conditions. The lack of expedition on the part of OHL had led to what amounted to a 2-year delay on a 2-year contract, for which there was at best a minimal entitlement to extension of time. Accordingly, the Employer was entitled to terminate the contract.

Footnotes

1 [2014] EWHC 1028 (TCC)

2 Per approach of Lord Diplock in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201D: "... if a detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts common sense, it must be made to yield to business common sense."

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