UK: Prepare The Ground For Effective Contract Administration: The UK's Privy Council Looks At Termination Risks And The Employer's Rights Of Set-Off Under The FIDIC Red Book

Introductory remarks The UK's Privy Council recently considered the interpretation of two clauses in the FIDIC Red Book 1999, concerning the obligations of an employer to evidence financial arrangements and to notify employer's claims1.

The Privy Council, hearing an appeal from the Court of Appeal of the Republic of Trinidad and Tobago, adopted a strict approach to both of these matters. As a result, employers operating under FIDIC contracts should give careful consideration to this decision, which highlights the importance of good and timely contract administration, in order to avoid landing themselves in hot water.

The facts National Insurance Property Development Company Limited (NIPDC), as employer, appointed NH International (Caribbean) Limited (NHIC), as contractor, in 2003 to construct a hospital in Tobago.

The contract was based on the FIDIC Red Book 1999. In 2006, NHIC suspended and then terminated the contract, on the basis that the employer had failed to comply with clause 2.4, which obliged NIPDC to provide "reasonable evidence" that financial arrangements had been made and were being maintained in order to enable the employer to comply with its payment obligations.

Several disputes were then referred to an arbitrator, two of which were appealed to the Court of Appeal of Trinidad and Tobago. The Privy Council had to consider two issues:

  1. NIPDC's ability to raise counterclaims following termination
  2. Whether NHIC had rightfully terminated the contract

A strict approach to the notification of employer's claims NIPDC raised various counterclaims as part of the financial assessment following the termination.

NHIC challenged these counterclaims on the basis that clause 2.5 of the FIDIC Red Book obliges the employer to give notice of any claims "as soon as practicable" after it becomes aware of the event or circumstance giving rise to the claim. Clause 2.5 goes on to state that: "The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this Sub-Clause." (emphasis added)

The arbitrator took the view, which was upheld by the Court of Appeal, that clause 2.5 was not sufficient to bar NIPDC's counterclaims in these circumstances. This was on the basis that the clause was limited to set-off against amounts certified in a payment certificate and could not serve to exclude or limit the employer's common law rights of set-off and/or abatement of legitimate cross-claims.

The Privy Council took a different view. It considered that, given the use of the word "otherwise", the wording of clause 2.5 could not be clearer and applied to any employer's claims, whether or not they are intended to be relied on as set-offs or cross-claims. To be successful, therefore, any employer's claim needs to be notified as soon as practicable and in compliance with the other provisions of the clause2.

This can be contrasted with the contractor's obligation to notify claims under clause 20 of the FIDIC Red Book. For example, in Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar3, the Technology and Construction Court in London saw no reason why the clause should be construed strictly against the contractor and saw reason why it should be construed reasonably broadly. The court held that the clause did not call for any particular form and should be construed as permitting any claim, provided it is made in writing to the engineer, the notice describes the event or circumstance relied on, and that the notice is intended to notify a claim for extension of time and/or additional payment. The court added that the notice "must be recognisable as a "claim"".

The Privy Council's decision is a warning to employers that courts and tribunals applying English law will take a stricter line when looking at compliance with the requirements in respect of employer's claims, both in terms of the timing and content of notices.

It is clear that employers must notify all and any claims without delay. The Privy Council did not, however, seek to opine on what time period might comply with the "as soon as practicable" requirement. Unlike clause 20, there is no maximum 28-day cut-off for claims in clause 2.5, so, what may or may not amount to a compliant notification is going to depend on the facts in each case.

In addition, along with the notice, the employer must provide particulars specifying the clause or other basis of the claim and substantiation of the amount claimed and/or extension to which the employer considers itself entitled.

Obligations of an employer to evidence financial arrangements The assessment of NHIC's right to terminate turned on analysis of letters issued by the permanent secretary at the Tobago Ministry of Health, which assured the contractor that the government would meet the financial requirements for the project. However, the letters did not contain specific confirmation of approval by the Cabinet to payment of sums due, which was required for this project.

The arbitrator considered that the evidence was not sufficient. Clause 2.4 required more than just showing the employer was able to pay, it needed evidence of positive steps that the financial arrangements had been made. The Court of Appeal disagreed and considered that the arbitrator was demanding the "highest standard" rather than "reasonable evidence".

The Privy Council held that the arbitrator had erred in law as to one of his reasons for holding that the termination was valid. However, that did not infect his first and main reason, which it duly upheld. As a result, the Privy Council confirmed the arbitrator's decision that the contract was validly terminated.

The case serves as a useful illustration of the dangers of this clause. If left un-amended by the parties, there is considerable scope for disagreement as to what constitutes "reasonable evidence". Given that a breach of this clause entitles the contractor to terminate the contract, the consequences of getting this wrong can be severe for an employer.

Recommendations for contract negotiation and administration

  • The Privy Council has expressed its view as to what FIDIC, and, therefore, the parties, intended by clause 2.5 in its un-amended form.
  • As a result of this decision, employers should ensure that any claims arising during the course of a project are promptly notified to the contractor. The same analysis is likely to apply to contractors making claims under a FIDIC-based sub-contract if equivalent clauses are included.
  • During contract negotiations, contractors will, no doubt, want the certainty provided by clause 2.5 to be maintained, whereas employers may be minded to seek an amendment to soften its effects.
  • FIDIC recognised in clause 2.4 the importance to the contractor of the employer's ability to comply with its payment obligations. Indeed this was one of a small number of contractor-friendly provisions introduced by FIDIC in its Red Book 1999.
  • So as to provide greater certainty, it would be sensible for an employer to identify at tender stage what evidence it is prepared to give and for clause 2.4 to be amended so as to specify precisely what is to be provided.
  • Alternatively, in order to achieve FIDIC's objective, the parties may agree to replace clause 2.4 with a more specific obligation, such as a requirement for the provision of a payment guarantee or the setting-up of a project bank account.
  • Finally, as ever, the message to employers (or their engineers), and contractors for that matter, is that they must manage the risks under the contract through diligent and timely contract administration.

  1. NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago) [2015] UKPC 37 (6 August 2015).
  2. The one exception highlighted by the Privy Council was an abatement argument. In other words, it could still be open to the employer to argue that the contractor should not be entitled to payment on the basis that the work carried out was so poor or defective that it was not worth the sum claimed.
  3. Obrascon Huarte Lain SA v Her Majesty's Attorney General for Gibraltar [2014] EWHC 1028 (TCC).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.