Termination by the contractor

The decision in the case of NH International (Caribbean) Ltd v National Insurance Property Development Company Limited (Trinidad and Tobago)1  was an interesting one for a number of reasons.

We have already discussed this case in the context of time bars on pages 20 and 21 of this Review. However, the case has a number of important lessons for employers and in particular in terms of the importance of diligent contract administration.

The case was a decision of the Privy Council in London. The Privy Council is made up of members of the UK Supreme Court and is the final court of appeal for many Commonwealth countries. The appeal in question here came from Trinidad and Tobago and arose out of two interim arbitration awards.

In 2003, the National Insurance Property Development Company Ltd (“NIPDEC”) engaged NH International (Caribbean) Ltd (“NHIC”) to construct the new Scarborough Hospital in Tobago. The Contract was based on the 1999 FIDIC Red Book. Following disagreements between the parties, NHIC suspended work on the project in September 2005, and, in November 2006, it purported to exercise its right to determine the Agreement.

The key provisions of the Agreement were as follows:

(i) Clause 2.4 provided that the employer, NIPDEC, “shall submit within 28 days after receiving any request from the Contractor [NHIC], reasonable evidence that financial arrangements have been made and are being maintained which will enable the Employer to pay the Contract Price … in accordance with clause 14”.

(ii) Clause 14 set out the contract price and procedure for payment, including provisions for interim certificates and a final certificate, referred to as “Payment Certificates”.

(iii) Clause 16.1 entitled the contractor, after giving 21 days’ prior notice to the employer, to “suspend work (or reduce the rate of work) unless and until [it] has received the … reasonable evidence”. Clause 16.2 entitled the contractor to terminate the Agreement if, within 42 days of giving notice under clause 16.1, it had not received the reasonable evidence required by clause 2.4.

Employer’s financial arrangements

Clause 2.4 was an entirely new provision inserted into the 1999 FIDIC Rainbow suite of contracts. It provides a mechanism whereby the contractor can obtain confirmation that sufficient funding arrangements are in place to enable him to be paid. This is something which may be of particular importance if the employer is a company which has been specifically set up to carry out the project in question and this is therefore typically backed by loan finance. It may also be important if the employer orders a significant variation midway through the project. It is also a clause that typically the employer will seek to delete.

Here, on 3 September 2004, NHIC issued a request to NIPDEC under clause 2.4. NIPDEC responded on 29 December 2004, enclosing a letter from the Project Administration Unit of the Ministry of Health (“the Ministry”), which advised that the Cabinet had approved additional funding for the project in the sum of US$59.1m. On 28 April 2005, NHIC sent a further request under clause 2.4, which was answered on 5 July 2005 by the Permanent Secretary at the Ministry, Reynold Cooper. Having referred to the fact that the estimated final cost was $286,992,070, Mr Cooper stated that the Ministry “advise without prejudice that funds are available in [this] sum to meet the estimated final cost to completion”.

NHIC then wrote on 8 July 2005, expressing concern about the words “without prejudice” and asking whether there had been Cabinet approval for payment of sums due under the Agreement. No response was received to this request. NHIC then suspended work under the Agreement on 23 September 2005 (having already reduced its rate of work on 23 June 2005).

On 19 October 2006, over a year later, NHIC received a letter from the new Permanent Secretary, Sandra Jones, dated 6 October 2006. After referring to the previous correspondence, Ms Jones stated that the Government “confirm[ed]” that (i) completion of the project “is of the highest priority”, (ii) the current estimate for the work was US$224,129,801.99, (iii) “these funds are available from the consolidated fund for disbursement to NIPDEC for onward payment to NHIC or for direct payment to NHIC”, (iv) “moneys certified or found due to NHIC … will be paid by the Government”, and (v) “the Government stands fully behind the project … and will meet the contractual financial requirements for completion of the project”.

On 27 October 2006, NHIC wrote to NIPDEC requesting confirmation that the Cabinet had approved the funds. No such confirmation was forthcoming and on 3 November 2006, NHIC issued a notice of termination pursuant to clause 16.2. Around this time, the Cabinet accepted a recommendation from Ms Jones that the funds referred to in the letter of 6 October 2006 be provided for completion of the project, and this decision was formally recorded in a note prepared by the Cabinet Secretary on 16 November 2006.

The arbitrator’s decision

In the arbitration, the arbitrator decided that the letters of 29 December 2004, 5 July 2005 and 6 October 2006, whether taken together or separately, did not amount to such “reasonable evidence” that “financial arrangements” had been “made and maintained”. Accordingly, he concluded that NHIC had been entitled to terminate the Agreement as it had purported to do on 3 November 2006.

The arbitrator said that clause 2.4 required more than showing that “the employer is able to pay”, let alone that it was enthusiastic about the project. What was required was evidence of “positive steps” on the part of the employer which showed that “financial arrangements” had been made to pay sums due under the Agreement.

Although the arbitrator accepted that the evidence before him showed that, as at 3 October 2006, ministerial and prime ministerial consents to the payment of any money due under the Agreement would be approved by Cabinet, he noted that this had not been communicated to NHIC. The arbitrator accordingly held that NHIC was entitled to terminate the Agreement.

The Privy Council agreed with the arbitrator, for example citing the arbitrator’s views that “the mere fact that an employer is wealthy is inadequate for the purposes of sub-clause 2.4” and that “the mere fact that an Employer has good reasons for wanting a project completed does not itself mean that he has made and maintained the necessary financial arrangements”. Accordingly the termination was valid.

The employer’s cross-claims

As we have noted on page 20 and 21 of the Review, the Privy Council found that the employer was not entitled to set off any of its claims against the contractor. Under sub-clause 2.5, if the employer wished to raise such a claim, it must do so promptly and in a particularised form. Where the employer has failed to raise a claim as required by the earlier part of the clause:

“the back door of set-off or cross-claims is as firmly shut to it as the front door of an originating claim”.

There was one limited exception. Clause 2.5 did not prevent the employer from raising an abatement argument – for example that the work for which the contractor is seeking a payment was carried out so poorly that it does not justify any payment, or that it was carried out defectively so that it is worth significantly less than the contractor is claiming.

Conclusions

Whilst both clauses 2.4 and 2.5 of the FIDIC form are perhaps unusual in that they place specific requirements on the employer, the Trinidad case provides an important lesson for any employer, whatever contract they are operating under. Both problems could have been avoided through more diligent contract management. If the employer had submitted timely claims as required under the contract, it could have set these off against the contractor’s claim.

If the employer had responded more promptly to the contractor’s requests for details of the employer’s financial arrangements, particularly when the contractor had exercised its right of suspension, then the contractor would not have been entitled to terminate.

Put another way, if the employer had maintained better lines of communication with the contractor, it may never have found itself in these difficulties at all.

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  • 1. 2015] UKPC 37

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