Employer claims under the FIDIC form

By Jeremy Glover, Partner, Fenwick Elliott

At the inaugural FIDIC Africa conference, held in Zambia on 12—15 October 2015, there was discussion about FIDIC’s plan for revising their Rainbow Suite of Contracts. One point which struck me was the suggestion that FIDIC are giving serious consideration to making the employer’s right to bring claims subject to a similar condition precedent to that currently imposed upon the contractor by sub-clause 20.1. By condition precedent we mean that if a claim is not made within the time limits imposed by that clause, then the right to make the claim will be lost. FIDIC has always tried to ensure that its suite of contracts is as balanced as possible and this might be one way to maintain parity.

This is an interesting possibility. Currently the standard sub-clause 2.5 of the FIDIC form states that:

“If the Employer considers himself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract … the Employer or the Engineer shall give notice and particulars to the Contractor. …

The Notice shall be given as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim. … The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount and/or extension to which the Employer considers himself to be entitled in connection with the Contract.

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.”

There is no similar provision to sub-clause 20.1 which says that any claim to time or money will be lost if no notice is given within the specified time limit.  As a consequence, it has generally been considered that a failure by the employer to bring a claim “as soon as practicable” would not be treated as a condition precedent. That said, any notice relating to the extension of the Defects Notification Period had of course to be made before the current end of that period.

What made FIDIC’s comments especially interesting was that they coincided with the release of a decision by the Privy Council in the case of NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago).1 The Privy Council is effectively the Supreme Court for many Caribbean countries.

The case itself was a long-running dispute arising out of a contract, under the FIDIC Red Book, to construct a new hospital in Tobago. In short, an arbitrator had decided that the contractor was entitled to terminate the contract as a result of a failure by the employer to provide proper evidence that it held funds to cover the contract price. Sub-clause 16.4 provided that in such circumstances, the contractor was entitled to be paid loss of profit and other losses arising as a result of this termination.

One of the defences raised by the employer was an attempt to set off claims of its own against the contractor. The contractor said that the employer could not do this, as the claims had not been notified in accordance with sub-clause 2.5. The arbitrator at first instance agreed that the employer was entitled to bring these claims because “clear words are required to exclude common law rights of set-off and/or abatement of legitimate cross-claims”.  The arbitrator felt that the words of clause 2.5 were not clear enough.

However, the Privy Council agreed with the contractor, noting that it was hard to see how the words of clause 2.5 could be clearer. Lord Neuberger said that the purpose of sub-clause 2.5:

“is to ensure that claims which an Employer wishes to raise, whether or not they are intended to be relied on as set-offs or cross-claims, should not be allowed unless they have been the subject of a notice, which must have been given ‘as soon as practicable’. If the Employer could rely on claims which were first notified well after that, it is hard to see what the point of the first two parts of clause 2.5 was meant to be. Further, if an Employer’s claim is allowed to be made late, there would not appear to be any method by which it could be determined, as the Engineer’s function is linked to the particulars, which in turn must be contained in a notice, which in turn has to be served ‘as soon as practicable’.

Lord Neuberger continued:

“Perhaps most crucially, it appears to the Board that … although the closing part of clause 2.5 limits the right of an Employer in relation to raising a claim by way of set-off against the amount specified in a Payment Certificate, the final words are ‘or to otherwise claim against the Contractor, in accordance with this sub-clause’. It is very hard to see a satisfactory answer to the contention that the natural effect of the closing part of clause of 2.5 is that, in order to be valid, any claim by an Employer must comply with the first two parts of the clause, and that this extends to, but, in the light of the word ‘otherwise’, is not limited to, set-offs and cross-claims.”

The Privy Council felt that the words “any payment under any clause of these Conditions or otherwise in connection with the Contract” were of very wide scope. Sub-clause 2.5 made it clear that if the employer wanted to raise such a claim, it must do so promptly and in a particularised form. Finally, the Privy Council felt that the purpose of the final part of the clause was to emphasise that, 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”.

What the Privy Council did not do was provide any definition of “as soon as practicable”.  Therefore this is likely to be a question of fact depending on the circumstances of each particular project. However, the judgment of the Privy Council does suggest that employers too might be subject to a time bar, under the FIDIC form at least. Indeed it might be that depending on the definition of “as soon as practicable” that time bar is potentially stricter that the 28-day time bar contractors are subject to. 

Further, it is a time bar in two parts.  Not only must the employer make a claim “as soon as practicable”, but the employer must also provide particulars or other substantiation; again the absence of these could prove fatal to the right to assert a right of set-off. Obviously employers (and those acting as employers’ representatives) should take careful note of this decision, and ensure that any claims are promptly notified to the contractor.

So perhaps there is no need for FIDIC to make any changes to sub-clause 2.5 after all.  If the Privy Council decision is followed, it would appear that the right of employers and contractors alike to bring claims under the FIDIC form may both be subject to certain conditions precedent that must be followed to ensure that potentially valid claims can be duly adjudicated upon.

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• 1. [2015] UKPC 37