Getting termination right: PBS Energo A.S. v Bester Generacion UK Limited & Anor [2020] EWHC 223 (TCC) and the FIDIC Silver Book

By Jesse Way, Associate, Fenwick Elliott

Introduction

PBS Energo A.S. v Bester Generacion UK Limited is a case with a raft of issues which commonly arise on construction projects.  However, the parties’ entitlement to terminate was the central issue before the Court and will be the focus of this article.  Terminating a contract is a risky business and, if it is not done correctly, it can have disastrous financial implications.  This article will consider the PBS decision and discuss the 2017 FIDIC Silver Book (“Silver Book”) provisions for termination by a Contractor for a failure to receive payment.  

The project concerned was a biomass energy plant to be built in the north of Wales.  Ultimately, the plant was never constructed and the case was concerned with the circumstances in which that happened.  PBS, a company incorporated in the Czech Republic, specialises in the design and manufacture of power plant equipment.   Bester, a UK subsidiary of a Spanish company, specialises in the provision of renewable energy projects. Unsurprisingly, the parties fell out and ended up in Court.  PBS, the Contractor, claimed it was entitled to terminate because Bester, the Employer, failed to pay the fifth Milestone payment by the date required and substantially failed to fulfil its contractual obligations.  Bester claimed it could terminate the contract because PBS had failed to comply with a Notice to Correct and PBS had abandoned the works or evinced an intention not to perform the contract. 

In the end, the Court determined that PBS’s basis for terminating the contract was without foundation.  The Court held that Bester was entitled to terminate the contract and its reasons for reaching that finding are explained in more detail below. 

Facts

On 29 April 2016, Bester contracted with Equitix ESI CHP (Wrexham) Limited (“Equitix”) to design, construct, install and commission a biomass-fired energy generating plant and associated works, and later (by a separate contract) to operate the plant (“the Equitix Contract”).

On 10 May 2016, PBS and Bester entered into a subcontract (“the Contract”) for the engineering, procurement, construction and commissioning of a biomass-fired energy generating plant and associated works at Wrexham (“the Works”).  The Contract price was approximately £14 million and the Contract was based on an amended form of the FIDIC Silver Book Conditions of Contract for EPC/Turnkey Projects.    

The project commenced in May 2016 but the key programme dates were not met.  Disputes arose and, by April 2017, contractors performing civil works had stopped work.  

On 24 May 2017, PBS gave notice of its intention to terminate the Contract on the basis that Bester failed to make payment for Milestone 5 by the Final Date for Payment and for substantial failures to fulfil its contractual obligations.  The substantial failures alleged by PBS were essentially a failure to determine PBS’s extension of time (“EOT”) claims.  PBS’s EOT claims related to: 

• unforeseeable detection of underground sewage/drainage system;
• detection of asbestos at the site;
• delay in provision of ROC and permits; 
• additional payment for a variation in respect of an electrical connection; and
• BT cable lines. 

On 14 June 2017, PBS sent a further letter to terminate the Contract on and from the date of the letter.

Bester then sent a series of letters in which Bester sought to affirm the Contract and requested PBS retract the termination but PBS did not do so.   

On 12 July 2017, Bester served a notice of termination on the basis that:

• PBS failed to comply with Bester’s Notice to Correct of 7 November 2016 (relating to delays in PBS’s submissions of civil work designs, procurement of documents, failure to progress the works, and failure to provide collateral warranties and subcontracts from PBS’s subcontractors);
• ongoing delay by PBS, failure to proceed diligently, and unlawful suspensions; 
• PBS failed to provide permits and assistance to Bester; and
• PBS abandoned the works and/or intended not to perform its obligations under the Contract.

On 7 August 2017, Bester confirmed its termination of the Contract.

Whilst the above was happening, Equitix issued a notice of intention to terminate the Equitix Contract on 3 July 2017 and did terminate that contract on 17 July 2017.  

PBS’s termination

The Court considered PBS’s EOT claims and determined they were without basis or not pursued by PBS at trial.  An examination of each of the EOT claims and the Court’s reasoning in respect of each is beyond the scope of this article.  The second basis upon which PBS sought to terminate the Contract was that Bester failed to make payment of Milestone 5 by the date for payment.  The Contract contained a number of Milestones but the issue was whether Milestones 3–5 were achieved.  In relation to Milestone 5, if it was achieved, the issue was whether the notice served in relation to it was valid so as to trigger an entitlement to payment. 

The Court held that Milestones 3 and 4 were never achieved, albeit they were paid on a without prejudice or commercial basis.   As Milestones 3 and 4 had not been achieved, it followed that payment for Milestone 5 could never have become due for payment.  This was because completion of the preceding Milestones was a prerequisite to payment (i.e. Milestones 1–4 had to be achieved before payment for Milestone 5 could be achieved).  Accordingly, PBS’s termination failed. 

Bester’s termination 

The Court held that Bester was entitled to terminate.  This was on the basis that PBS had abandoned the works and failed to comply with the Notice to Correct.  PBS had argued that it was unable to comply with the Notice to Correct because Equitix had terminated Bester’s contract and locked up the site.  However, the Court found that on the evidence it was in fact PBS who had locked up the site and abandoned it long before termination of the Equitix Contract. The Court found that Bester’s contract was terminated because of PBS’s failure to perform.  PBS tried to rely on the prevention principle; however, the Court was not persuaded the prevention principle applied here.  As an aside, the Court noted Coulson LJ in Cyden v North Midland [2018] EWCA Civ 1744 where he reiterated the warning that the prevention principle is not a broad and overarching principle or general backstop to an EOT regime, but a principle of narrow application.  Accordingly, as Bester was entitled to terminate, the Court held that Bester’s counterclaim succeeded, which was approximately £16 million (and the consequence of PBS’s failed termination). 

2017 FIDIC Silver Book – termination by a Contractor

Sub-Clause 16.2 of the Silver Book sets out how a Contractor can terminate the contract.  In this article, only termination for a failure to receive payment will be considered. 

Sub-Clause 16.2.1 and 16.2.2 relevantly state:

“16.2.1  Notice

The Contractor shall be entitled to give a Notice (which shall state that it is given under this Sub-Clause 16.2.1) to the Employer of the Contractor’s intention to terminate the Contract … if:

…

(b)  the Contractor does not receive a payment under Sub-Clause 14.7 [Payment] within 42 days after the expiry of the relevant period for payment stated in Sub-Clause 14.7;

…

16.2.2  Termination

Unless the Employer remedies the matter described in a Notice given under Sub-Clause 16.2.1 [Notice] within 14 days of receiving the Notice, the Contractor may by giving a second Notice to the Employer immediately terminate the Contract.  The date of termination shall then be the date the Employer receives the second Notice.”There are a number of elements to the above clauses which are commonly overlooked or misinterpreted by Contractors (not only in FIDIC contracts but in standard forms as well).  

One of the most common pitfalls is the issue of a Notice of termination (the Notice contemplated in Sub-Clause 16.2.2) before, and without, issuing the initial Notice (the Notice contemplated in Sub-Clause 16.2.1).   However, as is clear from the clauses, the first step is to issue Notice of the Contractor’s intention to terminate the Contract.  This is an important point.  The reason for such a Notice is because the consequences of termination, as can be seen from the PBS decision, are significant and also to allow the Employer an opportunity to remedy the default.  

A Notice is a defined term in the Silver Book and the requirements for it must be followed, including how and to whom it is to be issued (see Sub-Clauses 1.1.48 and 1.3).  The Notice must also state that it is given under Sub-Clause 16.2.1.  Whilst this may seem insignificant, the purpose is to draw the Employer’s attention to the fact that it is a Notice of intention to terminate. 

The Contractor can only proceed to terminate if the Employer does not remedy the matter described in the Notice under Sub-Clause 16.2.1 within 14 days of receiving the Notice.  Once again, the Contractor must comply with the requirements for a Notice as described above.  However, termination can only occur if the Employer has not remedied the matter in the initial Notice “within 14 days of receiving the Notice”.  It is not within 14 days of the Contractor sending the Notice.  It is important to note the distinction because the Silver Book sets out when Notices are deemed to be received.

Once the Notice to terminate is given, it takes effect immediately and there are further steps required to be taken by the Contract under the later clauses regarding termination.  However, it is clear from the above that there are a number of steps to be followed to correctly terminate a contract subject to the Silver Book conditions and they must be complied with.   

Of course, in the example above, it is all predicated on the basis that the Contractor has in fact not received a payment under Sub-Clause 14.7 and that the payment application process has been complied with by the Contractor.  A common way for an Employer to impeach a termination by a Contractor on the basis of a failure to receive payment is that the Contractor was never entitled to payment because the Contractor failed to follow the payment application process.  This is similar to what occurred in PBS because the Court held that PBS had no entitlement to payment for Milestone 5 because completion of Milestones 3 and 4 was a prerequisite for an entitlement to payment for Milestone 5.  As PBS did not complete Milestones 3 and 4, entitlement to payment for Milestone 5 could not arise.  

Conclusion

Termination is a common issue that arises on construction projects.  The PBS case serves as a good example of the importance of getting termination right as there is often a competing termination and the consequences of an incorrect termination are significant.  To terminate a contract effectively it is imperative that the terms of the contract are followed and it is clear from the Silver Book conditions that there are many requirements which can easily be overlooked.  The bottom line?  Check twice before terminating (and then again!).

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