14  fidic
                     FIDIC Yellow Book and 
                     judicial interpretation
                     James Pickavance and Kate Sanger of Eversheds analyse a recent court ruling interpreting the FIDIC 
                     Yellow Book with implications for both employers and contractors. 
                                                                                    tion at the Gibraltar Airport. These works comprised the 
                                                                                    design and construction of a road and tunnel under the 
                                           KEY POINTS                               eastern end of the runaway (works). Following some pre-
                       l  A ‘common sense’ approach will be applied by              liminary site investigations, GOG issued an invitation to 
                          the courts to the resolution of disputes where            tender to a number of potential tenderers for the works. 
                          the parties have contracted on a FIDIC basis              Ultimately it signed an agreement with OHL in No-
                       l  Sub-cl 4.12 (unforeseen physical conditions)              vember 2008, which was  based on a largely unamended 
                          imposes an active responsibility on the                   FIDIC Yellow Book. The construction period was two 
                          contractor to have appropriate regard to,                 years, but progress of the works was significantly delayed 
                          and to interpret, site data and pre-contract 
                          information, and to price bids accordingly                and, after 30 months, approximately only 25% of the 
                       l  Sub-cl 20.1 (contractors’ claims) will be                 works were completed. 
                          construed broadly. The wording of the                        On 16 May 2011 a notice to correct was sent to 
                          clause means that contractors could submit                OHL pursuant to sub-cl 15.1 (initial notice to correct). 
                          a claim for either a prospective delay or a               It set out a number of alleged breaches of contract (a 
                          retrospective delay                                       number of which were premised on sub-cl 8.1 (failure 
                       l  An employer exercising its rights to                      to proceed with due expedition and without delay)); the 
                          terminate for contractor default under sub-
                          cl 15 (termination) must do so only where                 remediation steps to be taken in respect of each breach; 
                          the breach giving rise to the termination is              and the time by which the breaches were to be remedied. 
                          substantial, but a substantial breach did not                OHL was warned that failure to achieve any one of 
                          itself need to amount to repudiatory conduct              the required remedial actions in the notice to correct 
                                                                                    would entitle GOG to terminate the contract. OHL 
                                                                                    denied liability, claiming that unforeseen levels of soil 
                                                                                    contamination were to blame, the risk for which lay 
                                                                                    with GOG. A second notice to correct was issued 
                                                                                    pursuant to sub-cl 15.1 on 5 July 2011 (second notice). 
                            he recent decision of Obrascon Huarte Lain SA           This second notice to correct related specifically to the 
                            v A-G for Gibraltar [2014] EWHC 1028 (TCC)              failure to commence excavation work as instructed. 
                     Thas provided some valuable insight as to the court’s             On 28 July 2011 GOG sent a notice of 
                     interpretation of three key provisions of the FIDIC            termination pursuant to cl 15.2 of the contract, 
                     Conditions of Contract for Plant and Design-Build (1st         notifying that the contract would be terminated on 
                     edn, 1999) (FIDIC Yellow Book). In this case, proceed-         12 August 2011 as a result of OHL’s failure to comply 
                     ings were brought by Obrascon Huarte Lain SA (OHL)             with the notices to correct (sub-cl 15.2(a)); and/or 
                     against the Government of Gibraltar (GOG) in relation          demonstration of an intention not to continue the 
                     to GOG’s termination of a construction contract. GOG           performance of its obligations under the contract 
                     decided to undertake works to resolve the traffic conges-      (sub-cl 15.2(b)); and/or failure, without reasonable 
                                                                                                                                          fidic  15
                         excuse, to proceed with the works in accordance with                   risk: (i) Make a substantial financial allowance within 
                         cl 8 of the contract (sub-cl 15.2(c)).                                 the tendered price for this. (ii) Plan and price for a 
                            OHL responded on 3 August 2011, advising GOG                        post-contract site investigation accordingly. (iii) Plan to 
                         that it considered the notice of termination wrongful                  remove all the made ground which could be assessed as 
                         and amounted to a repudiatory breach of contract.                      having a good chance of containing contaminants. (iv) 
                         On 20 August 2011, GOG informed OHL that it                            Plan the design and construction of the works on the 
                         was terminating the contract, alternatively accepting a                basis that there was an unacceptable risk of significant 
                         repudiation on the part of OHL (for various reasons).                  quantities of contaminants randomly distributed in the 
                            Akenhead J held that OHL’s breaches of contract had                 ground (which it was noted was what OHL’s belated 
                         been sufficient to justify a termination under cl 15, and              redesign had sough to achieve).
                         the contract had been lawfully terminated. In arriving at 
                         this decision, three key provisions of the FIDIC Yellow            Contractors’ claims
                         Book –  unforeseeable physical conditions., notice of              A contractor’s entitlement to an extension of time 
                         claim and termination – were examined in detail.                   pursuant to sub-cl 8.4 is subject to sub-cl 20.1 
                                                                                            (contractors’ claims). In assessing OHL’s claims for 
                         Unforeseen physical conditions                                     extension of time, Akenhead J noted:
                         OHL claimed that the amount, location and extent of                l  The service of a notice by a contractor required by 
                         contamination in the ground, contamination in the                      sub-cl 20.1 as soon as practicable, and not later than 
                         water and rock excavation, were physical conditions                    28 days after the contractor became aware, or should 
                         that were not reasonably foreseeable by an experienced                 have become aware, of the event or circumstance is a 
                         contractor by the date of submission of its tender.                    precondition to an award of additional time and/or 
                         OHL argued that, pursuant to sub-cl 4.12, this                         cost under the contract.
                         unforeseeability entitled it to an extension of time for           l  Irrespective of this precondition, the clause was to be 
                         completion under sub-cl 8.4.                                           construed broadly, and not interpreted strictly against 
                            This argument was not successful. Akenhead J                        the contractor. 
                         held, on the facts, that the quantities of contaminated            l  The wording ‘event or circumstance’ in sub-cl 20.1 
                         materials in the ground were in fact likely to have been               therefore meant that contractors could submit a claim 
                         less than could have reasonably been foreseen by an                    for an extension of time either when it is clear that 
                         experienced contractor. Akenhead J noted:                              there will be a delay (prospective) or when the delay 
                         l  Sub-clause 4.12 imposed a positive obligation on                    has at least started to be incurred (retrospective).
                             a contractor to have appropriate regard to, and to             l  The onus of proof was on the employer to prove 
                             interpret, site data and pre-contract information and              that the notice required by sub-cl 20.1 was 
                             to price bids accordingly.                                         submitted outside the 28-day-period.
                         l  It was not reasonable for OHL to rely on preliminary            l  Sub-clause 20.1 did not specify any form of 
                             information provided in an invitation to tender.  An               notice, besides that service must be recognisable 
                             experienced contractor would not limit itself to an                as a ‘claim’. OHL’s reliance on monthly weather 
                             analysis of the geotechnical information contained in              progress reports as evidence of a claim under sub-
                             a pre-contract site investigation report.                          cl 20.1 was insufficient.
                         l   A contractor provided with preliminary information 
                             regarding site contamination was obliged to carry out          Clause 15 (termination)
                             some intelligent assessment and analysis of: (i) why           GOG terminated on three separate grounds; sub-cll 
                             the site was contaminated; and (ii) what the real risk         15.2(a), 15.2(c) and 15.2(b). 
                             was of encountering more contaminated material 
                             than envisaged at tender stage.                                Sub-clause 15.2(a) – notices to correct
                         l  Where there is foreseeable uncertainty of the precise           The notices to correct issued by GOG identified a 
                             type, location and quantity of contaminated soil,              number of contractual breaches, the remediation steps to 
                             bidding contractors could reasonably have taken some           be taken in respect of those breaches, and a time by which 
                             or all of the following steps pre-contract to address this     the breaches were to be remedied. Where an employer 
                                                                                                                                            December 2014
                      16  fidic
                      seeks to terminate a contract pursuant to sub-cl 15.2(a)       a failure to ‘proceed with the Works in accordance with 
                      for failure to comply with a notice to correct under sub-cl    Clause 8’. In a fairly scathing assessment of OHL’s 
                      15.1, the notice issued pursuant to sub-cl 15.1 will itself    performance, Akenhead J stated that he was satisfied 
                      be examined in order to determine whether or not the           that OHL had failed to proceed in accordance with 
                      termination is justified. Akenhead J noted:                    cl 8.1, meaning that OHL was in default under cl 8.1 
                      l  The primary purpose of sub-cl 15.1 is to give a             already on 28 July 2011. Although there were some 
                         contractor the right of remedy.                             expressions by OHL wanting to proceed with the works, 
                      l  Accordingly, for an employer to issue a notice              its inactivity indicated otherwise.
                         under sub-cl 15.1: (i) there must be a significant or 
                         substantial failure. However, a substantial failure did     Significance
                         not itself need to amount to repudiatory conduct;           This decision will be relevant to both employers and 
                         and (ii) the failure must be established as a failure to    contractors. To date, judicial guidance on FIDIC 
                         comply with the contract.                                   provisions has been limited as disputes involving FIDIC 
                      l  The time for making good specified by the employer          contracts are usually resolved in arbitration. Whilst the 
                         in a notice issued under sub-cl 15.1 must be                judgment was lengthy and detailed, and the case itself 
                         considered ‘reasonable’ in all of the circumstances         was largely determined on its particular facts, 
                         prevailing at the time of the notice.                          Akenhead J’s comments on the provisions discussed 
                      l  The fact that liquidated damages were payable for the       above indicate that a ‘common sense’ approach will be 
                         failure to complete on time did not qualify the right       applied to the resolution of disputes in circumstances 
                         to terminate under sub-cl 15.2 for failing to proceed       where the parties have contracted on a FIDIC basis. 
                         with due expedition and without delay.                      Akenhead J’s decision regarding unforeseen physical 
                                                                                     conditions confirms both that the determination 
                      Sub-clause 15.2(b)                                             of a claim under sub-cl 4.12 will require a detailed 
                      Akenhead J held that OHL had, on the facts,                    examination of the facts, and that contractors will be 
                      demonstrated an intention not to continue performance          judged by an objective standard. 
                      in accordance with its obligations under the contract             This decision indicates that courts are unlikely to 
                      so as to give rise to an entitlement to terminate. In          be sympathetic to contractors who simply rely on 
                      considering the standard to be satisfied by sub-cl             preliminary site information, submit a low offer and then 
                      15.2(b), Akenhead J noted:                                     seek additional relief by way of a claim for site conditions 
                      l  Where an employer purports to terminate under               following commencement of works. 
                         sub-cl 15.2(b) on the basis the contractor has                 Whilst employers will generally exercise a contractual 
                         either abandoned the works or otherwise plainly             right to terminate only as a ‘last resort’, this decision 
                         demonstrated the intention not to continue                  indicates that courts will uphold an employer’s 
                         performance of its obligations under the contract,          contractual right to terminate a contractor’s employment 
                         a verbal and contractual distinction needed to              under sub-cl 15.2 in circumstances where the 
                         be drawn between an intention to continue                   termination can be justified. 
                         performance and an intention to continue                       Finally, it is probable that this ‘contractor-friendly’ 
                         performance of the contractual obligations.                 interpretation of sub-cl 20.1 will be relied upon by 
                      l  Determining an intention not to continue performance        contractors to reduce the risk of losing the entitlement 
                         could be judged by both words and actions.                  to an extension of time in circumstances where it has 
                      l  Here a prolonged failure to perform in accordance           arguably failed to provide notice. Similarly, employers 
                         with the contract, with no demonstrable intent to           seeking to enforce the 28 day notice period for claims are 
                         remedy the failure or recommence the permanent              likely to be more alert to ensuring drafting amendments 
                         works until a commercial solution was reached,              are made to clarify that this is the intended position.  
                         ultimately justified termination.                           While Akenhead J’s analysis of sub-cl 20.1 was in this 
                                                                                     instance restricted to claims for extensions of time, the 
                      Sub-clause 15.2(c)(i)                                          broad interpretation may well be relied on by contractors 
                      The majority of items in the first notice to correct alleged   when submitting claims for additional costs. CL