FIDIC standard form: Rock steady ruling

It is welcome that, at a relatively early stage, the parties decided to have this dispute resolved by the Technology and Construction Court (TCC) in London, because of its specialist expertise, rather than by the Gibraltar courts as provided in the contract. Large international disputes like this will play an increasingly vital part in keeping the ailing UK civil justice system going. It was also a rare opportunity for the English courts to pass judgment on some of the key provisions in the FIDIC standard form used on the majority of international construction and engineering projects.

The dispute concerns the construction of a road tunnel under part of Gibraltar airport which lies on an isthmus which is geographically and emotionally at the heart of the sovereignty dispute between the UK and Spain. It involves a claim for damages against the Gibraltar government brought by Spanish contractor Obrascon Huarte Lain SA (OHL).

The tunnel was designed to prevent the need for traffic to travel to the border literally across the runway. The project was supposed to take two years, but after two and a half years, only 25% of the work had been completed. OHL said the rock it had encountered was more onerous than it could reasonably have anticipated at tender. It then suspended work on the strength of a report warning of a health and safety risk resulting from airborne contamination on the site.

Gibraltar decided it had no option but to terminate the contract, which incorporated the FIDIC design and build form (the Yellow Book).

One line of attack taken by OHL was the fact that, whereas the contract requires notices to be sent to a specified address, the termination notice had been sent to a different address, namely OHL’s site office

At the heart of the dispute was the termination issue. If, as OHL argued, Gibraltar’s termination of the contract had been wrongful, OHL would have been justified in terminating the contract and entitled to substantial compensation. Gibraltar succeeded in defeating OHL’s claim and the decision required the judge to review a number of the most important FIDIC provisions.

One line of attack taken by OHL was the fact that, whereas the contract requires notices to be sent to a specified address, the termination notice had been sent to a different address, namely OHL’s site office. In rejecting OHL’s position, the judge considered that the fact that both parties had used OHL’s site office for communications throughout the project completely undermined OHL’s contentions. He also indicated that service of an otherwise valid termination notice on the wrong address would not amount to a repudiation.

The alternative line of attack from OHL related to the actual grounds on which Gibraltar had relied for the notice. Such grounds, OHL suggested, had to be sufficiently serious to justify the use of such a draconian sanction. Clause 15 of the Yellow Book permits the engineer to serve a notice to remedy on the contractor if it fails to “carry out any obligation under the contract”. OHL argued that this must mean a failure sufficiently serious to amount to a repudiation. The judge’s conclusion was that, although any breach relied on for such a notice did have to be more than trivial, OHL was wrong in suggesting that it had to be repudiatory.

Another ground relied on by Gibraltar was that OHL’s conduct “plainly demonstrate[d] the intention not to continue performance of his obligations under the contract”. In deciding that Gibraltar’s use of that ground was legitimate, the judge said that this provision will be triggered even if the contractor is actually performing if, in doing so, it is not complying with “important contractual provisions”. Indeed, he added that this should be judged not simply by reference to what the parties say but also to their deeds.

The other interesting aspect of the judgment is the judge’s treatment of the notice requirements for contractor claims in clause 20. That provision makes any claim brought by the contractor conditional upon the service of a notice describing the matters on which he intends to rely. Failure to serve the notice within 28 days following the date on which the contractor became aware, or should have been aware, of such matters is fatal to any claim.

What has not been so clear is what starts this time period running. The judge used an example of a variation issued on 1 June which was going to affect performance in some way. However, in the judge’s example, it was not until October that it was clear that it was going to actually hold up completion of the works as a whole and it was not until November that this delay actually occurred. The judge considered that the contractor had until the date in November to give notice.

Let us hope that more FIDIC users will follow in the footsteps of these parties by bringing their disputes to the TCC for resolution.

Dominic Helps is a consultant for construction specialist law firm Corbett & Co