March 2016 An international perspective Annual Review of English Construction Law Developments Contents 3 Introduction 4 The enforceability of liquidated damages clauses 9 Employer claims and fi nancial arrangements: FIDIC before the Privy Council 14 The interpretation of design obligations in construction contracts: fi tness for purpose vs reasonable skill and care 19 Exclusion clauses update: differences in approach continue 25 Restraining calls under on-demand securities: debate continues 30 The impact of insurance obligations on liability between the parties under construction contracts 35 Controlling management risk on construction projects: the effectiveness of 'entire agreement', 'no amendment' and 'no waiver' clauses 43 The interpretation of express good faith obligations in construction contracts 47 Good faith and reasonableness in the exercise of contractual discretions 55 FIDIC dispute resolution update 2 | Annual Review of English Construction Law Developments Introduction Welcome to the 2016 edition of our internationally focused Annual Review of English Construction Law Developments. 2015 has been an eventful year for English Construction Law, with a number of important decisions from the UK’s highest courts, the Supreme Court and Privy Council, as well as the English Court of Appeal. 2016 shows no sign of slowing, with a number of the cases covered in this year’s Annual Review presently under appeal, including one to the Supreme Court. The articles in this year’s edition cover rulings from the Supreme Court and Privy Council as to the validity of liquidated damages clauses and the meaning of key causes in the FIDIC suite of contracts, as well as an expansion of the law governing the exercise of contractual discretions (which are frequently deployed in construction contracts). We also cover an important decision of the English Court of Appeal, now on appeal to the Supreme Court, with regard to the interpretation of design obligations in construction contracts and the interplay between fi tness for purpose and reasonable skill and care obligations. New guidance has also been given by the English Court of Appeal as to the interpretation of insurance obligations. Particular care is needed to ensure that these obligations do not inadvertently override the allocations of risk agreed by the parties in other parts of the contract with regard to defective work or the consequences of each other’s negligence. Repeating themes from previous editions, we have also included updates in relation to on-demand securities, good faith obligations under English law, and English law’s approach to exclusion and limitation clauses. The cases continue to provide a developing picture in relation to these issues. Finally, and prompted by a number of cases on the topic in 2015, we take an in depth look at the role of 'entire agreement', 'no amendment' and 'no waiver' clauses in controlling management risk on construction projects. We hope you enjoy our analysis of the law and recent cases on the above topics. Should you wish to receive more frequent updates throughout the coming year, please feel free to sign up for our Law-Now service at www.law-now.com and select 'Construction' as your chosen area of law. We look forward to working with you over the coming year and wish you a prosperous continuance of 2016. Victoria Peckett Partner, Head of Construction T +44 (0)20 7367 2544 E [email protected] Your free online legal information service. A subscription service for legal articles on a variety of topics delivered by email. www.cms-lawnow.com 3 The enforceability of liquidated damages clauses 'Penalty' clauses Commercial contracts will often provide that where one party is in breach of the contract, they must pay a pre-determined amount of damages to compensate for that breach. Traditionally, English law has made a distinction between a liquidated damages clause, which is enforceable, and a penalty which is unenforceable. The traditional approach to such clauses dates from a 1914 decision of the English House of Lords (now known as the Supreme Court) where Lord Dunedin stated the test for an unenforceable penalty as being whether the stipulated damages were primarily intended as a deterrent against a breach of the relevant obligation instead of a genuine pre-estimate of the loss which was likely to be suffered as a result of such a breach (Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd). Cavendish and ParkingEye In 2015, two appeals came before the Supreme Court in which the traditional approach to liquidated damage clauses noted above was challenged. The fi rst appeal concerned a dispute between Cavendish Square Holding BV ('Cavendish') and a Mr Talal El Makdessi. Mr Makdessi sold to Cavendish part of his advertising and marketing company. The contract included an 'earn out' provision whereby the fi nal two instalments of the purchase price were to depend on the future fi nancial performance of the company as a means of valuing goodwill in the business. The contract also gave Mr Makedessi an option in future to sell the remaining shares in the company to Cavendish at a price refl ecting the goodwill in the business (again by reference to the company’s fi nancial performance in the years after the sale). The contract also provided that if Mr Makdessi breached certain restrictive covenants against competing activities, Mr Makdessi would not be entitled to receive the fi nal two instalments of the purchase price (clause 5.1) and could be required to sell his remaining to shares to Cavendish, at a price excluding the value of the goodwill in the business (clause 5.6). Mr Makdessi subsequently breached these covenants but argued that clauses 5.1 and 5.6 operated as penalty clauses and were unenforceable. The English Court of Appeal agreed and, overturning Mr Justice Burton at fi rst instance, held that clauses 5.1 and 5.6 were unenforceable penalties. A landmark decision of the UK’s Supreme Court in 2015 has reformulated the English law principles applicable to liquidated damages clauses. The decision has considerable implications for construction contracts and is likely to make challenges to the enforceability of liquidated damages clauses more diffi cult than is already the case. The decision is also likely to give more fl exibility to Employers to propose broader liquidated damages regimes, by reference to a wider variety of business and other interests. 4 | Annual Review of English Construction Law Developments | Annual Review of English Construction Law Developments The second appeal, on a much more modest scale, concerned a parking fi ne. ParkingEye Ltd ('ParkingEye') managed a car park on behalf of the owners of a shopping complex of which the car park formed part. Customers were permitted to park for free up to a period of 2 hours. ParkingEye displayed numerous notices throughout the car park, stating that a failure to comply with a two hour time limit would 'result in a Parking Charge of £85'. Mr Beavis parked in the car park but overstayed the two hour limit by almost an hour. ParkingEye demanded payment of the £85 charge. Mr Beavis argued that the £85 charge was unenforceable at common law as a penalty. The Court of Appeal upheld the fi rst instance decisions rejecting those arguments. The Supreme Court decision The Supreme Court allowed the appeal in the Cavendish proceedings and dismissed the appeal in ParkingEye, upholding the validity of the disputed clauses in both cases. In brief terms, the Supreme Court ruled that: — The rule against penalty clauses should not be abolished, but was in need of refi nement. — The rule should apply only to secondary obligations, being obligations which are contingent on the breach of a primary obligation, such as the payment of liquidated damages (the rule extends more broadly, however, to cover non-monetary obligations imposed upon such a breach). The rule should not be extended to cover cases where there is no breach of a primary obligation (as is now the case in Australia). — The true test for whether a clause is a penalty is 'whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.' — In straightforward cases, where a party’s interest in performance of a primary obligation will be met by fi nancial compensation, the existing rules focusing on whether a clause is a 'genuine pre-estimate of loss' or is intended primarily as a deterrent are likely to be suffi cient. In more complex cases, where there are other factors in addition to fi nancial losses, a broader enquiry focusing on the legitimate interest of the innocent party will be appropriate. — The distinction between primary and secondary obligations means that the 'the application of the penalty rule can still turn on questions of drafting'. The wording used by parties will not be conclusive, however, and the rule will still apply where a 'realistic appraisal of the substance of contractual provisions' shows that they are intended to be secondary obligations dependent on the performance of primary obligations, even where drafted in terms which avoid any breach of contract arising (sometimes referred to as 'disguised penalties'). In relation to the Cavendish appeal, the Supreme Court held that clause 5.1 was in reality a price adjustment clause, and therefore not a secondary provision but a primary obligation. Similarly, clause 5.6 was a share forfeiture clause and also held to be a primary obligation. As such, they were not unenforceable penalty clauses. Nonetheless, the Supreme Court also appears to have considered both clauses as if they were secondary obligations and therefore subject to the rule against penalties. On that basis, clause 5.1 was held not to be a penalty because Cavendish had a 'legitimate interest' in the observance of the restrictive covenants, in order to protect the goodwill of the business. The court could not determine how much less Cavendish would have paid for the business without the benefi t of the restrictive covenants. This was a matter for the parties, who were 'sophisticated, successful and experienced commercial people bargaining on equal terms over a long period and with expert legal advice.' The same 'legitimate interest' justifi ed Clause 5.6 and, although the clause acted as a deterrent by intending to infl uence Mr Makdessi’s conduct, it was not 'penal' since the object was not to punish. With regard to the ParkingEye appeal, both ParkingEye and the owners of the car park were said to have a legitimate interest in charging overstaying motorists, which extended beyond the recovery of any loss. The landowners were interested in the provision and effi cient management of customer parking for retail outlets and ParkingEye was interested in raising income from the charge. Further, the charge was neither extravagant nor unconscionable in the circumstances. 5 Implications for construction contracts Construction contracts will often contain liquidated damages clauses, most commonly for delayed completion. For projects which have purely commercial ends, the Supreme Court’s decision may not result in any meaningful change in current practices. Contracts for the construction of offi ce blocks or process plants, for example, are likely to be cases where the Employer’s interest in timely completion will be met by fi nancial compensation. Whether a liquidated damages clause in such circumstances is liable to be struck down as a penalty is still likely to depend on an enquiry into the commercial losses likely to be suffered by the Employer in the event of delay. There are, however, a large range of circumstances in which an Employer’s interest in performance would not be met fully by fi nancial compensation and where the new test expounded by the Supreme Court is likely to provide much greater scope for the drafting of liquidated damages provisions. For example: 1. Certain projects carry reputational risks as well as fi nancial risks. Construction contracts for the Olympic Games or other regular sporting fi xtures, for example, involve large reputational risks to the Employer in the event that work is not completed on time. The Employer’s interest in timely completion is unlikely, therefore, to be met fully by compensation for fi nancial losses alone. 2. In a similar vein, public infrastructure projects often carry large political and social risks in the event of delayed completion or a failure to meet performance requirements. For example, a government authority may not suffer fi nancial losses in the event of the delayed completion of a highway, but still has a substantial interest in ensuring that construction is completed on time. Even if fi nancial losses are suffered, they are unlikely to represent the full extent of the authority’s interest in the project. 3. Liquidated damages are sometimes sought to be imposed by employers for publicly sensitive issues such as health and safety or environmental damage. An Employer’s interest in such matters will often involve moral and reputational elements and again is unlikely to be met fully purely by reference to fi nancial compensation. The Supreme Court’s refusal to extend the penalty rule to primary obligations and its related comments in relation to 'disguised penalties' are also of relevance to construction contracts. A good example is the use of bonuses to avoid the stipulation of liquidated damages. The mirror image of contractual provisions for the payment of liquidated damages for delay are provisions which provide bonuses for early completion. It is possible to use the latter in place of (rather than as well as) the former - the originally intended contract price can be decreased by the maximum liquidated damages payable and the date for completion pushed back to match the period of delay applicable to those liquidated damages. Bonuses are then payable on a daily/weekly basis for the period between the originally intended date for completion and the deferred contractual completion date. This means the originally intended contract price will be payable if the originally intended date for completion is met, with the contract price decreasing for delays beyond this date. The extent to which such attempts to draft around the penalties rule will succeed is diffi cult to judge in advance and will depend on all of the circumstances surrounding the contract. The Supreme Court has indicated that drafting out of the rule will be permitted in some circumstances, but not where the court is able to see through to the substance of the arrangement as in truth being one for the payment of liquidated damages. The Supreme Court’s decision is likely to take time to work through in practice and further decisions in the future are likely to be needed to test its boundaries. For the time being, the decision appears to provide greater scope to deal with non-fi nancial risks through the use of liquidated damages provisions and preserves the ability, save in contrived circumstances, to structure agreements to avoid the penalties rule. References: Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79; Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67. 6 | Annual Review of English Construction Law Developments 7 Employer claims and fi nancial arrangements: FIDIC before the Privy Council The decision concerns the Employer’s obligations to provide evidence of fi nancial arrangements made to fund payment of a project and the requirement for Employer claims to be notifi ed as soon as practicable with certain details. The case is likely to be of importance to Employers and Contractors operating under the FIDIC forms of contract regardless of the nature of the project. NH International (Caribbean) v National Insurance Property Development Company The National Insurance Property Development Company Ltd ('NIPDC') is a private company wholly owned by the National Insurance Board of Trinidad and Tobago. The Board is in turn a public entity funded principally by National Insurance contributions collected from the population of Trinidad and Tobago. The Board is subject to the supervision and control of the Trinidadian Parliament. NIPDC entered into a contract with NH International (Caribbean) Ltd ('NHIC') to construct a new hospital in Tobago (the 'Contract'). The Contract incorporated the standard FIDIC General Conditions of Contract for Construction 1999 (the 'Red Book'). Clause 2.4 of the Red Book required NIPDC to submit, within 28 days of a request by NHIC, 'reasonable evidence that fi nancial arrangements have been made and are being maintained which will enable [NIPDC] to pay the Contract Price'. Under clause 16.1, a right of suspension would arise if such evidence was not provided. A right of termination was also provided by clause 16.2 if such evidence had still not been provided within 42 days of a notice of suspension under clause 16.1. NHIC made a request under clause 2.4 and the parties fell into dispute as to whether NIPDC had submitted suffi cient evidence in accordance with the clause. An initial request under clause 2.4 in 2004 had been answered by NIPDC supplying a letter from the Trinidadian Ministry of Health (the 'Ministry') which confi rmed that Cabinet had approved additional funding required to meet the then expected Contract Price. NHIC made a further request in 2005 by which time the Contract Price had increased to some $287 million. In response the Ministry advised 'without prejudice that funds are available in [this] sum to meet the estimated fi nal cost to completion'. NIPDC was concerned by the Ministry’s use of the phrase 'without prejudice' and sought confi rmation that Cabinet approval had been obtained for the payment of sums up to this level. No response was received and NHIC suspended work under clause 16.1. Due to the prevalence of arbitration clauses in international construction contracts, reported cases in relation to the FIDIC suite of contracts are rare. It is rarer still for such cases to reach higher appellate levels of review. It is of some signifi cance therefore that a decision last year of the UK’s Privy Council, composed of members of the UK’s highest court, has given detailed consideration to key clauses within the FIDIC suite. The Privy Council’s involvement came as an appeal from the Trinidad and Tobago Court of Appeal, and was the last in a string of appeals from an arbitration decision given by a well-known English arbitrator. 9 After a year of inactivity, the Ministry wrote to NHIC in October 2006 confi rming that the project was 'of the highest priority' and that suffi cient funds to cover the revised Contract Price were 'available from the consolidated fund for disbursement to NIPDC for onward payment to NHIC or for direct payment to NHIC'. The Ministry also assured NHIC that any 'moneys certifi ed or found due to NHIC … will be paid by the Government' and that the 'the Government stands fully behind the project … and will meet the contractual fi nancial requirements for completion of the project'. NHIC responded to the Ministry on 27 October 2006 by again seeking confi rmation that Cabinet approval had been obtained for payment up to the revised Contract Price. In the absence of any response, NHIC sought to terminate the Contract under clause 16.2 on 3 November 2006. Cabinet approval was obtained at around the same time as NHIC’s notice to terminate and was formally recorded on 16 November 2006. NIPDC subsequently produced evidence showing that Ministerial and Prime Ministerial consents had been obtained by 3 October 2006 and that it could be said by that date that Cabinet approval would be given. NIPDC disputed the validity of NHIC’s termination and an arbitration ensued. If it had successfully terminated the Contract, Clause 16.4 of the Red Book entitled NHIC to be paid any loss of profi t or other loss or damage sustained by it as a result of the termination. In seeking to defend NHIC’s claim for such losses, NIPDC sought to set-off its own claims against NHIC. The Contract required such claims to be notifi ed in accordance with clause 2.5 of the Red Book, which provides as follows: '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 certifi ed in a Payment Certifi cate, or to otherwise claim against the Contractor, in accordance with this Sub-Clause.' No such notifi cation had been given by NIPDC and NHIC alleged that any right to set-off was therefore barred. Financial arrangements: clause 2.4 The arbitrator upheld NHIC’s notice of termination and agreed that, in the particular circumstances of this case, NIPDC was required to provide evidence of Cabinet approval in order to satisfy its obligation to provide 'reasonable evidence' under clause 2.4. He considered the clause required more than evidence merely that the Employer was able to pay or that it was enthusiastic about the project. It required evidence of 'positive steps' on the part of the Employer which showed that 'fi nancial arrangements' had been made to pay sums due under the Contract. The mere fact that an Employer is wealthy was not of itself suffi cient for the purpose of clause 2.4. Although accepting the NIPDC’s evidence that Cabinet approval was bound to be obtained as at 3 October 2006, once Ministerial and Prime Ministerial consents had been obtained, the arbitrator noted that these events had not been communicated to NHIC. The Ministry’s letter of 6 October 2006 did not indicate that Cabinet approval had been sought or that it would be obtained in the near future. Accordingly, NIPDC had not provided 'reasonable evidence' that fi nancial arrangements had been made to enable it to pay the Contract Price and NHIC had validly terminated the Contract. NIPDC appealed the arbitrator’s fi ndings fi rst through the High Court and then the Court of Appeal in Trinidad and Tobago. The Trinidadian courts retain an inherent power to set aside or remit an arbitration award where the award contains an 'error of law apparent on the face of the award'. This power derives from Trinidad and Tobago’s English law heritage, but was abolished in England by the Arbitration Act 1979. The retention of such a power is generally seen to be contrary to the 'pro-Arbitration' stance of the ever increasing number of countries who have enacted arbitration legislation similar to the UNCITRAL Model Law on International Commercial Arbitration. 10 | Annual Review of English Construction Law Developments After an unsuccessful appeal to the High Court, NIPDC’s position was accepted by the Trinidadian Court of Appeal, which found that the arbitrator’s interpretation of clause 2.4 involved an error of law on the face of the award. The Court of Appeal found that the arbitrator had been in error in requiring evidence of Cabinet approval and in effect had required evidence of the 'highest standard' rather than only 'reasonable evidence'. The Court of Appeal considered that the arbitrator should have given more weight to the overall fi nancial standing of the Trinidadian Government and the evidence of the Ministry. NHIC appealed this fi nding to the Privy Council in the United Kingdom. The Privy Council is the fi nal court of appeal for UK overseas territories and Crown dependencies and some Commonwealth nations. The Privy Council is comprised of members of the Supreme Court, the UK’s highest court (formerly known as the House of Lords). The Privy Council allowed NHIC’s appeal and restored the arbitrator’s fi ndings on this issue. Although characterising the Court of Appeal’s view of clause 2.4 as 'understandable', they found that the Court of Appeal had overstepped the extent of its jurisdiction. The arbitrator’s assessment as to whether evidence of actual or forthcoming Cabinet approval was required to satisfy the 'reasonable evidence' required by clause 2.4 was a question of fact. The Court of Appeal had been wrong to characterise this as an error of law and had impermissibly substituted its own assessment of the issue for the arbitrator’s: 'Where parties choose to resolve their disputes through the medium of arbitration, it has long been well established that the courts should respect their choice and properly recognise that the arbitrator’s fi ndings of fact, assessments of evidence and formations of judgment should be respected, unless they can be shown to be unsupportable. In particular, the mere fact that a judge takes a different view, even one that is strongly held, from the arbitrator on such an issue is simply no basis for setting aside or varying the award. Of course, different considerations apply when it comes to issues of law, where courts are often more ready, in some jurisdictions much more ready, to step in.' 11 Employer claims: clause 2.5 Having upheld NHIC’s termination of the Contract, the arbitrator proceeded to consider whether NIPDC was able to set-off claims not previously notifi ed to NHIC from the termination payment required by clause 16.4. NIPDC argued that the fi nal sentence of clause 2.5 showed that a failure to notify was only to have the effect of preventing set-offs or deductions being made from Payment Certifi cates under the Contract. The Employer was still to be free to pursue such claims directly or by way of set-off from payments outside of the Payment Certifi cate process (such as the termination payment required by clause 16.4). The arbitrator agreed with NIPDC on this point, fi nding that the clause was silent as to whether set-off was permitted against NHIC’s claim for termination losses as distinct from a claim for amounts certifi ed in a Payment Certifi cate. The arbitrator purported to apply the settled rule under English law (known as the Gilbert Ash line of authority) that 'clear words are required to exclude common law rights of set-off and/or abatement of legitimate cross-claims'. In the arbitrator’s opinion, the words of clause 2.5 were not suffi ciently clear to prevent NIPDC from raising claims not previously notifi ed in accordance with clause 2.5 outside of the Payment Certifi cate process. The arbitrator’s award on this issue was also appealed to the Trinidadian High Court and Court of Appeal and again ultimately to the Privy Council. The High Court and Court of Appeal agreed with the arbitrator’s fi ndings on this issue, however the Privy Council took a different view. It considered the clause was suffi ciently clear to apply to all set-offs or cross-claims raised by an Employer, not only those made in respect of Payment Certifi cates. The court emphasised the concluding words of the clause – 'or otherwise claim' – and noted 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 fi rst 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.' NIPDC had therefore lost any entitlement it may otherwise have had to set-off its claims from amounts due to NHIC as a result of the termination of the contract. Conclusion and implications This is an important decision reached by fi ve members of the UK’s highest court as to the meaning of key Employer obligations under the FIDIC form (clauses 2.4 and 2.5 apply in slightly different forms across all of the main FIDIC contracts). Although the court’s decision in relation to clause 2.4 was primarily based on jurisdictional grounds, it appears to have approved the arbitrator’s legal interpretation of clause 2.4 (as opposed to his assessment of the factual position before him) as requiring evidence of the taking of 'positive steps' on the part of an Employer to show that fi nancial arrangements have been made to pay sums falling due under the contract. The decision suggests therefore that wealthy and large institutional Employers will not simply be able to rely on their fi nancial standing, but will be required to evidence that positive steps have been taken to put in place the necessary fi nancial arrangements to make payment under the Contract. The decision may therefore give encouragement to Contractors to make more probing enquiries as to any fi nancial control mechanisms which are required to be fulfi lled to allow payment by an Employer. Employers may also need to be vigilant in keeping Contractors informed. In the present case, NIPDC had requested Cabinet approval at the time of termination and the evidence showed that approval was inevitable at that stage. NIPDC would have avoided a successful termination by NHIC if it had communicated these facts to NHIC. The court’s fi ndings as to clause 2.5 will also be of general application to those FIDIC based contracts which retain the clause. In contrast to the Contractor’s obligation to notify claims within 28 days under clause 20.1 of each of the main FIDIC contracts, the court’s decision may be seen as providing somewhat of a level-playing fi eld for Employer and Contractor claims alike. Indeed, the requirements for Employer claims may on the whole be stricter. Clause 20 provides for a maximum 28 day notifi cation period in addition to the requirement found also in clause 2.5 for notifi cation 'as soon as practicable'. However, the present decision confi rms that the notifi cation of Employer claims, if they are to be valid for the purposes of set-off or otherwise, are also required to be accompanied by particulars 12 | Annual Review of English Construction Law Developments specifying the basis of the claim, the clauses relied upon and substantiation of any amounts claimed. This can be contrasted with the position under clause 20.1 where more general notifi cations are often suffi cient. For example, as reported in last year’s edition of this publication, the English Technology and Construction Court recently upheld a Contractor’s compliance with clause 20.1 by reference to letters which stated merely that certain events would entitle the Contractor to an extension of time without further substantiation (in Obrascon Huarte lain SA v A-G for Gibraltar). Employers should therefore take note of the present decision and ensure that any claims arising during the course of a project are promptly notifi ed to the Contractor or that amendments are made to the standard wording of clause 2.5 during contract negotiations. The court’s decision does not give guidance as to how the requirement for notifi cations to be made 'as soon as practicable' is to be interpreted in the context of Employer claims. Employers should not assume, however, that the generality of this description means that a period of 28 days or longer will be allowed (to refl ect the period in clause 20.1). Contractors may well seek to argue that briefer periods of notifi cation are required in certain circumstances. The present case also provides a good illustration of the importance of parties to international construction contracts giving careful thought to the applicable arbitration law for any arbitration proceedings which might be commenced under the contract (usually governed by the choice of arbitral seat). The inherent powers reserved to the Trinidadian courts in the present case resulted in lengthy delays to the resolution of the underlying dispute. The arbitrator’s award having been issued in April 2007, appeals through the Trinidadian courts and then to the Privy Council occupied the parties for the next eight years, only for various issues to be remitted back to the arbitrator for his further consideration. Such an outcome could have been avoided by the parties selecting a arbitral seat in a jurisdiction which places greater limits on the jurisdiction of the courts to review arbitration awards (such as England or any country which has enacted arbitration laws similar to the UNCITRAL Model Law on International Commercial Arbitration). References: Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689; Obrascon Huarte lain SA v Attorney General for Gibraltar [2014] EWHC 1028 (TCC); NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago) [2015] UKPC 37. 13 The interpretation of design obligations in construction contracts: fi tness for purpose vs reasonable skill and care Contractors will often struggle either to obtain similar commitments from their supply chain or to obtain insurance for such obligations, and may seek to limit their design responsibility to the exercise of reasonable skill and care only (i.e. liability for negligence). The tension between these two standards of responsibility is greatest when the works are technologically advanced or involve a large degree of design risk. In such circumstances, an Employer may be forced to accept that a Contractor will do his best, but not be able to guarantee the successful completion or performance of the works. In other circumstances, for example engineering projects typically let on an EPC or Turnkey basis, the acceptance of a 'fi tness for purpose' obligation can be less controversial. This is particularly the case for conventional engineering projects, such as power or process plants, where the Contractor will have experience in providing very similar installations in the past. Where the appropriate level of design responsibility is contentious, parties will often seek a negotiated solution. Those negotiating for Employers will be aware that the phrase 'fi tness for purpose' will be controversial and may seek to include such an obligation by less obvious means. It might be proposed, for example, that the Contractor accept responsibility for compliance with certain technical specifi cations or Employer’s requirements. These can have the effect of imposing a 'fi tness for purpose' obligation where they contain performance criteria such as a minimum lifespan or certain effi ciency or output/input parameters. Less directly, an Employer might simply propose that the Contractor build the works in accordance with all of the 'Contract Documents' and then seek to append such technical specifi cations which impose performance requirements to the contract. This can often result in a contract containing both reasonable skill and care obligations and absolute obligations to meet certain performance criteria.It may be unclear how the parties intended the two to relate to each other. In what follows we consider two cases decided by the English courts in 2015 considering the correct legal approach to such situations. International construction projects will commonly involve a Contractor taking design responsibility for the whole or large parts of a project. A key consideration for both parties will be whether the Contractor accepts any absolute obligation for the performance or functioning of the completed works. This is sometimes referred to as performance specifi ed work or the acceptance of a 'fi tness for purpose' obligation. Such obligations can be contentious as they involve a guarantee of performance and have the potential to give rise to liability in circumstances where the Contractor has not acted negligently. 14 | Annual Review of English Construction Law Developments | Annual Review of English Construction Law Developments MT Højgaard A/S v E.On Climate And Renewables UK Robin Rigg East Ltd MT Hojgaard ('MTH') was engaged by E.ON to design, fabricate and install the foundation structures for 60 offshore wind turbines in the Solway Firth off the coast of Scotland. The foundation structures were to include monopoles driven into the sea bed and a 'transition piece' on which an individual wind turbine would rest. The transition piece was to be held in place via a grouted connection with the monopile. Shortly after completion of MTH’s works the grouted connections failed. The parties agreed that E.ON would develop a scheme of remedial works, the cost of which amounted to €26 million. Litigation proceeded in order to determine who should bear that cost. MTH’s works were carried out in accordance with an international standard applicable to works of this nature known as 'J101'. J101 formed the basis on which MTH tendered for the works and was expressly incorporated within the contract. The standard set out various calculations for the design of the grouted connections intended to achieve a lifespan of 20 years. Unfortunately, J101 contained an error which resulted in the design of the grouted connections being considerably under-designed, which in turn led to their failure soon after construction. As J101 was an internationally recognised standard, MTH had not been negligent in carrying out its design in accordance with it. The primary dispute between the parties therefore centred on who was to bear the risk of the error within the standard. E.ON sought to rely on two passages within a 'Technical Requirements' schedule attached to the contract, which read as follows: 'The design of the foundations shall ensure a lifetime of 20 years in every aspect without planned replacement. The choice of structure, materials, corrosion protection system operation and inspection programme shall be made accordingly.' And: 'The design of the structures addressed by this Design Basis shall ensure a lifetime of 20 years in every aspect without planned replacement. The choice of structure, materials, corrosion protection system operation and inspection programme shall be made accordingly.' MTH pointed to the fact that the Technical Requirements contained numerous other references to a 'design life' of 20 years, which was different to a fi tness for purpose obligation guaranteeing that the works would last 20 years. The requirement for a 'design life' of 20 years meant only that MTH was to exercise reasonable skill and care in designing the grouted connections to achieve a 20 year lifespan. MTH also noted that the Technical Requirements schedule required compliance with J101, which was based on a 'design life' of 20 years. MTH therefore argued that the two passages relied upon by E.ON, although literally requiring MTH to 'ensure a lifetime of 20 years', should be read down consistently with the references to 'design life' elsewhere in the Schedule and in accordance with J101. MTH also relied on the statement of its general obligations contained in the main conditions of contract, which were to take precedence over the Technical Requirements Schedule. It read: '8.1 GENERAL OBLIGATIONS The Contractor shall, in accordance with this Agreement, design, manufacture, test, deliver and install and complete the Works: (i) with due care and diligence expected of appropriately qualifi ed and experienced designers, engineers and constructors (as the case may require); … (iv) in a professional manner in accordance with modern commercial and engineering, design, project management and supervisory principles and practices and in accordance with internationally recognised standards and Good lndustry Practice; (v) using only materials and goods which are new, unused and factory fresh and of a sound satisfactory quality and workmanship, manufactured and fabricated in accordance with internationally recognised standards, codes of practice and in accordance with Good Industry Practice; (vi) so that each item of Plant shall, upon Completion in accordance with this Agreement, satisfy the Tests on Completion set out in this Agreement unless otherwise agreed in writing by the Employer; … 15 (viii) so that the Works, when completed, comply with the requirements of this Agreement and shall comply with all Legal Requirements … (ix) so that the Contractor shall comply at all times with all Legal Requirements and the standards of Good Industry Practice; (x) so that each item of Plant and the Works as a whole shall be free from defective workmanship and materials and fi t for its purpose as determined in accordance with the Specifi cation using Good Industry Practice; … (xv) so that the design of the Works and the Works when Completed by the Contractor shall be wholly in accordance with this Agreement and shall satisfy any performance specifi cations or requirements of the Employer as set out in this Agreement; …' MTH claimed that this condition emphasised reasonable skill and care and was inconsistent with the fi tness for purpose obligation argued for by E.ON. Although sub-clause (x) referred expressly to fi tness for purpose, this was qualifi ed by the words 'using Good Industry Practice' which were in turn defi ned by the contract in terms of reasonable skill and care to mean: 'the exercise of skill, diligence, prudence and foresight that can ordinarily and reasonably be expected from a fully skilled contractor who is engaged in a similar type of undertaking or task in similar circumstances in a manner consistent with recognised international standards.' In an initial decision in 2014, the English Technology and Construction Court agreed with E.ON and found MTH liable to ensure a 20 year lifespan for the grouted connections on the basis of the two provisions in the Technical Requirements schedule quoted above. Clause 8.1 required the works to be 'wholly in accordance with this agreement' and to 'satisfy any performance specifi cations or requirements of the Employer as set out in this Agreement'. MTH was therefore required to comply all parts of the Technical Requirements schedule. On appeal to the English Court of Appeal in 2015, the TCC’s decision was reversed. The Court of Appeal found that the two paragraphs in the Technical Requirements schedule relied upon by E.ON were 'too slender a thread' upon which to hang a fi nding that MTH gave an absolute commitment to achieve a 20 year operational life for the foundations. Although accepting that these two paragraphs required such a commitment, the court stressed that the contract was to be read as a whole and that the court was 'not to be led astray' by what it considered to be a large inconsistency between those paragraphs and the balance of the contract. It did not 'make sense to regard them as overriding all other provisions of the contract'. With regard to clause 8.1 the court noted that the reference to Good Industry Practice had signifi cantly qualifi ed the reference to fi tness for purpose and the primary thrust of the clause was to refer one back to the Technical Requirements schedule. The overall impression given by that schedule was that MTH was to achieve only a 'design life' of 20 years (and it did not necessarily follow from this that the foundations would function for 20 years) and the two paragraphs relied upon by E.ON were to be read down accordingly. 16 | Annual Review of English Construction Law Developments The Court of Appeal’s decision is an uncommon example of an English court departing from the clear meaning of a contractual clause through a wider reading of the contract as a whole. It is an important decision for those involved in negotiating large construction contracts. It suggests that it may not be suffi cient for parties to refer to fi tness for purpose obligations in isolated paragraphs of a technical schedule in circumstances where a broad view of the contract would suggest that only reasonable skill and care obligations were to apply. E.ON was given permission late last year to appeal to the Supreme Court, the UK’s highest court. In a decision last year, just after the Court of Appeal’s decision in this case, the Supreme Court stressed the importance of giving effect to the words used by the parties in a contract and warned against too great a use of commercial considerations to give a broader or different meaning to those words (Arnold v Britton). The decision has been noted by many as signalling a change in emphasise in English law’s approach to the interpretation of contracts. We suspect that E.ON will look to press the signifi cance of this change in approach in seeking to challenge the Court of Appeal’s decision before the Supreme Court. Mw High Tech Projects UK Ltd v Haase Environmental Consulting GmbH A separate decision of the TCC last year considered almost the inverse question to that in MT Højgaard: does a reasonable skill and care obligation allow a party to adopt a higher standard of design than required by specifi c fi tness for purpose type obligations? MW High Tech Projects ('MW') was appointed as main contractor for the design and construction of a waste to energy plant in West Sussex. The contract was awarded on a fi xed priced basis. MW engaged Haase Environmental Consulting ('HEC') under a letter of intent to develop a basic design for the process engineering elements of the plant. That design informed MW’s tender price. Once the main contract was signed, MW formally appointed HEC to develop its initial design. Under that appointment HEC was obliged to (i) act with reasonable skill and care; and (ii) design in accordance with certain specifi ed design requirements, including an output specifi cation, intended to give effect to HEC’s basic design. HEC duly developed its design but in doing so went well beyond the parameters of its basic design. This signifi cantly increased MW’s costs (which could not be recovered under the fi xed price main contract). This led to a dispute and MW brought proceedings before the TCC. MW asked the court to fi nd that, in making such signifi cant changes to its original design, HEC had breached its obligation to design in accordance with the specifi ed design requirements. HEC on the other hand argued that it was not in breach so long as its design was not negligent i.e. it had exercised reasonable skill and care. The court looked at the priority of the various contractual obligations. It found the obligation to exercise reasonable skill and care was paramount. HEC would not be required to comply with any other obligation that placed it in confl ict with this overriding duty. However where there was no such confl ict, HEC was required to use reasonable skill and care to comply with any other obligations, including those to develop the initial design in accordance with the specifi c design requirements. HEC was therefore in breach of contract for deviating from its previous brief and had failed to meet its design requirements. This case provides an interesting reversal of the usual tension between general standards of care and fi tness for purpose type obligations. Most commonly, designers will be criticised for not achieving a suffi ciently high standard of design, whereas in the present case the complaint was one of over-design. Fitness for purpose in the present case meant sticking as close as possible to the original design requirements so as to keep costs down. 17 18 | Annual Review of English Construction Law Developments Conclusion These two cases illustrate the uncomfortable tension that often exists between reasonable skill and care and fi tness for purpose obligations. Parties involved in negotiations over design responsibility should give careful consideration as to how any obligations to comply with specifi c technical requirements will relate to any more general obligations to exercise reasonable skill and care. Where possible, parties should avoid seeking to impose fi tness for purpose obligations through technical schedules and deal with them upfront in the body of the contract. Where parties have reached an agreed position excluding any fi tness for purpose obligations, Contractors would be well advised to include provisions stating that nothing in any of the schedules to the contract is intended to impose a fi tness for purpose obligation. Where agreement over reasonable skill and care and fi tness for purpose obligations is not possible, parties might consider whether a middle ground can be found. For example, the parties might seek to impose an enhanced duty of care on the Contractor, going beyond reasonable skill and care, but not quite as far as the absolute guarantee provided by a fi tness for purpose obligation. References: MT Højgaard A/s v E.ON Climate And Renewables UK Robin Rigg East Limited [2014] EWHC 1088 (TCC); MW High Tech Projects UK Ltd v Haase Environmental Consulting GmbH [2015] EWHC 152 (TCC); MT Hojgaard A/S v E. ON Climate and Renewables UK Robin Rigg East Limited [2015] EWCA Civ 407; Arnold v Britton [2015] UKSC 36. Exclusion clauses update: differences in approach continue Exclusions for 'loss of use' … again In last year’s review, we reported on an English Commercial Court decision which had considered the interpretation of an exclusion for 'loss of use' in a construction context (Transocean Drilling UK Ltd v Providence Resources Plc). The clause in question had excluded 'loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties),' Adopting English law’s traditionally strict approach to exclusion clauses, the Commercial Court held that this clause was not suffi ciently clear to exclude liability for the costs of personnel, equipment and third party services wasted as a result of delays in the delivery of equipment. A differently worded 'loss of use' clause came before the Commercial Court again in 2015 in the case of Scottish Power UK v BP Exploration Operating Co. Scottish Power had entered into a long term agreement for the sale and purchase of natural gas (the 'Sale and Purchase Agreement') from the owners of an oil and gas fi eld known as the 'Andrew Field' some 230km north east of Aberdeen in the North Sea (the 'Sellers'). The Sellers were found by the court to have breached the Sale and Purchase Agreement by failing to produce gas from the Andrew Field during a period of shutdown. Scottish Power claimed to recover the additional costs it had incurred in sourcing replacement gas from third parties at a higher price than provided for by the Sale and Purchase Agreement. Among other defences, the Sellers relied upon Article 4.6 of the Sale and Purchase Agreement which provided that: '…neither Party shall be liable to the other Party for any loss of use, profi ts, contracts, production or revenue or for business interruption howsoever caused and even where the same is caused by the negligence or breach of duty of the other Party.' The Sellers argued that Scottish Power’s claim was one for 'loss of use' or 'loss of production' as it concerned Scottish Power’s inability to use gas produced from the Andrew Field or a lack of production of gas by the Sellers from the Andrew Field. Alternatively, the Sellers argued that the Scottish Power’s purchase of replacement gas at a higher price had mitigated the loss of profi t and revenue it would have otherwise suffered had it been unable to source replacement gas. Previous case-law had suggested that a claim for costs incurred in mitigating or avoiding a loss was to be classifi ed in the same way as the loss avoided for the purpose of an exclusion clause. The Sellers argued that Scottish Power’s claim could on this basis also be classifi ed as a claim for loss of profi t or revenue. In last year’s review we commented on a number of cases which appeared in varying degrees to favour a return to the traditionally stricter approach to exclusion and limitation clauses favoured by English law. 2015 has provided more cases on this topic of relevance to construction projects. The traditional approach retains its popularity in some of these cases, but support for a broader, more liberal approach is also apparent. 19 Although the Sellers succeeded in relation to other defences raised in response to the claim, the court rejected both of the Seller's arguments in relation to Article 4.6. In interpreting the clause, the court drew a distinction between three types of losses: 1. The 'normal' or basic measure of loss for a failure to supply goods, being the difference between the contract price and the market price of the goods at the time or times when they ought to have been delivered. Where there is an available market this is the default rule which will apply in the absence of evidence as to any greater loss incurred by the buyer. 2. Secondary losses which go beyond the normal or basic measure of loss, for example if there are delays in sourcing replacement goods from an available market, or where no market exists at the given time, with the result that the purchaser’s ability to trade is affected. 3. More remote losses which would not in ordinary circumstances be expected to arise. A buyer might, for example, have entered into an especially lucrative trading contract which is lost due to the interruption in supply brought about by a seller’s breach. In order for these losses to be recoverable by the buyer, the seller must have had specifi c knowledge as to the risk of the loss (e.g. the buyer’s especially lucrative trading contract) at the time of entering into the contract. Such losses are said to fall within the 'second limb' of the well-known English case of Hadley v Baxendale. They are to be contrasted with losses occurring naturally according the usual course of things (which would include the normal measure of loss and secondary losses referred to above) which are said to fall within the 'fi rst limb' of the case. As explained in earlier editions of this publication, English law has developed a rule – frequently misunderstood in international contracts – that exclusions of liability which refer to 'consequential' or 'indirect' losses will be taken as referring to losses falling within the 'second limb' of Hadley v Baxendale. Such clauses will not therefore in ordinary circumstances be suffi cient to exclude the normal measure of damages or any secondary losses (including ordinary loss of profi t)1 . 1 The English rule has been criticised on the basis that the phrase 'indirect and consequential loss' is often used by lawyers and businessmen to mean anything other than the normal measure of loss, covering both secondary losses and more remote losses. Often it is thought to exclude any form of lost profi t. For this reason, courts in other jurisdictions have taken opposing views to the English courts: see, for example, the Australian decision of Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358; [2008] VSCA 26 (per Nettle JA, 'In my view, ordinary reasonable business persons would naturally conceive of 'consequential loss' in contract as everything beyond the normal measure of damages, such as profi ts lost or expenses incurred through breach'). 2 This is sometimes referred to as the 'declaration of intent' argument as it is said that a broad reading of the exclusion clause would reduce the primary obligations of the contract to a mere 'declaration of intent' – there being no fi nancial sanction to prevent their breach. In the Scottish Power case, the court considered it clear that Article 4.6 quoted above did not intend to exclude the normal measure of loss for a failure to supply gas, but was aimed at secondary losses going beyond the usual measure. As the words 'consequential' and 'indirect' were not used in the clause, there was no need to limit the exclusion to the third category of remoter types of loss mentioned above. Accordingly, the references to 'loss of use' and 'loss of production' were interpreted by the court as being directed to the future use by Scottish Power of gas to be supplied from the Andrew Field for its own business and the production of other products from it (such as electricity). The clause did not intend to exclude liability for the immediate production and supply of gas to Scottish Power under the Sale and Purchase Agreement. In reaching its conclusion the court referred to the Transocean decision reported in last year’s edition of this publication and noted, as was the case in Transocean, that a broader interpretation of Article 4.6 would cover 'all losses which Scottish Power might conceivably suffer rather than, as is plainly the intention, excluding only certain types of loss' 2. The court also noted the requirement for 'appropriately clear words … to exclude a remedy for breach of contract that would otherwise arise as a matter of law'. The court also applied its distinction between future use of gas by Scottish Power and the immediate supply of that gas by the Sellers to the mitigation case law relied upon by the Sellers. The court noted that, strictly speaking, the normal measure of loss can always be said to be a mitigation of greater secondary losses (i.e. if a market for replacement gas were not available, then secondary losses would follow). However, only mitigation costs beyond the normal measure of loss were intended to be excluded by Article 4.6. The court’s distinction between the normal measure of loss and secondary losses may prove diffi cult to apply in a construction context, where rules as to what constitutes the normal measure of loss are less established than with regard to contracts for the sale of goods. For example, the FIDIC suite of contracts contains a similar exclusion for the 'loss of use of any Works [and] loss of profi t'. Where works are left incomplete, the normal measure of loss would include 20 | Annual Review of English Construction Law Developments 21 the additional cost of completing the works with an alternative contractor but may also include delay related losses (including for loss of profi t) in respect of the additional time needed for a new contractor to be appointed, to mobilise and commence work. Such delays will usually be unavoidable even in a healthy construction market. However, delay related losses of this kind might also be said to ordinarily be expected to fall within an exclusion for loss of use and loss of profi t. The connection made in the present case between the normal measure of loss and the commercial intention of such exclusions may not therefore be as clear cut in other cases. The court’s decision, coupled with the Transocean decision before it, would however appear to provide strong opposition to any attempt by parties to give a wide interpretation to exclusions for 'loss of use' and 'loss of production' by reference to their literal meaning. In most cases, it appears that such phrases will be limited to the future use of the subject matter of the contract by the paying party (i.e. the future use of the gas by Scottish Power, which in a construction context would equate to the future use of the Works by the Owner). Loss of 'future or anticipated' profi t A similar approach was taken to an exclusion clause for loss of profi t in University of Wales v London College of Business Ltd. The London College of Business (the 'LCB') had entered into an accreditation arrangement with the University of Wales (the 'University') whereby students enrolled in certain LCB courses would receive, upon completion of their course, a degree qualifi cation from the University. In return, the LCB was to pay to the University certain accreditation fees. The LCB fell behind with the payment of accreditation fees and the University sought to terminate the arrangement. The LCB disputed the termination and claimed £25 million in damages, alleging that the University’s decision had destroyed its business. In defence of the LCB’s claim, the University relied on the following exclusion clause in the agreement between the parties (referred to as the 'Validation Agreement'): '17. LIABILITY … 17.3 … Neither party shall have any liability whatsoever to the other whether in contract tort or otherwise for any losses or damages: 17.3.1 which were not reasonably foreseeable by the parties or either of them at the date of this Agreement; or 17.3.2 to the extent to which they are attributable to any intervening act, omission or event; or 17.3.3 which represent loss of any anticipated or future business, revenue, goodwill or profi t.' The court gave this clause a limited interpretation and held that the reference to loss of business and profi t was limited to losses arising from other contracts or business which LCB or the University might have had with third parties. The clause did not go so far as to exclude losses of profi t or business under the Validation Agreement itself. The clause was intended to prevent the LCB or the University from claiming that, in addition to loss of profi t or business under the Validation Agreement, it had also suffered damage to its general business reputation and been deprived of the opportunity to grow its business in other ways. In reaching its conclusion the court referred, in a similar way to the court in Scottish Power, to the consequences of taking a literal interpretation of the clause and the 'declaration of intent' argument. If all loss of profi t or business was to be excluded, the parties could refuse to perform their primary obligations under the contract without fi nancial consequences . The court also used the context of clause 17.3 as a whole together with the references to 'anticipated' and 'future' loss of profi ts or business to give a narrow reading to the clause. Anticipated or future loss of profi t or business was said to contemplate business or profi ts which were future to, or outside of, the Validation Agreement. The court’s decision can be contrasted with the 2014 decision in Fujitsu Services Limited v IBM United Kingdom Limited referred to in the previous edition of this publication. That case concerned a clause excluding liability for 'loss of profi ts, revenue, business, goodwill, indirect or consequential loss or damage'. The clause was upheld by the Technology and Construction Court as being suffi ciently clear, despite the fact that it would have allowed either party to refuse performance of their primary obligations without fi nancial consequences (although each party could still apply to the court for mandatory or injunctive relief in appropriate cases). A wider approach Another TCC decision in 2015 also appears to give support for a wider approach to exclusion clauses. Persimmon Homes Ltd v Ove Arup & Partners Ltd concerned an exclusion for asbestos liability. Persimmon was part of a consortium (the 'Consortium') which bought and developed a large site in Wales. Arup was also involved with the development, advising and providing professional services to the Consortium. After committing itself to the purchase and development of 22 | Annual Review of English Construction Law Developments the site, the Consortium discovered asbestos contamination. The Consortium alleged that Arup ought to have discovered the contamination and claimed damages. Arup argued that its liability for negligence was excluded under Clause 6.3 of the Contract which provided: 'The Consultant’s aggregate liability under this Agreement whether in contract, tort (including negligence), for breach of statutory or otherwise (other than for death or personal injury caused by the Consultant’s negligence) shall be limited to £12,000,000.00 (twelve million pounds) with the liability for pollution and contamination limited to £5,000,000.00 (fi ve million pounds) in the aggregate. Liability for any claim in relation to asbestos is excluded.' The Consortium relied on a line of cases suggesting that a strict approach should be taken to determining whether an exclusion clause is suffi ciently clear to exclude liability for acts of negligence by a party to the contract. It argued that general words such as 'any claim in relation to asbestos' should not be interpreted as including negligence by Arup where those words were broad enough to cover other non-negligent acts. What was required, it argued, was an express reference to negligence in the same way as the fi rst sentence of the above clause. The court noted that there had been a shift in the approach of the English courts to exclusion clauses since the older cases relied upon by the Consortium. That shift was said to have come about for two reasons: 'The fi rst is the passing of the Unfair Contract Terms Act 1977 ['UCTA']; the second is an increasing recognition that parties to commercial contracts are and should be left free to apportion and allocate risks and obligations as they see fi t, particularly where insurance may be available to one or other or both parties to cover the risks being so allocated. The impact of UCTA and, in particular, the fact that Parliament had chosen not to extend its application to commercial contracting parties of equal bargaining status, was recognised by Lord Wilberforce in Photo Production v Securicor Ltd …' As a result of this shift, the approach of the court was now said to be focused more on ascertaining the true meaning of an exclusion clause rather than on the application of rules or presumptions requiring exclusion clauses to be drafted in clear language: '… the Court's task is essentially the same when interpreting what is said to be an exclusion or limitation clause as it is when interpreting any other provision of a contract: it is to identify what a reasonable person 3 The point does not appear to have been made that each party could still sue for payments owing under the Validation Agreement (as the University had done) and to bring claims for declaratory, mandatory or injunctive relief. having all the background knowledge which would reasonably have been available to the parties would have understood the parties to have meant. And in pursuing that task, the commercial and contractual context may make it improbable that one party would have agreed to assume responsibility for the relevant negligence of another, so that clear words are needed. What matters most, to my mind, is not that the words should initially seem clear (though that often makes life much easier – pace Charter Re) but that, at the end of the interpretative process their meaning should be clear and established.' [Emphasis in original] Adopting this approach to clause 6.3 quoted above, the court found that the exclusion for asbestos liability was suffi ciently clear to cover Arup’s own negligence. The limitations of liability in the fi rst sentence of the clause expressly applied to negligence by Arup. Taking Clause 6.3 as a whole, the fi nal sentence was seeking to exclude liability for asbestos altogether and it was not necessary to repeat the words 'whether in contract, tort (including negligence)'. The approach in this case may also be thought to be consistent with the Privy Council’s decision last year in the NH International case referred to earlier in this review (see page 9). That case concerned the standard FIDIC clause requiring claims by Owners to be made 'as soon as practicable'. The Privy Counsel in that case found the FIDIC clause to be suffi ciently clear to cover all Owner claims, not only those which the Owner wished to set-off from Payment Certifi cates in favour of the Contractor. In so deciding, the Privy Counsel overruled the arbitrator’s fi nding that the clause lacked the 'clear words' he thought necessary to achieve such a result. Conclusion The correct approach to exclusion clauses remains an area of strong debate under English law, with the above cases showing that differences in approach continue among the recent cases. As always with such debates, it is diffi cult to ascertain precisely the extent to which the results in any given case might vary on each approach. Nevertheless, the difference of opinion between the Privy Council and the arbitrator in the NH International case suggest that the difference is more than merely theoretical and that in certain cases the outcome may change depending on the approach adopted. We are likely to see more cases on this topic over the course of 2016. Appeals in the Transocean and Scottish Power cases are due to be heard later in the year and it is hoped that he Court of Appeal will provide further guidance as to the correct approach to such clauses. 23 References: Hadley v Baxendale (1854) 9 Ex 341; Transocean Drilling U.K. Limited v Providence Resources plc [2014] EWHC 4260 (Comm); Fujitsu Services Limited v IBM United Kingdom Limited [2014] EWHC 752 (TCC); Scottish Power UK Plc v BP Exploration Operating Company Ltd [2015] EWHC 2658 (Comm); Persimmon Homes Ltd & Ors v Ove Arup & Partners Ltd [2015] EWHC 3573 (TCC); University of Wales v London College of Business Ltd [2015] EWHC 1280 (QB) (08 May 2015); NH International (Caribbean) Ltd v National Insurance Property Development Company Ltd (Trinidad and Tobago) [2015] UKPC 37. 24 | Annual Review of English Construction Law Developments Restraining calls under on-demand securities: debate continues It was thought that this decision might also herald a return to a stricter approach to injunctions sought directly against Employers under the terms of an underlying construction contract. This prediction has proved correct, with a decision of the English Technology and Construction Court in 2015 declining to follow earlier cases which had adopted a broader approach. Background Calls under on-demand securities were traditionally only able to be restrained by an English court where a call was shown to be fraudulent. In the Privy Council decision reported in last year’s edition of this publication (Alternative Power Solution Ltd v Central Electricity Board), the requirements for obtaining an injunction on the grounds of fraud were restated as follows: — It must be 'clearly established at the [initial hearing] that the only realistic inference is (a) that the benefi ciary could not honestly have believed in the validity of its demands under the letter of credit and (b) that the bank was aware of the fraud'. — The 'balance of convenience' must favour granting an order preventing payment by the bank (with the consequential impacts on the bank’s business and reputation that may entail) as opposed to leaving the bank to reimburse its client for any damage which will be wrongfully caused by allowing payment under the letter of credit. As the court noted, the stringency of these two tests account for why examples of successful challenges based on the fraud exception are so rare: '(a) because it is almost never possible to establish the test for fraud as opposed to a mere possibility of fraud, but also (b) because the balance of convenience will almost always militate against the grant of an injunction.' These diffi culties have led to Contractors seeking other ways to prevent the making of calls. In 2003, the English Court of Appeal allowed an order restraining the making of a call under a letter of credit where a call could be shown to be in breach of an express restriction in the underlying contract and such a restriction had been 'positively established' (Sirius International Ins Co v FAI General Ins). The restriction in that case was a requirement to seek consent before any call was made. The 'positively established' requirement was subsequently applied by the English Technology and Construction Court in the 2007 case of Permasteelisa Japan KK v Bouyguesstroi by Mr Justice Ramsay. Over the various editions of this publication, we have commented on what has in recent years been a widening of the grounds on which parties can seek to challenge calls under on-demand securities under English law. Last year, we reported on a UK Privy Council decision which confi rmed the very diffi cult test for fraud required to be established to obtain an injunction from an English court to prevent a bank or other fi nancial institution from paying out under an on-demand security. 25 In the subsequent case of Simon Carves v Ensus UK (decided in 2011), a different judge of the TCC sought to develop this rule by requiring only a 'strong case' as to an alleged restriction in the underlying contract rather than one which was positively established. A further TCC decision in 2013 confi rmed the 'strong case' test and queried whether the still lesser standard of a 'realistic prospect of success' might apply to situations in which a call under an on-demand security could be said to fall within the principle that no party should benefi t from their own wrong (Doosan Babcock v Comercializadora De Equipos Y Materiales Mabe). MW High Tech Projects UK v Biffa Waste Services In 2015, a further case came before the TCC for orders to restrain the making of a call under an on-demand security (this time a Retention Bond) by reference to the terms of an underlying construction contract. The case concerned an EPC Contract for the construction of a waste treatment plant by MW High Tech Projects UK Limited ('MW High Tech') at the request of Biffa Waste Services Limited ('Biffa'). The works were delayed and Biffa sought to terminate the contract due to the passing of a long stop date. It then sought to recover amounts alleged to be due in respect of liquidated damages for delay under an on-demand Retention Bond. The EPC Contract contained a clause (clause 22) requiring the payment of liquidated damages for delay within 8 business days of a demand made by Biffa for the same. The EPC Contract also contained detailed provisions (Schedule 10) for the amounts to be paid by MW High Tech in the event of termination by Biffa. Schedule 10 included amounts for liquidated damages previously accrued under clause 22 and for liquidated damages which would have been incurred had the contract not be terminated. The amounts set out in Schedule 10 were stated to be Biffa’s 'exclusive remedy' against MW High Tech for termination of the contract. Biffa made a demand for the payment of liquidated damages under clause 22 on 5 December 2014. However, due to provisions in the EPC Contract governing the service of notices, the demand was only deemed to have been served on 12 December 2014. By this stage, the contract had been terminated. MW High Tech therefore argued that the demand under clause 22 was invalid as upon termination that clause became inoperative and Biffa’s rights in relation to liquidated damages (among other things) were to be determined under Schedule 10. Clause 43.6 of the contract imposed a condition precedent to a call under the Retention Bond as follows: 'It shall be a condition precedent to the Employer's right to make a call upon either the Performance Bond or the Retention Bond that the Employer has fi rst called upon the Parent Company Guarantee…in respect of the same matter. In the event that the Guarantor has not accepted in writing each and every aspect of such a call on the Parent Company Guarantee… made by the Employer, including any requirement to make payment within ten (10) Business Days of receipt of a notice from the Employer pursuant to Clause 1 of the Parent Company Guarantee…then such condition precedent shall be discharged.' In accordance with this clause, Biffa duly made a demand under the parent company guarantee for the liquidated damages it had demanded under clause 22. Biffa then proceeded to call the Retention Bond in the absence of any acceptance of the demand by MW High Tech’s parent company. MW High Tech sought to challenge the call on the basis that Biffa’s demand under the parent company guarantee lacked an adequate contractual basis (as it was made under clause 22 rather than in accordance with Schedule 10). It argued that in order for the condition precedent to be satisfi ed, the demand under the parent company guarantee was required to be a 'valid' demand. 26 | Annual Review of English Construction Law Developments In considering MW High Tech’s challenge, the court noted those recent cases which had sought to broaden the scope for challenging calls under on-demand securities. The court conveniently summarised the English law position as follows: 'There are two established exceptions to the rule that the court will not intervene. The fi rst is where there is obvious fraud known to the bank. That is not alleged here. The nearest that M+W gets to alleging fraud is to characterise Biffa's conduct as 'cynical', and it is not alleged that even this cynicism was known to Euler. The second exception is where the terms of the underlying contract preclude the benefi ciary from making a call – see Sirius … There have to date been two matters of principle that have been developed in relation to this second exception. The fi rst is … that the benefi ciary's right to drawdown must be precluded by the express terms of the underlying contract. There is to my mind no principle or reason why the benefi ciary's right could not be precluded by an implied term in the contract. What should matter is whether the right to drawdown is clearly precluded by the terms of the underlying contract, whether they be express or implied. The second is that, when considering whether or not to grant an injunction, it is not suffi cient that there is a seriously arguable case that the benefi ciary was not entitled to draw down. It must be positively established that he was not entitled to draw down under the underlying contract – see the judgment of Ramsey J in Permasteelisa Japan KK v Bouyguesstroi and Bank Intesa SpA … If and to the extent that the subsequent decisions of Aikenhead J in Simon Carves v Ensus … or Edwards-Stuart J in Doosan Babcock v Comercializadora de Equipos y Materiales Mabe Limitada … suggest that a less rigorous test is to be applied, I respectfully consider that the views of Ramsey J should prevail as being in accordance with the substance of the decisions of higher authority, to which I have referred. It seems to me, both on principle and authority, that the only established exceptions to the rule that the court will not intervene should be where there is a seriously arguable case of fraud, or it has been clearly established that the benefi ciary is precluded from making a call by the terms of the contract.' The court noted that MW High Tech’s argument was in effect an attempt to extend the Sirius line of cases beyond instances where the underlying contract contained specifi c restraints on calling on the security, to instances where the call could be shown to have been made without an adequate contractual basis. It was an attempt to imply a qualifi cation into the EPC Contract that calls made under the Retention Bond be required to have an adequate contractual basis or otherwise be 'valid'. The court rejected MW High Tech’s argument, noting the proposed validity requirement did not meet the usual tests for the implication of terms under English law (in particular, such a term would be uncertain in scope and was not necessary to make the contract work). The court noted: 'Even if the call in this case could be described as ‘ill founded’, there is no suggestion that it was fraudulent, and there is nothing new or remarkable in calls on guarantees being controversial, objectionable, or misconceived. There is, to my mind, no reason in favour of imposing any further qualifi cation on the requirement that there be a call on the Parent Company Guarantee, and potent reasons against it. It would encourage protracted satellite litigation at short notice to try and establish whether or not the call on the Parent Company Guarantee was not merely controversial, but misconceived; and such an approach is inconsistent with a typical approach to the acknowledged end point, which is a call on the retention bond. The notion that there should be a preliminary dispute about whether the underlying demand is justifi able goes directly against the normal approach to on-demand bonds: pay now, argue later.' 27 Conclusions and implications This decision is an important departure from the wider approach adopted in the Simon Carves and Doosan Babcock cases. In addition to the court’s express indication that those two cases are not to be followed, the conclusions reached by the court also support a narrower approach. In Doosan Babcock the underlying contract between in that case a Contractor and a Sub-contractor contained no express qualifi cations on the Contractor’s ability to call on the on-demand performance security provided by the Sub-contractor. However, the court in that case sought to impose a restriction by reference (among other things) to the general principle that a party should not benefi t from its own wrong. The court’s decision in the present case suggests that any such implied restrictions should be rejected. Unless it is clear from the contract that the parties intended recourse to an on-demand security to be restricted in some way, the court should only intervene where the requirements of the fraud exception have been satisfi ed. The Simon Carves and Doosan Babcock decisions had been thought by some to have diluted the strength of on-demand bonds governed by English law, which have historically been held in high regard and are popular on international projects (irrespective of the law governing the underlying contracts). The present decision, together with the Privy Council’s decision in Alternative Power Solution Ltd v Central Electricity Board should go a considerable way to easing these concerns. Although authoritative guidance will be needed from the Court of Appeal before the broader grounds of challenge suggested in Simon Carves and Doosan Babcock can safely be disregarded, it seems that English law is now well on the way to returning to its traditionally robust approach to on-demand securities. References: Sirius International Insurance Company v FAI General Insurance Ltd [2003] EWCA Civ 470; Permasteelisa Japan KK v Bouyguesstroi [2007] EWHC 3508 (TCC); Simon Carves Ltd v Ensus UK Ltd [2011] EWHC 657 (TCC); Doosan Babcock Ltd v Comercializadora De Equipos Y Materiales Mabe Limitada [2013] EWHC 3201 (TCC); Alternative Power Solution Ltd v Central Electricity Board [2014] UKPC 31; MW High Tech Projects UK Limited v Biffa Waste Services Limited [2015] EWHC 949 (TCC). 28 | Annual Review of English Construction Law Developments 29 The impact of insurance obligations on liability between the parties under construction contracts An English Court of Appeal decision last year appears to signal a more liberal approach to determining whether insurance clauses are to have this effect. The implications of clauses being classifi ed in this way are considerable. If the required insurance has not been taken out or is successfully avoided by insurers, the parties will have no recourse to each other under the terms of the contract, even where losses have been caused through a breach of contract by one of the parties. Gard Marine & Energy v China National Chartering The Court of Appeal’s decision concerned a charterparty contract. The charterer of a vessel was obliged to maintain insurance in joint names with the ship’s owner against specifi ed risks. The vessel ran aground in a port in Japan and, after paying out under the insurance policy, one of the insurers, Gard Marine, sought to recover damages from the charterer in possession of the vessel at the time it was damaged. Although fi nding that the charterer was not in breach of its contract with the owner, the Court of Appeal also considered whether the insurance arrangements agreed by the owner would have had the effect of relieving the charterer of liability in any event. The contract agreed between the parties contained optional provisions for insurance. The joint names option chosen by the parties did not expressly state that rights of subrogation would be waived, in contrast to other options which did have such language. Despite this, the Court of Appeal held that the parties had by implication excluded their right to seek compensation directly from each other in respect of matters covered by the agreed insuring clause. Construction contracts, both domestic and international, will usually contain clauses requiring one or both of the parties to insure against damage or liability arising in relation to the contract works. Such clauses can in certain circumstances relieve the parties of liability for matters falling within the scope of the clause (whether or not insurance has in fact been obtained). In such cases, the parties are deemed to have intended an insurance-based solution for losses falling within the agreed scope of insurance, rather than one based on contractual liability. 30 | Annual Review of English Construction Law Developments A more liberal approach? The court’s decision may suggest a more liberal approach to the interpretation of insurance clauses. The court made specifi c reference to its previous decision in Tyco Fire v Rolls Royce (where an insurance clause in a construction contract was not held to exclude liability between the parties). In that case, the court had sought to apply the general rule under English law that clear words are needed to exclude liability for negligence. Accordingly, it considered that insurance clauses should not ordinarily exclude liability between the parties for negligent acts purely by implication. In the present case, however, the Court of Appeal counselled against too cautious an approach to such a principle. Rather, the Court emphasised that one of the main reasons why parties take out insurance is to be covered for the consequences of their own negligence. The Court also articulated the following principle which appears to be of general application to cases involving insurance clauses: 'The prima facie position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurers for indemnifi cation rather than to each other. That will be all the more so if it is agreed that the insurance is to be in joint names for the parties’ joint interest…' This passage is notable because it appears to apply not only to joint names insurance, but whenever a party accepts an obligation to insure the subject matter of a contract. It is also notable that the court was prepared to apply this principle despite a contrasting reference to waiver of subrogation in an alternative insuring clause not selected by the parties. Implications for construction contracts The Court of Appeal’s decision has a number of implications for construction contracts. — The court’s comments apply regardless of whether there is a successful insurance recovery. An Employer, for example, who is obliged to insure the works and existing structures under a construction contract may not therefore have any right of recourse against a negligent Contractor in the event that it fails to obtain insurance or the insurer avoids the policy or becomes insolvent. — The court’s decision suggests that any obligation to insure may have this effect, not only obligations for joint names insurance. The key consideration is whether the contract shows an intention that the insurance is to be for the joint benefi t of the parties. — The court’s decision relates to a claim for breach of contract and it is unclear to what extent a similar approach might apply to limit the terms of express indemnities given under a construction contract. Such an indemnity was held to survive a joint names insuring clause in Tyco Fire v Rolls Royce. To the extent that the court’s decision in the present case rests on an implied term, such indemnities may be said to be inconsistent with any implied exclusion of liability. Given the tension between the present case and the Tyco Fire decision, both from the Court of Appeal, those drafting or negotiating insurance clauses in construction contracts would be well advised to spell out in clear terms how the clauses are to affect liabilities between the parties under the contract for events falling within the proposed insurances. The FIDIC Red Book, for example, contains such a statement in clause 18.1 as follows: 31 'Nothing in this Clause limits the obligations, liabilities or responsibilities of the Contractor or the Employer, under the other terms of the Contract or otherwise. Any amounts not insured or not recovered from the insurers shall be borne by the Contractor and/or the Employer in accordance with these obligations, liabilities or responsibilities. However, if the insuring Party fails to effect and keep in force an insurance which is available and which it is required to effect and maintain under the Contract, and the other Party neither approves the omission nor effects insurance for the coverage relevant to this default, any moneys which should have been recoverable under this insurance shall be paid by the insuring Party.' This clause appears to preserve the contractual liability of the parties one to another, whilst at the same time requiring a party who has failed to insure to fund any losses which were required to be insured. Upon analysis, this arrangement may lead to surprising results. The remainder of the FIDIC insurance clauses require various insurances in joint names to be procured but do not provide for any waiver of subrogation between the parties. Accordingly, given that the parties are to remain liable to each other for insured events in accordance with clause 18.1, rights of subrogation will be available to insurers (subject to anything to the contrary in the insurance policy) in the event that insured losses are caused by breaches of the construction contract . For example, if the contractor were negligently to cause damage to existing property of the Employer, the damage could be claimed by the Employer under the joint names insurance required by clause 18.3 of the FIDIC Red Book, but insurers (absent anything to the contrary in the insurance policy) would be entitled to bring a subrogated claim against the Contractor under the contract. Accordingly, the Contractor would end up bearing the ultimate loss caused by its negligence, assuming it remains solvent, rather than insurers. By contrast, if the Employer had failed to obtain insurance in breach of its obligations under the contract, it would be required in accordance with clause 18.1 to make good the moneys which should have been recoverable under the required insurance. The Employer would therefore bear the ultimate loss caused by the Contractor’s negligence as a result of its failure to insure. Given that the Contractor would not have been relieved of liability had insurance been obtained (i.e. due to rights of subrogation remaining), this regime appears to provide a somewhat contradictory allocation of risk. SSE Generation v Hochtief Solutions As noted above, it is unclear to what extent the Court of Appeal’s decision in Gard Marine might be applied to limit the terms of express indemnities under a construction contract. Doubt over this is borne out by a Scottish decision later in 2015 considering the insurance provisions of the NEC form of engineering contract. The case concerned a contract between SSE, as Employer, and Hochtief, as Contractor, to design and build a new hydro-electric scheme at Glendoe, Fort Augustus, in Scotland. The scheme involved the construction of a 6km long power (or headrace) tunnel using a Tunnel Boring Machine. The form of contract was NEC2 Option A and the contract required Hochtief to take out insurance in the joint names of SSE and Hochtief to cover contractor risk events. After around only 9 months of operation, it was discovered that there had been a major collapse in the tunnel. Discussions between the parties ensued regarding rectifi cation of the collapsed tunnel but no agreement was reached. SSE commenced proceedings against Hochtief seeking to recover losses of approximately £130 million arising from the tunnel collapse. As a preliminary point of law, Hochtief raised an issue as to whether the insurance clause requiring joint names insurance to cover contractor risk events (i.e. events for which Hochtief would otherwise be liable) had the effect of excluding or limiting Hochtief’s liability for those events. 32 | Annual Review of English Construction Law Developments In determining this issue, the Scottish Court of Session considered the English Court of Appeal decision in Gard Marine discussed above and noted that 'the thrust of the authorities is in favour of joint names insurance displacing contractual liability'. Nevertheless, the court found that the standard NEC2 provisions as to as to liability were suffi cient to preserve Hochtief’s liability in the face of the joint names insurance. In particular, clause 83.1 of the contract provided that 'Each party indemnifi es the other against claims, proceedings, compensation and costs due to an event which is at his risk'. Clause 85.4 also provided that, 'Any amount not recovered from the insurer is borne by the Employer for events which are at his risk and by the Contractor for events which are at his risk.' These provisions were suffi ciently clear in the courts opinion to show that the requirement for joint names insurance was not intended to affect contractual liabilities as between the parties under the contract. Conclusion Insurance obligations pose diffi cult and complex issues for the structuring of liability under construction contracts. Particularly where joint names insurance is contemplated, there is a signifi cant risk that liability as between the parties to a construction contract will be altered such that events which are intended to be insured against will not be found to attract liability between the parties. This in turn can result in signifi cant and unexpected shifts in risk allocation where one party fails to insure as required by the contract, or where insurers become insolvent or successfully avoid any policy taken out pursuant to the contract. The drafting of contractual provisions dealing with these issues requires careful attention to the rights and interests of both parties to the contract as well as any rights of subrogation which might be exercised by insurers under the policies envisaged by the contract. Reference: Tyco Fire & Integrated Solutions (UK) Ltd v Rolls-Royce Motor Cars Ltd [2008] EWCA Civ 286; Gard Marine & Energy Ltd v China National Chartering Co Ltd [2015] EWCA Civ 16; SSE Generation Ltd v Hochtief Solutions AG and Hochtief (UK) Construction Ltd [2015] CSOH 92. 33 34 | Annual Review of English Construction Law Developments Controlling management risk on construction projects: the effectiveness of 'entire agreement', 'no amendment' and 'no waiver' clauses Introduction Large international construction contracts are typically administered for Employers and Contractors alike by project managers or engineers within defi ned project teams. In a FIDIC context, these positions are occupied by the Engineer and the Contractor’s Representative (and any of their delegates or assistants). Throughout the course of a project, these personnel will discuss a broad range of issues, including technical matters, fi nancial details and the legal merits of particular positions adopted by either party. As they are appointed by the parties and given responsibility for the management of such issues, these personnel will usually have authority to conclude agreements on behalf of the parties or to make statements which have legal effect under the relevant construction contract. Given that project level discussions often take place informally, risks arise that agreements or statements may be made without proper consideration or without prior approval of senior management. These risks are illustrated by a decision last year by the English Technology and Construction Court in Mi-Space (UK) Ltd v Bridgwater Civil Engineering Ltd. Mi-Space (UK) Ltd ('Mi-Space') was in dispute with its sub-contractor, Bridgwater Civil Engineering Ltd ('Bridgwater') over an interim payment which had led to Bridgwater suspending work. Settlement discussions took place via email between Mi-Space’s 'Project Surveyor' and a director from Bridgwater whereby Bridgwater would withdraw its existing claims and recommence work in return for a further payment by Mi-Space. Although the emails were marked 'without prejudice', this tag was removed in the fi nal email exchange (as Mi-Space’s email put it) 'to allow you to formally accept'. A few days later, Mi-Space sent a contract to Bridgwater to formalise the agreement they had reached by email. Bridgwater refused to sign, claiming that the agreement by email was 'subject to contract' and not binding on the parties. Under English law, a party who indicates that they are negotiating 'subject to contract' will ordinarily not be bound to any agreement reached unless and until the agreement is recorded in a formal contract. However, the email exchanges between Bridgwater and Mi-Space did not expressly state that they were 'subject to contract'. Bridgwater relied instead on a reference in Mi-Space’s fi nal offer email to the receipt of Bridgwater’s 'formal acceptance in writing of this agreement'. Bridgwater claimed this suggested that the parties were not to be bound until a formal written agreement had been prepared. A number of English cases in 2015 have considered the effectiveness of informal agreements or statements made between personnel employed to manage a given project or transaction. The risk of such agreements or statements being made is typically sought to be addressed in construction contracts through the use of clauses which state that the contract is to be the 'entire agreement' between the parties, or that no amendment or waiver of the contract terms will be permitted unless certain formalities are complied with (such as the execution of a written document). We consider the effectiveness of such clauses in detail below. 35 The court disagreed with Bridgwater and held that a binding agreement had been reached by the exchange of emails. There was a 'clear and properly recorded' offer and acceptance in the email chain. The reference in the fi nal emailed offer to a 'formal acceptance in writing of this agreement' required only an acceptance in writing (which was sent by reply email) and was not suffi cient to make the agreement 'subject to contract'. Neither did the use of the 'without prejudice' label assist Bridgwater and the judge noted that, even were that label to have been used (mistakenly) by Brigwater to mean 'subject to contract', it had been removed from the fi nal exchange of emails to allow Brigwater to 'formally accept' the agreement. The risks posed by informal communications of this nature are frequently sought to be managed by the inclusion of various standard or 'boilerplate' clauses as follows: — 'Entire agreement' clauses will usually seek to exclude the ability of a party to rely upon representations or statements made during tender negotiations and prior to the execution of a contract. The FIDIC suite of contracts do not contain an entire agreement clause, although they are frequently inserted where English law is applicable. The popular English engineering contract, the NEC, includes a simple entire agreement clause as follows: 'This contract is the entire agreement between the parties.' Such clauses are often expanded to preclude any reliance by the parties on pre-contractual statements or representations. — 'No Amendment' clauses will usually seek to preclude the making of informal amendments to the contract unless certain formalities are followed. A popular form is to require that any amendment be 'in writing and signed by the parties'. — 'No waiver' clauses are similar and will usually seek to preclude any informal waiver of rights by stating that any waiver must be in writing and signed by the party concerned. Such clauses will often also state that any failure or delay in exercising rights shall not amount to a waiver. We consider the effectiveness of each of these mechanisms further below. 'Entire agreement' clauses A simple 'entire agreement' clause such as that contained in the NEC form of contract is designed to preclude one party from alleging that additional documents or terms formed part of the contract between the parties other than those set out within the documents containing or referred to by the entire agreement clause. One common way for such arguments to arise is through what is known as a 'collateral contract'. Such contracts can arise where one party to a proposed contract seeks assurances from another party before agreeing to enter into the contract. If the assurances are given, a second and distinct contract may arise (known as a 'collateral contract') on the basis that the assurances amounted to promises given in return for one party’s agreement to enter into the primary contract. Simple entire agreement clauses such as that found in the NEC form of contract will usually be suffi cient to prevent any collateral contract argument from succeeding. By agreeing that the primary contract is the 'entire agreement', the parties agree to exclude the prospect of any collateral or related agreements with regard to the same subject matter. It is less clear whether such a clause would protect against situations falling under the rubric of 'estoppel' under English law, whereby non-contractual understandings or representations may sometimes be enforced where they have been relied upon to the detriment of another party. It is clear however, that such simple provisions will not be suffi cient to prevent claims for misrepresentation. Where misrepresentations have been made which induce entry into a contract, English law will permit a party who has relied on those representations to rescind or void the contract or to claim compensation. In Axa Sun Life Services Plc v Campbell Martin Ltd, an entire agreement clause was in a slightly broader form. In addition to stating that, '[t]his Agreement and the Schedules and documents referred to herein constitute the entire agreement and understanding between you and us in relation to the subject matter thereof' the clause also stated that: 'this Agreement shall supersede any prior promises, agreements, representations, undertakings or implications whether made orally or in writing between you 36 | Annual Review of English Construction Law Developments and us relating to the subject matter of this Agreement …'. Despite this addition, the clause was still insuffi cient to exclude liability for misrepresentation. The language of the clause as a whole indicated that contractual liability was still in mind and the reference to 'representations' was therefore limited to representations which might otherwise have had contractual or legal effect (such as through a collateral contract) rather than to liability for misrepresentation. This broader language would, however, appear to extend to claims for 'estoppel' which are typically based either on a joint 'understanding' or on 'representations' made by one of the parties – both of which are said to have been superceded in the above clause. In order to avoid liability for misrepresentation, entire agreement clauses are required to go further and state either that no relevant representations have been made, or that no representations have been relied upon in entering into the agreement, or more directly still, that any liability for misrepresentation is excluded. An example of such a clause came before the English High Court last year in Thornbridge Ltd v Barclays Bank Plc. The contract in question was a banking contract, which provided that the bank’s customer was: 'not relying on any communication (written or oral) of the [bank] as investment advice or as a recommendation to enter into the Transaction: it being understood that information and explanations related to the terms and conditions of the transaction shall not be considered investment advice or as a recommendation to enter into the Transaction.' This clause was held to be effective to prevent the customer from claiming against the bank on the basis of alleged advice and recommendations provided by the bank prior to entry into the contract. That will be the case even where it is clear that both parties are aware that advice or representations have been made and have been relied upon. English law’s approach to freedom of contract means that the parties are able to 'rewrite history' and state authoritatively in their contract whether or not any representations have been made and/or relied upon by the parties (save in cases of fraud, where English law does not permit any exclusion of liability). Despite the above cases, even the most welldrafted entire agreement clause may still be overcome by conduct of the parties which indicates that the entire agreement clause is not to apply in any given situation. Such a position arose in Shoreline Housing Partnership Ltd v Mears Ltd where both estoppel and misrepresentation arguments were raised in an attempt to overcome an entire agreement clause. During the course of contract negotiations, the parties had agreed certain rates, known as 'composite rates' for repair works which were not provided for by the formal Schedule of Rates which was to form part of the proposed contract. The need for an amendment to the draft contract documents was raised, but no amendment was said to be necessary. The contract was signed and the composite rates were initially used and paid for under the contract. However, the Employer subsequently sought to revert to the formal Schedule of Rates relying on the entire agreement clause. The clause was not drafted widely enough to include misrepresentation, but the English Court of Appeal also noted that such a clause could not prevent an estoppel argument being made whose subject matter included the effect of the entire agreement clause itself. As the draft contract had been said not to require amendment to include the agreement over composite rates, the effect of the entire agreement clause itself had been the subject of the understanding or representations which were alleged to support the estoppel. 'No amendment' clauses As noted above, a 'no amendment' clause will typically state that no amendments to a contract will be valid unless 'made in writing and signed by the parties'. An English Commercial Court decision this year has considered the extent to which such clauses can prevent amendments being agreed by an exchange of emails between management personnel (C&S Associates UK Ltd v Enterprise Insurance Company Plc). 37 Enterprise, an insurance company, entered into a contract with C&S, an insurance claims handler, for C&S to handle third party motor claims on behalf of Enterprise. The contract included a clause stating that: 'Any variation of this Agreement shall not be effective unless made in writing and signed by or on behalf of each of the Parties to this Agreement'. Despite this clause, the court determined that by a series of emails between Enterprise’s Head of Claims and a director of C&S, agreement was reached to an increase in fees and the introduction of a two year minimum contractual term. The court found that the 'no amendment' clause was insuffi cient to prevent such an agreement taking effect. In particular: 1. The requirement for 'writing' was broad enough to cover an agreement by email exchange. To avoid this, the clause would have to specifi cally carve out emails, require manuscript signatures, paper documents or both parties’ signatures on the same document. 2. An earlier decision of the Court of Appeal in Golden Ocean Group v Salgaocar Mining Industries could be applied by analogy, where it was held that agreement by a series of emails was capable of satisfying the requirements of the Statute of Frauds (i.e. that a contract of guarantee must be in writing and signed by or on behalf of each party). The signature blocks in the email chain between Enterprise’s Head of Claims and C&S’s director could therefore satisfy the requirements for the amendment to be 'signed'. 3. There was nothing in the emails to suggest that the intention of the parties was for the agreement to be 'subject to contract', and all of the required components for a valid contract (agreement, intention to bind and consideration) were in existence. The wording of the clause before the court in this case resembles that contained in the NEC form of contract, which also requires that amendments be in writing and signed by the parties. Such wording is also widely used as boilerplate language in bespoke construction contracts or for addition into standard forms which do not have a 'no amendment' clause (such as the FIDIC suite of contracts). This decision poses a question as to the extent of the protection provided by such provisions. Aside from purely oral agreements, such provisions would not appear to be effective to prevent amendments being agreed through any number of electronic means. An exchange of text messages, for example, might be thought to constitute an agreement 'in writing and signed' if the senders had written their names at the end of each text message. Doubts also exist as to whether such clauses can be effective at all. It is been argued, for example, that the doctrine of freedom of contract requires that parties be able to make new contracts through whatever means they choose. By contrast, proponents of such clauses argue that by giving effect to them the courts are upholding an exercise of the parties’ freedom of contract. This theoretical debate has yet to be authoritatively decided under English law, but the existing case law suggests a middle ground whereby such clauses have some effect, but will not prevent parties from agreeing amendments without the required formality where the evidence shows that a binding amendment agreement was intended by the parties. The position adopted in recent English cases has been to take a 'no amendment' clause into consideration as part of the evidence as to whether an oral or informal amendment had in fact been concluded despite the lack of required formalities. The test is in essence whether the parties had agreed to override the 'no amendment' clause by their oral or informal agreement. One judge of the English Commercial Court has recently put the position as follows (in Energy Venture Partners Ltd v Malabu Oil and Gas Ltd): '…as at present advised, I incline to the view that there can be an oral variation in such circumstances, notwithstanding a clause requiring written modifi cations, where the evidence on the balance of probabilities establishes such variation was indeed concluded. In many cases, such as United Bank Limited v Asif (where the relationship between the parties was a formal banking relationship) the factual matrix of the contract and other circumstances may well preclude the raising of an alleged oral variation to defeat [a 'no amendment' clause]. In others, the evidence may establish on the balance of probabilities that the parties by their oral agreement and/or conduct have varied the basis of their contractual dealings, and have effectively overridden a written clause excluding any unwritten modifi cation.' 38 | Annual Review of English Construction Law Developments 39 In this context it has also been said that the emphasis placed by one party on the inclusion of a 'no amendment' clause may also be relevant (see Virulite LLC v Virulite Distribution Ltd). If the clause was shown to be of importance to one party, as a matter of evidence that may suggest that any later agreement reached informally was not intended to override the clause and form a binding agreement. Conversely, if the clause was not specifi cally negotiated and was merely boilerplate language introduced by lawyers (as is often the case), it may be that as a matter of evidence the parties can more easily be taken to have overridden the clause. 'No waiver' clauses Similar comments apply to 'no waiver' clauses. For example, in Virulite LLC v Virulite Distribution Ltd the English High Court considered a clause stating that, '[w]aiver by either party of any particular default by either party must be in writing and shall not affect or impair such party's rights in respect of any subsequent default of any kind.' The position as quoted above from Malabu Oil and Gas was said to apply equally in the case of a 'no waiver' clause. The court noted that the key question is whether the evidence of any informal waiver or agreement is 'suffi cient to establish that the parties have subsequently overridden the terms of the original contract'. Such 'no waiver' clauses are frequently coupled with a statement that no delay in exercising any rights shall amount to a waiver. For example, the clause in Virulite also stated that, '[n]either party's failure to exercise any power given to it under this Agreement or to insist upon strict compliance with any obligation under it … shall constitute any waiver of any rights under this Agreement.' A similar provision was considered by the English Court of Appeal in Tele2 International Card Company SA v Post Offi ce Ltd. In that case, the contract provided a right of termination in the event that certain parent company guarantees were not provided. These were not provided, however the right of termination was not sought to be exercised until nearly a year later whilst in the meantime both parties had continued to perform the contract. The termination was sought to be saved by reference to a 'no waiver' clause in the following terms: 'In no event shall any delay, neglect or forbearance on the part of any party in enforcing (in whole or in part) any provision of this Agreement be or be deemed to be a waiver thereof or a waiver of any other provision or shall in any way prejudice any right of that party under this Agreement.' The Court of Appeal considered this clause insuffi cient to preserve the right of termination in the above circumstances. Once the parent company guarantees had not been provided, the innocent party was put to what is known under English law as an 'election' as to whether to terminate or proceed with the contract. By continuing the perform the contract, the innocent party had elected to affi rm the contract. It was not so much a question of whether the innocent party had delayed in exercising its right of termination, but that it had made a positive 'election' not to terminate the contract. It is unclear how such a clause would apply to mere delay in such circumstances. For example, if the contract did not require any performance by the innocent party in the period between a right of termination arising and it being exercised. Absent such a clause, the right of termination could be said to have lapsed as English law will usually imply a requirement that express termination rights be exercised within a reasonable period of time. A 'no waiver' clause such as that quoted above may be suffi cient to reverse this rule such that a right of termination will remain open for so long as the innocent party does not take any positive action which could be viewed as affi rming the contract. Aside from cases where the doctrine of election applies, such clauses may provide some benefi t where a party otherwise seeks to rely on a delay in the exercise of rights. An Employer might, for example, hold off in collecting liquidated damages for fear of prejudicing the progress of the works. In ordinary circumstances, such an Employer may be required to make a formal demand for payment of the outstanding liquidated damages before taking any recovery action, such as the liquidation of any performance securities. A 'no waiver' clause along the lines noted above might potentially avoid the need for such a demand to be made. 40 | Annual Review of English Construction Law Developments Conclusion The analysis set out above shows that the protection often thought to be obtained through the use of commonly worded 'entire agreement', 'no amendment' and 'no waiver' clauses may not in fact be the case. Misrepresentation or estoppel arguments can often succeed despite an 'entire agreement' clause. A requirement for agreements or waivers to be 'in writing and signed' is more easily fulfi lled than many parties may realise. The use of 'no amendment' or 'no waiver' clauses also remain subject to the parties ability to override the original contract, even through informal means. Careful attention to the drafting of these common clauses can overcome many of these diffi culties. For example: — 'Entire agreement' clauses can be drafted widely to exclude estoppels and claims for misrepresentation. — The requirements of any 'no amendment' or 'no waiver' clause can be tightened to require paper documents or traditional manuscript signatures (although the prospect of informal agreements overriding such clauses will still remain). — A 'no amendment' clause might also state that any amendments agreed shall be 'subject to contract' and enforceable only once certain formalities have been completed. This is a potentially stronger clause, because evidence that an agreement was actually intended by informal discussions, whilst potentially suffi cient to override a simple 'no amendment' clause, may not be suffi cient to override a 'subject to contract' clause (i.e. such a clause contemplates that informal agreements will be reached – albeit 'subject to contract' – and therefore reduces the scope for arguments that evidence of an informal agreement should be taken to be inconsistent with or have overridden the clause). — Stronger still, 'no amendment' or 'no waiver' clauses might seek to state those persons or categories of people who have authority to agree amendments or waive rights under the contract. Such a clause might, for example, specify the need for the agreement of two directors. Agreements or waivers made by persons outside of those mentioned in the clause should not bind the party concerned unless by other words or conduct the party has indicated that those persons do have authority to amend or waive rights under the contract on their behalf. Even the most well drafted clauses will, however, be capable of being waived by the parties at one level or another either expressly or through a course of dealing. Freedom of contract requires that parties cannot completely preclude themselves from making fresh agreements or amending existing ones. References: Tele2 International Card Company SA & Ors v Post Offi ce Ltd [2009] EWCA Civ 9; Shoreline Housing Partnership Ltd v Mears Ltd [2013] EWCA Civ 639; Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2013] EWHC 2118 (Comm); Axa Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133; Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd [2012] EWCA Civ 265; Virulite LLC v Virulite Distribution Ltd [2014] EWHC 366 (QB); MiSpace (UK) Ltd v Bridgwater Civil Engineering Ltd [2015] EWHC 3360 (TCC); Thornbridge Ltd v Barclays Bank Plc [2015] EWHC 3430; C&S Associates UK Ltd v Enterprise Insurance Company Plc [2015] EWHC 3757 (Comm). 41 42 | Annual Review of English Construction Law Developments The interpretation of express good faith obligations in construction contracts Mears Ltd v Shoreline Housing Partnership Ltd As noted in the previous article, this case involved estoppel and misrepresentation arguments raised in an attempt to overcome an entire agreement clause. Certain rates had been agreed by the parties and used initially after the contract had been signed, but they had not been formally incorporated within the signed contract. In a fi nal decision in the case last year, the court accepted Mears’ estoppel arguments. Mears had also relied on an express term in the contract, clause 10.1, which read as follows: 'The Parties shall act as stated in this contract and in a spirit of mutual trust and cooperation.' This is a standard clause appearing in the NEC3 suite of contracts on which the Mears contract was based. The court rejected the potential for clause 10.1 to apply in such a situation. Mr Justice Akenhead said that he was 'not satisfi ed that … the obligation to act in a spirit of mutual trust and cooperation or even in a ‘partnering way’ would prevent either party from relying on any express terms of the contract freely entered into by each party'. As noted above, however, the judge found on the facts of the case that there was an estoppel (both by convention and by representation) such that Shoreline was effectively committed to paying Mears on the basis of the rates originally agreed between them. Portsmouth City Council v Ensign Highways Ltd Portsmouth City Council ('PCC') and Ensign entered into an agreement for the long term rehabilitation, maintenance and operation of PCC’s highway network by Ensign (the 'Agreement'). The Agreement incorporated a regime for the awarding of 'Service Points' for breaches by Ensign of its obligations. A schedule to the Agreement set out a large number of 'Default Events' for which Service Points could be awarded and, against each Default Event, a 'Maximum Event Value'. The accumulation of Service Points could have serious consequences for Ensign: over 225 points in a 12 month period would amount to an event of default under its fi nancing documents and over 250 points in a 12 month period would give PCC a right to terminate the Agreement. Good faith obligations have continued to feature in the English cases over 2015. The English courts have on the whole refused to imply freestanding good faith obligations and continue to be reluctant to use express good faith type obligations to qualify the scope of other express terms of a contract. A continuing theme is the reliance on other English law doctrines, such as estoppel and the control of contractual discretions, to achieve the ultimate ends of justice for which good faith obligations are often sought. 43 PCC was under a statutory duty – known as the 'Best Value Duty' – to secure continuous improvement in the way its functions were exercised. To fulfi l this duty, the Agreement included at clause 44 a requirement for Ensign to make continuous improvement and an entitlement for PCC to advise Ensign of areas in which it considered such improvements could be made. Clause 44 also provided for fi ve yearly 'Best Value Reviews' between the parties. In a further sub-clause to clause 44, the parties agreed in general terms to 'deal fairly, in good faith and in mutual co-operation with one another'. PCC’s policy in relation to Service Points, for the fi rst decade of operation, was to issue Service Points monthly and to make the amount dependent on its view of the gravity of the breach. In early 2014, however, PCC changed its policy and levied 4 ½ months’ worth of Service Points all at once, and in each case for the relevant Maximum Value. Ensign argued that the express obligation of fair dealing and good faith in clause 44 applied beyond that clause to the Agreement as a whole, including the Service Point regime. Alternatively, Ensign argued for an implied term governing PCC’s ability to award Service Points to the effect that, when issuing Service Points, PCC’s representative had to hold the balance between the parties fairly, and to act in a manner which was independent, impartial, fair and honest. Much of the judgment concerns whether the Service Point regime, correctly interpreted, applied on a sliding scale basis depending on the gravity of the breach, or whether the 'Maximum Event Value' was a fi xed tariff. The judge found it was the former. An element of discretion was therefore given to PCC as to the level of Service Points to be applied in any situation. With this in mind, the judge went on to consider the parties’ arguments around good faith and implied terms. Although the express good faith obligation in clause 44 was couched in general terms, the court found that it could not be extended to apply to other clauses in the Agreement. In particular: — The court could not fi nd anything in the language of the clause in question or in the rest of the Agreement that would indicate either expressly or impliedly that the good faith duty was to apply more widely than to clause 44 alone. — The Agreement contained a number of other clauses which contained specifi c and narrow obligations of good faith or similar obligations to use reasonable endeavours. This indicated that where a good faith obligation was considered necessary, the parties had provided for such an obligation accordingly. — The good faith obligation was necessary to make the Best Value Duty provisions of clause 44 workable, otherwise Ensign would have no duty to properly consider and discuss Best Value proposals made by PCC. There were no other clauses in the Agreement which required good faith obligations to make them work and in some cases such an obligation would be nonsensical. For example, the court considered there to be 'no room … for the imposition of any duty of good faith' in relation to termination provisions in the Agreement regarding non-payment. The court drew support from the recent Court of Appeal decision in Mid Essex Hospital Services NHS Trust v Compass Group and noted the warning given by Lord Justice Beatson that, 'care must be taken not to construe a general and potentially open-ended obligation such as an obligation to ‘co-operate’ or ‘to act in good faith’ as covering the same ground as other, more specifi c provisions, lest it cut across those more specifi c provisions and any limitations in them'. In the Compass case, Service Point deductions were specifi ed on a fi xed tariff basis, so that the Employer’s decision was limited simply to whether or not to apply the fi xed deduction. The Court of Appeal found there to be no implied duties limiting the circumstances in which such deductions could be made. The making of a fi xed deduction was the exercise of a pure legal right and it was not relevant to consider whether that right was exercised in good faith. Contractual rights under English law can ordinarily be exercised for good or bad reasons or none at all. 44 | Annual Review of English Construction Law Developments The operation of the Agreement between PCC and Ensign, however, differed from that in the Compass case in that rather than Service Point deductions being awarded on a fi xed tariff basis they applied on a sliding scale basis. As a result, PCC had a discretion as to the number of Service Point deductions to award where a maximum number of points had been specifi ed. Both parties had accepted that an implied term should govern the exercise of that discretion, but differed on the content of that implied term. The judge did not accept Ensign’s formulation referred to above: PCC was not required to 'hold the balance' and be fair and impartial as between the parties (i.e. PCC was not to be treated as akin to a third party contract administrator in this respect). However, PCC was required to act honestly and on proper grounds and not in an arbitrary, irrational or capricious manner. In adopting this approach, the court followed established English law principles governing circumstances in which one party is given a contractual discretion to affect the rights of another party. Conclusion These two decisions, along with others in 2015, suggest that the English courts will continue to keep a tight rein on the implication of good faith obligations and in relation to the interpretation of express good faith obligations. Express good faith obligations, in particular, are unlikely to provide the broad and open ended protection that is often hoped for. As the Ensign decision shows, parties are likely to have more success in incorporating good faith obligations individually, on a clause-by-clause basis and with appropriately tailored drafting, rather than by the use of an overarching, 'one size fi ts all' clause. Both of the above cases also illustrate the point that parties will often be more successful in relying on an established principle of English law in aid of its position rather than arguments made by reference to general good faith principles. In the Mears case, an estoppel was used to overcome the strict application of contractual terms in circumstances where the court considered that a general 'mutual trust and co-operation' obligation was unable to assist. Similarly, in the Ensign case the express good faith obligation relied upon by Ensign could not be extended to the Service Point regime, but the court nonetheless relied on established English law principles to impose limits on the Employer’s discretion as to the amount of Service Point deductions to be levied for any particular breach of the Agreement. In the following article, we consider English law’s approach to contractual discretions in more detail, including a Supreme Court decision in 2015 which may broaden the scope for challenging unreasonable decisions made by Employers pursuant to such discretions. References: Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA; Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC); Mears Ltd v Shoreline Housing Partnership Ltd [2015] EWHC 1396 (TCC). 45 46 | Annual Review of English Construction Law Developments Good faith and reasonableness in the exercise of contractual discretions Introduction Construction contracts frequently provide for the exercise of contractual discretions by one party which affect the rights of another (usually an Employer affecting the rights of a Contractor). The scope of such discretions may range from matters of quality, safety and the suffi ciency of information to matters of entitlement in relation to extensions of time, rights of termination or the recoverability of extra cost. The need for such discretions will often arise where certain details as to the parties’ agreement or the works remains to be fi nalised. Or there may be a need for fl exibility in determining whether certain rights may be exercised or whether certain contractual standards have been met. The use of contractual discretions provides one way to manage these uncertainties. An alternative approach is for the parties to provide for an independent third party to administer the contract, such as the Engineer provided by the FIDIC Red and Yellow Books. Where one party may have been given a discretion, authority is instead given to the Engineer to make a determination. Even in such contracts, however, certain residual matters may still be left to the discretion of one of the parties. For example, the FIDIC Red Book provides that the Performance Security to be provided by the Contractor shall be 'issued by an entity and from within a country (or other jurisdiction) approved by the Employer'. One key advantage often sought by using contractual discretions over other means of resolving uncertainty is the avoidance of any objective standard by which the subject matter of the discretion is to be determined. A helpful example comes from a 2014 case (Bluewater Energy Services v Mercon Steel Structures), decided under the LOGIC form of contract, and concerns a termination clause which provided for a right of termination where a notice of default had been given and the Contractor did not thereafter 'continuously proceed with action satisfactory to [the Employer] to remedy such default'. The clause might have said simply that the Contractor was to take reasonable action to remedy its default, but by referring to action 'satisfactory to the Employer' an objective standard is avoided. International construction contracts will often leave certain matters to the discretion of the Employer. The potential for the abuse of such discretion is controlled by English law through the implication of a term requiring the discretion to be exercised in accordance with certain minimum standards, such as good faith, honesty and rationality. A Supreme Court decision in 2015 has signifi cantly clarifi ed the scope of these implied restrictions under English law. The decision expands the grounds on which the exercise of such discretions may be challenged and is likely to have a wide application to decisions made under construction contracts. 47 Where an Engineer or Contract Administrator is used, they will ordinarily be required to make decisions or exercise discretions which affect the rights of the Contractor fairly and reasonably. This may also be the case where the Employer fulfi ls the decision making role of an Engineer. For example, under the FIDIC Silver Book, clause 3.5 provides for the Employer to make determinations in relation to various entitlements arising under the contract. However, the Employer is to 'make a fair determination in accordance with the Contract'. Thus, although a decision is reserved to the Employer, it must be made in accordance with an objective standard and is capable of being challenged on the basis that is unreasonable or does not refl ect the requirements of the Contract. The Employer’s decision therefore carries no inherent weight and is more procedural than substantive. True contractual discretions, on the other hand, are less open to challenge. It is not suffi cient for an opposing party to allege that the decision reached is unreasonable. A court or arbitrator will not be entitled to substitute their own assessment as to how the discretion ought to have been exercised. Any challenge must instead be made on the basis that discretion has miscarried and has not been exercised properly. For example, it might be said that the discretion has been exercised in bad faith, arbitrarily or capriciously. Rather than considering the substance of the decision made, it is necessary to analyse the way in which the decision was made. Braganza v BP Shipping English law in this area has been signifi cantly clarifi ed by a Supreme Court decision last year. The decision concerned the disappearance of an employee from an oil tanker in the mid-North Atlantic Ocean. The employee’s widow claimed for death-in-service benefi ts provided for by her husband’s employment contract. Clause 7.6.3 of the employment contract provided these benefi ts would be lost in certain circumstances as follows: 'For the avoidance of doubt compensation for death, accidental injury or illness shall not be payable if, in the opinion of the Company or its insurers, the death, accidental injury or illness resulted from amongst other things, the Offi cer's wilful act, default or misconduct whether at sea or ashore …' The employer carried out an investigation and came to the conclusion that the most likely cause of the husband’s disappearance was that he had committed suicide by throwing himself overboard. This decision resulted in the loss of the husband’s death-in-service benefi t under clause 7.6.3. The husband’s widow sought to challenge the opinion reached by the employer under that clause. It was accepted by both parties that, as clause 7.6.3 conferred a contractual discretion on the employer which had the potential to signifi cantly affect the rights of the husband and his family, an implied term was necessary to control the exercise of that discretion. As Lady Hale in the Supreme Court noted: 48 | Annual Review of English Construction Law Developments 'Contractual terms in which one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts, are extremely common. It is not for the courts to re-write the parties' bargain for them, still less to substitute themselves for the contractually agreed decision-maker. Nevertheless, the party who is charged with making decisions which affect the rights of both parties to the contract has a clear confl ict of interest. That confl ict is heightened where there is a signifi cant imbalance of power between the contracting parties as there often will be in an employment contract. The courts have therefore sought to ensure that such contractual powers are not abused. They have done so by implying a term as to the manner in which such powers may be exercised, a term which may vary according to the terms of the contract and the context in which the decision-making power is given.' The disagreement between the parties concerned the precise content of the implied term. Previous cases had drawn guidance from public law cases concerning the challenge of statutory decisions made by Government Departments, Ministers of State or other persons or bodies charged with making decisions of a public nature. There had been a reluctance to apply precisely the same requirements to the exercise of contractual discretions, but key components of good faith, honesty and rationality had been imported. A frequently quoted decision in this area of the law is Socimer International Bank Ltd v Standard Bank London Ltd. In that case, the English Court of Appeal summarised the English law position with regard to contractual discretions as follows: 'It is plain from these authorities that a decisionmaker's discretion will be limited, as a matter of necessary implication, by concepts of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality. The concern is that the discretion should not be abused.' The reference to 'irrationality' is not intended to imply any objective standard by which an exercise of discretion is to be evaluated. The test is rather whether the decision is one which is so unreasonable that no reasonable decision maker could ever have come to it. As recently explained by the UK Supreme Court in Hayes v Willoughby: 'Rationality is not the same as reasonableness. Reasonableness is an external, objective standard applied to the outcome of a person's thoughts or intentions. ... A test of rationality, by comparison, applies a minimum objective standard to the relevant person's mental processes. It imports a requirement of good faith, a requirement that there should be some logical connection between the evidence and the ostensible reasons for the decision, and (which will usually amount to the same thing) an absence of arbitrariness, of capriciousness or of reasoning so outrageous in its defi ance of logic as to be perverse.' The requirement for rationality is sometimes referred to as 'Wednesbury unreasonableness' after the name of the public law case which established the requirement of rationality for public law decisions under English law (Associated Provincial Pictures Houses Ltd v Wednesbury Corporation). In the present case, the above principles appeared not to provide suffi cient grounds for challenging the employer’s opinion as to suicide. The employer had carried out a detailed investigation in relation to the husband’s disappearance and had considered all the relevant evidence. Its opinion as to suicide had been based on circumstantial evidence, such as changes in mood which had been observed of the husband in the lead up to his disappearance and evidence of fi nancial stress taken from emails between the husband and his wife. Its opinion had therefore been formed honestly and in good faith and without arbitrariness or capriciousness. It’s opinion was also rational in the sense that the matters taken into account could rationally be thought to weigh in favour of 49 50 | Annual Review of English Construction Law Developments a conclusion of suicide. Suicide was also one of two possible causes of the husband’s disappearance, the other being an accidental fall from the vessel. The opinion as to suicide could not in itself therefore be described as irrational. To support her case, the husband’s widow relied on an additional public law principle arising from the Wednesbury case. The case provides two distinct grounds on which a public law decision can be challenged as follows: 'The court is entitled to investigate the action of the local authority with a view to seeing whether they have taken into account matters which they ought not to take into account, or conversely, have refused to take into account or neglected to take into account matters which they ought to take into account. Once that question is answered in favour of the local authority, it may still be possible to say that, although the local authority have kept within the four corners of the matters which they ought to consider, they have nevertheless come to a conclusion so unreasonable that no reasonable authority could ever have come to it.' The cases referred to above have applied the second sentence of this passage to contractual discretions. The fi rst ground, however, dealing with the matters to be taken into account by a decision maker, had not previously been applied to contractual discretions. The question before the Supreme Court was therefore whether the implied term applicable to contractual discretions should cover both limbs of the public law grounds of challenge deriving from the Wednesbury case. The court held unanimously that both limbs of Wednesbury should apply to contractual discretions. It was an integral part of requiring that a contractual discretion be exercised 'rationally' that the decision maker exclude extraneous considerations and take account of relevant considerations. However, the court would not require the 'almost microscopic investigation' required in formal court proceedings and a 'slight misdirection' would not invalidate a decision where it is clear that the same decision would have been reached without that misdirection. The court noted that its decision brought the test for contractual discretions closer to the test for challenging public law decisions. The court left open, however, to what extent the test for contractual discretions might differ and be less onerous from the public law test. It noted however that it 'may very well be that the same high standards of decision-making ought not to be expected of most contractual decision-makers as are expected of the modern state.' In relation to the case before it, a majority of the court found that the employer’s opinion as to suicide had not been properly reached. The employer had failed to take into account the fact that suicide is an inherently improbable event, and that cogent evidence is needed in order support a conclusion that suicide has taken place. This was a relevant matter which the employer had not taken into account. The employer was not entitled simply weigh the circumstantial evidence and fi nd that on balance it favoured a fi nding of suicide. Rather, it ought to have proceeded by reference to the inherent unlikelihood of the suicide hypothesis and required that any circumstantial evidence in support of it be of suffi cient strength before any positive fi nding was made. As the court noted, 'a decision that an employee has committed suicide is not a rational or reasonable decision, in the terms discussed above, unless the employer has had it clearly in mind that suicide is such an improbability that cogent evidence is required to form the positive opinion that it has taken place.' Implications for construction contracts The Supreme Court’s decision, although decided under an employment contract, has considerable signifi cance for construction contracts. By more closely tying the test applicable to contractual discretions to the test for public law challenges, the decision will expand the grounds upon which, usually Contractors, will be able to challenge the exercise of contractual discretions by an Employer. The decision confi rms that any material omission by an Employer to take into account relevant matters, or to exclude extraneous matters, when exercising a discretion has the potential to invalidate the Employer’s 51 decision. Employers might therefore expect well-informed Contractors to seek a full explanation as to the reasons for any decision they wish to challenge in the hope of identifying irrelevant matters or an absence of other relevant considerations. Employers should now exercise greater care in recording the grounds for any decisions made under a construction contract and the extent to which those grounds are communicated to the Contractor. As noted above, the types of contractual discretions conferred under construction contracts are many and varied. Some recent examples from the recent cases include: — An Employer’s decision as to whether contractual defaults had not been suffi ciently remedied so as to give rise to a right of termination (the Bluewater decision mentioned in the introduction). — An Employer’s decision as to the number of Service Point deductions to apply in response to a breach of the Contractor’s performance obligations (Portsmouth City Council v Ensign Highways Ltd referred to in the previous article). — An Employer’s discretion as to whether the Contractor was to forfeit any entitlement to extensions of time and adjustments to the contract price as a result of a failure to submit notices, documentation and records required by the contract (the Bluewater decision). — An Employer’s decision as to whether to terminate for 'material breach' (BT Cornwall Ltd v Cornwall Council). The last case above in relation to termination rights deserves further mention. An argument was made by the Contractor that any termination by the Employer for 'material breach' was subject to the usual implied term applying to contractual discretions. The court dealt with the point swiftly, by noting that any requirement for good faith, honesty and rationality had been satisfi ed, however it is unclear whether the implied term ought to apply generally to termination rights under English law. As noted in the previous article, the English Court of Appeal in the Compass decision refused to allow the implied term to restrict the circumstances in which an Employer was entitled to make Service Point deductions specifi ed on a fi xed tariff basis as a result of breaches of contract by the Contractor. This was said to be a pure legal right and not the exercise of a discretion. Much the same could be said about a right to terminate for material breach. 'reasonable opinion' and 'sole discretion' Before leaving this topic, it is worth mentioning two recent cases which have considered the effect of language commonly used to qualify discretions conferred under construction contracts. The word 'reasonable' is sometimes inserted before discretionary language in an attempt to make the exercise of a discretion more objective. Such an example came before the English courts in 2015 in a case concerning repurchase agreements in relation to certain metal cargoes (Mercuria Energy Trading v Citibank). The agreements permitted a fi nancier, Citibank, to issue 'Bring Forward Event' notices where, 'in the reasonable opinion of [Citibank]', certain storage facilities were no longer able to safely or satisfactorily store the metal. A dispute arose over whether the words 'reasonable opinion' imported any objective standard of reasonableness or whether it simply confi rmed the requirement for rationality or 'Wednesbury reasonableness' which is usually applicable to the exercise of a contractual discretion. The English Commercial Court found that the word 'reasonable' was not suffi cient to import an objective standard, largely because the reference to Citibank’s 'opinion' made it clear that the parties had not intended an objective standard to apply. The reference to reasonableness therefore merely confi rmed the rationality requirements of the usual implied term applying to the exercise of a contractual discretion. Conversely to the position in Citibank, parties may sometimes seek to reinforce the subjective nature of a contractual discretion by including the word 'sole', 'absolute' or 'unfettered' before the relevant discretionary language. For example, in the Bluewater case, a Contractor was required to give a notice and certain information to the Employer when it considered or should reasonably have considered itself entitled to 52 | Annual Review of English Construction Law Developments claim an extension of time or adjustment to the contract price as a result of a variation occurring (as defi ned in the contract). If it failed to do so, the Contractor was to forfeit its rights, 'at the sole discretion of [the Employer]'. The court held that reference to the Employer’s 'sole discretion' did not prevent the usual implied term from applying. It was not therefore suffi cient for the Employer to rely simply on the Contractor’s failure to give notices. The court noted that: 'In such circumstances the absence of information given at a particular time may have no effect on Bluewater’s ability to make those adjustments [to the contract price or time for completion]. It would clearly be an abuse for Bluewater to reject a request for a Variation or to seek to forfeit Mercon’s rights to additional payment or an extension of time, merely because the information was not given 'without delay' or some information was missing. To do so would mean that Bluewater was entitled to have work carried out for which Mercon would receive no payment and for Bluewater to cause delay and then also recover liquidated damages for that delay. No clearer case of abuse can be made out and would be contrary to the limitations on Bluewater’s discretion in terms of honesty, good faith, and genuineness, and the need for the absence of arbitrariness, capriciousness, perversity and irrationality.' These cases suggest that qualifi cations made to clauses which provide for the exercising of a discretion by one party are unlikely to prevent the usual implied term from controlling the manner in which the discretion is exercised. Parties wishing to grant a completely unrestricted discretion to one party will need to do so with clear language and may be better served by removing the discretion altogether and replacing it with a strict legal right (which can of course be waived should one party not wish to take the benefi t of that right). References: Associated Provincial Pictures Houses Ltd v Wednesbury Corporation [1948] 1 KB 223; Socimer International Bank Ltd v Standard Bank London Ltd [2008] EWCA Civ 116; Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd (t/a Medirest) [2013] EWCA; Hayes v Willoughby [2013] UKSC 17; Bluewater Energy Services BV v Mercon Steel Structures BV [2014] EWHC 2132 (TCC) Braganza v BP Shipping Ltd [2015] UKSC 17; Mercuria Energy Trading Pte Ltd v Citibank NA [2015] EWHC 1481 (Comm); BT Cornwall Ltd v Cornwall Council [2015] EWHC 3755 (Comm); Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC). 53 54 | Annual Review of English Construction Law Developments FIDIC dispute resolution update The enforcement of DAB decisions: the Singaporean experience In last year’s Annual Review, we commented on a decision from the Singaporean High Court granting enforcement of an arbitral award to enforce a DAB decision under the FIDIC Red Book. The decision formed part of long running litigation between the parties over a DAB decision decided in 2008, involving previous High Court and Court of Appeal proceedings in Singapore. This latest decision was also appealed by the Employer and the Singaporean Court of Appeal delivered its decision on the appeal last year. The relevant provisions of the FIDIC Red Book at the heart of the dispute read as follows: '20.4 Obtaining Dispute Adjudication Board’s Decision If a dispute (of any kind whatsoever) arises between the Parties in connection with, or arising out of, the Contract or the execution of the Works, including any dispute as to any certifi cate, determination, instruction, opinion or valuation of the Engineer, either Party may refer the dispute in writing to the DAB for its decision, with copies to the other Party and the Engineer. … Within 84 days after receiving such reference, or within such other period as may be proposed by the DAB and approved by both Parties, the DAB shall give its decision … The decision shall be binding on both Parties, who shall promptly give effect to it unless and until it shall be revised in an amicable settlement or an arbitral award as described below. … If either Party is dissatisfi ed with the DAB’s decision, then either Party may, within 28 days after receiving the decision, give notice to the other Party of its dissatisfaction. … Except as stated in Sub-Clause 20.7 [Failure to Comply with Dispute Adjudication Board’s Decision] and Sub-Clause 20.8 [Expiry of Dispute Adjudication Board’s Appointment], neither Party shall be entitled to commence arbitration of a dispute unless a notice of dissatisfaction has been given in accordance with this Sub-Clause. If the DAB has given its decision as to a matter in dispute to both Parties, and no notice of dissatisfaction has been given by either Party within 28 days after it received the DAB’s decision, then the decision shall become fi nal and binding upon both Parties. In last year’s Annual Review, we commented on a number of cases in 2014 which had considered the role and enforceability of Dispute Adjudication Board ('DAB') decisions under the FIDIC dispute resolution provisions. 2015 has provided further guidance on this topic, with a conclusion to the long running Persero litigation in Singapore and an English decision on the waiver of pre-conditions to arbitration by an Employer under a FIDIC 4th edition contract. 55 20.5 Amicable Settlement Where notice of dissatisfaction has been given under Sub-Clause 20.4 above, both Parties shall attempt to settle the dispute amicably before the commencement of arbitration. However, unless both Parties agree otherwise, arbitration may be commenced on or after the fi fty-sixth day after the day on which notice of dissatisfaction was given, even if no attempt at amicable settlement has been made. 20.6 Arbitration Unless settled amicably, any dispute in respect of which the DAB’s decision (if any) has not become fi nal and binding shall be fi nally settled by international arbitration. … 20.7 Failure to Comply with Dispute Adjudication Board’s Decision In the event that: (a) neither Party has given notice of dissatisfaction within the period stated in Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision], (b) the DAB’s related decision (if any) has become fi nal and binding, and (c) a Party fails to comply with this decision, then the other Party may, without prejudice to any other rights it may have, refer the failure itself to arbitration under Sub-Clause 20.6 [Arbitration]. Sub-Clause 20.4 [Obtaining Dispute Adjudication Board’s Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply to this reference.' These provisions permit a party dissatisfi ed with a DAB decision to serve a Notice of Dissatisfaction. Such a notice prevents the DAB’s decision from becoming fi nal and allows arbitration proceedings to be commenced to challenge the decision. In the meantime, however, the parties are required to comply with the DAB’s decision. Where no Notice of Dissatisfaction is served, the DAB decision becomes fi nal and binding in accordance with clause 20.4. If a party still fails to comply with the DAB decision in these circumstances, clause 20.7 provides expressly that non-defaulting party may 'refer the failure itself to arbitration' under clause 20.6. The FIDIC provisions are silent, however, as to how enforcement of a DAB decision is to be pursued in circumstances where a Notice of Dissatisfaction has been served i.e. pending fi nal determination of the overall dispute. In contrast with the express provisions of clause 20.7, FIDIC’s silence on this point has led to arguments as to whether the enforcement of such a binding-butnot-fi nal DAB decision is able to pursued through arbitration. The problem has received considerable attention over the past decade and was summarised in 2014 by the English Technology and Construction Court as follows (in Peterborough City Council v Enterprise Managed Services): '… what has been described as ‘the gap’ in those sub-clauses … arises when the DAB has made a decision and one party has given a notice of dissatisfaction - with the result that the DAB's decision, whilst binding, is not fi nal. The problem then is that if the unsuccessful party refuses to comply with the decision of the DAB, as it is required to do by sub-clause 20.4.4, the only remedy (it is said) available to the other party is to refer the dispute occasioned by the refusal to comply to yet another adjudication. This can have the effect, [it is] submitted, that the party in default can embark on a course of persistent non-compliance with DAB decisions and thereby deprive the other of any effective remedy.' The court in that case was able to side-step the issue because the FIDIC terms before it provided for court proceedings rather than arbitration. Accordingly, whilst the point 'may be arguable in the context of the standard FIDIC Books which include an arbitration clause', an English court was not subject to the same jurisdictional limitations as an arbitrator. It could, for example, simply order specifi c performance of a DAB decision pending fi nal determination through further court proceedings. Persero: round 1 The diffi culties which arise in an arbitration context have, however, been the subject of intense scrutiny in long running litigation in Singapore. The fi rst round of the litigation involved a Contractor obtaining a DAB decision for the payment of $17 million against an Employer. The Employer gave a Notice of Dissatisfaction and the Contractor commenced an arbitration to enforce the binding-but-not- fi nal DAB’s decision. The arbitral tribunal gave a fi nal award enforcing the DAB’s decision and 56 | Annual Review of English Construction Law Developments declined the Employer’s request to consider the underlying merits of the Contractor’s claim. The tribunal ruled that the proper course for the Employer was to seek such a review by a separate arbitration. This fi nal award was ultimately struck down by the Singaporean Court of Appeal in 2011 as being without jurisdiction and in breach of the rules of natural justice. The arbitral tribunal was required to determine the full dispute between the parties and had been wrong to decline the Employer’s request to consider the underlying merits of the claim. The court noted that a better approach for the Contractor would have been to seek an interim or partial award pending the making of a fi nal award on the merits of the DAB’s decision. Persero: round 2 Heeding the Court of Appeal’s advice, the Contractor commenced a further arbitration, this time seeking an interim award to enforce the amount of the DAB’s decision. An interim award was granted and the Employer then brought further proceedings before the Singaporean High Court to challenge its validity. The Employer contended that the enforcement of a bindingbut-not-fi nal DAB decision fell outside the scope of the FIDIC arbitration clause. Alternatively, it argued that the applicable arbitration rules prevented any provisional award being made which might be varied in the tribunal’s fi nal award and also offended against a provision in the rules which prevented the tribunal from varying, amending or revoking an award. In the fi rst instance decision reported in last year’s edition of this publication, the Singaporean High Court rejected the Employer’s challenge, adopting a pragmatic view as to the scope of the FIDIC arbitration clause. It found that the tribunal’s award, although expressed as being 'interim', was fi nal and binding in relation to its subject matter, that being the Employer’s compliance with the DAB’s decision. If the DAB decision was reversed in the fi nal award that would not be an amendment or revocation of the interim award, as such, but merely an accounting exercise given effect to by the fi nal award. The Employer appealed. 57 The second Court of Appeal decision By a majority of 2:1 the Court of Appeal dismissed the Employer’s appeal. The majority emphasised the importance of taking a pragmatic approach to the FIDIC dispute resolution clauses. They relied in particular upon a Guidance Memorandum issued by FIDIC in 2013 and articles written by a member of the FIDIC drafting committee to support their conclusion that the arbitration clause must have been intended to encompass a dispute as to compliance with a binding-but-not-fi nal DAB decision as well as a dispute as to its substance. The majority also confi rmed that the tribunal’s interim award did not lack fi nality. Although by the time of the appeal hearing the tribunal had already issued a further partial award indicating that it would not award the Employer the full amount of the DAB’s decision and that the repayment of part of the amounts awarded by the DAB’s decision was a likely result of the tribunal’s fi nal award, the two awards were to be seen as standing together rather than one having reviewed or altered the other. In reaching their decision the majority also noted their disagreement with the earlier Singaporean Court of Appeal decision from 2011 noted above. Given their fi ndings as to the FIDIC arbitration clause, the majority accepted that a binding-but-not-fi nal DAB decision was enforceable by way of a specifi c arbitration limited to compliance with the decision as the Employer had sought to do initially. In a robust dissenting judgment running to 95 pages, directly opposing views on these issues were put by the third member of the court. By tracing the history of the FIDIC form to its origins as a domestic English law contract in 1957, the intention of the FIDIC arbitration clause was said to be in favour of a 'gap' in relation to the enforcement of binding-but-not-fi nal DAB decisions. In the dissenting judge’s view, the enforcement of DAB decisions was originally intended under the FIDIC form to have been carried out through local court procedures rather than through arbitration. The judge also considered that an interim award seeking to enforce a DAB decision lacked suffi cient fi nality for the purpose of local Singaporean arbitration law and noted a number of practical diffi culties with the majority’s views to the contrary. Where to from here? Whilst providing an illuminating addition to the debate over the operation of the FIDIC dispute resolution procedure, this most recent decision is unlikely to provide any greater certainty to parties grappling with the diffi culties posed by the FIDIC form. The Singaporean Court of Appeal’s rejection of its own 2011 decision together with a robust dissenting opinion from one member of the court is, if anything, likely to encourage greater uncertainty. As noted in the 2012 edition of this publication, it is anticipated that the issue will be resolved expressly in the revised suite of FIDIC contracts which are expected for release in the near future. According to FIDIC’s 2014/15 Annual Review, a draft version of an updated Yellow Book has been presented to FIDIC’s Contracts Committee, who are fi nalising the draft for 'fi nal review by the industry before market entry.' Updates of the other editions of the Rainbow Suite are expected to follow thereafter. It is understood that the amendments being considered by the FIDIC Contracts Committee include changes to the dispute resolution procedure which mirror the majority view of the Singaporean Court of Appeal noted above by giving an express right to enforce binding-butnot-fi nal DAB decisions by arbitration in the same way as is provided under the FIDIC Gold Book (the only FIDIC contract which presently escapes the above diffi culties). Amendments to this effect have already been put forward by FIDIC in its Guidance Memorandum issued in 2013. Parties would be well advised to consider the adoption of these amendments pending the release of a revised suite of contracts. For FIDIC contracts which do not include appropriate amendments, disputes over the enforceability of binding-but-not-fi nal DAB decisions will continue to be subject to the arguments considered by the Singaporean Court of Appeal. Regional variations may also occur depending on the robustness of local arbitration laws as to issues of fi nality and the making of provisional, interim and partial arbitration awards. 58 | Annual Review of English Construction Law Developments For FIDIC based contracts subject to English law and with arbitral seats in England, it is thought that the enforceability of binding-but-not-fi nal DAB decisions would not pose as signifi cant an issue as has proved to be the case in Singapore, for two reasons: 1. English law now takes a pragmatic view of arbitration clauses, following the House of Lords decision in Premium Nafta Products Ltd v Fili Shipping Company Ltd. The interpretation of arbitration clauses under English law should now: 'start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction.' This approach leaves little scope to apply the analysis detailed in the minority judgment of the Singaporean Court of Appeal. It would not be suffi cient for an English court to fi nd that the FIDIC provisions were unclear, rather it would have to fi nd that those provisions clearly intended to exclude jurisdiction to arbitrate over a binding-but-non-fi nal DAB decision. 2. Section 39 of the English Arbitration Act 1996 expressly permits the making of provisional awards, in contrast to the Singaporean International Arbitration Act which does not contain such a power (something specifi cally acknowledged by the Singaporean Court of Appeal). It is doubtful therefore that any issue would arise under English arbitration law in relation to the making of a partial or provisional award to enforce a binding-but-non-fi nal DAB decision. Pre-conditions to arbitration under the FIDIC 4th edition An English Technology and Construction Court decision published last year has considered the arbitration provisions of the previous FIDIC form of contract, the 4th edition. Although now out-dated, the 4th edition is still used on construction projects in various parts of the world. Al-Waddan Hotel Limited ('AWH') and Man Enterprise SAL ('MAN') entered into a contract based on the FIDIC 4th edition (1992 reprint, with amendments) in 2007 for the refurbishment of a hotel in Tripoli, Libya. A dispute arose between the parties for unpaid contract sums. The contractor, MAN, wrote to the Engineer on 10 June 2012 referring a dispute under clause 67.1 of the contract to him. The Engineer responded on 19 June 2012 advising that its services contract with the employer, AWH, had effectively expired on 31 December 2010 and that it had ceased to be the Engineer under the contract. The Engineer further advised that it would not act on MAN’s notice and requested that MAN did not address them further on the issue. MAN wrote to AHW on 1 August 2012 to advise of the Engineer’s response and ask that AWH admit the sums claimed by MAN or confi rm that they had re-engaged the Engineer or appointed a new Engineer. Alternatively, AWH were to treat MAN’s letter as a notice of intention to commence arbitration. AWH failed to engage in the process and an arbitrator was appointed by the English courts pursuant to section 18 of the Arbitration Act 1996. AWH subsequently challenged the arbitrator’s jurisdiction on the basis that MAN had failed to comply with clause 67 of the contract and have the dispute determined by the Engineer before commencing arbitration. The arbitrator found that he did have jurisdiction, but AWH applied to the English TCC under section 67 of the Arbitration Act 1996 to challenge the arbitration proceedings. 59 The court held that in the absence of an Engineer, who had ceased to act by virtue of its retainer having been ended by AWH, the English law principles of prevention, lack of co-operation or interference deprived AWH from placing reliance on the Engineer’s notice of decision, especially when AWH had ceased to engage the Engineer and had no intention of putting that right. The arbitration was therefore permitted to proceed. This case provides helpful confi rmation that while the English courts (and those in many other jurisdictions) will generally uphold preconditions to arbitration, parties will not be permitted to take advantage of any nonfulfi llment of those conditions which they themselves have contributed to. References: Premium Nafta Products Ltd v Fili Shipping Company Ltd [2007] UKHL 40; Peterborough City Council v Enterprise Managed Services Ltd [2014] EWHC 3193 (TCC); AlWaddan Hotel Limited v Man Enterprise SAL (Offshore) [2014] EWHC 4796 (TCC) (fi rst published in May 2015); PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation (Indonesia) [2015] SGCA 30. 60 | Annual Review of English Construction Law Developments 61 Bristol Amsterdam Brussels Utrecht London Edinburgh Aberdeen Luxembourg Antwerp Paris Leipzig Lyon Strasbourg Madrid Barcelona Lisbon Seville Casablanca Algiers Rome Milan Zurich Ljubljana Vie Pra Munich Geneva Berlin Hamburg Duesseldorf Cologne Frankfurt Stuttgart Glasgow Rio de Janeiro Mexico City 62 | Annual Review of English Construction Law Developments Dubai Muscat Tehran nna Bratislava Budapest Zagreb Sarajevo Tirana Belgrade Sofia Bucharest gue Warsaw Kyiv Moscow Istanbul Podgorica Shanghai Beijing 63 CMS Cameron McKenna LLP Cannon Place 78 Cannon Street London EC4N 6AF T +44 (0)20 7367 3000 F +44 (0)20 7367 2000 The information held in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice. 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