Prepare The Ground For Effective Contract Administration: The UK's Privy Council Looks At Termination Risks And The Employer's Rights Of Set-Off Under The FIDIC Red Book

Introductory remarks The UK's Privy Council recently considered the interpretation of two clauses in the FIDIC Red Book 1999, concerning the obligations of an employer to evidence financial arrangements and to notify employer's claims1.

The Privy Council, hearing an appeal from the Court of Appeal of the Republic of Trinidad and Tobago, adopted a strict approach to both of these matters. As a result, employers operating under FIDIC contracts should give careful consideration to this decision, which highlights the importance of good and timely contract administration, in order to avoid landing themselves in hot water.

The facts National Insurance Property Development Company Limited (NIPDC), as employer, appointed NH International (Caribbean) Limited (NHIC), as contractor, in 2003 to construct a hospital in Tobago.

The contract was based on the FIDIC Red Book 1999. In 2006, NHIC suspended and then terminated the contract, on the basis that the employer had failed to comply with clause 2.4, which obliged NIPDC to provide "reasonable evidence" that financial arrangements had been made and were being maintained in order to enable the employer to comply with its payment obligations.

Several disputes were then referred to an arbitrator, two of which were appealed to the Court of Appeal of Trinidad and Tobago. The Privy Council had to consider two issues:

NIPDC's ability to raise counterclaims following termination Whether NHIC had rightfully terminated the contract A strict approach to the notification of employer's claims NIPDC raised various counterclaims as part of the financial assessment following the termination.

NHIC challenged these counterclaims on the basis that clause 2.5 of the FIDIC Red Book obliges the employer to give notice of any claims "as soon as practicable" after it becomes aware of the event or circumstance giving rise to the claim. Clause 2.5 goes on to state that: "The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this Sub-Clause." (emphasis added)

The arbitrator took the view, which was upheld by the Court of Appeal, that clause 2.5 was not sufficient to bar NIPDC's counterclaims in these circumstances. This was on the basis that the clause was limited to set-off against amounts certified in a payment certificate and could not serve to exclude or limit the employer's common law...