Fidic Clause 20.1

[Donahue Granados]

Oneof the ultimate goals of construction contracts is for the Works to be handed over by the Contractor to the Employer. Clause 10.1 of the FIDIC Contracts deals with taking over of the Works in the ordinary course of the Project, that is when the Works are substantially complete.

After having received an application for a Taking-Over Certificate from the Contractor, the Engineer has two options. One, to reject the application while giving reasons for the rejection and specifying which parts of the Works are not up to scratch. Or two, to issue the Taking-Over Certificate stating the date on which the Works or Section was completed in accordance with the Contract.

The effect of this sub-clause is that the Engineer may still issue a Taking-Over Certificate despite there being minor outstanding work and defects not substantially affecting the use of the Works or Section for their intended purpose.

In J. Jarvis and Sons v Westminster Corporation (1978) 7 BLR 64 HL, practical or substantial completion was defined by Lord Justice Salmon not to mean completion down to the last detail, however trivial and unimportant, but rather completion for the purpose of allowing Employers to take possession of the Works and use them as intended. Other judgments have held that practical completion means that if there were any patent defects, the Engineer should not give a certificate of practical completion. In addition, the Engineer may consider the value of the work outstanding and the importance of the defects to the safety of the facility.

Employer's claims are governed by sub-clause 2.5 in the Red, Yellow and Silver Books of FIDIC Contracts (and sub-clause 20.2 in the Gold Book). If an employer considers itself to be entitled to any payment from the contractor in connection with the contract, the employer is required to follow the procedure set out in this sub-clause, which includes the requirement to give notice to the contractor. But is an employer precluded from claiming payment at any later stage from a contractor if a notice in terms of sub-clause 2.5 is not given under the FIDIC contract?

This amount may be included as a deduction in the Contract Price and Payment Certificates. 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."

The sub-clause makes it clear that an employer is entitled to claim a deduction or set-off from any amount owing to a contractor as set out in a Payment Certificate if the employer has complied with the requirements set out in sub-clause 2.5. But what if the contract is terminated and no further Payment Certificates are issued? Is an employer entitled to claim payment from a contractor by way of a counterclaim in subsequent proceedings?

This is one of the issues which were recently decided upon by the Privy Council in the matter of NH International (Caribbean) Limited v National Insurance Property Development Company Limited (Trinidad and Tobago). In summary, the relevant facts of the case were as follows:

The contractor contended that the employer was precluded from raising any counterclaims in the arbitration proceedings given that the employer had failed to give notice of an employer claim under sub-clause 2.5. The arbitrator rejected the contractor's contention in this regard and held that "clear words are required to exclude common law rights of set-off and/or abatement of legitimate cross-claims". Given that the words of sub-clause 2.5 were not clear enough, a notice was not required by the employer to raise counterclaims during the arbitration proceedings.

However, the Privy Council overruled this decision. It found that the wording of sub-clause 2.5 is clear. If an employer wishes to raise claims, whether or not they are intended to be relied on as set-offs or counterclaims, those should not be allowed unless they have been the subject of a notice referred to in sub-clause 2.5. Moreover, this notice must have been given "as soon as practicable". If the employer could rely on claims which were notified well after that, no purpose would be served by the first two paragraphs of sub-clause 2.5. The Privy Council stated that "If an Employer's claim is allowed to be made late, there would not appear to be any method by which it could be determined, as the Engineer's function is linked to the particulars, which in turn must be contained in a notice, which in turn has to be served 'as soon as practicable'".

The Privy Council found that although the final sentence of sub-clause 2.5 limits the right of the employer to claim by way of set-off or to make any deduction from an amount certified in a Payment Certificate, the words "or to otherwise claim against the Contractor" extends this limitation beyond the claim against any Payment Certificate. In other words, to have a valid claim for payment against a contractor, the employer must comply with provisions of sub-clause 2.5 by giving a notice to the contractor if it wishes to make a claim, such notice must be given as soon as practicable and the notice is to contain the particulars referred to this sub-clause.

The Privy Council also found that the provisions of sub-clause 2.5 apply to any claims which the employer wishes to raise. The clause makes it clear that if the employer wishes to raise a claim, it must do so promptly and in a particularised form (given the engineer's role to agree or determine the employer's entitlement by way of a sub-clause 3.5 determination). Moreover, the Privy Council found that if the employer has failed to give notice of a claim as required "the back door of set-off or cross-claims is as firmly shut to it as the front door of an originating claim". The employer's counterclaims, raised by way of set-off, were disallowed.

However, the Privy Council did concede that sub-clause 2.5 does not preclude the employer from raising a plea in abatement for example that no payment is justified to the contractor given that the work was so poorly carried out or that it was defectively carried out so that it is worth significantly less than the contractor is claiming.

An employer is therefore well advised to give notice of any claim, which it considers it may be entitled to, in writing to the contractor and as soon as practicable after it has become aware of the event or circumstance given rise to the claim. The notice is to contain sufficient particularity of the claim and shall specify the clause or other basis, including the substantiation of the amount to which the employer considers itself to be entitled to from the contractor. If the employer fails to comply with the notification requirements as set out in sub-clause 2.5, the back door to raising the claim at a later stage is firmly shut. It follows that the employer is not entitled to set-off or counterclaim against any amount owing to the contractor, unless a notice has been given to the contractor as provided for in sub-clause 2.5.

To the best of our knowledge, the interpretation of sub-clause 2.5 has not yet been pronounced on by an arbitral tribunal or a court in the Republic of South Africa. There is, however, little doubt that if an arbitral tribunal or court is faced with an argument by a contractor that an employer's claim should be disallowed for want of compliance with the provisions of sub-clause 2.5, the arbitral tribunal or court will have careful regard to the decision by the Privy Council referred to above.

Clauses to include in the International Federation of Consulting Engineers (FIDIC) form of Engineering, Procurement and Construction (EPC) contracts, obliging the contractor (and any subcontractors) to act sustainably in carrying out the works.

(d) Offset its Residual Emissions relating to performance of this Agreement [for each financial year OR Emissions Reporting Period] within [60 (sixty)] days of the end of such [financial year OR Emissions Reporting Period];

[Drafting note: this may need adjusting depending on the size and capability of subcontractors, as it may place an unfair burden on those lacking the resources to meet the reporting requirements. However, to appropriately set a Contract Target and for the Scope 3 Emissions of the entire chain to be properly assessed, this is necessary. This could be supported by providing funding to subcontractors (that is, by extending the Employer Assistance clause) in order to decarbonise the supply chain.]

* [Drafting note: the first bracketed drafting option may be a disincentive to setting ambitious targets by encouraging the Contractor to overestimate their projected emissions, unless the Employer also evaluates the Projected Total Emissions value and provides a benefit for an ambitious value. A disincentive for exceeding the previous period's Actual Total Emissions may be preferable, since it encourages a reduction in emissions.]

The [Employer] shall take reasonable steps to procure that the Contractor or Subcontractor (as applicable) is provided with appropriate training and/or resources* to enable it to meet its obligations under Clause [4.25].

* [Drafting note: where there are different interim targets for scope or other sub-targets, more than one target could be specified here for each scope or subcategory of emissions reductions. Alternatively, consider pre-agreed emissions benchmarks for each reporting period that are not linked directly to the Net Zero Target.]

Contract Target Date means the date set for the Contractor or Subcontractor (as applicable) to achieve the Contract Target, which date should not be more than [24 (twenty-four)] months from the date of this Agreement.

(b) details of how Offsetting will be used to balance any Residual Emissions relating to performance of this Agreement after achieving the Contract Target and how such Offsetting aligns with the Oxford Principles for Net Zero Aligned Carbon Offsetting.

(b) thereafter, a period of twelve consecutive months commencing on each anniversary of the start date of this Agreement and ending on the day immediately before the next anniversary of that date provided that the final Emissions Reporting Period shall end on the expiry or termination of this Agreement.

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