Construction Industry

by Sarah Thomas

I am a contractor working on a wastewater project in Eastern Europe, using the FIDIC Yellow Book –Design & Build. Vol.3 of our contract contains the following clause:

“Tests on Completion

The test on completion duration shall be 90 days.

The first 30 days shall be a monitoring period during which the Contractor sets up the operation of the plant and conducts his own water quality tests to confirm that the final effluent consent has been met. At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.”

We have met the final 30 consecutive days successfully and want taking over. The Employer says we must complete the 90 days which takes us outside of the construction period and hence delay damages are being threatened.

I say we have satisfied the contract at the end of the 30 consecutive days and we should get Take Over even though it is not 90 days.

Have you any idea if we are right in our assessment?

Answer:
Firstly, a couple of brief provisos. I assume that you have made no amendments to the Yellow Book that affect this issue. I’m also assuming that, as you say, otherwise the works have indeed all been completed in accordance with the Contract.

Have the Tests on Completion been passed and are the Works ready for Taking Over?

Obviously your argument is that having satisfied the first 30 day monitoring period and then completed the further 30 consecutive day period and having notified the Engineer that the plant is complete and meeting the Process Guarantee, you have therefore satisfied the requirements for completion and Take Over.

Clause 10 – which deals with Taking Over – says that the Works must have been completed in accordance with the Contract and that a Taking-Over Certificate must have been issued. The Employer must issue such certificate within 28 days of an application if the Works are substantially complete in accordance with the Contract (i.e. apart from minor outstanding work and defects not substantially affecting the Works); otherwise the certificate is deemed to have been issued.

Crucially, “completion” for these purposes includes:

• achieving the passing of the Tests on Completion; and
• “completing all work which is stated in the Contract as being required for the Works to be considered completed for the purposes of taking over”.

So it all comes down to (1) what is required to achieve passing of the Tests on Completion and (2) what the Contract states needs to be completed to achieve take over.

Under the Yellow Book, “Tests on Completion” means “those tests which are specified in the Contract or agreed by both Parties…and which are carried out under Clause 9 [Tests on Completion] before the Works…are taken over by the Employer”.

Clause 9 goes on to spell out the process for carrying out these tests, which falls into 3 stages – pre-commissioning tests, commissioning tests and trail operation – the latter which is intended to show that the plant is operating reliably.

Ambiguous provisions

I think that the Engineer/Employer will forcefully argue that waiting for the 90th day to elapse is part of the “trial operation” and is required for you to pass the Tests on Completion. I agree that there is some ambiguity in the wording in Volume 3 of the Contract as it states: “At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.” However, my own view is that the drafting of the full testing period is clear and explicit – “The test on completion duration shall be 90 days“. Bearing in mind that FIDIC explicitly states “The documents forming the Contract are to be taken as mutually explanatory of one another” I do not think that this wording is actually inconsistent with the words: “which then shall be met by a further 30 consecutive days before Taking Over can take place”. In my view, all the Contract is saying is that the actual commissioning tests period is 30 days but there is then a further 30 day trial operation period to ensure the plant is operating reliably. This is also consistent with the description of Tests on Completion (and the 3 stages) described in Clause 9.1.
Of course, it is open to you to request clarification on this point from the Engineer. Clause 1.5.2 of the General Conditions provides that: “If an ambiguity or discrepancy is found in the documents, the Engineer shall issue any necessary clarification or instruction.”

You do not mention if the Engineer in this case is an independent engineer or is part of the Employer organisation. Whichever is the case, he may well come to the same view as the Employer and, in my opinion, this would be consistent with:

• the express wording (”The test on completion duration shall be 90 days“);
• interpreting the documents as mutually explanatory of each other; and
• the 3 stage process of Tests on Completion which includes a “trial operation”.

Whether or not the Engineer is truly independent, Clause 3.5 applies when a party asks the Engineer for clarification and provides that he must consult with each party in an endeavour to reach agreement. If agreement is not reached, “the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.”

The Engineer must give notice to both parties of the determination with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 (Claims, Disputes and Arbitration).

What do you do now?

Whilst I think that the correct interpretation is that the testing period is the full 90 days, I am conscious that complying with this period will put you in delay and at risk of liquidated damages for delay. Therefore in practical terms, I think that you should at least make the argument that you have already substantially completed. I think that there is sufficient ambiguity in the Volume 3 wording to argue that the Tests on Completion have been completed and that you are entitled to issue of the Taking-Over Certificate. Therefore you should apply for issue of this certificate if you haven’t already done so (although if you haven’t already done so you will still have to wait at least 28 days before the Engineer is obliged to issue the certificate or you can argue that it is deemed to be issued).

Under Clause 10.1 [Taking Over of the Works and Sections], the Engineer is deemed to have issued a Taking Over Certificate if he fails either to issue a TO Certificate or rejects the Contractor’s application for a TO Certificate within a period of 28 days after receiving the Contractor’s application.

You have not said whether or not the Engineer has rejected the application. If he has not, and more than 28 days has elapsed since you issued it, then the TO Certificate will be deemed to have been issued on the last day of the 28-day period.

Of course, if you applied for the TO Certificate right before the end of the 30+30 days, then the Engineer has up to 28 days to issue or reject, and you are almost in the same position as if your completion test phase was 90 days. If you applied substantially earlier than that then it will make a bigger difference and might be the difference between completing on time or late.

If you are late, then there probably is no harm in making the application for a Taking-Over Certificate. Note that in accordance with Clause 10.1.3(b) of the General Conditions, if the Engineer wishes to reject the application, he has to give reasons and specify the work that is required to be done by the Contractor to enable the TO Certificate to be issued. Even if the Engineer has purported to reject your application, you might be able to argue that he has not done so in accordance with the contract, because he has not specified the work that is required to be done in order to enable the TO Certificate to be issued. Of course in my view, he is likely to simply point to the further 30 day trail operation period under the Contract.

Delay to Testing

Whilst I do not think you have a basis of claim (as my interpretation of the Contract is that you have not yet fully passed the Tests on Completion), if the Employer’s insistence on you waiting until the end of 90 days after the start of the testing period is not permitted under the Contract, there is potentially the right to claim for delay. Clause 7.4.5 provides that “If the Contractor suffers delay and/or incurs Cost … as a result of a delay for which the Employer is responsible, the Contractor shall give notice to the Engineer and shall be entitled to claim both an extension of time and “payment of any such Cost plus reasonable profit, which shall be included in the Contract Price” (Clause 7.4.5(b)). Equally there is the ground in Clause 8.4.1 (e), being “any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s Personnel, or the Employer’s other contractors on the Site.” The Employer’s Personnel, as defined, includes the Engineer.

Any right to claim will be subject to strict compliance with FIDIC’s notice provisions in Sub-Clause 20.1 (Contractor’s Claims)). I have previously stressed the importance of getting your notice exactly right in the previous Q&A; click here to read more. After receiving this notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 (Determinations) (see above) to agree or determine these matters.

One final note

Finally, do you have any minutes or notes of any discussions with the Employer about completion testing? If you do, have a look at them to see whether they clarify the position. Obviously it will be helpful if you have evidence that you and the Employer intended the tests to consist of the 30-day monitoring period plus the second consecutive 30-day period only. It is worth noting that FIDIC Yellow Book does not include an “entire agreement” clause precluding extra contractual documents/negotiations in interpreting the Contract. If you have clear evidence that the parties both intended the completion tests to last for 30 days plus 30 days (only) then you may be able to claim successfully that the figure 90 was inserted into the contract by mistake instead of 60, in the event that the dispute goes to arbitration.

 

Kluwer Construction Blog

by Sarah Thomas

In this, the second of my New Year updates, I would like to discuss two interesting cases which have recently been decided by the UK courts. The first is the UK Court of Appeal upholding of a first instance judgment and the comments that the Court made on the recoverability of damages under English contract law.

The case is Supershield Limited v Siemens Building Technologies FE Ltd. As a reminder, the basic test under English law is that a party will recover losses flowing from the breach that (i) arise naturally, in the usual course of things, or (ii) are losses which the parties may reasonably be taken to have contemplated when entering into the contract (the “Hadley v. Baxendale” test, often known as the “remoteness” test). A previous recent development of this area resulted from the House of Lord’s decision in the Achilleas case which suggests that a defendant will not be liable for losses – even those which are not unusual and therefore potentially not too “remote” – which he cannot reasonably be regarded as having assumed responsibility for.

The facts of the Supershield case (whether Siemens could recover from its defaulting subcontractor the losses flowing from a series of failures in a water sprinkler system and in particular, the amount that Siemens had settled for a claim upstream with the main contractor) are not so important as what the Court said about the current interpretation of this remoteness rule. It held that Hadley v. Baxendale remains the standard rule and reflects “the expectation or intention reasonably to be imputed to the parties”. The Court went on to say that this can be interpreted so that “…if on the proper analysis of the Contract against its commercial background, the loss was within the scope of duty (i.e. what was within the contract breaker’s duty to prevent under the Contract) it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances”.

This means that under English law, a contract breaker can still be liable for damages even if those damages would have been considered unlikely by the parties when entering into the contract. Thus this judgment is important for its distinction between what “intention can be imputed between the parties” as to what damages should be covered and likelihood/foreseeability.

Another case, from a Scottish court, provides an interesting example of notice bars in a construction contract being strictly enforced in the UK. The case in question, Education 4 Ayrshire v South Ayrshire Council involved a contractor who had contracted to design and build six schools for the South Ayrshire Council under a PPP contract. During the works, asbestos that had not been revealed by a previous survey was discovered. This qualified as a “Works Compensation Event” under the contract, for which the Contractor might be entitled to an extension of time, payment of compensation and/or relief from its obligations but provided that the proper procedure was followed.
The Authority rejected the contractor’s claim for an extension of time and compensation on the basis that the contractor had failed to give the required notice in accordance with Clause 17 of the contract.
The judge agreed that the Contractor had not in fact complied with clause 17. He explained that once it is accepted that compliance with the notice clause is a condition precedent (and both parties agreed that it was), the question is simply, “what does the clause require?” In this case the clause required the Contractor to give notice of its claim. What the Contractor’s letter to the Authority about the delay actually said was “We will submit our full claim in accordance with clause 17.6 (…)”. This was held not to be valid notice under clause 17.6. A number of readers, particularly those from non-common law jurisdictions, will be surprised by this, as the Contractor had indeed flagged to the employer that a claim was being sought. But it just goes to show how strictly these notice provisions may be interpreted under English law and the need to follow ‘the letter of the contract’. You may recall that I answered a query on notices from a project manager recently (see Ask the Expert, February 2010) and warned of the need to check that the notice strictly complied with all formalities.
“But how is this equitable?” a number of you will cry. In the case, the judge said that the whole purpose of the clause is to give certainty – the Authority should not have to infer or assume from correspondence that a claim will be made. In this case, in accordance with the contractual notice provisions, the chief executive of the Authority was entitled to formal notification of a claim. The fact that those “on the ground” at the Authority may have been aware of the situation (the Authority was sent a copy of the survey report, attended a meeting to discuss its implications and had been provided with a copy of the Sub-Contractor’s claim against the Contractor in relation to the same event) was irrelevant.

Food for thought….

Please let me know if any of you have come across similar situations.

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