Termination

CMS_LawTax_CMYK_28-100.
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English construction
law developments 2013
An international perspective
June 2014
Contents
Introduction
Termination for delay under express contractual rights
Termination for delay without express contractual rights
Termination for convenience
12
On-demand securities: compliance with formalities and dealing with proceeds
18
On demand securities: erosion of the English law position
22
Time bar clauses: return of the strict interpretation?
26
Caps on liability and performance securities
30
Waiver and estoppel: overcoming express contractual terms
34
Dispute Resolution Provisions: recent developments
38
Temporary disconformity: a cause for action?
42
2 | English construction law developments 2013: An international perspective
Introduction
Welcome to the 2013 edition of our English Construction Law Developments bulletin.
2013 proved to be an exciting year for us, bringing as it did the opening of our CMS
offices in Istanbul and Omar and news of our merger with law firm Dundas & Wilson
of Scotland, a firm with more than 250 years of history, which brings further strength
in depth to our UK Construction Team.
2013 was also an exciting year for legal developments. We have further case law on
the age-old topics of termination clauses, caps on liability and exclusion clauses,
which continue to provide fertile grounds for dispute. We have further scrutiny of
calls on performance securities and the continuing trend of softening the traditionally
robust practice taken by English law in relation to on-demand bonds. We have
consideration of the interlinked issues of waiver, estoppel and representation clauses
and entire agreement clauses, and some further judicial thought given to the
temporary disconformity principle. We also have some consideration of dispute
resolution clauses and the operation of Dispute Adjudication Board provisions under
FIDIC contracts.
We hope you enjoy our analysis of the law and recent cases on the above topics. If
you have any queries on the topics covered please do not hesitate to contact either
me or one of my fellow partners.
In the meantime, we look forward to working with you and wish you a prosperous
continuance of 2014.
Victoria Peckett
Partner
T +44 (0)20 7367 2544
E [email protected]
Termination for delay under express contractual rights
Terminating a contract is a risky business and a number of recent cases

have highlighted the consequences of getting it wrong. The importance
of these cases and their implications for international construction
contracts has merited three separate articles in this years publication.
This article considers termination for delay under express contractual
clauses, the second termination for delay without express clauses, and
the third deals with so called termination for convenience clauses.
Termination for a lack of due
diligence
Failing to proceed with due diligence often
triggers the termination of a construction
contract. A lack of due diligence is often difficult
to prove. However, the recent case of Sabic
Petrochemicals Limited v Punj Lloyd Limited
demonstrates that this is not impossible.
SABIC UK Petrochemicals Limited (SABIC)
entered into a contract with Simon Carves
Limited (SCL) to design, procure and construct
a petrochemical plant in England. SABIC also
received a parent company guarantee from Punj
Lloyd Limited (PLL). The contract required SCL
with due diligence, [to] carry out and complete
the Engineering Works in accordance with the
Contract and provided that SABIC could
terminate SCLs employment forthwith if
despite previous warning by the Purchaser in
writing the Contractor is failing to proceed with
the Engineering Works with due diligence or is
otherwise persistently in material breach of its
obligations under the Contract.
Following substantial delays, SABIC sent a
warning letter to SCL and claimed that SCL
had, amongst other things, failed to proceed
with due diligence in attempting to meet the
completion date. A month later, SABIC
terminated SCLs contract and issued
proceedings against PLL to recover costs and
losses arising from the delays.
1. [2013] EWHC 2916 (TCC)

2. [2011] EWHC 3449 (TCC)
SCL/PLL argued that SABICs termination was

unjustified as SCL had not failed to exercise due
diligence during the warning period. Both
parties accepted that the contractual completion
date was impossible to achieve at the date of
the warning letter and SCL/PLL argued that due
diligence should therefore be assessed by
reference to a date which could realistically be
achieved at the date of the warning letter, rather
than the contractual completion date. SCL/PLL
also argued that due diligence did not require it
to adopt specific accelerative measures.
Rejecting these arguments, the court held that
SCL had failed to proceed with the works with
due diligence and SABIC was justified in
terminating the contract. The judgment contains
the following key points: (1) to proceed with
diligence meant SCL ought to have carried out
the works industriously and expeditiously. What
is meant by due diligence depends on the
contractual object to which the obligation is
attached; (2) the fact that the completion date
had become impossible did not render the
separate obligation of due diligence irrelevant or
less onerous; (3) completing the project had not
become impossible - only the completion date
was unachievable; (4) due diligence meant SCL
ought to have adopted accelerative measures to
minimise the ongoing breach (despite such
measures not initially being envisaged by the
contract); and (5) a failure to achieve a given
completion date does not necessarily amount to
a failure to progress with due diligence.
Implied term to proceed with

diligence
Interestingly, in the earlier case of Leander
Construction limited v Mulalley and company,
the court held that even if a contract contained
a clause allowing for termination for failing to
proceed regularly and diligently with the works,
the court would not imply a term requiring the
contractor to proceed with the works regularly
and diligently. The court has always been
reluctant to imply terms, particularly when
parties have entered into detailed terms and
conditions. In this case, the court went further,
saying the use of the term regularly and
diligently in the termination provision
demonstrated that the parties had considered
the consequences of not proceeding regularly
and diligently and had allowed for termination
rather than damages for a breach of contract.
Due diligence and Reasonable

Endeavours
Morris Homes (West Midlands) Limited v
Anthony Paul Keay and Jeffrey David Keay,
considered the interplay between the obligations
to proceed with diligence and to use
reasonable endeavours under an agreement
for lease.
Morris Homes, as the developer, suspended works
on the development of a medical centre in July
2008, claiming the recession made the project
unviable. Works re-commenced in January 2010

and were completed in August 2011.
Morris Homes argued that proceeding in 2008
would have been commercial suicide and the
contract had not required such measures. The
prospective tenants claimed damages alleging
Morris Homes were in breach of the agreement
for lease for failing to progress satisfactorily and
raised arbitration proceedings. The arbitrator
awarded damages and Morris Homes sought
leave to appeal, claiming that the arbitrators
decision was open to serious doubt.
The court looked at the following specific
provisions of the agreement for lease:
Clause 3.1: The landlord shall as soon as
reasonably practicable commence and
thereafter diligently carry out the Works...
Clause 4: The landlord shall use all
reasonable endeavours to ensure that the
Works are completed as soon as reasonably
practicable...
The arbitrator concluded that the clauses created
three distinct obligations: (1) Morris Homes was
obliged to commence the works as soon as was
reasonably practicable; (2) once the works had
commenced, Morris Homes was obliged to carry
them out diligently; and (3) Morris Homes had to
use all reasonable endeavours to ensure the works
were completed as soon as reasonably practicable
(unless prevented or delayed by a cause or
circumstance outside its reasonable control). The
3. [2013] EWHC 932 (TCC)
arbitrator concluded and the court agreed that

the three distinct obligations were not expressed
as subject to any of the others and therefore
effect had to be given to each one independently.
The arbitrator decided that Morris Homes had
failed to carry out the works diligently and was
therefore in breach of clause 3.1. Morris Homes
appealed on the basis that if it was held that it
was not in breach of clause 4 then it could not
be in breach of clause 3.1. It claimed that if
clause 4 was complied with, then it followed that
the works had been carried out diligently and,
on this basis, the arbitrators decision was open
to serious doubt as it was inconceivable that the
parties would agree that the extent of the
diligence due under clause 3.1 was such that it
required steps beyond all reasonable
endeavours as envisaged by clause 4.
The court agreed with the arbitrators conclusion
that Morris Homes had used all reasonable
endeavours and, by suspending the works, it
had secured the future of the project. However,
it could not be said that the works had been
carried out diligently when they had stopped in
2008 and not recommenced until 2010. Morris
Homes were required to take steps to carry out
the works regardless of whether such steps were
required under the obligation at clause 4 to use
all reasonable endeavours to ensure the works
were complete as soon as reasonably
practicable. If the alternative had been found
(i.e. that Morris Homes were not in breach of
contract) this would have resulted in the
prospective tenants being bound to take a
tenancy at any stage in the future once the
works were complete and Morris Homes would
not be in breach of contract.
Regularly and Diligently/Cap on

Liquidated Damages
Vivergo Fuels Ltd v Redhall Engineering
Solutions Ltd is a case which considers both
contractual termination and termination at
common law for delay and in relation to the
latter makes an interesting argument in respect
of time/liquidated damages.
Vivergo Fuels Ltd (Vivergo) appointed Redhall
Engineering Solutions Ltd (Redhall) to carry out
mechanical and piping works at a biofuel plant in
England. Works commenced on site in January
2010 and were delayed from the outset. There
were numerous meetings to discuss the delay and
4. [2013] EWHC 4030(TCC)
agreements were reached between the parties.

However the delays continued. Vivergo
complained that Redhall was failing to produce
the programmes required by the contract. Redhall
contended that it was entitled to extensions of
time and payment of additional costs.
In February 2011, Vivergos contract manager
wrote to Redhall stating We must record our
opinion that you are failing to proceed regularly
and diligently with the Contract Works, as
reflected in your inability to produce a
competent programme. On 3 March 2011
Redhall produced a revised programme.
However on 11 March 2011, Vivergo wrote
again seeking to terminate Redhalls
appointment pursuant to the contract due to
delay and notifying Redhall that the site was
locked and their access cards had been blocked.
Redhall wrote to Vivergo on 14 March 2011
explaining that it deemed Vivergos failure to
allow access to the site to be repudiation by
Vivergo, which it accepted as bringing the
contract to an end.
Subsequently, Vivergo commenced proceedings
seeking declarations that lawful notice was
given determining Redhalls appointment and in
the alternative Vivergo claimed common law
repudiation by Redhall which Vivergo accepted.
The court considered many issues including
whether Vivergo could have terminated Redhalls
appointment for failing to proceed regularly and
diligently with the works. The contract provided
that if Redhall was in default in failing to
proceed regularly with the works, notification
could be given to Redhall and if Redhall did not
commence and diligently pursue the rectification
of this default within 14 days, Vivergo could
terminate Redhalls employment by means of a
further notice.
Vivergos position was that it had issued a
number of notices in the form of letters from
August 2010 to February 2011, all of which were
14 days before the Notice of Termination and on
that basis Redhall had been notified in line with
the contract.
The court considered the case law regarding the
obligation to proceed regularly and diligently,
setting out that the two obligations overlap.
Regularly is to, as a minimum, attend site with
sufficient labour and materials to have the
physical capacity to progress works. Diligently
is to apply this physical capacity industriously
and efficiently with successful progress towards

completion. Following consideration of the facts,
the court concluded that Redhall had failed to
proceed regularly and diligently.
After reviewing the letters Vivergo sought to rely
on, the court concluded that the letter of
February constituted sufficient notification that
Redhall was in default in failing to proceed
regularly and diligently with the Works. However
the question then arose as to what particular
aspect of that default was being notified and
therefore what action was required to rectify it.
The court found that the particular aspect of the
failure to proceed regularly and diligently which
was being notified was the failure to provide a
competent programme. Thus, Redhall, on receipt
of this notice, had to commence and diligently
pursue the production of a programme complying
with the contract. After reviewing the evidence
the court concluded that the programme
produced by Redhall on 3 March 2011 satisfied
this requirement. Accordingly Vivergo was not
entitled to terminate the contract.
Vivergos secondary case was that Redhalls
failure to proceed regularly and diligently
amounted to repudiatory breach of contract on
the basis that it had breached its obligations as
to time, sequencing and quality of the works.
Vivergo sought to rely on time as being essential
to the contract and a cap on liquidated damages
resulted in a position that Vivergo could
potentially have unrecoverable losses. Vivergo
argued that time was a condition that went so
directly to the substance of the contract or was
so essential to the nature of the contract that
the non-performance may be considered a
failure to perform the contract at all and on that
basis Redhalls breaches as to time and
sequencing of the works amounted to
repudiatory breach. At 11 March 2011, Redhalls
best case completion date was 31 August 2011
(184 days delay) and it was responsible for the

majority of this delay.
Redhall claimed that its failure to proceed
regularly and diligently did not amount to a
repudiatory breach, its delay did not go to the
root of the contract as the contract contained
provisions for substantial liquidated damages
and time was not of the essence.
The court held that Redhalls failure to proceed
regularly and diligently did not amount to
repudiatory breach as it was not demonstrative of
Redhalls intention not to be bound by the
contract. Whilst Redhall were late, the delays were
not deliberately caused. In any event, had the
court found that repudiatory breach had occurred,
the letter issued by Vivergo on 11 March 2011
would have failed to adequately accept it.
The court then decided that, in failing to
terminate the contract either contractually or at
common law, and having then shut Redhall out
of the site, it was Vivergo, not Redhall, who had
committed a repudiatory breach of the contract.
Redhall had accepted that repudiation and the
contract had thereby been terminated. It would
have followed from this conclusion that Vivergo
would be liable in damages to Redhall for
wrongfully terminating the contract.
Conclusion
The above cases serve as a reminder of how
difficult termination under a contract can be and
that the consequences of getting it wrong can
be very serious. Many international contracts
require contractors to proceed regularly and
diligently and/or to use reasonable endeavours,
and often allow for termination for failing to do
so. Very clear factual evidence will generally be
required to justify a termination on this ground.
It is also important that any notice is
contractually compliant and severed properly.
Termination for delay without express contractual rights
Two recent Court of Appeal decisions have highlighted the difficulties in

attempting to terminate construction contracts for delay without express
contractual provisions permitting such a course. The use of Notices to
Complete making time of the essence may now no longer be
available as a separate route to terminate at common law, leaving the
position to be determined in most cases by reference to whether delay
has gone to the root of the contract or deprived the owner of
substantially the whole benefit of the contract.
In considering whether a breach of contract

allows the innocent party a right of termination,
English law adopts a threefold classification of
contractual terms:
Some terms are to be classified as
conditions and allow the innocent party
an immediate right of termination for any
breach, however slight.
Other terms (the majority) are to be classified
as innominate terms and will only allow an
innocent party to terminate where beach of
the term is sufficiently serious. The breach
must deprive the innocent party of
substantially the whole benefit that the
parties intended it should obtain from the
contract (Hongkong Fir Shipping Co v
Kawasaki Kisen Kaisha).
A third category of terms are called
warranties and do not permit an innocent
party to terminate regardless of how
seriously they are breached (although the
innocent party may still claim damages for
breach of contract).
Classification of any given term into one of these
three categories depends upon the significance
of the term in the context of the contract as a
whole and on any specific intention to be
gleaned from the words used by the parties (the
parties may, for example, expressly designate a
term as either a condition or a warranty).
In the majority of construction contracts where
a fixed time for completion is specified and
liquidated damages are stipulated, it can
generally be said that:

The Contractors obligation to complete by
the time for completion is an innominate
term. The availability of extensions of time
under the contract and the fact that the
Owner is prepared to accept liquidated
damages for delay are usually strong
indicators that the obligation to complete is
not intended to be a condition allowing
immediate termination regardless of the
seriousness of the breach.
Express contractual rights of termination may
often provide an indication as to when the
parties intended that a breach of the
obligation to complete on time would deprive
the innocent party of substantially the whole
benefit of the contract. For example, if
liquidated damages are capped at a certain
level after which an express right to terminate
arises, this will usually mean that a common
law right to terminate also arises for breach of
the innominate term on the basis that the
express right reveals the parties intentions in
relation to when delay would become
sufficiently serious as to justify termination
(Stocznia Gdynia v Gearbulk Holdings).
Where no limit date is provided for in the
contract, after which termination is expressly
permitted, the innocent party must prove its
right to terminate at common law by showing
that the delays suffered by it have deprived it of
substantially the whole benefit it intended to
obtain under the contract. A recent Court of
Appeal decision has emphasised how difficult
this test is to satisfy in the context of large

construction projects.
In Telford Homes v Ampurius Nu Homes Holdings
an investor sought to terminate an agreement for
the construction of four blocks of commercial
units after the developer suspended work on two
blocks as a result of funding difficulties due to
the financial crisis. The developer had agreed to
build the units and grant the investor a long lease
for 999 years (equivalent to property ownership
under English law). The developer had assured
the investor that it remained in a position to
complete the development and would resume
work as soon as possible, but the investor sought
to terminate at common law for delay. At that
point work had been suspended on the two
blocks for approximately one year (although work
recommenced just prior to the termination).
The termination was initially upheld by the trial
judge, but overturned by the Court of Appeal on
the basis that the delay had not deprived the
investor of substantially the whole benefit of the
contract. The Court of Appeal emphasised the
fact that the investor was to receive a 999 year
lease. In this context it was difficult to say that a
delay of only 1 year had deprived the investor of
substantially the whole benefit of the contract.
This was particularly the case where the market
for the units had not declined and the value of
the units once completed had not therefore
been materially affected.
Whilst generally construction contracts do not
involve the transfer of property interests such as
leases, the reasoning behind this decision could
apply similarly to some types of large
infrastructure and engineering projects. The
construction of a highway, for example, will
usually be based upon certain long term traffic
or population forecasts and will be intended to

provide the Owner with benefits over many
years. In these circumstances it may be difficult
to say that delayed completion will have
deprived the Owner of substantially the whole
benefit of the contract. If the highway will still
be used as intended much of the benefit of the
contract is still likely to be provided, albeit later
than planned. Similar considerations apply to
production projects such as power-plants or
refineries: there is no fundamental shift in the
commercial business case underpinning the
project, even very long delays may not be
sufficient to deprive the Owner of substantially
the whole benefit of the contract.
It had been thought that one way of avoiding
the substantially the whole benefit test was
to serve what is known as a Notice to
Complete. Such a notice requires the
Contractor to complete the works within a
reasonable time from the date of the notice,
failing which the Owner proposes to terminate
the contract. Such a notice was thought to make
time of the essence in the contract, meaning
that a failure to comply with the notice would
allow immediate termination at common law.
This line of reasoning found support in a Court
of Appeal decision from 2005 in Shawton
Engineering v DGP International. After noting
that the obligation to complete the works in that
case was an innominate term, the Court of
Appeal commented that:
Shawton could only in law legitimately
determine the contracts for delay if either
(a) they gave reasonable notice making time of
the essence; or
(b) DGPs failure to complete within a
reasonable time was a fundamental

breach such that the gravity of the breach
had the effect of depriving Shawton of
substantially the whole benefit which it
was the intention of the parties that they
should obtain from the contracts.
Where time is not of the essence and
where the party said to be in breach by
delay is nevertheless making an effort to
perform the contract, it is intrinsically
difficult for the other party to establish a
fundamental breach in this sense.
The use of such a notice to avoid the
difficulties mentioned above, has however
now been put in doubt by a further Court of
Appeal decision in 2013. In Urban I (Blonk
Street) v Ayres, the true position in relation to
Notices to Complete was said to be as follows:
Notices to Complete evolved in English
law at a time before innominate terms
had been recognised and when
obligations as to the time for performance
were readily interpreted as conditions in
the sense described above, allowing
immediate termination regardless of the
seriousness of the breach.
In order to mitigate against the harshness
of a party being able to terminate a
contract as soon as performance was late,
the English courts developed a rule that in
the ordinary case time would not be of
the essence for such contracts and a
Notice to Complete would need to be
served by the innocent party before
termination could take place.
Parties were able to avoid this rule by
expressly stating in their contract that time
was of the essence or by providing
expressly for a right of immediate
termination for late performance.
With the development of innominate

terms confusion arose as to whether and
how a Notice to Complete applied when
an innominate term was breached.
The true position (according to the Court
of Appeal in Urban I) is that Notices to
Complete do not affect the test for
termination on breach of an innominate
term (i.e. substantially the whole
benefit). Notices of Complete were
designed to mitigate the harshness of time
obligations which are already conditions
and therefore, absent a Notice to
Complete, would justify immediate
termination for breach. A notice given
unilaterally by one party cannot convert an
innominate term into a condition and a
Notice to Complete cannot therefore
fundamentally alter the test which must be
satisfied by an innocent part to terminate
for breach of an innominate term.
It is unfortunate that the Shawton decision
was not referred to by the Court of Appeal in
Urban I and as such there is now a divergence
of authority, particularly in a construction
context, as to whether a Notice to Complete
may provide an easier route to termination at
common law. Nevertheless, the reasoning in
Urban I is forceful and difficult to counter as a
matter legal principle. Certainly for those
parties considering potential rights of
termination at common law, the prudent
assumption to make will now be that a Notice
to Complete is unlikely of itself to make it
easier to terminate a contract. A notice can be
useful if not essential in terminating but it will
still be necessary to show that the delay goes
to the root of the contract or has deprived
the party of substantially the whole benefit of
the contract.
References: Shawton Engineering Ltd v DGP International Ltd (t/a Design Group Partnership) [2005] EWCA Civ 1359; Stocznia Gdynia SA v
Gearbulk Holdings [2009] 3 WLR 677; Telford Homes (Creekside) Ltd v Ampurius Nu Homes Holdings Ltd [2013] EWCA Civ 577; Urban I
(Blonk Street) Ltd v Ayres [2013] EWCA Civ 816.
11
Termination for convenience
A recent case in the Technology and Construction Court has considered

the operation of so called termination for convenience clauses and the
extent to which challenges may be made to their use on grounds of
unreasonableness or a lack of good faith. The Court has confirmed
English laws robust approach to these types of clauses and we take the
opportunity below to consider the topic in detail.
Termination for Convenience

Clauses
It is common for international construction
contracts to contain a clause permitting the
Owner to terminate the contract by giving a
notice to that effect to the Contractor. These
clauses do not depend upon the Owner showing
that Contractor is in breach of the contract
but are generally inserted for the convenience
of the Owner. Such clauses are often called
termination for convenience or termination
without cause clauses.
The financial consequences of a termination for
convenience vary from one contract to another
but it is often provided that the Contractor will
be paid the value of works executed and
materials delivered to site up to the date of
termination and also his demobilisation costs,
but not loss of the profit that he would have
made if the contract had continued to
completion.
The FIDIC contracts contain just such a
termination for convenience clause. For example
the salient part of Clause 15.5 of the Red,
Yellow and Silver Books provides:
The Employer shall be entitled to terminate the
Contract, at any time for the Employers
convenience, by giving notice of such
termination to the Contractor. The termination
shall take effect 28 days after the later of the
dates on which the Contractor receives this
notice or the Employer returns the Performance
Security.
The FIDIC Red, Yellow, and Silver Books then
provide that the Contractor will be paid the
value of work carried out, the cost of Plant and

Materials delivered to the Contractor, or of
which the Contractor is obliged to accept
delivery, any other Cost or liability reasonably
incurred by the Contractor in the expectation of
completing the Works, and demobilisation costs.
Problems
Termination for convenience clauses can
sometimes give rise to difficulties in practice.
Questions may arise as to whether there are any
limitations to the circumstances in which the
Owner can exercise his rights under the clause
or whether he has an entirely free hand to
operate the clause in any circumstances and for
any reason whatsoever.
The FIDIC Red Yellow and Silver Books seek
address this issue by adding a proviso to the
clause to the effect that the Owner may not
terminate the contract under the termination for
convenience clause in order to execute the
Works himself or to arrange for the Works to be
executed by another contractor.
Many contracts do not, however, deal with this
point and the question of whether there is any
fetter on the Owner relying upon such clauses
will have to be answered by reference to first
principles. The question is important from the
Contractors point of view because he will clearly
not wish to be exposed to the possibility that he
may lose his contract at the whim of the Owner,
and from the Owners point of view because if
he does terminate the contract for a reason
which is not in fact covered by the convenience
clause he will have wrongfully terminated the
contract and may be liable for substantial
damages to the Contractor.
Governing Law
The starting point for the consideration of this
question will of course be the governing law
of the contract. Whilst there are numerous
authorities on this point from the United States,
Canada and Australia, there have been very
few English cases which have directly addressed
the question.
Termination for convenience clauses were
considered in Abbey Developments v PP
Brickwork, decided in 2003. The case concerned
a labour only sub-contract for brickwork and
blockwork for the development of a housing
estate of sixty nine houses. The sub-contract
included a clause which provided:
Abbey Developments Limited reserve the right
to renegotiate rates or suspend the Contract and
retender the works without vitiating the Contract
or giving rise to any claim from subcontractor
The court held that:
A contract for the execution of work confers on
the contractor not only the duty to carry out the
work but the corresponding right to be able to
complete the work which it contracted to carry
out. (The work has to be defined sufficiently
for there to be a right to execute it.)
Accordingly:
reasonably clear words are needed in order to
remove work from the contractor simply to have
it done by somebody else; whether because the
prospect of having it completed by the contractor
will be more expensive for the employer than
having it done by somebody else.
The court held that the provision in the subcontract quoted above would have permitted
Abbey Developments permanently to suspend
the sub-contract and have the work completed
by another sub-contractor. The clause was in
reality quite comparable to a clause empowering
termination for convenience and the
interpretation adopted by the court was justified
by the background to the contract, that is the
nature of the services to be provided by the
sub-contractor (a labour only sub-contract) and
the fact that this was a house building project,
which was by its nature speculative.
On the facts of the case, however, the clause did
not avail the contractor since the contractor had
not relied upon it at the time it removed the
outstanding work from the sub-contractor and
brought in others to complete.
A Recent Case
A very different termination for convenience
clause was considered more recently in TSG
Building Services v South Anglia Housing,
decided in 2013. In that case, TSG and South
Anglia entered into a term contract for the
provision by TSG of a gas servicing and
associated works programme in relation to South
Anglias housing stock. The contract was to last
for an initial period of four years. It required TSG
to carry out the Tasks ordered by South Anglias
representative during that period.
The Contract was a partnering contract. Clause
1.1 provided that the parties:
13
shall work together and individually in the spirit

of trust, fairness and mutual co-operation for
the benefit of the Term Programme, within the
scope of their agreed roles, expertise and
responsibilities as stated in the Partnering
Documents, and all their respective obligations
under the Partnering Contract shall be construed
within the scope of such roles, expertise and
responsibilities, and in all matters governed by
the Partnering Contract they shall act reasonably
and without delay.
Clause 13.3 provided
The Client may terminate the appointment of
all other Partnering Team members, and any
other Partnering Team member may
terminate its own appointment, at any time
during the Term . by three months notice to
all other Partnering Team members.
Clause 13.8 provided:
In the event of termination in accordance with
Clause . 13.3 .., the relevant Partnering
Team member(s) shall be entitled to payment
of the total amount(s) properly due up to
the date of termination.
The Client terminated the Contractors
engagement under the Contract by giving three
months notice in accordance with Clause 13.3.
The Contractor made claims against the Client
for under-recovery of overheads, profit, contract
set-up and termination costs resulting from the
termination.
The Client issued proceedings seeking a
declaration that, the Client having exercised its
right to serve notice to terminate the
Contractors engagement under the Contract
under Clause 13.3, the Contractor had no
entitlement, whether as damages for breach of
contract, or as a sum due under the contract, to
receive monies and/or compensation in respect
of the overheads and profit it would have
recovered over the balance of the term of the
Contract, had the Contract not been terminated.
There was no consideration of the question of
the reasons why the Client had decided to
operate the termination clause in this case and
the court specifically stated that it made no
findings on that issue. Rather the case was
concerned solely with the correct interpretation
of the clauses in the Contract.
Firstly, the Contractor argued that the right to
terminate under Clause 13.3 was constrained by

the partnering provisions of Clause 1.1; in
particular, the provision that the Client was
obliged to act reasonably in all matters
governed by the Partnering Contract. The court
held that one needs to consider not just what
the words in Clause 1.1 mean verbally but also
what from looking at the contract overall they
are intended to apply to. In the context of
Clause 1.1 as a whole the word matters was
readily comprehensible in relation to the
assumption, deployment and performance of
roles, expertise and responsibilities and could
not be understood to refer to each and every
obligation, power and right under the Contract.
After reviewing the contract as a whole, the
court concluded that Clause 1.1 did not require
the Client to act reasonably as such in
terminating under Clause 13.3.
Secondly, the Contractor argued that there was
an implied term in the Contract that each party
would act in good faith in connection with the
Contract, including Clause 13.3. The court held,
however, that there was no such implied term of
good faith in the Contract:
The parties had gone as far as they wanted in
expressing terms in Clause 1.1 about how they
were to work together in a spirit of trust
fairness and mutual cooperation and to act
reasonably. Even if there was some implied term
of good faith, it would not and could not
circumscribe or restrict what the parties had
expressly agreed in Clause 13.3, which was in
effect that either of them for no, good or bad
reason could terminate at any time before the
term of four years was completed. That is the
risk that each voluntarily undertook when it
entered into the Contract, even though,
doubtless, initially each may have thought,
hoped and assumed that the Contract would
run its full term.
So, if, for example, the reason for the termination
had been to bring in another (perhaps cheaper)
contractor to help deliver the Term Programme,
this would not have made any difference to the
outcome. The result may well have been different
if a different system of laws had governed the
contract, particularly a system which recognises a
general principle of good faith in the operation
and performance of contracts.
It is interesting to note that Abbey
Developments does not appear to have been
referred to or relied upon in the South Anglia
case. The reasons for this are not apparent from
the judgment, but it is likely that if the

Contractor had relied upon Abbey
Developments, this would not have assisted him.
Abbey Developments proceeds upon the basis
that the Contractor has not only the obligation
to carry out the work but also the right to do so.
It is suggested that such an argument would not
be available to the Contractor where the
termination for convenience clause is a mutual
one, i.e. either party could terminate. The
Contractor could not really argue that it had a
right as well as an obligation to carry out the
work if it could itself terminate the contract at
its convenience (for example, if the contract
turned out to be an unprofitable one).
for convenience cases. For example, in Looney v

Trafigura Beheer, decided in 2011, the court was
influenced by the fact that a requirement for a
party to act reasonably was expressly stated in
other clauses in the contract but not in the
termination for convenience clause. A number of
provisions in a typical construction contract are
likely to be relevant when interpreting a
termination for convenience clause, for example
the actions which are required of the contractor
following the termination (is he required to hand
over all the design drawings?) and the financial
compensation payable to the contractor
following termination (is he to be compensated
for the loss of the contract?).
Interpretation of Contract
Implied Terms
In fact, both the decision in South Anglia and

the decision in Abbey Developments reflect
English law principles relating to the
interpretation of contracts. In South Anglia, the
court summarised these as follows: In broad
terms, one needs to determine objectively what
a reasonable person with all the background
knowledge reasonably available to the parties at
the time of the contract would have understood
the parties to have meant and one is looking to
adopt the more rather than less commercial
construction. These principles can be seen to
have been applied in Abbey Developments
where the court took into account the
background to the sub-contract (i.e. the nature
of the services to be provided and the type of
building project).
In the South Anglia case the Contractor argued

for an implied term which restricted the
circumstances in which the Client could invoke
the clause. Here too the court applied classic
English law principles to the implication of
terms. In particular the court was influenced by
the Privy Councils opinion in Reda v Flag in
which it had been held that an express and
unrestricted power cannot in the ordinary way
be circumscribed by an implied qualification.
A similar approach has been taken in other
termination for convenience cases. For example
in Hadley Design Associates v City of
Westminster, the City of Westminster had
operated a termination for convenience clause
to terminate a consultants appointment in a
project for the repair and refurbishment of a
number of blocks of flats owned by the City.
The consultant argued that there was an implied
term in the contract that the City could only
terminate the appointment under the
termination for convenience clause if to do so
In the South Anglia case the court also

highlighted the importance of construing the
termination for convenience clause in the
context of the contract as a whole. A similar
approach has been taken in other termination
15
was fair and reasonable and/or done in good

faith. The court declined to imply such a term.
The court said: the implication of a term
inhibiting the circumstances in which the express
term as to termination could be relied upon
would be wrong in principle.
Other possible arguments

In South Anglia, the court acknowledged the
possibility of other grounds upon which a
termination for convenience clause might be
ineffective. For example, if the Owner
misrepresented prior to the Contract that it
intended to proceed to the full term in
circumstances when it was always planning to
terminate early, that could give rise to a separate
cause of action for one type of
misrepresentation or another. Another example
given by the court was, if there was some
material fraud or dishonesty in and about the
termination, that might well give rise to some
cause of action. There was no suggestion that
any of these possibilities applied in the South
Anglia case. Claims for misrepresentation were,
however, made in the Hadley Design case. In
that case, the consultant had alleged that the
City of Westminster had assured the consultant
prior to entering into the contract that the City
would not terminate the appointment unless the
consultant was in default or the City ran out of
money and was unable to complete the
intended works. These assurances, the
consultant argued, constituted a separate
contract collateral to the appointment;
alternatively they were representations upon
which the consultant relied in entering into the
appointment. On either basis, the consultant
contended, the City could not terminate the
appointment under the termination for
convenience clause unless the City for financial
reasons could not continue with the intended

works. The success of these arguments,
however, depended upon the facts; and the
consultant was unable to prove the facts
necessary for the claims to succeed.
Another possible argument is an argument by
analogy with contracts for the sale of land
where the English courts have intervened to
restrain or control the exercise of a right of
termination by a vendor where he is unable or
unwilling to prove to the purchaser that he has
title to the land he is selling. Such a right, it has
been held, must not be exercised arbitrarily,
capriciously or unreasonably. The argument by
analogy is as yet untested but it seems unlikely
that the courts would be willing to exercise in
relation to construction contracts the powers
they have for many years had in relation to
contracts for the sale of land; the two categories
of contract are very different.
Practical implications
The handful of reported English law cases
concerning termination for convenience clauses,
some of which are touched upon here,
demonstrate the fact that each case depends
very much on the wording of the particular
contract and upon the nature of the project
concerned. The decisions in some of the cases
were extremely finely balanced. Parties should
try, if they can, to address the question of
whether there should be any fetter upon the
right to terminate under these clauses, and, if
so, what that fetter should be, at the time they
are negotiating their contract. No one can be
completely clairvoyant, but attempts to define
the ambit of these clauses may reduce the ambit
for disputes later.
References: Reda v Flag Ltd [2002] UKPC 38; Hadley Design Associates Ltd v City of Westminster [2003] EWHC 1617; Abbey Developments
Ltd v PP Brickwork Ltd [2003] EWHC 1987; Looney v Trafigura Beheer BV [2011] EWHC 125; TSG Building Services plc v South Anglia
Housing Ltd [2013] EWHC 1151.
17
On demand securities: compliance with formalities and

dealing with proceeds
On-demand securities such as on-demand guarantees and performance

bonds are a commonly used and important form of security on
international construction projects. However demands for payment
under such securities are not always quite as straightforward as one
might expect and are often disputed. Last years publication focused on
two such cases: one of which related to the proper interpretation of a
guarantee (and whether or not the guarantee in question was ondemand or conditional in nature) and the other related to the issue of
execution formalities.
Reports of these types of cases continued unabated in 2013, with
further cases coming before English courts meriting two separate articles
in this years publication. This article considers two interesting cases
dealing with compliance with formalities when making a demand under
on-demand securities and the extent to which English law will restrict a
beneficiary from dealing with the proceeds of a successful demand. The
next article considers an important case which appears to broaden the
grounds on which Contractors may challenge demands on the basis of
fraud or a lack of entitlement in the underlying construction contract.
Compliance with formalities: Sea-Cargo Skips v State Bank of India

On-demand securities come in various shapes
and sizes (indeed the variety in approach can
cause problems as the lines of distinction
between on-demand and conditional guarantees
are not always clear). These securities often
therefore differ in their terms, including in their
requirements for the methods of making
demands for payment under the security.
The form of on-demand guarantee contained in
the FIDIC Silver Book, for example, states that a
demand for payment should be in writing,
include confirmation that (a) the contractor is in
breach of its obligation(s) under FIDIC and (b)
how the contractor is in breach, and contain an
authenticated signature of the person making

the demand. Some bespoke forms of on-demand
guarantee, on the other hand, go further and
attach a form of demand to the guarantee itself
(intended to minimise ambiguity in relation to
the mechanics of making a demand and,
therefore, reduce the likelihood of disputes).
Non-compliance with the requirements for
making a demand was successfully raised as a
defence in the recent case of Sea-Cargo Skips v
State Bank of India. The case involved a contract
between a buyer and a shipbuilder for the
construction and sale of a container vessel. A
bank provided on-demand guarantees to the
buyer in Sea-Cargo Skips as security for advance

payments made by the buyer to the shipbuilder.
Under the on-demand guarantees, the bank had
an irrevocable and unconditional obligation to
pay the buyer upon receipt of a written demand
from the buyer stating that:
(a) the buyer was entitled to cancel the contract,
the cause entitling cancellation had occurred,
the buyer had so cancelled, the contractor
had not disputed the cancellation, no
arbitration proceedings were initiated with
reference to the cancellation, a demand for
payment had been made to the contractor
and the contractor had not paid; or
(b) the shipbuilder had been delayed in the
construction of the vessel for more than 270
days as set out in contract article IV 1(e)
which entitled the buyer to cancel the
shipbuilding contract and, pursuant to such
right, the buyer had so cancelled.
The demand for payment made by the buyer
included the following statement:
We confirm that the vessel has not been
delivered by the delivery date of 30 June 2011 or
within 270 days of the same, that is by 26 March
2012 and that the Buyer has accordingly
exercised their right to cancel the Contract.
The buyers demand did not contain the
requisite information to satisfy limb A but the
buyer argued that its demand did fulfil
the requirements of limb B and therefore was,
in the buyers opinion, a compliant demand
for payment.
The judge, Mr Justice Teare, disagreed and

emphasised that the bank providing the
guarantee was not party to the shipbuilding
contract and was not expected to investigate the
position between the parties to the shipbuilding
contract; the banks liability to pay did not
depend on the actual position between the
buyer and contractor but on whether the
demand contained the requisite statement.
The demand did not contain a statement that
there had been 270 days delay as set out in
article IV 1(e): that article related to delay in
stages 2 to 4 of construction of the vessel
(whereas the demand referred to delay in
delivery of the vessel). The court therefore
followed previous cases in holding that an
ambiguous demand could not constitute a
compliant demand.
Mr Justice Teare suggested that a demand for
payment should slavishly follow the language set
out in the guarantee (I do not knowwhy the
demand did not slavishly follow the wording of
the refund guarantee). Sea-Cargo Skips
therefore underlines the importance of
complying with the terms of an on-demand
security when making a demand for payment. If
the security sets out a form of demand, it must
be used. If the guarantee identifies wording to
be included in a demand (as does the form of
guarantee included in the FIDIC Silver Book),
that wording should be adopted in the demand.
Failure to do so potentially opens the door for
the security provider to argue against making
payment and puts the beneficiary at risk of
either delayed payment (which of course goes
against one of the primary purposes of an
on-demand security i.e. quick/immediate
payment) or, worse, non-payment.
19
Dealing with proceeds: Wuhan Guoyu Logistics Group Co Ltd v Emporiki

Bank of Greece SA
In last years publication we commented on
the Wuhan number 1 case, which concerned
whether a guarantee given by a bank was to
be interpreted as being truly on-demand
(i.e. requiring immediate payment) or merely
conditional upon proof of an underlying liability
(i.e. a guarantee in the traditional sense). The case
concerned a shipbuilding contract under which
the buyer was to procure that its bank issue a
Payment Guarantee in favour of the seller
that Payment Guarantee was held in Wuhan
number 1 to be an on-demand guarantee.
A second dispute was decided in 2013 over the
extent to which the beneficiary was entitled to
deal with the proceeds paid out under the
guarantee. The seller had made a demand for
payment of an unpaid instalment of the contract
price which, though initially refused by the bank,
was ultimately paid out under the on-demand
guarantee after the decision in Wuhan number
1. It was, however, later determined at
arbitration that the instalment had not fallen
due under the shipbuilding contract and the
bank, relying on that determination, argued that
the money paid out under the on-demand
guarantee was held on trust for the bank.
The court however held that the seller did not
hold the money on trust for the bank and
therefore made clear that money paid out under
an on-demand security will not be held in trust
by a beneficiary even where it is subsequently
shown that the beneficiary was not entitled to
payment under the underlying contract to which
the security relates.
The courts reasoning was as follows:
There was no analogy with cases of mistake.
On making its demand, the seller had
acquired an enforceable cause of action
against the bank and the bank had to make
payment immediately as per the on-demand
guarantee terms. It was of no relevance that
the demand, although made in good faith,
was in fact made upon an incorrect premise.
The on-demand guarantee was intended to
be an autonomous contract, independent of
disputes between the parties to the
shipbuilding contract. The shipbuilding
contract was subject to an implied term that
the seller, as beneficiary of the on-demand
guarantee, would account to the buyer to

the extent that the seller was overcompensated by the bank.
It is critical to the efficacy of financial
arrangements such as these that as between
seller and bank the position crystallises at
presentation of demand. Only in the case of
fraudulent demand can the bank resist
payment against an apparently conforming
demand.
There was no unconscionability in the sellers
retention of the on-demand guarantee sum.
The purpose of prompt payment under the
on-demand guarantee was to ensure that
the seller had funds available to conduct its
business, including construction of the ship.
Both of the Wuhan judgments demonstrate the
traditionally robust approach to on-demand
securities taken by the English courts and a
reluctance to interfere with security
arrangements. In the first judgment, the court
held that the guarantee was on-demand rather
than conditional (despite a number of pointers
indicating that it could be one or other). In this
more recent judgment, the court decided in
strong terms that payment under an on-demand
guarantee will not be held on trust where the
demand for payment was validly made albeit
based on an incorrect premise (which also
reinforces the importance of ensuring that
formalities of making a demand are complied
with). As between the bank and the beneficiary,
the demand was validly made and beneficiary
had validly come into receipt of the proceeds
the seller was required to account to the buyer
for any overpayment, but property in the funds
had validly passed to the seller pursuant to the
demand made to the bank.
This continuation of English laws traditionally
robust approach to on-demand securities
contrasts with a decision late last year in Doosan
Babcock where Mr Justice Edwards-Stuart in the
Technology and Construction Court sought to
widen the grounds upon which challenges to
demands under on-demand securities can be
made by the party procuring the guarantees.
We consider this decision in detail in the
next article.
References: Sea-Cargo Skips AS v State Bank of India [2013] EWHC 177 (Comm); Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of
Greece SA [2013] EWCA Civ 1679; Doosan Babcock Limited v Comercializadora De Equipos Y Materiales Mabe Limitada [2013] EWHC 3201
(TCC).
21
On-demand securities: erosion of the English law

position
In the 2011 edition of this publication, we reported on certain case law

developments which suggested a softening in English laws traditionally
robust approach to the enforcement of on-demand securities. A further case
in 2013 has continued this trend and provides greater scope for Contractors
to prevent calls being made on on-demand performance securities.
The law pre-2013

English law has traditionally taken a robust
approach to on-demand performance securities.
It has previously resisted attempts to limit the
ability of a beneficiary to call on such securities
by reference to the strength of its underlying
entitlement against the person arranging for the
provision of the security, such as a Contractor.
The only ground which had previously been
permitted for challenging a call was fraud.
A good example of this robust approach is Enka
Insaat Ve Sanayi v Banca Popolare Dellalto
Adige, decided in 2009. There, calls on
performance bonds were sought to be
challenged on the basis that they had been
made for the full amount of the bonds and
considerably in excess of the loss caused by the
underlying breach of contract leading to the
calls. The challenge failed because on a strict
reading of the performance bonds, the court
held that such calls were permissible. The bonds
required the beneficiary to state that a breach
had occurred and that it was entitled to
receive payment under the bonds and this was
held not to limit the amount of any call to the
loss caused by such a breach. In addition, even if
the interpretation had been otherwise, the court
found that the beneficiary had a genuine belief
in its own interpretation of the bond and fraud
could not therefore be established.
This approach tightly limits the scope of any
challenge to a call to allegations of fraud in
respect of the precise statements required to be
made to support a call under a performance
security. As we noted previously, developments in
2011 had softened that position in two directions:
It had been suggested that the fraud test

might be formulated more broadly so as to
cover any call on a performance security in
excess of what its maker honestly believed to
be due to it from the person arranging for
the provision of the security.
In the case of Simon Carves v Ensus UK,
it was held that the party providing a
performance security could obtain an order
preventing the beneficiary from calling on
the bond if it could show that the underlying
contract clearly and expressly disentitled
the beneficiary from making a call in certain
circumstances and that it could show a
strong case that such circumstances had
arisen. In other words, a strong case that the
beneficiary was not entitled to call on the
securities by virtue of specific provisions in
the underlying contract. This case appeared
to extend previous law which required such
circumstances to be positively established
before such an order would be granted,
meaning in practice that such orders were
unlikely to be made on an urgent application
to the court in advance of a full trial.
The recent case of Doosan Babcock v
Comercializadora De Equipos Y Materiales Mabe
has softened the position further in both of
these directions.
Doosan Babcock
Doosan Babcock concerned the construction of
two power plants in Brazil. Doosan was
subcontracted to the main contractor for the
project, MABE, for the provision of two boilers
and associated equipment, together with
technical advisory services. Two on-demand
performance bonds were provided by Doosan

and these were expressed to expire on the
earlier of Taking-Over under the subcontract or
a certain long-stop date.
The parties fell into dispute over whether Taking
Over had occurred. Doosan contended that
Taking-Over had occurred when the boilers had
been put to use by MABE. This was said to have
occurred during the commissioning process for
the power plants, when power was first
exported to the grid. MABE argued that this
was an essential part of the overall
commissioning process for the boilers and that
Taking-Over could only occur once the power
plants had been fully commissioned and there
had been an opportunity to carry out the
performance tests set out in the subcontract
for each of the boilers.
Prior to the performance tests being carried out,
but after Doosan had requested the issuance of
the Taking Over Certificates, MABE had notified
a claim for defects in relation to the boilers.
Doosan feared that MABE might make calls
under the performance bonds and brought
pre-emptive proceedings in England for an order
preventing such calls. Doosan argued that it had
been entitled to Taking Over Certificates for
some time and that, as these certificates would
bring about the expiry of the performance
bonds, MABE should be restrained from making
any call under the bonds.
The court upheld Doosans challenge on three
separate grounds:
1. Applying the decision in Simon Carves v
Ensus UK, the court found that Doosan had
shown a strong case that the Taking Over
Certificates ought already to have been
issued by MABE. This was said to be enough

to allow an order to be made restraining calls
by MABE under the performance bonds.
2. The court found that Doosan had a realistic
prospect of success (which is a lesser
standard of proof than a strong case) in
showing that MABEs rejection of Doosans
request for the Taking Over Certificates had
not been made in good faith. The court
based its finding in this regard solely on
what it perceived to be the implausibility of
MABEs position in relation to the Taking
Over Certificates i.e. there was no specific
evidence that MABE did not in fact believe
its position to be true. The courts ruling as
to a lack of good faith appears to have been
equated to fraud and thereby to have
afforded a separate basis for restraining calls
by MABE under the performance bonds.
3. The court found that the order could be
separately justified by an independent
principle under English law that no party
should benefit from its own wrong (derived
from the House of Lords decision in
Alghussein Establishment v Eton College).
The principle was said to be applicable
because it was only by virtue of MABEs
breach of contract in refusing to issue the
Taking Over Certificates that it could
preserve its ability to call under the
performance bonds. The court left open
whether a breach of this principle would
need to be proved to the standard of a
strong case or the lesser realistic prospect
of success to justify the making of an order.
23
Criticism and the future

The decision in Doosan has drawn criticism from
a number of English law commentators and can
be viewed as extending the law in two
directions:
The decision extends the principle in Simon
Carves v Ensus UK (which itself was already
an extension of English law) by detaching it
from the need for a clear and express
stipulation in the underlying contract. A
good example of such a clear and express
stipulation can be found in clause 4.2 of the
standard FIDIC terms where the employer is
expressly not entitled to call under the
performance security except for amounts
to which the Employer is entitled under the
Contract in the event of [list of triggers].
No similar clause was present in the Doosan
sub-contract. Although the failure to issue
the Taking Over Certificate was held to be a
breach of contract, there was no express
restriction on the circumstances in which a
call could be made under the performance
bonds. This would appear to be the reason
why the decision seeks support from the
principle that no party should benefit from
its own wrong. However, this principle
applies to a much broader spectrum of
cases. It could, for example, apply to a threat
to collect liquidated damages by a call under
a performance security. The Contractor in
such a situation might be able to argue that
it was entitled to extensions of time under
the contract and that the Owner could only
make a call for liquidated damages by virtue
of its breach of contract in failing to grant
extensions of time (if the facts support an
allegation that such failure constituted a
breach). The possibility that relief might be
granted in such cases, not only where the
Simon Carves criteria of a strong case is
satisfied, but also where there is only a
realistic prospect of success could provide
considerable assistance to Contractors
seeking to restrain calls being made under
performance securities.
The courts findings in relation to good faith

have the potential to dilute significantly the
fraud exception under the English law. As
noted above, the court was content to
accept the perceived implausibility of MABEs
position as providing sufficient evidence of a
lack of good faith. This then appears to have
been equated as fraud for the purpose of
preventing a call on the performance bonds.
This finding would appear to permit the
fraud exception to apply (i) merely if there is
a lack of good faith and (ii) based on an
inference from the perceived weakness of
the beneficiarys legal position. In Doosan,
the courts finding that the Taking Over
Certificates were not refused in good faith
appears to have led automatically to the
conclusion that any call under the
performance bonds would be fraudulent.
It remains to be seen whether the Doosan
decision will be followed in future cases. The
decision is likely to encourage further challenges
by Contractors and Sub-Contractors who have
provided on demand securities and it may be
that we need not wait very long before the
matter is reconsidered in another case or by the
Court of Appeal. In the meantime, the decision
should be taken into account by those
considering making calls under performance
securities and in negotiations for new projects. If
possible, such parties would be well advised to
avoid strong contractual linkages between the
expiry of performance securities and project
milestones such as Taking Over as such linkages
will provide the foundation for arguments to be
made along the lines of those accepted in
Doosan. Those considering calling on demand
securities would also be well advised to avoid (to
the extent possible) tipping off a Contractor/
Sub-Contractor that a call is to be made, as the
Doosan decision is likely to be of much less
relevance where a call has already been made.
References: Alghussein Establishment v Eton College [1988] 1 WLR 587; Enka Insaat Ve Sanayi AS v Banca Popolare Dellalto Adige SPA
[2009] EWHC 2410 (Comm); 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).
25
Time bar clauses: return of the strict interpretation?
In previous editions of this publication we have noted that the recent trend
taken by the English courts to time bar and exclusion clauses was to interpret
them in the same way as any other contractual provision. A recent TCC
decision in 2013 suggests that the traditionally stricter approach may still yet
be applied by the English courts. In this article we explore time bar clauses
more closely what they are, what they look like and how we might expect
them to be interpreted in light of recent case law.
What is a time bar clause?
A time bar clause is one that requires a party to
make or notify the other of a claim (say for extra
time or money) within a specified timeframe,
which if not complied with means the partys
claim is time barred. In other words, a time
bar clause renders the making or notification of
a claim a condition precedent to a partys
entitlement to relief. It is effectively an exclusion
or limitation clause.
Whats the rationale?

In Multiplex Constructions v Honeywell Control
Systems (No. 2), Mr Justice Jackson (as he then
was) provided a neat summary of the usefulness
of time bar clauses in the context of
preconditions to extension of time claims:
Contractual terms requiring a contractor to give
prompt notice of delay serve a valuable purpose;
such notice enables matters to be investigated
while they are still current. Furthermore, such
notice sometimes gives the employer the
opportunity to withdraw instructions when the
financial consequences become apparent
Such clauses are inteded to promote certainty
and finality and ensure the orderly and timely
provision of information so that matters such an
extensions of time or claims for more money are
dealt with promptly.
How have the courts interpreted

such clauses?
It is perhaps no surprise, then, that the English
courts have tended towards enforcing time bar
clauses, with the effect that a party will lose its
right to claim where the notice or claim is
submitted out of time. For example, in WW

Gear Construction v McGee Group the English
Technology and Construction Court held that
where a contractor failed to comply with the
notice requirements for claims for loss and
expense and extensions of time (which were
expressly a condition precedent to a claim), it
had no entitlement to more time or money
under those clauses. The court went further in
Steria v Sigma Wireless Communications finding
that an extension of time clause in an amended
MF/1 subcontract, which gave the contractor
certain entitlements provided a timely notice
was issued, amounted to a condition precedent.
Failure to serve the notice in time therefore
debarred the contractor under that clause,
despite the absence of express words to
that effect.
The trend in recent years, exemplified by these
two cases, has been that no special approach is
to be taken to the interpretation of time bar
clauses. Mr Justice Akenhead said in the WW
Gear case:
It is sometimes said and argued that conditions
precedent which have the effect of otherwise
excluding what would otherwise be perfectly
valid claims or entitlements are to be construed
strictly However the basic rules of construction
apply to all contractual terms.
It was thought therefore that such clauses did
not require especially clear words in order to be
effective a view shared by Mrs Justice Gloster
DBE in Waterfront Shipping Co v Trafigura:
the especially exacting principles of
construction that apply to exemption clauses
probably do not apply to time-bar provisions
Likewise in Tradigrain v Intertek Testing Services,

Moore-Bick LJ explained:
English law has traditionally taken a
restrictive approach to the construction of
exemption clauses and clauses limiting liability
for breaches of contract and other wrongful
acts. However, in recent years it has been
increasingly willing to recognise that parties to
commercial contracts are entitled to apportion
the risk of loss as they see fit and that provisions
which limit or exclude liability must be construed
in the same way as other terms.
In the Waterfront Shipping decision the court
also noted that the so called contra
proferentem rule (that where there is doubt
about the meaning of a particular part of the
contract, the words in question will be
construed against the person who put them
forward) would only be invoked as a last resort
when interpreting these sorts of clauses; only if
the meaning of the words was so finely
balanced should that rule be applied.
Recent developments
A recent Technology and Construction Court
decision in 2013 appears to doubt the trend
noted above. In Elvanite Full Circle v AMEC Earth
& Environment, a demolition and recycling
contractor, Elvanite, engaged AMEC to submit a
planning application for permission for waste
recycling. The application was made later than
envisaged, for various reasons, and the parties
went to court. In its defence AMEC put forward
a number of exclusions of liability in the contact
including the following:
All claims by the CLIENT shall be deemed
relinquished unless filed within one (1) year after
substantial completion of the Services.
In interpreting this clause Coulson J said:

It is of course axiomatic that exclusion clauses
of this type have to be construed strictly. They
also have to be construed contra proferentem.
On either approach, it seems to me that I have
to give the claimant the benefit of any doubt
arising from the words used by the defendant in
their standard terms and conditions.
On the facts this meant that Elvanite did not
need to have issued proceedings within a year of
the termination of AMECs services, although
the court held that something akin to a letter of
claim should have been provided within that
timeframe and the clause therefore operated to
prevent any recovery.
In a similar way, a decision of the Northern Irish
Court of Appeal earlier this year in Northern
Ireland Housing Executive v Healthy Buildings
(Ireland) in relation to the NEC form of contract
concluded that:
The overall time bar provision in Clause 61.3 is
an exclusion clause in favour of the Executive
and falls to be construed contra proferentem.
These cases tend to cut across the trend of
noted above. There are, however, other recent
cases, which continue to the trend. For example,
earlier this year in Fujitsu Services v IBM United
Kingdom, the TCC confirmed that:
There is no reason to approach the exercise of
construing an exemption or limitation of liability
clause in any way different to any other term in
a contract.
There is therefore some uncertainty in any given
case as to which approach will be applied and
the trend outlined above cannot (yet) be said to
be a uniform one.
27
What do the industry standard forms say?

We set out below a summary of time bars clauses in various industry standard contracts:
Contract
Wording
FIDIC
Conditions of
Contract
(1999)
If the Contractor fails to give notice of a claim within such period of 28 days, the Time for
Completion shall not be extended, the Contractor shall not be entitled to additional payment,
and the Employer shall be discharged from all liability in connection with the claim.
FIDIC Red
Book 4th
Edition
the Contractor shall keep such contemporary records as may reasonably be necessary to
support any claim he may subsequently wish to make.
If the Contractor fails to comply his entitlement to payment in respect thereof shall not
exceed such amount as the Engineer or any arbitrator considers to be verified by
contemporary records
MF/1
within 30 days of the said circumstances arising the Contractor shall give to the Engineer
notice of his intention to make a claim and shall state the reasons by virtue of which he
considers that he is entitled thereto
the Purchaser shall not be liable to make payment in respect of any claim for an additional
payment unless the Contractor has complied with the requirements of this clause.
Orgalime
The Purchaser shall lose his right to liquidated damages if he has not made a claim for such
damages within 180 days after the earliest due dates specified.
A right to liquidated damages which has been lost due to this limitation cannot be used to
offset other claims.
Defects shall be notified to the Contractor without undue delay after the defect has
appearedThe Purchaser shall immediately notify the Contractor of any defect which may
cause damage to the Works. If the Purchaser fails to do so, the Contractor shall not be liable
for any damage which could have been avoided if notice had been given immediately.
NEC
If the Contractor does not notify a compensation event within eight weeks of becoming
aware of the event, he is not entitled to a change in the Prices, the Completion Date or a Key
Date unless the event arises from the Project Manager or the Supervisor giving an instruction,
issuing a certificate, changing an earlier decision or correcting an assumption.
What can we learn?

Contractors must take care to comply carefully
with specific requirements with regard to
contractual relief - requirements which are
common in standard and bespoke contracts
industry wide. While the outcome will depend
on the facts of each case, despite a different
emphasis in the recent Elvanite and Healthy
Buildings cases, the overall trend does seem to
be that the courts will be prepared to enforce
time bar clauses without the need for very clear
language, as the clauses are seen as promoting

contractual certainty and encouraging effective
project management during the life of a project.
However this trend may not be followed in all
cases and any issues with regard to the scope of
specific requirements should therefore be
specifically addressed in negotiations prior to
execution of the contract, using clear,
unambiguous words and then adhered to during
the course of the works.
References: Multiplex Constructions (UK) Limited v Honeywell Control Systems Ltd (No. 2) [2007] EWHC 447 (TCC); Waterfront Shipping
Company Ltd v Trafigura AG [2007] EWHC 2482 (Comm); Tradigrain SA & Ors v Intertek Testing Services (ITS) Canada Ltd & Anor [2007]
EWCA Civ 154; Steria Ltd v Sigma Wireless Communications Ltd [2007] EWHC 3454 (TCC); WW Gear Construction Ltd v McGee Group Ltd
[2010] EWHC 1460 (TCC); Elvanite Full Circle Limited v AMEC Earth & Environment (UK) Limited) [2013] EWHC 1191 (TCC); Fujitsu Services
Limited v IBM United Kingdom Limited [2014] EWHC 752 (TCC); Northern Ireland Housing Executive v Healthy Buildings (Ireland) Ltd [2014]
NICA 27.
29
Caps on liability and performance securities
A Technology and Construction Court decision during 2013 has considered

whether sums paid out under performance securities should be included
within general limits or caps on liability provided by a construction contract.
The sums in question were held to be outside the liability cap and the
decision potentially gives rise to exposure for contractors which may not
previously have been envisaged.
Background
In February 2006, SABIC UK Petrochemicals
(SABIC) entered into a bespoke contract with
Simon Carves Limited (SCL) in which SCL was
employed to design, procure and construct a
low density polyethylene (LDPE) petrochemical
plant in England (the Contract). The Contract
sum was 135 million. As part of the contractual
obligations, SCL was required to provide a
performance bond for 10% of the Contract Sum
of 13.5 million. Throughout the project SCL
received substantial financial support from its
parent company (PLL) before entering
administration in 2011.
By late 2006, shortly after the works had
commenced, it was clear that the completion
date would not be met and the parties agreed
to enter into a compromise agreement which
varied the Contract by: (1) extending the
completion date; and (2) increasing the contract
sum by 5.5m. However, despite this, the
project continued to encounter substantial
delays as a result of SCLs financial difficulties
and it was clear that the revised completion date
was unlikely to be achieved.
SABIC claimed that SCL was failing to discharge
its obligations under the Contract while SCL
claimed that it was entitled to additional
payments over and above the contract price. It
was also apparent that the revised extended
completion date was not going to be met.
A further variation to the Contract was agreed
in July 2008. This agreement had certain key
provisions including that SCL was to undertake
the works which they had previously claimed fell
outside the scope of the Contract. The date for
completion was varied to the date at which the
ethylene could enter the plant (the ethylene in

date or EID), which was expected to be 5
December 2008. It was also agreed that
liquidated damages would be calculated from
this date rather than the completion date.
SABIC agreed to pay the balance of the Contract
Sum (law 14,338,609) to SCL in advance and
also a further 15m (i.e. an increase in the
contract sum). In return, SCL provided an
advance payment bond for 15m.
Termination
In October 2008, just three months after the
variation, SABIC sent a warning letter to SCL
(relying on the terms of the Contract). SABIC
claimed that: (1) despite previous warnings, SCL
had failed to proceed with the works with due
diligence or was otherwise persistently in
material breach of its obligations under the
Contract and (2) SCLs financial position had
deteriorated to the extent that SCLs capability to
fulfil its obligations under the Contract was in
jeopardy (which was a ground for termination
under the contract). A month later, SABIC
followed this letter with another terminating
SCLs Contract. SABIC then proceeded to
complete the works and employed the current
subcontractors directly. Around the time of
termination, SABIC also called upon the advance
payment bond of 15m and the original
performance bond of 13.5m.
Bond calls within the liability cap?

SABIC issued proceedings against PLL under a
parent company guarantee to recover the
additional costs incurred in completing the
project and the losses arising from the delayed
LDPE production. SCL/PLL disputed SABICs right
to terminate the contract on both substantive

and procedural grounds and counterclaimed for
the sums called under the bonds. Part of SCL/
PLLs case was that SABICs claim was subject to
a contractual cap on liability set at 20% of the
adjusted Contract Sum, which amounted to just
over 31 million.
SABICs claim amounted to 26.4 million, after
amounts recovered from the performance bond
and advance payment bond had been taken into
account. On SABICs case therefore the claim fell
within the cap. SCL/PLL argued that the
recoveries from the bonds should not be taken
into account before applying the cap. On this
basis SABICs total claim would then be for
54.9 million, well above the 31 million cap,
and SABIC was not entitled to recover the excess
from SCL/PLL.
The court found that SABICs recovery under the
performance and advance payment securities
should be excluded before applying the cap for
the following reasons:
Under the contract, SABIC was entitled to
recover its additional costs reasonably
incurred in completing the works and it
could be properly said that SABIC had
incurred sums in completing the works
which it had in fact funded from the monies
obtained under the bonds.
Further, the contract required that SABICs
additional costs were to be calculated by
taking the total cost to SABIC of the whole
of the Works (including sums already paid to
SCL) and deducting what SABIC would have
paid to SCL had the contract not been
terminated and SCL completed the whole
job. Had SCL completed the works, SABIC
would not have had the benefit of the bond
monies but it would not have had to pay for

the works (having already paid the contract
sum). Thus, ignoring the bond monies would
have rendered the two sides of the equation
unbalanced.
It would have been counter intuitive to
regard the cost of completion of the works
as a loss without taking account of the
fact the parties had made arrangements to
obviate the losses by providing bonds.
SABIC had called on the bonds before
completing the works and it therefore made
more sense to say that SABIC had exhausted
the bond monies before incurring losses
(rather than the other way around).
If it was to agree with SCL/PLLs
interpretation (that the bond monies formed
part of the cap), it would unfairly punish
SABIC for making the advance payment of
15m to SCL which assisted with SCLs
financial difficulties before termination.
Broader Implications
Although part of the courts reasoning set out
above was based upon the specific provisions of
the termination clause in the contract between
SABIC and SCL, other parts apply more
generally. As such, the decision may well be
relevant to other circumstances. For example, it
might in some circumstances be said in relation
to defective work or contractual indemnities that
monies received through calls under
performance securities will not diminish the
amount of any cap on liability.
The form of liability cap in the Contract was in a
relatively standard form and parties may now
wish to ensure that the position is sufficiently
31
clear when bonds or other forms of financial

security are involved in a project, particularly
whether bond monies are to be included within
any cap on liability and how any cap is to
operate in the event of a claim.
For example, the FIDIC forms of contract each
contain a limitation of liability clause on similar
terms. The Red Book at Sub-Clause 17.6 sets out
at the second paragraph that: The total liability
of the Contractor to the Employer, under or in
connection with the Contract shall not exceed
the sum stated in the Particular Conditions or (if
a sum is not so stated) the Accepted Contract
Amount. Although the SABIC decision

concerned bespoke termination provisions, the
general wording of such a limitation clause
would still appear to leave scope for argument
over whether the Contractors total liability is
inclusive or exclusive of amounts recovered by
the Owner under performance or advance
payment securities. Much will depend on a finer
analysis of the particular contracts in question,
but parties would be best advised to clarify the
question at the same time as negotiating the
extent of any cap on liability.
References: SABIC UK Petrochemicals Limited v Punj Lloyd Limited [2013] EWHC 2916 (TCC).
33
Waiver and estoppel: overcoming express contractual

terms
So called entire agreement clauses are frequently included in international
construction contracts to reduce, if not eliminate, the risk that a party could
later rely on anything said or done during pre-contractual negotiations to
undermine or vary the terms of the completed contract. The recent first
instance and Court of Appeal decisions in Mears v Shoreline Housing
Partnership show that the drafting of such clauses is crucial if they are
to fulfil their intended purpose.
Background
During negotiations over a Schedule of Rates
for maintenance works, Mears proposed the use
of composite rates for reactive repairs which
were otherwise not covered by the Schedule.
A document explaining these rates was prepared,
circulated and agreed during correspondence
and meetings. The need for an amendment to
the draft Contract was raised to take account of
the composite rates but it was agreed that it
would not be necessary. The Contract, when
signed, contained the following clauses:
12.3 No change to this contract, unless
provided for by the conditions of contract,
has effect unless it has been agreed,
confirmed in writing and signed by the
Parties.
12.3 This contract is the entire agreement
between the Parties.
The Contract did not permit payment on the
basis of the composite rates. Despite this, for
the first six months of the term of the Contract,
Mears was paid on the basis of the composite
rates for reactive repairs. Sometime later
Shoreline Housing Partnership (SHP) deducted,
from sums otherwise due to Mears, sums paid
to Mears by it on the basis of the composite
rates. Mears issued proceedings to recover the
deducted amount and SHP countered by
bringing an application to strike out the claim.
Mears argued that SHP was estopped from
withholding the deductions (either on the basis
of estoppel by convention or estoppel by
representation), and also claimed damages on
the basis of misrepresentation.
SHP submitted that Mears arguments were

destined to fail on the basis of the entire
agreement clause and applied for summary
judgment or for the claim to be struck out.
Estoppel
Mr Justice Akenhead, the judge at first instance,
described estoppel by convention at paragraph 29:
The convention is broadly a common
assumption which must be expressly shared
between the parties, the party alleging the
estoppel must have conveyed to the other party
an understanding that he expected
the other party to rely upon it and that
reliance must have occurred in connection
with some subsequent mutual dealings
between the parties.
Mears was arguing that, prior to the contract
being signed, the parties had conducted
themselves on the common assumption that the
composite rates would be used for calculating
payments due to Mears. The judge considered
that, on the facts as pleaded, it was arguable
that estoppel by convention could apply in
relation to the composite rates. The judge also
made a similar finding in relation to estoppel by
representation which involves reliance on a
specific representation by one party rather than
a common assumption shared between the
parties. In the circumstances, Mr Justice
Akenhead considered that estoppel by
representation could apply to a representation
made by SHP during negotiations that it was not
necessary to amend the contract to allow for
composite rates. Mears having acted on such a

representation to its detriment, SHP would not
be allowed to go back on that representation.
The entire agreement clause

SHP argued that the entire agreement
clause prevented Mears from relying on
misrepresentation or estoppel (either by
convention or by representation). The entire
agreement clause was taken from the NEC
standard form and read simply that: This contract
is the entire agreement between the parties.
Both Mr Justice Akenhead at first instance and
the Court of Appeal found that this clause did
not form a complete bar to Mears claim.
The Court of Appeal confirmed that the effect
of an entire agreement clause would depend
on its wording, but that generally speaking
liability for misrepresentations would need to be
expressly excluded. SHP had sought to rely on a
previous Court of Appeal decision in Springwell
Navigation v J P Morgan, however, the Court of
Appeal distinguished between the detailed
clause in Springwell, which expressly prevented
the parties from relying on prior representations,
and the more basic clause in Mears contract.
Lady Justice Gloster noted that:
As the Court of Appeal held in Springwell
the doctrine of freedom of contract allows
parties to agree that, at the time they enter into
the contract, a representation-free state of
affairs exists, even if, in reality, that is not the
case and prior representations have been indeed
made that might ground an estoppel. But here
there was no such express contractual wording
as was present in Springwell preventing the
parties from reliance on prior representations or
estoppels, or deeming the parties to be
contracting on a representation-free basis.
A wide range of entire agreement clauses is

found in practice and the courts will approach
each clause on the basis of the precise words
used by the parties. The rule in relation to
misrepresentation - that such claims must be
expressly excluded - may therefore apply more
broadly, including to claims for estoppel.
Dubai Islamic Bank

The decision in Mears can be contrasted with a
later decision in 2013 in Dubai Islamic Bank v PSI
Energy Holding Co. The contract in that case
contained the following clause:
This Restructuring Agreement (including the
schedules and appendices hereto), the
Fitzwilliam Comelius Agreement and the
Rescheduling Documents whether in existence
at the execution hereof or executed
subsequently represents the entire
understanding and agreement between the
parties with respect to the subject matter hereof
and, except as otherwise expressly provided in
this Restructuring Agreement, can be amended,
supplemented or changed and any provision
hereof can be waived only by written agreement
making specific reference to this Restructuring
Agreement and signed by each party.
The court held that this drafting was effective to
prevent an argument of estoppel by convention.
The clause was described as giving rise to a
contractual estoppel, precluding the
defendants from asserting that something
outside the four corners of the RSA had
contractual effect.
The decision in Dubai Islamic Bank, on one view,
is at odds with the decision of the Court of
Appeal in Mears given that the drafting of the
two clauses in question is similar. Both clauses
35
stated simply that the agreement is the entire

agreement and did not expressly exclude
estoppels or misrepresentations. On the other
hand, the clause in Dubai Islamic Bank referred
to the entire agreement and understanding
between the parties and it may be possible to
reconcile the two decisions on the basis that the
word understanding covers an estoppel by
convention (which is based upon a common
assumption between the parties).
Commonly used contracts

Given the uncertainty over how these clauses
will be approached by the English courts, it is
worth considering how the issue is approached
in some of the more commonly used standard
forms of construction contract. As can be seen
from the table below, the standard forms vary
considerably in their approach to the inclusion
and drafting of entire agreement clauses.
The IChemE Lump Sum Contract (2013 edition)
is the most robust of the standard form clauses
Standard form contract
and refers to representations though it does

not expressly state that it excludes liability for
misrepresentation, nor does it address estoppel.
In the 2012 Court of Appeal decision in Axa Sun
Life Services v Campbell Martin, Lord Justice Rix
took the view that a reference to representation
in an entire agreement clause was not sufficient
to exclude liability for misrepresentation. The
relevant clause in Axa read:
(i) This 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 this agreement shall supersede any
prior promises, agreements, representations,
undertakings or implications whether made
orally or in writing between you and us relating
to the subject matter of this agreement
In response to a submission that the above
clause excluded a claim for misrepresentation,
Lord Justice Rix explained that:
Entire agreement clause
IChemE Lump Sum Contract

(the Red Book), 2013 edition.
The Contract constitutes the entire agreement between the

Purchaser and the Contractor with respect to the performance of
the Works and supersedes any prior negotiation, representation or
agreement relating thereto, whether written or oral, except to the
extent that they are expressly incorporated into the Contract. No
change, alteration or modification to the Contract shall be effective
unless the same shall be in writing and signed by both parties.
Orgalime Turnkey Contract

for Industrial Works, 2003
edition
The Contract constitutes the entire agreement between the parties.

Written or oral communications and statements from the parties
made before or in connection with entering into the Contract are
only a part of the Contract if expressly incorporated therein.
IEE/IMechE MF/2,
1999 edition
None
FIDIC Conditions of
Contract for Construction,
1999 edition
None
NEC
This contract is the entire agreement between the Parties.
Given that the clause as a whole is concerned

with agreements rather than
misrepresentations, and that the word
misrepresentations does not appear in it, this
is not to my mind fertile ground for AXAs
submission. Nevertheless, the word
representations does appear, albeit it will be
seen that it is completely sandwiched between
words of contractual import, namely prior
promises, agreements undertakings or
implications. It will also be observed that part
(iii) does not in terms state either that no
representations have been made, or that no
reliance has been placed on any representations,
or that liability for (mis)representations is
excluded: each of which is a traditional way in
which potential liability for misrepresentations
has been sought to be avoided.
Conclusion
There remains some uncertainty as to the
position in English law at the current time, given
the potentially inconsistent approaches taken by
the courts in Mears and Dubai Islamic Bank. This
applies particularly to the extent to which an
entire agreement clauses need to expressly
exclude estoppel arguments. Nevertheless,
paying head to the Court of Appeal decision in
Mears, particularly when read with the earlier
decision of the Court of Appeal in Axa, parties
would be well advised to specifically address
claims for estoppel and misrepresentation in
their entire agreement clauses if they intend for
such claims to be covered.
Accordingly, while more robust than the other

standard form clauses, even the IChemE clause
may not be sufficient to prevent a claim for
misrepresentation or estoppel.
References: Springwell Navigation v J P Morgan [2010] 2 CLC 705; Axa Sun Life Services v Campbell Martin [2012] Bus LR 203; Mears
Limited v Shoreline Housing Partnership [2013] EWHC 27 (TCC); Shoreline Housing Partnership Ltd v Mears Ltd [2013] EWCA Civ 639; Dubai
Islamic Bank PJSC v PSI Energy Holding Company BSC & Ors [2013] EWHC 3781(Comm).
37
Dispute Resolution Provisions: recent developments
This has been a busy year for FIDIC practitioners.

Amongst growing uncertainty in the wake of
the ruling of the Singaporean Court of Appeal
in CRW Joint Operation v PT Perusahaan Gas
Negara, FIDIC took the unprecedented
(and arguably much needed) step of issuing
a guidance memorandum regarding the
enforcement of binding, but not final, decisions
of dispute adjudication boards (DABs).
The English courts also considered contract
provisions very similar to those involving DABs
under FIDIC contracts, in particular the
requirement that both parties co-operate in
appointing a DAB or its equivalent and a partys
recourse where this has not been possible in
Mi-Space v Lend Lease Construction and in
MAN Enterprise v Al-Waddan Hotel.
The role of DABs and their decisions have
received significant attention from academics
and practitioners alike, due not least to the
recent surge in front end work owing to the
increasing number of large scale projects in
certain regions, chiefly the Middle East and
neighbouring areas. Often the scale and
longevity of such projects means that the
out-dated tendency to wait until a project is
complete before raising any claims (which may
or may not develop into disputes) is simply not
commercially viable. Instead, parties are
increasingly adopting a more proactive approach
to contract management, taking legal advice at
a much earlier stage and tackling issues head on
as they arise. It is perhaps unsurprising then that
the focus on the role of DABs has grown even
more concentrated.
FIDIC Guidance Memorandum,

1 April 2013
The background will be familiar to many. The
current editions of the FIDIC Red, Yellow and
Silver Books (published in 1999) all provide for
disputes, in the first instance, to be referred to a
DAB. If either party is dissatisfied with the DABs
decision, it may give notice of its dissatisfaction
and, if the dispute cannot be settled amicably, it
is then referred to arbitration. In the meantime,
however, the DABs decision is said to be

binding and the parties are required to give
effect to it. It is the enforcement of these
decisions, where notice of dissatisfaction has
been given, that the Guidance Memorandum
seeks to address.
Through its memorandum, FIDIC acknowledged
that a number of arbitral tribunals had found
dispute resolution Clause 20 unclear on the issue
of whether a party could refer the failure of
another party to comply with a DAB decision
that is binding but not final and binding to
arbitration. A DAB decision is only final and
binding where a party fails to notify the other
of its dissatisfaction with the decision within 28
days of it being issued. If a party fails to comply
with a final and binding DAB decision, it is
clear that the other party can refer this failure to
arbitration in order to enforce the decision
(sub-clause 20.7). For DAB decisions that are
binding but not final, the answer is not so easy.
For these decisions there is no equivalent, clearly
expressed clause granting a direct right to
arbitration. It is here that different arbitral
tribunals have adopted polarised positions,
principally based on different interpretations of
the primary arbitration clause, sub-clause 20.6.
This is an important distinction, because where a
decision that is merely binding is referred to
arbitration, the tribunal will review the merits of
the decision. Where a decision is final and
binding on the other hand, the tribunal will
deal with it summarily, so that it need only
trouble itself with the failure to comply and will
not make enquiries into the merits of not
underlying decision.
The point came into sharp focus in CRW Joint
Operation v PT Perusahaan Gas Negara
(Persero) TBK where CRW had been engaged
under a FIDIC Red Book form of contract in
relation to a pipeline and optical fibre cable
project in Indonesia. A DAB was appointed to
deal with various disputes that had arisen and
decided, amongst other things, that CRW were
owed around USD 18m. PT issued a notice of
dissatisfaction and the DABs decision was

therefore binding but not final and binding.
CRW sought to enforce the DABs decision
summarily by referring PTs non-payment to
arbitration. The arbitral tribunal made a
summary award as sought, refusing to hear any
argument concerning the merits of the dispute.
The intention of course is that parties have

issues dealt with quickly by DABs during a
project, in the knowledge that the DAB decision
can be enforced (at least for the time being).
Parties can then get on with the matter at hand,
and deal with a better prepared arbitration in
due course if required.
When the matter was referred to the

Singaporean Court of Appeal, notwithstanding
the fact that the tribunals terms of reference
seemed to empower it to make the summary
finding it had reached, it was held that the
tribunal had by refusing to go into the merits of
the dispute operated without jurisdiction and its
award was therefore set aside.
To give paying parties some comfort that the

decision can ultimately be reversed on an
analysis of its merits, FIDIC also recommends
that a new Sub-Clause 20.4 is inserted
specifically entitling the DAB to order the
receiving party to provide appropriate security.
In response, FIDIC has issued its Guidance

Memorandum recommending the following
change to Clause 20:
In the event that a Party fails to comply with
any decision of the DAB, whether binding or
final and binding, 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] for summary or
other expedited relief, as may be appropriate.
Sub-Clause 20.4 [Obtaining Dispute
Adjudication Boards Decision] and Sub-Clause
20.5 [Amicable Settlement] shall not apply to
this reference.
As such, FIDICs position is that decisions that
are binding as well as those that are final
and binding should be dealt with summarily by
a tribunal. However, where a notice of
dissatisfaction is issued, and the underlying
dispute is ultimately arbitrated, the tribunal
would not be prevented from opening up the
DAB decision.
It is anticipated that the guidance will be

incorporated into new versions of the FIDIC
contracts when then are next published. Until
then, it is open for parties to agree to use the
new wording but there is no requirement to
do so.
Mi-Space v Lend Lease

Construction
Mi-Space v Lend Lease Construction concerned a
contract for the construction of residential units
for service personnel and families for the
Secretary of State for Defence. Lend Lease
subcontracted the majority of the works to
Mi-Space. The sub-contract contained a dispute
resolution provision requiring reference to a
Disputes Review Board (DRB) as one of five
steps. If the DRB failed to resolve the dispute,
the parties would proceed to mediate and then
arbitrate.
In this case, however, the parties had failed to
appoint a DRB. Although it was not clear why
the parties had not been able to proceed to
39
appoint the DRB, the court gave some useful

guidance on the circumstances in which the
court will intervene. In particular, in the event
that parties fail to appoint a DRB a party could
either make an application for specific
performance requiring the other party to
co-operate or argue that the contractual
machinery had broken down irretrievably such
that the parties could abandon the contractual
dispute resolution process and proceed to court.
them (and which the parties may well have been

trying to avoid by agreeing to a contractual
dispute resolution procedure).
The court observed that the sub-contract in this

case required the parties to exercise best
endeavours to resolve any dispute or
difference in accordance with one of the
dispute resolution procedures. Furthermore,
the sub-contract included a mechanism for the
appointment of the DRB. As such, it would be
difficult to envisage circumstances in which the
dispute resolution process could be abandoned
and the dispute be instead resolved by the court.
As the court stated, [t]here is machinery still
available for the DRB to be appointed and
appropriate steps could be taken to secure the
appointment if one or other party dragged
its feet.
MAN Enterprise v Al-Waddan

Hotel
It is clear from the judgment that the court

placed considerable weight on the specific
wording of the Sub-contract and the actions of
the parties. In doing so, the court also suggested
that if there had been any suggestion that the
parties had mutually abandoned the contractual
process or any argument based on waiver or
estoppel, the court may well have considered
itself entitled to intervene. These comments,
although strictly obiter (and applicable only in
England and Wales), are potentially concerning
to companies operating internationally in
countries whose court systems are unfamiliar to
Based on the guidance in Mi-Space, parties

should be careful to clearly state their intentions
within the contract and to properly engage in
the contractual dispute resolution process so as
to avoid any suggestion of it being displaced and
permitting the intervention of a local court.
Earlier in 2013, the English TCC was also called

upon to appoint an arbitral tribunal in MAN
Enterprise v Al-Waddan Hotel. This case related
to the refurbishment of a hotel in Tripoli, Libya
and is notable for being one of only a limited
number of English cases dealing with the
FIDIC terms.
The FIDIC contract used by the parties specified
that in the event of a dispute an engineers
decision was to be obtained, followed by
settlement negotiations and, if necessary,
arbitration. A dispute arose but it transpired
that the engineers appointment had come
to an end and despite an exchange of
correspondence, the parties could not make
any further progress. Man therefore applied
to the TCC to appoint an arbitrator.
Despite a suggestion by Al-Waddan that the
underlying contract had been replaced entirely,
the court was satisfied that there was an
arguable case that a valid arbitration agreement
existed. As such, any challenge as to the validity
of the underlying contract was a matter for the
arbitrator and the court proceeded to make
the appointment.
References: FIDIC Guidance Memorandum to Users of the 1999 Conditions of Contract dated 1st April 2013; CRW Joint Operation v PT
Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33; Mi-Space (UK) Limited v Lend Lease Construction (EMEA) Limited [2013] EWHC 2001
(TCC); MAN Enterprise Sal v Al-Waddan Hotel Limited [2013] EWHC 2356 (TCC).
41
Temporary Disconformity: a cause for action?
The TCCs decision last year in Hunt v Optima provides a useful reminder of
the temporary disconformity principle and the importance from an
Owners point of view of having clear rights of recourse against a Contractor
for defects arising during the course of the works. We consider the issue in
detail below.
What is temporary disconformity?
The term temporary disconformity is used to
describe the argument that before completion
of the work a failure by the contractor to carry
out work in accordance with the contract
(for example non-compliance with the
specification) is not a breach of contract but
only a temporary disconformity. It only
becomes a breach of contract if the breach
is not corrected before completion.
Under English law there are two distinct theories
relating to temporary disconformity, both of
which seek to clarify when a cause of action for
breach of contract arises:
The first principle stems from a dissenting
judgment given by Lord Diplock in the House
of Lords decision in P&M Kaye v Hosier &
Dickinson where he stated: Provided that
the Contractor puts it right timeously I do
not think that the parties intended that any
temporary disconformity should of itself
amount to a breach of contract by the
contractor.
The competing principle is expressed as
follows in one English construction law
text: on grounds of both principle and
practicality, a Contractor will be in immediate
breach of contract whenever their work fails
to comply with the contract descriptions or
requirements. It is often said therefore
that there is a basic dual obligation to both
carry out and complete the works in all
respects in accordance with the contractual
requirements and descriptions.
The courts in England have sought to side step
the approach outlined by Lord Diplock,
favouring a dual obligation approach, although
primary importance is given to the contract

terms agreed between the parties. The decision
in Hunt v Optima reinforces this approach.
Hunt v Optima
The case concerned the development of a new
four storey block of residential flats by Optima
(Cambridge) Limited (Optima). Half of the
flats were sold to leaseholders who included
some of the 8 Claimants and Optima retained
the remaining flats to let.
A number of defects and deficiencies within the
flats and common areas emerged which led to a
claim against Optima being issued by the
Claimants. One of the claims against Optima
was in relation to breach of clause 3.1 of the
Sale Agreement which stated that Optima shall:
cause the Premises to be completed in a good
and workmanlike matter and with suitable
materials pursuant to any Planning Permissions
granted in respect of the Building so that the
Premises shall be fit for occupation on
completion and the Building will comply with all
Planning Permissions and Building Regulations as
soon as may be reasonably practicable
Optima argued that the cause of action (i.e. the
breach of clause 3.1) alleged by two of the
Claimants was statute barred by the English
Limitation Act. Of particular note are Mr Justice
Akenheads comments in the judgment
regarding when a cause of action for breach
crystallises and whether breach of the
contractual term gives rise to two causes of
actions at different times. This discussion is
relevant to the issues commonly raised in
relation to the temporary disconformity principle
concerning when defective work during the

course of construction contract becomes an
actionable breach of contract.
In this case, Mr Justice Akenhead accepted the
view of Optimas Counsel - that under clause
3.1, the Claimants had two causes of action:
1. if their particular flat was not constructed
properly; and
2. if the Building as a whole did not comply
with the Building Regulations.
The next issue to determine was when any cause
of action for breach of this clause crystallised.
The norm is that crystallisation occurs on the
date of the breach of the clause. Optima argued
that crystallisation, i.e. the date of the breach,
could occur no later than the date when the
works have been completed to enable a
purchaser to enter and occupy the flat in
question. However the Claimants argued that
the relevant date of the breach was when the
Building as a whole was completed rather than
when each flat was completed.
In considering his issue, Mr Justice Akenhead
referred to Tameside Metropolitan Borough
Council v Barlow Securities Group Services which
concerned similar limitation issues in relation to
defects in a large group of houses built by the
contractor, Barlow. In that case, the JCT form of
building contract obliged the contractor to:
carry out and complete the Works in
compliance [with the Contract Documents] using
materials and workmanship of the quality and
standards therein specified
In Tameside, as the work progressed (i.e. houses
completed), a series of interim certificates of
practical completion were issued. In order to

determine whether the defects claims were
statute barred the court was required to
determine whether only a single cause of action
arose upon completion of the whole works or
whether separate causes of action also arose as
each individual house was completed. His
Honour Judge Gilliland QC decided that there
were separate causes of action as follows:
The position in relation to dual obligations to
carry out the Works in accordance with the
contract documents and complete the Works in
accordance with the contract is not in my
judgement different in principle. There is no
reason in law why the parties cannot enter
into an agreement whereby the same acts
or omissions may not give rise to breaches
at different points in time of two distinct
obligations and if they do so, then in principle
there will be two different causes of action
for the purposes of the the Limitation Act.
Applying this to Hunt v Optima, Mr Justice
Akenhead confirmed:
a cause of action broadly arises when the
relevant facts or factual situation have
arisen such that they first could be sued
upon; and
where the cause of action is for breach of
contract, the court needs to analyse the term
or terms of the contract said to have been
breached to determine when a cause of
action can first be said to arise. The court
also needs to determine whether there are
actually or potentially two causes of action
which could arise in connection with one
contractual term or in relation to the same
facts but at different times.
43
Accordingly under clause 3.1, a cause of action

against Optima for a defect (such as the use of
inappropriate materials) could arise when a flat
was sold and handed over to a leaseholder.
However when the building as a whole was
completed, the leaseholder had a further cause
of action against Optima because the defects
remained and Optima was again in breach of
contract for not completing the building in
accordance with the Building Regulations/
Planning Permissions as required under clause 3.1.
Hunt v Optima therefore reinforces the dual
obligation approach taken by the courts in
relation to this issue and reminds us that the
express terms of the contract will come under
close scrutiny by the courts in assessing whether
the term or terms of the contract are said to
have been breached to determine when a cause
of action has arisen.
Dealing with defects during the

course of the works
The above discussion should be borne in mind
when considering temporary disconformity and
the rights of an Owner to oblige the Contractor
to make good defects during the course of the
works (i.e. prior to completion). As one English
construction law text states:
if defective work or materials are detected prior
to completion and handover, the Employer or
Certifier, to avoid any doubts should in any
sophisticated contract have express powers,
backed by necessary financial sanctions or other
remedies, to secure their removal or at the very
least carrying out of remedial works
So how far do current contracts go in providing
the Employer with a remedy to deal with
defective work? We comment on some of the
more common standard forms in the table below.
FIDIC (Red Book) Clause
Obligation
Commentary
Clause 4.1
Contractor is obliged to ...design,

execute and complete the Works in
accordance with the Contract and the
Engineers instructions, and shall remedy
any defects in the Works.
This clause imposes a dual obligation on the

Contractor, i.e. to carry out and complete
There is also an express obligation to remedy
defects during the course of the works which
is useful to the Owner/Employer.
Clause 7.5
After any examination, inspection,

measurement or testing, the Engineer is
entitled to reject plant, materials or
workmanship where it is found to be
defective or not in accordance with the
contract.
This clause then requires the Contractor to

promptly make good the defect and to
ensure that the rejected item complies with
the contract. Any re-testing is also at the
Contractors cost.
Clause 7.6 (b)
Permits the Engineer to instruct the

Contractor to remove and re-execute any
other work not in accordance with the
contract within a specified time.
This reinforces the principle under clause

7.5 above.
The Engineer can instruct the Contractor to

make good a failure where the Contractor
has failed to carry out an obligation under
the contract within a specified reasonable
time.
This clause is a useful catch all for the Owner/

Employer where the Contractor has failed to
carry out his obligations under the contract
(of course this is only useful to the extent that
the obligations under the contact are
sufficient). However, because it is located in
the termination clause, there is an argument
that it only applies to serious breaches.
Clause 15.1
NEC3 Contract
Clause 20.1
Clause 40
The Contractor Provides the Works in

accordance with the Works Information.
In particular under clause 40.4 where the

Contractor is obliged to correct defects
following a test or inspection.
This wording may not be sufficient to permit a dual

obligation to arise. Only one word is used
provides and it would seem therefore that this
claims either provides for a breach during the course
of the works or upon completion, but not both.
This clause is similar to clause 7.5 under FIDIC which

requires the Contractor to make good the defect
prior to completion. Any re-testing is also at the
contractors cost.
JCT (traditional)
Clause 2.1
Clauses 3.18
Contractor is obliged to carry out and

complete the works.and in compliance
with the Contract Documents and other
Statutory Requirements.
(i)Work, goods or materials which are not

in accordance with the contract can be
instructed to be removed from site, (ii) if
the defective works are allowed to remain
a deduction is to be made from the
contract sum, (iii) an instruction for a
variation may be issued if reasonably
necessary in consequence of (i) or (ii)
without entitlement to time and money,
or (iv) instructions may be issued to open
up the works.
This clause imposes the dual obligation on the

Contractor, i.e. to carry out and complete the works
and (as noted in Hunt v Optima) in accordance with
relevant statutory obligations which would capture
building regulations etc.
This clause is again similar to clause 7.5 under FIDIC

but provides a more detailed regime.
Conclusion
Hunt v Optima emphasises the need for Owners
to make check that their contracts allow for a
dual obligation approach to defective works.
Owners would also be well advised to include
robust provisions giving powers for the
remediation of defects during the course of the

works, so as to avoid theoretical debates about
whether or not the Contractor is in breach of
contract prior to completion of the works.
References: Hudsons Building and Engineering Contracts (Twelfth Edition), page 720; P&M Kaye Limited v Hosier & Dickinson Limited
[1972] 1 WLR 146; Tameside Metropolitan Borough Council v Barlow Securities Group Services Limited (1995) 75 ConLR 112, [2001] EWCA
Civ 1; Hunt & Ors v Optima (Cambridge) Limited & Ors [2013] EWCH 681 (TCC).
45
Mexico City
Aberdeen
Edinburgh
Glasgow
Amsterdam
London Utrecht
Antwerp
Bristol
Berlin
Leipzig
Duesseldorf
Cologne
Brussels
Pra
Frankfurt
Luxembourg
Stuttgart Vie
Paris
Munich
Strasbourg
Zurich
Geneva
Ljubljana
Lyon
Milan
Barcelona
Rio de Janeiro
Madrid
Lisbon
Seville
Algiers
Casablanca
Hamburg
Rome
Moscow
rsaw
Beijing
Kyiv
atislava
Budapest
eb
Belgrade
Sarajevo
Shanghai
Bucharest
Sofia
Tirana
Moscow
Istanbul
Warsaw
Kyiv
ague
enna
Bratislava
Budapest
Zagreb
Belgrade
Sarajevo
Bucharest
Dubai
Sofia
Tirana
Istanbul
Muscat
47
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Termination for delay under express contractual rights

Termination for delay without express contractual rights

Termination for convenience

On-demand securities: compliance with formalities and dealing with proceeds

On demand securities: erosion of the English law position

Time bar clauses: return of the strict interpretation?

Caps on liability and performance securities

Waiver and estoppel: overcoming express contractual terms

Dispute Resolution Provisions: recent developments

Temporary disconformity: a cause for action?

2 | English construction law developments 2013: An international perspective

Termination for delay under express contractual rights

Terminating a contract is a risky business and a number of recent cases

1. [2013] EWHC 2916 (TCC)

4 | English construction law developments 2013: An international perspective

SCL/PLL argued that SABICs termination was

Implied term to proceed with

Due diligence and Reasonable

unviable. Works re-commenced in January 2010

3. [2013] EWHC 932 (TCC)

arbitrator concluded and the court agreed that

Regularly and Diligently/Cap on

4. [2013] EWHC 4030(TCC)

6 | English construction law developments 2013: An international perspective

agreements were reached between the parties.

and efficiently with successful progress towards

(184 days delay) and it was responsible for the

Termination for delay without express contractual rights

Two recent Court of Appeal decisions have highlighted the difficulties in

In considering whether a breach of contract

8 | English construction law developments 2013: An international perspective

generally be said that:

this test is to satisfy in the context of large

or population forecasts and will be intended to

reasonable time was a fundamental

With the development of innominate

10 | English construction law developments 2013: An international perspective

Termination for convenience

A recent case in the Technology and Construction Court has considered

Termination for Convenience

value of work carried out, the cost of Plant and

12 | English construction law developments 2013: An international perspective

shall work together and individually in the spirit

terminate under Clause 13.3 was constrained by

14 | English construction law developments 2013: An international perspective

the judgment, but it is likely that if the

for convenience cases. For example, in Looney v

In fact, both the decision in South Anglia and

In the South Anglia case the Contractor argued

In the South Anglia case the court also

was fair and reasonable and/or done in good

Other possible arguments

reasons could not continue with the intended

16 | English construction law developments 2013: An international perspective

On demand securities: compliance with formalities and

On-demand securities such as on-demand guarantees and performance

Compliance with formalities: Sea-Cargo Skips v State Bank of India

authenticated signature of the person making