Scarborough Fair?

Scarborough HospitalMy eye was caught today by the decision just a month ago of the Privy Council in NH International (Caribbean) Limited v National Insurance Property Development Company Limited (Trinidad and Tobago)[1] . The case arose out of Scarborough Hospital in Tobago.

The first part of the Appeal was about the provision at clause 2.4 of the Red Book whereby Employers can be required to provide reasonable evidence of financial arrangements having been made and maintained which will enable it to pay the contract price. In this case, the finding was that the Employer had not done that. And so the Contractor was entitled to determine. The case is of course important to FIDIC projects; probably, FIDIC contractors do not make as much use of this clause as they could do if they wanted to.

Rather, my attention was attracted by the second part of the Appeal, which was to do with the notice provision at clause 2.5 of the Red Book, dealing with claims brought by the Employer against the Contractor. The clause required the Employer to give notice and particulars to the Contractor as soon as practicable, specifying the clause relied on or other basis of claim and substantiation of the amount claimed. The mechanism was for the Engineer to assess the amount of the entitlement, and to include it as a deduction in certification. The final part of the clause limited the Employer’s right to set off to that contractual mechanism. The arbitrator, Robert Gaitskell (my colleague at Keating Chambers and of course a highly experienced construction lawyer) found that clause 2.5 did not bar the owner’s counterclaims, because he found that the words of clause 2.5 were not sufficiently clear to exclude common law rights of set off. It has long been the law – since Gilbert-Ash v Modern Engineering – that clear words are required to exclude those common law rights. In the High Court of Trinidad and Tobago, Rajnauth-Lee J, and then all three judges in the Court of Appeal, reached the same conclusion. The Privy Council, however, disagreed, finding that the clause was effective to bar the employer from setting off its cross claims.

Now, of course it is very rare for cases to reach the Privy Council; in this case, it amounted to “Round 4” of the legal fight about this particular issue. If the case had rested on the result of any of the previous three rounds, the bar would not have been effective. As cases go through round after round of appeal, the decisions get more and more authoritative, but they do not necessarily get any more logical. There are a couple of strange things about the Privy Council’s judgment in this case.

First, the reasoning of the Privy Council appears in part to have been based upon the certification mechanism, the Privy Council suggesting that if late claims were to be allowed, there would not be any method by which they could be determined. This is a surprising approach; in the great majority of cases, the courts have no difficulty themselves in reaching a conclusion on whether cross claims should be allowed, and if so in what amount.

Secondly, the impact of the bar was however somewhat ameliorated by the Pricy Council’s decision that the clause did not bar claims that could be “characterised as abatement claims”[2]. Now, the distinction between an abatement (sometimes defined as a common law set off) and other sorts of set-off is far from clear. Thus for example where goods are defective, the buyer is entitled to an abatement of the price in respect of those defects, but the buyer is equally entitled to a set-off based on the damage that he suffers by reason of a breach of warranty of quality. So in that case, the buyer can choose which remedy to rely on. But in other cases (where, for example, a contractor’s work is worth less than it might otherwise be because of tardy performance), the distinction between the two is murky to say the least. And so, by sending the case back to the arbitrator for him to decide which of the claims could be “characterised as abatement claims” is hardly going to add to clarity as to precisely which sorts of claims this clause, or others like it, is effective to bar. At the very least, it is hard to see that resulting confusion is indicative of the “clear words” required by Gilbert-Ash.

The Privy Council’s logic is presumably based on the point that a claim to an abatement is not a “claim to payment” and thus outside the scope of clause 2.5. But if that is the basis of the logic, it is hard to follow through, because precisely the same logic would apply to any other set off.

Probably, the real basis of the Privy Council’s decision is more tribal. Some judges are relatively quick to relieve the parties of the penalty that often attaches to the failure to give a contractual notice; other judges take a more “black letter” approach. This decision appears to represent Lord Neuberger applying some stick to encourage the second approach.

I have been spending quite of time recently looking at this issue for the purpose of my book on Extra-Contractual Recoveries (which would be proceeding rather more rapidly if I was not distracted by real work). It seems to me that the question of when notice provisions are treated as effective to bar otherwise valid claims is not something that is susceptible of satisfactory analysis on ordinary principles. A number of features emerge:

  • The notion of any genuine party autonomy in this area is a complete myth. Particularly in the case of bespoke contracts, but also in the case of many standard forms, the impact of notice provisions is rarely the result of any genuine agreement at all, and the parties rarely have any adequate understanding of what would or would not be required by a literal interpretation of the contractual notice provisions, and the subsequent disputes about the issue are about as connected to the original bargain as any other trial by champion;
  • The treatment of these clauses varies greatly from tribunal to tribunal. Generally speaking, tribunals with the greatest understanding of the construction process are the tribunals that are most likely to allow notice provisions to be circumvented, and tribunals with the least understanding of the construction process other most likely to apply them rigidly;
  • A feature which seems to be common to all tribunals, however, is their willingness to be influenced by the practical consideration of whether it was really possible for a party to give the notice required by contractual provision. The more onerous the contractual provision, the more likely it is that the tribunal will allow it to be circumvented. It is difficult to find any conventional legal basis for this analysis. The law of contract (unlike the law of tort) is supposed to be based upon the more absolute standard of what the parties have actually agreed, and there is certainly no general principle that a party should be excused from performance of a contractual obligation merely because that contractual obligation is difficult or inconvenient. But time after time, the cases suggest that adjudicators, arbitrators and courts do allow precisely this consideration to impact their approach.

The relevant passage from the Privy Council’s judgment is as follows:

The second issue: NIPDEC’s set-offs and cross-claims

  1. As explained above, the Arbitrator’s third award addressed the financial consequences of his finding that the Agreement had been validly determined by NHIC in accordance with clause 16.2. In the third award, having found what sums were owing to NHIC from NIPDEC, the Arbitrator went on to consider “NIPDEC’s counterclaims”, in respect of which he rejected NHIC’s contention that clause 2.5 barred all or some of the counterclaims, because “clear words are required to exclude common law rights of set-off and/or abatement of legitimate cross-claims” and (by implication) the words of clause 2.5 were not clear enough. That decision was upheld by Jones J and by the Court of Appeal, in a judgment given by Mendoza JA with which Jamadar and Bereaux JJA agreed.
  2. In his clearly reasoned judgment, Mendoza JA stated that, while the closing part of clause 2.5 “prohibits the employer from setting off any sum against any amount certified in a Payment Certificate”, it “does not prevent the employer from exercising his right of set-off in any other way”, and in particular “against amounts that are not certified”.
  3. The Board takes a different view. In agreement with the attractively argued submissions of Mr Alvin Fitzpatrick SC, it is hard to see how the words of clause 2.5 could be clearer. Its purpose is to ensure that claims which an employer wishes to raise, whether or not they are intended to be relied on as set-offs or cross-claims, should not be allowed unless they have been the subject of a notice, which must have been given “as soon as practicable”. If the Employer could rely on claims which were first notified well after that, it is hard to see what the point of the first two parts of clause 2.5 was meant to be. Further, if an Employer’s claim is allowed to be made late, there would not appear to be any method by which it could be determined, as the Engineer’s function is linked to the particulars, which in turn must be contained in a notice, which in turn has to be served “as soon as practicable”.
  4. Perhaps most crucially, it appears to the Board that the Court of Appeal’s analysis overlooks the fact that, although the closing part of clause 2.5 limits the right of an Employer in relation to raising a claim by way of set-off against the amount specified in a Payment Certificate, the final words are “or to otherwise claim against the Contractor, in accordance with this sub-clause”. It is very hard to see a satisfactory answer to the contention that the natural effect of the closing part of clause of 2.5 is that, in order to be valid, any claim by an Employer must comply with the first two parts of the clause, and that this extends to, but, in the light of the word “otherwise”, is not limited to, set-offs and cross-claims.
  5. More generally, it seems to the Board that the structure of clause 2.5 is such that it applies to any claims which the Employer wishes to raise. First, “any payment under any clause of these Conditions or otherwise in connection with the Contract” are words of very wide scope indeed. Secondly, the clause makes it clear that, if the Employer wishes to raise such a claim, it must do so promptly and in a particularised form: that seems to follow from the linking of the Engineer’s role to the notice and particulars. Thirdly, the purpose of the final part of the clause is to emphasise that, where the Employer has failed to raise a claim as required by the earlier part of the clause, the back door of set-off or cross-claims is as firmly shut to it as the front door of an originating claim.
  6. The reasoning of Hobhouse LJ in Mellowes Archital Ltd v Bell Products Ltd (1997) 58 Con LR 22, 25-30, supports this conclusion. It also demonstrates that a provision such as clause 2.5 does not preclude the Employer from raising an abatement argument – eg that the work for which the contractor is seeking a payment was so poorly carried out that it does not justify any payment, or that it was defectively carried out so that it is worth significantly less than the contractor is claiming.
  7. In the light of the unchallenged part of the Court of Appeal’s decision, it is common ground that the third award must be remitted to the Arbitrator. In the light of the Board’s decision as to the effect of clause 2.5, it will have to be remitted on the basis that he will have to reconsider the sums which he allowed NIPDEC to raise by way of set-off or cross claims. Any of those sums which (i) were not the subject of appropriate notification complying with the first two parts of clause 2.5 and (ii) cannot be characterised as abatement claims as opposed to set-offs or cross-claims, must be disallowed. It is for the Arbitrator to decide which sums are to be allowed in the light of this conclusion, and to decide how he should proceed to determine that issue.

[1] [2015] UKPC 37.

[2] See paragraph 42 of the judgment.

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