NH International (Caribbean) Limited (Appellant) v. National Insurance Property Development Company Limited (Respondent) (Trinidad and Tobago)

Readers may recall that in February 2015 we published an article on the decision of the High Court of England & Wales in Obrascon Huarte Lain SA v. Attorney General for Gibraltar, and commented that court decisions interpreting the FIDIC terms of contract are not often seen, and are generally to be welcomed when they are seen.  As luck would have it, we now have another such judicial decision, namely that of the Judicial Committee of Privy Council in London on two appeals from the Court of Appeal of the Republic of Trinidad and Tobago.  The judgment also provides useful support to the arbitration process.

In NH International (Caribbean) Limited (Appellant) v. National Insurance Property Development Company Limited (Respondent), judgment 6 August 2015, the Privy Council was called upon to decide whether a contractor was entitled to terminate its employment pursuant to the provisions of a contract based on the FIDIC Red Book.  The lead judgment was that of Lord Neuberger.

Background

The background to the matter can be stated briefly.  NH International (Caribbean) Limited (NHIC) as Contractor and National Insurance Property Development Company Limited (NIPDEC) as Employer, entered into an agreement (Agreement) based on the FIDIC Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer, first edition 1999 (generally known as the "Red Book") for the construction of a hospital in Trinidad and Tobago.

Differences arose between the parties, and the differences were referred to arbitration with the arbitrator (the eminent Dr Robert Gaitskell QC) subsequently delivering five partial awards.  The two appeals from the Court of Appeal that were heard by the Privy Council arise out of two of the awards.

The first appeal

The operation of clause 2.4 (and accordingly its interaction with clauses 14 and 16) were central to the first appeal.

Under clause 2.4 of the Agreement, the Contractor may request that the Employer submits reasonable evidence, within 28 days, which indicates that financial arrangements have been made and are being maintained which will enable the Employer to pay the Contract Price.

Should the Employer fail to provide the required information timeously, a suspension ground arises in terms of clause 16.1 the Agreement:

"...[if] the Employer fails to comply with Sub-Clause 2.4 [Employer's Financial Arrangements]...the Contractor may after giving not less than 21 days' notice to the Employer, suspend work (or reduce the rate of work) unless and until the Contractor has received...reasonable evidence...as described in the notice."

Further to this, should the Contractor not receive the reasonable evidence within 42 days after giving notice under sub-clause 16.1, the Contractor shall be entitled to terminate the Agreement under clause 16.2.

The question on which this first point turned was neatly summarised at paragraph 17 of the Privy Council's advice, namely, "whether ... NIPDEC had given 'reasonable evidence' that financial arrangements have been made and are being maintained which will enable NIPDEC to pay the Contract Price ... in accordance with clause 14 within clause 2.4"'. 

And then, in light of the evidence provided, whether NHIC was justified in determining the Agreement by relying on clause 16.1 and 16.2.

The arbitrator had examined the exchange of correspondence between the parties to determine if what was exchanged could constitute "reasonable evidence". A brief overview of the exchange of correspondence disclosed that on 3 September 2004 NHIC, under clause 2.4, issued a request to NIPDEC for reasonable evidence to be presented. On 28 April 2005 NHIC sent a further request under clause 2.4 to which a response was sent, and an exchange of correspondence took place which culminated in a letter dated 5 July which said in part that, "the Ministry advise without prejudice that funds are available in [this] sum to meet the estimated final cost to completion".

By letter dated 8 July 2005 NHIC expressed concern at the use of the phrase, "without prejudice" and enquired if Cabinet approval had been obtained for payment of sums under the Agreement.  There was no response to this request, and NHIC suspended work.

Over a year later a letter was received from the (new) Permeant Secretary of the Ministry of Health which indicated the Government's commitment to the project, and included a current estimate for the work (some $224,129,801.99); the funds for this work were said to be available from the consolidated fund.  The letter went on to state that, "the Government stands fully behind the project...and will meet the contractual financial requirements for completion of the Project".

NHIC responded with a further enquiry, to which a response was received on 3 November 2006, and NHIC thereupon terminated on 3 November 2006.

Did the evidence that had been provided meet the contractual requirement in clause 2.4 of the Agreement that 'reasonable evidence' be provided? The Privy Council made reference to the Arbitrator's decision (which the arbitrator made after hearing and reading evidence and argument), and held:

"The Arbitrator then turned to the wording of clause 2.4, and concluded that it required more than showing that "the employer is able to pay", let alone that it was enthusiastic about the project. He said that what was required was evidence of "positive steps" on the part of the employer which showed that "financial arrangements" had been made to pay sums due under the Agreement" (emphasis added).

The Privy Council was critical that the court below in taking over the fact finding role of the arbitrator, and went on to provide guidance indicating that the courts should respect an arbitrator's findings on fact and should not readily step in and interfere.  However, different considerations arise when it comes to findings on law:

"[29] Where parties choose to resolve their disputes through the medium of arbitration, it has long been well established that the courts should respect their choice and properly recognise the arbitrator's findings of fact, assessment of evidence and formations of judgment should be respected, unless they can be shown to be unsupportable. In particular, the mere fact that a judge takes a different view, even one that is strongly held, from the arbitrator on such an issue is simply no basis for setting aside or varying the award. Of course, different considerations apply when it comes to issues of law, where courts are often more ready, in some jurisdictions much more ready, to step in." (emphasis added)

The appeal by NHIC was thus allowed by the Privy Council, and accordingly upheld the arbitrator's award that NHIC's suspension pursuant to clause 16.1 and termination pursuant to clause 16.2 were justified and valid.

The second appeal

The second appeal turned on clause 2.5 of the Agreement which consists of 4 paragraphs. It reads (in summary):

(i) If the Employer considers himself to be entitled to any payment under any Clause of these conditions or otherwise in connection with the Contract...the Employer or the Engineer shall give notice and particulars to the Contractor...

(ii) The notice shall be given as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim...

(iii) The particulars shall specify the Clause or other basis of the claim and shall include substantiation of the amount...to which the Employer considers himself to be entitled in connection with the Contract. The Engineer shall then proceed...to agree or determine (i) the amount (if any) which the Employer is entitled to be paid by the Contractor...

(iv) This amount may be included as a deduction in the Contract Price and Payment Certificates. The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor in accordance with this Sub-Clause.

The Privy Council provided helpful guidance on the interpretation of clause 2.5.  First, it confirmed that for any claim by the Employer to be valid, the first two paragraphs of clause 2.5, namely the notification procedures need to be adhered to and satisfied, and that need for compliance includes, but is not limited to, matters of set-off and cross-claims.

Secondly, due to the structure of clause 2.5, and in particular the use of wide wording, "any payment under any clause of these Conditions or otherwise in connection with the Contract", clause 2.5 is applicable to all claims that the Employer wishes to advance.

It was held that the structure of the clause also particularises the format and manner in which the claim must be raised, and emphasises the time frame - the claim must be promptly raised.

Finally, the Privy Council concluded by holding that the final paragraph of clause 2.5 prevents the Employer seeking to rely upon set offs and cross claims should the Employer have failed to raise a claim in the manner stipulated by clause 2.5. Therefore, for any claim to be successful, the requirements in the first two paragraphs of the clause need to be satisfied, and are in effect a conditions precedent to a successful claim.  As the Privy Council held:

"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."

However, despite clause 2.5, an abatement argument can still be raised by the Employer, and a dissatisfied Employer is not precluded from relying on an abatement to the Contract Price should the Contract Works fall short of the prescribed contractual standards.  (Abatement is, in brief, the diminution in value of the work undertaken due to, for example, poor work or a defect.)

Comment

The judgment of the Privy Council is most welcome.

It provides helpful guidance as to what should be considered as 'reasonable evidence' in light of clause 2.4, whilst creating a gentle reminder that the courts must be hesitant to overstep into the domain of the fact finding mission of an arbitrator and, unless a factual finding is largely unsubstantiated, must limit itself to questions of law.

The detailed commentary as to the proper operation of clause 2.5 provides clarity with regards to the types of employer claims (namely all) that are susceptible to compliance with this clause, except under a justified abatement for poorly executed work.

Finally, the comments concerning findings by an arbitral tribunal on matters of fact and the role of the courts should serve as a useful reminder to those contemplating agreeing to arbitration that the process involves a degree of finality which may surprise them, and also for the courts when looking at an arbitration award that comes before them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.