[2016] EWHC 607 (TCC) Date:18 March 2016

Before : THE HON. MRS JUSTICE CARR DBE

This case concerns the call on the performance bond, the application of liquidated damages and the interplay of clauses in the FIDIC contract 1999.

Cases quoted in reference: 

• Homburg v Agrosin (The Starsin) [2003] UKHL 12 at paragraph 11
• Mottram Consultants Ltd v Bernard Sunley & Sons [1975] 2 Lloyd’s Rep 197 at 209

Background:

Beckton and Murphy entered into a contract based on the FIDIC Yellow book 1999, in which Murphy was contracted to carry out the design, procurement, construction, start-up, testing and commissioning of a Combined Heat and Intelligent Power Plant at Beckton, East London. 

The works being more than 400 days late, Beckton gave Murphy a 23 days written notice of its intention to make a demand under the Bond in respect of its claim for liquidated damages in the sum of £8,274,000.

Claims

Murphy (the Claimant), seeks:

1. A declaratory relief preventing Beckton (the Defendant) from making a demand on the Bond relating to the LDs, until there has been agreement or Determination by the Engineer and notice according to the Clause 4.2.5. 
2. An injunctive relief against Becton preventing it from making a demand on the Bond relating to the LDs, until there has been agreement or Determination by the Engineer . Question: Is Beckton entitled to call on the Bond?  

Issues: 

There are, according to Mrs Justice Carr, 3 questions to be answered in this hearing:

1. Is Beckton entitled to recover delay damages under Sub-Clause 8.7 without agreement or determination by the Engineer of Beckton’s entitlement to liquidated damages under Sub-Clauses 2.5 and 3.5?
2. If Murphy succeeds on Issue 1, would a call by Beckton on the Bond be fraudulent?
3. If so, should injunctive relief be granted as sought by Murphy

Context: 

The contract:

Sub-Clause 4.2 is substantially different to the equivalent clause in the FIDIC Yellow Book, in which the contractor’s failure has to be a failure to pay an amount due “as either agreed by the Contractor or determined under Sub-Clause 2.5”.

Here all reference to agreement or determination under Sub-Clause 2.5 was removed.

The facts:

• Murphy failed to achieve the ROC Accreditation Milestone and Taking Over Date as required by Sub- Clause 8.2 of the Contract; Murphy is in breach under Sub-Clause 8.2 
• Murphy’s claims for extensions have not been granted by the Engineer
• Murphy contends it has suffered significant delays on the project and requested an Extension of Time, which was refused by the Engineer and this refusal was contested by Murphy. Murphy also contends that Beckton is deemed to have taken over parts of the Works in accordance with Sub-Clause 10.2, matters contested by Beckton. 

The relevant correspondences:

On 23rd December 2014 Beckton notified Murphy of its entitlement to delay damages following Murphy’s failure to achieve the ROC Accreditation Milestone.

On 12th January 2015 Murphy responded to acknowledge receipt “without prejudice to any of [its] rights under the…Contract and in particular [its] entitlements to extensions of time and any other defences [it might] have in relation to any future claim [Beckton might] make in respect of liquidated damages.”

By letter dated 31st March 2015 Beckton notified Murphy of its alleged entitlement to delay damages due to Murphy’s failure to complete the works within the Time for Completion, namely 31st January 2015.

By letter of 25th January 2016 Beckton required Murphy to pay the damages accrued to that date in accordance with Sub-Clause 8.7.4.

The sums of £592,000 and £7,682,000 were said to be payable within 30 days.

By letter dated 22^nd February 2016 Murphy contended that it was entitled to a Taking-Over Certificate for a large part of the Works pursuant to Sub-Clause 10.2.2. Even if delay damages are due, which Murphy denies, the amount of any such damages falls to be reduced significantly.

On 8th March 2016 Murphy asked the Engineer to issue a Taking-Over Certificate accordingly.

By letter dated 25th February 2016 Beckton notified Murphy pursuant to Sub-Clause 4.2.5 of its intention to make a demand under the Performance Bond.

The breach identified was breach on the part of Murphy in failing to pay liquidated damages within 30 days as required by Sub-Clause 8.7.4. On the same day it also notified its intention to deduct further delay damages for the month of January 2016 from the next payment application.

Issue 1

Is Beckton entitled to recover payment of liquidated damages from Murphy under Sub-Clause 8.7 without agreement or determination by the Engineer of Beckton’s entitlement to liquidated damages under Sub-Clauses 2.5 and 3.5?

Murphy’s submission:

Payment of LDs is not an exception of Sub-Clause Cl.2.5 therefore Sub-Clause 2.5 applies.

Beckton did give notice pursuant to Sub-Clause Cl.2.5, hence he considered that the clause applied.

There has been no agreement or Determination by the Engineer under Sub-Clause 3.5.

Murphy is entitled to a Taking-Over Certificate, the effect of which would be to reduce dramatically any sum to which Beckton might be entitled by way of delay damages.

Sub-Clause 8.7 is a significant, if not the most significant, clause in the Contract. One would expect there to be clear words if its provisions were to be outside the regime in Sub-Clause 2.5.

Beckton’s submission:

Murphy shall pay the  LDs for delays to the ROC Accréditation, pursuant to Sub-Clause 8.7.

The obligation to pay delay damages arises independently of Sub-Clause 2.5 and 3.5 and is not contingent upon an Engineer’s determination. 

Analysis:

The court identified the intention of the parties by referring to what a reasonable person with all the background knowledge available to the parties would have understood from the contract:

• The ordinary meaning of the clause,
• Any other relevant provisions of the contract,
• The overall purpose of the contract,
• The facts and circumstances known by the parties at the time the document was executed,
• Commercial common sense, 
• Disregarding subjective evidence of any party’s intentions. 

In Sub-Clause 8.7 the words “subject to Clause 2.5” qualifying Murphy’s payment obligations do not appear, whereas in the equivalent standard clause in the FIDIC Yellow Book they do. Beckton’s rights to claim delay damages is not subject in any way to Clauses 2.5 and 3.5.

Therefore the parties chose to agree a clause wholly different from the standard wording and one which excluded any reference to Sub-Clause 2.5. 

The court held that there were significant inconsistencies between Sub-Clause 2.5 and 8.7.4

• The Sub-Clause 2.5 refers to an amount deducted in the Contract Price and Payment Certificate (issued by the Engineer), and the Sub-Clause 8,7.4 refers to liquidated Damages being deduced from the next applicable “Notified Sum” being a statement by Murphy,
• Sub-Clause 8.7.4 provides for a precise, fixed and inflexible timetable,
• The amount payable specified in Clause 2.5 and 3.5 is left to the determination of the Engineer  

Issue 2:

Whether, if Murphy succeeds on Issue 1, a call by Beckton on the Bond would be fraudulent. 

It follows from the conclusion of issue 1 that a decision on Issue 2 is unnecessary, but the issue will be addressed based on the premise that this conclusion is wrong.

The Bond is a conventional “on-demand” bond, acting as a security regarding to Murphy’s Performance. 

All that is required to trigger payment under the Bond (after notice as stated in Sub-Clause 4.2.5) is a written demand signed by two directors stating that Murphy had committed a breach of the Contract, with particulars, and the amount claimed by Beckton. 

There is nothing in the Contract to say that Murphy’s liability for delay damages was conditional on determination by the Engineer under Clauses 2.5 and 3.5. On the facts here the parties expressly rejected the standard FIDIC’s clause that prevents the Employer from calling on the Bond without the Engineer’s Determination. 

It is implicit in the nature of a performance bond that, in the absence of some clear words to a different effect, when the bond is called, the rights and obligations of the parties will be determined finally at some future date. Indeed this is what is expressly envisaged in Sub-Clause 4.2.6.

If subsequently there is an overpayment as a result, the position is rectified under Sub-Clause 4.2.6.

Against this background, as identified above, the claim for injunctive relief falls away.

Conclusion

The claims for declaratory and injunctive relief are dismissed. The parties are invited to draw up an order accordingly and to agree all consequential matters, including costs, so far as possible.

LESSONS LEARNED: 

Clauses interplay: 

– Clause 2.5 (Employer’s Claim) of the FIDIC contract relates to all types of payments the Employer considers himself to be entitled to, provided that the other clauses relating to payments call this Clause. 

Contract construing: 

– The construing of the contract by the parties and its related actions (issuing of correspondances pursuant to specific clauses) during the execution of the contract is less relevant than the actual contract construing as contemplated by a court.