Practical Law

Obrascon Huarte Lain SA v AG for Gibraltar approves an interpretation of the notice requirements in the FIDIC Conditions of Contract that may offer contractors greater flexibility as to when they must notify an entitlement (or risk losing it).

FIDIC Conditions of Contract

Under the FIDIC Conditions of Contract for Plant and Design-Build (known as the Yellow Book), a contractor must give notice of a delaying event within 28 days or risk losing its entitlement to an extension of time. This reflects standard practice for international EPC contracts.

Under English law, a properly drafted “notice condition precedent” will be enforceable and can have dramatic consequences for a contractor – in some circumstances leaving the contractor liable for liquidated damages even where the project owner is responsible for the delay.

Under the Yellow Book’s relevant notice clauses (clauses 20.1 (contractor’s claims) and 8.4 (extension of time for completion)), notice must be given within 28 days of any event where the date for completion “is or will be delayed”. This has traditionally been understood to place the burden on a contractor to notify not only an event that has an immediate and measurable impact on the completion date, but also one which will, at some time in the future, have such an impact.

Obrascon Huarte Lain SA v AG for Gibraltar

Obrascon Huarte Lain SA v AG for Gibraltar has offered an alternative interpretation of FIDIC’s notice obligation that is more accommodating to contractors and may permit a valid notice to be served at a later date than previously thought. It relates to a road and tunnel project in Gibraltar where the dispute arose under a contract based on the FIDIC Yellow Book.

Clause 20.1 of the Yellow Book provides:

“If the Contractor considers himself to be entitled to any extension of the Time for Completion and/or any additional payment… the Contractor shall give notice to the Engineer, describing the event or circumstances giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance.

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.” (My emphasis added.)

Clause 20.1, which is identical in the Silver and Red Books, is a well-drafted “condition precedent” clause. This means that (under English law, at least) a failure to give the required notice will result in the contractor losing its entitlement to an extension of time and/or additional payment in respect of an otherwise valid claim. It should be noted that the law in some jurisdictions will limit the effectiveness of notice conditions precedent, for example, the Arabic Civil Codes in the Gulf Region.

Clause 8.4 of the FIDIC Yellow Book (again identical in the Silver and Red Books) outlines when an entitlement to an extension of time arises as follows:

“The Contractor shall be entitled… to an extension of Time for Completion if and to the extent that completion… is or will be delayed by any of the following causes:”

Clause 8.4 then lists the events that entitle the contractor to an extension of time.

“Is or will be delayed” – notify now or in the future?

Clause 8.4 defines when, for the purposes of clause 20.1, the contractor could “consider himself entitled to an extension of time” and, therefore, when the 28-day window for notice starts running. The trigger is where completion “is or will be delayed” by one of the listed events.

Similar formulations of this language are commonly found in international EPC contracts. For example, the following is extracted from the EPC contract for a project financed process plant in the Middle East:

“The Contractor must without undue delay give notice… of all… events… affecting or likely to affect the progress of the Works such that the achievement of the Guaranteed Completion Date for the Plant will or is likely to be delayed.” (My emphasis added.)

Language linking a notice obligation to both the occurrence of an event having an immediate impact, and also to one that “will” or “is likely” to have an impact, was introduced into EPC contracts to offer greater protection to an owner’s interests. Earlier EPC contracts only required that notice be given of events “which caused a delay”. However, this caused difficulties where project owners wished to make the giving of notice within a fixed (and short) time period a pre-condition to any entitlement. For example, where it was not immediately clear to the contractor whether a particular event would cause a delay or not, or where an event had no immediate impact, but caused a delay to a future activity that may not have been critical at the time of the original event.

Problematic situations like this led to interpretative difficulties, which left some conditions precedent clauses unenforceable or construed against the owners on the basis that the notice obligation was uncertain.

Language of the type used in clause 8.4 of the FIDIC Conditions was thought to eliminate this problem by requiring a contractor to give notice of both actual and potential delay events. This has placed an additional burden on contractors to consider whether notice is required even where an event does not immediately impact activities that are on the critical path at the time of its occurrence.

The Obrascon decision

In Obrascon, in considering the wording of clause 8.4, Akenhead J concluded that an extension of time can be claimed either:

• When it is clear that there will be delay (a prospective delay); or
• When the delay has started to be incurred (a retrospective delay).

In reaching this conclusion, Akenhead J noted that clause 8.4 does not say that notice is to be given when completion “is or will be delayed, whichever is the earliest“. The absence of this express requirement leaves it open to the contractor to notify at either point. Given the serious effect of vitiating a party’s contractual right to claim, Akenhead J considered that the clause should be construed strictly against the owner.

Let’s briefly consider the implications of this interpretation by reference to a scenario where a variation is instructed to a part of the works that is programmed to fall on the critical path but which, at the time of the instruction, has not been commenced.

On the interpretation offered in Obrascon, the contractor’s obligation to notify is triggered either at the point of the instruction when it is known that the event “will” cause a delay, or at the later point when work commences on the variation and delay “is” being caused.

In the absence of clear language requiring the contractor to give notice at the earlier of these two points, Akenhead J decided that the contractor can, in effect, choose which point to treat as the trigger.

Key point to take away

Akenhead J either did not consider that the requirement in clause 20.1 that notice be given “as soon as practicable” altered this interpretation, or he was not directed to consider this point. However, these words are, arguably, insufficiently express to detract from his interpretative approach.

Legal advisers should take note:

• Contractors need to take full advantage of an approach that reduces the risk of losing an entitlement.
• Owners need to consider drafting amendments to clarify the intention that notice must be given at the earliest possible stage.

It remains good practice for contractors to serve notices at the earliest possible date to avoid the risk of losing an entitlement and there are good commercial reasons for a project owner to require this. However, this interpretation may provide greater flexibility to contractors to retrospectively notify events the impact of which was not fully understood at the time.