This judgment from the Inner House of the Scottish Court of Session is therefore very useful as an indication of the UK Courts’ current approach to causation of delay and extensions of time. Of course, this may not be the end of the story as City Inn still has the chance to lodge an appeal to the Supreme Court.

Key Elements

The dispute centred on a late-running project to build a hotel in the city of Bristol. Shepherd was employed by City Inn to carry out this project under an amended version of the 1980 edition JCT contract (a UK standard form of building contract with Quantities). The adjudications which followed the late finish resulted in Shepherd being awarded a 9 week extension of time (“EoT“) made up of 4 weeks awarded by the Architect and a further 5 weeks from the Adjudicator. City Inn was unhappy with this result and took the matter to the Outer House of the Scottish Court of Session. They applied for various orders including
a declaration that Shepherd were not entitled to an EoT; a reduction of the Architect’s award of 4 weeks EoT; and an order for payment of outstanding liquidated damages for delay.

Shepherd counterclaimed for a further 2 weeks EoT and for consequent loss and expense. The matter eventually proceeded to trial and was heard by Lord Drummond Young.

The main elements of the case were a bespoke clause covering entitlement to an EoT (clause 13.8), and the cause of the delay, taking into account the multiple delaying factors which occurred and the extent of their impact.

On the first issue, Lord Drummond Young found that clause 13.8 could not logically apply to instructions which caused delay just because they were in themselves late. Lord Drummond Young also noted that City Inn had not referred to their clause 13.8 rights until this juncture, and that neither of the parties appeared to take the clause into account when acting.

On the second – and more interesting – issue, causation and delay, Lord Drummond referred back to another contract clause (clause 25) to give his judgement. He said that under clause 25 the architect was to exercise his judgment and fix a “fair and reasonable” completion date. He held that an apportionment exercise may be necessary where there is concurrency or no dominant event.

The parties had been unable to locate an electronic, logic linked version of the original programme and so had to use a basic programme showing the activities and durations of the project. Lord Drummond rejected City Inn’s expert evidence which tried to establish, retrospectively, a critical path which led to the conclusion that Shepherd was not entitled to any EoT at all. Instead, he favoured Shepherd’s expert who said that he had attempted to establish a critical path, but that it was impossible to do so accurately. Lord Drummond preferred this common sense approach and found that, using this analysis, Shepherd was entitled to 9 weeks EoT.

City Inn appealed unsuccessfully with most of the judgment concurring with Lord Drummond’s reasoning. The majority opinion was set out by Lord Osborne, and contains five principles relating to the evaluation of a delay and loss plus expense claim. Of course, the Court was examining these issues under clause 25 of the JCT form. However, I think these general principles would have relevance to most construction contracts and illustrate the likely approach that would be adopted by the UK Courts:

1. For an EoT claim to succeed the relevant event must be shown to be likely to cause delay or have caused delay.

2. Whether or not a relevant event causes delay is a matter for common sense.

3. It is for the decision maker to decide what evidence to use in forming his conclusion. This may or may not include a critical path analysis. What matters is that the evidence used is sound, whatever form it takes.

4. If there is one dominant cause, all other causes will be disregarded. The dominant cause must be a relevant event for a claim to succeed.

5. It is for the decision-maker to apportion the delay to completion of works in a “fair and reasonable way” where there are two (or more) causes of delay, but only one of which is a relevant event and neither is dominant.

Although Lord Calloway dissented from the ‘apportionment’ reasoning, all three judges concurred in the result and on the critical path analysis being relevant but not necessary to decide the outcome of an EoT claim.

Implications for future cases

I should have of course stressed that this was a Scottish Judgment. What this means is that the decision is binding on the lower courts of Scotland but not so on the English courts – although given that it is an appeal court decision it will at least be persuasive in England.

What is most striking is that all the judges leaned heavily towards the arguments for being guided by principles of fairness, reasonableness and common sense. Many of the arguments put forward centred on the true meaning and consequences of events being concurrent. However, Lord Osborne stated that the important question was not whether events were truly concurrent, but rather the effects on the completion date of the events. In a similar spirit, Lord Carloway talks about the Architect applying “professional judgment” and “using his and not a lawyer’s common sense“.

In terms of implications for future cases in the UK, the judgment must not be considered an approval of the use only of common sense and fairness at the expense of a critical path analysis. In this case the critical path analysis presented was not considered sound and so was not used to form the judgement. However, that is not to say it may never be used to determine EoT claims, but rather it is up to the decision-maker as to whether he uses the critical path analysis in his “fair and reasonable” decision-making process.

And what of its implications further afield – in the international arena? I think the judgment and the arguments employed would be useful to anyone involved in disputes on causation and EoT’s where there are concurrent events and particularly where there is no critical path analysis or such evidence is flawed.

FIDIC talks about the Engineer making a “fair determination” whenever required to determine any matter under the Contract [Sub-Clause 3.5] and the provision dealing with extensions of time [Sub-Clause 8.4] refers to an extension of time “if and to the extent that completion……..is or will be delayed by any of the [specified] causes“. So the same arguments about causation, apportionment and concurrency could run under a FIDIC based contract.

Similarly, the NEC construction form NEC3, which treats delay events as “Compensation Events”, requires the Project Manager (who has to act “as stated in this contract and in a spirit of mutual trust and co-operation”) to assess “the length of time that, due to the compensation event, planned Completion is later than planned Completion” [Core Clause 63.3]. Interestingly, in NEC, assessment of the impact of the event includes “risk allowances for cost and time for matters which have a significant chance of occurring and are at the Contractor’s risk under this Contract” [Core Clause 63.6].

And, of course, I cannot sign off without mentioning that Pinsent Masons acted for Shepherd Construction on this case!

After finishing the project 467 days late, Maropakis had sent letters asking for a time extension but failed to turn them into a formal, certified claim. Maropakis then brought a claim against the Navy for the unpaid contract balance, which the Navy had withheld as partial payment for claimed LDs. The Navy counterclaimed for the full 467 days of LDs. The court granted summary judgment on the Navy’s counterclaim, on the basis that since Maropakis had never formally sought (in the form of a certified claim) a time extension, the court had no jurisdiction to consider such a claim in defense of the LD assessment. The trial court agreed, as did the Federal Circuit on appeal.

The Federal Circuit’s ruling on appeal was as follows: “we hold that a contractor . . . must meet the jurisdictional requirements and procedural prerequisites of the CDA [Contract Disputes Act-the U.S. law that requires claims to be certified before they can be litigated], whether asserting the claim against the government as an affirmative claim or as a defense to a government action.” The Court saw no reason to distinguish between affirmative claims and matters of defense to government claims in applying the requirement for a certified claim prior to litigation, at least when the defense would involve an adjustment to the contract terms, as in the case of a time extension.

The dissenting opinion argued in vain that there is a clear distinction between presenting an affirmative claim for relief, where claim certification is required, and simply defending against a government claim, where no affirmative relief is sought.

The simple lesson of Maropakis is that whenever completing a U.S. government contract late, it is vital to submit a formal claim for a time extension so as to preserve your right to dispute a possible LD assessment (which may not come for several years). There are also two broader concerns. First, this is another brick in the wall of recent decisions by the Federal Circuit hostile to the position of Contractors. Contractors should be learning that they are not dealing with a tribunal at all inclined to give them the benefit of the doubt. Second, developments in the law relating to U.S. government contracts frequently spread to the U.S. private sector. Where private contracts require some sort of formalities associated with asserting a claim, the Owner may raise similar arguments, seeking to bar any ability to dispute its later assessment of LDs when the claim formalities were not followed to seek a time extension.

Andrew Ness
Christian Henel

The Rent-A-Center decision is complex, and well illustrates the very fine distinctions being made in the U.S. law of arbitration, but which have the net effect of strengthening the arbitrators’ role at the expense of the courts. The underlying broader issue is whether it is for the arbitrators or the courts to decide questions going to whether there is in fact a valid contract and a valid agreement to arbitrate (so called “arbitrability” or “gateway” questions). Under the longstanding Prima Paint rule, a challenge to the validity of the entire contract (including, but not specifically directed at, the arbitration clause) is to be decided by the arbitrators. But a challenge specifically to the validity of the agreement to arbitrate, or as to whether that arbitration agreement covers a particular dispute, is normally for the courts to determine. This, however, can be altered by the parties if they “clearly and unmistakably” demonstrate their intent to delegate such gateway questions to the arbitrators.

In Rent-A-Center, a former employee (Jackson) sued his former employer (Rent-A-Center) for employment discrimination. Rent-A-Center sought dismissal in favor of arbitration, based on an arbitration agreement signed by Jackson at the outset of his employment. That agreement (which covered only arbitration; other employment terms were in other documents) not only specifically provided that discrimination claims were to be arbitrated, but contained a separate “delegation” sentence giving the arbitrator “exclusive authority to resolve any dispute relating to the . . . enforceability . . . of this Agreement.” Jackson countered by asserting that the agreement to arbitrate was unconscionable and thus unenforceable.

The Supreme Court resolved the dispute in favor of arbitration by, in effect, extending the Prima Paint rule. It held, by a 5-4 margin, that since Jackson’s challenge to the enforceability of the arbitration agreement went to the entire arbitration agreement, and not specifically to the “delegation” sentence, then it was up to the arbitrator to determine the unconscionability challenge to the enforceability of the arbitration agreement. It was not a matter for the court to decide. This extension of the Prima Paint concept thus appears to further narrow the situations where the court gets to determine “gateway” issues, at least if the arbitration agreement is worded so as to delegate gateway issues to the arbitrators.

The lesson for construction practitioners is thus that the particular wording of the arbitration clause, and how, if at all, it delegates the arbitrators to determine arbitrability issues, is more important than ever. The specific wording, if deemed “clear and unmistakable,” may indeed immunize the parties from any scrutiny by the court of all but the narrowest and specific of challenges to the clause’s enforceability.

Andrew D. Ness

Neil MacBride, the U.S. Attorney leading the prosecution team, noted, “Bribery isn’t just a cost of doing business overseas. Today’s sentence makes clear that this is a serious crime that the U.S. government is intent on enforcing.” This statement succinctly illustrate the US DOJ’s commitment to prosecute individuals who violate the FCPA.

Assistant Attorney General Lanny Breuer has made no secret that the “prosecution of individuals is a cornerstone of [the DOJ’s FCPA] enforcement strategy.” “Put simply,” Breuer said in a November speech, “the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations.” Thus, the FCPA poses a hazard not just for corporate reputations and profits but also for the individual executive. Companies can be fined, but only individuals can be put in prison, and DOJ well knows that the prospect of a stretch in the Federal pen can have considerably greater deterrent effect than the possibility of your employer having to pay a fine. Look for more such announcements in the months and years to come, as FCPA enforcement efforts continue to escalate.

Fiona Philip
Andrew Ness

Shell’s position was that Centurion Petroleum Corporation was in repudiatory breach and that Shell had clearly “accepted” this repudiation. The problem they faced was that the arbitral tribunal had interpreted their letter notifying Centurion that their contract was at an end as an “affirmation” of the contract – an interpretation with a significant price tag attached. On appeal, Shell were asking the Court “what principle requires a clear election to terminate on the basis that a substantial sum is recoverable to be treated as a termination on the basis that nothing is recoverable?”

A fair question, you might agree. Yet the Court ruled that by sending a letter terminating the contract in accordance with its termination procedure, Shell had “affirmed” the contract – i.e. treated it as continuing. This cost Shell about $15m.

The background

A number of disputes had arisen between Shell and oil exploration company Centurion Petroleum Corporation (now Dana Gas Egypt) concerning their contract for an oil and gas exploration project in the Nile Delta. Shell argued that Centurion had committed a repudiatory breach of the contract by failing to issue notices about a change in control of its holding company and that Centurion had also breached one of its warranties, entitling Shell to rescind the contract in accordance with clause 5 of the contract.

By this time, Shell was also entitled to terminate the contract on giving 30 days’ notice to Centurion in accordance with clause 3.1.8 because the “Closing Date” had not been achieved by the specified deadline. This is the right that Shell in fact exercised. It wrote a letter to Centurion stating that the contract would be terminated 30 days after the date of the letter. In the letter Shell invoked Clause 3.1.9 of the contract which provided that if the Closing Date had not been achieved because certain consents from the Egyptian government had not been obtained, Centurion was obliged to refund all payments made by Shell, including its initial US $15m investment.

In fact, the authors of the termination letter were mistaken about the consents not being obtained; Centurion had provided them to Shell a month before. Centurion responded to the termination letter by accepting the termination, waiving the 30-day notice period and pointing out that Centurion was under no obligation to refund any payments.

The dispute went to arbitration and the arbitrators found that Centurion had indeed committed a repudiatory breach of the contract and a breach of warranty entitling Shell to rescind the contract. However, they found that Shell had neither accepted the repudiatory breach nor exercised their contractual right to rescind the contract. By terminating under the contract they had affirmed it. Shell appealed against this award.

The judgment

The High Court judge had to decide whether or not Shell’s termination letter could be regarded as accepting Centurion’s repudiatory breach as terminating the contract.

There is no set form for accepting repudiation; all that is required is a clear, unequivocal communication (whether orally, in writing, or by conduct) that the innocent party is treating the contract as discharged. Whether a clear and unequivocal communication has been made is examined objectively – what would the reasonable recipient of the communication have understood from it?

On the face of it, the letter clearly stated that Shell was terminating in accordance with clause 3 of the contract, and made no mention of the repudiatory breach. However, there is case-law that says that, if a party has both a right to terminate at common law for repudiatory breach and a right under the contract, as long as the innocent party makes it clear that he is treating the contract as discharged, he does not have to choose between the common law right and the contractual clause. He can effectively accept the repudiation by exercising the contractual right. This is the case even if he does not refer to the common law right, and even if he gives a “bad reason” for terminating the contract (such as wrongly asserting that consents have not been obtained).

He must choose which right to exercise though, if exercising the right under the contract is inconsistent with accepting the repudiatory breach. In this case, the rights Shell had at common law and under Clause 3 of the contract were inconsistent with each other. The termination clause was not triggered by breach, and provided that Centurion was not obliged to repay any money in the event that it was exercised.

So, would a reasonable recipient read the letter as unequivocally terminating under Clause 3.1.8, or as accepting the repudiation? Shell said repudiation, because, they argued, they had made a mistake about the government consents and no-one would think they were terminating under Clause 3.1.8 if they could not recover their $15m. The judge disagreed.

“The letter as written plainly communicates an unequivocal election to terminate under Clause 3.1.8. In my judgment the obvious mistake contained in it does not, in context, derogate from that message, because it was a perfectly feasible commercial stance for Shell to adopt (…)”

Faced with the choice of arguing about whether Centurion had committed a repudiatory breach or not, or exercising a contractual right which was indisputably available (which would have meant losing the initial $15m but not having to pay a further $20m), the judge thought it was plausible that Shell would have cut its losses and plumped for the termination clause.

Interestingly, the judge suggested that Shell could have “hedged its bets” and opted to accept the repudiation AND terminate under the contract in case they got it wrong:

“I can see no reason why Shell could not have served a notice which accepted the repudiatory breach as terminating the contract but, in the alternative, in case they were wrong in asserting that Centurion were in repudiatory breach, exercised the contractual right to terminate afforded by Clause 3.1.8.”

What can be learned from Shell’s expensive mistake?

Well, it shows how carefully you need to tread if you think the other side has committed a repudiatory breach. If you terminate the contract but end up being wrong about a repudiatory breach being committed, then you could be in repudiatory breach yourself.

On a positive note, the judge’s suggestion about how Shell could and should have worded its termination letter is helpful to others. Shell had their pick of reasons to terminate the contract but chose the wrong one – but maybe it is sometimes possible to have your cake and eat it?

By Sarah Thomas and Susannah Cassedanne

Most construction disputes are contract cases not involving federal law, so a federal court will only have jurisdiction if the suit involves more than $75,000 and is between citizens of different U.S. states. The key question is usually: where is a corporation a “citizen” for the purpose of determining whether such “diversity of citizenship” exists?

By statute, a corporation is a citizen of both the state (1) where it is incorporated, and (2) where it maintains its “principal place of business.” While the state of incorporation is obvious, for nearly 60 years, federal courts have struggled to define a corporation’s principal place of business. Last month, the United States Supreme Court reconciled divergent tests and clarified this at last. In Hertz Corp. v. Friend, No. 08-1107, slip op. (Feb. 23, 2010), the Court held that a corporation’s principal place of business is just one place, its headquarters. By limiting corporations to one static principal place of business, Hertz increases the number of states where a corporation is not a citizen, meaning it increases the likelihood of getting access to the federal courts in a particular case.

For 60 years, the Circuit Courts of Appeal have been split over where a corporation had its principal place of business. Some circuits held it was the state containing the corporation’s “nerve center.” Others held it was any state where the corporation conducted significant activities. Thus, in the Ninth Circuit a corporation had a principal place of business wherever the corporation conducted “significantly larger” or “substantially predominant” operations. Under such fluid standards, corporations with a presence in all 50 states might be considered a citizen of most or even all 50 states, effectively precluding access to federal courts. What’s worse, the fluidity of the tests made it impossible to predict the outcome from one case to the next.

In Hertz v. Friend, Hertz was sued by California residents in state court. Hertz removed to federal court, asserting it was not a California citizen. The lower court concluded Hertz’s principal place of business was California under the Ninth Circuit test, Hertz was a California citizen, and thus there was no jurisdiction in federal court. The Ninth Circuit agreed.

The Supreme Court reversed, concluding that a corporation’s principal place of business is best interpreted as “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities.” The Court noted in most cases, this should be the state containing the corporate headquarters, “provided that the headquarters is the actual center of direction, control, and coordination.” Id. Hertz’s headquarters is in New Jersey, so it was not a citizen of California and the federal court thus had jurisdiction.

With this relatively simple test for determining principal place of business, Hertz reduces the likelihood that a corporation will be deemed a citizen of more than two states, and makes predictable what those states are. So corporations should have relatively predictable access to federal courts in the remaining 48 states.

Michael McNamara
Andrew Ness

The Swiss principal applied to the Swiss Federal Supreme Court for revision of the partial award, the time limit for the setting aside of the award, which would have been the ordinary remedy in such a case, having already expired. The principal contended before the Supreme Court that the agreement had an illegal content as it contemplated bribery, and produced new evidence to support its claim. The Court denied the request, as the prerequisites under Swiss law for a review of the award were not met. Indeed, according to the Court, the evidence could have been produced in the arbitration and was therefore not new. The arbitration resumed and the arbitrators eventually rendered a final award in favour of the consultant.

The principal sought to have the final award set aside on the grounds that it breached public policy, relying on the same evidence on which it had previously sought to rely in its request for review of the partial award. The principal further argued that the Supreme Court must examine the alleged nullity of a contract on its own motion. The Court however dismissed the application. It found that the principal could and should have produced the evidence purportedly showing bribery during the arbitration. The Court also ruled that it would not review on its own motion the validity of private law contracts.

The principal again raised its public policy defence in the subsequent enforcement proceedings in Switzerland. The competent cantonal court however ruled that arguments which could have been raised in setting aside proceedings could no longer be raised at the enforcement stage.

In another dispute between a consultant and a principal, the Swiss Federal Supreme Court admitted the principal’s request to set aside an arbitral award due to procedural fraud. In the highly publicized Thales v Frontier AG matter, the award was annulled and the matter remanded to the arbitrators. The facts of the case are summarised below.

In 1989, France authorised the export of new F-3000 frigates to Taiwan. Mainland China objected to the export and a few months later, upon request of a French minister, France withdrew the export authorisation. In 1990, Thomson CSF (which later became Thales), the manufacturer of the frigates, entered into an agreement with Frontier, a Swiss company, to act as its agent. According to the agreement, Frontier was to receive remuneration amounting to 1% of the value of Thomson CSF’s contract with Taiwan for its assistance in relation to the sale of the warships. Behind Frontier was Alfred Sirven, a high ranking manager with the French oil company Elf Aquitaine. Subsequently, in 1991, the French government reversed its previous position and gave its final approval for the sale of the ships. The contract between Thomson and Taiwan was concluded on 31 August 1991 for a purchase price of approximately USD 2.5 billion.

Thomson however refused to pay Frontier, which initiated ICC arbitration as a result. In the arbitration, Thomson contended that the objective of the contract was in fact for Frontier to solicit the services of Edmond Kwan, a consultant of Elf Aquitaine in China, in order that he use his political connections to persuade the Chinese to cease their opposition to the sale of the warships to Taiwan. Thomson argued that the contract was void as its object was influence peddling. Messrs Sirven and Kwan, as well as other witnesses, were heard by the arbitral tribunal.

In 1996, the tribunal rendered its award, ordering Thomson to pay the contractual fee to Frontier. The tribunal found that Frontier had provided the services which were due under the contract by assisting Thomson, through Edmond Kwan, to appease Chinese opposition to the sale. The tribunal admitted that influence peddling was unlawful but found that it had not been proven that influence peddling had occurred. Thomson subsequently initiated criminal proceedings in France against Mr. Kwan and others for giving false testimony before the arbitral tribunal. On 1 October 2008, the French authorities ceased their investigation as a result of Mr. Sirven’s death and because there was insufficient evidence against the other actors. The French authorities however concluded that Sirven had indeed given false testimony during the arbitration.

On 17 December 2008, Thales (formerly Thomson) brought a request for review of the 1996 arbitral award before the Swiss Federal Supreme Court on the basis of the findings of the French authorities. The French investigation had shown that the real objective of the contract between Thomson and Frontier was not to lobby for the sale of the warships in China, but rather to persuade a French minister, who wanted to avoid retaliation measures by Mainland China, to reconsider his objections to the sale. Commissions had therefore been paid by Frontier to Mr. Sirven and a woman who had privileged relations with the minister. Mr. Sirven had represented to the arbitral tribunal that Mr. Kwan had been the only beneficiary of a commission, however it was uncovered that he had implicated Mr. Kwan merely for the purposes of the arbitration. The Swiss Supreme Court ruled that it had been established that Mr. Sirven had orchestrated an influence peddling scheme to the detriment of the French authorities. He had misled the arbitral tribunal and was therefore guilty of procedural fraud. In the opinion of the Supreme Court, Mr. Sirven’s untruthful testimony had had a direct influence on the tribunal’s award. Consequently, the Supreme Court annulled the award and remanded the matter to the original arbitral tribunal or a new tribunal to be constituted in accordance with the ICC Rules.

Conclusions

Several conclusions can be drawn from these two cases. The first is that arbitral tribunals and the Swiss Supreme Court will not uphold contracts that are flawed by illegality. However, it is for the party which alleges an illegality to prove it. Another conclusion to be drawn is that if evidence of illegality exists at the time of the arbitration, it must imperatively be produced in the arbitral proceedings. A party therefore cannot hold back evidence, even if it is self-incriminating, and rely on it in subsequent annulment or enforcement proceedings in the event of an unfavourable outcome of the arbitral proceedings. On the other hand, if a party misleads the arbitral tribunal, as could be uncovered in subsequent criminal proceedings, an arbitral award may not stand.

By Matthias Scherer and Sam Moss

The facts of the Supershield case (whether Siemens could recover from its defaulting subcontractor the losses flowing from a series of failures in a water sprinkler system and in particular, the amount that Siemens had settled for a claim upstream with the main contractor) are not so important as what the Court said about the current interpretation of this remoteness rule. It held that Hadley v. Baxendale remains the standard rule and reflects “the expectation or intention reasonably to be imputed to the parties”. The Court went on to say that this can be interpreted so that “…if on the proper analysis of the Contract against its commercial background, the loss was within the scope of duty (i.e. what was within the contract breaker’s duty to prevent under the Contract) it cannot be regarded as too remote, even if it would not have occurred in ordinary circumstances”.

This means that under English law, a contract breaker can still be liable for damages even if those damages would have been considered unlikely by the parties when entering into the contract. Thus this judgment is important for its distinction between what “intention can be imputed between the parties” as to what damages should be covered and likelihood/foreseeability.

Another case, from a Scottish court, provides an interesting example of notice bars in a construction contract being strictly enforced in the UK. The case in question, Education 4 Ayrshire v South Ayrshire Council involved a contractor who had contracted to design and build six schools for the South Ayrshire Council under a PPP contract. During the works, asbestos that had not been revealed by a previous survey was discovered. This qualified as a “Works Compensation Event” under the contract, for which the Contractor might be entitled to an extension of time, payment of compensation and/or relief from its obligations but provided that the proper procedure was followed.
The Authority rejected the contractor’s claim for an extension of time and compensation on the basis that the contractor had failed to give the required notice in accordance with Clause 17 of the contract.
The judge agreed that the Contractor had not in fact complied with clause 17. He explained that once it is accepted that compliance with the notice clause is a condition precedent (and both parties agreed that it was), the question is simply, “what does the clause require?” In this case the clause required the Contractor to give notice of its claim. What the Contractor’s letter to the Authority about the delay actually said was “We will submit our full claim in accordance with clause 17.6 (…)”. This was held not to be valid notice under clause 17.6. A number of readers, particularly those from non-common law jurisdictions, will be surprised by this, as the Contractor had indeed flagged to the employer that a claim was being sought. But it just goes to show how strictly these notice provisions may be interpreted under English law and the need to follow ‘the letter of the contract’. You may recall that I answered a query on notices from a project manager recently (see Ask the Expert, February 2010) and warned of the need to check that the notice strictly complied with all formalities.
“But how is this equitable?” a number of you will cry. In the case, the judge said that the whole purpose of the clause is to give certainty – the Authority should not have to infer or assume from correspondence that a claim will be made. In this case, in accordance with the contractual notice provisions, the chief executive of the Authority was entitled to formal notification of a claim. The fact that those “on the ground” at the Authority may have been aware of the situation (the Authority was sent a copy of the survey report, attended a meeting to discuss its implications and had been provided with a copy of the Sub-Contractor’s claim against the Contractor in relation to the same event) was irrelevant.

Food for thought….

Please let me know if any of you have come across similar situations.

The tendering and procurement process in Canada has traditionally been treated by the courts as a special area of contract law in which fairness and protecting the integrity of the tender process have been guiding principles.  Courts have implied terms into contract “A” bid contracts that have obliged owners to act fairly, and wide discretionary clauses have been interpreted narrowly to ensure the integrity of the tendering process.

Owners looking to maximize their control over the selection of contractors have continued to fine-tune instructions to bidders and attempt to limit their own liability.  How far will the courts go to intervene in these commercial contracts because of the special status historically bestowed on the tendering process?  In a 5 – 4 split decision, the Supreme Court of Canada (SCC) has delivered its views in the case of Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways), 2010 SCC 4. The SCC has highlighted the importance of maintaining the integrity of the tendering process and treating bidders fairly, but has also “laid to rest” the doctrine of fundamental breach in connection with exclusion clauses and provided guidelines for the future preparation and analysis of tender documents.

Facts in Tercon

The British Columbia Ministry of Transportation and Highways (MOTH) issued a tender call for the construction of a gravel highway and the bid rules prohibited joint venture bids.  MOTH accepted a low bid submitted by a joint venture consisting of two parties, one of which might have alone been a qualified bidder, and MOTH directed the “acceptance” to that single member of the two-party joint venture bidder.  Tercon Contractors Ltd. was one of the unsuccessful bidders, and they sued MOTH on the argument that the contract could not be awarded to a non-compliant bidder.  On the facts, MOTH had broken its own tendering rules but it rejected Tercon’s claim for compensation and relied on the following limitation provision included in the MOTH tender instructions:

“Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall have any claim for any compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a proposal each Proponent shall be deemed to have agreed that it has no claim.”

Variations on this clause have since become known as “Tercon clauses.”

Supreme Court of British Columbia Decision (March 2006)

The British Columbia Supreme Court heard the arguments of the parties and determined that MOTH had awarded the contract to a non-compliant bidder.  The BC Supreme Court maintained that it had the discretion to restrict the enforceability of the Tercon limitation clause.  The court decided that the discretion to limit such exclusionary clauses may be exercised in the tendering context on policy considerations, and under general contract law on principles of fundamental breach, unfairness, unreasonableness and unconscionability.  In this case, the court found that it was neither fair nor reasonable to enforce the exclusion clause and that MOTH had acted egregiously in awarding the contract to a non-compliant bidder.  Tercon was awarded damages in the amount of $3,293,998.

Court of Appeal for British Columbia Decision (December 2007)

MOTH appealed the trial decision and the Court of Appeal did not consider it necessary to determine whether the successful bid was non-compliant with the instructions to bidders.  Instead, the Appeal Court focused on the exclusion clause and found that the trial judge had erred in refusing to give effect to it.

The Court of Appeal recognized that while the integrity of the bidding process, especially for public works, should be given high value, it considered “ … the words of the exclusion clause so clear and unambiguous that it is inescapable that the parties intended it to cover all defaults, including fundamental breaches.”

In answer to the argument that such exclusion clauses may be contrary to the public interest by disrupting an orderly and fair scheme for tendering, the Appeal Court observed that judicial intervention in this area of commercial dealings is not appropriate and that the industry will have to react by choosing whether to bid in the presence of such clauses.

The clear and unambiguous exclusion clause was held to be a complete bar to Tercon’s claim against MOTH.

Supreme Court of Canada Decision (February 2010)

In a 5 – 4 decision of the SCC, the appeal of Tercon was allowed.  While the entire court agreed on the appropriate framework of analysis in reviewing whether a party can avoid the effect of an exclusion clause, they were divided on how the formula applied to the facts of Tercon.  The majority concluded that the words in the exclusion clause, “participating in this RFP,” must mean “participating in a contest among those eligible to participate.”  Consequently, the majority decided that the Province of British Columbia had accepted a bid from a party who should not have been eligible to participate, and a process involving ineligible bidders could not be covered by the clause.  The minority sided with the BC Court of Appeal and considered the exclusion clause to be clear, unambiguous and applicable.

The SCC decided that a party attempting to escape the effect of an exclusion must apply the following three-step analysis:

1.  the clause does not apply to the circumstances, as a matter of interpretation; or, if it does apply;

2.  the clause was unconscionable at the time it was made and therefore invalid, such as in the case of an inequality of bargaining power between the parties; or, if this cannot be shown;

3.  the clause offends “an overriding public policy … that outweighs the very strong public interest in the enforcement of contracts” (this third part of the analysis replaces the doctrine of fundamental breach as a policy basis for avoiding a contract provision).

The Future of Exclusions in Procurement Documents

Exclusion clauses that will be upheld by the courts will require more detailed acknowledgements and clarity in order to be enforced.  Although the minority decision in Tercon considered the exclusion clause to be clear and unambiguous, the preparation of such clauses will require more fine-tuning to avoid judicial interference.  The Tercon decision provides some guidance, or at least a reaffirmation, of the principles to be followed in the administration of any procurement process:

A.  Prepare clear rules regarding how the procurement process will be administered, and follow those rules. Do not award to a party who is not in material compliance with the rules.

B.  If a revised “Tercon clause” is to be included in procurement documents, it must address, to the greatest extent possible, the circumstances of the parties and the mutual acceptance of the intent to waive claims arising out of the process.  If this approach is repugnant to contractors they may refuse to participate, and this risk will have to be evaluated by the entities initiating the procurement process.

The message from the Supreme Court of Canada seems to be that clearly drafted, unambiguous exclusion clauses will be permitted in the absence of egregious conduct by the party conducting the procurement process.

If you would like to discuss the potential impacts of the Tercon case on tendering law or any procurement contracts, please contact Michael Mitchell, Counsel in McCarthy Tétrault’s Vancouver office at 604-643-7937 or mmitchell@mccarthy.ca.

Yet, how many reported cases are there where the notice provision is strictly enforced? Most commentators struggle to point to a decision where a contractor was deprived of his ability to claim an extension of time solely on the basis of non-compliance with a notice provision. The point sometimes seems more of academic interest than practical application.

The good news for the academics is that this struggle may now be partially over. In the Scottish case of Education 4 Ayrshire Limited v South Ayrshire Council , a contractor tried to claim an extension of time due to the discovery of asbestos. This was a “neutral event”, outside the control of the parties, but one which entitled the contractor to bring a claim.

The court “was minded to dismiss” a claim by a contractor who got into a bit of a contractual and semantic muddle with its notices. (Instead of being actually dismissed, the case was “put out By Order”, a Scottish procedure whereby the case is “returned” to the parties for further consideration in light of the court’s decision.)

The contractual muddle arose in that the contractor gave notice under clause 17.1 of the relevant contract, when it should perhaps have given notice under clause 17.6.1 as well. In terms of semantics, the contractor said “we will submit our full claim in accordance with clause 17.6 of the project agreement”, instead of saying something along the lines of “we hereby give notice of our claim”.

It was accepted by both parties that compliance with the notice requirements was a condition precedent to the right to bring a claim.

The bad news for contractors is that the Judge held that this condition precedent had not been complied with, despite the clear intention of the contractor’s letter.

Most pieces on notices conclude with the usual sage advice about getting notices right. This piece is no exception. In Education 4 Ayrshire the parties accepted that the employer was fully aware of the position regarding the asbestos. He was sent a survey report and attended a meeting to discuss its implications. The employer was also aware that the sub-contractor had claimed an extension of time against the contractor as a result of the same event. Yet the Judge still held the contractor to a very exacting standard regarding the provision of notices.

This was despite the fact that the basic commercial intention of the notice provisions had been satisfied. The employer suffered no prejudice as result of any muddle which the contractor may have got into, semantic or otherwise. However, that did not change the outcome of the case. Just when we were getting our heads round the application of the UK (Technology & Construction Court’s) 2007 decision in Steria Limited v Sigma Wireless Communications Limited, it seems that we are back in the danger zone if there is not strict compliance with contract terms regarding notices’ provisions.

So, just how bad is the news for contractors? As mentioned above, this case concerned a “neutral event”. Had a court reached the same decision following a delay caused by an employer breach or act of prevention, the news for contractors would be worse. It would certainly be very bad news for contractors if decisions like this were handed down by those courts or tribunals in Hong Kong who deal regularly with construction matters. But surely, that would never happen. Or would it…?
With that thought, just as I’m discarding the detritus from my mailbox into the trashcan, I stop: maybe that carelessly-drafted note from my landlord does deserve greater scrutiny, after all…Or maybe on the strength of Education 4 Ayrshire I am safe to ‘bin’ it, with impunity?!