Charles Edwards, high performing Construction Barrister reviews the landmark decision of Judicial Committee of the Privy Council in Water and Sewerage Authority of Trinidad and Tobago v Waterworks Ltd (Trinidad and Tobago) [2025] UKPC 9, involving an Employer’s right to terminate for convenience and a Contractor’s right to recover reasonable costs under Clause 19.6(c) of the FIDIC Yellow Book 1999 (Conditions of Contract for Plant and Design-Build).
The Judicial Committee of the Privy Council hearing this matter comprised of Lloyd-Jones LJ, Sales LJ, Leggatt LJ, Burrows LJ and Rose LJ.
This dispute was in relation to two international projects for the design and build of water treatment plants based on FIDIC Yellow Book 1999 contracts (as amended) (the “FIDIC Yellow Book Contracts”) which were terminated for convenience by the Employer before construction started and for which the Contractor was seeking recovery of cancellation costs incurred as a result pursuant to Clause 19.6(c) of the FIDIC Yellow Book 1999 Contracts.
The parties to the FIDIC Yellow Book Contracts were the Water and Sewerage Authority of Trinidad and Tobago (“the Employer”) and Waterworks Ltd (Trinidad and Tobago) (the “Contractor”). The FIDIC Yellow Book Contractsare intended for use for projects where the Contractor has the main responsibility for design as well as the construction of plant or equipment on site.
A dispute arose between the parties’ following termination for convenience by the Employer of theFIDIC Yellow Book Contracts pursuant to Clause 15.5, before the designs for the two water treatment plants had been finalised and any construction had begun on site. The Contractor, relying on preliminary designs, had entered contracts with a third party (the MAAK contracts) for the purchase of equipment for the construction of the plants, although no steps were ever taken to perform those contracts, which were terminated when the FIDIC Yellow Book Contracts were terminated.
In accordance with the Contractor’s agreement with a third-party supplier, the Contractor was liable to pay cancellation charges calculated as 30% of the total price quoted for the equipment if the MAAK contracts were terminated. This was a question which the courts below reached opposite conclusions on the Contractor’s entitlement to claim/recover the same and as to whether the costs/liabilities to pay the cancellation charges by the Contractor were “reasonably incurred by the Contractor in the expectation of completing the Works” so as to fall within clause 19.6(c) of General Conditions of the FIDIC Yellow Book Contracts, thereby entitling the Contractor to recover such costs from the Employer.
The key issue between the Employer and the Contractor to be considered by the Judicial Committee of the Privy Council was what the proper interpretation of Clause 19.6(c) of the General Conditions of the FIDIC Yellow Book Contracts, which provided as follows:
“Upon such termination, the Engineer shall determine the value of the work done and issue a Payment Certificate which shall include:
(a) the amounts payable for any work carried out for which a price is stated in the Contract;
(b) the Cost of Plant and Materials ordered for the Works which have been delivered to the Contractor, or of which the Contractor is liable to accept delivery …;
(c) any other Cost or liability which in the circumstances was reasonably incurred by the Contractor in the expectation of completing the Works;…”
The Contractor submits that it is entitled to be recover the cancellation costs of 30% pursuant to Clause 19.6(c) of the FIDIC Yellow Book Contracts from the Employer. The Employer submits that such costs were unreasonably incurred by the Contractor and therefore the Contractor is not allowed to recover such costs. The Contractor seeks determination of issue following differing judgments from lower courts.
The key issues for determination by Judicial Committee of the Privy Council in order to determine this dispute were as follows:
- What was the proper interpretation of “reasonably incurred” in clause 19(c) in the FIDIC Yellow Book Contracts, Clause 19.6(c): “…any other Cost or liability which in the circumstances was reasonably incurred by the Contractor in the expectation of completing the Works;…”.
- Was it premature for the Contractor to purchase equipment and to enter into such contracts at this stage of the projects?
- A review of the nature of the MAAK contracts and whether they created enforceable obligations?
- The Contractor has the burden of proof – has the Contractor discharged its burden of proving that they reasonably incurred a cost or liability that falls within clause 19.6(c) of FIDIC Yellow Book Contracts?
What was the proper interpretation of “reasonably incurred” in accordance with Clause 19.6(c) in the FIDIC Yellow Book Contracts?
The Contractor argued amongst other things that: “in interpreting and applying clause 19.6(c), it is important to have regard to the nature of the contract containing the clause and, in particular, to the features that the Contractor was obliged to complete the Works at a fixed price within a specified time… “in the expectation of completing the Works” and submitted that they are forward-looking and presuppose that the Works will be completed rather than terminated prematurely…Contractor argued that, given this context, there will generally be no justification for disallowing costs or liabilities incurred as a result of planning ahead and ordering materials or equipment in advance. A contractor is entitled to proceed on the basis that the entire contract will be performed and to order, for this purpose, whatever materials and equipment will be needed. For costs or liabilities to fall within the scope of clause 19.6(c), it is sufficient to show that they have been incurred in genuine expectation of completion of the works and that, had the works been completed, those costs or liabilities would have been no more than reasonably necessary to perform the contract.”
The Privy Council agreed that as a general rule, the Contractor was entitled to proceed and to incur costs and liabilities on the assumption that the FIDIC Yellow Book Contracts would be performed. Further, due to the allocation of risk under the contract, Clause 8.1 of the General Conditions of Contract (as modified) required the Contractor to “proceed with the works with due expedition and without delay, until completion”. To do otherwise because of an expectation that the FIDIC Yellow Book Contracts was likely to be terminated before completion would be inconsistent with that obligation and would also expose the Contractor to a risk of liability to pay liquidated damages and incurring other additional costs in the event that the FIDIC Yellow Book Contractswas not terminated early for which it would not be entitled to any compensation from the Employer. It is unreasonable to expect the Contractor to take such a risk.
However, the Privy Council pointed out that a “prudent contractor” would not generally commit itself to purchasing equipment before it is needed (taking into account delivery times) and before the designs to which the equipment must conform have been finalised, which in essence was the Employer’s primary position that this is exactly what the Contractor done.
Was it premature for the Contractor to purchase equipment and to enter into such contracts at this stage of the projects?
In circumstances, the final designs had not yet been approved by the Employer and were subject to change. The Privy Council stated, it was not inconsistent for the judge in the lower court to find that before the final designs were approved it was possible to identify the equipment likely to be needed with sufficient certainty to obtain a quotation for the cost of supplying it, which could be done on the basis of the preliminary designs available, provided the Contractor did not actually order the equipment, subsequent changes in the designs including details which affected the exact specification of the equipment could be accommodated.
A review of the nature of the MAAK contracts and whether they created enforceable obligations?
The Privy Council following disagreed with the lower court’s judge’s analysis of the MAAK contracts and conclusion that the MAAK contracts were not contracts for “the actual supply of the equipment”; rather, they were merely an arrangement by which the Contractor had “sourced, priced and locked in prices to the prices applicable in 2008”. The Privy Council agreed with the Court of Appeal’s judgment and held that by issuing the “purchase orders” the Contractor accepted the terms of MAAK’s quotations as the quotations were on the face of it, offers to sell the equipment described in the quotations at the prices quoted on “Terms and Conditions…” (para 32 of the Privy Council Decision) and further these were governed by the laws of the province of Ontario, Canada and subject to liability of 30% of the quoted price for cancellation charges.
The Contractor bore the burden of proof pursuant to the FIDIC Yellow Book Contracts – has the Contractor discharged its burden of proving that they reasonably incurred a cost or liability that falls within clause 19.6(c) of FIDIC Yellow Book Contracts?
The Contractor bore the burden of proof and in circumstances where only preliminary designs had been completed and much of the design work for the water treatment plants remained to be done, the Privy Council held it was on the face of things unreasonably premature for the Contractor to enter into unconditional contracts to purchase most of the equipment for the plants. The fact that nothing was done to perform those contracts reinforces that impression. Further, the Privy Council held that it was prima facie unreasonable for the Contractor to undertake obligations to pay cancellation charges if the purchase orders were cancelled when MAAK was not, so far as the evidence shows, itself incurring any costs or liabilities for which those charges could be regarded as compensation. In these circumstances to have any prospect of displacing the appearance that the liabilities to pay cancellation charges were unreasonably incurred, the Contractor needed, at least, to adduce evidence from a witness to explain its decision to enter into the MAAK contracts and why this was thought at the time to be in the Contractor’s interests. No such evidence was adduced by the Contractor (paragraphs 39 to 41 of the Judgment) and in the absence of such evidence, the submissions made on this point was based on speculation.
In the circumstances, the Privy Council could not find anything to displace, or as stated: which was capable of displacing, the inference that it was unreasonable for the Contractor to enter into the MAAK contracts when it did. More specifically, there was no good reason given or shown for undertaking obligations to pay cancellation charges equal to a minimum of 30% of the prices quoted by MAAK if the purchase orders were later cancelled, regardless of whether at the time of such cancellation MAAK had taken any steps whatever to perform the contracts. In short, this was a very bad bargain for the Contractor to have made.
Conclusion
The Privy Council upheld the Court of Appeal’s judgment confirming that the Contractor’s liabilities to pay cancellation charges to MAAK did not fall within Clause 19.6(c) of the FIDIC Yellow Book Contracts. The appeal was therefore be dismissed with the Contractor incurring significant costs and liability for which it was unable to recover from the Employer. The key takeaways include:
1. Contractors demonstrating costs and liabilities have been reasonably incurred pursuant to Clause 19.6(c) of the FIDIC Yellow Book 1999, when seeking to recover such costs and liabilities will need to be able to provide credible evidence taking into account all relevant factors to support such construction claims.
2. Contractors should keep clear records to support such construction claims.
3. Contractors should ensure that they are able to justify early procurement decisions which as in this case, attract significant costs and liabilities taking into account amongst other things, the stage of the design and project when binding agreements are made with third parties which they would seek to recover pursuant to Clause 19.6(c) of the FIDIC Yellow Book 1999 if the contract is terminated as it was in this case.
The above is for general information only and to encourage discussion and does not constitute legal advice. The author does not assume any responsibility for the accuracy of any statements made and appropriate legal advice should be taken in each instance and relied upon before taking or omitting to take any action in respect of any specific matter.
Charles Edwin Edwards MSt(Cantab) MSc(Lond) MCIArb MRICS FCInstCES Barrister
New Temple Chambers
30 St Mary Axe (The Gherkin)
London EC3A 8BF
16th April 2025
charles.edwards@newtemplechambers.com
For further information with regard to the resolution of any construction, engineering or infrastructure dispute and issues as set out above, please do not hesitate to contact, Charles Edwards, high performing Construction Barrister and Head of Chambers at New Temple Chambers to see how chambers can assist you or your organisation.
