Reed Smith Client Alert

Authors: Shareena Edmonds

Type: Client Alerts

It is quite rare to see a Court hand down a judgment in relation to a FIDIC-based contract. The reason is that most FIDIC-based contracts contain an arbitration agreement resulting in disputes being resolved privately and confidentially. Unfortunately, that means there is little available precedent to help arbitrators decide cases. However, in October 2013, the Technology and Construction Court in London handed down two judgments in relation to the Pecem 1 Power Project in Brazil. Those judgments followed an application by a contractor, Doosan Babcock Limited (Doosan), for an interim injunction in support of an arbitration agreement. The judgments highlighted the problem a contractor may face when an employer fails to issue a Taking-Over Certificate (or otherwise fails to accept that the work is complete) and holds on to the performance guarantee. The judgments also reinforced the willingness of the English Courts to support the arbitration process, whenever possible.

Doosan had contracted to supply two boilers to Comercializadora de Equipos y Materiales Mabe Limitada (MABE). Doosan’s position was that MABE had wrongfully failed to issue Taking-Over Certificates for the boilers given that MABE had been using them for some time.

As part of the security package, Doosan had provided two "on demand" performance guarantees which would expire on the issue of the Taking-Over Certificate for each of the boilers, or on 31 December 2013 (whichever being the earlier). In the contract, the original FIDIC wording in relation to performance guarantees had been deleted and new wording substituted, removing the restrictions as to how and when calls on the guarantees might be made. In short, it gave MABE an unfettered right to make a call on the guarantees, subject only to their terms. The guarantees themselves were incredibly wide, such that MABE would simply have to tell the bank that Doosan had failed to perform its obligations in conformity with the terms of the contract before the sums guaranteed would be paid.

In August 2013, MABE threatened to bring claims against Doosan for sums in the region of US$57 million for delays and defective performance. MABE did not mention the guarantees although Doosan was, nevertheless, concerned that a call on the guarantees might be made. Doosan, therefore, sought an interim injunction from the Court in London restraining MABE from making any call. Even though the parties had agreed in the contract to resolve disputes finally by way of an ICC arbitration, the English Court, if it has jurisdiction, is still able in urgent cases to make orders (under Section 44 of the Arbitration Act 1996) to preserve assets (including contractual rights) until such time as an arbitral tribunal is able to decide the case finally.

At the hearing on 4 October 2013, the Court heard from Doosan that the boilers had been taken into use by MABE on 30 November 2012 and 10 May 2013. However, Doosan’s application to the Engineer for Taking-Over Certificates made on 10 July 2013 had been refused. In this case, the Engineer happened to be MABE itself. MABE’s refusal to issue the Taking-Over Certificates relied on a provision in the contract which, MABE said, permitted it to withhold the Certificates where the boilers had been used only as a temporary measure. The evidence, however, suggested that the boilers had, in fact, been used to export more than 7,500 hours of power. In those circumstances, Doosan insisted that the Taking-Over Certificates should have been issued and that the guarantees should have expired.

Because disputes under the contract require final decisions to be made through arbitration, the Court was unable to reach any factual or legal conclusions (that being a matter for the arbitral tribunal). However, before it could decide whether it should grant an interim injunction preventing the guarantees being called, the Court still had to satisfy itself that Doosan had a strong case.

As far as the Court was concerned, Doosan overcame this test. As to the question of whether MABE had taken over the boilers as a temporary measure, the Court commented that:

        "… the suggestion that Units 1 and 2 are only in operation as a temporary measure is, on the material before the court, little short of ludicrous."

Although the Court felt (in this case) it was not required to consider the balance of convenience before granting the injunction, the Court was perfectly happy to conclude that it would have found the balance in favour of restraining a call on the guarantees in any event. It commented:

        "… in short, a call on a bond, even an unjustified one, is likely to damage the commercial and financial reputation of a contractor."

In contrast, restraining the call on the guarantees on an interim basis would do little damage to MABE since the guarantees would not otherwise expire until 31 December 2013 and, by then, the dispute could properly be placed before an arbitral tribunal for final determination.

At the first hearing, an interim injunction was granted to Doosan for 14 days, at the end of which time the Court heard from both parties, MABE having by then fully briefed its lawyers.

At the second hearing, MABE sought to argue that Taking-Over could not be achieved until the Tests on Completion (including all performance tests) had been satisfactorily completed. It also sought to argue that, for Doosan to establish it had a strong case, Doosan was required to demonstrate that MABE has refused to issue the Taking-Over Certificates by acting in bad faith.

Both arguments failed. As to the Tests on Completion, the parties had amended FIDIC’s standard form wording and, on the true construction of the relevant provisions, the Court found that Doosan had a strong case that the Taking-Over Certificates were not dependent on the completion of all the performance tests since some were clearly required after the Tests on Completion had been satisfactorily carried out and failures in relation to the performance tests would be the subject of a separate performance liquidated damages regime.

On the issue of good or bad faith, the Court simply said it had:

        "… difficulty in seeing how anyone could in good faith assert that the taking into use of the units by MABE in July 2013 was only a temporary measure."

In conclusion, the Court considered, on the facts before it, that Doosan had a strong case that MABE’s refusal to issue the Taking-Over Certificates was a breach of contract and, as a result of that breach – and only that breach – MABE was (without an injunction) in a position that it could call the guarantees. MABE should not, therefore, be allowed to benefit from its own apparent wrongdoing.

In the circumstances, the Court continued the injunction until 31 December 2013.

Throughout both judgments, the Court made plain that it was not finally determining any of the issues in the case and that the arbitrators, when appointed, would have the final decision once the cases of both sides had been fully set out.

As we say, not many FIDIC-based contracts are the subject of judicial comment. In this case, the facts alone are particularly interesting, as is the reaction of the Court to the suggestion that the boilers were being used on a temporary basis having exported more than 7,500 hours of power. It is difficult to argue against the latter point, and contractors should take some comfort in the words of the Court, particularly where employers are, in refusing to issue Taking-Over Certificates (or otherwise accepting the work as complete), seeking to benefit from their obvious own wrongdoing.

Finally, since the changes to the ICC Rules in 2012, contractors, like Doosan, may be able to obtain the emergency injunctive relief through the ICC under the "Emergency Arbitrator" procedures; but, given the speed and the willingness of the English Court to assist, such a process may be unnecessary, at least where the seat of arbitration is London.

Client Alert 2013-288