FIDIC termination for convenience payment did not cover cancellation charges payable under subcontracts

By Philip Hancock, Senior Associate

Even though FIDIC contracts are widely used around the world, it can be hard to find judicial guidance on interpretation of standard terms of FIDIC contracts (because they are often considered in confidential arbitrations).

The case of Water and Sewerage Authority of Trinidad and Tobago (Respondent) v Waterworks Ltd (Appellant) (Trinidad and Tobago) [2025] UKPC 9 is, therefore, a rare treat. It provides helpful insight and guidance on the court’s interpretation of the FIDIC termination for convenience provisions.

The 1999 Yellow Book permits the employer to terminate for convenience (under clause 15.5), and (in such circumstances) provides that the contractor shall be paid in accordance with clause 19.6, which provides that “upon such termination, the Engineer shall determine the value of the work done and issue a Payment Certificate which shall include: … (c) any other Cost or liability which in the circumstances was reasonably incurred by the Contractor in the expectation of completing the Works …”. It was this limb (c) that was considered by the Privy Council in the Waterworks case.

Key takeaways

1. What costs fall within clause 19.6(c) of FIDIC will be a matter of interpretation, by reference to the facts around why a particular cost was incurred. In the Waterworks case, cancellation charges under two purchase orders with suppliers, which were executed at an early stage of the contractor’s design, were not recoverable because the court found that the purchase orders were executed prematurely (because the design had not yet been finally approved by the employer).
2. For that reason, contractors should think carefully about when it is necessary to enter into supply/subcontracts, especially if at an early (e.g. tender) stage, and keep contemporaneous records that help explain why it may be necessary to execute a particular agreement, on particular terms, at a particular time (e.g. the need to secure particular delivery windows).
3. It is helpful for termination provisions of supply/subcontracts to be back-to-back with the main contract, so that whatever is payable to suppliers/subcontractors is more likely to be recoverable from the employer.

Facts of the case

Waterworks Limited (the “Contractor”) was engaged by the Water and Sewerage Authority of Trinidad and Tobago (the “Authority”) to design and build two water treatment plants, pursuant to two design and build contracts (the “Contracts”) based on the 1999 FIDIC Yellow Book (the “Projects”).

The Contracts were executed in July and October 2007. The Contractor was due to commence its works 14 days from the date of the relevant Contract, and then had 15 months to complete the works. The general scheme of works entailed (1) preparation by the Contractor, and approval by the Authority, of preliminary designs, (2) preparation, and approval, of final designs, and (3) construction by the Contractor of the water treatment plants in line with the approved final designs.

Early during the Projects, the Authority informed the Contractor of potential issues that the Authority had to overcome to proceed with the Projects, including acquisition of one of the sites, completion of surveys, and obtaining environmental clearance.   

After execution of the Contracts, the Contractor executed purchase orders (in or around April 2008) with a supplier (“MAAK”) which had, during the tender phase, carried out the Contractor’s design work. The true nature of the purchase orders was in contention during the case, but, in effect, they provided for the supply of equipment by MAAK for use in building each water treatment plant. The purchase orders contained a provision that, if cancelled, the Contractor would be liable to pay a minimum amount equal to 30% of the quoted price of the products to be supplied.

In June and October 2009, the Authority terminated the Contracts for convenience. The Contractor submitted financial claims under the Contracts, which included the 30% cancellation charges for the two MAAK purchase orders. The Engineer determined that the Contractor was not entitled to be paid the 30% cancellation charges. The Contractor’s entitlement to the cancellation charges was the subject of the appeal to the Privy Council, and specifically whether the Contractor was entitled to payment under clause 19.6(c) (i.e., whether they had been reasonably incurred in expectation of completing the works).

Court’s reasoning and decisions

At first instance, the court found that the Contractor was entitled to be paid the cancellation charges. Partly based on witness evidence of MAAK’s president, the judge accepted that it was “necessary and normal business practice” for contractors to enter into agreements with subcontractors at the tender stage, which bound the subcontractor to provide services or equipment at the prices used as the basis of the tender. By such agreements, contractors mitigated the risk of price increases between tender stage and execution stage (a big issue in recent years!).

However, the Trinidad & Tobago Court of Appeal and, ultimately, the Privy Council, disagreed with the that decision. The Privy Council found that the Contractor was unreasonable, and premature, to execute purchase orders for supply of the equipment at such an early stage. That was because it was necessary to obtain the Authority’s approval to the final designs, to give certainty as to what equipment was necessary, which approval the Authority never gave before terminating the Projects.

The first instance decision was partly based on an interpretation that the purchase orders were not in fact orders to obtain the equipment, but rather arrangements to acquire the equipment at an unspecified time in the future, at the price quoted by MAAK in 2008. The Court of Appeal and Privy Council rejected that interpretation and found that the purchase orders were, in fact, purchase orders, and that where the final design was yet to be approved, it was premature to have agreed those purchase orders and, by extension, the 30% cancellation charges.

It was also noted that neither the Contractor nor MAAK had taken any steps to actually arrange shipment or delivery of any of the equipment in the 14 to 18 month period between executing the purchase orders to termination of the Contracts, nor were any invoices raised in the period.

Comment

Part of the Privy Council’s reasoning was that the Contractor had not adduced any evidence that it was reasonable for the Contractor to enter into the MAAK purchase orders, and so the Contractor had not discharged its burden of proof to show that the cancellation charges fell within the meaning of clause 19.6(c).

If the Contractor could have proven that it was reasonable to do so, for example, witness evidence that it was necessary to secure a particular delivery window to keep to the programme, and that the cancellation charges were standard in the industry, the result might have been different.

This case highlights the benefit in keeping contemporary records (e.g. minutes of meetings, internal notes) that evidence why it may be necessary to enter into particular contracts at a particular time, especially where they may be executed at an early stage of the works, or contain onerous terms such as the cancellation charges in the MAAK purchase orders.

It is also a warning that parties should think carefully before agreeing to such terms, where they may not be back-to-back with other agreements (and sums may be payable under one contract, and not recoverable under another).

In relation to the fact that the Authority had indicated at an early stage that there were some issues with the Projects that they had to overcome, the Privy Council helpfully noted that “as a general rule under a contract of this kind, the contractor is entitled to proceed and to incur costs and liabilities on the assumption that the contract will be performed”. So, the Contractor was entitled to proceed with its design and procurement without worrying that the Contracts may be terminated (or, at least, that did not factor against the Contractor in determining whether costs were incurred reasonably).

The 2017 FIDIC Rainbow Suite includes changes that may mitigate against some of these risks: under clause 15.6, termination for convenience by the employer entitles the contractor to payment of “any loss of profit or other losses and damages suffered by the Contractor as a result of this termination”. That clause is drafted more widely than clause 19.6, and so it might be that the Contractor could have recovered the MAAK cancellation charges under the 2017 form.

For more on termination for convenience under FIDIC and how it is dealt with in different forms, please see this excellent article by my colleagues Mark Pantry and Caitlin Binns.

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