This article was first published in the Practical Law Construction Blog.
Carr J’s judgment in J Murphy & Sons Ltd v Beckton Energy Ltd offers a salutary reminder of the dangers that can befall a contractor when dealing with an unfamiliar amended contract. Not getting to grips with the operation of amended clauses, and the interplay between them, can be a trap for the unwary, as J Murphy & Sons found out to its cost. It is critical that parties know and understand the operation of the terms they are agreeing to before entering into the contract.
Murphy v Beckton
The facts in Murphy were straightforward. In March 2013, the parties contracted for the construction of a power plant in Beckton, East London using an amended version of the FIDIC Yellow Book. They also agreed that Murphy would obtain an on-demand performance bond.
Amendments to the contract meant that, alongside the standard mechanism for claiming delay damages determined by the engineer under clauses 2.5 and 3.5 of the Yellow Book, there was a separate regime under amended clause 8.7, which did not refer to clause 2.5. There was also an amended clause 4.2 governing notification in relation to a call on the bond, which also did not refer to clause 2.5.
The key point was that the amendments created two separate mechanisms that were not easily reconciled. The dispute arose from uncertainty as to the interplay between the two. The principal difference between the mechanisms was that, under clause 2.5, an employer’s claim for liquidated damages required the engineer to determine the amount due under clause 3.5. By contrast, the amended clause 8.7 did not contain any reference to clause 2.5 and, instead of the engineer’s determination, fixed the sums payable in respect of liquidated damages.
The project was significantly delayed and Beckton notified Murphy of its intention to claim liquidated damages by a call on the bond. Initially, this claim was to be brought in accordance with clause 2.5. However, Beckton then changed its position and gave notice of its intention to make a demand on the bond, on the basis of a claim for liquidated damages under clause 8.7.
Murphy did not accept that Beckton was entitled to bring its claim without first obtaining the engineer’s determination in accordance with clause 3.5. Therefore, it brought a Part 8 claim for a declaration that there had to be a determination under clause 3.5 and for an injunction to restrain Beckton’s call on the bond, on the basis that to do so would be fraudulent.
Against that background, Carr J considered that she had two issues to deal with:
- Whether Beckton was entitled to recover liquidated damages from Murphy under clause 8.7 “without agreement or determination by the Engineer of Beckton’s entitlement to liquidated damages under Sub-Clauses 2.5 and 3.5” (issue 1).
- Whether, if Murphy succeeded on issue 1, Beckton’s call on the bond would be fraudulent (issue 2).
Construction of the relevant clauses
It is relatively rare to have a TCC decision dealing with the construction of a FIDIC contract, partly due to the arbitration clause that most FIDIC contracts contain. As a result, this is an interesting decision on that basis, if nothing else.
The standard position regarding a claim for liquidated damages under clause 2.5 of the Yellow Book is set out in Lord Neuberger’s 2015 Privy Council judgment in NH International (Caribbean) v National Insurance Property Development Company Ltd. There, the clause was held to be of wide application so that it applies to any claim that the employer wishes to raise.
By contrast in Murphy, Carr J held that the amended clause 8.7 provided a distinct mechanism for claiming liquidated damages that was not caught by clause 2.5. She construed the clauses in this way for three principal reasons, which provide useful guidance on the construction of an amended FIDIC contract:
- First, Carr J noted that the amended clause 8.7 contained no reference to clause 2.5, whereas the standard wording of the clause did. She held that this was “relevant background” to construing the clause. Construction by reference to deleted words is an interesting issue, as seen in the Court of Appeal’s judgment in Narandas-Girdhar v Bradstock. The decision in Murphy emphasises that a comparison between the standard and amended clauses in a standard form contract may be used to construe an ambiguous clause.
- Secondly, Carr J was influenced by the fact that clause 8.7 was a “self-contained regime” in relation to delay damages. For example, the clause set out the obligation to pay, the precise amounts due and fixed the time for payment or deductions to be made. It did not require any further elements, such as those in clauses 2.5 and 3.5, in order to be operational.
- Finally, Carr J held that the inconsistencies between clauses 2.5 and 8.7 indicated that they were separate mechanisms for claims. The procedure, timing and calculation of sums due were all different under the two clauses. Rather than finding that such inconsistencies rendered clause 8.7 inoperable, she took the view that construing clause 8.7 as a separate regime was the most appropriate construction. Given the ease with which inconsistencies can occur in amended contracts, this is an important point to note.
As a result of her findings on the issues above, Carr J was not required to deal with the second issue she identified, namely whether Beckton’s call on the bond would be fraudulent. Despite that, she chose to briefly address the point and provided some useful guidance on the issue, even if it is obiter.
Her view was that Murphy’s position was misconceived on this second issue. She stated that:
“The fundamental flaw in Murphy’s approach is to confuse liability on the part of Murphy to pay delay damages under Clause 8.7 with the agreed mechanism for resolution of the parties’ dispute in Sub-Clauses 2.5 and 3.5 which leads to enforcement…
The fact that there was such an outstanding process does not mean that Murphy has no liability to account for delay damages. The trigger for a performance bond is belief on the part of the drawing party in its entitlement, not such entitlement having been subject to a final determination giving rise to a payment obligation.”
Ultimately, she held that even if clause 8.7 was subject to clause 2.5, Murphy would not be able to obtain its injunction. It would not be fraudulent for Beckton to call on the bond because what was required was not a determination as to damages, but Beckton’s belief as to its entitlement. That is simply the nature of an on-demand performance bond such as this.
Murphy is certainly not the first contractor to discover the harsh effect of an on-demand bond and will likely not be the last.
Murphy v Beckton provides a reminder of the need to fully understand the operation of a construction contract. Where amendments to a standard form have created inconsistencies between clauses, it is important to consider and understand how these will be construed. For parties at the negotiation stage, it may be possible for any such problems to be avoided in advance.
The case also provides further guidance on the strict operation of on-demand performance bonds. A contractor who agrees to obtain such a bond must be aware of the significant difficulty they would face in opposing an employer who wishes to call upon it.
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