Reasonable Evidence

The 1999 FIDIC forms of contract seem to be gaining increasing popularity in South Africa despite some obvious flaws in the contract drafting, writes Chris Binnington.

Eskom, a staunch supporter of the NEC suite of contracts, has gone out on enquiry for the proposed new conventionally-fired power station at Ellisras (Lephalale), and has elected to use the International Federation of Consulting Engineers (FIDIC) ‘yellow book’ design-and-build contract,

One of the difficulties in using FIDIC forms (not unique to FIDIC) is the frequent use of the term ‘reasonable’. In my experience, what is reasonable’ to the contractor is rarely reasonable to the employer and vice versa.

Of particular concern is the use of the word in Clause 2.4 (Employer’s Financial Arrangements). This peculiar clause gives the contractor rights to request

reasonable evidence that financial arrangements have been made and are being maintained which will enable the employer to pay the contract price”

This piece of late-night drafting by the FIDIC drafting committee has the potential to create serious embarrassment for the contractor if it misinterprets the reasonable evidence’ provided, The rights of the contractor following from a failure to provide the ‘reasonable evidence’ alternatively following provision of evidence, which the contractor determines is not reasonable, are to suspend the work under the provisions of Clause 16.1 and thereafter, and following proper notice, to cancel the contract under Clause 16,2,

The effect of giving notice to suspend where the evidence is in fact reasonable but is misinterpreted by the contractor, even where suspension itself has not taken place, is to create, in law, a repudiation of the contract. Repudiation occurs when one of the parties to a contract demonstrates, by words or deeds, that it no longer intends to be bound by the terms of the contract, Thus, if the contractor misinterprets the evidence when it is in fact reasonable, the giving of the notice to suspend would be repudiation as the contractor would have no rights under the contract to give such notice.

Repudiation provides the other (innocent) party with an election. It can uphold the contract and insist on performance under the contract while, at the same time, reserving the recovery of any damages it may have suffered. Alternatively, and this is the real danger for the contractor, it can accept the repudiation and cancel the contract and claim damages. The damages in this latter case could be very substantial as it will be, in essence, the difference between what it would have cost for the original contractor to complete the work and what it will cost to bring in a new contractor to complete it.

If this clause is to be retained, and it is doubtful in my opinion that many employers will retain it, then an improvement on the clause might be to provide that the Dispute Adjudication Board (DAB) is brought into play where the contractor gives notice requesting the employer to provide financial information. In my view, this information should then be provided on a confidential basis to the DAB and the DAB would then advise the contractor whether or not the evidence was reasonable and hence whether or not the right to suspend exists. This would eliminate the possibility of the contractor misinterpreting the information and consequently running the risk of repudiating the contract.

A far better method would be to eliminate the clause altogether and substitute the requirement that, wherever an employer insists on receiving a performance security, it should put up an equivalent payment guarantee. While such a guarantee will not give the comfort that perhaps the balance of the purchase price will be paid, it will certainly go a long way towards those frequently encountered situations where unscrupulous employers (and unscrupulous contractors vis-á-vis sub-contractors) simply deduct an amount from the final account and threaten to withhold the entire amount if the compromised payment is not accepted. Usually the amount deducted does not warrant entering into dispute and the contractor walks away with less than its contractual entitlement.

The NEC suite of contracts has avoided the use of subjective terms such as ‘reasonable’. In the absence of consensus as to what is reasonable, a Court, or an arbitrator, will be obliged to approach the situation by being reasonable in the circumstances, which in itself may well be difficult! Chief Justice Watermeyer, in the 1950 case of Vanderbijlpark Health Committee versus Wilson, said:

“reasonableness means considering the mailer as a reasonable man normally would and then deciding as a reasonable man normally would decide”

Another judgment, which no doubt while competent in law, does not give the lay person a great deal of guidance. Far better to follow the NEC example and either eliminate such subjectivity altogether by avoiding similar terms or create an objective set of comparisons against which to measure the situation.

Chris Binnington of Binnington Copeland & Associates.