Suspension and Termination under FIDIC Red Book (First Edition, 1999)
Our Associate Budoor Alhalwachi examines contractor remedies under the FIDIC Red Book for delayed payments, alongside relevant protections under Bahraini law.
Budoor Alhalwachi (balhalwachi@raeesandco.com) – Associate
FIDIC contracts are the foremost contracts used in international construction and engineering projects. The form of contract known as the FIDIC Red Book is the Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (First Edition, 1999) is arguably the most used within the FIDIC suite of contracts (hereinafter the Red Book).
The Red Book is intended for use in the traditional form of contracting where the employer provides the design, and the contractor constructs the works in accordance with the design. The contractor may also receive additional instructions, typically limited to elements requiring specialist input or detailed technical specifications. The contract price is determined by remeasurement and evaluation at the rates and prices contained within the contract. This allows tenders to be based on estimated quantities (possibly before detailed design for all the project elements has been completed) and the final price to be based on the “as-built” design. Where an engineer is appointed to administer the contract on behalf of the Employer.
Timely payment by the employer constitutes a fundamental obligation under the Red Book. Nevertheless, delayed payments are a recurring issue in practice. In such circumstances, the contractor is not left without recourse. The principal mechanisms available to the contractor in response to delayed payment are outlined and discussed below in the context of the Red Book.
Claims for Interest on Delayed Payment
Sub-Clause 14.8 (Delayed Payment) provides the following:
“If the Contractor does not receive payment in accordance with Sub-Clause 14.7 [Payment], the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay. This period shall be deemed to commence on the date for payment specified in Sub-Clause 14.7 [Payment], irrespective (in the case of its sub-paragraph (b)) of the date on which any Interim Payment Certificate is issued.
Unless otherwise stated in the Particular Conditions, these financing charges shall be calculated at the annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment, and shall be paid in such currency.
The Contractor shall be entitled to this payment without formal notice or certification, and without prejudice to any other right or remedy.”
FIDIC acknowledges the importance of the contractor’s cash flow to the overall success of the project and gives the contractor entitlement to the payment of financing charges in the case of late payment. The contractor is not obliged to give notice for such a claim. This Sub-Clause sets out the method of calculation of the financing charges by way of the amount unpaid during the period that the payment is delayed at a rate of 3% over the central-bank rate in the country of the currency of payment. Moreover, the provision permits monthly compounding of these charges, allowing accrued amounts to be included in future calculations if they remain unpaid.
Sub-Clause 14.8 is applicable not only to a situation where the contractor receives no payment but also where there is a partial shortfall in the amount due. The amount to which the contractor is entitled to be paid would be in accordance with the engineer’s payment certificate under the Red Book. However, in instances where the engineer fails to issue such a certificate, it is understood that the contractor may rely on the amount stated in their submitted payment application as the basis for calculating any entitlement.
Contractor’s Suspension of Work
Where Sub-Clause 14.8 (Delayed Payment) entitles the Contractor to the payment of financing charges in the case of delayed payments, Sub-Clause 16.1 (Contractor’s Entitlement to Suspend Work) introduces further measures that the Contractor may take in case if the employer’s or engineer’s failure in connection with the provision of financial information or payment procedures. Sub-Clause 16.1 provides the following:
“If the Engineer fails to certify in accordance with Sub-Clause 14.6 [Issue of Interim Payment Certificates] or the Employer fails to comply with Sub-Clause 2.4 [Employer’s Financial Arrangements] or Sub-Clause 14.7 [Payment], the Contractor may, after giving not less than 21 days’ notice to the Employer, suspend work (or reduce the rate of work) unless and until the Contractor has received the Payment Certificate, reasonable evidence or payment, as the case may be and as described in the notice.
The Contractor’s action shall not prejudice his entitlements to financing charges under Sub-Clause 14.8 [Delay Payment] and to termination under Sub-Clause 16.2 [Termination by Contractor].
If the Contractor subsequently receives such Payment Certificate, evidence or payment (as described in the relevant Sub-Clause and in the above notice) before giving a notice of termination, the Contractor shall resume normal working as soon as reasonably practicable.
If the Contractor suffers delay and/or incurs Cost as a result of suspending work (or reducing the rate of work) in accordance with this Sub-Clause, the Contractor shall give notice to the Engineer and shall be entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to:
- An extension of time for any such delay. If completion is or will be delayed under Sub-Clause 8.4 [Extension of Time for Completion], and
- Payment of any such Cost plus reasonable profit, which shall be included in the Contract Price.
After receiving this notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine these matters.”
The contractor is entitled, after giving 21 days’ notice, to suspend or reduce the rate of work in the case of: (i) failure of the engineer to certify payment under the Red Book, (ii) failure of the employer to provide evidence of the financial arrangements that will enable the employer to pay the contract price if such evidence has been requested by the contractor, and (iii) failure of the employer to make payment in accordance with the contract.
A sustained suspension or a reduced pace of work is very likely to impact the time of completion and lead the contractor to incur additional Cost. When this occurs, the Contractor may claim an extension of time along with compensation of the cost, including reasonable profit.
Bahraini Law Position on Suspension of Work
The act of suspension may be exercised unilaterally, even in the absence of explicit contractual provisions detailing the conditions under which suspension is permitted. However, courts will assess the lawfulness of the suspension by reference to the overriding principle of good faith and will consider whether the breach of a reciprocal obligation is sufficiently serious to justify such a measure.
Bahraini law places particular emphasis on the principle of good faith as a fundamental principle governing all contractual relationships. This is codified in Article 129 of the Bahraini Civil Code, which stipulates the following: “The contract shall be performed in accordance with its provisions and in such a manner that is consistent with the requirements of good faith and honesty”. This has also been affirmed by the Bahraini Court of Cassation in Challenge No. 12 J.Y. 2023 which held:
“ […] in accordance with the text of Articles 128 and 129 of the Civil Code, the contract is the law of the contracting parties and that the contract must be performed in accordance with its terms and in a manner that is consistent with what is required by good faith and honourable dealing”.
Termination of the Contract by the Contractor
Clause 16.2 (Termination by Contractor) sets out the right of the Contractor to terminate the Contract under the Red Book providing the following:
“The Contractor shall be entitled to terminate the Contract if:
- the Contractor does not receive the reasonable evidence within 42 days after giving notice under Sub-Clause 16.1 [Contractor’s Entitlement to Suspend Work] in respect of a failure to comply with Sub-Clause 2.4 [Employer’s Financial Arrangements],
- the Engineer fails, within 56 days after receiving a Statement and supporting documents, to issue the relevant Payment Certificate,
- the Contractor does not receive the amount due under an Interim Payment Certificate within 42 days after the expiry of the time stated in Sub-Clause 14.7 [Payment] within which payment is to be made (except for deductions in accordance with Sub-Clause 2.5 [Employer’s Claims]),
- the Employer substantially fails to perform his obligations under the Contract,
- the Employer fails to comply with Sub-Clause 1.6 [Contract Agreement] or Sub-Clause 1.7 [Assignment],
- a prolonged suspension affects the whole of the Works as described in Sub-Clause 8.11 [Prolonged Suspension], or
- the Employer becomes bankrupt or insolvent, goes into liquidation, has a receiving or administration order made against him, compounds with his creditors, or carries on business under a receiver, trustee or manager for the benefit of his creditors, or if any act is done or event occurs which (under applicable Laws) has a similar effect to any of these acts or events.
In any of these events or circumstances, the Contractor may, upon giving 14 days’ notice to the Employer, terminate the Contract. However, in the case of subparagraph (f) or (g), the Contractor may by notice terminate the Contract immediately.
The Contractor’s election to terminate the Contract shall not prejudice any other rights of the Contractor, under the Contract or otherwise.”
Pursuant to Sub-Clause 16.2(b) and (c), the contractor is entitled to serve notice allowing the employer a 14 day period to address a breach where: (i) payment has not been certified within 56 days, or (ii) payment due under the contract remains outstanding 42 days after the specified due date. Should the employer fail to make the necessary payment within this timeframe, the contractor may proceed to terminate the contract. It is worth noting, however, that FIDIC contracts are designed for international application and may not reflect the specific legal requirements found in certain regional civil law jurisdictions regarding the termination of contracts.
Bahraini Law Position on Termination of the Contract
Except where expressly agreed otherwise, a contract may not be terminated by one party acting alone. A party seeking to terminate must apply to the court for an order declaring the contract terminated. Articles 140 and 141 of the Bahraini Civil Code allows judges absolute discretion in approving the termination of contracts where performance is no longer possible.
Article 140 of the Bahraini Civil Code provides that in a bilateral contract, if one party fails to perform their obligations within the agreed time frame, the other party is entitled to either demand the performance of the contract or seek its rescission from a judge. It further stipulates that the non-breaching party may claim damages for any losses incurred due to the non-performance, provided they themselves have not failed to meet their own contractual duties. However, depending on the circumstances, the judge has the discretion to grant an extension of time to permit the defaulting party to fulfill their obligation. The judge may also decline the application for rescission if the unperformed obligation is considered insignificant in relation to the contract’s overall obligations.
According to Article 141 of the Bahraini Civil Code, if one party does not fulfill their contractual duties, the contract is not automatically terminated unless a court issues an order to that effect. This automatic termination can only occur if the contract explicitly states so and both parties fully understand the legal implications involved. In other words, failure to perform does not inherently lead to the contract being voided unless there is a clear mutual agreement stating otherwise.
This has been confirmed by the Bahraini Court of Cassation in Challenge No. 246 J.Y. 2011 wherein the Court held that:
“It is established, according to Articles 140 and 141 of the Civil Code, that in bilateral contracts, if one of the parties fails to fulfil their obligation when due, the other party may, after serving notice, request that the contract be rescinded, unless they themselves have also failed to fulfil their obligations. In non-commercial matters, the intention of both parties expressed explicitly in the contract to treat the contract as automatically terminated in the event of non-performance does not exempt the requirement of notice, even if they agree to waive it. Therefore, notice is considered an essential condition for the rescission of the contract, whether it is an agreed rescission that occurs immediately upon the failure to perform according to the contract’s terms or a judicial rescission, which arises through a court order in the absence of such a provision”.
Concluding Remarks
The affected party must decide how serious the situation is and whether it is worth taking action when the contract is breached. Enforcing rights under the contract often involves weighing the cost and effort of doing so against the possible impact on the business relationship. Contractors hoping to win future work from a major employer may be more willing to accept difficult conditions. This can lead some employers to take advantage by delaying payments. However, in the long run, this approach can backfire, as contractors may increase their prices to cover the risk of late payments.
For more information, please contact us on info@raeesandco.com.