Water and Sewerage Authority of Trinidad and Tobago v Waterworks Ltd

Under a construction contract allowing termination for convenience, a contractor may generally incur costs and liabilities on the assumption that the contract will be performed. The employer’s possible early termination will not ordinarily make such expenditure unreasonable, given the contractor’s obligation to proceed and the allocation of risk.

Reasonableness remains sensitive to timing. A contractor should not generally commit to purchasing equipment before it is needed or before the relevant designs are finalised. The contractor bears the burden of proving that the cost or liability was reasonably incurred. Evidence of the commercial justification for the commitment may be essential where the transaction appears prematurely entered into.

Water and Sewerage Authority of Trinidad and Tobago v Waterworks Ltd concerned two 1999 FIDIC Yellow Book contracts for the design and construction of water treatment plants. The Authority terminated both contracts for convenience before construction began. The Contractor had entered into contracts with MAAK Technologies Group Inc to purchase equipment and was liable for cancellation charges of 30% of the quoted prices.

The High Court allowed the Contractor’s claim for those charges. The Court of Appeal allowed the Authority’s appeal and held that the commitments were premature and that the documents created contracts for the actual supply of equipment. The Contractor appealed to the Privy Council. The central issue was whether the cancellation liabilities were reasonably incurred in the expectation of completing the works under clause 19.6(c) of the FIDIC General Conditions.

1. Disposition. The Board dismissed the appeal. The cancellation liabilities did not fall within clause 19.6(c).
2. General approach. A contractor is generally entitled to proceed on the assumption that the contract will be performed and to incur costs and liabilities on that basis. The possibility that the employer may terminate for convenience will not ordinarily make the expenditure unreasonable. This follows from the allocation of risk under the contract and the Contractor’s obligation under clause 8.1 to proceed with due expedition and without delay. Holding back could expose the contractor to liquidated damages and other costs if termination did not occur.
3. Timing and reasonableness. Those considerations did not make all timing questions irrelevant. A prudent contractor would not generally commit to purchasing equipment before it was needed, allowing for delivery times, or before the designs to which the equipment had to conform were finalised. The site difficulties, absent environmental approvals and other risks of early termination were therefore not relevant, but the premature nature of the equipment commitments was relevant.
4. Nature of the MAAK contracts. The purchase orders accepted MAAK’s quotations and created contracts for the actual sale and purchase of equipment. An agreement leaving the time for transfer of property and possession entirely unspecified would be too vague, but that difficulty did not arise. Under the common law, reflected in Trinidad and Tobago Sale of Goods Act, section 30(2), delivery within a reasonable time was required where no delivery time was stated. What constituted a reasonable time was a question of fact under section 56.
5. Burden and application. The Contractor bore the burden of proving that the liabilities were reasonably incurred. The contracts were unconditional, the designs were only preliminary, no evidence showed that MAAK had incurred expenditure or taken steps to perform, and no witness explained why the Contractor chose binding sale contracts carrying cancellation charges of at least 30%. General evidence about normal business practice did not justify this particular commitment. The trial judge’s evaluation was vitiated by her mistaken view of the contracts and her failure to analyse the reasonableness of the cancellation liabilities at that stage. The Court of Appeal was accordingly right to overturn her decision.

• Privy Council: The Contractor’s appeal as of right was dismissed.
• Court of Appeal of the Republic of Trinidad and Tobago: Allowed the Authority’s appeal and overturned the High Court’s decision on the cancellation charges.
• High Court: Jones J allowed the Contractor’s claim to recover the cancellation charges in ancillary proceedings.