Recovery of Reasonably Incurred Costs Following Termination

The recent Privy Council decision in Water and Sewerage Authority of Trinidad and Tobago v Waterworks Ltd [2025] UKPC 9 relates to a Contractor’s claim for the recovery of reasonably incurred costs under a FIDIC Yellow Book 1999 contract after a termination for convenience. This decision provides useful insight on the approach to interpreting reasonably incurred costs and the evidence required in support of such claims.

Background

Waterworks Ltd (the Contractor) and Water and Sewerage Authority of Trinidad and Tobago (the Authority) entered into two contracts based on the FIDIC Yellow Book 1999 for the design and construction of two water treatment plants.

The contracts contained a termination for convenience clause allowing the Authority to terminate the contracts at any time. Additionally, the contracts provided in clause 19.6(c) that following a termination for convenience, the Contractor was entitled to the reimbursement of its costs including “…any other Cost or liability which in the circumstances was reasonably incurred by the Contractor in the expectation of completing the Works” (emphasis added).

The Contractor engaged MAAK Technologies Group Inc (MAAK) for the supply of equipment. The supply agreements contained a clause making the Contractor liable to pay cancellation charges of 30% of the total price quoted for equipment.

During the design and build contracts, issues arose surrounding the need to relocate the site of the plants and there was a lack of environmental approvals.

The Authority exercised its contractual right to terminate for convenience for both plants prior to the finalisation of any designs or the commencement of construction. As a result, the Contractor terminated the supply agreements and MAAK required payment of the cancellation charges. At this time, no equipment had been delivered under the supply agreements.

The main issue in dispute was whether the cancellation charges fell within the scope of clause 19.6(c) of the design and build contracts, enabling the Contractor to seek reimbursement from the Authority.

The High Court of the Republic of Trinidad and Tobago decided in favour of the Contractor, holding that it was reasonable to agree to the supply of equipment early on to ensure their costs remained within their budget. Therefore, the cancellation charges were reasonably incurred and within the scope of clause 19.6(c) of the design and build contracts.

On appeal by the Authority to the Court of Appeal of the Republic of Trinidad and Tobago, the High Court’s decision was overturned. The Court of Appeal concluded that it was unreasonable for the Contractor to agree to the supply of equipment with MAAK and commit to the extensive liabilities arising from the cancellation charges when the preliminary designs were at such an early stage. Subsequently, the Contractor appealed to the Privy Council.

The decision

The Privy Council dismissed the appeal finding in favour of the Authority. Ultimately, the Privy Council concluded that the cancellation costs incurred by the Contractor were not reimbursable under clause 19.6(c) of the contracts because they were not reasonably incurred.

In arriving at its decision, the Privy Council considered the interpretation of “reasonably incurred”.

The Privy Council determined that generally, costs incurred by a contractor in expectation of completing the works will be reasonably incurred. A contractor may act under the assumption that the contract will be performed and need not hold back based on the likelihood of a termination.

The Privy Council considered the position of a commercial contractor and concluded that a commercially attuned contractor would typically avoid agreeing to the supply of equipment at an early stage prior to the finalisation of designs which would determine what equipment was necessary. Whilst it would have been reasonable for the Contractor to obtain cost estimates for the supply of equipment based on preliminary designs, it was premature for the Contractor to commit to ordering the equipment. The Privy Council also noted that before procuring the equipment, the Contractor would have to submit final designs for the Authority’s approval, and until these final designs were approved, the details of the equipment could change.

The Privy Council took into account the nature of the cancellation charges noting that MAAK would not have incurred any cost or liability on termination of the supply agreements. MAAK’s entitlement to the cancellation charges was effectively a form of compensation. Further, the burden of proof was on the Contractor to provide evidence that it incurred these costs reasonably and they fell within the scope of clause 19.6 (c) which it failed to do so.

Therefore, the Contractor acted unreasonably when it entered into an unconditional contract with MAAK and agreed to be liable for compensatory cancellation charges. The Privy Council concluded this was a “very bad bargain” for the Contractor to have made.

Comment

The Privy Council’s decision highlights a number of interesting points on the interpretation of reasonably incurred costs, the criticality of providing evidence in support of a claim and the impact of different contractual provisions.

First, the decision provides guidance on the approach to determining what costs were reasonably incurred. In this instance, when interpreting the recoverability of costs under clause 19.6(c), the Privy Council decided reasonably incurred costs did not extend to costs that amounted to a contractor’s bad bargain.

Second, the decision illustrates the importance of supplying sufficient evidence when seeking to recover losses. The Contractor failed to adduce any evidence to substantiate why it entered into the supply agreements with MAAK and why the cancellation charges were reasonably incurred. Faced with no evidence to support that the costs were reasonably incurred, the Privy Council felt that there was no good reason to order the repayment of those costs. The decision serves as a useful reminder that providing adequate evidence is critical to a successful claim.

Third, as was noted by the Privy Council in the judgment, the more recent 2017 FIDIC Yellow Book incorporates additional provisions enabling contractors to recover compensation for loss of profit in the event of a termination for convenience. Such wording would no doubt have assisted the Contractor more generally with the recovery of its losses following the termination.

Cassandra Stead, Trainee Solicitor, co-authored this briefing.