In Water and Sewerage Authority of Trinidad and Tobago v Waterworks Ltd [2025] UKPC 9, the Privy Council dismissed a contractor’s appeal in a case about cost recovery following the early termination of a construction contract. The contractor had sought reimbursement for cancellation charges it paid to a third-party supplier. However, the Privy Council ruled that these costs were not “reasonably incurred” in anticipation of completing the project and were therefore not recoverable from the employer.
The Yellow Book
FIDIC contracts are standard in international construction, and the 1999 Yellow Book was the basis for two agreements between the Water and Sewerage Authority of Trinidad and Tobago (the "Employer") and Waterworks Ltd (the "Contractor"). These contracts covered the design and construction of water treatment plants.
Under the Yellow Book, the employer could terminate the contract at any time for convenience, without any fault on the contractor’s part. However, unlike later editions (such as the 2017 version), the 1999 version did not allow the contractor to claim for lost profit in such cases. Instead, clause 19.6 stipulated that the contractor would only be reimbursed for work done and costs incurred up to the point of termination. Specifically, clause 19.6(c) allowed for reimbursement of any other costs or liabilities that were "reasonably incurred by the Contractor in the expectation of completing the Works."
The dispute
The contracts (named the "Matura contract" and "Yarra contract") were terminated before construction had even started. A year earlier, the Contractor had signed a deal with a third-party, MAAK Technologies Group Inc. ("MAAK"), to supply equipment. When the project was cancelled, the Contractor became liable for cancellation fees towards MAAK — amounting to 30% of the equipment's quoted price — and sought to recover these charges under clause 19.6(c) from the Employer.
The key question in the dispute was whether these cancellation charges, resulting from the termination of the third-party agreement, could be considered "reasonably incurred by the Contractor in the expectation of completing the Works" under clause 19.6(c).
Procedural history
Initially, the High Court of Trinidad and Tobago sided with the Contractor, ruling that it was reasonable to order equipment early to keep within budget.
This decision was overturned. The Court of Appeal of the Republic of Trinidad and Tobago held that entering into a binding equipment supply contract — with significant cancellation penalties — was premature, especially since the project designs were incomplete.
The Contractor then appealed to the Privy Council.
Privy Council's decision
The final appeal was dismissed. The Privy Council found that the cancellation charges did not meet the threshold of being “reasonably incurred” under clause 19.6(c). Their reasons included:
- The project was still in its early stages, with final designs yet to be approved.
- The Contractor had no clear justification or documentation explaining why it entered into the supply agreement so early.
- Agreeing to cancellation penalties at such a preliminary phase was, in the court's view, commercially unreasonable.
Whilst this case is not binding on UK courts, it will be persuasive given the limited amount of UK case law on FIDIC contracts.
Key takeaways
- Know your contract - costs arising from what courts consider poor or premature contractual decisions may not be recoverable.
- Where a major supply contract contains hefty cancellation penalties, avoid committing before designs are finalised and approvals secured.
- If early commitment is necessary (e.g. due to long lead times or volatile prices), keep a record of your commercial reasoning – it may be the difference between recoverable and irrecoverable costs.
