‘25. Claimant’s position about non-performance

Claimant maintains that the case is not one of delayed performance but of total non-performance by Respondent, because a) the drilling was finished thanks to the intervention of the Claimant and b) because, by failing to meet the timescale, Respondent did not fulfil the essential obligation of the Agreement. Claimant also maintains that Respondent behaved with bad faith and that it committed a serious, grave and inexcusable defaulting, which is equal to deceit (culpa lata dolo aequiparatur).

26. On the above assertions, the arbitral tribunal considers:

a) Claimant’s intervention to assist Respondent, by assuming an essential part of Respondent’s duties by hiring equipment, and by ordering and paying missing parts for Respondent’s account, has been proved to be important and is to be taken into consideration below, but it cannot be considered as a total non-performance of the Agreement by Respondent.

b) Respondent’s essential obligation was to perform the drilling in the time agreed upon. And the fact that the drilling started 46 days after the agreed date is of particular importance in this case. It constitutes the essence of this dispute. But the time scale alone is not and cannot be considered to constitute Respondent’s essential obligation.

Respondent’s repeated easy promises and undertakings – prior to the Agreement, in the text of the Agreement, and after the Agreement was signed – about its readiness, in contrast with the consecutive successive postponements of the starting date, attest a lack of organization and an irresponsible behaviour, which, however, cannot be equalled to bad faith. During the long 46 days from the promised starting date to the effective one, Respondent did cooperate in order to overcome the difficulties resulting from its lack of readiness. It did accept Claimant’s intervention and did delegate to the Claimant, in writing, its own duties, as they were specified in the Agreement.

Respondent’s lack of readiness, in contrast with its reiterated promises of readiness, constitutes a fault, or “faute” in the sense of applicable French law. However, the arbitral tribunal was not convinced that such a faute was intentional, or that such a faute was of a serious and inexcusable gravity (faute lourde): it did not lead to the non-accomplishment of the drilling.

But it was a faute, and such a fault created a damage on the part of the Claimant. We shall revert on this question. Prior to that, it is necessary to establish the relationship between Art. II and Art. V(c) of the Agreement.

27. Schedule of work and default penalties.

Article II of the Agreement reads:

Schedule of work:

[Respondent] will mobilize, and have ready for shipment, the thereinafter specified equipment, in order to start the drilling operations on [date].

Drilling and testing operations shall be performed under a working schedule of 10 hour shifts, 1 shift per day, 7 days per week.

The anticipated duration of the drilling operation is 6 weeks, but according to rock and soil conditions the effective duration may vary. Nevertheless any delay due to default of the drilling equipment or inefficiency of the drilling operation will not be accepted.

Article V(c) reads:

If [Respondent] fails to adhere to the work programme as stated under Article II: Schedule of Work, due to any reasons directly imputable to themselves, then a penalty of US dollars 1000 per calendar day will apply up to a maximum amount of 5% of the contract value, excluding obstructions by [State C] customs out of [Respondent]’s reasonable control.

The combined effect of Articles II and V(c) is that:

a) The drilling operations should have started on [the agreed date] and they were anticipated to last 6 weeks, but b) any delay due to default, i.e. late arrival or bad condition of the drilling equipment would not be accepted.

It results from the wording of the above two Articles that the liability limitation of Art V(c) is not applicable when, as provided in Art. II, there is a delay in the performance of the drilling due to late arrival or to defective mechanical state of the drilling equipment.

28. Expenses incurred by Claimant and due by Respondent

The expenses resulting for the Claimant on account of its complying with its obligations are not damages: They have nothing to do with the compensatory nature of damages. They are expenses incurred because Claimant conformed itself with the stipulations of the Agreement, during Respondent’s failure to comply as a result of “default of the drilling equipment”, “default” which consisted in the absence of the agreed upon drilling equipment on the starting date, and long after it (46 days), as well as serious technical deficiencies of that equipment. In addition, they are expenses incurred by Claimant’s officials in order to assist and organize Respondent’s personnel and equipment during the 46 days’ “crossing of the desert” of Respondent’s inadequacy.

………

29. The liquidated damages

Article V(c) of the Agreement reads as follows:

Default penalities (sic). If [Respondent] fails to adhere to the work programme as stated under Article II: Schedule of Work, due to any reasons imputable to themselves, then a penalty of US dollars 1000 per calendar day will apply up to a maximum amount of 5% of the contract value, excluding obstructions by [State C] customs out of [Respondent]’s reasonable control.

Both written and witness evidence have shown that, due to default of the drilling equipment, Respondent started the drilling 46 days later than the agreed date, and only thanks to Claimant’s initiative and active involvement in Respondent’s duties.

According to Art. 1147 French Civil Code, invoked in Annex 3 of the legal opinion … produced by the Respondent, a debtor is ordered to pay damages, whenever there is such a case, either [......] or on account of delayed performance, even if there is no bad faith by him, always when he does not prove that the default is due to an external cause that cannot be attributed to him.

As already dealt with, Respondent did not prove that the delayed performance of the drilling was due to reasons not imputable to itself, or, to use the words of the above law provision, to an external cause that cannot be attributed to it.

Since the Agreement provides for liquidated damages for the delay (Article V(c) above), then Article 1152 of the French Civil Code is applicable. It reads as follows:

Lorsque la convention porte que celui qui manquera de l’exécuter payera une certaine somme au titre de dommages-intérêts, il ne peut être alloué à l’autre partie une somme plus forte, ni moindre.

Néanmoins, le juge peut, même d’office, modérer ou augmenter la peine qui avait été convenue, si elle est manifestement excessive ou dérisoire. Toute stipulation contraire sera réputée non écrite.

The above provision may be translated as follows:

When the agreement provides that the party which will default in the implementation of the agreement shall pay a definite amount of money as damages, the other party may not be attributed a higher or a lower amount.

Nevertheless, the judge can, even ex officio, moderate or increase the agreed upon liquidated damages, if the latter are manifestly excessive or derisory. Any stipulation to the contrary shall be reputed not to be written.

If Art V(c) of the Agreement is applied with the 5% limitation, the liquidated damages due by the Respondent must be 5% of the contract value. …

Is such amount “derisory” as compared with the damage caused to the Claimant because of the delay?

An illustration of Claimant’s damage is given in a letter … from the Claimant’s headquarters ... It is worth noting that the above letter is not addressed to the other party; it is a communication within the Claimant’s company. According to that estimation, Claimant’s daily damage is …, and its total damage is [almost ten times the above-mentioned figure of 5% of the contract value].

Nevertheless, in view of Art. II, para. 2b of the Agreement, according to which the default of the drilling equipment and its implications are not covered by the limitation of the liquidated damages clause, as also it has not been proved that the amount of [5% of the contract value] is derisory as compared with the amount of … Claimant’s estimated damage, the arbitral tribunal will not apply Art. 1152, para. 2 of the French Civil Code, and will award the amount of [5% of the contract value] to the Claimant for liquidated damages

30. One arbitrator … declares, with regard to points 28 and 29 above.

I disagree with my honourable colleagues, and my opinion is:

[Respondent] achieved the objectives of the contract …[Respondent] staff completed (85.79%) of the work as compared to the (14.1%) completed by … drillers hired by [Claimant] to operate the replacement rig, as it is evident from the work reports … and [an official of Claimant] said that he stayed on the site for one week only during the drilling period ...

As we decided that the Liquidated Damages Clause is valid and enforceable, and as we have dismissed defences concerning the validity and applicability of this Clause, then we must apply the Liquidated Damages Clause, and the employer may not be awarded compensation which exceeds the maximum stated in the Clause.

The compensation awarded under a valid Liquidated Damages Clause shall cover all the costs and expenses incurred by the employer as a result of the delay or non-performance of the contractor. These costs and expenses are the damages intended to be paid under the Liquidated Damages Clause. Therefore, they shall be limited to the ceiling stated therein.

It should be reiterated and re-emphasized that the costs and expenses incurred by the employer as a result of the delay shall be covered by the Liquidated Damages Clause.

The only exception would be if there was an explicit agreement made in advance between the employer and the contractor to allocate certain works to the employer, or to delegate the employer to purchase certain equipment or materials. The cost of these works and materials would be a debt to be paid by the contractor. But other costs and expenses incurred by the employer without previous agreement and caused by the delay shall be considered the damages covered by the Liquidated Damages Clause. Otherwise, that Clause would be impotent and useless. …’