Nicholas Gould, Fenwick Elliott LLP
The new FIDIC 2017 suite of contracts was launched in London at the FIDIC International Contract Users’ Conference in December 2017. The first edition of the suite was issued in 1999, and so 18 years have passed without revision. A pre-release version of the Yellow Book was unveiled on 6 December 2016 at the Users’ Conference in London, which resulted in further consultation, discussion and amendment before the 2017 second editions were concluded. The second-edition contracts include the Red Book (a traditional-build contract, so for construction only with design by the employer), the Yellow Book (a design-and-build contract) and the Silver Book (for EPC/turnkey projects).
The 1999 Yellow Book was 63 pages long, and is now 119 pages (was 69 pages, now 126 pages, if you include the appendices with the DB rules). The contract has therefore approximately doubled in size. Perhaps this is not surprising given the passing of time and the many issues that have been considered and developed in the new contracts. The contracts are prescriptive and so try to set out detailed rules for construction operations with minimal reliance on the substantive law. Parties to international projects come with different backgrounds, expectations and legal knowledge, and so a contract that prescribes the fundamental principles and mechanisms for the detailed development of a project will perhaps lead to fewer disputes about the obligations and rights of the parties.
Unsurprisingly, then, much has changed in the new contract. By way of overview there is an increased role of the engineer. New quality management and compliance requirements are combined with an advance warning system, which also ties in to notification requirements and time bars as part of a claims procedure. Interestingly, old clause 20, dealing with claims and disputes, has now been divided. New clause 20 deals solely with a claims procedure, which is aimed at resolving disagreements before they become disputes.
New clause 21 focuses on disputes and deals with the dispute board and arbitration. The term “claims and disputes” has been defined in order to lead the parties through a procedure for notifying, developing, substantiating and attempting to agree issues that would have an impact on time and money, or perhaps even another form of relief under the new contract
FIDIC’s Task Group 15 that led the drafting of the new contracts set out “Golden Principles” as a guide for the new terms. The principles were, in summary, to clearly set out the duties, rights, obligations, roles and responsibilities of the parties in a clear and unambiguous manner. There was to be a fair, balanced risk allocation, and the parties were to have a reasonable time in order to perform their rights and obligations. Finally, disputes were to be referred to a dispute board for a provisionally binding decision before being allowed to progress to arbitration or litigation.
In relation to reciprocal rights, the contractor and employer are now treated equally in relation to confidentiality, and the need to progress permits and permissions together. There is also a provision for claims relating to permits where one side does not fulfil its obligation. Either party can complain about corrupt practices and require the removal of the other’s personnel. There is also a prohibition of recruitment of the other’s personnel. These provisions apply equally to the contractor and the employer, and balanced reciprocal rights must be welcomed.
Subclause 2.2 has also expanded. The employer must now provide details of its financial arrangements in the contract data. If there is any material change then the employer should notify the contractor about this change. The contractor can also request further financial information if a variation exceeds 10 per cent or the cumulative value of variation exceeds 30 per cent of the accepted contract amount. Whether this provision survives the often amended contracts that are encountered in the international arena remains to be seen. However, these provisions are perhaps reasonable given the substantial financial investment not just by the employer but also by the contractor.
The engineer’s determination procedure has also been revised under new subclause 3.7. The engineer shall act “neutrally” and “shall not be deemed to act for the employer”. The word “neutrally” has not been defined but suggests some form of non-partisan participation. Perhaps more importantly, where a claim arises the employer is to consult jointly and separately with the parties in order to try to encourage agreement. If an agreement can be reached in 42 days then it settles the matter, and the engineer is to record the agreement in writing.
Only after this attempt to settle has failed can the engineer then go on in a further 42-day period to make a determination. FIDIC has, therefore, chosen to elevate attempts to reach an amicable settlement, thus promoting the avoidance of disputes.
The contractor is to put in place a quality management and compliance system at the outset of the project. This is in order to trace as-built records and notices, and ensure proper coordination and interface between the parties. It should be possible to demonstrate that the design, materials and workmanship are all in accordance with the contract, and as aspects of design are developed it should be easier to review the design and also understand the timing and therefore criticality of the documentation on the progress of the physical works.
The contractor’s programme requirements in subclause 8.3 continue to develop in importance, not only in relation to the contract but also in relation to the effective running of the project. The programme must include all activities, and set out the sequence and timing of inspections and tests. All key dates must be identified, and all activities are to be logically linked, also identifying float, rest days and holidays as well as the delivery of materials. A supporting method statement is required. Emphasis here is very much on a more effective approach to project management, including not just the activities on site but those important activities that lead up to the effective construction work at the site.
In relation to risk and insurance, the limitation of liability has been moved from subclause 17.6 to subclause 1.15. Neither party is liable to the other for any loss of use of the works and loss of profit, indirect or in sequential loss. The usual indemnity for personal injury, death and property damage as well as related insurance remains. However, professional indemnity (PI) insurance is now required for any “act, error or omission … in the carrying out of the Contractor’s design obligations”. The issue here is whether a minor act, error or omission (which will be a breach of contract) will actually trigger a professional negligence insurance policy that requires actual negligence in addition to a mere breach. Further, there is also an optional PI insurance clause for the fitness for purpose obligation. Obtaining PI insurance for a fitness for purpose obligation will be more than challenging.
There is a detailed claims procedure at clause 20. Claims for time, money and “another relief” are just disagreements. The aim here is to stop parties jumping straight to arbitration, and instead follow the mechanics of clause 20. Initially, a notice of claim must be issued as a condition precedent. The engineer may issue an initial response deciding whether that notice of claim has been received within the 28-day time limit from the date on which the event or circumstance arose. The parties can challenge that decision, or indeed challenge the deemed acceptance of the notice should the engineer not respond within 14 days.
A fully detailed claim then follows. Note that the fully detailed claim must identify the legal or contractual basis of the claim within 84 days of the event or circumstance, or once again the original notice lapses. There are therefore two conditions precedent in the FIDIC claims procedure. Further, this claims procedure applies equally to the employer and the contractor. Both parties must be aware of and able to manage this procedure, and understand the impact of losing their right to any further monetary or time-related relief.
Clause 20 helpfully provides that the engineer may help the parties to reach an agreement or come to a determination about the figures, and importantly also identifies that monthly claim updates, assessments and payments must be made. In other words, the new FIDIC contracts now clearly state that any amounts due should be paid on a monthly rolling basis, after assessment and inclusion in the interim payment process.
If an agreement cannot be reached or one of the parties does not accept the determination, then a formal dispute arises and is dealt with under clause 21. Initially, disputes are referred to the dispute board. There are two interesting aspects here. First, dispute boards are now “standing” under all three forms of contract. In other words, they are to be engaged at the outset of the contract, not simply when disputes arise. There is much more value in having a dispute board from the outset, and research from the Dispute Review Board Foundation demonstrates that standing boards are much more effective at avoiding disputes. Second, the old Dispute Adjudication Board has now been revised recognising the greater avoidance requirement. It is called the Dispute Avoidance and Adjudication Board. So the DAB is now the DAAB.
If a dispute is referred to the DAAB it should be decided within 84 days by the DAAB issuing a written decision. The parties can accept that decision, but if not, either party can issue a notice of dissatisfaction within 28 days of the decision. Either way, the decision remains binding. Each party can refer a dispute to ICC Arbitration, but must comply with the DAAB decision regardless of whether they agree with it or not. The contract emphasises that the arbitral tribunal may deal with a failure to comply with the DAAB decision within a summary or expedited procedure, and no doubt an interim award for enforcement is envisaged. However, that might be subject to some form of financial security from a party that receives payment.
It will take some time for the international community to understand and begin to use the new FIDIC forms of contract. Some certainly will not like the prescriptive detailed manner of the new contracts, while others will welcome it. Some will use ideas from the new contract terms for particular amendments to older versions of FIDIC or other standard terms and conditions that they use. Either way, the FIDIC forms are bound to be used more and more over time, given that the 1999 versions are the dominant standard form used internationally in the construction industry.