Somewhere over the (FIDIC) Rainbow

Richard Khoo and Rachel Chiah highlight some amendments in the latest FIDIC contracts.

In December 2017, the International Federation of Consulting Engineers (“FIDIC”) launched the second edition of their Red Book (Conditions of Contract for Construction), Yellow Book (Conditions of Contract for Plant and Design-Build), and Silver Book (Conditions of Contract for EPC/Turnkey Projects) (collectively “2017 Edition”). Forming part of FIDIC’s “Rainbow Suite” of standard form contracts, the Red, Yellow, and Silver Books are an established presence in the international construction and engineering industry and the 2017 Edition was a much-anticipated update to the first edition of these contracts (“1999 Edition”).
 
This article provides an overview of several key changes in the 2017 Edition. Capitalised terms used shall have the meaning assigned to them in the 2017 Edition, unless defined otherwise.
 
THE POT OF GOLDEN PRINCIPLES
 
FIDIC contracts are intended to be fair and balanced in nature. In practice, this is not always the case. Parties often amend the general terms of the FIDIC Contracts for purposes of their respective projects, sometimes even to the extent that a contract may become overly onerous on one party. At FIDIC’s International Contract Users Conference 2017, FIDIC emphasised the importance of parties maintaining the fundamental characteristics of their contracts. In this regard, they recommend that parties take into consideration the following Five Golden Principles during the drafting and negotiation stages of a project:
  1. the duties, rights, obligations, roles and responsibilities of all the parties to the contract must be generally as implied in the General Conditions, and appropriate to the requirements of the project;

  2. the Particular Conditions must be drafted clearly and unambiguously;

  3. the Particular Conditions must not change the balance of risk/reward allocation provided for in the General Conditions;

  4. all time periods specified in the contract for parties to the contract to perform their obligations must be of reasonable duration; and

  5. all formal disputes must be referred to a Dispute Avoidance/Adjudication Board for a provisionally binding decision as a condition precedent to arbitration.
The abovementioned principles, which are included in the Guidance section of the 2017 Edition, are intended to guide parties towards a fair and balanced contract. It is pertinent to note, however, that the Five Golden Principles are not expressly incorporated in the 2017 Edition. As mere guidance, these principles may carry little weight, if any, when pitted against the commercial considerations of the parties or specific project requirements.
 
IMPROVED FORM AND STRUCTURE
 
Aside from the contents of their contracts, FIDIC has also updated the form and structure thereof in the 2017 Edition.
 
While the contract still comprises the Contract Agreement, the General Conditions, and the Particular Conditions, there are changes in these documents which make the task of referencing easier. For one, definitions are now listed in alphabetical order rather than by topic. In addition, the Sub-Clauses now contain subheadings and divisions, which is a welcome change from the multiple unnumbered paragraphs used in the 1999 Edition.
 
FITNESS FOR PURPOSE
 
In the Yellow and Silver Books, the Contractor undertakes design responsibility for the works. Part of his obligations thereunder is to ensure that the works are fit for purpose. While this obligation to ensure fitness for purpose is retained in the 2017 Edition, it has been modified. It is expressly provided that the purpose will be as stated in the Employer’s Requirements. This differs from the more general provision in the 1999 Edition, which stated that the purpose was as defined in the contract. The Employer can therefore no longer rely on the argument that the purpose can be derived from the contract in its entirety.
 
At the same time, the Contractor is not released from his obligation to ensure fitness for purpose simply because the Employer did not state the purpose of the works in the Employer’s Requirements – Sub-Clause 4.1 states that even if no purpose is defined or described in the Employer’s Requirements, the works should still be fit for their ordinary purpose. This illustrates FIDIC’s intention for their contracts to have a balanced risk allocation between the parties.
 
The 2017 Edition also expands on the Contractor’s design responsibility in that he now indemnifies the Employer against all acts, errors, or omissions in the performance of his design obligations which result in the works not being fit for purpose. Such an indemnity was absent in the 1999 Edition. Contractors are likely to be displeased with the introduction of this new indemnity on their part. However, the blow is somewhat softened by Sub-Clause 1.15, which operates to exclude liability for indirect or consequential losses as well as to limit the liability of the Contractor under this indemnity to the agreed cap in the contract.
 
A DETAILED CLAIMS PROCEDURE
 
Claims are an inevitable occurrence in the development of a project. As a result, construction and engineering contracts typically contain a claims procedure which imposes obligations on the parties. It is unsurprising that FIDIC’s update for the 2017 Edition extended to the making of Claims under the contract.
 
Firstly, both the Employer’s Claims and the Contractor’s Claims are housed together in the same Sub-Clause. This differs from the 1999 Edition, which provided for both separately. More significantly, the 2017 Edition distinguishes claims for money and/or time from other claims. Such a distinction between Claims is an important one. Claims for money and/or time are subject to the detailed and rather lengthy procedure described in Sub-Clause 20.2. This includes provisions on the documents required to be submitted to the Engineer by the claiming party, specified time frames for the parties’ performance of their respective obligations, and specified time frames for the Engineer’s performance of his obligations in his role as the contract administrator. In contrast, other claims are determined by the Engineer in accordance with Sub-Clause 3.7, which is a simpler process.
 
Further, for the Claims procedure under Sub-Clause 20.2, parties have to exercise great care with regard to the time frame within which they are to perform an obligation, particularly in respect of the giving of Notices to each other. In the event a party fails to submit a Notice to the other within the stipulated number of days, it loses its entitlement to make the relevant Claim. Moreover, there are deeming provisions – for instance, if the claiming party fails to submit a statement of the basis of its Claim, which is one of the documents specified as required, its Notice of Claim will be deemed to have lapsed and therefore becomes invalid.
 
The more comprehensive Claims procedure in the 2017 Edition is reflective of FIDIC’s aim to increase clarity and certainty in order to achieve better project management. The success of this, however, very much depends on all parties involved performing their respective obligations satisfactorily and complying with the different time frames.
 
ADDITIONAL GROUNDS FOR TERMINATION
 
FIDIC has included more grounds for termination of the contract in the 2017 Edition. This is briefly discussed below:
  1. failure to comply with a final and binding Engineer’s determination, and such failure constitutes a material breach of contract;

  2. failure to comply with a decision of the Dispute Avoidance/Adjudication Board, and such failure constitutes a material breach of contract;

  3. the cap on Delay Damages has been exceeded; and

  4.  a party has been found, based on reasonable evidence, to have engaged in corrupt, fraudulent, collusive or coercive practice in relation to the contract.
The inclusion of the failure to comply with the Engineer’s determination or a decision of the Dispute Avoidance/Adjudication Board as additional grounds for termination is evidence of FIDIC’s emphasis on the importance of project management mechanisms in resolving, at an early stage, issues that may give rise to a dispute. However, including the failure to comply with a decision of the Dispute Avoidance/Adjudication Board as grounds for termination hinges on the said board being established in the first place. While FIDIC has long encouraged parties to maintain the provisions on the Dispute Avoidance/Adjudication Board, in practice these provisions are often removed from the contract. The envisaged costs involved in establishing the Dispute Avoidance/Adjudication Board, as well as doubts about the binding effect of the decisions of this purely contractual creature, have made it an unpopular choice in many markets, including Malaysia.
 
Aside from the above, the contract may also be terminated if a party has been found by the other to have engaged in corrupt or fraudulent behaviour. It is common for such a provision to be inserted by the parties themselves in the Particular Conditions, particularly for projects involving the government or government-linked companies. Certain standard form construction contracts, such as the Malaysian Public Works Department standard forms, have already incorporated this provision. This inclusion by FIDIC therefore appears to be an update based on market practice.
 
CONCLUSION
 
Taken as a whole, the 2017 Edition appears to be a step towards more effective project management and efficient resolution of issues that may give rise to a dispute. However, at FIDIC’s International Contract Users Conference 2017, several lawyers took the view that the detailed procedures and requirements in the 2017 Edition could make for a dispute minefield. It will be interesting to see whether FIDIC’s hard work pays off, or if the devil truly is in the details.