INTERNATIONAL CONTRACTING

2. Using The FIDIC “Family” Of

Contracts

MARTIN HARMAN

PARTNER

Using The FIDIC Family of Contracts

• The FIDIC Rainbow Explained

• Compromise of Interest

• Role of the Engineer

• Common Features

• Key claims and principles

2

The FIDIC Rainbow Explained

• Introduction

• The “new” Red Book: Conditions of Contract for Construction (1999)

• The “new” Yellow Book: Conditions of Contract for Plant and

Design-Build (1999)

• The Silver Book: Conditions of Contract for EPC/Turnkey Projects

(1999)

• The Gold Book: Conditions of Contract for DBO Projects

• The “new” Green Book: Conditions of Short Form Contract (1999)

• The White Book (1990): Model form of agreement between

Employer/Client and Consultant – new (4th) Edition released in

September 2006

3

The FIDIC Rainbow Explained

Additional Forms:

• Form of Contract for Dredging and Reclamation Works (published

2003)

• MDB/FIDIC Contract: FIDIC conditions incorporated in standard

bidding documents of multilateral development banks (June 2010)

• Fidic SubContract Form

Additional Materials:

• The FIDIC Contract Guide

• Standard bidding documents: Procurement of Works and Users

Guide (World Bank) May 2005

4

A Compromise of Interests?

• FIDIC is International Federation of National Association of

Independent Consulting Engineers

• FIDIC Forms of Contract are drafted by committees which represent

a variety of interests, Owners, Engineers, Contractors and other

construction professionals

• As such they generally represent a kind of compromise

• FIDIC written in English but intended to be used internationally –

used on 50% of projects

• Written primarily from a Common Law perspective but capable of

adaptation for Civil Law jurisdictions

• Supplemented by Particular Conditions

• Choice of governing law extremely important

5

Role of Engineer

• Traditional role of Engineer to make impartial

determinations now modified to reflect current practice –now represents the Employer

• “Employer’s Representative” introduced into the Silver

and the Gold Books

• Issue instructions, monitors performance, acts as certifier

• In making decisions, reviewing documents, approving

design, issuing instructions Engineer /Employer’s Representative to act fairly

6

Role of Engineer

• In making any determination /decision under the

Contract the Engineer /Employer’s Representative must

– Consult with both parties

– Make a fair determination

– Take due regard to all relevant circumstances

– Act in accordance with the Contract

• A failure to so act could place the Employer in breach of Contract and possibly expose the Engineer to a claim in

negligence by the Contractor.

7

Common Features

• Structure and clause numbering – 20 main clauses

• Dispute resolution procedure – Dispute Adjudication Board –

“Temporarily” binding – followed by Amicable settlement attempt,

followed by Arbitration

• Employer can terminate for convenience

• Notice provisions and procedural bars to claim:

– Employer claims (including LAD’s) : Clause 2.5

– Contractor claims : Clause 20

• Design (where undertaken) to be fit for purpose

• Contractor’s liability under the Contract is limited – Clause 17.6

– Exclusion of indirect or consequential losses (save for termination

losses /indemnities)

– Financial cap – in Particular Conditions

8

New Red Book

• For Work where Contractor builds to Employer’s design

• BUT See Clause 4.1 –

– Works may include some Contractor-design works with Fitness for purpose obligation

– Strict conditions for the pursuit of Claims

– Remeasurement form – Employer takes on risk on quantities

– Unclear what happens if Contractor doing “incidental” design

• Engineer acts for the Employer – no longer stated to be impartial.

• Specified examples of Variations

• Particular entitlements to Extensions of Time

9

New Yellow Book

• Old Yellow Book was for E & M Work

• New Yellow Book for all D&B Contracts – Plant, E&M, Building and

Engineering

• Lump Sum – Contractor takes risk of quantities

• Payment on basis of lump sum with payment plan

• Some design may be carried out by the Employer or his Engineer

• Express “fitness for purpose” obligation – (Clause 4.1)

• Contractor responsible for interpreting and verifying site data

• Relief for “Unforeseeable Physical Conditions” (Clause 4.12)

• Extensive testing procedures.

10

Silver Book

• Engineer Procure Construct /Turnkey Contract

• Specifically introduced for Project Financed Works

• Employer’s Requirements usually a Performance (Output) Specification

• Almost Complete Risk transfer to the Contractor

– Sufficiency of design

– Adequacy of Price (Lump Sum) with limited adjustments

• No Independent Engineer, Employer’s Representative

“determines”

• Testing procedures to demonstrate achievement of specified and result – prove reliability and performance.

11

The DBO Form (‘Gold Book’)

• Design-Build-Operate Form

• First Edition officially launched in 2008

• Combines Yellow Book with a 20 year O&M Contract

• A response to calls for a standard concession contract particularly

in transport and water/waste sectors, but:

– No funding element

– long term maintenance period

– Intended for greenfield sites

• Some authorities use other FIDIC construction forms and “add on”

O&M obligations.

12

Key FIDIC Clauses - Design

• Full design responsibility on Contractor

– Works to be Fit for purpose “as defined in Contract”

• Yellow Book and Gold Book:

• Contractor must scrutinise but not responsible for errors/omissions in Employer’s Requirements

• Entitled to a Variation unless an experienced contractor should have

discovered the error prior to tender

• Silver Book:

• Contractor bears risk of errors /omissions in Employer’s Requirements and site data but some carve outs (Clause 5.1):

• Immutable or responsibility of Employer

• Definitions of intended purposes of Works

• Testing and performance criteria

• Cannot be verified by Contractor

• Importance of full and proper due diligence by Contractor – responsibility for

Site data (Clause 4.10)

13

Contractor’s Obligations – Design

• Design review under Sub-Clause 5.2 [Contractor’s Documents]

– Important: Employer’s scope of review confined to notice that a document fails to comply with the Contract

– Definition of “Variation” (Sub-Clause 1.1.6.8): means any change to the Employer’s Requirements or the Works which is instructed or approved as a variation under Clause 13 [Variations and Adjustments]

– Clause 13 Variations may be initiated at any time “either by an instruction or by a request for the Contractor to submit a proposal”. The Contractor must execute each Variation unless he promptly gives notice to the Employer stating that he cannot readily obtain the Goods, the Variation will reduce the safety or suitability of the Works or will have an adverse effect on the achievement of the Performance Guarantees

– So, what should the Contractor do if he considers that a comment changes the Works?

• write to the Employer confirming whether it amounts to an instruction to change the works and if so instructed this falls within Sub-Clause 13.1

• complying with Sub-Clause 20.1 [Contractor’s Claims], request the Employer to agree or determine adjustments to the Contract Price and the Schedule of Payments, proceeding in accordance with Sub-Clause 3.5 [Determinations]

14

Contractor’s Obligations – Design

– Alternatively, Contractor can argue that the provision of comments that

do not specify non conformity with Contract is not a proper use of the

review procedure under Sub-Clause 5.2, which only allows the

Employer to give notice to the Contractor if a Contractor’s Document

fails to comply with the Contract

– Sub-Clause 20.1 [Contractor’s Claims] must be complied with to the

extent that the Contractor is making any claim

– See also Sub-Clause 3.4 [Instructions] stating that each instruction must

be:a) given in writing; andb) must state the obligations to which it relates under the sub-clause in which

the obligations are specified

This makes it clear that if any instruction “constitutes a Variation, Clause

13 [Variations and Adjustments] shall apply”.

15

Employer’s Claims

• Where Employer believes it is entitled to additional payment or to an

extension to the Defects Notification Period

If the Employer considers himself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract, and/or to any extension of the Defects Notification Period, the Employer or the Engineer

shall give notice and particulars to the Contractor. However, notice is not required for payments due under Sub-Clause 4.19 [Electricity, Water and Gas], under Sub-Clause 4.20 [Employer’s Equipment and Free-Issue Material], or for other services requested by the Contractor.

• Notice must be given "as soon as practicable after the Employer became

aware of the event or circumstances giving rise to the claim."

• Engineer then proceeds to determine the claim in accordance with Clause

3.5 (except under the Silver book, where Employer determines his own

claim).

16

Contractor's Claims

• Red and Yellow Books contain approximately 30 sub-clauses specifying

events entitling Contractor to claim, for example:

– Clause 2.1: Late Access to Site

– Clause 4.12: Unforeseeable physical conditions

– Clause 8.5: Authority generated delays

– Clause 13.2: Variations

– Clause 16.1: Contractor's entitlement to suspend work

– Clause 17.4: Consequences of Employer's Risks

17

Procedure - Contractor's Claims

• Notice – Contractor gives notice to the Engineer /Employer within 28 days of event or circumstance giving rise to claim

• Records – Contractor required to "keep such contemporary records as may be necessary to substantiate claim“

• Further information – within 42 days after Contractor became aware, or should have become aware, of event or circumstance giving rise to claim, Contractor required to submit a fully detailed claim

• Engineer's /Employer's Response – within 42 days after receiving claim or any further particulars supporting previous claim, Engineer /Employer must respond "with approval or with disapproval and detailed comments“

• Sanction for non-compliance – If the Contractor fails to give Notice of Claim within 28 days:

"the time for completion shall not be extended, the Contractor shall not be entitled to additional payments, and the Employer shall be discharged from all liability in connection with the claim“

But under Gold Book express right to petition DAB if it is “fair and reasonable” to overrule the 28 day limit.

18

Contractor's Claims (Cont’d)

• Common claims from contractors:

– Direct loss and expense – items can be claimed if they fall within the

definition of Cost (including "all expenditure reasonably incurred by the

Contractor“) and are directly linked to the cause giving rise to the claim

– Preliminaries – recoverable

– Overheads – the costs of running the business, as distinct from general

site costs, are expressly allowed for in the definition of "Cost" and can

be claimed

– Loss of productivity /disruption – can be claimed as a matter of

principle, but proving loss is difficult

– Profit – not defined as such but referred to as “reasonable profit”. Some

clauses allow entitlement to Cost plus profit; others allow “Cost” only

e.g. Sub-Clause 4.12 Unforeseeable Physical Conditions only allows

Cost but lack of access allows Cost plus reasonable profit

19

Employer’s Right to Vary

Clause 13 Variations and Adjustments

• VARIATION – “any change to the Employer’s Requirements or the Works

which is instructed or approved as a variation under Clause 13 [Variations

and Adjustments].

• What about “Design Creep”.

• Does not include work omitted for the purposes of giving it to others

• Includes (under Red Book - Other FIDIC books do not expressly set out

what constitutes a variation):

– Changes to quantities

– Changes to quality /other characteristics

– Changes to levels /positions /dimensions

– Omission of works

– Additional work, Plant, Materials or services (including Tests on Completion,

boreholes or other testing /exploratory work)

– Changes to the sequence or timing of the execution of the Works

• No changes to be made other than in accordance with a Variation

20

Employer’s Right to Vary (2): Procedure

Clause 13.3 (Variations and Adjustments)

• Three options:

– Employer instruction

– Employer request for proposal

– Contractor’s “value engineering” proposal

• Grounds for refusal:

– Contractor cannot readily obtain any necessary Goods

• Additional grounds under Yellow and Silver Books:

– Reduction in safety or suitability of the Works;

– Adverse impact on any guarantees

• Further additional ground under Gold Book

– Adverse impact upon provision of Operation Service

Not

– Time/cost to implement

– Hinder or prevent performance

21

Contractor’s Proposal: Procedure

• Contractor’s proposal must include:

– Description of work to be performed

– Programme for execution of the work

– Proposal for any necessary modifications to the (Contract) programme /Time for Completion

– Proposal for evaluation of the proposed Variation

• Engineer /Employer’s Representative to consider and approve /disapprove /comment on the proposal as soon

as practicable

22

Contractor’s Right to Propose “Value Engineering”

• Proposals which would be of benefit to the Employer:

– Accelerates completion

– Reduces cost to the Employer of executing or operating/maintaining the Works

– Improves overall efficiency or value to the Employer of completed Works

– Otherwise of benefit to the Employer

– [Gold Book – improve the efficiency of Operation Service]

• Contractor bears the cost of preparing the proposal

• Under Red Book, Contractor obtains a 50% share in the savings

• Under Yellow, Silver and Gold Books, no express savings-sharing mechanism, but value engineering proposals must be “taken into account”when making any adjustment to the Contract Price as a result of any Variation

23

Valuation of Variations

• Red Book:

– Variations valued on a re-measurement basis under Clause 12

• Gold, Yellow and Silver Books:

– Value determined by Engineer/Employer in accordance with Clause 3.5

– “Fair determination”

– Engineer no longer has a duty to act impartially but has to be fair

• All to include an allowance for reasonable profit and take account of

value engineering proposals

• Day works for minor Variations

24

Completion and Taking Over

Tests on Completion Clause 9

• Before Take Over the Contractor is required to carry out Tests on Completion. 3 elements [Sub-

Clause 9.1]:

– Pre commissioning tests including dry /cold functional tests

– Commissioning tests – can the Works be operated safely?

– Trial operation – do the Works “perform reliably and in accordance with…Contract” BUT

Reliability and Performance tests often carried out post Take-Over?

• Under Sub-Clause 7.4 the tests to be carried out are ‘all tests specified in the Contract’

• Red Book

- Tests are carried out before Take Over

• Silver and Yellow Books

- Testing occurs both before Take Over and subsequently for performance testing [Clause 12

Tests After Completion]

• How do all these tests translate into ‘cold’ and ‘hot’ commissioning?

• If any part of the Works fails to pass the Tests on Competition the Engineer (or Employer in the

Silver Book) are entitled to:

- order retesting

- rely on the remedies in Clause 11.4

- issue a Take Over Certificate

25

Completion and Taking Over

Employer’s Taking Over Clause 10

• The Works are taken over by the Employer once they are completed in accordance with the Contract and a Taking Over Certificate has been issued

• The Contractor may apply by notice for a Taking Over Certificate

• If the Employer fails to issue the certificate within 28 days of an application, provided the Works are substantially [complete] in accordance with the Contract, the certificate will be deemed to have been issued on the last day of that period [Sub-Clause 10.1]

• If the Employer prevents the Contractor from carrying out the Tests on Completion for a period exceeding 14 days (for a cause for which Employer responsible) the Employer will be deemed to have taken over the Works or Section on the date when

the Tests would have otherwise been completed [Sub-Clause 10.3] . Contractor still has to carry out Tests – before end of Defects Notification Period

• No final and conclusive effect

26

Extensions of Time and Money - Clause 8

• The Contractor shall commence the design and execution of the Works as soon

reasonably practicable after the Commencement Date [Sub-Clause 8.1]

• The Works are to be carried out with due expedition and without delay unless the Employer at anytime suspends the progress of part or all of the Works [Sub-Clause 8.1]

• Employer right to suspend at any time [Sub-Clause 8.8]; entitlement to EoT and Cost; if suspension exceeds 84 days, Contractor may give Employer notice to proceed:

– If no intention to proceed within 28 days, treated as an omission under Sub-Clause 13;

– If affects whole of Works, Contractor can terminate under Sub-Clause 16.2

• Contractor liable for delay damages if Actual Completion occurs after the Agreed Completion Date [Sub-Clause 8.7] Sum stated in Appendix to Tender and “only damages due from Contractor for such default other than in event of [Employer

termination under 15.2] Contractor still has to complete and perform all other obligations

UNLESS

• Delay is caused by a matter for which an EoT is available under the relevant FIDIC

form

27

Extensions of Time and Money

• EoT provisions scattered through the FIDIC contracts. Under the FIDIC

Family, EOT may be granted under, amongst other things:

– Clause 2.1: Lack of Access to the Site

– Clause 8: Delays caused by Employer’s breaches

– Clause 8.5: Delays caused by Authorities

– Clause 8.9: Consequences of Suspension

– Clause 10.3: Interference with Tests on Completion

– Clause 13: A Variation

– Clause 13.7: Adjustments for Changes in Legislation

– Clause 16.1: Contractor's Entitlement to Suspend Work

– Clause 17.4: Consequences of Employer's Risks and

– Clause 19.4: Consequences of Force Majeure

28

Extensions of Time and Money (EoT) (3)

Any purported EoT must comply strictly with terms of contract:

• See condition precedent to Contractor's claim in Clause 20.1 which requires the first notice to be given to the Engineer (Employer in Silver Book) not later than 28 days after the Contractor is aware of the event or circumstances

• Contractor must then submit a fully detailed claim within 42 days after becoming aware of the event or circumstances - failure to comply may be considered by the Engineer when making its decision

• Engineer responds to an EoT application within 42 days of receiving the claim. The [Engineer] (Employer’s Representative under Silver and Gold Books) decides whether and on what grounds to grant an EoT based on own knowledge and additional information from Contractor

• Generally Contractor entitled to an EoT where event constitutes a relevant event and it is delayed or is likely to delay works beyond the completion date.

• Concurrency?

• Failure to comply with notice provisions will, according to the contract provisions, disbar the Contractor’s claim: “the Employer shall be discharged from all liability in connection with the claim” BUT: consider jurisdiction and governing law

29

Risks and Limit of Liability

Clause 17.6

• Exclusion of consequential loss or damage

"Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract.

• Limit of liability with carve outs

– The total liability of the Contractor to the Employer, under or in connection with

the Contract other than under Sub-Clause 4.19 [Electricity, Water and Gas], Sub-Clause 4.20 [Employer's Equipment and Free-Issue Material], Sub-Clause 17.1 [Indemnities] and Sub-Clause 17.5 [Intellectual and Industrial Property Rights], shall not exceed the sum stated in the Particular Conditions or

(if a sum is not so stated) the Accepted Contract Amount.

• No limit for fraud, deliberate default or reckless misconduct

30

FIDIC Key Clauses: Change of Law, Clause 13.7

• Naturally Contractor must comply with the law, but compensation for

Changes:

– In “Laws” of the Country where the Works are executed

– “Laws” include all national (or state) legislation, statutes, ordinances and other

laws and regulations and by-laws of any legally constituted public authority;

– Extends to changes in judicial interpretation of such laws

– After Base Date

– Affecting Contractor’s performance of its obligations

– Contract price adjusted up or down to reflect increased or decreased Costs

– Cost includes overheads but not profit

– Adjustment determined by Engineer/Employer in accordance with Clause 3.5

31

Key FIDIC Clauses: Dispute ResolutionClause 20 (Claims Disputes and Arbitration)

• Timing of creation of DAB

– at start of project or when dispute arises ?

– involvement with project and provision of opinions

– guidance in Yellow Book suggests early involvement may be

appropriate

• Note time limits

– Engineer’s review 42 days

– DAB review 84 days

– Amicable Settlement 56 days

– Arbitration ?

32

Conclusions

• FIDIC used on about 50% of International Projects

• It represents a reasonable balance of sometimes conflicting interests

• It is well understood in the market

• It is capable of being adapted for specific requirements

• Need to check local law for compliance

33

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