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

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

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

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

Role of Engineer
Traditional role of Engineer to make impartial determinations now modified to reflect current practice now represents the Employer Employers 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 /Employers Representative to act fairly

Role of Engineer
In making any determination /decision under the Contract the Engineer /Employers 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.

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 LADs) : Clause 2.5 Contractor claims : Clause 20

Design (where undertaken) to be fit for purpose Contractors 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

New Red Book

For Work where Contractor builds to Employers 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

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.

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Silver Book
Engineer Procure Construct /Turnkey Contract Specifically introduced for Project Financed Works Employers 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, Employers Representative determines Testing procedures to demonstrate achievement of specified and result prove reliability and performance.
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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.
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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 Employers 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 Employers 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)

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Contractors Obligations Design

Design review under Sub-Clause 5.2 [Contractors Documents]
Important: Employers 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 Employers 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 [Contractors 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]

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Contractors 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 Contractors Document fails to comply with the Contract Sub-Clause 20.1 [Contractors 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; and b) 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.

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Employers 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 [Employers 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).
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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

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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.

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Contractor's Claims (Contd)

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

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Employers Right to Vary Clause 13 Variations and Adjustments

VARIATION any change to the Employers 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

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Employers Right to Vary (2): Procedure Clause 13.3 (Variations and Adjustments)
Three options:
Employer instruction Employer request for proposal Contractors 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

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Contractors Proposal: Procedure Contractors 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 /Employers Representative to consider and approve /disapprove /comment on the proposal as soon as practicable

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Contractors 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
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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

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Completion and Taking Over Tests on Completion Clause 9

Before Take Over the Contractor is required to carry out Tests on Completion. 3 elements [SubClause 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 withContract 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

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Completion and Taking Over Employers 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

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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

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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 Employers 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

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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] (Employers 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 Contractors claim: the Employer shall be discharged from all liability in connection with the claim BUT: consider jurisdiction and governing law

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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], SubClause 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

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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 Contractors 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

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Key FIDIC Clauses: Dispute Resolution

Clause 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

Engineers review DAB review Amicable Settlement Arbitration 42 days 84 days 56 days ?

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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

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Working hard to make it easier

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