International Construction Law Review 16 Pt.

1 (1999) 27-37

FIDIC DESIGN-BUILD, TURNKEY AND EPC CONTRACTS

JOSEPH A HUSE* AND JONATHAN KAY HOYLE** *Partner, Freshfields, Paris. **Manager, Clayton Utz, Sydney and a former manager at Freshfields, Paris. 1. INTRODUCTION Over the past 40 years, the Fdration Internationale des Ingnieurs-Conseils (FIDIC) have developed an unparalleled reputation as the leading body for the development of model standard form contracts for use in the international construction industry. In September 1998, FIDIC published four new or revised standard form contracts comprising new editions [1] of two existing forms - the Red Book [2] and the Yellow Book [3] - and two completely new forms-the Silver Book [4] and the Green Book [5]. These contracts are, at present, in test editions and FIDIC plan to publish definitive editions during the course of 1999. Previously, FIDIC had in place two contracts that were based on the nature of the works: broadly speaking, the Red Book (fourth edition) [6] dealt with civil engineering works and the Yellow Book (third edition ) [7] with electrical and mechanical works (in both instances, the employer and/or the engineer either supplied the design or played a central role in producing it). FIDIC prepared the Orange Book (first edition ) [8] to provide a contract where the contractor supplied the design and took single-point completion responsibility. The Orange Book, unlike the old Red and Yellow Books, contemplates the use of an employer's representative and does not use the term "Engineer". The new Red and Yellow Books have shifted this perspective to contracts based on the relationship between the parties, particularly with reference to which party takes responsibility for the design. [9] The revised Red Book is now primarily focused on those situations where the employer will supply the design (and an engineer will be used) and the new Yellow Book on those situations where the contractor supplies the design (and an engineer will be used). By contrast, the Silver Book is intended to deal with something entirely new in FIDIC's scheme: an EPC'0 turnkey contract where the contractor takes responsibility for design and the contract is on a strictly two-party basis (that is to say, there is no intermediary such as the engineer). The new FIDIC contracts are harmonised around the same format: that of the Orange Book. Therefore, the new Red, Yellow and Silver Books are now all

structured in the same way: the 20 clauses of the Orange Book taking account of the particulars of each contract. This harmonisation has extended to the language of the contracts. Much of the basic Orange Book language has been retained in the three contracts. The authors welcome, for the most part, the specific drafting changes to for example, the new Yellow Book (as compared to the Orange Book) that FIDIC have undertaken. However, they question the rationale used in developing the newYellow Book and Silver Book, particularly in light of their relationship to the existing Orange Book and the role they will play as design-build contracts. [11] This article will first provide some preliminary comments on the new Yellow Book and the Silver Book. The article will then consider FIDIC's overall approach to design-build/turnkey/EPC contracts and attempt to reach certain tentative conclusions regarding the policy underlying the new Yellow Book and the Silver Book. This article is not meant to constitute a detailed analysis of the language of the new Yellow Book and the Silver Book.

2. FROM THE ORANGE BOOK TO THE NEW YELLOW BOOK The following analysis will first describe certain (but not all) of the major changes made to the drafting of the Orange Book in the development of the new Yellow Book. It questions whether, instead of drafting the new Yellow Book, FIDIC should simply have prepared a second edition of the Orange Book. All parenthetical clause references are references to clauses in the Yellow Book. 2.1 Major Drafting Changes "Defects Notocation Period' (sub-clause 1. 1. 3.7) This definition is not in the Orange Book. The concept of the contract period in the Orange Book has been removed (something the authors welcome). The period is defined as one within which defects are notified and runs from the date on which the works are certified as being complete. Assignment (sub-clause 1.7) Surprisingly, the Orange Book did not contain any general language concerning assignment. This omission has been corrected in the new Yellow Book. Neither party can assign any "benefit or interest" without the prior agreement of the other party. However, they can assign, as security, the right to money due under the contract to a "bank or financial institution". This is clearly a sensible

addition. Compliance with Laws (sub-clause 1. 13) Under the new Yellow Book scheme the employer has been given responsibility for obtaining "the planning, zoning or similar per-mission for the Permanent Works, and any other permissions described in the Employer's Requirements [ ... ] ". Employer's Financial Arrangements (sub-clause 2.4) This sub-clause is not in the Orange Book. The employer must furnish 11 reasonable evidence" after a request from the contractor that the financial arrangements for the project have been made and are being maintained. This seems a fair measure-the contractor should have a means of satisfying himself, if the need arises, that the employer is capable of paying. However, the sub-clause leaves open the issue of what constitutes reasonable evidence. This ambiguity is particularly important given the remedy that the contractor has if he is not satisfied by the employer's evidence. [12] Employer's Claims (sub-clause 2.5) This sub-clause is not found in the Orange Book. It mirrors the formal requirements placed on the contractor by making the employer follow a claims procedure for certain payments he wishes to obtain from the contractor or any extension of the defects notification period. The employer must present a notice to the contractor after which the engineer determines the claim on the basis of the particulars supplied. The Engineer (clause 3) The employer's representative in the Orange Book is replaced, in the new Yellow Book, by an engineer; however, his powers and duties under the contract are broadly similar to those of the employer's representative (for example, the first determination of extensions of time and extra cost, certification of payments, issue of the taking-over and performance certificates). As under the Orange Book, he does not have the authority to amend the contract, he must be suitably qualified and he may delegate his duties to an assistant. There are limited differences between the role of the engineer and that of the employer's representative (for example, sub-clause 3.4); however, most of these differences are due to the drafting and best practice changes, many of which are described in this section 2.1 The authors also note that under sub-clause 3.2 of the Orange Book the

employer's representative shall be a suitably qualified engineer or other appropriate professional and that under sub-clause 3.1 of the new Yellow Book the engineer is deemed to act on behalf of the employer. Training (sub-clause 5.5) This sub-clause is not found in the Orange Book and is a welcome addition. It sets up a regime for the contractor to train the personnel for operation and maintenance of the plant. The contractor is often best placed to carry out such training. Testing (sub-clause 7.4) The testing regime has been modified under the new Yellow Book. The employer now has the express right to vary the location or details of the tests by means of a variation. If the varied or additional tests show that the plant, materials or workmanship are not in accordance with the contract then the contractor pays the costs of carrying out the variation. This clause also contains a provision allowing the contractor to claim extra cost and time when "complying with the Employer's instructions (to refrain from proceeding with the tests) or as a result of a delay for which the Employer is responsible". Remedial Work (sub clause 7.6) This is an entirely new sub-clause in the newYellow Book. It provides that the contractor may now be asked to carry out remedial work on any plant and materials by removal, substitution or re-execution of the work.' The contractor must comply with any such instruction irrespective of whether he intends to challenge its validity. Programme (sub-clause 8.3) The programme provisions have been restructured and modified in order, presumably, to take account of what FIDIC consider to be current best practice. Broadly, the contractor now has a duty to submit revised programmes when the operative programme is inconsistent with current progress or with the contractor's obligations. The contractor must now warn the engineer of "probable future events or circumstances which may adversely affect the work". [13] Extension of Timefor Completion (sub-clause 8.4) In the new Yellow Book, two grounds for claiming an extension of time have been added to the Orange Book scheme. First, the contractor is able to claim for

"unforeseeable climatic conditions"; secondly, he can claim for 11 unforeseeable shortages in the availability of personnel or Goods caused by epidemic, changes in Law or other governmental actions". Tests on Completion (clause 9) The new Yellow Book wording now takes account of three phases: (i) pre-commissioning tests including appropriate inspections and functional tests; (ii) commissioning tests including specified operational tests; and (iii) trial operation (it is made clear that trial operation does not constitute taking over). If any of the tests on completion have been unduly delayed by the employer then the contractor may claim an extension of time for completion and extra cost. In the event that the plant fails to pass the tests on completion then the employer has the same remedies as under the Orange Book. [14] However, rejection of the works is no longer an unfettered right; it has been qualified by whether such failure deprives the employer of "substantially the whole benefit of the Works". Adjustments for Changes in Cost (sub-clause 13.8) The sub-clause provide for the possibility of price adjustment in the new Yellow Book for "cost of labour, Goods and other inputs to the Works". This provision is optional ("if this Sub-Clause applies"); see, however, the similar clause in Part 11 of the Orange Book. Insurance (clause 18) There have been a number of changes to the insurance scheme under the newYellow Book but perhaps the most noteworthy is that the contractor is no longer required to take out insurance for his design. Force majeure (clause 19) The framework forforce majeureunder the Orange Book contains a number of unsatisfactory features. [15] Under the new Yellow Book, there has been a wholesale reworking. Important changes have been made to what constitutes force majeure. [16] The insistence in the Orange Book of a force majeure event having to be beyond the control of both parties has been removed. The test has now become one based on an event which: (i) is beyond a party's control;

(ii) could not reasonably be provided against before entering into the contract; (iii) could not be reasonably avoided or overcome; and (iv) was not "substantially" attributable to the other party. Two examples of force majeure have been added-the operation of forces of nature and change in law. 2.2 Is the new Yellow Book a good idea? FIDIC state that the Orange Book is suitable for works "which may include any combination of engineering (including civil, mechanical and electrical) and building works" (emphasis added) [17] . By comparison, the new Yellow Book is recommended "for the provision of electrical and/or mechanical plant, and for the design and execution of building or engineering works". The basis of the contract is stated to be that the contractor "designs and provides, in accordance with the employer's requirements, plant or other works which may include any combination of civil, mechanical, electrical and/or construction works" (emphasis added)."' From this standpoint, with the exception of the use of the term "Engineer", there would seem to be little to differentiate the aims of the new Yellow Book from the Orange Book. As discussed above, the role of the "Engineer" under the new Yellow Book is broadly similar to the role of the "Employer's Representative" under the Orange Book. Aside from the confusion that may be caused by use of the term "Engineer" in this context, it is also surprising from an historical perspective. In early drafts of the Orange Book, FIDIC had included the term "Engineer" but the term was deleted before the issue of the test edition. From a design and build perspective, the changes described in sectiori 2.1 above cannot be considered as radical. In this regard, the allocation of risk has remained broadly the same as in the Orange Book. In certain limited instances, additional risk has been placed on the contractor - for example, it is now the contractor's responsibility to ensure that personnel are properly trained to operate the plant and he now has an express obligation as regards remedial work. In certain limited instances, the employer has been allocated additional risk-for example, the employer takes the risk of obtaining planning and zoning permission for the works. In some cases, changes have modified procedures but not significantly shifted risk from one party to the other-for example, the tests on completion now

comprise three phases including trial operation. On the basis of this comparison of aims and the actual drafting changes in the new Yellow Book, it is arguable that there is little essential difference between the Orange Book and the new Yellow Book-both are design-build contracts that place substantial risk on the contractor. Consequently, it would seem legitimate to pose two questions: (i) why did FIDIC go back to the use of the term "Engineer" in the design-build context; and (ii) why did FIDIC simply not issue a second edition of the Orange Book?

3. FROM THE NEW YELLOW BOOK TO THE SILVER BOOK The following analysis will first describe certain (but not all) of the major differences between the newYellow Book and the Silver Book and then query whether similar changes should also have been made to the newYellow Book and the Orange Book. All parenthetical clause references are references to clauses in the Silver Book. The reader should note that virtually all of the changes described in section 2.1 above, with the exception of those in respect of the "Engineer", "Adjustments for Changes in Costs" and "Extension of Time for Completion", have been included in the Silver Book. 3.1 Major Drafting Changes Employer's administration (clause 3) Consistent with FIDIC's stated aim of making a strict two-party contract, the role of the engineer or employer's representative has been removed. The employer deals directly with the contractor; for example, the employer determines in the first instance claims for extra cost and/or extension of time. However, the employer has the option of having a representative if he so wishes and he may delegate any authority to such a representative.

Setting out (sub-clause 4.7) The contractor now takes responsibility for "the correct positioning of all parts of the Works, and shall rectify any error in the positions, levels and dimensions or alignment of the Works". The corresponding provision of the new Yellow Bookaccording to which the employer is responsible for any errors "in these specified or notified items of reference" and the contractor may, under certain circumstances, seek an extension of time or extra cost if extra work is necessary as a result of such errors-has been deleted. Site data (sub-clause 4. 10) The contractor is responsible for verifying as well as interpreting all relevant data in the employer's possession, made available to the contractor, on hydrological and sub-surface conditions at the site. The corresponding provision of the newYellow Book does not contain any such obligation on the contractor in respect of the verification of the data. Unforeseeable difficulties (sub-clause 4.12) Under the new Yellow Book, the contractor may obtain extra time or cost in the event that he encounters unforeseeable subsurface conditions. Under the Silver Book, the contractor is deemed to have taken account of all necessary information; furthermore, the contract price is not adjusted "to take account of any unforeseen difficulties or costs" (emphasis added) except as otherwise stated in the contract. Contractors will argue that this is an unreasonable allocation of risk. Design obligations (sub-clause 5.1) Under the Silver Book, the contractor has been allocated almost all of the design risk. The contractor is deemed to have taken account of the employer's requirements and he is "responsible for the design of the Works and for the accuracy and completeness of the Employer's Requirements (including design and calculations)". Thus, as under the lCE'9 design-build contract, the contractor's risk with respect to design includes not only his design for the works but also the employer's requirements generally. The employer also disclaims any responsibility for information given to the contractor.

The above responsibility is, however, tempered by the addition of wording identifying three parts of the employer's requirements for which the employer remains responsible: (i) the definitions of intended purposes of the works; (ii) criteria for testing and performance of the works; and (iii) any other portions of the works for which the employer is responsible under the contract. Taking over of parts of the works (sub-clause 10.2) Under the Silver Book, there is a simple bar on early taking over or use of parts of the works by the employer subject to the agreement of the parties. Tests after completion (clause 12) The Silver Book provides that the contractor is responsible for carrying out the tests after completion. The contract price (clause 14) The payment structure of the Silver Book is different from the new Yellow Book. The concept of certification has been dropped; it has been replaced by interim payments (although both the new Yellow Book and the Silver Book have the same system of statements for showing the amounts due). This is consistent with the direct relationship between the employer and the contractor contemplated by the Silver Book. Employer's risks (sub-clause 17.3) There are three areas of risk which the Silver Book has not retained as employer's risks from the new Yellow Book scheme. First, use or occupation by the employer of any part of the works, presumably on the basis that the employer is barred from using the works except as agreed between the parties. Second, design of any part of the works by the employer's staff and personnel, on the basis that the contractor takes all design risk. Third, any operation of the forces of nature which is not reasonably foreseeable. 3.2 Is the Silver Book a good idea? The Silver Book, according to FIDIC, would appear to be

designed for a specific role. It is described as being a contract for "EPC Turnkey Projects". It would be inappropriate to place any exaggerated emphasis on the nomenclature "EPC/Turnkey". FIDIC have, until now, placed no special emphasis on the use of the word "turnkey". As far back as 1995, in their introduction to the Orange Book, they stated that "there are no universallyaccepted definitions of the terms 'design-build' and 'turnkey', except that both involve the Contractor's total liability for design" (emphasis added). In as much as a distinction was made it rested on turnkey contracts being the provision of a "fully-equipped facility, ready for operation and [ ... ] typically includ[ing] design, construction, fixtures, fittings and equipment the scope of which would be defined in the contract documents". [20] Likewise with the term "EPC"; it is simply an acronym for "Engineering, Procurement and Construction". FIDIC have set out in their introduction to the Silver Book what they believe to be the key concept of an "EPC" contract for use in a project finance context. They state that such projects require greater certainty about cost and, therefore, final price than is ordinarily the case (generally driven by the concern of lenders). Consequently, it is necessary for the contractor "to assume responsibility for a wider range of risks than under the traditional Red and Yellow Books"-all in the name of greater cost certainty. Thus, FIDIC seem to be putting forward the Silver Book as a design-build/ turnkey with greater price certainty that will be acceptable to the employer (and lenders) for such a project. However, they go on to state that the Silver Book is suitable for projects "where the government departments or private developers wish to implement their project on a fixedprice turnkey basis and with a strictly two party approach" (emphasis added). As can be seen from the previous section, the Silver Book places greater risk on the contractor than the Orange Book or the new Yellow Book. In the areas of site data, unforeseeable conditions and design, the contractor is allocated substantially all of the risk (apart from the intended purpose of the employer's requirements and the testing criteria). However, the number of such changes remains relatively small. With the exception of the role of the engineer/ employer's representative and the related issue of certification of payment, the rest of the Silver Book does not appear to be fundamentally different from the

Orange Book and the new Yellow Book. Furthermore, it is arguable that the scope of the changes that FIDIC have included in the Silver Book as compared to the Yellow Book are not sufficient to make the contract a "project finance" construction contract. In this regard, FIDIC state in the introduction to the test edition, that the contract "may need to be adapted to take account of the special, if not unique, characteristics of each project, as well as the requirements of lenders and others providing financing".

4. FIDIC POLICY ON DESIGN-BUILD, TURNKEY AND EPC From the wider perspective of strategy and policy there appears to be some confusion over how the FIDIC "design and build" contracts (i.e. the Orange Book, the new Yellow Book and the Silver Book) will operate in practicethat is to say, how these contracts conceptually fit together and in which circumstances it would be appropriate to use each of them. FIDIC have chosen not to update the Orange Book. While the contract has been used as the basis of the drafting of the new Yellow Book and the Silver Book, the Orange Book itself has not been the subject of the new modifications. On this basis, the Orange Book would seem no longer to represent best practice and therefore should not be used unmodified. This policy of benign neglect towards the Orange Book is somewhat puzzling. The Orange Book is now starting to gain market acceptance and FIDIC are simply not in the habit of launching and then discarding form contracts. The new Yellow Book has made a number of changes to the present Orange Book; these changes could be described as (i) minor drafting changes and (ii) incorporation of best practice. One of the few major conceptual changes is that the new Yellow Book now makes use of the term "Engineer". Yet, in fact, when the engineer's role under the new Yellow Book is examined it turns out to be quite similar to that of the employer's representative under the Orange Book. However, the use of the term "Engineer" may cause potential users to avoid adopting the contract. The Silver Book itself is largely based on the new Yellow Book.

One major difference is that the engineer has been removed in order to make the contract a "two-party" contract-although in the event that the employer chooses to use a representative he presumably could have powers similar to those of the representative under the Orange Book. Another major difference is that additional risk has been placed on the contractor. However, FIDIC are also apparently keen to promote the Silver Book as a fixed price turnkey contract on a two-party basis not limited to project financing. From this it would appear that FIDIC have not decided whether these changes regarding additional risk constitute "best practice" or constitute necessary modifications purely in a project financing context. If FIDIC believe that such changes constitute best practice, it should also have made corresponding changes to the new Yellow Book and the Orange Book. However, it is unlikely that contractors will agree that such changes should in fact be characterised as best practice, particularly when they are imposed outside a project finance context. With these considerations in mind, the authors have to wonder whether it would not have been more appropriate to update the Orange Book as FIDIC's flagship "design and build" contract and take account of its project finance applications in an expanded set of particular conditions. 5. CONCLUSIONS (a) FIDIC are to be applauded for their decision to harmonise the basic structure and wording of the new Red, Yellow and Silver Books around one model. (b) FIDIC are also to be congratulated on making a comprehensive attempt to make the new design-build contracts consonant with best practice. The authors also broadly welcome the quality of the changes made to the drafting of the Orange Book in the development of the new Yellow Book and the Silver Book-although it is to be expected that employers and contractors will have differing views as to the appropriateness of certain of these modifications. (c) The authors query why FIDIC went back to the use of the term "Engineer" in the design-build context and why FIDIC did not issue a revised version of the Orange Book instead of

issuing the new Yellow Book. (d) The Silver Book retains the changes made to the new Yellow Book but with a strict two-party approach. The Silver Book places completion risk on the contractor additional to that contemplated by the new Yellow Book and the Orange Book. FIDIC state that the Silver Book is suitable for all fixed-price turnkey projects (with a two-party approach). FIDIC apparently believe that the provisions regarding allocation of additional risk to the contractor constitute best practice for all such projects, and not just projects financed on a "project finance" basis. If this is the case, the authors do not share FIDIC's view. Further, if indeed this is FIDIC's view, then corresponding changes in the new Yellow Book and the Orange Book should have been made as well. If, however, FIDIC believe that the Silver Book is suitable for all such projects except that the allocation of additional risk provisions should be implemented only in the project finance context, then FIDIC could have prepared special conditions to the appropriate standard form design-build contract reflecting this approach. (e) The new Yellow Book and the Silver Book are in test edition form. First editions will be issued in the course of 1999. The authors are confident that FIDIC will carefully consider industry comments for the purposes of finalising the first editions. References 1. According to FIDIC, the new Red Book and the new Yellow Book will be published as first editions. 2. Conditions of Contract for Construction (for Building and Engineering Works Designed by the Employer) (1998). 3. Conditions of Contract for Plant and Design-Build (for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor) (1998). 4. Conditions of Contract for EPC Turnkey Projects (1998). 5. The New Short Form of Contract (1998). 6. Conditions of Contract For Works of Civil Engineering

Construction (1992) 7. Conditions of Contract for Electrical and Mechanical Works (1998). 8. Conditions of Contract for Design-Build and Turnkey (1995). 9. See also the comments of Christopher Wade in his paper "History and Scope ofThe Three Major New Books" in FIDICs New Standard Forms of Contract, IBC UK Conferences Ltd. 10. Engineering Procurement and Construction. For further discussion of this term see section 3.2 infra. 11. FIDIC now have three design-build contracts: the Orange Book, the new Yellow Book and the Silver Book. 12. See Clause 16 (Default of Employer) of the Yellow Book. The contractor is entitled to terminate the contract if he does not receive reasonable evidence within 42 days after giving notice. 13. However, the language in the Orange Book relating to precedence networking techniques has been removed. 14 See sub-clause 9.4, Orange Book. The remedies are: (i) further repetition of tests (ii) rejection of the works or section and (iii) issuance of a taking-over certificate plus an agreed reduction in the contract price. 15. See sub-clause 19.1, Orange Book. Note, for example, the concept of impossibility. 16. Changes that appear to be based on model wording set out by the International Chamber of Commerce (ICC) in Paris, Brochure No 421. See also the comments of Christopher Seppala, "Risks, Force Majeure, Claims, Disputes and their Resolution" FIDICs Four New Standard Farms of Contract, IBC UK Conferences Ltd. 17. See the introduction to the Orange Book (Ist Edition). 18. See the introduction to the new Yellow Book. 19. The Institution of Civil Engineers Design and Construct

Conditions of Contract (1992), sub-clause 8 (2) (b). 20. See Hudsons Building and Engineering Contracts (11th Edition) (1995) section 3.026 pp 426-428 where the editor suggests that the expressions "turnkey" and "design-and-build" can now be said to be synonymous.