The 1999 FIDIC ‘Red Book’ form of contract has been, for many years, a widely used standard in international construction works which are based on design provided by the project’s employer. The Red Book has long proven its efficiency in ensuring viability of projects which rely on it.
However, resolution of disputes between contractors and employers, under the rather complex mechanism set out in clause 20 of the FIDIC General Conditions, still has the potential to generate risks for the contractors if their contractual behaviour is not correctly and carefully managed. This article will outline what we believe to be two of the most relevant risks in clause 20, awareness of which will help construction companies to avoid considerable losses on projects run under FIDIC Red Book terms.
Risk triggered by a contractor’s failure to observe sub-clause 20.1 of the General Conditions
FIDIC Red Book Sub-clause 20.1 compels the contractor to comply with a 28-day deadline for giving notice to the engineer supervising the project (as established under the contract) with regard to any claim for extension of performance time and/or additional payment This deadline will be deemed to start from the moment when the contractor was aware or should have been aware of the event or circumstance giving rise to the claim.
Sub-clause 20.1 further stipulates that if the contractor fails to observe the deadline, it shall be denied the extension of time, it will receive no additional payment and the employer of the contract will bear no liability with regard to the contractor’s claim.
While the wording of this sub-clause appears to leave no doubt as to the harsh consequences on the contractor’s part, in practice the consequences of failure to observe such a deadline vary greatly from one legal system to another. While common law systems tend to apply the sanction strictly, thereby fully denying contractors their untimely claims, civil law systems (such as that in Romania) have shown serious reluctance to pin down contractors for their failure. They consider that, for reasons of good faith in contractual relationships, failure to observe the 28-day deadline might deprive contractors of their claim only in cases where lack of compliance by the contractor has resulted in serious, proven losses for the employer.
In any case, contractors should be vigilant about this matter and hence manage their projects diligently to avoid breaching the sub-clause 20.1 deadline; this will quell any chance for the employer to evade liability for the claims by invoking a contractor's (sometimes irrelevant) procedural failures. Another option for the contractor is to remove risks posed by sub-clause 20.1 from the start by ammendments negotiated and implemented in the contract by way of special conditions.
Risk triggered by a contractor's failure to observe provisions of Sub-clause 20.4 of the General Conditions
According to the last paragraph of the Red Book’s Sub-clause 20.4, a decision issued to both parties by the contractually appointed Dispute Adjudication Board (DAB) to resolve a dispute between them triggers a 28-day deadline for the dissatisfied party to serve a notice of dissatisfaction on the other party. Failure to do so gives the DAB decision a ‘final and binding’ effect which, in essence, signifies that the dissatisfied party (in practice, usually the contractor) is contractually barred from its right to arbitration – which would have been the only valid dispute resolution procedure in any standard FIDIC contract, in which parties renounce litigation in state courts. In such a situation the pursuit of the claims, primarily resolved by the DAB, would be completely barred.
On one hand, the contractor would be barred from arbitration since the DAB decision would have become final. This would actually stop the dispute resolution procedure in its tracks way before an arbitration tribunal could be constituted under the contract, since without notice of dissatisfaction, the pre-arbitral compulsory period of 56 days (provided by Sub-clause 20.5 of the General Conditions) for the parties to attempt amicable settlement could not actually run. On the other hand, should the contractor submit its claim to state courts to avoid the consequences of its failure to submit a notice of dissatisfaction, this tactic would be likely to trigger a jurisdictional objection from the employer on the basis that the contractor had waived its rights to submit claims as per Clause 20.6 of the FIDIC General Conditions.
The best remedy for such a situation is, of course, prevention. The contractor must be vigilant to recognise the moment when the note of dissatisfaction must be issued. As in so many critical situations which can arise during a FIDIC project, contractual and operational discipline are crucial, as well as legal awareness of the risks and their mitigation.
As both DAB and arbitration doctrine and precedent have indicated, negligence in fulfilling dispute-related procedural duties under FIDIC-based construction contracts is risky and may even spell disaster for the contractors. Regarding any potential claim against the employer, legal awareness and due operational assessment and action by the contractor can become matters of critical business importance, especially in high value construction projects.