The International Federation of Consulting Engineers ("FIDIC") has recently produced a test edition of a new set of Conditions of Subcontract for Construction for Building and Engineering Works Designed by the Employer (the "Test Edition"). The new standard form is intended to be used with the FIDIC main contract Conditions (the Red Book) produced in 1999 (the "Main Contract"). This Test Edition has been put forward for comments with a view to producing a final edition in the near future.

This is the first subcontract to be produced by FIDIC since 1994 when FIDIC produced a subcontract for use with the old, 1987, edition of the FIDIC Red Book (the "1994 Edition") and has been written on the same basis as that edition in that the overall intention of the Subcontract is that the Subcontractor will assume the duties and obligations of the Contractor under the Main Contract that relate to the Subcontract Works.  

Main clauses of interest

The main clauses to be noted are as follows:-  

  • in Sub-clause 1.5 the Subcontractor is required promptly to give notice to the Contractor of any error or defect in a document which was prepared for use in executing the Subcontract Works. The Contractor is to issue any necessary clarification or Contractor's Instruction in respect of any ambiguity or discrepancy, but it is not stated at whose risk this may be.  
  • in Sub-clause 2.2 the Subcontractor is required to design execute and complete the Subcontract Works so that no act or omission by the Subcontractor shall constitute, cause or contribute to any breach by the Contractor of the Main Contract. The Subcontractor is to perform and assume all the obligations and liabilities of the Contractor under the Main Contract save in relation to certain specified clauses, for example setting out. As with the 1994 Edition, the Subcontractor is required to indemnify the Contractor against any damages for which it becomes liable under the Main Contract as a result of the Subcontractor's breach of the Subcontract.  
  • in Sub-clause 3.3 provision is made for the Contractor's claims against the Subcontractor. After having submitted a notice of claim and detailed particulars to the Subcontractor, the Contractor is empowered to make a "fair decision" on its own claim and deduct the resultant amount from sums otherwise due to the Subcontractor. This is a new procedure that was not used in the 1994 Edition, but reflects the equivalent Employer's claims procedure in the FIDIC 1999 suite of contracts.  
  • in Sub-clause 4.1 if the Subcontractor is required to design any part of the Subcontract Works, this part is to be fit for the purposes for which the part is intended as are indicated by or reasonably to be inferred from the Subcontract. This provision was not contained in the 1994 Edition and imposes a substantial further obligation on the Subcontractor. It should be noted that the Contractor has a similar fitness for purpose obligation under the Main Contract (Main Contract Clause 4.1(c)) however that fitness for purpose obligation refers to only the purposes that are specified in the Main Contract; the additional reference in the Test Edition to purposes reasonably inferred from the Subcontract is likely to be unacceptable to most subcontractors.  
  • in Sub-clause 6.1 it is provided that the Subcontractor will be entitled to an extension of time and Cost for non-cooperation by the Contractor's other subcontractors. This is a new provision.  
  • in Sub-clause 8.4 and Part A of Annex F, the requirement for the Subcontractor to submit a detailed programme is substantially enhanced from the 1994 Edition.
  • Further a substantially more detailed provision is also made as to the circumstances in which the Subcontractor is to update its programme. Provision is also made in this clause for the first time permitting the Contractor to issue an instruction requiring acceleration procedures, which has been added to reflect the Employer's equivalent right to instruct acceleration under the Main Contract.  
  • in Sub-clause 8.7 new provision is made restricting the liability of the Subcontractor to the Contractor for delay to the Subcontract Works to an amount stated in the Appendix to the Subcontractor's Offer or if none is stated to 10% of the accepted Subcontract amount. This had previously been suggested as an alternative clause in the Particular Conditions of the 1994 Edition.  
  • Sub-clause 11.2 provides that the Defects Notification Period extends until the expiry of the defects notification period under the Main Contract; a provision that may not be appropriate where the Subcontract Works form only a part of the Main Contract Works and will be completed some time before completion of the Main Contract Works.  
  • Clause 14 covers adjustments to the Subcontract Price and payment terms. The intention is that the Main Contract and Subcontract are entirely back to back, not only to ensure that no adjustment will be made to the Subcontract Price unless there is an equivalent entitlement to an adjustment under the Main Contract (Sub-clause 14.1), but also that payment against the Subcontractor's monthly interim payment applications will be conditional upon the Contractor receiving payment under the Main Contract (Sub-clause 14.6). Such pay-when-paid provisions are unenforceable in some jurisdictions, in which case the alternative Sub-clauses provided in the Particular Conditions should be used instead. Finally, Sub-clause 14.10 provides that the Contractor's liability to the Subcontractor ceases upon the issue of the Performance Certificate, to be issued on the expiry of the Defects Notification Period under the Main Contract, except to the extent that the Subcontractor has already given a notice of claim in accordance with Sub-clause 20.2 (see below).  
  • Sub-clause 15.3 contains a new provision entitling the Subcontractor to recover loss of profit if the Contractor is entitled to recover loss of profit under the termination provisions in the Main Contract (i.e. in the event that the Contractor terminates the Main Contract for the Employer's failure to issue payment certificates, non-payment, the Employer substantially fails to perform its obligations, prolonged suspension and/or if the Employer becomes bankrupt or insolvent).  
  • Clause 16 is a new provision entitling the Subcontractor to suspend the Subcontract Works for non-payment and to terminate the Subcontract in the event of prolonged non-payment, if the Contractor becomes bankrupt or insolvent, or the Contractor substantially fails to perform its obligations under the Subcontract.  
  • Sub-clause 17.1 provides that the Subcontractor has care of the Subcontract Works until the Main Contract Works are taken over. The Subcontractor is required to rectify any loss or damage to the Subcontract Works occurring during that time but will be entitled to recover the cost of doing so if the loss or damage was not due to the Subcontractor.  
  • Sub-clause 17.3 contains a new provision excluding both Parties' liability for loss of profit or indirect or consequential loss and a cap on the Subcontractor's overall liability under the Subcontract.  
  • in Sub-clauses 20.1 and 20.2 the notice provisions of the Main Contract are passed down to the Subcontractor such that it is only entitled to an extension of time or additional Cost if it complies with the Main Contract notice requirements (the Main Contract deadlines for providing notices of claim and particulars have been reduced by a week so as to allow the Contractor sufficient time to process the claims). Further, if the Subcontractor's failure to provide the requisite information results in the Contractor being prevented from claiming any other amounts (other than those claimed by the Subcontractor) the Contractor is entitled to deduct the irrecoverable element from the Subcontract Price (Sub-clause 20.3).
  • Sub-clause 20.4 allows the Contractor to defer the referral of a Subcontract dispute to the Subcontract DAB (Dispute Adjudication Board) while it refers it to the Main Contract DAB; the Subcontractor is obliged to assist the Contractor in pursuing the Subcontract dispute under the Main Contract, but will not be bound by the Main Contract DAB's decision (but note the alternative clause in the guidance for preparing the Particular Conditions referred to below). A Party may issue a notice of dissatisfaction with the DAB's decision and refer the dispute to arbitration.

In its guidance for the preparation of the Particular Conditions, FIDIC give options for various Sub-clauses where appropriate. Some important examples are as follows:-  

  • For Sub-clause 8.7 FIDIC provides optional wording for liquidated damages for delay, which will be subject to a cap stated in the Appendix to the Subcontractor's Offer.  
  • Alternative payment provisions are given in Sub-clause 14.6 for use in jurisdictions where pay-when-paid clauses are unenforceable. This wording is compliant with the law on pay-when- paid clauses in the UK although it would need to be adapted to include extra wording regarding notices to withhold payment (although it is anticipated that the necessary amendments will be incorporated by FIDIC prior to publishing the Subcontract for use).  
  • A new optional clause 'Unidentified and Unallocated Risks' for insertion at Sub-clause 17.3 provides for the Parties to agree the extent of their liability for events that have not been addressed in the Subcontract, failing which the Contractor shall make a "fair decision" on where the liability will fall.  
  • An alternative Clause 20 is given for use where the Subcontractor is to be bound by a determination, decisions and/or arbitral award under the Main Contract concerning a Subcontractor's claim.  

Conclusion

There will inevitably be some terms which will appear to subcontractors to present a substantial alteration to the previous risk allocation. Amongst these may be the fitness for purpose obligation in Sub-clause 4.1, the extended programming requirements in Sub-clause 8.4 and the pay-when-paid provision in Sub-clause 14.6. It is likely that one of the areas where substantial negotiation will be expected is the cap on liability under Sub-clause 17.3.  

Subcontractors may also seek to obtain the ability to continue with their referral of a Subcontract dispute to the Subcontract Dispute Adjudication Board whilst the Main Contract Board is considering the same issue. This would, however, conflict with the overall "back to back" philosophy of the new Subcontract.