FIDIC is synonymous with international construction and engineering projects.
Over the course of 2016, FIDIC has been focussing on efforts to update its existing suite of contracts and working to introduce entirely new forms of contract.
For those who attended the FIDIC International Contract User's Conference in December 2016, FIDIC handed out a "special pre-release version" of the 2nd Edition of the Yellow Book (2017) and the 5th Edition of the White Book (2017). We will be running training sessions across the world for issues to consider when using these forms, and if you are interested in attending, please contact ray. email@example.com for further details.
Other contracts that are still a "work in progress" include a new Tunnelling Contract, new Professional JV Agreement, new Sub-Consultancy Agreement, new Bronze Book (ODB) and a Renewables Energy Sector Contract with a focus on wind (on and offshore) not much new detail of the content of these forms have been provided since the last conference in 2015.
Roll out of these new and updated contracts will take place in key stages over the course of the next two years, with the first updated Blue Book (dredging contract) already issued in electronic form (hard versions to follow) and the professional services-driven suite being released soon. The Red, Yellow and Silver Books are scheduled for Q1 2017 release.
Details of the entire release schedule and some of the changes that might be expected are set out below albeit, this is subject to change:
The Professional Suite (STET)
The Professional Suite includes a new White Book, a new Sub-Consultancy Agreement and a new Joint Venture Agreement to be published imminently.
It is understood that the new and updated White Book was completed in August 2015 but due to FIDIC's desire to prepare and publish the new White Book simultaneously with the new Sub-Consultancy Agreement and Joint Venture Agreement, the timescale for publication has been delayed. The prerelease 5th Edition (2017) version was handed out to conference delegates in London in December.
New Update to the White Book
There are a lot of changes, so more detailed updates will follow in later press releases, but an example of some of the headline issues in the new White Book Model Services Agreement "special pre-release edition" appear to be as follows:
There are now 10 sections.
Definitions are in alphabetical order for ease.
Background Intellectual Property Rights and Foreground Intellectual Property Rights are split with a different licence regime in relation to both. There is no right for the Client to copy or sublicence, so this will need to be considered on a project-by-project basis.
Client-provided (or others on behalf of the client) information is now expressly more of a risk for the Client under clause 2.1, entitling reliance on the accuracy, sufficiency and consistency (subject to a reasonable endeavours review process for manifest error, omission or ambiguity) leading to the possibility of a Variation. This needs to be considered carefully by both Parties.
New suspension rights are introduced in relation to a change in the Client's financial arrangements which the Consultant (acting reasonably) is not satisfied with. Clients may require a more appropriate and objective set of test criteria.
Normal Services, Additional Services and Exceptional Services have been replaced by Services and Variations together with entitlements in respect of Exceptional Events. These will need to be carefully considered on a project level.
Good faith and mutual trust obligations are added at clause 1.16.1 (along with some other more "boiler-plate" clauses). The meaning and impact of this for each particular country (and governing law clause) should be carefully considered.
3.3 to reflect what is now perceived to be the "market norm" but interestingly, there is now also a hybrid fitness for purpose requirement (known as function and purpose, which needs to be specified in Appendix 1) but only to the extent this is achievable applying the elevated standard of skill and care (clauses 3.3.1 and 3.3.2). This will mean that the function and purpose will need to be carefully considered and included in the White Book not unlike a well-drafted construction or EPC contract. Consultants should check this with their insurers.
A Programme is required to be provided by the Consultant (clause 4.3) within 14 days of the Commencement Date this will include key dates for deliverables and will reflect what is included in Appendix 4.
Clause 7.2.3 provides that no withholding of monies will be allowed by the Employer unless this has been agreed with the consultant or awarded under the dispute resolution process (adjudication of arbitration). Employers will want to carefully consider whether this is acceptable.
Dispute resolution follows a tiered approach and requires attempts at amicable resolution, adjudication (replacing mediation) and finally, ICC Arbitration. There is a timetabled requirement (28 days) for a Notice of Dissatisfaction (NOD) with the adjudicator's decision as a precondition to arbitration and arbitration must be commenced within 182 days (i.e. six months) failing which there would appear to be no right to arbitrate. This elevator approach ties the parties to a dispute process which may require arbitration whilst the services are ongoing which invariably diverts attention from the project and needs to be seriously considered (albeit the parties may agree a stay but query how likely this will be in practise).
A fairly typical elevated standard of skill and care requirement has been included at clause
Whilst a number of countries adopt rapid dispute resolution procedures, the right to adjudicate is by no means standard and depending on the jurisdiction/location of the project, this may have to be altered. Enforcement of an adjudicator's decision will also need to be considered on a jurisdictional level for each project and gives rise to its own issues.
New Joint Venture Agreement
Some details of the new Joint Venture Agreement appear to be as follows:
This is for consultants only and allows for all consultants to be jointly and severally liable. It requires consensus for any decision and allows for a Lead Member.
Breach of the elevated standard of skill and care or the agreement itself is required for any liability to attach to the consultant. FIDIC has attempted to dictate the damages payable in the event of breach to "reasonably foreseeable loss and damage as a direct result of such breach", a capped "Limit of Liability" in clause 8.3.1 and introduces what appears to be an oddly worded "net contribution" clause at 8.1.3(c) which may give rise to some interesting arguments in the author's opinion (and the possibility of a "damages black hole" for the Client must be considered from a Client's perspective). Legal advice is required for the relevant jurisdiction because these words may not have the effect that FIDIC may intend e.g. if loss of profit is intended to be excluded, then this may not be covered by simply referring to a "direct result".
Whilst there is a cap on liability, deliberate manifest and reckless default, fraud, fraudulent misrepresentation or reckless misconduct are excluded, as are finance charges (compounded monthly).
The Joint Venture Agreement allows for either an "integrated" or "non-integrated" approach.
The "integrated approach" requires pre-agreed financial interest to be included, all parties to be responsible with pre-agreed staffing levels and inputs set out in the agreement itself. There is no inter-parties liability except in circumstances where there has been bad faith or gross negligence. The use of these terms should be carefully considered by advisors. Insurance arrangements are required to be proportional based on the financial interest of the Joint Venture parties.
The "non-integrated approach" requires each member to be responsible only for its services. Each party has its own Profit and Loss account, there are joint and several liabilities coupled with indemnities to the other parties for default. Each party will be required to carry its own insurance.
Updated Rainbow Construction Contract Suite Red, Yellow and Silver Books (STET)
The Rainbow Suite includes the Red, Yellow and Silver books, which are due to be published in Q1 2017. For those who attended the FIDIC International Contract User's Conference, FIDIC handed out a "special pre-release version" of the 2nd Edition of the Yellow Book (2017) and gave some guidance on the changes at rapid pace, as well as some thoughts on the approach to be adopted in the Red Book.
As the Rainbow Suite broadly follow the same layout, FIDIC decided to start with the Yellow Book as (based on its experience) this is the most common form used in practice, and utilised the Gold Book as the approach to some of the updates, as this was the latest FIDIC version in circulation at the time. As can be seen below, this approach (amongst other things) has already created concern for Contractors and Employers at the User's Conference. In the author's view, whilst it was envisaged that the "special pre-release version" was ready for imminent roll out in Q1 2017, some of these issues and clauses will need to be revisited following the conference and this appeared to be acknowledged by FIDIC.
FIDIC is using Contract Data rather than an Appendix to Tender approach this approach seems therefore to be similar to the NEC3 form of contract commonly used in the UK. The "special pre-release version" did not, unfortunately, include sample Contract Data or Guidance or Forms for consideration.
Definitions are in alphabetical order for ease, which is a welcome change. There are multiple new definitions to tie in with the wholesale changes made, e.g. Cost Plus Profit (note, the default profit is 5% unless changed in the Contract Data), Delay Damages, Dispute, Extension of Time or EOT, Exceptional Event (replacing Force Majeure) and Programme, to name just a few.
A simple comparison of some of the core clauses shows that the "special pre-release version" of the 2nd Edition of the Yellow Book (2017) is tantamount to a wholesale redraft so more detailed updates will follow in later press releases and training sessions. FIDIC has suggested that there is a 50% word count increase, but the General Conditions alone now run to 108 pages compared with 63 pages for the 1999 Edition, so the General Conditions alone are 71% longer. Obviously, it will take time to digest the implications of all these changes but for now, some examples of change in approach and issues in the new Yellow Book appear to be as follows:
As a general observation, the drafting is now significantly more complex and interconnected and is significantly longer, meaning that any amendments should be undertaken with extreme care and by a professional. We recommend specialist lawyers are engaged more than ever given the wholesale changes made.
Strengthening the project management tools and clauses for example, programming, records, Quality Management System, advance warning regime, introducing milestones and critical path wording.
Working up drafting to facilitate use of "Employer's Equipment" and "Employer-Supplied Materials" concepts.
Amending the role of the Engineer. For example, requiring a qualified Engineer to be appointed who is fluent in the ruling language (clause 3.1).
Introducing an Engineer's Representative (clause 3.3).
Performance Security if the Contract Price, by virtue of Variations, alters up or down by 20% when compared with the Accepted Contract Amount (and relating to the relevant currency), then there are provisions for the value of the Performance Security to change with the Employer paying the Cost of any increase, and if the Employer agrees, a reduction, there is no commensurate saving for the Employer.
Limitations of Liability is a particularly problematic clause as drafted for Contractors and FIDIC appears to have recognised this following feedback and discussion at the User's Conference. To explain:
FIDIC clause 17.6 [Limitations of Liability] is split into two elements. The first element excludes types of loss and effectively provides that neither Party is liable for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage ... other than under (amongst other things) Sub-Clause 17.7. The second element relates to the total liability of the Contractor and again excludes Sub-Clause 17.7.
Sub-Clause 17.7 [Indemnities by Contractor] provides that "The Contractor shall also indemnify and hold harmless the Employer against all errors in the Contractor's design and the Works and other professional services which result in the Works not being fit for the purpose(s) intended in accordance with SubClause 4.1 [Contractor's General Obligations] or result in any loss and/or damage for the Employer (including legal fees and expenses)".
The immediate and obvious concern with this approach is that it gives rise to potentially uncapped liabilities (including loss of profit, etc.) of any design errors, which mean the Works are not fit for purpose. There may be ways around this but the drafting itself has caused widespread concern and in the author's view, it is considered that this will be amended prior to final launch of the FIDIC suite. It should be noted, though, that this is reflective of the Gold Book approach, so those using that form should take care.
Regarding programming and extensions of time:
There are deemed Notice of No-objections to Programme submissions if the Engineer does not respond within the required timescales (clause 8.3).
FIDIC has not adopted any particular approach to "concurrency" risk for extensions of time merely referring to the Particular Conditions, leaving it to the Employer/Contractor to insert (assuming they remember/agree) otherwise a vague (as appropriate taking due regard of all relevant circumstances) approach is adopted where the Particular Conditions do not deal.
Authority delays are extended to include "private utility companies".
For Provisional Sums, the Employer can now require quotations from one or more suppliers/subcontractors (clause 13.4).
Change in Law (now clause 13.6) introduces entitlement for changes in permits or the requirements of any permit, etc.
Change in Cost (now clause 13.7) must be set out in the Particular Conditions rather than FIDIC stipulating in the General Conditions which rules apply.
Force Majeure (clause 18) has been replaced with concepts of Exceptional Risks and Exceptional Events (albeit the list of Exceptional Events are subtly different from the examples of Force Majeure in the 1999 Yellow Book).
Employer's and Contractor's Claims are now contained in a standalone clause (20), with Disputes and Arbitration in a new clause 21 and together these clauses run to over 10 pages.
The Engineer only deals with Claims he does not deal with Disputes.
Regarding Claims, FIDIC 1999 clause 2.5 dealing with Employer's Claims has been removed, requiring the Employer to comply with the same provisions as the Contractor in clause 20. Accordingly, the time bar provisions apply to both the Employer and the Contractor, albeit with a twist.
Interestingly, clause 20.1 envisages three claims scenarios. Scenario (a) relates to the Employer's entitlement to additional payments or reduction in the Contract Price or extension of the DNP; scenario (b) relates to the Contractor's entitlement to additional payment or an EOT these apply the new notice provisions in clause 20.2. The third scenario (c) applies to both the Employer and Contractor and relate to "another entitlement or relief...including in connection with any certificate, determination, instruction, Notice, opinion or valuation of the Engineer" but excludes entitlements under (a) and (b) and any "claim by or against a third party". This scenario (c) accelerates to clause 3.7 determination and the notice provisions provide for the Notice to be given "as soon as reasonably practicable after the claiming Party becomes aware of the Party's disagreement with the requested entitlement (or deemed disagreement if no response is received ... within a reasonably time".
Time bars apply to both Employer and Contractor claims under clause 20. There is now a twostage time bar. The first time bar applies to the initial Notice of Claim (28 days from the date of awareness or when he should have become aware so no real change).
The second time bar is new and applies to a failure to submit the Fully Detailed Claim in the 42-day period (unless the Engineer agrees to an extension requested by the claiming party) but interestingly, only if the claim does not include "particulars of the contractual and/or other basis of the claim" under sub-paragraph (b) of 20.2.4 failures of the other sub-paragraphs apparently not being considered sufficient important to FIDIC. The Engineer has a positive duty within 14 days of receipt of the Notice of Claim to give a preliminary response if he considers that the initial Notice of Claim is time barred (clause 20.2.2) there may be debate about whether a failure is tantamount to acceptance that the claim is within time but FIDIC does not appear to expressly state this effect.
Those time bars and preliminary notice by the Engineer are, however, subject to a new "Waiver of Time-limits" clause 20.3, which allows the Claiming Party, within 14 days of the Engineer's Notice, to apply to the DAB to justify the late submission of the initial Notice of Claim or 20.2.4(b). If it does not, then the relevant Notice is deemed to be final and conclusive. This keeps the parties on the claims "conveyor belt" and introduces the DAB into the mix. The DAB considers the issue and if it considers that "in all the circumstances, it is fair and reasonable that the late submission be accepted", it may waive the time bar. There are some criteria that the DAB may take into account in clause 20.3, including "the extent the other Party would be prejudiced by acceptance of the late submission" and "other Party's prior knowledge" so all in all, there is clearly a shift in favour of the time bar not being effective and preliminary DAB (and possibly arbitral) issues having to be commenced to resolve all this before the actual claim is dealt with.
This trade off of contract certainty (subject to the usual governing law issues in the relevant jurisdiction) and achieving a fairness for the claiming party comes with obvious additional administration burdens at a time when some might argue the parties should be focussing on the project.
Employer claims, set off and deduction have to comply with clause 20. This may not be acceptable to all Employers.
Clause 3.5 (determinations) is now moved to clause 3.7 and is now over two pages in length. This determination role is not just for claims and the new Yellow Book has multiple links to this process. Some of the main points here are:
The Engineer is required, when clause 3.7 applies to "act neutrally between the Parties". This is an entirely new term and deliberately deployed by FIDIC, yet the precise scope and meaning of this in practice could well give result to various arguments being advanced.
There are positive obligations on the Engineer to consult with the Parties and time limits for the "agreement" (42 days unless the Engineer proposes longer and the Parties agree or if earlier, both Parties notify no agreement can be reached) failing which the Engineer is required in a second time limit (further 42 days unless the Engineer proposes longer and the Parties agree) to make a fair determination, taking regard of all relevant circumstances and including reasons and supporting particulars.
If the Engineer fails to give the Notice of agreement or determination in the required timescale, this is a deemed rejection. This will be welcome news to Contractors who find themselves frustrated by continued requests for information and failure to make a determination leading to an inability to commence dispute resolution proceedings.
The Engineer's notice of agreement or determination is binding unless and until revised under new clause 21. Payment Certificates need to include this.
There is a "slip rule" included for typographical, clerical or arithmetical errors the 14-day time limits require parties to scrutinise any agreement or determination swiftly.
A Notice of Dissatisfaction/NOD is required within 28 days failing which the dispute is finally and conclusively binding on the parties. If a NOD is issued, there is a fast-track approach through the DAB leading to unavoidable arbitration in clause 21, which may occur whilst the project is live. Leaving to one side the possibility of a stay of arbitral proceedings if agreed, this has the obvious concern that attention, resource and focus will be drawn to the dispute whilst the project is ongoing. Dealing with issues contemporaneously (not storing problems to the end) is FIDIC's reason for this but it comes at a risk to the project which may not be acceptable for all Employers.
Regarding Disputes (clause 21), some observations are as follows:
Disputes are dealt with by the Dispute Adjudication Board (DAB) in the first instance, but the DAB can be asked (if the Parties agree) to provide "assistance and/or informally discuss" any issue or disagreement unless the Engineer is carrying out his duties under clause 3.7. FIDIC has drafted the new Yellow Book on the basis that there will be a standing DAB rather than an ad hoc DAB, which of course, may not be acceptable on all projects.
The DAB will usually give its decision with 84 days (but may withhold if payment is outstanding). The decision is binding regardless of any NOD issued and payment obligations are immediate (albeit may be subject to appropriate security).
Any NOD must be given within 28 days of receipt of the decision. Like the new White Book approach, the DAB decision is a precondition to arbitration (save where no DAB is in place or there is a failure to comply with the DAB decision) and arbitration must be commenced within 182 days (i.e. six months) failing which there would appear to be no right to arbitrate. There is an "amicable settlement" requirement (28 days) from the date of the NOD subject to agreement otherwise (again the same provisos apply). This "conveyor belt" approach ties the parties to a dispute process that may require arbitration whilst the services are ongoing, which invariably diverts attention from the project and needs to be seriously considered (albeit the parties may agree a stay but query how likely this will be in practice). Whilst a number of countries adopt rapid dispute resolution procedures, the right to adjudicate is by no means standard, and depending on the jurisdiction/location of the project, this may have to be altered. Enforcement of the DAB's decision will also need to be considered on a jurisdictional level for each project and gives rise to its own issues.
New Bronze Book (STET)
The New Bronze Book is based on an Operate, Design and Build model (ODB), as distinct from the Gold Book; Design Build and Operate (DBO) model.
In December 2015, it was expected to be finalised by the end of 2016, with a target publication date of Q1 2017, but whether this is achievable seems doubtful.
The new Bronze Book is envisaged for use on an existing brownfield site with 20 years of operation. Details remain limited at this stage but it is understood that it envisages an initial operational period with a simultaneous design and build phase followed by operation with certain classes of assets attracting different risk profiles under the contract. For example, Class A assets (which the contractor can assess) and Class B assets (covered up assets, which the contractor cannot assess) will be dealt with differently. The contract will also include an asset inventory report.
Updated and New Sub-Contracts (publication in Q3 2017)
FIDIC is updating the Red Sub-Contract and publishing new Yellow and Silver Sub-Contracts to align with the updated main contract suite. Details remain to be disclosed.
New Tunnelling Contract (publication in 2018)
It seems there will be a need not only for soil data, but also some form of assumed soil conditions report. This will be the benchmark against which time and price will be measured, so if there is a change in actual soil conditions, the programme and the price will change.
Whilst FIDIC is considering how and when this will be reconciled (for example, whether time and price considerations are reassessed every so many months), FIDIC appreciates there will be a need for interface with others e.g. breaking into station
boxes on new underground rail projects). FIDIC envisages, however, that Time for Completion could actually be less than originally set by reference to this in the contract. It will be interesting to see how this develops.
New Renewables Energy Sector Contract (publication in 2018)
Details of this form are currently scarce, but FIDIC sees an opportunity for the creation of a new Renewables Energy Sector Contract and it is understood that the focus of attention is on wind power generation, both on and offshore. Offshore construction comes with its own complexities and different risk profiles, so it will be interesting to see how FIDIC addresses this in one standard form. Further details will follow in due course.
Other Possible Updates/Update Positions
Pink Book (MDB). FIDIC is currently in discussions with various multilateral banks about the Pink Book and the Yellow and Red Books. There is the possibility of an update to the Pink Book in 2017.
Blue Book (Dredging). The update to this form has been published electronically with the hard copy due for publication imminently.
Green Book (Short Form of Contract). Whilst there are no plans at present to update this form, we understand this is likely to be looked at in 2017.
Take Away Points
FIDIC is undertaking a major overhaul of its existing suite of contracts and is adding some interesting new contracts into the mix.
For all of those familiar with the existing Rainbow Suite and the current edition of the White Book, the publication dates are imminent, so it is time to get ready for some significant changes.
Some of the most important changes in the Rainbow Suite appear to be aimed at practical issues that have stifled the rapid resolution of claims, leading to disputes being stored up until the end of the project particularly splitting the Claims and Disputes roles and requiring a standing DAB at the outset. The approach FIDIC appears to be taking with the "special pre-release version" of the 2nd Edition of the Yellow Book (2017) is, however, already receiving some critical appraisal, particularly with regard to key issues like caps on liability not being commercially workable (which the author considers will need to be revisited) and a "conveyor belt" approach to Engineer agreements, determinations, default positions, Notices of Dissatisfaction and DAB and Arbitration whilst a project is ongoing. What is clear is that the wholesale changes made to Yellow Book (running to an additional 45 pages in total) are complex and interconnected in a way that makes legal input even more important.
Only time will tell if Employers actually adopt some or all of the changes or if the Particular Conditions will simply adjust the risk profile in the contract (at least in some instances) back to the pre-update positions and the risk profile with which those Employers are content. Some of the amendments are sensible and should be welcomed generally by Contractor's and Employers alike. All the changes are intended to reflect FIDIC's Golden Principles.
Until the updates are finally published (and the Yellow Book appears close even with the key acknowledged caps on liability issue identified above), the risk profile and issues associated with each of these updates or new contracts cannot be known with precision. We will be monitoring these updates in future editions and will be running training sessions on the new White Book and Yellow Book around the world. If you are interested in attending any of these sessions, please contact ray. firstname.lastname@example.org.
What is abundantly clear, though, is that the FIDIC landscape is changing and each of these contracts will need to be carefully considered once published. As always, the governing law (and local law impacts) on any given project should be scrutinised before entering into any contract. In the author's experience, not only do parties not always consider what is written in the contract itself, but they are also often unaware of all the things which are implied into the contract by local or governing law clauses without ever being written down in the contract itself, which may completely override whatever is written down. It is those "unwritten" (or hidden) issues that require specific advice. As a truly global specialist firm, we are here to help you identify and then navigate these issues successfully.
Ray O'Connor T +44 207 655 1422 M +44 771 492 2762 E email@example.com
The contents of this update are not intended to serve as legal advice related to individual situations or as legal opinions concerning such situations nor should they be considered a substitute for taking legal advice.
Squire Patton Boggs.
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