Risk allocation in Red and Yellow Fidic form of contracts[1]


This study is aiming to examine how two of the standard forms of Fidic (the Red[2] and Yellow[3] Book) drafted by the International Federation of Consulting Engineers, treat the issue of risk allocation with respect to price, quality and time for completion.

We will also comment on two cases, both with a significant relevance for the degree to which risks should be transferred from the Employer to the Contractor and vice versa, in relation to different unplanned events.


Cette étude vise à examiner comment deux des contrats-types FIDIC (Livre Rouge, Livre Jaune) rédigés par la Fédération Internationale des Ingénieurs-Conseils, traitent la question de l’attribution des risques en termes de prix, de qualité et de délai d’achèvement.

Nous allons aussi commenter deux cas pertinents pour la mesure dans laquelle les risques doivent être transférés de l’Employeur à l’Entrepreneur et vice versa, en relation avec différents événements imprévus.

The main focus of this presentation is to identify how two of the most popular Fidic forms of contract – the Yellow Book[4] and the Red Book[5] regulate the transfer of the risks between the contracting parties in respect to price, quality and time for completion of the works/project.

We consider the internal, subjective risks likely to trigger the contractual liability, but especially, those events that are external to the contracting parties and which, by their technical, financial and time implications, impose on one or the other party obligations additional to the ones undertaken and/or anticipated at the date of the tender or of the conclusion of the Contract.

We will also examine two cases, both with a significant relevance for the dynamics of the burden of risks and which offer us two practical approaches with respect to the degree to which the risks should be transferred from the Employer to the Contractor and vice versa, depending on the type of the unplanned event which impacts the execution of the project, and also on the particularities of each project.

Our analysis will be directed to the following issues of concern:

  1. If undertaking the design duties involves or not the undertaking de plano of a higher responsibility arising therefrom.
  2. If the burden of risk remains unchanged throughout the execution period.
  3. If there are any circumstances in which the party initially relieved from the burden is subsequently held liable for the negative effects generated by the unplanned event.

By reference to these three guidelines, we will notice from the very beginning that the main difference between the Conditions of Contract for Works (the Fidic Red Book) and the Conditions of Contract for Design and Works (the Fidic Yellow Book) consists in the capacity of the person who ensures the design.

Whilst in the context of the Red Book, the Contractor executes the construction works according to the Employer’s design, the Yellow Book provides the conditions in which the Contractor undertakes not only the execution duties, but also the design duties.

At prima facie, based on elementary logic, one could argue that whenever the design lies with the Contractor, the contingencies arising from or related to this are borne exclusively by the Contractor, the Employer bearing higher responsibilities only if it undertakes the design duties itself[6].

However, a detailed theoretical analysis with respect to the two Fidic forms of contract might prove that the majority of the possible unplanned events are treated in the same manner, with similar mechanisms of risk management, irrespective of the party responsible for the design works.

However, the practical analysis that we propose in the end will prove that none of the two assumptions above are proved and the manner in which the unplanned events are actually managed by the contracting parties can be in conflict both with the applicable contractual standard, and with the reasonable expectations with respect to the nature of the relevant Fidic contract. Certainly, such contractual framework depends exclusively on the manner in which the parties understood to negotiate with respect to the contractual rights and obligations, which is embodied in the Special Conditions of Contract agreed upon.

The general notion of “risk”, for the purpose of this work, refers to “an event or set of circumstances that, should it occur, will have an effect on the achievement of the project’s objectives”[7].

From another perspective, the risk can be assimilated to a probability or threat of harm, damage, liability or any other negative event that is caused by external or internal vulnerabilities and that may be avoided through various preemptive actions[8].

Whereas in civil law, risks are being regulated by the principles res perit debitori[9] and res perit domino[10], both with a non-mandatory force[11], in the referred Fidic rules, the burden of risk varies depending on the category of the unplanned events that arise throughout the contract execution, however, without losing the flexible component that is also provided by the Civil Law, due to the parties’ freedom to determine the Special Conditions of the Contract.

The generally accepted rule governing the regime of the risks in the Fidic contracts is that the risks should be allocated between the parties, so that they are effectively managed.

In light of this general rule, there have been outlined various internationally recognized principles[12] which suggest that, in order to obtain a practical and convenient management, risk should be allocated as follows:

  • to the defaulting party, if the risk is attributable to the faulty performance of the contract or the lack of reasonable efficiency or care in the performance of the contract;
  • to the party which is the beneficiary of the insurance, if it can cover the effects of the risk by the amounts obtained from the insurance premiums;
  • to the party which has preponderant economic benefits as a result of incurring such risk;
  • in the absence of any of the reasons above, or if otherwise it would be inconvenient for the purpose of the contract, to the party which incurs the loss caused by the occurrence of the risk.

For the sake of a more efficient analysis, we will group all the unplanned events that are likely to occur throughout the execution period and to have an impact on the cost, duration and quality of the works, as follows[13]:

  • Natural risks
  • Political and social risks
  • Economic and legal risks arising from legislative changes
  • Risks arising from the parties’ contractual behavior

The categories of risks that we consider are the following:

Natural risks

a) Climatic conditionsboth forms of contracts contain identical provisions with respect to the risks arising from the climatic changes

Sub-clauses 8.4, 17.3 and 17.4 of the Red and Yellow Fidic, when interpreted correlatively, stipulate that the burden of risks arising from climatic conditions is shared between the Contractor and the Employer.

The risk management is expressly defined as follows:

  • Under normal climatic changes, the Contractor will bear the financial consequences arising from these, i.e., the loss of profit anticipated at the date of the tender and bearing additional costs, except for the ones that could not be reasonably foreseen by an experienced contractor by the date for the submission of the Tender.[14]
  • In case of exceptionally climatic changes, which affect the Contractor’s construction progress, the Employer grants an extension of the execution period, whereas the Contractor will bear the relevant costs, namely, the additional registered costs and the related loss of profit;

Thus, the Contractor will be entitled to an extension of the execution period if and to the extent that the completion of the Works for the purposes of Sub-clause 10.1 [Taking Over of the Works and Sections] is or will be delayed as a result of the occurrence of exceptional adverse climatic changes (see Sub-clause 8.4 [Extension of Time for Completion], let. c).

  • In case of unforeseen natural forces[15], the Employer allows for an EOT and covers the additional costs, whereas the Contractor will bear the loss of profit.

Sub-clause 17.3 [Employer’s risks] provides the events whose consequences fall, mainly, under the Employer’s responsibility. Letter h of Sub-clause 17.3 refers to any occurrence of natural phenomena which is unforeseeable or against which an experienced contractor cannot be reasonably expected to have taken adequate preventive measures.

Furthermore, Sub-clause 17.4 regulates the Consequences of the Employer’s risks, and shows as follows: if and to the extent that the Contractor suffers delays and/or incurs Costs as a result of the losses or damage caused by the occurrence of the risks listed in Sub-clause 17.3, it will be entitled to an extension of the time for completion due to the delay, if the completion of the work is or will be delayed, as well as to the payment of additional Costs, which will be included in the Contract Price[16].

b) Unforeseeable physical conditions – the provisions are identical in both forms of contract

To identify the manner in which the risk of the occurrence of unforeseeable physical conditions was borne, the following preliminary contractual obligations are relevant:

  • the Employer is responsible for the information it makes available to the Contractor before and after the Base Date, and therefore, bears the possible risks in relation to the accuracy of such information;

Pursuant to Sub-clause 4.10 [Site Data], the Beneficiary must provide the Contractor, both before and after the Base Rate, all relevant data in its possession and which is related to the hydrological and underground conditions of the Site, including with respect to the environmental issues.

  • the Contractor becomes responsible for interpreting all the data received from the Employer.

In this respect, Sub-clause 4.10 [Site Data] of the General Conditions of the Contract shows that to the extent possible, taking into account the costs and time, it will be considered that the Contractor obtained all necessary information regarding the risks, unplanned events and other circumstances that may influence the Tender or the Works.

At the same time, it will be considered that the Contractor inspected and examined the Site, its vicinities, the aforementioned data and other available information and that, before the submission of the Tender, it was deemed as being satisfied with respect to all relevant issues, including the following: “(…) b) the hydrological and climatic conditions”.

Therefore, under the Red and Yellow Books, once all hydrological and underground data in the Employer’s possession have been communicated, the Contractor becomes the only party responsible for the interpretation of this information.

In addition, it must act in the sense of inspecting and examining the Site and the data provided by the Employer, as well as other available information that can be accessed by the Contractor without the Employer’s intermediation.

In this latter case, the assumption of the professionalism and experience of any Contractor, which conducts in its turn a set of tests and examinations for the verification of the Site, of the vicinities and of the information provided to it by the Employer or obtained from other sources, prevails, and the time and price offer will be made depending on these coordinates.

However, we are of the opinion that the application of these provisions, whereby the risk is transferred to the Contractor, bears a double limitation:

  1. On the one hand, they apply only to the extent that the investigation conducted by the Contractor is practicable taking into account the cost and time anticipated/taken into consideration at the date of the tender.
  2. On the other hand, they apply only with regard to physical conditions which could have been reasonably foreseen by an experienced contractor at the date of tender.

The General Conditions of the Contract (the Fidic Yellow and Red Book) propose a definition of the unforeseeable physical conditions, in Sub-clause 4.12: “physical conditions” means natural physical conditions and man-made and other physical obstructions pollutants, which the Contractor encounters at the Site when executing the Works, including sub-surface and hydrological conditions, but excluding climatic conditions.

If such conditions prove to be unforeseeable, then the Contractor is entitled both to an extension of time due to the delay and to recover the additional Costs registered and which will be included in the Contract Price. By opposition, the Contractor is not entitled to collect the profit it would have obtained if in the tender period it would have anticipated the occurrence of the event at issue.

The General Conditions of the Contract offer a definition of what “Unforeseeable” means, in Sub-clause not reasonably foreseeable by an experienced contractor, by the date submission of the Tender.

Therefore, the treatment of risk allocation in the context of unforeseeable physical conditions implies, in principle, a foreseeability test[17], according to which the Employer bears the burden of risk insofar as the risks were not foreseen pursuant to the cost and time tendered by the Contractor, as well as pursuant to the normal experience of a contractor involved in such project.

Political and social risks

Political and social risks are also treated in an identical manner both in the Red and in the Yellow Book, in the sense of an almost unconditional transfer of the risk to the Employer, by Sub-clauses 17.3[18] [Employer’s risks] and 19[19] [Force majeure] of the General Conditions of the Contract.

In case such risks occur and impact the project execution, the Employer will allow an EOT and pay compensation for additional costs incurred by the Contractor, without granting however additional profit.

Considering the lack of provisions in the General Conditions of the Contract with respect to the consequences and burden of the contracting parties when other social risks (e.g., theft, vandalism) occur, subject to a specific contractual regime, agreed upon by the parties in the Special Conditions of the Contract, such events remain to be managed by the Contractor, from a technical and financial perspective and from the perspective of the time necessary for the execution of the works.

Such general rule can be inferred from Sub-clause 17.2[20] [Contractor’s Care of the Works] in which it is shown that the Contractor will take the entire responsibility for the care of the works and of the goods during the execution period, in the sense that it will need to recover, at its own cost and risk, all losses or damage the occurred with respect to or in connection with the Works, Goods or Documents of the Contractor, so that they are compliant with the provisions of the Contract.

Economic and Legal Risks

The economic risks usually consist in the fluctuation of the equipment, material or manual labor price, either in the sense of their increase, or in the sense of their decrease.

Subject to a special regime agreed upon by the parties, the inflation risk is shared between the Employer and Contractor.

However, pursuant to Sub-clauses 4.1 and 6.1 of the General Conditions of the Contract, the Employer must make all necessary arrangements for hiring the entire personnel and labor, as well as for providing them with remuneration, accommodation, meal and transportation. Therefore, one may conclude that the Contractor will bear all consequences deriving from the lack of availability of the personnel, materials, unless this lack is unforeseeable in nature until the date of the Tender.

The legal risks refer to the changes occurred in the national legislation after the Base Rate.

The General Conditions of the Contract propose that the Contract Price is adjusted so that it takes into account any increase or decrease of the Costs resulting from the change of the Laws of the Country or of the legal or official, governmental interpretation of these Laws, a change which occurs after the Base Date and affects the Contractor with respect to the performance of its obligations according to the provisions of the Contract.

Sub-clause 13.7 [Adjustments for Changes in Legislation] provides that, to the extent that the Contractor incurs delays and/or additional costs as a result of these changes in the Laws or in such interpretations, made after the Base Date, it will be entitled to an extension of time due to the delay, according to Sub-clause 8.4 [Extension of Time for Completion], if the completion of the Works is or will be delayed and to the payment of the additional Costs registered and which will be included in the Contract Price.

Therefore, according to the standard Fidic – Red or Yellow Book templates, such legislative changes fall under the Employer’s responsibility.

Risks arising from the parties’ behavior

Both forms of contract propose that such risks be incurred by the party at fault.

It therefore follows that, the legal regime of these events may be assimilated to the legal regime of contractual liability in case of which fault is assumed and, furthermore, it is proved that an action which is in breach of the agreement concluded between the parties was committed, the actual harm (delays in the performance and additional costs, with the consequence that the anticipated profit at the date when the Tender was submitted) and the cause- effect relation.

With respect to the risks incurred by the Employer, the General Conditions of the Contract set forth, in both forms (Fidic Red and Yellow Books):

  • the delayed delivery of the Design Drawings or Instructions (Sub-clause 1.9 [Delayed drawings or instructions]),
  • delays in ensuring access to the site (Sub-clause 2.1[21] [Right of Access to the Site]),
  • failure to send the notice within the general contractual term of 28 days, with respect to maintaining the financial arrangements, when there is a request in this respect from the Contractor (Sub-clause 2.4 [Employer’s Financial Arrangements]),
  • delays in making the payments (Sub-clause 14.8 [Delayed Payment]),
  • design defects (Sub-clause 17.3 [Employer’s Risks]),
  • use or occupation by the Employer of any part of the Permanent Works, except for the ones specified in the Contract (Sub-clause 17.3 [Employer’s Risks]).

However, the two forms of the Fidic Contract set forth a series of risks incumbent upon the Contractor:

  • work accidents (Sub-clause 4.1 [Contractor’s General Obligations]),
  • damage, loss or expenses (legal taxes and expenses) that may result from the transportation of the Goods (Sub-clause 4.16 [Transport of Goods]),
  • actions of the subcontractors committed in breach of the contract (Sub-clause 4.4 [Subcontractors]),
  • defects of the equipments, materials, execution (Sub-clauses 7.1 – 7.5).

Furthermore, the relevant provisions also take into consideration those actions committed by third parties who have negative consequences on the cost or duration necessary for the execution of the project:

  • unauthorized access (Sub-clause 4.22 [Security of the Site]);

However, from this perspective, the Contractor is responsible for prohibiting the access to the Site of the unauthorized persons.

Consequently, even if the eventual harmful actions were committed by third parties, it may be argued that liability will continue to rest with the Contractor, the latter having a right to seek redress against the persons liable for the actions, in accordance with the provisions regulating general civil tort liability.

  • delays caused by the authorities (Sub-clause 8.5 [Delays caused by Authorities]);

In this case, the General Conditions of the Contract assimilate the event to a reason for delay that entitles to an extension of time for completion, in accordance with Sub-clause 8.4, letter b.


The construction of the Tsing[22] Ma Bridge – design duties assumed by the Employer

For the construction of the Tsing Ma Bridge[23] a Red Fidic form of contract was concluded whereby design works and, in theory, the risks arising therefrom[24] were assigned to the Employer.

This is an aggressive example of risk transfer, as the Employer transferred to the Contractor both the risk of delay and of additional cost in case of weather events with significant adverse effects, namely typhoons.

However, in this particular case, the allocation of the risk regarding weather events was not unreasonable, taking into consideration the following:

  • Statistically, one could have easily anticipated when typhoons were most likely to strike and when the strongest typhoons were expected to hit.
  • The program of works was under the control of the Contractor, which indicates that the Contractor is the party that is best suited to manage the risk.
  • Although the obligation to manage the risk so as to minimize the effects remained with the Contractor, the parties negotiated in the end an extension of time for the period during which Signals 8 and 10[25] were hoisted.

Even though the risk management system developed and agreed by the parties seemed incompatible with the nature of the contract, the system has proved efficient and successfully confirmed the rule according to which the analysis, management and allocation of the risk must be regulated on a case by case basis and depending on the location of the project and access to information.

The construction of a tunnel underneath the Gibraltar airport runway[26] – design duties assumed by the Contractor

The Spanish Contractor Obrascon Huarte Lain SA (referred to as OHL) and the Government of Gibraltar concluded a Yellow Fidic form of contract, 1999 edition, in relation to the design and execution works for the construction of a tunnel passing underneath the Gibraltar airport runway.

The issues on which the parties disagreed, settled in April 16, 2014 in Great Britain, essentially referred to the termination of contractual relations on grounds of breach of contract.

At the same time, the resolution of the dispute entailed issuing general arguments regarding the interpretation and significance of the concept of unforeseeable physical conditions and in relation to the Contractor’s entitlement to an extension of time.

More specifically, the relevant courts had to establish whether the discovery by OHL of large deposits of contaminated ground could qualify as unforeseeable physical conditions and therefore entitle the Contractor to an extension of time and to the recovery of the additional costs borne by the Contractor, as appropriate.

With regard to the factual situation, a relevant aspect is that the site is located in an area known for the intense military operations that used to take place, and the land was subjected to repeated bombings during the Spanish military campaigns in the 18th century and during the Napoleonic Wars and afterwards during World War II.

When the tender was submitted for the awarding of the Contract, the Contractor was provided with some information, in particular the environmental statement, a site investigation report and a contaminated land desk study.

The Environmental Statement recommended that the tenderer, OHL, should take into account the possibility of discovering, during excavations, contaminated ground that was not foreseen in the environmental statement or in other pre-contractual studies carried out by the Employer.

Soon after the contract was concluded and as the works were progressing, OHL encountered a number of difficulties that caused delays. The overwhelming issue causing delay was the discovery of large deposits of contaminated ground during the excavation works. The actual quantities discovered by OHL significantly exceeded the assumptions included in the Environmental Statement.

The main issue to clarify was whether, and to what extent the actual quantity of contaminated ground could have been reasonably foreseen by an experienced contractor when the tender was submitted, and depending on the answer to this question to determine whether OHL was responsible.

OHL claimed that it encountered unforeseeable physical conditions and therefore was entitled to an extension of time and to additional costs pursuant to Sub-clause 4.12 of the Contract.

However the relevant courts dismissed the Contractor’s claims. The following aspects have been considered in resolving the dispute:

  • The Contractor had been warned by the Employer to account for the possibility of discovering a substantial volume of contaminated material but OHL ignored this real risk;
  • The Contractor should have made an analysis and assessment of the contamination source and of the actual quantity of contaminated material as opposed to what had been revealed by the pre-contract site investigation. Had the Contractor conducted such analysis and assessment, it could have anticipated the actual conditions of the land and provided a particularized tender in terms of price and time required for the works;
  • The contaminated land identified during the execution phase, although it exceeded significantly the quantities assumed in the Environmental Statement, cannot be included in the category of unforeseen events;
  • OHL relied unconditionally on the Environmental Statement and made no material independent inquiry into the site conditions, despite the fact that the well known history of the place offered sufficient indications as regards the level of ground contamination;
  • An experienced Contractor would not have simply considered as accurate and complete the geotechnical data provided during the tender process.


In view of the narrow approach permitted by the scope of this work, we consider that the following main conclusions may be drawn:

The assumption of design duties does not entail de plano that all risks arising from the performance of those duties are also assumed.

Risk management does not remain unchanged throughout the term of the contract.

Insofar as one of the parties does not act diligently and causes or refuses to prevent an aggravation of the consequences of the materialized risks, the responsibility for these risks shall be borne by the respective party, regardless of whether the contract stipulated that the respective party was to bear the consequences of such risks[27].

Therefore, regardless of the capacity of the party who bears the risk pursuant to the contract, both the Employer and the Contractor have the implicit obligation to act jointly to minimize as much as possible the negative consequences of the unforeseeable events.