Guide to the FIDIC contracts

For those of you not familiar with the FIDIC suite of contracts for international construction and engineering projects this presentation will provide a brief overview of the core principles behind FIDIC’s standard form contracts as well as some of the key changes introduced in the 2017 second edition red, yellow and silver books.

So the three most commonly used FIDIC contracts for major works, often referred to as the rainbow suite, are the red book for projects designed by the employer or designed on the employer’s behalf with an engineer administrating the contract. The yellow book for projects designed by the contractor with an engineer administering the contract and finally the silver book for turnkey projects designed by the contractor and administered by the employer or the employer’s representative who performs more or less the same functions as the engineer in the red and yellow books.

When selecting the right FIDIC contract for a project we should consider the value, duration and nature of the project. The design liability and the risk allocation as between the employer and the contractor. Typically there are three common ways to deliver a project. FIDIC users may adopt the traditional design build approach whereby the employer produces a detailed design and then receives tenders or bids from contractors. The selected contractors are then tasked with construction only and so the employer carries more risk. The red book adopts this approach often with payments structured in a re-measured or unit price basis. Alternatively, FIDIC users may adopt the classic design and build approach whereby the employer produces the pre-design stage of the project and the contractor is tasked with completing the design and construction. This approach is taken in the yellow book which sees the contractor incur more risk than he would under the red book. Payment is typically agreed on a lump sum payment basis and the yellow book is suited to more complex projects where the contractor is often required to have a high degree of specialist know-how. The third method is the engineering procurement construction method whereby the employer produces a performance specification and the contractor carries out the design and construction. The contractor should deliver the works in a working condition fulfilling the requirements of the performance specification. FIDIC’s sliver book adopts the EPC method which is more suited to complex infrastructure projects where the employer relies heavily on the contractor’s expertise to deliver on both the design and construction front without much interference. Payment is normally agreed on a lump sum basis, so it is vital that the contractor’s budget is calculated correctly. For this reason, naturally, contractors tend to bear the most risk under EPC contracts.

Now if we look to the other FIDIC contracts, the complete suite of contracts published by FIDIC cover the most common forms of procurement strategy ranging from short-form contracts for relatively simple or repetitive work over a short duration as covered by the green book to design build and operate contracts which require that the contractor extend its responsibility to operational services as provided for under the gold book. Each of the FIDIC books are generally organised into three parts. Part 1 will comprise of the general conditions reflecting the rights and obligations of each party, the payment mechanism and the procedures for variation, certification and dispute resolution. Part 2 will contain the particular conditions including some guidance for preparation of the particular conditions. They should be amended as appropriate to introduce project specific clauses and meet particular requirements of the project. And finally, part 3 will contain an appendix with sample forms to be used depending on the relevant procurement process.

Now regardless of which form of contract is adopted there are five conceptual principles that FIDIC considers to be necessary, particularly when amending the general conditions. These are appropriately referred to as FIDIC’s five golden principles. The first being that the duties, rights, obligations, roles and responsibilities of the parties must be generally as defined in the general conditions. Users will have immediately noticed that FIDIC has developed a more prescriptive set of conditions and processes applicable to the parties including the engineer or employer’s representative in the second edition. The second principle states that any particular conditions must be clear and unambiguous and improving clarity has been one of FIDIC’s primary objectives with the second edition. The third principle provides that any particular conditions must not change the risk allocation as between the employer and contractor as set out in the general conditions. The fourth is that all time period specified in the contract must be of a reasonable duration and finally, unless there is a conflict with the governing law of the contract, all disputes should be referred to the Dispute Adjudication Avoidance Board previously known as the Dispute Adjudication Board for a provisionally binding decision as a condition precedent to arbitration or litigation.

So notwithstanding the importance of FIDIC’s golden principles, freedom on contract means that parties are free to agree whatever contractual terms they wish provided it complies obviously with the law and public policy. So it remains to be seen whether these conceptual principles will have any effect in practice, however they are useful in terms of providing guidance to FIDIC users. When considering the changes introduced in the 2017 suite it is important to understand the causes for change. Whilst there are various factors contributing to the call for the development of the 1999 suite the Global Construction Dispute Report by Arcadis in 2019 found that the top three causes for construction disputes in the US proceeding the publication of the 2017 suite were that parties were failing to understand or comply with contractual obligations, there were errors or omissions in contract documentation or there was a failure to properly administer the contract. The report also found that the average length of disputes increased from 10 or 12 months back in 2011 to 17 months by 2018. So in this context the 2017 suite aims to achieve three primary objectives. The first is to improve contract management by adopting detailed prescriptive provisions setting out step by step processes. Second, is to improve clarity in respect of each party’s role and obligations, particularly that of the engineer in the red and yellow books. And thirdly is to support an industry wide focus on dispute avoidance and collaboration between the parties by enhancing claims provisions in drawing distinction between claims and disputes which are now dealt with separately in clauses 20 and 21.

Now if we look more closely at some of the improvements made in the second addition we can appreciate how these objectives have been achieved. Notices play a significant role in the 2017 suite which contains approximately 70 sub-clauses that require notice to be given. Amongst users of the 1999 suite there was a high number of disputes surrounding the validity of notice and whether the notices failing to confirm to the strict forms prescribed under the contract should justify the dismissal of claims, for example, we often seen notices challenged for being out of time or omitting express reference to a particular cause. With the 2017 suite FIDIC have introduced some changes in terms of notice requirements, time limits for responding and the consequences of failure to comply. Parties must ensure that they are fully aware of the latest requirements and in each instance they should ask when is a notice or other communication required, for example, how many days after the occurrence of an event or knowledge of the occurrence of an event should notice be issued. What are the time limits for both giving notice and receiving a response. What form must it take, written or verbal. Who gives the notice and who has authority to sign it. Who is the recipient and who must receive copies. Standard practice under FIDIC is always to copy the engineer and any other party in every communication and you should ask whether there are continuing notice requirements. This is typically required where an event has a continuing effect on the works which all parties and the engineer must be kept informed of with regular updates and also one should be aware of what happens if no notice is given or no response is received. With clear guidelines laid out in the 2017 suite with respective of the consequences of a failure to comply with the notice provisions is very much welcome by the users which brings us to the key issue of time bar provisions. Now in line with FIDIC’s objective to impose a more prescriptive process driven contract the following time bar provisions have been updated to ensure that (a) the parties clearly understand their notice obligations and the consequences of any failure to comply and (b) ultimately claims are dealt with as they arise as opposed to be being left to the final stages of the project. In particular, under clause 20.2.1 we notice that the failure to notify an initial claim or provide full particulars within the time prescribed does not necessarily result in the failure of that claim. With discretion left to the engineer to waive such requirements in special circumstances. However, notices of dissatisfaction under 3.7.5 and 21.4.1 in respect of the engineer’s determination or a decision by the Dispute Adjudication Avoidance Board must be submitted within the prescribed time in order to be valid without the possibility of the condition being waived. This is to ensure that the disputes are dealt with promptly as they arise which brings us nicely to the role of the engineer.

As with the 1999 suite the role of the engineer under the red and yellow books is three fold. Acting on behalf of the employer as the employer’s agent, as set out in clause 3.2, administering the contract subject to any limitations imposed on the engineer’s duties and authority, also under 3.2, and determining various matters that arise during the life of the project and evaluating party entitlements pursuant to the terms of the contract as laid out under 3.7. Now whilst there is no engineer under the silver book, the engineer’s role is performed either by the employer or the employer’s representative. It is the employer’s representative that agrees or determines claims under 3.5 of the silver book and the provisions of 3.5 of the silver book are materially the same as 3.7 of the red and yellow books. Now the 2017 suite imposes stricter requirements on the engineer when administering the contract, both in terms of communications and time limits for actions supported with deeming provisions if the engineer fails to act. A few noteworthy deeming provisions contained in the red and yellow books are clause 3.5, which obliges the engineer to respond to a contractor’s notice, challenging the engineer’s instruction within seven days of the contractor’s notice, if the engineer fails to respond with confirmation, reversal or variation of the instruction it is being revoked. Under 11.9 which provides that the engineer fails to issue a performance certificate within the prescribed period it is a deemed issue within 28 days after the date it should have been issued and clause 8.3 where the engineer is deemed to have been given notice of a non-objection if it fails to give notice that the contractor’s programme or revision does not comply with the contract within the prescribed time limit. Strict notice procedures are similarly imposed on the engineer in relation to various other procedures including the review of contract documents, test on completion, measurement and valuation, variations and payments mechanisms.

Now this brings us to the engineer’s duties when determining the claim. The engineer’s role in agreeing and determining claims and other matters referred to is one of the key areas of change under the 2017 suite. Clause 3.7, which is 3.5 under the silver book, 3.7 of the red and yellow books details the procedure to be followed by the engineer when agreeing or determining claims for time and money under clause 20.1. Claims for any other entitlement or relief, excluding time or money, under clause 20.1(c) which is a new provision in the 2017 suite. The parties can no longer refer to such claims directly to the Dispute Adjudication Board for a decision as they could under the 1999 suite and any other matter that the contract expressly provides for is to be referred to the engineer. So when determining claims the engineer is required to act neutrally and is not deemed to act for the employer which is laid out in 3.7. Under clause 3.5 of the silver book there is no obligation on the employer’s representative to act neutrally. The engineer is not required to obtain the employer’s prior consent and the employer must not impose constraints on the engineer’s authority under 3.7 and for obvious reasons there is no equivalent provision under the silver book. The engineer must consult with the parties and encourage discussion in an endeavour to reach an agreement within the prescribed time limit and he must reach a fair determination of the matter or claim within the prescribed time limit. There is no agreement unless there is an agreement obviously for him to reach it within an extended period. The engineer must give the required notices within the required time period and he may correct any minor errors in the parties’ agreement or in its determination and issue a corrected agreement or determination within the specified time limits under 3.7.4. So clause 3.7 is a much expanded version of the equivalent provision under the 1999 suite which comprise just two paragraphs and includes several strict time limits which brings us to the next slide summarising the process for determination of claims.

The prescriptive step by step procedure laid out in the 2017 suite strengthens the engineer’s role for the resolution and determination of claims to the extent that a dispute does not arise under the contract unless and until the process for agreeing and determining claims under 3.7 has been completed. In line with FIDIC’s renewed focus on dispute avoidance clause 3.7 begins with the engineer encouraging discussions between the parties in order to achieve an agreement. Failing any agreement of the parties the engineer is required to issue a determination within 42 days subject to providing notice of a non-agreement under 3.7.1 and if no determination is issued in respect of claim clause 3.7.3 deems that the claim was rejected. If either party disagrees with the rejection and notice of dissatisfaction must be given within 28 days as per 3.7.5 before the dispute may be considered to have crystallised and is now referable to the Dispute Adjudication Board. Otherwise, failure to give a notice of dissatisfaction within the prescribed period results in the deemed determination becoming final and binding. For any other matters to be agreed or determined other than claims for time and money where the engineer fails to issue determination under 3.7.3 the matter may be referred by either party directly to the Dispute Adjudication Board without the need for a notice of dissatisfaction. The deeming provisions in 3.7.3 and 3.7.5 mean that recourse to the Dispute Adjudication Board is more tightly controlled and the parties are required to deal with potential disputes sooner rather than later during the life of the project. In addition to the prescriptive process laid out in 3.7 and the enhanced role of the engineer FIDIC have taken further steps to improve the claims and dispute resolution provisions which is key to the success of FIDIC’s second edition.

Now if we look to the improved claims and dispute resolution provisions under the 1999 suite the contractor’s claims and party disputes are dealt with together under clause 20, while the employer’s claims are addressed separately under clause 2.5. Whereas, the 2017 suite provides a more balanced and reciprocal approach by applying a uniform process for both employer and contractor claims under clause 20 which means that the parties are now subject to the same time limits or conditions precedent for making a claim. The process for determination or agreement of claims is dealt with separately from the dispute avoidance and resolution process under clause 21. This change appears procedural but actually represents a much more rudimentary change in ideology. By no longer clumping claims and disputes together on one clause FIDIC reinforce the concept that assertion of one’s claim is not the same, nor should it be treated the same, as a disagreement about that entitlement. Now the Dispute Adjudication Board, also referred to as DAB, was first introduced in the 1999 suite with the aim of ensuring prompt payment of interim instalments of the contract price to the contractor even if the underlying dispute may eventually be finally determined in other proceedings. In the 1999 suite clause 21 provided for a project specific adjudication process as an alternative to more conventional methods of dispute resolution such as arbitration or litigation. The 2017 suite now provides for a considerably expanded DAB agreement and procedural rules. The change in title from Dispute Adjudication Board to the Dispute Adjudication Avoidance Board is indicative of the change in process laid out under clause 21 and FIDIC’s tightened focus on dispute avoidance.

The 2017 suite sets out a four step process for the resolution of disputes by the board beginning with the appointment of one or three board members. Now each of the contracts in the 2017 suite provides for a standing board appointed at the outset of the contract for the duration of the project under clause 21.1. Now this inevitably means additional costs for the parties, however, it also means that disputes may be referred to an independent board for a swift resolution which is good practice in terms of contract management. Whilst FIDIC advocates a standing board, users of FIDIC especially in certain jurisdictions such as the Middle East have traditionally preferred to appoint dispute boards on an ad hoc basis. This preference is catered for in the guidance notes which provides for an alternative clause for appointment of an ad hoc Dispute Adjudication Board. Now in doing so, however, the board’s ability to exercise dispute avoidance is removed. Now advocates of the standing DAB or Dispute Adjudication Avoidance Board will argue that the early appointment of the board does at least provide an opportunity for any initial concerns to be raised and potentially dealt with informally at an early stage. The goodwill and cooperation of the parties will always be an underlying factor in the success of this process. And the parties may refer to an independent appointing entity if they fail to agree which ensures that the dispute resolution process is not unnecessarily delayed.

Now with reference to the referral to the board, if either parties considering referring a matter to the board they must do so with express reference to clause 21.4 and copy to the engineer and the other party or the employer’s representative. In line with FIDIC’s approach to dispute avoidance, clause 21.3 requires the board to provide assistance and/or informally discuss any issue or disagreement between the parties at their joint request. In addition, if the board becomes aware of any issue or disagreement it may invite the parties to make a joint request. Now the board is expected to deliver a reasoned decision within 84 days of receiving reference under 21.4 and orders for payment from one party to another should be adhered to without the need for a payment certification or notice. Now a key issue often raised by FIDIC users or commentators is that the board’s advice is not binding on the parties which leaves one to question the usefulness of referring potential disputes to the board where a decision is binding but not final, ie where no notice of dissatisfaction is given in respect of the board’s decision. That said, clause 21.7 of the 2017 suite now makes it clear that where either party fails to comply with a binding or final and binding decision by the board such breach may be referred directly to arbitration under clause 21.6.

Now in conclusion the 2017 suite has brought some long anticipated changes which improve the parties’ ability to administer the contract with reference to a step by step prescriptive process. FIDIC’s focus on dispute avoidance is certainly welcomed and it remains to be seen how much of an impact the new and improved clauses will have on reducing the number of disputes and the duration of those disputes.