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14 August 2019

FIDIC golden Principles - Are They Too Precious?

INTRODUCTION

FIDIC publishes a suite of contracts intended for use on international projects (often referred to as the Rainbow Suite). FIDIC has become concerned that its contracts are being heavily amended. It considers these amended contracts may undermine its “brand” position as a fair and balanced internationally recognised suite of contracts for use in all jurisdictions. In June 2019, FIDIC published the first edition of its guide to the FIDIC Golden Principles. The Principles are intended to dissuade parties from making significant changes to its contracts. FIDIC consider that it is “misleading” to call a contract “FIDIC” if amendments undermine their Golden Principles.

FIDIC has always envisaged that its contract conditions would be supplemented by project specific contract provisions (“Particular Conditions”). The practise of amending standard form building contracts has been going on for as long as there have been standard form contracts. For example, the commonly used standard form JCT (utilised throughout the UK) also seeks to discourage amendments in its guidance, however, it is not unusual for developers to utilize 100+ pages of “standard” amendments to standard JCT contracts.

To some extent FIDIC could do more to protect its “brand” in relation to its licensed software. Whilst JCT has been very careful to restrict its “on line” software so that all amendments are tracked and certain provisions (e.g. clause headings) cannot be deleted or amended, FIDIC software contains no such restrictions (although it may be that acceptance of the “golden principles will from part of future licensing arrangements).

The five Golden Principles are:
  • The rights, obligations and roles of the parties (Employer, Contractor, DAAB and Engineer) must not significantly change from FIDIC
  • Amendments must be clear and unambiguous
  • The FIDIC “risk/reward” allocation must not change
  • FIDIC time periods should not be significantly changed
  • Unless applicable law requires otherwise, formal disputes must be referred to a DAAB/DAB for a provisionally binding decision as a condition precedent to arbitration.

This article will discuss each of the golden principles and examples that have been provided by FIDIC’s publications and discuss whether FIDIC’s approach is reasonable and appropriate.

RIGHTS, OBLIGATIONS AND ROLES OF THE PARTIES

FIDIC examples of the “proper application” of this provision include retaining the FIDIC requirement that the Employer must provide the Contractor with “reasonable evidence” of “adequate financing arrangements” for the project. This requirement is often deleted. Clearly both the Employer and the Contractor should interest themselves and carry out due diligence on the financial capacity of their counterpart before entering into a contract. FIDIC does not require a Contractor to provide any evidence of its financial standing. It seems a little strange to say that the Contractor is always entitled to this information from the Employer but the Employer has no equivalent rights. The Employer’s financial arrangements may be confidential and possibly even politically sensitive. In the writer’s view, this matter should always be for negotiation between the parties.

FIDIC also say that the Contractor must not be deprived of its rights to levy financial charges, suspend and even (ultimately) terminate in accordance with FIDIC conditions for non-payment. In our experience it’s unusual to see FIDIC rights significantly eroded in relation to these matters. However it is extremely common for Contractors to provide collateral warranties including step in rights for the benefit of commercial lenders in connection with FIDIC projects. Commercial lenders will not tolerate FIDIC time periods in respect of suspension and termination for delayed payments. Indeed many banks and their advisors routinely require 120 days before suspension/termination compared to FIDIC’s 21 days for suspension and 42/56 days for termination.

FIDIC also disapprove any constraints on the Engineer’s role in making determinations of extensions of time. Readers familiar with MDB Harmonised edition of the 1999 FIDIC Red Book (the Pink Book) will be aware that Engineer’s right to make a determination was subject to “specific approval” of the Employer. We understand that the World Bank has endorsed the FIDIC 2017 form. Presumably other multilateral banks will follow or at least drop their previous requirement for Employer approval.

FIDIC “condemn” amendments which transfer risk of unforeseeable psychical conditions to the Contractor (except under their Silver Book). However in the writer’s view there are some reasonable exceptions that FIDIC have not considered. One example would be where the Contractor has already carried out site preparation or ground investigation works or is working in an adjoining area.

CLARITY

It is difficult to argue with a FIDIC principle requiring amendments/Particular Conditions to be drafted clearly and unambiguously. However their examples of “non-compliant” Particular Conditions are not without some controversy. FIDIC say it is unacceptable for the Particular Conditions to stipulate that a General Condition is deleted and replaced in the Particular Conditions by the words “not used”. Why is such a provision unclear? If a provision is deleted it is helpful to stipulate that the clause number is not used in order to explain what might otherwise appear a rather odd gap in the contract numbering system.

RISK AND REWARD

FIDIC say that the Particular Conditions must not change their “risk reward allocation”. Clearly this is closely linked to the first Principle as regards to the rights/obligations of the parties.

In their examples, FIDIC endorse a common amendment which requires the Contractor to provide the Engineer all the Program information as a precondition before any interim payment certificate. In practice Contractors often struggle to provide the detailed program with all the supporting information within the 28 day period required. Accordingly this amendment could oblige the Contractor to commence work and continue without payment for several months. It is not clear whether or not FIDIC envisage that the advance payment could properly be subject to such a precondition.

FIDIC quite properly considers that failure by the Employer to fulfil his duty to provide access and possession of all parts of the site to the Contractor should always give rise to the Contractor’s rights for compensation. However in the writer’s experience there are exceptions even to this general principle. One example would be where the Contractor was the previous owner of the site and/or where the Contract makes specific arrangements/imposes clear duties on the Contractors to share access/possession of the site particularly in relation to fit out works by others. Shared access/possession arrangements should not be a breach of a Golden Principle.
FIDIC defends all its timelines as reasonable. However as we have indicated above many Contractors consider the 28 day period for production of the program and all supporting details (bearing in mind that FIDIC 2017 adds a significant level of additional detail to the program requirements) to be onerous and commercial banks will not accept FIDIC’s suspension/termination time periods.

DAAB

The final FIDIC principle seeks to preserve the role of the dispute avoidance/ adjudication board (DAAB) or dispute adjudication board (DAB) as a condition precedent to arbitration (unless the local governing law requires otherwise). In FIDIC 2017 Contracts the DAAB has a much wider role as a standing body which deals with all instances of dissatisfaction with the Engineer’s determination (or failure to determine). Many Particular Conditions either delete the DAB completely or else severely restrict it’s role. Where the DAB/DAAB provisions are deleted this is often because of local law requirements or because the parties agree that the project isn’t large enough to warrant a standing DAB/DAAB. Another difficulty can arise if the DAB/DAAB is involved to decide on completion. On commercial projects the Employer will often have committed to allowing interested third parties to make comments. It is perfectly possible for the Engineer’s appointment to require him to review these observations without offending his duty to provide a fair and reasonable determination. Third parties are unlikely to accept that they are bound by a DAAB/DAB decision.

The difficulties with enforcement and recognition of DAB decisions may be the subject of a separate article. If the DAB/DAAB determination cannot be efficiently enforced it seems unfair and wasteful to make the parties participate in process to get a DAB/DAAB “decision”. Whilst the DAB/DAAB decision may result in a commercial compromise thereby avoiding arbitration, the same can be said of mediation and most people agree that mediation should not be compulsory.

CONCLUSIONS

FIDIC says its Golden Principles are based on the most fundamental principle of FIDIC contracts which is that their contracts have a fair risk reward allocation.

FIDIC say that they apply the following principles to allocate risks:
  1. Which parties can best control the risk and/or its associated consequences;
  2. Which party can best foresee the risk;
  3. Which party can best bare the risk;
  4. Which party ultimately most benefits or suffers when the risks eventuate.

Ultimately FIDIC is a standard form, but the projects on which they are used are rarely “standard” and whilst these are proper and appropriate principles, they can only provide guidance. Ultimately if a contract is being entered into between two sophisticated parties with the benefit of appropriate advice why should FIDIC object to the use and amendment of its standard forms?

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