The new 2017 FIDIC Books

Following on from the recent update of the JCT and NEC standard form contracts, the FIDIC organisation has also now issued an updated second edition of its Red (Construction), Silver (EPC/Turnkey Projects) and Yellow (Plant & Design Build) Books. As the first editions were released back in 1999, these updated forms have been much anticipated by users.

The core purpose, according to FIDIC, was to achieve greater clarity, transparency and certainty, which should lead to fewer disputes and more successful projects. Underlying this overarching aim was the recognition of a need to reflect current best practice and address the issues raised by users over the past 18 years.

FIDIC's ethos bears similarities with the NEC approach when producing NEC4 (the NEC4 contracts were released in June 2017 and have been generally well-received). However, FIDIC's revisions are much more substantial. The new editions are around 50 per cent longer than the first editions. This additional length is largely a consequence of more prescriptive provisions which detail the step-by-step procedures that the Parties and the Engineer must comply with throughout the course of the project.

This article highlights some of the most significant areas of change which are likely to attract the attention of users of the second editions. We have focused on the Yellow Book but most of the points raised are common to all three Books.

Structural and Cosmetic Changes

The structure and format of the second editions will be familiar to users of the first editions. However, there are some substantive changes:

• definitions are now in alphabetical order (instead of thematically grouped);
• there are some new definitions and defined abbreviations (e.g. "Extension of Time" is abbreviated as "EOT");
• Force Majeure events have been renamed as "Exceptional Events";
• clauses 18 (Insurance) and 19 (Force Majeure/Exceptional Events) have been reversed; and
• clause 20 (Claims, Disputes and Arbitration) has been split into two new clauses: clause 20 (Claims) and clause 21 (Disputes and Arbitration).

FIDIC has also included an "Advisory Note" on BIM which includes guidance as to which conditions of contract may need to be amended if BIM is to be used on the project.

Statement of Intent

FIDIC has introduced "Five Golden Principles" in the Guidance section of the new contracts. These are intended to ensure that contract drafters stay within a recognisable "FIDIC" framework when drafting the Particular Conditions (i.e. when making bespoke amendments to the General Conditions) and "do not change the essential fair and balanced character of a FIDIC contract". The Five Golden Principles are:

1. The duties, rights, obligations, roles and responsibilities of all the Contract Participants must be generally as implied in the General Conditions, and appropriate to the requirements of the project.
2. The Particular Conditions must be drafted clearly and unambiguously.
3. The Particular Conditions must not change the balance of risk/reward allocation provided for in the General Conditions.
4. All time periods specified in the Contract for the Parties and the Engineer to perform their obligations must be of reasonable duration.
5. All formal disputes must be referred to a Dispute Avoidance/Adjudication Board (or a Dispute Adjudication Board, if applicable) for a provisionally binding decision as a condition precedent to arbitration.

These principles are not incorporated within the contracts and do not therefore have any legal effect. The extent to which the legal community (and its clients) adhere to the Five Golden Principles (particularly principle no. 3) remains to be seen.

Best Practice

FIDIC has incorporated a number of new or amended provisions relating to fraud and/or corruption (sub-clause 15.2.1(h)), health and safety (sub-clause 4.8), quality assurance (sub-clause 4.9) and environmental impact assessments (sub-clause 4.18). The inclusion of these provisions is helpful and should not be contentious.

Employer's Financial Arrangements

The obligations on the Employer relating to financial transparency (sub-clause 2.4) have been extended. The Employer's financing arrangements must now be detailed in the Contract Data. If the Employer intends to make a material change to these arrangements that will affect "the Employer's ability to pay the part of the Contract Price remaining to be paid" notice must be given to the Contractor immediately, together with detailed supporting particulars.

If the Contractor:

(a) is instructed to carry out a single Variation valued in excess of 10% of the Accepted Contract Amount (or accumulated Variations worth more than 30%); or
(b) does not receive payment in accordance with the contract provisions; or
(c) becomes aware of a material change in the Employer's financial arrangements of which it has not been notified,

then the Employer must provide evidence of its ability to pay what remains of the Contract Price.

On a project involving limited recourse, project financing and/or the provision of an Employer payment guarantee, these provisions are likely to be the subject of some debate.

Programme Management and Extensions Of Time

There is significant new provision within sub-clause 8.3 dictating the required content of the Contractor's programme and the procedure by the which that programme (and subsequent iterations thereof) are "reviewed" by the Employer before becoming "the Programme" with which the Contractor must then comply.

There is also:

(a) a new sub-clause 8.4 setting out a (delay related) "early warning" notification procedure; and
(b) new additional provision within sub-clause 9.1 obliging the Contractor to provide a testing and commissioning programme for "review" by the Employer.

It may be that FIDIC has taken its lead from the NEC in adopting these useful project management tools.

The grounds on which the Contractor can claim an Extension of Time (sub-clause 8.5) remain largely unchanged although:

(a) there is now some definition around what is meant by the term "exceptionally adverse climatic conditions"; and
(b) there is a new paragraph which envisages that the Parties will include an additional provision specifying which Party will take the risk of concurrent delay, i.e. whether the Contractor will be entitled to an Extension of Time and/or costs reimbursement in the event that there are two events which have given rise to the same delay, only one of which entitles the Contractor to an Extension of Time and costs reimbursement. If the Parties do not include such an express provision, the issue of concurrency is to be determined "as appropriate taking due regard of all relevant circumstances". The effect of that wording is likely to be the cause of some debate between the Parties.

Role of the Engineer¹

There is a significant increase in the role and responsibilities of the Engineer (clause 3). Previously clause 3 was just over a page long, but it now runs to almost six pages. Most of the new provision is included within sub-clause 3.7 and is designed to regulate more closely the process by which any matter, including a Claim made by either Party in accordance with clause 20, is first referred to and agreed, or determined by, the Engineer.

Another point of note is the Engineer's new obligation within sub-clause 3.2 to "act as a skilled professional". Sub-clause 3.7 also obliges him to "act neutrally between the Parties" when agreeing or determining any matter that has been referred to him. Quite whether those two new obligations impose any greater obligation on the Engineer than his previous (clause 5) obligation to act "fairly" (which is retained in the new sub-clause 3.7.2) remains to be seen.

There is also a new role for an "Engineer's Representative" who is to be based on site for the duration of the project. This underlines FIDIC's greater emphasis on active project management.

Insurance and Liability Limitation

The insurance provisions have been substantially amended. The Parties will need to consider these amendments together with their insurance advisers to ascertain whether they meet their particular requirements for any given project.

The main liability limitation provision, which used to be found within sub-clause 17.6, has been moved to sub-clause 1.15, apparently in an effort to reflect its importance and remind users that it applies generally and not only to the Parties' indemnity liability.

The lists of carve-outs from both the consequential loss exclusion clause and the Contractor's aggregate liability cap have also been increased. They are now more reflective of current market practice (save for the reference to sub-clause 13.3.1 within the list of carve outs to the consequential loss exclusion, which is likely to be the cause of some debate). However, we suspect that the Employer and those providing any finance for the project may still wish to make further amendment to these provisions, particularly to carve out the Contractor's compensation liability on a default termination from the consequential loss exclusion clause.

It is of some note that FIDIC has not only retained the Contractor's fitness for purpose warranty within sub-clause 4.1 (albeit now defining that warranty by reference to the purposes set out in the Employer's Requirements, rather than the contract as a whole, which is to be welcomed), but has also now obliged the Contractor to indemnify the Employer against the consequences of any breach of that warranty which arises as a result of defective design (sub-clause 17.4). However, it should also be noted that such liability is not carved out of the consequential loss exclusion clause and the aggregate liability cap set out at sub-clause 1.15.

Sub-clause 19.2.3 provides that, if so stated in the Contract Data, the Contractor's professional indemnity insurance must indemnify it against its liability for a breach of the fitness for purpose warranty. That may be a difficult obligation for some contractors and their insurers to comply with–another point to be checked with the Contractor's insurance brokers (as is the absolute obligation within sub-clauses 5.3 and 5.4 to ensure that the Contractor's design complies with the contract requirements and applicable standards).

Payment

The payment provisions remain largely unchanged although, in line with the more prescriptive approach, the second editions now contains a requirement for all Contractor claims and financial entitlements to be set out in its Statement at completion and in its final Statement, otherwise the Employer will avoid liability for them. The Employer then has a prescribed period to challenge the amounts contained in any such Statement, failing which it is "deemed" to have accepted the amounts claimed.

Termination

There are several changes to clause 15 (Termination by the Employer), including greater clarity as to the heads of loss which the Employer can claim on a Contractor default termination. There are also new Contractor default events such as:

• a failure to comply with an Engineer's determination made under sub-clause 3.7 or a decision of the DAAB, provided that such failure amounts to a "material" breach;
• exhaustion of the cap on its liability for delay damages; and
• a failure to comply with its sub-clause 4.2 obligations in relation to Performance Security.

While these changes are welcome, we suspect that in most cases the Parties will still want to make amendment to further clarify the circumstances in which the Employer can terminate for Contractor default and their respective rights on any such termination.

It is also of note that the Contractor will now be entitled to recover lost profit following Termination for Employer's Convenience (sub-clause 15.6), something it could not do under the first edition of the Yellow Book. It is presumably on that basis that the first edition prohibition on the Employer's right to complete with a replacement contractor following a termination at will, has been deleted in the second edition. We think this is a sensible reciprocal amendment.

Claims Management

The process by which claims are made and particularised by each Party (clause 20), the role of the Engineer in agreeing or determining claims (sub-clause 3.7 and clause 20) and the procedure for determining any residual disputes (clause 21) are all now more prescriptive. Timescales are set out for each step along the way, with deemed acceptance or rejection (as appropriate) if the Parties and/or the Engineer fails to comply within the requisite timescale.

FIDIC's laudable intention is to ensure that each Party is clear about who is doing what and when and thereby keep the project moving forward. That said, the Parties and their advisers will need to keep on their toes if they are to avoid the sometimes draconian effects of slack claims management. Of particular note are the following "time-barring" provisions:

• if the claiming Party fails to give the other notice of its claim for an Extension of Time, an adjustment to the Contract Price and/or an extension to the Defects Notification Period, in each case within 28 days of the date on which it became aware (or should have become aware) of the event or circumstance which gave rise to the claim, it shall forego its entitlement to any such extension or adjustment (sub-clause 20.2.1); and
• if a "Notice of Dissatisfaction with the Engineer's Determination" is not served within 28 days of such determination (or deemed determination, if the Engineer fails to make a determination within 42 days of the matter being referred to him), the determination (or deemed determination) shall be final and binding upon the Parties (sub-clause 3.7.5).

Disputes Resolution

A new disputes resolution clause 21 has been incorporated in order to separate "Claims" from "Disputes". The ethos behind this separation is to underline the fact that claims should not necessarily result in disputes, but instead have the potential to be resolved quickly and amicably.

The key change is the replacement of the DAB (Dispute Adjudication Board) with the DAAB (Dispute Avoidance/Adjudication Board) which is intended to be constituted at the outset of the contract as a permanent board for the duration of the project. FIDIC believe that this will assist in avoiding disputes and/or settling them quickly. While the concept makes good sense, commentators have noted the likely increased costs of appointing a standing board that is required to have regular site meetings.

Some other commentators have questioned, perhaps a little cynically, whether the numerous new time bars and deeming provisions will, in fact, increase or decrease the potential for disputes.

Conclusions

It should be noted that this note is not an exhaustive summary of the changes to the Yellow Book; there are many other material changes which we have not mentioned. However, the predominant message to take away is this–FIDIC's revisions have resulted in a more prescriptive and procedural contract requiring significantly greater contract management. There are more onerous and burdensome contract administration obligations for both Parties, but particularly for the Contractor, and also for the Engineer.

Furthermore, the consequences of inactive contract management could be severe.

Conversely, we believe that FIDIC has now given the Parties and the Engineer a comprehensive new set of contract management tools. If all those involved make best use of them, then that should help considerably in reducing the scope for disagreement and as such, will represent an investment well made.

 

^{1.   Note that in the Silver Book this role is performed by the Employer's Representative and the sub-clause numbers are different.}