Question: Scenario: In 2019, the Carri Windfarm Authority (CWA) of Carriland, a country in the Caribbean with the same laws as England, advertised a tender

c Preview

This first topic will consider the following:

1.     Understanding international construction practice

2.     Differences between domestic construction and international construction practice

3      Brief history of international construction contracts

4.     Why use standard form contracts in international projects 5.        Major forms of International Construction Contracts

6.     Brief introduction to procurement/delivery methods

Topic Content

1. Understanding International Construction practice

International construction practice has provided the world with many beautiful sights to behold and has made possible the provision of essential infrastructure in very challenging and in previously impossible locations. Employing innovative technological structures and complex financing instruments, the sector connects designs from one part of the world to expertise and finance in another, translate theminto completedprojects undertaken by workers of different nationalities in yet another part of our world, thus traversing a variety of languages and cultures.

International Construction project in its basic form is aptly described by S B Stebbings as ‘…projects where the contractor, lead consultant or the employer is not of the same domicile and at least one of them is working outside its country of origin’. International Construction entails engaging resources (whether technical or financial)fromdifferentsourcesacrosstheglobeforthedelivery of major aspects of construction/engineeringprojects. Duetotheincreasinginvolvementof lendersin projects,apredominantlyforeignfinancedconstructionproject (especially where the project is funded by one of the multilateral development banks) will qualify as an international project.

International projects involve complex and multidimensional contractual relationships; these could include a joint venture comprising localandinternational contractors,anemployerthatlieswithinalarger bureaucraticstructure with different levels of authority, or international lenders acting in a syndicate. Each set of relationship is governed by seriesof documents. The mix of possible documents in an international construction project could include:

1. An agreement of “business terms” indicating such things as the names of the parties, description of the project, and the contract sum.

1 | P a g e

Topic 1 -Introduction

2. The construction contract indicating the general and special conditions of the contract, stating the basic rights, duties, and obligations of the parties.

3. The agreementwith the lendersincludingguaranteesand step-in rights.

4. The tender documents.

5. Time and cost schedules.

6. Insurance agreements,consultancy, and confidentiality agreements.

7. Others i.e., ancillary agreements, exceptions, manuals, protocols, payment schedules, specifications, and appendices etc.

These documents usually translate to thousands of gigabytes in electronic data and an avalanche of paper if printed out.

International construction is usually concerned with high net worth projects which create a different matrix of risks and challenges. These projects are often large and technically complex. Examples of international construction projects with complex characteristics abound and can be found across different regions of the world. Let’s look at the Hong Kong airport project as an illustration here. The project required 1248-hectare reclamation, a 34km rail and road access, over 30,000 site workers andawebof225agreementswithcontractorsfrommorethantendifferentcountries including China, Japan, Hong Kong, United Kingdom, Holland, France, Belgium, New Zealand, Australia, South Africa, Italy amongst others, at a cost of approximately US$20billion. The construction industry accounts for approximately 10% of global Gross Domestic Product (GDP) translating into receipts of over 7.5 trillion US Dollars. Information from the European International contractors (the EIC is Europe’s trade association of construction contractors involved in international projects) indicates that the turnover of its members in 2016 (for international projects only) was more than one hundred and seventy-one billion Euros.1 The 2017 figure stands at EUR 176 billion plus.2 In spite of the pandemic, there are still signs that infrastructure development remains a priority of many governments around the world.

The growth of international construction is attributable to the increased demand for infrastructure services across the globe in the past three decades. Bruner and O’Connor on construction Law, list seven reasons for the growth of international construction projects, to wit:

1. Advances in communicationtechnology.

2. Increased political stability and military security.

3. Democratisation of national governments and movement towards

1 https://www.eic-federation.eu/services/statistics 2 ibid

2 | P a g e

Topic 1 -Introduction cooperation between nations.

4. Increased interdependency in trade and banking between nations evidenced by various trade agreements i.e., GATT.

5. The desire of project controllersto obtain the best available resource at the lowestpricelocatedinanypartoftheworld,thistrendisspecially

promoted by multinational corporations and multilateral lending agencies.

6. Continuous increase in the size and financial requirements of construction projects prompting action to spread risks

7. Willingness by international construction companies to compete for jobs in different jurisdictions. The global economic problems make going international even more crucial.

2. What differentiates domestic construction from international construction projects?

Complexity and size have been used to differentiate domestic and international constructionprojects.Thelatterisoftenthoughttoinvolvemore complex processes. However, this is not a very helpful analytical tool: many domestic projects have matched their international counterparts in terms of size and complexity. So, what makes a project international and another domestic?

Professor Nael G Bunni has suggested that a series of factors are peculiar to international construction. His list includes:

1. Vast sums of money are frequently provided by various banks, financial institutions, and insurance companies,with guarantees.

2. Construction people usually come from different social classes, and from different countries and cultures.

3. Construction people also come from different firms. Extensive interaction is required between many of the firms involved in construction, including those engaged as suppliers, manufacturers,subcontractors, and contractors,each with its own set of commitments and goals.

4. International construction projects are susceptible to unusual risk, i.e., cultural risk.

5. Many international construction projects are constructed in isolated regions of difficult terrain, sometimesstretching over extensive areas,

being exposed to natural hazards of unpredictable intensity, frequency, and return.

Again, there is another category of projects which will often come under the description of international construction contracts. These are international development projects. Mainly championed/sponsored by multilateral development banks (MDB), UN related agencies, bilateral agencies, or non-governmental organisations in partnership with national governments in developing economies, they may be medium or large. These traditionally are “hard” projects (physical construction projects) but are increasingly being extended to cover “soft” projects

3 | P a g e

(education, health projects) as well.3 Our interest here is on the “hard” projects. Such projects will often have at least five different set of stakeholders involved4:

(a)     a national project manager or coordinator.

(b)     a task manager who may be in the headquarters of the MDB involved who supervises the project implementation.

(c)     the national supervisor, often a civil servant of the host State, who works closely with the national coordinator as a supervisor.

(d)      the project team under the coordinators authority-playing mainly an administrative role; and

(d)     the various firms (designers/consultants, contractors, sub-contractors etc.). This group will invariably involve teams and entities which are foreign.

From the above discussions, one could identify two important factors that distinguish a local construction project from an international construction project:

1. The existence of significant foreign element to the project and

2. The project’s ‘unusual risks’ on account of 1) above – these are risks that are not common to domestic projects. There may be some risks often associated with domestic projects, but in the context of international construction,thesemayassumeenhanced significance due to the structure of an international project.

While the first factor is self-explanatory, the second requires further study.

2.A. Risks in International Construction Practice

Risk has been the subject of different definitions by various bodies. To understand the risks involved in international construction practice it is useful to understand what risk means. The Royal Society in a study on risk analysis, perception, and managementin1992definedrisk using the point of view of an adverse occurrence as “a combination of the probability, or frequency, of occurrence of a defined hazard and the magnitude of the consequences of the occurrence.” Hazard as used in the definition was described as “a situation that could occur during the lifetime of a product, system or plant that has the potential for human injury, damage to property, damage to the environment, or economic loss.” Another definition from this viewpoint defines risks as “the probability that a particular adverse event occurs during a stated period of time or results from a particular challenge.”

The approach of the latest Australia/New Zealand Standard for Risk Management

3 Amadou Diallo and Denis Thuillier, ‘The success of international development projects, trust and communication: an African perspective’, International Journal of Project Management

Volume 23, Issue 3, April 2005, Pages 237-252

4 ibid

4 | P a g e

(AS/NZS ISO 31000: 2009) is significantly different; their definition focuseson thedualnatureofriskandthepossibilityofapositiveoutcome. It definesrisk as “the effect of uncertainty on objectives”. This effect may be negative or positive. The definition of risk in the Risk Analysis and Management of Projects (RAMP) (the third edition published 2014), a collaboration between the Institute of Civil Engineers (ICE) and the Institute of Actuaries in the United Kingdom, has also traditionally viewed risk, from the point of view of an event with two possible outcomes.

In construction practice, risk is generally understood as the existence of potential or actual threats that would affect the objective of a project during the different stages of construction and use. The fact that a risk could result in a positive consequence is a relatively recent notion in the industry.

In terms of the risks the construction industry faces, E.J Rimmer5 writing in 1939putstheuniquepositionof theindustryaptlywhenhe stated thus:

“The subject-matter of an engineering contract is generally such as necessitates that the documents of which the contract is composed must make provision for contingencies and events of a special nature, and it is chiefly in this respect that it has peculiarities not to be found in other forms of contract, and is often inevitably of considerable length”.

He added:

“The facts that contract works are to be constructed in or erected and fixed on to land, and cannot be rejected and sent back to the Contractor if they prove to be unsatisfactory; that the works are to be carried out in open air under unstable conditions with material and labour of varying quality; that the conditions of excavation and foundation cannot be entirely foreseen until the ground is opened up; that execution of the works may result in damage to property belonging to other persons; that works of specialists may have to be carried out concurrently with work done by the generalcontractor;that the period of the contractmay extend over several years and the Employer may desire the use of completed parts of the work before final completion of the whole; and that the amount of money involved is often such as to imperil the financial resources of a contractor who has made an unwise tender.”

He concluded that

“...[This] necessitate that terms should be inserted in engineering contracts which would be superfluous to ordinary commercial

contracts of purchase and sale.”

A casual observation of a minor construction project will reveal the various layers of risk inherent therein. From accurate design layouts, to purchasing the right materials, to successfully supervising workers, meeting budgetary targets etc.,

5 E.J. Rimmer, The Conditions of Engineering Contacts, Journal of The Institution of Civil Engineers

(London, England) No. 4 1938-39, February 1939, p. 3. Reproduced in Christopher Seppala, ‘Contractor’s Claims Under the FIDIC Contracts for Major Works’ (2005) 21 Construction Law Journal 278

5 | P a g e

constructionprojects pose considerable challenges and uncertainties.

These challenges are multiplied in international construction practice. Materials may besourced from different locations, in different currencies. Workers may come from different nationalities andwork in different locations. The financier or lending bank may have an official language different from the language of the lead contractor. The employer could be a sovereign government creating both payment and enforcement risks. The sheer volume of papers when disputes arise - design papers, comments, instructions, emails correspondence, telephone messages etc. all created during one internationalconstruction project could fill a small office. Below is a non-exhaustive list of the common risks associated with international construction practice:

1.        Profit reparation and currency exchange risk

2.        Political risk – disruption of project due to wars, unrest etc. 3.        Cultural risk

4.        Double taxation risk

5.        Expropriation risk especially in build–operate–transfer type agreements

6. Corruption and money laundering risk 7. Regulatory and payment risk

Where projects carry some or all the above in its risk profile, it would indicate that it is most probably an international construction project.

Theappropriate allocation of these risksis one of the main concerns of construction contracts especially in common law countries. The understanding of the risk inherent in a project influence, to a large extent, the choice of contract (contract terms) for the project. This is very important in international construction practice where it has been observedthatasubstantialpercentageofparticipating stakeholders (contractors,sub-contractors,consultants)donotaddresstheirminds sufficiently to the risks and severity of impact that such risks will have on the delivery of the project. One reason for this is that the nature of international projects requires segmentation of activities into phases, this usually creates compartmentalization and information disconnect between stakeholders. This will oftenobscurethe riskprofile of a projectleaving the undiscerning participant open to various unfavourable outcomes.

2.B. Difference between International Construction Contracts and Domestic Construction Contracts

There is a historical and ongoing argument over the utility of creating different contracts for domestic and international projects. The difference in opinion is premised on the argument that, whatever favourable provisions are included for the benefit of an employer/ contractor in either segment [domestic or international] should be passed to the stakeholder in the other.

The counter argument points to the difference in the risk profile of domestic and international projects and the need to create contracts, which specifically cater for the risk of each segment of the industry. The decision on the choice of contract

6 | P a g e

for any project is determined by the parties. However, as a general trend, domestic projects use one of the many standard forms available within the jurisdiction. For instance, in the United Kingdom the Joint Contract Tribunal (JCT) forms and the NEC3 are popular. While standard forms used domestically are increasingly being used for international projects, it is worth noting that parties to international projects will usually use standard contract forms with established reputation and association with successful international project delivery. The rationale here is that these internationally recognised forms provide mechanisms to manage some, or all the risks associated with international projects. Another rationale is that while domestic contracts are amended and drafted with a particular legal system in view, international construction contracts are drafted with multiple jurisdictions in mind.

3. Brief History of International Construction Contracts

From the start the institutions that issue industry standard agreements have been minded to separate domestic and international contracts. ICE’s ‘General Conditions of contract and forms of Tender, Agreement, and Bond for use in connection with Works of Civil Engineering Construction’, is arguably the first form to go international. Aftervariousamendmentsthe last being by1950, itwasfinally prepared for the international audience. This was because the ICE took notice of the increasing appeal of its form among many professional groupings in the world. Many contracts adopted the format and content of the ICE contract for international projects. To go beyond the minor changes usually employed when using the forms in those countries, and to provide for a fair international contract, the association drew up a new version of the contract differentiated from the domestic version by the blue colour of its cover. The major changes in the international version when compared to the domestic form included:

1. The allocation of risk of damage due to unforeseenforces of nature; this was shifted to the employer from the contractor.

2. Requirementforjointinsurancebetweenthepartiestosecure against third party risks.

3. Provision for amendment of the contract price where the net effect of a variationisfoundtoresultinthereductionoradditionofthesum stated in the tender by 15%.

The culture of designating a contract form as ‘international’ was followed by the Fédération Internationale des Ingénieurs Conseils6 (FIDIC) when it released its first form in 1957. This practice has been preserved by the Engineering Advancement Association of Japan (ENAA) whose standard forms maintain the tag ‘international’ and Institution of Chemical Engineers (IChemE) which publishes two parallel forms one for domestic projects and another designated international for international projects.

Over the years there was a shift of emphasis from differentiating domestic and international contracts. FIDIC in the 1987 fourth edition of the Red Book deliberately dropped the word ‘international’ in its name and invited parties to use

6 International Federation of Consulting Engineers

7 | P a g e

the contract for both domestic and international projects. The NEC (formerly New Engineering Contract) published by the ICE is used for both international and domestic projects; it provides alternative terms that cater for the risk profile of domestic and international projects.

For a particular contract to be fit for purpose it must anticipate the challenges and the risk in a project. Some contract forms have embraced the risk and challenges inherent in international construction and provide appropriate provisions. These contracts are therefore regularly used in international construction projects. The nextsectionexamineswhythe industryadoptsstandardforms. This is followed by an overview of international construction contracts.

4. Why use Standard form in International Projects

International commerce has seen a movement towards harmonization of rules and practice. The need to allow less burdensome transfer of goods and services has seen the development of rules and guidelines by various international organisations with the aim of harmonizing rules and practices in different sectors. Notable examples of such harmonizing efforts include the Organization for Economic Cooperation and Development’s (OECD) contract guidelines, the New York Convention on the enforcement of arbitration awards in different jurisdictions and the United Nation’s Convention on Contracts for the International Sale of Goods (CISG) amongst others. In the area of contract law, there are the UNIDROIT Principles of International Commercial Contracts 2016 (PICC), the Principles of European Contract Law (PECL) and the EU’s Draft Common Frame of Reference (DCFR) as examples of soft laws which are outcomes of efforts to harmonise rules of contract. Construction law’s contribution to this process has been germane even though somewhat different. Standard form contracts have been the basis for international construction projects for nearly 70 years. Unlike other spheres of commerce where standard form contracts are developed by individual organisations /companies based on cumulative experience and drafted mainly to protect the organization, in the construction industry standard forms are prepared by professional organisations with the aim to share risk equitably and improve efficiency.

The advantages of using standard forms of contract in international construction projects are numerous. Beyond providing predictability, familiarity with the form and certainty, it also reduces the costs of negotiating anagreementofsimilarnature on a repetitive basis. It also removes the balance of bargaining power conundrum, where the party with superior bargaining power would force onerous terms on the other party. Standard forms also allow for a more comprehensive coverage of risk and points the parties to the areas where beneficial and substantial negotiations could be undertaken without dissipating energy on the less important aspects.

5. What are the major forms of international construction contracts?

There are many forms of international construction contracts as well as domestic contracts which are increasingly gaining grounds in the international construction

8 | P a g e

market. It would be an error to assume that all the contracts say the same thing in a different way. As this module progresses, you will gain knowledge of the significant differences between the popular types of international construction contracts in use. The following overview acknowledges the work of International Bar Association subcommittee TI, whose work forms the basis of the overview. Please note that what follows is exactly what it is meant to be, an outline. As this module progresses, we shall look at some of the contracts, particularly the FIDIC and the NEC forms in much detail.

5.1. Fédération Internationale des Ingénieurs-Conseils (FIDIC)

FIDIC produces standard forms of contract for civil engineering construction which are used throughout the world. FIDIC contracts are often referred to as the international standard. They are best known by their colours. This module will study the major colours of the FIDIC suites of contract, these will include, the old Red Book (1987), the 1999 Rainbow suite- the Red Book, the Yellow Book and the Silver Book; also the Pink Book and the Gold Book. We shall also introduce you to the new FIDIC forms released in December 2017.

Contracts under the FIDIC family include:

1. Conditions of Contract for Construction (First Edition, 1999) - Red Book.7

2. Conditions of Contract for Plant and Design-Build (First Edition, 1999)-Yellow Book.8

3. Conditions of Contract for EPC/Turnkey Projects (First Edition, 1999)- Silver Book.9

4. Short Form of Contract (First Edition, 1999) - Green Book

5. Conditions of Contract for Design, Built and Operate (First Edition, 2008) – Gold Book

6. Conditions of Contract for Construction (the MDB Harmonised Edition, 2010) -Pink Book

7. Conditions for Subcontract for Construction (First Edition, 2011) -also in Pink 8. Conditions of Contract for Construction (Second Edition, 2017) - Red Book 2. 9. Conditions of Contract for Plant and Design-Build (Second Edition, 2017)-Yellow

Book 2.

10.Conditions of Contract for EPC/Turnkey Projects (Second Edition, 2017)- Silver Book 2.

11. ConditionsofSubcontractfor PlantandDesign-Build(FirstEdition,2019)-Yellow Book

12.Conditions of Contract for Underground Works (First Edition, 2019) – Emerald Book

7 Conditions of Contract for Construction are recommended for building or engineering works designed by the employer or by its representative, the engineer. However, this may still include some elements of contractor-design.

8 Conditions of Contract for Plant and Design-Build are recommended for the provision of electrical and/or mechanical plant, and for the design and execution of building or engineering works where the majority of the design is undertaken by the contractor.

9 Conditions of Contract for EPC Turnkey Projects is recommended where the contractor takes total responsibility for the design and execution of an engineering project. Here, the contractor is expected to deliver a fully equipped facility, ready for operation at the “turn of the key”.

9 | P a g e

Other Forms of FIDIC Contracts:

13.Form of Contract for Dredging and Reclamation Works “Dredgers Contract” -Blue Book

14.AformofagreementforengagementofConsultants-WhiteBook 15.A form of agreement for Sub-consultants

16.A joint venture agreement form

We will not have the time to examine all these forms in detail so we will focus on the most popular and commonly used, namely the Red, Yellow and Silver Books. As part of the discussion, we may touch on some of the other forms briefly.

5.2. Institution of Civil Engineers (ICE)

ICE is an independent engineering institution and represents approximately 80,000 civil engineers worldwide. Principal membership is in the United Kingdom, but it has memberships in China, Hong Kong, Russia, India and roughly 150 other countries. The ICE documents are traditionally for Engineering Contractors. Pre-1987 versions of FIDIC were based on ICE forms but there is far less similarity now. Traditionally, they were Engineer-based contracts where the Employer appointed the Engineer.

Available Documents

1. ICE Conditions of Contract MeasurementVersion 7th Edition: July 2004

2. ICE Conditions of Contract Design and Construct 2nd Edition: July 2004

3. ICE Conditions of Contract Minor Works 3rd Edition: July 2004 4. ICE Conditions of Contract Term Version: July 2004

5. ICE Conditions of Contract Ground Investigation 2nd Edition: July 2004

6. Agreement for Consultancy Work in respect of Domestic or Small Works: amendments.

From August 2011, ICE withdrew from the publication of the ICE conditions. It has now been taken over by other organisations (Association for Consultancy and Engineering (ACE) and the Civil Engineering Contractors Association (CECA)) and renamed the Infrastructure and Construction Contract (ICC).

The New Engineering Contract/ the NEC

The NEC was developed by ICE in the early 1990s with the aim of introducing a new form of non-adversarial contract strategy which would contribute towards more effective and smoother management of projects. NEC is now in its Fourth Edition. The third edition is currently used across the spectrum of engineering and construction activities by a wide range of clients, consultants, and contractors. Its use encompasses projects large and small, civil engineering and building, national and international. It has been used on several high-profile projects including the 2012 Olympics and the on-going Crossrail project. Internationally, NEC has been used on projects such as the Christchurch Art Gallery re-level project in New Zealand, the Mt. Mercer wind farm project completed in 2014 in Australia and the Witwatersrand University project in South Africa.

10 | P a g e

The NEC is radically different from previous standard forms. It is a legal framework of project management procedures designed to handle all aspects of the managementofengineering and constructionprojects.Inthismodule, we willstudy the provisions of NEC with emphasis on the NEC 3 ECC. The NEC4 Contract refines, and fills gaps identified with NEC3. To this extent, it represents an improvement over the forms preceding it. Details of the changes introduced by NEC4 together with the subsequent amendments will be examined under Topic 10.

Structure of the NEC

The main NEC3 contract, the Engineering and Construction Contract (ECC) and its associated sub-contract, are based on nine core clauses, a set of main clauses (six main options) and a series of secondary option clauses. The six main Option clauses are:

Option A: Priced contract with activity schedule Option B: Priced contract with bill of quantities Option C: Target contract with activity schedule Option D: Target contract with bill of quantities Option E: Cost reimbursable contract

Option F: Managementcontract

Depending on the Main Option Clause selected, an Employee may incorporate additional clauses by selecting from series of secondary options (19 in total). These include Options X1(price adjustment for inflation), X2 (changes in the law) and X3 (Multiple currencies). The Main Options under both NEC3 and NEC4 are the same but NEC4 introducessome additionalsecondary option clauses and hasalsomodified the names of some of the existing secondary options under NEC3. We shall examine the content of the NEC Conditions in some detail under Topics 9 and 10.

5.3. III. Institution of Electrical Engineers (IEE) (now the Institution of Engineering and Technology (IET))

The IET, based in London, England, is an international organization for electronics, electrical, manufacturing and IT professionals, with specifically tailored products, services, and qualifications to meet the needs of today's technology industry.

The IET, jointlywith the Institution of MechanicalEngineers (IMechE), issues arange of model forms of general conditions of contract (including, inter alia, Forms of Tender, Agreements and Performance Bonds) and guides (known as "commentaries") to their use. These are Model Forms of Contract for electrical, electronic, and mechanical work and consultancy. The contents of these publications are decided by a joint committee of IET /IMechE members and others representing the various interests of the electrical and mechanical engineering industries. IEE has developed the Joint IMechE/IET Model Forms of General Conditions of Contract. Apart from Model Form MF/4 and Model Form MF/3, the model forms have also been adopted and are recommended by the Association of Consulting Engineers (ACE).

A Model Forms Information Pack which expands on the Model Forms and which 11 | P a g e

contains copies of all Supplements, Amendment Slips and Amendment Lists relating to the current range of Model Forms is available on the IET website. The website also sets forth the terms and conditions upon which a licence to install and use the texts of the IET copyright Model Forms on users' computing systems may be purchased.10

5.4. Institute of Chemical Engineers

IChemE as an organisation is like IMechE/IET but is interested in production of contracts for the specialist process industry. The forms of contract have been significantly updated in recent years to cover the spectrum of contract possibilities. Like FIDIC, IChemE contracts are often known by their colour and a list of available contracts is set out below:

IChemE (Green): Form of Contract –Reimbursable Contracts, 4th Edn. 2013 IChemE (Brown): Form of Contract – Subcontract for Civil Engineering Works, 3rd Edn. 2013

IChemE (Orange): Minor Works 2nd Ed 2003

IChemE (Red): Form of Contract – Lump Sum Contracts, 5th Edn. 2013 IChemE (Yellow): Subcontracts 4th Edn. 2013

IChemE (Burgundy): Target Cost, 2nd Edn. 2013 IChemE (Silver): Professional Services Agreement, 2015

IChemE (White): Rules for Expert Determination 3rd Ed 2001 IChemE (Pink): Arbitration Procedures

Currently, there are two suites of forms, one for the UK market and the other for the international market. The suites contain model form of agreement, general conditions, and guide notes. The distinguishing feature of these suits is that they are performance-based. This follows from the fact that process plants are judged by their performance in operation.11

5.5. The Joint Contracts Tribunal (JCT)

Since 1931, the JCT, based in London, England, has been producing standard forms of contract, guidance notes and other standard documents used in the construction industry. The JCT range of contracts are fundamentally building rather than civil engineering contracts but are used for projects where both building and civil engineering works are involved. They cover orthodox contracting and design and build and management contracts. Some forms deal with less complicated or expensive forms of contract. The major types of form are listed below. Traditionally, English building contracts have been divided into ‘With’ and ‘Without’ Quantities forms to cover both methods of measurement.

The JCT helpfully publishes a document entitled – Practice Note – Deciding on the appropriate JCT Contract, which provides guidance on what they would consider to

10 The Model Forms and their commentaries can be purchased from the IEE Publication Sales Department, email: sales@iee.org

11 https://www.icheme.org/knowledge/forms-of-contract/

12 | P a g e

be the appropriate JCT Contract for different situations, e.g., design and build, traditional contracting, cost plus or management. The note also contains a detailed list of JCT style contracts available.

In a radical departure from previous JCT forms, the JCT launched on 1 March 2007, a new set of contract documents entitled JCT – Constructing Excellence. JCT following changes in legislation in the UK, published in September

2011, the 2011 set of JCT contracts:12

1. 2011 Standard Form of Building Contract

2. 2011 Intermediate Form of Building Contract

3. 2011 Minor Works Building contract among others

The body released the 2016 Edition of the JCT suite of contracts during the latter part of 2016. The following is a list of the forms included in the new (2016) edition:

1. Standard Building Contract with Quantities (SBC/Q)

2. Standard Building Contract without Quantities (SBC/XQ)

3. Standard Building Contract with Approximate Quantities (SBC/AQ) 4. Standard Building Contract Guide (SBC/G)

5. Standard Building Sub-Contract Agreement (SBC Sub/A) 6. Standard Building Sub-Contract Conditions (SBC Sub/C)

7. Standard Building Sub-Contract withsub-contractor’s design Agreement (SBC Sub/D/A)

8. Standard Building Sub-Contract with sub-contractor’s design Conditions (SBC Sub/D/C)

9. Standard Building Sub-Contract Guide (SBC Sub/G)

10.Standard Building Contract with Quantities (SBC/Q) Tracked Change Document

11.Standard Building Contract without Quantities (SBC/XQ) Tracked Change Document

12.Standard Building Contract with Approximate Quantities (SBC/AQ) Tracked Change Document

13. Collateral Warranties for different types of Works, 2016.

5.6. International Chamber of Commerce (ICC)

The Commission on Commercial Law and Practice (CLP) (one of the Commissions of the ICC) based in Paris, France, has developed the ICC model contracts and ICC model clauses, which give parties a neutral framework for their contractual relationships. These contracts and clauses were carefully drafted by the experts of the CLP Commission without expressing a bias for any one legal system. The idea behind ICC model contracts and clauses is to provide a sound legal basis upon which parties to international contracts can quickly establish an even-handed agreement acceptable to both sides. The contracts are constructed to protect the interests of all parties, combining a single framework of rules with

12 Information can be accessed at: http://www.jctltd.co.uk

13 | P a g e

flexible provisions allowing the parties to insert their own requirements. Currently, the following ICC model contracts have been developed:13

1. ICC Model Turnkey Supply of an Industrial Plant Contract, 2003 2. ICC Model Turnkey Contract for Major Projects, 2007

2. ICC Model Sub-contract (for Turnkey Projects), 2011

5.7. Liaison Group of the European Mechanical, Electrical, Electronic and Metalworking Industries (ORGALIME)

ORGALIME publishes Model forms covering a wide range of issues including construction. In March 2003, the ORGALIME Turnkey Contract for Industrial Works was published. It is their most comprehensive contract publication on the subject. ORGALIME’s premise was that purchasers and contractors in the engineering sector, who had used existing models, had not found them as suitable for industrial works as for civil engineering contracts. In April 2015, it published the Model form of Consortium Agreement to be used where two or more companies agree to cooperate to tender and deliver a large industrial installation(s).14

5.8. ENAA the Engineering Advancement Association of Japan (ENAA)

ENAA is a non-profit organization established in 1978 with the support of the Ministry of International Trade & Industries Japan to promote the advancement of engineering capabilities and the development of the engineering service industry. A major feature of ENAA is the close cooperation it receives from its numerous member engineering firms which cover a broad spectrum of the industry.

ENAA publishes model contract form for international construction; these include International Contract for Process Plant construction (Turnkey Lump sum Basis),2010, the ENAA Model Form - International Contract for Power Plant Construction, 2012 and the ENAA Model Form-International Contract for Engineering, Procurement and Supply for Plant Construction, 2013.15 In preparing theseformsENAA pointto having engaged in substantial consultations.

6. Procurement/Project delivery Methods

You would have been introduced to this subject in Semester 1. This sub-section reiterates some of the issues discussed and serves as a reminder of the relevance of that content. Several factors may determine what type of contract form may be used on an international project. These include the procurement or delivery method and types of construction contracts (which invariably also reflect payment arrangements). There are different types of delivery methods suitable for international construction projects. These include the traditional design-bid-build method, design and build, management contracting and construction management. Others, often used on major projects, include prime contracting, alliancing,

13 https://iccwbo.org/resources-for-business/model-contracts-clauses/turnkey-transactions/ 14 For more information on the available contract forms, go to: https://licensing.orgalime.org/index.php/publications/en/

15 https://www.enaa.or.jp/EN/activities/model.html

14 | P a g e

partnering (though there remain some debate on whether partnering is a procurement method), Public-Private Partnerships (PPP), Build-Operate and Transfer (BOT) and Design – Build and Operate (DBO).16 The procurement option is also dictated by several factors including the nature of the project, the parties, the project location, and funding requirements.

Whatever the options may be, the choices parties make regarding the delivery method influences substantially the kind of contract form they will ultimately use. A close observation of the various forms reviewed will disclose that some of them are modelled on the various types of delivery methods outlined above. The JCT Suite of contract forms provides a good example of standard forms which have been fashioned to cater for most of these procurement/delivery options. The FIDIC Red Book, 1999 is said to be suitable for situations where the Employer or its representative is primarily responsible for the design of the project. In most instances where the Red Book will be used, the design is likely to be separated from construction. This reflects the traditional design-bid-build procurement method. Similarly, the Yellow Book is suitable for design and build projects, whilst the Silver Book is primarily suitable for turnkey projects.

Some of the standard forms make contract type primary distinguishing feature. Thus, a standard form may be more suitable for use where the proposed contract is a lump sum or fixed price, prime cost/cost plus or reimbursable contract, target cost contract or unit price. A good example here is the NEC3 Options A-F (see Section 5.2 above).

16 For more on these methods, see Klee, International Construction Contracts (Wiley Blackwell,2015) (available in the reading list/Library)

15 | P a g e

Topic 2: Introduction to FIDIC and the Old Books

Topic Preview

This topic will examine the history of FIDIC, introduce FIDIC contracts and examine key provisions of the fourth edition of the FIDIC Red Book, the old Yellow, and Orange Books.

Topic Content

1. A Brief history of FIDIC

FIDIC is a French language acronym for Federation Internationale des Ingenieurs Conseils, known in English as the International Federation of Consulting Engineers. It was started in 1913 by the trio of France, Belgium, and Switzerland. The United Kingdom joined the Federation in 1949. Primarily, FIDIC is the international federation of national associations of independent consulting engineers. It is head quartered in Switzerland and now boasts of about 100 member associations.1 These associations represent over a million engineering professionals working with about 40 000 firms worldwide. Then there are affiliate members, which are mainly corporate entities operating in many countries globally.2 The constituting national associations have expanded to also represent other groups of professionals including architects. The main objective of FIDIC is to promote the interest of consulting engineers worldwide. Over the years, FIDIC has become famous for its secondary activity of producing standard form contracts for the construction and engineering industry.

FIDIC published its first contract titled ‘Conditions of Contract (international) for works of Civil Engineering construction’ in 1957. As the title indicated, this first contract was aimed at the Civil Engineering sector and it soon became known as the ‘Red Book’, after the colour of its cover. It has become the tradition that FIDIC contracts are known in popular parlance by the colour of their cover.

This first contract by FIDIC was undertaken jointly with the then International Federation of Building and Public works.3 FIDIC’s concerted effort at achieving broad consultation and acceptance of its contract forms has seen subsequent editions of its contracts being ratified by the International Federation of Asian and Western Pacific Contractors Association, Associated GeneralContractorsofAmerica and theInter-AmericanFederationoftheConstructionIndustry, Multilateral Development Banks, amongst others. Because of the broad support it enjoys, FIDIC contracts are the foremost contracts in international construction.

2. FIDIC Contract Forms

Over the years FIDIC has consistently improved on its contracts. The organisation has added new forms of contract, replaced previous ones, and updated important terms in the ‘FIDIC family’ of contracts. We have previously encountered a list of all the contracts from 1999 to date – see pages 9&10 of the Topic 1 Notes. The table below identifies the pre-1999 FIDIC forms.

1 See https://fidic.org/membership/membership_associations 2 https://fidic.org/affiliates

3 Now known as the European Construction Industry Federation (FIEC): http://www.fiec.eu/

1 | P a g e

Apart from being a standard form contract and therefore sharing most of the advantages and disadvantages of such adhesion contracts, FIDIC contracts are distinct for several reasons. Some features of the contract forms are examined below.

3. General Features of FIDIC contracts

The FIDIC family covers a wide range of contracts. The following are some of the common features:

3.1. Presentation

Each of the FIDIC forms of contract consists of a group of documents namely: 1. General Conditions

2. Guidance on the preparation of the Particular Conditions 3. Forms of Tender

4. Contract Agreement

5. Dispute Adjudication Agreement

Our focus will be mainly on the General Conditions. FIDIC is usually presented in two parts. Part I consists of the General conditions and Part II is made of the Conditions of Particular Application. Part I contains the general terms of the contract. FIDIC intends that these terms will be common to all projects and parties. Such issues as rights and obligations of each party, procedure for payment, variation, certification, and dispute resolution are all provided for in Part I. It is hoped that the parties will use the Part II of the contract (Conditions of Particular Application) to introduce any qualifications or amendments to Part I provisions they have agreed to. They are also to use the Part II to insert terms to cater for the peculiarity of the project. Terms to be inserted by the parties in Part II include the language of the contract, choice of law, the name of the person or firm appointed to act as Engineer or Employers representative for the project among other terms.

2 | P a g e

In most FIDIC forms there is a default hierarchy for the documents forming the contract. The following are listed in the order of priority, such that, in the event of inconsistency the first on the list takes precedence:

1. The Contract Agreement

2. The Letter of Acceptance (this is the formal acceptance of the contractor’s tender and marks the formation of the contract)

3. The Letter of Tender.

4. Part II -The Conditions of particular application. 5. Part I - General conditions of contract

6. The Specification and Drawings (Red Book), the Employer’s Requirements (Yellow Book), the Schedules (Red and Yellow Books).

7. Further documents (if any), listed in the Contract Agreement or in the Letter of Acceptance.

The parties are allowed to rearrange the priority of documents or stipulate that no priority or order of hierarchy will apply to the contract. This can be done in Part II of the contract.

3.2. Dispute Resolution

FIDIC contract forms provide for a multi-tier dispute resolution process. The emphasis in recent years has been on the amicable settlement of disputes. The process usually provides as a first step, for disputes to be submitted for adjudication before an Engineer or a Dispute Board. If one (or both) of the parties is dissatisfied, a period is allowed for amicable settlement. If the parties are not able to settle the dispute during the ‘amicable settlement’ period, the final stage is to proceed to arbitration. FIDIC contracts provide as a default position that the arbitration rules of the International Chambers of Commerce should apply in the arbitration of disputes arising from the contract.

3.3. Bias for English Law

The first sets of FIDIC contracts were based on English law principles. This bias was so strong, that in commenting on the FIDIC Red book first edition, Ian Duncan Wallace QC put it lightly in this way:

“As a general comment, it is difficult to escape the conclusion that at least one primary object in preparing the present international contract was to depart as little as humanly possible from the English conditions.”

Since 1957, future FIDIC contracts have successfully incorporated the principles of other legal systems. However, the basic framework of English law principles has survived. For instance, provisions relating to liquidated damages have been maintained.

4. Why study (or use) the FIDIC family of contracts?

The FIDIC forms have a global reputation as standard forms of choice in engineering and construction fields. Anyone who has been involved with international construction projects would be familiar with at least one of the FIDIC forms, and for some, perhaps not in sufficient detail. Below are some reasons why studying the FIDIC forms is important:

4.1. The range of contracts.

FIDIC contracts are among the few standard forms that cover a wide range of activities and sectors relevant to international construction. Unlike some other international standard forms that are specialised and cover only specific project types, FIDIC forms are amendable to a wide range of sectors. So rather than being tied to the process industry or the power plant sectors, for instance, FIDIC covers these areas and others based either on the type of works (civil or mechanical) or on who bears the greater share of the design responsibility. The FIDIC suite provides a wide range of contracting options. These include options for Employer designed projects,Contractordesigned projectsandTurnkeyprojectswitha single pointofresponsibility. Recently, FIDIC has also made available a Design, Build and Operate contract.

3 | P a g e

4.2. Successful usage

Over the last sixty years, the FIDIC form has continuously been used for major international projects inall regionsof the world. It hasbeen endorsed and is used by mostleading Multilateral Lending institutions. It has also been interpreted into various languages including Arabic, Spanish and French to mention a few. Because of its wide usage, students currently involved in or who plan to be part of international construction projects will likely encounter the FIDIC form – in its pristine or modified form - during practice.

4.3. An International Benchmark

FIDIC contracts have become the benchmark for international standard forms. Other contract forms are analysed from their point of divergence from the FIDIC forms. A good understanding of FIDIC forms is therefore important in understanding other standard forms used in international construction. Additionally, at various times, FIDIC contracts formed part of or were the foundation for the public procurement and construction legislation of Oman, Saudi Arabia, Kuwait, and Romania (some of the legislations have since been changed or updated).

4.4. Certainty of terms

Because FIDIC is widely used, parties have relative confidence to predict the boundaries of their rights and the extent of their responsibilities. Over the years, clauses in FIDIC contracts have gained judicial notoriety in various jurisdictions, creating certainty around them. Even where this has not been the case, experience from previous projects gives each party a good understanding of the terms and reciprocal expectations created by the contracts.

4.5. Perception of fairness

FIDIC’s extensive consultation process ensures that its contract forms receive wide acceptance across different stakeholder groups in the industry. This reduces the incidence of protracted negotiations over accepting a FIDIC Contract as the applicable contract for a project. Also, the clauses in FIDIC contracts already go through extensive negotiations during the drafting process, therefore reducing considerably the need to renegotiate individual clauses. The forms are accepted as being fair in the most and parties are inclined to implement them with minimum resistance.

4.6. Flexibility

As can be deduced from the discussion above, the FIDIC forms are flexible and are created to allow for input by the parties. Given the distinct nature of construction projects, this feature of the FIDIC form has made it adaptable to different types of projects in different environments. Similarly, FIDIC’s well-defined dispute resolution process also speaks to the same idea of flexibility.

5. The FIDIC (old) Red Book, 4th edition

In 1987, FIDIC published the fourth and last edition of the old Red Book. This contract form or modified versions are still being used by some organisations for new projects in some parts of the world. Another important reason for the study of the old Red Book is to lay a good foundation for understanding the new suite of contracts released by FIDIC. The problems with the old Red Book are the ‘mischiefs’ that the new forms are created to correct. Each edition of new set of forms represents an improvement on the previous edition.

5.1. Background

The background under which the FIDIC Red Book 4th edition was published makes compelling literature. While the 3rd edition of the Red Book did revise in some significant manner the 2nd edition of the book, it left unchanged many salient points. For instance, the 3rd edition made no attempt to wean the FIDIC Red Book from its English law foundations. Despite this, the 3rd edition of the Red Book still was a particularly successful contract form. It was translated into German, French, and Spanish. Its use coincided with the World economic ‘reorganisation’ of

4 | P a g e

the 1970’s and it formed the basis of numerous successful projects in the Middle East. During the lateryears of the3rd edition ofthe RedBook, disputes between partieswere on the increase and the terms of the contract came under microscopic scrutiny. This revealed some problems with the contract form (3rd edition of the Red Book). In choosing which set of professionals to blame for this, Professor Nael Bunni noted as follows:

“Criticism only came to surface in recent years when the number of disputes ending in arbitration grew and every clause and term in the Red book came under the scrutiny of lawyers experienced in discovering different interpretations to a set of words!”

While this fault placing is arguable, the fact that a review of the 3rd edition of FIDIC Red Book was due was not in dispute. In keeping with its tradition of updating its contract forms, FIDIC appointed a drafting committee in 1983.

A few other issues are worth noting about the period the draft was undertaken. The World Bank and other multilateral institutions had become major players in the international construction industry. As of 1987, the World Bank had grown its annual infrastructure expenditure to $25.57 billion from $8 billion a decade earlier. Much of the increased expenditure involved construction works in developing countries. The Bank had adopted the FIDIC Red Book as its preferred form for construction projects. This meant the importation of FIDIC concepts into countries with no equivalent principles. For instance, its concept of liquidated damage had no equivalent in the Islamic legal system. In reacting to this, one commentator observed:

“...on many occasions the intended aims of the FIDIC clauses supported by the English legal system and the UK construction industry practice may lead to a different result for the same FIDIC clause governed by Egyptian law or any other Arab country’s laws’’.4

5.2 Drafting of the Old Red Book

The 1983 drafting committee for the 4th edition of the Red Book had a balancing act on its hand because of the terms of reference assigned to it. The terms could be summarised as follows: (i) Change only where change was required; (ii) pay attention to specific topics that had increasingly become contentious; (iii) maintain the status of the consultant engineer; and (iv) make the language easier to understand and to administer at construction sites. The stakeholder groups consulted in the drafting process included:

1. FIDIC National Member Associations

2. European InternationalContractors (EIC) (representing the Confederation of International Contractors Associations (CICA). The EIC representatives were assisted by two groups from the Associated General Contractors of America (AGC)

3. Multilateral development banks

4. Gulf States represented by officials from the various Arab Funds 5. Insurers, brokers, and legal experts.

By the time the final draft of the contract was approved, each of the clauses had been redrafted twice, most went through more than four redrafts and one clause suffered through seventeen redrafts. The chairman of the drafting committee of the 1987 Red Book, Mr. Helge Sorensen, listed the broad achievements of that edition of the contract as follows: (i) Protecting and maintaining the FIDIC notion of the engineer; (ii) enhancing the role of the employer and getting it more involved in the project without eroding the sphere of influence of the Engineer; (iii) maintaining the balance of rights and obligations between parties to the contract without tilting the balance in favour of either party; (iv) spelling out in detail action and time oriented procedures in the light of (iii) above; (v) making efforts to synchronise the wording and

4 Hani Serie-Eldin, Operation of FIDIC Civil Engineering Conditions in Egypt and Other Arab Middle Eastern Countries, 28 INT’L LAW 951 (1994)

© Robert Gordon University: BSM 135                                                                                5 | P a g e

presentation of the Red book with the sister Yellow Book; and (vi) creating new provisions to deal with the reality of current international construction practice. The fourth edition of the Red Book was arranged in two parts (Part I and II), and it had 72 clauses.

5.3. Features, General Principles and Roles.

The following features and general principles underpin the FIDIC Red Book fourth edition:

5.3.1. Applicable in various legal systems

To ensure that the Red Book was applicable internationally, FIDIC inserted three important clauses relating to the law of the contract. The first is clause5.1 (b), which required the parties to choose the law to govern the contract and to insert this in Part II of the contract. The next is clause 26.1, which obliged the contractor to conform to the applicable national laws in performing his duties under the contract. This entails not only the laws of the country where the project is located but all countries where elements of the project are being constructed. The last but not the least, is clause 70, which recognised that changes in national laws do occur and provides for the contract to incorporate such changes into the cost of the project. These clauses allow the Red Book to fulfil its purpose irrespective of the laws applicable in a particular jurisdiction - civil, common or Islamic Law. It is important to note that the Red Book clauses relating to risk, liability and damages are all common law based. Therefore clauses 5, 26 and 70 are central in maintaining the international outlook of the contract.

5.3.2. It is a Re-measurement Contract

The FIDIC Red Book (4th Edition) was drafted originally as a re-measurement contract. In a re-measurement contract, procurement is based on quotations made by the Contractor to the bill of quantities prepared by the Employer’s agent or Engineer. Dividing the details of the design calculations, specifications and drawings into appropriate trades and activity creates a bill of quantity. The bill is further subdivided into different items with a brief description of what is required in each item. The contractor considers the items and quotes a unit price for each of the items on the bill of quantities. In doing this, the contractor is expected to add ‘mark-up’ rates and prices to cover the cost of mobilization, labour, plant, overheads, demobilization, and profit. The successful tenderer will have his payment calculated based on the bill of quantities. That is, if the payment is for laying blocks, the number of blocks laid is multiplied by the unit price quoted for laying one block. Therefore, the risk of the price of the contract lies with the Employer. This is because the quantity of materials used on the project could fluctuate. At completion, a re-measurement of the actual work done is undertaken and the final contract price is valued.

A 1995 supplement to the 4th edition of the Red Book created an option to proceed by way of lump sum contract. Here the contractor quotes the final price for the project in his tender. The risk of completing the job on the quoted prices (taking into consideration the changes that might occur in the quantity of materials used for the project) lies with the contractor.

5.3.3. Shared Risks

The FIDIC Red Book fourth edition was built on the principle of appropriately distributing the risks in the project among the parties. The risk of delay caused by the contractor, for instance, is borne by him by way of liquidated damages. The risk of a defective design by the Employer’s agent is borne by the Employer. The correction of such design defect will be termed a variation, entitling the Contractor to extension of time to complete the project and additional payment (where appropriate). In essence, the FIDIC Red Book was a balanced contract ensuring that the parties carry the responsibility and risk best suited to their rights and obligations.

5.3.4. Roles

There were three main entities playing key roles under the FIDIC Red Book fourth edition. These are the Employer, the Contractor, and the Engineer. The contract was between the Employer and Contractor but contained rights and responsibilities for the Engineer. It was

© Robert Gordon University: BSM 135                                                                                6 | P a g e

drafted originally as a re-measurement contract. The major roles under the contract mostly followed common practice but the role of the Engineer was peculiar to the form (and to the United Kingdom construction industry). Below is a brief description of the roles:

5.3.4.1. The Employer

This is the owner of the project and one of the parties to the Red Book contract. This may be a sovereign government department, an independent person, or a corporate entity. It is at the behest of the Employer that the work is carried out. His/its duties included appointing the Engineer, providing access to the site, paying for the work at agreed intervals among others.

5.3.4.2. The Contractor

The contractor is the company or organisation charged with carrying out the works. The contractor’s duty is to ensure that the work is carried out according to the instructions of the Employer.

5.3.4.3. The Engineer

The FIDIC Code of practice defined the consulting engineer as:

“...a professional engineer in private practice. He maintains his engineering office either alone or in association with other engineers. He employs the necessary staff to assist in carrying out the services which he provides. His organisation may be that of a sole proprietorship, a partnership or a company. This depends on the type and magnitude of his operations and the conditions of practice set by his national association. He must carry out his practice on a highly ethical and professional basis. The technical knowledge, experience and ability of the consultant, his associates and assistants must be fully adequate for the projects undertaken.”

In essence, FIDIC’s view of the consulting engineer is that it must be professional, independent, and competent. The Red Book 4th Edition required the Engineer to be impartial. The primary duty of the Engineer was to administer the construction contract on behalf of the Employer. Among other things, the Engineer was expected to conduct tests to ascertain the suitability and quality of works constructed by contractor and to issue certificates on which payments will be based. The Engineer also played a quasi-legal role. He was the first point for settling disputes between the Contractor and the Employer. Even where such disputes may have arisen from his/her action/inactions, the Engineer is expected to be impartial and to aim for a speedy resolution of the dispute(s). The Engineer was permitted to appoint representatives or assistants often referred to as the Engineer’s representatives. The duty of these assistants was to assist the Engineer to carry out the enormous responsibilities entrusted to him by the contract.

5.4. The Rights and Obligations of the Employer

It was the intention of the drafters of the FIDIC Red Book (4th Edition) to make the Employer more visible. Some of the responsibilities and rights of the Employer may be summarised as follows:

1. The Employer is to appoint the Engineer, and where appropriate provide him with the necessary approvals to carry out his work.

2. The Engineer is to consult with the Employer on issues specified by the contract and on any other issue that the Employer indicates in Part II that his approval is required.

3. The Engineer is also to consult with the Employer and contractor when deciding a dispute between the parties. In this regard, it is important that the Employer understands that the Engineer is enjoined to be impartial.

© Robert Gordon University: BSM 135                                                                                7 | P a g e

4. The Employer is entitled to receive copies of the decisions taken by the Engineer.

5. The Employer is to give possession of the site to the contractor and not to interfere with the works. The Employer is also to give instructions that are necessary for the progress of the work. This covers all areas of direct communication between the Employer and the Contractor, i.e., execution of the contract agreement, appointment of nominated sub-contractors etc.

6. The Employer is obliged to notify the Engineer of any decision he is dissatisfied with and to issue a notice of intention to commence arbitration.

7. The Employer is to make timely payments to the contractor with a corresponding right accruing to the contractor to terminate the agreement on grounds of non-payment. FIDIC 4th edition specifically created a 28-day timeline for interim payments and 56-day timeline after the final certificate has been issued for final payment.

8. The Employer is entitled to liquidated damages for delay caused by the contractor.

9. The Employer is entitled to be indemnified by the Contractor for patent rights used by the Contractor in the project and for any delict/tort caused by interference with traffic or damage to an adjoining property by the Contractor or his agents. There is also an indemnity to be provided by the Contractor in favour of the Employer, if the later fails to comply with relevant local laws.

5.5. The Obligations of the Engineer

Some of the functions of the engineer under the FIDIC Red Book fourth edition include:

1. The Engineer is to seek and obtained approval from the Employer before undertaking duties that such approval is a pre-requisite.

2. The Engineer is to consult with both parties before taking any decisions on matters where the contract so specifies. Although in consultation with the parties, the Engineer is to ensure that his/her decisions are fair and impartial.

3. It is also the duty of the Engineer to appoint an Engineer assistant(s) and delegate duties to her/them in writing as is appropriate.

4. It is the Engineer’s duty to inspect the works carried out by the contractor and determine whether the work meets the standard set by the contract. The Engineer is also to issue instructions where necessary and ensure that all defects are remedied.

5. It is the Engineers duty to indicate the form of programme of work to be submitted by the contractor and to accept the programme so prepared. It is also his duty to request for a revised programme (when necessary), and request for a general description of the arrangement of the works to be carried out.

6. The Engineer has the power to request the contractor to remove any person who is incompetent or negligent from the site.

7. In the event of damage or loss due to the Employers risk, it is the Engineers duty to indicate the extent of repairs required and the addition to time and contract price for such repairs after due consultation with the Employer.

8. It is the duty of the Engine e r to order variations to the project. No variation is to be carried

© Robert Gordon University: BSM 135                                                                                8 | P a g e

out except on the instructions of the Engineer.

9. It is the Engineer’s duty to set the tests to be carried out by the contractor to determine the suitability of materials used for the project and the suitability of the works.

10. It is the Engineers duty when the contractor gives notice of encountering obstructions and physical conditions which could not have been reasonably foreseen by an experienced contractor, to determine the extension in time and the addition in costs to be awarded to the contractor after due consultations with the parties and notifying the Employer.

11. It is the duty of the Engineer, to receive any dispute referred to him by the parties and to determine it within 84 days.

The Engineer is the heartbeat of the contract. The success of the relationship between the parties and the successful completion of the project is determined to a large extent on how well the Engineer performs his duties.

5.6. The Rights and Obligations of the Contractor

1. The main duty of the contractor is to complete the works with due diligence within the time contemplated by the contract.

2. The contractor’s main right is to receive payment for works according to the contract.

3. The contractor contracts to complete the works no matter the circumstance. The exceptions to this obligation are:

(a)     Where it is legally or physically impossible to complete. In most jurisdictions a distinction is made between situations that are merely difficult and those where it is impossible to complete.

(b)     When the work is suspended because of a default in payment by the employer and in the exercise of the contractor’s right to terminate.

(c)     Where the work is suspended by the Engineer under the various powers accorded him and where an instruction to resume is not communicated 84 days after the date of suspension.

(d)     Where any of the items listed under the employer’s risk events (e.g., wars, rebellion, natural disasters, riots etc.) disrupts the continuation of the project.

4. It is the duty of the contractor to source the security for performance of the contract (if required by the invitation to tender) within 28 days after the receipt of the Letter of Acceptance from the Employer.

5. It is the duty of the contractor to prepare and submit for the consent of the Engineer a programme for the execution of the works within a timescale to be set out in Part II of the contract.

6. It is the duty of the contractor to notify the Employer within 84 days of the commencement date of the contract that all insurance policies required to be taken out in accordance with the contract are in place.

7. The contractor’s duty of due diligence extends to the materials to be used in the construction, and it is to ensure they are of the quality appropriate for the works.

8. The contractor’s role also extends to carrying out the design of part of the works as specified

© Robert Gordon University: BSM 135                                                                                9 | P a g e

by the contract.

9. It is the duty of the contractor to secure a safe working area although this duty does not extend to cover the Employer and his work men.

10. In performing his/her/its obligations, the contractor needs to be particularly careful of section 47.1 of Part I of the FIDIC 4th edition. This section sets out a liquidated damage procedure against the contractor for delay in completing the project within the time contemplated by the contract.

For a complete overview of the roles and responsibilities of the stakeholders under the Red Book, fourth edition, please access the further reading section of this topic.

5.7. Selected Clauses

1. Variations

This is provided for under Clauses 51 and 52 of the FIDIC Red Book fourth edition. Clause 51 entitles the Engineer to give instructions for variations of any type relating to the form, quality, or quantity of the works. The contractor is obliged to increase or decrease the quantity of work in accordance with the instructions of the Engineer. The Contractor is also to omit any work as directed by the Engineer. The clause also provides that where an aspect of the works has been omitted on the instructions of the Engineer, it is not to be carried out by the Employer or another contractor.

In the FIDIC Red Book, 4th edition, variations entitle the contractor to payment at the rates determined under Clause 52. An exception to the rule that payment will be made for variations is where such variation is required because of the defects or default caused by the contractor. While the powers to order a variation seem limitless, under common law there is an implied term that one may not by variation procure a new contract for works.

2. Claims

Clause 53 sets out the procedure for the contractor to claim for additional payment. The contractor is to make his claims within 28 days after the event giving rise to his claim. Under the same Clause it is the duty of the contractor to keep records that are material (contemporary records) to the claim. Within 28 days or such other timeframe to be agreed to by the Engineer, the contractor is to furnish the Engineer with particulars of the claims and grounds upon which they are based. Payment for a claim certified as correct by the Engineer is to be included in the interim payments due under the contract.

3. Termination

The Employers right to terminate is set out in Clause 63. The Employer may terminate the contract after the expiry of a 14-day notice to the Contractor on the occurrence of any of the events listed below. The termination will not release the Contractor of his liabilities or obligations under the contract. The events are as follows:

(a)     The contractor goes into administration or liquidation and is unable to pay his debts.

(b)     The contractor repudiates the contract.

(c)     The contractor fails to commence work in accordance with the contract.

(d)     The contractor fails to proceed with works diligently and promptly within 28 days of receiving notice in accordance with clause 46.1.(This clause concerns the rate of progress of work and entitles the Engineer to issue a notice to the Contractor to increase the pace of work, where the contractor had been slow).

(e)     The contractor despite written warnings by the Engineer persistently refuses to

© Robert Gordon University: BSM 135                                                                             10 | P a g e

comply with its obligations under the contract.

(f)      The contractor subcontracts the whole of the works contrary to Clause 4.1.

The Engineer is authorised on such termination to determine the amounts due to the Contractor for work already done and/or for equipment used or partially used on the project. Payments of such amounts by the employer shall not be due until the expiration of the defects liability period and after that (where a defect has been identified) until any defects have been remedied.

The contractor’s right to terminate the contract is provided for in Clause 69. The clause empowers the contractor to terminate the contract for the following reasons:

(a)     Bankruptcy of the employer.

(b)     The failure of the Employer to pay the contractor within 28 days after the expiry of agreed timescales for payment under clause 60.10

(c)     Where the Employer gives notice to the contractor that due to unforeseen reasons including economic dislocation, he is unable to continue with the contract.

(d)     The Contractor also has a right to terminate where a suspension ordered by the Engineer has lasted longer than 84 days and the suspension is not due to one of the listed reasons in clause 40.1. In such circumstance, the Contractor is to follow the procedure set out in clause 40.3.

The Contractor’s termination would take effect after the expiration of a 14-day notice to terminate.

4. Dispute Resolution

The 4th edition of the Red Book has its dispute resolution procedure set out in Clause 67. The FIDIC Red Bookfourth edition removes the reference to the dispute being between the Engineer and the Contractor and clearly states that the dispute is between the parties. The steps set out by the clause are as follows:

(a)     The Engineer and the other party are to be notified in writing of a dispute requiring the Engineer’s decision.

(b)     The Engineer is to determine all disputes referred to him within 84 days after consulting with the parties. The Engineer is to communicate his decision in writing to the parties.

(c)     If the contract is current (that is, it has not been terminated or otherwise discontinued), the parties are to give effect to the Engineer’s decision until it is set aside either by mutual agreement of the parties or by a subsequent arbitral award.

(d)     Where either party is dissatisfied with the Engineers decision, a notice of intention to commence arbitrationshould be issuedwithin70daysofthe Engineersdecision.

(e)     Where the 70dayselapses,thedecisionofthe Engineerbecomesfinaland binding. This decision can be enforced by arbitration.

(f)      Where the Engineer has failed to determine the dispute after the expiration of the 84 days stipulated for him to do so, either party may within or on the 70th day after this period, serve a notice of intention to commence arbitration on the other party.

(g)     Parties are expected to use 54 days to attempt amicable resolution of the dispute. The arbitration would commence after the 54 days even though no attempt had been made by the parties at amicable resolution

© Robert Gordon University: BSM 135                                                                             11 | P a g e

The ICC rules of arbitration are adopted as the default arbitration rules for the contract. Parties may provide for alternative arbitration rules in Part II of the contract.

5.8. Changes from the third to fourth edition of the(old) Red Book.

To appreciate the trajectory of the development of the FIDIC forms, it is always useful to keep an eye on changes made at different stages of their development. The following are some of the changes introduced by the FIDIC fourth edition:

1. The contract introduced an important change in the power of the Employer to replace the Engineer under clause 1.1(a) (iv).

While earlier versions allowed the Employer wide discretion on the matter, the 4th edition provided that the Engineer appointed for the project would carry out his/her duties for the duration of the contract. The replacement of an Engineer once appointed could only be done with the consent of the Contractor. This was to ensure that the Engineer retained his independence and impartiality without the fear of being relieved of his duties. The guidance note justified this position by stating that the identity and reputation of the Engineer might have been a contributing factor in the contractor’s decision to tender for the project. This being so, the contractor was entitled to be taken into consideration before any changes is made to the position of the Engineer. Subsequent forms have made changes to this position.

2. Consents, approvals, certificates etc. to be given by the Employer, Engineer or Contractor or sub-contractor or Arbitrator are to be done in writing (clause 1 (1.5).

An instruction by the Engineer is also to be given in writing. Where instructions are given orally, the Contractor is expected to confirm such instructions in writing to the Engineer. Where this is not contradicted by the Engineer in writing within seven days, the instructions are deemed to be correct.

3. The requirement that the Engineer consults with the Employer before taking certain actions.

This is another important change. The list of actions includes instructing a variation, accepting a claim for additional costs among others. There is also provision to allow the Employer to specify additional areas that the Engineer should obtain his approval before acting. Where the Employer places such restrictions on the power of the Engineer, the contractor is not required to investigate whether such approval had been sought and granted. The contract deems that the exercise by the Engineer of a power covered by such restrictions is conclusive proof that the approval had been granted.

4. The introduction of an express term in Clause 2 (2.6) requiring the Engineer to act impartially.

This important change applies whenever the Engineer is deciding, expressing an opinion, consenting, approving, or taking any action that might affect the rights and obligations of the parties to the contract. While this was an implied term in some jurisdictions, FIDIC thought it wise to remove any doubts that may exist on the matter.

5. Removal of the word ‘international’ from the title

One important innovation in the FIDIC Red Book fourth edition is that the drafters dropped the word ‘international’ from the name of the contract. This was to emphasise that this FIDIC form was also suitable for domestic use.

6. Definition of cost

This was minor change. Profit was excluded from the definition of cost under the form.

© Robert Gordon University: BSM 135                                                                             12 | P a g e

6. Introduction to the Old Yellow Book

As stated under 5 above, the old Red Book was aimed at the civil engineering sector. Because of the differences between civil engineering and electrical/mechanical engineering (these differences will be considered below), it became necessary to create a contract form that suited electrical and mechanical engineering aspects of construction. The importance of this is further emphasised by the fact that most international projects usually combine aspects of civil engineering construction with electrical and mechanical works. The aim of FIDIC was to produce a contract form that would be compatible with the Red Book while also catering for the specific nature of E&M construction. To achieve this, FIDIC came up with the Conditions of Contract for Electrical and Mechanical Works, commonly known as the Yellow Book after the colour of its booklet. The first edition of the Yellow Book was produced in 1967, a 2nd edition in 1980 and then the 3rd and last edition in 1987. This study will concentrate on the 3rd edition of the Old Yellow Book.

6.1. Differences between Civil Construction                                                             and Electrical and Mechanical Construction

The philosophy of the Old Yellow book was rooted in the perceived differences between civil engineering construction works and the activities undertaken in an Electrical or Mechanical construction works. These differences include:

Nature of activities: Civil Engineering construction would usually require work on the site with heavy digging or some other activity related to the surface of the site being a prominent feature. In contrast, Electrical and Mechanical works begin before access to the site is sought and involves the supply and erection of specialist plant or machinery with a significant proportion of the works (design and fabrication) undertaken at the Contractor’s workshop.

Intellectual Property Risk: While this might exist on both types of works, it is a more usual and regular risk under Electrical and Mechanical construction. The component parts, the technology and other related outputs are usually all subject to patent rights.

Duration of the project: While the approximate minimum duration of an international civil construction project is four years with many lasting well over this minimum, the Electrical and Mechanical works have a shorter duration and may be completed before a project has been commissioned or alternatively may only be used towards the end of a project.

Tests: Because of the nature of Electrical and Mechanical engineering works, the Employer would require much more detailed and specific tests than is required for civil construction works.

Technology and changes: Equally important is the fact that some of the designs in Electrical and Mechanical works are technology driven and thus liable to change significantly at short notice.

The FIDIC Yellow Book 1987 was meant to address the risks and interests created due to the differences highlighted above.

6.2. Presentation and Clauses

In issuing the 3rd edition of the old Yellow Book, FIDIC had gathered the views of users on the performance of the 2nd edition in various projects. The preponderance of the views pointed to the need for a simpler and clearer text, adaptable to users in the different jurisdictions of the World. This is what FIDIC set to achieve in 3rd edition of the Yellow Book.

© Robert Gordon University: BSM 135                                                                             13 | P a g e

6.2.1. Presentation

The presentation of the 3rd edition of the Old Yellow Book followed the popular FIDIC two- part format namely General Conditions of Contract (Part I) and Particular Conditions of contract (Part II). Like the Red Book, Part 1 of the old Yellow Book contains the general terms of the contract that FIDIC believes should be applicable to all projects. These include such matters as duties of the parties, insurance, dispute resolution among others. However, unlike the Red Book, Part II is divided into A and B. Section A contains alternative terms to some of the clauses in Part I of the contract. Section B provides the space for the Parties to include any further specifications that they require. This should be used to provide terms to cater for the peculiarity of individual projects. The parties have the option of not completing Part II section A, in which case the clauses in Part I would apply.

6.2.2. Clauses and Terms

Since the aim was to achieve compatibility between the Red Book 4th Edition and the Yellow book 3rd Edition, there are similar terms in both contract forms. The areas of similarity include the presence of an Engineer under the same FIDIC concept of an independent Engineer. It also includes the requirement for the Engineer to obtain approval from the Employer and to consult with the parties for specified activities. The similarities extend to the restriction on the right of the Employer to replace the Engineer, this right being subject to the consent of the contractor and the requirement for written instructions; other similarities are the preference for the ICC arbitration rules among others. There are also many differences between the two forms, probably the most significant is that in the Yellow Book, it is expected that a significant portion of the design of the works will be undertaken by the contractor and not the Engineer. We will now examine the major clauses of the Yellow Book 1987 3rd Edition focusing on the areas of difference with the old Red Book.

6.2.3. Clauses

The Old Yellow Book 3rd edition dealt with the peculiar risks involved in Electrical and Mechanical construction by adopting different clauses than those used by the old Red Book. The more significant differences in the provisions include the following:

Clause 1- Commencement date: The commencement of works on an Electrical and Mechanical contract does not require access to the site. The definition of commencement date under the contract assumed five different options, these were:

(a)     the date specified in the preamble as the date for commencement of the works; or

(b)     the date when the contractor receives such payment in advance of the commencement of the works as may be specified in the terms of payment; or

(c)     the date when the contractor receives notice of the issue of any import license necessary for commencing performance of the contract; or

(d)     the date when the contractor receives notice that any legal requirements necessary for the contract to enter into force have been fulfilled; or

(e)     the date when the contractor receives notice that any necessary financial or administrative requirements specified in Part II as condition(s) precedent to commencement have been fulfilled.

The parties are required to choose the option that best fits the circumstance of their contract. Still under Clause 1, the definition of completion test envisaged for projects under the Old Yellow book are more comprehensive. This is explained in the context of the construction activities contemplated by the contract. The “finished construction product‟ would require sufficient test to ascertain quality and performance before being incorporated into a project. Clause 1.1.34 defines the test of completion as those tests specified in the contract. It is

© Robert Gordon University: BSM 135                                                                             14 | P a g e

expected that the parties would in Part II section B of the contract, set out the relevant tests applicable to their project.

Clause 2 - The replacement of the Engineer: The old Yellow book, like the Red Book, provides that the contractor’s consent would be required if the employer chooses to replace the Engineer.

Sub-clause 2.7 of the contract deals with claims by a contractor arising from a disagreement with the Engineer’s instruction or decision. This clause provides for the contractor to give a written notice within 28 days of the direction or decision made by the Engineer that it intends to contest. Notably, there is no similar provision for when an Employer wishes to dispute an engineer’s decision or direction. However, both parties do have the right to commence arbitration under Clause 50 (see clause 50 discussed below). On the receipt of the notice referred to above, the Engineer has a further 28 days to confirm, reverse, or vary the decision or instruction. Where the Contractor is still dissatisfied with the Engineer’s action after this further 28 days, and the matter cannot be settled amicably the procedure under clause 50 (discussed below), can then be adopted.

Clause 8 - Contractor’s obligation: The Old Yellow Book envisages that a significant portion of the design is undertaken by the contractor. The obligations of the contractor are divided into different headings as follows:

(a)     design

(b) manufacture (c) delivery to site

(d)     set out the works

(e)     tests and commission

(f)      timely completion as provided for in the contract.

Clause 27 (sub-clause 1 and 2): This provides an interesting alternative to the liquidated damages procedure. It provides that the Employer is entitled to reduce the contract sum at a specified percentage to be agreed by the parties for each day of delay by the contractor up to a maximum reduction stipulated in the contract. At that maximum, the employer is entitled to terminate the contract. This is qualified where it is argued that the Employer will not suffer loss because of the delay.

Clause 50 deals with dispute resolution: Unlike clause 2.7 discussed above, the clause refers to parties. This means that both the Employer and Contractor may commence the process of dispute resolution under this clause. In sharp contrast to the provision of the Red Book 4th edition, the Yellow Book 3rd edition does not provide for the Engineer to determine, at first instance, all disputes that may arise in the project; the parties may proceed straight to arbitration. However, for disputes arising from an Engineer’s decision or instruction, the parties are to commence arbitration within 56 days of the Engineer’s reply to the Contractor’s notice (under clause 2.7 discussed above). If the Engineer’s decision or instruction is not challenged within this timescale, it becomes final.

Under Clause 50 sub-clause 3, the performance of the contract continues during the pendency of the arbitral proceedings, unless the Employer suspends the works under his right to do so in the contract. In the same vein, all payments due the Contractor by the Employer are to proceed as usual during the arbitral process. Sub clause 4, also stipulates that at conclusion of the contract, if there are still disputes requiring arbitration, a formal notice of arbitration should be issued within 84 days of the issue of the final certificate of payment.

© Robert Gordon University: BSM 135                                                                             15 | P a g e

Finally, Clause 51 sets out the parties’ choice for the venue of arbitration, the applicable procedural law, and the language of arbitration etc. From the study of Arbitration Law in your first year, the importance of this clause should be apparent.

Officially, the Yellow Book, 3rd Edition was superseded by the Yellow Book, 1999, and now the Yellow Book 2017. Nevertheless, it is important to note the peculiarities of this form as this will help you appreciate how the Yellow Book has evolved over the years and provide better understanding of subsequent Yellow Books.

7. Introduction to the Orange Book First Edition.

7.1. Background

The Orange Book does not have the rich history of the other FIDIC books so far discussed. It has neither an old nor new version. The Orange book 1st edition (and only edition) was published in 1995 in response to market trends. Known as "Conditions of Contract for Design-Build and Turnkey‟, the Orange Book as is the tradition, derives its common name from the colour of the booklet. The foreword to the contract distinguished between Turnkey projects and design and build projects. The former refers to projects where the Contractor undertakes to design, construct, install fittings and deliver in a state that is ready for use at the turn of a key. Design and build on the other hand include a combination of the different processes required for the full design and construction of a project.

As indicated under Topic 1, Design and build and turnkey are procurement concepts which had gained some popularity in the 1980s. Their advent was borne out of the dissatisfaction of Employers with the traditional procurement method. In those early years however, they were adopted for very few projects, majority of which were projects that the Contractor either had a patent or some specialist skills.

The ‘design and build’ and ‘turnkey’ concepts appealed to Employers interested in securing certainty of price and less involvement in the design of a project. This type of construction procurement was also suited to the needs of private finance institutions. These institutions while looking for minimal direct involvement in the design and completion of a project required that it met pre-set standards. Theyalso wanted a single person or company to hold responsible on each contract (rather than responsibilities being shared by the Contractor and the Engineer-with incessant buck passing).

FIDIC were somewhat slow to respond to this market trend. It was apparent that FIDIC’s major forms (the Red Book 4th Edn. and the Yellow Book, 3rd Edn.) were unsuitable for this route of construction procurement. The first organisation to respond to this need was the Japanese Engineering Advancement Association (ENAA). ENAA started its process of consultation from 1986 and by 1992 had published its second volume of a standard form turnkey contract for international projects.

In 1992, the United Kingdom Institution of Civil Engineers published its version of a Design and Construct conditions of contract. This is a domestic form best suited for works within the United Kingdom. Also, to join the ‘fray’ was the German-based European International Contractors Association (EIC). In 1994, they published the EIC Turnkey Contract. The EIC form seems to have borrowed from the brevity of civil law contracts. It is perceived in some quarters that the EIC form was weighted in favour of the contractors since it was prepared by a contractors’ association.

It was in this context that FIDIC began consultations towards publishing the Orange Book. The Orange book released in 1995 announced itself as being suitable for design and build contracts and turnkey contracts. As would be expected from the underlying philosophy of the books, the Orange Book is significantly different from the Red and Yellow Books. For a start, FIDIC in the

© Robert Gordon University: BSM 135                                                                             16 | P a g e

OrangeBookdropped thedistinctionbetweencivilengineering and electrical/mechanicalworks and opted for a hybrid contract comprising of both types of activities.

7.2. FIDIC Orange Book 1st Edition- Presentation, Concepts and Clauses

Presentation

The Orange book follows the FIDIC format of a two-part contract with General Conditions in Part I and Conditions of Particular Application in Part II. The principle for this presentation remains the same. Part II is to be used by the parties to modify any parts of Part I and to insert any specifications peculiar to the contract.

Concepts

The principles underlying the Orange Book are different from the other FIDIC forms discussed so far. The Orange Book dropped the concept of the impartial Engineer and replaced him with an Employer’s Representative. The Employer’s representative has no quasi–judicial powers instead a Dispute Adjudication Board (DAB) is constituted to be the first stage of the dispute resolution process. The contract also adopts the fixed price payment option as against the re-measurement payment option used in other FIDIC forms. It places all design responsibilities on the contractor and requires him to create works to fit the Employer’s requirement. The Orange Book, however, adopts many of FIDIC’s tested concepts. It places a similar set of responsibilities on the Employer and shares the risk on the project as fairly as it is possible in a turnkey procurement.

Provisions

With the benefit of hindsight, the Orange Book laid the foundation for the change in philosophy and style that is evident in the 1999 suite of FIDIC contracts. Some of the provisions that set the Orange Book apart from the Old Red/Yellow Books include:

Clause 1: In the Orange Book, the concept of an ‘effective date of contract’ is introduced. Defined as the date the contract comes into ‘legal force and effect’. It is used as a guide in calculating various time limits including provision of performance security, appointment of members of the Dispute Adjudication Board amongst others. The guidance notes to the contract states that the date of entry into force of the contract is the date when the Employer acceptsthe Tender.Thiswould implythe date ofthe LetterofAcceptance.However,the parties are free to agree to any other date as the effective date of the contract including providing any condition precedent to be met prior to commencement.

The Orange Book places at the apex of the contract documents the Employers requirement document. The Employer’s requirement is defined as ‘the description of the scope, standard, design criteria (if any) and programme of work, as included in the Contract, and any alterations and modifications thereto in accordance with the Contract’. The Contractor's Tender (clause 1.6(d)), similarly occupies a prestigious position while the preliminary design included in the Contractor's Proposal (clause 1.6(h)) comes last after the Conditions of Particular Application – Part II and the General Conditions Part I.

Clause 2 sets out the obligations and rights of the Employer. This clause borrows the standard language of the other FIDIC forms obligating the Employer to, among other things, provide access to the Site, and pay the price of the contract. Sub-clause 1 deals with the right of access and sub clause 2 with possession of the Site, they obligate the Employer to assist the Contractor in applying for permits, licences, and approvals.

Importantly, under sub-clause 2.4, the Orange Book introduces the right of the Employer to terminate the contract at his convenience. The only restriction being that it may not terminate the contract to complete the works itself or employ another contractor to complete the works within a six-year period.

© Robert Gordon University: BSM 135                                                                             17 | P a g e

Clause 3 introduces the employer’s representative and places on him the responsibility of supervising and administering the works. It also places on the Representative (much like the Engineer in the Red/Yellow Book) the responsibility of obtaining permission from the Employer for certain matters and to transmit all copies of his instructions or decisions to the Employer. Clause 3.2 envisages a situation where the Employer’s Representative may not be a qualified construction professional and obligates him to appoint Engineers or other professionals to assist him.

Under Clause 3.5, which relates to adjustment of the Contract Price for Variations or claims, requires the Employer's Representative, failing an agreement by the parties, to make a fair and reasonable determination.

Clause 4 deals with the obligations of the Contractor. Clause4.1placesonthe Contractor the duty to meet the Employer's Requirements, including the performance of any work which is necessary, even beyond the letter and specifications of the Contract in order to allow the safe, reliable, and efficient operation of the Works. Clause 4.9 stipulates that the Contractor will be deemed to have checked and confirmed the accuracy of the site data provided by the Employer. To balance the risk on this point, the Orange Book places such acceptance of responsibility on the Contractor being reasonably permitted by time and cost to check the accuracy of the data at the Tender stage. Under Clause 4.11, the Contractor is not required to bear the risk of unforeseeable sub-surface conditions.

Clause 8 deals with extension of time and delay. In relation to extension of time, Clause 8.3 (e) and 8.4 stipulates that any delays caused by the Employer, or the Authorities should entitle the contractor to an extension of time. Clause 8.3 provides the procedure for the Contractor to claim for extension of time for delay caused by the Employer and requires the submission of “full supporting details”. Clause 8.5 of the Orange Book requires the Contractor to check that the rate of progress of the works matches the programme and in the event it does not, to inform the Employer's Representative of the measures he intends to take to bring the rate up to the requirements of the programme. This is to be done without prejudice to the liquidated damages for delay. Clause 8.6 deals with liquidated damages for delay which is to be calculated in accordance with the provisions of the Appendix to the Tender. Clause 8.8 providesthatcostswillbepaidtotheContractorwherethedelay hasbeencaused bya suspension of the works by the Employer.

Testing - Clause 9.4: Testing is an important part of the turnkey process. The Orange Book provides for a double test process,before and after completion. The first setof tests apparently corresponds to the erection and commissioning while the Tests after Completion (which are optional) are basically performance tests. Tests on Completion are provided for under clause 9.4; this clause gives the Employer the right to terminate the Contract for repeated failure to pass these tests.

Clause 10.2 deems that a Taking-Over Certificate has been automatically issued in the event that the Employer uses any part of the Works before all relevant tests have been carried out. The performance tests option, if chosen by the parties, is of critical importance. These tests will be used to determine if the Employer's Requirements have been met. This is particularly important in the light of the significant penalties that may be imposed for sub-standard performance under clause 11.4 (b). This clause links not passing these set of tests with liability to pay liquidated damages.

Clause 14 deals with the often-vexed issue of variations. Sub-clause 14.1 allows alterations to the document called Employers Requirement (defined above). By implication, the Employer’s right to request variations at any time during the Contract Period (clause 14.1) is virtually unlimited. It has been argued that this is unsuitable for this type of contract. Clause

© Robert Gordon University: BSM 135                                                                             18 | P a g e

14.2 allows the Contractor the use of the Variation procedure to suggest required improvements including those which improve the operation of the Works or reduce the cost of construction.

The Orange Book does not prescribe the means for calculation of the adjustments to the Contract Price on account of Variations. The only important direction is under Clause 14.3 which provides that it should include profit and the provision under Clause 3.5 that obligates the Employer’s Representative to be fair and reasonable when deciding issues on variation.

Clause 15 deals with the breach of the terms of the contract by the Employer. It follows on from previous FIDIC forms. Clause 15.1 and 2 requires that the Contractor should be notified of the breach and provided an opportunity to remedy same within a reasonable time before the sanction of termination can apply.

The Contractor may suspend further work under clause 16.1 where payments that are due and are not in dispute are withheld. The right to terminate for non-payment is provided for under clause 16.2. Interestingly, this is not dependent on a prior period of suspension. However, the clause requires a 14 days’ notice after payment has been delayed for 42 days. The right to terminate for breach by the Employer, where the employer consistently fails to meet his obligation under the contract is provided for under clause 16.2. In the event of termination for the default of the Employer, the Contractor is entitled to compensation for both direct loss, and loss of profit.

Clause 20 – Dispute Resolution: Probably the most significant change of all is contained in Clause 20. By contrast to other FIDIC forms, the claims clause is included under the same title as disputes and arbitration. As noted above, the real innovation of the Orange Book is the creation of the Dispute Adjudication Board (DAB). The board is appointed for the duration of the project. The DAB is required to respond with a reasoned decision, whatever the nature of the claim, within 42 days.

Clause 20.4 stipulates that the members of the Board are required to act as experts and not arbitrators. Under Clause 20.4 the Board's decision will be binding unless one of the parties gives notice of its dissatisfaction within a 28-day period. Even then, it remains unless and until it is modified by amicable settlement or an arbitral award.

Clause 20.6 provides that the arbitrators should have full power to review and revise any decision of the Board and that both parties shall be free to rely on any new evidence or argument they choose to overturn a decision of the Board and shall not be limited by the arguments previously advanced before the Board itself. The procedure for amicable settlement prior to arbitration is provided under clause 20.5, it is not particularly exacting and failure by a party to participate will not prevent it initiating arbitration proceedings.

Officially, the FIDIC Orange Book has been superseded the 1999 and 2017 editions of the Yellow Book and the Silver Book. It is obvious from the discussion above (e.g., on the DABs) that understanding of this Book will enhance your knowledge and understanding of several concepts and how they have developed over a period to date. You also need to bear in mind that some of these old FIDIC forms are still in use in some regions of the world.

Introduction of Dispute Adjudication Boards:

In 1996, a supplement was issued for the Red Book 4th edition which provided for a Dispute Adjudication Board of either one or three persons. This was after the concept had made its way into the Orange Book in the previous year. The subject of Dispute Adjudication Boards will be considered critically both under Weeks 3 and 7.

6. Conclusion

© Robert Gordon University: BSM 135                                                                             19 | P a g e

FIDIC has over the years grown its suite of international construction contract forms and by so doing has extended its influence globally. The study of the pre-1999 FIDIC Red, Yellow and Orange Books are necessary for two reasons: Firstly, these Books provide the relevant background to the evolution of relatively recent forms. Secondly, unlike statutes/legislation, old FIDIC standard forms do not necessarily become irrelevant with the introduction of new forms; parties in different parts of the world still make use of these forms in a variety of ways. With this background, we are ready to examine the 1999 Edition of the FIDIC Contract forms in the next lecture.

Further Reading

1. Bunni, Nael G, The FIDIC forms of contract [electronic resource]: the fourth edition of the Red Book, 1992, the 1996 Supplement, the 1999 Red Book, the 1999 Yellow Book, the 1999 Silver Book (Blackwell 2005): Specifically, Part IV- Other Documents Related to the Red Book. (Electronic copy of this material and other relevant materials are accessiblefromtheRGU Librarythrough theASPIREliston theMoodlepageoftheModule). Please note that electronic copies of the old Yellow and Orange Books are not available in the RGU Library. However, information on the relevant clauses has been provided in sufficient detail in this lecture note and in Prof. Bunni’s book

2. Bunni, Nael G, The FIDIC forms of contract: the fourth edition of the Red Book, 1992, the 1996 Supplement, the 1999 Red Book, the 1999 Yellow Book, the 1999 Silver Book (Blackwell 2005) (Part III- The Fourth Edition in Practice.

3. Christopher R. Seppala, Contractor's claims under the FIDIC civil engineering contract, Fourth (1987) Edition, International Business Journal, 1997.

4. Fritz Nicklish, “The Role of the Engineer as Contract Administrator and Quasi-Arbitrator in International Construction and Civil Engineering Projects”, International Construction Law Review, Vol. 7, Part 3, pp. 322-338.

7. (Electronic copies of these materials and other relevant materials are accessible from the RGU Library through the Reading List on the Moodle.

© Robert Gordon University: BSM 135                                                                             20 | P a g e

International Construction contracts                                                                                Topic 3 Part 1: The 1999 FIDIC contracts (Red and Yellow

Topic 3: The 1999 Red and Yellow Books (Part 1)

Topic Preview

This is the first of two topics dealing with the FIDIC 1999 suite of contracts. This topic will provide an overview of the 1999 Red and Yellow Books. It will briefly look at the underpinning concepts, examine how the provisions are presented and consider some of the key provisions of the two books.

Topic Content

1. Introduction

In 1994, FIDIC appointed a group within its contracts committee to update the FIDIC Red Book 4th edition and the FIDIC Yellow Book 3rd edition. The mandate of the group was later extended to include a further book that would be used for privately financed projects and for large projects employing the design and build procurement route.

In performing its duties, the task group among other things, commissioned Reading University in the United Kingdom to carry out a survey on the use of FIDIC contracts in projects. The survey was to identify the main areas of difficulties encountered by users of the form. The survey process involved the distribution of questionnaires to various construction stakeholders (contractors, employers, lending institutions) around the world. The group also studied other forms of contract by other organisations to determine whether corresponding FIDIC forms were lacking in some material respect.

The survey and studies threw up some issues of note. Prominent among them was the role of the Engineer in FIDIC contracts. The phenomenon of an Engineer who is paid by one of the partiesbut required to be impartial in disputes concerning that party continued to attract diverse opinions. Another recurrent area of concern was the need tomakethe contracts simpler to understand and easier to administer in practice. The task group drafted the 1999 forms to meet these, and many other concerns expressed by different users of the FIDIC forms. The current suite of contracts is marketed as being practical contracts, with common sense clauses incorporating the best in engineering practice.

2. The 1999 Contract Forms

After much deliberation, the FIDIC contracts committee opted not to update the contract forms under review (the Red Book, 4th edition and the Yellow Book, 3rd edition) but to discontinue with those forms entirely. The committee chose to release new forms of contract to replace the discontinued contract forms.

The four new contracts released by the committee were:

International Construction contracts                                                                                Topic 3 Part 1: The 1999 FIDIC contracts (Red and Yellow

(a)     The 1999 Red Book 1st edition: Conditions of Contract for Building and Engineering Works, Designed by the Employer.

(b)     The 1999 Yellow Book 1st edition: Conditions of Contract for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed by the Contractor.

(c)     The Silver Book: Conditions of Contract for EPC and Turnkey Projects.

(d)     Green Book (Short Form of Contract).

FIDIC has, in subsequent years, released other forms modelled on the concepts underpinning the 1999 books – these were outlined in the Topic 1 Lecture notes.

3. Presentation and Concept

3.1.    Presentation

The 1999 forms listed above, generally maintain the two-part presentation of FIDIC contracts.

Part I - Conditions of General Application.

Covering matters such as the rights and the duties of the employer; the rights and duties of the contractor and the dispute resolution process amongst others.

Part II - Conditions of Particular Application.

This is to be used by the parties to set out qualifications to specific clauses in Part I and any other conditions of contract peculiar to the project. It is FIDIC’s recommendation that parties should use Part II to amend the contracts rather than delete or alter sections in Part I.

The 1999 forms are organised into clauses covering specific subjects and they each have 20 clauses. For user friendliness and uniformity, the forms have similar clauses and contain similar wordings except for where the differences in the purpose of the contracts require that different clauses/terms be used. In general, the 1999 forms are more organised and detailed than previous FIDIC forms. It is easier to locate the rights and obligations of each stakeholder in the contracts by referring to the specific section concerned with that stakeholder.

3.2. Concept

The 1999 forms are nearer to the Orange Book in concept than the pre-1999 Yellow and Red Books. In the 1999 suite, FIDIC jettisoned the distinction between civil engineering works and electrical and mechanical works and adopted the responsibility for design as the distinguishing factor.

•     The 1999 Red Book is for projects designed by the Employer •     The 1999 Yellow Book is for projects designed by the Contractor.

The concept of the impartial Engineer is also dropped by FIDIC in the 1999 suite. In this suite the Engineer acts on the Employer’s behalf and where the Engineer

International Construction contracts                                                                Topic 3 Part 1: The 1999 FIDIC contracts (Red and Yellow is required to take any decision, he/she is obliged to consult with the parties in an attempt to reach a common agreement, and in the absence of such consensus, to determine the matter fairly. In the Silver Book, the Engineer’s role completely disappears.

With regards to Dispute Resolution, the Dispute Adjudication Board (DAB) (introduced later in this module) becomes the preferred method of dispute settlement. Despite the wholesale changes in the concept of the 1999 forms, FIDIC successfully maintained the overriding principle of fairness in the contracts. It ensured that both parties shared the liability and risks and had commensurate benefits accruing to them.

4. The Red Book, 1999

4.1. Overview

The Conditions of Contract for Building and Engineering Works, designed by the Employer is commonly called the 1999 Red Book. It replaced the old Red Book 4th edition issued in 1987. It is the contract form for projects where the Employer takes responsibility for the design of the project. While this contract makes provision for the contractor to design certain aspects of the project, it is intended by the drafters that much of the design will be completed by the Employer who would usually use his professional consultants.

Although the 1999 Red Book is not a direct update of the Old Red Book, it adopts the main framework of the latter. Essentially, it is a Contract between the Employer and the Contractor for the construction of works under the supervision of the Engineer, who also administers the contract. Some of the provisions of the old Red Book are continued in the 1999 contract. For instance, the requirement that all instructions or directions by the Engineer are to be in writing is preserved. The rule requiring the Contractor to comply with the applicable law is also maintained.

The discussion on the provisions of the 1999 Red Book will focus on the major changes made by FIDIC in the contract when compared to previous editions. Some of the main clauses distinguishing the 1999 Red Book from previous FIDIC forms are set out below. Emphasis has been placed on the moresignificant terms:

Clause 1

This covers the definition of terms and related preliminary issues. Some of the important additions to this include:

Subclause 1.1.2.4

Defines the Engineer as the person appointed by the Employer as an Engineer and named in the Appendix to Tender. The Engineer is also defined as any other person appointed ‘from time to time’ by the Employer. The clause refers to Clause 3.4 which contains the new procedure for the replacement of the Engineer. This definition marks the end of the era of the ‘permanent’ engineer that was started in the Red Book 4th edition.

International Construction contracts                                                                                Topic 3 Part 1: The 1999 FIDIC contracts (Red and Yellow

Subclause 1.1.6.8

Defines ‘unforeseeable’ as any conditions not reasonably foreseeable by an experienced contractor by the date of the submission of the tender. What may or may not be foreseeable can be a contentious matter. See e.g., the Court of Appeal decision in Obrascon Huarte Lain SA v Attorney General for Gibraltar [2015] EWCA Civ 712.

Subclause 1.12

Obliges the Contractor to disclose to the Engineer all information required to satisfy the Engineer of the Contractor’s compliance with the contract. Such information may include confidential information.

Clause 2

This clause relates to the Employer. It enumerates the usual duties of an Employer i.e., duties to give access to the site and use ‘reasonable’ efforts to assist the Contractor in obtaining permits, licenses, or approvals according to the applicable law.

Under Subclause 2.1, where due to the fault of the Employer, the Contractor suffers delays and or costs in gaining possession/access to the site, the Contractor shall be entitled to an extension of time for that delay and payment for the costs incurred including reasonable profit. For the Contractor to enjoy these rights, it is required to serve notice on the Engineer in accordance with the requirements of Clause 20. The subclause also provides information on what happens after notice is served – the Engineer is required to proceed to determine the claim under Clause 3.5.

There are two important innovations under Clause 2. These are found in subclause 2.4 and 2.5.

Subclause 2.4

Requires the Employer to submit to the contractor reasonable evidence of his financial arrangements to pay the contract price. This requirement is to be completed within 28 days from the date of request for such evidence by the Contractor. It also obligates him to inform the Contractor of any material changes in his financial position that may occur from time to time. This provision has been the subject–matter of a decision by the Privy Council in the case of NH International (Caribbean) Limited v National Insurance Property Development Company Limited (Trinidad and Tobago) [2015] UKPC 37. It will certainly be useful to spend some time to digest this decision and its implications for the interpretation of this clause.

Subclause 2.5

This clause sets up the specific procedure to be followed by Employers when making claims against Contractors. The clause prevents the Employer from setting off any payment due the Contractor without following the Employer claims procedure. The procedure requires the Employer to give notice to the Contractor

International Construction contracts                                                                Topic 3 Part 1: The 1999 FIDIC contracts (Red and Yellow of his claim and to provide particulars of the claims to the Contractor as soon as practicable. The particulars are to include the basis of the claim and substantiation of the amount. Payments due for Electricity, Water and Gas consumed under Subclause4.19, for Employer’s equipment and free issue material under subclause 4.20 and other services are not subject to notice requirement under this subclause.

Following notification to the Employer, the Engineer should then proceed in accordance with subclause 3.5 to obtain an agreement from the parties or to determine:

(a)     The amount (if any) which the Employer is entitled to be paid by the Contractor, and/or

(b)     The extension (if any) of the Defect Notification Period in accordance with subclause 11.3.

The last paragraph of subclause 2.5 provides as follows:

This amount may be included as a deduction in the Contract Price and Payment Certificate. The Employer shall only be entitled to set off against or make any deduction from an amount certified in a payment certificate or to otherwise claim against the contractor, in accordance with thissubclause.

The import of this provision is that Employers cannot make deductions, set-off or withhold payments certified as due to the contractor unless same is done pursuant to the procedure set out under this subclause. In the NH International (Caribbean) Limited case, Mendoca JA, in the Court of Appeal of the Republic of Trinidad and Tobago, had argued that whilst the clause prevents the Employer from setting off any amount certified under a payment certificate, the provision did not preclude the Employer from exercising the right to set-off against amounts not certified. However, the Privy Council disagreed with this interpretation of the subclause and, as part of its discussion of the provision, set out the essence of the Subclause as a whole as follows:

More generally, it seems to the Board [the Privy Council] that the structure of clause 2.5 is such that it applies to any claims which the Employer wishes to raise. First, “any payment under any clause of these Conditions or otherwise in connection with the Contract” are words of very wide scope indeed. Secondly, the clause makes it clear that, if the Employer wishes to raise such a claim, it must do so promptly and in a particularised form: that seems to follow from the linking of the Engineer's role to the notice and particulars. Thirdly, the purpose of the final part of the clause is to emphasise that, where the Employer has failed to raise a claim as required by the earlier part of the clause, the back door of set-off or cross-claims is as firmly shut to it as the front door of an originating claim.

International Construction contracts                                                                Topic 3 Part 1: The 1999 FIDIC contracts (Red and Yellow Clause 3

This relates to the Engineer.

Subclause 3.1

This specifically provides that the Engineer, except where provided for in contract, shall be deemed to act for the Employer. The clause also provides that any restrictions on the power of the Engineer must clearly be specified in Part II of the contract. This would include requirements to obtain approval prior to taking some actions. The inclusion of specific limits on the power of the Engineer in Part II of the contract is to serve as sufficient notice to the Contractor, of the extent and limit of the Engineers powers. The clause also restricts the Employer from unilaterally placing any further restrictions on the power/role of the Engineer.

Subclause 3.4

This provides for the ‘Replacement of the Engineer’. The new provision requires the Employer to inform the Contractor 42 days before the appointment of a new Engineer. The Employer is to furnish the Contractor with the particulars of the intended replacement. The Employer is obligated not to replace the Engineer with a person who the Contractor has reasonable objections to, where such objections are supported with relevant particulars. From our earlier discussions on this subject in the forum in relation to the old FIDIC Red Book, 4th Edition, it is fairly obvious that this provision represents a modification of the position on the Employer’s ability to replace the Engineer under the old book.

Subclause 3.5

This clause deals with the Engineer’s power to determine certain issues that may arise during the contract. The clause requires that the Engineer should consult with the parties towards reaching an agreement on the issue for which determination is sought. Where the attempt to reach an agreement fails, the Engineer is to determine the matter fairly.                                        Such decision is to take into consideration all the circumstances of the issue which is the subject for determination and the relevant terms of the contract. It is important to note that in most jurisdictions, the requirement to determine a matter ‘fairly’ would require the Engineer to be impartial when making his decision.

Clause 4

This deals with the Contractor. The responsibilities of the Contractor follow previous forms. In summary, it is the Contractor’s duty to design any aspects of the works to the extent specified in the contract (the contractors design responsibility should be relatively less than the Employers design responsibility when using the Red Book); his primary duty is to execute and complete the works as required by the contract and in accordance with the instructions of the Engineer. The Contractor is also expected to remedy all defects in the works before handing it over to the Employer. There are, however, some important innovations in the 1999 Red Book, these are:

Subclause 4.1(c)

Thissubclauseprovides that where the Contractor is required todesign any section of the works, it is expected that his design shall meet the standard of being fit for

International Construction contracts                                                                Topic 3 Part 1: The 1999 FIDIC contracts (Red and Yellow purpose. This standard is higher than the more usual standard of applying due professional care and diligence.

Subclause 4.2

This requires the Contractor to provide a performance security to the Employer within 28 days from the date of receiving the letter of Acceptance. The amount and currency of the performancesecurity is to be stated in the Appendix to Tender. The security is to remain valid until all defects in the works have been remedied.

The subclause sets out the specific circumstances under which the Employer may make a claim under the performance security. These include the failure of the contractor to extend the validity of security to cover the periods indicated in the clause, failure by the Contractor to remedy a defect within 42 days of notice to do so, failure to pay sums due to the employer as determined under clause 20.1, or actions that entitle the Employer to terminate under subclause 15.2

Subclause 4.12