Managing Your FIDIC Contract

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Managing your FIDIC ContractICE United Arab Emirates – Learned Event

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SpeakerProf. Nicholas GouldPartner, Fenwick Elliott LLPVisiting Professor, King’s College London

ICE Learned EventManaging your FIDIC ContractProf. Nicholas Gould, Partner, Fenwick Elliott LLP

FIDIC Suite of Contracts Red Book 1999 – Conditions of Contract for Construction forBuilding and Engineering Works Designed by the Employer (firstEd 1999). Yellow Book 1999 – Conditions of Contract for Plant and DesignBuild, for Electrical and Mechanical Plant, and for Building andEngineering Works Designed by the Contractor (first Ed 1999). Silver Book 1999 – Conditions of Contract for EPC/Turn KeyProjects (first Ed 1999). Green Book 1999 – Short form of Contract (first Ed 1999).

FIDIC Suite Expanded Blue/Green Book “Dredging Form” – Form of Contract forDredging and Reclamation Works (first Ed 2006). Gold Book – Conditions of Contract for Design Building andOperate Projects (first Ed 2008). Pink Book “MDB Form” - Conditions of Contract forConstruction (Multilateral Development Bank HarmonisedEdition) for Building and Engineer Works Designed by theEmployer (Second Ed, 2006 and Third Ed 2010). Red Book Subcontractor – Conditions of Subcontractor forConstruction for Building and Engineering Works Designed bythe Employer (first Ed 2011).

Current FIDIC Agreements White Book – Client – Consultant Module ServicesAgreement (fourth Ed 2006). Sub-Consultancy Agreement (first Ed 1992). JV (Consortium) Agreement (first Ed 1999). Note this isfor a Consultant JV not a Contractor’s JV. Module Representative Agreement (first Ed 2013).

FIDIC Guidance and Published Amendments FIDIC Contract Guidance 1999. FIDIC Guidance Memorandum to Users of the 1999Conditions of Contract (1 April 2013).

Sequence of principle events under the FIDICContracts

Risk Allocation Unforeseeable ground conditions.Setting out.Design liability.Errors in the Employer’s Requirements.

Unforeseeable Physical Conditions FIDIC Red Book Sub-Clause 4.12 (Yellow Book is the same):“Physical Conditions means natural Physical Conditions and man made andother physical obstructions and pollutants, which the Contractor encountersat the Site when executing the Works, including sub-surface andhydrological conditions but excluding climatic conditions”. The Contractor gives notice to the Engineer as soon as practicable. The Contractor must also issue a Sub-Clause 20.1 Notice in so far as an EoTand/or additional costs are claimed. The Contractor is to proceed in accordance with the Sub-Clause 3.5[Determinations]. The Engineer may consider and review whether the physical conditions aresimilar or more favourable than could reasonably have been foreseen when theContractor submitted the Tender. If so a reduction could be determined.However, there should be no net reduction in the Contract Price.

Unforeseeable Physical Conditions (Cont.) Gold Book – same as Red/Yellow except notice is given to the Employer’sRepresentative. Silver Book – is quite different: The Contractor is deemed to have obtained all necessary information as tothe risks, contingencies and other circumstances which may influence oraffect the Works; The Contractor accepts total responsibility for having foreseen all difficultiesin costs successfully completing the Works; and The Contract Price shall not be adjusted to take account of any unforeseendifficulties or costs.

Setting out information FIDIC Red Book – Sub-Clause 4.7 Setting Out: The Contractor sets out the Works based on the “points, lines and levelsspecified” in the Contract or notified by the Engineer. The Contractor is responsible for any error in the setting out. The Employer is responsible for any errors in the specified or notifiedreference and items, but the Contractor is to use reasonable efforts to verifytheir accuracy. If the Contractor suffers delay or cost because “an experienced Contractorwould not reasonably have discovered such error and avoided this delayand/or cost” the Contractor must give a Sub-Clause 4.7 Notice and onceagain the usual Sub0-Clause 20.1 Notice. The Engineer is to issue a Sub-Clause 3.5 Determination.

Setting Out Information (Cont.) FIDIC Silver Book – Clause 4.7:“The Contractor shall set out the Works in relation to the original points, linesand levels of reference specified in the Contract. The Contractor shall beresponsible for the correct positioning of all parts of the Works, and shallrectify any error in the positions, levels, dimensions or alignment of theWorks”.

Design LiabilityFIDIC Yellow Book – Sub-Clause 5.1 General Design Obligations: The Contractor is to carry out and be responsible for the design of the Works as ifprepared by qualified Engineers who comply with any criteria set out in theEmployer’s Requirements. The Contractor warrants that the designers and design subcontractors haveexperience and the capability for the design. The Contractor is to give notice to the Engineer of any error, fault or other defectfound in the Employer’s Requirements. The Engineer then determines whether a Sub-Clause 13 [Variations andAdjustments] is required by considering if an experienced Contractor exercisingdue care would have discovered the error, fault or other defect when examiningthe Site or the ERs before submitting the Tender.

FIDIC Silver BookFIDIC Silver Book – Sub-Clause 5.1:“The Contractor shall be deemed to have scrutinised, prior to the BaseDate, the Employer’s Requirements (including design criteria andcalculations, if any). The Contractor shall be responsible for the design ofthe Works and for the accuracy of such Employer’s Requirements(including design criteria and calculations), except as stated below. TheEmployer shall not be responsible for any error, inaccuracy or omission ofany kind in the Employer’s Requirements as originally included in theContract and shall not be deemed to have given any representation ofaccuracy or completeness of any data or information, except as statedbelow. Any data or information received by the Contractor, from theEmployer or otherwise, shall not relieve the Contractor from hisresponsibility for the design and execution of the Works.

FIDIC Silver Book (Cont.)However, the Employer shall be responsible for the correctness of the followingportions of the Employer’s Requirements and of the following data andinformation provided by (or on behalf of) the Employer:(a)(b)(c)(d)Portions, data and information which are stated in the Contract as beingimmutable or the responsibility of the Employer.Definitions of intended purposes of the Works or any part thereof.Criteria for the testing and performance of the Completed Works, andPortions, data and information which cannot be verified by the Contractor,except as otherwise stated in the Contract.”

The Role of the Engineer andEmployer’s Representative Red and Yellow Book:“Engineer means the person appointed by the Employer to act asthe Engineer for the purposes of the Contract ” Silver Book (Sub-Clause 1.1.2.4):“Employer’s Representative means the person named by theEmployer in the Contract or appointed from time to time whoacts on behalf of the Employer ” Gold Book – Employer’s Representative (Sub-Clause 1.1.35).

The Engineer – under the Red Book (Clause 3) The Engineer is appointed to carry out the role and duties of the Engineerassigned to him under the Contract. The Engineer cannot amend the terms of the Contract. If the Engineer exercises any authority for which the Employer’s approval isrequired then deemed approval has been given. The Engineer may delegate to suitably qualified assistants. Instructions – the Engineer can issue instructions to the Contractor at any timeincluding additional or modified drawings necessary for the execution of theWorks. The Contractor must comply, and may only take instructions from theEngineer or a delegated assistant with the appropriate authority. If an instruction is a Variation then Clause 13 [Variations and Adjustments]applies. If the Employer wants to replace the Engineer, then the Employer is to give theContractor 42 days’ notice before the intended date of replacement identifying thereplacement Engineer. The Contractor may raise reasonable objections (SubClause 3.4).

The Engineer – Red Book Sub-Clause 3.5 A Sub-Clause 3.5 Determination requires the Engineer to: Consult with each Party “in an endeavour to reach agreement”; In the absence of agreement make a fair determination in accordancewith the Contract; Give notice to both Parties of each agreement or determination togetherwith supporting particulars; The Parties are bound by any agreement or determination until revisedunder Clause 20 [Claims, disputes and Arbitration].

Employer’s Obligations Possession (Sub-Clause 2.1): Shall give access to the site; Possession might not be exclusive; As may be required in order to comply with the SubClause 8.3 programme. Assist the Contractor to obtain permits, licences orapprovals (Sub-Clause 2.2). Ensure its employee’s co-operate (Sub-Clause 2.3) Provide “reasonable evidence” of financial arrangements(Sub-Clause 2.4). Give notice to the Contractor of any claims (Sub-clause2.5).

Sub-Clause 2.4 Contractor can request at any time:“ reasonable evidence that financial arrangements have been madeand are being maintained which will enable the Employer to pay theContractor Price (as estimated at that time) in accordance with Clause 14[Contractor Price and Payment]” Employer must provide “reasonable evidence”. Contractor may suspend work on 21 days notice if reasonable evidence isnot provided within 28 days (Sub-Clause 16.1). Contractor is entitled to an EOT and payment of Costs incurred plus profit(Sub-Clause 16.1, 4th paragraph). Must recommence work “as soon as reasonably practical” once reasonableevidence is provided. Contractor may terminate on 14 days notice if “reasonable evidence” is notprovided within 42 days from the clause 16.1 notice (Sub-Clause 16.2 (a)).

Sub-Clause 2.4 continued On termination (Sub-Clause 16.4 and Sub-Clause 19.6): Performance security returned; Employer must pay for work done; Employer to pay for costs or liabilities “reasonablyincurred by the Contractor in the expectation ofcompleting the Works”; Employer to pay demobilisation costs; and Employer to pay loss of profit or other loss or damagecaused by the termination.

NH International (Caribbean) Limited v NationalInsurance Property Development Company Construction of a public hospital in Tobago. Arbitration, Trinidad & Tobago High Court, Court of Appeal and then PrivyCounsel, London. Chronology: 3rd September 2014 – 2.4 request issued 29th December 2004 – project administration unit, Ministry of Health,issued letter stating the Cabinet approved additional funding for theproject of TT 59.1 million 28th April 2005 – Further 2.4 request made 23rd June 2005 – Contractor reduces rate of work 5th July 2005 – Permanent Secretary, Ministry of Health issues letterestimating final costs of TT 286,992,070 stating that “withoutprejudice that funds are available in sum to meet the final cost tocompletion” 8th July 2005 – Contractor queries meaning of “without prejudice”.Has Cabinet approved funding?

NH International (Caribbean) Limited v NationalInsurance Property Development Company Continued. 23rd September 2005 – Contractor suspends work 19th October 2006 – New Permanent Secretary writes stating: Project is of the highest priority The current estimated value of the work is TT 224,129,801.99 Funds are available from the consolidated fund to pay theEmployer, for onward payment to the Contractor Money certified will be paid by the Government Government stands fully behind the project and will meet thecontractual financial requirements for completion 27th October 2006 – Contractor requests confirmation thatCabinet has approved the funds 3rd November 2006 – Contractor issued notice of terminationunder clause 16.2

Decision in Arbitration Arbitrator concluded that evidence had not been provided, soContractor entitled to terminate This was based on evidence that funding for Governmentprojects in Trinidad required cabinet approval As a result “reasonable evidence” should for Trinidad includesome evidence of cabinet approval Even though the cabinet had approved funding, sufficientreasonable evidence had not been provided to the contractor

Court, Trinidad & Tobago High Court - Approved the arbitrators award Court of Appeal - Reversed the decision at first instance CA considered that the errors included: A written assurance from the Government should not havebeen disregarded Direct mandate from the Government was reasonableevidence Cabinet approval would have been the best evidence, butthe assurance came from a relevant person within theGovernment (the Permanent Secretary) and that wassufficient.

Court of Appeal, Trinidad & Tobago The test in relation to “reasonable evidence” is an objectiveone. You do not have to meet the Contractor’s subjectiveexpectations The Sub-Clause 2.4 notice might have lapsed by the timethe contract was terminated (noted by the court but notargued by the parties) Arbitrator was wrong (error in law) in holding the Employerto the higher sum of TT 286 million when the Engineer hadcertified only TT 224 million

NH International – Privy Counsel Decision Arbitrator’s award was partially upheld. No error of law. The arbitrator had jurisdiction to consider what“reasonable evidence” was and this was a question of fact notlaw. The court should not intervene in an arbitrator’sconsideration of the facts. The Court of Appeal had in reality considered that the arbitratorhad applied a higher standard in relation to “reasonableevidence”. The court must not replace the arbitrator’s judgment. The Privy Counsel did give some guidance, by approving someof the Court of Appeal’s analysis: A relevant consideration is the wealth and financial ability ofthe Employer to pay the contract price; Permanent Secretary assurances in writing are reasonableevidence. Reasonable evidence needed only to relate to theprobably assessed contract sum, not a higher figureproposed by the Contractor.

Ramifications of NH International Will Employers delete Sub-Clause 2.4? Could Sub-Clause 2.4 be further clarified to identify the meaningof reasonable evidence and how the contract price is to beascertained at the particular point of time for the purposes ofreasonable evidence. Is 28 days enough for an Employer? Are repeated requests from a contractor unreasonable? Must the contractor suspend and terminate promptly inaccordance with the clause in case the notice is lapsed? How does one objectively asses the documentation provided bythe employer? What sources of finance might be available in the public domainthat could inform both parties about the financial arrangements?

Clause 2.5 – Employer Claims Employer considers himself to be entitled to payment “under or inconnection with the Contract” Employer or Engineer shall give notice and “particulars” to theContractor Notice is not required for payments in relation to electricity, water, gas,employers equipment, free issue materials or services requested by thecontractor (Sub-Clause 4.19 & Sub-Clause 4.20) Notice to be given, as soon as practical after the Employer becameaware of the event or circumstances given rise to the claim. Notice extending the defects notifications period must be given beforethe expiry of that period “Particulars” must specify the clause or other basis of the claim andshould include substantiation of the amount and extension to which theEmployer considers himself entitled

Clause 2.5 – Employer Claims Continued Engineer shall proceed in accordance with Sub-Clause 3.5[Determination] Amount may be deducted from the contract price and paymentcertificates, but Employer can only set off if Sub-Clause 2.5mechanism is followed

NH International Arbitration – Sub-Clause 2.5 is not a condition precedent T&T High Court and Court of Appeal – agrees Privy Counsel – overturns – Sub-Clause 2.5 is a conditionprecedent

NH International – Sub-Clause 2.5, Privy Counsel Any claims which the employer wishes to raise (whether they areto be relied on as set offs or cross claims) are not to be allowedunless they are subject to Sub-Clause 2.5 notice. The notice must be given as soon as practicable. Failure to serve a notice might not prevent a claim in abatement(i.e. one that reduces the price due because of the defective orbadly completed nature of the work). Note that a notice inrelation to abatement is probably still required before completionof the defects notification period. Employer’s claims that have not been notified under Sub-Clause2.5 “must be disallowed” unless they are true abatement claims. Notification of Employer’s claims is a condition precedent torecovery and/or set off. The notice must be particularised when it is issued.

Sub-Clause 2.5 - Ramifications Note the time barring nature of Sub-Clause 2.5. Employers and in particular the Engineer must review any claimsand issue Sub-Clause 2.5 notices as soon as possible. If indoubt a notice should be issued. Employers now need to behave like Contractors in relation toSub-Clause 20.1 and issue notices, and manage claims andadjustments to the Contract Price as the work proceeds Delete Clause 2.5? Amend Sub-Clause 2.5 – state that it is not a conditionprecedent to recovery? Amend Sub-Clause 2.5 – identify time periods? Amend Sub-Clause 2.5 – set out what particulars are required,perhaps giving a longer period for their submission?

Contractor’s Obligations – Sub-Clause 4“the Contractor shall design (to the extents specifiedin the Contract), execute and complete the Works inaccordance with the Contract and with the Engineersinstructions, and shall remedy any defects in theWorks.” (Sub-Clause 4.1). Deliver performance security to the Employer within 28days of the Letter of Acceptance (Sub-Clause 4.2). Extend the performance certificate until the works havebeen completed or defects remedied. Appoint a contractor’s representative and give themauthority (Sub-Clause 4.3).

Contractor’s Obligations Continued Not subcontract the whole of the works (Sub-Clause 4.4). Obtainprior consent from the engineer for subcontractors, and notify theengineer not less than 28 days before the commencement of thesubcontractor. All subcontractors should include assignmentprovisions in the event of termination. Cooperate with the Engineer (Sub-Clause 4.6). Deemed to be satisfied as to the sufficiency of the acceptedcontract amount (Sub-Clause 4.11). Deemed to be satisfied as to the suitability and availability of theaccess to the site (sub-Clause 4.15). Be responsible for all power, water and other services for theworks (Sub-Clause 4.19). Issue detailed progress reports (Sub-Clause 4.21). Keep unauthorised persons off the site (Sub-Clause 4.22).

Commencement, EOT and Programme Engineer gives contractor 7 days notice of thecommencement date (Sub-Clause 8.1) within 42 daysafter the Letter of Acceptance. Complete by the Time for Completion including passingany Tests on Completion and completing all of the work inthe contract (for any section as necessary). Delay caused by authorities – if Contractor diligentlyfollows procedures laid down by authorities then any delayor disruption is unforeseeable may be claimed (SubClause 8.5). If the rate of progress is slow, the engineer may instructthe Contractor to submit a revised programme to expediteprogress and complete within the Time for Completion.

Commencement, EOT and ProgrammeContinued Delay damages – for failure to complete by the Time forCompletion. May be subject to a maximum amount

Yellow Book 1999 – Conditions of Contract for Plant and Design Build, for Electrical and Mechanical Plant, and for Building and Engineering Works Designed by the Contractor (first Ed 1999). Silver Book 1999 – Conditions of Contract for EPC/Turn Key Projects (first Ed 1999). Green Book 1999 –

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