FIDIC 2017 Suit of Silver, Yellow and Red books are released. How far they are meeting the long awaiting demands of the FIDIC users has been discussed here in a nutshell.
The International Federation of Consulting Engineers (FIDIC) contract has long been the contract of choice for use on international construction and engineering projects. The FIDIC produced a core 'rainbow suite' of four contracts in 1999:
The new documents are having clearly drafted terms, better balancing of risk between parties, improved project management tools, and a renewed focus on avoiding disputes. The use of the FIDIC internationally in a diverse range of countries has driven many of the changes. How the new FIDIC suit will be welcomed in India is to be seen.
Defined terms:
The 2017 Yellow Book brings greater clarity to the defined terms used throughout the contract. The terms are now listed in alphabetical order, where previously they were grouped by topic. This should make the book more user-friendly, particularly for new users. There has also been an increase in the number of defined terms – for example, the concept of 'reasonable profit' from the 1999 edition (which was open to interpretation) is now defined with the entitlement to recover 'cost plus profit', with the profit element listed as 5% unless otherwise specified in the contract data.
A newly formalised notice procedure will also prevent parties from claiming that a ‘one-liner’ hidden at the bottom of an email to another party should be considered sufficient notice on a particular issue. New FIDIC demands notice shall be prominent and labelled. This will be welcomed as standard of document management and formal correspondence will get prominence in contract management.
The terms 'may' and 'shall' (used extensively throughout the general conditions) have also been defined, and the concept of 'force majeure' has been replaced by 'exceptional event' (although the categorisation of such events remains broadly the same).
2017 suite of contracts:
Under the 2017 Red and Yellow Books, there is a greater emphasis on the role of the Engineer. The Engineer is required to be fluent in the ruling language of the contract, hold suitable qualifications, and act neutrally in his role as mediator between parties when agreeing or determining disputes (although the term ‘neutral’ has not been defined). Similar provisions have also been added to the Silver Book, and the Employer’s representative is now deemed not to act for the Employer when agreeing or determining disputes.
These developments may be less popular in developed countries, where Employers have typically amended the equivalent provisions in the 1999 suite to restrict the authority of the Engineer.
While it is difficult to imagine such attitudes will change, if either party is unhappy after receiving the Engineer’s or Employer’s representative’s decision, the 2017 contracts also allow for the dissatisfied party to give a ‘Notice of Dissatisfaction’ to the other ,arty within 28 days, in order to obtain a dispute adjudication/avoidance board (DAAB) decision. The DAAB itself must now be appointed from the outset and monitor disputes throughout the project, and will have the power to invite the parties to refer any issue in dispute if it becomes aware of it.
The amendments in the 2017 suite of contracts will not make disputes boards more popular. Instead, FIDIC users will likely continue to change the DAAB drafting and opt for the tried and tested approach of negotiation/amicable settlement at first instance, followed by arbitration.
Re-balanced risk:
In addition to narrowing the circumstances for which the contractor may claim an extension of time, the 2017 suite of contracts introduces the concept of concurrent delay, and requires that at the outset, the parties agree how concurrent delay will be dealt with.
The clarity maintained by this new provision, the contractor will have no entitlement to time or cost relief for an Employer delay where the contractor himself is culpable for the delay.
Proof of Delay:
To address the belief that under the 2011 editions, the claims procedure was one-sided, the 2017 contracts make no distinction between how the Employer’s and Contractor’s claims are dealt with. The Employer and Contractor will now both be subject to the same 28-day period, commencing from when they “became aware, or should have become aware of the event or circumstance”. Where the relevant party fails to give notice of its claim within 28 days, the other party will be discharged from any liability in connection with the matter that gives rise to the claim.
Significantly, the term 'notice' has been redefined, such that where the contract requires the service by one party of a notice on the other, such notice must fulfil certain requirements (eg, be in writing and correctly labelled).
Parties will also be required to provide advance warning of potential risks to the project, with the 2017 suite of contracts imposing a mandatory obligation on both parties to notify the other of any event that may affect the completion date, the price or the performance of the project.
It remains to be seen whether these amended provisions will discourage parties from adopting one approach common to disputes, which is to save claims and disputes until the project is nearing or has achieved completion.
Engineers' role:
Greater clarity is given to the role of the engineer. The 2017 Yellow Book specifies that the engineer must be fluent in the ruling language of the contract and must hold suitable qualifications, experience and competence to act as the engineer. The engineer can also appoint an engineer's representative and delegate to him or her, the authority to act on the engineer's behalf. If appointed, the engineer's representative is required to remain on site for the duration of the works. Except for the engineer's role in relation to determinations or agreements regarding claims, as well as issuing notices to the contractor to correct breaches, the engineer can still delegate the discharge of its duties to assistants and must issue a formal notice to the employer and contractor for such delegation to be effective.
A reminder is now included in the drafting that when making a determination, the engineer must 'act neutrally' between the parties and should not be deemed to act for the employer.
In relation to determinations and claims overall, the manner in which the engineer must administer the contract has become more prescriptive in the 2017 Yellow Book and a greater onus is placed on the engineer to administer claims efficiently.
Engineer's determinations:
The procedure for contractor and employer claims is one of the most significant areas of change in the 2017 Yellow Book.
The provisions from the 1999 Yellow Book, which set out separate claims provisions for both the employer and the contractor, have been abolished. In the 2017 Yellow Book, there is a single claims procedure which applies to both employer and contractor.
Notification of claims:
Previously, the 28-day time bar for notification of claims applied only to the contractor (running from the date that the contractor became or should have become aware of the event). This time bar now applies to both parties under the 2017 Yellow Book, such that if the employer wants to make a claim (eg, for a reduction of the contract price or an extension of the defects notification period) it is also subject to the 28-day limitation period. This is unusual and arguably does not reflect the nature of contractor claims under a construction contract as distinct from an employer's entitlements to apply deductions. However, this change reflects practices encountered in the international market.
There is also a requirement for a formal notice to be provided in respect of any claims. To be valid, the notice must describe itself as a 'notice of claim' and refer to the relevant clause, in addition to complying with the other notice requirement in Sub-clause 1.3. This has the effect of bringing greater clarity to the claims process and means that parties will be unable to rely on informal notices (eg, references in emails or meeting minutes). If the engineer considers the notice of claim to be out of time, he or she must duly notify the claiming party within 14 days of receiving the notice or the notice of claim will be deemed valid.
Dealing with Variations:
Under the 2017 Yellow Book, the variations procedure has now been split into two parts. The first is a variation by instruction, whereby the engineer may instruct a variation by giving a notice (which must be in writing and labelled 'variation') to the contractor and the contractor must submit a proposal. This is a significant departure from the 1999 Yellow Book, where the engineer was not obliged to issue variation instructions in writing. This change should result in greater clarity as to when a variation has actually been instructed.
Significantly, if the engineer issues the contractor with a notice which is not labelled as a 'variation', and the contractor considers that it is in fact a variation, the contractor can immediately (before commencing any work) notify the engineer that it considers that a variation has been instructed. If the engineer does not respond either to confirm or revoke the instruction within seven days, the engineer will be deemed to have revoked the instruction. This is an important demonstration of the enhanced contract management role that the engineer has under 2017 Yellow Book.
The second procedure under the 2017 Yellow Book is a variation by request for proposal procedure. This is essentially the same as the variations procedure in the 1999 contract. The engineer may request a proposal prior to instructing a variation by giving a notice to the contractor and the contractor must submit a proposal or give reasons why it can or cannot perform the variation.
Fitness for purpose:
In the 2017 Yellow Book, the fitness for purpose provision (in Sub clause 4.1) now states that:
"When completed, the Works shall be fit for the purpose for which they are intended, as defined as described in the Employer's Requirements (or, where no purpose(s) are so defined and described, fit for their ordinary purpose(s))."
This is a departure from the 1999 Yellow Book, which simply stated that "the Works shall be fit for the purpose for which they are defined in the Contract".
From the employer's perspective, this change poses the question of whether a purpose stated elsewhere in the contract (outside of the employer's requirements), should be disregarded from the perspective of the fitness for purpose warranty. From the contractor's perspective, this amendment means that the contractor's review of the employer's requirements document should be thorough and comprehensive, to ensure that the document makes clear the purpose of the works.
A further significant change introduced by the 2017 Yellow Book is that the fitness for purpose obligation is backed up by an indemnity in Sub-clause 17.4 – the contractor is now required to indemnify the employer for loss suffered by the employer as a result of the works not being fit for purpose (albeit that indirect and consequential losses are excluded from this indemnity).
The inclusion of this indemnity is likely to cause contractors problems, particularly in light of debates about whether and the extent to which the contractor can assume a fitness for purpose obligation on the basis of recent case law.
It remains to be seen how the 2017 suite of contracts will be viewed by employers, contractors and engineers, and the extent to which the changes will be incorporated into contract documents going forward
Adjustment period:
While FIDIC’s intention was to create a simpler contract, the additions to the document have, arguably, made it more complex, and significantly longer – with 126 page-long forms of contract that are nearly double the length of the 1999 versions. As such, many people may stick with their 1999 contracts, at least for a little longer. Given that it is not unusual to encounter FIDIC contracts dating back to 1987, it may be continued for some time before the 1999 contracts lose favour.
Nevertheless, the introduction of a more robust contract management regime, a system of advance warning for potential project risks, and a fairer extension of time/determination regime are welcome developments, and should go some way to convincing FIDIC users to consider moving over to the 2017 suite sooner rather than later.
For Guidance on Construction Contract Management CLICK HERE
- the Red Book (building and engineering works);
- the Yellow Book (plant and design build);
- the Silver Book (engineering, procurement and construction and turnkey projects); and
- the Green Book (short form contract).
The new documents are having clearly drafted terms, better balancing of risk between parties, improved project management tools, and a renewed focus on avoiding disputes. The use of the FIDIC internationally in a diverse range of countries has driven many of the changes. How the new FIDIC suit will be welcomed in India is to be seen.
Defined terms:
The 2017 Yellow Book brings greater clarity to the defined terms used throughout the contract. The terms are now listed in alphabetical order, where previously they were grouped by topic. This should make the book more user-friendly, particularly for new users. There has also been an increase in the number of defined terms – for example, the concept of 'reasonable profit' from the 1999 edition (which was open to interpretation) is now defined with the entitlement to recover 'cost plus profit', with the profit element listed as 5% unless otherwise specified in the contract data.
A newly formalised notice procedure will also prevent parties from claiming that a ‘one-liner’ hidden at the bottom of an email to another party should be considered sufficient notice on a particular issue. New FIDIC demands notice shall be prominent and labelled. This will be welcomed as standard of document management and formal correspondence will get prominence in contract management.
The terms 'may' and 'shall' (used extensively throughout the general conditions) have also been defined, and the concept of 'force majeure' has been replaced by 'exceptional event' (although the categorisation of such events remains broadly the same).
2017 suite of contracts:
Under the 2017 Red and Yellow Books, there is a greater emphasis on the role of the Engineer. The Engineer is required to be fluent in the ruling language of the contract, hold suitable qualifications, and act neutrally in his role as mediator between parties when agreeing or determining disputes (although the term ‘neutral’ has not been defined). Similar provisions have also been added to the Silver Book, and the Employer’s representative is now deemed not to act for the Employer when agreeing or determining disputes.
These developments may be less popular in developed countries, where Employers have typically amended the equivalent provisions in the 1999 suite to restrict the authority of the Engineer.
While it is difficult to imagine such attitudes will change, if either party is unhappy after receiving the Engineer’s or Employer’s representative’s decision, the 2017 contracts also allow for the dissatisfied party to give a ‘Notice of Dissatisfaction’ to the other ,arty within 28 days, in order to obtain a dispute adjudication/avoidance board (DAAB) decision. The DAAB itself must now be appointed from the outset and monitor disputes throughout the project, and will have the power to invite the parties to refer any issue in dispute if it becomes aware of it.
The amendments in the 2017 suite of contracts will not make disputes boards more popular. Instead, FIDIC users will likely continue to change the DAAB drafting and opt for the tried and tested approach of negotiation/amicable settlement at first instance, followed by arbitration.
Re-balanced risk:
In addition to narrowing the circumstances for which the contractor may claim an extension of time, the 2017 suite of contracts introduces the concept of concurrent delay, and requires that at the outset, the parties agree how concurrent delay will be dealt with.
The clarity maintained by this new provision, the contractor will have no entitlement to time or cost relief for an Employer delay where the contractor himself is culpable for the delay.
Proof of Delay:
To address the belief that under the 2011 editions, the claims procedure was one-sided, the 2017 contracts make no distinction between how the Employer’s and Contractor’s claims are dealt with. The Employer and Contractor will now both be subject to the same 28-day period, commencing from when they “became aware, or should have become aware of the event or circumstance”. Where the relevant party fails to give notice of its claim within 28 days, the other party will be discharged from any liability in connection with the matter that gives rise to the claim.
Significantly, the term 'notice' has been redefined, such that where the contract requires the service by one party of a notice on the other, such notice must fulfil certain requirements (eg, be in writing and correctly labelled).
Parties will also be required to provide advance warning of potential risks to the project, with the 2017 suite of contracts imposing a mandatory obligation on both parties to notify the other of any event that may affect the completion date, the price or the performance of the project.
It remains to be seen whether these amended provisions will discourage parties from adopting one approach common to disputes, which is to save claims and disputes until the project is nearing or has achieved completion.
Engineers' role:
Greater clarity is given to the role of the engineer. The 2017 Yellow Book specifies that the engineer must be fluent in the ruling language of the contract and must hold suitable qualifications, experience and competence to act as the engineer. The engineer can also appoint an engineer's representative and delegate to him or her, the authority to act on the engineer's behalf. If appointed, the engineer's representative is required to remain on site for the duration of the works. Except for the engineer's role in relation to determinations or agreements regarding claims, as well as issuing notices to the contractor to correct breaches, the engineer can still delegate the discharge of its duties to assistants and must issue a formal notice to the employer and contractor for such delegation to be effective.
A reminder is now included in the drafting that when making a determination, the engineer must 'act neutrally' between the parties and should not be deemed to act for the employer.
In relation to determinations and claims overall, the manner in which the engineer must administer the contract has become more prescriptive in the 2017 Yellow Book and a greater onus is placed on the engineer to administer claims efficiently.
Engineer's determinations:
The procedure for contractor and employer claims is one of the most significant areas of change in the 2017 Yellow Book.
The provisions from the 1999 Yellow Book, which set out separate claims provisions for both the employer and the contractor, have been abolished. In the 2017 Yellow Book, there is a single claims procedure which applies to both employer and contractor.
Notification of claims:
Previously, the 28-day time bar for notification of claims applied only to the contractor (running from the date that the contractor became or should have become aware of the event). This time bar now applies to both parties under the 2017 Yellow Book, such that if the employer wants to make a claim (eg, for a reduction of the contract price or an extension of the defects notification period) it is also subject to the 28-day limitation period. This is unusual and arguably does not reflect the nature of contractor claims under a construction contract as distinct from an employer's entitlements to apply deductions. However, this change reflects practices encountered in the international market.
There is also a requirement for a formal notice to be provided in respect of any claims. To be valid, the notice must describe itself as a 'notice of claim' and refer to the relevant clause, in addition to complying with the other notice requirement in Sub-clause 1.3. This has the effect of bringing greater clarity to the claims process and means that parties will be unable to rely on informal notices (eg, references in emails or meeting minutes). If the engineer considers the notice of claim to be out of time, he or she must duly notify the claiming party within 14 days of receiving the notice or the notice of claim will be deemed valid.
Dealing with Variations:
Under the 2017 Yellow Book, the variations procedure has now been split into two parts. The first is a variation by instruction, whereby the engineer may instruct a variation by giving a notice (which must be in writing and labelled 'variation') to the contractor and the contractor must submit a proposal. This is a significant departure from the 1999 Yellow Book, where the engineer was not obliged to issue variation instructions in writing. This change should result in greater clarity as to when a variation has actually been instructed.
Significantly, if the engineer issues the contractor with a notice which is not labelled as a 'variation', and the contractor considers that it is in fact a variation, the contractor can immediately (before commencing any work) notify the engineer that it considers that a variation has been instructed. If the engineer does not respond either to confirm or revoke the instruction within seven days, the engineer will be deemed to have revoked the instruction. This is an important demonstration of the enhanced contract management role that the engineer has under 2017 Yellow Book.
The second procedure under the 2017 Yellow Book is a variation by request for proposal procedure. This is essentially the same as the variations procedure in the 1999 contract. The engineer may request a proposal prior to instructing a variation by giving a notice to the contractor and the contractor must submit a proposal or give reasons why it can or cannot perform the variation.
Fitness for purpose:
In the 2017 Yellow Book, the fitness for purpose provision (in Sub clause 4.1) now states that:
"When completed, the Works shall be fit for the purpose for which they are intended, as defined as described in the Employer's Requirements (or, where no purpose(s) are so defined and described, fit for their ordinary purpose(s))."
This is a departure from the 1999 Yellow Book, which simply stated that "the Works shall be fit for the purpose for which they are defined in the Contract".
From the employer's perspective, this change poses the question of whether a purpose stated elsewhere in the contract (outside of the employer's requirements), should be disregarded from the perspective of the fitness for purpose warranty. From the contractor's perspective, this amendment means that the contractor's review of the employer's requirements document should be thorough and comprehensive, to ensure that the document makes clear the purpose of the works.
A further significant change introduced by the 2017 Yellow Book is that the fitness for purpose obligation is backed up by an indemnity in Sub-clause 17.4 – the contractor is now required to indemnify the employer for loss suffered by the employer as a result of the works not being fit for purpose (albeit that indirect and consequential losses are excluded from this indemnity).
The inclusion of this indemnity is likely to cause contractors problems, particularly in light of debates about whether and the extent to which the contractor can assume a fitness for purpose obligation on the basis of recent case law.
It remains to be seen how the 2017 suite of contracts will be viewed by employers, contractors and engineers, and the extent to which the changes will be incorporated into contract documents going forward
Adjustment period:
While FIDIC’s intention was to create a simpler contract, the additions to the document have, arguably, made it more complex, and significantly longer – with 126 page-long forms of contract that are nearly double the length of the 1999 versions. As such, many people may stick with their 1999 contracts, at least for a little longer. Given that it is not unusual to encounter FIDIC contracts dating back to 1987, it may be continued for some time before the 1999 contracts lose favour.
Nevertheless, the introduction of a more robust contract management regime, a system of advance warning for potential project risks, and a fairer extension of time/determination regime are welcome developments, and should go some way to convincing FIDIC users to consider moving over to the 2017 suite sooner rather than later.
For Guidance on Construction Contract Management CLICK HERE