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14 May 2018
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:
In December 2017 the FIDIC Contracts Committee unveiled the much-anticipated new suite of rainbow contracts, with the publication of amended Red, Yellow and Silver Books. The last update to these contracts was 18 years ago and the revisions to these contracts have been the subject of significant discussion and debate in the construction industry. This update focuses on some of the main changes to the Yellow Book, many of which are also reflected in the revised Red and Silver Books.
The revisions introduced in the 2017 Yellow Book are extensive and affect employers, contractors and engineers. The Yellow Book General Conditions now run to 108 pages (previously 63 pages) and many clauses have been completely re-drafted. The use of the FIDIC internationally in a diverse range of countries has driven many of the changes, which are aimed at improving contracting practices across the globe. However, for this reason, many of the changes may appear unnecessary or unhelpful to some users (eg, how certain terms are defined).
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.
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(used extensively throughout the general conditions) have also been defined, and the concept of 'force majeure' has been replaced by 'exceptional event' (although the categorisation of such events remains broadly the same).
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). This has been included to ensure that informal notices (eg, by email) will no longer constitute validly served notices under the contract.
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.
Claims and 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, has been abolished. In the 2017 Yellow Book, there is a single claims procedure which applies to both employer and contractor.
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.
The time periods for claims has become more prescriptive. The claiming party must submit a notice of claim within 28 days of the circumstance giving rise to the claim. Thereafter, a fully detailed claim must be submitted within 84 days (under the 1999 Yellow Book this was 42 days) and which include:
If fully detailed particulars are not provided within the 84-day period, the notice of claim will lapses and no longer be valid.
Under the 2017 Yellow Book, the engineer has a significantly expanded role in determining claims and disputes and in encouraging greater collaboration between the parties. Where the engineer is required to determine any matter or claim, the engineer must consult with both parties and encourage them to reach agreement within 42 days. If no agreement is reached within the 42-day period, the engineer has a further 42 days to make a 'fair' determination on the matter or claim. If the engineer fails to make a determination within this period, the claim will be deemed to be rejected.
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 Subclause 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.
Dispute adjudication/avoidance board
The new Clause 21 in the 2017 Yellow Book requires the parties to jointly appoint a dispute adjudication/avoidance board at the start of the contract, which must visit the site on a regular basis and will remain in place for the duration of the contract to assist the parties in the avoidance of disputes and in the 'real-time' resolution of disputes, if and when they arise.
The changes reflect only some of the key amendments introduced by the revised 2017 FIDIC contracts. Nevertheless, these changes are significant and it will undoubtedly take time for contracting parties to become familiar with the revised contracts. The revisions are intended to bring greater clarity to the contracts and to encourage increased collaboration between the parties, albeit that it is possible that the more prescriptive nature of many of the provisions may result in a greater burden on the parties in administering the contract.
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.
For further information on this topic please contact Niav O'Higgins, Karen Killoran or Niamh McGovern at Arthur Cox by telephone (+353 1 618 0000) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Arthur Cox website can be accessed at www.arthurcox.com.
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