Protecting your interests and profit margin under the revised FIDIC Contracts

Protecting your interests and profit margin under the revised FIDIC Contracts

The FIDIC Conditions of Contract are among the most commonly used standard form contracts for the procurement of major infrastructure projects worldwide, particularly in emerging markets. Among the broader suite of contracts produced by FIDIC are the Conditions of Contract for EPC/Turnkey Projects, Plant Design Build and Construction. These contracts, released by FIDIC in 1999 (First Editions), are commonly referred to as the Silver, Yellow and Red Books respectively.
In December 2017, revised forms of the Silver, Yellow and Red Books were released for the first time (Second Editions). The changes in the Second Editions are intended to increase clarity, transparency and certainty, emphasise dispute avoidance, improve balance and equivalence between the parties (as well as reflect market practice by incorporating market standard revisions made to the First Editions over the intervening eighteen years). As a result of the changes, the Second Editions are considerably longer than the First Editions, and following the trend of other construction industry standard form contracts (such as the NEC) now lend themselves more naturally for use as contract administration bibles. FIDIC’s Dispute Adjudication Board (DAB) has also been reincarnated as the Dispute Avoidance/Adjudication Board (DAAB) with parties not only able to request assistance from the standing DAAB to attempt to resolve issues that have arisen, but the DAAB also able to invite Parties to request its assistance if the DAAB becomes aware of issues.

By adopting the Second Editions in the form proposed by FIDIC, it is hoped parties might mitigate the most common causes of disputes on construction projects. According to Arcadis’ Global Construction Disputes Report 2018, failure to properly administer the contract, poorly drafted or incomplete/unsubstantiated claims and parties’ failure to understand and/or comply with contractual obligations remain the leading causes of disputes on infrastructure projects globally. While on the whole parties might consider the changes in the Second Editions as balanced as between the parties, there are aspects of the contract forms that Contractors and Employers (and indeed Lenders) will seek to revise.

Contractors may seek to remove the fitness for purpose warranty savings provision, as well as the indemnity to be provided in respect of such warranty, both now included in the Second Editions. The savings provision provides that if the purpose of the Works is not specified in the contract, the Works will be fit for their ordinary purpose. Due to insurance concerns and the higher standard imposed under a fitness for purpose warranty as compared with the professional standard of care applied to the work of architects and engineers, fitness for purpose warranties tend to be difficult provisions to negotiate. Contractors may also push back on the new right for Employers to capture cost savings from any changes in law and the right of Employers to terminate for convenience notwithstanding Contractors’ entitlements to lost profits and other damages.

Employers and lenders will want to see deeming provisions watered down, reference dates for Contractor claims entitlements due to changed circumstances tied to the contract execution date (or otherwise aligned with relief entitlements under upstream contracts), and critically, the newly inserted time bar on Employer’s entitlement to bring a claim and the purportedly non-binding matters for Engineer/Employer’s Representative consideration when making a decision on an ostensibly time barred claim, deleted. Lenders will see these points as adversely impacting the bankability of a project.

The Second Editions impose additional programming and administrative requirements on both parties with an enlarged role for the Engineer/Employer’s Representative. Depending on the value and complexity of the project, parties may continue using the First Editions as an alternative to avoid the greater costs of administering the Second Editions. We expect parties to cherry-pick provisions from both editions to suit their interests and reflect market standard practice.

Bree Miechel, Partner, Reed Smith; Laura Riddeck, Senior Associate, Reed Smith