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The Guide to Construction Arbitration - Second Edition

Change and Continuity: the FIDIC 2017 Red and Yellow Book Amendments

Introduction

After a substantial period of consultation and a fair degree of speculation within the industry, the new editions of the FIDIC Red, Yellow and Silver Books were issued on 5 December 2017 and include significant amendments to the 1999 suite. The FIDIC Suite is a truly international set of engineering standard forms, used across a wide range of sectors and preferred by an impressive range of stake holders often in the largest and most challenging projects. As a set of contracting forms that are prepared predominantly by engineers, the construction industry and the arbitration community were keen to see how far the amendments reflected the challenges within major projects.

FIDIC's reasons for amending the contracts included the following:

  • to 'reinforce the role of the engineer';
  • to achieve 'clarity, transparency and certainty'; and
  • to address 'issues raised by users over the past 17 years arising out of the use of the 1999 Suite'.

This chapter considers some of the changes to the Red and Yellow Books that strike the author, as a disputes lawyer, as being of potentially greatest significance.

The question 'Will people use the 2017 amended forms?' is a legitimate one. Within standard form contracts, there is always a tension between the attraction of contracts whose use has become familiar and whose provisions are well-trodden, and the desirability of changes that reflect, or seek to reflect, emerging consensus within user groups, and also seek to reflect the realities of modern international contracting. The 2017 FIDIC Suite contains contracts that are noticeably more voluminous and, on certain subjects, far more detailed and prescriptive. This is part of a trend, perhaps driven by other contracting forms,2 towards greater detail within express terms regarding the manner in which essential obligations are to be formed. The increased role for the engineer is interesting, certainly in the UK context, given the extent to which the traditional view of the certifier as holding the balance between the contracting parties has been subject to a degree of judicial scepticism.3 Again, the great focus on dispute avoidance and adjudication boards (DAABs) is laudable, and the careful drafting is impressive; but the extent to which these detailed provisions – emphasising the valuable role to be played by dispute boards – will be widely embraced on the international scene, is open to doubt. Questions of recognition and enforcement of the decisions of dispute boards remain a major challenge to the use of this sort of machinery in many of the jurisdictions where major projects occur, and where the contracting environment is most vibrant. If parties cannot be assured that decisions of a dispute board will be recognised within the particular jurisdiction, the provisions are likely to be deleted wholesale.

Notices

The notice provisions have been substantially reworked and the number of notice requirements have increased considerably. For example, notice requirements now appear in approximately 80 places in the 2017 Red Book.

'Notice' is now a defined term at Sub-Clause 1.1.56:

A written communication identified as a Notice and issued in accordance with Sub-Clause 1.3.

Sub-Clause 1.3(a) requires a notice to be a paper-original, signed by the contractor's representative, the engineer or the authorised representative of the employer, or an electronic original generated from any of the systems of electronic transmission stated in the contract data.

Sub-Clause 1.3(b) draws a distinction between a notice and another form of communication. A notice need not refer to the clause under which it is issued, whereas another form of communication must do so.

However, it is important to bear in mind that a notice given under certain clauses must state that it is given under the relevant clause, for example, Sub-Clauses 15.2.1 (Termination for Contractor's Default: Notice), 15.5 (Termination for Employer's Convenience), 16.1 (Suspension by Contractor) and 16.2.1 (Termination by Contractor Notice).

Sub-Clause 1.3 also introduces the requirement that all notices and other types of communication shall 'not be unreasonably withheld or delayed'.

The purpose of these additions appears to be to reduce disputes as to what constitutes a notice and to facilitate a better claims procedure.

The enhanced role of the engineer

Under Sub-Clause 3.1, an engineer:

  • may now be a legal entity rather than an individual;
  • must be a professional engineer with suitable qualifications, experience and competence; and
  • must be fluent in the language of the contract.

Under Sub-Clause 3.2, if an engineer exercises a specified authority for which the employer's consent is required, then (for the purposes of the contract), such consent is deemed to have been given. Sub-Clause 3.3 provides an engineer with the ability to appoint an 'engineer's representative' and to delegate to them the authority necessary to act on the engineer's behalf at the site. The engineer's representative is to be based at the site for the whole time that the works are being executed.

Sub-Clause 3.7, formerly 3.5, has been substantially extended and is now headed 'Agreement or Determination', reflecting the fact that the engineer is under a positive obligation to encourage agreement of the claims.

Sub-Clause 3.7 begins by stating that when making a determination, the engineer shall act 'neutrally' and 'shall not be deemed to act for the employer'.

This is in contrast with words such as 'independently' and 'impartially' that feature in previous FIDIC forms.

'Neutrally' is not defined but the Guidance to the General Provisions states that the intention behind the statements was to ensure that:

although the Engineer is appointed by the Employer and acts for the Employer in most other respects under the Contract, when acting under this Sub-Clause the Engineer treats both Parties even-handedly, in a fair-minded and unbiased manner.

While the intention of the draftsmen was to make clear the mind-set of the engineer, the word 'neutral' does not appear to have improved the previous wording and further debate on this point seems likely.

Sub-Clause 3.7.1 introduces the concept of consultation:

  • the engineer is now required to consult with both parties jointly or separately and encourage discussion in an endeavour to reach agreement;
  • the engineer is to provide both parties with a record of the consultation; and
  • if an agreement is reached, within the limit for agreement prescribed by Sub-Clause 3.7.3, the engineer is required to give a notice stating that is it a 'notice of the parties' agreement' and include a copy of the agreement to be signed by both parties.

Pursuant to Sub-Clause 3.7.3, the notice of agreement must be given within 42 days, or such other time limit as may be proposed by the engineer and agreed by both parties. If no agreement is achieved within the time limit or both parties advise the engineer that no agreement can be achieved within the time limit, the engineer will proceed to make a determination.

Sub-Clause 3.8 further demonstrates the shift towards collaboration as the engineer or the contractor's representative may require the other to attend a management meeting to discuss arrangements for future work or other matters in connection with the execution of the works.

The engineer is to keep a record of each such management meeting and to supply copies of the record to those attending and to the employer.

Fitness for purpose in the Yellow Book

The fitness for purpose provision in Sub-Clause 4.1 has been reworked. The 1999 edition of the Yellow Book states:

When completed, the Works shall be fit for the purposes for which the Works are intended as defined in the Contract.

The 2017 edition states:

When completed, the Works (or Section or Part or major item of Plant, if any) shall be fit for the purpose(s) for which they are intended, as defined and described in the Employer's Requirements (or, where no purpose(s) are so defined and described, fit for their ordinary purpose.

Limiting the scope of the fitness for purpose obligation to the employer's requirements narrows its scope and should provide greater certainty as to the obligations imposed on the contractor. However, there remains the distinct possibility that the 'purpose' will be insufficiently defined in the employer's requirements. While a default position is welcomed in the event that a purpose is not specified, 'fit for their ordinary purpose' (emphasis added) appears to add very little clarity to the obligations imposed on the contractor.

It also seems that the amendments have opened up a potential avenue for future disputes by stating that the fitness for purpose obligation does not just apply to 'the works' but also potentially to a 'section or part or major item of plant'.

A related point is that the 2017 Yellow Book contains a newly framed indemnity at Sub-Clause 17.4 that provides:

The Contractor shall also indemnify and hold harmless the Employer against all acts, errors or omissions by the Contractor in carrying out the Contractor's design obligations that result in the Works (or Section or Part or major item of Plant, if any), when completed, not being fit for the purpose(s) for which they are intended under Sub-Clause 4.1 [Contractor's General Obligations].

This indemnity is more limited in scope than the fitness for purpose obligation in Sub-Clause 4.1 since the indemnity is limited to design obligations that result in the works not being fit for purpose.

The indemnity is further limited by the fact that the failure must be a result of the acts, errors or omissions on the part of the contractor. The fitness for purpose obligation does not impose such requirements.

The burden of proof is therefore on the employer to identify a relevant act, error or omission as opposed to simply demonstrating that the works are not fit for purpose.

Advance warning

Sub-Clause 8.4 introduces advance warning provisions into the books requiring:

each Party to advise the other and the Engineer, and the Engineer to advise the Parties, in advance of any known or probable future events or circumstances which may:

(a) adversely affect the work of the Contractor's Personnel;

(b) adversely affect the performance of the Works when completed;

(c) increase the Contract Price; and/or

(d) delay the execution of the Works or a Section (if any).'

The provisions offer no time limit or explicit sanction for a failure to issue an advance warning. This provides room for the parties to specify a time by which an advance warning should be given and the consequences for the contractor if they fail to issue an advance warning within such time or at all.

Sub-Clause 8.4 also provides the engineer with an entitlement to require the contractor to submit a proposal under Sub-Clause 13.3.2 (Variation by Request for Proposal) to avoid or minimise the effects of such events or circumstances.

This imposes further obligations on both the engineer and the contractor.

Termination by employer

The 2017 editions contain new grounds for termination by the employer:

  1. non-compliance with a determination by the Engineer under Sub-Clause 3.7 or with a decision of a DAAB (Clause 21.4) and such failure constitutes a material breach of the contractor's obligations under the contract;
  2. where the employer is entitled to delay damages that exceed the maximum amount of delay damages stated in the contract data (Sub-Clause 15.2.1(c)); and
  3. for the employer's convenience (Sub-Clause 15.5).

Non-compliance

With regards to (a), above, 'material breach' is not defined and the Guidance on the General Conditions does not provide any further explanation. The reference to material breach may be intended to more clearly reflect the common law position.

Akenhead J. in Obrascon Huarte Lain SA v. Her Majesty's Attorney General for Gibraltar [2014] EWHC 1028 (TCC) considered a contract that contained the General Conditions of Contract of the 1999 Yellow Book, subject to some relatively minor changes.

The case revolved around termination and Akenhead J. stated in paragraph 321:

It follows that, in construing both Clauses 15.1 and 15.2 of the Contract, a commercially sensible construction is required. The parties can not sensibly have thought (objectively) that a trivial contractual failure in itself could lead to contractual termination. Thus, there being one day's culpable delay on a 730 day contract or 1m2 of defective paintwork out of 10,000m2 good paintwork would not, if reasonable and sensible commercial persons had anything to do with it, justify termination even if the Contractor does not comply with a Clause 15.1 notice. What is trivial and what is significant or serious will depend on the facts.

Jackson L.J., Gloster L.J. and Floyd L.J. made no comment on this reasoning in the Court of Appeal [2015] EWCA Civ. 712 and agreed with Akenhead J. that the government of Gibraltar was entitled to, and did validly, terminate the contract.

The question of material breach will therefore inevitably depend on the facts. It seems likely that the content of the determination or the DAAB's decision will determine whether non-compliance with it constitutes a material breach. There is likely to be variability within international arbitral tribunals as to the threshold to be applied to 'material'. It is suggested that an appropriate benchmark is any breach that is not trivial.

Exceeding the maximum amount of delay damages

'Delay damages' is a new defined term in the 2017 editions. Sub-Clause 1.1.28 defines the term as:

The damages for which the Contractor shall be liable under Sub-Clause 8.8 [Delay Damages] for failure to comply with Sub-Clause 8.2 [Time for Completion].

Sub-Clause 8.8 provides that delay damages are the amount stated in the contract data that shall be paid for every day that elapses between the relevant time for completion, as defined in Sub-Clause 8.2, and the relevant date of completion of the works or section.

The parties can specify, in the contract data relating to Sub-Clause 8.8, the maximum amount of delay damages, beyond which the employer is entitled to terminate the contract.

The intention is clearly to remove any debate as to the amount of liquidated damages that have to have accrued before the employer can terminate.

Termination for convenience

The 2017 editions contain a new Sub-Clause 15.5 that entitles the employer to terminate the contract at any time for the employer's convenience, by giving a notice of such termination to the contractor. The phrase 'for the employer's convenience' is not developed or defined by drafting.

The Guidance on the General Conditions only reminds parties intent on using the contract that it may not be permissible for the employer to terminate the contract for convenience under the applicable law of many jurisdictions. As a result, the Guidance states that before inviting tenders the employer should verify that the wording of the Sub-Clause is consistent with the law governing the contract.

It is particularly surprising that there is little explanation of the constraints on the entitlement to terminate 'for the employer's convenience', considering the general trend of the 2017 editions is to produce more detailed and prescriptive provisions. The contract does provide some security to the contractor in the event of such a termination:

  • After giving notice to terminate, the employer immediately:
    • has no right to further use any of the contractor's documents, which are to be returned to the contractor, except those for which the contractor has received payment or for which payment is due under a payment certificate (Sub-Clause 15.5(a));
    • has no right, provided that Sub-Clause 4.6 that deals with cooperation applies, to allow the continued use (if any) of the contractor's equipment, temporary works, access arrangements or other of the contractor's facilities or services (Sub-Clause 15.5(b));
    • has to make arrangements to return the performance security to the contractor.
  • The contractor is entitled to payment under Sub-Clause 15.6:
  • in the event of a termination, the contractor is to submit detailed supporting particulars setting out the value of work done and the 'amount of any loss of profit or other losses and damages suffered by the contractor as a result of the termination';
  • the reference to 'other losses and damages' is a catch-all phrase that ensures that the contractor is not limited to claiming the loss of profit;
  • the engineer will agree or determine the amount due and issue a payment certificate for the amount so due without the need for the contractor to submit a statement; and
  • the employer is to pay the amount certified in the payment certificate within 112 days of the receipt by the engineer of the contractor's submission (Sub-Clause 15.7).

Suspension and termination by the contractor

The 2017 editions have also introduced several new grounds that entitle the contractor to terminate:

  • non-compliance with a determination by the engineer under Sub-Clause 3.7 or with a decision of a DAAB (Clause 21.4) and such failure constitutes a material breach of the employer's obligations under the contract (Sub-Clause 16.2.1(d));
  • non-receipt by the contractor of a notice of the commencement date under Sub-Clause 8.1 (Commencement of Works) within 84 days after receiving the letter of acceptance (Sub-Clause 16.2.1(f)); and
  • the employer is found, based on reasonable evidence, to have engaged in corrupt, fraudulent, collusive or coercive practice at any time in relation to the works or to the contract (Sub-Clause 16.2.1(j)).

The comments above on non-compliance with a determination by the engineer or with a decision of the DAAB are equally applicable to Sub-Clause 16.2.1(d).

It is also worth noting the attempt made in Sub-Clause 16.2.1(e) to raise the threshold for termination where the employer has failed to perform his obligations under the contract.

In the 1999 editions, Sub-Clause 16.2(d) stated that the contractor was entitled to terminate the contract if 'the Employer substantially fails to perform his obligations under the Contract'.

In the 2017 editions, Sub-Clause 16.2.1(e) states that the contractor is entitled to give a notice of its intention to terminate if 'the Employer substantially fails to perform, and such failure constitutes a material breach of, the Employer's obligations under the Contract'.

The requirement that the failure must constitute a 'material breach' seems to be aimed at preventing termination following a substantial failure in performing a trivial part of the contract.

Sub-Clause 16.2.1(j) represents a change from the 1999 editions where termination for corrupt payments, etc., was only a right possessed by the employer. Under the 2017 editions, both parties possess this right.

Exceptional events

Clause 19 of the 1999 editions referred to 'force majeure'. Part of the definition of 'force majeure' was 'an exceptional event or circumstance'. Clause 18 of the 2017 editions refers to an 'exceptional event', and so the relevant part of the definition is replaced by 'an event or circumstance'. It appears that the change was an attempt to assuage the concerns of civil lawyers for whom the phrase 'force majeure' may bear different connotations. The phrase 'exceptional event' does not seem to have brought any additional clarity to the clause.

One change to the non-exhaustive list of 'exceptional events' in Sub-Clause 18.1 is that 'strikes and lockouts', that were grouped with riots, commotion and disorder under the 1999 editions, have now been separated out into their own standalone example at Sub-Clause 18.1(d). This reflects that strikes and lockouts are likely to be the most common form of 'exceptional event' and do not sit easily with the more extreme connotations evoked by the word 'riot'.

Claims

The provisions related to claims and disputes have been separated and redrafted substantially.

Sub-Clause 20.1 of the 2017 editions sets out a procedure for:

a employer claims for 'any additional payment from the contractor (or reduction in the contract price and/or to an extension of the DNP)';

b contractor claims for any 'additional payment from the employer and/or to EOT'; and

c either party for 'another entitlement or relief against the other…of any kind whatsoever…except (a) and (b).'

The 2017 editions contain notable changes to the relevant timings:

  • the FIDIC 1999 28-day time-bar on notification of claims now applies to the employer as well (Sub-Clause 20.2.1);
  • if the engineer considers that the claiming party has failed to give the notice of the claim within the 28-day period, the engineer shall, within 14 days of receiving the notice of claim, give a notice to the claiming party with reasons (Sub-Clause 20.2.2);
  • if no such notice is given within the 14 days, the notice of claim is deemed to be valid. the other party can give a notice to the engineer if they disagree with the deemed valid notice and require the engineer to make a determination (Sub-Clause 20.2.2);
  • the 1999 42-day timeframe for the 'fully detailed claim' has been increased to 84 days (Sub-Clause 20.2.4);
  • if the claiming party fails to submit a statement of the contractual or legal basis of the claim within the 84 days, the notice of claim is deemed to have lapsed and the engineer, within 14 days after the time limit has expired, is to give a notice to that effect to the claiming party (Sub-Clause 20.2.4); and
  • if the engineer does not give such a notice within the 14-day period then the notice of claim is deemed to be a valid notice. As above, the other party can disagree with the deemed valid notice and require the engineer to make a determination (Sub-Clause 20.2.4).

It is also worth noting that, in response to an engineer's notice provided as a result of a party's failure to comply with a time-limit, a party that disagrees with the engineer or believes that there are circumstances that justify late submission should include details of the disagreement or the justification for the late submission in the fully detailed claim (Sub-Clauses 20.2.2 and 20.2.4).

The timeline of the claims process is therefore more clearly defined, and it has become particularly important for the engineer to monitor the dates on which notices are given.

Disputes and arbitration

Dispute

'Dispute' is a defined term at Sub-Clause 1.1.29 in the 2017 editions and denotes:

any situation where:

  • one Party makes a claim against the other Party (which may be a Claim, as defined in these Conditions, or a matter to be determined by the Engineer under these Conditions, or otherwise);
  • the other Party (or the Engineer under Sub-Clause 3.7.2 [Engineer's Determination] rejects the claim in whole or in part; and
  • the first Party does not acquiesce (by giving a NOD under Sub-Clause 3.7.5 [Dissatisfaction with Engineer's determination] or otherwise,

provided however that a failure by the other Party (or the Engineer) to oppose or respond to the claim, in whole or in part, may constitute a rejection if, in the circumstances, the DAAB or the arbitrator(s) as the case may be, deem it reasonable for it to do so.

While an attempt has clearly been made to narrow the scope of the term 'dispute', this definition does not seem to be straightforward to apply and therefore may be a source of disputes in the future.

DAAB

The term 'dispute adjudication board' or 'DAB' from the 1999 Editions has been replaced by the term 'dispute avoidance/adjudication board'. This again reflects the emphasis in the 2017 editions on dispute avoidance.

The 1999 Red Book states in Sub-Clause 20.2 that the parties were to 'jointly appoint a DAB by the date stated in the Appendix to Tender'. The 1999 Yellow Book states in Sub-Clause 20.2 that the parties were to 'jointly appoint a DAB by the date 28 days after a Party gives notice to the other Party of its intention to refer a dispute to a DAB in accordance with Sub-Clause 20.4'. The 2017 editions share a single provision at Sub-Clause 21.1 that provides that, unless the parties agree otherwise, the DAAB members are to be appointed within 28 days after the contractor receives the letter of acceptance.

The DAAB is a standing DAAB rather than an ad hoc DAB. If one party refuses or fails to sign a DAAB agreement within 14 days of the other party's request to do so, the appointing entity or official named in the contract data will, at the request of either or both parties and after due consultation with both parties, appoint the member of the DAAB.

After the appointment, the parties and the member or members so appointed will be deemed to have signed and be bound by a DAAB agreement (Sub-Clause 21.2).

Avoidance of disputes

Similar to the 2008 Gold Book, the 2017 Yellow and Red Books contain a new sub-clause that deals with the avoidance of disputes. Sub-Clause 21.3 permits the parties to make a joint request at any time to the DAAB, except during the period when the engineer is carrying out a determination, to 'provide assistance and/or informally discuss and attempt to resolve any issue or disagreement.'

Interruption of the limitation period

A new paragraph has also been added in relation to the effect of a reference on the limitation period. Sub-Clause 21.4.1 expressly provides that the reference of a dispute to the DAAB, unless prohibited by law, is deemed to interrupt the running of any applicable statute of limitation or prescription period.

DAAB's decisions

In line with the 1999 editions, the DAAB must give its decision within 84 days after receiving the reference. Sub-Clause 21.4.3 of the 2017 editions makes clear that the DAAB decisions are expressly binding on the engineer. The employer is responsible for ensuring the engineer's compliance with the DAAB decision.

Sub-Clause 21.4.3 also adds that, where the DAAB requires a payment of an amount by one party to another, subject to the DAAB's discretion to require the payee to provide an appropriate security, the amount shall be 'immediately due and payable without any certification or Notice'.

Notice of dissatisfaction

'Notice of dissatisfaction' or 'NOD' is a defined term at Sub-Clause 1.1.57 in the 2017 edition. The term refers to the notice one party may give to the other party if it is dissatisfied, either with an engineer's determination under Sub-Clause 3.7 or a DAAB's decision under Sub-Clause 21.4. Sub-Clause 21.4.4 now permits a party to draft a NOD in respect of parts of the DAB's decision. The part or parts that the party is dissatisfied with should be clearly identified in the NOD.

The parts specified in the NOD and any other parts affected by such parts are deemed to be severable from the rest of the decision and the remainder of the decision becomes final and binding on both parties as if the NOD had not been given.

Amicable settlement

As was found in Sub-Clause 20.5 of the 1999 editions, provision is made in Sub-Clause 21.5 of the 2017 editions for amicable settlement without recourse to arbitration. The time period for amicable settlement has, however, been reduced from 56 days to 28 days.

Arbitration

The 2017 editions have retained ICC arbitration and there are now four routes to arbitration:

  • the issuance of a NOD followed by an attempt at amicable settlement (Sub-Clause 21.5);
  • any failure to comply with a DAAB decision (Sub-Clause 21.7);
  • any failure to comply with an agreement or a final and binding determination of the engineer (Sub-Clause 3.7.5); or
  • no DAAB has been put in place (Sub-Clause 21.8).

A particularly notable change is that, in an attempt to incentivise parties to utilise DAABs, the arbitrator may take into account the extent to which a party has failed to cooperate in constituting and appointing a DAAB, in any award dealing with costs of the arbitration (Sub-Clause 21.6).

The support for DAAB's is also demonstrated by the fact that where a party has failed to comply with a DAAB's decision, whether binding or final and binding, the arbitral tribunal will have the power by way of summary or other expedited procedure, to order, whether by an interim or provisional measure or an award, the enforcement of that decision (Sub-Clause 21.7).

The provisional measure or an award is subject to the express reservation that the rights of the parties are reserved until the merits of the dispute are resolved by an award.

Conclusion

This chapter is not intended to be exhaustive and only serves to provide an overview of significant changes present in the 2017 Red and Yellow Books.

Some of the headline changes are as follows:

  • the 2017 editions contain a significant increase in the number of notice requirements and newly prescribed formalities in relation to them;
  • the role of the engineer has been significantly enhanced;
  • fitness for purpose – there has been an attempt in the Yellow Book to ensure that the purpose is defined with a greater degree of precision;
  • advance warning provisions are present for the first time;
  • new grounds for termination by both the employer and contractor;
  • 'force majeure' has been replaced by 'exceptional event';
  • there have been significant changes to the timetable for claims and additional burdens have been imposed on the engineer; and
  • greater emphasis has been placed on DAABs and dispute avoidance.

The 2017 editions are certainly more detailed and prescriptive than their predecessors and are therefore likely to exert additional pressure on contracting parties attempting to comply with the provisions. Whether this more prescriptive approach ultimately detracts from the adaptability of the FIDIC Suite in different jurisdictions, contracting environments and project challenges – which, in the author's view, is one of the great strengths of FIDIC – remains to be seen.


Footnotes

1 Simon Hughes QC is a senior counsel at Keating Chambers.

2 NEC springs to mind in this context.

3 See the remarks of Lord Hoffmann in Beaufort Developments Limited v. Gilbert-Ash NI Limited [1999] AC 266 at 276 speaking of the architect acting qua certifier: 'He is a professional man but can hardly be called independent.'

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