FIDIC contracts are well established – better the devil you know
FIDIC forms of contract are widely and successfully used for international construction projects, largely because they are tried, tested and respected and because they seek a fair and balanced, or at least known, approach to risk and reward. Parties believe they know what they are signing up to when they enter into a FIDIC contract.
But FIDIC contracts are standard forms; they do not and cannot include all the provisions that the parties wish or need to include. The forms are intended to be amended to take into account, for example: (i) governing law; (ii) the location of the project; (iii) other special and particular characteristics of each project; and (iv) the parties’ particular preferences. Other amendments may simply be general improvements that clarify the drafting or reflect developments in practice, for example, including BIM provisions (where FIDIC has so far only provided guidance).
I can resist everything, but temptation – to amend FIDIC
The standard FIDIC forms are drafted to ensure that the right party is doing the right things, within appropriate and sensible timescales and, importantly, taking on the right risks, i.e., those which they are best placed to manage. However, Employers and their advisers cannot resist the temptation to amend the FIDIC forms, perhaps in search of that mythical ‘watertight’ contract. But when a FIDIC form is amended by replacing, changing or omitting the wording of the General Conditions through the Particular (or ‘special’) Conditions, the result typically is that even if a party is unable or ill equipped to manage a particular risk, they are required to do just that. In the most severe cases the contract is only recognisable as a FIDIC form by the clause numbering used.
This practice is frequently adopted without full consideration of the potential ramifications of that shift in risk, both in terms of necessary consequential amendments to the remainder of the contract to make the change work and the broader impact of such change on pricing, attitudes to a project and relationships.
For example, it is not unusual to see wide-ranging amendments to the notice provisions, reporting requirements, and testing and commissioning provisions, which may not be practicable, as well as amendments that transfer key risks relating to design obligations, site data, ground conditions and work permits. Employers require, and contractors frequently accept, contracts that convert the FIDIC Red Book into something more akin to the Silver Book, to introduce and extend design obligations, remove price and time adjustments for unforeseeable ground conditions, or otherwise more broadly reduce the possible grounds to seek such adjustments. In other projects, employers often deploy, alongside the FIDIC forms, an array of other contract documents (‘project procedures’ and the like) to govern rights and obligations of the parties that may duplicate or, more worryingly, be inconsistent with the terms in the FIDIC forms.
One step forwards, two steps back…
Where amendments have been made which cut across the underlying philosophy of the FIDIC forms, and when things go wrong, the parties often end up making/facing claims, which then evolve into full-blown disputes. Such disputes can be more difficult to assess and resolve against the backdrop of a contract, which in important respects is less understood than, and is different from, the FIDIC form it claims to be.
An increased risk of claims and disputes naturally places greater emphasis on the need to examine and resolve the same efficiently. Yet one of the other popular amendments made to the FIDIC forms is the removal of the tiered resolution procedures, including the Dispute Adjudication Board, which are designed to give the parties access to a process designed to resolve their claims and disputes in a timely, efficient and contemporaneous manner.
FIDIC’s response…2017
FIDIC considers that widespread change to its forms is jeopardising the FIDIC brand and misleading tenderers and the public. On FIDIC’s request, a special task group (TG15) was therefore set up (and headed by Mr Husni Madi, CEO of Jordan-based Shura Construction Management) to identify which contractual principles of each form of FIDIC contract FIDIC considers to be inviolable and sacrosanct.
The five such principles identified are referred to as the FIDIC Golden Principles (GPs) and they were originally set out in the guidance section to the Particular Conditions in the 2017 FIDIC suite of contracts, with a strong recommendation that Employers, Contractors and all drafters of the Particular Conditions in the FIDIC forms of contract take due regard of them.
The Golden Principles
GP1: The duties, rights, obligations, roles and responsibilities of all the Contract Participants must be generally as implied in the General Conditions, and appropriate to the requirements of the project.
GP2: The Particular Conditions must be drafted clearly and unambiguously.
GP3: The Particular Conditions must not change the balance of risk/reward allocation provided for in the General Conditions.
GP4: All time periods specified in the Contract for Contract Participants to perform their obligations must be of reasonable duration.
GP5: Unless there is a conflict with the governing law of the contract, all formal disputes must be referred to a Dispute Avoidance/Adjudication Board (or a Dispute Adjudication Board, if applicable) for a provisionally binding decision as a condition precedent to arbitration.
The aim of the GPs was that modifications to the General Conditions:
- are limited to those necessary for the particular features of the site and the project;
- are necessary to comply with the applicable law;
- do not change the essential fair and balanced character of a FIDIC contract; and
- allow the contract to remain recognisable as a FIDIC contract.
The FIDIC Golden Principles, First Edition, 2019
TG15 was also requested to consider and suggest possible ways to prevent, or at least limit, misuses of FIDIC conditions of contract. It is against that background that TG15 prepared the “FIDIC Golden Principles 2019” document, which was launched on 25 June 2019 at the FIDIC Asia Pacific Contract Users’ Conference in Hong Kong.
The 12-page document confirms the above five GPs previously included in the 2017 suite of contracts, but developed these further by setting out the reasons why such principles are considered to be GPs and providing guidance as to how users should draft Particular Conditions and other contractual documents to achieve the intent of the GPs. For example, the GPs confirm that:
- Modifying the General Conditions to require the Engineer to obtain the Employer’s approval (under a FIDIC Red or Yellow Book contract) before making any determination of a Contractor’s claim or granting any extension of time would not comply with GP1.
- Any deletions of General Conditions must be replaced with Particular Conditions that cover the same scope, and do not leave any roles, duties, obligations, rights and risk allocation undefined, or otherwise disturb the integrity and consistency of the General Conditions to comply with GP2.
- Making amendments that require the Contractor to assume the risk of unforeseeable physical conditions under a Red, Pink or Yellow Book contract would not comply with GP3. The guidance in relation to GP3 notes that GP3 is a fundamental principle that should be considered in any amendment in the Particular Conditions to the General Conditions and provides that the yardstick to apply in drafting any provision that amends the roles, duties or obligations as defined in the General Conditions is to enquire whether risks are being allocated to the party that is in the position to control and bear the consequences of a potential risk becoming a reality. If so, the amendment is compliant with GP3.
- The Particular Conditions must not specify impractical time periods that impose unreasonable conditions for a contracting party to exercise any of its rights and/or to perform its obligations in order to comply with GP4.
- Any contract that does not provide for a Dispute Avoidance/Adjudication Board or Dispute Adjudication Board does not comply with GP5. Likewise restricting the ambit of disputes that can be referred to the Board to exclude certain determinations of the Engineer will not comply with GP5.
The full text of the FIDIC Golden Principles 2019 can be found on FIDIC’s website.
All that glitters is not gold…will anything change because of the FIDIC GPs?
The GPs are a welcome reminder of the principles underlying the FIDIC forms, which have contributed to FIDIC’s successful use globally. It is clear that FIDIC would like parties to stop modifying and misusing the General Conditions in such a way that alters the balance of the contract. Whether the GPs will achieve this remains to be seen. Perhaps the GPs will be of most assistance at tender stage, when a party who considers that the GPs are not being achieved in the draft contract may be able to support their position in negotiations by reference to the GPs and drafting guidance.
Ultimately, the reality is that if an Employer is not willing to change its terms or, more importantly, the mind-set that drives this approach to changing FIDIC forms, it is up to the Contractor to decide whether or not to accept terms that do not achieve the GPs. Realistically, and for obvious reasons, Contractors may have to continue to accept terms that do not achieve some, or all, of the GPs, and commit to the arrangement of the project according to the known and (adjusted) allocation of risk that has been accepted. When doing so, all involved need to be prepared for the inevitable issues, claims and disputes that may result.
Client Alert 2019-212
