SHOULD YOU USE FIDIC CONTRACTS FROM 1999 OR 2017?

Approximately 6 years ago in 2017, FIDIC launched the second edition of the three contract forms, popularly referred to as “The Rainbow Suite”: Yellow, Red and Silver Book. It was the expectation on FIDIC’s part that going forward the updated contracts would be the standard replacing the 1999 editions.

But the 2017 version of the contracts have not had the success that FIDIC had expected. But why that? There may be many reasons for this. E.g. it may be a deliberate decision as a result of the fact that there are elements in the contract sets that do not suit the individual developer or the specific project.

On the other hand, the decision may have been made on the basis that it may be an unmanageable task to understand the differences and possibly adapt to an existing delivery model.

Therefore, we would like to shed some light on the differences so that you can make a more informed choice about which version is best suited to your projects.

THE MOST SIGNIFICANT CHANGES IN THE FIDIC YELLOW, RED AND SILVER BOOK 2017 SECOND EDITION

What is the background and the purpose of the changes? 

It has been FIDIC’s overall philosophy that the updated versions of the FIDIC Yellow, Red and Silver Book should help to improve the project management tools and mechanisms that we already know from FIDIC’s 1999 Standard Contractual Terms and Conditions. In addition, the aim has been to strengthen the role of the engineer and to make it more neutral than before. It has also been FIDIC’s intention that conflicts should be resolved at the lowest possible ‘conflict level’ and preferably faster than in the past.

The updated terms have also aimed to ensure clarity and transparency for users. The new terms reflect the current international practice in the field, attempt to clarify the interpretative doubts in the first editions and incorporate the latest development of the other FIDIC standard terms, including the development of the Gold Book, which was published in 2008.

What was changed in the “new” 2017 versions? 

At first impression, you get a much more comprehensive contract. The new editions of the FIDIC Yellow, Red and Silver Book are approximately 50% longer and contain 50% more words than the first edition.

A large part of the increased volume is related to the new contract management provisions, including an update of the dispute resolution mechanisms, more deadlines and stricter requirements for complaints. With the new and longer provisions, FIDIC wanted to reduce the risk of disputes not being dealt with in a timely manner and the possibility of alternative dispute resolution during in the project.

How are the contracts in the new “2017” versions?

The three new editions follow the same structure and approach as those of the first editions. There has been a slight increase in the number of clauses in all contracts, from 20 to 21. The changes are essentially the same in all three contracts (Red, Yellow and Silver). This also means that a change in one contract is, as a general rule, also present in the other two contracts, unless the change relates to, for example, the chosen form of undertaking and to the tendering procedure.

For example, there will be new provisions in the Yellow Book, which are solely relevant for a turnkey contractor and which were not relevant for inclusion in the Red Book where the specialist/general contractor is either not responsible for project planning or has very limited responsibility.

The updated versions also include a number of changes that are designed to make the contracts more user-friendly.  Among other things, a number of abbreviations have been introduced in the introductory Clause 1.1, including “NOD” for “Notice of Dissatisfaction” and “EOT” for “Extension of Time”. These are terms commonly used in international construction contracts.

The appendix system has also been modified. The so-called “Appendix to Tender”, previously known from the first editions of the Red and Yellow Book, has been renamed “Particular Conditions Part A – Contract Data” in the new editions. Correspondingly, additions and deviations are expected to be described under a new appendix named “Particular Conditions Part B – Special Provisions”. Both appendices belong under “Particular Conditions”.

What does the management of contracts look like in the “new” 2017 versions?

The majority of the major changes we find in the updated editions relate to contract management. The purpose of the amendments is to ensure that the parties are informed as early as possible of the consequences of the amendments, including in particular how the counterparty will respond to a claim or an amendment.

FIDIC has aimed for disputes that arise along the way to be resolved quickly, so that they do not develop into an actual arbitration case between the parties.

Examples relating to contract management include the communication between the parties. When sending a so-called “Notice” in accordance with Clause 1.3, it must be clear to the recipient what type of communication is involved. The communication must also specify the provision of the contract to which the notification relates.

In practice, this will mean that, in addition to stating that it is a “Notice”, communications relating to, for example, extra time or extra payment, must contain a direct reference to the relevant provision in the contract which gives rise to a party’s belief that it is entitled to the claim. At the same time, the number of situations in which a party is required to submit a Notice has increased.

This, together with the new requirements for the specification of individual notifications, will naturally require the contracting parties to allocate more resources to contract management than was (perhaps) the case when using the 1999 editions. This applies in particular to the developer. Whether this is good or bad is a matter of personal preference, but it does place greater demands on contract management than in the past, especially for the developer.

How are disputes resolved in the “new” 2017 versions?

In the new versions, the provisions on claims and disputes have been extended to include two provisions (Subclauses 20 and 21) instead of one. According to FIDIC, the intention was to separate and subdivide the various procedures for submitting claims for decision by the engineer and for resolving a dispute by DAAB or by arbitration. This is not only for procedural reasons, but also for psychological reasons.

In the past, the claims of the developer and the contractor were divided into different provisions, which provided for considerably more detailed and stricter conditions for the contractor’s submission of claims. In the updated versions, Clause 20 now provides a unified and mutual provision for the claims of the parties. This means that to a much greater extent the developer now also needs to be aware that he may forfeit his claim if it is submitted too late. This is a significant change from the 1999 editions.

 

Subclause 20

For claims for additional time and extra payment, two preclusive provisions have been inserted, which may result in a party losing its claim through failure to act. Firstly, a claim must be reported within a period of 28 days after a party becomes aware of the event or circumstance giving rise to the claim. Secondly, a party must submit its fully detailed claim within 84 days from that same date.

The deadline for submitting a fully detailed claim has been extended from 42 days to 84 days in the new versions.

Subclause 21

Similarly, fundamental changes have been included in the new Clause 21 regarding the resolution of disputes between the parties.

The most significant and far-reaching change is the provision for a permanent DAAB (Dispute Avoidance/Adjudication Board), which is generally required to function as a permanently attached committee of one or more experts who must initially decide on disputes between the parties. For the users of the AB system, this is (partly) comparable to quick decisions. However, it must be emphasised that DAAB is much more complex than a quick decision under AB 18. And it’s probably more costly too. Previously, only the Red Book contained a provision for forming a DAAB, while the Yellow and Silver Book only contained provisions for an ad hoc DAAB.

In addition, the 2017 editions contain more and increasingly detailed provisions on disputes. An important point of attention is a requirement that disputes must be referred to the DAAB within 42 days after a party has submitted a “NOD” (“Notice of Dissatisfaction”) following the engineer’s decision. If the deadline is not met, the engineer’s decision will generally be final and binding.

 

What is the role of the engineer in the ‘new’ 2017 versions?

FIDIC has tried to clarify and balance the role of the engineer. This is clearly reflected in the scope of the 2017 versions. The changes take up more than 3 pages in the contracts and contain a large number of new initiatives.

For example, the engineer has been given an explicit obligation to be “neutral” when deciding on claims arising from the contract. This was not the case previously, when the engineer was more clearly the developer’s representative.

The process that the engineer must follow in his decision-making work is now divided into a series of detailed steps with specified deadlines, within which the engineer and the parties to the contract must act.

There are also new requirements on the speed with which the parties must respond if they disagree with the engineer’s decision. The consequence of a party’s failure to respond within a given deadline is that the engineer’s decision becomes final and binding.

 How do the engineer’s decisions work in the “new” 2017 versions?

Generally speaking, the engineer must consult the parties to the contract within a period of 42 days from the receipt of a claim in an attempt to reach a joint solution. If the parties are unable to reach a solution, the engineer shall take a decision within 42 days from the date on which it became clear to the engineer that a common solution could not be reached. In principle, it can take up to 84 days for a decision to be taken.

If the engineer does not make a decision within the 42-day deadline, the engineer is deemed to have rejected the contractor’s claim.

If a party is not satisfied with the engineer’s decision, the party in question must send a Notice of Dissatisfaction to the other party and the engineer within a period of 28 days. The question may then be brought before the current DAAB (Dispute Adjudication Board).

As mentioned earlier, the engineer’s decision becomes final and binding if neither party sends a Notice of Dissatisfaction within the 28-day deadline. What is less obvious is that the same applies where the engineer, instead of making a decision, has acted passively and thereby rejected the contractor’s claim.

The many deadlines, as well as the fact that the engineer’s inaction leads to rejection of the contractor’s claims, is a change that is extremely important to be aware of, especially for the contractor. The contractor’s project team, therefore, has to consider not only its own deadlines but also those of the engineer as they move forward under the new conditions.

Fit for purpose

One of the concepts of interest to many parties in the construction industry – from a Danish perspective – is the concept of “fit for purpose”. The meaning of this concept has been the subject of considerable discussion in recent years.

In the updated editions of the Silver and Yellow Book, a fit for purpose provision is also included, as in the first editions. The provision is contained in Clause 4.1, according to which the contractor is liable if it is not fit for purpose.

However, in the new editions, a new requirement has been inserted that the description of fit for purpose must be included in the “Employer’s requirements”. The purpose is to make it clear to the contractor what he must fulfil in order for the work to be fit for purpose, and therefore what risk he is assuming. In other words, what it means to be “fit for purpose”.

In cases where it is not clear from the “Employer’s Requirement’s” what is contained in the description of “purpose”, what is delivered must be in accordance with “the ordinary purpose”. What is included in the term “ordinary purpose” will, of course, depend on the specific service that the contractor is required to provide. We have not yet seen a strict interpretation of the concept of “ordinary purpose” in legal or arbitration practice. Therefore, we can only recommend that “fit for purpose” is defined correctly in “Employers’ requirements”.

Fit for purpose and insurance

Although fit-for-purpose provisions may at first appear to benefit the developer by tightening the requirements for the contractor’s work, it is important that the developer also exercise caution. Although it may seem easier for the developer to prove that what was delivered was not suitable for the purpose described in the contract, this may have negative consequences for the developer’s ability to recover damages from the contractor if the contractor is unable to pay. This is because most Danish insurances only cover if the contractor has acted negligently, and not all insurances cover liability for fitness for purpose.

We recommend that both developer and contractor examine the insurance coverage before entering into the contract.

What do we think of the “new” 2017 versions?

The updates to FIDIC’s terms and conditions are overall comprehensive and contain many changes. Many of the most significant changes appear to be of a practical nature and are designed to ensure that disputes are more likely to be resolved during the course of construction, before they develop into more significant disputes. A proactive approach to resolving disputes that might otherwise escalate into costly arbitration is positive.

But the changes also mean more attention to the handling of claims, which can be resource-intensive for some. The parties need to focus more on contract management. Conversely, it could also lead to claims being addressed early in the process.

Whether you want to continue with 1999 or use the 2017 editions, contact us to find out how we can help you update your contracts to fit your delivery model.

 

For further dialogue, book a meeting with one of our specialists: Joachim Riis Jensen, Mie Chatrine Fjeldbonde or Heidi Melchiorsen