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FIDIC & recent infrastructure developments

February 2007

 

 

This article appeared in Who's Who Legal Construction in February 2007 and was written by Mark Roe, Head of International Construction & Energy, Pinsent Masons.

 

The demand to open construction markets to international competition to improve quality, timeliness of supply and price is growing.  There has been a noticeable increase in the number of developers, owners and operators who are now looking to involve use of a form of contract familiar to international contractors even on projects being undertaken in their home jurisdiction.  In Europe, Africa, the Middle East and Asia that has meant a substantial increase in the demand for FIDIC based contracts.  The availability of a familiar and respected legal framework in which construction business is conducted internationally is very great.   It saves contractors costs because they are familiar with the form and its method of operation. It also provides an improved competitive environment which in turn gives the Employer a better deal; often it is quality rather than price which is the driver for this change.

In the field of infrastructure construction one of the most significant quality issues is the ability of the consulting engineer to offer quality services at the crossroads between acting as a trusted adviser to the Employer and as a supplier of a commodity, in this case the design.  The FIDIC suite of  contracts have responded to the changes in the international procurement market and the changed role of the engineer. 

FIDIC Red Book

In particular these contracts now have recognised the fact that the engineer, when appointed by the employer, may not in fact be impartial.  The 1999 FIDIC Red Book for example, makes it clear that he should be deemed to act for the Employer.  The 1999 Red Book is illustrative of the way in which risk allocation has developed in the international context as the employer can now terminate for convenience but in return the contractor's liability under the contract is limited.  The contractor has however to accept a fitness for purpose obligation in certain circumstances. 

The defining characteristics of the contract are the concepts of contract price and measurement but with provision for re-measurement.  The role of the engineer is pivotal given his responsibility for measuring the works albeit that the measurement is to be carried out in accordance with the contract schedules.

 

The contractor is however, also given enhanced rights by the new Red Book including the right of suspension, additional rights of termination and extended force majeure provisions.  The contract therefore remains balanced.  It should be noted for example, that the fitness for purpose obligations, although a greater obligation than under the old Red Book, only applies to the extent that the contractor is required to undertake the design.  The contract also now contains a dispute adjudication board, again a feature intended to improve harmony between contractor and employer by resolving disputes promptly. 

FIDIC Silver Book

The impact of private finance in the international infrastructure market place is reflected in the FIDIC Silver Book.  This form was subject to much controversy and protest when it first appeared.  However, it is used quite frequently both on BOT type contracts and on design and construct process work where the FIDIC Yellow Book might be thought more appropriate by many.  The reason for controversy is the significant risk transferred to the contractor.  While this is standard in private finance projects it has still caused much consternation in European contracting circles.   However, overall the bankability of the project is enhanced by sufficiency and certainty of price and time.  All these are the contractor's risk save for variations, other very limited relief events specified in the contract or as a result of a delay/impediment by the employer. 

The contractor is also liable for design failures.  The only exception to the sufficiency of price under the Silver Book are certain specific defaults by the employer (e.g. failure to give access/ delay to testing or similar); employer instructions (e.g. archaeological/historic finds or variations) or events outside the control of the parties which include change in law, force majeure and rectification of damage caused by employer's risk.  The contractor accepts the onerous responsibility described as "total responsibility for having foreseen all difficulties and costs of successfully completing the Works".  The contractor is also obliged to accept fitness for purpose obligations although these are confined to the purposes as defined in the contracts. 

The contractor also accepts responsibility for the correctness of the employer information including the employer's requirements and any employer design.  This obligation is only removed where the contract states these to be the employer's responsibility, there are requirements defining the intended purposes of the works or there are criteria for testing or performance of the completed works which cannot be verified by the contractor.  By comparing the Red and Silver books it is clear that the impact that private finance has on the risk allocation between the parties.

Future developments

The increased sophistication of the procurement methods demanded and used in the modern international infrastructure market has led to the creation of new FIDIC forms to supplement the main Standards of Red, Yellow and Silver.  These have included working closely with multi-lateral development banks resulting in the creation of the MDB/FIDIC contract where FIDIC conditions are incorporated in standard bidding documents of multi-lateral development banks.

Similarly there has been a development of standard bidding documents with the World Bank and there are also a number of other forms under development.  These include a DBO form, particularly in response to calls for a standard concession contract for the transport and water/waste water sectors. 

The push to develop a DBO form is partly a response to the use of the existing FIDIC Yellow Book with operation and maintenance obligations tacked on.  This is an unsatisfactory state of affairs and FIDIC has very sensibly appreciated the need to tailor a form to meet this market place demand.  One of the other developments is the sophistication of the industry sectors where FIDIC contracts are used and the difficulties of using a generic style of contract to meet the needs of particular industries.  This raises the question of how frequently it is appropriate to use the generic FIDIC form without amendment for an international project.  To take a power project for example there were three main areas in FIDIC where consideration to amending Standard terms would seem appropriate:

  • Design development – FIDIC may apply too light a touch in this area.  It envisages Employer's Requirements, Contractor's Document and review periods for design development.  In practice more sophisticated procedures are required to ensure collaborative working and adherence to the programme.  It is critical to ensure that the review process is properly managed and that the input from that review is used. 
  • Testing and Completion – It may be necessary to re-write the FIDIC provisions for this aspect of a power project.  When re-drafting it is important to consider the relationship between performance testing, risk transfer and insurance and delays.  The way in which different sections of work interact with each other would also need to be managed.  The market will dictate whether contractors are prepared to risk an outright right of rejection. 
  • Risk and Maintenance Obligations – As regards defect notification periods, blanket extended warranties are often no longer appropriate because different suppliers will insist on giving different warranties.  Separate agreements divorced from the construction contracts are required.  Commercial pressures could mean there are long lead times for key equipment and needs to be careful risk evaluation and the reflection of the fact that Power Projects are developing sections and that tests need to be done to avoid the risk of defects at an early stage affecting the project at a later stage. 

The universal respect with which the FIDIC documents are treated in the infrastructure field is key in facilitating agreements being reached.  The impact of these forms should not be underestimated and although in many circumstances the forms may need adapting to particular local conditions and the needs of particular industry sectors, they are nonetheless a good starting point for those discussions, saving parties time and costs, particularly in circumstances where there may be significant cultural differences between the parties. 

 

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