Out-Law Guide | 08 May 2012 | 2:51 pm | 7 min. read
FIDIC have published the First Edition Subcontract, to be used with the current Red and Pink Books.
Why this matters
The Subcontract is the first set of standard subcontract terms that can be used with the current Red Book (building and engineering works designed by the Employer). It is likely to become the standard international subcontract for building and engineering projects over the next few years.
Background & Overview
A "Test Edition" of the Subcontract was published in December 2009. Building on feedback from users, the finalised version of the Subcontract – officially known as the "First Edition" – was published in October 2011. Some of the main changes made to the Test Edition are summarised later in this Guide.
The FIDIC Subcontract is intended for use with the FIDIC "Red Book" 1999 edition. The full name of the Red Book is the "Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer". So, the Subcontract is intended to be used when the Red Book is the main contract on a project. The Subcontract is drafted in a way which assumes that all the obligations of the Contractor under the Main Contract are passed down to the Subcontractor via the Subcontract and that the numbering of both the Main Contract and Subcontract are unchanged.
The Subcontract can also be used with the FIDIC "Pink Book" (the Harmonised Edition of the Red Book used for Multilateral Development Banks). Note that some alterations are needed in order for the Subcontract to be used with the Pink Book to reflect the differences between the Red and Pink Books.
Main Features of the FIDIC Subcontract
Risk Pass Down: The Subcontract works on the basis that the risks assumed by the Contractor under the Main Contract are passed down to the Subcontractor and the Subcontractor is deemed to have "full knowledge of the relevant provisions of the Main Contract". This was the overriding philosophy of the Test Edition and remains largely true of the First Edition.
The Subcontract is therefore drafted on a "back to back" basis with the Main Contract, with the Subcontractor obliged to perform "all the obligations and liabilities of the Contractor under the Main Contract" insofar as relevant to the Subcontract works - albeit with some modifications. For example in relation to the time limits for giving notice in Clause 20.1, the Subcontractor has a shorter time limit than the corresponding time limit in the Main Contract. This is in order to ensure that the Contractor has sufficient time to receive and process the information from the Subcontractor and still meet the deadline for giving notice to the Employer.
There are also stated exceptions to the risk pass down approach. These are listed at Clause 2.2 of the Subcontract and include the Contractor's obligations in relation to setting out and obtaining permits, licences and approvals. Clause 2.2 of the Subcontract also allows the parties to add other additional specific exclusions in Annex A.
Payment: The Subcontractor must submit his draft final statement 28 days after the end of the Subcontractor Defects Notification Period (which is tied into the Defects Notification Period under the Main Contract). The Contractor may require additional information if he is unable to verify any part of the final statement. The Contractor must pay the balance of the Subcontract Price within 56 days after the end of the Subcontractor Defects Notification Period.
The Contractor can defer payments to the Subcontractor if the amount has not been certified by the Engineer or the amount has been certified by the Engineer but not paid by the Employer. He may not do so if the non-certification or non-payment is due to Contractor default or Employer insolvency. FIDIC recognises that this pay when paid approach may not be consistent with the local law (e.g. the UK HGCRA regime) and so includes alternative provisions in the Guidance Notes to the Subcontract.
Co-operation with other subcontractors: The Contractor is responsible for the overall co-ordination and project management of the Works and for the co-ordination of the Subcontract Works with the Main Contract Works and the works of any other subcontractors.
However, these obligations of the Contractor are subject to Clause 6.1 which requires the Subcontractor to co-operate with any other subcontractors. Clause 6.1 also provides that if the Subcontractor is delayed or impeded by another subcontractor he must give notice of this to the Contractor. In these circumstances the Subcontractor may be entitled to an extension of time and payment of any costs incurred.
Performance Certificate: The Performance Certificate applicable to the Subcontract Works is deemed to be the Certificate that is issued by the Engineer under the Main Contract. In other words, the Subcontractor's performance is not certified until performance of all the Works have been carried out and certified under the Main Contract. The Guidance Notes contain an alternative clause that can be used if the Subcontract Works are completed in the early stages of the overall project.
Notices: As is the case with Contractor claims under Clause 20.1 of the Main Contract, compliance with the obligations relating to notices in Clause 20.1 of the Subcontract is a condition precedent to any Subcontractor claim. Failure to comply with the notice provisions will disbar any claim.
Loss or damage to Subcontract Works: The Subcontractor is by default obliged to rectify all loss or damage to the Subcontract Works during the period when he is responsible for their care. Clause 17 sets out the circumstances for which the Subcontractor is responsible for the cost of that rectification and contains a mechanism whereby the Subcontractor can recover its costs for rectification of loss or damage caused by something for which he is not responsible.
Termination: Clause 15.1 entitles the Contractor to terminate the Subcontract if the Main Contract is terminated. Other rights of the Contractor to terminate the Subcontract are set out in Clause 15.6 and arise if any one or more of the events or circumstances set out in Clause 15.2(a)-(f) of the Main Contract are applicable to the Subcontractor's performance under the Subcontract.
Differences between the Test and First editions
Risk pass down: The exception to the Subcontractor's general duty to perform and assume all the obligations and liabilities of the Contractor in relation to the Subcontract Works which is contained in the words "other than where the provisions of the Subcontract otherwise require" in Clause 2.2 is a new and important provision. It allows the parties to ensure that express provisions of the Subcontract take precedence over the Main Contract and to list other clauses that are exceptions to the general duty in addition to the finite list of clauses contained in Clause 2.2. That list of clauses itself has also been expanded to include the obligations in Clause 2.2 of the Main Contract (provisions dealing with permits, licences and approvals).
There is also a significant change in relation to the rights that are passed down to the Subcontractor. The First Edition Clause 2.4 states that the Subcontractor "shall have" the like rights entitlements and remedies that the Contractor has under the Main Contract. The Test Edition simply required the Contractor to exercise "reasonable steps to secure from the Employer like rights entitlements and remedies" he enjoyed under the Main Contract.
Payment: The payment provisions have been streamlined and shortened in the First Edition. The interim "draft" stages have been removed and the timeframe for payment of the Final Subcontract Payment has been reduced from 84 days after the expiry of the Subcontract Defects Notification Period to 56 days after this date.
The Contractor has a new obligation to give full particulars and provide substantiating documentation of amounts that have not been certified by the Engineer or for which the Employer has failed to make payment under the Main Contract.
In relation to measurement and evaluation, the First Edition contains a slight change to what happens if the parties cannot agree on the measurement. The Contractor is now expressly required to make "a fair decision...having due regard to the Subcontractor's views and all relevant circumstances." The Test Edition simply provided for the Contractor to use "the appropriate and applicable measurement" if the parties could not agree.
Under the Test Edition the Contractor was not obliged to make an advance payment to the Subcontractor until the Subcontractor had submitted its advance payment guarantee. This provision does not appear in the First Edition.
Progress of the Works: The Subcontractor is no longer expressly required to comply with the Subcontract Programme. This is a significant change but not altogether surprising. The programme is a live document and subject to change and the Subcontractor already has a strict obligation to comply with completion dates and ensure that the Contractor does not breach completion dates in the Main Contract.
Extensions of Time: Clause 8.4(d) of the Test Edition contained a general "catch-all" provision entitling the Subcontractor to an extension of time for "a cause of delay which would give the Contractor an entitlement to extension of time under the Main Contract". The catch-all has been slightly changed in the First Edition Clause 8.4(d) so that it now refers to "any one of the causes set out in the Main Contract Clause 8.4". This is a potentially narrower catch-all than the one which related to any cause under the whole Main Contract.
Loss or damage to Subcontract Works: In the Test Edition the Subcontractor was only obliged to rectify loss and damage occurring as a result of "any cause which was the responsibility of the Subcontractor". In practice it can be difficult for a Contractor to prove that any damage to the Subcontract Works has been caused by something for which the Subcontractor is responsible. The change is therefore a practical one and ensures that rectification works can be carried out before any argument about responsibility arises. It does not significantly change the underlying risk allocation.
Points to be aware of when using the Subcontract
Numbering: The "back to back" drafting approach assumes that the numbering of the Main Contract and the Subcontract are identical. Care is needed to check that the numbering of the two contracts corresponds exactly, particularly if substantial amendments have been made to the Main Contract.
Deemed knowledge of Main Contract: The Subcontractor is deemed to have full knowledge of all the relevant provisions of the Main Contract – whether or not this is in fact the case.
Overriding the general risk pass down approach: If the Contractor and Subcontractor have agreed any specific exceptions to the general risk pass down approach in addition to the ones set out in Clause 2.2, these should be expressly identified in Annex A.