Updated FIDIC Contracts
Introduction
International Federation of Consulting Engineers that is known by the abbreviation of FIDIC (Fédération Internationale Des Ingénieurs-Counseils) launched updated Red Book (the Conditions of Contract for Works of Civil Engineering Construction), Yellow Book (the Conditions of Contract for Plant and Design-Build)) and Silver Book (the Conditions of Contract for EPC/Turnkey Projects) in the “International Contract Users Conference,” organized in London in December of 2017.
Thus, the versions that have been in use since 1999 until today, have been expanded, updated and are more user-friendly contracts, formed by way of reflecting 18 years’ of experience of users of the contracts.
What is the Objective of 2017 Updates?
Firstly, as the risk distribution was unbalanced enough in the 1999 versions of the contracts, they were referred to, and used, according to which party they served, rather than their purposes. For example, the Silver Book was referred to as being in favor of the employer, and the Red Book was referred to as being in favor of the contractor, rather than their purposes of publication. In the 2017 versions of the contracts, a more balanced risk distribution was made, and giving prominence to the functions of the contracts, was aimed.
As another novelty, it was aimed to diversify project management mechanisms. In this respect, broader discretion and decision-making powers are given to “Engineers”. Uncertainties in project management have been attempted to be abolished by stipulating definitive terms regarding the provisions in which there is no clarity as to the time periods.
Again, in order to reduce ambiguous regulations, the clarity and precision in the writing has increased. Thus, the rights and obligations of the parties have been clarified. In addition, international best practices have been reflected in contracts to create more user-friendly contracts.
Moreover, it is intended that the elements of the newer FIDIC contracts published after 1999 (especially, the Gold Book-2008) have been added to the updated contracts, and the 18-year experiences of the users are reflected in these three revised contracts.
In addition to reflecting the above-mentioned updated reasons of the contracts, the guidelines published for the purposeful use of contracts have also changed. The FIDIC strongly recommends that the following five "Golden Principles" be considered when using all contracts:
- The duties, rights and responsibilities of the Parties shall remain as they are in the general provisions.
- Special conditions must be formulated in such a way that ensures clarity and removes contradiction.
- Special conditions should not disrupt the risk distribution balance.
- The time to fulfill the obligations of the Convention and to exercise the rights must be reasonable.
- All disputes must be directed to the Dispute Adjudication / Avoidance Board (“DAAB”) before referring to arbitration.
Most Remarkable Changes in the 2017 Updates
Interpretation Rules
The definitions have been expanded to mean uniformity in the sense used, apart from the language used, and attempts have been made to reduce the headings that may lead to different interpretations of the parties. Some of the noteworthy definitions are as follows:
- May. Statement used in matters for which election is granted;
- Shall. Statement used in liability issues;
- Include. Not limited to the counted matters;
- Claim. Request or claim;
- Dispute. Where a request or claim is alleged, not accepted and the claimant does not consent to, or the assignment is not accepted by, one of the parties;
- Cost Plus Profit. Unless otherwise agreed to in the contract, it is 5%;
- Execute the Works. Completion of design, construction and works and elimination of defects/ deficiencies from previous versions.
Claim and Determination
Another important innovation is with respect to the "Determination" provision in Article 3.5 of each of the three books. The Determination regulation in Article 3.5 of the FIDIC 1999 is taken to Article 3.7 in FIDIC 2017, and structural changes are made. According to the new clause (“Determination” is made by the “Engineer” in the Red and Yellow Books and by the “Employer” in the Silver Book), upon the claim of one of the parties, the parties are to make negotiations within 42 days, and sign a binding agreement if they agree. However, if these parties fail to reach an agreement within 42 days, the claim is directed to the Engineer for determination. The Engineer also has a 42-day period in which to make a Determination. The party who is not satisfied with the determination made by the Engineer must provide a “Notice of Dissatisfaction” notice within 28 days. Determination made in the event that the Notice of Dissatisfaction is not given within 28 days becomes definite and binding. In addition, if a determination is not made within 42 days by the Engineer, the claim is regarded as rejected, and the matter is then considered to be a dispute.
Dispute Resolution
One of the most important changes, including all three books, has been made regarding the solution of disputes. Firstly, the claim and dispute regulation in Article 20 of the contracts in FIDIC 1999 is divided into two, and Article 20 is regulated as a claim article for both the Contractor the Employer, and Article 2.5 regulating the Emloyer’s Claim is removed from the contract. Similar applications and equal time constraints have been introduced in new Article 20 for both the Employer and the Contractor. Thus, the effort to create more balanced contracts, which is one of the objectives of the 2017 updates, is reflected in this Article. Furthermore, preparing the grounds to resolve disagreements between parties by agreement, by way of separating the claim and the dispute, constitutes a part of the dispute-prevention mechanism, which is also one of the purposes of the updates.
One of the most remarkable points of the FIDIC 2017 updates is that the Dispute Adjudication / Avoidance Board (DAAB) has taken the place of the DAB (Dispute Adjudication Board), which is the FIDIC-specific dispute resolution path before the arbitration trial. With this regulation, the DAAB delegation is transformed into a structure that has been assigned, and has been in service, since the enforcement of the contract. It is aimed to reach the agreement of the parties before it becomes a dispute, by intervening in the process before the emergence of a dispute, with the standing DAAB delegation that has been in duty since the beginning of the contract, instead of the delegation that is appointed after the emergence of a dispute.
With the FIDIC 2017 updates, the authorities of the DAAB have also been extended with the new structure. The delegation, which will be on duty since the beginning of the contract, now has been granted the right to request meetings, make field visits, and even claim collateral when necessary, in order to prevent disputes.
We are of the opinion that a costly arrangement has been introduced for both sides, considering that the DAAB, which has been equipped with many new authorities and will be in office from the beginning of the contract, will be composed of a delegation of 3 people.
Financial Structure
Another regulation, which may be of a compelling nature, especially in terms of the Employer, is the Article related to the financial structure. Contract Data is introduced by FIDIC 2017 updates. Tender documents, technical requirements, field reports, as well as financial structuring documents, are included in this document group. This means that the entire financial structure must be set up before the contract signing date. However, in the FIDIC 1999 regulation, the evidence concerning the financial structure was presented at the request of the Contractor. This may be a procedural obstacle to the Worker, especially in projects financed as project financing, as many credit institutions are looking for a signed project contract to release the loan amount.
Another arrangement that is in favor of the Employer stipulated by the FIDIC 2017 is that the performance guarantee can be held until the end of the warranty period, and until the Contractor leaves the field, unlike the regulation of the FIDIC 1999, which stipulated that the performance guarantee could be held until the completion of the work.
Conclusion
The Red Book, the Yellow Book, and the Silver Book, as published under the FIDIC 2017 updates, seem to be aimed at meeting the needs of the industry, and establishing a more balanced framework of contracts between the parties. Time will show to what extend these model contracts, which are fairly new, will be adopted and selected by sector players. However, we are convinced that the contracts updated after 18 years shall be accepted in the sector considering that they have been made more suitable to the present conditions, and reflect the users’ experience of the passing of time.
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