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FIDIC'S NEW STANDARD FORMS OF CONSTRUCTION CONTRACT: AN INTRODUCTIONIn September 1999, FIDIC (the International Federation of Consulting Engineers), which has its Secretariat in Lausanne, Switzerland, updated its existing standard forms of contract for engineering construction and for mechanical and electrical plants by publishing four new standard forms of contract designed to take account of developments over the past decade or so in the international construction industry The new forms are:    Conditions of Contract for Construction for building and engineering works designed by the employer (the new Red Book); Conditions of Contract for Plant and Design-Build for electrical and mechanical plant and for building and engineering works designed by the contractor (the new Yellow Book); Conditions of Contract for EPC Turnkey Projects EPC being the abbreviation for Engineer - Procure - Construct (the Silver Book); and Short Form of Contract for projects of relatively small value) (the Green Book) Description of the new forms The new books are not directly comparable to the old (pre-1999) FIDIC standard forms of construction contract. It will be recalled that FIDIC's old forms of construction contract were:    Conditions of Contract for Works of Civil Engineering Construction, Fourth Edition, 1987 (reprinted in 1988 with editorial amendments and reprinted in 1992 with further amendments) (the old Red Book); Conditions of Subcontract for Works of Civil Engineering Construction, First Edition, 1994 (to function with the old Red Book); Conditions of Contract for Electrical and Mechanical Works, Third Edition, 1987 (reprinted in 1988 with editorial amendments) (the old Yellow Book); and Conditions of Contract for Design-Build and Turnkey, First Edition, 1995 (the Orange Book). In 1996, FIDIC published a Supplement to the old Red Book providing for: 1. a Dispute Adjudication Board (or 'DAB') as an 'acceptable alternative' to the engineer's former role in dispute resolution (the DAB had already been provided for in the General Conditions of the Orange Book published in 1995); 2. optional amendments to the old Red Book to enable payments to be made on a lump sum basis instead of on the basis of a bill of quantities; and 3. an optional amendment to the old Red Book to safeguard the contractor in case the engineer was late in certifying payment (the old Red Book only protected the contractor where the employer paid late, not where the engineer certified late). Similarly, in 1997, FIDIC published a Supplement to the old Yellow Book providing, again, for a DAB as an acceptable alternative to the engineer's former role in dispute resolution. Although the new Red and Yellow Books follow the same principles and philosophy as their predecessors, they are considerably different in actual structure, layout and wording. A serious shortcoming of the old Red and Yellow Books was that as they had been prepared by different drafting groups, they were drafted quite differently, even when dealing with subject-matter that was (or should be) common to both, eg (1) the old Yellow Book contained a force majeure clause whereas the old Red Book provided, instead, for 'special risks'; (2) the old Yellow Book contained a clause dealing with 'Limitations of Liability' whereas the old Red Book did not; and (3) the procedures for requesting engineers' decisions on disputes were not the same in the two Books. It was indefensible for FIDIC to be issuing two separate standard forms of contract dealing with the same or similar subject-matter in a different way for no apparent reason and also placed an unnecessary burden on users, who were obliged to familiarize themselves with more contract clauses and procedures than should have been necessary. One of the aims of the new forms was therefore to harmonies clauses, definitions and wording, across all the new forms, whenever this could be justified and, in particular, in the new Red and Yellow Books. With this goal in mind, the old Red and Yellow Books were restructured (and the new Silver Book was structured) so that they would all be based on 20 main clauses, as had been true of the Orange Book published in 1995, and the wording of clauses and definitions were made the same or similar where appropriate. The goal of harmonization was facilitated by the assignment of the responsibility for the drafting of the new Red, Yellow and Silver Books to a single FIDIC Task Group and by requiring that it coordinate closely with the Task Group responsible for the new Green Book (for small works, as indicated above). Another structural change is that the new Red and Yellow Books are not broken down strictly into 'civil' and 'electrical and mechanical' forms, as before, but into 'building and engineering works designed by the Employer' (the new Red Book) and 'electrical and mechanical plant, and for building and engineering works, designed by the Contractor' (the new Yellow Book). In the case of both the new Red and Yellow Books, administration of the contract and supervision of the execution of the works is carried out by the engineer who is employed by the employer as is the case with the old Red and Yellow Books. However, as regards dispute resolution, the DAB is no longer merely an 'acceptable alternative' to the engineer (as indicated in the 1996 Supplement referred to above), but has now firmly replaced the engineer in the General Conditions of both the new Red and Yellow Books. The Orange Book has been effectively replaced by the entirely new Silver Book (as well as by the new Yellow Book). While preparing the new books, FIDIC concluded that there was a market demand for an entirely new standard form of contract for turnkey projects which, while allowing the contractor a correspondingly higher contract price, would provide the employer (so it was believed) with greater certainty of final price and greater assurance that the final completion date would be respected. As stated in the Introductory Note to the First Edition of the new Silver Book: 'During recent years, it has been noticed that much of the construction market requires a form of contract where certainty of final price, and often of completion date, are of extreme importance. Employers on such turnkey projects are willing to pay more - sometimes considerably more - for their projects if they can be more certain that the agreed final price will not be exceeded. Among such projects can be found many projects financed by private funds, where the lenders require greater certainty about a project's costs to the Employer than is allowed for under the allocation of risks provided for by FIDIC's traditional forms of contracts. Often the construction project (the EPC - Engineer, Procure, Construct - Contract) is only one part of a complicated commercial venture, and financial or other failure of this construction project will jeopardize the whole venture. For such projects it is necessary for the Contractor to assume responsibility for a wider range of risks than under the traditional Red and Yellow Books. To obtain increased certainty of the final price, the Contractor is often asked to cover such risks as the occurrence of poor or unexpected ground conditions, and that what is set out in the requirements prepared by the Employer actually will result in the desired objective.' The new Silver Book is FIDIC's response to this perceived market demand. While FIDIC's standard forms of contract have traditionally observed the principle of balanced risk sharing between the employer and the contractor, the new Silver Book avowedly - and unashamedly - places more risk on the contractor than FIDIC's traditional standard forms. Among other things, the contractor is made responsible for the accuracy of the 'Employer's Requirements' (that is, the design parameters supplied by the employer on the basis of which the contractor is expected to develop his design), as well as for unforeseeable conditions, including underground conditions (but subject to a force majeure clause). However, as is well known, merely transferring risks blindly from the employer to the contractor will not necessarily better ensure that the works are done on time or at the agreed price. Instead, this may, at best, cause more claims and disputes and, at worst, bankrupt the contractor, thereby requiring the employer to re-bid the job and, almost inevitably, pay a higher price to get the work done. Acknowledging this, FIDIC cautions, in its Introductory Note to the Silver Book, that the form is not suitable for use where, among other things, construction will involve substantial work underground or work in other areas which tenderers cannot inspect or if there is insufficient time or information for tenderers to scrutinize and check the employer's requirements or for them to carry out their designs, risks assessment studies and estimates. In such cases, FIDIC accepts, the contractor would be required to assume risks that he cannot reasonably be expected to evaluate, which would not be in the interest of either party Accordingly, in these . Situations, FIDIC recommends that the new Yellow Book be used, which provides for balanced risk sharing between the employer and the contractor. As indicated by the above quotation, the new Silver Book is intended for use as an EPC contract within a BOT (Build-Operate-Transfer) or similar type structure, and also for other types of project where government departments, private developers or others wish to implement a project on a fixed turnkey basis with a strictly two-party approach, that is, without the intermediary of the engineer. The fourth new book, the Short Form of Contract (the General Conditions are only ten pages long), which is also called the 'Green Book', is entirely new. It is basically intended for building and engineering works of relatively small capital value (typically under US$500,000) or for relatively simple or repetitive work, or work of short duration (typically six months or less). Until the issuance of this Book, there existed no FIDIC short form of contract for use in international construction. INNOVATIONS MADE BY THE NEW BOOKS FOR MAJOR WORKS Within the confines of this brief article, it is not possible to examine each of the above new standard forms in detail. However, some of the innovations that have been introduced into the three new Books for major works may be illustrated by reference to the following new provisions in the new Red Book which, I suggest, either (1) favour the contractor, or (2) favour the employer. In most instances, the new Yellow and Silver Books contain identical or similar provisions. New provisions favoring the contractor New provisions which may be said to favour the contractor include the following: 1. The employer is required to submit, within 28 days after receiving any request from the contractor, 'reasonable evidence that financial arrangements have been made and are being maintained' which will enable the employer to pay the contract price in accordance with the contract. If the employer intends to make 'any material change' to his financial arrangements, he is required to give notice to the contractor with detailed particulars (Sub-Clause 2.4). 2. If the employer considers himself to be entitled to any payment under or 3. 4. 5. 6. 7. in connection with the contract, and/or to any extension of the Defects Notification Period (the new name for the Defects Liability Period), the employer or the engineer must give 'notice and particulars' to the contractor. The particulars must 'specify the Clause or other basis of the claim ... and ... include substantiation of the amount and/or extension to which the Employer considers himself to be entitled'. The notice must be given as soon as practicable' after the employer became aware of the event or circumstance giving rise to the claim. The employer is expressly denied the right to set off against or make any deduction from a certified amount or otherwise claim against the contractor, except in accordance with this provision (Sub-Cause 2.5). The contractor's right to adjustment of the contract price to take account of any increase or decrease in cost (as defined) resulting from a change in law in the country where the site is located has been extended (beyond 'changes in legislation', as in e.g., the Orange Book) to include changes in the judicial or official governmental interpretation of laws made after the base date (as defined), which affect the contractor in the performance of his obligations (Sub-Clause 13.7). If the contractor is not paid on time, the contractor is entitled to receive 'financing charges compounded monthly on the amount unpaid during the period of delay'. Unless otherwise stated in the Particular Conditions, these financing charges are to be calculated at the annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment and should be paid in such currency (Sub-Clause 14.8). The above provision is derived from the Orange Book. While the old Red Book provided that the contractor was entitled to interest on late payments, it did not specify how this was to be calculated. The contractor is now entitled, after giving notice, to suspend or reduce the rate of work where the engineer fails to certify an interim payment certificate or the employer fails to provide information about the employer's financial arrangements for paying the contract price (see point (1) above) (Sub-Clause 16.1). Under the old Red Book (Sub-Clause 69.4), the contractor was only entitled to suspend or reduce the rate of work where the employer was not paying an amount due under any certificate. Within 42 days after receiving a claim or any further particulars supporting a previous claim of the contractor, the engineer is now expressly required to 'respond with approval, or with disapproval and detailed comments' (Sub-Clause 20.1). Under the old Red Book, there was no express requirement that the engineer respond to the merits of the contractor's claims at all, except in the case of a dispute (Clause 67). Under the General Conditions of the new Books for major works, disputes are now required to be submitted to a DAB for decision. In the case of the new Red and Yellow Books, the DAB must be appointed at the time the contract is signed and remain in place until it is concluded (under the General Conditions of the Silver Book, a DAB is appointed for each dispute and ordinarily only remains in office until that dispute is decided) (Clause 20). Under the old Red and Yellow Books, disputes had to be submitted to the engineer for a decision, as a condition to arbitration. The provision for a DAB to replace the engineer for the settlement of disputes in the General Conditions may be the most favorable of the innovations in the new Books from the contractor's point of view. New provisions favoring the employer New provisions which may be said to favour the employer include the following: 1. The employer is now entitled, on not less than 42 days' notice, to replace the engineer provided that the employer may not do so with a person against whom the contractor 'raises reasonable objection' by notice to the employer (Sub-Clause 3.4). Under the old Red Book, the employer had no right to change the engineer (Sub-Clause 1.1(iv)). 2. If the contract specifies the contractor shall design any part of the permanent works (as defined) then such part must, when completed, be 'fit for such purposes for which the part is intended as are specified in the Contract` (Sub-Clause 4.1(c)). Under the old Red Book, there was no requirement that any works designed by the contractor be fit for purpose. 3. Where the contractor makes a claim for adverse 'physical conditions' (as defined) which he considers to have been unforeseeable (as defined), the engineer may review whether other physical conditions 'in similar parts of the Works (if any)' were more favourable than could reasonably have been foreseen. If so, the engineer may reduce the amount of any cost (as defined) claimed by the contractor for adverse physical conditions by the amount of the reduction in cost of such more favorable conditions, so long as the net effect does not result in a reduction in the contract price (Sub-Clause 4.12). 4. The contractor is required to submit detailed monthly progress reports to the engineer, including charts and detailed descriptions of progress, photographs showing the status of manufacture and, of progress on the site, details regarding the manufacture of each main item of plant and materials, records of the contractor's personnel and equipment as well as other information (Sub-Clause 4.21). Such progress reports are required to accompany the contractor's applications for Interim Payment Certificates (Sub-Cause 14.3), implying that payment may be conditional on the receipt of such reports. 5. The employer is expressly entitled to extend the Defects Notification Period for the works or a section of the works for up to two years if it cannot be used for the purposes for which it was intended by reason of a defect or damage (Sub-Clause 11.3). 6. The employer has the right, after notice to the contractor, to terminate the contract at any time for the employer's convenience provided that the employer may not do so in order to execute the works himself or to arrange for them to be executed by another contractor. In the case of such termination, the contractor is paid for work done but is deprived of the right to profit on the balance of the contract (Sub-Clauses 15.5 and 19.6). 7. The contractor is required to give notice to the engineer of any claim for an extension of time or additional payment 'not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance' giving rise to a claim. If he fails to do so, the employer is stated to be discharged from all liability in connection with the claim. In addition, the contractor is required to send to the engineer a fully detailed claim within 42 days after the contractor became aware, or should have become aware, of the event or circumstance giving rise to the claim (unless the engineer approves a longer period). If the contractor should fail to comply with this latter requirement, any extension of time and/or additional payment must be adjusted to take account of the extent to which the failure may have prevented or prejudiced proper investigation of the claim (Sub-Clause 20.1). Conclusion Not only are the new Red, Yellow and Silver Books different in structure, layout and wording from their predecessors, but they are also more detailed, reflecting the increasing complexity and (often) size of international construction projects and also recognizing the increasing need, in such projects, for more extensive contract administration and supervision. Consequently, users will inevitably need time to become familiar with them. However, as indicated earlier, users should be aided by the identical or similar treatment of common subject-matter (eg force majeure, claims and disputes) throughout the new books for major works, and should also appreciate the inclusion of (1) helpful charts to illustrate the typical sequences of (a) principal events' during the life of the contracts, (b) payment events' and (c) 'dispute events', (2) numerous alternative example clauses in the 'Guidance for the Preparation of Particular Conditions' in each book, and (3) seven different forms of guarantee or bond, most of which incorporate the excellent (but still little known) new ICC Uniform Rules for Demand Guarantees or Uniform Rules for Contract Bonds. Consequently, the present author is convinced that, with time, the new books will be widely accepted and be seen as representing a significant advance over their predecessors. While FIDIC does not presently anticipate issuing a new form of subcontract for the new Red Book (as this is not justified by demand for the existing form of Subcontract for the old Red Book), a Guide to the new books for major works has been prepared and is expected to be published by FIDIC later this year (2000) and should be of assistance to all users of the new books, especially those still unfamiliar with them. Note For a detailed discussion of the clauses of a more legal nature in the new FIDIC forms, see the author's 'FIDIC's New Standard Forms of Contract - Force Majeure, Claims, Disputes and Other Clauses (2000) ICLR 235. For articles dealing in detail with other clauses in the new forms, see Christopher Wade, 'FIDICs Standard Forms of Contract - Principles and Scope of the Four New Books' and Peter Booen, 'The Three Major New FIDIC Books', both of which appear in [20001 ICLR at pages 5 and 24, respectively. Messrs Wade, Booen and the author were all members of the FIDIC Task Group that was responsible for preparing the new books. CLAIMS & ADJUSTMENTS OF THE CONTRACT In the various Sub-Clauses, the Contractor's entitlements to claim are expressed using similar wording, typically as follows: "If the Contractor suffers delay and/or incurs Cost .., the Contractor shall give notice... and shall be entitled subject to Sub-Clause 20. 1[..], to: (a) An extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8. 4[..], and (b) Payment of any such Cost [plus reasonable profit], which shall be included in {EPCT which shall be added to} the Contract Price." Note the following aspects of this typical wording:     "The Contractor shall give notice...": which is obligatory, but a failure to notify may be due to him not having suffered delay and not having incurred Cost. "The Contractor ... shall be entitled ...": which is not stated as being subject to anyone's opinion. "Subject to Sub-Clause 20.1 ...": the second and the final paragraphs of which may affect the Contractor's entitlements. "An extension .... If completion is... delayed ...": so it should be calculated by reference to the delay in completion. Sub-Clause l0.1 (i) defines the extent of work to be completed within the Time for Completion, which must include the matters described in sub-paragraphs (a) and (b) of Sub-Clause 8.2 but may exclude minor outstanding work and defects which will not substantially affect use for the intended purpose, as permitted in Sub-Clause 10. 1 (a). "Payment of any such Cost...µ which is the Cost attributable to the event or circumstance, excluding Costs which are not attributable thereto. "Plus reasonable profit ...µ this phrase is included in Sub-Clause which relate to failure by (or on behalf of) the Employer, and not to other risks. Employer's Entitlement Sub-Clause 1.9 CONS Delayed Drawings or Instructions Contractor's Entitlement Contractor may claim extension of time, Cost and reasonable profit if Engineer fails to instruct within notified reasonable time 1.9 P&DB Errors in the Contractor may claim extension of Employer's time, Cost and reasonable profit for Requirements error in Employer's Requirements which was not previously discoverable 2.1 Right of Access to the Site* Contractor may claim extension of time, Cost and reasonable profit if Employer fails to give right of access to Site within time stated in the Contract Procedure with which Employer must comply when claiming payment from the Contractor and when claiming an extension to the Defects Notification Period Contractor May claim extension of time, Cost and reasonable profit for errors in original setting-out points and levels of reference Contractor may claim extension of time and Cost if he encounters physical conditions which are Unforeseeable Employer entitled to payment if Contractor uses power, water or other services provided by the Employer, if any, 2.5 Employer's Claims* 4.7 Setting Out 4.12 Unforeseeable Physical Conditions 4.19 Electricity, Water and Gas* without prior notice under SubClause 2.5 4.20 Employer's Equipment and FreeIssue Material* Employer entitled to payment if Contractor uses the Employer's Equipment, if any, without prior notice under SubClause 2.5 Contractor may claim extension of time and Cost attributable to an instruction to Contractor to deal with an encountered archeological finding Contractor may claim extension of time, Cost and reasonable profit if testing is delayed by (or on behalf of) the Employer Employer may claim costs if defective Plant, Materials or workmanship is rejected and subsequently retested Employer may claim costs if Contractor fails to carry out remedial work and if he would not have been entitled to be paid for it Extension of Time for Contractor may claim extension of time if completion (see Sub-Clauses 8.2 & 10. 1) is or will be delayed by a listed cause 4.24 Fossils* 7.4 Testing* 7.5 Rejection* 7.6 Remedial Work* 8.4 Extension of Time for Completion* 8.5 Delays Caused by Authorities* 8.6 Rate of Progress* Contractor may claim extension of time if Country's public authority causes Unforeseeable delay Employer may claim costs attributable to revised methods which Contractor adopts in order to overcome a delay for which no extension of time is due Employer may claim prescribed de lay damages if Contractor fails to achieve completion within Time for Completion Contractor may claim extension of time and Cost if Engineer instructs a suspension of progress Employer may claim costs if Works or Section repeatedly fails Test on Completion Contractor may claim Cost and Employer's reasonable profit attributable to the entitlement to taking over of a part of the Work prescribed delay damages is reduced by a proportion related to the contract value of the part taken over 8.7 Delay Damages* 8.9 Consequences of Suspension* 9.4 Failure to Pass Tests on Completion* 10.2 Taking Over of Parts of the Works 10.3 Interference with Contractor may claim extension of tests of Completion* time, Cost and reasonable profit if Employer delays a Test on Completion 11.3 Extension of Defects Notification Period* Employer may claim extension of the Defects Notification Period if Works or Section or major Plant cannot be used for intended purpose because of any defect Employer may claim costs if Contractor fails to remedy a defect for which Contractor is responsible Contractor may claim Cost and reasonable profit if instructed to search for cause of a defect for which he is not responsible Contractor may claim Cost and reasonable profit if Employer delays a Test after Completion Engineer evaluates each item of work, applying measurement and appropriate rate or price Employer may claim costs attributable to repeated failures of Test after Completion Contractor may claim a Cost which, although it had been included in a BoQ item, he would not recover because the item was for work which has been omitted by Variation Contractor may claim Cost and Employer may reasonable profit if Employer delays claim prescribed access to the Works or Plant non-performance damages in event of failure to pass 11.4 Failure to Remedy Defects* 11.8 Contractor to Search* 12.2 P&DB Delayed Tests* 12.3 CONS Evaluation 12.3 P&DB Retesting* 12.4 CONS Omissions 12.4 P&DB Failure to Pass Tests after Completion* Test after Completion 13.2 CONS Value Engineering Contractor may claim half of the saving in contract value of his redesigned post-contract alternative proposal, which was approved without prior agreement of such contract value and of how saving would be shared The Contract Price shall be adjusted as a result of Variations Employer may claim payment of reduction in Contractor's Cost attributable to a change in the Laws of the Country 13.3 Variation Procedure* 13.7 Adjustments for Contractor may claim extension of changes in Legislation* time and Cost attributable to a change in the Laws of the Country 14.4 Schedule of Payments* If interim payment installments were not defined by reference to actual progress and actual progress is less than that on which the schedule of payments was originally based, these installments may be revised 14.8 Delayed Payment* Contractor may claim financing charges if he does not receive payment in accordance with SubClause 14.7 15.3 Valuation at Date of Termination* Works, Goods and Contractor's Documents are valued after Employer has terminated Contract Employer may claim losses and damages after terminating Contract Contractor may claim extension of 15.4 Payment after Termination* 16.1 Contractor's Entitlement to Suspend time, Cost and reasonable profit if Work* Engineer fails to certify or if Employer fails to pay amount certified or fails to evidence his financial arrangements, and Contractor suspends work 16.4 Payment on Termination* 17.1 Indemnities* Contractor may claim losses and damages after terminating Contract Contractor may claim cost Employer may attributable to a matter against claim cost which he is indemnified by Employer attributable to a matter against which he is indemnified by Contractor Contractor may claim extension of time, Cost and (in some cases) reasonable profit if Works, Goods or Contractor's Documents are damaged by an Employer's risk as listed in Sub-Clause 17.3 Contractor may claim cost of premiums if Employer fails to effect insurance for which he is the "Insuring Party" Employer may claim cost of premiums if Contractor fails to effect insurance for which he is the "Insuring Party" Employer may claim payment of reduction in cost of premiums if the Contractor's insurance of an Employer's risk becomes unavailable at commercially reasonable terms Contractor may claim extension of time and (in some cases) Cost if Force Majeure prevents him from performing obligations 17.4 Consequences of Employer's Risks* 18.1 General Requirements for Insurances* 18.2 Insurance for Works and Contractor's Equipment (last paragraph)* 19.4 Consequences of Force Majeure* 19.6 Optional Payment, Termination and Release* Contractor work and other Costs are valued after progress is prevented by a prolonged period of Force Majeure and either Party then gives notice of termination. Procedure with which the Contractor must comply when claiming an extension of time and/or additional payment. 20.1 Contractor's Claim* Sub-Clauses marked are those relevant to EPCT 3.5, although their details may differ from those in the provisions relevant to CONS/P&DB 3.5 FIDIC'S NEW SUITE OF CONTRACTS - CLAUSES 17 TO 19 Risk, Responsibility, Liability, Indemnity, Insurance and Force Majeure I. Introduction Part I of the excellent article by Christopher Seppala in which he explains the thinking behind Clauses 17 & 19 of FIDIC's new suite of contracts, published by ICLR, (1) prompts me to respond with a critique of these two clauses and must, by necessity, include the related Insurance Clause sandwiched between them. Mr. Seppala explains lucidly the changes made in the FIDIC forms, which led to the new forms and how the new Clauses 17 and 19 differ from their equivalent provisions in FIDIC's old Red, Yellow and Orange Books. In this article I attempt to highlight the shortcomings and problems in these new clauses and outline what, in my view, should have been the text of these three clauses. A. Clause 17 - Risk & Responsibility 1. Although this clause of FIDIC's new suite of contracts is entitled "Risk & Responsibility", it encompasses other contractual provisions, including Indemnities; Limitation of Liability; and the unrelated topic of Intellectual and Industrial Property Rights. In fact, Clause 17 starts from the wrong end of the stick by dealing first with "Indemnities" and then it somehow back tracks to deal with "Responsibility" and then takes a further leap backwards and returns to "Risk" and finally marches on to "Liability". This illogical sequence hardly helps the non-lawyer professionals for whom these provisions are intended. The clause leaves even the expert in the field wondering about the purpose of this confused and baffling sequence. 2. The theory of Risk has developed in the past twenty years or so to such an extent that it is now common knowledge that for a contract to be performed in an effective manner, the inherent risks must be allocated to the contracting parties on some logical basis, which should be made known to them. Thus, it has been said that the main purpose of a contract is to identify the principles of allocating the risks facing the contracting parties. Once these principles are identified, the consequences flow in the natural pattern of Risk to Responsibility to Liability to Indemnity to Insurance. (2) The format of Clause 17 should, therefore, follow that same sequence, with the insurance provisions left to the next clause, i.e. Clause 18, if it is desired that they should be presented separately. 3. Accordingly, Clause 17 ought to start with the provisions for "Risk" and not with "Indemnities" and Sub-clause 17.3 should be 17.1. Furthermore, the wording of Sub-clause 17.1 should then start by explaining that the risks included under Clause 17 of the conditions of contract are only those Risks of Loss and Damage and not the whole spectrum of the risks to which the project is exposed. The term "Employer's Risks" in the context of this clause should therefore be replaced by "Employer's Risks of Loss and Damage", since these risks are confined to those which lead to some form of accidental loss or damage to physical property or personal injury, which in turn may lead to financial and/or time loss risks, directly or through the other clauses of the contract. 4. If this explanation is not given and the mistake of referring to the risks under Clause 17 as "Employer's Risks" is not corrected, then there is serious danger that the reader, and of course the user, will conclude that having identified in Clause 17 the Employer's Risks, all the other risks are the Contractors' risks, including the contractual risks in the remaining provisions of the contract. This problem can be highlighted by reference to Clause 17 of the Orange Book where the draftsman fell into that trap and stated expressly in Sub-clause 17.5 that "The Contractor's risks are all risks other than the Employer's Risks listed in Sub-Clause 17.3". This mistake has led to many instances of misunderstanding, conflict and at least one serious arbitral proceedings, where the employer pointed out that by Subclause 17.5 he bears no risks under the contract other than those specified in Sub-clause 17.3. 5. It is also interesting to note that, in referring to the article by Mr. Seppala, the editors of ICLR fall into the same trap in their "Introduction". They refer to the term "Employer's Risks" in Sub-clause 17.3 as the contractual risks concluding that "Part I (of the article) consider the contractual risks to be borne by contractor and employer...µ (3)As explained above, such a conclusion is of course incorrect. 6. Accordingly, it is essential to understand that the Employer's Risks traditionally identified under Sub-clause 20.3 of the old Red Book and those under Sub-clause 17.3 of the new suite of contracts, are only the amalgamation of risks which are beyond the control of either the contractor alone or both the contractor and the employer. Furthermore, these risks might have an implied resultant loss or damage to physical property or cause bodily injury, all of which are insurable. In contrast, very few of the other risks to which the project is exposed are insurable. 7. There are other problems in Clause 17. The second problem is the allocation of the risks specified in sub-paragraph (h) of Sub-clause 17.3 to the employer. (4) Whilst this does not form a departure from the old Red Book, it was hoped that the new suite of contracts would be up to date with developments in this field. The origin of this sub-paragraph goes back to the ACE Form of Contract recognizable as the route for the FIDIC Red Book. Whilst it is true that the contractor has no control over the events identified in this sub- paragraph, he is in control over their consequences and can instigate protection measures. The contractor can also mitigate any losses that might occur should any of these risks eventuate. Perhaps, more importantly, all the risks identified in sub-paragraph (h) represent events that are insurable and are generally required to be insured under the terms of the contract. The employer ultimately pays for such insurance through the contract provisions leaving the contractor in charge of any necessary repair, its cost and any claim negotiations with the Insurers following the filing of such claims. These risks are not included as Employer's Risks in the ICE domestic contract or the others rooted in it. (5) 8. The third problem in Clause 17 of the new suite of contracts is the newly introduced restriction in Sub-clause 17.1(b)(ii) of the contractor's indemnity to the employer for property damage. This indemnity is now based on negligence rather than on legal liability as was provided in Clause 22.1 of the old Red Book. (6) This change is a retrograde step and copied from standard forms of contract for Building Works in the UK (7) without any benefit to either the contractor or the employer. The only beneficiary as a result of this change is the insurance market since to cover this gap a new policy is now needed, which is commonly referred to in the UK as the non-negligence insurance policy. As Mr. Seppala explains in his article, it seems that in making this change, the draftsmen of Clause 17 of the new suite of contracts took comfort from a footnote in Hudson's Building and Engineering Contracts (1995), Vol. II, page 1437, where reference is made to both the RIBA and the ICE forms of contract. The reference to the ICE form of contract in that footnote is incorrect since civil engineering contracts do not distinguish between the indemnity required to be given by the contractor for property damage on one hand and that for bodily injury, disease or death of any person on the other. In fact, the standard forms of contract for civil engineering construction in the UK or elsewhere do not impose the restriction now introduced. (8) 9. The last major problem in Clause 17 relates to the allocation to the contractor of the risk of "use or occupation by the employer of any part of the Permanent Works" in the EPC Form of contract. The reasoning for such allocation is extremely obscure since such use or occupation by the employer of any part of the Permanent Works cannot be within the control of the contractor and thus it is not a risk that could be assessed or against which some preventative measure could be taken. 10. Finally, there are some minor problems of drafting in Clause 17, which should be addressed for the proper understanding of what is intended by such a clause. For example, Sub-clause 17.2 is a "Responsibility" clause; Sub-clause 17.5 is a "Risk" clause; and accordingly they should be designated as such. Another example is the need for there to be a statement as to proportional apportionment of indemnities when both employer and contractor have contributed to damage, loss or bodily injury. This would be particularly important where an indemnity clause is strictly interpreted under the applicable law of contract. (9) A. Clause 18 - Insurance 6. Whilst there was no commentary provided by Mr. Seppala on Clause 18 of FIDIC's new suite of contracts, it is important to include one here, since, as explained earlier, insurance is the last of the contractual provisions in the chain of Risk; Responsibility; Liability; Indemnity; and Insurance. 7. The first major problem in this Clause is the fact that the "Insuring Party", as defined in the contract, is not the same for all the insurance policies required under the contract and it may be either of the two parties, employer or contractor. This is a recipe for confusion, gaps and/or overlaps in the combined insurance package, which could cost the parties dearly. It could only be advantageous to those involved in the insurance market. 8. The second paragraph of Clause 18 assumes that there would be a meeting between the parties prior to the date of the Letter of Acceptance at which the whole insurance package would be discussed and agreement would be reached on a policy towards insurance, which would "take precedence over the provisions of (Clause 18)". It remains to be seen as to how this provision would operate in practice and the effect it would have. 9. There are many drafting ambiguities in this Clause, which should be clarified if the contract is to be operated successfully. Examples are:     Sub-clause 18.1 provides that "Wherever the Employer is the insuring Party, each insurance shall be effected with insurers and in terms consistent with the details annexed to the Particular Conditions". (10) What is intended by the term "details"? If, as stated, these details are expected to furnish the terms of the insurances supplied by the employer, then surely this must mean that nothing less explicit than the policies of insurance themselves have to be annexed. Sub-clause 18.1 provides that "When each premium is paid, the insuring Party shall submit evidence of payment to the other Party ...µ (11) this wording does not provide the intended meaning. Payment of each insurance premium should be made to initiate or maintain the insurance cover and evidence should be provided whenever required. Sub-clause 18.2(d) specifies the deductibles to be applied to the insurance cover for some of the Employer's risks. Should the insurance cover for the Contractor's risks be subject to no deductibles? What is the meaning of "insurable at commercially reasonable terms" in Sub-clause 18.2(d); in the last paragraph of Sub-clause 18.2; and in Sub-clause 18.3(d)(iii)? A. Clause 19 - Force Majeure 6. As observed by Mr. Seppala, a force majeure clause is an increasingly common feature of international contracts. It is the fashion, but is it necessary or even desirable? For FIDIC, I suspect that importing force majeure from the old Yellow and Orange Books into the new suite of contracts was a desire to show a closer position to the civil law concepts and a move away from the common law principles. If the truth be told, such a move in the context of "force majeure" is neither necessary nor desirable because:  Firstly, incorporating a clause such as Clause 19 into a contract not only duplicates what is usually provided for in the civil code of a civil law jurisdiction, but also enlarges the scope of the meaning and application of force majeure. This could  result in the Parties getting into a muddle and a contradictory situation Secondly, the original concept of the Special Risks in Clause 65 of the old Red Book is all the protection that the contractor needs; Thirdly, most of the risks, which now come under the FIDIC definition of force majeure, are insurable and required to be insured. Therefore, no real benefit accrues to the contractor from being protected by such a clause without having to slip into uncharted waters. 6. Therefore, whilst it must be agreed that the treatment of the risks specified in Clause 19 should be a special one, it is erroneous to swing to the extreme end of the scale and designate them in the category of false majeure, particularly when that tem has legal implications in certain jurisdictions. The answer for the purposes of these conditions of contract should to designate as what they are, i.e. an exceptional set of risks with different treatment to that given to the normal set of risks to which the project is exposed. A. The solution 1. It is unwise to criticize without offering a reasonable alternative. Therefore, attached herewith is a replacement offer to Clauses 17 to 19 of the new Red Book of FIDIC. The new Yellow Book and the Silver Book require some modification to suit the risks shifted from the employer to the contractor and in particular the design risk. FIDIC'S NEW SUITE OF CONTRACTS - CLAUSES 17 TO 19 RISK, RESPONSIBILITY, LIABILITY, INDEMNITY, INSURANCE AND FORCE MAJEURE INTRODUCTION Part I of the excellent article by Christopher Seppala in which he explains the thinking behind Clauses 17 & 19 of FIDIC's new suite of contracts, published by ICLR1, prompts me to respond with a critique of these two clauses and must, by necessity, include the related Insurance Clause sandwiched between them. Mr. Seppala explains lucidly the changes made in the FIDIC forms, which led to the new forms and how the new Clauses 17 and 19 differ from their equivalent provisions in FIDIC's old Red, Yellow and Orange Books. In this, article I attempt to highlight the shortcomings and problems in these new clauses and outline what, in my view, should have been the text of these three clauses. A. Clause 17 - Risk & Responsibility 1. Although this clause of FIDIC's new suite of contracts is entitled "Risk & Responsibility", it encompasses other contractual provisions, including Indemnities; Limitation of Liability; and the unrelated topic of Intellectual and Industrial Property Rights. In fact, Clause 17 starts from the wrong end of the stick by dealing first with "Indemnities" and then it somehow back tracks to deal with "Responsibility" and then takes a further leap backwards and returns to "Risk" and finally marches on to "Liability". This illogical sequence hardly helps the non-lawyer professionals for whom these provisions are intended. The clause leaves even the expert in the field wondering about the purpose of this confused and baffling sequence. The theory of Risk has developed in the past twenty years or so to such an extent that it is now common knowledge that for a contract to be performed in an effective manner, the inherent risks must be allocated to the contracting parties on some logical basis, which should be made known to them. Thus, it has been said that the main purpose of a contract is to identify the principles of allocating the risks facing the contracting parties. Once these principles are identified, the consequences flow in the natural pattern of Risk to Responsibility to Liability to Indemnity to Insurance2. The format of Clause 17 should, therefore, follow that same sequence, with the insurance provisions left to the next clause, i.e. Clause 18, if it is desired that they should be presented separately. Accordingly, Clause 17 ought to start with the provisions for "Risk" and not with "Indemnities" and Sub-clause 17.3 should be 17.1. Furthermore, the wording of Sub clause 17.1 should then start by explaining that the risks included under Clause 17 of the conditions of contract are only those Risks of Loss and Damage and not the whole spectrum of the risks to which the project is exposed. The term "Employer's Risks" in the context of this clause should therefore be replaced by "Employer's Risks of Loss and Damage", since these risks are confined to those which lead to some form of accidental loss or damage to physical property or personal injury, which in turn may lead to financial and/or time loss risks, directly or through the other clauses of the contract. If this explanation is not given and the mistake of referring to the risks under Clause 17 as "Employer's Risks" is not corrected, then there is serious danger that the reader, and of course the user, will conclude that having identified in Clause 17 the Employer's Risks, all the other risks are the Contractors' risks, including the contractual risks in the remaining provisions of the contract. This problem can be highlighted by reference to Clause 17 of the Orange Book where the draftsman fell into that trap and stated expressly in Sub-clause 17.5 that "The Contractor's risks are all risks other than the Employer's Risks listed in Sub-Clause 17.3". This mistake has led to many instances of misunderstanding, conflict and at least one serious arbitral proceedings, where the employer pointed out that by Sub-clause 17.5 he bears no risks under the contract other than those specified in Sub-clause 17.3. It is also interesting to note that, in referring to the article by Mr. Seppala, the editors of ICLR fall into the same trap in their "Introduction". They refer to the term "Employer's Risks" in Sub-clause 17.3 as the contractual risks concluding that "Part I (of the article) considers the contractual risks to be borne by contractor and employer...". 3' As explained above, such a conclusion is of course incorrect. 2. 3. 4. 5. 6. Accordingly, it is essential to understand that the Employer's Risks traditionally identified under Sub-clause 20.3 of the old Red Book and those under Subclause 17.3 of the new suite of contracts, are only the amalgamation of risks which are beyond the control of either the contractor alone or both the contractor and the employer. Furthermore, these risks might have an implied resultant loss or damage to physical property or cause bodily injury, all of which are insurable. In contrast, very few of the other risks to which the project is exposed are insurable. There are other problems in Clause 17. The second problem is the allocation of the risks specified in sub-paragraph (h) of Sub-clause 17.3 to the employer4. Whilst this does not form a departure from the old Red Book, it was hoped that the new suite of contracts would be up to date with developments in this field. The origin of this sub-paragraph goes back to the ACE Form of Contract recognizable as the route for the FIDIC Red Book. Whilst it is true that the contractor has no control over the events identified in this sub-paragraph, he is in control over their consequences and can instigate protection measures. The contractor can also mitigate any losses that might occur should any of these risks eventuate. Perhaps, more importantly, all the risks identified in subparagraph (h) represent events that are insurable and are generally required to be insured under the terms of the contract. The employer ultimately pays for such insurance through the contract provisions leaving the contractor in charge of any necessary repair, its cost and any claim negotiations with the Insurers following the filing of such claims. These risks are not included as Employer's Risks in the ICE domestic contract or the others rooted in it5. The third problem in Clause 17 of the new suite of contracts is the newly introduced restriction in Sub-clause 17.1(b)(ii) of the contractor's indemnity to the employer for property damage. This indemnity is now based on negligence rather than on legal liability as was provided in Clause 22.1 of the old Red Book.6 This change is a retrograde step and copied from standard forms of contract for Building Works in the UK 7 without any benefit to either the contractor or the employer. The only beneficiary as a result of this change is the insurance market since to cover this gap a new policy is now needed, which is commonly referred to in the UK as the non-negligence insurance policy. As Mr. Seppala explains in his article, it seems that in making this change, the draftsmen of Clause 17 of the new suite of contracts took comfort from a footnote in Hudson's Building and Engineering Contracts (1995), Vol. II, page 1437, where reference is made to both the RIBA and the ICE forms of contract. The reference to the ICE form of contract in that footnote is incorrect since civil engineering contracts do not distinguish between the indemnity required to be given by the contractor for property damage on one hand and that for bodily injury, disease or death of any person on the other. In fact, the standard forms of contract for civil engineering construction in the UK or elsewhere do not impose the restriction now introduced.8 The last major problem in Clause 17 relates to the allocation to the contractor of the risk of "use or occupation by the employer of any part of the Permanent Works" in the EPC Form of contract. The reasoning for such allocation is extremely obscure since such use or occupation by the employer of any part of the Permanent Works cannot be within the control of the contractor and thus it is not a risk that could be assessed or against which some preventative measure could be taken. Finally, there are some minor problems of drafting in Clause 17, which should 7. 8. 9. 10. be addressed for the proper understanding of what is intended by such a clause. For example, Sub-clause 17.2 is a "Responsibility" clause; Sub-clause 17.5 is a "Risk" clause; and accordingly they should be designated as such. Another example is the need for there to be a statement as to proportional apportionment of indemnities when both employer and contractor have contributed to damage, loss or bodily injury. This would be particularly important where an indemnity clause is strictly interpreted under the applicable law of contract.9 B. 11. Clause 18 -Insurance Whilst there was no commentary provided by Mr. Seppala on Clause 18 of FIDIC's new suite of contracts, it is important to include one here, since, as explained earlier, insurance is the last of the contractual provisions in the chain of Risk; Responsibility; Liability; Indemnity; and Insurance. The first major problem in this Clause is the fact that the "Insuring Party", as defined in the contract, is not the same for all the insurance policies required under the contract and it may be either of the two parties, employer or contractor. This is a recipe for confusion, gaps and/or overlaps in the combined insurance package, which could cost the parties dearly. It could only be advantageous to those involved in the insurance market. The second paragraph of Clause 18 assumes that there would be a meeting between the parties prior to the date of the Letter of Acceptance at which the whole insurance package would be discussed and agreement would be reached on a policy towards insurance, which would "take precedence over the provisions of (Clause IS)". It remains to be seen as to how this provision would operate in practice and the effect it would have. There are many drafting ambiguities in this Clause, which should be clarified if the contract is to be operated successfully. Examples are: y 12. 13. 14. y y y Sub-clause 18.1 provides that "Wherever the Employer is the insuring Party, each insurance shall be effected with insurers and in terms consistent with the details annexed to the Particular Conditions". 10 What is intended by the term "details"? If, as stated, these details are expected to furnish the terms of the insurances supplied by the employer, then surely this must mean that nothing less explicit than the policies of insurance themselves have to be annexed. Sub-clause 18.1 provides that "When each premium is paid, the insuring Party shall submit evidence of payment to the other Party .... ". 11 This wording does not provide the intended meaning. Payment of each insurance premium should be made to initiate or maintain the insurance cover and evidence should be provided whenever required. Sub-clause 18.2(d) specifies the deductibles to be applied to the insurance cover for some of the Employer's risks. Should the insurance cover for the Contractor's risks be subject to no deductibles? What is the meaning of "insurable at commercially reasonable terms" in Sub-clause 18.2(d); in the last paragraph of Sub-clause 18.2; and in Subclause 18.3(d)(iii)? C. Clause 19 - Force Majeure 15. As observed by Mr. Seppala, a force majeure clause is an increasingly common feature of international contracts. It is the fashion, but is it necessary or even desirable? For FIDIC, I suspect that importing force majeure from the old Yellow and Orange Books into the new suite of contracts was a desire to show a closer position to the civil law concepts and a move away from the common law principles. If the truth be told, such a move in the context of "force majeure" is neither necessary nor desirable because: y y y Firstly, incorporating a clause such as Clause 19 into a contract not only duplicates what is usually provided for in the civil code of a civil law jurisdiction, but also enlarges the scope of the meaning and application of force majeure. This could result in the Parties getting into a muddle and a contradictory situation; Secondly, the original concept of the Special Risks in Clause 65 of the old Red Book is all the protection that the contractor needs; Thirdly, most of the risks, which now come under the FIDIC definition of force majeure, are insurable and required to be insured. Therefore, no real benefit accrues to the contractor from being protected by such a clause without having to slip into uncharted waters. 16. Therefore, whilst it must be agreed that the treatment of the risks specified in Clause 19 should be a special one, it is erroneous to swing to the extreme end of the scale and designate them in the category of false majeure, particularly when that tem has legal implications in certain jurisdictions. The answer for the purposes of these conditions of contract should to designate as what they are, i.e. an exceptional set of risks with different treatment to that given to the normal set of risks to which the project is exposed. D. 17. The solution It is unwise to criticize without offering a reasonable alternative. Therefore, attached herewith is a replacement offer to Clauses 17 to 19 of the new Red Book of FIDIC. The new Yellow Book and the Silver Book require some modification to suit the risks shifted from the employer to the contractor and in particular the design risk. E. The Replacement for Clauses 17 to 19 of the New Red Book 12, 13 17 RISK AND RESPONSIBILITY Employer's Risks of Loss & Damage 17.1 The risks of loss and damage to the Works, Goods or Contractor's Documents for which the Contractor is not liable are: (a) Employer's Exceptional Risks of Loss & Damage, which are: i. war, hostilities (whether war be declared or not), invasion, ii. iii. iv. act of foreign enemies, rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war, within the Country, riot, commotion or disorder within the Country by persons other than the Contractor's Personnel and other employees of the Contractor and Subcontractors, and Munitions of war, explosive materials, ionizing radiation or contamination by radio-activity, within the Country, except as may be attributable to the Contractor's use of such munitions, explosives, radiation or radio-activity. (b) Employer's Normal Risks of Loss & Damage, which are: i. ii. iii. pressure waves caused by aircraft or other aerial devices traveling at sonic or supersonic speeds, use or occupation by the Employer of any part of the Permanent Works, except as may be specified in the Contract, and Design of any part of the Works by the Employer's Personnel or by others for whom the Employer is responsible, if any. RESPONSIBILITY FOR CARE OF THE WORKS 17.2 The Contractor shall take full responsibility for the care of the Works and Goods from the Commencement Date until the Taking-Over Certificate is issued (or is deemed to be issued under Sub-Clause 10.1 [Taking Over of the Works and Sections]) for the Works, when responsibility for the care of the Works shall pass to the Employer. If a Taking-Over Certificate is issued (or is deemed to be issued) for any Section or part of the Works, responsibility for the care of the Section or part shall then pass to the Employer. After responsibility has accordingly passed to the Employer, the Contractor shall take responsibility for the care of any work which is outstanding on the date stated in a Taking-Over Certificate, until this outstanding work has been completed. If any loss or damage happens to the Works, Goods or Contractor's Documents during the period when the Contractor is responsible for their care, from any cause not listed in Sub-Clause 17.1 [Employer's Risks of Loss & Damage], the Contractor shall rectify the loss or damage at the Contractor's risk and cost, so that the Works, Goods and Contractor's Documents conform with the Contract. The Contractor shall be liable for any loss or damage caused by any actions performed by the Contractor after a Taking-Over Certificate has been issued. The Contractor shall also be liable for any loss or damage, which occurs after a Taking-Over Certificate has been issued and which arose from a previous event for which the Contractor was liable. CONSEQUENCES OF EMPLOYER'S RISKS OF LOSS & DAMAGE 17.3 If any of the risks listed in Sub-Clause 17.1 (a) above occur, the parties' rights and obligations are set out in Clause 19 below. If and to the extent that any of the risks listed in Sub-Clause 17.1(b) above result in loss or damage to the Works, Goods or Contractor's Documents, the Contractor shall promptly give notice to the Engineer and shall rectify this loss or damage to the extent required by the Engineer. If the Contractor suffers delay and/or incurs Cost from rectifying this loss or damage, the Contractor shall give a further notice to the Engineer and shall be entitled subject to SubClause 20.1 [Contractor's Claims] to: (a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and Payment of any such Cost, which shall be included in the Contract Price. In the case of sub-paragraphs ii and iii of Sub-Clause 17.1(b) [Employer's Normal Risks of Loss & Damage], reasonable profit on the Cost shall also be included. (b) After receiving this further notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine these matters. RISK OF INFRINGEMENT OF INTELLECTUAL AND INDUSTRIAL PROPERTY RIGHTS 17.4 In this Sub-Clause, "infringement" means an infringement (or alleged infringement) of any patent, registered design, copyright, trade mark, trade name, trade secret or other intellectual or industrial property right relating to the Works; and "claim" means a claim (or proceedings pursuing a claim) alleging an infringement. Whenever a Party does not give notice to the other Party of any claim within 28 days of receiving the claim, the first Party shall be deemed to have waived any right to indemnity under this Sub-Clause. The Employer shall indemnify and hold the Contractor harmless against and from any claim alleging an infringement which is or was: (a) an unavoidable result of the Contractor's compliance with the Contract, or (b) a result of any Works being used by the Employer: i. ii. for a purpose other than that indicated by, or reasonably to be inferred from, the Contract, or in conjunction with any thing not supplied by the Contractor, unless such use was disclosed to the Contractor prior to the Base Date or is stated in the Contract. The Contractor shall indemnify and hold the Employer harmless against and from any other claim which arises out of or in relation to (i) the manufacture, use, sale or import of any Goods, or (ii) any design for which the Contractor is responsible. If a Party is entitled to be indemnified under this Sub-Clause, the indemnifying Party may (at its cost) conduct negotiations for the settlement of the claim, and any litigation or arbitration which may arise from it. The other Party shall, at the request and cost of the indemnifying Party, assist in contesting the claim. This other Party (and its Personnel) shall not make any admission which might be prejudicial to the indemnifying Party, unless the indemnifying Party failed to take over the conduct of any negotiations, litigation or arbitration upon being requested to do so by such other Party. LIMITATION OF LIABILITY 17.5 Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect loss or damage which may be suffered by the other Party in connection with the Contract, other than under Sub-Clause 16.4 [Payment on Termination],Sub-Clause 17.6 [Indemnities by the Contractor], and Sub-Clause 17.7 [Indemnities by the Employer]. Indirect loss shall include, but not limited to, for the purpose of this clause loss of profits, loss of use, loss of production, loss of business or loss of business opportunity The total liability of the Contractor to the Employer, under or in connection with the Contract other than under Sub-Clause 4.19 [Electricity, Water and Gas], Sub-Clause 4.20 [Employer's Equipment and Free-Issue Material], and Sub-Clause 17.4 [Risk of Infringement of Intellectual and Industrial Property Rights] shall not exceed the sum stated in the Particular Conditions or (if a sum is not so stated) the Accepted Contract Amount. This Sub-Clause shall not limit liability in any case of fraud, deliberate default or reckless misconduct by the defaulting Party. INDEMNITIES BY THE CONTRACTOR 17.6 The Contractor shall indemnify and hold harmless the Employer, the Employer's Personnel, and their respective agents, against and from all claims, damages, losses and expenses (including legal fees and expenses) in respect of: (a) bodily injury, sickness, disease or death of any person whatsoever employed on or in connection with the Works; and damage to or loss of any property real or personal (other than the Works), (b) arising out of or in the course of or by reason of the Contractor's design (if any), the execution and completion of the Works and the remedying of any defects, unless attributable to any negligence, willful act or breach of the Contract by the Employer, the Employer's Personnel, or any of their respective agents. INDEMNITIES BY THE EMPLOYER 17.7 The Employer shall indemnify and hold harmless the Contractor, the Contractor's Personnel and their respective agents against and from all claims, damages, losses and expenses (including legal fees and expenses) in respect of: (a) bodily injury, sickness, disease or death, which is attributable to any negligence, wilful act or breach of the Contract by the Employer, the Employer's Personnel, or any of their respective agents; Damage to crops being on the Site (save in so far as possession has not been given to the Contractor); The use or occupation of land (provided by the Employer) by the Works or any part thereof or for the purpose of the construction and completion of the Works (including Consequential Losses of Crops) or interference whether temporary or permanent with any right of way light air or water or other easement or quasi-easement which are the unavoidable result of construction of the Works in accordance with the Contract; The right of the Employer to construct the works or any part thereof on over under in or through any land; Damage which is the unavoidable result of the Contractor's obligations to execute the Works and remedy any defects in accordance with the Contract; and The Employers' Risks as set out in Sub-Clause 17.1 above. (b) (c) (d) (e) (f) The indemnities provided pursuant to Sub-Clause 17.6 and this Sub-Clause by the parties towards each other shall be proportionally reduced, if any act or neglect by either Party to the other Party contributed to the said bodily injury, sickness, disease, death, damage or loss. 18 INSURANCE General Requirements for Insurances 18.1 If a policy indemnifies additional joint insured, namely in addition to the Employer and the Contractor (i) the Contractor shall act under the policy on behalf of these additional joint insured except that the Employer shall act for Employer's Personnel, (ii) additional joint insured shall not be entitled to receive payments directly from the insurer or to have any other direct dealings with the insurer, and (iii) the insuring Party shall require all additional joint insured to comply with the conditions stipulated in the policy. Each policy insuring against loss or damage shall provide for payments to be made in the currencies required to rectify the loss or damage. Payments received from insurers shall be used for the rectification of the loss or damage. The Contractor shall, within 28 days of the date of the Letter of Acceptance_ or as otherwise agreed, submit to the Employer: (a) evidence that the insurances described in this Clause have been effected, and copies of the policies for the insurances described in Sub-Clause 18.2 [Insurance for Works and Contractor's Equipment] and SubClause 18.3 [Insurance against Injury to Persons and Damage to Property]. . evidence of payment of each insurance premium (b) (c) Whenever evidence or policies are submitted to the Employer, the Contractor shall also notify the Engineer of such submission. The Employer and the Contractor shall comply with the conditions stipulated in each of the insurance policies. In the event that the Contractor or the Employer fails to comply with any condition imposed by the insurance policies effected pursuant to the Contract each shall indemnify the other against all losses and claims arising from such failure. The Contractor shall keep the insurers informed of any relevant changes to the execution of the Works and ensure that insurance is maintained in accordance with this Clause. Neither Party shall make any alteration to the terms of any insurance without the prior approval of the other Party. If an insurer makes (or attempts to make) any alteration, the Party notified by the insurer shall promptly give notice to the other Party. If the Contractor fails to effect and keep in force any of the insurances it is required to effect and maintain under the Contract, or fails to provide satisfactory evidence and copies of policies in accordance with this. SubClause, the Employer may (at its option and without prejudice to any other right or remedy) effect and keep in force any such insurance for the relevant coverage and pay the premiums due. The Employer may from time to time deduct the amount of these premiums so paid from any monies due or which may become due to the Contractor or recover the same as a debt due from the Contractor, and the Contract Price shall be adjusted accordingly. Nothing in this Clause limits the obligations, liabilities or responsibilities of the Contractor or the Employer, under the other terms of the Contract or otherwise. Any amounts not insured or not recovered from the insurers shall be borne by the Contractor and/or the Employer in accordance with these obligations, liabilities or responsibilities. However, if the insuring Party fails to effect and keep in force an insurance which is available and which it is required to effect and maintain under the Contract, and the other Party neither approves the omission nor effects insurance for the coverage relevant to this default, any moneys which should have been recoverable under this insurance shall be at the cost of the Contractor. Payments by one Party to the other Party shall be subject to Sub-Clause 2.5 [Employer's Claims]or Sub-Clause 20.1 [Contractor's Claims] as applicable. INSURANCE FOR WORKS AND CONTRACTOR'S EQUIPMENT 18.2 The Contractor shall insure the Works, Plant, Goods and Materials (including any unfixed Materials and Plant or other things whether on the Site or otherwise intended for the Works) and Contractor's Documents for not less than the full reinstatement cost plus an additional 10% to cover any additional costs that may arise incidental to the rectification of any loss or damage including cost of demolition, removal of debris, professional fees and profit. This insurance shall be effective from the Commencement Date until the date of issue of the relevant Taking-Over Certificate for the Works. The Contractor shall maintain this insurance to provide cover until the date of issue of the Performance Certificate, for loss or damage for which the Contractor is liable arising from a cause occurring prior to the issue of the Taking-Over Certificate, and for loss or damage caused by the Contractor in the course of any other operations (including those under Clause 11 [Defects Liability]). The Contractor shall insure the Contractor's Equipment for not less than the full replacement value, including delivery to Site. For each item of Contractor's Equipment, the insurance shall be effective while it is being transported to the Site and until it is no longer required as Contractor's Equipment. The insurance policies under this Sub-Clause: (a) shall be in the joint names of the Employer and the Contractor, who shall be jointly entitled to receive payments from the insurers, payments being held or allocated between the parties for the sole purpose of rectifying the loss or damage, (b) shall cover all loss and damage from any cause not listed in SubClause 17.1 [Employer's Risks of Loss & Damage], with deductibles per occurrence of not more than the amount stated in the Appendix to Tender. shall also cover loss or damage to a part of the Works not in the occupation of the Employer which is attributable to the use or occupation by the Employer of another part of the Works; and may however exclude loss of, damage to, and reinstatement of: i. a part of the Works which is in a defective condition due to a defect in its design, materials or workmanship (but cover shall include any other parts which are lost or damaged as a direct result of this defective condition and not as described in subparagraph (ii) below), a part of the Works which is lost or damaged in order to reinstate any other part of the Works if this other part is in a defective condition due to a defect in its design, materials or workmanship, and a part of the Works which has been taken over by the Employer, except to the extent that the Contractor is liable for the loss or damage. (c) (d) ii. iii. INSURANCE AGAINST INJURY TO PERSONS AND DAMAGE TO PROPERTY 18.3 The Contractor shall insure against each Party's liability for any loss, damage, death or bodily injury which may occur to any physical property (except things insured under Sub-Clause 18.2 [Insurance for Works and Contractors Equipment;) or to any person (except persons insured under Sub-Clause 18.4 [Insurance for Contractor's Personnel]), which may arise out of the Contractor's performance of the Contract and occurring before the issue of the Performance Certificate. This insurance shall be for a limit per occurrence of not less than the amount stated in the Appendix to Tender, with no limit on the number of occurrences, and with deductibles per occurrence of not more than the amount(s) stated in the Appendix to Tender. If an amount is not stated in the Appendix to Tender, this Sub-Clause shall not apply. The insurance policies specified in this Sub-Clause: (a) shall be in the joint names of the parties defined in the Appendix to Tender and shall contain a cross liabilities clause such that the cover shall apply separately to each Insured as though a separate policy had been issued for each of them. May however exclude liability to the extent that it arises from a cause listed in Sub-Clause 17.7 [Indemnity by the Employer]. (b) INSURANCE FOR CONTRACTOR'S PERSONNEL 18.4 The Contractor shall effect and maintain insurance against liability for claims, damages, losses expenses (including legal fees and expenses) arising from injury, sickness, disease or death to any person employed by the Contractor or any other of the Contractor's Personnel. The Employer and the Engineer shall also be indemnified under the policy of insurance, except that this insurance may exclude losses and claims .to the extent that they arise from any act or neglect of the Employer or of the Engineer or their respective servants or agents or any other contractor (not being employed by the Contractor). The insurance shall be maintained in full force and effect during the whole time that these personnel are assisting in the execution of the Works. For a Subcontractor's employees, the Subcontractor may effect the insurance, but the Contractor shall be responsible for compliance with this Clause. 19 EMPLOYER'S EXCEPTIONAL RISKS OF LOSS & DAMAGE Notice of an Employer's Exceptional Risk of Loss & Damage 19.1 If a Party is or will be prevented from performing any of its obligations under the Contract by an Employer's Exceptional Risk of Loss & Damage, then it shall give notice to the other Party of the event or circumstances constituting such a risk and shall specify the obligations, the performance of which is or will be prevented. The notice shall be given within 14 days after the Party became aware, (or should have become aware), of the relevant event or circumstance constituting such risk. The Party shall, having given notice, be excused performance of such obligations for so long as such risk prevents that Party from the performance thereof Notwithstanding any other provision of this Clause, an Employer's Exceptional Risk shall not relieve either Party from making payments to the other Party under the Contract. DUTY TO MINIMISE DELAY 19.2 Each Party shall at all times use all reasonable endeavours to minimise any delay in the performance of the Contract as a result of an Employer's Exceptional Risk. A Party shall give notice to the other Party when it ceases to be affected by the Employer's Exceptional Risk. CONSEQUENCES OF AN EMPLOYER'S EXCEPTIONAL RISK 19.3 If the Contractor is prevented from performing any of his obligations under the Contract by an Employer's Exceptional Risk of which notice has been given under Sub-Clause 19.1 [Notice of an Employer's Exceptional Risk of Loss & Damage], and suffers delay and/or incurs Cost by reason of such an Employer's Exceptional Risk, the Contractor shall be entitled subject to SubClause 20.1 [Contractor's Claims] to: (a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and if the event or circumstance is of the kind described in subparagraph (a) of Sub-Clause 17.1 [Employer's Risks of Loss & Damage] and, in the case of sub-paragraphs 17.1(a) (ii) to (iv), occurs in the Country, payment of any such Cost. (b) After receiving this notice, the Engineer shall proceed in accordance with SubClause 3.5 [Determinations] to agree or determine these matters. OPTIONAL TERMINATION, PAYMENT AND RELEASE 19.4 If the execution of substantially all the Works in progress is prevented for a continuous period of 84 days by reason of Exceptional Risks of which notice has been given under Sub-Clause 19.1 [Notice of an Employer's Exceptional Risk of Loss & Damage], or for multiple periods which total more than 140 days due to the same notified Exceptional Risks, then either Party may give to the other Party a notice of termination of the Contract. In this event, the termination shall take effect 7 days after the notice is given, and the Contractor shall proceed in accordance with Sub-Clause 16.3 [Cessation of Work and Removal of Contractor's Equipment]. Upon such teimination, the Engineer shall determine the value of the work done and issue a Payment Certificate which shall include: (a) the amounts payable for any work carried out for which a price is stated in the Contract; (b) the Cost of Plant and Materials ordered for the Works which have been delivered to the Contractor, or of which the Contractor is liable to accept delivery: this Plant and Materials shall become the property of (and be at the risk of) the Employer when paid for by the Employer, and the Contractor shall place the same at the Employer's disposal; any other Cost or liability which in the circumstances was reasonably incurred by the Contractor in the expectation of completing the Works; the Cost of removal of Temporary Works and Contractor's Equipment from the Site and the return of these items to the Contractor's works in his country (or to any other destination at no greater cost); and the Cost of repatriation of the Contractor's staff and labour employed wholly in connection with the Works at the date of termination. (c) (d) (e) FORCE MAJEURE UNDER COMMON LAW AND THE CIVIL CODES - THE FIDIC FORM AND NEC CONTRACT COMPARED INTRODUCTION One of the potential difficulties with international projects is that the contracts entered into are governed by laws which may be unfamiliar to one or other of the contracting parties. For example, there is a difference in the way that force majeure is treated in common and civil law jurisdictions. Whilst most civil codes make provisions for force majeure events, at common law, force majeure is not a term of art and its meaning is far from clear. No force majeure provision will be implied in the absence of specific contractual provisions, and the extent to which the parties deal with unforeseen events will be defined in the contract between them. Thus without a specific clause, there will not necessarily be relief for force majeure events. The aim of the force majeure clause is to exempt a party from performance on the occurrence of a force majeure event. Commercially the clause is there to address risks which cannot necessarily be economically insured and which are outside the control of the parties to the contract. There are, of course, many definitions of that force majeure event. For example, in the case of Atlantic Paper Stock Ltd v St Anne-Nackawic Pulp and Paper Co, [1976] 1 SCR 580, Dickson J in the Supreme Court of Canada said that: An act of God or force majeure clause ... generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill. The FIDIC Form The definition of force majeure provided in the new FIDIC form at clause 19 is widely drawn. Clause 19.1 defines a force majeure event as one:     which is beyond a Party's control, which such Party could not reasonably have provided against before entering into the Contract, which, having arisen, such Party could not reasonably have avoided or overcome, and Which is not substantially attributable to the other Party? Force Majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied:    munitions of war, explosive materials, ionizing radiation or contamination by radioactivity, except as may be attributable to the Contractor's use of such munitions, explosives, radiation or radioactivity, and Natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity. war, hostilities (whether war be declared or not), invasion, act of foreign enemies, rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war, riot, commotion, disorder, strike or lockout by persons other than the Contractor's Personnel and other employees of the Contractor and Sub-Contractors, munitions of war, explosive materials, ionizing radiation or contamination by radioactivity, except as may be attributable to the Contractor's use of such munitions, explosives, radiation or radioactivity, and Natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity.   The broad definition of force majeure to be found here, and it should be remembered that the examples listed above are examples and not an exhaustive list, reflects the basic premise of a force majeure clause, namely that it serves to exempt a party from performance on occurrence of a false majeure event. One problem with the FIDIC form is that there is a risk of potential overlap and/or contradiction between sub-clause 19.1 and the definition of force majeure, which one can find in the civil codes of most, if not all, civil law jurisdictions. For example, the definition of force majeure under the Quebec Civil Code is much narrower in scope. Article 1470 simply provides that: A superior force [in the French version, force majeure] is an unforeseeable and irresistible event, including external causes with the same characteristics. This has led one commentator to express caution that "incorporating a clause such as Clause 19 into a contract not only duplicates what is usually provided for in the civil code of a civil law jurisdiction, but also enlarges the scope of the meaning and application of force majeure. This could result in the Parties getting into a muddle and a contradictory situation."1 In any event, the Particular Conditions note that the Employer should verify, before inviting tenders, that the wording of Clause 19 is compatible with the law governing the Contract. In fact, there was no specific force majeure clause in the Old Red Book FIDIC 4th Edition. However, the Contractor was afforded some protection by Clause 65, which dealt with special risks including the outbreak of war, and Clause 66, which dealt with payment when the Contractor was released from performance of its contractual obligations. The scheme of the FIDIC form is that the party affected, which is usually the Contractor but could here be the Employer, is entitled to such an extension of time as is due and (with exceptions) additional cost where a "force majeure" occurs. For Clause 19 to apply, the force majeure event must prevent a Party from performing any of its obligations under the Contract. The now classic example of this is the refusal of the English and American courts to grant relief as a consequence of the Suez crisis during the 1950's. Those who had entered into contracts to ship goods were not prevented from carrying out their contractual obligations as they could go via the Cape of Good Hope even though the closure of the Suez Canal made the performance of that contract far more onerous. Clause 19.7 of the FIDIC form is also of interest. Here, the parties will be released from performance (and the Contractor entitled to specific payment) if (i) any irresistible event (not limited to force majeure) makes it impossible or unlawful for the parties to fulfill their contractual obligations, or (ii) the governing law so provides. It acts as a fall-back provision for extreme events (i.e., events rendering contractual performance illegal or impossible) which do not fit within the strict definition of force majeure laid out under sub-clause 19.1. It also grants the party seeking exoneration the right to rely on any alternative relief-mechanism contained in the law governing the contract. If English law applies, following the landmark case of Davis Contractors v Fareham UDC, 2 All ER 145, the affected party will be able to rely on the common law concept of frustration, which "occurs whenever the law recognizes that without the default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract". Here, the contract was to build 78 houses for a fixed price in 8 months. Because of labour shortages and bad weather, it took the contractor 22 months to build the houses. It was held by the House of Lords that the contract had not been frustrated. To claim frustration, therefore, it will not be enough for a contractor to establish that new circumstances have rendered its contractual performance more onerous or even dangerously uneconomic. For frustration, what is required is a radical turn of events completely changing the nature of the contractual obligations. It is a difficult test to fulfil, but not as difficult as that of sub-clause 19.4 (force majeure) or the first limb of sub-clause 19.7 which both refer to the concept of impossibility (or illegality). To take the example put forward by A.Puelinckx of a wine connoisseur signing a contract for the construction under his house of a very sophisticated wine cellar.2 If the house is burned down before execution of the contract, leaving the basement part in perfect condition, this will certainly be considered frustration under English law. However, no claim could be put forward under a strict interpretation of sub-clauses 19.4 or 19.7 as the house could in theory be rebuilt and the contractual obligation to build the cellar performed. French law would apply the same reasoning as sub-clauses 19.4 or 19.7 and because performance is still possible, would hold the abovedescribed events as a mere imprevision, which will not afford any financial relief to the affected party. What is common to both the notion of frustration and that of force majeure as interpreted under English law though, is that no relief will be granted in case of economic unbalance. A recent illustration concerning the interpretation of a force majeure clause under English law can be found in the case of Thames Valley Power Limited v Total Gas & Power Limited, (2006) 1 Lloyd's Rep 441. Here there was a 15-year exclusive gas supply contract between Thames Valley Power Limited (buyer) and Total Gas & Power Limited (supplier) for the operation of a combined heat and power plant at Heathrow Airport. Clause 15 of the supply contract provided in part as follows: if either party is by reason of force majeure rendered unable wholly or in part to carry out any of its obligations under this agreement then upon notice in writing [...] the party affected shall be released from its obligations and suspended from the exercise of its rights hereunder to the extent that they are affected by the circumstances of force majeure and for the period that those circumstances exist. The supplier sought to rely on Clause 15 to stop supplying gas at the contract price as the market price for gas had increased significantly and rendered it "uneconomic" for the supplier to supply gas. Christopher Clarke J, however, found that: The force majeure event has to have caused Total to be unable to carry out its obligations under the [agreement]. [...] Total is unable to carry out that obligation if some event has occurred as a result of which it cannot do that. The fact that it is much more expensive, even greatly more expensive for it to do so, does not mean that it cannot do so. Clause 19 would certainly be interpreted in much the same way by English courts. In large projects where the performance of the parties' contractual obligations is spread over several years, the parties might thus consider whether or not to add a hardship clause to the contract which will stipulate when and how the parties will rearrange the contractual terms in the event the contract loses its economic balance. The NEC 3rd Edition At first look, the new NEC form, whose third edition was published in July 2005, does not include a force majeure event. However, reference to the guidance notes shows that clause 60.1(19) qualifies as a force majeure event. This clause refers to events which:      Stops the Contractor from completing the works or Stops the Contractor completing the works by the dates shown on the Accepted Programme, and which Neither Party could prevent, An experienced Contractor would have judged that the contract dates have such a small chance of occurring that it would have been unreasonable for him to have allowed for it and Is not one of the other compensation events stated in this contract? Thus it looks very much like a force majeure clause and that is exactly what it is. Indeed, the reference to the Guidance Notes confirms this explicitly-referring to "force majeure". The drafting of this compensation/force majeure event is plainly very broad. Indeed, maybe it is too broad. Therefore, it may well be that this is exactly the type of clause that many employers will seek to delete or revise. And under common law jurisdictions, this will mean that no protection will be provided to the Contractor for typical force majeure events. FIDIC: AN OVERVIEW THE LATEST DEVELOPMENTS, COMPARISONS, CLAIMS AND FORCE MAJEURE CONSTRUCTION LAW SUMMER SCHOOL 2007 TUESDAY 11 SEPTEMBER 2007 QUEEN·S COLLEGE CAMBRIDGE Introduction 1. The purpose of this paper is twofold. First to provide a brief overview of the history and development of the FIDIC form; and second to discuss the different ways the employer and contractor are treated when it comes to making claims. This second section includes a brief discussion about the different approaches under the civil codes and common law jurisdictions. This leads to a short comment at the end about the treatment of force majeure. 2. Accordingly this paper is set out in the following sections: (i) The FIDIC form: a brief history; (ii) The new Fidic form 1999; (iii) The MDB version of the New Red Book May 2006; (iv) The future the new FIDIC DBO contract September 2007; (v) Making a claim under the FIDIC form the employer; (vi) Making a claim under the FIDIC form ± the Contractor; (vii) Force majeure the FIDIC form and NEC3 compared The FIDIC form: a brief history 3. The Federation Internationale des Ingénieurs-Conseils (³FIDIC´) organization was founded in 1913 by France, Belgium and Switzerland. The UK did not join until 1949. The first edition of the Conditions of Contract (International) for Works of Civil Engineering Construction was published in August 1957 having been prepared on behalf of FIDIC and the Federation Internationale des Bâtiment et des Travaux Publics (FIBTP)1. 4. The form of the early FIDIC contracts followed closely the fourth edition of the ICE Conditions of contract. In fact so closely did the FIDIC form mirror its English counterpart that Ian Duncan Wallace said: as a general comment, it is difficult to escape the conclusion that at least one primary object in preparing the present international contract was to depart as little as humanly possible from the English conditions2. 5. One difficulty with the first FIDIC contracts was that they were based on the detailed design being provided to the contractor by the employer or his engineer. It was therefore best suited for civil engineering and infrastructure projects such as roads, bridges, dams, tunnels and water and sewage facilities. It was not so suited for contracts where major items of plant were manufactured away from site. This led to the first edition of the ³Yellow Book´ being produced in 1963 by FIDIC for mechanical and electrical works. This had an emphasis on testing and commissioning and was more suitable for the manufacture and installation of plant. The second edition was published in 1980. 6. Both the Red and Yellow Books were revised by FIDIC and new editions published in 1987. A key feature of the 4th edition of the Red Book was the introduction of an express term which required the engineer to act impartially when giving a decision or taking any action which might affect the rights and obligations of the parties, whereas the previous editions had assumed this implicitly. Although this talk concentrates on the new FIDIC forms, it should be remembered that the FIDIC 4th edition (³The Old Red Book´) remains the contract of choice throughout much of the Middle East, particularly the UAE. 7. In 1995 a further contract was published (known as the Orange Book). This was for use on projects procured on a design and build or turnkey basis, dispensing with the engineer entirely and providing for an ³Employer¶s Representative´ who, when determining value, costs or extensions of times had to: ³determine the matter fairly, reasonably and in accordance with the Contract´. 8. Consequently the need to submit matters to the engineer for his ³Decision´ prior to an ability to pursue a dispute, was eliminated. In its place an Independent Dispute Adjudication Board was introduced consisting of either one or three members appointed jointly by the employer and the contractor at the commencement of the Contract, with the cost being shared by the parties. This provision mirrored a World Bank amendment to the FIDIC Red Book. 9. A Supplement to the Red and Yellow Books was published in November 1996 which provided all users with the ability to incorporate alternative arrangements comprising an option for a Dispute Adjudication Board to go with modeled terms of appointment and procedural rules, and an option for payment on a lump sum basis rather than by reference to bills of quantities. THE NEW FIDIC FORMS - 1999 10. In 1994 FIDIC established a task force to update both the Red and the Yellow Books in the light of developments in the international construction industry, including the development of the Orange Book. The key considerations included: (i) The role of the engineer and, in particular, the requirement to act impartially in the circumstances of being employed and paid by the employer; (ii) The desirability for the standardization within the FIDIC forms; (iii) The simplification of the FIDIC forms in light of the fact that the FIDIC conditions were issued in English but in very many instances were being utilized by those whose language background was other than in English; and (iv) That the new books would be suitable for use in both common law and civil law jurisdictions. 11. This led to the publication of four new contracts in 1999: (i) Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer: The Construction Contract (the new Red Book); (ii) Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works, Designed by the Contractor The Plant and Design/Build Contract (the new Yellow Book); (iii) Conditions of Contract for EPC/Turnkey Projects: the EPC Turnkey Contract (the Silver Book); (iv) A short form of contract (the Green Book). 12. In keeping with the desire for standardization, each of the new books includes General Conditions, together with guidance for the preparation of the Particular Conditions, and a Letter of Tender, Contract Agreement and Dispute Adjudication Agreements. Whilst the Red Book refers to works designed by the employer, it is appropriate for use where the works include some contractor-designed works whether civil, mechanical, and electrical or construction work. THE CONTENT OF THE NEW FIDIC FORMS 13. The new FIDIC form has 20 clauses which are perhaps best viewed as chapters covering the key project topics. I propose to consider some of the more important ones. 14. Clause 2 addresses the role of the Employer. There are two particularly interesting sub-clauses. First sub-clause 2.4 requires the Employer following request from the Contractor to submit: ³reasonable evidence that financial arrangements have been made and are being maintained which will enable the Employer to pay the contract price punctually´; and ³Before the Employer makes any material change to his financial arrangements, the Employer shall give notice to the Contractor with detailed particulars.´ 15. If the Employer fails to provide this evidence, the Contractor can suspend work, ³or reduce the rate of work´, unless or until the Contractor actually receives the reasonable evidence. This was an entirely new provision to the 1999 FIDIC form and provides a mechanism whereby the Contractor can obtain confirmation that sufficient funding arrangements are in place to enable him to be paid, including if there is a significant change in the size of the project during construction. 16. Second, as will be discussed later on, in another new development, sub-clause 2.5 requires the Employer to give notice and particulars to a Contractor: ³if the Employer considers himself to be entitled to any payment under any clause of these conditions or otherwise in connection with the Contract.´ 17. Clause 3 deals with the position of the Engineer. There was one significant change from the 1987 edition. The express reference in the 1987 edition to the Engineer¶s impartiality has gone. Unless otherwise stated: ³Whenever carrying out duties or exercising authority, specified in or implied by the Contract, the Engineer shall be deemed to act for the Employer.´ 18. Now, the conditions provide that the Engineer shall proceed in accordance with subclause 3.5 to agree or determine any matter: ³«the Engineer shall consult with each Party in an Endeavour to reach agreement. If agreement is not achieved, the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.´ 19. Clause 4 is by far the longest sub-clause and covers the Contractor¶s general obligations including the requirement that in respect of Contractor-designed works3 : ³It shall, when the works are completed, be fit for such purposes for which the part is intended as are specified in the Contract.´ 20. This is an absolute duty. 21. Sub-clause 4.2 specifies that the Contractor shall provide a Performance Security4 where the amount has been specified in the Appendix to Tender, and the subclause continues with provisions for extending the security. Some protection is afforded to the Contractor as the sub-clause requires the Employer to provide an indemnity to the Contractor against damage, loss and expense resulting from a claim under the performance security: ³To the extent to which the Employer was not entitled to make the claim´. 22. An Employer should decide upon the form of the performance security during the finalization of tender documentation. Whilst the Old Red Book favored Bonds which were in conditional terms, payable upon default, there has been a general trend towards the use of first or on-demand bond. This is reflected in the 1999 form where the performance guarantees are in an on-demand guarantee form, which are payable upon the submission of identified documentation by the beneficiary. It is still necessary to state in what respect the Contractor is in breach of his obligations6. In keeping with the intentions of FIDIC to achieve a degree of uniformity and hence clarity, the securities derive from the Uniform Rules of the International Chamber of Commerce.7 23. Clause 4.21 provides details of the information required to be inserted by the Contractor in the Progress Reports. The provision of this report is a condition of payment. Under clause 14.3, payment will only be made within 28 days of receipt of the application for payment and the supporting documents, one of which is the Progress Report. 24. Whilst the importance of ensuring that the progress reports are accurate might seem obvious, His Honour Judge Wilcox, in a recent case8 involving a construction manager, highlighted some of the potential difficulties where that reporting is not accurate. 25. Under the terms of the particular contract, the construction manager was described as being the only person on the project with access to all of the information and the various programmes. He was the only available person who could make an accurate report to the Client at any one time, of both the current status of the Project and the likely effects both on timing and on costs. He was at ³the centre of the information hub´ of the Project. 26. It is only with knowledge of the exact status of the Project on a regular basis that the construction manager can deal with problems that have arisen, and therefore anticipate potential problems that may arise, and make provisions to deal with these work fronts. That is not dissimilar from the status of the Contractor under FIDIC conditions. 27. An Employer will need accurate information of the likely completion date, and the costs, because this would affect his pre-commencement preparation and financing costs. Any change to the likely completion date would give an Employer the chance to adjust its operational dates. Judge Wilcox concluded: ³Where a completion date was subject to change the competent Construction Manager had a clear obligation to accurately report any change from the original Projected completion date, and the effect on costs.´ 28. Sub-clause 4.21(h) confirms that the Contractor has a similar obligation here. 29. Clauses 6 and 7 deal with personnel, plant, materials and workmanship. Clause 6 has particular importance in relation to staff. The Contractor must not only engage labour and staff, but must also make appropriate welfare arrangements for them. 30. Clause 8 deals with Commencement, Delay and Suspension. Sub-clause 8.3 sets out the manner in which the Contractor should provide programmes showing how he proposes to execute the works. For example the programme must be supported by a report describing the methods which the Contractor is to adopt. The extensions of time provisions are clear. By sub-clause 8.4: ³the Contractor shall be entitled ...to an extension of the Time for Completion if and to the extent that completion ... is or will be delayed by any of the following causes´ 31. Sub-clause 8.7 deals with delay or liquidated damages. To be able to levy such damages, the Employer must make an application (in effect a claim) in accordance with sub-clause 2.5. 32. Measurement is a central feature of Clause 12 and is the basis ultimately upon which payment to the Contractor is calculated. Sometimes called a ³measure and value´ type of contract, the arrangements in place in the FIDIC form proceed on the basis that the Works are to be measured by the Engineer, and those quantities and measured amounts of work are then to be paid for alternatively at the rates and prices in the Contract, or else on the basis of adjusted rates, or entirely new rates (if there is no basis for using or altering Contract rates for the work). 33. Clause 13 addresses variations and incorporates adjustments for changes in legislation and in costs. However, provided the Contractor notifies an inability to obtain the required goods, a variation is not binding. Equally it is not binding in the case of contractor design if the proposed variation would have an adverse impact on safety, suitability or the achievement of performance criteria as specified. 34. The amount the Contractor is going to be paid, and the timing of that payment, is of fundamental importance to both Contractor and Employer alike. The manner in which the payment is made is traditionally dependent on the precise wording of the contract9. Under the code of Hammurabi10 the rule was as follows: ³If a builder build a house for some one and complete it, he shall give him a fee of two shekels in money for each sar of surface.´ 35. Thus the amount to be paid was clear and, given that the punishment for violating most of the provisions of the code was death, it might be presumed that most builders were paid, provided the house was constructed properly. However, unlike the FIDIC form, the rule does not say when the payment has to be made. 36. Clauses 15 and 16 deal with termination by the Employer and suspension and termination by the Contractor, whilst clause 17 deals with risk and responsibility. This includes at sub-clause 17.6 the exclusion of the liability of both Contractor and Employer: ³for loss of use of any works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other party in connection with the contract´. 37. Clause 17 includes a cap on the liability of the Contractor to the Employer, something which was again new to the 1999 FIDIC form. 38. Clause 19 deals with Force Majeure. As is discussed below, whilst most civil codes make provision for force majeure, at common law, force majeure is not a term of art and no provision will be implied in the absence of specific contractual provisions. 39. Finally clause 20 deals with claims, and again this is something I deal with below. The MDB version of the new Red Book 40. The MDB version of the FIDIC Red Book evolved out of the fact that the world¶s banking community tended to adopt the FIDIC Conditions as part of their standard bidding documents. However when doing this, the banks also introduced their own amendments. There were inevitable differences between these amendments and the banks realized there would be a benefit in having their own uniform conditions. This has resulted in a ³harmonized edition´ which was the product of preparation by the FIDIC Contracts Committee and by a group of participating banks11. The first harmonized edition of the 1999 Conditions was published in May 2005, only to be amended in March 200612. The clear aim is that all MDB-funded contracts will incorporate these amendments. 41. There are a number of differences between the FIDIC form and the MDB version. Perhaps the most notable (or indeed controversial) changes are those to be found in clause 3. These include the following additional clause: ³The Engineer shall obtain the specific approval of the Employer before taking action under the following sub-clauses of these conditions: (a) Sub-clause 4.12: Agreeing or determining an extension of time and/or additional costs. (b) Sub-clause 13.1: Instructing a Variation; except: (i) in an emergency; or (ii) if such a variation would increase the Accepted Contract Amount by less than the percentage specified in the Contract Data. (c) Sub-clause 13.3: Approving a proposal for variation submitted by the contractor in accordance with Sub-clauses 13.1 or 13.2. (d) Sub-clause 13.4: Specifying the amount payable in each of the applicable currencies.´ 42. Further, whilst under the 1999 edition: ³The Employer undertakes not to impose further constraints on the Engineer¶s Authority, except as agreed with the Contractor.´ Under the MDB version, this is replaced with: ³The Employer shall promptly inform the Contractor of any change to the authority attributed to the Engineer.´ 43. Perhaps the first of these changes is the most controversial. Under the 1999 edition, the Employer actually undertook not to change the basis of the Engineer¶s authority without the agreement of the Contractor. This has been changed to give the Employer the right to make whatever changes it likes to the basis of the Engineer¶s authority. The only restriction is that it must inform the Contractor of these changes. There is no longer any requirement that the Contractor agrees to these changes. 44. The view of contractors is that this is a retrograde step permitting unilateral alteration of the engineer¶s authority, and thus potentially impacting upon the balance of risk13. 45. There are a number of other features within the MDB version14. These include apparently simple changes such as that from ³reasonable profit´ to ³profit´. The reason for this is that by sub-clause 1.2(e) that profit is fixed at 5% unless otherwise agreed. 46. In sub-clause 2.4, the four circumstances under which an Employer is entitled to make a call under the performance security have been deleted. There is no equivalent replacement and now the Employer is able to make a call in respect of amounts to which it is entitled under contract. Arguably, this represents an extension of the Employer¶s rights, although it might be felt that the reference to the ICC Uniform Rules provides an adequate safeguard for the employer, the financing institutions and the Contractor. 47. The amendments to sub-clause 4.12 proved to be controversial. Sub-clause 4.12 provides that a Contractor may be entitled to an extension of time in respect of unforeseeable physical conditions. Under the May 2005 version of the MDB harmonized edition, sub-clause 1.1.6.8 defined unforeseeable as meaning: ³Not reasonably foreseeable and against which adequate preventative precautions could not be taken by an experienced contractor by the date for the submission of the Tender.´ 48. The European International Contractors (EIC) group criticized the addition, as underlined in the above extract, referring to it as a ³twist of Catch-22 proportions´,15 and the editors of the International Construction Law Review indicated that the change calls for ³rational justification and explanation of its practical application´16. 49. It could be argued that the addition to the clause serves to add clarity to the original definition, no more. For example, in demonstrating that the physical conditions would have been unforeseeable to an experienced contractor, the Contractor would already have to show that there were no adequate precautions which could have reasonably been taken. However, the EIC raised three questions of the amendment: (i) Is it the intention that contractors should make allowances for precautionary steps for unforeseeable events and circumstances? (ii) Is it the intention of the MDB harmonized edition to shift the balance of risk under the contract for unforeseeable events to the contractor? (iii) How can you take reasonable precautions against an event which is not reasonably foreseeable? 50. The answer to the first question does appear to be yes, which may well have had an impact on the tender returns. If the answer to the second question is yes then this would suggest that the contract drafters are moving towards the risk profile adopted under the Silver Book. A simple comparison between the two forms of wording seems to make it clear that this is not the intention behind the new clause. 51. It was the third question that demonstrated the real difficulty with the new wording and this may have been one factor that led to the revision being dropped. However, as there have been two versions, care should be taken to check which definition has been adopted. 52. The 10 particular locality sub-clauses, 6.12 - 6.22, form part of the MDB contract. These are likely to be reflected in local labour and health and safety legislation. 53. Under sub-clause 8.1, the project cannot commence until the Contract Agreement has been signed by both parties, the Contractor has reasonable proof that the Employer can fund the works and the Contractor has received any advanced payments it was entitled to. 54. However, the changes to sub-clause 12.3 are pro-Employer. Sub-clause 12.3 sets out circumstances when the Contractor can claim enhanced rates. In the MDB version, the rates shown in sub-paragraphs (a)(i) and (ii) (which can trigger the use of rates other than those specified in the Contract) have been increased from 10% and 0.01% to 25% and 0.25% respectively. This seems to be a pro-Employer change as the increase in the threshold amount is of no benefit to the Contractor. 55. Conversely, the threshold as to when any repayment of the advance payment (if any) must be made has been increased from 10% of the Accepted Contract Amount to 30%, a more Contractor-friendly change. 56. Some clauses in the MDB version are entirely new. One such is 15.6 which deals with corrupt or fraudulent practice. Sub-clause 15.6 states that: ³If the Employer determines that the Contractor has engaged in corrupt, fraudulent, collusive or coercive practices, in competing for or in executing the Contract, then the Employer may, after giving 14 days notice to the Contractor, terminate the Contractor¶s employment under the Contract and expel him from the Site, and the provisions of Clause 15 shall apply as if such expulsion had been made under Sub-Clause 15.2 [Termination by Employer]. Should any employee of the Contractor be determined to have engaged in corrupt, fraudulent or coercive practice during the execution of the work then that employee shall be removed in accordance with Sub-Clause 6.9 [Contractor¶s Personnel]. For the purposes of this Sub-Clause: See Notes for definitions of corrupt, fraudulent, collusive or coercive practices for each Participating Bank.´ 57. The sub-clause will be slightly different for each Participating Bank as each has its own definition of corrupt, fraudulent, collusive or coercive practice. The sub-clause has some similarities with sub-paragraph (f) of sub-clause 15.6; however, unlike sub-clause 15.1(f), here 14 days¶ notice must be given. This new sub-clause is also more widely drawn, for example making it clear that the tendering process must be fair as it refers to both ³competing for´ and ³executing´ the Works. In the case of Cameroon Airlines v Trasnet Ltd17, an arbitration tribunal ruled that Trasnet had to repay commission monies it had added to its tender sum the commission monies being money paid as bribes to officials. 58. This extension to clause 15 is entirely in keeping with the global trend in seeking to clamp down on this type of behavior. For example, in the UK, the Anti-Terrorism, Crime and Security Act 200118 provides that a UK citizen can be guilty of an offence in the UK if he is involved in offering or receiving bribes abroad, provided that what he has done would amount to an offence in the UK. 59. Under sub-clause 17.6, the sub-clause has been extended to make it absolutely clear that certain items, for example delay damages, are not covered by the limitation of liability provisions. The future ² the DBO form 60. On 13 September 2007, in Singapore, FIDIC launched their new DBO19form of contract. The FIDIC DBO form has arisen out of recognition that for concession contracts in the transport and water/waste sectors, the market typically uses the existing FIDIC Yellow Book with operations and maintenance obligations tacked on. FIDIC has recognized that this is unsatisfactory, and in a similar way some of the contractual developments described above, in order to achieve uniformity and therefore a higher degree of certainty, the new form has been prepared to meet the demand. 61. The DBO approach to contracting combines design, construction, and long-term operation and maintenance of a facility into one single contract awarded to a single contractor (who will usually be a joint venture or consortium containing all the skills required by the particular DBO arrangement). 62. There are two options: (i) D-B-O: ³green-field´ scenario; (ii) O-D-B: ³brown-field´ scenario 63. FIDIC has chosen to produce a document based on the DBO green-field scenario with a Guide containing guidelines on the changes necessary to cover a brown-field arrangement. The base scenario is the ³green-field´ scenario plus a 20 year operation period. 64. The new contract will mirror the existing forms in that again it will only have 20 clauses. However, the following new definitions have been introduced in the contract: (i) Auditing Body; (ii) Commissioning Certificate (iii) Maintenance Retention Fund & Asset Replacement Fund; (iv) Exceptional Risk 65. Three key factors and potential advantages in the new form are: (i) Time - possibilities to overlap some design and build activities; (ii) Cost ± cost restraints, commitments, and other risks carried by Contractor; and (iii) Quality ± as the Contractor is responsible for 20 years¶ operation, it is in his interest to design and build quality plant with low operation and maintenance costs. 66. Given the increasing sophistication of the industry, it seems likely that this new DBO form will not be the last new FIDIC form. Making a claim under the FIDIC Form ² the employer 67. The ability to make claims under any contract is always an area that requires careful consideration. Under the FIDIC form, it is noticeable that the Employer and Contractor are treated very differently. Introduction ² the claims mechanism 68. Sub-clause 2.5 of the FIDIC Conditions of Contract for Construction20 provides that: If the Employer considers himself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract, and/or to any extension of the Defects Notification Period, the Employer or the Engineer shall give notice and particulars to the contractor. However, notice is not required for payments due under Sub-Clause 4.19 [Electricity, Water and Gas], under Sub-Clause 4.20 [Employer¶s Equipment and Free-Issue Material], or for other services requested by the Contractor. The notice shall be given as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim. A notice relating to any extension of the Defects Notification Period shall be given before the expiry of such period. The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount and/or extension to which the Employer considers himself to be entitled in connection with the Contract. The Engineer shall then proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine (i) the amount (if any) which the Employer is entitled to be paid by the Contractor, and/or (ii) the extension (if any) of the Defects Notification Period in accordance with Sub-Clause 11.3 [Extension of Defects Notification Period]. This amount may be included as a deduction in the Contract Price and Payment Certificates. The Employer shall only be entitled to set off against or make any deduction from an amount certified in a Payment Certificate, or to otherwise claim against the Contractor, in accordance with this Sub-Clause. 69. The final paragraph of the conditions for EPC/Turnkey projects reads slightly differently as follows: The Employer may deduct this amount from any moneys due, or to become due, to the Contractor. The Employer shall only be entitled to set-off against or make any deduction from an amount due to the Contractor, or to otherwise claim against the Contractor, in accordance with this Sub-Clause or with sub-paragraph (a) and/or (b) or Sub-Clause 14.6 [interim payments]. 70. The key features of this sub-clause are: o If the Employer considers himself entitled to either any payment or an extension of the Defects Notification period under the Contract, the Employer or Engineer shall give notice and particulars to the Contractor. o The notice relating to payment should be given as soon as practicable o o o o o o after the Employer has become aware of the event or circumstance which gives rise to the claim. Any notice relating to the extension of the Defects Notification Period should be given before the expiry of that period. The Employer must also provide substantiation including the basis of the claim and details of the relief sought. Once notice has been given, the Engineer shall make a determination in accordance with sub-clause 3.5. Any amount payable under sub-clause 2.5 may be included as a deduction in the Contract Price and Payment Certificates. The Employer cannot make any deduction by way of set-off or any other claim unless it is in accordance with the Engineer¶s determination. Notice is not required for payments due to the Employer for services under sub-clause 14.19 or equipment under sub-clause 4.20. 71. Sub-clause 2.5 is a new ³Contractor-friendly´ clause. I say this because it is designed to prevent an Employer from summarily withholding payment or unilaterally extending the Defects Notification Period. One particularly important feature can be found in the final paragraph which specifically confirms that the Employer no longer has a general right of set-off. The Employer can only set-off sums once the Engineer has agreed or certified any amount owing to the Contractor following a claim. 72. The Employer should remember that in accordance with sub-cause 14.7, he must pay any amount certified, even if he disagrees with the Engineer¶s decision. By sub-clause 14.8, were the Dispute Adjudication Board to decide that the Employer had not paid the amount due, the Contractor would be entitled to finance charges. 73. Sub-clause 2.5 imposes a specific notice procedure on any Employer who considers that it has any claims against the Contractor. Unless the Employer follows the procedure laid down by this sub-clause, he cannot withhold or otherwise deduct any sums due for payment to the Contractor. The notice must be in writing and delivered in accordance with the requirements of sub-clause 1.3. It is unclear as to whether the particulars are required to be provided at the same time as the notice is served. The sub-clause does not require that the particulars are provided at the same time as no time limit or frame is imposed on either. 74. The Employer must give notice ³as soon as practicable´ of him becoming aware of a situation which might entitle him to payment. Therefore unlike sub-clause 20.1, where a Contractor has 28 days to give notice, there is no strict time limit within which an Employer must make a claim, although any notice relating to the extension of the Defects Notification Period must of course be made before the current end of that period. In addition it is possible that the Applicable Law might just impose some kind of limit. 75. It might have been thought that one option would have been to suggest that the Employer should be bound by the same 28-day limit as the Contractor. Instead, subclause 2.5 provides simpler claims mechanism with no time bar. However, the rationale for the difference in treatment is presumably that in the majority of, if not all, situations, the Contractor will be (or should be) in a better position to know what is happening on site and so will be much better placed than an Employer to know if a claims situation is likely to arise. 76. The particulars that the Employer must provide are details of the clause (or basis) under which the claim is made, together with details of the money is time relief sought. Details of any notices served by the Employer are also required by sub-clause 4.21(f) to form part of the regular progress reports. 77. Under sub-clause 3.5 of the Construction and Design-Build Conditions, the Engineer must first try and agree the claim. Under the EPC/Turnkey Conditions, the primary onus to agree or determine any claims lies with the Employer. If either party is not satisfied with the determination made by the Engineer under sub-clause 3.5, then the resulting dispute could be referred to the Dispute Adjudication Board under clause 20. An Employer would therefore be advised not to deduct the amount to which he believes he is entitled, before any such determination of the Dispute Adjudication Board, as to do so would leave the Employer liable to a claim from the Contractor. What does sub-clause 2.5 cover? 78. There are a number of different clauses throughout the Contract which provide the Employer with a right to claim payment from the Contractor. These include: Sub-clause 4.19 - Electricity, water and gas Sub-clause 4.20 - Employer¶s equipment and free-issue material Sub-clause 7.5 - Rejection Sub-clause 7.6 - Remedial work Sub-clause 8.1 - Commencement of works Sub-clause 8.6 - Rate of progress Sub-clause 8.7- Delay damages Sub-clause 9.4 - Failure to pass tests on completion Sub-clause 10.2 - Taking over of parts of the works Sub-clause 11.3 - Extension of defects notification period Sub-clause 11.4 - Failure to remedy defects Sub-clause 13.7 - Adjustments for changes in legislation Sub-clause 15.3 - Valuation at date of termination Sub-clause 15.4 - Payment after termination Sub-clause 17.1 - Indemnities Sub-clause 18.1 - General requirements for insurances Sub-clause 18.2 - Insurance for works and contractor¶s equipment MDB harmonised edition 79. There are, of course, two different versions of sub-clause 2.5. There are some slight differences between the FIDIC Standard Form and the version produced by the Multilateral Development Banks known as the MDB harmonised edition. Some of these differences are minor. For example, the reference to Free-Issue Material has been changed to Free-Issue Materials. 80. However, a more significant change has been introduced to the sentence which details when the Employer must give notice. It now reads as follows: The notice shall be given as soon as practicable and no longer than 28 days after the Employer became aware, or should have become aware, of the event or circumstances giving rise to the claim. A notice relating to any extension of the Defects Notification Period shall be given before the expiry of such period. 81. The first impression given by the addition of the underlined words is that they serve to tighten up the period in which the Employer must notify any claim an impression reinforced by the apparent 28-day time limit. However, the new words introduce an additional subjective reasonableness test. Whereas before, all that mattered was when the Employer actually became aware of the circumstances giving rise to a claim, now some consideration needs to be given to when the Employer should have realised that a claims situation had arisen. 82. However, in reality, save for extreme cases, little has changed. There is still no time limit to serve as a condition precedent to deprive the Employer of the opportunity to make a claim. Making a claim under the FIDIC form - the contractor Introduction - the claims mechanism 83. For the Contractor, it is a different story. Sub-clause 20.121 states that: ³If the Contractor considers himself to be entitled to any extension to the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractorbecame aware, or should have become aware, of the event or circumstance. ³If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. Otherwise, the following provisions of this Sub-Clause shall apply.´ 84. The NEC3 contains similar provisions: ³The Contractor notifies the Project Manager of an event which has happened or which he expects to happen as a compensation event if The Contractor believes that the event is a compensation event and The Project Manager has not notified the event to the Contractor. If the Contractor does not notify of a compensation event within eight weeks of becoming aware of the event, he is not entitled to a change in the Prices, the Completion Date or a Key Date unless the Project Manager should have notified the event to the Contractor but did not.´ 85. That said, the regime is very different between FIDIC and NEC. Under FIDIC, the duty is to notify of an entitlement to additional time or money; under NEC3 there is a duty to notify of an event. 86. The key features of sub-clause 20.1 are that: o o o o o o o o The Contractor must give notice to the Engineer of time or money claims, as soon as practicable and not later than 28 days after the date on which the Contractor became aware, or should have become aware, of the relevant event or circumstance. Any claim to time or money will be lost if there is no notice within the specified time limit. Supporting particulars should be served by the Contractor and the Contractor should also maintain such contemporary records as may be needed to substantiate claims. The Contractor should submit a fully particularised claim after 42 days. The Engineer is to respond, in principle at least, within 42 days. The claim shall be an interim claim. Further interim updated claims are to be submitted monthly. A final claim is to be submitted, unless agreed otherwise, within 28 days of the end of the claim event. Payment Certificates should reflect any sums acknowledged in respect of substantiated claims. Contrary to the old FIDIC Books22, the notice to be served under subclause 20.1 relates to claims for an extension of time as well as claims for additional payment. 87. The 28-day deadline does not necessarily start on the date of the claim event itself but on the date the Contractor objectively should have become aware of the event. Whilst it is relatively easy to identify the claim event in the case of a single event such as the issuing of engineers¶ instructions or the receipt of borehole tests indicating unforeseen ground conditions, when, however, the claim event is a continuous event, such as unforeseeable weather over a certain period of time, it can become extremely difficult to pinpoint the exact start of the 28-day period. The Contractor also needs to remember that where the effects of a particular event are ongoing then, rather unusually, the Contractor is specifically required to continue submitting notices at monthly intervals. 88. As outlined above, it can immediately be seen that a different set of rules apply to the Contractor than to the Employer. Is sub-clause 20.1 a condition precedent? 89. Yes. Sub-clause 20.1 is a condition precedent and potentially provides the Employer with a complete defence to any claim for time or money by the Contractor not started within the required time frame. 90. Generally, in England and Wales, the courts will take the view that timescales in construction contracts are directory rather than mandatory, so that the Contractor should not lose its right to bring its claim if such claim is not brought within the stipulated timescale23. In the case of Bremer Handelgesellschaft mbH v Vanden Avenne Izegem nv24, however, the House of Lords held that a notice provision should be construed as a condition precedent, if: (i) it states the precise time within which the notice is to be served, and (ii) it makes plain by express language that unless the notice is served within that time the party making the claim will lose its rights under the clause. 91. Sub-clause 20.1 plainly fulfils both these conditions as: (i) the notice of claim must be served ³as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance´, and (ii) ³If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim.´ 92. Sub-clause 20.1 was thus clearly drafted as a condition precedent. However, there is always a possibility that a court/arbitral tribunal might decline to construe it as a condition precedent, having regard to the particular circumstances of the matter before it and the impact of the applicable law. Are there any ways round sub-clause 20.1? 93. Quite possibly not, at least in England and Wales. Prevention 94. The concept of preventive acts is based on the universally accepted provision that one is not entitled to benefit from one¶s own wrongs. It thus operates to defeat claims for the employer¶s claims for liquidated damages if, by its own acts or omissions, the employer has prevented the main contractor from completing its work by the date for completion, and thus rendered ³time at large´. 95. To protect its right to claim liquidated damages and to avoid the time for completion to be declared ³at large´, the employer will therefore insert provisions into the contract enabling the contractor to seek an extension of the time for completion in case the employer is responsible for the delay incurred by the contractor. 96. The issue with conditions precedent to the contractor¶s right to claim for an extension of time, such as sub-clause 20.1, is that if the contractor fails to comply with such conditions, then its right to claim for additional time will be forfeit, and thus the question arises as to whether the employer will then still be able to claim liquidated damages (and arguably rely on its own wrong). 97. This issue was considered in 1999 in the case of Gaymark Investments Pty Ltd v Walter Construction Group Ltd in the Northern Territory of Australia25, where the court found that the ³prevention principle´ took precedence over the notification provisions, notwithstanding the fact that such provisions had clearly been drafted as a condition precedent. The employer was accordingly not allowed to claim for liquidated damages and the contractor not deprived of its right to claim for an extension of time in spite of its failure to serve a valid notice. 98. This judgment gave rise to a long debate as to whether the same principles should be applied in England and Wales and other common law jurisdiction. Whilst some commentators argued that a similar approach might be adopted26, others strongly rejected the reasoning of the court in Gaymark.27 99. One author submitted that the better approach for resolving the tension between ³time bar´ clauses and the ³prevention principle´ would be to accept first that the ³prevention principle´ is a rule of construction (as opposed to a rule of law) and can therefore be excluded by contractual provisions such as sub-clause 20.1, and second that the ³prevention principle´ does not apply because the major cause for the contractor¶s loss in the above circumstances is the contractor¶s failure to operate the contractual machinery28. 100. This second option was clearly accepted in 2001 by the Inner House of the Court of Session of Scotland in the case of City Inns Ltd v Shepherd¶s Construction29, in which Lord MacFadyen found that there was a causal connection between the contractor's failure to comply with the notification provisions of the contract and its liability to pay a sum of money which bears no relation to the loss resulting to the employer from that breach of contract. Lord MacFadyen thus held that the liquidated damages remained payable by the contractor: ³on the basis that it is a genuine pre-estimate of the loss suffered by the employer as a result of the delay in completion, and is not converted, by the fact that the contractor might have avoided that liability by taking certain steps which the contract obliged him to take, but failed to do so, into a penalty for failing to take those steps. The fact that the contractor is laid under an obligation to comply with clause 13.8.1 [obligation to notify], rather than merely given an option to do so, does not in my opinion deprive compliance with clause 13.8.1 of the character of a condition precedent to entitlement to an extension of time. Non-compliance with a condition precedent may in many situations result in a party to a contract losing a benefit which he would otherwise have gained or incurring a liability which he would otherwise have avoided. The benefit lost or the liability incurred may not be in any way commensurate with any loss inflicted on the other party by the failure to comply with the condition. But the law does not, on that account, regard the loss or liability as a penalty for the failure to comply with the condition (The µVainqueur José¶, per Mocatta J at 578, col. 2).´ 101. The crucial fact in this case was that, under the terms of the contract, but for its failure to serve a valid notice on time, the contractor would have been in a position to claim an extension of time and therefore defend the employer¶s claim for liquidated damages. The fact that it failed to comply with this simple requirement may lead to very harsh consequences such as the employer being able to claim liquidated damages despite being responsible for the delay incurred by the contractor. However, the contractor only had itself to blame for losing the right to claim additional time. 102. Six years after Lord MacFadyen¶s decision in City Inns Ltd vShepherd¶s Construction, the position of the English courts with regard to the effect of the ³prevention principle´ on notification clauses was also finally clarified in the judgment of the TCC in Multiplex Construction v Honeywell Control Systems30, where Mr Justice Jackson held that: ³Whatever may be the law of the Northern Territory of Australia, I have considerable doubt that Gaymark represents the law of England. Contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose; such notice enables matters to be investigated while they are still current. Furthermore, such notice sometimes gives the employer the opportunity to withdraw instructions when the financial consequences become apparent. If Gaymark is good law, then a contractor could disregard with impunity any provision making proper notice a condition precedent. At his option the contractor could set time at large.´31 103. The debate as to whether the decision of the court in Gaymark should also be followed by the courts in England and Wales is therefore now over. Equally importantly, Mr Justice Jackson said this about the rationale of the condition precedent: "Contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose; such notice enables matters to be investigated while they are still current. Furthermore, such notice sometimes gives the employer the opportunity to withdraw instructions when the financial consequences become apparent.´ 104. The condition precedent did not render time at large. A condition precedent which bars a right to an extension of time if not complied with is valid. Good faith 105. Unlike England, many jurisdictions are governed by their own civil codes. Whilst these codes recognise contract autonomy and allow the parties to determine the terms and conditions of their contract, they will also insist that these conditions do not contravene any mandatory provision of the law or public policy. One such example is the concept of good faith. Many civil codes provide that a contract must be performed in accordance with its contents, and in a manner consistent with the requirements of good faith. It is not always that easy to define what good faith might mean. The English courts have said this: ³It is a principle of fundamental justice that if a promisor is himself the cause of the failure of performance, either of an obligation due to him or of a condition upon which his own liability depends, he cannot take advantage of the failure.´32 106. It is possible that the concept of good faith can help defeat the harsh consequences of clause 20.1. However, the concept of time bars is also accepted and upheld by the courts in several civil law jurisdictions, provided they appear to be reasonable under the circumstances. As you would expect, everything would depend on the circumstances of the case and the conduct of both parties. If a contractor is only a few days late in submitting its sub-clause 20.1 notice in respect of very substantial claims and the forfeiture of its contractual rights would result in serious financial difficulties, then one might reasonably be entitled to argue that it would be contrary to good faith for the employer to rely on clause 20.1. Similarly, if the employer has actual knowledge of the ³event or circumstance giving rise to the claim´, and/or suffers no substantial harm as a result of not receiving the contractor¶s notice on time, then, having regard to its implied obligation of good faith, the employer may not be able to rely on sub-clause 20.1 to defeat the contractor¶s claims. 107. In France there is the concept of ³abus de droit´ (misuse of a right). Under the Egyptian Civil Code, for example, "the exercise of a right is considered unlawful in the following cases: o o If the sole aim thereof is to harm another person; If the benefit it is desired to realize is out of proportion to the harm caused thereby to another person; 33 o If the benefit it is desired to realize is unlawful." 108. Article 148 of the Egyptian Code further provides that "a contract must be performed in accordance with its contents and in compliance with the requirements of good faith". 109. However, in France, for example, where contractual time bars have been given effect by the Courts provided they appear to be reasonable under the circumstances34. Similarly, before Egyptian courts, an agreement to a contractual forfeiture of a right for the non-accomplishment of a certain action within a determined period of time might still be valid and binding35. 110. In practice, much will therefore depend on the circumstances of the case and the conduct of both parties. The contractual obligation to deliver timely notice of one¶s intention to claim additional time or money will normally be upheld, unless the particular circumstances of the case show that such conclusion would lead to a misuse of a right or a breach of the parties¶ good faith obligations. 111. If therefore a contractor is only a few days late in submitting its sub-clause 20.1 notice in respect of very substantial claims and the forfeiture of its contractual rights would result in serious financial difficulties, then one might reasonably be entitled to argue that it would be an abus de droit for the employer to rely on clause 20.1. Similarly, if the employer has actual knowledge of the ³event or circumstance giving rise to the claim´, and/or suffers no substantial harm as a result of not receiving the contractor¶s notice on time, then, having regard to its implied obligation of good faith, the employer may not be able to rely on sub-clause 20.1 to defeat the contractor¶s claims. Conclusion 112. Therefore, unless you are able to come to an agreement with the employer36, whatever the jurisdiction it is better to serve the notice in time. Compliance with the notice provisions is intended to be a condition precedent to recovery of time and/or money and, without notices, the employer has no liability to the contractor. Certainly parties should treat the sub-clause in this way. 113. Whilst there are fundamental differences in the approach adopted by common law and civil law systems in analysing time bar clauses and in deciding whether such clauses should be given effect, the contractor will always face a difficult battle in order to convince a judge or arbitral tribunal not to apply the clear words of the contract. Irrespective of the law applicable to that contract, the contractor will need to justify its failure to serve a timely notice and/or demonstrate that given the particular circumstances of the case, it would be unfair, inequitable or against mandatory principles of the law for its right to claim additional time and/or money to be forfeit. 114. To avoid having to put forward complex legal arguments, the prudent contractor should never assume that conflicts can be resolved informally, and instead always take care to comply with the timescales set out in sub-clause 20.1 and submit the required notice within the prescribed period of 28 days. 115. The rationale for the difference in treatment between the employer and contractor is that presumably in the majority of, if not all, situations, the contractor will be (or should be) in a better position to know what is happening on site and so will be much better placed to know if a claims situation is likely to arise than an employer. Nevertheless, sub-clause 2.5 is a clear step forward for the contractor from the 1987 Old Red Book edition as one reason for the introduction of the clause was, as noted above, to prevent an employer from unilaterally withholding payment. FORCE MAJEURE THE FIDIC FORM AND NEC COMPARED 116. In my brief discussion about the different ways in which the employer and contractor are treated when it comes to making claims, I mentioned the NEC3 contract and also the contrast between the civil and common law jurisdictions. Another area where both these points can be illustrated, relates to the concept of force majeure. 117. One of the potential difficulties with international projects is that the contracts entered into are governed by laws which may be unfamiliar to one or other of the contracting parties. For example, there is a difference in the way that force majeure is treated in common and civil law jurisdictions. Whilst most civil codes make provisions for force majeure events, at common law,force majeure is not a term of art and its meaning is far from clear. No force majeure provision will be implied in the absence of specific contractual provisions, and the extent to which the parties deal with unforeseen events will be defined in the contract between them. Thus without a specific clause, there will not necessarily be relief for force majeure events. 118. The aim of the force majeure clause is to exempt a party from performance on the occurrence of a force majeure event. Commercially, the clause is there to address risks which cannot necessarily be economically insured and which are outside the control of the parties to the contract. There are, of course, many definitions of that force majeure event. For example, in the case of Atlantic Paper Stock Ltd v St Anne-Nackawic Pulp and Paper Co, [1976] 1 SCR 580, Dickson J in the Supreme Court of Canada said that: ³An act of God or force majeure clause generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond the control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill.´ 119. The definition of force majeure provided in the new FIDIC form at clause 19 is widely drawn. Clause 19.1 defines a force majeure event as one: (i) Which is beyond a Party¶s control; (ii) which such Party could not reasonably have provided against before entering into the Contract; (iii) which, having arisen, such Party could not reasonably have avoided or overcome; and (iv) which is not substantially attributable to the other Party. 120. Force majeure may include, but is not limited to, exceptional events or circumstances of the kind listed below, so long as conditions (a) to (d) above are satisfied: (i) war, hostilities (whether war be declared or not), invasion, act of foreign enemies, rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war; (ii) riot, commotion, disorder, strike or lockout by persons other than the Contractor¶s Personnel and other employees of the Contractor and Sub-Contractors; (iii) munitions of war, explosive materials, ionizing radiation or contamination by radioactivity, except as may be attributable to the Contractor¶s use of such munitions, explosives, radiation or radioactivity; and (iv) Natural catastrophes such as earthquake, hurricane, typhoon or volcanic activity. 121. The broad definition of force majeure to be found here, and it should be remembered that the examples listed above are examples and not an exhaustive list, reflects the basic premise of a force majeure clause, namely that it serves to exempt a party from performance on occurrence of a force majeure event. 122. One problem with the FIDIC form is that there is a risk of potential overlap and/or contradiction between sub-clause 19.1 and the definition of force majeure, which one can find in the civil codes of most, if not all, civil law jurisdictions. For example, the definition of force majeure under the Quebec Civil Code is much narrower in scope. Article 1470 simply provides that: ³A superior force [in the French version, force majeure] is an unforeseeable and irresistible event, including external causes with the same characteristics.´ 123. Therefore incorporating clause 19 could be said to be duplicating or enlarging upon what is provided for in the civil codes of a civil law jurisdiction. In any event, the Particular Conditions note that the Employer should verify, before inviting tenders, that the wording of clause 19 is compatible with the law governing the Contract. 124. In fact, there was no specific force majeure clause in the Old Red Book FIDIC 4th Edition. However, the Contractor was afforded some protection by clause 65, which dealt with special risks including the outbreak of war, and clause 66, which dealt with payment when the Contractor was released from performance of its contractual obligations. The scheme of the FIDIC form is that the party affected, which is usually the Contractor but could here be the Employer, is entitled to such an extension of time as is due and (with exceptions) additional cost where a force majeure occurs. 125. For clause 19 to apply, the force majeure event must prevent a Party from performing any of its obligations under the Contract. The now classic example of this is the refusal of the English and American courts to grant relief as a consequence of the Suez Crisis during the 1950s. Those who had entered into contracts to ship goods were not prevented from carrying out their contractual obligations as they could go via the Cape of Good Hope even though the closure of the Suez Canal made the performance of that contract far more onerous. 126. Clause 19.7 of the FIDIC form is also of interest. Here, the parties will be released from performance (and the Contractor entitled to specific payment) if (i) any irresistible event (not limited to force majeure) makes it impossible or unlawful for the parties to fulfil their contractual obligations, or (ii) the governing law so provides. It acts as a fallback provision for extreme events (i.e., events rendering contractual performance illegal or impossible) which do not fit within the strict definition of force majeure laid out under sub-clause 19.1. It also grants the party seeking exoneration the right to rely on any alternative relief-mechanism contained in the law governing the contract. 127. If English law applies, following the landmark case of Davis Contractors v Fareham UDC37, the affected party will be able to rely on the common law concept of frustration, which ³occurs whenever the law recognises that without the default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract´. Here, the contract was to build 78 houses for a fixed price in 8 months. Because of labour shortages and bad weather, it took the contractor 22 months to build the houses. It was held by the House of Lords that the contract had not been frustrated. To claim frustration, therefore, it will not be enough for a contractor to establish that new circumstances have rendered its contractual performance more onerous or even dangerously uneconomic. 128. For frustration, what is required is a radical turn of events completely changing the nature of the contractual obligations. It is a difficult test to fulfill, but not as difficult as that of sub-clause 19.4 (force majeure) or the first limb of sub-clause 19.7 which both refer to the concept of impossibility (or illegality). To take the example put forward by A. Puelinckx of a wine connoisseur signing a contract for the construction under his house of a very sophisticated wine cellar38. If the house is burned down before execution of the contract, leaving the basement part in perfect condition, this will certainly be considered frustration under English law. However, no claim could be put forward under a strict interpretation of sub-clauses 19.4 or 19.7 as the house could in theory be rebuilt and the contractual obligation to build the cellar performed. French law would apply the same reasoning as sub-clauses 19.4 or 19.7 and because performance is still possible, would hold the above-described events as a mere imprévision, which would not afford any financial relief to the affected party. 129. What is common to both the notion of frustration and that of force majeure as interpreted under English law, though, is that no relief will be granted in case of economic unbalance. A recent illustration concerning the interpretation of a force majeure clause under English law can be found in the case of Thames Valley Power Limited v Total Gas & Power Limited39Here there was a 15-year exclusive gas supply contract between Thames Valley Power Limited (buyer) and Total Gas & Power Limited (supplier) for the operation of a combined heat and power plant at Heathrow Airport. Clause 15 of the supply contract provided in part as follows: ³if either party is by reason of force majeure rendered unable wholly or in part to carry out any of its obligations under this agreement then upon notice in writing « the party affected shall be released from its obligations and suspended from the exercise of its rights hereunder to the extent that they are affected by the circumstances of force majeure and for the period that those circumstances exist.´ 130. The supplier sought to rely on clause 15 to stop supplying gas at the contract price as the market price for gas had increased significantly and rendered it ³uneconomic´ for the supplier to supply gas. Christopher Clarke J, however, found that: ³The force majeure event has to have caused Total to be unable to carry out its obligations under the [agreement]. « Total is unable to carry out that obligation if some event has occurred as a result of which it cannot do that. The fact that it is much more expensive, even greatly more expensive for it to do so, does not mean that it cannot do so.´ 131. Clause 19 would certainly be interpreted in much the same way by English courts. In large projects where the performance of the parties¶ contractual obligations is spread over several years, the parties might thus consider whether or not to add a hardship clause to the contract which will stipulate when and how the parties will rearrange the contractual terms in the event the contract loses its economic balance. THE NEC 3RD EDITION 132. At first look, the new NEC form, whose third edition was published in July 2005, does not include a force majeure event. However, reference to the guidance notes shows that clause 60.1(19) qualifies as a force majeure event. This clause refers to events which: o o Stop the Contractor from completing the works; or Stop the Contractor completing the works by the dates shown on the Accepted Programme and which o Neither Party could prevent; o An experienced Contractor would have judged that the contract dates have such a small chance of occurring that it would have been unreasonable for him to have allowed for it; and o Is not one of the other compensation events stated in this contract. 133. Thus it looks very much like a force majeure clause and that is exactly what it is. Indeed, the reference to the Guidance Notes confirms this explicitly, referring to ³force majeure´. The drafting of this compensation/force majeure event is plainly very broad. Indeed, maybe it is too broad. Therefore, it may well be that this is exactly the type of clause that many employers will seek to delete or revise. And under common law jurisdictions, this will mean that no protection will be provided to the Contractor for typical force majeure events.