EIC presentation on FIDIC contract forms

EIC Presentation “Experience with FIDIC Contracts on the

Polish Market and EIC comments to the

various FIDIC forms of contracts ”

By Isolino Gomes,

Member of the EIC Working Group “Contract Conditions”

with the support of Frank Kehlenbach and Krzysztof Obidziński

Ljubljana, 20th Aril 2012 1 Chamber of Commerce & Industry in Slovenia 1

Chamber of Commerce & Industry in Slovenia

Overview

1. FIDIC Principles of Allocation of

Risks

2. Understanding Turnkey and Fit

for Purpose Requirements

3. Unfair Conditions

4. Law Issues

5. Better Practices, Suggestions on

How to Improve

6. Summary/Conclusions

2

EIC Organization • Organization

• European International Contractors (EIC)

was founded in 1970 and since 1984 has

been registered as a legally independent

association under German law in Berlin,

Germany.

• EIC has as its members construction

industry federations from 15 European

countries which are directly or indirectly

affiliated to the European Construction

Industry Federation (FIEC) in Brussels.

• The association maintains close relations

with all international and other organizations

whose policy is of relevance for the

international construction business, for

instance with various European Commission

Directorates General (DGs),(Trade,

Development and EuropeAid) the European

Bank for Reconstruction and Development

(EBRD), the Organization of Economic Co-

operation and Development (OECD) and the

World Bank.

• According to the latest EIC International

Contracts Statistics, the total volume of

international turnover carried out by EIC

member companies in 2009 amounted to

some 140 billion €.

• This excellent result was confirmed by the

latest survey on the “Top 225 International

Contractors” survey, as published in the

Engineering-News Record magazine, which

illustrates that EIC member companies hold

an international construction market share of

around 56%.

Chamber of Commerce & Industry in Slovenia 3

Tasks and Objectives

• Tasks and Objectives

• The three main objectives of EIC are the

following:

• 1. To lobby for a bigger market, e.g. by

persuading the international financing

institutions, and in particular the European

donor agencies, to allocate more funds to

the infrastructure sector and by promoting

the concept of Public-Private Partnerships;

• 2. T o lobby for a better market, e.g by

advocating fair and innovative forms of

procurement and contracts and by calling for

a level playing-field for European contractors

internationally, in particular concerning

environmental, social and corporate

standards; and

• 3. To provide for better networking, e.g. by

offering European contractors a unique

forum for the exchange of experience in all

matters relating to the international

construction business. Within the broad

range of operating conditions influencing the

work of European international contractors

abroad, the following framework conditions

have been identified as priority issues for

EIC’s activities:

• I. EU-financed infrastructure Projects in

Africa

• II. Consultation with the World Bank on

Country Procurement Systems

• III. International Standard Bidding

Documents and Contract Forms

• IV. Third country state-owned and state-

aided enterprises in EU public

procurement markets


Contract and Tender Conditions

• For more than 40 years, EIC's Working Group “Contract

Conditions” reviews and comments on the FIDIC

standard Forms of Contract. The work of the group has

been condensed into several high-quality publications

which are influencing the international debate amongst

clients, financiers and their advisers. The group does not

only concentrate on Conditions of Contract but also

scrutinizes the tender conditions of the International

Financing Institutions and Multilateral Development

Banks and it follows the latest development in

international arbitration.


FIDIC 1999 Yellow/Silver Book Comparison Employer’s Administration – clause 3

• FIDIC 1999 Yellow Book:

The Engineer makes the first

determination of extension of time

and extra cost, certifies payments,

issues the taking-over and the

performance certificates.


The Engineer is deemed to act on

behalf of the Employer.

• FIDIC 1999 Silver Book:

The Employer deals directly with

the contractor and determines in

the first instance claims for extra

cost and /or extension of time.


The powers of the Engineer have

been transferred to the Employer.

Ljubljana, 20th April 2012 Chamber of Commerce & Industry in Slovenia 6 6

FIDIC 1999 Yellow/Silver Book Comparison Setting Out, sub-clause 4.7

Ljubljana, 20th April 2012 Chamber of Commerce & Industry in Slovenia 7


The Employer shall be responsible for

any errors in the specified or notified

items of reference, but the Contractor

shall use reasonable efforts to verify

their accuracy before they are used.


The Contractor may under certain

circumstances seek an extension of

time or extra cost if extra work is

necessary as a result of such errors.


The Contractor shall be

responsible for the correct

positioning of all parts of the

Works, and shall rectify any error

in the positions, levels, dimensions

or alignments of the Works even in

case the information is provided by

the Employer.

7

Site data – sub-clause 4.10


The Employer is responsible for

the correctness of the information.


responsible for interpreting all

such data.


The Contractor shall be deemed to

have based his price on such

information and on his reasonable

inspection of the Site.



responsible for verifying and

interpreting all such data. The

Employer shall have no

responsibility for the accuracy,

sufficiency or completeness of

such data, except for Sub-Clause

5.1.


FIDIC 1999 Yellow/Silver Book Comparison

8

Unforeseeable difficulties – sub-clause 4.12


If the Contractor encounters

unforeseeable adverse physical

conditions on Site, then he is

entitled to additional payment and

extension of time. However,

deductions may be made in case

he also encountered more

favourable conditions then

foreseen.


The Contractor shall be deemed

to have taken account of all

necessary information. The

Contract price is not adjusted to

take account of any unforeseen

difficulties or costs, except as

otherwise stated in the Contract.

The Price must include also

unforeseeable events !



9

General Design Obligations – sub-clause 5.1


The Contractor must scrutinise the

Employer’s Requirements for any

error or omission, but it is for the

Employer to resolve any by issuing

a Variation. The Contractor will be

entitled to additional time and

money, unless he should have

reasonably discovered the error or

omission before submitting his

tender.


The Contractor is deemed to have

taken account of the Employer’s

Requirements and he is generally

responsible for the design of the

Works and for the accuracy of the

Employer’s Requirements.



10

General Design Obligations – sub-clause 5.1


If the Contractor is delayed or

incurs Cost as a result of an error

itself, he is entitled to additional

time and /or money, provided that

he could not have reasonably

foreseen it prior to tender.


The Employer also tries to

disclaim any of his responsibility

for information given to the

Contractor. However, this

responsibility is tempered by Sub-

Clause 5.1 sub a) - d) in the cases

of immutable or unverifiable

information stated in the contract,

correctness of definitions of the

intended purpose, testing.



11

Extension of Time – sub-clauses 8.4 and 8.5


The Contractor is entitled to EoT

in case of:

• a variation

• exceptionally adverse climatic

conditions

• Unforeseeable shortages of

personnel and / or goods

• a Delay caused by action or inaction

of authorities or Employer’s personnel

• any contractual clause giving right to

EoT


The Contractor’s entitlement to

EoT is limited to the following

cases:

• a variation order • a Delay caused by action or inaction of

Employer’s personnel

• any contractual clause giving right to EoT

• a delay caused by action or inaction of authorities but only if the Contractor ‘diligently followed the procedures’ and

the delay was not „reasonably foreseeable by an experienced Contractor”



12

Employer‘s risks – sub-clause 17.3


The Employer’s Risks also

include:

• use or occupation by the

Employer of any part of the

Permanent Works, sub f)

• design of any part of the Works

by the Employer, sub g)

• any unforeseeable operation of

the forces of nature, sub h)

• FIDIC 1999 Silver Book :

The Employer’s Risks are much

more limited and do not include

for example: loss or damage due

to occupation of the works by the

Employer, most of the General

Design risks even when data is

provided by the Employer, Force

Majeure etc.



13

Understanding “Turnkey” and “Fit for Purpose” in the

Public Procurement Contracts for Construction

Services

• Conditions of Contract for EPC Turnkey Projects, which

are recommended where the Contractor takes total

responsibility for the design and execution of an

engineering project. Under the usual arrangements for

this type of contract, the the Contractor carries out all the

Engineering, Procurement and Construction: providing a

fully-equipped facility, ready for operation (at the "turn of

the key”). This type of contract is to be negotiated

between the parties. Therefore the tendering procedure

has to permit discussions between the Tenderer and the

Employer about technical matters and commercial

conditions.


Turnkey

• 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

• occurrence of poor or unexpected ground conditions,

• Content of the seting out in the requirements prepared by the Employer.

Preconditions:

• the Employer must give to the Contractor the time and opportunity to obtain

and consider all relevant information before the Contractor is asked to sign

on a fixed contract price.

Price:

• The Employer must also realize that asking serious contractors to price

such risks will increase the construction cost and result in some projects not

being commercially viable.


Turnkey

• This form for EPC Turnkey Projects is thus intended to be suitable,

not only for EPC Contracts within a BOT or similar type venture, but

also for all the many projects, both large and smaller, particularly E

& M (Electrical and Mechanical) and other process plant projects,

being carried out around the world by all types of employers, often in

a civil law environment, where the government departments or

private developers wish to implement their project on a fixed-price

turnkey basis and with a strictly two party approach.

• A feature of this type of contract is that the Contractor has to prove

the reliability and performance of his plant and equipment. Therefore

special attention is given to the ‘Tests on Completion’, which often

take place over a considerable time period, and Taking Over shall

take place only after successful completion of these tests.


Fit for Purpose

• Fitness for purpose: FIDIC

• For Contractors it is tied to purposes expressly set out in the

contract. For example, clause 4.1 of the FIDIC Silver, Yellow and

Gold Books (Conditions of Contract for EPC/Turnkey Projects,

Design and Build and Design Build Operate) contains the following

provision:

• “When completed, the Works shall be fit for the purposes for which

the Works are intended as defined in the Contract.”

• Contractors will still want to be clear where these purposes are

defined in the Contract (and that they are narrowly and precisely

defined).


Fit for Purpose

• Employers’ tactics: fitness for purpose by stealth?

• “When completed, the Works shall comply in all respects with the

requirements of the Employer as defined in the Contract.”

• The advantage of using this amended wording, from an employer’s

point of view, is that it has the same power and effect of a fitness for

purpose clause, without the stark (and easily identifiable and word-

searched) term ‘fitness for purpose’.



Unfair Conditions


ISSUE

Sub-

contractors

Sub-clause 4.4

The Contractor may not subcontract 100 % of

works under the Contract

Compulsory delivery of confirmation of payment

to Subcontractors along with application for IPC

– precondition of issuance of IPC, or

Subcontractor’s entitlement to demand payment

directly from the Employer in case the Contractor

does not pay them (regardless of the cause) or

Employer pays directly to Subcontractors

Site Data

Sub-clause 4.10

•declaration that all available information about

Construction Site are included into tender

documentation – what is not there, a Contractor

must acquire on his own

•Contractor’s declaration that he checked all the

requirements and got all explanations on tender

stage

•possibility to claim for EoT and / or additional

payment excluded

20 Ljubljana, 20th April 2012

Unfair Conditions


ISSUE

Unforeseeable

Difficulties

Sub-clause 4.12

there are often unbalanced provisions

related to obligation of the contractor

when encounters unforeseen

conditions, geological more works

costs etc. are covered automatically

by contractor (so the project

documentation can be of a very bad

quality, all risks are covered by

contractor, design documentation is

very low quality)

Time for Completion

Sub-clause 8.2

Fixed deadline of completion

instead number of months

Hidden limitations, e. g. taking

over procedure included into

Time for Completion


Unfair Conditions


ISSUE

Penalties,

Sub-clause 8.7

Multiple penalties,

High penalty rates, e. g. 0,5 % of

the Price per day

No contractual limit of penalties –

risk of extreme increase of cost

Lack of penalties against

Employer, only interests for

delayed payment

Entitlement to claim additional

compensation usually reserved

only for the Employer


Unfair Conditions


ISSUE

Variations &

Price Revision,

Clause 13

the price is fixed, with no possibilities to raise

it in case of more works not foreseen in

project documentation.- Due to low quality of

the project documentation this is very often

the case

Only variations and

adjustments that are

‘profitable’ from technical,

economical or exploitation

point of view are permissible

Variations are permissible

but they may not result in

increase of the Contract

Price

in case of more work performed, additional

payment is not approved, it looks more like

lump sum contract in these Slovenian

"turnkey" contract) can not be changed due

to any change of the price of material and

works, sometimes more work is be calculated

on the basics of some non-specified or poor

specified calculation elements, and in the

same contract there is provision wording for

more works another public procurement

procedure should be performed


Unfair Conditions


ISSUE

VAT rate

change,

Sub-clause

13.7

Employers do not want to

agree on price rise even in

the case of big delays

provoked by the Employer

Excluding the provisions,

specific or whole articles of

Special Construction

Usuances (PGU) and even

Code of obligations (articles

655, 656) in construction

contracts


Unfair Conditions


ISSUE

Claims & Dispute

Settlement,

Clause 20

Very limited claims procedures,

National court as the only dispute settlement

body

No alternative dispute resolution methods (DAB,

mediation, independent arbitration).

If arbitration is allowed, it is only national

arbitration.

Tender Conditions Treating Conditions of Contract as less important

than tender documents such as Specification

(SIWZ) and Invitation for Tenders – often

important terms and conditions are ‘hidden’ there

instead of being included into PCC

Many requirements set out in EU funds

guidelines are transferred to the Contractor – e.

g. to produce necessary documents and to

comply with the terms of the loan agreement

between the Employer and the Lender – which is

not known to the Contractor


LAW ISSUES

Chamber of Commerce & Industry in Slovenia Ljubljana, 20th April 2012

ISSUE

Variations &

Price Revision

•Permissible in measurement contracts

•Employer’s consent required

•In emergency situation Contractor may act without such consent – if the increase

of Price resulting from it is excessive an Employer may terminate the contract

(Code of Obligations art. 653 – 656) (Civil Code art. 630 - 631)

In lump-sum contract excluded unless:

1) the change of circumstances was not

foreseeable when signing the contract

2) the Contractor suffers excessive loss

If those two happen a court must decide

on Price Revision (Civil Code art. 632)

Employer’s

cooperation

Employer is obliged to cooperate with the

Contractor – e.g. help in obtaining permits

If he refuses it may be a basis for

termination of the contract.

(Civil Code art. 354 § 2 and art. 640)

LAW ISSUES


ISSUE

VAT rate change

In case of the VAT increase public employer demands to be covered by the

Contractor

Contractor should cover all the cost, even those not foreseen in the design

documentation, the cost of all permits, that additionally should be payed in the time

of performing work on construction site

(Code of Obligations art. 653 – 659) (Civil Code, art. 630 – 632)

Unforseeable

difficulties

The contractor has the right to fair

payment for the unforeseen works

(art. 653, sub. 4)

But

The Employer may withdraw from the

contract if the agreed fee would be

considerably higher owing to such works

(art 653, sub. 5)

Contractor’s entitlement to EoT and /

or additional payment in such case

only if it is explicitly stated both in

tender documents and contract

(Public Procurement Law art. 144 ).

Dispute Resolution Usually neither DAB nor arbitration foreseen in a contract, only common court can

settle contractual disputes

LAW ISSUES


ISSUE

Subcontractors • subcontractors must be accepted by the

Employer

• Scope of works to be executed by subs

shall be indicated in main contract

• Joint and several liability of Employer and

Contractor for payment to subcontractors -

Subcontractor’s entitlement to demand

payment directly from the Employer in case

the Contractor does not pay them (regardless

of the cause) or Employer pays directly to

Subcontractors

Payment Guarantee

Contractor’s right to demand payment

guarantee foreseen in Civil Code (art. 649¹ -

6494).

The Employer shall not refuse.

The Contractor cannot renounce this

entitlement in the contract.

LAW ISSUES


ISSUE

Payments,

Sub-clause 14.8

Under civil law maximum payment term is

30 days, after that interests should be paid

(art. 2.1 Act on Payment Deadlines in

Commercial Transactions).

Exception:

The aforementioned principle does not

apply in contracts co-financed by EU funds

(art. 93 of Public Procurement Law).

Performance

Security

Sub-clause 4.2

Performance Security according to Public

Procurement Law:

• max 10 % of the Accepted Contract

Amount (art. 148),

• 70 % to be returned after taking over of

Works, (art. 151)

• 30 % after expiry of Defects Notification

Period (art. 151)

Better Practices

Suggestions on How to Improve

• Sub-clause 4.1 (Contractor’s General Obligations) – fitness for purpose

obligation must be defined clearly and unambiguously in the contract.

Where a contractor is both the designer and the contractor, unless the

contract deals expressly with the point, a fitness for purpose obligation will

often be implied into the terms of the contract. As a result, contractors

unwilling or unable to take on a fitness for purpose obligation in their design

and build contract should check the standard form includes wording that

excludes fitness for purpose, or will need to propose their own.

• Sub-clause 4.2 (Performance Security) – a limit of 10 % and clear

conditions, amounts and deadlines for the return of the Security should be

agreed in the Contract

• Sub-clause 4.7 (Setting out) – check the setting out data prior to submission

of the tender or clarify the basis of the offer and propose the Employer to

retain responsibility under sub-clause 5.1.


Better Practices


• Sub-clause 4.10 (Site data) – any time these circumstances occur:

– time or information is insufficient before Contract signature

– there is considerable work underground or difficult to inspect

– Employer intends to supervise closely or control or review

– an intermediary certifies interim payments

– part of the Works is designed by Employer

the Contractor should follow FIDIC’s own recommendation that the Silver

Book is not suitable and propose to replace it by the Yellow Book.

• Sub-clause 5.1 (General Design Obligations) – the Contractor should state

in his offer which parts of the Employer’s requirements could not be verified

and the matter should be agreed before signing of the contract.

• Sub-clause 10.2 (Taking over of parts of the Work) – if possible contractors

should insist in using the corresponding provisions of the YB (deemed

taking over).

• For further suggestions please refer to the EIC Contractor’s Guide on the

various FIDIC forms of Contract


Better Practices


• Under certain circumstances (in cases of projects financed by

Multilateral Development Banks ) the use of the MDB Harmonized

Edition of the FIDIC Conditions of Contract for Construction, June

2010 may be advisable due to the following improvements:

• EIC is pleased to note that several comments made earlier by EIC,

either in relation to the FIDIC 1999 “Red Book” or with regard to the

May 2005 and the March 2006 versions of the FIDIC MDB

Harmonised Construction Contract have been rectified in the FIDIC

2010 MDB Harmonised Construction Contract, such as:

• Sub-Clause 1.12 [Confidential Details] – The parties’ obligations

with regard to Confidential Details are now mutually binding;

• Sub-Clause 1.13 [Compliance with Laws] – Obtaining the building

permit is now the explicit responsibility of the Employer;

• Sub-Clause 2.5 [Employer’s Claims] – The 28-days notification

deadline contained in Sub-Clause 20.1 now also applies to the

Employer;


Better Practices


• Sub-Clause 3.5 [Determinations] – The time limit for the Engineer

to make a Determination has been fixed to 28 days;

• Sub-Clause 7.7 [Ownership of Plant and Materials] – The

ownership subrogates only with incorporation in the Works or with

actual payment.

• Sub-Clause 8.1 [Commencement of Works] - The commencement

of Works is now subject to conditions precedent;

• Sub-Clause 13.1 [Right to Vary] – An additional reason entitling the

Contractor to reject a Variation has been introduced;

• Sub-Clause 14.2 [Advance Payment] – The purpose of the

advance payment as cash flow injection enabling investment and

mobilisation is demonstrated more clearly given that the

amortisation schedule is to become less burdensome on the

Contractor;


Better Practices


• Sub-Clause 14.9 [Payment of Retention Money] – The repayment

of the Retention Money has been modified in favour of Contractor;

and

• Sub-Clause 20.1 [Contractor’s Claims] - The Dispute Board can be

activated if the Engineer fails to respond within the given deadline.

• However, even this form of contract has some retrogressions which

increase the risks for contractors, for instance regarding

performance security (sub-clause 4.2), evaluation (sub-clause 12.3).

limitation of liability (sub-clause 17.6), arbitration (sub-clause 20.6).

• For further suggestions please refer to the EIC Contractor’s Guide

on the various FIDIC forms of Contract


Summary/Conclusions

• Inside EIC the members of the Contract Conditions Working Group, to

which I belong, have reflected in the EIC comments to the various FIDIC

forms of contracts the international experience and the variety of solutions

found to solve arising problems.

• Unfortunately, we cannot say that there would be a standard solution, that

we could recommend for all countries, considering that:

• Some of the problems exist specifically in Slovenia, others can also be

found in Central Europe

• the applicable (national) Law may allow or not for certain solutions that are

not transferrable but some solutions can already be found in national

legislations, for instance in Polish Civil Code art. 354 § 2 and art. 640

(Employer’s obligation to cooperate with the Contractor), art. 632

(entitlement to go to court for Price Revision in lump-sum contracts) and

649¹ - 6494 (Payment Guarantee).


Summary/Conclusions

• the level of qualification and interest in cooperation with the Contractor by

public entities dealing with FIDIC Contracts may vary from country to

country, however it is crucial that the various FIDIC forms of contract are

used for the type of projects they were created for:

• Red Book: building and engineering works if most (or all) of the works are to

be designed by (or on behalf of) the Employer,

• Yellow Book: the provision of electrical and/or mechanical plant and for

building and engineering works if most (or all) of the works are to be

designed by (or on behalf of) the Contractor,

• Silver Book: a process or power plant, or an infrastructure project, if:

• a higher degree of certainty of final price and time is required; and

• the Contractor takes total responsibility for the design and execution of

the project (including responsibility for Employer design),

• the Employer is willing to pay more and not to interfere in the

construction process


Summary/Conclusions

• Generally EIC does not recommend Contractors to use the Silver Book due

to its unbalanced risk distribution leading to misuse by Employers in Central

and Eastern Europe and around the world.

• The actual economical situation of the country may influence the approach

of public entities regarding their flexibility in finding equitable solutions for

both Parties

• The agreed contractual terms for dispute resolution also determine the level

of success of possible solutions (DAB clause, arbitration, national courts).


The EIC Contractor‘s Guides

EIC Contractor‘s Guides on the FIDIC „New Books“ were produced between 2000 and 2003

and the EIC Guide on the DBO Contract in 2009.

EIC Guide on the “MDB Harmonised Construction Contract” was published in April 2011

March 2000 March 2002 March 2003 May 2009

38 Ljubljana, 20th April 2012 Chamber of Commerce & Industry in Slovenia 38

EIC Contact

Address: EIC Secretariat Kurfuerstenstrasse 129, D - 10785 Berlin, Germany

Phone: ++49 (0)30 /21286-244

Fax: ++49 (0)30 /21286-285

E-mail: [email protected]

Internet: www.eicontractors.de


Thank you for your attention
