Practical Law

Drum roll please… In case you haven’t heard already, FIDIC has announced that second editions of the Red, Yellow and Silver Books (1999 Suite) will be released at the FIDIC International Contract Users’ conference in London in December. I’ll be covering those in future blogs but in the meantime, in this second instalment, I look at some of the issues that arise in practice when users amend a FIDIC contract as well as FIDIC’s proposed new “Golden Principles”.

When is a FIDIC contract not a FIDIC contract?

This is not a riddle. It’s a question that comes up often when users, mainly contractors, complain of the nature and extent of amendments that are made to the FIDIC “standard” general conditions. An extensively amended FIDIC contract often results in a contract that no longer resembles the “standard” FIDIC form but is more akin to a “bespoke” contract. This raises a further question: are there any provisions that should be treated as sacrosanct?

Common types of amendment to FIDIC contracts

Amending the FIDIC general conditions is not a bad thing in itself. Quite the opposite. To state the obvious, the 1999 Suite, as standard form contracts, are by definition, generic documents that need to be tailored to each specific project. The FIDIC contracts:

• Are intended for tenders invited on an international basis and are not drafted with only one jurisdiction in mind (unlike domestic standard form contracts).
• Are not industry-specific (unlike other international standard forms, such as the IChemE and ENAA contracts).
• Only broadly cover two of the multitude of potential procurement methods: employer-design (Red Book) and contractor design-build (Yellow and Silver Books).

Common categories of amendment include:

• Project-specific, to address the chosen procurement method, pricing, industry and so on.
• Governing law-specific, to ensure that provisions such as delay damages, limitations of liability and indemnities are enforceable in different jurisdictions.
• Location-specific, to address local statutory or regulatory requirements (including the Construction Act 1996 in the UK).
• Party-specific, to address the requirements of funders who invariably require greater certainty in terms of budget and timing.
• Improvements to the general conditions to fill gaps, tighten up the drafting and to address omissions or developments in industry practice, for example, on intellectual property, confidentiality, BIM, early warning, enforcing DAB decisions and boilerplate clauses.
• Employer and contractor-friendly amendments (depending on who holds the pen).
• Negotiated provisions, for example exclusions and caps on liability, indemnities, securities, force majeure events and the supply of information.
• Draftsman preference.

Some of these amendments are essential and FIDIC recognises that each contract may have to be adapted to:

“take account of the special, if not unique characteristics of each project, as well as the requirements of lenders and others providing financing.”

Others are less helpful and even, I might suggest, unnecessary.

Since the 1999 Suite was introduced, a number of sets of what could broadly be described as “standard amendments” have appeared, as well as some limited example “particular conditions” found in the guidance to the forms. The most established of these are those in the MDB form that amends the Red Book. An orthodoxy has also developed in specific industries. For example, the Yellow Book is frequently used for offshore wind projects and we invariably see a degree of harmony in the particular conditions for this type of project addressing the specific “market” risk profile and offshore features. The similarities in the amendments are primarily found in the principles and not the actual drafting. Seeing an opportunity, FIDIC is considering producing a “plug-in” for the renewable industry.

More generally, many drafters of particular conditions now have a standard set of amendments falling in the “improvements” category. To continue the theme of my previous blog, it is interesting to compare this with NEC. The NEC4 suite includes new and updated secondary options that address amendments frequently made to NEC contracts that enables NEC to take back control of them. These include additional compensation events, confidentiality and collateral warranties. Some of the common FIDIC amendments are expected to be included in the second editions (including those found in the MDB form) but, based on the pre-release edition of the Yellow Book, it seems not all of them.

FIDIC and the Golden Principles: should the parties’ ability to amend FIDIC contracts be restricted?

The two most commonly stated reasons for the international popularity of the 1999 Suite are:

• The fair and balanced risk allocation (except the Silver Book).
• The fact that they are tried and tested contracts.

Of course, these benefits only hold true if the particular conditions do not amend the risk allocation or contain untested, bespoke provisions (which they almost invariably do). This, however, applies to any standard form contract.

A more universal, practical reason for the popularity of the 1999 Suite is familiarity. The general conditions provide a common (and in my view a good) starting point for the international contracting community, against which proposed amendments can be assessed. Even if only a starting point, this helps to unite parties from different countries, different industries, different legal systems and speaking different languages. Critically, the particular conditions provide a mechanism for assessing any deviation from the tried and tested framework: the general conditions act as a baseline; the particular conditions as deviations from that baseline.

Faced with complaints from users and driven by concerns that heavily amended contracts are damaging FIDIC’s reputation, FIDIC is preparing a set of “Golden Principles”. These are yet to be published and we must wait to see how far FIDIC goes. They are nevertheless expected to set out a number of core contractual principles aimed at upholding FIDIC’s “fair and balanced” contracting philosophy. These include the risk allocation in the Red and Yellow Books, the role of the “Engineer” and the use of the DAB as interim binding dispute resolver.

The difficulty that FIDIC faces is how to police these Golden Principles. Can FIDIC – legally or practically – restrict the use of FIDIC contracts that offend the Golden Principles? Is there a risk that some current users may be reluctant to adopt a FIDIC contract if they feel that their freedom to negotiate and amend the contract terms is constrained in this way?

On the other hand, if the Golden Principles represent established, current industry practice, I can see that they could be a useful tool in the negotiation of contracts. Parties could use them as a benchmark as evidence as to what is “market”. A similar reference point is found in the Check List for One Sided Contracts published by the Japanese International Cooperation Agency (JICA) in March 2011. This, of course, requires the industry to accept that the Golden Principles represent current practice.

The extent to which FIDIC contracts should properly be amended is a vexed and highly philosophical question. In practice, most of the problems I have encountered lie either in the parties not fully understanding what they have signed up to or in the quality of drafting. Amending standard forms is both a skill and an art and human nature dictates that the greater the number of changes, the more opportunity for drafting errors and inconsistent provisions. FIDIC contracts are complex, involving the interaction of multiple sub-clauses. Numerous amendments and careless drafting often give rise to unintended consequences. J Murphy & Sons Ltd v Beckton Energy Ltd is a good example of this.

Practical considerations in amending FIDIC contracts

While we wait to see what the Golden Principles hold in store, here are my thoughts on some of the key considerations that parties should keep in mind when selecting and amending FIDIC (or indeed any standard form) contracts:

• At the outset, ask yourself whether the particular contract is in fact right for the project taking into account the extent of essential amendments that will be required.
• Consider the primary reason for selecting a FIDIC form. Is it the fair and balanced risk allocation, a funding requirement or to provide an internationally recognised starting point? In my experience this will drive the extent of the amendments.
• Be aware that a departure from the tried and tested, fair and balanced general conditions is likely to have cost consequences.
• Keep necessary amendments to a minimum. Numerous amendments create potential uncertainty and increase the risk of drafting errors and inconsistent provisions.
• Ensure that all amendments are carefully considered and prepared by someone very familiar with FIDIC contracts.
• Avoid unnecessary amendments that come down simply to party-preference and do not materially make any difference (other than to make the contract more complicated).
• Make sure all parties understand the effect of the amendments.

In my next blog I will be giving my first thoughts on the second editions of the 1999 Suite, hot off the press!