Practical Law

Last month FIDIC published its official “First Edition” of “Conditions of Subcontract for Construction, Building and Engineering Works designed by the Employer” – the subcontract primarily intended to be used with the FIDIC Red Book and the harmonised MDB Conditions (the Pink Book).

As the “Test Edition” was launched almost 2 years ago (in December 2009), many will question whether this is really news at all. But the “First Edition” has made a number of changes to the Test Edition and some of these raise interesting questions…

Changes made throughout

In total there are changes to some 17 Clauses. As one might expect, some are mere corrections of typos and punctuation, but a number impact the overall risk profile of the new subcontract. The overriding philosophy of the Test Edition was “risk pass down”. While this is still largely true of the First Edition, there has been a slight relaxation of the strict “back to back” approach in some areas. For example, a change to Sub-clause 12.3 (Evaluation under the Subcontract) means that the application of new rates under the Subcontract is no longer tied to their application under the Main Contract.

Relationship with the Main Contract

FIDIC has clearly taken another look at Clause 2, which deals with the relationship with the “Main Contract” and effectively espouses the risk pass down principle. The list of exceptions from the Subcontractor’s general obligation in relation to the Subcontract Works “[to] perform and assume all the obligations and liabilities of the Contractor under the Main Contract” – has been extended in two ways:

• The all-important words “other than where the provisions of the Subcontract otherwise require” have been added. This allows the parties to ensure that express provisions of the Subcontract take precedence over the Main Contract. This must be right in principle, although subcontractors should be aware that the exceptions will need to be explicitly stated.
• The list of specific provisions of the Main Contract that will not be subject to this obligation has also been expanded to include “Clause 2.2” of the Main Contract (the provision within the Red Book dealing with Permits, Licences or Approvals). In practice, this would probably have been of little consequence to the Subcontractor, since under the Main Contract the Employer is obliged to provide reasonable assistance to the Contractor in the obtaining of consents and approvals.

The more significant change is at Clause 2.4, where the Subcontractor is no longer reliant upon the Contractor to exercise “reasonable steps to secure from the Employer like rights entitlements and remedies that the Contractor has under the Main Contract”. The clause now explicitly states that the Subcontractor “shall have” such like rights, entitlements and remedies (that the Contractor has under the Main Contract with respect to the Subcontract Works) but still goes on to say that the Contractor will take reasonable steps to secure these rights, entitlements and remedies from the Employer. This was presumably in response to complaints that the Subcontract was too one-sided and was dependant upon the Contractor’s actions.

However, a question remains over how will this second change will be interpreted in practice. Does this mean that the Subcontractor will be able to use defences that would otherwise be available to the Contractor under the Main Contract (whether or not the Main Contractor wishes to pursue them)?

In practice, it may be difficult for the Subcontractor to fully take advantage of this clause, as often it will be dependant upon information that only the Main Contractor has in its possession. There is no corresponding provision requiring the Contractor to provide the Subcontractor with all relevant information to allow it to give full effect to Sub-clause 2.4. It remains to be seen whether this is a remedy “without teeth”.

Progress of the Works and Extensions of Time

FIDIC has made a number of changes to Clause 8 (Commencement and Completion). The Subcontractor is now required to proceed with the Subcontract Works with “due expedition” rather than “due diligence” – a change that doesn’t really mean anything different in English law. However, the more significant change is the removal (from Sub-clause 8.1) of the additional obligation in the Test Edition to proceed “without delay in accordance with current Subcontract Programme”. This is a welcome change for subcontractors and is not altogether surprising. Contractors generally resist any explicit obligation to comply with the programme – on the basis that this is a live, iterative document and they already have a strict obligation to comply with particular end dates (“Times for Completion”).

In relation to the extension of time provision (Sub-clause 8.4), the “catch all” provision at item (d) has been changed from the Test Edition wording (which referred to “a cause of delay which would give the Contractor an entitlement to extension of time under the Main Contract”) to:

“any one of the causes set out in the Main Contract Clause 8.4” [Extension of Time for Completion].

Arguably, this has narrowed the scope of grounds for extensions of time to which the Subcontractor is entitled under the Main Contract, since they are now limited to the grounds for extension of time explicitly set out in Clause 8.4 of the Main Contract, rather than any right of extension of time that may arise under any clause of such Contract. However, the Subcontractor is still entitled to rely on Sub-clause 2.4 under which it is entitled to “like benefits etc” that the Contractor has under the Main Contract, so it is not entirely clear what this change is trying to achieve.

Payment

The provision in the Test Edition which said that the Contractor had no obligation to make an advanced payment unless and until the Subcontractor had submitted its advanced payment guarantee has been deleted. This is rather a curious change, since it is a standard market position for this to be a condition precedent to payment of any advance payment and was generally viewed as a neutral position.

Regarding measurement and evaluation, if the parties cannot agree on the measurement, the Contractor is now expressly required to make “a fair decision” (Sub-clause 12.1) rather than “the appropriate and applicable measurement, having due regard to the Subcontractor’s views and all relevant circumstances”, which was the wording in the Test Edition. Again, this is a reflection of FIDIC introducing greater “fairness and balance” to the Subcontract, although it is interesting to note that no such provision is included in the overarching Red Book. As such, it may be that this creates more disputes than it resolves.

The Contractor must also now give full particulars and provide substantiating documentation of the amounts that have not been certified by the Engineer or for which the Employer has failed to make the payment under the Main Contract. It will be interesting to see whether or not these additions find their way as new “Employer obligations” into the new amendments of the Yellow Book, which FIDIC is currently working on.

In terms of the Final Subcontract Payment, this provision has been considerably shortened in the First Edition, including reducing the timeframe for payment from 84 days (after the expiry of the Subcontract Defects Notification Period) to 56 days after that expiry date. Most significantly, the simplified provision has removed the interim “draft” stages and the provision of information between the parties before a final statement is issued, to speed up the process.

Risk and indemnities

A key clause of any FIDIC contract is Clause 17 [Risks and Indemnities], which covers the general indemnity clauses together with any limitations on liability. Significantly, in Sub-clause 17.1, a change has been made regarding loss or damage that occurred to the Subcontract Works during the period when the Subcontractor is responsible for their care.

The Test Edition had made the Subcontractor responsible for “any cause which was the responsibility of the Subcontractor”. FIDIC has deleted this additional qualification in the First Edition, recognising that it would be difficult for a Contractor to prove, in practice, that any damage to the works had been caused by something “for which the Subcontractor is responsible”. Now, given the Subcontractor has overall responsibility for the care of the Works, the default position is that it is responsible. The Subcontractor would have to show that the cause of damage is something for which it is specifically not responsible.

In any event, the tail end of Clause 17.1 includes a number of sub-clauses setting out in what circumstances the Subcontractor is actually responsible for the cost of rectification. FIDIC has added two limbs so that:

• any act or default of the Contractor or the Contractor’s Personnel causing loss or damage will entitle the Subcontractor to recover its costs; and
• any cause that is not covered by the other specific limbs allows the Subcontractor to claim under insurance.

Here, FIDIC has adopted a sensible pragmatic approach, recognising that (in practice) it is easier to get the Subcontractor to actually rectify the loss or damage (as it is in charge of the works at this stage) and then deal with recovery of costs for such rectification separately.

The changes overall

So, to conclude, FIDIC has clearly made some substantive amendments from the Test Edition to the First Edition – some in favour of the Contractor, some in favour of the Subcontractor – but on balance there is a slight softening of the strict pass down approach that characterised the Test Edition. There are also a few signposts to possible amendments to the Yellow Book – to be previewed in December. Watch this space…