FIDIC-A Guide for Practitioners Axel-Volkmar Jaeger l Go¨tz-Sebastian Ho¨k FIDIC-A Guide for Practitioners Axel-Volkmar Jaeger Dr. Götz-Sebastian Hök Moitzfeldstraße 11 Eschenallee 22 51069 Ko¨ln 14050 Berlin Germany Germany Foreword In 1999, a suite of three new conditions of contract was published by FIDIC, following the basic structure and wording harmonised and updated around the previous FIDIC Design-Build and Turnkey Contract (the 1992 ‘‘Orange Book’’). These conditions, known as the ‘‘FIDIC rainbow, were the Conditions of Con- tract for: l Construction, the so-called Red Book, for works designed by the Employer l Plant and Design-Build, the so-called Yellow Book, for works designed by the Contractor l EPC/Turnkey Projects, the so-called Silver Book, for works designed by the Contractor The first is intended for construction works where the Employer is responsible for the design, as for per the previous so-called Red Book 4th Edition (1987), with an important role for the Engineer. The other two conditions of contract are intended for situations when the Contractor is responsible for the design. The Plant and Design-Build Contract has the traditional Engineer while the EPC/Turnkey Contract has a two-party arrange- ment, generally with an Employer’s Representative as one of the parties. The 1999 Conditions of Contract for Plant and Design/Build retained the essential elements of the earlier Orange Book. It had been noted, however, that new trends in project financing and management, especially related to PFI and BOT, required a different set of conditions, and the Conditions of Contract for EPC/ Turnkey Projects were drafted to cater for to this. The EPC/Turnkey Contract complements, but does not replace, the Plant and Design/Build Contract in that it was intended to be used in a rather specific context. While it was recognised that there were alternative scenarios encompassing the Design, Build and Operate Service (DBO), the so-called Gold Book concept, FIDIC recognised that the various scenarios required different contract conditions that could be used where long-term operation was involved. The Conditions of Contract for Design, Build and Operate Projects, the so-called Gold Book, for works designed by the Contractor were published in 2008. v vi Foreword Understanding the FIDIC Conditions of Contract is the key to preparing and managing FIDIC contracts. Only a keen and comprehensive understanding of the contracts will help in avoiding disputes and the accompanying cost and time over- runs. However, even though the FIDIC suite of contracts enjoys a worldwide reputa- tion because they are widely accepted by employers, contractors, international financing organizations, engineers and lawyers, regrettably, misunderstanding and poor practices lead to avoidable disputes. It is with great pleasure that I draw the attention of users of FIDIC contracts to this FIDIC Guide for Practitioners. The authors have shared their huge wide knowledge of the contracts and their implementation in various countries with the FIDIC community. Both are well known and experienced experts and accredited FIDIC trainers, as well as being adjudicators and arbitrators. They have made a major contribution in seeking to give guidance on the use of FIDIC forms of contract. This Guide is easy to read, and engineers, as well as legal advisors, employers and contractors will find it very helpful in daily practice. In particular, those practitioners in civil law countries will benefit greatly from this Guide, which shows how FIDIC contracts should be interpreted against a civil code background. Common law practitioners will also welcome the Guide as a valuable source of information on how to address issues raised by the FIDIC contracts in a common law jurisdiction. Sample letters, checklists and other features will help to ensure that the Guide will meet with success all over the world. In summary, I believe the Guide represents an invaluable resource that will raise the awareness of practitioners in the international construction industry to the rights and responsibilities of the parties under an FIDIC contract. Informative and acces- sible, the Guide provides employers, contractors and engineers with the means to manage FIDIC-based contracts properly and in accordance to with best-practice principles. Gregs G. Thomopulos President, FIDIC Preface The idea for this book was born out of the belief that the increasing dissemination of FIDIC forms of contract throughout the Civil Law world requires a different approach to the subject matter than that which is found under the Common Law. An English native speaker will naturally not encounter many difficulties when reading the FIDIC forms, although of course the wording used will sometimes be subject to interpretation. Again an English native speaker will usually be familiar with the underlying legal principles, which mostly derive from Common Law, despite the fact that some Civil Law-inspired features have been incorporated in the FIDIC books. Thus there is a clear need to explain Common Law concepts and legal terms in the context of Civil Law. This may often prove to be difficult as the very nature of Civil Law language is in many respects different from Common Law language. Both systems have terms which are often difficult to translate literally because of the fact that the terms reflect legal concepts which are unknown in the other legal world. Although many difficulties in understanding the wording may be overcome if the terms and concepts are carefully explained, the English wording may sometimes be in direct contradiction to Civil Law concepts and practice. Whether the FIDIC wording will then prevail depends on the strength of the pacta sunt servanda principle. Civil Law systems usually determine and categorise the very nature of a contract. If the contract falls within the limits of a nominated contract, the relevant default rules (lois supple´tives, dispositives Recht) and additionally the relevant mandatory rules will apply. Whether the FIDIC based contract will be recognized as an agreement sui generis or at least as a valid agreement although being in contradiction to the law must be ascertained on a case by case basis. On the other hand, English native speakers will hopefully appreciate this book as a means of understanding better the members of the constructing team originating from Civil Law nations. Common Law practitioners should realise that the export of services does not always follow the export of Common Law practice. Common Law practitioners will encounter unknown legal concepts, such as pre-contractual duties, specific performance, duties to negotiate in good faith and judicial powers to adapt contracts to changed circumstances. They will also become aware of different vii viii Preface approaches as to the designer’s scope of service, its content and the resulting duties and obligations. The authors have combined both practical experiences and an academic approach. They have also combined the views of an engineer with the views of a lawyer, which sometimes proves to be difficult. However, lawyers should under- stand that the practical needs are sometimes stronger than any sophisticated legal thinking can envisage. Engineers should accept that the law is a useful and a necessary feature because it makes decisions predictable and therefore calculable. It is the law which gives the engineer the powers to do what the parties expect him to do, although it is also the law which places constraints and limits on him when acting as a certifier or decision maker. Thus an exchange of ideas, impressions and experiences between lawyers and engineers appears to be not only helpful, but even essential. Both authors wish to emphasize that a contract is not only a means to solve misunderstandings and disputes. Thus it should be read and prepared with the common understanding to follow its provisions from the outset. Only then can the contract provide easy answers. Legal help will then quite often be unnecessary. However, if, as is too often the case, the Parties ignore the contract on a day to day basis until it proves difficult to find a common understanding, sophisticated and expensive legal solutions have to be worked out and disputes will then become unavoidable. The authors are further of the unanimous opinion that even though standard forms of contract may be as good and balanced as possible and even better, they are as good as worthless if the project is badly prepared and if in particular the bespoke documents such as the specifications, schedules, bills of quantities and/or employer’s requirements do not reflect the intentions of the employer in a compre- hensive and unambiguous way and if the aforementioned documents ignore the basic requirements of a FIDIC contract. Preparing a contract means taking into account that a FIDIC contract includes specific documents, defines terms, contains references to sub-clauses and comprises fall-back clauses. Multiple details must be specified in the documents and they should be implemented as provided and required by the FIDIC documents. It should be the primary interest of both parties to the contract to do so in order to avoid misunderstandings, lacunas and the debate and disputes which will inevitably result. Finally the authors wish to apologise to their wives and families for the time spent on this book, and neglecting their needs and hopes, and also wish to thank all those who have contributed to this book, in particular Mr. Robert Leadbeater and Mr. Henry Stieglmeier. Berlin and Cologne September 2009 Axel-Volkmar Jaeger Dr. Go¨tz-Sebastian Ho¨k Contents 1 Legal Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 English Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.1.1 Relevant Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.1.2 English Legal System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.1.3 Entering a Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.1.4 Validity of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.1.5 Express Term or Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.1.6 Implied Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.1.7 Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.1.8 Common Features of English Construction Contracts . . . . . . . . . . . 13 1.2 Finnish Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.3 French Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.3.1 Relevant Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1.3.2 Entering a Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1.3.3 Contract Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1.3.4 Effects of a Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1.3.5 Limitation Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1.3.6 Pre-contractual Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 1.3.7 Good Faith . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 1.3.8 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 1.3.9 Damages and Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 1.3.10 Penalty Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1.3.11 Subcontracting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1.4 German Contract Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.4.1 Relevant Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.4.2 German Legal System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.4.3 Entering a Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 1.4.4 Contract Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 1.4.5 Construction Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 1.4.6 German Legal Concepts as to Construction Contracts . . . . . . . . . . . 32 1.5 Romanian Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ix x Contents 1.5.1 Relevant Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 1.5.2 Definition of Contract Under Romanian Law . . . . . . . . . . . . . . . . . . . . 46 1.5.3 Effects of the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 1.5.4 Limitation Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 1.5.5 Does Romanian Law Recognize Pre-contractual Liability? . . . . . 47 1.5.6 Non-performance Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 1.5.7 Damages and Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 1.5.8 Penalty Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 1.6 Islamic Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 2 Conflict of Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 2.2 Nature of the Cause of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 2.3 Pre-contractual Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 2.4 Proper Law of the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 2.4.1 Rome Convention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 2.4.2 Rome I Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 2.5 Tort Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 2.6 Quasi Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 2.7 Choice of Law as to Extra-contractual Claims . . . . . . . . . . . . . . . . . . . . . . . . . . 65 2.8 In Rem Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 2.9 The Importance for Choice of Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 2.10 Compliance Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 3 English and International Standard Forms of Contract . . . . . . . . . . . . . . . . . 71 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 3.2 Types of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 3.3 Common Characteristics of Standard Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.3.1 The Position of the Engineer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.3.2 Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.3.3 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.3.4 Programming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 3.3.5 Substantial Completion and Taking Over . . . . . . . . . . . . . . . . . . . . . . . . 75 3.3.6 Liquidated Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 3.3.7 Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 3.3.8 Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 3.4 Contract Forms Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 4 Civil Law Business Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81