FIDIC CONTRACTS: LAW AND PRACTICE RELATED TITLES Partnering and Collaborative Working edited by David Jones, David Savage and Rona Westgate (2003) Delay and Disruption in Construction Contracts 3rd edition by Keith Pickavance (2005) The Law of Insurance Contracts 6th edition by Malcolm A. Clarke (2009) Construction Law and Management edited by Keith Pickavance (2007) Compendium of Insurance Law by Robert Merkin and Johanna Hjalmarsson (2007) Insurance Law: An Introduction by Robert Merkin (2007) Construction Insurance and UK Construction Contracts by Marshall Levine and Roger ter Haar QC (2008) FIDIC CONTRACTS: LAW AND PRACTICE By ELLIS BAKER BEN MELLORS SCOTT CHALMERS ANTHONY LAVERS WHITE KCASE © Ellis Baker, Ben Mellors, Scott Chalmers and Anthony Lavers 2009 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 978–1–84311–628–8 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechnical, photocopying, recording or otherwise, without the prior written permission of Informa Law. Whilst every effort has been made to ensure that the information contained in this publication is correct, neither the authors nor Informa Law can accept any responsibility for any errors or omissions or for any consequences arising therefrom. Typeset in 10/12 Erhardt by Interactive Sciences Ltd, Gloucester ����������������������������������������������������� ��������������������������������������������������� ����������������������������������������������������� Informa Law from Routledge is an imprint of the Taylor & Francis Group, an Informa business FOREWORD In 1999, three new conditions of contract were published by FIDIC, with their basic structure and wording harmonised around the previous FIDIC Design-Build and Turnkey Contract (the 1995 “Orange Book”) format. These conditions were the Conditions of Contract for Construction, for Plant and Design-Build, and for EPC/Turnkey Projects. The first one is intended for construction works where the Employer is responsible for the design, similar to the old Red Book, and with an important role for the Engineer. The two latter ones are intended for cases when the Contractor supplies the design. The Plant and Design-Build Contract has the traditional Engineer while the EPC/Turnkey Projects Contract has a two-party arrangement. 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 this. They complement but do not replace the Conditions of Contract for Plant and Design/Build, in that they are intended to be used in a rather specific context, for example: u when greater certainty is sought that price and time will not be exceeded; u when the Contractor is required to take total responsibility for the design and construction of the infrastructure or other facility; u when the Employer is willing to pay more in return for the Contractor bearing the extra risks associated with this; and u when uncertain or difficult ground conditions or other largely unforeseeable risks are unlikely to be encountered. The EPC/Turnkey Contract should not be used for design-build work in other circum- stances. The decision about which form of contract to use should, therefore, always be taken in full consideration of the particular characteristics of the project at hand. While several guides to the 1999 editions have been published, only a few deal with the whole suite of contracts, most notably the Contracts Guide published by FIDIC. For FIDIC, this guide, with detailed guidance to the new contracts, remains the main reference work, especially since it was written by the principal drafter of the three 1999 conditions of contract. However, it aims mainly to explain the basis for interpreting the clauses. This new guide—FIDIC Contracts: Law and Practice—is sure to become a leading industry guide as it also covers the full suite of contracts but does so in a more detailed manner by providing legal commentary and detailed analysis of the clauses for each of the different forms, with relevant case law. Moreover, the guide examines the FIDIC suite of contracts in relation to other organisations, such as the World Bank and the ICC, who are closely involved in their use. This is especially important now that the Multilateral Development Banks (MDBs) and an increasing number of bilateral development agencies have adopted the MDB Harmonised Edition of the Construction Contract for their projects. v The authors have considerable experience in project procurement and international dispute resolution, so they are able to explain and interpret the significance of the contract clauses in the light of extensive use by a large user community that takes in engineers, project managers, quantity surveyors, architects, contractors, and professional staff from public authorities and procurement agencies. The new guide will certainly receive much positive attention from all interested parties. Philip Jenkinson, Chairman of the FIDIC Contracts Committee vi FOREWORD PREFACE For a practising lawyer, a book is a daunting undertaking. In the course of producing this one, I came to understand better why there was so little published assistance in use of the FIDIC contracts. This is not to denigrate the work of other authors on FIDIC subjects: grateful reference to their contributions has been made and recorded in many places within this one. But it was not hard to see the incentive to limit the scope of coverage, for example, to one form of contract. And this was the gap which I, and colleagues, and indeed clients and others in the industry, remarked over many years; the absence of a comprehensive legal text on the entire FIDIC suite, reflecting the full range of options offered by the respective forms. It is, of course, not possible to practise in construction law internationally without being fully aware of the massive presence of the FIDIC contracts in the global construction and engineering industries. Apart from the numerous projects where one or other of the FIDIC contracts is selected for use, there are indirect, often ‘unofficial’ influences, as in the adaptation of older FIDIC editions for use as standard forms (e.g., in Eastern Europe or by State entities in the Middle East) or in reference of terms of bespoke contracts to the FIDIC equivalent for comparison with an international benchmark. For me, at White & Case, this awareness was greatly enhanced by Christopher Seppälä, in the Paris office. His work as Legal Adviser to the FIDIC Contracts Committee and as author and presenter of papers was a constant reminder of the paramountcy of the FIDIC contracts in international construction procurement and disputes practice and was one of the inspirations for this book. Reference should also be made to FIDIC itself. This is in no sense an ‘official’ publication. Indeed, individual aspects of the FIDIC contracts are criticised where that is felt to be justified, but this does not reduce the gratitude felt for encouragement received from Peter Boswell, as General Manager, and Philip Jenkinson, as Chairman of the Contracts Committee. I have always taken the view that FIDIC is ‘big’ enough in attitude to accept differences of opinion and valid criticism and do not regard these as being inconsistent with sincere respect for FIDIC’s many achievements. That the opportunity ever arose to try to fill the perceived gap was due to the enterprise of Informa in making the initial approach to us and the tenacity of Jessica Westwood and her colleagues in seeing the project through. It is even more of a pleasure to record how much is owed to them now that the debt no longer includes an undelivered manuscript. While I have taken responsibility for all editorial judgements, including any errors in the text, final delivery would never have been achieved without the sustained efforts of my co-authors, all White & Case lawyers in the London Construction & Engineering Practice Group. Ben Mellors has, in less than a year, project-managed the team effort from a part- finished draft to an end product. Scott Chalmers combined preparation of draft chapters with lengthy overseas business trips and a young family. Anthony Lavers brought experi- ence of authorship as well as his substantive contribution to the collective effort. vii Formal acknowledgement is made throughout to the sources referred to, but more general gratitude is also appropriate to the colleagues, senior and junior, in the Firm and in the wider legal profession, clients and other FIDIC users. Their insights and comments have often enriched my understanding of the forms in practice. As I have indicated, the intention behind this book is to respond to a need which was obvious to me and to many others. How completely it meets that need is for readers to say; the team intends to listen to all constructive comment to factor into the preparation of any future editions, which the publishers have been kind enough to anticipate. What can be stated with certainty is that FIDIC Contracts: Law and Practice is offered to FIDIC users and their advisers in the same spirit of sharing of knowledge and experience from which I and my co-authors have benefited over the years. We hope it will make a difference. Ellis Baker White & Case, London viii PREFACE OUTLINE CONTENTS Foreword v Preface vii Author Biographies xxvii Introductory Notes for Readers xxix Table of Cases xxxiii Table of Legislation xxxvii List of Tables xxxix CHAPTER 1. FIDIC 1 CHAPTER 2. THE FIDIC CONTRACT 17 CHAPTER 3. PRODUCT 57 CHAPTER 4. PRICE 157 CHAPTER 5. TIME 217 CHAPTER 6. CONTRACT ADMINISTRATION AND CLAIMS 267 CHAPTER 7. RISK, INSURANCE AND SECURITIES 343 CHAPTER 8. REMEDIES 401 CHAPTER 9. DISPUTE RESOLUTION 505 Index 555 ix This page intentionally left blank DETAILED CONTENTS Foreword v Preface vii Author Biographies xxvii Introductory Notes for Readers xxix Table of Cases xxxiii Table of Legislation xxxvii List of Tables xxxix CHAPTER 1. FIDIC FIDIC 1 The meaning of FIDIC 1 The history of FIDIC 1 The FIDIC organisation and its activities 1 The FIDIC Contracts Committee 3 The background to FIDIC’s contracts 4 Collaborative work with other organisations 6 ICC 6 World Bank/Multilateral Development Banks 10 European International Contractors 12 Utilisation of the FIDIC contracts 13 FIDIC’s aspiration 13 The 1990s: the Reading University Study 14 FIDIC usage globally 14 CHAPTER 2. THE FIDIC CONTRACT Introduction 17 The FIDIC Suite of Contracts 17 FIDIC current major project forms 17 Currently published prior forms 18 Other FIDIC construction forms 18 FIDIC consultant and consortium agreements 18 Rainbow Suite: major project forms 18 FIDIC’s general principles 18 FIDIC’s contract suite 19 Other FIDIC forms 22 The Contract 24 Documents forming the Contract 25 Generally 25 Documents forming a FIDIC Contract 26 xi Location of contractual information or data in the Contract 31 Incorporation of documents 32 The Conditions of Contract 33 Interpretation of the Conditions of Contract 34 Particular Conditions—‘Tailored’ Provisions 35 Priority of contract documents—Sub-Clause 1.5 36 Procurement and contract award 38 Procurement 38 Tender documents 40 Base Date 40 Administration of the tender process 41 Legislative regulation 41 Development of tender contracts 43 Contract award—formation of the Contract 45 Red, MDB, Yellow and Gold Books 45 Silver Book 46 Applicable laws and permissions 46 Laws relevant to the Contract 46 Law governing the Contract 47 Ruling language 48 Compliance with applicable Laws 49 ‘‘Laws’’ 50 Permissions, permits, licences and approvals 51 Indemnities 53 Change in laws 53 Changes in Laws of the Country 54 CHAPTER 3. PRODUCT Introduction 57 The scope of work 59 Contractor’s general obligations: Red Book and MDB 59 Contractor’s general obligations: Yellow, Silver and Gold Books 60 Implied Works 61 Contractor’s general obligations: Gold Book—Operation Service 61 Permanent Works, Temporary Works, Goods, Plant and Materials 62 Manner of execution 62 Methods of construction 63 Contractor’s Documents 64 Red Book and MDB 65 Sub-Clause 5.2: Yellow and Silver Books 65 Contractor’s Documents submitted for review: Yellow and Silver Books 66 Contractor’s Documents submitted for approval: Yellow and Silver Books 67 Contractor’s Documents: Gold Book 68 Training 69 As-Built Documents 69 Red and MDB Books 69 xii DETAILED CONTENTS Yellow, Silver and Gold Books 70 Operation and maintenance manuals 71 Operation Service: Gold Book 71 Generally 71 General requirements 72 Commencement and carrying-out of Operation Service 74 Independent compliance audit 74 Delivery of raw materials 75 Delays and interruptions during the Operation Service 76 Failure to reach production outputs 77 Completion of Operation Service 77 Ownership of output and revenue 78 Site 78 Site and possession 78 Setting out 80 Access, transport and rights of way 80 Access and access routes 80 Transport 81 Security of the Site 82 Contractor’s operations on Site 82 Access after Taking Over 83 Clearance of Site 83 Red, MDB, Yellow and Silver Books 83 Gold Book 83 Site data and tender information 84 Red, MDB, Yellow and Gold Books 84 Site Data 84 All necessary information and sufficiency of Accepted Contract Amount 84 Silver Book 85 Adverse physical conditions 86 Red, MDB, Yellow and Gold Books 87 Physical conditions 87 Unforeseeable 87 Procedure and consequences 89 Risk sharing 91 Silver Book 92 Design obligations 92 Red Book and MDB 93 Errors or defects in documents prepared for the execution of the Works 94 Yellow and Gold Books 94 Errors in the Employer’s Requirements 95 Indemnity due to errors 96 Silver Book 96 Errors in the Employer’s Requirements 96 Fitness for purpose 98 Red Book and MDB 99 DETAILED CONTENTS xiii Yellow and Silver Books 99 Gold Book 100 Design compliance with law and standards 100 Standards and quality 101 Materials and workmanship 101 Generally 101 Samples: Red, MDB, Yellow and Gold Books 102 Samples: Silver Book 103 Royalties and material disposal 103 Quality assurance 103 Compliance with law 103 Generally 103 Gold Book: Operation Service 104 Permits, licences or approvals assistance 104 Working hours 105 Technical standards and regulations: Yellow, Silver and Gold Books 105 Safety, personnel and execution 106 Health and safety 106 Personnel 107 Labour and labour laws 107 Contractor’s Personnel 108 MDB obligations 108 MDB labour and social obligations 109 Employer’s Personnel obligations 110 Execution 110 Co-operation 110 Contractor’s superintendence 111 Rights of way 111 Avoidance of interference with public 111 Protection of the environment 112 Contractor’s Equipment 112 Facilities for staff and labour 113 Employer’s Equipment and free-issue materials 114 Employer’s Equipment 114 Free-issue materials 114 Electricity, water, gas and facilities 115 Books other than Gold Book 115 Gold Book 116 Variations 116 Definition of Variation 117 Who can order Variations? 121 Right to vary in the Red Book and MDB 122 Grounds for objection 123 Right to vary in the Yellow, Silver and Gold Books 124 Grounds for objection 125 Limits to the scope of Variations 125 xiv DETAILED CONTENTS