The FIDIC Forms of Contract Third Edition In September 1999, FIDIC introduced its new Suite of Contracts, which included a ‘new’ Red, Yellow, Silver and Green forms of contract. The ‘new’ Red Book was intended to replace the 1992 Fourth Edition of the Red Book, with the ambition that its use would cease with time. This ambition has not materialised and is unlikely to do so in the future. Despite the importance of the 1999 forms, there has been very little published on the new concepts adopted in them and how they interact with the previous forms. This important work considers these aspects together with the many developments affect- ing the Fourth Edition of the Red Book that have taken place since 1997, when the sec- ond edition of this book was published, and relates them to key contracting issues. It is written by a chartered engineer, conciliator and international arbitrator with wide experience in the use of the FIDIC Forms and in the various dispute resolution mech- anisms specified in them. Important features of this book include: — background and concepts of the various forms of contract; — a detailed comparison of the wording of the 1999 three main forms, which although similar in nature nevertheless significantly differ in certain areas due to their intended purpose; — analysis of the rights and obligations of the parties involved in the contract and the allocation of risks concerned; — a range of ‘decision tree’ charts analysing the main features of the 1992 Red Book, including risks, indemnities and insurances, claims and counterclaims, vari- ations, procedure for claims, programme and delay, suspension, payments and certificates, dispute resolution mechanisms, and Dispute Boards; — a much enlarged discussion of the meaning of ‘claim’ and ‘dispute’ and the types of claim with a discussion of the notice provision in the 1999 forms of contract for the submittal of claims by a contractor and by an employer; — the FIDIC scheme of indemnities and insurance requirements; and the methods of dispute resolution provided by the various forms of contract; and — five new chapters in this third edition, four chapters dealing with each of the 1999 forms and the fifth chapter focusing on the topic of Dispute Boards. The FIDIC Forms of Contract Third Edition The Fourth Edition of the Red Book, 1992 The 1996 Supplement The 1999 Red Book The 1999 Yellow Book The 1999 Silver Book Nael G. Bunni BSc, MSc, PhD, CEng, FIEI, FICE, FIStructE, FCIArb, FIAE, MConsEI © 2005 Nael G. Bunni Editorial offices: Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK Tel: +44 (0)1865 776868 Blackwell Publishing Inc., 350 Main Street, Malden, MA 02148–5020, USA Tel: +1 781 388 8250 Blackwell Publishing Asia Pty Ltd, 550 Swanston Street, Carlton, Victoria 3053, Australia Tel: +61 (0)3 8359 1011 The right of the Author to be identified as the Author of this Work has been asserted in accordance with the Copyright, Designs and Patents Act 1988. 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, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. First edition published 1991 Reprinted 1993, 1994, 1996 Second edition published 1997 Reprinted 1998, 2000, 2001, 2004 Third edition published 2005 Library of Congress Cataloging-in-Publication Data Bunni, Nael G. The FIDIC forms of contract : the fourth edition of the Red Book, 1992, the 1996 Supplement, the 1999 Red Book, the 1999 Yellow Book, the 1999 Silver Book / Nael G. Bunni.—3rd ed. p. cm. Rev. ed. of: The FIDIC form of contract, 2nd ed. 1997. Includes bibliographical references and index. ISBN 13: 978-14051-2031-9 (alk. paper) ISBN 10: 1-4051-2031-2 (alk. paper) 1. Engineering contracts. 2. Standardized terms of contract. I. Bunni, Nael G. FIDIC form of contract. II. International Federation of Consulting Engineers. III. Title. K891.B8B86 2005 343′.07862—dc22 2005041189 ISBN 10: 1-4051-2031-2 ISBN 13: 978-14051-2031-9 A catalogue record for this title is available from the British Library Set in 9.5/12.5pt Palatino by Graphicraft Limited, Hong Kong Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall Thepublisher’s policy is tousepermanentpaper from mills that operate a sustainable forestry policy, andwhich hasbeenmanufacturedfrompulp processed usingacid-free andelementarychlorine-free practices. Furthermore, the publisher ensures that the text paper and cover board used havemet acceptable environmental accreditation standards. For further information on Blackwell Publishing, visit our website: www.blackwellpublishing.com Contents List of Figures xx List of Tables xxii The Author xxiii Preface xxv Acknowledgements xxvii Part I Background and Concepts of the Red Book 1 Chapter 1 Background of the Red Book 3 1.1 The ACE Form 4 1.2 The First Edition of the Red Book 6 1.3 The Second and Third Editions of the Red Book 7 1.4 The Fourth Edition of the Red Book 11 1.5 The 1996 Supplement to the Red Book 14 1.6 Concepts of the Red Book 15 1.7 The new suite of FIDIC contracts 15 Chapter 2 The Red Book is Based on a Domestic Contract 17 2.1 Introduction 17 2.2 Diversity of legal systems 17 2.3 The applicable law in international construction 19 2.4 The applicable law of the contract 20 2.5 Law governing procedure 22 2.6 Law governing enforcement of awards 23 2.7 Grouping of the contemporary legal systems 24 2.8 The Romano-Germanic group 25 2.8.1 Sources of law in the Romano-Germanic group 28 2.8.2 Legal authoritative writing 31 2.8.3 Areas of the law affecting construction in the Romano-Germanic group 32 2.9 The common law group 32 2.9.1 Sources of law in the common law group 35 2.9.2 Areas of the law affecting construction in the common law group 40 vi Contents 2.10 The law in Islamic countries 41 2.10.1 Sources of Islamic law 42 2.10.2 Contracts in general and construction and engineering contracts in particular under Islamic law 44 2.10.3 Some salient principles in construction and engineering contracts 44 Chapter 3 Legal Concepts Based on the Common Law System 49 3.1 The law applicable to the contract 49 3.1.1 Clause 5 49 3.1.2 Clause 26 50 3.1.3 Clause 70 50 3.2 Conflict 51 3.3 Some specific concepts under the common law 52 3.3.1 Substantive law and procedural law 52 3.3.2 Legislation, common law and equity 52 3.4 Tort 52 3.5 Contract – general principles 54 3.5.1 Prerequisites of a contract 55 3.5.2 Limitation periods 57 3.6 Privity of contract 58 3.7 Performance of a contract 58 3.8 The contents of a contract 59 3.9 Remedies for breach of contract 62 3.10 Exclusion clauses 68 3.11 The responsibility to complete 68 Chapter 4 Drafting Principles 70 Chapter 5 The Concept of a Trusted Independent Engineer 73 5.1 Introduction 73 5.1.1 FIDIC’s Statutes and By-Laws and the independent engineer 73 5.1.2 FIDIC’s Code of Ethics 76 5.1.3 FIDIC’s Quality-Based Selection, ‘QBS’ 77 5.2 Other suppliers of consulting services 78 5.3 Services provided by the consulting engineer 79 5.3.1 Counselling services 79 5.3.2 Pre-investment studies 79 5.3.3 Design, preparation of documents and supervision 80 5.3.4 Specialised design and development services 80 5.3.5 Project management 80 5.3.6 Programme manager 81 5.4 Independence 81 Contents vii Chapter 6 A Traditional Re-measurement Contract 83 6.1 Factors governing choice of contract 83 6.2 The allocation of essential functions 83 6.2.1 The allocation of the function relating to finance 84 6.2.2 The allocation of the functions of design and construction 86 6.2.3 The allocation of risk, quality control and the method of pricing and payment 86 6.3 Re-measurement contracts 87 6.3.1 The Red Book is a re-measure contract 88 6.3.2 Contracts with a bill of quantities 89 6.3.3 Contracts with a schedule of rates 90 6.4 Cost-reimbursable contracts 90 6.5 Lump sum contracts 90 6.5.1 The Supplement to the Fourth Edition of the Red Book, Section B 91 6.5.2 Main features of FIDIC’s Form for Payment on a lump sum basis 91 Chapter 7 Sharing of Risks 93 7.1 Introduction 93 7.2 The definition of ‘risk’ 94 7.3 Measurement of risk 98 7.4 Risk management 99 7.5 Allocation of risks and their management 100 7.6 Allocation of risks in the Red Book 105 7.7 Responsibility and liability 108 7.8 Indemnity and insurance 109 Chapter 8 The Concepts in Practice 112 8.1 The Red Book in use 112 8.2 Areas of conflict 114 8.2.1 A relationship of trust 114 8.2.2 The role of the engineer 114 8.2.3 Avoidance of risk 115 8.2.4 The design function 115 8.2.5 Absence of a legal system 116 8.2.6 Distrust of changes 117 8.2.7 Legal questions 117 8.3 EIC/FIDIC survey of 1996 120 8.4 A brief summary of Part I 120 Part II The Fourth Edition: A Commentary 123 Chapter 9 The Revisions – Purposes and Consequences 125 9.1 Introduction 125 9.2 Clause 1 129 viii Contents 9.2.1 Definition of ‘Engineer’ under group (a) 129 9.2.2 Definition of ‘tests on completion’ 130 9.2.3 Definitions under group (e) 130 9.2.4 Definitions under group (f) 130 9.2.5 Definitions under group (g) 131 9.2.6 Definition of ‘approved’ 134 9.3 Clause 2 134 9.3.1 Requirement for consultation 135 9.3.2 Responsibility for delegation 136 9.3.3 Requirement for writing 136 9.3.4 Express requirement for impartiality 136 9.4 Sub-clause 5.2 136 9.5 Sub-clauses 6.1, 6.4 and 6.5 137 9.6 Clause 7 137 9.7 Clause 8 138 9.8 Clause 10 138 9.9 Sub-clause 12.2 139 9.10 Clause 13 140 9.11 Sub-clauses 14.1 and 14.3 140 9.12 Clause 15 141 9.13 Clause 19 141 9.14 Clause 20 141 9.15 Clause 21 142 9.16 Clause 23 143 9.17 Clause 25 143 9.18 Clause 27 143 9.19 Clause 28 144 9.20 Clause 30 144 9.21 Clauses 34 and 35 144 9.22 Sub-clause 36.5 144 9.23 Clause 37 145 9.24 Clause 40 145 9.25 Clause 41 145 9.26 Sub-clause 42.3 146 9.27 Clause 44 146 9.28 Clause 46 147 9.29 Clause 51 147 9.30 Sub-clause 52.3 147 9.31 Clauses 53 and 54 148 9.32 Sub-clause 57.2 148 9.33 Clause 60 148 9.34 Sub-clauses 65.4 and 66.1 150 9.35 Clause 67 150 9.36 Clause 69 151 9.37 Other changes made in the 1992 Reprint 152 9.38 Concluding remarks 152 Contents ix Part III The Fourth Edition in Practice 153 Chapter 10 Role of the Engineer 155 10.1 Introduction 155 10.2 The engineer as a designer 157 10.3 The engineer as the employer’s agent 162 10.3.1 Authority and duties of the engineer 163 10.4 The engineer’s proactive duties and authority 167 10.5 The engineer’s reactive duties and authority 170 10.6 The engineer’s passive duties and authorities 173 10.7 The engineer as a supervisor 175 10.8 The engineer as certifier 178 10.9 The engineer as adjudicator or quasi-arbitrator 180 10.10 Concluding remarks 183 Chapter 11 Responsibility and Liability of the Engineer 184 11.1 Introduction 184 11.2 Responsibility of the engineer towards the employer 187 11.3 Responsibility of the engineer towards the contractor 192 11.3.1 In the common law countries 193 11.3.2 In the Romano-Germanic system 198 11.4 The responsibility of the engineer towards third parties (other than the contractor) 199 11.5 The responsibility of the engineer towards society; employees; and the engineer himself 200 11.6 Liability in construction 200 11.7 Levels of liability 201 Chapter 12 The Employer’s Obligations 208 12.1 Introduction 208 12.2 Identification of specific elements of the project 209 12.3 Appointment of engineer 209 12.4 Possession of site 211 12.5 To provide instructions as and when they are required 213 12.6 The employer is to refrain from taking any action which would impede or interfere with the progress of the works 215 12.7 The employer is to supply materials and carry out works if these form part of the work as defined in the contract 216 12.8 The employer is to nominate specialist sub-contractors and suppliers as and when they are required 217 12.9 To permit the contractor to carry out the whole of the works 218 12.10 To make payments and to make them on time 218 12.11 Additional obligations for the employer under the Fourth Edition of the Red Book 219 x Contents Chapter 13 The Contractor’s Obligations 222 13.1 Introduction 222 13.2 The contractor’s obligations during the tendering stage 223 13.3 The contractor’s obligations following the letter of acceptance and during the construction stage up to substantial completion 224 13.3.1 Finalising documentation required prior to commencement of the works 224 13.3.2 Construction and completion of the works with due diligence and within the time for completion 225 13.3.3 Use of materials, plant and workmanship 230 13.3.4 Provision of securities, indemnities and insurances 233 13.3.5 Supply of information, notices or alerts 234 13.3.6 Performance of certain administrative functions 236 13.4 Contractor’s obligations after substantial completion of the works 240 Chapter 14 Risks, Liabilities, Indemnities and Insurances 241 14.1 Introduction 241 14.2 The Red Book provisions relating to risk, responsibility, liability, indemnity and insurance 241 14.3 Clause 20 of the Red Book – ‘20.1: care of the works’; ‘20.2: responsibility to rectify loss or damage’; ‘20.3: loss or damage due to employer’s risks’; and ‘20.4: employer’s risks’ 245 14.3.1 Sub-clause 20.1: care of the works 245 14.3.2 Sub-clause 20.2: responsibility to rectify loss or damage; and sub-clause 20.3: loss or damage due to employer’s risks 245 14.3.3 Sub-clause 20.4: the employer’s risks 246 14.4 Clause 65 of the Red Book (sub-clauses 65.1 to 65.8) – special risks 248 14.5 Clause 21 of the Red Book – insurance 252 14.5.1 Importance of adequacy of cover 252 14.5.2 Period of insurance and extent of cover 253 14.5.3 Joint names 256 14.5.4 Scope of insurance cover 257 14.5.5 Provisions for payment in foreign currency 258 14.5.6 Provision for deductibles 259 14.6 Clause 22 of the Red Book – indemnity for damage to persons and property other than the works 259 14.7 Clause 23 of the Red Book – third party insurance 260 14.8 Clause 24 of the Red Book – injury to workmen and insurance 261 14.9 Clause 25 of the Red Book – general insurance requirements 262 Contents xi 14.10 Part II of the Red Book – insurance arranged by the employer 263 14.11 Definitions 266 Chapter 15 Performance and other Securities 269 15.1 Introduction 269 15.2 The spectrum of securities 270 15.3 Types of securities 271 15.4 Characteristics of performance bonds and guarantees 272 15.4.1 Payment guarantees 272 15.4.2 Performance bonds 273 15.4.3 Demand guarantees 276 15.5 The ICC Uniform Rules for Demand Guarantees 280 15.6 Uniform Rules for Contract Bonds 281 15.7 Insurance against unfair calling 284 15.8 Performance securities under the Red Book 284 15.9 Examples of securities provided 288 15.10 Other securities associated with a construction contract 290 15.10.1 Bid bonds or guarantees 290 15.10.2 Advance payment guarantees 290 15.10.3 Retention money bonds 291 15.10.4 Maintenance or defects liability bonds 291 15.10.5 Company suretyship 291 15.11 Concluding remarks 292 Chapter 16 Claims and Counterclaims 293 16.1 Introduction 293 16.2 Definition and legal basis of claims and counterclaims 293 16.3 A claim under the contract and based on its provisions 298 16.3.1 Variations 299 16.3.2 Measurement changes 304 16.3.3 Adverse physical obstructions or conditions 305 16.3.4 Employer’s risks 315 16.3.5 Compliance with statutes, regulations, price fluctuations, currency and other economic causes 316 16.3.6 Defects and unfulfilled obligations 317 16.3.7 Failure to commence, delays, suspension of work, release from performance, default and termination 320 16.3.8 Other miscellaneous specified events 325 16.4 A claim arising out of or in connection with the contract 327 16.5 Procedure for claims for additional payment – clause 53 328 16.5.1 Procedural steps 329 16.5.2 Records 332 16.6 The presentation of claims 333