workshop 1 report
TRANSCRIPT
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PROGRAMME
9.30 Registration and refreshments 10.00 Chairman’s Introduction
John Bowcock, Chairman of the Network Management Committee 10.15 The Aims and Objectives of the Network Project
Dr. Issaka Ndekugri, University of Wolverhampton
10.30 Allocation of Risks between Contractor and Employer under the 1999 FIDIC Contracts Followed by questions and answers Christopher Wade, Chairman, FIDIC’s Contracts Committee
11.00 Break 11.30 Harmonisation of FIDIC Red Book with tender documents of the multilateral banks
Jean-Francois Maquet, Deputy Vice President, European Bank for Reconstruction and Development
12.00 Use of the FIDIC Family of Contract Documents on EBRD Financed Projects
Ian Nightingale, Deputy Director of Procurement and Purchasing, EBRD 12.30 Questions and answers 12.45 Lunch 14.00 Break out Sessions to examine amendments commonly made and common pitfalls at contract execution 14.45 Reports from the Break-out Sessions 15.15 Discussions 15.45 Chairman’s summing up 16.0 Close
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LIST OF PARTICIPANTS
First Name Surname Contact Details
Lilin Bates Knowles
London
Manfred Baur Knowles
Tamworth
John Bowcock Consulting Engineer,
Former Chairman of GIBB and of FIDIC
Contracts Committee
George Burn Denton Wilde Sapte
London
Daniele Carminati* Studio Legale Padovan
Tony Chappell Hyder Consulting Ltd
Edward Corbett Corbett & Co
UK
David Courtney-
Hatcher*
Denton Wilde Sapte
Peter Dannbring AF-Process AB
Malmo, Sweden
Nicholas Gould Fenwick Elliot
London,
Nick Henchie* Mayer Brown Rowe & Maw LLP
Dr. Goetz-
Sebastian
Hoek Kanzlei (law firm)
Berlin, Germany
Dr. Will Hughes University of Reading
Luc Imbrechts JAN DE NUL N.V
Peter Jolly Retired Civil Engineer
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Robert Knutson Consultant to Corbett & Co
Maurice Lepage Director of Procurement & Purchasing
Dept
European Bank for Reconstruction and
Development
Hamish Macdonald Knowles Middle East
Dr. Roger Maddrell Halcrow Group Ltd
Jean-
Francois
Maquet Deputy Vice President
European Bank for Reconstruction and
Development
Dr. Issaka Ndekugri University of Wolverhampton
Ian Nightingale Deputy Director of Procurement &
Purchasing
European Bank for Reconstruction and
Development
Marco Padovan* Studio Legale Padovan
Dr. Derek Ross ADR Associates
Arbitrator, Adjudicator, Mediator
Ian
Smith Lovells
London
Prof. Nigel Smith University of Leeds
School of Civil Engineering
John Tieder Attorney
Watt, Tieder, Hoffar & Fitzgerald, L.L.P.
Brian Totterdill ECV
Consulting Engineer
Christopher Wade Consulting Engineers
Chairman, FIDIC Contracts Committee
Francis Wallace Rix & Kay Solicitors
* late cancellation
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DISCLAIMER
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CONTENTS
INTRODUCTION ....................................................................................................................................... 7
WORKSHOP THEME ............................................................................................................................... 7
THE ROLE OF THE ENGINEER UNDER THE CONTRACT ............................................................ 8
DIFFERING SITE CONDITIONS .......................................................................................................... 10
CHANGES TO TIME LIMITS UNDER THE CONTRACT ............................................................... 11
PERFORMANCE SECURITY ................................................................................................................ 12
FORCE MAJEURE................................................................................................................................... 14
DISPUTE ADJUDICATION BOARD .................................................................................................... 15
CORRUPTION .......................................................................................................................................... 16
PROJECT DELIVERY STRATEGY...................................................................................................... 17
JOINT VENTURES BETWEEN WESTERN CONTRACTORS AND LOCAL CONTRACTORS
..................................................................................................................................................................... 17
EXECUTION OF THE CONTRACT ..................................................................................................... 17
QUOTATIONS FROM LOCAL SUPPLIERS AND SUB-CONTRACTORS .................................... 19
EMPLOYER’S RISKS .............................................................................................................................. 19
INDECISION IN DEALING WITH DEFAULTS ................................................................................. 20
SUMMARY AND CONCLUSIONS ........................................................................................................ 20
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Introduction
A particular feature of the use of international contracts is that information on disputes and problems in
general rarely gets into the public domain because of the private nature of the Dispute Review
Board/Dispute Adjudication Board proceedings and arbitration, dispute resolution methods often used.
The chances for users of the contracts to learn from the experience of others have therefore been very
limited. Although commercially expedient and extremely useful, there is a disadvantage to this privacy in
that knowledge can only be acquired through direct experience or through attendance at expensive
international seminars, not a realistic option for project participants from developing countries.
The Engineering and Physical Sciences Research Council (EPSRC) of the United Kingdom is funding a
network of experts on construction contracts to carry out a study into the legal framework of international
construction. The study is concentrating on the four new standard forms of contracts produced by FIDIC
in 1999. Knowledge of the operation of these contracts and potential sources of disputes is important for
reasons of dispute prevention and efficiency. The aim of the study is to develop and disseminate such
knowledge. It entails running multi-disciplinary workshops, conferences and on-line discussion in which
specific issues are subjected to critical examination by members of the network.
This is a report of from the first workshop, which was held in the University of Reading on 4 February
2005.
Workshop Theme
The workshop theme was “contract execution”. The premise for this was that many a construction
contract dispute can be traced back to acts or omissions that occurred before or at the time of signing the
contract. The aim of the workshop was to identify some of these acts and omissions and to investigate
preventative strategies. It focused on amendments to the General Conditions and drafting of the Particular
Conditions by employers in relation to the Red Book. It also sought to explore common pitfalls to be
aware of at the time of contract execution.
The workshop started with four introductory presentations on: (i) the aims and objectives of the Network;
(ii) allocation of risks between the Contractor and Employer under the 1999 FIDIC contract documents;
(iii) harmonisation of the FIDIC Red Book with tender documents of the Multilateral Development Banks
(MDB); (iv) use of the FIDIC family of standard contracts on projects financed by the European Bank for
Reconstruction and Development. After the presentation participants broke into three groups to discuss
the issues relevant to the workshop in different seminar rooms. The participants then reconvened together
for general discussion of issues raised in reports by rapporteurs from each group.
Group 1 Rapporteur: Edward Corbett
Group 2 Rapporteur: Nicholas Gould
Group 3 Rapporteur: Will Hughes
It was reported that the MDBs had been in discussion with FIDIC with a view to adopting harmonised
versions of the 1999 FIDIC contracts. This involvement was in response to a call from the G7 to
coordinate and harmonise their procurement policies and procedures and the banks’ independent
realisation that such harmonisation would be in the interests of their borrowers. It was reported that all
the MDBs and FIDIC have agreed on a harmonised version of the General Conditions of the Red Book.
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The most common amendments by parties reported by participants concerned the following issues:
the role of the Engineer under the contract,
differing site conditions,
time limits for specific actions under the contract,
performance security,
Force Majeure,
Dispute Adjudication Board,
Corruption.
Participants were also asked to describe common pitfalls to be avoided at contract execution. Some
participants expressed some difficulty in understanding what was required of them. The investigators
explained that the aim of this part of the proceedings was to collect information towards a checklist of
potential problems for consultation by contractual parties during their contract execution procedures.
Participants replied that, in the light of the dynamics of contract execution in practice, this aim was
misconceived. A particular dynamic stated was that in many cases the matters relating to contract
execution are decided at the highest political levels and the technical and legal experts presented with a
messy contractual framework to operationalise within timetables dictated more by political expediency
than best engineering contracting practice. Pitfalls identified concerned:
project delivery strategy,
joint ventures between western contractors and local contractors,
execution of the contract agreement,
quotations from local suppliers and sub-contractors,
Employer’s risks,
indecision in dealing with defaults.
The Role Of The Engineer Under The Contract
There have been two main issues on which the old Red Book’s provisions on the Engineer have received
some critical comment over the years: replacement of the Engineer and the duality of the role.
Replacement of the Engineer
The old Red Book did not allow expressly for replacement of the Engineer. FIDIC justified this policy on
a perceived need to safeguard the Contractor’s expectations on integrity and competence in the
administration of the contract developed on the basis of the identity of the Engineer stated in the tender
documentation (FIDIC 1989). It is easy to appreciate the need to avoid the possibility of an unscrupulous
Employer, after execution of the Contract, replacing the Engineer stated in the Contract with one without
appropriate qualifications and experience or even one more inclined always to make decisions in the
Employer’s favour. Expert commentators, for example Corbett (1991), have pointed out circumstances in
which a contract in the old Red Book form could become unworkable in the event of the Engineer, for
whatever reason, ceasing to act.
The Engineer is defined in Sub-Clause 1.1.2.4 of the new Red Book as “the person appointed to act as the
Engineer for the purposes of the Contract and named in the Appendix to Tender, or other person
appointed from time to time by the Employer and notified to the Contractor under Sub-Clause 3.4”.
Under the new Red Book the Employer may therefore replace the Engineer for any reason whatsoever
subject only to two procedural requirements. Firstly, the Employer must notify to the Contractor the
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name, address and relevant experience of the intended replacement not less than 42 days before the date
from when the replacement is to take effect. Secondly, the replacement must not be a person against
whom the Contractor has raised reasonable objections. There is still the problem that where the Engineer
ceases to act unexpectedly because of death or other reasons, administration of the Contract could grind to
a virtual halt unless the Engineer had delegated certain functions such as issue of Interim Payment
Certificates. This can be compounded by objections from the Contractor and ensuing disputes as to their
reasonableness.
The Duality of the Engineer’s Role
A persistent criticism of the old Red Book concerned the duality of the Engineer’s role: as Employer’s
agent in relation to some duties and independent party holding balance evenly between the parties with
respect of others (Goedel 1983; Mortimer-Hawkins 1984; Westring 1984; Kristensen 1985; Myers 1985;
Lloyd 1986; Rubino-Sammartano 1986; Seppala 1986; Nicklish 1990; Hughes 1996; Bowcock 1997;
Hughes and Shinoda 1999). In response to the criticism, under the new Red Book, the role of the
Engineer has been modified in two main respects. First, Clause 3.1 of the new Red Book provides, inter
alia, that “except as otherwise stated in these Conditions, whenever carrying out duties or exercising
authority, specified in or implied by the Contract, the Engineer shall be deemed to act for the Employer”.
The second change is that the provision in Sub-Clause 2.6 of the old Red Book has been dropped. It
provided that the Engineer, in arriving at any opinion, decision, valuation or certificate under the Contract
that would affect the rights and obligations of the parties, must exercise impartially any relevant
discretion allowed him. It has been replaced by a provision under Sub-Clause 3.5 that, where the
Employer and the Contractor fail to agree any matter specified as subject to that Sub-Clause, the Engineer
is to determine it fairly. The parties are to comply with the Engineer’s determination pending resolution
of the parties’ disagreement by the appropriate dispute resolution mechanism. From the initial reaction
from some expert commentators, high incidence of disputes as to the exact nature, extent and impacts of
the change is expected (Corbett 2000; Hoyle 2001).
Changes to the Replacement Duties and Powers of the Engineer
It was reported by workshop participants that one of the most common amendments to the new Red Book
gives the Employer absolute power to replace the incumbent Engineer, i.e., the Contractor’s right under
Sub-Clause 3.1 to raise reasonable objections to the replacement is removed. Some of the participants
were of the view that, in the light of the provision in that Sub-clause that the Engineer is an agent of the
Employer unless stated otherwise in relation to the relevant issue, there is nothing particularly
objectionable about this type of amendment. This amendment ensures smooth replacement of the
Engineer where such action is necessary. However, it also has implications for the likely perceptions of
the fairness of the Engineer’s Sub-Clause 3.5 determinations.
The third paragraph of Sub-Clause 3.1 of the Red Book States:
The Engineer may exercise the authority attributable to the
Engineer as specified in or necessarily to be implied from the
Contract. If the Engineer is required to obtain the approval of the
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Employer before exercising a specified authority, the
requirements shall be as stated in the Particular Conditions. The
Employer undertakes not to impose further constraints on the
Engineer's authority, except as agreed with the Contractor.
The Employer is given free reign as to the extent to which he wishes to control how the Engineer
performs his role provided the Particular Conditions state the powers the Engineer is not to exercise
without prior consultation with the Employer. Participants also reported, as common practice, addition of
a term giving the Employer the power unilaterally to change the duties and powers of the Engineer. Such
an amendment could have the effect of the Engineer being required to seek the approval of the Employer
on matters not stated in the Particular Conditions as subject to the Employer’s approval.
Differing Site Conditions
Under Sub-clause 4.10 the Employer warrants that he provided to the Contractor all relevant data in his
possession on “sub-surface and hydrological conditions at the Site, including environmental aspects”. The
information must have been made available prior to the Base Date, which is defined under Clause 1.1.3.1
as “the date 28 days prior to the latest date for submission of the Tender”. It is a breach of warranty where
the Employer had relevant data but, not realising this, failed to make it available to the Contractor.
Only raw “data”, e.g., borehole logs, results of standard soil tests, is to be provided. It is for the
Contractor to interpret the data supplied by the Employer.
Sub-Clause 4.10 also states:
“To the extent which was practicable (taking account of cost and time), the
Contractor shall be deemed to have obtained all necessary information as to risks,
contingencies and other circumstances which may influence or affect the Tender
or Works. To the same extent, the Contractor shall be deemed to have inspected
and examined the Site, its surroundings, the above data and other available
information, and to have been satisfied before submitting the Tender as to all
relevant matters, including (without limitations):
(a) the form and nature of the Site, including sub-surface conditions,
(b) the hydrological and climatic conditions,
(c) the extent and nature of the work and Goods necessary for the
execution and completion of the Works and the remedying of any
defects,
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(d) the Laws, procedures and labour practices of the Country, and
(e) the Contractor's requirements for access, accommodation, facilities,
personnel, power, transport, water and other services.
Sub-Clause 4.12 provides that the Contractor is entitled to extension of time for delay and recovery of
Costs incurred as a consequence of encountering Unforeseeable physical conditions. “Physical
conditions” is defined in the first paragraph of Clause 4.12 as “natural physical conditions and man-made
and other physical obstructions and pollutants, which the Contractor encounters at the Site when
executing the Works, including hydrological conditions but excluding climatic conditions”.
Sub-Clause 1.1.6.8 states that physical conditions are “Unforeseeable” if they are “not reasonably
foreseeable by an experienced contractor by the date for submission of the Tender”. This is a familiar
chestnut. It is submitted that mere foreseeability is not the issue, as the uncertainties of site conditions are
such that it can hardly be said that any condition could not have been foreseen by even an inexperienced
contractor. Corbett (2000) suggested that most arbitrators are likely to perceive the issue of foreseeability
as one of whether an experienced contractor could not only have foreseen them but would also have
allowed for them in his pricing, programming and other arrangements for carrying out the Works. In the
FIDIC/MDB harmonised version of the new Red Book the definition of “Unforeseeable” has been
extended to include “against which adequate preventive precautions could not reasonably be taken”.
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Clause 4.12 requires the Contractor to serve notice if he encounters “adverse physical conditions which
he considers to have been Unforeseeable”. The notice must describe the conditions in sufficient detail to
allow their inspection by the Engineer. It must also state why the Contractor considers them to be
Unforeseeable.
The Engineer must, upon receipt of the notice, inspect the notified conditions and investigate the extent to
which they are Unforeseeable. He may request the Contractor to submit a proposal for dealing with the
problem. The Contractor may also take the proactive step of submitting a value engineering proposal.
Participants reported instances of employers deleting Clause 4.12, particularly employers in the Middle
East. Risk allocation theory suggests that employers who engage in this type of blatant risk transfer would
pay for it through tender prices being higher than if the Sub-clause were left intact (Center for Public
Resources 1990; CPR 1994). Those participants with involvement in the Middle East reported that
competition is so fierce that such deletion has virtually no impact on tender prices.
The construction lawyers were of the view that in their experience employers, regardless of the risk
allocation, almost always pay in one way or another for unforeseeable differing site conditions.
Contractors faced with major unexpected expense come to them for assistance to obtain compensation by
employing any basis for still maintaining a claim. Basis of compensation available depends on the law
governing the contract. In English law possible grounds for non-contractual claims include
misrepresentation and negligent misstatement. Contractors may even argue for release from their
obligations to complete the Works under the Force Majeure clause, impossibility or frustration under the
general law.
Changes to Time Limits Under the Contract
The contracts lay down time limits within which specified actions are to be taken. For example, under
Sub-Clause 20.1, the Contractor must serve notice if he considers himself entitled to extension of time or
additional payment. The notice must be served as soon as practicable, and in any case not more than 28
days after he became aware, or should reasonably have become aware, of the event or circumstance that
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gives rise to the entitlement . The Contractor forfeits any right to make any claim in contract, tort or on
any other legal basis whatsoever in relation to that event or circumstance if he fails to serve the notice
within the 28 days.
Subject to a prior valid notice of a claim as already explained, the Contractor must submit a fully
particularised claim within 42 days after the date of awareness of the causative event or circumstance.
The full claim must contain particulars on its quantum and legal justification. This period may be
extended subject to the Engineer's approval of the extension. Under Sub-Clause 1.3 the Engineer must not
unreasonably withhold any approval required under the contract.
Some participants described common situations where it would be impracticable for the Contractor to
serve the notice within the 28 days or submit a particularised claim within the 42 days’ timetable. In one
reported case a major rock fall (in excess of 3 000 m3) occurred on a tunnelling project. This occurrence
necessitated the appointment of internationally experienced tunnelling experts to ascertain the cause of
the rock fall and to advise on remedial earth support systems. Experts (geologists, lawyers, claims
consultants, and delay and disruption analysis consultants) were then appointed to prepare a
fully particularised claim document for submission to the Engineer, with a copy to the Employer not only
in English but also in another language, thus necessitating translation work on an extensive scale.
Producing the claim therefore took months. Whether the Engineer should approve this type of extended
period for submitting the claim is likely to be hotly disputed.
Challenging as these time limits are in practice, participants reported amendments still reducing them.
The purpose of such amendments is obvious: to reduce claims from contractors. Participants considered
that the consequences are the same as denying the Contractor the right to extension of time and additional
payment on account of Unforeseeable differing site conditions: claims that go all the way to arbitration in
Contractors’ expectations that arbitrators would be sympathetic.
Under Sub-Clause 14.7 the Employer must make payment of certain sums due under the contract within
specified periods after the obligation to make the payment accrued. For example, the Employer must
make interim payment of the amount due within 56 days after the Engineer receives the Contractor’s
statement of the value of the relevant works. Tasks that must be completed within the 56 days include the
Engineer checking the accuracy of the statement and their administrative procedures for payment for
contracts within the Employer’s organization. Some employers extend this period either to improve their
own cashflow or to accommodate unavoidable delays in the administrative procedures. Participants were
in agreement that contractors normally price such amendments by appropriate increases to their tender
prices to reflect the less favourable cashflow.
Performance Security
Clause 4.2 requires the Contractor to provide Performance Security to the Employer if the Appendix to
Tender is completed stating the amount of such security. The amount may be stated as a lump sum or as a
percentage of the Accepted Contract Amount. The details of the Contractor’s obligation to provide
security are:
1. It must be for at least the amount stated in the Appendix to Tender and in the currencies and their
proportions applicable to payment of the Contract Price.
2. It must be provided within 28 days after the Contractor’s receipt of the Letter of Acceptance.
3. A copy of the security is to be provided to the Engineer.
4. The security must be in the form annexed to the Particular Conditions or approved by the
Employer.
5. The security must be issued by an entity and from a country approved by the Employer.
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6. The Performance Security must be in force until the Works are completed and defects made good.
If the security specifies its expiry date and, as a result of delays in carrying out the Works, it is to
expire before the issue of the Performance Certificate, the Contractor must extend the validity of
the security until the completion of the Works and the making good of defects.
FIDIC has included sample forms for three types of Performance Security as annexes in all the 1999
contract documents except The Short Form of Contract: (i) Example Form of Parent Company Guarantee;
(ii) Example Form of Performance Security – Demand Guarantee, (iii) Example Form of Performance
Security: Surety Bond. The Employer may ignore all of these forms and annex a form of his own choice.
Participants reported that it is common practice for employers to specify on-demand bonds (also referred
to as an “unconditional bond”) although the FIDIC Guide on the 1999 suite of contract documents
advises against this on account of the likelihood of contractors increasing their tenders to reflect the risk
of abusive calls on such bonds (FIDIC 2000). An employer only has to demand payment on this type of
bond for the bank to comply, a contrast to the need to provide evidence of default where the security is of
the conditional variety (or surety bond). This report corroborates an assertion by Bertrams (2000) that
performance security required in international construction is of the on-demand variety in most cases. He
attributed this preference to the following factors:
1 To obtain the evidence of default necessary to call a conditional bond successfully, the Employer
has to obtain an arbitration or court decision in his favour in the likely event that the Contractor
disputes that he is in default. Getting such evidence could therefore be a very protracted process.
2 The law governing the validity and calling of conditional performance bonds varies from
jurisdiction to jurisdiction. There is therefore the risk of the employer coming against unexpected
legal obstacles in any attempt to call the bond for good cause.
3 Banks generally prefer issuing on-demand bonds because they involve no risk of getting
embroiled in disputes between employers and contractors as to whether there has been a default.
This preference has resulted in a relatively small market for conditional bonds, thus giving rise to
very high premiums.
A suggestion was made during the workshop discussions that contractors should price their tenders on the
assumption that an employer who requires an on-demand bond will call it in any event, i.e., the bidder
should treat the amount of the bond as a discount and price it accordingly. Participants with direct
experience of on-demand bonds stated that employers hardly call them without a breach by the contractor
because such conduct damages their commercial reputations. Furthermore, there are sanctions against
abusive calls of an on-demand bond because Sub-Clause 4.2 also states:
The Employer shall not make a claim under the Performance Security, except
for amounts to which the Employer is entitled under the Contract in the event
of:
(a) failure by the Contractor to extend the validity of the Performance
Security as described in the preceding paragraph, in which event
the Employer may claim the full amount of the Performance
Security,
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(b) failure by the Contractor to pay the Employer an amount due, as
either agreed by the Contractor or determined under Sub-Clause
2.5 [Employer's Claims] or Clause 20 [Claims, Disputes and
Arbitration], within 42 days after this agreement or determination,
(c) failure by the Contractor to remedy a default within 42 days after
receiving the Employer's notice requiring the default to be
remedied, or
(d) circumstances which entitle the Employer to termination under
Sub- Clause 15.2 [Termination by Employer], irrespective of
whether notice of termination has been given.
The Employer shall indemnify and hold the Contractor harmless against and
from all damages, losses and expenses (including legal fees and expenses)
resulting from a claim under the Performance Security to the extent to which
the Employer was not entitled to make the claim”.
Under the above provisions the Contractor may therefore claim against an abusive call of the security and
pursue it to arbitration. If the security is in the Surety Bond form annexed to the contract documents there
is the additional protection that the Employer must state in any demand: (i) that the Contractor is in
breach of his obligations under the construction contract; and (ii) the nature of the breach. In some
jurisdictions a false statement would result in a criminal offence being committed. For example, in
English law it would constitute theft by the Employer.
Force Majeure
This term is generally used in construction contracts to refer to catastrophic events outside the control of
the parties. The most obvious of these events are Acts of God such as earthquakes, volcanic eruptions and
hurricanes. Some man-made events outside the control of the parties, or at least that of the party relying
upon it, such as war and strikes, are also included. This concept of Force Majeure is well developed and
known in the French and other civil law jurisdictions (Van Dunné 2002). However, it has no precise legal
meaning in English law and related common law jurisdictions (Wallace 1995). For this reason, what
constitutes Force Majeure for the purposes of a particular contract is usually defined in it.
Three main consequences of Force Majeure are commonly provided for in contracts. Firstly, it is
invariably a provision that where the event prevents a party from performing its contractual obligations, it
is excused from responsibility for any delays caused. There may also be a right to suspend the carrying
out of the whole of the works for a stated period or even terminate the contract in exceptional
circumstances. Finally, there may be entitlement to recovery of costs incurred on account of the event.
Sub-clause 19.1 of the Red Book defines it in these terms:
“In this Clause, "Force Majeure" means an exceptional event or circumstance:
(a) which is beyond a Party's control,
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(b) which such Party could not reasonably have provided against before
entering into the Contract,
(c) which, having arisen, such Party could not reasonably have avoided or
overcome, and
(d) which is not substantially attributable to the other Party.
Force Majeure may include, but is not limited to, exceptional events or
circumstances of the kind listed below, so long as conditions (a) to (d) above
are satisfied:
(i) war, hostilities (whether war be declared or not), invasion, act of foreign
enemies,
(ii) rebellion, terrorism, revolution, insurrection, military or usurped power, or
civil war,
(iii) riot, commotion, disorder, strike or lockout by persons other than the
Contractor's Personnel and other employees of the Contractor and Sub-
contractors,
(iv) munitions of war, explosive materials, ionising radiation or contamination
by radio-activity, except as may be attributable to the Contractor's use of
such munitions, explosives, radiation or radio-activity, and
(v) natural catastrophes such as earthquake, hurricane, typhoon or volcanic
activity”.
It is advised in the Particular Conditions that the Employer should verify that the wording of Clause 19 is
compatible with the applicable law of the contract before inviting tenders. Participants reported that
amendments are often made in compliance with this advice. One of the changes made in the FIDIC/MDB
harmonised version concerns the Contractor’s entitlement to claim more money and time on account of
Force Majeure. Under Sub-Clause 19.4 of the new Red Book the Contractor is entitled to claim if it
incurs additional costs or suffers delay on account of being prevented by Force Majeure from performing
“any of its obligations”. The harmonised version limits the entitlement to where the Contractor is
prevented from performing “its substantial obligations”.
Dispute Adjudication Board
In response to the continuing criticism of the fourth edition of the Red Book, FIDIC in October 1996
published a Supplement, which, inter alia, offered a Dispute Adjudication Board (DAB) as an alternative
to the Engineer’s role as first instance tribunal for disputes. The concept of a DAB is a development of
that of the Dispute Review Board (DRB) which was first used in the US on civil engineering projects
(Technical Committee 1991). Both the DAB and DRB take the form of an independent panel constituted
by three members of recognised knowledge, experience and professional standing in construction to
whom disputes are referred. The project owner and the contractor jointly approve and appoint each
member of the panel to ensure their neutrality and independence. There is however the distinguishing
feature that whilst the US-style DRB generally makes a non-binding recommendation as to how the
dispute is to be resolved, the DAB makes a decision that is binding pending final resolution of the dispute
by amicable settlement or arbitration. A DAB may take the form of a standing or ad hoc board. A
standing DAB is appointed either in the contract or soon after contract execution and stays with the
project until completion. An ad hoc board is formed only after a dispute has arisen and is disbanded after
a decision has been made.
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By the time of publication of the 1999 FIDIC contracts, FIDIC had therefore had some experience of the
use of DABs on projects on which its contracts had been used. Bowcock (1997), a former Chairman of
FIDIC’s Contract’s Committee, wrote that informal advice given by DABs during site visits had been of
great help in preventing disputes. It is therefore not surprising that all the 1999 contract documents,
except The Short Form of Contract, provide for a Dispute Adjudication Board DAB as the first tier
tribunal for resolution of disputes between the Employer and the Contractor.
It was reported in the workshop that some project employers had little enthusiasm for the DAB concept
and tended to delete the provisions requiring a DAB to be set up. The EBRD has a policy of not
permitting DAB provisions to be deleted where a FIDIC standard contract requiring a DAB is used
although the Bank does not impose the use of any particular standard contract on its funded projects.
Some employers therefore opt to use the old Red Book to avoid having to set up a DAB. Where a
contract document requiring a DAB is used, some employers failed to operate the DAB provisions
properly, e.g., demanding to have greater control over the membership of the board than allowed under
the contract, refusing to take steps necessary for the setting up of the DAB or, where one was set up,
failing to make use of it as required by the contract.
The Employers who insist on nomination of all the DAB members may derive some encouragement from
the fact that the Red Book appears to allow this. The Letter of Tender form annexed to the contract
documents contemplates the owner including a schedule of names of suggested DAB members for the
Contractor to accept or add to. In an environment of fierce competition for work, it is difficult to
contemplate a bidder rejecting the employer’s suggestions even before the contract has been won.
The DAB is to be constituted by the date specified in the Appendix to Tender. By analogy with US-style
DRB practice, cooperation between the parties in the appointment of a DAB should be at the heart of the
effectiveness of the DAB provisions (Matyas et al 1996). The contract document provides a default
mechanism for appointing the DAB where such cooperation does not exist. Under Sub-Clause 20.3 (b),
where “either Party fails to nominate a member (for approval by the other Party) of a DAB of three
persons by such date”, either or both of the Parties may apply to the appointing entity named in the
Particular Conditions to make an appointment of that member. This provision clearly covers the situation
where the owner declines to nominate a member for approval by the Contractor. However, it is doubtful
whether the Contractor has a right to invoke the default mechanism where the Employer simply refuses to
approve any nomination by the Contractor. It is not clear how, apart from arbitration at this early stage,
such unreasonable withholding of approval by the Employer can be resolved, as the DAB is not yet
constituted.
The Dispute Adjudication Board in the FIDIC/MDB harmonised version of the Red Book has been
renamed “Dispute Board”. The reasons for this change were not stated. There has been considerable
litigation in relation to adjudication of construction disputes as practiced in the UK. A need to draw a
distinction between UK practice and what is anticipated for international construction may have been a
factor. For example, whilst informal advice given by the DAB is a valued feature of dispute boards
(Matyas et al 1996; Bowcock 1997), such advice by an adjudicator in the UK system of adjudication
could have the effect of making the adjudicator’s subsequent decision on the same matter unenforceable
(see Glencot Development and Design Co. Ltd. v. Ben Barrett (Contractors) Ltd. [2001] BLR 207).
Corruption
One of the grounds upon which the Employer may terminate the Contractor’s employment under Sub-
clause 15.2 of the Red Book is if the Contractor “ gives or offers to give (directly or indirectly) to any
person any bribe, gift, gratuity, commission or other thing of value, as an inducement or reward: (i) for
17
doing or forbearing to do any action in relation to the Contract, or (ii) for showing or forbearing to show
favour or disfavour to any person in relation to the Contract”. The like misconduct by the Contractor’s
Personnel, agents or Subcontractors also gives rise to a right to terminate the Contractor’s employment.
This clause is obviously aimed at discouraging of the most unacceptable aspects of international
construction. Participants agreed with the view expressed in Construction Business Formbook, a very
popular US publication on contracts, that such clauses could have the opposite effect in that agents and
representatives of the Employer and the Engineer can exploit it to extort bribes from contractors with
threats of falsely accusing them of offering bribes if the contractors refuses to pay up (Tieder, 2004).
Project Delivery Strategy
It was reiterated by many participants that, without prior design of an appropriate project delivery
strategy, the use of any form of contract is likely to run into severe difficulties. The factors identified in
the presentations and not questioned by participants as requiring serious consideration in the production
of an effective project delivery strategy included the following:
analysis of the employer’s need to be satisfied by the project,
in-house capability of the employer,
local technical capacity,
local regulations,
market conditions,
the party to design the Works (the employer or the contractor),
how much the works will cost,
the financiers and their project procurement regulations,
acceptable completion time,
the risks the employer is able to accept,
the risks that must be transferred to contractors and designers.
Joint Ventures Between Western Contractors And Local Contractors
A joint venture between a western contractor and local contractor must be scrutinised at the contractor
pre-qualification stage to ensure that it is a genuine joint venture. Participants reported instances where
the western contractor was just a front for the local contractor who proved unable to achieve the quality
standards of the western contractor, which were deciding factors in the award of the contracts.
Execution of the Contract
A common concern was that contract documents are sometimes completed without due care. According
to participants, these failures are often the result of contracts being put together in a “hot workhouse
environment”, with different teams working on different aspects of the contract to meet tight deadlines
imposed by the political dynamics of the project. Specific shortcomings that participants had come across
are next outlined.
Appendix to Tender not Fully Completed.
The Appendix to Tender is the form for insertion of the particulars of the project, e.g., the names and
addresses of the parties and of the Engineer, time for completion, damages for delay and list of materials
to be paid for before their delivery to the Site. Participants reported that these forms are not always fully
18
completed. They attributed this failure to the ambiguity on responsibility created by the fact that parts of
it are to be completed by the Employer whilst others can be left for completion by the Contractor.
The FIDIC/MDB version of the Red Book has moved away from this requirement for joint completion by
the parties. The Particular Conditions in this version are organised in two parts. Part A is referred to as
“Contract Data” and contains the data that the original Red Book requires to be completed in the
Appendix Tender. It is for the Employer alone to complete this Part. Part B is referred to as “Specific
Conditions” and contains provisions particular to this version.
Sectional Completion
Providing for sectional completion without specifying the work content in each section or otherwise
providing clear delineation between sections creates risks of disputes about whether or not a particular
section has been completed by the time specified in the contract.
Languages of the Contract
Sub-clause 1.4 states inter alia:
If there are versions of any part of the Contract which are written
in more than one language, the version which is in the ruling
language stated in the Appendix to Tender shall prevail.
The language for communications shall be that stated in the
Appendix to Tender. If no language is stated there, the language
for communications shall be the language in which the Contract
(or most of it) is written.
The contract document therefore contemplates more than one language being used in relation to the
performance of the contract: (i) the ruling language for interpretation of the contract; (ii) the language for
communications. Both are to be stated in the Appendix to Tender.
It is inferred from the label “language for communications” that approvals, certificates, consents,
determinations, notices, claims, requests and the like must be in that language. The contract also states
expressly other obligations in relation to the language for communications:
1. Assistants to the Engineer must be fluent in it (Sub-Clause 3.2).
2. Where the Contractor is to design any part of the Permanent Works, the Contractor is to provide to
the Engineer the Contractor’s Documents for such part in the language for communications unless
it is stated otherwise in the Particular Conditions (sub-Clause 4.1).
3. The Contractor’s Representative and his assistants to whom he has delegated any of his powers
and functions under the contract must be fluent in it (Sub-Clause 4.3).
4. The Contractor must provide superintendence to plan, arrange, direct, manage, inspect and test the
work by sufficient numbers of persons “having adequate knowledge of the language for
communications” (Sub-Clause 6.8).
5. Any arbitration shall be conducted in the language for communications (Sub-Clause 20.6).
19
Where more than one language is stated in the Appendix to Tender as the language for communications
all these obligations would apply in relation to each language. Unless there are reasons demanding
multiple languages to be specified in the contract such practice is to be avoided because of the obvious
additional costs and staff recruitment difficulties. Specification of two languages as alternative, e.g.,
“English or Finnish”, was thought by participants to be creating uncertainty as to whether either may be
used or everything must be translated into relevant languages..
Access/Possession of Site
Many types of projects, e.g., highways, power transmission and dams, take up extensive tracts of land.
The risk of environmental activists, not necessarily from the Country of the works, and local religious,
ancestral and other strong interests being in the way of the Contractor is very real. It is an Employer’s risk
that needs very careful management.
Definition of the Site
“Site” is defined under Sub-Clause 1.1.6.7 as “the places where the Permanent Works are to be executed
and to which Plant and Materials are to be delivered, and any other places as may be specified in the
Contract as forming part of the Site”. The extent of the Site has implications for not only the Employer’s
obligation to provide access and possession but also claims for Unforeseeable physical conditions. An
example of this problem brought to the attention of participants was where the Employer offered use of an
off-site camp. The Contractor, who based his tender on the condition of the camp at the time, submitted
an Unforeseeable physical conditions claim when the condition of the camp deteriorated.
Lack of Indices for Adjustments for Inflation
Sub-Clause 13.8 provides for adjustment of the Contract Price for inflation by a formula that requires the
existence of indices reflecting price movements of categories of resources. The Sub-Clause applies if a
“table for adjustment data” in the Appendix to Tender is completed. How this clause is to be implemented
in a country without an independent source of indices was a matter of concern to participants.
Quotations From Local Suppliers And Sub-Contractors
Contractors should always bear in mind that local suppliers and sub-contractors often ignore their
quotations upon which the Contractor prepared his bid. Sometimes prices demanded after award of the
main contract can be up to three times the corresponding prices in the quotations, particularly where it
becomes public knowledge that the project is being financed by a MDB.
Employer’s Risks
Sub-clause 17.3 lists a number of risks. Reading Clause 17 as a whole, this list is intended as a method of
demarcating risks for the purpose of allocating responsibility between the Employer and the Contractor
but only in relation to two matters: (i) liability for loss or damage to the Works, Goods or Contractor’s
Documents, and (ii) the cover to be provided by insurance. Under Sub-Clause 17.4 if this type of material
damage is caused by a risk listed in Sub-Clause 17.3 and the Contractor suffers delays or incurs additional
costs in complying with the Engineer’s requirement to rectify it he is entitled to claim more time and
money. The Contractor must rectify, at his own risk and cost, any loss or damage of that kind where it is
caused by a risk not in Sub-Clause 17.3.
20
With a few exceptions, the insuring party, usually the Contractor, has no duty to take out any insurance
against any loss or damage to the Works, Plant and Materials and Contractor’s Documents from the Sub-
Clause 17.3 risks. The insuring party is to provide cover against personal injury and property damage
caused by the Sub-clause 17.3 risks only to the extent that such cover is available at commercially
reasonable rates of premium.
There is the marginal note “Employer’s Risks” against the Sub-Cause 17.3 list. It can be inferred from
the statement in Sub-Clause 1.2 that this note in itself would not have the contractual effect of this group
of risks carrying such a label. However, Sub-Clause 17.2 clearly refers to them by that label. It was
pointed out that this label carries the danger of the misunderstanding that it is a comprehensive list of the
risks for which the Employer is responsible under the contract, thus supporting arguments that risks
allocated to the Employer elsewhere in the contract are not the Employer’s.
Indecision in Dealing with Defaults
Participants from the MDBs expressed the view that threats of drastic action in response to defaults have
to be given and implemented more sensibly and credibly than they had come across. Repeated failure to
act on threats when the default complained is not remedied only leads to further disintegration of
troubled projects.
Summary and Conclusions
The 1999 FIDIC contract documents are in use across the globe for international construction contracts.
There is evidence that the Red Book is sometimes amended. Such amendments are not usually the result
of negotiations after the contract award but unilateral pre-tender action by employers to transfer certain
risks to contractors. Amendments reported include: removal of the Contractor’s entitlement to claim
more time or money on grounds of encountering unforeseeable differing site conditions; extensions of the
time within which the Employer is to take certain actions under the contract, e.g., making payment;
reduction of the time within which the Contractor is to comply with contractual requirements for notices;
changes to the definition of Force Majeure; removal of requirement for DABs; unqualified powers to the
Employer to replace the Engineer without consultation with the Contractor; additional powers to the
Employer to change the duties and powers of the Engineer.
According to risk allocation theory, transfer of risks to the contractor causes higher bid prices. This
impact does not appear to occur in parts of the world where competition for construction work is strong,
e.g., the Middle East. It would therefore appear that some employers engage one-sided transfer of risks
without adversely affecting their interests. However, participants reported that in their experience,
employers always pay for such risk transfer one way or another, as very few contractors, faced with major
unanticipated costs not of their making, are likely to accept the risk allocation and just walk away. On the
contrary, they instruct their lawyers to pursue claims for additional time or money or release from the
contract on any available grounds outside the express terms of the contract in the expectation that, in the
light of the inequitable risk allocation, DABs and arbitrators would be sympathetic to such claims.
Furthermore, such claims are highly complex and likely to test to the limit the legal expertise of the DAB
members and arbitrators. In any case employers are unlikely to recover all their costs even if they
successfully rebut the claims. Owners also pay a high price for the contractual disorder likely to result
from removal of clauses governing the management of major construction risks.
Pitfalls identified for action in avoidance included: failure to develop a project delivery strategy or failing
to implement it; the Appendix to Tender not being fully completed; requiring sectional completion
without clear sectional demarcation; uncertainty in the specification of the language of the contract;
21
inadequate attention to issues concerning definition of the Site and access to, or possession of, it; ill-
thought out amendments to the contract; western contractors fronting local contractors in the guise of
joint ventures; naïve reliance on quotations from local sub-contractors and suppliers; lack of indices for
contract price adjustment for inflation; misunderstanding of the significance of Employer’s risks under
Sub-Clause 17.3; and employers’ indecision in dealing with defaults.
Some participants doubted the utility of such a list of pitfalls. They explained that the dynamics of
contract execution are often politically driven. By the time lawyers and technical experts are brought on
board, avoidance of the pitfalls is usually too late. Severe time constraints imposed from the highest
political levels often dictate multiple teams working on separate aspects of the contractual jigsaw in a
“hot workhouse” environment, thus creating risk of misalignment.
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