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The International Federation of Consulting Engineers (“FIDIC”) is an international standards organization for consulting, engineering and construction, which publishes standard form contracts between employers (owners) and contractors that are often considered to be the preferred contracts for use on international construction and engineering projects. A fundamental principle behind the FIDIC contracts is the use of general conditions of contract that are suitable in almost all cases. In 1999, FIDIC published a range of first edition contracts, including:
- Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer: The Construction Contract (the “Red Book”);
- Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor: The Plant and Design-Build Contract (the “Yellow Book”);
- Conditions of Contract for EPC Turnkey Projects: The EPC/Turnkey Contract (the “Silver Book”); and
- Short Form of Contract: The Short Form (the “Green Book”).
FIDIC published the second edition of its standard form contracts in December 2017. The update was much anticipated and the revisions have prompted a great deal of discussion. This article addresses some of the major changes between the Yellow Book first edition (“First Edition”) and the Yellow Book second edition (“Second Edition”). The Yellow Book is a lump sum contract intended for use where the work is designed by the contractor, and under which the contractor accepts the risk of quantities.
Significant Differences between the First and Second Editions of the Yellow Book
Role of the Engineer
In the Second Edition, the role of the engineer remains instrumental to the administration of the contract and the engineer is given greater responsibility and power. The engineer must now be fluent in the language of the contract, must have suitable qualifications, experience and competence, and must act like a skilled professional.
The Second Edition introduces an aspect of neutrality to the role of the engineer. Despite being appointed and remunerated by the employer, there is now a requirement in Sub-Clause 3.7 that, in making a Determination, the engineer “act neutrally” between the parties. While “neutrally” is not defined, this is a significant change from Sub-Clause 3.1 of the First Edition, which deemed the engineer to be an agent of the employer when carrying out its duties or exercising authority, except where otherwise stated in the contract. As well, under the new Sub-Clause 3.7, the engineer has a positive obligation to encourage the resolution of claims and is not required to obtain the employer’s consent before making a Determination.
The engineer may now appoint an “Engineer’s Representative” and may delegate its authority to the Engineer’s Representative to act on its behalf. However, the Engineer’s Representative must remain on site for the duration of the work.
The procedure for the determination of contractor and employer claims has also undergone significant changes from the First Edition. Under the Second Edition, the engineer has a greater role in determining claims and disputes, and encouraging collaboration between the parties. For example, Sub-Clause 3.7 of the Second Edition refers to joint consultations with both parties in order to reach an agreement within 42 days. This is a departure from Sub-Clause 3.5 of the First Edition which did not specify joint meetings with both parties.
In the event that no agreement is reached between the parties, the engineer must issue a Determination within 42 days of the end of the 42 day period for agreement, which Determination must be “fair.” A failure on the part of the engineer to make a Determination within the 42 day period is deemed to be a rejection of a claim. Once the engineer has made a Determination or there has been a deemed rejection, a party has 28 days to serve a Notice of Dissatisfaction (referring the dispute to the Dispute Adjudication Board), otherwise the Determination is final and binding.
Overall, the engineer’s role in the administration of the work has become more prescriptive and there is a greater reliance placed on the engineer to administer claims efficiently.
Fitness for Purpose
One of the more contentious changes from the First Edition to the Second Edition was to the language of the Fitness for Purpose provision in Sub-Clause 4.1. The First Edition provides “[w]hen completed the Works shall be fit for the purposes for which the Works are defined in the Contract” while the Second Edition provides “[w]hen completed, the Works (or Section or Part or major item of Plant, if any) shall be fit for the purpose(s) for which they are intended, as defined and described in the Employer’s Requirements (or, where no purpose(s) are so defined and described, fit for their ordinary purpose(s)).”
This change to the language of the Second Edition will require the employer to pose the question of whether any purpose stated outside the Employer’s Requirements, if any, should be disregarded when considering the Fitness for Purpose warranty.
By defining the purpose by reference to the Employer’s Requirements rather than the contract as a whole, this change should narrow the scope of the contractor’s warranty and provide some certainty to the contractor. However, it also obliges the contractor to perform a detailed review of the Employer’s Requirements, if any, to ensure that the stated purpose(s) for which the Works are intended are clear. This is especially important, as the Second Edition now includes a corresponding indemnity in Sub-Clause 17.4 whereby the contractor indemnifies the employer “against all acts, errors or omissions by the Contractor in carrying out the Contractor’s design obligations that result in the Works (or Section or Part or major item of Plant, if any), when completed, not being fit for the purpose(s) for which they are intended under Sub-Clause 4.1.” Indirect and consequential losses are, however, excluded from this indemnity.
It should also be noted that the fitness for purpose obligation now does not just apply to the Works as a whole, but also to a “Section or Part or major item of Plant.” This may be a future source of disagreement.
Employer’s and Contractor’s Claims
A number of revisions have been made in order to encourage faster resolution of claims. In the First Edition, the contractor was required to give notice of a claim to the employer within 28 days of becoming aware of the same. By contrast, Sub-Clause 2.5 of the First Edition entitled an employer to claim payment or extension of the defects notification period “as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim.”
The Second Edition has removed Sub-Clause 2.5, and, with it, the distinction between employer and contractor claims. Now, both the employer and contractor are subject to the 28-day limitation period for notification of claims under Clause 20. This revision reflects international practice, but does not necessarily recognize the distinction between a contractor’s claim and an employer’s entitlement to apply deductions or set-off.
As well, the Second Edition now requires a formal Notice be provided in respect of any claims. The Notice must be described as a “Notice of Claim” and refer to the relevant clause of the contract. As a result, parties will no longer be entitled to rely on informal notices, such as discussion points in meeting minutes or emails. The engineer is now also required to notify the claiming party within 14 days if the engineer considers a “Notice of Claim” to have been submitted out of time.
The Second Edition provides for an 84 day limitation period for submission of a detailed claim by either the employer or the contractor. This deadline only applies to claims for payment or for reduction in the contract price and claims for extension of time, and replaces the 42 day limitation period for contractor claims in Sub-Clause 20.1 of the First Edition. The detailed claim must include:
- a detailed description of the event or circumstance giving rise to the claim;
- a statement of the contractual or legal basis for the claim;
- all contemporary records on which the claiming party relies; and
- detailed supporting particulars of the amount of additional payment (or reduction in the contract price if the employer is the claiming party), extension of time or extension of the defects notification period being claimed.
If a detailed claim is not submitted within 84 days of the date when the claiming party first became aware of the event giving rise to the claim, then the claim will lapse. Maintaining adequate records is therefore critical to establishing entitlement to money and time.
Sub-Clause 20.1 of the Second Edition also introduces an “other” claim category for claims that are for a relief or remedy other than time or money and sets out the procedure to be followed for those claims.
The revisions listed above are only some of the major changes introduced with the Second Edition of the Yellow Book. This article does not address other major changes introduced in the Second Edition, including revisions to the defined terms (Sub-Clause 1.1), limitation of liability provisions (Clause 17), variations procedure (Clause 13), disputes and arbitration (Clause 21) and advanced warning (Sub-Clause 8.4).
FIDIC intended the revisions discussed in this article to bring increased clarity and certainty to roles so as to encourage active contract management and put more emphasis on dispute avoidance. However, they may also increase the cost and burden of administering the contracts. Overall, there are no earth-shattering changes to the allocation of risk between the employer and contractor, and it is expected that the Second Edition contracts will remain popular on international projects.