eic cons guide

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EIC Contractors Guideto

the FIDIC Conditions of Contract

for

Construction

Copyright European International Contractors 2002

ISBN 3-9808257-2-8

Reprint March 2003 with editorial amendments

All rights reservedNo part of this publication may be

Reproduced or transmitted in any

form or by any means without

permission of the publisher

Published by European International Contractors

Kurfrstenstrasse 129

D 10785 Berlin, Germany

Phone:++493021286244

F a x : ++493021286285

E - m a i l :[email protected] e b : www.eicontractors.de

March 2002


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Erratum

EICContractorsGuidetothe

FIDIC

ConditionsofC

ontractforCon

struction

(The

New

RedBook)

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ingsentence:These

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ub-Clause20.3

[Fa

iluretoAgreeDisp

uteAdjudicationB

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wordsParticularConditionsmustbere

placedbythewords

AppendixtoTender.


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EIC Contractors Guide to the FIDIC Conditions of Contract for Construction

Foreword

EIC prepared a Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey Contracts(the Silver Book) and published it in March 2000. EIC took this decision, not only due to thesignificant (in some instancesunquantifiable) risks that the Contractor is required to carry underthe Silver Book but also because it places the Contractor in a contractual environment that permitsthe Employer considerable scope for interference and unilateral action. It is this combination ofhigh risk and limited freedom of action that concerns contractors. The Guide to the Silver Bookwas generally well received and whilst it did not receive a wholehearted endorsement from FIDICthey were kind enough to suggest that it provided a useful checklist for both employer andcontractor. Feedback from contractors tells us that they find it useful; it highlights and discusses

the risks confronting contractors within the restrictive contractual framework of the Silver Book andis a useful checklist, highlighting those clauses requiring careful thought.

As a FIDIC form the Silver Book was completely new to EIC contractors, whereas we are veryfamiliar with the Fourth Edition of the Conditions of Contract for Works of Civil EngineeringConstruction and generally consider it an acceptable form of contract. Indeed, given theopportunity, contractors have recommended its use to employers. Throughout this Guide, it isreferred to as the Fourth Edition. So, why publish a guide to its successor, the Conditions ofContract for Construction for Building and Engineering Works Designed by the Employer,hereinafter referred to as the Red Book? In contrast to contractors favourable impressions of theFourth Edition, our study of the Red Book and discussions with FIDIC led us to the conclusion that

whilst it does not present the same high degree of risk as the Silver Book it is more onerous thanthe Fourth Edition to the extent that the publication of a guide is justified. We have followed aformat similar to our Guide to the Silver Book and comment only where we think that there issomething important for contractors to consider and only at length where there are importantissues at stake.

EIC wishes to make it clear that this document is not exhaustive and is intended for guidance only.Expert legal advice should always be obtained before submitting an offer or making anycommitment to enter into a contract. Neither EIC nor the authors of this document accept anyresponsibility or liability in respect of any use made by any person or entity of this document or itscontents which is and shall remain entirely at the user's risk.

To ensure that this Guide provides the maximum benefit to the industry at large, we would like toreceive feedback from EIC member companies on its usefulness and relevance and we wouldparticularly like to gather experience of any contracts carried out under the Red Book. Allcommunications should be sent to the EIC Secretariat in Berlin.


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Acknowledgements

EIC would like to thank the FIDIC Contracts Committee for the time they devoted to explaining thephilosophy behind the publication of the Red Book and for listening patiently to our arguments. Wewould particularly like to thank the Contracts Committee of the International Construction Group inthe United Kingdom for the preparation of the first draft of this Guide and Mr RobertAkenhead QCfor the important contributions he made in reviewing the draft and recommending improvements.

EIC would also like to express its appreciation of the work carried out by those members of its ownConditions of Contract Working Group who contributed to the preparation of this Guide: Richard

Appuhn,Sa li ni ;HkanBroman, NCC; MartinCa rr ey ,Carillion; EricEggink, BallastNedam; DrJoachim Goedel, HOCHTIEF; Frank Kennedy (Chairman); Simon Williams, TaylorWoodrow. Ourthanks also go to the Working Group's secretary Frank Kehlenbach.


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Executive Summary

We readily accept that in some respects the Red Book is an improvement on the Fourth Edition.However, we believe that the balance of all amendments will increase the risk to contractors andhave concluded therefore that the Red Book is a less satisfactory form of contract than the FourthEdition. From a contracting perspective, the clauses dealing with the provision of confidentialinformation, fitness for purpose, tests on completion and notice of claim represent a move in thewrong direction. Whilst we recognise that todays engineer can no longer act impartially, webelieve that some of his new powers could prove problematical in practice, especially where he isrequired to make judgements as if he were an experienced contractor.

Improvements

The first of the welcome changes requires the Employer to demonstrate that sufficient finance is

available to carry out the Works (Sub-Clause 2.4). This will be particularly important where theimmediate client is a Special Purpose Company (SPC) and is funded by loans. For contractsplaced by an SPC it is usual for the lending banks to put a Direct Agreement in place, whichpermits them to take over control of the contract should the SPC default. Where such anagreement exists it is important that the Contractor is given the opportunity to study and considerits terms and conditions before the construction contract is finalised. This clause will also proveuseful where major variations are ordered or where the Employer has acknowledged theContractor's right to any significant payment for additional works or major claims.

The procedure for dealing with Employers Claims (Sub-Clause 2.5) is also an improvement overthe Fourth Edition. The Employer must now follow a set procedure if he considers himself entitled

to any payment and must give notice as soon as practicable and provide particulars of the claim.These provisions are mandatory. The Engineer must then make a determination but theContractor can refer such a determination to a new and independent body, the Disputes

Adjudication Board (the DAB, Sub-Clause 20.2). These new provisions should go a long way toprevent any unreasonable actions of the Employer, especially in terms of the application of DelayDamages, a not uncommon practice with some employers in countering or indeed negating thelegitimate claims of the Contractor. The DAB can comprise either one or three members, to beappointed by the Employer and the Contractor. The appointment of the DAB expires only after awritten discharge by the Contractor has become effective and the DAB is therefore avai lablethroughout the duration of the Contract. Provided both Parties agree they can refer any matter to itand this provision could prove useful in resolving disputes before they effect the progress of theworks. The creation of the DAB is a welcome addition to the Red Book and the binding nature of

its decisions, even if either Party is dissatisfied, is an added benefit.

Our friendly and impartial Engineer has been laid to rest! The Engineer is now required to act forthe Employer (Sub-clause 3.1) and no longer has a duty to act impartially. Why do we considerthis a change for the better? Simply because it recognises what has long been the establishedcustom and practice in the industry. In any event, we believe that any possible downside will bemore than compensated for by the introduction of the DAB.

Whilst the Employer can still make claims on the Contractors Performance Security (Sub-Clause4.2), any claim must now be made strictly in accordance with the terms laid down in the Contract.This is an improvement on the Fourth Edition, as the Contractor is offered protection for all costs

incurred should the Employer make a false claim and the Employer must indemnify the Contractoraccordingly. Whereas the Fourth Edition merely required the Employer to notify the Contractor


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prior to making a claim, the Red Book limits the Employers claims under this guarantee toamounts to which the Employer is entitled.

Retrogressions

Regrettably there are quite a few clauses in the Red Book which have been toughened up andwhilst the principal obligations and risks carried by the Contractor are still construction oriented,they are generally more onerous than under previous construct only editions and the overall effectis to increase the risk profile by comparison with the Fourth Edition.

The Contractor is now required (Sub-Clause 1.12) to provide all such confidential information asthe Engineer may reasonably require in order to verify the Contractors compliance with theContract. This clause is overly demanding and could place the Contractor in a difficult position insituationswhere a dispute has arisen, especially with regard to third parties. A similar provision tothat in the Silver Book would be more appropriate, which sets out a mutual confidentiality

obligation and provides for agreement of privileged information pre-tender. This would be a moresensible approach.

The Contractor is entitled to time extension and payment of additional cost suffered due to errors inSetting Out information provided by the Employer (Sub-Clause 4.7). However, this entitlement isnow subject to the test of whether an experienced contractor would spot the error and the Engineerwill be the judge on this matter. Not only does the Engineer act for the Employer, he is alsorequired to make decisions as if he were an experienced contractor!

Of particular concern for contractors working under English or Common Law is the introduction ofan obligation (Sub-Clause 4.1) which stipulates that any designs by the Contractor must be fit forpurpose. Under those jurisdictions, the Employer's designer will only have an obligation to designwith reasonable skill and care and this could lead to some interesting disputes should difficultiesarise as a result of any conflicts or anomalies that occur between the Employers and theContractors designs.

A requirement to carry out Tests on Completion has been introduced (Clause 9) and is a novelconcept for a construct only contract. It is difficult to see what type of contract would qualify and itis not the tests themselves that are the problem but rather the punitive sanctions that could besuffered in the event of failure to pass such tests. In extreme circumstances, these could includedismantling the structure, removing it and returning the site to its original condition and repaying allmonies received by the Contractor. This clause, which may well be attractive to the lessreasonable type of employer should be deleted in its entirety - a possibility that FIDIC actually

provide for if the clause is inappropriate to the nature of work being carried out. This makes it evenmore difficult to understand why it is there in the first place.

Most parties to a construction contract would agree that the ability of any contractor to prepare anaccurate cost estimate is completely dependent on the quality and comprehensiveness of theinformation provided at tender stage. In the Fourth Edition, the Employer was required to supplyall available data on hydrological and sub-surface conditions. It is difficult to understand thereforethe provisions of the Red Book (Sub-Clause 4.10) which modify that requirement to relevant datain the Employers possession.It is difficult to seehow it will help employers to limit in any way theinformation provided to bidders and contractors should try to amend this requirement to reflect theterms of the Fourth Edition.

Where the Contractor encounters unforeseen conditions (Sub-Clause 4.12), the Engineer may nowconsider whether conditions in similar parts of the Works were more favourable than could havebeen foreseen before finally determining any entitlement to additional costs. If, in the Engineer's


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opinion, such favourable conditions were encountered, the Engineer can take them into accountwhen determining any entitlement to additional Cost. This provision could be extremely prejudicialto the Contractor and is open to widely differing interpretations. A further new concept permits theContractor to provide evidence of the physical conditions foreseen in his tender calculation.However, if such evidence is provided, the Engineer may or may not take account of it and is not

bound by it. It would appear thatFIDICs objective is to use every means possible to reduce thefinancial impact of claims for unforeseeable conditions but the extent of the discretionary powersnow at the Engineers disposal seem more likely to increase the potential for dispute anddisagreement.

The Employer now has the right, not present in the Fourth Edition, to terminate for convenience(Sub-Clause 15.5). This right can be exercised at any time 28 days after giving written notice.The payment terms do not provide for loss of profit and are inequitable and inappropriate in thecase of termination for the Employers convenience. In such circumstances, loss of profit shouldbe payable to the Contractor. The clause states that the Employer may not terminate in order toundertake the Works directly or arrange for them to be completed by another Contractor.

The Contractors obligation to issue a notice has changed for the worse and he is now requiredto give notice 28 days after becoming aware, or when he should have become aware (Sub-Clause 20.1). Contractors should beware! Failure to comply with this provision will incur a fiercepenalty and will result in the Contractor forfeiting his right to an Extension of the Time forCompletion and to additional payment and the Employer is also discharged from any liability.The penalty for failure to comply with a purely technical requirement to give notice is undulyharsh. This is the first time that a FIDIC contract has removed the fundamental right of theContractor to make a claim merely as a result of a failure to comply with a fixed period of time tosubmit the required notice. Whilst we accept that the Contractor may prejudice his entitlementby failing to comply strictly with a notice provision we cannot agree that he should forfeit hisrights altogether and neither should the Employer be discharged from any and all liability. Itbecomes doubly unreasonable that this provision also applies when the Employer is responsiblefor causing the problem in the first case. It is revealing to compare these terms with theobligations of the Employer where either the Employer or the Engineer is only required to givenotice as soon as practicable after becoming aware. This demonstrates once again the unfairimbalance between the respective obligations of the Employer and the Contractor that isbecoming symptomatic of FIDIC contract forms.

Comments on a number of individual clauses follow and deal with the matters referred to abovein greater detail.


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1 General Provisions

1.1.2.6Employer'sPersonnel

The new definition of the Employers Personnel includes the personnel ofboth the Employer and those of the Engineer. This could include a verysignificant number of people, especially where the Employer is a nationalgovernment or government agency.

1.1.4.3C o s t

The definition of Cost excludes profit and could result in the Contractorcarrying out extra work or incurring expense, possibly quite substantial inextent, without profit. Such work or expense could arise under variousSub-Clauses, for example, 4.12 [Unforeseen Physical Conditions], 4. 24[Fossil ] , 8 . 9 [Consequences of Suspensio] , 13 . 7 [Adjustments foChanges in Legislation] , 17 .4 [Consequences of Employers Risks] ,except as indicated, and 19.4 [Consequences of Force Majeure]. Undereach of those clauses any entitlement would exclude profit unless tenders

have been otherwise qualified.

1 . 4Law andLanguage

Provides thatThe Contract shall be governed by the law of thCountry (or other jurisd iction) stated in the Appendix to Tender.The Contractor should be aware that under certain Civil Law jurisdictionssome Red Book conditions may be considered unfair trade terms andtherefore inapplicable. There may also be mandatory laws, which cannotbe overridden by the Contract. Any potential conflict between thContract and mandatory legal requirements is best clarified by takingexpert advice during the tender period.

1.12

ConfidentialDeta i ls

Requires that,The Contractor shall disclose all such confidenti

and other information as the Engineer may reasonably require.This clause could present difficulties if the Contractor were required todisclose confidential information in respect of which the Contractor has aduty of confidentiality to a third party.

The Silver Book allows the Contractor to retain confidentiality overinformation, which has been specified at tender stage, whereas the RedBook offers no such protection. Whilst the Sub-Clause includes thphrase"as the Engi neer may reaso nably requ ire no criteria arprovided to give guidance on what is reasonable. The Contract shouldcontain a provision to provide the Parties with the opportunity, pre-tender,to discuss and agree the extent of any privileged Contractorsinformation. Contractors should be mindful of this requirement withregard to internally confidential and sensitive information and that of thirdparties.

1.13Compliance withLaws

The Contractor shall comply with all applicable laws. Howeverresponsibility for obtaining permits, licences or approvals is not entirelyclear when Sub-Clauses 1.13 (a) and (b) are compared:

Sub-Clause 1.13 (a) provides thathe Employer shall have obtaine(or shall obtain) the planning, zoning or similar permission for thPerma nent Works Sub-Clause 1.13 (b) states that the Contracto

shall give all notices, pay all taxes, duties and fees, and obtain apermits, licences and approvals, as required by the Laws in relationto the execution and completion of the Works and the remedying ofany defects.Responsibility for obtaining permissions is ambiguous and


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should be clarified. For instance, what issimilar permissionfor whichthe Employer is responsible pursuant to Sub-Clause 1.13 (a) and howdoes it fit with the Contractors obligations under Sub-Clause 1.13 (b)?Ideally, the Contract should include a detailed schedule of the permitsrequired and should identify the party responsible for obtaining the same.

In the event that the Contractor is responsible then, under Sub-Clause2.2. (b)(i) [ ermits, Licences and Approval] the Emplo yer sha(where he is in a position to do so) provide reasonable assistance toth e Co nt ra ct or Consequently, any delays caused by the Employerfailure entitle the Contractor to an extension of time in accordance withSub-Clauses 8.4 (e) [Extension of Time for Completion]. Any delayscaused by authorities entitle the Contractor to an extension of time under8 . 5 [Delays Caused by Authorities], 8.4 (b). In particular, all permits thatare required to allow the project to be developed at the Site of the Worksshould be specifically identified in the Contract as being the responsibilityof the Employer.

In the event that the Contractor undertakes any design of the Works, hemust clarify who is responsible for the provision of permits, licences orapprovals for that part of the Works.

1.14Joint andSeveral Liability

Where the Contracting Party is a joint venture or consortium, this Sub-Clause requires that, the parties to such joint venture or consortium mustbe jointly and severally liable to the Employer. Likewise, should theEmployer consist of two or more legal entities the obligation should bereciprocal.

2 The Employer 2 . 1Right of Accessto the Site

Al though right of access to and possession o f the Site is to bgiven by the Employer, this r ig ht and poss essi on m ay not bexclusive. It would be sensible for the contract documents to identifthe extent to which there may not be exclusive access and possessionand it would be beneficial to clarify this, given the Contractors duty to co-operate with others under Sub-Clause 4.6.

2 . 3EmployersPersonne l

This Sub-Clause relates to the Employers obligations in respect of hispersonnel and contractors employed directly by him. It should be notedthat there is no express obligation on the Employer to secure generallthat his other contractors co-operate with the Contractor other than in therespects identified.

The effects of any delay or disruption caused by the Employerspersonnel and contractors are dealt with under Sub-Clause 8.4 (e)[Extension of Time for Completion] which provides only for granting a timeextensio for such events. There is no provision in the Contract trecompense the Contractor for the cost of delay and disruption caused bysuch events. Contractors should carefully consider the possible effectson the cost of successfully completing the Works, especially where theEmployer intends to be closely involved.


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2 . 4EmployersFinancialArrangements

FIDIC recognises the need for the Contractor to be satisfied that thEmployer has the necessary financial strength to undertake hisobligations under the Contract. This Sub-Clause requires that t hEmployer shall submit, within 28 days after receiving any requef r o m t h e C o n t r a c t o r , r e a s o n a b l e e v i d e n c e t h a t f i n a n c i

arrangements have been made and are being maintained which willenable the Employer to pay the Contract Price. This is a c ruciobligation on the Employer, particularly where funding is being providedby third parties. The Contractor must have the right to refuse tundertake any significant Variation if no clear evidence is provided thatthe available funding is sufficient to cover the cost of the varied Works.

The Contractor should also have a right to be made aware of any terms,conditions or step-in rights that exist in any agreement between theEmployer and his Lenders. If such an agreement is to be put in placebetween lenders and contractor then the terms and conditions should bemade available prior to signature of the Contract.

A powerful sanction is available to the Contractor should the Employer failto furnishreasonable evidence. The Contractor is entitled to suspend

the work or terminate the Contract under Sub-Clauses 16.1 [ContractorsEntitlement to Suspend Work] and 16.2[Termination by Contractor] .However, what constitutes reasonable evidence is undefined and theContractor should try to establish this prior to submitting a tender. Failureto do so could prejudice any attempt to obtain more detailed informationduring the currency of the Contract, if for example a major Variation isinstructed.

Contractors should give due consideration to the risk associated withcontinuing to work during the 28 day period available to the Employer toprovide the required evidence and the further extended notice periodrequired to comply with the suspension and termination provisions.

2 . 5EmployersClaims

This Sub-Clause offers better protection to the Contractor and obligatesthe Employer to follow a given procedure if heconsiders himself to beentitled to any payment under any Clause of these Conditions ootherwise in connection with the Contract, and/or to any extensionof the Defects Notification Period, the Employer shall give noticand particulars to the Contractor.The Employer or the Engineer maygive notice andThe notice shall be given as soon a practicable

and give particulars of the claim, after which the Parties may agree theclaim or failing which the Engineer may then make a determination inaccordance with Sub-Clause 3.5 [Determinations] .

The provisions of this Sub-Clause are also mandatory in the event thatthe Employer wishe to set off against or make any deduction froman amount due to the Contractor.In accordance with Sub-Clause 3.5[Determinations], the Engineer shall make a determination in respect ofany such Employer claim. These new provisions should go a long way toprevent any unreasonable actions of the Employer, especially in terms ofthe application of Delay Damages.

These provisions for Employers Claims represent a signif icaimprovement over the Fourth Edition. If the Engineer fails to make a fairdetermination pursuant to Sub-Clause 3.5 [Determinations], the disputes


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procedures laid down in Sub-Clause 20.4 [Obtaining a DisputAdjudication Boards Decision] operates within very strict time constraintsand offers therefore, an immediate means of challenge and should act asa deterrent to any unreasonable action on the part of the Engineer.

A provision entitling the Contractor to claim against the Employer is found

in Sub-Clause 20.1[Contractors Claims], but its terms are much moreonerous on the Contractor than those placed upon the Employer underthis Sub-Clause. The obligations of the Employer and Contractor shouldprovide for similar time frames and sanctions for non-compliance. (Sealso comments under Sub-Clause 20.1 [Contractors Claims] ) .

3 The Engineer

3 . 1Engineers

Duties andAuthori ty

This Sub-Clause states that the Engineer acts for the Employer but theobligation to act impartially as set out in the Fourth Edition does not

appear in the Red Book.

Where the Engineer is required to obtain the approval of the Employerbefore issuing an instruction this shall be stated in the ParticularConditions. However, whenever the Engineer issues an instructiowithout first obtaining approval, then the Employer shall be deemed tohave given his approval. This means that the Contractor is relieved ofany need to establish any limitations on the Engineers powers.

3 . 3Instructions ofthe Engineer

This Sub-Clause gives the Engineer wide powers to i ssue to thContractor (at any time) instructions and additional or modifiedrawings which may be necessary for the execution of the Works

and obligates the Contractor to comply with such instructions.Contractors should note the 2-day period in sub-paragraph (b) regardingthe written confirmation of oral instructions of the Engineer or delegatedassistants.

3 . 5Determinations

Sub-Clause 3.5 sets down the procedure to be followed by the Engineerwhen he is required to make a determination. The Engineer shall consultboth Parties, endeavour to reach an agreement and failing agreement, heshall then make a fair determination taking account of all relevantcircumstances. The Engineer is required to make a determination underthe following Clauses:

1 . 9 [Delayed Drawings or Instructions]2 . 1 [Right of Access to the Site]2. 5 [Employer's Claims]4 . 7 [SettingO u t]4.12 [Unforeseeable Physical Conditions]4.19 [Electricity, Water and Gas]4.20 [Employer's Equipment and Free-issue Materials]4.24 [Fossi ls]7 . 4 [Testing]8 . 9 [Consequences of Suspension]9 . 4 [Failure to Pass Tests on Completion]

10 .2 [Taking Over Parts of the Works]10.3 [Interference with Tests on Completion]11 .4 [Failure to Remedy Defects]11 .8 [Contractor to Search]


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12 .3 [Evaluation]12. 4 [Omissions]13.2 [Value Engineering]13.7 [Adjustments for Changes in Legislation]14 .4 [Schedule of Payments]

15. 3 [Valuation at Dateo fTermination]16.1 [Contractor's Entitlement to Suspend Work]17.4 [Consequences of Employer's Risks]19.4 [Consequences of Force Majeure]20 .1 [Contractor's Claims]

4 The Contractor

4 . 1Contractors

Genera lObligations

Sub-paragraph (c) places a fitness for purpose obligation on theContractor in respect of any design of any part of the Permanent Works

which the Contract specifies shall be undertaken by the Contractor. Itprovides that unless the Particular Conditions provide otherwise the workswhen they are complete shall,be fit for such purposes for which thepart is intended as are specified in the Contract.Fitness for purposeobligations are of particular concern where a contract is carried out under

jurisdictions based on English Law or Common Law. It may be of lessconcern under other jurisdictions where fitness for purpose is the law of acountry or common practice. However, the issues discussed below arerelevant to both situations.

The Red Book contains no obligation on the Employer to provide thedefinition of Intended Purpose. If the Technical Spe icat ion s do n

sufficiently define the reference terms for that part of the Design to beprovided by the Contractor, contractors should ensure that prior tocontract signature a definition is agreed by both Parties which is clear andunambiguous and is not open to re-interpretation at a later date. Failureto do so could lead to a serious and costly dispute.

With regard to the obligation to design for fitness for purpose it may notbe possible to pass the full liability on to any third party design consultantappointed by the Contractor. Current practice is for consultants to acceptonly an obligation to design with reasonable skill and care becauseinsurance to cover the risk associated with fitness for purpose is not

universally available and is a particular problem for British consultants. Itis quite likely therefore that the Red Book will create anomalies where theEmployers designers (having carried out the greater part of the design)might only be subject to a reasonable skill and care obligation whilst thContractor will be subject to the more onerous fitness for purposeobligation.

If the Contractors design is in respect of a major part of the Works(major part is not a defined term and is accordingly open to differininterpretation) which major part cannot be put to the intended use thenthe Contractor may incur punitive sanctions limited only by the terms ofSub-Clause 17.6 [Limitation of Liability] .


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4 . 2PerformanceSecurity

The form of Performance Security must be clearly set out in the ContraFailure to do so could result in difficulty in obtaining approval from theEmployer and particularly so if a Conditional Bond is offered whereas theContract anticipates an On Demand Bond.

This Sub-Clause is an improvement on the Fourth Edition and theContractor is offered protection for all costs incurred in the event that theEmployer makes a false claim and the Employer must indemnify theContractor accordingly. Whereas the Fourth Edition merely required thEmployer to notify the Contractor prior to making a claim under thePerformance Security, the Red Book limits the Employers claims underthis guarante for amounts to which the Employer is entitled a nthe Employers entitlement to demand sums under the guarantee islimited by Sub-Clause 2.5 [Employers Claims].

The Employer is permitted to make a claim on the ContractorPerformance Security in the event ofcircumstances which entitle theEmployer to termination under Sub-Clause 15.2 [Termination by theEmployer ], but again such claim must be made in accordance with Sub-Clause 2.5.

4 . 6Co-operation

This Sub-Clause spells out the obligations of the Contractor in respect ofco-operation. However, there is no equivalent or corresponding obligationon the Employer to secure that h is d i rec t ly employed o th eco nt ract or s co-ordinate or co-operate with the Contractor. In mocontracts, especially those where the Employer intends to placesignificant other contracts, notwithstanding Sub-Clause 2.3 [EmployersPersonnel], it would be prudent to ensure that the Employer assumes

clear and reciprocal obligations.

4 . 7Sett ing Out

The Employer shall be responsible for errors in specified or notified itemsof reference provided by the Employer or Engineer but the Contractor hasa duty to verify their accuracy.

The Contractor is required to give notice to the Engineer in the event thatdelay or additional costs arise due to such errors, and will only be entitledto an extension of time and payment of his additional costs plusreasonable profit if it is considered that an exper ienced con tractocould not reasonably have discovered such error. This leaves thresponsibility for such errors open to the Engineers judgement, which isunsatisfactory, as all such errors should without exception be theresponsibility of the Employer.

4.10Site Data

This Sub-Clause constitutes a step backwards for the Contractor.Whereas in previous editions, the Employer was required to supply allavailable data on hydrological and sub-surface conditions, the Red Bookmodifies that requirement by inserting the word relevant data in thEmployer s possession.It is difficult to seehow it helps employers tolimit in any way the information provided to bidders and contractorsshould try to amend this requirement to match those of the Fourth Edition.


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4.11Sufficiency of theAccepted ContractAmount

This Sub-Clause is to be read together with Sub-Clause 4.10 [Site Data].Within the practical restraints of reasonable time and cost, the Contractorshall satisfy himself as to the correctness and sufficiency of the AcceptedContract Amount. The requirement to have based the Accepted Contract

Amount on data, interpretations, inspections and information provided bythe Employer and obtained from his inspection of the Site are included inthis Sub-Clause. The Contractors obligations under this Sub-Clause donot deviate in substance from the Fourth Edition.

4.12UnforeseeablePhys ica lCondit ions

Unforeseeab le is a defined term (see Sub-Clause 1.1.6.8) and meansnot reasonably foreseeable by an experienced Contractor by thdate of submission of the Tender. Sub-Clause 4.10 [Site Data] deemsthe Contractor to have obtained all necessary information (based onpracticality of time and cost) as to risks, contingencies and to havesatisfied himself before submitting his tender as to the nature of the Site,including sub surface conditions, all of which permits the Engineer t

argue that the Contractor should have foreseen such physical conditions.

Where the Contractor is entitled to recover his additional costs, thesecosts will not include profit. This is totally unreasonable as the Contractorwill have been required to undertake additional work and as such heshould be entitled to receive a reasonable profit for his labours.

The Contractor is entitled to relief for cost and time due to unforeseeablenatural physical conditions and man made and other physico bs t ru c ti o ns o r p ol l ut an t s a n i n c l u d i ng s u b s u r f a ce a nhydrological condi tions. The Contractor may no longer rely on thiSub-Clause for relief due to impediments encountered off the site. Like

the Fourth Edition, the Red Book excludes climatic events from thedefinition of physical conditions that may give rise to entitlement to timeextension and Cost.

Before finally determining any entitlement to additional Cost the Engineermay take into account whethe other Physical Conditions in similaparts of the Works ( i f any) were more favourable than coulreasonably have been foreseen when the Contractor submitted itTender. If, in the Engineer's opinion such favourable conditions werencountered the Engineer can take them into account when determininany entitlement to additional Cost (although not with regard to additionaltime); however he may not reduce the Contract Price. This provisioncould be extremely prejudicial to the Contractor and the expressionssimilar parts of the Worksa ndmore favourableare open to widelydiffering interpretations.

The closing paragraph of this Sub-Clause introduces a new concept thatallows for the Contractor to provide evidence of the physical conditionf o reseen in his tender calculation. The Contractor should be aware that ifhe provides the Engineer with such evidence, the Engineer may takeaccount of this evidence, but is not bound by any such evidence inmaking a determination pursuant to Sub-Clause 3.5 [Determinations].

An alternative approach would be for the parties to agree the foreseeableconditions beforehand. Where this practice has been adopteexperience shows that this approach simplifies claims negotiations, whichis obviously to the benefit of both parties.


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4.15Access Route

On certain projects there could well be an inconsistency between thisSub-Clause and Sub-Clause 2.1 [Right of Access to Site] which requiresthe Employer to give the Contractor theright of access to the Sit(possession of the Site). Contractors should be aware that their right ofaccess to Site does not require the Employer to provide a physical accessroute .

4.21ProgressReports

The requirements of this Sub-Clause are unnecessarily detailed and overprescriptive for most types of project. Contractors would be advised toagree at tender stage a format, which is more appropriate to the particularcontract.

5 Nominated Sub-Contractors

5Generally

Although satisfactory as far as it goes, this Clause is incomplete in that itdoes not address the need for re-nomination or the other consequencesof a determination of the nominated Subcontract. The Contract does notidentify how work, which is to be the subject of nomination is to beidentified or how (in detail) such work is to be valued. Definition shouldbe provided in the Contract documentation.

7 Plant, Materials and Workmanship

7 . 6Remedial Work

A surprising omission is the lack of any express provision, which permitsthe Engineer to order a repair as opposed to removal, replacement or re-

execution and the Contractor should have the right to carry out repairs torender the Plant or Materials acceptable and in accordance with thContract. Should the Engineer insist on a replacement in situationswhere a repair would be a perfectly reasonable solution then theEmployer should bear the additional cost.

7 . 7Ownership ofPlant andMaterials

Plant and Materials will become the property of the Employer whendelivered to Site or when the Contractor is entitled to payment of thevalue of the Plant and Material. In each case ownership passes to thEmployer prior to the Contractor being paid for such Plant and Materials,which could prove unsatisfactory in the event of Employer bankruptcy.

8 Commencement, Delay and Suspension

8 . 1Commencementof Work

The Engineers notice of Commencement Date is onerous at 7 days; amore reasonable period would be 28 days. If the Engineer fails to givenotice of the commencement date, then after a period of 42 days there isentitlement to extension of time and an increase in the Contract Price.

8 . 3Programme

This Sub-Clause obliges the Contractor to give advance warning, and is anew feature of the FIDIC Conditions requiring that,the Contractor shallp rompt l y g i ve no t i ce o f spec i f i c p robab le fu tu re even ts o

circumstances which may adversely affect or delay the execution ofthe Works. Contractors should consider whether such a warning couldhave an impact on the starting point for calculating the notice periods


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under Sub-Clause 20.1 [Contractors Claims]. It would be reasonable forthis obligation to be reciprocal and also apply to the Employer.

8 . 4Extension of

T ime for Completion

The Contractor has an entit lement to an extension of Time forCompletion:

( i ) if the delay is due to a Variation Order, or( i i ) exceptionally adverse climatic conditions, or( i i i ) is caused by the Employer or his other contractors, or( i v ) is due to unforeseeable shortages in the availability of personnel

or goods caused by epidemic or governmental actions; or( v ) if a right to extension exists under any other Sub-Clause of these

conditions, i.e.

1.9 Failure of the Engineer to issue notified drawing or instruction2 . Failure by the Employer to give access to and possession of th

S i t e .(Cost plus reasonable profit added to Contract Price).

4 .7 Setting Out(Cost plus reasonable profit added to Contract Price)

4. 12 Unforeseeable Physical Conditions(Cost but no profit added to Contract Price).

4. 24 Discovery of fossils etc.(Cost but no profit added to Contract Price).

7 . 4 Delayed testing caused by Employer (see also Sub-Clause 10.3).(Cost plus reasonable profit added to Contract Pric e )

8 . 5 Delays caused by Authorities.(Extension of time only).

8 . 9 Suspension initiated by Employer (see also Sub-Clause 16.1).(Cost but no profit added to Contract Price).10.3 Interference with testing by Employer (see also Sub-Clause 7.4).

(Cost plus reasonable profit added to Contract Price).1 3 The time consequences of Variations are dealt with in Sub-Clause

8.4(a)13 .7 Changes in Legislation.

(Cost but no profit added to Contract Price).16.1 Suspension initiated by Contractor (see also Sub-Clause 8.9 ).

(Cost plus reasonable profit added to Contract Price).17.4 Employers Risks.

(Generally cost but no profit added to Contract Price).

19.4 Force Majeure.(Cost but no profit added to Contract Price).

It is difficult to follow FIDICs logic with respect to the variation in remediesopen to contractors which are:

x time only,x time and costx time, cost and profit

The Red Book does not contain the sweep-up clause found in the FourthEdition, which refers to other special circumstancesand contractors face

increased risk as a result of this omission and should reinstate a similprovision whenever possible.


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Sub-Clause 8.4 (e) permits time extension where there has been a ndelay, impediment or prevention caused by or attributable to thEmployer. Under some jurisdictions, this wording may not be specifienough to cover breaches of contract by the Employer. In the event thatno time extension is granted, time may become at large and the delay

(liquidated) damages provisions will be unworkable in law.

8 . 6Rate of Progress

If the Contractor is working too slowly, the Engineer can instruacceleration measures. This applies not only when the agreed Time forCompletion is at risk but also wherprogress has fallen (or will falbehind the current programme under Sub-Clause 8.3Programm]In addition to any delay damages the Contractor will be responsible forthe Employers additional costs arising from the Contractors revisedmethods.

8 . 7

Delay DamagesThe maximum amount of Liquidated Damages shall be stated in the

Appendix to Tender. However, damages in the event of delay canexceed this amount e.g. if the Contractor has to pay the Employers costsunder Sub-Clause 8.6 [Rate of Progress] or if the Contract is terminated.

If the Contract is terminated due to delay then the Contractor will have topay all losses and damages suffered by the Employer (see Sub-Claus15.4 [Payment after Termination]). However, such loss and damage maynot include loss of profit or other indirect damages and the maximumliability is limited under Sub-Clause 17.6 [Limitation of Liability] .

Contractors should be aware that submitting claims for an extension of

time will not necessarily prevent the deduction of delay damages. TheContractor must ensure that any claim for an extension of time issubmitted in accordance with the Contract. Should the Employer thededuct damages despite receiving a properly documented claim or,without pursuing his own entitlement under Sub-Clause 2.5[EmployersClaims] this would be a breach of Contract.

9 Tests on Completion

9Generally

This clause should be deleted to avoid confusion where no practicalpurpose would be served by Tests on Completion.

9 . 2Delayed Tests

In the event that Tests on Completion are applicable, then this Sub-Clause provides remedies to the Contractor in the event that theEmployer delays such tests. Under Sub-Clause 7.4[Testing] , t h eContractor will be entitled to an extension of time and the recovery of hisCosts plus reasonable profit if the Employer is responsible for delay.the tests are delayed for more than fourteen days, then, under Sub-Clause 10.3[Interference with Tests on Completion] the Engineer isrequired to issue a taking over certificate and the Contractor will beentitled to an extension of time and recovery of Costs plus reasonableprof i t .


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9 . 4Failure to PassTests onCompletion

If the Works fail to pass repeated Tests on Completion and the failurdeprives the Employer of substantially the whole benefit of thWorks or Section, then the Engineer has the right to reject the Works,terminate the Contract, recover all sums paid for the Works, plusfinancing costs, costs for dismantling the Works and clearing the Site.

Manifest ly, the Contractor would suffer catastrophic f inancialconsequences if these punitive sanctions were levied and it i sinconceivable that there are projects, suitable for execution under the RedBook, where such a severe remedy can be justified.

Current practice in the event of termination is that the Contractor isentitled to payment for the value of the Works completed at the date oftermination. In the event of termination for default by the Contractor it isup to the Employer to decide whether or not to complete the Works withanother contractor. In such situations the Contractor must pay theEmployers additional costs. In circumstances where the Works contaitechnology which is in the public domain, then the same principle shouldapply. However, it should be recognised that in such a situation designresponsibility for that portion of the Works designed by the originalContractor could rest with the new Contractor and contractors faced withsuch a prospect should pay due regard to the risks involved. It isimportant to understand the implications of this requirement, as theContractor could face very serious financial penalties in the event thatTests on Completion are not successful.

It is important, in relation to this Sub-Clause to consider the limitation ofliability under Sub-Clause 17.6 [Limitation of Liability] .

10 Employers Taking Over

10.1Taking Over ofthe Works andSections

Insurance must be maintained for the Worksuntil the date of issue ofthe Taking-Ov er Cer t i f ic ate for t he Works (Sub-Clause 18.[Insurance of the Works and Contractors Equipment]) and cover shouldbe maintained even if the Engineer unreasonably withholds the Taking-Over Certificate (subject to the deemed issue referred to at the end of thisSub-Clause).

11 Defects Liability11.2Cos t o f RemedyingDefects

The Contractor shall at his own cost remedy defects caused by a ndesign for which the Contractor is responsible. The Contractor is, byvi rtu e of Sub-C lau se 4 .1 [Contractors General Obligations] o n l yresponsible for any design which he actually carries out but it should benoted that th is obl igat ion inc ludes any design carr ied out bysubcontractors including those that are nominated.

11.4Failure toRemedy Defects

If the Contractor fails to remedy a defect and the defect or damagedeprives the Employer of substantially the whole benefit of thWorks or any major part of the Works, then the Employer is entitled to

recover all sums paid for the Works, plus financing costs and costs fordismantling the Works and clearing the Site. These provisions are similarto those noted under Sub-Clause 9.4, are completely inappropriate for the


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type of contract likely to be carried under the Red Book and should bredrafted to provide a more sensible remedy.

12 Measurement & Evaluation

12.1Works to beMeasured

The Sub-Clause states that the Contractor has only 14 days to notify theEngineer if the measurement records are inadequate. On major projectsthere will invariably be voluminous records and 14 days is totallyunreasonable, particularly as Contractors are required to give noticewithin this period if they disagree with any measurement record otherwiseit will be considered as accurate. At tender stage, Contractors shouldagree a more realistic time frame, which is appropriate for the type ofworks being carried out.

12.3

Evaluation

The provision for revising rates is complex and is based on (i) a 10% or

greater increase or decrease in any quantity, (ii) the change in quantitymultiplied by the Contract rate exceeding 0.01% of the Accepted ContractAmount, and (iii) the change in quantity changes the cost per unit by morethan 1%. At best, this is confusing and at worst, could result in losseswhere individual rates do not accurately reflect costs.

13 Variations & Adjustments

13.1Right to Vary

The Engineer may initiate Variations prior to issuing the Taking OvCertificate for the Works, and the Contractor has only limited grounds forrefusing to undertake the instructed Variation, for example i f t hContractor cannot readi ly obta in the Goods required for thVariation. Notwithstanding any objections raised by the Contractor, the

Engineer may still confirm his instruction.

If, following a request by the Contractor under Sub-Clause 2.[Employers Financial Arrangements], the Employer is unable to provideevidence that satisfactory financial arrangements are in place and beingmaintained to pay for the addition to the Contract Price resulting from theVariation, then it should be at the Contractors sole discretion to refuse oraccept a Variation.

Should the Engineer instruct the Variation despite the Contractor givingnotice that he will not consider himself bound by the Variation, then thonly remedy open to the Contractor is to refer the matter to the Dispute

Adjudication Board.

13.2ValueEngineering

The Red Book provides a mechanism through which the Contractor iscompensated if the Engineer approves his suggestion in respect of valueengineering. The Engineer can determinethe reduction (if any) in thevalue to the Employer of the varied works taking account of anreductions in quality, anticipated life or operational efficiencies. Amore specific provision should be provided to make it clear how thebenefits to both parties will be apportioned.


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13.3VariationProcedure

It is quite likely that the Contractor will be required to carry out substantialwork before a Variation is approved. It is not clear whether the cost ofsuch work will be reimbursed in the event that the Variation is notexecuted. This should be clarified pre-tender.

It would also be helpful if separate provision were made for compensationfor delay and disruption caused by Variations. Building such costs intothe revised rates under Sub-Clause 12.3 [Evaluation] could well make theVariation look over priced.

13.7Adjustments forChanges inLegislation

This Sub-Clause contains provisions in respect of the recovery ofadditional Costs associated with changes in legislation. Contractorsshould note however that the recovery of losses only applies to changesin legislation in the country in which the Site of the Permanent Works islocated. The Contractor is now expressly entitled to an extension of timeif he is delayed by reason of subsequent legislation, which is aimprovement over the Fourth Edition.

14 Contract Price and Payment

14.2AdvancePayment

Provision is made for the Contractor to receive an Advance Payment asan interest-free loan for his mobilisation and design provided that theamount of the advance is stated in the Appendix to Tender.If an advance is specified in the Appendix to Tender then the Engineerwill issue an Interim Payment Certificate after receipt by the him of aStatement (under Sub-Clause 14.3 [App lica tion fo r Inter im PaymentCertificate ]) and after the Employer receives (i) the Performanc

Security in accordance with Sub-Clause 4.2 [Performance Security] ,and (ii) a guarantee in amounts and currencies equal to the advancepayment. The advance payment may be paid in instalments. Howeverthe number and timing must be stated in the Appendix to Tender and theContractor must ensure that this is clear in the advance paymentguarantee.

The advance payment is repaid through percentage deductions iPayment Certificates. In the absence of agreements to the contrarydeductions take place when the total of all certified interim paymentsexceeds 10% of the Accepted Contract Amount and deductions are thenmade at the rate of 25% from each (it is presumed subsequent) PaymentCertificate. The cash flow implications of this should be carefully studiedand if appropriate, an alternative time for commencement of repaymentand rate of repayment should be agreed.

14.3Application forInterim PaymentCertif icates

To initiate the payment process the Contractor is to submit a Statement tothe Engineer at the end of each month. To be valid, the Statement mustinclude items detailed in Sub-Clauses 14.3 (a) to (g) and also include theprogress reports defined in Sub-Clause 4.21 [Progress Reports]. Theserequirements are considered an unduly onerous precondition for thereceipt of payment and should be modified if possible.

14.4Schedule ofPayments

The Contract may provide for payment to the Contractor based upon aSchedule of Payments and if so,the inst almen ts quote d i n thSchedule of Payments shall be the estimated contract values for thepurposes of sub-paragraph (a) of Sub-Clause 14.3Appl icat ion fo


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Interim Payment Certificates.

If the instalments are not defined by reference to actual progressachieved then the Engineer is entitled to revise any payment instalmentby making a determination under Sub-Clause 3.5 [Determinations] which

will take into account any delay in progress. Equally, the Contractor couldrequest that, when the Works are ahead of programme he receives anappropriate increase in the scheduled payment.

If it is intended that the Schedule of Payments is based on theachievement of specific Milestone Events then this should be expresslystated. Otherwise, payments would be based on the actual value of workd o n e .

14.5Plant andMaterials

intended for theWorks

This Sub-Clause makes provision for payment of plant and materialswhich are either in the course of being shipped to the site (whicpresumably includes all other forms of transportation) or, (after beingseparately identified in the Appendix to Tender) are delivered to Site. Abank guarantee in favour of the Employer is required to be given b

the Contractor to the Engineer in respect of the Plant and Materials beingshipped which is to guarantee repayment of the pre-payment to theEmployer. Its validity expires whe Plant and Materials are properlstored on Site and protected against loss, damage or deterioration.

The additional amount certifiedshall be the equivalent of eightpercent of the Engineer's determination of the cost of the Plant andMaterials (including delivery to Site).

14.7Payment The Sub-Clause details the periods within which payment is to be madeby the Employer in respect of the advance, interim and final payments.By comparison with well-established norms, the periods proposed arexcessive and contractors may wish to suggest more reasonableintervals.

14.8DelayedPayment

The Red Book makes provision for interest upon late payments (referredto in this Sub-Clause as financing charges) and the payment obligationscontained in Sub-Clause 14.7 should give the Employer an incentive topay promptly. The Red Book also makes provision for a rate of interest tobe defined and the Contractor is entitled to payment without the need forthe issue of a Payment Certificate.

14.9Payment ofRetention Money

After the Taking Over Cert ificate has been issued for the Works, theEngineer will certify one half of the Retention Money for payment by theEmployer. If the Works are taken over in Sections then the Contractor willonly be entitled toa proport ion of the Retent ion Money w hi cproportion equates to 40% othe proportion calculated by dividinthe estimated contract value of the Section or part, by the estimatedfinal Contract Price. A similar proportion of the Retention Money mabe released if the Contract provides that Sections may be the subject ofseparate expiry provisions of the Defects Notification Period.

However, the Sub-clause states that the outstanding balance of the

Retention Money is to be paidprompt ly after expiry of the latest expirydate of the Defects Notification Period(s). Sub-Clause 1.1.3.7 providesthat the Defects Notification Period shall be extended for a period to be


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notified in the Appendix to Tender and under Sub-Clause 11.3 [Extensionof Defects Notification Period] th e pe riod cou ld b e ex tended byamaximum of two years. The release of the final tranche of RetentionMoney could therefore be up to three years after completion or indeedlonger depending upon how the Appendix to Tender is completed. The

full release of Retention Money may be further delayed if any workremains to be completed, as the Engineer may withhold certification of theestimated cost of any outstanding works.

The above restrictions, together with differing interpretations of themeaning of the word p ro mp tl y could result in a protracted periobefore the Contractor is able to recover Retention Money. Disputeswould be less likely if the Employer were prepared to accept a bankguarantee in lieu of retention.

14.10Statement at

Completion

The Contractor is required to submit a Statement at Completion witsupporting documents within 84 days after receiving the Taking-OverCertificate following which the Engineer shall certify and the Employershall make an Interim Payment to the Contractor. This statement requiresthat notice of all the Contractors claims must be submitted, along with allother documentation required or reasonably implied as required under theContract. Whilst there is no specific requirement to submit full anddetailed particulars of all claims at this stage it would be prudent to do soas soon as possible. Sub-Clause 14.10 (b) and (c) refers. Failure toinclude notice of claims would result in them being barred under Sub-Clause 14.14 (b) [Cessation of Employers Liability]. Contractors shouldalso have regard to the extremely tight time limits laid down in Clause 20[Claims, Disputes and Arbitration] f or th e submiss ion o f d etai le d

particulars.

14.12Discharge

A written discharge is to be submitted by the Contractor with the FinStatement and should be worded to provide for such discharge to becomeeffective when the final payment has been received and all bonds andguarantees returned.

14.14Cessation ofEmployersLiabi l i ty

This is a very important Sub-Clause in respect of any Contractors claims.Claims arising prior to the Statement of Completion will be time barred ifnotifications are not included in the Statement as required by Sub-Clause1 4 . 1 0 [Statement on Completion]. Notices of Claims arising after theStatement of Completion must be included in the Final Statement to be

eligible for consideration. The notifications under this Sub-Clause are inaddition to those required under Sub-Clause 20.1 [Contractors Claims] .

15 Termination by Employer

15.1Notice toCo r r e c t

This Sub-Clause gives the Engineer, in addition to the right to giveinstructions under Sub-Clause 3.4[Instructions], an unlimited right torequire the Contractor by notice to make good any alleged failure to carryout any obligation under the Contract. If the Contractor fails to complywith such a notice, the Employer has the right to terminate the Contra

under Sub-Clause 15.2 [Termination by Employer] .


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15.2Termination byEmployer

The Employer has further rights to terminate the Contract in certaicircumstances. These circumstances include breach by, and insolvencyof, the Contractor as well as corruption.

Allowing the Employer the right to terminate the Contract in the event of

corruption as defined by this Sub-Clause is too wide. It extends to theContractors sub-contractors (over whom the Contractor does not havetotal control) and it covers any act, however small, carried out by anyindividual. As a consequence, determination of the Contract for the act ofcorruption under a sub-contract is too severe a remedy. The obligationshould be limited to an obligation on the Contractor to terminate the sub-contract and should not give the Employer the right to terminate theContract.

Sub-Clause 15.2(a) could be applied to quite trivial faults since it relateto compliance with a Sub-Clause 15.1 [Notice to Correct] notice whichcovers a n y failure by the Contractor to carry outany obl igat ion.This clause is open to abuse by an employer.

This Sub-Clause should also be considered in the light of the commentson Sub-Clause 8.7 [Delay Damages] above regarding damages payableby the Contractor in the event of delay.

15.5EmployersEntitlement toTermination

This Sub-Clause introduces a right, not present in the Fourth Edition, forthe Employer to terminate for convenience. This right can be exercised atany time upon 28 days written notice. Payment is then made inaccordance with Sub-Clause 19.6 [Optional Termination, Payment and

Release], which is inappropr iate. In the case of termination for theEmployers convenience, loss of profit should be payable to theContractor.

Contractors should note that the Employer may not terminate under thisSub-Clause for the purpose of undertaking the Works directly or arrangingfor the Works to be completed by another Contractor.

16 Suspension and Termination by Contractor

16.1

ContractorsEntitlement toSuspend Work

The Contractor is entitled to suspend the Works in the event that theEngineer fails to certify in accordance with Sub-Clause 14.6 [Issueof Interim Payment Certificates] or the Employer fails to comply withSub-Clause 2.4 [Employers Financial Arrangements] or Sub-Clause14.7 [Payment] by giving 21 days notice.

16.2Termination byContractor

The right of the Contractor to terminate the Contract is subject toextended notice periods. In the case of failure to receive reasonableevidence with regard to the Employers financial arrangements, Sub-Clause 2.4 [Employers Financial Arrangement] or failure to pay to theContractor amounts due, Sub-Clause 14.7 [Payment] the Contractor mustallow 42 days to elapse to demonstrate non-payment by the Employerand in the case of a failure of the Engineer to certify, the period is 56days. Thereafter he must give a further 14 days notice before he mayterminate the Contract.


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These time limits are too long. It would be more equitable if (similar tother grounds for termination in this Sub-Clause) the Contractor is onlyrequired to give 14 days notice.

17 Risk and Responsibility

17.1Indemnities

The Contractors obligations to indemnify and hold harmless the Employerexist irrespective of whether the Contractor is liable for any negligence,wilful act or breach of the Contract. By contrast, the Employers obligation,set down in the second paragraph of this Sub-Clause, is subject to thedefault of the Employer. This imbalance is not justified and the additionalrisks imposed on the Contractor might not be insurable.

The reference to Sub-Clause 18.3 (d) (iii) in the second paragraph of this

Sub-Clause makes the Employers obligation to indemnify and holdharmless the Contractor inter alia, subject to the Contractors ability toobtain insurance at commercially reasonable terms. Since it is arguablewhether or not insurance cover will be available on such terms, it willprobably be advisable when negotiating a contract to exclude thiprovision.

17.3EmployersR isks

The Employers Risks have been amended by comparison with thosecontained in the Fourth Edition and Civil War and Riot is only applicable ifit occurs within the Country. The Fourth Edition contains no suchrestriction. Munitions of war have been introduced as an additionalEmployers Risk and should include landmines.

17.4Consequencesof EmployersR isks

If the Engineer requires the Contractor to rectify the loss or damage to theWorks, Goods or Contractors Documents resulting from any of theEmployers Risks, the Contractor is entitled to time extension andpayment of the Cost incurred for rectifying the loss or damage but, withminor exceptions, no uplift for profit(as is the case in the Fourth Edition).The Contractors rights under this Sub-Clause are subject to hiscompliance with Sub-Clause 20.1 [Contractors Claims] .

17.6Limitation ofLiabi l i ty

This Sub-Clause provides that there is no liability on either Party to theother Party for loss of use of any Works, loss of profit, loss of any contractor for any indirect or consequential loss or damage other than under Sub-Cla use 16. 4 [Payment on Terminat ion] a nd Su b- Cl au se 17 .1[Indemnities]. By excluding Sub-Clause 17.1[Indemnities] f rom thelimitation of liability both the Contractor and the Employer are fully liablfor the events outlined in that Sub-Clause.

The Contractor should note that it is only in certain cases of breach ofcontract by the Employer that the Contractor is entitled to compensationfor loss of profit. See also the comments made under Sub-Clause1.1.4.3. This is inequitable and the Contractor should always be entitledto compensation for loss of profit and other indirect or consequentialdamages, in the event of a breach of contract by the Employer.


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19 Force Majeure

19.1Definition ofForce Majeure

This Sub-Clause provides a definition of Force Majeure and provides anon-exhaustive catalogue of Force Majeure events in the second

paragraph that includes natural catastrophes such as earthquakes,hurricane, typhoon or volcanic activity.

19.4Consequencesof Force Majeure

In the event that the Contractor is prevented from performing any of hisobligations under the Contract due to an event of Force Majeure, theContractor can claim for time extension and the Cost incurred. However,entitlement to claim for Cost is limited to the events listed in Sub-Clause19.1 (ii) to (iv) [Definition of Force Majeure]. Such limitation is difficult tounderstand given that the catalogue of Force Majeure events is notexhaustive.

19.6

Opt iona lTermination,Payment andRelease

In case of termination due to Force Majeure, the Contractor is entitled to

be paid for the Works executed, the Cost of Plant and Materials ordered,any other Cost incurred in the expectation of completing the Works, theCost of removal of Temporary Works and Contractors Equipment and theCost of repatriation of staff and labour. If the Contractor wants to receiveprofit on these Costs, an appropriate provision would have to be includedin the Contract.

20 Claims, Disputes and Arbitration

20.1ContractorsClaims

This Sub-Clause details the procedure that the Contractor must followwhen he considers himself entit led to an Extension of Time forCompletion and/or additional payment under any Clause or otherwise inconnection with the Contract.

The Contractor is required to give notice of his claim as soon aspracticable and not later than 28 days after becoming aware, or when heshould have become aware, of the event or circumstance giving rise tothe claim. Failure to comply with this notice provision results in theContractor forfeiting his right to an Extension of the Time for Completionand to additional payment and the Employer is then discharged from hisliability in connection with the event.

The penalty for failure to comply with a purely technical requirement togive notice of a claim is unduly harsh. This is the first time that a FIDIcontract has removed the fundamental right of the Contractor to make aclaim merely as a result of a failure to comply within a fixed period of timeto submit the required notice. In certain circumstances the Contractormay prejudice his entitlement by failing to comply strictly with a noticeprovision but he should certainly not forfeit his rights altogether andneither should the Employer be discharged from any and all liability inconnection with an event. It is ironic that this provision would also applwhen the event or circumstance giving rise to the claim is caused by theEmployer in the first case e.g. Sub-Clause 8.9 [Consequences ofSuspension] .

A comparison of the notice provisions under Sub-Clause 20.1 with thenotice provisions under Sub-Clause 2.5 [Employer's Claims] where the


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Employer or the Engineer is required to give notice as soon as practicableafter becoming aware of the event or circumstance demonstrates onceagain the unfair imbalance between obligations carried by the Employerand the Contractor.

In addition to the first 28 day notice period the Contractor is also subjectto a 42 day period (that is a further 14 days) by which he has to send tothe Engineer a fully detailed claim with full supporting particulars. (Seealso the provisions for continuing claims). This could prove to bextremely difficult and inevitably, the task of compiling and interpreting therelevant facts to support and justify the claim will be a time consumingand long drawn out process. Such provisions could lead to intensivedisputes and costly arbitration. However, it should be noted that failure toprovide a fully particularised claim (as opposed to giving notice of a claim)does not in itself bar the claim.

The sixth paragraph of this Sub-Clause requires the Engineer to respondto the Contractor's claim giving his approval or disapproval within a fixedperiod or time whereas the eighth paragraph requires the Engineer toproceed in accordance with Sub-Clause 3.5 [Determinations] to agree ordetermine any Extension of Time for Completion and/or any additionalpayment. It is not clear why these two separate procedures are required.However, it should be borne in mind that under Sub-Clause 3.5 there isno time limit within which the Engineer has to make a determination.

Comments made under this Sub-Clause should be read in conjunctionwith those under Sub-Clauses 14.10 [Statement at Completion] and 14.14[Cessation of Employers Liability] all of which underline the importance of

submitting all required notices in time to ensure that the Contractorsrights are protected and maintained.

20.2Appointment ofthe Dispute

Adjudi cat ionBoard

This Sub-Clause provides for the establishment of the DisputeAdjudication Board (DAB) comprising either one or three members to beappointed by the Parties. The DAB is to be appointed by the date givenin the Appendix to Tender. The appointment of the DAB expires after theContractors written discharge to be provided under Sub-Clause 14.12[Discharge] has become ef fective; accordingly the DAB is availablethroughout the duration of the Contract to review any disputes referred toit. If both Parties agree they may jointly refer any matter to the DAB for itto give its opinion and, employed sensibly, this could present a useful

forum for resolving disputes before they cause delay and disruption to theprogress of the Works.

20.3Failure to AgreeDispute

Adjudi cat ionBoard

If the parties are unable to agree on the appointment of the third memberand they do not wish the President of FIDIC to make the appointment, the

Appendix to Tender should be amended accordingly.

20.4ObtainingDispute

Adjudi cat ionBoardsDecision

Either Party may refer a disput of any kind whatsoever that ariseout of the Contract or the execution of the Works to the DAB at any time.

It should be noted that, if the DAB has given its decision as required bthis Sub-Clause and if neither Party has given notice of dissatisfactionwithin 28 days after having received the DAB's decision, the decision


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becomes final and binding on both Parties. Even in the casedissatisfaction by either Party, decisions of the DAB are binding on bothPartieswho shall promptly give effect to it unless and until it shabe revised in an amicable settlement or an arbitral award T h iarbitral award could be many months after the DAB decision during which

time the DAB decision would still rule.

The Contractor is required tocontinue to proceed with the Worksb u tthe obligation of the Employer, in so far as payment is concerned, imerely to comply with the normal process for Interim or Final Paymentsdetailed in Clause 14[Contract Price and Payment]. Payment under thisprocess does, of course, give the Contractor the right to suspend orterminate the works if the Employer fails to make the payment due.However, any payments due as a result of a DAB decision should bemade with immediate effect and not in accordance with Clause 14. Anyfailure to make immediate payment should give the Contractor the rightsunder Clause 16 [Suspension and Termination by Contractor].


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