FIDIC and the issues that arise from use

In the first of a two-part examination, Joe Colgan, senior project manager, EC Harris, looks at FIDIC, its problemsand some solutions.
FIDIC and the issues that arise from use
By Joe Colgan
Sat 29 Mar 2008 04:00 AM

In the first of a two-part examination, Joe Colgan, senior project manager, EC Harris, looks at FIDIC, its problemsand some solutions.

FIDIC problems? On so tried-and-tested a document? Well maybe that's a bit of an exaggeration, but use and longevity are no bars to contractual disputes arising, there is, after all, case law dating back years on most forms of contract despite revised editions supposedly taking account of historic problems.

Whilst the LADS are probably the sharpest tooth in the armoury of contractual remedies, there are other areas where no sanction at all exists for non-compliance.

FIDIC is no different, there are clauses within it that fail to provide any meaningful remedy in the event they are patently ignored or are problematic in implementation; both are recipes for dispute and this article examines a few of them.

The basis of any well-balanced contract is that risk is (or should be) allocated to the party best able to bear it and in a less than perfect world, compliance with all of the terms and conditions would be both mandatory and achievable, but we don't live there, do we?

Standard Forms of Contract, therefore, provide remedies for non compliance with contract terms and permit termination for breaches of conditions; two very different issues. Whilst the contractor is obliged by several clauses to maintain progress and finish in the time that it has committed to, it is none the less allowed to be late but it will incur the imposition of LADs in so doing.

It is not, however, permitted to fail to perform any of its varied obligations and complete cessation of the work (repudiation of the contract aside) would enable the client to terminate the contract.

Whilst the LADs are probably the sharpest tooth in the armoury of contractual remedies (litigation aside), there are other areas where no sanction at all exists for non-compliance.

The first is programme; Clause 8.3 FIDIC '99 states that the contractor should submit a programme with significant supporting documentation; but there is no stated remedy available to the engineer should this not occur, nor is it linked to Clause 8.4 Extension of Time as might be expected.

Yes, LADs may well be applied for late completion but rarely in this market do they provide adequate recompense for all of the clients losses (the market simply won't accept the level of damages that accrue on the large projects executed here) whilst the 'penalty' to the contractor is, by way of damage to reputation, often far greater than the financial burden that meeting such damages entails.

The premise of FIDIC as a whole is that is governs an entire contract; there is no provision for sectional completion although one might be persuaded to think that there was something along those lines lurking in the back of the drafters' minds when one considers Clauses 10.1 and 10.2 which provide for 'Taking over of the Works'.

These clauses provide the engineer with a discretionary right to take over a part or parts of the works but this flies in the face of the provisions of Clause 11.9 'Performance Certificate' which provides for one final performance certificate only for the entire works.

Attempting to implement either 10.1 or 10.2 can result in significant unfairness in release of retention monies for the works that are taken over. There may well be years (given the scale of the projects here) between the completion of an early section or element and the final completion of the works.

But without back-to-back specific provisions within the particular conditions (it is suggested) to govern the release of retention and securities (as is envisaged by the phased reduction of LADs when parts are taken over in line with Clauses 10.1/2), subcontractors can be deprived of the final tranche of retention monies for years beyond the completion of their works, a burden they will transfer to the client in pricing such an arrangement.

Another problematic issue (although simplistic upon first examination) is the nomination clause. FIDIC '99 provides for a right of objection under Clause 5.2 that is conditional upon the contractor's receipt of an indemnity from the proposed nominated entity.

In my next article, I'll go into detail on the issues raised from this clause.

In my last article, I looked at FIDIC and some of the clauses that potentially caused problems.

Another problematic issue (although simplistic upon first examination) is the nomination clause. FIDIC '99 provides for a right of objection under Clause 5.2 that is conditional upon the contractor's receipt of an indemnity from the proposed nominated entity.

Sounds very straightforward doesn't it?

However, the actual words 'indemnify the contractor against and from any negligence or misuse of goods...' import a whole raft of possible options and ramifications for both the indemnifier and the indemnifiee.

Notwithstanding that the terms 'Goods' isn't defined, indemnifications such as this oblige the party to accept and bear the consequences of a specific risk and it can choose to do that either by procuring cover or ‘self insuring,' but what does the party insure against?

The range of potential losses is great, the breadth of the indemnity is huge, 'any negligence' covers just about all bases and the clause is silent as to exactly what that may mean.

It is also silent on other salient points such as;

• what the key provisions of an indemnity requirement are?

• how it is called or triggered?

• is there any limit on liability?

• for how long does it last?

• what about contributory negligence?

• does the Engineer administer the process? (clearly not in the absence of clauses saying so) therefore;

• who decides on the allocation of monies?

• is the contractor effectively 'self insuring' and if so, is the company financially sound enough to do that?

There are numerous problems arising from this simple requirement and this article barely scratches the surface of them.

Even though the Employer is obligated to indemnify the contractor should the nominated entity fail to provide the indemnity, the self same questions are raised again but from the Employer's perspective.

Clearly any contractor is going to prescribe the terms of any indemnity it seeks and object if the form required is not forthcoming. This is a positive disincentive for contractors to even consider tenders where there is any significant degree of nomination and in a market such as prevails here in the UAE, it behoves Employers to be wary of setting any conditions that may deter receipt of competitive tenders.

There are also problems with Termination; Clause 15.2 FIDIC '99 and Clause 63.1. Aside from some specific condition precedents to allowing Employer Termination relating to insolvency and bankruptcy, one key precedent is failure to comply with Clause 8 under FIDIC '99 and Clause 46.1 under FIDIC '87. The general obligation in these clauses being to complete the works in accordance with the agreed programme and to progress the works promptly.

Giving the Employer the right to terminate consequent upon breach of this obligation, is in my view wrong for one simple reason; the contractor is fully entitled to be late of his own volition!

Should the project be delivered late, then Liquidated Damages will be levied but that will not end the contract.

Usually, only a breach of a fundamental condition of the contract that cannot be remedied will allow termination, but that is not usually the case when a contract term is broken and a remedy is either prescribed or readily available.

This 'optional' remedy, (termination for breach of a term) begs the question, 'does the right to receive LADs survive termination of the contract?' The answer (in FIDIC '99) on the face of it, is 'yes,' as written in the fourth from last paragraph of Clause 15.2 which states; 'The Employer's election to terminate the Contract shall not prejudice any other rights of the Employer, under the Contract or otherwise.'

But does that statement really preserve the right to LADs under the contract when said contract is no longer in existence by virtue of simply saying so?

Well, contractually speaking, again the answer is again 'yes,' the parties have signed a contract saying so but logically the answer would be 'no;' the whole premise of recovering the LADs is by offsetting them from amounts otherwise due to the contractor and this opportunity falls away upon termination although they are still due.

Certainly (practically) deduction of LAD's from an interim application is significantly easier than attempting to wring them out of a contractor no longer employed by the Employer but if litigation follows termination, then they would cease to be a head of cost recoverable and be subsumed by the general claim made by the Employer.

I would conclude that they survive the Termination but not in reality, succeeding litigation.

So, FIDIC's not perfect, but then nor are any other forms; it has its problems but I would suggest they are no more nor less severe than other forms and can and often are, readily resolved as can be seen by the many successful projects undertaken on it throughout not only the UAE but the rest of the world.

As ever, co-operation and teamwork often go a long way to resolving problems that on the face of it, require a judge to determine and it is a tribute to all of us working to resolve them on a daily basis that, for the mostpart, we do.

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