NEC4 contracts: user group seminar report

by Hardwick Legal | Jun 27, 2017 | Purpose Built (LexisNexis)

I was kindly invited by the NEC to its Users’ Group Annual Seminar on 22 June 2017, at which the new NEC4 suite of standard form construction contracts was launched. In this report I highlight some of the key information points from the seminar, in particular in relation to the new Alliance Contract (ALC), the new Design, Build and Operate Contract (DBO) and the changes made to the Engineering and Construction Contract (ECC).

For a full list of what’s in the NEC4 suite, see News Analysis: NEC4 contracts published.

Introductory remarks

The seminar was opened by the President of the Institution of Civil Engineers (ICE), Tim Broyd. According to Broyd, ICE’s vision is for the NEC contracts to be the ‘world’s favourite procurement suite in the foreseeable future’, and NEC4 had been ‘improved and streamlined’ in light of feedback, consultations and developments.

The NEC3 contracts had been recommended for use on government contracts by the (then) Office of Government Commerce (OGC). David Hancock, Construction Director of the Infrastructure and Projects Authority (the OGC’s successor), confirmed that this recommendation has been extended to NEC4. In particular, Hancock thought that the NEC4’s aim of contract standardisation (ie reducing the need for amendments) encouraged efficiency, and that its clarity enabled suppliers to appreciate what was required of them—both aspects were consistent with the Government Construction Strategy. He also welcomed the introduction of the DBO, as the government was looking to move towards whole life delivery systems.

Alliance Contract

The ALC is a multi-party contract, entered into by the ‘Client’ (this term is now used throughout the NEC4 suite instead of ‘Employer’) and multiple ‘Partners’ (ie contractors). The Client and Partners together make up the ‘Alliance’, which is managed by an ‘Alliance Board’ (which makes decisions unanimously) and an ‘Alliance Manager’ (which carries out a project manager-style role).

The project is delivered by the Alliance acting together as an integrated team, sharing risk and reward:

• work is allocated on a ‘best for project’ basis, ie it is carried out by the people/organisations best able to do it
• payment is made on a cost reimbursable basis (ie ‘Defined Cost’ plus ‘Fee’). This is similar to Option E of the ECC
• there are also incentives, shared by the Partners, for achievement of ‘Alliance Objectives’ set by the Client and for coming under budget
• liabilities are shared jointly by the Alliance (except where there is wilful default or a third party claim)
• joint names insurance is provided by the Client, including professional indemnity insurance (but each Alliance member is still required to take out its own employer’s liability insurance)
• there is a single ‘Contract Data’, created by mutual agreement

Given the effort involved in setting up the ALC, the NEC suggested that it was most appropriate for major projects/ programmes of work.

The ALC does not expressly provide for disputes to be resolved by adjudication, court or arbitration proceedings, but rather states that they are to be finally resolved by the Alliance Board. However, and as acknowledged at the seminar, the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996) will imply a right to refer a dispute arising under a construction contract to adjudication where none is expressly provided (see Practice Note: Construction contracts under the HGCRA 1996).

A consultative copy will be available for download from the NEC4 website from 28 June 2017 (following a webinar about the ALC), and the NEC is aiming to formally publish the ALC in January 2018.

Design, Build and Operate Contract

The DBO is a two-party contract between a Client and Contractor, under which the Contractor designs the asset and operates it for a period of years. It retains the structure and standard provisions of the EEC. The DBO is driven by the Client’s operational requirements, with the NEC framing it as essentially a contract for an operational service. The construction work can be specified by the Client, or left to the Contractor to propose.

The NEC described the DBO as a ‘complex contract’, suitable where significant construction work is needed. It is flexible in that, as well as being suitable for a project to construct and then operate an asset, it could be used on a project to take over an existing asset, operate and improve (or even replace) it.

A performance table sets out targets for performance against operational requirements, as well as a reduction in payment if targets are not met or additional payment if they are exceeded. Unlike EEC there are no payment Options, but rather payment is split into parts A (which allows for construction as a series of lump sums, and service as periodic payments) and B (which allows for target share arrangements from the performance table).

Unlike the ALC, the DBO was not initially published in consultative form and is available for use now.

Changes to the NEC4 Engineering and Construction Contract

John Hughes D’Aeth of Berwin Leighton Paisner (and an NEC4 Contract Board member) went through what he considered to be the main changes to the EEC:

Design responsibility

Option X15.1 of the NEC3 EEC provided that:

The Contractor is not liable for Defects in the works due to his design so far as he proves that he used reasonable skill and care to ensure that his design complied with the Works Information

Therefore, the onus was on the Contractor to prove that it had used reasonable skill and care in carrying out its design. In Option X15.1 of NEC4 the burden has now been switched on to the Client to prove that the Contractor did not use reasonable skill and care (which is consistent with the position in the JCT contracts):

The Contractor is not liable for a Defect which arose from its design unless it failed to carry out that design using the skill and care normally used by professionals designing works similar to the works.

The description of the standard of care has also changed in NEC4 to align with the industry standard.

LexisPSL Construction customers are able to access further information and resources in the NEC contracts subtopic. Click here for a free trial.

Source: LexisNexis Purpose Built
NEC4 contracts: user group seminar report

The evolving role of arbitration in construction disputes

by Hardwick Legal | Jun 15, 2017 | Purpose Built (LexisNexis)

To what extent is arbitration being used to resolve construction disputes? Hamish Lal, construction partner at Akin Gump Strauss Hauer & Feld, suggests that while statutory adjudication and the existence of the Technology and Construction Court (TCC) has made arbitration less common on UK projects, the use of arbitration on international projects has increased significantly.

This article was first published on LexisPSL Construction. Click here for a free trial.

How common is the use of arbitration in resolving construction disputes?

The tangible impact of statutory adjudication on construction projects in the UK, coupled with the existence of the specialist TCC, means that arbitration is not often used to resolve construction disputes in UK projects. One cannot over-emphasise the profound effect of statutory adjudication on UK projects and the fact that adjudication is often treated by the parties to be the final stage in the dispute resolution process. UK projects concerned with nuclear decommissioning or offshore wind are two notable exceptions and provide examples of where arbitration is preferred and often used. Where adjudication is not mandated by statute one will see arbitration as the preferred final and binding dispute resolution process. Put simply, it is the impact of statutory adjudication that has ‘killed’ domestic arbitration in the UK. In summary, one cannot foresee that position changing.

In contrast, arbitration is very often used to resolve high value disputes in international construction contracts, engineering, procurement and construction (EPC) contracts and drilling contracts. The primary reasons for this are:

• a tangible and common apprehension about local courts
• a shared desire to have the dispute resolved on a final and binding basis by an experienced, specialist and partly party-nominated tribunal
• a perception that tribunals are more likely to make awards based on a consistent and uniform understanding of how major construction contracts operate

To what extent has this changed over the last few years?

The use of arbitration to resolve construction disputes in international projects has increased significantly over the last three years. This is because a number of large, high value and complex infrastructure projects and hotel and tourism projects, procured or commissioned by various Gulf-seated sovereign wealth funds, have now reached the ‘dispute stage’. Complex, high value and largescale construction projects inevitably give rise to a range of complex or technical disputes which are best addressed and resolved only in arbitration. Examples include liability for front-end engineering design (FEED) errors and subsequent design changes.

A key feature of an EPC contract is getting the contractor to buy in and accept responsibility at an early stage of the engineering and construction process. However, all too often the lines of responsibility are not clearly drawn in the contract and disputes arise over responsibility for errors in and changes to the FEED during the contract. In the case of conflicts in engineering design standards, it is not uncommon for an infrastructure contract to specify compliance with more than one engineering design standard or code—for example both the American Petroleum Institute and the British Standard may be specified.

Also, the decrease in the crude oil prices means that ‘claims’ that would ordinarily have been accommodated by contractors and owners are now the subject of requests for arbitration. Since the drop in global oil prices, we have seen a significant increase in parties electing to terminate contracts and a greater desire in owners to seek to recover performance damages. When output falls short of the target performance levels, employers feel compelled to recover their losses.

Is this likely to continue?

There is nothing to indicate that the increase in the use of international construction arbitration is not likely to continue. Further, the increased use and familiarity with arbitration over the last few years has the tangible consequence that international contractors and owners become more comfortable with arbitration and thus more inclined to advocate its benefits which ultimately allows arbitration use to continue to grow. On a commercial analysis, there is no indication that the oil prices will rise so significantly that disputes will be resolved or compromised without the need for arbitration. One must keep in mind that the parties are often keen to receive a reasoned and considered award delivered by a specialist tribunal.

Are construction disputes particularly suited to being resolved by arbitration?

Yes. This is because construction disputes involve complex technical issues, industry terms, construction law principles and voluminous contracts. Internationally, judges in local courts cannot, naturally, be expected to be familiar with such specialised contracts and technical issues and so the increased attraction of international construction arbitration. An additional factor is that the ‘world of arbitrators’ is also familiar with the technical experts and so a level of consistency in expert work products is more likely. Counsel, experts and tribunals all understand and appreciate what is required and so the process is less open to abuse or the creation of delay.

Which arbitration rules are commonly used?

Our arbitrations for Middle East projects use the Dubai International Arbitration Centre (DIAC) rules or the Dubai International Financial Centre-London Court of International Arbitration (DIFC-LCIA) rules. We are now also seeing an increase in the Singapore International Arbitration Centre (SIAC) rules. The International Chamber of Commerce (ICC) rules are also very common, especially in oil and gas construction projects.

Are there any changes that could be made to the arbitration process to make it a more attractive dispute resolution option?

Some clients are concerned with speed, and especially so when an interim application or relief is sought. In that context, the ICC released (in November 2016) its expedited rules, as part of its latest effort to promote greater efficiency in its arbitral proceedings. Those expedited rules will automatically apply to arbitrations in which the amount in dispute is less than $2m and to cases involving higher amounts on an opt-in basis. Under these rules, the ICC court will normally appoint a sole arbitrator even if the parties’ agreement provides otherwise.

The practice note released in March 2017 provides users with detailed guidelines as to how these new expedited rules can be used, it also establishes the new principle that the court may now provide reasons for its decisions once a request is made by any party to the arbitration. Previously, agreement of all the parties was required before such a request would be honored. Expedited rules are likely to be seen in the other commonly used rules.

Interviewed by Nicola Laver. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

LexisPSL Construction customers are able to access further information and resources in the Arbitration for construction lawyers subtopic. Click here for a free trial.

Source: LexisNexis Purpose Built
The evolving role of arbitration in construction disputes

Construction in the Middle East—key projects and outlook

by Hardwick Legal | May 24, 2017 | Purpose Built (LexisNexis)

Mark Raymont, partner at Pinsent Masons LLP Dubai, and Paul Prescott, legal director at Pinsent Masons LLP Qatar, take a look at construction activity in the Middle East, including the key infrastructure projects being procured or constructed, and consider the outlook for the industry.

How is construction activity in the region?

The major economies of the Middle East have been significantly affected by the drop in oil and gas prices since 2014, due to the region’s reliance on oil and gas as its major exports and the key role of state entities in procuring major projects. The resulting economic uncertainty has, in some cases, caused governmental departments to cut existing budgets and to reduce planned spending for infrastructure development and related activities, which has in turn affected the level of construction activity over the last few years.

With these fiscal challenges in the region, alternative funding and financing structures are moving more sharply into focus, especially delivery of infrastructure using public-private partnership (PPP) and concession models which previously may have not been considered when the oil prices were significantly higher.

Moreover, the reduction in the number of projects being tendered has increased competition throughout the region. Many contractors and consultants are now looking to offer innovative commercial solutions in order to secure work (including the provision of funding), and cheaper ways to deliver solutions in order to remain competitive.

While construction activity levels have by and large reduced across the region, nevertheless, certain jurisdictions remain reasonably active. In Qatar, for example, the country is preparing for the 2022 World Cup and is in the process of building new roads, railway networks, football stadia and other infrastructure and facilities to support the World Cup Tournament and its 2030 vision.

The same is true for Dubai—with Expo 2020 coming up, the construction sector remains active with a particular focus on transportation and general infrastructure.

In Saudi Arabia, the recent 2016 Middle East Economic Digest reported that projects worth $442bn in 2017 have been earmarked for the construction sector, followed by $228bn and $170bn for the transport and power sectors respectively. It is particularly noteworthy that the power sector is expected to launch a renewable energy programme between 2017 and 2023 to produce 10 gigawatts of power requiring an investment of between $30bn to $50bn. It has also been reported that Saudi Arabia has commenced feasibility studies for two commercial nuclear reactors.

We identify below some of the key infrastructure projects being procured or constructed in the Middle East.

What is the outlook for construction?

The key issue facing the construction sector has been the general reduction in spending in the Middle East by procurement authorities as outlined above. This has caused a downturn in new work and new opportunities in the market. We have also noticed an increase in payment issues with regard to on-going projects and, unfortunately, it seems to be becoming increasingly common in the market for suppliers, contractors and consultants to experience delays/reductions in payment which in turn is causing cash-flow issues throughout the whole supply chain.

Issues that are beginning to surface as a result of the region’s market downturn include funding deficits, declining asset values and increasing sovereign debt, all of which are contributing to a general negative sovereign credit outlook among Gulf Cooperation Council (GCC) countries for 2017. It is no surprise that the market sentiment in the first quarter of 2017 has generally been fairly pessimistic among many contractors and consultants. Non-priority projects and schemes have been put on hold until further notice including the Qatar-Bahrain Causeway, Qatar’s national healthcare scheme, the ambitious Sharq Crossing Programme and the Inner Doha Re-Sewerage Implementation Strategy (IDRIS).

PPP laws

It is anticipated that the Middle East will continue to consider alternative means to finance the delivery of its vital infrastructure. Kuwait and UAE have already introduced a PPP law (Kuwait’s PPP Law is Law No 116 of 2014 Regarding Public Private Partnerships; the UAE’s PPP Law is Law No 22 of 2015 Concerning Regulating Partnership between the Public and the Private Sector in the Emirate of Dubai), and it is anticipated that Qatar will implement its proposed PPP law during the course of 2017. It was announced in March 2016 that the Qatari Ministry of Commerce would submit a draft law covering the use of PPPs. There is speculation in the market that there is a pipeline of potential projects earmarked for when the PPP law becomes effective in Qatar. The introduction of PPP laws in the region is a good indication that the governments of the Middle East are starting to look at alternative ways to deliver key infrastructure especially in the health, education and water sectors. This is a positive sign and will present various opportunities for businesses operating in the Middle East.

Elsewhere in the region, it is evident that other fundraising initiatives are being actively pursued. Saudi Arabia has recently introduced a National Centre for Privatisation which it has been reported will also be responsible for overseeing new PPP procurement options in the country. PPP is already being pursued on a number of Saudi transport, education and health sector projects. Saudi Arabia is also preparing for the IPO of a 5% share in Aramco, which is anticipated to be the world’s largest IPO and would deliver a welcome injection of funds to the state treasury.

Value Added Tax (VAT)

A law introducing VAT in the UAE is expected to be published soon with speculation that VAT in the UAE will be effective from 1 January 2018.

There still remains uncertainty in terms of which goods and services will attract VAT and which exemptions, if any, will apply under this new regime.

However, the entire supply chain in the construction sector in the UAE should consider the changes they will need to make to their businesses, including accounting systems and contracting strategies, to calculate and report VAT when the law comes into force.

It is also anticipated that VAT will be implemented in the rest of the Middle East after the UAE, and it has been reported that all six GCC countries have now signed a unified VAT agreement. This is an area which is likely to attract further interest in the upcoming months.

This article is part one of a three-part series on construction in the Middle East, which was published on LexisPSL. See also:

Construction in the Middle East—legal issues and standard forms

Construction in the Middle East—governing law and disputes

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Interviewed by Jenny Rayner. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Source: LexisNexis Purpose Built
Construction in the Middle East—key projects and outlook

High Court orders publication of draft air quality plan before the general election

by Hardwick Legal | May 5, 2017 | Purpose Built (LexisNexis)

In ClientEarth v Secretary of State for Environment, Food and Rural Affairs, the High Court rejected the government’s application to delay publishing its draft Air Quality Plan (AQP) for consultation until after the June 2017 general election. The government had argued that consultation on its AQP would contravene the purdah restrictions ahead of the forthcoming local and general elections. In refusing the application, the court ruled that purdah was simply a convention and did not override the government’s statutory duty and legal obligations to comply with the Air Quality Directive. Furthermore, the case fell within the exceptions to the purdah rules in the Cabinet Office Guidance on account of the continued threat to public health resulting from additional delays.

This Analysis was originally published on Lexis®PSL Environment. Discover how Lexis®PSL can help you stay on top of the latest developments and find the answers you need fast: click here for a free trial to access.

What is the significance of the decision?

This decision is the latest in a series of court challenges between by ClientEarth and the government concerning the domestic implementation of the EU Ambient Air Quality Directive 2008/50/EC (the Air Quality Directive). It illustrates the role of national courts in ensuring the proper implementation of and compliance with EU law. The judgment is also an important confirmation that political convention does not necessarily entitle a public authority to fail to comply with its statutory duties or a court imposed order, particularly where such failures lead to a continued threat to public health.

The government has confirmed it will not be seeking leave to appeal the ruling. Consequently, it will have to publish its draft AQP by 9 May 2017. Developers promoting development projects with air quality implications will have to take into account the modelling used to prepare the draft AQP and any measures it contains to reduce nitrogen dioxide.

What is the legal background to the case?

ClientEarth first commenced proceedings against the government in 2011 for the failure to put a plan to the European Commission for reducing nitrogen dioxide to levels below the limit values by 1 January 2015, as required under Articles 13 and 22 of the Air Quality Directive. The court in that initial case recognised that the government was in breach of its obligations to ensure cleaner air but declined to grant any relief. A 2014 ruling by the Court of Justice of the European Union in C-404/13: The Queen, on the application of ClientEarth v The Secretary of State for the Environment, Food and Rural Affairs clarified that enforcement of the Air Quality Directive was within the jurisdiction of national courts. The Supreme Court subsequently issued both a declaration of non-compliance and a mandatory order requiring the Secretary of State to revise the AQPs to demonstrate how conformity with the nitrogen dioxide limit values would be achieved as soon as possible in R (on the application of ClientEarth) v The Secretary of State for the Environment, Food and Rural Affairs [2015] UKSC 28.

In December 2015, the government published its revised AQP. ClientEarth issued proceedings against the AQP, arguing that it failed to achieve the value limits within the shortest possible time, as required by the Air Quality Directive. On 2 November 2016, in R (ClientEarth (No. 2) v Secretary of State for Environment, Food and Rural Affairs [2016] EWHC 2740 (Admin), the High Court held that the December 2015 AQP published by the Secretary of State had failed to comply with Article 23(1) of the Air Quality Directive, and its domestic implementing instrument, Regulation 26(2) of the Air Quality Standards Regulations 2010, SI 2010/1001 (the Air Quality Regulations). The court found that on its proper construction, Article 23 of the Air Quality Directive meant that the Secretary of State ‘must aim to achieve compliance by the soonest date possible, that she must choose a route to that objective which reduces exposure as quickly as possible, and that she must take steps which mean meeting the value limits is not just possible, but likely.’ For several reasons, which included that the Secretary of State adopted too optimistic a model for future emissions, the AQP failed to comply with those requirements, so that the 2015 AQP was quashed. The court ordered that a draft modified AQP was to be published for consultation by the Secretary of State by 4pm on 24 April 2017, and a final AQP by 31 July 2017.

What is the political background to the case?

On 12 April 2017, in advance of the local elections on 4 May 2017, the Cabinet Office published its guidance on a three week ‘period of sensitivity’ (also known as purdah) in which ministers, public servants, councillors and officials are expected to refrain from making announcements or decisions with political implications. On the following day, the Department for Environment, Food and Rural Affairs (Defra) issued its application for an order to vary the court’s order and to postpone the publication of the draft AQP from 24 April 2017 to 9 May 2017.

On 18 April 2017, the Prime Minister made a surprise announcement that she intended to seek Parliament’s approval for a general election to be held on 8 June 2017. The Cabinet Office published its guidance in respect of the purdah period applying in respect of the general election on 20 April 2017 (the Guidance). It came into effect at midnight on 21 April 2017 and is applicable until the date of the general election.

On 21 April 2017, Defra prepared an urgent application to the High Court to extend the deadline for publication of the draft AQP to 30 June 2017, ie after the general election, and the final AQP by 15 September 2017. The government relied on the Cabinet Office’s Guidance, which it argued restricted it from publishing and consulting on the draft AQP.

What did the court decide?

The court allowed the first extension of time for the draft AQP to be published on 9 May 2017, the day after which the newly elected local councillors take office. However it dismissed the second application to cover the general election period.

The nature of purdah

The government had argued that the purpose of purdah is to protect the electoral process from interference, whether intentional or not, by local or central government members. As such, a consultation on an AQP during this period could risk distracting the electorate or potentially influence the final outcome. Furthermore, the government argued that if the consultation were to go ahead in advance of the general election, there was a real risk that the quality of the process would be substantially undermined because the government would be constrained in publicising it or holding stakeholder events.

The court rejected this argument. It ruled that purdah in itself is not a principle of law nor binding upon the courts. It therefore did not override the government’s duty to comply with both its statutory duty and order of the court to produce a draft plan to reduce exposure to nitrogen dioxide as quickly as possible, regardless of the degree of influence this would risk having on local and general elections.

However the court accepted that local authorities are potentially crucial consultees in the consultation of the draft AQP due to their active role in monitoring air pollution against national targets and to take action where these targets are unlikely to be met. This contrasts to the primarily receptive role of the national government after the launch of a consultation, and so the same considerations do not apply in respect of the general election. Additionally, granting the extension to take into account the local election need not threaten the publication date of the final plan.

The effect of the Cabinet Office Guidance

The court accepted that the general principles set out in the Guidance applied in the present case but noted that the Guidance also acknowledges that it remains open to the government to launch public consultations during the purdah period preceding a election if there are ‘exceptional circumstances which make that launch essential’. It rejected the government’s distinction that these ‘exceptional circumstances’ applied to the example of an unexpected public health emergency, and not the continued threat caused by nitrogen dioxide emission which the government has been long aware of.

Furthermore, the government’s failure to comply with its obligations to improve air quality compounds an already significant existing threat to public health. On this point, the court cited Defra’s own analysis that the effects of exposure to nitrogen dioxide contributes to the equivalent of 23,500 deaths annually in the UK or on average 64 deaths a day. The circumstances of the present case therefore fell within the exceptional circumstances exception provided for in the Guidance.

Condoning a continuing breach

The court emphasised that as no AQP has yet been published, the Secretary of State remains in breach of her obligations to achieve compliance by the soonest possible date under the Air Quality Directive, the Air Quality Regulations as well as the by the date specified in the court order of November 2016. By granting the extension as sought by the government, the court would serve to permit all these continuing breaches of law. Such a step by the court could only be justified in the most exceptional of cases, of which the present case was not one.

Finally, the court re-iterated the detrimental continued threat to public health caused by continued delays in complying with the Air Quality Directive and Air Quality Regulations. According to the court, ‘[t]hat alone constitutes a powerful reason for refusing to permit further delay in the process to remedy the problem’ and constitute circumstances which are ‘wholly exceptional’.

This Analysis was originally published on Lexis®PSL Environment. Discover how Lexis®PSL can help you stay on top of the latest developments and find the answers you need fast: click here for a free trial to access.

Postscript: On 5 May 2017, Defra and the Department for Transport published their draft AQP for consultation.

Source: LexisNexis Purpose Built
High Court orders publication of draft air quality plan before the general election

A bigger better FIDIC 2017 Yellow Book?

by Hardwick Legal | Mar 27, 2017 | Purpose Built (LexisNexis)

Sarah Jane Hudson, consultant at Charles Russell Speechlys, considers the pre-release version of the second edition of the FIDIC Yellow Book, which is currently being unveiled at FIDIC conferences. It was first made available at the FIDIC users’ London conference in December 2016 (see News Analysis: FIDIC—an update on the new contracts and other developments).

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For regular users of the FIDIC Yellow Book, the new edition will offer much more detailed conditions. Here I explain the key differences for practitioners to note.

The most notable change is that the Contract is now 50% longer and for those who enjoyed the relative brevity of the FIDIC conditions, this will be a disappointment.  However, for those drafting Particular Conditions, FIDIC have now incorporated additional requirements which make some Particular Conditions redundant.

What are the key changes?

FIDIC intends to formally publish the second edition of the Yellow Book (new edition) during the course of 2017, at the same time as the second edition of both the Red Book and Silver Book. FIDIC intends that the “new look” Yellow Book provisions will be reflected in the amended Red and Silver Books as well. We have identified six key changes in the new edition, as follows:

1. The Engineer

FIDIC still enshrines the Engineer’s role in making “determinations” under clause 3.7 (previously clause 3.5).  Importantly, the parties may refer many matters to the Engineer without having to make a formal claim under the revised clause 20. The new edition requires the Engineer to:

• Act “neutrally” when determining any matter or claim.
• Consult with the parties either jointly or separately and actively encourage discussion between the parties in an endeavour to reach agreement on a matter or claim.
• Adhere strictly to various time limits in reaching agreement or making a determination. If the Engineer does not give notice of agreement or determination within the relevant time limit, the Engineer shall be deemed to have given a determination rejecting the matter or claim.

The clear intention behind these new provisions is to try and avoid disputes escalating in the first instance, not delay their resolution by the DAB, and ultimately to avoid arbitration.  This could, of course, be unavoidable if the Engineer either can’t or won’t reach agreement or make a determination.

A new ‘Notice of Dissatisfaction’ (NOD) must be given within 28 days of the Engineer’s determination, otherwise the determination will be deemed to have been accepted “finally and conclusively” by the parties.

The requirement that the Engineer must be “a professional engineer having suitable qualification, experience and competence in the main engineering discipline applicable to the works” may cause problems for project managers taking on the role.

A new provision which provides for what happens if the Contractor considers that an instruction constitutes a Variation is helpful and states that the contractor should give a notice to the Engineer “immediately and before commencing any work related to the instruction”. However the clause (new 3.5) does not go on to explain what happens if the contractor fails to give a notice.

2. “Claims” and time bars

As expected, clause 20 of the current new edition is now reciprocal, covering both contractor and employer claims. While perhaps not welcomed by employers, this at least provides certainty following the interpretation of the existing clause 2.5 as an effective condition precedent in NH International (Caribbean Limited) v National Insurance Property Development Company [2015] UKPC 37, 162 ConLR 183.

It also covers “other” claims which are defined as those claims that are not third party claims and do not relate to time and money, for example a party’s failure to assist in obtaining permits. These are all referred directly to the Engineer for agreement or determination (under new clause 3.7) and notice of this type of claim shall be given “as soon as practicable”. Requiring the Engineer to “determine” employer’s claims may cause a few headaches.

Failure to comply with the time bar results in the other party “discharged from any liability in connection with the event or circumstance giving rise to this claim”. This wording is wider than the existing clause 20.1 which excludes claims for additional payment/extension of time “in connection with the claim”.

Clause 20 of the new edition contains not one, but two time bar clauses and various other time limits and notice provisions. The second and important time bar relates to the production of the “fully detailed claim” within 42 days. Ensuring that claims are dealt with as and when they arise in a structured way is entirely consistent with the FIDIC theme of effective project management and dispute avoidance. However, given the current uncertainty as to how strictly time bar provisions will be enforced, both under English law and in civil law jurisdictions, it remains to be seen whether these provisions will have the effect FIDIC intends.

The DAB is able to waive the time limits and effectively over-ride the time bar provisions in certain circumstances. This is a concept borrowed from the Gold Book but it will only operate as intended if there is a standing DAB.

3. Contract price payment

FIDIC has introduced a definition of cost plus profit with a default profit rate of 5%.

New provisions at clause 13.4 amplify the arrangements for agreement of provisional sums by reference to quotations.  Adjustments to the Contract Price by reference to changes in the law (13.6) have been amplified to reference not merely legislative action but also permits, permission licences and approvals.

The contract now references a Schedule of Rates for valuing variations.

4. Interim payment certificates

Clause 14.6 has been amended to indicate that the value will be the amount the Engineer fairly “considers” to be due and that the Engineer may withhold an amount if he considers that there is a “significant error or discrepancy” in the statement.  The Engineer must “detail his calculations” of the amount withheld and state the “reasons for it being withheld”.

Generally, clause 14.6 has been amplified and clarified with reference to interim payment certificates (now called IPCs). The clause now includes an additional provision (clause 14.6.3) for both the Engineer and the contractor to correct and/or modify IPCs.

Clause 14.6.3 says the contractor should highlight “identified amounts” that are disputed in IPCs. These may be referred for determination by the Engineer under clause 3.7 where appropriate where the identified amounts exceed 5% of the accepted contract amount.  .

5. Dispute Avoidance/Adjudication Board (DAB)

The change in name of the DAB is indicative of its more proactive role in dispute avoidance as well as dispute resolution. Disputes now reside in a new, much extended (from the previous clause 20) clause 21, leaving clause 20 for employer and contractor claims under the contract. The new clause:

• Requires the DAB to be a standing DAB rather than an ad hoc one.
• Provides that the parties may jointly refer a matter to the DAB with a request for “assistance” and/or to informally discuss and attempt to resolve any disagreement between them.
• Allows the DAB to invite the parties to make a joint referral if it becomes aware of any issue or disagreement.
• Requires a party to give a notice of dissatisfaction (NOD) with the DAB’s decision within 28 days after receiving it, otherwise the decision will become final and binding on both parties.
• Requires the parties to commence arbitration within 182 days after giving or receiving an NOD with the DAB’s decision. If arbitration is not commenced within this period then the NOD will be deemed to have lapsed and no longer be valid.

Obliging parties to commence arbitral proceedings while the works are still progressing may seem odd. In practice, parties may opt to “commence” arbitral proceedings within the time period but delay progressing the substance of the dispute until after the works are complete. However, this may lead to multiple referrals and some complexity around jurisdiction.

6. Caps on liability

Although FIDIC has promised to revisit this drafting, there is a significant change in the approach of the pre-publication draft contract as regards the clause 17.6 exclusion clause/cap on liability. The contractor’s indemnities (new clause 17.7) now include an indemnity in relation to “the design of the Works and other professional services which result in the Works not being fit for purpose”. This indemnity is “carved out” of the overall cap on liability.

Whilst the drafting is consistent with the approach adopted in the Gold Book and perhaps resolves the potential conflict between the termination provisions which permit the Employer to recover all sums paid, finance charges etc. under clause 11.4(d) of the new Yellow Book, the change of approach will not be welcome amongst contractors. Several groups have already voiced their opinions on this – see News Analysis: Contractor groups express concern regarding new FIDIC contracts.

What else has changed?

The clause regarding errors in the Employer’s Requirements (clause 1.9) has been amplified and rebalanced in favour of the employer (if the contractor fails to give notice within 42 days).

The programme provisions of the contract have been extensively re-written and amplified in a new clause 8.3.  There are deemed notices of no objection within 21 days/14 days of receipt of the contractor’s programme.

There is a new provision in clause 8.4 to supplement the amended programme requirements as regards “advance warning”.  Both parties shall “endeavour” to give advance warning of probable future events that will adversely affect the project.

The extension of time provisions (clause 8.5) now include an amended definition as regards adverse climatic conditions.  The conditions must be unforeseeable by reference to climatic data published in the country for the geographical location of the site.

FIDIC has also introduced a new provision in clause 8.5 as regards concurrent delay.  Unfortunately, the provision, highlighting the possibility that a delay caused by the employer may be concurrent with a delay which is the contractor’s responsibility indicates that the issue will be dealt with in the Particular Conditions (or if not “as appropriate taking due regard of all relevant circumstances”).

The extension of time provisions have also been amended with regard to delays by authorities to include a reference to delay by private utility entities.

Contractors should note that a new clause 8.8 introduces the possibility of delay damages outside the scope of the liquidated sums agreed in the case of fraud, deliberate default or reckless misconduct.

The Insurance provisions of the contract have been extensively re-written although specialist advice from local lawyers and brokers should always be sought and FIDIC assumes that they are only providing “base” requirements with further details in the Particular Conditions.

Conclusions

Contractors will regard the change of approach in relation to caps on liability as a major shift in the balance of this contract which is now more favourable to employers. Employers will be nervous about the mutual and wider notice provisions which will require proper administration and management. These provisions aside, we believe there is much to be commended in the revised editions in relation to the clarity of the drafting of FIDIC forms.

For more information, see subtopic: FIDIC contracts (which includes reference PDF copies of the key contracts). To keep up to date with the release schedule of standard form contracts, and other key upcoming developments relevant to construction lawyers, see the Construction future developments tracker.

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Source: LexisNexis Purpose Built
A bigger better FIDIC 2017 Yellow Book?