FIDIC commentaries – January 2019

Adding the best bits of FIDIC 2017 to the 1999 Forms

Edward Corbett
Corbett & Co International Construction Lawyers, London

Much has been said about the second editions of the Red, Yellow and Silver Books launched by FIDIC in December 2017. The most obvious comment has been about their size, almost 50,000 words, which is some 60 per cent longer than the 1999 forms.

Although the 1999 forms were not perfect, most regular users seem to agree that 20,000 additional words were not needed to fix the issues. This consensus led this author to attempt to cherry-pick the useful provisions of the 2017 forms and propose amendments to add these good ideas to the 1999 forms. The amendments apply to all three forms unless otherwise indicated.

Reasonable profit

Any reduction in the number of occurrences of the word ‘reasonable’ is to be applauded, given the scope for argument that the word introduces. The World Bank introduced a definition of reasonable profit into its documents and the Pink Book Multilateral Development Bank form.

1.2 Add: ‘(e) references to reasonable profit shall mean the percentage of Cost stated in the Appendix to Tender.’

Add to Appendix to Tender: ‘Reasonable profit… 1.2(e)… __ per cent or, if none is stated, 5 per cent.’

Approval for engineer’s actions

The 1999 forms did not make clear whether the employer could insist on pre-approving determinations under Sub-Clause 3.5. Many assumed they could not, but FIDIC’s guide to the 1999 form said otherwise. The 2017 forms put the matter beyond doubt, introducing a new requirement for the engineer to act ‘neutrally’ when making determinations.

3.1 Add in the third paragraph after ‘undertakes’: ‘not to require approval for a determination under Sub-Clause 3.5 [Determinations] and’.

3.5 Red and Yellow only: replace ‘the Engineer shall consult’ with ‘the Engineer shall act neutrally and shall consult’.

Prompt notice of variations

The 1999 drafters slipped up by not explicitly requiring prompt notice of instructions that the contractor considers to be variations. This has led to problems with unhappy employers blaming their engineers for inadvertently incurring additional costs. The notice requirement gives employers and engineers an opportunity to reconsider an instruction.

3.3 Red and Yellow – add after the second sentence: ‘If the Contractor considers that an instruction constitutes a Variation, the Contractor shall immediately, and before commencing any work related to the instruction, give a notice to the Engineer with reasons. If the Engineer does not respond within 7 days confirming, revoking or varying the instruction, the Engineer shall be deemed to have revoked the instruction.’

3.4 Silver – add after second sentence: ‘If the Contractor considers that an instruction constitutes a Variation, the Contractor shall immediately, and before commencing any work related to the instruction, give a notice to the Employer with reasons. If the Employer does not respond within 7 days confirming, revoking or varying the instruction, the Employer shall be deemed to have revoked the instruction.’

Definition of fitness for purpose

The 1999 form required the works to be fit for the purposes as defined in the contract. This caused problems when secondary elements of the work did not function properly. The primary purpose of the project may have been defined, but no one will define the purpose of each and every element, rendering the fitness for purpose obligation less than useful. So some general wording is needed.

4.1 Red – add to (c) after ‘Contract’: ‘(and each element of the part shall be fit for its ordinary purpose)’.

Yellow and Silver – add at end of first paragraph after ‘Contract’: ‘(and each element of the Works shall be fit for its ordinary purpose)’.

Cap on delay damages

It seemed anomalous that the limitation of liability in Sub-Clause 17.6 should not apply in cases of fraud, and so on, but that the cap on delay damages should apply regardless. Some contractors exploited this when the delay damages had reached their maximum, and the employer had no realistic option of termination: resources were transferred to other, more profitable projects and there was little that the employer could do.

8.7 Add at the end of the first paragraph: ‘other than in the case of fraud, deliberate default or reckless misconduct by the Contractor’.

Enforcement of dispute adjudication board (DAB) decisions

It was a major shortcoming of the 1999 forms that there was no clear sanction where a party, usually the employer, failed to pay amounts awarded by the DAB. Despite the obligation to comply set out in Sub-Clause 20.4, there was little that the party winning the DAB could do; and thus little incentive for the unsuccessful party to pay. Rights of suspension and termination were needed.

15.2 Add: ‘(g) fails to give effect promptly to a decision of the DAB in accordance with Sub-Clause 20.4 [Obtaining the Dispute Adjudication Board’s Decision]’.

16.1 Add after ‘Sub-Clause 14.7 [Payment]’: ‘or fails to give effect promptly to a decision of the DAB in accordance with Sub-Clause 20.4 [Obtaining the Dispute Adjudication Board’s Decision]’.

Add in the first and third paragraphs after ‘evidence or payment’: ‘or the Employer has given effect to the decision of the DAB’.

16.2 Red and Yellow – add: ‘(h) the Employer fails to give effect promptly to a decision of the DAB in accordance with Sub-Clause 20.4 [Obtaining the Dispute Adjudication Board’s Decision]’. For Silver, it is (g).

Some employers argued that giving a notice of dissatisfaction relieved them of the obligation to give effect to the DAB decision. It makes sense to put the matter beyond doubt.

20.4 Add in the fourth paragraph after ‘who shall promptly give effect to it’: ‘whether or not notice of dissatisfaction has been given under this Sub-Clause’.

The right of a party to go to arbitration and ask for an immediate award enforcing the DAB decision has been much debated due to the language of Sub-Clause 20.7. FIDIC issued a memorandum recommending an amendment to the clause; in 2017, the clause was further refined.

20.7 Replace the clause with:
‘In the event that a Party fails to comply with any decision of the DAB, whether binding or final and binding, then the other Party may, without prejudice to any other rights it may have, refer the failure itself directly to arbitration under Sub-Clause 20.6 [Arbitration] in which case Sub-Clause 20.4 [Obtaining DAB’s Decision] and Sub-Clause 20.5 [Amicable Settlement] shall not apply to this reference. The arbitral tribunal shall have the power, by way of summary or other expedited procedure, to order, whether by an interim or provisional measure or an award (as may be appropriate under applicable law or otherwise), the enforcement of that decision.’

Mechanism for termination and cure period

The 1999 forms were ambiguous about whether termination required one notice or two: whether termination occurred automatically on the 14th day after the notice of termination or whether a second action was required from the party terminating in order to complete the termination. The 2017 editions make it clear that two actions are required. A second uncertainty was whether action by the defaulting party within the 14 days to remedy the breach could stop the termination – in other words, whether the 14 days was a cure period. The 2017 forms resolve this by making it clear that the right to termination is lost if the fault is corrected during the notice period. Although there are arguments both ways as to how these two ambiguities should have been resolved, the most important thing is to resolve them.

15.2 After ‘may’ in the first line of the second paragraph, replace the remaining text of that sentence with: ‘give 14 days’ notice of his intention to terminate the Contract. Thereafter, the Employer may forthwith terminate the Contract and expel the Contractor from the Site by giving a second notice to that effect, provided that in the case of sub-paragraphs (a) to (d) and (g) the default has continued until the date of issue of the second notice.’

16.2 Add to the first sentence of the second paragraph: ‘by giving a second notice, provided in the case of sub-paragraphs (a) to (e) and (h) that the default has continued for the notice period’. For Silver, replace (h) with (g).

After ‘may’ in the first line of the second paragraph, replace the remaining text of that sentence with: ‘give 14 days’ notice of his intention to terminate the Contract. Thereafter, the Contractor may forthwith terminate the Contract by giving a second notice to that effect, provided that in the case of sub-paragraphs (a) to (e) and (h) the default has continued until the date of issue of the second notice.’ For Silver, replace (h) with (g).

Time-bars

The 28-day notice of claim under Sub-Clause 20.1 caused a good deal of unnecessary misery and dispute due to its black-and-white nature and the unintended difficulty and discrepancy of its drafting (eg, the conflict between the subjective and objective tests and the uncertainty as to what a notice should look like). The drafters of the 2017 forms have unfortunately increased the number of time-bars from two to five, but they have also blunted the harsh edges of two of them by allowing the engineer and DAB to waive them in certain circumstances.

20.1 Add to the second paragraph after ‘28 days’: ‘and (a) there are no circumstances which justify such failure and (b) the Employer can demonstrate material prejudice as a result of such failure’.

Appointment of DABs

A lot of difficulty arose when one party refused to cooperate in the appointment of a DAB member. If FIDIC steps in and nominates the member but the party then refuses to sign the member’s Dispute Adjudication Agreement, then what? Could the DAB proceed and produce a valid decision or not? This uncertainty added to the problems of the DAB system.

20.3 Add at end: ‘Both Parties and each appointed member shall promptly sign or shall be deemed to have signed the Dispute Adjudication Agreement provided by the member, under which:

(i) the monthly services fee and daily fee shall be as stated in the terms of the appointment; and

(ii) the law governing the Dispute Adjudication Agreement shall be the governing law of the Contract defined in Sub-Clause 1.4 [Law and Language].’

Absence of a DAB

In 1999, the drafters of Sub-Clause 20.8 considered that if a DAB had existed and had resigned or their agreements had expired, then it should be possible for the parties to go to arbitration directly. They probably thought that the clause would normally apply after the work was complete, when quick, interim dispute resolution was less important. In fact, the clause – which referred to when a DAB was not ‘in place’ due to expiry ‘or otherwise’ – was invoked in the common circumstance when no DAB had ever been appointed. Parties to Yellow and Silver Book contracts were not obliged to appoint a DAB until a dispute arose; Red Book parties often did not comply with the obligation to appoint at commencement.

It might therefore be a good idea to consider limiting the DAB provisions so that they become optional after taking-over has been certified. However, no change was introduced by the 2017 forms. For simplicity, the following amendment is recommended:

20.8 Delete this Sub-Clause.

Conclusion

The 2017 forms contain some useful ideas and corrections to well-known issues in the 1999 forms. It is a pity that these good points are buried in 50,000 words, of which 20,000 are probably unnecessary. Those wishing to continue to work with the familiar 1999 forms may nevertheless benefit from parts of FIDIC’s latest thinking.

Of course, every project is different and every contract must be carefully adapted to the project, the applicable law and the circumstances. Careful advice from specialists and local lawyers should be obtained before adopting any of the suggestions in this article.

How does the new German construction law Affect the implementation of the 2017 FIDIC Silver Book?

Tobias Boecken and Elisa Freiburg
Gleiss Lutz, Berlin

Claudia Krapfl
Gleiss Lutz, Stuttgart

The new German construction law, which entered into force on 1 January 2018, provides some long-awaited additions to the German Civil Code (Bürgerliches Gesetzbuch or BGB). For the first time, construction law has been codified as a separate area of law in the BGB. Thereby, the existing law on contracts to produce a work (Werkvertragsrecht) has been adapted to meet the special needs of private construction law.

This reform has the potential to affect the practical implementation of standard business terms in construction projects, such as the 2017 edition of the Fédération Internationale des Ingénieurs Conseils (FIDIC) Silver Book on ‘Conditions of Contract for EPC/Turnkey Projects’ (Silver Book 2017). Prior to the recent construction law reform, it was already a matter of debate as to whether the Silver Book 1999 was compatible with the German law on standard business terms (Allgemeine Geschaeftsbedingungen or AGB law) as codified in section 305 et seq of the BGB and considered mandatory law by state courts. Where terms in the Silver Book are found to be incompatible with AGB law, they will be considered invalid. The question remains whether the Silver Book 2017 is compatible with AGB law on the basis of the revised German construction law. It is therefore important for the international construction law practitioner to have an understanding of the potential conflicts that may arise if German law is applicable, and to be aware of potential opportunities to escape the ‘sword of Damocles’ of AGB law.

The FIDIC rules are standard business terms under German law

For more than 60 years, FIDIC has published model contracts, which have become the main standard for international construction projects. In 1999, FIDIC launched its Silver Book and in 2017, it published a new, second edition. It addresses ‘Engineering, Procurement and Construction’ and turnkey projects for a fixed price, to be completed by a fixed date. It is particularly popular in the area of plant engineering, where all parties involved have a strong interest in fixed prices and fixed dates being observed. In the 1999 edition, the contractor bore the main risks of construction and planning, while the 2017 edition strives for a more balanced solution between the contractor and employer. Despite these changes in risk allocation, quite a number of provisions in the Silver Book 2017 (still) differ significantly from the respective rules of the BGB.

Typically, it is the employer who requires the application of FIDIC clauses. If the parties agree on a contract based on the Book 2017, and at the same time provide for the application of German law, the AGB law will apply. The clauses from the FIDIC Silver Book 2017 are considered to be standard business terms in the meaning of section 305(1) of the BGB because they are pre-formulated for more than two contracts and presented by one party (the user) to the other party upon entering into the contract. By contrast, the AGB law does not apply to specific clauses if those clauses were negotiated between the parties with respect to the individual circumstances of the contract, or were at least seriously put up for negotiation by the user (Individualvereinbarung), even if the rest of the contract consists of unilaterally formulated provisions.

According to section 307 of the BGB, provisions in standard business terms are ineffective if, contrary to the requirement of good faith, they unreasonably disadvantage the other party to the contract. In case of doubt, an unreasonable disadvantage is to be assumed if a provision is not compatible with the essential principles of the statutory provision from which it deviates or limits indispensable rights or duties intrinsic to the contract to such an extent that attainment of the purpose of the contract is jeopardised.

One might consider that section 307 of the BGB does not apply to the Silver Book 2017 by analogy to section 310 of the BGB. According to this provision, section 307 of the BGB does not apply to contracts in which the entire General Conditions of Contract relating to the Execution of Construction Work (Vergabe- und Vertragsordnung für Bauleistungen – Teil B (VOB/B), the German rival to the FIDIC Books) are included without material deviation as to their content. However, this is unlikely to be accepted by German courts for the simple reason that the provision relating to the VOB/B was included specifically because the VOB/B, overall, is deemed to provide a fair allocation of risks for both parties to the contract. Because the Silver Book 2017 undertakes an allocation of risks that differs substantially from the allocation of risks under the VOB/B, it appears unlikely that a German court would privilege it by applying section 310 of the BGB by analogy.

Therefore, the clauses of the Silver Book 2017 – if the contract is governed by German law – always have to be measured against the standards of the AGB law and accordingly against the substantive provisions of the BGB’s construction law. If the clauses are found to be ineffective on the basis of section 307 of the BGB, the invalid clause will be substituted by the respective comparable provision of the BGB (see section 306(2)).

In the paragraphs that follow, we will provide a few examples related to the new German construction law describing the possible practical implications of this mechanism under German law.

Clause 13 of the Silver Book 2017 (variations and remuneration for additional works) may be considered ineffective by German courts

Under clause 13 of the FIDIC Silver Book 2017, variations may be initiated by the employer at any time before the taking-over certificate for the works is issued. The contractor is bound by each variation and is obligated to execute it with due expedition. Within 28 days, the contractor shall submit to the employer a proposal for adjustment of the contract price due to the variation, with supporting particulars. The rate for the varied remuneration – if the contract does not contain a respective schedule – shall be derived from the cost plus profit of executing the work. The term ‘costs’ covers the expenditures reasonably incurred by the contractor in performing the variation (compare to Sub-Clause 1.1.16 of the Silver Book 2017).

In contrast to these Silver Book provisions, the new section 650b of the BGB provides for a consent-based model for variations. In the first step, the parties are obligated to attempt to reach an agreement on the requested changes and remuneration issues. Only if the parties cannot reach such an agreement within 30 days will the employer be entitled to issue a unilateral variation request. The law does not provide for exceptions to the 30-day negotiation period, and exceptions are likely to be accepted by courts only in very limited and severe circumstances. If the changes requested unilaterally are necessary for the successful performance of the works, the contractor is obliged to perform them. In all other cases, it depends on whether it is deemed to be reasonable to require the contractor to perform the requested works. With regard to the remuneration for such additional works, section 650c of the BGB contains detailed provisions to ensure adequate remuneration based on actual costs plus a reasonable markup for indirect costs, including profit, as well as to ensure the immediate liquidity of the contractor.

Accordingly, it can be reasoned from a German law perspective that the Silver Book 2017 provision on variations (the remuneration notwithstanding) disadvantages the contractor, who cannot rely on a 30-day negotiation period before being obliged to execute the variation request. It can be argued that the negotiation period as contained in section 650b of the BGB is part of the guiding principles of the new construction law and therefore cannot be waived by standard business terms. The BGB did not contain a provision on the right to request variations prior to the revision of the German construction law. Section 650b of the BGB specifically includes the 30-day negotiation period to protect the contractor from unwarranted unilateral variation requests. Therefore, it is likely that German courts would consider Clause 13 of the Silver Book 2017, which allows for an immediate unilateral right to request variations, to be incompatible with AGB law.

Another problem in the Silver Book 2017 is the employer’s extensive right to insist on changes to the sequence or timing of the works’ execution. Section 650b of the BGB intentionally excluded these far-reaching instruction rights, so as not to restrict the contractor’s freedom to arrange the details of works. In the Silver Book 2017, Sub-Clause 8.3 provides for a detailed programme that the contractor shall submit to the employer; Sub-Clause 8.7 enables the employer to instruct the contractor to submit a revised programme with revised methods in order to expedite progress and complete the work within the relevant time for completion. Given the related risks for delay liability, such an extensive right to instruction would probably be considered ineffective under AGB law, with the consequence that sections 650b and 650c would be applicable instead (section 306(2) of the BGB).

Clause 20 of the Silver Book 2017 (time limit for raising claims) may be considered ineffective by German courts

Clause 20 of the Silver Book 2017 provides for a very short period to give notice of a claim: just 28 days after the claiming party became aware, or should have become aware, of the event or circumstance. Otherwise, the party shall not be entitled to any claims in regard to this event or circumstance and the other party shall be discharged from any liability in connection with the respective event or circumstance. This duty applies to the employer and the contractor, while under the Silver Book 1999 this duty had been limited to the contractor.

The new German construction law upholds the established statute of limitations (see section 195 et seq, as well as 634a of the BGB – the usual time period for being entitled to raise claims ranges between three and five years), but does not contain any further limitations for raising claims that would be comparable to the period of 28 days as provided for in the Silver Book 2017.

The clause in the Silver Book 1999 was held to be seriously prejudicial to the contractor because of the strict one-sided limitation for raising claims and therefore ineffective under AGB law. While under the Silver Book 2017 there is no longer an imbalance between the contractor and the employer, the question remains whether such a strict (and very short) period of notification will be considered valid under AGB law because it will mainly be to the detriment of the contractor and not the employer as the user of the standard business terms that has to raise claims at such short notice. During the execution of the works, the contractor needs to focus on performing its obligation under the contract and will not have the time or personnel to work on documenting and justifying possible claims in detail within less than a month. This appears to be a particular burden for the contractor, which German courts might well consider unwarranted.

Is it possible to escape the ‘sword of Damocles’ of German AGB law?

How (and to what extent) do parties to a contract have a chance to escape the ‘sword of Damocles’ of AGB law, without having to change the FIDIC provisions themselves? When looking for solutions, it must be borne in mind that section 305 et seq of the BGB generally constitute jus cogens in German law, even when the standard business terms are used in a business-to-business context. Accordingly, the German Federal Court of Justice has held that these provisions cannot be excluded by a contract clause providing that section 305 et seq of the BGB will not apply.

One option for escaping AGB law might of course be the choice of non-German law to govern the contract, in accordance with Article 3(1) of the Rome I Regulation. While this is an option in an international context, it is not possible in a purely German context. As provided for in Article 3(3) of the Rome I Regulation, where all elements relevant to the situation at the time of the choice of law are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country that cannot be derogated from by agreement. Accordingly, in an entirely German situation the parties cannot escape German jus cogens, such as AGB law, merely by choosing another law to govern their contract.

Might arbitration clauses provide a solution?

Another way to avoid the applicability of AGB law – without having to forfeit the benefits of German law – might be through an arbitration clause. The argument can be made that by choosing arbitration, the parties to a contract are entitled to exclude sections of the BGB that would otherwise (by state courts) be considered jus cogens, at least in a business-to-business context. This follows from section 1051(1) of the German Code of Civil Procedure (Zivilprozessordnung or ZPO), which provides that ‘[t]he arbitral tribunal is to decide on the matter in dispute in accordance with the statutory provisions that the parties have designated as being applicable to the content of the legal dispute’. This can be read to mean that the parties are not bound to choose one legal order in its entirety, but are free to agree on specific provisions only. Section 24.1 of the 2018 German Arbitration Institute (Deutsche Institution für Schiedsgerichtsbarkeit or DIS) Arbitration Rules contains a similar provision.

While this interpretation of section 1051 of the ZPO is not compatible with Article 3(3) of the Rome I Regulation, the Rome I Regulation does not apply to arbitral tribunals but only to national courts. Furthermore, the parties’ right to empower arbitral tribunals to decide ex aequo et bono (see section 1051 (3) of the ZPO) should also include the possibility of agreement on a nuanced choice of law.

Of course, it remains to be seen whether arbitral tribunals will embrace this view. The risk remains that arbitral tribunals might find this type of agreement between the parties to be ineffective due to the AGB law’s jus cogens character.

However, even with this risk in mind, choosing an arbitration clause based on German law without AGB law can have significant advantages for the parties. If the construction project has a connection to Germany – be it because one or more of the parties are German entities or because the construction project is located in Germany – the parties will be able to base their contract on the internationally accepted FIDIC Silver Book, but embedded in the familiar German legal order. At the same time, there will be at least a fair chance that an arbitral tribunal will respect the arbitration clause excluding AGB law for the purposes of a dispute between the parties.

Conclusion

We have demonstrated that despite the revision of the German construction law and the reform of the Silver Book, there are Silver Book 2017 clauses that are still incompatible with the provisions of the new German construction law and therefore, due to AGB law, might be ineffective.

In order to ensure the effectiveness of the Silver Book 2017 in a German law context, we suggest that parties should agree on an arbitration clause, providing that the arbitral tribunal is to apply German law, but excluding the AGB law. Whether this will be accepted by German courts remains to be seen. For now, it appears to be the only viable option if Silver Book 2017 provisions are contained in a construction contract based on German law.

Notes

1 FIDIC, Conditions of Contract for EPC Turnkey Projects, 2nd edn 2017.

2 Cf Kapellmann/Messerschmidt/von Rintelen, VOB/B, 6th edn 2017, s 1, para 101c.

3 Müller-Helle, RdE 2014, 53 (54); Hök, ZfBR 2014, 627 (628 et seq).

4 Bamberger/Roth/Hau/Poseck/Voit, BeckOK BGB, 46th edn 2018, s 650b, paras 41, 44.

5 Kniffka/von Rintelen, Ibr-online-Kommentar Bauvertragsrecht, 20th edn 2018, s 650b, para 246 et seq; Abel/Schönfeld, BauR 2018, 1 (12).

6 Kus/Markus/Steding, 16 ICLR 1999, 533 (547 et seq).

7 BGH NJW 2014, 1725 (1728).

8 Pfeiffer, NJW 2012, 1169 (1170); Vorwerk/Wolf/Wilske/Markert, BeckOK ZPO, 29th edn 2018, s 1051, para 6; Kondring, ZIP 2017, 706 (709).

9 MüKo/Münch, ZPO, 5th edn 2017, s 1051, paras 16, 20; Valdini, ZIP 2017, 7 (10).