Project contracts fit for the 21st century

01 May 2018
Following FIDIC’s release of its 2017 suite of Red, Yellow and Silver Books, Norton Rose Fulbright assesses whether the new provisions will suit users in the Middle East

The release of the 2017 International Federation of Consulting Engineers (FIDIC) suite of Red, Yellow and Silver Books represents a timely update of project contracts that, while longer and weightier than its 1999 suite, addresses long-standing issues. The documents deliver more clearly drafted terms, better balancing of risk between parties, improved project management tools, and a renewed focus on avoiding disputes – and should lead to fewer costly and damaging arbitration cases in the region.

Defined terms are now listed alphabetically, new definitions have been added, and previous definitions and clauses have been amended or reformulated to make the 2017 suite of contracts more user friendly. As an example, ‘reasonable profit’ in the first edition of the Yellow Book has been replaced by ‘cost plus profit’, which means the cost plus the applicable percentage for profit stated in the contract data. This reflects a common amendment made by users in the region, who tend to be cautious about cost entitlements that are not strictly defined and the risk of dispute arising from unresolved cost claims.

A newly formalised notice procedure will also prevent parties from claiming that a ‘one-liner’ hidden at the bottom of an email to another party should be considered sufficient notice on a particular issue. This will be welcomed in the region, where the standard of document management and formal correspondence tends to lag behind other parts of the world.

2017 suite of contracts

Under the 2017 Red and Yellow Books, there is a greater emphasis on the role of the engineer. The engineer is required to be fluent in the ruling language of the contract, hold suitable qualifications, and act neutrally in his role as mediator between parties when agreeing or determining disputes (although the term ‘neutral’ has not been defined). Similar provisions have also been added to the Silver Book, and the employer’s representative is now deemed not to act for the employer when agreeing or determining disputes.

These developments may be less popular in the region, where employers have typically amended the equivalent provisions in the 1999 suite to restrict the authority of the engineer.

While it is difficult to imagine such attitudes will change, if either party is unhappy after receiving the engineer’s or employer’s representative’s decision, the 2017 contracts also allow for the dissatisfied party to give a ‘Notice of Dissatisfaction’ to the other party within 28 days, in order to obtain a dispute adjudication/avoidance board (DAAB) decision. The DAAB itself must now be appointed from the outset and monitor disputes throughout the project, and will have the power to invite the parties to refer any issue in dispute if it becomes aware of it.

It is unlikely, however, that the amendments in the 2017 suite of contracts will make disputes boards any more popular in the region as there remains a perception that only the largest and most complex projects will be able to absorb the cost of a standing disputes board.

Instead, FIDIC users in the region will likely continue to take the proverbial red pen to the DAAB drafting and opt for the tried and tested approach of negotiation/expert determination at first instance, followed by arbitration.

Rebalanced risk

In addition to narrowing the circumstances for which the contractor may claim an extension of time, the 2017 suite of contracts introduces the concept of concurrent delay, and requires that at the outset, the parties agree how concurrent delay will be dealt with.

Although the region may welcome the clarity afforded by this new provision, in practice in most Middle East construction contracts, the contractor will have no entitlement to time or cost relief for an employer delay where it is itself culpable for the delay.

To address the belief that under the 2011 editions, the claims procedure was one-sided, the 2017 contracts make no distinction between how the employer’s and contractor’s claims are dealt with. The employer and contractor will now both be subject to the same 28-day period, commencing from when they “became aware, or should have become aware of the event or circumstance”. Where the relevant party fails to give notice of its claim within 28 days, the other party will be discharged from any liability in connection with the matter that gives rise to the claim.

Parties will also be required to provide advance warning of potential risks to the project, with the 2017 suite of contracts imposing a mandatory obligation on both parties to notify the other of any event that may affect the completion date, the price or the performance of the project.

It remains to be seen whether these amended provisions will discourage parties from adopting one approach common to disputes in the region, which is to save claims and disputes until the project is nearing or has achieved completion.

Adjustment period

While FIDIC’s intention was to create a simpler contract, the additions to the document have, arguably, made it more complex, and significantly longer – with 126 page-long forms of contract that are nearly double the length of the 1999 versions. As such, users in the region may stick with their 1999 contracts, at least for a little longer. Given that it is not unusual to encounter FIDIC contracts dating back to 1987, it may be some time before the 1999 contracts lose favour.

Nevertheless, the introduction of a more robust contract management regime, a system of advance warning for potential project risks, and a fairer extension of time/determination regime are welcome developments, and should go some way to convincing FIDIC users in the Middle East to consider moving over to the 2017 suite sooner rather than later.

About the authors

Kristian Perussich is a senior associate in Norton Rose Fulbright’s Dubai office; David Johnston is a senior associate in Bahrain; and Joanne Emerson Taqi is a partner and head of Bahrain

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