In this article Corbett & Co. Director Andrew Tweeddale addresses whether sub-clause 20.5 is a condition precedent to the commencement of an arbitration or whether it is an obligation, the breach of which will not affect the jurisdiction of the arbitral tribunal to resolve the dispute.

This article addresses whether sub-clause 20.5 is a condition precedent to the commencement of an arbitration or whether it is an obligation, the breach of which will not affect the jurisdiction of the arbitral tribunal to resolve the dispute.

Click here to read the full article originally published in The International Construction Law Review in 2016.

Rumour reaches us that the Multilateral Development Banks (MDBs) behind the Pink Book, FIDIC’s harmonised version of the 1999 Red Book, will discontinue the experiment. Should we be sorry to see the back of the Pink Book? We think not.

Rumour reaches us that the Multilateral Development Banks (MDBs) behind the Pink Book, FIDIC’s harmonised version of the 1999 Red Book, will discontinue the experiment. Should we be sorry to see the back of the Pink Book? We think not.

The idea would be to return to the Red Book with each MDB developing its own particular conditions.

The fragile consensus between the banks was already unravelling: the 2010 edition already had six bank-specific versions of clauses 15.6 to 16.2 on the subject of bribery and corruption.

The creations of committees are notoriously odd. The more independent and strong-willed the representatives of the committees, the odder will be the result. MDBs – and there were nine of them involved in the first version in 2005 – can be notoriously stubborn. So it would be no surprise to learn that their amendments to the Red Book produced some oddities.

However, to be fair, the Pink Book also gave birth to some interesting ideas which FIDIC would do well to consider when drafting the 2^nd editions of the Red, Yellow and Silver Books, a process now under way.

Below we consider a sample of both MDB oddities and also some it its good ideas.

Oddity #1: Contractor Control of the Commencement Date

The “stand-out” oddity relates to the Commencement Date. The amendments to clause 8.1 effectively put the Contractor in charge of when both work and the Time for Completion start. The Commencement Date can only be given when both parties have agreed that four precedent conditions have been fulfilled. Two of these are under the control of the Contractor, namely the signature of the Contract Agreement by the Contractor and the payment of the advance payment which depends on the provision by the Contractor of the advance payment guarantee.

The result is that if it benefits a Contractor to delay the start date – for example to give himself additional mobilisation time or in order to avoid a winter period – he can do so simply by delaying provision of the guarantee.

Better still for the unscrupulous, if the notice and instruction to commence are not provided within 180 days, the Contractor can terminate for Employer default and claim his lost profit on the job! This is apparently so even if the delay was due to the Contractor withholding his guarantee.

Of course, legal systems would resist this extraordinary result. Good faith doctrines would no doubt be mobilised in the civil law world to try to prevent a windfall result. Prevention principles might help out the Employer.

The question is: what were the draftsmen thinking when they added this to the MDB form? It was not in the original 2005 edition. And: who was lobbying the MDBs on behalf of contractors? They plainly did a very good job.

Good Idea #1: Define the Term “Profit”

The Pink Book defines as 5% the profit to which the Contractor is entitled as part of “Cost plus profit”. This avoids the 10 instances of “reasonable profit” that appear in the Red Book with all the accompanying room for uncertainty and argument. (Should “reasonable profit” be based on any profit figures in the contract, or the Contractor’s tender calculations, or current market profit levels or the Contractor’s own average historical profitability or indeed the profitability of the particular project?)

There are 71 “reasonables” and “reasonablys” plus two “unreasonablys” still left to argue about but the MDBs have taken a step in the right direction.

Oddity #2: The Contractor Chooses his Bonding Bank

The contractors’ lobby appears to have succeeded regarding bonds and guarantees. Clauses 4.2 and 14.2 have been amended so that contractors can provide performance and advance payment guarantees from any “reputable bank or financial institution selected by the Contractor”. The same applies to retention bonds which, by clause 14.9, the Contractor is entitled to substitute for a cash retention on taking-over.

As the MDBs know better than most, the value of bonds does not depend only on the repute of the bank but also on the attitude of the courts. The courts appear to be very willing to intervene on behalf of a contractor to block payment. Other countries have the same problem – or safeguards – depending on your point of view.

The fact is that if the point of the bond is to provide security nearly equivalent to cash in hand, or at least security obtainable “on demand”, then it matters where it comes from. Employers should be careful to ensure that the bond will be readily cashable. These amendments effectively prevent that. It is particularly odd that amendments made by funders for their client Employers should insist on bonds in lieu of cash retention; and then undermine the value of those bonds.

Good Idea #2: A Timescale for the Engineer’s Determination

The obligation on the Engineer to make determinations promptly is specified in clause 3.5. He has 28 days. The consequence of not making a determination in relation to a claim within 42 days is spelt out in clause 20.1: the claim may be treated as rejected and the matter may be referred to the dispute board. This is a welcome clarification: it was generally understood that silence could be treated as a rejection; but there was much room for argument as to the required length of the silence and the effect of a late determination.

Oddity #3: Contractor Receives Profit if Project Cancelled

It is odd that the MDBs should volunteer that Employers who cancel the project and terminate for convenience under clause 15.5 should have to compensate contractors for their lost profit as if the termination were a default.

The 1999 editions – and, I would imagine, the 2^nd editions will do the same – require Employers to refund to Contractors their costs and pay for their demobilisation but they do not award profit. It was accepted that Contractors signing FIDIC contracts took the risk that their clients might cancel the project for one reason or another. An omission is a cancellation of part only of the project: however, here the Pink Book does not award lost profit on the omitted work.

Clause 16.4 no longer refers expressly to loss of profit but there can be little doubt that a right to be paid “the amount of any loss or damage suffered by the Contractor as a result of this termination” would include profit.

Good Idea #3: Time Limit for Employer’s Claims

The Red Book imposes tough time-limits and draconian sanctions on Contractor claims; but imposes neither on the claims of Employers. It seems right and a little more balanced to impose a time-limit on the Employer’s notices of claim. Even though there is no express sanction attached to a failure to notify, the 28-day obligation reduces the contrast between the regimes applying to Contractors and Employers.

Conclusion

Whether the Pink Book continues to a new edition or not, it has certainly produced some good ideas as well as some curiosities. Harmony may be desirable in general but perhaps not when it comes to standard forms.

For a full list of the differences between the Red Book 1999 and the Pink Book 2010,click here

What is the point of a variations clause? It is almost inevitable that, however well thought through a construction project is at design stage, when it comes to be built, there will be a need for some variations. The FIDIC

What is the point of a variations clause?

It is almost inevitable that, however well thought through a construction project is at design stage, when it comes to be built, there will be a need for some variations. The FIDIC 1999 Red, Yellow and Silver Books, for example, devote an entire chapter to the subject (Clause 13 [Variations and Adjustments]).

At least under English law an employer is not entitled unilaterally to vary the original works unless the new work is of a kind contemplated by the clauses of the contract which provide for the ordering of extras. The purpose of a ‘variation clause’ is to enable an employer to avoid having to enter into a new contract with the same contractor, or perhaps another contractor, to have him perform the variation. If the employer were to approach a new contractor, he would face re-tendering costs, possible increases in prices, delay, and clashes between the original and new contractors on site. If on the other hand the employer is able to vary the original contract, costs and inconvenience may be kept to a minimum.

The contractor may argue however that the nature of the proposed varied works falls outside the scope of his original pricing mechanism, and he should be properly compensated for that. Therefore, arguably, a well-drafted variations clause will address the type of changes that that the employer may instruct and provide a clear mechanism for valuing them.

What does the FIDIC Variation Clause say?

A variation is defined in the FIDIC Red Book as meaning

“any change to the Works, which is instructed or approved as a Variation under Clause 13 [Variation and Adjustments].”

Sub-Clause 13.1 of the FIDIC Red Book provides that:

“Variations may be initiated by the Engineer at any time prior to issuing the Taking-Over Certificate for the Works, either by an instruction or by a request to the Contractor to submit a proposal.”

The Sub-Clause goes on to provide that the Contractor “shall execute and be bound by each Variation“. The only exception which enables the Engineer to cancel, confirm or vary the instruction is where the Contractor promptly gives notice and particulars to the Engineer stating that he “cannot readily obtain the Goods required for the Variation“. The Sub-Clause goes on to list what a Variation “may” include. From the wording it is not clear whether the word “may” is intended to mean that the list that follows is an exhaustive or non-exhaustive one although the latter is more likely. Sub-Clause 12.3 of the Red Book provides a mechanism to the Engineer to evaluate instructed Variations. The valuation clause is quite difficult to interpret but is not the subject of this short article.

Neither the FIDIC Yellow Book nor the Silver Book contains a list of possible Variations like the one provided in the Red Book. Nor do they make provision for the valuation of Variations in the same way that the Red Book does. However Sub-Clause 13.1 of both the Yellow and Silver Books picks up on one of the scenarios in the Red Book list referred to above, namely that a Variation shall not comprise the omission of any work which is to be carried out by others. Therefore, unless it is considered that Variations under the Red Book are restricted to the categories listed, all the FIDIC Red, Yellow and Silver Book contracts allow the Employer to instruct a variation which the Contractor is then bound to execute. On a strict construction of Clause 13, there is no restriction on the nature or scope of additional work that can be instructed as long as it is a “change to the Works“.

Is the FIDIC Variation Clause Sufficiently Comprehensive?

What, therefore, is a change to the works? The Concise Oxford Dictionary defines ‘change’ as: “Making or becoming different; substitution of one for another variety“. Does that definition help? How different can the change make the project? What if the change makes the project an entirely different proposition to that which was tendered for? So, to take the extreme example posed in the title, if the employer wished the contractor to build an airport as a variation to a road project, would that be permissible?

Back in 1876, Lord Cairns in the English case of Thorn v London Corporation distinguished between additional or varied work that was contemplated by the contract, and work that was not. He described work not contemplated by the contract as “additional or varied work, so peculiar, so unexpected, and so different from what any person reckoned or calculated upon, that it is not within the contract at all” and concluded that such work would not fall within the variation clause.[1] Other cases in England have followed this approach.

In the United states a ‘cardinal-change’ doctrine has developed. Initially it referred to the legal principle by which a contractor is released from the obligation to work under the terms of a government contract if the government has made a major or cardinal change to that contract by directing the contractor to perform work not within its general scope. In some states the doctrine is now also recognised in relation to private contracts. The law has developed to the point in the US where in some states the doctrine also covers circumstances where a large number of small changes are instructed which individually would fall within the ambit of the variations clause, but which collectively have the effect of completely changing the scope of works.

Under the doctrine, when a contractor claims that there has been a cardinal change, it is essentially an assertion that the employer has breached the contract. The purpose of the doctrine is to provide a remedy for the contractor who feels obliged to execute changed or additional work despite his protest that the change is cardinal. A court addressing the issue of ‘cardinal-change’ and the contractor’s claim for damages would be likely to consider:

• The individual and cumulative impact of changes;
• The degree of added complexity and difficulty of the work;
• Any disruption caused to the contractor’s performance;
• The overall impact upon contract cost and time of performance; and
• The effect of change on compensation or risk allocation.

The American courts (using a similar approach to the English courts) would in effect ask whether the employer has made changes to a project beyond what the parties reasonably could have anticipated at the time the contract was entered into.

Plainly it will be a question of fact whether a change falls within the Thorn test for a legitimate variation or whether it crosses the threshold of a cardinal change. It is suggested that it would be inappropriate to set out in the FIDIC General Conditions an exhaustive set of criteria to aid in that determination. The question however is whether the principles referred to in Thorn or that of a cardinal change should find expression in the FIDIC conditions at all.

Conclusion

Having witnessed the consequences of employers’ attempts to impose a ‘cardinal change’ on contractors, in the author’s view it would be sensible for the FIDIC standard forms of contract to include in their ‘variation clause’ greater clarity on what does constitute a change, perhaps adopting wording derived from the Thorn test, and for the concept of a cardinal change to be expressly recognised. Major disputes might thereby be avoided.

Please get in touch at joanne.clarke@howardkennedy.com or victoria.tyson@howardkennedy.com with your thoughts or to discuss any concerns.

[1] 1 App Cas 120.