As most people started to wind down in December 2019 the Fédération Internationale des Ingénieurs Conseils (FIDIC) launched another contract at the FIDIC users conference in London.
This contract to use its full title is known as the Conditions of Subcontract for Plant and Design-Build and adds to FIDIC’s popular suite of construction contracts that are used extensively on global infrastructure projects. The Yellow Book Conditions of Subcontract is for use in conjunction with the FIDIC Conditions of Contract for Plant and Design-Build, First Edition 1999. The CICES Civil Engineering Surveyor magazine published articles about the FIDIC Yellow Book First edition and the Rainbow Suite in 2011 and 2012 so I won’t cover old ground again in this article.
Whilst FIDIC launched a 2017 version of the Conditions of Contract for Plant and Design-Build as an update to the FIDIC 1999 Conditions of Contract for Plant and Design-Build (Yellow Book), First Edition; the first edition is still the most commonly used globally. It is particularly favoured in the European offshore wind industry and the global power industries. The 2018 CICES Construction Law Review Article Use of FIDIC contracts in the UK and European offshore wind industry covers this aspect in more detail.
Commenting on the new subcontract, Dr Nelson Ogunshakin, FIDIC chief executive, said: “We believe that subcontracting deserves greater attention. When a part of the main works contracted based on the FIDIC Conditions of Contract for Plant and Design-Build, First Edition 1999 is sub-contracted, it is equally important for the successful completion of the project that the terms of the sub-contract are properly addressed and drafted. The FIDIC Conditions of Subcontract for Plant and Design-Build should serve this purpose.”
FIDIC lead board member for the contracts committee, Aisha Nadar, said: “FIDIC is known and well regarded for its fair-and-balanced contracts and the new design-build subcontract is no exception. The rights of the contractor under the main contract, as well as the obligations, are passed down to the subcontractor. The general conditions of subcontract are drafted on the basis of pay-when-paid, being the most common commercial arrangement between contractors and subcontractors in general - but not pay-if-paid. The subcontractor will not lose their entitlement to be paid if it transpires that the employer does not pay the contractor under the main contract.
In those parts of the world where pay-when-paid provisions are not allowed by law, the guidance for the preparation notes of particular conditions at the back of the new subcontract give the example clauses for subcontracts. Additionally, there are example provisions in the guidance at the back of the new subcontract where an engineer’s determination and/or a DAB decision and/or an arbitral award under the main contract concerning a subcontractor’s claim is to be binding under the subcontract.”
FIDIC published in October 2011 its official “First Edition” of “Conditions of Subcontract for Construction, Building and Engineering Works designed by the Employer” – the subcontract primarily intended to be used with the FIDIC Red Book and the harmonised MDB Conditions (the Pink Book) and the Yellow Book subcontract will be gratefully received by those that have waited over the years for its publication and distribution.
Users of the subcontract in the United kingdom will need to decide if the work let under this form will be covered any of the exemptions to the Construction Act if they are confident it is, for example because the work is offshore, such as a wind turbine foundation they need do nothing further, the standard payment provisions and use of the Subcontract DAB dispute board can stand. If the subcontract work in part or whole isn’t covered by the exemptions then the payment and dispute board provisions in the subcontract do not comply with the Construction Act and either need amending wholesale or the applicable provisions will be implied into the contract by the Act and Scheme.
I would suggest that this it is inadvisable not to amend as some Adjudicator Nominating Body could be selected that may not have the right level of legal or technical expertise within its panellists for the project and you also want certainty as to payment terms and processes. The better option would be to use the Particular Conditions to amend the contract so that both parties know where they stand and can price the subcontract accordingly. FIDIC publish guidance on amending their contracts and also provide a free guide known as the Golden Principles which sets out five principles which they say should be taken into account.
GP1: The duties, rights, obligations, roles and responsibilities of all the Contract Participants must be generally as implied in the General Conditions, and appropriate to the requirements of the project.
GP2: The Particular Conditions must be drafted clearly and unambiguously.
GP3: The Particular Conditions must not change the balance of risk/reward allocation provided for in the General Conditions.
GP4: All time periods specified in the Contract for Contract Participants to perform their obligations must be of reasonable duration.
GP5: Unless there is a conflict with the governing law of the Contract, all formal disputes must be referred to a Dispute Avoidance/Adjudication Board (or a Dispute Adjudication Board, if applicable) for a provisionally binding decision as a condition precedent to arbitration.
http://fidic.org/sites/default/files/_golden_principles_1_12.pdf
GP3 is an important Golden Principle and FIDIC consider that:
In defining roles, duties, obligations and rights, a contract explicitly or implicitly allocates risks to either one or both of the contracting Parties.
Fair and balanced risk/reward allocation is widely accepted as the most appropriate basis for drafting of construction contracts to minimise the prospects of disputes, enhance the likelihood of achieving successful project outcomes, and to keep the Contract Price moderate and optimum. It is a fundamental principle on which FIDIC Contracts are based.
The Abrahamson principles, well known to construction lawyers, are widely regarded as the basis of «balanced» or «fair» risk/reward allocation. These principles, as refined by Dr Nael Bunni, dictate that the allocation of risks to a Party to a Contract should be determined by:
- Which party can best control the risk and/or its associated consequences?
- Which party can best foresee the risk?
- Which party can best bear that risk? and
- Which Party ultimately most benefits or suffers when the risk eventuates?
Since 1999 users of the Yellow Book have had to craft their own subcontracts giving rise to problems with ensuring a true back to back basis is in place for the contractual relationship between contractor and subcontractor; the new form of subcontract will therefore be warmly received by the global industry and should make for a common standard of subcontract terms with risks being allocated on a more equitable basis. Not only will this help FIDIC users, but it should cascade these principles around the global industry to other standard form drafters and help them recognise the important principles touched upon above.
One of the features of this subcontract is that it is intended to impose the Main Contract conditions and particular conditions upon the subcontract. Clause 2.2 states clearly that:
The Subcontractor shall, in relation to the Subcontract Works, perform and assume all the obligations and liabilities of the Contractor under the Main Contract save where the provisions of the Subcontract otherwise require….
Subcontractors tendering for work under this subcontract should therefore carefully review the tender documents and in particular Annex A which provides particulars of the Main Contract and thoroughly review the Particular Conditions of the Main Contract as this will be where the standard General Conditions of the Main Contract are amended.
Whilst the Subcontractor assumes the obligations and liabilities of the Contractor under the Main Contract they also shall have all rights, entitlements and remedies that the Contractor has under the Main Contract under Clause 2.4, though the Subcontractor must comply with its obligations as to Notices under Clause 20.1 and Subcontractors Claims under Clause 20.2.
The Subcontract doesn’t allow for verbal instruction per se by the Contractor’s Subcontract Representative; it requires all instructions to be confirmed in writing and a prudent Subcontractor would not action verbal instructions without first having a written instruction from the Contractor.
The Contractor must give notice to the Subcontractor within 28 days of it becoming aware of an event or circumstance giving rise to any payment by the Subcontractor to it under Clause 3.3. This drafting though does not specify a remedy for failure to comply with the notice requirement and as a condition precedent may be hard to enforce in certain jurisdictions. In the case of Bremer Handelgesellschaft mbH v Vanden Avenne Izegem nv, [1978] 2 Lloyd’s Rep. 113 the House of Lords held that a notice provision should be construed as a condition precedent, and so would be binding if:
(i) it states the precise time within which the notice is to be served; and
(ii) it makes plain by express language that unless the notice is served within that time the party making the claim will lose its rights under the clause.
As such in most common law jurisdictions the courts may reject that compliance with this period is a condition precedent to the Contractor being able to recover a payment.
The Subcontractor under Clause 4.1 has a general obligation under the Subcontract that when the subcontract works are completed, the Subcontract Works shall be fit for the purposes for which the Subcontract are intended as defined in the Subcontract Requirements. The fitness for purpose obligation is unusual for most parties in the United Kingdom as insurers will expect the insured to only contract on a reasonable skill and care basis rather than the much more onerous fitness for purpose. Any Subcontractor must therefore at tender stage confirm with its insurers that insurance cover is available on these terms prior to submitting its tender or risk not being insured or having extremely high premiums if cover is available.
The Subcontractor may not subcontract the whole or any part of the Subcontract without the prior consent of the Contractor. As such it would be advisable to confirm those subcontractors the Subcontractor intends to use during the tender; as it may find that the Contractor objects to its supply chain during the period of performance. The provision of labour is excluded from this requirement. Designers employed by the Subcontractor for the design of the Subcontract Works similarly require the consent of the Contractor and once again it may prove beneficial that they are included in the Subcontractors tender to prevent their being rejected.
If the Subcontractor fails to comply with the Subcontract Time for Completion and this failure cause or contributes to a failure by the Contractor to comply with the Main Contract for Completion subject to the notification provisions in Clause 3.3 the Contractor is entitled to deduct delay damages from the Subcontract Price. The liability can be capped, and the Subcontractor must ensure that it has stated this in its Appendix to the Subcontractor’s offer otherwise it will be limited to 10% of the Accepted Subcontract Amount as per the General Conditions.
Late payment of an Interim Subcontract Payment or a Subcontract DAB’s decision award allows the Subcontractor to suspend work or reduce the rate of works provided it has given not less than 21 days’ notice to the Contractor is strict accordance with the provisions of Clause 16.1. Delay or Cost incurred as result of suspending or reducing the rate of work can be claimed plus reasonable profit provided the provisions of Clause 20.2 Subcontractor’s Claims and Clause 8.4 Extension of Subcontract Time for Completion are complied with.
The Subcontractor has three main grounds for termination, failure by the Contractor to make payment after notice has been given under 16.1 and the default continues, the Contractor enters insolvency or bankruptcy or enters into administration or such other arrangement with creditors or that the Contractor substantially fails to perform his obligations under the subcontract. All of these require compliance with the stated notice periods and provisions otherwise the Subcontractor risks committing a repudiatory breach.
The Main Contract Force Majeure provisions are expressly incorporated into the Subcontract under Clause 19.1 by reference and for the benefit of readers are usually:
Clause 19.1 of the FIDIC Yellow Book defines force majeure as:
“an exceptional event or circumstance:
- which is beyond a Party’s control,
- which such Party could not have reasonably provided against before entering into the Contract,
- which, having arisen, such Party could not have reasonably provided against before entering into the Contract,
- which, having arisen, such Party could not reasonably have avoided or overcome, and
- which is not substantially attributable to the other Party.”
Clause 19.1 then provides a non-exhaustive list of the kind of events or circumstances that might amount to Force Majeure, these examples include:
1.war, hostilities (whether war be declared or not), invasion, act of foreign enemies,
2.rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war,
3.riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors” …
The recent Coronavirus could arguably be covered by these provisions so users must be alert to any attempts to change the wording of this provisions that seeks to change the balance of risk.
Whilst I have flagged up issues with the unamended General Conditions in the United Kingdom other jurisdictions with statutory security of payment legislation and adjudication will also need to think carefully how to amend including those of Ireland, Singapore, Australia and New Zealand. South Africa doesn’t have statutory adjudication, but the courts have willingly enforced contractual adjudication decisions including dispute board decisions and both the FIDIC Red Book and Yellow are commonly used on projects in the country.
Cases where the courts have enforced DAB decisions in South Africa and other African countries include:
- Esor Africa (Pty) Ltd/Franki Africa (Pty) Ltd JV and Bombela Civils JV (Pty) Ltd, SGHC case no. 12/7442
- Salz-Gossow (Pty) Ltd v Zillion Investment Holdings (Pty) Ltd (A 44/2016) [2017] NAHCMD 72 (9 March 2017)
- Tubular Holdings (Pty) Ltd v DBT Technologies (Pty) Ltd (06757/2013) [2013] ZAGPJHC 155
The contract having been designed to work with the 1999 Yellow Book doesn’t refer to a DAAB (dispute avoidance and adjudication board) nor does it place a duty on the board members to help avoid disputes, as an hoc board it can only react to problems once they have arisen and are full blown disputes as it is appointed once the dispute arises. To refer a dispute to the Subcontract DAB the process is started by either Party serving a ‘Notice of Dispute’. If the matter is one that is also in dispute between the Contractor and Employer, the mater can be deferred until the Main Contract DAB has considered it.
If the matter can be progressed the parties should jointly appoint the Subcontract DAB within 42 days after the Notice of Dispute. Once the DAB has issued its decision the Parties are bound by it pending amicable settlement or referring the dispute to Arbitration. A party not happy with the decision should serve a notice of dissatisfaction within 28 days of the decision but the decision must be complied with.
This article has only briefly skimmed over this new subcontract, but the writer believes that it is a very fair and useful subcontract for those working with the FIDIC Yellow Book no matter whether they are a Contractor or Subcontractor. The only criticism that can be levelled at FIDIC is that is has taken so long for this to be issued and that other forms of main contract FIDIC produce need standard forms of subcontract producing urgently.
About the author
Sean Sullivan Gibbs BSc. LLB(Hon) PG Dip Arb, PG Dip Bar, LLM, MICE, AFICHEME, FRICS, FCIOB, FCICES is a director with Hanscomb Intercontinental Ltd. Hanscomb Intercontinental provide expert advisory and expert witness services to the onshore and offshore construction, engineering and shipbuilding industries in the United Kingdom and internationally from offices in London, Hong Kong, Johannesburg and New York.
Sean serves on the CICES Contract and Disputes Resolution Committee and is a Committee Member of the South West and South Wales branch of the CICES.
He can be contacted by email sean.gibbs@hanscombintercontinental.co.uk or telephone +44 (0)20 3287 8518