FIDIC PROCUREMENT OPTIONS, Clause 3 and Clause 20

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1 FIDIC PROCUREMENT OPTIONS, Clause 3 and Clause 20 PATRIZIA PALMITESSA-SAVRIC BSc Arch Eng MArch Arch.BW RIBA MAAB FCIArb FAArb FBIArb Head Contracts & Dispute Resolution GINDER PALMITESSA PTY LTD T: gpa@ginderpalmitessa.com

2 FIDIC 1999 Rainbow Suite of Contracts First Edition: RED BOOK: Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer YELLOW BOOK: Conditions of Contract for Plant and Design Built for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor SILVER BOOK: Conditions of Contract for EPC/Turnkey Projects GREEN BOOK: Short Form of Contract intended for works of relatively small capital value, designed by the Contractor as specified in the Appendix, suitable for simple or repetitive works or works of short duration without a need for specialist subcontractors, no Engineer, Employer appoints spokesman or a representative

3 OVERVIEW OF FIDIC MAJOR WORKS BOOKS MAIN FEATURES: Red, Yellow and Silver Books Readily availablestandard forms, prepared by engineers Suitable for internationaland domestic use, compatible with both common and civil law concepts Clearly defined risk allocation Harmonized in form, wording and definitions Each of the Books is in three parts: General Conditions 20 Clauses Guidance for the Preparation of the Particular Conditions Forms RED BOOK: Intended for works designed by (on behalf of) the Employer; the Contractor may be required to supply plant and may do some design Contract comes into effect on issue of Letter of Acceptance; Contract Agreement may be signed Contract administrationby the Engineer Interim and Final Payments based on measurement, applicableboq rates and prices Standing DAB

4 YELLOW BOOK: Intended for plant and works designed by the Contractor; the Employer may do some design Contract comes into effect on issue of Letter of Acceptance; Contract Agreement may be signed Contract administrationby the Engineer Interim Payments based on Schedule of Payments, Final Payment based on lump sum Contract Price Ad-hoc DAB SILVER BOOK: Intended for EPC Engineer, Procure, Construct Contract where responsibility for the design lies solely with the Contractor and is done in accordance with the Employer s Requirements Contract comes typicallyinto effect on signingof the Contract Agreement Contract administrationby the Employer or Employer s Representative Interim Payments based on Schedule of Payments, Final Payment based on lump sum Contract Price Testing Procedure includingtests after Completion Intentionalunbalanced risk allocation Contractor assumes majority of risks Final price and time of completion more certain AD-hoc DAB

5 DISCUSSION: Benefits of standard form contracts v benefits of bespoke contracts in construction Procurement and standard forms of contract: how to choose the right match If the following are to be taken into consideration, which Book is suitable as a Form of Contract: 1. Certainty of final price and completion date are of extreme importance 2. Employer is willing to pay a premium for this certainty 3. Tenderer can verify all relevant data and make necessary site investigations before submitting tender 4. Employer's award evaluation is not based on price 5. Employer is willing to accept less competition If the following are to be taken into consideration, which Book is suitable as a Form of Contract: 1. Time to verify Employer's Requirements and site conditions is not sufficient within the tender period 2. Extensive underground works is required 3. Site is not available for inspection 4. Employers wishes to supervise works and review Contractor s documents 5. Engineer is certifying payments

6 CONTRACT STRATEGIES: choice of DELIVERY METHODS and PROCUREMENT ROUTES: Influencing factors include: type and nature of the project financing arrangements payment arrangements required services: construct only, design, maintenance and operation certainty of cost and time during construction value/size of the project day to day management and control time availablepre-construction associated and other risk allocation Main differences are in the following areas: Design responsibility Contract price and payment methods Control and contract administration Risk profile

7 Risk- Occurrence of an uncertain event that has consequences Philosophy of RISK ALLOCATION under FIDIC Contracts: Influenced by common law Fair and well balanced Relies on four allocation maxims: risk allocated to the party that can best control and manage the risk and is best able to sustain the consequences Contractual mechanism allows for paying only for risks that eventuates Exception: SILVER BOOK Employer pays higher price to transfer more risk : Accurate feasibilitystudies prepared to make go/no go decisions Willingto pay premium for shiftingrisks and includes same in project viabilitycalculations Does not want to be involved in day-to-day management Wants operational capabilitywithin time and budget Consequence: Employer pays premium even if the risk does not eventuate

8 DISCUSSION - Examples of inherent risks in FIDIC Contracts: changes to sub-surface, adverse climatic conditions, difficulties getting access to site etc. TRANSFER OF RISK: RED - YELLOW - SILVER: Owner s Risk RED Book Design by Employer YELLOW Book Design - Build Contractor's Risk SILVER Book EPCT CATEGORIES OF RISK: Insurable risk (e.g. war, civil commotion, fire, flood, pressure waves) Uninsurable risk (e.g. delayed drawings, ground conditions, late access to site, force majeure) SEE: Sub-Clause 17 Risk and Responsibility and Employer s Risks and Sub-Clause 19: Force majeure All risk will be spread between the parties by contract or transferred to a third party through insurance Risk PROFILE of FIDIC Contracts: BALANCED RISK ALLOCATION (RB, YB) - minimize the cost of risks and the cost of projects UNBALANCED RISK (SB) increase in costs: premium or increase in complications, claims, disputes

9 OVERVIEW OF FIDIC 1999 MAJOR WORKS BOOKS GENERAL CONDITIONS RED Book YELLOW Book SILVER Book 1. GENERAL PROVISIONS 2. THE EMPLOYER 3. THE ENGINEER 3. THE EMPLOYER S ADMINISTRATION 4. THE CONTRACTOR 5. NOMINATED SUBCONTRACTORS 5. DESIGN 5. DESIGN 6. STAFF AND LABOUR 7. PLANT, MATERIALS AND WORKMANSHIP 8. COMMENCEMENT, DELAYS AND SUSPENSION 9. TEST ON COMPLETION 10. EMPLOYER S TAKING OVER

10 OVERVIEW OF FIDIC 1999 MAJOR WORKS BOOKS GENERAL CONDITIONS 11. DEFECTS LIABILITY RED Book YELLOW Book SILVER Book 12. MEASUREMENT AND EVALUATION 12. TESTS AFTER COMPLETION 12. TESTS AFTER COMPLETION 13. VARIATIONS AND ADJUSTMENTS 14. CONTRACT PRICE AND PAYMENT 15. TERMINATION BY EMPLOYER 16. SUSPENSIONAND TERMINATION BY CONTRACTOR 17. RISK AND RESPONSIBILITY 18. INSURANCE 19. FORCE MAJEURE 20. CLAIMS, DISPUTES AND ARBITRATION

11 THEROLEOFTHEENGINEERUNDERTHEFIDIC SUITEOFCONTRACTS THE ENGINEER - Sub-Clause : Engineer is a defined word and means the person appointed by the Employer to carry out duties assigned to the Engineer under the contract. The Engineer is to be named in the Appendix to Tender Also consider Sub-Clause 1.1: The words that indicate persons or parties include corporations and other legal entities APPOINTMENT OF THE ENGINEER - Sub-Clause 3.1: The Employer shall appoint the Engineer REPLACEMENT OF THE ENGINEER - Sub-Clause 3.4: If the Employer wishes to replace the Engineer, it shall give at least 42 days notice with details of the replacement Engineer to the Contractor. The Employer shall not appoint a person as a replacement Engineer if the Contractor raises a detailed and reasonable objection by notice to the Employer *Wording of Sub-Clauses paraphrased for actual wording of Sub-Clauses see FIDIC 1999 Red Book

12 AUTHORITY OF THE ENGINEER - Sub-Clause 3.1: The Engineer has no authority to change the Contract. The Engineer has the authority as specified in or as implied from the Contract. If the approval of the Employer is required before the Engineer is to exercise a specified authority, this requirements is to be noted in the Particular Conditions. The Employer is not to interfere with the Engineer s authority. It continues to provide, unless otherwise stated in the Contract, that: a) the Engineer is deemed to act for the Employer, b) the Engineer is not authorised to relieve either Party of its obligations under the Contract and c) No act or failure to act by the Engineer shall relieve the Contractor from its responsibilities under the Contract DUTIES OF THE ENGINEER: Approve Check Certify Consent Examine Inspect Instruct Notify Request Determine Disapprove Clarify Monitor progress Evaluate Measure etc. *Wording of Sub-Clauses paraphrased for actual wording of Sub-Clauses see FIDIC 1999 Red Book

13 DELEGATION BY THE ENGINEER - Sub-Clause 3.2: The Engineer is authorised to assign duties and delegate authority to assistants and to revoke such assignments or delegation. Any assignment, delegation or revocation is to be by a written notice to the Parties and only takes effect once the notice is received by both Parties. But, the engineer cannot delegate the authority to determine any matter under Sub-Clause 3.5 (Determinations) INSTRUCTIONS BY THE ENGINEER - Sub-Clause 3.3: The Engineer is authorised to issue instructions at any time which are necessary for the execution of the Works and remedying of the defects. The Contractor is to comply with all such instructions by the Engineer. DETERMINATIONS BY THE ENGINEER- Sub-Clause 3.5: When the Engineer is required to proceed in terms of Sub-Clause 3.5 to agree or determine any matter, the Engineer must first consult with each Party in an attempt to reach agreement. Only if no agreement is reached, the Engineer is required to make a fair determination, in terms of the Contract and with regard to all relevant circumstances. *Wording of Sub-Clauses paraphrased for actual wording of Sub-Clauses see FIDIC 1999 Red Book

14 The Engineer is to notify both Parties of each agreement or determination and details thereof. The determination of the Engineer is binding on both Parties who are to give effect to each agreement or determination until the determination is revised in terms of Clause 20 (Claims, Disputes and Arbitration) Analysis of requirements under Sub-Clause 3.5: the Engineer shall proceed to either agree or determine if agreement not reached, the Engineer shall only then make a fair determination Sequence of events under Sub-Clause 3.5 in reaching agreement or making a fair determination: the Engineer is to proceed to agree or determine the Engineer is to consult with each Party in an attempt to reach agreement if agreement is not reached, the Engineer is to make a fair determination in making a fair determination, the Engineer is to do so in accordance with the Contract and to take due regard of all relevant circumstances the Engineer is to give notice to both Parties of each agreement or determination, with particulars each Party shall thereafter give effect to each agreement or determination subject to Clause 20 *Wording of Sub-Clauses paraphrased for actual wording of Sub-Clauses see FIDIC 1999 Red Book

15 Some Sub-Clauses that require the Engineer to proceed in accordance with Sub-Clause 3.5: Sub-Clause 2.1 (Right of Access to the Site) Sub-Clause 2.5 (Employer s Claims) Sub-Clause 4.7 (Setting Out) Sub-Clause 4.12 (Unforseeable Physical Conditions) Sub-Clause 12.3 (Evaluations) Sub-Clause 20.1 (Contractor s Claims) PAYMENT CERTIFICATION: Sub-Clause 14.6: The Engineer is to issue Interim Payment Certificates within 28 days after receiving Statement and supporting documents from the Contractor at the amount that the Engineer fairly determines to be due Sub-Clause 14.13: The Engineer is to issue Final Payment Certificates within 28 days after receiving the Final Statement and written discharge (Sub-Clause and Sub-Clause 14.12) *Wording of Sub-Clauses paraphrased for actual wording of Sub-Clauses see FIDIC 1999 Red Book

16 TAKING OVER OF THE WORKS: Sub-Clause 10.1: The Engineer is to either issue the Taking-Over Certificate or reject the application within 28 days receiving the Contractor s application. CLAIMS: Sub-Clause 2.5: The Engineer may give notice of the Employer s claims to the Contractor. The Engineer is then to proceed to agree or determine the claim as stipulated in Sub-clause 3.5 (Determinations). Sub-Clause 20.1: The Engineer is to proceed in accordance with Sub-clause 3.5 (Determinations) but is to respond to the Contractor s claim within 42 days with approval or disapproval in principle and may request further particulars. *Wording of Sub-Clauses paraphrased for actual wording of Sub-Clauses see FIDIC 1999 Red Book

17 DISPUTE RESOLUTION Under FIDIC 1999 Books, a dispute is not a defined word. However, Gold Book Sub-Clause defines that a dispute arises in a situation where there is a claim. Where the other Party ejects the claim and where the claiming Party does not agree with the rejection. DISPUTE RESOLUTION Clause 20 procedure: Dispute Notice of intention to refer a dispute to a DAB (additional step in Yellow and Silver Books only) Referral to Dispute Adjudication Board DAB no time limit Decision within 84 days Notice of dissatisfaction within 28 days Amicable settlement within 56 days InternationalChamber of Commerce ICC arbitration may commence in respect of that dispute only *Wording of Sub-Clauses paraphrased for actual wording of Sub-Clauses see FIDIC 1999 Red Book

18 Sub-Clause : FIDIC DAB is either one person or a three persons board named in the Contract. Each member is independent and warrants to act and remain impartial. Regardless of who nominates them, members do not represent Parties DAB - Sub-Clause 20.2: DAB adjudicates disputes in accordance with Sub-Clause 20.4 which provides that reasoned decisions shall be given by the DAB within 84 days and that decisions shall be binding on both Parties, who shall promptly give effect to it unless and until it shall be revised in amicable settlement or by an arbitral award ARBITRATION - Sub-Clause 20.6: If the disputes are not settled amicably, the disputes in respect of which there is no DAB s decision or the decision has not become final and binding are to be finally settled by international arbitration under the Rules of Arbitration of the International Chamber of Commerce *Wording of Sub-Clauses paraphrased for actual wording of Sub-Clauses see FIDIC 1999 Red Book

19 DISPUTE AVOIDANCE Sub-Clause 20.2 Red and MDB Books: Parties may agree to jointly refer a matter to the DAB for opinion, neither party may approach the DAB for opinion without the consent of the other. Clause 4 of the Red, MDB and Gold Books General conditions of Dispute Adjudication Agreement: DAB Member shall be available to give opinions on matters relevant to the Contract when so requested jointly by the Parties and subject to the consent of the other DAB Members, if any Avoidance role of the DAB is further emphasised in Sub-Clause 20.5 of the Gold Book which provides for joint referral in writing with a request to provide assistance and in an informal manner resolve any disagreements subject to both Parties presence at discussions, unless otherwise agreed by the Parties. Such an advice by the DAB, written or verbal, is neither binding on either of the Parties nor on the DAB in any future formal proceedings. *Wording of Sub-Clauses paraphrased for actual wording of Sub-Clauses see FIDIC 1999 Red Book