EIC Publications

§ EIC Turnkey Contract (1994)

§ EIC Synopsis on Contract Bonds (1999)
§ EIC Contractor’s Guide to the FIDIC “Silver Book” (March 2000)
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§
§
EIC Contractor’s Guide to the FIDIC “New Red Book” (March 2002)
EIC Contractor’s Guide to the FIDIC “New Yellow Book” (March 2003)
EIC Contractor’s Guide
§ EIC White Book on BOT (April 2003) to the
Secretariat:
FIDIC Conditions of Contract
for
§ Frank Kehlenbach (Director)
§ Hasso von Pogrell (Assistant Director) Plant and Design-Build
§ Vera Stark (Secretary)

Address:

§ Kurfürstenstrasse 129
§ D-10785 Berlin
§ TEL +49 30 2 12 86-244
§ FAX +49 30 2 12 86-285
§ [email protected]
§ www.eicontractors.de

Issued March 2003 ISBN 3-9808257-3-6 THE NEW EIC YELLOW BOOK GUIDE
 EIC Contractor’s Guide
to
the FIDIC Conditions of Contract
for
Plant and Design-Build
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© Copyright European International Contractors 2003

ISBN 3-9808257-3-6

All rights reserved

No part of this publication may be
Reproduced or transmitted in any
form or by any means without
permission of the publisher

Published by European International Contractors

Kurfürstenstrasse 129
D – 10785 Berlin, Germany
Phone: ++493021286244
Fax: ++493021286285
E-mail: [email protected]
Web: www.eicontractors.de

March 2003
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Erratum

EIC Contractor’s Guide to the

FIDIC Conditions of Contract for Plant and Design-Build

(The „New Yellow Book“)

We would like to draw your attention that the following mistakes appear in this document:

• The first sentence in the 2nd paragraph of our comment on Sub-Clause 16.2 [Termination by
Contractor] must be replaced by the following sentence: “These time limits are too long”.

• In our comment on Sub-Clause 20.3 [Failure to Agree Dispute Adjudication Board] the
words “Particular Conditions” must be replaced by the words “Appendix to Tender”.
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 1

Foreword

It is one of EIC’s principal objectives to contribute constructively to the development of

acceptable and standard forms of contract for use in the international construction
industry. EIC shares FIDIC´s viewpoint that standardisation, both in technical and
administrative matters, is more likely to result in the satisfactory and trouble free
execution of projects. EIC’s contribution to improving standard forms of contract was the
publication of guides to FIDIC´s Silver and Red Books. The EIC Contractor's Guide to
the Silver Book (FIDIC Conditions of Contract for EPC Turnkey Contracts) was published
in March 2000 and was followed in March 2002 by the EIC Contractor’s Guide to the Red
Book (FIDIC Conditions of Contract for Construction).

The Silver Book is a completely new FIDIC form and EIC has expressed serious
reservations over many of its provisions. On the other hand, the Red Book is essentially
a revised version of the Fourth Edition of the Conditions of Contract for Works of Civil
Engineering Construction; a document which most contractors are happy to accept.
However, EIC believes that the Red Book will be more onerous for contractors.

The Yellow Book falls somewhere between those extremes. FIDIC recommends it for
the provision of electrical and/or mechanical plant and/or other works which may include
any combination of civil, mechanical, electrical and/or construction works. EIC believes
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that such a broad application is inappropriate and we doubt the wisdom of trying to
produce a standard form of contract for such a wide range of applications. EIC accepts
that the Yellow Book provides a useful starting point for a Design-Build contract, which
includes both plant supply and construction works. However, there are many provisions
that are onerous and unlikely to be acceptable to contractors and, in EIC’s view, require
redrafting.

In preparing this guide, we have followed a similar approach to the guides to the Silver
and Red Books and comment only where we believe that there are matters of
importance to consider and only at length where there are important issues at stake.

Comments received from both contractors and consultants tell us that the EIC guides
are proving useful. We would like to continue to receive feedback on their usefulness
and relevance and we would particularly like to gather experience of any contracts carried
out under the Yellow Book. All communications should be sent to the EIC Secretariat in
Berlin.

EIC wishes to make it clear that this document is not exhaustive and is intended for
guidance only. Expert legal advice should always be obtained before submitting an offer
or making any commitment to enter into a contract. Neither EIC nor the authors of this
document accept any responsibility or liability in respect of any use made by any person
or entity of this document or its contents which is and shall remain entirely at the user's
risk.

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 3

Acknowledgements

EIC would like to thank the FIDIC Contracts Committee for the time they devoted to
explaining the philosophy behind the publication of the Yellow Book and for listening
patiently to our arguments.

EIC would also like to express its appreciation of the work carried out by those members
of its Conditions of Contract Working Group who contributed to the preparation of this
Guide: Richard Appuhn, Salini; Håkan Broman, NCC; Martin Carrey, Carillion; Eric
Eggink, Netherlands Association of International Contractors; Dr Joachim Goedel,
HOCHTIEF; Frank Kennedy (Chairman). Our thanks also go to the Working Group's
secretary Frank Kehlenbach.
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 4

Executive Summary

As we explain in the Introduction to this guide, it is EIC’s view that contracts for the design
and construction of building and civil engineering works (even where equipment supply is
included) require a different contractual framework to contracts which cover only
equipment supply and installation. Consequently, the comments and recommendations
contained within this guide are intended to assist contractors engaged in design-build
contracts of a building or civil engineering nature regardless of whether or not equipment
is included.

Improvements over previous forms

EIC welcomes the requirement whereby the Employer now has to demonstrate that
sufficient finance is available to carry out the Works (Sub-Clause 2.4). This will be
particularly important where the immediate client is a Special Purpose Company (SPC)
funded by loans. For contracts placed by an SPC it is usual for the lending banks to put
a Direct Agreement in place, which permits them to take over control of the contracts
should the SPC default. Where such an agreement exists, it is important that the
Contractor is given the opportunity to study and consider its terms and conditions before
the construction contract is finalised. This clause will also prove useful where major
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variations are ordered or where the Employer has acknowledged the Contractor's right to
any significant payment for additional works or major claims.

The procedure for dealing with Employer’s Claims (Sub-Clause 2.5) is also an
improvement over previous FIDIC editions. The Employer must now follow a set
procedure if he considers himself entitled to any payment and must give notice as soon
as practicable and provide particulars of the claim. These provisions are mandatory. The
Engineer must then make a determination but the Contractor can refer such a
determination to a new and independent body, the Disputes Adjudication Board (the DAB,
Sub-Clause 20.2). These new provisions should go a long way to prevent any
unreasonable actions of the Employer, especially in terms of the application of Delay
Damages, a not uncommon practice with some employers in countering or indeed
negating the legitimate claims of the Contractor. The creation of the DAB is a welcome
addition to the Yellow Book and the binding nature of its decisions even if either party is
dissatisfied, is an added benefit.

The Engineer is now required to act for the Employer (Sub-clause 3.1) and no longer has
a duty to act impartially. This is considered a change for the better because it recognises
what has long been established custom and practice in the industry. In any event, we
believe that any possible downside will be more than compensated for by the introduction
of the DAB.

Whilst the Employer can still make claims on the Contractor’s Performance Security
(Sub-Clause 4.2), any claim must be made strictly in accordance with the terms laid
down in the Contract. This is an improvement on previous FIDIC editions, as the

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 5

Contractor is offered protection for all costs incurred should the Employer make a false
claim and the Employer must indemnify the Contractor accordingly. Whereas previous
editions merely required the Employer to notify the Contractor before making a claim, the
Yellow Book limits the Employer’s claims under this guarantee to amounts to which the
Employer is entitled.

Retrogressions

Regrettably there are a quite a few clauses that are inappropriate for the type of contract
covered by the Yellow Book and by comparison with previous editions have the overall
effect of increasing the risk to the Contractor.

The Contractor is now required (Sub-Clause 1.12) to provide all such confidential
information as the Engineer may reasonably require in order to verify the Contractor’s
compliance with the Contract. This clause is overly demanding and could place the
contractor in a very difficult position in situations where a dispute has arisen, especially
with regard to third parties. A similar provision to that in the Silver Book would be more
appropriate, which sets out a mutual confidentiality obligation and provides for agreement
of privileged information pre-tender. This would be a more sensible approach.

The Contractor is entitled to claim for time extension and payment of additional cost
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suffered due to errors in Setting Out information provided by the Employer (Sub-Clause
4.7). However, this entitlement is now subject to the test of whether an experienced
contractor would spot the error and the Engineer will be the judge on this matter. Not
only does the Engineer act for the Employer; he is also required to make decisions as if
he were an experienced contractor!

Of particular concern for contractors, working under English or Common Law is the
introduction of an obligation (Sub-Clause 4.1) which stipulates that the works, including
design, must be fit for purpose. Under those jurisdictions, the obligation is to design with
reasonable skill and care and this could lead to some interesting disputes should
difficulties arise as a result of any conflicts or anomalies that occur between the
Employer’s and the Contractor’s designs. The Yellow Book contains no obligation on the
Employer to provide a definition of “Intended Purpose” and this should be agreed by the
Parties before contract signature.

The concept of an Employer nominating a subcontractor in connection with Variations

(Sub-Clause 4.5) is unacceptable in a design and build contract. The Contractor must
have an absolute right to choose his subcontractors and the opportunity offered by the
Yellow Book, which is only to raise reasonable objection to such nomination, is
unacceptable. Contractors would be well advised to avoid or renegotiate the terms of
any contract that permits the interference of the Employer in the selection of
subcontractors.

Most parties to a construction contract would agree that the ability of any contractor to
prepare an accurate cost estimate is completely dependent on the quality and

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 6

comprehensiveness of the information provided at tender stage. It is difficult to

understand therefore the provisions of the Yellow Book (Sub-Clause 4.10) which requires
that only relevant data on sub-surface and hydrological conditions, which is in the
Employer’s possession has to be provided. In previous editions, the Employer had to
supply all such available data. It is difficult to see how it will help employers to limit in any
way the information provided to bidders. Contractors should try to amend this
requirement to reflect the terms of previous editions.

Where the Contractor encounters unforeseen conditions and submits a claim (Sub-
Clause 4.12), the Engineer may now consider whether conditions in similar parts of the
Works were more favourable than could have been foreseen before finally determining
any entitlement to additional costs. If, in the Engineer's opinion, such favourable
conditions were encountered, the Engineer can take them into account when determining
any entitlement to additional Cost. This provision could be extremely prejudicial to the
Contractor and is open to widely differing interpretations. A further new concept permits
the Contractor to provide evidence of the physical conditions foreseen in his tender
calculation. However, if such evidence is provided, the Engineer may or may not take
account of it and is not bound by it. It would appear that FIDIC’s objective is to use every
means possible to reduce the financial impact of claims for unforeseeable conditions but
the extent of the discretionary powers now at the Engineer’s disposal seem more likely to
increase the potential for dispute and disagreement.

Although Sub-clause 5.1 is considerably different from the corresponding sub-clause in

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the Silver Book, the contractor should be aware that the Yellow Book still requires the
Contractor to diligently scrutinise the Employer’s Requirements, including design criteria
and calculations. After commencement of the Works, the risk (and consequences) of
any errors in the Employer’s Requirements will pass to the Contractor, unless such
errors could not have been discovered by an experienced contractor. The application of
the test as to what an experienced contractor should have foreseen will pose similar
problems to the situation where unforeseeable physical conditions are encountered (Sub-
clause 4.12 refers).

The Employer now has the right to terminate for convenience (Sub-Clause 15.5)! This
right can be exercised at any time 28 days after giving written notice. The payment terms
do not provide for loss of profit and are inequitable and inappropriate in the case of
termination for the Employer’s convenience. In such circumstances, loss of profit should
be payable to the Contractor. The clause states that the Employer may not terminate in
order to undertake the Works directly or arrange for them to be completed by another
Contractor.

The Contractor’s obligation to issue a claim notice has changed for the worse and he is
now required to give notice of claim 28 days after becoming aware, or when he should
have become aware (Sub-Clause 20.1). Failure to comply with this provision will incur a
fierce penalty and will result in the Contractor forfeiting his right to an Extension of the
Time for Completion and to additional payment. The Employer is also discharged from
any liability. The penalty for failure to comply with a purely technical requirement to give
notice of claim is unduly harsh. It is inequitable to remove the fundamental right of the
Contractor to make a claim merely as a result of a failure to submit the required notice
within a fixed period of time. Whilst we accept that the Contractor may prejudice his

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 7

entitlement by failing to comply strictly with a notice provision we cannot agree that he
should forfeit his rights altogether and neither should the Employer be discharged from
any and all liability. It becomes doubly unreasonable that this provision also applies when
the Employer is responsible for causing the problem in the first place. It is revealing to
compare these terms with the obligations of the Employer where either the Employer or
the Engineer is only required to give notice as soon as practicable after becoming aware.
This demonstrates an unreasonable imbalance between the respective obligations of
Employer and Contractor that is becoming symptomatic of FIDIC contract forms.

Comments on a number of individual clauses follow and deal with the matters referred to
above in greater detail.
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EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 8

1 General Provisions
1.1.2.6 The new definition of the Employer’s Personnel includes the personnel of
Employer's both the Employer and those of the Engineer. This could include a very
Personnel significant number of people, especially where the Employer is a national
government or government agency.

1.1.4.3 The definition of Cost excludes profit and could result in the Contractor
Cost carrying out extra work or incurring expense, possibly quite substantial in
extent, without profit. Such work or expense could arise under various Sub-
Clauses, for example, 4.12 [Unforeseen Physical Conditions], 4.24 [Fossils],
8.9 [Consequences of Suspension], 13.7 [Adjustments for Changes in
Legislation], 17.4 [Consequences of Employer’s Risks], except as indicated,
and 19.4 [Consequences of Force Majeure]. Under each of those clauses,
any entitlement would exclude profit unless tenders have been otherwise
qualified.

1.4 Provides that “The Contract shall be governed by the law of the
Law and Country (or other jurisdiction) stated in the Appendix to Tender”. The
Language Contractor should be aware that under certain Civil Law jurisdictions some
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Yellow Book conditions may be considered unfair trade terms and therefore
inapplicable. Mandatory laws may also exist, which cannot be overridden by
the Contract. Any potential conflict between the Contract and such
mandatory legal requirements is best clarified by taking expert advice during
the tender period.

1.12 Requires that, “The Contractor shall disclose all such confidential and
Confidential other information as the Engineer may reasonably require”. This
Details clause could present difficulties if the Contractor were required to disclose
confidential information in respect of which the Contractor has a duty of
confidentiality to a third party.

The Silver Book allows the Contractor to retain confidentiality over

information, which has been specified at tender stage, whereas the Yellow
Book offers no such protection. Whilst the Sub-Clause includes the phrase
"as the Engineer may reasonably require" no criteria are provided to give
guidance on what is reasonable. The Contract should contain a provision to
provide the Parties with the opportunity, pre-tender, to discuss and agree the
extent of any privileged Contractor’s information. Contractors should be
mindful of this requirement with regard to internally confidential and sensitive
information and that of third parties.

Notwithstanding the above, any information made available by one Party to

the other Party should be kept confidential from all third parties.

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 9

1.13 The Contractor shall comply with all applicable laws. However responsibility
Compliance with for obtaining permits, licences or approvals is not entirely clear when Sub-
Laws Clauses 1.13 (a) and (b) are compared:

Sub-Clause 1.13 (a) provides that “the Employer shall have obtained (or
shall obtain) the planning, zoning or similar permission for the
Permanent Works”. Sub-Clause 1.13 (b) states that “the Contractor
shall give all notices, pay all taxes, duties and fees, and obtain all
permits, licences and approvals, as required by the Laws in relation to
the design, execution and completion of the Works and the remedying
of any defects”. Responsibility for obtaining permissions is ambiguous and
should be clarified. For instance, what is “similar permission” for which the
Employer is responsible pursuant to Sub-Clause 1.13 (a) and how does it fit
with the Contractor’s obligations under Sub-Clause 1.13 (b)? Ideally, the
Contract should include a detailed schedule of the permits required and
should identify the party responsible for obtaining the same. In the event that
the Contractor is responsible then, under Sub-Clause 2.2. (b) (i) [Permits,
Licences and Approvals] “the Employer shall (where he is in a position
to do so) provide reasonable assistance to the Contractor”.
Consequently, any delays caused by the Employer’s failure entitle the
Contractor to an extension of time in accordance with Sub-Clauses 8.4 (e)
[Extension of Time for Completion]. Any delays caused by authorities entitle
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the Contractor to an extension of time under 8.5 [Delays Caused by

Authorities], 8.4 (b). In particular, all permits that are required to allow the
project to be developed at the Site of the Works should be specifically
identified in the Contract as being the responsibility of the Employer.

1.14 Where the Contracting Party is a joint venture or consortium, this Sub-
Joint and Clause requires that, the parties to such joint venture or consortium must be
Several Liability jointly and severally liable to the Employer. Likewise, should the Employer
consist of two or more legal entities the obligation should be reciprocal.

2 The Employer
2.1 Although a “right of access to and possession” of the Site is to be given
Right of Access by the Employer, this “right and possession may not be exclusive”. It
to the Site would be sensible for the contract documents to identify the extent to which
there may not be exclusive access and possession and it would be beneficial
to clarify this, given the Contractor’s duty to co-operate with others under
Sub-Clause 4.6 [Co-operation].

2.3 This Sub-Clause relates to the Employer’s obligations in respect of his

Employer’s personnel and contractors employed directly by him. It should be noted that
Personnel there is no express obligation on the Employer to secure generally that his
other contractors co-operate with the Contractor other than in the respects
identified.

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 10

The effects of any delay or disruption caused by the Employer’s personnel

and contractors are dealt with under Sub-Clause 8.4 (e) [Extension of Time
for Completion] which provides only for granting a time extension for such
events. There is no provision in the Contract to recompense the Contractor
for the cost of delay and disruption caused by such events. Contractors
should carefully consider the possible effects on the cost of successfully
completing the Works, especially where the Employer intends to be closely
involved.

2.4 FIDIC recognises the need for the Contractor to be satisfied that the
Employer’s Employer has the necessary financial strength to undertake his obligations
Financial under the Contract. This Sub-Clause requires that “the Employer shall
Arrangements submit, within 28 days after receiving any request from the Contractor,
reasonable evidence that financial arrangements have been made and
are being maintained which will enable the Employer to pay the
Contract Price”. This is a crucial obligation on the Employer, particularly
where funding is being provided by third parties. The Contractor must have
the right to refuse to undertake any significant Variation if no clear evidence is
provided that the available funding is sufficient to cover the cost of the varied
Works.

The Contractor should also have a right to be made aware of any terms,
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conditions or step-in rights that exist in any agreement between the

Employer and his lenders. If such an agreement is to be put in place
between lenders and contractor then the terms and conditions should be
made available prior to signature of the Contract.

A powerful sanction is available to the Contractor should the Employer fail to

furnish “reasonable evidence”. The Contractor is entitled to suspend the
work or terminate the Contract under Sub-Clauses 16.1 [Contractor’s
Entitlement to Suspend Work] and 16.2 [Termination by Contractor].
However, what constitutes reasonable evidence is undefined and the
Contractor should try to establish this prior to submitting a tender. Failure to
do so could prejudice any attempt to obtain more detailed information during
the currency of the Contract, if for example a major Variation is instructed.

Contractors should give due consideration to the risk associated with

continuing to work during the 28 day period available to the Employer to
provide the required evidence and the further extended notice periods
required to comply with the suspension and termination provisions.

2.5 This Sub-Clause offers better protection to the Contractor and obligates the
Employer’s Employer to follow a given procedure if he “considers himself to be
Claims entitled to any payment under any Clause of these Conditions or
otherwise in connection with the Contract, and/or to any extension of
the Defects Notification Period, the Employer shall give notice and
particulars to the Contractor”. The Employer or the Engineer may give
notice and “The notice shall be given as soon as practicable” and give

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 11

particulars of the claim, after which the Parties may agree the claim or failing
which the Engineer may then make a determination in accordance with Sub-
Clause 3.5 [Determinations].

The provisions of this Sub-Clause are also mandatory in the event that the
Employer wishes “to set off against or make any deduction from an
amount due to the Contractor”. In accordance with Sub-Clause 3.5
[Determinations], the Engineer shall make a determination in respect of any
such Employer claim. These new provisions should go a long way to prevent
any unreasonable actions of the Employer, especially in terms of the
application of Delay Damages.

These provisions for Employer’s Claims represent a significant improvement

over previous editions of FIDIC Contracts. If the Engineer fails to make a fair
determination pursuant to Sub-Clause 3.5 [Determinations], the disputes
procedures laid down in Sub-Clause 20.4 [Obtaining a Dispute Adjudication
Board’s Decision] operates within very strict time constraints and offers an
immediate means of challenging any unreasonable action and should deter
such practices.

A provision entitling the Contractor to claim against the Employer is found in

Sub-Clause 20.1[Contractor’s Claims], but its terms are much more onerous
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on the Contractor than those placed upon the Employer under this Sub-
Clause. The obligations of the Employer and Contractor should provide for
similar time frames and sanctions for non-compliance. (See also comments
under Sub-Clause 20.1 [Contractor’s Claims]).

3 The Engineer
3.1 This Sub-Clause states that the Engineer acts for the Employer but the
Engineer’s obligation to act impartially, as set out in previous editions of FIDIC Contracts
Duties and does not appear in the Yellow Book.
Authority
Where the Engineer is required to obtain the approval of the Employer before
issuing an instruction this shall be stated in the Particular Conditions.
However, whenever the Engineer issues an instruction without first obtaining
approval, then the Employer shall be deemed to have given his approval.
This means that the Contractor is relieved of any need to establish any
limitations on the Engineer’s powers.

3.3 This Sub-Clause gives the Engineer wide powers “to issue to the
Instructions of Contractor (at any time) instructions which may be necessary for the
the Engineer execution of the Works” and obligates the Contractor to comply with such
instructions. Instructions may be given by the Engineer or an assistant to
whom the appropriate authority has been delegated. The instructions are to
be in writing.

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 12

3.5 Sub-Clause 3.5 sets down the procedure to be followed by the Engineer
Determinations when he is required to make a determination. The Engineer shall consult
both Parties, endeavour to reach an agreement and failing agreement, he
shall then make a fair determination taking account of all relevant
circumstances. The Engineer is required to make a determination under the
following Clauses:

1.9 [Errors in the Employer's Requirements]

2.1 [Right of Access to the Site]
2.5 [Employer's Claims]
4.7 [Setting Out]
4.12 [Unforeseeable Physical Conditions]
4.19 [Electricity, Water and Gas]
4.20 [Employer's Equipment and Free-issue Material]
4.24 [Fossils]
7.4 [Testing]
8.9 [Consequences of Suspension]
9.4 [Failure to Pass Tests on Completion]
10.2 [Taking Over of Parts of the Works]
10.3 [Interference with Tests on Completion]
11.4 [Failure to Remedy Defects]
11.8 [Contractor to Search]
12.2 [Delayed Tests]
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12.4 [Failure to Pass Tests after Completion]

13.3 [Variation Procedure ]
13.7 [Adjustments for Changes in Legislation]
14.4 [Schedule of Payments]
15.3 [Valuation at Date of Termination]
16.1 [Contractor's Entitlement to Suspend Work]
17.4 [Consequences of Employer's Risks]
19.4 [Consequences of Force Majeure]
20.1 [Contractor's Claims]

4 The Contractor
Clause 4 [The Contractor] and Clause 5 [Design] set out the principal
obligations and risks which are to be carried by the Contractor. These two
clauses interact with one another on a number of very important issues and
should be studied together to ensure that the extent of the Contractor’s
potential exposure is fully understood. The principal matters in Clause 4
which justify analysis and prudent appraisal are:

- Sub-Clause 4.1 [Contractor’s General Obligations]; Fitness for

purpose;
- Sub-Clause 4.5 [Nominated Subcontractors];
- Sub-Clause 4.7 [Setting Out];
- Sub-Clause 4.10 [Site Data];

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 13

- Sub-Clause 4.11[Sufficiency of the Accepted Contract Amount]; and

- Sub-Clause 4.12 [Unforeseeable Physical Conditions].

4.1 The Yellow Book places a fitness for purpose obligation on the Contractor.
Contractor’s According to this Sub-Clause, “When completed, the Works shall be fit
General for the purposes for which the Works are intended as defined in the
Obligations Contract”.

Sub-Clause 4.1 [Contractor’s General Obligations] should be read together

with Sub-Clause 5.1 [General Design Obligations] See comments in respect
of Sub-Clause 5.1 hereafter.

Fitness for purpose obligations are of particular concern where a contract is

carried out under jurisdictions based on English Law or Common Law. It
may be less of an issue under other jurisdictions where fitness for purpose
obligations are the law of a country or are common practice. However, the
issues discussed below are relevant to both situations.

The Yellow Book contains no obligation on the Employer to provide a

definition of the intended purpose. If the Technical Specifications do not
sufficiently define the reference terms for the Works, including the Design, to
be provided by the Contractor, the Contractor should ensure that his
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interpretation of the Employer’s Requirements is clear and unambiguous and

that it is not open to re-interpretation at a later date. If a satisfactory definition
is not available prior to tender submission then it would be prudent in almost
all circumstances to prepare a definition acceptable to both Parties prior to
contract signature. Failure to do so could lead to a serious and costly
dispute.

With regard to the full extent of the obligation to design for fitness for purpose
it may not be possible to pass the full liability on to any third party design
consultant appointed by the Contractor. Many consultants accept only an
obligation to design with “reasonable skill and care” because insurance to
cover the risk associated with fitness for purpose is not presently universally
available. This is a particular problem for British consultants.

The Contractor, within the framework of a fixed Contract Price, should not be
held responsible for providing everything that an Employer may later claim
that he understood to be included in his Requirements. Some Employers
may choose to use this Yellow Book requirement for that very purpose. The
only protection against such behaviour is to prepare and to agree as
comprehensive and detailed a schedule, as is possible to prepare, setting
out exactly what is to be provided by the Contractor under the Contract.

Failure of the Works to be fit for purpose may carry sanctions pursuant to
Sub-Clause 12.4 [Failure to Pass Tests After Completion] which sanctions
then would be limited only by the terms of Sub-Clause 17.6 [Limitations of
Liability].

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4.2 The form of Performance Security must be clearly set out in the Contract.
Performance Failure to do so could result in difficulty in obtaining approval from the
Security Employer and particularly so if a Conditional Bond is offered whereas the
Contract anticipates an On Demand Bond.

This Sub-Clause is an improvement on previous FIDIC contracts as the

Contractor is offered protection for all costs incurred in the event that the
Employer makes a false claim and the Employer must indemnify the
Contractor accordingly. Whereas previous FIDIC contracts merely required
the Employer to notify the Contractor prior to making a claim under the
Performance Security, the Yellow Book limits the Employer’s claims under
this guarantee “for amounts to which the Employer is entitled” and the
Employer’s entitlement to demand sums under the guarantee is limited by
Sub-Clause 2.5 [Employer’s Claims].

The Employer is permitted to make a claim on the Contractor’s Performance

Security in the event of “circumstances which entitle the Employer to
termination under Sub-Clause 15.2 [Termination by the Employer]”,
but again such claim must be made in accordance with Sub-Clause 2.5.

4.5 The concept of an Employer nominating a subcontractor is hardly compatible

Nominated with the obligations of the Contractor in a plant or design and build contract.
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Subcontractors Whilst this Sub-Clause does contain a provision for the Contractor to “raise
reasonable objection … with supporting particulars”, it does not convey
an absolute right to reject a nomination. Manifestly, it is impossible to comply
with such a requirement where the Contractor’s concerns arise, say, from
the relationships that are perceived to exist between the Nominated
Subcontractor and the Employer or his advisers. Contractors would be well
advised to avoid or renegotiate the terms of any contract that envisages such
an arrangement.

Where relevant the Contractor should ensure that Nominated Subcontractors

assume the same obligations as provided for under the main contract
(including the same fitness for purpose obligations), and should refuse a
nomination if the subcontractor will not comply.

In the event that the Employer instructs the employment of a subcontractor in

spite of a Contractor’s reasonable objection, then the Contractor will have a
very strong case against the Employer to recover any costs arising from a
default of the Nominated Subcontractor.

4.6 This Sub-Clause spells out the obligations of the Contractor in respect of co-
Co-operation operation. However, there is no equivalent or corresponding obligation on the
Employer to secure that his directly employed “other contractors” co-
ordinate or co-operate with the Contractor. In most contracts, especially
those where the Employer intends to place significant other contracts,
notwithstanding Sub-Clause 2.3 [Employer’s Personnel], it would be prudent

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to ensure that the Employer assumes clear and reciprocal obligations.

4.7 The Employer shall be responsible for errors in specified or notified items of
Setting Out reference provided by the Employer or Engineer but the Contractor has a
duty to verify their accuracy.

The Contractor is required to give notice to the Engineer in the event that
delay or additional costs arise due to such errors, and will only be entitled to
an extension of time and payment of his additional costs plus reasonable
profit if it is considered that an “experienced contractor could not
reasonably have discovered such error”. This is unsatisfactory, as all
such errors should, without exception, be the responsibility of the Employer.

4.10 This Sub-Clause requires the Employer to have “made available all
Site Data relevant data in the Employer’s possession”.

The reference to “relevant data” could limit the information to be provided

by the Employer. Contractors are well advised to try to amend this
requirement so that the Employer is required to supply all available data on
hydrological and sub-surface conditions. It is in the interest of the Employer
to include any information concerning his requirements to bidders in Plant
and Design-Build contracts.
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Sub-Clause 4.10 in the Yellow Book is identical to that in the Red Book. It
should be expanded to include all information relevant to the Contractor’s
design (see Sub-Clause 4.11 [Sufficiency of the Accepted Contract Amount]
below).

4.11 This Sub-Clause is to be read together with Sub-Clause 4.10 [Site Data].
Sufficiency of the Within the practical restraints of reasonable time and cost, the Contractor
Accepted Contract shall satisfy himself as to the correctness and sufficiency of the Accepted
Amount Contract Amount. The requirement to have based the Accepted Contract
Amount on data, interpretations, inspections and information provided by the
Employer and obtained from the Contractor’s inspection of the Site, “and any
further data relevant to the Contractor’s design” are included in this Sub-
Clause.

4.12 “Unforeseeable” is a defined term (see Sub-Clause 1.1.6.8) and means

Unforeseeable “not reasonably foreseeable by an experienced Contractor by the date
Physical of submission of the Tender”. Sub-Clause 4.10 [Site Data] deems the
Conditions Contractor to have obtained all necessary information (based on practicality
of time and cost) as to risks, contingencies and to have satisfied himself
before submitting his tender as to the nature of the Site, including sub
surface conditions, all of which permits the Engineer to argue that the
Contractor should have foreseen such physical conditions.

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Where the Contractor is entitled to recover his additional costs, these costs
will not include profit. This is totally unreasonable, as the Contractor will
have been required to undertake additional work and as such, should be
entitled to receive a reasonable profit for his labours.

The Contractor is entitled to relief for cost and time due to unforeseeable
“natural physical conditions and man made and other physical
obstructions or pollutants” and “including subsurface and
hydrological conditions”. The Contractor may no longer rely on this Sub-
Clause for relief due to impediments encountered off the site. The Yellow
Book excludes climatic events from the definition of physical conditions that
may give rise to entitlement to time extension and Cost.

Before finally determining any entitlement to additional Cost the Engineer may
take into account whether “other Physical Conditions in similar parts of
the Works (if any) were more favourable than could reasonably have
been foreseen when the Contractor submitted its Tender”. If, in the
Engineer's opinion such favourable conditions were encountered, the
Engineer can take them into account when determining any entitlement to
additional Cost (although not with regard to additional time); however he may
not reduce the Contract Price. This provision could be extremely prejudicial
to the Contractor and the expressions “similar parts of the Works” and
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“more favourable” are open to widely differing interpretations.

The closing paragraph of this Sub-Clause introduces a new concept that

allows the Contractor to provide evidence of the physical conditions foreseen
in his tender calculation. The Contractor should be aware that if he provides
the Engineer with such evidence, the Engineer may take account of this
evidence, but is not bound by any such evidence in making a determination
pursuant to Sub-Clause 3.5 [Determinations].

An alternative approach would be for the parties to agree the foreseeable

conditions beforehand. Where this practice has been adopted, experience
shows that this approach simplifies claims negotiations, which is obviously
to the benefit of both parties.

4.15 On certain projects there could well be an inconsistency between this Sub-
Access Route Clause and Sub-Clause 2.1 [Right of Access to Site] which requires the
Employer to give the Contractor the “right of access” to the Site
(possession of the Site). Contractors should be aware that their right of
access to Site does not require the Employer to provide a physical access
route.

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4.21 The requirements of this Sub-Clause are unnecessarily detailed and over
Progress prescriptive for most types of project. Contractors would be advised to agree
Reports at tender stage a format, which is more appropriate to the particular contract.

5 Design
5.1 Although this Sub-Clause is considerably different from Sub-Clause 5.1 in the
General Design Silver Book, the Contractor is still required to diligently scrutinise the
Obligations Employer’s Requirements (including design criteria and calculations, if any)
and the items of reference mentioned in Sub-Clause 4.7 [Setting Out].

After receiving the notice under Sub-Clause 8.1 [Commencement of Works]

and within the period stated in the Appendix to Tender, “the Contractor
shall give notice to the Engineer of any error, fault or other defect
found in the Employer's Requirements or these items of reference”.
Only such errors, faults or other defects, that an experienced Contractor,
exercising due care would not have discovered before submitting the Tender
(taking account of cost and time) entitle the Contractor to time extension and
an adjustment to the Contract Price.

The reference to the period stated in the Appendix to Tender would appear to
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limit the right of the Contractor to give notices of deficiencies in the

Employer's Requirements during that period. However, this is not FIDIC’s
intention. In their Contracts Guide, FIDIC explain that, after the period stated
in the Appendix to Tender in respect of Sub-Clause 1.9 of the Yellow Book
"Thereafter there remains the possibility that the Employer's Requirements
are found to contain an error which could not previously have been
discovered by an experienced Contractor exercising due care. In this event
the Contractor may give the notice described in Sub-Clause 1.9”.
Accordingly, claims for time extension and cost plus reasonable profit
relating to errors in the Employer’s Requirements can be raised after the
period stated in the Appendix to Tender, provided notice is given pursuant to
Sub-Clause 20.1 [Claims, Disputes and Arbitration].

The obligation to check employer supplied data under Sub-Clause 5.1 also
covers the items of reference in Sub-Clause 4.7 [Setting Out]. However, any
entitlement of the Contractor, whether under Sub-Clause 5.1, Sub-Clause
4.7 or Sub-Clause 1.9 depends on what an experienced Contractor could
foresee, when scrutinising the Employer's requirements or the items of
reference. The application of this test will pose similar problems as in the
case of unforeseeable physical conditions.

In place of the complicated procedure outlined above it would be more

appropriate if the Employer were responsible for any error, fault or other
defect in both the Employer's Requirements and the items of reference
mentioned in Sub-Clause 4.7[Setting Out].

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It is also of concern that the Sub-Clause is vague on the likely content of the
Employer's Requirements. Design criteria encompass many and varied
technical matters that include amongst other things, quality standards,
process design, capacity, design life and, in the case of process and power
plants, equipment specifications. The Contractor must not only establish
whether the design criteria are factually correct but must also establish
whether they are adequate to achieve the desired performance and intended
purpose. It would be prudent for contractors to establish their own design
criteria to ensure compatibility with their own design and to make this an
integral part of the offer, even where design criteria have been provided by
the Employer.

Employers and engineers are likely to insist that performance criteria and
definitions of intended purpose be complied with even where the technical
specification fails to produce satisfactory compliance. Contractors must
understand therefore that the Employer’s definition of intended purpose and
the required performance criteria will invariably take precedence over
detailed technical specifications.

Paradoxically, it could well be that in situations where the performance

criteria are vague or are difficult to measure, then a statement of and
compliance with a detailed technical specification could be a more
appropriate safeguard for contractors.
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5.2 Most contractors would agree that an orderly flow of technical information is
Contractor’s critical to the success of a design-build project. The Yellow Book does not
Documents specifically address this issue but, under the terms of Sub-Clause 5.2,
actually invites a situation where the Engineer can seriously disrupt and
delay the design and construction process by repeatedly reviewing
documents before giving permission for construction to proceed.

To delay the commencement of construction until reviews of the Contractor’s

documents are completed to the satisfaction of the Engineer is, to put it
mildly, a recipe for disaster. The provisions for review of documents are
overly prescriptive and give the Engineer too much freedom to disrupt the
Contractor’s design.

The Contractor has total responsibility for achieving the performance criteria
and must therefore have considerable freedom to achieve this objective free
of the Engineer's interference. To avoid potential conflict, contractors should
set out in their tender document a clear and practical programme for the
submission of all data, design and technical information required by the
Engineer and this could include a specific provision for work to proceed at all
times, at the Contractor's risk. The Contractor's offer should be clarified
accordingly and, to avoid dispute later, any differences of opinion on the
procedure to be adopted should be resolved prior to contract signature.

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5.3 The apparently simple undertaking required by this Sub-Clause hides a

Contractor's potentially dangerous inconsistency with Sub-Clause 5.1 [General Design
Undertaking Obligations ]. Manifestly, “the documents forming the Contract”, include
the Employer's Requirements and Sub-Clause 5.3 requires the Contractor to
design and execute the Works to comply with the Employer's Requirements
even if they are defective or deficient. The Contractor’s only defence can be
that such defect or deficiency was undetectable even for an experienced
contractor before submitting the Tender. Furthermore, the Contractor has
no power to vary the Works without an instruction from the Engineer who is
not bound to issue one! This obvious ambiguity should be resolved pre-
tender.

5.4 This Sub-Clause should ensure that there is no open-ended obligation on the
Technical Contractor to amend the Works at his cost in order to comply with the very
Standards and latest design standards even if published after the tender has been
Regulations submitted. The Contractor should check that the Particular Conditions do
not amend or override this Sub-Clause. However, there is no mechanism in
the Contract to resolve any ambiguity between the Country's technical
standards and the Employer's Requirements. Yet another matter for pre-
contract discussions.
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7 Plant, Materials and Workmanship

7.6 A surprising omission is the lack of any express provision, which permits the
Remedial Work Engineer to order a repair as opposed to removal, replacement or re-
execution and the Contractor should have the right to carry out repairs to
render the Plant or Materials acceptable and in accordance with the
Contract. Should the Engineer insist on a replacement in situations where a
repair would be a perfectly reasonable solution then the Employer should
bear the additional cost.

7.7 Plant and Materials will become the property of the Employer when delivered
Ownership of to Site or when the Contractor is entitled to payment of the value of the Plant
Plant and and Material. In each case ownership passes to the Employer prior to the
Materials Contractor being paid for such Plant and Materials, which would be
unsatisfactory in the event of Employer bankruptcy.

8 Commencement, Delay and Suspension

8.1 The Engineer’s notice of Commencement Date is onerous at 7 days; a more
Commencement reasonable period would be 28 days. If the Engineer fails to give notice of the
of Work commencement date, then after a period of 42 days there is entitlement to
extension of time and an increase in the Contract Price.

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8.3 This Sub-Clause obliges the Contractor to give advance warning, and is a
Programme new feature of the FIDIC Conditions requiring that, “the Contractor shall
promptly give notice of specific probable future events or
circumstances which may adversely affect or delay the execution of
the Works”. Contractors should consider whether such a warning could
have an impact on the starting point for calculating the notice periods under
Sub-Clause 20.1 [Contractor’s Claims]. It would be reasonable for this
obligation to be reciprocal and also apply to the Employer.

8.4 The Contractor has an entitlement to an extension of Time for Completion:

Extension of
Time for (i) if the delay is due to a Variation Order, or
Completion (ii) exceptionally adverse climatic conditions, or
(iii) is caused by the Employer or his other contractors, or
(iv) is due to unforeseeable shortages in the availability of personnel or
goods caused by epidemic or governmental actions; or
(v) if a right to extension exists under any other Sub-Clause of these
conditions, i.e.
1.9 Errors in the Employer’s Requirements.
(Cost plus reasonable profit added to Contract Price).
2.1 Failure by the Employer to give access to and possession of the Site.
(Cost plus reasonable profit added to Contract Price).
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4.7 Setting Out

(Cost plus reasonable profit added to Contract Price)
4.12 Unforeseeable Physical Conditions
(Cost but no profit added to Contract Price).
4.24 Discovery of fossils etc.
(Cost but no profit added to Contract Price).
7.4 Delayed testing caused by Employer (see also Sub-Clause 10.3).
(Cost plus reasonable profit added to Contract Price)
8.5 Delays Caused by Authorities.
(Extension of time only).
8.9 Suspension initiated by Engineer (see also Sub-Clause 16.1).
(Cost but no profit added to Contract Price).
10.3 Interference with testing by Employer (see also Sub-Clause 7.4).
(Cost plus reasonable profit added to Contract Price).
13 The time consequences of Variations are dealt with in Sub-Clause
8.4(a)
13.7 Changes in Legislation.
(Cost but no profit added to Contract Price).
16.1 Suspension initiated by Contractor (see also Sub-Clause 8.9).
(Cost plus reasonable profit added to Contract Price).
17.4 Employer’s Risks.
(Except in the case of risks arising from the occupation of any
part of the Permanent works or the design of any part of the Works by
the Employer the Contractor receives cost but no profit is added to
Contract Price).
19.4 Force Majeure.
(In certain circumstances cost but no profit added to Contract Price).

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It is difficult to follow FIDIC’s logic with respect to the variation in remedies

open to contractors which are:

• time only,
• time and cost
• time, cost and profit

The Yellow Book does not contain the sweep-up clause found in previous
editions of FIDIC Contracts, which refers to “other special circumstances”
and contractors face increased risk as a result of this omission and should
reinstate a similar provision whenever possible.

Sub-Clause 8.4 (e) permits time extension where there has been “any
delay, impediment or prevention caused by or attributable to the
Employer”. Under some jurisdictions, this wording may not be specific
enough to cover breaches of contract by the Employer. In the event that no
time extension is granted, time may become at large and the delay
(liquidated) damages provisions will be unworkable in law.

8.6 If the Contractor is working too slowly, the Engineer can instruct acceleration
Rate of measures. This applies not only when the agreed Time for Completion is at
Progress risk but also where “progress has fallen (or will fall) behind the current
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programme under Sub-Clause 8.3 [Programme]”. In addition to any

delay damages the Contractor will be responsible for the Employer’s
additional costs arising from the Contractor’s revised methods.

8.7 The maximum amount of Liquidated Damages shall be stated in the

Delay Damages Appendix to Tender. However, damages in the event of delay can exceed
this amount e.g. if the Contractor has to pay the Employer’s costs under
Sub-Clause 8.6 [Rate of Progress] or if the Contract is terminated.

If the Contract is terminated due to delay then the Contractor will have to pay
all losses and damages suffered by the Employer (see Sub-Clause 15.4
[Payment after Termination]). However, such loss and damage may not
include loss of profit or other indirect damages and the maximum liability is
limited under Sub-Clause 17.6 [Limitation of Liability].

Contractors should be aware that submitting claims for an extension of time

will not necessarily prevent the deduction of delay damages. The Contractor
must ensure that any claim for an extension of time is submitted in
accordance with the Contract. Should the Employer then deduct damages
despite receiving a properly documented claim or, without pursuing his own
entitlement under Sub-Clause 2.5 [Employer’s Claims] this would be a
breach of Contract.

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9 Tests on Completion
This clause should be deleted where no practical purpose would be served
by Tests on Completion and none are specified or intended.

9.2 In the event that “Tests on Completion” are applicable, then this Sub-
Delayed Tests Clause provides remedies to the Contractor in the event that the Employer
delays such tests. Under Sub-Clause 7.4 [Testing], the Contractor will be
entitled to an extension of time and the recovery of his Costs plus reasonable
profit if the Employer is responsible for delay. If the tests are delayed for
more than fourteen days then, under Sub-Clause 10.3 [Interference with
Tests on Completion] the Engineer is required to issue a taking over
certificate and the Contractor will be entitled to an extension of time and
recovery of Costs plus reasonable profit.

9.4 If the Works fail to pass repeated Tests on Completion and the failure
Failure to Pass “deprives the Employer of substantially the whole benefit of the
Tests on Works or Section”, then the Engineer has the right to reject the Works,
Completion terminate the Contract, recover all sums paid for the Works, plus financing
costs, costs for dismantling the Works and clearing the Site. Manifestly, the
Contractor would suffer catastrophic financial consequences if such punitive
sanctions were levied.
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It would be more equitable to provide that in the event of termination, the

Contractor is entitled to payment for the value of the Works completed at the
date of termination. In the event of termination for default by the Contractor, it
is up to the Employer to decide whether or not to complete the Works with
another contractor. In such situations, the Contractor must pay the
Employer’s additional costs. The Contractor taking over the Works could
have design responsibility for that portion of the Works designed by the
original Contractor and contractors faced with such a prospect should
carefully assess the risks involved. It is important to understand the
implications of this requirement, as the new Contractor could face very
serious financial penalties in the event that Tests on Completion are not
successful.

It is important, in relation to this Sub-Clause to consider the limitation of

liability under Sub-Clause 17.6 [Limitation of Liability].

10 Employer’s Taking Over

10.1 Insurance must be maintained for the Works “until the date of issue of the
Taking Over of Taking-Over Certificate for the Works” (Sub-Clause 18.2 [Insurance of
the Works and the Works and Contractor’s Equipment]) and cover should be maintained
Sections even if the Engineer unreasonably withholds the Taking-Over Certificate
(subject to the deemed issue referred to at the end of this Sub-Clause).

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11 Defects Liability
11.2 The Contractor shall at his own cost remedy defects caused by “the Design
Cost of of the Works, other than a part of the design for which the Employer is
Remedying responsible (if any)”. It should be noted that this obligation includes any
Defects design carried out by subcontractors including those that are nominated.

11.4 If the Contractor fails to remedy a defect and the defect or damage
Failure to “deprives the Employer of substantially the whole benefit of the
Remedy Defects Works or any major part of the Works”, then the Employer is entitled to
recover all sums paid for the Works, plus financing costs and costs for
dismantling the Works and clearing the Site. These are punitive sanctions
and contractors must carefully consider whether the risks they carry under
the Yellow Book are commensurate with the rewards. The provisions are
similar to those noted under Sub-Clause 9.4.

13 Variations & Adjustments

13.1 The Engineer may initiate Variations at any time prior to issuing the Taking
Right to Vary Over Certificate for the Works, and the Contractor has only limited grounds
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for refusing to undertake the instructed Variation, which are: “(i) the
Contractor cannot readily obtain the Goods required for the Variation,
or (ii) it will reduce the safety or suitability of the Works, or (iii) it will
have an adverse impact on the achievement of the Schedule of
Guarantees”. Notwithstanding any objections raised by the Contractor, the
Engineer may still confirm his instruction.

If the Contractor believes that the Variation will have an adverse effect on the
undertaking of any of his obligations under the Contract or, if, following a
request by the Contractor under Sub-Clause 2.4 [Employer’s Financial
Arrangements], the Employer is unable to provide evidence that satisfactory
financial arrangements are in place and being maintained to pay for the
addition to the Contract Price resulting from the Variation, then it should be at
the Contractor’s sole discretion to refuse or accept a Variation.

Should the Engineer instruct the Variation despite the Contractor giving notice
that he will not consider himself bound by the Variation, then the only remedy
open to the Contractor is to refer the matter to the Dispute Adjudication
Board.

A Variation may not comprise “the omission of work which is to be

carried out by others” which precludes the possibility of work being
omitted simply for the purpose of having it carried out by another contractor.

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13.2 The Yellow Book provides a mechanism through which the Contractor is
Value compensated if the Engineer approves his suggestion in respect of value
Engineering engineering. The Engineer can determine “the reduction (if any) in the
value to the Employer of the varied works taking account of any
reductions in quality, anticipated life or operational efficiencies”. A
more specific provision should be provided to make it clear how the benefits
to both parties will be apportioned.

13.3 It is quite likely that the Contractor will be required to carry out substantial
Variation work before a Variation is approved. It is not clear whether the cost of such
Procedure work will be reimbursed in the event that the Variation is not executed. This
should be clarified pre-tender.

It would also be helpful if separate provision were made for compensation for
delay and disruption caused by Variations.

No specific criteria are provided under the Yellow Book to define how
variations are to be valued except that it provides that the Engineer shall
determine the value of Variations under Sub-Clause 3.5 [Determinations],
and ultimately, in the event of disagreement, by the Disputes Adjudication
Board or Arbitrator. ”Reasonable” profit will be allowed but it should not be
assumed that this means the same profit margin as is built into other
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contract rates or in prices for comparable works.

This process is unreasonable and prior to signature of the Contract the

parties should agree a suitable method of valuing such variations, based
either on a schedule of rates or cost plus a reasonable allowance for
overheads and profit.

13.5 It is not clear whether the Contractor is liable for any design associated with
Provisional Provisional Sums. In the absence of any express provision it may well be
Sums that the Contractor is held to be responsible under Sub-Clause 5.1 [General
Design Obligations ]. This is a further issue that should be resolved pre-
contract.

The Guidance for the Preparation of Particular Conditions section of the

Yellow Book considers that Provisional Sums are “generally inappropriate
for this type of Contract” but suggests that they may be required where the
Employer wishes to select certain goods, or where there is a “major”
uncertainty regarding sub-surface conditions.

13.7 This Sub-Clause contains provisions in respect of the recovery of additional

Adjustments for Costs associated with changes in legislation. Contractors should note
Changes in however that the recovery of losses only applies to changes in legislation in
Legislation the country in which the Site of the Permanent Works is located. The
Contractor is now expressly entitled to an extension of time if he is delayed
by reason of subsequent legislation.

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14 Contract Price and Payment

14.2 Provision is made for the Contractor to receive an advance payment as an
Advance interest-free loan for his mobilisation and design provided that the amount of
Payment the advance is stated in the Appendix to Tender.

If an advance is specified in the Appendix to Tender then the Engineer will

issue an Interim Payment Certificate after receipt by the him of “a
Statement (under Sub-Clause 14.3 [Application for Interim Payment
Certificates]) and after the Employer receives (i) the Performance
Security in accordance with Sub-Clause 4.2 [Performance Security],
and (ii) a guarantee in amounts and currencies equal to the advance
payment”. The advance payment may be paid in instalments. However the
number and timing must be stated in the Appendix to Tender and the
Contractor must ensure that this is clear in the advance payment guarantee.

The advance payment is repaid through percentage deductions in Payment

Certificates. In the absence of agreements to the contrary, deductions take
place when the total of all certified interim payments exceeds 10% of the
Accepted Contract Amount and deductions are then made at the rate of 25%
from each (it is presumed subsequent) Payment Certificate. The cash flow
implications of this should be carefully studied and if appropriate, an
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alternative time for commencement of repayment and rate of repayment

should be agreed.

14.3 To initiate the payment process the Contractor is to submit a Statement to

Application for the Engineer at the end of the period of payment which period is to be stated
Interim Payment in the Contract. If no period is stated, the submission is to be made at the
Certificates end of each month. To be valid, the Statement must include items detailed
in Sub-Clauses 14.3 (a) to (g) and also include the progress reports defined
in Sub-Clause 4.21 [Progress Reports]. These requirements are considered
an unduly onerous precondition for the receipt of payment and should be
modified if possible.

14.4 The Contract may provide for payment to the Contractor based upon a
Schedule of Schedule of Payments and if so, “the instalments quoted in the
Payments Schedule of Payments shall be the estimated contract values for the
purposes of sub-paragraph (a) of Sub-Clause 14.3 [Application for
Interim Payment Certificates]”.

If the instalments are not defined by reference to actual progress achieved,

then the Engineer is entitled to revise any payment instalment by making a
determination under Sub-Clause 3.5 [Determinations] which will take into
account any delay in progress. Equally, the Contractor could request that,
when the Works are ahead of programme, he receives an appropriate
increase in the scheduled payment.

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 26

If it is intended that the Schedule of Payments is based on the achievement

of specific Milestone Events then this should be expressly stated.
Otherwise, payments would be based on the actual value of work done.

14.5 This Sub-Clause makes provision for payment of plant and materials
Plant and (provided that they have been identified in the Appendix to Tender) which are
Materials either in the course of being shipped to the site (which presumably includes
intended for the all forms of transportation) or, are delivered to Site. A “bank guarantee” in
Works favour of the Employer is required to be given by the Contractor to the
Engineer in respect of the Plant and Materials being shipped which is to
guarantee repayment of the pre-payment to the Employer. Its validity expires
when “Plant and Materials are properly stored on Site and protected
against loss, damage or deterioration”.

The additional amount certified “shall be the equivalent of eighty percent

of the Engineer's determination of the cost of the Plant and Materials
(including delivery to Site)”.

14.6 The provisions for withholding an Interim Payment Certificate in this Sub-
Issue of Interim Clause are potentially harsh. For instance, if the Contractor, in the
Payments Engineer’s view is allegedly proceeding without “due expedition”, in
Certificates apparent breach of Sub-Clause 8.1 [Commencement of Work], the
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Employer could maintain that the whole of the value of the delayed works
should be withheld. This is a most unsatisfactory and unacceptable
situation.

14.7 This Sub-Clause details the periods within which payment is to be made by
Payment the Employer in respect of the advance, interim and final payments. By
comparison with well-established norms, the periods proposed are
excessive and contractors may wish to suggest more reasonable intervals.

14.8 The Yellow Book makes provision for interest upon late payments (referred to
Delayed in this Sub-Clause as financing charges) and the payment obligations
Payment contained in Sub-Clause 14.7 [Payments] should give the Employer an
incentive to pay promptly. The Yellow Book also makes provision for a rate
of interest to be defined and the Contractor is entitled to payment without the
need for the issue of a Payment Certificate.

14.9 The amount of any Retention Money will be defined within the Particular
Payment of Conditions and this Sub-Clause provides for the first half of the Retention
Retention Money to be released after the Taking-Over Certificate has been issued
Money provided that the Works have passed all specified tests, including any Tests
after Completion.

It is important to fix a date for any tests to be carried out after completion to
avoid any delay to the release of the moiety of the retention.

However, the Sub-clause states that the outstanding balance of the Retention
Money is to be paid “promptly” after expiry of the latest expiry date of the

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 27

Defects Notification Period(s). Sub-Clause 1.1.3.7 provides that the Defects

Notification Period shall be extended for a period to be notified in the
Appendix to Tender and under Sub-Clause 11.3 [Extension of Defects
Notification Period] the period could be extended by a maximum of two
years. The release of the final tranche of Retention Money could therefore be
up to three years after completion or indeed longer depending upon how the
Appendix to Tender is completed. The full release of Retention Money may
be further delayed if any work remains to be completed, as the Engineer may
withhold certification of the estimated cost of any outstanding works.

The above restrictions, together with differing interpretations of the meaning

of the word “promptly” could result in a protracted period before the
Contractor is able to recover Retention Money. Disputes would be less likely
if the Employer were prepared to accept a bank guarantee in lieu of retention.

14.10 The Contractor is required to submit a Statement at Completion with

Statement at supporting documents within 84 days after receiving the Taking-Over
Completion Certificate following which the Engineer shall certify and the Employer shall
make an Interim Payment to the Contractor. This statement requires that
notice of all the Contractor’s claims must be submitted, along with all other
documentation required or reasonably implied as required under the
Contract. Whilst there is no specific requirement to submit full and detailed
particulars of all claims at this stage it would be prudent to do so as soon as
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possible. Sub-Clause 14.10 (b) and (c) refers. Failure to include notice of
claims would result in them being barred under Sub-Clause 14.14 (b)
[Cessation of Employer’s Liability]. Contractors should also have regard to
the extremely tight time limits laid down in Clause 20 [Claims, Disputes and
Arbitration] for the submission of detailed particulars.

14.12 A written discharge is to be submitted by the Contractor with the Final

Discharge Statement and should be worded to provide for such discharge to become
effective when the final payment has been received and all bonds and
guarantees returned.

14.14 This is a very important Sub-Clause in respect of any Contractor’s claims.

Cessation of Claims arising prior to the Statement of Completion will be time barred if
Employer’s notifications are not included in the Statement as required by Sub-Clause
Liability 14.10 [Statement on Completion]. Notices of Claims arising after the
Statement of Completion must be included in the Final Statement to be
eligible for consideration. The notifications under this Sub-Clause are in
addition to those required under Sub-Clause 20.1 [Contractor’s Claims].

15 Termination by Employer
15.1 This Sub-Clause gives the Engineer, in addition to the right to give
Notice to instructions under Sub-Clause 3.4 [Instructions], an unlimited right to require
Correct the Contractor by notice to make good any alleged failure to carry out any
obligation under the Contract. If the Contractor fails to comply with such a

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 28

notice, the Employer has the right to terminate the Contract under Sub-
Clause 15.2 [Termination by Employer].

In circumstances where the Employer has given the Contractor a very brief
and vague description of the scope of work, such a provision would be very
dangerous for the Contractor. In situations where the Parties have made
different interpretations of the Employer’s Requirements, then this provision
enables the Employer to impose his view on the Contractor by threatening
termination of the contract if the Contractor will not comply.

15.2 The Employer has the right to terminate the Contract in certain
Termination by circumstances. These circumstances include breach by, and insolvency of
Employer the Contractor, as well as corruption.

The Employer should have the right to terminate the Contract in the event of
corruption however; this Sub-Clause is too widely drafted. Its scope extends
to the Contractor’s sub-contractors (over whom the Contractor does not
have total control) and it covers any act, however small, carried out by any
individual. As a consequence, determination of the Contract for the act of
corruption under a sub-contract is too severe a remedy. The obligation
should be limited to an obligation on the Contractor to terminate the sub-
contract and should not give the Employer the right to terminate the Contract.
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Sub-Clause 15.2 (a) could be applied to quite trivial faults since it relates to
compliance with a notice given under Sub-Clause 15.1 [Notice to Correct]
which covers “any” failure by the Contractor to carry out “any obligation”.
This clause could be abused by some employers.

This Sub-Clause should also be considered in the light of the comments on

Sub-Clause 8.7 [Delay Damages] above regarding damages payable by the
Contractor in the event of delay.

15.5 This Sub-Clause introduces a right, not present in previous editions of FIDIC
Employer’s Contracts, for the Employer to terminate for convenience. This right can be
Entitlement to exercised at any time upon 28 days written notice. Payment is then made in
Termination accordance with Sub-Clause 19.6 [Optional Termination, Payment and
Release], which is inappropriate. In the case of termination for the
Employer’s convenience, loss of profit should be payable to the Contractor.

Contractors should note that the Employer may not terminate under this Sub-
Clause for the purpose of undertaking the Works directly or arranging for the
Works to be completed by another Contractor.

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 29

16 Suspension and Termination by Contractor

16.1 The Contractor is entitled to suspend the Works in the event that the
Contractor’s “Engineer fails to certify in accordance with Sub-Clause 14.6 [Issue of
Entitlement to Interim Payment Certificates] or the Employer fails to comply with Sub-
Suspend Work Clause 2.4 [Employer’s Financial Arrangements] or Sub-Clause 14.7
[Payment]” by giving 21 days notice.

16.2 The right of the Contractor to terminate the Contract is subject to extended
Termination by notice periods. In the case of failure to receive reasonable evidence with
Contractor regard to the Employer’s financial arrangements, Sub-Clause 2.4
[Employer’s Financial Arrangement] or failure to pay to the Contractor
amounts due, Sub-Clause 14.7 [Payment] the Contractor must allow 42
days to elapse to demonstrate non-payment by the Employer and in the case
of a failure of the Engineer to certify, the period is 56 days. Thereafter he
must give a further 14 days notice before he may terminate the Contract.

These time limits are too long. It would be more equitable if (similar to other
grounds for termination in this Sub-Clause) the Contractor is only required to
give 14 days notice.

The situation will be more complex where project finance is in place and a
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lender has step-in rights. However, the same basic principles should apply.

17 Risk and Responsibility

17.1 The Contractor’s obligations to indemnify and hold harmless the Employer
Indemnities exist irrespective of whether the Contractor is liable for any negligence, wilful
act or breach of the Contract. By contrast, the Employer’s obligation, set
down in the second paragraph of this Sub-Clause, is subject to the default of
the Employer. This imbalance is not justified and the additional risks
imposed on the Contractor might not be insurable.

The reference to Sub-Clause 18.3 (d) (iii) in the second paragraph of this
Sub-Clause makes the Employer’s obligation to indemnify and hold harmless
the Contractor, inter alia, subject to the Contractor’s ability to obtain
insurance at commercially reasonable terms. Since it is arguable whether or
not insurance cover will be available on such terms, it will probably be
advisable when negotiating a contract to exclude this provision.

17.3 The Employer’s Risks have been amended by comparison with those
Employer’s contained in previous editions of FIDIC Contracts, and civil war and riot is
Risks now only applicable if it occurs within the Country and a new risk in respect
of munitions of war have been introduced which should include landmines.

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 30

17.4 If the Engineer requires the Contractor to rectify the loss or damage to the
Consequences Works, Goods or Contractor’s Documents resulting from any of the
of Employer’s Employer’s Risks, the Contractor is entitled to time extension and payment
Risks of the Cost incurred for rectifying the loss or damage but, with minor
exceptions, no uplift for profit (as is the case other editions of FIDIC
contracts). The Contractor’s rights under this Sub-Clause are subject to his
compliance with Sub-Clause 20.1 [Contractor’s Claims].

17.6 This Sub-Clause provides that there is no liability on either Party to the other
Limitation of Party for loss of use of any Works, loss of profit, loss of any contract or for
Liability any indirect or consequential loss or damage other than under Sub-Clause
16.4 [Payment on Termination] and Sub-Clause 17.1 [Indemnities]. By
excluding Sub-Clause 17.1 from the limitation of liability, both the Contractor
and the Employer are fully liable for the events outlined in that Sub-Clause.

The Contractor should note that it is only in certain cases of breach of

contract by the Employer that the Contractor is entitled to compensation for
loss of profit. See also the comments made under Sub-Clause 1.1.4.3. This
is inequitable and the Contractor should always be entitled to compensation
for loss of profit and other indirect or consequential damages, in the event of
a breach of contract by the Employer.
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19 Force Majeure
19.1 This Sub-Clause provides a definition of Force Majeure and provides a non-
Definition of exhaustive catalogue of Force Majeure events in the second paragraph that
Force Majeure includes natural catastrophes such as earthquakes, hurricane, typhoon or
volcanic activity.

19.4 In the event that the Contractor is prevented from performing any of his
Consequences obligations under the Contract due to an event of Force Majeure, the
of Force Contractor can claim for time extension and the Cost incurred. However,
Majeure entitlement to claim for Cost is limited to the events listed in Sub-Clause 19.1
(ii) to (iv) [Definition of Force Majeure]. Such limitation is difficult to
understand given that the catalogue of Force Majeure events is not
exhaustive.

19.6 In case of termination due to Force Majeure, the Contractor is entitled to be

Optional paid for the Works executed, the Cost of Plant and Materials ordered, any
Termination, other Cost incurred in the expectation of completing the Works, the Cost of
Payment and removal of Temporary Works and Contractor’s Equipment and the Cost of
Release repatriation of staff and labour. If the Contractor wants to receive profit on
these Costs, an appropriate provision would have to be included in the
Contract.

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 31

20 Claims, Disputes and Arbitration

20.1 This Sub-Clause details the procedure that the Contractor must follow when
Contractor’s he considers himself entitled to an Extension of Time for Completion and/or
Claims additional payment under any Clause or otherwise in connection with the
Contract.

The Contractor is required to give notice of his claim as soon as practicable

and not later than 28 days after becoming aware, or when he should have
become aware, of the event or circumstance giving rise to the claim. Failure
to comply with this notice provision results in the Contractor forfeiting his
right to an Extension of the Time for Completion and to additional payment
and the Employer is then discharged from his liability in connection with the
event.

The penalty for failure to comply with a purely technical requirement to give
notice of a claim is unduly harsh. This is the first time that a FIDIC contract
has removed the fundamental right of the Contractor to make a claim merely
as a result of a failure to comply within a fixed period of time to submit the
required notice. In certain circumstances the Contractor may prejudice his
entitlement by failing to comply strictly with a notice provision but he should
certainly not forfeit his rights altogether and neither should the Employer be
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discharged from any and all liability in connection with an event. It is ironic
that this provision would also apply when the event or circumstance giving
rise to the claim is caused by the Employer in the first case e.g. Sub-Clause
8.9 [Consequences of Suspension].

A comparison of the notice provisions under Sub-Clause 20.1 with the notice
provisions under Sub-Clause 2.5 [Employer's Claims] where the Employer
or the Engineer is required to give notice as soon as practicable after
becoming aware of the event or circumstance demonstrates once again the
unfair imbalance between obligations carried by the Employer and the
Contractor.

In addition to the first 28 day notice period the Contractor is also subject to a
42 day period (that is a further 14 days) by which he has to send to the
Engineer a fully detailed claim with full supporting particulars. (See also the
provisions for continuing claims). This could prove to be extremely difficult
and inevitably, the task of compiling and interpreting the relevant facts to
support and justify the claim will be a time consuming and long drawn out
process. Such provisions could lead to serious dispute and costly
arbitration. However, it should be noted that failure to provide a fully
particularised claim (as opposed to giving notice of a claim) does not in itself
bar the claim.

The sixth paragraph of this Sub-Clause requires the Engineer to respond to

the Contractor's claim giving his approval or disapproval within a fixed period
or time whereas the eighth paragraph requires the Engineer to proceed in
accordance with Sub-Clause 3.5 [Determinations] to agree or determine any

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 32

Extension of Time for Completion and/or any additional payment. It is not

clear why these two separate procedures are required. However, it should
be borne in mind that under Sub-Clause 3.5 there is no time limit within
which the Engineer has to make a determination.

Comments made under this Sub-Clause should be read in conjunction with

those under Sub-Clauses 14.10 [Statement at Completion] and 14.14
[Cessation of Employer’s Liability] all of which underline the importance of
submitting all required notices in time to ensure that the Contractor’s rights
are protected and maintained.

20.2 This Sub-Clause provides for the establishment of the Dispute Adjudication
Appointment of Board (DAB) comprising either one or three members to be appointed by the
the Dispute Parties. The DAB is to be appointed by the date 28 days after a Party has
Adjudication given notice of its intention to refer a dispute to a DAB. The appointment of
Board the DAB expires after it has given a decision on the referred dispute,
provided no other disputes have been referred to it in the meantime. When
the appointment expires, a new DAB will have to be appointed to deal with
the next dispute.

It is very likely that adjudication by a DAB in large and complex Design and
Build Projects would be much more effective under a standing body rather
than one convened on an ad hoc basis. It would be particularly beneficial for
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the DAB to become conversant with the Contract and the Works at an early
stage and to familiarise itself with the progress of the Works on a regular
basis. Undoubtedly this will result in speedy and well-informed judgements
and consequently the procedures and draft agreements set out in the Red
Book are to be preferred for such projects. Under the Red Book the DAB is
appointed at the start of the Contract and remains in existence for the
duration of the Contract unless agreed otherwise by the Parties.

20.3 If the parties are unable to agree on the appointment of the third member and
Failure to Agree they do not wish the President of FIDIC to make the appointment, the
Dispute Appendix to Tender should be amended accordingly.
Adjudication
Board

20.4 Either Party may refer a dispute “of any kind whatsoever” that arises out
Obtaining of the Contract or the execution of the Works to the DAB after it has been
Dispute appointed.
Adjudication
Board’s It should be noted that, if the DAB has given its decision as required by this
Decision Sub-Clause and if neither Party has given notice of dissatisfaction within 28
days after having received the DAB's decision, the decision becomes final
and binding on both Parties. Even in the case of dissatisfaction by either
Party, decisions of the DAB are binding on both Parties “who shall promptly
give effect to it unless and until it shall be revised in an amicable
settlement or an arbitral award”. This arbitral award could be many

EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 33

months after the DAB decision during which time the DAB decision would still
rule.

The Contractor is required to “continue to proceed with the Works” but

the obligation of the Employer, in so far as payment is concerned, is merely
to comply with the normal process for Interim or Final Payments detailed in
Clause 14 [Contract Price and Payment]. Payment under this process does
of course give the Contractor the right to suspend or terminate the Works if
the Employer fails to make payment. However, any payments due as a result
of a DAB decision should be made with immediate effect and not in
accordance with Clause 14. Any failure to make immediate payment should
give the Contractor the right to Suspend the Works under Sub-Clause 16.1
[Contractor’s Entitlement to Suspend Work].
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EIC Contractor’ s Guide to the FIDIC Conditions of Contract for Plant and Design - Build
 EIC Publications

ƒ EIC Turnkey Contract (1994)

ƒ EIC Synopsis on Contract Bonds (1999)
ƒ EIC Contractor’s Guide to the FIDIC “Silver Book” (March 2000)
ƒ EIC Contractor’s Guide
FOR EXCLUSIVE USE BY AECOM MIDDLE EAST, ABU DHABI UNTIL END JULY 2011

EIC Contractor’s Guide to the FIDIC “New Red Book” (March 2002)
ƒ EIC Contractor’s Guide to the FIDIC “New Yellow Book” (March 2003)
ƒ EIC White Book on BOT (April 2003) to the
Secretariat:
FIDIC Conditions of Contract
for
ƒ Frank Kehlenbach (Director)
ƒ Hasso von Pogrell (Assistant Director) Plant and Design-Build
ƒ Vera Stark (Secretary)

Address:

ƒ Kurfürstenstrasse 129
ƒ D-10785 Berlin
ƒ TEL +49 30 2 12 86-244
ƒ FAX +49 30 2 12 86-285
ƒ [email protected]
ƒ www.eicontractors.de

Issued March 2003 ISBN 3-9808257-3-6 THE NEW EIC YELLOW BOOK GUIDE