Other colours in the Fidic rainbow
JOANNE EMERSON TAQI and HUGH MURRAY** discuss the lesser-known White, Blue, Gold and Pink books of the Fidic form contracts and the issues that arise in relation to them.
01 December 2011
OF THE Federation Internationale des Ingenieurs-Conseils (Fidic) standard form contracts, the Red Book (build only), Silver Book (design and build/EPC {engineering, procurement and construction} turnkey), Yellow Book (design and build/electrical and mechanical) and Green Book (small value, short form contracts) are most broadly understood.
Following these four principal standard forms, Fidic produced another four contracts: the White Book (consultancy services); Blue Book (dredging and reclamation works); Gold Book (design, build and operate projects); and Pink Book (the Multilateral Development Bank edition). These more specific standard forms are less common and generally less well understood than the earlier, established forms.
The aim of this article is to provide an insight into the use, context and particular issues arising in relation to each of these newer forms.
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The Model Services Agreement (fourth edition 2006) or ‘White Book’ can cover general consultancy services including feasibility study as well as design and construction administration and project management. It is suitable where proposals for such services are invited on either an international or domestic basis.
While the White Book addresses the typical issues in a consultancy agreement, it is generally weighed more in favour of the consultant and contains issues which can expose an unwary employer to unnecessary risk.
One such example is the consultant’s obligation to undertake the ‘performance of his obligations under the agreement’ using reasonable skill, care and diligence. This is of little comfort, however, to an employer who would expect to be able to strictly enforce certain contractual obligations such as the duty to commence on the date of commencement, the duty to take out professional indemnity (PI) insurance and to promptly notify the client of a change in circumstances.
Similarly, key personnel proposed by the consultant are subject to acceptance by the employer. However, there is no obligation on the consultant to keep such personnel working on the project. A prudent employer would ensure the consultant should not remove such personnel without their consent. Further imbalances in favour of the consultant exist in relation to insurance, indemnities and compensation.
Undoubtedly, the White Book serves as a useful addition to the Fidic portfolio for added consistency across project contracts. However, any employer adopting this form unamended should be wary of the implications.
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The Form of Contract for Dredging and Reclamation Works (first edition 2006) or ‘Blue Book’ is similar to the Fidic Short Form of Contract (the Green Book) and for this reason it is sometimes called the ‘Blue-Green Book’.
The most obvious difference between the two is the Blue Book’s inclusion of provisions relating to dredging and reclamation work and ancillary construction. The particular nature of dredging work means the Blue Book separates dredging from other works and removes any obligation on the contractor to remedy any dredging work defects after completion, as stated in the taking-over certificate.
The Blue Book also makes another dredging-specific amendment to the Green Book by including 'climatic conditions more adverse than those specified in the Appendix' as an additional event of force majeure.
A number of commentators have raised concern about the vesting of plant provisions in the Blue Book. Historically, vesting of plant provisions have been included in construction contracts to grant rights for an employer to gain title to use and/or sell the contractor’s equipment in the event of termination for contractor default or insolvency. Such vesting provisions have caused problems not just on the contractor side, where the value of the remaining work may be less than the investment held in the equipment, but also on the employer’s side where its insurance and/or expertise does not cover the operation of such equipment. These problems are particularly serious in the context of high-value dredging/reclamation projects which require specific expertise and make a contractor default a devastating prospect.
The Blue Book does nothing to ameliorate concerns on the contractor’s side about this issue. In the event of termination for contractor default or insolvency, it provides that the contractor must leave behind all materials and equipment, until the completion of the works. There is, however, no right for the employer to try and sell the contractor’s equipment to recover outstanding monies. Additionally, no provision exists for the employer to take over the obligations to a third-party entity which owns the equipment (that is, the lessor of the dredging vessel) and repay hire charges. This would cause significant concern to a contractor as the obligor under a hire or hire purchase contract.
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The Fidic Conditions of Contract for Design, Build and Operate (DBO) Projects (first edition 2008) or ‘Gold Book’ was produced in response to the growing need for a document to combine design-build obligations with a long-term concession arrangement. Previously, employers amended existing Fidic forms, commonly the Yellow Book, adding maintenance and operation provisions. This created inconsistent market precedents, prolonged negotiations and increased expenditure.
The Gold Book’s approach is to award a single contract to a single contracting authority, such as a consortium or joint venture, so as to optimise the co-ordination of innovation, quality and performance. This single-contract approach was intended to incentivise contractors to focus on the whole-life costs of the facility – the rationale being that if the contractor is responsible for long-term operation it is in his interest to design and build a quality plant with low operation and maintenance costs.
The Gold Book, therefore, combines design and construction with long-term operation and maintenance. The design-build portion widely replicates the Yellow Book and following commissioning testing, a long-term (20 years minimum) operation and maintenance period triggers, during which the contractor must achieve various operational targets and return the plant to the employer in an agreed condition.
This gives the employer assurance that the facility will remain in good operating condition for the duration of the contracted period and is particularly helpful in countries where the employer cannot provide a suitable workforce. It is critical that the parties do their utmost to co-operate for the prolonged period of the contract and to facilitate this there are new provisions dealing with adjustments for ‘changes in technology, new materials or products’ (rather than just changes in ‘law’ and ‘costs’ as in the Yellow Book). This is a prudent inclusion given the inevitable change in technologies over such a long period.
The Gold Book has met some criticism that it is not substantially different from the Yellow Book and not sufficiently tailored for DBO procurement.
For example, there is the obligation on the contractor to 'be responsible for the design of the works' and ensure his designers are available to attend discussions with the employer’s representative for the entire duration (including 20-plus years of operation). This results from the removal in the Gold Book of the Yellow Book concept of the designer’s liability up to the ‘defects notification period’ (in a DBO scenario there is no handover of the project to the employer on completion). Consequently, difficulties in terms of insurance coverage and statutory limitation periods would arise from such an extended period of liability and may serve to hinder the contractor’s ability to incorporate innovative designs.
The Gold Book certainly provides a foundation for a long-term DBO contract. However, as with the White Book, caution should be taken when adopting the standard form as substantial amendments may be needed to address those issues highlighted above.
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The Fidic MDB (Multilateral Development Bank) Harmonised Edition (2005) or ‘Pink Book’ was published in response to the regular amending of the Fidic General Conditions, by the world’s banking community.
The amendments made were often standard and repeated leading to inefficiencies at the procurement stage. Different multilateral development banks (MDBs) used varying amendments creating uncertainties for the documents’ users. The Pink Book simplifies the use of the Fidic contract for MDBs, their borrowers and others involved with project procurement, such as consulting engineers, contractors and contract lawyers.
Based on the Red Book (1999 edition), the Pink Book is only applicable when the project is MDB-financed and the contract is one for building and engineering works designed by the employer*. The Pink Book was prepared and agreed by the heads of procurement of various notable MDBs and will likely be the common form going forward.
Some notable clause amendments to the 1999 Red Book were made when creating the Pink Book, imposing stricter obligations/standards on both the employer and the contractor. Examples include:
(a) Employer’s financial arrangements: The Pink Book is stricter than the Red Book, and requires the employer to submit reasonable evidence that financial arrangements had been made (and were being maintained) before the commencement date as well as within 28 days of the contractor’s request and also demonstrate its ability to pay the contract price punctually.
(b) Employer’s claims: The employer must still give notice of a claim as soon as practicable and at least within 28 days of the employer becoming aware, or when it 'should have become aware', of the circumstances giving rise to the notice.
(c) Termination by contractor: The contractor’s termination grounds have been amended in the Pink Book, so it is not enough for the employer to fail to perform its obligations. The employer’s breaches must 'materially and adversely affect the economic balance of the contract and/or the ability of the contractor to perform the contract'. Additionally, two new grounds for termination are included covering:
(i) the suspension of the loan/credit from which the contractor is paid; and
(ii) if no instructions are given by the engineer 180 days after the letter of acceptance.
In addition, the Pink Book includes a number of other clauses addressing matters of concern to MDBs, such as avoiding corruption, the impact of work on the environment and local community as well as improving disease avoidance and the facilities for workers on site. The resulting harmonised and accepted standard form benefits all users of the tender documents and has substantially increased efficiencies in contract negotiations.
Conclusion
In conclusion, these contracts serve to extend the scope of the Fidic suite and cover a greater range of projects and methods of procurement. Probably all international employers, contractors, sub-contractors and consultants working on international projects will frequently encounter Fidic conditions of contract and the inclusion of these new forms adds breadth to an already established suite and facilitates more efficient negotiations between parties. The specific circumstances of every project will demand fine tuning and, particularly with the White and Gold Books, a cautious approach should be adopted in view of substantial amendments which may need to be made to ensure comprehensive risk allocation.
* If a project is financed by an MDB (or a group of MDBs) but the employer will not carry out the design (that is, where the 1999 Red Book would not have applied), the parties should not use the Pink Book without amendment. However, Fidic has published guidance on adapting the Pink book for use on a design-build project.
**Joanne Emerson Taqi is partner and Hugh Murray an associate at Norton Rose (Middle East) LLP Bahrain office. Legal queries related to the construction sector can be addressed to Norton Rose (Middle East) LLP through Gulf Construction magazine at editor@gulfconstructionworldwide.com.
Norton Rose Group has had a presence in the Middle East for 30 years and has advised developers, lenders, and contractors in relation to the legal aspects of a wide variety of construction and infrastructure projects in the region.
With a combined team located in the Abu Dhabi, Bahrain and Dubai offices, Norton Rose (Middle East) LLP is able to provide both contentious and non-contentious support to financiers, developers, contractors and specialist contractors in the region.
