FIDIC a recognised balanced construction contract that could turn into a significant challenge for small companies

Kathu CSP (South Africa) (c) Benjamin Coquerelle

By Benjamin Coquerelle, Senior Director Legal, AMEA Power

A)     The origin

The suite of FIDIC agreements has been implemented across the globe over the last few decades. It has been largely adopted by the construction industry, being clients or contractors, as well as many law firms. It is used on small to very large scales projects.

The FIDIC conditions have been developed in order to maintain a rather general balanced split of risks between a client and its contractor.

Where essentially the FIDIC suite is designed so that the structure and main terms are kept “as is”, on many occasions the FIDIC terms have been amended, supplemented and sometimes made hardly recognizable. This largely originates from the “Employers-to-be” who may think that FIDIC could be not enough demanding on their “contractor-to-be”. But by an effect of balance, it is then also amended by contractors who on their turn find the terms sometimes too demanding.

The initial intent of FIDIC was to release a set of standard terms that would be only marginally negotiated. In certain markets, it turns not to be the case which sort of defeat the initial intent.

For convenience of use, the split between the general conditions and the particular conditions has often disappeared, leaving a standalone self-standing set of terms and conditions. This is probably better than to have particular conditions that modify almost every single line of the contract, turning this into a nightmare for negotiators and contract managers.

B)     Reasons leading to use FIDIC

One element is however often forgotten when the decision is made to use FIDIC rather than a different from of contract. And sometimes that may lead a client to choose the wrong form of contract to govern the construction of its project.

The main concern is that the client does not take into account the fact that FIDIC is a “managed” contract. Being a managed contract requires the client to put in place the required teams and processes to enable appropriate handling of the contract during execution.

While large organisations usually have the extensive resources to achieve this, we find that many clients that decide to use FIDIC are rather small companies which by essence lack them. And the reasons why they choose FIDIC in the first place is that being standard :

(i)                 it will require less transaction time (and legal costs) to complete,

(ii)               that it is generally balanced between the contractor and its client; and

(iii)              that there are enough specialist who are “fluent” in reading and understanding its terms.

But what clients do not always realise is that during execution they may not be equipped to properly manage the contract, especially as soon as claims start to pile on their desks.

And this inability can usually stem from one clause only. But a clause that is the foundation of FIDIC.

C)     Clause 3.5 – When one has to determine

One of the key principles in FIDIC is the existence of the mechanism / principle for a “determination” through the famous clause 3.5.

Most construction contracts provide that once the contractor is entitled to claim (being an extension of time or extra costs), it must do so by raising a claim to its client.

FIDIC is not different in that.

Looking into clause 20.1, the contractor is obliged to claim within a certain time frame. In doing that it is also due to submit evidence supporting its claim. But then it stops abruptly. The contractor is not obliged to go beyond the mere evidence of the facts surrounding the claim. It does not have to extend its notice beyond “a fully detailed claim which includes full supporting particulars of the basis of the claim (…)”. Hence, there is nothing that imposes on the contractor to provide costs analysis, critical path impact or any other engineered proof. This may be a strict interpretation. But as in any interpretation it, in the opinion of the author, has a certain standing.

And that is where FIDIC differs, as unlike many other contracts, FIDIC puts a lot of burden on the client.

D)     Claiming under a Non-Managed contracts

In non-managed contracts:

(i)                 the contractor informs the client that it is making a claim;

(ii)               in support of its claim it will attach conclusive elements that form the basis of it (revised implementation schedule, quotes/invoices for additional costs, additional internal costs, etc);

(iii)              it then has to convince the client that its claim is justified;

(iv)              the client is then entitled to ask for further information, dispute the basis of the claim.

But in a nutshell, the heavy lifting on the claim is done by the contractor claiming.

The client will have the benefit of assessing the claim on its merits. The client does not have any obligation to enter into the details of the claim, prepare its own analysis nor to recourse to third party advisors. And it goes without saying that it is rather normal since the contractor is the one that has the teams on the ground, has access to relevant information and in the end… it is a contractor’s job to also be good at claim management.

E)     Claiming under FIDIC

In FIDIC, the process is designed at following a whole different way. It is not evident on first sight but the reality will inevitably show differently. And an unprepared client could end up suffering and being at a disadvantage.

A search for a cross-reference to clause 3.5 has 21 hits in FIDIC. This concerns determination for breaching certain obligations (site access, provision of utilities or equipment, interferences), occurrence of certain events (site related findings such as archaeological, bombs or pollution, force majeure), instructions (for tests, suspension), price adjustment (for failure to remedy defects, for variations and change in law, and for the purpose of valuation after a termination for default) and finally for any Employer’s Risks.

Upon receiving a claim from the contractor, the Employer is obliged to make its determination. However, that should not be a simple determination but rather, as prescribed by the clause, a “fair determination” which must be in addition made “taking due account of all relevant circumstances”. 

How can then someone make a fair determination if it does not dive into a detailed analysis of the facts, evidences of the claim ? But can that person even do that if its organisation is not dimensioned and prepared for this ?

F)      Conclusion

So, after this reading, are you still confident that FIDIC is the most appropriate tool to your organisation ?

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