This article is written by Vidhya Sumra who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
In the last few years, we have seen substantial growth in the real estate and construction industries worldwide. The projects are now becoming universal and inventive and it requires more expertise as the risks to the parties are increasing.
Therefore, engineers, contractors and builders are looking to execute international forms of contract for their projects, which will have a clear scope of works, rights and obligations, and liabilities of the parties. Hence, FIDIC contracts are model contracts for such projects.
What is FIDIC?
FIDIC stands for Fédération Internationale des Ingénieurs – Conseils, which means International Federation of Consulting Engineers. It started in 1913 in Belgium and now has a membership of over 100 countries. Currently situated at the World Trade Center in Geneva Switzerland. It is an international standard organisation for consulting engineering and construction are best known for the FIDIC family of contract templates.
What is the main purpose of FIDIC?
The principal goal of FIDIC is to promote and execute the consulting engineering industry’s strategic goals on behalf of its members and to publish information and resources of interest to its members. FIDIC standardizes contracts that are commonly used in the global construction and engineering industry, primarily for international construction projects, which have a higher value and are authorised by many multilateral development banks.
It publishes standard forms of contracts for construction works, infrastructure projects, EPC/Turnkey projects, consultancy services, etc. and publishes agreements for clients, consultants, sub-consultants and joint ventures together with related materials such as standard pre-qualification form, performance guarantee form, letter of acceptance, etc.
FIDIC organises the annual conference and an extensive programme of seminars, workshops and training courses and other events in the furtherance of its goals.
The origins of the FIDIC standard forms of the contract lie in the Institution of the Civil Engineers London form of contract, which was issued in 1956 by UK-Engineers. In 1957, FIDIC adopted and published its first edition of a standard form of contract which is called the “Red Book” for civil engineering works. Since then, FIDIC has regularly updated its standard forms of contract.
Objectives of FIDIC
One of the key objectives of FIDIC is to promote sound and effective project management of engineering works.
Following are the other objectives of the FIDIC:
- Provide the consulting engineers with standard forms of contract and other related documents like standard pre-qualification form, performance guarantee form, letter of acceptance, etc.
- To provide solutions on issues relating to consulting engineering by developing and promoting consulting engineering best practices.
- Provide consulting engineers with the resources needed for their better image and reputation.
- Promote and assist the worldwide development of viable consulting engineering industries, as the industry needs to maintain the best practices and sustainable quality services.
- Promote and enhance the leading position of FIDIC’s forms of contract.
- Improve and develop FIDIC’s training and publishing activities that will make the organization visible and valued.
- Promote and encourage the development of young professionals in the consulting engineering industry as they represent the future of the industry.
What are the FIDIC forms of Contract?
FIDIC is well known for drafting standard forms of contract (“FIDIC Model Contracts”) in the field of consulting engineering industry worldwide and over the years, it has consistently improved its contracts. The main purpose of the FIDIC Model Contracts is to define the contractual relationship between the parties and distribute the risks fairly to the parties.
The FIDIC Model Contracts are drafted for a wide range of projects. They are segregated by the colour given to the cover of the document in which rules and regulations of the contracts are mentioned.
The below table gives a brief overview of FIDIC contracts:
Conditions of contract for construction for building and engineering works.
This is for the very common job works, designed mainly by the employer.
Conditions of contract for plant and design-build for electrical and mechanical plant and building and engineering works.
The contractor is responsible for the plant design, building and engineering works. Yet still, the employer might be required to carry some design.
Conditions of contract for use on engineering and building works of relatively small capital value or where the construction time is short.
This is the short form of the contract. It is used mostly for simple, repetitive, short-duration jobs.
Conditions of contracts for use of building and engineering works designed by the employer.
The projects funded by certain MDBs, which are supranational institutions such as the World Bank.
Conditions of contract for EPC/Turnkey Projects.
The contractor carries the engineering, procurement and constructions tasks up to the final delivery of a fully equipped, tested and ready to run facility.
Conditions of contract for design, build and operation project.
It implies a long-term commitment of the contractor and offers a new and unique procurement route.
Form of contract for dredging and reclamation works.
The only standard international form of contract designed specifically for the dredging industry.
FIDIC Client/consultant model service agreement.
The White Book is an important part of the FIDIC suite and is one of the most widely used forms of professional services contract internationally.
Features of FIDIC Contracts
Generally, the FIDIC Model Contracts consist of two parts. Part A is known as General Conditions of the Contract and part B as Particular Conditions of the Contract.
What are the FIDIC General Conditions of the Contract (“GCC”)?
The GCC describes allocation and management of risk between the parties and it contains the general terms of the contract like rights and obligations of parties, procedure for payment, certification, dispute resolution, etc. They are published by FIDIC and should not be amended.
What are the FIDIC Particular Conditions of the Contract (“PCC”)?
The PCC defines conditions, which are specific to the project and the place where the project is executed. They are used as an amendment and the purpose of the PCC is to define clauses that are not part of the GCC.
Why is a hierarchy of documents important?
In the FIDIC Model Contract, all parts of the contract should be read together and it provides a default hierarchy for the documents forming the contract as stated below:
- The Contract Agreement (if any);
- The Letter of Acceptance (this is the formal acceptance of the contractor’s tender and usually presents the point in time when Contractual Parties enter into the Contract, but this depends on the local regulations);
- The Letter of Tender;
- Part B or the Particular Conditions of the Contract;
- Part A or the General Conditions of the Contract;
- The Specification;
- The Drawings;
- Schedules and any other document forming part of the Contract.
The main purpose of the hierarchy is that documents have precedence based on the time of their origin and parties can exclude or limit the parts of the documents previously produced.
Golden Principles of FIDIC
The FIDIC Model Contracts were made to maintain the standardization in the contract and FIDIC thinks that amendments in the GCC are changing their contracts to such an extent that contracts are no longer identifiable as FIDIC contracts. Therefore, FIDIC implemented five golden principles (“FIDIC Golden Principles”) which will prevent modifying or deleting some general conditions.
The FIDIC Golden Principles were launched at the FIDIC Asia Pacific Contract Users’ Conference in Hong Kong on 25th June, 2019. In order to promote acceptance and understanding:
- It is framed at a conceptual level to summarize the essence of a FIDIC contract;
- Each Golden Principle expresses a single, readily understood and generally accepted concept;
- The FIDIC Golden Principles are limited to the minimum number necessary for completeness.
Following are the FIDIC Golden Principles
- The duties, rights, obligations, roles and responsibilities of all the contract participants must be generally as implied in the general conditions, and appropriate to the requirements of the project.
- The particular conditions must be drafted clearly and unambiguously.
- The particular conditions must not change the balance of risk/reward allocation provided for in the general conditions.
- All time periods specified in the contract for contract participants to perform their obligations must be of reasonable duration.
- All formal disputes must be referred to a dispute avoidance/adjudication board (or DAB, if applicable) for a provisionally binding decision as a condition precedent to arbitration.
Advantages of FIDIC
As informed above, the FIDIC Model Contracts are widely accepted by the construction industries as they offer several advantages. The advantages of using the FIDIC Model Contracts are following:
FIDIC is a true international standard. Therefore, the FIDIC Model Contracts are familiar to contractors throughout the world and are widely accepted.
Focus on Projects
To execute a new contract, the parties have to start from the base, which needs a lot of time starting from appointing lawyers until the contract is executed. By using the FIDIC Model Contracts, the parties can focus directly on the project and can manage the risk efficiently.
Most contractors worldwide use the FIDIC Model Contracts as it allows increased bid lists and encourages more price competition amongst tenderers. Therefore, ultimately it provides value for money.
Lower bid time and cost
The FIDIC Model Contracts are ready to use drafts, which will expedite the discussion and negotiations on the terms and conditions of the contract. The contractors do not have to engage the specialist, which will result in less cost and a shorter time.
Various types of Contracts
As informed above, the FIDIC Model Contracts are divided into different colour books and the parties can choose the contracts as per various features like kind of construction, size & nature of the project, purpose of the contract and identity of the parties. The parties can choose the right book for a certain type of project which will cover different terms and conditions specific to the project.
The FIDIC Model Contracts are already intended for use on major projects thus practical clauses like the scope of work, rights and obligations, liabilities of the parties are covered.
The FIDIC Model Contracts are published in up to 20 different languages including major languages like Chinese, Japanese, Indonesian, French and Spanish. This means lower translation cost where the contracts need translation into the foreign language of the other party.
Most of the international banks including Multilateral Development Banks are using the FIDIC Model Contracts, which eases obtaining approval from the bank for the contracts.
Less Risk of Disputes
The FIDIC guide, other FIDIC publications and published papers provide a broad explanation of the FIDIC Model Contracts and the particular provision of each clause. This means there is less disagreement and less risk of disputes between the parties.
Another advantage of the FIDIC Model Contracts is that it is fair and neutral. It balances the obligations and duties of the parties, as they are not drafted in favour of one party and protects the interest of both parties.
Since the FIDIC Model Contracts are accepted worldwide and are easier to use, the parties will be more confident as these contracts can impact significantly on the efficiency and success of the projects.
Disadvantages of FIDIC
However, FIDIC Model Contracts are widely accepted and there are several advantages as well, but in some situations, they seem to create some issues with it. Following are few disadvantages to the FIDIC Model Contracts:
Unfamiliarity by Local Contractors
The local contractors are not still not familiarised with the FIDIC Model Contracts and it may discourage them from tendering, reducing local competition and increasing their bid time and costs.
Limited Judicial Consideration/Precedent
As FIDIC Model Contracts provide for arbitration, there is little guidance from the Courts as to the intended operation of particular clauses or precedents to follow. This compares to general contracts where there are significantly more decisions about the operation of various clauses.
As we know, every project is different and customization is necessary for every project. To implement modifications in the contract, they tend to shift commercial terms to the schedules of the contract. Moreover, it becomes an exhausting experience as all technical and legal details are put together in the schedules of the contract.
FIDIC in India
The FIDIC Model Contracts are used all over the world including the Government of India for executing projects. Consulting Engineers Association of India (CEAI) is the apex body of consulting engineers in India. CEAI is the only Member Association from India representing the Indian Engineering Consultancy profession at the FIDIC. CEAI membership comprises individual consulting engineers working independently, private and public sector engineering consulting firms and firms engaged in activities related to engineering consultancy.
In India, in recent times, international competitive bidding has become a model in infrastructure projects. Some of these projects include the mega power projects, railways, telecommunications, airports, highways, ports, etc.
Let us take an example of national highway development in India.
The national highway development in India is mainly financed by the World Bank and the World Bank and the other multilateral development banks emphasize incorporating the FIDIC terms into their tender documentation. However, in India, the contracts are developed by the Ministry of Road Transport and Highways and projects are based on Engineering, Procurement and Construction (“EPC”) contract scheme laid down by the National Highway Authority of India (“NHAI”) guidelines. EPC stands for Engineering, Procurement and Construction. Under an EPC delivery model, an EPC contractor will generally be responsible for the design, construction and commissioning of a facility.
Let us compare the selected clauses and various features regarding the execution of highway construction projects based on EPC mode of NHAI conditions of contract with FIDIC contract. The below points will highlight the difference between the documents prepared based on EPC and FIDIC.
- The FIDIC and EPC contract by NHAI brings out similar clauses regarding the security deposit. It is observed that FIDIC specifies clear guidelines regarding precautions and procedures for suspension of work due to poor workmanship while NHAI specifies a performance bond to guarantee workmanship.
- FIDIC provides an extension of time clause to be determined by the engineer based on the early warning provided by the contractor due to unprecedented factors while NHAI specifies the extension of time-based on the discretion of the engineer in charge.
- While NHAI specifies clear guidelines and a hierarchy of responsibility to grant the variation of work, FIDIC specifies that variation of work other than the omission of work can be executed by the contractor with the consent of the engineer based on value engineering principles.
- Even though dispute resolution by both the EPC contract of NHAI and FIDIC model is based on similar time-bound procedures, wide contrast exists in the settlement of claims by both systems as NHAI does not specify an intermediate resolution paving the way to arbitration and court litigation.
In conclusion, the FIDIC Model Contracts are drafted for major construction projects and have been successfully used on thousands of projects by contractors across the world. It provides various benefits as they improve the chances of success of the project. These facts lead to the logical conclusion that the FIDIC Contracts should become the standard starting point for construction contracts worldwide where foreign contractors are involved on major projects.
- Comparative study on Indian Highway Construction Project by Arun Chandramohan and Vinay Mohan Agrawal
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