The FIDIC 1999 Red Book - Essay Example

 The FIDIC 1999 Red Book Introduction Balanced risk sharing is one of the most imperative constituent of the FIDIC. In particular, the FIDIC 1999 Red Book is globally renowned for standard form contract for construction and engineering projects, where the whole or substantially the whole project is designed by, or on authority of the employer. In accordance with the Red and Yellow Books, it is the employer, who essentially assumes responsibility for risks such as changes in law, unforeseeable ground conditions, unpredictable natural calamities, force majeure, and environmental permits. On the other hand, the party assigned with designing, assumes the responsibility for its defects. Nonetheless, the risk sharing principles of the FIDIC are advantageous for both, the Employer and the Contractor. The Construction and Plant & Design-Build Books shed further light on the subject of risk-sharing principles. Overall, risk allocation notions and philosophies recognize standards of fair risk-allocation, like the following: 1. Risks should be allocated to the party that is in a better position to handle them. 2. Risks should not be assigned to a part, which cannot deal with the repercussions in the event of the risk becoming a reality. This paper seeks to explore the distribution of risks as per the FIDIC code between various parties namely the employer, the contractor and the engineer in order to discover how risks are fairly allocated. Adoption by United Arab Emirates (UAE) In 2007, the UAE government adopted new contracts, based on the broad principles of the FIDIC conditions for construction, plant and design and build form of contracts. These contracts offer two forms, namely, Conditions of Contract for Construction and Conditions of Contract for Design and Build1. However, these contracts exclusively apply to public centre construction entities in UAE; thus, private developers are free to adopt any preferred form of contract. Arguably, while some new provisions are in the Employer’s interest, others tend to favour the Contractor. The Contractor The new contracts entailed subtle changes from the FIDIC forms of contract, that impose more stringent requirements on the Contractor and alleviate the balancing obligations that FIDIC had introduced to foster a more even risk-allocation amongst parties. For instance, a noteworthy amendment was made in the Design and Build form, which originally was based on the Yellow Book. The primary philosophy behind this contract was for the employer to assume responsibility for both, providing accurate information to the contractor and delineating his precise requirements. In the event of discovery of erroneous information as provided by the Employer or unforeseen physical conditions, the Contractor shall have a right to recover additional expenditure and seek an extension. However, these aforementioned provisions regarding remedy have been deleted from the UAE contracts. Not only that, but the UAE law expressly states that the Contractor shall be liable for any subsequent defects in the design, irrespective of the fact that it was prepared by the Employer2. In addition, the Employer is to maintain responsibility for unforeseeable physical conditions. Sub-clause 4.123 serves as a classic illustration to elucidate the above point. It states that normally, a contractor can deal with subsoil problems; although, he might fail to make allowance for the extra costs incurred with regard to this problem. Thus, clause 4.124 lays down for the Contractor to assume risk while dealing with such problems, whereas the Employer is responsible for compensating the Contractor in the event of unforeseeable risk that might eventuate. Similarly, the addition of another clause in the UAE contracts encompassing the list of warranties the Contractor is liable for, is another deviation from the standard form of contracts. Likewise, the ‘cap on the liquidated damages for delay’ has been raised to 20% of the contract sum, instead of 10% that is applicable in the region. This implies that many Contractors can stand to lose considerable amount of money5. Although, the Employer is entitled to give only a fourteen days notice prior to termination of contract; however, the Contractor is obliged to adhere to a series of legal steps such as referral to the dispute board before being able to terminate the contract. This denotes that the Contractor shall have to wait for at least 132 days from the breach or event before being entitled to terminate the contract. Clearly, this is opposed to the primary principles of fair risk-allocation amongst parties to the contract6. The Employer Under the previous UAE construction law of 1982, it was the contractor, who maintained responsibility for the ground conditions. However, with the inclusion of clause 4.127 concerning unforeseeable ground conditions, the risk has shifted from the Contractor to the Employer, who now assumes risk to the extent of its unforeseen nature. However, this provision involves a caveat, since the Employer is entitled to adjust against any amounts related to unforeseen ground conditions and the monetary impact of those ground conditions within the site, that tend to favour him more than was foreseeable8. The Employer is now entitled to compensate the Contractor over and above the agreed amount in the event of delayed payment. This amount shall be determined in the light of sub-clause 14.8 9that lays down, “financing charges compounded monthly on the amount unpaid during the period of delay”. In such a situation the employer is legally required to respond to the contractor within a span of 42 days, having received a claim or any other documents that support a previous claim by the Contractor. This point is illustrated in sub-clause 20.110 that forces the employer to “respond with approval or with disapproval and detailed comments”11. Nonetheless, many other provisions that deviate from the standard FIDIC tend to favour the employer. This point is evidenced in sub-clause 13.212 regarding value engineering, which advocates the Employer to benefit in terms of time and cost savings by utilising the Contractor’s experience. Likewise, clause 4.913 necessitates on the contractor the need to conduct a quality assurance system. As far as risk-allocation is concerned, the most imperative provision in determining cost is clause 13.814 titled, adjustments for cost. It comprises of a formula based on indices, to calculate adjustments because of change in material prices, labour remuneration, and equipment costs15. It is noteworthy, that unlike standard FIDIC, the Employer under UAE law retains a range of responsibilities that are otherwise to be fulfilled by the engineer, for instance, sub-clause 8.416 regarding extension of time to complete the project. Thus, the executing department needs to ensure that it is equipped with adequate resources to exercise its duties. The degree of adjustment in relation to the project price is dependent upon the chosen input for adjustment and the element of non-adjustability17. The Engineer The role of the engineer as envisaged in FIDIC has always attracted criticism. This is attributed to the fact that although the Employer remunerates an engineer, yet he retains the responsibility for everyday decisions as a part of the contract’s administration. However, the new Red Book has fundamentally changed an engineer’s role as clause 3.118 titled Engineer’s Duties and Authority dictates for an engineer to be considered as acting on behalf o f the employer. In addition, Part 1 of the General Conditions of the FIDIC Red Book sub-clause 1.1.2.6. that define employer’s personnel also consist of an engineer as well as his assistants. Hence, clause 16.219 decrees that a contractor is allowed to terminate a contract within 56 days after sending requisite documents or statement for issuance of payment certificate from an engineer20. As an engineer is under a contractual obligation, so sub-clause 3.521lays down for an engineer to apply fair determination when a specific sub-clause involves acting in accordance with sub-clause 3.522. However, fair determination by an engineer remains open to speculation since almost 25 clauses require him to act within the parameters of sub-clause 3.523. At this point, the role of an engineer transforms from being an Employer’s employee to that of an autonomous consultant for both, the Employer and the Contractor. Moving on, sub-clause 3.424, Replacement of an engineer explicitly provides that and Employer cannot replace an engineer in event of an object raised by the Contract, adequately supported by documents as enlisted in the sub-clause. In the ultimate analysis, an engineer’s impartiality has been compromised as he acts in varying capacities. Thereby, in order to re-establish his neutrality, the engineer should be mutually selected and remunerated. Additionally, provisions in FIDIC should demarcate his precise role in both forms of contract25. Conclusion From the afore-mentioned analysis, it can be deduced that standard principles related to formation of contracts tend to be impartial and balanced in respect of the involved parties – the employer and the contractor. Undeniably, the provisions dictate the risk to be assigned to the party best suited to deal with the risk. Moreover, if the FIDIC form of contracts are adopted without any local amendments, contactor confidence shall necessarily escalate, ensuing in more competitive pricing and mutual advantages. The fair balance established between employer and contractor for risk sharing for practical purposes is visible under the FIDIC regime. While evaluating risks in consideration of FIDIC provisions, the parties should firstly take the scope of the form of contracts into account, as the risks can only be allocated with regard to the true nature of contract between the parties. 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