Global M&A trends and risks
Powerful new forces shaping in the M&A landscape
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Global | Publication | January 2018
After one of the longer gestation periods in construction contract history and much publicity surrounding the new suite’s inaugural event, FIDIC launched new editions of the FIDIC Red, Yellow and Silver Books at its annual International Conference in London, which took place in December 2017.
The conference was attended by double the usual number of delegates - a clear sign of the keen interest in the new forms and confirmation that, when it comes to international contracts, FIDIC is still king 60 years after the first Red Book was published. In fact, one of the opening remarks made concerned the Red Book (the 2017 edition is its sixth incarnation): this form has been used more than any other contract, on a global scale, and therefore made a huge contribution to improved living conditions and greater prosperity around the world – a fitting tribute at the start of the 30th International Conference.
We were delighted to be present among the glitterati of the international construction, engineering and infrastructure procurement world. As practitioners in a global law firm, we were thrilled by the number of delegates from Asia and Africa and, with an ever-increasing number of FIDIC projects on the go, we were keen to find out more – not just about the new 2017 contracts but also users’ experiences of the previous forms.
After dipping a toe in the water with its 2016 special pre-release version of the Yellow Book 2nd edition, this was FIDIC’s real opportunity to update and improve their most popular forms of contract. In this overview, our comments are on the new Yellow Book (“YB17”) and the comparisons made are against the first edition (“YB99”).
The first thing we noted was the weight of the contracts; upon closer inspection, we noticed that the new forms have almost doubled in length. YB17 is still comprised of three parts – the General Conditions (“GCs”), Guidance for the Preparation of Particular Conditions and Annexes: Forms of Securities and Forms. Together with an appendix and additional annex, the GCs now take up 126 pages in YB17, as opposed to 69 pages in the 1st edition; the Guidance with Annexes take up 68 pages, as opposed to 30.
FIDIC users will be forgiven for thinking that the new forms appear to incorporate a fair chunk of the amendments commonly made to the 1999 forms. From a page turn, it is also clear that the new forms represent a change of form as well as content. By way of example, YB17 lists all definitions in alphabetical order and introduces more headings (to aid interpretation); at the same time, the fundamental concepts relating to claims and dispute resolution and the conditions that relate to the separate disputes agreement and procedural rules that form the Appendix to the GCs and the Annex to that Appendix have been expanded considerably. It would be fair to say that FIDIC’s approach to dispute management and resolution constitutes one of the hallmarks of FIDIC 2017.
Key features of the new forms include:
Early in the conference, speakers made reference to the Gold Book (the Design, Operate and Build contract), which is now a decade old. It was acknowledged that take up of this form has been poor and the lesson learned (by FIDIC) is to focus on the contracts which are being used and the users’ needs.
Throughout the conference, FIDIC Committee member speakers re-iterated the raison d’etre behind the new suite – to increase clarity and give more certainty. In producing the new forms, FIDIC’s key aims were to:
Evidence of “improved clarity” can be found throughout the new forms, such as:
One of the presentations given at a previous FIDIC Conference was on the development of certain ‘Golden Principles’ – principles which FIDIC considers to be inviolable and sacrosanct and in accordance with which FIDIC contracts should be negotiated and executed. These are:
These principles were covered again, at this year’s conference, in more detail and now appear in the contracts themselves (in the introduction to the Particular Conditions).
At the conference, a number of delegates mentioned that the issue of the three new editions has effectively created a gap in the suite between the main forms and the Green Book (which is yet to be updated). Whatever FIDIC users think of the new forms, the reality is that they contain some new drafting and are considerably longer than their predecessors. Take up of the 2017 contracts may therefore be slow as users delay making a wholesale transition. FIDIC would argue that, while the new agreements are longer, their provisions are more considered and this should result in fewer disputes arising.
Mention was also made at the conference of the less sophisticated SME employer (aid agencies and other similar entities that support smaller communities) who is more in need of a ‘Red-lite’ FIDIC contract rather than a ‘Green-heavy’ agreement incorporating substantial amendments. In our view, the FIDIC suite has room for a new form – a contract for works of intermediate size and complexity (as the JCT does) – but only time will tell how FIDIC proposes to deal with this.
FIDIC users will be familiar with the Pink Book: first published in 2005, it is (in essence) a version of the Red Book current at the time incorporating the additional clauses and standard amendments which were often required and repeated whenever bidding documents were prepared for multilateral development banks. Following the publication of the new Red Book, one of the conference speakers from a multilateral financial institution even went as far as to say that the new RB17 sounds the death knell for the Pink Book.
Another key message conveyed on the first day of the conference concerned the choice of contract – or, more accurately, the wrong contract being selected in the first place with a plethora of contractual amendments then being introduced.
Mention in particular was made of the 1st edition of FIDIC’s Procurement Procedures Guide 2011, a mighty 250 page tome with chapter and verse on the procurement phase from strategy through prequalification to obtaining tenders, evaluation and finally award of contracts.
FIDIC has always voiced concerns over changes being made en masse to its contractual terms. That said, it fully understands the need which users have to amend the agreements and, over the years, it has developed its practice of selling licences to amend its contracts (which are subject to strict terms).
With the evolution of the Golden Principles mentioned above, it is surely only a matter of time before FIDIC re-publishes the guidance on its licence. In particular, mention was made at the conference of FIDIC being able to confer “FIDIC-Compliant Contract status” on a contract amended in accordance with its licence and, in addition, potential contractors bidding on a project being able to ask whether the contract proposed has such status.
A recurring theme at the conference was the 2017 Supreme Court decision in MT Højgaard A/S v E.ON Climate and Renewables UK, which restored the TCC’s original decision that the contractor was liable to comply with a fitness for purpose type obligation “tucked away” in a technical schedule, despite the obligations contained in the contract terms to exercise reasonable skill and care and to comply with a particular international standard.
The Højgaard decision has significant ramifications for the interpretation of construction contracts, which regularly incorporate schedules and technical documentation that, more often than not, have not been “harmonised” as against the final conditions. Højgaard is also viewed, by many, as yet another example of the courts returning to the literal meaning of contractual terms; now, more than ever before, parties will be taken to mean what they say in their contracts.
Templates of seven typical security documents (including a PCG and the bonds) appear as Annexes at the end of the Guidance. These remain largely the same as before, except that references have been updated (for example, the Uniform Rules for Demand Guarantees 2010 Revision).
Behind the Guidance (with Annexes) are the FIDIC Forms – template forms of a Letter of Tender, a Letter of Acceptance, a Contract Agreement and Dispute Avoidance/Adjudication Agreement between the parties and a DAAB member (“DAAA”).
Compared with YB99, the form of Letter of Acceptance is new, the separate YB99 Dispute Adjudication and Dispute Adjudication Board Agreements have been merged and adapted into the new DAAA and the three page YB99 Appendix to Tender has been moved to the front of the Guidance now taking pride of place as the Contract Data.
The bulk of the Guidance itself (that precedes the Annexes) concerns the Particular Conditions (“PCs”), which are broken down into two parts - the Contract Data and the Special Provisions. In the GCs, the Contract is defined as including the Conditions which, in turn, are defined as the GCs as amended by the PCs.
The Introduction and the Notes on the Preparation of Tender Documents that appear within the Guidance give a steer as to how the information required at tender stage is to be obtained and also list the documents which should be issued to prospective contractors when going out to tender.
The Special Provisions (“SPs”), which in YB17 are now twice as long as before, are the PCs which amend or supplement the GCs. The Guidance contains a valuable reminder that the tender documents should make it clear that the SPs take precedence over the equivalent provisions in the GCs and the Contract Data takes precedence over the SPs.
It is important to read the Guidance thoroughly as certain points will need careful consideration. For example, on page 35 of the Guidance, in the section on extending time for completion, the commentary provided steers the parties towards making specific provision regarding the contractor’s entitlement to an EOT where there is concurrent delay attributable to both parties (“… the rules and procedures for assessing the Contractor’s entitlement to an EOT where there is concurrency between delays attributable to both Parties shall be stated in the Special Provisions.”).
In relation to concurrent delay, the Guidance makes reference to the 2nd edition of the UK Society of Construction Law Delay & Disruption Protocol 2017 which it states “is increasingly being adopted internationally”.
Our view, however, is reflected in last year’s decision of the English High Court in North Midland Building Limited v Cyden Homes Limited (2017) which confirms the ability of parties to exclude concurrent delay claims by the terms of their contract.
In a new section in the Guidance, FIDIC asks its employer users and their advisers who draft SPs to consider whether and how the terminology used in the GCs would accord with general practice in the relevant jurisdiction. As examples, the Guidance notes (page 13) that “gross negligence” has no meaning under a number of legal systems, and “indemnity” and “indemnify” have specific meanings under English law.
The number of definitions has gone up to 90 (from just short of 60). New definitions include “Claim”, “Date of Completion”, Delay Damages”, “Dispute”, “Key Personnel”, “Notice” and “Notice of Dissatisfaction” and “Programme”.
Since the contractual documentation in most projects comes from several sources, it will important to ensure that all parties drafting documents are aware of the interpretation clause and the expanded definitions so that terminology is uniform across documentation.
One of FIDIC’s fundamental pillars is the ‘fair’ allocation of risk between the parties under its contracts: see the third of the five Golden Principles mentioned above. In the new forms, various additions and tweaks mean this new ‘reciprocity’ can be seen in a number of clauses - 1.12 (Confidentiality), 1.13 (Compliance with Laws), 6.3 (Recruitment of Persons), 16.2 (the contractor now has the right to terminate for any fraud or corruption on the part of the employer) and, most notably, GC 20 (claims made by each of the employer and contractor).
GC 1.3 has also been broadened to include the concept of communication through “Notices”, which are the required form of communication in a number of contractually defined circumstances. All communications must be made “in writing” (which includes email). If a communication is a “Notice”, it must be identified as one. If it is not, it must be identified by reference to the contract provision under which it is issued. Finally, an electronic Notice or communication is deemed to have been received on the day after transmission. To ensure compliance with these provisions and contractual time periods, the parties will need to be vigilant in their contractual administration practices.
Under a new GC 3.1, if the engineer is a legal entity, it is required to appoint a “natural person” to act on its behalf who must have suitable qualifications, the experience and competence to act under the contract and “… be fluent in the ruling language …”.
A new GC 3.2 boldly provides that there is no requirement for the engineer to obtain the employer’s consent before exercising his authority under GC 3.7 (as to which, see below) and, additionally, that the employer “shall not impose further constraints on the Engineer’s authority”. In addition, whereas YB99 made provision for delegation by the engineer, YB17 now goes further with a new definition – the “Engineer’s Representative”.
GC 3.5 contains an interesting new provision concerning any instruction issued by the engineer which does not state that it is variation: if the contractor considers the instruction to be a new variation or part of an existing variation or that it will reduce safety of the works or does not comply with applicable laws or is “technically impossible”, the contractor is required to give immediate notice. If the engineer does not respond within 7 days, his original instruction is deemed to have been revoked.
YB99 GC 3.5 has been wholly rebuilt as a three-page GC 3.7 under the heading Agreement or Determination. The first paragraph states that the engineer is “to act neutrally” between the parties (but there is no definition of “neutrally”) and “shall not be deemed to act for the Employer”. In order to encourage dialogue between the parties and reach an agreement, the engineer is required to consult with both parties “jointly and/or separately”.
As before, the engineer is then required to make a “fair determination, in accordance with the Contract, taking due regard of all relevant circumstances”. The engineer is now given a time limit within which to issue his notices (of agreement / determination), namely 42 days (or other time period put forward by him and agreed to by both parties). Agreements reached and determinations made are binding unless and until revised by the DAAB or in arbitration.
The new GC 3.7 also makes provision for either party to give the other a “Notice of Dissatisfaction” with reasons as to why it is not happy with any part of the engineer’s determination which is the pre-cursor to proceeding to the DAAB.
Many of the new and amended provisions have been introduced to emphasise the independence of the engineer and to detail procedures and powers.
GC 5.2 has been amended to create a clearer step-by-step procedure. A careful read of the changes made to the definition of “Contractor’s Documents” suggests that the GC might now apply to a wider range of documents. In any event, the procedure still makes provision for review by the engineer (if the parties agree in the contract that any specific documents are to be subject to such review) and construction is not to begin until a Notice of No-objection is given (or deemed to have been given) by the engineer.
In addition to improved clarity and fairer risk allocation, FIDIC’s additional aims are to promote active project management and encourage continuous dispute resolution throughout the contract period and the carrying out of the works as well as encouraging dispute avoidance.
There is now a distinction between a “Claim” (a request for an entitlement provided for in the contract) and a “Dispute” (which arises if the Claim is rejected or ignored) and the old GC 20 has been split into two and new definitions introduced. A “Claim” extends to any “entitlement or relief under any Clause … or otherwise in connection with … the Contract or … execution of the Works”; so, importantly, it is not limited to time and/or money.
The YB99 provisions dealing with each of the employer’s and contractor’s claims were in different parts of that contract and differed from each other. In YB17, the process for both parties’ claims is now set out in GC 20 and is the same for both parties.
Also new to YB17 is the reciprocal obligation at GC 8.4 known as “Advance Warning”. This provision has been taken from the Gold Book. Both parties and the engineer are required to advise the other party (and engineer), in advance, of any known or probable future events or circumstances which may adversely affect the works or increase the contract price.
The process for dealing with claims (other than for time and/or money) is set out in GC 20.1 and is short. If the claim is not agreed, the claiming party may by giving a notice refer its claim to the engineer for agreement/determination under GC 3.7 (and ultimately arbitration under GC21).
For time and money claims, GC 20.2 sets out a very detailed procedure. The clause is 4 pages long - so there is clearly more for the parties to comply with, and contractors should make sure they fully understand what is required of them and the consequences of failure to comply with the strict terms of the contract.
GC 20.2.4 sets out what is meant by a “fully detailed” claim and requires the claiming party to submit one to the engineer which has to include “all contemporaneous records”. In a conference session on managing claims, there was a useful discussion of the importance of keeping records. This considered what types of records the parties should proactively maintain and keep (projects records, programmes, digital reports), looking out for “inadequacies” (lack of precision and detail) in records (such as invoices) and the guidance given in the 2nd Edition of the UK Society of Construction Law Delay & Disruption Protocol 2017.
In GC 20.2, the requirement (in YB99) for notification of the claim to be made within 28 days has been retained, as has the provision stating that if the notice is not given in time, the claim is lost. In 20.2.4, there is an additional condition precedent for the claimant to comply with and failure to state the contractual or other legal basis of its claim within 84 days of it arising renders the claim susceptible to being time-barred in a similar way.
However, new drafting in clause 20.2.5 now gives the engineer (or the employer’s representative under the Silver Book) the power to consider a Notice of Claim that has been submitted late and sets out various circumstances which may be taken into account in making such a decision. Leaving aside the issue of how willing in practice the engineer will be to exercise this power, this new wording in effect enables the engineer to disapply the time bar provisions and may increase the scope for disputes between the parties as to the effectiveness of Notices of Claim and the relevant decisions of the engineer.
The Dispute Avoidance/ Adjudication Board (“DAAB”) is the new name for the Dispute Adjudication Board. “Avoidance” focuses the mind on the new driver – the requirement to avoid disputes wherever possible. Where, under the 1999 suite, the Red Book 1999 required a standing DAB, a standing DAAB now applies in all three new contracts on the basis that it is easier to prevent a claim from becoming a dispute if there is a standing board in place to guide the parties. While the logic behind this approach is clear there is additional cost to the parties of adopting this approach.
GC 21.3 enables the parties (if they agree) to “jointly request … the DAAB to provide assistance and/or informally discuss and attempt to resolve and issue or disagreement”. Any advice given by the DAAB is said not to bind it in subsequent formal DAAB proceedings.
The DAAB Procedural Rules are set out in the Annex to the Appendix to the GCs. They are now three times as long as before and include provisions for the DAAB to meet with the parties regularly and make site visits – again, all well and good, until one considers the additional costs this will give rise to.
As regards the reference of a dispute to the DAAB, the last paragraph of GC 21.4.1 and GC 21.5 need to be read together. What is unclear is how the deemed interruption of “the running of any applicable statute of limitation or prescription period” will work in practice. What has been made clear (unlike the provisions of YB99) is that DAAB decisions which have not become final and binding may still be enforced by separate arbitration proceedings.
Finally, arbitration clause 21.6 now provides for “one or three arbitrators”; in YB99, three arbitrators had been stipulated.
This overview lists just a few of the changes.
The new contracts represent a combination of updated and clearer drafting, “fairer” provisions (risk allocation), more detailed procedural mechanisms and more comprehensive guidance.
However, whatever the form of the agreement, while the drafting is often shared, overall each contract is unique and the language used fundamental. It is of paramount importance that the whole contract (and not just the GCs) is drafted to reflect both the sector-specific details (for example, testing and commissioning) and the project-specific details (for example, liquidated damages and caps on liability).
In 2018, we will continue our look at specific features of the new forms as well as other developments in construction procurement.
If you have any questions or comments about the new FIDIC forms, please email or call one of our contacts.
Nina Varumo is a freelance portrait and documentary photographer based in Stockholm. A recent project of hers Kvinnor till sjöss (‘Women at sea’) is on ongoing photo series highlighting the working life of female seafarers in order to change the stereotypical image of what and who is a seafarer.
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