FIDIC Updates its Rainbow Suite of Contracts

In Short

Background: Fédération Internationale Des Ingénieurs-Conseils ("FIDIC")'s Red (Construction), Yellow (Plant and Design and Build) and Silver (EPC) Books ("Rainbow Suite of Contracts") are widely used on major construction and infrastructure projects worldwide. Their popularity stems largely from the fact that these standard forms are familiar to market participants across both civil and common law jurisdictions.

The Development: Almost 18 years after it released the first edition of the Rainbow Suite of Contracts, FIDIC has launched the much anticipated second edition of the Rainbow Suite of Contracts.

Looking Ahead: The updates made to the Rainbow Suite of Contracts are intended to, amongst others, reflect current international best practices and to promote greater clarity, transparency and certainty in standard form contracting between employers and contractors.

On December 5 and 6, 2017, at the International Contract Users Conference in London, FIDIC launched the updates to the first edition of the Rainbow Suite of Contracts. This is the first time these contracts have been amended since their release in 1999. The new contracts are not yet publicly available, but this update is based on FIDIC's announcements made to date. A more detailed update will be issued when FIDIC formally releases the new contracts.

In introducing the changes, FIDIC explained that these have been drafted with the intent of:

• Promoting dispute avoidance between the Employer and the Contractor;
• Enhancing the project management mechanisms contained in the contracts;
• Achieving increased clarity, transparency and certainty in the documentation; and
• Reflecting international best practice since the first release of the documents.

The new contract forms are substantially more prescriptive, particularly across formal notice and time period requirements, contain more detailed "deeming provisions" (e.g. if notices are not issued on time) and hard and soft time bars. Some specific changes made to the Rainbow Suite of Contracts include the following.

Role of the Engineer

In the new edition of the Red and Yellow Books, changes have been made to enhance the role of the Engineer in the overall management of the contract as well as in resolving claims between the parties before these become disputes. These changes include requiring the Engineer to:

• Act "neutrally" as between the Employer and the Contractor in seeking to make any determination under the contract or in reaching any agreement and should not been seen to be acting solely for the Employer.
• Consult with each party and be seen to be positively encouraging the agreement of claims arising under the contract as between the Employer and the Contractor, including by encouraging discussions between the contracting parties.
• Ensure that it observes the newly prescribed time limits set out in Clause 3 in making any required determinations under the contract, with the goal of resolving claims and avoiding disputes under the contract.

Advance/Early Warning and Programming

The new edition contains changes within Clause 8, providing mechanisms to help parties avoid getting into disputes arising from potential delays during the performance of the works. These include:

• The provision of an advance/early warning to the other party of any potential or foreseeable circumstances that may affect the performance of the works, so that the Employer and Contractor can seek an early resolution of any delay issue before it develops into something more serious.
• Increased programming requirements to enable the parties to be fully informed of the actual progress of the works—this will aid the Engineer's or the Employer's Representative's management of the contract during the performance of the works.

Profit

A default percentage of 5 percent profit has been included across the amended Rainbow Suite of Contracts where a contractor would be entitled to "Cost Plus Profit." It is interesting that the default percentage is applied across the Red, Yellow, and Silver Book contracts notwithstanding the different risk profiles for build only, design and build, and EPC/turnkey contracting. FIDIC contracts are commonly used in developing infrastructure jurisdictions, and many contractors will consider such a default profit percentage as low. Note the parties are able to specifically agree to a different percentage, but 5 percent will be the default amount in the absence of agreement under the new terms.

Claims Procedure

The updated claims procedure has now been expanded in what is seen to be FIDIC's attempt to achieve reciprocity between the parties. Under the updated edition, both the Contractor and the Employer are now required to submit claims (if any) under an updated claims process. This is thought to reduce ambiguities created under the first edition of the suite of contracts with respect to claims made by the Employer. Under the new edition:

• Claims are now distinguished from disputes (which are now dealt with under a new Clause 21, as described below).
• More prescriptive and detailed administrative requirements are imposed on the parties (for example, requiring that all communications issued under the contract as "Notices" must be expressly identified, that the Contractor and the Employer must provide a Notice within 28 days of any event giving rise to a claim, and this is to be followed by an extended time period to submit a fully detailed claim within 84 days). The contracts now also contain more "deeming" provisions so as to provide for consequences, allowing for the performance of the contract to continue if parties do not comply with the prescribed time periods (for example, if a party fails to give its initial Notice within 28 days, the other party may be discharged for any liability arising from such claim).
• The Engineer's determination will now become final and binding unless a Notice of Dissatisfaction is issued within the prescribed time period of 28 days. This appears to be a hard time bar and so may force a dissatisfied party into an early escalation of a dispute.
• A third category of "other" claims has been introduced under the contract in relation to a party's entitlement or relief (in addition to time and cost relief). While the contracts do not define what such "other" claims will be, it is thought that these may include claims arising from, for instance, a party's failure to provide assistance to the other party in obtaining consents. Interestingly, the resolution of such "other claims" will be referred directly to the Engineer (for the Red and Yellow Books) or the Employer's Representative (under the Silver Book) and is not subject to the new claims procedure contained in Clause 20.

Dispute Resolution

FIDIC has split the old Clause 20 into two provisions—Clause 20 deals with claims from both the Employer and Contractor (discussed above), while Clause 21 now relates to disputes and arbitration. The new Clause 21 provides that the "DAB" is now referred to as the "Dispute Avoidance/Adjudication Board" ("DAAB"), and this reflects FIDIC's overall goal of having parties try to avoid disputes in the first instance (with resolution by the DAAB) instead of immediately referring disputes to arbitration. If parties are unable to agree on the appointment of the DAAB, the default under the new edition is that FIDIC appoints the DAAB.

Under the new documentation, all DAABs are to be constituted as standing DAABs with the primary purpose of preventing claims from escalating into disputes, and this is thought by FIDIC to be achieved if a standing board is appointed by the parties for the duration of the contract to resolve claims/disagreements as and when they arise. An additional role of the DAAB includes providing assistance (where agreed to by the parties) to informally discuss or attempt to resolve any issues or disagreements.

Three Key Takeaways

1. The changes that have been made to the Rainbow Suite of Contracts are in relation to contract/project management and are said to be focused on dispute avoidance.
2. The changes are intended to provide greater clarity and certainty, and some of these changes result in far more prescriptive administrative requirements and hard and soft time bars across the contract suite being imposed on the Employer and the Contractor.
3. Parties will need to take greater care when tendering or entering into the new FIDIC contracts in their construction projects as the changes made are extensive and change the contracting and contract management requirements in several key areas.