EBRD conference on FIDIC 2017 – Red and Yellow Books

On 27th of September 2018, AfiTaC participated to an event organized by EBRD (the European Bank for Reconstruction and Development) at its headquarters in London. The event was about the changes introduced with the new forms of contract, Red and Yellow Books, of the 2017 rainbow suite.

A couple of months ago, we also published on this subject, which became a very popular article: Thank you FIDIC for explaining changes introduced with FIDIC Rainbow Suite (ed. 2017).

Participants

After an introduction by Betsy Nelson (EBRD VP, Risk and Compliance), Jan Jackholt (EBRD Procurement) explained that  the event was a first of a kind for EBRD as an initiative the engage around selected topics with their stakeholders. The morning part included speakers from FIDIC (Aisha Nadar, Zoltan Zahonyi and Christopher Seppala), from Contractors (Philippe Dessoy, Mathias Fabich and Nabeel Khokhar) and from EBRD’s Clients (Kakha Sekhniashvili and Olena Kryvoruchko). The afternoon was devoted to a panel discussion, moderated by Sarah Thomas with the participation of Zoltan Zahonyi, Christopher Seppala, François Doré and Stefan Ciufu-Hayward.

Issues covered

Enough “name dropping”; let us now go to the take away’s from this event. To make this post compact and quick to read, I’ll present them in the form of bullet points:

• • Thank you to EBRD, FIDIC and the other participants for this event because it was really well organized, informative and open minded. Good general subject, excellent speakers, nice interaction from the public during the panel discussions, great networking opportunities during the coffee breaks with all the major actors concerned by FIDIC present.
  • FIDIC stressed that the 2017 versions remained loyal to their principle “made by engineers for engineers” with, of course, a legal review. They have enhanced Project Management features, a balanced risk allocation and more emphasis on reciprocity of the rights and obligations of Employers and Contractors. The changes were driven by users’ feedback, the international state of the practice and adopting some of the developments introduced with other versions since 99 (Gold and Pink Books).
  • Zoltan Zahonyi introduced the ideas around the changes:
    • More prescriptive:  requirements to give proper notices explaining their purpose.
    • Greater certainty, for example, on unforeseeable physical conditions and key personnel.
    • Enhanced contract administration: the programme (Sub-Clause 8.3) is now evolving along the project and better described. The contract shall be proactively administered by the Engineer.
  • Christopher Seppala explained the more detailed and prescriptive claims and disputes mechanism:
    • Still based on 4 tiers: Engineer’s role, DAAB, amicable settlement and finally international arbitration. Every dispute must go through these 4 levels (if not resolved during the process, which is of course the objectif).
    • An important psychological changes is that routine claims in day-to-day contract management (Sub-Clause 20) are now separated from the exceptional disputes (Sub-Clause 21).
    • Time limits have been further enhanced to impose discipline on the parties. There is a procedure for the Engineer to loosen the time bars.
    • The former DAB is now a DAAB. The additional “A” is there to put emphasis on “Avoidance” of disputes. There is a strong preference for a “standing”, rather than “ad hoc”, dispute board because the standing boards are more knowledgeable about the contract and can work pro-actively to avoid disputes to escalate.
  • The representatives of EIC (European International Contractors) provided their postions, established after months of internal analysis between their members, in a straightforward way:
    • They regret the length of the new contract (50% longer), which looks like a manual of good engineering practices. They fear the additional contract administration costs in order to properly serve notices and follow all the prescribed steps. These costs may not be incorporated in the price by less experienced contractors and consequently no resources will be made available which may result in contractual chaos.
    • Some concerns relate to the risk of “form over substance” when it comes to notices. For example, all information has been properly provided but the document is not correctly labelled as a notice for a specific purpose.
    • Also automatic answers to respect the time limits and avoid the “deemed” provisions are feared. They are worried that qualified contract managers, more than ever needed by both Employer’s and Contractors, will be scarce and hard to find.
    • The management meetings as per Sub-Clause 3.8 should have a defined output to avoid non-value added meetings.
    • They are a bit skeptical about the advance warning principle in Sub-Clause 8.4 where they are of the opinion that no party will give an advance warning if it relates to a risk it bears under the contract and rather handle this internally.
    • On dispute adjudication, EIC welcomes the emphasis on avoidance and favor standing boards but mention a JICA study on 124 large scale contracts, where 43% had a standing DAB contractually foreseen, but only 7% actually constituted it at the beginning of the contract. Maybe the additional “avoidance role” will motivate the parties to select the board members at a stage when disputes are still an unwelcome and remote subject?
    • They are relieved by the fact that “fitness for purpose” provisions now have to be explicitly stated in the Employer’s Requirements rather than understood from the “1000 pages contract” (or otherwise be limited to “ordinary purpose”).
    • FIDIC 99 Sub-Clause 3.5 [Determinations] only had two paragraphs and now has become Sub-Clause 3.7 [Agreement or Determination] with 36 paragraphs and many steps to be performed to conclude something.
    • The regulations regarding concurrent delays are still unclear.
    • A special concern is about the Contractors Documents that have to be reviewed by the Engineer (Sub-Clause 5.2.2). The definition of Contract Documents is hard to understand even by the top contractors. This definition starts with an exclusion and uses the word “Contractor’s Documents” in its own definition (see quote here below). My recommendation is to mutually agree a clear & explicit list of “to be approved” documents & drawings during the first month(s) of the project execution because this is a subject that can only be resolved on a case-by-case basis.

“Contractor’s Document” excludes any of the Contractor’s Documents which are not specified in the Employer’s Requirements or these Conditions as being required to be submitted for Review, but includes all documents on which a specified Contractor’s Document relies for completeness.

• • The representatives of EBRD’s Clients talked about some problems encountered on recent contracts using FIDIC. They also expressed some fear that the “deemed” acceptance provisions will expose them. An example is the case of deemed acceptance of O&M manuals which may be incomplete but still essential with during the entire operation period. Maybe Employers can propose an alternative remedy (time & money) for very specific cases where they cannot live with deemed acceptance?
  • The new “FIDIC Golden Principles”, which are a part of the guidance notes in the new standard contracts, are very positively received by all stakeholders. All agreed that a sixth golden principle would also be welcome: international arbitration in a neutral country.
  • At the end of the event, Sarah Thomas organized a vote to see if it is more likely that (i) people will continue using FIDIC 1999 and add, in the particular conditions, those provisions from FIDIC 2017 they find improvements or (ii) take FIDIC 2017 and adjust the changes they are less happy with. There were a bit more votes for the first option than the second. However, a natural tendency to oppose change and stick, as close as possible, to one’s knowledge base (FIDIC 1999) is no surprise. Time will tell.

My conclusions

• Change is always opposed initially but FIDIC 2017 has the substance to make things work. The administrative rigor, for example related to notices, will soon become a habit just like EHS measures did over the past decade. This rigor will avoid misunderstandings about the stage the project is in (e.g. regular claim vs real dispute) and push the parties to table their problems early when they can be mitigated.
• The “deemed” approvals & replies will avoid that projects stall and will push the parties to reply in a timely matter.
• The Engineer is now back to a more neutral role with some mediator actions as foreseen in Sub-Clause 3.7 [Agreement or Determination]. It will take some time for Engineers to adapt but, I believe, it is this kind of attitude that avoids conflicts (together with the standing DAAB as second line of defense). The construction / contracting / project business can partially avoid the huge, non-value added, costs of disputes (cost of arbitration, delay in decisions etc).
• The more prescriptive processes will help the less experienced users to implement the contract properly. The new versions can hopefully remain on top of the stakeholders’ desks. We must move away from the “negotiate, file & forget the contract” attitude that often existed in the past.

Let us try to make these new versions, and the philosophy behind it, a success. Of course, this will require mobilization of adequate resources to live up to this challenge. Please provide your comments here below.

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