The FIDIC Forms of Contract

Part I

Background and Concepts of the Red Book

Chapter 1

Background of the Red Book

In the commercial activities of today’s highly complex society, standard forms of contract have become an essential part of the day-to-day transactions of most agreements. The majority of standard forms have been developed by commercial organisations for the purpose of efficiency, to build on the experience gained from the repeated use of these forms, but most of all for the optimum protection of one or both parties’ interests. Standard forms of contract developed for construction activities, however, have mostly been drawn up by independent professional organisations, rather than by one or other of the parties to the contract, in order to establish or to consolidate a fair and just contract. Knowledge accumulated through experience and recurrent use over a long period of time has brought about revisions and modifications in construction standard forms with the aim either of achieving greater certainty in the intention of the wording or of providing a response to the needs of the parties and/or society. The use of a standard form in construction contracts where tendering is the conventional method of obtaining quotations has also ensured a common basis for the comparison and evaluation of tenders.

In Europe, and more particularly in the United Kingdom and in Ireland, such forms were produced as early as the nineteenth century. A standard form for building contracts was used under the aegis of the Royal Institute of British Architects some time towards the end of the nineteenth century. This led to what became known as the ‘RIBA Form’ which was published in successive editions between 1909 and 1957. It later developed into what became known as the JCT Form (Joint Contracts Tribunal) when the 1963 and the 1980 Editions were published. In Ireland, the RIBA Form was followed by the RIAI Articles of Agreement and Schedule of Conditions of Building Contract, issued by the Royal Institute of the Architects of Ireland.

In civil engineering contracts, various forms which were used by different employers prior to the Second World War were combined by the Institution of Civil Engineers and the Federation of Civil Engineering Contractors in the United Kingdom into an agreed standard document. This was published in December 1945, and the document was thereafter known as the General Conditions of Contract and Forms of Tender, Agreement and Bond for Use in Connection with Works of Civil Engineering Construction, in short the ICE Form. In January 1950 it was revised and issued with the added agreement of the Association of Consulting Engineers, London. Other revisions followed in March 1951 (Third Edition); in January 1955 (Fourth Edition which was later amended in 1969); in 1973 (Fifth Edition); and in 1991 (Sixth Edition). These revisions reflected some changes in the law and in the practice of civil engineering.

1.1 The ACE Form

To the credit of those responsible for drafting the ICE Form, many professional institutions all over the world modelled their own conditions of contract on its text, making only minor amendments to accommodate differences in local matters of law and nomenclature. The ICE Form was, however, drawn up mainly for the domestic scene in the United Kingdom. The obvious need for a similar form in the international construction field prompted the Association of Consulting Engineers in the United Kingdom, jointly with the Export Group for the Construction Industries in the United Kingdom, and with the approval of the Institution of Civil Engineers, to prepare a document for use in other parts of the world. It was published in August 1956 and became commonly known as the Overseas (Civil) Conditions of Contract (the ACE Form). Although in text and format this latter Form differed only slightly from the ICE Form, there were some minor changes in forty clauses as well as a small number of major alterations.

The most important of the minor changes were as follows:

(a) a definition of the word ‘approved’ was added;

(b) a clarification statement was added in clause 3 in relation to assignment;

(c) the words ‘which shall not be unreasonably withheld’ were added in respect of the consent of the engineer to the contractor to sub-let any part of the works;

(d) the words ‘touching or concerning the Works’ were added in clause 13 to describe the engineer’s directions;

(e) clause 15 in relation to contractor’s superintendence was expanded;

(f) the exception relating to damage to crops in clause 22 was re-worded;

(g) the words ‘affecting the safety of the Works’ were added in sub-clause 40(l)(b) to describe the weather conditions as a reason for suspension of the works; and

(h) the day as a unit of measurement of time replaced the week for the purpose of calculating liquidated damages in clause 47.

The major alterations were as follows:

(a) the document was published in two parts: Part I which incorporated 68 clauses as general conditions of contract; and Part II which included notes and a number of new clauses to be considered for inclusion in Part I. Part II was intended as ‘a guide in the preparation of clauses (some of which are referred to in Part I)’ but which were expected to ‘vary as necessary to take account of the circumstances and locality of the works.’ These additional clauses were intended to be drafted for each particular project to cover matters such as, definitions; labour; temporary reinstatement; material and plant; and certificates and payment. Part II was referred to as ‘Conditions of Particular Application’;

(b) a greater involvement and authority was given to the engineer’s representative under a number of the clauses of the ACE Form as compared with the ICE Form;

(c) the explicit procedural provisions under clause 12 in the case of adverse physical conditions and artificial obstructions were deleted;

(d) allocation of the risk of damage due to unforeseen forces of nature was shifted in clause 20 from the contractor to the employer by including the following words into the excepted risks:

‘any such operation of the forces of nature as reasonable foresight and ability on the part of the Contractor could not foresee or reasonably provide against’.

Whilst this shift in risk in respect of accidental damage to the works was implemented in clause 20, a similar shift in risk was not implemented in respect of financial loss resulting from suspension of work, under sub-clause 40(l)(b), due to weather conditions which are also a form of the forces of nature;

(e) the requirement that joint insurance for the employer and the contractor be provided against third party liability risks was deleted from clause 23 of the ACE Form;

(f) a change in clause 26 was made in connection with payment of fees under foreign statutes, ordinances and bylaws;

(g) a new sub-clause (4) was added to clause 30 in respect of water-borne traffic;

(h) the provision for labour under clause 34 was recommended to be drafted for each contract;

(i) temporary reinstatement as referred to in clause 49 of the ICE Form was omitted in the corresponding clause of the ACE Form;

(j) a condition was incorporated in the ACE Form requiring an amendment of the amount of the contract price in the case where the ‘net effect of all variations’ is found to result in a reduction or an addition greater than 15 per cent of the sum named in the tender;

(k) reference to the standard method of measurement was omitted from clause 57 of the ACE Form;

(l) failure by the contractor to proceed with the works with due diligence was deleted from the list of grounds entitling the employer to determine the contract under clause 63(l);

(m) a major revision was made to clause 65 which deals with special risks under which the employer was required to provide an indemnity to the contractor in respect of increased costs arising from these risks;

(n) a new clause was added under the title ‘Default of Employer’ entitling the contractor to determine the contract where no payment is made by the employer within a set period of time or where the employer interferes with or obstructs the issue of any certificate or where the employer becomes bankrupt; and

(o) a number of new clauses were included in Part II of the ACE Form to be considered for inclusion in Part I depending on the circumstances and locality of the works. These new clauses related to conditions of contract for price variations, customs duties and other dues, taxation, bribery and corruption, non-disclosure of information, other matters peculiar to the specific contract and finally, but most importantly, the law governing the contract.

1.2 The First Edition of the Red Book

The ACE Form as published in 1956 included a standard Form of Tender, an Appendix and a standard Form of Agreement. It was published in a blue cover which helped to distinguish it from the ICE Form. It was, perhaps, the first standard form of international conditions of contract for civil engineering works. In concept and style, however, it remained faithful to the original domestic form.

The ACE Form had only been used for a short period of time when the Conditions of Contract (International) for Works of Civil Engineering Construction was published in August 1957. This was based on the ACE Form, described above, and was also published in two parts. Perhaps because of its long title, in a very short time it became popularly known as the ‘Red Book’ (its cover was printed in red). It was prepared by the Fédération Internationale des Ingénieurs Conseils (the International Federation of Consulting Engineers, FIDIC) and the Fédération Internationale du Bâtiment et des Travaux Publics (the International Federation of Building and Public Works, now known as the International European Construction Federation, FIEC).

FIDIC is the international Federation of duly elected associations of consulting engineers representing the profession in their respective countries. Membership in the Federation is restricted to one association for each country. To qualify for membership, an association must demonstrate that its statutes, bylaws and regulations ensure that its members comply with the ethics and professional code of practice of a consulting engineer as outlined and according to the principles endorsed by FIDIC.¹.¹ These principles have developed over the years and significant changes were recently introduced as explained later in Section 5.1 of this book.

In addition to some editing changes and a few minor revisions in clauses 1, 16, 31, 34, 40, 53, 60, 65 and 69(2), a number of important modifications were made to the ACE Form in the evolution of the first edition of the Red Book. These were:

(a) a reference to the ruling language of the contract was incorporated in clause 6(l);

(b) the reference to sureties in clause 10 was changed to performance bond;

(c) it was provided in clause 11 of the Red Book that the tender is to have been based on data supplied by the employer;

(d) the reference in the ACE Form to weather conditions or conditions due to weather conditions in clause 12 was deleted;

(e) a provision for the payment of a bonus under clause 47 for early completion of the works or any part thereof was added in Part II;

(f) in clause 52(l) of the ACE Form, the words ‘If the Contract shall not contain any rates applicable to the extra or additional work then reasonable prices shall be fixed by the Engineer’ were changed to:

‘If the Contract shall not contain any rates applicable to the extra or additional work then suitable prices shall be agreed upon between the Engineer and the Contractor. In the event of disagreement the Engineer shall fix such prices as shall in his opinion be reasonable and proper.’

(g) it was provided in the Red Book that the appointment of the arbitrator (or arbitrators) for the settlement of disputes under the contract was to be under the Rules of Conciliation and Arbitration of the International Chamber of Commerce in Paris (ICC); and

(h) two clauses were added at the end of the general conditions: the first provided for any increase or decrease in the costs of labour and/or materials or any other matters affecting the cost of execution of the works; the second provided for currency restrictions or devaluation.

1.3 The Second and Third Editions of the Red Book

The Second Edition of the Red Book was published in July 1969, when the document was approved and ratified by the International Federation of Asian and Western Pacific Contractors’ Associations. A supplementary section containing Conditions of Particular Application to Dredging and Reclamation Work was then added as Part III. The Second Edition, however, included no changes in the text. A reprint of the Second Edition in 1973 added the approval and ratification by the Associated General Contractors of America and the Inter-American Federation of the Construction Industry.

However, the publication of the controversial Fifth Edition of the ICE Form in June 1973 provided an impetus for a further revision of the Red Book. This Fifth Edition of the ICE Form provided the civil engineering industry in the United Kingdom with a document which included major departures from the practice followed in its Fourth Edition. Three main commentaries were published in July and November 1973, analysing the effect of these changes. Both Abrahamson and Akroyd criticised the style, language and lack of clarity of the document. Akroyd inquired as to ‘whether this new document forms a contractor’s charter to riches?’¹.² Duncan Wallace, in an article published in November 1973 (with the title ‘The Modest Revision which Became a Torrent of Change’) called the Fifth Edition of the ICE Form ‘a new and radically revised contract’.¹.³

The Fifth Edition of the ICE Form obviously provided food for thought for those responsible for the Red Book, and so it was in March 1977 that the Third Edition of the Red Book was published, incorporating some significant changes. These changes, however, did not follow in all respects those made in the ICE Fifth Edition. In the preface to his book on the Fifth Edition of the ICE Form,¹.⁴ Duncan Wallace wrote:

‘… it is apparent that they [the draftsmen of the Third Edition of the Red Book] evidently considered and studiously avoided, all the principal difficulties (and indeed innovations) in the Fifth Edition, as well as a number of the anomalies in the Fourth Edition (with the single exception of the difficult Maintenance Certificate provisions in Clause 62, which have been swept away, quite rightly, in the Fifth Edition, but which are retained unchanged in the 1977 FIDIC Contract).’

As well as editing and other minor changes, a full list of the revisions is given in a supplement to a book by Duncan Wallace, dealing with the Red Book.¹.⁵ The most significant revisions made for the Third Edition of the Red Book were as follows:

(a) the definition of the word ‘cost’ was added as a new sub-clause 1(4) of the Third Edition, providing for cost ‘to include overhead costs whether on or off the site’. It replaced the word ‘expense’ in some of the clauses of the previous edition which led to the inference that profit should not be paid to the contractor in a claims situation under these clauses of the contract. Such situations, for example, arose in:

(i) sub-clause 5(2), under ambiguities or discrepancies in the contract documents,

(ii) sub-clause 6(4), under a failure or inability of the engineer to issue drawings or orders within a reasonable time,

(iii) clause 12, under conditions which could not have been reasonably foreseen by an experienced contractor;

(b) the duties and power of the engineer were defined under sub-clause 2(l) of the Third Edition and for the first time it was accepted that the engineer may be required under the terms of his appointment by the employer to obtain the latter’s specific approval for the execution of any part of these duties in which case this information was to be set out in Part II of the Conditions.

In clause 2, it was clearly stated that the engineer’s representative is responsible to the engineer;

(c) clause 5 of the Second Edition which specified the extent of the contract was enlarged and incorporated into a new clause 8 within the section dealing with the general obligations of the contractor. These obligations were explicitly stated. However, the obligation of the contractor to complete the works which is accepted in most, if not all, construction contracts was replaced by the term ‘execute and maintain the Works’. Similarly under clauses 12 and 13, this obligation to complete was omitted. This omission was criticised: although some may argue that it is implicit in construction contracts that the contractor must complete, it would have been much clearer had this requirement remained in explicit terms. This is because the remaining clauses in the general conditions assume such an obligation and, perhaps more importantly, because such an obligation is not necessarily implied in all legal jurisdictions;

(d) sub-clause 6(1) of the Second Edition became sub-clause 5(1) of the Third Edition. It was expanded to include both the ruling language and the applicable¹.⁶ law of the contract;

(e) the concept of disruption to the progress of the works in the case of nonavailability of information which is considered necessary for the implementation of the contract, was incorporated in the Third Edition by the inclusion of sub-clause 6(3). Sub-clause 6(4) was added to deal with extensions of time and payment to the contractor as a result of such disruption.

Under the Second Edition, delay in the receipt of information or instructions which resulted in extra cost to the contractor could have formed a valid claim for damages for breach of contract. This was because it is an implied term of the contract that the contractor is entitled to receive such information or instructions within a reasonable time before the date on which the relevant work is required to be executed.¹.⁷ See Section 3.8 for further commentary on implied and express terms. Reference should also be made to Section 17.4.2 where the question of calculating the cost of disruption is discussed;

(f) under clause 11 of the Third Edition, distinction was made between the data provided by the employer and the contractor’s interpretation of such data. It is worth noting that the effect of the risks associated with the site is recognised and allocated to the contractor ‘in so far as is practicable’;

(g) clause 14 of the Third Edition was amended slightly and expanded making it necessary for the contractor to submit a programme within a certain period after the acceptance of his tender. The required programme in the Third Edition deals only with the proposed ‘order of procedure and not the method of working previously stipulated’. If required, the contractor was also obliged under the latter edition to revise his programme;

(h) the provision in the Second Edition that the contractor is not liable to insure against the necessity for the repair or reconstruction of any work constructed with materials or workmanship not in accordance with the requirement of the contract, was omitted from the Third Edition. This change was criticised as there did not seem to be any reasonable explanation for the decision to omit this sentence and as drafted it contradicted the requirement in the clause itself that all loss or damage for which the contractor is responsible must be insured. Accordingly, unless the contractor was able to insure against defective materials and workmanship, he would automatically be in breach of contract;

(i) sub-clause 23(3) was added in the Third Edition in which it was stipulated that the terms of the third party insurance, required under sub-clause 23(l), should ‘include a provision whereby, in the event of any claim in respect of which the contractor would be entitled to receive indemnity under the policy being brought or made against the employer, the insurer will indemnify the employer against such claims and any costs, charges and expenses in respect thereof’.

This sub-clause 23(3), which became known as the ‘Principal Clause’ was added to fill the gap formed originally in the First Edition when it followed the ACE Form by omitting the requirement for joint insurance. In filling this gap the Red Book followed the revision in the Fifth Edition of the ICE Form, published in 1973;

(j) the extra cost incurred by the contractor and borne by the employer in the case of suspension of work as described in clause 40 was detailed in more precise terms in the Third Edition;

(k) clause 46 of the Third Edition was re-drafted to accord with the Fifth Edition of the ICE Form. The noise and disturbance indemnity provided by the contractor in the Second Edition was omitted;

(l) clause 48 of the conditions was expanded in the Third Edition providing for more specific terms under which a certificate of completion of the works may be issued by the engineer to the contractor with a copy to the employer. The revision to this clause followed in broad terms that in the Fifth Edition of the ICE Form;

(m) time limits were added in the Third Edition for written confirmation of an oral order given by the engineer under sub-clause 51(2);

(n) the word ‘rates’ in clause 52 of the Second Edition was replaced in the Third Edition by ‘rates and prices’, thus permitting the valuation of variations to be based on both rates and prices. It was also envisaged in this clause in the Third Edition that a decrease as well as an increase may result in the valuation of variations;

(o) the percentage of variations which would trigger the operation of clause 52(3) was reduced to 10 per cent in the Third Edition and a more precise definition, although not precise enough, was given to the method of calculation of that percentage;

(p) the reference to prime cost sums in clause 58 of the Second Edition was omitted in the Third Edition. Clause 58 of the latter edition dealt only with provisional sums as defined therein, the power of the engineer to order such sums and the production of documentation related thereto;

(q) clause 59 dealing with nominated sub-contractors was expanded in the Third Edition with the inclusion of three new sub-clauses providing for:

(i) an express statement of design requirements where such exist in a nominated sub-contract;

(ii) the payments to be made in respect of actual price paid or to be paid by the contractor, labour to be supplied by the contractor and all other charges and profit; and

(iii) the assignment of nominated sub-contractors’ obligations;

(r) nuclear and pressure wave risks as described in sub-clause 20(2) were added to the list of special risks in clause 65 of the Third Edition;

(s) a provision was added under clause 66 of the Third Edition whereby the contract would be treated as frustrated should the parties to the contract be released from further performance under the law governing the contract;

(t) a provision was added under clause 67 of the Third Edition permitting the reference to arbitration to proceed during the progress of the works;

(u) three new clauses were added to Part I of the Third Edition under the headings of:

(i) Changes in Costs and Legislation: Clause 70;

(ii) Currency and Rates of Exchange: Clause 71;

(iii) Rates of Exchange: Clause 72.

A set of ‘Notes on Documents for Civil Engineering Contracts’ was published by FIDIC in 1977 which referred to some selected aspects of the various clauses of the Third Edition of the Red Book. The status of these Notes was briefly alluded to by the statement that they ‘must not be taken as representing in any way an interpretation of the text of these clauses’ (the individual clauses of the Third Edition).¹.⁸

Unfortunately, these Notes did not deal with the background or the reasons behind the extensive changes which were made in producing the Third Edition, especially when only some of these changes reflected the revisions which had taken place in producing the Fifth Edition of the ICE Form in 1973.

As in the ACE Form, the importance of the law governing a specific contract, the applicable law of the contract, was recognised in the Red Book but despite this, no attempt was made to depart from the principles of the common law under which the ACE and the ICE Forms were drafted. Neither was there any attempt to recognise that there could be a conflict of laws between the common law system and any other system of law to which the applicable law of the contract belonged.

Despite this lack of recognition, it seems that the provisions of the Red Book coped extremely well, and for a long time, with any conflict of laws which may have existed. The Second and Third Editions of the Red Book proved to be successful in many projects throughout the world. The Third Edition in particular coincided with the major economic growth which took place in developing countries towards the end of the 1970s and the major part of the 1980s and, particularly, in the Middle East and the Far East. The Third Edition was translated into French, German and Spanish.

Criticism came to the surface only in recent years when the number of disputes ending in arbitrations increased and every clause and term in the Red Book came under the scrutiny of lawyers experienced in discovering differing interpretations to a set of words. This problem and others were dealt with quite successfully when the revision of the Third Edition was undertaken by FIDIC.

1.4 The Fourth Edition of the Red Book

The Third Edition of the Red Book remained unaltered and no amendments were issued until the Fourth Edition was published in September 1987, when major revisions were made which extended even to the title of the document. The word ‘international’ was deleted, inviting parties from all over the world to use the Red Book not only in international contracts but also in domestic contracts.

Part II of the Red Book which is referred to as the ‘Conditions of Particular Application’ was expanded and produced in a separate booklet. It is linked to Part I by the corresponding numbering of the clauses, so that Parts I and II together comprise the conditions governing the rights and obligations of the parties. Part II must be specifically drafted to suit each individual contract. To assist in the preparation of Part II, explanatory material and example clauses are included providing the parties with options for their use where appropriate.

In 1988, the Fourth Edition of the Red Book was reprinted with a number of editorial amendments which were identified at the end of the document. These amendments were of a very minor nature and did not affect the meaning of the relevant clauses but simply clarified their intention. They are reproduced in Appendix A at the end of this book.

Later, in 1992, further amendments were introduced in a reprint of the Fourth Edition of the Red Book. The list is reproduced in Appendix B at the end of this book and the editorial amendments relating to punctuation and the use of ‘and’, ‘or’ or both are individually set out. Some of these 1992 amendments were directed towards a more uniform style of drafting but others were of a more significant nature, either adding to or changing the meaning of the relevant clauses of the Form. These significant amendments are as follows:

1.5 The 1996 Supplement to the Red Book

In November 1996, FIDIC published a document entitled ‘Supplement to Fourth Edition 1987 – Conditions of Contract for Works of Civil Engineering Construction – Reprinted 1992 with Further Amendments’. It is intended to provide the user with alternative arrangements in three controversial areas of the Red Book, thus giving him a choice in the method to be used for: settlement of disputes; payment; and preventing delay in certification for the purpose of payments. The Supplement comprises three sections, referred to as follows:

(a) Section A, entitled ‘Dispute Adjudication Board’. This section provides an alternative wording to clause 67 of the Fourth Edition of the Red Book, ‘Settlement of Disputes’. The new wording was drafted in response to mounting criticism of the role of the engineer as an adjudicator or quasi-arbitrator in the resolution of disputes under clause 67 of the Red Book (see Chapter 9 later). Various alternative methods of dispute resolution were considered in the past few years, both domestically and internationally. The method finally chosen by FIDIC in its new supplement is that based on the use of an adjudication board composed of one or three experts who can render a decision in respect of a dispute without having to resort to the engineer for a final determination under the present clause 67 (see Chapter 19 later). This new method requires an expert or experts to be appointed at the beginning of a contract, who must keep in touch with the work in progress on the site which is achieved by visiting the site at regular intervals. The appointed expert, or experts, are to be available to act in the resolution of any disputes that may arise. In the supplement, FIDIC embraces this alternative method of dispute resolution as an acceptable substitute to the engineer’s traditional role in dispute settlement.

The new supplement provides the necessary amendment to the wording of clause 67 of the Red Book and also contains a guide to this amended wording. Moreover, it contains Model Terms of Appointment and Procedural Rules for the Dispute Adjudicaton Expert or Board and the necessary amendments required to the Appendix to Tender which correspond to the amended wording of clause 67.

(b) Section B, entitled ‘Payment on Lump Sum Basis’. This section provides the necessary amendments to the relevant clauses in Part I, General Conditions of Contract, of the Red Book which enable payment to be made to the contractor on a lump sum basis instead of using bills of quantities. Section B contains an introductory note followed by the amendments, together with amended forms of Tender and Agreement corresponding to the lump sum basis. See Chapter 6 later in this book for further discussion of this topic.

(c) Section C, entitled ‘Late Certification’. This section provides alternative wording to safeguard the interests of the contractor where the engineer is late in certifying interim payments. See Chapter 18 later in this book for further discussion on this part of the supplement.

A detailed analysis and commentary on the Fourth Edition of the Red Book as a whole including the above mentioned amendments is provided later in Chapter 9. The text of the whole Form including the amendments of 1988 and 1992 is provided in Chapter 23 of the second edition of this book where it is compared with the Third Edition.

1.6 Concepts of the Red Book

Despite the universal use of the Red Book, its Fourth Edition retained some essential features and concepts which formed the foundation of its previous editions. In order to understand the provisions of the Red Book and the implications of the changes made in the Fourth Edition and its most recent amendments, it is essential to elaborate on these concepts as a background to the form of contract itself, on the reasoning underlying the revisions it was necessary to make, and underlying further changes which could have been made but were not. These concepts are set out below and are dealt with in detail in the following six chapters.

— Apart from a few revisions which have been made, it is based on a domestic contract: Chapter 2.

— Its legal concepts are based on the common law system: Chapter 3.

— Its wording is based on English legal drafting principles: Chapter 4.

— Its concept, in relation to the design and supervision of construction of the project, is based on the appointment of a consulting engineer trusted by both parties to the contract and referred to as the ‘Engineer’: Chapter 5.

— Its concept of remuneration is based on a re-measurement contract with a provisional bill of quantities which serves as a basis for final remeasurement and payment, under certificates from the engineer: Chapter 6.

— Its concept of responsibility and liability is based on the sharing of risks: Chapter 7.

1.7 The new suite of FIDIC contracts

In October 1999, FIDIC produced a totally new set of standard forms of contract alongside those that were in use at that time. The new set comprises the following four contract forms:

(a) The Construction Contract (Conditions of Contract for Building and Engineering Works, Designed by the Employer) – General Conditions, Guidance for the Preparation of the Particular Conditions, Forms of Tender, Contract Agreement, and Dispute Adjudication Agreement, referred to in this text as the ‘1999 Red Book’;

(b) The Plant and Design-Build Contract (Conditions of Contract for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed by the Contractor) – General Conditions, Guidance for the Preparation of the Particular Conditions, Forms of Tender, Contract Agreement and Dispute Adjudication Agreement, referred to in this text as the ‘1999 Yellow Book’;

(c) The EPC and Turnkey Contract (Conditions of Contract for EPC Turnkey Projects) – General Conditions, Guidance for the Preparation of the Particular Conditions, Forms of Tender, Contract Agreement and Dispute Adjudication Agreement, referred to in this text as the ‘1999 Silver Book’; and

(d) The Short Form of Contract – Agreement, General Conditions, Rules for Adjudication and Notes for Guidance, referred to in this text as the ‘1999 Green Book’.

The old set is divided into the ‘Red’ and ‘Yellow’ forms on the basis of the type of the project to be constructed. The new forms are divided on the basis of who designs the project. Whilst the 1999 Red, Yellow and Silver books are similar in many areas, they are in fact three separate and distinct forms of contract. A comparative analysis of all three books can be seen in Chapter 27 in Part VI.

Chapter 2

The Red Book is Based on a Domestic Contract

2.1 Introduction

As discussed earlier, the Red Book was modelled on the ACE Form which originated from the ICE Standard Form of Contract. The ICE Form was drafted for use as a domestic contract in the United Kingdom. The changes made to transform that domestic form to an international one were minimal.

A brief knowledge of the legal systems around the world and how these relate to the legal concepts on which the FIDIC Red Book is based is therefore helpful, if not essential, to the understanding of the problems which may result from its use.

This task is attempted in the present chapter and in Chapter 3. It is a difficult but necessary task. Comments on the law are of necessity generalised, and statements of general rules and principles are not intended to mean that they are without exception or qualification. These rules and principles may differ from one jurisdiction to another and even within one legal group. The present chapter and Chapter 3 are intended to expose the non-lawyer reader to legal topics which are considered important in the international construction scene. These topics include: the diversity of legal systems, the applicable law in international construction, the applicable law of the contract, the law governing procedure, the law governing enforcement of awards and the various groups of contemporary legal systems.

2.2 Diversity of legal systems

As long as there is human endeavour, there will always be conflict. The idea of law was born and developed independently in communities around the world at very early stages of civilisation in order to provide an instrument to regulate the various aspects of human behaviour and relationships between one individual and another and thus achieve a balance between the freedom of choice of the individual and the control of this freedom for the protection of others. Societies aspired to have laws that mirrored justice so as to eliminate the necessity to resort to force except for the purpose of upholding the supremacy of the law itself.

To that end, rules were written in the form of legal codes as early as 1700 BC,².¹ and as communities sprang up, grew and later declined, the legal rules changed from a few basic, simple codes to sophisticated, complex and voluminous systems of law.

By that time, legal concepts had developed from what was earlier considered to be the law of the gods to a three-tier hierarchy. At the top, the law of the gods changed to the laws of God due to the evolution of religion. The second tier represented natural law or the law of reason and common sense, and the third tier represented man-made law. The latter has been subject to evolution from time to time and from place to place while endeavouring to respect the boundaries laid down by the divine and natural laws.

Whilst this aim and concept prevailed in the West, Near East, and parts of the Middle East where law was held supreme, it was quite different in the Far East. In China and indeed in some communities in the Middle East, law has been and is still considered an instrument of arbitrary action rather than necessarily one of justice. Thus, it is expected that the good citizen would not resort to the law or the courts. Rather, the conduct of individuals should be animated by the search for harmony and peace through methods other than the law. In these parts of the world, conciliation and mediation have been considered to be superior and of greater value in resolving conflicts. Countries in the Far East have traditionally held the view that law is for barbarians and that one should avoid ending with a winner and a loser.

As these developments in the law took different directions in different cultures around the world, it is practically impossible today to achieve any degree of international standardisation of the law dealing with legal relationships of individuals from different states. Even worse, it is now impossible to unify the national laws of all political entities and states of the world. The contemporary legal systems of the world have evolved across societies and cultures and across political systems differently. Because they are rooted in different cultures, they are written in different languages, influenced by different religious beliefs and formed under different customs. Given such socio-cultural variety, it may, therefore, be easier and more acceptable to reach international agreement on the basic concepts and rules which should govern contractual relationships in an international field, such as, construction. In a simple form, this is what is attempted by a standard form of contract for civil engineering works. However, the fact remains that as soon as one specifies in an international contract the applicable law of the contract as the law of the locality of the project, one automatically introduces a diversity of laws governing the relationship between the parties to the contract.

At first glance, the task of understanding the differences between two or more legal systems and realising their implications seems insurmountable. However, at closer scrutiny one may simplify the task by grouping these legal systems into a small number of categories. Each category should include systems with recognisable fundamental similarities and criteria upon which a classification can be successfully made. These groups can then be compared and contrasted using as a base matters such as legal principles, sources of law, influences on form, drafting and substance.

Such an analysis comes within the boundaries of comparative law, a complex and specialised area of the law, but it is essential in international contracts where a mix of legal systems is used. The problem for the analyst is that there is no agreement on the matters which should form the essential fundamental criteria for such an analysis and for establishing these groups. However, a certain minimum basic knowledge of the law governing the areas of professional activity is necessary for the engineer. Furthermore, for the engineer in international contracts, it is essential for him to understand the implications of the applicable law of the contract in a particular project since it is accepted that ignorance of the law is no excuse for mistakes.

From the point of view of construction, it is suggested that a simple classification should suffice in any study of comparative law, at least as a beginning, since a large number of the relevant basic concepts are similar in many potential subdivisions of legal systems. However, before dealing with the contemporary legal systems, it is important to consider the topic of the applicable law in international construction contracts.

2.3 The applicable law in international construction

In an international construction contract, the law under which the parties’ rights and obligations are determined may be one of many. It could be the law of the country where the contract is made or where the project is constructed or that of the domicile of one of the parties to the contract. It could also be the law of the state where a significant part of the contract works are manufactured, or that where the contract is financed or simply the law which the parties regard as well-suited to govern the particular contractual relationship. In this connection, it has been stated that ‘a contract is only international if the parties have either their places of business, or habitual residence, in different states’.².² In the context of international commercial arbitration, however, the word ‘international’ has a secondary criterion in respect of the arbitration process itself. Thus, it is defined by the United Nations Commission on International Trade Law (UNCITRAL) Model Law as follows:

‘An Arbitration is international if:

(a) the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different States; or

(b) one of the following places is situated outside the State in which the parties have their places of business:

(i) the place of arbitration if determined in, or pursuant to, the arbitration agreement;

(ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected;

or

(c) the parties have expressly agreed that the subject-matter of the arbitration agreement relates to more than one country.’².³

In general, there is broad international acceptance that subject to few limitations, the parties are free to choose for themselves the law applicable to their contract. This freedom to choose is referred to as the principle of autonomy of the parties and although it was developed first by jurists under various systems of law, it was adopted by national courts and has been accepted by most legal systems.².⁴ This principle has also been adopted in international conventions.².⁵ In international commercial arbitration, the European Convention of 1961 provides in Article VII that the parties are to be free to determine, by agreement, the law to be applied by the arbitrators to the substance of the dispute. Similarly, Article 33.1 of the UNCITRAL Arbitration Rules provides that ‘(T)he arbitral tribunal shall apply the law designated by the parties as applicable to the substance of the dispute.’

2.4 The applicable law of the contract

The law which governs a contract between certain parties and by which questions as to the validity, application and interpretation of its terms are addressed, is referred to as the ‘applicable law of the contract’. In some jurisdictions, the terms ‘proper law of the contract’ or ‘governing law of the contract’ are used instead. However, as stated earlier in Section 1.3, the term applicable law is preferred by this writer. It is essential to recognise, however, that in certain circumstances it is possible to have different contractual matters of a contract governed by different systems of law, by agreement either of the parties or of a competent authority such as a court or an arbitrator, should the contract be silent on the point or if the parties disagree. In such a case, the applicable law of these specific matters could be different from the applicable law of the contract as a whole.

Where there is no certainty as to the applicable law of the contract, it would have to be selected in accordance with the principles of a branch of law known as ‘private international law’ sometimes called ‘the conflict of laws’. This is a body of principles which attempts to provide answers as to what law is the most appropriate to apply and which forum is appropriate to determine a particular issue with an international dimension. This branch of the law forms part of the legal system of every jurisdiction and therefore, there are as many systems of conflict of laws as there are jurisdictions.².⁶

There are three alternatives in respect of the determination of the applicable law of the contract:

(a) where there is an express choice of the applicable law;

(b) where there is an inferred choice of the applicable law; and

(c) where there is no choice of the applicable law.

These alternatives are now considered separately.

Where there is an express choice of the applicable law

At the time of making the contract, the parties may expressly choose the law which they wish to apply to their contract. As in clause 5 of the FIDIC Form, this choice may be expressed by a simple statement naming the country to which the chosen law belongs. In such a case, the only question which remains to be answered is whether there are any limits to the freedom of that choice and if so what are these limits.

Where litigation is concerned, there is a great deal of controversy over this question. At one end of the scale there are those who advocate that the parties are free to submit the validity of their contract to any law of their own choosing. Article 3(l) of the EEC Convention on the Law Applicable to Contractual Obligations (see Section 2.8 later) provides as follows:

‘A contract shall be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case. By their choice the parties select the law applicable to the whole or a part only of a contract.’

Others prefer the view that a court should not necessarily regard an express choice of law by the parties as being the governing consideration in cases where:

(a) a system of law is chosen which has little or nothing to do with either party or with the contract; and/or

(b) the chosen law may frustrate the mandatory provisions of the law which has in fact the closest connection with the contract.

In contrast to litigation, the situation is different in international commercial arbitration where, unlike a judge of a national court, an arbitral tribunal is not bound to follow the rules of conflict of laws of the country in which it has its seat.².⁷ An arbitral tribunal may refuse to recognise and apply a chosen law only in the unlikely event of the effect of that chosen law violating international public policy. Subject to this limitation, party autonomy is unlimited and an arbitrator is obliged to recognise and give effect to a choice of law by the parties.².⁸

Accordingly, subject to the above consideration, it is wise for parties to a construction contract to exercise their discretion carefully and to choose an appropriate system of law as the applicable law of the contract. Of course, what may be ‘appropriate’ for one party may not be so for another. In construction contracts, the choice of the applicable law of the contract is generally made by the promoter of the project or the ‘employer’.

Where there is an inferred choice of the applicable law

In some cases where there is no express and clear choice of the applicable law of the contract, it may be possible to infer a choice of law from the other provisions of the contract and the relevant surrounding circumstances. The most important provision from which such inference may be taken is the arbitration clause where the place for arbitration has been selected. Other factors from which a choice of the applicable law of the contract may be inferred include the form of the conditions of contract adopted by the parties, the residence of the parties, the currency in which payment is to be made, and the nature and location of the subject matter of the contractual obligations.

Where there is no choice of the applicable law

Where there is no express choice of the applicable law of the contract and no inference can be made to establish such law, the principles of conflict of laws are used to select the legal system which should apply. In international commercial arbitration, however, the tribunal is faced firstly with the question of whether it has a free choice of the applicable law of the contract or whether it must follow the private international law of the place of arbitration. As this law differs from one jurisdiction to another, the result may be different. In this connection, it is interesting to note the provisions of Article 4(l) of the EEC Convention, discussed later in Section 2.8.1. It provides that to the extent that the law applicable to the contract has not been specified in accordance with Article 3 of the Convention, the contract is to be governed by the law with which it is most closely connected.

If the applicable law of the contract is not selected and specified when the contract is formed, extremely complex and difficult problems could arise should it be found necessary at a later stage to make such a selection. Further consideration of the topic is outside the scope of this book, and especially so in view of the fact that the Fourth Edition of the Red Book provides, in clause 5, the opportunity to select and specify the applicable law of the contract.².⁹

However, it is not sufficient simply to choose the applicable law of the contract. It is equally important to understand the implications of such choice. Unfortunately, despite its obvious importance, clause 5 of the Fourth Edition of the Red Book is often given no more than a passing reference by the parties when international construction contracts are initiated. Indeed, in a large number of these contracts, the characteristics of the applicable law of the contract are unscrutinised or even ignored. Where disputes arise but are not settled under the provisions of the contract, the applicable law of the contract can form a leading section of the dispute resolution process. The special characteristics of the chosen applicable law of the contract then become the focal consideration of the parties to the contract and their legal advisers.

In this connection, it is essential to appreciate that when the applicable law of the contract is being selected or considered, not only its prevailing characteristics should be scrutinised but one ought also to consider the likelihood of any changes which may be enacted and the nature of such changes. This is because such changes may bring matching effects on the contract itself, thus altering its character and causing an imbalance in the relationship between the parties. Of course, the probability of such a change may have to be considered by one of the parties or all as part of the risk undertaken in pursuing and executing the contract. The risk is of greater severity if the other party to the contract, for example, a government ministry, has some or total control over such changes.

2.5 Law governing procedure

Distinction must be made between the law applicable to procedure and that applicable to the substance of a dispute or the applicable law of the contract discussed above. This distinction is important because it is generally accepted that the law applicable to procedure is the law of the forum where the litigation or arbitration takes place; whereas the law applicable to substance is the law governing the matters in principle: in a contract it is the applicable law of the contract or the particular term in question. Accordingly, this distinction assumes greater importance where international contracts are concerned because one may find that the applicable law of the contract and that applicable to procedure belong to two different jurisdictions or even two different systems of law.

Although this distinction is not an easy one, it may be taken that in general the concept of procedure includes, amongst others, the areas of evidence, assistance of the courts and in some cases the rules on limitation. An arbitrator appointed to determine a dispute in an international commercial arbitration may find that the applicable law of the contract is different from that which regulates the internal arbitration proceedings. In general and subject to those arbitrations which are delocalised,².¹⁰ an arbitration is governed in respect of procedural law by the law of the jurisdiction in which the arbitration proceedings are held – the place of arbitration – which is technically referred to as the Seat of arbitration. In many cases, the choice of the Seat of arbitration is left to the arbitrator or to a third party, such as the authority named as responsible for the appointment of the arbitrator. In the latter case, should this appointing authority be an institution, such as the International Court of the International Chamber of Commerce (ICC) in Paris or the London Court of International Arbitration, the Seat of arbitration is fixed in accordance with the institution’s rules.

In the case of the International Court of the ICC, whose Rules are named in clause 67 of the Fourth Edition of the Red Book, the Seat of arbitration (referred to in French as ‘siège’ and in the English version as ‘place’), if not agreed by the parties, is fixed by the Court under Article 12 of the Rules. It is usually chosen on the basis of its neutrality and as a place other than that to which either of the parties is connected.

In the case of the London Court of International Arbitration, Article 7 of the Court’s Rules provides that ‘The parties may choose the place of arbitration. Failing such a choice, the place of Arbitration shall be London, unless the Tribunal determines in view of all the circumstances of the case that another place is more appropriate’.

Accordingly, should the parties wish to determine the law applicable to the arbitration proceedings, a choice of the place of arbitration should be made by them at the time of the formation of the contract.

2.6 Law governing enforcement of awards

Besides the applicable law of the contract and the law applicable to the procedure, the parties in an international construction contract may be involved in yet another system of law: the law of the country where a decision or an arbitral award is to be enforced.

A party seeking to enforce an award may have a choice of jurisdiction where to do so. The selected location will depend on where the assets of the losing party