Richard Booth, a senior associate at HFW LLP, analyses the new Yellow Book, the contract from the FIDIC suite most commonly used for offshore wind projects
The new suite of FIDIC contracts arrived on 5 December 2017, including the second editions of the three major forms of contract in the FIDIC rainbow suite (the Yellow, Red and Silver Books).
The first edition of the current suite was launched in 1999, and accordingly, the second edition represents 18 years of industry and legal changes and developments, perhaps explaining why each contract is now 50% longer than the first.
The structure and format of the second edition will be familiar to regular users of the first edition. The general conditions are formed of the same clauses, although clause 20 has now been split into two clauses. Clause 20 is restricted to claims, and a new clause 21 covers disputes.
The old particular conditions now comprise contract data and ‘special provisions, which are any bespoke amendments agreed to the general conditions.
Improvements include the alphabetical listing of definitions (instead of thematically grouping them). New definitions include profit, notice, claims and disputes, and the exclusion and limitation of liability provisions have been moved from clause 17 to clause 1.15 of the conditions in an apparent nod to their importance and significance to contracting parties. Clauses 18 (force majeure, now known as exceptional events) and 19 (insurance) have been sensibly reversed in order.
The second edition is supported by FIDIC’s new golden principles, – five statements that FIDIC expects contract drafters to adopt, including that the duties/responsibilities of the contracting parties must be generally as implied by the general conditions, special provisions must not change the risk allocation and all disputes must be referred to the Dispute Avoidance/Adjudication Board (DAAB) for a provisionally binding decision as a condition precedent to arbitration.
The accompanying guidance notes include proposed drafting for special provisions (bespoke amendments, including identifying the general conditions that would need to be amended to introduce BIM into the contract.
Clause 3, which contains the provisions concerning the engineer, is a good example of the cumbersome approach taken to the redrafting of the FIDIC suite. Clause 3.7 – the old clause 3.5 (determinations) – has been expanded from a single paragraph to three pages. The additional drafting is intended to make the provisions more prescriptive but is unfortunately hard to follow.
Clause 3 has been heavily amended with an emphasis placed on the engineer making determinations freely and being required to act neutrally. It is expressly stated that the employer is not to prevent the engineer from making a determination without seeking the employer’s prior approval. If the engineer does not reach their determination on a contractor’s claim within the 42-day period, they are deemed to have rejected the claim. If the contractor does not issue a notice of dissatisfaction within 28 days, the engineer’s deemed rejection of the claim is deemed to have been accepted by the parties and is final and binding on both of them.
This is in itself a particularly draconian provision that will inevitably catch out contractors using the new form of FIDIC contract and appears to have the effect of rebalancing the risk allocation in the employer’s favour. The effect is further compounded by a second time bar, which is that, if the dispute arising from a notice of dissatisfaction is not issued to the DAAB within six weeks, the engineer’s actual or deemed determination is also deemed to be final and binding.
The fit-for-purpose warranty at clause 4.1 of the Yellow Book has been amended to clarify that the purpose is specified in the employer’s requirements (rather than more generally across the contract documents as a whole). This clarification is to be welcomed, and parties should ensure the purpose is clearly defined in the employer’s requirements to gain the greatest certainty from the scope of this warranty.
Controversially, the fit-for-purpose warranty is now backed by an indemnity at clause 17.4. This is a new indemnity, and contractors should ensure that it remains within the scope of the exclusion and clauses and liability caps. Again, reflecting industry practice, the contractor is required to take out professional indemnity insurance, and if required by the contract data, the insurance is to also cover the contractor against its liabilities for a failure to comply with the fit-for-purpose warranty. These provisions will need to be carefully considered in conjunction with the contractor’s insurance advisers, as typically professional indemnity insurance does not extend coverage to fit-for-purpose warranties.
As mentioned earlier, the exclusion clause and liability cap have been moved forward from clause 17.6 to clause 1.15 of the contract in an apparent nod to their significance to the parties. There are new carve-outs from these exemption clauses including for delay damages and claims under the intellectual property indemnity (both in the employer’s favour and typically made) and in the contractor’s favour for variations (an unusual carve-out), losses in respect of omissions of work given to third parties and losses arising from a termination for convenience. The nature of the carve-outs is to continue to be negotiated by the parties, with employers seeking a broader selection of carve-outs to include issues such as termination losses following contractor default. The cap on delay damages at clause 8.8 can now also be disapplied by fraud and/or gross negligence.
The performance security provisions at clause 4.2 (bonds and guarantees) remain largely untouched, save that an express right is included to permit an increase or decrease in the value of performance security if the contract price changed by 20%. This amendment reflects industry practice. However, the requirement for the employer to consent to a decrease in value means the FIDIC drafting is likely to be toothless.
The employer’s financial arrangements for the project are now required by clause 2.4 to be specified in the contract data, with the employer obliged to give notice if it intends to make a material change to them. If the contractor is instructed to carry out a single variation valued in excess of 10% of the accepted contract amount (or 30% in aggregate) and it does not receive payment or is aware of a change in the employer’s financial arrangements, it can request evidence that the employer has financial arrangements in place. Not many employers are likely to allow clause 2.4 to remain given the sophisticated nature of funding for offshore wind projects.
Clause 14 (payment) also remains largely untouched by the FIDIC drafting committee, although the concept of cost plus reasonable profit has been replaced by a new defined term ‘cost plus profit’, which provides that, if the profit is not stated in the contract data, it is deemed to be 5%.
A further reflection of the prescriptive nature of the second edition is the express requirement for the contractor to include all claims and financial entitlement in its final statement/statement at completion and to then make a claim under clause 20.2 for any uncertified sums within 56 days of receipt of the final payment certificate, otherwise it is deemed to have accepted the amounts included in the final payment certificate.
The requirements for the programme have been expanded and made substantially more prescriptive by clause 8.3. The parties are now required by clause 8.4 to provide each other with advance warning of matters likely to cause delay or additional cost or impact on performance (although there is no sanction for a failure to give such notice). The extension of time mechanism is largely untouched, but a new paragraph has been included at the end of clause 8.5 requiring concurrent delay to be dealt with by any rules and procedures set out in the special provisions (or, if none stated, as appropriate taking due regard of all the relevant circumstances). Contractor should be careful to ensure that this provision is not amended to introduce an ‘anti-malmaison’ type clause, which has the effect of denying an extension of time if the contractor is in concurrent delay. New mutual trigger events for termination for default are provided for, including a failure to comply with an engineer’s determination or a DAAB decision (provided, in either case, it will result in a material breach of the contract), together with the employer’s entitlement to terminate if a cap on delay damages is exceeded.
The employer’s right to terminate for convenience is subject to a requirement for it to pay loss of profit and other losses and damages to the contractor (which is also carved out from the exemption clauses). This is a marked improvement from the contractor’s perspective, but we consider it unlikely that an employer will readily accept such open-ended liability, instead seeking to negotiate a specific entitlement (a fixed amount or a percentage of the contract price).
Assessing the changes – summing up
The Yellow Book remains in principle an onshore contract, so still requires the usual amendments for issues such as the vessel spread (including the right to remove the spread in the event of project delay), burial performance criteria (where the scope includes subsea cabling), UXOs, rely upon information, a knock for knock indemnity regime, and the involvement of the marine warranty surveyor.
It had been understood that FIDIC was planning to introduce a specific offshore contract, but this is not on the immediate horizon at the drafting committees, and accordingly, participants in the offshore wind industry must continue to work with and adapt the onshore Yellow Book for use offshore.
In terms of the new amendments introduced by the second edition of the Yellow Book, it is questionable whether the new prescriptive time periods and mechanisms are practical for offshore work. These mechanisms indirectly shift risk onto the contractor. They will inevitably require more proactive contract management than previously (perhaps reflecting the approach taken by NEC drafters). The increased use of time bars and deeming provisions are likely to result in satellite disputes over whether particular claims are time barred. The parties are also going to find themselves in formal dispute procedures during the project (if the DAAB provisions are not heavily amended).
The experience following the introduction of the first edition of the FIDIC suite in 1999 is that it took several years for projects to start being procured under the new form. It is likely to also be the case for the second edition, particularly given the fairly significant amendments that have been introduced.