In December 2017, the International Federation of Consulting Engineers (“FIDIC”)[1] published an updated edition of the Conditions of Contract for EPC/Turnkey Projects (“FIDIC Silver Book” or “Silver Book”). FIDIC Silver Book has become one of the most popular contract templates for the international construction projects. Compared with 1999 Silver Book, 2017 Silver Book makes a more reasonable adjustment to the risks and responsibilities allocation between the Owner and the Contractor, and introduces the project management mechanism and dispute avoidance mechanism with an aim to solve the issue about a significant increase in the number of disputes, to some extent which is attributable to the excessive risks assigned to the Contractor under 1999 Silver Book. [2]

Notwithstanding that certain risks placed on the Contractor have been transferred to the Owner under 2017 Silver Book, the Silver Book sticks to the principle of imbalanced risk sharing by virtue of the greater certainty about the price and duration of the Works to be required by the Owner. In return, the Owner is willing to pay more as consideration for a wider range of risks to be allocated on the Contractor. Having considered that there is a significant difference on the matter of risk sharing principle between the FIDIC Silver Book and our standard contracts, our construction enterprises have to be familiar with and understand the terms of the FIDIC Silver Book in order to better participate in and implement international construction projects. This article will give a brief interpretation of 2017 Silver Book, based upon which we will also make some comments on risk identification, management and solution related to overseas construction projects under the EPC Mode.

1.  Risk identification

On 23 December 2019, the Ministry of Housing and Urban-Rural Development (“MOHURD”) and the National Development and Reform Commission jointly published the Administrative Measures for General Contracting for Housing Construction and Municipal Infrastructure Projects (“Administrative Measures”). On 28 May 2020, MOHURD also issued the Draft for the Model Text for General Contracting Contract for Construction Engineering Projects (“Model Text”). It is stipulated in both Administrative Measures and Model Text that the Owner and the Contractor shall share risks on a reasonable and balanced basis. Nevertheless, in order to reduce the chance of giving rise to the Contractor’s claims and ensure the agreed price and duration of the Works not to be exceeded, FIDIC Silver Book has removed balanced risk sharing principle and allocated extensive risks to the Contractor,[3] for example the Contractor’s commitment to be responsible for, inter alia, the accuracy of the Site data and information, suitability and availability of the access route to the Site and unforeseeable difficulties and costs.

(1)  Risks related to the Basic Information

Clause 2.3 of the Model Text stipulates that the Owner shall make available to the Contractor for information all relevant data and information on the topography, subsurface, hydrological, climatic and environmental conditions at the Site, and shall also assume responsibility for errors on such basic data or information. Even though the Owner is also required to provide the Contractor with the Site data and information under 2017 Silver Book, Clause 2.5 states that, except as stated in Clause 5.1 [General Design Obligations], the Owner shall have no responsibility for the accuracy, sufficiency or completeness of such data and/or information of reference. In the meantime, Clause 4.10 requires the Contractor to be responsible for verifying and interpreting all data and information made available by the Owner under Clause 2.5.

Despite the provision of Clause 4.10, 2017 Silver Book sets out some exceptional circumstances under which the Owner shall be responsible for the correctness of the data and information, including (a) data and information which are stated in the Contract as being immutable or the responsibility of the Owner, (b) definitions of intended purposes of the Works or any parts thereof, (c) criteria for the testing and performance of the completed Works, and (d) except as otherwise stated in the Contract, data and information which cannot be verified by the Contractor.

(2)  Risks related to the Access Route

Pursuant to Clauses 2.2.2, 7.1.1 and 7.1.2 of the Model Text, the Owner is obliged to provide the Contractor with access routes to the Site as required for the Works and bear costs due to non-suitability of the access route. In China, the suitability of access routes to the Site is one of conditions necessary for the execution of the Works and also a precondition for the Owner to issue a valid notice of commencement of the Works.

To the contrary, FIDIC Silver Book assigns the risks related to the access routes to the Contractor. Clause 4.13 of 2017 Silver Book states that the Contractor shall bear all costs and charges for special and/or temporary rights of way which may be required for the purpose of the Works including those for access to the Site, and shall also obtain at its own risk and costs, any additional facilities outside the Site which may be required for the purposes of the Works.

Compared with 1999 Silver Book, it is nevertheless on the Base Date which is 28 days before the latest date for submission of the Tender under 2017 Silver Book that the Contractor has been satisfied with the suitability and availability of access routes to the Site. Therefore, it allows the Contractor to conduct an on-site inspection on the access routes before the Base Date, and to have the potential increased risks and/or costs arising from any non-suitability or non-availability of access routes considered and covered by the tender offer. Meanwhile, the Contractor may also be entitle to claim for fees and time extension if the access routes become unsuitable or unavailable due to the Owner or the third party’s default after the Base Date.

(3)  Risks related to Unforeseeable Difficulties and Costs

The essence of the FIDIC Silver Book is to pursue greater certainty about the price and duration of the Works. Clause 4.11 requires the Contractor to have satisfied with himself/herself as to the correctness and sufficiency of the contract price. It further states that, unless otherwise stated in the contract, the contract price shall be deemed to cover all the Contractor’s obligations under the contract and all things necessary for the proper execution of the Works in accordance with the contract. In addition, Clause 4.12 provides that (a) the Contractor shall be deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the Works, (b) by signing the contract, the Contractor accepts total responsibility for having foreseen all difficulties and costs of successfully completing the Works, and (c) the contract price shall not be adjusted to take account of any unforeseeable or unforeseen difficulties or costs. It is therefore emphasized in the introductory note that Silver Book is not suitable for use in the circumstances if there is insufficient time or information for tenderers to scrutinize and check the Owner’s requirements or for them to carry out their risk assessment studies and estimating, or if construction will involve substantial work underground or work in other areas which tenderers cannot inspect.

2.  Risk Management

In comparison with 1999 Silver Book, 2017 Silver Book does not only impose guidance on the authority of the Owner’s representative, but also improve the project management mechanism including progress and quality management by requiring the Owner to participate in the project management and to manager the risks jointly with the Contractor. It further introduces the advance warning mechanism with the intent to encourage the parties to advise any adverse event in advance and avoid or minimize the adverse effects of such events.

(1) Guidance on the Authority of the Owner’s Representative

According to the Silver Book mode, the Owner shall supervise the Works either by itself or by its appointed representative. The Owner’s representative shall be deemed to have full authority of the Owner under the contract, except in respect of termination of contract. But in contrast with full authority, 1999 Silver Book did not make any requirement for the qualification of or exercise of authority by the Owner’s representative. So there has been a significant increase in the risk of claims and disputes due to improper supervision or management by the Owner’s representative. 2017 Silver Book addresses the issue of lack of guidance and makes revisions accordingly with respect to the authority of the Owner’s representative.

With reference to the qualification applicable for the engineer as stipulated in the Conditions of Contract for Construction and the Conditions of Contract for Plant and Design-Build, 2017 Silver Book requires the Owner’s representative to be a competent and skilled professional. Unlike 1999 Silver Book which gives the Owner absolute discretion on the matter of the Owner’s representative replacement, the Owner shall not replace its representative with a person against whom the Contractor has raised reasonable objection by notice under 2017 Silver Book. On the matter of exercise of authority by the Owner’s representative, 2017 Silver Book also requires the Owner’s representative not to act for the Owner, but act in a fair manner as if it is an engineer when it makes determination of the matter or claim under Clause 3.5.

(2) Project Management Mechanism

In order to promote the Owner to deeply participate in the execution of the Works, 2017 Silver Book establishes the project management mechanism which has strengthened communication between the Owner and the Contractor and improved the progress and quality management in particular. The Contractor should study the project management mechanism which will be invoked as an important tool for risk control and management.

2017 Silver Book introduces a provision of management meeting where either the Contractor or the Owner may require the other party to attend a management meeting to discuss arrangements for future work and/or other matters in connection with execution of the Works. The Owner shall keep a record of each management meeting and supply copies of the record to those attending. In addition to the requirement of the Owner’s fully involvement in preparation and implementation of the quality management and compliance verification system, 2017 Silver Book also requires the Owner to review and respond to the Contractor’s documents within a specified period. No-objection notice rule is applicable to the Owner’s review process. Under this rule, the Owner shall be deemed to have given a notice of no-objection to the Contractor’s documents if it gives no notice within a review period. For example, the Contractor may refuse to commence relevant construction work until a notice of no-objection is given, or is deemed to have been given, by the Owner for the Contractor’s document related to the design and execution of the Works. The Contractor may also withhold the completion test until a notice of no-objection is given, or is deemed to have been given, by the Owner in this respect.

(3) Advance Warning Mechanism

Having considering an initiative of risk prevention in advance better than remedy afterwards, 2017 Silver Book adds an advance warning mechanism. Clause 8.4 states that either the Contractor or the Owner shall advise the other party in advance of any known or probable future events or circumstances which may (a) adversely affect the work of the Contractor’s personnel, (b) adversely affect the performance of the Works when completed, (c) increase the contract price, and/or (d) delay the execution of the Works. The Owner may request the Contractor to submit a proposal to avoid or minimize the effects of such events in accordance with the provisions of Variations and Adjustments. In case of the Owner’s consent to the proposal by the Contractor, the Owner shall instruct a variation. Even if the Owner does not give consent to the proposal, the Contractor will be reimbursed for the costs incurred as a result of preparation and submission of the proposal. So the advance warning mechanism will effectively promote notice of adverse events in advance and also facilitate the parties to evaluate whether such events may cause detriment to the Works and to determine what remedial measures should be taken by negotiation, for the ultimate purpose of risk control and management.

3. Risk Solution

Either the Contractor or the Owner may submit any dispute for a decision or arbitral award in accordance with the provisions of Claims, Disputes and Arbitration. Due to different procedures applicable to the claims and dispute resolution, 2017 Silver Book divides Clause 20 [Claims, Disputes and Arbitration] of 1999 Silver Book into two separate provisions, that is Clause 20 [Owner’s and Contractor’s Claims] and Clause 21 [Disputes and Arbitration]. 2017 Silver Book also replaces the Dispute Adjudication Board (“DAB”) with the Dispute Avoidance/Adjudication Board (“DAAB”). It is well indicated by these changes that 2017 Silver Book is committed to solving the disputes through consultations.

(1) Claims

In addition to the claim for additional payment or time extension, a claim may also arise if either party considers that he/she is entitled to another entitlement or relief against the other party under 2017 Silver Book. If the other party disagrees with the requested entitlement or relief, a dispute may be referred to the Owner’s representative for determination in accordance with Clause 3.5 [Agreement or Determination].

The Contractor shall give a notice to the Owner no later than 28 days after it becomes aware, or should have become aware, of the event giving rise to the claim for any additional payment or time extension. The Contractor shall also keep and provide to the Owner such contemporary records as may be necessary to substantiate the claim. The Contractor shall further submit a fully detailed Claim within an 84-days period, including a detailed description of the event, factual and legal basis of the claim, and time extension and/or additional payment claimed. If the event giving rise to the claim has a continuing effect, the Contractor shall submit further interim detailed claims at monthly intervals, and a final fully claim within 28 days after the end of the effects resulting from the event.

There was a stringent rule on the time limit for submission of claim notice under 1999 Silver Book. The Contractor would not be entitled to the claim after this time limit has expired. But as an exception to the loss of rights due to late claim, 2017 Silver Book introduces an initial response concept. If the Owner considers that the Contractor has failed to give the notice of claim within the period of 28 days, it shall within 14 days after its receipt of such notice notify the Contractor accordingly. If the Owner does not give such a notice within this period of 14 days, the notice of claim shall be deemed to be valid notice. Even though the Owner gives a notice that claim notice has lapsed within a 14-days period, the Contractor may continue the claim proceeding by submission of the fully detailed claim together with evidence on why such late submission is justified.

(2) Dispute Avoidance/Adjudication Board

2017 Silver Book replaces DAB with DAAB with the intent to facilitate the parties to solve the dispute which may have arisen during the course of execution of the Works through consultations rather than arbitration.

According to 1999 Silver Book, DAB will be appointed and constituted within 28 days after a party gives notice to the other party of its intention to refer a dispute to DAB. However, under 2017 Silver Book, the parties shall jointly appoint the members of DAAB within 28 days after the date that both parties have signed the contract. DAAB may attend to the management meetings, carry out the site visits and inspection and check with the documents related to the Works upon the parties’ joint request, for the purpose of enabling DAAB to informally discuss and attempt to solve any issue or disagreement between the Owner and the Contractor.

Notwithstanding that DAAB may cause the parties to reach an amicable agreement, any party is entitled to refer to DAAB for its decision any dispute including dissatisfaction with the determination of the Owner’s representative. If DAAB has given its decision as to a matter in dispute, and no notice of dissatisfaction has been given by either party within 28 days after the receipt of DAAB’s decision, then the decision shall become final and binding on the parties. Neither party shall be entitled to commence arbitration of the dispute unless a notice of dissatisfaction has been given within the required time limit. So DAAB mechanism together with the requirement for fair determination by the Owner’s representative will help avoid any initiation of arbitration proceedings by a party on a sudden and unexpected basis, and also cause the parties to reasonably predict the outcome of arbitration before determining as to whether to submit the dispute for arbitration.

Conclusion

Compared with 1999 Silver Book, 2017 Silver Book makes some revisions to and improvement on the matters of risk sharing between the Owner and the Contractor, project management mechanism, advance warning mechanism, claims and dispute resolution mechanism. In general, such revisions demonstrate FIDIC’s intention to boost cooperation between the Owner and the Contractor on the matters of risk identification and management on one hand, and to encourage the parties to solve the issue or disagreement which may have arisen during the execution of the Works through consultations on the other hand. 

Note:

[1] FIDIC was founded in 1913 by the national associations of consulting engineers of France, Belgium and Switzerland. The objectives of forming the federation were to promote the development of consulting engineering industry by the publication of standard contract documents, proceedings of conferences and exchange of information for consulting engineers. To date, FIDIC membership numbers more than 60 countries. Our national associations of consulting engineers was admitted to FIDIC in 1996.

[2] Zhao Shanshan, Zhang Shuibo, Ajiabuke, Zhang qihang, Comparative Analysis of 2017 FIDIC Silver Book and 1999 FIDIC Silver Book, published in the International Economic Cooperation, Vol.5, 2018.

[3] Zhang Ran, Ding Liuxiang, Zhang Rendong, Research on EPC Project’s Risk under the Conditions of FIDIC Silver Book of 2017 Edition, published in the Construction Economy, Vol.41, No.8, Aug. 2020.