Corrs High Vis: Episode 28 – FIDIC and the Rainbow Suite

Andrew McCormack, Partner, Corrs Chambers Westgarth
Justin O’Callaghan, Special Counsel, Corrs Chambers Westgarth
Wayne Jocic, Consultant, Corrs Chambers Westgarth
Megan Sharkey, Associate, Corrs Chambers Westgarth

Megan: In December 2017 FIDIC released its new Rainbow Suite of construction contracts which includes eight different forms of construction contract including the new EPC contract, the Silver Book. I am Megan Sharkey, a lawyer in the Construction team at Corrs, and I’m joined by Partner, Andrew McCormack; Special Counsel, Justin O’Callaghan; and Consultant, Wayne Jocic to discuss the new Rainbow Suite and in particular some of the key features of the new Silver Book. Before we delve into the deep end of the FIDIC contract, Wayne, we were hoping you would be able to tell us a little bit more about what or, more accurately, who FIDIC is.

Wayne: FIDIC is the International Federation of Consulting Engineers and if that leaves you scratching your head for a second it’s because the acronym isn’t English, the title is in French. FIDIC is based in Geneva in Switzerland. And if we just take those few things I think we can learn quite a bit about FIDIC. So one thing is that it is an international organisation, it’s a federation of more than 100 engineering organisations. They cross common law and civil law jurisdictions. And then the other very important thing is that it is an organisation of engineers. So what it does, it does through the eyes of engineers and that includes its preparation of contracts.

Megan: Today we are looking to focus on one of the particular contracts in the new Rainbow Suite – the Silver Book. But before we discuss that, Wayne, can you please give us a snapshot of what this new Rainbow Suite is and that it has to do with rainbows.

Wayne: I’m going to take a side approach to this. Let’s think about some of the common Australian contracts. So let’s think, maybe, of AS2124 or Defence HC1 or AS4300. The problem is that none of those are memorable. What FIDIC has done, in what I think is a stroke of marketing genius, is to come up with a suite of contracts – nothing new there. But to give it a catchy name, to call it the Rainbow Suite. And so the cover page of each of these contracts is a particular colour and people around the world refer to each of those contracts by the colour. If you’re stretching back your mind to high school optics, unfortunately we don’t have violet, indigo and so on, but we have some more boring colours. So there’s a large suite. There are eight contracts, three of those contracts have been refreshed very substantially. That was done in December 2017. So they are the Red Book, which essentially is a construct only contract; the Yellow Book, which is a design and construct contract; and then the Silver Book which is our focus today.

Megan: Justin, with that background to FIDIC, what is the Silver Book and what type of projects is it used for?

Justin: The Silver Book’s an EPC contract which is designed for the delivery of turnkey projects. And as the name suggests, these are projects that can be handed over to the employer, ready for operation at effectively the turn of a key. Typically under this form of contract, risk and responsibility is largely allocated to a contractor to deliver the project on time and, importantly for an EPC contract, to a required performance level. One of the key questions that we’re often asked is whether that is the same as the design and construct, a D&C contract. And the answer is “no”. The EPC process is broken down into its component parts of engineering, procurement and construction. And the Silver Book’s really used for projects that require proof of a reliability and performance element. So for example unlike the design and construction of an office tower, a power station requires both the structure to be completed as well as a certain performance level to be achieved.

Megan: Andrew, with the release of the new 2017 edition, what are some of the key features and how has this changed?

Andrew: Well I think the first thing to say is that the new Silver Book’s a bit longer. It’s got more detailed provisions and it’s also got more prescriptive contractual procedures and notification requirements. It seems however in look and feel still quite similar to the old Silver Book – it’s not a radical departure away from the existing standard in the same way that the AS11000 was going to be, had it seen the light of day. There are however some fairly significant changes that are made in the new Silver Book. Some that are probably worth commenting on are the fitness for purpose warranty that’s been retained is now supported by an indemnity from the contractor. That’s a bit of a radical departure and is probably likely to meet with opposition from contractors, particularly contractors in the Australian market who aren’t used to giving that type of indemnity. It is worth noting though that the indemnity itself is still subject to the consequential loss exclusion and indeed the overall cap on liability that the contractor enjoys under FIDIC. In terms of new things, there’s also a carve out from that cap on liability for gross negligence. That again might be a bridge too far for a number of contractors because in some jurisdictions, indeed including all Australian jurisdictions, gross negligence is not a judicially defined or statutory defined concept. And therefore that might be something that’s quite difficult for contracting parties to grapple with. I think another interesting point that’s worth noting is the fact that if a party is dissatisfied with an engineer’s determination of a claim under the FIDIC Silver Book - and the engineer is king in FIDIC, he’s the equivalent of the superintendent in an Australian Standard form – he makes a decision: if you are not happy you have 28 days to issue a “NOD”, which is a notice of dissatisfaction. If you fail to issue that notice, then the engineer’s determination is deemed to be accepted and it becomes final and binding. So clearly, contract administration becomes even more important in these circumstances because if you fail to issue a notice on time you may lose the entirety of your contractual entitlement.

Megan: Justin, is the FIDIC suite used widely in Australia? What do you think the expected uptake of the new Silver Book in the Australian market will be?

Justin: The historical use of FIDIC in the Australian market hasn’t been high. Research suggests that there’s an uptake for larger projects, over around $500 million, and projects with international parties. And this has really been consistent with our experience. However with the globalisation of the domestic construction and infrastructure market, and with international entrants continuing to increase and establish a footprint here, the use of FIDIC is increasing and in fact we have looked and used the FIDIC Silver Book in a number of recent jobs. Now one of the drivers behind this has been to help increase interest from international tenderers on these projects. And so its use has really been increasing in line with changes to market participants here. The second issue relates to whether the uptake of the new Silver Book will occur quickly in the Australian market. We’ve seen overseas commentators suggest that the new contract form may have a slow uptake because of familiarity with the established form and its use historically in that it’s been market tested. However, with limited historic use of FIDIC and the FIDIC Silver Book here in Australia, there may be an opportunity for uptake of the new form to occur more swiftly here, but we’ll really need to see how that plays out.

Megan: Following on from that, what amendments do you think will be required for the Silver Book to be used in Australia?

Justin: There are really three types of amendments that FIDIC requires for use here in Australia. The first type of amendments are the relevant jurisdictional amendments. Now these are the requirements that are common to most forms of construction contracts here in Australia and include amendments driven by legislation - and here we’re talking about things like work health and safety; proportionate liability; PPSA; GST; security of payment. It also requires updates to address changes driven by the development of the common law in Australia. For instance clause 8.5 of the new Silver Book deals with extensions of time for completion but may require amendment in an Australian context by employers to allow an employer’s representative to grant an extension of time in its absolute discretion and without being under an obligation to exercise that power for the benefit of the contractor. Now that’s to address the development of the prevention principle here and is really consistent with drafting that we’ve seen come in to construction contracts post the decisions in Peninsula Balmain, Harvey Bay and more recently in CMA Assets and John Holland. The second general type of amendments, so those required to amend the contract for project issues that the FIDIC Silver Book doesn’t address. So this category of amendments includes project specific requirements that are unique to a particular project and have been negotiated by the parties. They might include the security package and recourse requirements to the security; the provision or reliance on specific information such as site reports; and the detailed agreement of what’s constituted by indirect or consequential loss, which Andrew mentioned earlier. Now that’s a usual term that can be defined in Australian contracts but isn’t in FIDIC. And also amendments to address issues that the Silver Book specifically notes aren’t appropriately dealt with and which may arise on a particular project. For example, where there may be insufficient time or information for the contractor to have reviewed the employee requirements and undertaken a detailed risk review; risks to deal with subsurface work which can’t be inspected, and they’re really the cases where it may be more appropriate for an employer to take the risk of those conditions. In fact, FIDIC provides guidance that where it’s difficult or impossible to estimate contingencies for these types of risks in advance, that perhaps FIDIC’s conditions of construct for plant and design built could be used, and where the employer intends to supervise or closely control the contractor’s work, or requires a detailed design development procedure. The third type of general amendment that’s required to the FIDIC Silver Book are those amendments that are driven by the commercial risk profile. Now in this context it’s important to note that FIDIC sets out a set of golden principles for preparing special provisions, and these are driven largely at maintaining the integrity of FIDIC’s approach to drafting and to risk. Now, our experience of the Australian market and the FIDIC Silver Book is that the golden principles are probably more aspirational than reflective of market and that the more usual position in the Australian market is that employers tend to require a contractor to manage a greater degree of risk than what’s provided for in the standard form. And that’s not unique to FIDIC. That happens across contract suites in Australia. So to recap, the three overarching types of amendment are: jurisdictional amendments, specific project requirements, and commercial risk profile.

Megan: I think this nicely closes out our discussion on the FIDIC 2017 Rainbow Suite. Thank you Andrew, Justin and Wayne for taking us through the new suite and, in particular, the Silver Book. And thank you to our listeners for tuning in. Until our next High Vis podcast, goodbye.

This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.

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