A. What are FIDIC Contracts?
Construction projects tend to involve a vast number of activities performed over a protracted period of time by different parties. Each role carries its own duties and risks. This necessitates a robust contract regulating the terms between the parties concerned.
A construction contract is generally either an ad hoc contract or a standard form contract. Ad hoc contracts are bespoke, drafted for a specific task or purpose, whilst standard form contracts are pre-prepared standardised as tailored and localized to the specific realities of a project and localized to the applicable law. In the construction industry there are various bodies that have published standard form contracts. These include the International Federation of Consulting Engineers’ (“FIDIC”) “FIDIC Contracts”, Joint Contracts Tribunal’s “JCT Contracts” and the Institution of Civil Engineers’ “NEC Contracts”. These contracts, and others, have become industry standard in several jurisdictions, with different applications depending on the nature of the project.
The construction industry (locally and internationally) tends to favour these standard form contracts – and for good reason. They generally include the most important provisions one would expect in construction contracts with a well-allocated risk distribution between the parties. They are also the result of detailed discussion and negotiation between stakeholders, experts and the main committees and bodies in the construction industry (be it banks, insurers, contractors, developers and engineers). They are also generally more cost and time efficient, saving parties time and money on drafting and negotiating.
FIDIC Contracts have been used in Malta for over twenty years and have progressively become industry standard. Today, most medium to large-scale commercial construction projects are regulated by FIDIC Contracts. While most Government contracts in Malta are still procured using the General Conditions for Works Contract issued by the Department of Contracts, in more recent years, various projects have been procured with a FIDIC Contract getting public procurement closer to the prevalent situation in privately procured construction projects.
FIDIC has been developing contracts for almost seventy years, with contracts covering the main types of construction contracts, including:
- Design-Build Contracts (“FIDIC Yellow Book”);
- Construction (build only) Contracts (“FIDIC Red Book”);
- EPC/Turnkey Contracts (“FIDIC Silver Book”); and
- Design, Build and Operate Contracts (“FIDIC Gold Book”).
FIDIC have also developed contracts for specific types of work (such as dredging works and underground works) and contracts relating to construction works (such as consultancy and sub-consultancy agreements).
B. Understanding FIDIC Contracts
The General Conditions (found in all FIDIC Contracts) contain the main clauses of the contract. Naturally, each project has its particularities, and certain clauses will require amendment, localization or adaptation to the specific requirements of the project or the parties. The amendments are reflected in the Particular Conditions, a document which will rank above the General Conditions in the hierarchy of documents (with the General Conditions remaining untouched).
This is an efficient format. It allows industry specialists who are already familiar with the General Conditions to focus on the amendments in the Particular Conditions, without the need to go through each and every clause in the main body.
The General Conditions in the FIDIC Red Book, FIDIC Yellow Book and FIDIC Silver Book, follow the same format, with streamlined concepts and definitions.
C. Key Benefits and Insights
Whilst there are various standard form contracts, certain characteristics make FIDIC Contracts an ideal fit for the Maltese construction landscape.
a. International elements
FIDIC Contracts may be distinguished from the other standard form contracts, by the drafters’ active efforts to make the document as international as possible, without particularly favouring a single jurisdiction or legal system. This allows for straightforward adaptation of the contracts to a particular legal system and jurisdiction’s needs.
FIDIC Form Contracts are also well known globally and most widely used (particularly for projects with an international element). The prevalent trend to use FIDIC contracts in construction projects in Malta has attracted numerous foreign contractors to participate in local construction projects. It has also given comfort to foreign investors and financiers funding local construction projects.
b. Risk allocation
Construction projects tend to be riddled with risks, and a robust risk allocation is critical for the efficiency and success of a construction project.
FIDIC Contracts are renowned for being balanced contracts with a fair distribution of risk between the parties. The prevailing principle in FIDIC Contracts is that risks should be borne by the party best able to control that risk.
c. Variety of contracts
FIDIC has published a wide range of contracts, including design and build contracts, build only contracts and EPC/Turnkey contracts. The way they are drafted also allows for alternative types of payment methodologies (be it re-measurement, lump sum, or cost plus).
The array of contracts published by FIDIC also allows for easy application of multiple different contracts to a single project, particularly where the project may be split into different work parcels (such as excavation works, civil works, M&E works).
In addition, most FIDIC Contracts contain guidance notes and suggested amendments to the General Conditions. There are various books published each year by experts on the interpretation of clauses, as well as their practical insights, which provides an added degree of sophistication to the choice and amendment of a FIDIC contract.
d. Bankability
In view of the global widespread use of FIDIC Contracts, projects procured using these contracts tend to benefit from a more straightforward path to raising capital. The clear and fair risk allocation in FIDIC Contracts, is particularly favoured by Banks and other alternative financiers. The wide range of FIDIC Contracts also allows for better alignment between a project and its risk profile.
In addition, FIDIC’s long standing relationship with the World Bank has further solidified FIDIC’s presence in the market. FIDIC Contracts are incorporated as part of the World Bank’s standard bidding documents.
e. Compatibility with the jurisdiction
FIDIC’s active efforts towards contracts which are as international and adaptable as possible have allowed for a straightforward adaptation to local laws. In fact, there are various amendments which are generally included to better align these contracts with the laws of Malta.
The familiarity of local financiers and insurers with FIDIC Contracts has further simplified the process of securing financing and insurance for local projects.
FIDIC Contracts have also been adapted with success for public projects in Malta. In recent years, we have seen the construction of projects such as a public health hub, a psychiatric hospital and a wastewater treatment plant, all of which utilised FIDIC Contracts.
f. Dispute avoidance and dispute resolution
In construction projects it is very common for the contractor and the employer to have a claim against one another, be it for an extension of time, for delay penalties or additional payment. FIDIC Contracts have a robust claims management system that promotes the swift resolution of claims. Generally, claims are determined by the Engineer (a role which is present both in the FIDIC Red Book and the FIDIC Yellow Book), a party who is on the ground whilst the project is ongoing. Should either party be dissatisfied with the Engineer’s determination, the claim becomes a dispute, and a party can take the matter to the Dispute Adjudication Board or the Dispute Avoidance and Adjudication Board, depending on the FIDIC Contract used. If a party is still dissatisfied, the matter can then be finally resolved by arbitration.
This multi-tiered system facilitates the resolution of disputes in real time, reducing the likelihood that the issues which accumulate will be put off until project completion. The system also pushes parties to try and find an amicable settlement and ultimately avoid litigation.