Contracts: advanced questions Yellow Book Question/Answer

Yellow Book (Electrical and Mechanical Works)

Taking over delayed

Question

We are working on two surface water treatment projects in public sector contracted under FIDIC: Conditions of Contract for Electrical & Mechanical Works (Including Erection on Site) Third Edition 1987 Reprinted 1988 with Editorial Amendments. While both the projects are in operation for the past six months but there has been a debate on the Taking Over of these jobs since then. As per OUR understanding of the ground situation under the provisions of the contract. a) One of these projects was deemed Taken Over under clause 29.1 & 29.2 as a formal notice was given to the Employer & Engineer that they never responded to. Subsequently this project was also put to use. b)The other project was deemed Taken Over under clause 29.3 as it was put to use. No formal notice was given to the Engineer / Employer. However the Employer / Engineer has been contesting that position by referring to: In Special Conditions of Contract the priority of the contract documents under sub-clause 5.3 has been set as: 1. The Contract Agreement (if completed) 2. The Letter of Acceptance 3. Preamble to Conditions of Contract 4. The Particular Conditions of Contract 5. The Special Conditions of Contract 6. The General Conditions of Contract. In the Special Conditions of Contract the sub-clause 6.6 Operational & Maintenance Manual, has been amended by adding "The work shall not be considered to be completed for the purpose of taking over until such manual and drawings have been supplied to the Employer." Whereas Clause 29 has neither been modified by Particular Conditions nor by Special Conditions of Contract or anywhere else in the Contract. Employer / Engineer have been insisting that since these manuals and drawings under sub-clause 6.6 have been submitted recently and that Special Conditions of contract have a higher priority, the plants could not be considered deemed Taken Over. They are insisting that even though Clause 29 has not been modified anywhere in the contract, yet due to priority of special conditions of contract, sub-clause 6.6 prevails over clause 29 as well. I seek your expert advice on how to interpret such a situation under the structure of the contract that happens to be the FIDIC. 

Answer

Apparently there is a discrepancy in the contract clauses. However the Special Conditions of Contract supersede the General Conditions. However, the Special Conditions were known at the time of Tender and the Contractor is in a bad position. It would be useful to read the provisions of the law of the Contract regarding the Taking Over. The Employer constrains the Taking Over in the Special Conditions, with the Contractor's obligation to have the maintenance manual submitted. The Contractor may take the following actions: 1. Ask for substantial completion since the works are ready and to have a timeframe for the submission of the drawings and maintenance manual. 2. Since the factory is working, to ask for partial taking-over of the works. 3. To make a claim for recovery of the additional costs occurred in order to push the Employer/Engineer to speed up the process of the Taking Over. 4. Since the Contractor has possession of the Site, to ask the value of the production done for the Employer for this period. The best way is for the parties to negotiate in order to obtain an agreement on the issue.
 

Final Certificate and due payment date

Question

I need some help for the interpretation of Contract Clauses, especially for the Final Certificate and due payment date 

Answer

We should point out that FIDIC is prepared to give some guidance about FIDIC contracts if problems mainly concern interpretation of a contract document. If you seek more detailed advice that relates to actual contracts, then we recommend you discuss the matter with experts whom FIDIC can recommend, on the understanding that they or a colleague would seek remuneration once you entered into detailed discussions. Essentially, you do not seem to be requesting guidance about FIDIC contracts, and your problems do not seem to concern the interpretation of a contract document. Rather, your question seems to be: what do we do next? You give no details whatsoever of the form of contract, FIDIC or otherwise. Based on the presumption that your contract incorporates FIDIC's 1992 Conditions of Contract for Works of Civil Engineering Construction, you seem to be referring to a request for the Engineer's decision under Clause 67, following the lapse in the Clause 60 procedures. In that case, you should be mindful of other procedures described in Clause 67, particularly of the period within which to issue a notice of intention to commence arbitration. If that period has already passed, you may wish to consider taking legal advice. Arbitration is a lengthy and expensive procedure, so you may wish to consider alternative methods of dispute resolution, as an attempt at amicable settlement under Sub-Clause 67.2. We would be pleased to assist you in these endeavours, if appropriate commercial arrangements can be concluded. Alternatively, an epert proposed by FIDIC could be jointly appointed by the Contractor and Employer, either as a conciliator or as a member of a dispute board (either the sole member or one of three members).
 

Lump-sum contract: revert to cost plus

Question

I would obtain your opinion in relation to the situation described below, concerning the execution of a Lump Sum construction contract based on the Yellow FIDIC Book (electrical and mechanical works).
 
A Lump Sum budget for civil works have been decided upon between the Contractor and his Client, as part of the total Contract value. In addition, a certain percentage of this budget (5%) ought to be paid by the Client to the Contractor without need to present any cost justification, as per mutual agreement.
 
This percentage having been exceeded: the Contractor now wishes to revert to a cost plus method of payment for the TOTALITY of the budget, i.e including the initial percentage of 5%.
 
Has this situation been encountered in the past, and is this Contractor's request legitimate? In other words, is it customary that a Contractor, having exceeded his civil works budget under the context of a lump-sum contract, requests to be paid this budget as if the contract was a cost-plus contract?
 
Some real-life examples would be most welcome to support the said Contractor who is presently encountering a stiff reaction from the Client.

Answer

We have just replied to a query from your colleages concerning problems with a Lump Sum project - and wonder if this is the same project. My reason for making this point is that they refer to a Lump Sum contract, and you refer to a Lump Sum Budget. A lump sum is usually a fixed price, a budget is usually an estimate which may be subject to change. In the event of a budget, it is very important that the terms of the Contract should clearly state what measures are to be adopted if the budget is, or is likely to be, exceeded or changed. And of course the reasons for exceeding the budget must be carefully established (i.e. Contractor or Employer responsibility) to see whether or not the Contractor has the right to additional compensation However, whatever the terms of the Contract may say about payment and percentages etc., if either party, for whatever reason, wishes to change the provisions of the contract - e.g. by moving over to a Cost-plus contract - the change, and the terms of the change must be agreed by both parties - the Contractor and the Employer. The Contractor cannot unilaterally decide to do this just because life is getting difficult. Normally such a move would be to the benefit of both parties - e.g. facilitating project administration or cost control, etc. It is not unknown to change the basis of a Contract in this way, especially if the conditions and circumstances foreseen at the outset have changed fairly substantially. But both parties must agree that this is the best way to continue and agree on the basics for the new provisions. We hope these thoughts are of some help in sorting out the situation.
 

Access

Question

For a Contract based on the Yellow FIDIC Book, the Employer failed to give us access and possession of the site on 30 March as agreed contractually owing to an administrative problem: the site is constituted of two parcels (recently owned by the Employer) which were not unified until today. Therefore the constuction permit could not be granted until the unification is done. The Employer is currently doing the necessary procedure for unification, but it takes time. For the approved planning, the works on site must start two months after 30 March, i.e., on 30 May. Which clause must be applied if we want to terminate the Contract:

  • Clause 46.1(d) directly (14 days notice only) because the Employer failed to meet his contractual obligations;
  • Clause 17.1 (obligation of the Employer: access to and possession of the site) or this case must be considered as a suspension under Clause 23.1?

Alternatively Clause 24.3 (prolonged suspension): after 84 days of suspension, we shall give notice to proceed within 28 days. Then Clause 46 applies: 14 days notice (we must wait 84 + 28 + 14 days before terminating the Contract).

Answer

Failure by the Employer to give possession of Site under Clause 17.1 is normally considered to be a serious breach of his obligations where it has the effect of preventing the Contractor from proceeding with the Works as planned and agreed. The normal remedy for the Contractor, and the principal remedy provided in the Yellow Book, is the award of an extension of time under Clause 26.1 (d). Coupled to this could be additional costs under Clause 34 if the delay has caused the Contractor additional expenditure (which he would be required to prove). Also dates in the Contract which referred to the planned access date (e.g., in your case, the start date) should be revised to reflect the actual dates.
 
You say that the Employer is working on the various matters which require to be resolved, and thus there would appear to be a genuine desire by the Employer to proceed with the Work as soon as he can (in other words he is not delaying access for no good reason and with no intention or prospect of solving the situation as soon as he can). We would suggest that any thought of termination in the situation you describe is a little premature at the moment. Clause 46.1 (d) which you mention, begins with the word "consistently" and this is important. In this case it is a one-off failure, and there are provisions in the Contract for dealing with it.
 
Provided that the situation does not get out of hand - and only you can judge this based on the time it takes to solve the problem - the Yellow Book provides the solution of a time extension with possible costs (subject to the Contractor making due application as set out in the clauses).
 
We would also suggest that suspension under Clause 23.1 is not an option since the Contractor cannot himself suspend work under this clause: it starts "The Engineer may ....".
 
However, what you could possibly consider is using the provisions of Clause 24.3 as a guideline to the sort of time you should wait for access before considering termination.
 

Negative variation not issued

Question

We wish to address to you the following query in relation to a situation which has occured in the context of the execution of a Lump Sum contract for a power distribution substation, regulated by a standard FIDIC (Yellow Book - Electro-Mechanical Works) terms and conditions.
 
Due to an error in the pricing of the original tender, which pricing and all related correspondences form part and parcel of the final Contract, the prices for medium voltage cables were mistakenly ventilated in the Contract BoQ, to appear in front of ALL "medium voltage switchgears" BoQ items, in lieu of "incoming MV switchgears" BOQ items only, as should be the case.
 
Also, the Contract specifications no where mention the necessity to provide such cables on all MV switchgears, but only on incoming ones. In parallel, it is clearly mentioned in the Contract agreement that in case of ambiguity, the Contract specifications supercede (have higher priority than) the Contract BoQ, as ought to be the case in the Lump Sum form of Contract.
 
Now, the Client has proceeded unilaterally to deduct from his payments to the Contractor, all amounts figuring in the BoQ for medium voltage cables which do not correspond to "incoming MV switchgears", i.e all amounts ventilated by error on "outgoing MV switchgears". This, on the basis that the Contractor did not provide such cables for "outgoing MV switchgears".
 
The crucial argument is that the Client did not issue any negative variation during the execution of the works, but satisfied himself to arbitrarily deduct the subject amounts from the Contractor's certificates, while ISSUING THE TAKING OVER CERTIFICATE AND AVOIDING TO INCLUDE THESE ALLEGED MISSING CABLES IN THE FINAL SNAG LIST.
 
When the Contractor requested clarification from the Engineer regarding this ambiguity between the Contract BoQ and the Contract Specs, in line with FIDIC contract standard procedures, the Engineer effectively responded that there was no ambiguity and that he could not certify items "not existing physically on site".
 
Today, nearly a year and a half after the issue of the Taking Over certificate, the total Lump Sum Contract amount is still unpaid to the Contractor, reduced by an amount equivalent to the BoQ amount corresponding to these alleged missing cables. As a result, the Contractor is seriously entertaining the idea to treat this matter through arbitration.
 
Please, clarify whether the Contractor is in your opinion entitled for obtaining payment of these cables and therefore payment of the total initially committed lump-sum Contract amount, and advise on the proper course of action to follow.

Answer

The right of the Contractor under a Lump Sum contract is usually to receive the full amount of the Lump Sum by the time the contract is completed. The use of a BoQ in a Lump Sum contract is usually to facilitate progress payments and to help value variations etc. - but a lot will depend on the wording of the payment clauses and the Preamble to the BoQ. Other factors to bear in mind are (i) that if the Contractor has made a mistake in pricing the work (and this is now all part of the Contract) - he must stand for his error, (ii) the Employer (Client) is not normally entitled to make reductions in the amount certified by the Engineer (see Clause 33.5 - the Employer shall {= must} pay the amount certifed). If he does not pay the amount certifed, the Contractor can terminate the Contract under Clause 46.1 (although it would appear to be a bit late for that in your contract).
 
From your wording it would appear that the Employer has made deductions from the amount certified by the Engineer, but you then say that the Engineer "could not certify items not physically exisitng on Site". So it is not clear as to whether it is the Engineer who has failed to certify - or the Employer who has failed to pay. However, depending very much on wording in the Contract, a Contractor is usually entitled to receive the full Lump Sum for a Lump Sum contract, subject to any variations or other agreed changes made to the Works. We are sorry not to have been more helpful, but we hope these thoughts will help you in resolving the matter.
 

Alternative solutions

Question

We tender a wastewater plant according to the FIDIC Yellow Book and the Consultant who prepared this Teneder Document allowed for an alternative solution. Our belief is that as far as it responds to the Employer's Requirements any offer can be considered an ..."alternative". What do you think: is it normal to have alternative solutions in the tender documents for a FIDIC Yellow contract ?

Answer

With Yellow FIDIC you can certainly have alternatives. In fact, it is often desirable. As you say, the Contractor is designing the work to the Employer's Requirements, so as long as his design fulfills the Employers' Requirements that is OK (it is presumed you are referring to the New Yellow Book - but even under the Old Yellow the Tenderer can propose an alternative). However, it is usually required for him to propose his alternative IN ADDITION to an offer exactly in the form requested. This is so that offers from different tenderers can be compared and the 'lowest evaluated offer' can be chosen. Having chosen the 'lowest evaluated offer' with full transparency, one can then discuss the alternative offer with him.
 

Multiple copies

Question

Our company is commencing negotiations on two components (a steam generator and a turbine unit). Commercial terms will be based on FIDIC Yellow Book. Negotiations will be held with a total of four cancidates (two for the boiler; two for the turbine). In the course of the negotiations, we plan to refer to FIDIC General Conditions and modify the FIDIC Particular Conditions based on comments from the purchaser and the supplier. There will be two Contracts (one for the boiler and one for the turbine) at the end. My question is how many licences do we need from FIDIC: one, two or four? The purchaser is the same entity for each component

Answer

A standard FIDIC electronic product will be sufficient. You can print the contract 10 times, and text can be copied for Particular Conditions without restriction. Forms are also available for completion by yourself.