Termination and FIDIC: The 4 Key Clauses You Need to Know
Termination is a hot topic right now due to the current hostilities in the Gulf region. This article examines what the FIDIC contracts say on the subject, with a focus on the 4 key clauses you need to know and understand.
Sub-Clause 15.5 (Termination for Employer’s Convenience)
Sub-Clause 15.5 (Termination for Employer’s Convenience) provides that ‘The Employer shall be entitled to terminate the Contract at any time for the Employer’s convenience’. This is not linked to any reasons, so if the Employer decides that he/she no longer wishes to continue with the project, because of circumstances arising out of the hostilities, he/she may give the required Notice and the Contract will be terminated.
Sub-Clause 15.6 (Valuation after Termination for Employer’s Convenience)
Sub-Clause 15.6 (Valuation after Termination for Employer’s Convenience) provides that the Contractor shall be paid in accordance with Sub-Clause 18.5 (Optional Termination) for:
(a) ‘the amounts payable for any work carried out for which a price is stated in the Contract;
(b) the Cost of Plant and Materials ordered for the Works which have been delivered to the Contractor, or of which the Contractor is liable to accept delivery. This Plant and Materials shall become the property of (and be at the risk of) the Employer when paid for by the Employer, and the Contractor shall place the same at the Employer’s disposal;
(c) any other Cost or liability which in the circumstances was reasonably incurred by the Contractor in the expectation of completing the Works;
(d) the Cost of removal of Temporary Works and Contractor’s Equipment from the Site and the return of these items to the Contractor’s place of business in the Contractor’s country (or to any other destination(s) at no greater cost); and
(e) the Cost of repatriation of the Contractor’s staff and labour employed wholly in connection with the Works at the date of termination.’
and, under sub-section (b):
‘the amount of any loss of profit or other losses and damages suffered by the Contractor as a result of this termination.’
Clause 18 (Exceptional Events)
Clause 18 (Exceptional Events) deals with events that are beyond a Party’s control and includes war, hostilities and acts of foreign enemies as being the type of events that are considered by this clause to be exceptional events.
Clause 18.5 (Optional Termination)
Clause 18.5 (Optional Termination) provides that:
‘If the execution of substantially all the Works in progress is prevented for a continuous period of 84 days by reason of an Exceptional Event of which Notice has been given under Sub-Clause 18.2 [Notice of an Exceptional Event], or for multiple periods which total more than 140 days due to the same Exceptional Event, then either Party may give to the other Party a Notice of termination of the Contract’.
Conclusion
So, if the hostilities prevent execution for the periods stated, either Party may elect to terminate by giving notice. Payment to the Contractor is the same as described above under Termination for Employer’s Convenience, with the exception that the Contractor is not entitled to payment for loss or profit or other losses and damages under this clause.
Need to understand the full FIDIC contracts? Check out our Practical Use of FIDIC 1999 or Practical Use of FIDIC 2017 e-courses.
How to Claim During Periods of Regional Hostility
I have received several enquiries from Claims Class students citing the current hostilities in the Arabian Gulf and asking whether the situation provides grounds to claim. The answer, as usual, is “it depends”.
Firstly, in order to receive compensation, the contractor must have incurred some sort of damage. In other words, to have either suffered delay or incurred additional cost because of the event. If we think about the current situation, the contractor could be affected by the following:
- actual damage caused to the project as a result of the hostilities
- disruption to the supply chain caused by restrictions in the Straits of Hormuz shipping lane
- disruption to the supply chain caused by disruptions to flights
If hostilities continue or escalate, however, it is likely that the effects on projects will also increase.
What if the Contractor Has Been Affected?
Secondly, if the contractor has been affected, there must be a contractual mechanism to allow the Contractor to receive compensation. Most projects in the Gulf region are governed by the FIDIC contracts. The Red Book, 2017 Edition covers such a situation under Sub-Clause 18.1 (Exceptional Events), which provides the following:
““Exceptional Event” means an event or circumstance which:
(i) is beyond a Party’s control:
(ii) the Party could not reasonably have provided against before entering
(iii) having arisen, such Party could not reasonably have avoided or
(iv) is not substantially attributable to the other Party.
An Exceptional Event may comprise but is not limited to any of the following events or circumstances provided that conditions (i) to (iv) above are satisfied:
(a) war, hostilities (whether war be declared or not), invasion, act of foreign enemies;
(b) rebellion, terrorism, revolution, insurrection, military or usurped power, or civil war; …
(e) encountering munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity;…”
For the above, it may be concluded that the current situation in the Gulf comprises an exceptional event as defined by FIDIC.
Sub-Clause 18.2 (Notice of an Exceptional Event), provides that:
“If a Party is or will be prevented from performing any obligations under the Contract due to an Exceptional Event (the “affected Party” in this Clause), then the affected Party shall give a Notice to the other Party of such an Exceptional Event, and shall specify the obligations, the performance of which is or will be prevented (the “prevented obligations” in this Clause).
This Notice shall be given within 14 days after the affected Party became aware, or should have become aware, of the Exceptional Event, and the affected Party shall then be excused performance of the prevented obligations from the date such performance is prevented by the Exceptional Event. If this Notice is received by the other Party after this period of 14 days, the affected Party shall be excused performance of the prevented obligations only from the date on which this Notice is received by the other Party.
Thereafter, the affected Party shall be excused performance of the prevented obligations for so long as such Exceptional Event prevents the affected Party from performing them. Other than performance of the prevented obligations, the affected Party shall not be excused performance of all other obligations under the Contract.
However, the obligations of either Party to make payments due to the other Party under the Contract shall not be excused by an Exceptional Event”
The Importance of Notices
Consequently, if either Party is, or will be prevented from performing any obligations because of the current situation, they must give Notice and will thereafter be excused performance of the affected obligation(s), although this does not apply to payments.
Sub-Clause 18.4 (Consequences of an Exceptional Event) provides entitlement to the Contractor to claim compensation as follows:
“If the Contractor is the affected Party and suffers delay and/or incurs Cost by reason of the Exceptional Event of which he/she gave a Notice under Sub-Clause 18.2 [Notice of an Exceptional Event], the Contractor shall be entitled subject to Sub Clause 20.2 [Claims For Payment and/or EOT] to:
(a) EOT; and/or
(b) if the Exceptional Event is of the kind described in sub-paragraphs (a) to (e) of Sub-Clause 18.1 [Exceptional Events] and, in the case of sub-paragraphs (b) to (e) of that Sub-Clause, occurs in the Country, payment of such Cost."
Having given the required Notice, the Contractor may claim for any delay to the Time for Completion caused by the hostilities. Additionally, because items (a) to (e) of Sub-Clause 18.1 (Exceptional Events) includes events such as those that are currently being experienced in the Gulf, the Contractor may also claim for payment of any additional Cost incurred.
I hope that this provides some guidance on the current situation and, if you are located in the Gulf region, I hope that you and your loved ones stay safe.
Understanding your contract and knowing which clauses provide entitlement is critical at the best of times, and especially during time of high risk. Check out our Practical Use of FIDIC 1999 and Practical Use of FIDIC 2017 e-courses and ensure you are best placed to support your project.
Notices of Claim and Civil Law
I recently read an interesting article by Joseph Durkin, Senior Vice President at Burford Capital. The article discusses notices, with a focus on the Saudi Arabian jurisdiction.
This region is known for using FIDIC. And under FIDIC, once aware of an event which provides entitlement to claim, the Contractor must submit a notice of claim within 28 days. If notice is not given, the Contractor loses all entitlement. Now, in a common law jurisdiction, the situation is simple. If the Contractor has signed an agreement which says that if they do not submit a notice, the court will uphold the Contract. As a result, the Contractor will not be entitled to anything. In civil jurisdictions, however, things may not be quite so straightforward.
The article refers to the findings of tribunals in Saudi Arabia, Dubai, Qatar and Kuwait. In these jurisdictions, the parties must act in good faith. The article explains that in some circumstances, however, the notice provisions have not been upheld either entirely or partially by arbitral proceedings or in the courts. The important phrase here, however, is “in some circumstances”. In some cases, the situation is certainly not clear cut-and in other circumstances, the time bar has been upheld. Whilst the article draws on Middle East experiences, it doesn’t matter where in the world you are working, this situation is fairly typical of civil law jurisdictions.
Given the uncertainty of such a situation, isn’t it better to simply give notice within the time frame rather than be forced to spend time and a lot of money challenging a decision via legal proceedings?
10 Tips for Notices
Preparing and sending a notice of claim is not an onerous task, so here are my 10 top tips for getting notices right:
1. Ensure that the document is identified as a notice.
2. Ensure that the notice is delivered to the address(es) stated in the Contract.
3. Ensure that the notice is delivered by the means stated in the Contract.
4. Ensure that the notice is copied to the Employer.
5. Make reference to the clause(s) of the Contract which require the notice to be given.
6. Briefly describe the circumstances of the event giving rise to the notice.
7. Record relevant dates in the notice.
8. Restrict the contents of the notice to the requirements of the clause that requires the notice to be given. Do not go into detail of the effect of the event. The time to do this is when you submit the particulars of the claim.
9. Avoid accusatory language and finger pointing. A simple statement of the facts cannot be argued and is less likely to elicit a defensive response.
10. If you are unsure whether the event will have an effect on the time for completion or will incur additional cost, send a notice anyway. If, having later examined the circumstances more thoroughly, you decide not to submit a claim, then it’s a simple matter to write to confirm the situation.
Interested in learning more about notices under FIDIC? Check out our FIDIC e-courses where we cover this topic and much more regarding your obligations, rights and remedies under these popular contracts.
You may also be interested in adding these books to your bookshelf: FIDIC 1999 Notices and FIDIC 2017 Notices.
Failure in Contract Administration - A Leading Cause of Disputes
I have just completed a training course for a large contractor based in the Middle East. The title of the course was the The Practical Use of the FIDIC Contracts. The attendees were contract managers and contract administrators. The course consisted of weekly 2-hour online tutorials over a period of 6 weeks. After each tutorial, the attendees were given some case studies to examine. They then submitted assignments for grading.
After the first two week’s assignments had been submitted, I was able to reach the following conclusions:
- Despite most of the contractor’s projects being FIDIC contracts, the attendees had very poor knowledge of the contract.
- Many of the attendees based their answers on usual practice and what had been done previously, rather than the actual contract provisions.
- Most of the attendees failed to justify their answers by making reference to the contract.
Contracts managers and contract administrators are responsible for ensuring that:
- The contractor complies with his/her contractual obligations.
- The contractor receives any rights and remedies contained in the contract.
- The employer and engineer act in accordance with the contract.
Given the above, these gaps in knowledge present many risks for the contractor. There was no doubt that the training had benefit. As the attendees worked though the course and followed our advice, not only on the conditions of contract, but on how to deal with contractual matters, their grades improved.
Studies on international disputes over many years have revealed that some of the leading causes of disputes are:
- Failure of the parties to comply with contractual obligations.
- Failure of the project participants to understand the contract.
- Inadequately trained and qualified persons responsible for contract administration.
Our client’s contract administration clearly needed improvement. Hopefully our training has gone some way towards avoiding contentions and disputes on their projects. This company realised that they had a problem and took steps to provide a solution via staff training. Unfortunately, many companies continue to get things wrong, finding themselves in difficult and costly situations.
So, for those facing similar problems, here are my top tips for effective contract administration:
- Ensure that you have adequately trained and qualified staff on the project to deal with contractual matters.
- If you do not have such staff, seek the advice of others, perhaps from head office or external consultants.
- Ensure that you understand your contract and comply with your obligations.
- Be aware of the obligations of other project participants and check compliance.
- Ensure that your project procedures, including any forms and templates are in accordance with the contract.
- When dealing with contractual matters, justify your position by reference to the provisions of the contract.
I hope this helps you to provide effective contract management and to avoid contention and disputes. For those looking to improve their skills in contract administration, this e-course may be of interest. Or for team training, get in touch directly to discuss your needs.
A Guide to Fair Pricing: Mastering Construction Cost Adjustments
Fluctuation provisions in construction contracts are designed to adjust the contract sum. This might be needed to reflect changes in labour, material, and associated costs. By adding fluctuation clauses, you can mitigate the risk of price volatility during the project.
However, in my experience, these provisions are rarely included in contracts. This often stems from a reluctance by the employer to assume the potential risk of significant price increases. Often the contractor is left to bear the full burden of material price fluctuations. This risk can be substantial and difficult to predict, especially on multi-year, large-scale construction projects.
What can you do if labour and material costs rise?
Let me put this into a relevant real-world context. Back in 2022, I acted as the commercial lead on a project just as the global pandemic was ending and war in Ukraine was looming. Working for the main contractor, my role was responsible for the procurement of the supply chain, and it turned out to be a testing experience.
The tendering steelwork contractors would not fix their quotations for more than a day due to the volatility in the market. Other contractors were also reluctant to quote on fixed prices for works too far into the future, unless a margin of safety was included in the contract sum.
Taking that stance in such challenging times was completely understandable. Our issue, as the contractor, was that the contract we had in place with our employer was agreed in 2021 on a fixed-sum basis.
A deed of variation
Thankfully, the employer understood the position and showed empathy. They accepted that their main contractor was facing a tough situation, which could even be potentially business ending.
Through a process of negotiation, we agreed to a deed of variation to increase the contract value. But it wasn’t a simple process and took a great deal of time and substantiation — and, ultimately, led to a delay to the original completion date.
Looking back in hindsight, that was the right decision and an example of the best face of our industry. Official data from the Insolvency Service in the UK, revealed that 4,165 construction firms in became insolvent in the twelve months ending on 31 March 2023.
Three key steps to ensure a successful outcome on your project
Having a provision in your contract for price fluctuations or an employer who is willing to come to an agreement is not the end of the matter. You will still need to compile a credible document that demonstrates why the prices should be amended. When doing so, there are three steps to consider:
1. Establish a narrative
Claimants often identify events in price escalation requests but fail to connect them directly to the cost increases. This leaves it up to the reviewer to infer the link. Provide a clear narrative that explicitly details how specific events caused the price fluctuations and quantifies their impact.
2. Provide relevant index or cost adjustments
The FIDIC form, for example, often utilises cost indices to calculate price adjustments. These published indices provide a clear and consistent method. Alternatively, claimants can demonstrate the actual cost difference by comparing the current material price to the originally estimated price.
3. Substantiation
To come to a successful conclusion, you are going to have to demonstrate that the price fluctuation you are claiming is accurate. Good record keeping is essential. The use of indices is a straightforward approach due to the fact they are transparent and publicly available. Even so, you’ll still have to illustrate to the reviewer what the data is telling them, leading them to a logical conclusion. Cost-based adjustments, however, demand robust record-keeping to validate both the original and revised costs.
Documenting and substantiating cost adjustments under FIDIC
Under FIDIC (2nd ed., 2017), Clause 13.7 addresses adjustments to the contract price for changes in the cost of labour, goods, or other inputs. It’s an optional provision that parties can choose to incorporate in their contract.
The application of Clause 13.7 is contingent upon the inclusion of a "schedule of cost indexation" within the contract. This schedule outlines the specific indices and coefficients to be used for calculating the price adjustments.
FIDIC guidance notes suggest that this sub-clause is particularly relevant when it would be unfair or unreasonable to expect the contractor to solely bear the risk of significant cost escalations. This typically occurs in projects with long durations or in volatile markets where price fluctuations are difficult to predict.
This article was written by Steven Woolnough, Chartered Quantity Surveyor, MRICS, MCIOB, MCICES, MCIArb.
To understand more, the practical use of FIDIC 2017 intermediate course covers variations and adjustments. Visit the webpage now to see the full course outline.
Are Your Project Procedures in Conflict with the Contract
In this article, Andy Hewitt considers what happens when project processes and documents are in conflict with the contract. Read on to discover when to use standard forms and processes and when they can create problems.
Many projects have procedures for administration and management purposes. These are often introduced by the project participants and can include standard forms and/or document templates. Contractors often have company-wide procedures so that staff moving from project to project will always find that things are done the same way. This standardisation is a great idea because the procedures can be improved upon over time. Users become familiar with them, and all this leads to familiarity and increases in efficiency.
It is vitally important to ensure that whatever procedures you use on the project, are compatible with the conditions of contract. If this is not done, the results could be serious. I will give a couple of examples.
Example 1 – Requests for Information
The contractor’s procedures include a form for Requests for Information (RFI) from the engineer. The procedures include an RFI log in which the details of the RFIs are recorded along with the issue and response dates.
The contractor issues an RFI on an important matter which is required urgently to avoid delay. The engineer responds after a considerable period and the contractor is delayed. The delay affects the time for completion.
The contractor submits a claim for an extension of time and the payment of prolongation costs.
The contract provides that if the contractor requires any information from the engineer, they must give notice to the engineer. This notice must state the information required, when by (which must be a reasonable period) and the consequences if the information is provided late. The contract also says that notices should be specifically identified as notices, citing the clause under which they are issued.
We can see here that if you don’t identify the RFI as a notice and include the information stipulated in the contract, it will not be regarded as a notice. The claim may be rejected on the grounds that the engineer was not given formal notices of the matter.
There may be grounds to contest a rejection of the claim in dispute proceedings. However, had the project procedure been changed to ensure that RFIs were issued by way of a notice, a dispute could have been avoided.
Example 2 – Non-Conformance Report
The engineer has a number of forms and documents that they use to administer projects. These have developed over several years and include a Non-Conformance Report (NCR). This advises the contractor that something has been carried out or executed not in accordance with the contract. The NCR contains standard wording that instructs the contractor to remedy the matter.
The contract provides that if the engineer discovers something that is not in accordance with the contract, they are obliged to issue a ‘Notice to Correct’ to the contractor. This should state the details of the non-compliance and a time-scale for the matter to be remedied. If the contractor fails to remedy the matter the employer may arrange for the matter to be remedied by others at the cost of the contractor.
We can see here that the term ‘Non-Conformance Report’ does not exist in the contract. Consequently, the issue of such a document has no contractual merit. Whilst the contractor may be obliged to act on the instructions of the engineer, the issue of an NCR instead of a Notice to Correct would negate the employer’s rights to use others to remedy the non-conformance and to claim the costs from the contractor.
The solution to avoid such a conflict is simple. The engineer must change their Non-Conformance Report to a Notice to Correct. If the Notice to Correct contains a reference to the clause under which it is issued, then that would be even better.
In Conclusion
The use of project procedures is to be encouraged. But, such procedures must be reviewed at the very beginning of the project by a someone suitably qualified to do so. You must ensure that all parts of the procedures are in compliance with the contract and if not, the procedures must be revised accordingly.
If you are looking for practical advice on drafting documents to avoid these issues, you can read this article we wrote on the subject. Or, our Effective Contract Administration E-Course might be helpful.
FIDIC 2017 - How Strong is Your Knowledge?
Think you are a FIDIC expert? Put your skills to the test with our interactive quiz.
With the launch of our brand new FIDIC 2017 e-course, we thought it would be fun to test our readers knowledge of the contract form.
Take part in our interactive quiz and find out how strong your contract knowledge really is.
FIDIC 2017 - 15 Top Tips For Successful Construction Projects
The FIDIC 2017 red, yellow and silver forms of contract were introduced seven years ago. Similar to previous new editions, they have taken time to gain traction within the industry. However, they are becoming more widely used. We anticipate that within the next few years, they will have become the “go to” forms of contract, gradually replacing the old editions in many regions internationally.
Before you start a project under FIDIC 2017, you might want to arm yourself with some practical knowledge. In this guide, we provide an introduction to the current FIDIC contracts. Read on, to discover our 15 FIDIC 2017 tips to help you with your contract administration and management.
The 2017 editions of FIDIC have 71% more pages and 64% more words than the previous editions. That’s a lot of changes to get your head around!
Obviously then, the new contracts are more complicated. Good contract administration demands that users become familiar with the extra content.
FIDIC realised that project participants were not following what was essentially advice in 1999, so the 2017 editions contain more procedures. Many of the new procedures include new obligations for the parties and the engineer.
Use the form below to access our top 15 FIDIC 2017 tips for ensuring project success with the FIDIC 2017 contracts...
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