New FIDIC Second Editions: revamped claims and dispute resolution provisions

The much awaited Second Editions of the FIDIC Yellow, Red and Silver Books were unveiled yesterday at the FIDIC Users’ Conference in London. The new versions contain extensive amendments and are an attempt to modernise the FIDIC form 18 years after the First Editions were released in 1999. For an overview of the main areas of change please see our in depth CMS Guide to the FIDIC 2017 Suite here.

The Second Editions contain heavily revised claims and dispute resolution provisions, including an increased number of deeming provisions and time-bar clauses. These changes will be of central importance to those engaged in international construction projects. In this Law-Now we take a detailed look at these new provisions.

Philosophy

The new provisions show a much greater emphasis on procedure with a view to having disputes arising during the course of a project resolved or determined promptly and not left to fester until after the end of the Project. The achieve this, various time-limits and deeming provisions have been put in place to ensure that disputes are progressed without delay.

The new process

The old Clause 20 has now been separated into two clauses. The new Clause 20 deals with the notification of claims and their determination by the Engineer (or the Employer’s Representative under the Silver Book). Clause 21 deals with subsequent Dispute Avoidance and Adjudication Board (the “DAAB”, the new name for the old Dispute Adjudication Board) and arbitration proceedings. Overall, the process envisaged is as follows:

• Both the Employer and Contractor must notify Claims for additional payment or extensions of time to the Engineer (or, under the Silver Book, to the other Party, as there is no Engineer) as soon as practicable and no later than 28 days after the claiming Party becomes aware, or should have become aware, of the event or circumstance giving rise to the Claim (the “trigger date”). A failure to notify within this period renders the Claim liable to be barred and the receiving party discharged from any liability.
• If the Engineer (or the receiving Party under the Silver Book) believes that such a Claim has been notified late and is barred, it must serve a notice to this effect within 14 days of receiving the Notice of Claim. In the absence of such a notice, the Notice of Claim is deemed to be valid.
• A fully detailed Claim is then required within 84 days (or longer if agreed) of the trigger date. The fully detailed Claim should contain, in summary:
  • a detailed description of the event or circumstance giving rise to the Claim
  • a statement of the contractual and/or other legal basis of the Claim
  • all contemporaneous records (which is a term now defined within clause 20) on which the claiming Party relies
  • detailed supporting particulars of the amount/EOT claimed
• Failure to provide the statement of the contractual and/or other legal basis of the Claim within the 84 day time period, renders the Claim liable to barred and the receiving Party discharged from liability.
• If the Engineer (or Employer’s Representative under the Silver Book) believes that the statement of the contractual and/or other legal basis of the Claim has not been given in time, he or she must serve a notice to this effect within 14 days of the expiry of the 84-day period. In the absence of such a notice, the Notice of Claim is deemed to be valid.
• Both the claiming Party and the receiving Party are given the ability to dispute any barring notice issued by the Engineer or the absence of those notices as the case may be (and similarly in relation to barring notices issued by the receiving Party or the Employer’s Representative under the Silver Book). The Engineer/Employer’s Representative must then include a review as to whether the Claim is barred in his determination of the Claim. The Engineer/Employer’s Representative’s review in this regard is not limited to matters of timing but may also consider whether a late submission is justified on broader grounds such as the absence of prejudice and prior knowledge of the Claim by the receiving Party.
• Once the fully detailed Claim has been submitted, the Engineer/Employer’s Representative then has a period of 42 days to consult with both Parties and to encourage discussion in an endeavour to reach agreement.
• If no agreement is reached, the Engineer/Employer’s Representative then has a further period of 42 days to make a fair determination of the Claim and notify the same to the Parties. If no determination is made at the end of this period, the Engineer/Employer’s Representative is deemed to have rejected the Claim.
• The Parties then have a period of 28 days to issue a Notice of Dissatisfaction in respect of the Engineer/Employer’s Representative’s determination. If no such notice is given by either Party, the Engineer/Employer’s Representative’s determination becomes final and binding on the Parties.
• If a Notice of Dissatisfaction is issued, the Claim must be referred to the DAAB within 42 days otherwise the Notice lapses and the Engineer/Employer’s Representative’s determination becomes final and binding.
• As is the case under the First Editions, the DAAB is then to give its decision within 84 days of the reference.
• If a party wishes to challenge a DAAB decision through arbitration proceedings, a further Notice of Dissatisfaction must be issued within 28 days of the DAAB decision, failing which the decision becomes final and binding on the Parties.
• After that further Notice of Dissatisfaction, the Parties are to attempt to settle the Claim amicably, but if no agreement can be reached within 28 days, arbitration proceedings may be commenced. There is no contractual time limit specified for the commencement of such proceedings (although the applicable law will usually impose a limitation period).
• Specific provision is made for Claims involving events or circumstances which have a continuing effect. The fully detailed Claim required within 84 days of the trigger date is to be considered as interim and further fully detailed Claims are required at monthly intervals thereafter until a final fully detailed Claim can be submitted. The Engineer/Employer’s Representative’s role is then triggered at two points. After the first interim fully detailed Claim, he or she is to proceed to seek agreement and/or determine the legal basis of the Claim. After the final fully detailed Claim, he or she is to proceed to seek agreement and/or determine the balance of the Claim.
• A simplified procedure applies to Claims other than for additional payment or an extension of time. Such claims must be notified as soon as practicable after the claiming Party becomes aware that the Claim is disputed or is deemed to have been disputed. The Engineer/Employer’s Representative must then seek to agree and/or determine the Claim and the procedure is as set out above. Late notification of such claims would not appear to affect the claiming Party’s entitlement.
• All Notices must now state on their face that they are a “Notice”.

Potential for delay and fragmentation

The evident intention of the new Claims process is to ensure that claims are progressed contemporaneously. Tallying up the various time periods gives a maximum period of 266 days (claims of continuing effect aside) from an event or circumstance giving rise to a Claim before that Claim must be referred to the DAAB if not yet resolved (i.e. 28 days for the Notice of Claim, 84 days for the fully detailed Claim, 84 days for the Engineer’s determination, 28 days for the fFirst Notice of Dissatisfaction, 42 days to refer the dispute to the DAAB). Despite this detailed procedure, there would still appear to be a route by which a claiming Party might seek to postpone the determination of a Claim by the Engineer/Employer’s Representative and the DAAB.

A claiming Party must submit its statement of the contractual and/or other legal basis of the Claim within 84 days, otherwise the Claim is liable to become barred. It need not submit the remainder of the requirements of its fully detailed Claim within this period, however.

It is unclear whether this result was intended by the drafters of the Second Editions, or is simply a hangover from adopting some of the drafting from the First Edition of the Gold Book. However, as it stands, the drafting could lead to gamesmanship. For instance, it is conceivable that a claiming Party could submit its statement of the contractual and/or other legal basis of the Claim within the 84 day period to avoid the time-bar, but defer the submission of its fully detailed Claim (including all contemporary records on which the claiming Party relies as well as a detailed quantum submission) until a later date. As the Engineer/Employer’s Representative’s obligation to seek to agree and/or determine the Claim only arises upon receipt of the fully detailed Claim (i.e. one that satisfies all four requirements), the procedure could effectively stall at that point. A claiming Party might also include the statement of the contractual and/or other legal basis of the Claim earlier within the Notice of Claim. In an extension of time case, for example, satisfying this requirement could simply mean including a reference to Clause 8.5 (the extension of time provision in the Second Editions).

Another means by which Parties may seek to delay the submission of a fully detailed Claim and postpone the strict time periods which follow thereafter is by utilising the provisions for Claims of continuing effect. The new provisions do not spell out when events or circumstances are to be considered as having a continuing effect. A broad interpretation might suggest that all but the most straight-forward extension of time and prolongation claims have a continuing effect in that the delays in question will continue to impact on the Works and the costs incurred by the Parties up until completion.

One consequence of the use of the Claims of continuing effect procedure is that the Engineer/Employer’s Representative’s role is triggered at two separate points. Unless agreement is reached, such Claims will therefore be the subject to two decisions from the Engineer/Employer’s Representative, one with regard to the contractual and/or other legal basis of the Claim and another with regard to the remainder of the Claim. Each of these decisions is subject to the Notice of Dissatisfaction procedure and the 42 day limitation period for DAAB proceedings. Regular use of the Claims of continuing effect procedure is likely therefore to result in the fragmentation of DAAB proceedings with an additional time and cost burden for the parties.

New DAAB and Arbitration provisions

Aside from the new 42 day period within which DAAB proceedings are to be commenced after the first Notice of Dissatisfaction, a number of other changes have been made to the DAAB and Arbitration provisions (now contained within a separate Clause 21):

• A standing DAAB is now to apply in all three of the contracts. Previously a standing DAAB was only stipulated in the Red Book, with ad-hoc DAABs provided in the Yellow and Silver Books.
• The DAAB has been given a new dispute avoidance role (hence the change in name) whereby it can provide “informal assistance” to the parties. The Parties must both agree before the DAAB provides such assistance and any views or advice given by the DAAB is said not to bind it in formal DAAB proceedings arising subsequently. Natural justice issues may however arise in certain circumstances if a DAAB is seen to unquestionably adopt previous informal advice when deciding subsequent DAAB proceedings.
• The DAAB Procedural Rules have been significantly expanded increasing from 2 to 7 pages in length. They also now contain a requirement for the DAAB to regularly meet with the Parties and/or visit the Site outside the context of any formal proceedings. Ordinarily, such meetings or Site visits are to be held at intervals of between 70 and 140 days. Critics will argue that this simply adds unnecessary further costs to the process.
• Where a DAAB decision requires the payment of an amount by one Party to another, the DAAB is now empowered to require that the receiving party provide appropriate security for repayment of that amount in the event that the DAAB decision is reversed in arbitration proceedings.
• The reference of a Dispute to the DAAB is now said to “interrupt the running of any applicable statute of limitation or prescription period”. It is unclear when, if at all, the running of such a period would recommence, given that a party is not permitted to commence arbitration immediately after a DAAB decision (i.e. it must first await the outcome of the 28 day Amicable Settlement period).
• The equivalent of the old Clause 20.7 has been amended to make clear that DAAB decisions which have not become final and binding may nonetheless be enforced by separate arbitration proceedings. The amendments broadly follow the drafting proposed in a FIDIC Guidance Memorandum for users of the 1999 Red Book issued on 1 April 2013 noting that a substantial number of arbitral tribunals had found the position under the First Edition contracts to be unclear in this regard. A well known example of the effect of this uncertainty is the Persero litigation in Singapore (click here for our Law-Now on the final Court of Appeal decision in that litigation).
• The arbitration clause has been amended to provide for “one or three arbitrators” appointed in accordance with the ICC Rules, whereas previously three arbitrators had been stipulated. There is no corresponding entry in the Contract Data for the Parties to identify whether one or three arbitrators are required. The intention appears to be that the ICC Court will decide the number of arbitrators. This may have been thought necessary to avoid jurisdictional issues which can arise where the ICC Expedited Procedure applies, which requires the appointment of a sole arbitrator even where an arbitration clause stipulates three arbitrators. The Expedited Procedure is relatively new (having only been applicable from March this year), but challenges to similar procedures under other rules have led to inconsistent results, with at least one being upheld in China and one being rejected in Singapore (click here to read a more detailed article CMS has prepared on the impact of the ICC Expedited Procedure on international construction disputes generally).

Conclusion and implications

The new Second Editions contain a full scale revision of the claims and dispute resolution procedure for three of the most commonly used FIDIC Contracts. The increased emphasis on time-bars and deeming provisions to control the claims procedure is likely to give rise to “satellite disputes” over whether particular claims are barred or whether an Engineer, Employer’s Representative or DAAB decision is final and binding.

If the new provisions succeed in ensuring that claims are progressed quickly, a greater number of DAAB proceedings appears to be inevitable, given the strict 42 day limitation period which now applies to the commencement of such proceedings after an Engineer/Employer’s Representative’s decision is disputed. Overall, parties who adopt the Second Edition will need to be well prepared and adequately resourced to manage the new provisions. Those who are not may find that entitlements have been unwittingly lost.