Understanding FIDIC Contracts and its Application in UAE

Introduction

Generally speaking, a contract between two parties is drafted based on either the specific agreement and obligations of each party or by adopting a model form of contract which governs the relationship between the two parties. A model form of contract is one that is designed by industry specialists that have knowledge and experience in that particular sector. The Federation Internationale des Ingenieurs- Conseils (FIDIC) or the International Federation of Consulting Engineers is an organization that has been founded by 3 countries namely France, Germany and Switzerland which establishes the international standard for the construction sector. Take an insight through this article by the well-known lawyers in UAE

The organization has gained widespread recognition due to the suite of contracts released in the form of books which are popularly known by the colour of their covers; the predominant ones being:

Given the legal complexities, long time periods and high costs associated with construction work, model forms of contracts issued by FIDIC and ENAA are widely used. The FIDIC contract terms are widely adopted by parties undertaking construction projects as most contractors are willing to accept its terms and the apportionment of risk is equally distributed among all parties in the construction contract. FIDIC Contracts are generally divided into two parts: Part One consists of general terms(rights and obligations of parties, payment conditions, variation, dispute resolution) and Part Two consists of conditions concerning the particular application (i.e. guidelines on drafting Part II clauses, project-specific clauses such as language, choice of law, etc)  There is a default hierarchy in the documents forming the FIDIC contract and in case of discrepancy, the preceding documents take priority over their succeeding ones:

  1. The Contract Agreement
  2. The Letter of Acceptance (this is the formal acceptance of the contractor’s tender and marks the formation of the contract)
  3. The Letter of Tender
  4. Part II – the conditions of particular application
  5. Part I – general conditions of contract
  6. The Specification and Drawings (Red Book), The Employer’s Requirements (Yellow Book), the Schedules (Red and Yellow Books)
  7. Further documents (if any), listed in the Contract Agreement or in the Letter of Acceptance.

The parties can choose to contract out of this provision or may reshuffle the order of priority according to their liking and as prescribed under Part II (Particular Conditions).

In the Middle East, FIDIC contracts have been in common usage since the 1970’s. Countries like Saudi Arabia, UAE, Kuwait and Oman which derive their laws from a combination of civil law and sharia law jurisdictions have increasingly adopted the FIDIC standard form of contract, which is based on English common law principles. In fact, Abu Dhabi has recognized and officially accepted the FIDIC form for construction contracts entered into with governmental entities. When using FIDIC contracts in the United Arab Emirates, contracting parties should be aware of local limitations that will curtail their applicability and supersede FIDIC conditions. Construction Contracts are governed by provisions in the UAE Civil Code (Muqawala i.e contract to make a thing or perform a task). In UAE, the common practice is for parties to draft a bespoke construction agreement, which adopts FIDIC conditions and is compliant with local UAE law.

 

Process of selecting a FIDIC contract as per the requirement of parties:

 

Conditions of Contract for Construction for Building and Engineering works designed by the Employer (the Red book):

Perhaps the most commonly used in practice, the Red Book is applicable on construction works when the design is carried out by the Employer. It makes provisions for some elements of the construction to be designed by the Contractor- however, in cases where the Contractor undertakes the design it is more fitting to use the yellow or silver book. Administration of the project and supervision of the works is carried out by an Engineer, who is an independent party but generally acts on behalf of the Employer. Payment is made by measuring the actual quantity of work performed by the Contractor. Parties can opt for payment to be made on a lump sum basis.

 

Conditions of Contract for Plant and Design-Build (the Yellow book):

The Yellow book is ideal for construction contracts where the design work is undertaken by the Contractor. The Yellow Book is ideal for the construction of electrical and/or mechanical plant, and for the design and execution of building or engineering works.

 

Short Form of Contract (the Green book):

The Green Book is often recommended for building and engineering works that are uncomplicated and are of a relatively lower value. As per the guidance notes, it is recommended to use the green book for projects that are valued at USD 500,000 or lower. However, based on the circumstances and the specific project, it is still advisable to use the Green Book for simple/ repetitive work or work of short duration without the need for specialist sub-contracts. There is no provision for the appointment of an independent Engineer in this form of contract and instead, one of the Employer’s staff is appointed to carry out the duties generally imposed on the Engineer.

 

Conditions of Contract for Design-build and turnkey (the Orange book):

The Orange Book is ideal for use in turnkey projects, where the Contractor carries total liability for design. Although this is advantageous to the Employer, it has less control over the design process and there is limited scope for variation.

 

Conditions of Contract for EPC/Turnkey Projects (the Silver book):

Contractor is responsible for design and execution and assumes liability for risk associated with completion to time, cost and quality of works. Provides greater cost certainty to contractors and payment is given on lump sum basis.

 

Conditions of Contract for Design Build and Operate Projects (the Gold book):

The Gold Book has conditions which are similar to the Silver book, combining the obligations of designing and building with a long-term operation commitment of minimum 20 years. This will be drafted as a single contract and given to a single entity, possibly construed as a joint venture agreement.

Language– As per UAE law, construction contracts should be drafted in Arabic.[1] However in practice, most contracts are drafted in English. If drafted in both English and Arabic, and in case of any dispute related to interpretation, the Arabic version will prevail over the English version.

Governing Law- The FIDIC form allows parties to opt for a foreign jurisdiction to govern their contract, even when the contracts are concluded or performed in the UAE. As per the UAE civil code, parties may opt for foreign law to govern their contract provided i) such laws do not conflict with Islamic sharia law or with the UAE public policy and morals and ii) they are able to prove the existence of an applicable law or to determine its effect.

However, UAE law will apply to contracts with governmental or quasi- governmental bodies and parties will not be able to contract out of these provisions. Moreover, there are standard procurement forms which the parties are obligated to use eg. Dubai Procurement Law does not recognize FIDIC contracts and uses its own laws and regulations.

Risk Allocation- Generally under FIDIC contracts, risk allocation provisions are stipulated under Part II- Specific Conditions, where more risk is allocated to the Contractor and liabilities of Employer and Engineer are significantly reduced. This results in the creation of a new contract altogether; the changes to risk allocation are drastic and vary significantly to the standard FIDIC form.  

Disputes- FIDIC contracts adopt a multi- layer dispute resolution process. Parties will first attempt to resolve their dispute before the appointed Engineer or a Dispute Board. If any of the parties are dissatisfied with the outcome, they can attempt to resolve their dispute amicably within a given time period. If an amicable settlement is not reached, parties will then proceed to the ultimate stage of dispute resolution by invoking arbitration or court proceedings, as agreed in the Part II Particular conditions. Contracting parties can choose to resolve disputes in UAE Courts, foreign courts or through arbitration (foreign or local). The UAE courts (which includes both the local courts and DIFC courts) will accept the jurisdiction to hear a dispute if i) it falls within the UAE Courts jurisdiction and ii) there is a legal nexus with UAE, even if there is an existing express agreement between the parties to opt for foreign court jurisdiction or foreign arbitration. Parties must be especially careful when drafting the dispute resolution clause and should not mistakenly believe they have agreed to arbitration by simply making a reference to applying general conditions of a FIDIC contract (which includes arbitration clause.[2])

Payment- Generally under FIDIC contracts, final price of the contract is calculated based on actual construction works that have been carried out. When contracting with governmental entities, lump sum fixed price contracts are commonly used. Contractors must note that when contracting with Dubai government entities, the stated quantities in the contract can be increased or decreased at the same contract rate and up to 30% of the total contract price, with no change in contract price.[3]  

Good Faith- As per Article 246 of the UAE Civil Code, the parties must execute their contractual obligations in good faith.

Termination of Contract- Parties contracting under FIDIC Conditions recognize the Employer’s right to terminate the Contract without consequence, by providing a termination letter to the Contractor. In such situations, parties should be aware of their right to bring claims against the Employer under Article 879 of the UAE Civil Code.

[1] Article 4 of the UAE Ministerial Decision No. 255 of 2010

[2] https://www.lexology.com/library/detail.aspx?g=bc7969a5-ff21-41b5-8292-d302671dfdef

[3] Article 48 of Law no.(6) of 1997 Concerning Contracts of Government Departments in the Emirate of Dubai