FIDIC 1999 (Red Book): A Review of Key Contractual Issues

Author: N.M.Raj

1. FIDIC 1999 Edition – Sub-Clause 8.3 Programme

“But, I didn’t ask for your approval Mr. Engineer…”

It still surprises me to discover that many FIDIC 1999 (Red Book) Engineers and their representatives are blissfully unaware of the fact that they are not required (or empowered) to “approve” the Contractor’s Sub-Clause 8.3 Programme.

Whenever an Engineer’s representative attempts to triumphantly dismiss my Client’s (Contractor) Sub-Clause 8.3 Baseline Programme by stating that it cannot be used as a basis for an EOT claim (because it was not approved by the Engineer), I usually respond as detailed in the title.

So, all you professionals working for Contractors, do bear in mind that the Sub-Clause 8.3 Programme is the Contractor’s As-Planned or Baseline Programme and as long as it complies with the requirements of the Contract, it may be used as a basis for EOT and/or other claims – you don’t have to worry about the Engineer’s approval or lack thereof.

For FIDIC Engineers and their colleagues, please note that removing the power/obligation to approve a Contractor’s Programme is actually a blessing in disguise. This is because the Contractor can no longer use the Engineer’s approval of an over-optimistic programme as a line of argument for validating their claims.

2. Are Hedging Losses Incurred By A Contractor Recoverable?

Currency hedging is the act of entering into a financial contract in order to protect against unexpected, expected or anticipated changes in currency exchange rates.

In the construction industry, currency hedging is used by a contractor to eliminate risks associated with project payments in different currencies. Hedging is similar to an insurance policy that limits the impact of foreign exchange risk.

However, a lot of Employers amend the standard forms of Contract to transfer the risk associated with currency exchange to the Contractor.

So, the question arises whether a contractor can recover costs associated with his hedging arrangements in case of a breach of contract by the Employer.

I deal with claims related to “hedging losses” more often than I would like, it’s a difficult claim but I usually get a recovery for it. The rationale I generally use follows this pattern:

(1) Is the Contractor deemed to have included for risks associated with currency fluctuation? The answer is usually “Yes”; in this scenario, it is reasonable to assume that a competent or experienced contractor would hedge said risks if he is required to hire/buy material/resources using multiple currencies (if the associated sums are considerably large). Therefore, it is also reasonable to state that the cost of this “hedging” is what I, as a Contractor, is deemed to have “allowed for” within my Contract Sum.

(2) As far as pricing risk is concerned, a line is drawn in the sand after the Base Date (FIDIC – 28 days prior to latest submission of Tender) or other relevant contractual date.

(3) If your Employer states that Currency fluctuations are expected and you are deemed to have priced for it, your response should be “Currency fluctuations are to be expected and they are foreseeable. However, the extent of fluctuation is not foreseeable. Additionally, I’m only contractually obliged to price for risks associated with said fluctuations for the duration of the original Contract. If there is an Employer delay event which causes me to incur a loss i.e. to my currency risk insurance (Hedging), that should be recoverable because I’m not contractually obliged to price for risks associated with Employer delay events, pertinent contractual provisions are available to cover these risks.”

(4) In Choil Trading SA v Sahara Energy Resource SA, Choil (supplier) incurred a loss under its *hedging arrangement* due to breach of Contract by Sahara. Choil submitted a claim to recover said loss; Sahara rejected the claim and, as justification, referred to this extract from the Contract _“Neither party shall be liable for any consequential, indirect or special losses or special damages of any kind arising out of or in any way connected with the performance of or failure to perform the agreement”_

However, the Hon. Mr. Justice Christopher Clarke disagreed and stated “I do not regard the damages so far discussed as consequential, indirect or special….It did not require any special knowledge to realise that hedging was what Choil was likely to do. It was regarded as a normal and necessary part of the trade.”

(5) To conclude, as a contractor, you should not back down – win the claim.

3. FIDIC 1999 – Sub-Clause 2.5 (Employer’s Claims) – Can The Employer’s Claim Be Time-Barred?

For Employer’s claims that require a contractual notification, Sub-Clause 2.5 does not specify a clear timeframe by when the Employer should submit a notification of claim to the Contractor. The only obligation is to submit the notification “as soon as practicable after the Employer became aware of the event”.

This has resulted in quite a few Employers (and FIDIC Engineers) taking the position that there is no specified time limit i.e. the notice could be submitted at any point within the Time for Completion.

However, this assertion is incorrect; in NH International (Caribbean) v National Insurance Property Development Company [2015], it was held that the Employer should issue a notification promptly and in a particularised form. If this obligation was not fulfilled, the Employer could not set-off sums and “the back door of set-off or cross-claims is as firmly shut to it as the front door of an originating claim”.

Lord Neuberger of the Privy Council said this of sub-clause 2.5:

“Its purpose is to ensure that claims which an employer wishes to raise, whether or not they are intended to be relied on as set-offs or cross-claims, should not be allowed unless they have been subject of a notice, which must have been given ‘as soon as practicable.”

“…the natural effect of the closing part of clause 2.5 is that in order to be valid, any claim by an employer must comply with the first two parts of the clause, and that this extends to, but, in the light of the word ‘otherwise’ is not limited to, set-offs and cross claims.”

4. FIDIC 1999 – Sub-Clause 4.12 (Unforeseeable Physical Conditions) – Carte Blanche Reduction Of The Contractor’s Entitlements Is Not Allowed

Sub-Clause 4.12 empowers the Engineer to reduce the Contractor’s claim for additional costs under this Sub-Clause if physical conditions in similar parts of the Works (if any) were more favourable than could reasonably have been foreseen when the Contractor submitted the Tender.

Case Study: Bearing in mind the above, is it contractually tenable for the Engineer state that the Contractor’s claims for additional costs related to unforeseeable physical conditions for earthwork operations (for a bridge on Site) shall be reduced to account for physical conditions for a building (at another location on Site) which were more favourable than foreseen at tender stage?

The answer is “No”; Sub-Clause 4.12 includes:

“…the Engineer may also review whether other physical conditions in similar parts of the Works (if any)…” [Emphasis Added].

In other words, reductions are only applicable if the physical conditions were more favourable in another similar section of the work i.e. another bridge location, not a building.