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Legal Advice on FIDIC Conditions of Contract for Design, Build and Operate Projects

Introduction 

The FIDIC Gold Book, officially titled “Design, Build and Operate Projects,” is tailored for projects where the contractor designs, builds, and operates the facility for a specified period. It is commonly used for public-private partnership (PPP) projects and concessions.

When addressing the FIDIC Conditions of Contract for Design, Build and Operate Projects, it is important to understand the comprehensive structure provided to facilitate effective project execution. The FIDIC drafting task group has integrated conditions of a general nature, likely to apply to most DBO contracts, into the General Conditions. These serve as a foundational framework for contract consistency and enforceability across varied projects.

Notably, each project carries unique requirements and specifics. Therefore, essential provisions tailored to each project are included in Particular Conditions Part A – Contract Data. This segment ensures that the contract adapts to the specific needs and characteristics of the project.

Furthermore, recognizing the diversity in employer needs, government regulations, and jurisdictional nuances, the document accommodates modifications through Particular Conditions Part B – Special Provisions. This allows for the addition of special conditions or procedures that diverge from those stipulated in the General Conditions, ensuring compliance and relevance to local or specific contractual environments.

The document also anticipates scenarios where the standard 20-year operation period may not align with project requirements. In such cases, reference to the forthcoming FIDIC DBO Contract Guide is advised. This guide will highlight necessary amendments and offer detailed guidelines on addressing them. However, for comprehensive and specialized adjustments, consulting with FIDIC experts is recommended before implementing significant changes through Special Provisions.

Drafters are reminded of the copyright and trademark protections on the General Conditions. Any amendments here require explicit written consent from FIDIC, typically through a licensing agreement, and should ideally be confined to Particular Conditions Part B.

In support of the long-term success of DBO contracts, FIDIC emphasizes the importance of mutual understanding and commitment between the Employer and the Contractor regarding the contract’s time framework.

Included in the standard FIDIC document are various sample forms and comprehensive flow charts. These tools are designed to aid both parties in understanding the critical sequences of activities specific to the DBO contract structure. While these tools are provided for user completion and reference, any significant alterations might compromise the contract’s balance and clause integrity.

Drafting the Particular Conditions 

The FIDIC Conditions of Contract for Design, Build, and Operate Projects, first edition 2008, crafted by the Fédération Internationale des Ingénieurs-Conseils (FIDIC), is the definitive framework for managing complex engineering projects where one entity is responsible for both the construction and long-term operation of a facility. This contract format is particularly suited to international tenders, requiring a comprehensive understanding of both legal and operational nuances.

Understanding the Contract Structure The contract structure comprises three main components:

  1. General Conditions: These provide the standard contract terms applicable universally across similar projects.
  2. Particular Conditions Part A – Contract Data: This section contains project-specific details and requirements.
  3. Particular Conditions Part B – Special Provisions: Where necessary, this part includes amendments or additions to the General Conditions to cater to specific legal, technical, or geographic requirements.

It’s essential for the tender documents to explicitly include these sections and state that the Special Provisions (Part B) and the Contract Data (Part A) override the General Conditions when discrepancies arise. This ensures clarity and avoids contractual disputes related to interpretative differences.

Drafting and Amending Contract Provisions The drafting of these contractual provisions must be handled with precision. Changes to the General Conditions require careful consideration to ensure they do not inadvertently shift the contractual balance of obligations or risks. It is critical that any amendments made in the Special Provisions are clearly marked, using the same clause numbers and titles as those in the General Conditions for ease of reference.

Preparation of Tender Documents When preparing the tender documents, it is recommended that employers engage with the FIDIC Procurement Procedures guide. This resource offers valuable insights into the contents and formatting of tender documents and the procedures for receiving and evaluating bids. The tender documents should typically include:

  • Invitation to tender
  • Instructions for tenderers
  • Tender form and appendices
  • Employer’s Requirements
  • Conditions of Contract (General and Particular)
  • Necessary technical and general information
  • Required forms of securities and guarantees

Advice for Employers and Contractors Employers should ensure that the Employer’s Requirements clearly define the operational and functional needs of the project, including quality standards and scope. Similarly, contractors need to be aware that any omission in the Employer’s Requirements might relieve them of certain responsibilities.

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For projects that deviate from the typical 20-year operational framework or involve refurbishment of existing facilities (“brown field” scenarios), specific guidance will be provided in the upcoming FIDIC DBO Contract Guide. This guide will assist in identifying which clauses and procedures may require modifications to suit the unique aspects of such projects.

Expert Legal Consultation Navigating the complexities of FIDIC contracts, particularly for DBO projects, requires specialized legal expertise. At Josh and Mak International, our team is equipped to provide comprehensive legal support and advice tailored to your specific project needs. For more information and personalized assistance, feel free to contact us at aemen@joshandmak.com. We are here to ensure that your contractual engagements are robust, clear, and effectively managed.

The FIDIC Conditions of Contract for Design, Build, and Operate Projects offer a structured legal framework designed to facilitate the comprehensive management of engineering projects. These projects often require integration of design, construction, and long-term operational management by a single entity. Understanding the nuances of the contract’s sub-clauses and their implications is crucial for both employers and contractors.

Key Sub-Clauses in Employer’s Requirements

Employers must provide detailed specifications in the Employer’s Requirements, which are referenced in various sub-clauses such as:

  • 1.9 Publications to be kept on Site
  • 1.12 Intellectual property rights retained by the Employer
  • 1.14 Permissions being obtained by the Employer
  • 4.1 Intended purposes for which the Works are required
  • 4.5, 4.6, 4.18, 4.19, 4.20 Various operational, environmental, and service-related specifications

These sub-clauses necessitate explicit instructions and details from the employer to ensure clarity and compliance throughout the project’s lifecycle.

Preparation and Submission of Tender Documents

When preparing tender documents, it is imperative to clearly specify which documents and information tenderers are expected to provide. This may include:

  • Details of nominated subcontractors
  • Information about other contractors on site
  • Required environmental constraints
  • Available services such as electricity, water, gas
  • Specifications of Employer’s Equipment and materials provided

It is advisable to include a questionnaire with the tender documents to facilitate the collection of necessary data from the tenderers. Moreover, if preliminary designs or studies are required from the tenderers before awarding the contract, they should be fairly compensated for their efforts.

Contract Formation and Tender Evaluation

It’s essential for parties to recognize which documents will form part of the contract. Instruction to tenderers, for instance, should not be binding but merely provide guidance on how to prepare and submit proposals. Employers need to allot a realistic timeframe for the preparation and submission of tenders, allowing enough time for thorough preparation by experienced contractors without unnecessarily prolonging the tender period.

Drafting Special Provisions

Special provisions may need to be drafted to address project-specific requirements not covered by the General Conditions. This could involve amending existing sub-clauses or introducing new ones to ensure the contractual terms align with the specific needs of the project and the obligations of the parties involved. Care must be taken not to disrupt the balance of obligations and rights between the parties when making such amendments.

The FIDIC Conditions of Contract for Design, Build, and Operate Projects provide a comprehensive legal framework tailored to complex projects where one entity is responsible for the design, construction, and ongoing operations. Understanding the nuances of specific clauses within these conditions is crucial for ensuring compliance and optimizing project outcomes.

General Provisions and Key Sub-Clauses

Clause 1: General Provisions

Sub-Clause 1.1 Definitions: Modifications to the definitions section should be approached with caution due to the potential impact on the interpretation of the contract. In cases where the project spans multiple countries, for instance, definitions such as “Country” and “Local Currency” may need adjustments to reflect the geographic specifics accurately.

Sub-Clause 1.5 Priority of Documents: It’s important to establish a clear order of precedence among contract documents to address any conflicts or discrepancies. This clause can be adapted to ensure that ambiguities are resolved in a manner consistent with the governing law, often deferring to the authority of the Employer’s Representative.

Sub-Clause 1.7 Operating Licence: Specific details regarding the form and nature of the required authorizations, such as operating licenses, should be tailored to comply with applicable laws and the project’s specific requirements.

Clause 2: The Employer

Sub-Clause 2.1 Right of Access to the Site: Details regarding access to the site, especially when such access is restricted or unusual, should be clearly stated in the Employer’s Requirements to avoid operational delays.

Sub-Clause 2.3 Employer’s Personnel: This provision should reflect the need for cooperation between the contractors and the Employer’s other contractors present on the site.

Clause 3: The Employer’s Representative

Sub-Clause 3.1 Employer’s Representative’s Duties and Authority: Any special approvals required by the Employer’s Representative should be explicitly detailed in the Special Conditions to avoid overreach or misunderstandings.

Clause 4: The Contractor

Sub-Clause 4.1 Contractor’s General Obligations: The Employer’s Requirements must clearly define the intended purpose of the facility to ensure that the construction is fit for the intended use.

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Sub-Clause 4.2 Performance Security: The acceptable forms of Performance Security, such as bank guarantees, should be specified, including details on how these securities can be managed or reduced over time.

Sub-Clause 4.12 Unforeseeable Physical Conditions: Consideration should be given to the allocation of risks for sub-surface conditions, potentially amending the standard provisions to balance the risks between the Parties appropriately.

Clause 5: Design

Sub-Clause 5.1 Outline Design The Employer’s Requirements might include an outline design, which should clearly indicate the extent to which it is a suggestion versus a requirement. This clarity helps tenderers understand which aspects of the design are fixed and which may be subject to adjustments based on their proposals.

Sub-Clause 5.2 Contractor’s Documents It is crucial that the Employer’s Requirements specify which Contractor’s Documents are necessary for approval rather than just for review. The submission procedures and review periods should be defined clearly to avoid any misunderstandings and ensure timely progress within the design-build process.

Clause 6: Staff and Labour

Sub-Clause 6.6 Facilities for Staff and Labour Details regarding the provision of office accommodation or other facilities for the Contractor during the Operation Service Period should be explicitly stated in the Employer’s Requirements. This ensures all logistical needs are planned and agreed upon in advance.

Sub-Clause 6.8 Contractor’s Superintendence To avoid language barriers on site, it may be necessary to specify that a reasonable proportion of the Contractor’s supervising staff must have a working knowledge of the project’s primary language or that competent interpreters are available during working hours.

Clause 7: Plant, Materials, and Workmanship

Additional Sub-Clause For projects financed by international institutions, restrictions on the origin of goods and services may apply. A sub-clause should be added to specify that all goods, transport, surety, insurance, and banking services comply with the eligibility criteria from the financing institution.

Clause 8: Commencement, Delays, and Suspension

Sub-Clause 8.2 Time for Completion If the project involves phased commissioning, these stages should be defined clearly in the Contract Data to coordinate the scheduling and management of each phase effectively.

Sub-Clause 8.5 Delay Damages The contractual provisions should reflect that delay damages are a reasonable pre-estimate of the loss likely to be suffered in the event of delay. This is particularly relevant in jurisdictions where punitive damages are not enforceable.

Clause 10: Operation Service

Sub-Clause 10.2 Commencement of Operation Service There may be scenarios where the Operation Service Period cannot commence immediately after issuing the Commissioning Certificate. In such cases, a provision should be included to allow the Operation Service to commence only upon receiving a written instruction from the Employer’s Representative, thus providing flexibility in the project timeline.

Clause 11: Testing

Sub-Clause 11.4 Failure to Pass Tests on Completion of Design-Build If the facility fails to meet the performance criteria at completion but can still be operated, the Employer may opt to accept this non-compliance against a reduction in cost or impose non-performance damages. These damages should be clearly defined in the Contract Data to ensure transparency and enforceability.

Variations and Adjustments

Provisional Sums Provisional Sums accommodate uncertainties or specific selections by the Employer, such as choosing particular goods or covering unknown sub-surface conditions. It is crucial to define the scope of these sums accurately within the contract to ensure that these costs are managed separately from the fixed contract price.

Clause 14: Contract Price and Payment

Payment terms and conditions should be scrutinized to ensure they align with both the Employer’s financial procedures and the requirements of any financing institutions involved. Modifications to the standard payment terms may be necessary to accommodate real-world delays or procedural inefficiencies.

Additional Sub-Clause for Expatriate Staff Considerations for expatriate staff, such as exemptions from local income tax, must be clearly defined within the contract. If exemptions are not granted, provisions for the reimbursement of such taxes by the Employer should be stipulated. Legal advice from tax experts is recommended when drafting these provisions to comply with local tax laws.

Clause 15: Termination by Employer

Sub-Clause 15.2 Termination by Employer Before the tender process, it is vital to ensure that the grounds for termination outlined in the contract are consistent with the applicable law. This alignment prevents legal disputes and clarifies the conditions under which either party can terminate the contract.

Clause 16: Suspension and Termination by Contractor

Sub-Clause 16.2 Termination by Contractor It’s essential for the Employer to ensure that the grounds for termination available to the Contractor are explicitly defined and compliant with the governing law of the contract before the tendering process begins. This clarity helps prevent legal disputes over the validity of termination actions during the contract period.

Clause 17: Risk Allocation

Additional Sub-Clause on Use of Employer’s Accommodation/Facilities If the Contractor will be using the Employer’s facilities or accommodation, specific responsibilities regarding their upkeep must be clearly stated. An additional sub-clause should detail the Contractor’s obligations to maintain these facilities and address any damages that occur during their use, ensuring that responsibilities for losses or damages are unequivocally defined.

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Clause 19: Insurance

Changes to standard insurance provisions require careful consideration. If the Employer decides to undertake some of the insurance responsibilities, it’s crucial that these changes are drafted with the assistance of a professional experienced in construction insurance. This ensures that all potential liabilities are adequately covered and that the Employer does not inadvertently assume risks without proper protection.

Clause 20: Claims, Disputes, and Arbitration

Sub-Clause 20.3 Appointment of the Dispute Adjudication Board (DAB) The effectiveness of the DAB largely depends on the impartiality and the mutual confidence in its members by all parties involved. It is crucial that the members of the DAB are not imposed by either party. FIDIC offers a roster of approved adjudicators, ensuring the selection process is handled by a neutral body, enhancing trust and fairness in the adjudication process. Parties must decide between a one-person or a three-person DAB based on the project’s size, complexity, and duration.

Sub-Clause 20.4 Failure to Agree Dispute Adjudication Board If the parties fail to agree on the appointment of the DAB, it is essential to have an appointed entity predetermined in the contract that is qualified to resolve such deadlocks. Notable appointing entities often include the President of FIDIC or the International Chamber of Commerce.

Sub-Clause 20.8 Arbitration For international projects, arbitration is often preferred over litigation due to its flexibility, confidentiality, and generally faster resolution times. The contract should specify the arbitration rules (e.g., ICC rules), the number of arbitrators, and the language of arbitration to avoid any ambiguity. Selecting a neutral arbitration venue, particularly in a state with a robust legal framework for arbitration and a party to the New York Convention, is crucial for facilitating the enforcement of arbitral awards.

Multi-Party Arbitration Considerations

For projects involving multiple stakeholders from different jurisdictions, multi-party arbitration might be necessary. This requires meticulously crafted arbitration clauses tailored to the specific needs of the project and the parties involved.

The FIDIC Conditions of Contract for Design, Build, and Operate Projects provide a comprehensive framework for dispute resolution throughout the project lifecycle, including the Operation Service Period. A specific focus on Sub-Clause 20.10 offers guidance on handling disputes that may arise during this phase. Understanding and implementing these provisions effectively can ensure swift resolution and continuity of operations.

Sub-Clause 20.10: Disputes Arising During the Operation Service Period

Ad-Hoc Operation Service DAB Appointment Rather than maintaining a standing Dispute Adjudication Board (DAB) for the entirety of the Operation Service Period, parties may opt for an ad-hoc appointment model. This approach involves appointing a DAB only when disputes arise, allowing for a more flexible and potentially cost-effective method of dispute resolution.

Proposed Wording for Ad-Hoc Appointments: Disputes arising during the Operation Service Period that cannot be resolved amicably between the parties shall be settled by an ad-hoc one-person DAB (“Operation Service DAB”). This individual should be jointly agreed upon and appointed within 28 days following the notice of dispute from one party to another.

Procedure If Agreement Fails: If the parties fail to agree on an individual for the Operation Service DAB, the appointment should follow the protocols set out in Sub-Clause 20.4 [Failure to Agree Dispute Adjudication Board], ensuring impartiality and expertise in the selection.

Terms and Procedure: The agreement between the parties and the Operation Service DAB will reference the General Conditions of Dispute Adjudication Agreement, with necessary amendments as agreed by the parties. The remuneration terms for the DAB should also be mutually agreed upon at the time of appointment, with costs typically shared equally between the parties.

The DAB must deliver its decision within 84 days of receiving a response to the dispute or 105 days after receiving the dispute reference if no response is provided. The appointment of the DAB expires 28 days after delivering its written decision.

Following the DAB Decision: If either party is dissatisfied with the DAB’s decision, they may proceed according to the mechanisms outlined in Sub-Clauses 20.6 [Obtaining Dispute Adjudication Board’s Decision], 20.7 [Amicable Settlement], 20.8 [Arbitration], and 20.9 [Failure to Comply with Dispute Adjudication Board’s Decision], ensuring further avenues for resolution are available.

Expert Legal Support

Navigating the complexities of dispute resolution within the FIDIC contract framework, especially during the operational phase of a project, requires precise understanding and strategic handling. At Josh and Mak International, our legal experts are well-versed in the intricacies of international construction law and can provide comprehensive support and guidance for effectively managing disputes. For expert legal advice and assistance in setting up ad-hoc or standing DABs, or for any other FIDIC contract-related inquiries, please contact us at aemen@joshandmak.com. We are dedicated to ensuring that your contractual engagements are managed with the highest level of professional expertise and attention to detail.

By The Josh and Mak Team

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