FIDIC updates to impact engineers and MidEast's project employers

In an analysis piece exclusive to Construction Week, Matthew Heywood, partner at Clyde & Co, outlines how FIDIC’s latest contract updates will impact both engineers and employers in the Middle East

New rules: FIDICs latest updates place emphasis on the role of the engineer
New rules: FIDICs latest updates place emphasis on the role of the engineer

In an analysis piece exclusive to Construction Week, Matthew Heywood, partner at Clyde & Co, outlines how FIDIC’s latest contract updates will impact both engineers and employers in the Middle East.

The construction sector in the Middle East region has a long tradition of using the Fédération Internationale Des Ingénieurs-Conseils (FIDIC) suite of contracts as the basis of its building agreements.

Now, FIDIC has launched revised versions of its internationally recognised contracts, which includes a number of important changes that will have a significant impact on the key role of the engineer.

These are the first major amendments to FIDIC’s suite of contracts in 18 years, and have been drafted by engineers experienced in design and construction. Therefore, it comes as no surprise that the role of the engineer has attracted major revisions.

The philosophy behind the latest changes is to enhance contractual project management tools and mechanisms so as to balance risk allocation; promote early dispute resolution; achieve clarity, transparency, and certainty; and to reflect current international best practices.

FIDIC has addressed a number of the issues raised by users since its previous version of contracts in 1999. The construction industry has changed, and as such, FIDIC’s contracts have evolved as well.

A key theme running throughout the revised contracts is the involvement of the engineer. The role of the engineer has always been pivotal in the administration of FIDIC contracts, and historically, the engineer had greater autonomy than they do today. The engineer’s role has become more complex particularly in the context of major international projects, and they must now follow very prescriptive procedures in the administration of the contract.

In addition, the engineer’s duties to the employer and the project have changed. In FIDIC’s 1987 Red Book contract, the engineer was considered as impartial – sub-clause 2.6 (Engineer to Act Impartially) stated that the engineer shall exercise his discretion “impartially within the terms of the contract”.

The 1999 FIDIC Red Book sought to bring about a fundamental change to the engineer’s role. Pursuant to sub-clause 3.1 (Engineer’s Duties and Authority), the engineer was “deemed to act for the employer”. This changed on-site dynamics, and the engineer was no longer considered to be impartial. In the Red Book 2017, the engineer continues to be deemed to act for the employer – however, there have been new provisions regarding the engineer’s ‘neutrality’.

As a further nod to the importance of the engineer in construction schemes, FIDIC has taken the much-welcomed step of providing enhanced requirements on the qualifications that the engineer must possess. These include being a professional engineer, suitably qualified and experienced, and fluent in the language of the contract, though it is unclear as to how compliance with such requirements will be policed.

The new contracts recognise the commercial realities of the engineer’s role being fulfilled by large corporate bodies, and do not provide an obligation to name an individual as the engineer. This is a disappointment, given the need for certainty in communications on projects. By way of concession to this, FIDIC in sub-clause 3.3 allows the engineer to appoint a “natural person” to act.

Clause 3 of the new FIDIC contracts outlines the role of the engineer and extends to eight sub-clauses. It provides that the engineer may appoint an ‘engineer’s representative’ (ER) and delegate to them the necessary duties and authority. The wording suggests that the ER is on site for the entire duration of the project, which is a welcome addition that allows the employer and the engineer to have increased overall understanding of how the project is progressing.

It is unclear whether the ER will have the authority to make determinations, but the assumption is that they will do so. Otherwise, there would be no substantial differentiation between an engineer’s assistant and the ER.

It is interesting to note that FIDIC at sub-clause 3.1(b) considered it necessary to provide that the engineer must be fluent in the language of the project. This reflects a theme that runs throughout the amendments – communication between parties is crucial to a successful project.

The engineer continues to be deemed to act for the employer, but sub-clause 3.2 states that – under the new sub-clause 3.7 – they are not required to obtain the employer’s consent before making a determination. This amendment should save the time and resources incurred on projects during the determination process.

Indeed, at sub-clause 3.2, the employer is prohibited from imposing the obligation to obtain consent before issuing a determination on the engineer.

The theme of reconciliation without recourse to formal dispute proceedings runs throughout the new contracts, with the engineer taking a major role. To set the tone, the new sub-clause 3.7 is named ‘Agreement or Determination’, which reflects the engineer’s positive obligation to encourage the agreement of claims. Sub-clause 3.7 requires the engineer to promote discussions between the parties in an attempt to reach an agreement, and envisages the engineer having an active role in the reconciliation process.

At sub-clause 3.7.1, the engineer must allow time and promptly consult with the parties – jointly or separately – and encourage discussion. The main cause of formal disputes in this region, and around the world, is lack of communication, and an increased emphasis on dialogue will have a positive impact.

In the FIDIC 1999 contract, determinations only related to claims; however, in the 2017 version, the Agreement and Determination aspect of sub-clause 3.7 also applies to measurement of the works, rates and prices, variations, extension of time (EOT) and adjustments of the contract price and schedule of payments, daywork, amount to be paid for plant and materials off-site, amounts not certified in the interim payment certificate (IPC), and disagreement as to the cause of a defect.

If the engineer fails to make a determination within the stated time limits, then they will be deemed to have rejected the claim, with the result that the claim can be referred by either party to the dispute avoidance or adjudication board.

In the Agreement and Determination process, the engineer must carry out their duties neutrally, and are not deemed to be acting on behalf of the employer. According to the FIDIC drafting committee, the word ‘neutrally’ in this context is not to be understood as meaning ‘impartial’ or ‘independent’. Given that the term has not been defined, it will no doubt become the subject of contract negotiations and discussions. The amendments to the Agreement and Determination process do represent a positive step forward. However, tension with respect to the impartiality of the engineer will remain. In the 1999 Red Book at sub-clause 3.5 (Determinations), the engineer was under a contractual duty to exercise “fair determination”. This term was often subject to conjecture, and represented one of the most challenging aspects of the engineer’s role, which entailed acting as employer’s agent, but also as an independent consultant to both the employer and contractor.

The 2017 conditions at sub-clause 3.7 force the engineer to have a more active role in encouraging the parties to reach an agreement, but the engineer must ultimately make a fair determination of the matter or claim. However, this is given the context that the engineer is no longer deemed to act for the employer when carrying out their duties under the determination provisions. So, this should promote increased confidence that a matter or claim will be considered from a more balanced basis than in the previous contract.

Construction projects in the Middle East still largely use the 1987 and 1999 versions of the FIDIC contracts, and it will take time for the new contracts to be operated. It will also require employers and developers to embrace the changes, and use them as their standard form of contract.

FIDIC strongly recommends in the guidance notes that all drafters should pay due regard to its Five Golden Principles, and ensure that any modifications to the conditions of contract are limited to those necessary to comply with the applicable law. The organisation stresses that modifications should not change the fair and balanced character of the FIDIC contract, and that the contract should remain “recognisable as a FIDIC contract”. It will be interesting to see if employers and developers in this region adhere to this advice.

The amended role of the engineer should be welcomed by parties; however, as with any new contract, practical questions remain. Will parties be prepared to commit the additional resources needed for a more prescriptive and complex claims resolution, and will such provisions assist in resolving claims more quickly – or will the complexity will lead to more claims? Will employers allow increased neutrality of the engineer in the Determination process?

In my opinion, FIDIC’s changes to the role of the engineer should be welcomed, and while the regional construction industry may take time to react to new contracts – in the interim, parties might continue to use the old forms – change will come.

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