The new FIDIC sub-contract

There have been a number of developments at FIDIC over the past 12 months. These include the introduction of a new subcontract for use with the Red Book – the FIDIC Construction Contract, 1st Edition 1999 - and also some changes to the Pink Book, the version of the Red Book used by the Multilateral Development Banks.

The need for FIDIC to produce a subcontract for the Red Book came about for a variety of reasons, primarily perhaps because FIDIC had not produced one since 1994, and that was designed for use with the old 4th Edition of the Red Book. But also, this new draft is particularly important to the Multilateral Development Banks, who required that subcontracts issued under their forms be in an “internationally recognised form”. The new subcontract, currently available as a test edition, is called the FIDIC Conditions of Subcontract for Construction.

In short the subcontract is intended to operate in the usual back-to-back basis, and, unsurprisingly, the subcontract provides for a direct total pass down of risk, with the subcontractor assuming the duties and obligations of the contractor under the main contractor for the subcontract works. This includes a fitness for purpose obligation in respect of any design work, something which is not in the 1994 version.

This principle also applies to payment and one thing that will be of particular note to those operating in the UK market is inclusion of pay-when-paid conditions. This of course conflicts with the payment requirements of the Housing Grants Act. FIDIC has included guidance notes and particular sample conditions to assist parties working in the UK1 and other jurisdictions with similar legislation. However, subcontractors used to practising in the UK market will need to take especial care to see what the main contract says about payment.

There are a number of new provisions, including at sub-clause 8.4 additional programming obligations, and at 15.3 the right of a subcontractor to recover loss of profit, if the Contractor is entitled to recover loss of profit under the Red Book termination provisions. Whilst under clause 16, the subcontractor can suspend performance and ultimately terminate in the event of persistent non-payment.

As always, FIDIC has given considerable attention to the dispute resolution provisions of the subcontract. The subcontract contains its own dispute resolution procedures. The time limits for notifying and dealing with claims are shorter in the subcontract than the main contract, no doubt to enable the subcontractor claims to be passed up the line. The subcontractor should take careful note that it will only be entitled to extra time or costs, if it complies with the main contract notice requirements. Further, the subcontract contains a suspension period which requires that once a claim is notified, the parties must defer any DAB proceedings (and the DAB here is an ad hoc one in contrast to the standing DAB typically favoured under the Red Book) under the subcontract for 112 days, in order to give the contractor the time to resolve the dispute under the main contract. Thus this suspension period “quantifies” the simple “best endeavours” obligation that is included in other standard forms requiring the contractor to pursue subcontractor entitlements under the main contract.

In addition, the subcontract contains alternative dispute resolution options for use in subcontracts where (i) the subcontract is such that the parties might prefer a simpler dispute resolution process (i.e. just arbitration and amicable settlement) or (ii) it can be anticipated that complex subcontractor claims are likely to arise that will be “related” to contractor’s entitlements under the main contract (including utilising the main contract DAB).

This new subcontract is a further step along the FIDIC road to standardisation and as such it is a welcome addition as it has been specifically drafted to comply with the Red and Pink Books. Of course, to fully understand the risks and liabilities, as with every subcontract, the onus will be on all parties to read the subcontract together with the applicable main contract.

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• 1. Although of course FIDIC is rarely used for UK projects.