FIDIC contracts: key FIDIC rules and practical benefits

FIDIC contracts have become increasingly widespread in Serbia in both the construction industry and in legal practice. FIDIC stands for Fédération Internationale des Ingénieurs – Conseils, or the International Federation of Consulting Engineers, created by France, Belgium, and Switzerland in 1913. Today, FIDIC is headquartered in Geneva, Switzerland, and has members in over 100 countries.

Ever since FIDIC’s inception, its key role has been to produce standard form contracts for the construction and engineering industry. Its first standard form, published in 1957, was the so-called RIBA Form, or the Form of Contract for Works of Civil Engineering Construction, derived from common law practice; this was the forerunner of all subsequent FIDIC forms. The first edition became known as the Red Book due to the colour of its cover, which started the tradition of naming the various FIDIC forms by colour.

FIDIC publishes the Pink Book, Yellow Book, Orange Book, Silver Book, Gold Book, Green Book, Emerald Book, Blue-Green Book, and White Book, but the Red Book remains the most widely used, and this article will accordingly focus on its provisions. The most common edition in use worldwide is the 1999 one, although the latest 2017 edition of the Red Book (reprinted in 2022) amends 50 percent of the text and adds another 50 percent.

In an age of globalisation, all market players are interested in streamlining the performance and monitoring of construction works, necessitating a common set of rules binding on all (or most) participants in a venture. With cross-border construction projects increasingly common, the need arose to standardise international construction contracts and the relationships between stakeholders. This required establishing rules that were acceptable to and feasible in most countries, with the support of major financial institutions, to create security and predictability for a variety of investors, on the one hand, and, on the other, to attract foreign partners and foreign investment. FIDIC has entered into five-year agreements with a variety of international financial institutions (IFIs) that allow them to apply FIDIC contracting terms in their projects (such as the World Bank, European Bank for Reconstruction and Development, European Investment Bank, Asian Development Bank, African Development Bank, Inter-American Development Bank, and many others).

The stabilisation of the Serbian market has seen growing inflows of foreign investment, with construction taking pride of place amongst areas attractive for investors. The increasing number of investment projects financed either partially or wholly by IFIs has made it necessary to ensure and guarantee the application of modern legal features that ought to result in predictability, certainty, and stability, as well as strict working procedures – which is what FIDIC rules are designed to do.

Without burdening the reader with excessive detail, the purpose of this article is to provide an overview of the key features and operation of FIDIC rules and their practical benefits.

FIDIC contracts consist of General and Particular Conditions.

The General Conditions of Contract distribute risk between the parties by assigning rights and duties to each party, as well as setting out payment procedures, variations, certificates, and dispute resolution. The general nature and extent of these standardised conditions means they are not enforceable in and of themselves.

The Particular Conditions of Contract are used to amend, extend, or omit some of the General Conditions, so adjusting them to suit local rules and customs, the specific circumstances of a construction project, design documentation, and the requirements of the Employer.

It is especially important to determine the hierarchy of Contract documents. For instance, the 1999 Red Book sets out the following order of priority:

• Contract Agreement (if any), which is a brief document termed by the parties the Agreement on the Performance of Construction Works, and which lists the parties, subject matter, and price and payment procedure, together with a detailed list of appendices (documents) that constitute integral parts of the Contract;
• Letter of Acceptance (this is the formal acceptance of the Contractor’s tender and usually presents the point in time when the Contracting Parties enter into the Contract, but this depends on the local regulations),
• Letter of Tender;
• Particular Conditions of the Contract;
• General Conditions of the Contract;
• Specification;
• Drawings;
• Bills of Quantities;
• Tables and all other documents that are part of the Contract.

In the event of any dispute, the higher priority document will prevail.

As can be seen from the list above, the original intention is that documents have priority based on the time of their origin. This allows the Contracting Parties to exclude or limit the parts of the documents previously produced.

Although the Parties can use the Particular Conditions of the Contract to change the priority of documents, it is highly advisable to keep them as defined in the General Conditions of the Contract. However, if there is an intention to change the priority of documents, special attention should be given to the possible consequences of such change.

To better understand the FIDIC General Conditions of Contract, it is necessary to examine their legal nature, or their position in the hierarchy of the sources of law. Since FIDIC is an international organisation, the General Conditions of Contract are considered to be a source of international autonomous law.

This leads to the conclusion that the FIDIC General Conditions of Contract must be aligned with the Serbian legal system to ensure security in administering any contract that has been entered into.

In the FIDIC General Conditions of Contract, the consulting engineer is given the key role in managing the works; the consulting engineer is appointed by the Employer and is deemed to work for and on behalf of the Employer from the time the contract is entered into until the completion of the works. In contrast to this position, which is subject to private law, the Serbian Planning and Construction Law (Official Gazette of the Republic of Serbia Nos. 72/2009, 81/2009 – Correction, 64/2010 – Constitutional Court Ruling, 24/2011, 121/2012, 42/2013 – Constitutional Court Ruling, 50/2013 – Constitutional Court Ruling, 98/2013 – Constitutional Court Ruling, 132/2014, 145/2014, 83/2018, 31/2019, 37/2019 – Other Law, 9/2020, and 52/2021) envisages the involvement of a ‘supervising engineer’ (stručni nadzor).

FIDIC provides comprehensive legal security to the contracting parties and offers them a variety of guarantees.

The Employer is able to benefit from the following:

• Tender bank guarantee, to be activated in the event the winning tenderer fails to meet the requirements for entering into a Contract for whatever reason;
• Performance bank guarantee, to be provided by the Contractor after receiving a Letter of Tender;
• Advance payment guarantee;
• Retention money, generally a sum equal to 5 to 10 percent of the total cost of works, retained by the Employer for the purpose of repairing any defects to the works; and
• Retention bank guarantee, to be provided by the Contractor; some contracts include this option, where any retention money can be paid after this guarantee is submitted.

Interestingly, no warranty bank guarantee is envisaged as such under FIDIC contracts. Rather, the performance bank guarantee remains in place until the expiry of the defects notification period, which includes the warranty period.

Insurance is a major feature of FIDIC contracts, which require insurance of works and Contractor’s equipment, liability insurance to cover bodily injury and damage to property (third-party insurance), and liability insurance covering the Contractor’s staff. The Contractor is required to provide proof of having obtained such insurance and copies of any insurance policies directly to the Employer, who notifies the Engineer of this fact. The engineer is responsible for ensuring that the Contractor maintains appropriate insurance in accordance with contractual requirements.

Sliding scale contracts have become increasingly popular due to disruptions in the construction materials market that began during the Covid-19 pandemic and continued with the outbreak of the war in Ukraine, leading to major increases in the cost of building supplies. Serbia is a net importer of construction materials and the global turmoil has driven up the cost of transport. This situation has been having an impact on both Contractors and Employers, with all parties seeking answers to questions of how cost fluctuations affect contractual prices of construction services and whether those prices can be adjusted once a Contract has been entered into.

Here, the Red Book provides an option for the Contractor to seek a price adjustment to reflect changes in costs, which requires including a table of adjustment data in the initial Contract.

This table must be part of the tender. Once enshrined in the Contract, the table permits the Contractor to adjust any amounts paid or payable, so allowing them to consider any increase or decrease in the cost of inputs such as labour, goods (machines, equipment, materials, instruments, fittings, and other goods to be incorporated into Permanent Works).

In Serbian practice, the FIDIC General Conditions of Contract are often contracted but not applied consistently, leading to confusion over what happens if there is no table of adjustment data appended to a Contract.

If no table has been contracted, the price variation clause is not applicable. Therefore one must consider which other regulations can be used to resolve the issue of changes to the contracted price of works caused by variations in the cost of materials.

It may be useful to cite one key example of the law applicable in cases where a FIDIC Contract does not govern a particular issue.

The Law and Language section of the Red Book provides that the Contract is to be governed by the law of the country in question (which is to be construed as the country in which the construction site is located or where permanent works are performed) or by other law where so stipulated in the Particular Conditions of Contract. Assuming no other law is envisaged, Serbian law will apply, specifically the provisions of Articles 635 to 637 of the Law of Contracts and Torts (Official Gazette of the Socialist Federal Republic of Yugoslavia Nos. 29/78, 39/85, 45/89 – Constitutional Court of Yugoslavia Ruling, and 57/89; Official Gazette of the Federal Republic of Yugoslavia No. 31/93; Official Gazette of Serbia and Montenegro No. 1/2003 – Constitutional Charter, and Official Gazette of the Republic of Serbia No. 18/2020).

This article has presented a brief outline of how the complex FIDIC rules should be applied. In the current economic climate, these rules are invaluable for the construction industry and, indeed, the economy as a whole, as globalisation imposes the need to streamline the performance and oversight of works where a single set of rules applies to most participants in a business venture. The needs of the market dictate adaptations to how law is applied and promote the modernisation of legal safeguards, with the ultimate aim of ensuring greater predictability to all parties to a contract. As such, these complex contracts should not be entered into without consultation with legal practitioners who possess the appropriate knowledge and expertise in the field and who will endeavour to guide the client, whether an employer or a contractor, through the process to methodically and efficiently complete any project.