Risks in International Consultancy Appointments: The FIDIC White Book

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1 Risks in International Consultancy Appointments: The FIDIC White Book An increasing number of UK based consultants are involved in international projects. Given the forecasted growth in global construction of 70% by 2025, international opportunities for the UK construction industry will continue to expand. Consultants wishing to take advantage of these exciting opportunities should exercise caution when negotiating their appointments on international projects. The most widely used standard form of consultancy appointment on international projects is the FIDIC White Book. This article considers some of the risks arising under the FIDIC White Book and how the FIDIC White Book differs from the ACE Agreement 1, the terms of which many UK consultants will be familiar with. Duty of Care UK based consultants will ordinarily seek to make clear that their duty of care is that of exercising reasonable skill and care. Whilst this is found in both the ACE Agreement 1 and the FIDIC White Book, consultants should understand how the applicable law stated in the appointment will interpret the obligation under the FIDIC White Book: The ACE Agreement 1 requires the Consultant to use reasonable skill, care and diligence in performing the services 1 and the FIDIC White Book states that the Consultant s responsibility is limited to exercising reasonable skill, care and diligence. 2 The duty of care in the FIDIC White Book is expressed to apply notwithstanding...any legal requirement of the country where the services are performed. This is intended to override any more onerous standard of care which may be implied by the law of the country where the services are performed. As commented below, in addition, the limit of liability states that the Consultant is only liable to pay compensation if a breach of the duty of care is established. The effectiveness of the duty of care in the FIDIC White Book will depend upon the applicable law and the country where services are being performed but this is an example of how the FIDIC White Book aims to protect the Consultant when used in various different jurisdictions. Liability A key consideration for any consultant when negotiating an appointment is the extent to which it can be liable under the appointment. This is one important area where the FIDIC White Book differs in approach to the ACE Agreement 1: The ACE Agreement 1 limits the Consultant s aggregate liability under the appointment to the fixed amount stated in the Particulars, 3 for claims in contract, tort, in negligence, for breach of statutory duty or otherwise. The ACE Agreement 1 also provides for liability in relation to pollution and contamination and asbestos to be limited or excluded, 4 which reflects the fact that professional indemnity insurance cover for such matters is typically subject to an aggregate cap or excluded. The FIDIC White Book takes a different approach. The Consultant is only liable to pay compensation if in breach of clause (the duty of care clause, see above). 5 The compensation payable (which is not defined) is limited to the amount of reasonably foreseeable losses suffered as a result of the breach 6 and to the amount stated in 1 ACE Agreement 1, clause F2.1 2 FIDIC White Book, clause ACE Agreement 1, clauses B12 and F7.1 4 ACE Agreement 1, clauses B13-B14 and F7.2 5 FIDIC White Book, clause FIDIC White Book, clause

2 the Particular Conditions. 7 Claims are waived in so far as the aggregate of compensation which might otherwise be payable exceeds the maximum amount payable. 8 However, clause 6.5 states that the limit of liability in clause 6.3 does not apply to deliberate default...or reckless misconduct or otherwise than in connection with the performance of obligations under [the] appointment. Whilst the limit of liability in the FIDIC White Book provides the Consultant with some valuable protection, it does not provide for liability in relation to asbestos etc. to be excluded. Further, it is not a comprehensive limit of liability as it does not expressly apply to claims other than for breach of the contractual duty of care (e.g. claims in tort, for misrepresentation, or for breach of statutory duty) and it only refers to liability for compensation. This has not been tested before the courts, but the general position under English law is that very clear wording is needed to exclude such liability, particularly if excluding liability for negligence. In our view there is a risk that liability could arise under the FIDIC White Book which is not a liability for compensation. An express amendment to the standard terms will be required to avoid this risk. Net Contribution Clause Net contribution clauses are commonly required by consultants to protect them from being liable for losses caused jointly by the Consultant and a third party. Under English law in such circumstances either party can be pursued for the full amount of the loss. Whilst the party who is pursued can bring a contribution claim against the other party under the Civil Liability (Contribution) Act 1978, it may incur irrecoverable costs in doing so and bears the risk of the third party becoming insolvent. A net contribution clause addresses this risk. The ACE Agreement 1 9 and the FIDIC White Book 10 both seek to protect the Consultant against these risks; however the ACE Agreement 1 is stronger in that in apportioning liability the court is required to have regard to certain assumptions, which are outside the Consultant s control, such as the assumptions that: the third parties entered into contracts with the client on terms no less onerous than the duty of care in clause 2.1; those contracts do not include a limit of liability; and there were no joint insurance provisions between the client and the third party. In the absence of these assumptions, the liability apportioned to the third party could be significantly reduced and the Consultant s liability increased. The net contribution clause in the FIDIC White Book does not therefore provide the full level of protection as the ACE Agreement 1 and consultants should seek to agree amendments to the FIDIC White Book in order to increase this protection. Duration of Liability One key issue on international projects is the duration for which the Consultant can be held liable: Under the ACE Agreement 1, no action or proceedings can be commenced following the expiry of the period in the Particulars from the completion of the services/termination. 11 It is common for this to be 6 years if the Appointment is executed as a simple contract and 12 years if it is a deed. The FIDIC White Book takes a slightly different approach in stating that neither party shall be liable unless a claim is formally made against him before the expiry of the period stated in the Particular Conditions. 12 Under English law, the notion of a claim being formally made is unfamiliar. However, the courts have suggested that this does not refer only to a claim form or 7 FIDIC White Book, clause FIDIC White Book, clause ACE Agreement 1 clause F FIDIC White Book, clause 6.1.3(c) 11 ACE Agreement 1, clause B17 12 FIDIC White Book, clause

3 notice of arbitration and that a claim may be formally made in correspondence. This reflects our experience as to how notice provisions are often interpreted by Arbitral Tribunals. It appears therefore that the time limit in the FIDIC White Book provides slightly less protection than the ACE Agreement 1 as less is required to be undertaken within the time limit for a claim to be brought in time. The FIDIC White Book states that the contractual limitation period applies notwithstanding...any legal requirement of the Country. This is intended to override lengthy limitation periods, such as that where the principle of decennial liability (which provides for strict liability for latent defects appearing in buildings and civil engineering projects for a period of 10 years after completion and handover) applies (e.g. in UAE, Egypt, Qatar and Kuwait and various other countries). The effect of decennial liability differs across jurisdictions, but by way of an example, in the UAE it makes the Architect and Engineer (as well as the Contractor) strictly and jointly liable for up to 10 years from handover for the total or partial collapse of the project and any defect which threatens the stability or safety of a building or other fixed installation (Articles of the Civil Transactions Law No. 5 of 1985). Whilst there is sometimes a limitation to such a right such as that the claim must be made within a certain period from the discovery of the defect, decennial liability is a real risk. In many jurisdictions it is not possible for one to contract out of decennial liability and the contractual limitation period in the FIDIC White Book may not override any decennial liability. Consultants operating in jurisdictions where decennial liability applies need to fully understand the principle. One solution may be to consider taking out decennial liability insurance. Payment Ensuring timely payment is received is, of course, essential for any consultant and can be especially concerning when working with parties based in foreign jurisdictions, as formally pursing them could be difficult. In this connection: Payment under ACE Agreement 1 complies with the payment procedure under the Housing Grants, Construction and Regeneration Act 1996 ( the Construction Act ) which applies to contracts in relation to Construction Operations (as defined in the Construction Act) in England, Wales and Scotland. Under the ACE Agreement 1, the amount claimed in the Consultant s invoice must be paid by the final date for payment (28 days after the Client receives the invoice), 13 unless the Client submits a pay less notice at least 7 days prior to the final date for payment. 14 The Consultant also has the right to suspend (on 7 days notice) if payment is not made by the final date for payment and no pay less notice was served. 15 Given the scope of the Construction Act, it is unlikely to apply to international projects. One view may be that administrative notice provisions required by the Construction Act are unnecessary for projects abroad. The FIDIC White Book incorporates some similar concepts and procedures to the ACE Agreement 1 into its payment provisions. For example: Under the FIDIC White Book payment is required within 28 days (or such other time period specified) of the Consultant s invoice. 16 The Client must give notice four days before the due date if it intends to withhold payment. 17 The Consultant has a right to suspend or terminate by giving at least 42 days notice if payment has been outstanding for 28 days and the Consultant has already given a prior 14 days notice ACE Agreement 1, clause F ACE Agreement 1, clause F ACE Agreement 1 clause F FIDIC White Book, clause FIDIC White Book, clause FIDIC White Book, clause

4 Whilst this is an important right for the Consultant, it requires two separate notices to be given and is therefore very administrative. Further, the minimum notice period is much longer under the FIDIC White Book and therefore the Consultant could be required to continue to provide the services for a significant time despite non payment. As the FIDIC White Book is intended to apply to international projects, these provisions are not Construction Act compliant. If the FIDIC White Book is used for projects in England, Scotland or Wales, the payment provisions will need to be amended. Where failure to pay causes delay, as with all contracts, consultants should carefully ensure they are complying with any notification obligations required in order to obtain an extension of time for completion of the services (which the FIDIC White Book requires). Liability for delay Understandably, consultants are keen to avoid strict liability for delay, as this may not be covered by professional indemnity insurance and such delays may be outside their control. In relation to the ACE Agreement 1 and the FIDIC White Book: The ACE Agreement 1 simply requires the Consultant to use reasonable endeavours to perform the Services in accordance with the programme and makes clear that this is [s]ubject always to conditions beyond the Consultant s reasonable control. 19 The FIDIC White Book requires that [t]he Services...shall proceed in accordance with the Time Schedule...and shall be completed within the Time for Completion, subject to extensions Given that clause makes clear that the Consultant s responsibility is limited to reasonable skill and care (see above) and clause 4.4 provides for an extension of time where the Consultant is impeded or delayed by the Client or his contractors, the effect of the FIDIC White Book may ultimately be similar to the ACE Agreement 1. However consultants should note that under the FIDIC White Book an extension to the time for completion is subject to a duty to notify the Client of the circumstances and any probable effect of any impediment or delay to the completion of the services. The FIDIC White Book does not make the Consultant liable for liquidated damages if it does not complete the services within the Time for Completion, but Employers on international projects will often request such amendments. This should be resisted, as liquidated damages are often excluded from professional indemnity insurance. Claims by Third Parties As it is intended for use on international projects the FIDIC White Book, unlike the ACE Agreement 1, does not exclude the Contracts (Rights of Third Parties) Act 1999 and does not provide for collateral warranties to be provided. Instead, the FIDIC White Book requires the Consultant to take out insurance for third party claims made against them 21 and includes an indemnity from the Client in respect of third party liability not covered by the insurance required to be maintained by the Consultant. 22 Whilst the value of such an indemnity would depend upon the financial strength of the Client, it does potentially provide some useful protection to the Consultant. Force Majeure On international projects the risk of a force majeure event (i.e. an event outside the parties control which means that the Consultant is physically unable to complete its services), such as war, is a particular concern. So: 19 ACE Agreement, clause F FIDIC White Book, clause FIDIC White Book, clause 7.1.1(c) and (d) 22 FIDIC White Book, clause 6.4 4

5 ACE Agreement 1 entitles the Consultant to suspend on four weeks notice where circumstances beyond the control of the Consultant prevent or significantly impede the Consultant s performance of the Services. 23 In addition, where circumstances arise for which the Consultant is not responsible and which make it irresponsible for the Consultant to carry out the Services, the Consultant may terminate on just two weeks notice in respect of the Services affected. 24 In the FIDIC White Book, the Consultant must give prompt notice if circumstances arise which would make it impossible for the Consultant to perform the Services. If, following such notice, the Services are suspended or the speed of performance reduced, the Consultant is entitled to an extension of time. However, whilst the ACE Agreement 1 includes all circumstances outside the Consultant s control, under the FIDIC White Book they must be neither the responsibility of the Consultant nor the Client. The ACE position can be considered more favourable. In the event that the circumstances which led to suspension continue, termination of the Appointment is a much speedier process under ACE Agreement 1. However, whilst the FIDIC White Book provisions regarding Force Majeure are slightly less favourable for the Consultant than those in the ACE Agreement, they will provide valuable protection for the Consultant. Applicable Law The ACE Agreement 1 is governed by English law and the non-exclusive jurisdiction of the English Courts. Being an international agreement, the FIDIC White Book allows for the governing law to be chosen by the parties and inserted in Part A of the Particular Conditions. Parties should consider carefully the governing law of their agreement and form of dispute resolution. English law is often both acceptable and preferable to parties on international projects due to the perceived fairness of English law and the ability to enforce arbitral awards in a larger number of jurisdictions. Parties working on international projects will nevertheless need to be aware of any local laws that will continue to apply to the carrying out of the Consultant s services (notwithstanding the choice of law). Further, the ease of enforcing any judgement or award should be considered carefully, particularly if the client only has assets in one particular jurisdiction. Conclusion As highlighted above, whilst both the ACE Agreement 1 and the FIDIC White Book provide a number of protections for the Consultant, in some areas, such as in relation to the limit of liability, the net contribution clause, suspension for non payment and the contractual limitation period, the ACE Agreement 1 provides additional protection that is not present in the FIDIC White Book. In addition, in any jurisdiction there will be mandatory provisions which cannot be contracted out of, such as decennial liability. This article is not suggesting that the ACE Agreement 1 should be used on international projects instead of the FIDIC White Book, as the FIDIC White Book contains a number of additional beneficial provisions drafted specifically for use on international projects (including, for example, an obligation for the Client to demonstrate that it has made financial arrangements to enable if to pay the Consultant s fees 25 ). In addition, the FIDIC White Book is significantly more preferable than many bespoke appointments on international projects. Nevertheless, Iin light of the above, as with any standard form contract, consultants considering the use of the FIDIC White Book on international projects should consider having a standard schedule of amendments to provide additional protection and should consider the use of the FIDIC White Book on a case by case basis, taking into account the jurisdiction in which it is being used. By Andrew Croft, Beale & Company Solicitors LLP 23 ACE Agreement, clause F ACE Agreement, clause F FIDIC White Book, clause 2.4 5