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Is it permissible under FIDIC Contracts to omit work from the Contractor and give it to another Contractor during the course of the project?

posted Apr 27, 2011, 3:17 AM by Administrator 1   [ updated Apr 27, 2011, 3:39 AM ]
Going by the Book


The position is clear in the Yellow, Silver and Gold Books wherein each states that 'A Variation shall not comprise the omission of any work which is to be carried out by others'. Although the wording in the Red Book is not as precise, it appears to be the clear objective.

If the work is included in the Contract and there are no defects in the Contractor’s work then there may not be any justifiable reasons to change. However, the role of the Engineer is key in determining any liability or defects and, of course, if a Variation is being proposed. This is discussed in section 13 of the Red Book.

It would appear that this provision is included in FIDIC to prevent the Employer/Engineer from awarding work to others, possibly because they could save money by doing so or because the Employer may have some or other family member or “connection” who could do it better/cheaper/quicker job. In this type of situation, many Employers/Engineers fail to realise that the Contractor is fully within his rights to bring a claim against him for loss of profit or costs incurred if such an action was taken.

Also, it depends on whether the COPA has made provisions for doing so. The standard FIDIC conditions does not contain any provisions that will allow the Employer/Engineer/SO from omitting work from one Contractor to give it another Contractor during the course of the project. Unless the COPA has incorporated provisions for doing so, and work is omitted from the Contractor, it would clearly be a breach of Contract.

It would, though, be prudent of the Employer, that even if such a course of action is open to him, to take care that he does not run foul of other common provisions. For example, in the Red Book, Clause 12.3, variations in price may be claimed if the reduction in scope causes a change in the quantities of materials of more that 10%, and so forth. Additionally, some Contracts may contain a provision where a change in the total Contract price beyond a certain percentage permits either party to renegotiate the Contract.

Hence, if the removal is not about cause but rather for the Employer’s convenience, then the Employer could most certainly expect a claim for loss of profit, overheads and so forth from the Contractor.

Notably, if the work being removed is of a specialist nature, this would then most likely be carried out by a Subcontractor. This could be negotiated with the Main Contractor. If he is unwilling, and there has been no provision for such an act in the special provisions in the Contract, it will be open to dispute.

Sub-Clause 13.1 (Right to Vary) of the Red Book says as follows: “Each Variation may include …. (d) omission of any work unless it is to be carried out by others”.

So now the question is, would the situation be different if the Contractor was in culpable delay (having submitted extension of time claims which have been rejected by the Engineer), and already running some months late, where the penalty has already reached the 10% limit? Would the Employer, who, for example, may have apartment owners threatening to claim their money back, then be justified in omitting Works from the Contractor and subsequently giving such Works to other Contractors to speed up the completion of the project and then hand over the apartments to disgruntled owners? In all likelihood, the answer would still be the same. It is a breach of Contract on the Employer’s side and the Contractor would still be entitled to claim his loss of profit on the omitted work. Doubtless, this would be set against the substantial claims that the Employer would have and, in any event, the Employer would likely argue that he would only be mitigating his losses. However, if the Contractor’s default is that bad, the Employer could terminate anyway - or use the threat of termination - to negotiate a commercial deal whereby the Employer would not terminate but could omit part of the Works and have them carried out by others without penalty.

Another recommendation may be to enforce acceleration measures by negotiating that the Main Contractor engage in nominating a Subcontractor. Minimum management fees could be paid, the Subcontractor could be paid directly and the Main Contractor could still be held fully responsible during the defects liability period. This could hopefully achieve an earlier occupation date with less resulting losses to the Client. There will, of course, be additional costs when a Subcontractor is nominated but the Client would have paid extra if he eliminated part of the Works (this would be a problematic scenario) and engaged another Contractor at the same time.

But, can the Employer partially terminate the Works? Unless this has been specifically written into the Contract, then under the Red Book alone it would appear that the Employer may only totally terminate the Contractor’s Contract.


When the Contractor is in the Wrong

If the Contractor has been negligent in performance due solely to reasons attributable to the Contractor, then termination is possible under the Red Book Clause 15 (the Silver Book appears to be the same).

All law jurisdictions require the omission to be genuine and if not, it would be a breach of Contract of an implied condition or under law. In common law countries, there is sufficient case law under "stare decisis" (a legal phrase referring to the obligation of courts to honour past precedents. Latin: stand by the decision) to make it a breach. In USA, it would possibly be covered under "Rules of Equity" (being a civil law jurisdiction). In UAE, it would be covered under Article 246 (1) of the Federal Law No: 5 of 1985 where "good faith" is an absolutely essential part of a Contract.

The situation must be considered where the Contractor fails in his Contractual obligations and the resulting actions which the Engineer may take in such circumstances. The Red Book contains provisions whereby the Engineer may award work to others in such cases until the expiry of the defects liability period, where Sub-Clause 11.4 (Failure to Remedy Defects) indicates that after providing notice to the Contractor, the Employer may carry out the work himself at the cost of the Contractor. Should the situation arise that action needs to be taken prior to this time, the Engineer must be very careful to ensure that the Contractor has been served notices and have been given a reasonable amount of time to rectify the situation prior to omitting the work from the Contractor and awarding to someone else.


The Middle East and Far East

In Islamic jurisdictions “good faith” is key in these courts. To omit work from a Contractor, even if there are provisions in the Contract, is viewed as “bad faith” and as such may be illegal under the law (although certainly not under the Contract, if those provisions were stated in the Contract).

Business in these regions is often done, not according to the written word, but is based on personal relationships and a concept of 'fairness' (not necessarily the Western understanding of this word) and compromise. The ideas of 'win/lose' and conclusive proofs are much less supported here than in the West.

Sometimes it is helpful if the parties have a common 'friend', possibly a sister company working with both parties or an external sponsor known to both), who can explain to each side the difficulties the other party is causing, and can promote a compromise.

The solution will most likely not be FIDIC one, but at least there may be a solution.


FIDIC, Arbitration and the Law

Proving whether the omission is a genuine act is a matter which can be determined readily at Arbitration by looking at the actual acts by Employer, and by interviewing witnesses, including those from the Employer. These facts can easily enough be produced during a trial or a hearing, whether at the time of “discovery” or by direction from the Arbitrator.

Often it is beneficial to look beyond the terms and conditions of the Contract to where the case can be stated under the laws or jurisdiction of the country for resolution or relief. Hence, it is possible to look to the law during the time of a dispute when the Contract does not provide the Clause to assist in resolving the dispute.

No Contract can overwrite what is provided under the written laws of a country, unless the provision allows for it. Therefore, if a Clause is permissible but not enforceable because it is in conflict with the written law of the country, it has no legal backup and is of no use.

All this having been taken into account, if there is a case of a defaulting Contractor, he should have already been served notices of default and notices to remedy the situation. If the Contractor does not remedy his default, he should be terminated. It is Contractually tidier and allows the Client greater room for maneuverability and is in the best interests of the Client and the property purchasers.

If extensions of time have been submitted and rejected by the Engineer under the older FIDIC forms, and the Engineer is acting impartially, then the issue probably would be legitimately clear-cut. Then it possibly would be best for another Contractor to be mobilised to complete any outstanding Works without major impact on time, cost or quality. However, if the Contract is under FIDIC 1999 then the Engineer's impartial role is not as clear-cut and the Contractor may argue that his extensions of time claims did or are not getting a fair hearing. Hence, the Engineers impartiality should be above question and the extension of time issues must be clearly dealt with.

Where the 10% penalty is being greatly exceeded, the civil courts will look beyond the FIDIC provisions and consider the actual losses being incurred.

Omission is not permissible within the FIDIC agreement and the case of Contractor default being the cause of failure to complete the Works would need be fairly clear-cut in the face of civil court 'good faith' provisions before the course of action of omission of Works should be considered.


Conclusion

  • The Employer, Engineer and Contractor must know the contents of the Contract and understand all implications and results due to actions or inactions. 
  • FIDIC does not permit omission. If this is being considered, proofs of preceding notifications to a negligent Contractor must be above reproach if an Employer does not want to be sued by the Contractor.

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