Construction contracts: standard forms, novel applications and social responsibility

Written on 9 Dec 2020

How does the FIDIC suite of construction contracts respond to the unique issues arising on projects as a result of Covid-19 and to what extent should parties be considering the wider impact on society at large?

Given FIDIC's widespread use on projects across the globe, the factual circumstances in which the FIDIC standard forms are being applied during the Covid-19 pandemic are varied, ranging from changes of law and robust government and legislative intervention to non-binding guidance and advice. As a result, FIDIC has produced a Guidance Memorandum to Users of FIDIC Standard Forms of Works Contract.

FIDIC state that the core purpose of the guidance is to "help Parties to a FIDIC contract to consider mutually satisfactory solutions and avoid disputes arising between them". In this regard, FIDIC reiterates that it promotes cooperation between contracting parties, including dispute avoidance, and discourages adversarial attitudes.

It is against that background that FIDIC has outlined several scenarios that may arise in relation to Covid-19 and how the FIDIC suite of contracts responds to those scenarios, including:

  • extensions of time as a result of delays in mobilising personnel, supply chain issues and authorities;
  • changes in law as a result of local authority or government action; and
  • exceptional events or force majeure.

In keeping with the dispute avoidance mandate behind the FIDIC guidance, in respect of any such issues that may arise, they are keen to promote use of:

  • the Engineer's role in assisting the parties to reach agreements on claims or to issue fair and binding determinations where that is not possible; and
  • its "unique" dispute avoidance boards in order to provide opinions, advice and decisions where necessary. FIDIC's 5th Golden Principle provides that "unless there is a conflict with the governing law of the Contract, all formal disputes must be referred to a Dispute Avoidance/Adjudication Board (or a Dispute Adjudication Board, if applicable) for a provisionally binding decision as a condition precedent to arbitration". Though the Golden Principles and FIDIC's Covid-19 guidelines are not legally binding, it may be said that FIDIC is encouraging parties away from proceeding to arbitration. Whether the utility of the DAAB is enough to prevent that remains to be seen.

Sustainable solutions

What is most interesting about FIDIC's guidance is its emphasis on encouraging parties to act in a way that ensures the sustainability of the construction industry and society at large. FIDIC is keen to avoid parties adopting firm and robust contractual positions that may result in widespread insolvencies and thereby impact local communities and wider society.

In this regard, the guidance encourages parties: to adopt a longer term view over a short term approach that may affect SMEs in its supply chain; to act objectively and with an open mind; and to look outside the four corners of the contract for solutions to the difficult issues faced as a result of Covid-19. The guidance reminds users that enforcing strict contractual rights may not be in in their best interests if that ultimately results in the collapse of the project supply chain.

Such an approach is in keeping with guidance issued by other industry bodies and governments, for example, in the UK from the Construction Leadership Council and UK Government, encouraging parties to manage the effects of the Covid-19 pandemic commercially and to avoid disputes where possible.

The industry has long been calling out for more collaboration and less conflict and the standard forms, such as FIDIC, have consistently stated that the purpose behind their suite of contracts is to assist those in the construction industry to work together to build successful projects. Arguably this form of guidance goes further than the traditional collaborative guidance, which focuses on the successful delivery of the particular project in question, in that parties are urged to considered the wider impact on the industry and society.

A balancing act

This requires parties to tread a careful line to protect their contractual positions whilst seeking to find and agree upon sensible commercial resolutions to the ever-increasing list of issues being encountered on projects. We may therefore see an increase in parallel lines of communications; one open line of correspondence reflecting the terms of the contract and one protected line of correspondence (for example, subject to without prejudice privilege in the UK) in order to seek to agree upon a position of compromise.

The question nevertheless remains: to what extent will a failure to act collaboratively and in the interests of the project as a whole as a result of non-binding guidance such as that of FIDIC have a bearing in any formal dispute that ultimately arises? It is certainly possible to foresee adjudicators and other decision makers being influenced by the meritorious position of a party who has sought to proactively engage and work with its supply chain to manage this unique situation as opposed to a party who has been rigid in the application of the terms of the contract, even if there is force in that party's legal arguments.

In this regard, notwithstanding the emphasis on encouraging collaborative behaviours and societal and industrial responsibility, FIDIC reminds users of the importance of complying with their contractual notice and record keeping obligations; some things will never change.