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The FIDIC Yellow Book Subcontract: Opportunities in Asia?

Late last year, the Fédération Internationale Des Ingénieurs-Conseils1 ("FIDIC") launched the First Edition Conditions of Subcontract for Plant and Design-Build (the "Yellow Book Subcontract"). The Yellow Book Subcontract is the first standard form intended for use with the 1999 FIDIC Conditions of Contract for Plant and Design-Build (the "1999 Yellow Book"). The Clauses of general application in the Yellow Book Subcontract are similar to those in the 2011 FIDIC First Edition Conditions of Subcontract for Construction, known as the "Red Book Subcontract". 

Opportunities may arise for deployment of this latest addition to the FIDIC family in the context of the Chinese Government's Belt and Road Initiative ("BRI"). The release of the Yellow Book Subcontract coincides with a period of increased activity by FIDIC to promote the use of its suite of contracts by the Chinese construction industry. In July 2019, FIDIC signed a memorandum of understanding ("MoU") with the China International Contractors Association ("CHINCA") to improve collaboration between international and Chinese businesses.2 The parties agreed on a number of issues including working together on the BRI. In January 2020, FIDIC entered into another MoU with the China Association of International Engineering Consultants ("CAIEC").3 Likewise, the aim was to improve business collaboration, while BRI projects were one of the key areas of interest. FIDIC president Bill Howard referred to the above agreement as "another significant step in FIDIC's efforts to work in global partnership with the Chinese construction industry."4 In November 2019, the Asian Infrastructure Investment Bank ("AIIB") signed a five-year agreement to use FIDIC Contracts.5

In light of these developments, it is anticipated that we will see increased usage of the FIDIC standard forms, including the Yellow Book Subcontract, between international and Chinese parties on BRI and other Chinese-led international investment projects.

 

Key Provisions of the Yellow Book Subcontract

The Yellow Book Subcontract is intended for use on projects where the 1999 Yellow Book is the "Main Contract". The approach to passing through obligations is premised on the Subcontractor being familiar with the provisions of the Main Contract and Sub-Clause 2.1 requires the Contractor to make the Main Contract documents available to the Subcontractor for inspection (other than pricing and other confidential elements). The Subcontractor is then required to comply with the Main Contract in respect of the Subcontract Works, and to "assume all the obligations and liabilities of the Contractor under the Main Contract, save where the provisions of the Subcontract otherwise require." (Sub-Clause 2.2).

The Contractor's key obligations under the Main Contract are passed through to the Subcontractor with allowance for the particular scope and content of the Subcontract Works. Some of the key ‘back-to-back' obligations are as follows:

  • If the Subcontractor commits any breach of the Yellow Book Subcontract, which, as mentioned above, includes an obligation to comply with the terms of the Main Contract, it must indemnify and hold the Contractor harmless against and from all damages for which the Contractor becomes liable under the Main Contract as a result of such breach (Sub-Clause 2.2).
  • The Subcontractor is required to comply with all instructions and determinations of the Engineer under the Main Contract, of which the Subcontractor has notice, irrespective of whether the instructions and determinations were validly given under the Main Contract (Sub-Clause 2.3).
  • The Subcontractor's obligation to execute the Subcontract Works, to remedy defects and to ensure the Works, when completed, are fit for purpose, all mirror the corresponding obligations in the Main Contract (Sub-Clause 4.1).
  • As do the Subcontractor's design obligations, to the extent that the Subcontract Works include design (Sub-Clause 5.1). 
  • The Subcontractor is paid only when payment to the Contractor is certified or made under the Main Contract (commonly known as a ‘pay-when-paid' provision) (Sub-Clause 14.7). Interim payments to the Subcontractor could therefore be delayed until such time as the Contractor is paid by the Employer. However, parties will need to consider whether this is enforceable under the applicable law.6
  • Provision is made to enable the Contractor to comply with timing requirements for notification and submission of claims under the Main Contract, by requiring the Subcontractor to notify and submit any claims within shorter periods, in each case seven days shorter than those provided for in the Main Contract (Sub-Clause 20.2). 

The Yellow Book Subcontract also seeks to provide a framework for dispute resolution, which addresses the practical reality that Main Contract disputes will, on occasion, address issues of relevance to the Subcontract, and vice-versa. Where a Subcontract dispute involves issues that are also in dispute between the Contractor and the Employer under the Main Contract, the Parties' rights of referral to the Subcontract DAB are suspended for 140 days (or another period otherwise agreed) (Sub-Clause 20.4(a)). The intention is to allow the Contractor time to seek first to resolve the dispute with the Employer under the Main Contract DAB, before addressing the Subcontract dispute.

 

Comment

The Particular Conditions of the Yellow Book Subcontract will need to be carefully drafted to suit the circumstances of individual subcontract packages. 

From the Main Contractor's perspective, the comprehensive flow-down of obligations effectively addresses the key objective of passing risk down the contractual chain. Nevertheless, there remain some risks which cannot be passed on, such as the Subcontractor's entitlement to time and money where Subcontract Works are disrupted by "non-cooperation" from other subcontractors (Sub-Clause 6.1), which will leave Main Contractors exposed to claims. 

The comprehensive approach taken to passing through obligations and contract administration mechanisms from the Main Contract to the Yellow Book Subcontract, may, however, prove overly burdensome for those engaged on smaller packages of work.

The Yellow Book Subcontract is a welcome addition to the FIDIC family. Whilst it is perhaps curious that 2 years after the publication of the Second Edition of the FIDIC Yellow Book, FIDIC has decided to publish a subcontract for use with its First Edition, this nevertheless reinforces the reality that the 1999 Editions of the FIDIC forms are, and will continue to be, in widespread use for the foreseeable future.

 

1 The International Federation of Consulting Engineers.
2 FIDIC signs ground-breaking collaboration agreement with China International Contractors Association, International Federation of Consulting Engineers, 22 July 2019, available at https://fidic.org/node/23602
3 FIDIC signs landmark cooperation agreement with China Association of International Engineering Consultants, International Federation of Consulting Engineers, 17 January 2020, available at https://fidic.org/node/27420
4 Ibid. 
5 Asian Infrastructure Investment Bank signs five-year agreement to use FIDIC contracts, International Federation of Consulting Engineers, 26 November 2019, available at https://fidic.org/node/26488.
6 For example, for projects in England, Wales and Scotland, it may be contrary to Part II of the Housing Grants, Construction and Regeneration Act 1996 (as amended by Part 8 of the Local Democracy, Economic Development and Construction Act 2009).

 

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