Italy: Introduction To FIDIC Silver Book

Last Updated: 9 February 2015
Article by Giuseppe Broccoli

FIDIC Contracts are widely used in the international construction industry and their purpose is to define the contractual relationship between the parties and to allocate the risks between the Contractor and the Employer.

The main forms of FIDIC Contracts are known as:

  • the Red Book which refers to Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer. If the Red Book has been intended to be used for works designed by the Employer, it can be used also in case the Contractor is in charge for the design of some elements (civil, mechanical, electrical and/or construction works);
  • the Yellow Book which refers to Conditions of Contract for Plant and Design-Build. This form is recommended for construction of electrical and/or mechanical, building and engineering works where the Contractor designs and provides plants or other works or any combination of civil, mechanical, electrical and/or construction works;
  • the Silver Book which refers to Conditions of Contract for EPC/Turnkey Projects. The Silver Book is recommended for turnkey provision of process or power plants, factories and/or infrastructure when the Employer wishes the maximum degree of certainty in terms of costs and time of the works and intends to have the Contractors entirely responsible (and liable) for the design and execution of the Works;
  • the Gold Book which refers to FIDIC Design, Build and Operate Projects where the project os also operated generally via and operational and management contract.

The FIDIC Contracts are composed of General Conditions which can be amended through Particular Conditions to adapt them to the characteristics of the specific project. One thing that should be avoided to the maximum extent is to modify the General Conditions without due care since the modifications of the General Conditions may bring to material inconsistencies and/or pitfalls.

The following note aims at providing a brief introduction to the main features of the Silver Book.

Main features.

The Silver Book deals with turn-key projects ie those projects for which the Contractor takes care and is responsible for the engineering, the procurement and the construction. The Contractor will then deliver to the Employer a plant, a factory or an infrastructure ready to be used by the Employer.

The introductory note of the Silver Book states that the aim of the Book is to give certainty as to the time and costs of the works.

The main features of the Silver Book are that:

  • the Contractor takes full responsibility for the design of the project;
  • the project is on a lump sum basis;
  • the possibility for the Contractor to request and obtain adjustment of the price are limited.

Contractor's obligations.

The Contractor's obligations are specified under Clause 4. Certainly of the most relevant is that under Sub-Clause 4.1 [Contractor's General Obligations] which reads as follows:

"When completed, the Works shall be fit for purposes for which the Works are intended as defined in the Contract".

The fit-for-purposes obligation is rather burdensome for the Contractor and some disputes may arise in connection with its legal meaning and construction (depending on the governing law of the Contract) even if the obligation is specified to refer to what is "defined in the Contract". That means that particular attention should be given first of all to what it is stated in the Contract and in the technical specifications.

Employers' Requirements.

Sub-Clause 4.1 [Contractor's General Obligations] goes on specifying also that the Contractor shall be responsible for any work "necessary to satisfy the Employer's Requirements" or that, in any event, "is implied by the Contract" and this is in line with the aim of the Silver Book and the need of the Employer to leave any and all the responsibilities with the Contractor to the maximum possible extent. Said Clause must be read in conjunction with Sub-Clause 5.1 [General Design Obligations] which provides that "the Contractor shall be deemed to have scrutinized [...] the Employer's Requirements"

With specific limited exception, the Employer shall not be responsible for any error, inaccuracy or omission contained in the Employer's Requirements as included in the Contract. Again particular attention should be given to the Employer's Requirements to avoid any liability actually unknown to the Contractor.

The Contractor shall in addition satisfy himself as to the "correctness and sufficiency of the Contract Price" (Sub-Clause 4.11 [Sufficiency of the Contract Price]) and this is in line with the main purposes of the Silver Book in terms of certainty of costs of the works and responsibility resting on the Contractor.

Administration of the Contract.

The administration of the Contract remains in the hands of the Employer unless the latter appoints, under Clause 3.1 [The Employer's Representative] the Employer's Representative (which appointment is therefore optional). However, the Employer's Representative does not play an independent role. The Representative is expressly the longa manus of the Employer.

The Employer shall act via determinations which shall be "fair" as provided by Clause 3.5 [Determinations], determinations which are subject to a notice of dissatisfaction in the case the Contractor believes it appropriate.

Variations and adjustments

Sub-Clauses 13.1 [Right to Vary] to 13.3 [Variation Procedure] provides for the variations and adjustment of the Works. The rationale of the clause stays in that in almost all the construction contracts the need to vary the works may arise during the construction phase and after the contract has already been awarded.

There are three main types of variations:

  • those purely instructed by the Employer;
  • those proposed by the Contractor upon request of the Employer;
  • those proposed by the Contractor.

Sub-Clause 13.1 [Right to Vary] clearly states that "variations may be initiated by the Employer [...] either by an instruction or by a request for the Contractor to submit a proposal". Unless the Contractor gives a notice to the contrary in case of specific and limited cases, the latter will be bound by any variation instructed by the Employer.

Variations initiated by the Contractor are instead governed by Sub-Clause 13.2 [Value Engineering] which provides that the Contractor is entitled to propose a variation which may (i) accelerate the completion, (ii) reduce the costs for the Employer, (iii) improve the efficiency of the Works or (iv) otherwise be of benefit to the Employer.

The proposal submitted by the Contractor shall clearly specify any impact that the variation will have on costs and time for completion. If no agreement is reached between the parties in such respect, the Employer shall proceed according to Sub-Clause 3.5 [Determinations] and will be entitled to determine any adjustment to the Contract price including "reasonable profit" taking however into account the proposal submitted by the Contractor.

Clearly one point to be also considered is that any Variation may have an impact on the liabilities of the Contractor and this should be carefully considered especially in the case the Contractor simply execute an Employer's Instruction.

Claims

One of the most important issues for any contractor is the entitlement to submit claims. While the Silver Book limits the right of the Contractor to request additional payments (in the sense that the aim of the Silver Book is expressly to provide certainty to the Employer as to the costs and time of the Works) the Silver Book provides certain cases where the Contractor is entitled to obtain costs, profit and/or extension of time.

There are various clauses which provides expressly said right.

In general terms however, the most relevant provision of the Silver Book is contained in Sub-Clause 20.1 [Contractor's Claims] pursuant to which whenever the Contractor believes to be entitled to additional payment and/or to an extension of the Time For Completion he must notify the event to the Employer no later than 28 days after the Contractor has become aware (or should have become aware) of the event giving rise to the claim.

It must be stressed that the provision is a time-bar-limit provision and this is expressly stated in the second paragraph of the same Sub-Clause which provides that:

"if the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim".

Whether the time-bar-provision will be enforceable or not will clearly depend on the governing law of the Contract but this will eventually be discussed during the dispute or even at contentious level. The best advice is clearly to comply with the time limit provided by Sub-Clause 20.1 [Contractor's Claims](even if the number of days has not been increased between the parties).

Clause 20.1 [Contractor's Claims] provides more details on the submission of the claim:

  1. the Contractor has to submit his claims within 28 days from becoming aware (or should have become aware) of the event providing the Employer with a description of the event of circumstance giving rise to the claim; that means that the Contractor does not need to provide any quantification of additional payment or of extension of time he claims;
  2. however within 42 days after the Contractor became aware (or should have become aware) of the event, he must provide a fully detailed claim with full particulars of the claim, amount of extension of time sought and/or amount of additional payment claimed.

Summary

FIDIC contracts are widely used in international construction projects. Their provisions are mostly self-explanatory and provide the possibility to amend the General Conditions via Special Conditions which will allow adapting the Contract to the specific project and the governing law.

Silver Book aims at providing the Employer certainty in terms of costs and time for completion. It is fair to say that as they are now the provisions of the Silver Book are slightly more favorable to the Employer. The use of the Silver Book (but this is true also for the other FIDIC forms) requires however a competent contract administration both from the Employer and the Contractor to avoid any pitfall and to ensure that it reaches fully the aim the parties have in mind.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Giuseppe Broccoli
 
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