Ukraine: Can International FIDIC Contracts Make Ukrainian Construction Projects Appealing To Investors?

International standards could make the Ukrainian construction industry more transparent but a range of implementation issues demand attention.

FIDIC contracts have already featured in a number of Ukrainian projects financed by international financial institutions and largely focused on the energy, transport and municipal infrastructure sectors.

FIDIC is the International Federation of Consulting Engineers founded in 1913. It publishes international standard forms of contracts for works and for clients, consultants, sub-consultants, joint ventures and representatives, together with related materials such as standard pre-qualification forms. FIDIC contracts differ from those usually used in Ukraine for construction projects. However, foreign investors and contractors are familiar with FIDIC contracts and are now actively lobbying for their use in Ukraine.

FIDIC contracts have already featured in a number of Ukrainian projects financed by foreign banks and international financial institutions such as the European Bank for Reconstruction and Development, the European Investment Bank, and the World Bank. This activity has largely focused on the energy, transport and municipal infrastructure sectors.

The Ukrainian authorities have also become FIDIC advocates in recent years. Minister of Infrastructure Omelyan announced in 2016 that the use of FIDIC contracts in road construction would help facilitate higher quality and greater cost control. The Ukrainian Sea Port Authority has recently started to introduce FIDIC contracts into its projects such as dredging work at Yuzhny Port.

Most of Ukraine's existing experience with FIDIC methodology relates to highway construction projects. Reconstruction work on parts of the Kyiv-Kharkiv highway and Kyiv-Chop highway featured FIDIC contracts. This initial experience with FIDIC contracts has helped to identify a number of challenges presented by the increasing use of FIDIC regulations in Ukraine.

Project Paperwork

The very first impression from starting work with FIDIC contracts is their significant volume. A typical FIDIC contract consists of general and particular conditions, with the volume of the former alone often running to around 100 pages. Meanwhile, the particular conditions further amend or supplement the general conditions, often taking into account the specifics of the Ukrainian legal framework. In addition to this, even a midscale construction contract usually includes a number of annexes totaling hundreds of pages with tender, technical and other details. As the project progresses, the volume of documentation increases significantly. Correspondence between the various parties may generate thousands of pages. The management of so many documents requires special skills and knowledge. Otherwise, failure to meet various deadlines, pre-conditions and other FIDIC contract requirements will usually lead to additional costs, project delays and in many cases will ultimately result in complex legal disputes.

Engineer Authority

The most recognizable feature of FIDIC contracts is the highly specific role of engineers in the construction project. This is usually a special company with a qualified staff. Even though the engineering group may not be a party to the contract, they perform a number of crucial functions such as monitoring quality control and work acceptance, as well as considering complaints and making decisions on various other issues. This is in stark contrast to standard practice in the Ukrainian construction industry. The functions of FIDIC engineers overlap with the authority of a number of state institutions. In order to address the legislative gap highlighted by the lack of accommodation for the FIDIC engineer role in Ukraine, the Cabinet of Ministers of Ukraine adopted a resolution in December 2016 introducing the notion of a "consulting engineer" into the Ukrainian legal framework. However, this resolution exclusively relates to road construction and is merely the first step. It actually raises more questions than it answers in terms of the FIDIC engineer role under Ukrainian law.

Furthermore, on 8 November 2017, the government amended the resolution by substantially limiting the scope of its application. Thanks to these amendments, we are unlikely to see substantial reforms even in the road construction industry, which used to be a regarded as a pioneer for FIDIC in Ukraine.

Double Accounting

Ukraine's mandatory forms for calculation of work value and their acceptance do not fit into the budgeting and work acceptance procedures stipulated under FIDIC. This might require the parties to perform "double accounting", for themselves under FIDIC contract requirements and then in line with Ukrainian law requirements.

Extension Inflexibility

It is often the case that a construction project requires adjustments in time or costs. FIDIC conditions are well equipped for dealing with such issues, while this is not the case for Ukrainian public procurement rules. The employer in the kind of large-scale infrastructure projects which FIDIC is typically used for is usually a state authority. This means that any adjustments of time and pricing are very limited. Consequently, the employer may not be able to accept even reasonable requests for extensions of time or additional costs, regardless of whether the engineer independently backs these requests. This leaves the contractor no other option but to proceed with legal claims against the employer.

Dispute Resolution

Default FIDIC conditions provide a three-tier dispute resolution clause. First, the engineer rules on disputable issues. The "DAB" (Dispute Adjudication Board) is the second tier and is the forum where parties can contest the engineer's decisions. The DAB is usually composed of three persons, with the majority being engineers rather than lawyers. Finally, any of the parties not satisfied by the DAB's decision may appeal for international commercial arbitration. Obviously, Ukrainian practice, and in particular the Ukrainian law enforcement system, is not familiar with this kind of procedure for resolving disputes. However, this approach has proven an efficient way to achieve construction dispute settlement in a number of countries.

Attracting Investment

FIDIC contracts are featuring more and more in large-scale construction projects in Ukraine. The participants of any projects featuring FIDIC contracts need to make sure they are well prepared to meet a number challenges in the structuring and management of their work. Making Ukrainian law more "FIDIC friendly" will not only help make implementation of ongoing construction projects smoother – it could also facilitate investment into the infrastructure sector of Ukraine. However, implementation requires care and attention.

Originally published by Business Ukraine.

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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