Bad news from the World Bank

The FIDIC standard form published by the International Federation of Consulting Engineers is used on a large proportion of the world’s international construction projects. I would estimate more than half. It also gets used on major projects in the UK. So changes to those forms, especially when approved by the World Bank among others, are important. FIDIC is poised to publish a second edition of the Conditions of Contract for Construction, better known as the Red Book, and this is already accessible on the World Bank’s web site.

The international contracting community will probably not be best pleased with many of the changes as they include several onerous provisions that the World Bank had previously insisted on including in its amendments to the standard FIDIC contract.

Some contractors and many engineers may be concerned about the removal of the contractor’s power of the reasonable veto of a proposed replacement engineer. This is to be replaced by a non-binding right of objection. The role of the engineer is still of great importance in the FIDIC form, particularly when construction works are being undertaken in difficult conditions for an employer whose motives are not always straightforward. A new power of the employer to unilaterally appoint any replacement engineer will therefore raise concerns among contractors.

FIDIC looks set to push back the point in time when the employer must notify the contractor of any material change to the employer’s financial arrangements. Instead of this being when the employer has formed the intention to make the change, the deadline for giving notice is to slide back to just before the change to these financial arrangements is actually made. This last-minute timing would leave the contractor with little chance to react to any substantial deterioration in the employer’s financial arrangements.

Changes are also being made so that the employer is no longer permitted to make a call on a performance security only in specific circumstances. As a consequence unscrupulous employers will find it easier make a call on a performance bond and there will be little the contractor will be able to do to prevent it. The bank will of course recover the funds from the contractor under its cross indemnity and the contractor will be left with the dismal prospect of attempting to recover its money by arbitration.

The second edition appears set to embed the World Bank’s stringent requirements in relation to foreign personnel, concerning:

• The provision of a sufficient supply of suitable and reasonably priced food and an adequate supply of drinking and other water;
• The taking of precautions to provide protection from insects and pests;
• The keeping of complete, detailed and accurate employment records open for inspection.

It seems likely also that under the second edition the contractor would carry the burden of employer’s risk events, even those whose direct impact is felt away from the site, say somewhere within the supply chain.

Not all the changes go against the engineer, however. For instance, the second edition is likely to bring about:

• A toughening of the notification requirements for employer’s claims;
• A requirement that the employer promptly inform the contractor of any change to the engineer’s authority;
• An obligation of best endeavours on the part of the employer to assist with permissions related to foreign personnel;
• An increase in the advance payments threshold triggering repayments by the contractor;
• An option for a guarantee in lieu of retention money after the issuing of a taking-over certificate;
• Additional fetters on the employer’s right to terminate for convenience;
• A tightening of the qualifications necessary for members of the dispute board, and other improvements to the dispute resolution process.

That said, the multilateral development banks and international financing institutions have secured changes from FIDIC that generally favour the banks and the employers.