Ercüment Erdem Att. Melissa Balikci

Employer’s Remedies under FIDIC Silver Book

October 2019

Introduction

This newsletter briefly explains the Employer’s remedies under FIDIC (the acronym for Fédération Internationale Des Ingénieurs-Conseils) Silver Book (the Conditions for EPC[1]/Turnkey Projects) which is one of the most well-known contacts. FIDIC has published several standard forms of contracts and has updated them in 2017 considering the need for improvement[2]. These contract forms are very reputable and frequently used in many construction projects. As it is clear from its name, the Silver Book[3] is used for turnkey projects and this contract is one that places significant risks on the Contractor. This contract provides for a high degree of certainty on time of completion, as well as project costs. There are several remedies available to the Employer under this contract, which are:

  • Delay Damages;
  • Performance Damages;
  • Termination; and

In addition to these provisions, there are clear provisions as to the rights of the Employer in case a Contractor fails to remedy a defect. Each of these remedies are set out below. For the avoidance of doubt, the capitalized terms have the meaning ascribed to them in the FIDIC Silver Book.

Remedies

As mentioned above, according to the Silver Book, the Contractor has responsibility of the design and execution of the project. The Contractor is under the obligation of providing a fully equipped plant that is ready for operation. The Contractor also guarantees the performance of such plant. In accordance with these obligations, the Employer’s remedies have been drafted.

Delay Damages

One of the most important remedies foreseen in the Silver Book is Delay Damages. In such large projects time is of crucial importance and even a slight delay may cause substantial damages to an Employer.

Considering this, Clause 8.7 was drafted, which reads as follows:

If the Contractor fails to comply with Sub-Clause 8.2 [Time for Completion], the Contractor shall subject to Sub-Clause 2.5 [Employer’s Claims] pay delay damages to the Employer for this default. These delay damages shall be the sum stated in the Particular Conditions, which shall be paid for every day which shall elapse between the relevant Time for Completion and the date stated in the Taking-Over Certificate.

However, the total amount due under this Sub-Clause shall not exceed the maximum amount of delay damages (if any) stated in the Particular Conditions.

These delay damages shall be the only damages due from the Contractor for such default, other than in the event of termination under Sub-Clause 15.2 [Termination by Employer] prior to completion of the Works. These damages shall not relieve the Contractor from his obligation to complete the Works, or, from any other duties, obligations or responsibilities which he may have under the Contract.

The advantage of this clause is that, the Employer’s damage is calculated based on the number of days the project was delayed. At this point, the Employer is not obliged to establish that the Contractor is at fault.

Performance Damages

The control of the project is in the hands of the Contractor and the Contractor is under an obligation to deliver the project in accordance with the specifications provided by the Employer. The Contractor provides guaranteed standards and performance and should adhere to these. Whether the Contractor has provided a plant that complies with the specifications will be determined following certain tests. Where the plant does not perform according to these standards, (even after the Contractor is afforded an opportunity to make good the non-performance) then performance damages become payable. Again, these damages may be in the form of liquidated damages. In the Silver Book, non-performance damages are stipulated in Clause 12.4 [Failure to Pass Tests after Completion].

Termination

Termination is perhaps the most powerful remedy that the Employer has against a Contractor[4]. The relevant clause that sets out the Employer’s right to Termination is Clause 15 [Termination by Employer] which lists the circumstances where the Employer will be entitled to terminate the Contract. This clause foresees that a 14 days’ notice should be given to the Contractor. However, in certain circumstances the Employer may terminate the contract immediately.

The Employer also has a right to terminate the contract at its convenience pursuant to Clause 15.5 [Employer’ Entitlement to Termination]. According to this provision, the Employer shall not terminate the Contract under this Sub-Clause in order to execute the Works for himself or to arrange for the Works to be executed by another contractor.

Failure to Remedy Defects

In case of a defect, the Contractor is under a duty to remedy. If the Contractor fails to remedy any defect or damage within a reasonable time, a date may be fixed by (or on behalf of) the Employer, on or by which the defect or damage is to be remedied. In case the Contractor fails to remedy the defect or damage by this notified date and this remedial work was to be executed at the cost of the Contractor under Sub-Clause 11.2 [Cost of Remedying Defects]. In these circumstances, the Employer has several options, which includes a reduction in the Contract Price, termination.

In addition to the above, a distinct particularity of the Silver Book should be mentioned. The Silver Book affords the Employer with a right to Rejection. This right is foreseen in Clause 7.5 [Rejection]. The consequences of Rejection are disastrous – particularly for the Contractor – many contractors seek to exclude this provision.

Conclusion

Provision of liquidated damages in construction contracts is quite common. The parties may also incorporate penalty clauses into their contracts. However, the validity of penalty clauses and whether liquidated damages are, indeed, penalties is debated. The answer to this question depends on the law applicable to the contract. Accordingly, correct drafting of these provisions are crucial.

It is also important to note that amendment to these standard clauses should be made cautiously. Particular attention should also be given to the limitation of liability clauses and parties using these contracts should carefully consider what they wish to exclude.

[1] EPC stands for engineering, procurement and construction.

[2] For an overview of the changes made to the FIDIC Contracts in 2017, please see: Tuna Çolgar, “Updated FIDIC Contracts” Erdem & Erdem Newsletter, April, 2018.

[3] The below explanations are made in respect of the 2010 and 2017 versions of the Silver Book.

[4] James Bremen and Mark Grass: Employer’s Claimants and Remedies in the Guide to Construction Arbitration.