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The Fidic “Silver Book” is a significant departure from typical risk allocation contained in the other Fidic forms of contract. This change of risk allocation is designed to give employers an alternative to the standard form when a pre-determined fixed final cost is the most important factor for the employer; even more so than obtaining the. This note highlights the key issues and commonly amended provisions of FIDIC's Silver Book (1999). Free Practical Law trial To access this resource, sign up for a free trial of Practical Law.

“Silver Book” is not suitable in many circumstances. With the aim of creating an even-handed Construction Contract based on the FIDIC 1999 standard contract forms, EIC has published a series of “EIC Contractor’s Guides to the FIDIC 1999 New Books”. These Guides highlight the potential risks and pitfalls of each of the.

Background

In recent years the FIDIC Silver Book has become the de facto starting position for EPC contracts in project financed transactions in Sub-Saharan Africa and other emerging markets. For the purposes of this article, our comments relate to the use of the Silver Book in that context, rather than applying more generally to all uses of the Silver Book, although a number of our comments will also apply to other geographies and sectors, and where construction is being financed other than by limited recourse debt.

The Silver Book represents a turnkey, fixed price, lump sum arrangement, whereby the contractor assumes the majority of key construction risks. It is recognisable to the vast majority of the international contracting community, and has thus gained a foothold as a useful template on which to base an EPC contract. The contractor assumes the majority of risk on key matters such as design, specifications, time, price, site conditions and certain unforeseen risks. This sets it apart from the Red and Yellow Books, where the Employer retains a number of these key risks, in line with the purpose and scope for which the contract is being used. The difference in risk allocation between the FIDIC suite of contracts has been reflected in the market by differential pricing (even taking into account the differences in scope for which the different Books were designed), namely, a contractor bidding under a Red Book risk profile is likely to offer a lower price than for a Silver Book risk profile.

In project financed transactions, the preference for a Silver Book allocation has arisen from the need to ensure price and completion date certainty given that the project SPV generally does not have a balance sheet capable of absorbing cost increases beyond levels covered by its committed financial resources. Equally, most SPVs do not have the human resources and expertise available to call upon to deal with technical risks as they materialise on site. Even then, although the Silver Book is used as the basis of the construction arrangements, more often than not, the standard clauses end up being heavily amended. This is due to the need to take into account project specifics and pass-down (sometimes also referred to as ‘back-to-backing’) from the other project documents (such as power purchase agreements, concession contracts and/or financing documents). This is in addition to more general requirement from many lenders (and their credit committees) to have extremely robust conditions of contract that insulate their borrowers from cost and delay risks to the maximum extent possible.

Amendments in the 2017 Edition of Silver Book

This article does not attempt to list out all the changes made in the Second Edition but instead focuses on the key changes to the Silver Book that are likely to be relevant for those using it as the basis for their EPC contracts in the project finance context. We have also sought to set out how some of the new provisions are likely to be viewed in light of the points mentioned above relating to the current market practice of making amendments ‘above and beyond’ the standard form. Accordingly, we have summarised the below changes as being relevant to parties considering using the new template.

• Sub-Clause 1.13 – both parties are now under an express obligation to comply with all Applicable Laws. The Contractor is now under an obligation to assist the Employer in obtaining its permits and related items, which mirrors the Employer’s obligations in Sub-Clause 2.2.
• Sub-Clause 1.15 – the main limitation on liability clause has now been moved from Sub-Clause 17.6 to Sub-Clause 1.14. FIDIC say the intention is to make clear that it applies more generally and not just to the indemnities. There are additional carve outs from the exclusion of liability for consequential loss although in our experience, well-advised counterparties have been making, and continue to make, amendments to cover these positions in any event. It is to be noted that there has been discussion on recent transactions as to whether the liability cap applies to the Contractor’s obligation to repay all sums in a rejection scenario. The new liability clauses do not, in our view, shed any light on this subject and hence this may remain a topic for further discussion.
• Sub-Clause 2.4 – this clause in the 1999 edition required the Employer to provide evidence in respect of its financial arrangements for a given project. Generally in project finance transactions, these requirements have been deleted or scaled back: the financing is complex and the project finance lenders, who are integral to the project, will have effective control over the Employer’s financial arrangements. Taking into account that the lenders will have undertaken extensive financial due diligence, the need for such provisions has been typically considered unnecessary. However, it would appear that FIDIC has “doubled down” on this topic, and the new Sub-Clause 2.4 goes further than the previous version, requiring notice to the Contractor of material changes to the Employer’s financial arrangements, and giving the Contractor explicit rights to require the Employer to provide further evidence of its financial arrangements in certain circumstances (large Variations / following a payment default / following a material change in the Employer’s financial arrangements). The provisions in Sub-Clause 16 allowing the Contractor to suspend performance of the Works and then terminate for non-compliance with Sub-Clause 2.4 have been retained but have been narrowed in scope. We believe that in project finance transactions however, lenders and sponsors will continue to require such provisions to be removed.
• Sub-Clause 4.1 – this still contains an express “fitness for purpose” requirement but it has been modified, such that the purpose itself must be stated in the Employer’s Requirements (rather than anywhere in the Contract). This is backed up by an indemnity in Sub-Clause 17.4. This means the Contractor is required to indemnify the Employer for the Works or any substantive part thereof, not being fit for purpose. Whilst at first sight this appears to be a very Employer-friendly addition, it has to be viewed in light of the fact that the drafting includes an exclusion of liability for indirect and consequential losses and any liability under this Sub-Clause will fall within the cap on liability – both of which will curtail some of the benefit that the indemnity would otherwise afford. Nonetheless, this is likely to be a key area of concern for contractors who are required to accept this clause. In addition, the fact that most EPC contracts in a project finance context normally have provisions stating that indemnities fall outside the cap on liability and the exclusion of liability for indirect and consequential losses, means this provision may be additionally problematic for contractors.
• Sub-Clause 4.2 – the provisions relating to performance security remain largely unamended. However, there is one additional provision that allows the Employer to request an increase or consent to a decrease in the amount of the performance security, where variations or adjustments result in an upwards or downwards change to the Contract Price of more than 20%. It has been common practice for similar modifications to be made to the Conditions of Contract to allow amendment to the value of the security where the Contract Price changes, but the percentage change that must arise before the value of performance security is amended is typically much lower than 20%, often in the range of 3-5%. In addition, bespoke conditions of contract usually sanction the Contractor if it fails to increase the value of the performance security, and the new Silver Book does not cover this aspect. However, it is useful to see that the new edition has at least captured the key principle.
• Sub-Clause 4.15 – the provisions dealing with access routes to the site have been amended. The new position is that the Contractor is deemed to be satisfied with the access routes as at the Base Date and if there are changes to the same after the Base Date, then this will entitle the Contractor to an extension of time and cost. This will be problematic for Employers who often do not have absolute control over the access routes. Project finance transactions will likely seek to revert to the position that the access routes are a matter for the Contractor only, and a normal aspect of doing business which must be managed by the Contractor.
• Sub Clause 8.3 – the clauses dealing with the provision of the Contractor’s programme are now more intricate. The contract sets out more detail as to what each programme must show including, for example, links between activities and critical path items. There is also a new requirement in Sub-Clause 9.1 to submit a (specific) testing programme.
• Sub Clause 8.4 – a reciprocal duty to provide advance warning of matters likely to cause delay or increased costs has been introduced. Although not in itself particularly onerous, it is clearly a step designed with the overall intention to avoid disputes in mind. One could also speculate as to the extent of the influence of regimes such as the NEC’s “early warning” on the FIDIC Contracts Committee.
• Sub-Clause 8.5 – the list of grounds that permit the Contractor to claim an extension of time has been left largely unchanged. There is, however, additional drafting that provides that where a delay is caused by matters for which the Employer is responsible which are concurrent with delays caused by the Contractor, then they need to be dealt with under the Particular Conditions. If no such provisions exist then the same should be dealt with as appropriate “taking due regard of all relevant circumstances”. The discussion around concurrent delay in construction contracts is extensive and it is questionable whether this wording clarifies or just adds to the uncertainty in this area. It is likely that Employers in particular may look to exclude this drafting accordingly.
• Sub-Clause 8.8 – additional language has been added such that the cap on liquidated damages for delay does not apply for fraud, gross negligence, deliberate default or reckless misconduct. This mirrors the language in the provisions dealing with carve outs from the caps on overall liability.
• Sub-Clauses 9.4, 11.4 and 12.4(b) – these introduce for the first time in FIDIC contracts a concept of performance liquidated damages. It is to be noted that in most contracts where performance parameters need to be measured and specific levels achieved in order for Taking Over to occur (typically power projects and some process plants), these types of provisions are already added to the base FIDIC clauses. Indeed, participants in such sectors will likely have forms of wording with which they are already comfortable, and which are often more intricate than the new drafting proposed in the Silver Book.
• Sub-Clause 13 – the change in law provisions remain but with a number of alterations relating to events that now constitute a Change in Law (such as changes in permit requirements). In addition, the Employer is now allowed to request a decrease in the Contract Price as a result of a relevant Change in Law. Whilst this seems helpful in isolation, the change in law provisions are often amended so as to mirror the equivalent provisions in a key project document further up the chain (such as a power purchase agreement or concession agreement) and hence these provisions will need to be reviewed accordingly.
• Clause 14 – the payment provisions remain largely unchanged with a few exceptions:
• The provisions have been expanded to include more detailed drafting relating to the expiry and renewal of Advance Payment security. These are provisions which are typically already dealt with by many FIDIC users through amendments or particular conditions.
• A precondition has been added that requires the Contractor’s Representative to have been appointed prior to payment.
• The Employer must in response to a Statement provide supporting particulars in support of any differences between the amounts the Contractor has claimed and those that have been notified by the Contractor in the Statement as being payable. There is a new clause that allows the Contractor to apply again in the next Statement for amounts that were not included in the previous notification. Ultimately if these matters are not resolved then this can lead to a Claim under Sub-Clause 20. FIDIC has mentioned that these provisions are designed to ensure that payment-related issues are resolved at the soonest opportunity.
• The previous form of contract referred in some cases to “Cost” and in other specific provisions to “Cost plus reasonable profit”. The definition of Cost is unchanged other than a reference to tax in addition to overheads and similar charges. However, there is now a new definition of “Cost Plus Profit” in substitution of “Cost plus reasonable profit”. The profit percentage is to be agreed by the Parties but in default of any stated sum will be 5% of the Cost.
• Sub-Clause 15.2 – a number of new termination rights have been included with respect to the Employer’s right to terminate for Contractor default.
• If the delay damages cap (assuming the same is specified) is exceeded. The Employer merely has to evidence that it has an entitlement to deduct damages in excess of the cap as opposed to actually deducting them. Typically, this limb was included by many Employers that used the Silver Book prior to the new edition.
• If the Contractor is found to have engaged in corruption, fraudulent, collusive or coercive practices in relation to the Contract. This change is an expansion of the termination trigger beyond the previous language (which was limited to bribery).
• The list of events that allows immediate termination (as opposed to termination after a 14-day notice period) now includes the breach by the Contractor of the assignment and subcontracting provisions.
• Sub-Clause 15.5 – The Employer’s right to terminate for convenience now has a different compensation regime. Previously, the Contractor was entitled only to costs reasonably incurred in anticipation of completing the Work together with demobilisation costs and payment for work that was completed but unpaid at the date of termination. This emulated the position in respect of termination under the Force Majeure (now Exceptional Events) regime. The new edition entitles the Contractor to loss of profit and other losses and damages. EPC contracts do not contain termination for convenience regimes across the board but to the extent one is included, then parties will need to be mindful of this shift in payment regimes. The new regime is more punitive than in the previous edition and hence may be an issue for some Employers, since it results in the convenience termination trigger being virtually identical to termination for Employer default in terms of the compensation that arises.
• Sub-Clause 16.2 – An additional trigger has been added to the list of events allowing the Contractor to terminate. This states that if the Contractor does not receive a notice of the Commencement Date within 84 days after receipt of the Letter of Acceptance the Contractor has the right to terminate. Presumably FIDIC has added this to ensure that contractors are not left exposed to uncertain timescales. However, many EPC contracts generally have modified provisions relating to the Commencement Date, stating that if the Commencement Date does not occur by a given date, then the contract is effectively null and void (barring the continuation of certain boilerplate clauses). The new edition, however, provides for a termination right with enhanced compensation for the Contractor (as compared to the previous edition). It is likely that this provision will be resisted by Employers, who will instead want the Contractor to draw its own comfort regarding the Employer’s financing structure and associated timetable.
• Clause 17 – the former Clause 17 dealing with Employer’s Risks and indemnities has been restructured. The basic approach remains largely the same, however the Contractor’s indemnities have been expanded to include an indemnity against the Works not being fit for purpose when completed (Sub-Clause 17.4) – see our earlier comments on this above.
• Clause 19 – the insurance section has been redrafted and reordered so as to be more comprehensive as to the types of insurances that need to be taken out and by whom. This drafting is more akin to the type of insurance provisions that are normally included in a project finance context. The new requirements do require the Contractor to carry professional indemnity insurance for the fitness for purpose indemnity.
• Clause 20 – The previous Clause 20 has been split into a new-Clause 20 (Employer and Contractor Claims) and Clause 21 (Disputes and Arbitration), presumably to highlight the distinction in the contractual approach. Employer’s claims are no longer dealt with in Sub-Clause 2.5 via the regime set out in the previous 1999 edition whereby notification of Employer’s Claims occurred under Sub-Clause 2.5 followed by an Employer determination under Sub-Clause 3.5. These are now dealt with in Sub-Clause 20 in the same way as Contractor claims (including in respect of the time bar). This is probably one of the most significant changes to the 1999 edition insofar as it has put the parties on a level playing field in respect of claims. As such this has also resulted in a specific time bar being placed on the Employer’s claims as compared to the 1999 edition where no such time bar existed. This change may be one which employers and their lenders may be reluctant to move towards given that the previous system was accepted in the market.
• The provisions of the former Employer claims and Contractor claims provisions also produced potentially different outcomes if there was an element of non-compliance (partly due to the absence of a time bar in respect of the Employer’s claims), so the new edition seeks to avoid this. The split of the old Clause 20 into the new Clauses 20 and 21 is probably one of the key changes insofar as it introduces a clear distinction between claims and disputes and the methodology for establishing both. This separation is aimed, in FIDIC’s estimation, to avoid run-of-the-mill matters resorting unnecessarily to dispute. We expect this is an area where contractors will look to ensure that Silver Book-based EPC contracts contain the new wording so as to ensure parity of treatment and clarity for claims and disputes.
• Sub-Clause 20.2 prescribes the step-by-step procedures to be followed for an Employer’s and Contractor’s claim for time and/or cost. One point to note is that if a Party’s initial response to a claim for cost/extension of time is time barred due to the 28-day time-bar provision, but the claiming party disagrees, the claiming party is required to include these points in the fully detailed claim and this has to be taken into account in the agreement/determination. This is an area on which FIDIC has focussed in response to industry concerns (particularly from contractors). This is exemplified on even the simplest level by the fact that the drafting has increased in this section of the Silver Book from one page in length to around five pages. The Silver Book essentially now has a much more detailed approach to claims for cost and time.
• The section previously entitled “Appendix to Tender” has been renamed as “Contract Data” and still requires completion by the Parties so as to include project-specific data. The updated editions include updated documents such as Letters of Tender and Acceptance.
• The Dispute Adjudication Board (“DAB”) is now referred to as the Dispute Avoidance Adjudication Board (“DAAB”). The provisions have been extensively amended and the new emphasis on dispute avoidance is clear. However, it is worth noting that in the majority of project financed EPC contracts, take-up of dispute board provisions has been historically low, and the relevant clauses have often been deleted and/or replaced with dispute resolution provisions that incorporate amicable settlement regimes supplemented with arbitration as the final method of dispute resolution.
• The definitions are now in alphabetical order rather than being sub-divided by themes. Also, there are sub-headings to assist with interpretation as opposed to long paragraphs of text under only one sub heading. Generally, the Clauses are in the same order as the 1999 edition except that Clauses 18 and 19 have been reversed so that Clause 18 deals with Force Majeure (now entitled Exceptional Events) and Clause 19 deals with insurance.
• FIDIC has introduced a definition of “Notice”. FIDIC states that this is now included so that Parties are clear when a Claim is being issued, particularly when the Claim may be obscured in routine communications. The new edition states in some instances when written communications can constitute Notices and when they cannot (i.e. progress reports cannot be deemed to be Notices).
• There are also additional provisions in Clause 3 in relation to the appointment of the Employer’s Representative relating to his role, the actual appointment and qualifications. These include:
  – the Employer’s Representative must appoint a natural person if the Representative is a legal entity; and verbal instructions cannot be used and instead instructions need to comply with the new Notice procedure.

  These provisions are generally driven by the theme that the Employer’s Representative is to be regarded as a more neutral figure than was previously the case, and this is embodied in the drafting in Sub-Clause 3.5 that states that “the Employer’s Representative shall not be deemed to act for the Employer”.

• FIDIC has also introduced the “Golden Rules”. These set out the “spirit” in which the General Conditions of the Silver Book should be used. Put simply, FIDIC states that amendments to the Conditions of Contract should not be made in an attempt to transfer risk to a party that would otherwise alter the balance of risk set out in the underlying Conditions of Contract. During the presentation launch, the Golden Rules drew much comment particularly from those in the project finance sector. This was due to the fact that the Golden Rules probably have little significance to project financed EPC contracts because the Contractor is paid to assume the risks that the Employer and lenders require him to. Also, the potential impact of the Golden Rules is arguably negligible insofar as FIDIC has stated that it has no means of effectively monitoring or policing compliance with the Golden Rules.

At this point it is worth reminding ourselves that market practice in the project finance sector has led to a situation where most EPC contracts are a fortified version of the basic Silver Book provisions to ensure a comprehensive allocation of key construction phase risks to the contractor. The amendments already made regularly to the Silver Book capture a number of the points or themes that have been drafted into the new editions, and so to this extent, the market practice has therefore already made ground on FIDIC’s attempts to clarify and expand certain provisions in the updated Silver Book.

The changes that seek to introduce reciprocity in respect of areas such as claims will be a test of the market’s appetite for such changes, bearing in mind that the 1999 edition’s basic risk transfer as supplemented by appropriate amendments has been accepted for a number of years by lenders, sponsors and contractors alike. The provisions that introduce a more favourable risk allocation in the Contractor’s favour (such as those relating to termination) will also need to be processed by the project finance market. However, it is likely that Employers and lenders will be resistant to these changes given the fact that contractors have set a precedent in recent years by accepting the previous risk allocation.

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The introduction of the Golden Rules is an intriguing foray by FIDIC into seeking to promote certain behaviours and risk allocation between the parties – in that sense, it has commendable goals. This has to be balanced against the low likelihood of them being adopted by parties to contracts where the Contractor is being paid to assume all relevant risks and obligations under amended Conditions of Contract, and where such parties are used to doing so under forms of the Silver Book that have often been heavily negotiated.

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