RISK ALLOCATION IN FIDIC FORMS OF CONTRACT

Table of Contents

1. INTRODUCTION ...................................................................................................... 1

2. PROJECT RISKS AND FIDIC ................................................................................. 2

3. FIDICS DIFFERENT FORMS OF CONTRACT .................................................. 2

4. CHANGES IN RISK ALLOCATION FROM 4TH EDITION .............................. 5

5. BURDEN OF RISK UNDER APPLICABLE LAW ............................................. 7

6. CONCLUSION ........................................................................................................... 8

7. WORD COUNT ............................................................Error! Bookmark not defined.

APPENDIX A – COMPARISON OF RISK ALLOCATION IN RED, YELLOW AND

SILVER BOOKS ..........................................................................................................................

APPENDIX B – UAE CIVIL CODE PROVISIONS COMPARED WITH FIDIC RED

BOOK

By : Femeena Mohamed, UAE

femeenamohamed@gmail.com

Page i of i
November 2012
1. INTRODUCTION

Construction projects are prone to risk generation by parties involved1 and identification
of these probable risks and allocating these aptly has been quite a challenge to drafters
of contracts. Risk can be defined as likelihood of occurrence of an event that can lead
to loss or damage or a possible gain. Over assignment of risks to contractor can lead to
escalation of cost and under assignment will constrain the employer having to deal with
trivial and inevitable issues during performance of the contract. Risks when eventuate
have greater inference on progression of events during the phase of the contract. FIDIC
during the course of its evolution has tried to provide for a fair allocation of risks
between the contracting parties and constantly try to improve this concept.

In 1957, FIDIC released their first edition of Red Book which was called “Conditions of
Contracts for Works of Civil Engineering”, prior to which the construction industry did
not have an internationally recognized conditions of contract. Red Book was based on
British form of contract and mostly reflected British language and legal system. FIDIC
established different committees to improve their Forms of Contract and to develop
further Contract Conditions for different types of construction. FIDIC kept on par with
the changing international construction sector needs by introducing new forms of
contract to suit project needs like EPC, DBO etc.

In this paper first to be considered is how FIDIC has treated various risks in its current
forms of contracts. Being the commonly used forms in the 1999 Suite, main focus is
placed on Red Book2, Yellow Book3 and the Silver Book4. Secondly an examination of
the extent of changes in allocation of risks in FIDIC is done by comparing 1999 FIDIC
forms with the earlier versions. Lastly an endeavor is made to see the similarities of
FIDIC risk provisions with those under UAE Civil Code5.

1
N Bunni, The FIDIC Forms of Contract (3rd edn, Blackwell Publishing, 2005) page 94
2
FIDIC Conditions of Contract for Construction for Building and Engineering Works Designed by the
Employer, 1st edn, 1999
3
FIDIC Conditions of Contract for Plant and Design Build, for E&M Plan ant for Building and
Engineering works, Designed by the Contractor,1st edn, 1999
4
FIDIC Conditions of Contract for EPC/Turnkey Projects,1st edn, 1999
5
U.A.E Civil Transaction Code, Law # 5 of 1985

November 2012 Page 1 of 10

2. PROJECT RISKS AND FIDIC

Project risks are generally considered as two types – insurable and non-insurable.
Insurable are those losses or damages caused as consequences of accidents and fire, acts
of God, defective material, workmanship etc. Non-insurable are those which leads to
time and money loss due to delays in works, change in design, variations etc6.

In case a risk is not allocated to one of the contracting parties and in the event a dispute
arises, the parties will have to rely on the dispute resolution mechanism stipulated in the
contract or the applicable law to determine who is in the best position to take
responsibility.

This determination would be based on the following four criteria7 – (1) Which party
could best foresee the risk? (2) Who could best control the risk and the consequences?
(3) Who can bear the risk? (4)Who will benefit or suffer the most when risk
eventuates?

FIDICs view in its older and conservative forms (red and yellow books) is that insurable
risks are covered by means of procuring adequate insurance policies and non-insurable
risks be borne by the party who was responsible for loss or additional cost.
Construction Contracts are all about prior apportionment of risks like all other type of
contracts8. Risks should not be allocated to a party who cannot bear consequences or
aftermath in case the potential becomes a reality.

3. FIDICS DIFFERENT FORMS OF CONTRACT

FIDIC contracts have been in predominant use for many decades now. Notwithstanding
the form of contract chosen, the primary role of identifying and allocating risks to right
party must be achieved9.

The forms of contract in FIDIC suite deals with current and common types project
procurement and delivery methodologies. Majority of risk matters in FIDIC may be

6
FIDIC Conditions of Contract Training, Session 1, IBRD, Katmandu, 21-23 September, 2011, Zoltán
Záhonyi
7
N Bunni, The FIDIC Forms of Contract (3rd edn, Blackwell Publishing, 2005) page 101
8
The Nature of Construction Contracts, available at http://www.palgrave.com/PDFs/9780230521650.pdf
accessed on 03 October 2012
9
S Hibbert, Project and Construction Contracts – are you measuring the risks, not just the rewards,
Emirates Business 24/7 ( UAE, 28th January 2010)

November 2012 Page 2 of 10

considered as covered under clauses 17, 18 and 19 of these three forms, but FIDIC
throughout the general conditions have provided a fine balance of risks and
responsibilities allocated between parties to the contract10. Change in quantities, design
responsibility, variation, force majeure, unforeseen situations, price escalation etc are
major risk faced in any contract and an analysis of allocation of these in FIDIC Forms is
analyzed below and in the succeeding section:

a) In red book11, the quantities are re-measured, but in both yellow and silver books,
the quantity is a risk to contractor as the contract is based on a lumpsum amount12.
This can be seen as a fair allowance given that red book is based on employer‟s
design, while yellow and silvers books are based on the contractor‟s design to suit
employer‟s requirement. For need of meticulous and professional attitude from
contractor where he is responsible for design, it is best that this is apportioned in
the given manner.

b) In Red book, risks in connection with design responsibility lie with the employer,
while it is contractor‟s responsibility in both yellow and silver books. Incase of red
book, the design risk is not covered by contractors insurance, whereas in Silver
book complete design risk has to be insured by the contractor13. In both red and
silver books, contractor is required to provide insurance coverage for complete risks
except for those listed as employers risk. This is also a fair allocation considering
the scope under each form.

c) In both red and yellow books, the contractor is not responsible for consequences
arising from unforeseeable physical conditions and other physical obstructions like
extreme climatic conditions and if the work delays due these reasons, the contractor
is entitled to extension of time. The rationalisation here is that it is better for the
employer to shoulder the risks of ground conditions in cases where an experienced
contractor cannot reasonably determine or appraise the probability14. In silver book
the contractor is supposed to have acquired all necessary information as to risk,

10
P Battrick, P Duggan and Driver Consult Ltd, Risk and Responsibility Clause 17 and Beyond, 2012
11
FIDIC Red book, Sub-clause 12.1 of
12
FIDIC Yellow and Silver Books, Sub-clause 14.1 of
13
V H Langer, Risk Apportionment in FIDIC Contracts, available at http://www.ganz-
recht.de/index.php?id=28,76,0,0,1,0 accessed on 15 October 2012
14
Bearing the risk of the unexpected in the ground, Herbert Smith Newsletter

November 2012 Page 3 of 10

 contingencies and other matters which may disturb work and the contract price
shall not be modified due to any unforeseen difficulties or exceptionally adverse
climatic conditions or unforeseeable shortages in good or personnel 15 . This
provision in silver book is a huge risk to the contractor as it is not possible to allow
for all the contingences during the tender period and as a result, this could result in
under estimated or over escalated tender figures which may lead to claims and
disputes or high cost of project respectively for the employer.

d) With regards to responsibility for accuracy of setting out data, it is employers risk
in both red and yellow books. In silver book, the contractor is assigned the risk to
ensure accuracy of this data. This again is an additional risk to the contractor but
can be justified since the contractor in silver book is responsible to bring to fruition
the employers requirement.

e) In all three forms, the contractor is required to protect the works during
suspension16 and this can be considered unfair in case the contractor has not been
paid 17 . During suspension, as a fair means it would have been better if this
responsibility was allocated to the employer at least in cases where cause for
suspension was not contractor‟s performance or when payment was not effected for
a certain period.

FIDIC standard forms are considered as well balanced when it comes to risk allocation
principles 18 .The risk sharing theory in both red and yellow books are favourable to
employer and contractor as the employer gets the deal at a lower price as the contractor
is not required to price the risk which are very unlikely to occur.

The use of turnkey contract or silver book is ideal for an employer who does not want to
be actively involved in the project but would like an operational facility delivered. Such
employers do not want to assume huge risks and want certainty on final cost and time.

15
FIDIC Silver Book, Sub-clause 8.4(c) and (d)
16
FIDIC Red Book, Sub-clause 8.8
17
P Battrick, P Duggan and Driver Consult Ltd, Risk and Responsibility Clause 17 and Beyond, 2012
18
Hok G S., „Risk Allocation in the FIDIC Conditions of Contract for Red Book and Silver Book,
http://www.dr-hoek.de/EN/beitrag.asp?t=Risk-allocation-FIDIC accessed on 7 October 2012

November 2012 Page 4 of 10

Only risks to employer in Silver book are employer‟s risk19. FIDIC when developed the
silver book was responding to the market requirement from risk averse employers who
wanted more certainty in cost and time of contract at the time of making the contract
deal.

Employers risk can be generally considered as events or circumstances over which

neither of the contracting parties have any control and those which are caused by the
employer‟s or their representatives‟ actions20.

“The great benefits of the present Red and Yellow Books are that the balance of risks
and responsibilities as well as allocation of duties and authorities between the parties
generally is accepted by both employers and contractors. The FIDIC Conditions have
therefore become the baseline conditions for a fair international construction
contract.21”

FIDIC contracts are widely used internationally and they are recognised as being
reasonable and impartial in allocating risks and obligations. Due to wide use, this has
led to contractor confidence and lower risk allowance and contingencies.

4. CHANGES IN RISK ALLOCATION FROM 4TH EDITION

With the introduction of 1999 suite, it can be considered that the risk allocation in
general has been made more equitable and reasonable when compared to previous
versions. Some of the amendments made are employer friendly while some aspects
have softened contractor‟s exposure to risks.

Probably the most important of new provisions in 1999 FIDIC forms is the introduction
of fluctuations clause22, which provides for adjustment of cost. The cost includes a

19
FIDIC Silver Book, Sub-clause 17.3
20
C R. Seppala, FIDIC‟s Four New Standard Forms of Contract : Risks, Force Majeure and Termination
(Construction Management Guides)
21
J Glover, „FIDIC an overview: the latest developments, comparisons, claims and a look into the future‟
http://www.fenwickelliott.co.uk/files/FIDIC.pdf accessed on 30 September 2012 citing „A Contractor‟s
View on FIDIC Conditions of Contract for EPC Turnkey Projects‟ ICLR (1999) Vol 16
22
Sub-clause 13.8 of FIDIC Red, Yellow and Silver Books

November 2012 Page 5 of 10

formula for calculating changes. This provision is same in red book and yellow book,
but in silver book this is subject to refined agreement between parties23.

Under the old red book, the contractor was entitled to “an addition to the contract price
in accordance with clause 52” in case of Employers risk 24 which is construed as
entitlement to profit. As per old orange book, contractor was only entitled to cost25. In
new FIDIC red and yellow books26, the perspective is somewhat intermediary as the
contractor is entitled to recover cost, but if loss is due to employer‟s use of works or
design, contractor is entitled also for reasonable profit27. These two risks are not listed
in Silver Book as the Employers Risk.

The old red book did not contain force majeure clauses, but old yellow and orange
books had such provisions. New red, yellow and silver books contain force majeure
clauses28. Termination of convenience by employer is also a new provision in 1999
forms which poses great risk to contractor and can be considered a one sided.

FIDIC also have made provisions in new version to reduce risk undertaken by
contractor for protection in cases of delayed payment practice29. Sub-clause 2.4 gives
contractor right to demand evidence for financial arrangements and sub-clause 16.1
provides for contractors entitlement to suspend work in the event of failure by employer
to provide such evidence.

Another new introduction is provision for Employers claim against Contractor 30 . In

1999 forms, contractor is entitled for financing charges in case of payment delays,
compounded monthly on amount unpaid for period of delay31.

23
Sub-clause 13.8 of Silver book in Particular condition suggests adjustments to contract value in case of
unreasonable escalation due to inflation
24
FIDIC Conditions of Contract for Civil Engineering Construction ( 4th edn, 1999) Sub-clause 20.3
25
FIDIC Orange Book, (1st edn, 1999) Sub-clause 17.4
26
FIDIC Red Book and Yellow Book, Sub-clause 17.3(f) and (g)
27
C R. Seppala, FIDIC‟s Four New Standard Forms of Contract : Risks, Force Majeure and Termination
(Construction Management Guides)
28
Clause 19 in FIDIC Red, Yellow and Silver Books
29
Sub-clause 2.4 in FIDIC Red, Yellow and Silver Books gives the contractor right to demand evidence
for financial arrangements and sub-clause 16.1 provides for contractors entitlement to suspend work in
the event of failure by employer to provide such evidence
30
Sub-clause 2.5 in FIDIC Red, Yellow and Silver Books provides for Procedures for Employer‟s claims
against the Contractor
31
Sub-clause 14.8 of FIDIC Red, Yellow and Silver Books

November 2012 Page 6 of 10

In new editions of FIDIC, employers risk now includes terrorism 32 and also a new
limitation of liability clause is introduced33. Also Dispute resolution has been made
more effective by emphasizing on detailed clarity on procedures.

By broadening of force majeure clause, increased power to contractor regarding

evidence to employers ability to pay, financing charges on late payments, limitation to
liability, right to suspend or reduce rate of work and consideration for changes in law;
some of major issues for contractor have been addressed. From the employer‟s
perspective, moves which are in his favour are introduction of termination of
convenience, quality assurance, increased payment period which is now changed to 56
days instead of 28 and value engineering provisions.

5. BURDEN OF RISK UNDER APPLICABLE LAW

Burden of risk vary according to the applicable Law 34 . UAE Civil Code has some
provisions similar to those in FIDIC Red Book. It exemplifies similarity to FIDIC
stands in cases like Contractors Care of works 35 , consequences of force majeure 36 ,
contractors claims, unforeseen situations37, quantities increase during construction38 etc.
A list of such risks, clauses from UAE Civil Code and the corresponding clauses from
FIDIC are provided in Appendix B.

Having said this, it has to be also noted that according to UAE Civil code, liability
cannot be limited by agreeing to it in a contract39.

32
Sub-clause 17.3 of FIDIC Red, Yellow and Silver Books
33
Sub-clause 17.7 of FIDIC Red, Yellow and Silver Books
34
Hok G S., „Risk Allocation in the FIDIC Conditions of Contract for Red Book and Silver Book,
http://www.dr-hoek.de/EN/beitrag.asp?t=Risk-allocation-FIDIC accessed on 7 October 2012
35
U.A.E Civil Transaction Code, Law # 5 of 1985, Article no. 875(2)
36
U.A.E Civil Transaction Code, Law # 5 of 1985, Article no. 894
37
U.A.E Civil Transaction Code, Law # 5 of 1985, Article no. 889(2)
38
U.A.E Civil Transaction Code, Law # 5 of 1985, Article no. 887(1)
39
According to article no. 882 of UAE Civil code article, any agreement with the contractor to limit the
liability to a certain amount is void

November 2012 Page 7 of 10

6. CONCLUSION

In both the red and yellow books, risks are allocated between the parties on a fair and
equitable basis, after considering matters about insurability, control of risk, and ability
to foresee the risk. Under silver book more risks are allocated to the contractor. The
tenderers will require more information related to site conditions, hydrological and
subsurface data to evaluate the risks involved. FIDICs traditional approach has been
allocating risk to the party who is in control of that factor; however, diverging from this
policy the silver book can be considered as an effect of the market needs and it places
majority of the risks on the contractor. It is therefore considered that Red Book and
Yellow Book are fairer when it comes to allocation of risk and silver book provides for
allocation in a disproportionate manner. Then again Silver Book is meant for use by
employers who do not want to assume more risk and prefer to have a stable contract
sum.

Due to their neutral standpoint, the FIDIC standard forms are adopted by many
International organizations such as World Bank, the Islamic Bank for Development,
European Commission etc and also many government and other leading organizations
have standardized their contracts by making amendments to FIDIC forms.

From an overall point of view, it can be concluded that FIDIC forms of contract are
balanced in its notion of risk allocation to right parties. It is for employer to choose the
right form of contract to achieve the intended purpose.

By : Femeena Mohamed, UAE

femeenamohamed@gmail.com

November 2012 Page 8 of 10

BIBLIOGRAPHY

Books

Bunni N, The FIDIC Forms of Contract (3rd edn, Blackwell Publishing, 2005)

FIDIC Conditions of Contract for Construction for Building and Engineering Works
Designed by the Employer, 1st edn, 1999

FIDIC Conditions of Contract for Civil Engineering Construction, 4th edn, 1999

FIDIC Conditions of Contract for Design-Build and Turnkey, (1st edn, 1999)

FIDIC Conditions of Contract for EPC/Turnkey Projects, 1st edn, 1999

FIDIC Conditions of Contract for Plant and Design Build, for E&M Plant for Building
and Engineering works, Designed by the Contractor, 1st edn, 1999

Articles

A Contractor‟s View on FIDIC Conditions of Contract for EPC Turnkey Projects, (ICLR, 1999,
Vol 16)

Battrick P, Duggan P and Driver Consult Ltd, Risk and Responsibility Clause 17 and
Beyond, 2012

Bearing the risk of the unexpected in the ground, Herbert Smith Newsletter

Hibbert S, Project and Construction Contracts – are you measuring the risks, not just the
rewards, Emirates Business 24/7 ( UAE, 28th January 2010)

Seppala C R., FIDIC‟s Four New Standard Forms of Contract : Risks, Force Majeure
and Termination (Construction Management Guides)

Electronic Sources
Hok G S., „Risk Allocation in the FIDIC Conditions of Contract for Red Book and
Silver Book,
http://www.dr-hoek.de/EN/beitrag.asp?t=Risk-allocation-FIDIC accessed on 7 October
2012

November 2012 Page 9 of 10

J Glover, „FIDIC an overview: the latest developments, comparisons, claims and a look
into the future‟ http://www.fenwickelliott.co.uk/files/FIDIC.pdf accessed on 30
September 2012

Langer V H, Risk Apportionment in FIDIC Contracts, available at http://www.ganz-

recht.de/index.php?id=28,76,0,0,1,0 accessed on 15 October 2012

The Nature of Construction Contracts, available at

http://www.palgrave.com/PDFs/9780230521650.pdf accessed on 03 October 2012

Training Material
Záhonyi Z, FIDIC Conditions of Contract Training (Session 1, IBRD, Katmandu, 21-23
September, 2011)

U.A.E Legislation
U.A.E Civil Transaction Code, Law # 5 of 1985

November 2012 Page 10 of 10

APPENDIX A – COMPARISON OF RISK ALLOCATION IN RED, YELLOW AND SILVER BOOKS

This table is an improved version of the table from the paper which was delivered by Toby Shnookal at the Society of Construction Law Australia's inaugural
conference in Perth on 19 June 2010, available at http://www.mtecc.com.au/uploads/papers/Shnookal,_Toby.pdf, accessed on 29 October 2012

Clause Risk Description Red Book Yellow Book Silver Book Remarks
no.
1.13 Compliance with Laws C C C
1.9 Delayed drawings or instructions E N/A N/A
1.9 Errors in the Employer 's requirements N/A E N/A
2.1 Right of access to the Site E E E
4.7 Setting out E E C
4.9 Quality Assurance C C C
4.10 Site Data C C C
4.12 Unforeseeable physical conditions E E C
4.18 Protection of the Environment C C C
4.24 Fossils E E E
5.1 General Design Obligations N/A C C In silver book, contractor is responsible to
ensure accuracy in employers requirements
including design criteria and calculations
5.8 Design Error N/A C C
7.4 Testing delays by Employer E E E
7.5 Rejection of materials C C C
7.6 Remedial work C C C
8.4(a) Extension of Time for Completion - E E E
Variation
8.4(b) Extension of Time for Completion - delay E E E
giving entitlement to an EOT
8.4(c) Exceptionally adverse climatic conditions E E C

Appendices November 2012

Clause Risk Description Red Book Yellow Book Silver Book Remarks
no.
8.4(d) Unforeseeable shortages and the availability E E C
of personnel or Goods caused by epidemic or
government actions
8.4(e) Delay, impediment or prevention caused by E E E
the Employer its personnel or other
contractors
8.5 Delay caused by Authorities E E E
8.6 Rate of progress C C C
8.7 Delay Damages C C C
8.9 Consequences of Suspension E E E Contractor is responsible to protect the work
during suspension (8.8)
9.4 Failure to pass Tests on Completion C C C
11.4 Failure to remedy Defects C C C
12.1/14 Increased of quantities during construction E C C
.1
12.4 Omission of work through a Variation E N/A N/A
12.4 Failure to pass tests after Completion N/A C C
13.3 Variation procedure E E E
13.7 Adjustment for changes in legislation E&C E&C E&C
13.8 Adjustment for changes in cost E E C/E This sub-clause includes a formula for
calculating adjustments for change in cost
related to labour, material and equipment.
In silver book, it is subject to agreement in
particular conditions.
14.8 Delayed payment E E E The contractor shall be entitled to receive
financing charges compounded monthly on
the amount unpaid during the period of
delay.
15.4 Payment after Termination C C C
15.5 Termination for convenience C C C

Appendices November 2012

Clause Risk Description Red Book Yellow Book Silver Book Remarks
no.
17.1 Indemnities E&C E&C E&C
17.2 Care of the Works prior to the Taking Over C C C Contractor is responsible for care of works
Certificate until Taking over certificate is issued or
deemed to be issued
17.3 Employers Risk E E E List of Employers risk in silver book does
not include consequences due to use of
facilities by Employer, design by employer
and any operation by forces of nature which
is unforeseeable
17.4 Consequences of Employer's risks E E E
19.4 Consequences of force majeure E E E
20.1 Contractor's claims E E E Consequences of contractors claims are to be
met by employer, but the contractor has to
ensure providing notice to claims as per the
strict requirements in clause 20.1

KEY
E – EMPLOYER
C-CONTRACTOR
E&C-EMPLOYER&CONTRACT(SHARED RISK)
N/A-NOT APPLICABLE

Appendices November 2012

APPENDIX B – UAE CIVIL CODE PROVISIONS COMPARED WITH FIDIC RED BOOK
FIDIC Red Risk Description Corresponding Civil Code Clause and language/interpretation
Book Clause
4.12 Unforeseeable physical 878 – contractor is not liable if the damages resulted from an event which could not have been prevented
conditions
7.5 Rejection of materials 875 – contractor shall be liable for the quality thereof in accordance with the conditions of the contract
7.6 Remedial work 877 – if the contractor carried out the work in a defective manner or in a manner amounting to breach of
contract, the employer can demand repair or rectification of works within a reasonable period
8.4(c) Exceptionally adverse 889(2) – If any unforeseen event occurs which prevents the completion of the performance of the work
climatic conditions in accordance with the plan prepared, he shall be entitled to fair remuneration for what he has done.
8.4(d) Unforeseeable shortages and 889(2) – If any unforeseen event occurs which prevents the completion of the performance of the work
the availability of personnel in accordance with the plan prepared, he shall be entitled to fair remuneration for what he has done.
or Goods caused by epidemic
or government actions
8.4(e) Delay, impediment or 894 - If the contractor commences to perform the work and then becomes incapable of completing it for
prevention caused by the a cause he played no part, he is entitled to cost of work and the value of benefit employer derives.
Employer its personnel or
other contractors
8.5 Delay caused by Authorities 894 - If the contractor commences to perform the work and then becomes incapable of completing it for
a cause he played no part, he is entitled to cost of work and the value of benefit employer derives.
12.1/14.1 Increased of quantities during 887(1) – If a contract is on lumpsum basis, contractor cannot demand any increase during execution of
construction the contract. On the contrary if the contract is based on unit prices he has the entitlement (886-1)
17.1 Indemnities 878 – The contractor shall be liable for any loss or damage resulting from his act or work whether arising
through his wrongful act or default or not, but he shall not beliable if it arises out of an event which
could not have been prevented.
17.2 Care of the Works prior to 875(2) – This clause provides for due care by the contractor
the Taking Over Certificate
19.4 Consequences of force 894 - If the contractor commences to perform the work and then becomes incapable of completing it for
majeure a cause he played no part, he is entitled to cost of work and the value of benefit employer derives.

Appendices November 2012