New Standard for International Turnkey Contracts: The FIDIC Silver

New Standard for International Turnkey Contracts: The FIDIC Silver Book

Pierrick Le Goff

Legal Advisor, Alstom Power Plants Ltd (UK). Member of the New York Bar, LL.M University

of Pennsylvania (USA), LL.M University of Marburg (FRG), DEA de droit international (Paris

II). The views expressed in this article are personal to the author and do not necessarily

reflect those of his employer.

Published in RDAI/IBLJ, 2 (2000)

The International Federation of Consulting Engineers, generally referred to as FIDIC, is an

organization well known to those involved in the drafting and negotiation of major

international turnkey contracts. For many years, FIDIC has supplied the industry with

standard contract forms, which it regularly revises to reflect evolving international trade

practices. In 1998, FIDIC issued the test edition of the Conditions of Contract for EPC

Turnkey Projects, a new standard form also referred to as the "Silver Book" because of the

color of its front cover (1). Following the review by FIDIC of comments received on the test

edition from various organizations, the first edition of the Silver Book was released during

the course of 1999 (2). Was there really a need for a new model form for international

turnkey contracts? After considering this question, we will address the main features of the

Silver Book and discuss how the international construction industry and the legal profession

are likely to receive this new standard form.

I. THE NEED FOR A NEW STANDARD FOR INTERNATIONAL TURNKEY CONTRACTS

The FIDIC Silver Book is not the first standard form available to the industry for international

turnkey contracts. Other organizations have published standard forms in the past ten years.

The 1988 MF/1 Conditions for the Supply of Electrical, Electronic or Mechanical Plant (3),

the 1993 New Engineering Contract (4) and the 1995 Conditions of Contract for Process

Plant (5) are examples. FIDIC itself produced as recently as 1995 an earlier standard form for

turnkey contracts, the Conditions of Contract for Design-Build and Turnkey, also referred to

as the "Orange Book" (6).

Why then did FIDIC produce a new form, just three years later? One reason could be the

limited success that the Orange Book has enjoyed since its 1995 release. It appears,

however, that the main reason behind the issuance of the Silver Book was the need to

create a standard form that reflects the recent development, in the world market for

turnkey infrastructures, of EPC contracts (7) involving private project financing (8).

EPC turnkey projects are the result of a wave of liberalization of certain economies, mainly

in Asia and Latin America. This is especially true of the electricity sector where deregulation

and privatisation have enabled independent power producers to enter the market, thereby

creating a significant number of privately financed power plants construction projects in

developing countries (9). By allowing investors to be awarded operation concessions for

certain infrastructures (10), such as power plants or water supply and treatment systems,

many countries have enabled the investment of private funds in the development of local

economies (11). Compared with more traditional projects where the turnkey contractor

deals only and directly with a public or semipublic entity, EPC turnkey projects involve

multiple parties and a complex nexus of contracts (12).

An interesting feature of such projects is that the purchaser (usually called "Owner") is

almost invariably a company created specifically for the particular project (a so-called

"Special Purpose Company") (13). From the perspective of the Contractor, this company is

nothing more than a client with no assets, i.e. an empty shell.

Another major feature of EPC projects is the strong involvement of the financing institutions

in the contractual relations between the Contractor and the Owner. It is not surprising for

the banks (usually called "Lenders") to be entitled to specified rights of supervision during

the performance of the contract, such as the right to witness major tests or to visit the

construction site (14).

These particular features of EPC turnkey projects create the need for specific contract terms

which are not needed for contracts involving publicly financed turnkey infrastructures.

Because the Silver Book is specifically designed for the private financing context (15), it

presents to our knowledge the first and only international standard form for EPC turnkey

projects.

II. THE SILVER BOOK IN A NUTSHELL

As in any other standard form of turnkey contracts, the Silver Book contains a detailed

description of the general obligations imposed on the purchaser (referred to in the FIDIC

terminology as the "Employer") and the Contractor.

Giving the Contractor access to the site (article 2.1), assisting the Contractor with obtaining

licenses and permits (article 2.2) and, of course, paying the contract price (article 14) are

among the traditional obligations of the Employer. An interesting feature of the Silver Book

is the requirement that the Employer provide the Contractor with reasonable evidence that

financial arrangements have been made to enable the Employer to pay the contract price

(article 2.4), in the absence of which the Contractor may terminate the contract (article

16.1a). This obligation clearly takes account of the fact that, as explained earlier, the

Employer in a typical EPC turnkey project is a Special Purpose Company with minimal assets.

The Contractor's payment protection therefore depends heavily on the soundness of the

financing package.

The Contractor's main obligations are to obtain the necessary permits and licenses (article

1.131), to carry out the design of the works (article 5.1), to provide the Employer with the

required operation and maintenance manuals (article 5.7), to put in place the agreed

performance bond(s) as security for the due performance of the contract (article 4.2) and,

more generally, to provide the works on a turnkey basis and remedy defects in accordance

with the contract (article 4.1). A particularity of the Silver Book is to place on the Contractor

the risk of unforeseen ground conditions. This results from the general principle according

to which the Contractor is to accept "total responsibility for having foreseen all difficulties

and costs of successfully completing the Works" (article 4.12) (16). The rationale behind this

burden allocation is the recognition that in many EPC projects the Lenders rely heavily on

the certainty of the project costs and schedule. As a result, Lenders insist on limiting the

number of possibilities for the Contractor to claim extra costs or extra time to perform the

works (17).

In addition to the description of the Employer's and Contractor's respective obligations, the

Silver Book contains a full array of standard clauses for major turnkey contracts. Among the

best known are those:

 providing for i) the payment of damages in the event of a delay in performing the

works (article 8.7) or ii) a reduction in the contract price to account for the failure of

equipment supplied to perform as guaranteed (article 9.4);

 describing the procedure for the take-over of the works by the Employer (article 10);

 detailing the Contractor's obligations to remedy defects in the works (article 11);

 stating the conditions under which the Employer may order variations in the scope

of work (article 13); and

 enabling a modification in the contract price and schedule as a result of a change in

laws affecting the works (article 13.7).

Other key clauses are those relating to the parties' respective indemnity obligations (article

17.1), the right to suspend and/or terminate the contract (articles 15 and 16), the allocation

of risk and responsibility for the care of the works (articles 17.2, 17.3 and 17.4), the

exclusions and limitations of liability (article 17.6), and the conditions under which a force

majeure event may be claimed (article 19).

Finally, the Silver Book contains a detailed clause regarding the settlement of disputes

which, absent an agreement to the contrary, are to be settled under the arbitration rules of

the International Chamber of Commerce (article 20).

A notable characteristic of the settlement of disputes clause is the provision of a fast track

pre-arbitration procedure through the constituting of a Dispute Adjudication Board. The

Board must render decisions within 84 days from submission of the matter in dispute

(article 20.4). Disputes will go to full-fledged arbitration only if the parties are not satisfied

with the outcome of the litigation in front of the Dispute Adjudication Board. Apart from the

fact that such fast track procedure seems to correspond to a trend in the international

construction industry (18), it appears to be justified in the light of the provisions of article

3.5 of the Silver Book. According to this article, the Contractor is to give effect to Employer's

determinations made on various contractual issues unless the Contractor sends to the

Employer a notice of dissatisfaction with such determinations within 14 days, at which point

either party may refer the dispute to the Dispute Adjudication Board. An example of such

determinations would be those made on the issue of a contract price and schedule

adjustment following a change in laws affecting the performance of the works (article 13.7).

Obviously, the Employer's determinations on extra time or extra costs will invariably be

quite significant to the proper performance of the works by the Contractor. It is therefore in

both parties' interest to solve in a timely fashion any dissatisfaction on such determinations,

so as to avoid any detrimental effects to the harmonious continuation of their contractual

relations. This is exactly what the Dispute Adjudication Board procedure is designed to

allow.

In summary, the Silver Book addresses with a high level of sophistication the numerous

issues inherent to turnkey projects.

III. WHAT IS THE FUTURE OF THE SILVER BOOK?

Several factors need to be considered in evaluating the probable use of the Silver Book.

First, it is likely that potential Employers and Contractors will be dissatisfied by the position

taken by the Silver Book on certain crucial issues. For example, Contractors will undoubtedly

challenge the principle that they are responsible for ground risks, since no reasonable

Contractor will commit to a fixed price and schedule without the possibility of making

modifications in the event of unforeseen ground conditions (19). Employers, on the other

hand, are likely to require some more clarity as to what is to be understood in article 2.4 by

"reasonable evidence" that financial arrangements have been made to enable payment of

the contract price. As a result, Employers and Contractors may both view the Silver Book as

a contractual document that may not be implemented without substantial changes, so that

the readyto-use advantage that standard forms ordinarily offer may be lost. It has been

argued, though, that in a typical BOT, the EPC Contract is nothing more than a mere sub-

contract between the special purpose company and the construction contractor so that "it

should be possible to fashion it from an existing model, which incorporates the

particularities of traditional financing structures" (20). The need to amend the Silver Book to

suit a particular project or the general corporate policy of the participants should not,

therefore, be viewed as a significant impairment to its possible use.

Second, although the Silver Book is primarily intended for EPC turnkey projects involving

private finance, it appears that several features typically present in such projects are

missing. For example, the Lenders systematically insist in such projects on the signature of a

so-called "direct agreemenC with the Contractor whereby, in the event of default of the

Employer under the loan agreements, the Contractor accepts to make payments due under

the EPC contract directly to the Lenders (21). Surprisingly, the Silver Book does not provide a

sample form of direct agreement, merely making reference in article 1.71) to the possibility

of an assignment of moneys due under the EPC contract to a bank or financial institution.

The Silver Book is generally silent on the Lenders' involvement in the project and makes no

concrete references to the Lenders' rights or those of their designated engineer. It should

be noted, however, that the Silver Book guidance notes for the preparation of particular

conditions recognize that there may be a need for additional clauses to satisfy the

requirements of financing institutions (22). Again, it will be the responsibility of the

potential users to tailor the Silver Book via the special conditions to respond to the

particular desiderata of the lenders.

Finally, the Silver Book arrives on the market at a time when EPC projects developed with

recourse to private project finance have been in existence for several years. The major

American and English law firms with significant project finance departments have already

developed their own standard form of EPC contract that they use when hired as outside

legal counsel by private developers. It would be surprising if they simply substituted the

Silver Book for their own standard. However, it has been recently underlined by several

authors that the use of standard contract conditions, such as the FIDIC model contracts,

reduces legal costs and speeds up contractual negotiations (23). This may create an

incentive for Employers to instruct their outside legal advisors to use the Silver Book as the

main basis of the tender documentation.

It is clear that a few years will be needed to fully appreciate how the Silver Book is being

received by the international construction industry. Certain potential users will perhaps be

reluctant to have recourse to the Silver Book as the sole source of contract terms in

upcoming EPC turnkey projects. Because it represents an official norm, however, it will

certainly be used indirectly by Employers or Contractors as a negotiating tool in the course

of contractual negotiations. "What does the Silver Book say on this issue?" or "Our

proposed clause is in line with the norm for EPC contracts as reflected in the Silver Book"

could become recurrent expressions in the negotiation rooms of many parties to turnkey

projects in the years to come. This should be viewed as a great achievement for the FIDIC

organization, which has produced an international model form in an area where a standard

was much needed.

Endnotes

1. The release of this test edition was accompanied by several launching conferences at

the end of 1998 in London and other major international cities.

2. Copies of the first edition of the Silver Book can be obtained from FIDIC, PO box 86,

1000 Lausanne 12, Switzerland.

3. This model form is issued by the Institution of Electrical Engineers, the Institution of

Mechanical Engineers and the Association of Consulting Engineers, UK.

4. This model form is issued by the Institution of Civil Engineers, UK.

5. This model form is issued by the Institution of Chemical Engineers, UK.

6. For an analysis of the Orange Book, see B. de Cazalet and R. Reece, "Conditions of

contract for design - build and turnkey/Conditions applicables aux contrats de

conception - construction et clés en main", International Business Law

Journal/Revue de Droit des Affaires Internationales, No 3, 1996, p. 279.

7. The letters EPC stand for "Engineering, Procurement, Construction". The term "EPC

contract" aims at making it clear that the object of the contract is the supply of a

turnkey infrastructure since the EPC Contractor is to develop the design of the

infrastructure, procure the equipment and materials needed, and then construct

such infrastructure.

8. For a detailed analysis of recent developments in the private financing of

infrastructure projects, see Scott L. Hoffman, The Law and Business of International

Project Finance, Kluwer Law International, The Hague, 1998; F. Nicklisch,

Rechtsfragen Privatfinanzierter Projekte, C.F. Müller Juristischer Verlag, Heidelberg,

1994.

9. See Patrick Blanchard, "Contractual structures which guarantee the internal

profitability of independent power production projects in developing countries

/Montages contractuels de projets de production indépendante d'électricité dans les

Etats en développement", International Business Law Journal/Revue de Droit des

Affaires Intemationales, N' 415, 1998, p. 417.

10. This is usually done under a Build, Operate, Transfer (BOT) approach whereby

private developers are awarded the right to construct and operate the infrastructure

for several years (usually between 15 and 20 years) and are then to transfer it to the

State which awarded the concession. On this subject, see J-M Loncle, "Big

infrastructure projects: the build, operate, transfer (BOT) approach/Grands projets

d'infrastructures : le montage Build, Operate, Transfer (BOT)", International Business

Law Joumal/Revue de Droit des Affaires Internationales, No 8, 1997, p. 945.

11. For examples of major privately financed projects, see P-H. Ganem, "Grands projets

internationaux au jour le jour - De Laibin B et de quelques autres projets d'énergie

en Chine", International Business Law Journal/Revue de Droit des Affaires

Internationales, No 3, 1997, p. 413/IN' 4, 1997, p. 535IN' 5, 1997, p. 653.

12. It should be noted that the EPC contract represents only the construction phase in

the BOT or similar privately financed scheme. For an overview of the contractual

structure in a typical privately financed infrastructure project. see the Guide to

financing Build-Operate-Transfer projects produced by Wilde Sapte, Euromoney

Publications PLC, U K, 1997, p. 37.

13. A good and concrete example of the creation of a special purpose company is

provided by the PECHINEY led project for the construction of a factory for aluminium

electrolysis in Dunkerque (France) described by A. Bied-Charreton and D. Musson in

"The legal separation of the owner and the developer in the operation of large scale

industrial projects: new approaches/La dissociation juridique du propriétaire et de

I'exploitant dans ]a conduite de grands projets industriels: nouvelles approches",

International Business Law Journal/Revue de Droit des Affaires Internationales, No 1,

1992, p. 3.

14. The banks normally designate their own engineer (usually called the "Lenders'

Engineer") to that effect.

15. This intention is stated clearly in the FIDIC's introductory note to the Silver Book.

16. The Contractor will therefore not be entitled to claim extra cost or extra time

because of unforeseen ground conditions, except in the event of the discovery of

fossils or other articles of antiquity (article 4.24).

17. See in this regard the FIDIC's introductory note to the Silver Book.

18. See J. Myers, 'Developing methods for resolving disputes in world-wide

infrastructure projects", Journal of International Arbitration, Vol. 13, No 4,

December 1996, p. 101.

19. It must be underlined that the Silver Book guidance notes for the preparation of

particular conditions recommend to allocate to the Employer the underground risks

when the project contemplated involves substantial foundation works (see p. 8 of

the guidance notes). However, it remains to be seen to what extent Employers will

indeed follow this recommendation.

20. B. de Cazalet, "Construction contracts in the framework of BOT projects (Build,

Operate, Transfer)/Le contrat de construction dans le cadre des projets en BOT

(Build, Operate, Transfer), International Business Law Journal/Revue de Droit des

Affaires Internationales, No 415, 1998, p. 412).

21. It is also customary in such direct agreements for the Contractor to accept a

provisory stay of its termination rights under the EPC contract while the Lenders try

to remedy defaults of the Employer by replacing, if necessary, the defaulting

Employer by a substitute obligor.

22. See page 16 of the guidance notes.

23. See G. Lefebvre and J. D'Hollander, "La normalisation des contrats internationaux

d'ingénierie", Droit et Pratique du Commerce International, No 2, 1996, p. 246, and

also B. de Cazalet, supra note 20, p. 412.