ABSTRACT
“The EPC/Turnkey Contract 1st Edition 1999 Silver Book” (“Silver Book”)1 published by the International Federation of Consulting Engineers (“FIDIC”), sets forth the main principles which can be applied to complex and grand scale construction projects through its standardized turnkey agreement clauses. In this context, Silver Book aims to provide regulations for the general construction process as well as providing resolutions to disputes which may arise from these projects in a rapid, systematic and fair manner. The Silver Book offers the Dispute Adjudication Board (“DAB”), amicable settlement and arbitration procedures for settling possible disputes and assigns an important mission to the DAB. Despite this mission bestowed upon DAB, neither Silver Book’s general provisions nor its annexes2 specify which law shall be applied during the dispute resolution process by the DAB. Considering the parties’ choice of the governing law of the contract is in a way an indication of the parties’ preference on the rules they choose to govern their relationship with, it is considered that the DAB should apply the “governing law” chosen by the parties while solving the dispute referred by the parties.
I. INTRODUCTION
Construction industry remains to be one of the top sectors for investment purposes. Construction works such as roads, buildings and infrastructure development have been on the rise while being globalized due to increasing needs of the population in correlation with increasing technological improvements. Various companies in the construction industry undertake grand-scale projects, especially the ones that require expertise, not solely in their own countries but abroad as well. Besides requiring considerably large financing, grand-scale cross border construction works that require expertise also require its agreements to be thorough and comprehensive enough to regulate the often complicated and complex procedures, and prevent disputes arising between the contracting parties and settle them systematically if they arise. The standardized and global agreements published by FIDIC are the primary agreements that come to mind with regard to suitability to the needs of the construction sector.
This article primarily focuses on the general scope of the FIDIC agreements, then the dispute resolution process arising from the execution of FIDIC Silver Book agreements and DAB’s role during the resolution of disputes. It finally considers how the DAB will settle disputes and which law will be applied.
II. FIDIC AND FIDIC CONTRACTS
A. What is FIDIC?
FIDIC is the abbreviation of Federation Internationale des Ingénieurs Conseils; the French title for International Federation of Consulting Engineers. The members of FIDIC founded in 1913, consist of international unions of consulting engineers. FIDIC, which currently has members from ninety seven different countries, is represented in Turkey by Association of Turkish Consulting Engineers and Architects since 1987. FIDIC publishes various materials such as international standardized contracts as well as standardized preliminary qualification forms for works and for the clients, consultants, sub consultants, joint ventures and agents who undertake these works. FIDIC also publishes documents for business practice, such as activity reports on management systems and work process, position papers, guides, and educational brochures3.
B. General Overview of the FIDIC Contracts
Contracts provided by FIDIC include standardized provisions which are applicable to numerous construction projects4. In addition to the standardized provisions, FIDIC contracts also contain instructions about preparing the particular conditions specific to projects. These contracts are published by FIDIC in several different and colour-coded books in accordance with the different types of construction projects to which their standardized provisions can be applied. The books are “Red Book5”, “Yellow Book6” , “Silver Book7” , and “Green Book8”. Red Book contains the conditions of contract for the construction and engineering works designed by the employer; Yellow Book contains conditions of contract for plant and design-build for electrical and mechanical plant and for building and engineering works designed by the contractor; the Green Book contains short form of contract conditions and finally, the Silver Book contains the condition of contract for EPC (engineering, procurement and construction) and turnkey contracts.
1. Features of the Silver Book
As the article will specifically focus on the dispute resolution methods of the Silver Book in the forthcoming sections, it is necessary to introduce the general features of the Silver Book. Silver Book is generally used for privately financed build-operate-transfer (BOT) projects, and for fixed-price turnkey contracts such as infrastructure (roads, bridges, sewage treatment plants etc.), factory, and energy plant constructions9. Under the Silver Book, there is a direct relationship between the contractor and the employer instead of the presence of an engineer. The relationship involves the employer’s responsibility to handle the financing of the process while the contractor undertakes full responsibility for completing and delivering the design and construction works in accordance with the agreement10. Under these types of contracts, the employer does not interfere with the construction process provided that the relevant work is being completed by the contractor in accordance with the criteria established in the contract11. This type of contract is more suitable for agreements where the specified term and payment for the completion of the work is relatively unlikely to be amended. This is because the rationale of these contracts holds the contractor fully liable for the additional risk of possible increases in final payment amount and term of the agreement12, while the employer is responsible for the additional fees to be paid to the contractor.
III. DISPUTE RESOLUTION ACCORDING TO THE SILVER BOOK
As mentioned above, construction projects, to which FIDIC’s Silver Book turnkey agreement (“EPC”) is applied, usually have a grand-scale and complex nature and need a lengthy time frame for completion. This characteristic tends to cause disputes between the -contracting parties on various issues during the construction of these projects. The Silver Book article 2013 provides a dispute resolution mechanism for possible conflicts between the parties. The time limits and the manner of communication with the employer in cases where the contractor requests an extension of time and additional payment are also laid out in article 20 of the Silver Book. Accordingly, the contractor will provide supporting evidence for the situation which has caused the request for extension of time or additional payment.
A. Dispute Resolution According to Article 20 of the FIDIC Silver Book
In case a dispute arises between the employer and the contractor which are parties to an agreement formed within the scope of the Silver Book, the relevant dispute will be settled in accordance with article 20 of the Silver Book. Article 20.2 of the Silver Book titled “Appointment of the DAB” states that in case a dispute arises between the parties, it will be settled by the DAB in accordance with article 20.4 titled “Obtaining DAB’s Decision”14. The parties will jointly appoint the DAB within twenty eight days following a party’s notification15 to the other regarding its intent to bring the dispute to the DAB.
The DAB consists of one to three members in accordance with the particular conditions of the agreement. If the number of members is not specified in the particular conditions and the parties have not agreed otherwise, the DAB will consist of three members. These members must be suitable and qualified to undertake the relevant duty. If the DAB will consist of three members, each party will designate one member to be approved by the other party. The parties will consult each of these designated members and will then decide on the third member to be appointed to serve as the chairman of the board16. However, if a list of possible candidates for the DAB is included in the agreement, excluding the ones who are unavailable or who refuse to be appointed to the DAB, the members will be selected from this list17. An agreement must be made between the parties and the member/s of the DAB who will settle the dispute, and this agreement shall comprise the “Dispute Settlement Contract’s General Conditions” specified in the annex of the general conditions, while also taking into consideration the amendments made by the parties18.
Duties of the DAB members can only be terminated by the mutual agreement of the parties. Unless otherwise agreed by the parties, according to article 20.4 (Obtaining Dispute Adjudication Board’s Decision), DAB’s (including each and every member) duty will come to an end upon reaching a decision on the dispute. However, according to article 20.4, if another dispute is brought to the DAB at the date of the decision for the relevant dispute, DAB’s duty will end when the decision for the new dispute is finalized. Finally, article 20.3 of the Silver Book’s general conditions provides the path which should be followed in case the parties to the agreement are unable to agree on the members of the DAB.
If a dispute arises between the parties because of, or in connection with the agreement, or relating to the work within the scope of the agreement, including disputes related to the employer giving and determining certificates, orders or suggestions, or carrying out valuation, DAB’s decision making process will begin once either party delivers a written request to the DAB after it has been appointed in accordance with articles 20.2. and 20.3. provided that a copy of the written request with regard to bringing the dispute to the DAB is delivered to the other party. The written request will also include a statement as to its suitability with article 20.4. When the DAB consists of three members, the date of receipt of the written request by the chairman of the board will be deemed the date of receipt of the written request by the DAB19.
In order for the DAB to be able to settle the dispute, the parties are obliged to provide the necessary information and documents to the DAB. Furthermore, parties must also allow the DAB to enter the construction site and other relevant areas when it is necessary20. DAB will reach a decision on the dispute within eighty four days or on a date proposed by the DAB and accepted by the parties from receiving the parties’ request or the advance payment in accordance with the dispute resolution agreement’s general conditions. The DAB’s decision must include a basis for the conclusions reached as well as a statement as to its suitability with article 20.4 of the agreement21. It should be noted that according to article 20.4 DAB members are not obligated to reach a decision regarding the dispute at hand unless the necessary payments have been made by the parties. In case the decision by the DAB does not satisfy the expectations of any one of the parties or the DAB is unable to reach a decision within the specified time frame, the relevant party may notify the other party as to its dissatisfaction within twenty eight days from the end of the eighty four day period22. If no such notification is made, DAB’s decision will be binding and final for the parties.
According to article 20.5 of the Silver Book EPC contract, the parties shall try to resolve the dispute through amicable settlement before initiating the arbitration procedures upon notifying their dissatisfaction with the decision as provided in article 20.4. However, unless otherwise agreed by the parties, on or after the fifty sixth day following either party’s notification about the unsatisfactory decision, the parties may initiate the arbitration procedures even if they did not try to resolve the dispute through amicable settlement23.
Disputes which are not settled by the DAB in a manner satisfactory to the parties or through amicable settlement between the parties, will be settled by international arbitration. According to the contract, unless otherwise agreed by the parties, during the arbitration process, the arbitration rules of International Chamber of Commerce will be applied and the language specified by the parties in article 1.4. of the agreement will be applied to the procedure. The arbitrators may examine all information and documents as to the dispute24.
As is evident from article 20 of the Silver Book which regulates the settlement of disputes, there is no clear provision on the law to be applied to a dispute by the DAB in the general conditions of the Silver Book. Furthermore, the general conditions of the dispute resolution agreement signed by the employer, contractor and a DAB member which regulates the duties of the parties under the relevant agreement and the rules of procedure which shall be followed by the DAB and the disputing parties; both laid out in the Silver Book’s annex, fail to address which law will be applied to the subject of the dispute by the DAB.
B. The Applicable Law to the DAB’s Dispute Adjudication Process
As mentioned above, the Silver Book’s general conditions and annexes do not specify the applicable law to be used by the DAB during the adjudication of the disputes. On the other hand, the law which will be applied during the arbitration phase in case the contract or project related disputes are not resolved through the DAB or by amicable settlement between the parties, is specified in the Silver Book. As explained above, according to article 20.6 of the Silver Book, unless otherwise agreed by the parties, the dispute shall be settled under the Rules of Arbitration of the International Chamber of Commerce and the arbitration shall be conducted in the language defined in article 1.4 of the agreement. Article 1.4 of the Silver Book general conditions also stipulates the governing law of the contract. According to article 1.4, the agreement shall be governed by the law of the country stated in the particular conditions. The main reason to being able to choose the governing law of the agreement stated in the particular conditions in accordance with article 1.4 of the Silver Book, is to enable the parties to carry out their contractual relationship within certain boundaries and rules as they wish. Considering different legal systems may have different approaches to issues; it can be deduced that the parties expect to prevent the uncertainty that may arise due to these differing legal approaches by choosing the governing law of the contract. Thus, if the parties in fact make a specific choice as to the governing law of the contract, it will be appropriate and convenient to apply that relevant law to a possible dispute that may arise between the parties25.
It will be appropriate for the DAB; which has a mission to settle disputes according to the Silver Book, to apply the governing law chosen by the parties while undertaking its duty to adjudicate on disputes. In cases where the parties have not specified the governing law of the contract, DAB may apply the most suitable law to the problem, conditions of the matter and the contract while settling the dispute in a satisfactory manner for both parties. The main reason DAB exists as a dispute settlement mechanism under the Silver Book is the expectation for disputes to be resolved in a time efficient and fair manner. Moreover, considering that arbitration is a costly process, DAB is expected to provide a more cost effective settlement option for the parties. However, if the DAB does not abide by the chosen governing law during the dispute settlement process and reaches an unsatisfactory result for the parties, the parties will have to bear both the costs of the DAB and the arbitration process. As a result, not only the parties’ interests will have not been protected as they had aimed, but they will also have been unnecessarily subjected to exorbitant sums.
IV. A RELEVANT EXAMPLE FROM PRACTICE
Related to the subject, the turnkey agreement laid out in the Silver Book, one of the standard agreements of FIDIC, has been selected to be applied to a major construction project undertaken between a contractor and employer from different countries. A lump sum price has been adopted by the parties to this contract. The contractor has demanded the operational costs of the worksite from the employer due to an unexpected situation which arose at the site and interfered with the construction phase during the execution of the construction project.
In one of the provisions of the side agreement which has been signed between the parties prior to the date of the dispute because of delays during the construction phase, the expenses which may be considered as operational costs of the worksite have been listed and it is stated that additional payment, which would be calculated by using the formula provided in the same side agreement, may be requested from the employer if there is a delay in the construction process. Yet another provision of this side agreement states that the contractor may demand additional costs related to the operational costs of the worksite and that the parties shall accept the principles relating to these additional costs outlined in the side agreement. Thus, the contractor has invoiced all the costs arising from his machinery and personnel’s inability to work to the employer, while indicating that he incurreddamages due to the delay and as a result he requested additional payments as operational costs of the worksite. The employer, on the other hand, has stated that these costs have already been paid to the contractor as additional costs at various times and therefore the contractor’s request is unfounded. Additionally, the scope of the aforementioned provision which regulates that “additional costs” may be demanded from the employer has been interpreted differently by the parties. Against the contractor’s claim that there are no restrictions related to the additional costs which the contractor may demand, the employer has stated that the reason for the lack of a restriction in the agreement is the ambiguity of the relevant provisions of the agreement, and the additional costs which may be requested from the employer cannot be interpreted unlimitedly, and the parties agreed upon this during the pre-contract negotiations and that it is against the principle of good faith for the contractor to demand more than the amount agreed upon during the pre-contract negotiations. Hence, this situation has caused a dispute regarding the interpretation of the agreement and has been delivered to the DAB.
The employer has emphasised the differences between the common law and the civil law, while stating that the DAB must apply Turkish law, which is a civil law system and has been selected as the applicable law to the relevant agreement between the parties. The employer’s concern is that, even though the applicable law to the agreement has been clearly specified in the agreement by the parties, the DAB will settle the dispute according to the rules of the common law system as it has previously done in other DAB hearings. Due to the major differences between these two legal systems, DAB’s decision to not applying the law chosen by the parties in their agreement may jeopardize a fair settlement of the dispute. Common law system accepts that the intentions of the parties are reflected through the text of the agreement and therefore, the common approach to interpreting an agreement is to use literal interpretation and disregard the meetings and negotiations which took place prior to the execution of the agreement. In contrast, according to Turkish law, the court is not bound by the agreement provisions and may investigate the real and mutual intentions of the parties through examining the correspondence which took place prior to the execution of the agreement26. Consequently, DAB’s application of the law chosen by the parties during the settlement process is of great importance for the interests of the parties. If the DAB applies the common law rules to the dispute adjudication process instead of Turkish law, the DAB will not be able to satisfy the employer’s expectations and be able to provide an agreeable solution for the employer. This will cause a long period of dispute, delay in works and an unnecessary incurring of expenses. In the event that the parties had to refer the disputes that were not resolved by the DAB to arbitration, they will need make even more expenses as explained above.
V. CONCLUSION
As mentioned throughout the article, major construction agreements require very thorough and detailed agreement terms due to their complex, time consuming and costly natures. FIDIC contracts constructed in the aforementioned manner contain provisions which the parties may use according to their needs. These detailed contracts aim to procure dispute resolution mechanisms which will resolve conflicts in a time efficient, systematic and fair manner. Indeed, as a means to this end, Silver Book contracts provide the DAB, amicable settlement and arbitration procedures and explain the systematic manner in which these procedures can be used. On the other hand, whereas the law applicable to the arbitration procedure is indicated even in the case where the parties have not selected a governing law for their agreement, the same consideration has not been provided for the DAB procedure. This situation causes not only the DAB being unable to provide a correct and satisfactory resolution to the conflicts of parties, but also causes loss of time and money. In our opinion, while settling the disputes DAB must abide by the law chosen by the parties if they chose it and apply the most suitable law to the agreement and the parties if they did not chose it.
BIBLIOGRAPHY
http://fidic.org (Last access: 26.11.2016).
Nazlı Töre, FIDIC Kurallarının Karşılaştırmalı Hukuktaki Yeri, Ankara 2011 FIDIC Silver Book, 1999.
Buket Koldaş, FIDIC Kapsamında Uyuşmazlıkların Çözümü, Master Thesis, Gazi University Institute of Social Sciences, Ankara 2008.
S. Aslı Budak, “Türk Eser Sözleşmesi Hukuku Işığında FIDIC Sözleşmeleri”, Yeşim M. Atamer, Ece Baş Süzel, Elliott Geisinger, Uluslararası İnşaat Sözleşmeleri ve Uyuşmazlık Çözüm Yolları, İstanbul Uluslararası İnşaat Hukuku Konferansları-1, Ed. 1, Istanbul 2016.
FOOTNOTE
1 The original French title of the federation is “Federation Internationale des Ingénieurs Conseils” and the Turkish title of the federation is recognized as “Müşavir Mühendisler Uluslararası Federasyonu”.
2 The annexes related to the DAB under Silver Book general conditions are; General Conditions of Dispute Adjudication Agreement and Procedural Rules.
3 http://fidic.org/about-fidic (Last access: 26.11.2016).
4 http://fidic.org/node/7089 (Last access: 26.11.2016) .
5 Conditions of Contract for Construction For Building and Engineering Works designed by the Employer, Ed. 1, 1999.
6 Conditions of Contract for Plant & Design-Build For Electrical & Mech. Plant & For Building & Engineering Works Designed by the Contractor, Ed. 1, 1999.
7 Conditions of Contract for EPC Turnkey Projects, Ed. 1, 1999.
8 The Short Form of Contract, Ed. 1, 1999.
9 http://fidic.org/bookshop/about-bookshop/whichfidic-contract-should-i-use (Last access: 02.05.2017).
10 Nazlı Töre, FIDIC Rules in Comparative Law, Dayınlarlı Hukuk Yayınları Ltd. Şti, Ankara 2011, p.15-16.
11 Töre, p.16.
12 Töre, p.16 cited from Pierrick Le Goff, A New Standart for International Turnkey Contracts: The FIDIC Silver Book (Une Nouvelle Reference Pour Les Contrats Internationaux Cle En Main: Le Livre Argent de la FIDIC) Int’l Bus. L.J., 2000, p.154.
13 The title of the relevant article is “Claim, Disputes and Arbitration”. Since the article herein is constructed according to the Silver Book general conditions, the parties may make amendments by taking into the consideration the specified times under article 20.
14 FIDIC Silver Book, 1999 (FIDIC SB), Art. 20.2, p. 53.
15 FIDIC SB, Art. 20.2, p. 53.
16 FIDIC SB, Art. 20.2, p. 53.
17 FIDIC SB, Art. 20.2, p. 54.
18 FIDIC SB, Art. 20.2, p. 54.
19 FIDIC SB, Art. 20.4, p. 54.
20 FIDIC SB, Art. 20.4, p. 55.
21 FIDIC SB, Art. 20.4, p. 55.
22 FIDIC SB, Art. 20.4, p. 55.
23 FIDIC SB, Art. 20.5, p. 55.
24 FIDIC SB, Art. 20.6, p. 55-56.
25 Yaşar KARAYALÇIN, “İnşaat Sözleşmeleri”, Yönetici- İşletmeci Mühendis ve Hukukçular için Ortak Seminer, Ankara Banka ve Ticaret Hukuku Araştırma Enstitüsü, 18-29 March 1996, p. 307 cited from Buket Koldaş, FIDIC Kapsamında Uyuşmazlıkların Çözümü, Master Thesis, Gazi University Institute of Social Sciences, Ankara 2008, p.68-69.
26 S. Aslı Budak, “Türk Eser Sözleşmesi Hukuku Işığında FIDIC Sözleşmeleri”, Yeşim M. Atamer, Ece Baş Süzel, Elliott Geisinger, Uluslararası İnşaat Sözleşmeleri ve Uyuşmazlık Çözüm Yolları, İstanbul Uluslararası İnşaat Hukuku Konferansları-1, Ed. 1, Istanbul 2016, p. 93.
