UK & Europe
At the London FIDIC Users' Conference held in December 2019, the newest edition to the FIDIC standard form suite of contracts was launched – the Conditions of Subcontract for Plant and Design-Build - also known as the "Yellow Book Subcontract".
Intended to be used in conjunction with the Conditions of Contract for Plant & Design Build (1999) (the "1999 Yellow Book"), this new form plugs the subcontract gap that existed on FIDIC design-build projects. Based on the Conditions of Subcontract for Construction released in 2011 (known as the "Red Book Subcontract"), FIDIC have taken a similar approach to flowing down rights and liabilities under the Main Contract to Subcontractors – the difference being that this version is for use where the Subcontractor has both design and build obligations.
Following the release of FIDIC's updated rainbow suite in 2017 (see here for more details) some FIDIC users have been surprised at the release of a subcontract to be used with the old 1999 suite and wonder how long we will have to wait for a form of subcontract that can be used with the 2017 suite? Leaving that question to one side for now, let's look at some of the key features of this new edition:
The Yellow Book Subcontract has been drafted on a back-to-back basis, where the Main Contract is procured using the 1999 Yellow Book. The Subcontractor is deemed to have full knowledge of the Main Contract and (with a few exceptions – see further below) the Subcontractor is required, in relation to the Subcontract Works, to perform and assume all obligations and liabilities of the Contractor under the Main Contract, and to perform the Subcontract Works in such a manner that no act or omission of the Subcontractor will constitute, cause or contribute to a breach by the Contractor under the Main Contract. If the Subcontractor causes the Contractor to breach the Main Contract, it is required to indemnify the Contractor from any liability incurred under the Main Contract.
FIDIC have included some specific exceptions to this flow down of obligations, an exhaustive list of which is set out at clause 2.2. By way of example, these exceptions include Main Contract obligations relating to permits and licences, access routes and site security, which remain as Contractor obligations under the Main Contract. Subcontractors will need to take care that any other obligations and risks which aren't suitable to be passed down to the Subcontract are addressed in the Particular Conditions.
As a result of this back-to-back approach, it is important that the Subcontract and the Main Contract are read together – Subcontractors will need to ensure they are fully familiar with the terms and conditions of the Main Contract in order to assess their exposure to risk under the Subcontract. Anyone experienced in drafting and negotiating subcontracts will know that, in practice, this back-to-back approach can lead to lengthy negotiations and an understandable reluctance on the part of Subcontractors to assume risks accepted under a Main Contract they didn’t negotiate, particularly where there is a significant difference in the value of the respective contracts.
Subcontractor rights, entitlements and remedies
The Subcontractor is expressed to have the same rights, entitlements and remedies as the Contractor has under the Main Contract. This reflects the back-to-back nature of the Subcontract, seeking to provide the Subcontractor with the same entitlements to additional time and money under the Subcontract as the Contractor has under the Main Contract. However, the Contractor is only required to take 'all reasonable steps' to secure these rights, entitlements and remedies from the Employer – which seems to undermine the Subcontractor's more general entitlement in this regard. Subcontractors would be wise to push for stronger, absolute obligations on the Contractor to pursue claims up the line, including obligations to update, or consult with, the Subcontractor in the settlement of any claims.
Co-ordination and co-operation
The Contractor retains responsibility for co-ordination and project management of the Main Contract Works, including the co-ordination of any other subcontract work packages. Whilst the Subcontractor is required to cooperate with any other subcontractors employed by the Contractor, the Contractor is responsible for ensuring other subcontractors do the same. To the extent the Subcontractor is delayed, impeded or prevented from performing its obligations due to the non-cooperation of any other subcontractors, the Subcontractor shall be entitled to additional time and money.
Taking Over and Defects Notification Period
Unless the Subcontract states otherwise, taking over of the Subcontract Works shall be deemed to occur when the Main Contract Works are taken over by the Employer. In addition, the Subcontract Defects Notification Period will not expire until expiry of the Main Contract Defects Notification Period. Where the Subcontract Works are completed early in the context of the programme for the whole project, Subcontractors should be wary of these provisions as their obligation to care for the Subcontract Works until taking over and their liability for defects during any Defects Notification Period could extend far beyond what they would generally accept.
Pay when paid
Another issue that may ring alarm bells for Subcontractors, particularly those used to working in the UK, are the 'pay when paid' provisions. Under clause 14, the default position is that Subcontract interim payments may be withheld by the Contractor until receipt of the same from the Employer under the Main Contract. FIDIC does recognise that such provisions may fall foul of legislation in certain jurisdictions, such as the Housing Grants, Construction and Regeneration Act 1996 (as amended) in the UK, and has provided alternative drafting in the Guidance Notes for use where 'pay when paid' provisions are not enforceable, or do not reflect the standard market approach to supply chain payments.
Termination of Main Contract
Where the Main Contract is terminated, the Contractor may terminate the Subcontract immediately. Where such termination occurs as a consequence of any breach of the Subcontract by the Subcontractor, the Contractor will be entitled to recover any costs and losses it has incurred to the Employer as a result of termination of the Main Contract, as well as any other losses incurred by the Contractor as a result of termination of the Main Contract or any other subcontracts. Any such liabilities will fall within the Subcontractor's aggregate cap on liability, but they are carved out from the exclusion of indirect loss. Where a Subcontract works package is significantly lower in value than the Main Contract, this may pose an unacceptable risk to a Subcontractor.
The condition precedent notice requirements under the claims procedure in the 1999 Yellow Book have been flowed down to the Subcontract, although the Subcontractor has just 21 days to bring a claim for an extension of time or to recover additional Cost (as opposed to 28 days under the Main Contract). This buffer period is intended to allow the Contractor enough time to process the claim and comply with the corresponding notice procedure under the Main Contract, although Subcontractors should consider whether such a period is practicable.
Main Contract disputes
Where any dispute arising under the Subcontract involves an issue which is also disputed under the Main Contract, referral of the dispute to the Subcontract Dispute Adjudication Board ("DAB") will be deferred for up to 140 days to allow it to be resolved under the Main Contract. However, the dispute decision under the Main Contract (along with any determinations of the Engineer under the Main Contract) will not be binding on the Subcontractor – instead, FIDIC have provided alternative drafting in the Guidance Notes to provide for DAB or arbitral decisions (and Engineer determinations) under the Main Contract to be binding under the Subcontract if the parties wish such decisions to be binding.
Looking to the future…
Whilst the Yellow Book Subcontract serves its purpose for subcontracting work packages under the 1999 Yellow Book, given the complete overhaul of the general conditions in the 2017 suite and their near doubling in length, the Yellow Book Subcontract is not suitable for use with the 2017 Yellow Book and would require significant amendment if it were. Perhaps this is an acknowledgment by FIDIC that, with the slow uptake in use of the new suite, the market isn't calling out for any complementary contracts just yet.
So, to answer my earlier question of when we can expect the launch of a subcontract to be used alongside the 2017 Yellow Book, if FIDIC stick to their existing timetable for producing subcontract forms, you can expect a follow up article on the new subcontract sometime in 2037…