Brazil 2014

Mon, 26 Apr 2010 11:24

As construction for the 2010 Soccer World Cup in South Africa draws to a close, all eyes in the industry move to Brazil. In this article, we briefly consider the advantages of using either the Fédération Internationale des Ingénieurs-Conseils (FIDIC) Red Book, and the New Engineering Contract (NEC3) Engineering and Construction Contract.

With 12 host cities, Brazil has to construct four new stadia and upgrade eight existing stadia for the 2014 Soccer World Cup. In addition to the construction and remodelling of its stadia, Brazil is also gearing up for major upgrades to its basic infrastructure, including its airports and roads, and the construction of a new high speed railroad.

Brazil would need to look to construction companies the world over for assistance. In international construction projects of this nature, one of the key factors to be considered, by any country, is whether the construction agreement will be custom made in accordance with the local laws and contractual principles, or whether an international standard form contract is more desirable.

There are pros and cons to both forms of contract, however, the international form has the following advantages:

• They are widely used, recognised and accepted in the global construction industry
• Employers, contractors and other parties involved in the implementation of any project are aware of the contents of the contract, and the standard obligations expected of them
• Parties will be able to give considerable input during the negotiation phase of the contract in regard to what provisions of the contract need to be adapted or amended to bring the contract in line with the specific requirements and unique characteristics of the project

Standard form contracts have been drafted in accordance with Industry Best Practice and in a manner that is, as far as possible, clear and reasonable for all contracting parties. The allocation of risk is equally distributed among the parties, but more interestingly however, is that they have been drafted on a neutral jurisdiction basis, which enables them to be applied and understood globally.

FIDIC is a more conventional construction contract, with due emphasis placed on the contractual rights and obligations of the parties and the consequences of non-compliance with the provisions of the contract. NEC, on the other hand, places more emphasis on creating and maintaining a good and sustainable relationship between the parties, based on mutual trust and co-operation.

While both contracts are aimed at providing clear and concise language easily understood by all the contracting parties, NEC is worded in much simpler terms. Whilst this simple language appears to be an advantage, it often has the opposite effect in that it sometimes fails to clearly set out precisely which party bears which obligation, and what sanctions (if any) will be imposed on a contracting party for failure to comply with the provisions of that contract.

The obligations of the parties and the consequences of non-compliance are more precise and clearly set out in FIDIC, which reduces the risk of disputes arising out of the interpretation of the contract and the obligations imposed on the parties.

Another major distinction between the two includes: the manner in which delays, variations, force majeure and disputes or potential disputes are dealt with and/or resolved. In the NEC, delays and variations are dealt with under ‘compensation events'. Compensation events are additional events that occur during the project that generally have a time and/or cost implication for the contractor. The employer bears the risk for the occurrence of these compensation events. The NEC sets out what qualifies as a compensation event and the procedures applicable in notifying, quoting, assessing and implementing these events.

FIDIC on the other hand deals with ‘contractor claims', which are applicable if the contractor considers itself to be entitled to any extension of time for completion, and/or any additional payment, under any clause of the contract, or otherwise in connection with the contract. Unlike the NEC, FIDIC does not contain a specific list of events which could give rise to a contractor(s) claim, the events that may give rise to contractor(s) claims, such as variations, adjustments and delays, are disbursed throughout the contract. Accordingly FIDIC deals with events or claims which may entitle a contractor(s) to additional compensation or an extension of time for completion, in much broader terms than that offered in the NEC. Regarding Force Majeure events (a natural or human-induced disaster that causes a contract to fail), globally there is a difference in the way such events are treated under common law and civil law jurisdictions. In countries with common law jurisdictions, the exact meaning of a Force Majeure event can sometimes be vague or unclear and, in the absence of a specific contractual provision detailing the effects and consequences of a Force Majeure event, no Force Majeure provision will be implied. The main purpose of the Force Majeure provision is to address the allocation of risk and contractual liability on the happening of an event which is beyond the control of the contracting parties, and which generally cannot be economically insured.

FIDIC has a dedicated clause for Force Ma-jeure events, containing a broad definition of Force Majeure and a non-exhaustive list of exceptional events or circumstances that may qualify as Force Majeure events. Accordingly, events that may exempt a contracting party from performance. It further provides that a contracting party will be released from further performance of the contract if an event or circumstance outside the control of the parties, including but not limited to a Force Majeure event, makes it impossible or unlawful for the parties to fulfil their contractual obligations. Under NEC, Force Majeure events are provided for under the heading of ‘compensation events' and there is no specific reference to the event being a Force Majeure event.

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