Idayatova A. Peculiarities of FIDIC Contracts Adaptation to the Kazakh Legislation. // Petroleum. – 2019. – № 6.

Background

  Economic globalization and increasing number of cross-border transactions bring forth the objective need for contract documents unification. In the construction domain, this is resolved through FIDIC model contracts representing standardized forms of contracts for diverse construction operations.

  FIDIC model contracts are widely used in the US and Europe, having come to be used in Kazakhstan in the post-Soviet era. According to our observations, FIDIC contracts find use in Kazakhstan only for especially large construction projects financed by private investors or international financial institutions.

  FIDIC model contracts were prepared by the International Federation of Consulting Engineers (Fédération Internationale des Ingénieurs-Conseils). There are 9 basic FIDIC model contracts covering a broad range of contractual relations in construction, the most popular being the Red Book (design by the employer), Yellow Book (design by the contractor), Silver Book (turnkey projects), and Pink Book (adapted to the requirements of international financial institutions). The latest novelty is the Emerald Book released in 2019 on the basis of the FIDIC Yellow Book and intended for underground construction projects. FIDIC model contracts are periodically amended to take into account the experience of contracts application in practice. The latest significant amendments were made in December 2018. The FIDIC contracts exist in the form of unified model forms, the so-called General Conditions. The General Conditions regulate in fair detail the entire process of interaction between the employer and the contractor, from the handover of the construction site to its hand back once the construction is completed. At the same time, they are worded so universally that they can be used anywhere in the world.

  The parties do not directly amend the General Conditions. In order to adapt a FIDIC contract to a particular project or a particular country's legislation, the parties prepare and sign a separate document – Particular Conditions – reflecting the specific agreements of the parties and amending the General Conditions.

  In addition to the Particular Conditions, the parties must also fill out and sign the Contract Data – a document containing such project data as the names of the parties and the engineer, construction work commencement and completion dates, duration of the guarantee period, deadlines for payments under interim payment certificates, contract's governing law, amount of security (Performance Security), amount of penalty, advance payment details, composition of the Dispute Adjudication Board, place of arbitration, etc.

  It should be mentioned that when using a FIDIC contract, the parties decide for themselves which edition of a book they intend to use. For example, the parties can choose the 1999 or the 2017 edition of the Red Book.

  Offered below for your attention are the key issues that need to be addressed when drafting Particular Conditions in Kazakhstan. In this work we were relying on the latest 2017 edition of the FIDIC Red Book (hereinafter, the "FIDIC Contract"), due to its practical relevance.

Legal Overview

  Material Conditions of Contract Agreements

Pursuant to the Kazakh legislation, the following conditions may be generally identified in contracts:

• Material conditions (without agreement on which the contract is not concluded);
• Additional conditions (if no agreement is reached on these conditions, in a number of instances the general statutory approach may apply).

As regards contract agreements, the material terms and conditions are:

• Determination of specific work to be performed under the contract (Article 616.1 of the Civil Code);
• Time of work commencement and completion (Article 620.1 of the Civil Code).

  Thus, one should keep in mind that if the parties do not agree in the FIDIC Contract on the subject of contract work, as well as the initial and final date of its implementation, then, pursuant to the Kazakh law, such contract would be deemed non-concluded, i. e., not creating the rights and obligations of the parties.

  Please also note that other imperative provisions of the Kazakhstan legislation may be applicable to the FIDIC Contract, such as requirements to language, currency and choice of governing law in contracts between two residents, which cannot be disregarded.

Design Documentation

  The FIDIC Contract pays little attention to design documentation issues. Although design is not within the scope of contractor's work under the FIDIC Contract, issues relating to the design documentation may be important in the course of contract performance.

  Due to this, it is recommended that the parties fill this gap themselves by setting forth in the Particular Conditions an algorithm for the parties to interact on the matters of approval, provision and amendment of design documentation.

  FIDIC Contract does not use the term "design documentation", it uses the term "drawings."According to the FIDIC Contract, drawings are to be provided by the employer. Further in the text of the FIDIC Contract dedicated to drawings is only one Sub-Clause 1.9, whereunder the contractor must notify the engineer in case the necessary drawings are missing. If the requested drawings are not provided by the engineer within the established time, the contractor is entitled to claim the extension of work completion deadlines and compensation.

  At the same time, the rules of the Civil Code establish that a contract agreement must determine the composition and content of the design and estimate documentation and set forth which of the parties and within which period must provide the relevant documentation (Article 654.3). Besides, the Civil Code provides for the consequences of contractor's identifying work that has not been accounted for in the design and estimate documentation. In such circumstances, the contractor must notify the employer and may suspend work if receiving no response within 10 days or another period established by the contract. It is important to note that in case of failure to notify the employer, the contractor is deprived of the right to payment for the additional work performed and to the damages caused thereby.

  Hence, Sub-Clause 1.9 of the FIDIC Contract is not sufficient to comply with the requirements of Article 654.3 of the Civil Code. In the Particular Conditions to the FIDIC Contract, the parties need to provide for an algorithm of their interaction in the course of preparation, transfer and amendment of the design and estimate documentation, as well as the information on its composition and content. When preparing the Particular Conditions, we would also recommend following the current rules of the CN RK 1.03-00-2011 and CN RK 1.02-03-2011, which contain detailed regulations regarding the relevant requirements.

Indemnity and Limitation of Liability

  The FIDIC Contract contains provisions based on such concept of the English law as exemption from liability (indemnity). The relevant provisions are presented in Sub-Clauses 1.13, 4.2.2, 4.14, 4.16, 5.2, 17.4, 17.5, 17.6 and 19.1 of the FIDIC Contract.

  Sub-Clause 1.15 of the FIDIC Contract contains a provision pursuant to which liability of the parties is limited by the amount agreed upon by the parties, or, if such amount is not agreed upon, by the contract price.

  These conditions may be unenforceable, because the Kazakhstan legislation does not allow for the possibility to fully exempt from liability. Parties to the contract may limit liability to actual damages, and an agreement exempting from the compensation for actual damages would be null and void (Article 350.2 of the Civil Code).

  In view of the above, the aforementioned liability clauses of the FIDIC Contract need to be amended and adapted to the Kazakhstan legislation via Particular Conditions.

Delay Damages and Financial Charges

  Sub-Clause 8.8 of the FIDIC Contract provides for damages payable by the contractor for a delay in work completion. The delay damages are understood as the amount to be paid per each day of delay as established by the contract (in the Contract Data). The total amount of delay damages cannot exceed the amount specified in the Particular Conditions. In the context of Kazakhstan legislation, the above implies penalty. However, in order to avoid ambiguity and controversies, we would recommend replacing the wording "delay damages" by "penalty" in the Particular Conditions. Please note that since February 2017, due to changes in the relevant provisions of the Civil Code, penalties (recovery of penalty, but not losses) have become possible in Kazakhstan only in cases provided by law. Similarly, Sub-Clause 14.8 of the FIDIC Contract provides that, in the event of delayed payments under interim payment certificates, the employer must pay to the contractor financial charges compounded monthly on the unpaid amount at the average bank interest rate plus 3%. The Kazakh law is unfamiliar with the term "financial charges." Since this contractual instrument is similar by nature to penalty, when drafting the Particular Conditions we would recommend replacing the term "financial charges" by "penalty" so that this contract provision does not give rise to further disputes caused by different interpretations.

Figure of the Engineer

  The figure of engineer in the FIDIC Contract is the key one. The engineer represents the employer on the construction site and is authorized to resolve differences and make decisions on the contractor's and the employer's claims against each other.

  In local practice, the role of the engineer remains unclear. While in terms of representing the employer's interests onsite the role of the engineer is generally similar to the functions of project manager (engineering company) and no particular questions should arise in this respect, the aspect where the engineer is to actually resolve disputes between the parties raises many questions.

  Sub-Clause 3.7 of the FIDIC Contract says that the engineer is to act neutrally and is not to be deemed as acting in the interests of the employer. However, as practice shows, ensuring the engineer's neutrality is a task difficult to implement. The essence of construction disputes our firm has worked on often boils down to the contractor's challenging the engineer's decisions and accusing the latter of bias.

  If in the Western practice the duality of engineer's functions raises no questions and is permissible, in Kazakhstan this concept causes anxiety and distrust in the very possibility of ensuring the proper neutrality of the engineer.

Contract Price and Payment Certificates

  Article 4.11 of the FIDIC Contract implies the establishment of fixed contract price. In this connection, the following provisions arising from the Civil Code rules concerning prices for work under contract agreements should be taken into account and, if necessary, reflected in the contract. The work price (budget estimate) may be approximate or fixed. Unless otherwise specified in the contract, the work price (budget estimate) shall be deemed fixed (Article 621.2 of the Civil Code).

  The contractor may not request to increase the fixed price (fixed budget estimate), and the employer – to reduce it, including where at the time of contract conclusion the possibility was excluded to provide for the scope of work subject to performance or the costs necessary for this (Article 621.5 of the Civil Code).

  The contractor may request revision of the budget estimate if, due to reasons beyond his control, the cost of work has exceeded the budget estimate by at least ten per cent (Article 655.3 of the Civil Code). In the event the cost of materials and equipment to be provided by the contractor and of services to be rendered to him by third parties has considerably increased after the contract conclusion, the contractor may request to increase the established price (budget estimate), and in case the employer' refuses to satisfy this request, the contractor may request to terminate the contract (Article 621.5 of the Civil Code).

  In our view, Sub-Clauses 14.3 and 14.6 of the FIDIC Contract dedicated to the issuance of interim payment certificates and employer's payments against them also require separate elaboration.

  In particular, the FIDIC Contract states that the contractor, on a monthly or other basis, requests the engineer to issue an interim payment certificate containing a report on work performed and the amounts due for such work. Based on such request, the engineer issues the interim payment certificate in which he confirms or does not confirm the stated amounts. Further, on the basis of the certificate issued by the engineer, the employer makes the corresponding payment to the contractor. The FIDIC Contract does not define the legal meaning of the interim payment certificate, specifically, whether it means the acceptance of work specified in the certificate, or whether the amounts payable thereunder should be regarded as advance payments. In our practice, we often come across FIDIC contracts, in which interim payment certificates are accompanied by the signing of work completion certificates and issuance of the corresponding invoices. We believe that in this case there is work acceptance in parts. However, the parties may determine by their agreement that the issuance of interim payment certificates does not constitute work acceptance and the payment thereunder is an advance payment under the contract. This issue is topical from the risk allocation perspective, because pursuant to the Kazakhstan legislation the owner of the construction-in-progress before it is transferred to the employer and the work is paid for is the contractor (Article 651.4 of the Civil Code). This means that until the employer accepts the work, the one who bears the risk of accidental loss of, or damage to, the construction facility or the construction deliverable is the contractor. Engagement of Subcontractors

  Sub-Clause 5.1 of the FIDIC Contract stipulates that the contractor may not subcontract all the scope of contract work. This Sub-Clause requires further detailing in the Particular Conditions subject to the provisions of the Law on Architecture.

  In particular, according to Article 66.11 of the Law, the contract agreement must specify on a mandatory basis the types and scope of work the contractor (general contractor) intends to subcontract. At the same time, it is not allowed to subcontract more than two thirds in aggregate of the value of all contracted work (contract price) stated in the contract agreement. Thus, when preparing the Particular Conditions relating to Sub-Clause 5.1 of the FIDIC Contract it is necessary to take into account the above regulations.

Involvement of Technical and Author's Supervision

  Pursuant to the Kazakhstan legislation, the construction employer must ensure that the construction of a facility is supported by technical and author's supervision (Article 34-2.2(3) of the Law on Architecture). Technical supervision is the supervision over construction at all stages of project implementation, including quality, deadlines, cost, acceptance of work performed and commissioning of facilities (Article 1.59 of the Law on Architecture).

  Author's supervision is the supervision of the author of design documentation over compliance of construction work with the design documentation.

  There are no technical and author's supervision provisions in the FIDIC Contract. Accordingly, when adapting the FIDIC Contract to the Kazakh legislation, attention should be paid to the implementation of provisions relating to the technical supervision and author's supervision procedure, as well as to the issues of interaction and coordination of actions of the contractor, engineer and persons carrying out the author's and technical supervision on the construction site.

Work Acceptance

  Clause 10 of the FIDIC Contract is dedicated to the acceptance of work performed.

  It should be noted that this Clause does not contain the specific aspects of construction facility acceptance established by the Law on Architecture.

In view of the above, when working on Particular Conditions, we would recommend taking into account the following imperative rules:

• The employer accepts and commissions the built facility when it is completely ready;
• The employer accepts the work, if the relevant opinions of the author's supervision and technical supervision and the contractor's declaration of compliance are in place.

  Attention should be paid to Sub-Clause 10.1 of the FIDIC Contract. It says that in certain circumstances (e. g., if the employer evades work acceptance) the work performed will be deemed accepted by the employer and the certificate of acceptance will be deemed issued.

In our view, this provision may be unrealizable in practice.

  In particular, pursuant to the Law on Architecture, acceptance of a built facility is formalized by a certificate signed by the employer, contractor and persons carrying out the author's and technical supervision. Further, the signed acceptance certificate constitutes the basis for entering into the legal cadastre the information on the built facility and serves as the facility's title-establishing document. Due to this, recognition of the construction as completed in the absence of the built facility acceptance certificate signed by the parties looks difficult to implement.

  Moreover, the essence of Article 663.4 of the Civil Code suggests that a unilateral certificate of acceptance of work deliverables may be recognized as valid only through court proceedings.

Guarantee Periods

  Clause 11 of the FIDIC Contract dwells on the procedure for interaction between the employer and the contractor in the process of detecting and remedying the flaws and defects in the work performed. The Clause, however, does not reflect the following special regulations of the Kazakh legislation, which should be provided for in the Particular Conditions: The Civil Code leaves the guarantee period establishment to the discretion of the parties, i. e., it can be provided or not provided for by the contract. However, the Law on Architecture says that the guarantee period cannot be less than two years from the date of the facility commissioning. The practice today is that the parties prefer to follow the rules of the Law on Architecture and set the minimum two year guarantee period.

  It is necessary to distinguish between the guarantee period and the latent defects detection period. Article 630.5 of the Civil Code contains a somewhat inadequate language that mixes these two categories of periods. However, one should keep in mind that the minimum period to detect latent defects is 3 years, while the guarantee period is at least 2 years. If the guarantee period agreed by the parties has expired, but the statutory defects detection period is still in effect, the employer may lay a claim against the contractor in connection with the inadequate quality of contract work within the defect detection period.

Preclusive Term for Claims

  Sub-Clause 20.2 of the FIDIC Contract provides for a preclusive term for the employer and contractor to lay claims against each other. Generally, this is not contrary to the Kazakh legislation, since the legal theory does identify the preclusive terms.

  In particular, according to Sub-Clause 20.1 of the FIDIC Contract, if a party to the contract becomes entitled to an extension or payment, it must notify the engineer within 28 days of the date when it has or was to become aware of the arising of such entitlement. If the said deadline is missed, the party will not be entitled to the extension or payment, and the other party will be exempt from the relevant liability.

  This provision of the FIDIC Contract causes debates among practicing lawyers, namely, whether or not it contradicts the statutory period of limitations.

  Our opinion is that in the situation in question these are different time periods. Sub-Clause 20.2 of the FIDIC Contract deals with the arising and loss of a right. More specifically, in case of a certain event a party becomes entitled to an extension or payment, and this entitlement is lost, unless the party lays its claim within 28 days (i. e., the right ceases to exist). Please note that the Civil Code contains a number of regulations similar in content. For instance, under a contract agreement, the contractor identifying in the course of construction a work not included in the design and estimate documentation must notify the employer accordingly (Article 654.4 of the Civil Code), otherwise it loses the right to claim payment for the additional work performed.

  In turn, the period of limitations is associated with the judicial protection of an available, but violated right. The Civil Code sets forth as follows: "The period of limitations is the period of time during which a claim, arising out of a violation of a person's right or a legally protected interest, may be satisfied" (Article 177.1) For instance, if the contractor has the right to extend the work completion deadline or to receive an additional payment, and the employer does not grant the extension or does not pay the additional amount, the contractor may, during the 3-year period of limitations, obtain a judicial satisfaction of its right violated by the employer (i. e., force the employer, via a court judgment, to perform the necessary actions).

  Proceeding from this, we believe that Sub-Clause 20.2 of the FIDIC Contract establishing the 28-day period for the parties to lay claims against each other does not contradict the Kazakh legislation.

Arbitration

  When drafting the Particular Conditions to the FIDIC Contract relating to arbitration, please pay attention to the following. Seat of arbitration. The FIDIC Contract does not determine the seat of arbitration. If the parties do not agree on it in the Particular Conditions, then, according to the Arbitration Rules of the International Chamber of Commerce (ICC), it will be determined by the ICC International Court of Arbitration itself.

  In turn, the choice of the seat of arbitration means the choice of law applicable to the arbitration proceedings. If the parties have specified London as the seat of arbitration, their arbitration, in accordance with the widespread interpretation of the New York Convention, will be subject to the UK's national Arbitration Act. And this means that the issues of setting aside the award, challenging the arbitrators and other issues related to arbitration proceedings will be resolved in accordance with the UK Arbitration Act and will be within the English courts' jurisdiction.

  In this connection, when entering into a contract, the parties should choose the seat of arbitration subject to the residency of the parties to the contract and the specifics of the national arbitration legislation of a given jurisdiction.

  Choice of law applicable to the arbitration agreement. The arbitration agreement is autonomous and, by virtue of this, the law applicable to the FIDIC Contract would not automatically apply to the arbitration agreement (arbitration clause).

  In our practice, as a general rule, the parties do not separately agree on the law applicable to the arbitration agreement. In this case, the law of the seat of arbitration will apply to the arbitration agreement (this rule stems from the broad interpretation of Article V(1)a of the New York Convention). For example, if the parties chose London as the seat of arbitration, their arbitration agreement will be subject to English law and the issues of validity, lawfulness and enforceability of the arbitration agreement will be reviewed under the English law.

  Thus, we would recommend that the parties to the contract, when drafting the Particular Conditions, consider separately the issue of the law applicable to the arbitration agreement.