In June this year, FIDIC published five standard construction contracts in Chinese. The aim is to foster greater awareness and understanding of FIDIC contracts in the PRC construction sector, for both outbound and domestic projects. The recent publication includes four 2017 editions and one 2008 edition of FIDIC standard forms:
- FIDIC Conditions of Contract for Plant and Design Build second edition 2017 (“Yellow book“);
- FIDIC Conditions of Contract for EPC Turnkey Projects second edition 2017 (“Silver Book“);
- FIDIC Conditions of Contract for Construction for Building and Engineering Works designed by the Employer second edition 2017 (“Red book“);
- FIDIC Client/Consultant Model Services Agreement (“White book”), Fifth Edition 2017; and
- FIDIC Conditions of Contract for Design Build and Operate Projects (“Gold book”) First Edition 2008.
The implementation of the Belt and Road Initiative has significantly advanced the recognition and adoption of FIDIC contracts by Chinese contractors and lenders in recent years. In terms of Chinese outbound projects, it appears that, despite the publication of the FIDIC 2017 suite, a preference by parties to use the 1999 edition continues to prevail. It is expected, however, that the adoption of the 2017 edition by multilateral banks – who increasingly play a key role in financing BRI projects – will result in greater uptake of the later forms amongst Chinese parties. This will likely be assisted by FIDIC’s collaboration with the China International Contractors Association (CHINCA) and the China Association of International Engineering Consultants (CAIEC) in promoting, and improving the ability of Chinese contractors and consultants to manage, FIDIC contracts.
When it comes to projects in China, FIDIC standard forms are most frequently used where foreign investment is involved. In those circumstances, the most common forms have been the FIDIC 1999 Red Book, Yellow Book and Silver Book. In contrast, the use of FIDIC standard forms is much less common in projects which are financed by domestic investment; here, model contracts published and promoted by national and local authorities remain the dominant forms. While some of these contracts may bear some resemblance to FIDIC standard forms, significant differences do exist. For example:
- FIDIC contracts intend to resolve most disputes during the project by way of engineer’s or employer’s determinations and/or the Dispute Adjudication Board or Dispute Avoidance/Adjudication Board; similar mechanisms are rare in Chinese model contracts and disputes are most often resolved through arbitration or litigation.
- FIDIC standard forms stipulate a broader range of recourse for parties than its PRC counterparts. For instance, the employer is entitled under FIDIC contracts to recover costs due to contractor’s delay or failure to carry out testing, or failure to search for defects, whereas the contractor has an express contractual right to reduce the rate of progress in the event of delayed payment. FIDIC contracts also contain detailed provisions on matters such as indemnities and performance security. In comparison, Chinese model construction contracts are less prescriptive, leaving the aforesaid matters largely for negotiation between the parties. The practical consequence is that many construction contracts in China are simpler and shorter than FIDIC standard forms, such that the parties often resort to domestic statutes and regulations to resolve contractual ambiguities and disputes.
It appears that the wider adoption of FIDIC standard forms in China projects could take some time. The recent publication of Chinese FIDIC contracts contain mostly 2017 edition forms which, as indicated earlier, have yet to see immediate widespread uptake in China and globally. To the extent that earlier editions of FIDIC forms have been used in projects involving foreign parties, these are in the relative minority and often reflect a desire by multinational companies to adopt a consistent approach to contract management across different jurisdictions. However, doing so is not always practicable in China. Non-FIDIC contracts are used for a myriad of reasons. For instance, projects with a governmental aspect may, as a matter of practice, require parties to adopt specific model contracts.
Another concern is the potential need to reconcile the terms of FIDIC standard forms and PRC laws. One example is the claim notification requirement in FIDIC contracts. The need for the contractor to notify its claim (intention) has been recognised under English law (and in other common law jurisdictions) as a condition precedent to the contractor’s right to bring a claim. The contractor‘s failure to do so could extinguish its right to claim. Like other civil law systems, in some circumstances PRC courts may not be as ready to uphold a claim notification requirement in the same way as its common law counterparts, given the ensuing harsh consequences.
However, issues such as these are not insurmountable. We know as much from past cases where foreign parties have successfully implemented projects in China using FIDIC-based contracts. Also, with the BRI continuing to gain ground, we are seeing FIDIC contracts being used more frequently by Chinese parties in overseas projects. We expect this trend to continue as domestic industry organisations further promote FIDIC standard forms in the PRC contractors market. The recent publication of the bilingual FIDIC contracts – which will no doubt help improve Chinese parties’ understanding of the standard forms – will facilitate such development, and is a move in the right direction.
For more information, please contact Michele Li, Partner, Murphy Mok, Senior Associate, or your usual Herbert Smith Freehills contact.