A new second edition of the Green Book from FIDIC “Green Book–Short Form of Contract 2nd Edition)” was published in December 2021. The second edition of the Green Book contains a more detailed, complete contractual solution while at the same time maintaining the peculiarities of the Green Book, i.e. being a simple, practical standard contract that is suitable for simpler projects with lower exposure to risk.
FIDIC’s Green Book
The FIDIC (International Federation of Consulting Engineers) standard contracts are the world’s most widely used standard contracts for construction and installation projects. The first edition of the Green Book was published in 1999 and is part of FIDIC’s famous “Rainbow Suite” collection.
The first version of the Green Book was tailored to construction and installation projects of a lower value (approximately USD 500,000) or projects with an implementation period of less than six months. The aim was to offer a simpler standard contract that did not place an excessive administrative burden on the parties when applying the contract. The first edition of the Green Book consisted of only 15 provisions extending over 10 pages.
The Green Book has proved to be extremely popular and is also widely used in larger projects. FIDIC estimates that approximately 18% of the projects that apply the Green Book have a contract amount in excess of USD 10,000,000 and an implementation period of more than two years. In the second edition, FIDIC has therefore sought to bring about a contractual solution that regulates the most important matters, including for slightly larger projects, without compromising on the simple design of the contract.
There follows a brief account of the most important new features in the revised Green Book
The concept of “the Engineer” is borrowed from the Yellow and Red Books
The second edition of the Green Book introduces a concept that is well-known in the FIDIC contracts: "the Engineer”. The Engineer is a consultant who is appointed by the client and whose task is to represent the client in the ongoing administration during the implementation of the project. However, the role of the Engineer under the FIDIC contracts is special insofar as the Engineer is also expected to adopt an approach towards a number of matters that is independent and neutral as far as the parties are concerned. For example, the contract stipulates that the Engineer must evaluate whether modification work, so-called “Variations”, should lead to adjustment of the contract amount. In the aforesaid case, the Engineer must endeavour to ensure that the parties achieve a solution by mutual agreement and, if the parties are unable to agree, it is up to the Engineer to carry out an impartial assessment of the facts. As a starting point, the parties are required to comply with the Engineer’s decision. However, the decision may be subject to review in accordance with the provisions on dispute resolution. A similar system is already found in FIDIC’s Yellow Book and Red Book.
A new, innovative penalty clause is introduced
One of the major new features of the new Green Book relates to the penalty clauses. A penalty may be regarded as pre-established damages that are intended to provide the parties with predictability as far as the penalties for certain specified breaches of contract are concerned, to facilitate administrative management for the person suffering damage due to breach of contract and also to constitute a means of exerting pressure for the party whose rights the penalty clause is intended to protect.
In the older version of the Green Book, there were two provisions containing penalty sanctions: a penalty fine for delay on the part of the supplier and a specific type of penalty fine at the moment of cancellation of the contract. The new edition of the Green Book has clarified that the penalty clause that takes effect upon cancellation constitutes an exclusive penalty, which means that no further penalties can be imposed due to the cancellation.
The most important new feature is the introduction of a penalty clause aimed at the supplier’s costs due to a time extension, so-called “Prolongation Costs”. Otherwise, a common way for the supplier to achieve coverage of costs for circumstances that lead to an extension of the implementation period is to tie the supplier's right to compensation to the underlying reason for the extension. For example, it is common for the supplier to be entitled to compensation for direct costs incurred as a result of obstacles and additional work.
However, some costs can be difficult to capture with such a regulation, e.g. administrative costs as a result of having to carry out the work for a longer period than that calculated by the supplier may be difficult for the supplier to account for.
This penalty regulation for Prolongation Costs aims to guarantee the supplier some compensation for so called “overhead costs”, e.g. costs for implementing the project such as transport costs, costs to guarantee a good working environment and for equipment. However, it also contemplates costs relating to the supplier’s activities such as expenses for bookkeeping/accounting, administration, IT systems, etc. This penalty provision also aims to bring about predictability for both parties, who are able to form a view in advance of the consequences of circumstances that entitle the supplier to a time extension.
However, this penalty provision, which aims to compensate the supplier for overheads as a result of an extension of the project period, does not preclude the supplier from being entitled to receive compensation for direct expenses due to obstacles or disturbances. It remains to be seen whether a problem may arise with drawing boundaries between costs that relate to obstacles, for example, and costs that relate to Prolongation Costs.
Limitation of liability is imposed
From a supplier’s point of view, the previous edition of the Green Book was problematic insofar as the contract did not limit the supplier’s total liability or liability for indirect damages. This poses considerable risks for the supplier.
The new edition of the Green Book limits both contracting parties’ liability for indirect damages. In addition, the parties are expected to agree on a ceiling for the supplier’s total liability as a starting point. If the parties fail to specify a ceiling for the supplier’s liability, the supplier’s liability cannot exceed the contract amount. In that regard, the Green Book has become more supplier-friendly.
Exceptions to the limitation of liability apply in the case of fraud, gross negligence and malicious intent, etc. Furthermore, the contract provides a mutual commitment for the parties to indemnify the counterparty – “Indemnity” – in certain cases of property damage, personal injury and intellectual property infringement. These commitments are also exceptions to the aforementioned limitations of liability.
Simplified design and new templates
The new edition of the Green Book contains a number of documents aimed at simplifying the application of the contract. The book has been supplemented with tables aimed at providing an overall view of matters such as the risks for the client according to the standard contract and allocation of the parties’ insurance commitments. The Green Book also contains a number of templates for use during the implementation of the project, such as different types of templates for notification.
Several new provisions are introduced
Most of the provisions added to the new edition relate to matters that were left unregulated in the first edition. These include a new system for testing, commissioning and takeover, new provisions on notifications, intellectual property rights, confidentiality, cancellation rights, insurance, assignment of contracts and liability for subcontractors, etc.
The new edition of the Green Book is a welcome addition to FIDIC’s Rainbow Suite. The previous edition of the Green Book left many matters unresolved. The revised edition offers a standard contract which is still easy to apply but which provides prospective contractual parties with a more complete regulation of their contractual dealings.
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