SA PERSPECTIVES ON RISK ALLOCATION UNDER THE NEW FIDIC

By Stephanie McDonald,Tumisang Mongae Wednesday, July 25, 2018
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Now that the new FIDIC suite of contracts has been in circulation for a few months, industry players are starting to look at the nuts and bolts. Two aspects that merit closer scrutiny from a risk allocation perspective are the provision for “exceptional events” (the term that replaces “force majeure”) and the amended “fitness for purpose” test.

Exceptional Events

Some say the change in terminology to exceptional events is useful as it avoids the confusion sometimes created where force majeure is defined at law in certain jurisdictions. While there is no real change in meaning, what is of interest from a South African point of view is the approach in the new FIDIC towards “strike and lockout” because it appears as a separate event within the new definition of “exceptional events” rather than within the broader category of riot, disorder, etc. as was previously the case.

Strikes and lockouts are a common occurrence in South Africa and, more than anything else, FIDIC’s separate categorisation of this risk serves as a reminder that it needs to be carefully considered in the South African context.

Specifically, employers and contractors should bear in mind the trade union dynamics in South Africa, where strikes are sometimes initiated by unions rather than by unionised employees. There was a case in South Africa involving the 1999 FIDIC terms, where a union-initiated strike occurred and the employer claimed the contractor’s employees had been involved. The contractor, in turn, said its employees had not been involved by choice but because of their membership of the union which had initiated the strike.

The potential for this type of dispute is still present under the new 2017 FIDIC terms. Although riots and commotion on the one hand, and strike and lockout on the other, are now in separate categories, they are not clearly defined in either category. This leaves the door open for an opportunistic employer or contractor to cherry-pick whichever category it considers best suited to its argument in a claim. For example, if a contractor wanted to argue that its employees were not solely responsible for a strike, it could claim that the disturbance was in fact a commotion (limb c of the definition) and not a strike (limb d of the definition).

The best way to overcome this kind of ambiguity is for the parties to amend the standard wording of the definition to ensure that the substance of the two categories is clearly and unequivocally spelt out so that there can be no room later for selective argumentation.

Fitness for Purpose

The new fitness for purpose test is more specific than the previous one and from this point of view can be seen as a positive development since it means greater certainty. Previously, fitness for purpose was defined, in broad terms, by reference to the purpose “as defined in the Contract”. Now it is defined as the purpose “defined and described in the Employer’s Requirements” or where there is no such definition, the works are required to be “fit for their ordinary purpose”. 

Both employer and contractor will want to avoid the uncertainty of what “ordinary purpose” means and no doubt this will encourage greater focus on ensuring the purpose is clearly and accurately described in the Employer’s Requirements. Many say this is already the case and that FIDIC is simply catching up with market practice but it does highlight the importance of getting this essential element of the contract right (particularly in light of recent UK case law on the point (see MT Hojgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Limited [2017] UKSC 59).

It is also worth highlighting that FIDIC’s new fitness for purpose obligation is backed up both by an indemnity from the contractor and by a requirement to place professional indemnity insurance covering any liabilities arising from a failure to achieve the fitness for purpose obligation. It is questionable whether this new insurance requirement is viable given the limitations commonly seen in insurance markets.

This newsflash on the new FIDIC suite of contracts is the second in a series compiled by the members of our Construction Sector.