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Using FIDIC Contracts in Eastern Europe

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Using FIDIC Contracts in Eastern Europe

    Using FIDIC Contracts in Eastern Europe

    By Ilya Nikiforov1[1]

    thThe Official Russian Text of FIDIC 4 edition

    Believe it or not, Russia does not currently have a model set of contract conditions for construction works universally recognized in the industry. The only document of this type is a letter of the Ministry of Construction dates 10 June 1992 N BF-558/15 which proposed a 5-page specimen

    contract. Needless to say this contract is quite out of date construction

    now.It was developed to fit the old Soviet Rules for the Construction

    [2]which were adopted back in 1986 by the Decree of the USSR Contracts

    Council of Ministers. The Rules were abolished in 1993 by the Decision Of The Council Of Ministers No. 812 Of August 14, 1993 which enacted the General Regulations On The Procedure For The Conclusion And Execution Of State Contracts (For Performance of Works) For The Construction Of Objects

    )[3]. However the for the Federal State Needs in the Russian Federation

    model Rules introduced by this Regulation are quite narrative and are applicable only to government-procured contracts. Moreover, part two the new Civil Code adopted in 1996 overhauled the regulation of construction

    [1] Ilya Nikiforov - J.D. (Law School of St.Petersburg University, Case Western Reserve University School of Law),an advocate (member of St.Petersburg Bar Association). His practice is focused on transnational business and litigation. Mr. Nikiforov is also an adjunct professor at the Law School (Civil law Department) of St.Petersburg State University. He often serves as a counsel in international arbitration proceedings and a local Russian counsel to western law firms. He delivered expert opinions on Russian law in proceedings before US, German, Dutch and French courts. Formerly Mr. Nikiforov worked with Gide, Loyrette, Nouel (St.Petersburg, Russia), Fulbright & Jaworski (USA), International Monetary Fund (Washington, DC). Contact details: E-Mail: ilya@hq.pu.ru, Internet:

    www.friends-partners.org/partners/fplegal/main.htm. Phone. +7(812)965-0417.Worldwide fax +1(215)-893-3680

    1[2]Approved by a Decree of the USSR Council of Ministers of 26 December 1986 No.1550. 1[3] published in: Sobranie Aktov Prezidenta i PravitelstvaRossiiskoi Federatsii No. 34, 1993, art. 3189.

    contracts brining this area of law in line with the contemporary standards.

    In this situation several public customers (government entities) have developed the model contracts for their own procurement needs. No form has come from the industry, apparently for the reason that the industry is too weak and unorganized to join efforts in developing a standard set of contractual conditions, a development which was for long anticipated by many.

    In 1997 the world has witnessed the publication of the Russian editions thof FIDIC forms of contracts. The Russian Text of FIDIC 4 edition was

    published first. This is a timely development. The Conditions of Contract for Works of Civil Engineering Construction developed by FIDIC (?the Red Book?) were the contract conditions of choice for foreign contractors rdworking in Russia. FIDIC 3 edition was used for more than 20 contracts concluded within the framework of the program for construction of housing thfor Russian troops withdrawing from Germany. FIDIC Red Book 4 was used

    for construction of modern buildings in Moscow and construction of roads in Russia.

    For each of these projects a separate, independent translation of FIDIC was prepared. A translation from German version (which itself is not authentic one was used for the program of construction of housing for Russian troops withdrawing from Germany. Independent Russian translations from English were used for other projects. An author of this submission has been personally participating in the implementation of many of such projects in Russia. They have seen how grotesque the application legal rules of foreign origin might be in the context of Russian business and legal practices. However, the FIDIC conditions have proven themselves viable in the Russian woods.

    Until recently there was no official translation of FIDIC conditions. This situation Mr. Marshall Gysi in October 1997 has inaugurated the official thtranslation of FIDIC Red Book 4 edition into Russian. The Russian text

    was developed under the authority of FIDIC by the British firm called European Construction Ventures with offices in London and St. Petersburg. The Red Book was only the first to appear, and more editions were prepared later. Now the palette of official FIDIC translations into Russian includes:

    th1. 1.Conditions of contract for (the Red book) 4 edition as revised in 1992

    2. 2.Client/Consultant Model Services Agreement (the White book)

    3. 3.Conditions of contract for design-build and turnkey (the Orange book)

    4. 4.Conditions of contract for electrical and mechanical work including Erection on Site ( the

    Yellow book)

    5. 5.Conditions of Sub-Contract for Works of Civil Engineering Construction

    These text are quite useful. Probably they are the best translations of FIDIC conditions into Russian, which means they are closest to the original. Still, these texts contain a number of irregularities. These irregularities were not exposed or discussed insofar. Perhaps the reason is that Construction projects extend over a significant period of time and disputes normally do not arise until some point in time after the original completion date. In the meantime, Russian texts of FIDIC are only two years old. It is even more important to point out certain irregularities in these texts and suggest improvements which that they could be taken into account by contracts drafts already at this early stage.

    If we look back, the similar situation had arisen in connection with the rdrdGerman text of FIDIC 3 edition. FIDIC 3 entitles a contractor to claim

    a compensation for increase in costs caused by the legislation passed at any time after the date which is 30 days prior to the last date for rdsubmission of bids (Clause 70(2)). The German text of FIDIC 3 was read

    to say in Clause 70(2) that such claim can be made if there is a change of legislation "within the last thirty days prior to the submission of bids", which, of course is a material difference. Original text provided for an open period and indicated the starting date therefore. German text was referring to a 30-days period. This was a simple error in translation, which, fortunately, was noticed soon. The error was noted and addressed in leading publications on the subject. This allowed the construction industry to modify the standard bidding forms including the corrections to FIDIC text by reference to that publication.

    To avoid such discrepancies is usually recommended to expressly provide in a contract for a governing language. Even the best translation cannot follow the original text just exactly and there is always a room for small discrepancies. For these and probably other reasons FIDIC has always stressed that only the English text of the Contract Conditions is the authentic one. It is recommended to include a statement providing for English as a governing language in the appropriate clause of the contract th(say, clause 5.1 of the Red Book 4 edition or corresponding clause of

    Special Conditions) . This is a good way to follow.

    However, certain Russian legislation dictates that Russian, and not any other language must be the authentic language of the tender and contractual documentation. This requirement is contained in certain laws. For instance, under Clause 22 of the Russian Federation of 25 October 1991

ã. N 1807- On languages of people of the Russian Federation (as amended

    on 24 July 1998) the official documentation in commercial activity must be drawn up in Russian language and other languages provided in the contracts between business partners. Under Clause 16 of the same law the official paperwork in the state bodies, institutions, organizations is drawn up in the Russian language. Another provision on languages is found in the Regulation on the organization of procurement of goods, works, and

    approved by the Presidential Decree of 8 services for the federal needs

    April 1997 N 305,which says that qualification, tender and other documentation related to invitation for tender, tender offers and quotations is drawn up in the Russian language.

    Suggested changes

    It is therefore suggested to make certain improvements to the Russian texts of FIDIC Contractual Conditions before using them in practice. The threcommendations regarding amendment of the Russian text of Red Book 4

    edition are summarized below. If they are not accounted for at a tender stage, the parties could then incorporate these revisions into their contractual documentation during negotiations phase to avoid future complications. These improvements are of three types:

    1. Grammar Changes

    2. Terminology

    3. Substantive modifications

    Grammar/linguistic changes

    These are least significant remarks. They relate to missing ?or? between two parts of a clause or convoluted language, which really do not affect interpretation.

    For instance, in Clause 2.6 the Russian text misses “or” between items of the list of situations where an Engineer is to act impartially. In Clause 10.3 the word “podat’” (ïîäàòü/file) is used in the Russian

    version while the word “pred’yavit” (ïðåäúÿ?âòü/make) serves the

    purpose better.

    Clause 10.3 speaks of the insurance “in the name” of the Contractor and the Employer. However, in Russian a phrase “for the benefit of” in this context serves the purpose better than the literal translation.

Terminology

     An attention must be given to the words used for translation of foreign legal texts. Some of the words which seem to be appropriate have specific meanings as legal terms of clause. Using such terms may lead to incorrect interpretations.

     1) Claim

     The word ?claim? is commonly found in FIDIC conditions. Articles 53,67 thof Red Book 4 edition speak of the contractor's claims. Clause 10 discusses claims against performance security. The word “claim” is

    universally translated throughout Red Book Russian edition as ?isk? (âñê).In the meantime, the word isk in Russian law stands for a statement of claim filed with a jurisdictional body such as a court of law or arbitration tribunal. For other claims the term ?òðåáî?àíâå? or, in some situations, ?ïðåòåíçâÿ? must be properly used. The word “isk” is only properly used in Art.67 where it says about “a claim to be filed before an international arbitration tribunal.”

    It must not be used in relation to Contractor’s claims ans also in the

    Russian text of Clause 10.2, 10.3 where the term “claim” relates not only to lawsuits but also, for instance, to claims against the guarantor 2) Liability

    In Clause 20.2 the word “otvestvennost’” (liability) is used.This

    legal term has quite specific meaning in the Russian law.The theory of liability is one of the most developed and advanced in Russian civil (private) law.Liability is a sanction, punishment for the breach of a duty owed by virtue of contract or otherwise.It is not a separate obligation. It substitutes or supplements the duty owed within the framework of the same original legal relationship.The content of the original legal obligatory relationship is modified as a consequence of the breach of duty owed by a debtor.14]

    Therefore, the proper term to use in Art.20.2 would be “obyazannost”, which is close to “responsibility”.

    At the same time the term “otvetstvennost” is properly used in Clause 62.1 speaking about defects liability certificate.

    2[4] V.F. Popondopulo. Dinamika obyazatelstvennogo pravootnosheniya i grazhdansko-pravovaya otvetstvennost’. An abstract of the Candidate’s Thesis. Leningrad University. 1981

3) Liquidated damages

    Clause 47.1 speaking of liquidated damages is translated in the official thRussian text of Red Book 4 edition into Russian

    literally as - zaranee otzenennye ubytki. Legal effect of liquidated damages clauses in contracts is one of the most common problems of interaction of common law and civil law. It routinely arises when laws a civil law jurisdiction are elected as a governing law for a contract conditions originating in common law country or drafted by common law country is put into operation in the civil law country. It is impossible under the Russian law to agree on the particular amount of damages to be compensated to an injured contractual party in advance of the breach. In each case the claimant has to prove damages.

    It is advisable to substitute the liquidated damages clause with the penalty clause in the corresponding section of the model Russian edition of FIDIC conditions. In Russian business practice penalty is the preferred remedy which allows the simplified recovery of damages. Unlike in many common law jurisdictions, penalty clauses are recognized and enforced by Russian courts. The amount of contractual penalty is not limited by the law.

    Still, the penalty is not the same as liquidated damages (pre-assessed damages). Its function is different. Notably, the penalty clause does not limit the exposure of the Contractor to compensation of Employer’s damages in full, including real damages and lost profits. The amounts of penalty are normally set off against damages, but to the extent Employers’ damages exceed the amount of penalty, the difference may be recovered on top of sums payable as penalties.

    4) Days of rest

    thClause 45.1 of Red Book 4 edition provides that a contractor, subject

    to some exceptions, should not carry on works durign locally recognized “days of rest”.Days of rest in this paragraph were translated into Russian as “vykhodnye dni”.The term used here stands in the Russian law for the weekends.Notably, it does not include public holidays, for which the special term “prazdnichnye dni” is used.A generic term for “days of rest” is “nerabochie dni”, which must be used in the Russian text of Clause .

Factual and Legal Irregularities

    This group includes legally significant irregularities which must be taken care of by contract. They require amendment by Special Conditions or Contract.

    This group includes missing predicates, erronious translations which materially affect the interpretation. Importantly, the literal interpretation is the preferred method of interpretation of contracts under the Russian law (the RF Civil Code Art. 431). Therefore, a careful attention must be given to the text which will be understood by judges at its face “value”, i.e. as “what is says” and not as “what it is meant to say”.

1) 6.3.Distruption of progress

    The propose of this provision says is to avoid disruption of works. It requires the contractor to notify the engineer that it needs instructions, and in the absence of such instructions, the works progress will be impeded. The Russian official text adds extra “not” thereby chaning the meaning to the opposite. It reads as follows.

    6.3 Disruption of Progress

    The Contractor shall give notice to the Engineer, with a copy to the

    Employer, whenever planning or execution of the Works is likely to be

    delayed, or disrupted unless any further drawing or instruction is not

    issued by the Engineer within a reasonable time.

    I.e. the Contractor shall give notice when further activity by an Engineer who continues to issue instruction and drawings threatens the project, and unless the Engineer stops activities, the works may be disrupted. Suggested improvements to the Russian text to bring its meaning back to track are shown in the attachment.

    2) 10.2. Period of Validity of Performance Security

    The Russian translation of the last sentence omits the words “against the performance security” therefore it literally prohibts any actions by either party after the issue of the Defects liability certificate. It

says:

    10.2. Period of Validity of Performance Security1[5]

    The performance security shall be valid until the Contractor has executed

    and completed the Works and remedied any defects therein in accordance

    with the Contract. No suits against the performance security shall be

    brought after the issue of the Defects Liability Certificate in accordance

    with Sub-Clause 62.1. and such security shall be returned to the Contractor

    within 14 days of the issue of the said Defects Liability Certificate.

     3) Clause 60.7 Discharge

    According to FIDIC, upon submission of the Final Statement, the Contractor shall give to the Employer, with a copy to the Engineer, a written discharge confirming that the total of the Final Statement represents full and final settlement of all monies due to the Contractor arising out of or in respect of the Contract.

    Drafters of the Russian Red Book for some reason have assumed that this is a discharge confirming performance by the Contractor, not by the Employer. They have therefore added modified this text, which reads “a Contractor shall give to Employer [„] a written discharge of its

    ” Obviously, this is not the meaning of original FIDIC text obligations.

    where discharge serves the purpose of the confirmation by the Contractor of the fact that it has no claims against the Employer except those mentioned further in this provision of the law.

    The Russian text, if used unmodified will give rise to the uncertainty as to the contents and significance of discharge given by the Contractor. 4) Loss and damages

    In many instances the Red Books uses the phrase “loss and damage” for

    the purpose of allocating the risks between a contractor and an employer, scope of insurance cover and liability. These words are universally thtranslated throughout the Russian official text of FIDIC 4 as “ubytki

    3[5] For clarity the words missing in the Russian text are striken through.The words added in the Russian version which are absent in the original are underlined.

I uzerb”, which is “damages and real losses”. This term is much wider

    than original FIDIC draft. The term damages is not the same as “damage”.

    It covers not only actual, but also future damages, and most importantly, lost profits and the like. Therefore, exposure of the parties to liability is not limited to compensation of real damages.

    5) Loss and damages

    In many instances the Red Books uses the phrase “loss and damage” for the purpose of allocating the risks between a contractor and an employer, scope of insurance cover and liability. These words are universally thtranslated throughout the Russian official text of FIDIC 4 as “ubytki

    I uzerb”, which is “damages and real losses”. This term is much wider than original FIDIC draft. The term is not the same as “”. damages damage

    It covers not only actual, but also future damages, and most importantly, lost profits and the like. Therefore, exposure of the parties to liability is not limited to compensation of real damages.

    6) Taking over certificate

    Upon substantially completion of the whole of the works the Contractor gives a notice to that effect to the Engineer.Such notice and undertaking shall be deemed to be a request by the Contractor for the Engineer to issue a Taking-Over Certificate in respect of the Works. The Russian official text of clause 48.1 of the Red Book refers to the Employer, not to an Engineer in this context. It reads

    48.1 Taking-Over Certificate

    […] Such notice and undertaking shall be deemed to be a request by the

    Contractor for the Employer Engineer to issue a Taking-Over Certificate in

    respect of the Works. […]

    This brings a confusion as to who has responsibility of issuing Taking-Over Certificate.However, since an engineer acts here as a representative of an employer, it is not expected that use of this provision in practice will cause substantial problems.

    7) Clause 52.4 Dayworks.

    “Dayworks” were translated into Russian as “dnevnyie raboty”. This term in Russia means essentially “daylight work”, i.e. the work that is carried out in the light of a day, as distinguished from the night or nighttime. This is not the proper meaning of this term as it appears in

    FIDIC. Dayworks stand for the works which are paid for on the “time spend basis”, as disinguished from the payment on the basis of physical

    quantities of work done and the ratesthey must be properly called in Russia “s povremennoj oplatoi”, “s oplatoj na osnove povremennykh stavok”. thThis change affects Clause 52.4, 52.3, 60.1 of FIDIC 4 Red Book.

FIDIC and Russian substantive law

    The law of the country where the construction project is implemented is of the utmost importance to drafting contract conditions. It is traditional that a domestic law of the country where the works are constructed is selected as a governing law of the contract. At the same time, the imperative provisions of the domestic law are applicable even where the choice of law clause opts in favor of the foreign law. The Russian conflict of laws rules are contained in the 1991 Fundamentals

    1[6], which are still effective in of the Civil Legislation of the USSR

    the Russian Federation pursuant to the Resolution of the RSFSR Supreme Soviet No. 3301-1 of July 14, 1992 On the Regulation of Civil Legal Relations in the Period of the Economic Reform.1[7]4Under Clause 166 of

    Fundamentals, the parties to the construction contract are free to choose the governing law for their contract.However, absent the express agreement of the parties, the governing law will be that of the country where the works are being constructed (the project country).This corresponds to the customary practice of selecting the law of the project country as the governing law of contract.

    Contrary to common opinion, the private law of the Russian Federation at this point is sufficiently developed to provide a solid framework for the legal relations of parties to the investment project.In most cases the Russian customers insist on the choice of the Russian law as the governing law of the contract and include corresponding provisions in tender documentation.This choice of law on several occasions was challenged in the ensueing legal proceedings by foreign parties argueing generally that Russian law is nonexistent and this very expression ?Russian law? is oxymoron.The crux of their motions was that the court or arbitral tribunal has to decide the case pursuant to the general principles of law and

    46] Fundamentals of Civil Legislation of the USSR and theRepublicsofMay 31, 1991 published in:VedomostiVerkhovnogoSoveta SSSR, 1991, No. 26, art. 733.

    5[7]Rossiiskaya Gazeta, 24 July 1992; Vedomosti S'ezda Narodnykh Deputatov Rossiiskoi Federatsii i Verkhovnogo Soveta Rossiiskoi Federatsii No. 30 of 30 July 1992

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