Using FIDIC Contracts in Eastern Europe

By Ilya Nikiforov [1]

The Official Russian Text of FIDIC 4^th 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10 June 1992 N BF-558/15 which proposed a 5-page specimen construction contract.Needless to say this contract is quite out of date now.It was developed to fit the old SovietRules for the Construction Contracts [2]which were adopted back in 1986 by the Decree of the USSR Council of Ministers. The Rules were abolished in 1993 by the Decision Of The Council OfMinisters 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 for the Federal State Needs in the Russian Federation)[3].However the 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 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 of FIDIC forms of contracts. The Russian Text of FIDIC 4^th 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 working in Russia. FIDIC 3^rd edition was used for more than 20 contracts concluded within the framework of the program for construction of housing for Russian troops withdrawing from Germany.FIDIC Red Book 4^th 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 Gizi in October 1997 has inaugurated the official translation of FIDIC Red Book 4^th 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:

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

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

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

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

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 German text of FIDIC 3^rd edition. FIDIC 3^rd 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 submission of bids (Clause 70(2)). The German text of FIDIC 3^rd 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 providied 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 (say, clause 5.1 of the Red Book 4^th edition or corresponding clause of Special Coditions) . 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 г. 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 services for the federal needs approved by the Presidential Decree of 8 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 recommendations regarding amendment of the Russian text of Red Book 4^th 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:

Grammar Changes
Terminology
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’” (подать/file) is used in the Russian version while the word “pred’yavit” (предъявить/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 clauseUsing such terms may lead to incorrect interpretations.

1) Claim

The word «claim» is commonly found in FIDIC conditions.Articles 53,67 of Red Book 4^th 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» (иск).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 «требование» or, in some situations, «претензия» 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 Cotnractor’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.[4]

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 inClause 62.1 speaking about defects liability certificate.

3) Liquidated damages

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

literally as - zaranee otzenennye ubytki (заранее оцененные убытки).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

Clause 45.1 of Red Book 4^th 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 absense 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 Security [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 obligations.”Obviously, this is not the meaning of original FIDIC text 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 uncetainty 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 translated throughout the Russian official text of FIDIC 4^th as “ubytki 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

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 issueing 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”. This change affects Clause 52.4, 52.3, 60.1 of FIDIC 4^th 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 of the Civil Legislation of the USSR [6], which are still effective in 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.[7]Under 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 justice, ars equa et bono.In all cases known to authors, the international arbitration tribunals have denied the motions of foreign parties to dispense with the Russian law.

The choice of the law of the project country is desirable in view of the fact that in many respects it is designed to fit with the mandatory provisions of the country where the works are constructed.These mandatory provisions cannot be waived by a contractual stipulation even where both parties apply their best efforts to achieve this aim.Mandatory legislation of the Russian Federation relevant to construction projects includes the laws on:

·Licensing (a license is required for foreign contractors to realize works in the Russian Federation);

·Certificaiton and standardisation (the Works must conform to the safety and standards requirements);

·Tax (foreign contractors are liable for domestic taxes, most importantly VAT, property and income taxes, social security payments), including double tax treaties;

·Currency regulations (the payment toforeign contractors working in Russia must normally be made in roubles);

·Immigration laws (foreign contractors are required to obtain work permits for their foreign employees working on site in Russia);

·Labor laws, including work safety (even foreign workers employed in Russia enjoy the benefits of generious Russian employment law);

·Construction rules and normatives (Russia has an extensive body of rules and normatives governing a construciton process)

·Environmental and fire satety laws (Russian environmental standards are among the thoughest in Europe);

The Russian private law at this point is quite advanced. Part one of the new Civil Code was enacted in 1994 and part two – in 1996.[8] More information on the Russian law is available at the Russian Legal Server, the free Internet WWW resource maintained by the author of this piece at www.friends-partners.org/partners/fplegal/main.html.

Specific rules governing construction contracts were incorporated in part two.Drafters of these provisions had the contemporary international models of such contract in mind, but of course a due account was taken of the traditions of Russian legislation.The Civil Code does even include a provision on an Engineer, which reads as follows:

Art. 749. Participation of an Engineer (or of Engineering Organization) in the Realization of the Rights and in the Performance of the Obligations of the Employer

An employer, for the purpose of carrying on supervision and inspection of construction and for taking decisions in its name in relations with a contractor, may conclude independently, without the consent of the contractor, a contract under which a correponding engineer (or an engineering organization) will provide such services to the employer.In this case, the construction contract must define funcitons of such an engineer (or an engineering organization) in connection with consequences of its actions for the contractor.

An expert in FIDIC would momentarily notice that the Code provides for appointment of an Engineer at a discretion of the contractor, whereas FIDIC provide a contract an option to challenge an appointment of particular person to this position.

Interaction of FIDIC conditions and domestic construction law gives rise to certain interesting issues.Some of these issues were explored in connection with contractual claims and ensueing international arbitration proceedings, to which the author has participated.However, the scope of this submission does not allow to discuss it in detail.This topic will be covered in the other article specifically devoted to FIDIC Conditions and the Russian private law.

Summary

If the Russian official edition of FIDIC 4^th Red Book is elected as one of the texts of a contract, or, even more so, when it is a controlling text, we suggest in include in the Special Conditions the following clauses which are intended to bring the Russian edition of FIDIC in line closer to the authentic legal text.With the exception of clause 47.1 (liquidated damages/penalty), these clauses do not constitute a deviation from authentic FIDIC conditions but merely an improvement of language.The clause 47.1 is to apply where the Russian substantive law is elected as a governing law of contract.

This material is submitted for publication in the leading Russian law reviews so that the organizers of tenders could incorporate the suggested changes as part of Special Conditions of tender documentation.The following text may be suggested:

«Russian edition of FIDIC 4^th conditions with amendments published in Construction Law Review vol. ___________».

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

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

[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.

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

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

[8]The text of the Part One was published inRossiiskayaGazeta of December 8, 1994, and in Sobranie ZakonodatelstvaRossiiskoiFederatsii No. 32, 1994, art. 3301; Adopted by the State Duma on December 22, 1995. The text of the Part Two was published inRossiiskayaGazeta of February 6, 7,8,1996,andinSobranieZakonodatelstvaRossiiskoi Federatsii No. 5, 1996, art. 410