What is risk? Quite frankly it’s just uncertainty. It’s non-quantifiable events or circumstances that are avoided or minimised by effective project planning, procurement and management throughout the contract. Risks don’t simply go away if you plan for them, but they are capable of greater control. The greater the complexity of a project, the bigger the value of the project, the longer the contract period, the greater the risks that have to be planned and managed. The risk of a dispute is always ongoing.
The holy grail of risk allocation is achieving a fair and balanced allocation of risk. The effect of inappropriate risk allocation is failure to achieve one or more of the key project objectives e.g., price or quality. The more balanced the allocation of risk, the greater the prospect of project success. When working on risk allocation, there are a number of considerations; for example, whether the risk is within a party’s control, whether a party can transfer the risk e.g., through insurance, and who is likely to benefit most through the control of the risk.
Karen Gough stated in our webinar that “many programmes say different things for different parties to the contract, that carries a serious risk… the contractor’s veracity will easily be attacked in any dispute”. FIDIC proposes that the risks should be allocated between the parties on a fair and equitable basis, as reflected in the various contract forms. Risks should be allocated so that they are effectively managed and allocated to the party best able to control them. It is important to recognise that not all risks can be managed by one or other of the parties.
What does this look like in practice? Generally, the FIDIC forms pre-allocate responsibility for insuring against certain risks and recovery of loss from insurers and, where not possible, they identify the party responsible for bearing the loss. For example, the Red Book places substantial risk on the Employer, as they are responsible for the design, and the Contractor constructs, whereas the Yellow Book shifts design risk to the Contractor, as they are responsible for design and construction, so the design risk falls with the Contractor. The Employer takes on other risks. The Silver Book has a major shift of risk to the Contractor.
In the Red and Yellow Books, the Contractor may recover time and money for unforeseen physical conditions. There is often an argument as to what qualifies as unforeseen conditions. It is important to bear in mind the site data clause and the obligation to interpret the site data. In the Silver Book, unforeseeable difficulties in ground conditions are at the Contractor’s risk under Clause 4.10, which requires the Contractor to verify all of the site data. Ground conditions will mean different things to different people and tribunals. For example, see the English cases of Obrascon [1] and PBS[2], which focused heavily on the subjective issue of what constituted unforeseen ground conditions.
Another example is Clause 18 in the FIDIC 2017 forms, which covers exceptional events. It covers the same right across all three FIDIC forms. The events included did not cover pandemics and the ability to recover costs caused by them. Clause 8.5 was added to the Red and Yellow Books to cover pandemics. However, nothing was added to the Silver Book to cover these kinds of events.
FIDIC – know your risks was discussed at our 16 February 2023 webinar with Karen Gough of 39 Essex Chambers. To view the webinar and supporting notes please click here.
To find out how Barton Legal can help you, please click here.
[1] Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar
[2] PBS Energo A.S. v Bester Generacion UK Limited & Anor [2020] EWHC 223 (TCC)
