In its practice, Linkage & Mind has not infrequently come across
applications of FIDIC templates in major construction projects in
various industries. FIDIC templates were normally used where the
contractor was a foreign company and/or the project was financed by
international financial institutions[1].
In this context, the Kazakhstan party quite often tried to change the
structure and contents of the contract in an attempt to harmonize it as
much as possible with the Kazakhstan law and practices. In the end, the
contract contained a great number of amendments and exceptions to the
General Terms and Conditions set out in the FIDIC templates, and the
pattern of relationship between Customer and Contractor was
significantly changed from the conventional pattern described in the
FIDIC templates.
FIDIC boilerplate contracts are indeed long, and their structure and organization unfamiliar to Kazakhstan lawyers. This article will describe the three most critical provisions of FIDIC templates that we have seen the parties focus on:
- Fixed contract price
According to the General Terms and Conditions of FIDIC templates, the contract price is the finalized fixed price of the Contract, which can be adjusted as provided for in the Contract. Such adjustment of the Contract price, however, can/must only be made in a limited number of situations:
1) Adjustment due to legislative changes in Customer’s jurisdiction (increase in taxes/duties, restrictions etc.)
2) Adjustment due to a change in value, applicable under certain conditions.
Further, where the project is financed by an international financial institution, the contract is normally awarded to the contractor in a tendering procedure conducted by Customer under the rules of the international financial institution involved. Again, the rules of international financial institutions normally do not allow material changes to the contract, whose terms and conditions are set in the tender documentation; i.e., the contract price must match the price quoted by the contractor in his tender.
Thus, FIDIC templates provide for a fixed contract price to be set for the entire scope of work provided for by the Contract.
At the same time, the Kazakhstan party normally insists that the contract include a clause whereby the works must be completed by the contractor strictly within the price specified in the approved PSD [design and estimate documentation (DED)] (to be developed by the contractor). The position of the Kazakhstan party is predicated on the fact that under 1, art. 654 of GK RK [Civil Code of the Republic of Kazakhstan (ROK CC)] the contractor is required to perform construction and associated works according to the design documentation, which determines the scope and quantity of works, and to the cost estimate, which determines the price of works. However, given that DED is subject to government review, contractors are apprehensive that government review will “approve” a price of works that is much lower than that determined by the contractors and finalized by the parties by negotiation/tendering. The situation is a far cry from what contractors expect because it is at variance with the global EPC practices and effectively makes contractual arrangements dependent on the opinion of the persons in charge of government review. At the same time, completing the work within the estimated cost is a statutory requirement in Kazakhstan, and this is a problem that every contractor can face in Kazakhstan when doing turnkey projects; this is sort of an imperfection in Kazakhstan legislation. In this context, for public-funded investments, a government-approved costing is a safeguard against overspending of public funds.
The only currently available solution, in our opinion, is to segment the work scope and to contract accordingly by phases (design and construction), i.e. not to contract for construction until after it has been costed following a government review.
- Acceptance of works
According to FIDIC templates, works are to be accepted by the customer/engineer party, with the option of acceptance by default also available. Such an acceptance procedure is at variance with the ROK’s current building regulations, which provide for government acceptance of completed construction projects. However, in light of the legislative amendments to repeal, as of 1.01.2016, the existing procedure for the commissioning of completed projects, the FIDIC arrangements for accepting completed projects will be relevant.
- Limitation of contractor’s liability (liquidated damages)
FIDIC standard form EPC contracts provide for liquidated damages, i.e. a limit on the contractor’s total liability under the contract, which is widely used by contracting parties. This being the case, in accordance with par. 2, art. 350 of the ROK Civil Code, Kazakhstan law permits the exclusion of consequential damages, but prohibits the exclusion of actual damages. In other words, any liability cap/limit on damages will only be enforceable over and above actual damages. In view of the above, contractors prefer to have their contracts governed by a more discretionary law (quite often English law), rather than the law of the Republic of Kazakhstan.
[1] Normally, the use of FIDIC templates is a condition for investment project financing by international financial institutions