A NUMBER OF CAUSES BEHIND DISPUTES DURING THE PERFORMANCE OF FIDIC – PINK BOOK CONTRACTS

FIDIC Contracts are a type of contract in the field of civil construction drafted by The International Federation of Consulting Engineers with many different versions to suit different types of projects. The basis to determine the applicable type of contract is mainly the scope of the design work of the Investor. The FIDIC – Pink Book contract form is applicable to construction projects designed by the Investor but sponsored by development banks.

Most traffic infrastructure projects that use borrowed capital from the World Bank (WB), Asian Development Bank in Vietnam employ the use of FIDIC – Pink Book contract form. From his personal experience in the field, the author notices that Investors in Vietnam face many difficulties during the performance of contracts based on the FIDIC – Pink Book contract form, which lead to many accusations regarding violations, even complaints, or the filing of suits to dispute resolution agencies.

In the context of Vietnam’s unfinished infrastructure which requires the utilization of many different capital sources in order to continue construction and development, restricting and reducing complaints, litigation and disputes are necessary to preserve the credibility of the Investors, as well as the image of the country. This article shall present certain causes behind popular disputes that the author has been involved in during his career.

First, the contract form limits the ability to adapt to changes 

The regulations governing construction contracts in Vietnam are stipulated in the Construction Law 2014 (amended in 2020), Decree No. 37/2015/ND-CP (amended by Decree No. 50/2021/ND-CP). Furthermore, the Ministry of Construction issued the construction contract form pursuant to Circular No. 08/2016/TT-BXD. In reality, for projects utilizing State capital where the Investor is not imposed a contract form by the Capital Sponsor, the contract form of the Ministry of Construction is usually employed; and such usage is rather stiff, with little room to adapt to the actual situation.

For projects where the Investor has to abide by the regulations of the capital sponsor which is the World Bank, the FIFIC – Pink Book contract form is often used. In this case, the capital sponsor rarely allows the Investor to customize and rewrite the contract, as such, the Contract between the Investor and the Contractor has to abide by the contract form provided by the capital sponsor. There many issues that could arise during the performance of the contract stemming from the lack of compatibility between the FIDIC contract form and Vietnamese legal regulations in the field of construction, and normal work habits.

Second, the relative independence between the contract principle and the local legal regulations

As it is a contract form drafted by The International Federation of Consulting Engineers, the FIDIC contract form is designed to balance the benefits of parties, minimize the ability of the Investor to impose its will on the activities of the Contractor. Furthermore, due to the FIDIC contact form being designed for usage in many different countries, territories in the world, it, by itself, has the ability to minimize the impacts of  “contractualization” of the legal regulation of each country.

From one perspective, the FIDIC contract form was drafted on the basis of principles and experience in the field of construction rather than the legal regulations of any country. For that reason, there exist the possibility of disputes, differences between the FIDIC contract form and the legal system of the country during the performance of a specific project. For Investors and Contractors, being aware of the difference is crucial in the process of contract management, not only for the compliance of contractual commitments but also for suggesting solutions to minimize and avoid conflicts, disputes.

Another reality in the construction process employing the FIDIC – Pink Book contract form is that the Investor is usually an enterprise with State capital and the Contractor is a major foreign construction firm in the shortlist approved by the capital sponsor. International Contractors have the tendency to hold contractual obligations in higher regards than the laws of the country, even if the substantive laws governing  the negotiation, signing and performance of the contract is Vietnamese.

Third, the lack of contract management department

International experience shows that, during the performance of the construction contract, the contract management department is extremely crucial. The works that this department performs are not divided separately between parties, rather, there needs to be cooperation between the Investor and Contractor on the basis of goodwill, timeliness and effectiveness. Contract management is to observe, monitor and timely handle arising issues regarding the contract performance progress, dossier management, performance results management, payment management, the management of changes, issues arising from payments, and time extensions, complaint management…etc.

Each party can also organize its own department or personnel to manage the contract, but the connection between the two parties is necessary and paramount for contract management to be appropriate and effective. Unfortunately, the author personally finds that very few projects in Vietnam have a separate contract management department, and there sometimes is confusion between the roles of contract management and project management. This reality leads to a lot of conflicts and differences arising between parties during the performance of the construction contract going undetected and are not resolved in a timely manner, which become disputes that are difficult to resolve since the “disease” has exceeded the capacity of self-reconciliation between the parties due to the formation of damages.

Forth, the differences regarding the variation procedure performance habits

According to the author’s personal observation, most of the contracts using the FIDIC – Pink Book form for construction projects in Vietnam use the contract under the adjusted unit price, and this form is not unfamiliar to Vietnamese Investors and Contractors. However, the procedure for adjusting the unit price and volume specified in the FIDIC contract form has some differences with the provisions of Vietnamese law, or is not in the habit of Vietnamese Investors.

In the FIDIC – Pink Book contract form, such adjustments are based on the Variations made by the Contractor at the request of the Supervision Consultant or at its own discretion. The change orders will take effect with the approval of the Supervision Consultant if the change does not alter the value of the contract, if the value of the contract altered, the approval of the Investor is required. Such change orders will alter the calculations in the financial plan that the Investor (or the competent entity) has made in the feasibility study report. Such variations include changes or additions to construction design drawings and cost estimates, and the Contractor must prepare documents to submit to the Supervision Consultant for approval.

According to the Vietnamese laws and habits of Vietnamese Investors, all changes and adjustments to the construction drawing design and cost estimate must be approved by the Investor; but the FIDIC contract form only stipulates the approval authority of the Investor and the Supervision Consultant in the two cases mentioned above. This difference leads to the reality that International Contractors often follow the procedure specified in the contract, bypassing the Investor’s approval procedure (where applicable) leading to Investors often citing this reason to refuse to perform payment obligations.

Fifth, the difference in thinking regarding the power, role of Supervision Consultant

It should be stressed that, in the international practice of the construction industry in general as well as in the FIDIC contract forms in particular, the power of the Supervision Consultant is great, with its position and role being independent of both the Investor and the Contractor. Meanwhile, the habit and mentality of Vietnamese often lead to the Supervision Consultant being seen only as an “employee” of the Investor. This difference leads to very different project management methods and is one of the causes behind poor project management.

Sixth, implementation of the conclusions of the State Audit

Construction projects using State capital are subject to the supervision and inspection of many functional units, including the State Audit. From the author’s personal experience, over the years, all construction projects have been concluded by the State Audit of Vietnam as having made some sort of mistake. Typical mistakes include those regarding setting up unit prices, errors in calculating volume, material usage, incorrect application of regulations in payment procedures, errors in finalizing volumes and completion values…etc.

However, it must be recognized that the projects are prepared by the Investor or a competent agency and approved according to the provisions of Vietnamese law, including the financial plan or cost estimate. Construction Contractors participate in the bidding on the assumption that the cost estimate given by the Investor in the bidding dossier is accurate, truthful and consistent with reality. Therefore, when there is a conclusion of the State Audit leading to changes in some elements of unit price, volume calculation and value recorded in the bidding dossier, the Contractor will tend to refuse to follow the audit conclusions. The Contractor often makes the excuse that it is not bound by the audit conclusion and pushes this responsibility onto the Investor. On the side of the Investor, it is clear that it is impossible to refuse to implement the conclusions of the State Audit. The difference in position between the two parties is a huge cause of disputes between the Vietnamese Investor and the International Contractor.

Seventh, lack of experience in handling procedures for extension of time and problems regarding site handover

International practice has guidelines on procedures for extension of time (EOT) for civil construction works, applicable even to cases where the construction time is prolonged due to the fault of the Investor, or the Contractor, or due to objective reasons. However, such instructions are not specified in the FIDIC contract form in general and the FIDIC – Pink book contract form in particular, so it requires the parties to have experience and move to exchange with each other to inform and carry out the extension procedure, as well as discuss the cost issues arising from the extension of the construction period.

Another common occurrence in infrastructure projects in Vietnam is that the Investor often violates the obligation to hand over the site to the Contractor, leading to prolongation of the construction time. Although the Investor is not always at fault for the delay in handing over the site, because the Investor itself is not the unit responsible for the site clearance. It is not unusual for infrastructure projects in Vietnam to be prolonged due to lack of construction site, however such situations have been going on for many years, and currently there is no effective mechanism to handle this matter thoroughly. The Investor is the one stuck in the middle and is deemed responsible for these delays, because in terms of the contractual relationship with the Contractor, the responsibility for handing over the site on time belongs to the Investor.

International Contractors always have enough evidence and arguments to push the responsibility onto the Investor to claim compensation for damage caused by the prolonged construction time and it is very difficult for the Investor to defend itself before such claims. 

Other causes

In addition to the causes stated above, other reasons can be mentioned such as: different understanding and application of payment procedures, in which the FIDIC contract form has no requirements regarding contract appendices but Vietnamese law Nam has requirements (although not explicitly) about the contract addendum for variations; or the Contractor’s obligation to comply with the Investor’s regulations on the processes related to change orders, payment, acceptance, etc.

It must be said that the difference in legal thinking between the Investor and the International Contractor is a factor that increases the distance and deepens the conflicts arising during the implementation of the construction contract. Project Investors using State capital often put themselves in a higher position than the Contractor and the Supervision Consultant, imposing requirements that are unreasonable or inconsistent with the laws, contract provisions, and construction industry practices, thereby diminishing equality and mutual respect between the parties. International Contractors are forced to seek dispute resolution bodies (usually the ICC, or SIAC, VIAC arbitration centers) when there is no other recourse and such lawsuits will damage the reputation and Vietnam’s ability to access international capital markets for infrastructure investment.

The author personally believes that, in order to minimize possible disputes, the Investor should pay more attention to building a contract management department for each project, with the participation of the personnel of both parties and experts, independent external lawyers. The above-mentioned causes can be mitigated if they are discovered and actively resolved from the onset by the parties, and the contract management department will act as an advisory body to mediate and advise both the Investor and the Contractor to agree on a possible solution that benefits both parties.

Lawyer Ha Huy Phong

Director of Inteco Legal Practice