Unification and Standardization in International Construction
All fields of human activity undergo natural unification and harmonization over time. Following successful unification, business negotiations become easier and cheaper, communication and management are simpler and distrust vanishes. Complications and disputes can then be settled with less effort, especially in international transactions.
In business, in general (and in construction, in particular), this issue is more complicated than anywhere else. In the past, construction used to be local by nature as an industry with local contractors and employers devising and implementing habitual rules which were rigid and difficult to alter or unify.
Contractual relationships are subject to unification at three levels:
- Sample documents.
5.2.1 Unification per law
Parties intending to enter into cross-border contractual relationships have a general freedom to choose the law which will govern their contract. A mandatory provision of law (i.e. the governing law) will prevail over a private choice of law with which it is in conflict. In general, if there is no choice of law available to the parties to a particular contract and the contractual relationship contains an international element, the regulations of private international law will have to be considered in finding the relevant governing law. Choice of law conflicts are complex and difficult to resolve. For this reason it is advisable to select the governing (applicable) law before entering into a contract. Failure to do so could lead to unexpected outcomes or unexpected shifts in risk allocation because of unforeseen mandatory provisions of substantive or procedural law.
There is no particular regulation in private international law applicable to international contracts for works. By way of comparison, contracts for sale of goods, for example, fall under the United Nations Convention on Contracts for the International Sale of Goods (CISG).
The Convention on the Law Applicable to Contractual Obligations of 19 June 1980 (‘the Rome Convention’) became crucial for contractual obligations with international elements by creating a common choice of law system for contracts within the European Union. The Rome Convention was replaced by Regulation (EC) No. 593/2008 of the European Parliament and Council by way of The Convention on the Law Applicable to Contractual Obligations of 17 June 2008 (‘Rome I’) and by the Regulation (EC) No. 864/2007 of the European Parliament and Council on 11 July 2007 by way of The Convention on the Law Applicable to Non-Contractual Obligations (‘Rome II’). Rome I, Rome II, Rome Convention (Article 3/1) and international private law respect the choice of law principle.
If there is no choice of law or if the choice of law is invalid, the applicable law will usually be the law of the state where:
- the works are executed;
- the contract was concluded;
- the contractor’s business is registered; or
- the litigation or arbitration takes place.
The most significant example of the unification of law is the above-mentioned CISG, which, unless expressly excluded by contract, is automatically applicable to contracts for cross-border sales of goods in EU member countries.
5.2.2 Unification per principles
As a rule, the governing law will be agreed upon by the contracting parties to an international construction project. A situation, dispute or particular problem without any clearly defined solution either in the contract or in the governing law can further be encountered. Business usage and general principles of law will often have to be used where there is a gap in the contract and/or governing law.
In terms of unification of principles, the most significant are the UNIDROIT Principles of International Commercial Contracts and The Principles of European Contract Law. These principles are a set of model rules drawn up by leading contract law academics in Europe. The Principles of European Contract Law are based on the concept of a uniform European contract law system and were created by the Commission on European Contract Law (the Lando Commission). The latest attempts are The Definitions and Model Rules of European Private Law or the Draft Common Frame of Reference (DCFR) prepared by the Study Group on a European Civil Code and the Research Group on EC Private Law (Acquis Group) and based in part on a revised version of the Principles of European Contract Law.
The Unidroit Principles have been referred to in a significant number of publicly reported international arbitrations (Charrett, 2013).
It should further be mentioned that unification is also imposed by legislative and quasi-legislative activities, treaties, international conventions, economic and political unions. Furthermore, individual usages and customs in the construction business which are generalized in principles deserve a separate subcategory within the scope of lex mercatoria called lex constructionis. The lex constructionis principles come from the general lex mercatoria principles with necessary modifications due to construction specifics, see Section 5.10.
5.2.3 Unification per sample documents
Unification in the field of sample documents is represented by rules of trade such as the International Commercial Terms (‘INCOTERMS’) and sample forms of contracts published by FIDIC and many others.
INCOTERMS are a set of international rules for modes of transport expressed by a series of three-letter trade terms related to common contractual sales practices. INCOTERMS came into being in Paris in 1936. They were issued by the International Chamber of Commerce to avoid problems in connection with the nature and differences between business codes in different countries. The eighth edition of the INCOTERMS (2010) was reduced to 11 rules and came into effect on 1 January 2011.
The INCOTERMS rules are intended to clearly communicate the duties, costs and risks associated with the transportation and delivery of goods. They also define where and how the goods are to be transported, and allocate responsibility to the parties. For example, Who bears the loading costs? Who is in charge of transportation? Who is responsible for damage and how and when they are to be paid? Who is to insure? Who is to pay customs and other duties? Who is to unload the goods and pay for them?
The FIDIC forms of contract define the most significant terms to be used in international construction contracts. Attention will be paid to the FIDIC forms in respective sections of this book. Another sample form receiving increasing attention in recent years is known by its abbreviated name of the NEC (the New Engineering Contract). For further details of the NEC, see Chapter 13.
5.3.1 European Union funds
The drive of international developers to invest in international construction projects using domestic or international construction companies and the expansion of the European Union (the EU) are the main reasons why the FIDIC forms of contract continue to spread across Central and Eastern Europe. The EU requires the use of the well-established sample forms of contract as a pre-condition for potential financing of jointly financed projects. This condition first appeared within structural funds such as the Instrument for Structural Policies for Pre-Accession (ISPA). ISPA found its focal point in financing infrastructure projects in the fields of environment and transport. Its aim was to simplify the implementation of the acquis communautaire (a law of the EU) in the candidate countries during the period from 2000 up to their membership to the EU by making contributions to sustainable development in these countries.
5.3.2 The European Investment Bank (EIB)
Another impetus for the use of FIDIC forms was provided by the European Investment Bank’s requirement to use these forms in the projects financed by it. Established in 1958 by the Treaty of Rome, the European Investment Bank (EIB) is an EU institution set up to provide credit to public and private entities. The money lent is intended for projects that will benefit Europe, keep EU regions in cohesion, support small and medium-sized businesses, protect the environment, support research and development, improve transport and assist the energy industry.
The EIB is a non-profit bank and its activities aim to achieve political objectives and provide long-term credits for capital investment projects (mainly to cover long-term activities). The EIB does not, however, provide subsidies. Owned by the EU member states, the EIB cannot lend more than 50% of the total project costs. The projects which are financed are meticulously selected and must meet strict criteria. The EIB also fosters sustainable development in potential candidate countries, in EU neighbour states and in other partner countries.
5.3.3 The European Bank for Reconstruction and Development (EBRD)
The European Bank for Reconstruction and Development (‘EBRD’) provides project financing for banks, industry and businesses, new ventures and investments in existing companies. The EBRD also works with publicly owned companies. The EBRD provides loan and equity finance, guarantees, leasing facilities and trade finance. Typically the EBRD funds up to 35% of total project costs.
The bank invests only in projects that would not otherwise attract financing on similar terms. The EBRD is committed to undertaking operations throughout the region and has engaged in projects in each country where it has a presence. To coordinate local activities, the EBRD has established resident offices in all of these countries.
The EBRD is composed of multinational staff and an in-house Board of Directors representing the shareholders (64 countries plus the EU and the EIB).
The EBRD develops partnerships with local and international business and the investment community. The bank acts in close cooperation with all members, public and private entities, and all multilateral institutions concerned with the economic development of, and investment in, countries from central Europe to central Asia. These include the EU, the EIB, the World Bank Group, the International Monetary Fund and the United Nations and its specialized agencies.
The EBRD entered into a licence agreement with FIDIC which gives entities involved in EBRD-financed projects free access to the FIDIC-MDB Harmonised General Conditions of Contract for Construction (www.ebrd.com/downloads/procurement/project/mdbgcv3unprotected.pdf). Although the EBRD supports the use of these General Conditions, they are not mandatory and other internationally recognized forms of contracts may also be used.
5.3.4 The World Bank (WB)
The World Bank (WB) is managed by 188 member countries and is comprised of two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD’s objectives are to reduce poverty in middle-income nations and countries with bad credit ratings. The IDA focuses exclusively on the world’s poorest countries. These institutions are part of a larger body known as the World Bank Group.
Established in 1944, the WB is headquartered in Washington, DC, and employs 9,000 people in more than 100 offices worldwide.
Six strategic themes drive the WB’s work: (1) the world’s poorest countries; (2) fragile and conflict-affected states; (3) the Arab world (4) middle-income countries; (5) global public goods issues; and (6) the delivery of knowledge and learning services.
The WB provides low-interest loans, interest-free credit and grants to developing countries. These support a wide array of investments in areas such as education, health, public administration, infrastructure, financial and private sector development, agriculture and the environment and natural resource management. Some projects are co-financed by governments, others by multilateral institutions, commercial banks, export credit agencies and private sector investors.
The WB recommends FIDIC forms of contract for projects where they lend money.
National substantive laws and regulations rarely provide sufficient rules for large construction projects. On the contrary, local commercial laws tend to be inadequate in terms of dealing with contract administration, price, time, variation procedures, risk allocation and claims issues. The use of extensive sample documents has assisted in filling these gaps and has led to greater certainty and foreseeability in large construction projects.
Governing law ordinarily states that general terms and conditions, as prepared by professional or other organizations, will be part of the contract merely by being referred to. The position these terms and conditions are to occupy within the hierarchy of the contractual documents has to be defined in the contract.
The long-term use of sample documents in a certain industry sometimes leads to their incorporation in local public procurement legislation. In this way, the FIDIC forms have become part of public procurement law in, for example, Central and Eastern Europe and the Middle East. Developments in some Arabic countries are now so advanced that standardized conditions or their parts have become mandatory elements of local public procurement law.
Specific provisions are encountered in international construction contracts. For example, large construction contracts often foresee the participation not only of the employer and the contractor, but also of a neutral third party (the contract administrator) authorized to make decisions and certify various operations or activities performed by the contracting parties. The meaning and effect of those certificates will always depend on a particular contract and the governing law. Concerning their meaning, these certificates usually reflect the as-built state. Such a certificate is scrutinized at a point in time specified in the contract and is usually a pre-condition for invoicing and payment. Contracts tend to include provisions that define the conditions upon which a performance certificate (or related payment) can be refused. It is not then surprising that numerous disputes arise at this point if the engineer proceeds contrary to the contract while issuing such certificates. British courts have ruled that the engineer is considered as incompetent in such situation, giving the contractor the right to claim payment even when lacking the certificate.
Complications also appear where common law principles are used in connection with completion where a distinction is drawn between such completion, thereby allowing the resulting work to be used for the agreed purpose (substantial completion) and fulfilment of the contractual commitment (performance). Most sample forms used in international construction projects build, therefore, on the substantial completion concept, coming from the common law. This approach presumes that the work has been taken over by the engineer, but without relieving the contractor of any of its contractual responsibilities. Only the performance certificate will have such consequences, once issued.
Typical features of international construction projects are discussed in other chapters of this book where common issues such as price, time, claims, variations and risk allocation are explained.
These and other common features of large international construction projects frequently dealt with in sample forms of contract have arguably become part of lex mercatoria (from the Latin for ‘merchant law’, i.e. supranational customs and rules of international trade).
International debates have been ongoing in professional circles for decades, but these efforts have not yet provided any statutory regulation for international construction contracts. The central question is whether such regulation is necessary at all. Even lex mercatoria itself owes its existence to the inadequacy and ‘stubbornness’ of written law. International traders very often conclude that they do not need any such national law in any case. Owing to customs and the inflexibility of commercial law, traders create their own habitual rules. This extends to resolving disputes in the least painful way by using their own agreed alternative methods which exist separately to those prescribed by the state.
These days, FIDIC forms (as a standardized law applicable to construction projects) are without doubt part of lex mercatoria. However, many questions remain as to whether they are anything more than general terms and conditions of contract prepared by a professional organization. For example, what is their relation to international principles of contract law, general principles of law or the principles that prevail in the construction industry or trade in general? Can they become an international business custom? Can the individual provisions of FIDIC conditions be used in disputes even when there is no reference to a FIDIC sample document in the contract (i.e. where such document is not a part of the contract)? Would the selection of lex mercatoria as the governing law of a contract be deemed applicable and can FIDIC be subsumed under this category as a suitable source of regulation? And, finally, can the FIDIC contractual conditions replace applicable law?
Another issue centres around the option to fill the gaps in a national law with supranational regulations and the possibility of using the FIDIC forms in this context (Mallmann, 2002).
FIDIC conditions were not created with the intent of becoming a source of law. What is relevant, however, is how they are practically applied by contract drafters, parties to the contract and in dispute resolution.
FIDIC forms are sometimes used as a source of law in disputes resolved in arbitration where there is a gap between contractual provisions and the governing law. When there is doubt or uncertainty, adjudicators, arbitrators or judges fill these ‘gaps’ with generally accepted FIDIC form provisions. Similarly, FIDIC forms can be used to find out what clauses would be generally accepted in construction contracts before the project begins. For instance, it may be possible to compare unclear or potentially invalid clauses of a bespoke contract to a particular FIDIC clause at the negotiation stage.