INFR AST R U CT U R E HU B

FEBR UAR Y 2 8 , 2 0 2 0

FIDIC launches new Yellow Book Subcontract

At the London FIDIC Users' Conference held in December 2019, the newest edition to the FIDIC standard
form suite of contracts was launched – the Conditions of Subcontract for Plant and Design-Build - also
known as the "Yellow Book Subcontract".

Intended to be used in conjunction with the Conditions of Contract for Plant & Design Build (1999) (the
"1999 Yellow Book"), this new form plugs the subcontract gap that existed on FIDIC design-build projects.
Based on the Conditions of Subcontract for Construction released in 2011 (known as the "Red Book
Subcontract"), FIDIC have taken a similar approach to flowing down rights and liabilities under the Main
Contract to Subcontractors – the difference being that this version is for use where the Subcontractor has
both design and build obligations.

Following the release of FIDIC's updated rainbow suite in 2017 (see here for more details) some FIDIC users
have been surprised at the release of a subcontract to be used with the old 1999 suite and wonder how
long we will have to wait for a form of subcontract that can be used with the 2017 suite? Leaving that
question to one side for now, let's look at some of the key features of this new edition:
Back-to-back obligations

The Yellow Book Subcontract has been drafted on a back-to-back basis, where the Main Contract is
procured using the 1999 Yellow Book. The Subcontractor is deemed to have full knowledge of the Main
Contract and (with a few exceptions – see further below) the Subcontractor is required, in relation to the
Subcontract Works, to perform and assume all obligations and liabilities of the Contractor under the Main
Contract, and to perform the Subcontract Works in such a manner that no act or omission of the
Subcontractor will constitute, cause or contribute to a breach by the Contractor under the Main Contract. If
the Subcontractor causes the Contractor to breach the Main Contract, it is required to indemnify the
Contractor from any liability incurred under the Main Contract.

FIDIC have included some specific exceptions to this flow down of obligations, an exhaustive list of which is
set out at clause 2.2. By way of example, these exceptions include Main Contract obligations relating to
permits and licences, access routes and site security, which remain as Contractor obligations under the
Main Contract. Subcontractors will need to take care that any other obligations and risks which aren't
suitable to be passed down to the Subcontract are addressed in the Particular Conditions.

As a result of this back-to-back approach, it is important that the Subcontract and the Main Contract are
read together – Subcontractors will need to ensure they are fully familiar with the terms and conditions of
the Main Contract in order to assess their exposure to risk under the Subcontract. Anyone experienced in
drafting and negotiating subcontracts will know that, in practice, this back-to-back approach can lead to
lengthy negotiations and an understandable reluctance on the part of Subcontractors to assume risks
accepted under a Main Contract they didn’t negotiate, particularly where there is a significant difference in
the value of the respective contracts.

Subcontractor rights, entitlements and remedies

The Subcontractor is expressed to have the same rights, entitlements and remedies as the Contractor has
under the Main Contract. This reflects the back-to-back nature of the Subcontract, seeking to provide the
Subcontractor with the same entitlements to additional time and money under the Subcontract as the
Contractor has under the Main Contract. However, the Contractor is only required to take 'all reasonable
steps' to secure these rights, entitlements and remedies from the Employer – which seems to undermine
the Subcontractor's more general entitlement in this regard. Subcontractors would be wise to push for
stronger, absolute obligations on the Contractor to pursue claims up the line, including obligations to
update, or consult with, the Subcontractor in the settlement of any claims.

Co-ordination and co-operation

The Contractor retains responsibility for co-ordination and project management of the Main Contract
Works, including the co-ordination of any other subcontract work packages. Whilst the Subcontractor is
required to cooperate with any other subcontractors employed by the Contractor, the Contractor is
responsible for ensuring other subcontractors do the same. To the extent the Subcontractor is delayed,
impeded or prevented from performing its obligations due to the non-cooperation of any other
subcontractors, the Subcontractor shall be entitled to additional time and money.

Taking Over and Defects Notification Period

Unless the Subcontract states otherwise, taking over of the Subcontract Works shall be deemed to occur
when the Main Contract Works are taken over by the Employer. In addition, the Subcontract Defects
Notification Period will not expire until expiry of the Main Contract Defects Notification Period. Where the
Subcontract Works are completed early in the context of the programme for the whole project,
Subcontractors should be wary of these provisions as their obligation to care for the Subcontract Works
until taking over and their liability for defects during any Defects Notification Period could extend far
beyond what they would generally accept.

Pay when paid

Another issue that may ring alarm bells for Subcontractors, particularly those used to working in the UK, are
the 'pay when paid' provisions. Under clause 14, the default position is that Subcontract interim payments
may be withheld by the Contractor until receipt of the same from the Employer under the Main Contract.
FIDIC does recognise that such provisions may fall foul of legislation in certain jurisdictions, such as the
Housing Grants, Construction and Regeneration Act 1996 (as amended) in the UK, and has provided
alternative drafting in the Guidance Notes for use where 'pay when paid' provisions are not enforceable, or
do not reflect the standard market approach to supply chain payments.

Termination of Main Contract

Where the Main Contract is terminated, the Contractor may terminate the Subcontract immediately.
Where such termination occurs as a consequence of any breach of the Subcontract by the Subcontractor,
the Contractor will be entitled to recover any costs and losses it has incurred to the Employer as a result of
termination of the Main Contract, as well as any other losses incurred by the Contractor as a result of
termination of the Main Contract or any other subcontracts. Any such liabilities will fall within the
Subcontractor's aggregate cap on liability, but they are carved out from the exclusion of indirect loss.
Where a Subcontract works package is significantly lower in value than the Main Contract, this may pose an
unacceptable risk to a Subcontractor.

Claims

The condition precedent notice requirements under the claims procedure in the 1999 Yellow Book have
been flowed down to the Subcontract, although the Subcontractor has just 21 days to bring a claim for an
extension of time or to recover additional Cost (as opposed to 28 days under the Main Contract). This
buffer period is intended to allow the Contractor enough time to process the claim and comply with the
corresponding notice procedure under the Main Contract, although Subcontractors should consider
whether such a period is practicable.

Main Contract disputes

Where any dispute arising under the Subcontract involves an issue which is also disputed under the Main
Contract, referral of the dispute to the Subcontract Dispute Adjudication Board ("DAB") will be deferred for
up to 140 days to allow it to be resolved under the Main Contract. However, the dispute decision under the
Main Contract (along with any determinations of the Engineer under the Main Contract) will not be binding
on the Subcontractor – instead, FIDIC have provided alternative drafting in the Guidance Notes to provide
for DAB or arbitral decisions (and Engineer determinations) under the Main Contract to be binding under
the Subcontract if the parties wish such decisions to be binding.

Looking to the future…

Whilst the Yellow Book Subcontract serves its purpose for subcontracting work packages under the 1999
Yellow Book, given the complete overhaul of the general conditions in the 2017 suite and their near
doubling in length, the Yellow Book Subcontract is not suitable for use with the 2017 Yellow Book and
would require significant amendment if it were. Perhaps this is an acknowledgment by FIDIC that, with the
slow uptake in use of the new suite, the market isn't calling out for any complementary contracts just yet.
So, to answer my earlier question of when we can expect the launch of a subcontract to be used alongside
the 2017 Yellow Book, if FIDIC stick to their existing timetable for producing subcontract forms, you can
expect a follow up article on the new subcontract sometime in 2037…

Return to the Quarterly Bulletin here 

 Authors

Robert Meakin
Partner

Catherine Johnston
Legal Director

Rebecca Evans
Senior Associate

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