December 15, 2020
Features of Kazakhstani legislation in the application of FIDIC contracts
1. Brief description of FIDIC contracts.
FIDIC in French is the International Federation of Consulting Engineers, which was established in 1913. FIDIC standard contracts are widely used in construction activities, are unified and, at the same time, are subject to change if necessary – standard contracts provide for the adaptation of a standard contract to the terms of a specific transaction and legislation. All this makes them easy to use. Especially often contracts are used if one of the participants in the construction project is an international organization. Most often, these proformas are used by the International and European Development and Reconstruction Banks as a tool for harmonizing law.
FIDIC proformas, in addition to the terms of the contract itself, can also regulate the relations between the parties to the contract also at the pre-contractual stage, regulate the holding of construction tenders, both at the international and national levels. FIDIC proformas, despite the fact that they are detailed documents, should not contradict the legislation of the country of their application.
There are 9 main standard FIDIC contracts, covering a wide range of contractual relations in construction, among which the most popular are: Red Book (design is carried out by the customer); Yellow Book (design by contractor); Silver Book (turnkey construction); Pink Book (adapted to the requirements of international financial institutions). The latest addition is the Emerald Book, released in 2019, based on the FIDIC Yellow Book for Underground Construction. The FIDIC Model Contracts are periodically amended to reflect the experience of using contracts in practice. The last significant changes were made in December 2018.
For the most effective use in a specific project and easy adaptation, the FIDIC model contracts consist of two parts: General conditions and conditions for specific application. The first part “General Conditions of Contract” contains the clauses of the contract, which are drafted in such a way that they are theoretically suitable for any construction project. The general conditions are included in the contract without or with minor changes. The second part “Conditions for special application” is linked to the first part by reference rules and serves to adapt the contract to the national legal system and the specific project, when the need arises.
2. Legislation of the Republic of Kazakhstan in the field of construction.
The Civil Code of the Republic of Kazakhstan in the field of construction is governed by paragraphs 1 (General provisions on contracting), 3 (Features of construction contracts), 4 (Features of contracts for design and survey work), Chapter 33 (Paid provision of services).
Law of the Republic of Kazakhstan dated July 16, 2001 No. 242-II “On architectural, urban planning and construction activities in the Republic of Kazakhstan”.
Order of the Chairman of the Committee for Construction and Housing and Communal Services of the Ministry of Industry and Infrastructure Development of the Republic of Kazakhstan dated January 20, 2020 No. 9-NҚ. “On the approval of building codes of the Republic of Kazakhstan”.
Order of the Minister of National Economy of the Republic of Kazakhstan dated March 19, 2015 No. 231 “On approval of the List of types of work (services) as part of construction and installation works.”
Order of the Minister of National Economy of the Republic of Kazakhstan dated November 19, 2015 No. 704 “On approval of the Rules for the formation of the Unified State Register of New Technologies in Construction”.
Order of the Chairman of the Committee for Construction, Housing and Communal Services and Land Management of the Ministry of National Economy of the Republic of Kazakhstan dated December 29, 2014 No. 156-NҚ “On approval of a new regulatory framework for the construction industry”.
Order of the Minister of National Economy of the Republic of Kazakhstan dated November 19, 2015 No. 700 “On approval of the public service standard” Accreditation of legal entities applying for a comprehensive non-departmental examination of projects for the construction of facilities “.
Joint order of the Minister for Investment and Development of the Republic of Kazakhstan dated November 19, 2018 No. 807 and the Minister of National Economy of the Republic of Kazakhstan dated November 26, 2018 No. 81 “On approval of the criteria for assessing the degree of risk and checklists in the field of architecture, urban planning and construction for the activities of subjects of architectural , urban planning and construction activities “.
Order of the acting Minister of National Economy of the Republic of Kazakhstan dated March 27, 2015 No. 276 “On approval of standards for public services in the field of architecture, urban planning and construction.”
Order of the acting Of the Minister of National Economy of the Republic of Kazakhstan dated February 12, 2016 No. 72 “On approval of the standard of the public service” Accreditation of legal entities carrying out technical supervision and technical inspection of facilities of the first and second levels of responsibility “.
Methodological document of the Republic of Kazakhstan “Designer supervision over the construction of buildings and structures” (approved by the order of the Committee for Construction, Housing and Utilities and Land Management of the Ministry of National Economy of the Republic of Kazakhstan dated December 29, 2014 No. 156-NҚ).
Rules for determining the cost of construction of facilities at the expense of public investments and funds of subjects of the quasi-public sector, (Appendix 5 to the order of the Chairman of the Committee for Construction and Housing and Utilities of the Ministry of Investment and Development of the Republic of Kazakhstan dated November 14, 2017 No. 249-nқ).
Regulatory document for determining the cost of design work for construction in the Republic of Kazakhstan (Appendix 5 to the order of the Chairman of the Committee for Construction and Housing and Communal Services of the Ministry of Investment and Development of the Republic of Kazakhstan dated November 14, 2017 No. 249-nқ).
Regulatory document for determining the cost of engineering surveys for construction in the Republic of Kazakhstan (Appendix 6 to the order of the Chairman of the Committee for Construction and Housing and Communal Services of the Ministry for Investment and Development of the Republic of Kazakhstan dated November 14, 2017 No. 249-nқ).
Regulatory document for determining the estimated cost of construction in the framework of the pilot project (Appendix 8 to the order of the Chairman of the Committee for Construction and Housing and Utilities of the Ministry of Investment and Development of the Republic of Kazakhstan dated November 14, 2017 No. 249-nқ).
Regulatory document for determining the estimated cost of commissioning when commissioning construction projects in the Republic of Kazakhstan (Appendix 9 to the order of the Chairman of the Committee for Construction and Housing and Communal Services of the Ministry of Investment and Development of the Republic of Kazakhstan dated November 14, 2017 No. 249-nқ).
Rules for the implementation of engineering and geological surveys, approved by order of the Minister of Industry and Infrastructure Development of the Republic of Kazakhstan dated September 30, 2020 No. 509.
3. Correlation of FIDIC conditions with the norms of national legislation when drawing up construction contracts.
In Kazakhstan, the most common use of the Red Book (construction contract) and the Silver Book (turnkey construction, sometimes called EPC contracts – engineering, procurement, construction)
Brief information on active projects financed by the European Bank for Reconstruction and Development (EBRD) in Kazakhstan under EPC contracts.
- provision of a loan in the amount of up to 10 billion 847 million. Kazakhstani tenge (25 million 280 thousand US dollars) LLP Zhanatasskaya Wind Power Plant for the construction and commissioning of a wind farm with a capacity of 100 MW, including the laying of a single-circuit 110 kV transmission line with a length of 8.6 km to the operating substation Opornaya, in Zhambyl region in the south of Kazakhstan.
- provision of a loan in the amount of 24.9 million euros (in tenge) to KazSolar 50 LLP for the development, construction and operation of a solar photovoltaic power plant with a capacity of 76 MW, located in the Karaganda region of Central Kazakhstan.
- Phase II of the Kazakhstan Renewable Energy Framework Program ((“Phase II” or “Facility”) will consist of debt financing of up to € 300 million for renewable energy generation and gridding for the integration of renewable energy projects in Kazakhstan.
- provision of a principal loan of up to 10 billion tenge to APL Construction LLP (Company), an operator of domestic gas distribution networks, for the construction of gas distribution networks in the Almaty region.
- предоставление инвестиций для строительства и эксплуатации 66-километровой кольцевой дороги вокруг Алматы в Казахстане, который будет осуществляться ТОО «BAKAD Investment and Operation».
- предоставление займа в размере до 12 миллионов долларов США в тенге для ТОО «Жангиз Солар» на разработку, строительство и эксплуатацию солнечной фотоэлектрической электростанции с установленной мощностью 30 МВт в районе Жангизтобе, в г. Восточно-Казахстанская область Казахстана.
According to Kazakhstani legislation, the contract may contain:
1) essential conditions (without reaching agreement on which the contract is not concluded);
2) additional conditions (if agreement is not reached on these conditions, then in some cases the general approach established by law can be applied).
In relation to a work contract, the essential conditions are:
1) Determination of specific work to be performed under the contract (paragraph 1 of article 616 of the Civil Code);
2) Initial and final terms of work performance (Clause 1 of Art. 620 of the Civil Code).
Thus, it must be borne in mind that if the parties do not agree in the FIDIC Contract on the subject of contract work, as well as the initial and final terms of their implementation, then, under Kazakh law, such a contract will be deemed not concluded.
In addition, such mandatory norms of Kazakhstani legislation, which contain requirements for language, currency, applicable law, should also be taken into account in the terms of the contract.
Also, the norms of the Civil Code establish that the composition and content of the design and estimate documentation must be determined in the construction contract, and it must also be stipulated which of the parties and in what time period must provide the relevant documentation (clause 3 of article 654). In addition, the Civil Code provides for the consequences of the discovery by the contractor of works that were not taken into account in the design and estimate documentation. In such circumstances, the contractor is obliged to notify the customer about this and has the right to suspend the work in case of not receiving a response within ten days or another period established by the contract. It is important to note that in case of failure to notify the customer, the contractor is deprived of the right to pay for additional work performed and compensation for losses caused by this. Thus, the provision contained, for example, in the Red Book (2017) (“the contractor must notify the engineer in the absence of the necessary drawings and if the requested drawings are not provided by the engineer within the requested time frame, the contractor in this case has the right to demand an extension of the term and compensation ”), is not sufficient to comply with the requirements of paragraph 3 of Article 654 of the Civil Code.
In the Special Conditions to the FIDIC Contract, the parties to the contract must provide for the interaction between the contractor and the engineer during the development, transfer and modification of design and estimate documentation, as well as information on its composition and content.
FIDIC contracts contain provisions based on such a concept of English law as indemnity. The relevant provisions are contained in the FIDIC contracts. FIDIC contracts may contain conditions according to which the liability of the parties is limited to the amount agreed by the parties, and if this amount is not agreed, then the amount of the contract. These conditions may turn out to be unenforceable, since Kazakhstani legislation does not allow for the possibility of complete exemption from liability. The parties to the contract may limit liability to real damage, and the agreement on exemption from compensation for real damage will be null and void (clause 2 of article 350 of the Civil Code). Consequently, liability provisions require adaptation to Kazakh law.
FIDIC contracts also contain clauses for damages for delayed work completion. The total amount of damages for delay must not exceed the amount specified in the Special Conditions. In the context of the Civil Code, such damages are subject to a forfeit. Therefore, in order to avoid ambiguity and disagreement, it is recommended to replace the wording “damages for delay” with “forfeit”.
The role of the engineer in the FIDIC Contract (Red Book) is key. The engineer represents the customer at the construction site, and is also authorized to resolve differences and make decisions on the claims of the contractor and the customer to each other. For Kazakhstani practice, the role of an engineer remains ambiguous. If in terms of representing the interests of the customer at the construction site, the role of the engineer generally corresponds to the functions of the project manager, then in the part where the engineer, in fact, resolves disputes between the parties, many questions arise. Oftentimes, engineers cannot cope with this task.
Regarding the cost of work, FIDIC contracts involve fixing a fixed price. It is necessary to take into account article 621 of the Civil Code of the Republic of Kazakhstan, which states that “the price of work can be determined by drawing up an estimate. In cases where the work is performed in accordance with the estimate drawn up by the contractor, the estimate takes effect and becomes part of the contract from the moment it is confirmed by the customer. The price of the work (estimate) can be approximate or fixed. In the absence of other indications in the contract, the price of the work (estimate) is considered fixed.
- If it becomes necessary to carry out additional work and for this reason – in a significant excess of the approximate price of the work (approximate estimate), the contractor is obliged to promptly notify the customer about this and suspend the work. A customer who does not agree to exceed the price of work (estimate) has the right to withdraw from the contract. In this case, the contractor may require the customer to pay the price for the part of the work performed.
- A contractor who has not timely warned the customer about the need to exceed the price (estimate) specified in the contract is obliged to fulfill the contract, retaining the right to pay for work at the price specified in the contract.
- The contractor does not have the right to demand an increase in the fixed price (firm estimate), and the customer does not have the right to demand a decrease thereof, including in the case when at the time of the conclusion of the contract it was impossible to provide for the full amount of work to be performed or the costs necessary for this.
With a significant increase after the conclusion of the contract, the cost of materials and equipment that must be provided by the contractor, as well as services rendered to him by third parties, the contractor has the right to demand an increase in the established price (estimate), and if the customer refuses to fulfill this requirement, the contract is terminated.»
The FIDIC contract provides for an interim payment certificate in which the engineer confirms or does not confirm the declared amounts. Based on the certificate issued by the engineer, the customer makes the corresponding payment to the contractor.
In our practice, most often, intermediate payment certificates mean signing acts of completed work and issuing relevant invoices. In this case, the acceptance of works takes place in parts.
According to the terms of the FIDIC Contract (in particular, the Red Book), the contractor is not entitled to subcontract the entire volume of contract work. According to clause 11 of Article 66 of the Law of the Republic of Kazakhstan dated July 16, 2001 No. 242-II “On architectural, urban planning and construction activities in the Republic of Kazakhstan” (hereinafter referred to as the law) in the work contract in mandatory the order must indicate the types and volumes of work that the contractor (general contractor) intends to transfer for execution to subcontractors. At the same time, it is not allowed to subcontract in aggregate more than two-thirds of the contractual value of all contract work (contract price). The maximum amount of work (services) performed (provided) within the framework of public procurement, which can be transferred to subcontractors (co-executors) for the performance of work or the provision of services, are determined in accordance with the legislation of the Republic of Kazakhstan on public procurement. Thus, taking into account this norm, it is necessary to supplement the contract norm.
According to subparagraph 3) of paragraph 2 of Article 34-2 of the Law, the customer is obliged to ensure the construction of the facility accompanied by technical and designer supervision, while the FIDIC conditions do not contain such a norm.
Article 75 of the law provides for the procedure for the acceptance of objects into operation, while the FIDIC conditions do not contain the specifics of the acceptance of construction projects. Therefore, the following mandatory provisions of the law must be considered in the contract:
“- acceptance of the object from the contractor (general contractor) is carried out by the customer in conjunction with technical and designer supervision.
– after receiving a written notice from the contractor (general contractor) about the readiness of the facility for commissioning, the customer accepts the facility for operation.
– the contractor (general contractor) and persons exercising technical and architectural supervision, within three working days from the date of receipt of the request from the customer, submit a declaration of conformity, conclusions on the quality of construction and installation work and the compliance of the work performed with the project, or negative conclusions.
– the conclusion of the author’s supervision on the compliance of the work performed with the project is the basis for providing the service providers for engineering and utilities with access to the services they provide in accordance with the previously issued technical conditions during the design of the facility, if this does not contradict the current norms and rules.
– the customer, on the basis of the declaration of conformity, conclusions on the quality of construction and installation work and the conformity of the work performed to the project, together with the contractor (general contractor), persons exercising technical and architectural supervision, is obliged to check the executive technical documentation for availability and completeness, inspect and accept the object into operation according to the relevant act (to conduct a final check of the object for readiness for commissioning). “
Acceptance of the constructed facility into operation is formalized by an act and is regulated by the provisions of Chapter 11 of the Law, which is signed by the customer, the contractor and persons exercising technical and designer supervision. The signed acceptance act in the future is the basis for entering information about the constructed object into the legal cadastre and serves as a document of title to it. In this regard, in the absence of a signed act, construction is considered incomplete.
Another equally important condition is the place of arbitration. In turn, the choice of the location of the arbitration means the choice of the law applicable to the arbitration. If the parties indicated, for example, London as the place of arbitration, then the national Arbitration Law of England will apply to their arbitration, in accordance with the interpretation of the New York Convention.
And this means that the issues of cancellation of the arbitral award, challenge of arbitrators and other issues related to the arbitration proceedings will be resolved in accordance with this law and will be subject to the jurisdiction of the English courts. Therefore, when concluding a contract, the parties should make the choice of the place of arbitration, taking into account the residence of the parties to the contract, as well as the specifics of the national legislation on arbitration of a particular jurisdiction.