FIDIC or Orgalime contracts?

Many industrial, energy and technology companies use Orgalime standard contracts when buying or selling technological plants and installations. However, Orgalime may not sufficiently address the challenges that can arise in relation to large facilities developed or customised to the customer’s specific needs. Therefore, it may be relevant to consider a FIDIC contract, which contains more detailed regulations.

If your company is considering buying or selling a large technological facility, it is important to understand the significant differences between FIDIC and Orgalime contracts regarding risk allocation. In this article, we compare the FIDIC Yellow Book and two commonly used Orgalime contracts in relation to a number of key clauses.

Who drafted the standard contracts?

To understand the standard contracts and their risk allocation, it is important to keep in mind who drafted them.

The FIDIC Yellow Yook is drafted by FIDIC, an international association of consulting engineers who typically assist employers. Consequently, the FIDIC contract is in some respects quite buyer-friendly.

The Orgalime contracts are drafted by Orgalime, a trade association representing Europe's technology industry, which typically represents sellers. Therefore, Orgalime contracts tend to be more seller-friendly.

Neither the FIDIC nor the Orgalime contracts are "agreed documents", i.e. documents formally approved or accepted by the parties involved (such as the Danish General Conditions for Building and Construction Works and Supplies, referred to as AB18). Hence, the contracts are customised and negotiated quite extensively.

Size of the various standard contracts

Considering the length of the contracts, it is evident that the FIDIC Yellow Book is significantly more detailed than the Orgalime contracts. The FIDIC contract is intended for long-term complex construction projects and regulates the parties’ obligations in detail. For instance, FIDIC (especially the 2017 version) includes comprehensive regulations of various cooperation processes, including submission of claims, testing, invoicing, and payment, etc. Orgalime contracts are briefer, regulating only the cooperation processes at a general level - in some cases not at all.

In a Danish contractual context, FIDIC’s detailed regulation may appear overwhelming. However, these regulations should be seen in light of their intended use for large complex installations, where the parties are likely to face unforeseen challenges leading to requests for changes, extension of time, claims, etc. To ensure progress, it is advisable for the parties to agree in advance on how to handle unforeseen circumstances - not only in terms of who is right, but also the process for determining who is right.

FIDIC Yellow Book
109 pages.
Orgalime Turnkey Contract for Industrial Works
40 pages.
Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products
8 pages.

What roles are foreseen in the contracts?

In addition to the contractor and the customer, the FIDIC contract incorporates the role of an engineer, who is appointed by the customer as a kind of project manager to issue instructions to the contractor and make first-instance decisions. These decisions are binding and the project must proceed accordingly until a decision is overturned, if applicable, by a court or tribunal. Thus, the engineer supports and ensures the progress of the construction project, even in the presence of disputes.

In contrast, Orgalime contracts do not involve the role of an engineer; they solely regulate the relationship between the two contracting parties: the contractor and the customer.

FIDIC Yellow Book: Contractor, customer, and engineer.
Orgalime Turnkey Contract for Industrial Works: Contractor and customer.
Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products: Contractor and customer.

Who has the obligation to deliver the works and the design responsibility?

Obviously, all three contracts impose an obligation on the contractor to deliver the works. In the Orgalime General Conditions for Supply and Installation the obligation is limited to what is specfied in the contract, whereas both the FIDIC and Orgalime Turnkey contracts require the contractor to deliver more than what is strictly specified. In the case of Orgalime Turnkey, the contractor is required to deliver what is necessary to meet the performance requirements etc. in the contract - i.e. still a specific obligation but here also with an obligation to guarantee a certain outcome.

The FIDIC contract goes even further by requiring the contractor to meet a "fitness-for-purpose" standard, meaning that the facility must not only deliver a certain output but also fulfil a certain purpose. The fitness-for-purpose standard should be seen in the context of the contractor's general design obligation and is a very broad obligation for the contractor - especially if the purpose is not (clearly) defined in the contract, or if the purpose is described in general terms, for example to gain certain competitive advantages. This ambiguity often leads parties to contract out of the fitness-for-purpose standard.

FIDIC Yellow Book
The contractor has design responsibility - must fulfil a purpose.
Sub-Clause 4.1: "When completed the Works … shall be fit for the purpose(s) for which they are intended, as defined and described in the Employer's Requirements (or, where no purpose(s) are so defined and described, fit for their ordinary purposes(s)."
Orgalime Turnkey Contract for Industrial Works
The contractor has design responsibility and must deliver the agreed results.

Sub-clause 4.2: "The Works shall include all that is necessary for the Works to fulfil the operating characteristics and performance requirements specified in the Contract."
Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products
The contractor must deliver the work and equipment etc. agreed under the contract (see definition of "Works" and "Plant"). It is for the customer to decide if the works fulfils the purpose and needs.

Clause 2.: ""Works": the Plant, installation of the Plant and any other work to be carried out by the Contractor under the Contract. If the Works shall according to the Contract be taken over by separate sections intended to be used independently from each other, these Conditions shall apply to each section separately. The term "Works" shall then refer to the section in question."

Clause 2.: ""Plant": the machinery, apparatus, materials, articles, documentation, software and other products to be supplied by the Contractor under the Contract."

What are the contractual requirements in relation to the project time schedule?

In large complex construction projects, it will generally be necessary to specify detailed requirements as to the content and continuous update of a time schedule, including in case of delays.

The Orgalime contracts do not regulate these key issues. The FIDIC contract, on the other hand, imposes detailed requirements in relation to the content of contractor's time schedule, including the planning of each phase of the installation, critical path through the installation, etc.

FIDIC Yellow Book: Detailed regulation of the contractor's obligation to submit a time schedule and to update the schedule if the project is delayed.
Orgalime Turnkey Contract for Industrial Works: The contractor must submit a time schedule but no further regulation in this respect.
Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products Does not regulate the submission of an actual time schedule.

Regulation of time extensions

All three contracts entitle the contractor to an extension of time in certain situations. The contracts differ not only in terms of the level of detail but also in terms of allocation of risks between the customer and the contractor. These factors must be tailored to the specific installation regardless of which of the standard contracts the parties are basing their agreement on.

In the FIDIC contract, extensions of time are determined by the engineer based on the claims submitted by the contractor. Moreover, the FIDIC contract contains extensive requirements in relation to both the contractor’s claims and the customer's claims. Thus, the regulation of claims is 4.5 pages long, stipulating i.a. that claims must be made within 28 days after which they will generally lapse. This time-barring of claims is often subject to negotiation between the parties, and it is also questionable whether a Danish arbitration tribunal will uphold a preclusive time limit like that.

The Orgalime Turnkey contract generally states that the contractor's request for an extension of time must indicate the reasons for the extension and, if possible, the duration of the extension.

FIDIC Yellow Book: The contractor is entitled to an extension of time in certain circumstances, provided that the contractor gives notice within 28 days after the contractor became (or should have become) aware of them. The extension of time will be determined by the engineer. Comprehensive regulation of the parties' submission of claims.
Orgalime Turnkey Contract for Industrial Works: The contractor is entitled to an extension of time in certain circumstances, provided that the contractor gives notice of such without undue delay after the contractor became aware of the circumstances, or should have become aware of them.
Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products: The contractor is entitled to an extension of time in certain circumstances.

How are changes regulated?

All three contracts regulate changes to the works but with varying obligations for the contractor to implement these. Not surprisingly, the FIDIC imposes the most far-reaching obligations on the contractor, providing detailed principles for determining the consequences of the change.

FIDIC Yellow Book
- Imposes an obligation on the contractor to carry out changes with certain exceptions. The engineer instructs changes. Detailed principles for determining the consequences of the change.
Orgalime Turnkey Contract for Industrial Works
Imposes an obligation on the contractor to carry out changes, unless the nature or extent of the change could not reasonably have been foreseen by the contractor at the time of entering into the contract.
The contract must be adapted to “reasonably” reflect the consequences of the change.
Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products
No obligation for the contractor to carry out changes.
No regulations stating how the consequences of the change are to be determined.

How do testing requirements differ in the contracts?

As a general rule, the FIDIC and Orgalime Turnkey contracts regulate the same type of tests, but they differ in terms of who is responsible for performing the tests and who has to pay the costs. In addition, FIDIC contains far more detailed requirements in relation to the content of the tests, the contractor’s submission of test programmes, and the engineer’s acceptance of the tests and preparation of a taking-over certificate.

The contracts also regulate the consequences of failing tests and any commissioning by the customer before taking over. In general, FIDIC is much more detailed and also more onerous to the contractor. No matter which standard is chosen by the parties, the regulations on testing must be adapted to the specific project.

FIDIC Yellow Book regulates: ongoing testing and inspections. Additionally, tests as part of taking over, with the contractor bearing the costs. The customer performs tests after taking over

Orgalime Turnkey Contract for Industrial Works regulates: ongoing testing and inspections. Additionally, tests as part of taking over and after taking over. Tests are carried out under the contractor's instruction as agreed between the parties in terms of responsibility and costs.

Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products regulates: tests before shipment, with the supplier bearing the costs. Additionally, tests as part of taking over, with the customer bearing all costs except for the contractor's personnel expenses.

How are liquidated damages regulated in the contracts?

All three contracts provide for liquidated damages in the event of contractor delays. Another common feature of the contracts is that payment of liquidated damages excludes other remedies for breach except termination and remedial action. FIDIC is silent on the level of liquidated damages for delay and non-performance, including on maximum damages. The Orgalime contracts specify a percentage. However, it is in the lower end, thus favouring the contractor. In practice, liquidated damages and maximum liquidated damages is an issue which must always be adapted to the specific project, and which is always subject to negotiation.

FIDIC Yellow Book
Delay damage: must be determined by the parties in the contract.
Performance damages: as determined by the parties.
Orgalime Turnkey Contract for Industrial Works
Delay damages: 0.5% per full week of delay. Up to a maximum of 7.5% of the contract price. If part of the work is delayed, the damages and the maximum amount are calculated for the part that is delayed. Falls due only after takeover or termination.
Performance damages: as determined by the parties but limited to a maximum of 5% of the contract price. The maximum damages is determined by the parties.
Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products
Delay damages: 0.5% per week or fraction of a week. Up to a maximum of 7.5% of the contract price. If part of the work is delayed, the damages and the maximum amount are calculated for the part that is delayed. Falls due only after takeover or termination.

How do the contracts regulate defects and defects notification periods?

All contracts operate with a period after takeover, where the contractor is obligated to remedy defects (defects notification period/DNP). Neither FIDIC nor the Orgalime Turnkey contract specifies the duration of this period, leaving it to the parties. However, the Orgalime Supply and Installation provides for a one-year DNP. In practice, the DNP depends on the project, varying between one and five years.

As noted above, FIDIC is characterised by extensive regulation of the parties' cooperation. This also applies in relation to defects. FIDIC does not specify any limit on the amount of any reduction of the contract price. Both Orgalime contracts limit any reduction of the contract price to a maximum of 15%.

FIDIC Yellow Book:

Determined by the parties and may be extended by no more than 2 years.
Extensive regulation of defects, including in relation to the parties’ inspection, costs, tests, analyses, etc.
Right to rectification at the contractor’s expense, reduction, or termination.

Orgalime Turnkey Contract for Industrial Works:

Determined by the parties and may be extended by no more than 1 year.
Regulates the handling of defects.
Right to rectification at the contractor’s expense, reduction (maximum of 15%), or termination.

Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products:

1 year and may be extended by no more than 1 year.
Regulates the handling of defects.
Right to a reduction (maximum of 15%) and partial termination.

This is how payment and financial guarantees work

For large, complex installations, it is often relevant to agree on performance bonds that guarantee both parties’ fulfilment of the contract. While the Orgalime Turnkey contract assumes that the parties can agree on financial guarantees, it does not regulate such guarantees, i.e. it does not specify when the guarantees should be provided or by whom, or the consequences if they are not provided as agreed. These aspects are all covered in FIDIC. However, parties to contracts involving large, complex installations often supplement the FIDIC provisions, such as by adding a parent company guarantee.

FIDIC's comprehensive regulation of the parties' cooperation also extends to invoicing and payment. The regulation seems, however, unnecessarily complex - even where the project involves a large complex installation. Therefore, the provisions will often be adjusted to ensure alignment with the actual processes.

The specified default interest rate reflects the difference in risk allocation between the customer and the contractor across the contracts. In FIDIC, the contractor receives an additional 3% - in the Orgalime contracts it is 8%. However, there is a difference in how the interest is applied.

FIDIC Yellow Book
Very extensive regulation of invoicing and payment processes, currency payments, etc.
Regulates the customer's financing arrangements and the contractor’s performance and advance payment guarantees.
- An additional 3% to the average short-term lending rate in the country where payment is to be made in case of late payment.
Orgalime Turnkey Contract for Industrial Works
No regulation of financing or performance guarantees.
Payment: regulated by the parties in the contract. 8% in addition to the MRO (main refinancing rate, being the rate paid by the bank to the ECB) in the event of late payment.
It is assumed that the parties can agree on financial guarantees.
Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products
No regulation of financing or performance guarantees.
- Payment:
- - - 30 % at the time of signing
  - - 30 % at the time of shipping
  - - 30% when materials etc. arrive at the site
  - - 10 % at the time of takeover
8 % in addition to the MRO (main refinancing rate, being the rate paid by the bank to the ECB ) in the event of late payment.

Who is liable for any damage caused?

The regulation of liability for damage, such as damage to the customer's property, varies considerably across the three contracts. Regulating liability for damage requires careful review and consideration, including in relation to the interaction with the insurance taken out for the project and the installation:

FIDIC Yellow Book: Mutual indemnification that imposes greater obligations on the contractor than on the customer. The indemnities are not subject to any limitation or exclusion of liability clause.

Orgalime Turnkey Contract for Industrial Works: Both parties are liable for damage caused to the other party’s property due to negligence. Liability for personal injury is regulated by the applicable law.

Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products: The contractor is liable for damage caused to the customer’s property caused before takeover, provided that the damage is due to proven negligence and not for indirect losses. The contractor is not liable for damage caused by the deliverable or for damage caused to the customer’s products.

How is insurance regulated?

The contracts also differ quite a lot in terms of insurance regulation. The insurance of large complex installations is a very important element that should be regulated in detail.

In practice, the customer will often take out all-risk insurance covering the contractor's - and other contractors' - work on the site during the construction phase.

FIDIC Yellow Book
Requires the contractor to take out a range of policies
Orgalime Turnkey Contract for Industrial Works
Requires the contractor and the customer to take out a range of policies.
Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products
Insurance is not regulated.

Exclusion and limitation of liability in the contracts

The limitation of liability reflects the difference in the distribution of risk between the customer and the contractor across the contracts. In FIDIC, liability is capped at the contract price for both parties unless otherwise specified, whereas in the Orgalime contracts the contractor's liability is capped at 15% of the contract price.

FIDIC Yellow Book:

Indirect losses are excluded. Both parties’ liability is limited to the contract price, unless otherwise agreed.
The contract lists a number of circumstances in which liability cannot be excluded or limited, including in case of gross negligence.

Orgalime Turnkey Contract for Industrial Works:

Indirect losses are excluded.
The contractor’s liability is limited to 15% of the contract price (unless otherwise agreed).
The customer's liability is limited to the contract price.
The exclusion and limitation of liability does not apply in case of gross negligence.

Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products:

Indirect losses are excluded (except in the event of termination due to delay by the contractor).
The contractor's liability is limited to 15% of the contract price.
The customer's liability is limited to the contract price.
The exclusion and limitation of liability does not apply in case of gross negligence.

How are choice of law and jurisdiction regulated?

The different risk allocations in the contracts are also reflected in the the choice of law regulations. In Orgalime contracts, the law applicable in the country where the contractor is resident is the default governing law. Conversely, in FIDIC contracts, it is the law applicable in the country where the work is performed. Since the customer determines the site for the works to be performed, FIDIC’s choice-of-law clause will often be to the benefit of the customer.

FIDIC also provides for a special dispute avoidance/adjudication board (DAB or DAAB) to handle any disputes before they are referred to arbitration. The DAB/DAAB regulation is quite extensive, and in practice, parties often agree on their own dispute resolution mechanism as a (voluntary) alternative before arbitration.

FIDIC Yellow Book
Determined by the parties. Unless otherwise agreed by the parties, the governing law is the law of the country in which the work is to be performed.
Provides for ICC arbitration but only after hearing by a special dispute avoidance/adjudication body ("DAB/DAAB").
Orgalime Turnkey Contract for Industrial Works
Determined by the parties. Unless otherwise agreed by the parties, the governing law is the law of the country in which the contractor is resident.
Provides for ICC arbitration.
Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products
Determined by the parties. Unless otherwise agreed by the parties, the governing law is the law of the country in which the contractor is resident.
Provides for ICC arbitration.

Here is what else you need to know

All contracts contain provisions regarding the passing of risk, transfer of ownership, suspension, and termination. While these provisions vary across the contracts, generally, the regulation in the FIDIC contract is more comprehensive and customer-friendly compared to the Orgalime contracts.

Furthermore, FIDIC addresses a broader range of issues than the other contracts. However, the Orgalime Turnkey contract specifically regulates software rights, which is only indirectly covered in the FIDIC contract as part of the "Contractor's Documents". In practice, software will be present in all long-term complex installations, making it crucial that the right to use the software is regulated (also more extensively than in the Orgalime Turnkey contract), including the right to make changes, maintenance, and access to source code and documentation.

FIDIC Yellow Book provides a detailed contractual framework, including in relation to:

interpretation, contractual notices, language, confidentiality, errors in customers requirements, documentation and rights to documentation, and joint and several liability in joint ventures
assignment of the contract, access to site and site data, and cooperation with the customer's other contractors.

The Orgalime Turnkey Contract for Industrial Works regulates certain general aspects, including in relation to:

interpretation, documentation, on-site work, and contractual notices
language, confidentiality, force majeure, and software rights.

Orgalime General Conditions for Supply and Installation of Mechanical, Electrical and Electronic products regulates certain general aspects, including in relation to:

documentation, preparatory works by the customer, and force majeure.

Summary

The FIDIC contract contains much more detailed regulations than the Orgalime contracts, especially in relation to the parties’ cooperation processes, but it also imposes more substantive requirements on the contractor, such as detailed requirements for the contractor's time schedule.

Both the FIDIC contract and the Orgalime contracts are recognised standards in Europe and can be used across borders. However, the FIDIC contract is also recognised outside Europe and within financial circles as described in more detail here:

FIDIC internationale standardkontrakter 1920x1080jpg.jpg

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FIDIC: International standard forms of contracts

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As a customer, considering a FIDIC contract when contracting for a major installation is prudent. In certain circumstances, it may also be appropriate for the contractor to use a FIDIC contract. However, the contractor should carefully assess the regulations and ensure that the contractor’s risk premium accounts for the increased exposure to risk under the FIDIC contract compared to the Orgalime contract.

Do you need advice on the choice of contract?

Deciding whether you should go for a FIDIC or an Orgalime contract and how to customise the contract to a sale or purchase of a large complex installation is not easy. If you and your company need advice or assistance, please do not hesitate to reach out to us. With our extensive experience in various contract types, we are ready to help you.

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