1. EPC Contracts

Current situation

The EPC contract is a common form of contract worldwide and is used for construction projects. EPC is an acronym for Engineering, Procurement and Construction.

The EPC contract usually regulates the legal relationship between the Employer and the Contractor. It also serves as a means of managing risk and determining the interests of the parties to the project.

The EPC contract is characterised by its comprehensive approach. This means that the contract covers all stages of the project and defines the roles of all those involved in the project.

Thus, the EPC contract covers the following main works:

• Engineering – surveying, design and approval works;
• Procurement – selection and procurement of materials and equipment for the whole project;
• Construction – construction, installation and commissioning works.

The EPC contract is a rather complex and multi-page document that provides different provisions for the execution of the project.

From the point of view of Kazakhstan civil legislation, the EPC contract is a mixed contract. As the contract provides for elements of various contracts. However, the current legislation of Kazakhstan does not provide for the concept and regulation of an EPC contract as such.

In Kazakhstan, EPC contracts are being introduced into construction practice gradually. According to established practice, in Kazakhstan the most common form of EPC contracts is the FIDIC form of contract. This form is universal for use under the legislation of almost any country (FIDIC contracts contain concepts of English law). Therefore, FIDIC contracts are used throughout the world in the implementation of major construction projects, including in Kazakhstan.


2. FIDIC Contracts

FIDIC is an acronym for “Fédération Internationale des Ingénieurs-Conseils”. The FIDIC model contract forms were developed by this federation, which was founded in 1913 in France. Initially, the federation included only France, Switzerland and Belgium. However, the federation currently includes over 50 countries.

Over the years, the federation has become popular all over the world because of its work in creating model contract forms for the construction and engineering industries.

The very first model contract form was created in 1957. It was called The Form of contract for works of civil engineering construction (The Red Book). It has become a tradition that FIDIC contracts are popularly known by the colour of the cover.

FIDIC contracts now cover a wide range of projects and procurement methods. Therefore, almost any international contractor or consultant is often dealing with FIDIC contract terms and conditions.


FIDIC forms

Over the years FIDIC has consistently improved on its contracts. The organisation has added new forms of contract, replaced previous ones and updated important terms. The table below provides a brief overview of FIDIC contracts to date:

Other FIDIC contracts include the FIDIC subcontracting agreements:

• The Blue Book; and
• The White Book.

Although there are several types of FIDIC contracts, almost 99% of projects use the following types of FIDIC contracts:

1) The Red Book;
2) The Yellow Book;
3) The Silver Book. The features of each contract are briefly described below.


1) The Red Book

Contents of the Red Book:

• General conditions;
• Guidance for the preparation of the particular conditions;
• Forms of tender and contract agreement;
• Dispute adjudication agreement.

Design
The Red Book contains the terms of a construction contract when the design is implemented by the Employer. Therefore, the Red Book is applicable to any construction work where the design is implemented by the Employer. However, it also allows for some elements of the project to be designed by the Contractor.

Project management
The project is managed and supervised by an engineer employed by the Employer. The engineer is responsible, inter alia, for issuing instructions, confirming payments and determining the completion of the work. The engineer’s decisions are mandatory for the Contractor.

Payment
The contract fee may be adjusted. Also, the scope of work under the contract cannot be estimated. Therefore, payment under the contract shall be made for work actually performed.

Risk allocation
The contract provides for equal distribution of risk. Therefore, the risk shall be borne by the party who has breached one of the provisions of the contract and by whose fault the risk has arisen.


2) The Yellow Book

Contents of Contract Book:

• General conditions;
• Guidance for the preparation of the particular conditions;
• Forms of tender and contract agreement;
• Dispute adjudication agreement.

Design
The Yellow Book contains the terms of a construction contract when the design is implemented by the Contractor.

Under the usual terms of the Yellow Book, the Contractor shall design and execute the works in accordance with the Employer’s requirements, which may include any combination of construction, mechanical, electrical and structural works.

Project management
The project is managed and supervised by an engineer employed by the Employer. The engineer is responsible, inter alia, for issuing instructions, confirming payments and determining the completion of the work. The engineer’s decisions are mandatory for the Contractor.

Payment
As the Contractor is fully responsible for the scope of work, the contract fee is usually fixed.

Risk allocation
As the contractor is responsible for the scope of work, the contractor bears the main risk under the contract. However, the Employer bears the risk of the contract to the extent of his requirements which he has imposed on the Contractor.


3) The Silver Book

Contents of Contract Book

• General conditions;
• Guidance for the preparation of the particular conditions;
• Forms of tender and contract agreement;
• Dispute adjudication agreement.

Design
The Silver Book is suitable for use in technology, energy and private infrastructure projects. The Contractor takes full responsibility for the design and implementation of the project.

Project management
The project is managed and supervised by the Employer’s representative. The representative is responsible, inter alia, for issuing instructions, confirming payments and determining the completion of the work. The representative’s decisions are not mandatory for the Contractor. Therefore, the representative under this contract has less authority than the engineer in the Red and Yellow Books.

Payment
As the Contractor is fully responsible for the scope of work, the contract fee is usually fixed. However, the Employer bears the risk of the contract to the extent of his requirements which he has imposed on the Contractor.

Risk allocation
As the contractor is responsible for the scope of work, the contractor bears the main risk under the contract. However, the Employer bears the risk of the contract to the extent of his requirements which he has imposed on the Contractor.


3. Application of FIDIC Contracts in Kazakhstan

Despite the complexity of the documentation constituting the FIDIC contract, the purpose of each of the documents is justified in terms of regulation/detail of the relationship between the parties, resolution of conflicts, deadlines for performance, payment for work performed, identification and correction of defects, determination of penalties, performance of individual project milestones, etc. Moreover, the existence of Special conditions allows the specificities of the relevant legislation to be taken into account so that the signed contract will be enforceable for both the Employer and the Contractor.

However, despite the current principle of freedom of contract in Kazakhstan and the fact that FIDIC forms are adaptable to the conditions of national law, it must be taken into account that, under Kazakhstan law, the essential terms of the contract must be defined in the contract itself, but not in the appendices. Therefore, in practice, entities combine the provisions of the general part, the special part and the relevant appendices in order to have a complete document. This approach may be justified if the contract is governed by Kazakhstan law (where both parties to the contract are Kazakhstani legal entities) and disputes are litigated in Kazakhstan. In all other cases, attention must be paid to amendments in the FIDIC form of contracts and to the established practice of the relevant arbitration regarding non-compliance with the FIDIC form.

Tender documentation is also part of the FIDIC contract. However, according to Kazakhstan law, the tender documentation is not part of the contract. Therefore, it is not legally correct to refer in the contract to the provisions of the tender documentation (material conditions of the contract). Moreover, certain elements of the tender documentation in the context of Kazakhstan law are the basis for the conclusion of the contract, but not the contract itself. At the same time, these elements do not constitute a preliminary contract. Therefore, in order to avoid conflict with Kazakhstan law, it is necessary to specify all material conditions in the contract itself without reference to the tender documentation.

In general, FIDIC forms are adapted depending on the project, taking into account national legislation, commercial conditions, cost of construction of the facility, management and maintenance of the facility, time frame, project phases, fees, etc.

It must be taken into account that FIDIC contracts are characterised by the application of the principle of reasonableness, admissibility and justification to the actions of the parties to the contract. However, these principles are not regulated by the Kazakhstan legislation. Therefore, they may be unpredictably interpreted both by the court and the parties to the contract. In practice, it is necessary to clarify what a particular term means in each particular context. However, as mentioned above, it is important to keep in mind which law governs the contract and which bodies deal with disputes between the parties.

The above are only some aspects of the difference between FIDIC contracts and the current Kazakhstan law. Overall, in order to fully implement and adapt the FIDIC forms in Kazakhstan without compromising their integrity and the risk of breach of legislation, it will take time to analyse in detail and implement amendments to construction legislation with regard to the procurement of construction services and related financing.