Ukraine: Legal Aspects Of Using FIDIC Contracts In International Construction Projects In Ukraine

Last Updated: 22 May 2018
Article by Svitlana Teush
Most Read Contributor in Ukraine, May 2019

Co-authored by Dr Lukas Klee, LL.M, PHD, MBA
Advisor, Lecturer, Arbitrator, Expert witness at Klee Consulting (Czech Republic)

I. INTRODUCTION

Recent years have seen Ukraine's significant progress in reforming different sectors of its economy, including the construction industry, which has been a challenging task, given the historical context in which Ukraine has found itself. It is common knowledge that the Soviet era was the realm of state monopoly, overregulation and centralisation, and the Ukrainian construction industry embodied all of the above. During those times and the years following, practically no room was left for independent technical supervision, consultancy or project management, private ownership or funding. Absent were competition, market-based procurement, bidding price mechanisms or other components of a liberal market. The elements of this onerous approach inherited from the USSR still persist in many post-Soviet countries, including Ukraine.

Since the launch of the construction reform in Ukraine, new market instruments and practices have begun to be introduced in Ukraine. These include: certification of professionals by industry associations; liberalisation of mandatory rules; facilitation of permit and licensing procedures; reallocation of powers from centralised governmental agencies to local self-governing authorities; and sharing state control functions with non- governmental self-governance associations. The industry is digitised, and becomes ever more transparent with the gradual introduction of electronic services and online public registers (such as the register of property rights to real estate, construction permits, construction licences, land zoning documents, public procurement portal, etc). This contributed to a significant improvement in the regulatory framework, evidenced by Ukraine's rocketing score in World Bank's "Ease of Doing Business" over the past five years.1 The signing of the EU-Ukraine Association Agreement in 2014 provided another strong impetus for Ukraine to intensify this reform and align its regulatory and operational environment with international standards.

In Ukraine, there is no codified legislative act that regulates on a comprehensive basis all of the principal aspects of construction, such as a city planning code.2 The principal acts of legislation governing construction issues are the Civil Code of Ukraine ("Civil Code") and the Commercial Code of Ukraine ("Commercial Code"), enacted in 2004. As well as the above laws, there are also numerous laws and by-laws governing licensing, construction permits, commissioning (putting into operation) of finished property, responsibility in construction, etc. Construction standards and norms are embraced by the so-called "DBNs" (the state construction norms). This is an odd conglomeration of the old-fashioned regulations inherited from Soviet times and modern, progressive regulations.

In Ukraine, there are no mandatory standard forms of construction contracts.3 However, particular regard should be given to Regulation of the Cabinet of Ministers of Ukraine No 668 approving "The General Conditions for Conclusion and Performance of Capital Construction Contacts" ("Regulation No 668"), adopted in 2005. Regulation No 668 requires that these general conditions should be "mandatorily taken into consideration" irrespective of the sources of construction funding or the form of ownership of an employer or a contractor or sub-contractors. An exemption is made for the rules established by the international treaties of Ukraine, which override the provisions of Regulation No 668, as is, for example, the case with FIDIC contracts concluded by the international finance institutions ("IFIs") under the international agreements of Ukraine. The general conditions as set out in Regulation No 668 should not be confused with the General Conditions of FIDIC contracts, which are compounded by the Particular Conditions. Regulation No 668 does not provide for a binary structure, and there are no references to particular conditions as is the case with FIDIC contracts.

FIDIC contracts are usually used in the international construction projects funded by IFIs. The EBRD, the EIB and the World Bank feature as the most active donors to such projects and, it is through these projects that the use of FIDIC contracts in Ukraine is promoted. FIDIC's heritage is not well-known in Ukraine, except for the 1999 Conditions of Contract for Construction for Building and Engineering Works designed by the Employer ("Red Book") and the Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Works Designed by the Contractor ("Yellow Book"), which are typically used in the IFI-funded projects in Ukraine.4 Other documents developed by FIDIC (such as the new contract forms developed by FIDIC in 2017, "The FIDIC Contracts Guide", "FIDIC Procurement Procedures Guide", "Risk Management Manual", etc.) are practically unknown, and are not used in Ukraine. Other international practices promoted by FIDIC, such as Building Information Modeling (BIM) are not well-known in Ukraine, and used only by some international engineering companies represented in Ukraine. Public authorities have no methodologies or other instruments at their disposal which could guide them through different practical aspects related to the use of FIDIC contracts, such as time or cost management, variations and other aspects of contract administration and project management, quantification of claims and claim management procedures, evaluation criteria and other public procurement issues, etc. Greater use of FIDIC contracts in Ukraine is hampered by the fact that there are no official translations of FIDIC forms of contract into the Ukrainian language.

Based on the fundamental principle of the freedom of contract, which is officially recognised in Ukraine, FIDIC contracts as well as other forms of contract can be used, unless they are expressly prohibited by law or deviate from mandatory provisions of Ukrainian law. Whether a provision is mandatory is implicit in either its contents or the substance of the relationship between the parties. It is not always possible to clearly differentiate between the discretionary and mandatory provisions of Ukrainian law. Mandatory provisions are usually understood to include, amongst other things, licensing, certification and permit procedures, technical regulations and standards, immigration and labour requirements, environmental and safety issues, and taxation.

Apart from regulatory and other mandatory requirements and the Ukrainian public order issues, it is necessary to account for the differences between FIDIC contracts and the law of contract in Ukraine, as discussed below. The differences are rooted in the historical background of Ukraine and the peculiarities of the civil law system to which Ukraine adheres. In civil law jurisdictions, there are difficulties with the interpretation and implementation of many terms, notions and principles of common law underlying FIDIC contracts (such as "time is of the essence", "dispute adjudication board", "variations", "value engineering", "early warning", "substantial completion", "constructive acceleration", "time at large", "experienced contractor" or "determinations").

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Footnotes

1. For the general ranking in "Ease of Doing Business", Ukraine ranks 76 out of 190 in 2018 vs 152 out of 183 that it held in 2012. For the sub-ranking "Dealing with Construction Permits", Ukraine ranks 35 out of 190 in 2018 vs 180 out of 183 in 2012. For the sub-ranking "Registering Property", Ukraine ranks 64 out of 190 in 2018 vs 166 out of 183 in 2012. 2. There is a draft of such code, yet the prospects of its adoption are not clear.

3. There is a non-binding, exemplary form approved by the central authority for construction, which parties can deviate from.

4. For this reason, in this article the provisions of Ukrainian law on construction contracts will be compared against FIDIC's 1999 "Red Book" and, in some instances, "Yellow Book".

This article was originally published in The International Construction Law Review Volume 35 Part 1 [2018] ICLR 97.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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