FIDIC contracts in Finnish energy infrastructure: Benefits, challenges, and adaptations

In the wake of the global green transition, the Finnish energy landscape stands at a pivotal crossroads, charting its course towards a more sustainable future. As Finland wholeheartedly commits to reducing carbon emissions and embracing renewable energy sources, the energy infrastructure sector is undergoing transformative shifts. This evolution brings not only opportunities but also challenges the prevailing contract tradition. And it demands innovative solutions.

One example from a legal perspective is that the progression of contract templates used in the construction of energy infrastructure lags behind the industry's swift advancement. Finnish contract templates do not adequately address the market practices stemming from the green transition.

Challenges with local general conditions provide room for the implementation of internationally well-known FIDIC contracts to the Finnish market. These standardized conditions provide a framework that navigates the intricate terrain of energy infrastructure development. But as the green transition unfolds, new challenges emerge in the realm of FIDIC contracts, necessitating careful adaptations to align with the unique demands of diverse energy projects.

This article explores the role of FIDIC contracts, delving into the realm of FIDIC Yellow Book [1] in Finnish energy infrastructure projects, uncovering the advantages they offer, the hurdles they pose, and the requisite adjustments. We discuss the provisions typically found in Finnish contracts based commonly on the general conditions for building contracts, known as YSE (Rakennusurakan yleiset sopimusehdot, 1998), the standardized framework of FIDIC. And how they can be balanced to work harmoniously with the Finnish construction industry’s local needs, facilitating collaboration and engagement from local stakeholders.

Benefits of FIDIC contracts in Finnish energy infrastructure

YSE is a well-established set of guidelines in Finland that have historically been tailored for construction projects, particularly for various types of buildings. These local conditions have played a crucial role in shaping construction contracts in Finland. The current version of YSE has been in use since 1998. The conditions have already aged somewhat, and they’ve proven to be less suitable especially for large and complex energy infrastructure projects or, one could argue, for turn-key or EPC project deliveries. In fact, Finland lacks a domestic contract model that could be easily adjusted to meet the requirements of a project delivery, including the liability over the plant design and performance.

FIDIC contracts, whose terms and conditions are internationally recognized, serve as indispensable tools for advancing green energy projects in Finland. Through clarity, standardization, risk allocation, adaptability, and familiarity with terms, FIDIC offers several key advantages. It also empowers stakeholders to navigate the complex legal aspects of energy initiatives effectively as they promote a common comprehension of roles and obligations that are not typically addressed in local conditions. Some wind turbine suppliers have tailored their own turbine supply agreements based on the Yellow Book, providing an excellent example of their adaptability, which can also to be used in other energy plant supply and procurement, construction and even installation contracts.

A key characteristic of energy infrastructure projects is that they bring global stakeholders to the Finnish market. If technology providers and financing parties are more international, standardization and familiarity with common terms and conditions becomes beneficial. For instance, when an international financing party evaluates their risk exposure pertaining to the project agreements subject to their project financing, and step-in rights secured with direct agreements, the contracts that the investor is already familiar with can smoothen the investor’s due diligence process and reduce investors' requests for contractual amendments.

Also, using a standardized international contract model, such as FIDIC, as a basis for plant engineering and delivery contract, can speed up the contract drafting and negotiation process, where the alternative would be taking one party’s general terms and conditions or YSE and making heavy amendments and revisions. For an international player, negotiating a supply contract based on YSE conditions may be “no-go” in the first place, but finding a common ground with FIDIC minimizes the risk of disputes arising from misunderstandings. While energy projects are not without their share of risks, FIDIC contracts tackle this issue by providing a mechanism for the fair allocation of liabilities between all parties, including project owners, contractors, and financiers. This fosters private investment in the sector, as investors are assured that their interests are well-protected. Consequently, this facilitates the financing and execution of energy projects.

Challenges and adaptations

While FIDIC contracts offer substantial benefits to Finnish energy infrastructure projects, they’re not without challenges that require thoughtful adaptations. We specifically address issues related to the Yellow Book.

The Yellow Book is often considered overly broad and detailed for the local construction industry. [2] Finnish legislation allows contractual freedom, and local tradition embraces simple form contracts. Surprisingly complex projects have been conducted with, from an international perspective, short contract documents that have their established interpretation in the complementary legislation. Additionally, the English language and common law contract culture and style may be unfamiliar, especially for local subcontractors. This can pose challenges from a risk management perspective when considering the entire supply chain. In general, local contractors have a strong understanding of YSE, and the extensive legal precedents related to YSE, which further contributes to its widespread acceptability in the Finnish market. Adopting a simplified form of FIDIC Contract within the supply chain could be beneficial. Similarly, incorporating some key YSE terms and local legislation would facilitate collaboration with subcontractors.

The concept of the engineer, as commonly found in FIDIC contracts, also presents a challenge when applied in the Finnish context. Finland's construction market lacks a well-established tradition of engineers playing a specific role like that defined in the Yellow Book. The absence of a clear and readily available pool of engineers with expertise in the technical questions, in-depth knowledge of the parties’ risk sharing model and the FIDIC contracts in general can pose challenges to the successful implementation of this concept. As there is a need for independent and authoritative decision-makers, lack of FIDIC engineers can lead to replacing the engineer concept with some other independent expert evaluation, which can be used as the FIDIC-style fast-track step for parties to seek mediation before lengthy arbitration.

The adaptation needs are related not only to locality but also to the sector itself. Although the Yellow Book provides mechanisms for addressing delays and cost adjustments, a contract may require adaptation to the unique circumstances of energy projects as they are prone to unpredictable delays and cost overruns and to some extent, change of laws. A swift and effective resolution process is essential to prevent costly delays and safeguard project continuity. The Yellow Book offers dispute resolution mechanisms, but these may require adaptations to expedite the resolution process in energy projects.

By customizing and supplementing FIDIC contracts with additional clauses and provisions used generally in YSE-based contracts that address the needs and capabilities of local contractors, a balance between FIDIC and YSE can meet the needs of large energy projects.

Conclusion

The adoption of internationally recognized FIDIC contracts in the Finnish energy infrastructure sector is a significant stride towards achieving a more sustainable future. These standardized contracts offer a multitude of benefits, particularly in projects involving pioneering technologies, facilitating negotiations among the diverse array of stakeholders involved. These benefits not only streamline the legal aspects of project management but also contribute significantly to the overall success and sustainability of energy initiatives in Finland. Additionally, the concept of the engineer, as defined in the Yellow Book, requires adaptation in Finland, where a distinct tradition of engineers in the construction market may necessitate alternative dispute resolution mechanisms.

To find a middle ground between the standardized FIDIC framework and the unique demands of extensive energy projects, it’s essential to customize and supplement it with local clauses, such as those found in YSE contracts. This approach fosters collaboration with local stakeholders and ensures that the contractual foundation aligns with the unique needs and capabilities of the Finnish energy sector stemming from, for instance, challenges associated with local subcontractors and various energy technologies.

FIDIC contracts serve as a much-needed tool in advancing Finland's energy infrastructure towards sustainability. With careful adaptation and collaboration, these contracts can navigate the complexities of the evolving energy landscape, facilitating the realization of a greener and more sustainable future for Finland.

[1] Conditions of Contract for Plant & Design-Build.
[2] Moreover, FIDIC Silver Book being the most comprehensive set of conditions for turn-key project deliveries requires a significant sized project to be applied at Finnish market, such as a nuclear plant delivery. 

Read more about the emerging trends to look out for in energy infrastructure in the latest issue of our Real Estate Gazette.