FIDIC (Turnkey)

Type/Clase : Guide de redaction / Users’s guide / Guías de redacción

Source/Procedencia : European International Contractors

129, Kurfurstenstrasse D-10785 Berlin

Date de publication : Date of publication : Fecha de publicación :

01/03/2000

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(49) 30 212 86 244

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(49) 30 212 86 285

� [email protected] Avertissement: Les contrats et guides de la présente collection ont été sélectionnés à seule fin d'illustration. Leur contenu et leur utilisation n'engagent pas la responsabilité de Juris International. Please note: The contracts and guides contained in the present collection have been selected for illustrative purposes only. Juris International shall not be liable for their contents or use. Advertencia: Los contratos y las guías de la presente colección han sido seleccionados únicamente a manera de ilustración. Su contenido y utilización no compromenten la responsabilidad de Juris internacional.

EIC Contractor’s Guide to

the FIDIC Conditions of Contract for

EPC Turnkey Projects

Foreword

FIDIC and EIC have held many constructive discussions since the September 1997 draft ofthe Conditions of Contract for EPC Turnkey Projects (known as the Silver Book) was issued.As a result of these discussions and those held with other interested parties, the first editionof the Silver Book has incorporated some improvements by comparison with the originaldraft. To EIC however, the Silver Book represents such a significant departure from FIDIC'straditional approach to the contractual and risk sharing relationship that has prevailed overthe years between Employer and Contractor that EIC has decided to take the unusual stepof publishing a contractor's guide to the Silver Book. Contractors often take comfort from thefact that a contract is to be carried out under FIDIC terms and conditions but this willcertainly not be the case where the Silver Book is used. The purpose of this guide is tohighlight the potential risks and pitfalls.

It is FIDIC's view that the individual nature of the turnkey project invariably requires a fairdegree of flexibility on the part of Employer and Contractor and extensive negotiations areessential prior to contract signature and they offer the Silver Book as a good starting pointfor negotiation. EIC does not share this view and in the preparation of this guide, EIC hastried to highlight for contractors, particularly those who may be confronted with this form ofturnkey contract for the first time, some of the more important issues to be addressed in bidpreparation and client discussions.

EIC wishes to make it clear that this document is not exhaustive and is intended forguidance only. Expert legal advice should always be obtained before submitting an offer ormaking any commitment to enter into a contract. Neither EIC nor the authors of thisdocument accept any responsibility or liability in respect of any use made by any person orentity of this document or its contents which is and shall remain entirely at the user's risk.

To ensure that this Guide provides the maximum benefit, we would like to receive commentsfrom EIC member companies on its usefulness and relevance. We would particularly like tohear about any contracts which have been put out to tender under the Silver Book. Allcommunications should be sent to the EIC Secretariat in Berlin.

EIC Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey Projects.

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Acknowledgements

EIC would like to thank the FIDIC Contracts Committee for the time they devoted toexplaining the philosophy behind the publication of the Silver Book and for listening patientlyto our arguments. We would also like to thank the Organisme de Liaison IndustriesMetalliques Europeennes (ORGALIME) and Mr Robert Akenhead QC for the importantcontributions they made in reviewing the final draft of this Guide and recommending

improvements.

EIC would also like to express its appreciation of the work carried out by members of the theConditions of Contract Working Group who produced this Guide: Lidia Amadio, Astaldi;Louise Axton-Wilkins, Costain; Eric Eggink, Ballast Nedam; John Fenwick, Amec; DrJoachim Goedel, Hochtief; Frank Kennedy (Chairman), Carillion; Andrew Lee, BalfourBeatty; Agne Sandberg, Skanska; Charles Shankland, Eiffage. Thanks also to the WorkingGroup's secretary Frank Kehlenbach and Martin Carrey of Carillion.


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Executive Summary

In their Introductory Note to the Silver Book, FIDIC describe the benefits to the Employer ofturnkey project execution and state that passing responsibility for designing and constructingthe works to the Contractor will relieve the Employer of responsibility for close supervision ofthe design and construction processes. FIDIC also maintain that there will be an increasedcertainty of the final price and fewer disputes if the Contractor assumes responsibility for thewide range of risks set out in the Silver Book. Regrettably, EIC cannot endorse this viewand believe that the Silver Book falls a long way short of meeting the objectives which FIDICset down for it.

Contractors accept that, by choosing a turnkey approach, Employers can reasonably expectthe Contract to transfer as much risk as practicable to the Contractor, offer a high degree ofcertainty on the final price, facilitate the speedy completion of the Works and, in the event ofdispute, provide for their rapid resolution. Contractors on their part, are quite prepared tocontract on a turnkey basis and accept additional risk, provided that risks can be identified,priced and managed, design and construction of the works is free of disruptive interferenceand disputes are resolved quickly and equitably.

In a number of important respects, the Silver Book does not adequately satisfy therespective aspirations of Employer and Contractor and its failure to do so is best illustratedby consideration of those matters that most commonly give rise to disputes in turnkey

projects;.inadequate definition of the scope of work,.disruption of the design and construction process,.inequitable allocation of risk and.claims and dispute resolution.

Definition of the scope of the works

It is stating the obvious to say that an offer to work on a fixed lump sum basis can only bemade if the Works are sufficiently well defined. This requires an adequate preliminarydesign, comprehensive technical specifications and clear and unambiguous performancecriteria. The Contractor will carry out the majority of these tasks in a turnkey project.However, it is essential that the Employer fully understands and accepts what is on offer andthe required clarity of understanding will only be achieved through detailed and lengthynegotiation between employer and contractor. Manifestly, this cannot possibly be achievedduring the tender period with all bidders and, until such time as agreement has beenreached, any offer should remain conditional.

The obligations placed upon contractors by the Silver Book are onerous, whereas theEmployer's most significant responsibility is limited to providing a definition of the intendedpurposes of the Works and setting criteria for testing and performance. The Employer is noteven responsible for the accuracy of the "Employer's Requirements"! The Contractor isrequired to make all necessary investigations, verify relevant information and carry outdesign in sufficient detail to price the Works. Such demands, combined with the allocation ofrisks to the Contractor which may be impossible to predict or cost accurately, may make itimpossible for the Contractor to establish precisely the full scope and extent of his liability.In particular, it will be practically impossible for the Contractor to fully comply with all of theseobligations during the tender period especially the full verification of the Employer'sRequirements and the development of a fully detailed design. Contractors must decide

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whether it will be feasible to clarify all of these matters following tender submission and priorto the signature of a binding contract. In most circumstances, contractors will be welladvised to submit an appropriately conditioned offer which makes it clear that a full andbinding offer will only be made (to the extent that this is practically possible) followingextensive and conclusive negotiations.

Arguably I the submission of a qualified bid might lead to disqualification of the Contractor'stender despite FIDIC's recommendation in their Introductory Note that it should be used as astarting point for negotiations. Clarification of the Employer's position on qualified tendersshould be established before any decision is made to submit a bid.

In many instances, clauses in the Silver Book are in direct conflict with the obligations placedon Contractors. Not only is the obligation to define the scope of the Works loosely defined, itis also subject to reviews by the Employer who has the same power to interfere throughinstructions, approvals, variations and determinations as the Engineer in a conventionalconstruct only contract. Paradoxically, should any Employer exercise his right to interfere inthis way it will inevitably undermine FIDIC's primary objective, certainty of the final price.

Disruption of the design and construction process

Only the Employer can make the choice of a turnkey contract and should only do so if hehas confidence in the competence, resources and experience of his potential Contractor. Toachieve this level of confidence demands a serious and comprehensive pre-qualification andtendering process aimed at selecting the best contractor for the project. Thereafter, therecan be no justification for detailed supervision and interference and clearly specifiedmonitoring at defined milestone events should be perfectly adequate. For a Contractor toenter into a contract of fixed time and price his obligations must also be fixed and once thecontract is signed, the Employer should not be able to unilaterally impose his will on thedesign and construction process.

The extent to which the Employer might disrupt the design and construction process is themost fundamental area of concern for contractors working on turnkey projects. FIDIC wouldappear to accept this important principle by stating in the Introductory Note to the SilverBook,

"the Employer should exercise limited control over and shouldin general not interfere with the Contractor's work".

Consequently, in the event that the Employer orders the Contractor to design or construct allor part of the works in a particular way, then the Employer must accept full responsibility forthe consequences of his actions. Should the Contractor be responsible for the achievementof any Performance Criteria then the Contractor must have the right to refuse an instruction,which, in his opinion, is likely to have an adverse effect on the achievement of thePerformance Criteria.

Allocation of risks and responsibilities

EIC accept that Contractors will bear considerably more risk under a turnkey contractcompared to that of a conventional construct only contract but EIC cannot accept the extentto which Silver Book goes in attempting to make the Contractor responsible for almost everyeventuality however unforeseeable. EIC believe that the Employer cannot pass liability forall risks to the Contractor and any contract signed under the Silver Book should clearly

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define where liability lies to ensure that contractors are in a position to accurately identify,price and manage those risks which are to be their responsibility.

The Contractor must be especially alert to uninsurable risks, risks that are completely outwith his control or risks that are likely to increase as. a consequence of the actions of theEmployer or third parties. Contractors should also be wary of those clauses, which, asdrafted, could leave the Contractor at the mercy of an unscrupulous Employer.

However, it is probable that the greatest challenge and consequently the greatest risk will bethe difficulty of checking and confirming the accuracy or adequacy of the information anddata supplied by the Employer. Contractors who accept contracts under the Silver Book areresponsible for the accuracy and correctness of all information and data regardless of itssource. Contractors are advised to take particular care with clauses dealing with thedefinition of fitness for purpose and liability for unforeseeable difficulties and adversephysical conditions.

Claims and disputes management

Despite FIDIC's claims to the contrary the Silver Book is likely to give rise to disputesbetween the Parties unless several of its provisions are modified during negotiation. Inparticular due to the time constraints placed on the Contractor to submit a notice of anintention to claim are impractical and the sanctions for non-compliance are unreasonablypunitive. By contrast the Employer is neither required to observe similar time limits norsuffer any sanction provided he gives notice as soon as practicable. This is yet anotherexample of an inequitable contract.

The Contractor should only be required to advise the Employer of an intention to claim assoon as reasonably practicable and there should be no time deadline after which thecontractor would lose his rights. This should also apply to the procedure to be followedwhere details of the claim are to be submitted. Events may have a continuing effect and it isnot always possible to establish the final effect resulting from an event until later.

A comparison of FIDIC's Conditions of Contract for Plant and Design-Build (theYellow Book) and EPC Turnkey Projects (the Silver Book)

If further evidence is required to demonstrate EIC's concerns regarding the Silver Book thefollowing comparison of these two books highlights how far FIDIC have departed from theirnormal fair-handed and equitable distribution of risk and responsibility. Consequently theYellow Book provides a useful source of reference when drafting an alternative allocation ofrisk and design responsibility. It is also extremely important to remember and to point out toclients at every opportunity that FIDIC is well aware of the fact that the Silver Book is highlyunsuitable for certain types of turnkey projects. FIDIC makes this clear in the IntroductoryNote to the First Edition by stating that it IS not suitable in the following circumstances andthat the Yellow Book should be used:

If there is insufficient time or information for tenderers to scrutinise and check theEmployer's Requirements or to carry out the necessary designs, risk assessment studiesand estimating (taking particular account of Sub-Clauses 4.12 [Unforeseeable Difficulties]and 5.1 [General Design Obligations])If construction will involve substantial work underground or work in other areas whichtenderers cannot inspect.If the Employer intends to supervise closely or control the Contractor's work, or to reviewmost of the construction drawings.


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If the amount of each interim payment is to be determined by an official or otherintermediary .

EIC consider that the following circumstances could be added to the list;

Where part of the design is made by the Employer and is binding on the Contractor -seealso comments on Sub-Clause 5.1 [General Design Obligations] in this Guide.In competitive bidding without negotiations.

As a final word the principal differences between the Yellow and Silver Books are worth

highlighting:

It should be noted however, that the above only describes the overall responsibilities of theparties and that important exceptions apply in each particular case.

Comments on a number of individual clauses follow and deal with the matters referred toabove in greater detail. Where considered appropriate comparative references are made tothe Yellow Book.

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1

General Provisions

1.4 Provides that "The Contract shall be governed by the law ofthe Country (or other jurisdiction) stated in the ParticularConditions". The Contractor should be aware that undercertain Civil Law jurisdictions some Silver Book conditions maybe considered unfair trade terms and therefore inapplicable.Also there may be mandatory laws which cannot be over riddenby the Contract.

Law and

Language

1.9 Obligates both Parties to treat the details of the Contract asconfidential. If the Contractor's design contains data which iscommercially sensitive and which he does not wish to be placedin the public domain, the second sentence of this Sub-Clause,referring to restrictions on publication or disclosure ofparticulars, should also be an obligation on the Employer.

Confidentiality

1.13 The Contractor shall comply with all applicable laws. Howeverthe responsibility for obtaining permits, licenses or approvals isnot entirely clear when Sub-Clauses 1.13 (a) and (b) are

compared:

Compliancewith Laws

Sub-Clause 1.13 (a) provides that "the Employer shall haveobtained (or shall obtain) the planning, zoning or similarpermission for the Permanent Works". Sub-Clause 1.13 (b)states that "the Contractor shall... ...obtain all permits,licences and approvals, as required by the Laws in relationto the design, execution and completion of the Works andthe remedying of any defects".

Responsibility for obtaining permissions is ambiguous andshould be clarified. For instance, what are "similar permissions"for which the Employer is responsible pursuant to Sub-Clause1.13 (a) and how do they fit with the Contractor's obligationsunder Sub-Clause 1.13 (b)?

Ideally, the Contract should include a detailed schedule of thepermits required and should identify the responsible Party. Inthe event that the Contractor is responsible, then the Employer,under Sub-Clause 2.2(b)(e) [Permits, Licences and Approvals]"shall (where he is in a position to do so) providereasonable assistance to the Contractor", Consequently,any delay in the issue of permits caused by the Employer'sfailure should entitle the Contractor to an extension of time inaccordance with Sub-Clauses 8.4 [Extension of Time forCompletion] and 8.5 [Delays Caused by Authorities].

In particular, those permits that are required to allow the projectto be developed at the Site of the Works should be specificallyidentified in the Contract as being the responsibility of the

Employer.


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Where the Contracting Party is a joint venture or consortium,this Sub-Clause requires that, the parties to such joint ventureor consortium must be jointly and severally liable to the

Employer.

1.14

Joint andSeveral Liability

Conversely, should the Employer consist of two or more legalentities then, in such a case the obligation should be reciprocal.

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This Sub-Clause relates to the Employer's obligations in respectof his personnel and contractors employed directly by him. Itshould be noted that there is no express obligation on theEmployer to secure generally that his other contractors co-operate with the Contractor other than in the respectsidentified.

2.3

Employer'sPersonnel

The effects of any delay or disruption caused by the Employer'spersonnel and contractors are dealt with under Sub-Clause 8.4(c) [Extension of Time for Completion] which provides only forgranting a time extension for such events. There is no provisionin the Contract to recompense the Contractor for theconsequential cost of delay and disruption caused by suchevents. Contractors should carefully consider the possibleeffects of such events in light of the obligation under Sub-Clause 4.12 [Unforeseeable Difficulties] where the Contractor isdeemed to have foreseen all difficulties and costs ofsuccessfully completing the Works.

FIDIC recognises the need for the Contractor to be satisfied thatthe Employer has the necessary financial strength to undertakehis obligations under the Contract. This Sub-Clause requiresthat "the Employer shall submit, within 28 days afterreceiving any request from the Contractor, reasonableevidence that financial arrangements have been made andare being maintained which will enable the Employer to paythe Contract Price".

2.4

Employer'sFinancial

Arrangements

This is a crucial obligation on the Employer, particularly wherefunding is being provided by third parties. Fundamentally, theContractor should have the right to refuse to undertake anyVariation if he believes that the available funding is insufficientto cover the varied Works. (See also comments in respect ofSub-Clause 13.1 [Right to Vary]).

The Contractor should also have a right to be made aware ofany terms, conditions or step-in rights that exist in anyagreement between the Employer and his Lenders. If anydirect agreement with regard to the project is to be madebetween the Lenders and the Contractor then the terms andconditions of such an agreement should be provided to theContractor prior to signature of Contract.

A powerful sanction is available to the Contractor should the


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Employer fail to furnish reasonable evidence. The Contractor isentitled to suspend the work or terminate the Contract underSub-Clauses 16.1 [Contractor's Entitlement to Suspend Work]and 16.2 [Termination by Contractor]. However, whatconstitutes "reasonable evidence" is undefined and theContractor should establish this prior to submitting a tender.Failure to do so could prejudice any attempt to obtain moredetailed information during the currency of the Contract, forexample in the event of a major Variation being instructed.

Contractors should give due consideration to the risk associatedwith continuing to work during the 28 day period available to theEmployer to provide the required evidence and the furtherextended notice periods required to comply with the suspensionand termination provisions.

2.5 This Sub-Clause offers some protection to the Contractor and

obligates the Employer to follow a given procedure if he

"considers himself to be entitled to any payment and/or to any extension of the Defects Notification Period".Employer'sClaims

The Employer must notify the Contractor ''as soon aspracticable" and give particulars of his claim, after which theParties may agree the claim or failing which the Employer maythen make a determination in accordance with Sub-Clause 3.5

[Determinations].

The provisions of this Sub-Clause are also mandatory in theevent that the Employer wishes "to set off against or makeany deduction from an amount due to the Contractor".

A provision entitling the Contractor to claim against theEmployer is found in Sub-Clause 20.1 [Contractor's Claims], butis much more onerous on the Contractor compared with Sub-Clause 2.5. (See comments under Sub-Clause 20.1).

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The Employer is completely free to appoint any person to act asthe Employer's Representative and/or to revoke any suchappointment. Invariably it will be important for the Contractor toestablish whether that representative will be an independentConsulting Engineer or a member of the Employer's personnel.It is also important for the Contractor to be aware of the exactnature of the duties and authority assigned to the

representative( s).

3.1

The Employer's

Representative

Contractors should appreciate a fundamental differencebetween a two Party contract such as the Silver Book andtraditional FIDIC forms of contract. Under the Silver Book, theEmployer's Representative acts directly for the Employer and isonly responsible for looking after his interests. This isparticularly relevant when compared to the role traditionallycarried out by the Engineer which required the exercise of

EIC Contractors Guide to the FIDIC Conditions of Contract for EPC Turnkey Projects.

discretion and impartiality even when fulfilling the role of

Employer's Representative.

Contractors should also take note that the powers of theEmployers Representative are potentially very comprehensive."Unless and until the Employer notifies the Contractorotherwise, the Employer's Representative shall be deemedto have the full authority of the Employer under theContract, except in respect of Clause 15 [Termination by

Employer]".

The Employer or the Employer's Representative may delegatepowers to assistants. The power to delegate authority to thesethird persons is very broad, and the Contractor should be alertto the possible confusion and interference that might arise if toomany assistants are appointed. The Contractor is entitled toreceive a copy of the written delegation which describes clearlythe role of the assistant or the like and the delegation does notbecome effective until received by the Contractor.

Other

Employer'sPersonnel

This Sub-Clause is very specific in terms of what constitutes aninstruction under the project and requires that "Each instructionshall be given in writing and shall state the obligations towhich it relates ". Contractors should ensure that allinstructions comply with these requirements and should note thatverbal instructions would appear to have no validity under theContract.

Instructions

3.5 Notwithstanding the fact that FIDIC has drafted the Silver Bookas a two-party contract, the Employer is given the unilateralright under this Sub-Clause to determine matters in respect of abroad range of matters. The thinking behind this waspresumably to ensure that decisions are taken when required tominimise delay. The Employer has such rights in respect of theSub-Clauses listed below.

Determinations

2.1 [Right of Access to the Site];2.5 [Employer's Claims];4.19 [Electricity, Water and Gas];4.20 [Employer's Equipment and Free-issue Materials];4.24 [Fossils];7.4 [Testing];8.9 [Consequences of Suspension];9.4 [Failure to Pass Tests on Completion];10.3 [Interference with Tests on Completion];11.4 [Failure to Remedy Defects];11.8 [Contractor to Search];12.2 [Delayed Tests];12.4 [Failure to Pass Tests after Completion];13.3 [Varia,tion Procedure];13.7 [Adjustments for Changes in Legislation];14.4 [Schedule of Payments];15.3 [Valuation at Date of Termination];16.1 [Contractor's Entitlement to Suspend Work];

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17.4 [Consequences of Employer's Risks];19.4 [Consequences of Force Majeure];20.1 [Contractor's Claims].

It may seem strange that one of the parties has the right tomake determinations regarding the respective rights of theparties. This was normally reserved for the truly impartialengineer -a rare bird nowadays. However, the Contractor isnot obliged to give effect to the determination provided he givesnotice of his dissatisfaction within 14 days in which case thedetermination is not binding.

The fact that the Employer has the right to make adetermination is not necessarily against the interests of theContractor. If no agreement is achieved and the Employer failsto make a fair determination then this will be a breach ofContract and the Contractor may refer the matter to theDisputes Adjudication Board.

No time limit is placed upon the Parties reaching agreement andthe Sub-Clause does not define a period in which the Employeris required to make a determination. It is suggested that a timelimit of 28 days should be imposed on the Employer to reachagreement with the Contractor and that a further 14 days areprovided for making a determination upon failure to reach

agreement.

The Contractor must be aware that the Sub-Clause places noobligation of the Employer to label his decision a determination.Conversely, the Contractor is required to "give notice, to theEmployer, of his dissatisfaction with a determination within14 days of receiving it". Consequently in cases of dispute asto whether a communication was a determination or otherwise itwould be very unusual and grossly unfair for the Contractor losehis rights simply as a result of a failure to comply with theobligation to notify. However, every effort should be made toavoid dispute by establishing whether a communication from theEmployer constitutes a determination or not. Avoidance ofdoubt is the safest way of ensuring that there is no loss ofentitlement through any failure to lodge the required notice.

4 The Contractor

Clauses 4 [The Contractor] and Clause 5 [Design] set out theprincipal obligations and risks which are to be carried by theContractor and both are much more onerous than any imposedby previous FIDIC Conditions of Contract. These two clausesinteract with each other on a number of very important issues andshould be studied together to ensure that the extent of acontractor's potential exposure is fully understood. The principalmatters in Clause 4 which justify meticulous analysis and prudentappraisal are:-Fitness for purpose, Sub-Clause 4.1 [Contractor's General

EIC Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey Project

Obligations] ,Nominated subcontractors, Sub-Clause 4.5 [Nominated

Subcontractors],Setting out, Sub-Clause 4.7 [Setting Out],Site Data, Sub-Clause 4. 1 0 [Site Data],Unforeseen difficulties, Sub-Clause 4.12 [Unforeseen

Difficulties].

4.1 Fitness for purpose obligations are of particular concern where acontract is carried out under jurisdictions based on English Law orCommon Law. It may be less of an issue under otherjurisdictions where fitness for purpose obligations have beencommon practice for many years. However the issues discussedbelow are relevant to both situations.

Contractor'sGeneralObligations

According to this Sub-Clause, "When completed, the Worksshall be fit for the purposes for which the Works areintended as defined in the Contract".

Under Sub-Clause 5.1 (b) [General Design Obligations] theEmployer is responsible for the correctness of the definition ofintended purpose. Immediately however, we must consider thewider implications of Sub-Clause 5.1, which requires theContractor to satisfy himself as to the accuracy of the Employer'sRequirements. Contractors must therefore ensure that thedefinition is clear and unambiguous and that it is not open to re-interpretation at a later date. If a satisfactory definition is notavailable prior to tender submission then it would be prudent inalmost all circumstances to prepare a definition acceptable toboth Parties prior to contract signature. Failure to do so couldlead to dispute later.

With regard to the full extent of the obligation to design for fitnessfor purpose it may not be possible to pass the full liability on toany third party design consultant appointed by contractors.Current practice is for consultants to accept only an obligation todesign with "reasonable skill and care" because insurance tocover the risk associated with fitness for purpose is not presentlyuniversally available and is a particular. problem for Britishconsultants.

In a perfect world, it should be obvious to all concerned thatcontractors cannot, within their lump sum price, be responsible forproviding everything that an Employer later claims that heunderstood to be included. In reality, some Employers willchoose to use the Silver Book for that very reason. Anunscrupulous Employer could argue that the Contractor isresponsible for an omission and refuse to issue a variation order.The Contractor's only protection against this type of behaviour isto prepare and agree as comprehensive and as detailed aschedule, as it is possible to prepare, setting out exactly what it isthat is being provided.

Failure of the Works to be fit for purpose carries punitive

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sanctions limited only by the terms of Sub-Clause 17.6 [Limitationof Liability].

4.5 The concept of an Employer nominating a subcontractor ishardly compatible with the obligations of the Contractor in aTurnkey Contract. Whilst this Sub-Clause does contain aprovision for the Contractor to "raise reasonable

objection...with supporting particulars", it does not conveyan absolute right to reject a nomination. Manifestly, it isimpossible to comply with such a requirement where theContractor's concerns arise, say, from the relationships that areperceived to exist between the Nominated Subcontractor andeither the Employer or his advisers. Contractors would be welladvised to avoid or re-negotiate the terms of any contract thatenvisages such an arrangement.

Nominated Sub-Contractors

In the event that the Employer instructs the employment of aparticular subcontractor despite the Contractor's reasonableobjections then the Contractor will have a very strong caseagainst the Employer to recover all of his costs arising from thedefault of the Subcontractor.

This Sub-Clause spells out the obligations of the Contractor.However, there is no equivalent or corresponding obligation onthe Employer to secure that his directly employed "othercontractors" co-ordinate or co-operate with the Contractor. Inmost contracts, but especially those where the Employer intendsto place significant other contracts, it would be prudent to ensurethat the Employer assumes clear and reciprocal obligations.

4.6

Co-operation

4.7

Setting Out

Taken at face value, the obligations under this Sub-Clause wouldappear to be fair and reasonable and in accordance with normalpractice. "The Contractor shall set out the Works...and shallbe responsible for the correct positioning of all parts of theWorks, and shall rectify any error". However, Sub-Clause 5.1[General Design Obligations], which deals with the Contractor'sdesign obligations, makes the Contractor responsible for theaccuracy of the information provided by the Employer! There aresome exceptions to this general requirement, but they are atbest, limited and somewhat confusing in their application. Twocourses of action are open to contractors:-If practicable, check the setting out data prior to

submission of the tender, or-Clarify the basis of the offer and propose that the

Employer retain responsibility under Sub-Clause 5.1.

The question of responsibility for data is discussed moreextensively under Sub-Clause 4.10 [Site Data] and Clause 5

[Design].

4.10 The obligations and risks to consider under this Sub-Clause are

essentially similar to, but much more wide-ranging than, thoseidentified above under Sub-Clause 4.7[Setting Out]. "The

Employer shall have no responsibility for the accuracy,sufficiency or completeness of such data, except as stated in

Site Data


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Sub-Clause 5.1 [General Design Obligations]." Put simply,whatever the source, the Contractor is responsible for verifyingdata. In particular, the Contractor is responsible for verifying andinterpreting all data on subsurface and hydrological conditions,including environmental aspects. Such obligations are extremelyonerous. The precise extent to which the exceptions offeredunder Sub-Clause 5.1 are actually applicable to the data suppliedto the Contractor is debatable and it is recommended that theterms of the exceptions on offer in each individual contract becarefully scrutinised.

Significantly, the disclaimer covers any information providedduring the performance of the Works. Consequently theContractor cannot rely on information provided by the Employerduring the execution of the Contract and must always thereforeestablish its veracity unless the Employer retains liability underSub-Clause 5.1 [General Design Obligations].

FIDIC recognise that, under certain circumstances, it will beimpossible for contractors to comply with these obligations andpropose a way out of this particular dilemma. They suggest, inthe Introductory Note, that the Silver Book is not suitable for usewhere "there is insufficient time or information for tenderersto scrutinise and check the Employer's Requirements or forthem to carry out their designs, risk assessment studies andestimating". FIDIC go on to state that, if contractors believe thatsuch a situation pertains then they are advised to draw theEmployers attention to FIDIC's own recommendation which is tosuggest a suitable alternative form of contract e.g. the YellowBook! Instead of admitting that the Silver Book is inadequate onthis important issue and amending it, they leave the Employerand the Contractor to choose a totally different form of contract atsuch a late stage in the implementation process that theirproposal cannot be considered a credible alternative! Inevitably,it must be concluded that FIDIC have opted out and ducked thetask of solving a difficult problem of their own making.

4.12 The language used in this Sub-Clause is uncompromising in theextreme and its scope and application are much more wide-ranging than any previous clause covering unforeseen conditions.The consequential effects of all unforeseen difficulties are passedto the Contractor, "Except as otherwise stated in theContract". Sub-Clause 4.12 (b) requires the Contractor toforesee and allow in the price for every eventuality howeverunforeseeable! Presumably this is intended to include events thatare completely out with the control of the Contractor. It is difficultto imagine a clause which would be more threatening tocontractors and which would leave them more open tounscrupulous Employers who could allege that any difficulty,however inconceivable at tender stage, could be laid at theContractor's door under this Sub-Clause. Contractors shouldbeware!

UnforeseeableDifficulties

EIC Contractor's Guide to the FIDIC Conditions of Contract tor EPC Turnkey Projects.

16

On certain projects there could well be an inconsistency betweenthis Sub-Clause and Sub-Clause 2.1 [Right of Access to Site]which requires the Employer to give the Contractor the "right ofaccess" to the site. A matter to be clarified pre-contract.

Access Route

The requirements of this Sub-Clause are unnecessarily detailedand over prescriptive. Contractors would be well advised toagree at tender stage a more appropriate format for the particularcontract.

ProgressReports

5

A number of references have already been made to Clause 5,largely because it deals with the responsibility of the respectiveparties for the basic data, and it is for that same reason that it isconsidered to be one of the most important in the Silver Book. Ashas already been explained, Clause 5 [Design] establishes thefundamental and crucial principle that the Contractor has wideresponsibility for the correctness of the Employer's Requirementsand there are only limited and inadequately defined exceptions tothis principle. It is in the Contractor's interest to make allproposed exceptions clear and precise.

5.1 This is a complex Sub-Clause with many potential pitfalls for theunwary and it is well worth having a further look at the majordisclaimer it contains. "The Employer shall not be responsiblefor any error, inaccuracy or omission of any kind in theEmployer's Requirements as originally included in theContract". The problem created by this statement is particularlyevident when considering the important matter of the Employer'sresponsibility for design criteria. This would normally be theEmployer's responsibility, yet the Silver Book fails to establish thisas a fundamental principle and this should be covered by theexceptions provided for in this Sub-Clause.

General Design

Obligations

The Sub-Clause is equally vague on the likely content of theEmployer's Requirements. The whole case for producing aturnkey form of contract such as the Silver Book was based onthe thinking that the Contractor must comply with the Employer'sRequirements and carry all risks in doing so. Yet the onlyindication in the Silver Book of what the Employer's Requirementsmight be or what they might contain is contained in the GuidanceNotes. According to FIDIC they are to be specifically prepared

project by project by "suitably-qualified engineers", no doubttaking many months to do so! Notwithstanding all of theseconsiderations, the Contractor is expected, prior to submission ofthe Tender, to check the Employer's Requirements and to verifyhis design criteria and calculations. To do this properly andestablish a high degree of confidence in the Employer's datawould be an enormous undertaking.

Design criteria encompass many and varied technical mattersthat include amongst other things, quality standards, processdesign, capacity, design life and, in the case of process andpower plants, equipment specifications. The Contractor must not


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only establish whether the design criteria are factually correct butmust also establish whether they are adequate to achieve thedesired performance and intended purpose, all in the limited timeavailable during the tender period! Inevitably, it will be prudent forcontractors to establish their own design criteria to ensurecompatibility with their own design and to make this an integralpart of the offer, even where design criteria have been providedby the Employer.

Employers are likely to insist that performance criteria anddefinitions of intended purpose be complied with even if thetechnical specification fails to produce satisfactory compliance.Contractors must understand therefore that the Employer'sdefinition of intended purpose and his required performancecriteria will invariably take precedence over detailed technical

specifications.

Paradoxically, it could well be that in situations where theperformance criteria are vague or are difficult to measure, then astatement of and compliance with a detailed technicalspecification could be a more appropriate safeguard.

Whilst there is no specific declaration to limit the Contractor'sresponsibility for omissions it should be reasonably limited to thephysical limits of the Works, especially if the alleged omissioncould not reasonably be established by a careful study of theintended purpose or from legal requirements or standards. To beon the safe side, proposals should be appropriately clarified.

The exceptions offered under Sub-Clause 5.1 are of fundamentalimportance to the Contract. They would appear to mitigate manyof the Contractor's extremely wide responsibilities for thedefinition and specification of the Works. It is crucial to keep sub-paragraphs (a) to (d) in mind when studying the Employer'sRequirements and negotiating the Contract. They are importantenough to consider one by one.

Sub-Clause 5.1 (a) states that, "portions, data and informationwhich are stated in the Contract as being immutable". Thismeans that they are incapable of being changed and are,therefore mandatory on the Contractor and must be theresponsibility of the Employer. It is therefore very important tocheck and confirm that the Employer's Requirements state veryspecifically which parts are immutable. This is such an importantmatter that it must not be left to post contract interpretation andargument. Of particular importance is the need to identify anypart of the Employer's Requirements which uses the term "theContractor shall" in respect of any data or information, as thiscould well make the requirement immutable, insofar as it isincapable of being changed by the Contractor.

Under Sub-Clause 5.1 (b), the Employer is responsible for thecorrectness of the definition of the intended purpose and it isreasonable to conclude therefore that the Employer also retainsresponsibility for ensuring that it actually fulfils his needs.


18

Unfortunately, the Silver Book does not deal with the situationwhere the Employer has provided no clear and identifiabledefinition. If this important issue is left unresolved, it could well bethat the definition could only be established later by aninterpretation of the Employer's Requirements. Such a situationwould be unsatisfactory in the extreme and contractors would bewell advised to insist that a definition be provided in the

Employer's Requirements.

Criteria for testing and performance is normally the Employer'sresponsibility and this is as stated in Sub-Clause 5.1 (c), so thisissue should not be a problem. Again however, contractors wouldbe well advised to satisfy themselves that they are appropriate totheir proposed design for the particular project.

Sub-Clause 5.1 (d) will undoubtedly give rise to a significantamount of discussion. According to this Sub-Clause the Employeris responsible for "those portions, data and information whichcannot be verified by the Contractor, except as otherwisestated in the Contract". This is, to put it mildly, an interestingstatement. The words "cannot be verified" are obviously open tointerpretation but in this context, probably mean that it is eitherimpossible or impractical to verify. Nowhere in the Contract orguidance notes is advice offered on how this is to be decided oragainst what yardstick it is to be measured. It might be assumedthat the available time would be a deciding factor and yet nocomfort is offered to the Contractor by including a statement suchas "with reasonable regard to time and economy". However, inthe event of dispute, commercia] practicality could still be areasonable defence when interpreting the word "cannot". In thelong term, only arbitrators or the courts will establish where theborder lies between "can be verified" and "cannot be verified".

It would certainly be sensible for contractors to state in theirtenders which parts of the Employer's Requirements could not beverified. Such a statement should at least lead to a discussion toestablish who is to be responsible for which information. It isimportant that these matters are agreed before the Contract issigned if dispute is to be avoided later.

5.2 Most contractors would agree that an orderly flow of technicalinformation is critical to the success of a turnkey project. Yet, theSilver Book does not specifically address this issue but, under theterms of Sub-Clause 5.2, actually invites a situation where theEmployer, or his adviser, can seriously disrupt and delay thedesign and construction process by repeatedly reviewingdocuments before giving permission for construction to proceed.

Contractor'sDocuments

Regrettably, this is not uncommon in turnkey projects, especiallythose where the Employer has appointed a consulting engineer,'independent' from his own organisation. To delay thecommencement of construction until reviews of the contractorsdocuments are completed to the satisfaction of the Employer is, toput it mildly, a recipe for disaster. The provisions for review ofdocuments are overly prescriptive and give the Employer too


19

much freedom to interfere with and disrupt the Contractor's

design.

The Contractor has total responsibility for achieving theperformance criteria and must therefore have total freedom toachieve this objective free of the Employer's interference.Contractor's Documents should be given to the Employer forinformation and the Contractor should at his own risk, be entitledto proceed with construction. To avoid potential conflict,contractors should set out in their tender document a clear andpractical programme for the submission of all data, design andtechnical information required by the Employer and this shouldinclude a specific provision for work to proceed at all times, at theContractor's risk. The Contractor's offer should be clarifiedaccordingly and, to avoid dispute later, any differences of opinionon the procedure to be adopted should be resolved prior tocontract signature.

5.3 The apparently simple undertaking required by this Sub-Clausehides a potentially dangerous inconsistency with Sub-Clause 5.1

[General Design Obligations]. Manifestly, "the documentsforming the Contract", include the Employer's Requirementsand, subject to certain exceptions, Sub-Clause 5.1 makes theContractor responsible for their accuracy. Notwithstanding this,Sub-Clause 5.3 requires the Contractor to design and execute theWorks to comply with the Employer's Requirements even if theyare defective or deficient. Furthermore, the Contractor has nopower to vary the Works without an instruction from the Employerwho is not bound to issue one! This obvious ambiguity should beresolved pre-tender.

Contractor's

Undertaking

5.4 This Sub-Clause should ensure that there is no open-endedobligation on the Contractor to amend the Works at his cost inorder to comply with the very latest design standards even ifpublished after the tender has been submitted. The Contractorshould check however that the Particular Conditions do notamend or override this Sub-Clause. However, there is nomechanism in the Contract to resolve any ambiguity between theCountry's technical standards and the Employer's Requirements.Yet another matter for pre-contract discussions.

TechnicalStandards and

Regulations

7 Plant, Materials and Workmanship

7.6 A surprising omission is the lack of any express provision thatpermits the Employer to order a repair as opposed to removal,replacement or re-execution and the Contractor should have theright to carry out repairs to render the Plant or Materialsacceptable and in accordance with the Contract. Should theEmployer insist on a replacement in such situations then he shouldbear the additional cost.

Remedial Work

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8

8.3 This Sub-Clause obliges the Contractor to give advance warning,is a new feature of the FIDIC Conditions and requires that, "theContractor shall promptly give notice of specific probablefuture events or circumstances which may adversely affector delay the execution of the Works".

Programme

Contractors should consider whether, if such warning i~ given, itcould have an impact on the starting point for calculating thenotice periods under Sub-Clause 20.1 [Contractor's Claims]. Itwould be only fair if this obligation to give warning is madereciprocal and applies to the Employer as well.

The Contractor's entitlement to an extension of Time forCompletion is limited by comparison with the Yellow Book. Aright to extension exists if the delay is due to a Variation Order, toa delay caused by the Employer or his other contractors or if aright to extension exists under any other Sub-Clause of theseconditions, i.e.

8.4

Extension ofTime forCompletion

2.1

7.4

8.5

13

Failure by the Employer to give access to andpossession of the Site.(Cost plus reasonable profit added to Contract Price).Discovery of fossils etc.(Cost but no profit added to Contract Price).Delayed testing caused by Employer (see also Sub-Clause 10.3).(Cost plus reasonable profit added to Contract Price)Delays caused by Authorities.(Extension of time only).Suspension initiated by Employer (see also Sub-Clause16.1 ).(Cost but no profit added to Contract Price).Interference with testing by Employer (see also Sub-Clause 7.4).(Cost plus reasonable profit added to Contract Price).The time consequences of variations are dealt with inSub-Clause 8.4(a)Changes in Legislation.(Cost but no profit added to Contract Price).Suspension initiated by Contractor (see also Sub-Clause

8.9).(Cost plus reasonable profit added to Contract Price).Employer's Risks.(Cost but no profit added to Contract Price).Force Majeure.(Cost but no profit added to Contract Price).

The variable remedies open to contractors should be carefullynoted i.e. time only, time and cost and time, cost and profit.Here again, FIDIC's logic is difficult to follow.


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The Red and Yellow Books contain, in addition to those,mentioned in the Silver Book, the right to an extension of time inthe following cases:(i) exceptionally adverse climatic conditions;(ii) unforeseeable shortages in the availability of personnel or

goods caused by epidemic or governmental actions; or(iii) in the event of adverse physical conditions.

None of the new FIDIC Contracts contain the sweep-up clausefound in the 4th Edition of the Red Book which refers to "otherspecial circumstances",

It could be argued that the Force Majeure provision in Sub-Clause19.1 [Definition of Force Majeure] gives the Contractor a right toan extension of time in the events listed above under (i)-(iii).Manifestly, exceptionally adverse climatic conditions should be aForce Majeure event, as should shortage in personnel and goodsalbeit depending on the reason for such shortage. The differencebetween an undisputed contractual right to an extension of timeand claiming Force Majeure is that additional requirements mustbe satisfied for the latter such as the delaying event could nothave been provided against before entering into the Contract noravoided nor overcome when it happens. The existence of a rightto an extension of time is not dependent on these requirements.

If, in the opinion of the Employer, the Contractor is working tooslowly he can instruct acceleration measures. This applies notonly when the agreed Time for Completion is at risk but alsowhere "progress has fallen (or will fall) behind the currentprogramme under Sub-Clause 8.3 [Programme]".

8.6

Rate

Prog

This type of clause is normally found in construction contractswhere the Employer or his engineer has produced the design andtherefore has know-how sufficient to follow closely the actualconstruction of the works and construction methods. In a turnkeycontract, the Employer has less detailed knowledge.

With the increased responsibility for the Contractor under theSilver Book it should follow that the Contractor has more freedomto execute the Works at his own pace as long as he complies withthe Time for Completion or other contractually agreed dates. It isperfectly feasible to sustain a position which maintains that it is forthe Contractor to decide whether acceleration measures shouldbe undertaken or not, particularly if the Employer's justification foracceleration is that although the Contractor has not yet fallenbehind he "will fall" behind. Contractors should have a strongincentive to adhere to the programme in any event, as their rightto payment is normally tied to meeting programme milestonestied to a payment plan.

EIC Contractors Guide to the FIDIC Conditions of Contract for EPC Turnkey Projects

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8.7 The maximum amount of Liquidated Damages shall be stated inthe Particular Conditions. However, damages in the event ofdelay can exceed this amount e.g. if the Contractor has to pay theEmployers costs under Sub-Clause 8.6 [Rate of Progress] or theContract is terminated.

Delay Damages

It is not unusual for contracts to state that that the Employer maynot terminate the Contract before the aggregate of liquidateddamages has reached the maximum amount. The Silver Bookdoes not contain such limitation but, on the other hand, inaccordance with Sub-Clause 15.2 [Termination by Employer]there have to be qualified reasons for termination due to delay.

If the Contract is terminated due to delay then the Contractor willhave to pay all losses and damages suffered by the Employer-(see Sub-Clause 15.4 [Payment after Termination]). However,such loss and damage may not include loss of profit or otherindirect damages and the maximum liability is limited under Sub-Clause 17.6 [Limitation of Liability].

9

The references in this Sub-Clause to Sub-Clause 7.4 [Testing](fifth paragraph) and Sub-Clause 10.3 [Interference with Tests onCompletion] are confusing because these sub-clauses providerelief to the Contractor for the circumstances set out in those sub-clauses and not specifically for those set out in Sub-Clause 9.2

[Delayed Tests].

9.2

Delayed Tests

9.4 If the Works fail to pass repeated Tests on Completion and thefailure "deprives the Employer of substantially the wholebenefit of the Works or Section..." then the Employer has theright to reject the Works, terminate the Contract, recover all sumspaid for the Works, plus financing costs, costs for dismantling theWorks and clearing the Site.

Failure to PassTests on

Completion

It is obvious that the Contractor will suffer catastrophic financialconsequences if the Contract Price has to be repaid together withfinancing costs and the costs of dismantling the Works andreinstating the Site.

It is conceivable that there could be contracts where such asevere remedy is justified, where, for example the Contractor hasdeveloped a unique know-how for a complete production processand it fails to perform as guaranteed and no other contractor iscapable of putting it into satisfactory working order. In suchcircumstances, it would be unreasonable to expect the Employerto bear the consequences of the Contractor's failure.

On the other hand, current practice in the event of termination isthat the Contractor is entitled to payment for the value of theWorks completed at the date of termination. Thereafter, it is up tothe Employer to decide whether or not to complete the Workswith another contractor. In both situations the Contractor must


23

pay the Employer's additional costs. In circumstances where theWorks contain technology which is "in the public domain", thenthe same principle should apply. However, it should berecognised that in such a case design responsibility for the wholeof the Works could rest with the new Contractor and contractorsfaced with such a prospect should take due regard of the risksinvolved. It is important to understand the implications of thisrequirement, as the Contractor could be in a very serioussituation in the event that Tests on Completion are notsuccessful.

It is important, in relation to this Sub-Clause to consider the

limitation of liability under Sub-Clause 17.6 [Limitation of

Liability].

10

According to this Sub-Clause, "Parts of the Works shall notbe taken over or used by the Employer, except as maybe agreed by the parties". It fails to address the situation wherethe Employer uses the Works or part of the Works without theagreement of the Contractor. Various difficulties and risks couldarise in such a situation none the least of which would be damageto the Works, which may not be covered by insurance. TheYellow Book offers a way out in Sub-Clause 10.2 [Taking Over ofParts of the Works] which states that "... if the Employer doesuse any part of the Works before the Taking-Over Certificateis issued: (a) the part which is used shall be deemed to havebeen taken over as from the date on which it is used "

Taking Over ofParts of theWorks

11

The Contractor shall at his own cost remedy defects caused bythe design of the Works.

Cost of

RemedyingDefects

Sub-Clauses 4.1 [Contractor's General Obligations] and 5.1[General Design Obligations] make it absolutely clear that theContractor is fully responsible for the design of the Works,including the correctness of the information on which he basesthe design subject only to the important exceptions in Sub-Clause 5.1. As written this means that the Contractor takesresponsibility for any design supplied by the Employer.

No exception is made for the situation where part of the design issupplied by the Employer or the defect in the design is due toincorrect information or design criteria for which the Employerremains responsible in accordance with Sub-Clause 5.1. It isclearly a flaw in the Silver Book that such important exceptionsare not expressly referred to. This is an unsatisfactory state ofaffairs and the Contractor should not be left to rely on a court orsimilar to establish that a reasonable interpretation is that aresponsibility allocated to the Employer under Sub-Clause 5.1should also have the effect that the Employer takes the risk and


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cost for remedying defects caused thereby. The Employer'sresponsibility under Sub-Clause 11.2 (a) should be entirelyconsistent with that set out in Sub-Clause 5.1.

It is therefore recommended that the Parties clarify this matter inthe Particular Conditions. This will be particularly importantwhere the Employer has responsibility for supplying a widerange of information or for important parts of the design. It isinteresting to note that Sub-Clause 11.2 (a) in the Yellow Bookhas specific wording to cover just this situation.

It should also be noted that a similar ambiguity exists and ishighlighted under Sub-Clause 17.3 [Employers Risks] andunderlines the importance of getting the exclusions under Sub-Clause 5.1 absolutely correct.

11.4 If the Contractor fails to remedy a defect and the defect ordamage "deprives the Employer of substantially the wholebenefit of the Works or any major part of the Works..." thenthe Employer is entitled to recover all sums paid for the Works,plus financing costs, costs for dismantling the Works andclearing the Site. These are indeed punitive sanctions andcontractors must carefully consider whether the risks they carryunder the Silver Book are commensurate with the likely rewardfor performing the Contract.

Failure toRemedy Defects

This Sub-Clause is similar in effect to Sub-Clause 9.4 [Failure toPass Tests on Completion] where more comprehensivecomments have been made.

13

13.1

Right to Vary

The Employer may initiate Variations prior to issuing the TakingOver Certificate for the Works, and the Contractor has onlylimited grounds for refusing to undertake the instructed Variation,which are:"(i) the Contractor cannot readily obtain the Goods requiredfor the Variation, or (ii) it will reduce the safety or suitabilityof the Works, or (iii) it will have an adverse impact on theachievement of the Performance Guarantees",Notwithstanding any objections raised by the Contractor, theEmployer may still confirm his instruction.

The Employer's right to unilaterally issue Variations does not fitwell within the concept of an EPC Turnkey Contract and thegrounds that permit the Contractor to object to a Variation are toorestrictive. It should be at the Contractor's sole discretion torefuse or accept a Variation if he believes that the price offered iswholly inadequate, the Variation will have an adverse effect onthe undertaking of any of his obligations under the Contract or,following a request by the Contractor under Sub-Clause 2.4[Employer's Financial Arrangements], the Employer is unable toprovide evidence that satisfactory financial arrangements are inplace and being maintained to pay for the addition to the Contract


25

Price resulting from the Variation Order.

Should the Employer instruct the Variation despite the Contractorgiving notice that he will not consider himself bound by theVariation, then the only remedy open to the Contractor is to referthe matter to the Dispute Adjudication Board.

This Sub-Clause provides that the Contractor may, but is underno obligation to, make proposals to amend the Works that willbenefit the Employer.

Value

Engineering

Unreasonably, what is not provided is a process whereby thetwo Parties share the benefits of any value engineeringundertaken by the Contractor.

The Contractor may therefore wish to consider how he should bereimbursed for his additional efforts, or agree a method of sharingthe enhanced benefits to be enjoyed by the Employer.

This Sub-Clause represents a dramatic departure from normallyaccepted practices for dealing with the valuation of Variationsand Contractors would be well advised to agree the price of allVariations before starting the additional work.

VariationProcedure

The procedure outlined places the onus on the Contractor toprepare the design and price and to re-programme the Works toaccommodate the proposed Variation. The Employer may thenapprove, disapprove or comment upon the Contractor'ssubmission. The procedure will involve the Contractor in a greatdeal of additional effort and expenditure that may not berecoverable if the Variation is not approved or is substantiallyamended by the Employer. Accordingly, the Employer should bemade aware at the time of Tender that the Contractor will expectto recover such additional expenditure.

If the price of a Variation is not agreed, then it shall beunilaterally determined by the Employer under Sub-Clause 3.5[Determinations], and ultimately, in the event of disagreement,by the Disputes Adjudication Board or Arbitrator. "Reasonable"profit will be allowed but this does not necessarily mean thesame profit margin as is built into other contract rates or in pricesfor comparable works or that comparable rates will apply.

It is not clear whether the Contractor is liable for any designassociated with Provisional Sums. In the absence of anyexpress provision it may well be that the Contractor is held to beresponsible under Sub-Clause 5.1 [General Design Obligations] .Again, an issue to be sorted pre-contract. Attention is drawn tothe Guidance Notes which indicate that Provisional Sums shouldonly be used for minor supplies.

ProvisionalSums


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This Sub-Clause contains provisions in respect of the recoveryof additional Costs associated with changes in legislation.

Adjustments forChanges in

LegislationContractors should note however that the recovery of losses onlyapplies to changes in legislation in the Country in which the Siteof the Permanent Works is located.

14

Provision is made for the Contractor to receive an AdvancePayment as an interest-free loan for his mobilisation and designprovided that the amount of the advance is stated in theParticular Conditions.

Advance

Payment

If an advance is specified in the Particular Conditions then itspayment will only be made after receipt by the Employer of "(i) aStatement (under Sub-Clause 14.3 [Application for InterimPayments], (ii) the Performance Security in accordance withSub-Clause ~.2 [Performance Security], and (iii) a guaranteein amounts and currencies equal to the advance payment".The advance payment may be paid in instalments. However thenumber and timing must be stated in the Particular Conditionsand the Contractor will require the advance payment guaranteeto recognise this.

Within Sub-Clause 14.7 [Timing of Payments], paragraph (a)states that the first instalment of the advance payment shall bepaid within 42 days after the date on which the ContractAgreement came into full force and effect, or within 21 days afterthe Employer receives the documents in accordance with Sub-Clause 4.2 [Performance Security] and Sub-Clause 14.2 ,whichever is later. Contractors may consider these periods toolong before receipt of the advance and could indeed requirepayment of the advance as a condition precedent to thecommencement of work on Site

To initiate the payment process the Contractor is to submit aStatement at the end of the period of payment which period is tobe stated in the Contract. If no period is stated, the submissionis to be at the end of each month.

Application forInterim

Payments

To be valid, the Statement must include items detailed in Sub-Clauses 14.3 (a) to (t). It must also include the progress reportswhich are defined within Sub-Clause 4.21 [Progress Reports], anonerous precondition for the receipt of payment.

Sub-Clause (a) requires that the contract value of the Worksexecuted be estimated unless defined in accordance with Sub-Clause 14.4 [Schedule of Payments]. It does not detail how theestimate is to be prepared in a manner that will be acceptable tothe Employer. Accordingly, a suitable procedure should beagreed with the Employer. The Statement should also containthe various additions and deductions to be made to the contractvalue of the Works.


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Sub-Clause 14.5 [Plant and materials intended for the Works]below, makes provision for payment to be made in respect ofcertain Plant and Materials which are in the Country in which theWorks are located but which are not yet on Site. Howevercontractors should be aware that there are no provisions tomake payments in respect of any Plant and Materials whichhave not been included in the entitlement under Sub-Clause14.5, or for those which are either stored outside the Country ofthe Works or which have been delivered to the Site but are notincorporated in the Permanent Works. It is recommended thatamended payment procedures be negotiated prior to Contract

signature.

The amount of any Retention Money is to be stated in theParticular Conditions and the Contractor may wish to includeprovisions that permit him to provide a retention guarantee in lieuof the Employer retaining cash.

The Contract may provide for payment to the Contractor basedupon a Schedule of Payments and if so, "the instalmentsquoted in the Schedule of Payments shall be the estimatedcontract values for the purposes of sub-paragraph (a) ofSub-Clause 14.3 [Application for Interim Payments]".

Schedule of

Payments

If the instalments are not defined by reference to actual progressachieved then the Employer is entitled to revise any paymentinstalment by making a determination under Sub-Clause 3.5[Determinations] which will take into account any delay inprogress. Equally, the Contractor could request that, when theWorks are ahead of programme he is entitled to an appropriateincrease in the scheduled payment.

If it is intended that the Schedule of Payments be based on theachievement of specific Milestone Events then this should beexpressly stated. Otherwise, payments would be based on theactual value of work done.

This Sub-Clause provides for payment in respect of Plant andMaterials provided they are in the Country in which the Worksare located. To obtain payment, the Contractor is to mark therelevant Plant and Material as being the property of theEmployer or provide suitable insurance together with aguarantee equal to the value of the payment to be made. (Seealso comment under 14.3 [Application for Interim Payments]

above).

Plant andMaterialsintended for theWorks

The provisions for withholding payment in this Sub-Clause arepotentially harsh. For instance, if the Contractor, in theEmployer's view, is allegedly proceeding without "dueexpedition", in apparent breach of Sub-Clause 8.1[Commencement of Works], the Employer could maintain thatthe whole of the value of the delayed works should be withheld.A most unsatisfactory and unacceptable situation.

Interim

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This Sub-Clause details the periods within which payment is tobe made by the Employer in respect of the advance, interim andfinal payments. By comparison with well-established norms, theperiods proposed are excessive and contractors may wish tosuggest more reasonable intervals.

Timing of

Payments

The amount of any Retention Money will be defined within theParticular Conditions and this Sub-Clause provides for the firsthalf of the Retention Money to be released after the Taking-OverCertificate has been issued provided that the Works havepassed all specified tests, including any Tests after Completion.

14.9

Payment ofRetentionMoney

It is important to fix a date for any tests to be carried out aftercompletion to avoid any delay to the release of the moiety of the

retention.

The outstanding balance of the Retention Money is to be paid"promptly" after expiry of the latest expiry date of the DefectsNotification Period(s). Sub-Clause 1.1.3.7 provides that if nosuch period is stated in the Particular Conditions then thedefects Notification Period shall be 12 months and under Sub-Clause 11.3 [Extension of Defects Notification Period] the periodcould be extended by a maximum of two years. The release ofthe final tranche of Retention Money could therefore be up tothree years after completion. The full release of RetentionMoney may be further delayed if any work remains to becompleted, as the Employer may withhold the estimated cost of

any outstanding works.

The above restrictions, together with differing interpretations ofthe meaning of the word "promptly" could result in a protractedperiod of delay before the Contractor is able to recover hisRetention Money. Pressure on contractor's cash flow could beavoided if the Employer is prepared to accept a bank guarantee

in lieu of retention.

The Contractor is required to submit a Statement at Completionwith supporting documents within 84 days after receiving theTaking-Over Certificate following which the Employer may makean Interim Payment to the Contractor. This statement meansthat all of the Contractor's claims must be submitted, along withall other documentation required or reasonably implied asrequired under the Contract. Sub-Clause14.10 (b) and (c) refers.Failure to include claims would result in them being barred under

Sub-Clause 14.14 (b) [Cessation of Employer's Liability].Contractors should also have regard to the extremely tight timelimits laid down in Clause 20 [Claims, Disputes and Arbitration] for

the submission of detailed particulars.

14.10

Statement atCompletion

A written discharge is to be submitted by the Contractor with theFinal Statement and should be worded to provide for suchdischarge to become effective when the final payment has been

received and all bonds and guarantees returned.Discharge

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This is a very important Sub-Clause in respect of anyContractor's claims. If the Contractor fails to notify them in theFinal Statement and the Statement at completion required bySub-Clause 14.10 [Statement on Completion], then, with minorexceptions, they will be barred. The notifications under this Sub-Clause are in addition to those required under Sub-Clause 20.1

[Contractor's Claims].

Cessation of

Employer'sLiability

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This Sub-Clause gives the Employer, in addition to the right togive instructions under Sub-Clause 3.4 [Instructions], an unlimitedright to require the Contractor by notice to make good any allegedfailure to carry out any obligation under the Contract. If theContractor fails to comply with such notice, the Employer has theright to terminate the Contract under Sub-Clause 15.2

[Termination by Employer].

Notice toCorrect

In circumstances where the Employer has given the Contractor avery brief and vague description of the scope of work and theContractor is responsible for the design and tied into a lump sumprice, such a provision would be very dangerous for theContractor. In situations where the Parties have made differentinterpretations of the Employer's Requirements, then thisprovision enables the Employer to impose his view on theContractor by threatening termination of the contract if theContractor will not comply. Such a right should only apply in theevent of material breach of contract.

As always the Employer has the right to terminate the Contract incertain circumstances. These circumstances include breach by,and insolvency of, the Contractor as well as corruption.

Termination by

Employer

Allowing the Employer the right to terminate the Contract in theevent of corruption is a sound principle. However, the definitionof corruption as defined by this Sub-Clause is too wide. Itextends to the Contractor's sub-contractors (over whom theContractor does not have total control) and it covers any act,however small, carried out by any individual. As a consequence,determination of the Contract for the act of corruption under asub-contract is too severe a remedy. The obligation should belimited to an obligation on the Contractor to terminate the sub-contract and should not give the Employer the right to terminatethe Contract.

Sub-Clause 15.2 (a) could be applied to quite trivial faults since itrelates to compliance with a Sub-Clause 15.1 [Notice to Correct]notice which covers "any" failure by the Contractor to carry out"any obligation". Such a clause could be used oppressively by an

employer.

This Sub-Clause should also be considered in the light of thecomments on Sub-Clause 8.7 [Delay Damages] above regardingdamages payable by the Contractor in the event of delay.

EIC Contractor's Guide to the FIDIC-Conditions of Contract for EPC Turnkey Projects.

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14.14

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16 Suspension and Termination byContractor

The right of the Contractor to terminate the Contract is subject tonotice periods that could extend to 84 days. In the case of failureto receive reasonable evidence with regard to the Employer'sfinancial arrangements (Sub-Clause 2.4 [Employer's FinancialArrangement]) or failure to pay the Contractor amounts due (Sub-Clause 14.7) the Contractor must allow 42 days to elapse todemonstrate non-payment. Thereafter he must give a further 14days notice before he may terminate the Contract.

Termination byContractor

These time limits are too long. The Contractor must continueworking even if the Employer has failed to pay. It would be moreequitable if (similar to the other grounds for termination in Sub-Clause 16.2) the Contractor were required to give 14 days' notice,particularly in the case of suspension of work by the Contractor.

The situation will be more complex where project finance is inplace and a lender has step-in rights. However, the same basicprinciples should apply.

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This Sub-Clause is unnecessarily broadly drafted. It imposes therisk on the Contractor of injury etc and damage to property (otherthan the Works) arising "in the course of' the design orexecution of the Works even if not caused by the Works. This isa ridiculously wide risk for the Contractor to assume which, in itsdefined terms, may not be insurable.

Indemnities

The last paragraph contains a reference to Sub-Clause 18.3 (d)(iii) [Insurance against injury to Persons and Damage to Property]according to which the Employer is not obliged to indemnify theContractor to the extent that insurance cover is available atcommercially reasonable terms. Since it is arguable whether ornot insurance cover was available at commercially reasonableterms, it may be advisable when negotiating a contract to excludethis exception in Sub-Clause 18.3 (d) (iii).

The catalogue of Employer's Risks does not include loss ordamage due to the occupation of the Works, or any Sectionthereof, by the Employer because Sub-Clause 10.2 [Taking Overof Parts of the Works] does not allow the use of any parts of theWorks, except if stated in the Contract or as agreed by bothParties. Where these latter exceptions occur, the Contractorshould either ensure that a Taking Over Certificate is issued inrespect of any such parts or the Yellow Book solution identifiedunder the comments previously made in relation to Sub-Clause10.2 [Taking Over of Parts of the Works] is followed.

Employer'sRisks

The Employer's Risks does not contain the Employer'sRequirements, data and information for which the Employer is


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responsible according to Sub-Clause 5.1 [General DesignObligations]. If any loss or damage to the Works is caused bythese responsibilities then the Employer must remain liable.

The operation of exceptional forces of nature has not beenincluded as an Employer's Risk because it is intended that theContractor bears the full risk. Omitting the operation of(exceptional) forces of nature from the list of Employer's Risks isvery burdensome. Generally speaking, their specific occurrenceis unforeseeable even by an experienced Contractor, and anexperienced Contractor can not be expected to take adequateprecautions against them.

In view of the Contractor's inability to foresee such risks theContractor cannot make any realistic risk assessment.Accordingly, any estimate in respect of such events can only bespeculative.

If the Contractor does not want to assume such risks thecorresponding provision of the Yellow Book Sub-Clauses (f), (g)and (h) should be adopted as a more appropriate risk allocation.

17.4 If, and to the extent that, the Employer requires the Contractor torectify the loss or damage to the Works, Goods or Contractor'sDocuments resulting from any of the Employer's Risks, theContractor is entitled to time extension and payment of the Costincurred, but not to any uplift for profit, for rectifying the loss or

damage.

Consequencesof Employer'srisks

The Contractor's rights under this Sub-Clause are subject to hiscompliance with Sub-Clause 20.1 [Contractor's Claims].

17.6 This Sub-Clause provides that there is no liability on either Partyfor loss of use of any Works, loss of profit, loss of any contract orfor any indirect or consequential loss or damage.

Limitation ofLiability

It should be noted that it is only in certain cases of breach ofcontract by the Employer that the Silver Book entitles, theContractor to compensation for loss of profit (see Sub-Clauses2.1 [Right of Access to Site], 7.4 [Testing], 10.3 [Interference withTests on Completion]).

This is inequitable and the Contractor should always be entitled tocompensation for loss of profit and other indirect or consequentialdamages, in the event of a breach of contract by the Employer,irrespective of whether or not there is a specific Sub-Clause in theSilver Book.

By excluding Sub-Clause 17.1 [Indemnities] from the limitation ofliability both the Contractor and the Employer are fully liable forthe events outlined in Sub-Clause 17.1.

EIC Contractor's Guide to the FIDIC Conditions of Contract tor EPC Turnkey Projec

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19.1 This Sub-Clause provides a definition of Force Majeure andprovides a non-exhaustive catalogue of Force Majeure events inthe second paragraph that includes natural catastrophes such asearthquakes, hurricane, typhoon or volcanic activity.

Definition ofForce Majeure

19.4 In the event that the Contractor is prevented from performing anyof his obligations under the Contract due to an event of ForceMajeure, the Contractor can claim for time extension and the Costincurred. The claims for Cost are limited to the events listed inSub-Clause 19.1 (i) to (iv) [Definition of Force Majeure]. Suchlimitation is difficult to understand given the fact that thecatalogue of Force Majeure events is not exhaustive.

Consequencesof Force

Majeure

19.6 In case of termination due to Force Majeure, the Contractor isentitled to be paid for the Works executed, the Cost of Plant andMaterials ordered, any other Cost incurred in the expectation ofcompleting the Works, the Cost of removal of Temporary Worksand Contractor's Equipment and the Cost of repatriation of staffand labour. If the Contractor wants to receive profit on theseCosts, a corresponding provision would have to be included in theContract.

OptionalTermination,Payment andRelease

This Sub-Clause details the procedure that the Contractor mustfollow when he considers himself entitled to an extension of Timefor Completion and/or additional payment under any of theClauses or otherwise in connection with the Contract.

20.1

Contractor'sClaims

The Contractor is required to give notice of his claim as soon aspracticable and not later than 28 days after becoming aware, orwhen he should have become aware, of the event orcircumstance giving rise to the claim. Failure to comply with thisnotice provision would result in the Contractor forfeiting his rightto an extension of the Time for Completion and to additionalpayment and the Employer is then discharged from his liability inconnection with the event.

The penalty for failure to comply with a purely technicalrequirement to give notice of a claim is unduly harsh. This is thefirst time that a FIDIC contract has removed the fundamental rightof the Contractor to make a claim merely as a result of a failure tocomply with a fixed period of time to submit the required notice.In certain circumstances the Contractor may prejudice hisentitlement by failing to comply strictly with a notice provision buthe should certainly not forfeit his rights altogether and neithershould the Employer be discharged from any and all liability inconnection with an event. It is ironic that this provision would alsoapply when the event or circumstance giving rise to the claim iscaused by the Employer in the first case e.g. refer to Sub-Clause8.9 [Consequences of Suspension].

EIC Contractors Guide to the FIDIC Conditions of Contract tor EPC Turnkey Proje<

A comparison of the notice provisions under Sub-Clause 20.1with the notice provisions under Sub-Clause 2.5 [Employer'sClaims] where the Employer is required to give notice as soon aspracticable after becoming aware of the event or circumstance.This demonstrates an unfair imbalance between the position ofthe Employer and that of the Contractor without any reason beingoffered for such imbalance.

In addition to the first 28 day notice period the Contractor is alsosubject to a 42 day period by which he has to send to theEmployer a fully detailed claim with full supporting particulars.(See also the provisions for continuing claims). Due to thecomplex nature of the Works in an EPC contract this could proveto be extremely difficult and inevitably, the task of compiling andinterpreting the relevant facts to support and justify the claim willbe a time consuming and long drawn out process. Suchprovisions could be lead to intensive disputes and costlyarbitration.

The sixth paragraph of this Sub-Clause requires the Employer torespond to a Contractor's claim giving his approval or disapprovalwithin a fixed period or time whereas the eighth paragraphrequires the Employer to proceed in accordance with Sub-Clause3.5 [Determinations] to agree or determine any extension of Timefor Completion and/or any additional payment. It is not clear whythese two separate procedures are required. However, it shouldbe borne in mind that under Sub-Clause 3.5 there is no time limitwithin which the Employer has to make a determination.

Contractors should read the comments made under this Sub-Clause in conjunction with those under Sub-Clauses 14.10[Statement at Completion] and 14.14 [Cessation of Employer'sLiability] all of which underline the importance of submitting allrequired notices in time to ensure that their rights are protectedand maintained.

20.2 This Sub-Clause provides for the establishment of the DisputeAdjudication Board (DAB) comprising either one or threemembers to be appointed by the Parties. The DAB is to beappointed by the date 28 days after a Party has given notice of itsintention to refer a dispute to a DAB. The appointment of the DABexpires after it has given a decision on the referred dispute,provided no other disputes have been referred to it in themeantime. When the appointment expires a new DAB will haveto be appointed to deal with the next dispute.

Appointment ofthe DisputeAdjudicationBoard

It is very likely that adjudication by a DAB in large and complexEPC Projects would be much more effective under a standingbody rather than one convened on an ad hoc basis. It would beparticularly beneficial for the DAB to become conversant with theContract and the Works at an early stage and to familiarise itselfwith the progress of the Works on a regular basis. Undoubtedlythis will result in speedy and well informed judgements andconsequently the procedures and draft agreements set out in the


34

Red Book are to be preferred for such projects. Under these rulesthe DAB is appointed at the start of the Contract and remains inexistence for the duration of the Contract unless agreedotherwise by the Parties.

20.4 It should be noted that, if the DAB has given its decision asrequired by this Sub-Clause and if neither Party has given noticeof dissatisfaction within 28 days after having received the DAB'sdecision, the decision becomes final and binding on both Parties.Even in the case of dissatisfaction by either Party it would appearthat the intention is that decisions of the DAB are binding on bothParties "unless and until it shall be revised in an amicablesettlement or an arbitral award".

ObtainingDisputeAdjudicationBoard'sDecision

The Contractor is required to "continue to proceed with theWorks" but the obligation of the Employer, in so far as paymentis concerned, is merely to comply with the normal process forInterim Payments. There is no provision for any sanction againstthe Employer in the case of non-payment. Manifestly, anypayments due as a result of a DAB decision sholJld be consideredas Payments due under Clause 14 [Contract Price and Payment]but to be made with immediate effect. Any failure to pay wouldthen give the Contractor the right to Suspend the Works underSub-Clause 16.1[Contractor's Entitlement to Suspend Work], anappropriate sanction in such circumstances.

EIC Contractor's Guide to the FIDIC Conditions of Contract for Epc.:rumkey Projects.