Understanding and negotiating turnkey and EPC contracts

UNDERSTANDING AND NEGOTIATING TURNKEY CONTRACTS

•

UNDERSTANDING AND NEGOTIATING TURNKEY CONTRACTS

By

JOSEPH A. HUSE Freshfields, Paris

SWEEr" MAXWELL

Published in 1997 by Thomson Reuters (Legal) Limited (Registered in England & Wales, Company No 1679046. Registered Office and address for service: 100 Avenue Road, London, NW3 3PF) trading as Sweet & Maxwell Digitally reprinted in 2009 by TJI Digital, Padstow, Cornwall

ACKNOWLEDGMENTS

The author would like to thank all the partners, managers and staff at the various offices of Freshfields for their assistance. In particular, he would like to thank Matthew Turner and Claire Skrinda for their invaluable efforts with respect to the preparation of the second edition of this book.

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© Joseph A. Huse 1997

v

FOREWORD When the first edition of "Understanding and Negotiating Turnkey Contracts" was written by Mr. Huse, the Orange Book ("Conditions of Contract for Design-Build and Turnkey"), issued in 1995, was the only FIOIC form of contract intended for use in a design and build context. FIDIC being well known for the quality of its prior documents, it was certainly only natural for him to use the Orange Book as a basis for discussing turnkey contracts and proposing negotiation points for the parties. In 1999, three new Books were issued by FIDIC, with their basic structure and wording harmonised around the previous Orange Book format. These Books were the Conditions of Contract for Construction, for Plant and Design-Build, and for EPCffurnkey Projects. The first one is intended for construction works where the employer is responsible for the design, similar to the old Red Book, and with an important role for the Engineer. The two latter ones are intended for cases when the contractor supplies the design. The Plant and Design-Build Book has the traditional Engineer while the EPCffurnkey Projects Book has a two-party only arrangement. With further development, the new (1999) "Conditions of Contract for Plant and Design/Build" retain the essential elements of the earlier Orange Book. It had been noted, however, that new trends in project financing and management, especially related to PFI and BOT, required a different set of conditions, and the "Conditions of Contract for EPCffurnkey Projects" were drafted to cater for this. They complement but do not replace the "Conditions of Contract for Plant and Design/Build", in that they are intended to be used in a rather specific context, e.g.: • • • •

when greater certainty is sought that price and time will not be exceeded; when the Contractor is required to take total responsibility for the design and construction of the infrastructure or other facility; when the Employer is willing to pay more in return for the Contractor bearing the extra risks associated with this; and when uncertain or difficult ground conditions or other largely unforeseeable risks are unlikely to be encountered.

They should rather not be used for design-build work in other circumstances. The decision which Book to use should, therefore, always be taken in full consideration of the particular characteristics of the project at hand. In a similar way, depending on the project context, the first edition of "Understanding and Negotiating Turnkey Contracts" very much retains its merits for a better understanding and appreciation of FIDIC's new "Conditions of Contract for Plant and Design/Build", while the new, second edition is equally valuable with respect to the "Conditions of Contract for EPCffurnkey Projects". vii

FOREWORD

In the very detailed discussion of the context and of the operation of the various clauses, the author pays special attention to the operation of the contract in a BOT project. This will certainly be much appreciated by the many employers and contractors who do not yet have much first-hand experience of such projects but are eager to make the best possible use of this approach to project financing and execution. Other interesting features are the tables summarising the employer's and the contractor's obligations under the various clauses of the contract, and comparisons with other standard forms of turnkey contracts. For FIDIC, its own "FIDIC Contracts Guide", with detailed guidance to the new contracts, remains the main reference work, especially since it was written by the principal drafter of the three 1999 Books. However, Mr. Huse's work is still the major commentary coming from an independent construction lawyer and will therefore certainly receive much positive attention from employers, contractors, lenders and other interested parties. Daniel Ivarsson Managing Director FIDIC

INTRODUCTION

When drafting international construction contracts, practitioners often use standard form contracts as a basis for their documents. The form contract provides a familiar starting point to ease the drafting burden and facilitate negotiation. The Federation Internationale des Ingenieurs-Conseils (FIOIC) has recently published a new form contract for use with the design and construction of works using the engineer, procure, construct or turnkey contracting method. This contract, the FIOlC Conditions of EPCffurnkey Projects (the Silver Book), is aimed at situations where bids are invited on an international basis; with some modification the contract could be used, in certain countries, for domestic contracts as well. The purpose of this book is twofold: (i) to provide a comparison of the terms of the principle design-buildlEPClturnkey contracts; and (ii) to assist contract drafters in their analysis of the Silver Book and in the modification of its provisions to meet the specific needs of the project in question. The final chapter gives drafting suggestions for selected contract provisions of the Silver Book from the perspective of both the contractor and the employer.

Turnkey contracts In a design-bid build contract, the employer supplies the design, which often includes the designation of materials and other key construction parameters. Under an EPC agreement, the contractor provides all of the engineering, procurement and construction. Under a turnkey contract, the contractor supplies the final design of the project. From the perspective of the author, these three terms are largely interchangeable and the drafting of this book reflects this position. These contracts place the design and construction duties in the same hands, providing in theory a more easily co-ordinated project with potential for increased speed of completion and decreased cost, due to tighter project organisation. They also place primary liability on the contractor for any defect in the design, construction or performance of the works. Therefore, as a general proposition, where a defect arises in the works, the employer need not prove to what extent resultant damage was caused by faulty design or by faulty construction, as may be the case under a design-bid-build contract. As the contractor is allocated design, co-ordination and construction responsibilities for the whole of the work, the employer need not provide the same level of technical expertise required under the traditional contract, e.g. he need not provide detailed design preparation capabilities. In complex EPC and turnkey contracts parties often use the lump-sum viii

IX

INTRODUCTION

pricing method. This method provides greater price certainty. Fixed pricing can also facilitate financing, as many banks and other financing institutions prefer or require increased certainty as to the final price for a project. EPC and turnkey contracts often provide for contractor training of the employer's staff, as well as provision of know-how updates, patent licences and other technological aspects of the project. Among the disadvantages of EPC and turnkey are the employer's decreased role in co-ordination of the construction and the cost of tender. The contractor, receiving a lump-sum price, will be under a certain pressure to provide less sophisticated designs in order to save on costs and increase profit. Since the employer is removed from the dominant position in the design and co-ordination of the project he will need to monitor the contractor's performance carefully. An EPC or turnkey contract can also result in an increase in the cost of tendering. The employer will need to develop a complete and clear set of requirements and criteria for the project in order to define the design and construction to be executed by the contractor. The bidders may need to provide an advanced level of design for the project at tender. Such a complete tender will often require extensive studies of the site and the needs of the employer. The following are form contracts cited throughout this book: Silver Book (Federation Internationale des Ingenieurs-Conseils, Conditions of Contract for EPCffurnkey Projects, 1999), a turnkey/engineer-procureconstruct style contract. Orange Book (Federation Internationale des Ingenieurs-Conseils, Condition of Contract for Design-Build and Turnkey, 1995), a turnkey/ design-build style contract. Red Book (Federation Internationale des Ingenieurs-Conseils, Conditions of Contract for Construction, 1999), a standard form contract using an engineer and largely employer-designed works. Yellow Book (Federation lnternationale des Ingenieurs-Conseils, Conditions of Contract for Plant and Design-build, 1999), a contract using an engineer and largely contractor-designed works. ENAA Contract (Engineering Advancement Association of Japan, Model Form International Contract for Process Plant Construction, General Conditions, 1992), a turnkey-style contract designed specifically for process plant construction. ICE Contract (Institution of Civil Engineers, Conditions of Contract Design and Construct, 2001), a design-build style contract. x

INTRODUCTION

EIC Contract (European International Contractors, Conditions of Contract for Design and Construct Projects, 1994), a turnkey-style contract. AlA Contract (American Institute of Architects, Standard Form of Agreements Between Owner and DesignlBuilder, Document A191, 1996), a two-part design-build-style contract. The first part provides for design and budgeting, while the second provides for construction. DBIA Contract (Design-Build Institute of America, Standard Form of Agreement Between Owner and Design-Builder - Lump Sum, 1998), a design-build style contract. AGC Contract (Associated General Contractors of America, Standard Form of Design-Build Agreement and General Conditions between Owner and Design-Builder, 1999), a design-build style contract. Employer-Owner Certain contracts such as the ICE Contract and FIbIC Silver Book use the term "Employer" for the person who has contracted with the contractor for the completion of the works. Others, such as the ENAA Contract, use the term "Owner". Where the discussion is general in nature, the term "employer" will be used. Where the discussion relates to a particular contract, the terms specific to that contract will be used. Notes for reading this book Starting with Chapter 5 the chapters of this book follow the Silver Book clause by clause, in an effort to folIow the logic of its construction. In each section, a comparison is made with provisions from other form contracts. These comparisons are meant, inter alia, to highlight alternatives available to drafters and other approaches to issues considered by the Silver Book. The author does do not claim to provide an intensive study of each and every form contract used. The first chapter describes the different types and elements of construction contracts, including price, payment and co-ordination. It is meant to provide a general overview of construction contracting. The second chapter defines in some detail the turnkey concept, its advantages and disadvantages. The third chapter contains a brief discussion of certain of the other model form contracts and an introduction to the Silver Book. The fourth chapter presents a discussion of BOT contracts and how the Silver Book may need to be modified for use in such projects. Chapters 5 to 24 discuss each clause of the Silver Book. The first section of each of these chapters prevents a general discussion of the topic of the relevant clause of the Silver Book. The second section considers the contract clause section by section, comparing it to other FIDIC contracts, the Orange Book, Yellow Book and Red Book, and to other form contracts. It also gives xi

INTRODUCTION

guidance as to how the clauses should be adapted to the drafter's individual needs. The last chapter provides an examination of the employer's and contractor's interests as they relate to each sub-clause of the Silver Book. This chapter is intended to assist drafters in identifying the needs and interests of the party, and gives some suggestions as to how to modify the Silver Book in relation to the drafter's interests. However, the list of items discussed is by no means exhaustive. This work is also confined to the contractual relationship between the employer and contractor. The author will not venture into the internal organisation of the contractor, by studying the relationship between the contractor and designer, nor the relationship between the contractor and other contractors. Nor will the author discuss contractual groupings of contractors (e.g. consortia or joint ventures) for the purposes of submitting a single tender. The drafting of a construction contract involves important legal consequences. Each project is unique and will require consideration of issues specific to that project and its participants. Changes to model form contracts will have legal implications, which will vary in accordance with the applicable legal system. Reference to this book should not replace reference to competent and experienced legal counsel.

Comment/request for Information The first edition of the FIDIC Conditions of Contract for EPClTurnkey Projects, otherwise known as the Silver Book, was published in December 1999 (although draft editions were available earlier). This means that the construction industry's experience of negotiating and litigating the provisions of the Silver Book has been, until now, necessarily limited. Consequently, in some respects this book is somewhat premature. However, my colleagues urged me to bring out this book as quickly as possible and given the need for a commentary of this type this seem an appropriate thing to do. With this in mind, I would welcome any material or comments that would improve any subsequent editions. In particular, I would greatly appreciate any comments from construction industry professionals regarding their experience in using the Silver Book. Such material or comments should be sent to me at the following address: Joseph A. Huse Freshfields 69, Boulevard Haussmann 75008 Paris France Fax: (33) 1.44.56.44.00 [email protected]

Xli

CONTENTS

Page Acknowledgments Foreword Introduction 1. Types of Contract

Contracting Methods Design-bid-build Single versus multiple construction contracts Management contracting Design-build, turnkey and EPC BOT (Build Operate Transfer) Pricing Methods Lump-sum method Cost-reimbursable or cost-plus Unit price or bill of quantities Bonus schemes and currency of the price Payment Methods Payment after completion Milestone payments Progress or scheduled payment 2. Turnkey and EPC Contracts Advantages and Disadvantages of Turnkey and EPC Contracts Advantages Disadvantages Issues in Connection with Lump-Sum Turnkey or EPC Contracts Standard Form Design-Build and Turnkey Contracts 3. FIDIC Design-Build, Turnkey and EPC Contracts Introduction From the Orange Book to the New Yellow Book Major drafting changes Is the new Yellow Book a good idea? From the New Yellow Book to the Silver Book Major drafting changes Is the Silver Book a good idea? FIOIC Policy on Design-build, Turnkey and EPC Conclusions

v

vii ix 1 1 2 3 4 5 7 9 10 11 12 13 14 14 15 15 17 17 17 20 23 24 29 29 30 30 34 35 35 37 38 39

CONTENTS

CONTENTS

4. The Use of the FIDIC Silver Book in the Context of a BOT Project

8. The Contractor 41

41 Introduction 41 Description of a BOT Project 46 Allocation of Risk Specific Issues raised in connection with the use of the Silver Book 48 in the context of BOT projects 48 Design 50 Construction 53 Tests on completion 54 Taking over 55 Tests after completion 56 Time for completion 59 Price 63 Liquidated damages 64 Guarantees 65 Co-ordination of construction (employer's control) 67 Payments 68 Additional lender requirements 70 Conclusion 5. The Contract General Comments Contract language Conflicts clause Confidentiality clause Definition of design Rights in the construction documents Discussion of Specific Sub-Clauses General provisions

6. The Employer General Comments Access and possession Employer assistance with permits and licences Discussion of Specific Sub-Clauses Employer Obligations in the Silver Book

7. The Employer's Administration General Comments The role of the engineer in the construction contract Turnkey contracts with an employer's representative Comparison of the role of the employer and his representative in the Silver Book with the role of engineer in the Yellow and Red Books Discussion of Specific Sub-Clauses XIV

71 71 71 72 72

73 74 74 74 107 107 107 108 108 117 123 123 124 125 128 130

General Comments The tender phase The performance phase Discussion of Specific Sub-Clauses Key Obligations of the Contractor in the Silver Book

9. Design General Comments Design standard / contractor's liability Design timing issues Discussion of Specific Sub-Clauses

10. Staff and Labour General Comments Provision of staff and labour Superintendence Discussion of Specific Sub-Clauses

1t. Plant, Materials and Workmanship General Comments Discussion of Specific Sub-Clauses

12. Commencement, Delays and Suspension General Comments Commencement and time for completion Completion delays Suspension by the employer Suspension by the contractor Discussion of Specific Sub-Clauses

13. Tests on Completion General Comments Discussion of Specific Sub-Clauses

14. Employer's Taking Over General Comments Discussion of Specific Sub-Clauses

15. Defects Liability General Comments Duration of the defects period Duties placed on the contractor Employer's right to use an outside contractor Expiration of the defects liability period and its effect Discussion of Specific Sub-Clauses

141 141 142 148 152 197 205 205 205 208 209 233 233 233 234 235 251 251 251 273 273 273 274 276 277 277 311 311 312 323 323 324 335 335 336 336 337 337 339 xv

CONTENTS

CONTENTS

16. Tests After Completion General Comments Minimum levels of performance Failure of impossibility of attaining the expected performance Discussion of Specific Sub-Clauses

17. Variations and Adjustments General Comments Variations The variation procedure Value engineering Valuation of variations Provisional sums Discussion of Specific Sub-Clauses

18. Contract Price and Payment General Comments Lump-sum price Adjustment of price for unforeseen circumstances Payment methods The interim payment procedure Retention money Advance payments Final payment and discharge Discussion of Specific Sub-Clauses

19. Termination by Employer General Comments The validity and effect of a termination clause Drafting of the termination clause Default of Contractor Procedure for termination Grounds for termination Effects of termination for default of the contractor Termination for convenience Discussion of Specific Sub-Clauses

20. Suspension and Termination by Contractor General Comments Suspension by the contractor Termination by the contractor Bases for termination Procedure for termination Valuation and payment at termination Discussion of Specific Sub-Clauses

I

xvi

357 357 359 359 360 369 369 370 371 372 372 373 373 393 393 393 394 395 395 396 397 397 397 443 443 443 444 444 445 445 446 447 447 465 465 465 466 466 468 468 469

21. Risk and Responsibility General Comments Employer's risks Contractor's responsibility for the care of the works Indemnification Environmental risks Intellectual and industrial property rights infringement indemnification Limitation of contractor liability Discussion of Specific Sub-Clauses

22. Insurance General Comments Property insurance Liability insurance Terms of insurance and the insurer Proof of insurance Failure to provide insurance Discussion of Specific Sub-Clauses

23. Force Majeure General Comments Force majeure Discussion of Specific Sub-Clauses Comparison of Force Majeure Provisions

24. Claims, Disputes and Arbitration General Comments Procedure for claims Final dispute resolution Discussion of Specific Sub-Clauses Initial claim Supporting documentation Fully detailed claim Interim and final claim measures Employer's response Payment of contractor Formation of DAB Composition of DAB Remuneration of DAB Replacement of DAB member Expiration of DAB Composition and Appointment of DAB Terms of appointment of DAB Remuneration of DAB and DAB activities Failure to pay remuneration

483 483 485 485 485 486 487 487 488 509 509 511 513 514 515 515 515 531 531 531 532 550 555 555 555 561 564 566 567 567 567 568 568 572 574 574 574 574 575 575 575 576 xvii

CONTENTS

Submission of dispute to DAB Decision rendered by DAB Effect of decision rendered by DAB Where one party protests decision rendered by DAB Effect of notice of dissatisfaction Eligibility for arbitration Proceedings before the arbitrators 25. Negotiation of the Silver Book Formulating a Negotiating Strategy: The Key Characteristics of the Silver Book Specific Negotiating Issues

584 585 585 586 586 591 591

599 601

655

2. Engineering Advancement Association of Japan Model Form International Contract for Process Plant Construction (Turnkey Lumpsum Basis) with Process Licence

757

3. European International Contractors: Conditions of Contract for Design and Construct Projects

1

TYPES OF CONTRACT

599

APPENDICES 1. Federation lnternationale des Ingenieurs-Conseils: Conditions of Contract for EPClrurnkey Projects

CHAPTER

819

4. AlA Document A191: Standard Form of Agreements Between Owner and Design/Builder 1996 Edition

843

5. Design-Build Institute of America: Standard Form of Agreement Between Owner and Design-Builder-Lump Sum

869

6. AGC Document No. 415 Standard Form of Design-Build Agreement Between Owner and Design-Builder

903

Index

935

In considering which contracting method to use the employer will need to assess his own particular institutional and technical strengths and weaknesses (including access to financing).1 Each method of contracting affects in its own way the allocation of responsibility and the demands on the employer for coordination of the project. Through the proper allocation of responsibility for the project to reflect these strengths and weaknesses, the employer can rationalise the price of the contract against his exposure to project risks. The employer's first consideration will be to identify the design source, i.e. the person who will develop the employer's requirements for the project into a practicable design. This design source can come from the employer's inhouse staff, an independent consultant or the contractor. The person providing the design will often have some oversight function in the execution of the project to ensure proper implementation of the design and provide for efficient and effective interfaces in the construction of the works. Next, the employer must consider how best to allocate co-ordination responsibility. The individual elements of the design and construction process will need to be properly co-ordinated to ensure balanced and efficient progress. This includes management of incoming and stored supplies, construction by the contractor's employees and subcontractors, and inspection and testing crews belonging to the employer, the contractor or local regulatory bodies. Co-ordination can be provided by the contractor, the employer or a third party such as a management contractor. These two aspects will be discussed under the section on contracting methods (below). Finally, the employer must also consider the pricing method to be used (considered below) and the payment conditions to be incorporated into the contract (also considered below).

1-01

1-02

Contracting Methods Although the construction contract can be broken up into the various elements necessary for construction (such as civil engineering, electrical/mechanical engineering, finishing, and so on) the two main aspects of the construction that the employer needs to consider when choosing the 1

xviii

See generally I.N.D. Wallace, "Contracts for Industrial Plant Projects" (1984) 2 I.c.L.R. 322 at 328 (hereinafter "Contracts").

1

1-03

TYPES OF CONTRACT

1-04

CONTRACTING METHODS

appropriate contracting method are the design function and co-ordination of the works. The employer can himself provide one or both of these functions, or he can allocate them to one or more third parties. Methods of contracting available to the employer can be split into two broad categories: design-bid-build, which separates the design and construction functions, and design-build, or turnkey, which places the entire project, including design and construction, in the hands of the contractor. The turnkey method is often referred to as "engineering, procurement and construction" (or "EPC"), especially in the context of project financing. With respect to the first category, a distinction should be made between a designbid-build project using a single construction contract and a design-bid-build project using several construction contracts.

Design-bid-build

1-05

1-06

The design-bid-build method is the traditional approach to construction contracts (see Figure 1.1). First the employer provides for the design of the project in accordance with his requirements. The designer chosen by the employer then provides a set of drawings sufficient for construction. How far advanced these designs are when used for the tendering process may vary Figure 1.1

The design-bid-build method

I

EMPLOYER

I I l

I 2

DESIGNER

I

ENGINEER

I

ICONSTRUCTION I ICONSTRUCTION I CONTRACT CONTRACT

in relation to the origin and experience of the employer. In France, for example, the contractor will usually be responsible for detailed design. In a design-bid-build project the employer provides the design and co-ordination of the project; thus he will be responsible for the interface between the design and construction aspects of the project. The designer often acts on behalf of the employer as the supervisor or engineer for the project, guiding the contractor in the progress of the works and supervising the interface between the design and construction. Where the project requires extensive financing, this may not be acceptable to lenders (as discussed below). There are a number of potential disadvantages associated with the designbid-build form of contracting. It tends to delay the overall completion date due to the use of distinct design and construction phases (as opposed to the turnkey method). The employer-provided designs will not necessarily correspond with the technical capacities of the contractor. There may be added delay while the contractor familiarises himself with the designs provided and the technology used in the designs.

Single versus multiple construction contracts When choosing the design-bid-build method of contracting, the employer will need to decide whether he wants a number of contractors to fulfil the various construction tasks of the project, or whether to place all of these tasks into the hands of one contractor. When using a number of contractors, the employer may also need to decide which tasks to contract out and which tasks can be provided by his own in-house staff. The employer may choose the multiple-contract approach when he wishes to establish individual construction packages in order to achieve the lowest price. If multiple construction contracts are used, the employer will need to provide co-ordination of the various contractors and, under certain circumstances, subcontractors. 2 Therefore, the employer will be responsible not only for the interfaces between the designs used and the work methods of the various contractors and suppliers, but also the co-ordination of each of the construction packages assigned to such contractors and suppliers. This necessitates either that the employer has the skills and experience to undertake such co-ordination (and understands the construction methods and technology to be used by the various contractors and suppliers), or that he contracts with a competent third party to undertake such co-ordination. The employer's first step in implementing the construction component of such an approach to design-bid-build is to define the individual construction work packages. Construction packages are sometimes defined on the basis of electrical/mechanical works and works of civil engineering. Subject to relevant procurement requirements, the employer will then be able to allocate the individual work packages to the contractor or supplier of his choosing. 2

I.N.D. Wallace, Construction Contracts: Principles and Policies in Tort and Contract (Sweet & Maxwell, London, 1986), p. 401 (hereinafter Construction Contracts).

3

1-07

1-08

CONTRACTING METHODS

TYPES OF CONTRACT

1-09

1-10

Since the employer chooses the individual contractors and suppliers for each construction package, the employer has greater control over the quality of contractors used and materials chosen. By using this contracting method, the employer may also achieve a lower price for the works. The use of several contractors may enable the employer to use local contractors, possibly under the supervision of experienced foreign contractors, particularly where it is in the employer's interest to effect a transfer of technical and managerial skills to the site country. This same goal can, however, be achieved in a single construction contract by mandating the use of local subcontractors for a certain percentage of the works. When using the multiple contract method, properly defining the interfaces among each of the work packages may be problematic. Any ambiguity, or the failure of any such definition, is the responsibility of the employer and may result in contractor claims. For the employer this constitutes one of the major risks of the multiple contractor method. Under the single or prime construction contract method, the employer places the responsibility for all of the construction of the works with one contractor. This relieves the employer of the need to co-ordinate the interfaces among the construction packages. It also reduces the risk of contractor claims in respect of such interfaces. However, it removes from the employer a certain amount of his control over the construction of the works. The use of this method may also result in a higher cost for the construction of the works (as mentioned above). In a design-bid-build project with a single construction contract, the employer will still be required to manage the design/construction interface. However, the employer will be able to pass on to the contractor the responsibility for the interfaces between the various construction packages. Design-bid-build with multiple contractors provides the employer with extensive control over the design and construction process. Not surprisingly, this method also requires the greatest degree of intervention on the part of the employer. He will be responsible for interfaces between the multiple contractors and co-ordination of their work. The design-bid-build model can prove to be disappointing. The designer employed by the employer is often removed from the actual field experience of contracting; thus his designs may be distanced from the realities of construction. This distance could result in inaccurate cost and scheduling estimates, impractical or outdated designs and failure to implement new construction methods. 3

Management contracting 1-11

Management contracting is a less traditional approach which involves hiring a contractor whose role is the co-ordination and management of the project. J

4

Brown, "Opportunities and Risks of Design Build Superconference, San Francisco, U.S., December 7-8, 1995.

Projects~,

The Construction

This management contractor organises time, cost and quality control. He engages a number of other contractors to do the actual construction work. The management contract provides the employer with the control of the project typical of a traditional design-bid-build contract, while reducing the requirements on the employer (a feature similar to the turnkey contract). The primary difference between the management contract and the turnkey model is that the management contractor generally assumes no responsibility for the work of the other contractors or for the performance of the design. 4 He acts purely as a management intermediary. The management contractor can be given any number of different mandates, with greater or lesser powers of intervention in the construction process. He can be involved from the very outset of the project, inviting tenders, negotiating for the employer and selecting contractors, through to the completion of the works. The management contractor's fee can be tied to the completion time or the overall price of the contract, or both, using a target price. The management contractor's fees will decrease where the actual price surpasses the target price, and increase where costs are less than those targeted. Under this system by using target pricing the management contractor has an incentive to control the price of the contract in the employer's favour. Similarly, the management contractor can be required to assume some of the liability for the performance of the works or the quality of construction to provide an incentive to supervise closely the quality of the workmanship and materials that go into the works.

Design-build, turnkey and EPC The "turnkey" arrangement, (also known as the "package deal", "design and build", "cle-en-main " , "design and construct" or "EPC") places the duty to design and construct solely on the contractor. There is no accepted definition for each of these terms in the construction field. The term "turnkey" tends to mean the most extreme form of placing design and construction responsibility on the contractor, such that after completion the employer need only turn the key to commence operation of the constructed facility. Notwithstanding this, the term "turnkey" will be used here to describe the more general global arrangement of placing all design, procurement and construction responsibilities on one contractor. In recent years, design-build projects have seen rapid growth in some parts of the world. For example, use of the design-build method increased from an $18 billion (in the mid-1980s) to a $69 billion (in the mid-1990s) industry and now represents roughly 25 per cent of the United States construction industry.s 4

5

For a detailed analysis of the management contracting method, see generally Freshfields' Construction & Engineering Group, Freshfields Guide to Management Contracting: Law and Practice (1994). . M.L. McAlpine, "Construction Law: Will Design·Build Contracting Really Solve All of the Problems?" (1997) 76 MI Bar Jnl. 522, online: LEXIS at 533.

5

1-12

CONTRACTING METHODS

TYPES OF CONTRACT

1-13

1-14

Where the contractor takes responsibility for the design of the works, the employer's advisers find their involvement limited primarily to the tender process and supervision of the contractor's work. The definition of supervision is likely to be the subject of extensive negotiation between the parties, as the employer will want to maintain control over the construction process. The turnkey system generally uses the lump-sum pricing method. Certain practitioners believe that it is ill-suited to interim payment based on the cost of work done, due to the difficulty of verification by outside experts of the figures submitted by the contractor. 6 The turnkey contract places the responsibility for the entire project in the hands of the contractor. Thus, there is no need to identify whether a defect has been caused by defective design or defective construction of the works. As a general rule, any defect falling within the scope of works will be the responsibility of the contractor. Contractor liability makes design-build contracts particularly attractive for employers.7 The potential liability of the employer under other construction contracts (where, for example, he provides any design specification) has led to a dramatic growth of design-build contracting. 8 The use of the turnkey method of construction results in a considerable reduction of intervention by the employer in the design and construction process, as compared with other contracting methods. The role of the employer will consist primarily of contract administration. His role may also include, depending upon the terms of the turnkey contract, review and/or approval of designs. Further, the design used ought to be consistent with the technical capacities of the contractor, resulting in a more efficient and costeffective application of the design to the construction of the works. The combination of the design and construction responsibilities should also decrease the overall time for completion. This phenomenon is known as "fast track" construction. Efficiencies in the design and construction process may potentially reduce the price of the project. However, certain construction professionals maintain that the claims of earlier completion with designbuild construction are exaggerated and that design-bid-build projects achieve similar completion times. As the responsibility for co-ordination of the project passes from the employer to the contractor, so does some of the control. The employer will experience a decrease in his day-to-day control of the construction of the works. As the contractor's control of the construction increases, so does his need to be experienced in the management of large-scale projects. This may include handling interfaces between multiple methods of construction, interfaces between different industries, and the various designs used by subcontractors and suppliers. Under the turnkey method of contracting, the tender stage takes on greater importance. Given the short time period available, it may be difficult for the

employer to analyse properly each design at tender. 9 Therefore, he will need to be extremely precise in his "request for tender" as to the performance and capacities desired from the works, (known, in the Silver Book, as the Employer's Requirements). The employer will need to spend a greater amount of resources on the tender stage to ensure the contractor and his proposed design are of the requisite quality. Similarly, the contractor may need to expend heavily on bid preparation to ensure the buildability of the project and the profitability of his bid price. to The employer may choose to use a turnkey model for only part of the project (called "part-turnkey" or "semi-turnkey"). The co-ordination responsibility for the entire project will then either fall on the employer's consultants or the turnkey contractor. The contractor will, therefore, bear design responsibility for only a part of the works. ll Thus, for example, the turnkey contractor can provide certain aspects of the works such as heavy civil facilities which require specialised design and attention, while the employer can contract on a designbid-build basis for the finishing of the works and equipment systems. This method decreases necessary interfaces, thus simplifying the co-ordination of the project. It may also separate the responsibility for differing types of work, for example equipment systems work and heavy civil work, thus reducing contact between various industries not necessarily familiar with each other's working methods. The advantages and disadvantages of the part-turnkey model are generally the same as those for the turnkey and design-bid-build models, including considerations related to the combination of the two contract models. Reference should also be made to a variant of the EPC construction methodology referred to as "EPCM" or "engineering, procurement and construction management". The essential difference between EPC and EPCM methodology is that the contractor under an EPCM contract assumes responsiblity for supervision/management of construction but does not assume responsibility for the construction itself. BOT (Build Operate Transfer)12 The typical BOT (along with its variants such as BOO (Build Own Operate), BLT (Build Lease Transfer) and others) contract encapsulates the process whereby a government grants a concession or similar right to a project development company to develop and operate what would normally be a public sector project, for a given period of time known as the concession period. The project development company obtains financing for the project, and then designs and constructs the facility; it then operates the facility during the agreed period and thereafter turns the plant over to the government. The 9

6 ?

8

6

Construction Contracts, op. cit. n. 2 above, p. 365. M.L. McAlpine, op. cit. n. 5 above, 522, online: LEXIS at 555. C.G. Hammond, "Dealing with Defects: Defective Owner· Provided Preliminary Design in Design-Build Contracting" (1998) 15 1.C.L.R. 193 at 196.

1-15

10 11

12

M.L. McAlpine, op. cit. n. 5 above, 522, online: LEX IS at 554; I.N.D. Wallace, "Designand-Build: a No-No for Owners" (1999) 4 Const. & Eng. L. 7 at 8 (hereinafter "No-No"). For an outline of how this process might look under the Silver Book, see the applicable sections of the FIDIC Guide. Construction Contracts, op. cit. n. 2 above. . For further analysis of this concept, in relation to the Silver Book, see Chap. 4.

7

1-16

TYPES OF CONTRACT

l-17

parties generally intend that the income received by the project development company during the concession period (including, in certain circumstances, subsidies) will pay for the cost of financing and running the plant with an adequate return for the investors. These investors often include the contractor. 13 Any BOT project involves a potentially complex contractual structure. However, in most cases, the BOT project will use a turnkey or EPC contract for the actual design and construction. Thus the BOT is not really a separate method of construction contracting, but rather a method of financing the project. Indeed, the lenders of the BOT projects have significant influence on the terms of the underlying construction contract, including the requirement that such a contract be turnkey and, often, in the form of an EPC contract. 14 In a BOT project, the operation period between completion and transfer also gives the transferee an opportunity to verify the quality and quantity of output of the works. The contractor can be required to provide the transferee's personnel with training prior to the transfer, thereby easing transition. The transferee will need to take care to maintain the operator's incentive to maintain properly the works, in order to avoid deterioration in the final period before transfer to the transferee (the operator, in an attempt to save on costs, may towards the end of the operating period decrease maintenance and operating expenditures resulting in accelerated deterioration of the works). In certain BOT projects, the operator is required to assume defects liability for a limited period of time subsequent to the transfer. A BOT project, in practice, is often not as simple as its definition implies. There may be a large number of parties. For example, in a recent hydroelectric project, the project development company (granted a concession by the government), entered into various contracts for the building of the facility, its operation and maintenance during the concession period and a power purchase agreement with an electrical utility. The construction of the facility was provided through a turnkey contract with a consortium of contractors. Each of the turnkey contractors was also an investor in the project development company. A subsidiary of one of these turnkey contractors also acted as the operator of the facility after completion. This complex structure is typical of power plant BOT projects in developing nations, as developing economies struggle to meet the dramatic increase in demand for energy (see Chapter 4 BOT)Y The increasing popularity of the BOT project is largely due to a shortage of public funding and the opinion that the facility will be more efficiently managed by a private entity.16 In theory, the BOT scheme provides developing countries with much-needed infrastructure at a reduced direct cost to the government. I? However, BOT projects are high-cost and high-risk ventures for private entities operating in a traditionally public domain. j. Scriven, "A Banking Perspective on Construction Risks in BOT Schemes" (1994) 11 I.C.L.R. 313 at 314. 14 C. Wade, "History and Scope of the Three Major Books" (1998) online: FIDIC http://www.fidic.comldocumentsllaunchlwade1.html(date accessed: November 19, 1999). IS D. Blumental, "Sources of Funds and Risk Management for International Energy Projects" (1998) 16 Berk. J. Int'J Law 267, online: LEXIS at 270. 16 j. Scriven, op. cit. n. 13 above, 313. 17 S.W. Stein, "Build-Own-Transfer (BOT) ARe-Evaluation" (1994) 2I.C.L.R. 101.

CONTRACTING METHODS

The cost of tender being high, the project company members should take great care to examine the risks associated with the project prior to tendering. The project company will prefer an exclusive and specific mandate from a host country interested in the project and supportive of it. 18 Project company members should have experience not only in constructing large projects but also in investing in and operating such projects. 19 Where the grantor of a concession for a project is a political entity, it takes on a further political risk in that the project is placed in the hands of an entity not necessarily affected by the political repercussions of its actions. The public may not understand that the grantor is removed from the day-to-day operations of the public service subject of a BOT project (e.g., an underground railway) and thus any mismanagement or politically unpopular decision may be imputed to the grantor. Although the contract may provide for grantor influence in the selection of personnel in order to ensure proper operation, the effectiveness of such influence may be practically minimal. The grantor will, thus, want to consider the independent status of the project development company and the potential effect the company's actions may have on the grantor's political position and the public welfare. Banks and other financing institutions will make it a condition of their financing of a project that there is implementation of a contractual scheme that provides them with some certainty as to their financial risk. By using a lump-sum price and placing much of the completion risk on the contractor, the turnkey contract can provide the lenders with a significant amount of certainty and thereby confidence in the project. (A more detailed discussion of the issues can be found in Chapter 4 BOT.) Some authors assert that the "contractor and employer are very likely to rely on the Silver Book as a good compromise approach». 20

Pricing Methods 1-19

Some of the most common methods of pricing a construction project are: (a) (b) (c)

lump-sum; cost-reimbursable; and unit price.

T.hey can be used alone or in combination. The selection of a pricing method directly affects the distribution of certain risks, such as changes in the cost of labour and materials.

IJ

8

1-18

18 19

20

Gurun, ." Build-Own-Tran.sfer Projects: The Contractor's Role in Risk Management", InternatIOnal Ba~ ASSOCIation Conference in Tokyo, japan, February 1993, at 11. S.W. Stem, op. CIt. n. 17 above, 101. C. Pedamon, "~ow is Convergence Best Achieved in International Project Finance?" (2001) 24 Fordham Int J L.}. 1272, online: LEXIS at 1300.

9

PRICING METHODS

TYPES OF CONTRACT

Lump-sum method L-20

The lump-sum method gives a price for the whole of the contract, irrespective of the contractor's as-built cost. The difference between the price and the actual cost of the works to the contractor will constitute the contractor's profit or loss. The contractor assumes substantial risk, including the risk of most changes of circumstances (for example, a change in the price of materials or labour). Although most lump-sum contracts provide for modification of the price in certain limited circumstances, such contracts usually provide that the contractor may not claim additional payment for work indispensably necessary to completion, even where omitted from the specifications of the contract. The employer is therefore given a figure representing his global exposure, although this figure may be subject to adjustment as provided by the contract. The contractor will usually be paid the lump-sum price in instalments. The instalments will be based on a schedule of payments or payable at specified stages of completion. In certain cases the lump-sum price may only be payable by the employer to the contractor upon completion, i.e. where completion is a condition precedent to payment. 21 1-21 The lump-sum is generally easier and less expensive to administer than the other pricing methods, as the price is clearly specified (although variations and other alterations to the contract and its price are still possible). Rather than having to calculate the pricing of completion based on the amount of construction units required or the extent of materials, equipment and services used (e.g. a calculation of the cost of construction), the parties need only refer to the lump-sum price. The employer will need to provide for compilation and transfer of information concerning the site in order to enable the contractor to formulate a realistic lump-sum price. Construction contracts often provide that the contractor will not be required to go through the expense of verifying employer-supplied information. However, the contractor will almost invariably be required to investigate, or be deemed to have investigated, the site and the conditions present at the site. The time and cost associated with lump-sum tendering required of both parties may exceed the cost of tendering in contracts priced in accordance with actual cost. 22 The employer may require the contractor to provide him with a breakdown of the lump-sum price into specific amounts payable for different activities or portions of the works. In a tender process, this information will enable the employer to obtain a better understanding of the basis of the contractor's price. This breakdown will facilitate adjustment or revision of the contract price where provided for in the contract. It may also be used for the pricing of variations.

The lump-sum price regime does not allow for adjustment or revision of the contract price, unless specifically provided for in the contract. There may be adjustment for incorrect data provided by the employer, unforeseeable adverse sub-surface conditions, or changes in the works required by the employer. The employer may also decide to assume the risk of inflation and exchange rate risk. The parties should specify with clarity the situations in which adjustment is available.

Cost-reimbursable or cost-plus Under cost-reimbursable conditions the employer pays the contractor for costs incurred plus a predetermined margin of profit. The margin or fee can be fixed, fluctuating or determined as a percentage of actual costs. For example, the margin for building a tunnel may be a flat fee on completion, a percentage of the actual costs incurred in building the tunnel, or a fee that will fluctuate in accordance with some external measure such as the rate of inflation or the base rate of the central bank of the country in which the tunnel is built. This form of payment may create no incentive to work economically or rapidly, since, for example, the greater the cost, the greater the profit, irrespective of progress. In order to compensate for this lack of incentive the parties can include, as part of the pricing provisions of the contract, an incentive mechanism. One example of an incentive mechanism is target cost. This mechanism may be implemented in a number of ways. One possibility is that any cost above a maximum "upset" or "target" cost will not receive any profit or "fee", and may incur a decrease in "fees" already earned. 23 To increase the incentive to finish within a given time period, the contract could also increase or decrease the fee in relation to the completion date of the project. 24 The cost-plus system is generally only used as a last resort, where it is impossible to calculate construction costs, such as tunnelling works. For example, the Eurotunnel project used a target cost mechanism for the tunnelling works. The construction contract awarded the contractor 50 per cent of the savings should the actual price be les:; than the target price. Where the actual price exceeded the target price then the contractor was liable for 30 per cent of the difference. The contractor's liability was limited to half of the fee, or 12.36 per cent of the contract price for such works. 25 Another method of reducing the employer's risk in respect of the cost reimbursement price is to apply a reasonableness standard. The contractor is then only compensated for costs reasonably expended. However, it may 23

Z4 2\ 22

A. Burns ed., Construction Disputes: Liability and the Expert Witness (Butterworths, London, 1989) p. 26 (hereinafter Construction Disputes). , P.O. Marsh, Contracting for Engineering and Construction Proiects (Institute of Purchasmg & Supply, 1988), p. 164.

10

IS

"Contracts", op. cit. n. 1 above at 345. P.O. Marsh, Contracting for Engineering and Construction Projects (Institute of Purchasing & Supply, 1988), p. 167. Huse, Kirkland and Shumway, "The Use of the Target Concept for Tunnelling Projects in Light of the Eurotunnel Experience", Options for Tunnelling Conference of the International Tunnelling Association, Amsterdam, the Netherlands, April 19-22, 1993, at 6.

11

1-22

1-23

PRICING METHODS

TYPES OF CONTRACT

be difficult to determine the reasonableness of a given cost. 26 This difficulty arises in the pricing mechanism of any cost-reimbursable contract, requiring detailed provisions regarding verification and administration of the contractor's costs, detailed schedules and care in eliminating the possibility that the contractor could make a profit at the costs level before the fee element has been calculatedP An employer becomes dependent on the reliability and efficiency of the contractor, despite protection placed in the body of the contract. 28 The contract may also provide that the employer pay to the contractor only the amount paid for materials and services actually used by the contractor (to take into account any over-ordering by the contractor and subcontractors). The definition of costs may also take into consideration any discounts offered by suppliers. The obligation of the contractor to keep extensive records will provide some measure of protection for the employer in calculating costs.

Unit price or bill of quantities

1-24

According to the unit pricing method, the price of the project is calculated in accordance with the amount of work done. The price is established per unit of quantity with reference to a bill of quantities or a schedule included in the contract which specifies the amount of materials and labour needed for a particular task. This method places the risk of the number of units used on the employer but transfers risk of change in the cost or rate of each unit to the contractor. 29 Thus, if the cost of a unit of excavation in a tunnelling contract is provided at 100, the employer will pay where more units are excavated than expected. However, in the absence of unforeseeable adverse sub-surface conditions (assuming the contract provides a changed conditions clause), the contractor is responsible for added cost where the unit of excavation costs more than 100. The unit pricing method is common in construction contracts. Employers have traditionally used this method where the quantity of construction inputs is not ascertained at the time of contracting. Thus, for example, where the amount of concrete to be used for the construction of a building is not yet ascertained, the employer can price the contract in accordance with the cost of a unit of concrete. The contractor will then be compensated for the actual amount of concrete required, while the employer will be assured a fixed price per unit of concrete. This method continues to be used extensively today, even in projects where the quantity of materials is certain. Certain publications, such as the

26

21

28 29

ibid. at 3. "Contracts", op. cit. n. 1 above at 345-346. Construction Disputes, op. cit. n. 21 above, p. 26. Huse, Kirkland and Shumway, op. cit. n. 25 above, at 3.

12

Standard Methods of Measurement in England, provide forms of schedules as a pricing method. As with the lump-sum pricing mechanism, the parties may provide for a system of adjusting the unit price. The pricing mechanism may provide for changes beyond the parties' control, such as unforeseeable sub-surface conditions, or changes in law or regulations that affect some aspect of the contract. The contract may even provide for adjustment on the basis of changes in the cost of materials or labour. The ability of the contractor to obtain an adjustment to the contract price in respect of certain defined circumstances shifts the risk in respect of such circumstances from the contractor to the employer. The parties should, of course, define carefully any such circumstances and their potential impact on the unit price. The parties will need to agree on a precise method of calculating the quantities used. Although the costs of valuation and measurement associated with a project carried out under a unit-priced contract are not as high as those of a similar project under a cost-reimbursable contract, they are still higher than those necessary under a lump-sum contract. While a good idea in theory, and often in practice, parties should be wary of the potential for the bills of quantities system to be abused. After the Second World War, widespread usage of contracts of this type "rapidly produced a whole science of upward price manipulation bearing no relation to the site realities which lasted for decades due to the apathy of clients' legal advisors and ~he collusion of architects, engineers, etc".30 Eventual disillusionment with the bill of quantities method is perhaps one of the reasons for the growing interest in, and popularity of, the turnkey (and therefore lumpsum) contracting method.

1-25

Bonus schemes and currency of the price In addition to the pricing mechanism, the parties may want to add a bonus scheme to create an incentive for early completion. Such a bonus can be calculated in a manner similar to the calculation of liquidated damages, providing for a fixed amount or percentage of the contract price for each day of early completion. The employer may wish to defer payment of the bonus to the contractor until after the works have been operational for a period of time, such as after the defects liability period, to ensure proper performance of the works. Further, it is not normally advisable to use the bonus system in a cost-reimbursable contract without including a mechanism designed to eliminate any incentive that the contractor might have to construct using more costly methods in order to achieve early completion. The parties will also need to consider the currency in which the price is paid. If the price is to be paid in the currency of the costs incurred by the contractor and such currency is different from the currency of the employer's

30

"No-No" op. cit. n. 9 above at 7.

13

1-26

1-27

PAYMENT METHODS

TYPES OF CONTRACT

country, then the employer carries the risk of a change in the exchange rate between the currency of the employer's country and the currency of the price. Where the currency of the price is the currency of the employer's country then the contractor bears the risk of a change in the exchange rates. If the currency of the contract is a third currency, not that of the employer's country and not that of the costs incurred, then both parties will bear a portion of the risk of a change in exchange rates. In certain countries, the parties may also have to consider exchange control regulations, including restrictions on the currency of payment of a contract and restrictions on indexation tied to a currency other than the currency of the locale of the project. Currency ledging may also be available to layoff part or all of the currency risk onto one or more financial institutions.

Payment Methods 1-28

1-29

When considering the payment provisions of the contract, the parties must agree upon the methods of payment. The contract may provide for a certain portion of the price to be payable upon commencement of the works, through advance payments, in order to provide the contractor with sufficient cash flow to cover the substantial expenditures which may be required at the early stages of construction. For example, in a power plant project, advance payments may be provided for the purchase of certain equipment and machinery such as the generator and the turbines. This advance payment would then be repaid through reduction of future payments. The employer may also want a security to be provided for the amount of the advance payment. An advance payment guarantee for the amount can be provided by a third party much in the same way as a performance security, with the employer giving his consent to the guarantor chosen or a guarantor being indicated in the contract itself. The cost of the guarantee will lessen the benefit of the advance payment to the contractor, but may allow the employer to provide a larger sum than he would otherwise have supplied without the protection of the guarantee. Where funds must be transferred to different locations the parties must consider risks relating to exchange rate fluctuation during transfer, and the tax regulations concerning such transfers. The form of payment may also incorporate some guarantee of payment, such as the use of a letter of credit. There exist a number of methods of payment, three of which are discussed below. The second and third methods are the most commonly used.

it is not unknown on larger projects. When used on such large projects the payment after completion provides a form of contractor financing of the project, requiring the contractor to obtain outside financing himself or to auto-finance the construction. Sometimes this method will be used to finance a portion of the construction with payments extending well beyond completion of the construction.

Milestone payments Under milestone payments the parties set up a schedule of tasks for the contractor to perform. For each milestone achieved, the contractor is paid a portion of the lump-sum price or an amount in accordance with rate schedules, bills of quantities or cost-plus pricing. Payment occurs only after completion of the tasks required. Milestone payments at specified stages of completion provide an incentive for rapid progress. 31 Milestone payments can occur either at the completion of each given milestone, or periodically, resulting in payment for all milestones completed within the period involved. Thus the greater the progress during a payment period the greater the value of the payment received. Contractors may be tempted to carry out the more expensive tasks at the early stages of construction, resulting in less of an; incentive to progress at later stages of completion. Where combined with lump-sum pricing, milestone payments can avoid such "front-loading" by the contractor. 32 This approach may be combined with the progress payment method for certain portions of the works. For example, the parties may decide that the contract will be paid in accordance with milestones except for the price of the plant or certain materials for which the contractor will be compensated once they are in the employer's possession (such as upon delivery to the site).

Progress or scheduled payments

Payment after completion

The contract can provide for payment for work completed during a given period of time, calculating the value of the work done during the period, or simply setting a percentage of the contract price to be paid at the end of each period. The former method of payment is frequently used in connection with the unit-price method of pricing. The latter method of payment is not frequently used. There is little incentive for efficient completion under this latter type of periodic payment since the contractor receives remuneration irrespective of the progress achieved by the work completed. In order to balance the need for progress and timely completion with the use of progress payments, parties may institute different pricing or incentive

The first is rare in large construction contracts, involving the payment of the contract price only after completion of the works involved. This method is more common for smaller subcontracts or simple task-oriented contracts but

J2

14

1-30

)1

Construction Contracts op. cit. n. 2 above, p. 380. "Contracts" op. cit. n. 1 above at 345-349.

15

1-31

TYPES OF CONTRACT

programmes. The use of target costs, as described under cost-reimbursable pricing, will provide the contractor with an incentive to decrease the real cost of the project, while the use of unit pricing will define the value of work completed in order to avoid the effects of increases in costs of materials and labour.

CHAPTER

2

TURNKEY AND EPC CONTRACTS Advantages and Disadvantages of Turnkey and EPC Contracts In recent years the use of turnkey and EPC contracts for construction projects, and in particular infrastructure projects, ha~ become popular with employers and financing institutions. However, · although the turnkey approach is in fashion and it provides many benefits to these entities, it also has certain disadvantages.

2-01

Advantages In traditional design-bid-build projects, responsibility for design and construction is often spread between a number of parties. Design and construction tasks are often performed by separate entities or pursuant to separate contracts. Such projects are often split into different elements, or works packages. These packages will interact with one another (their "interface"). Interfaces exist between the design and all the construction packages but also between the individual construction packages themselves. Generally, in design-bid-build projects the employer takes the responsibility for co-ordinating these various project elements and their respective interfacing. For example, in the construction of a hydroelectric project the employer will have to ensure that the design element and the civil and electrical works interface correctly as well as between the civil and electrical works elements themselves- by seeing, for example, that the foundations can sustain vibration from turbines. Each contractor or participant will only have liability for the discrete project package for which he is responsible. This may lead to a number of problems. Contractors may make claims as a result of poor co-ordination between packages. One contractor may delay the work of others. Furthermore, it may be very difficult to allocate responsibility for defects between a designer and a contractor. By contrast, the turnkey or EPC contract makes the contractor entirely responsible for both the design and construction of the works. The employer receives a completed project in accordance with his performance specifications. When he looks for accountability as to the performance and quality of the works, he need look no further than the contractor. 16

17

2-02

2-03

TURNKEY AND EPC CONTRACTS

2-04

2-05

This means that the employer does not need to worry about co-ordinating contractors effectively (and avoids claims resulting from lack of interface definition). If he wishes to make a claim concerning a defect he can look to the contractor without the need to address whether it is a design or workmanship problem. In addition, single-point responsibility can also reduce the opportunity for claims by the contractor. Under more traditional contracting arrangements, these claims are often based on directions given by the engineer. Since the engineer is no longer a central co-ordinating figure in the turnkey contract and the contractor has taken on the responsibility for the design and construction the turnkey contract may provide decreased opportunity for claims. The contractor must deliver works that are fully operational to the specifications of the employer; any defect or fault is necessarily his responsibility except where the contract provides otherwise. Everything relating to the works can, thus, be concentrated in a single point of responsibility-the contractor. This single point responsibility has two notable consequences: first, the role of performance criteria; secondly, the standard of performance expected from the contractor. The contractor must design and build the works in a manner such that the performance of the finished works satisfies the criteria set out in the contract (otherwise known as performance criteria). The employer will define these performance criteria in such a way as to ensure that the works provide at least the level of performance required for profitable production. The performance criteria may specify output, input, waste, and any other performances the employer may desire. For example, in the construction of a coal-fired power plant the employer will want to ensure that the plant produces sufficient power to satisfy his commercial needs, in particular where he has entered separately into an agreement for a third party to purchase a certain amount of the electricity produced. Thus, these criteria set out levels of performance the employer expects; it is then the responsibility of the contractor to produce works that are in conformity with them. Under a traditional design-bid-build contract the construction contractor and the designer are held to different standards of performance for the completion of the works. Designers in many jurisdictions traditionally have not been required to guarantee results, but rather method. They are held to have a superior base of knowledge, sufficient in competency and ability to complete the design with a reasonable degree of technical skill. For example, courts in the United States have held that the designer, in the preparation of designs and drawings, must exercise his skill and ability, judgment and taste reasonably and without neglect.! This standard represents a professional duty of care. The contractor, on the other hand, often may be required to construct the works

ADVANTAGES AND DISADVANTAGES OF TURNKEY AND EPC CONTRACTS

with due care and diligence. The standards are often defined by the relevant legal system and in accordance with industry practice. The standard of performance can 'vary from contract to contract, and construction contractors are required to complete the works in accordance with the contract. Therefore, the contractor will not generally be held responsible for design deficiencies. Under a turnkey or EPe contract both the designer and contractor responsibilities are placed on the contractor along with a :stricter standard of performance. The standard of performance applied will be provided by the contract, or in the absence of a specific provision, by the applicable law. Under the Silver Book the standard is "fitness for purpose".2 According to English case law, a turnkey contractor is under strict liability to deliver a structure "fit for the purpose" for which it was made. 3 The "fitness for purpose" standard goes beyond a "professional" duty of care, placing on the contractor liability for any failure of the design to perform to the standards required. This provides the employer with works constructed and operational in accordance with the intended purpose or use of the works as provided in the contract. For example, in the construction of a thermal power plant the employer can set out in the employer's requirements the size and nature of the plant desired, as well as its operational output and the consumption necessary to reach such output. Therefore, if the employer's original conception of the works lacked some element necessary for it to be fit for the purpose intended, the contractor would be responsible for ensuring that the finished works contained the missing element. 4 Lump-sum price. The lump-sum pricing method is often used for turnkey and EPe contracts and enables the use of fixed payments by stages of completion. Lump-sum pricing and fixed insta lment payments provide the employer with greater certainty in overall cost as well as in the timing of payments. s This system reduces front-loading by the contractor and encourages rapid completion. It also facilitates financing, as lenders will have greater certainty of financial exposure and the timing of draw-downs. However, even where the contract is priced on a lump-sum basis, the contractor will normally have the right, under certain limited circumstances, to claim an increase in the contract price (as discussed above).

2-07

The role and influence of project financing. Lending institutions, such as the European Bank for Reconstruction and Development, often insist on lumpsum turnkey contracts for construction projects which they finance. Project lenders believe that lump-sum pricing and single-point completion responsibility reduce the completion risk to project lenders and provide greater

2-08

2 J

I

Stated in the U.S. case of Surf Realt)' Corp. v. Standing 78 S.E.2d 901 at 907 (1953) cited in Gravel), v. Providence Partnerships 549 F2d 958 (4th Cir. 1977).

18

2-06

4

5

Silver Book sub-clause 4.1. IBA v. EMI and BICC (1980), 14 B.L.R. 1. For a more detailed discussion of the "fitness for purpose" obligation, see Chap. 8. I.N.D. Wallace, Construction Contracts: Principles and Policies in Tort and Contract (Sweet & Maxwell, London, 1986), p. 408 (hereinafter Constmction Contracts).

19

ADVANTAGES AND DISADVANTAGES OF TURNKEY AND EPC CONTRACTS

TURNKEY AND EPC CONTRACTS

certainty of overall financial exposure. This method of contracting is becoming increasingly prevalent for international infrastructure projects. This is particularly true in BOT and similar projects, where limited recourse financing makes lenders wary of taking further risks when it comes to the pricing of the construction project. 6

2-09

Speed of procurement. The traditional design-bid-build method of contracting contemplates separate and distinct design and construction phases. The turnkey or EPC method combines these two phases and allows construction to proceed along a "fast-track"; in certain cases the contractor can even commence construction prior to the completion of the design phase. Consequently, the turnkey method of contracting may result in earlier project completion.

2-10

Efficiency. Since the contractor both builds and designs the works, the contractor no longer needs to take the time to understand the employer's designs. 7 The design should also take into consideration the contractor's methods of construction, providing more efficient and timely completion. 8 The control given to the contractor should facilitate implementation of new and better approaches to design, developed through his experience and expertise. The contractor will have an incentive to implement such timesaving changes under the turnkey structure, which may not be true under more traditional contracting methods. Since the designer and the constructor work as a team, they are more likely to identify critical flaws in the design at an earlier stage, ensuring avoidance or mitigation of the flaw when such action is more effective. This team approach will help avoid many design and construction risks which a separate designer and constructor would not be able to identify.9 The joining of the design and construction task under one contractor may also reduce the number of disputes which arise between the contractor and employer.

Disadvantages

2-11

Loss of control. The overall design and construction supervision role of the engineer is absent from the turnkey contract. Under the Silver Book, the engineer's supervisory role has been replaced, but in part only, by that of the employer's representative. This new role is relatively flexible, allowing D. Blumental, "Sources of Funds and Risk Management for International Energy Projects" (1998) 16 Berk. J. /nt'/ Law 267, online: LEXIS at 271, 288-289. 7 However, contractors operating under the terms of the Silver Book would be wise to take time to understand employer designs, as the contractor is strictly liable for any designs proVIded by the employer under the Silver Book. See discussion in Chap. 9 (design) • Construction Contracts, op. cit. n. 5 above, p. 407. 9 Brown, "Opportunities and Risks of Design Build Projects", The Construction Superconference, San Francisco, U.S., December 7-8, 1995, p. 5.

input in and control of the design and construction of the works. However, the turnkey model generally contemplates less day-to-day intervention than is present under a traditional design-bid-build contract. Under the turnkey contract, it may be more difficult for the employer to exercise his variation power properly. He may be distanced from the design, reducing his understanding of the processes used and his ability to verify the need for a variation and whether the variation proposed will affect the performance of the finished works. Where the engineer designs and co-ordinates the construction, the employer knows at each stage how the works may need to be altered. In the absence of the engineer, the employer's understanding of the process of the design and construction of the works may be diminished. The contractor will want to execute the works within the parameters of the employer's requirements for the least cost possible. The contractor in a turnkey or EPC contract may be tempted to under-design the project in order to cut his costs and save on time. Therefore, under the turnkey or EPC model the employer will still need to provide supervision of the construction, to ensure that the contractor's performance satisfies the contract requirements. Indeed, where the nature of the project is such that design changes are likely to be necessary (and yet where the contractor will not be entitled to an increase in the contract price) the employer should be aware that the ultimate maintenance costs and long-term performance of the project's structure may be negatively affected. 1o Some employers try to offset this risk by requiring the successful bidder to operate and maintain the facility for a period of time after construction, thereby providing the contractor with incentive to produce an efficient, low-maintenance product. 11 Cost of tender.12 When tendering for a turnkey contract, the contractor often must have a design in the advanced stages of completion, having made sufficient tests and studies to know the costs and the level of risk involved in the project. Under such circumstances, the cost of tendering a turnkey contract can be quite high. In order to counteract the expense of bidding, the World Bank has suggested limiting the number of bids to a maximum of six, based first on technical merit and secondly on price competition. 13 The employer can also offer to make a payment to those contractors giving serious bids, but who are not chosen. This will decrease the cost of bidding to the contractor and increase the quality of the bidding pool. However, in practice, employers do not often provide for such payment.

6

20

M.L. McAlpine, "Construction Law: Will Design-Build Contracting Really Solve All of the Problems?" (1997) 76 M/ Bar Jnl. 522, online: LEXIS at 557; I.N.D. Wallace, "Design-andBuild: a No-No for Owners" (1999) 4 Canst. & Eng. L. 7 at 8. " M.L. McAlpine, op. cit. n. 10 above, online: LEXIS at 555. 12 For further discussion of issues relating to the tendering process, see Chap. 5. 13 G. Westring, "Turnkey Heavy Plant Contracts from the Owner's Point of View" (1990) 7 I.C.L.R. 234 at 235. 10

21

2-12

TURNKEY AND EPC CONTRACTS

The cost to the employer of verifying the design-if such verification is possible considering the time frame of the tender process-may prove to be quite high. As one construction expert has noted: " ... if a really detailed check of the design and specification is attempted, using consultants engaged for that purpose by the owner, the basic saving in costs by way of reduced fees of professionals is likely to prove illusory" .14 The temptation to underdesign, combined with the difficulty of verifying the quality and efficiency of the design tendered, could result in increased contract cost. Further, carrying out an effective comparison between the various tenders (due to their individual design characteristics) will likely prove costly in both time and money to the employer. IS In order to avoid the temptation to accept bids based on price rather than quality of design, the World Bank suggests a two-stage bidding process. During the first stage contractors submit unpriced technical proposals. It is only during the second stage that prices are considered. A legal counsel for the World Bank suggests five main steps: pre-feasibility, feasibility, bidding, evaluation of bids and award of contract, and negotiation. 16 Such staged bidding will allow the employer to look first to the quality of the design, then only secondly at the bid price.

2-13

ISSUES IN CONNECTION WITH LUMP-SUM TURNKEY OR EPC CONTRACTS

Issues in Connection with Lump-Sum Turnkey or EPC Contracts There are a number of key issues relating to the drafting and negotiation of lump-sum turnkey or EPe contracts which drafters will need to consider carefully, to ensure complete and effective allocation of risk. The key issues include the following: (a)

(b)

(c)

Cost of risks,l7 Under the turnkey or EPC contract the employer benefits from an increased amount of the risk of the project being placed on the contractor. However, depending upon market forces, a contractor will attempt to increase the contract price in accordance with the increase in risk. IS Where there is little competition, the employer may have to assume the cost of the increased risk placed on the contractor. Thus the employer may end up paying a higher overall price for the project due to the degree of risk that is placed on the contractor and the need for the contractor to price such risk. Indeed, this is the idea behind the risk transfer and the justification for such transfer. Whether the advantages of the turnkey contracting method will outweigh the disadvantages will depend primarily on the nature of the project in question and the identity of the parties involved. Naturally, the answer will also be influenced by the balance of power in the contracting relationship. The current employer-dominated market often results in greater risk being allocated to the contractor, without a commensurate increase in the contract price to the contractor.

(d)

(e)

(f)

(g)

(h)

(i) I~ IS 16

11 18

Construction Contracts, op. cit. n. 5 above, p. 409. I.N.D. Wallace, "Design-and-Build: a No-No for Owners" (1999) 4 Const. & Eng. L. 7 at 8. G. Westring, "Turnkey Heavy Plant Contracts from the Owner's Point of View", op. cit. n. 13 above at 236-238. For further discussion of risk allocation issues, see Chap. 21. P.O. Marsh, Contracting for Engineering and Construction Projects (Institute of Purchasing & Supply, 1988) at 252.

22

19 20 21

The definition of the scope of the works l9 : the parties will need to specify carefully the scope of the works and the employer's requirements. in order to define the contractor's liability for design, construction and performance. 20 Use of an engineer or employer's representative: the parties will need to decide how to make use of an engineer and his role (or the role of the employer's representative) in the execution of the project. Increases in the contract price: the lump-sum price is fixed, except to the extent that the contract provides for price increases for certain events or modifications. Due to the contractor control over the works, the employer may want to limit the. ability of the contractor to obtain such increases. Extensions of time for completion: the time for completion of the works, otherwise fixed, can be extended under certain circumstances. The employer may want to limit the scope of the contractor's right to obtain such extensions. Resp~nsibilit.y for employer-supplied designs: the risk of employersupplied desIgns should be specifically allocated as between the parties. 21 Employer's ris.ks: the contract will need to list the employer's risks, so as to proVIde a comprehensive allocation of such risk for the project. Performance guarantees: the parties will need to discuss the form and amount of the security provided by the contractor to the employer for performance of the contract. This security can take the form of ~ bank guarantee or other security and/or retention money. Completion: the contract should provide a definition of the extent and nature of completion required before the employer takes over the works. It should identify whether any performance tests are to be passed before or after such completion. Defects liability: the parties will need to decide the period of time

The definition of the scope of the works is found in the employer's requirements in the Silver Book. Under the Silver Book, the contractor is responsible for almost the totality of the risk assocIated WIth these phases of the process. Under the Silver Bo~k, the contractor is deemed to have scrutinised the employer's requirements and therefore IS generally responsIble for the accuracy of any designs provided in such requIrements (SIlver Book sub-clause 5.1).

23

2-14

TURNKEY AND EPC CONTRACTS

during which the contractor will be responsible for remedying any defect that may arise in the works. (j) Training of staff: to the extent training of staff is required, the parties will want to provide for a period of time during the contract period and before the employer takes possession of the works for the contractor to train the employer's staff. (k) Use of a consortium or a joint venture by the contractor: a consortium or joint venture of contractors may prove beneficial to the employer as they can provide more expertise as well as a broader base of liability for the completion of the works. However, the employer will need to ensure that the contractors agree to joint and several liability and elect a representative of the joint venture with sufficient decision-making power to facilitate interaction with the employer. (I) Regulation of labour to be used on site: including origin of staff, facilities to be supplied and the skill and experience to be required of such employees. (m) The organisation of the site: including the contractor's responsibilities for safety and protection, as well as sanitation and services such as water and electricity. (n) Effect of local law and regulations including allocation of the responsibility for obtaining permits and licences. (0) Patent and know-how rights and licences of the technology necessary for the completion of the works. The drafter of a turnkey contract will need to consider each of these points, among others. Allocation of risk for these issues should follow a reasonable assessment of the ability of the parties to bear the risk in question.

Standard Form Design-Build, Turnkey and EPC Contracts 2-15

Sectors that require a high degree of expertise and technicality, such as the construction sector, often engender the development of standard form contracts. 22 Such forms can be an important factor in reducing costs for the participants, as they represent a predictable and stable basis upon which parties can begin negotiating. 23 Indeed, some attribute the sophistication and existence of standard form contracts for design-build projects to be a measure of the popularity of this project delivery system. 24 When using standard form contracts, however, parties should always keep in mind the specificities of the project (which may make a particular contract less suitable) as well as the particularities of the governing law (which may denature, if not override, sometimes key provisions of the standard form contract). 22

C. Pedamon, "How is Convergence Best Achieved in International Project Finance?" (2001) 24 Fordham Int'/ L.}. 1272, online: LEXIS at 1294.

23

ibid. at 1298. M.L. McAlpine, op. cit. n. 10 above, online: LEXIS at 553.

2~

24

STANDARD FORM DESIGN- BUILD AND TURNKEY CONTRACTS

Over the past few years a number of standard form design, build, turnkey and EPC contracts have been published. These include: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

the ENAA Model Form International Contract (1992); the ICE Design and Construct Conditions of Contract 2nd Ed. (2001); , the DBIA (1998); the AlA Contract Form A191 (1996); the AGC 415 (1994); the EIC Contract (1994); the FIDIC Orange Book (1995); the FIDIC Silver Book (1999); the FIDIC Yellow Book (1999); the FIDIC Red Book (1999).25

The above list is by no means exhaustive. A brief introduction to each of the listed contracts is set forth below. The ~~AA Contract Model Form, The Engineering Advancement Assocl~tlon of Japan (ENAA) is a non-profit organisation that was established 10 August 1978 and supported by the Ministry of Economy, Trade and I~dustry.of J~~an and by various other national and local government agenCies, UniverSIties and research organisations. The Association has the support of numerous specialists from member companies as well as various experts in their respective fields. 26 ' . This book. refers .to the second edition of the ENAA model form published 10 1992, which reVised the first edition issued in October 1986. Volume 1 of the EN~A Model ~orm for Process Plant Construction is reproduced in the appendl~es of thiS book. The remaining four volumes, Samples of Appendices (Volume 2), Guide Notes (Volume 3), Work Procedures (Volume 4) and Alternative Form ~ithout Process Licence (Volume 5) are not reproduced. T~e form contract IS meant for use in connection with the design and construction .of process plants using the turnkey approach.27 In 1996 the ENAA published a standard form relating to Power Plant Turnkey Cont~a~ts. That edition consisted of three volumes: Agreement and General Condlt1ons (Volume 1), Samples of Appendices (Volume 2) and Guide Notes (Volume 3). It has not been reviewed for the purposes of this book.28 The ICE Design and Construct Conditions of Contract. This model contract :-vas drafted by the Conditions of Contract Standing Joint Committee which IS the permanent joint committee of the Institute of Civil Engineers (ICE), the l':I0te that, although not a turnkey contract, for comparison purposes this book will also con. SIder the terms of the Red Book. ~; jay~es, ".Turnkey Contracts: japan's Model Forms" (1993) 10 I.C.L.R. 251 at 253. Engmeermg Advancem~nt Association of japan, Model Form International Contract for 28 Process Plant ConstructIOn, Volume 3 Guide Notes (1992), p. 1. T~es~ fo~ms m~y ~ obtained by contacting the ENAA at GECIENAA, CYD Bldg. 1-4-6, NIshI Shmbashl,. Mmato-ku, Tokyo 105-0003, japan; telephone +81 35024441; fax +81 3502 5500; emaIl [email protected]. 25

25

2-16

2-17

STANDARD FORM DESIGN-BUILD AND TURNKEY CONTRACTS

TURNKEY AND EPC CONTRACTS

design-build method of contracting, the AGC first published a set of standardised design-build contracts in the early 1990s. 36 In 1999 the AGC published the standard form contract AGC 415 to be used as a follow-on document to the 1999 edition of AGC 400. Unlike its predecessor, AGC 415 is not intended as a stand-alone agreement, but rather assumes that schematic design documents plus a preliminary estimate and schedule (i.e. the work product of AGC 400) is part of the owner's program provided in AGC 415. The revision of AGC 415 was developed with the advice and cooperation of the AGC Private Industry Advisory Council which council is comprised of a number of Fortune 500 owners' design and construction managers who meet with AGC contractors to discuss issues of mutual concern. 37

Association of Consulting Engineers and the Federation of Civil Engineering Contractors. This drafting body has a long history in and experience of traditional forms of contract, including, most recently, the ICE Minor Works 3rd edition (2001) and the ICE Conditions of Contract, 7th edition (2001). The ICE Design and Construct Contract 2nd edition, referred to here as the ICE Contract, is based on the traditional form contracts of the ICE and adapted for use in connection with the design and construction of civil engineering works. The second edition of the ICE contract reflects certain changes made in light of "legislative change and [... 1evolution of working practice".29 2-18

2-19

2-20

The DBIA Agreement Between Owner and Design-Builder-Lump Sum. The Design-Build Institute of America (DBIA) was founded in 1993 in order to promote the design-build project delivery process throughout industry and government in the United States. 30 In 1998 the DBIA published Document No. 525, Standard Form Agreement Between Owner and Design-Builder-Lump Sum. This form is examined in this book, along with Document No. 535, a Standard Form of General Conditions of Contract Between Owner and Design-Builder, which complements this document.

The European International Contractors Turnkey Contract. The European International Contractors (EIC) is associated with the FIEC (Federation de l'Industrie Europeenne de la Construction) and the CICA (Confederation of International Contractors' Associations). Its membership includes 15 construction industry federations in 15 different European countries. 38

2-21

The FII~IC Design-Build and Turnkey (Orange Book). Created in 1913, the Federation Internationale des Ingenieurs-Conseils (FIDIC) represents national associations of consulting engineers. It maintains its seat and secretariat in Lausanne, Switzerland. The first FIDIC conditions of contract were published in 1957 with the aid of the Federation lnternationale du Batiment et des Travaux Publics (FIBTP). The (1995) Orange Book represents the fifth FIDIC form of contract. It is intended for use with international design and construct contracts.

2-22

The FIDIC Plant and Design-Build (Yellow Book). The (1999) Yellow Book (first edition) is based both on its predecessor (the (old) Yellow Book) and on the Orange Book. 39 The Yellow Book is intended "for plant and for building and engineering works designed by (or on behalf of) the Contractor where, nonetheless, the Employer may have executed some design".4o

2-23

The AGC Document 415 Standard Form of Design-Build AgreementLump Sum. The Associated General Contractors of America was formed in 1918 with the intention, amongst others, to adopt standard form construction contracts "which would equitably divide responsibilities and risks and assure fair competition for works". 35 In response to a renewed interest in the

The FIDIC Construction (Red Book). The (1999) Red Book (first edition) is based on its predecessor (the (old) Red Book) and is intended to be "suitable for building and civil or other engineering works designed by the Employer or by his representative, the Engineer" .4!

2-24

Online: The ICE http://www.ice.org.uklnavigationlindex_news.asp?page=/newsI pressarchive.asp Online: The DBIA http://www.dbia.org/aulindex.html(date accessed: August 16, 2001); online: The DBIA hrrp:/lwww.dbia.org/aulmission.html(date accessed: August 16,2001). R.J. Smith, "Risk Identification and Allocation: Saving Money by Improving Conrracts and Contracting Practices" (1995) 12 I.C.L.R. 40 at 58. M.L. McAlpine, op. cit. n. 10 above, online: LEXIS at 558. American Institute of Architects, Form A 191 Instruction Sheer at 1. J.E Butler, "Protecting Owner with Conrract Clauses" in R.E Cushman & K.S. Taub (eds), Design-Build Contracting Handbook (Wiley Law Publications, New York, 1992),253 at 255. T.J. Stipanowich, "Reconstructing Construction Law: Reality and Reform in a Transactional

System" (1998) Wis. L. Rev. 463, online: LEXIS at 485 n. 74 citing in turn Booth Mooney Builders (or Progress 6 (1965). ' , ~; M.L. McAlpine, op. cit. n. 10 above, online: LEXIS at 553. AGC Document 415 Instruction sheet. 38 Dr J.J. Goudsmit, . "The EIC (European International Contractors) Turnkey Contract 39 (Co?dltlons for DeSIgn and Construct Projects)" (1995) 12 I.C.L.R. 23. Online: FIDIC http://www.fidlc.org/resources/contracts/courses.asp (date accessed, April 4 2001. . ,

The AlA Form A191. The American Institute of Architects (AlA) is a national association of architects whose form contracts for design-build projects are a standard in the construction industry of the United States. 3! AlA contracts are particularly well suited for architectural projects. 32 The AlA A191 Standard Form of Agreement Between Owner and Design/Builder is for use where the employer contracts directly with one entity for both design and construction services. 33 The AlA A191 is a two-part agreement, developing the project and the design through two separate agreements, one for preliminary design and budgeting and one for final design and construction. 34 This structure and the guiding concepts of this form are markedly different from the approaches of the other standard forms examined in this book.

29

30 31

I

32 33 34 35

26

40

41

C. Wade, "~istory and Scope of the Three Major Books" (1998) online: FIDIC http://www.fidlc.comldocumentsllaunchlwade1.html(date accessed: November 19 1999) at 2 ibid. at 2. ' .

27

TURNKEY AND EPC CONTRACTS

2-25

Due to significant changes between the two versions of the Yellow and Red Book contracts, FIDIC issued the new contracts as first editions. CHAPTER

The FIDIC EPC and Turnkey Projects (Silver Book), The Silver Book (1999 first edition) was issued for EPC Turnkey Projects and is suitable for BOT projects as well as process plant projects (such as E&M, or electrical and mechanical, projects).42 The Silver Book provisions arguably reflect industry practice at the expense of FIDIC's traditional even-handed approach. 43 Under the Silver Book, the contractor takes a higher degree of risk and, therefore, the construction time and cost are more certain. 44

31

FIDIC DESIGN-BUILD, TURNKEY AND EPC CONTRACTS Introduction Over the past 40 years, the Federation Internationale des IngenieursConseils (FIDIC) has developed an unparalleled reputation as the leading body for the development of model standard form contracts for use in the international construction industry. In September 1998, FIDIC published four new or revised standard form contracts comprising new editions of two existing forms-the Red Book 2 and the Yellow Book 3-and two completely new forms-the Silver Book4 and the Green Book. s Definitive editions of these contracts were published in 1999. Previously, FIDIC had in place two contracts that were based on the nature of the works: broadly speaking, the Red Book (fourth edition)6 dealt with civil engineering works and the Yellow Book (third editionj7 with electrical and mechanical works (in both instances, the employer and/or the engineer either supplied the design or played a central role in producing it). FIDIC prepared the Orange Book (first edition)8 to provide a contract where the contractor supplied the design and took single-point completion responsibility. The Orange Book, unlike the old Red and Yellow Books, contemplates the use of an employer's representative and does not use the term "Engineer". The new Red and Yellow Books have shifted this perspective to contracts based on the relationship between the parties, particularly with reference to which party takes responsibility for the design. 9 The revised Red Book is now primarily focused on those situations where the employer will supply A previous version of this chapter (in anticipation of the publication of this edition) first appeared in (1999) I.C.L.R. 27 and was co-authored by Joseph A. Huse and Jonathan Kay Hoyle. 2 Conditions of Contract for Construction (for Building and Engineering Works Designed by the Employer) (1998). J Conditions of Contract for Plant and Design-Build (for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor) (1998). • Conditions of Contract for EPC Turnkey Projects (1998). S The New Short Form of Contract (1998). 6 Conditions of Contract For Works of Civil Engineering Construction (1992). 7 Conditions of Contract for Electrical and Mechanical Works (1998). S Conditions of Contract for Design-Build and Turnkey (1995). • See also the comments of Christopher Wade in his paper "History and Scope of The Three Major New Books" in FIDIC's New Standard Forms of Contract, IBC U.K. Conferences Limited. 1

42

43 44

ibid. at 5. ibid. at 4; see generally C. Wade, "The Silver Book: The Reality" (2001) 18 (3) I.C.L.R. 497. Online: FIDIC www.fidic.orglresources/contracts/courses.asp (date accessed: April 4, 2001).

28

29

3-01

3-02

FROM THE ORANGE BOOK TO THE NEW YELLOW BOOK

FIDIC DESIGN-BUILD, TURNKEY AND EPC CONTRACTS

3-03

the design (and an engineer will be used) and the new Yellow Book on those situations where the contractor supplies the design (and an engineer will be used). By contrast, the Silver Book is intended to deal with something entirely new in FIOIC's scheme: an EPCIO turnkey contract where the contractor takes responsibility for design and the contract is on a strictly two-party basis (that is to say, there is no intermediary such as the engineer). The new FIOIC contracts are harmonised around the same basic format: that of the Orange Book. Therefore, the new Red, Yellow and Silver Books are now all structured in the same way: the 20 clauses of the Orange Book taking account of the particulars of each contract. This harmonisation has extended to the language of the contracts. Much of the basic Orange Book language has been retained in the three contracts. The author welcomes, for the most part, the specific drafting changes to, for example, the new Yellow Book (as compared to the Orange Book) that FlOIC has undertaken. However, he questions the rationale used in developing the new Yellow Book and Silver Book, particularly in light of their relationship to the existing Orange Book and the role they will playas design-build contracts.!! This chapter will first provide some preliminary comments on the new Yellow Book and the Silver Book. The chapter will then consider FIDIC's overall approach to design-builditurnkey/EPC contracts and attempt to reach certain tentative conclusions regarding the policy underlying the new Yellow Book and the Silver Book. This chapter is not meant to constitute a detailed analysis of the language of the new Yellow Book and the Silver Book, which may be found in subsequent chapters.

From the Orange Book to the New Yellow Book 3-04

The following analysis will first describe certain (but not all) of the major changes made to the drafting of the Orange Book in the development of the new Yellow Book. It questions whether, instead of drafting the new Yellow Book, FIDIC should simply have prepared a second edition of the Orange Book. All parenthetical clause references are references to clauses in the Yellow Book.

Major drafting changes

3-05

"Defects Notification Period" (Sub-clause 1.1.3.7). This definition is not in the Orange Book. The concept of the contract period in the Orange Book

10 II

Engineering, Procurement and Construction. For further discussion of this term see para. 3-32 below. FIDIC now has three design·build contracts: the Orange Book, the New Yellow Book and the Silver Book.

30

has been removed (something the author welcomes). The period is defined as one within which defects are notified and runs from the date on which the works are certified as being complete. Assignment (Sub-clause 1.7). Surprisingly, the Orange Book did not contain any general language concerning assignment. This omission has been corrected in the new Yellow Book. Neither party can assign any "benefit or interest" without the prior agreement of the other party. However, they can assign, as security, the right to money due under the contract to a "bank or financial institution". This is clearly a sensible addition.

3-06

Compliance with Laws (Sub-clause 1.13). Under the new Yellow Book scheme the employer has been given responsibility for obtaining "the planning, zoning or similar permission for the Permanent Works, and any other permissions described in the Employer's Requirements".

3-07

Employer's Financial Arrangements (Sub-clause 2.4). This sub-clause is not in the Orange Book. The employer must furnish "re~sonable evidence" after a request from the contractor that the financial arrangements for the project have been made and are being maintained. This seems a fair measure-the contractor should have a means of satisfying himself, if the need arises, that the employer is capable of paying. However, the sub-clause leaves open the issue of what constitutes reasonable evidence. This ambiguity is particularly important given the remedy that the contractor has if he is not satisfied by the employer's evidence.!2

3-08

Employer's Claims (Sub-clause 2.5). This sub-clause is not found in the Orange Book. It mirrors the formal requirements placed on the contractor by making the employer follow a claims procedure for certain payments he wishes to obtain from the contractor or any extension of the defects notification period. The employer must present a notice to the contractor after which the engineer determines the claim on the basis of the particulars supplied.

3-09

The Engineer (Clause 3). The employer's representative in the Orange Book is replaced, in the new Yellow Book, by an engineer; however, his powers and duties under the contract are broadly similar to those of the employer's representative (for example, the first determination of extensions of time and extra cost, certification of payments, issue of the taking-over and performance certificates). As under the Orange Book, he does not have the authority to amend the contract, he must be suitably qualified and he may delegate his duties to an assistant. There are limited differences between the role of the engineer and that of the employer's representative (for example, sub-clause 3.4); however, most

3-10

12

See Clause 16 (Default of Employer) of the Yellow Book. The contractor is entitled to termi. nate the contract if he does not receive reasonable evidence within 42 days after giving notice.

31

FROM THE ORANGE BOOK TO THE NEW YELLOW BOOK

FIDIC DESIGN-BUILD, TURNKEY AND EPC CONTRACTS

of these differences are due to the drafting and best practice changes, many of which are described in this section (paragraph 3-05 et seq.). The author also notes that under sub-clause 3.2 of the Orange Book the employer's representative shall be a suitably qualified engineer or other appropriate professional and that under sub-clause 3.1 of the new Yellow Book the engineer is deemed to act on behalf of the employer.

3-11

Training (Sub-clause 5.5). This sub-clause is not found in the Orange Book and is a welcome addition. It sets up a regime for the contractor to train the personnel for operation and maintenance of the plant. The contractor is often best placed to carry out such training.

3-12

Testing (Sub-clause 7.4). The testing regime has been modified under the new Yellow Book. The employer now has the express right to vary the location or details of the tests by means of a variation. If the varied or additional tests show that the plant, materials or workmanship are not in accordance with the contract then the contractor pays the costs of carrying out the variation. This clause also contains a provision allowing the contractor to claim extra cost and time when "complying with the Employer's instructions (to refrain from proceeding with the tests) or as a result of a delay for which the Employer is responsible".

3-13

3-14

3-15

Remedial Work (Sub-clause 7.6). This is an entirely new sub-clause in the new Yellow Book. It provides that the contractor may now be asked to carry out remedial work on any plant and materials by removal, substitution or re-execution of the work. The contractor must comply with any such instruction irrespective of whether he intends to challenge its validity. Programme (Sub-clause 8.3). The programme provisions have been restructured and modified in order, presumably to take account of what FIDIC considers to be current best practice. Broadly, the contractor now has a duty to submit revised programmes when the operative programme is inconsistent with current progress or with the contractor's obligations. The contractor must now warn the engineer of "probable future events or circumstances which may adversely affect the work".13 Extension of Time for Completion (Sub-clause 8.4). In the new Yellow Book, two grounds for claiming an extension of time have been added to the Orange Book scheme. First, the contractor is able to claim for "unforeseeable climatic conditions"; secondly, he can claim for "unforeseeable shortages in the availability of personnel or Goods caused by epidemic, changes in Law or other governmental actions".

IJ

However, the language in the Orange Book relating to precedence networking techniques has been removed.

32

Tests on Completion (Clause 9). The new Yellow Book wording now takes account of three phases:

3-16

(i)

pre-commissioning tests including appropriate inspections and functional tests; (ii) commissioning tests including specified operational tests; and (iii) trial operation (it is made clear that trial operation does not constitute taking-over).

If any of the tests on completion have been unduly delayed by the employer then the contractor may claim an extension of time for completion and extra cost. In the event that the plant fails to pass the tests on completion then the employer has the same remedies as under the Orange Book.14 However, rejection of the works is no longer an unfettered right; it has been qualified by whether such failure deprives the employer of "substantially the whole benefit of the Works". Adjustments for Changes in Cost (Sub-clause 13.8). This sub-clause provides for the possibility of price adjustment in the new Yellow Book for "cost of labour, Goods and other inputs to the Works". This provision is optional ("if this Sub-Clause applies"); see, however, the similar clause in Part II of the Orange Book.

3-17

Insurance (Clause 18). There have been a number of changes to the insurance scheme under the new Yellow Book but perhaps the most noteworthy is that the contractor is no longer required to take out insurance for his design.

3-18

Force Majeure (Clause 19). The framework for force majeure under the Orange Book contains a number of unsatisfactory features. IS Under the new Yellow Book, there has been a wholesale reworking. Important changes have been made to what constitutes force ma;eure. 16 The insistence in the Orange Book of a force majeure event having to be beyond the control of both parties has been removed. The test has now become one based on an event which:

3-19

(i) (ii)

is beyond a party's control; could not reasonably be provided against before entering into the contract; (iii) could not be reasonably avoided or overcome; and (iv) was not "substantially" attributable to the other party. I. See sub-clause 9.4 Orange Book. The remedies are: (i) further repetition of tests, (ii) rejectIon of the works or section, and (iii) issuance of a taking-over certificate plus an agreed reduction in the contract price. IS See sub-clause 19.1 of the Orange Book. Note, for example, the concept of impossibility. 16 Changes that appear to be based on model wording set out by the International Chamber of Commerce (ICC) in Paris. Brochure No 421. See also the comments of Christopher Seppala in his paper "Risks, Force Majeure, Claims, Disputes and their Resolution" FIDIC's Four New Standard Forms of Contract, !BC U.K. Conferences Limited.

33

FROM THE NEW YELLOW BOOK TO THE SILVER BOOK

FIDIC DESIGN-BUILD, TURNKEY AND Erc CONTRACTS

Two examples of force majeure have been added-the operation of forces of nature and change in law.

Is the new Yellow Book a good idea?

3-20

3-21

FIDIC states that the Orange Book is suitable for works "which may include any combination of engineering (including civil, mechanical and electrical) and building works" (emphasis added)Y By comparison, the new Yellow Book is recommended "for the provision of electrical and/or mechanical plant, and for the design and execution of building or engineering works". The basis of the contract is stated to be that the contractor "designs and provides, in accordance with the employer's requirements, plant or other works which may include any combination of civil, mechanical, electrical and/or construction works" (emphasis added).18 From this standpoint, with the exception of the use of the term "Engineer", there would seem to be little to differentiate the aims of the new Yellow Book from the Orange Book. As discussed above, the role of the "Engineer" under the new Yellow Book is broadly similar to the role of the "Employer's Representative" under the Orange Book. Aside from the confusion that may be caused by use of the term "Engineer" in this context, it is also surprising from an historical perspective. In early drafts of the Orange Book, FIDIC had included the term "Engineer" but the term was deleted before the issue of the test edition. From a design and build perspective, the changes described in paragraph 3-05 et seq. above cannot be considered as radical. In this regard, the allocation of risk has remained broadly the same as the Orange Book. In certain limited instances, additional risk has been placed on the contractor-for example, it is now the contractor's responsibility to ensure that personnel are properly trained to operate the plant and he now has an express obligation with respect to remedial work. In certain limited instances, the employer has been allocated additional risk-for example, the employer takes the risk of obtaining planning and zoning permission for the works. In some cases, changes have modified procedures but not significantly shifted risk from one party to the other-for example, the tests on completion now comprise three phases including trial operation. On the basis of this comparison of aims and the actual drafting changes in the new Yellow Book, it is arguable that there is little essential difference between the Orange Book and the new Yellow Book-both are design-build contractS-that place substantial risk on the contractor. Consequently, it would seem legitimate to pose two questions: (i) (ii)

why did FIDIC go back to the use of the term "Engineer" in the design-build context; and why did FIDIC simply not issue a second edition of the Orange Book?

I 17 18

See the introduction to the Orange Book (1st edition). See the introduction to the new Yellow Book.

34

From the New Yellow Book to the Silver Book The following analysis will first describe certain (but not all) of the major differences between the new Yellow Book and the Silver Book and then query whether similar changes should also have been made to the new Yellow Book and the Orange Book. All parenthetical clause references are references to clauses in the Silver Book. The reader should note that virtually all of the changes described in paragraph 3-05 et seq. above, with the exception of those in respect of the "Engineer", "Adjustments for Changes in Costs" and "Extension of Time for Completion", have been included in the Silver Book.

3-22

Major drafting changes Employer's Administration (Clause 3). Consistent with FIDIC's stated aim of making a strict two-party contract, the role of the engineer or employer's representative has been removed. The employer deals directly with the contractor; for example, the employer determines in the first instance claims for extra cost and/or extension of time. However, the employer has the option of having a representative if he so wishes and he may delegate any authority to such a representative.

3-23

Setting Out (Sub-clause 4.7). The contractor now takes responsibility for "the correct positioning of all parts of the Works, and shall rectify any error in the positions, levels and dimensions or alignment of the Works". The corresponding provision of the new Yellow Book-according to which the employer is responsible for any errors "in these specified or notified items of reference" and the contractor may, under certain circumstances, seek an extension of time or extra cost if extra work is necessary as a result of such errors-has been deleted.

3-24

Site Data (Sub-clause 4.10). The contractor is responsible for verifying as well as interpreting all relevant data in the employer's possession, made available to the contractor, on hydrological and sub-surface conditions at the site. The corresponding provision of the new Yellow Book does not contain any such obligation on the contractor in respect of the verification of the data.

3-25

Unforeseeable Difficulties (Sub-clause 4.12). Under the new Yellow Book, the contractor may obtain extra time or cost in the event that he encounters unforeseeable sub-surface conditions. Under the Silver Book, the contractor is deemed to have taken account of all necessary information; furthermore, the contract price is not adjusted "to take account of any unforeseen difficulties or costs" (emphasis added) except as otherwise

3-26

35

FROM THE NEW YELLOW BOOK TO THE SILVER BOOK

FlOIC DESIGN-BUILD, TURNKEY AND EPC CONTRACTS

stated in the contract. Contractors will argue that this is an unreasonable allocation of risk.

3-27

Design Obligations (Sub-clause 5.1). Under the Silver Book, the contractor has been allocated almost all of the design risk. The contractor is deemed to have taken account of the employer's requirements and he is "responsible for the design of the Works and for the accuracy and completeness of the Employer's Requirements (including design and calculations)". Thus, as under the ICE19 design-build contract, the contractor's risk with respect to design includes not only his design for the works but also the employer's requirements generally. The employer also disclaims any responsibility for information given to the contractor. The above responsibility is, however, tempered by the addition of wording identifying three parts of the employer's requirements for which the employer remains responsible: (i) the definitions of intended purposes of the works; (ii) criteria for testing and performance of the works; and (iii) any other portions of the works for which the employer is responsible under the contract.

3-28

Taking Over of Parts of the Works (Sub-clause 10.2). Under the Silver Book, there is a simple bar on early taking-over or use of parts of the works by the employer subject to the agreement of the parties.

3-29

Tests after Completion (Clause 12). The Silver Book provides that the contractor is responsible for carrying out the tests after completion.

3-30

The Contract Price (Clause 14). The payment structure of the Silver Book is different from the new Yellow Book. The concept of certification has been dropped; it has been replaced by interim payments (although both the new Yellow Book and the Silver Book have the same system of statements for showing the amounts due). This is consistent with the direct relationship between the employer and the contractor contemplated by the Silver Book.

3-31

I

Employer's Risks (Sub-clause 17.3). There are three areas of risk which the Silver Book has not retained as employer's risks from the new Yellow Book scheme. First, use or occupation by the employer of any part of the works, presumably on the basis that the employer is barred from using the works except as agreed between the parties. Second, design of any part of the works by the employer's staff and personnel, on the basis that the contractor takes all the design risk. Third, any operation of the forces of nature which is not reasonably foreseeable.

Is the Silver Book a good idea? The Silver Book, according to FIDIC, would appear to be designed for a specific role. It is described as being a contract for "EPC Turnkey Projects". It would be inappropriate to place any exaggerated emphasis on the nomenclature "EPC!Turnkey". FIDIC has, until now, placed no special emphasis on the use of the word "turnkey". As far back as 1995, in the introduction to the Orange Book, it was stated that "there are no universallyaccepted definitions of the terms 'design-build' and 'turnkey', except that both involve the Contractor's total liability for design" (emphasis added). In as much as a distinction was made it rested on turnkey contracts being the provision of a "fully-equipped facility, ready for operation and ... typically includ[ingJ design, construction, fixtures, fittings and equipment the scope of which would be defined in the contract documents" .20 Likewise with the term "EPC"; it is simply an acronym for "Engineering, Procurement and Construction" . FIDIC has set out in the introduction to the Silver Book what it believes to be the key concept of an "EPC" contract for use in a project finance context. It states that such projects require greater certainty about cost and, therefore, final price than is ordinarily the case (generally driven by the concern of lenders). Consequently, it is necessary for the contractor "to assume responsibility for a wider range of risks than under the traditional Red and Yellow Books" -all in the name of greater cost certainty. Thus, FIDIC seems to be putting forward the Silver Book as a design-build/turnkey with greater price certainty that will be acceptable to the employer (and lenders) for such a project. However, it goes on to state that the Silver Book is suitable for projects "where the government departments or private developers wish to implement their project on a fixed-price turnkey basis and with a strictly two party approach" (emphasis added). As can be seen from the previous section, the Silver Book places greater risk on the contractor than the Orange Book or the new Yellow Book. In the areas of site data, unforeseeable conditions and design, the contractor is allocated substantially all of the risk (apart from the intended purpose of the employer's requirements and the testing criteria). However, the number of such changes remains relatively small. With the exception of the role of the engineer/employer's representative and the related issue of certification of payment, the rest of the Silver Book does not appear to be fundamentally different from the Orange Book and the new Yellow Book. Furthermore, it is arguable that the scope of the changes that FIDIe has included in the Silver Book as compared to the Yellow Book are not sufficient to make the contract a "project finance" construction contract. In this regard, FIDIC states in the introduction to the test edition, that the contract "may need to be adapted to take account of the special, if not unique, 20

19

The Institution of Civil Engineers Design and Construct Conditions of Contract (1999), sub. clause 8(2)(b)_

36

See Hudson, Building and Engineering Contracts (11th ed., 1995), section 3.026 pp. 426-428, where the editor suggests that the expressions "turnkey" and "design-and-build" can now be said to be synonymous.

37

3-32

3-33

FIDIC DESIGN-BUILD, TURNKEY AND EPC CONTRACTS

characteristics of each project, as well as the requirements of lenders and others providing financing". 21

FIDIC Policy on Design-build, Turnkey and EPC 3-34

3-35

From the wider perspective of strategy and policy there appears to be some confusion over how the FIDIC "design and build" contracts (i.e. the Orange Book, the new Yellow Book and the Silver Book) will operate in practicethat is to say, how these contracts conceptually fit together and in which circumstances it would be appropriate to use each of them. FIDIC has chosen not to update the Orange Book. While the contract has been used as the basis of the drafting of the new Yellow Book and the Silver Book, the Orange Book itself has not been the subject of the new modifications. On this basis, the Orange Book would seem no longer to represent best practice and therefore should not be used unmodified. This policy of benign neglect towards the Orange Book is somewhat puzzling. The Orange Book had started to gain market acceptance and FIDIC is simply not in the habit of launching and then discarding form contracts. 22 The new Yellow Book has made a number of changes to the present Orange Book; these changes could be described as (i) minor drafting changes and (ii) incorporation of best practice. One of the few major conceptual changes is that the new Yellow Book now makes use of the term "Engineer". Yet, in fact, when the engineer's role under the new Yellow Book is examined it turns out to be quite similar to that of the employer's representative under the Orange Book. However, the use of the term "Engineer" may cause potential users to avoid adopting the contract. The Silver Book itself is largely based on the new Yellow Book. One major difference is that the engineer has been removed in order to make the contract a "two-party" contract-although in the event that the employer chooses to use a representative he presumably could have powers similar to those of the representative under the Orange Book. Another major difference is that additional risk has been placed on the contractor. However, FIDIC is also apparently keen to promote the Silver Book as a fixed-price turnkey contract on a two-party basis not limited to project financing. From this it would appear that FIDIC has not decided whether these changes regarding additional risk constitute "best practice" or constitute necessary modifications purely in a project financing context. 23 If FIDIC believes that such changes constitute best practice, it should also have made corresponding changes to the new Yellow Book and the Orange Book. However, it is 21 22

23

FIDIC POLICY ON DESIGN-BUILD, TURNKEY AND EPC

unlikely that contractors will agree that such changes should in fact be characterised as best practice, particularly when they are imposed outside of a project finance context. With these considerations in mind, the author has to wonder whether it would not have been more appropriate to update the Orange Book as FIDIC's flagship "design and build" contract and take account of its project finance applications in an expanded set of particular conditions.

Conclusions FIDIC is to be applauded for its decision to harmonise the basic structure and wording of the new Red, Yellow and Silver Books around one model. FIDIC is also to be congratulated on making a comprehensive attempt to make the new design-build contracts consonant with best practice. The author broadly welcomes the quality of the changes made to the drafting of the Orange Book in the development of the new Yellow Book and the Silver Book-although it is to be expected that employers and contractors will have differing views as to the appropriateness of certain of these modifications. However, the author queries why FIDIC went back to the use of the term "Engineer" in the design-build context and why it did not issue a revised version of the Orange Book instead of issuing the new Yellow Book. The Silver Book retains the changes made to the new Yellow Book but with a strict two-party approach. The Silver Book places completion risk on the contractor additional to that contemplated by the new Yellow Book and the Orange Book. FIDIC states that the Silver Book is suitable for all fixedprice turnkey projects (with a two-party approach). FIDIC apparently believes that the provisions regarding allocation of additional risk to the contractor constitute best practice for all such projects, and not just projects financed on a '"project finance" basis. If this is the case the author does not share FIDIC's view. Further, if indeed this is FIDIC's view then corresponding changes in the new Yellow Book and the Orange Book should have been made as well. If, however, FIDIC believes that the Silver Book is suitable for all such projects except that the allocation of additional risk provisions should be implemented only in the project finance context, then FIDIC could have prepared special conditions to the appropriare standard form design. build contract reflecting this approach.

For further discussion on this point, see Chap. 4. Wade comments that although the Orange Book has been superseded, in practice superseded FIDIC contracts continue to be used by certain parties years after a new edition has been published. C. Wade, "The Silver Book: The Reality" (2001) 18 (3) I.C.L.R. 497. For discussion and defence of the rationale behind FIDIC's introduction to the Silver Book, see ibid.

38

39

3-36

3-37

CHAPTER

4

THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT1 Introduction In August of 1.999, the Federation Internationale des Ingenieurs-Conseils ("FIDIC") published the first edition of its Conditions of Contract for EPCffurnkey Projects, commonly referred to as the "Silver Book". In the Introductory Note to the Silver Book, FIDIC states that the Silver Book is intended to be suitable, in particular, for BOT and similar type projects. This chapter will identify important issues and generally discuss the suitability of the Silver Book in BOT-type projects. It will begin by providing a description of a typical BOT power project, then discuss issues of risk allocation in such projects and conclude with an examination of the relevant provisions of the Silver Book as they relate to the BOT method.

t

Description of a BOT Project

The term "build-operate-transfer" or "BOT" is used to identify a particular type of project, generally falling within the broa'der category of project financing. In project finance, as the term is now commonly used, a project is developed and financed on a non-recourse or limited recourse basis. Project lenders look primarily to the revenues generated by the completed facility for repayment of the loan and to all the project assets as security for the loan. Project finance differs from traditional loan structures in that lenders generally have recourse only to project assets or limited recourse to sponsor assets. Under the BOT model a particular country's government ("host government") identifies an infrastructure need, for example, a power generation facility. Potential sponsors organise in an effort to obtain a concession from the government through a bidding process. Under such a concession, the sponsors agree to build and own the project for a specified number of years and to then transfer ownership of the facility to the host government. The sponsors will organise into some type of special purpose vehicle ("project I

4-01

A version of this chapter (in ancticipation of the publication of this edition) first appeared in Huse, "The Use of the FIDIC Silver Book in the Context of a BOT Project" (2000) 17 I.C.L.R. 384.

J.

41

4-02

DESCRIPTION OF A BOT PROJECT

THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

4-03

company"), which will normally be a limited liability company. However, the choice of form will depend on the specific needs of the sponsors regarding taxation, risk and management requirements. It is interesting to note that the roots of project finance for government projects may be traced at least as far back as the period between the middle ages until the seventeenth century.2 The historical roots of this process indicate that it may remain a useful method of finance for times to come. The project company will be obligated under the concession agreement signed with the host country to design and construct the works, and possibly operate the works during the concession period. Once the facility is built, the project company will use the income generated by the facility'S operations to make repayments of the loans incurred for the construction process and operate the facility. Any extra revenue will be distributed to the shareholders as a return on their equity. At the end of the concession period, the project company transfers the facility back to the host country that granted the concession. Funds for the facility's construction are provided by loans from any mixture of commercial banks, export-credit agencies or multilateral agencies. Generally, one or several commercial banks will organise the loan facility as the arrangers. The loan will often then be syndicated in order to allow a number of lenders to participate in the credit facility and to distribute the risk among a greater number of lenders. The credit agreement signed between the project company and the lenders will be a key document in a BOT project because it may impose detailed requirements to be incorporated in the concession, construction and other agreements. Pledges of project assets as well as sponsor and other guarantees will be put in place as security for the loan. As indicated above, revenue from the project's operation will fund loan repayments. The reason for using project financing for the construction of large infrastructure projects is evident. The sources of direct financing available from the public sector are not presently sufficient to fund the infrastructure needs of many developing economies in regions such as Africa, Asia and Eastern Europe. In particular, certain infrastructure projects, such as electrical power generation, require a scale of investment beyond the capabilities of the governments of most emerging economies. 3 Even in developed countries, many governments are unwilling to use their scarce resources to fund projects. 4 2

C. Pedamon, "How is Convergence Best Achieved in International Project Finance?" (2001) 24 Fordham Int'J L.J. 1272, online: LEXIS at n. 3.

D. Blumental, "Sources of Funds and Risk Management for International Energy Projects" (1998) 16 Berk. J. Int'l Law 267, online: LEXIS at 296. • Perhaps an indication of the widespread or growing use of BOT financing structures, UNIDO published UNIDO, Guidelines for Infrastructure Development Through Build-OperateTransfer (BOT) Projects (UNIDO, Vienna, 1996) (IDISER.0/22); and UNCITRAL published UNCITRAL, Legislative Guide on Privately Financed Infrastructure Projects (UN, New York, 2001) (UNDOC. NCN.9/SER.B/4) online: UNCITRAL Homepage (pdf format) http://www.uncitral.org!englishltexts/procurem/pfip-index-e.htm (date accessed: July 16, 2001). For further discussion see Pedamon, op. cit., n. 2, ahove. J

I

42

Figure 4.1

4-04

The structure of a BOT project Shareholders

Shareholders' agreement

Credit agreement

Power purchase agreement

Concession agreement

O&M agreement

~--------~OPERATOR

Construction contract

Fuel supply agreement

CONTRACTOR

This shortage of such public funding and a belief that the construction and operation of the facility would be more efficiently managed by a private entity has led to the development of the BOT project finance mode!.s The BOT method of project finance is rapidly becoming the vehicle of choice for large-scale infrastructure projects. 6 The BOT concept theoretically allows .1

6

Other variants include the BOO (build-own-operate) and the BLT (build-lease-transfer). D.A. Levy, "BOT and Public Procurement: A Conceptual Framework" (1996) 7 Ind. Int'l & Camp. L. Rev. 9.1 at 96.

43

4-05

THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

governments to obtain needed infrastructure without using public funds. In addition, the government will assume much less risk as compared to the project company and the various lenders. Although critics in a number of countries have questioned whether the BOT format truly gives significant advantages in comparison with more traditional formats, it is being used on an increasing number of major infrastructure projects worldwide. This increased use of the BOT financing techniques has led to a greater awareness among infrastructure project participants of the need for careful risk analysis and allocation in structuring a successful BOT project. Figure 4.1 shows the structure of a typical BOT power project. Such projects generally require a complex contractual structure, including a construction element that reflects the numerous interlocking elements. 4-06 The shareholders' agreement (top of chart): this governs the relationship of the shareholders in the project company. The agreement will cover items such as the business of the project company, conditions precedent to its creation, the issue of shares and the management of the project company. 4-07 The credit agreement (upper left): this contains the terms and conditions pursuant to which the lenders agree to loan funds to the project company. The lenders to the project may include commercial banks, export credit agencies and multilateral lending institutions such as the World Bank. The credit agreement is of particular importance in the BOT context as the lenders will generally be responsible for financing a substantial portion of the project. A typical equity to financing ratio might be 30 per cent to 70 per cent, respectively. As a result of this funding, the lenders will usually have a substantial influence in the drafting of the other agreements involved in the BOT project with a view to limiting the risk they bear (in particular the concession agreement, the power purchase agreement and the turnkey construction contract). 4-08 The concession agreement (upper right): the government grants a concession to the project company for a fixed period, the concession period, for the operation of a project which would often otherwise belong to the public sector. The concession agreement may also provide the legal and tax regime applicable to the project and any environmental obligations of the project company. The terms of the concession will need to satisfy the requirements of all of the project participants, including the lenders. 4-09 The power purchase agreement (left): this is of primary importance in a BOT power generation project. It creates a contractual relationship between the power purchaser and the project company obligating the power purchaser to purchase a certain amount of electricity over a given time period. This obligation may be based on a take-or-pay regime, whereby the power purchaser must purchase a minimum amount of power at a certain price. If it does not purchase (or take) the minimum amount, it must nevertheless pay the price. The project company is obligated to provide a certain quantity of electricity over the given period, and the power purchaser's obligation is subject to the condition that the project company is capable of delivering the amount in question for the relevant period. 44

DESCRIPTION OF A BOT PROJECT

The power purchase agreement will provide sanctions, including liquidated damages, where the project company fails to deliver electricity as promised (in particular as a consequence of the power plant not being finished within the time for completion or not performing as required). Failure to deliver where the works are not maintained in a manner sufficient to ensure continued operation at the intended output levels may also result in liquidated damages being imposed on the project company. The duty to purchase output may also involve requirements that the power purchaser maintain transmission lines and a power grid sufficient to receive the power transmitted. One of the more significant risks in the power purchase agreement is the devaluation of the local currency. Lenders will often require loan repayments in a hard currency, such as U.S. dollars, and may require the project company to fix power purchase obligations in the currency of repayment, rather than in the local currency. This causes the power purchaser to assume the risk of changes in the exchange rate, namely devaluation of the local currency due to inflation or other events. Consequently, if the local currency is subject to significant value fluctuation it may require more local. currency for the power purchaser to purchase the fixed amount of power from the project company. Since consumer electricity rates are generally inflexible, the price charged to the consumer may be insufficient for the power purchaser to meet its power purchase obligations to the project company. This risk of default is very real, and the power purchaser's default may cause a default by the project company with regard to its loan repayments. However, it is possible for the project company and the power purchaser to share this risk. Nonetheless, default of the power purchaser is a primary risk to the success of a BOT power project. The fuel supply agreement (lower right): this obliges a fuel supplier to deliver periodically a given amount of fuel at a certain level of quality to the operator. This agreement allocates market risk involved in the price and availability of fuel to the fuel supplier. The terms of this agreement will be closely linked to those of the power purchase agreement and operation and maintenance agreement. The operation and maintenance agreement (right): the project company and other project participants will want to ensure proper operation of the works during the concession period. Thus the project company will enter into an operation and maintenance agreement with some entity (possibly one of the sponsors) to operate the facility. The maintenance obligations of the project company under the power purchase agreement will in large part be passed to the operator. The government will also want to ensure that the operator is bound to a strict maintenance programme to avoid degradation during the final phases of the concession. In some cases warranties will be given as to the state of the works at the time of transfer to the government. The construction contract (bottom): in a BOT project this is generally a turnkey construction contract, sometimes referred to as an EPC (engineering, procurement and construction) contract. The lenders, in search of security and certainty of exposure, generally require the use of turnkey contracts with a fixed lump-sum price placing the majority (and in some cases substantially all) of the completion risk on the contractor. Lenders may also require

45

4-10

4-11

4-12

ALLOCATION OF RISK

THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

4-13

that the contractor acknowledge and consent to the assignment of the employer's right under the contract to the lenders.7 Other contracts: Although not represented on the chart, the project company may also enter into certain external credit support arrangements, as required by the lenders. Some examples are direct agreements (consent agreements), collateral warranties, equity contribution agreements, subordinated loan agreements and sponsor guarantees. The project company will also need to have in place a stand-by credit facility because the costs of the project normally exceed the original contract price. This may involve primary loan facilities in an amount greater than the original contract price or some form of stand-by credit facility.

Allocation of Risk 4-14

4-15

As the focus of this work is the FlDIC Silver Book, the following discussion of risk allocation does not attempt to cover all the risks to all the parties in a BOT project. Much of the risk allocation will occur in contracts other than the construction contract, such as the concession and the power purchase agreement. However, some aspects of risk allocation can be discussed generally before moving on to a more specific discussion of the FIOIC Silver Book provisions. The assessment of which parties will be affected by a particular element of risk, and in what way, will be quite complicated and difficult to clarify since many project participants typically assume several project roles (for example, the turnkey contractor may also be one of the shareholders of the project company and/or the operator). In most projects, the following risk allocation operates: market risk will be assumed by the project company (and the power purchaser to a limited degree-for example, in a power project); design, construction and commissioning risk will be assumed by the contractor; and operation and maintenance-related risk will be assumed by the operator. The majority of political risk, such as events of war, rebellion and delays by authorities, will generally be allocated to the government through the concession agreement. It is appropriate that the government accepts such risk as they are the sole party who could control it (by direct influence) and mitigate its effects. Any residual risk will be borne, in the first instance, by the project company, which will frequently attempt to transfer this risk to the host government. The project lenders, positioned as they are behind the project company, will want to limit their assumption of any risk, but will generally be unable to displace all of it.

I 7

B. De Cazalet & R. Reece, "The New FIDIC EPC BOT Contract" (1999) Project Finance Inf/, online: FIDIC http://www.fidic.orglresourceslcontractslbot_ pfi_ nov99.asp (date accessed: July 4, 2001) at 6.

46

Provisions that deal with risk allocation may be drafted so as to mirror the language of the concession, and other agreements, (e.g. power purchase). This will generally have to take account of considerations such as identical language for force majeure and extensions of time (e.g. for the project company under the concession agreement and the turnkey contractor). Such back-to-back language reduces the scope for ambiguity and gaps between the various agreements. However, in order for it to function effectively the governing law and dispute resolution clauses need to be identical. For example, to save time and money and to avoid the risk of conflicting decisions, the employer "may wish to try to find a way of involving the contractor in dispute resolution proceedings with the grantor or otherwise to oblige the contractor to accept findings made in:such proceedings". 8 A practical solution to such difficulties is to include "if and when" language in the turnkey contract-for example, the turnkey contract may state that the contractor is entitled to extensions of time, under certain circumstances, if and when such extensions are granted to the project company under the concession agreement. Few projects appear to implement such arrangements. The project company may also wish to see an overriding provision in the turnkey contract such that the contractor is under an obligation to perform so that the project company is not in breach of its obligations in the concession and other project agreements. Completion risk, containing elements of design, construction and commissioning risk as well as other residual risk, will be a factor for all of the principal project participants. A certain number of them will typically bear the greatest level of such risk (in particular, the Contractor), but even the power purchaser may end up bearing some of the completion risk. The allocation of risk for lenders is further affected by the recourse that is open to them with regard to the financing of the project. The financing may be recourse, non-recourse or limited recourse. Recourse financing provides the lenders with full recourse to the assets of the shareholders (or other project participants) in the event of default on repayment of the loan by the project company. Non-recourse financing limits the lenders' recourse to the assets of the project at hand. Limited recourse financing provides the lenders with recourse to the assets of the shareholders up to a limited maximum amount and over a limited period of time (although such financing may be structured in a variety of ways). In a limited recourse financing, the period of recourse may be limited to the period until completion of the works (which will generally be defined in the contract and marked by the issue of a certificate or the passing of specified tests). It may be limited to the period in which certain financial ratios are achieved or to the period until the works are "up and running" (e.g. subsequent to a period of performance at a certain level and over a certain period of time). In the event of certain breaches of a covenant or representation by the project company or its shareholders (often limited to intentional breaches) such limitations may no longer operate. 8

Ibid. at 6.

47

4-16

4-17

THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

BOT projects are typically financed primarily on a limited or nonrecourse basis with the cash flow generated by the project and the project assets constituting the principal project security. Therefore, project lenders (and consequently the other participants) in such projects have become particularly sensitive to the need to identify and allocate project risks at a very early stage of the development of the project. Although the contractor assumes much of the risk, vis-a-vis the owner, during the construction phase (see discussion below) the construction phase is the "most critical stage for the lenders" as in non-recourse financing they only have recourse to the project assets and "as such, the lenders take on proportionally greater risk".9

Understanding and Negotiating Turnkey Contracts lO in 1997, has been incorporated into the FIDIC Silver Book (e.g. sub-clauses 5.1 and 5.8). 5.1

The Contractor shall be deemed to have scrutinised, prior to the Base Date, the Employer's Requirements (including design criteria and calculations, if any). The Contractor shall be responsible for the design of the Works and for the accuracy of such Employer's Requirements (including design criteria and calculations), except as stated below. The Employer shall not be responsible for any error, inaccuracy or omission of any kind in the Employer's Requirements as originally included in the Contract and shall not be deemed to have given any representation of accuracy or completeness of any data or information, except as stated below. Any data or information received by the Contractor, from the Employer or otherwise, shall not relieve the Contractor from his responsibility for the design and execution of the Works.

Specific issues raised in connection with the use of the Silver Book in the context of BOT projects 4-18

As mentioned above, the Silver Book was specifically drafted for use in BOT projects. However, it is important to note that most large contractors, sponsor groups and law firms working in the area of project finance will have their own in-house standard EPC contract. For these entities, the Silver Book may serve as a solid reference to review and update their in-house standard forms. For those who do not have an in-house standard, the Silver Book can serve as a good basis for the EPC contract in a BOT project. EPC contracts are also heavily negotiated, and in practice it is more likely to find a single set of general conditions, rather than separate general and particular conditions as contemplated by the FIDIC Silver Book. When the Silver Book is being used for the turnkey construction portion of a BOT project the financing institutions involved as lenders in the project will wish to carefully review the construction-related risks and responsibilities of the contractor and his liability to the project company. For the purposes of the turnkey contract, the project company is usually the employer or owner. Therefore, in the discussion set forth below reference will be made either to the project company or to the" Employer", both terms having the same meaning.

Design

4-19

I

Financial institutions acting as the lenders in a BOT project generally require a single point of responsibility for the design and construction of the works. They therefore require the contractor to assume the risk of any defect or error in the design, including any defect or error in the employer's requirements. This idea, expressed by the author in the first edition of this book

9

48

D. Blumental, op. cit. n. 3 above at 288.

4-20

General Design Obligatio,:,s

However, the Employer shall be responsible for the correctness of the following portions of the Employer's Requirements and of the following data and information provided by (or on behalf of) the Employer: (a) portions, data and information which are stated in the Contract as being immutable or the responsibility of the Employer, (b) definitions of intended purposes of the Works or any parts thereof, (c) criteria for the testing and performance of the completed Works, and (d) portions, data and information which cannot be verified by the Contractor, except as otherwise stated in the Contract. In summary, sub-clause 5.1 makes the contractor responsible for the design of the works and the employer's requirements, which the contractor is deemed to have examined carefully. This clause further operates as a disclaimer of the employer's liability for any "error, inaccuracy or omission of any kind" in the employer's requirements and expressly denies any representations concerning the accuracy or completeness of the data and information therein. In its final paragraph sub-clause 5.1 does provide a list of some exceptions for which the contractor does not assume responsibility, such as definitions of intended purposes of the works, testing and performance criteria and data which cannot be verified by the contractor. These exceptions reflect the idea that the contractor cannot in fairness be held responsible for errors in the employer's definition of the intended purpose of the works because those parameters are solely within the control of the employer. However, it is important to consider this exception in light of sub-clause 4.1 which req uires

10

j.A. Huse, Understanding and Negotiating Turnkey Contracts (Sweet & Maxwell, London, 1997), p. 452. In addition, the author's suggestion that the language in Clause 4.1 of the

Orange Book allowing the contractor to notify and obtain a variation from the employer for any faults in the employer's requirements discovered prior to the commencement of the design process has also been incorporated into the FIDIC Silver Book.

49

4-21

THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

~he contractor to pr?vide works "fit for the purposes for which [they] are

struction risks, must be borne jointly and severally among all members of any joint venture, consortium or group of any type that constitutes the contractor (sub-clause 1.14). The contractor will also be responsible for any acts of defaults of any of its subcontractors (sub-clause 4.4). Silver Book sub-clause 4.1 "Contractor's General Obligations" states that "[t)he Contractor shall design, execute and complete the Works in accordance with the Contract, and shall remedy any defects in the Works .... The Contractor shall be responsible for the adequacy, stability and safety of all Site operations, of all methods of construction and of all Works." Sub-clause 4.1 also sets the standard that will be applied to the completed construction: the works must be "fit for the purposes" intended by the employer. In addition to the general obligation to execute and complete the works, the contractor has a related obligation of completeness. The completeness obligation means that the contractor must supply all materials and services necessary for the execution of the contract. The result of non-compliance with these obligations is the loss of payment for work not completed, deductions for the cost of rectification and replacement (sub-clause 14.6) and possibly liquidated damages (sub-clause 8.7) or contract termination (sub-clause 15.2). This author suggested in 1997 that the FIDIC Orange Book could be adapted for use in a BOT project by adding, among other things, a clause requiring the contractor to acknowledge that it has examined all aspects of the project prior to commencement. 11 This clause would serve to avoid claims in respect of time and cost changes once the works commence. The FIDIC Silver Book incorporates such a clause. In 'addition to the general attribution of construction risks in sub-clause 4.1, sub-clause 4.12 provides for "unforseeable difficulties".

Intended as defined In the Contract". The testing and performance criteria are also solely within the control of the employer and therefore not the responsibility of the contractor. The Employer in a BOT project will wish carefully to consider the appropriateness of each of these exceptions. The last exception in sub-clause 5.1(d) is perhaps the most subject to interpretation. It states generally that "the Employer shall be responsible for the correctness of ... portions, data and information which cannot be verified by the ~ontractor, except as otherwise stated in the Contract". This exception permIts the contractor to rely on information in the employer's requirements without taking responsibility for the correctness of the information when the contractor is unable to verify that information. This language may create some ambiguity and uncertainty as to what information in the employer's requirements cannot be verified by the contractor. A modification to this sub-clause 5.1(d) may be appropriate to reference and incorporate a schedule or exhibit which specifically lists the information from the employer's requirements that cannot be verified by the contractor and on which the contractor shall be able to rely without risk of liability. Without a specification of this information the contractor could simply claim in the event of a dispute that the incorrect information that perhaps led to a defect or delay of the works could not have been verified by the contractor and is therefore not his responsibility. Sub-cl~use 5.8, entitled "Design Error", allocates some additional design~elated. rtsk .to ~he contra~tor, stating: "If errors, omissions, ambiguities, inCOnsIstencIes, inadequaCIes or other defects are found in the Contractor's Documents, they and the Works shall be corrected at the Contractor's cost ' notwithstanding any consent or approval under this Clause." Construction 4-22

I

In addition to requiring a single point of responsibility for the design of the works, financial institutions acting as the lenders in a BOT project will require such responsibility for the actual construction of the works as well. As stated earlier, the primary means for lenders to allocate constructionrelated. risks will be to require the project company to pass substantially all these nsks on to the contractor in a fixed price, lump-sum turnkey contract. Lenders may also require performance and completion guarantees from the contractor, often supported by bonds or letters of credit. ~here are numerous. identifiable construction-related risks in any major proJect. Some of the prtmary risks are unanticipated construction costs and d~lays, the risk o.f unforeseeable physical conditions, the risk that the project wtll not be ~hY~lcally completed and the risk the project will not meet perf?rmance cntena. The FIDIC Silver Book provides a relatively comprehensIve treatment of these and other risks. A basic requirement in attributing risks is ensuring that all construction parti~ipants are jointly and severally liable to the project company. Under the Stiver Book, responsibility for contract performance, including all con50

4-23

4.12 Unforeseeable Difficulties Except as otherwise stated in the Contract: (a) the Contractor shall be deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the Works; (b) by signing the Contract, the Contractor accepts total responsibility for having foreseen all difficulties and costs of successfully completing the Works; and (c) the Contract Price shall not be adjusted to take account of any unforeseen difficulties or costs.

In a related provision, sub-clause 4.10 "Site Data" requires the employer to provide the contractor with any information in the employer's possession on subsurface and hydrological conditions at the site. It states that" [t)he Contractor shall be responsible for verifying and interpreting all such data. The Employer shall have no responsibility for the accuracy, sufficiency or II

Ibid. p. 452.

51

4-24

THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

4-25

completeness of such data, except as stated in sub-clause 5.1 [General Design Responsibilities]." This may cause the employer to assume responsibility for site data it provides to the extent that it is not verifiable by the contractor. The employer is responsible under sub-clause 5.1 for data and information it provides that cannot be verified by the contractor. To avoid this responsibility, the employer may choose (or be required by the lenders) to either provide no site data or to give the contractor a complete opportunity to verify any site data. Even in the latter case, it would still be prudent to obtain from the contractor a representation that he had full opportunity and was able to verify any and all data provided by the employer. Nonetheless, this attribution of risk to the contractor regarding site data essentially requires every bidder (assuming, for example, a project which includes works of underground construction) to conduct its own subsurface and hydrological study of the site conditions before being able to develop an appropriate tender offer. The inefficiency lies in the requirement that each bidder conduct such a survey rather than allowing them all to rely on a single site survey prepared by the employer or project company. FIDIC itself recognises this inefficiency and states in the "Introductory Note to First Edition" of the Silver Book that: These Conditions of Contract for EPCffurnkey Projects are not suitable for use in the following circumstances: • If there is insufficient time or information for tenderers to scrutinise and check the Employer's Requirements or for them to carry out their designs, risk assessment studies and estimating (taking particular account of Sub-Clauses 4.12 and 5.1). • If construction will involve substantial work underground or work in other areas which tenderers cannot inspect. ( ... )

FIDIC recommends that the Conditions of Contract for Plant and Design-Build [the "Yellow Book"] be used in the above circumstances for Works designed by (or on behalf of) the Contractor. 12

4-26

I

Yellow Book sub-clause 4.12 "Unforeseeable Physical Conditions" does not require the contractor to assume the risk of unforeseeable subsurface conditions. It provides for a potential extension of time and increase in cost in the event unforeseeable physical conditions are encountered on the site. The alternative under the Silver Book may simply be for the employer to conduct a thorough site survey, provide the information to potential bidders and assume responsibility for the accuracy of the data. Lenders might object to this. However, the assumption of risk for site data may reduce the overall contract price and allow more competitive and prudent bidding. If no site data is provided or if the employer refuses to assume responsibility for the site data it does provide, each bidder is essentially required to conduct its own 12

FIDIC, Conditions of Contract for EPCrrurnkey Projects, Introductory Note to First Edition, 1999.

52

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

site survey, which may be cost prohibitive and discourage bidders. However, some bidders may simply assume the risk without a proper survey and either increase the contract price to reflect the increased risk or make an imprudent bid in the hope that unfavorable site conditions will not be encountered. In either case, the employer and the project lenders may be at risk. Under the Silver Book, the contractor also must assume the risk of suitability and availability of access routes to the site (sub-clause 4.20) and is liable for any damage to the employer's equipment while being used by the contractor or its personnel (sub-clause 4.20). In the event of the contractor's faulty design, workmanship or materials the contractor risks a suspension of the works by the employer. In relation to a suspension by the employer due to these faults, the contractor will be responsible to the employer for any delays and additional costs (sub-clause 8_9) as well as any deterioration, defect or loss to the works occurring during the suspension period (subclause 8.12). \3 Despite the attribution of substantially all co~struction risks to the contractor, the Silver Book does set a limit on total liability in sub-clause 17.6. Sub-clause 17.6 "Limitation on Liability" states that: [t)he total liability of the Contractor to the Employer, under or in connection with the Contract other than under Sub-Clause 4.19 [Electricity, Water and Gas], Sub-Clause 4.20 [Employer's Equipment and Free-Issue Material], SubClause 17.1 [Indemnities] and Sub-Clause 17.5 [Intellectual and Industrial Property Rights), shall not exceed the sum stated in the Particular Conditions or (if a sum is not so stated) the Contract Price stated in the Contract Agreement.

Limitation of liability in an amount equal to the contract price should be acceptable to the project lenders, provided that the contract price is generally a good estimate of the cost of completion. However, if the contract price is deemed too low, the project lenders may require a higher limit on liability.

Tests on completion Tests on completion are those tests to be performed on the works in order to demonstrate their substantial completion. The works must pass the tests on completion before issue of a taking-over certificate. In order to review the testing procedure and its execution, the lenders may wish to have their own technical adviser present and involved in the tests, or possibly on site during the construction in general. The operator under the operation and maintenance agreement may also need to be involved in the testing in order to familiarise himself with the works and their operation. 13

Note that Clause 8.12 states generally that contractor is responsible for deterioration, defects or losses during a suspension instructed by the employer but does not indicate, as it does in Clause 8.9, that rhe contractor must be at fault for it to be responsible for these rhings.

53

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THE USE OF THE FIOIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

The Silver Book provides that if the works, or a section, fail to pass the tests on completion when they have been repeated, the project company may choose to reduce the contract price by an amount agreed between the project company and the contractor (sub-clause 9.4). The lenders may prefer to remove this power from the project company or qualify it, since they will not want to be left with works which underperform. The lenders may require that more detailed provisions be included as to the method of calculation of any contract price reduction. Any acceptance of substandard performance for a price reduction may need to be reviewed by the lenders' technical adviser to determine the ultimate effect on the project's operation. The lenders may also want the right to approve or disapprove any performance shortcoming or insist upon rectification at the contractor's cost. They will want to consider the effect of the contractor delivering a facility which underperforms on the other agreements involved in the project, such as the concession agreement, the power purchase agreement and the fuel supply agreement (to the extent that this provides for a minimum fuel purchase).

responsibility of the contractor. The parties may also wish to implement a dispute resolution mechanism specific to the relationship of the operator and the contractor during this interim period.

Taking over

4-28

!

Under Silver Book sub-clause 10.1, the contractor finishes the works, or sections of the works, which are then transferred to the care of the employer. This transfer is called taking over and occurs after substantial completion of the works and passing of any tests required by the contract. The works may then be subject to tests after completion, performed either by the contractor or the employer under the contractor's guidance. In most BOT projects, however, the project company does not take over care of the works after substantial completion. Rather, the works pass into the care of the operator after completion. Thus the question arises as to the responsibility of the contractor and the operator for the works during this period of taking over. The lenders are interested in the organisation of the responsibility for the works during the period of transfer between the contractor and the operator. This transfer may cover an extended period of time, where taking over of sections of the works is allowed. The lenders may want the contractor to remain responsible for ensuring completion and performance of the works, notwithstanding the completion of individual sections. In the alternative, taking over in sections may be precluded by the lenders so that the operator may take over fully completed works at one point in time. However, if commercial operation of a unit is necessary (for example, to begin some power generation before final completion), the lenders will want to ensure that there is no gap in responsibility for the works and that overlapping responsibilities do not inhibit use of the portion of the works taken over. One way to fill this gap is to require the contractor to remain liable to the project company for the entire works until taking over of all the sections and to require the operator to operate the facility under the supervision and

54

Tests after completion The Silver Book also provides for tests after completion if these are specified in the contract. The tests after completion take place after the employer has taken over the works or a section thereof. Sub-clause 12.2 "Procedure for Tests after Completion" indicates that "the Contractor shall carry out the Tests after Completion ... as soon as is reasonably practicable after the Works or Section have been taken over by the Employer". If defects or damage to the works are identified by the tests or a remedy is otherwise required that may affect the performance of the works, "the Employer may require the repetition of any of the tests described in the Contract, including Tests on Completion and/or Tests after Completion" (subclause 11.6). However, the Silver Book contemplates the possibility that the particular conditions may state amounts of non-performance damages for certain defects. In that case, if the works do not pass the tests after completion the contractor may pay these non-performance (liquidated) damages to the employer to satisfy his performance obligation or propose and execute any adjustments or modifications to cause the works to pass these tests (sub-clause 12.4). Again, the lenders should carefully consider the propriety of giving the contractor the option of paying non-performance damages in lieu of remedying defects. Accepting a liquidated sum rather than specific performance generally means the project is not complete to the expected performance level. The turnkey construction contractor will assume a large share of the risk that the works will not perform to the standards and criteria specified in the contract. This allocation is generally effected by placing performance criteria in the construction contract and requiring the works to meet a fitness for purpose standard evidenced by successful completion of the tests after completion, among other things. Failure of the works to pass such tests will expose the turnkey contractor to either rejection or, assuming minimum performance levels are met, liquidated damages, in an amount and to a maximum relative to the value of proper performance which must be specified in the particular conditions. The project company will ensure that these liquidated damages cover "back-to-back" any damages that would be incurred through other agreements, such as the power purchase agreement. The project company will also seek to allocate certain performance risks to the power purchaser, the fuel supplier (where relevant) and the government (for risks such as the failure of water supply in hydroelectric projects). The Silver Book contemplates that, subsequent to taking over, the tests after completion will be carried out to ensure that the works perform to the levels required by the employer's requirements. The lenders may decide to require the contractor to carry out any such tests before taking over, to

55

4-29

4-30

THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

ensure that the works satisfy the performance criteria before transfer of the care of the works and the contractor is relieved of the sanction of liquidated damages for delay. The minimum levels of performance, if any, will need to be reviewed by the lenders. The lenders will want to maintain maximum liability on the contractor where the failure is due to reasons attributable to the contractor. The project company's remedies and damages, for breach by the contractor of its obligations under the contract, will need to be reviewed by the lenders. In this regard, the lenders will need to consider carefully any proposed cap or limitation on the contractor's liability. Sub-clause 12.4 of the Silver Book provides that if the performance criteria are not attained then the contractor shall have the option either of making changes to the works in order to attain the performance criteria or paying liquidated damages. The lenders may prefer that the project company elect whether to require the contractor to make the changes or accept liquidated damages, thus maintaining the duty to achieve the performance criteria on the contractor.

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

Despite the general rule that the contractor is responsible for achieving completion on a certain date, it is commonly acc~pted that the contrac~or will not be responsible for delays caused by certalO types of events outSide his control. Silver Book sub-clause 8.4 is the primary provision dealing with time extensions.

The Contractor shall be entitled subject to Sub-Clause 20.1 [Contractor's Claims) to an extension of the Time for Completion if and to the extent that completion for the purposes of Sub-Clause 10.1 [Taking Over of the Works and Sections] is or will be delayed by any of the following causes: (a) a Variation (unless an adjustment to the Time for Completion has been agreed under Sub-Clause 13.3 [Variation Procedure]), (b) a cause of delay giving an entitlement to extension of time under a SubClause of these Conditions, or (c) any delay, impediment or prevention caused by or attributable to the Employer, the Employer's Personnel, or the Employer's other contractors on the Site.

Time for completion

4-31

Under the FIDIC Silver Book and in the BOT project scheme the construction contractor bears the risk of delays in completion. This allocation of risk is based on the principle that the contractor will best be able to regulate the timing of the construction work to satisfy his work programme and meet the contractual date of completion described in Silver Book sub-clause 8.2.

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8.2 Time for Completion The Contractor shall complete the whole of the Works, and each Section (if any), within the Time for Completion for the Works or Section (as the case may be), including: (a) achieving the passing of the Tests on Completion, and (b) completing all work which is stated in the Contract as being required for the Works or Section to be considered to be completed for the purposes of taking-over under Sub-Clause 10.1 [Taking Over of the Works and Sections].

4-33

The particular conditions will set completion dates either for the works as a whole or for discrete sections or milestones, if appropriate. Respect from the contractor for the time for completion of the works will be essential to the lenders. Late completion can cause loss of production, loss of market share, damages in relation to other related agreements, such as the power purchase agreement, and can result in additional finance charges. For this reason, the Silver Book generally satisfies the lenders' requirement that each event resulting in the contractor's right to request an extension of time be specifically identified and defined in the contract.

56

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8.4 Extension of Time for Completion

H the Contractor considers himself to be entitled to an extension of the Time for Completion, the Contractor shall give notice to the Employer in accordance with Sub-Clause 20.1 [Contractor's Claims]. When determining each extension of time under Sub-Clause 20_1, the Employer shall review previous determinations and may increase, but shall not decrease, the total extension of time.

Other than the extensions granted for variations or delays attributable to the employer, subpart (b) of sub-clause 8.4 incorporates the numerous other grounds for time extensions found in the Silver Book. These other potential grounds for an extension of time are the following:

• • •

• • •

•

delays caused by the employer's failure to give the contractor access to or possession of the site within the time stated in the particular conditions (sub-clause 2.1); delays caused by the employer's instructions to the contractor regarding archaeological remains discovered on the site (sub-clause 4.24); changes in the host country's technical standards and regulations for which the contractor's compliance causes delay (sub-clause 5.4); delays caused by the employer's instructions to vary the location or details of any tests or to perform additional tests (sub-clause 7.4); unforeseeable delays or disruptions by the public authorities of the host country (sub-clause 8.5); delays caused by the contractor's compliance with the employer's instruction to suspend work to the extent the suspension was not due to the contractor's fault (sub-clause 8.9); delays caused by the employer's interference with the tests on completion (sub-clause 10.3);

57

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THE USE OF THE FlDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

•

delays caused by a change in the laws of the host country (sub-clause 13.7); delays resulting from the contractor's suspension of work for the employer's failure to provide evidence of its ability to payor for non-payment (sub-clause 16.1); delays caused by the occurrence of an employer's risk (sub-clause 10.3); delays caused by the occurrence of a force majeure event (sub-clause 19.4).

ordination of the various constituent contracts so that the allocation of risks in one contract corresponds to the allocation of risks in other dependent or related contracts. For example, if the contractor is entitled to an extension of time under the construction contract for a particular force majeure event, the project company should ensure that the same events of force majeure are contained in the other contracts within the overall BOT project.

Sub-clause 8.4 effectively requires any extension of time to which the contractor believes himself to be entitled to be subject to the procedure for "Contractor's Claims" under sub-clause 20.1. Under sub-clause 20.1 the contractor must give notice to the employer and later provide a fully detailed claim describing the event for which the contractor requests an extension of the time for completion. The employer will then either approve or disapprove the request with detailed comments in the event of disapproval. If an extension of time is approved, the employer then proceeds in accordance with sub-clause 3.5 "Determinations" to agree or determine the extension of time. Under this sub-clause the employer must consult with the contractor and try to reach an agreement on the extension. If no agreement is reached, the employer may make a fair determination in accordance with the contract. Note also that this procedure generally applies with regard to price increases as well, discussed below. If the contractor receives a variation order under the construction contract, responsibility for any resulting delay will frequently remain with the project company. However, where the variation order is a result of the changed requirements of the host government or the power purchaser (as, for example, in respect of connection to the power purchaser'S grid), this risk will commonly be transferred to such parties. The risk of delay caused by the failure of government authorities to issue construction, import and other permits is also frequently assumed by the host government in the concession agreement on the theory that the host government will be best able to control and minimise this risk. The project company will also attempt to transfer to the host government liability for various force majeure events that may be deemed to be within the government's control, such as political strikes, acts of war, sabotage, terrorism or changes in local law. The project company (and its insurers) will then bear any additional force majeure risk it is unable to transfer to the other parties, as well as gaps in its "back-to-back" protection, such as where the definition of force majeure in the construction contract is broader than that in the power purchase agreement. Where the- contractor may receive an extension of time under these circumstances, the project company should try to transfer as much risk as possible to the host government, the power purchaser or even the project lenders and insurers to avoid being in default. The importance of completion time and extensions in a BOT structured project lies therefore in the co-

Under the FIDIC Silver Book and in the BOT project scheme the contractor also bears the risk of contract price sufficiency. The contract price is defined in sub-clause 1.1.4.1 as "the agreed amount stated in the Contract Agreement for the design, execution and completion of the Works and the remedying of any defects, and includes adjustments (if any) in accordance with the Contract". Sub-clause 4.11 attributes the risk of contract price sufficiency to the contractor.

4-37

4.11 Sufficiency of the Contract Price

4-38

• • • 4-36

I

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

58

Price

The Contractor shall be deemed to have satisfied himself as to the correctness and sufficiency of the Contract Price. Unless otherwise stated in the Contract, the Contract Price covers all the Contractor's obligations under the Contract (including those under Provisional Sums, if any) and all things necessary for the proper design, execution and completion of the Works and the remedying of any defects. In short, the contractor must agree to complete the works for a fixed, lumpsum contract price (sub-clause 14.1). The contractor therefore assumes the risk that the contract price is not sufficient to cover his contract obligations and provide a reasonable profit. Price/cost exceptions in favour of the contractor. As indicated below, the Silver Book attempts to specify each situation where a price increase or decrease may occur. Lenders may wish to review and shorten this list and limit the circumstances in which a variation may be sought by the employer, and impose a cap on any resulting adjustments to the contract price. The Silver Book contains numerous exceptions allowing the contractor to request an increase in the contract price in certain circumstances, as follows:

• •

costs to the contractor caused by the employer's failure to give the contractor access to or possession of the site within the time stated in the particular conditions (sub-clause 2.1); unforeseeable work accommodations to the employer's personnel or public authorities causing the contractor to incur additional cost (sub-clause 4.6);

59

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THE USE OF THE FIOIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

• • •

• •

• •

• •

• •

• • • •

•

• • 60

costs caused by the employer's instructions to the contractor regarding archaeological remains discovered on the site (sub-clause 4.24); changes in the host country's technical standards and regulations for which the contractor's compliance causes additional costs (subclause 5.4); additional costs caused by the employer's instructions to vary the location or details of any tests or to perform additional tests (subclause 7.4); additional costs caused by the contractor's compliance with the employer's instruction to suspend work to the extent the suspension was not due to the contractor's fault (sub-clause 8.9); additional costs caused by the employer's interference with the tests on completion (sub-clause 10.3); additional costs of tests required after the correction of any defect or damage to the works to the extent the defect or damage was not attributable to the contractor (sub-clause 11.6); additional costs incurred by the contractor when instructed by the employer to search for a defect in the works not attributable to the contractor (sub-clause 11.8); additional costs to the contractor caused by any unreasonable delay by the employer to the tests after completion (sub-clause 12.2); additional costs as a result of any unreasonable delay by the employer in permitting access to the works or plant by the contractor, either to investigate the causes of a failure to pass a test after completion or to carry out any adjustments or modifications (subclause 12.4); variations (sub-clause 13.3); additional costs caused by a change in the laws of the host country (sub-clause 13.7); price adjustments for increases or decreases in the cost of labour, goods and other inputs to the works (if so provided in the particular conditions) (sub-clause 13.8); financing charges for delayed payments (sub-clause 14.8); additional costs resulting from the contractor's suspension of work because of the employer's failure to provide evidence of its ability to pay, or for non-payment (sub-clause 16.1); cost to the contractor of rectifying any loss or damage due to an employer's risk event (sub-clause 17.4); payment by the contractor of insurance premiums for which the employer is responsible and the amount of any insurance payment that would have been received upon the occurrence of an insurable event absent employer failure to maintain insurance (sub-clause 18.1); costs resulting from the occurrence of a force majeure event (subclause 19.4); costs incurred in connection with termination of the contract after a force majeure event (sub-clause 19.6);

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

•

costs incurred in connection with termination of the contract due to the occurrence of an event making it impossible or unlawful for either party to fulfil its contractual obligation and which under the law of the contract entitles either party to be released from further performance (sub-clause 19.7).

As for extensions of time, contractor requests for increases in the contract price or payments are generally subject to the "Contractor's Claims" procedure under sub-clause 20.1 and the "Determinations" process under subclause 3.5. The host government can reasonably be expected to bear the increased construction costs associated with newly enacted or newly amended laws in the host country which enter into force and affect the contractor in the performance of his construction work. If construction costs increase as a result of a change in the requirements of the power purchaser (for example, where the power purchaser changes the requirements for interface with its distribution grid and the contractor receives a corresponding variation order) these costs will usually be passed on to the power purchaser. In general, the risk of an increase in construction costs will be borne by the turnkey contractor on the theory that the contractor is the best placed to control this risk by virtue of having considered all available information that would affect his tender and having provided an appropriate contract price in consideration of all labour and materials necessary for the design and execution of the works. Consequently, the contractor will generally be unable to seek a price increase in the event of changes in the cost of labour or materials. Price/cost exceptions in favour of the employer. In addition to circumstances that might allow an increase in the contract price or additional payments to the contractor, the Silver Book also provides for situations where the contractor may be required to make additional payments to the employer, effectively decreasing the contract price. The contractor may incur additional financial liability beyond the contract price in the following circumstances: •

• • •

•

changes in applicable country standards which might reduce cost to the contractor and be subject to a claim for price reduction by the employer (sub-clause 5.4); additional costs to the employer from the rejection and retesting of part of the works (sub-clause 7.5); additional costs to the employer for performing remedial work for which the contractor is responsible (sub-clause 7.6); additional costs to the employer relating to any revised programme necessary to ensure an appropriate rate of progress in the completion of the works (sub-clause 8.6); liquidated damages payable by the contractor to the employer for each day after the time for completion until the issuance of the taking-over certificate (sub-clause 8.7); 61

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THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

•

• • • • • •

• •

• • • • •

•

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additional costs to the employer for carrying out the tests on completion upon the contractor's failure to do so within the time allotted (sub-clause 9.2); reduction in contract price due to failure of works to pass the tests on completion (sub-clause 9.4); cost to the employer of remedying any defects; cost to the employer of the contractor's failure to remedy any defects (sub-clause 11.2); increase in performance security for the contractor's removal from site of defective work for repair (sub-clause 11.5); additional costs of retesting after defects are remedied for which the employer is not responsible (sub-clause 11.6); any cost to the employer of clearing the site after completion (subclause 11.11); cost of retesting upon failure of the works to pass the tests after completion where the fault is attributable to the contractor (sub-clause 12.3); non-performance damages (if provided) for failure of the works to pass the tests after completion (sub-clause 12.4); decrease in cost resulting from a change in the laws of the host country (sub-clause 13.7); adjustment of contract price for fall in the cost of labour, goods and other inputs to the works (if so provided in the particular conditions) (sub-clause 13.8); retention money for work not in accordance with the contract or other failure of the contractor to perform (sub-clause 14.6); cost to the employer of any termination for the contractor's fault (sub-clause 15.4); cost of any loss or damage to the works for which the contractor is responsible (sub-clause 17.2); payment by the employer of insurance premiums for which the contractor is responsible and the amount of any insurance payment that would have been received upon the occurrence of an insurable event absent the contractor's failure to maintain insurance (subclause 18.1).

The employer must comply with the "Employer's Claims" procedure under sub-clause 2.5 with regard to any additional payment from the contractor under the contract to which the employer believes itself to be entitled. Under sub-clause 3.5 the employer must give notice and particulars of the claim to the contractor. The employer will then proceed in accordance with sub-clause 3.5 "Determinations" to either agree or determine its own claim. This process applies to additional payments from the contractor and any payment withholding or reduction of the contract price to be undertaken by the employer, except as provided under sub-clause 14.6 "Interim Payments". Sub-clause 14.6 allows direct deduction of amounts from interim payments for work not completed by the contractor, the cost of rec62

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

tification or replacement of work and the value of any failure of the contractor to fulfil a contract obligation. Liquidated damages As discussed briefly above, the Silver Book contains provisions regarding liquidated damages in the case of non-performance of the contractor's obligations. Liquidated damages allow the injured party to receive the relevant amounts without having to refer to an arbitrator or a national court (although this may not be true in every jurisdiction). If properly drafted, the liquidated damages provision of a construction contract will provide the contractor with a powerful incentive to complete the project on time and will apportion clearly the financial responsibility for late completion. The Silver Book also contemplates under sub-clause 12.4 that the particular conditions may be drafted to contain liquidated damages for certain performance shortcomings in addition to the provisions for delay contained in the general conditions. Specifically, sub-clause 8.7 "Delay Damages" of the Silver Book provides for per diem liquidated damages in an amount stated in the particular conditions for every day of delay from the fixed time for completion date until the issuance of the taking-over certificate. These damages are subject to a ceiling representing the maximum amount of permissible liquidated damages for delay. These damages are generally the only damages for delay that may be extracted from the contractor. Potential liability for the liquidated damages for delay terminates on the date of issuance of the taking-over certificate. Nonetheless, the contractor will still have remaining obligations under the contract, such as performing the tests after completion and remedying any defects. Sub-clause 12.4 "Failure to Pass Tests after Completion" therefore refers to the possibility of including liquidated damages for non-performance relating to the failure of the works to pass the tests after completion. From the perspective of the project company, in the event of late completion due to contractor default, the contractor should be obligated to pay liquidated damages in an amount equal to or greater than the amount of the delay payments (including interest) the project company will be required to make. However, depending on the governing law, attention may need to be given to avoiding a potential recharacterisation of the liquidated damages as an illegal penalty. The lenders will want to review any cap on the contractor's overall liability in the context of liquidated damages. The liquidated damages and any such cap provided for in the construction contract must also take into consideration loss of debt service during the period of delay. The lenders should therefore closely scrutinise Silver Book sub-clauses 8.7 and 12.4. The limit for delay damages should be set in an appropriate amount, and language in the particular. conditions should be included to enable the liquidated damages for performance in sub-clause 12.4. 63

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I

THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

Guarantees

Parent company guarantees. The contractor will traditionally be required to provide a parent company guarantee, if applicable. In the parent company guarantee, the contractor's parent company guarantees the p~rforma.nce of the contractor's obligations under the contract and agrees to mdemmfy the .. employer in the case of the contractor's non-perfo.rmance. As mentioned earlier, the lenders may also reqUIre some additional external credit support arrangements affecting the Contractor, such as a consent agreements and collateral warranties. However, these are generally not part of the construction contract.

In order to protect against additional costs or delays, the Silver Book requires that several guarantees be put in place for different aspects of the contract. Generally, the contract will require the following guarantees from the contractor: (1) a performance security, (2) an advance payment guarantee, (3) a security in the amount of any retention (where actual retention money is not used), and (4) a parent company guarantee where a subsidiary acts as the contracting party. As discussed above, any contractors acting through a joint venture must be jointly and severally liable to the employer (as is provided under the Silver Book sub-clause 1.14). The lenders will review the form and the amount of guarantees provided by the contractor to ensure adequate protection in the case of default. The lenders will wish all guarantees to be in the form of, and/or to have the characteristics of, an on-demand guarantee. Performance security. The project company will attempt to ensure timely completion by obliging the contractor to provide a performance security. Sub-clause 4.2 "Performance Security" indicates that the contractor shall provide a performance security in the amount stated in the particular conditions which must remain valid and enforceable "until the Contractor has executed and completed the Works and remedied any defects". The amount of the performance security will vary widely from project to project anywhere from five per cent to 50 per cent of the overall contract price depending upon the type of project and the financial standing of the contractor. Ten per cent of the contract price is average for a performance security. Advance payment guarantee. Under sub-clause 14.4 "Advance Payment" the contractor must submit a guarantee to the employer before the employer is required to make its advance payment for mobilisation and design. The advance payment guarantee must cover the entire amount of the employer's advance payment and remain valid and enforceable until the advance payment has been repaid to the employer by proportional reductions in the interim payments. A similar guarantee is required under sub-clause 14.5 "Plant and Materials intended for the Works" for interim payment for plant and materials which are not yet on the site. Retention money. As an additional guarantee Silver Book sub-clause 14.3(c) "Application for Interim Payments" contemplates that a percentage of the payments from the employer to the contractor may be retained as retention money, if specified in the particular conditions. There may also be a fixed maximum amount of retention. The employer may thus retain a certain portion of each interim payment. These funds will then be returned to the contractor by virtue of sub-clause 14.9 "Payment of Retention Money": one half upon the issuance of the taking-over certificate and the other half at the end of the defects notification period.

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Co-ordination of construction (employer's control) Some commentators conclude that in design-build contracts in general, "the Contractor should be given the freedom to carry out the work in his chosen manner provided the end result meets the performance criteria specified by the Em'ployer. Consequently, the employer should only exercise limited control over and should in general not interfere with the Contractor's work."14 Although the thoughts expressed above may be the general rule for turnkey contracts, increased control of the construction by the employer may be required by lenders and may be more characteristic of the construction contract in a BOT project. FIDIC designed the Silver Book for BOT projects yet indicates that it is not appropriate for contracts where "the Employer intends to supervise closely or control the Contractor's work, or to review most of the construction drawings" .IS However, relaxing the employer's control over the project may be somewhat contrary to the requirements of a BOT project. In any event, despite FIDIC's intention and statement in its "Introductory Note" to the Silver Book that "the employer should only exercise limited control over and should in general not interfere with the contractor's work", the Silver Book is replete with opportunities for the employer to control many aspects of the project's completion. This level of employer intervention should ~e satisfactory to lenders. Examples of the employer's control can be found 10 the following sub-clauses: • •

•

1.8 "Care and Supply of Documents": right of access of the employer's personnel to all the contractor's documents at all reasonable times. 1.14 "Joint and Several Liability": prohibiting alteration of the contractor's joint venture or other association without the employer's consent. 3.4 "Instructions": ability to instruct the contractor concerning contract execution.

,< C. Wade, "History and Scope of the Three Major Bo'oks" (1998) online: FIDIC http://www.fidic.comldocumentsllaunchlwade1.html(date accessed: November 19,1999) at 9. '5 FIOIC, op. cit. n. 12. above.

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THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

• • •

• •

• • •

• • • •

• • •

• • • •

•

• • • • •

• 66

3.5 "Determinations": power to unilaterally determine disputed matters, such as price increases, decreases and time extensions. 4.1 "Contractor's General Obligations": ability to require the contractor to submit details of contractor's construction methods and arrangements. 4.3 "Contractor's Representative": power to approve or reject the contractor's representative. 4.9 "Quality Assurance": ability to audit quality assurance system put in place by the contractor. 4.21 "Progress Reports": requirement of monthly progress reports to the employer. 5.2 "Contractor's Documents": power to review and reject the contractor's documents. 6.9 "Contractor's Personnel": power to order removal of the contractor's personnel and representative. 7.2 "Samples": ability to review samples of materials. 7.3 "Inspection": power to inspect all parts of the works and progress of construction at all times. 7.4 "Testing": power to vary the details of any testing. 7.5 "Rejection": power to reject plant, materials, design or workmanship. 7.6 "Remedial Work": power to instruct remedial work. 8.3 "Programme": power to reject the contractor's programme. 8.6 "Rate of Progress": power to order acceleration of work's progress. 8.8 "Suspension of Work": power to suspend work. 9.2 "Delayed Tests": power to execute testing upon the contractor's failure. 11.4 "Failure to Remedy Defects": power to reduce contract price or terminate contract for the contractor's failure to remedy defects. 11.5 "Removal of Defective Work": power to approve removal of defect works for repair. 13.1 "Right to Vary": power to order a variation. 13.3 "Variation Procedure": power to order a variation proposal from the contractor. 13.5 "Provisional Sums": power to control expenditure of provisional sums. 14.6 "Interim Payments": power to withhold payments for nonperformance. 14.11 "Application for Final Payment": power to approve or reject the contractor's application for final payment. 15.1 "Notice to Correct": power to order the contractor to carry out any obligation under the contract. 15.2 "Termination by Employer": power to terminate contract. 15.5 "Employer's Entitlement to Termination": power to terminate for convenience.

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

Notwithstanding the employer's specific powers and abilities under the contract, the lenders may also wish to exercise some degree of control over the progress of the works, contract administration and the project company's decisions (where they relate to the completion and performance of the works). This control may be accomplished by the appointment of a lenders' engineer or technical adviser. The lenders' engineer or adviser will also provide technical expertise as requested by the lenders. The degree of control that he exercises varies but might include some control over extensions of time, variations, payments to the contractor, and issuance of certificates, particularly in relation to testing. The lenders will want to ensure that the engineer has wide powers relating to access and inspection in order to protect their interests in the project. However, the presence of a lenders' engineer may also result in an unacceptable level of intervention by the lenders in the execution of the works by the contractor. The contract will need to clearly specify the roles of the lenders' engineer and the employer's representative in order to avoid any friction and resultant delay (particularly as concerns the testing regime).

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Payments Starting from the point where all guarantees required from the contractor have been put into place, payment of the contractor generally occurs as follows. Under sub-clause 14.2 "Advance Payment" the employer will make an "advance payment, as an interest-free loan for mobilization and design" which is then repaid through proportional deductions from the interim payments. At the end of a period of payment stated in the contract (or monthly if not otherwise stated), the contractor makes an application for interim payment to the employer in the form of a statement under subclause 14.3, together with all supporting documents, including the progress report. The statement indicates the estimated contract value of the works executed and the contractor's documents produced (including variations) and must also specify any amounts to be added or deducted pursuant to the contract, the amount of retention (if any) and any amounts to be added or deducted for advance payment and repayments. If the contract includes a schedule of payments specifying instalments, the instalment amount will be the estimate contract value for the period (subclause 14.4). The employer shall then make the int~rim payment pursuant to and subject to any modifications under sub-clause 14.6. As indicated above, the money retained as retention money (if any) is returned in halves at the time of taking over and at the expiry of the defects notification period. Within 84 days of receiving the taking-over certificate, the contractor must prepare pursuant to sub-clause 14.10 "Statement at Completion" a statement indicating the value of the work done to date, any further sums due and any further sums the contractor believes will become due. Within 56

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THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

SPECIFIC ISSUES RAISED IN CONNECTION WITH THE USE OF THE SILVER BOOK

days after receiving the performance certificate, the contractor must submit under sub-clause 14.11 "Application for Final Payment" a draft final statement showing the value of all work done under the contract and any further sums the contractor considers it is due. With the application for final payment the contractor submits a written discharge under sub-clause 14.12 "Discharge" indicating that the final statement represents the full and final settlement of all moneys due to the contractor under the contract. Under subclause 14.13 "Final Payment", "the Employer shall pay to the Contractor the amount which is finally due, less all amounts previously paid by the Employer and any deductions in accordance with sub-clause 2.5 [Employer's Claims)". The lenders will want to control the payment regime implemented by the contract. By controlling the payment regime, the lenders can ensure timely and proper performance and regulate outflow of capital from the project company. The payment regime review will begin with the amount, timing and repayment of the advance payment. Lender control of the payment regime may include the lenders' engineer being given the right to certify interim payments. The lenders will seek to impose a contract payment method that will provide the greatest incentive for timely completion. Therefore, the lenders will often require payments of the contract price to be linked to milestone events. The language of the Silver Book is appropriate for payments linked to milestones (sub-clauses 14.3 and 14.6). The present Silver Book language, in sub-clause 15.4 "Payment after Termination" provides that in the event of termination for cause by the employer the project company will receive the difference between the cost of completion and the contract price, taking into account any limitation of the contractor's liability as provided for in the contract and the valuation of the works to date. For lenders this compensation scheme may be considered insufficient, as it does not explicitly protect their interests in the project company's loan service costs. In the event of such termination, the lenders may want to be paid all amounts that they have advanced for construction costs. Consequently, they may wish to modify the present Silver Book language to provide for payment by the contractor of all other direct or indirect damages suffered by the project company as a result of the termination. The contractor will be reluctant to accept any such provision.

to act where the contractor intends to terminate for a project company default.

Additional lender requirements 4-55

The preceding portions of this chapter discuss ways in which the specific provisions of the Silver Book address, with or without modification, the risks and requirements of the construction contract in a BOT project. However, the project company does continue to bear some risks under the Silver Book which may not satisfy the lenders. The lenders may wish to see additional financing for cost overruns. Furthermore, the lenders may want the ability

68

Financing of cost overruns. As discussed above, the financing of the project company must take into consideration potential cost overruns. This can be done either through increasing the amount of financing by an amount to account for a reasonable contingency (e.g. five to ten per cent), or by providing for a stand-by line of credit, with or without a cap, generally from the sponsors of the project. This stand-by credit can also be provided by the contractor (in the form of an additional completion guarantee), although this will generally not occur unless the contractor is also one of the sponsors.

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Step-in / step-out rights. The lenders may also want to implement step-in / step-out rights which allow the lenders to step into the turnkey contract and take the place of the project company under certain circumstances. In common-law countries, it is generally possible to establish fixed and floating charges and to permit lenders to appoint a receiver or manager over the project assets. However, in many civil-law countries it is not permitted for lenders to establish such a global package for protection; the lenders must provide a contractual security regime. Such contractual provisions give the lenders the right to step into the contractor's obligations under the contract but do not require them to do so. The lenders will also be allowed to step out of the contract, where they have stepped in but no longer want to maintain the obligations they have assumed. This regime can be included in the conditions of contract or as a separate agreement between the lenders and the contractor. The step-in / step-out rights include a regime for the contractor's co-operation with the lenders, including communication to the lenders of the contractor's intention to act in accordance with its right to terminate. Where the contractor intends to terminate, the lenders will have certain rights to intervene, including cure rights, step-in rights, substitution rights and novation. Cure rights allow the lenders to maintain the project company in its position in the contract by curing whatever defect has given the contractor the right to terminate. The regime for cure rights will vary where the termination is for non-payment or for some other default. The lenders will first give a notice of intention to cure, which will suspend the contractor's right to terminate for a certain period. This suspension will be lifted if the lenders do not act within that period. If the lenders decide to cure, they will enter into an undertaking with the contractor to remedy the breach by the project company. As mentioned above, step-in rights provide the lenders with the right to step in for the project company in the contract. The lenders will give a notice, after which the contractor's termination rights are suspended. The lenders will then appoint an additional obligor who will be bound to satisfy the project company's obligations under the contract until completion or step-out has

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THE USE OF THE FIDIC SILVER BOOK IN THE CONTEXT OF A BOT PROJECT

occurred. The contractor will then be bound to the additional obligor for the period of its presence as the step-in entity. The additional obligor or the lenders may give a step-out notice, indicating that they are removing themselves from the step-in position. During the time of step-in, the project company remains liable under the contract. Substitution leading to novation allows the lenders to provide an alternative party who will take the place of the project company and take over the obligations under the contract. This requires a complete novation of the contract, involving a transfer of the rights and obligations of the project company under the contract to a third party. The contractor must generally consent in writing to any such novation, although the contract can specify that he may not withhold such consent unreasonably. The effect of the novation is to remove the project company entirely from the contract. The substitute entity then becomes the project company for the purposes of the contract.

Conclusion

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The review of the Silver Book in this chapter evokes two general conclusions. First, the FIDIC Silver Book is clearly a document that is very well developed and drafted. Second, it can be used as a good starting point for the drafting and negotiation of the EPC contract in a BOT project. However, as discussed above, it does contain numerous areas requiring review and careful consideration to ensure its successful use in such a project.

CHAPTER

5

THE CONTRACT General Comments As with any complex construction contract, the Silver Book is a compilation of separate documents that together constitute the contract .. These documents are subject to certain rules of interpretation and definltlon. Part II of the Silve~ Book states that the employer will want to be especially careful when drafting the central documents of the contract, which include the conditions of contract, the employer's requirements, and the schedules. These documents will set forth the rights and obligations of the parties and the scope of the contract. . In order to simplify and better organise the contract, the Silver Book provides a definition section organised according to general topics that is similar to the other FIDIC contracts examined, namely the Orange, (new) Yellow and Red Books. Those working with the contract may find it easier to organise the definitions by alphabetical order, as opposed to grouping the definitions by category, in order to simplify term searches. The Silver Book is divided into two parts. P~rt I, entitled "General Conditions" sets out the general conditions of contract. Part II, "Particular Conditions", discusses certain sub-clauses and suggests modifications to the conditions of contract found in Part I. Memoranda annexed to the contract agreement complete the conditions of contract and further define certain terms.

5-01

Contract language The parties should be aware of the language used for the documents prepared in connection with the project. Where the contract documents, designs or the arbitral procedure are to be carried out in differing languages there may need to be translation of documents and proceedings, which may prove both burdensome and confusing to the parties.! The parties may want to provide for a single language for all of the project documents and contractual procedures. The employer's representative and the contractor 1

Wiwen-Nilsson «A Brief View of the 1992 Edition of the ENAA Model Form-International Contract for Pr~cess Plant Construction (Turnkey Lump sum Basis)" (1994) 111.C.L.R. 526 at 532.

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GENERAL COMMENTS

THE CONTRACT

would then need to be fluent in such language, or to provide for competent translators, in order to avoid misunderstandings during the progress of the works. The Silver Book (sub-clause 1.4) provides for a ruling language for the contract. Thus where documents are drafted in several languages, those drafted in the ruling language prevail. This will give some certainty where the parties have failed to provide for one language.

Conflicts clause

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The conflicts clause, which governs the order of priority of the contract documents, should not be used as a replacement for careful cross-comparison of the documents to ensure technical and legal consistency. Although such "c.ross-commenting" may prove time-consuming, it is invaluable as a preventative measure in avoiding disputes. The conflicts clause may not be able to remedy every inconsistency, since it could be disputed whether a given term was inconsistent with the other contract documents or merely a specific exception to a general rule. Further, the conflicts clause will not remedy gaps between the conditions and the specifications. 2 Sub-clause 1.6 of the Silver Book wisely places the expressed intention of the parties above the form of the conditions of contract. This follows the warning, given by a noted expert in the field, against placing the standard form contract in a position of priority over the less formal documents that express the true intention of the parties. 3 However, the Silver Book also places the contractor's tender at the bottom of the list. The contractor will need to be aware that his tender document will have a lower priority than the employer's requirements.

Confidentiality clause

5-04

The Silver Book provides for confidentiality concerning certain details, as specified in the tender. The parties may want to add provisions such as the following: exclusion from the site of parties not bound to similar confidentiality provisions; exemptions where the information is in the public domain or where confidentiality agreements are made with third parties (this allows confidential details to be given to third parties if such parties are in turn, bound by a confidentiality agreement).4 The ENAA and EIC use such an exception in specifying that documents or data in the public domain, to R.H. Turner, uAvoidance and Resolution of Construction Disputes-Prior to and During the Construction Process" (1994) 11 I.C.L.R. 284 at 285. J I.N.D. Wallace, Construction Contracts: Principles and Policies in Tort and Contract (Sweet & Maxwell, London, 1986), p. 376. • J.S. Roehl & J.B. Grove, uP~rformance Guarantees and Testing; Intellectual Property and Technology Transfer Issues" In R.E Cushman & K.S. Taub, eds, Design-Build Contracting Handbook (Wiley Law Publications, New York, 1992),341 at 341. 2

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which the party had lawful access at the time of disclosure or to which the party acquires lawful access through a third party, do not fall under the confidentiality clause (ENAA 16.3; EIC 21.2). There should also be exceptions to the confidentiality clause where financing and licensing is involved. Financing institutions may require that certain information be revealed either to reassure them as to concerns regarding the risks involved, or to verify the validity of the project. In some instances licensing by a local authority, particularly in the area of environmental regulation, will require disclosure of the methods and processes used. In such situations the parties will want to specify in detail the information to be disclosed in the contract. Further, the party owning the process or method to be disclosed for licensing may want to take the responsibility for such licensing in order to protect their intellectual property rights and facilitate the licensing process. The Silver Book sub-clause 1.9 provides an additional sub-clause requiring information concerning the project to be kept confidential in order to avoid publication or disclosure of such information without employer consent. This.obligation will restrict unwanted publicity for commercial or political reasons. Highly sensitive or cutting-edge projects may require such additional language.

Definition of design The Silver Book does not provide a separate definition for design: it simply places the responsibility for the entire design on the contractor (sub-clause 5.1). The contractor is limited in the form of the design by the specifications provided in the employer's requirements and elsewhere in the contract. However, the employer may want to specify more thoroughly the design obligations. The EIC does this by dividing the definition and treatment of the design into several stages. Sub-clause 1.1 (i) of the EIC gives a general definition of design. Section (ii) defines "conceptual design", which is the employer's submission to the contractor upon which the design is based. Under the Silver Book this concept would fall under the employer's requirements. Under the EIC, the "design elements" (section iii) are the contractor's response to the conceptual design and is accepted by the parties as the design to be developed for the works. The "preliminary design" (section iv) is the next step of a completed design provided by the contractor. The "final design" (section v) is the last stage of design; it consists of a fully detailed design. The "approved design" is the final design as it is approved by the employer. This detailed definition of design may be useful where substantial design development will be required during the period of the contract. If the employer has an approval power over each such stage of design development, the time necessary for the exercise of such approval rights will need to be reflected in the project programme. 73

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DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACT

Rights in the construction documents 5-06

The parties will need to allocate specifically the right to use the construction documents. The allocation of these rights will depend generally on the origin of the technology reflected in the construction documents and the balance of power as between the parties. As a general proposition, where one party brings a specific skill or technology to a project, that party should maintain their proprietorship of that technology. For example, where the employer wishes to build a facility to process a given raw material, he may hire a contractor who specialises in such a process. In such a case the contractor would maintain his rights to the process, restricting the employer's use of the process to the facility constructed. On the other hand, the employer may come to the contractor with an idea, a basic design. He then hires a contractor to develop that idea into a buildable final design. In such a one-off situation, arguably the employer should obtain the rights to the design and documents developed on his behalf. Construction documents may also be relevant to the production of spare parts. The employer may want the right to use the documents to produce spare parts, decreasing his costs of operation. The contractor, particularly if he is a supplier of such spare parts, may not want to give the employer rights to such technology.

persons; dates, tests, periods and completion; money and payments; works and goods; and other definitions. As mentioned above, parties working with the Silver Book may wish to put the list in alphabetical order in order to facilitate term searches.

1.1.1.1 "Contract" means the Contract Agreement, these Conditions, the Employer's Requirements, the Tender, and the further documents (if any) which are listed in the Contract Agreement. 1.1.1.2 "Contract Agreement" means the contract agreement referred to in Sub-Clause 1.6 [Contract Agreement], including any annexed memoranda. 1.1.1.3 "Employer's Requirements" means the document entitled employer's requirements, as included in the Contract, and any additions and modifications to such document in accordance with the Contract. Such document specifies the purpose, scope, andlor design andlor other technical criteria, for the Works. 1.1.1.4 "Tender" means the Contractor's signed oHer for the Works and all other documents which the Contractor submitted therewith (other than these Conditions and the Employer's Requirements, if so submitted), as included in the Contract. 1.1.1.5 "Performance Guarantees" and "Schedule of Payments" mean the documents so named (if any), as included in the Contract.

Discussion of Specific Sub-Clauses General provisions 5-07

Clause 1 of the FIDIC Silver Book provides definitions that apply to both the general and particular conditions. In addition, clause 1 sets forth general provisions that relate to these conditions. A well-drafted general provisions section is essential for both defining terms to be used in the contract as well as providing coherence to the contract documents as a whole.

5-08

1.1 Definitions In the Conditions of Contract ("these Conditions"), which include Particular Conditions and these General Conditions, the following words and expressions shall have the meanings stated. Words indicating persons or parties include corporations and other legal entities, except where the context requires otherwise. The Silver Book sub-clause 1.1 provides lists of definitions for words or phrases used in the particular and general conditions documents. These definitions are grouped under the following categories: the contract; parties and

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1.1.1 The Contract

1.1.1.1 "Contract". The "contract" defines the legal agreement including the conditions of contract. The list of documents that make up the "contract" should be extensive enough to provide the parties with flexibility, yet restricted enough to avoid the inclusion of inappropriate documentation that might misrepresent the intent of the parties. Parties should be careful to appropriately entitle each contractual document, as many contractual documents are referred to by their title. s Due to the particularities of the negotiation of a contract under the Silver Book, the list of documents constituting the contract is more restrictive than under the other FIDIC contracts examined herein. All of the FIDIC contracts, however, provide for the addition of further contractual documents as the parties may list in the contract agreement. For example, the Red Book specifically includes drawings listed in the contract agreement. This is because, under the Red Book, the employer supplies the design and not, as under the Silver and Yellow Books, the contractor. Further, the other FIDIC contracts define such terms as "schedules", "contractor's proposal", "letter of tender" and "letter of acceptance" as such documents are included in the list of contract documents. Finally, due to the importance of defining the documents comprising the contractual .I

FIDIC, The Fidic Contracts Guide (Federation Internationale des Ingenieurs·Conseils, Lausanne, 2000), p. 44 (hereinafter HDle Guide) .

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DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACT

agreement, all of the standard form contracts examined herein define the contract. 6

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1.1.1.2 "Contract Agreement". In the Silver Book, the signature of a contract agreement is specifically contemplated. In the Red and Yellow Books, the contract agreement is optional (as it is in the Orange Book). The ENAA, EIC, ICE and OBIA all provide contract agreement definitions within the sense of that of the Silver Book, although a contract agreement is optional under the ICE.

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1.1.1.3 "Employer's Requirements". This document outlines and defines the works in accordance with the employer's concept of the project. The FIDIC Guide recommends the employer's requirements include details such as "the definition and purpose of the works; quality and performance criteria; definition and location of the site; special obligations; etc. "7 The Silver Book and the Yellow Book indicate the employer is to specify "the purpose, scope, and/or design and/or other technical criteria, for the works". FIOIC suggests the employer's requirements "should describe the principle and basic design of the plant on a functional basis". 8 The Orange Book provision is slightly less detailed. Finally, the Red Book calls for "specification", instead of employer's requirements, where such document merely "specifies the works". The specifications, coupled with the drawings, are to specify "all matters not covered in the conditions of contract".9 The ICE, OBIA, AGC contain definitions of employer's requirements.

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1.1.1.4 "Tender". The tender in a turnkey contract often involves the submission by the contractor of a more complete set of documents than does the tender for a traditional design-bid-build contract. The contractor must invest greater time and resources in order to provide sufficient design for the project. The risk the contractor incurs in providing a tender for large-scale construction projects, such as BOT projects under the Silver Book, is partly offset by the tendering practices under such projects. For example, bidders may be subject to pre-qualification in order to ensure they are fully capable of performing the contract satisfactorily. to This partially eliminates the risk of bidding against unrealistically low bidders. 6

7 8

9 10

For the purposes of the definitions discussion in this chapter, the provisions of the various contracts will only be sited where such definitions are not found in the general definitions section of the relevant contract. Further, where a standard form contract, usually examined in this book, is not referenced in this discussion, there exist no equivalent provisions in the relevant contract. Fidic Guide, op. cit., n. 5 above, p. 45. C. Wade, "History and Scope of the Three Major Books" online: FIOIC http://www.fidic.com/documents/launch/wade1.html (date accessed: November 19, 1999) (hereinafter "History"). Fidic Guide, op. cit., n. 5 above, p. 45. O.A. Levy, "BOT and Public Procurement: A Conceptual Framework" (1996) 7 Ind. Int'/ & Compo L. Rev. 95 at 102 for a fuller discussion of tendering/bidding procedure under BOT projects, see same; for an outline of how FlOIC envisages the tendering process under the Silver Book, see "History" op. cit. n. 8 above; see also FIDIC Guide, op. cit. n. 5 above, for outline of tendering procedure and sample forms and instructions.

76

The Silver Book definition of tender is the same as those of the (new) Red and Yellow Books, once the definitions of "letter of tender" are included in the later. The Orange Book definition of tender does not seem to require the signature of the contractor on the priced offer of the contractor for the works. The ICE also works under a tender system and provides a form of tender as an appendix. "Appendix'to Tender". Unlike under the Silver Book, the Orange Book and (new) Red and Yellow Books include definitions for an "appendix to tender". Although an appendix to tender is not excluded from the definition of tender under the Silver Book, there may be a functional purpose to the separate definition provided under the other FIOIC contracts. In the other FlOlC contracts, the appendix to tender is referred to where the Silver Book refers to particular conditions. The appendix to tender originates from the contractor whereas the particular conditions are negotiated between the parties. Further, under the priority ranking of the contractual documents, the Silver Book places the particular conditions just below the contract agreement, where the Red and Yellow Books place the letter of tender in this position. A separate definition for an appendix to tender is indicative, therefore, of the relative importance of the tender under the Red and Yellow Books. 1I The FlOIC Guide explains the omission of the use of an appendix to tender in the Silver Book as a means to provide greater flexibility in the use of this contract. 12 Contractual references to the particular conditions, in lieu of the appendix to tender, allow parties to include the relevant information, refer to the location of the relevant information, or delete the sub-clause in the particular conditions.

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"Contractor's Proposal". Both the Orange and (new) Yellow Book define a contractor's proposal, which is to be submitted with the letter of tender regarding the preliminary design. Although this preliminary design is an important part of the contract it is subject to the specifications provided in the other contract documents such as the employer's requirements (in accordance with the priority of documents provided in 1.6 Orange Book; 1.5 (new) Yellow Book).

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1.1.1.5 "Performance Guarantees" and "Schedule ~f Payments". The Silver Book allows the employer to adjust the schedule of payments in all those cases where the contractor does not achieve the progress required by the contract (sub-clause 14.4). Thus, even when the parties choose not to base the schedule of payments on the progress of the works, the employer has the ability to amend it in respect of any delay in progress. This may be inconsistent with the needs of the contractor.

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II

12

For a comparison of FIDIC's view of the tender process under the Silver Book and the Yellow Book, see C. Wade, "The Silver Book: The Reality" (2001) 18 (3) I.C.L.R. 497. FIDIC Guide, op. cit. n. 5 above, p. 47.

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THE CONTRACT

DISCUSSION OF SPECIFIC SUB-CLAUSES

The Silver Book also contains reference to performance guarantees. Such guarantees are found under all of the FIDIC contracts examined herein (Silver, Orange and (new) Red and Yellow Books sub-clauses 4.2), although only the Silver and Yellow Book define such guarantees. Performance guarantees are important to the employer as they provide security for the contractor's financial ability to perform his obligations under the contract.

terms (such as under the insurance provisions, see Chapter 22). As a result, parties may latter assign responsibility, under a given clause, to either the contractor or employer by substituting the appropriate designation. Second, the Silver Book is the only contract where a "third party" is not intimately involved in the carrying out of the contractual pro~isions. The "employer's representative" under the Orange Book and the "engineer" under the Yellow and Red Books, however, play significant roles in the respective contracts.

1.1.2 Parties and Persons

1.1.2.2 "Employer". Whereas the "employer" is named in the contract agreement in the Silver Book, he is named in the appendix to tender under the other FIDIC contracts examined herein. The Orange Book excludes any unapproved assignees of the employer or his legal successors from the definition of "employer". The other FIDIC contracts do not specifically exclude unapproved assignees under the definition of employer, but rather in a separate sub-clause 1.7 (see discussion below). The ENAA, EIC and ICE also provide definitions for employer or, the equivalent, "owner".

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1.1.2.3 "Contractor". Where the "contractor" is named in the contract

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1.1.2.1 "Party" means the Employer or the Contractor, as the context requires. 1.1.2.2 "Employer" means the person named as employer in the Contract Agreement and the legal successors in title to this person. 1.1.2.3 "Contractor" means the person(s) named as contractor in the Contract Agreement and the legal successors in title to this person(s). 1.1.2.4 "Employer's Representative" means the person named by the Employer in the Contract or appointed from time to time by the Employer under SubClause 3.1 [The Employer's Representative], who acts on behalf of the Employer. 1.1.2.5 "Contractor's Representative" means the person named by the Contractor in the Contract or appointed from time to time by the Contractor under Sub-Clause 4.3 [Contractor's Representative], who acts on behalf of the Contractor. 1.1.2.6 "Employer's Personnel" means the Employer's Representative, the assistants referred to in Sub-Clause 3.2 [Other Employer's Personnel] and all other staff, labour and other employees of the Employer and of the Employer's Representative; and any other personnel notified to the Contractor, by the Employer or the Employer's Representative, as Employer's Personnel.

•

1.1.2.7 "Contractor's Personnel" means the Contractor's Representative and all personnel whom the Contractor utilises on Site, who may include the staff, labour and other employees of the Contractor and of each Subcontractor; and any other personnel assisting the Contractor in the execution of the Works. 1.1.2.8 "Subcontractor" means any person named in the Contract as a subcontractor, or any person appointed as a subcontractor, for a part of the Works; and the legal successors in title to each of these persons. 1.1.2.9 "DAB" means the person or three persons so named in the Contract, or other person(s) appointed under Sub-Clause 20.2 [Appointment of the Dispute Adjudication Board] or Sub-Clause 20.3 [Failure to Agree Dispute Adjudication Board]. 1.1.2.10 "FIDIC" means the Federation Internationale des IngenieursConseils, the international federation of consulting engineers.

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1.1.2.1 "Party". The Silver Book definition of party is unique to the FIDIC contracts examined herein. "Party" is defined in the Silver Book for two reasons. First, it allows provisions of the contract to be drafted in neutral 78

agreement in the Silver Book, he is named in the appendix to tender under the other FIDIC contracts examined herein. The Orange Book excludes any unapproved assignees of the employer or his legal successors from the definition of "contractor". The other FIDIC contracts do not specifically exclude unapproved assignees under the definition of employer, but rather in a separate sub-clause 1.7 (see discussion below). The ENAA, EIC and ICE all provide definitions for contractor.

1.1.2.4 "Employer's Representative". Like the Orange Book, the Silver Book has an "employer's representative" and no "engineer". The employer's representative plays a less prominent role in the Silver Book than in the Orange Book. A reflection of this fact, Silver Book sub-clause 3.1 allows that the employer "may" appoint a representative whereas Orange Book sub-clauses pertaining to the employer's representative presume his appointment. Under the Orange Book, the employer's representative "shall be a suitably qualified engineer or other appropriate professional" whereas the Silver Book makes no such specification (Silver Book sub-clause 3.1). The Yellow and Red Books still use the offices of an "engineer" rather than an employer's representative (sub-clauses 1.1.2.4). Whereas the employer's representative is to "act on behalf of the employer", the role of the employerappointed engineer in the Yellow and Red Books is less clear. For example, the engineer is to be "deemed to act for the employer" (sub-clauses 3.1(a)) but the contractor may raise reasonable objections to the appointment of a replacement engineer (sub-clauses 3.4). In addition, the engineer exercises a dispute resolution function under these contracts (sub-clauses 3.5). The removal of the engineer, in the Silver and Orange Books, is consistent with the nature of the turnkey contract in which the contractor designs the project and coordinates construction thereby reducing the need for a central figure. A detailed discussion of the role of the employer's representative is contained in (Chapter 7). 79

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THE CONTRACT

The ENAA, EIC and ICE also provide definitions for the employer's representative.

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1.1.2.5 "Contractor's Representative". Under the FIDIC contracts, a "contractor's representative" may be appointed and fills a, largely, facilitative role. Unlike the other FIDIC contracts, the Orange Book does not specify that the contractor's representative "acts on behalf of the contractor". He provides a connection between the contractor, on the one hand, and the employer's representative, on the other hand, as regards communication and notices. Despite the differences in the definitions, the contractor's representative fulfils a similar role under the FIDIC contracts examined herein. The ENAA, EIC and ICE all provide definitions for the contractor's representative.

DISCUSSION OF SPECIFIC SUB-CLAUSES

may arise in a less contentious atmosphere than would be found in arbitration or litigation. All of the FIDIC contracts examined herein contain equivalent definitions of this board. Further discussion of this dispute resolution regime may be found in Chapter 24. None of the other standard form contracts examined herein define their dispute resolution bodies, where such exist.

1.1.2.10 "FIDIC". This is a seemingly unnecessary definition that is, nonetheless, provided in all FIDIC contracts other than the Orange Book. The FIDIC Guide states this definition is provided for greater certainty, as (under sub-clause 20.3) the president of FIDIC or his appointee may act as appointing entity for the purpose of sub-clause 20.3.13

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1.1.3 Dates, Tests, Periods and Completion

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1.1.2.6 "Employer's Personnel". The Silver Book definition of "employer's personnel" is the same as that of the Yellow and Red Books, except that the latter two include the engineer and his delegates in this category. This inclusion has implications at other points in the contract and calls into question the independence of the engineer. As discussed above, however, the engineer is not truly independent. Rather, a better characterisation of the engineer is that he is relied on to be professional. The Orange Book does not designate employer's personnel, nor do the other standard form contracts examined herein.

1.1.3.1 "Base Date" means the date 28 days prior to the latest date for submission of the Tender. 1.1.3.2 "Commencement Date" means the date notified under Sub-Clause 8.1 [Commencement of Works], unless otherwise defined in the Contract Agreement. 1.1.3.3 "Time for Completion" means the time for completing the Works or a Section (as the case may be) under Sub-Clause 8.2 [Time for Completion], as stated in the Particular Conditions (with any extension under Sub-Clause 8.4 [Extension of Time for Completion]), calculated from the Commencement Date.

1.1.2.7 "Contractor's Personnel". All FIDIC contracts examined herein, with the exception of the Orange Book, define "contractor's personnel". This definition has consequences under the contracts, especially with regard to the allocation of responsibility for actions attributable to the contractor or the contractor's personnel. The other standard form contracts, however, do not provide definitions for contractor's personnel.

1.1.3.4 "Tests on Completion" means the tests which are specified in the Contract or agreed by both Parties or instructed as a Variation, and which are carried out under Clause 9 [Tests on Completion) before the Works or a Section (as the case may be) are taken over by the Employer. 1.1.3.5 "Taking-Over Certificate" means a certificate issued under Clause 10 [Employer's Taking Over).

1.1.2.8 "Subcontractor". The contractor, when performing the works contemplated by a turnkey contract, will generally use a number of subcontractors to provide various services and supply materials for construction. These subcontractors are referred to in the conditions of contract. This allows some regulation of them by the employer in the interests of ensuring, inter alia, the quality of the construction and the materials used. The Silver Book provision is identical to those of the Red and Yellow Books. The Orange Book provision differs in that it specifically includes a manufacturer or supplier for a part of the works. The Orange Book specifically excludes subcontractor status to the assignees of any subcontractor. The ENAA, AGe and DBIA all provide definitions for subcontractors. 1.1.2.9 "DAB". The dispute adjudication board provides the dispute resolution function that was traditionally part of the role of the engineer. The goal of such dispute resolution is the rapid resolution of any dispute that 80

1.1.3.6 "Tests after Completion" means the tests (if any) which are specified in the Contract and which are carried out under Clause 12 [Tests after Completion] after the Works or a Section (as the case may be) are taken over by the Employer. 1.1.3.7 "Defects Notification Period" means the period for notifying defects in the Works or a Section (as the case may be) under Sub-Clause 11.1 [Completion of Outstanding Work and Remedying Defects), as stated in the Particular Conditions (with any extension under Sub-Clause 11.3 [Extension of Defects Notification Period]), calculated from the date on which the Works or Section is completed as certified under Sub-Clause 10.1 [Taking Over of the Works and Sections). If no such period is stated in the Particular Conditions, the period shall be one year.

Il

ibid., p. 310.

81

DI SCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACT

1.1.3.8 "Performance Certificate" means the certificate issued under SubClause 11.9 [Performance Certificate]. 1.1.3.9 "day" means a calendar day and "year" means 365 days.

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1.1.3.1 "Base Date". All of the FIDIC contracts reviewed in this book provide the same definition of the "base date". The base date allows the contractor to utilise, for pricing and programming purposes, the laws and certain circumstances that existed at the appropriate time when he finalised his tender. Thus he will not bear the risk of a change in law or circumstances occurring after the formulation of the tender. The base date could be defined as a particular calendar date. The base date is referred to in Silver Book sub-clauses 4.10 (site data); 5.1 (general design obligations); 5.4 (technical standards and regulations); 13.7 (adjustments for changes in legislation); 14.15 (e) (currencies of payment); 17.5 (b)(ii) (intellectual and industrial property rights); 18.2 (insurance for works and contractor's equipment). None of the other standard form contracts contain a definition for a mechanism similar to the base date. 1.1.3.2 "Commencement Date". The commencement date can be indicated either by the employer or his representative, by reference to events external to the parties, or can be predetermined in the contract. The definitions of the other FlDIC contracts examined herein are essentially equivalent to that of the Silver Book, although the provisions vary, regarding the commencement date, as between the contracts (sub-clauses 8.1). The FlDIC contracts do not specify what occurs if the contractor is not notified of commencement within the time specified under the various contracts. Presumably, the contractor would be allowed to terminate under sub-clauses 16.2. The parties may wish to specify the effect of such a failure. The ICE defines a commencement date. The ENAA provides a definition for an "effective date" within seven days after which commencement is to occur (ENAA Agreement 5.1). 1.1.3.3 "Time for Completion". Generally speaking, the contractor must achieve substantial completion of the works within a given time period, defined as the time for completion. Under the Silver Book, the contractor must complete the works, including passing the tests on completion, within the time for completion. This leaves the tests after completion to be performed subsequent to the time for completion. The FIDIC contracts examined herein contain similar provisions to that of the Silver Book, although the time for completion under these contracts is stated in the appendix to tender. Both the ENAA and EIC also define a time for completion. 1.1.3.4 "Tests on Completion". Tests on completion are designed to verify that the contractor has completed construction of the works to the extent 82

required within the time for completion. The works must pass these t.ests before they can be considered complete; they can then be pa~sed. back I~to the possession and care of the employer. Care should be .t aken In dlffere.n tlating between tests on completion and tests after completion, as the passmg of the former test will precede the employer's taking over of the works (or a section thereof).14 This section is identical to those definitions found in the (new) Red and Yellow Books and similar to that of the Orange Book. Rough equivalents to this definition may be found in the ENAA and EIe.

1.1.3.5 "Taking-Over Certificate". Taking over indicates the successf~1 completion of the works to the extent required by the contract .. At thiS point the works are taken over by the employer who proceeds With tests after completion to verify the functioning of the works as contracted. Although the contractor no longer has possession of the site and care of the works, he maintains the right to enter the site and have access to the works in order to fulfil his obligation to remedy defects.·The Orange Book and (new) Yellow and Red Books' definitions follow the wording of that of the Silver Book. Of the other standard form contracts examined herein, only the EIC contains a similar definition. Along a similar vein to the purpose of a taking-over certificate, the ICE, AGC and DBIA all provide definitions for "substantial completion" and for the issue of corresponding certificates.

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1.1.3.6 "Tests after Completion". Under a turnkey or EPC contract the contractor must deliver completed works satisfying certain specifications provided by the employer. These specifications may include performance standards that the finished works must meet. In such case the parties may include tests after completion to verify that the works perform to the specifications required. The FIDIC contracts examined herein contain similar definitions for tests after completion, although the Orange Book definition does not refer to Orange Book clause concerning tests after completion (clause 11) and the Red Book includes the specifications for these tests in the particular conditions. In order to provide sample wording for both instances, FlDIC requires the contractor to carry out the tests after completion in the Silver Book, whereas the employer is to do so under the Yellow BookY

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1.1.3.7 "Defects Notification Period". The defects notification period is important, as this period is effectively a warranty period on the works of the contractor. The contractor is bound to remedy any defects where the owner notifies the contractor of these defects within this time period. Both the (new) Yellow and Red Books contain equivalent provisions to that of

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14 IS

ibid., p. 51. ibid., p. 51.

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THE CONTRACT

DISCUSSION OF SPECIFIC SUB-CLAUSES

the Silver Book, although neither contract provides for a one-year period where no period is stated in the particular conditions. The Orange Book does not provide any such definition. The ENAA, EIC and ICE contain ~oughly equivalent definitions to that of the Silver Book, and the EIC Includes a 12-month fall-back where there is failure to stipulate a period otherwise.

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1.1.3.8 "Performance Certificate". The performance certificate indicates both successful passage by the works of the tests after completion and the approval of the works by the employer. The issue of the performance certificate also signals the end of the defects liability period. The other FIDIC contract provisions are virtually identical but, under these contracts, the certificate is to be issued by the engineer ((new) Yellow and Red Books) or the employer's representative (Orange Book) where such are used. Finally, while the other standard form contracts examined herein may use a similar mechanism (i.e. the final certificate) only the ENAA contains an equivalent definition of this mechanism (i.e. acceptance).

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1.1.3.9 "Day". Such a provision can be important in international contracts where projects may be constructed in countries running under other calendar systems. A year could mean a year under the Islamic calendar, for example. Another example of potential for confusion: in Israel each day begins at sunset. All of the FIDIC contracts examined herein contain equivalent provisions. In addition, and an indication of the importance of such a definition, the ENAA, EIe, AGC and DBIA all define day.

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1.1.4 Money and Payments 1.1.4.1 "Contract Price" means the agreed amount stated in the Contract Agreement for the design, execution and completion of the Works and the remedying of any defects, and includes adjustments (if any) in accordance with the Contract. 1.1.4.2 "Cost" means all expenditures reasonably incurred (or to be incurred) by the Contractor, whether on or off the Site, including overhead and similar charges, but does not include profit. 1.1.4.3 "Final Statement" means the statement defined in Sub-Clause 14.11 [Application for Final Payment]. 1.1.4.4 "Foreign Currency" means a currency in which parr (or all) of the Contract Price is payable, but not the Local Currency. 1.1.4.5 "Local Currency" means the currency of the Country.

I

1.1.4.6 "Provisional Sum" means a sum (if any) which is specified in the Contract as a provisional sum, for the execution of any part of the Works or for the supply of Plant, Materials or services under Sub-Clause 13.5 [Provisional Sums].

84

1.1.4.7 "Retention Money" means the accumulated retention moneys which the Employer retains under Sub-Clause 14.3 [Application for Interim Payments] and pays under Sub-Clause 14.9 [Payment of Retention Money]. 1.1.4.8 "Statement" means a statement submitted by the Contractor as part of an application for payment under Clause 14 [Contract Price and Payment].

1.1.4.1 "Contract Price". The Silver Book assumes that the price, for construction will be a fixed amount, rather than one based on the actual cost of the work completed or the amount of work done, i.e, a fixed, lump-sum contract. This fixed price is called a lump sum. Turnkey and EPC projects are more amenable to lump-sum pricing given the control that the contractor has over the design and construction of the project. The Silver and Orange Books speak of the "contract price" which includes adjustments of this price made in accordance with the contract. The (new) Yellow and Red Books splice their definitions such that the "accepted contract amount", found in the letter of acceptance, does not include adjustments whereas the "contract price" includes any adjustments made in accordance with the contract. The ENAA, EIC and ICE all define the contract price.

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1.1.4.2 "Cost". The definition of cost may have a significant impact on the performance of the contract when it comes to valuation of damages and reimbursement of the contractor for such events as changes in legislation. The definition specifically excludes profit. However, it does not specify the treatment of supplier discounts and other such benefits that contractors, especially on large purchase orders, might receive. It also includes overhead and similar charges that arguably render the definition favourable to the contractor. The definitions of the FIDIC contracts are almost identical. The ICE also provides a definition for cost but, unlike the FIDIC contracts, does not require the expenditures in question to be incurred by a particular party (ICE 1(5)).

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1.1.4.3 "Final Statement". Issued subsequent to the performance certificate, which is issued within 28 days of the end of the contract period, this statement indicates the work completed, its value and the amount still due to the contractor by the employer. The final payment is based on this amount. The FIDIC contracts contain similar provisions to each other as regards the final statement mechanisms.

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1.1.4.4 "Foreign Currency". This sub-clause contemplates that the contract price will be paid, at least partly in local currency. This may not be the case, however, particularly where project financing is obtained or where another currency is preferable for reasons of exchange or stability. The Silver Book definition is identical to that of the (new) Red and Yellow

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85

THE CONTRACT

Books. The Orange Book differs, however, as the definition specifies that foreign currency means a freely convertible currency. It is unclear what the result under the Orange Book will be, if a currency referred to in the appendix is not freely convertible or loses its convertibility after the contract comes into force. Although parties are unlikely to choose an unstable foreign currency, parties may, nonetheless, want to include the specifications of the Orange Book. The ENAA does not define foreign currency but does provide that the contract price may be paid in both local and foreign currency (ENAA Agreement 3.1). 5-42

1.1.4.5 "Local Currency". This definition is identical amongst the FlDIC contracts.

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1.1.4.6 "Provisional Sum". Provisional sums are used by the employer to maintain control over certain aspects of the construction-for example, the purchase of know-how, the hiring of subcontractors or the choice of the materials to be used in the works. The contract specifies the amount that is then allocated in accordance with the directions of the employer's representative. The FIDIC contracts examined herein contain virtually identical definitions.

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1.1.4.7 "Retention Money". A portion (usually a percentage) of each payment made to the contractor is retained by the employer to be paid back at specified stages of completion. This provides the contractor with a greater incentive for timely completion at later stages of construction and also gives to the employer an added guarantee against failure of performance by the contractor. The amount held back is the retention money. The parties may prefer to replace retention money with a bond or third-party guarantee in order to provide the employer with an additional performance security while maintaining the contractor's capital flow. The issue of a bond or guarantee may also prove less costly to the contractor than the use of retention money. The FlDIC contracts examined herein contain virtually identical definitions. 1.1.4.8 "Statement". The FIDIC contracts examined herein, other than that of the Orange Book, provide a general definition of "statement" under the contracts. The Orange Book contains an almost identical list of requirements for a contractor's statement (under 13.3 Orange Book), although no definition of "statement" is provided in the definitions section. The Orange Book excludes liquidated damages deduction by the employer from such a statement (sub-clause 8.6).

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"Payment certificate"; "interim payment certificate"; "final payment certificate". The Red and Yellow Book's definitions include mention of a 86

DISCUSSION OF SPECIFIC SUB-CLAUSES

"payment certificate", as an engineer is used under these contracts. For the same reason, these two contracts, as well as the Orange Book, each define a "final payment certificate" and an "interim payment certificate". Under the Silver Book, interim and final payments are made on the basis of the statements issued by the contractor and su~mitted directly to the employer. 5-47

1.1.5 Works and Goods 1.1.5.1 "Contractor's Equipment" means all apparatus, machinery, vehicles and other things required for the execution and completion of the Works and the remedying of any defects. However, Contractor's Equipment excludes Temporary Works, Employer's Equipment (if any), Plant, Materials and any other things intended to form or forming part of the Permanent Works. 1.1.5.2 "Goods" means Contractor's Equipment, Materials, Plant and Temporary Works, or any of them as appropriate. 1.1.5.3 "Materials" means things of all kinds (other than Plant) intended to form or forming part of the Permanent Works, including the supply-only materials (if any) to be supplied by the Contractor under the Contract. 1.1.5.4 "Permanent Works" means the permanent works to be designed and executed by the Contractor under the Contract. 1.1.5.5 "Plant" means the apparatus, machinery and vehicles intended to form or forming part of the Permanent Works. 1.1.5.6 "Section" means a part of the Works specified in the Particular Conditions as a Section (if any). 1.1.5.7 "Temporary Works" means all temporary works of every kind (other than Contractor's Equipment) required on Site for the execution and completion of the Permanent Works and the remedying of any defects. 1.1.5.8 "Works" mean the Permanent Works and the Temporary Works, or either of them as appropriate.

1.1.5.1 "Contractor's Equipment". The FIDIC contracts examined herein provide similar definitions of contractor's equipment. The Orange Book, however, does not specifically exclude employer's equipment from this definition, nor does it specifically include vehicles. It may be difficult to differentiate contractor's equipment from temporary works unless they are specifically defined in the contract. The ENAA and ICE also provide definitions for contractor's equipment.

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1.1.5.1 "Goods". The Silver, Red and Yellow Books provide identical definitions of "goods", while the Orange Book provides none. "Goods" are used in the FIDIC contracts to allocate responsibility to the contractor for the care of such items while in transit to the site (under 4.16 Silver, Red and Yellow Books). "Goods" include both the contractor's equipment

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87

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACT

and temporary works (which will revert back to the contractor) as well as the materials and plants (which will be incorporated into the permanent works).16 The Orange Book provisions, however, do not hold the contractor exclusively liable for such items. For example, Orange Book sub-clause 4.20 stipulates that where the employer is to provide machinery and materials, such items are, at his risk and cost, transported to the site. 5-50

5-51

5-52

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1.1.5.3 "Materials". The FlDIC contracts examined herein provide similar definitions of "materials". The Orange Book definition differs from the other FIDIC contracts as it is only prospective: the materials are "to be provided" whereas the other contracts speak of items "intended to form or forming" part of the permanent works. The ENAA also defines materials. 1.1.5.4 "Permanent Works". Permanent works are those works which are to be erected on the site and which will remain on the site for use by the employer. Under both the Silver and Orange Book such works are "designed and executed" by the contractor whereas the (new) Red and Yellow Books only mention those works "executed" by the contractor. This is in keeping with the allocation of design responsibility under the contracts. Under the Yellow and Red Book, the contractor is to design the works in accordance with the engineer's instructions or subject to his approval (5.1 Yellow Book; 4.1 Red Book). Under the Silver and Orange Book, the contractor alone is to design the works, although the employer's representative plays a role under the Orange Book (5.1 Orange Book; 5.1 Silver Book). The ICE also defines permanent works.

less valuable) taking-over certificate for the works at the end of the project. IS ., .. The FIDIC contracts examined herein provide Identical definitIOns, although the Silver Book provides such sections may be delineat~d in. the particular conditions whereas, in the other contracts, such speCificatIOns are to be found in the appendix to tender. Due to the use of the contract period, division into sections will not affect the defects liability of the contractor. The ICE also contains a definition for section. 1.1.5.7 "Temporary Works". Temporary works are those works to be erected on the site for the sole purpose of constructing the permanent works that will then be removed by the contractor by the end of the project. The FIDIC contracts examined herein contain identical provisions, although the Orange Book omits the qualification of permanent works in its definition. The ICE also contains a definition for temporary works.

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1.1.5.8 "Works". The FlDIC contracts examined herein contain identical provisions. In addition, the ENAA, EIC and ICE all contain similar definitions of works. The AlA, AGC and DBIA, on the other hand, define works differently. Due to the design-oriented nature of the contracts, "work" includes the design/construction services provided by the contractor (AlA 1.1.2-Part 2; AGe 2.4.2; DBIA 1.2.12).

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1.1.6 Other Definitions

5-56

1.1.6.1 "Contractor's Documents" means the calculations, computer pro· grams and other software, drawings, manuals, models and other documen~s of a technical nature supplied by the Contractor under the Contract; as descClbed in Sub-Clause 5.2 [Contractor's Documents]. 1.1.6.2 "Country" means the country in which the Site (or most of it) is located, where the Permanent Works are to be executed.

1.1.5.5 "Plant". Plant indicates elements to be incorporated into the construction of the permanent works that have an independent function. An example would be a generator in a power project. The FIDIC contracts contain virtually identical definitions, although the Orange Book definition adds supply-only items. The ENAA and EIC also contain definitions for plant.

1.1.6.3 "Employer's Equipment" means the apparatus, machinery and vehicles (if any) made available by the Employer for the use of the Contractor in the execution of the Works, as stated in the Employer's Requirements; but does not include Plant which has not been taken over by the Employer.

1.1.5.6 "Section". The parties may divide the completion of the works into sections that can be completed as separate units (for example, the separate generating units of a power plant). Each section can then be allocated a separate time for completion, if such sections are truly susceptible to independent completion. In addition, these sections should be given precise geographical definitions in order to clarify the extent of parties' responsibilities upon taking over.17 FIDIC also advises that the whole of the works not be divided into sections, as this would eliminate the need for the (nonethe16 17

ibid., p. 55. ibid., p. 5.5.

88

1.1.6.4 "Force Majeure" is defined in Clause 19 [Force Majeure]. 1.1.6.5 "Laws" means all national (or state) legislation, statutes, ordinances and other laws, and regulations and by-laws of any legally constituted public authority. 1.1.6.6 "Performance Security" means the security (or securities, if any) under Sub-Clause 4.2 [Performance Security].

18

ibid., p. 55.

89

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACT

1.1.6.7 "Site" means the places where the Permanent Works are to be executed and to which Plant and Materials are to be delivered, and any other places as may be specified in the Contract as forming part of the Site. 1.1.6.8 "Variation" means any change to the Employer's Requirements or the Works, which is instructed or approved as a variation under Clause 13 (Variations and Adjustments).

•

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1.1.6.1 "Contractor's Documents". The contractor's documents definitions are roughly equivalent between the FlDIC contacts examined herein. The Orange Book, however, caIls such documents "construction documents". In addition, each FIDIC contract provides further specifications for such documents (5.2 Silver Book; 5.2 Yellow Book; 5.2 Orange Book), except for the Red Book. This discrepancy may be explained by the fact that under the Red Book the employer is to provide for the design for the works. The employer's use of these documents is subject to constraint (see subclauses 1.10).

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1.1.6.2 "Country". Although defined under the FlOlC contracts, this definition does not appear in the other form contracts.

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1.1.6.3 "Employer's Equipment". Silver, YeIlow and Red Books define employer's equipment. The Orange Book does not define employer's equipment, although the possibility of employer-supplied machinery and materials is addressed under Orange Book sub-clause 4.20. The (new) Yellow Book contains an error in referring to "specification", instead of "employer's requirements", for a list of items making up the employer's equipment. Specification is relevant only under the Red Book.

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1.1.6.4 "Force Majeure". The FIDIC contracts examined herein, other than the Orange Book, contain definitions of force majeure. The Orange Book, however, provides a definition of force majeure under the clause relating to the occurrence of such an event (see 19.1 Orange Book),

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1.1.6.5 "Laws". The FIDIC contracts, other than the Orange Book, provide definitions for laws referred to under the contracts. Where such reference is made, parties should take care to specify the jurisdiction in question, as provisions such as those relating to the law governing the contract would not be sufficient. The DBIA also provides a definition for "legal requirements".

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1.1.6.6 "Performance Security". The contractor's provision of performance security to the employer is an important feature of the FIDIC contracts. Under the provisions of the FIDIC contracts, performance security is to remain valid and enforceable until the contractor has executed and completed the works and remedied any defects (see sub-clauses 4.2). Such security helps ensure the contractor wiIl have the financial means to complete the various 90

stages of the contract. The FlDIC contracts, other than the Orange Book, provide definitions for performance security referred to under the contracts. Performance security is, nonetheless, discussed under Orange Book subclause 4.2. 1.1.6.7 "Site". The site includes the locations to which the contractor will have access and over which he will have control to permit construction of the works. The site must, therefore, be carefuIly delineated in the contract, particularly in consideration of the contractor's duty to keep the site clean and secure and to avoid poIlution issuing from it. Although the contractor may, upon agreement by the employer, obtain additional working areas (under sub-clause 4.23), these areas are not included in the site definition as "such provision would be inconsistent with the employer's obligations in respect of the site" {i.e. under sub-clause 2.1 ).19 The FIOIC contracts examined herein provide virtuaIly identical provisions although the Orange Book omits the qualification of permanent works in its'definition. The ENAA, ElC, ICE and DBlA 1.2.8 also contain definitions of site.

5-62A

1.1.6.8 "Variation". Although the contractor is generaIly responsible for design and construction of the works, the employer may implement changes during the period of the contract. Such variations are performed at the cost of the employer. The FIDlC contracts examined herein contain essentially identical definitions in this regard. The Red Book, however, does not mention a change to the "employer's requirements" as such requirements do not exist under this contract. The ElC and AlA also contain definitions for variation.

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1.2 Interpretation

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In the Contract, except where the context requires otherwise: (a) words indicating one gender include all genders; (b) words indicating the singular also include the plural and words indicating the plural also include the singular; (c) provisions including the word "agree", "agreed" or "agreement" require the agreement to be recorded in writing, and (d) "written" or "in writing" means hand-written, type-written, printed or electronically made, and resulting in a permanent record. The marginal words and other headings shall not be taken into consideration in the interpretation of these Conditions. The Silver Book sub-clause 1.2 indicates general principles of interpretation for the contract documents. This clause is standard in construction con19

ibid., p. 57.

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DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACT

tracts to allow sufficient flexibility in the contract language and to avoid misinterpretation. The relevant Yellow and Red Book provisions are identical to that of the Silver Book. The Orange Book provisions differ from the Silver Book, however, specifying, "words importing persons or parties shall include firms and corporations and any organisation having legal capacity" (Orange Book 1.3). The Orange Book also diverges from the other FIDIC contracts in not including clarification of terms relating to "agreement". Finally, the Orange Book, unlike the other FIDIC contracts, does not begin with the proviso that the context may require an interpretation other than as provided under the interpretation provision. Various other of the standard form contracts examined herein contain 'similar provisions to that of the Silver Book regarding headings (ENAA 3.3; ICE 1(3); EIC 1.3; AGC 13.5; DBIA 12.6.1) and the significance of words appearing in the plural or singular (ENAA 3.2; ICE 1(2); EIC 1.10). The ICE also includes a definition for "in writing" (ICE 1(6)). Similar to the Orange Book, both the ENAA and the EIC indicate that reference to persons or parties, under the contract, may include firms, organisations, and any organisation having legal capacity (ENAA 3.4; EIC 1.4).

5-65

cautions that the importance of the requirement that certain communications not be unreasonably withheld or delayed should not be under-estimated, nor should the serious consequences of non-compliance with this requirement. 2o The ENAA covers notices but with more specificity with respect to time periods, presumption of reception in a certain time and time period for confirmation. The presumption of reception under the ENAA has been criticised, suggesting that parties should instead be required to provide evidence of actual receipt. 21 The ICE, EIC and DBIA provisions relating to notices are less detailed (ICE 68; EIC 1.11; DBiA 12.7). Similar to the ENAA, the DBIA also contains a presumption of receipt clause (DBIA 12.7.1).

The Contract shall be governed by the law of the country (or other jurisdiction) stated in the Particular Conditions. If there are versions of any part of the Contract which are written in more than

one language, the version which is in the ruling language stated in the Particular Conditions shall prevail.

1.3 Communications Wherever these Conditions provide for the giving or issuing of approvals, certificates, consents, determinations, notices and requests, these communications shall be: (a) in writing and delivered by hand (against receipt), sent by mail or courier, or transmitted using any of the agreed systems of electronic transmission as stated in the Particular Conditions; and (b) delivered, sent or transmitted to the address for the recipient's communications as stated in the Contract. However: (i) if the recipient gives notice of another address, communications shall thereafter be delivered accordingly; and (ii) if the recipient has not stated otherwise when requesting an approval or consent, it may be sent to the address from which the request was issued. Approvals, certificates, consents and determinations shall not be unreasonably withheld or delayed. The Silver Book sub-clause 1.3 provides details on how communications under the contract should occur. Communication between the parties is extremely important in a construction project, not only for the proper performance of the contract but also for the resolution of any claims made by the contractor. The provisions of the various FIDIC contracts examined herein are substantially the same, although some additional language is added to ensure the employer and employer's representative/engineer each both get and give notice. The FIDIC Guide

92

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1.4 Law and Language

The language for communications shall be that stated in the Particular Conditions. If no language is stated there, the language for communications shall be the language in which the Contract (or most of it) is written. The Silver Book sub-clause 1.4 indicates the relevant law and language for both the governing of the contract and communication between the parties. The other FIDIC contracts examined herein contain equivalent provisions. Differences do appear under the Orange Book, which fails to provide a default language for communications, should none be stipulated in the appendix to tender. The Orange Book also only refers to "day-to-day" communications whereas the other FIDIC contracts address communications in general. The choice of language can be extremely important. A single day-to-day language will prevent confusion on the site caused by linguistic differences and translations. The language of the contract is similarly important. For example, a construction contract may provide for the contract language to be both French and English. Such a stipulation may be politically convenient but could result in confusion and miscommunication, particularly in the more technical aspects of the contract documents. The choice of law is equally important. It will define and regulate the terms and execution of the contract. The parties should indicate a legal system 20

2.

ibid., p. 59.

Wiwen-Nilsson," A Brief View of the 1992 Edition of the ENAA Model Form-International Contract for Process Plant Construction (Turnkey Lump sum Basis)", op. cit. n. 1 above at 532.

93

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACT

consistent with their needs and protective of their interests. The EIC Guide warns, for example, that "under certain Civil Law jurisdictions, some Silver Book conditions may be considered unfair trade terms and therefore inapplicable" .22 Furthermore, parties should inform themselves as to the rules of public order of the jurisdiction in question, as such rules may not be contracted out of. Other standard form contracts examined herein contain provisions relating to language (ENAA 3.1; EIC 25.4) and law (ENAA 5; EIC 24; AlA 7.1Part. 1; AlA 11.1-Part.2; AGC 13.2; DBIA 12.3).

5-'{)7

1.5 Priority of Documents The documents forming the Contract are to be taken as mutually explanatory of one another. For the purposes of interpretation, the priority of the documents shall be in accordance with the following sequence: (a) the Contract Agreement, (b) the Particular Conditions, (c) these General Conditions, (d) the Employer's Requirements, (e) the Tender and any other documents forming part of the Contract. The Silver Book sub-clause 1.5 sets out the priority of the various documents comprising the contract for the purposes of interpretation. This section is similar to those of the Yellow and Red Book sub-clauses 1.5, although these sub-clauses include the letter of acceptance (which is not specifically referenced or defined under the Silver Book) after the contract agreement. Further, the "schedules" referred to in the Yellow and Red Books take the place of, and are roughly equivalent to, the "tender" of the Silver Book. Finally, the Yellow Book, as does the Orange Book, places the "contractor's proposal" at the bottom of the priority list. The FIDlC Guide justifies placing the employer's requirements before the tender as this signals to the contractor the obligatory nature of the employer's requirements. Where the tender does not, or to the extent that it does not, conform to the employer's requirements; these differences may be incorporated into (and thus sanctioned) the letter of acceptance or contract agreement. 23 Further, although the general conditions are ranked above the employer's requirements and the tender, where the general conditions state they are to apply "unless otherwise stated in the contract" the provisions of these lower-ranked documents may apply in case of conflict. 24 The Orange Book does not include a catch all of the other documents forming part of the contract. The Orange Book also provides a different 22 2J 24

EIC~ The EIC Contractor's Guide to the F1DIC Conditions of Contract for EPC Turnkey ProJects (European International Contractors, Berlin, 2000), p. 8 (hereinafter EIC Guide). FIDIC Guide, op. cit. n. 5 above, p. 62. ibid., p. 62.

94

ordering from that of the Silver Book, placing both the employer's requirements and the tender before the particular and general conditions (although called by a different name). The Red and Yellow Books allow the employer to issue a clarification or instruction (under sub-clause 3.3) where an ambiguity or discrepancy is found in the contract documents. The Silver Book contains no such provision and, therefore, the FIDIC Guide suggests, "parties should endeavour to reach agreement on how [such discrepancy] should be resolved, which may result in an adjustment to the contract price".2s Other standard form contracts examined herein also contain provisions both ranking the various contract documents and specifying that these documents mutually complement each other (ENAA Agreement 1.2; EIC 1.5; AGC 2.4.1; DBIA Agreement 3.1). The EIC provision, however, only specifies that the parties may agree to a ranking but does not indicate the ranking itself. 1.6 Contract Agreement

S-'{)8

The Contract shall come into force and effect on the date stated in the Contract Agreement. The costs of stamp duties and similar charges (if any) imposed by law in connection with entry into the Contract Agreement shall be borne by the Employer. Silver Book sub-clause 1.6, unlike the other FIDIC contracts examined herein, requires a contract agreement in which the date of the entry into force and effect of the contract is stated. Under the Red and Yellow Books, the parties are to enter into a contract agreement "within 28 days after the contractor receives the letter of acceptance" unless agreed otherwise. Where no letter of acceptance exists under these contracts, however, in order to establish a binding contract parties must sign a contract agreement. 26 Under the Orange Book, a contract agreement may be entered into at the request of either party. Unlike the other FIDIC contracts examined herein, the Orange Book contains a further provision regarding the "effective date", meaning "the date on which the contract entered into legal force and effect" (sub-clause 1.1.3.2). In general, the provision for drafting of a contract agreement stems from concerns regarding legality, as in some jurisdictions a contract agreement is advisable or required. The parties should make sure their contract includes an appended form of contract agreement, as do the Orange, (new) Red and Yellow Books. Where parties do enter into a contract agreement, all of the FIDIC contracts examined herein place the cost of stamp duties and execution costs as well as the cost of drafting on the employer. 25 26

ibid., p. 62. ibid., p. 63.

95

THE CONTRACT

DISCUSSION OF SPECIFIC SUB-CLAUSES

1.7 Assignment

5-69

Neither Party shall assign the whole or any part of the Contract or any benefit or interest in or under the Contract. However, either Party: (a) may assign the whole or any part with the prior agreement of the other Party, at the sole discretion of such other Parry, and (b) may, as security in favour of a bank or financial institution, assign its right to any moneys due, or to become due, under the Contract. The Silver Book sub-clause 1.7 prohibits either party from assigning his interest or benefit under the contract unless approval is obtained from the other party or assignment is made as a security in favour of a bank or financial institution. The (new) Red and Yel10w Book sub-clauses 1.7 contain identical provisions to that of the Silver Book. The Orange Book, however, does not contain a clause relating to the assignment of benefits or interests under the contract. The other standard form contracts herein contain provisions relating to assignment of contract interests. As a general rule parties must obtain permission from each other before any assignment (ENAA43, EIC 25.1; EIC 25.2; ICE 3; AlA 7.2-Part 2; AlA 11.6.1-Part 2; AGC 13.1; DBIA 12.1.1). The contracts provide several derogations from this principle, however. For example, the ENAA al10ws the contractor to assign monies that are, or will be, due and payable to it under the contract (ENAA 43). Further, the EIC allows the contractor to both assign, to his insurers, his right to obtain relief against any other party liable (EIC 25.2(b)) and assign monies due as a charge in favour of the contractor's banker (EIC 25.2(a)). Finally, under the AlA, the owner may assign the agreement to an institutional lender providing construction financing (AlA 11.6.1Part 2).

The Silver Book sub-clause 1.8 indicates the arrangements for the allocation of the care and supply of the documents as between the parties. Taking over of the contractor's documents does not correspond with the taking over of the works, or part thereof, but rather is generally occasioned by the contractor's issuance of these documents to the employer.27 The Red and Yellow Book sub-clauses 1.8 are identical to that of the Silver Book with regard to the contractor's documents. There will, however, be fewer (if any) contractor's documents in a Red Book contract depending on the amount of the contractor's design responsibility of the contract. The Red Book differs from the other two contracts in that the specifications (the Red Book equivalent to the employer's requirements) and drawings are to be in the custody and care of the employer. The Silver and Yellow Book clauses do not address the employer's requirements. Orange Book sub-clauses 1.7 and 1.9 roughly correspond to that of the Silver Book. The Orange Book provisions, however, do not require that one party notify the other party where there is an error or defect of a technical nature in a document relating to the execution of the works. Several of the other standard form contracts examined herein contain provisions similar to those of Silver Book sub-clause 1.8. For example, the EIC requires the contractor to provide the employer with copies of both t~e drawings and, following the issue of the taking-over certificate, the as-bUilt drawings (EIC 6.14). In addition, the ICE provides for certain documents and drawings to be kept by the contractor on the site, with access for inspection and use by the employer's representatives (ICE 6(2)). Final1y, the AGC requires the owner give prompt written notice to the contractor where the owner "becomes aware of any error, omission or failure to meet the requirements of the contract documents or any fault in the work" (AGC 4.3.2).

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1.9 Confidentiality

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1.8 Care and Supply of Documents

Both Parties shall treat the details of the Contract as private and confidential, except to the extent necessary to carry out obligations under it or to comply with applicable Laws. The Contractor shall not publish, permit to be published, or disclose any particulars of the Works in any trade or technical paper or elsewhere without the previous agreement of the Employer.

Each of the Contractor's Documents shall be in the custody and care of the Contractor, unless and until taken over by the Employer. Unless otherwise stated in the Contract, the Contractor shall supply to the Employer six copies of each of the Contractor's Documents. The Contractor shall keep, on the Site, a copy of the Contract, publications named in the Employer's Requirements, the Contractor's Documents, and Variations and other communications given under the Contract. The Employer's Personnel shall have the right of access to all these documents at all reasonable times.

If a Party becomes aware of an error or defect of a technical nature in a document which was prepared for use in executing the Works, the Parry shall promptly give notice to the other Party of such error or defect.

Silver Book sub-clause 1.9 states that the parties are to treat the details of the contract as private and confidential. This confidentiality provision is unique to the STiver Book amongst the other FIDIC contracts examined herein. Such a provision may be important, particularly to the employer, where the project is of a sensitive nature, commercial1y or otherwise. Where

27

96

ibid., p. 65.

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DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACT

the contractor's design includes commercially sensitive data which he does not want disclosed, the second sentence of this sub-clause might be adjusted to include reference to the employer. 28 A few of the other standard form contracts examined herein also provide confidentiality clauses. Both the ENAA and EIC impose a general obligation of confidentiality with respect to data or other information received in connection with the contract whose dissemination is not necessary for the fulfilment of contractor's obligations under the contract (ENAA 16.1; EIC 7.2; EIC 21.1). Indeed, parties may wish to provide that such particulars should no lo~ger be subject to confidentiality once they fall within the public d.omam. The EIC also provides that confidentiality obligations will not apply eIther where the information falls within the public domain or where it is obtained from outside of the confidential relationship between the parties (EIC 21.2). This provision may be superfluous, as the law of the jurisdiction of the contract may provide similar qualifications where a confidential relationship exists between parties.

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1.10 Employer's Use of Contractor's Documents As between the Parties, the Contractor shall retain the copyright and other intellectual property rights in the Contractor's Documents and other design documents made by (or on behalf of) the Contractor. The Contractor shall be deemed (by signing the Contract) to give to the Employer a non-terminable transferable non-exclusive royalty-free licence to coPy, use a~d c~mmunicate the Contractor's Documents, including making and uSing modificatIOns of them. This licence shall: (a) apply throughout the actual or intended working life (whichever is longer) of the relevant parts of the Works, (b) entitle any person in proper possession of the relevant part of the Works to copy, use and communicate the Contractor's Documents for the ~u~poses of completing, operating, maintaining, altering, adjusting, repamng and demolishing the Works, and (c) in the case of Contractor's Documents which are in the form of computer programs and other software, permit their use on any computer on the Site and other places as envisaged by the Contract including replacements of any computers supplied by th~ Contractor. The Contractor's Documents and other design documents made by (or on behalf of) the Contractor shall not, without the Contractor's consent be used copied or communicated to a third party by (or on behalf of) the Em;loyer Eo; purposes other than those permitted under this Sub-Clause.

The Silver Book sub-clause 1.10 indicates how the ownership and use of the contractor's documents are to be allocated between the parties. 29 Indeed, due to the sensitivity and value of the documents used in construction, including know-how and construction procedures that may not be licensed, the contractor will want to be protected against improper use of such documents by the employer. Thus, all of the FlDIC contracts examined herein stipulate that the contractor retains the copyright of the contractor's documents. Unlike the Orange Book, however, the other FIDIC contracts examined deem the contractor to have given the employer a "non-terminable transferable non-exclusive royalty-free licence to copy use and communicate" the contractor's documents. Such a clause gives the employer both certain rights in the use of the contractor's documents and a way of conceptualising these rights. The Orange Book provision is less comprehensive that those of the other FIDIC contracts examined, and does not provide a time period during which the employer may make certain uses of the contractor's documents, nor is the case of computer software mentioned. The employer may want to clarify the language of this clause to ensure that he has the right to use the construction documents for future additions or modifications to the site or the works. He may also wish to ensure that he has the right to make or have made any necessary spare parts. The employer's rights in the designs and construction documents will depend on his negotiating power in the transaction as well as his economic investment in the designs. Where the contractor is developing an idea provided by the employer, the employer may want to own the rights to the designs and construction documents. This is particularly appropriate where the contract involves a one-off project. The majority of the other standard form contracts examined herein contain similar provisions. For example, under the ENAA, a number of provisions create similar rights between the parties to those of the Silver Book (ENAA .15; ENAA 16). The ICE, on the other hand, claims the copyright remains with the contractor, but only provides for the grant to the employer of the use of, and not the licence to use, these documents (ICE 7(1)(b)). Under the EIC, the contractor retains the copyright in any drawings, documents, data and other information he provides to the employer (EIC 20.2). No mention is made of a licence to use the documents but rather the employer is granted a non-exclusive fight to utilise patents, know-how and other industrial property incorporated in the works (EIC 20.1). Under the AlA, the contractor retains intellectual property rights regarding drawings, specifications and other documents provided by the contractor (AlA 3.1-Part 1; AlA 1.3.1-Part 2). The employer is allowed to make copies of these documents (AlA 3.1-Part 1; AlA 1.3.1-Part 2) and may 29

28

The EIG C:uide makes this suggestion, although sub-clause 1.12 may address some of the contractor s concerns 10 thiS regard. EIC Guide, op. cit. n. 22 above, p. 8.

98

The FIDICGuide notes the e.xpression "as between the parties" was utilised in the drafting In order to mclude other parties (such as subcontractors) in the intellectual property protection prOVided under thiS sub-clause. FIDIC Guide, op. cit. no. 5 above, p. 69.

99

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THE CONTRACT

DISCUSSION OF SPECIFIC SUB-CLAUSES

request permission to use these documents (AlA 3.2-Part 1; AlA 1.3.2Part 2) but a licence to use these documents is not granted to the employer save upon the contractor's default in his obligations to the owner (AlA 3.3Part 1; AlA 1.3.3-Part 2). The DBIA allocates a limited licence to the employer, but only upon payment in full (DBIA Agreement 4.1; DBIA Agreement 4.2).

5-74

through the special expertise of the contractor, then ar~uably the contractor should own the rights to the design and constructIon doc~ments. FO.r example, where the contractor is experie~ced in t~e co~structIon of fOSSIl fuel power plants, the contractor may decide that hIS deSIgns and construction documents prepared for the construction of such a plan~ should not become the property of the employer. Further, a contractor who IS also a supplier may not want to provide the employer with the technology needed to produce needed spare parts.

1.11 Contractor's Use of Employer's Documents

The Silver Book sub-clause 1.11 allows for the contractor to copy and use employer's documents. The employer retains the intellectual property rights in these documents, however, and the contractor may not, without the employer's consent, transmit them to a third party except as necessary for purposes of the contract. 30 The FIDIC contracts examined herein contain equivalent clauses to that of the Silver Book. Only a few of the other standard form contracts examined contain similar provisions regarding the employer's documents. This is perhaps because, under turnkey contracts, the contractor will produce the majority of the drawings and documents used in the construction. The employer, however, may provide designs in the employer's requirements or he may provide know-how or techniques that need protection against improper use by the contractor. The contractor should, therefore, retain sufficient flexibility to be able to use the documents and information for the purposes of the contract. The ENAA and ICE provisions roughly mirror those of the Silver Book (ENAA 16.1; ENAA 16.2; ICE 7(1)(a)). The same caveat regarding the lack of confidentiality of information in the public domain, or accessed through third parties, applies here as in the case of contractor's documents (ENAA 16.3). As discussed above, ownership of the construction documents and designs developed under the contract may result largely from the economic investment of the parties. Where the contractor is largely responsible for the designs of the project, developed with minimal preliminary design or )0

The Contractor shall not be required to disclose, to the Employer, any information which the Contractor described in the Tender as being confidential. The Contractor shall disclose any other information which the Employer may reasonably require in order to verify the Contractor's compliance with the Contract. Silver Book sub-clause 1.12 provides the contractor with an additional protection of confidentiality, allowing the contractor not to disclose information specified as confidential in the ten?er. The employer ~ay require the contractor to disclose any other information reasonably reqUIred f?r the empl.oy~r to verify the contractor's compliance with the contract. The SIlver Book IS Silent as to what would occur where the contractor classifies as confidential any information that is needed by the employer to verify the contractor's performance of the contract. Under the o'range Book, as under the Silver Book, the contractor may stipulate, in the tender, confidential details he will not be required to disclose although, unlike the Silver Book, the Orange Book does not provi?e a~y specific disclosure requirements. Indeed, it is often important to maJOtaln confidentiality in order to protect the interests of t~e parties involved. As discussed above in relation to Silver Book sub-clause 1.9, the contract can also include a provision protecting the parties from any publication of the . details of the agreement. The Yellow and Red Book sub-clauses 1.12 differ from that of the Silver Book. First, the contractor is required to disclose all such confidential, and other information as the engineer may reasonably require to verify the contract~r's compliance with the contract. Second, there is no mention of the contractor's ability to place information off limits through classifying such information as confidential. Indeed, the wording of these provisions suggests even confidential information may be released to the employer for the purposes of certain ends. The FIDIC Guide, however, states that the contractor may not be required to make certain disclosures where such are precluded in contractual documents having priority over the general conditions. 31

The FIDIC Guide notes the expression Mas between the parties" is utilised in the drafting in order to include other parties (such as the employer's personnel) in the intellectual properry protection provided under this sub·clause. FIDIC Guide, op. cit. n. 5 above, p. 70. )1

100

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1.12 Confidential Details

As between the Parties, the Employer shall retain the copyright and other intellectual property rights · in the Employer's Requirements and other documents made by (or on behalf of) the Employer. The Contractor may, at his cost, copy, use, and obtain communication of these documents for the purposes of the Contract. They shall not, without the Employer's consent, be copied, used or communicated to a third party by the Contractor, except as necessary for the purposes of the Contract.

ibid., p. 71.

101

THE CONTRACT

5-76

DISCUSSION OF SPECIFIC SUB-CLAUSES

1.13 Compliance with Laws i ,

j

The Contractor shall, in performing the Contract, comply with applicable Laws. Unless otherwise stated in the Particular Conditions: (a) the Employer shall have obtained (or shall obtain) the planning, zoning or similar permission for the Permanent Works, and any other permissions described in the Employer's Requirements as having been (or being) obtained by the Employer; and the Employer shall indemnify and hold the Contractor harmless against and from the consequences of any failure to do so; and (b) the Contractor shall give all notices, pay all taxes, duties and fees, and obtain all permits, licences and approvals, as required by the Laws in relation to the design, execution and completion of the Works and the remedying of any defects; and the Contractor shall indemnify and hold the Employer harmless against and from the consequences of any failure to do so.

It is important for both parties to ensure that the other abides by the legal system of the site country and any other country that may have jurisdiction over performance of the contract. This is especially true for the employer, who may be liable for the contractor's failure to comply with certain regulations, obtain permits or pay fees required for the construction of the works and any of its ancillary activities. Indeed, the majority of the other standard form contracts examined herein contain provisions relating to the compliance of laws. The Silver Book sub-clause 1.13 both affirms that the contractor is to comply with applicable laws in performance of the contract and apportions the responsibility for the compliance of various laws between the parties. More speCifically, the employer is responsible for obtaining the relevant permission relating to the permanent works, in addition to any other employer responsibilities for permissions as described in the employer's requirements, and shall indemnify the contractor against any consequences of his failure to do so. The contractor's responsibilities, on the other hand, are to obtain permissions relating to the design, execution and completion of the works and the remedying of any defects. The contractor shall indemnify the employer against any consequences of his failure to do so. The exact responsibilities of the parties under this sub-clause are potentially ambiguous. For greater clarity, parties may wish to append to the contract a detailed schedule of the permits required and indicate which party is to procure these permits. 32 Parties may also include such information in the particular conditions. 33 The Red and Yellow Book sub-clauses 1.13 are essentially identical to that of the Silve.r Book. The Orange Book, on the other hand, diverges significantly from the Silver Book. Orange Book sub-clause 13.1 provides a general provision requiring both parties to comply with the laws of each country where the 32 33

EIC Guide, op. cit. n. 22, p. 8.

For ~~re guidance as to issues to consider in the preparation of this aspect of the particular conditions, reference may be had to FIDIC Guide, op. cit. n. 5, p. 72.

102

activities are performed. Further, the contractor is responsible for both assuring the compliance with the bureaucratic requirements of the jurisdiction of the works and for obtaining the relevant permissions relating to the works or their completion. The parties may, however, wish to allocate the burden of obtaining licences and permits on the basis of the identity of the parties, as under the Silver Book provision. Indeed, as the employer's requirements exist under the Orange Book, it might make sense to allocate responsibility to the employer for permissions required in relation to these requirements. Under the ENAA, the contractor has a general responsibility to comply with all laws in force in the country where the works are carried out (ENAA 9.4). The contractor is to obtain permissions required from government authorities in the country where the site is located that either relate to the performance of the contract or that the employer is not otherwise required to obtain (ENAA 9.3). The employer, on the other hand, must obtain permissions required from such authorities necessary for the execution of the works (ENAA 10.3) and shall assist the contractor in obtaining such permissions where they are not the responsibility of the employer under the contract (ENAA lOA). The ICE provides that the contractor is to act in accordance with applicable laws (ICE 26(3)). The contract also allocates to the contractor the general responsibility for obtaining permissions relating to both the design construction and completion of the permanent and temporary works (ICE 26(1)). The contractor is not responsible, however, for obtaining permissions in respect of the permanent works or any temporary works where such works were designed other than by or on behalf of the contractor (ICE 26(3)(c)). Under the AlA, the contractor is not obliged to violate any applicable law and shall notify the owner, in writing, where' implementation of any instruction received from the owner may result in such violation (AlA 1.2.5-Part 1; AlA 1.2.2-Part 2). This provision is complemented by a general stipulation that the contractor comply with the applicable laws, including the procurement of permissions, relating to the project (AlA 3.2.11-Part 2). Under the AGC, the contractor is responsible to "give all notices and comply with all laws and ordinances legally enacted at the date of the execution of the agreement which govern the performance of the work" (AGC 3.2.3). Similarly, the DBIA provides the contractor shall both perform the work and provide the legal notices necessary in connection with the work as required by the legal requirements (DBIA 2.5.1). The owner, on the other hand, is to obtain the permissions required "for the construction, use, occupancy or renovation of permanent structures" (AGC 4.1.2). Other provisions specify the contractor's responsibility to comply with applicable safety laws for the safety of its employees on the project (AGC 3.2.6; DBIA 2.8.2) and to ensure the drawings and specifications conform to the codes or laws enacted at the time of their preparation (AGC 3.1.1). Finally, under the DBIA the contractor is to ensure any design consultants used in the formulation of the design be qualified and licensed professionals, in conformity with applicable state licensing laws (DBIA 2.2.1). ln~

5-77

DISCUSSION OF SPECIFIC SUB-CLAUSES THE CONTRACT

5-78

1.14 Joint and Several Liability

If the Contractor constitutes (under applicable Laws) a joint venture, consortium or other unincorporated grouping of two or more persons: (a) these persons shall be deemed to be jointly and severally liable to the Employer for the performance of the Contract; (b) these persons shall notify the Employer of their leader who shall have authority to bind the Contractor and each of these persons; and (c) the Contractor shall not alter its composition or legal status without the prior consent of the Employer.

of these two entities varies in accordance with differences in legal culture and experience. The author identifies them as discussed below. The integrated joint venture involves the parties investing certain skills or materials in the project. The parties then receive a percentage of the profit made in the joint venture. In the example given below, the parties each place certain inputs or contributions into the joint venture. At the completion of the project they receive a set percentage of the projects made from the performance of the entire contract. A 20/% of profit or loss

A 20% of inputs -

5-79

The Silver Book sub-clause 1.14 speaks to the situation where the contractor, under the contract, is neither a single corporation nor a single physical person. Where such is the case, the entities comprising the contractor are to be held jointly and severally liable to the employer for performance of the contract, and are to indicate to the employer a designated spokesperson with the authority to bind the contractor. Finally, any change in either the legal status or composition of the contractor is subject to the prior consent of the employer. The contractor may wish the provisions of this sub-clause also to apply to the employer. 34 All of the FIDIC contracts examined herein contain similar provisions with regard to the potential nature of the contractor as a joint venture or consortium, although the Orange Book omits or other unincorporated grouping from its description of the contractor. The majority of the other standard form contracts examined herein do not contain provisions similar to that of the Silver Book. The ENAA is an exception, specifying that the contractor be "an independent contractor performing the contract" (ENAA 3.8). The ENAA places more emphasis on the contractor's position in relation to the owner, however, as the same provision also confirms that "the contract does not create an agency, partnership, joint venture or other joint relationship between the parties thereto" (ENAA 3.8). Often under construction contracts, the contractor may be a single entity or a group of entities acting collectively through a given project vehicle. The project vehicle may either be established in the form of a contractual grouping or a project company. Given the variety of legal regimes under which turnkey construction contracts are found, parties may want to include a clause, such as those found in the FIDIC contracts, specifying the responsibility of a party where that party is not a single entity. For example, although the legal construction of partnerships may be found in many jurisdictions, significant differences can occur between jurisdictions with respect to the asset base for any liability of the partnership and who may legally bind the partnership. However, although the contractor may form a company (e.g. partnership or limited liability company) for the purposes of the contract, contractual groups are more common. The two forms of contractual groupings most frequently employed by contractors are the joint venture and the consortium. The conceptualisation H

ibid., p. 9.

104

B 30% of inputs -

Joint Venture

_

C 50/% of profit or loss

C 50% of inputs Figure 5.1

B 30/% of profit or loss

5-80

An integrated joint venture

The second method involves the creation of a consortium, or a non-integrated joint venture. In this model, the parties come together to tender a bid for a project. Once the bid has been accepted, each party is responsible for a discrete portion of the works. The contract price will be allocated according to each such portion. For example, one consortium member could be responsible for the civil works and the other could be responsible for the electro-mechanical works. As among the members of the consortium, each member will be responsible for the profits or losses realised with respect to the portion of the works for which he is responsible.

100% of input-

100% of input-

Figure 5.2

A

(civil)

B

(electro-mechanical)

5-81

100% of profit - or loss

100% of profit - or loss

5-82

A non-integrated joint venture 105

THE CONTRACT

5-83

As mentioned in particular conditions of the Silver Book, the employer may want to impose other requirements on joint ventures in large turnkey contracts, such as the provision of parent company guarantees (sub-clause 1.14). There may also need to be some scrutiny of the joint venture, its make-up and operation, by the financiers of the project. Provision for the intervention of financiers involves a separate topic which will not be studied in detail in this work, but which should be considered carefully by the employer when first tendering the project (e.g. compliance with the procurement rules of the European Bank for Reconstruction and Development).

CHAPTER

6

THE EMPLOYER General Comments The first edition of the present book was based on the FIDIC Orange Book (1995), which contained a clause 2 "The Employer" similar to the current clause under discussion in this chapter. Some of the provisions contained in the Orange Book clause 2 have been moved to different sections of the Silver Book. In addition, the Silver Book clause 2 contains three new provisions concerning the obligations of the employer regarding his personnel, proof of the employer's financial capability and a separate clause setting forth a procedure for claims against the contractor by the employer. Silver Book Clause 2 contains five sub-clauses setting forth a number of the employer's express obligations: sub-clauses 2.1 "Right of Access to the Site", 2.2 "Permits, Licences or Approvals", 2.3 "Employer's Personnel", 2.4 "Employer's Financial Arrangements" and 2.5 "Employer's Claims". This chapter will begin with a brief discussion of two of the major topics contained in clause 2 and then move to an analysis of the specific clauses with comparisons to similar provisions from other industry standard form design-build/turnkey contracts.

6-01

Access and possession The employer's duty to give access to and provide the site constitutes one of the fundamental aspects of the parties' relationship under the construction contract. Whether or not it is specifical\y included as an obligation in the construction contract, the employer wil1 nonetheless have to provide the contractor access to and possession of the site. Preferably, this will be an express obligation in the contract and wil1 occur in accordance with specific provisions. The contract should careful1y define the site to be provided and the timing of giving access or possession to allow performance of the work in accordance with the programme and completion dates. In any event, the contractor should be adequately protected from the consequences of the employer's failure to provide site access and possession and to provide certain elements of the site at the appropriate time or times during the construction process. The approaches used by the various form construction contracts discussed herein differ widely. The Silver Book seems to be at one extreme containing

106

107

6-02

DISCUSSION OF SPECIFIC SUB-CLAUSES THE EMPLOYER

very specific obligations for the employer both to provide access to the site and regarding other elements of the site for which the employer is responsible. It also contains specific provisions for contractor extensions of time and payment of costs for the employer's failure in these obligations. At the other extreme would be the AlA and AGC contracts that do not contain any express obligation for the employer to provide site access and possession, and only provide general time extension and cost-payment provisions covering delays attributable to the employer. An approach similar to the provisions of Silver Book sub-clause 2.1 seems to be preferable, as discussed more fully below.

Employer assistance with permits and licences

6-03

The contract should clearly allocate the duty to obtain the permits and licences necessary for the design and construction of the works. Under traditional contracts the duty to obtain, for example, any necessary import licences, the construction permit and other licences and permits would often be allocated to the employer. However, where the contractor undertakes both the design and construction functions, the employer may prefer to place a greater burden in this regard on the contractor. Consequently, it is appropriate to impose specific obligations on the employer to assist the contractor in obtaining permits or other authorisations. These authorisations may require procedures under local law with which the contractor may not be familiar. In addition, turnkey contracts are often entered into by large private or public entities from the site country acting as the employer. In such cases, the employer may be better placed to obtain the necessary permits and licences at a lower cost, thereby potentially decreasing the contract price. The title of sub-clause 2.2, "Permits, Licences or Approvals" is somewhat misleading in that the substance of this clause concerns primarily the employer's obligation to assist the contractor in obtaining certain permits. The actual designation of responsibility for permits between the employer a?d co?tractor is contained in sub-clause 1.13 discussed in Chapter 5. The discussIOn of sub-clause 2.2 below will deal mainly with the employer's obligation to assist the contractor.

Discussion of Specific Sub-Clauses 6-04

2.1 Right of Access to the Site The Employer shall give the Contractor right of access to, and possession of, all parts of the Site within the time (or times) stated in the Particular Conditions. The right and possession may not be exclusive to the Contractor. If, under the Contrac.t, the Employer is required to give (to the Contractor) possession of any foundation, structure, plant or means of access, the Employer shall do so in the time and manner stated in the Employer's Requirements. However, the

108

Employer may withhold any such right or possession until the Performance Security has been received. If no such time is stated in the Particular Conditions, the Employer shall give the Contractor right of access to, and possession of, the Site with effect from the Commencement Date. If the Contractor suffers delay and/or incurs COSt as a result of a failure by the Employer to give any such right or possession within such time, the Contractor shall give qotice to the Employer and shall be entitled subject to Sub-Clause 20.1 [Contractor's Claims] to: (a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and (b) payment of any such Cost plus reasonable profit, which shall be added to the Contract Price.

After receiving this notice, the Employer shall proceed in accordance with SubClause 3.5 [Determinations] to agree or determine these matters. However, if and to the extent that the Employer's failure was caused by any error or delay by the Contractor, including an error in, or delay in the submission of, any of the Contractor's Documents, the Contractor shall not be entitled to such extension of time, Cost or profit. Silver Book sub-clause 2.1 states that the employer must give the contractor access to and possession of all parts of the site within the time stated in the particular conditions, or as of the commencement date if no other time is specified. Sub-clause 2.1 indicates that this right and possession may not be exclusive to the contractor. This language may need to be clarified to indicate that the contractor's rights regarding possession of the site definitely "are not exclusive", rather than "may not be exclusive", given that certain legal systems might imply exclusive possession as a result of the contract unless otherwise stated. Silver Book sub-clause 2.1 also contains language indicating that the employer must give the contractor possession of "any foundation, structure, plan~ or means of access" in the time and manner stated in the employer's reqUirements. These terms suggest that if the employer must provide an element necessary to the overall works which must be provided prior to the cont~actor'~ co~mencement or continuation of its work, the employer has a speCific obhga.tlOn to do so in accordance with the employer's requirements. For. example, If the employer agreed to provide the cement foundation upon which the contractor would subsequently build a'nd install an electrical plant, the employer must ensure that the foundation is completed and available to the contractor at the appropriate time so as not to delay the contractor's work or affect the critical path of the overall completion timing. No~etheless, if the parties intend for this clause to clearly apply in such a situatlO~, the particular conditions and the employer's requirements should contam.a v~ry pr~c!se description of what element the employer has agreed to proVide m addition to the exact time at which it must be available and finally, a stipulation that such element is intended to be covered by the term~ of this sub-clause. .

109

THE EMPLOYER

6-05

Sub-clause 2.1 further provides that the contractor may claim an extension of the time for completion as well as cost plus profits in the event these claims result from the employer's failure to provide timely access to the site or to a particular structure or item of plant. This possibility of claims by the contractor makes it important to be precise in the contract with regard to the exact date that site possession must be given to the contractor in order better to calculate the amount of delay or cost. However, the last sentence of sub-clause 2.1 indicates that the contractor is not entitled to any extension of time or payment of costs if the employer's failure to provide access to the site or to a site element is due to any error or delay by the contractor. Silver Book sub-clause 2.1 differs in many respects from the corresponding sub-clause 2.1 contained in the Orange Book. The Orange Book provision includes the obligation to provide access or possession of the site but not a specific obligation to provide timely access to other potential site elements for which the employer may be responsible, such as plant or foundations. However, unlike the Silver Book, the Orange Book does not give the employer the right to withhold site access until the contractor's performance security is in place. Another slight difference is that under the Orange Book it is the employer's representative who would agree or determine any time extension or price increase whereas it is the employer who makes these determinations in the Silver Book. Both the Silver and Orange Books, however, are similar in that the greater part of the risks and costs associated with access are imposed on the contractor, which appreciably limits the obligations of the employer as regards access rights (OB sub-clauses 4.9, 4.12, 4.13; SB sub-clauses 4.15, 4.13, 4.10).1 The provisions in sub-clause 2.1 of the current (new) Red Book and Yellow Books (1999) are nearly identical to the provisions of Silver Book sub-clause 2.1 except that the default time for possession of the site in the absence of a specific time or times stated in the appendix to tender 2 is not the commencement date, as it is in the Silver Book. The Red and Yellow Books simply indicate that absent specification in the appendix to tender the site must be provided "within such times as may be required to enable the Contractor to proceed in accordance with the programme ... ". This language may be more effective than the default time used in the Silver Book ("access ... with effect from the Commencement Date") in the event that certain portions or elements of the site will be provided by the employer at some time after the commencement date, such as a foundation on which an electric plant would be installed. The provisions of the old Red Book (sub-clause 42.1) and old Yellow Book (sub-clause 17.1) similarly require the employer to give access to the site. In the old Red Book this must occur upon the engineer's notice and in the old

DISCUSSION OF SPECIFIC SUB-CLAUSES

"

Yellow Book within a reasonable time. Unlike the new FIDIC contracts, neither the old Red nor the old Yellow Book mentions the provision of access to or possessi
2.2 Permits, Licences or Approvals I

2

B. Cazalet & R. Reece, "Conditions applicables aux contrats de conception-construction et des en main" (1996) 3 R.D.A.l.lI.N.LJ. 279 at 288, with regard to the Orange Book. Note that the new Yellow and Red Books generally refer to the appendix to tender rather ' than the particular conditions for data or specific information that the general conditions might require.

110

6-06

6-07

The Employer shall (where he is in a position to do so) provide reasonable assistance to the Contractor at the request of the Contractor: (a) by obtaining copies of the Laws of the Country which are relevant to the Contract but are not readily available, and 111

THE EMPLOYER

(b)

6-08

for the Contractor's applications for any permits,licences or approvals required by the Laws of the Country: (i) which the Contractor is required to obtain under Sub-Clause 1.13 [Compliance with Laws], (ii) for the delivery of Goods, including clearance through customs, and (iii) for the export of Contractor's Equipment when it is removed from the Site.

Under Silver Book sub-clause 2.2 the employer must provide reasonable assistance to the contractor at its request to obtain copies of the site country's relevant laws, assist the contractor in its application for any permits, licences or approvals required of the contractor by applicable laws and regulations as well as for customs clearance of goods and for the reexport of the contractor's equipment as necessary. Although the employer is responsible for obtaining some permits and authorisation (see sub-clause 1.13(a) and its discussion in Chapter 5), the contractor is responsible for any remaining permits, licences or approvals required by law in relation to the works (sub-clause 1.13(b)). Therefore, the employer's assistance in obtaining these permits may be reques~ed by virtue of sub-clause 2.2. Subclauses 2.2 of the Red and Yellow Books are identical to the Silver Book provision. The corresponding Orange Book sub-clause 2.3 also imposes on the employer a requirement of reasonable assistance to the contractor for all of the same permits and permissions mentioned above. However, this assistance is specifically at the contractor's cost, and the employer has no specific requirement to obtain copies of relevant laws. The old Red Book and old Yellow Book do not contain provisions for employer's assistance relating to the contractor's permits because the employer bears the responsibility for all permits (sub-clauses 26.1 (ORB) and 17.4 and 17.5 (OYB)). However, the employer is specifically required to assist the contractor regarding customs clearance for goods (sub-clauses 54.3 (ORB) and 48 .2(OYB)) and re-export of contractor's equipment (sub-clauses 54.4 (ORB) and 48.2(OYB)). The employer is under no requirement to obtain copies of laws for the contractor under the old Red Book but is required to do so under sub-clause 17.2 of the old Yellow Book. None of the non-FIOIC form contracts discussed herein impose a requirement on the employer 3 to obtain copies of laws of the site country. Under the ENAA and EIC, the owner is responsible for obtaining all licences and ' permits that it must obtain in its own name (sub-clauses GClO.3 (ENAA) and 3.6 (EIC)) and require the employer to assist the contractor in obtaining other permits and licences (sub-clauses GCIO.4 (ENAA) and 5.2 (EIC)) . This obligation specifically extends to customs clearance and re-export of the

J

Note that all of the non-FIDIC contracts discussed herein use the term "Owner" instead of "Employer", with the exception of the ICE which uses the term "Employer".

112

DISCUSSION OF SPECIFIC SUB-CLAUSES

contractor's equipment (see sub-clauses GC2.2.2.3 (ENAA)4 and 5.3 and 5.4 (EIC)). The ICE form seems to impose on the employer the obligation of obtaining permissions for the works and contains no specific contractor assistance requirements with regard to any licences, permits or approvals (see sub-clause 26(3)(c) (ICE)). Similarly, the AGC indicates that the employer will obtain any relevant permits or authorisations (sub-clause 4.1.2.3) and contains no further obligation of assistance. The requirements in this regard under the AlA are somewhat ambiguous, stating in Part 1 that the owner must obtain all legal authorisations concerning the execution of the works (sub-clause 2.1.8 (AlA-Part 1)), but then indicating that "[tJhe Owner shall cooperate with the Design/Builder in securing building and other permits, licences and inspections" (sub-clause 2.3 (AlA-Part 2), suggesting that the contractor has some responsibility with regard to permits. Where the employer is given the responsibility of obtaining all permits and other authorisations required by law it may seem useless to impose upon the employer an obligation to assist the contractor in obtaining permits. However, it will be the rare occasion that the contractor will not be responsible for any permits or authorisations at all. Consequently, the requirement of employer assistance may be appropriate regardless of the repartition of permit obligations. This will be particularly true in the case of international construction projects involving foreign parties.

6-09

2.3 Employer's Personnel The Employer shall be responsible for ensuring that the Employer's Personnel and the 'Employer's other contractors on the Site: (a) co-operate with the Contractor's efforts under Sub-Clause 4.6 [Cooperation], and (b) take actions similar to those which the Contractor is required to take under sub-paragraphs (a), (b) and (c) of Sub-Clause 4.8 [Safety Procedures] and under Sub-Clause . 4.18 [Protection of the Environment). This sub-clause is a new provision in the FIDIC forms and is generally not found in any of the non-FIDIC contracts discussed herein. Silver Book sub-clause 2.3 requires the employer to be responsible for ensuring that its personnel and other contractors co-operate with the contractor's efforts, follow safety procedures and respect environmental requirements. It imposes on the employer some oversight responsibility with regard to its personnel, but does not impose any specific remedy for the contractor • Note that the ENAA contains no specific requirement for customs clearance. However, assistance in that regard seems to be included in the general obligation for permit assistance imposed under GC 10.4. Nonetheless, GC 21.5 expressly states that customs clearance is the contractor's obligation.

113

DISCUSSION Of' SPECIFIC SUB-CLAUSES

THE EMPLOYER

6-10

in the event of the employer's failure in this regard. However, the employer already agrees in sub-clause 17.1 to indemnify the contractor for any environmental liability attributable to the employer or its personnel. In addition, the contractor may obtain an extension of time for any delay caused by the employer or his personnel (sub-clause 8.4). Subclause 2.3 does favour the contractor, however, in that it provides a contractual basis on which to base any potential claim against the employer under sub-clause 20.1 "Contractor's Claims" in the event that the employer's breach of these requirements causes the contractor to incur additional costs or completion delays. Indeed, the contractor may choose merely to make an argument under sub-clause 20.1, as the provisions of sub-clause 8.4 only allow for a time extension grant and not for costs. s The FIDIC Red and Yellow Books each contain a sub-clause 2.3 identical to that of the Silver Book. . ~he O~a~ge Book and the old Red and old Yellow Books contain no provIsions Similar to the above sub-clause 2.3, with the exception of old Red Book sub-clause 19.2 requiring the employer to have regard for the safety of all persons ~n the site and keep the site in an orderly state to avoid danger. However, thiS falls well short of the requirement of oversight imposed by the Silver Book sub-clause 2.3. Like the old Red Book, the ICE imposes the requirement that the employer's workers have regard for the safety of others and keep the site free from danger (sub-clause 19(2) (ICE)). However, the ENAA, EIC and AlA contain no such provisions regarding the employer's oversight of its workers' adherence to safety requirements. With regard to co-operation of the employer's personnel with the contractor's efforts, the AlA requires the employer to be responsible for the cost of co-ordinating the construction of its workers (sub-clauses 3.3.1 and 3.3.5 (AlA)), which might imply a responsibility of co-ordination with the contra~tor's personnel. None of the other non-FIOIC contracts impose an obligation on the employer to ensure its workers' co-operation with the contractor. Neither the Orange Book, old Red 'Book, old Yellow Book nor the nonFIOIC contracts impose on the employer the responsibility to ensure that its ' workers take measures to protect the environment in the same manner required of the contractor under Silver Book sub-clause 4.18.

6-11

2.4 Employer's Financial Arrangements The Employer shall submit, within 28 days after receiving any request from the Contracto~, reasonable evidence that financial arrangements have been made and are bemg maintained which will enable the Employer to pay the Contract

s EIC~ The EIC Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey ProJects (European International Contractors, Berlin, 2000), p. 9 (hereinafter EIC Guide).

114

Price (as estimated at that time) in accordance with' Clause 14 [Contract Price and Payment]. If the Employer intends to make any material change to his financial arrangements, the Employer shall give notice to the Contractor with detailed particulars. Sub-clause 2.4 is another new addition to the FIOIC construction contracts since the publication of the Orange Book in 1995. It allows the contractor to insist that the employer provide "reasonable evidence" of ability to pay the contract price within 28 days and requires the employer to inform the contractor of any material change in its financial arrangements. Given the uncertain nature of "reasonable evidence", the employer may wish to limit his obligation through specifying, in the particular conditions, what, if any, evidence he would provide. 6 The contractor is also empowered to suspend the contract (sub-clause 16.1) and possibly terminate the contract (sub-clause 16.2) for employer's failure under this subclause. The contractor may want to add a provision allowing the contractor to require the employer to demonstrate financial means after the issuance of any significant variation order.7 In addition, the contractor may wish to be made aware of any "terms, conditions or step-in rights that exist in any agreement between the employer and his lenders". g Although agreeing with the provisions of sub-clause 2.4 in principle, some warn that the vagueness of "reasonable evidence", coupled with the severe sanctions where such is not provided to the contractor's satisfaction, may engender much debate. 9 The Red an.d Yellow Books contain identical provisions in their respective sub-clause 2.4. The Orange, old Red and old Yellow Books contain no provision similar to the above sub-clause 2.4. The ENAA, EIC and ICE also contain no such provision. However, the AlA does allow the contractor to request proof of the employer's financial arrangements to fulfill its obligations under the contract (sub-clause 2.10 (AlA-Part 2)), but there: is no specific remedy for employer non-compliance. Termination under the AlA by the contractor is generally permitted only upon non-payment by the employer (sub-clause 12.2.1 (AlA-Part 2)). Under the AGC, the reasonable evidence of financial ability to pay must be provided by the employer prior to commencement of the work as well as during the progress of the work (sub-clause 4.L3 (AGC)). The AGC provision indicates that the contractor is not required to commence work until this reasonable proof is communicated and it is not required to continue working if this proof is not provided during the course of the work. However, none of the non-FIOIC contracts require the emplorer to notify the contractor of material changes in the employer'S finanCial arrangements.

~

P.L. Booen, "The Three Major New FIDIC Books" (2000) 17 (1) I.C.L.R. 24.

9

E. Corbett, "FIDIC's New Rainbow-An Overview of the Red Yellow Silver and Green Test Editions" (1999) 16 (1) I.C.L.R. 39 at 41. "

EIC Guide, op. cit. n. 5 above, p. 9. , ibid., p. 9.

115

THE EMPLOYER

6-12

DISCUSSION OF SPECIFIC SUB-CLAUSES

2.5 Employer's Claims

If the Employer considers himself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract andlor to any extension of the Defects Notification Period, he shall give notice and particulars to the Contractor. However, notice is not required for payments due under Sub-Clause 4.19 [Electricity, Water and Gas], under Sub-Clause 4.20 [Employer's Equipment and Free-Issue Material], or for other services requested by the Contractor. The notice shall be given as soon as practicable after the Employer became aware of the event or circumstances giving rise to the claim. A notice relating to any extension of the Defects Notification Period shall be given before the expiry of such period. The particulars shall specify the Clause or other basis of the claim, and shall include substantiation of the amount andior extension to which the Employer considers himself to be entitled in connection with the Contract. The Employer shall then proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine (i) the amount (if any) which the Employer is entitled to be paid by the Contractor, andlor (ii) the extension (if any) of the Defects Notification Period in accordance with Sub-Clause 11.3 [Extension of Defects Notification Period]. The Employer may deduct this amount from any moneys due, or to become due, to the Contractor. The Employer shall only be entitled to set off against or make any deduction from an amount due to the Contractor, or to otherwise claim against the Contractor, in accordance with this Sub-Clause or with sub-paragraph (a) andior (b) of Sub-Clause 14.6 [Interim Payments).

The disparity between the employer's claims and the contractor's claims provisions has engendered some discussion, in the literature, as to the "fairness" of such an employer's claims provision. One author provides some rationale for the disparity, stating that imposing strict time constraints on the employer "could give rise to unfairness in terms of when the employer's personnel should have become aware of a defect giving rise to a claim".!! Indeed, with employers less involved in the site, this explanation makes some sense. This does not, however, justify expiry of a contractor's claim if the notification procedure is not complied with (see discussion below). Although they do not expressly preclude employer claims for additional costs or extensions of the defects notification period and all contain dispute resolution mechanisms, the Orange, old Red and old Yellow Books do not contain separate procedures for employer's claims. The same is true for all the non-FIDIC contracts discussed herein.

Employer Obligations in the Silver Book Although Silver Book clause 2 contains only a small portion of the employer's obligations, it seems appropriate in this chapter to provide a more comprehensive list of all these obligations. The chart below provides a summary description to give the reader a concise overview of the extent of the employer's obligations under the FIDIC Silver Book. The particular clauses mentioned below can be found at.other points in the book for a comparison with other industry form construction contracts.

Silver Book sub-clause 2.5 is another provision new to the FIDIe construction contracts. It provides a specific mechanism and procedure for the employer to follow in the event it considers itself to be entitled to payment of any cost by the contractor or any extension of the defects notification period. It requires notice of any claim to the contractor "as soon as practicable after the employer became aware of the event or circumstances giving rise to the claim". This differs from the corresponding obligation on the contractor for contractor's claims, which must be notified within 28 days (sub-clause 20.1) and are subject to more onerous stipulations for claims submissions. lo Under the "Employer's Claims" provisions the employer is required under sub-clause 3.5 after notice of the claim to attempt to agree on the claimed amount or extension with the contractor. However, absent agreement it is the employer who makes the final decision. Nonetheless, the contractor may appeal the determination to the Dispute Adjudication Board or eventually an arbitral panel. The Red and Yellow Books contain identical provisions in their respective sub-clause 2.5 except that the engineer undertakes the determination in these contracts.

10

6-14 Clause 1

EIe Guide, op. cit. n. 5 above, p. 10. 11

116

6-13

General Provisions

1.6

Responsibility for stamp duties and similar charges in connection with entering into contract agreement.

1. 7

Obligation to obtain consent of contractor before assigning the contract in whole or in part.

1.9

Obligation to treat contract details as private and confidential.

1.13

Obligation to obtain all planning, zoning or similar provisions for the works and other permissions as indicated in the employer's requirements.

P.L. Booen, "The Three Major New FIDIC Books", op. cit. n. 6 above, at 30 .

117

EMPLOYER OBLIGATIONS IN THE SILVER BOOK

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Clause 2 2.1

2.2

0 bligation to give contractor access to and possession of the site and to any foundation, structure, plant or means of access in the time and manner specified in the contract.

Obligation to provide assistance to the contractor in obtaining country laws and in applications for permits and other authorisations.

2.3

Ensure co-operation with contractor's efforts, safety compliance and adherence to environmental requirements by employer's personnel.

2.4

Provide reasonable evidence of financial arrangements to contractor upon request.

2.5

Obligation to give notice and details to contractor of employer's claims for payment of costs or extension of the defects notification period.

Clause 3 3.5 Clause 4

The Employer's Administration Obligation to agree or determine claims or disputes as indicated under the contract. Obligation to provide site data to the contractor prior to and subsequent to the base date.

4.20

Obligation to make employer's equipment available for use by the contractor and supply free-issue materials.

5.1 5.4

Clause 7 7.3

7.4

7.5 Clause 8

Obligation to initiate a variation if employer requires contractor's compliance with any changed or new standard, regulation or other law.

r,:

Obligation to give contractor notice of and reasons for rejection of plant, materials, design or workmanship. Commencement, Delays and Suspension Obligation to give contractor seven days' notice of the commencement date.

8.3

Obligation to give contractor 21 days' notice of a non-compliant programme.

8.4

Obligation to agree or determine c,ontractor's claims for extension of time for variations, delays or impediments caused by the employer or for other reasons stated in the contract.

8.9

Obligation to agree or determine contractor's claims for extension of time and/or costs for suspension of the works instructed by the employer (when c:ontractor is not at fault) and make certain payments for materials (sub-clause 8.10).

Clause 9 9.2

Clause 10

Tests on Completion Obligation to agree or determine contractor's claims for extension of time and/or costs for employer delays to the tests on completion. Employer's Taking Over

10.1

Obligation to take over works when works are completed and taking-over certificate issued or deemed issued.

10.3

Obligation to agree or determine contractor's claims for extension of time and/or costs for employer's interference with tests on completion.

Design Responsibility for the correctness of certain data and information provided by the employer in the employer's requirements.

.'

8.1

The Contractor

4.10

Clause 5

118

The Employer

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Clause 11

Defects Liability

11.1

Obligation to notify contractor of defects in or damage to the works.

11.6

Obligation to carry out examination, inspection, measurement or testing of the works without unreasonable delay or to give notice to contractor of intention not to do so.

Obligation to give contractor notice of employer-required repetition of tests after the remedying of any defect or damage.

11.7

Obligation to give contractor 24 hours' notice of employer's intention to attend tests and grant contractor costs and extension of time for variations in tests instructed by the employer.

Obligation to give the contractor access to all parts of the works and operation and performance records until the performance certificate is issued.

11.8

Obligation to agree or determine contractor's claim for the cost of a search for defects by the contractor requested by the employer.

Plant, Materials and Workmanship

119

EMPLOYER OBLIGATIONS IN THE SILVER BOOK

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11.9

Obligation to issue a performance certificate within 28 days of the expiry of the latest defects notification period or after contractor has supplied all contractor's documents, completed and tested all works and remedied all defects.

11.10

Responsibility to fulfill any of employer's obligations remaining after issuance of the performance certificate. Obligation to sell or dispose of any items not cleared from the site, with payment of the balance to contractor after deduction of costs.

11.11

Clause 12

14.7

Obligation to pay contractor instalments of advance payment, payments due for each statement and final amount due, as specified in the contract.

14.8

Obligation to pay financing charges for late payments to contractor.

14.9

Obligation to pay retention money to contractor: one half when taking-over certificate issued, the remainder at the expiry of the latest defects notification period.

14.10

Obligation to give contractor notice within 28 days after receiving contractor's statement at completion of any items of disagreement and make payment to contractor.

14.13

Obligation to make final payment to contractor.

Tests after Completion

12.1

Obligation to give 21 days' notice of tests after completion and provide all electricity, fuel and materials and make employer's personnel and plant available.

12.2

Obligation to agree or determine contractor's claims for costs due to unreasonable delay by employer of the tests after completion.

15.2

Obligation to give 14 days' notice of contract termination to contractor (if employer is entitled to termination upon the occurrence of certain events).

12.3

Obligation to agree or determine contractor's claims for costs due to unreasonable delay by the employer in permitting access by contractor to the works or plant to investigate the cause of any failure to pass tests after completion and to carry out adjustments or modifications.

15.3

Obligation to agree or determine the value of the works in the event of an employer termination of the contract.

15.4

Obligation to pay balance of money owed to contractor after employer termination.

Variations and Adjustments

15.5

Obligation to give contractor notice of employer's termination for convenience and pay contractor all amounts due.

Clause 13 13.1 13.3

Obligation to cancel, confirm or vary employer-issued instructions to which contractor objects. Obligation to approve, disapprove or comment on contractor proposals for variations requested by employer. Obligation to agree or determine contract price adjustment for variation.

13.7 Clause 14 14.2

14.6

120

'

Clause 15

Clause 16

Obligation to make an advance payment for mobilisation and design to the contractor, if specified in the particular conditions. Obligation to give contractor notice within 28 days after receiving statement of any items of disagreement.

Suspension and Termination by Contractor

16.1

Obligation to agree or determine contractor's claims for extension of time andlor costs following contractor's justified suspension of the contract.

16.4

Obligation upon justified termination of contract by contractor to return performance security, pay contractor amounts due and costs, lost profits and damages.

Obligation to agree or determine contractor's claims for extension of time and/or costs due to changes in legislation. Contract Price and Payment

Termination by Employer

Clause 17

Risk and Responsibility

17.1

Obligation to indemnify contractor against and from specified claims, damages, loss and expenses.

17.4

Obligation to agree or determine contractor's claims for extension of time andlor costs following the occurrence of an employer's risk event.

121

THE EMPLOYER ... j'; . :I. •

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17.5

Obligation to indemnify and hold harmless (and assist contractor in defending against) claims for infringement of intellectual and industrial property rights.

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Clause 18

Insurance

18.1-18.4

Obligation to effect each insurance for which employer is responsible in the manner and as provided in the contract.

Clause 19

Force Majeure

19.2

CHAPTER

THE EMPLOYER'S ADMINISTRATION I

,

General Comments

Obligation to give contractor notice of force majeure events preventing employer from performing its obligations under the contract.

19.3

Obligation to minimise delay in performance as a result of force majeure and give notice when employer ceases to be affected by force majeure.

19.4

Obligation to agree or determine contractor's claim for extension of time and/or costs resulting for the occurrence of a force majeure event.

19.6-19.7

Obligation to make payment to contractor in the event of contract termination caused by force majeure or by reason of contract illegality.

Clause 20

Claims, Disputes and Arbitration

20.1

Obligation to respond to contractor's claims with approval or disapproval with detailed comments and to agree or determine claims by contractor for extensions of time and/or costs.

20.2

Obligation to appoint a Dispute Adjudication Board (DAB) jointly with the contractor, one member nominated by employer for contractor's approval, and to pay one half of the DAB's remuneration.

20.3

Obligation to give notice and a copy to the contractor of any dispute the employer refers to the DAB and make information available and give site access to the DAB. Obligation to give timely notice of dissatisfaction to contractor regarding a DAB decision.

20.4

Obligation to attempt amicable settlement of a dispute before arbitration.

20.5

Obligation to submit remaining disputes to final and binding arbitration.

(t

The FIDIC form construction contracts traditionally contained a very well defined role for the engineer in the co-ordination of the overall project. This is particularly true in the case of its oldest form contract, the original Red Book, as well as in the later Yellow Book and in the current versions of the Red and Yellow Books. With the publication of the FIDIC Orange Book in 1995 and later the Silver Book in 1999, FIDIC removed the separate role of Engineer from these two contracts and added the possibility of using an employer's representative who could undertake many of the responsibilities traditionally within the domain of the engineer. One clear purpose of the FIDIC Silver and Orange Books was to lessen the role of an engineer and create a two-party contract between the employer and the contractor. The Orange Book shifted many of the engineer's traditional responsibilities to a mandatory employer's representative who could, nonetheless, be an engineer. Yet, the Silver Book went a step further by making the employer's representative merely an option. Nearly all of the rights and responsibilities formerly attributable to the engineer remained in the contract, but they were attributed. to the employer only with the possibility of delegation. Nonetheless, the new FIDIC Yellow and Red Books continue to use an engineer with significant responsibilities under the contract. Historically, the prominent role of the engineer'in the FIDIC forms stems in large part from the English tradition of the architect/engineer. By contrast, the French tradition prefers direct contact between the employer and the contractor. Contractors from this tradition remain sceptical about the efficiency and appropriateness of using an engineer with a significant role in the contract administration.! Largely through the use of FIDIC contractual terms in international construction agreements, "the concept of the independent engineer has been exported widely to both civil law and developing countries" .2 The Silver Book Clause 3 discussed in this present chapter deals more generally with the employer's administration. This includes the possibility of an

I

2

122

7

F. Einbinder, UThe Role of an Intermediary Between Contractor and Owner on International Construction Projects: A French Contractor's Point of View" (1994) 11 I.C.L.R. 175 at 177. J. Bowcock, "The FIDIC Contract Forms: The Present and Future" (Society of Construction Law, London, November 7,1995).

7-01

7-02

GENERAL COMMENTS

THE EMPLOYER'S ADMINISTRATION

employer's representative, assistants and other persons with delegated authority. The Silver Book's new approach to contract administration will be compared with the Orange Book's mandatory employer's representative and the Red and Yellow Books' continuing use of the engineer. A former chairman of the FIDIC Contracts Committee cites several factors relating to the diminution of the role of the engineer in FIOIC contracts: (1) (2) (3) (4) (5)

concerns, on the part of contract users, with the ability of the engineer to be impartial, as he is paid by the employer; decrease in the practice of giving full decision-making powers to the engineer, often for reasons of public accountability; increase in the use of design-build projects such that the engineer may find himself designing and supervising the same project; increase in the role of claims as a means of adjusting the contract price, which puts additional pressure on the engineer; other standard form contracts have abandoned the concept of the engineer in the decision-making process. 3

The role of the engineer in the construction contract

7-03

It is appropriate to begin the examination of the issues raised in this chapter by a discussion of the engineer, as the modern FIOIC contracts all evolved from form contracts in which the engineer played a distinct and prominent role. The engineer is generally appointed and compensated by the employer. He acts as the employer's agent and generally oversees all the main elements of the project, often including dispute resolution. Although the extent of the engineer's role may vary from contract to contract, in his traditional role the engineer's responsibilities will include the preparation of feasibility studies and design, the engagement of contractors, supervision of the construction and the general administration of the construction contract or contracts. In order properly to carry out these administrative duties under the contract, the engineer should have the power to: • • • • • • • •

approve the time schedule for performance, monitor progress, assess payment claims, evaluate delays or defects, order or decide upon variations, consent to subcontractors, deal with impediments or hardship claims, and oversee and evaluate inspections and tests. 4

The engineer may also serve an additional function as the first level of dispute resolution. His technical expertise should enable him to deal with technical questions efficiently without needing to refer to an external consultant. The engineer's intervention can often avoid time-consuming and costly arbitral or judicial proceedings. Although the e;gineer is an agent of the employer he may be specifically required in the contract to act impartially when carrying out his responsibilities and in exercising his discretion. Under these traditional contracts (such as the old and new Red and Yellow Books), the engineer must exercise a dual role, balancing between acting as the employer's representative and agent and as the neutral evaluator of costs, extensions of time, approvals or variations. Consequently, this duality also calls into question the engineer's ability to decide disputes in an unbiased manner. His decisions may be perceived as favouring the interests of the employer, particularly where the engineer comes from the employer's inhouse technical staff. s This potential partiality may not be the fault of the engineer, but rather an unavoidable conflict that follows from the ambivalent nature of being both agent and neutral decision maker. This conflict may also inconvenience the employer. If the employer does not have a representative other than the engineer, it is difficult for the engineer to act as a neutral and also represent the employer's interests. Neither the Red nor Yellow Books have a role of employer's representative defined separately from that of the engineer. Developing nations have also criticised the use of the engineer for reasons of cultural bias. As the engineer typically comes from a developed nation, this may result in a favouring of the interests and needs of the parties from developed countries.6 Nonetheless, the use of the engineer may be logical where the employer hires the contractor to provide the labour and mechanical support for the project and at the same time uses the engineer to provide technical expertise, design for the works (whether all or part) and organisational skills. Use of the engineer also makes sense where the contractor is hired to provide labour, design and contract co-ordination, but the employer bears greater liability for the project. In this case, the employer may require a high degree of supervision for the construction of the works through an engineer or project manager.7

Turnkey and EPC contracts with an employer's representative The nature of the turnkey or EPC construction project allows the parties, if they so desire, to dispense with the use of an engineer as a primary participant in the construction contract. The use of a turnkey or EPC contract S

) See generally j. Bowcock, op. cit. n. 2 above. • UNCITRAL, UNCITRAL Legal Guide on Drawing Up International Contracts for the Construction of Industrial Works (UN, New York, 1998) UNDOC. NCN.9/SER.B/2 at 121 (hereinafter UNCITRAL Guide).

124

7-04

6

?

Walser, "The ENAA Model Forms: Tentative Comments of a World Bank Lawyer", International Bar Association Conference in Tokyo, japan, February 1993, at 9. ibid., at 8; same view expressed in j. Bowcock, op. cit. n. 2 above. Wright, "A 'Fair' Setof Model Conditions of Contract-Tautology or Impossiblity?" (1994) 11 I.C.L.R. 549 at 551.

125

7-05

GENERAL COMMENTS

THE EMPLOYER'S ADMINISTRATION

7-06

7-07

generally presumes that the contractor has a certain level of sophistication, given that it is being asked to be the designer of the project and to carry out all the construction work. The engineer's co-ordination role may become superfluous in this context. 8 Any traditional role he might undertake in relation to co-ordination could lead to clashes between the engineer and the contractor in their views of the design and manner of project co-ordination. 9 The engineer's role in a turnkey contract may simply be limited to preparation of feasibility studies, preparation of contract documents and the drawing up of the employer's requirements.!O With regard to EPC or turnkey contracts where the contractor assumes most, if not all, liability under the contract, it is generally accepted that the contractor should be given a freer hand to complete the project within the terms of agreement and with less intervention or interference from the employer or an engineer. Indeed, if the employer has sufficient confidence in the contractor and assumes less risk, the importance of the engineer's role as the representative of the employer and administrator of the contract lessens significantly. The solution employed by FIDIC is the replacement of the engineer with an employer's representative in the Orange Book and the possibility of such a representative in the Silver Book. The absence of an engineer in his traditional role will require the employer to assume some increased responsibility for contract administration. However, these duties may be delegated to an employer's representative, if necessary. In addition, the parties may need to implement a first-stage dispute resolution mechanism because the engineer will not be present under the contract to fulfill that function. Failure to resolve disputes promptly can cause delay in the project and substantial losses for both parties. The reference of a dispute to arbitration will ultimately provide resolution, but only after a delay which may prove to be completely unacceptable in light of the type of commercial relationship involved. As discussed above, the engineer has often traditionally supplied this on-site dispute resolution function. The standard form contracts examined in this book deal with the employer's contract administration in different ways. First, certain contracts (the Red and Yellow Books) leave the engineer in his traditional role, accepting the inherent conflicts of interest discussed above rather than sacrificing the control and efficiency provided by the engineer. A second option is to disassociate the engineer from his quasi-judicial functions. This solution has been criticised as cumbersome!! and is not a solution presented in any of the contracts discussed herein. The notion under this second approach is to remove the engineer from his traditional dispute 8 9

10 \I

However, the Yellow Book provides a middle·ground approach where the contract is turnkey but an engineer is still used. Gould, "Comments on the ENAA Model Form International Contract for Process Plant Construction (Revised 1992)" (1994) 11 I.e.L.R. 498, generally and at 500. I.N.D. Wallace, "Contracts for Industrial Plant Projects" (1984) 2 I.C.L.R. 322 at 339. UNCITRAL Guide, op. cit. n. 4 above, at 122.

126

,, I

,

resolution functions. This approach is seen in the ICE New Engineering Contract's combination of a project manager for the supervisory functions and an adjudicator for dispute review. 12 Still another approach is explicitly to recognise the partiality of the engineer, as agent of the employer, and thereby leave it open to the contractor to have any engineer decision reviewed by an independent expert. 13 Finally, some contracts remove the role of the engineer altogether, with the possible use of an employer's representative to assist the employer in fulfilling his obligations with regard to contract administration. For example, FIDIC removed the engineer function in the Orange Book but added a mandatory employer's representative. FIDIC saw this as a potential solution to the "engineer dilemma".14 Similarly, the Silver Book contains no provisions for an engineer but contemplates the possible appointment of an employer's representative. However, this appointment is not mandatory under the Silver Book, as it seems to be under the Orange Book. Such changes may be disingenuous, however, and some authors criticise the FIDIC contracts for continuing to "tinker with the role of the engineer without, in substantive terms, addressing the continuous dichotomy between agent and certifier".1S The Silver Book offers the most flexible option for a construction contract without an engineer in that the employer may delegate as much or as little responsibility to an employer'S representative as it desires. The employer's representative under the Orange Book and the employer under the Silver Book assume the responsibility of first-tier dispute resolution and other determinations, with possible referral to a dispute' adjudication board in the event of dissatisfaction. Under the Silver Book, the use of the employer, in lieu of the engineer, still produces conceptual confusion as the employer, despite being a party to the contract, is relied on to make "fair" determinations.!6 Like the Silver Book and the Orange Book, the ENAA and the ICE contracts have opted to remove the engineer and chosen to replace him with an employer's representative. The role of the employer's representative retains flexibility. He is given the power to act in accordance with powers specified or necessarily implied by the contract. Under the ENAA and ICE contracts the dispute resolution responsibility of the engineer has been given to an independent third party, called either an expert, an adjudicator or a dispute adjudication board. The change in the title of the engineer reflects the change in his role. The employer's representative il} the Orange Book and in the Silver Book (if one is appointed) no longer straddles the line between a neutral and an employer's agent; he is now, in title and duty, overtly acting in favor of the employer. In the case of the Silver Book, there may be no employer's 12 tl 14

IS 16

Walser. op. cit. n. 5 above, at 8. J.K. Hoyle, "The Rainbow Down Under-Part 1 Some Reflections from the Antipodes on aspects of the new FIDIC Design-Build Contracts" (2001) 18 (1) I.C.L.R. 5 at 12. J. Bowcock, op. cit. n. 2 above. 1.K. Hoyle, op. cit. n. 13 above, at 11. ibid. at 12.

127

7-08

GENERAL COMMENTS

THE EMPLOYER'S ADMINISTRATION

representative at all, leaving many discretionary decisions to the employer. The FIDIC Silver, Orange, Red and Yellow Books do not impose an express duty of impartiality on the employer's representative or the engineer, as did the old Red Book in its sub-clause 2.6 in respect of the engineer. Under the newer FIDIC forms, the employer, his representative or the engineer must simply make fair determinations in accordance with the contract. The lack of any express requirement of impartiality better reflects the true role of the employer's representative and engineer and avoids the problems caused when the impartiality statement proves falseY Both represent the interests of the employer. The newer FIDIC contracts counterbalance this potential bias by inserting a more flexible interim dispute resolution mechanism, the dispute adjudication board, to allow the contractor to contest any acts or decisions of the employer, his representative or the engineer with which it is dissatisfied. Similarly, none of the non-FIDIC contracts discussed herein contain any express requirement of impartiality. To begin with, all these contracts use an employer's representative and not an engineer. In addition, the employer and/or his representative playa much more limited role in making decisions under the contract. In the event of disputes over variable elements relating to contract administration, such as extensions of time or price increases, these contracts generally indicate that the parties should reach an agreement, with formal dispute resolution being the remedy in the event of failure to agree or dissatisfaction.

Comparison of the role of the employer and his representative in the Silver Book with the role of engineer in the Yellow and Red Books }

7-09

It is important to note that under sub-clause 3.1 of the Silver Book, the

employer's appointment of an employer's representative is entirely optional. Consequently, the Silver Book contains no rights or obligations that pertain solely to the employer's representative. This differs from the Orange Book where the employer's representative is apparently mandatory. Further, the use of an appointed engineer is required under the Red and Yellow Books. In fact, the alteration of the role of the engineer/employer's representative, and the related issue of certification of payment, is perhaps the fundamental difference between the Silver Book and the Orange and (new) Yellow Books. 18 Some authors criticise the Silver Book on the grounds that, in taking a tw?-party approach the Silver Book transferred the engineer's powers to only one party: the employer. This is particularly troubling as the responsibility for the design and specification of the work lies with the contractor, 17 18

P.L. Booen, "The Three Major New FIDIC Books" (2000) 17 (1) I.C.L.R. 24 at 30. J.A. Huse & J.K. Hoyle, "FIDIC Design-Build, Turnkey and EPC Contracts" (1999) 16 (1) J.C.L.R. 27 at 36.

128

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"

:

under the Silver Book, and thus the employer need not have the powers of the engineer, which go beyond the scope of monitoring the execution of the works. 19 Indeed, as a former chairman of the FIDIC Contracts Committee recognises, "in the FIDIC Conditions 'The Engineer' is an essential factor and [therefore] if the power of the engineer is eroded much of the logical system built up in the conditions will cease to make sense".20 As this power has been transferred, rather than diminished, the logic of the system may hold, while the fairness may suffer. Most of the functions carried out by the engineer in the Yellow or Red Book are taken care of by the employer under the terms of the Silver Book. Of course, most of the employer's functions could be delegated to an employer's representative. The extent to which the employer's representative takes charge of any rights or obligations of the employer depends solely on the delegation of such authority by the employer. The employer's representative may take over nearly all the functions of the employer, very few of the employer's functions or be entirely absent from the contract altogether. As a result, a comparison of the role of the employer's representative with the role of the engineer serves little purpose due to the lack of finite parameters for the employer's representative in the Silver Book. The comparison would be more relevant when examining the Orange Book where the employer's representative is mandatory and is specifically attributed many of the rights and responsibilities that would otherwise belong to the employer. However, rather than undertake an extensive comparison of the older Orange Book with the newer Red and Yellow Books, it should simply be noted that the employer's representative is attributed certain rights and responsibilities of the employer under the Orange Book, whereas this attribution is optional under the Silver Book. In the FIDIC Silver, Red and Yellow Books the employer has a defined set of rights and responsibilities. The difference in these contracts is that many of these rights and responsibilities are specifically transferred to the engineer under the Red and Yellow Books. Regardless of whether any right or responsibility is attributed to the employer under the Silver Book or to the engineer under the Red and Yellow Books, the underlying rights and responsibilities are generally the same and are present in all three contracts. As a result, the function of the employer in the Silver Book and the function of the engineer in the Red and Yellow Books overlap in most cases. For example, under Silver Book sub-clause 4.21 it is the employer who receives the contractor's progress reports, while under the same sub-clause in the Red and Yellow Books it is the engineer that receives theses reports. Similarly, under Silver Book sub-clause 3.5 the employer has the general power to make determinations, whereas it is the engineer who does this 19

20

A. Sandberg, "A Contractor's View on FIDIC Conditions of Contract fo r EPC Turnkey Projects" (1999) 16 (1) I.C.L.R. 47 at 57. J. Bowcock, op. cit. n. 2 above.

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THE EMPLOYER'S ADMINISTRATION

7-11

under the same sub-clause in the Red and Yellow Books. In Silver Book sub-clause 7.3 the employer has the right to inspect any part of the works as does the engineer under the same sub-clause in the Red and Yellow Books: As illustrated above, in the Red and Yellow Books the engineer simply assumes many administrative functions that would otherwise be the responsibility of the employer. What is perhaps more interesting is the extent to which the use of the engineer adds an extra level of separation between the contractor and the employer in the Red and Yellow Books. For example, under the Silver Book the contractor will make applications for interim payments directly to the employer (sub-clause 14.3), while under the Red and Yellow Books the contractor's application is to the engineer who then issues a payment certificate to the employer (sub-clauses 14.3 and 14.6 (RBIYB)). The same is true for the contractor's application for final payment (sub-clause 14.13 (SBIRBIYB)). Howeve:, :~ere.are a few instances where the engineer has a unique right or responslbdlty 10 the Red or Yellow Books that is not available to the employer in the Silver Book. For example, under the Red and Yellow Books (sub-clause 14.13) the engineer has the right to issue clarifications and instructions regarding ambiguities or discrepancies in the contract documents. This right is not available to the employer under the Silver Book. The engineer's consent is required for subcontractors not named in the contract under RedlYellow Book sub-clause 4.4, whereas the employer's consent to subcontr.actors ~s not required in the Silver Book. In addition, the engineer's consent IS reqUired for each proposed designer and design subcontractor under Yellow Book sub-clause 5.1, whereas this is not a requirement or power of the employer under the Silver Book. The additional powers in the Red an~ Yellow Book illustrate the intended supervisory role of the engineer With regard to more technical matters, whereas the lack of similar powers for the employer in the Silver Book illustrates the intent to lessen the amount of supervision over the contractor in the context of an EPC/turnkey contract where the contractor assumes greater risks than in the Red or Yellow Books.

Discussion of Specific SubMClauses 7-12

•

As indicated below, the S.i1ver Book clause allows the employer to appoint an employer's representative to be responsible for certain aspects of the contract administration. However, the employer must narrowly define the role of the empl~yer's representative and assistants with delegated power. If the employer Wishes to delegate a great deal of authority and discretion to the e~ployer's rel?rese?tative, he may do so provided that these powers are suffiCiently des~nbed 10 the notice of delegation to the contractor. However, the employer wdl be unable to remove himself entirely from the process of contract administration in that the contractor may request confirmation of 130

instructions or decisions made or issued by any person delegated authority by the employer.

7-13

3.1 The Employer's Representative The Employer may appoint an Employer's Representative to act on his behalf under the Contract. In this event, he shall give notice to the Contractor of the name, address, duties and authority of the Employer's Representative. The Employer's Representative shall carry out the duties assigned to him, and shall exercise the authority delegated to him, by the Employer. Unless and until the Employer notifies the Contractor otherwise, the Employer's Representative shall be deemed to have the full authority of the fmployer under the Contract, except in respect of Clause 15 [Termination by Employer].

"

If the Employer wishes to replace any person appointed as Employer's Representative, the Employer shall give the Contractor not less than 14 days' notice of the replacement's name, address, duties, authority, and of the date of appointment. Silver Book sub-clause 3.1 simply gives the employer the option of appointing an employer's representative to act on his behalf. The definition of the role of the employer's representative is outlined very broadly, and he is deemed to have the full authority of the employer, if appointed. If an employer's representative is used, the parties may want to provide him with the power to call meetings with the contractor in order improve communication. This may improve the employer's access to information on the progress of the works and signal any difficulties as they arise. Under the corresponding Orange Book sub-clause 3.1, the use of an employer's representative is required. However, unlike the Silver Book, the Orange Book sets forth specific limits on the extent of authority of the employer's representative, such as no authority to amend the contract and no authority to relieve the contractor of his duties, obligations or responsibilities under the contract. The Orange Book also contemplates that provisions may be included in the contract requiring the employer's representative to seek the employer's approval before exercising certain powers. Nonetheless, the Silver Book and Orange Book provisions are otherwise very similar. The new Red and Yellow Books continue the tradition of the old Red and Yellow Books by requiring the use of an engineer in the contract and not an employer's representative (sub-clause 3.1 (RBIYB)). Under the new Red Book, however, the engineer's contractual impartiality has been diminished in comparison to his position in the old Red Book. 21 Sub-clause 3.1 indicates that the engineer is deemed to be acting for the employer and shall 21

D. Bateson, "FIDIC-New 1999 Edition of the Red Book Impartiality of the Engineer" (2000), online: FIDIC http://www.fidic.orglresources/contracts/bateson _augOO.asp (date accessed: July 4, 2001).

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7-15

carry out the duties assigned to him under the contract. Similar to the Orange Book's employer's representative, under sub-clause 3.1 (RBIYB) the engineer is specifically denied authority to amend the contract and denied the authority to relieve either party of any duties or obligations under the contract. The FIDIC Guide states that the contractor is not entitled to question whether communication from the engineer was approved or not, as the employer is deemed to have given approval for the purposes of the contract. Where the engineer acts without the approval of the employer, however, this will be an issue as between the employer and the engineer and may represent a breach of their consultancy agreement. 22 One new addition to the Red and Yellow Books in sub-clause 3.1 is the employer's undertaking not to impose further constraints on the engineer's authority except as agreed with the contractor. The evolution of the engineer's role under the FIDIC contracts is also reflected in the notice requirements for replacement of the engineer or employer's representative. In the old Red Book, the employer was under no obligation to give the contractor notice of replacing the engineer with a different engineer. In the old Yellow Book, the employer could replace the engineer, but not without the contractor's consent (sub-clause 2.8 (OYB)). Subsequently, in the Orange Book the engineer's role was largely replaced by that of the employer's representative for which the employer had no notice obligation with regard to the replacement of his representative. However, in the Silver Book, the employer must now give the contractor 14 days' notice of replacement of the employer's representative (sub-clause 3.1). Under the new Red and Yellow Books, not only must the employer give the contractor 42 days' notice of the engineer's replacement, the contractor has the right to object to the replacement (sub-clause 3.4 (RBIYB)). The contractor's possibility of objection is a compromise between the parties as it represents the middle ground between no input at all from the contractor and a veto power by the contractor. 23 The increased notice requirement and possibility of contractor objection in the new Red and Yellow Books indicates the more controversial role played by the engineer in the contract administration as compared to the employer's representative in the Silver and Orange Books. The increased notice requirement and possibility of objecting may dissuade the employer from abusively changing engineers during the contract execution simply in response to unfavourable determinations made by the engineer, such as for extensions of time or price increases. The ENAA, EIC, ICE, AlA and AGC all use an employer's (or owner's) representative and not an engineer (see sub-clauses 17.1 (ENAA), 5.1 (EIC), 2(1) (ICE), 2.1 (AlA-Part 2) and 4.4 (AGC)). Under the EIC, the employer's representative is an agent of the employer. The employer, therefore, is "responsible for any acts or commissions of his representative vis-a-vis the 22 2)

FIDIC, The FIDIC Contracts Guide (Federation Internationale des Ingenieurs.Conseils, Lausanne, 2000), p. 82. P.L. Booen, op. cit. n. 17 above, at 31.

132

contractor" .24 However, like the Silver Book and the .Orange Bo~k., .n?ne of the aforementioned contracts outline as many speCific responSibilities for contract administration as do the Red and Yellow Books with regard to the engineer. The function of the employer's representative in the non-FIOIC form contracts is less specifically defined in the contract and can be as broad or narrow as the employer sees fit.

7-16

3.2 Other Employer's Personnel The Employer or the Employer's Representative may from time to time as~ign duties and delegate authority to assistants, and may also revoke such assignment or delegation. These assistants may include a resident engineer, andlor independent inspectors appointed to inspect andlor test items of Plant and/o.r Materials. The assignment, delegation or revocation shall not take effect until a copy of it has been received by the Contractor. Assistants shall be suitably qualified persons, who are competent to carry out these duties and exercise this authority, and who are fluent in the language for communications defined in Sub-Clause 1.4 [Law and Language). Under Silver Book sub-clause 3.2 the employer andlor the employer's representative have the power to assign duties and delegate authority to assistants. The Silver Book specifically names the resident engineer and independent inspectors as potential assistants. The Silve.r Book ~lso requires notice to the contractor of such assignment or delegation. ThiS sub-clause imposes a standard of competence on any assistant to whom duties may be assigned by the employer. The corresponding Orange Book sub-clause 3.3 permits the employer's representative to delegate duties, but does not expr.essl~ g~ve t~is right to the employer. However, such a power of delegation IS Implied by the control the employer may assert over the employer's representative. In addition, the fact that the employer's representative is seemingly mandatory under the Orange Book and optional under the Silver Book makes th.e Silver Book's express right of delegation by the employer more appropnate. The Orange Book in sub-clause 3.2 imposes a standard of competence not only on assistants of the employer's representa~ive but al~o on th.e employer's representative himself, who must be a SUitably qualified engineer or other appropriate professional. Where the employer's representative is not sui~ably qualified, he is obliged to appoint engineers or other professionals. According to some authors, this obligation leaves the door open to those appointed by the employer's representative to "re-establish the traditional role of the engineer and thus overload the structure of the project" .25 A better approach might be to leave such appointments to the 2< B

Dr J.G. Rechtsanwalt, "The EIC Turnkey Contract" (1997) 14 I.C.L.R. 33 at 44. , B. Cazalet & R. Reece, "Conditions applicables aux contrats de conception-construction et cles en main" (1996) 3 R.D.A.l.n.N.L.J. 279 at 289.

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THE EMPLOYER'S ADMINISTRATION

discretion of the employer's representative. The provisions of sub-clause 3.2, however, may act to protect the contractor by providing assurances th~t a competent person exercises the authority of the employer's representative under the contract. Si~ilarly, ~he Red and Yellow Books allow the engineer in sub-clause 3.2 to assign ~utles and de!egate authority to assistants. However, the delegation of authonry to determine matters under the contract is specifically excluded. Both ~he employer and the contractor must receive a notice of the delegation or assignment. Although the Red and Yellow Books do not impose a specific sta~dard of competence on the engineer, a standard of competence for the ~nglneer's staff (sub-clause 3.1) and his assistants (sub-clause 3.2) is Inclu~ed. The: ?Id Re,d ~nd old Yellow Book sub-clauses 2.3 (and 2.4 (ORB)) contain provIsions similar to those of the new Red and Yellow Books with regard to delegation or assignment of duties by the engineer. However, the old ,Red an,d Yellow Books do not contain standards of competence for the engineer, hiS staff or assistants with delegated duties. 7-18 The EN~A, EIC and ICE a,lI contain provisions allowing the employer's representative to delegate duties and authorities vested in him (sub-clauses 1?1.2 (E~AA)" 5.1 (EIC) and 2(3)-(4) (lCE)). The AlA provides for a pos~I,ble on-SIte prOject representative who may be delegated certain responsibilities ~s~b-c1ause 2: 1 (AIA-P~rt 2)). However, the AGC contains no specific provIsions regarding delegatIOn of responsibility and authority to others. None of the non-FIDIC contacts discussed herein impose a standard of competence: on ~he employer's representative or other persons with delegated authOrity, ,with the exc~ption of the ,,,?-GC in sub-clause 4.4.1 that requires the o~ner s representative to be famlhar with the project. Unltke the non-FIDIC contracts and to a greater extent than in the FIDIC contracts, the IC~ places specific limitations on what powers may be delegat:~. No delegatl,on by the employer's representative is possible for certain deCISions or certificates that are his specific responsibility (sub-clause 2(3)(c) ,(ICE)? These non-delegable powers include the power to make time and price adjustments for unforeseeable physical conditions encountered by the contractor (sub-clause 12(6)), determinations of time extensions gen:rally (sub-clause 44) and the issuance of certificates of substantial completIOn (sub-clause 48) and of final account (sub-clause 60(4)) among others. '

7-19

3.3 Delegated Persons All these ~ersons, includin~ the Employer's Representative and assistants, to whom ,duties ~ave ~een ass~gned or authority has been delegated, shall only be a uthon,sed to Issue instructIons to the Contractor to the extent defined by the ?e1egatl?n. An~ approval, check, certificate, consent, examination, inspection, ~nstructlon, notl~e, proposal, request, test, or similar act by a delegated person, In accordance WIth the delegation, shall have the same effect as though the act had been an act of the Employer. However: 134

DISCUSSION OF SPECIFIC SUB-CLAUSES

(a)

(b)

(c)

unless otherwise stated in the delegated person's communication relating to such act, it shall not relieve the Contractor from any responsibility he has under the Contract, including responsibility for errors, omissions, discrepancies and non-compliances; any failure to disapprove any work, Plant or Materials shall not constitute approval, and shall therefore not prejudice the right of the Employer to reject the work, Plant or Materials; and if the Contractor questions any determination or instruction of a delegated person, the Contractor may refer the matter to the Employer, who shall promptly confirm, reverse or vary the determination or instruction,

This Silver Book sub-clause specifically limits the power of the employer's representative and assistants in their issuance of instructions to the contractor. It also describes the effect of any act or decision made by a person with delegated authority or responsibility. It confirms that the acts of the employer's representative or assistant have the same effect as though the employer himself had acted. Nonetheless, the sub-clause lists certain exceptions, namely that the contractor cannot be relieved of a contractual responsibility by the act of the employer's representative or assistant and that failure of these persons to disapprove certain aspects of the contractor's responsibilities does not constitute an implicit approval on which the contractor may rely. Finally, sub-clause 3.3 permits the contractor to seek confirmation from the employer of any determination or instruction of the employer's representative or other delegated person. The Orange, Red and Yellow Books all contain provisions similar to those of Silver Book sub-clause 3.3. The Red and Yellow Books in clause 3.2 focus on the power of the engineer's assistants and the effect of their acts, which are similar to those of the employer's representative and assistants in the Silver and Orange Books. In addition, Red and Yellow Book sub-clauses 3.1 (c), regarding the contractor's responsibilities for error, are comparable with Silver Book sub-clause 3.3(a). The old Red and old Yellow Books also contain similar provisions in their sub-clauses 2.2-2.4 (ORB) and 2.3 (OYB). However, the old Yellow Book does not expressly give delegated assistants the power to issue instructions, though this power is implied by sub-clause 2.3 (OYB). The non-FIDIC contracts coma in fewer specific provisions dealing with the powers and restrictions of delegated persons than the FIDIC contracts. The ICE is the only contract that specifically indicates that the employer's representative or his delegates may issue instructions to the contractor (subclause 2(5)(a) (ICE)). Under the ENAA, EIC, AlA and AGC, there is no specific restriction against the employer delegating his: power to instruct to his representative or assistants. However, under these contracts the employer has no general power to instruct. The employer is entitled to instruct the contractor in specific circumstances and under certain conditions, but these are generally described is some detail in each contract. Some of the nonFIDIC contracts (ENAA, EIC and AGC) do state that any acts of persons delegated power or duties by the employer or his representative have the

135

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DISCUSSION OF SPECIFIC SUB-CLAUSES THE EMPLOYER'S ADMINISTRATION

same effect as if the person who delegated the power had done such act (see sub-clauses 17.1.2 (ENAA), 5.1 (EIC) and 4.4.3 (AGC)). i '

7-21

3.4 Instructions The Employer may issue to the Contractor instructions which may be n~cessary for the Contractor to perform his obligations under the Contract. Each instruction shall be given in writing and shall state the obligations to which it relates and the Sub-Clause (or other term of the Contract) in which the obligations are specified. If any such instruction constitutes a Variation, Clause 13 [Variations and Adjustments) shall apply. The Contractor shall take instructions from the Employer, or from the Employer's Representative or an assistant to whom the appropriate authority has been delegated under this Clause. Under a traditional construction contract the employer generally has the power to define and shape the nature of the works. This may be accomplished from a practical standpoint by the issuance of instructions, such as for a change in the works. However, under an EPClturnkey contract where the contractor assumes increased risks and for a fixed, lump-sum price as in the Silver Book, the contractor may wish to negotiate restrictions on the employer's power to instruct or on the employer's power to delegate this authority. The greater the contractor's assumption of risk, the more likely it is that more restrictions on the employer's intervention may be requested. By contrast, the employer will want to retain as broad a power to instruct as possible. Silver Book sub-clause 3.4 specifically empowers the employer to issue instructions to the contractor regarding the execution of the contract and requires that the instructions be in writing. In addition, the Silver Book specifically states that the contractor is bound by the instructions from the employer, the employer's representative or any other person to whom the proper authority has been delegated. The corresponding Orange Book clause 3.4 indicates simply that the contractor must comply with the instructions given by the employer's representative in accordance with the contract. This suggests that instructions may only be given by and through the employer's representative, as opposed to from the employer directly. It appears that delegates of the employer's representative are not able to issue instructions to the contractor. Orange Book sub-clause 3.3 allows the employer's representative to delegate duties to other persons but apparently not powers. The Red and Yellow Books at sub-clause 3.3 allow the engineer to issue instructions to the contractor. They also indicate that the contractor must follow the instructions from the engineer or from the engineer's assistants to whom the appropriate authority has been given. The old Red Book contains provisions similar to those of the current Red and Yellow Books (see subclause 2.2, 2.4 and 2.5 (ORB)). The old Yellow Book is different in that it states only the contractor must comply with the instructions of the engineer

136

(sub-clause 2.5 (OYB)), but does not specifically mention assist~nts. Simil~r to the Orange Book, the old Yellow Book sub-clause 2.3 permits the engineer to delegate to the engineer's representative only its duties but does not mention delegation of the engineer's powers. Of the non-FIDIC contracts, the ICE is the most similar to the current FIDICs. Under sub-clause 2(5)(a) (ICE) the employer's representative or delegates are given the power to issue instru~tions. ~owever, a~sistants .are precluded from issuing instructions that Involve Increases In the time for completion or increases in the contract price (see sub-clauses 2(4)-(5) (ICE)). The ENAA, EIC, AlA and AGC contain no general power for the employer or his representative to issue instructions to the contractor. Howev~r, these contracts provide for certain specific cases where the employer can Instruct the contractor on a particular matter. For example, under the ENAA the owner may instruct the contractor as to how to proceed with the works in the event of a dispute over construction documents (sub-clause 20.3.5 (ENAA)), tests or inspections (23.7) or cost and time extensions ~~r change orders (39.3) when these have been referred to an expert for deCISion upon disagreement between the employer and the contractor. The EIC, AlA and AGC also contain specific instances for employer instructions but to a more limited extent. For example, both the AlA and AGC contain provisions allowing the employer to instruct a change to the works, even if the cost and necessary time extension have not been agreed (see sub-clauses 8.1.2, 8.3.1 (AlA-Part 2) and 8.2 (AGC)). These are effectively instructions as well as change directives or orders. However, the power to instruct only arises under the AlA and AGC in the context of work changes. In the limited circumstances under which instructions are possible under the ENAA, EIC, AlA and AGC, there appears to be no specific prohibition against the employer's delegation of this power to the employer's representative or assistants. Another issue in relation to the issuance of instructions is whether instructions must be issued in writing. The FIDIC Silver, Orange and Yellow Books simply indicate that instructions must be in writing (sub-clauses 3.4 (5B), 1.8 (OB) and 3.3 (YB)). Instructions regarding work changes under the AlA and AGC must also be in writing (sub-clauses 8.3.1 (AlA-Part 2) and 8.2 (AGC)). The ENAA and EIC do not specifically state that instructions must be in writing, but a writing requirement is imposed for notices and similar communications from which a writing requirement for instructions may be implied. The Red, old Red and old Yellow Books, as well as the ICE contract, indicate that instructions must be in writing but that oral instructions are possible subject to subsequent confirmation by the employer or the contractor (see sub-clauses 3.3 (RB), 2.5 (ORB), 2.6 (OYB) and 2(5)(a) (ICE)).

3.5 Determinations

7-22

7-23

Whenever these Conditions provide that the Employer shall proceed in accordance with this Sub-Clause 3.5 to agree or determine any matter, the Employer shall consult with the Contractor in an endeavour to reach agreement. If agreement is

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DISCUSSION OF SPECIFIC SUB-CLAUSES

THE EMPLOYER'S ADMINISTRATION

not achieved, the Employer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances. The Employer shall give notice to the Contractor of each agreement or determination, with supporting particulars. Each Party shall give effect to each agreement or determination, unless the Contractor gives notice, to the Employer, of his dissatisfaction with a determination within 14 days of receiving it. Either Parry may then refer the dispute to the DAB in accordance with Sub-Clause 2004 [Obtaining Dispute Adjudication Board's Decision).

7-24

Silver Book sub-clause 3.5 provides the general procedure for employer determinations under the Silver Book. Numerous sub-clauses in the Silver Book indicate that the employer is to proceed in accordance with sub-clause 3.5 to agree or determine certain issues under the contract. This responsibility for making a determination arises most commonly in the context of events that might entitle the contractor to claim an increase in the contract price or an extension of the time for completion. Each of the specific situations requiring agreement or determination specifically reference sub-clause 3.5 for the process to be followed. Some examples of circumstances requiring agreement or employer determination in accordance with sub-clause 3.5 are: the determination of contract price increase and/or extensions of the time for completion resulting from an employer-instructed test variation (sub-clause 7.4); a suspension of the works by the employer (sub-clause 8.9); and the cost of an employer-instructed search for defects performed by the contractor (subclause 11.8), among others. However, determinations may also arise in the context of employer claims as well. For example, sub-clause 11.4 provides for a potential employer determination of a reduction in the contract price for the contractor's failure to remedy defects in or damages to the works. When an agreement or determination is required under the contract, the first step is for the employer to consult with the contractor in an attempt to reach agreement on the matter. In the absence of agreement, the employer is then entitled to make a determination of the matter. The contractor may want to specify a time period within which the employer must issue a determination, where agreement is not reached. 26 This determination must be fair and in accordance with the contract. The parties must give effect to each agreement or determination. However, in the event of a determination by the employer, the effect of the determination may be suspended if the contractor gives a notice of dissatisfaction to the employer regarding the determination. Either party may then refer the matter to the next tier of dispute resolution-the Dispute Adjudication Board-for decision in accordance with the applicable procedures contained in the contract. Contrast the timing of this suspension with that contemplated by the similar provisions of the Red and Yellow Books as discussed below. The Orange Book at sub-clause 3.5 contains a similar provision for determinations. However, under the Orange Book it is the employer's representa-

26

EIC, The EIC Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey Projects (European International Contractors, Berlin, 2000), p. 12. The EIC Guide suggests 28 days may be an appropriate time period.

138

\

. 1

, 1

tive who makes the determinations, rather than the employer. In addition, there is no requirement of giving a notice of dissatisfaction before contesting the determination. . It is worth noting that the conditions only refer to sub-clause 3.5 m respect of claims, but not with regard to payment and v~riations. Similarly, the effect of Red Book sub-clause 3.5 is to make the engmeer "only under a contractual duty to act fairly in circumstances where he is required by a particular clause to comply with sub-clause 3,5 (unless otherwise specified)",21 To the extent that one accepts the engineer can be impartial, some auth?~s suggest that a general fairness obligation should be imposed wherever deCISions have to be taken by the engineer or employer.28 . .. The Red and Yellow Books at sub-clause 3.5 contam a determmatlon provision nearly identical to that of the Silver Book. Howev~r, u.nder the Red and Yellow Books it is the engineer who makes the determmatlon after consulting both parties. Unlike the Silver Book, the Red and Yellow Bo~ks contain no requirement of giving notice of dissatisfaction before proceedmg to the next level of dispute resolution. Furthermore, both the Red and Yellow Book provide that each party "shall give effect to each agre~ment or .d.etermination unless and until" revised under the dispute resolution provIsions. One additional provision in the Red and Yellow Books is that the engineer's power to determine matters cannot be delegated (sub-clause 3.2 (RBIYB)) .. The old Red Book contained provisions somewhat similar to the determinations procedure under the newer FlDIC forms. Under sub-clause 53.5, the engineer was required to consult with both parties and deter~ine any clai~s by the contractor against the employer. Clause 67.1 also reqUired that all diSputes be referred to the engineer for a decision before it was possible t~ begin an arbitration. In that regard, sub-clause 2.6 of the qld Red Book specifically required the engineer to act impartially in making determi.nation~, ?iving decisions or other discretionary acts. This requirement of ImpartialIty no longer exists in the newer FIDIC contracts. By contrast, the old Yellow Book contained no general procedure for determinations by the engineer, but did require the engineer to act impartially nonetheless (sub-c1aus~ 2.4 (OYB)) .. The determinations process by the employer, his representative or the englneer as contained in the FIDIC contracts is generally foreign to the nonFIDIC contracts discussed herein. The ENAA and EIC contain no specific determinations process. No party under these contracts really has a "determination" role similar to that provided in the FIDIC forms. Issues such as time extensions and cost increases are either agreed between the parties or subject to the contract's dispute resolution process. The ICE contains no general determinations procedure like sub-clause 3.5 of the Silver Book. However, the employer's representative does have the power to determine specific matters in various clauses of the ICE contract. Rather than being a determinations process, the employer's representative 21

2i

D. Bateson, op. cit. n. 21 above. E. Corbett, "FIDIC's New Rainbow 1" Edition-An Advance?" (2000) 17 (2) I.C.L.R. 3 at 256.

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generally just makes the determination in question, subject to later reversal through dispute resolution sub-clause 66 (ICE). The AlA and AGC contain no blanket guidelines or general procedure for determinations. Most issues under the contract are stated to be determined by agreement between the employer and the contractor. In the event agreement cannot be reached, these contracts contain procedures for mediation and arbitration of disputes.

CHAPTER

8

THE CONTRACTOR General Comments

;

\

Under the traditional design-bid-build method of construction, the role of the contractor is primarily limited to construction of the works. The employer brings in one or more contractors, often under the guidance of an engineer, to accomplish specific tasks of construction. Generally, under this method of construction, the contractor does not assume the overall responsibility for the design and co-ordination of the project. Turnkey and EPC contracts place certain, if not all, design responsibilities on the contractor. The process or design in major p.cojects may be extremely advanced, making sufficiently skilled and sophisticated design consultants difficult to find. l When the turnkey contract is signed, it is presumed that the contractor already has, or has access to, the technical knowledge necessary to undertake the design. The turnkey contractor will be, by the end of the design development process, intimately familiar with the design of the project. Thus the period required for transmission of the design from the engineer to the contractor, common to the traditional contract, is removed. The turnkey contract also places the responsibility for co-ordination of the project on the contractor. The contractor is no longer simply a construction expert but also an expert on design and project resource co-ordination. Therefore, the contractor will be responsible for co-ordination of the interfaces between design and construction and the interfaces between the individual construction packages. The turnkey contractor may even be required to co-ordinate the tasks accomplished by other contractors of the employer. The contractor in a major turnkey or EPC project will typically be either a large enterprise or a joint venture or consortium of specialists in different aspects of the project. The combination of contractors often provides the financial wherewithal necessary for the successful completion of large projects typical of turnkey contracts. A simple example would be a consortium consisting of a civil works contractor and a mechanicaUelectrical works contractor. Set forth below is a discussion of some of the contractor's key obligations under a turnkey contract in respect of (a) the tender phase and (b) the performance phase of the project. Discussion of the first phase will include the topics of site data and ground conditions. Discussion of the latter phase will

I

140

I.N.D. Wallace, "Contracts for Industrial Plant Projects" (1984) 21.C.L.R. 322 at 331.

141

8-01

8-02

GENERAL COMMENTS

THE CONTRACTOR

include the topics of duty to perform, standard of performance (i.e. fitness for purpose) and duty to co-ordinate the works.

The tender phase 8-03

8-04

•

A turnkey or EPC project often differs from construction contracts let on a more traditional basis in its emphasis on the pre-tender stage. The cost and time expended by the contractor to satisfy such tender requirements can be substantial. The tender will often require not only the contractor's price, but also a specific design proposal to satisfy the employer's requirements, which may include projected performance levels. There is a belief that in turnkey projects requiring major design work during the tender phase the employer should limit the number of potential bidders and consider the possibility of remunerating contractors making serious bids, to increase the quality of the tenders received. However, in the experience of the author, this recommendation is rarely followed in practice. The development of a tender is rarely straightforward. As part of the tender preparation process, the contractor should consider the site and its surrounds. Where the site is in a foreign country, the political and economic situation, availability of resources, import requirements for necessary materials, employee visa requirements for employees, local hiring and purchase requirements, and other such aspects add to the complication of the tender. The extent of the contractor's responsibility for site conditions and unforeseeable events are additional issues that require close attention. Unexpected subsurface conditions or unforeseeable events may cause delay to the works and increase the contractor's cost to complete the construction. The contracts discussed herein vary greatly in their treatment of these issues, ranging from placing all responsibility for site conditions on the contractor, as in the Silver Book, to making the employer responsible for all site data and allowing the contractor to receive time extensions and costs for unforeseeable events and conditions, as in the AlA. Site data. There has been some controversy surrounding the Silver Book's apportionment of responsibility between the parties with respect to ground conditions. This controversy largely stems from the effect of the interplay between the Silver Book provisions relating to site data (sub-clause 4.10) and unforeseeable difficulties (sub-clause 4.12). These provisions result in the contractor assuming the risks related to unforeseeable ground conditions, as will be outlined below in the discussion relating to sub-clause 4.12 and ground conditions. In his examination and inspection of the site, the contractor will have to consider access. The contract will allocate the risk as regards the accessibility of the site, including potential damage to access roads, bridges and other such structures involved in obtaining access. This risk will also include special rights of access and permits or licences needed for transportation of materials, plant and equipment to and away from the site. 142

Risks involved in the design and construction process are generally allocated in accordance with one of three views: (i) the foreseeable risks are assumed by the contractor and the unforeseeable risks are assumed by the employer; (ii) the party best able to manage the risk will bear that risk 2; or (iii) the party with the better negotiating position will take the least risk. The risk of unforeseeable conditions is often placed on the employer. Unforeseeable conditions are particularly difficult risks to insure against because they 'are hard to quantify and often difficult to mitigate. For example, even the most comprehensive geotechnical survey may not discover certain hazards. 3 In principle, if the contractor is to assume the risk of unforeseeable conditions, the tender price should be increased accordingly. However, whether this happens in reality is subject to debate. In highly, competitive bidding, it is possible that the potential cost of unforeseeable conditions may not be covered in many of the tenders. Just as certain risks may be difficult to assess and insure against, these same risks may be impossible for the contractor to properly include as a component of the tender price. The competition among contractors is such that competitive pricing often cannot support contemplation of such contingencies in the tendered price. In turnkey contracts, particularly in the case of projects financed on a project finance basis, the contractor often assumes part or all of the risk of unforeseeable conditions. In today's market, employers are requiring contractors to assume increasingly significant risks in the context of turnkey contracting. Consequently, a turnkey construction contract may not necessarily include an unforeseeable conditions c1ause. 4 This is the case of the Silver Book. However, assuming the employer does pay a contract price that takes account of such contingencies, this results in an economic loss to the employer if the unforeseen conditions do not arise during performance. Therefore, an employer may decide to assume the risk himself in order to decrease the overall cost of the project. s Parties should be proactive in dealing with risk. For example, with respect to subsurface conditions, the employer may want to invest in more complete geotechnical studies and information. 6 This may include a full and complete site inspection with full disclosure of the results to the contractor. 7 For example, the AlA Contract contemplates such a system of developed and Rutgers. "The Essence of Construction Risk" World Conference on Construction Risk II. Singapore. October 5-6,1995. J ibid. ~ Jones. "Philosophies of Risk Allocation: The Case for Foreseeability" World Conference on Construction Risk II. Singapore, October 5-6.1995. 5 C.R. Seppala. "Les Principaux 'Claims' de l'Entrepreneur aux Termes des Conditions FIDIC (1965) R.D.A.1. 171 at 178. 6 R.J. Smith. "Risk Identification and Allocation: Saving Money by Improving Contracts and Contracting Practices" (1995) 12I.C.L.R. 40 at 54. 7 The International Tunnelling Association suggests the provision by the employer at tender of a complete ground characterisation of subsurface conditions for contracts involving tunnelling work. International Tunnelling Association Working Group. "Contractual Sharing of Risks: ITA Recommendations on contractual sharing of risks" in Tunnelling & Underground Space Technology (2nd ed •• March 1992). 2

143

8-05

8-06

GENERAL COMMENTS

THE CONTRACTOR

shared site information. Where the employer has concerns regarding the validity of any resulting information he should make a specific disclaimer to the contractor. By developing a relatively detailed geological baseline for the works, the employer will simplify the determination of the foreseeability of actual ground conditions. 8

8-07

8-08

•

Ground conditions. Under the Silver Book, sub-clause 4.12 serves several purposes. In conjunction with sub-clause 4.10, it places all responsibility on the contractor for unforeseen site conditions. The contractor carries this risk irrespective of what might otherwise be extenuating circumstances such as where the employer provided the original site conditions information or where the site conditions were in fact unforeseeable. Indeed, the effect of this clause is to hold the contractor liable even where the conditions were unforeseeable and/or are completely out of the control of the contractor. Under the Silver Book, therefore, the risk associated with unforeseen ground conditions falls solely under the responsibility of the contractor. Other standard form contracts may address the unforeseeable ground conditions in "differing conditions" clauses. Such clauses, however, allow for adjustment of the contract where differing conditions are discovered, and this is contrary to the goals of the Silver Book. Indeed, sub-clause 4.12 specifies that there shall be no adjustment of the contract price to take account of any unforeseen difficulties or costs. The controversy surrounding the Silver Book sub-clause 4.12 primarily results from the fact that this provision stands in stark contrast to the preceding standard industry practice, particularly on an international level. Indeed, in one author's study, out of 20 countries surveyed, only Hong Kong and Malaysian governmental construction contracts usually allocated risk for differing conditions exclusively to the contractor. 9 It is worth noting that a study commissioned by the Hong Kong government, which resulted in the Grove Report, recommended the government take responsibility for ground conditions in the construction contracts. IO Although not disagreeing in principle, the Hong Kong government did not adopt this recommendation as changing the longstanding practice would likely result in "more contractual disputes and a higher final total cost" .11 Many authors also disagree with the allocation of unforeseeable ground conditions risk to the contractor. 12 Several arguments are put forward as to • J.A. Huse, "Control of tunnelling contracts" (1992) 24:9 Tunntls and Tunnelling 47. 9 P. Fenn, "Review of International Practice on the Allocation of Risk of Ground Conditions" (2000) 17 (3) I.C.L.R. 439 at 449. 10 The Groue Report (J.B. Grove, "The Grove Report: Key Terms of 12 Leading Construction Contracts Are Compared and Evaluated" online: Construction Web Links (November 6, 2000) http://www.Constructionweblinks .com/Resources nndustry _Reports_N .. .Igrove_ report.ht (date accessed: June 20, 2001) (hereinafter The Grove Report) was the subject of an international conference on November 20 and 21, 2000 in Hong Kong. Certain papers resulting from this conference may be found in (2001) 18, (2) I.C.L.R. 302 et seq. 1\ H. Lloyd J. Q .C., "The Grove Report: The Background to the Conference on Whose Risk?" (2001) 18 (2) I.C.L.R. 302 at 308. 12 The allocation of risk in the Silver Book "is at variance with the traditional FIDIC position and ... is not an appropriate change" (A.H. Gaede, Jr., "The Silver Book: An Unfortunate

144

why the contractor should not be exclusively responsible for such risks. First, it is assumed the contractor will provide a contingency in the contract price to take account of possible unforeseen risks. Where the risks do not materialise, the owner has notionally paid too much. Where the risks do materialise, the contractor is unlikely to have the financial means to manage the consequences of these risks and therefore may try to cut corners on the construction or even go out of business. 13 This is particularly true in BOT projects, where the contract is usually both long-term and of high value such that even large multinational contractors may not be.able to realistically bear such risks. 14 There is some question as to whether, in fact, thecontractor will provide a contingency for such risks. Indeed, it could result that "the less responsible, and frequently less qualified, bidder is the one who will include little or no contingency for the risk and thus be awarded the project".IS One must also keep in mind the time constraints surrounding the tender process that may prevent the contractor from undertaking a survey of the ground sufficient to predict ground conditions. Indeed, one author notes a twostage tender process might relieve some of the uncertainty. In the first stage, contractors could bid on the basis of site conditions provided by the employer and in the second stage the contractors could bid on the basis of their own investigations. 16 Although employers may want to structure their bidding process in such a manner, this does not directly solve the problem at hand. Along a similar vein, the Silver Book Introductory Note recognises that, due to the extent of the risks a contractor assumes under the Silver Book, "the employer obviously must give him the time and opportunity to obtain and consider all relevant information before the contractor is asked to sign on a fixed contract price". Where there is insufficient time, the Silver Book recommends that parties use another FIDIC contract. Neither of these suggestions, however, remedies the problem at hand. That is, the problem with the risk attribution under the Silver Book clause is the unforeseeable ground conditions that, due to their nature, only extensive investigations could uncover. In addition, there exists no insurance for unforeseeable ground

13 H 1$

16

Shift from FlOle's Tradition of being Evenhanded and of Focusing on the Best Intertsts of the Project" (2000) 17 I.C.L.R. 477 at 485); "There is widespread agreement in the literatureconstruction, legal and management-that the risk of differing conditions should be borne by the owner." (P. Fenn, op. cit. n. 9 above at 441-442; the language of Silver Book subclause 4.12 "is uncompromising in the extreme" (EM. Kennedy, "EIC Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey Projects (The Silver Book)" (2000) 17 J.C.L.R. 504 at 513); Demonstrates/Shows how in the American experience, the owner is generally responsible for unforeseen conditions and attempts to make it otherwise usually do not work (P.L. Bruner, "Force Majeure and Unforeseen Ground Conditions in the New Millennium: Unifying Principles and 'Tales of [rUn Wars'" (2000) 17I.C.L.R. 47 at 100). P. Fenn, op. cit. n. 9 above at 441. A.H. Gaede, Jr. op. cit. n. 12 above at 489. ibid. at 485. N.D.]. Henchie, "FIDIC Conditions of Contract for EPC Turnkey Projects-The Silver Book Problel11s in Store?" (2001) 18 (1) I.C.L.R. 41 at 45.

145

8-09

GENERAL COMMENTS

THE CONTRACTOR

8-10

conditions,17 so a site examination that indicated possible future risks would not, per se, help the contractor. The Silver Book also notes that it may be an inappropriate model where the construction project involves "substantial work underground or work in other areas which tenderers cannot inspect" .18 Indeed, it has been suggested that, in such a case, the parties might replace Silver Book sub-clause 4.12 with the provisions of Yellow Book sub-clause 4.12,l9 There are further examples of criticisms of the Silver Book's disclaimers. First, some authors question what construction contracts might not be characterised as involving "significant" ground work. 20 Second, if the only "projects where the risk can be properly shifted are those where the ground conditions are known and not uncertain ... then what is the risk?"21 The basic issue at the root of the debate surrounding the attribution of the risk of unforeseeable ground conditions may be reduced to a question of risk attribution. Under some legal systems, one may not be able to allocate such risk entirely to the contractor. Where such risk may be so allocated, other provisions of the Silver Book may provide an obstacle to such allocation. For example, in principle, under German law one could allocate the responsibility for unforeseeable adverse ground conditions to the contractor. 22 Other provisions of the Silver Book, however, undermine this intention. The Silver Book risk-shifting is ineffective as the "contractor is also responsible in a case where the employer has provided him with an expert's report on the ground conditions containing hidden errors which are not provable within the short tendering period". 23 Amongst others, the Grove Report offers two persuasive reasons for the employer to accept the risk for unforeseen conditions. First, as the risk is impossible to quantify and, therefore, difficult to accurately reflect in the contract price, "the winning tenderer will either be the gambler or the low guesser" with the risk that highly competent, conservative contractors will be discouraged. 24 Second, where contractors are forced to assume the risk, "excessive c1aimsmanship and adversarial conduct can be expected" such that a "breeding ground for disputation and its notorious consumption of resources" results. 25

\7 P. Fenn, op. cit. n. 9 above at 447. '" FIDIC, Conditions of Contract for EPCffurnkey Projects, Introductory Note to First Edition, 1999. \9 C. Wade, "The Silver Book: The Reality" March 2001, online: FIOIC http://www.fidic.orgl resources/contractsiwade_mar01.asp (date accessed: July 4, 2001) or C. Wade, "History and Scope of the Three Major Books" online: FIOIC http://www.lidic.comldocumentsllaunchlwade1.html (date accessed: November 19, 1999) (at 7 of internet version). 20 N.D.J. Henchie, op. cit. n. 16 above at 46. 2\ A.H. Gaede, Jr. op. cit. n. 12 above at 488. 22 Dr A. Kus, Dr J. Markus & Dr R. Steding, "FIOIC's new 'Silver Book' under the German Standard Form Contracts Act" (1999) 16 I.C.L.R. 533 at 538. 23 ibid. at 538-539. 2' The Grove Report, op. cit. n. 10 above at 12.10. 25 ibid. at 12.11.

146

Despite the disadvantageous position the contractor is placed in under the provisions of the Silver Book, other provisions might be used to exculpate the contractor from responsibility in the event of certain unforeseeable ground conditions. First, sub-clause 5.1 may provide a 100phole26 as it attributes responsibility to the employer for "portio~s, data and information which cannot be verified by the contractor, except as otherwise stated in the contract". A second possibility would be to use the provisions of the force ma;eure clause. Under this approach, the contractor could argue the unforeseeable ground conditions presented an exceptional event or circumstance that was beyond the contractor's control and could not have reasonably have been provided against. 27 Nothing in the language of the force ma;eure provisions of the Silver Book would seem to preclude such an argument, and some authors have suggested the argument has merit. 28 A final possibility might be to use sub-clause 19.7, which excuses either party from performance where an "event or circumstance outside of the control of the parties ... arises which makes it impossible or unlawful" to perform their contractualobligations. 29 To conclude, it is true that the allocation of risk for unforeseen ground conditions in international construction contracts raises many issues. FIDIC's decision to allocate such risks to the ,contractor under the terms of the Silver Book has led to, often heated, debate and protest. Reflecting on the hue and cry engendered, in some circles, by the Silver Book terms, "the [FIDIC) Task Group believes that the outcry at the risk of unforeseen ground conditions is exaggerated and misplaced" .30 This is partially because "[eJven on many BOT projects the risk of unforeseen ground conditions may be minimal compared to the other risks" .31 Indeed, the instructions contained in the Introduction to the Silver Book go a long way towards alerting employers and contractors involved in problematic projects to the potential unsuitability of the Silver Book terms. While allocation of risk for unforeseen ground conditions is interesting terrain for debate concerning the theory of risk allocation in general, one should not lose sight of the Silver Book's contribution in the domain of standard form construction contracts. The Silver Book represents a useful attempt to provide a standard form contract containing conditions increasingly found in certain international EPC contracts. To the extent that the Silver Book represents an accurate reflection of a certain reality, i.e. market practice, it may be this "reality" that should be critiqued, rather than the instrument of reflection.

26 27

n 29

30

31

Indeed, some authors recommend its removal for this very reason, see E. Corbett, "FIDIC's New Rainbow 1st Edition-An Advance?" (2000) 17 I.C.L.R. 3 at 269. Indeed, unforeseeable ground conditions may not be currently insured against (P. Fenn, op. cit. n. 9 above at 447). A.H. Gaede, Jr., up. cit. n. 12 above at 490. E. Corbett, op. cit. n. 26 above at 44. C. Wade, "The Silver Book: The Reality" March 2001, online: FIOIC http://www.fidic.orgl resources/contractsiwade_marOI.asp (date accessed: July 4, 2001). C. Wade, "The Silver Book: The Reality" (2001) 18 I.C.L.R. 497 at 514.

147

8-11

8-12

GENERAL COMMENTS

THE CONTRACTOR

The performance phase

8-13

8-14

while the contractor is generally responsible for both design and construction under a turnkey contract, the Silver Book provisions allow the employer to contribute to the design and, at the same time, hold the contractor liable for any fault in the employer's design. The fitness for purpose obligation compounds the responsibility of the contractor, in such a case, such that the effect is to make the contractor the insurer for both the technical and practical aspects of the employer's design. on Indeed , contractors may contest the fitness for purpose obligation . 35 several grounds. 34 First, fitness for purpose cannot generally be IDsured. Consultants, therefore, usually only accept an obligation of "reasonable skill and care" in their design of projects. 36 The result is that the contractor essentially insures the employer against design faults where such insurance would otherwise be unavailable to the employer. The FIDIC Guide implicitly recognises this reality, stating "fitness for purpose is required ... irrespective of the likelihood that independent professional designers may be unable to procure insurance other than up to the level of the usual professional duty of skill, care and diligence".J7 This is related to a second possible objection of contractors: they are held to a higher standard of care than the designers themselves. Professional designers are usually only held to a professional standard of care. A contractor might argue that the mere fact of contractor-supplied design should not expose the contractor to greater risk or responsibility than the employer would receive from a professional designer. A counter-argument justifies this discrepancy by claiming that a designer will design differently for an employer (e.g. might focus on longevity and quality of design) as opposed to a contractor (e.g. might focus on providing the least expensive design). As such is the case, the added safeguard of applying a fitness for purpose standard to the contractor is necessary to balance the effect of the competing interests of the employer and the contractor in the design of the project. 38 A third objection would be that a "fitness for purpose" obligation deprives the contractor of a "state of the art" defence. In other words, the contractor will be strictly liable, "even if the state of knowledge across the industry is

The contractor must perform the works in accordance with the contract. In addition, the contractor may be held to a stated standard of performance set forth in the contract. The contractor will also be required to co-ordinate the works, which includes responsibility for all interfaces involved in the design, construction and site management. All the standard form contracts discussed herein contain some provision requiring the contractor to execute the works in accordance with the contract. This is a relatively basic concept. As will be discussed below, this obligation may extend to anything necessary to complete the works or reasonably inferable from the contract requirements. In addition to the general obligation to perform, the contract may place a duty on the contractor to perform his obligations in accordance with a standard specified either by the contract or by the applicable law. Under a traditional design-bid-build project the design and construction phases are separate, and generally are undertaken by two different entities under two separate contracts. The designer in such a project is often held to a performance standard of professional negligence-that is, the work that a careful designer would provide. The contractor is often held to a "due care and diligence" standard or the equivalent. Fitness for purpose. Under the turnkey contract or EPC, the contractor is often held to a higher standard, such as "fitness for purpose". This liability extends beyond the common law concepts of warranty of merchantability or warranty of suitability. It creates liability for any inadequacy, covering not only the work done on the project but also the materials chosen and the design used.J2 Therefore, a true turnkey contract for the construction of an office building will require the contractor to provide not only a building of the dimensions specified but also one that is fit for use as office space and in accordance with any other criteria provided in the employer's requirements. Where the office electrical system is insufficient for average office use, the employer will not have to allocate responsibility, for example, for the defect amongst the designer, the supplier of the electrical equipment and the installation by the contractor. The turnkey contractor will be liable for the defect. The "fitness for purpose" obligation imposed on the contractor, in contracts such as the Silver Book, has given rise to controversy. Although the concept of holding the contractor liable for fitness for purpose is in keeping with the purpose of a turnkey contract, there is some debate as to the fairness of such an obligation. This is especially true under the Silver Book, where other contractual provisions may combine to make the fitness for purpose obligation particularly onerous for the contractor. 33 For example,

3<

JJ

J6

J7

• 12 JJ

38

I.N.D. Wallace Q.C., Hudson's Building and Engineering Contracts, (11th ed., Sweet & Maxwell, London, 1995), pp. 429 and 522. N.D.J. Henchie, op. cit. n. 16 above at 47.

148 i '

The grounds discussed are largely based on those outlined in Dr J.C. Rechtsanwalt, "The EIC Turnkey Contract" (1997) 141.C.L.R. 33. H. Fleming, "Fitness for Purpose: The Implied Design Obligation in Construction Contracts" (1997) 13 Canst. L.}. 227 at 238 citing for authority M. Levine and L. Wood Construction Insurance and UK Construction Contracts (Lloyd's of London Press Ltd, London, 1991), p. 110. EM. Kennedy, op. cit. n. 12 above at 511; H. Fleming, op. cit. n. 35 above at 229; EIC, The EIC Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey Pro;ects (European International Contractors, Berlin, 2000), p. 13. FIOIC, The FIDIC Contracts Guide (Federation Internationale des Ingenieurs·Conseils, Lausanne, 2000), p. 96 (hereinafter FIDIC Guide) . I.N.D. Wallace, "Letter to the Editor" (1999) 16 (2) I.C.L.R. 312 at 312 (hereinafter "Letter"); H. Fleming, op. cit. n. 35 above at 239 citing I.N.D. Wallace, Construction Contracts: Principles and Policies in Tort and Contract (Sweet & Maxwell, London, 1986), p. 368 (hereinafter Construction Contracts).

149

8-15

8-16

GENERAL COMMENTS

THE CONTRACTOR

8-17

8-18

such that a particular design fault would remain undetected by other competent contractors" .39 The employer could argue, however, that neither party is the obvious choice for assuring the risk, in this case, and that such allocation is legitimately bargained for in the contract. Finally, even where the contractor's design meets the employer's requirements for the design of the project, the contractor may be liable where the employer's requirements themselves are insufficient to meet the purpose of the works. This is particularly troubling where the employer significantly contributes to the design himself. A counter-argument is that the contractor is under a general obligation, under the Silver Book, to satisfy itself as to the suitability of the employer's requirements. 4o Indeed, the employer's requirements not only include possible design contributions, but also set out the purposes of the works. In this way, the contractor is responsible both for ensuring an accurate and clear definition of the purposes, as well as for ensuring coherence between the employer's design requirements and the employer's statement of the purpose of the works. The contractor is thus in a vulnerable position should arguments arise at a later date concerning the equivocacy of such defined purposes. Owners may make several arguments in favour of applying the fitness for purpose obligation to contractors ..First, and as noted above, the fitness for purpose obligation is in keeping with the philosophy of turnkey and EPC contracts. As both the construction and design services are provided by the same party under one contract, it does not make sense to have different levels of warranty for the different aspects of the construction project. 41 Even though this argument may be persuasive, there is nothing to say the single level of responsibility should be "fitness for purpose" and not, for example, "reasonable skill and care" .42 Second, where litigation arises as a result of major design failure, the fitness for purpose obligation helps ensure the arguments of the parties will focus on the fact of the product failure, rather than on more academic questions of standard of care. 43 Even though the fitness for purpose obligation may not decrease litigation, but rather may simply shift the grounds of the parties' arguments, these arguments will be more "useful" to the employer as they will focus on less ephemeral, more concrete realities of the project. Finally, there would be little incentive to use design-build contracts if the contractors could avoid performance responsibilities as soon as there is defect in the preliminary design. 44 To widen the discussion beyond the provisions of the Silver Book, the implication of a standard of performance may also depend on whether the

contract requires contractor design. As discussed above, the independent designer may have an incentive to design in favour of the employer, whereas the contractor designing the works has an incentive to under-design in order to save costs. It is for this reason that legal systems often apply a stricter standard of performance to a turnkey contractor. In any event, local law should be examined in any project to determine the existence of any standards implied by law and the validity of any different standard set forth in the turnkey contract. Indeed, the applicable law may apply a particular standard under some circumstances for the work under a turnkey contract. For example, although English law will imply a fitness for purpose obligation in designand-build contracts, where there are no contractual provisions to the contrary,4S the standard English practice does not include such an obligation. 46 In contrast, French law contains the equivalent to a fitness for purpose obligation,47 and such an obligation is "implied under the laws of many countries" .48 Consideration should be given to local law and practice as some authors claim caution should be used in applying fitness for purpose obligations in jurisdictions where these obligations are not common practice. 49 Finally, some authors remark on the results-oriented approach of legislators in the European Union, which results in "more fitn~ss for purpose obligations rather than obligations to use due care and diligence when complying with the owner's specifications" .50 Further, it should be noted that, in general, parties may substitute another standard only to the extent that they specifically exclude the implied standard sl or that the standard imposed by the applicable law is not of public order. s2 Programme of the works. The programme developed by the parties pursuant to the contract is an important element of the turnkey regime. The programme allows the employer to gauge and verify the progress of the contractor and intervene where completion of the works has been or is likely to be delayed. However, it is also necessary in order to allocate responsibility for developing the progress of the works. When a contractor claims damages or delay due to an employer's risk, such as unforeseeable adverse ground conditions, the contractor must prove the effect of

4J

46

H. Fleming, op. cit. n. 35 above at 237. '0 Whether this requirement is realistic or achievable, under the Silver Book, is debatable, given that the contractor has only the tender stage in which to verify the employer's requirements. Other FIDIC contracts, however, as discussed below, allow a greater time period for the detection of errors in the employer's requirements. 4' H. Fleming, op. cit. n. 35 above at 239. • 2 ibid. at 241. .3 "Letter" op. cit. n. 38 above at 314. 44 V. Van Houtte, "The Role and Responsibility of the Owner" (1999) 16 J.C.L.R. 59 at 71. 3'

150

41

48 49

JO II

J2

N.D.1. Henchie, op. cit. n. 16 above at 52-53 citing Lord Scarman's judgment in Independent Broadcasting Authority v. EMI Electronics Limited and BICC Construction Limited (1980) 14 B.L.R. 1, HL.); Fleming, Const L.J. 199713 (4) 227-242 at 228. "Letter" op. cit. n. 38 above at 312. As outlined by C.R. Seppala, UFIDIC's New Standard Forms of Contract-Force Majeure, Claims, Disputes and Other Causes" (2000) 171.C.L.R. 235 at 208 citing Art. 1792 and Art. 2270 C. civ. FIDIC Guide, op. cit. n. 37 above, p. 96. EM. Kennedy, op. cit. n. 12 above at 511. V. Van Houtte, op. cit. n. 44 above at 70 . B. Eggleston, The ICE Design and Construct: A Commentary (Blackwell Scientific Publications, Australia, 1994) p. 48; N.D.1. Henchie, op. cit. n. 16 above at 52-53. Or public policy, as it is more commonly referred to in common-law jurisdictions.

151

8-19

THE CONTRACTOR

such risk on the progress of the works. The programme will provide a model of the progress that should have been achieved as compared with the progress actually achieved. 53 This will allow the contractor to develop an impacted programme of the progress of the works and thereby quantify his claim. Under a turnkey contract, the contractor tends to have greater power than the employer over the development and management of the programme. This may have a negative impact on the employer's ability to properly administer the claims process. For example, a delay or slowdown in progress may not be related solely to the occurrence of some risk but also to inefficiencies on the part of the contractor or the contractor's equipment. 54 The employer will need to understand fully the contractor's programme in order to identify such inefficiencies.

8-20

Co-ordination of the works. Under a turnkey contract the contractor is responsible for the co-ordination of all of the works. The contractor's responsibility for the site during the contract period is therefore considerable. The contractor will want to study carefully the employer's requirements to determine the number of other contractors to be employed on the site by the employer. The programme and progress reports allow the employer or his representative to verify the status of such co-ordination. Provisions for detailed progress reports help ensure that the contractor continues with the works with reasonable diligence and maintains sufficient progress. In addition to performance of the construction, the employer may want to place on the contractor the duty to train the employer's personnel. This is particularly important where the technology used is such that' the employer will not be able to receive training from other sources. The obligations of each of the parties in respect of training should be well defined.

Discussion of Specific Sub-Clauses 8-21

Clause 4 of the Silver Book, entitled "The Contractor", sets forth in great detail the bulk of the Contractor's key obligations under the contract. As in the previous chapter, the Silver Book provisions will be discussed clause by clause with an explanation of the clause itself followed by a comparison with the other standard forms.

lJ

H

J.A. Huse, "Preparation and presentation of construction claims" (1993) Tunnels and Tunnelling 31. ibid. at 29.

152

DISCUSSION OF SPECIFIC SUB-CLAUSES

4.1 Contractor's General Obligations

8-22

The Contractor shall design, execute and complete the Works in accordance with the Contract, and shall remedy any defects in the Works. When completed, the Works shall be fit for the purposes for which the Works are intended as defined in the Contract. The Contractor shall provide the Plant and Contractor's Documents specified in the Contract, and all Contractor's Personnel, Goods, consumables and other things and services, whether of a temporary or permanent nature, required in and for this design, execution, completion and remedying of defects. The Works shall include any work which is necessary to satisfy the Employer's Requitements, or is implied by the Contract, and all works which (although not mentioned in the Contract) are necessary for stability or for the completion, or safe and proper operation, of the Works. The Contractor shall be responsible for the adequacy, stability and safety of all Site op~rations, of all methods of construction and of all the Works. The Contractor shall, whenever required by the Employer, submit details of the arrangements and methods which the Contractor proposes to adopt for the execution of the Works. No significant alteration to these arrangements and methods shall be made without this having previously been notified to the Employer. Under an EPClturnkey contract, the contractor has a broad range of duties to perform and is generally responsible for the entirety of the design and construction. The general obligations of the contractor under the Silver Book are therefore very comprehensive in order to reflect his extensive role in the design and construction of the works. FlDIC Silver Book sub-clause 4.1 sets forth a list and description of the contractor's general obligations under the contract. These obligations include the design, execution and completion of the works, as well as the obligation to remedy defects. Sub-clause 4.1 gives the standard for completion requiring that the works shall be "fit for the purposes for which the Works are intended as defined in the Contract". The general obligations are then supplemented by more specific obligations regarding plant, contractor's documents and generally all "other things" required to achieve the general design, execution, completion and defect remedies. The comparable provisions in FIDIC Orange Book sub-clause 4.1 are similar to the Silver Book with regard to the general obligations, including the "fitness for purpose" completion standard. The Orange Book clause also details certain obligations, but to a lesser extent than the Silver Book. As under the Silver Book, Orange Book sub-clause 4.1 requires the contractor to be responsible for the adequacy, stability and safety of all site operations, methods of construction and the works. However, the Orange Book contains no provision under this clause for the contractor to submit details of his work arrangements to the employer and to follow them.

153

8-23

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

8-24

The FIDIC Red and Yellow Book sub-clauses 4.1 are nearly identical to the Silver Book provision. However, the Red Book contains a few differences due to the fact that it does not contemplate that the contractor will be responsible for providing all or most of the design. Under Red Book subclause 4.1, the contractor is responsible for the design only to the extent specified in the contract. When some contractor design is supplied, subclause 4.1 sets forth requirements regarding contractor's documents, as-built documents and operation and maintenance manuals relating to the contractor-supplied design. Similarly, the "fitness for purpose" standard applies under the Red Book only to works designed by the contraCtor. In other words, there is no express requirement in the Red Book that works be fit for the intended purposes when they are erected by the contractor but for which the employer supplied the design. The Red Book sub-clause also does not contain the obligation to provide any work necessary to satisfy the employer's requirements, other than work implied by the contract and any works necessary for the stability, completion and safe and proper operation of the works. This omission from the Red Book seems to illustrate the difference between the Red Book's "Specification" and the Silver Book's "Employer's Requirements". Where under the Silver Book the contractor must generally satisfy the employer's requirements whether by virtue of an express or implied obligation, the Red Book does not seem to require the contractor to go beyond the contents of the specification. The non-FIDIC form turnkey contracts also contain the general obligations to design, construct and complete the works (ENAA 7.1, EIC 2.1, ICE 8(1)(A), AlA 3.11, 3.2.6-Part 2, AGC-article 3, DBIA 1.1(ca)). However, the obligation to remedy defects is generally found in a separate clause. (ENAA 27.1, EIC 9.5, ICE 49(1), AlA 3.2.9-Part 2, DBIA 2.10.1). All of the non-FIDIC contracts take different approaches to the statement of a standard for completion of the works, ranging from something less than "fitness for purpose" to no completion standard being stated at all. The ENAA and EIC contracts expressly require the contractor to execute and complete the works with "due care and diligence" (ENAA 9.1, EIC 4.1). This is in keeping with the contractual structures where the designer has "the obligation to exercise reasonable care, skill and diligence in preparing his design" and the contractor must merely build in accordance with the design to be discharged from his obligations. 55 The AGC requires the contractor to exercise "reasonable skill and judgment" in the performance of the works (AGC article 3). The ICE does not set forth a particular standard but indicates vaguely that where no completion standard is expressly stated, the works must be completed in accordance with appropriate standards and standard codes of practice (ICE 36(1)). The

55

Dr J.G. Rechtsanwalt, op. cit. n. 34 above at 43.

154

DBIA simply states that any performance standard shall be included in an appendix to the contract (DBlA 2.3.1). The AlA contains no completion standard other than the requirement of conformity with the contract requirements. (AlA 3.2.9-Part 2). The non-FIDIC contracts contain additional specific obligations of the contractor, similar to Silver Book sub-clause 4.1. These contracts vary with regard to which obligations are specified and the level of specificity with which they are described. However, with the exception of the EIC, all the non-FIDIC contracts require the contractor to provide everything" reasonably inferable" from the contract (ENAA 7.2, ICE 8(1)(b), AlA 1.2.1-Part 2, AGC 2.4.13, DBIA 1.1(ca)). 4.2 Performance Security The Contractor shall obtain (at his cost) a Performance Security for proper performance, in the amount and currencies stated in the Particular Conditions. If an amount is not stated in the Particular Conditions, this Sub-Clause shall not apply. . The Contractor shall deliver the Performance Security to the Employer within 28 days after both Parties have signed the' Contract Agreement. The Performance Security shall be issued by an entity and from within a country (or other jurisdiction) approved by the Employer, and shall be in the form annexed to the Particular Conditions or in another form approved by the Employer. The Contractor shall ensure that the Performance Security is valid and enforceable until the Contractor has executed and completed the Works and remedied any defects. If the terms of the Performance Security specify its expiry date, and the Contractor has not become entitled to receive the Performance Certificate by the date 28 days prior to the expiry date, the Contractor shall extend the validity of the Performance Security until the Works have been completed and any defects have been remedied. i

.!

The Employer shall not make a claim under the Performance Security, except for amounts to which the Employer is entitled under the Contract in the event of: (a) failure by the Contractor to extend the validity of the Performance Security as described in the preceding paragraph, in which event the Employer may claim the full amount of the Performance Security, (b) failure by the Contractor to pay the Employer an amount due, as either agreed by the Contractor or determined under Sub-Clause 2.5 [Employer's Claims) or Clause 20 [Claims, Disputes and Arbitration), within 42 days after this agreement or determination, (c) failure by the Contractor to remedy a default within 42 days after receiving the Employer's notice requiring the default to be remedied, or (d) circumstances which entitle the Employer to termination under SubClause 15.2 [Termination by Employer), irrespective of whether notice of termination has been given.

8-25

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

sions in sub-clause 4.2 of the FIDIC Red and Yellow Books are substantially similar to the Silver Book provisions. The employer will want to closely control the nature of the guarantee and the identity of the guarantor. Under Silver Book sub-clause 4.2, the employer approves the entity providing the performance security, and the form of the guarantee is either that annexed to the contract or subject to the approval of the employer. The limits on the employer's ability to claim against the performance security may be unacceptable to an employer who, in the event of contractor default, may need immediate access to the performance guarantee to continue construction (by comparison with, for example the form of security provided by the ENAA contract which is less restrictive). Annexes to the Silver Book provide sample forms of performance security. The Silver Book and the Red and Yellow Books annex sample performance security agreements that both rely on,61 an(l incorporate, the Uniform Rules published by the International Chamber of Commerce (ICC).62 FIDIC considers that these forms are "fair as between the parties and should therefore be conducive to keen tendering".63 Under these rules, the employer may call the security by simply declaring, without providing evidence, that the preconditions have been fulfilled. Where an employer makes an illegitimate call, the contractor's recourse lies both under the law governing the agreement and under sub-clause 4.2, which requires the employer to indemnify the contractor where an illegitimate claim was made under the performance security.64 The FlDIC Orange Book also contains provisions regarding the performance security in sub-clause 4.2. The Orange Book provisions are similar to those in Silver Book sub-clause 4.2. However, under Orange Book sub-clause 4.2, the performance security is mandatory, and there is no express requirement that the contractor extend the validity of the performance security. There are also no specific limits on the employer's ability to claim against the security. Most of the non-FIDIC contracts contain some provision regarding the performance security. A performance security or bond is required under the ENAA and EIC (ENAA 13.3.1, EIC 8.1). Under the ICE and the AGC, the contractor is required to obtain a performance security if so stated in the contract (ICE 10(1), AGC 10.9). A performance security is not required under the DBIA, but if used, the details are to be set forth in the contract agreement (DBIA 5.4.1). To the extent that they are included, the time of issuance and amounts vary between these contracts. The AlA and AGC contain no provisions regarding performance securities.

The Employer shall indemnify and hold the Contractor harmless against and from all damages, losses and expenses (including legal fees and expenses) resulting from a claim under the Performance Security to the extent to which the Employer was not entitled to make the claim. The Employer shall return the Performance Security to the Contractor within 21 days after the Contractor has become entitled to receive the Performance Certifica te.

8-26

The employer may decide that a third party should assume some portion of his completion risk (i.e. the failure of the contractor to perform properly his obligations under the contract). Most contracts require the contractor to provide a performance security to the employer. This security usually comes in the form of a guarantee or bond issued by a third party against the promise of the contractor to perform his obligations under the contract. In certain countries banks are not allowed to issue guarantees, and therefore standby letters of credit are used. 56 Institutional employers may require such guarantees for projects in excess of a certain value. 57 These bonds or guarantees are merely an undertaking by a third party to be held liable to a certain extent for the contractor's non-performance of the underlying obligation. 58 The guarantee will be a separate agreement between the contractor and a third party, usually a bank, to provide an amount of compensation on the occurrence or non-occurrence of a certain event. The guarantee mayor may not require the employer to provide proof of non-performance before the sum is paid out. 59 The employer will prefer no preconditions to payment whereas the contractor will prefer the employer be required to substantiate any call on the security and will prefer the possibility to contest such substantiation. 6o Silver Book sub-clause 4.2 sets forth the very detailed requirements regarding the performance security. However, it indicates that unless the amount and currency of the performance security are stated in the particular conditions, sub-clause 4.2 does not apply. If applicable, sub-clause 4.2 requires the contractor to provide a performance security to the employer in accordance with this sub-clause, which indicates the modalities regarding its form, issuance and return. The Silver Book specifically requires that the security remain valid and enforceable until the contractor has completed the works and remedied defects and that the contractor extend the validity of the performance security, if necessary. The provisions also specifically list the events for which the employer may make a claim, thereby limiting the breadth of the employer's power in this respect. The corresponding provi-

56

57 58 59

60

UNCITRAL, UNCITRAL Legal Guide on Drawing Up International Contracts for the Construction of Industrial Works (UN, New York, 1998) UNDOC. NCN.9/SER.Bl2 at 184. I.N.D. Wallace Q.C., op. cit. n. 32 above, pp. 1535 et seq. Mr Wallace gives good coverage to the matter of guarantees and bonds for construction contracts. Construction Contracts, op. cit. n. 38 above, p. 288. ibid. p. 310. P.L. Booen, "The Three Major New FIOIC Books" (2000) 17 (1) I.C.L.R. 24 at 32.

156

61

61

.1

i

6J

"

6~

ibid. at 32. To be more specific, one form incorporates the ICC's 458 Uniform Rules for Demand Guarantees (URDG, no. 4581992) and the other incorporates the ICC's 524 Uniform Rules for Contract Bonds (URCB, no. 524 1993). FIDIC Guide, op. cit. n. 37 above, p. 100. For further discussion of performance security see ibid., pp. 97-102. P.L. Booen, op. cit. n. 60 above at 33; FIDIC Guide, op. cit. n. 37 above, p. 100.

157

8-27

8-28

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

8-29

•

With regard to the duration and validity of the security, the Etc indicates that the performance security shall be valid until the contractor has executed and completed the works and remedied any defects (EIC 8.2). The ENAA indicates that the security remains valid until 12 months after acceptance of the works by the employer (ENAA 13.3.2). It requires the return of the bond on the day of its expiry as defined in the contract. This provision has been criticised as not· taking into account the possibility of a claim being made just before expiry.65 However, of the non-FIDIC contracts, only the ENAA specifically requires the contractor to extend the validity of the performance security if the defects liability period is extended (ENAA 8.2A). By contrast, the ICE and AGC do not specify the duration of validity of the performance security. Only the EIC, like the Silver Book, specifically lists and delimits in the contract the events entitling the employer to claim against the security (EIC 8.3). However, the form of security contemplated by the EIC will probably not be acceptable to many employers, for the reason that it requires the bank to verify the basis for an eventual call. Furthermore, the limited language of the conditions for a call reduce the value of security to the employer. Although not specifically in the contract, the ENAA provides in its appendix 8-2 a form of bond that also restricts the owner's right to call in many ways. The owner must produce a copy of a written notice to the contractor warning of the breach and requesting remedy, a letter from a duly authorised officer certifying the breach and a copy of a written notice to the contractor stating his intent to claim. It also limits the amount of the bond to five per cent of the contract price. As certain authors have indicated, such requirements of proof may allow the contractor the possibility of getting an injunction or other form of relief in order to argue the validity of the call. 66 These requirements remove the bonds from the realm of on-demand guarantees. Therefore, the owner will want to examine carefully the type of guarantee that is most suitable for him. The parties will also want to consider the effects of variations and termination on the performance guarantor. The contract can provide for an increase in the amount of the performance guarantee in the case of variations, or an extension of the duration of the guarantee. The parties may also want to provide for extinction of the guarantee in the case of termination of the contract or of the contractor's employment due to the default of the employer. In the search for a balanced form of performance security, various organisations have issued sample forms. The ICC has issued Uniform Rules for Demand Guarantees (publication number 458, May 1992) that reject both the straightforward on-demand guarantee and the more complicated FIDICstyle guarantee of yore, imposing instead a duty on the employer to accompany any call on the guarantee with a detailed written statement describing

65

66

Wiwen-Nilsson, ~ A Brief View of the 1992 Edition of the ENAA Model Form-International Contract for Process Plant Construction (Turnkey Lump sum Basis)" (1994) 111.C.L.R. 526 at 536. Walser, "The ENAA Model Forms: Tentative Comments of a World Bank Lawyer", International Bar Association Conference in Tokyo, Japan, February 1993 at 13.

158

the basis for the call. These rules have been incorporated into one of FIDIC's example forms for performance security (appended to the new editions) in order to "significantly reduce ... the wording in each example form [and to] facilitate a' common international standard for securities" .67 The ICC believes that this requirement will not create a heavy burden of proof on the employer, but will protect the contractor from frivolous demands. The International Bar Association has also proposed Illustrative Forms of

Performance Guarantee and Counter Guarantee Security for International Construction Projects (May 1992) which allow q"e employer to call on the bond where one of three conditions have been met: first, where the contractor consents to the call; secondly, where the contractor does not consent but the employer refers the dispute to an ICC pre-arbitral referee and provides a counter-guarantee which can be called by the contractor to the extent that the referee disagrees with the employer's position; and thirdly, where a call is based on an opinion issued by a referee. All the contracts discussed herein take slightly different approaches to the issue of the performance security. Silver Book sub-clause 4.2 appears to be the most comprehensive. It is also more flexible in that the provisions may be activated by the statement of the security amount in the particular conditions or left inapplicable if no amount is stated.

4.3 Contractor's Representative

8-31

The Contractor shall appoint the Contractor's Representative and shall give him all authority necessary to act on the Contractor's behalf under the Contract. Unless the Contractor's Representative is named in the Contract, the Contractor shall, prior to the Commencement Date, submit to the Employer for consent the name and particulars of the person the Contractor proposes to appoint as Contractor's Representative. If consent is withheld or subsequently revoked, or if the appointed person fails to act as Contractor's Representative, the Contractor shall similarly submit the name and particulars of another suitable . person for such appointment. The Contractor shall not, without the prior consent of the Employer, revoke the appointment of the Contractor's Representative or appoint a replacement. The Contractor's Representative shall, on behalf of the Contractor, receive instructions under Su b-Cla use 3.4 [Instructions).

1! .

The Contractor's Representative may delegate any powers, functions and authority to any competent person, and may at any time revoke the delegation. Any delegation or revocation shall not take effect until the Employer has received prior notice signed by the Contractor's Representative, naming the person and specifying the powers, functions and authority being delegated or revoked. The Contractor's Representative and all these persons shall be fluent in the language for communications defined in Sub-Clause 1.4 [Law and Language). 67

8-30

FIDIC Guide, op. cit. n. 37 above, p. 101.

159

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

8-32

Silver Book sub-clause 4.3 contains provisions regarding the appointment of the contractor's representative, which is required under the Silver Book. The contractor's representative is the person who receives instructions on behalf of the contractor and must be fluent in the language for communications defined in the contract. He may delegate any of his functions or authority provided that the employer is given prior notice. The employer's consent is required for the appointment or replacement of the contractor's representative unless this representative is named in the contract. Under the terms of sub-clause 1.3, consent must not be unreasonably withheld or delayed and must be in writing. Parties using the Silver Book may wish to consider modifying this sub-clause to provide for a possible extension of time and increase in the contract price if the employer unreasonably refuses to approve the appointment of the contractor's representative. Sub-clause 4.3 of the Orange, Red and Yellow Books contains provisions that are substantially the same as those of Silver Book sub-clause 4.3. The exception under the Red and Yellow Books is that the engineer must consent to the appointment of the contractor's representative and receive notices under the clause, rather than the employer. With the exception of the AGC, all the non-FIDIC contracts discussed herein contain some mention of a contractor's representative with varying degrees of description and definition. The ENAA provisions in sub-clause 17.2.1-17.2.3 are very similar to those of the Silver Book, providing an appointment and revocation process for the contractor's representative with the employer's conseni: required. The ENAA also gives the contractor's representative the power to delegate. The ICE is the next most similar to the Silver Book, requiring approval of the contractor's representative by the employer's representative (ICE 15(3)) and allowing delegation of responsibility to a nominated deputy (ICE lS(2)(b)). The EIC, AlA and DBIA are the least detailed with regard to the use of a contractor's representative. The EIC makes reference to and defines the contractor's representative as the person appointed by the contractor to act as such for the purposes of the contract (EIC 1.1 (xiii)), but contains no further provisions. Sub-clause 3.2.2-Part 2 of the AlA expressly states that the contractor shall designate a representative to act on his behalf but contains no further provisions. The DBJA simply indicates that the contractor's representative is vested with the authority to act on behalf of the contractor and may be replaced only by mutual agreement between the employer and the contractor (DBIA 2.1.1).

8-33

4.4 Subcontractors The Contractor shall not subcontract the whole of the Works. The Contractor shall be responsible for the acts or defaults of any Subcontractor, his agents or employees, as if they were the acts or defaults of the C~ntractor. Where specified in the Particular Conditions, the Contractor shall gIve the Employer not less than 28 days' notice of:

160

(a) (b) (c)

the intended appointment of the Subcontractor, with detailed particulars which shall include his relevant experience, the intended commencement of the Subcontractor's work, and the intended commencement of the Subcontractor's work on the Site.

The contractor is generally responsible under a turnkey contract for the hiring of subcontractors and the co-ordination of their activities on the site. Silver Book sub-clause 4.4 contains certain mandatory provisions regarding subcontractors. First, it prohibits the contractor from subcontracting the whole of the works. Second, it makes the contractor responsible for his subcontractors, agents and employees. The remaining requirements of Silver Book sub-clause 4.4 regarding notices to the employer seem to be triggered only if the parties so state in the particular conditions. If activated by inclusion in the particular conditions, this clause requires 28 days' notice of the intended appointment of a subcontractor with detailed particulars, the date of intended commencement of work and the date of his intended commencement of work on the site. It is unclear what the purpose of providing such information to the employer is, as the clause does not require the approval of the employer for appointing the subcontractors. 68 Although this Silver Book clause does not require employer approval of subcontractors, the employer may want to modify this clause requiring some type of employer approval or consent procedure in order to retain some control over the selection of subcontractors. This may be necessary to ensure the quality of materials used and work done, particularly with respect to subcontractors handling major aspects or elements of the project. However, the contractor may consider such power to be an unwarranted intrusion into his conduct of the works. Clearly, the Silver Book provisions favour contractor autonomy, as opposed to the Orange, Red and Yellow Books which contain some employer consent requirements. The employer may also want to insert language clarifying the employer's relationship to the contractor's subcontractors. This clause should exclude to the extent legally permissible any contractual or professional relationship between the employer and the contractor's subcontractors as, in some jurisdictions (e.g. France and Belgium) the subcontractors may have a direct claim against the employer for payment. 69 The AlA Contract sets forth this separation of the parties into a separate sub-clause that states that construction documents shall not create an obligation between the employer and a third party (AlA 1.2.6-Part 1). It has been suggested that the employer should specify that he is an intended third-party beneficiary of the contractor/subcontractor agreement, thus protecting the employer's rights without making him liable under that subcontract.7° 68 69 70

Gaede, Jr., op. cit. n. 12 above at 483. V. Van Houtte, op. cit. n. 44 above at 65 (n. 14). J.F. Butler, "Protecting Owner with Contract Clauses" in R.F. Cushman & K.S. Taub, eds, Design-Build Contracting Handbook (Wiley Law Publications, New York, 1992) 253 at 256. A.H.

161

8-34

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

8-35

•

In addition, the employer (and possibly project lenders) may want to be able to take over the project subcontracts in certain circumstances with no additional cost or in the event of termination. The employer may want to specifically require that all subcontracts be freely assignable and entirely transferable, including guarantees, where the employer or some other entity takes over the works from the contractor or when the contract is terminated for contractor fault. The employer may under certain circumstances attempt to hold the subcontractor liable in tort, where the applicable law does not limit his liability to do so and where the damage the employer suffers is not purely contractual.7 1 The Orange, Red and Yellow Books are all similar to each other and differ slightly from Silver Book sub-clause 4.4. Like the Silver Book, ,the Orange, Red and Yellow Books all prohibit the subcontractor from subcontracting the whole of the works and make the contractor responsible for the acts or defaults of his subcontractors, agents and employees (OB 4.5, RB 4.4, YB 4.4). These three also require notice to the employer's representative or engineer, respectively, concerning each subcontractor's commencement of work on the site. This notice requirement is not conditional and does not require reference to or repetition of the notice obligation in the particular conditions to activate it. However, the Orange, Red and Yellow Books contain additional and different provisions not found in the Silver Book. Under Orange Book sub-clause 4.5, unless otherwise stated in the particular conditions, no notice or consent is required for any purchases of materials or subcontracts for which the subcontractor is named in the contract. However, prior consent by the employer's representative is required for all other subcontractors. Red and Yellow Book sub-clauses 4.4 contain similar provisions, requiring the engineer's consent for all subcontractors not named in the contract. These provisions differ in that the Silver Book does not require the employer's consent for any subcontractors. In addition, Red Book sub-clause 4.4 requires each subcontract to contain a provision by which the contractor and subcontractor agree to the assignment of the subcontract to the employer in the event of termination of the main contract by the employer by reason of contractor default. Orange Book sub-clause 4.5 also requires the contractor to give a fair and reasonable opportunity to subcontractors of the host country. This is in line with World Bank sample provisions encouraging the contractor to employ staff and labour from sources inside the site country. Note, however, that due to its potentially adverse effect on the financial viability and efficiency of the project, the World Bank does not accept restrictions on the source of staff or labour except for unskilled labour, which could be restricted to sources in the employer's own country. 72

V. Van Houtte, op. cit. n. 44 above at 65. n World Bank "Standard Bidding Documents for the Procurement of Works n (World Bank Washington, D.C., 2000) online: World Bank http://www. worldbank.orglhtmUopr/biddocsi works/w-titlpg.htm (date accessed: July 16,2001) at 109.

The ENAA takes a slightly different approach to subcontractors than the 8-36 Silver Book. The ENAA contains no specific restriction prohibiting the contractors from subcontracting the whole of the works. The contractor's responsibility for his subcontractors also seems less b.road under the ENAA sub-clause 32.1, which makes the contractor responsible for loss or damage to the works due to his subcontractors. With regard to notice and consent for subcontractors, ENAA sub-clauses 19.1.1 and 19.1.3 provide a syst~m whereby subcontractors are put on lists for major items of the constructIOn work. These are subcontractors upon which the employer and contractor have agreed. However, the contractor may propose additions or deletions to the lists, subject to the employer's approval. The EIC allows the contractor to subcontract the whole of the works but subject to the employer's approval, which must not unreasonably be withheld (EIC 25.3). However, the contractor's responsibility for his subcontractors is not expressly stated in the EIC. The EIC also contains no other notice or consent provisions regarding subcontractors. Similarly, ICE sub-clause 4(1) prohibits the contractor from subcontracting the whole of the works without the prior consent of the employer. However, the contractor is expressly liable for all subcontracted work and for any acts, defaults or neglects of any subcontractors, agents, servants or workers (ICE 4(4)). Under ICE sub-clause 4(2)(b), the contractor is allowed to freely subcontract any part of the construction, but notice must be given to the employer before the subcontractor's entry onto the site. The AlA, AGC and DBIA place no restrictions on the contractor regarding subcontracting the whole of the works. The AlA and DBIA both make the contractor expressly liable for the acts or omission of his subcontractors (AlA 3.1.3-Part 2, DBIA 2.7.4). The contractor is also liable for his subcontractors under the AGC, but indirectly by application of several differ:ent sub-clauses. 73 The AGC and DBIA contain no notice or consent provisions regarding subcontractors, while the AlA only requires that the contractor furnish the employer with a list of the subcontractors' names (AlA 11.2.1Part 2). 4.5 Nominated Subcontractors

8-37

In this Sub-Clause, "nominated Subcontractor" means a Subcontractor whom the Employer; under Clause 13 [Variations and Adjustments], instructs the Contractor to employ as a Subcontractor. The Contractor shall not be under any obligation to employ a nominated Subcontractor against whom the Contractor raises reasonable objection by notice to the Employer as soon as practicable, with supporting particulars .

11

162

7J

The contractor is generally responsible for construction of the works (AGC-art. 3); the work includes construction services (AGe 2.4.13); and construction services includes subcontracted items (AGC 3.2.2). 163

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

8-38

8-39

•

The designation of a nominated subcontractor allows the employer to choose a particular subcontractor for a given task. This may be advantageous to an employer who wants to control the quality of the work done or to secure a competitive price for the service involved. The employer may also have a preferred subcontractor for a particular item or may wish to avoid any increase in the contract price resulting from using the contractor as the intermediary to obtain the subcontracted service. One of the particularities of using a nominated subcontractor is his position in the relationship between the employer and the contractor. Traditionally subcontractors are chosen by the contractor, who is liable for any breach or defect attributable to his subcontractor. The employer may also hire contractors independently to complete certain portions of the works under the contract or other related works, but these contractors are not the responsibility of the contractor. However, the contractor will be liable for the acts and defaults of nominated subcontractors even though they are chosen by the employer. The nominated subcontractor is often chosen by the employer before the signature of the turnkey contract. If the employer and nominated subcontractor have already signed an agreement, this will be novated with the contractor. However, there may be no contract between the employer and nominated subcontractor. The employer may simply mandate that the contractor use a given subcontractor in the execution of the works. In either case, the contractor becomes liable for the work of the nominated subcontractor chosen by the employer. This differs from the situation where the employer independently employs a subcontractor for certain portions of the work. Nonetheless, the nominated subcontractor may be better suited to a turnkey project than the employer's use of independent subcontractors given that the turnkey contract, at least in theory, is designed to provide the employer with a project ready for operation "at the turn of a key". Consequently, the employer's completion of parts of the works by subcontractors independent of the main contractor defeats the purpose of the turnkey setup. The eventual replacement of a nominated subcontractor is another issue of concern. The employer may appoint and contract with the nominated subcontractor before the signing of the main contract. Where a nominated subcontractor must be replaced, the employer will generally not have nominated a second subcontractor as a replacement. There may be some loss of time or cost increase resulting from the procedure used for replacing the nominated subcontractor. 74 In order to allocate the risk of such costs and delay, the parties could either agree on a reasonable allocation or place the risk on the employer, by requiring the replacement process to be deemed a variation or change to the works. 7s 7. 75

Gould, "Comments on the ENAA Model Form International Contract for Process Plant Construction (Revised 1992)" (1994) I.C.L.R. 498 at SIt. N. Wakame, "An Overview of Major Issues on ENAA Model Form International Contract for Process Plant Construction, 1992 Edition-A Drafter's View" (1995) 12 I.C.L.R. 98 at 113.

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It is debatable whether the use of nominated subcontractors makes sense at all in a turnkey operation, and some authors recommend against their use.76 Since the turnkey contract generally uses a lump-sum price, the employer need no longer concern himself with the cost of the ~ubcontracted service. Furthermore, the contractor can often perform a proJect at a more reasonable cost by using a team of subcontractors with whom he has experience. The use of an employer-nominated subcontractor may only complicate the contractor's organisation of the works. Silver Book sub-clause 4.5 contains very simplistic provisions regarding 8-40 nominated subcontractors. The Silver Book states that a nominated subcontractor is a subcontractor that the employer instructs the contractor to employ. However, the contractor may raise a reasonable objection to the employer's nominated subcontractor. This objection must be brought "as soon as practicable" and must be accompanied by "supporting particulars". The working of this sub-clause does not, however, give the contractor the right to reject the nominated subcontractors, merely to object. The FIDIC Guide suggests reasons for objection might be su.ch as those listed in Red Book sub-clause 5.2, which clause also addresses "the possibility of overcoming objections by way of an indemnification by the employer". 77 The results of this objection are unclear and a contractor may want to adjust the wording accordingly. The sub-clause also suggests that the instruction of a nominated subcontractor is subject to procedures for variations and adjustments. ,The other FIDIC form contracts take differing approaches to the issue of nominated subcontractors. The Orange Book contains no provisions whatsoever regarding nominated subcontractors. The Yellow Book in sub-clause 4.5 is identical to the Silver Book, except that it is the engineer who may instruct the use of a nominated subcontractor, rather than the employer. The Red Book contains much more detailed provisions in its Clause 5 regarding nominated subcontractors. Red Book sub-clauses 5.1 and 5.2 contain provisions comparable to the Silver Book sub-clause 4.5. Red Book sub-clause 5.2 goes further by listing specific objections of the contractor that will be "deemed reasonable". The Red Book also contains two additional sub-clauses concerning payments to nominated subcontractors and evidence of payments. The provisions of the ENAA regarding nominated subcontractors are 8-41 more similar to those of the Red Book than the Silver Book. ENAA subclause 19.2.1 contains the general provision regarding nominated subcontractors, and sub-clause 19.2.3 indicates that the contractor is not required to employ a nominated subcontractor under certain listed circumstances. The ENAA provisions are generally much more detailed than the Silver Book. 76

77

P.L. Booen, "FIDIC's Conditions of Contract for the Next Century: 1998 Test Editions" (1999) 16 (1) I.<::.L.R. 5 at 16-17; A.H. Gaede, Jr., op. cit. n. 12 above at 482; EM. Kennedy, op. cit. n. 12 above at 511; Ele Guide, op. cit. n. 36 above, p. 14. FIDIC Guide, op. cit. n. 37 above, p. 106.

165

THE CONTRACTOR

DISCUSSION OF SPECIFIC SUB-CLAUSES

The remaining contracts contain no express clauses regarding nominated subcontractors, but some have related provisions. The AGC does not contain an express provision regarding nominated subcontractors. However, it does state sub-clause 5.1 that "[tlhe Contractor shall not be required to retain any subcontractor to whom the contractor has a reasonable objection". This provision suggests that the contractor might be under some obligation to retain other subcontractors, possibly required by the employer. The AlA also contains no provisions for nominated subcontractors but does give the employer the right to perform construction or operations with the employer's own personnel and award separate contracts (AlA 11.3.1-Part 2). The EIC, ICE and DBIA contracts contain no provisions at all regarding nominated subcontractors.

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4.6 Co-operation

The Contractor shall, as specified in the Contract or as instructed by the Employer, allow appropriate opportunities for carrying out work to: (a) the Employer's Personnel, (b) any other contractors employed by the Employer, and (c) the personnel of any legally constituted public authorities, who may be employed in the execution on or near the Site of any work not included in the Contract.

..

Any such instruction shall constitute a Variation if and to the extent that it causes the Contractor to incur Cost in an amount which was not reasonably foreseeable by an experienced contractor by the date for submission of the Tender. Services for these personnel and other contractors may include the use of Contractor's Equipment, Temporary Works or access arrangements which are the responsibility of the Contractor. The Contractor shall be responsible for his construction activities on the Site, and shall co-ordinate his own activities with those of other contractors to the extent (if any) specified in the Employer's Requirements. If, under the Contract, the Employer is required to give to the Contractor possession of any foundation, structure, plant or means of access in accordance with Contractor's Documents, the Contractor shall submit such documents to the Employer in the time and manner stated in the Employer's Requirements.

Silver Book sub-clause 4.6 imposes certain obligations on the contractor regarding co-operation. The contractor agrees to allow appropriate opportunities to the employer's personnel, employer's contractors and public authorities to carry out work on or near the site. The extent to whic~ the .contractor must "allow appropriate opportunities" may be ~escnb~d In th~ tende~ documents. 78 If this is required by employer instruction, the instructIOn will be treated as a variation to the extent it causes the contractor to incur costs that were not reasonably foreseeable. This co-operation obligation extends to the use by these persons of the

166

contractor's equipment, temporary works and access arrangements. The contractor must also co-ordinate his activities with those of these other persons carrying out work on the site, but only if and to the extent specified in the employer's requirements. The final paragraph appears slightly out of context requiring the contractor to submit contractor's documents within the time stated in the employer's requirements if the employer is required to give the contractor possession of any foundation, structure, plant or means of access. The employer will want to have the ability to use the widest range of other contractors on the site in order to maintain flexibility in his actions. However, the breadth of Silver Book sub-clause 4.6 may create potential disruptions to the contractor in his execution of the works. In order to avoid this disruption, the contractor might require a specific list of other contractors susceptible to be present on the site along with the times and nature of their intervention. It could be further stated and required that any variation from the employer's specific list was "not reasonably foreseeable" and will constitute a variation. Further, where the employer plans to hire other contractors or subcontractors, either to carry out work on the project or simply on the site, the contractor may want to include reciprocal co-operation obligations for the employer.79 Orange Book sub-clause 4.4 contains a less detailed version of these obligations. Under the Orange Book, the contractor must allow appropriate work opportunities to other personnel, but the employer is not expressly given the power to instruct this. There is no mention of this cooperation constituting a variation giving the contractor the right to additional time or money. The contractor's obligation to provide specific services is also absent from the Orange Book provision. Although Orange Book sub-clause 4.4 does require the contractor to co-ordinate his activities with those of other contractors to the extent specified in the contract, it contains no provision regarding the timely provision of contractor's documents for employer-provided foundation, structure, plant or access. Sub-clauses 4.6 of the Red and Yellow Books are identical to the Silver Book provision, with two minor exceptions. In both, it is the engineer who may instruct the work opportunities, rather than the employer. In addition, the Red Book sub-clause does not mention any obligation for the contractor to co-ordinate his activities with those of other contractors. The FIDIC Guide explains this omission as to require such co-ordination under the Red Book would be impractical. 80 The ENAA'contains provisions very similar to Silver Book sub-clause 4.6. ENAA sub-clause 22.4 requires the contractor to provide reasonable opportunities upon the employer's request for the employer's contractors to carry FIDIC Guide, op. cit. n. 37 above, p. 108. EIC Guide, op. cit. n. 36 above, p. 14. so FIDIC Guide, op. cit. n. 37 above, p. 108.

78 79

167

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8-44

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

out work on the site. There is some indication that additional ' time and money might be obtained under appropriate circumstances, but this is not entirely clear. Sub-clause 22.4 also requires the contractor to provide certain services to the employer's personnel. The ENAA does not specifically state the contractor's obligation to co-ordinate his activities with those of other contractors. With regard to providing the employer with contractor's documents prior to the execution of an employer's obligation, ENAA does not contain a comparable obligation but does indicate in sub-clause 18.2 that the contractor's programme must indicate the date by which the employer must fulfill his obligations under the contract to enable the contractor to execute the works. The EIC contains no provision similar to Silver Book sub-clause 4.6. ICE sub-clause 31(1) is nearly identical to the co-operation obligation set forth in Silver Book sub-clause 4.6. ICE sub-clause 31(2) also provides for an extension of time and increase in cost. However, the ICE does not contain an express obligation for the contractor to co-ordinate his activities with the activities of other contractors on the site, nor is there any provision regarding the provision of contractor's documents in advance of employer-provided items. The AlA requires the contractor to afford the employer's separate contractors reasonable opportunity to store materials and equipment and perform their activities (AlA 11.3.2-Part 2). Although there is no specific mention of variations for related time and costs, AlA sub-clause 11.3.3-Part 2 indicates that costs caused by delays or by improperly timed activities shall be borne by the party responsible. The AlA does not specifically mention the requirement to provide services to employer's personnel or to provide contractor's documents in advance of items to be provided by the employer, but it does require the contractor to co-ordinate his construction and operations with those of the employer's contractors (AlA 11.3.2-Part 2). The AGC contains no provisions similar to Silver Book sub-clause 4.6. The contractor is responsible for managing his own subcontractors (AGC 5.2), but has no express obligation to manage those of the employer. The DBIA does not contain any specific requirements regarding the allowance of work opportunities to other personnel and provision of services to these personnel. It simply indicates that the contractor must co-operate and co-ordinate his activities with other contractors (DBIA 2.7.5).

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tract. He must also rectify any errors relating to the positioning. Note that by virtue of sub-clause 5.1, the contractor will be responsible for any error in the positioning of the works, even if the setting out was completed in accordance with employer-provided data contained in the contract. Subclause 5.1 imposes on the contractor the responsibility for all data regarding the works, subject only to certain exceptions. Sub-clause 5.1 is discussed at greater length in Chapter 9. It is worth noting that efforts to shift risk, such as result from the operation of these clauses, may not be upheld or valid . under the applicable law. S1 The comparable provisions in Orange, Red and Yellow Book sub-clauses 4.7 are similar to the Silver Book provision. However, the Red and Yellow Books specifically add in sub-clause 4.7 that the employer is responsible for any errors in the setting out of references, but that the contractor must use reasonable efforts to verify their accuracy. The contractor may be entitled to costs and additional time for employer errors. ENAA sub-clause 22.1.1 makes the contractor responsible for the true and proper setting out of the works in relation to the references provided by the employer. The contractor must rectify any errors in the setting out, but the cost is borne by the employer if the rectification is due to errors in the data provided by the employer. Neither the EIC, ICE, AlA, AGC nor DBIA contain any specific provisions regarding the setting out of the works. However, each of these contracts contain certain general obligation to execute the works in accordance with the contract documents, which will likely contain some specifications regarding the positioning of the works.

4.8 Safety Procedures

The Contractor shall: (a) comply with all applicable safety regulations, (b) take care for the safety of all persons entitled to be on the Site, (c) use reasonable efforts to keep the Site and Works clear of unnecessary obstruction so as to avoid danger to these persons, (d) provide fencing, lighting, guarding and watching of the Works until completion and taking over under Clause 10 [Employer's Taking Over), and (e) provide any Temporary Works (including roadways, footways, guards and fences) which may be necessary, because of the execution of the Works, for the use and protection of the public and of owners and occupiers of adjacent land.

4.7 Setting Out

The Contractor shall set out the Works in relation to original points, lines and levels of reference specified in the Contract. The Contractor shall be responsible for the correct positioning of all parts of the Works, and shall rectify any error in the positions, levels, dimensions or alignment of the Works .

•

Silver Book sub-clause 4.7 requires the contractor to set out or position the works in accordance with the relative specifications contained in the con168

8-46

81

For a discussion of the potential invalidity of these sub-clauses under German law, see Dr A. Kus, Dr J. Markus & Dr R. Steding, op. cit. n. 22 above at 536-537. 169

8-47

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

8-48

8-49

In order for the employer to reduce his potential liability for injuries or accidents occurring on the site, the employer will want to ensure that the contractor implements safety precautions from the outset of construction to avoid liability for any accident that might occur. In this respect, subclause 4.8 of the Silver Book sets out a list of specific obligations regarding safety for which the contractor is responsible under the contract. The contractor will want to review this duty carefully, particularly where several contractors will be working on the site at the same time. He will also want to consider carefully the definition of the "site" in order to ascertain the scope of this obligation. The obligations contained in sub-paragraphs (a), (b) and (c) are also listed as employer's obligations in sub-clause 2.3(b), as such obligations may be obligations imposed by the applicable laws. 82 The provisions in sub-part (d) also deal with security on the site by requiring the contractor to provide fencing, lighting, guarding and watching. The contractor may want to require the employer to agree that all persons for whom he is responsible will comply with the safety regulations that the contractor has established for the site. The obligations contained in sub-paragraphs (d) and (e) may form part of what sub-clause 4.1 describes as the "arrangements and methods which the contractor proposes to adopt for the execution of the works". 83 Orange Book sub-clause 4.17 contains similar requirements, but does not contain the express obligations set forth in sub-parts (b) and (c) of Silver Book 4.8 above. Sub-clauses 4.8 of the Red and Yellow Books are identical to the Silver Book. The specific obligation that the contractor comply with all applicable safety regulations is most specifically stated in the AlA, AGC and DBIA, which require the contractor to comply with all safety laws (AlA 6.3-Part 2, AGC 3.4.4, DBIA 2.8.2). The ICE states more generally in sub-clause 26(3) that the contractor shall conform with all laws. ENAA sub-clause 22.3 requires the employer and contractor to establish site regulations for the safety of the works. The EIC contains no express requirement that the contractor comply with safety regulations. The contractor's obligation to take care for the safety of all persons on the site is expressly contained in all of the non-FIDICs, with the exception of the ENAA (see EIC 6.8(a), ICE 19(1), AlA 6.2-Part 2, AGC 3.2.6, DBIA 2.8.1). The ENAA again imposes simply the requirement that the employer and the contractor establish site regulations for the safety of the works, which will presumably include provisions regarding safety of persons on the site (ENAA 22.3). With regard to the obligation to keep the works free of unnecessary obstruction to avoid danger to persons on the site, the non-FIDICs take varied approaches. The EIC and ICE are the most similar to the Silver Book

82 8)

FIDle Guide, op. cit. n. 37, p. 110. ibid., p. 110.

170

I

t '.:

requiring the contractor to keep the works in an orderly state to avoid danger to persons on the site (EIC 6.8(a), ICE 19(1)). The ENAA requires the contractor to keep the site free of unnecessary obstruction during the course of the works but makes no specific mention of the goal of avoiding danger to persons on the site (ENAA 22.6.1). Under the DBIA, the contractor must keep the site free of debris, trash and waste to ensure safety (DBIA 2.7.6). This is more specific and less inclusive than an obligation regarding to keep the site free from unnecessary obstruction to avoid danger. The AlA and AGC only require the contractor to keep the site free of waste and rubbish but make no specific mention of safety concerns (AlA 3.2.13-Part 2, AGC 3.2.9). The ENAA, EIC and ICE all require the contractor to provide fencing, lighting, guarding and watching of the works (ENAA 22.7, EIC 6.8(b), ICE 19(1)). The AGC is much less specific indicating simply that the contractor must take resonable steps to avoid injury, loss or damage to persons or property (AGC 3.4.2). The AlA and DBIA contain no provisions regarding fencing, lighting and guarding. The obligation to provi~e any temporary works necessary for the use and protection of the public and owners and occupiers of adjacent land is similar to the specific obligation regarding fencing and guarding, yet broader. The AGC is the most similar to the FIDIC books, requiring generally that the contractor erect and maintain necessary safeguards for the protection of the works and the public (AGC 3.4). The AlA requires the contractor to take reasonable precautions to protect other or adjacent property (AlA S.2-Part 2), but this focuses only on property and not on protection of people. The ENAA, EIC, ICE and DBIA contain no all-encompassing provisions for any temporary works to protect the public and adjacent landowners and are limited to the specific items of protection enumerated in the preceding paragraph.

8-S0

4.9 Quality Assurance

The Contractor shall institute a quality assurance system to demonstrate compliance with the requirements of the Contract. The system shall be in accordance with the details stated in the Contract. The Employer shall be entitled to audit any aspect of the system. Details of all procedures and compliance documents shall be submitted to the Employer for information before each design and execution stage is commenced. When any document of a technical nature is issued to the Employer, evidence of the prior approval by the Contractor himself shall be apparent on the document itself. Compliance with . the quality assurance system shall not relieve the Contractor of any of his duties, obligations or responsibilities under the Contract.

171

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

8-51

The preparation and implementation of a quality assurance system is essential for there to be proper progress of the design and construction-of the works. Compliance with the quality assurance system is equally important to the contractor and the employer. The contractor wishes to perform each task properly the first time and also wishes to ensure that the works will conform to the employer's requirements when completed. Quality assurance is particularly important in certain industries, such as in the design and construction of industrial plants. The FIDIC Guide does recognise, however, that a quality assurance system "may be inappropriate for some Works or for work in some countries".84 This Silver Book provision is similar to the ICE sub-clause 8(3), discussed below. Neither the Silver Book nor the ICE forms provide specific sanctions for failure to apply the programme. Silver Book sub-clause 4.9 requires the contractor to use a quality assurance system whose purpose is to demonstrate to the employer the contractor's compliance with the requirements of the contract. This goes beyond the mere submission of designs and drawings for approval and confirmation of the work by as-built records. Under sub-clause 4.9, the details of the quality assurance system should be contained in the contract. The system contemplates that details of the quality assurance procedures and documents demonstrating compliance with the contract must be submitted to the employer before each design and execution stage. The Orange Book contains provisions in its sub-clause 4.8 that are nearly identical to those of the Silver Book. The Red and Yellow Book provisions in their sub-clause 4.9 are identical to the Silver Book, except that it is the engineer who intervenes in this process, rather than the employer. Of the non-FIDIC contracts, only the ICE in its sub-clause 8(3) imposes the requirement of the quality assurance system. However, it requires such a system only to the extent required by the contract. None of the other nonFIDIC contracts discussed herein contain provisions regarding a quality assurance system. The ICE Contract requires the consent of the employer's representative regarding the quality assurance programme before commencement of each stage. The Silver Book requires submission of the programme before co~mencement of each stage but only gives the employer the power to audIt the programme. The employer may wish to amend the Silver Book provision to require consent of the employer regarding the quality assurance system prior to each stage in a fashion similar to that of the ICE contract.

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4.10 Site Data

face and hydrological conditions at the Site, including environmental aspects. The Employer shall similarly make available to the Contractor all such data which come into the Employer's possession after the Base Date. The Contractor shall be responsible for verifying and interpreting all such data. The Employer shall have no responsibility for the accuracy, sufficiency or completeness of such data, except as stated in Sub-Clause 5.1 [General Design Responsibilities.] The tender phase is substantially more important in a turnkey or EPC 8-53 contract because the design must be in an advanced stage of completion in order for the contractor to determine his lump-sum price. The site information gathered and shared by the parties is of vital importanc~, as it ~iIl affect the employer's requirements, the designs tendered and WIll provIde guidance with regard to the magnitude of certain risks, such as subsurface conditions. Since the site information will determine to a significant extent the contractor's potential liability under the contract, the parties must attribute responsibility for site information and site data among themselves. Silver Book sub-clause 4.10 deals with the important issue of site data and some related responsibilities. Silver Book 4.10 requires the employer to make available to the contractor prior to the base date all relevant data in the employer's possession on subsurface and hydrological conditions at the site.85 If the employer has no such data, the sub-clause does not impose a requirement for him to obtain this information. However, it does impose an ongoing duty to make available any data that employer obtains after the base date. If the employer does make data on hydrological and subsurface conditions available, the contractor has the responsibility of verifying and interpreting the data for accuracy, sufficiency and completeness, subject to certain exceptions. The employer specifically disclaims responsibility for any data he eventually makes available. The sub-clause 5.1 exceptions to the contractor's responsibility mentioned in sub-clause 4.1 include (i) data and information stated in the contract as being immutable or the responsibility of the employer, and (ii) data and information that cannot be verified by the contracto(. This type of data is the employer's responsibility, unless otherwise stated. Note that this sub-clause does not state the contractor's general responsibility for site conditions, which is covered in sub-clause 4.12, but only his responsibility for employerprovided site data. The contractor may want to specify that the employer is responsible for the accuracy of any data provided. The effect of Silver Book 4.10 is that einployer-provided data may be useless unless easily verifiable. If the site data provided by the employer describes site conditions that may subject the contractor to substantial liability, such as for subsurface conditions, the

The Employer shall have made available to the Contractor for his information prior to the Base Date, all relevant data in the Employer's possession on subsur:

•

85 8<

FIDIC Guide, op. cit. n. 37 above, p. 111.

172

For a description of what data or information the employer might not be required to make available to the contractor under this sub-clause, see ibid., p. 113.

173

THE CONTRACTOR

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8-55

8-56

contractor will have to verify the data to be certain of his risk exposure. The process of verification will in many cases be the equivalent of obtaining the site data from scratch. Requiring the contractor to obtain or verify this site data may result in an increase in the contract price. It may also discourage tenders if the site conditions are uncertain or expensive to verify. However, the lack of employer responsibility for employer-provided data may also result in tenders which ignore to some extent the risk of subsurface conditions and which are not based on a thorough verification of the employer data. This could also have disastrous effects. To avoid these inefficiencies and risks, the employer may consider providing data for which it assumes responsibility or provide no data at all. The International Tunneling Association (ITA) comes to similar conclusions in its "Recommendations for the Contractual Sharing of Risk" .86 The ITA suggests that the employer provide all available site data to contractors at tender. This is contrary to the provisions of the Silver Book. Although this would involve some cost to the employer, it will avoid the duplication of site surveys and studies by each bidder. The ITA also suggests a defined division of responsibility for the data provided. The employer could specify the data for which he is to be held responsible and the data for which he disclaims responsibility. Orange Book sub-clause 4.9 is similar to the Silver Book provision in that the employer must make available to the contractor prior to the base date all data that he has obtained on subsurface and hydrological conditions (if any). However, the employer is under no specific obligation to provide data he obtains after the base date. The contractor's responsibility under Orange Book 4.9 is also different. He is only required to interpret this data, not verify it. Finally, the employer's responsibility or lack of responsibility for the data he would eventually provide under this sub-clause is not specifically stated. The Red and Yellow Books in sub-clause 4.10 are very similar to the Silver Book with regard to the employer's responsibility to make certain site data available whether obtained before or after the base date. However, like the Orange Book, the Red and Yellow Book provisions only impose on the contractor the responsibility for interpreting the employer-provided data, not for verifying it. Furthermore, the Red and Yellow Book do not specifically state the employer's responsibility or lack of responsibility for the site data he provides. The ENAA is unclear regarding the employer's responsibility to provide data on subsurface and hydrological conditions. Various clauses in the ENAA seem to indicate that the employer will have supplied some data to the contractor (see ENAA 9.2, 10.1, 35.1). However, these clauses simply make reference to data relating to the works provided by the employer. No

86

International Tunneling Association Working Group, op. cit. n. 7 above.

174

DISCUSSION OF SPECIFIC SUB-CLAUSES

specific ongoing responsibility regarding the supply
8-57

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

8-58

with local conditions and correlate observable conditions with the requirements of the owner's programme, schedule and budget (AlA 1.3.2-Part 1). This would seem to rule out any contractor responsibility for hydrological and subsurface conditions to the extent they were not observable. In addition, the employer's responsibility for the site data he provides is very comprehensive. The services, surveys and reports required to be provided by the employer must be furnished at the employer's expense, and the contractor shall be entitled to rely upon the accuracy and completeness of this data, except to the extent the employer advises the contractor to the contrary in writing (AlA 2.7-Part 2). Clearly, the provisions on hydrological and subsurface conditions under the AlA are favourable to the contractor. Under the AGC, the employer's obligations regarding site data are similar to those of the AlA, yet described in less detail. Under sub-clause 4.1.2.1 of the AGC, the employer has the obligation to provide site data to the contractor. This includes all necessary information describing the physical characteristics of the site, including surveys, site evaluations, legal descriptions, existing conditions, subsurface and environmental studies, reports and investigations (AGC 4.1.2.1). Like the AlA, the employer is under no specific ongoing responsibility, and no time is set on the fulfillment of the employer's obligations. The contractor does not expressly assume any responsibility for site data under the AGC, except that, if requested by the employer, the contractor might be required to provide or procure the site information and studies for which the employer would otherwise be responsible by virtue of the "additional service" clause in the AGC 3.10.3-3.10.7, subject to written agreement. With regard to the accuracy of the data, the contractor is entitled to rely upon the completeness and accuracy of the information and services regarding site data that the employer must provide (AGC 4.1.4). However, if the contractor is required to prepare this information as an "Additional Service" under the contract but subject to a separate written agreement, this written agreement should make a clear attribution of responsibility for the service and site data provided. The DBIA indicates that the employer shall provide the contractor with site surveys, geotechnical studies describing subsurface conditions and other studies describing other latent or concealed physical conditions at the site (DBIA 3.2.1). No specific time is set for fulfillment of this responsibility. The contractor is under no specific obligation regarding this site data under the contract. With regard to accuracy and completeness, the DBIA states simply that the contractor is entitled to rely upon the employer's site data in performing the work (DBIA 3.2.1). In certain countries, such as the United States, environmental laws and regulations may impose substantial clean-up obligations on the property owner where contamination of certain types is discovered. The liability involved and the cost of remediation may leave the employer unable to continue with the project. Thus, the contractor may want the right to discontinue the works if contamination is found and full indemnity from the employer if any remedial 176

work or cleanup is required. 87 The employer, on the other hand, wo~ld be able to terminate for convenience under Silver Book sub-clause 15.5 If contamination impedes his ability to continue with the pr~ject. The Ame~ican forms AlA and DBIA contain provisions regarding the discovery of environmental hazards on the site (see AlA 3.3, DBIA article 4).

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4.11 Sufficiency of the Contract Price

The Contractor shall be deemed to have satisfied himself as to the correctness and sufficiency of the Contract Price. Unless otherwise stated in the Contract, the Contract Price covers all the Contractor's obligations under the Contract (including those under Provisional Sums, if any) and all things necessary for the proper design, execution and completion of the Works and the remedying of any defects. The Silver Book assumes a fixed lump-sum price for the execution of the works. Therefore the contract price will not vary due to changes in circumstances, su~h as cost of labour or materials, except as specified in the contract. Silver Book sub-clause 4.1 accomplishes this by expressly attributing to the contractor satisfaction as to the sufficiency of the contract price. The contractor is deemed to have satisfied himself as to the correctness and sufficiency of the price, which covers all of the contractor's obligations under the contract and all things necessary for the design, execution, and completion of the works and any defe:ct remedies. The significance of this clause lies primarily in the risk associated with unknown events or circumstances which may cause delay, increase costs and for which one or the other party will be responsible. For example, if the contractor assumes all responsibility for all subsurface conditions under the Silver Book, this sub-clause 4.11 confirms that the contract price covers the contractor's contractual obligation to complete the works without any price increase for unforeseen subsurface conditions, unless otherwise stated in the contract. Orange Book sub-clause 4.10 is substantially identical to the Silver Book provision. The contractor is deemed to be satisfied as to the correctness and sufficiency of the contract price. The Orange Book states also that the contract price covers all of the contractor's obligations under the contract (OB 4.10). Like the Silver Book, the Red and Yellow Books in sub-clause 4.11 indicate that the contractor is deemed to be satisfied as to the correctness and sufficiency of the contract price. These contracts also state that the contract price is deemed to be based on all the data, interpretations, information, examination and all relevant matters that for which the contractor is .7

S.R. Brooke, "Procecting Design-Builder with Appropriate Contract Clauses" in R.F. Cushman & K.S. Taub, eds, Design-Build Contracting Handbook (Wiley Law Publications, New York, 1992) 297 at 303.

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THE CONTRACTOR

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DISCUSSION OF SPECIFIC SUB-CLAUSES

responsible under the contract. Red/Yellow Book sub-clause 4.11 states that the contract price covers all of the contractor's obligations under the contract. Under the ENAA, the contractor confirms that he entered into the contract on the basis of a reasonable examination of information relating to the works provided by the employer, information that could have been obtained by visual inspection of the site and any other data readily available (ENAA 9.2). Any failure by the contractor to acquaint himself with this information will not relieve him of his responsibility for properly estimating the difficulty or cost of executing the works (ENAA 9.2). ENAA sub-clause 11.3 states that subject to the limits of the data and information for which the contractor is deemed to have taken into account and exceptions for unforeseen conditions, the contractor is deemed to have satisfied himself as to the correctness and sufficiency of the contract price (ENAA 11.3). As in the FIDIC contracts, ENAA 11.3 states that the contract price covers all the contractor's obligations under the contract. The ErC provision is quite unlike the other provisions discussed above. EIC sub-clause 14.5 simply states the parties' acknowledgment that the contract price represents a fair and proper price. Although the contract price presumabl~ covers all of the contractor's obligations, this is not specifically stated, nor IS there any statement that the contractor is deemed to have considered certain information in agreeing to the contract price. The ICE states that the contractor shall be deemed to have satisfied himself before the contract is awarded as to the correctness and sufficiency of the rates andlor prices stated in the contract (ICE 11 (3 )(b)). The rates and/or prices cover all the contractor's obligations under the contract unless otherwise provided (ICE 11(3)(b)). ' The AlA, AGC and DBIA contain no specific provisions or representations ~egarding the sufficiency of the contract price or other presumptions regardmg the contractor. They also contain no global description of what the contract price covers. However, the contract price will cover all the contractor's obligations under the contract as a matter of law.

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4.12 Unforeseeable Difficulties

Except as otherwise stated in the Contract: (a) the Contractor shall be deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the Works; (b) by signing the Contract, the Contractor accepts total responsibility for having foreseen all difficulties and costs of successfully completing the Works; and (c) the Contract Price shall not be adjusted to take account of any unforeseen difficulties or costs. Unfore~eeable conditions are second only to variations in their frequency as a baSIS for contract price disputes between the contractor and the

178

employer. 88 The success of any construction project will depend heavily on the site conditions and their suitability for the planned construction. The risk of unforeseeable difficulties can be reduced to some extent by proper testing and investigation prior to tender. However, some risks may simply be unforeseeable. Silver Book sub-clause 4.12 imposes general responsibility on the contractor for any unforeseeable or unforeseen difficulties. It begins with a statement that the contractor is deemed to have obtained all information as to all risks and circumstances that may affect or influence the works. The contractor then accepts total responsibility for having foreseen all difficulties and costs of successfully completing the works, except as otherwise stated in the contract. The contract price will not be adjusted for any unforeseen difficulties or costs, except as otherwise stated in the contract. In short, the contractor agrees that he has foreseen all difficulties and costs of completing the works and agrees to be responsible for any additional difficulties or costs even if they were unforeseeable. Although the clause already attributes great potential liability on the contractor, adding that no extension of time for completion will be permitted for unforeseen conditions, unless otherwise provided in the contract, could strengthen the c1au$e. It is interesting to note the use of the term "unforeseeable" in the clause title and "unforeseen" in the text. A truly unforeseeable condition would be one that a contractor of a certain skill level would not have foreseen, whereas an unforeseen condition would be one that the specific contractor, party to the contract, actually did not foresee (i.e. an unforeseen condition could be foreseeable). However, to the extent that the contractor agrees to accept responsibility for having foreseen all difficulties and costs of successfully completing the work, the terms unforeseeable and unforeseen have little importance because all conditions are deemed foreseen by the contractor. This sub-clause has been criticised for being "uncompromising in the extreme" such that "it is difficult to imagine a clause which would be more threatening to contractors and which would leave them more open to unscrupulous employers".89 Under Orange Book sub-clause 4.9, the contractor is deemed to have obtained all necessary information as to risks, contingencies and all other circumstances that may influence or affect the tender. Unlike the Silver Book, the Orange Book continues by stating that the contractor is deemed to have inspected and examined the site, the employer's data and other information and to have satisfied himself as to the form and nature of the site, including subsurface conditions, hydrological and climatic conditions, the extent and nature of the work and materials necessary and the means of access to the site (OB 4.9). Although the conditions of which the contractor is deemed to be aware are of comparable scopes in the Silver and Orange Books, the contractor is not required in the Orange Book to assume full.responsibility for having foreseen all difficulties and costs. If subsurface conditions are encountered by

80 89

P.R. Hibberd, Variations in Construction Contracts (Collins, London, 1986), p. 9. EIC Guide, op. cit. n. 36 above, p. 15.

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THE CONTRACTOR

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the contractor which, in his opinion, were not foreseeable by an experienced contractor, the contractor may give notice to the employer's representative so he can inspect the conditions (OB 4.11). If the subsurface conditions were not foreseeable by an experienced contractor as of the base date, the employer's representative will determine an extension of the time for completion and/or an increase in the contract price, to the extent these result from the condition (OB 4.11). Unlike the Silver Book, the Orange Book contains at least this one specific exception for unforeseeable subsurface conditions. The Red and Yellow Books are also more similar to the Orange Book than the Silver Book regarding unforeseeable difficulties. In fact, they are less stringent with regard to the extent of the contractor's duty to foresee difficulties and costs. Red Book sub-clause 4.10 and Yellow Book sub-clause 4.10 are nearly identical and will be discussed together. Under RedlYellow Book subclause 4.10 the contractor is deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence the tender or the works, but only to the extent which was practicable taking account of cost and time. This creates a generous and very subjective gap in the contractor's responsibility. In the event of a claim for additional time or cost for an unforeseeable event, the contractor will likely argue that it was either too costly or that he had insufficient time to obtain adequate information regarding that risk. In any event, sub-clause 4.12 of the Red and Yellow Books allows the contractor to claim an extension of time and payment of costs if he encounters physical conditions which are unforeseeable and suffers delay or incurs cost as a result. The engineer determines foreseeability. The treatment of unforeseen or unforeseeable conditions clearly differs between the Silver Book and the Orange, Red and Yellow Books. Since all conditions are deemed "foreseen" by the contractor in the Silver Book, a determination of what conditions are unforeseeable by an experienced contractor or unforeseen by the specific contractor serves no purpose in the context of this clause. However, the Orange Book sub-clause 4.11 uses the standard of "not foreseeable by an experienced contractor" for subsurface conditions, and the Red and Yellow Book create an exception for conditions which are unforeseeable. In testing foreseeability, the employer's representative or engineer will take into consideration the contractor's duty to inspect and examine the site. The condition will be deemed unforeseeable only if it falls outside of the information that was or should have been discovered during the contractor's investigation or within the scope of the information of which the contractor is deemed to have been aware. (Despite the wording of the clause, certain legal systems limit the duty on the contractor to a reasonable site investigation by an experienced contractor. 90 ) In the event the Orange, Red or Yellow Books are used, the word "reasonable" may need to be added in front of any reference to things that are "foreseeable". 90

J.F.

Hoffar er ai. , "Differing Sire Condirions Claims" in R.E Cushman & D.A. Carpenrer eds, Proving and Pricing Construction Claims (john Wiley & Sons, New York, 1990), p. 219 .

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DISCUSSION OF SPECIFIC SUB-CLAUSES

As stated in the discussion of Silver Book sub-clause 4.11, the contractor 8-65 confirms under the ENAA that he entered into the contract on the basis of a reasonable examination of information relating to the works provided by the employer, information that could have been obtained by visual inspecti?n of the site and any other data readily available (ENAA 9.2). However, If. the contractor encounters on the site physical conditions or artificial obstructlons that could not have been reasonably foreseen at the date of the agreement by an experienced contractor on the basis of a reasonable examination of the information the contractor is deemed to have considered, the contractor may give notice to the employer (ENAA 35.1). The contractor is then entitled to related costs and expenses (ENAA 35.2) and an extension of time (ENAA 35.3) for the unforeseen physical conditions or artificial obstructions. The EIC is similar to the ENAA in that the contractor confirms that he entered into the contract on the basis of a reasonable examination of the data relating to the works provided by the employer, information obtained by visual inspection of the site and other data readily available to the contractor (EIC 4.4). Similarly, if the contractor encounters circumstances that could not reasonably be expected to have been taken into consideration by an experienced contractor, the contractor may give notice of the circumstances to the employer (EIC 4.7). The contractor is then entitled to an extension of time and adjustment of the contract price (EIC 4.8). Under the ICE, the contractor is deemed to have inspected and examined the site, its surroundings and any available information (ICE 11(2)). The contractor is also deemed to have satisfied himself so far as is practicable and reasonable prior to the award of the contract as to the form and nature of the site, including the ground and subsoil and hydrological conditions, the extent and nature of the works and materials necessary for construction and completing the works, the means of communication with and access to the site and the accommodations the contractor may require and to have obtained in general all information as to risks, contingencies and all other circumstances which may influence or affect his submission (ICE 11 (2)). Presumably "submission" refers to submission of tender. However, if the contractor encounters physical conditions or artificial obstructions which could not, in his opinion, reasonably have been foreseen by an experienced contractor, the contractor may give notice to the employer (ICE 12(1 )). If ~he opinion of the employer's representative is that the condition or obstruction could not reasonably have been foreseen by an experienced contractor, the contractor may be entitled to costs and an extension of time (ICE 12(6)). The employer's representative determines foreseeability (lCE 12(5)). The AlA is less specific with regard to site conditions or circumstances that 8-66 the contractor is deemed to know. It states that the contractor shall visit the site, become familiar with the local conditions and correlate observable conditions with the requirements of the employer's programme, schedule and budget (AlA 1.3.2-Part 1). However, the contractor does not accept full responsibility for all difficulties and costs. The contractor may give notice to the employer of adverse weather, unavoidable casualties, subsurface or concealed conditions differing materially from what is indicated in the contract documents and 181

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

8-67

unknown and unusual physical conditions (AlA 8.2.1, 8.S.1-Part 2). If the contractor is delayed at any time in the progress of the works by, among other things, adverse weather conditions not reasonably anticipatable, unavoidable casualties or other causes beyond the contractor's control, or by causes which the employer and contractor agree may justify delay, then the contract time shall be reasonably extended by a change order (AlA 4.S-Part 2). The contract sum shall also be equitably adjusted for concealed or unknown conditions by change order upon claim by either party (AlA 8.S.1-Part 2). Under the AGC, the contractor is not expressly deemed to have knowledge or to have anticipated any specific conditions or circumstances. However, if the contractor finds latent, concealed or subsurface physical conditions which differ from the conditions he reasonably anticipated, or if physical conditions are materially different from those normally encountered and generally recognised as inherent in the kind of work provided for in the agreement, then the contract price and/or time for completion shall be equitably adjusted by change order (AGC 8.5). In addition, if causes beyond the contractor's control delay the progress of the work, the contract price and/or the time for completion shall be modified by change order as appropriate (AGC 6.3.1). Such causes include, without limitation, differing site conditions, and acts or omissions of the owner or separate contractors employed by the owner (AGC 6.3.1). However, to the extent any delay in the progress of the work is caused by "adverse weather conditions [... ] not reasonably anticipated [... ] impacting the Project but not specifically related to the Worksite", the contractor is only entitled to its "actual costs without fee and an extension" of the date of substantial and/or final completion (AGC 6.3.2). The DBIA also does not indicate that the contractor is expressly deemed to have knowledge of or to have anticipated any specific conditions or circumstances. However, the contractor is not responsible for hazardous conditions (DBIA 4.1.1) or differing site conditions, including concealed or latent physical conditions at the site that materially differ from the conditions indicated in the contract documents or that are of an unusual nature, differing materially from the conditions ordinarily encountered and generally recognised as inherent in the work (DBIA 4.2.1). The contractor is entitled to a contract price adjustment and/or an extension of time due to hazardous conditions (DBIA 4.1.4) and differing site conditions (DBIA 4.2.1). It is important to note that special consideration is necessary where the contract or part of the contract involves tunnelling or underground works given the risk of unforeseeable ground conditions. Special conditions of contract or at least a special formulation of risk allocation are called for in such contracts. 91 Such risks materialised in the Eurotunnel project where ground conditions impeded progress and resulted in several settlement agreements modifying the contract. 92 Given the Silver Book attribution of nearly all risk

91

91

J.A. Huse, "Improving contractual practices for underground work" Tunnels and Tunnelling. ~use, Kirkland and Shumway, "The Use of the Target Concept for Tunneling Projects in Light of the Eurotunnel Experience", Options for Tunneling Conference of the International Tunneling Association, Amsterdam, the Netherlands, April 19-22, 1993.

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of subsurface conditions to the contractor, it will not be suitable for projects involving tunnelling or underground works. FIDIC recognises this in the Introductory Note to the Silver Book where it states that the Silver Book is not suitable for use "[i]f construction will involve substantial work underground or work in other areas which tenderers cannot inspect". 4.13 Rights of Way and Facilities

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The Contractor shall bear all costs and charges for special and/or temporary rights-of-way which he may require, including those for access to the Site. The Contractor shall also obtain, at his risk and cost, any additional facilities outside the Site which he may require for the purposes of the Works. Rights-of-way may need to be obtained for access to the site. In addition, storage or other construction-related facilities may need to be located offsite. These facilities may be located, for example, in the "additional areas which may be obtained by the Contractor" referred to in sub-clause 4.23. 93 Silver Book sub-clause 4.13 states that the contractor will be responsible for all costs and charges for special and temporary rights of way, including those for access to the site. It also requires the contractor to be responsible for obtaining any additional facilities outside the site necessary to complete the works. Sub-clause 4.13 of the Orange, Red and Yellow Books impose identical responsibilities on the contractor. This clause contains a certain degree of ambiguity by requiring the contractor to be responsible for "special and/or temporary rights-of-way". These terms are undefined in the contract and suggest that responsibility for standard or traditional rights of way, such as easements for electrical, cable or water lines, is not covered by this clause. Unfortunately, the contract does not otherwise indicate who is responsible for rights of way that are not special or temporary. Silver Book sub-clause 2.1 requires the employer to give the contractor right of access to and possession of all parts of the site. This may include utility easements, but this is not clear. If the intent of the parties is to make the contractor responsible for obtaining all necessary easements or rights of way, this should be clearly stated in the contract, possibly by simply amending the above sub-clause. In the alternative, "special and/or temporary rights-of-way" should be defined. The ENAA makes the employer responsible for acquiring and providing legal and physical possession of the site and access thereto (ENAA 10.1). This would seem to encompass any special or temporary rights of way required by the contractor. The ENAA makes no specific mention of off-site facilities but states that the contractor is responsible for all materials and services required to complete the works (ENAA 7.1). "Facilities" is specifically listed in sub-clause 7.1 as being the contractor's responsibility.

93

FIDIC Guide, op. cit. n. 37 above, p. 119.

183

8-69

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

4.15 Access Route

The EIC makes the employer responsible for obtaining all planning, zoning and other similar permission (ElC 3.6). Arguably, this could include special and temporary rights of way. The ElC makes no specific mention of off-site facilities. The ICE provides that the contractor shall bear all costs and charges for any access required by him additional to that provided by the employer (ICE 42(4)). This would seem to include special and temporary rights of way. The ICE also indicates that the contractor shall provide at his own cost any additional facilities outside the site required by him for the purposes of the works (ICE 42(4)). The AlA, AGe and DBlA all require the employer to obtain all easements, permits and legal authorisations for the contractor to carry out the works (AlA 2.1.8-Part I, AGC 4.1.2.3, DBIA 3.2.2). None of these contracts make any specific mention of off-site facilities.

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The Contractor shall indemnify and hold the Employer harmless against and from all damages, losses and expenses (including legal fees and expenses) resulting from any such unnecessary or improper interference.

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The Contractor shall be deemed to have been satisfied as to the suitability and availability of access routes to the Site. The Contractor shall use reasonable efforts to prevent any road or bridge from being damaged by the Contractor's traffic or by the Contractor's Personnel. These efforts shall include the proper use of appropriate vehicles and routes. Except as otherwise stated in these Conditions: (a) the Contractor shall (as between the Parties) be responsible for any maintenance which may be required for his use of access routes; (b) the Contractor shall provide all necessary signs or directions along access routes, and shall obtain any permission which may be required from the relevant authorities for his use of routes, signs and directions; (c) the Employer shall not be responsible for any claims which may arise from the use or otherwise of any access route, (d) the Employer does not guarantee the suitability or availability of particular access routes, and (e) Costs due to non-suitability or non-availability, for the use required by the Contractor, of access routes shall be borne by the Contractor.

4.14 Avoidance of Interference The Contractor shall not interfere unnecessarily or improperly with: (a) the convenience of the public, or (b) the access to and use and occupation of all roads and footpaths, irrespective of whether they are public or in the possession of the Employer or of others.

This Silver Book provision requires the contractor to avoid interfering with public convenience and access to and use of roads and footpaths. The contractor agrees to indemnify and hold the employer harmless against and from all damages, losses and expenses caused by the contractor's failure to comply with these requirements. The Red and Yellow Books contain identical provisions in their respective sub-clauses 4.14. The ICE contains provisions similar to the Silver Book requiring that the contractor's operations do not interfere with public convenience or the use of and access to roads (ICE 29( 1 )). The ICE also contains an indemnity provision similar to that of the Silver Book (ICE 29(1)). The AlA requires the contractor to prevent damage, injury and loss to things on the site and to adjacent property, including trees, shrubs, walks, pavements, roadways, structures and utilities (AlA 6.2-Part 2). It does not contain indemnity provisions specific to this responsibility but states generally that the contractor must indemnify the employer for bodily injury and property damage claims resulting from the contractor's negligent acts and omissions (AlA 11.5.1-Part 2). The Orange Book, ENAA, ElC, AGC and DBlA contain no provision similar to Silver Book 4.14. However, they all contain general indemnity provisions regarding contractor negligence. 184

8-72

The parties must consider not only the contractor's possession of the site but also how the contractor will access the site, along with his equipment. Roads and bridges may need to be reinforced to support the weight or size of the plant and equipment to be brought to the site. Access routes may need to be improved, extended or created, particularly where the construction calls for unorthodox methods of access. Silver Book sub-clause 4.15 lists in great detail the contractor's obligations regarding access routes. The contractor is deemed to be satisfied as to the suitability and availability of access routes to the site and agrees to protect from damage routes used by the contractor and his personnel, maintain such routes and post any necessary signs and directions. The FIDIC Guide notes that "route" does not imply a road exists, merely that "there is a route by which access would be physically practicable" .94 The employer disclaims any responsibility for access routes or any claims related thereto. Orange Book sub-clause 4.12 contains all these same provisions, except for the express obligation to prevent damage to the routes. The Red Book and Yellow Book provisions in sub-clause 4.15 are identical to the Silver Book. The ENAA states that the employer is responsible for providing access to the site (ENAA 10.2), but contains no other provisions similar to Silver Book 4.15. The ElC contains no similar provisions regarding access routes. The ICE indicates that the contractor is deemed to have satisfied himself as to access to the site (ICE 11(2)(c)), but also states that the employer shall give the contractor access to the site as may be required to enable the contractor to carry out the works with due di:spatch (lCE 42(2)(a)). 9~

FIDIC Guide, op. cit. n. 37 above, p. 121.

185

8-73

THE CONTRACTOR

DISCUSSION OF SPECIFIC SUB-CLAUSES

However, the contractor bears the cost and charges for any additional access required (ICE 42(4)). The ICE further requires that the contractor use every reasonable means to prevent highways and bridges from being subjected to extraordinary traffic and to ensure that no unnecessary damage or injury is occasioned to these roadways (ICE 20( 1)). The contractor does not have a specific maintenance obligation but is required to pay the cost of strengthening any bridges or improving any road access to the site (ICE 30(2)). However, the contractor is not specifically responsible for sign and directions on the routes. The ICE does provide that the contractor must indemnify the employer against all claims for damage to any highway or bridge (ICE 30(2)), except for damages caused by the transport of materials not attributable to any fault of the contractor (ICE 30(3)). The AlA, AGC and DBIA contain no provisions similar to Silver Book 4.15. 95

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4.16 Transport of Goods Unless otherwise stated in the Particular Conditions: (a) the Contractor shall give the Employer not less than 21 days' notice of the date on which any Plant or a major item of other Goods will be delivered to the Site; (b) the Contractor shall be responsible for packing, loading, transporting, receiving, unloading, storing and protecting all Goods and other things required for the Works; and (c) the Contractor shall indemnify and hold the Employer harmless against and from all damages, losses and expenses (including legal fees and expenses) resulting from the transport of Goods, and shall negotiate and pay all claims arising from their transport. Sub-clause 4.17 sets forth the contractor's responsibilities regarding the transport and delivery of plant and other goods required for the works. The contractor must give the employer 21 days' notice of each delivery, and the contractor is responsible for all aspects of the packing, transport, receiving and protection of all these goods. The contractor also agrees to indemnify the employer for any loss relating to the transport of goods. The FIDIC Guide notes that such indemnity may be inappropriate in certain circumstances such as where the contract stipulates the manner in which an item of plant or materials is to be transported (such as in one large piece) and this method of transportation results in damage (such as to a bridge). 96 The Orange Book contains no specific notice requirement but does require the contractor to be responsible for all aspects of the goods transport (OB 7.2). The Orange Book also contains no specific indemnification obligation. Red Book and Yellow Book sub-clause 4.16 is identical to the Silver Book, 95 96

However, certain clauses in these contracts may address the issue indirectly; see discussion under Silver Book sub·c1ause 4.13 above. FIDIC Guide, op. cit. n. 37 above, p. 122.

186

except that it is the engineer who receives the notices rather than the employer. The ENAA requires the contractor to notify the employer of the shipping details upon dispatch of each shipment of goods (ENAA 21.4.3). In addition, the contractor is generally responsible for the transport of all materials and construction equipment to the site (ENAA 21.4.1). However, the ENAA contains no specific indemnification provision. The EIC, ICE, AlA, AGC and DBIA contain no provisions regarding notice of transport of goods and materials. The EIC, ICE and AlA make the contractor generally responsible for the transport of goods and equipment (EIC 6.9, ICE 8(1), AlA 3.2.5-Part 2), while the AGC and DBIA simply make the contractor generally responsible to provide the things necessary to complete the works (AGC article 3, DBIA 2.7.1). None of these contracts contain indemnification provisions specifically referring to loss or damage relating to the transport of goods and materials, with the exception of the ICE 30(3) under which the contractor must indemnify the employer for damages to roads and highways caused by the transport of materials.

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8-76

4.17 Contractor's Equipment The Contractor shall be responsible for all Contractor's Equipment. When brought on to the Site, Contractor's Equipment shall be deemed to be exclusively intended for the execution of the Works. The contractor will require certain equipment to construct the works. This equipment is not intended to be incorporated into the works. The contractor generally provides this equipment, though the employer may prefer to provide certain equipment in order to save cost or ensure quality. This equipment is vital to the progress of the project. Its loss, damage or removal before completion could have a negative impact on the time for completion. Silver Book 'sub-c1ause 4.17 simply states the contractor's responsibility for contractor's equipment, which is defined in the Silver Book as: all apparatus, machinery, vehicles and other things required for the execution and completion of the Works and the remedying of any defects. However, Contractor's Equipment excludes Temporary Works,. Employer's Equipment (if any), Plant, Materials and any other things intended to form or forming part of the Permanent Works. (SB 1.1.5.1.) This equipment is deemed to be exclusively intended for the execution of the works once it is brought onto the site. Orange Book 4.16 is the same as the Silver Book provision, except that the consent of the employer's representative is required before any contractor's equipment is removed from the site. Sub-clause 4.17 of the Red and Yellow Books is also the same, but with a similar prohibition that such equipment may not be removed from the site without the engineer's consent. 187

THE CONTRACTOR

8-77

DISCUSSION OF SPECIFIC SUB-CLAUSES

ENAA 22.2.1 states the contractor's responsibility for the contractor's equipment and also includes a restriction against removal until it is no longer required for execution of the works. The EIC makes no specific statement regarding the contractor's equipment responsibilities. The ICE, AlA and AGC simply make the contractor responsible for providing construction equipment (ICE 8(1), AlA 3.2.5-Part 2, AGC 3.2.2). The DBIA states even more generally that the contractor must provide the elements necessary to complete the works (DBIA 2.7.1). Neither the ENAA, EIC, ICE, AlA, AGC or DBIA contain language indicating that the equipment is intended exclusively for the execution of the works. There are two issues relating to contractor's equipment that should be examined during any contract negotiation. First, if provisions are suggested relating to contractor's equipment or equipment generally, these terms should be clearly defined. Absent clear definition, it may be difficult to distinguish between goods, materials, equipment and plant. For example, the contractor will not want a provision relating to equipment to be incorporated into the works to be applicable to the contractor's equipment that is not intended to be incorporated. This situation leads to the second issue: the ~otential transfer of ownership of equipment to the employer until completIOn of the works. Some contracts may contain provisions under which the contractor agrees not only to leave his equipment on the site until the employer consents to removal or until it is no longer required, but also to transfer ownership of his equipment to the employer until the works are taken over or until some other period. The employer may attempt to use this co.nditional transfer as additional completion security. More importantly, thIS transfer .m~y occur unbeknownst to the contractor if contractor's equipment falls wlthm a transfer of ownership of goods, materials and equipment generally. If contractor's equipment is not properly distinguished from equipment to be incorporated in the works, such a provision may produce an unexpected and unwanted result.

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4.18 Protection of the Environment

The Contractor shall take all reasonable steps to protect the environment (both on and off the Site) and to limit damage and nuisance to people and property resulting from pollution, noise and other results of his operations. The Contractor shall ensure that emissions, surface discharges and effluent from the Contractor's activities shall not exceed the values indicated in the Employer's Requirements, and shall not exceed the values prescribed by applicable Laws.

completion. 97 Sub-clause 4.18 of the Orange, Red and Yellow Books is identical to the Silver Book provision. The ENAA contains no provision regarding protection of the environment. The EIC states that the contractor shall take reasonable steps to protect the environment on and off the site and to avoid damage and nuisance to other people (EIC 6.8(c)). The ICE requires that the work be carried out without unreasonable noise, disruption or pollution (ICE 29(2)). The AlA contains no specific environmental provisions but requires simply that the contractor comply with all laws (AlA 3.2.11), which would include environmental laws. The AGC and DBIA also contain no specific environmental protection provisions, other than instructions on how to proceed if hazardous conditions are encountered (AGC 3.5, DBIA 4.1). However, like the AlA, the contractor is generally required to comply with all laws in AGC 3.2.3 and DBIA 2.5.1. Environmental regulation in most jurisdictions has grown in complexity and efficiency over the past 20 years. This regulation can have serious effects on both parties to a construction contract, regardless of fault. 98 Silver Book sub-clause 4.18 attempts to cover environmental damage by the contractor both on and off site, from his operations. However, this coverage may be insufficient. There are two stages of liability for effects the works may have on the environment: (i) responsibility during design and construction and (ii) responsibility during operations. The Silver Book language attempts to cover the first stage, but imposes no obligations on the contractor with regard to environmental effects during operation of the W9rks caused by the contractor's design. In general, Silver Book sub-clause 4.18 (along with all the other industry forms discussed herein) appears largely inadequate for either party to protect their positions regarding environmental liability. The contractor should attempt to obtain full indemnity from the employer from and against any liability for environmental hazards encountered on the site. The employer will also want to insert clearer provisions regarding potential contamination of the site caused by the contractor or contamination caused by operation of the works but due to the contractor's design. Although an exhaustive discussion of environmental liability is beyond the scope of this book, the AGC and DBIA can be consulted for ideas on how to deal with environmental hazards encountered on the site. In addition, in certain projects where environmental issues are of particular concern, it may be desirable to engage an environmental consultant to provide a full analysis of potential environmental liability in all aspects of

'7

This Silver Book sub-clause simply states the general requirements placed on the contractor regarding protection of the environment and avoiding nuisance to other people and property. It anticipates that the employer's requirements will set limits on emissions and discharges, which must not be exceeded by the contractor. Such limits could also form part of the tests after 188

•8

FIDIC Guide, op. cit. n. 37 above, p. 124 . For example, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) of the United States (Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) 26 U.S.c. S 4611-4682 (1980)) may impose strict liability on the contractor for environmental clean-up not only where the subsrance comes from the contractor's activities on the site, but also due to the contractor's operation of the site, regardless of the origin of the waste involved. Comen, "Environmental Issues", in Design-Build Contracting Handbook (Cushman and Sperling Taub eds, 1992), p. 219.

189

8-79

8-80

DISCUSSION OF SPECIFIC SUB-CLAUSES

THE CONTRACTOR

8-81

The Employer shall make the Employer's Equipment (if any) available for the use of the Contractor in the execution of the Works in accordance with the details, arrangements and prices stated in the Employer's Requirements. Unless otherwise stated in the Employer's Requirements: (a) the Employer shall be responsible for the Employer's Equipment, except that (b) the Contractor shall be responsible for each item of Employer's Equipment whilst any of the Contractor's Personnel is operating it, driving it, directing it or in possession or control of it.

4.19 Electricity, Water and Gas

The Contractor shall, except as stated below, be responsible for the provision of all power, water and other services he may require. The Contractor shall be entitled to use for the purposes of the Works such supplies of electricity, water, gas and other services as may be available on the Site and of which details and prices are given in the Employer's Requirements. The Contractor shall, at his risk and cost, provide any apparatus necessary for his use of these services and for measuring the quantities consumed.

The appropriate quantities and the amounts due (at such stated prices) for the use of Employer's Equipment shall be agreed or determined in accordance with Sub-Clause 2.5 [Employer's Claims) and Sub-Clause 3.5 [Determinations). The Contractor shall pay these amounts to the Employer.

The quantities consumed and the amounts due (at these prices) for such services shall be agreed or determined in accordance with Sub-Clause 2.5 [Employer's Claims) and Sub-Clause 3.5 [Determinations). The Contractor shall pay these amounts to the Employer. 8-82

The employer will often have available on-site sources of electricity, water or other services necessary for the construction of the works. Allowing the contractor to use such supplies can decrease the contract price and facilitate the contractor's task. Silver Book sub-clause 4.19 sets forth the contractor's responsibilities and rights regarding supplies of electricity, water and gas. As stated above, except as otherwise provided, the contractor is responsible for all power, water and other services he may require. However, the contractor is entitled to use any supplies of electricity, water, gas or other services that may be available on site. If so, details of these supplies and prices should be included in the employer's requirements. If any supplies are used, the contractor is responsible for providing any measuring devices to record usage. The contractor is then obligated to pay the employer for use of these supplies and services, if any. Where "the Contractor will need to rely upon the continued availability of a service, the contract should indicate who bears the cost of a failure in the supply".99 Sub-clause 4.19 of the Red and Yellow Books is substantially identical to the Silver Book provision. The Orange Book does not state that the contractor is specifically responsible for power, water and other services, but it does indicate in its sub-clause 4.19 that he may use on-site supplies and services. The contractor must pay for these supplies and services but does not have the express obligation to provide any measuring apparatus. With the exception of the ElC, all of the non-FlOlC contracts contain some provision generally indicating the contractor's responsibility for utilities (ENAA 7.1, ICE 8(1), AlA 3.2.5-Part 2, AGC 3.2.2, DBIA 2.7.1). However, none of the non-FIDIC contracts discuss on-site provision of power, water or other services.

The Employer shall supply, free of charge, the "free-issue materials" (if any) in accordance with the details stated in the Employer's Requirements. The Employer shall, at his risk and cost, provide these materials at the time and place specified in the Contract. The Contractor shall then visually inspect them, and shall prom'pdy give notice to the Employer of any shortage, defect or default in these materials. Unless otherwise agreed by both Parties, the Employer shall immediately rectify the notified shortage, defect or default. After this visual inspection, the free-issue materials shall come under the care, custody and control of the Contractor. The Contractor's obligations of inspection, care, custody and control shall not relieve the Ejnployer of liability for any shortage, defect or default not apparent from a visual inspection. The employer may wish to provide certain equipment or materials for the construction of the works. In that regard, Silver Book sub-clause 4.20 indicates that the employer must make the employer's equipment (if any) available to the contractor in accordance with the employer's requirements. The contractor agrees to be responsible for such equipment while he is using it or in control of it. If there are stated charges for the use of employer's equipment, the amounts due will be determined in accordance with the employer's claims provisions in sub-clause 3.5, and the contractor must pay these amounts to the employer. If the employer's requirements list "free-issue materials" the employer must provide these to the contractor free of charge and must rectify any shortage or defect signaled by the contractor. Where the employer is to supply the contractor with either equipment or "free-issue materials", specifications regarding this issue should be set out in the employer's requirements.! Sub-clause 4.20 of the Orange Book contains requirements similar to those of Silver Book 4.20. The Red and Yellow Book 4.20 provisions are also identical to the Silver Book, except that any notices are given to the engineer, rather than the employer. I

99

F1DIC Guide, op. cit. n. 37 above, p. 125.

190

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4.20 Employer's Equipment and Free-Issue Material

the project in order for the parties to attribute responsibility accordingly in the turnkey contract.

FIDIC Guide, op. cit. n. 37 above, p. 126; see also for an indication of issues to consider in this setting out, p. 126.

191

8-84

THE CONTRACTOR

DISCUSSION OF SPECIFIC SUB-CLAUSES

The ENAA contains provisions that are nearly identical to the Silver Book regarding employer's equipment and free-issue materials in ENAA subclause 21.2. However, the EIC, ICE, AlA, AGC and DBIA contain no such provisions. The World Bank does not recommend the provision of materials by the employer. It suggests instead the treatment of such provision as a nominated subcontract. 2

8-85

4.21 Progress Reports

Unless otherwise stated in the Particular Conditions, monthly progress reports shall be prepared by the Contractor and submitted to the Employer in six copies. The first report shall cover the period up to the end of the first calendar month following the Commencement Date. Reports shall be submitted monthly thereafter, each within 7 days after the last day of the period to which it relates. Reporting shall continue until the Contractor has completed all work which is known to be outstanding at the completion date stated in the Taking-Over Certificate for the Works. Each report shall include: (a) charts and detailed descriptions of progress, including each stage of design, Contractor's Documents, procurement, manufacture, delivery to Site, construction, erection, testing, commissioning and trial operation; (b) photographs showing the status of manufacture and of progress on the Site; (c) for the manufacture of each main item of Plant and Materials, the name of the manufacturer, manufacture location, percentage progress, and the actual or expected dates of: (i) commencement of manufacture, (ii) Contractor's inspections, (iii) tests, and (iv) shipment and arrival at the Site; (d) the details described in Sub-Clause 6.10 [Records of Contractor's Personnel and Equipment]; (e) copies of quality assurance documents, test results and certificates of Materials; (f) list of Variations, notices given under Sub-Clause 2.5 [Employer's Claims] and notices given under Sub-Clause 20.1 [Contractor's Claims]; (g) safety statistics, including details of any hazardous incidents and activities relating to environmental aspects and public relations; and (h) comparisons of actual and planned progress, with details of any events or circumstances which may jeopardize the completion in accordance with the Contract, and the measures being (or to be) adopted to overcome delays. 1

World Bank "Standard Bidding Documents for the Procurement of Works" (Washington, D.C., World Bank, 2000) online: World Bank http://www. woridbank.orglhtmUopr/biddocsl workslw-titlpg.htm (date accessed: July 16,2001) at 118.

192

A turnkey or EPC contract must provide for methods that will enable the employer to verify the progress and quality of the work performed. Progress reports are one aspect of this system of verification. Silver Book sub-clause 4.21 enumerates the contractor's obligations regarding progress reports. The reports must be submitted monthly and continue until all outstanding work stated in the taking-over certificate is completed. The Silver Book provision gives an exhaustive list of the elements to be contained in each report, as indicated above. 3 Contractors may consider some of these requirements to be unduly burdensome, expensive or unnecessary particularly if the employer appoints a representative to be on site who can inform the employer of progress. Indeed, the provisions of this sub-clause have been criticised for being "unnecessarily detailed and over prescriptive".4 The parties will need to discuss carefully the requirements of the progress reports. The Orange Book contains provisions for progress reports in its sub-clause 4.15 similar to the Silver Book requirements. However, the Orange Book is slightly less comprehensive with regard to the details and elements to be contained in the reports. Sub-clause 4.21 of the Red and Yellow Book is nearly identical to the Silver Book, but the reports are submitted to the engineer rather than the employer. In addition, there are some minor differences in the Red and Yellow Books as to what the progress reports contain. The ENAA contains a monthly progress report in its sub-clause 18.3, but the provisions and requirements are not as detailed as in the Silver Book. The EIC also requires a monthly progress report but does not indicate exactly what the report must contain (EIC 7.1). The EIC simply requires a report on the progress of the design and the works. The ICE contains no progress report provisions. The AlA also does not have provisions for progress reports but does indicate that the contractor must keep the employer informed of the progress and quality of the work (AlA 3.2.7-Part 2). AGC sub-clause 3.2.6 requires periodic written reports to the employer on the progress of the work, as agreed between the employer and the contractor. The employer and contractor are expected to come to some agreement on the nature of the written reports. No specific requirements are stated. The DBIA requires a similar report on a monthly basis (DBIA 2.1.2). The DBIA lists the report contents in some detail, yet still to a lesser extent than the Silver Book.

8-86

4.22 Security of the Site

8-88

Unless otherwise stated in the Particular Conditions: (a) the Contractor shall be responsible for keeping unauthorised persons off the Site, and The FIDIC Guide notes, however, that less detailed reports may be inappropriate for some projects (FIDIC Guide, op. cit. n. 37 above, p. 129). • EIC Guide, op. cit. n. 36 above, p. 16. 3

193

8-87

THE CONTRACTOR

(b)

8-89

DISCUSSION OF SPECIFIC SUB-CLAUSES

authorised persons shall be limited to the Contractor's Personnel and the Employer's Personnel; and to any other personnel notified to the Contractor, by (or on behalf of) the Employer, as authorised personnel of the Employer's other contractors on the Site.

The need for security is paramount in a construction project. A comprehensive security programme will protect the parties from the costs and delays resulting fr.om theft of materials or equipment and also reduce the possibility of injury to third persons present on the site. Nonetheless, despite the title of this sub~lause, the. provisions for certain aspects of site security, such as fencing, lightIng, guardIng and watching, are contained in Silver Book sub-clause 4.8. Silver ~ook sub-clause 4.22 primarily requires the contractor to keep unauthorIsed persons off the site. It also limits the scope of which persons are authorised to be on the site. Whether these limited provisions contained in sub-clause 4.22 justify a provision separate from 4.8 is questionable. The Orange Book contains substantially similar provisions in its sub-clause 4.22. The provisions in sub-clause 4.22 of the Red and Yellow Books are also identical to the Silver Book provision. The ENAA does not contain this express obligation but does indicate that the employer and the contractor shall establish site regulations for security (ENAA 22.3). The EIC, ICE, AlA, AGC and DBIA contain no provision similar to Silver Book 4.22.

8-90

4.23 Contractor's Operations on Site The Con~ractor shall confine his operations to the Site, and to any additional areas which may be obtained by the Contractor and agreed by the Employer as working a~eas. ~he Contractor shall take all necessary precautions to keep Contractor s EqUipment and Contractor's Personnel within the Site and these additional areas, and to keep them off adjacent land. During the execution of the Works, the Contractor shall keep the Site free from all ~nnecessary obstruction, and shall store or dispose of any Contractor's EqUipment or surplus materials. The Contractor shall clear away and remove from the Site any wreckage, rubbish and Temporary Works which are no longer required. Upon the issue of the Taking-Over Certificate for the Works, the Contractor shall clear awa~ and remove all Contractor's Equipment, surplus material, wreckage, rubbish and Temporary Works. The Contractor shall leave the Site and. the Wo~ks in a. clean and safe condition. However, the Contractor may retain on Site, dUrIng the Defects Notification Period such Goods as are required for the Contractor to fulfil obligations under th; Contract.

8-91

Turnkey construction, in theory, envisions the contractor's handing over ~o the employer a completed project ready for use. This will necessarily Involve the clearance from the site of debris or temporary works or equipment not integrated into the works. The contractor should be aware that he

194

is taking on the duty to keep the entire site clear both during the construction period and upon taking over. The wording of this clause suggests that the contractor will be responsible for rubbish, wreckage and surplus materials resulting from other contractors and the employer's staff. Depending on the nature of the work to be undertaken by other contractors and the employer himself, this duty could be costly and burdensome. The parties may also need to consider treatment of hazardous materials and their disposal. Silver Book sub-clause 4.23 imposes several obligations on the contractor regarding his operations on the site. Silver Book 4.23 requires the contractor to confine his operations to the site. The contractor must also keep the site free from unnecessary obstruction, store and dispose of equipment and materials and clear away wreckage and rubbish. Upon the employer's taking over, the contractor must also clear the site. It should be noted that clearance of the site follows the taking-over certificate and thus such a certificate "cannot be withheld for the sole reason that rubbish has not yet been removed, unless it prejudices safe use".5 Red and Yellow Book sub-clause 4.23 contains substantially identical provisions. The Orange Book contains in sub-clause 4.23 an obligation for the contractor to confine his operations to the site but does not have provisions regarding keeping the site free of obstruction and unnecessary materials, the clearing of wreckage and rubbish or clearance of the site upon employer taking over. The ENAA contains no provision requiring the contractor to confine his operations to the site. However, it does require him to keep the site free of unnecessary obstructions, to store and dispose of equipment and materials and to clear away wreckage and rubbish (ENAA 22.6.1). ENAA 22.2.2 provides that upon completion the contractor shall clear the site, and sub-clause 22.6.2 adds that all wreckage, rubbish and debris must be cleared upon completion and the site left in a clean and safe condition. The EIC and ICE contain no provisions regarding the confinement of the contractor's operations to the site, keeping the site free of obstructions or clearing away wreckage and rubbish during the construction process. However, they both require the contractor to clear the site upon completion with requirements nearly identical to those in Silver Book 4.23 (see EIC 6.10 and ICE 33). The AlA, AGC and DBIA do not expressly require the contractor to confine his operations to the site or impose a general requirement to keep the site free of unnecessary obstruction or store and dispose of equipment and materials. However, all three do impose a general requirement that the contractor keep the site clear of debris, waste, materials and rubbish and to clear the site upon completion (AlA 3.2.13-Part 2, AGC 3.2.8, DBIA 2.7.6).

5

HDle Guide, op. cit. n. 37 above, p. 130.

195

8-92

THE CONTRACTOR

8-93

DlSCUSION OF SPECIFIC SUB - CLAUSES

4.24 Fossils All fossils, coins, articles of value or antiquity, and structures and other remains or items of geological or archaeological interest found on the Site shall be placed under the care and authority of the Employer. The Contractor shall take reasonable precautions to prevent Contractor's Personnel or other persons from removing or damaging any of these findings. The Contractor shall, upon discovery of any such finding, promptly give notice to the Employer, who shall issue instructions for dealing with it. If the Contractor suffers delay and/or incurs Cost from complying with the instructions, the Contractor shall give a further notice to the Employer and shall be entitled subject to Sub-Clause 20.1 [Contractor's Claims) to: (a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion), and (b) payment of any such Cost, which shall be added to the Contract Price. After receiving this further notice, the Employer shall proceed in accordance with Sub-Clause 3.5 [Determinations) to agree or determine these matters.

8-94

8-95

The contractor may encounter items of value buried on the site, such as fossils or antiquities. This provision may be of particular relevance where the site is located in countries where buried antiquities are common and the domestic legal system has a sophisticated procedure for the care of such articles. Silver Book sub-clause 4.24 contains the provisions regarding the manner in which fossils and other archaeological finds must be dealt with upon discovery by the contractor. Generally, they must be turned over to the employer, and the contractor must take care to prevent damage to any finds. If the handling of these artifacts causes the contractor to incur additional costs or delays, these may be recuperated from the employer. The FIDIC Guide explains the absence of any reference to the "foreseeability" of the discovery of fossils and the like, as "the contract should specify the procedure in respect of foreseeable findings".6 The Orange Book contains nearly identical provisions in its sub-clause 4.24, although the Orange Book provisions are narrower in scope than those of the Silver Book. 7 Red and Yellow Book sub-clause 4.24 is identical to the Silver Book, except that notice of the finds is given to the engineer rather than the employer. The ICE contains provisions very similar to the Silver Book in sub-clause 32. However, the ENAA, EIC, AlA, AGC and DBJA contain no provisions regarding fossils and archaeological finds. Although Silver Book clause 4 is entitled "The Contractor" and contains many of the contractor's obligations, other obligations of the contractor can

6

7

ibid., p. 131. B. De Cazalet & R. Reece, "The New FIDIC EPC BOT Contract" (1999) Project Finance Int'l, online: FIDIC hnp:llwww.fidic.org!resources!contracts/bocpfi _nov99.asp (date accessed: July 4, 2001).

196

be found thro.ughout the contract as a whole. As the contractor's primary obligations are found in clause 4, it seems appropriate to provide a clauseby-clause summary of the contractor's key obligations under the Silver Book as a conclusion to this chapter.

Key Obligations of the Contractor in the Silver Book . Clause ~.

Clause 1 1.8

~(~,'~

Nature' of the contractor's·obligation "

.

J

8-96

~ .. '\:

General Provisions Obligation of custody and care regarding contractor's documents. Obligation to give employer notice of any technical error or defect in the contractor's documents.

1.9

Confidentiality obligation regarding contract details.

1.12

Obligation to disclose non-confidential information to employer as required to verify contractor's compliance with the contract.

1.13

Obligation to comply with applicable laws.

Clause 3 3.4 Clause 4 4.1

The Employer's Administration Obligation to receive instructions from the employer, his representative or delegated assistant. The Contractor Obligation to design, execute and complete the works in accordance with the contract and remedy any defects, such that the works are fit for their intended purpose upon completion. Obligation to provide everything specified in the contract and everything else required for the design, execution, completion and remedying of any defects. Obligation to ensure the adequacy, stability and safety of all site operations, methods of construction and of all works. Obligation to submit details of execution arrangements and methods to employer upon request and to follow these arrangements and methods.

4.2

Obligation to provide performance security if amount stated in the particular conditions.

4.3

Obligation to appoint the contractor's representative.

197

THE CONTRACTOR

•. Clause ;'

. !

KEY OBLIGATIONS OF THE CONTRACTOR IN THE SILVER BOOK

Nature of the contractor's o~ligation

4.4

Responsibility for subcontractors and to give related notices to the employer.

4.5

Obligation to employ nominated subcontractors to which contractor has no reasonable objection.

4.6

Obligation to allow appropriate work opportunities to employer's personnel, other contractors and any public authorities. Obligation to be responsible for contractor's construction activities on the site and to co-ordinate the activities of other contractors.

4.7

Obligation to properly set out the works according to the contract specifications and rectify any errors.

4.8

Obligation to follow applicable laws and safety procedures.

4.9

Obligation to institute a quality assurance system.

4.10

Obligation to verify and interpret employer-provided site data.

4.11

Obligation to be satisfied with correctness and sufficiency of the contract price.

4.12

Obligation to accept full responsibility for having foreseen all difficulties and costs of successfully completing the works.

4.13

Obligation to bear all costs of rights of way and facilities.

4.14

Obligation to avoid unnecessary or improper interference with public convenience and roads.

4.15

Obligation to prevent roads and bridges from being damaged by contractor's traffic or personnel, to provide maintenance, signs and directions, and to assume all costs of non-suitability or non-availability of access routes.

't. " 'Oause '!, lt~Jl!'~ .'f-~~ .. ~~,~

Na~ of the eont'tactor's obligation .' .

;

.". ~~.,

"

4.22

Obligation to ensure site security.

4.23

Obligation to confine operations to the site, to keep the site free of unnecessary obstructions and to clear site upon employer's taking over.

4.24

Obligation to take appropriate care of discovered fossils and archaeological finds.

Clause 5

Design

5.1

Obligation to scrutinise employer's requirements and be responsible for the design of the works and the accuracy of the employer's requirements.

5.2

Obligation to prepare all contractor's documents and submit them to the employer for review, as required.

5.3

Obligations to design, execute and complete the works in accordance with the country's laws and the contract documents.

5.4

Obligation to comply with technical standards and regulations in the design, execution and completion of the works.

5.5

Obligation to train the employer's personnel in the operation and maintenance of the works, if specified.

5.6

Obligation to prepare and maintain as-built documents.

5.7

Obligation to supply operation and maintenance manuals.

5.8

Obligation to correct errors in contractor's documents and related works.

Clause 6

Staff and Labour

6.1

Obligation to engage all staff and labour.

6.2

Obligation to pay labourers appropriate wages and observe local labour conditions.

6.3

Obligation to refrain from recruiting employer's personnel.

6.4

Obligation to comply with relevant labour laws.

6.5

Obligation to carry out work only during normal working hours.

4.16

Obligation to assume responsibility for the transport of goods and making related notifications to the employer.

4.17

Obligation to be responsible for all contractor's equipment.

4.18

Obligation to protect the environment.

4.19

Obligation to provide electricity, water and gas.

4.20

Obligation to care and pay for any employer's equipment used.

6.6

Obligation to provide necessary accommodations and welfare facilities for contractor's and employer's personnel.

4.21

Obligation to submit detailed monthly progress reports.

6.7

Obligation to take precautions regarding health and safety of workers.

198 199

KEY OBLIGATIONS OF THE CONTRACTOR IN THE SILVER BOOK

THE CONTRACTOR

Clause

6.8

.

Nature of the contractor'~ oblik.ation

.

Obligation to superintend the design and execution of the works.

Clause

9.3 Clause 11

T;"0 f . f,,"' r~'l-: ~ _. ~~ture

the contractor' .S 0 ibl'19anon .

,~,~,

"~ 'f'.

,"

.,

•

Obligation to repeat tests after test failure. Defects Liability

6.10

Obligation to submit to employer records of contractor's personnel and equipment.

11.1

Obligation to complete outstanding works and remedy defects after taking over.

6.11

Obligation to prevent disorderly conduct.

11.6

Obligation to perform further tests subsequent to a defect remedy.

11.8

Obligation to search for the cause of any defect upon employer's instruction.

11.10

Obligation to remain liable for any obligation still outstanding after issuance of the performance certificate.

11.11

Obligation to clear the site upon receiving the performance certificate.

Clause 7

7.1

Plant, Materials and Workmanship Obligation to execute the works in the manner specified in the contract, in a workmanlike and careful manner and with properly equipped facilities.

7.2

Obligation to submit samples to employer for review.

7.3

Obligation to allow employer's personnel the opportunity to inspect the works.

7.4

Obligation to carry out all testing (other than tests after completion).

7.5

Obligation to remedy defects upon employer's rejection of plant, materials, design or workmanship.

7.6

Obligation to execute remedial work instructed by the employer.

7.7

Obligation to pay all royalties, rents and other payments for materials and disposal of materials.

Clause 8

Clause 12

Tests After Completion

12.1

Obligation to provide plant, equipment and personnel to carry out the tests after completion.

12.3

Obligation to retest after failure of the tests after completion.

Clause 13

Variations and Adjustments

13.1

Obligation to execute and be bound by each variation instructed by the employer.

13.3

Obligation to respond to employer's requests for proposals, prior to instructing variations.

Commencement, Delays and Suspension

8.1

Obligation to commence design and execution as soon as reasonably practicable after commencement date and to proceed with works with due expedition.

13.5

Obligation to use provisional sums only in accordance with employer's instructions and produce related quotations, invoices, vouchers and receipts.

8.2

Obligation to complete the whole of the works (or the section) within the time for completion.

13.6

Obligation to execute employer's variations on a daywork basis.

8.3

Obligation to prepare and submit a time programme to the employer and give notice of potential delays.

Clause 14

8.6

Obligation to submit a revised programme to expedite progress upon employer's instruction.

8.7

Obligation to pay delay damages if time for completion is not met.

8.8

Obligation to suspend work upon employer's instruction.

Clause 9

9.1 200

'~-

Tests on Completion Obligation to carry out the tests on completion.

Contract Price and Payment

14.1

Obligation to pay all taxes, duties and fees required under the contract.

14.2

Obligation to submit advance payment guarantee to employer.

14.3

Obligation to submit detailed applications for interim payments.

14.10

Obligation to submit statement at completion within 84 days of receiving taking-over certificate.

201

KEY OBLIGATIONS OF THE CONTRACTOR IN THE SILVER BOOK

THE CONTRACTOR

Clause

14.11 14.2 Clause 15

15.1

15.2

15.5 Clause 16

16.3 Clause 17

;-

Nature of the contractor's obligation

Nature of the contractor's obligation

Obligation to submit application for final payment.

19.6

Obligation to submit written discharge to employer with final statement.

Obligation to cease work and remove equipment upon termination due to force majeure.

19.7

Obligation to cease work and remove equipment due to release from performance under law.

Termination by Employer Upon notice by employer, obligation to make good any failure to carry out any obligation under the contract or to remedy any default within a reasonable time.

Clause 20

Claims, Disputes and Arbitration

20.1

Obligation to submit timely notice of contractor claims to employer with appropriate description, to keep adequate records to substantiate claims and to subsequently submit a fully detailed claim.

20.2

Obligation to nominate one member of the dispute adjudication board (DAB) and to agree with employer on the third member.

Suspension and Termination by Contractor

2004

Obligation to make all information available to the DAB in relation to any claim.

Obligation to cease work and remove equipment upon contractor termination for cause.

20.5

Obligation to attempt amicable settlement after timely notice of dissatisfaction of DAB decision and prior to arbitration.

20.6

Obligation to submit to ICC arbitration.

Obligation to leave site and deliver all materials relating to the contract to employer upon employer termination for cause. Obligation to cease work and remove equipment upon employer termination for convenience.

Risk and Responsibility

17.1

Obligation to indemnify and hold employer harmless from and against all claims, damages, losses and expenses attributable to contractor.

17.2

Obligation to take full responsibility and care for the works and goods until taking over.

17.4

Obligation to give notice to employer of loss or damage due to an employer's risk event and to rectify the loss or damage to the extent required by the employer.

17.5

Obligation to indemnify and hold employer harmless against and from certain intellectual and industrial property claims.

Clause 18

Insurance

18.1-18.4

Obligation to obtain insurance and pay premia as required in the contract.

Clause 19

Force Majeure

202

Clause

19.2

Obligation to give employer notice of being prevented in the performance of an obligation under the contract due to force majeure.

19.3

Obligation to use reasonable endeavours to minimise any performance delay due to force majeure and to give notice to employer upon termination of the force majeure hindrance.

203

CHAPTER 9

DESIGN General Comments Under turnkey contracts such as the Silver Book and the Yellow Book, the contractor will be generally responsible for most, if not all of the design of the works. This represents a departure from the traditional design-bid-build method of contracting whereby the engineer or a third-party architect generated the design, as is still contemplated under the FIDIC Red Book. Before moving on to the analysis of the sub-clauses of the Silver Book, some introductory comments on design standards seem to be in order.

9-01

Design standard I contractor's liability Under a design-build contract or a design-bid-build contract, the contractor will have some responsibility regarding the design, whether it is providing the entire design outright or in merely implementing a third party's design in the construction process. For example, in the context of a design-bid-build contract, the contractor may be under a duty in some jurisdictions to warn the employer of defects in the design which are apparent to the contractor despite the fact that a third party or the employer provided and is primarily responsible for the design. Otherwise, in the design-bid-build context the designer is generally a third party not associated with the contractor who assumes a separate duty of professional care to the employer for the design it provides. The standard of care for design becomes more problematic in design-build contracts. Clearly, some standard will be applicable to the contractor who, as the design-builder, must provide a design that meets a certain level of performance. Although design responsibility will range generally from "due skill and care" to "fitness for purpose," it is very possible that under a design-build/turnkey contract the contractor may be held either expressly or implicitly to the latter standard which is standard of care more stringent than that imposed on a third-party designer. The standard will be defined by the relevant provisions of the contract and the law applicable to the contract. Under the due skill and care standard, the design must be executed to the level of skill and care of a professional designer. Thus the contractor will only be liable for fault that constitutes negligence under this professional standard. Under the "fitness for purpose" standard, the design must result in works that fulfill the purpose(s) for which they are intended. Where the

205

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9-03

contractor is held to this latter standard, he will not be able to escape liability by showing that his design satisfied accepted standards of engineering knowledge. It may also be true that the contractor cannot escape liability by simply designing and building according to detailed specifications for the works if the result is works that are not fit for the purposes intended. This last conclusion may depend, however, on the law of the jurisdiction applica ble to the contract. I At the time of tender the employer will give the contractor his specifications and performance requirements for the works. In a turnkey project, the contractor will be obliged to provide works in accordance with these specifications and criteria as set forth in the employer's requirements, which may contain varying levels of detail. The employer should strive to specify these requirements in sufficient detail, including the function of the works and the circumstances in which they will be used. 2 The employer will generally prefer that the "fitness for purpose" standard be applied to the design in a turnkey contract. Indeed, some authors recommend employers against the use of design-build contracts where lesser standards, such as "professional care only" liability, apply. This is because "in the event of a major design failure the owner will almost invariably find that he has bought himself into expensive litigation and 'state of the art' defenses in which the question of standard of care, rather than the incontrovertible fact of product failure, will be at issue" .llt is possible that the law of the contract will imply a fitness for purpose standard, when this criterion is not stated. 4 However, reliance on an implied standard of fitness for purpose is very risky in that exceptions to such an implied standard will undoubtedly arise. To avoid uncertainty, the parties should clearly specify the standard. The use of an express "fitness for purpose" requirement suggests that the intended purpose or purposes of the works should be defined in the contract, For example, it appears to be the rule under English law that where a contractor has expressly warranted the fitness of the works, he may be liable to achieve such a result. See S. Furst Q.c. & V. Ramsey Q.c. eds, Keating on Building Contracts (7th ed., Sweet & Maxwell, London, 2001), p. 11 (hereinafter Keating), citing Steel Co. of Canada Ltd v. Willard Management Ltd (1966) S.C.R. 746 (S.C.C.). 2 Mr Bunni provides a breakdown of the elements of the project that need to be determined as a precursor to efficient design. He includes a list prepared by an advisory committee to the Institution of Civil Engineers in London, which specifies in detail the requisite steps in the contracting process. It should be noted that this list was created for the ICE 5th Edition but is also applicable to the FIDIC forms. N.G. Bunni, FIDIC Form of Contract: The Fourth Edition of the Red Book (Black well Science, 1991) pp. 117-119. J I.N.D. Wallace, "Design-and-Build: a No-No for Owners" (1999) 4 Canst. & Eng. L. 7 at 7-9. • For example, under English law: I

Where the employer makes known to the contractor the particular purpose for which the work IS to be done and the work is of a kind which the contractor holds himself out as performing, and the circumstances show that the employer relied on the contractor's skill and judgment in the matter, there is an implied warranty that the work as completed will be reasonably fit for the particular purpose. Keating, op. cit. n. 1 above, p. 72; see also J. Chitty, Chitty on contracts - Vol. 2: Specific contracts (28th ed., H.G. Beale et al. eds, Sweet & Maxwell, London, 1999), pp. 518-19.

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whether in very broad terms, in very specific detail or both. In attempting to claim later that the works as designed are not fit for the purposes intended under the contract, the employer may otherwise be at a disadvantage in trying to persuade a tribunal of what the intended purpose(s) for the works might have been_ Rather than allowing a tribunal a free hand to examine the general circumstances surrounding the contract in order to determine the intended purpose(s), expressly including a statement of the intended purposes of the works is advisable. The "fitness for purpose" standard is discussed to some extent in the previous chapter since it arises in the context of, and applies to, the contractor's general obligations in Silver Book sub-clause 4.1. Sub-clause 4.1 indicates that "[t)he Contractor shall design, execute and complete the Works in accordance with the Contract, and shall remedy any defects in the Works. When completed, the Works shall be fit for the purposes for which the Works are intended as defined in the Contract." At first glance, the "fitness for purpose" standard would seem to apply simply to the works but not expressly to the design. However, Silver Book 4.1 also indicates that "[t]he Works shall include any work which is necessary to satisfy the Employer's Requirements, or is implied by the Contract". Consequently, the design is part of the works as defined under the contract and must therefore be fit for the purposes intended. The Orange and Yellow Books both contain a similar "fitness for purpose" standard which extends to the design under their respective sub-clauses 4.1.. Under the Red Book, the contractor is only responsible for the design to the extent specified in the contract, and the "fitness for purpose" standard applies only to works designed by the contractor. Therefore, under the Red Book the contractor is not responsible for erecting works fit for the purposes intended, to the extent the design is provided by the employer. The contractor generally must simply build according to the employer's specifications, though he may still be under an implied duty in some jurisdictions to inform the employer of any obvious design defects or other shortcomings. The non-FIDIC contracts take different approaches to the statement of a standard for completion of the works, ranging from something less than "fitness for purpose", to the more subjective standards of reasonable skill and judgment, to no express design standard whatsoever. The ENAA expressly requires the contractor to execute and complete the works with "due care and diligence" (ENAA 9.1.) The definition of "Works" in ENAA Clause 1 extends to "the entire works and services to be carried out by the Contractor under the Contract". Consequently, the design must be completed with due care and diligence. However, the ENAA also contains a provision relating directly to design: "The Contractor shall execute the basic and detailed design and the engineering work in compliance with the provisions of the Contract, or where not so specified, in accordance with good engineering practice." (ENAA 20.1.1). Note that this standard is somewhat less stringent than "fitness for purpose". The EIC requires that "[t]he Design and the Works shall be executed and completed by the Contractor with due care and diligence in accordance with 207

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the Contract" (EIC 4.1). The contractor must also "execute the Design ... using proper skill and care of professional designers experienced in that type of design". This places a high standard of care on the contractor in the design of the works, perhaps higher than the ENAA but still somewhat less than that of "fitness for purpose" in the Silver Book. The ICE states that "[iJn carrying out all his design obligations under the Contract ... the Contractor shall exercise all reasonable skill, care and diligence" (ICE 8(2)(a)). This standard remains somewhat vague. The AGC is also vague, simply requiring the contractor to exercise "reasonable skill and judgment" in the performance of the work (AGC-article 3). "Work" is defined to include the design services (AGC 2.4.13). Under the AlA the parties approach the design and budgeting aspect of the project together from the very beginning in the Part 1 contract. Once design has been completed, the parties may then go on to the second contract which provides for construction. The AlA indicates in sub-clauses 1.2.1-Part 1 and 3.1.1-Part 2 that design services must be performed by qualified architects and other design professionals, and that the contractor is responsible for their acts or omissions (AlA 1.2.4-Part 1, 3.1.3-Part 2). However, the AlA contains no design standard other than the requirement that construction be in conformity with the contract requirements (AlA 3.2.9-Part 2). The DBIA's design standard is very specific: "The standard of care for all design professional services performed to execute the Work shall be the care and skill ordinarily used by members of the design profession practicing under similar conditions at the same time and locality of the Project." (DBIA 2.3.1.) However, different or additional design standards may be included in an appendix to the contract (DBIA 2.3.1).

Design timing issues 9-05

Parties using a unified system where both design and construction are executed under one contract, and who wish to retain the time benefits of the turnkey contract, may want to provide for two separate times for completion: one for the design (a more flexible measure) and one for the actual construction. Of course, this will depend on the needs of the parties and the requirements of the project. The all-in-one method found in most of the contracts discussed herein (with the notable exception of the AlA) is a "fast-track" construction method, wherein the parties desire rapid results and thus combine the steps of design and construction. However, the extent of the employer's review and approval power may affect the true speed at which the design process is completed. Nonetheless, the interaction between the parties in the design phases may prove necessary or more beneficial for certain types of contracts. s For

5

This is true even amongst turnkey contracts. For example, for a comparison between the design procedures outlined in the EIC Turnkey Contract (1994) (i.e. the EIC contract exam. ined in this work) and the Orange Book, see Dr J. Goedel, "The EIC Turnkey Contract-A Comparison with the FIDIC Orange Book" (1997) 141.C.L.R. 33.

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COMMENTS

example, the concept of a close and continuous dialogue between the parties during the design phase was used in the Eurotunnel contract. Eurotunnel used a complex system developed to get both parties fully involved in the progress of the designs. However, as a contractual matter, it was the contractor who was liable for the design of the project.

Discussion of Specific Sub-Clauses Clause 5 of the Silver Book, entitled "Design", sets forth the contractor's general obligations regarding the design of the works as well as the procedure for the preparation, submission, review and correction of design-related documents by the employer. It also contains provisions regarding certain collateral responsibilities, such as the contractor's undertaking to adhere to laws and technical standards, to train the employer's personnel in the operation of the works and to provide operation and maintenan~e manuals.

9-06

5.1 General Design Obligations

9-07

The Contractor shall be deemed to have scrutinised, prior to the Base Date, the Employer's Requirements (including design criteria and calculations, if any). The Contractor shall be responsible for the design of the Works and for the accuracy of such Employer's Requirements (including design criteria and calculations), except as stated below. The Employer shall not be responsible for any error, inaccuracy or omission of any kind in the Employer's Requirements as originally included in the Contract and shall not be deemed to have given any representation of accuracy or completeness of any data or information, except as stated below. Any data or information received by the Contractor, from the Employer or otherwise, shall not relieve the Contractor from his responsibility for the design and execution of the Works. However, the Employer shall be responsible for the correctness of the following portions of the Employer's Requirements and of the following data and information provided by (or on behalf of) the Employer: (a) portions, data and information which are stated in the Contract as being immutable or the responsibility of the Employer, (b) definitions of intended purposes of the Works or any parts thereof, (c) criteria for testing and performance of completed Works, and (d) portions, data and information which cannot be verified by the Contractor, except as otherwise stated in the Contract. Silver Book sub-clause 5.1 states expressly that the contractor is deemed to have scrutinized the employer's requirements prior to the base date. 6 It • "Base date" means the date 28 days prior to the latest date for submission of the tender (sb 1.1.3.1), hence, prior to the tender or signature of the contract. 209

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DESIGN

states the contractor's general responsibility for the design of the works but also makes him responsible for the accuracy of the employer's requir~ments, subject to certain exceptions. The contractor should be aware that where the employer supplies any part, small or substantial, of the design, the terms of the Silver Book "become little less than a required guarantee from the contractor of the owner's design" for these parts. 7 Specifically, with only limited exceptions, the employer will not be responsible for any error, inaccuracy or omission of any kind in the employer's requirements. Such terms may prove too oppressive where the owner is to provide any significant part of the design. Indeed, due to these concerns the Silver Book is likely to "receive a rocky reception from some quarters and changes will no doubt be made to address the legitimate concerns being raised".8 The combination of the two provisions of the first two paragraphs of subclause 5.1 would seem, as one author points out, to hold the contractor liable for any errors in the employer's requirements, to the extent that the employer . is not responsible for errors and the contractor is not responsible for accuracy. If this interpretation is correct, the reason these terms were not stated explicitly may be because "it just looks too horrible to write that the contractor shall be responsible for the employer's errors".9 The FIDIC Guide justifies holding the contractor responsible for the employer's requirements, stating "the intention is to minimize the extent of the employer's responsibility, recognizing that [the Silver Book] will often be used in situations where the contractor's technical resources exceed those of the employer".10 Furthermore, under the terms of sub-clause 5.1, the employer is responsible for errors, inaccuracies and omissions in any data stated as being immutable, definitions of the intended purposes of the works, any testing and performance criteria and any data or information which cannot be verified by the contractor. Indeed, paragraph (d) may be used by contractors in order to avoid liability, otherwise imposed by sub-clauses 4.10 and 4.12, for unforeseen ground conditions. I I Paragraph (d) was added due to pressure from contractors. 12 In addition to possible debate as to what might be "verifiable by the Contractor", there is the added uncertainty as to the relevant time period for this verification. One author suggests it is reasonable to assume this reference is to verification at the tender stage, as the other interpretation {i.e. ver7 J. Wallace, op. cit. n. 3 above at 7-9. • E. Corbett, ~FIDIC's New Rainbow-An Overview of the Red, Yellow, Silver and Green Test Editions" (1999) 16 (1) I.C.L.R. 39 at 45; citing "rocky" A.H. Gaede, Jr., "The Silver Book: An Unfortunate Shift from FIDIC's Tradition of being Evenhanded and of Focusing on the Best Interests of the Project" (2000) 17 I.C.L.R. 477. 9 A. Sandberg, "A Contractor's View on FIDIC Conditions of Contract for EPC Turnkey Projects" (1999) 16 (1) I.C.L.R. 47 at 55. 10 FIDIC, The FIFIC Contracts Guide (Federation Internationale des Ingenieurs Conseils, Lausanne, 2000), p. 319 (hereinafter FIDrC Guide). 11 A.H. Gaede, Jr., "The Silver Book: An Unfortunate Shift from FIDIC's Tradition of being Evenhanded and of Focusing on the Best Interests of the Project" (2000) 17 I.C.L.R. 477 at 490. 12 E. Corbett, "FIDIC's New Rainbow I" Edition-An Advance?" (2000) 17 (2) I.C.L.R. 253 at 269.

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DISCUSSION OF SPECIFIC SUB-CLAUSES

ifiable by the contractor at any time before the error becomes manifest) would be unreasonable. 13 Employers may want to clarify the terms of this provision. Similar to the Silver Book, Orange Book sub-clause 4.1 requires the contractor to "satisfy himself regarding the Employer's Requirements". However, he must do this only before commencing design rather than prior to the base date. Orange Book sub-clause 5.1 makes the contractor generally responsible for the design of the works. The contractor is not under as stringent a standard under the Orange Book regarding responsibility for errors and inaccuracies in the employer's requirements. Under Orange Book sub-clause 4.1, the contractor is required to review: the employer's requirements before commencing the design and may give ·notice to the employer's representative of any errors, faults or other defects. the employer's representative must then determine whether a variation is in order and if so will notify the contractor accordingly. Variations are subject to price increases and time extensions for the contractor under the Orange Book. Consequently, the contractor assumes no liability for inaccuracies, errors or omissions in the employer's requirements provided they are discovered by the contractor prior to commencing the design. The Red Book does not expressly impose upon the contractor the responsibility for scrutinising the employer's requirements, or "Specification" which is the comparable term used in the Red Book. On the contrary, Red Book sub-clause 4.1 states that the contractor is responsible for proper execution of the contract and any design for which he is responsible, but "shall not otherwise be responsible for the design or specification of the Permanent Works". Under the Red Book the contractor is not generally responsible for the design of the works since this is provided by the employer. However, Red Book sub-clause 4.1 states that "[tJhe Contractor shall design [the Works) (to the extent specified in the Contract)", thereby making this an obligation if the contractor agrees to provide some design for part of the works. Under the Red Book, the contractor has little or no responsibility for the project specification. He must execute the contract and provide design services (if any) to the extent indicated in the contract but "shall not otherwise be responsible for the design or specification of the ~ermanent Works" (RB 4.1). In its sub-clause 5.1 the Yellow Book requires the contractor to scrutinise the employer's requirements upon receiving the engineer's notice to commence the works. Note the difference in the timing for this obligation: prior to commencement of the works, rather than prior to the base date, as in the Silver Book. As in the Silver Book, the contractor is generally responsible under the Yellow Book for the design of the works (YB 5.1). However, under the Yellow Book the contractor has a certain period of time during which he may inform the engineer of errors in the employer's requirements. The Yellow Book states that:

13

ibid. at 269.

211

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DISCUSSION OF SPECIFIC SUB-CLAUSES

DESIGN

[w)ithin the period stated in the Appendix to Tender, calculated from the Commencement Date, the Contractor shall give notice to the Engineer of any error, fault or other defect found in the Employer's Requirements or these items of reference. After receiving this notice, the Engineer shall determine whether Clause 13 [Variations and Adjustments) shall be applied, and shall give notice to the Contractor accordingly. If and to the extent that (taking account of cost and time) an experienced contractor exercising due care would have discovered the error, fault or other defect when examining the Site and the Employer's Requirements before submitting the Tender, the Time for Completion shall not be extended and the Contract Price shall not be adjusted.

9-10

(YB5.1.) This Yellow Book provision makes the contractor responsible for any errors in the employer's requirements only to the extent that these errors would have been discovered prior to tender by an experienced contractor exercising reasonable care and provided that these errors are discovered and notified to the engineer within the period stated in the appendix to tender. In addition, and contrary to the Silver Book, the employer's design is included as an employer's risk under Yellow Book sub-clause 17.3(g). Some are critical of these provisions, projecting that "this test will cause endless debate, as a similar test for ground conditions has done".14 There is no provision in ENAA that is exactly comparable to Silver Book sub-clause 5.1 regarding the contractor's scrutiny of the employer's requirements. However, "[t]he Contractor confirms that he has entered into this Contract on the basis of a reasonable examination of the data relating to the Works [... J provided by the Owner" (ENAA 9.2). Under the ENAA, the contractor has general responsibility for the "basic and detailed design and the engineering work in compliance with the provisions of the Contract" (ENAA 20.1.1). However, the employer is responsible for ensuring "the correctness and exactitude of all information and/or data to be supplied by the Owner as described in Appendix 9-3 (Scope of Works and Supply by the Owner) to the Agreement except when otherwise stated in the Contract" (ENAA 10.1). Under the ENAA, except as otherwise stated in the contract, the employer expressly assumes responsibility for the correctness and accuracy of the employer's requirements, as well as any other information he supplies (ENAA 10.1). There also is no provision in the EIC comparable to Silver Book sub-clause 5.1 regarding the contractor's scrutiny of the employer's requirements. However, "[iJn relation to the Design and execution and completion of the Works the Contractor confirms that he has entered into the Contract on the basis of reasonable examination of data relating to the Works provided by the Owner and information which he could have obtained from a visual inspection of the Site (if access thereto was available) and other data readily available to him relating to the Works" (EIC 4.4). The EIC makes the contractor generally responsible for the design of the works (EIC 4.1) but, like the ENAA, "[tJhe Owner is responsible for the specifications and

definitions set out in the Conceptual Design .... The Owner shall be responsible for such information and data, in particular for its accuracy." (EIC 3.2.) Whether the EIC provision extends fully to all of the employer's requirements is unclear. Although it is not entirely clear that the "Conceptual Design" is the full equivalent of the FlDlC employer's requirements, it would appear that the employer is responsible for this type of information. Although the term "conceptual design" is commonly used and understood in the industry, according to one commentator, absence of a precise definition of the term provides flexibility. IS The ElC system, as opposed to that of the Orange Book, differs in "the scope of design works which might have to be undertaken by the Contractor already at the tender stage" .16 The ElC requires the contractor to provide less detailed design at the early stages and according to one commentator this arguably results in a time- and cost-saving solution,17 FIDlC envisages an interactive tendering procedure by which the contractor may ascertain how best to design to meet the needs of the employer. 18 Although this facilitates the tender process under the Silver Book, it does not address the costly aspect of providing such a tender. It is worth noting that this process is also criticised from the employer's perspective, as a meaningful price comparison between very different design proposals "is quite impractical for an owner unless he enlists so much design advice as to render the whole process selfdefeating" .19 The ICE indicates that the "Employer's Representative shall provide to the Contractor such design criteria relevant to the Employer's Requirements as may be necessary to enable the Contractor to comply with" his obligation to submit details of his design and methods of construction (ICE 6(1)). However, there is no specific mention of any obligation of the contractor to scrutinise the employer's requirements. Under the ICE, the contractor is required to design the works and provide all design services (ICE 8(1)). However, the ICE does not expressly state which party is responsible for the accuracy, completeness or errors in the employer's requirements. Under the ICE, the contractor does assume some express responsibility for the employer's requirements, but only with regard to designs contained therein provided by the employer. Sub-clause 8(2)(b) of the ICE states: Where any part of the Works has been designed by or on behalf of the Employer and that design has been included in the Employer's Requirements the Contractor shall check the design and accept responsibility therefor having first obtained the approval of the Employer's Representative for any modifications thereto which the Contractor considers to be necessary.

IS 16 17

18 14

E. Corbett, "FJDIC's New Rainbow I" Edition-An Advance?" (2000) 17 (2) I.C.L.R. 253 at 268.

212

19

Dr J. Goedel, op. cit. n. 5 above at 34. ibid. at 35. ibid. at 36. C. Wade, "History and Scope of the Three Major Books" (1998) online: FIDIC http://www.fidic.comldocumentsllaunch/wade1.html( da te accessed: Novem ber 19, 1999). I.N.D. Wallace, op. cit. n. 3 above at 8.

213

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DESIGN

Albeit indirectly, the AlA seems to impose an obligation on the contractor to closely review the employer's project requirements. It states that "[t]he Design/Builder shall visit the site, become familiar with the local conditions and correlate observable conditions with the requirements of the Owner'~ programme, schedule and budget" (AlA 1.3.2-Part 1). The contractor is generally responsible for design services under the AlA, but with its two-part approach, Part 1 covers the creation of preliminary design documents, whereas Part 2 covers design services in a broader sense. Under Part 1, the contractor and employer are supposed to review alternative approaches to the design and construction of the project (AlA 1.3.4-Part 1). The contractor then submits to the employer a proposal, including completed preliminary design documents (AlA 1.3.5-Part 1). Part 2 indicates the contractor must provide or procure all (subsequent or additional) design services (AlA 3.2.5-Part 2). The AlA contains no specific mention of employer's requirements nor a designation of which party is responsible for the project requirements. Under Part 1, the employer is required to provide full information regarding the requirements for the project (AlA 2. 1. I-Part 1). This is roughly the equivalent of the FIDIC "Employer's Requirements". However, it is not stated in either part of the AlA which party assumes responsibility for any errors in the employer's project requirements. The employer is expressly responsible for the accuracy and completeness of site data he provides (see AlA 2.1.9Part 1, 2.7-Part 2), but responsibility for the general project specifications is not mentioned. 9-12 The AGC and DBIA contain no express requirement for the contractor to review or scrutinise the employer's project requirements. Under the AGC, "[t]he Design-Builder shall be responsible for procuring the design ... of the Work consistent with the Owner's Programme" (AGC 3) but there is no mentio~ of ultimate responsibility for the employer's req~ire­ ments .(re~erred to In the AGC as the "Owner's Program"). Similarly, the ~BIA Indicates that the contractor shall procure or perform all design services (~BIA 1.1 (ca), 2.2.1) but does not state which party is ultimately responsible for the employer's requirements. The AGC makes the employer responsible for the completeness and accuracy of the project requirements he provides (AGC 4.1.1,4.1.4). DBIA refers to the owner's "Pr?ject Criteria" in its sub-clause 1.2.7 definition, which is roughly the eqUivalent of the Silver Book's "Employer's Requirements". Apart from the definition, there is no obligation for the contractor to scrutinise these criteria or an express attribution of responsibility for these criteria to either party, except for site data for which DBIA 3.2.1 attributes responsibility to the employer. 9-13 An additional issue not specifically treated in the Silver Book is that of the nature of the person who, specifically, must prepare the design. For example, the Orange ~ook requires in sub-clause 5.1 that the design be prepared by q~ahfied d~slg~er~ who are engineers or other professionals and who comply With the cCiteCia (If any) stated in the employer's requirements. The current Yellow Book sub-clause 5.1 contains an identical provision. Similarly, sub214

DISCUSSION OF SPECIFIC SUB-CLAUSES

clause 1.2.1 of AlA Part 1 indicates that design services "shall be performed by qualified architects and other design professionals". Orange Book sub-clause 5.1 also requires that for each part of the works, "the prior consent of the employer's representative shall be obtained ~o the designer and design Subcontractor, if they are not named as such 10 the Contract". Yellow Book sub-clause 5.1 contains a similar consent requirement. Under sub-clause 5.1 of the Orange and Yellow Books respectively, the contractor also warrants that he, his designers and design subcontractors have the experience and capability necessary for the design. Whether the inclusion of such provisions is appropriate will depend on the identity of the contractor and the nature of the project. The importance of the design is such that the employer may want to specify standards regarding the qualifications of the designers and be involved in their selection or approval, if possible. However, where the contractor is a large and reputable company or has skilled and experienced designers in-house, employer approval and consent provisions may be unnecessary or unwanted. Although not contained in the Silver Book, some contracts, such as the Orange Book, contain provisions stating that nothing in the contract creates any contractual relationship or professional obligation between any designer or design subcontractor and the employer (see Orange Book 5.1, AlA 1.2.6-Part 1, 1.2.3-Part 2, DBIA 2.2.1). It has been suggested that the employer should perhaps specify his status as an intended third party beneficiary to any agreement between the contractor and a designer or design subcontractor, thus protecting the employer's rights without making him liable under that contract.2° Such a provision could also provide the employer with access to the warranties and guarantees provided by the designers as well as their insurance coverage. 21 9-14

5.2 Contractor's Documents The Contractor's Documents shall comprise the technical documents specified in the Employer's Requirements, documents required to satisfy all regulatory approvals, and the documents described in Sub-Clause 5.6 [As-Built Documents] and Sub-Clause 5.7 [Operation and Maintenance Manuals]. Unless otherwise stated in the Employer's Requirements, the Contractor's Documents shall be written in the language for communications defined in Sub-Clause 1.4 [Law and Language]. The Contractor shall prepare all Contractor's Documents, and shall also prepare any other documents necessary to instruct the Contractor's Personnel.

If the Employer's Requirements describe the Contractor's Documents which are to be submitced to the Employer for review, they shall be submitted accordingly,

20

2.

J.E Butler, "Protecting Owner with Contract Clauses" in R.E Cushman & K.S. Taub, eds, Design-Build Contracting Handbook (Wiley Law Publications, New York, 1992) 253 at 256. ibid. at 272.

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DESIGN

together with a notice as described below. In the following provisions of this Sub-Clause, (i) "review period" means the period required by the Employer for review, and (ii) "Contractor's Documents" exclude any documents which are not specified as being required to be submitted for review. Unless otherwise stated in the Employer's Requirements, each review period shall not exceed 21 days, calculated from the date on which the Employer receives a Contractor's Document and the Contractor's notice. This notice shall state that the Contractor's Document is considered ready, both for review in accordance with this Sub-Clause and for use. The notice shall also state that the Contractor's Document complies with the Contract, or the extent to which it does not comply. The Employer may, within the review period, give notice to the Contractor that a Contractor's Document fails (to the extent stated) to comply with the Contract. If a Contractor's Document so fails to comply, it shall be rectified, resubmitted and reviewed in accordance with this Sub-Clause, at the Contractor's cost. For each part of the Works, and except to the extent that the Parties otherwise agree: (a) execution of such part of the Works shall not commence prior to the expiry of the review periods for all the Contractor's Documents which are relevant to its design and execution; (b) execution of such part of the Works shall be in accordance with these Contractor's Documents, as submitted for review; and (c) if the Contractor wishes to modify any design or document which has previously been submitted for review, the Contractor shall immediately give notice to the Employer. Thereafter, the Contractor shall submit revised documents to the Employer in accordance with the above procedure. Any such agreement (under the preceding paragraph) or any review (under this Sub-Clause or otherwise) shall not relieve the Contractor from any obligation or responsibility.

9-15

One of the contractor's design-related obligations is to prepare the contractor's documents. Silver Book sub-clause 5.2 describes the contractor's documents as the technical documents specified in the employer's requirements, the documents required to satisfy regulatory approvals, the as-built documents and the operation and maintenance manuals. These documents provide the basis for the construction of the works. Although the employer places the responsibility for these documents on the contractor, he will still want ~o oversee their preparation to ensure that the employer's requirements are bemg followed. The contractor, in turn, will want to be assured "that the manner in which the designs are being prepared are in accordance with the employer's expectations". 22 U~der Silver Book sub-clause 5.2 a review procedure is provided but is applicable only to documents specified in the employer's requirements as

DISCUSSION OF SPECIFIC SUB-CLAUSES

being required to be submitted to the employer for review. If a document must be submitted for review, the contractor must give the employer notice that the document is ready for review and use. It must also state that the document complies with the contract or the extent to which it does not apply. The review period (21 days maximum) starts to run from the date the employer receives the document and the notice. Within the review period, the employer may give notice to the contractor that the document does not comply with the contract. In this case, the document must be rectified and resubmitted under this same review procedure. Unless the parties otherwise agree, execution of each part of the works shall not commence prior to the expiry or the review periods for all related contractor's documents, and execution must be in accordance with these documents. Any modifications will be subject to this same review procedure. Silver Book sub-clause 5.2 also indicates that any agreement or review under the clause does not relieve the contractor of any obligations or responsibility. It is important to note that the Silver Book provisions give the employer only limited rights regarding oversight of the contractor's documents. The employer has the right to review the documents only. Although the review procedure is mandatory, approval (or response) is not. Indeed, some authors recommend that design review procedures never be a condition precedent to the proceeding of the works,23 The employer may reject the documents submitted only to the extent that they do not comply with the contract. This "review only" process possibly represents FIDIC's attempt to decrease the employer's control over the construction documents, as compared with the Yellow Book, for example, which has a procedure for review and/or approval. The design review process can be important in order to identify inconsistencies between the employer's requirements and the design at a pre-construction stage where such divergences may be more easily managed or remedied. 24 The "review only" process may also serve to ensure the employer is not viewed as having taken any responsibility for the design, for which the contractor is generally exclusively liable under the Silver Book. 25 In any event, in the experience of the author, in practice there may not be a substantial difference between a simple review process and a process whereby the employer's express approval of documents is required. The FIDIC Orange Book sub-clause 5.2 refers to "Construction Documents" rather than "Contractor's Documents". However, the Orange Book's terminology has generally the same meaning as "Contractor's Documents" under the Silver Book. The Orange Book's provisions under sub-clause 5.2 are similar to those of the Silver Book, except that the employer's representative is expressly given the right to review and inspect the preparation of the construction documents (without the prerequisite of 23

24 22

O. Fox, "Design and Build-The Scope for Claims" (1998) 9 Construction Law 291 at 293.

216

25

ibid. ibid. ibid.; agreeing saying "to avoid/shift risk" Gaede, op. cit. n. 11 above at 483.

217

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9-17

DESIGN

9-18

listing in the employer's requirements). In addition, review by the employer's representative of each construction document is mandatory under the Orange Book. Otherwise, the review procedure is the same as that provided in the Silver Book. The Red Book takes a slightly different approach to contractor's documents because the contractor is generally not responsible for the design of the works. As the Red Book contains no clause 5 regarding design, most references to any contractor-provided design appear in sub-clause 4.1. The Red Book sub-clause states that the contractor shall be responsible for all contractor's documents to the extent that such documents are required, and "Contractor's Documents" has generally the same meaning as in the Silver Book. Contractor's documents are not required if the contractor provides no design. However, Red Book sub-clause 4.1 states that if the contractor designs any part of the permanent works, then the contractor must submit contractor's documents to the engineer for this part as well as "as-built" documents and operation and maintenance manuals. There are no specific review and approval procedures set forth in the Red Book. However, subclause 4.1 indicates that the documents will be submitted in accordance with the procedures specified in the contract. The Red Book contains no restriction that the works shall not commence until the contractor's documents are approved, no express requirement that the execution be in accordance with those documents nor any reaffirmation of the contractor's responsibility despite any approval by the Engineer. The Yellow Book sub-clause 5.2 is generally the same as the Silver Book. However, the Yellow Books adds that the employer's personnel have the right to inspect the preparation of the contractor's documents. There is a procedure for review but it only applies, if so indicated in the employer's requirements, for certain documents. The Yellow Book procedure for review is identical to that of the Silver Book, except that it indicates that the procedure may be for review and/or approval of the specified documents, rather than just review. Note that under the Silver Book, execution does not require approval of the document. The Yellow Book may require review and/or approval by the engineer. If approval is required, the engineer must give notice to the contractor that a contractor's document is approved or that it fails to comply with the contract. Execution may not begin until approval is obtained. However, the document is deemed approved if the engineer fails to approve or notify non-compliance within the 21-day review period. If only review by the engineer is required but no approval, execution may begin upon the expiry of the review period. As in the Silver Book, any review or approval does not relieve the contractor of responsibility, and subsequent modifications are subject to the review and/or approval procedures. A graphic comparison of the review procedures under the Silver and Yellow Books is provided at the end of this subpart. The ENAA does not use the term "Contractor's Documents", nor does it specifically impose any requirements upon their preparation. Under the ENAA, the contractor is obligated to prepare and furnish to the owner any 218

DISCUSSION OF SPECIFIC SUB-CLAUSES

documents listed (in an appendix) as being required to be submitted for approval or review by the owner (ENAA 20.3.1). The documents to be submitted for review only have no special procedure. However, there is a detailed approval procedure, similar to the review andlor approval procedure in the Silver Book. With regard to documents specified as requiring approval, within 14 days of the owner's receipt of such a document, he must either return the document with his approval or notify the contractor of his disapproval and indicate the reasons and proposed modifications (ENAA 20.3.2). If the owner fails to take action within the 14 days, the document is deemed approved (ENAA 20.3.2). The owner may only disapprove on the grounds that the document does not comply with some specific provision of the contract or that it is contrary to good engineering practice (ENAA 20.3.3). Upon disapproval, the contractor may either modify (or accept the owner's proposed modification) and resubmit the document or dispute the disapproval (ENAA 20.3.4). If the disapproval is disputed, the dispute is referred to an expert for decision (ENAA 20.3.5). Any part of the works covered by or related to the documents to be approved shall be executed only after the owner's approval thereof (ENAA 20.3.1). Under the ENAA, the contractor must follow the approved documents, unless a modification has been submitted to the owner and approved (20.3.7). Any subsequent change to an approved document constitutes a change in the works (20.3.7). The owner's approval, however, does not relieve the contractor of any responsibility or liability, except where and to the extent that an expert upholds the contractor's dispute of a modification to a document (ENAA 20.3.6). In any event, regardless of whether the document is subject to review and/or approval, the ENAA states: The Contractor shall be responsible for any discrepancies, errors or omissions in the specifications, drawings and other technical documents prepared by it, whether such specifications, drawings and other documents have been approved by the Owner or not, provided that such discrepancies, errors or omissions are not due to inaccurate information furnished in writing to the Contractor by or on behalf of the Owner. (ENAA 20.1.1.) The EIC does not contain a comprehensive listing or description of documents required of the contractor that would be similar to contractor's documents as the term is used in the Silver Book. The EIC does refer to preliminary and final design, as well as drawings and as-built drawings. The term "drawings" is defined in EIC 1.1(xvi) as "all Drawings, provided by the Contractor under the Contract". However, "drawings" under the EIC seem to be only a subset of what the Silver Book would refer to as contractor's documents. There are some £IC review and approval procedures relating to designs. Under EIC sub-clause 3.3, the employer is required to review the contractor's proposals for the preliminary design and approve the same within a particular time stated in the appendix to the contract. The employer must also 219

9-19

DESIGN

review the final design submitted by the contractor within a particular time stated in the appendix (EIC 3.4). Upon approval, the final design becomes the approved. design (EIC 3.4). T~e times for submission of the preliminary and final designs are also stated In the appendix (EIC 4.2). With regard to the approval procedure: Where approvals are required or sought from the Owner under the Contract the Owner shall give timely consideration to approval or disapproval. If th~ Owner has not approved or disapproved within 14 (fourteen) Days of submission by the Contractor to the Owner for approval, the approval shall be deemed to have been given.

(EI~ 3.7.) The contractor also assumes full responsibility for the approved deSign, unless the contractor expressly disclaims responsibility for a decision by the employer regarding the design in the context of the approval procedure (EIC 4.2). 9-20 The ICE does not use the term "Contractor's Documents" but does require the contractor to submit to the employer's representative "such designs and drawings as are necessary to show the general arrangement of the Works and that the Works will comply with the Employer's Requirements" (ICE 6(2)(~)). If the employer'~ representative considers that any design or draWing does not comply With either the employer's requirements or the contr~ct, he must give the contractor motivated, written notice (ICE 6(2)(b)). In this event, the employer's representative's consent is withheld and the c,ontractor must re-submit the design or drawing with appropriate modifications (ICE 6(2)(b)). As in the Silver Book, the contractor must re-submit designs or drawings that he wishes to modify that have already been consented to (~CE 6(2!(c))., Although there is no fixed time for the employer's represe~ta~lve to give hiS consent to, or reject, a design or drawing, if it is not "Within a reasonable period" this must be taken into account when determining the contractor's extension of time and increase in cost (ICE 6(2)(d)). The contractor is also precluded from beginning construction based on a submitted design or drawing until he has received the consent of the employer's representative (ICE 6(2)(a)). Finally: The giving ,of any cons~nt or approval by or on behalf of the Employer's ~epresentatJve shall not In any way relieve the Contractor of any of his obligatlo,ns under the Contract or his duty to ensure the correctness accuracy or suitabIlity of the matter or thing which is the subject of the consent or approval.

9-21

(ICE 1 (7)(a).) Un~e~ the AlA's two-part approach, the contractor begins under Part 1 by submitting to the employer a proposal for completion of the works: The Desig~~uilder sh~ll submit to the Owner a Proposal, including the completed PreltmInary DeSign Documents .... Preliminary Design Documents shall consist of preliminary design drawings, outline specifications or other documents sufficient to establish the size, quality and character of the entire Project,

DISCUSSION OF SPECIFIC SUB-CLAUSES

its architectural, structural, mechanical and electrical systems, and the materials and such other elements of the Project as may be appropriate. (AlA 1.3.5-Part 1.) In Part 2 of the AlA, the contractor must submit construction documents for review and approval by the owner (AlA 3.2.4-Part 2). The AlA indicates that: Construction Documents may include drawings, specifications, and other documents and electronic data setting forth in detail the requirements for construction of the Work, and shall: .1 be consistent with the intent of the Design/Builder's Proposal; ,2 provide information for the use of those in the building trades; and .3 include documents customarily required for regulatory agency approvals. (AlA 3.2.4-Part 2). However, there is no detailed procedure regarding review and approval. The contractor is also authorised to make minor changes to the construction documents and to the construction, provided that the changes are consistent with the contract documents and do not require adjustment of the contract price or time extension (AlA 8.4.1-Part 2). However, any minor changes must be promptly notified to the employer in writing (AlA 8.4.l-Part 2). The AGC requires the employer's written approval of all drawings and specifications:

9-22

Pursuant to a mutually agreeable schedule, the Design-Builder shall submit for the Owner's written approval, as applicable, Design Development Documents and/or Construction Documents, based on the Contract Documents in existence at the time of the execution of this Agreement or any further development of Contract Documents that have been approved in Writing by the Owner. (AGC 3.1.1.) A separate provision indicates that employer "shall review and approve further development of the drawings and specifications as set forth in Article 3" (AGC 4.2.1). Revisions to design documents after they have been approved by the owner when the revisions are due to causes beyond the control of the contractor are considered "additional services" under AGC 3.10.11. Causes "beyond the control" of the contractor, however, do not include "acts or omissions on the part of subcontractors, sub-subcontractors or the Architect/Engineer" (AGC 3.10.11). The DBlA contemplates that the contractor and the employer will come to an agreement upon any "interim design submissions" that the employer may wish to review (DBIA 2.4.1). "Interim design submissions" include "design criteria, drawings, diagrams and specifications setting forth the Project requirements" (DBIA 2.4.1). The contractor must also submit construction documents to the employer "setting forth in detail drawings and specifications describing the requirements for construction of the Work" (DBIA 2.4.2). Around the time these submissions are to be made, the contractor and employer are required under the contract to meet and confer

220 221

9-23

DESIGN

9-24

DISCUSSION OF SPECIFIC SUB-CLAUSES

Figure 9.1

Comparison of FIDIC review processes

about the submissions (DBIA 2.4.1, 2.4.2). After the review meeting, the employer must review and approve the interim design submissions and construction documents "in a time that is consistent with the turnaround times set forth in Design-Builder's schedule" (DBIA 2.4.1,3.1.2). The DBIA also states that "[n]either Owner's review nor approval of any interim design submissions and Construction Documents shall be deemed to transfer any design liability from Design-Builder to Owner" (DBIA 2.4.3).

A. Review only-Silver Book CONTRACTOR prepares contractor's documents Submission to employer with notice

9-25

5.3 Contractor's Undertaking r------------------------------------------------ ---------- __________________________________ _

i I

~

, 'E

Contractor rectifies document(s) and resubmits

1i

::.~

I~U-

Il~! II ~§ ' i

The Contractor undertakes that the design, the Contractor's Documents, the execution and the completed Works will be in accordance with: (a) the Laws in the Country, and (b) the documents forming the Contract, as altered or modified by Variations.

':

:

I!

~ ~ ~

I ,:

~-

I

-1

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.----------------... --------------------------- ---------------------------------- _________________ .. J

Contractor may commence works after expiry of 21-day review period

B. Review and possible approval- Yellow Book CONTRACTOR prepares contractor's documents Submission to employer with notice EMPLOYER r------------------------------------------------ ---------------------------------------__________ _ , C-l

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ontractor rectifies

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resubmits I 1

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l~_ :_ _ _ _--- - - ___ _ _ ____ _ _ __ ___ _ ________________________J Contractor may commence works after expiry of 21-day review period

222

Silver Book sub-clause 5.3 provides simply that all aspects of the works and contract execution must comply with the laws of the host country and be in accordance with the contract documents, as modified or altered by variations. As a point of precision, the FIDIC Guide asserts that "[a] variation changes the 'works', but does not amend the 'contract'" .26 It should be noted that the contract documents include the employer's requirements, the accuracy of which the contractor is responsible for. Sub-clause 5.3 appears to require the contractor to execute the works in accordance with these requirements, regardless of any inaccuracies they may contain. One author suggests this ambiguity should be resolved pre-tender.27 Orange Book sub-clause 5.3 is generally the same as the Silver Book, except that the contractor only undertakes to do these things "if legally and physically possible" (OB 5.3). The Red Book contains these same general requirements but not in a single clause. Under Red Book sub-clause 1.13 the contractor agrees to comply with all applicable laws and under sub-clause 4.1 agrees to design, execute and complete the works in accordance with the contract. Yellow Book sub-clause 5.3 is identical to the Silver Book provision. The ENAA contains no single clause comparable to Silver Book sub-clause 5.3. However, the same obligations exist in two separate clauses. Under ENAA 9.4 the contractor agrees to "comply with all laws in force in the country where the Works are carried out, whether national, provincial, municipal or otherwise". ENAA 7.1 provides that the contractor ensure the "design, procurement, construction, erection, commissioning, testing and delivery of the Plant and the completion of the Works in accordance with [the documents forming the Contract)". The EIC is similar to the ENAA in that provisions comparable to Silver

26

21

FIDIC Guide, op. cit. n. 1 above, p. 144. EIC, The EIC Contractor's Guide to the FIDIC Conditions for EPC Turnkey Projects (European International Contractors, Berlin, 2000), p. 19.

223

9-26

DESIGN

DISCUSSION OF SPECIFIC SUB-CLAUSES

Book sub-clause 5.3 are contained in two separate clauses. Under EIC 6.1 the contractor agrees to "comply with the local statutes and regulations prescribed for use of the Site and performance of the Works". EIC 4.1 further states that "[tJhe Design and the Works shall be executed and completed ... in accordance with the Contract". Similarly, under the ICE, AlA and DBIA the contractor is generally required to comply with all applicable laws (ICE 26(3), AlA 1.3.3-Part 1, AlA 3.2.11-Part 2, DBIA 2.5.1) and complete the works in accordance with contract (ICE 8(1), AlA 3.2.9-Part 2, DBIA 2.9.1). AGC 3.2.3 requires the contractor to comply with all laws, but does not contain an express provision requiring execution in accordance with the contract documents, though this obligation is generally implied (see, for example, AGC 8.3.1 and AGC 9.3.1).

9-27

S.4 Technical Standards and Regulations The design, the Contractor's Documents, the execution and the completed Works shall comply with the Country's technical standards, building, construction and environmental Laws, Laws applicable to the product being produced from the Works, and other standards specified in the Employer's Requirements, applicable to the Works, or defined by the applicable Laws. All these Laws shall, in respect of the Works and each Section, be those prevailing when the Works or Section are taken over by the Employer under Clause 10 [Employer's Taking Over). References in the Contract to published standards shall be understood to be references to the edition applicable on the Base Date, unless stated otherwise. If changed or new applicable standards come into force in the Country after the

Base Date, the Contractor shall give notice to the Employer and (if appropriate) submit proposals for compliance. In the event that: (a) the Employer determines that compliance is required, and (b) the proposals for compliance constitute a variation, then the Employer shall initiate a Variation in accordance with Clause 13 [Variations and Adjustments).

9-28

Silver Book sub-clause 5.4 requires the design, contractor's documents, execution and completion to be in compliance with the country's technical standards, building codes, environmental laws, laws applicable to the product produced and any other standards specified in the employer's requirements. The laws are those in force when the works or section is taken over by the employer. If changes in these laws or standards occur after the base date, the contractor must give notice to the employer and possibly submit proposals for compliance. If the employer determines compliance is required and compliance constitutes a variation, the employer is required to initiate a variation under the appropriate contract procedure. Orange Book 5.4 is generally identical to the Silver Book but does not contain the mention that the applicable laws are those in force at the time of 224

taking over. If there are changes in the laws or standards, the contractor is required to submit a proposal for compliance to the employer's representative who will initiate a variation if he considers compliance to constitute a variation. The Red Book does not contain a provision similar to Silver Book subclause 5.4. However, the general obligation can be found in other clauses. In Red Book 1.1.6.5, "laws" are defined as "all national (or state) legislation, statutes, ordinance and other laws, and regulations and by-laws of any legally constituted public authority". Sub-clause 1.13 indicates that the contractor shall comply with applicable laws in performing the contract. Although, there are not specific notice, proposal and variation procedures imposed comparable to those in the Silver Book, Red Book sub-clause 13.7 would give the contractor the right to request an extension of time or payment of costs to the extent these were incurred due to a change in law affecting the contractor's performance of his obligations. The Red Book generally succeeds in imposing the same general obligations as Silver Book 5.4 but indirectly and with less specificity. Yellow Book 5.4 is identical to Silver Book 5.4, except that it is the engineer who receives notice of a change in the law or standard and determines whether contractor's compliance is required. The non-FIDIC contracts do not speak in terms of "technical" standards and regulations but more generally of laws, regulations, ordinances, etc. However, most of the provisions seem broad enough to cover technical standards. Most of the non-FIDIC contracts also contain provisions for contract adjustments in the event laws or regulations are added or changed. Although in separate clauses and in a slightly different form, the ENAA provisions, for the most part, parallel those of Silver Book sub-clause 5.4. ENAA sub-clause 9.4 requires the contractor to "comply with all laws in force in the country where the Works are carried out, whether national, provincial, municipal or otherwise". ENAA 20.2 further states that when references are made in the contract to codes and standards applicable to execution of the works, the version in effect at the date of the agreement shall apply unless otherwise specified. Finally, if any law, regulation, ordinance, order or bye-law is enacted, abrogated or changed and this affects the costs and expenses of the contractor and/or the time for .completion, reasonable adjustments in price and time will be made (ENAA 36.1). ENAA 36.1 only permits price and time adjustments for changes in law and regulations occurring after the date of the agreement. Consequently, the contractor is liable for changes between the date of tender and the date of agreement. The EIC is much less detailed than the Silver Book or the ENAA and does not contain all the same obligations. Nonetheless, the contractor is expressly required to "comply with the local statutes and regulations prescribed for use of the Site and performance of the Works" (EIC 6.1). The ICE states in its sub-clause 26(3) that: [t)he Contractor shall ascertain and conform in all respects with the provisions of any general or local Act or Parliament and the Regulations and Bye-laws of 225

9-29

9-30

DISCUSSION OF SPECIFIC SUB-CLAUSES DESIGN

any local or other statutory authority which may be applicable to the Works and with such rules and regulations of public bodies and companies as aforesaid ....

9-31

The ICE refers to all rules and regulations that "may be applicable to the Works" but does not state exactly what will happen if these are changed after the contract enters into effect. However, ICE 26(3)(b) does state that "if the Employer's Requirements are at any time found to preclude conformity with any such Act Regulation or Bye-law the Employer's Representative shall issue such instructions including the ordering of a variation under Clause 51 as may be necessary to ensure conformity with such Act Regulation or Byelaw" (ICE 26(3)(b)). Under the AlA, the contractor has a responsibility in Part 1 of the contract to "review laws applicable to design and construction of the project, correlate such laws with the owner's programme requirements, and advise the owner if any programme requirement may cause a violation of such laws" (AlA 1.3.3-Part 1). Part 2 of the AlA also requires the contractor to "comply with and give notices required by laws, ordinance, rules, regulations and lawful orders of public authorities relating to the Project" (AlA 3.2.11-Part 2). Revisions to any drawings, specification or other documents necessitated by the subsequent enactment or revision of codes, laws or regulation are considered "additional services" under both Parts 1 and 2 for which the contractor may receive additional compensation (AlA 1.4.1Part 1, 3.3.2-Part 2). In addition, the contractor "shall be compensated for changes in the construction necessitated by the enactment or revision of codes, laws or regulations subsequent to the submission of the Design/Builder's Proposal" (AlA 8.6.1-Part 2). The AGC does not specifically mention technical regulations. It does, however, require the contractor to "give all notices and comply with all laws and ordinances legally enacted at the date of execution of the Agreement which govern the proper performance of the Work" (AGC 3.2.3). In addition, drawings and specifications must be based upon the codes, laws or regulations enacted at the time of their preparation (AGC 3.1.2). Similarly, under the DBIA the contractor must "perform the Work in accordance with all Legal requirements and shall provide all notices applicable to the Work as required by the Legal Requirements" (DBIA 2.5.1). The DBIA also contains provisions for adjustments of the contract price and/or time for completion caused by "changes in the Legal Requirements enacted after the date of the Agreement affecting the performance of the Work", and this includes corresponding revisions to the construction documents (DBIA 2.5.2). In the context of the Silver Book's reference to the standards stated in the employer's requirements, the parties may want to include technical standards of another country if the site country's national standards are insufficient or do not exist. The contractor would then be required to comply with the more rigorous of the local standard or the additional contractual standard. In addition, it may be prudent to indicate that the contractor's reliance

on a specified standard shall not relieve him of the gen,eral fi~ness for purpo~e requirement in completing the works. If the employer s reqUlre~ents contam incomplete specifications that could be supplemented by techmcal standards referenced in the contract, the employer may want to preclude the contractor from claiming later that his design was proper, though arguably not fit for purpose, because he relied on an approved technical standard referenced in the contract.

9-32

5.5 Training The Contractor shall carry out the training of Employer's Personnel in the operation and maintenance of the Works to the extent specified in the Employer's Requirements. If the Contract specifies training which is to be carried out before taking-over, the Works shall not be considered to be completed for the putI~oses of taking-over under Sub-Clause 10.1 [Taking Over of the Works and SectIOns] until this training has been completed. Silver Book sub-clause 5.5 requires the contractor to train the employer's personnel to operate and maintain the works, to the exte~t specifie~ in the employer's requirements. The FIDIC Guide notes the rationale ~e.hmd the inclusion of this, otherwise optional, clause in the general condlt1~>ns: th.e stipulation that sub-clause 10.1 ("Taking Over") will not. b~ effe~tlve until such training is complete. 28 Yellow Book sub-clause 5.5 IS Identical to t~e Silver Book provision. Neither the Orange Book nor the Red Book contam any provisions regarding training. . The ENAA states that the "[c]ontractor shall be responSible for conducting the training of the Owner's operating and maintenance personnel" (ENAA 7.4). However, the EIC, ICE, AlA, AGC an~ DBIA contain no provisions regarding training.

9-33

5.6 As-Built Documents

9-34

The Contractor shall prepare, and keep up-to-date, a complet~ set of ~as-bu.i1t" records of the execution of the Works, showing the exact as-bUilt locations, sizes and details of the work as executed. These records shall be kept on the Site and shall be used exclusively for the purposes of this Sub-Clause. Two copies shall be supplied to the Employer prior to the commencement of the Tests on Completion. In addition, the Contractor shall supply to the Employer as-built drawings of the Works, showing all Works as executed, and submit them to the Employer for review under Sub-Clause 5.2 [Contractor's Documents). The Contractor shall obtain the consent of the Employer as to their size, the referencing system, and other relevant details. 2.

FIDIC Guide, op. cit. n. 1 above, p. 146.

227 226

DESIGN DISCUSSION OF SPECIFIC SUB-CLAUSES

Prior to the issue of any Taking-Over Certificate, the Contractor shall supply to the Employer the specified numbers and types of copies of the relevant as-built drawings, in accordance with the Employer's Requirements. The Works shall not be considered to be completed for the purposes of taking-over under SubClause 10.1 [Taking Over of the Works and Sections] until the Employer has received these documents. As-built records and drawings allow the employer and his personnel to have a full view of the construction and give them a guide for future maintenance, repairs or modification of the works. Given their importance, the Silver Book requires that these be subject to the review process set forth in sub-clause 5.2 (apparently without separate reference in the employer's requirements as documents subject to the sub-clause 5.2 review). Silver Book sub-clause 5.6 requires the contractor to prepare and update as-built records, which must be kept on the site. Prior to the tests on completion, two copies of these as-built records must be submitted to the employer. The as-built records must also be submitted for the employer's review in the same way as contractor's documents. The Silver Book also refers to "as-built drawings" which must be submitted prior to the employer's taking over of the works. The as-built records show "the exact as-built locations, sizes and details of the work as executed". The as-built drawings must be submitted in accordance with the employer's requirements. 9-35 Orange Book sub-clause 5.6 is generally identical to the Silver Book provision. Some minor differences are that the Orange Book specifically requires the as-built documents to be cross-referenced to the relevant specifications and data sheet. In addition, the as-built drawings must be prepared as the works proceed and be submitted to the employer's representative for his inspection but not specifically under the review procedure for contractor's documents. Yellow Book sub-clause 5.6 is identical to the Silver Book provision, except that it is the engineer, rather than the employer, who receives the copies and approves their form. Under the Red Book, the contractor is only responsible for as-built documents related to any design he might provide for the works. Under subclause 4.1(d), to the extent the contractor provides some design, as-built documents must be submitted to the engineer for that part of the works prior to the commencement of the tests on completion. As in the Silver Book, submission of the as-built documents are a prerequisite to completion of the works. However, no as-built drawings are required. 9-36 The ENAA makes no specific mention of as-built documents. However, this type of document may be listed in an appendix within the list of documents to be submitted to the employer for review. The EIC simply states: "Following issue of the Taking Over Certificate, the Contractor shall supply to the Owner 2 (two) copies of as built drawings." (EIC 6.14.) The requirements for as-built documents under the ICE are the same as its provisions for operation and maintenance manuals. Prior to the issue of the defects correction certificate, the contractor must submit "as-constructed record drawings" for approval and then a set of final drawings after approval by the employer's representative (ICE 61(3)).

The AlA requires the contractor to maintain and provide the employer with one record copy of construction documents (AlA 3:2.15-Part ~). However, it is not specifically stated that these documents lOc~ud.e as-bUilt records or drawings. The AGC requires the contractor to submit elt~er final marked up as-built drawings or updated electr?nic data (as d~ter~lOe~ b.y the parties before entering into the contract) ~hlch .documentatlon IS to lOdlcate "how the various elements of the Work lOcludlOg chang~s were actu~lly constructed or installed" (AGC 3.3.9). The DBIA contams no specific requirements regarding as-built records.

5.7 Operation and Maintenance Manuals

9-37

Prior to commencement of the Tests on Completion, the Contractor ~hall supply to the Employer provisional operation and maintenance manuals m s~fficlent detail for the Employer co operate, maintain, dismantle, reassemble, adjust and repair the Plant. The Work~ shall not be considered to be completed for the purp~ses of ta~ing­ over under Sub-Clause 10.1 [Taking Over of the Works and Sections) untll the Employer has received final operation and maintenance ~anuals in such detail, and any other manuals specified in the Employer's ReqUirements for these purposes. The operation and maintenance manuals will be :the guide for the futu~e operation, maintenance and modification of the ~orks. ~he employer Will want to ensure that these contain all the information that It or the operator will need. The Silver Book indicates that they must be sufficiently .detailed for the employer "to operate, maintain, dismantle, reassemble, adjust a~d repair the Plant". The employer will need to deci~e if this lev~l of deta~l ~Ill suffice. In addition, this sub-clause could be modified to require submiSSIOn of these manuals for approval by the employer. Silver Book sub-clause 5.7 divides the contractor's obligation to provide operation and maintenance manuals into two parts. First, prior to the tests on completion, the contr~c­ tor must supply provisional manuals. However, the work~ are not con~ld­ ered to be completed for taking over by the employer untIl final operatIOn and maintenance manuals are provided. Yellow Book sub-clause 5.7 is identical to the Silver Book prOVISIOn, except that the manuals are supplied to the engineer, rather than directly to the employer. Orange Book sub-c1a~se 5.7 con.tains substantia~ly the same requirements as the Silver Book but simply requJCes the 'preparatJo~ and submission to the employer's representative of the operation and. malOtena?ce manuals prior to commencing the tests on completion. There I~ no ment~on of "provisional" manuals and then later "final" manuals pnor to taklOg over. With regard to the Red Book, to the extent the contractor sup~lies any related design, sub-clause 4.1(d) requires the cont~actor to .submlt to the engineer, prior to the commencement of the tests on completIOn, operatIOn

228

229

9-38

DISCUSSION OF SPECIFIC SUB-CLAUSES DESIGN

9-39

and maintenance manuals in accordance with the specifications and in sufficient detail for the employer to operate, maintain, dismantle, reassemble, adjust and repair this part of the works. The part designed by the contractor shall not be considered complete for taking over until these manuals have been submitted. ICE sub-clause 48(3) requires the contractor to provide operation and maintenance instructions prior to the issue of any certificate of substantial completion. In addition, the contractor must submit to the employer's representative a set of draft operation and maintenance manuals for his approval after which the contractor must supply three sets of manuals as finally approved (ICE 61(3)). The ENAA, ElC, AlA, AGC and DBlA contain no specific obligation requiring operation and maintenance manuals.

3.2.8, 9.1-Part 2, AGC 3.8.1, DBIA 2.9.1, 2.10). However, these c~ntracts do not expressly state that contractor's documents must also .be r~ctlfied n?r do they link the identification of any error or defiCiency to Its discovery In the construction documents.

5.8 Design Error

9-40

If errors, omissions, ambiguities, inconsistencies, inadequacies or other defects are found in the Contractor's Documents, they and the Works shall be corrected at the Contractor's cost, notwithstanding any consent or approval under this Clause.

9-41

Silver Book 5.8 requires the correction at the contractor's cost of any errors, omissions, ambiguities, inconsistencies, inadequacies or other defects contained in the contractor's documents. Both the documents and the works themselves must be corrected. Orange Book sub-clause 5.8, entitled "Error by Contractor", is substantially similar to the Silver Book provision, but mentions only "errors" in the documents and leaves out the language, "notwithstanding any consent or approval under this Clause". Yellow Book subclause 5.8 is identical to the Silver Book provision. The "approval" mentioned in Silver Book sub-clause 5.8 would seem inconsistent with the provisions of sub-clause 5.2, where the employer does not "approve" the contractor's documents. One author suggests that, as a practical matter, "sub-clause 5.2, coupled with sub-clause 5.8, will expose the contractor to significant interference and ultimately expose the employer to claims for that interference" .29 Red Book sub-clause 4.1 (c) does indicate that the contractor is responsible for any part of the works he designs. In addition, the contractor is not relieved of responsibility by reason of the engineer approval of the design or related documents (RB 3.1(c)). Although the contractor would be liable to remedy any defect resulting from errors in his design (RB 4.1), there is no specific requirement stating that the related contractor's document must be corrected. However, correction of the related documents seems to be implicit. The non-FlDlC contracts all contain provisions requiring the contractor to remedy any defects in the works (ENAA 27.2, EIC 9.5, ICE 49(2), AlA 29

Gaede, op. cit. n. 11 above at 483.

230

231

CHAPTER

10

STAFF AND LABOUR General Comments Under a turnkey construction contract or EPC contract, the contractor is responsible for providing and supervising the necessary staff and labour. In order to ensure the quality of the works and their efficient and timely completion, the employer will impose certain restrictions on the contractor regarding labour and labour-related issues. This chapter discusses the regulation by the employer of the contractor's hiring and use of labour for the design and construction of the works.

10-01

Provision of staff and labour Under the FIDIC Silver Book the contractor provides all staff and labour (5B 6.1). He must provide them with wages and conditions no less favourable than those established in the trade or industry of the site country (SB 6.2). The contractor should carefully consider the hiring of staff and labour during the tendering stage. He will need to evaluate the site and the site country for legal and practical limitations and assess any expenses related to the hiring and transport of labour. This will include the need to provide for managers and supervisors with appropriate language skills to ensure proper cbmmunication between the contractor, his designers and the staff and labour.! The contractor must also consider the labour laws of the site country. In some instances mandatory legal rules of the contractor's country may also apply to construction performed in the site country by its nationals. International rules or conventions may also apply to health, safety or environmental considerations. 2 The parties will need to allocate responsibility for obtaining work permits I

2

The World Bank recommends the use of clauses requiring linguistic skills, including the provision of competent translators maintained on the site at all times for proper and correct transmission of instructions. World Bank "Standard Bidding Documents for the Procurement of Works" (World Bank, Washington, D.C., 2000) online: World Bank http://www.worldbank.orglhtmllopr/biddocs/workslw-titlpg.htm (date accessed: July 16, 2001) at 109. UNCITRAL, UNCITRAL Legal Guide on Drawing Up International Contracts for the Constructiofl of Industrial Works (UN, New York, 1998) UNDOC. NCN.9/SER.B/2, p. 110.

233

10-02

DISCUSSION OF SPECIFIC SUB-CLAUSES

STAFF AND LABOUR

10-03

and residence visas for expatriate personnel. This responsibility will almost invariably be allocated to the contractor. However, the employer will often be in a position in the site country to assist the contractor in obtaining such permits and visas. The contractor has a further duty to provide all staff, including the specified staff of the employer and the employer's representative, with certain facilities (SB 6.6). The facilities specified may range from accommodation, sanitation, food and medical facilities, to possibly schools for both indige- ' nous and expatriate children. 3 The provision of such facilities could prove to be expensive in certain countries or projects depending on the state and availability of facilities already on or near the site. One question that frequently arises in this regard is whether local labour will be provided with the same level of facilities as those provided to expatriate personnel. Similar questions may arise where the construction occurs in a nation that is more developed economically than that of the contractor. The different approaches to these issues in the various form contracts is contained in the discussion of Silver Book sub-clause 6.6 below. The parties may also need to consider a number of other factors, including supply of water, transport and/or use of alcoholic beverages, drugs and firearms, epidemics, repatriation, temporary housing, standards of accommodation, hospitals, schools, power, drainage, sewage disposal, fire services, telephones, work hours and working conditions. The World Bank provides a helpful series of model clauses on these issues in their Standard Bidding Documents. 4 The turnkey or EPC contract for each project should be carefully drafted to take into account the specific needs of labour in the site country.

Superintendence

10-04

Under the Silver Book, the contractor must oversee the design and execution of the works for as long as is necessary to fulfil his obligations (SB 6.8). The duty of superintendence includes verifying the professional and personal qualifications of each individual hired. s The persons employed must be qualified and careful (SB 6.9). This obligation to superintend extends to the contractor's responsibility to take reasonable precautions against unlawful, riotous or disorderly conduct among his labour force (SB 6.11).

The provision of schools is not specified in either the Silver or the Orange Books, but has been implied by Sawyer and Gillott from the old Red Book, as discussed in their article, The FIDIC Condition: Digest of Contractual Relationships and Responsibilities (1981), p. 40. • World Bank op. cit. n. 1 above at 208-210. S The World Bank recommends various provisions concerning the qualifications of personnel including specifying the language skills of employees, particularly those with supervisory duties, ibid. at 109. 3

234

Discussion of Specific Sub-Clauses Clause 6 of the Silver Book, entitled "Staff and Labour", sets forth the specific terms regarding the labour issues discussed above, such as t~e gene~al obligation to provide labour for completion of the works, compliance With labour laws as well as health, safety and superintendence obligations. The Silver Book also contains certain provisions that are unique to the industry forms. For example, the Silver Book requires that la~~ur be paid in accordance with local rates of wages and that local conditions of labour be observed. In addition, the contractor is prohibited from recruiting staff and labour from among the employer's personnel. The Silver Book provisions will be discussed below with a comparison to the other industry forms.

10-05

6.1 Engagement of Staff and Labour

10-06

Except as otherwise stated in the Employer's Requirements, the Contractor shall make arrangements for the engagement of all staff and labour, local or otherwise, and for their payment, housing, feeding and transport.

Silver Book sub-clause 6.1 sets forth the contractor's general obligation regarding staff and labour. It requires simply that the contractor. provide all staff and labour required for the works and to arrange for their payment, housing, feeding and transport. Orange Book sub-clause 6: 1 is nearly i?entical and the Red and Yellow Book provisions are identical to the Silver Book provision. Although this sub-clause '~removes any ,!mplication of o~li­ gation on the part of the Employer to proVide personnel , the FIDIC GUIde recommends that the employer's obligation be specified where he is to make available any personnel. 6 All of the non-FIDIC contracts discussed herein require the contractor to provide all staff and labour required for the execution of the works (see ENAA 22.1.3(a), EIC 6.2, ICE 8(1)(b), AlA 3.2.5-Part 2, AGC 3.2.2, DBIA 2.7.1). What differs in the non-FIOIC contracts is the extent to which requirements are expressly imposed on the contractor regarding payme~t, housing, feeding and transport of staff and labour. Some of the contracts diScussed below do not contain an express statement that the contractor "pay" for the labour. However, this is implied by the general obligation to provide all necessary labour. The ENAA contains all of the specific requirements of Silver Book 6.1 mentioned above, stating that "the Contractor shall be responsible for the recruitment, transportation, accommodation and catering of all labour, local ~r expatriate, required for the execution of the Works and for all payments In 6

FIDIC, The FIDIC Contracts Guide (Federation Internationale des Ingenieurs·Conseils, Lausanne, 2000), p. 150 (hereinafter FIDIC Guide).

235

10-07

STAFF AND LABOUR DISCUSSION OF SPECIFIC SUB-CLAUSES

connection therewith" (ENAA 22.1.3(b)). EIC sub-clause 6.3 is nearly identical to the ENAA provision and contains these same specific requirements. ' The ICE is less comprehensive. Along with the general obligation to provide all labour, ICE 8(1)(b) also provides that the Contractor is responsible for the transport of labour "to and from and in or about the Site ... ". However, housing and feeding of staff and labour are not specifically mentioned in the ICE. The AlA expressly requires the contractor to pay for labour and ensure their transport. Housing and feeding of labour are not specifically mentioned. However, the contractor's obligations are set forth in broad terms. He is required to provide "other facilities and services necessary for proper execution and completion of the Works" (AlA 3.2.5-Part 2). This could extend to additional accommodations for staff and labour to the extent these are required for the proper execution and completion of the works. Under the AGC, the Contractor has the general obligation under its subclause 3.2.2 to provide all necessary labour to complete the work. However, housing, feeding and transport of staff and labour are not specifically mentioned. Similarly, DBIA sub-clause 2.7.1 contains the general obligation to provide labour but makes no express mention of housing, feeding or accommodation.

10-08

d 'th the market value and not on an artificial scale imposed by acco:n a?~e e;ISome authors recommend a simple referen~e to the 10c~1 law inPorder to avoid controversy that may arise under thIS sub-clause s reference to an "industry standard".8

~~;

The Contractor shall not recruit, or attempt to recruit, staff and labour from amongst the Employer's Personnel. The above provision is self-explanatory and is contained ve~batim in ~h~ Red and Yellow Books in their respective sub-clauses 6.3. Parties may.wI~ to add language to the effect that neither party shall attempt t~ recruIt t , rsonnel without first seeking that other party s approva: is substantially identical. The non-FIDIC contacts contain no prohibition ~gainst the contractor's recr~itment of t~e empl.oyer~ personnel. The importance of this provision for eIther party IS questlOna e.

10-11

6.4 Labour Laws

10-12

6.2 Rates of Wages and Conditions of Labour

Silver Book sub-clause 6.2 is a rather unique provision that is not contained in any of the non-FIDIC contracts discussed herein. It sets certain levels for labour payment and conditions using local Custom and practice as the benchmark standard. This is an interesting provision in the COntext of an international project, but perhaps of little importance in purely domestic transactions. Orange Book sub-clause 6.2 contains nearly identical terms, and the Red and Yellow Books contain a sub-clause 6.2 identical to the Silver Book provision. The purpose of Silver Book sub-clause 6.2 is unclear. It has been suggested that FIDIC has embarked on "social engineering" through its form contracts'? Both parties will want to consider carefully the effect of such a clause on the cost and efficiency of their project. The contractor may want to delete this sub-clause. He will want to have the ability to pay the rate of wages in 7

J.L. Jaynes, "The New Color in FIDre's Rainbow: The Trial Edition of the 'Orange Book'" (1995) 12 1.C.L.R. 367 at 381. The author is of a similar opinion.

I;

~;:~g~a;:o~ ~e3

The Contractor shall comply with all the relev~nt labou~ Laws applicabl~to t~e Contractor's Personnel, including ~aws. relatin t~ ~~e:f :n:h~~~~~~eire~~a; safety, welfare, immigration and emIgration, an s a a 0 rights. , The Contractor shall require his employees to obey all applicable Laws, mcluding those concerning safety at work.

J

The Contractor shall pay rates of wages, and observe conditions of labour, which are not lower than those established for the trade or industry where the work is carried out. If no established rates or conditions are applicable, the Contractor shall pay rates of wages and observe conditions which are not lower than the general level of wages and conditions observed locally by employers whose trade or industry is similar to that of the Contractor. 10-09

10-10

6.3 Persons in the Service of Others

The requirement in sub-clause 6.4 to comply with applic~ble la;ou~ la~s and re ulations is perhaps an unnecessary repetition of SII.ver 00 suclause entitled "Compliance with Laws". Nonetheless, Book subclause 6.4 specifically requires the contractor to comp!y wI~h a!l releva~t labour laws applicable to the contractor's personnel. ThIS obhgatl~n sp.eclfically includes laws relating to employment, healt~, safety, ~~Ifa/e, Imm~g,ra­ tion and emigration. In addition, the contractor IS responsl Ie or requmng that his employees comply with these laws as well. Orange Book 6.4 provides substantially identical provisions. Red and Yellow sub-clauses 6.4 are identical to the Silver Book. . . d' The non-FIDIC contracts generally contain broader ?COVISlOns regar mg compliance with laws and regulations rather than haVing a separate clau~e addressing labour laws specifically. However, some of the books contain additional labour-related provisions.

r.13

8

9

S~lver

B. Cazalet &. R. Reece, "Conditions applicables aux contrats de conception et cles en main" (1996) 3 R.D.A.I.II.N.L.J. 279 at 291. FIDIC Guide, op. cit. n. 6 above, p. 151.

construction

236 237

10-13

STAFF AND LABOUR

Th~ ENAA indicates that the contractor must comply with all laws in force m the country where the works are carried out (ENAA 9.4). He must also use best endeavours to prevent unlawful conduct by employees or subcontractors (ENAA 22.1.3(e)). ,The EIC is very similar to the ENAA. It requires the contractor to "comply With the local statutes and regulations prescribed for use of the Site and performance of the Works" (EIC 6.1). The contractor must also use all reasonable endeavours to prevent any unlawful conduct by his staff and labour (EIC 6.4). 10-14 The ICE differs slightly from the aforementioned contracts. The contractor is required to ascertain and comply with all laws and regulations (ICE 26(3)). However, there is no express obligation that the contractor require his employees to do so. -r:he AlA not only requires the contractor to comply generally with all "laws, ordmances, rules, regulations and lawful orders ... relating to the Project" (AlA 3.2.11-Part 2), it also focuses specifically on safety laws and regulati?ns, like ,the Silver Book. ,The AlA states that the contractor shall "comply With applicable laws, ordmances, rules, regulations and lawful orders of ~ublic authorities bearing on the safety of persons or property or their protection from damage, injury or loss" (AlA 6.3-Part 2). Howeve[ there is no obligation in the AlA that the contractor require his employees t~ do so. The contractor is required under the AGC to comply with all laws and ordinanc,es (~GC 3.2.3). However, there is no express obligation for him to require hiS ~ers~nnel to do so. ~he contrac~or is also to establish a safety programme which shall comply With the reqUirements of government and quasigovernmental authorities having jurisdiction over the Work" (AGC 3.4.4). The DBIA generally requires the contractor to perform all work in accordance with all legal requirements (DBIA 2.5.1). It also requires the contractor ,and "Subcontractors" to comply with any safety-related legal reqUirements (DBIA 6.4). There is no mention of the contractor's personnel or any application of these requirements to them. 10-15 FIDIC indicates in the Guidance for Preparation of Particular Conditions ~elating to the Silver Boo~ that some additional provisions may be necessary m, the event o.f use of foreign labour or other personnel or in particular co untn~s. In pa~tlcular, FIDIC gives sample language for a provision regarding reSidence visas and work permits for foreign personnel, which the contractor might be required to provide. The contractor might also be responsible for the repatriation of foreign staff. Some of the non-FIDIC contracts already contain such provisions. For e~ample, und~r. the ENAA and the EIC contracts the contractor is responSible for obtamlng all entry permits and visas for all labour and personnel (ENAA 22.1.3(c), EIC 6.6), as well as for their eventual repatriation (ENAA 22.1.3(d), EIC 6.7).10

10

This repatriation aspect follows World Bank optional measures that were not followed by the FIDIC Orange Book, World Bank op. cit, n, 1 above at 208,

238

DISCUSSION OF SPECIFIC SUB-CLAUSES

Some of the additional country-specific provisions the FIDIC also suggests include the prohibition against the use or sale of alcohol or drugs and arms or ammunition. In addition, it may be appropriate to require the contractor to respect the site country's recognised festivals and religious or other customs. The latter is similar to ENAA 22.1.3(f) which requires the contractor to "pay due regard to all recognised festivals, official holidays and religious and other customs" (see also EIC 6.5).

10-16

6.5 Working Hours No work shall be carried out on the Site on locally recognised days of rest, or outside normal working hours, unless: (a) otherwise stated in the Contract, (b) the Employer gives consent, or (c) the work is unavoidable, or necessary for the protection of life or property or for the safety of the Works, in which case the Contractor shall immediately advise the Employer.

Silver Book sub-clause 6.5 prohibits work on locally recognised days of rest or outside of normal working hours unless otherwise stated in the contract or unless the employer gives his consent. An additional exception is in the event of emergency work to protect life or property or to ensure the safety of the works. In the latter case, the employer must be informed immediately. The contractor may want to delete this sub-clause in order to allow overtime and weekend work when necessary. If the local labour laws allow such work, the contractor should be able to so proceed at his cost. Certain works, such as tunnelling, require constant progress in view of the cost of the necessary equipment and the deleterious effects of leaving the works idle for any period of time. The respective sub-clauses 6.5 of the Orange, Red and Yellow Books are only slightly different from the Silver Book. Those contracts refer to "normal working hours stated in the Appendix to Tender" rather than simply to "normal working hours" as stated in the Silver Book. These contracts contemplate therefore that "normal working hours" will be defined in the particular conditions rather than left undefined as in the Silver Book. In addition, it is the engineer in the Yellow and Red Books and the employer's representative in the Orange Book who would have to consent to work outside normal hours and who would receive notice of any emergency work. The FIDIC Guide states that the employer may define "normal working hours" in the employer's requirements or in the particular conditions, but that the Silver Book philosophy favours contractor independence in determining such hours.11 The ENAA similarly prohibits work from being "carried out during the 11

FIDIC Guide, op. cit. n, 6 above, p, 152.

239

10-17

STAFF AND LABOUR DISCUSSION OF SPECIFIC SUB-CLAUSES

night and on public holidays of the country where the Site is located" subject to the same exceptions as the Silver Book (ENAA 22.8.1). The ENAA further indicates that its provisions do not apply to any work customarily carried out by rotary or double shifts. The ENAA also provides that "when the Contractor considers it to be necessary to carry out work at night or on public holidays so as to meet the Time for Completion, and requests the Owner's consent thereto, the Owner shall not unreasonably withhold such consent" (ENAA 22.8.2). By contrast, the contractor is required under the ENAA to immediately carry out any necessary emergency work (ENAA 22.5).

10-18

The EIC contains no provision prohibiting work outside normal working hours or locally recognised days of rest (and therefore also has no exceptions to such prohibitions). However, the contractor is still required to "pay due regard to all locally recognised festivals, official holidays and religious or other recognised customs" (EIC 6.5). Presumably, that might prohibit work on days of rest to the extent these are associated with festivals, holidays or religious customs. The ICE contains provisions similar to Silver Book sub-clause 6.5 but is closer in content to the ENAA provision. The ICE states that: Subject to any provisions to the contrary contained in the Contract, none of the Permanent and Temporary Works shall be carried out during the night or on Sundays without the permission of the Employer's Representative save when the work is una voidable or absolutely necessary for the saving of life or property or for the safety of such Works in which case the Contractor shall immediately advise the Employer's Representative. Provided always that this Clause shall not be applicable in the case of any work which it is customary to carry out outside normal working hours or by rotary or double shifts. (ICE 45) The AlA, AGC and DBIA contain no provisions similar to Silver Book sub-clause 6.5.

10-19

6.6 Facilities for Staff and Labour Except as otherwise stated in the Employer's Requirements, the Contractor shall provide and maintain all necessary accommodation and welfare facilities for the Contractor's Personnel. The Contractor shall also provide facilities for the Employer's Personnel as stated in the Employer's Requirements. The Contractor shall not permit any of the Contractor's Personnel to maintain any temporary or permanent living quarters within the structures forming part of the Permanent Works. In large projects, particularly in remote areas, the parties may need to provide for the care of their staff. This often includes the provision of facil-

ities for housing and social and emergency services. Silver Book sub-c.l~~se 6.6 requires the contractor to provide accommodation and welfare faclhtl~s for his personnel. However, the terms "accommodation" and "welfare faCilities" used in the Silver Book are imprecise and undefined. He must also provide facilities for the employer's personnel. to the e~t~~t state~ in the employer's requirements. This clause also contam~ a p~ohlbltl~n. agamst permitting any of the contract.or's personnel to mamtam any l:;rmg .quarters "within the structures formmg part of the Permanent Works . ThiS would not appear to prohibit living quarters "on site" provided they are not within the structures of the permanent works. Sub-clauses 6.6 of the Red and Yellow Books are identical to the Silver Book, and Orange Book 6.6 is substantially identical. The FIDIC Guide specifies the effect of this clause, which "removes any implication of obligation on the part of the employer to arrange facilities for the Contractor's personnel" unless the contract provides otherwise. 12 Silver Book sub-clause 6.6 reflects the suggestions provided by the World Bank, although the World Bank suggestions are far more detailed as to t~e faci~­ ities provided to staff and labourY The parties may want to define m detail the facilities required. The ENAA indicates that the contractor will be responsible for the accommodation of all labour (ENAA 22.1.3(b)). This might include accommodations for the employer's personnel as well. "Welfare facilities" are not specifically mentioned. However, under ENAA 7.1 the contr.actor'~ obligations extend to all services required to complete the works, mcludmg temporary facilities. This might be construed as an obligation to pr~vide welf~re facilities if these are necessary to complete the works. There IS no speCific restriction in the ENAA against employee living quarters on site or within the structures of the works. The EIC simply states that the contractor is responsible for the accommodation of all local and expatriate staff and labour (EIC 6.3). The EIC has no other specific provisions similar to Silver Book sub-clause 6.6. The ICE Contract does not contain detailed provisions concerning the responsibility of the contractor for the provision of facilities for hi.s.l~bour. The ICE provides that the contractor will afford all reasonable facilities for any other contractors employed by the employer and the employer's personnel in accordance with the contract (ICE 31(1)). "Contractor's personnel" are not specifically mentioned, but they may fall under general obligations to provide a II services under ICE 8 (1)( b). The AlA contains the general requirement that the contractor "shall provide or cause to be provided and shall pay for ... labor ... and other facilities and services necessary for proper execution and completion of the Works" (AlA 3.2.5-Part 2). The AlA is not specific regarding the provision of accommodation and welfare facilities for the contractor's personnel, but

12

13

FIDIC Guide, op. cit. n. 6 above, p. 153. World Bank op. cit. n. 1 above at 208.

240 241

10-20

STAFF AND LABOUR

DISCUSSION OF SPECIFIC SUB-CLAUSES

the contractor does have a general responsibility for any facilities or services necessary for proper execution of the works. However, the contractor is not expre~sly required to provide facilities for the employer's personnel, and there IS no express prohibition against contractor's personnel maintaining living quarters on site. The AGC contains no specific provisions similar to Silver Book sub-clause 6.6. The DBIA only contains the general obligation to provide "other temporary facilities" necessary to complete the project (DBIA 2.7.1) but makes no specific mention of accommodation or facilities for the contractor's or employer's personnel nor any prohibition against living quarters within the works.

10-21

6.7 Health and Safety The Contractor shall at all times take all reasonable precautions to maintain the health and safety of the Contractor's Personnel. In collabouration with local health authorities, the Contractor shall ensure that medical staff first aid facilities, sick bay and ambulance service are available at all times at 'the Site and at any accommodation for Contractor's and Employer's Personnel, and that suitable arrangements are made for all necessary welfare and hygiene requirements and for the prevention of epidemics. ~he Contra~tor.s~all appoint an accident prevention officer at the Site, responSible fo~ mamtammg safety and protection against accidents. This person shall ~e qualified for this responsibility, and shall have the authority to issue instruct~ons and take protective measures to prevent accidents. Throughout the execution of the Works, the Contractor shall provide whatever is required by this person to exercise this responsibility and authority.

The ~ontractor s~all send, to the Employer, details of any accident as soon as practicable after Its occurrence. The Contractor shall maintain records and make reports concerning health, safety and welfare of persons, and damage to property, as the Employer may reasonably require.

10-22

The employer will want to place specific responsibility on the contractor to care for the health and safety of the labour force to avoid the delays and costs that could. r~s.ult from inj ury or illness. Similarly, the parties need to allocate responsibility amongst themselves for any accident or illness that may occur on the site. Silver Book sub-clause 6.7 contains very specific and detailed health and safety provisions. The contractor is generally required to take any reasonable health and safety precautions and also make health services available on site at all times. The contractor must appoint an accident prevention ~fficer and promptly send the employer the details of any accident on the site. The co~tractor is also obligated to make and maintain reports on health and safety Issues as the employer may require. Red and Yellow Book subclauses 6.7 are identical to the Silver Book, and Orange Book 6.7 is substantially identical. 242

The parties should consider detailing such requirements at the negotiation stage. Certain facilities enumerated in the Silver Book, such as provision of an ambulance service, may prove impossible or impractical to arrange in certain locations. In some countries this clause may not be necessary if there are adequate local facilities. The health and safety provisions should therefore be amended to fit the specific needs of the project. For example, in some situations it may be necessary for the contractor to provide a fully equipped hospital. 14 The ENAA general conditions contain little detail with regard to health and safety on the site. It simply states that the employer and contractor will "establish Site regulations setting out the rules to be observed in the execution of the Works at the Site and shall comply therewith", which includes safety regulations (ENAA 22.3). This is in line with the UNCITRAL Legal Guide's recommendations that the parties draw up specific guidelines as to what facilities are to be provided and who will pay for their provision, as well as their standard. IS Again, these considerations will be affected by the site country's applicable laws and regulations. The EIC's health and safety provisions are also scant. The EIC only provides that the contractor shall have full regard for the safety of all persons entitled to be upon the site and keep the site and the works in an orderly state appropriate for the avoidance of danger (EIC 6.8). The ICE provisions are similar to the ENAA and EIC in their level of detail. The ICE makes the contractor generally responsible for the safety of all site operations (ICE 8(5)) and requires him to have full regard for the safety of all persons entitled to be on the site (I CE 19( 1)). However, there are no provisions regarding on-site health services, an accident prevention officer or reporting requirements for health and safety issues. The AlA is not as detailed as the Silver Book but is slightly broader than the ENAA, EIC and ICE. Under the AlA, the contractor is responsible for "initiating, maintaining and providing supervision of all safety precautions and programs" (AlA 6.1-Part 2). The contractor must also "take reasonable precautions for the safety of, and shall provide reasonable protection to prevent damage, injury or loss to . . . employees on the work and other persons who may be affected thereby" (AlA 6.2-Part 2). The AGC contains detailed safety provisions, stipulating that the contractor has overall responsibility for safety precautions and programs in the performance of the work (AGC 3.4.1). Further, the contractor is to designate a safety representative who shall be employed at the worksite and who shall have a duty to prevent accidents (AGC 3.4.3). The DBIA is clearly the most comprehensive of the non-FIDIC contracts with regard to health and safety issues. The DBlA provides: Design-Builder recognises the importance of performing the Work in a safe manner so as to prevent damage, injury or loss to ( 1all individuals at the Site,

14 15

FIDIC Guide, p. 154. UNCITRAL, up. cit. n. 2 above at 111.

243

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STAFF AND LABOUR

whether working or visiting, .... Design-Builder assumes responsibility for implementing and monitoring all safety precautions and programs related to the performance of the Work. Design-Builder shall, prior to commencing construction, designate a Safety Representative with the necessary qualifications' and experience to supervise the implementation and monitoring of all safety precautions and programs related to the Work. Unless otherwise required by the Contract Documents, Design-Builder's Safety Representative shall be an individual stationed at the Site who may have responsibilities on the Project in addition to safety. The Safety Representative shall make routine daily inspections of the Site and shall hold weekly safety meetings with Design-Builder's personnel, Subcontractors and others as applicable. (DBIA 2.8.1.) In addition, the contractor must provide the employer with a monthly report including, among other things, a statement of whether "health and safety issues exist in connection with the Work" (DBIA 2.1.2). Finally, the contractor must promptly report in writing any "safety-related injury, loss, damage or accident arising from the work to owner's representative and, to the extent mandated by Legal Requirements, to all government or quasi-government authorities having jurisdiction over safety-related matters involving the Project or the Work" (DBIA 2.8.2).

10-25

6.8 Contractor's Superintendence Throughout the design and execution of the Works, and as long thereafter as is necessary to fulfill the Contractor's obligations, the Contractor shall provide all necessary superintendence to plan, arrange, direct, manage, inspect and test the work. Superintendence shall be given by sufficient number of persons having adequate knowledge of the language for communications (defined in Sub-Clause 1.4 [Law and Language)) and of the operations to be carried out (including the methods and techniques required, the hazards likely to be encountered and methods of preventing accidents), for the satisfactory and safe execution of the Works. The contractor must supervise the construction activities at the site as part of his responsibility for the design, co-ordination and construction of the works. The contractor must generally supervise his employees and the subcontractors' employees. However, the parties may want the contractor to exercise general supervision over everyone working on the site, including other contractors of the employer, in order to centralise administration of the project. Silver Book sub-clause 6.8 requires the contractor to provide superintendence to plan, arrange, direct, manage, inspect and test the work. It requires this supervision to be given by a sufficient number of persons with adequate knowledge of the language for communications and knowledge of the operations, project hazards and accident prevention methods. The contractor is responsible for this superintendence throughout the design and execution of the works and as long thereafter as is necessary to fulfill the contractor's obligations.

244

The Orange Book contains similar requirements u~der its sub-clause 6:8. However, it is the employer's representative who deCides how long supenntendence may be necessary after design and execution ?y th~ contrac~or. The Red and Yellow Books are identical to the Silver Book In their respective subclauses 6.8. The ENAA provides that "[t]he Contractor shall give or provide all necessary superintendence during the execution of the Works, an~ the Construction Manager or his deputy shall be constantly on the Site to provide full-time superintendence of the Works" (~NAA 22.1.2). It fu~t~er requires that the supervisory staff be competent to give adequate supervIsIOn to the work they are required to supervise (ENAA 22.1.2). The.contract.or's obligations extend to the provision and perfor~ance of all.se~vI~es reqU1~ed for design, procurement, construction, ereCtion, commlsslOmng, testing delivery and completion of the works, including supervision (ENAA 7.1). The EIC contains no specific requirements regarding superintendence for the works. The ICE is very similar to the Silver Book. It states:

10-26

The Contractor shall provide all necessary superintendence during the carrying out of the Works and for as long thereafter as the Employer's Representative may reasonably consider necessary. Such superintendence shall be given by sufficient persons having adequate knowledge of the operations to be carried out (including the methods and techniques required, the hazards likely to be encountered and methods of preventing accidents) for the satisfactory and safe carrying out of the Works. (ICE 15(1)) The ICE further requires that the contractor's representative or a competent and authorised agent approved by the employer's representative shall superintend the construction of the works and shall give his whole time to such superintendence (ICE 15(3)). The AlA does not contain a general superintendence requirement as found in the Silver Book. Yet, the contractor is generally responsible for co-ordinating "all portions of the Work" under the contract (AlA 3.2.6-Part 2). However, unless otherwise stated in the contract documents (AlA 11.3.2Part 2), co-ordination services in connection with the employer's personnel or the employer's other contractors are considered an "additional service" for which additional compensation is required (AlA 1.4.1 O-Part 1, 3.3.5Part 2). Still, "co-ordination" does not imply the same responsibilities as "superintendence". . The AGC does not specifically require "superintendence". However, It does provide that contractor will "furnish construction and administration of the Work" (AGC 2.1). The contractor must also provide "all necessary construction supervision [and] inspection" (AGC 3.2.2). This equates to at least some minimal superintendence requirement. The DBIA states that "[u]nless otherwise provided in the Contract Documents to be the responsibility of Owner or a separate contractor, Design-Builder shall provide through itself or Subcontractors the necessary

245

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STAFF AND LABOUR

supervision, labour, inspection, testing ... and other temporary facilities to permit Design-Builder to complete construction of the Project consistent with the Contract Documents" (DBIA 2.7.1). "Design-Builder shall at all times exercise complete and exclusive control over the means, methods, sequences and techniques of construction" (DBIA 2.7.2).

10-28

6.9 Contractor's Personnel The Contractor's Personnel shall be appropriately qualified, skilled and experienced in their respective trades or occupations. The Employer may require the Contractor to remove (or cause to be removed) any person employed on the Site or Works, including the Contractor's Representative if applicable, who: (a) persists in any misconduct or lack of care, (b) carries out duties incompetently or negligently, (c) fails to conform with any provisions of the Contract, or (d) persists in any conduct which is prejudicial to safety, health, or the protection of the environment. If appropriate, the Contractor shall then appoint (or cause to be appointed) a

suitable replacement person. 10-29

10-30

Although the contractor is responsible for the hiring and maintenance of the labour used in the construction of the project, the employer may want a method of removing individuals who, in his opinion, are negligent in their work or who disrupt the progress of the works. This power should allow the employer to act but also restrict him in order to avoid abuse or delay. In that regard, the contractor may want to include some form of review of the employer's decision to remove one of the contractor's employees. This review may include having the employee in question interviewed by the employer and the contractor before being removed. The contractor may also want to apply a reasonableness standard to the employer's decision. Silver Book sub-clause 6.9 sets forth the requirements regarding the contractor's personnel and the employer's ability to remove such personnel. First, the contractor's personnel must be "appropriately qualified, skilled and experienced in their respective trades or occupations". This fixes a particular level of skill, albeit somewhat subjective and undefined. The clause also empowers the employer to remove any of the contractor's personnel for misconduct, carelessness, negligence, failure to adhere to the contract or other prejudicial conduct. Sub-clauses 6.9 of the Orange, Red and Yellow Books are generally identical to the Silver Book, with the exception that it is the employer's representative who may remove contractor's personnel under the Orange Book and the engineer under the Red and Yellow Books. The ENAA contains similar provisions, but the skill requirements apply to "technical personnel" and "supervisory staff" rather than to contractor's personnel generally. Specifically, the ENAA states that the contractor 246

may employ "only such technical personnel as are skilled and experienced in their respective callings and such supervisory staff as are competent to give adequate supervision to the work they are required to supervise" (ENAA 22.1.2). However, the employer may give notice to the contractor of his objection to any person employed by the contractor in the execution of the works who, in the employer's opinion, misconducts himself, is incompetent or negligent or who commits a serious breach of site regulations (ENAA 17.2.5). "The Owner shall provide evidence of the same whereupon the Contractor shall remove such person from the Works" (ENAA 17.2.5). The skill requirements for the contractor's personnel under the EIC are more vague. The only indication of any standard of skill is the requirement that the contractor provide "such skilled staff and labour as is necessary for the execution of the Works" (EIC 6.2). There is no express power of employer to remove personnel under the EIe. The standard of skill for contractor's personnel is defined better in the ICE: "The Contractor shall employ or cause to be employed in connection with the Works and in superintendence thereof only persons who are careful, skilled and experienced in their several professions, trade and callings." (ICE 16( 1)). The employer's representative is also allowed to object to and require the removal of any person employed for the works for misconduct, incompetence, negligence, failure to adhere to safety requirements or other prejudicial conduct (ICE 16(2)). The AlA and AGC contain no provisions similar to Silver Book sub-clause 6.9. Under the DBIA, there are no specific skill requirements or qualifications for the contractor's personnel.

6.10 Records of Contractor's Personnel and Equipment

10-31

The Contractor shall submit, to the Employer, details showing the number of each class of Contractor's Personnel and of each type of Contractor's Equipment on the Site. Details shall be submitted each calendar month, in a form approved by the Employer, until the Contractor has completed all work which is known to be outstanding at the completion date stated in the Taking-Over Certificate for the Works. Silver Book sub-clause 6.10 requires the contractor to provide the employer each month with details of the number and class of his personnel as well as details of all the contractor's equipment on the site. The Orange Book does not have a separate provision containing these requirements but does require records of contractor's personnel and equipment to be provided as part of the progress reports (OB 4.1S(d)). Sub-clauses 6.10 ofthe Red and Yellow Books are identical to the Silver Book provision, with the exception that it is the engineer who receives and approves the form of the records, rather than the employer. 247

DISCUSSION OF SPECIFIC SUB-CLAUSES

STAFF AND LABOUR

10-32

The ENAA does not require monthly records regarding the contractor's personnel and equipment but does contain somewhat similar provisions in other sub-clauses. Under ENAA 18.1 the contractor must provide the employer with an organisational chart showing, among other things, the identities of the key personnel with their curricula vitae (ENAA 18.1). In addition, the contractor must communicate to the employer a description and the shipping document of the construction equipment upon its dispatch to the site (ENAA 21.4.3). The EIC requires the contractor to provide the employer with "a detailed programme for the Works ... including the identities and curricula vitae of key personnel to be employed on the Contract" (EIC 4.5). However, it contains no provisions regarding records of contractor's equipment. The ICE imposes potentially the same requirements on the contractor as Silver Book 6.10. The ICE states:

protecting other persons and property on the site is not specifically mentioned in these clauses. Apart from obligations regarding general safety on the site, the ICE, AlA, AGC and DBIA do not contain provisions similar to Silver Book sub-clause 6.11. However, the AlA does require the contractor to provide reasonable protection for persons on the site (AlA 6.2-Part 2).

If the Contract so provides the Contractor shall deliver to the Employer's

Representative a return ... showing in detail the numbers of the several classes of labour from time to time employed by the Contractor on the Site and such information in respect of Contractor's Equipment as the Employer's Representative may require. (ICE 35) Under the AlA the contractor is not required to furnish to the employer the count of all the contractor's personnel in each class, but only the names of the persons or entities the contractor will engage as contractors for the project (AlA 11.2.1-Part 2). There is no requirement in the AlA requiring the contractor to provide details of his equipment to the employer. The AGC and DBIA contain no provisions similar to Silver Book 6.10. 10-33

6.11 Disorderly Conduct The Contractor shall at all times take all reasonable precautions to prevent any unlawful, riotous or disorderly conduct by or amongst the Contractor's Personnel, and to preserve peace and protection of persons and property on and near the Site.

10-34

Silver Book sub-clause 6.11 sets forth the contractor's obligations regarding the prevention of disorderly conduct, which can be broken into two parts: (1) preventing disorderly or unlawful conduct by the contractor's personnel and (2) upholding order and protecting persons and property on the site. The contractor must take "reasonable precautions", but the standard of "reasonableness" is unclear and will vary based on industry practice and applicable law. Sub-clauses 6.11 of the Red and Yellow Books are identical to the Silver Book, and Orange Book 6.10 is substantially identical. The ENAA and EIC both contain part of the Silver Book obligations. In both, the contractor must use his best endeavours to prevent unlawful and disorderly conduct by his employees (ENAA 22.1.3(e), EIC 6.4). However, 248

249

CHAPTER

11

PLANT, MATERIALS AND WORKMANSHIP General Comments Under a turnkey or EPC contract, the contractor is responsible for providing plant and materials as well as for the quality of workmanship used in the construction. In order to control the quality of the plant and materials used in the works and to verify the contractor's workmanship, the employer will generally require and specify tests, inspections and rights of approval as to suppliers and subcontractors who are providing key materials and services. Without the implementation of appropriate safeguards the use of the turnkey method of contracting could result in a decrease in quality. By requiring inspections, tests and approvals the employer better ensures a certain level of quality in the finished product. In the context of a turnkey or EPC contract, the employer may be tempted to select a contractor solely on the basis of the lowest priced bid, which does not necessarily ensure the highest quality offer. Where contractors are pushed to provide low-priced tenders, they will seek to minimise cost wherever possible in order to maintain budget. This may result in the use of materials and subcontractors of lower quality and competence. It therefore becomes important for the employer to have a system to verify that the quality of the works and the plant and materials used therein meet the desired contract standards. Unless the employer studies carefully the designs and materials tendered and clearly specifies the level of quality he desires, he may be disappointed by the final product. I Unlike separate contracts, a consolidated turnkey or EPC contract will generally not describe in detail the materials to be provided. Notwithstanding this, the major elements of the project should be specified to ensure the quality of the completed works. The parties should also consider the source of the materials used for construction. The World Bank suggests the consideration of materials from local sources, although only as an encouragem.ent of local industry. However, it does not permit any strict limitation on the sources of plant, materials or contractor's equipment because of the potential negative affect 1

B. Eggleston, The ICE Design and Construct: A Commentary (Blackwell Scientific Publications, Australia, 1994), p. 217.

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on quality.2 However, such limitations in international construction contracts are not uncommon. In a turnkey contract, the employer should also provide for tests and inspections during construction to verify the quality and progress of the works. These tests will either be specified in detail in the contract itself,3 or the employer may be allowed to proceed with tests and inspections at his discretion. Routine testing (as opposed to the tests on completion) should not form the basis of any acceptance of the works since this may be insufficient to judge every aspect of the works involved. Excessive testing should also be avoided as it may needlessly increase the cost of construction and the time for performance by interfering with the contractor's progress. Implementation of a quality assurance programme may partially satisfy the need for routine testing. The programme should be carefully prepared if it is to be used as a replacement for some of the testing to be performed during construction. 4 The parties to a turnkey contract will also want to check the applicable law with respect to any mandatory testing. Such testing may be required to precede any acceptance of a completed facility by the employer, where the employer is a public authority. This may be true even in jurisdictions where completed works (for public services) "automatically" become public property once construction is finished. s The testing regime provided by the contract should not duplicate unnecessarily the regime imposed by the applicable law.

11-02

Discussion of Specific Sub-Clauses 11-03

Clause 7 of the Silver Book, entitled "Plant, Materials and Workmanship", sets forth the contract requirements regarding the manner of execution of the work and the submission of samples for employer review, and specifies the contractor's responsibility concerning payment for natural materials and disposal of excess material. It also enumerates specific rights and responsibilities regarding the inspection and testing of the works, the employer's power to reject parts of the construction and the contractor's responsibilities regarding remedial work. Clause 7 also includes a simplified regime concerning the transfer of ownership of plant and materials to the employer.

2

3

4

5

World Bank "Standard Bidding Documents for the Procurement of Works " (World Bank Washington, D.C., 2000) online: World Bank http://www. woridbank.orglhtmVoprlbiddocsi works/w-titlpg.htm (date accessed: July 16,2001) at 113. As is recommended by UNCITRAL, Legislative Guide on Privately Financed Infrastructure Pro/ects (UN, New York, 2001) (UNDOC AlCN.9/SER.B/4) online: UNCITRAL Homepage (PDF format) http://www.uncltral.orglenghshltexts/procuremlplip_index_e.htm (date accessed: July 16,2001) at 126- 127. ibid. at 141-42. ibid. at 127.

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The majority of the provisions in this sub-clause are straightforward, clear and relatively well balanced with regard to the parties' respective rights. Depending on the jurisdiction governing the contract, closer attention may need to be paid to sub-clause 7.7, "Ownership of Plant and Materials", which may not fulfill its intended purpose for the employer or lenders. The various contracts discussed herein all present a slightly different approach to the issue that might be better adapted to certain jurisdictions. Advice of local counsel should be sought if the issues contained in Silver Book 7.7 are important to the party at risk.

11-04

7.1 Manner of Execution The Contractor shall carry out the manufacture of Plant, the production and manufacture of Materials, and all other execution of the Works: (a) in the manner (if any) specified in the Contract, (b) in a proper workmanlike and careful manner, in accordance with recognised good practice, and (c) with properly equipped facilities and non-hazardous Materials, except as otherwise specified in the Contract.

Under the Silver Book, the employer is no longer intensively involved in the day-to-day progress of the works. In order to ensure the quality of the materials and workmanship the contract imposes standards of quality on the contractor. These standards are then verified through the testing and inspection requirements set forth in the Silver Book clauses 7, 9 and 11 and the quality assurance system referred to in sub-clause 4.9. Silver Book sub-clause 7.1 attempts to set forth a standard to be applied to the execution of the contract. The contractor is generally required to manufacture plant and materials and execute the works in the manner specified in the contract, "in a proper workmanlike and careful manner, in accordance with recognised good practice", and with properly equipped facilities and non-hazardous materials. The Red and Yellow Books each contain a sub-clause 7.1 identical to the Silver Book, and Orange Book sub-clause 7.1 is identical in content to the Silver Book provision. . The Silver Book mentions a standard of "good practice", which applies where no other standard is specified in the contract. However, the meaning of "good practice" is unclear. The parties may want to redefine this term by making specific reference to a professional standard. The reference to hazardous materials should also be considered carefully where use of such materials may be necessary for the execution or operation of the works. In its guidance notes relating to clause 7, FIDIC provides an additional provision placing restrictions on the country of origin of materials, plant and equipment used in light of limitations placed on borrowers by certain financing institutions such as the World Bank.

253

11-05

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11-06

11-07

The ENAA is far less comprehensive than the FIDlC contracts with regard to manner of execution. However, it does state that "[t]he Contractor shall execute and complete the Works with due care and diligence in accordance with the contract" (ENAA 9.1). There is no mention of a standard for equipment or facilities and no express prohibition against the use of hazardous materials. The ElC provides a standard for execution and completion similar to that of the ENAA: "The Design and the Works shall be executed and completed by the Contractor with due care and diligence in accordance with the Contract." (ElC 4.1.) The ElC extends this standard specifically to workmanship and materials, stating that the contractor "will carry out and complete the construction of the Works with due diligence and with workmanship and materials of good quality in accordance with the Approved Design to meet the requirements of the Contract." (ElC 4.3). There is no mention of non-hazardous materials in the EIC. The standard for execution set forth in the ICE is that "[t]he Works shall be designed, constructed and completed in accordance with the Contract and where not expressly provided otherwise in the Contract in accordance with appropriate standards and standard codes of practice" (ICE 36(1)). In addition, the ICE states that "[a]ll materials and workmanship shall be of the respective kinds described in the Contract or where not so described shall be appropriate in all the circumstances" (ICE 36(2)). If chosen by the parties, English law will complete this standard with its guarantees of good and merchantable quality and reasonable fitness for the purpose intended. 6 The AlA takes a slightly different approach from the above contracts. The AlA requires the contractor to warrant the quality of goods, equipment and work. Sub-clause 3.2.9 of AlA-Part 2 states that the contractor warrants to the employer "that materials and equipment furnished under the Contract will be of good quality and new unless otherwise required or permitted by the Contract Documents, that the construction will be free from faults and defects, and that the construction will conform with the requirements of.the Contract Documents" (AlA 3.2.9-Part 2). The AlA contains no specific prohibition against hazardous materials. The AGC requires the contractor to "exercise reasonable skill and judgment in the performance of the Work" (AGC-article 3). In addition, "[t]he Contractor warrants that all materials and equipment furnished under this Agreement will be new unless otherwise specified, of good quality, in conformance with the Contract Documents, and free from defective workmanship and materials" (AGC 3.8.1). The AGC does not specifically prohibit the use of hazardous materials, though this may be implied from the general terms of the contract. Under the DBIA, the contractor is required to "perform all construction activities efficiently and with the requisite expertise, skill and competence to satisfy the requirements of the Contract Documents" (DBlA 2.7.2). The • B. Eggleston, The ICE Design and Construct: A Commentary (Blackwell Scientific Publications, Australia, 1994), p. 218.

254

DISCUSSION OF SPECIFIC SUB-CLAUSES

contractor must also warrant to the employer that "the construction, including all materials and equipment furnished as part of the construction, shall be new ... of good quality, in conformance with the Contract Documents and free of defects in materials and workmanship" (DBlA 2.9.1). Although there is no prohibition against the contractor's use of hazardous materials, the contractor is obligated to indemnify and hold the employer harmless from and against all claims, losses, damages, liabilities and expenses arising out of or resulting from hazardous materials, waste, substances or chemicals introduced to the site by the contractor (DBIA 4.1.6). 7.2 Samples

11-08

The Contractor shall submit samples to the Employer, for review in accordance with the procedures for Contractor's Documents described in Sub-Clause 5.2 [Contractor's Documents], as specified in the Contract and at the Contractor's cost. Each sample shall be labelled as to origin and intended use in the Works. Testing and examination of sample materials will help the employer verify their quality. Silver Book sub-clause 7.2 provides for review of samples to be submitted to the employer. The samples are subject to the same review procedure as for the contractor's documents. The samples must be labelled as to origin and their intended use in the works. An appendix to the contract should specify exactly which samples are subject to this provision. Orange Book sub-clause 5.5 requires the contractor to submit samples to the employer's'representative for pre-construction review in accordance with the procedure for contractor's documents. The samples to be submitted are manufacturer's standard samples of materials, samples specified in the employer's requirements and additional samples instructed by the employer's representative. There is no indication as to responsibility for the cost of additional samples instructed. Red Book sub-clause 7.2 is similar to the Silver Sook provision but provides more detail. The samples are submitted, but simply for the consent of the engineer rather than the review procedure applied to contractor's documents. However, the relevant samples subject to this clause are listed in slightly more detail, specifically, samples of materials, samples specified in the contract and additional samples instructed by the engineer. The Red Book provision indicates that standard samples of materials and samples listed in the contract will be furnished at the contractor's cost. However, additional samples are subject to the procedure for variations. Yellow Book sub-clause 7.2 is nearly identical to the Red Book provision. However, the samples are subject to the contractor's documents review procedure rather than simply subject to the engineer's consent. The ICE provides that the contractor "shall supply samples of materials before incorporation in the Works for testing as may be required by the Employer's Representative" (ICE 36(4)). "All samples shall be supplied by the Contractor at his own cost if the supply thereof is clearly intended by or 255

11-09

PLANT, MATERIALS AND WORKMANSHIP

provided for in the Contract but if not then at the cost of the Employer." (ICE 36(5).) The ENAA, EIC, AlA, AGC and DBIA contain no provisions comparable to Silver Book sub-clause 7.2 regarding samples.

11-10

7.3 Inspection The Employer's Personnel shall at all reasonable times: (a) have full access to all parts of the Site and to all places from which natural Materials are being obtained, and (b) during production, manufacture and construction (at the Site and, to the extent specified in the Contract, elsewhere), be entitled to examine, inspect, measure and test the materials and workmanship, and to check the progress of manufacture of Plant and production and manufacture of Materials. The Contractor shall give the Employer's Personnel full opportunity to carry out these activities, including providing access, facilities, permissions and safety equipment. No such activity shall relieve the Contractor from any obligation or responsibility. In respect of the work which Employer's Personnel are entitled to examine, inspect, measure and/or test, the Contractor shall give notice to the Employer whenever any such work is ready and before it is covered up, put out of sight, or packaged for storage or transport. The Employer shall then either carry out the examination, inspection, measurement or testing without unreasonable delay, or promptly give notice to the Contractor that the Employer does not require to do so. If the Contractor fails to give the notice, he shall, if and when required by the Employer, uncover the work and thereafter reinstate and make good, all at the Contractor's cost.

11-11

Silver Book sub-clause 7.3 indicates that the employer's personnel shall at all reasonable times have full access to all parts of the site and be entitled to examine, inspect, test and otherwise check the progress of the manufacture of plant and materials. This will allow them to ensure quality, although it could also serve to inhibit the progress of the works. The contractor is required to give the employer's personnel full opportunity to carry out these activities as well as provide facilities and safety equipment. In addition, the contractor must give notice to the employer whenever work is ready and before it is covered up, after which the employer shall either carry out the examination or give notice to the contractor that he does not need to do so. lf the contractor fails to give this notice, he may be required by the employer to uncover the work at the contractor's cost to permit the inspection and then restore the work to its completed condition. No inspection activities of the employer's personnel shall relieve the contractor of any obligation under the contract. The Orange, Red and Yellow Books contain provisions in their respective sub-clauses 7.3 that are substantially identical to the Silver Book. However, 256

DISCUSSION OF SPECIFIC SUB-CLAUSES

under the Orange Book it is the employer's representative who is the relevant actor, and the engineer under the Red and Yellow Books, rather than the employer. The ENAA contains provisions generally similar to the FlDIC books. It 11-12 indicates that the contractor shall afford the employer at the employer's expense "access at any reasonable time to any place w~ere the M~terials are being manufactured or the Works are being executed In order to Inspect the progress and the manner of manufacture or constructio?, prov~de~ that the [Employer] shall give the Contractor a reasonable pnor notice. (ENAA 23.8). The ENAA also contains provisions regarding the covenng-up of works and related notice requirements. In its sub-clause 23.10 the ENAA states that no part of the works may be covered up before an~ required tests or inspections are carried out, and the contractor must ~Ive re~sonable notice to the employer when the part is ready for test and/or inspectIOn. !he contractor is also obligated to uncover any part of the works or foundations as required by the employer and to later re-cover the works (ENAA 23.11). However, if the employer requires the works to be uncovered after proper notice has been given or after the part has been properly tested and/or inspected, the expenses of the uncovering and rei~statement will ~e borne by the employer i( the uncovered part is found to be In accordance with the contract (ENAA 23.11). Similar to the Silver Book, under the ENAA no test or inspection of materials or the works, nor the presence of the employer's inspector nor the issue of a test certificate shall release the contractor from any other responsibilities under the contract (ENAA 23.9). The EIC indicates that at the employer's reque!it, the contractor must allow the employer or any person authorised by him :"at all reasonable ti~es to have access to the Site and to all Workshops and places where materials or Plant are being manufactured, fabricated or prepared for the Works" (EIC 6.12). However, there are no provisions regarding the covering-up of work or related notices. The ICE contains provisions similar to those of Silver Book 7.2 and the 11-13 ENAA. It states that: The Employer's Representative and any person authorized by him shall at all times have access to the Works and to the Site and to all workshops and places where work is being prepared or whence materials, manufactured articles and machinery are being obtained for the Works and the Contractor shall afford every facility for and every assistance in obtaining such access or the right to such access.

(ICE 37) In addition, the contractor must give the employer's representative full opportunity to examine and measure any work which is about to be covered up and notice of the covering-up must be given (ICE 38(1)). The contractor is also required to uncover any part of the works as the employer's representative may require and subsequently reinstate and make good the works, if necessary (ICE 38(2)). If proper notice of covering-up was given to the employer's representative as well as full opportunity for examination, the 257

DISCUSSION OF SPECIFIC SUB- CLAUSES

PLANT, MATERIALS AND WORKMANSHIP

11-14

costs of uncovering, reinstatement and making good the works shall be borne by the employer if the works are found to be in compliance with the contract (ICE 38(2)). The AlA c~ntains no blanket authorisation for the employer and his personnel re~ardmg access to the works nor any notice requirelllents relating to the covering-up or subsequent uncovering of work for inspection. However, AlA 7.3:-Part 2 does state: "The Owner may appoint an on-site project representative to observe the Work and to have such other responsibilities as the Owner and the Design/Builder agree in writing." The AGC and DBIA contain no provisions similar to Silver Book subclause 7.3.

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7.4 Testing

This Sub-Clause shall apply to all tests specified in the Contract, other than the Tests after Completion (if any). The Contractor shall provide all apparatus, assistance, documents and other information, electricity, equipment, fuel, consumables, instruments labour materials, a~d suitably qu~1ified and experienced staff, as are necessar; to carr; out the specified tests effiCiently. The Contractor shall agree, with the Employer, the time and place for the specified testing of any Plant, Materials and other parts of the Works. The Employer ~ay, und~r Clause 13 [Variations and Adjustments), vary the' I?catlon or details of specified tests, or instruct the Contractor to carry out additIOnal tests. If these varied or additional tests show that the tested Plant Materials or workmanship is not in accordance with the Contract the cost of carrying out this Variation shall be borne by the Contractor not~ithstanding other provisions of the Contract. ' The Employer shall give the Contractor not less than 24 hours' notice of the ~mployer's intention to attend the tests. If the Employer does not attend at the time and place agreed, the Contractor may proceed with the tests unless otherwise instructed by the Employer, and the tests shall then be deemed to have been made in the Employer's presence. ~f the C,ontractor suffers delay and/or incurs Cost from complying with these Instructions or as ~ resul~ of a delay for which the Employer is responsible, the Contractor shall give notice to the Employer and shall be entitled subject to SubClause 20.1 [Contractor's Claims) to: (a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion), and (b) payment of any such Cost plus reasonable profit, which shall be added to the Contract Price.

After receiving this notice, the Employer shall proceed in accordance with SubClause 3.5 [Determinations) to agree or determine these matters. The Contractor shall promptly forward to the Employer duly certified reports of the tests. When the specified tests have been passed, the Employer shall 258

endorse the Contractor's test certificate, or issue a certificate to him, to that effect. If the Employer has not attended the tests, he shall be deemed to have accepted the readings as accurate. During construction of the works, the contract provides for testing of parts of the works as they are completed or as a certain stage is completed. This testing serves to verify the progress achieved on the construction of the works and the quality of the contractor's materials and workmanship. Silver Book sub-clause 7.4 sets forth the provisions for testing under the contract but does not apply to the tests after completion, if any. The contractor is required to provide all apparatus, assistance, utilities, consumables, staff and other items to carry out the tests efficiently. The contractor and the employer agree to the time and place for any specified testing. Howeyer, the employer may modify by formal variation the location or details of the tests or instruct additional tests. If the varied or additional tests show plant, materials or workmanship not in accordance with the contract, then the cost of carrying out the variation is borne by the contractor. The employer must give the contractor at least 24 hours' notice of his intention to attend the tests. If the employer does not attend, the contractor may proceed with the testing unless otherwise instructed by the employer. In that case, the test is deemed to have been made in the employer's presence, and the employer shall be deemed to have accepted the readings as accurate. If the contractor suffers delay or incurs costs from complying with the employer's instructions or as a result of a delay for which the employer is responsible, the contractor is entitled to an extension of time and/or payment of reasonable costs plus profit. The contractor is required to forward to the employer duly certified reports of the tests. When the tests have been passed, the employer must endorse the contractor's test certificate or issue a certificate to him. The employer may want to specify in this section that any failure of the employer or contractor to discover a defect during a test or inspection does not relieve the contractor of his duty to remedy any defect that subsequently arises. 7 The employer may also want to provide for certain materials or plant to be tested off-site before delivery. The parties may wish to make special provision for such tests and place a requirement on the contractor of successful performance and passage of such tests before delivery of the plant or materials to the site_ Orange Book sub-clause 7.4 is nearly identical to the Silver Book pro vision, except that it is the employer's representative who is referenced and who acts, rather than the employer. In addition, the employer's representative is not expressly entitled under this clause to vary the location or details of the testing or instruct additional tests. PresumaiJly, such additional or modified tests would be permitted under the employer's general power under

7

UNCITRAL, op, cit. n. 3 above at 141.

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PLANT, MATERIALS AND WORKMANSHIP

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the contract to issue instructions and variations. However, there is no specific provision, as is contained in the Silver Book, that the contractor is responsible for the cost of the variation if it turns up a defect or non-compliance with the contract (but see 12.8 "Contractor to Search"). The Orange Book also contains no provision in this sub-clause that the contractor may obtain an extension of time and costs for delays for which the employer is responsible, even though this is otherwise contained in Orange Book subclause 8.3. Sub-clause 7.4 of the Red and Yellow Books is nearly identical to the Silver Book provision. However, it is the engineer who is referenced and who acts, rather than the employer. The ENAA is very similar to Silver Book sub-clause 7.4. The ENAA indicates that "[t]he Contractor shall, at its own expense, carry out ... all such test and/or inspection of the Materials and any part of the Works as are specified in the Contract" (ENAA 23.1). The contractor's general obligations include the provision of all materials, all services required for testing of plant (ENAA 7.1) and all work and supply of materials reasonably inferable from the contract (ENAA 7.2). However, there is no specific requirement in the ENAA that the contractor and the employer agree to the time and place for any specified testing. The contractor must simply give the employer "a reasonable advance notice of such test and/or inspection and of the place and time thereof" (ENAA 23.3). By the same token, the employer is not required to give the contractor notice of his intention to attend. The ENAA simply states that the employer is entitled to attend tests and inspections represented by his own duly authorised inspector (ENAA 23.2). Under the ENAA, "[i]f the [Employer's] inspector fails to attend the test and/or inspection, or if it is agreed between the parties that the Owner's inspector shall not do so, then the Contractor may proceed with the test and/or inspection in the absence of the Owner's inspector and provide the Owner with a certified report of the results thereof" (ENAA 23.4). However, there is no express statement that the employer is deemed to have accepted the readings as accurate. On the contrary, the ENAA states that "[t]he Contractor agrees that neither the execution of a test and/or inspection of Materials or any part of the Works, nor the attendance by the [Employer's] inspector nor the issue of any test certificate ... shall release the Contractor from any other responsibilities under the Contract" (ENAA 23.9). Regardless, whether the employer attends or not, the contractor is still obligated to provide a certified report of the results of any test or inspection (ENAA 23.4). The employer is also permitted to order any test or inspection not described in the contract, provided that neither impedes the progress of the works or the contractor's performance of other obligations under the contract, unless the contractor is compensated for extra time and cost (ENAA 23.5). The EIC contains no specific provisions regarding testing. EIC sub-clause 9.4(a) simply makes a vague reference to "any Tests on Completion prescribed by the Contract". However, the general conditions contain no such 260

DISCUSSION OF SPECIFIC SUB-CLAUSES

provisions. Presumably, provisions regarding testing could be added as an appendix. Under the ICE Contract, the contractor must submit to the employer's representative "for his approval proposals for checking the design and setting out of the Works and testing the materials and workmanship to ensure that the Contractor's obligations under the Contract are met" (ICE 36(3)(a)). The contractor must carry out these approved checks and tests, any other tests required under' the contract and such further tests as the employer's representative may reasonably require (ICE 36(3)(b)). The contractor is responsible for providing "such assistance and such instruments, machines, labour and materials as are normally required for examining, measuring and testing any work and the quality, weight or quantity of any materials used" (ICE 36(4)). Unless otherwise stated in the contract, the costs of making any test are borne by the contractor if the test is provided for br intended by the contract or if the test is otherwise ordered by the employer and shows workmanship or materials not to be in accordance with the provisions of the contract (ICE 36(7)). The AGC's provisions are vague and few regarding testing. It states that "[t]he Contractor shall secure required certificates of inspection, testing and approval and deliver them to the Owner" (AGC 3.8.3). "With the assistance of the [Employer's] maintenance personnel, the Design-Builder shall direct the checkout of utilities and start up operations, and adjusting and balancing of systems and equipment readiness." (AGC 3.8.5.) However, the AGC indicates that the employer shall provide "inspection and testing services during construction as required by law or as mutually agreed" (AGC 4.1.2.2). The AlA and DBIA contain no specific provisions regarding testing. They only require notice of substantial completion by the contractor to the employer (AlA 3.2.14-Part 2, DBIA 6.6.1). If the employer agrees under the AlA that the works are substantially complete, a certificate of substantial completion is issued by the contractor establishing the date and a list of items to be completed or corrected. Under the DBIA, the employer and the contractor must jointly inspect the work to verify that it is substantially complete in accordance with the requirements of the contract documents. If it is substantially complete, then the employer shall prepare and issue a certificate of substantial completion (DBIA 6.6.1).

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7.5 Rejection

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If, as a result of an examination, inspection, measurement or testing, any Plant, Materials, design or workmanship is found to be defective or otherwise not in accordance with the Contract, the Employer may reject the Plant, Materials, design or workmanship by giving notice to the Contractor, with reasons. The Contractor shall then promptly make good the defect and ensure that the rejected item complies with the Contract. If the Employer requires this Plant, Materials, design or workmanship to be retested, the tests shall be repeated under the same terms and conditions. If the

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PLANT, MATERIALS AND WORKMANSHIP

rejection and retesting cause the Employer to incur additional costs, the Contractor shall subject to Sub-Clause 2.5 [Employer's Claims) pay these costs to the Employer.

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11-23

The employer's power to inspect and test would be ineffective without the power to reject materials or workmanship that do not satisfy the standards imposed by the contract. Silver Book sub-clause 7.5 gives the employer the power to reject defective or non-compliant plant, materials, design or workmanship. The rejection must be made by notice to the contractor stating the reasons for the rejection. The contractor is then under an obligation to remedy the defect or shortcoming. The employer may require retesting of the defective portion or material, and any related costs incurred by the employer must be paid by the contractor. Orange Book sub-clause 7.5 is essentially the same as the Silver Book provision. However, it is the employer's representative who may give notice of the rejection rather than the employer. In addition, the Orange Book further specifies that any retesting will be done under the same terms and conditions (presumably as those of a prior test that identified the defect). Under the Orange Book, the employer's related claim for costs, if any, may simply be deducted from monies owed to the contractor rather than being subject to the employer's claims procedure referenced in the Silver Book. The respective sub-clauses 7.5 of the Red and Yellow Books are essentially identical to the Silver Book. However, it is the engineer rather than the employer who may give notice of the rejection and require retesting. Further, under these contracts failure to comply with this sub-clause entitles the employer to terminate the contract (under sub-clause 15.2(c)(ii)). In addition, under the Red Book, defective design is not a ground for rejection. The ENAA does not expressly give the employer the power to reject defective or non-compliant plant, materials, design or work. However, if such things turn up as a result of a test or inspection, the contractor will be required to remedy the defect. This obligation is contained in ENAA subclause 23.6, which states that "[i]f any Materials or any part of the Works fails to pass any test and/or inspection, the Contractor shall either rectify or replace such Materials or part of the Works and shall repeat the test andlor inspection upon giving notice under GC 23.3 above". The parties can refer any related dispute to an expert (ENAA 23.7) or to arbitration (ENAA 6.1.2). During the interval between the reference to the expert and his actual ruling on the matter, the employer dictates the direction the contractor shall take in the execution of the works. The EIC contains no specific provisions regarding the eventual rejection by the employer of any work or materials. However, the employer must notify the contractor within 21 days of the contractor's notice of substantial completion of any defects in the works that have to be rectified before the issuance of the taking-over certificate (EIC 9.4(b)). The contractor is responsible for remedying any defects (EIC 9.5). 262

DISCUSSION OF SPECIFIC SUB-CLAUSES

The ICE's approach differs from that of Silver Book sub~c1ause 7.5 but should place the same obligations on the contractor and provide comparable rights to the employer. The ICE states:

11-24

The Employer's Representative shall during the progress of the Works have the power to instruct in writing ., . (a) the removal from the Site within such time or tlmes specified tn the instruction of any materials which in the opinion of the Employer's Representative do not comply with the Contract (b) substitution with materials in accordance with the contract and (c) the removal and proper replacement (notwithstanding any previous test thereof or interim payment therefor) of any work which in respect of (i) materials or workmanship or (ii) design by the Contractor or for which he is responsible does not in the opinion of the Employer's Representative comply with the Contract. (ICE 39.) However, there is no specific obligation regarding retesting. Note that the rejection is based on the employer's representative's opinion. The AlA generally contains all the same obligations as Silver Book subclause 7.5, except for the notice requirement with reasons regarding the rejection of work. Sub-clause 9.1 of AlA-Part 2 states: The Design-Builder shall promptly correct Work rejected by the Owner. or known by the Design/Builder to be defective or failing to conform to the reqUirements of the Contract Documents, whether observed before or after Substantial Completion and whether or not fabricated, installed or completed. The DesignlBuilder shall bear costs of correcting such rejected Work, including additional testing and inspections. (AlA 9.1-Part 2.) This provision comes in addition to the contractor's general responsibility for correcting work which does not conform to the contract documents set forth in AlA 3.2.8-Part 2. The employer's right to reject defective or non-compliant work is stated differently in the AGe. The employer is under an affirmative obligation to give prompt written notice to the contractor if he becomes aware of "any error, omission or failure to meet the requirements of the Contract Documents or any fault or defect in the Work" (AGC 4.3.2). The consequences of this notice are less clear. The employer may give the contractor notice of a failure to perform his obligations, and the failure must be corrected within five days or the employer may perform the correction at the contractor's cost (AGC 11.2.1). The AGC contains no specific provisions regarding subsequent retesting. Under the DBIA, the owner's representative is required to give the contractor prompt notice of any failure of his contractual obligation, including any errors, omissions or defects in the performance of the work (DBIA 3.4.1). Within seven days of such a written notice, the contractor must take steps to correct the work (DBIA 2.10.2). The DBIA contains no specific provisions regarding subsequent retesting. 263

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DISCUSSION OF SPECIFIC SUB-CLAUSES PLANT, MATERIALS AND WORKMANSHIP

11-26

7.6 Remedial Work Notwithstanding any previous test or certification, the Employer may instruct the Contractor to: (a) remove from the Site and replace any Plant or Materials which is not in accordance with the Contract, (b) remove and re-execute any other work which is not in accordance with the Contract, and (c) execute any work which is urgently required for the safety of the Works, whether because of an accident, unforeseeable event or otherwise.

If the Contractor fails to comply with any such instruction, which complies with Sub-Clause 3.4 [Instructions), the Employer shall be entitled to employ and pay other persons to carry out the work. Except to the extent that the Contractor would have been entitled to payment for the work, the Contractor shall subject to Sub-Clause 2.5 [Employer's Claims) pay to the Employer all costs arising from this failure.

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Silver Book sub-clause 7.6 indicates that the employer may instruct the contractor to remove and replace any plant or materials not in accordance with the contract, remove and re-execute any other non-compliant work or execute any urgent work required for the safety of the works. The employer may employ and pay others to carry out this work if the contractor fails to do so. In that case, the contractor must pay the employer's costs due to this failure unless the contractor would h\lve been entitled to payment for such work. The logic of this last point is that if the contractor would have been entitled to additional payment for the work instructed by the employer, the employer suffers no loss by performing the work himself at his own cost. However, if the contractor would have been obligated to perform this work without an increase in the contract price, the employer may recover his costs from the contractor for performing the work himself. Notably absent from this sub-clause is a provision allowing the contractor to effect repairs where any works prove insufficient. The EIC Guide criticises this aspect of the Silver Book and recommends the employer bear any additional cost where he insists on replacement where repair would have sufficed. 8 The Orange Book does not contain a sub-clause similar to Silver Book 7.6. Nonetheless, the contractor is under the same obligations and the employer possesses generally the same power by virtue of other Orange Book provisions. Under Orange Book sub-clause 4.1, the contractor is generally responsible to remedy any defects. In addition, under Orange Book 12.1 the contractor is required to "execute all work of amendment, reconstruction, and remedying defects or damage, as may be instructed by the Employer or the Employer's Representative during the Contract Period". This would seem to cover all the specific situations listed in Silver Book sub-clause 7.6. 8

EIC, The EIC Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey Contracts (European International Contractors, Berlin, 2000), p. 19.

264

To the extent that the contractor fails to follow the instruction, the employer may execute the work himself under Orange Book:14.4(a) and recover the cost from the contractor. The Red and Yellow Books are nearly identical to the Silver Book in their respective sub-clauses 7.6, with a few of exceptions. First, it is the engineer who may instruct the remedial or urgent work. Secondly, there is additional language in the Red and Yellow Books that "[t]he Contractor shall comply with the instruction within a reasonable time". Finally, sub-clauses 15.2(c)(ii) of these contracts entitle the employer to terminate the contract where the contractor fails to comply with subclause 7.6. The ENAA does not expressly give the employer the power to instruct the removal and replacement of defective or non-compliant work or materials. However, "[i]f the Owner notifies the Contractor of any defects and/or deficiencies, the Contractor shall then correct such defects and/or deficiencies" (ENAA 24.5). The ENAA does not also specifically mention a power of the employer to instruct emergency work but does indicate that the contractor must immediately carry out any protective or remedial work necessary as a matter of urgency to prevent damage to the works (ENAA 22.5). The ENAA contains an express provision indicating that the employer may recover his costs for emergency work necessary to prevent damage if it is work that the contractor was liable to do at its expense under the contract (ENAA 22.5). With regard to the employer's ability to remedy defects or deficiencies himself at the contractor's cost, this power seems to arise only within the defects liability period subsequent to the date of acceptance under the ENAA. However, if during that time and after proper notice the contractor fails to do the work necessary to remedy a notified defect, the employer may proceed to do such work, and the reasonable costs incurred by the employer shall be paid by the contractor (ENAA 27.7). The EIC contains no specific provision regarding the employer's power to instruct the removal and replacement of defective or non-compliant work. However, the employer does have the obligation to notify the contractor within 21 days of the contractor's notice of substantial completion of any defects in the works that have to be rectified before the issuance of the taking-over certificate (EIC 9.4(b)). The contractor is then responsible for remedying defects (EIC 9.5). The EIC does not contain, however, a provision indicating that the employer may correct the defect or any non-compliant work at the contractor's cost. The EIC does contain a provision that if any remedial or other work is urgently necessary for the safety of the works and the contractor is unable or unwilling to do such work, the employer shall be entitled to carry out such work (EIC 18.5). If the contractor would have been responsible for such work under the contract, the employer may recover his costs from the contractor (EIC 18.5). The ICE contains provisions nearly identical to Silver Book sub-clause 7.6. The ICE gives the employer's representative the power to instruct in writing: 265

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DISCUSSION OF SPECIFIC SUB-CLAUSES

PLANT, MATERIALS AND WORKMANSHIP

(a) (b) (c)

11-30

•

the removal from the Site within such time or times specified in the instruction of any materials which in the opinion of the Employer's Representative do not comply with the Contract substitution with materials in accordace with the Contract and the removal and proper replacement (notwithstanding any previous test thereof or interim payment therefor) of any work which in respect of (i) materials or workmanship or (ii) design by the Contractor or for which he is responsible does not in the opinion of the Employer's Representative comply with the Contract.

(ICE 39.) In addition, "Ii)f in the opinion of the Employer's Representative any remedial or other work or repair is urgently necessary ... the Employer's Representative shall so inform the Contractor with confirmation in writing" (ICE 62). If the contractor is unable or unwilling to carry out such work or repair, the employer may do this work himself and recover the cost from the contractor by deduction from any monies due or to become due if the contractor was liable under the contract to carry out the work at his own expense (ICE 62). Although the contractor has a general obligation to correct non-compliant work (AlA 9.1-Part 2), the AlA contains no express power for the employer to instruct the removal and replacement of defective or noncompliant work or material. There are also no specific provisions regarding work urgently required for the safety of the works, though the employer could always issue a change order or construction change directive under article 8 of AlA-Part 2. However, if the contractor fails after due notice to correct the non-compliant or defective work, the employer may carry out the work himself, deduct the cost from the contract price and recover any additional amounts from the contractor (AlA 9.S-Part 2). The AGC also contains no express power for the employer to instruct the removal and replacement of defective or non-compliant work or material. However, the contractor is generally liable to remedy defects, and if he fails to perform his obligations under the contract: "the Owner may, after five (5) days' written notice ... undertake to perform such obligations. The Contract Price shall be reduced by the cost to the Owner of performing such obligations." (AGC 11.2.1.) Furthermore, the owner has the power to issue work change directives by which the owner may direct a change in the work prior to reaching an agreement with the contract with respect to either costs or an extension of time (AGC 8.2). The AGC does indicate that in any emergency affecting the safety of persons and/or property, "the Design-Builder shall act, at its discretion, to prevent threatened damage, injury or loss. Any change in the Contract Price and/or extension of the Date of Substantial Completion on account of emergency work shall be determined as provided in this Article [regarding change orders)." (AGC 8.7). Although this obligation to act is discretionary for the contractor, article 8 of the 266

AGC does contain prOVISIOns regarding change orders to assist the employer. The DBIA does not expressly give the employer the power to instruct the removal and replacement of defective or non-compliant work or materials or work urgently required for the safety of the works. Nonetheless, the contractor is under a general obligation to correct any non-compliant work (DBIA 2.10.2, 7.5), and work change directives are possible under DBIA 9.2. In addition, the contractor is under an obligation upon proper written notice to "take meaningful steps to commence correction of such nonconforming Work, including the correction, removal or replacement of the non-conforming Work and any damage caused to other parts of the Work affected by the nonconforming Work" (DBIA 2.10.2). If the contractor fails to do so, the employer may correct the shortcoming himself, and the contractor shall be responsible for all reasonable costs incurred by the employer in performing such work (DBIA 2.10.2). Finally, "[i)n any emergency affecting the safety of persons and/or property, Design-Builder shall act, at its discretion, to prevent threatened damage, injury or loss. Any change in the Contract Price and/or Contract Time(s) on account of emergency work shall be determined as provided in this article 9 [Changes to Contract Pdce and Time)." (DBIA 9.5.1.) 7.7 Ownership of Plant and Materials

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11-32

Each item of Plant and Materials shall, to the extent consistent with the Laws of the Country, become the property of the Employer at whichever is the earlier of the following times, free from liens and other encumbrances: (a) when it is delivered to the Site; (b) when the Contractor is entitled to payment of the value of the Plant and Materials under Sub-Clause 8.10 [Payment for Plant and Materials in Event of Suspension]. This section deals with the transfer of ownership of the materials and plant from the contractor to the employer. It does not affect the transfer of risk, which does not occur until the issuance of the taking-over certificate according to sub-clause 17.2, nor does it affect the contractor's right to possess the materials and plant. It merely specifies the point at which legal title to the materials and plant used for the works will be transferred to the employer. As the FIDIC Guide points out, "as a legal matter, it may be important to establish the ownership of Plant and Materials, particularly in cases of bankruptcy/liquidation of the person who is in possession of them" .9 Silver Book sub-clause 7.7 indicates that all plant and materials become the property of the employer when they are delivered to the site or when the

9

FIDIC, The FIDIC Contracts Guide (Federation Internationale des Ingenieurs-Conseils, Lausanne, 2000), p. 165.

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contractor is entitled to payment of their value, whichever is earlier. This provision also indicates that this manner of vesting or transfer of ownership occurs "to the extent consistent with the Laws of the Country" and is free from liens and other encumbrances. Sub-clause 7.7 of the Red and Yellow Books is identical to the Silver Book provision. 11-34 In principle, this clause is not inappropriate. However, the caveat indicating that the clause works only "to the extent consistent with the Laws of the Country" is important. The law of a particular jurisdiction applicable to the contract will likely contain rules regarding construction materials, what liens or encumbrances may attach to these materials and how and when ownership may pass to the employer. For example, to the extent that a supplier of materials has not yet been paid for materials he supplies to the contractor the supplier may retain some type of security interest against the material: he provides to the contractor. Depending on the law of the jurisdiction, the purported transfer of ownership of the materials to the employer may theref~r.e be subject to some type of encumbrance, regardless of the contract provIsion between the contractor and the employer~ The situation may become even more problematic once the materials are incorporated into a structure and lose their separate identity. The supplier may still have an enforceable interest but now potentially enforceable against the improved real estate rather than just specific materials. . Each country will have its own laws and regulations regarding the validIty of the aforementioned security interests. The caveat contained in Silver Book sub-clause 7.7 may leave the employer with title to construction ma~erials. and possibly against improved real estate that is subject to vanous hens or other encumbrances by third parties. To the extent that this situatio~ presents unwanted risks for the employer, he may wish to seek the adVice of local counsel regarding the law applicable to the contract on these issues to determine the likelihood of an unwanted outcome. In addition, in certain jurisdictions, the employer may wish to obtain on a'p.eriodic basis appropriate waivers of liens and encumbrances. The proVISIOn by the contractor of such waivers could be established as a condition to payment. 11-35 Although the Silver Book perhaps better recognises the potential diffic~l.ties with t?is t~pe of c~ause, the Orange Book leaves out certain proVISIOns contamed 10 the Silver Book that materially affect the meaning of the clause. Orange Book sub-clause 7.6 is identical to the Silver Book except that it does not include the caveat "to the extent consistent wit1~ the Laws of the Country". The Orange Book also purports to transfer ownership of plant and materials to the employer at the same stated times but does not indicate that the transfer is "free from liens and other encumbrances" . Although.no~ sp~cifically a problem in the FIDIC contracts, another point wort? mentIOnIng 10 the context of this type of clause is the importance of defin10g the scope of what is being transferred to the employer. Often this type of clause states that plant, materials and equipment become the property of the employer at a given time. To the extent that the "equipment" is 268

DISCUSSION OF SPECIFIC SUB-CLAUSES

defined as equipment to be incorporated into the works, there is no problem. However, if "equipment" is left undefined, the term may extend to the contractor's own equipment, in respect of which he likely does not intend to transfer ownership to the employer. The transfer of ownership of materials varies under the ENAA depending on whether the materials are imported or procured in the country where the site is located. If they are to be imported, ownership of the materials "shall be transferred to the Owner upon loading on to the mode of transport to be used to convey the Materials from the country of origin to that country" (ENAA 31.1). If the materials are procured domestically, ownership "shall be transferred to the Owner when the Materials are brought on to the Site" (ENAA 31.2). The ENAA goes further to indicate clearly that the "[o)wnership of Construction Equipment used by the Contrac~or and its Sub-contractors in connection with the Works shall remain with the Contractor or its Sub-contractors" (ENAA 31.3). The ENAA does not expressly require that ownership transfer free and clear of any liens and does not specifically mention "plant". The EIC contains no provisions regarding the transfer of ownership of construction materials. The ICE's provisions are more complicated. To secure payment, the contractor may, and must if so directed by the employer's representative, transfer ownership to the employer of goods and materials specified in an appendix to the tender or as agreed between the employer and contractor (ICE 54(4)). Ownership is transferred before the goods and materials are delivered to the site, provided that they are owned by the contractor at the time of transfer (ICE 54(4)). The contractor must take certain steps to symbolise the transfer of ownership, such as providing documentation of the contractor's ownership, marking or identifying goods as the property of the employer and providing an inventory of goods for which the ownership is transferred with item values (ICE 54(5)). Ownership of the goods and materials vests in the employer once approved by the employer's representative (ICE 54(6). However, the contractor may remain in possession of, use and incorporate these goods and materials in the works (ICE 54(6)). The contractor remains responsible for the goods and materials during this time (ICE 54(6)). In addition, the employer's representative may reject any goods or materials, at which time these items revert immediately to the contractor's ownership (ICE 54(6)). The ICE provides that neither the contractor nor any subcontractor shall have a lien on any goods or materials which have vested in the employer (ICE 54(7)). However, this provision alone may not be effective absent additional steps by the parties and a close examination of the applicable law. For example, the employer's representative may need to require from the contractor not only proof of ownership but confirmation (such as a lien waiver) that the goods and materials are being transferred to the employer free and clear of any liens, encumbrances or other potential claims by third parties and that no such claims may arise later. This problem is ameliorated to some degree by the requirement in ICE 54(9) that all these transfer of 269

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PLANT, MATERIALS AND WORKMANSHIP

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ownership provisions be incorporated into every subcontract made by the contractor. Under the AlA, the Design-Builder warrants that: title to all construction covered by an Application for Payment will pass to the Owner no later than the time for payment. The Design/Builder further warrants that upon submittal of an Application for Payment all construction for which payments have been received from the Owners shall be free and clear of liens, claims, security interests or encumbrances in favour of the Design/Builder of any other person or entity performing construction at the site or furnishing materials or equipment relating to the construction. (AlA S.2.7-Part 2.) In addition, final payment and restitution of any retainage do not become due until the design-builder submits to the owner, as required: data establishing payment or satisfaction of obligations, such as receipts, releases and waivers of liens, claims, security interests or encumbrances arising out of the Contract, tothe extent and in such form as may be designated by the Owner. If a contractor or other person or entity entitled to assert a lien against the Owner's property refuses to furnish a release or waiver required by the Owner, the Design/Builder may furnish a bond satisfactory to the Owner to indemnify the Owner against such lien. If such lien remains unsatisfied after payments are made, the Design/Builder shall indemnify the Owner for all loss and cost, including reasonable attorneys' fees incurred as a result of such lien.

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(AlA S.2.1-Part 2.) Although slightly more complicated, the AlA offers perhaps the most secure method of protecting the employer against potential liens against construction materials or improved real estate: either the supplier/creditor furnishes a release or lien waiver or the contractor furnishes to the employer a bond to indemnify the employer against any such lien and related costs. The AGC provides a very simple provision regarding the transfer of ownership of plant and materials. It states that "[t)he Design-Builder warrants and guarantees that title to all Work, materials and equipment covered by an application for payment, whether incorporated in the Project or not, will pass to the Owner upon receipt of such payment by the Design-Builder free and clear of all liens, claims, security interests or encumbrances, hereinafter referred to as 'liens'" (AGC 9.2.5). Under the DBIA, the contractor may make requests for payment for equipment and materials, provided that "upon payment, owner will receive the equipment and materials free and clear of all liens and encumbrances" (DBIA 6.2.2). "The Application for Payment shall constitute DesignBuilder's representation that ... title to all Work will pass to Owner free and clear of all claims, liens, encumbrances, and security interests upon the incorporation of the Work into the Project, or upon Design-Builder's receipt of payment, whichever occurs earlier." (DBIA 6.2.3.) In addition, the contractor must indemnify and defend the employer against any claims for payment 270

DISCUSSION OF SPECIFIC SUB-CLAUSES

and mechanics' liens in connection with services, materials, labour, equipment, taxes or other items or obligations furnished in connection with the work (DBIA 6.5.1). Finally, at the time of submission of its final application for payment, the contractor shall provide an affidavit that there are no claims, obligations or liens outstanding or unsatisfied for labour, services, material, equipment, taxes or other items performed, furnished or incurred for or in connection with the work which will. in any way affect the employer's interests (DBIA 6.7.2.1).

7.8 Royalties

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Unless otherwise stated in the Employer's Requirements, the Contractor shall pay all royalties, rents and other payments for: (a) natural Materials obtained from outside the Site, and (b) the disposal of material from demolitions and excavations and of other surplus material (whether natural or man-made), except to the extent that disposal areas within the Site are specified in the Contract. Silver Book sub-clause 7.8 requires the contractor to be responsible for the payment of any royalties, rents or other payments in connection with natural materials obtained from outside the site. In addition, the contractor is responsible for such payments for the disposal of material from demolitions, excavations and other surplus material to the extent that there are not disposal areas on site specified in the contract. Sub-clause 7.8 of the Red and Yellow Books is identical to the Silver Book provision. The Orange Book does not contain a specific clause regarding royalties, rents and payment for natural materials or disposal of material. However, under Orange Book 7.2 the contractor is responsible for procurement of the materials required for the works. In addition, Orange Book 4.21 requires the contractor to dispose of any surplus materials. Without the detailed terms of Silver Book 7.8, the Orange Book provisions should accomplish the same attribution of responsibility to the contractor for these costs. Although stated less specifically than Silver Book sub-clause 7.8, the contractor is under the same obligations in the ENAA. The contractor's obligations include the provision of all materials (ENAA 7.1). In addition, the contractor is also responsible for clearing away "debris of any kind" (ENAA 22.6.2). The EIC is similar to the ENAA. The contractor is responsible for all procurement under EIC 2.1. In addition, upon taking over, the contractor must clear away and remove from the site all surplus material (EIC 6.10). Under the ICE, "[t)he Contractor shall pay all tonnage and other royalties, rent and other payments or compensation (if any) for getting stone, sand, gravel, clay or other materials required for the Works." (lCE 28(3)). "On completion of the Works the Contractor shall clear away and remove from the Site all Contractor's Equipment, surplus material, rubbish and Temporary Works of any kind .... " (ICE 33(1).) 271

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PLANT, MATERIALS AND WORKMANSHIP

The AlA provides that "[t]he Design/Builder shall pay royalties and license fees for patented designs, processes or products" (AlA 3.2. 12-Part 2). "At the completion of the Work, the Design/Builder shall remove from the site waste materials, rubbish, the Design/Builder's tools, construction equipment, machinery, and surplus materials." (AlA 3.2.13-Part 2.) Similarly, the AGC requires the contractor to provide all necessary materials (AGC 3.2.2). At the completion of the work, the contractor shall remove from the premises all construction equipment, tools, surplus materials, waste materials and debris" (AGC 3.2.8). Under the DBIA, the contractor must provide everything necessary to complete the construction of the works, including all materials (DBIA 2.7.1). "Upon Substantial Completion of the Work, or a portion of the Work, Design-Builder shall remove all debris, trash, construction wastes [and] materials [... J" (DBIA 2.7.6.)

CHAPTER

12

COMMENCEMENT, DELAYS AND SUSPENSION General Comments This chapter covers the issues relating to the time for the completion of the construction, including commencement, time for completion, delays, suspensions and liquidated damages. Time for completion is in most cases a crucial aspect of any turnkey or EPC project. Consequently, a clear definition of this time and of the events or circumstances that may affect or change this time must be included in the contract. This serves to better avoid the negative consequences that result from completion delays. Delays in completion will be contrary to the employer's expectations and may also be in conflict with his obligations to third parties, such as lenders, product purchasers and suppliers of raw materials.

12-01

Commencement and time for completion The contract can specify a fixed date for commencement and completion, or it can refer to a period of time for completion. Such a period will run from a commencement date that is either calculated by a method provided in the contract or determined by one of the parties. Where licences or permits need to be obtained after signing of the contract but before commencement, or where certain materials or other preliminary work must first be completed, the date of commencement can be adjusted to provide for such conditions precedent. Use of a fixed date for completion does not take into consideration steps such as these which must immediately precede construction. l The contract should specify if early completion is desired or permitted, in accordance with the employer's needs. 2 The employer can provide a bonus for early completion as an incentive, if so desired. Although no such provision is contained in the Silver Book as written, other contracts do allow for bonuses. For example, the EIC Contract provides for a bonus for early I

1

272

UNCITRAL, UNCITRAL Legal Guide on Drawing Up International Contracts for the Construction of Industrial Works (UN, New York, 1998) UN DOC. NCN.9/SER.B/2 at 113. ibid.

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GENERAL COMMENTS

COMMENCEMENT, DELAYS AND SUSPENSION

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completion calculated in a fashion similar to liquidated damages for each day substantial completion is achieved before the time for completion up to a maximum limit (EIC 10.2). However, in certain circumstances the employer may not be concerned with early completion. If early completion will not benefit the employer, he has no reason to provide a bonus incentive. In fact, the employer may in some cases wish to prohibit early completion to avoid responsibility for the works during a gap period between taking over upon completion and commencement of commercial operations. Nonetheless, the concept of a bonus for early completion combined with the control granted to the contractor in a design-build contract has had some notable success. After the earthquake of 1994 in Northridge, California, United States, the California Department of Transport contracted with a private contractor for the rebuilding of the Santa Monica Freeway on a design-build basis with a bonus for early completion. The construction was scheduled to take five months. The contractor finished the work in only two months and received approximately U.S.$1S million as a bonus. 3

Completion delays 12-04

The parties to a construction contract will want to create a performance programme both to evaluate the progress of the project and to deal with any request by the contractor for any extension of the time for completion. The use of a programme allows the employer to regulate the completion time of the works during the course of the performance of the contract. 4 The programme will break the project down into individual construction steps. It shows the planned progress of the construction, including the interrelationships of each of the major construction activities. It allows the employer to oversee the construction and to ensure that the contractor progresses at the rate desired. In the event of delay, it can be used to analyse the effect on the time of completion with respect to a given activity. The employer may require the programme to be subject to his approval at first submission and when the contractor makes any amendments to the programme. The employer may also require the contractor to revise the programme with some frequency, particularly where the project is long-term. For example, on the Eurotunnel project, because of the long-term nature of the project and its technical complexity, the contractor was required to

provide a revision of the programme at regular intervals, not exceeding three months (sub-clause 14(2)). The employer could also request a revision at any point in time. The contract must also provide for extensions of the time for performance when the progress of the works is delayed for certain causes not attributable to the contractor or his subcontractors. This change in the time for completion will require a revision to the programme. The extension of time benefits the contractor in that he avoids liquidated damages from accruing when faced with certain causes of delay.s The parties may wish to include the option for the employer to request an increase in the contractor's rate of construction (acceleration) in exchange for an increase in the contract price, when the project is delayed or behind schedule. The employer can require the contractor to give a proposal as to the cost of accelerating progress in order to complete on or near the original date for completion. The employer can then decide if he would rather extend the time for completion, or receive the works within the time frame originally agreed at a higher price. This same acceleration can occur where the delay in completion is the fault of the contractor with no consequent increase in the contract price. In an effort to secure performance and define in advance the eventual consequences of breach by the contractor, contracts often contain liquidated damages clauses. These clauses specify the damages for certain breaches, the most common being liquidated damages for failure to attain the time for completion and liquidated damages for failure to meet pre-determined performance levels. Parties should carefully examine the effects of the applicable law on any liquidated damages clause. Some legal systems do not allow such clauses in certain circumstances, while others allow their judges to reduce the agreed damages if they are grossly excessive. 6 Under English law, a liquidated damages clause must not be a penalty, in terrorem, i.e. it must be a "genuinely covenanted pre-estimate of damage".7 A common method to assess and impose liquidated damages for delay is by use of a daily rate for specific failure, such as failure to complete on time, subject to some maximum limit. By using a daily rate, logically related to the continuing loss to the employer, the liquidated damages clause is less vulnerable to recharacterisation as an illegal penalty under the English 8 and American legal systems.

5 6

7 1 4

Goldenhersh and Elder, "Design/Build Conrracting for Caltrans", The Construction Superconference, San Francisco, U.S., December 7-8, 1995. UNCITRAL, op. cit. n. 1 above at 114. 8

274

I.N.D. Wallace Q.C., Hudson's Building and Engineering Contracts (1lth ed., Sweet & Maxwell, London, 1995), p. 1172. UNCITRAL, op. cit. n. 1 above at 220. Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd., [1915] A.C. 79 at 86, in Wallace, op. cit. n. 5 above, p. 1134 n. 6, or in N.D.]. Henchie, "FIDIC Conditions of Contract for EPC Turnkey Projects-The Silver Book Problems in Store?" (2001) 18 I.C.L.R. 41 at 54. Wallace, op. cit. n. 5 above, p. 1144.

12-05

GENERAL COMMENTS

COMMENCEMENT, DELAYS AND SUSPENSION

Suspension by the employer

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12-07

12-08

Many contracts, such as the Silver Book, allow the employer to suspend progress on the works at his discretion. The contract may enable the employer to suspend for any reason or may limit this power of suspension to certain grounds. The contract may also require the employer to specify the duration of any suspension for convenience. This time frame should remain very flexible to permit recommencement at the earliest possible date. If a suspension for the employer's convenience is limited to certain grounds, these grounds should be clearly set out in the contract. If the employer is unable to state a reason for the suspension for which the contractor is responsible, it follows that the contractor should be entitled to an extension of the time for completion as well as the payment of any costs incurred due to the suspension. However, the contractor is not compensated for every case of suspension for which he is not directly responsible. The contract may provide that if the cause of the suspension was foreseeable by an experienced contractor as of the base date, then the contractor receives neither an extension of time nor an increase in the contract price. When the suspension is due to a cause attributable to the contractor, naturally he is not justified in receiving either compensation or an extension of time for the suspension. In either case, the contractor may also be required to preserve and protect the works from harm or damage during the period of suspension. Suspensions by the employer should also be limited to a certain maximum number of consecutive days for each individual suspension and also to an overall total combined number of days of suspension. The contractor should also be able to request permission to proceed after some period of suspension prior to exercising his remedies for prolonged suspensions. For example, if permission to proceed is requested after a certain period of suspension and not granted or the request ignored, the contractor should enjoy certain remedies, such as contract termination. The exact procedures for this situation should be outlined in detail. It may also be the case that only a portion of the works is suspended. If the portion remains suspended for an extended period, the parties may wish to have such a suspension treated as an omission ordered by the employer. This would be similar to a variation or change order instructed by the employer. However, it is important that the omitted part does not have a material detrimental effect on the whole of the works. Nonetheless, the employer will still want the works to satisfy as much of the original purpose of the project as possible. Therefore, the contractor will need to ensure that the contract is properly amended by a variation to take into consideration the effect this omission will have on his performance obligations under the contract. This may include modification of any tests specified in the contract as well as the results required. During an employer-ordered suspension there may be other issues involving transfer of risk. For example, provisions may be necessary to attribute responsibility for materials or plant that were scheduled to arrive but which

276

are being held up or still arriving despite the suspensi?n. The contractor may be under an obligation towards a third party supplier ~r subco~tractor to receive shipment of these materials. Provisions s~ould be mcluded. 10 the contract that deal with this situation in order to aVOId the accumulation of costs on the contractor during a period where no interim payment occurs due to the suspension of the works. . Finally, the provisions relating to employer-orde~ed ~uspenslOns sho~ld include a description of any requirements or obligatIons of the partIes relating to resumption of work after the suspension. The contractor may be required to make good any deterioration, defect or loss that occurred during the suspension. He should therefore be compensated for these costs and expenses to the extent that he was not the cause of the suspension nor negligent in his duties to protect and preserve the suspended works. Suspension by the contractor Although not contained in the Silver Book, there h~s b~en some discussion among industry commentators regarding a potential nght to susp~nd the works by the contractor for convenience, similar to the employer's ngh~. In a turnkey situation it is arguably unfair not to give.t~~ contractor some right of suspension given his greater design respons~bllity: F~r example, the contractor may want to suspend work for a certam period 10 ~r~er to r~as­ sess his design without breaching the contract. 9 ~owever, thIS. IS a radl~al position given the potential impact on the completion date and IS somethmg

12-09

with which the author disagrees.

Discussion of Specific Sub-Clauses Clause 8 of the Silver Book, entitled "Commencement, Delays ~nd Suspension", sets forth various clauses all relating in some wa! to the time for completing the works. The time requirements for commencmg and completing the works are set forth in sub-clause 8.1 a~~ 8.2. Sub-clause 8.3 contains the Silver Book's extensive programme provIsIons. Sub-clauses 8,4 and 8.5 both deal with potential extensions of the time for completion. The chapter also sets forth the parties' rights and privileges on matters relating to the rate of progress (SB 8.6), liquidated damages for delay (SB 8.7) and suspension of the work by the employer (SB 8.8-8.12).

9

B. Eggleston, The ICE Design and Construct: A Commentary (Blackwell Scientific Publications, Australia, 1994), p. 235. Mr. Eggleston suggests that the way co deal With thiS under the ICE Contract is to persuade the employer's representative that he should order a suspension "for the proper construction and completion" of the works. ")77

12-10

COMMENCEMENT, DElAYS AND SUSPENSION

12-11

8.1 Commencement of Works Unless otherwise stated in the Contract Agreement: (a) the Employer shall give the Contractor not less than 7 days' notice of the Commencement Date; and (b) the Commencement Date shall be within 42 days after the date on which the Contract comes into full force and effect under Sub-Clause 1.6 [Contract Agreement). The Contractor shall commence the design and execution of the Works as soon as is reasonably practicable after the Commencement Date, and shall then proceed with the Works with due expedition and without delay.

12-12

12-13

Silver Book sub-clause 8.1 requires the employer to give the contractor seven days' notice of the commencement date, which must be within 42 days of the contract's entry into force. Under the Silver Book, the contract enters into full force and effect on the date stated in the contract (SB 1.6). The contractor is then under an obligation to commence design and execution as soon as is reasonably practicable after the commencement date. The Silver Book imposes a further obligation that the contractor proceed with due expedition and without delay. The utility of this provision in the FIDIC contracts is somewhat limited. The specific commencement date does not directly affect the time for completion, which is a specific date under the FIDIC contract. Indeed, the FIDIC Guide recognises that "the date on which the works are completed is typically more important than the date on which they appear to be commenced".lo The Guide also indicates the difficulty in determining what constitutes commencement. The commencement date notified by the employer primarily serves as a benchmark reference for other provisions in the contract. For example, it marks the date by which the employer must provide the contractor access to the site (SB 2.1). The contractor's representative must also be appointed and the time programme submitted prior to this date (SB 4.3, 8.3). The contractor's provision of insurance coverage must also begin on the commencement date (SB 18.1). However, it does not serve as a reference for project milestones or for the time for completion. Orange Book sub-clause 8.1 is very similar to the Silver Book provision in content but is less specific with regard to the exact number of days for notice and the time period within which the commencement date must fall. Under the Orange Book, the notice of the commencement date is given by the employer's representative to the contractor within the time stated in the appendix for tender. Sub-clause 8.1 of the Red and Yellow Book are identical to each other, with one small exception. Since the Red Book generally does not contemplate design of the works by the contractor, the contractor's obligation is 10

FIDIC, The FIDIC Contracts Guide (Federation Internationale des Ingenieurs-Conseils, Lausanne, 2000), p. 168 (hereinafter FIDIC Guide).

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DISCUSSION OF SPECIFIC SUB-CLAUSES

only to commence execution as soon as reasonably practicable after the commencement date, while under the Yellow Book both execution and design must be commenced. The Red and Yellow Book provisions are also nearly identical to the Silver Book, except that it is the engineer who gives the notice of commencement and the 42-day window for the commencement date runs from the contractor's receipt of the letter of acceptance rather than from the effective date of the contract. The ENAA states that "[t)he Contractor shall commence the Works within the period specified in Article 5.1 (Time for Commencement) of the Agreement and ... the Contractor shall thereafter proceed with the Works in accordance with the time schedule specified in Appendix 9-7 (Time Schedule) to the Agreement" (ENAA 8.1). Article 5.1 of the ENAA contract agreement indicates that "[t)he Contractor shall commence the Works within seven (7) days after the Effective Date" (ENAA ca 5.1). Similarly, the EIC requires that the contractor "commence the Design and the Works at the Commencement Date" (EIC 9.1). The commencement date is to be stated in the appendix to the contract (EIC 9.2). The EIC differs from the contracts discussed above in that it requires the contractor to proceed with the works with due expedition and without delay "[u)pon approval of the Final Design by the Owner", though the parties may agree that certain work be performed before that time (EIC 9.1). The ICE takes a more comprehensive approach to the commencement date, stating that it shall be "(a) the date specified in the Appendix to the Form of Tender or if no date is specified, (b) a date between 14 and 28 days of the award of the Contract to be notified to the Contractor by the Employer's Representative in writing or, (c) such other date as may be agreed between the parties" (ICE 41(1)). Similar to the Silver Book, the ICE indicates that the contractor "shall start the Works on or as soon as is reasonably practicable after the Commencement Date. Thereafter the Contractor shall proceed therewith with due expedition and without delay in accordance with the Contract." (ICE 41(2).) The AlA does not contemplate that a specific commencement date will be contained in the contract nor does it place any specific time limits on when commencement of the works must occur. It states simply that "[t]he Work to be performed under this Part 2 Agreement shall commence upon receipt of a notice to proceed unless otherwise agreed" (AlA 4.2-Part 2). However, it does require that the works proceed expeditiously. Furthermore, this obligation applies not only to the contractor but also to the employer: "Unless otherwise indicated, the Owner and the DesignlBuilder shall perform their respective obligations as expeditiously as is consistent with reasonable skill and care and the orderly progress of the Project." (AlA 4.1-Part 2). The AGC provides a fixed commencement date, which is to be the effective date of the agreement unless otherwise stipulated, for "the work" but contemplates in addition a notice to proceed from the employer prior to commencement of construction. In addition, "The Work shall proceed in general accordance with the Schedule of Work as such schedule may be

12-14

12-15

DISCUSSION OF SPECIFIC SUB -CLAUSES

COMMENCEMENT, DELAYS AND SUSPENSION

amended from time to time" (AGC 6.1). "Construction will commence upon the issuance by the Owner of a written notice to proceed." (AGC 3.2.1.) The DBIA states that "[t]he Works shall commence within five (5) days of Design-Builder's receipt of Owner's Notice to Proceed ("Date of Commencement") unless the parties mutually agree otherwise in writing" (DBIA ca S.l-see also DBIA 8.1.1). 12-16

8.2 Time for Completion The Contractor shall complete the whole of the Works, and each Section (if any), within the Time for Completion for the Works or Section (as the case may be), including: (a) achieving the passing of the Tests on Completion, and (b) completing all work which is stated in the Contract as being required for the Works or Section to be considered to be completed for the purposes of taking-over under Sub-Clause 10.1 [Taking Over of the Works and Sections).

12-17

12-18

Silver Book sub-clause 8.2 requires the contractor to complete the works or section within the time for completion stated for the works or particular section. This provision states not only when completion must occur but also what completion entails. Under the Silver Book, completion includes passing the tests on completion and completing all work required prior to the employer's taking over. However, this clause should be modified to state that the works or part will not be considered complete for the purposes of this clause until the taking-over certificate has been issued by the employer or is deemed to have been issued under the contract. Orange Book sub-clause 8.2 is substantially the same as the Silver Book provision. However, it does not specifically state that all work required for the works to be taken over by the employer must be completed prior to the time for completion, though this may be implied. Sub-clause 8.2 of the Red and Yellow Books is identical to the Silver Book provision. The ENAA requires the contractor to attain "Mechanical Completion" of the works with a specified number of months after the contract's effective date (ENAA ca 5.2, 8.2). The time requirements may also be fixed for the different sections if the project is so divided (ENAA ca 5.2, 8.2). In addition, the time for completion is subject to a specific guarantee by the contractor that he shall attain Mechanical Completion of the Plant (or a part for which a separate time for completion is specified in the Agreement) within the Time for Completion specified in Article 5.2 (Time for Completion) of the Agreement, or within such extended time to which the Contractor shall be entitled under GC 40 (Extension of Time for Completion ) hereof.

(ENAA 26.1.) "Mechanical Completion" is defined under the ENAA as 'when the plant or specific part(s) have been completed "mechanically and structurally and put in a tight and clean condition and that work in respect of Precommissioning of the Plant or such specific part thereof has been completed, that it to say, that the Plant or the specific part thereof is ready for Commissioning" (ENAA 1). The EIC's provisions regarding the time for completion are more simplistic. It states that "[t]he whole of the Works shall be completed in accordance with the provisions of the Contract within the Time for Completion" (EIC 9.2). It defines "Time for Completion" as completion of the works up to the issue of the taking-over certificate (EIC 1.1 (xxiii) ).11 The ICE defines the time for completion in terms of "substantial completion". It requires that: [t)he whole of the Works and any Section required to be completed within a particular time as stated in the Appendix to the Form of Tender shall be substantially completed within the time so stated (or such extended time as may be allowed under Clause 44 or revised time agreed under clause 46(3)) calculated from the Commencement Date. (ICE 43.) "Substantial completion" is not specifically defined under the ICE but involves rather a notification by the contractor of substantial completion and the acceptance or non-acceptance of such by the employer's representative under clause 48 in relation to the issuance of a certificate of substantial completion. The AlA states that the "[t]ime limits stated in the Contract Documents are of the essence . . . and, subject to authorised Modifications, Substantial Completion shall be achieved on or before the date established in Article 14" (AlA 4.2-Part 2). Article 14 is simply a section of the contract where the commencement date and time for completion are stated. The AlA defines substantial completion as "the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so the Owner can occupy or utilize the Work for its intended use" (AlA 4.3Part 2). The AGC contemplates that a specific date for substantial completion will be stated in the contract and also states that time shall be of the essence (AGC 6.2). As in the AlA, under the AGC substantial completion of the works or of a designated portion is defined as "when construction is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Project, or a designated portion, for the use for which it is intended" (AGC 2.4.11). The DBIA contemplates that substantial completion of the works shall be achieved within a certain number of calendar days, as specified by the parties, after the date of commencement (DBIA ca 5.2.1). It also contains 11

280

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See Chap. 14 for the EIC requirements for taking over.

281

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COMMENCEMENT, DELAYS AND SUSPENSION

a section where interim milestones or substantial completion of identified portions can be set forth (DBIA ca 5.2.2). Under the DBIA: "Substantial' Completion is the date on which the Work, or an agreed upon portion of the Work, is sufficiently complete so that Owner can occupy and use the Project or a portion thereof for its intended purposes." (DBIA 1.2.11.) Finally, the contractor agrees that it will achieve the contract times in accordance with the Article 5 provisions discussed above (DBIA 8.1.1).

12-21

8.3 Programme The Contractor shall submit a time programme to the Employer within 28 days after the Commencement Date. The Contractor shall also submit a revised programme whenever the previous programme is inconsistent with actual progress or with the Contractor's obligations. Unless otherwise stated in the Contract, each programme shall include: (a) the order in which the Contractor intends to carry out the Works, including the anticipated timing of each major stage of the Works, (b) the periods for reviews under Sub-Clause 5.2 [Contractor's Documents], (c) the sequence and timing of inspections and tests specified in the Contract, and (d) a supporting report which includes: (i) a general description of the methods which the Contractor intends to adopt for the execution of each major stage of the Works, and (ii) the approximate number of each class of Contractor's Personnel and of each type of Contractor's Equipment for each major stage. Unless the Employer, within 21 days after receiving a programme, gives notice to the Contractor stating the extent to which it does not comply with the Contract, the Contractor shall proceed in accordance with the programme, subject to his other obligations under the Contract. The Employer's Personnel shall be entitled to rely upon the programme when planning their activities. The Contractor shall promptly give notice to the Employer of specific probable future events or circumstances which may adversely affect or delay the execution of the Works. In this event, or if the Employer gives notice to the Contractor that a programme fails (to the extent stated) to comply with the Contract or to be consistent with actual progress and the Contractor's stated intentions, the Contractor shall submit a revised programme to the Employer in accordance with this Sub-Clause.

12-22

Silver Book sub-clause 8.3 requires the contractor to submit a performance programme to the employer within 28 days of the commencement date. The contractor remains under an obligation to revise the programme whenever the current programme becomes inconsistent with the actual progress of the works or the contractor's obligations. The employer may also

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DISCUSSION OF SPECIFIC SUB-CLAUSES

require by notice a revision to the programme in the event of future events or circumstances that may adversely affect or delay the execution of the works. The contractor is under an ongoing obligation under this sub-clause to notify the employer of such events. Contractors may want to consider the possible impact of this notification requirement "on the starting point for calculating the notice periods under sub-clause 20.1 [Contractor's Claims]" and, in the interests of fairness, contractors may want employers to be under a similar notification obligation,u Sub-clause 8.3 also lists various things that must be included in the programme, such as the order and timing of the works' execution, review periods, a report of the contractor's work methods and personnel and equipment for each major stage of the project. The contractor proceeds with the submitted programme unless the employer gives him notice of non-compliance within 21 days of its receipt. The employer may also require a revision if the programme becomes inconsistent with actual progress. The Orange Book provisions regarding the work programme are found in its sub-clause 4.14. Under this sub-clause, the contractor must submit a programme to the employer's representative within the time stated in the appendix to tender, not necessarily within 28 days of the commencement date, as in the Silver Book. The content of the programme is less comprehensive under Orange Book 4.14 than under the Silver Book provision. For example, under the Orange Book a description of the contractor's work methods is required only upon request of the employer's representative. The Orange Book also states that the programme must be "developed using networking techniques, showing early start, late start, early finish and late finish dates" (OB 4.14). This has been eliminated from the corresponding Silver, Red and Yellow Book provisions whose origin is the Orange Book. Orange Book 4.14 also does not contain the affirmative obligation for the contractor to inform the employer or his representative of specific future events or circumstances which may adversely affect or delay the work. In short, the Orange Book's programme requirements are similar to the Silver Book but considerably less comprehensive. Sub-clauses 8.3 of the Red and Yellow Books are nearly identical to the Silver Book provision. Both contain the obligation to submit a programme and to submit revisions when the current programme is inconsistent with actual progress or the contractor's obligations. They also provide for the possibility of rejection of the programme within 21 days of submission, though the rejection is by the engineer under the Red and Yellow Books rather than by the employer. Like the Silver Book, these contracts also require the contractor to give prompt notice to the engineer of specific future eyents that may affect or delay execution. The Red and Yellow Books add that in this case the engineer may require an estimate of the anticipated effect and/or variation proposal. This would also be possible under the Silver Book's variation procedure in clause 13, but it is not specifically mentioned in Silver Book sub-clause 8.3. 12

EIC, The EIC Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey Projects (European International Contractors, Berlin, 2000), p. 20 (hereinafter EIC Guide).

283

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The Red and Yellow Book sub-clauses 8.3 further differ from the Silver Book in that the content requirements for the programme are slightly more detailed. The Red and Yellow Book also differ slightly between each other regarding the content of the programme. However, the substance of the programme for all three contracts is still very similar. The ENAA contains programme requirements similar to the Silver Book, yet less comprehensive. Within a mutually agreed time period, the contractor must: prepare and submit to the Owner a programme of the Works showing the sequence in which it proposes to carry out the Works and the date by which the Contractor reasonably requires that the Owner shall have fulfilled its obligations under the Contract so as to enable the Contractor to execute the Works in accordance with the programme and to achieve Mechanical Completion, Commissioning and Acceptance of the Plant in accordance with the Contract.

12-25

(ENAA 18.2.) The contractor remains under an obligation to revise the programme when appropriate and to submit all such revisions to the employer (ENAA 18.2). However, the ENAA contains no specific obligation that the contractor notify the employer of specific future events that may affect or delay execution of the works. The employer also does not have the unilateral power to require programme revisions, making this largely dependent upon the contractor's good faith. The ENAA programme provision has been criticised as allowing the contractor too much freedom regarding the schedule for performance. 13 The EIC requires the contractor to provide the employer with a detailed work programme at the time of submission of the final design (EIC 4.5). The programme must show, inter alia, "the sequence and methods in which the Works are to be carried out" (EIC 4.5). Unlike the ENAA, the EIC does impose upon the contractor the obligation "to inform the Owner of any circumstances or conditions adversely affecting or which may adversely affect the execution of the Contract and ... any circumstances and conditions which cause or which may be likely to cause significant alteration to the programme" (EIC 4.6). In this case, the contractor must promptly submit a revised programme to the employer taking account of such circumstances and conditions (EIC 4.6). The ICE indicates that the contractor must submit a programme within 21 days of the award of the contract to the employer's representative for his acceptance (ICE 14(1)(a)). The programme must show the order in which the contractor proposes to carry out the works (ICE 14(1)(a)), and the contr~~tor must also provide at the same time his proposal generally descnbtng the arrangements and methods of construction for carrying out the works (ICE 14(1)(b)). Within 14 days of receipt, the employer's repre-

13

Wiwen-Nilsson, "A Brief View of the 1992 Edition of the ENAA Model Form-International Contract for Process Plant Construction (Turnkey Lump sum Basis)" (1994) 11 I.C.L.R. 526.

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sentative must either accept the programme, reject the programme with reasons or request additional information (ICE 14(2)). If the employer's representative rejects any programme, the contractor must submit a revised programme within 14 days of the rejection (ICE 14(1)(c)). The employer's representative is also empowered to request a revised programme when it appears that "the actual progress of the work does not conform with the programme", and the contractor has 14 days to comply (ICE 14(4)). Submissions of programme revisions are also subject to the acceptance or rejection provisions for the initial program (ICE 14(4)). The AlA contains no detailed requirement regarding a work programme. It requires only that a construction schedule be provided based on the contractor's initial proposal (AlA 4.4-Part 2). The contractor's proposal for the works includes preliminary design documents, the proposed contract sum and a proposed schedule for completion of the project (AlA 1.3.5Part 1). Similarly, the AGC does not require a detailed programme but only a schedule of work. It states that the contractor "shall maintain the Schedule of Work. This schedule shall indicate the dates for the state and completion of the various stages of the construction including the dates when information and approvals are required from the Owner. It shall be revised as required by the conditions of the Work." (AGC 3.2.4.) The DBIA also requires a schedule for completion of the works. However it contains requirements more analogous to those contained in the Silver Book:

12-26

Design-Builder shall prepare and submit, at least three (3) days prior to the meeting contemplated by Section 2.1.4 hereof,14 a schedule for the execution of the Work for Owner's review and response. The schedule shall indicate the dates for the start and completion of the various stages of Work, including the dates when Owner information and approvals are required to enable Design-Builder to achieve the Contract Time(s). The schedule shall be revised as required by conditions and progress of the Work, but such revisions shall not relieve DesignBuilder of its obligations to complete the Work within the Contract Time(s), as such dates may be adjusted in accordance with the Contract Documents. Owner's review of and response to the schedule shall not be construed as relieving Design-Builder of its complete and exclusive :control over the means, methods, sequences and techniques for executing the:Work. (DBIA 2.1.3.)

8.4 Extension of Time for Completion

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The Contractor shall be entitled subject to Sub-Clause 20.1 [Contractor's Claims] to an extension of the Time for Completion if and to the extent that 14

Meeting under the DBIA held within 7 days after agreement becomes effective to discuss contract administration. 285

DISCUSSlON OF SPECIFIC SUB-CLAUSES

COMMENCEMENT, DELAYS AND SUSPENSION

cornpletion for the purposes of Sub-Clause 10.1 [Taking Over of the Works and Sections] is or will be delayed by any of the following causes: (a) a Variation (unless an adjustrnent to the Tirne for Cornpletion has been agreed under Sub-Clause 13.3 [Variation Procedure)), (b) a cause of delay giving an entitlernent to extension of tirne under a SubClause of these Conditions, or (c) any delay, irnpedirnent or prevention caused by or attributable to the Ernployer, the Ernployer's Personnel, or the Ernployer's other contractors on the Si te. If the Contractor considers hirnself to be entitled to an extension of the Tirne

for Cornpletion, the Contractor shall give notice to the Ernployer in accordance with Sub-Clause 20.1 [Contractor's Clairns). When deterrnining each extension of tirne under Sub-Clause 20.1, the Ernployer shall review previous deterrninations and rnay increase, but shall not decrease, the total extension of tirne. 12-28

12-29

Silver Book sub-clause 8.4 sets forth the general provisions regarding extensions of the time for completion in favour of the contractor. It states that the contractor shall be entitled to an extension of the time for completion if taking-over is delayed for certain listed causes, namely variations, delays caused by or attributable to the employer and generally any other cause of delay mentioned elsewhere in the contract as entitling the contractor to an extension of time. Any extension of time is subject to compliance with the procedure for contractor's claims under sub-clause 20.1. Subpart (b) of Silver Book 8.4 references other causes of delay for which the contractor is entitled to an extension of time for completion appearing at other points in the contract. A listing of these other causes is included in Figure 12.3 at the end of this chapter. To avoid unnecessary time extensions, the employer may wish to make entitlement to an extension conditional on proof that the delay will affect the "critical path" of the construction work. Contractors may be wise to consider the situations in which remedies such as time alone, time and cost, and time, cost and profit are available under the Silver Book. In the EIC Guide's view, the logic of the Silver Book in this respect is difficult to follow. IS Orange Book 'Sub-clause 8.3 is similar to the Silver Book provision. It indicates that the contractor is entitled to an extension of the time for completion in the event delay is caused by a variation, any delay attributable to the employer and any other cause referenced elsewhere in the contract as entitling the contractor to an extension of time. The Orange Book also specifies that an extension of time may be possible for delays caused by force majeure events and "physical conditions or circumstances on the Site, which are exceptionally adverse and were not (by the Base Date) foreseeable by an experienced contractor" (OB 8.3(d)). Whereas the Silver Book also allows an extension for force majeure events in its force majeure clauses, the latter Orange Book exception for exceptionally adverse physical conditions is not a ground for extension of time under the Silver Book. In addition, the

15

EIG

286

Guid~,

op. cit. n. 12 above, p. 20.

Orange Book does not make reference to a contractor's claims clause for the procedure. Orange Book 8.3 itself contains the applicable procedure for the contractor to follow when claiming an extension of time. Red and Yellow Book sub-clauses 8.4 are identical in most respects to Silver Book 8.4. In addition to a permissible extension for variations, the Red Book also indicates that the extension applies to variations as well as "other substantial change in the quantity of any item of work included in the Contract" (RB 8.4(a)). The Red and Yellow Books also contain two additional grounds for extensions of time not contained in the Silver Book. They allow an extension for "exceptionally adverse climatic conditions" and for "[uJnforeseeable shortages in the availability of personnel or Goods caused by epidemic or other governmental actions" (RBIYB 8.4 (c), (d)). The Silver Book does not allow for time extensions due to climactic conditions unless these conditions represent a force majeure under cla use 19. 16 The EI C Guide is critical of this possibility and emphasises the qualitative difference between a contractual right to an extension of time versus a (more onerous) . claim under a force majeure clauseP Notice of any claim for extension is given to the engineer under the Red and Yellow Books, rather than the employer as under the Silver Book. All the non-FIDIC contracts discussed herein contain, like the FIDIC con- 12-30 tracts, a primary clause regarding extensions of time. Due to their length the entire clause for each contract will not be restated herein but can be found in the appendi.ces to this book. Furthermore, some of the non-FIDIC contracts provide an exhaustive list of potential extensions directly in their extensions clause, whereas the Silver Book incorporates into its general time extension provisions numerous other grounds found elsewhere in the contract by having its sub-clause 8.4(b) cover any "cause of delay giving an entitlement to extension of time" found elsewhere in the Silver Book. As a result, many of these other Silver Book clauses giving an entitlement to an extension are discussed more thoroughly in other chapters of this book. Therefore, each individual ground for extension will not be discussed at length to the extent it is not specifically included in Silver Book sub-clause 8.4. However, to provide the reader with a concise overview and comparison of which grounds for extension of time might be available in each different book, a chart is included at the end of this section (Figure 12.4) listing all the possible grounds for all the extensions of time in all the contracts discussed herein, with a citation to the relevant provision and an indication of which contracts contain the same or similar extensions. ENAA sub-clause 40.1 and EIC sub-clause 9.3 both provide a list of 12-31 grounds for potential time extensions and incorporate any other extensions found elsewhere in their respective contracts. Like the Silver Book, the ENAA also provides a specific procedure for time extension claims (ENAA 40.2). The ICE contains an extension of time provision very similar to the Silver Book, listing specific grounds for extension and also incorporating any other 16 17

FIDIC Guide, op. cit. n. 10 above, p. 174. EIC Guide, op. cit. n. 12 above, p. 21.

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COMMENCEMENT, DELAYS AND SUSPENSION

grounds set forth elsewhere in the contract (ICE 44(1)). ICE 44(1) further provides the procedure for the contractor to make his claims. Under the ICE, it is the employer's representative who assesses any delay (ICE 44(2)) and then either grants the extension or denies the claim (ICE 44(3), (4)). The AlA, AGC and DBIA differ slightly from the above contracts in that in addition to the listing of specific events justifying an extension of time, they broadly extend the potential grounds for extension to any other causes beyond the contractor's control." (AlA 4.5-Part 2, AGC 6.3.1, DBIA 8.2.1). These are very generous time extension formulae. These contracts do not use the foreseeability concept found in certain other contracts but rather one of contractor's control over the event.

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8.5 Delays Caused by Authorities If the following conditions apply, namely: (a) the Contractor has diligently followed the procedures laid down by the relevant legally constituted public authorities in the Country, (b) these authorities delay or disrupt the Contractor's work, and (c) the delay or disruption was not reasonably foreseeable by an experienced contractor by the date for submission of the Tender, then this delay or disruption will be considered as a cause of delay under subparagraph (b) of Sub-Clause 8.4 (Extension of Time for Completion].

12-33

Silver Book sub-clause 8.5 adds an additional ground for an extension of time. If the contractor has diligently followed the required procedures of the host country's public authorities and these authorities delay or disrupt the contractor's work, the contractor will be entitled to an extension of time if the delay or disruption was not reasonably foreseeable by an experienced contractor by the date for submission of the tender. Orange Book sub-clause 8.4 is substantially identical to the Silver Book provision except that the delay must not have been foreseeable by the base date, 18 rather than the date of tender. The Orange Book also does not impose a standard of reasonableness relating to whether or not the delay was foreseeable. The Red and Yellow Book sub-clauses 8.5 are identical to the Silver Book, except that these contracts state that "the delay or disruption was Unforeseeable" (RBIYB 8.5). Nonetheless, the effect is the same as under the Silver Book because the Red and Yellow Book define "Unforeseeable" in the definitions section as "not reasonably foreseeable by an experienced contractor by the date for submission of the Tender" (RB/YB 1.1.6.8). The FIDIC Guide explains, perhaps unconvincingly, the absence of provisions for the financial consequences of such delay, as these consequences "would depend on the particular circumstances".19

18 19

28 days prior to the latest date for submission of the tender (OB 1.1.3.1). FIDIC Guide, op. cit. n. 10 above, p. 175 .

288

DISCUSSION OF SPECIFIC SUB-CLAUSES

Under the ENAA, delays caused by public authorities are not specifically mentioned as grounds for an extension of time for completion. However, such a cause might be a case of force majeure under ENAA 37.1, which includes "any event beyond the reasonable control of the Owner or the Contractor ... , and which is unavoidable notwithstanding the reasonable care of the party affected" (ENAA 37.1). Force majeure includes specifically, without limitation "any other act or failure to act of any local state or national government authority" ENAA 37.1(c). In the event of a properly notified force majeure event, performance is excused for the duration of the event, and the "Time for Completion shall be extended in accordance with GC 40 (Extension of Time for Completion) hereof" (ENAA 37.3). Although not expressly stated, delays caused by public authorities might also be grounds for an extension of time under the Ele. In its general extension of time provision, the EIC allows an extension for "force majeure or any operation of the force of nature or other circumstances (if not force majeure) beyond the reasonable control of either of the parties hereto which the Contractor could not have reasonably foreseen" (EIC 9.3). There is no specific provision in the ICE regarding delays due to public authorities. However, such a delay might fall under the potential grounds for extension of time in ICE 44(I)(e) in the category of "other special circumstances of any kind whatsoever which may occur". Similarly, there are no specific provisions regardil1g delays attributable to public authorities under the AlA, AGC or DBIA. However, the contractor might get an extension of time under all three of these contracts to the extent that these are causes beyond his control (AlA 4.5-Part 2, AGC 6.3.1, DBIA

12-34

8.2.1).

8.6 Rate of Progress

12-35

If, at any time: (a) actual progress is too slow to complete within the Time for Completion, and/or (b) progress has fallen (or will fall) behind the current programme under Sub-Clause 8.3 [Programme], other than as a result of a cause listed in Sub-Clause 8.4 [Extension of Time for Completion], then the Employer may instruct the Contractor to submit, under Sub-Clause 8.3 [Programme], a revised programme and supporting report describing the revised methods which the Contractor proposes to adopt in order to expedite progress and complete within the Time for Completion.

Unless the Employer notifies otherwise, the Contractor shall adopt these revised methods, which may require increases in the working hours and/or in the numbers of Contractor's Personnel and/or Goods, at the risk and cost of the Contractor. If these revised methods cause the Employer to incur additional costs, the Contractor shall subject to Sub-Clause 2.5 [Employer's Claims] pay these costs to the Employer, in addition to delay damages (if any) under SubClause 8.7 below. 289

COMMENCEMENT, DELAYS AND SUSPENSION

12-36

12-37

12-38

Silver Book sub-clause 8.6 indicates that if the actual progress of the works is too slow to complete within the time for completion or if progress has or will fall behind the current programme, the employer may require the contractor to submit a revised programme, provided that the cause of delay does not entitle the contractor to an extension of time under the contract. The revised programme must be accompanied by a supporting report describing the revised methods the contractor will adopt to expedite the progress and complete the works within the time for completion. The expedited work methods will be undertaken at the contractor's cost even if it requires increased work hours, personnel or goods. Finally, if the employer incurs any costs as a result of these revised work methods, the contractor shall pay these costs to the employer in addition to any applicable liquidated damages. The Red and Yellow Book sub-clauses 8.6 are identical to the Silver Book, except that it is the engineer who instructs the contractor to submit the revised programme and report of expedited work methods, rather than the employer. The FIDIC Guide notes the interaction of various sub-clauses may be such that the employer may anticipate approving a delay under sub-clause 8.4 but nonetheless proceed under sub-clause 8.6. Such actions may be appropriate where the potential delay to be granted will not be sufficient to cover the expected real delay.20 It could be, however, that the increased responsibility of the contractor under the Silver Book would be commensurate with more freedom for the contractor to "execute works at his own pace as long as he complies with the time for completion or other contractually agreed dates".2I The corresponding Orange Book provision is found in its sub-clause 8.5. The Orange Book provision is similar to the Silver Book but less comprehensive. It states that if actual progress falls behind the programme or if it becomes apparent that it will, the contractor shall submit a revised programme and notify the employer's representative of any steps to be taken to achieve the time for completion. If the employer incurs any additional costs, these are recoverable from the contractor and may be deducted from any monies due. However, the Orange Book does not empower the employer or his representative to instruct this revised programme. It would appear that it is the contractor's responsibility to determine when a revised programme and expedited work programme would be necessary. The Orange Book subclause also does not specifically indicate that any increased work, personnel or goods will be at the contractor's cost. The ENAA contains provisions very similar to Silver Book 8.6. Under the ~NAA, if the contractor's actual progress falls behind the programme, or if It becomes apparent that it will fall behind, upon the employer's request the contractor must prepare and submit a revised programme and notify the employer of the steps being taken to expedite progress so as to attain mechanical completion within the time for completion (ENAA 18.4). There is no specific indication under the ENAA clause as to whether the contractor is liable for any increased costs to the employer. 20

2.

FIDIC Guide, op. cit. n. 10 above, p. 176. EIC Guide, op. cit. n. 12 above, p. 21.

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DISCUSSION OF SPECIFIC SUB-CLAUSES

The EIC takes a slightly different approach. The contractor is under an obligation to inform the employer of "any circumstances or conditions adversely affecting or which may adversely affect the execution of the Contract and shall further inform the Owner without delay of any circumstances and conditions which cause or which may be likely to cause significant alteration to the programme and without delay submit a revised programme to the Owner taking account of such circumstances and conditions" (EIC 4.6). The ICE states that "Iilf for any reason which does not entitle the Contractor to an extension of time the rate of progress of the Works or any Section is at any time in the opinion of the Employer's Representative too slow to ensure substantial completion by the time . . . the Employer's Representative shall notify the Contractor in writing" (ICE 46(1)). The contractor must then take any steps necessary and to which the employer's representative consents to expedite the progress and complete the works or section by the time for completion (ICE 46(1)). The ICE states that "[t]he Contractor shall not be entitled to any additional payment for taking such steps" (ICE 46(1)). . The AlA, AGC and DBIA contain no specific provisions regarding the rate of progress. 12-39

8.7 Delay Damages If the Contractor fails to comply with Sub-Clause 8.2 [Time for Completion], the Contractor shall subject to Sub-Clause 2.5 [Employer's Claims] pay delay damages to the Employer for this default. These delay damages shall be the sum stated in the Particular Conditions, which shall be paid for every day which shall elapse between the relevant Time for Completion and the date stated in the Taking-Over Certificate. However, the total amount due under this Sub-Clause shall not exceed the maximum amount of delay damages (if any) stated in the Particular Conditions. These delay damages shall be the only damages due from the Contractor for such default, other than in the event of termination under Sub-Clause 15.2 [Termination by Employer] prior to completion of the Works. These damages shall not relieve the Contractor from his obligation to complete the Works, or from any other duties, obligations or responsibilities which may have under the Contract.

In order to motivate the contractor to achieve timely completion of the project, the employer will require that liquidated damages be paid for each day the contractor is late in completion. These damages will give the contractor a clear measure of the cost involved in late completion. They should also allow the employer to collect damages without legal action against the contractor, thus saving time and expense. Silver Book sub-clause 8.7 sets forth the contract's provisions regarding delay damages, also referred to as liquidated damages for delay. Delay damages are imposable if the contractor fails to meet the requirements for the

291

12-40

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12-41

12-42

time for completion. The damages payable are stated in the particular conditions and are assessed on a per diem basis for each day elapsing from the time for completion until the date stated in the taking-over certificate. The Silver Book contemplates that there may be a maximum total amount of delay damages stated in the particular conditions. In any event, delay damages are limited by the limitation of liability provision of Silver Book sub-clause 17.6. 22 These delay damages shall be the only damages due from the contractor for failure to meet the time for completion, except for additional damages associated with a termination for cause by the employer. Despite the contractor's payment of these damages, he is still obligated to complete the works and is not relieved of any other duties or obligations under the contract. Users of the Silver Book should be aware of the status of delay damages (or liquidated damages) under the relevant legal system. For example, under the English system, often such damages will only be acceptable where they represent "a genuine pre-estimate of the loss which the employer will suffer due to delayed completion" .23 The fact that the damages are payable on a periodic basis, under the Silver Book, may be helpful in establishing their compensatory character but may not be sufficient. The German Federal Supreme Court also insists "damages for delayed performance may not be unreasonably high and may not exceed the probable loss of the employer in the event of delay".24 Finally, there may be other obstacles to Silver Book sub-clause 8.7 as, for example, under German law a clause where damages are unrelated to the contractor's responsibility for such delay will be unenforceable. 2S Employers should be aware that a decreased rate of progress is often related to the contractor suffering a shortage of cash flow. Employers in such a situation may be better advised to deduct such damages from any retention monies or performance security held, rather than from the interim payments, which would only serve to decrease the contractor's cash flow further and potentially aggravate the slowed rate of progress. 26 However, under certain circumstances the net effect may be the same. Although organised in a slightly different manner, the provisions of Orange Book 8.6 are substantially identical to Silver Book 8.7 regarding delay damages. Red and Yellow Book sub-clauses 8.7 are identical to the Silver Book, with the exception that the per diem amount of damages and the possible maximum total amount are to be stated in the appendix to tender rather than the particular conditions. The ENAA's provisions regarding liquidated damages are contained in its contract agreement and the general conditions. The contract agreement indi-

22 23 24

2S 26

FIDIC Guide, op. cit. n. 10 above, p. 177. N.D.J. Henchie, "FIDIC Conditions of Contract for EPC Turnkey Projects-The Silver Book Problems in Store?" (2001) 18 (1) I.C.L.R. 41 at 54. Dr A. Kus, Dr J. Markus & Dr R. Steding, "FIDIC's new 'Silver Book' under the German Standard Form Contracts Act" (1999) 16 (4) I.C.L.R. 533 at 543. ibid. at 542. G.L. Jaynes, "The New Colour in FIDIC's Rainbow: The Trial Edition of the 'Orange Book'" (1995) 12 (3) I.C.L.R. 367 at 383.

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DISCUSSION OF SPECIFIC SUB-CLAUSES

cates that its provision regarding liquidated damages may be deleted if it ~s not applicable, if the parties do not wish to have liquidated d~mages provIsions. Otherwise the ENAA Contract Agreement states that If the contractor fails to attain'mechanical completion of the works or any part within the time for completion specified in the general conditions, the contractor m.ust pay the employer a particular amount (which is to be i~s.erted by the partles) for each day o'r week of delay (ENAA 5.4). The proVISIOn states that th~se are liquidated damages and not a penalty and provides a blank for the partles to enter a total aggregate amount or percentage which may not be exceeded (ENAA 5.4). Sub-clause 5.5 of the ENAA Contract Agreement and 26.3 of the General Conditions also contain provisions regarding bonuses for early completion. : ENAA 26.2 in the General Conditions relates and refers to sub-clause 5.4 of the ENAA Contract Agreement. It states that if payment of liquidated damages is provided for in the Contract Agreement, the contract~r s~al1 pay these damages to the employer in the event of the contractor s fatlure to attain mechanical completion. It further states that "[s]uch payment shall be in complete satisfaction of the Contractor's obligation to .at~ain Mec~anical Completion of the Plant or the relevant part thereof w.lth~~ the TIme for Completion ... and the Contractor shall have no further hablhty whatsoe~er to the Owner in respect thereof" (ENAA 26.2). However, the payment of hquidated damages does not relieve the contractor of any of his obligations to complete the works or of any other obligations under the contract. ENAA 26.2 further states that, aside from liquidated damages, the failure by the Contractor to attain any milestone or other act, matter or thing by any date specified in Appendix 9-7 (Time Schedule) to the Agreement and/or other programme of work prepared pursuant to GC 18 (Work Program) hereof shall not render the Contractor liable for any loss or damage thereby suffered by the Owner. (ENAA 26.2.) This last provision seems to protect the contra.c tor against consequential damages arising from a failure to complete on tlme, such as costs to the employer for delays to his other contractors. ENAA 30.1 also provides a limitation on the contractor's total maxi~um liability under the contract. The EIC contains similar provisions for liquidated damages:

If the Contractor fails to complete the Works within the Time for Completion in accordance with the Contract, then the Contractor shall pay to the Owner the relevant sum stated in the Appendix hereto as liquidated damages for such default and not as a penalty (which sum shall be the only monies due from the Contractor for such default) for every day which shall elapse between the Time for Completion and the date specified in the Taking-Over Certificate, subject to the limit stated in the Appendix hereto. The payment of such damages shall not relieve the Contractor from his obligation to complete the Works, or from any other of his obligations and liabilities under the Contract but shall be in fuJI discharge of the Contractor's liability for delay in completion.

293

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COMMENCEMENT, DELAYS AND SUSPENSION

(EIC 10.1.) In addition, "[iJf the Contractor achieves completion of the Works prior to the Time for Completion, the Owner shall pay to the Contractor a sum as a bonus" (EIC 10.2). 12-44 ,!,he ICE indicates that the appendix to tender shall include a genuine preestimate of da~ages, expressed per week or per day, likely to be suffered by the employer If the works are not substantially completed by the time for completion (ICE 47(1)(a)). The contractor shall pay these damages to the employer for the time elapsing between time for completion and actual substanti~1 co~pletion if the contractor fails to substantially complete within the prescnbed time (ICE 47(1 )(b)). If part of the works is substantially complete, the sum of damages shall be reduced proportionally by the proportional value of th~ ~ompleted part (ICE 47(1 )(b)). The ICE contains a separate, but similar prOVISIOn for when the work is divided into sections (ICE 47(2)). The ICE further states that the damages are imposed as liquidated damages for delay and not as a penalty (ICE 47(3)). The liquidated damages are subject to a maximum limit if so stated in the appendix to tender; otherwise, there is no limit on the liquidated damages (ICE 47(4)(a)). The employer may either deduct and retain the liquidated damages from any sums otherwise due to the contractor or require the contractor to pay these damages (ICE 47(5)). The DBIA Contract Agreement states that the contractor understands that if substanti.al completion is not attained by the completion date, the emp~oyer will suffer damages which are difficult to determine and accurately specify (DBIA ca 5.4). The DBIA provides a blank to insert a designated time after the substantial completion date, thereafter referred to as the liquidated damages date or "LD date" after which liquidated damages begin to accrue (DBIA ca 5.4). The per diem dollar amount for these damages is also stated (DBIA ca 5.4). It indicates that "[tJhe liquidated damages provided herein shall be in lieu of all liability for any and all extra costs losses expenses I . I' , , , calms, pena ties and any <:>ther damages, whether special or consequential, and o~ what.so~ver nature Incurred by Owner which are occasioned by any delay In achieving Substantial Completion" (DBIA ca 5.4). There is also the possibility of an early completion bonus (DBIA ca 5.5). The AlA and AGC contain no provisions regarding liquidated damages for delay. Under the AGC, however, the owner is permitted to adjust or reject a contractor's application for payment where, inter alia, there is "reasonable evidence of delay in performance of the Work such that the Work will not be c<:>mpleted by the Date of Substantial Completion" and where "the unpaid balance of the Contract Price is not sufficient to offset any direct damages that may be sustained by the Owner as a result of the anticipated delay caused by the Design-Builder" (AGC 9.3.5) 12-45

8.8 Suspension of Work The Employer may at any time instruct the Contractor to suspend progress of part or all of the Works. During such suspension, the Contractor shall protect, store and secure such part or the Works against any deterioration, loss or damage. 294

DISCUSSION OF SPECIFIC SUB-CLAUSES

The Employer may also notify the cause for the suspension. If and to the extent that the cause is notified and is the responsibility of the Contractor, the following Sub-Clauses 8.9, 8.10 and 8.11 shall not apply. The employer is allowed to suspend work during \=onstruction at any time and for any reason. Suspension has many uses for ·the employer, including completion of other construction that may need to precede the contractor's work, or for reasons related to the project's financing. Silver Book sub-clause 8.8 empowers the employer to suspend progress on part or all of the works at any time. In the event of such a suspension, the contractor is obligated to protect, store and secure the works against any deterioration, loss or damage. The sub-clause further indicates that the employer may notify the contractor of the cause of the suspension. If the cause is the responsibility of the contractor, certain additional sub-clauses do not apply, namely 8.9, 8.10 and 8.11, which give the contractor certain rights and remedies in the event of an employer-instructed suspension that is not the contractor's fault. Orange Book sub-clause 8.7 is identical to the Silver Book provision except that it does not contain the second paragraph regarding the employer's notification of the cause and the disabling of the additional sub-clauses in the event the suspension is attributable to some fault of the contractor. The corresponding Red and Yellow Book provisions in their respective sub-clauses 8.8 are identical to the Silver Book, except that it is the engineer, rather than the employer, who has the power to suspend the works and notify the cause of the suspension. The ENAA contains provisions nearly identical in substance to those of Silver Book sub-clause 8.8:

12-46

12-47

The Owner may by notice to the Contractor order the Contractor to suspend performance of all or any of its obligations under the Contract. Such notice shall specify the obligation of which performance is to be suspended, the effective date of the suspension and the reasons therefor. The Contractor shall thereupon suspend performance of such obligation (except those obligations which are necessary for the care or preservation of the Works) until ordered in writing to resume such performance by the Owner. (ENAA 41.1.) The only difference from the Silver Book is that the employer is required under the ENAA to state the reasons for the suspension. There is no specific power for the employer to suspend under the EIC. An employer suspension would probably require compliance with the contract's variation procedures. The employer might propose a change or omission by written notice to the contractor (EIC 11.1). The contractor informs the employer within 28 days of the cost of the proposed variation and the extension of time required, subject to the employer's approval (EIC 11.1.2). However, there is no unilateral power to order suspensions or variation without the contractor's agreement and prior agreement regarding price and time. The ICE contains a provision for employer suspensions similar to Silver Book sub-clause 8.8. It states: 295

12-48

COMMENCEMENT, DELAYS AND SUSPENSION

The Contractor shall on the written order of the Employer's Representative suspend the progress of the Works or any part thereof for such time or times and in such manner as the Employer's Representative may consider necessary and shall during such suspension properly protect and secure any work so far as is necessary in the opinion of the Employer's Representative. (ICE 40(1)) The AGC provides that "[tJhe Owner may order the Design-Builder in writing to suspend, delay or interrupt all or any part of the Work without cause for such period of time as the Owner may determine to be appropriate for its convenience" (AGC 11.1.1). The DBIA grants the employer a similar power but restricts the duration: "Owner may, without cause and for its convenience, order Design-Builder in writing to stop and suspend the Work. Such suspension shall not exceed sixty (60) consecutive days or aggregate more than ninety (90) days during the duration of the Project." (DBIA 11.1.1.) The AlA contains no provisions for employer suspensions.

12-49

8.9 Consequences of Suspension If the Contractor suffers delay and/or incurs Cost from complying with the Employer's instructions under Sub-Clause 8.8 [Suspension of Work] and/or from resuming the work, the Contractor shall give notice to the Employer and shall be entitled subject to Sub-Clause 20.1 [Contractor's Claims] to: (a) an extension of time for any such delay, if completion is or will be delayed, under Sub-Clause 8.4 [Extension of Time for Completion], and (b) payment of any such Cost, which shall be added to the Contract Price.

After receiving this notice, the Employer shall proceed in accordance with SubClause 3.5 [Determinations] to agree or determine these matters. The Contractor shall not be entitled to an extension of time for, or to payment of the Cost incurred in, making good the consequences of the Contractor's faulty design, workmanship or materials, or of the Contractor's failure to protect, store or secure in accordance with Sub-Clause 8.8 [Suspension of Work].

12-50

Although the employer has the power to suspend at his discretion, he must compensate the contractor for any cost incurred and any time lost toward completion (although he does not have to reimburse the contractor for lost profit)P The employer does not have to compensate the contractor

21

Although speaking in relation to variations, in respect of which the contractor is entitled to profits under Silver Book sub-clause 13.3, the Grove Report advocates for the elimination of the dichotomy between cost compensation and priced compensation. In other words, "if the Contractor is entitled to compensation, one wonders why he is not entitled to a profit as well. ... Elimination of the dichotomy would allow simplification in that a single set of pricing principles would apply to all compensation events." U.B. Grove, The Grove Report: Key Terms of 12 Leading Construction Contracts Are Compared and Evaluated online: Construction Web Links (November 6, 2000) http://www.Constructionweblinks.coml Resourceslindustry_Reports_N .. .1 grove_report.ht (date accessed: June 20, 2001) at para. 19.5). Grove's observation could apply to the Silver Book provisions.

296

DISCUSSION OF SPECIFIC SUB-CLAUSES

when the suspension is due to a cause for which the contractor is responsible. Silver Book 8.9 comes into effect when the employer has suspended the works and the suspension is not due to a cause for which the contractor is responsible. If the contractor suffers delay or incurs additional cost as a result of such a suspension, the contractor is entitled to an extension of the time for completion and the payment of his additional costs by the employer through an increase to the contract price. Any such claim by the contractor is subject to the contractor's claims procedure set forth in Silver Book subclause 20.1. However, no extension of time or payment of contractor's costs shall be allowed in connection with making good the consequences of the contractor's faulty design, workmanship or material or for the contractor's failure to protect, store or secure the works as required under Silver Book sub-clause 8.8. Sub-clauses 8.9 of the Red and Yellow Books are identical to the Silver Book provision, with the exception that the engineer is referenced rather than the employer. The corresponding provision in Orange Book sub-clause 8.8 is substantially identical to the Silver Book provision, with one minor exception. The Orange Book also requires that any delay or cost incurred by the contractor in connection with a suspension by the employer's representative must not have been foreseeable by an experienced contractor by the contract's base date. Under the ENAA, if the contractor's performance is suspended by the employer or the rate of progress reduced, the contractor is entitled to an extension of the time for completion and all additional costs or expenses incurred by the contractor as a result must be paid by the employer to the contractor (ENAA 41.3). However, this is not the case if the suspension order or reduction in the rate of progress is by reason of the contractor's default or breach of the contract. Under the EIC, although not specifically in the context of an employer suspension of the work, time and cost would likely be granted to the contractor if the employer used the EIC clause 11 variation procedure to suspend the works. The ICE states that any delay or extra cost incurred by the contractor as a result of compliance with a written suspension order shall be taken into account in determining any awards of cost or time: except to the extent that such suspension is (a) otherwise provided for in the Contract or (b) necessary by reason of weather conditions or by some default on the part of the Contractor or (c) necessary for the proper construction and completion or for the safety of the Works or any part thereof in as much as such necessity does not arise from any act or default of the Employer's Representative or the employer or from any of the Excepted Risks defined in Clause 20(2). (ICE 40(1).) Similarly, under the AGC "[aJdjustments caused by suspension, delay or interruption shall be made for increases in the Contract Price and/or the date

297

12-51

12-52

COMMENCEMENT, DELAYS AND SUSPENSION

of Substantial Completion" (AGC 11.4.2). However, "[n]o adjustment shall be made if the Design-Builder is or otherwise would have been responsible for th~ suspension, delay or interruption of the Work, or if another provision of thIs Agreement is applied to render an equitable adjustment" (AGC 11.1.2). Under the DBIA, the contractor "is entitled to seek an adjustment of the Contract Price and/or Contract Time(s) if its cost or time to perform the Work has been adversely impacted by any suspension of [sic] stoppage of work by Owner" (DBIA 11.1.2). The AlA contains no provisions regarding employer suspensions.

12-53

8.10 Payment for Plant and Materials in Event of Suspension

The Contractor shall be entitled to payment of the value (as at the date of suspension) of Plant andlor Materials which have not been delivered to Site, if: (a) the work on Plant or delivery of Plant andlor Materials has been suspended for more than 28 days, and (b) the Contractor has marked the Plant and/or Materials as the Employer's property in accordance with the Employer's instructions.

12-54

As for the previous sub-clause, Silver Book 8.10 comes into effect when the employer has suspended the works and the suspension is not due to a cause for which the contractor is responsible. This sub-clause states that despite the suspension of the work and/or deliveries, the contractor is enti~ tied to payment of the value of any plant or materials which have not been delivered to the site when the employer's suspension has lasted more than 28 ~ays and the co?tractor has marked these items as the employer's property In accordance with the employer's instructions. Such items become the property of the employer, subject to the procedural or formal requirements of the relevant jurisdiction, by virtue of sub-clause 7.7. Orange Book sub-clause 8.9 contains provisions substantially identical to those of the Silver Book. However, the Orange Book also adds that to the extent that this sub-clause applies, the employer shall take over the responsibility for the protection, storage, security and insurance of these suspended plant and materials upon the contractor's request, and the risk of loss or damage is passed to the employer. Sub-clause 8.10 of the Red and Yellow Books is identical to the Silver B.o~k provision ~it~ the exc.eption that the engineer is referenced as the party glvmg the marking instructions for the plant or materials. The ENAA, EIC, ICE, AlA, AGC and DBIA contain no provisions comparable to Silver Book sub-clause 8.10.

12-55

8.11 Prolonged Suspension If the suspension under Sub-Clause 8.8 [Suspension of Work) has continued for more than 84 days, the Contractor may request the Employer's permission to

298

DISCUSSION OF SPECIFIC SUB-CLAUSES

proceed. If the Employer does not give permission within 28 days after being requested to do so, the Contractor may, by giving notice to the Employer, treat the suspension as an omission under Clause 13 [Variations and Adjustments] of the affected part of the Works. If the suspension affects the whole of the Works, the Contractor may give notice of termination under Sub-Clause 16.2 [Termination by Contractor). Silver Book sub-clause 8.11 provides a remedy for the contractor in the event of a prolonged suspension by the employer when the cause of the suspension is not the responsibility of the contractor. If the suspension has continued for more than 84 days, the contractor may request the employer's permission to proceed with the execution of the works. If the employer does not grant this permission within 28 days of this request, the contractor may give notice to the employer and treat the suspension as an omission under the contract's clause 13 provisions for variations and adjustments. Presumably, this last provision means that if all or a portion of the works have been suspended by the employer, the contractor may treat the prolonged suspension as a variation order by which the employer intends to eliminate the suspended portion of the work from the sphere of the contractor's responsibilities. However, this conclusion is unclear because the referenced clause 13 does not specifically mention this type of "omission". Nonetheless, the most likely interpretation is that the work affected by the suspension would be treated as an employer-instructed variation for the contractor to not execute this work, and the deemed variation would be dealt with according the procedures of clause 13 (see Chapter 16). Finally, if the suspension affects the whole of the works, the contractor may give notice of termination under the contract's termination proVISIOns. The contractor may want to suggest the addition of language indicating that the 84 days of suspension are in the aggregate. In other words, the employer could technically order an 84-day suspension, give notice to proceed within 28 days of the contractor's request, and then institute another suspension. It is not clear that the contractor would have a termination remedy in this case. The FIDIC Guide provides no clarification with respect to these concerns. 28 Orange Book sub-clause 8.10 is substantially identical to the Silver Book provision, with the exception that the relevant actor for notice and permission is the employer's representative rather than the employer. Red and Yellow Book sub-clauses 8.11 are identical to the Silver Book sub-clause, except that the contractor must give the relevant notices to the engineer whose response or inaction then determines the availability of the contractor's remedies under this sub-clause. The ENAA provides that if, other than by reason of contractor's default or breach, the works are suspended by the owner for an aggregate period of lS

FIDIC Guide, op. cit. n. 10 above, p. 181.

299

12-56

12-57

12-58

DISCUSSION OF SPECIFIC SUB-CLAUSES

COMMENCEMENT, DELAYS AND SUSPENSION

90 days, then the contractor may give notice to the employer requiring him within 28 days either to order the resumption of such performance or request and subsequently order a change to the works excluding the performance of the suspended obligations from the contract (ENAA 41.1). If the employer fails so to do within the given period, the contractor may by further notice elect to treat the suspension, where it affects a part only of the works, as a deletion from the contract or, where it affects the whole of the works, as termination of the contract (ENAA 41.1). The ICE also provides a relatively clear outcome in the case of a prolonged suspension by the employer. It indicates that: lilf the progress of the Works or any part thereof is suspended on the written order of the Employer's Representative and if permission to resume work is not given by the Employer's Representative within a period of 3 months from the date of suspension then the Contractor may unless such suspension is otherwise provided for in the Contract or continues to be necessary by reason of some default on the part of the Contractor serve a written notice on the Employer's Representative requiring permission within 28 days from the receipt of such notice to proceed with the Works or that part thereof in regard to which progress is suspended. If within the said 28 days the Employer's Representative does not grant such permission the Contractor by a further written notice so served may elect to treat the suspension where it affects part only of the Works as an omission of such part under Clause 51 or where it affects the whole of the Works as an abandonment of the Contract by the Employer.

12-59

(ICE 40(2)) The AGC's provision is much less intricate. The contractor may terminate upon seven days' notice to the employer if the work is suspended by the employer for 60 days (AGC 11.4.2). The DBIA states that a suspension by the employer "shall not exceed sixty (60) consecutive days or aggregate more than ninety (90) days during the duration of the Project" (DBIA 11.1.1). The contractor may terminate the agreement if the work has been stopped for 60 consecutive days or more than 90 days during the duration of the project due to a suspension by the employer provided that the stoppages are not due to the acts or omissions of the contractor or anyone else for whose acts the contractor is responsible (DBIA 11.4.1.1). The EIC and AlA contain no provisions regarding prolonged employer suspensions.

12-60

After a period of suspension there may be loss of materials, particularly fungible materials, and deterioration to the works. Resuming work will necessarily involve a period of returning the works to a proper state before restarting construction. The parties should provide for attribution of costs for the deterioration of the works and loss of materials as well as the time required to recommence construction of the works. Silver Book sub-clause 8.12 indicates that if the employer gives permission or an instruction to resume the work after a suspension, the contractor and the employer must jointly examine the works, plant and materials affected by the suspension. The contractor is requ(red to make good any deterioration, defect or loss to the works, plant or materials that occurred during the suspension. This sub-clause applies regardless of whether the suspension was due to a cause that was the responsibility of the contractor or not. In other words, regardless of the cause, upon the resumption of the work after an employer suspension, the contractor must remedy any loss or defect to the works, plant or materials that occurred during the period of suspension. This accords with sub-clause 8.8, and the contractor may be compensated by an extension of time or payment of cost under sub-clause 8.9. 29 The corresponding provisions in Orange Book sub-clause 8.11 are nearly identical to the Silver Book, with the exception that it is the employer's representative acting for the employer. In addition, if the employer had taken over risk and responsibility for plant or materials not delivered to the site pursuant to Orange Book 8.9, this risk and responsibility reverts back to the contractor 14 days after receipt of the permission or instruction to proceed. Sub-clauses 8.12 of the Red and Yellow Books are identical to the Silver Book, except that the contractor examines the works with the engineer rather than the employer. The ENAA, EIC, ICE, AlA, AGC and DBIA all contain no specific provisions regarding the resumption of work after a suspension by the employer.

8.12 Resumption of Work After the permission or instruction to proceed is given, the Parties shall jointly examine the Works and the Plant and Materials affected by the suspension. The Contractor shall make good any deterioration or defect in or loss of the Works or Plant or Materials, which has occurred during the suspension. 300

29

FIDIC Guide, op. cit. n. 10 above, p. 182.

301

12-61

COMMENCEMENT, DELAYS AND SUSPENSION

12-62

Figure 12.1

DISCUSSION OF SPECIFIC SUB-CLAUSES

Completion process under the FIDIC Silver Book

Figure 12.2

12-63

Employer suspension under the FIDIC Silver Book E instructs C to suspent progress of parr or all of the works.

Commencement of works as soon as reasonably practicable after notice by E. 8.1

C protects, stores and secures such part or works against deteri<;>ration, loss or damage. 8.8

YES

NO NO YES

NO

Sub-clauses 8.9, 8.10 and 8.11 do not apply. 8.8

Have the works or section been completed and passed the tests on completion by the time for completion? 8.2

NO

. . . ._--------1 C is entitled to extension of time and payment of costs. 8.9

YES

YES NO

E proceeds in accordance with sub-clause 3.5 to agree or determine extension. 20.1

C is entitled to payment of value of plant and materials if: a. work is suspended for more than 28 days; and b. plant and materials marked as employer's by his instructions. 8.10

NO

YES

>--Y-E-S---t-l C may request E's permission to proceed. 8.11

NO

NO

C may treat NO suspended part as 1+---,.----< omission. 8.11

C may terminate if suspension affects whole of works. 8.11, 16.2

YES

YES Upon resuming work, parties jointly examine works. C makes good any deterioration, defect or loss to works, plant or materials. 8.12

302

303

COMMENCEMENT, DELAYS AND SUSPENSION

12-64

Figure 12.3 Book Clause

Reason for extension

., of time ~ ..

,

Figure 12.4

Extension of time comparison33

Delays caused by the employer's instructions to contractor regarding archaeological remains discovered on the site.

5.4

Changes in the host country's technical standards and regulations for which contractor's compliance causes delay.

Errors in employer's requirements not resonably discoverable

5(I)(c) (ii)

only)

Delays caused by employer's instructions to vary the location or details of any tests or to perform additional tests or any delay for which the employer is responsible.

8.4(a)

Variations. 3O

Delayed drawings or

8.4(c)

Any delay, impediment or prevention caused by or attributable to the employer, his personnel or his contractors.

attributable to E

8.5

Unforeseeable delays or disruptions by the public authorities of the host country.

8.9

Delays caused by contractor's compliance with employer's instruction to suspend work to the extent the suspension was not due to contractor's fault.

9.2

Tests on completion being unduly delayed by the employer.

10.3

Prevention of the tests on completion due to a cause for which the employer is responsible.

13.7

Delays caused by a change in the laws of the host country.

16.1

Delays resulting from contractor's suspension of work for non-payment by the employer or employer's failure to provide evidence of his ability to pay.

6(1)(c)

only)

Failure by employer (representative) to give timely consents or disapprovals

Employer's failure to give contractor timely access to or

8(3)

2. 1

2.2

42(3)

2.1

possession of site

Errors in original points, lines or levels of reference not reasonably discoverable by C

Delays caused by the occurrence of an employer's risk. 3! Delays caused by the occurrence of a force majeure

1.9 (RB

instructions

event. 32

Aside from the general variation provisions in clause 13, the Silver Book specifically men· tions other acts as potential variations: employer instructions (SB 3.4); instructions to cooperate with employer's personnel (SB 4.6); instructions to comply with changed laws or regulations (SB 5.4); employer changes to tests (SB 7.4); and daywork (SB 13.6). For a list of employer's risks, see SB 17.3. For a list of specific force majeure events, see SB 19.1.

304

12-65

,

4.24

19.4

31

..

...

Delays caused by employer's failure to give contractor access to or possession of the site within the time stated in the particular conditions.

17.4

31

Extensions of the time for completion under the FIDIC Silver

2.1

7.4

30

DISCUSSION OF SPECIFIC SUB-CLAUSES

JJ

4.7

The terms used have been modified from the original contract language in order to provide a measurable comparison. It should also be noted that the shaded boxes signal a contract's lack of a comparable specific provision but does not necessarily mean that the event might not qualify for an extension under a more general extension provision of the particular contract. For example, the ICE does not specifically provide for an extension of time when the contractor is required to perform emergency work but does offer a general extension under its sub-clause 44(I)(e) for "other special circumstances of any kind" .

305

DISCUSSION OF SPECIFIC SUB-CLAUSES

COMMENCEMENT, DELAYS AND SUSPENSION

Employer's instructions regarding archaeological remains discovered Changes in the host country's technical standards and regulations Employer's instructions to vary the location or details of any tests or to perform additional tests

4.24

4.24

4.24

5.4 5.4

5.4

(YB

only)

7.4

7.4

Unforeseeable conditions or

Exceptionally adverse climatic conditions

8.4(c)

37.1 (e)

Unforeseeable shortages of personnel or goods caused by epidemic or governmental actions

8.4(d)

37.1 (f)

9.3 (c)

44(1) (c)

4.5

6.3.2

8.2.1

8.2. 1

Unforeseeable delays or disruptions by public authorities

8.5

8.4

8.5

Employer's instruction to suspend work (C not at fault)

8.9

8.8

8.9

Undue delay to tests on completion by the employer

9.2

9.2

Prevention of the tests on completion due to a cause attributable toE

10.3

10.3

Change in the laws of the host country

13.7

13.16

13.7

36.1, 40.1 (d)

12. 14

Contractor's suspension of work for by the employer or other justified suspension

16.1

16.1

16.1

41 .3

19.4

Occurrence of an employer's risk

17.4

17.4

17.4

war, hostilities, invasion, act of foreign enemies

17.3

17.3

17.3

40.1

40(1)

(c)

11.1.2 11.1.2

circumstances

(may be physical, subsurface and/or events generally beyond C's control, depending on the contract)

4.11, 8.3(d)

4.12

35 .3, 40.1 (b)

4.8 9.3(f)

12(2)

4.5

Hazardous conditions/materials

3.5.5, 6.3.1

Special circumstances of any kind (not attributable to C)

Variations/change orders or directives

9.3(e)

8.4(a) 8.3(a) 8.4(a)

306

8.4(c)

8.3(e)

8.4(e)

39.6, 9.3(a), 44(1) 40.1 11.1.2 (a) (a) 11.2

40.1 (e)

9.3(d)

4.1.4, 8.2.1

44(1) (e)

4.5, 8.2.1, 8.3.1

Emergency work Any delay, impediment or prevention caused by or attributable to the employer, his personnel or his contractor

6.3.1, 4.2.1, 8.5 8.2.1

44(1) (d)

4.5

6.3.1, 8.1

8.2.1, 9.1.1, 9.2.1

8.7

8.2.1

6.3.1

8.2.1

37.1 (a)

2.5.2

64(3)

8.2.1

307

COMMENCEMENT, DELAYS AND SUSPENSION

rebellion, terrorism, revolution

17.3

17.3

17.3

insurrection, civil war

37.1 (b)

rebellion, terrorism, revolution, civil war

19.1

19.1

19.1

19.1

19.1

19.1

37.1 (b)

19.1

19.1

19.1

40.1 (b)

19.1

19.1

19.1

37.1 (e)

riot, commotion or disorder

17.3

17.3

17.3

37.1 (b)

riot, commotion or disorder

munitions of war, explosives, ionising radiation

17.3

17.3

17.3

40.1 (b)

explosives, ionising

17.3

40.1 (b)

natural catastrophes

17.3

40.1 (b)

confiscation, nationalisation, requisition by government

17.3

40.1 (bJ

Labour disputes

17.3

17.3

37.1 (eJ

pressure waves

from aircraft

17.3

loss or damage due to use of works by employer

17.3

17.3

design of any part of the works attributable to E

forces of nature

Delays caused by force majeure event

19.4

8.3(b)

19.4

37.3, 40.1 (b)

force majeure generallyJ.4

19.1

19.1

19.1

37.3

war, hostilities,

invasion, act of foreign enemies

3.

DISCUSSION OF SPECIFIC SUB-CLAUSES

19.1

19.1

19.1

37.1 (aJ

munitions of war, radiation

(b)

8.2.1

37.1 (c)

37.1 (d)

4.5

6.3.2

8.2.1

Unusual delays in tra nsport/de liveries

4.5

6.3.2

8.2.1

(f)

E's delay/prevention of C continuing work pending dispute resolution

4.5

6.3.1

9.3 (f)

Fire

4.5

6.3.2

9.3 (f)

8.2.1

9.3

8.2.1

Under the Silver Book general definition, force majeure is an exceptional event or circumstance, beyond a party's control, which the party could not reasonably have provided against before entering into contract, which, having arisen, the party could not reasonably have avoided or overcome, and which is not substantially attributable to the other party (SB 19.1). Definitions of force majeure may vary among the different contracts. See Chapter 23 for a more thorough comparison.

308

37.1

Affording facilities to other contractors/ employees of E

31(2)

Employer's instructions in context of dispute referred to expert that C ultimately wins

20.3.5

Uncovering of works ordered by E showing no fault of C

23.11

309

CHAPTER

13

TESTS ON COMPLETION General Comments The construction process under the Silver Book is divided into two major periods. During the first, the contractor constructs the body of the works, commissions the works and trial operation of the works. During the second, the contractor remains responsible for completing any outstanding work and remedying defects that are identified. The tests on completion confirm that the contractor has successfully completed the first stage and that the works are in proper operating order. They mark the shifting of responsibility for care of the works from the contractor to the employer, who will carry out subsequent testing after issue of the completion certificate. Before taking over, the employer will want to verify completion of the works in accordance with the contract. The tests on completion provide evidence of the quality and state of the works for this purpose. These tests are performed by the contractor after he considers that the works are substantially completed. The tests give the employer an objective set of standards against which to measure completion. The testing regime for a construction contract will usually include a requirement concerning certain documentation intended to assist the employer in operation of the plant, such as operation manuals and as-built plans.! According to the UNCITRAL Legislative Guide, a construction agreement for a project should detail: 1) the nature of the completion tests or the inspection of the completed facility; 2) the timetable for the tests; 3) the consequences of failure to pass a test; and 4) the allocation of the responsibility for organising the resources for, and paying the costs of, the tests. 2 In the interest of rapid completion, the contract may specify that even in the event of minor faults the completion tests may be considered successful. The minor faults may be treated as defects to be remedied separately. These items are generally tracked by means of a document known as a "punch list". It lists those items which the parties consider to be sufficiently minor that they can be rectified without delaying taking over by the employer. The time for rectiI

2

UNCITRAL, UNCITRAL Legal Guide on Drawing Up International Contracts for the Construction of Industrial Works (UN, New York, 1998) UNDOC. AlCN.9/SER.Bl2 at 49. UNCITRAL, Legislative Guide on Privately Financed Infrastructure Projects (UN, New York, 2001) (UNDOC. AlCN.9/SER.B/4) online: UNCITRAL Homepage (pdf format) http://www.uncitral.orglenglishltextslprocurernlpfip·index·e.htm (date accessed: July 16, 2001) at 127.

311

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TESTS ON COMPLETION

fying the minor omissions and defects contained in the punch list may vary. The contract documents or the punch list itself may indicate that minor omissions and/or defects be completed or corrected as soon as possible, during the defects liability period, at some specific time stated or as required by the contract.

Discussion of Specific Sub-Clauses 13-02

13-03

Clause 9 of the Silver Book, entitled "Tests on Completion", sets forth the contractor's obligations regarding the tests to be performed prior to the employer's taking over of the works (SB 9.1). It also delimits the parties' respective rights when faced with test delays caused by the other party (SB 9.2). It provides a specific regime applicable when the tests on completion are failed and retesting is required (SB 9.3) as well as the ultimate choice of outcomes for the employer in the event that the works or a part fail absolutely to pass these tests (SB 9.4). A flowchart diagram of the tests on completion process is included at the end of this chapter (Figure 13.1). The other standard forms discussed herein differ greatly from the Silver Book requirements and procedures regarding tests on completion. The different approaches may bear some similarities to the Silver Book, as in the case of the ENAA . However, many of the other contracts, such as the EIC, AlA, AGC and DBIA make little mention, if any, of tests to be performed by the contractor upon substantial completion of the works. Each construction project must be evaluated to determine what level of testing, if any, should be required to ensure successful completion and operation. Where tests are important and required for the project, the contract should contain clear provisions not only to identify the relevant tests and parameters but also a clear statement of the parties' rights and options in the event the works fail to pass such tests or attain the performances required. The Silver Book provides a sound example of general provisions. However, the contractor may object to certain of the employer's broad remedy options in the event the tests on completion fail repeatedly.

13-04

9.1 Contractor's Obligations The Contractor shall carry out the Tests on Completion in accordance with this Clause and Sub-Clause 7.4, [Testing) after providing the documents in accordance with Sub-Clause 5.6 [As-Built Documents) and Sub-Clause 5.7 [Operation and Maintenance Manuals). The Contractor shall give to the Employer not less than 21 days' notice of the date after which the Contractor will be ready to carry out each of the Tests on Completion. Unless otherwise agreed, Tests on Completion shall be carried out Within 14 days after this date, on such day or days as the Employer shall instruct.

312

Unless otherwise stated in the Particular Conditions, the Tests on Completion shall be carried out in the following sequence: (a) pre-commissioning tests, which shall include the appropriate inspections and ("dry" or "cold") functional tests to demonstrate that each item of Plant can safely under-take the next stage, (b); (b) commissioning tests, which shall include the specified operational tests to demonstrate that the Works or Section can be operated safely and as specified, under all available operating conditions; and (c) trial operation, which shall demonstrate that the Works or Section perform reliably and in accordance with the Contract. During trial operation, when the Works are operating under stable conditions, the Contractor shall give notice to the Employer that the Works are ready for any other Tests on Completion, including performance tests to demonstrate whether the Works conform with criteria specified in the Employer's Requirements and with the Performance Guarantees. Trial operation shall not constitute a taking-over under Clause 10 [Employer's Taking Over). Unless otherwise stated in the Particular Conditions, any product produced by the Works during trial operation shall be the property of the Employer. In considering the results of the Tests on Completion, appropriate allowances shall be made for the effect of any use of the Works by the Employer on the performance or other characteristics of the Works. As soon as the Works, or a Section, ~ave passed each of the Tests on Completion described in subparagraph (a), (b) or (c), the Contractor shall submit a certified report of the results of these Tests to the Employer. Under Silver Book sub-clause 9.1 the contractor must carry out the tests on completion after providing the as-built documents and operation and maintenance manuals required under the contract. Twenty-one days' notice is given to the employer, and the tests must be carried out within 14 days thereof and on such days as the employer may instruct. The Silver Book provides for a specific sequence of tests: pre-commissioning, commissioning and trial operation. During the trial operation the contractor must give notice to the employer when the works are ready for any other tests on completion, including performance tests. Once the tests on completion are passed, the contractor submits a certified report of the test results to the employer. In order to facilitate the testing process, the parties may want to provide that the contractor develop a "tests on completion programme" before performance of the tests on completion. In this way the employer will be better able to oversee the tests and consent to their progress. Orange Book sub-clause 9.1 is similar to the Silvl;r Book, except that the employer's representative, rather than the employer, is the relevant party regarding notices, instructions and receipt of the test:results. In addition, the specific requirements and listing of the pre-commissioning, commissioning and trial operation are not included in the Orange Book. Red Book sub-clause 9.1 is also similar to the Silver Book but closer in substance to the Orange Book sub-clause. The Red Book's engineer is the relevant actor under this contract. Like the Orange Book, Red Book 9.1 does

313

13-05

TESTS ON COMPLETION

13-06

13-07

not specifically list the tests or requirements regarding pre-commissioning, commissioning and trial operation. Yellow Book sub-clause 9.1 is substantially identical to the Silver Book provision, except that the engineer acts rather than the employer. It is the engineer who receives notices, issues instructions regarding the test days and receives the certified report of the test results from the contractor. The ENAA provides for a somewhat different testing and commissioning procedure than the Silver Book. Under the ENAA the contractor begins by giving notice to the employer of mechanical and structural completion (ENAA 24.1). Within seven days of the employer's receipt of this notice the employer must supply operation and maintenance personnel, raw materials and other services required of the employer under the contract for precommissioning (ENAA 24.2). As soon as reasonably practicable after the employer supplies these items, the contractor must commence precommissioning of the works or part (ENAA 24.3). As soon as pre-commissioning is complete, the contractor gives the employer notice that the works are ready for commissioning (ENAA 24.4). If the employer is satisfied, he will issue a mechanical completion certificate (ENAA 24.5). If not, he must notify the contractor of any defects or deficiencies, and the contractor must correct these (ENAA 24.5). The procedure is repeated as necessary (ENAA 24.5). Commissioning of the works is then commenced by the contractor immediately after the issue by the employer of the mechanical completion certificate (ENAA 25.1.1). After successful commissioning (operation under stable conditions), the contractor must give the employer notice that the works are ready for the performance tests (ENAA 25.1.3), which are carried out during commissioning (ENAA 25.2.1). The contractor must provide the employer with a certified report of the results of any test or inspection (ENAA 23.4). The EIC contains no specific provisions regarding tests on completion. It merely defines "Tests on Completion" as "the tests specified in the Contract or which are to be made by the Contractor before the issue of the Taking Over Certificate" (EIC 1.1(xxii)). In addition, EIC 9.4(a) mentions tests on completion, indicating that the contractor must give notice to the employer when the works are substantially complete and have passed any tests on completion prescribed by the contract. However, the EIC offers no specifics regarding such tests. The testing regime under the ICE is not well-defined and is much less comprehensive than the FIOIC books and the ENAA. Under the ICE, the contractor is required to submit to the employer's representative for approval proposals for testing the workmanship and materials (ICE 36(3)(a)). The contractor has an obligation to carry out these tests and any further tests the employer's representative may require (ICE 36(3)(b)). The contractor is also under a general obligation to notify the employer's representative when work is ready for examination (ICE 38(1)). However, there is no specific mention of what tests, notice or reporting might be required for any tests on the works. With regard more specifically to tests on completion, the closest reference to this concept in the ICE is the requirement that the contractor 314

DISCUSSION OF SPECIFIC SUB -CLAUSES

give notice to the employer's representative when he considers the works or a section to be substantially complete and has satisfactorily passed "any final test that may be prescribed by the Contract or Statute" (ICE 48(1)). The ICE seems to contemplate the possibility of tests on completion but contains no specific provisions. The AlA makes no reference whatsoever to any tests on completion. Under AlA 3.2.14, the contractor must give the employer notice when he believes the work or a part to be substantially complete. If the employer concurs, the contractor issues a certificate of substantial completion. However, no testing requirements are mentioned. The AGC also contains little detail regarding tests on completion. It states simply that "the Contractor shall direct the checkout of utilities and start up operations, and adjusting and balancing of systems and equipment for readiness" (AGC 3.8.5). The contractor must also "secure required certificates of inspection, testing and approval and deliver them to the Owner" (AGC 3.8.3). Apart from these few provisions, the AGC does not really contain any specific requirements for tests on completion. The DBIA similarly contains few provisions regarding tests on completion. It states generally that the contractor shall provide all necessary inspection, testing and start-up (DBIA 2.7.1) but gives no further specifics. Under DBIA 6.6.1, the contractor must notify the employer when he believes that the works or a part is substantially complete. Within five days of the employer's receipt of this notice, the employer and contractor must jointly inspect the works to verify that they are substantially complete. No other specifics regarding tests on completion are provided in the DBIA. 9.2 Delayed Tests

13-08

13-09

If the Tests' on Completion are being unduly delayed by the Employer, SubClause 7.4 [Testing) (fifth paragraph) and/or Sub-Clause 10.3 [Interference with Tests on Completion) shall be applicable. If the Tests on Completion are being unduly delayed by the Contractor, the Employer may by notice require the Contractor to carry out the Tests within 21 days after receiving the notice. The Contractor shall c;arry out the Tests on such day or days within that period as the Contractor may fix and of which he shall · give notice to the Employer. . If the Contractor fails to carry out the Tests on Completion within the period of 21 days, the Employer's Personnel may proceed with the Tests at the risk and cost of the Contractor. These Tests on Completion shall then be deemed to have been carried out in the presence of the Contractor and the results of the Tests shall be accepted as accurate.

Where the works are ready for tests on completion, and therefore taking over by the employer as well, and the employer is delaying the performance of such tests, the contractor should be entitled to an extension of time and any potential cost incurred due to the delay. By the same token, if the 315

13-10

TESTS ON COMPLETION

13-11

Contractor is delaying the tests, the employer may want to force performance of the tests to accelerate completion of the contract and enable him to have timely use of the works. Silver Book sub-clause 9.2 attempts to deal with these problems. Silver Book sub-clause 9.2 indicates that if the tests on completion are unduly delayed by the employer, sub-clauses 7.4 "Testing" and 10.3 "Interference with Tests on Completion" shall be applicable. Under these provisions the contractor may give notice to the employer to obtain an extension of time and/or costs plus reasonable profit due to the employer's delay. If the tests on completion are prevented for more than 14 days, the contractor may carry out the tests on completion as soon as practicable and obtain a time extension and costs. Note, however, that incorporation and reference to sub-clauses 7.4 and 10.3 is not entirely necessary in this provision because ~hese ?ro~isio~s are operative standing alone and do not actually require IOcluslon 10 thIs sub-clause. Indeed, the EIC Guide finds the reference to these sub-clauses in sub-clause 9.2 confusing, as they "provide relief to the Contractor for the circumstances set out in those sub-clauses and not specifically for those set out in sub-clause 9.2".3 Sub-clause 9.2 also contains provisions regarding test delays caused by the contracto,r. If the tests are unduly delayed by the contractor, the employer may reqUIre the contractor by notice to carry out the tests within 21 days. If the contractor fails to do so within this period, the employer's personnel may carry out the tests at the risk and cost of the contractor. In this case, the tests are deemed to have been carried out in the presence of the contractor and the results are deemed to be accurate. Sub-clause 9.2 of the Yellow and Red Books is identical to the Silver Book provision, except that the engineer is the relevant actor rather than the employer. Orange Book sub-clause 9.2 is identical to the Silver Book with two exceptions. First, the employer's representative acts on behalf of the employer and is the relevant party for the purposes of this provision. Second there is no specific indication or cross-reference to the contract provision~ regarding test delays caused by the employer, although the Orange Book does contains such provisions similar to the Silver Book. The cons~quences of test delays caused by the employer are not specifically stated 10 the ENAA. However, the contractor is entitled to an extension of time under ENAA 40.1 for any default or breach of the contract by the employer or any act or omission of his personnel. In addition the contractor might request a price increase as a "change" under ENAA 39. The ENAA does indicate that if the employer's inspector fails to attend the tests, the contractor may proceed with the testing and provide the employer with a report of t~e results (ENAA 23.4). Although there is no remedy stated regarding sp.eclfically the contractor's failure to execute the tests, the employer may termmate the contract under certain conditions subsequent to the contractor's default in his obligations (ENAA 42). 3

EIC~ The EIC Contractor's Guide to the FIDIC Conditions of Contract for EPC Turnkey Protects (European International Contractors, Berlin, 2000), p. 22 (hereinafter EIC Guide),

316

DISCUSSION OF SPECIFIC SUB-CLAUSES

The EIC contains no provisions regarding employer or contractor delays to any tests on completion. However, it does contain certain general provisions that might be applicable if such tests were specified as a contract requirement. For example, in the event of "any delay, impediment or prevention by the Owner", the contractor is entitled to an extension of time (EIC 9.3). In the context of a delay by the contractor, if he fails, following previous warning from the employer, to carry out his obligations under the contract (such as any specified tests), the employer may be entitled to terminate the contract (EIC 18.1). The ICE contains no specific provisions regarding the effect of delays to the tests on completion caused by the contractor or the employer, primarily because the ICE has no specific regime for such tests. However, assuming tests on completion were specified as an appendix or otherwise within the contract documents, the contractor does have the right to an extension of time for "any delay, impediment, prevention or default by the Employer" (ICE 44( 1)( d)). In addition, if the contractor had some specific testing obligation that he did not execute, the employer would be entitled to carry out this work at the contractor's cost (ICE 49(4)). Although the AlA contains a provision entitling the contractor to an extension of time for delays caused by the employer (AlA 4.5-Part 2), there are no tests on completion in the AlA to which this might be applicable. For lack of any such testing requirements, there are no provisions in the AlA comparable to ,Silver Book sub-clause 9.2. Similar to the AlA, the AGC contains a provision entitling the contractor to an extension of time for delays caused by the employer and also the possibility of potential price increases (AGC 6.3.1). However, there are no specific tests on completion to which these provisions might attach. The DBIA indicates that if the employer causes a delay to the contractor in performing his obligations under the contract, the:contractor may receive an extension of time for completion (DBIA 8.2.1) and possibly an increase in the contract price (DBIA 9.4). However, these provisions are not linked to any tests on completion.

9.3 Retesting

13-12

13-13

If the Works, or a Section, fail to pass the Tests on Completion, Sub-Clause 7.5 [Rejection) shall apply, and the Employer or the Contractor may require the failed Tests, and Tests on Completion on any related work, to be repeated under the same terms and conditions.

Where the works fail the tests on completion, one of the parties will generally wish to have the affected work retested, either immediately or once modifications or alterations have been made. The employer and contractor both have an interest in the works passing the tests on completion; the former in order to take possession of the completed works as early as 317

DISCUSSION OF SPECIFIC SUB-CLAUSES

TESTS ON COMPLETION

13-14

possible and the latter to avoid liquidated damages and in order to provide for the transfer of risk to the employer at the earliest date. Silver Book sub-clause 9.3 indicates that if the tests on completion are failed, the employer may reject the work and require rectification under sub-clause 7.5. The employer and contractor may also require failed tests to be repeated under the same terms and conditions. The corresponding provisions in sub-clause 9.3,of the Orange, Red and Yellow Books are identical to the Silver Book, with the exception that these contracts refer to the engineer and employer's representative, respectively, rather than the employer. The ENAA states that "[ilf any Materials or any part of the Works fails to pass any test and/or inspection, the Contractor shall rectify or replace such Materials or part of the Works and shall repeat the test and/or inspection upon giving notice" (ENAA 23.6). This is essentially the equivalent of Silver Book sub-clause 9.3. Although not specifically referenced in connection with tests on completion, the employer's representative has the general power under the ICE to instruct the removal and replacement of non-compliant work or materials, whether discovered as a result of testing or otherwise (ICE 39). In addition, the employer's representative has the power to order any additional tests at his discretion (ICE 36(3)(b)). If these tests are ordered due to non-compliant workmanship or materials, these tests are at the contractor's cost (ICE 36(7)). The AlA contains no specific provisions for tests on completion and thus no provisions regarding retesting. However, if the works are defective or non-compliant, the employer has the right to reject them and the contractor is responsible for correcting the defect (AlA 9.1-Part 2). The AGC and DBIA contain no provisions for tests on completion and therefore no provisions regarding retesting.

13-15

9.4 Failure to Pass Tests on Completion If the Works, or a Section, fail to pass the Tests on Completion repeated under Sub-Clause 9.3 [Retesting), the Employer shall be entitled to: (a) order further repetition of Tests on Completion under Sub-Clause 9.3;

(b)

if the failure deprives the Employer of substantially the whole benefit of the Works or Section, reject the Works or Section (as the case may be), in which event the Employer shall have the same remedies as are provided in sub-paragraph (c) of Sub-Clause 11.4 [Failure to Remedy Defects); or (c) issue a Taking-Over Certificate. In the event of sub-paragraph (c), the Contractor shall proceed in accordance with all other obligations under the Contract, and the Contract Price shall be reduced by such amount as shall be appropriate to cover the reduced value to the Employer as a result of this failure. Unless the relevant reduction for this failure is stated (or its method of calculation is defined) in the Contract, the Employer may require the reduction to be (i) agreed by both Parties (in full sat318

isfaction of this failure only) and paid before this Taking-Over Certificate is issued, or (ii) determined and paid under Sub-Clause 2.5 [Employer's Claims) and Sub-Clause 3.5 [Determinations). Where the works do not pass the tests on completion the employer needs a method to either force the contractor to continue with modifications in order that the works conform with the employer's requirements, or to negotiate some other resolution. The difficult aspect of this provision is balancing the interests of the parties, and protecting them both, while at the same time allowing flexibility with regard to the various possible resolutions. Silver Book sub-clause 9.4 gives extensive power to the employer, which may be appropriate in that it relates to the failure of successive tests on completion. It provides that if the tests on completion are still failed after retesting, the employer may choose between several options. He may order further repetition of the tests on completion. Alternatively, if the failure deprives the employer of substantially the whole benefit of the works or section, he may reject and terminate the contract (or the applicable part) under sub-clause 11.4(c) and recover from the contractor all sums paid for the works or for such part, plus, financing costs and the costs of dismantling and returning the plant and materials to the contractor. Finally, the employer may choose to issue a taking-over certificate and reduce the contract price to cover the reduced value to the employer of the failed works. Sub-clauses 9.4 of the Yellow and Red Books are substantially identical to the Silver Book provision. The contractor will not want the employer to enjoy such a broad remedy power. Technically, the employer has the right under :Silver Book 9.4 to exercise the extreme remedy under sub-clause 11.4(c) of termination after only one repetition of the failed tests on completion. The contractor may want to qualify that option and will want the right to remedy and test until the end of the time for completion and the exhaustion of the liquidated damages. This may be a point of contention in contract negotiation, particularly since the contractor may be liable for the entire cost of removing the entire constructed works and for all the employer's financing costs. The EIC Guide notes that the provisions of sub-clause 9.4 may be justifiable where the contractor is to provide "a unique know-how for a complete production process and it fails to perform as guaranteed and no other [Clontractor is capable of purting it into satisfactory working order".4 Where such is not the case, however, it is currently standard practice that the contractor be entitled to payment for the value of the works completed to date upon termination. s Orange Book sub-clause 9.4 is similar to the Silver Book provision but with certain exceptions. The Orange Book contains no requirement that the failure to pass the tests must deprive the employer of substantially the whole benefit of the works or section in order for the employer's representative to 4

5

EIC Guide, op. cit. n. 3 above, p. 22. ibid., p. 22.

319

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DISCUSSION OF SPECIFIC SUB-CLAUSES

TESTS ON COMPLETION

13-17

13-18

reject the works. In addition, Orange Book 9.4 references clause 15 "Default of Contractor" in the event of rejection rather than the Orange Book's specific sub-clause regarding "Failure to Remedy Defects" (OB 12.4). This results in a slightly different range of remedies for the employer. Finally, the provisions for determining a contract price adjustment in the event of the employer's taking over despite the failed tests is less comprehensive than those contained in the Silver Book. As indicated in the preceding section, under the ENAA if the tests are failed they must be repeated until passed (ENAA 27.6). However, if the contractor fails to attain mechanical completion after repeated testing, the employer may be entitled to terminate the contract (ENAA 42.2.2). The consequences to the contractor of this termination will be discussed in this book's Chapter 19 entitled "Termination by Employer". It is important to note that the ENAA has different remedies for failure to attain mechanical completion and failure to achieve the performance guarantees after the issuance of the mechanical completion certificate. Under ENAA 28.1, the contractor guarantees a certain level of process performance, measured by the performance tests after commissioning and mechanical completion. If the contractor's process performance guarantees are not attained, it is the contractor who has the option of either correcting the problem or paying liquidated damages to the employer (ENAA 28.3), which is the sole remedy for this default (ENAA 28.4). The ElC contains no specific provision comparable to Silver Book 9.4. The ICE contains no specific provisions regarding the repeated or absolute failure by the contractor to pass any tests on completion that might be included in the contract. However, the failure to pass any final tests basically prevents the contractor from achieving substantial completion. Under the ICE, liquidated damages are the remedy for delays in substantial completion, subject to offset for the value of any parts of the works that are substantially complete (ICE 47(1)(b)). These liquidated damages may also be limited (ICE 47(4)(a)). The AlA, AGC and DBIA contain no requirements regarding tests on completion and therefore no specific remedies for failure to achieve such tests. However, the contractor is obligated to correct any defective work (AlA 9.1-Part 2, ACG 3.6.1, DBlA 2.10.1). If the defects are not corrected, the employer may correct the work himself at the contractor's cost (AlA 9.4Part 2, AGC 11.2.1, DBIA 2.10.2) or possibly terminate the contract (AlA 12.1.2-Part 2, AGC 11.2.2, DBIA 11.2.1).

Figure 13.1

Tests on completion under the FIDIC Silver Book START

C provides "as·built" drawings and operation and maintenance manuals. 5.6, 5.7, ~ 9.1 C gives 21 days notice of the date after which he will be ready to carry out the tests. 9.1 The tests are carried out within 14 days of such date, on days instructed by the employer. 9.1 (The employer gives not less than 24 hours notice of his intention to attend the tests.) 7.4

C may obtain

E gives notice to

C carries out tests as soon as practicable and may obtain extension of ti me andlor cost plus profit. 10.3

tests are deemed accurate. 9.2

YES

E may reject. 9.3, 7.5 C shall make good the defect. 7.5 E or C may require repetition of tests. 9.3 C pays E's costs related to retesting (if any). 7.5

Reject the Works and invoke sub-clause 11.4(e) remedy (termination) if E deprived of substantially the whole benefit of the works or parr. 9.4

320

13-19

Issue a taking-over certificate with a

reduction of the contract price. 9.4

321

CHAPTER

14

EMPLOYER'S TAKING OVER General Comments After completion of the whole of the work or of a specified section, a process should exist to enable the employer to acknowledge completion and assume possession of the site and care of the works. This process of "taking over" is generally accompanied by the issue of a certificate to that effect. As a general rule, at taking over the responsibility for the works passes from the contractor to the employer.! The employer will want to verify that the works or section has been completed in accordance with the contract, by tests on completion or otherwise, before issuing a taking-over certificate. The parties to a construction contract for facilities built for provision of certain public services should be aware that upon the completion of construction, some legal systems deem such facilities to be public property.2 Formal acceptance is nonetheless frequently required under such systems and often is accompanied by testing or approval requirements. 3 The employer will generally retain the right to require the contractor to remedy defects that arise after taking over has occurred. The contract should specify the legal consequences of taking over, such as transfer of risk, payment of price and commencement of the defects liability or notification period. 4 Nonetheless, unlike the FIDIC contracts, many of the industry form contracts discussed herein do not use the concept of taking over or the issuance of a taking-over certificate. The equivalent in these types of contracts may simply be "substantial completion" accompanied by a certificate of substantial completion. The examination of each contract's provisions in this regard will shed more light on these issues in the discussion of Silver Book sub-clause 10.1. The extent of completion required before taking over may also vary from contract to contract. Complete performance, denying the contractor B. Eggleston, The ICE Design and Construct: A Commentary (Blackwell Scientific Publications, Australia, 1994), p. 273. 2 UNCITRAL, Legislative Guide on Privately Financed Infrastructure Pro;ects (UN, New York, 2001) (UN DOC. AlCN.9/SER.Bl4) online: UNCITRAL Homepage (pdf format) http://www.uncitral.orglenglishltextslprocurernlpfip·index-e.htm (date accessed: July 16, 2001) at 127. J ibid. at 127. • ibid. at 152. I

323

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14-02

EMPLOYER'S TAKING OVER

payment and relief from the payment of liquidated damages for delay where there are minor defects or omissions, is not always a practical requirement in a construction project. Courts have created the concept of substantial completion or performance to balance the needs of both parties, providing the employer with a workable product while not denying completion to the contractor for failure to complete some minor element. 5 On the other hand, in the case of a process project for example, a more complete performance may be extremely important. Parties will want to specify the level of performance required under the contract to avoid distortion of the intended purpose of the contract by the applicable law. Although the FIDIC contracts do not employ the term "substantial completion", this does arise in other contracts, such as the ICE. Although the ICE defines substantial completion, the vagueness of the definition (intended to create flexibility) may result in increased conflict between the parties. The contractor may consider the works to be substantially complete whereas the employer or his representative may require more work to be carried out before issue of the certificate. 6 In any event, for lack of clear provisions regarding "taking over", the standard forms will still contain the requirements for completion and an indication of when responsibility for the works passes to the employer.

Discussion of Specific Sub-Clauses 14-03

Clause 10 of the Silver Book, entitled "Employer's Taking Over", sets forth provisions regarding the requirements and process for the employer's taking over of the works as well as a restriction on the employer's taking over of parts of the works. The last sub-clause of the chapter restates the employer's accountability in terms of time extensions and contract price increases for hindering the contractor in carrying out the tests on completion prior to taking over.

14-04

10.1 Taking Over of the Works and Sections Except as stated in Sub-Clause 9.4 [Failure to Pass Tests on Completion], the Works shall be taken over by the Employer when (i) the Works have been completed in accordance with the Contract, including the matters described in Sub-

s I.N.D. Wallace Q.c., Hudson's Building and Engineering Contracts, (11th ed., Sweet & Maxwell, London, 1995), p. 476; S. Furst Q.c. & V. Ramsey Q.c. eds, Keating on Building Contracts, (7th ed., Sweet & Maxwell, London, 2001), at 4-09 to 4-12. 6 B. Eggleston, op. cit. n. 1 above, p. 276.

324

DISCUSSION OF SPECIFIC SUB-CLAUSES

Clause 8.2 [Time for Completion] and except as allowed in sub-paragraph (a) below, and (ii) a Taking-Over Certificate for the Works has been issued, or is deemed to have been issued in accordance with this Sub- Clause. The Contractor may apply by notice to the Employer for a Taking-Over Certificate not earlier than 14 days before the Works will, in the Contractor's opinion, be complete and ready for taking over. If the Works are divided into Sections, the Contractor may similarly apply for a Taking-Over Ce~tificate for each Section. The Employer shall, within 28 days after receiving the Contractor's application: (a) issue the Taking-Over Certificate to the Contractor, stating the date on which the Works or Section were completed in accordance with the Contract, except for any minor outstanding work and defects which will not substantially affect the use of the Works or Section for their intended purpose (either until or whilst this work is completed and these defects are remedied); or (b) reject the application, giving reasons and specifying the work required to be done by the Contractor to enable the Taking-Over Certificate to be issued. The Contractor shall then complete this work before issuing a further notice under this Sub-Clause. If the Employer fails either to issue the Taking-Over Certificate or to reject the Contractor's application within the period of 28 days, and if the Works or Section (as the case may be) are substantially in accordance with the Contract, the Taking-Over Certificate shall be deemed to have been issued on the last day of that period. After the contractor has completed the works, or a specified section, the employer will take over the works and their care. This taking over occurs after verification of completion by passage of the tests on completion. This sub-clause is intended to ensure that the works are complete before taking over and that the employer does not delay taking over. With the exception of any of the alternative remedies available to the employer in connection with a failure of the works or a part to pass the test on completion (see SB 9.4), Silver Book sub-clause·lO.t indicates that the works must be taken over by the employer when they have been completed in accordance with the contract and the taking-over certificate has been issued or is deemed issued. The contractor applies for a taking-over certificate within 14 days of the time at which the works will be complete and ready for taking over. This application process and issuance of taking-over certificates may apply to sections if the works are so divided. Where the works are divided, however, it is important that the contract contain a description delimiting and describing the section divisions, preferably with separate times for completion for each section. The Silver Book refers to both "sections" of the works and "parts" of the works. Although not clearly explained, "sections" are intended to be clearly defined segments, whereas "parts" are simply parts or portions of the work not characterised as a section for the purposes of completion. Within 28 days of the contractor's application, the employer has three options under Silver Book 10.1: issue a taking-over certificate, reject the contractor's application or do nothing. If the employer issues a taking-over

325

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certificate it must state the date of completion, except for any minor outstanding work or defects that will not substantially affect the use of the works or section for its intended purpose. If the employer rejects the contractor's application, he must give reasons and specify the work remaining to be done in order to obtain the certificate. The contractor is then under an obligation to complete this work before issuing a subsequent notice of completion. If the employer fails to accept or reject within the 28-day period, the taking-over certificate is deemed to have been issued on the last day of the period if the works or section are substantially in accordance with the contract. Sub-clause 10.1 of the Orange Book is identical in substance to the Silver Book provision, except that the employer's representative is the relevant actor for notice, response and the decision regarding taking over. Sub-clauses 10.1 of the Red and Yellow Books are exactly identical to the Silver Book provisions, with the exception that it is the engineer who is the relevant actor, rather than the employer. However, it should be noted that the Red and Yellow Books also contain a sub-clause 10.4 which is not present in the Silver and Orange Book contracts. It states that "(e]xcept as otherwise stated in a Taking-Over Certificate, a certificate for a Section or part of the Work shall not be deemed to certify completion of any ground or other surfaces requiring reinstatement" (RBIYB 10.4). The meaning of this extra provision is unclear. Presumably, it imposes on the contractor the obligation to reinstate any ground or surfaces that so require it, despite the issuance of a taking-over certificate and to the extent that such work does not qualify as minor outstanding work and defects or work that would not otherwise be covered under the contractor's general fitness for purpose or other completion obligations. The value of this provision is uncertain, particularly if such reinstatement work were described in the "punch list" of remaining work that would normally accompany the issuance of a taking-over certificate. Under the ENAA, the tests and inspection (ENAA 23), mechanical completion (ENAA 24), pre-commissioning (ENAA 24.3), commissioning (ENAA 25.1) and performance tests (ENAA 25.2) precede taking-over by the employer, referred to in the ENAA as "Acceptance". The ENAA refers to acceptance of the "Plant" or "parts" which are terms roughly equivalent to the FIDIC contracts' "Works" and "sections." However, the ENAA would appear to use the term "parts" in referring not only to "sections" that are discrete parts of the entire project subject to separate completion dates but also in referring to individual parts of the works not necessarily subject to separate completion dates, such as buildings. Subject to any partial acceptance or use by the employer, acceptance of the plant or any part occurs under the ENAA when: (a) (b)

(c)

326

the Performance Test has been successfully completed and the Process Performance Guarantees and Consumption Guarantees are met; or the Performance Test has not been successfully completed or has not been carried out for reasons not attributable to the Contractor within six (6) months from the date of Mechanical Completion or any other agreed upon period ... ; or the Contractor has paid the liquidated damages specified in GC 28.3 hereof;

DISCUSSION OF SPECIFIC SUB-CLAUSES

and any minor items mentioned in GC 24.7 hereof r~levant to the Plant or that part thereof have been completed.

(ENAA 25.3.1.) Upon occurrence of any of the events above, the contractor may give notice to the employer requesting an acceptance certificate for the plant or parr (ENAA 25.3.2). The employer must issue the certificate within seven days of receipt of the contractor's notice (ENAA 25.3.3). If, within the sevenday period, the employer fails to issue the acceptance certificate or fails to inform the contractor in writing of "justifiable reasons" for not issuing the certificate, the plant or relevant part is deemed accepted as of the date of the contractor's notice (ENAA 25.3.4). The ENAA further states that mechanical completion, commissioning and performance tests may apply to individual parts of the plant, and an acceptance certificate may be issued for each such part (ENAA 25.4.1). However, if the part comprises facilities, such as buildings, not requiring commissioning or performance tests, such facilities are to be accepted by the employer when it becomes "Ready for Use" (ENAA 25.4.2). Although the entire process of completion, testing and acceptance differs in complexity and procedure from the Silver Book, the substance of the acceptance process under the ENAA remains very similar to the Silver Book. A significant difference exists between the Silver Book and the ENAA, however, with respect to liquidated damages for delay. Under the ENAA, the contractor gets relief from liquidated damages for delay at mechanical completion whereas under the Silver Book, such relief only comes following taking over. One minor difference in the ENAA is that the punch list of minor outstanding work would be developed at the time of mechanical completion and must be completed prior to acceptance. Under the Silver Book, taking over may occur despite the outstanding work on the punch list. Under the EIC, when the works have been completed and have passed any tests on completion the contractor must give notice to the employer, which is considered as a request for a taking-over certificate (EIC 9.4(a)). Within 21 days of this notice, the employer must either issue a taking-over certificate confirming the date of substantial completion or identify in writing the works and services required to be done as well as any defects to be rectified before the issuance of a certificate (EIC 9.4(b)). The contractor is then entitled to receive within seven days of the completion of the notified work or defect remedies a taking-over certificate dated as of the completion of that work (EIC 9.4(c)). Within 14 days of the employer's notice of remaining work or defects to be remedied, the contractor must notify the employer in respect of any work or services the contractor considers as not part of the contract or that does not require completion before the issuance of the taking-over certificate (EIC 9.4(e)). The contractor is nonetheless obligated to complete any work outstanding at the time the taking-over certificate is issued as soon as reasonably practicable thereafter, including any defect remedies (EIC 9.5). Rather than using the terms "Taking-Over" or "Acceptance", the ICE contains a section describing the requirements for the employer's represen-

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EMPLOYER'S TAKING OVER

14-09

tative to issue a certificate of substantial completion to the contractor. When the contractor considers that the works or a section has been substantially completed and passed any final test provided in the contract or by statute, he may give notice to the employer's representative (ICE 48(1)). The notice must contain the contractor's undertaking to complete any outstanding work by the time agreed between the parties or, if no time is stated, as soon as reasonably practicable during the defects correction period (ICE 48(1), 49(1 )). Within 21 days of receipt of the notice, the employer's representative must either issue a certificate of substantial completion stating the date of completion or instruct the contractor in writing specifying all the work that must be done before issuance of the certificate (ICE 48(2)). If the employer's representative gives this instruction, the contractor is entitled to receive a certificate of substantial completion within 21 days of completion of the work specified to the satisfaction of the employer's representative (ICE 48(2)). However, there is no provision in the ICE regarding "deemed" taking over. Where the Silver Book states requirements for the employer to issue a taking-over certificate, the ICE uses a certificate of substantial completion. Like the ICE, the AlA uses a certificate of substantial completion rather than describing the employer's "taking over." With regard to the issuance of a certificate of substantial completion, the AlA provides: The DesignlBuilder shall notify the Owner when the DesignlBuilder believes that the Work or an agreed upon portion thereof is substantially completed. If the Owner concurs, the DesignlBuilder shall issue a Certificate of Substantial Completion which shall establish the Date of Substantial Completion, shall state the responsibility of each party for security, maintenance, heat, utilities, damage to the Work and insurance, shall include a list of items to be completed or corrected and shall fix the time within which the DesignlBuilder shall complete items listed therein.

(AlA 3.2. 14-Part 2). The AlA does not indicate whether a certificate of substantial completion may be deemed issued if the employer does not act. The AGC also describes substantial completion rather than taking over. Specifically, it states:

portion is substantially complete. Within five days thereafter, the employer and the contractor jointly inspect the works or portion to verify that it is substantially complete in accordance with the contract documents. If so, the employer issues a certificate of substantial completion. This certificate must set forth the date of substantial completion of the works or portion, the remaining items to be completed before final payment, provisions establishing the parties' relative responsibilities regarding se.curity, maintenance, utilities and insurance pending final payment and an acknowledgment that the warranties begin to run on the date of substantial completion or as otherwise indicated in the certificate. There is no mention in the DBJA of a deemed issuance of the certificate of substantial completion. 14-11 Figure 14.1

Taking over under Silver Book 10.1

START Contractor applies by notice (up to 14 days in advance) to employer that works or section are complete and ready for taking over.

Contractor must complete the work specified before issuing a further notice.

YES

Substantial Completion of the Work, or of a designated portion, occurs on the date when construction is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Project, or a designated portion, for the use for which it is intended. This date shall be confirmed by a certificate of Substantial Completion signed by the Owner and the Contractor. The certificate shall state the respective responsibilities of the Owner and the Contractor for security, maintenance, heat, utilities, damage to the Work, and insurance. The certificate shall also list the items to be completed or corrected, and establish the time for their completion and correction.

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(AGC 2.4.6.) There is no mention of a deemed issuance of the certificate of substantial completion. Like the three preceding contracts, the DBIA contains a regime for "substantial completion" rather than "taking over". Under DBIA sub-clause 6.6 the contractor must notify the employer when he believes the work or a 328

YES

329

EMPLOYER'S TAKING OVER

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10.2 Taking over of Parts of the Works Parts of the Works (other than Sections) shall not be taken over or used by the Employer, except as may be stated in the Contract or as may be agreed by both Parties.

14-13

Silver Book 10.2 departs from the Orange Book and differs from the Red and Yellow Books by disallowing the taking over of parts of the works by the employer, except as otherwise agreed between the parties. It should be noted that the Silver Book does not provide for the eventuality that the employer may take over the works, or a part thereof, without the accord of the contractor. The EIC Guide seems to recommend the re-wording of subclause 10.2 such that the works would be deemed taken over in such a situation. 7 The FIDIC Guide, however, notes that the contractor would be entitled to relief due to breach should the employer take over part of the works in such a manner, so such a change may not be necessary.8 When the Silver Book prohibits taking over of parts of the works, "parts" does not mean the taking over of identified sections of the works when they are so divided for completion. Orange Book sub-clause 10.2 permits the taking over of parts of the works. However, the employer is prohibited from using any part of the works unless the employer's representative has issued a taking-over certificate for that part. If the employer has taken over a part, this reduces any potential liquidated damages claim for any section of which it forms part or for the entire works, by the value of the part taken over. Orange Book 10.2 also states that if the employer uses any part of the works before a takingover certificate is issued relating to that part, the part is deemed to have been taken over on the date of its use. In addition, at the contractor's request, the employer's representative must issue a taking over certificate if the employer uses a part of the works. In either or both cases, responsibility for the part used shall pass to the employer, terminating any liability on the contractor for the care of such part. Nonetheless, after the employer's representative issues a taking-over certificate for a part of the works, the contractor must be given the opportunity and must carry out any outstanding tests on completion as soon as practicable before the expiry of the contract period. 9 Sub-clauses 10.2 of the Red and Yellow Books are identical to each other and closely resemble the Orange Book provision. As in the Orange Book, the employer may only use a part of the works if the engineer has issued a takingover certificate for that part. The part is also deemed taken over upon any use by the employer prior to issuance of a taking-over certificate, and the 7

8 9

EIC, The EIC Contractor's Guide to the FlDIC Conditions of Contract for EPC Turnkey Proiects (European International Contractors, Berlin, 2000), p. 23. FIDIC, The FIDIC Contracts Guide (Federation Internationale des Ingenieurs-Conseils, Lausanne, 2000), p. 192. "Contract Period" is defined in the Orange Book as "the period from the Commencement Date to the date 365 days after the date on which the whole of the Works shall have been completed as certified by the Employer's Representative" (OB 1.1.3.5).

330

DISCUSSION OF SPECIFIC SUB-CLAUSES

contractor may request this certificate of the engineer upon the employer's use of such part. Responsibility for the part also passes to the employer as of the date of use. Potential delay damages are also reduced for the relevant section of the works by the proportional value of the taken-over part. Finally, the contractor is also liable to carry out any outstanding tests on completion within the defects notification period. The Red and Yellow Books also contain provisions in addition to those found in Orange Book 10.2. If the contractor incurs cost as a result of the employer's taking over of a part of the works, other than by agreement or as provided in the contract, the contractor is entitled to payment of his costs plus reasonable profit. The ENAA seems to permit the taking over of parts of the works by the employer. It states that the employer may use any par·t of the plant which has reached mechanical completion prior to the acceptance of the plant as a whole (ENAA 25.4.3). In that case, the employer must give notice to the contractor of his intended use, the part is deemed accepted as of the date of such notice and an acceptance certificate must be immediately issued by the employer for the part (ENAA 25.4.3). The EIC does not expressly prohibit the taking over of parts of the works by the employer. However, EIC 9.4(d) states that if the employer has occupied or uses the works "the Contractor shall be entitled to a Taking-Over Certificate for such Works or part thereof effective as at the date of occupancy or use thereof" . Although the ICE does not use the term or concept of "partial taking over" by the employer, the employer is effectively permitted to do so under ICE sub-clause 48(5). It states that if the employer's representative considers that any part of the works has been substantially completed and passed any final test prescribed, he may issue a certificate of substantial completion for that part before completion of the whole works (ICE 48(5)). In addition, the contractor is deemed to have undertaken to complete any outstanding work on that part during the defects correction period. The ICE further states:

14-14

If any substantial part of the Works has been occupied or used by the Employer

other than as provided in the Contract the Contractor may request in writing and the Employer's Representative shall issue a Certificate of Substantial Completion in respect thereof. Such certificate shall take effect from the date of delivery of the Contractor's request and upon the issue of such certificate the Contractor shall be deemed to have undertaken to complete any outstanding work in that part of the Works during the Defects Correction Period. (ICE 48(4)). There is no restriction in the AlA concerning the employer's use or taking over of parts of the works. However, it does state that partial or entire use or occupancy of the project by the employer does not constitute acceptance of work not in accordance with the contract documents (AlA 5.1.6-Part 2). The AGC also does not use the concept of partial taking over in its provisions. However, it does state that "[ilf the Owner occupies or uses a portion 331

14-15

EMPLOYER'S TAKING OVER

of the Project prior to its Substantial Completion, such occupancy or use shall not commence prior to a time mutually agreed to by the Owner and the Design-Builder" (AGC 10.5.2). The DBIA does not contain a prohibition against the employer taking over or using a part of the works. Specifically, it states that: Owner, at its option, may use a portion of the Work which has been determined to be substantially complete, provided, however, that (i) a Certificate of Substantial Completion has been issued for the portion of Work ... , (ii) DesignBuilder and Owner have obtained the consent of their sureties and insurers, and to the extent applicable, the appropriate government authorities having jurisdiction over the Project, and (iii) Owner and Design-Builder agree that Owner's use or occupancy will not interfere with Design-Builder's completion of the remaining Work. (DBIA 6.6.3.)

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10.3 Interference with Tests on Completion If the Contractor is prevented, for more than 14 days, from carrying out the Tests on Completion by a cause for which the Employer is responsible, the Contractor shall carry out the Tests on Completion as soon as practicable. If the Contractor suffers delay andlor incurs Cost as a result of this delay in car-

rying out the Tests on Completion, the Contractor shall give notice to the Employer and shall be entitled subject to Sub-Clause 20.1 [Contractor's Claims) to: (a)

an extension of time for any such delay, if completion is or will be

delayed, under Sub-Clause 8.4 [Extension of Time for Completion); and (b) payment of any such Cost plus reasonable profit, which shall be added to the Contract Price. After receiving this notice, the Employer shall proceed in accordance with SubClause 3.5 [Determinations) to agree or determine these matters.

14-17

Silver Book sub-clause 10.3 is contained in this chapter because prevention of the tests on completion by the employer may delay taking over. This sub-clause indicates that if the contractor is prevented for more than 14 days from carrying out the tests on completion for a cause for which the employer is responsible, the contractor shall carry out these tests as soon as practicable thereafter. The contractor is also entitled to an extension of time and his reasonable costs plus profit in the event he suffers delay or incurs cost as result of this employer delay. The Orange, Red and Yellow Books take a different approach to dealing with employer's interference with tests on completion. Orange Book 10.3 states that if the contractor is prevented from carrying out the tests on completion by a cause for which the employer is responsible, the works or section shall be deemed taken over on the date when the 332

DISCUSSION OF SPECIFIC SUB-CLAUSES

tests on completion would otherwise have been completed. The employer's representative is then required to issue a taking-over certificate, and the contractor must still carry out the tests as soon as practicable, and before the expiration of the contract period. The employer's representative may also require the tests on completion to be carried out by 14 days' notice and in accordance with the relevant provisions of the contract. Similar to the Silver Book, the contractor is entitled to claim and receive an extension of time due to the delay as well as payment of any costs incurred plus reasonable profit. Sub-clauses 10.3 of the Red and Yellow Books are identical to each other, similar to the Orange Book and different from the Silver Book. Like the Orange Book, if the employer delays the tests on completion for more than 14 days, the works or section are deemed to be taken over and the engineer must issue a taking-over certificate for the date when the tests on completion would otherwise have been completed. The 14-day delay period is not contained in the Orange Book. The contractor must carry out the tests as soon as practicable before the expiration of the defects notification period, or the tests may be required by the engineer upon 14 days' notice. As in the Orange Book, the contractor is entitled to any related costs plus profits and an extension of time caused by the employer-caused test delay. The FIDIC Guide justifies the differing approach of the Silver Book by asserting it is "less likely" under this contract that the employer would delay tests for completion and, should the employer nonetheless do so, "a deemed taking over may be in neither party's interest" .10 As stated in Chapter 13 in the discussion of Silver Book sub-clause 9.2, the consequences of test delays caused by the employer are not specifically stated in the ENAA. However, in the event of a prevention of these tests caused by the employer, the contractor could obtain a price increase and extension of time (ENAA 40.1, 39). Such a result may also be obtainable under the applicable law. ll The EIC contains no specific provision dealing with the employer's prevention of any tests on completion. However, the contractor would be entitled to an extension of time for any delay or prevention attributable to the employer (EIC 9.3(d)). The EIC does not appear to provide for the payment of the contractor's costs in such a case. However, the contractor could request an adjustment to the contract price as a variation (EIC 11.2). Although the ICE contains no specific provisions regarding tests on completion or delays thereto, assuming such tests were specified in an appendix to the contract the contractor would have the right to an extension of time for "any delay, impediment, prevention or default by the Employer" (ICE 44(1)(d)). However, there is no clear provision for payment of the contractor's costs in this situation. The AlA contains a provision entitling the contractor to an extension of time for delays caused by the employer generally (AlA 4.S-Part 2), but there .0 FIDIC Guide, op. cit. n. 8 above, p. 193. " S. Furst Q.c. & V. Ramsey Q.C. eds, Keating on Building Contracts (7th ed., Sweet & Maxwell, London, 2001), at 5-03.

333

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EMPLOYER'S TAKING OVER

are no tests on completion in the AlA for the employer to prevent or delay to make this provision applicable. There is also no clear entitlement to an increase of the contract price under the AlA in this case. The AGC contains a provision entitling the contractor to an extension of time for delays caused by the employer and also the possibility of potential price increases (AGC 6.3.1). However, there are no specific tests on completion to which these provisions might apply. The DBIA indicates that if the employer causes a delay to the contractor in performing his obligations under the contract, the contractor may receive an extension of the time for completion (DBIA 8.2.1) and possibly an increase in the contract price (DBIA 9.4). However, these provisions do not specifically reference an employer prevention of any tests on completion.

CHAPTER

15

DEFECTS LIABILITY General Comments It is common for construction contracts to require the contractor to remedy

any defects which may arise in the works during a fixed period after completion. The contractor will usually only receive additional compensation for the repair of those defects that are not attributable to his fault. The employer will often wish to maintain some security in order to ensure the contractor's compliance with his obligations in respect of defects. He often does this by retaining a portion of the performance guarantee (e.g. a portion of the retention monies) until the end of such period.! This period is commonly called the defects liability period. Since the employer has taken possession of the works the contract may require the contractor to be notified of any defect before the duty to repair arises. 2 The wording of the defects liability clause should be considered carefully by the contractor. It could create liability to repair any and all damage occurring to the works for any cause whatsoever (a maintenance clause), or it may limit the contractor's liability to the repair of damage related to the defects in the works attributable to the contractor (a defect clause). The clause may also confer on the contractor the right to remedy defects in the works. The Silver Book has slightly modified the traditional concept of a defects liability period and renamed its creation the defects notification period. This change is also reflected in the definitions section. Some applaud this change and maintain that the previous definition of "defects liability period" was "actively misleading". The previous wording appeared "to have left a large number of users with the impression that the contractor's liability ends a year after taking over".3 The main difference between the two is that arguably a defects liability period represents a period during which time the contractor is liable to remedy defects, whereas the defects correction period represents the time period during which the employer must notify the contractor of any defect in order for it to be the contractor's responsibility. Under the Silver Book defects correction period, it is possible that the defect remedy by the contractor could occur after the expiration of the defects notification period, 1 2

J

334

May, Keating on Building Contracts (6th ed., Sweet & Maxwell, London, 1995), p. 266. See also Silver Book sub-clause 14.9. ibid., p. 247. E. Corbett, "FIDIC's New Rainbow 1" Edition-An Advance?" (2000) 17 (2) J.C.L.R. 253 at 254.

335

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for example, if the defect was notified on the last day of the period. Regardless of the terminology used, important factors to consider in connection with defects period provisions are: (a) the period's duration; (b) the duties placed on the contractor; (c) the exclusivity of those duties; and (d) the effect of the period's expiration. Duration of the defects period

15-02

15-03

The. defects liability period generally corresponds to the time from taking over of the works by the employer until some future time by which the works should be entirely completed by the contractor and any defects remedied. The expiration of the period will sometimes precede final payment and may be marked by the issuance of some type of performance certificate indicating the completion of the contractor's obligations under the contract. Although the beginning of the defects liability period is of less substantive importance than its date of expiration, a clear starting point is necessary when the period is expressed as a set length of time. Whether the period begins to run upon the employer's taking over or at some other milestone, the expiration date of the period should be clear and unambiguous. It is equally important that a construction contract contain the possibility of extending the defects liability or notification period in certain circumstances. In practice, the identification and notice of a defect or damage in the works should toll the running of the defects liability period, thus extending the period by the time necessary to remedy the defect and verify the subsequent performance of the works. The contractor may wish that the defects liability period not be extended in the event any identified defect or damage is not attributable to the contractor. It will also be desirable to place a limit on the aggregate time of such extensions of the period. Some commentators also suggest that where machinery or a significant part of the works must be replaced, the employer may want to require the start of a new defects liability period as concerns such machinery or part and any works it could directly affect. 4 Again, the period should only be lengthened where the defect or damage is a result of the contractor's fault to avoid overly extending the responsibility of the contractor. Duties placed on the contractor

15-04

Under defect liability provisions the contractor may have a duty during the relevant defects liability or notification period to remedy all defects irrespective of fault or merely defects resulting from the contractor's failure to comply with his obligations under the contract. The former constitutes a • Corbett, FID/C 4th-A Practical Legal Guide: A Commentary on the International Construction Contract (1991), p. 289; World Bank "Standard Bidding Documents for the Procurement of Works" (World Bank, Washington, D.C., 2000) online: World Bank http://www.worldbank.orglhtmllopr/biddocslworks/w-titlpg.htm (date accessed: July 16, 2001) at 115.

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GENERAL COMMENTS

maintenance clause, whereby the contractor must provide all repairs required by the employer regardless of the party at fault. However, the con~ractor should be compensated for those defects or damage for which he is not responsible. The latter, a defect clause, only requires the contractor to repair damage related to a default in his obligations. The Silver Book uses a maintenance clause, requiring the contractor to repair any defect or damage that arises. One pitfall of a maintenance clause is that the duty to repair all defects could prove to be onerous for the contractor. The contractor would have to repair damages resulting from negligence attributable to the employer or his staff. Although he would be compensated for work done, the contractor is seemingly liable for unlimited repairs as long as they are within the defects period. The contractor might also be compensated by reference to rates fixed in the contract for similar work, which by the time the works have been completed may well be outdated. The contractor may want to limit the extent of variations that can be required without the contractor's consent.

Employer's right to use an outside contractor The FIOIC contracts discussed herein generally limit the employer's ability to use outside contractors to remedy defects to when the contractor has failed to remedy the defect after a certain period. This effectively gives the contractor a right of first refusal to make the repairs. This right protects the contractor from having the responsibility for expenses incurred as a result of having an outside contractor repair defects, possibly at a higher cost than that at which the contractor could perform the repair himself. This will differ somewhat if the contract only requires the contractor to make good defects for which he is responsible. In that case, the employer should be free to bring in outside contractors to make other repairs.

15-05

Expiration of the defects liability period and its effect The employer will not want to release the contractor from any and alliiability simply after completion of the works and the expiry of the defects liability or notification period. He will want to maintain his legal remedies against the contractor for the duration of the period provided by law. Conversely, the contractor will want to limit his liability both under the contract and at law to the greatest extent possible. Although the expiry of the defects period absolves the contractor of an obligation to remedy further defects identified by the employer, this expiration should not be the equivalent of a waiver by the parties of any future claims under the contract and at law. For example, under Silver Book sub-clause 17.1 the contractor will remain liable to indemnify the employer against claims and losses caused by defects in the design of the works attributable to the contractor. The extent of the contractor's liability to the employer or third parties after the expiration of

337

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DEFECTS LIABILITY

15-07

15-08

the defects liability period may also be regulated by the applicable law and any agreement of the parties. If the parties wish to limit the contractor's liability to a greater extent than that provided by the applicable law, they should specify this in the contract. There is admittedly some grey area regarding the significance of the expiration of the defects liability period in a construction contract. To the extent that it is not clearly stated, this expiration may not entirely end the contractor's potential liability. In almost every case, it should end the employer's right to benefit from contractual rights permitting him to order the contractor to remedy additional defects found and any related remedies. However, the contractor will likely continue to have some liability risk both under the contract and at law. One source of protection contained in many contracts is a release of liability provision that would at least be effective against the employer. The issuing by the employer of the performance certificate (or final certificate) contemplated by the Silver Book may terminate a portion of the contractor's liability under the contract. In one English decision, the court found that the language used by the Joint Contracts Tribunal conditions of contract concerning the architect's issuance of a final certificate expressed his "approval" that the works were in compliance with the contract, thus relieving the contractor of liability.s Consequently, parties using a form of final certificate where the employer gives his approval may want to clearly specify the extent of the contractor's liability after issue of such certificate. EIC sub-clause 17.3 indicates that the contractor's entire liability to the employer ends at the expiry of the defects liability period, with no provision for latent defects. Similarly, under ENAA sub-clause 27.9, the contractor is no longer liable for defects in the works after the acceptance of the works, or any part thereof, regardless of the nature of the defect. Considering the liability periods applied by various legal systems for certain construction defects, up to 10 years after delivery,6 employers may believe that it is inappropriate to apply a complete extinction of liability after the defects liability period to a turnkey contract.7 The parties should also be aware of mandatory liability periods for defects in buildings that cannot be set aside by the contract. s The extent and duration of the contractor's liability for patent or latent defects in the works will depend on the relative bargaining positions of the parties and the nature of the project. The parties should use this liability issue Crown Estates Commissioners 11. John Mow/em & Co. Ltd (1994) Const. L. J. 4; for a detailed discussion of this case and its implications for the English construction industry, see J. Jenkins, "The Effect of Final Certificates in the Light of Crown Estate Commissioners 11. John Mow/em" in Justice A. Thorton Q.C. & W. Godwin eds, Construction Law: Themes and Practice (Sweet & Maxwell, London, 1998) 307 at 307 et seq. 6 Limitations Act of 1980 of the United Kingdom; Latent Damage Act 1986 of the United Kingdom; Garantie decennial-art. 1792 and 2270 of the French Civil Code. 1 Dr J.J. Goudsmit, "The EIC (European International Contractors) Turnkey Contract (Conditions for Design and Construct Projects)" (1995) 121.C.L.R. 23 at 38. M Dr J.J. Goudsmit, "Exclusion or limitation of liability in a turnkey contract" (1990) 7 I.C.L.R. 314 at 317. S

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to allocate risk as efficiently and clearly as possible. In some cases it may be appropriate to provide for an extended liability period. For example, the Eurotunnel project used a 10-yea