Legal Advice on FIDIC’s Conditions of Contract for EPC/Turnkey Projects (Silver Book)

Sub-Clause 1.14 Joint and Several Liability

For a substantial contract, there may arise a necessity to delineate meticulous requirements for joint ventures. For instance, it might be deemed prudent for each member to furnish a parent company guarantee—a sample template is appended to this document as Annex A. These stipulations, pertinent prior to the Contract’s enactment, ought to be encompassed within the Instructions to Tenderers. The Employer is inclined towards the designation of a lead entity within the joint venture at an early juncture, thereby facilitating a singular point of contact subsequently. Furthermore, the Employer harbours a preference for abstaining from involvement in any inter-member disputes arising within the joint venture. Scrutiny of the joint venture agreement by the Employer is imperative, potentially necessitating endorsement by the project’s financiers.

Sub-Clause 2.1 Right of Access to the Site

The Particular Conditions necessitate explicit specification regarding the timeframe within which the Employer is obligated to grant the Contractor access to the Site, if such access is post-Commencement Date. Early access to the Site for survey and sub-surface investigations may prove indispensable for the Contractor. Should the Employer arrange for Site-related work prior to granting access rights, comprehensive details must be furnished in the Employer’s Requirements.

Sub-Clause 2.3 Employer’s Personnel These provisions ought to be harmonized with the contractual arrangements between the Employer and any other contractors engaged on the Site.

 Sub-Clause 3.1 The Employer’s Representative While the appointment of a representative by the Employer is not obligatory, such an appointment can significantly bolster the efficiency of the Employer’s administration. If the Employer elects to designate an independent consulting engineer as the Employer’s Representative, the individual may be explicitly identified in the Particular Conditions.

Sub-Clause 4.2 Performance Security

The Particular Conditions should meticulously delineate the amount and currencies of the Performance Security, unless its procurement is deemed unnecessary. EXAMPLE: The quantum of the Performance Security shall equate to ten percent (10%) of the Contract Price stipulated in the Contract Agreement, and shall be denominated in the currencies and proportions stipulated for the Contract Price. The admissible form(s) of Performance Security ought to be appended to the tender documents as an annex to the Particular Conditions. Illustrative templates are appended to this document as Annex C and Annex D. These templates incorporate two sets of Uniform Rules disseminated by the International Chamber of Commerce (ICC), headquartered at 38 Cours Albert 1er, 75008 Paris, France. The ICC also offers explanatory guides to these Uniform Rules. It may be necessary to tailor these templates and the language of the Sub-Clause to ensure compliance with applicable legislation. EXAMPLE: Sub-Clause 4.2 Insert at the conclusion of the second paragraph of Sub-Clause 4.2: Should the Performance Security take the form of a bank guarantee, it must be issued either (a) by a bank situated within the Country, or (b) directly by a foreign bank deemed acceptable to the Employer. If the Performance Security does not assume the form of a bank guarantee, it must be furnished by a financial entity duly registered or licensed to conduct business within the Country.

Sub-Clause 4.3 Contractor’s Representative

Should the Representative be identified at the time of tender submission, the Tenderer retains the prerogative to nominate the Representative. The Tenderer may opt to propose alternatives, particularly if the contract award is anticipated to be deferred. If the prevailing language differs from the language designated for routine communications (as per Sub-Clause 1.4), or if it is imperative to mandate that the Contractor’s Representative possess proficiency in a specific language, one of the subsequent sentences may be appended. EXAMPLE: At the conclusion of Sub-Clause 4.3, append: In the event that the Contractor’s Representative, or said individuals, lacks fluency in (insert language name), the Contractor is obliged to provide a proficient interpreter during all operational hours.

Sub-Clause 4.4 Subcontractors

When subcontractors are engaged, the Contractor shall adhere to the notification requirements delineated in sub-paragraphs (a), (b), and (c) of Sub-Clauses 4.4. Notices pertaining to the following subcontractors shall be provided: (enumerate the pertinent activities and/or segments of the Works)

Sub-Clause 4.12 Unforeseeable Difficulties

In projects involving significant sub-surface construction such as tunnelling, it is advisable to allocate the risk of unforeseen ground conditions to the Employer. Reputable contractors typically hesitate to assume the liabilities associated with unpredictable ground conditions that are challenging or impossible to anticipate beforehand. In such scenarios, it is recommended to utilize the Conditions of Contract for Plant and Design-Build, particularly for works designed by or on behalf of the Contractor.

Sub-Clause 4.19 Electricity, Water, and Gas

If the Contractor is expected to utilize available services, the Employer’s Requirements must outline pertinent details, including service locations and associated costs.

Sub-Clause 4.20 Employer’s Equipment and Free-Issue Material

For this clause to be applicable, the Employer’s Requirements must delineate each item the Employer will furnish or operate, along with all relevant specifications. Additional provisions may be necessary for certain types of facilities to address matters such as liability and insurance.

Sub-Clause 4.22 Security of the Site

If the Contractor shares site occupation with others, amendments to Sub-Clauses 4.8 and/or 4.22 may be necessary, and the Employer’s responsibilities should be clearly stipulated.

Sub-Clause 5.1 General Design Obligations

When the Employer’s Requirements include an outline design, perhaps to assess project feasibility, tenderers should be informed of the extent to which this outline design is suggestive or mandatory. If this clause is deemed unsuitable, provisions from FIDIC’s Conditions of Contract for Plant and Design-Build might be preferable.

Sub-Clause 5.2 Contractor’s Documents

The term “Contractor’s Documents” refers to the documents that the Contractor must furnish to the Employer, as specified elsewhere in the Contract. These documents typically may not encompass all the technical documents required by the Contractor’s Personnel to execute the Works. For instance, in a plant contract, the Employer’s Requirements might specify that the Contractor’s Documents shall include drawings illustrating how the Plant is to be installed, along with any additional information needed for:

(a) preparing appropriate foundations or support structures, (b) establishing suitable access on the Site for the Plant and associated equipment to the installation site, and/or (c) making essential connections to the Plant.

Distinct “review periods” may be designated, considering the time required to review various types of drawings and the potential for substantial submissions at specific stages of the design process

Sub-Clause 6.6 Facilities for Staff and Labour

If the Employer intends to provide accommodation, the terms of this provision should be clearly outlined.

Sub-Clause 6.8 Contractor’s Superintendence

In cases where the ruling language differs from the language for day-to-day communications (as specified in Sub-Clause 1.4), or if it is necessary to ensure that the Contractor’s supervisory staff are proficient in a particular language, the following sentence may be added:

EXAMPLE

At the conclusion of Sub-Clause 6.8, insert:

A reasonable proportion of the Contractor’s supervisory staff must possess a working knowledge of [insert name of language], or the Contractor must ensure the availability of an adequate number of skilled interpreters on-site during all working hours.

Additional Proposed Sub-Clauses under Clause 6 (staff and labour)

In certain circumstances and specific locations of the Site, it may be prudent to introduce additional sub-clauses to address pertinent considerations:

Foreign Staff and Labour

The Contractor retains the prerogative to bring in essential personnel required for project execution. Ensuring compliance with local regulations, the Contractor must secure requisite residence visas and work permits for these personnel. Additionally, the Contractor assumes responsibility for repatriating imported Contractor’s Personnel to their recruitment location or domicile. In the unfortunate event of the demise of any such personnel or their family members within the Country, the Contractor shall manage all necessary arrangements for repatriation or burial.

Alcoholic Liquor or Drugs

Adherence to the Laws of the Country is paramount. The Contractor is strictly prohibited from importing, selling, providing, exchanging, or otherwise dealing with any alcoholic beverages or drugs, except in accordance with local regulations. Similarly, the Contractor is forbidden from facilitating the importation, sale, provision, exchange, or disposal of alcoholic beverages or drugs by Contractor’s Personnel.

Arms and Ammunition

Under no circumstances shall the Contractor engage in the transfer, exchange, or disposal of any arms or ammunition, nor shall Contractor’s Personnel be permitted to do so.

Festivals and Religious Customs

Respect for the Country’s established festivals, designated rest days, and religious or cultural observances is imperative. The Contractor is obligated to honour and accommodate these customs in all project activities.

Clause 7 Plant, Materials and Workmanship

Additional Sub-Clause

If the Contract is funded by an institution whose regulations necessitate restrictions on fund usage, an additional sub-clause may be appended:

EXAMPLE SUB-CLAUSE

All Goods must originate from eligible source countries as outlined in the specified guidelines for procurement. Transportation of Goods shall be facilitated by carriers from these eligible source countries, unless exempted by written authorization from the Employer due to anticipated excessive costs or delays. Surety, insurance, and banking services shall be procured exclusively from insurers and bankers operating in the eligible source countries.

Clause 8 Commencement, Delays and Suspension

Sub-Clause 8.7 Delay Damages

In many legal jurisdictions, the stipulated amount for these predefined damages must reasonably estimate the Employer’s anticipated loss in case of delay. The Particular Conditions should delineate the daily compensation, applicable to the Works and each Section, either as a fixed sum or a percentage, as elaborated in Sub-Clause 14.15(b).

EXAMPLE

Additional Sub-Clause

In compliance with Sub-Clause 8.7, the sum referenced in the second sentence shall equate to 0.02% of the Contract Price as delay damages for the Works, payable daily in the respective currencies stipulated in the Contract Price. For each Section, the daily compensation shall amount to 0.02% of the final contract value of said Section, payable daily in the specified currencies. The maximum aggregate delay damages shall not exceed ten percent (10%) of the Contract Price documented in the Contract Agreement.

Incentives for early completion may be detailed in the tender documents (although Sub-Clause 13.2 pertains to accelerated completion):

EXAMPLE SUB-CLAUSE

Sections must achieve completion by the deadlines outlined in the Employer’s Requirements to facilitate early occupancy and usage by the Employer prior to the overall completion of the Works. Specifications concerning the requisite work for qualifying for bonus payments and the corresponding bonus amounts are provided in the Employer’s Requirements.

For bonus payment calculations, the deadlines for Section completion are fixed, and no adjustments to these deadlines due to Time for Completion extensions will be entertained.

Sub-Clause 9.1 Tests on Completion: Contractor’s Obligations

The Employer’s Requirements should delineate the tests mandated for the Contractor before being eligible for a Taking-Over Certificate. Additionally, the Tender might specify comprehensive arrangements, instrumentation, etc. If the Works entail staged testing and takeover, the testing requirements must consider the impact of incomplete sections of the Works.

The language within the sub-paragraphs typically encompasses conditions applicable to plant contracts but may necessitate modification. Particularly, sub-paragraph (c) pertains to trial operation, during which any product generated by the Works becomes the Employer’s property. Consequently, the Employer assumes responsibility for its disposition and is entitled to the proceeds from its sale. Should the Contractor retain the product, the Sub-Clause should be adjusted accordingly.

Sub-Clause 9.4 Failure to Pass Tests on Completion

If the reduction referred to in the final paragraph, based on the extent of the failure, is to be defined in the Particular Conditions or in the Employer’s Requirements, minimum acceptable performance criteria should also be specified.

Clause 10 Employer’s Taking Over

Sub-Clause 10.1 Taking-Over Certificate

If the Works are to be taken over in stages, which is unusual under a turnkey contract, these stages should be defined as Sections in Clause 1 of the Particular Conditions. Precise geographical definitions are advisable.

Clause 11 Defects Liability

Sub-Clause 11.10 Unfulfilled Obligations

It may be necessary to review this Sub-Clause in relation to the period of liability under the applicable law.

Clause 12 Tests after Completion

Sub-Clause 12.1 Procedure for Tests after Completion

In an EPC turnkey project, the Contractor is typically required to demonstrate the reliability and performance of the Plant during the Tests on Completion, with the Works only being taken over upon successful completion of these tests. However, in exceptional cases, Tests after Completion may be deemed necessary, conducted after the Employer has taken over and operated the Works. This allows for the verification of guaranteed performance under normal operating conditions, such as after operational fouling of the plant.

The Employer’s Requirements should outline the tests required after taking over to verify that the Works meet the Performance Guarantees outlined in the Tender. Specifying these tests, particularly for complex projects, can be challenging yet crucial for project success. Detailed arrangements and instrumentation, beyond what is included in the Plant, may need to be defined in the Tender documentation.

The provisions in the General Conditions assume that Tests after Completion are conducted by the Contractor, with assistance from the Employer regarding personnel and consumables. These specifics should be outlined in the Employer’s Requirements. If alternative arrangements are envisaged, they must be clearly defined in the Employer’s Requirements, with corresponding amendments to the Sub-Clause. For example, FIDIC’s Conditions of Contract for Plant and Design-Build outline Tests after Completion being conducted by the Employer and operating personnel, under the guidance of the Contractor’s staff.

Sub-Clause 12.4 Failure to Pass Tests after Completion

If the first part of this Sub-Clause is to apply, the method for calculating non-performance damages (based on the extent of the failure) must be defined in the Particular Conditions or Employer’s Requirements. Additionally, minimum acceptable performance criteria should be specified to ensure clarity and enforceability.

Clause 13 Variations and Adjustments

Variations within the contract framework can be initiated through three avenues:

(a) The Employer may issue instructions for variation under Sub-Clause 13.1, addressing feasibility or price adjustments. (b) The Contractor has the autonomy to propose variations beneficial to both Parties under Sub-Clause 13.2. (c) The Employer may seek proposals under Sub-Clause 13.3, aiming for prior agreement to mitigate potential disputes.

Sub-Clause 13.5 Provisional Sums

While generally not standard for this contract type, a Provisional Sum may be necessary for certain parts of the Works not priced at the Contractor’s risk. For instance, it may be used for goods the Employer intends to select. Clear definition of each Provisional Sum’s scope is crucial, as it will be excluded from other elements of the Contract Price. If valuation under Sub-Clause 13.5(b) is warranted, the percentage should be stipulated in the Tender.

Sub-Clause 13.8 Adjustments for Changes in Cost

Provisions for adjustments may be warranted when it’s unreasonable for the Contractor to bear the risk of cost escalation due to inflation. Published wording for such provisions, based on cost indices, can be found in FIDIC’s Conditions of Contract for Plant and Design-Build, which may be deemed suitable. Diligent attention must be paid to calculating weightings/coefficients (“a”, “b”, “c”, etc.), ensuring their total does not exceed unity, and selecting and verifying cost indices. Seeking expert legal and financial advice may be prudent in this regard.

Clause 14 Contract Price and Payment

Sub-Clause 14.1 The Contract Price

When drafting the Particular Conditions, careful consideration should be given to the amount and timing of payments to be made to the Contractor. Ensuring a positive cash flow is evidently advantageous for the Contractor, and tenderers will factor in the interim payment procedures when formulating their tenders.

Typically, this contract type is structured around a lump sum price, placing the risk of cost changes resulting from design alterations on the Contractor. The lump sum price may comprise multiple amounts, specified in the currencies of payment, which may or may not include the Local Currency.

To facilitate the valuation of Variations, Tenders may necessitate detailed price breakdowns, encompassing quantities, unit rates, and other pricing details. While such information aids in assessing interim payments, it may not always be competitively priced. Hence, during the tender document preparation phase, the Employer must decide whether to accept the tenderer’s breakdowns as binding. If not, the Employer should ensure that their representative possesses the requisite expertise to evaluate any Variations that may arise.

Additional Sub-Clauses may be warranted to address exceptions to the options outlined in Sub-Clause 14.1 and any other payment-related matters.

If Sub-Clause 14.1 (b) is not intended to apply, additional Sub-Clause(s) should be introduced to address specific exemptions. Here are two examples:

1. Exemption from Duties:

All Goods brought into the Country by the Contractor shall be exempt from customs and other import duties, subject to obtaining prior written approval from the Employer for importation. The Employer shall endorse the necessary exemption documents prepared by the Contractor to facilitate customs clearance of the Goods. Additionally, the Employer shall provide the required exemption documents as follows: (describe necessary documents beyond the Contractor’s preparation capabilities) In the event that exemption is not granted, the customs duties paid shall be reimbursed by the Employer. Imported Goods not incorporated into or used in connection with the Works must be exported upon Contract completion. Failure to export these Goods will result in assessment for duties as per applicable Country Laws. However, exemptions may not apply to: (a) Goods similar to locally produced ones, unless unavailable in sufficient quantities or of different standards required for the Works; and (b) any inherent duty or tax component in goods or services procured within the Country, deemed included in the Contract Price. Port dues, quay dues, and any inherent tax or duty elements in goods or services shall be considered part of the Contract Price.

2. Exemption from Taxes:

Expatriate (foreign) personnel shall be exempt from income tax in the Country on earnings paid in any foreign currency, as well as on subsistence, rentals, and similar services directly provided by the Contractor to Contractor’s Personnel, or in lieu allowances. Any Contractor’s Personnel receiving part of their earnings in foreign currency within the Country may export any remaining balance after completing their term of service on the Works. The Employer shall pursue exemption for this purpose, and if not granted, the relevant taxes paid shall be reimbursed by the Employer.

Sub-Clause 14.2 Advance Payment

Consideration should be given to the advantages of advance payments when drafting the Particular Conditions. Unless this Sub-Clause is intended not to apply, the specifics outlined in sub-paragraphs (a) to (d) of this Sub-Clause should be detailed in the Particular Conditions. Additionally, the acceptable form(s) of guarantee should be provided in the tender documents, attached to the Particular Conditions. An example form is attached to this document as Annex E.

If the Contractor is responsible for supplying major items of Plant, the benefits of stage payments during manufacturing should be examined. It may be prudent for the Employer to consider some form of security for these payments since they do not correspond to anything in the Employer’s possession. If the Contractor is entitled to stage payments before shipment, the tender documents may include:

(a) Provisions in the Particular Conditions linking the timing of advance payment instalments (under this Sub-Clause) to the stages of manufacture; or (b) In the Schedule of Payments or another document used to determine the contract value under Sub-Clause 14.3(a), a price for each of these stages (the Schedule should reference the Contractor providing the security specified in Sub-Clause 14.5).

Sub-Clause 14.3 Application for Interim Payments

The Particular Conditions should define the percentage of retention for sub-paragraph (c) and may also specify a limit of Retention Money.

Sub-Clause 14.4 Schedule of Payments

The General Conditions include provisions for interim payments to the Contractor, which may be based on a Schedule of Payments. If an alternative basis is to be used for determining interim valuations, details should be added in the Particular Conditions. If payments are to be outlined in a Schedule of Payments, it could take one of the following forms:

(a) An amount (or percentage of the estimated final Contract Price) could be allocated for each three-month (or other) period during the Time for Completion. However, this approach may prove impractical if the Contractor’s progress significantly deviates from the Schedule’s expectations. (b) The Schedule could be based on actual progress achieved in executing the Works, necessitating clear definition of payment milestones. Disputes may arise when the work required for a payment milestone is nearly complete, but the remaining balance cannot be finalized until some months later.

Sub-Clause 14.9 Payment of Retention Money

In circumstances where part of the Retention Money is slated for release and substitution by an appropriate guarantee, an additional Sub-Clause may be incorporated. The acceptable form(s) of guarantee should be delineated in the tender documents, attached to the Particular Conditions. A specimen form is appended herewith as Annex F.

Example Sub-Clause for Release of Retention

Upon attainment of ____________ threshold of the Retention Money, the Employer shall effect payment of _________% of the Retention Money to the Contractor upon provision of a guarantee. This guarantee, in a form approved by the Employer and issued by an endorsed entity, shall match the payment in amounts and currencies.

The Contractor is responsible for ensuring the validity and enforceability of the guarantee until the completion of the Works, including rectification of any defects as outlined in Sub-Clause 4.2 for the Performance Security. Upon fulfilment of these conditions, the guarantee shall be returned to the Contractor. This release of retention shall stand in lieu of the subsequent release of the remaining Retention Money stipulated in the second paragraph of Sub-Clause 14.9.

Currencies of Payment

In instances where all payments are designated to be made solely in Local Currency, such currency must be expressly identified in the Contract Agreement. In this scenario, only the initial sentence of this Sub-Clause shall remain applicable. Alternatively, the Sub-Clause may be substituted as follows:

Example Sub-Clause for a Single-Currency Contract

The Local Currency shall serve as the currency of account, and all payments under the Contract shall be executed in Local Currency. Such payments in Local Currency shall be fully convertible, except for those concerning local costs, the percentage of which shall be specified in the Tender.

A note on financing arrangements under EPC/Turnkey Contracts of FIDIC

In certain markets, particularly for substantial contracts, securing financing from entities such as aid agencies, development banks, export credit agencies, or other international financing institutions may be imperative. Should financing be sought from any of these entities, it becomes essential for the Particular Conditions to accommodate their specific requirements. Crafting the precise language will necessitate consultation with these institutions to understand their stipulations and obtain approval for the draft tender documents.

These requirements may encompass tendering procedures essential for rendering the eventual contract eligible for financing, along with the inclusion of special Sub-Clauses in the Particular Conditions. Below are examples illustrating some topics that the institution’s requirements may encompass:

(a) Prohibition against discriminatory practices favouring shipping companies from any particular country. (b) Ensuring that the Contract is subject to widely-accepted neutral laws. (c) Provision for arbitration in accordance with recognized international rules and at a neutral venue. (d) Granting the Contractor the right to suspend or terminate the contract in the event of default under the financing arrangements. (e) Restrictions on the right to reject Plant. (f) Specification of payments due in case of contract termination. (g) Stipulation that the Contract becomes effective only upon satisfaction of certain conditions precedent, including pre-disbursement conditions for the financing arrangements. (h) Obligation on the Employer to make payments from internal resources if, for any reason, the funds under the financing arrangements prove insufficient to meet the payments owed to the Contractor, whether due to a default under the financing arrangements or otherwise.

Furthermore, the financing institution or bank may stipulate the inclusion of references to the financing arrangements within the Contract, particularly if funding from multiple sources is necessary to finance various supply components. It’s common for the Particular Conditions to incorporate special provisions delineating different Plant categories and specifying the requisite documents to be submitted to the relevant financing institution for payment acquisition. Failure to adhere to the financing institution’s requirements could impede or even preclude the procurement of suitable financing for the project, and the institution may opt against providing finance for either part or the entirety of the Contract.

Conversely, when financing isn’t contingent upon the export of goods and services from any specific country but is instead provided by commercial banks lending to the Employer, these banks may seek to impose stringent restrictions on the Contractor’s rights. They might prefer the Contract to omit any mention of the financing arrangements and/or curtail the Contractor’s entitlements under Clause 16.

With reference to Sub-clause on such a clause which a financing institution may require, we note as follows:

The  FIDIC provided form of sub-clause outlines a structured payment mechanism for the Contract Price, delineating various percentages and corresponding payment methods and conditions. This format is indicative of a financing institution’s requirements, reflecting the complexities and safeguards typically associated with financing arrangements in major contracts.

Firstly, the sub-clause segregates the Contract Price into distinct components, potentially including items such as supply, delivery, and services. This breakdown allows for a granular approach to payment allocation, aligning with the financing institution’s need for clarity and transparency in fund disbursement.

The sub-clause then specifies the payment terms for each component, with different percentages allocated to different stages or aspects of the contract. For instance, a portion of the Contract Price may be payable directly by the Employer to the Contractor within a specified timeframe upon receipt of requisite documents, such as commercial invoices and security guarantees issued by banks. This direct payment mechanism ensures timely remuneration for completed work or delivered items.

Additionally, the sub-clause outlines specific requirements for payments related to the supply of Plant, including provisions for direct payments upon shipment of items and disbursement from a Loan Agreement upon presentation of qualifying documents. These provisions reflect the financing institution’s interest in ensuring proper documentation and verification processes are in place before releasing funds for capital-intensive aspects of the project.

Furthermore, the sub-clause stipulates the use of irrevocable letters of credit for direct payments by the Employer, providing an added layer of security for the Contractor and aligning with standard banking practices in international transactions. This requirement underscores the financing institution’s emphasis on risk mitigation and financial stability in the contractual arrangement.

Overall, the form of sub-clause presented embodies the meticulousness and rigour typically demanded by financing institutions in major contracts, aiming to safeguard the interests of all parties involved while facilitating the smooth execution and financing of the project.

The aforementioned arrangements involving financing institutions, the Employer, and the Contractor can be initiated either by the Employer or by the Contractor prior to submitting the Tender. Alternatively, the Contractor may opt to spearhead financing arrangements and assume responsibility for them, although the provision of finance from the Contractor’s own resources might be infeasible or unfeasible. In such cases, the requirements set forth by the Contractor’s financing bank would significantly influence the Contractor’s stance in contract negotiations. These requirements might necessitate interim payments from the Employer, even though a substantial portion of the Contract Price could be withheld until the completion of the Works.

This payment structure can be realised through either a high Percentage of Retention or a meticulously crafted Schedule of Payments, with the Instructions to Tenderers outlining the criteria to which the Tenderer must adhere. Given that the Contractor would need to arrange financing to bridge the gap between the payments and their expenses, both the Contractor and their financing bank would likely insist on some form of security to guarantee timely payment.

It might be prudent for the Employer, during the preparation of the tender documents, to anticipate the latter requirement by committing to provide a guarantee for the payment element that the Contractor is due upon the completion of the Works. The acceptable form(s) of guarantee should be incorporated into the tender documents and annexed to the Particular Conditions, with an example form provided in Annex G. Additionally, the following Sub-Clause could be included:

PROVISIONS FOR CONTRACTOR FINANCE

“The Employer shall procure, at their expense, a payment guarantee in the specified amount and currencies, obtained from an entity as detailed in ____. This guarantee shall be delivered to the Contractor within 28 days following the execution of the Contract Agreement by both Parties. The guarantee shall conform to the form annexed to these Particular Conditions or another form acceptable to the Contractor. Until such time as the Contractor receives the guarantee, the Employer shall refrain from issuing the notice under Sub-Clause 8.1.

The guarantee shall be returned to the Employer no later than the earliest of the following dates: (a) upon the Contractor’s receipt of the Contract Price as stipulated in the Contract Agreement; (b) upon the expiry or fulfillment of obligations under the guarantee; or (c) upon the Employer’s fulfillment of all obligations under the Contract.” FIDIC SILVER-BOOK

 Sub-Clause 15.2 Termination by Employer

Sub-Clause 15.2 of the contract provides the Employer with the authority to terminate the contract under specified circumstances. It is imperative for the Employer to ensure that the language used in this Sub-Clause, as well as the grounds for termination outlined therein, align with the legal framework governing the contract. Before initiating the tendering process, a thorough review of this Sub-Clause is necessary to verify its compliance with applicable laws and regulations. Failure to ensure such consistency may result in legal complications and challenges to the validity of the termination.

Sub-Clause 15.5 Employer’s Entitlement to Termination

Sub-Clause 15.5 supplements the Employer’s entitlement to termination by specifying that, unless it conflicts with the Employer’s requirements or the terms set by financing institutions, the Employer is obligated to compensate the Contractor for any additional loss or damage resulting from the termination. This provision serves to ensure fairness and equity in the termination process, safeguarding the Contractor’s interests in the event of contract termination. However, the addition of this sentence should not contradict the Employer’s specific requirements or the conditions set forth by financing institutions, emphasizing the need for careful consideration and alignment with contractual obligations.

Suspension and Termination by Contractor: Sub-Clause 16.2 Termination by Contractor

Sub-Clause 16.2 grants the Contractor the right to terminate the contract under certain circumstances. Prior to soliciting tenders, it is incumbent upon the Employer to confirm that the language employed in this Sub-Clause adheres to the legal parameters governing the contract. Similarly, the Contractor must ensure that the grounds for termination outlined in this provision align with the prevailing legal framework. This proactive approach helps mitigate potential disputes and legal challenges arising from termination actions initiated by either party. By ensuring consistency with applicable laws, both parties can navigate the termination process effectively and minimize the risk of legal ramifications.

Clause 17 Risk and Responsibility

Sub-Clause 17.6 of the contract pertains to the limitation of liability. This clause typically outlines the maximum amount of liability that a party, usually the Contractor, may incur under the contract. However, the specific sum to be mentioned in the penultimate sentence of Sub-Clause 17.6 is left blank in the example provided. The appropriate sum should be determined based on factors such as the nature and scale of the project, potential risks involved, and prevailing legal standards. It is crucial for parties to carefully consider and negotiate this figure to ensure it aligns with their risk appetite and financial capabilities.

Additionally, it may be necessary to include an additional sub-clause addressing the use of the Employer’s facilities by the Contractor. This sub-clause would delineate the terms and conditions governing the temporary occupation of the Employer’s facilities, specifying matters such as duration, responsibilities for maintenance and upkeep, and any associated costs or liabilities. The inclusion of such a provision ensures clarity and mutual understanding between the parties regarding the use of the Employer’s facilities.

Moreover, Sub-Clause 18.2 concerning insurance requirements may require modification to allocate responsibility for obtaining and maintaining insurance coverage. The suggested amendment involves deleting the final paragraph of Sub-Clause 18.2 and substituting it with language clarifying that the Employer, rather than the Contractor, is responsible for effecting and maintaining the specified insurances. This revision ensures that the party with the primary interest in protecting the project and its assets assumes the responsibility for securing adequate insurance coverage.

Lastly, in the event of force majeure events, the Contractor is typically tasked with safeguarding certain items or assets provided by the Employer. This responsibility encompasses ensuring the care and protection of specified items from the time of their use or occupation by the Contractor until the agreed hand-over or cessation of occupation. Should any loss or damage occur to these items due to causes beyond the Employer’s liability, the Contractor is obligated to rectify such loss or damage at its own expense, as stipulated in the force majeure provision. This ensures that the Contractor bears the responsibility for mitigating risks associated with force majeure events to the extent feasible under the contract.

Clause 18 Insurance

In Clause 18, the General Conditions delineate the responsibilities regarding insurance arrangements, typically to be organized by the “insuring Party,” which is typically the Contractor unless otherwise specified in the Particular Conditions. The Contractor is obliged to procure insurances consistent with the agreed terms with the Employer, ensuring alignment with the project’s overall insurance framework. Tenderers are often required to furnish details of proposed insurance terms in accordance with Instructions to Tenderers. Moreover, the Particular Conditions should stipulate minimum deductibles for Sub-Clause 18.2(d) and minimum third-party insurance amounts for Sub-Clause 18.3, enhancing clarity and specificity in insurance requirements.

If the Employer assumes responsibility for arranging certain insurances under Clause 18, relevant details should be included in the tender documents as an annex to the Particular Conditions. This enables tenderers to assess additional insurance needs for their own protection, encompassing conditions, limits, exceptions, and deductibles, ideally in the form of policy copies. However, the Employer may encounter difficulties in effecting insurances described in Sub-Clause 18.2’s third paragraph, particularly for Contractor’s Equipment, due to uncertainties regarding item amounts or values. In such cases, a sentence may be included in the Particular Conditions to clarify the allocation of insurance responsibilities.

Clause 20 Claims, Disputes and Arbitration

Sub-Clause 20.2 pertains to the appointment of the Dispute Adjudication Board (DAB), a crucial mechanism for resolving disputes impartially. The contract should facilitate dispute resolution while allowing Parties to escalate contentious matters to a neutral DAB. The effectiveness of the adjudication process hinges on the Parties’ confidence in the selected DAB members. Therefore, it is imperative that candidates for this role are not unilaterally imposed by either Party, ensuring impartial selection through a wholly neutral entity, as prescribed under Sub-Clause 20.3. FIDIC may assume this role if authorized in accordance with the provided example wording, underscoring the importance of impartiality and fairness in dispute resolution mechanisms.

Sub-Clause 20.2 – Appointment of the Dispute Adjudication Board (DAB)

Sub-Clause 20.2 of the contract contemplates the appointment of the Dispute Adjudication Board (DAB) following notice from a Party indicating its intention to refer a dispute to the DAB. However, for projects, especially those involving extensive on-site work, where regular site visits by the DAB are deemed appropriate, the option of retaining a permanent DAB may be considered. In such cases, amendments to Sub-Clauses 20.2 and 20.4, along with the Appendix and Annex to the General Conditions, and the Dispute Adjudication Agreement, may be necessary to align with the corresponding provisions in FIDIC’s Conditions of Contract for Construction.

Sub-Clause 20.2 presents two alternatives for the composition of the DAB: (a) A single individual acting as the sole member of the DAB, entering into a tripartite agreement with both Parties; or (b) A DAB comprising three members, each entering into a tripartite agreement with both Parties.

The form of the tripartite agreement can be selected from the alternatives provided at the end of the contract document, depending on the chosen arrangement. Both forms incorporate the General Conditions of Dispute Adjudication Agreement, referred to in Sub-Clause 20.2. Each member of the DAB, under either alternative, is designated as a Member within the Dispute Adjudication Agreement. This structure ensures clarity and consistency in the appointment and operation of the DAB, promoting effective dispute resolution mechanisms throughout the contract duration.

Sub-Clause 20.3 – Consideration for DAB Composition

Before finalizing the contract, it’s prudent to deliberate on whether a one-person or three-person Dispute Adjudication Board (DAB) would be more suitable for the specific project, considering factors such as its scale, duration, and the required fields of expertise. The appointment process of the DAB can be facilitated by including a pre-agreed list of potential members in the contract, streamlining the selection process and ensuring suitability for the project’s needs.

Sub-Clause 20.5 – Failure to Agree Dispute Adjudication Board

In instances where the Parties fail to reach an agreement on the constitution of the DAB, the responsibility for appointment falls upon the President of FIDIC or an appointee designated by the President. This provision ensures that the appointment process proceeds smoothly and impartially, safeguarding the integrity of the dispute resolution mechanism.

Amicable Settlement

Sub-Clause 20.6 underscores the importance of amicable dispute resolution, encouraging Parties to seek resolution through negotiation, conciliation, mediation, or other alternative dispute resolution methods. Successful amicable settlements often hinge on confidentiality and mutual acceptance of the procedure, emphasizing the need for both Parties to willingly participate in the process without coercion.

Sub-Clause 20.6 – Arbitration

The contract should encompass provisions for the arbitration of unresolved disputes through international arbitration. International commercial arbitration offers several advantages over litigation in national courts, particularly in the context of international construction contracts. It provides a neutral and efficient forum for dispute resolution, offering greater flexibility and enforceability of awards, which may be preferable and more acceptable to the Parties involved.

Arbitration Rules and Venue Selection

When selecting international arbitration rules, meticulous attention must be paid to their compatibility with the provisions outlined in Clause 20 of the contract and other specified elements. The Rules of Arbitration of the International Chamber of Commerce (ICC) are commonly incorporated into international contracts, offering a robust framework for dispute resolution. In instances where the contract does not specify the number of arbitrators or the place of arbitration, the International Court of Arbitration of the ICC assumes authority to determine these aspects, typically opting for three arbitrators in significant construction disputes and selecting the place of arbitration.

Should the UNCITRAL or other non-ICC arbitration rules be preferred, it becomes necessary to designate an institution in the Particular Conditions to appoint arbitrators or administer the arbitration, unless such roles are already defined within the arbitration rules. Prior to designating an institution, it’s imperative to ensure its willingness and capacity to fulfill these roles effectively.

For large-scale projects tendered internationally, it’s advisable to choose a venue for arbitration located in a country distinct from that of the Employer or Contractor. This country should possess modern arbitration legislation and have ratified international conventions such as the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, facilitating the enforcement of arbitral awards across the Parties’ jurisdictions.

In certain scenarios, it may be advantageous to include other Parties in the arbitration proceedings, creating a multi-party arbitration. However, drafting multi-party arbitration clauses necessitates careful consideration and tailored drafting, as no universally accepted standard form for such clauses exists for international use. Each case requires individual attention to ensure clarity and effectiveness in resolving disputes involving multiple Parties.