Eic Contractor s Guide to the Fidic Conditions of Contract for Epc Turnkey Projects the Silver Book

EIC CONTRACTOR’S GUIDE TO THE FIDIC

CONDITIONS OF CONTRACT FOR EPC

TURNKEY PROJECTS (THE SILVER BOOK)

FRANK M KENNEDY

Carillion Plc and Chairman of the EIC 1 Conditions

of Contract Working Group

In October 1997, EIC received from FIDIC the first drafts of the 1999 First Editions of four new standard

forms of contract and were invited to comment. EIC gratefully accepted this opportunity and undertook a

comprehensive review of all of the new forms and submitted a large number of proposals for

amendment, clarification and improvement. A significant number of EIC proposals were incorporated in

the Test Editions of 1998 and, following further exchanges, in the First Editions of September 1999. In

common with a number of other reviewers of the draft forms, EIC’s objective was to try and ensure that

the new documents maintained the same balance and fairness between client and contractor that has

been the hallmark of FIDIC contracts. In our view the Silver Book falls a long way short of this objective.

The Silver Book will create problems for employers and contractors and is unlikely to achieve the

dispute free projects desired by FIDIC. It sets out to place almost every conceivable risk on the

contractor but within a framework of conventional FIDIC contract administration procedures. Such an

approach is a long way from good turnkey practice, which gives the contractor a fair degree of freedom

to decide how to achieve performance criteria unhindered by bureaucratic processes. Interestingly, it is

also contrary to FIDIC’s own recommendation in the Introductory Note to the Silver Book that the

“Contractor should be given freedom to carry out the works in his chosen manner”. It is this scope for

interference in the design and construction process along with the Employer’s right to unilaterally issue

instructions that so troubles contractors rather than any fundamental objection to the principle of risk

transfer. Regrettably, examples of turnkey projects falling behind programme whilst the contractor

attempts to satisfy the Employer’s engineer’s requests for further information before authority to

proceed with construction is permitted, are all too common. What could cause greater disagreement and

dispute however is the attempt to make the

1 European International Contractors was founded in 1970 and is a federation of construction industry trade

associations from 15 European countries. The value of international business carried out by members amounts to

around 30 billion Euro per annum. Copies of the Guide can be obtained from EIC at: European International

Contractors, Kurfurstenstrasse 129, D-10785 Berlin, Germany. Tel: ++49 30 21 286 244. Fax: ++49 30 21 286 285.

Email: [email protected]

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contractor responsible for information provided by the employer who is not even responsible for the

accuracy of the Employers Requirements. It is difficult to understand the thinking behind such a

requirement.

In the Introductory Note to the Silver Book, FIDIC set out their rationale for preparing it, point out some

of the consequent obligations on Employers and even go so far as to warn against its use in certain

circumstances. A more imaginative solution would have been to create a form of contract which

establishes a fair balance of risk between the parties, based on their respective abilities to deal with risk.

This would provide the Contractor with the freedom to perform his obligations and give the Employer

confidence that he is getting what he is paying for.

In the past, contractors have taken comfort from the fact that contracts produced by FIDIC have laid

down a predictable and practical starting-point for negotiations between the parties based on equitable

http://www.i-law.com/ilaw/doc/view.htm?id=129918#ICL:20000504.1170

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and balanced risk sharing. It is the Silver Book’s departure from the traditional FIDIC contractual and risk

sharing philosophy, that has prompted EIC to publish a Contractor’s Guide and highlight many of the

potential pitfalls of the Silver Book. In preparing our guide we have tried to avoid the pitfall of only

arguing the case for the contractor and we have attempted to point out what we see as potential areas

of difficulty for both employer and contractor. Consequently, we welcome the opportunity offered by the

International Construction Law Review to publish the guide, open a debate with a wider audience and

test the validity of our arguments.

1. GENERAL PROVISIONS

1.4 Law and Language

Provides that “The Contract shall be governed by the law of the Country (or other jurisdiction) stated in

the particular conditions”. The Contractor should be aware that under certain Civil Law jurisdictions some

Silver Book conditions may be considered unfair trade terms and therefore inapplicable. Also there may

be mandatory laws which cannot be overridden by the Contract.

1.9 Confidentiality

Obligates both Parties to treat the details of the Contract as confidential. If the Contractor’s design

contains data which is commercially sensitive and which he does not wish to be placed in the public

domain, the second sentence of this Sub-Clause, referring to restrictions on publication or disclosure of

particulars, should also be an obligation on the Employer.

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1.13 Compliance with Laws

The Contractor shall comply with all applicable laws. However the responsibility for obtaining permits,

licenses or approvals is not entirely clear when Sub-Clauses 1.13 (a) and (b) are compared:

Sub-Clause 1.13 (a) provides that “the Employer shall have obtained (or shall obtain) the planning,

zoning or similar permission for the Permanent Works”. Sub-Clause 1.13(b) states that “the Contractor

shall…obtain all permits, licences and approvals, as required by the Laws in relation to the design,

execution and completion of the Works and the remedying of any defects”.

Responsibility for obtaining permissions is ambiguous and should be clarified. For instance, what are

“similar permissions” for which the Employer is responsible pursuant to Sub-Clause 1.13 (a) and how do

they fit with the Contractor’s obligations under Sub-Clause 1.13(b)?

Ideally, the Contract should include a detailed schedule of the permits required and should identify the

responsible Party. In the event that the Contractor is responsible, then the Employer, under Sub-Clause

2.2(b) (e) [Permits, Licences and Approvals] “shall (where he is in a position to do so) provide reasonable

assistance to the Contractor”. Consequently, any delay in the issue of permits caused by the Employer’s

failure should entitle the Contractor to an extension of time in accordance with Sub-Clauses 8.4

[Extension of Time for Completion] and 8.5 [Delays Caused by Authorities] .

In particular, those permits that are required to allow the project to be developed at the Site of the

Works should be specifically identified in the Contract as being the responsibility of the Employer.

1.14 Joint and Several Liability

Where the Contracting Party is a joint venture or consortium, this Sub-Clause requires that, the parties to

such joint venture or consortium must be jointly and severally liable to the Employer.

Conversely, should the Employer consist of two or more legal entities then, in such a case the

obligation should be reciprocal.

2. THE EMPLOYER

2.3 Employer’s Personnel

This Sub-Clause relates to the Employer’s obligations in respect of his personnel and contractors

employed directly by him. It should be noted that there is no express obligation on the Employer to

secure generally that his other contractors co-operate with the Contractor other than in the respects

identified.

The effects of any delay or disruption caused by the Employer’s personnel

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and contractors are dealt with under Sub-Clause 8.4 (c) [Extension of Time for Completion] which

provides only for granting a time extension for such events. There is no provision in the Contract to

recompense the Contractor for the consequential cost of delay and disruption caused by such events.

Contractors should carefully consider the possible effects of such events in light of the obligation under

Sub-Clause 4.12 [Unforeseeable Difficulties] where the Contractor is deemed to have foreseen all

difficulties and costs of successfully completing the Works.

2.4 Employer’s Financial Arrangements

FIDIC recognises the need for the Contractor to be satisfied that the Employer has the necessary

financial strength to undertake his obligations under the Contract. This Sub-Clause requires that “the

Employer shall submit, within 28 days after receiving any request from the Contractor, reasonable

evidence that financial arrangements have been made and are being maintained which will enable the

Employer to pay the Contract Price”.

This is a crucial obligation on the Employer, particular where funding is being provided by third parties.

Fundamentally, the Contractor should have the right to refuse to undertake any Variation if he believes

that the available funding is insufficient to cover the varied Works. (See also comments in respect of

Sub-Clause 13.1 [Right to Vary] ).

The Contractor should also have a right to be made aware of any terms, conditions or step-in rights

that exist in any agreement between the Employer and his Lenders. If any direct agreement with regard

to the project is to be made between the Lenders and the Contractor then the terms and conditions of

such an agreement should be provided to the Contractor prior to signature of Contract.

A powerful sanction is available to the Contractor should the Employer fail to furnish reasonable

evidence. The Contractor is entitled to suspend the work or terminate the Contract under Sub-Clauses

16.1 [Contractor’s Entitlement to Suspend Work] and 16.2 [Termination by Contractor] . However, what

constitutes “reasonable evidence” is undefined and the Contractor should establish this prior to

submitting a tender. Failure to do so could prejudice any attempt to obtain more detailed information

during the currency of the Contract, for example in the event of a major variation being instructed.

Contractors should give due consideration to the risk associated with continuing to work during the 28

day period available to the Employer to provide the required evidence and the further extended notice

periods required to comply with the suspension and termination provisions.

2.5 Employer’s Claims

This Sub-Clause offers some protection to the Contractor and obligates the Employer to follow a given

procedure if he “considers himself to be entitled

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to any payment…and/or to any extension of the Defects Notification Period”.

The Employer must notify the Contractor “as soon as practicable” and give particulars of his claim,

after which the Parties may agree the claim or failing which the Employer may then make a

determination in accordance with Sub-Clause 3.5 [Determinations] .

The provisions of this Sub-Clause are also mandatory in the event that the Employer wishes “to set off

against or make any deduction from an amount due to the Contractor”.

A provision entitling the Contractor to claim against the Employer is found in Sub-Clause 20.1

[Contractor’s Claims], but is much more onerous on the Contractor compared with Sub-Clause 2.5. (See

comments under Sub-Clause 20.1.)

3. THE EMPLOYER’S ADMINISTRATION

3.1 The Employers Representative

The Employer is completely free to appoint any person to act as the Employer’s Representative and/or to

revoke any such appointment. Invariably it will be important for the Contractor to establish whether that

representative will be an independent Consulting Engineer or a member of the Employer’s personnel. It

is also important for the Contractor to be aware of the exact nature of the duties and authority assigned

to the representative (s).

Contractors should appreciate a fundamental difference between a two Party contract such as the

Silver Book and traditional FIDIC forms of contract. Under the Silver Book, the Employer’s Representative

acts directly for the Employer and is only responsible for looking after his interests. This is particularly

relevant when compared to the role traditionally carried out by the engineer which required the exercise

of discretion and impartiality even when fulfilling the role of Employer’s Representative.

Contractors should also take note that the powers of the Employer’s Representative are potentially

very comprehensive. “Unless and until the Employer notifies the Contractor otherwise, the Employer’s

Representative shall be deemed to have the full authority of the Employer under the Contract, except in

respect of Clause 15 [Termination by Employer]. ”

3.2 Other Employer’s Personnel

The Employer or the Employer’s Representative may delegate powers to assistants. The power to

delegate authority to these third persons is very broad, and the Contractor should be alert to the

possible confusion and

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interference that might arise if too many assistants are appointed. The Contractor is entitled to receive a

copy of the written delegation which describes clearly the role of the assistant or the like and the

delegation does not become effective until received by the Contractor.

3.4 Instructions

This Sub-Clause is very specific in terms of what constitutes an instruction under the project and requires

that “Each instruction shall be given in writing and shall state the obligations to which it relates…”.

Contractors should ensure that all instructions comply with these requirements and should note that

verbal instructions would appear to have no validity under the Contract.

3.5 Determinations

Notwithstanding the fact that FIDIC has drafted the Silver Book as a two-party contract, the Employer is

given the unilateral right under this Sub-Clause to determine matters in respect of a broad range of

matters. The thinking behind this was presuambly to ensure that decisions are taken when required to

minimise delay. The Employer has such rights in respect of the Sub-Clauses listed below.

2.1 [Right of Access to the Site];

2.5 [Employer’s Claims];

4.19 [Electricity, Water and Gas];

4.20 [Employer’s Equipment and Free-issue

Materials];

4.24 [Fossils];

7.4 [Testing];

8.9 [Consequences of Suspension];

9.4 [Failure to Pass Tests on Completion];

10.3 [Interference with Tests on Completion];

11.4 [Failure to Remedy Defects];

11.8 [Contractor to Search];

12.2 [Delayed Tests];

12.4 [Failure to Pass Tests after Completion];

13.3 [Variation Procedure];

13.7 [Adjustments for Changes in Legislation];

14.4 [Schedule of Payments];

15.3 [Valuation at Date of Termination];

16.1 [Contractor’s Entitlement to Suspend Work];

17.4 [Consequences of Employer’s Risks];

19.4 [Consequences of Force Majeure];

20.1 [Contractor’s Claims] .

It may seem strange that one of the parties has the right to make

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determinations regarding the respective rights of the parties. This was normally reserved for the truly

impartial engineer—a rare bird nowadays. However, the Contractor is not obliged to give effect to the

determination provided he gives notice of his dissatisfaction within 14 days in which case the

determination is not binding.

The fact that the Employer has the right to make a determination is not necessarily against the

interests of the Contractor. If no agreement is achieved and the Employer fails to make a fair

determination then this will be a breach of Contract and the Contractor may refer the matter to the

Disputes Adjudication Board.

No time limit is placed upon the Parties reaching agreement and the Sub-Clause does not define a

period in which the Employer is required to make a determination. It is suggested that a time limit of 28

days should be imposed on the Employer to reach agreement with the Contractor and that a further 14

days are provided for making a determination upon failure to reach agreement.

The Contractor must be aware that the Sub-Clause places no obligation of the Employer to label his

decision a determination. Conversely, the Contractor is required to “give notice, to the Employer, of his

dissatisfaction with a determination within 14 days of receiving it”. Consequently in cases of dispute as

to whether a communication was a determination or otherwise it would be very unusual and grossly

unfair for the Contractor to lose his rights simply as a result of a failure to comply with the obligation to

notify. However, every effort should be made to avoid dispute by establishing whether a communication

from the Employer constitutes a determination or not. Avoidance of doubt is the safest way of ensuring

that there is no loss of entitlement through any failure to lodge the required notice.

4. THE CONTRACTOR

Clause 4 [The Contractor] and Clause 5 [Design] set out the principal obligations and risks which are to

be carried by the Contractor and both are much more onerous than any imposed by previous FIDIC

Conditions of Contract. These two clauses intereact with each other on a number of very important

issues and should be studied together to ensure that the extent of a contractor’s potential exposure is

fully understood. The principal matters in Clause 4 which justify meticulous analysis and prudent

appraisal are:

Fitness for purpose, Sub-Clause 4.1 [Contractor’s

General Obligations],

Nominated subcontractors, Sub-Clause 4.5

[Nominated Subcontractors],

Setting out, Sub-Clause 4.7 [Setting Out],

Site Data, Sub-Clause 4.10 [Site Data],

Unforeseen difficulties, Sub-Clause 4.12

[Unforeseen Difficulties] .

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4.1 Contractor’s General Obligations

Fitness for purpose obligations are of particular concern where a contract is carried out under

jurisdictions based on English Law or Common Law. It may be less of an issue under other jurisdictions

where fitness for purpose obligations have been common practice for many years. However the issues

discussed below are relevant to both situations.

According to this Sub-Clause, “When completed, the Works shall be fit for the purposes for which the

Works are intended as defined in the Contract”.

Under Sub-Clause 5.1(b) [General Design Obligations] the Employer is responsible for the correctness

of the definition of intended purpose. Immediately however, we must consider the wider implications of

Sub-Clause 5.1, which requires the Contractor to satisfy himself as to the accuracy of the Employer’s

Requirements. Contractors must therefore ensure that the definition is clear and unambiguous and that

it is not open to reinterpretation at a later date. If a satisfactory definition is not available prior to tender

submission then it would be prudent in almost all circumstances to prepare a definition acceptable to

both Parties prior to contract signature. Failure to do so could lead to dispute later.

With regard to the full extent of the obligation to design for fitness for purpose it may not be possible

to pass the full liability on to any third party design consultant appointed by contractors. Current practice

is for consultants to accept only an obligation to design with “reasonable skill and care” because

insurance to cover the risk associated with fitness for purpose is not presently universally available and

is a particular problem for British consultants.

In a perfect world, it should be obvious to all concerned that contractors cannot, within their lump sum

price, be responsible for providing everything that an Employer later claims that he understood to be

included. In reality, some Employers will choose to use the Silver Book for that very reason. An

unscrupulous Employer could argue that the Contractor is responsible for an omission and refuse to issue

a variation order. The Contractor’s only protection against this type of behaviour is to prepare and agree

as comprehensive and as detailed a schedule, as it is possible to prepare, setting out exactly what it is

that is being provided.

Failure of the Works to be fit for purpose carries punitive sanctions limited only by the terms of Sub-

Clause 17.6 [Limitation of Liability] .

4.5 Nominated Sub-Contractors

The concept of an Employer nominating a subcontractor is hardly compatible with the obligations of

the Contractor in a Turnkey Contract. Whilst this Sub-Clause does contain a provision for the Contractor

to “raise reasonable objection…with supporting particulars”, it does not convey an absolute right to

reject a nomination. Manifestly, it is impossible to comply with such a requirement where the

Contractor’s concerns arise, say, from the

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relationships that are perceived to exist between the Nominated Subcontractor and either the Employer

or his advisers. Contractors would be well advised to avoid or re-negotiate the terms of any contract that

envisages such an arrangement.

In the event that the Employer instructs the employment of a particular subcontractor despite the

Contractor’s reasonable objections then the Contractor will have a very strong case against the Employer

to recover all of his costs arising from the default of the Sub-contractor.

4.6 Co-operation

This Sub-Clause spells out the obligations of the Contractor. However, there is no equivalent or

corresponding obligation on the Employer to secure that his directly employed “other contractors” co-

ordinate or co-operate with the Contractor. In most contracts, but especially those where the Employer

intends to place significant other contracts, it would be prudent to ensure that the Employer assumes

clear and reciprocal obligations.

4.7 Setting Out

Taken at face value, the obligations under this Sub-Clause would appear to be fair and reasonable and in

accordance with normal practice. “The Contractor shall set out the Works…and shall be responsible for

the correct positioning of all parts of the Works, and shall rectify any error”. However, Sub-Clause 5.1

[General Design Obligations], which deals with the Contractor’s design obligations, makes the Contractor

responsible for the accuracy of the information provided by the Employer! There are some exceptions to

this general requirement, but they are at best, limited and somewhat confusing in their application. Two

courses of action are open to contractors:

If practicable, check the setting out data prior to

submission of the tender, or

Clarify the basis of the offer and propose that the

Employer retain responsibility under Sub-Clause

5.1.

The question of responsibility for data is discussed more extensively under Sub-Clause 4.10 [Site Data]

and Clause 5 [Design] .

4.10 Site Data

The obligations and risks to consider under this Sub-Clause are essentially similar to, but much more

wide-ranging than, those identified above under Sub-Clause 4.7 [Setting Out] . “The Employer shall have

no responsibility for the accuracy, sufficiency or completeness of such data, except as stated in Sub-

Clause 5.1 [General Design Obligations] .” Put simply, whatever the source, the Contractor is responsible

for verifying data. In particular, the Contractor

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is responsible for verifying and interpreting all data on subsurface and hydrological conditions, including

environmental aspects. Such obligations are extremely onerous. The precise extent to which the

exceptions offered under Sub-Clause 5.1 are actually applicable to the data supplied to the Contractor is

debatable and it is recommended that the terms of the exceptions on offer in each individual contract be

carefully scrutinised.

Significantly, the disclaimer covers any information provided during the performance of the Works.

Consequently the Contractor cannot rely on information provided by the Employer during the execution

of the Contract and must always therefore establish its veracity unless the Employer retains liability

under Sub-Clause 5.1 [General Design Obligations] .

FIDIC recognise that, under certain circumstances, it will be impossible for contractors to comply with

these obligations and propose a way out of this particular dilemma. They suggest, in the Introductory

Note, that the Silver Book is not suitable for use where “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”. FIDIC go on to state that, if contractors believe that such a

situation pertains then they are advised to draw the Employer’s attention to FIDIC’s own

recommendation which is to suggest a suitable alternative form of contract e.g. the Yellow Book! Instead

of admitting that the Silver Book is inadequate on this important issue and amending it, they leave the

Employer and the Contractor to choose a totally different form of contract at such a late stage in the

implementation process that their proposal cannot be considered a credible alternative! Inevitably, it

must be concluded that FIDIC have opted out and ducked the task of solving a difficult problem of their

own making.

4.12 Unforeseeable Difficulties

The language used in this Sub-Clause is uncompromising in the extreme and its scope and application

are much more wide-ranging than any previous clause covering unforeseen conditions. The

consequential effects of all unforeseen difficulties are passed to the Contractor, “Except as otherwise

stated in the Contract”. Sub-Clause 4.12(b) requires the Contractor to foresee and allow in the price for

every eventuality however unforeseeable! Presumably this is intended to include events that are

completely outwith the control of the Contractor. It is difficult to imagine a clause which would be more

threatening to contractors and which would leave them more open to unscrupulous Employers who could

allege that any difficulty, however inconceivable at tender stage, could be laid at the Contractor’s door

under this Sub-Clause. Contractors should beware!

4.15 Access Route

On certain projects there could well be an inconsistency between this Sub-Clause and Sub-Clause 2.1

[Right of Access to Site] which requires the

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Employer to give the Contractor the “right of access” to the site. A matter to be clarified pre-contract.

4.21 Progress Reports

The requirements of this Sub-Clause are unnecessarily detailed and over prescriptive. Contractors would

be well advised to agree at tender stage a more appropriate format for the particular contract.

5. DESIGN

A number of references have already been made to Clause 5, largely because it deals with the

responsibility of the respective parties for the basic data, and it is for that same reason that it is

considered to be one of the most important in the Silver Book. As has already been explained, Clause 5

[Design] establishes the fundamental and crucial principle that the Contractor has wide responsibility for

the correctness of the Employer’s Requirements and there are only limited and inadequately defined

exceptions to this principle. It is in the Contractor’s interest to make all proposed exceptions clear and

precise.

5.1 General Design Obligations

This is a complex Sub-Clause with many potential pitfalls for the unwary and it is well worth having a

further look at the major disclaimer it contains. “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.” The problem created by this statement is particularly evident when considering the important

matter of the Employer’s responsibility for design criteria. This would normally be the Employer’s

responsibility, yet the Silver Book fails to establish this as a fundamental principle and this should be

covered by the exceptions provided for in this Sub-Clause.

The Sub-Clause is equally vague on the likely content of the Employer’s Requirements. The whole case

for producing a turnkey form of contract such as the Silver Book was based on the thinking that the

Contractor must comply with the Employer’s Requirements and carry all risks in doing so. Yet the only

indication in the Silver Book of what the Employer’s Requirements might be or what they might contain

is contained in the Guidance Notes. According to FIDIC they are to be specifically prepared project by

project by “suitably-qualified engineers”, no doubt taking many months to do so! Notwithstanding all of

these considerations, the Contractor is expected, prior to submission of the Tender, to check the

Employer’s Requirements and to verify his design criteria and calculations. To do this properly and

establish a high degree of confidence in the Employer’s data would be an enormous undertaking.

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Design criteria encompass many and varied technical matters that include amongst other things,

quality standards, process design, capacity, design life and, in the case of process and power plants,

equipment specifications. The Contractor must not only establish whether the design criteria are

factually correct but must also establish whether they are adequate to achieve the desired performance

and intended purpose, all in the limited time available during the tender period! Inevitably, it will be

prudent for contractors to establish their own design criteria to ensure compatibility with their own

design and to make this an integral part of the offer, even where design criteria have been provided by

the Employer.

Employers are likely to insist that performance criteria and definitions of intended purpose be complied

with even if the technical specification fails to produce satisfactory compliance. Contractors must

understand therefore that the Employer’s definition of intended purpose and his required performance

criteria will invariably take precedence over detailed technical specifications.

Paradoxically, it could well be that in situations where the performance criteria are vague or are

difficult to measure, then a statement of and compliance with a detailed technical specification could be

a more appropriate safeguard.

Whilst there is no specific declaration to limit the Contractor’s responsibility for omissions it should be

reasonably limited to the physical limits of the Works, especially if the alleged omission could not

reasonably be established by a careful study of the intended purpose or from legal requirements or

standards. To be on the safe side, proposals should be appropriately clarified.

The exceptions offered under Sub-Clause 5.1 are of fundamental importance to the Contract. They

would appear to mitigate many of the Contractor’s extremely wide responsibilities for the definition and

specification of the Works. It is crucial to keep sub-paragraphs (a) to (d) in mind when studying the

Employer’s Requirements and negotiating the Contract. They are important enough to consider one by

one.

Sub-Clause 5.1 (a) states that, “portions, data and information which are stated in the Contract as

being immutable”. This means that they are incapable of being changed and are, therefore mandatory

on the Contractor and must be the responsibility of the Employer. It is therefore very important to check

and confirm that the Employer’s Requirements state very specifically which parts are immutable. This is

such an important matter that it must not be left to post contract interpretation and argument. Of

particular importance is the need to identify any part of the Employer’s Requirements which uses the

term “the Contractor shall” in respect of any data or information, as this could well make the

requirement immutable, insofar as it is incapable of being changed by the Contractor.

Under Sub-Clause 5.1 (b), the Employer is responsible for the correctness of the definition of the

intended purpose and it is reasonable to conclude

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therefore that the Employer also retains responsibility for ensuring that it actually fulfils his needs.

Unfortunately, the Silver Book does not deal with the situation where the Employer has provided no clear

and identifiable definition. If this important issue is left unresolved, it could well be that the definition

could only be established later by an interpretation of the Employer’s Requirements. Such a situation

would be unsatisfactory in the extreme and contractors would be well advised to insist that a definition

be provided in the Employer’s Requirements.

Criteria for testing and performance is normally the Employer’s responsibility and this is as stated in

Sub-Clause 5.1(c), so this issue should not be a problem. Again however, contractors would be well

advised to satisfy themselves that they are appropriate to their proposed design for the particular

project.

Sub-Clause 5.1(d) will undoubtedly give rise to a significant amount of discussion. According to this

Sub-Clause the Employer is responsible for “those portions, data and information which cannot be

verified by the Contractor, except as otherwise stated in the Contract”. This is, to put it mildly, an

interesting statement. The words “cannot be verified” are obviously open to interpretation but in this

context, probably mean that it is either impossible or impractical to verify. Nowhere in the Contract or

guidance notes is advice offered on how this is to be decided or against what yardstick it is to be

measured. It might be assumed that the available time would be a deciding factor and yet no comfort is

offered to the Contractor by including a statement such as “with reasonable regard to time and

economy”. However, in the event of dispute, commercial practicality could still be a reasonable defence

when interpreting the word “cannot”. In the long term, only arbitrators or the courts will establish where

the border lies between “can be verified” and “cannot be verified”.

It would certainly be sensible for contractors to state in their tenders which parts of the Employer’s

Requirements could not be verified. Such a statement should at least lead to a discussion to establish

who is to be responsible for which information. It is important that these matters are agreed before the

Contract is signed if dispute is to be avoided later.

5.2 Contractor’s Documents

Most contractors would agree that an orderly flow of technical information is critical to the success of a

turnkey project. Yet, the Silver Book does not specifically address this issue but, under the terms of Sub-

Clause 5.2, actually invites a situation where the Employer, or his adviser, can seriously disrupt and

delay the design and construction process by repeatedly reviewing documents before giving permission

for construction to proceed.

Regrettably, this is not uncommon in turnkey projects, especially those where the Employer has

appointed a consulting engineer, “independent” from his own organisation. To delay the commencement

of construction

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until reviews of the contractor’s documents are completed to the satisfaction of the Employer is, to put it

mildly, a recipe for disaster. The provisions for review of documents are overly prescriptive and give the

Employer too much freedom to interfere with and disrupt the Contractor’s design.

The Contractor has total responsibility for achieving the performance criteria and must therefore have

total freedom to achieve this objective free of the Employer’s interference. Contractor’s Documents

should be given to the Employer for information and the Contractor should at his own risk, be entitled to

proceed with construction. To avoid potential conflict, contractors should set out in their tender

document a clear and practical programme for the submission of all data, design and technical

information required by the Employer and this should include a specific provision for work to proceed at

all times, at the Contractor’s risk. The Contractor’s offer should be clarified accordingly and, to avoid

dispute later, any differences of opinion on the procedure to be adopted should be resolved prior to

contract signature.

5.3 Contractor’s Undertaking

The apparently simple undertaking required by this Sub-Clause hides a potentially dangerous

inconsistency with Sub-Clause 5.1 [General Design Obligations] . Manifestly, “the documents forming the

Contract”, include the Employer’s Requirements and, subject to certain exceptions, Sub-Clause 5.1

makes the Contractor responsible for their accuracy. Notwithstanding this, Sub-Clause 5.3 requires the

Contractor to design and execute the Works to comply with the Employer’s Requirements even if they

are defective or deficient. Furthermore, the Contractor has no power to vary the Works without an

instruction from the Employer who is not bound to issue one! This obvious ambiguity should be resolved

pre-tender.

5.4 Technical Standards and Regulations

This Sub-Clause should ensure that there is no open-ended obligation on the Contractor to amend the

Works at his cost in order to comply with the very latest design standards even if published after the

tender has been submitted. The Contractor should check that the particular conditions do not amend or

override this Sub-Clause. However, there is no mechanism in the Contract to resolve any ambiguity

between the Country’s technical standards and the Employer’s Requirements. Yet another matter for

pre-contract discussions.

7. PLANT, MATERIALS AND WORKMANSHIP

7.6 Remedial Work

A surprising omission is the lack of any express provision that permits the Employer to order a repair as

opposed to removal, replacement or

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re-execution and the Contractor should have the right to carry out repairs to render the Plant or

Materials acceptable and in accordance with the Contract. Should the Employer insist on a replacement

in such situations then he should bear the additional cost.

8. COMMENCEMENT, DELAY AND

SUSPENSION

8.3 Programme

This Sub-Clause obliges the Contractor to give advance warning, is a new feature of the FIDIC Conditions

and requires that, “the Contractor shall promptly give notice of specific probable future events or

circumstances which may adversely affect or delay the execution of the Works”.

Contractors should consider whether, if such warning is given, it could have an impact on the starting

point for calculating the notice periods under Sub-Clause 20.1 [Contractor’s Claims]. It would be only fair

if this obligation to give warning is made reciprocal and applies to the Employer as well.

8.4 Extension of Time for Completion

The Contractor’s entitlement to an extention of Time for Completion is limited by comparison with the

Yellow Book. A right to extension exists if the delay is due to a Variation Order, to a delay caused by the

Employer or his other contractors or if a right to extension exists under any other Sub-Clause of these

conditions, i.e.:

2.1 Failure by the Employer to give access to and

possession of the Site.

(Cost plus reasonable profit added to Contract

Price).

4.24 Discovery of fossils etc.

(Cost but no profit added to Contract Price).

7.4 Delayed testing caused by Employer (see also

Sub-Clause 10.3)


Price).

8.5 Delays caused by Authorities.

(Extension of time only).

8.9 Suspension initiated by Employer (see also

Sub-Clause 16.1)


10.3 Interference with testing by Employer (see

also Sub-Clause 7.4).


Price).

13 The time consequences of variations are dealt

with in Sub-Clause 8.4(a).

13.7 Changes in Legislation.


16.1 Suspension initiated by Contractor (see also

Sub-Clause 8.9).


Price).

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519

17.4 Employer’s Risks.


19.4 Force Majeure.

(Cost but no profit added to Contract Price)

The variable remedies open to contractors should be carefully noted i.e. time only, time and cost and

time, cost and profit. Here again, FIDIC’s logic is difficult to follow.

The Red and Yellow Books contain, in addition to those mentioned in the Silver Book, the right to an

extension of time in the following cases:

← (i) exceptionally adverse climatic conditions;

← (ii) unforeseeable shortages in the availability of

personnel or goods caused by epidemic or

governmental actions; or

← (iii) in the event of adverse physical conditions.

None of the new FIDIC Contracts contain the sweep-up clause found in the fourth Edition of the Red

Book which refers to “other special circumstances”.

It could be argued that the Force Majeure provision in Sub-Clause 19.1 [Definition of Force Majeure]

gives the Contractor a right to an extension of time in the events listed above under (i)–(iii). Manifestly,

exceptionally adverse climatic conditions should be a Force Majeure event, as should shortage in

personnel and goods albeit depending on the reason for such shortage. The difference between an

undisputed contractual right to an extension of time and claiming Force Majeure is that additional

requirements must be satisfied for the latter such as the delaying event could not have been provided

against before entering into the Contract nor avoided nor overcome when it happens. The existence of a

right to an extension of time is not dependent on these requirements.

8.6 Rate of Progress

If, in the opinion of the Employer, the Contractor is working too slowly he can instruct acceleration

measures. This applies not only when the agreed Time for Completion is at risk but also where “progress

has fallen (or will fall) behind the current programme under Sub-Clause 8.3 [Programme] ”.

This type of clause is normally found in construction contracts where the Employer or his engineer has

produced the design and therefore has know-how sufficient to follow closely the actual construction of

the works and construction methods. In a turnkey contract, the Employer has less detailed knowledge.

With the increased responsibility for the Contractor under the Silver Book it should follow that the

Contractor has more freedom to execute the Works at his own pace as long as he complies with the Time

for Completion or other contractually agreed dates. It is perfectly feasible to sustain a position which

maintains that it is for the Contractor to decide whether acceleration measures should be undertaken or

not, particularly if the Employer’s

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justification for acceleration is that although the Contractor has not yet fallen behind he “will fall” behind.

Contractors should have a strong incentive to adhere to the programme in any event, as their right to

payment is normally tied to meeting programme milestones tied to a payment plan.

8.7 Delay Damages

The maximum amount of Liquidated Damages shall be stated in the Particular Conditions. However,

damages in the event of delay can exceed this amount e.g. if the Contractor has to pay the Employers

costs under Sub-Clause 8.6 [Rate of Progress] or the Contract is terminated.

It is not unusual for contracts to state that the Employer may not terminate the Contract before the

aggregate of liquidated damages has reached the maximum amount. The Silver Book does not contain

such limitation but, on the other hand, in accordance with Sub-Clause 15.2 [Termination by Employer]

there have to be qualified reasons for termination due to delay.

If the Contract is terminated due to delay then the Contractor will have to pay all losses and damages

suffered by the Employer (See Sub-Clause 15.4 [Payment after Termination] ). However, such loss and

damage may not include loss of profit or other indirect damages and the maximum liability is limited

under Sub-Clause 17.6 [Limitation of Liability] .

9. TESTS ON COMPLETION

9.2 Delayed Tests

The references in this Sub-Clause to Sub-Clause 7.4 [Testing] (fifth paragraph) and Sub-Clause 10.3

[Interference with Tests on Completion] are confusing because these sub-clauses 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 [Delayed Tests] .

9.4 Failure to Pass Tests on Completion

If the Works fail to pass repeated Tests on Completion and the failure “deprives the Employer of

substantially the whole benefit of the Works or Section…” then the Employer has the right to reject the

Works, terminate the Contract, recover all sums paid for the Works, plus financing costs, costs for

dismantling the Works and clearing the Site.

It is obvious that the Contractor will suffer catastrophic financial consequences if the contract price has

to be repaid together with financing costs and the costs of dismantling the Works and reinstating the

Site.

It is conceivable that there could be contracts where such a severe remedy

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is justified, where, for example the Contractor has developed a unique know-how for a complete

production process and it fails to perform as guaranteed and no other contractor is capable of putting it

into satisfactory working order. In such circumstances, it would be unreasonable to expect the Employer

to bear the consequences of the Contractor’s failure.

On the other hand, current practice in the event of termination is that the Contractor is entitled to

payment for the value of the Works completed at the date of termination. Thereafter, it is up to the

Employer to decide whether or not to complete the Works with another contractor. In both situations the

Contractor must pay the Employer’s additional costs. In circumstances where the Works contain

technology which is “in the public domain”, then the same principle should apply. However, it should be

recognised that in such a case design responsibility for the whole of the Works could rest with the new

Contractor and contractors faced with such a prospect should take due regard of the risks involved. It is

important to understand the implications of this requirement, as the Contractor could be in a very serous

situation in the event that Tests on Completion are not successful.

It is important, in relation to this Sub-Clause to consider the limitation of liability under Sub-Clause 17.6

[Limitation of Liability] .

10. EMPLOYER’S TAKING OVER

10.2 Taking Over of Parts of the Works

According to this Sub-Clause, “Parts of the Works…shall not be taken over or used by the Employer,

except…as may be agreed by the parties”. It fails to address the situation where the Employer uses the

Works or part of the Works without the agreement of the Contractor. Various difficulties and risks could

arise in such a situation none the least of which would be damage to the Works, which may not be

covered by insurance. The Yellow Book offers a way out in Sub-Clause 10.2 [Taking Over of Parts of the

Works] which states that “…if the Employer does use any part of the Works before the Taking-Over

Certificate is issued: (a) the part which is used shall be deemed to have been taken over as from the

date on which it is used…”

11. DEFECTS LIABILITY

11.2 Cost of Remedying Defects

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

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Sub-Clauses 4.1 [Contractor’s General Obligations] and 5.1 [General Design Obligations] make it

absolutely clear that the Contractor is fully responsible for the design of the Works, including the

correctness of the information on which he bases the design subject only to the important exceptions in

Sub-Clause 5.1. As written this means that the Contractor takes responsibility for any design supplied by

the Employer.

No exception is made for the situation where part of the design is supplied by the Employer or the

defect in the design is due to incorrect information or design criteria for which the Employer remains

responsible in accordance with Sub-Clause 5.1. It is clearly a flaw in the Silver Book that such important

exceptions are not expressly referred to. This is an unsatisfactory state of affairs and the Contractor

should not be left to rely on a court or similar to establish that a reasonable interpretation is that a

responsibility allocated to the Employer under Sub-Clause 5.1 should also have the effect that the

Employer takes the risk and cost for remedying defects caused thereby. The Employer’s responsibility

under Sub-Clause 11.2 (a) should be entirely consistent with that set out in Sub-Clause 5.1.

It is therefore recommended that the Parties clarify this matter in the Particular Conditions. This will be

particularly important where the Employer has responsibility for supplying a wide range of information or

for important parts of the design. It is interesting to note that Sub-Clause 11.2 (a) in the Yellow Book has

specific wording to cover just this situation.

It should also be noted that a similar ambiguity exists and is highlighted under Sub-Clause 17.3

[Employer’s Risks] and underlines the importance of getting the exclusions under Sub-Clause 5.1

absolutely correct.

11.4 Failure to Remedy Defects

If the Contractor fails to remedy a defect and the defect or damage “deprives the Employer of

substantially the whole benefit of the Works or any major part of the Works…” then the Employer is

entitled to recover all sums paid for the Works, plus financing costs, costs for dismantling the Works and

clearing the Site. These are indeed punitive sanctions and contractors must carefully consider whether

the risks they carry under the Silver Book are commensurate with the likely reward for performing the

Contract.

This Sub-Clause is similar in effect to Sub-Clause 9.4 [Failure to Pass Tests on Completion] where more

comprehensive comments have been made.

13. VARIATIONS AND ADJUSTMENTS

13.1 Right to Vary

The Employer may initiate Variations prior to issuing the Taking Over Certificate for the Works, and the

Contractor has only limited grounds for refusing to undertake the instructed Variation, which are:

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“(i) the Contractor cannot readily obtain the Goods required for the Variation, or (ii) it will reduce the

safety or suitability of the Works, or (iii) it will have an adverse impact on the achievement of the

Performance Guarantees.”

Notwithstanding any objections raised by the Contractor, the Employer may still confirm his instruction.

The Employer’s right to unilaterally issue Variations does not fit well within the concept of an EPC

Turnkey Contract and the grounds that permit the Contractor to object to a Variation are too restrictive.

It should be at the Contractor’s sole discretion to refuse or accept a Variation if he believes that the price

offered is wholly inadequate, the Variation will have an adverse effect on the undertaking of any of his

obligations under the Contract or, following a request by the Contractor under Sub-Clause 2.4

[Employer’s Financial Arrangements], the Employer is unable to provide evidence that satisfactory

financial arrangements are in place and being maintained to pay for the addition to the Contract Price

resulting from the Variation Order.

Should the Employer instruct the Variation despite the Contractor giving notice that he will not consider

himself bound by the Variation, then the only remedy open to the Contractor is to refer the matter to the

Dispute Adjudication Board.

13.2 Value Engineering

This Sub-Clause provides that the Contractor may, but is under no obligation to, make proposals to

amend the Works that will benefit the Employer.

Unreasonably, what is not provided is a process whereby the two Parties share the benefits of any

value engineering undertaken by the Contractor.

The Contractor may therefore wish to consider how he should be reimbursed for his additional efforts,

or agree a method of sharing the enhanced benefits to be enjoyed by the Employer.

13.3 Variation Procedure

This Sub-Clause represents a dramatic departure from normally accepted practices for dealing with the

valuation of variations and Contractors would be well advised to agree the price of all variations before

starting the additional work.

The procedure outlined places the onus on the Contractor to prepare the design and price and to re-

programme the Works to accommodate the proposed variation. The Employer may then approve,

disapprove or comment upon the Contractor’s submission. The procedure will involve the Contractor in a

great deal of additional effort and expenditure that may not be recoverable if the variation is not

approved or is substantially amended by the Employer. Accordingly, the Employer should be made aware

at the time of Tender that the Contractor will expect to recover such additional expenditure.

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If the price of a variation is not agreed, then it shall be unilaterally determined by the Employer under

Sub-Clause 3.5 [Determinations], and ultimately, in the event of disagreement, by the Disputes

Adjudication Board or Arbitrator. “Reasonable” profit will be allowed but this does not necessarily mean

the same profit margin as is built into other contract rates or in prices for comparable works or that

comparable rates will apply.

13.5 Provisional Sums

It is not clear whether the Contractor is liable for any design associated with Provisional Sums. In the

absence of any express provision it may well be that the Contractor is held to be responsible under Sub-

Clause 5.1 [General Design Obligations] . Again, an issue to be sorted pre-contract. Attention is drawn to

the Guidance Notes which indicate that Provisional Sums should only be used for minor supplies.

13.7 Adjustments for Changes in Legislation

This Sub-Clause contains provisions in respect of the recovery of additional Costs associated with

changes in legislation.

Contractors should note however that the recovery of losses only applies to changes in legislation in

the country in which the Site of the Permanent Works is located.

14. CONTRACT PRICE AND PAYMENT

14.2 Advance Payment

Provision is made for the Contractor to receive an advance payment as an interest-free loan for his

mobilisation and design provided that the amount of the advance is stated in the particular conditions.

If an advance is specified in the Particular Conditions then its payment will only be made after receipt

by the Employer of “(i) a Statement (under Sub-Clause 14.3 [Application for Interim Payments], (ii) the

Performance Security in accordance with Sub-Clause 4.2 [Performance Security], and (iii) a guarantee in

amounts and currencies equal to the advance payment”. The advance payment may be paid in

instalments. However the number and timing must be stated in the particular conditions and the

Contractor will require the advance payment guarantee to recognise this.

Within Sub-Clause 14.7 [Timing of Payments], paragraph (a) states that the first instalment of the

advance payment shall be paid within 42 days after the date on which the Contract Agreement came

into full force and effect, or within 21 days after the Employer receives the documents in accordance

with

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Sub-Clause 4.2 [Performance Security] and Sub-Clause 14.2, whichever is later. Contractors may

consider these periods too long before receipt of the advance and could indeed require payment of the

advance as a condition precedent to the commencement of work on Site.

14.3 Application for Interim Payments

To initiate the payment process the Contractor is to submit a Statement at the end of the period of

payment which period is to be stated in the Contract. If no period is stated, the submission is to be at the

end of each month.

To be valid, the Statement must include items detailed in Sub-Clauses 14.3 (a) to (f). It must also

include the progress reports which are defined within Sub-Clause 4.21 [Progress Reports], an onerous

precondition for the receipt of payment.

Sub-Clause (a) requires that the contract value of the Works executed be estimated unless defined in

accordance with Sub-Clause 14.4 [Schedule of Payments] . It does not detail how the estimate is to be

prepared in a manner that will be acceptable to the Employer. Accordingly, a suitable procedure should

be agreed with the Employer. The Statement should also contain the various additions and deductions to

be made to the contract value of the Works.

Sub-Clause 14.5 [Plant and materials intended for the Works] below, makes provision for payment to

be made in respect of certain plant and materials which are in the country in which the Works are

located but which are not yet on Site. However contractors should be aware that there are no provisions

to make payments in respect of any plant and materials which have not been included in the entitlement

under Sub-Clause 14.5, or for those which are either stored outside the Country of the Works or which

have been delivered to the Site but are not incorporated in the Permanent Works. It is recommended

that amended payment procedures be negotiated prior to Contract signature.

The amount of any Retention Money is to be stated in the particular conditions and the Contractor may

wish to include provisions that permit him to provide a retention guarantee in lieu of the Employer

retaining cash.

14.4 Schedule of Payments

The Contract may provide for payment to the Contractor based upon a Schedule of Payments and if so,

“the instalments quoted in the Schedule of Payments shall be the estimated contract values for the

purposes of sub-paragraph (a) of Sub-Clause 14.3 [Application for Interim Payments] ”.

If the instalments are not defined by reference to actual progress achieved then the Employer is

entitled to revise any payment instalment by making a determination under Sub-Clause 3.5

[Determinations] which will take into account any delay in progress. Equally, the Contractor could

request that,

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when the Works are ahead of programme he is entitled to an appropriate increase in the scheduled

payment.

If it is intended that the schedule of payments be based on the achievement of specific milestone

events then this should be expressly stated. Otherwise, payments would be based on the actual value of

work done.

14.5 Plant and Materials intended for the

Works

This Sub-Clause provides for payment in respect of plant and materials provided they are in the Country

in which the works are located. To obtain payment, the Contractor is to mark the relevant plant and

material as being the property of the Employer or provide suitable insurance together with a guarantee

equal to the value of the payment to be made. (See also comment under 14.3 [Application for interim

Payments] above.)

14.6 Interim Payments

The provisions for withholding payment in this Sub-Clause are potentially harsh. For instance, if the

Contractor, in the Employer’s view, is allegedly proceeding without “due expedition”, in apparent breach

of Sub-Clause 8.1 [Commencement of Works], the Employer could maintain that the whole of the value

of the delayed works should be withheld. A most unsatisfactory and unacceptable situation.

14.7 Timing of Payments

This Sub-Clause details the periods within which payment is to be made by the Employer in respect of

the advance, interim and final payments. By comparison with well-established norms, the periods

proposed are excessive and contractors may wish to suggest more reasonable intervals.

14.9 Payment of Retention Money

The amount of any Retention Money will be defined within the particular conditions and this Sub-Clause

provides for the first half of the Retention Money to be released after the Taking-Over Certificate has

been issued provided that the Works have passed all specified tests, including any tests after

completion.

It is important to fix a date for any tests to be carried out after completion to avoid any delay to the

release of the moiety of the retention.

The outstanding balance of the Retention Money is to be paid “promptly” after expiry of the latest

expiry date of the Defects Notification Period (s). Sub-Clause 1.1.3.7 provides that if no such period is

stated in the Particular Conditions then the Defects Notification Period shall be 12 months and under

Sub-Clause 11.3 [Extension of Defects Notification Period] the period

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could be extended by a maximum of two years. The release of the final tranche of Retention Money

could therefore be up to three years after completion. The full release of Retention Money may be further

delayed if any work remains to be completed, as the Employer may withhold the estimated cost of any

outstanding works.

The above restrictions, together with differing interpretations of the meaning of the word “promptly”

could result in a protracted period of delay before the Contractor is able to recover his Retention Money.

Pressure on contractor’s cash flow could be avoided if the Employer is prepared to accept a bank

guarantee in lieu of retention.

14.10 Statement at Completion

The Contractor is required to submit a statement at Completion with supporting documents within 84

days after receiving the Taking-Over Certificate following which the Employer may make an interim

payment to the Contractor. This statement means that all of the Contractor’s claims must be submitted,

along with all other documentation required or reasonably implied as required under the Contract. Sub-

Clause 14.10(b) and (c) refers. Failure to include claims would result in them being barred under Sub-

Clause 14.14 (b) [Cessation of Employer’s Liability] . Contractors should also have regard to the

extremely tight time limits laid down in Clause 20 [Claims, Disputes and Arbitration] for the submission

of detailed particulars.

14.12 Discharge

A written discharge is to be submitted by the Contractor with the final statement and should be worded

to provide for such discharge to become effective when the final payment has been received and all

bonds and guarantees returned.

14.14. Cessation of Employer’s Liability

This is a very important Sub-Clause in respect of any Contractor’s claims. If the Contractor fails to notify

them in the Final Statement and the Statement at completion required by Sub-Clause 14.10 [Statement

on Completion], then, with minor exceptions, they will be barred. The notifications under this Sub-Clause

are in addition to those required under Sub-Clause 20.1 [Contractor’s Claims] .

15. TERMINATION BY EMPLOYER

15.1 Notice to Correct

This Sub-Clause gives the Employer, in addition to the right to give instructions under Sub-Clause 3.4

[Instructions], an unlimited right to

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require the Contractor by notice to make good any alleged failure to carry out any obligation under the

Contract. If the Contractor fails to comply with such notice, the Employer has the right to terminate the

Contract under Sub-Clause 15.2 [Termination by Employer] .

In circumstances where the Employer has given the Contractor a very brief and vague description of

the scope of work and the Contractor is responsible for the design and tied into a lump sum price, such a

provision would be very dangerous for the Contractor. In situations where the Parties have made

different interpretations of the Employer’s Requirements, then this provision enables the Employer to

impose his view on the Contractor by threatening termination of the contract if the Contractor will not

comply. Such a right should only apply in the event of material breach of contract.

15.2 Termination by Employer

As always the Employer has the right to terminate the Contract in certain circumstances. These

circumstances include breach by, and insolvency of, the Contractor as well as corruption.

Allowing the Employer the right to terminate the Contract in the event of corruption is a sound

principle. However, the definition of corruption as defined by this Sub-Clause is too wide. It extends to

the Contractor’s sub-contractors (over whom the Contractor does not have total control) and it covers

any act, however small, carried out by an individual. As a consequence, determination of the Contract for

the act of corruption under a sub-contract is too severe a remedy. The obligation should be limited to an

obligation on the Contractor to terminate the sub-contract and should not give the Employer the right to

terminate the Contract.

Sub-Clause 15.2 (a) could be applied to quite trivial faults since it relates to compliance with a Sub-

Clause 15.1 [Notice to Correct] notice which covers “any” failure by the Contractor to carry out “any

obligation”. Such a clause could be used oppressively by an employer.

This Sub-Clause should also be considered in the light of the comments on Sub-Clause 8.7 [Delay

Damages] above regarding damages payable by the Contractor in the event of delay.

16. SUSPENSION AND TERMINATION BY

CONTRACTOR

16.2 Termination by Contractor

The right of the Contractor to terminate the Contract is subject to notice periods that could extend to 84

days. In the case of failure to receive reasonable evidence with regard to the Employer’s financial

arrangements

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(Sub-Clause 2.4 [Employer’s Financial Arrangement]) or failure to pay the Contractor amounts due (Sub-

Clause 14.7) the Contractor must allow 42 days to elapse to demonstrate non-payment. Thereafter he

must give a further 14 days notice before he may terminate the Contract.

These time limits are too long. The Contractor must continue working even if the Employer has failed to

pay. It would be more equitable if (similar to the other grounds for termination in Sub-Clause 16.2) the

Contractor were required to give 14 days’ notice, particularly in the case of suspension of work by the

Contractor.

The situation will be more complex where project finance is in place and a lender has step-in rights.

However, the same basic principles should apply.

17. RISK AND RESPONSIBILITY

17.1 Indemnities

This Sub-Clause is unnecessarily broadly drafted. It imposes the risk on the Contractor of injury etc and

damage to property (other than the Works) arising “in the course of the design or execution of the Works

even if not caused by the Works. This is a ridiculously wide risk for the Contractor to assume which, in its

defined terms, may not be insurable.

The last paragraph contains a reference to Sub-Clause 18.3(d)(iii) [Insurance against injury to Persons

and Damage to Property] according to which the Employer is not obliged to indemnify the Contractor to

the extent that insurance cover is available at commercially reasonable terms. Since it is arguable

whether or not insurance cover was available at commercially reasonable terms, it may be advisable

when negotiating a contract to exclude this exception in Sub-Clause 18.3 (d) (iii).

17.3 Employer’s Risks

The catalogue of Employer’s Risks does not include loss or damage due to the occupation of the Works,

or any Section thereof, by the Employer because Sub-Clause 10.2 [Taking Over of Parts of the Works]

does not allow the use of any parts of the Works, except if stated in the Contract or as agreed by both

Parties. Where these latter exceptions occur, the Contractor should either ensure that a Taking Over

Certificate is issued in respect of any such parts or the Yellow Book solution identified under the

comments previously made in relation to Sub-Clause 10.2 [Taking Over of Parts of the Works] is followed.

The Employer’s Risks does not contain the Employer’s Requirements, data and information for which

the Employer is responsible according to Sub-Clause 5.1 [General Design Obligations]. If any loss or

damage to the Works is caused by these responsibilities then the Employer must remain liable.

The operation of exceptional forces of nature has not been included as an

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Employer’s Risk because it is intended that the Contractor bears the full risk. Omitting the operation of

(exceptional) forces of nature from the list of Employer’s Risks is very burdensome. Generally speaking,

their specific occurrence is unforeseeable even by an experienced Contractor, and an experienced

Contractor can not be expected to take adequate precautions against them.

In view of the Contractor’s inability to foresee such risks the Contractor cannot make any realistic risk

assessment. Accordingly, any estimate in respect of such events can only be speculative.

If the Contractor does not want to assume such risks the corresponding provision of the Yellow Book

Sub-Clauses (f), (g) and (h) should be adopted as a more appropriate risk allocation.

17.4 Consequences of Employer’s risks

If, and to the extent that, the Employer requires the Contractor to rectify the loss or damage to the

Works, Goods or Contractor’s Documents resulting from any of the Employer’s Risks, the Contractor is

entitled to time extension and payment of the Cost incurred, but not to any uplift for profit, for rectifying

the loss or damage.

The Contractor’s rights under this Sub-Clause are subject to his compliance with Sub-Clause 20.1

[Contractor’s Claims] .

17.6 Limitation of Liability

This Sub-Clause provides that there is no liability on either Party for loss of use of any Works, loss of

profit, loss of any contract or for any indirect or consequential loss or damage.

It should be noted that it is only in certain cases of breach of contract by the Employer that the Silver

Book entitles the Contractor to compensation for loss of profit (see Sub-Clauses 2.1 [Right of Access to

Site], 7.4 [Testing], 10.3 [Interference with Tests on Completion] ).

This is inequitable and the Contractor should always be entitled to compensation for loss of profit and

other indirect or consequential damages, in the event of a breach of contract by the Employer,

irrespective of whether or not there is a specific Sub-Clause in the Silver Book.

By excluding Sub-Clause 17.1 [Indemnities] from the limitation of liability both the Contractor and the

Employer are fully liable for the events outlined in Sub-Clause 17.1.

19. FORCE MAJEURE

19.1 Definition of Force Majeure

This Sub-Clause provides a definition of Force Majeure and provides a non-exhaustive catalogue of Force

Majeure events in the second paragraph

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that includes natural catastrophes such as earthquakes, hurricane, typhoon or volcanic activity.

19.4 Consequences of Force Majeure

In the event that the Contractor is prevented from performing any of his obligations under the Contract

due to an event of Force Majeure, the Contractor can claim for time extension and the Cost incurred. The

claims for Cost are limited to the events listed in Sub-Clause 19.1 (i) to (iv) [Definition of Force Majeure] .

Such limitation is difficult to understand given the fact that the catalogue of Force Majeure events is not

exhaustive.

19.6 Optional Termination, Payment and

Release

In case of termination due to Force Majeure, the Contractor is entitled to be paid for the Works executed,

the Cost of Plant and Materials ordered, any other Cost incurred in the expectation of completing the

Works, the Cost of removal of Temporary Works and Contractor’s Equipment and the Cost of repatriation

of staff and labour. If the Contractor wants to receive profit on these Costs, a corresponding provision

would have to be included in the Contract.

20. CLAIMS, DISPUTES AND ARBITRATION

20.1 Contractor’s Claims

This Sub-Clause details the procedure that the Contractor must follow when he considers himself entitled

to an extension of Time for Completion and/or additional payment under any of the Clauses or otherwise

in connection with the Contract.

The Contractor is required to give notice of his claim as soon as practicable and not later than 28 days

after becoming aware, or when he should have become aware, of the event or circumstance giving rise

to the claim. Failure to comply with this notice provision would result in the Contractor forfeiting his right

to an extension of the Time for Completion and to additional payment and the Employer is then

discharged from his liability in connection with the event.

The penalty for failure to comply with a purely technical requirement to give notice of a claim is unduly

harsh. This is the first time that a FIDIC contract has removed the fundamental right of the Contractor to

make a claim merely as a result of a failure to comply with a fixed period of time to submit the required

notice. In certain circumstances the Contractor may

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prejudice his entitlement by failing to comply strictly with a notice provision but he should certainly not

forfeit his rights altogether and neither should the Employer be discharged from any and all liability in

connection with an event. It is ironic that this provision would also apply when the event or circumstance

giving rise to the claim is caused by the Employer in the first case e.g. refer to Sub-Clause 8.9

[Consequences of Suspension] .

A comparison of the notice provisions under Sub-Clause 20.1 with the notice provisions under Sub-

Clause 2.5 [Employer’s Claims] where the Employer is required to give notice as soon as practicable after

becoming aware of the event or circumstance. This demonstrates an unfair imbalance between the

position of the Employer and that of the Contractor without any reason being offered for such imbalance.

In addition to the first 28 day notice period the Contractor is also subject to a 42 day period by which

he has to send to the Employer a fully detailed claim with full supporting particulars. (See also the

provisions for continuing claims.) Due to the complex nature of the Works in an EPC contract this could

prove to be extremely difficult and inevitably, the task of compiling and interpreting the relevant facts to

support and justify the claim will be a time consuming and long drawn out process. Such provisions could

be lead to intensive disputes and costly arbitration.

The sixth paragraph of this Sub-Clause requires the Employer to respond to a Contractor’s claim giving

his approval or disapproval within a fixed period of time whereas the eighth paragraph requires the

Employer to proceed in accordance wtih Sub-Clause 3.5 [Determinations] to agree or determine any

extension of Time for Completion and/or any additional payment. It is not clear why these two separate

procedures are required. However, it should be borne in mind that under Sub-Clause 3.5 there is no time

limit within which the Employer has to make a determination.

Contractors should read the Comments made under this Sub-Clause in conjunction with those under

Sub-Clauses 14.10 [Statement at Completion] and 14.14 [Cessation of Employer’s Liability] all of which

underline the importance of submitting all required notices in time to ensure that their rights are

protected and maintained.

20.2 Appointment of the Dispute

Adjudication Board

This Sub-Clause provides for the establishment of the Dispute Adjudication Board (DAB) comprising

either one or three members to be appointed by the Parties. The DAB is to be appointed by the date 28

days after a Party has given notice of its intention to refer a dispute to a DAB. The appointment of the

DAB expires after it has given a decision on the referred dispute, provided no other disputes have been

referred to it in the meantime. When the appointment expires a new DAB will have to be appointed to

deal with the next dispute.

It is very likely that adjudication by a DAB in large and complex EPC

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533

Projects would be much more effective under a standing body rather than one convened on an ad hoc

basis. It would be particularly beneficial for the DAB to become conversant with the Contract and the

Works at an early stage and to familiarise itself with the progress of the Works on a regular basis.

Undoubtedly this will result in speedy and well informed judgments and consequently the procedures

and draft agreements set out in the Red Book are to be preferred for such projects. Under these rules the

DAB is appointed at the start of the Contract and remains in existence for the duration of the Contract

unless agreed otherwise by the Parties.

20.4 Obtaining Dispute Adjudication Board’s

Decision

It should be noted that, if the DAB has given its decision as required by this Sub-Clause and if neither

Party has given notice of dissatisfaction within 28 days after having received the DAB’s decision, the

decision becomes final and binding on both Parties. Even in the case of dissatisfaction by either Party it

would appear that the intention is that decisions of the DAB are binding on both Parties “unless and until

it shall be revised in an amicable settlement or an arbitral award”.

The Contractor is required to “continue to proceed with the Works” but the obligation of the Employer,

in so far as payment is concerned, is merely to comply with the normal process for Interim Payments.

There is no provision for any sanction against the Employer in the case of non-payment. Manifestly, any

payments due as a result of a DAB decision should be considered as Payments due under Clause 14

[Contract Price and Payment] but to be made with immediate effect. Any failure to pay would then give

the Contractor the right to Suspend the Works under Sub-Clause 16.1 [Contractor’s Entitlement to

Suspend Work], an appropriate sanction in such circumstances.

EXECUTIVE SUMMARY

In their Introductory Note to the Silver Book, FIDIC describe the benefits to the Employer of turnkey

project execution and state that passing responsibility for designing and constructing the works to the

Contractor will relieve the Employer of responsibility for close supervision of the design and construction

processes. FIDIC also maintain that there will be an increased certainty of the final price and fewer

disputes if the Contractor assumes responsibility for the wide range of risks set out in the Silver Book.

Regrettably, EIC cannot endorse this view and believe that the Silver Book falls a long way of short of

meeting the objectives which FIDIC set down for it.

Contractors accept that, by choosing a turnkey approach, Employers can reasonably expect the

Contract to transfer as much risk as practicable to the Contractor, offer a high degree of certainty on the

final price, facilitate the speedy completion of the Works and, in the event of dispute, provide for

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their rapid resolution. Contractors on their part, are quite prepared to contract on a turnkey basis and

accept additional risk, provided that risks can be identified, priced and managed, design and

construction of the works is free of disruptive interference and disputes are resolved quickly and

equitably.

In a number of important respects, the Silver Book does not adequately satisfy the respective

aspirations of Employer and Contractor and its failure to do so is best illustrated by consideration of

those matters that most commonly give rise to disputes in turnkey projects;

← inadequate definition of the scope of work;

← disruption of the design and construction process,

← inequitable allocation of risk and

← claims and dispute resolution.

Definition of the scope of the works

It is stating the obvious to say that an offer to work on a fixed lump sum basis can only be made if the

Works are sufficiently well defined. This requires an adequate preliminary design, comprehensive

technical specifications and clear and unambiguous performance criteria. The Contractor will carry out

the majority of these tasks in a turnkey project. However, it is essential that the Employer fully

understands and accepts what is on offer and the required clarity of understanding will only be achieved

through detailed and lengthy negotiation between employer and contractor. Manifestly, this cannot

possibly be achieved during the tender period with all bidders and, until such time as agreement has

been reached, any offer should remain conditional.

The obligations placed upon contractors by the Silver Book are onerous, whereas the Employer’s most

significant responsibility is limited to providing a definition of the intended purposes of the Works and

setting criteria for testing and performance. The Employer is not even responsible for the accuracy of the

“Employer’s Requirements”! The Contractor is required to make all necessary investigations, verify

relevant information and carry out design in sufficient detail to price the Works. Such demands,

combined with the allocation of risks to the Contractor which may be impossible to predict or cost

accurately, may make it impossible for the Contractor to establish precisely the full scope and extent of

his liability. In particular, it will be practically impossible for the Contractor to fully comply with all of

these obligations during the tender period especially the full verification of the Employer’s Requirements

and the development of a fully detailed design. Contractors must decide whether it will be feasible to

clarify all of these matters following tender submission and prior to the signature of a binding contract. In

most circumstances, contractors will be well advised to submit an appropriately conditioned offer which

makes it clear that a full and binding offer will only be made (to the extent that this is practically

possible) following extensive and conclusive negotiations.

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Arguably, the submission of a qualified bid might lead to disqualification of the Contractor’s tender

despite FIDIC’s recommendation in their Introductory Note that it should be used as a starting point for

negotiations. Clarification of the Employer’s position on qualified tenders should be established before

any decision is made to submit a bid.

In many instances, clauses in the Silver Book are in direct conflict with the obligations placed on

Contractors. Not only is the obligation to define the scope of the Works loosely defined, it is also subject

to reviews by the Employer who has the same power to interfere through instructions, approvals,

variations and determinations as the engineer in a conventional construct only contract. Paradoxically,

should any Employer exercise his right to interfere in this way it will inevitably undermine FIDIC’s primary

objective, certainty of the final price.

Disruption of the design and construction

process

Only the Employer can make the choice of a turnkey contract and should only do so if he has confidence

in the competence, resources and experience of his potential Contractor. To achieve this level of

confidence demands a serious and comprehensive pre-qualification and tendering process aimed at

selecting the best contractor for the project. Thereafter, there can be no justification for detailed

supervision and interference and clearly specified monitoring at defined milestone events should be

perfectly adequate. For a Contractor to enter into a contract of fixed time and price his obligations must

also be fixed and once the contract is signed, the Employer should not be able to unilaterally impose his

will on the design and construction process.

The extent to which the Employer might disrupt the design and construction process is the most

fundamental area of concern for contractors working on turnkey projects. FIDIC would appear to accept

this important principle by stating in the Introductory Note to the Silver Book,

“the Employer should exercise limited control over and should in general not interfere with the

Contractor’s work.”

Consequently, in the event that the Employer orders the Contractor to design or construct all or part of

the works in a particular way, then the Employer must accept full responsibility for the consequences of

his actions. Should the Contractor be responsible for the achievement of any performance criteria then

the Contractor must have the right to refuse an instruction, which, in his opinion, is likely to have an

adverse effect on the achievement of the performance criteria.

Allocation of risks and responsibilities

EIC accept that Contractors will bear considerably more risk under a turnkey contract compared to that

of a conventional construct only contract but EIC

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cannot accept the extent to which Silver Book goes in attempting to make the Contractor responsible for

almost every eventuality however unforeseeable. EIC believe that the Employer cannot pass liability for

all risks to the Contractor and any contract signed under the Silver Book should clearly define where

liability lies to ensure that contractors are in a position to accurately identify, price and manage those

risks which are to be their responsibility.

The Contractor must be especially alert to uninsurable risks, risks that are completely out with his

control or risks that are likely to increase as a consequence of the actions of the Employer or third

parties. Contractors should also be wary of those clauses, which, as drafted, could leave the Contractor

at the mercy of an unscrupulous Employer.

However, it is probable that the greatest challenge and consequently the greatest risk will be the

difficulty of checking and confirming the accuracy or adequacy of the information and data supplied by

the Employer. Contractors who accept contracts under the Silver Book are responsible for the accuracy

and correctness of all information and data regardless of its source. Contractors are advised to take

particular care with clauses dealing with the definition of fitness for purpose and liability for

unforeseeable difficulties and adverse physical conditions.

Claims and disputes management

Despite FIDIC’s claims to the contrary, the Silver Book is likely to give rise to disputes between the

Parties unless several of its provisions are modified during negotiation. In particular, the time contraints

placed on the Contractor to submit a notice of an intention to claim are impractical and the sanctions for

non-compliance are unreasonably punitive. By contrast the Employer is neither required to observe

similar time limits nor suffer any sanction provided he gives notice as soon as practicable. This is yet

another example of an inequitable contract.

The Contractor should only be required to advise the Employer of an intention to claim as soon as

reasonably practicable and there should be no time deadline after which the contractor would lose his

rights. This should also apply to the procedure to be followed where details of the claim are to be

submitted. Events may have a continuing effect and it is not always possible to establish the final effect

resulting from an event until later.

A comparison of FIDIC’s Conditions of

Contract for Plant and Design-Build (the

Yellow Book) and EPC Turnkey Projects (the

Silver Book)

If further evidence is required to demonstrate EIC’s concerns regarding the Silver Book the following

comparison of these two books highlights how far FIDIC have departed from their normal fair-handed and

equitable distribution of risk and responsibility. Consequently, the Yellow Book provides a useful source

of reference when drafting an alternative allocation

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of risk and design responsibility. It is also extremely important to remember and to point out to clients at

every opportunity that FIDIC is well aware of the fact that the Silver Book is highly unsuitable for certain

types of turnkey projects. FIDIC makes this clear in the Introductory Note to the First Edition, by stating

that it is not suitable in the following circumstances and that the Yellow Book should be used:

← If there is insufficient time or information for

tenderers to scrutinise and check the Employer’s

Requirements or to carry out the necessary

designs, risk assessment studies and estimating

(taking particular account of Sub-Clauses 4.12

[Unforeseeable Difficulties] and 5.1 [General

Design Obligations]) .

← If construction will involve substantial work

underground or work in other areas which

tenderers cannot inspect.

← If the Employer intends to supervise closely or

control the Contractor’s work, or to review most

of the construction drawings.

← If the amount of each interim payment is to be

determined by an official or other intermediary.

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

← Where part of the design is made by the

Employer and is binding on the Contractor—see

also comments on Sub-Clause 5.1 [General

Design Obligations] in this Guide.

← In competitive bidding without negotiations.

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

The Yellow Book The Silver Book Responsibility for the design provided by the Employer and for providing specifications rests with the Employer.

Responsibility for all designs and specifications rests with the Contractor, including those provided by the Employer.

Responsibility for the correctness of information provided by the Employer remains with the Employer.

The Contractor is responsible for the correctness of information provided by the Employer.

The risk for unforeseen physical conditions is borne by the Employer.

The risk for all unforeseen difficulties, including unforeseen physical conditions is borne by the

The Yellow Book The Silver Book Contractor.

It should be noted however, that the above only describes the overall responsibilities of the parties and

that important exceptions apply in each particular case.

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Comments on a number of individual clauses follow and deal with the matters referred to above in

greater detail. Where considered appropriate comparative references are made to the Yellow Book.

ACKNOWLEDGEMENTS

EIC would like to thank the FIDIC Contracts Committee for the time they devoted to explaining the

philosophy behind the publication of the Silver Book and for listening patiently to our arguments. We

would also like to thank the Organisme de Liaison Industries Métalliques Européennes (ORGALIME) and

Mr Robert Akenhead QC for the important contributions they made in reviewing the final draft of this

Guide and recommending improvements.

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

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