A CONTRACTOR'S VIEW ON FIDIC CONDITIONS OF CONTRACT FOR EPC TURNKEY PROJECTS

(Test Edition of the "Silver Book") AGNE SANDBERG * *Head of Legal Services at Skanska International Civil Engineering AB, Danderyd, Sweden Liaison Group of EU Mechanical, Electric, Electronic and Metal Working Industries. International Bar Association, Committee T - International Construction Projects. 1. INTRODUCTION Contractors in general agree that the FIDIC Conditions of Contract have been and still are important for facilitating the tendering for and negotiating of international construction contracts. The great benefit of the present Red and Yellow Books are that the balance of risks and responsibilities as well as allocation of duties and authorities between the parties generally is accepted by both employers and contractors. The FIDIC Conditions have therefore become the baseline conditions for a fair international construction contract. The major underlying trend in international construction projects is obviously the move from traditional employer-provided design with remeasurable price to design-build with lump-sum prices. A driving force behind this trend is the transition from publiclyfinanced to privatelyfinanced infrastructure. The limited recourse financing in BOT projects is considered to require an all-encompassing undertaking from the contractor. The most obvious effect of the trend is the allocation of more risks to the contractor. Pressure on FIDIC to publish a standard form for design-build resulted in FIDIC publishing Conditions of Contract for Design-Build and Turnkey, the Orange Book, in 1995. During the review process of the Orange Book, discussion was raised on a number of issues, large and small. General appreciation, however, was heard for the effort given by FIDIC in producing the form. One matter to which British contractors particularly objected fiercely was the strict design standard imposed by the fitness for intended purpose obligation. That discussion is not over yet. 2. THE FIDIC CONDITIONS UPDATE FIDIC has now published Test Editions of four new Conditions of Contract:

Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (referred to as "the Construction Contract" or "the New Red Book"); Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant, and for Building and Engineering Works Designed by the Contractor (referred to as "the Plant Contract" or the "New Yellow Book"); Conditions of Contract for EPC Turnkey Projects (referred to as "the EPC Contract" or "the Silver Book"); Short Form of Contract (referred to as "the Short Form" or "the Green Book").

I have chosen to adhere to the terminology used by FIDIC for the new Conditions. The EPC Contract is, however, commonly known as "the Silver Book". FIDIC has been generous in giving both experienced individuals and concerned organizations, such as European International Contractors (EIC), Orgalime [1] and IBA [2], opportunity to review the draft new Conditions. At least EIC, in which I am a member of the Working Group Contract Conditions, has taken the opportunity to give FIDIC many comments both in writing and in meetings. A number of EIC comments have been accepted and included. We did not expect FIDIC to accept all of them. In all fairness, when airing criticism, it must be mentioned that the New Books contain a number of new provisions that contain additional protection for the contractor. However, EIC and Orgallme remain in fundamental disagreement with FIDIC on the Test Edition of the EPC Contract. This article represents solely my opinion but I know that many of the views expressed are shared by both EIC and Orgalime. It should also be noted that the organizations are also critical of issues other than those mentioned herein. 3. PURPOSE OF THE EPC CONTRACT When FIDIC started to plan for a revision of the Conditions of Contract for the "next millennium", these plans did not encompass what became the EPC Contract. It entered the scene at a later stage. After having published , the Orange Book, FIDIC felt that their "rainbow" did not contain a colour that suited BOT projects and that there was a need for such a document. The Introductory Note to the Test Edition confirms that the EPC Contract is drafted specifically with project finance needs in mind. The task was therefore perceived to be to produce a document that allocated virtually all risks to the contractor. It is also stated in the Introductory Note that the EPC Contract is suitable for use in electro-mechanical and other process plant projects where the employer desires a fixedprice turnkey contract and with a two-party approach without an engineer. For the uninitiated reader it may seem confusing that the Plant Contract and the EPC Contract are both intended for the same type of works and both intend that design is made by the contractor. Beside these two new sets of conditions, it is also possible to apply the Orange Book. It is probably not much of a comfort that this situation also is confusing for the well initiated reader.

In relation to the design a principal difference can be traced between the Plant Contract and the EPC Contract. In the Plant Contract the contractor has the obligation to complete the design commenced by the employer (if any) and included in the Employer's Requirements. The employer will remain responsible for the design made by him. This is evidenced by the fact that employer's design is an Employer's Risk , SubClause 17.3(g), and that the contractor does not have an obligation to remedy defects due to design for which the employer is responsible at his own cost, Sub-Clause 11.2(a). This point is now, in comparison with the Orange Book, clarified. The EPC Contract, on the other hand, expressly makes the contractor also liable for any design made by the employer and included in the Employer's Requirements . We therefore now face three different design-build conditions with three different solutions as to the employer's responsibility for design included in the Employer's Requirements. This is hardly a satisfactory situation. Simply because of the sheer length of the conditions, it is unfortunate that they have all been published at the same time. It is very difficult even for a fluent English reader to digest the documents and to form a view on how and when it is appropriate to use them. The EPC Contract is intended to be used only in negotiated contracts, and not in connection with open or restricted tendering. It has therefore been argued that it is always up to the parties to amend any terms or conditions that are not suitable in the particular project. This argument is not acceptable for users of the FIDIC conditions as they should be able to assume that the terms are "market standard" and are fair and reasonable at the outset. 4. ALLOCATION OF RISKS The EPC Contract could simply be considered as an Orange Book, or more correctly the Plant Contract, with further risks allocated to the contractor. Sub-Clause 4.12 in the EPC Contract is a prime example of this as it states that "By signing the Contract, the Contractor accepts responsibility for having foreseen all difficulties and costs of successfully completing the Works" and further "The Contract Price shall not be adjusted to take into account any unforeseen difficulties or costs, except as otherwise stated in the Contract". It is therefore logical to begin by describing the risks ("unforeseen difficulties") allocated to the employer and then to assume that all others are the contractor's responsibility. I have not listed any provision that makes the employer responsible for failure to comply with his own obligations or that is consequent on his own actions, such as to issue a variation order. These are not risks as such, since they are within the employer's control . The risks allocated to the employer are:

Fossils and antiquities (4.24);

Changes in laws and technical standards after the Base Date (5.4); Extension of Time for Completion because of a shortage in availability of personnel or goods, or as a result of governmental action (8.4); Employer's risks for loss or damage to the Works, which include war risks, radiation and pressure waves but neither employer's use or design nor forces of nature (17.3); Costs and extension of time for delays due to Force Majeure events (19.5).

The risks to be assumed by the contractor are basically all of the risks not specifically allocated to the employer . Some of the items listed below are based on an e contrario interpretation with SubClause 4.12 in mind. The list is of course not conclusive but presents some of the more obvious risks.

Delay or disruption caused by the employer's other contractors (2.3); Errors in the points of reference for setting out provided by the employer (4.7); Delay in supply of material and services to be supplied by the employer (extension of time but not additional payment!) (4.20); Errors in information (including Site data) supplied by the employer (4. 10); Unforeseeable adverse physical conditions, including subsurface conditions (4.12); Errors in the Employer's Requirements (5.1).

It is noticeable that some of the above risks are for matters within the control of the employer, and are therefore in contradiction with a fundamental principle of a fair contract. It is disappointing to realize that FIDIC is in the process of publishing a set of conditions that will be more unbalanced in terms of risks than any other design-build forms that I know of, including:

The ENAA Model Forms International Contract for Power Plant Construction issued 1996 by the Engineering Advancement Association ofjapan. ICE Design and Construction, Conditions of Contract issued 1992 by the Institution of Civil Engineers. MF/ 1 -The Model Form of General Conditions of Contract for use in connection with Home or Overseas Contracts for the Supply of

Electrical, Electronic or Mechanical Plant-with Erection (reprinted 1995) issued by the United Kingdom Institution of Electrical Engineers. IChem/E Model Form of Conditions of Contract for Process Plant Lump Sum Contracts, Third Edition (reprinted 1996) issued by the United Kingdom Institution of Chemical Engineers. ABT 94 - General Conditions for Design Build contracts, issued by the Swedish Construction Contracts Committee.

5. SOME ISSUES OF PRINCIPAL INTEREST When setting out to analyse the EPC Contract it is tempting to concentrate on the provisions relating to risk allocation. As illustrated in the previous section, the contractor is expected to assume the risk for matters that are virtually impossible to price. Identification and pricing of risks is, however, also an exercise to be perforined by the contractor in the traditional construction contract and therefore not a particular feature of the EPC Contract. It is of course also tempting to venture into a whole range of provisions worthy of comment. Many of these would also apply to the Construction Contract and the Plant Contract and thus not be unique to the EPC Contract. However, I feel inclined to mention one such provision, Sub-Clause 20.1 on Contractor's Claims. FIDIC has in that provision introduced a general time bar for claims. The contractor shall (i) give a notice within 28 days after the event and submit any other notices which are required by the Contract together with supporting particulars, and (ii) within 42 days after the event send to the employer a "fully detailed claim which includes full supporting particulars of the basis of the claim and of the extension of time andlor additional payment claimed". At the end of the Sub-Clause it is stated that "If the Contractor fails to comply with this or another Sub-Clause in relation to any claim, the Time for Completion shall not be extended and the Contractor shall not be entitled to additional payment ". This is, in my opinion, an unfair term. To compile and submit a fully detailed claim with supporting particulars within 42 days after the event is in many situations extremely difficult. Why should the contractor lose his entitlement on such formal grounds? Perhaps the event may be due to breach of contract by the employer or disruption by him, may be well known to the employer and may be an event where mitigation is not possible. These requirements may cause contractors to mobilise claims experts to site before anything else and force them to divert management resources to preparing the claims rather than giving priority to production. Note that FIDIC tries

to achieve a balance by requiring the employer to respond to claims within 42 days after receipt of a claim. What is the remedy if he fails to respond to a proper claim within such time? Instead of looking closer at the above areas, I will explore some of the key provisions in the EPC Contract related to the definition of his requirements and the Works. These are specified in the Employer's Requirements and are the core of the contractor's obligations and the base for the price and the design. If the contractor is expected to give a fixed lump sum price and a fixed completion date his scope must also be "fixed", even if in performance terms rather than in detailed prescriptive terms . The main problem for the contractor, and I believe in the end also for the employer, is that the contractor's obligations in the EPC Contract are a "moving target" while at the same time the price is expected to be fixed. I base this opinion on the fact that under the EPC Contract the employer will not be responsible for the correctness of any information provided by him and will not (with some exceptions) be responsible for his own requirements and definition of the Works as given in the Employer's Requirements. At the same time he will have a wide authority to interfere in the contractor's performance of design and work and thus in fact have the power to enforce his interpretation of what the contractor's scope is. I will below identify and analyse the key provisions relating to the description of the contractor's scope and the employer's authority to interfere. It is likely that within these provisions the major risks lie for the contractor under the EPC Contract. 5.1 Responsibility for errors in information provided by the employer It is obviously intended that the employer shall not be responsible for errors in information provided by him to the contractor. Sub-Clause 4. 10 - Site Data "The Employer shall have made available to the Contractor for his information, prior to the Base Date, all relevant data in the Employer's possession on hydrological and sub-surface conditions at the Site, including environmental aspects. The Contractor shall be responsible for verifying and interpreting all such data." Sub-Clause 5. I-General Design Obligations

"The Employer ... shall not be deemed to have given any representation of accur4cy or completeness of any information. Any information received by the Contractor, from the Employer or otherwise, shall not relieve the Contractor from his responsibility for the design of the Works." Comments Occasionally construction contracts contain a waiver of responsibility for the employer for errors in geological or hydrological information. The best example of a standard form containing such a waiver is of course the famous clause 13 in the Government of Hong Kong Conditions of Contract for Civil Works Construction. However, until I read the EPC Contract I had not seen a contract where the employer is without responsibility for incorrectness in any information provided by him. In larger contracts, the contractor cannot reasonably obtain certain fundamental information or data from any source other than the employer. Consequently, he should not then be held responsible if such information is incorrect. The location of the Site, physical limits of the Works, interfaces, project type-specific data such as quality of the fuel for a coal- or gas-fired power plant or water flow (and arguably net head) for a hydro power project, are certainly details that must be provided by the employer and for which he must retain responsibility. For the purpose of this discussion, I consider that the standpoint of the EPC Contract can never fully apply in a proper contract of this type. Even in the most pure BOT situation, certain basic facts connected to the commercial foundation of the project cannot be off-loaded to the turnkey contractor, including the situation where a contractor is also a shareholder in the concession company. The wording of the EPC Contract can not apply to its full extent and is an anomaly in a standard form. As a result of these provisions the burden placed on the contractor becomes very heavy. The contractor, on the other hand, will-as the collector of and the party responsible for all information of importance for the execution of the Works-have a knowledge of the project that the employer will not have. This is important to remember for the discussion on the employer's interference below. 5.2 Responsibility for errors in the Employer's Requirements Sub-Clause 1.1.1.3-Definitions states that:

"'the Employer's Requirements'is the specification of the purpose, scope, and/or design and/or other technical criteria for the Works." The conditions shift virtually all responsibility for the Employer's Requirements to the contractor. Sub-Clause 5.1-General Design Obligations states that: "The Contractor shall be responsible for the design of the Works and for the accuracy and completeness of the Employer's Requirements and that "The Employer shall not be responsible for any error, inaccuracy or omission of any kind in the Employer's Requirements, and shall not be deemed to have given any representation of accuracy or completeness of any information." It is obvious that the employer at least must be responsible for defining what he wants to procure, even if it is expressed in performance terms rather than in prescriptive terms, as with a technical specification. Accordingly the conditions take a step back later in Sub-Clause 5.1 by providing that: "However, the Employer shall be responsible for the correctness of the following portions of the Employer's Requirements: (a) definition of intended purposes for the Works or any parts thereof, (b) criteria for testing/performance of completed Works, and (c) any other portions which responsibility of the Employer." Comments The Orange Book states that the contractor, before commencing the design, is obliged to "satisfy himself regarding the Employer's Requirements and to give notice of any error, fault or other defect". The Employer's Representative could then determine if he should issue a variation order and in other words allow the contractor additional payment and extension of time. The Plant Contract generally contains are stated as being the

the same principles, but with an improved wording that gives a lead to when a variation order shall be issued. FIDIC had apparently come to the conclusion that in this respect the Orange Book solution was not suitable for BOT projects. Perhaps the writer of the draft was influenced by an interesting article in the International Construction Law Review [1] named "Use of the FIDIC Orange Book in Context of a BOT Project" where the author said that: "Financial institutions acting as the lenders in a BOT project generally require a single point of responsibility for the design and construction of the works. They therefore require the contractor to assume the risk of any defect or error in the design including any defect or error in the employer's requirements". Before continuing the analysis it should be emphasised that I do riot object to having a single point of responsibility of design per se. To split design between two parties can sow a seed of dispute if a defect occurs. However, the matter can never be black and white as it is difficult to establish the line between the employer's description of the works that he wants designed and built and the design made by the contractor. This line must be drawn by the employerwhen writing the Employer's Requirements. For a large project it is very unusual for the employer to be satisfied with spelling out just the performance requirement, i.e. the energy~output from a power station, and not to include any other specifications. If the employer does include certain design criteria, i.e. quality requirements, design margins, expected trafficload on a bridge or road, then he must remain responsible for their correctness". [VIP] The EPC Contract expects the contractor already by the tender stage to have verified the Employer's Requirements and ascertained wheth~r it contains any errors or defects. Sub-Clause 5.1 states that the contractor shall be responsible for accuracy and completeness - not expressly for errors! In the same SubClause it is expressly stated that the employer is not responsible for errors in the Employer's Requirements. Is there a difference in the meaning of the word "accuracy" and "errors"? If so, who is responsible for the errors, if neither Employer nor Contractor? Is the explanation simply that it just looks too horrible to write that the contractor shall be responsible for the employer's errors? We should consider whether we understand what an "error" or "inaccuracy" in the Employer's Requirements actually means. What do

you measure against if we are talking about design criteria, such as quality requirements? On the other hand, I can understand it when it concerns interface description. The answer is not as simple as just to make the contractor responsible! The employer must in the first case decide which parts of the Employer's Requirements shall be mandatory and which are only a non-binding proposal or illustration. If a quality requirement is mandatory, then the employer is responsible for its suitability for achieving the intended purpose and the performance criteria. Responsibility for a correct description of an interface must rest with the employer if it is entirely within his control, which it is if the interface is part of another contract the employer may have . The blunt wording in the EPC Contract which makes the contractor responsible for the Employer's Requirements raises numerous questions on how the provision shall be applied in reality. If there is an inaccuracy or error in the Employer's Requirements, will a change require a variation order? Is it permissible for the contractor to depart from the Employer's Requirements without the employer's consent? Maybe lie should, since he is responsible for the consequences of any inaccuracy or incompleteness and must guarantee fulfillment of the performance criteria! I do not expect the conditions of contract to solve all problems relating to the content of the Employer's Requirements, but I think they would be more likely to be carefully drafted if the employer and his consultant had to take responsibility for their own errors. I do not want to think that the main purpose of these provisions is to exclude the employer's consultants from liability! 5.3 Interference by the employer

The Introductory note to the Test Edition states that as most of the risks are allocated to the contractor "the Contractor should be given freedom to carry out the work in his chosen manner, provided the final result meets the performance criteria specified by the Employer". I could not agree more. The note further continues "Consequently, the Employer should only exercise limited control over and should in general not interfere with the contractor's work." Unfortunately, the conditions do not live up to the spirit of the introductory note. The employer is in numerous provisions empowered to interfere in the execution of the Works by the contractor. This can be illustrated by inter alia the following provisions:

Sub-Clause 3.4 - Instructions: As this clause is worded, it could be understood to give the employer a general authority to issue instructions to the contractor. It should have been stated that an instruction could be given when so specified in the Contract. Sub-Clause 3.5 - Detenninations- It is dubious if one party should have a right to make unilateral determinations to the extent allowed for the employer in the EPC Contract. That the determination is a unilateral decision is nicely veiled behind the words that the determination shall be "fair" and made "in accordance with the Contract". Sub-Clause 5.2 - Contractor's Documents: As the contractor has the total responsibility for achieving the performance criteria, the employer should not interfere with the development of the contractor's Documents. The provisions on approval and review of documents are very detailed and give the employer extensive power to require changes. Sub-Clause 7. 1 - Manner of Execution: It is stated that the contractor shall carry out the manufacture of the Plant and all other execution of the Works in the manner (if any) specified in the Employer's Requirements. This is a strange provision in an EPC turnkey contract. Why would the employer specify the manner of execution? What happens if that specified manner causes a failure to obtain the performance criteria. Can the employer avoid responsibility? Sub-Clause 7.3 - Inspection: There is a very far reaching obligation to notify the employer before any work is covered up, put out of sight or plant packaged for storage or transport! Why is the employer in need of such extremely close supervision? Sub-Clause 7.5 - Rejection: The employer may after inspection reject any plant, material, design or workmanship that is defective or otherwise not in accordance with the Contract. The contractor must promptly make good the defect. Sub-Clause 7.6-Remedial Work: This provision allows the employer to interfere severely with the performance of the work by giving instructions for removal of plant or material from Site, and removal and re-execution of work. The contractor is obliged to comply whether or not he intends to challenge the instruction. Such remedial works shall be done within a "reasonable time"-reasonable time is the time specified in the employer's notice!

Sub-Clause 13 - Variation Procedure- The contractor is obliged to execute variations unless the goods required for the variation or the variation will cause concerns regarding safety. The contractor should also be able to contest the variation if it would prevent him from fulfilling his obligations under the Contract, primarily the performance criteria. Sub-Clause 14 - Payment Procedure- The provisions on payment should be radically simplified by assuming that the payments will be made in accordance with a payment plan. Sub-Clause 14.6 allows the employer to withhold payments if work appears to be not wholly in accordance with the Contract, which is too arbitrary.

Comments A comparison between the EPC Contract and the Plant Contract shows that the provisions relevant to the employer's control and powers are virtually the same. Is this logical when the contractor is expected to take considerably more risk and undertake a wider obligation of result? It is also puzzling when considering that the Plant Contract uses an Engineer who, even if not under an obligation to act impartially, has a position between the parties and thus expected to act in a more unbiased manner. The EPC Contract is taking a strict two-party approach. Why is it then that one of those parties is equipped with the same powers as the Engineer? In order to avoid misunderstanding, it should be noted that contractors have no objection to a reasonable amount of monitoring and supervision of the execution of the works. Obviously everyone benefits if mistakes or misunderstandings are detected early. However, these provisions are not aimed at monitoring, they go much further than monitoring. The fundamental objection to these provisions is that the employer has transferred all responsibility for the design and specification of the Works to the contractor. He has also transferred all responsibility for collecting, verifying and interpreting information needed for the design and execution to the contractor. The employer has thereby relieved himself of responsibility for these matters and is also likely to have reduced his ability to make a meaningful contribution to the development of the project, as it will be the contractor who will be the source of knowledge . This is fundamentally different from the world of the traditional FIDIC Engineer who made the design and collected most of the relevant Site data.

One of the most important objectives of the EPC Contract is that it should ensure certainty of final price and of completion date. It may sound extreme but, for the sake of the debate, I claim that the EPC Contract does not ensure these goals. It is a well known fact that interference from the employer in the contractor's design and execution can severely disrupt the contractor and, further down the line, may result in both additional costs and extension of time. The terms of a turnkey contract should give a strong incentive to the employer to write the Employer's Requirements in a manner so that he does not have to vary or explain them after signing the contract. The employer has to select a contractor with high qualifications and good reputation and last but not least, to let the contractor design, plan and perform the works in the manner that suits him, without disturbance, as long as he fulfils his obligations under the Contract. I believe that my argument is even stronger in light of a BOT project. The employer/concession company will be a provider of services. One of the benefits of construction in BOT projects in comparison with public works contracts is the freedom to optimize design and construction. If all construction risk is transferred to the contractor then that very freedom in design and construction should also be transferred, because it is only in such a case that the optimization can effectively take place. Another disturbing element is that the EPC Contract is a form intended for international use. In such documents there is an additional need for clarity since there may not be any firm practice in the country of the project on how EPC turnkey contracts should be correctly administered by the employer. Nor can it be guaranteed that the employer in a particular contract has not retained a consultant who misunderstands the roles of the parties in a turnkey contract and with a literal application of the provisions, but in contradiction with their intended purpose, disrupts the contractor. [Employers agents qualifications] 6. CONCLUSION

The EPC Contract goes to the extreme in allocating risks to the contractor and depending on the type of project, this may be regarded as unacceptable. It has also gone to the extreme in the extent to which the contractor is responsible for the specification and design of the Works. The employer is not responsible for correctness of any information provided by him nor for correctness of any specification or other matter included in the Employer's Requirements, except the

definition of the intended purpose and criteria for testing and performance. With such conditions it is surprising that the employer is entitled to interfere in the contractors performance to an extent that is close to what is norm for a construction contract with employer design and with "non-nal" risk allocation. The combination of risk allocation and inappropriate administrative provisions makes the EPC Contract a document that will meet severe resistance from contractors . It is also likely that employers will see the risks and difficulties from their own perspective. It is a fiction that the EPC Contract will give the employer a contract with a certainty of final price and completion date. It is not a fiction that the EPC Contract carries many seeds for disputes between the parties. The Orange Book has become an accepted document even if it clearly contains some weaknesses. Some of these have been corrected in the Plant Contract. In my opinion FIDIC should let users become more familiar with the Plant Contract as a follow up to the Orange Book. The EPC Contract is still only published in a Test Edition. The industry survived" without any FIDIC design-build conditions for almost 40 years. We now have the Orange Book and a Test Edition of the Plant Contract. It would perhaps be useful to have a more complete turnkey contract but we do not need a first edition of the EPC Contract as it now stands. FIDIC could not be blamed if they listened to reviewers and commentators and either considerably amended or postponed publishing the first edition of the EPC Contract. Time should be taken to reconsider the basic structure of the document. I know many that would appreciate FIDIC's wisdom if they followed such advice. Finally, I would like to thank all my friends in the Update Task Groups of FIDIC's Contracts Committee. They are wise men and devoted to doing a goodjob. Maybe sometimes too good! References 1. Liaison Group of EU Mechanical, Electric, Electronic and Metal Working Industries. 2. International Bar Construction Projects. Association Committee T International

3. Joseph A. Huse (1996) ICLR 435-450.