By Christopher R. Seppala

I propose briefly to discuss five topics in the three new Books for major works (the new Construction Contract, the Plant Contract and the EPC Contract), as follows:

 (1) Contractor’s risk and “Employer’s Risks”,

(2) Indemnities,

(3) Limitation of Liability,

(4) The New Force Majeure Clause, and

(5) Grounds and Procedure for Termination of the Contract by the Employer and the Contractor.

 

 

oo00oo

 

 

 

I. Contractor’s Risk and “Employer’s Risks” (Allocation of Responsibility for Damage to the Works) [ Sub-Clauses 17.2 to 17.4]

 

 

The basic allocation of risk between the Contractor and the Employer for damage to the Works before take-over is dealt with in Sub-Clauses 17.2 to 17.4 of the new Books. The principles are essentially unchanged from those in the old Red and Orange Books. These principles (it will be recalled) are, as follows:

 

(1) The Contractor is required to take full responsibility for the care of the Works, materials and Plant from the Commencement Date until the Taking-Over Certificate is issued for the Works.

 

(2) If any loss or damage happens to the Works or materials and Plant, other than due to “Employer’s Risks” (as defined), the Contractor must “rectify” this loss or damage at the Contractor’s cost.

 

(3) “Employer’s Risks” are generally events or circumstances over which neither party will have any control (e.g. war, hostilities and the like) or events or circumstances caused by the Employer, directly or indirectly.

 

 

However, under the new Books, the Contractor’s responsibility before take-over now extends not merely to the Works, materials and plant but, in addition, to:

 

(1) “Goods” – a new defined term in the new Books – which would include Contractor’s Equipment, whether on or off the Site, and

 

(2) “Contractor’s Documents” – also a new term – which include computer software and documents of a technical nature supplied by the Contractor.

 

 

The Employer’s Risks in the new Construction Contract and Plant Contract, which are defined in Sub-Clause 17.3, are similar to those in the old Red and Orange Books:

 

 

Employer’s Risks

Comment

(a) “war, hostilities (whether war be declared or not), invasion…”

May happen anywhere in the world, e.g. if a war in Europe causes losses or damages to the Contractor’s Equipment or to Plant for use on a Site in China, then that is an Employer’s Risk and the Contractor is entitled to recovery for the same.

(b) “rebellion, terrorism,

revolution…”, and

 

(c) “riot, commotion or

disorder…”, and

These are now all expressly limited to the country of the Works.

(d) “munitions of war,

explosive materials,

ionising radiation or

contamination by

radio-activity…”

[ Note: that “munitions of war” and “explosive materials” are new Employer’s Risks since the test editions.]

(e) “pressure waves caused by aircraft…”

No geographic limit.

[ Arguably, this could also have been limited to the country of the Works, but this was not done].

(f) “use or occupation by the Employer…”, and

(g) “design… by the Employer’s Personnel…”

 

 

Basically, here talking of fault of the Employer. No geographic limit.

(h) “operation of the forces of nature which is Unforesee-

able”

Again, no geographic limit.

 

 

The list of the Employer’s Risks in the EPC Contract is more limited. It only includes paragraphs (a) through (e). Thus, use or occupation of the Works by the Employer (paragraph (f)), design of the Works by the Employer’s Personnel (paragraph (g)) and “Unforeseeable” operations of the forces of nature (paragraph (h)), are not recognized as Employer’s Risks in the EPC Contract, in keeping with the risk allocation philosophy of that Book, under which more risk is allocated to the Contractor.

 

As was the case under the old Red and Orange Books, if the Works suffer loss or damage due to an Employer’s Risk, the Contractor must rectify this loss or damage to the extent required by the Employer or the Engineer. Where the Employer or the Engineer requires rectification and the Contractor suffers delay and/or incurs additional cost, the Contractor may be entitled to an extension of time and to the cost of rectification [ Sub-Clause 17.4].

 

Where the Contractor rectifies Works which have been lost or damaged as the result of an Employer’s Risk, is the Contractor entitled to recover profit in addition to the cost of rectification? In the past, FIDIC has taken different positions on this:

 

(1) Under the old Red Book [ Sub-Clause 20.3], the Contractor was entitled in all cases of Employer’s Risks to “an addition to the Contract Price in accordance with Clause 52”, implying he is entitled to profit.

 

(2) However, under the Orange Book [ Sub-Clause 17.4], the Contractor was entitled in all cases only to cost, implying he is not entitled to profit.

 

 

The new Books take an intermediate position. In general, the Contractor is only entitled to recover his cost, but in the case of paragraph (f) [ use or occupation by the Employer], and paragraph (g) [ design by the Employer], the Contractor is entitled to “reasonable profit” as well. The theory here is that these are cases where the Employer is, in effect, in breach of contract and, therefore, the Contractor should be entitled to recover his profit, whereas in the other cases the Employer is not at fault and, therefore, there should be some sharing of risk by the Contractor, by his giving up an entitlement to profit.

 

As paragraphs (f) and (g) are not contained in the list of Employer’s Risks in the EPC Contract, the issue of entitlement to profit does not arise at all in relation to that Book.

 

 II. Indemnities [ Sub-Clause 17.1]

 

 

Under the old Red Book, not only was the Contractor responsible for the care of the Works, from the Commencement Date until takeover, but he was also to a certain extent responsible for things that arise out of or as a consequence of his execution of the Works or remedying of any defects therein. Thus, if the Employer were subject to losses or claims for:

 

(a) death or injury to any person, or

(b) loss or damage to any property (other than the Works),

 

arising out of, or as a consequence of, the performance of the Contractor’s duties, the Contractor was required to indemnify the Employer against such claims or losses [ Sub-Clause 22.1] subject to certain exceptions [ Sub-Clause 22.2]. The Orange Book contains a somewhat similar indemnity [ Sub-Clause 17.1]. 

 

 

The policy adopted by FIDIC in the new Books is in line with the policy in the major U.K. and other standard forms.

 

 III. Limitation of Liability [ Sub-Clause 17.6]

  

There is no clause providing for limitation of the Contractor’s liability in the old Red Book, perhaps because the Contractor would be engaged in little or no design under that Book and, therefore, his exposure to liability was considered more limited. On the other hand, perhaps partly because the design and manufacture of electrical and mechanical works was considered to expose the Contractor to greater risk of liability, the old Yellow Book went to great lengths to limit the Contractor’s liability.

 

The old Yellow Book limited the Contractor’s liability in three main respects:

 

(1) By providing generally that neither party would be liable to the other for loss of profit or any other indirect or consequential damage [ Sub-Clause 42.1];

 

(2) By limiting the Contractor’s liability to the sum stated in the contract or, if no sum were stated, the Contract Price [ Sub-Clause 42.2]; and

 

(3) By expressly excluding the Contractor’s liability for defects and other things after the expiry of the Defects Liability Period, as defined, except in the case of Gross Misconduct, as defined [ Sub-Clauses 30.12 and 42.3].

 

 

Like the Yellow Book, the Orange Book excluded the Contractor’s liability for loss of use, loss of profit and indirect or consequential damage, subject to certain exceptions. In addition, like the Yellow Book, the Orange Book placed a specific monetary limit on the Contractor’s total liability to the Employer. The Contractor’s total liability to the Employer was said to be limited to the Contract Price, subject to the same exceptions5 [ Sub-Clause 17.6].

 

However, like the Red Book and unlike the Yellow Book, the Orange Book did not exclude the Contractor’s liability for defects and other things after the expiry of the Defects Liability Period (after the “Contract Period” in the Orange Book). Consequently, the Contractor would remain liable for defects until expiry of the relevant statute of limitations.

 What has changed now in the new Books for major works?

 First

 

(1) excludes the Contractor’s (and Employer’s) liability for, among other things, loss of use of the Works, loss of profit, loss of any contract and for indirect or consequential damage which may be suffered by the other party, and

 

(2) places a monetary limit on the Contractor’s total liability subject to certain exceptions.

 

 

The second change is that, unlike the Orange Book, the new clause does not specify, propose or recommend any particular monetary limit on the Contractor’s liability in the General Conditions. We did not wish to put a limit in the General Conditions as the limit which might be appropriate would vary widely depending, among other things, on the nature and importance of the Works to be constructed, the risks involved and the extent of the Contractor’s obligations e.g. whether he is designing the Works on a turnkey basis or not. Accordingly, the General Conditions now provide, like the old Yellow Book, that only if nothing is said in the Particular Conditions about the amount of this limit will the limit be effectively the “Contract Price” or, in the new Plant and EPC Contracts, the “Accepted Contract Amount”.

 

The third change (from the Orange Book) is that liquidated damages for delay and liquidated damages for failing to pass tests after completion are no longer excluded from the liability cap or limit. On the other hand, the Contractor’s general indemnification of the Employer [ Sub-Clause 17.1] is now excluded, just as the Contractor’s indemnification of the Employer for infringement of intellectual and industrial property rights [ Sub-Clause 17.5] is excluded, as was the case in the Orange Book [ Sub-Clause 17.6].

 

The only other qualification on the provision in the new Books limiting the Contractor’s liability is that it will not apply:

 

“in any case of fraud, deliberate default or reckless misconduct by the defaulting party.”

 

 Finally

 

Therefore, the Contractor will remain liable for defects for the period of the relevant statute of limitation unless he can negotiate a limit on his liability in the case of a given contract.

 

 IV. The New Force Majeure Clause and Release from Performance [ Clause 19]

 

 

A force majeure clause is an increasingly common feature of international contracts. Typically, under such a clause, where a party has been prevented from performing a contract by an event beyond its control, it will be excused for its delay in performing the contract, or, in an extreme case, it may be excused from having to perform the contract at all. In some cases, a party can recover the additional costs it had incurred as the result of the force majeure event as well.

 

In keeping with international practice, a force majeure clause, Clause 19, has now been introduced into all the new Books for major works.

 

While the old Red Book contained no force majeure clause, as such, by virtue of a combination of Clause 44 dealing with extensions of time and Clause 65 dealing with Special Risks (including war), the Contractor had, under the old Red Book, some of the relief (at least) provided by a typical force majeure clause.

 

Both the old Yellow Book [ Clause 44] and the Orange Book [ Clause 19] contain a force majeure clause. While the force majeure clause in the Yellow Book seems satisfactory, in my view, the force majeure clause in the Orange Book is deficient:

 

(1) Under the Orange Book, to constitute “force majeure“, the event must be “impossible or illegal”, which is much too restrictive. If an event must be either impossible or illegal, there are very few circumstances in which the force majeure clause in the Orange Book can apply.

 

It is only if you interpret the word “impossible” in the Orange Book broadly to refer to what is commercially impossible (e.g. cases where the cost of doing the work has increased by a multiple of 10 or 12 or where labour or materials have become extraordinarily scarce) that this clause can really provide practical relief. But the problem with this approach is that Clause 19 of the Orange Book does not refer to what is commercially impossible but only to “impossible”, which may imply something absolutely impossible.

 

(2) A related problem is that Sub-Clauses 19.3 and 19.4 of the Orange Book provide that where an event occurs which either the Contractor or the Employer considers to constitute force majeure, the Employer or the Contractor “shall endeavour to continue to perform [ their] obligations as far as reasonably practical”. However, as performance of their obligations had (under the Orange Book) to be “illegal or impossible” to constitute force majeure, it was not clear how the Employer and the Contractor could be expected to continue to perform their obligations “as far as reasonably practical”? Obviously, they could not be expected to do something illegal or impossible.

 

Sub-Clauses 19.3 and 19.4 of the Orange Book only appear to be understandable in this respect in cases of partial illegality or impossibility, that is, where a party can perform some, but not all, of his obligations.

 

 

In the Force Majeure clause in the new Books [ Clause 19], we have sought to overcome these difficulties. The new clause may be broken down into the following parts:

 

(i) a relatively broad definition of “Force Majeure[ Sub-Clause 19.1],

 

(ii) Force Majeure must “prevent” a party from performing “any of” its obligations (thereby expressly acknowledging the possibility of partial Force Majeure) [ Sub-Clause 19.2],

 

(iii) when this happens, the party affected must give notice within 14 days after the party became aware or should have become aware, of the event or circumstance said to constitute Force Majeure (otherwise, the party may have no right to claim Force Majeure) [ Sub-Clause 19.2],

 

(iv) where any force majeure clause in a Sub-Contract gives relief on broader grounds than these provided for under Clause 19, these broader grounds will not afford the Contractor relief under Clause 19 [ Sub-Clause 19.5],

 

(v) where the Contractor is prevented from performing any obligations by Force Majeure, it may claim an extension of time and, in the case of war and related risks [ Sub-Clause 19.1(i) to (iv)], its additional costs arising “by reason of such Force Majeure[ Sub-Clause 19.4],

 

(vi) if execution of substantially all the Works in progress is prevented for a continuous period of 84 days, or for multiple periods which total more than 140 days, by Force Majeure, either party may, after notice to the other, terminate the contract, in which event, the Contractor will be paid for work done only [ Sub-Clause 19.6], and

 

(vii) a party must give notice when it ceases to be affected by Force Majeure [ Sub-Clause 19.3].

 

 

Apart from the Force Majeure clause itself [ Sub-Clauses 19.1 to 19.6], Sub-Clause 19.7 provides that if performance of the contract becomes illegal or impossible, or the parties are released from performance under the applicable law, then upon notice by either party to the other party, the parties are discharged from further performance of the contract, implying that the contract then effectively comes to an end. Given the breadth of the Force Majeure clause, there are likely to be few cases where Sub-Clause 19.7 will apply. Where this Sub-Clause does apply, Sub-Clause 19.7 makes clear that the Contractor is paid the same amount as where the contract is terminated for Force Majeure.

 

 V. Grounds and Procedure for Termination of the Contract by the Employer and the Contractor [ Clauses 15 and 16]

 

 

Following the pattern established by the Orange Book, the new Books for major works contain a Clause 15 dealing with “Termination by the Employer” (referred to in the Orange Book as “Default of Employer”) and a Clause 16 dealing with “Suspension and Termination by Contractor” (referred to in the Orange Book as “Default by Employer”). Essentially, these clauses set out the grounds which will entitle the Employer to terminate the contract or entitle the Contractor to suspend or terminate the contract.

 

 

A

 

. Termination by the Employer [ Clause 15]

 

 

Both the old Red Book [ Clause 63] and the old Yellow Book [ Clause 45] contain provisions allowing the Employer to terminate the contract (or, in the case of the Red Book, to terminate “the employment of the Contractor”) in the case of specified defaults by the Contractor, e.g. acts of bankruptcy, repudiation or where the Contractor without reasonable excuse fails to proceed with the works [ Clause 63 of the Red Book]. But in the Orange Book, an additional ground for termination was introduced. Sub-Clause 2.4 of the Orange Book provided that the Employer could terminate the contract at any time for the Employer’s convenience upon 56 days prior notice to the Contractor. If the Employer did so, the Contractor would be paid for work done under Sub-Clause 19.6. The Contractor would not be paid the profit of which he would be deprived on the balance of the contract which he could no longer complete.

 

In order to ensure that this clause was not abused by Employers, who might terminate a contract early merely in order to arrange for the work to be done by some one else at less cost, Sub-Clause 2.4 in the Orange Book provided that, after termination, the Works could not be recommenced for a period of six years without the Contractor’s consent.

 

Like the earlier Books, the three new Books for major works provide that the Employer may “terminate the Contract” for specified defaults by the Contractor [ Sub-Clause 15.2]. Unlike the old Red Book [ Sub-Clause 63.1] and Orange Book [ Sub-Clause 15.2], the Employer no longer terminates the “employment of the Contractor” but terminates the contract.

 

As you will recall, under the old Red Book, where the Contractor had committed an event of default, the Employer had to give 14 days notice before he could “terminate the Contractor’s employment” [ Sub-Clause 63.1]. While the same notice period generally applies under the new Books, it is also provided under the new Books that the Employer may terminate the contract “immediately” in a case where the Contractor becomes bankrupt or commits bribery [ Sub-Clause 15.2]. No prior notice is required.

 

In addition, a “termination for convenience” clause has now been introduced into all the new books for major works, except that now, more logically, it is to be found at the end of the contract near the other termination provisions, in Sub-Clause 15.5, and not in Sub-Clause 2.4, as in the Orange Book.

 

This termination for convenience clause is basically the same as the Orange Book clause, except that instead of barring the Employer from engaging another contractor from doing the work for six years, it simply states that the Employer shall not terminate the contract:

 

“in order to execute the Works himself or to arrange for the Works to be executed by another Contractor.”

 

 

As in the case of the Orange Book clause, in the case of a termination for convenience, the Contractor is only entitled to be paid for work done and is not entitled to his profit on the balance of the contract which he is being deprived of the right to complete.

 

 B. Suspension or Termination by the Contractor [ Clause 16]

 

 

As you know, the fourth edition of the Red Book was the first FIDIC form to provide that where the Contractor was not being paid amounts to which he was entitled (e.g. certified amounts) in due time, he had the right to suspend work or reduce the rate of his work. A provision to this effect is contained in Sub-Clause 69.4 of the (old) Red Book and Sub-Clause 16.1 of the Orange Book.

 

This was an excellent addition as, without it, at least in many Common Law countries, it was unclear what the Contractor could do when he was not being paid amounts to which he was clearly entitled. He usually had only two alternatives:

 

(i) either to continue working, or

(ii) if the non-payment was serious enough to justify termination of the contract, then, to terminate the contract,

 

and, in either case, invoke the disputes clause and begin, if necessary, arbitration. In Common Law countries, at least, if the Contractor was not being paid, he normally had no right simply to slow down or suspend work. If he slowed down or suspended work, the Contractor would himself be in breach of contract, in which case the Employer might be justified in terminating the contract for breach.

 

Accordingly, at least in the Common Law countries, the introduction of this suspension provision provided the Contractor with a valuable remedy when he was not being paid.

 

I am glad to say that the new Books have improved on this situation still more. The new clause – Sub-Clause 16.1 – provides that the Contractor may suspend work not only where the Employer fails, for example, to pay a certificate but also:

 

(1) in the case of the new Construction Contract, where the Engineer fails to certify a payment certificate when he should do so, and

 

(2) where the Employer fails to provide reasonable evidence that financial arrangements have been made and are being maintained to enable the Employer to pay the Contract Price in accordance with the contract payment schedule [ Sub-Clauses 16.1, 14.6 and 2.4].

 

 

These are, I think, two very desirable additions in the new Books.

 

The new Books also add these two points as further grounds for termination of the contract by the Contractor. Thus, Sub-Clause 16.2 provides that the Contractor may terminate the contract:

 

(1) where the Contractor does not receive reasonable evidence of the Employer’s financial arrangements within 42 days after giving a notice to suspend on this account, and

 

(2) in the case of the new Construction Contract, where the Engineer fails, within 56 days after receiving a payment application and supporting documents, to issue the relevant payment certificate.

 

FIDIC has been criticized in the past for not acknowledging in its contracts the situation where the Engineer himself fails to perform his duty and, therefore, for not providing the Contractor with a remedy in this situation.

 

In Clause 16, FIDIC has, to its credit, I believe, gone some way to redress this situation.

 

As you will recall, under the old Red Book, where the Employer had committed an event of default the Contractor had always to give 14 days notice before he could terminate his “employment” [ Sub-Clause 69.1]. While the same notice period continues generally to apply under the new Books, nevertheless the Contractor may now terminate the contract immediately in the case of an act of bankruptcy of the Employer or a prolonged suspension ordered by the Employer [ Sub-Clause 16.2]. There appears no reason why the Contractor should have to wait out a notice period before being able to terminate in these two circumstances.

 

 

 

, I would note that, like the earlier Books, except the old Yellow Book, none of the new Books excludes the Contractor’s liability for defects after the Defect Notification Period. On the contrary, they provide that the Contractor’s liability for defects shall continue [ see Sub-Clause 11.10]., there is now a provision [ Sub-Clause 17.6] providing for limitation on the Contractor’s liability in all the new books, including the new Construction Contract. Like the Orange Book clause, the new clause:

 

Under the new Books, the Contractor continues to be responsible for losses or claims that arise out of, or as a consequence of, the Contractor’s design (if any) and execution of the Works and remedying defects. However, while the Contractor must indemnify the Employer for losses or claims for bodily injury, disease or death of any person, regardless of whether or not the Contractor was negligent (unless positively caused by the Employer or his agents) recognizing the Contractor’s overriding control over Site operations, the Contractor is only liable to indemnify the Employer for property damage where the Contractor has been negligent or committed a breach of contract [ Sub-Clause 17.1(b)].

 

London, Monday, September 27, 1999

Munich, Wednesday, October 20, 1999
London, Friday, December 3, 1999

 Fidic.org

Similar Topics