It is critical to underline that preparing the contract documents does not mean to make copies of existing schedules, bills of quantities, specifications and standard forms. Even though it may be helpful to review such existing forms, contract preparation means to shape an individual law for an individual project. Moreover existing standard forms assume that the parties using them have carefully scruti- nised them and filled them out properly with full knowledge of what the standard form entails.
FIDIC standard forms are recommendations and recognise that particular adjust- ments are often appropriate. A careful reader of the FIDIC conditions will fre- quently find the wording “unless otherwise” agreed or stated. Whenever this wording has been used within the General Conditions the FIDIC Drafting Commit- tee has supposed that adjustments or changes to the recommended wording can be either useful and appropriate or even necessary.
FIDIC standard forms shall be completed by stating and indicating the according data in either the Appendix to Tender or the Particular Conditions. Sometimes completion of data shall be done in Schedules and Appendices. Some of the Sub- Clauses within the General Conditions do not apply if the therein required data are omitted.
7.6.1 Technical Standards
Pursuant to Sub-Clause 4.5 the design, the Contractor’s Documents, the execution and the completed Works shall comply with the Country’s technical standards, building, construction and environmental Laws, Laws applicable to the product being produced from the Works, and other standards specified in the Employer’s
Requirements, applicable to the Works, or defined by the applicable Laws. It is thus extremely important to carry out a local survey on existing technical standards in order to ensure compliance with them. In addition the Particular Conditions may specify supplemental standards or even replace local standards by other ones.
However there are examples of clauses which may lead to uncertainty and disputes, such as the following:
l Contractor will use European Codes and Iranian Codes where appropriate based on client approval.
l Every item of electrical equipment used in the electrical system shall comply with the relevant IEC, or equivalent standards.
l Power cables have to be in accordance with the respective IEC or DIN-VDE standards or other equivalent norms.
Such types of clauses are unclear. It is obvious that the parties have refrained from ascertaining the relevant rules and determining clear standards. Instead the parties would be advised to refrain from changing Sub-Clause 5.4.
While CE standards are principally used within the EU, third (non-EU) countries may have their own standards and it is up to the Contractor to check import requirements in each destination country. The English Institute of Building Control produced a series of individual country reviews ofbuilding regulations and techni- cal provisions throughout Europe and the EFTA countries in 1993, which are updated periodically.
Examples:As for technical standards for buildings inJapan, the Law prescribes “building code” and “zoning code”. The building codes are technical standards for all buildings in order to ensure building safety with regards to structural strength, fire prevention devices, sanitation, etc. (Chapter II, Articles 19 to 41). TheUnited Arab EmiratesAuthority for Standardisation and Metrology (ESMA), being responsible for setting UAE standards, has been preparing, approving, publishing, reviewing, modifying, issuing and adapting standards and technical regulations, and establishing a national measurement system (NMS) in the country. In theFederation of Bosnia and Herzegovina, a manual of technical and obligatory conditions for the construction, reconstruction, repair and adaptation of construction (building) units has been published by the Ministry of Physical Planning and Environment.
A periodical survey of local standards is critical because Sub-Clause 5.4 puts the Contractor under the obligation to comply with standards prevailing when the Works or Section are taken over by the Employer under Clause 10.
7.6.2 Delay Damages
The relevant rate of delay damages must be stated in the Appendix to Tender (Red Book and Yellow Book) or the Particular Conditions (Silver) as a rate per day of delay. In addition there is provision for stating a maximum amount of delay damages. The Appendix to Tender (Red and Yellow Book) requires a percentage
of the Accepted Contract Amount to be stated for both the delay damages and the limit. Clause 14.15(b) (Red and Yellow) provides that damages shall be made in the currencies and proportions stated in the Appendix to Tender.
The figures of delay damages should be a reasonable estimate of the actual losses which will be incurred by the Employer. The term “delay damages” originates from English law, where delay damages or liquidated damages mean a “genuine pre- estimate of the creditor’s probable or possible interest in the due performance of the principal obligation”,13whether a sum is called penalty or damages.14
It is usually intended for the percentage delay damages to be calculated or estimated as the sum of:
(a) The anticipated average cost to the Employer of the extended period of the Engineer’s supervision, plus
(b) The anticipated average benefit to the Employer of the completed Works, or (2) an amount roughly equivalent to the commercial cost of borrowing the Accepted Contract Amount from a local bank.
It should be noted that due to the nature of liquidated damages save for liquidated damages payable under this Sub-Clause 8.7, the failure by the Contractor to attain any milestone or other act, matter or thing by any date specified in the corresponding Appendix (Time Schedule) to the Contract Agreement and/or other program of work prepared shall not render the Contractor liable for any (further) loss or damage thereby suffered by the Employer. This nature is clearly shown in the requirements of Sub-Clause 8.7, according to which delay damages shall be the only damages due by the Contractor for default to comply with Time for Completion.
The nature of delay damages in the sense of Sub-Clause 8.7 is often misunder- stood or becomes ignored, in particular in civil law countries. Civil law jurisdic- tions allow for penalty clauses (see Sect. 339 German Civil Code), which are commonly used. However, it must be noted that German law draws a clear difference between penalty clauses and liquidated damages.15Although there is some discussion about whether the beneficial of a liquidated damages clause is free to show evidence of a higher damage than originally estimated,16agreements as to liquidated damages are admissible and valid (see Palandt and Heinrichs 2009, Section 276, note 26). The argument which is sometimes used in Eastern European countries that delay damages subject to Sub-Clause 8.7 must be quali- fied as a penalty clause because there is a lack of an admissible and valid alternative, must therefore be rejected.
13Commissioner of Public Works v. Hills [1906] AC 368, at 375 to 376.
14See Alfred McAlpine Capital Projects Ltd v. Tilebox Ltd [2005] EWHC 281 (TCC).
15See BGH [1970] NJW 32.
16See OLG Schleswig [1985] DNotZ 310 and in the opposite direction LAG Du¨sseldorf [1973]
DB 85.
According to common law authorities a claim for time extension may be dismissed, if the Contractor is already in culpable delay.17In Balfour the contractor argued that “the effect of the issue of variations during a period of culpable delay was to render time at large, leaving the contractor to complete within a reasonable time”. This being the case, the Employer would lose his rights to levy liquidated damages. Mr Justice Colman did not agree with the contractor. He held that a variation issued during a period of culpable delay would not render time at large.
Under a FIDIC contract there seems to be a strong argument in favour of Balfour Beatty decision. It can be seen from the requirements in Sub-Clause 8.4 that extension of Time for Completion shall only be awarded for the purposes of Sub- Clause 10.1. If the Contractor already failed to comply with Sub-Clause 8.2 the risk of further delays caused by Employer’s risks or by culpable actions of the Employer is clearly allocated to the Contractor. As the Contractor is already liable to pay Delay Damages, the argument of “time at large” plays no further role. One could also argue that this is a foreseeable risk to which the Contractor should have given allowance in advance. The Contractor may therefore consider it to be wise to include an additional clause which ensures that if the Employer causes delay by initiating a variation after passing Time for Completion he will be discharged from Delay Damages for this additional period.
7.6.3 Performance Damages
All FIDIC forms miss a provision for liquidated damages for failure to meet the performance criteria of the plant, for example, efficiency, input, output or avail- ability. Instead Sub-Clause 9.4(b) provides that if the Works or a Section fails to pass the Tests on Completion and if this failure deprives the Employer of substan- tially the whole benefit of the Works or Section, then the Employer can reject the Works or Section and terminate the Contract as a whole or in respect of the major part which cannot be put to intended use.
Although failure to achieve the specified performance criteria is critical for the Employer, he may sometimes wish to stick to the contract. Both, the Contractor and the Employer may therefore probably wish to amend the contract and to add a liquidated damages clause. A measurable performance target is then required, because the measure of liquidated damages will depend on the relevant warranty.
In order to establish the threshold for levy of liquidated damages the required performance benchmarks must be prescribed by measurable parameters. Moreover the procedures within which the Contractor shall show that he complies with the benchmark criteria should be stated.
17Balfour Beatty Building Ltd v. Chestermount Properties Ltd (1993) 62 BLR 12 in contradiction with Pickavance (2005, note 6.79).
However, if failure to comply with the requirements deprives the Employer of substantially the whole benefit of the Works or Section, the Employer may never- theless wish to terminate the contract. It may then be useful to have stipulated a minimum level of performance required, in order to save the remedy of termination in favour of the Employer. If performance falls below the indicated minimum level the plant may be considered and agreed no longer to be a viable plant, the liquidated damages provision no longer an adequate remedy and the contractor’s performance not to be performance at all. The Employer shall then no longer be bound to rely on the liquidated damages clause.
In order to be enforceable, performance liquidated damages must again be a genuine pre-estimate of the loss and damage that the Employer will suffer over the life of the project if the plant or facility does not achieve the specified performance warranties. Performance liquidated damages usually represent a net present value calculation of the revenue forgone over the intended life cycle of the project.
An additional clause as to performance liquidated damages may have the following wording:
Contractor guarantees that the Works will meet the minimum performance guarantees as set forth below during the Tests on Completion.
Contractor shall pay to the Employer the Performance Liquidated Damages as set forth below, to the extent that the Works does not meet the Performance Guarantees during the Test on Completion.
The total aggregate Performance Liquidated Damages under the Contract shall not exceed [. . .] percent of the Contract Price.
7.6.4 Defects Notification Period
Subject to Clause 11 each FIDIC form of contract provides a so-called Defects Notification period which is defined in Sub-Clause 1.1.3.7 and should therefore not be confused with the legal defects liability period. Instead it means the period for notifying defects in the Works or Section under Sub-Clause 11.1 as stated in the Particular Conditions or the Appendix to Tender, as the case may be. The Particular Conditions should state the duration of this period, which is a special period of time during which the Contractor owes the duty to repair defects of all type and notwithstanding his own responsibility as to the defective issue (see Sub-Clause 11.2). Unless otherwise stated in the Particular Conditions/Appendix to Tender this period lasts over 365 days. Under FIDIC, the defects notification period is calculat- ed from the date of completion of a Section or of the Works. The period can be extended if, following the issue of the Taking over Certificate, the Works, a Section of the Works or a major item of plant cannot be used for the purposes for which they are intended. Under FIDIC, the Defects Notification Period cannot be extended by more than 2 years. Each Section will be treated differently. Thus the Defects Notification Period for different Sections of the plant will not necessarily be aligned. However, it is common in some branches of the industry to have a Defects
Notification Period or extended maintenance warranty for anything up to 5 years. If this is a key issue for the Employer he should amend the Particular Conditions accordingly.
7.6.5 Retention Money
Retention Money is a defined term meaning the accumulated retention monies which the Employer retains under Sub-Clause 14.3 and pays under Sub-Clause 14.9. The percentage of deduction and the limit of Retention Monies must be stated in the Particular Conditions. The Contractor should take into consideration that the first half of the Retention Monies will be paid to him after Taking Over and the second half after the end of the Defects Notification Period as referred to above.
7.6.6 Sections
Sub-Clause 1.1.5.6 provides a very useful feature which is often overlooked, underestimated or simply confused with milestones. Whereas the provision for sectional completion entails the taking over of a defined Section, a milestone date sets out a completion date for a special part of the Works, commonly for the purpose of an interface, which is not at all the same thing.
By the definition of Sections within the Appendix to Tender or the Contract Data or the Particular Conditions (as the case may be) the parties of the contract will activate some special features of the General Conditions which are quite useful:
l Firstly the Contractor is entitled to a sectional taking over. According to Sub- Clause 10.1 the taking over procedure rules apply also to Sections. Thus the Contractor may apply for a Taking-Over Certificate for each Section.
l Secondly, once a sectional Taking-Over Certificate has been issued, subject to Sub-Clause 14.9 the Contractor is entitled to the first half of the Retention Monies.
l Thirdly the Contractor will be entitled to get the second half of the Retention Monies as soon as the relevant Defects Notification period has expired.
Although common law courts have not generally dismissed liquidated damages claims based on failure to comply with agreed milestone dates,18Sections should in particular be used if the Employer intends to define interim goals. It is not appropriate to agree to milestones in combination with delay damages. By contrast it is appropriate to agree to Sections. This ensures that time extension claims will be treated separately Section by Section, which is critical in order to avoid the
18See Philips Hong Kong Ltd v. Attorney General of Hong Kong (1990) 50 BLR 122.
argument of “time at large”. If there is no effective system for the extension of time for each part of the works, the Employer must be cautious not to enter in “time at large”. As a matter of fact there is no such effective system because according to Sub-Clause 8.4 extension for Time of Completion may only be granted if and to the extent that completion for the purposes of Sub-Clause 10.1 is or will be delayed.
However at a first view provisions for stating delay damages for each Section don’t seem to be present in the FIDIC forms. But this is not true, because Sub- Clause 8.2 clearly requires the Contractor to complete the whole of the Works and each Section within the Time for Completion for the Works or Section. Once the Contractor has received the Taking-Over Certificate for a Section he is accordingly discharged from Delay Damages for this Section. Thus the delay damages as stated in the particular Conditions or the Appendix to Tender, as the case may be, apply either to the whole Works or to any defined Sections. Sub-Clause 8.4 clearly refers to Sub-Clause 10.1 and is therefore applicable to either the whole Works or to Sections as stated in the contract.
If Sections have been determined within the Particular Conditions or in the Appendix to Tender, sectional completion dates should be stated. If Sections have different importance to the Employer different Delay Damages rates can be fixed. It can be seen that Sections make the contract much more flexible and sometimes also more balanced.
For the avoidance of doubt Sections should not be confused with parts of the Works. According to Sub-Clause 10.2 the Employer is entitled to take over parts of the Works. The contractual framework as to Sections does not apply to the taking over of parts of the Permanent Works.
7.6.7 Taxes, Levies and Customs
It is important to be aware of which kind of tax contributions, levies and customs duties will have to be paid by the Contractor under the laws of the country where the site is located. Sub-Clause 14.1 states that the Contractor shall pay all taxes, duties and fees required to be paid by him under the Contract, and the Contract Price shall not be adjusted to cover s any of these costs. It is useful to find an additional clear wording as to all local duties. The below mentioned Sub-Clause can be used as a boilerplate.
14.1.1 All import duties and levies on the import of Goods and equipment under this Contract will be settled by the Employer.
14.1.2 All further taxes in connection with the execution of this Contract levied by the [Chinese Government] on the Employer in accordance with the tax laws in effect shall be borne by the Employer.
14.1.3 All taxes in connection with the execution of this Contract levied by the [Chinese Government] on the Contractor in accordance with the tax laws in effect and the “Agreement Between the Government of the [People’s Republic
of China] and Government of the Bidder’s country for the Reciprocal Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Property” shall be borne by the Contractor.
14.1.4 All taxes arising outside [of China] in connection with the execution of this Contract shall be borne by the Contractor.
A different and more detailed clause is recommended by FIDIC in the Guidance.
In addition, local laws may require from the Contractor to paysocial contribu- tionsfor own personnel and sub-contractors, which can often amount to consider- able sums.
Examples:In accordance with the Law on Social Insurance ofAzerbaijan, foreign nationals shall pay social contributions from Azerbaijani source income at a rate of 3%. Employers are responsible for withholding this contribution, paying it to the Budget and then reporting to the national authorities. Again, the employer is liable to pay social contributions at the rate of 22% of the accrued payroll fund. InRomaniaforeign citizens working in Romania on a work permit and under a labour contract registered with the Labour Office are required to pay the Romanian social contributions (except 1% unemployment contribution).
7.6.8 Copyright
Both the Yellow Book and the Silver Book provide three stipulations in relation to copyright and intellectual property rights. Sub-Clause 17.5 contains an indemnifi- cation rule in the event of copyright infringements. Sub-Clause 1.11 preserves the copyrights and intellectual property rights of the Employer. Sub-Clause 1.10 deals with copyrights and other intellectual property rights of the Contractor. Obviously design and build contracts often involve a considerable transfer of know how. In particular as with any process plant, the preservation of know-how is precious to the Contractor. Contractors shall supply the Contractor’s Documents as referred to in Sub-Clause 1.1.6.1 which include not just the usual menu of drawings, manuals and calculations but also extends to “computer programs, other software and models”.
According to Sub-Clause 1.10 the Contractor shall retain the copyright and other intellectual property rights made by the Contractor. Software and programs may in fact be owned by third parties. As to this issue Sub-Clause 17.5 applies.
The extent of know-how transfer may give rise to some concerns from Con- tractors in that the drafting of clause 1.10 is not sufficiently tight to protect its intellectual property rights. Subject to Sub-Clause 1.10 the Employer is granted a
“non-terminable, transferable non-exclusive royalty-free” licence to use Contrac- tor’s Documents including the right to copy, use, communicate and modify such documents. This licence is limited “for the purposes of completing, operating, maintaining, altering, adjusting, repairing and demolishing the Works”, and this
“throughout the actual or intended working life of the relevant parts of the work”.
The intention behind the drafting was clearly to limit such use to completing, modifying or altering the Works themselves. However, the circumstances may require more detailed provision.