Advantages of Standard Contracts

Steen Bruun-Nielsen

1

Content of presentation• The functions of contracts in general

• Contract management, risk allocation and risk mitigation

• The advantages of standard contracts and examples of such contracts

2

Functions of contracts• Contracts as a risk allocation tool ~ which party carries the various risks and how are the risks

dealt with (mitigated)• Contracts as management tools– Defining time and quality of performance – (delivery of goods or services, construction of works)– - Setting procedures for various control and verification procedures

(especially long-term contracts)– Setting sanctions in case of failure in performance– Dispute-solving/mediation mechanisms (especially relevant in long-

term contracts)).

3

Risk mitigation and allocation

Types of risks in works and other more complex contracts?

Design risk Site risk Construction risk Financial risk (contracting parties/lenders) Operational risk Demand/market risk Regulatory/political risk Force Majeure

4

Risk mitigation and allocation

What is mitigation? Preventing the risk or compensating for the effects if the risk

materializes

What is allocation? Making one of the parties liable for the risk

5

Example of risk allocation/mitigation

Category: Operational riskDescription of risk: Insufficient performance, such as

irregular service, no maintenance, bad customer serviceRisk mitigation: Verifiable contractual performance spec’s, regular

monitoring and effective “automatic” sanctions Obligation to operate despite unexpected events Performance bondRisk allocation: Private partyRisk compromise: Limits on costs, for example

unexpected repairs

6

Key contractual elements• Verifiable obligations - delivery of what, where and

when? – long-term contracts concerning works/services may include concrete performance indicators (a maximum of X failures during period Y)

• Rights for the public party to monitor performance (reporting, project meetings, testing and inspection procedures, ad-hoc inspections and queries)

7

Key contractual elements• System of sanctions to address both minor and major

infringements of performance requirements ( EX: minus points are triggered in each case of failure to perform - fines (deductions in payments) are triggered when points exceed certain levels over a period)

• Other elements, such as billing and payment, guarantees, insurance, liability and compensation, force majeure, termination

• NB! Requirements according to Ukrainian Civil Code

8

Advantage of standard contracts• Established, defined terminology • Established contractual mechanisms for risk

mitigation etc.• Established procedures for contract

management • Risk allocation according to best practices• Established dispute resolution procedures

(mediation/arbitration)

9

Standard contract sources• ICC model contracts and commercial terms

(INCOTERMS) – Of relevance for sale of goods– Standard arrangements (INCOTERMS) for allocation

of costs/risk in connection with delivery of goods (transport, customs, insurance)

– Standard provisions on liability and sanctions in case of delay in delivery or insufficient quality

10

Standard contract sources• The FIDIC Books, especially– Yellow Book on design/works, –Red Book on works and –Silver Book on projects involving operation as

well;• Standard contracts and “toolkits” from for

example World Bank

11