Workshop on Risks in Contracts...2020/04/02 · –17.3 of the FIDIC 1999 suite of contracts (Red,...

Workshop on

Risks in Contracts

Justice Academy

Author-presenter: Tahseen Saleh

FIDIC Training - Online Course

FIDIC – INTERNATIONAL FEDERATION OF CONSULTING ENGINEERS – WWW.FIDIC.ORG – [email protected] – COPYRIGHT 2019

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Outline

1. Risk Management

2. Employer’s Risks

1. In FIDIC 1987 RB

2. In FIDIC 1999

3. In FIDIC 2017

3. Exceptional Events and Force Majeure

4. Risks of Design

Risks in Contracts


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1. Risk Management

Risks in Contracts


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– What is Risk?

– What are the risk groups that may affect the construction contract?

– How we can manage the risk?

1- Risk Management


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• Risk is a major factor to be considered during the management of any project. Risks shall be controlled and contained if a project is to stand a chance of being successful.

• Risk is defined as uncertainty of outcome (whether positive opportunity or negative threat).

• Risk is a combination of the probability, or frequency, of occurrence of a defined hazard and the magnitude of the consequences of occurrence.

1- Risk Management


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• Businesses and people can be classed as:

– Risk Averse

– Risk Neutral

– Risk Seeking

1- Risk Management


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• Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.

• In other words, the task of risk management is to manage project’s exposure to risk (that is, the probabilityof specific risks occurring and the potential impact if they did occur).

1- Risk Management


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• Risk Groups

– Risks can be divided into certain groups which could affect the project:

• Strategic

• Financial

• Operational

• Commercial

• Technical

1- Risk Management


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• Principles of Risk management

– The International Organization for Standardization (ISO) identifies the following principles of risk management

• create value – resources expended to mitigate risk should be less than the consequence of inaction, or (as in value engineering), the gain should exceed the pain

• be an integral part of organizational processes

• be part of decision making process

• explicitly address uncertainty and assumptions

• be systematic and structured

1- Risk Management


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• Principles of Risk management

• be based on the best available information

• take human factors into account

• be transparent and inclusive

• be dynamic, iterative and responsive to change

• be capable of continual improvement and enhancement

• be continually or periodically re-assessed

1- Risk Management


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• How the risk is determined?

– In project management, risk assessment is an integral part of the risk management plan, studying the probability, the impact, and the effect of every known risk on the project, as well as the corrective action to take should that risk occur.

– This can be made by using certain checklists, using the past knowledge and records of similar projects, awareness of customer/ supply chain reactions, market information, etc.

1- Risk Management


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Risk management process:

• For the most part, these methods and processes consist of the following elements, performed, more or less, in the following order.

– identify, characterize threats

– assess the vulnerability of critical assets to specific threats

– determine the risk (i.e. the expected likelihood and consequences of specific types of attacks on specific assets)

– identify ways to reduce those risks

– prioritize risk reduction measures based on a strategy

1- Risk Management


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• Risk Identification

– It is the process of identifying potential risks which are about events that, when triggered, cause problems. Hence, risk identification can start with the source of problems, or with the problem itself.

• Source analysis - Risk sources may be internal or external to the system that is the target of risk management.

1- Risk Management


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• Risk Identification• Problem analysis - Risks are related to identified threats. For

example: the threat of losing money, the threat of abuse of confidential information or the threat of accidents and casualties. The threats may exist with various entities, most important with shareholders, customers and legislative bodies such as the government

• The chosen method of identifying risks may depend on culture, industry practice and compliance. The identification methods are formed by templates or the development of templates for identifying source, problem or event.

1- Risk Management


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• Risk Assessment

– Risks must then be assessed as to their potential severity of impact (generally a negative impact, such as damage or loss) and to the probability of occurrence

– These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in the case of the probability of an unlikely event occurring.

– Therefore, in the assessment process it is critical to make the best educated decisions in order to properly prioritize the implementation of the risk management plan.

1- Risk Management


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• Risk Assessment

– The fundamental difficulty in risk assessment is determining the rate of occurrence since statistical information is not available on all kinds of past incidents

– Risk assessment should produce such information for the management of the organization that the primary risks are easy to understand and that the risk management decisions may be prioritized

1- Risk Management


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• Risk Assessment

– It is the determination of quantitative or qualitativevalue of risk related to a concrete situation and a recognized threat (also called hazard)

• Quantitative risk assessment requires calculations of two components of risk (R):

– the magnitude of the potential loss (L),

– the probability (p) that the loss will occur

1- Risk Management


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• Risk Assessment

• Quantitative risk assessment includes many factors such as modeling, chance and probability and other mathematical approaches.

• Qualitative methods:

The essentially move around the formula:

Probability x consequence

1- Risk Management


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2. Employer’s Risks

1. In FIDIC 1987 RB

2. In FIDIC 1999

3. In FIDIC 2017

Risks in Contracts


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• Employer’s Risks

• Employer risks are defined under Sub-Clauses:

– 20.4 of the FIDIC 4th edition Red Book form of Contract

– 17.3 of the FIDIC 1999 suite of contracts (Red, Yellow &Silver) forms of Contract, and

– 17.2 of the FIDIC 2017 suite of contracts (Red, Yellow &Silver) forms of Contract.

2- Employer’s Risks


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• Employer’s risk as defined in the FIDIC 4th edition red book (Sub-Clause 20.4)– The Employer’s risks are:(a) war, hostilities (whether the war be declared or not), invasion,

act of foreign enemies;(b) rebellion, revolution, insurrection, or military or usurped

power, or civil war insofar as it relates to the country in which the Works are located or countries through which plant must be transported;

(c) ionising, radiation, or contamination by radio-activity from any nuclear fuel, or from any nuclear waste, from the combustion of nuclear fuel, radio-active toxic explosive or other hazardous properties of any explosive, nuclear assembly or nuclear component thereof;

(d) Pressure waves caused by aircrafts travelling at sonic or supersonic speed;

2.1 Employer’s Risks – FIDIC 1987 4th edition, Red Book


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• Employer’s risk as defined in the FIDIC 4th edition red book (Sub-Clause 20.4)– The Employer’s risks are (Cont’d):e) Riot, commotion, or disorder, unless solely restricted to

employees of the Contractor or his subcontractors and arising from the conduct of the Works,

f) Loss or damage due to the use or occupation by the Employer of any Section or part of the Permanent Works, except as may be provided for in the Contract.

g) Loss or damage to the extent that is due to the design of the Works, other than any part of the design provided by the Contractor or for which the contractor is responsible, and

h) any operation of the forces of nature against which an experienced Contractor could not reasonably have been expected to take precautions.



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• Employer’s risk as defined in the FIDIC 4th edition red book (Sub-Clause 20.4)

• The risk of war– Is the Employer responsible for consequences

resulting from the risks of war only in the countrywhere the works are being carried out or regardless ofwhere the war occurs in the world?

.



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• Risks related to design– The Employer’s risks as defined in paragraph (g) of sub-

clause 20.4 of the FIDIC 4th edition, is extremely wide as itrefers to loss or damage due to the design of works otherthan that provided by the Contractor.

– The definition is not restricted to negligent design as itincludes events where damages occur without any fault,defect, error or omission committed by the designer.

– The wording in the sub-clause 20.4 does not include theword “solely” previously included in the third edition.Accordingly, should damage occur to the Works incircumstances where an error in design is a contributoryfactor, then the Contractor is relieved of responsibility onlyto the extent that the damage was caused by a design notprovided by him.



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• Special Risks (Clause 65 of the 1987 FIDIC Red Book)• Sub-Clauses 65.1 & 65.2

The Contractor shall be under no liability whatsoever in consequenceof the special risks referred to in Sub-Clause 65.2, whether by way ofindemnity or otherwise for or in respect of:

(a) destruction of or damage to the Works, save to work condemnedunder the provisions of Clause 39 hereof prior to the occurrence ofany of the said special risks

(b) Destruction of or damage to property, whether of the Employer orthird parties or

(c) injury or loss of life

The Works described in sub-clause 65.2 refer to sub-clause 20.4paragraphs a, c, d, & e in addition to paragraph b which relates tothe country in which the Works are to be executed



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• Special Risks (Clause 65 of the 1987 FIDIC Red Book)

• Sub-Clauses 65.1 & 65.2– Accordingly, the special risks mentioned in paragraph (b) of

sub-clause 20.4 are only applicable to the country wherethe works are to be executed. Other risks such as war,hostilities, invasion, etc. could be a special risk to theworks wherever they occur in the world if the could havean impact on such works.

– It is seen that the Contractor shall be under no liabilitywhatsoever in case of such special risks except for hisdefective and faulty works. Where is this mentioned?

.



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• Consequences of special risks– What could be the consequences of special risks in terms

of damages, progress of works, increased costs, stoppages and termination of works, subcontractors , payments, materials ordered or delivered to site, contractors machinery, etc.?

– Shall the either party give notices to the other party with respect to the special risks?

– Within how many days such notice be given?

– When the contract can be terminated? And who can terminate it? The Contractor, the Employer or either of them?



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• Consequences of special risks

• Sub-clauses 65.3 to 65.7 deals with the consequences of the special risks– Sub-clause 65.3 (Damage to works by special risks)

In brief the Contractor is entitled for all the costs associated with:

• Rectifying any such destruction or damaged works, and

• Replacing or rectifying such material or contractor’s equipment

• Assessment shall be made in accordance with Clause 52

• It is mentioned … “include fair market value thereof as determined by Engineer.” How do we define the phrase (Fair market value)?



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– Sub-clause 65.4 (Projectiles, Missiles)

Destruction, damage, injury or loss of life caused by theexplosion or impact whenever and wherever occurringof any mine, bomb, shell, grenade or other projectilemissile, munitions or explosive of war shall be deemedto be a consequence of the said special risks.

Suppose that after 30 years of the end of the war, a minein an old mine field which is the new construction siteof the project exploded and injured two labors and onelife was lost? Is this a special risk case in the project?



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• Employer’s risk as defined in the FIDIC 1999 S/C 17.3

Clause 17 contents

Clause 17 gives the basis for indemnities given by theContractor and the Employer (Sub-Clause 17.1), theContractor’s care of the Works (Sub Clause 17.2), Employer’srisks (Sub-Clause 17.3) and their consequences (Sub-Clause17.4) and the limitation of liability (Sub-Clause 17.6 ).

Intellectual and industrial property risks covered in Sub-Clause17.5 fall outside normal project risks and can be consideredseparately.

.

2.2 Employer’s Risks – FIDIC 1999 Suite of Contracts


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Clause 17 summary

Clause 17 covers a wide-range of risks andresponsibilities that lead to claims arising out of theProject which are covered by the indemnities andinsurance.

Sub-clauses cover risk and responsibility, but also othercontractual provisions, including indemnities, limitationof liability, and the unrelated topic of intellectual andindustrial property rights.

The clause deals first with “Indemnities” , then“Responsibility” and returns to “Risk” and finally turns to“Liability”. This illogical sequence has been adjusted inthe 2008 FIDIC DBO Contract.



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17.3: Employer’s Risks - Key issues

Risks for which the Employer is responsible, to the extent

defined in Sub-Clause 17.4, are listed at (a)-(h).

Employer’s risks are:

war, hostilities, invasion; rebellion terrorism, revolution, civilwar, riot; munitions of war, explosive; pressure waves causedby aircraft; use or occupation by the Employer of any part ofthe Permanent Works; design by the Employer of any part;any unforeseeable adverse operation of the forces of nature.

Disorder or rioting on the part of the Contractor which arosefrom the conduct of the Works is not an Employer risk.



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– The Employer’s risks are:

(a) war, hostilities (whether the war be declared or not), invasion, act of foreign enemies;

(b) rebellion, revolution, insurrection, military or usurped power, or civil war, within the Country,

(c) riot, commotion or disorder within the Country by persons other than the Contractor’s Personnel and other employees of the Contractor and Subcontractors;

(d) munitions of war, explosive materials, ionizing radiation or contamination by radio-activity, except as may be attributable to the Contractor’s use of such munitions, explosives, radiation or radio-activity,



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• Employer’s risk as defined in the FIDIC 1999 S/C 17.3– The Employer’s risks are:e) pressure waves caused by aircrafts or other aerial

devices travelling at sonic or supersonic speed; f) use or occupation by the Employer of any part or part of

the Permanent Works, except as may be specified in the Contract,

g) design of any part of the Works by the Employer’s Personnel or by others for whom the Employer is responsible,

h) any operation of the forces of nature which is Unforeseeable or against which an experienced contractor could not reasonably have been expected to have taken adequate preventative precautions.



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17.4: Consequences of Employer’s Risks - Key issues

If the Contractor suffers loss or damage as a consequence of

any item of Employer risk, then he must give prompt notice tothe Engineer.

Engineer may require the Contractor to remedy the loss ordamage.

Although the Contractor can recover cost in all cases, he isonly entitled to reasonable profit in respect of (f) and (g) ofSub-Clause 17.3, items which refer to Employer responsibilityand/or fault.



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17.4: Consequences of Employer’s Risks (Continued) - Keyissues

Thus, if the Contractor suffers delay or increased cost, he may

be entitled to:

- an extension of time and to recover his costs (for a - d and g ofSub-Clause 17.3), or

- his costs plus reasonable profit in respect of use of the Worksor design by the Employer ((e) and (f) of Sub-Clause 17.3).



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– The Contractor shall have no liability whatsoever, whether by way of indemnity or otherwise, for loss or damage to the Works, Goods or Contractor's Documents caused by any of the following events (except to the extent that such Works, Goods or Contractor's Documents have been rejected by the Engineer under Sub-Clause 7.5 [Defects and Rejection] before the occurrence of any of the following events):



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• Employer’s risk as defined in the FIDIC 2017 S/C 17.2a) interference, whether temporary or permanent, with any right of

way, light, air, water or other easement (other than that resulting from the Contractor's method of construction) which is the unavoidable result of the execution of the Works in accordance with the Contract;

b) use or occupation by the Employer of any part of the Permanent Works, except as may be specified in the Contract.

c) fault, error, defect or omission in any element of the design of the Works by the Employer or which may be contained in the Specification and Drawings (and which an experienced contractor exercising due care would not have discovered when examining the Site and the specification and Drawings before submitting the Tender), other than design earned out by the Contractor in accordance with the Contractor's obligations under the Contract;



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• Employer’s risk as defined in the FIDIC 2017 S/C 17.2d) any operation of the forces of nature (other than those allocated

to the Contractor in the Contract Data) which is Unforeseeable or against which an experienced contractor could not reasonably have been expected to have taken adequate preventative precautions;

e) any of the events or circumstances listed under sub-paragraphs (a) to (f) of Sub-Clause 18.1 [Exceptional Events]; and/or

f) any act or default of the Employer's Personnel or the Employer's other contractors.



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Subject to Sub-Clause 18.4 [Consequences of an Exceptional Event], if any of the events described in sub-paragraphs (a) to (f) above occurs and results in damage to the Works, Goods or Contractor's Documents the Contractor shall promptly give a Notice to the Engineer. Thereafter, the Contractor shall rectify any such loss and/or damage that may arise to the extent instructed by the Engineer. Such instruction shall be deemed to have been given under Sub-Clause 13.3.1 [Variation by Instruction].



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• Employer’s risk as defined in the FIDIC 2017 S/C 17.2If the loss or damage to the Works or Goods or Contractor's Documents results from a combination of: i. any of the events described in sub-paragraphs (a) to (f)

above, and

ii. a cause for which the Contractor is liable,

and the Contractor suffers a delay and/or incurs Cost from rectifying the loss and/or damage, the Contractor shall subject to Sub-Clause 20.2 [Claims for Payment and/or EOT] be entitled to a proportion of EOT and/or Cost Plus Profit to the extent that any of the above events have contributed to such delays and/or Cost.



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3. Exceptional Events and Force Majeure

Risks in Contracts


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It is evidenced that the Employer’s Risks are related to the:

1. Special Risks Clause 65 (FIDIC 4th edition 1987 Red Book),

2. Force Majeure Clause 19 of the 1999 suite of Contracts

3. Exceptional Events Clause 18 of the 2017 suite of Contracts.

The Special Risks were discussed in previous slides. The nextslides discuss relationship Risks and Exceptional Events including Force Majeure in the 1999 & 2017 suites of Contracts.

3- Exceptional Events and Force Majeure


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– 1.1.6.4 states that “Force Majeure” is defined in Clause 19 [Force Majeure]

– Sub-Clause 19.1 provides for the definition and conditions of Force Majeure:

– In this Clause “Force Majeure” means an exceptional event or circumstance:

i. which is beyond a Party’s control;

ii. which such Party could not reasonably have provided against before entering into the Contract;

iii. which having arisen, such Party could not reasonably have avoided or overcome; and

iv. which is not substantially attributable to the other Party.44

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FIDIC – INTERNATIONAL FEDERATION OF CONSULTING ENGINEERS – WWW.FIDIC.ORG – [email protected] © Tahseen

FIDIC 1999Clause 19 [Force Majeure]

– The definition under S/C 1.1.{37, 37, 33} “Exceptional Event” means an event or circumstances as defined in Sub-Clause 18.1[Exceptional Events]

– Under S/C 18.1: “Exceptional Event” means an event or circumstance which:

i. is beyond a Party’s control;

ii. the Party could not reasonably have provided against before entering into the contract;

iii. having arisen, such Party could not reasonably have avoided or overcome; and

iv. is not substantially attributable to the other Party.

So the event or circumstance must be “exceptional” not merely unusual45

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FIDIC 2017Clause 18 [Exceptional Events]

– the title and definition “Force Majeure” was only

used in the 1999 suite of Contracts.

– this definition is now changed to “Exceptional

Event” in the 2017 suite of Contracts.

– the phrase “Exceptional Event” can apply to the

different possibilities of such events including the

“Force Majeure” which is only one possibility. 46

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[Exceptional Events] vs. [Force Majeure]

– the Exceptional Events or circumstances that could eventuate and prevent one Party from performing any (one, more, or all) of its obligations in items (i) to (v) in Sub-Clause 19.1 of the 1999 edition and items (a) to (f) in the 2017 edition.

– If the performance of one or more but not all of the obligations is prevented as a result of the Exceptional Event, then it is not a Force Majeure.

– Force Majeure applies only when all the obligations are prevented.

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[Exceptional Events] vs. [Force Majeure]

– An Exceptional Events may comprise but not limited to any of the following events or circumstances provided that the Conditions (i) to (vi) above are satisfied. (Slide # 9)

• (i) (a) war, hostilities, (whether war is declared or not), invasion, act of foreign enemies,

• (ii) (b) rebellion, revolution, insurrection, military or usurped power, or civil war,

• (iii) (c) riot, commotion, disorder, strike or lockout by persons other than the Contractor’s Personnel and other employees of the Contractor and his Subcontractors,

• (d) strike or lockout not solely involving the Contractor’s Personnel and other employees of the Contractor and his Subcontractors,48

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FIDIC 1999 S/C 19.1 & 2017 S/C 18.1[Exceptional Events]

– An Exceptional Events may comprise but not limited

to any of the following events or circumstances

provided that the Conditions (i) to (vi) above are

satisfied. (Slide # 9)

• (vi) (e) encountering munitions of war, explosive materials, ionizing

radiation or contamination by radio-activity, except as may be

attributable to the Contractor’s use of such munitions, explosives,

radiation or radio-activity, and or

• (v) (f) natural catastrophes such as earthquakes, tsunami, volcanic

activity, hurricane or typhoon.

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– The Exceptional Events listed in S/C 19.1 of the 1999

edition & S/C 18.1 of the 2017 editions are similar to

those addressed in S/C 65.2 of the 1987 Red book 4th

edition,

– the item of Pressure waves caused by aircrafts

travelling at sonic or supersonic speed, is not used in

both 1999 & 2017 editions. {why?}

– The natural catastrophes is considered as an

Exceptional Event in both 1999 & 2017 editions. It

was not considered as such in the 1987 Red Book 4th

edition. 50

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– “exceptionally adverse climatic conditions” is

excluded from the definition of what constitutes an

Exceptional Event.

– this means that there is no right for either Party to

suspend the Works in the case of an event of

“exceptionally adverse climatic conditions”

– if this type of event has the effect of delaying

completion and taking-over of the Works or Section,

the Contractor shall be entitled to EOT under sub-

paragraph (c) of S/C 8.5 [Extension of Time].51

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• From the previous slides, to have an exceptional risk six

criteria have to be met.

1. That the event is an Exceptional Events or circumstances,

2. The four criteria (i) to (vi) above are satisfied - S/C 18.1 of

the FIDIC 2017 suite. (Slide # 9)

3. And one Party (or both) is prevented or could be prevented

from performing any (one, more, or all) of its obligations.

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– If a Party is or will be prevented from performing any obligations

under the Contract due to an Exceptional Event (the “affected

Party” in this Sub-Clause), then the affected Party shall give a

Notice to the Other Party of such an Exceptional Event,

– shall specify the obligations, the performance of which will be

prevented (the ‘prevented obligations in this Clause).

– This Notice shall be given within 14 days after the affected Party

became aware, or should have become aware, of the Exceptional

Event.

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FIDIC 1999 S/C 19.2 & 2017 S/C 18.2[Notice of an Exceptional Events] wording of 2017 edition

– The affected Party shall then be excused performance the

prevented obligations from the date such performance is

prevented by the Exceptional Event.

– If the Notice is received by the other Party after the 14 days

period, the affected Party shall then be excused performance the

prevented obligations only from the date on which this Notice is

received by the other Party.

– Thereafter, the affected Party shall be excused performance the

prevented obligations for so long as such Exceptional Event

prevents him from performing them.54

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– Other than performance of the prevented obligations, the

affected Party shall not be excused performance of all other

obligations under the Contract..

– The obligations of either Party to make payments due to the other

Party under the Contract shall not be excused by an Exceptional

Event .

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– If the Exceptional Event has a continuing effect, the affected

Party shall give further Notices describing the effect every 28

days after giving the first Notice under Sub-Clause 18.2 [Notice of

an Exceptional Event].

• This paragraph is placed in Sub-Clause 18.3 [Duty to minimize Delay].

• The Notice to be given @ 28 days intervals, while the interim claims are to

be submitted on monthly basis under Sub-Clause 20.2.6 [Claims of

continuing effect], paragraph (c).

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FIDIC[Notice of an Exceptional Events] wording of 2017 edition

– Each Party shall at all Times use reasonable endeavors to

minimize and delay in the performance of the Contract.

– The affected Party shall immediately give a Notice to the other

Party when he ceases to be affected by the Exceptional Event.

– If the affected Party fails to do so, the other Party may give a

Notice to the affected Party stating that the other Party considers

that the affected Party’s performance is no longer prevented by

the Exceptional Event, with reasons.

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FIDIC 1999 S/C 19.3 & 2017 S/C 18.3[Duty to Minimize Delay] wording of 2017 edition

– If the Contractor is the affected Party and suffers delay and / or

incurs Cost by reason of the Exceptional Event of which he/she

gave a Notice under the relevant Sub-Clause 18.2 [Notice of an

Exceptional Event], the Contractor shall be entitled subject to

Sub-Clause 20.2 [Claims for Payment and/or EOT] to:

• (a) EOT, and/or

• (b) if the Exceptional Event is of the kind described in sub-

paragraphs (a) to (e) of Sub-Clause 18.1 [Exceptional Events] and,

in the case of sub-paragraphs (b) to (e) of that Sub-Clause, occurs

in the Country of payment of such Cost. (slides…..)

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FIDIC 1999 S/C 19.4 & 2017 S/C 18.4[Consequences of an Exceptional Events] wording of

2017 edition

– Accordingly, the Contractor to be entitled for an EOT and/or

additional payment under Clause 18 [Exceptional Events]:

• A Notice under the relevant Sub-Clause 18.2 [Notice of an

Exceptional Event] shall be given, and

• Being subject to Sub-Clause 20.2 [Claims for Payment and/or EOT],

another Notice under Sub-Clause 20.2.1 [Notice of Claim] shall be

also given.

• The Exceptional Events other than war, hostilities, (whether war

is declared or not), invasion, act of foreign enemies shall be in

the Country of payment to be a basis Claim.59

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2017 edition

– What if the Exceptional Event in the case of sub-paragraphs (b) to (e) of Sub-Clause 18.1 [Exceptional Event] occur in the Country of carrying out the Works? Or the Country of manufacturing certain plant and/or materials for the Works?

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2017 edition

– If the execution of substantially all the Works in progress is

prevented for:

• a continuous period of 84 days by reason of an Exceptional

Event of which a Notice has been given under Sub-Clause

18.2 [Notice of an Exceptional Event], or

• for multiple periods which total more than 140 days due

to the same Exceptional Event,

then either Party may give to the other Party a Notice of

Termination of the Contract.

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FIDIC 1999 S/C 19.5 & 2017 S/C 18.5[Optional Termination] wording of 2017 edition

– The Termination date shall be the date 7 days after the Notice is received by the other Party.

– The Contractor shall proceed in accordance with Sub-Clause 16.3 [Contractor’s Obligations After Termination].

– The Contractor shall submit detailed supporting particulars of the value of the work done

– The Engineer shall proceed in accordance with Sub-Clause 3.7 [Agreement or Determination] to agree or determine the value of done …

– The Engineer shall issue a Payment Certificate in accordance with Sub-Clause 14.6 [Issue of IPC], for the amount so agreed or determined without the need for the Contractor to submit a Statement.62

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Compensation

– Manmade Exceptional Events, entitles the Contractor

for Time and Cost compensations, while Exceptional

Events resulting from the forces of nature entitles the

Contractor for extension of time only should he/she had

suffered the same.

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4. Risks of Design

Risks in Contracts


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It is evidenced in Employer’s Risks Sub-Clause :

1. S/C 20. 4 of (FIDIC 4th edition 1987 Red Book),

2. S/C 17.3 of of the 1999 suite of Contracts

3. S/C 17.2 of the 2017 suite of Contracts.

that the interference with the design is treated as Employer’sRisks. The allocation of design responsibility is related to theproper selection of the Contract Type (Construction, Plant, Design & Build or EPC/ Turnkey). The next slides discuss proper selection of Contract in relation with the allocation of design responsibility the 1999 & 2017 suites of Contracts.

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FIDIC Short Form• The Green Book • Short Form of Contract• 1st Edition 1999 • Short sentences; simple straight forward

language.• 15 Clauses in 10 pages• The complexities of other forms is not present• Suitable when work is not complicated.• For building or engineering works of relative

small capital value and/or short construction period. (Projects up to US $ 500,000 and duration not more than 6 months)

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http://fidic.org/books/short-form-contract-1st-ed-1999-green-book

• FIDIC Short Form• May also be suitable for contracts of greater value, if

relatively simple or repetitive work. • Can be suitable for certain larger construction projects

and for longer construction period.• Regularly used in some suitable cases for contracts with

value up to US$10,000,000.• The upper sum me be ignored in simple repetitive work.• Limiting the duration of the construction period to that

time when the contract sum can remain fixed, i.e. without allowance for escalation and other changes in costs (usually contractors agree to keep their prices firm for up to 12months, or sometimes more than that).

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• FIDIC Short Form

• Under the usual arrangements of this type of contract:

– The Employer Provides the finance.

– Works comprise construction but may include, or wholly comprise electrical, mechanical or other works.

– Design can be provided by the Employer, the Employer Representative (if any) or by the Contractor.

– Employer may wish to order variations to the Works.

– Employer may wish to appoint an individual or a firm, as his Representative, to carry out certain duties.

– Employer has choices for evaluation and payment.

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FIDIC Construction ContractThe Red Book

• Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer.

• 1st Edition 1999 • For building or engineering works of larger and

more complex than minor projects. • The design is made by the Employer (in house if

he has the capabilities and authorized to do so) or on behalf of the Employer by design consulting engineer.

• Often includes some elements of Contractor-designed civil, mechanical, electrical and/or construction works.

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http://fidic.org/books/construction-contract-1st-ed-1999-red-book

The Red Book • The procurement of construction works takes place

according to a standard pattern of pre-feasibility & feasibility studies, conceptual design, final design.

• Then the consultant prepares the tender documents• The Employer or the consultant (on behalf of the

Employer) announces for the tenders and either invites a specific list of contractors (short list), a specific category or grade of contractors or qualify (pre-qualification or post qualification) the contractors to participate if the project and the works are of special nature, higher requirements or more complicated.

• The award is made to the most suitable bid (normally the lowest if the contractors have already been qualified).

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The Red Book • Payment to the contractor is made by measurement of the

completed works at the end of each month. • Under the usual arrangements for this type of Contract the

Employer:– Provides finance– Appoints a consulting engineer to carry out the design work and

prepare the tender documents.– Appoints the Engineer to supervise the works and monitor the

construction, administer the contract, certify payments, make determinations on issues raised by the parties, etc.

• The Engineer may initiate variations. • The Employer wishes to be fully informed• Payments to the Contractor will be according to a Bill of Quantities

or lump sum for the approved works.• The Employer seeks to ensure a fair sharing of the construction

risks.

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FIDIC Plant and Design BuildThe Yellow Book

• Conditions of Contract for Plant and Design Build for electrical and mechanical plant and for building works, designed by the Contractor.

• 1st Edition in 1999• For projects of larger and more complex than

minor works projects.• The Contractor designs and provides in

accordance with the Employer’s Requirements, plant and or other works; which may include any combination of civil, mechanical, electrical and or construction works.

• The Employer may carry out some designs.

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http://fidic.org/books/plant-and-design-build-contract-1st-ed-1999-yellow-book

• The Yellow Booka) Electrical and mechanical Plant designed by the

Contractor

– Traditional plant projects involve design, manufacturer, delivery, erection, testing, etc. of plant by a contractor to an outline, certain requirements and performance prepared by the Employer.

– The Procurement of the supply and installation of plant and equipment closely follow the same procedure of the Construction works.

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The Yellow BookSome of the differences are:

– Detailed design of the plant is the Contractor’s responsibility;

– Most of the plant is manufactured off-site;– Contractor is associated with the a plant manufacturer or

supplier or with civil works contractor.– Payment is mainly made on a schedule of payments or

based on the achieved progress of work of predefined milestones;

– testing and commissioning are comprehensive and stringent;

– Procurement process may be in two stages of tendering which allows contractors / suppliers more chance to offer their own solutions to the Employer’s Requirements

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The Yellow Book

b) Building and Engineering works designed by the Contractor – Design-Build: design is mainly carried out by the

Contractor, who is responsible for the design and the completed works which shall fit for purpose.

– The Employer provides the Employer’s Requirements and the Contractors designs and builds the facility.

– The tender documents usually include drawings showing the conceptual or preliminary design.

– The Procurement may be single or two stages.

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The Yellow Book• Under the usual arrangements for this type of Contract (Plant

and Design Build) the Employer:– Provides finance– Appoints Engineer to administer Contract, monitor the design and

manufacturing, installation and erection on site and construction. Also, certify payments, make determinations on issues raised by the parties, etc.

• The Engineer may initiate variations. • The Employer wishes to be fully informed.• Payments to the Contractor will be according to achieved

milestones or as per defined schedule of payments.• Contract is generally lump sum• The Employer seeks to ensure an equitable sharing of the

construction risks and accepts the overruns may occur to contract sum and possibly the completion date.

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FIDIC EPC/Turnkey ProjectsThe Silver Book

• Conditions of Contract for EPC/Turnkey Projects.

• 1st Edition in 1999.• For different sizes and complexity of

projects.• The Contractor fully designs and provides

in accordance with the Employer’s Requirements for the required works.

• The Employer is not interfering with the designs.

• .

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http://fidic.org/books/epcturnkey-contract-1st-ed-1999-silver-book

The Silver Book• The need for contract forms where the emphasis is on a fixed

final price and duration was the basis to publish the EPC/Turnkey form.

• In addition, Owners (Employers) who do not have their own technical staff capable of designing the facility or who do not want to take the responsibility of design and / or in the absence of the required engineering experience of that specific field, Owners may go directly to qualified and capable contractors to carry out all the works.

• It is believed that the overall implementation time can be less than that of traditional approach.

• Turnkey projects range from those with minimum requirements by the Employer to very detailed and complex requirements.

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The Silver Book• Under the usual arrangements for this type of

Contract the Employer:– Provides finance. – Does not wish to be fully informed.– Wants the Contractor to be fully responsible for the design

and construction of the project.– Wants high degree of certainty that the contract price and

the duration will not be exceeded.– Is conveying the risks to the Contractor. Accordingly, he

expects and is willing to pay more.– Payments to the Contractor will be according to achieved

milestones or as per defined schedule of payments.– Contract is generally lump sum.

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FIDIC Design, Build and Operate ProjectsThe Gold Book

• Conditions of Contract for Design, Build and Operate Projects.

• 1st Edition in 2008.• For different sizes and complexity of projects.• The project is long-term and it combines the

operation and maintenance into one contract with the design and building of the facility.

• The Contractor designs and provides in accordance with the Employer’s Requirements, plant and or other works.

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http://fidic.org/books/dbo-contract-1st-ed-2008-gold-book

The Gold Book• The Contractor will usually be a joint venture

or consortium.• The Contractor will be responsible for

providing a lasting service through good quality and reduced maintenance and operation costs.

• The Employer is responsible for financing the project.

• New procedures and new terminology are introduced in the Gold book which are not found in the other FIDIC books.

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• .

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Which Form to Use

Risks in Contracts


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• THANK YOU• Tahseen Saleh

mailto:[email protected]

Workshop on Risks in Contracts...2020/04/02 · –17.3 of the FIDIC 1999 suite of contracts (Red,...

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