Getting it Right at Tender Stage in FIDIC Contracts


By McDowell Purcell \ In News

The level and depth of due diligence carried out by funders has increased in recent years for project finance and construction developments in Ireland. So more than ever before, both Employers and Contractors benefit from putting in sufficient time preparing and considering draft contracts and Employer’s Requirements included with tender documents prior to funder due diligence commencing. It is also important that Contractors take adequate time at tender stage to scrutinise and check the tender documents so that they can get comfortable with the design and works they are to carry out, or adopt as their own, and become familiar with the overall risk allocation proposed in the contract.

If a Contractor is appointed as a preferred supplier prior to their responsibilities and contractual obligations being substantially finalised, this can result in lengthier negotiations in the long run if there is disagreement in principle on certain points. In this situation a Contractor may seek an increase in the contract price due to a contractual term it had not allowed for being amended (or introduced).It may also result in an extended due diligence period if a funder is not satisfied with how the contract deals with a risk item. This could in turn delay the financial close of a project, which will have a knock on effect on any commitments and contracts already entered into by an Employer with contractors and suppliers.

While a funder and their lawyers will have their own views as to what is a bankable contract, a one size fits all approach may not be appropriate. An Employer or Contractor may be willing to accept a higher, or lower, degree of risk on particular issues based on their own commercial position, the contract price, knowledge of the site and the circumstances of the project.

The funder will traditionally want the least amount of risk possible retained by the Employer / borrower, however such caution is  often  beyond what an Employer wants or requires. This scenario may have implications for the contract pricing, as it can impose would could be deemed to be an unnecessary cost on the Employer. By way of example, a particular environmental or hydrological risk might not be considered material by an Employer due to their knowledge of the site.  A funder may nevertheless seek that this risk be imposed on a Contractor, who could then price for it as they will not be familiar with the site. To avoid this situation arising during due diligence, an Employer should consider and attempt to anticipate the risk allocation a funder may look for, and then be prepared to explain the reason for retaining the risk for certain matters, and not for others, and outline the positive impact on price resulting from this approach.

Errors in Employer’s Requirements (Sub-Clause 1.9) and General Design Obligations (Sub-Clause 5.1)

Projects using the FIDIC Yellow Book in Ireland are commonly amended so that Sub-Clause 1.9 is deleted and the final two paragraphs in Sub-Clause 5.1 are deleted or amended. This is so that the Contractor has the full design obligation under the contract. The intention is to remove design responsibility from the Employer in respect of documents provided by the Employer which form part of the Employer’s Requirements.

While a Contractor may argue that this is closer to a Silver Book position, it is a standard amendment in Ireland to design and build contracts using the Yellow Book. The practical way to deal with this is to allow the Contractor sufficient time at tender stage so that they can adequately review the Employer’s Requirements and carry out any other assessments they consider necessary. By dealing with this issue at the outset, they can avoid a debate later on during contract negotiations as to whether the Employer retains any residual design responsibility in respect of any specifications or outline designs it has provided. Generally a funder will want all design responsibility to rest with the Contractor, therefore an Employer should set out this position in the draft contract included with the tender documents and ensure that the Yellow Book is amended accordingly.

Setting Out (Sub-Clause 4.7)

Another common amendment in Yellow Book Contracts is that Sub-Clause 4.7 (Setting Out) is amended so that a Contractor cannot claim time or money in respect of errors in the positioning or setting out of the works, which is in effect the Silver Book position. Whether this amendment is appropriate in a particular case, will depend on what works are being carried out. If the works are to be set out in accordance with existing planning permission provided by the Employer to the Contractor, or in accordance with fixed points as determined by another contractor already working
on the site, then the Contractor could reasonably argue that they should be able to claim time and/or cost due to any such errors in the setting out. By way of example, a turbine supplier for windfarm may be required to locate each turbine in accordance with the planning permission and foundation works. In this instance, if a turbine was in the wrong location due to an error in the planning permission, or an error by the foundation contractor, then the turbine supplier would expect to be able to claim time and/or cost.

Site Data (Sub-Clause 4.10) & Unforeseeable Physical Conditions (Sub-Clause 4.12)

Responsibility for the site is an important issue for both Employers and Contractors. The FIDIC Yellow Book is commonly amended so that a Contractor cannot claim time or money due to the condition of the site and so that they accept the risks in respect of the site including its subsurface, hydrological and climatic conditions. While an Employer will provide site surveys, reports or documents it has obtained, it may not wish to give a confirmation as to their completeness in the event that further issues arise in the course of the project.

A Contractor should be made aware of this at the beginning of the tender process.  However in a situation where an Employer is familiar with the site, and is comfortable that there is not a material site risk, the Employer may be willing to accept a less onerous risk transfer to the Contractor under Sub-Clause 4.10 (Site Data) or under Sub-Clause 4.12 (Unforeseeable Physical Conditions) if it results in a more competitive price from the Contractor.

When the funder due diligence is starting, an Employer should clearly communicate the position to the funder’s technical adviser and outline where they may be willing to retain any site risks, prior to the contract being reviewed by the funder’s legal advisers. This should help to avoid a disconnect between what the funder’s technical adviser may consider acceptable and any contractual amendments the funder’s legal adviser will inevitably seek to ensure the lowest risk positon for the funder.

Programming (Sub-Clause 8.3)

While amendments to Sub-Clause 8.3, which deals with the programme, usually do not involve lengthy negotiations, the implications of including the programme as a contract document needs to be considered by both an Employer and a Contractor. There are benefits and risks associated with doing so, though it is standard practice in a project finance involving multiple contractors that the programme will be a contract document. Particular care should be taken when any contract is entered into prior to the funder due diligence process starting. If the programme is included as a contract document and the project is subsequently delayed due to a longer than anticipated due diligence process, or for any other reason, then the Employer may be in breach of its obligations to the Contractor to give it access to the site by an agreed date, and the Employer may be subject to claims by the Contractor for compensation for any resulting prolongation costs. This could become particularly complicated in a multi-party project involving numerous contractors. If the programme is to be included as a contract document, then it is preferable that all project contracts are entered into at the same time, preferably immediately prior to financial close.

Courts in England have also held[1] that where there are clear dates in a contact for the completion of specific works or milestones, then additional interim progress obligations will not be implied into a contract where the Contractor must carry out the works regularly and diligently. An Irish court may consider following this approach, and decisions of the English courts are of persuasive authority in Ireland. As such where the programme is a contract document, the contract should also state that the Contractor will exercise “diligence” in carrying out the works. Sub-Clause 8.1 of the Yellow Book provides that a contractor must proceed with “..due expedition and without delay” and it is important that wording to this effect is retained.

In multi-party projects, Sub-Clause 4.6 (Co-Operation) of the Yellow Book is also commonly amended and expanded upon to provide that a Contractor will co-operate with and co-ordinate their design and construction work with other contractors, and the Engineer. An obligation is often included for that the Contractor to interface and integrate with the works of other contractors to ensure timely, efficient and cost-effective completion of the various elements of its own work and that of other contractors. This again ties in with the “diligence” requirement whereby meeting the milestones set out in the programme is not the only progress requirement for a Contractor, as they will need to carry out and co-ordinate their work with the other contractors on site so that each contractor can comply with the programme.

Comment

While there are certain risk allocations that an Employer and Contractor should accept as standard in Ireland so that financing can be obtained, in each particular case it also needs to be considered which risks can legitimately be shared (or retained by an Employer) where this will have a positive effect on pricing of a contract or speed of the negotiation process. Early acknowledgement and consideration of these risks, and the incorporation of them into a bankable draft contract, will benefit the Employer and Contractor as it will clarify their obligations at the outset and avoid misunderstandings later on. Following this, clear communication by an Employer or their Engineer with a funder’s technical adviser and legal team can help ensure that a joined up and common sense approach is taken to contract negotiation, and the funder due diligence process, to ensure the project is delivered on time and on budget.

Author: David Gunn

Remember that this article is for information purposes only and does not constitute legal advice. Specific advice should always be taken in given situations.

For further information on any of the items discussed, please contact a member of the Commercial team at McDowell Purcell.

David Gunn, Associate                  Feilim O’Caoimh, Partner

References:

[1] Leander Construction Ltd v Mulalley and Company Ltd [2011] EWHC 3449 (TCC) (England, High Court, 21 December 2011) and Greater London Council v The Cleveland Bridge and Engineering Co Ltd and Another (1986) 34 BLR 50