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FIDIC Conditions of Contract for EPC Turnkey Projects The Silver Book Problems in Store?

? Introduction When should the Silver Book be used? Allocation of Risk

Unforeseen Ground Conditions Site Data Fitness for Purpose Employers Control Claims

The Dispute Adjudication Board The Silver Book under English Law a few points to note

Fitness for Purpose Limitation of Liability Consequential Loss Delay Damages Summary Introduction The growth in the use of private finance to fund major public infrastructure projects throughout the world continues unabated. The traditional role of governments in providing public infrastructure projects has been supplemented significantly by the use of private finance. This effectively transfers the responsibility for certain services from the public to the private sector. In particular, the BOT (Build Operate Transfer) transaction has become common world-wide. Using the simple example of a bridge, under this type of arrangement a company, often a special purpose vehicle (SPV) formed by private sponsors, established solely for that project and with no real assets, is granted a concession from the public authority or host government to own and operate the bridge, for a set period of time. The SPV will arrange the finance (the majority of it by way of loan(s)) and employ a contractor to design and build the bridge. The SPV will own and operate the bridge for a set period, raising money to repay the debt (and hopefully making some profit) by way of tolls. At the end of the period, the bridge is transferred back to the public authority or host government. The recent growth of such projects has taken place in both the developed and developing world. For example, the private finance initiative has been pioneered in the United Kingdom under successive governments, allowing them to avoid substantial capital expenditure on projects which they would traditionally finance. Meanwhile, in developing countries, traditionally adverse to foreign capital, but with a lack of public and private domestic finance, attitudes have been forced to change in recent years in recognition that without domestic and foreign private investment, vital infrastructure projects would simply never get off the ground. It is not surprising that the concept of BOT is appealing to governments around the world. Arguably, the single most important reason for the growth in private finance initiatives is the consequent reduction in government expenditure on infrastructure needs. Other advantages come hand in hand: private investors take most of the commercial risks, they raise the finance thus enabling the project to proceed, and the quality of the product can be higher since the private sector has an interest in the project long after the work has been completed. In a BOT project, the design and build construction contract is of central importance. FIDIC have produced standard forms of contract for civil engineering projects since 1957 and the contracts have been widely used in international construction projects. In August 1999, FIDIC issued four new standard forms of contract. These have, not surprisingly, attracted much publicity and have been the subject of many articles in The International Construction Law Review and elsewhere. To the practitioner it seems that the forms of contract have been generally well received by the international construction industry if for no other reason than that the forms are being used regularly. In particular, the Yellow Book appears to be a popular choice as the form of procurement for a variety of construction and infrastructure projects but also in the field of telecommunications across Europe.

Possibly the one exception to this, in the authors experience, is the contract for EPC/Turnkey Projects (known as the Silver Book). This is also the contract which is of most interest, in light of the developments in the procurement process described above, and it is this contract upon which this article focuses. It is also the contract within the new suite which has perhaps received most attention, much of it critical. When should the Silver Book be used? FIDIC have set out an introductory note in the Silver Book which explains the circumstances in which the contract should be used and the philosophy behind the balancing of risk. FIDIC rightfully acknowledge that in recent years much of the construction market has needed a form of contract where special emphasis is placed on the certainty of the final price and the completion date. FIDIC state in the introductory note to the Silver Book: Among such projects can be found many projects financed by private funds, where the lenders require greater certainty about a projects costs to the Employer than is allowed for under the allocation of risks provided for by FIDICs traditional forms of contracts. Often the construction project is only one part of a complicated commercial venture, and financial or other failure of this construction project will jeopardize the whole venture. This highlights the fact that when drafting the conditions of contract for EPC/Turnkey Projects, FIDIC have recognised the commercial reality by balancing the risks in favour of the Employer, and, in truth, the lending institutions, whose capital makes such projects possible. It is perhaps unusual that a contract has been drafted which really is intended to satisfy the requirements of third parties (lending institutions), which are not themselves a party to the contract. In the previous edition of International Construction Law Review AH Gaede, Jr correctly summarised the position as follows: The trend towards shifting risks to the contractor appears to be a reaction to perceived bargaining strength of financiers rather than proper analysis and what is in the best interests of the project. However, whilst there can be no doubting the motivation behind this shift in risk (the power of the lending institutions) one has to acknowledge that lenders themselves do feel the need for some form of security for the massive loans which they make with (often) no real security in terms of assets. The irony of the situation, as we will see, is that by creating this form of contract in an effort to give lenders added confidence, FIDIC may have actually gone too far and produced a form of contract which will prove to be wholly unacceptable as a starting point for negotiation to the vast majority of international design and build contractors, and also one which is likely to lead to the types of long running disputes which the lenders are trying to avoid. The end result may be to drive up the cost of some of these projects. The Silver Book is quickly developing a reputation as a draconian form of contract and already the author has seen examples in practice of projects for which the Silver Book was intended to be used being procured on the basis of amended versions of the Yellow Book, as lenders and clients realise that the Silver Book is already simply unacceptable to many contractors who are familiar with its terms. One can also expect that, under English law at least, the rights of third parties such as lenders may in the future actually be written into this type of contract so that, if necessary, they can enforce the terms of the contract themselves, thereby doing away with the need for collateral warranties. To date, lenders ability to safeguard the future of the project and secure a return on the loan has been established by the inclusion of step in rights in collateral warranties so that in the event the SPV defaults under the loan agreement, the lender can step in to the SPVs shoes and ensure the project is completed. Allocation of Risk The allocation of risk under the contract has led to much debate in the construction industry. In their introductory note, FIDIC state that it is necessary for the contractor to assume responsibility for a wider range of risks than is traditional given the importance of the certainty of the final price. It is likely that in order to price such risks construction costs may be significantly increased and, as FIDIC are right to envisage, some projects may simply become unviable. As we have seen above, a major factor in the allocation of risk is, of course, the requirements of the lender. In short, the lender will be looking for a fixed price lump sum contract with certainty of completion date, a single point of responsibility for the design and construction of the work, and with as much risk as is possible in relation to any increases in cost being borne by the contractor. However, contractors argue, with some justification, that the Silver

Book goes too far in the allocation of such risk, and the following aspects of the contract lend some support to this view: Unforeseen Ground Conditions The best place to start on any analysis of risk allocation under the Silver Book is perhaps where the contractor itself will start when it considers tendering for a project under these conditions. If the contractor is to provide a fixed price with certainty of completion date then it must be satisfied that it can build the project on time and within budget. Having considered what it is building, as particularised in the employers requirements, the first thing the contractor will require is detailed information about the nature of the site. This is all the more important because under clause 4.12 the contractor is deemed to have foreseen all difficulties and costs of successfully completing the works, and the contract price cannot be adjusted to take account of any unforeseen difficulties or costs. In major engineering projects, design and build contractors are traditionally reluctant to assume such risks given the potential consequences, both in time and costs, of encountering unforeseeable ground conditions or ground behaving in an unforeseen way. Such a risk is difficult to price how can the contractor price the unforeseen? Claims for unforeseeable ground conditions (for example, under clause 12 of the ICE Form of Contract) traditionally account for some of the most technically complex and high value construction disputes. Placing such risk on the contractor will inevitably lead to a (significantly) higher contract price. Clearly, if the contractor is to take the risk of unforeseeable ground conditions, the time allowed to the tenderer to carry out its investigations and fix its price, and the quality and responsibility for the site data upon which the tender is based becomes of crucial importance. Site Data Although clause 4.10 of the Silver Book provides for the employer to make available to the contractor all the relevant data in the employers possession on the sub-surface and hydrological conditions at the site, the contractor is responsible for verifying and interpreting all such data. The employer has no responsibility for the accuracy, sufficiency, or completeness of such data, except to the extent that such data cannot be verified by the contractor (clause 5.1(d)). One can imagine that this clause will lead to significant disputes. The issue of what can and cannot be verified by the contractor will be open to debate. By what standard will this be judged? On one view it would be theoretically possible for the contractor to verify just about any information which the employer gives it, given sufficient time. The logical answer, given the balance of risk described above, is that the contractor should carry out its own site surveys during the tender process. However, the cost and time which it may take a number of tenderers to do this, with no guarantee that they will win the job, may be prohibitive. AH Gaede, Jr concludes that the solution is for the owner, who controls the site and performs the site investigation, should assume the risk of unforeseen ground conditions. However, that may be taking matters too far: often, on large scale civil engineering projects, the cost implications of encountering unforeseen ground can be so great that the employer may simply not have commenced the project had it known what it would cost at the outset. It cannot be unreasonable for an employer to say this is what I want, how much will it cost? If he then gives the contractor time to carry out the ground investigations, it may then not be unreasonable for the contractor to assume the risk. It should always be remembered that no one forces the contractor to take a job. In practice, of course, the contractor will often (and would be well advised to) employ a third party to carry out the site investigation and will have a right of recourse against that third party should the investigation prove inadequate or negligent, subject to the limitations of professional indemnity insurance. One possible solution (if time, and the employer, permits) may be to use a two stage tendering process, where a contractor is selected under a competitive tender on the basis of the site data provided by the employer. Once the (preferred) tenderer is selected, however, the price can be firmed up following the contractors own site investigations.

The introductory note to the Silver Book states that the conditions are not suitable for use where there is insufficient time or information for tenderers to carry out risk assessment studies. Certainly this must be correct since it is entirely unreasonable for a contractor to take all the risk if it is not even given the opportunity to consider and price that risk properly. However, FIDIC also state in the introductory note that if construction will involve substantial work underground or work in other areas which tenderers cannot inspect the Silver Book is also not suitable. This seems rather curious since there are not too many major infrastructure projects which do not involve underground work (such as piling, for example) which is to some extent substantial. We are therefore left with a contract which is recommended by FIDIC for use on major infrastructure projects around the world where tenderers are given plenty of time to carry out risk assessment studies but which do not involve substantial work underground. If the Silver Book is only ever intended to be used for such projects it is a wonder so much has been written about it. Notwithstanding the above, it is inevitable that if the contractor takes the risk and encounters something unforeseen it will try to recover the costs from the employer. A.H Gaede has illustrated a number of ways in which the contractor might seek to argue that it is the Employer who must pay. These demonstrate that disputes are highly likely when unforeseen ground conditions are encountered. Additionally, the Silver Book does not appear to consider what should happen in the following scenario: the contractor is awarded the contract on the basis of site data which the employer (later) accepts could not be verified and which turns out to be inaccurate. It necessitates the contractor changing its piling design, due to unforeseen ground conditions, at a cost to it of many millions of pounds. Who bears that cost? Is it the employer, who bears the responsibility for the inaccurate site data which could not be verified, or the contractor, who accepts an apparently unqualified and absolute responsibility for having foreseen all difficulties and costs of successfully completing the works? The answer is unclear, although, presumably, the intention must be that the employer is to bear the extra cost. Although clause 4.12 is stated to be subject to any other clauses in the contract, including therefore clause 5.1, there is no provision for the contractor to be paid any extra money in the above scenario. The employer may be responsible, but it does not (apparently) have to pay. Contrast the position under clause 4.24 which expressly allows the contractor an extension of time and additional cost if it encounters items of geological or archaeological interest, for example. Consideration should be given to agreeing at the outset, before entering into the contract, what information cannot be verified and for which the employer will be ultimately responsible if it proves to be inaccurate, and adding an express mechanism for payment and an extension of time, in such circumstances. Fitness for Purpose It is perhaps not surprising that the Silver Book imposes a fitness for purpose obligation upon the contractor. This is one of the most obvious ways of transferring risk from the employer to the contractor and thus avoiding state of the art defences raised by contractors when the design fails to achieve its purpose. Contractors will often argue that it is unreasonable for them to assume a higher degree of responsibility for design than an engineer would have carried had it been appointed directly by the employer to carry out the design. The fitness for purpose obligation must also be read in context with clause 5.1 which makes the contractor responsible for the design of the work and for the accuracy of the employers requirements, including design criteria and any calculations. The employer is not responsible for any error, inaccuracy or omission in the employers requirements except in relation to definitions of intended purposes of the work. Making the contractor responsible for the employers own errors in setting out exactly what it is buying could serve, in some instances, to make the fitness for purpose obligation even more onerous. One can imagine that contractors may be keen to draft the employers requirements themselves, since inadequate drafting of the employers requirements is a common source of disputes.

Employers Control One might expect, given the allocation of risk described above, that the employer would have relatively little influence on how the project is actually run. This concept is in fact endorsed in the introductory note to the Silver Book which states: the Contractor should be given freedom to carry out the work in his chosen manner, provided the end result meets the performance criteria specified by the Employer. Consequently, the Employer should only exercise limited control over and should in general not interfere with the Contractors work. Beyond telling the design and build contractor what it is that it actually wants, one school of thought is that the employer should leave the contractor to build the project how it sees fit. Intervention by the employer is not necessary and is unwelcome. The Silver Book appears to endorse this school of thought in the introduction but departs from it in rather alarming fashion within a few pages of the contract itself. There are a myriad of clauses which allow the employer to exercise a degree of control over the contractor. Clause 3.4, for example, provides as follows: The Employer may issue to the Contractor instructions which may be necessary for the Contractor to perform his obligations under the Contract. Each instruction shall be given in writing and shall state the obligations to which it relates and the Sub-Clause (or other term of the Contract) in which the obligations are specified. If any such instruction constitutes a Variation, Clause 13 shall apply. The Contractor shall take instructions from the Employer, or from the Employers Representative or an assistant to whom the appropriate authority has been delegated under this Clause. This is a wide ranging power allowing the employer to give instructions on the contract and one can envisage disputes as to what instructions are necessary for the contractor to perform his obligations. A contractor might argue (justifiably) that when it requires an instruction it will raise a query and that there is no need otherwise for employers to intervene. Further, the second paragraph of clause 3.4 sets out from whom the contractor shall take instructions. This includes the employer, or the employers representative, or an assistant to whom the appropriate authority has been delegated. However, taken in its most literal sense, the clause also means that the contractor shall take any instructions from the employer, whether or not they relate to instructions which are necessary in order to perform his obligations under the contract. Clearly, that was not the intention behind the clause. Various other clauses allow the employer to influence the way the contract is performed such as clause 4.5 (nominating subcontractors), clause 5.2 (contractors documents), clause 7.5 (rejection) and clause 7.6 (remedial work). Clause 7.3 places an obligation on the contractor to give notice to the employer whenever works are covered up, put out of sight, or packaged for storage or transport. The employer may thereafter examine, measure, or test the work without unreasonable delay or promptly give notice to the contractor that he does not require to do so. No definition of the word promptly is given. Does the contractor wait a day or a week to receive such notice before covering up the work? Further, if the contractor fails to give notice, it may be required by the employer to uncover the work and thereafter reinstate and make good at the contractors cost and with no extension of time. Notably, the employer has the power to control the contractors rate of progress by instructing it to accelerate, even when the contractor is not in critical delay. Pursuant to clause 8.6, if the contractor falls behind programme, the employer can instruct it to accelerate at the contractors cost. This seems a highly undesirable clause for the contractor. So long as the contractor is confident it can finish on time (which is clearly in its interest so as to avoid delay damages) it should not matter that it may, at any given point, be behind programme. The programme may have float built into it many contractors, for example, will (in practice) overlap construction work with commissioning at the end of the project, even though the programme shows

commissioning as the final element of the programme (sometimes an artificially long element), and taking place only after all construction work has finished. Where there have been delays, it is not unusual for construction work to be concurrent with commissioning, which on the face of the programme indicates the project is in delay, although, in reality, it may be on course to complete on time. The requirement to accelerate in such circumstances may be costly, and wholly unnecessary. Further, there will be many non critical activities shown on the programme. When these activities are best and most economically carried out is a decision which should be purely down to the contractor, who should not be strictly bound by the timing and sequence of every event shown on its programme, produced possibly a number of months or years previously. The power for the employer to order acceleration in such circumstances is perhaps the most blatant departure from FIDICs stated intention in their introductory note that in general the employer should not interfere with the contractors work. Claims One of the most notable aspects of the Silver Book is the absence of an engineer as the first tier in the decision making process. The employer itself assumes the role although in practice it may well appoint its own engineer to carry out this function. The employer/engineer will not, of course, be impartial. There is considerable scope for abuse by the employer of its position as can be seen from the manner in which claims are to be handled. Experience suggests that the position will be abused and that contractors will be forced to turn to the Dispute Adjudication Board (or arbitration), as to which see below. Should the contractor consider itself entitled to an extension of time or any additional payment under any clause of the contract, notice must be given within 28 days after the contractor becomes aware, or should have become aware, of the event or circumstance. Failure to do so means the contractor will not be entitled to an extension of time or additional money. Within 42 days of the contractor becoming aware of the event or circumstance, a fully detailed claim, including full supporting particulars, must be sent to the employer. The employer then determines the claim pursuant to clause 3.5 which provides that in the absence of any agreement, the Employer shall make a fair determination. The employers determination is binding unless the contractor issues a notice of dissatisfaction within a further 14 days. On the other hand, clause 2.5 provides that the employer determines its own claims. No time period is given within which the employer must make the claim other than as soon as practicable. The employer may then deduct the money from any monies due to the contractor. Assuming that the contractor serves within due time a notice of dissatisfaction with the employers decision, the next tier of dispute resolution is (probably) the Dispute Adjudication Board, to which, it is suspected, contractors will have to seek recourse more often than under contracts where an impartial engineer makes decisions. Long running disputes under this form of contract appear to be inevitable. The Dispute Adjudication Board The ultimate forum for dispute resolution under all the FIDIC contracts is arbitration. However, arbitration in the Silver Book is supplemented and preceded by the Dispute Adjudication Board (DAB) which effectively replaces the role of the engineer as the pre-arbitral decision maker. The concept of the DAB is not new either to FIDIC contracts or in general. The DAB first appeared in FIDIC contracts in the design and build contract in 1995. However, its position in FIDIC contracts as the major vehicle for dispute resolution, prior to arbitration, is now confirmed. The DAB is similar in nature to the Dispute Resolution Board (DRB) which originated in the United States over twenty years ago and would (often) consist of a board of three suitably qualified people who would meet regularly on site during the course of the project and make recommendations in relation to any disputes as these arose. In recent years the use of dispute resolution boards of this kind in both international and domestic construction has become increasingly popular. There is no doubt that DRBs have had considerable success in resolving and avoiding major disputes without the need to seek recourse to arbitration or litigation with the consequent expense.

In the three main FIDIC contracts produced in 1999, the status of the DAB is confirmed by clause 20 of the conditions. In the Red Book it is contemplated that a permanent DAB be set up at the outset of the contract and stay in place until the end of the project. Indeed, the guidance notes in the Red Book suggest that it is preferable that the DAB visit site on a regular basis (even if there is, at that time, no dispute) If this happens then the members of the DAB would be in a relatively informed position to assist and hopefully prevent major disputes arising. Clearly, this in keeping with the original philosophy behind DRBs; they are not simply another tier of the decision making/dispute resolving process but rather can be used to facilitate/mediate as events and disputes occur. Clearly, the composition of the DAB is crucial and, as the guidance notes suggest, the success of the dispute resolution procedure depends on the parties confidence in the individuals who will serve on the DAB. However, in the Silver Book it is envisaged that the DAB is only appointed after a party gives its notice of intention to refer a dispute to the DAB and the DAB will expire after it gives its decision on the dispute. It is not clear why FIDIC differentiates between the Red and Silver Books in this way, but for contractors on major infrastructure projects it may certainly be worth considering seeking to amend the Silver Book so that a DAB is set up at the outset for the duration of the project, despite the extra cost this may cause. To appoint the DAB only after the dispute has occurred seems completely to detract from its original purpose. The decision of the DAB will be final and binding if no notice of dissatisfaction is given by either party within 28 days of the DABs decision. The DAB itself has 84 days to make its decision after referral of the dispute. A number of points arise out of this procedure: the period of 84 days, nearly 3 months, seems a long period to resolve a dispute bearing in mind that the matters will have already been considered by the employer when making its initial determination, especially if the DAB has been set up at the outset (as some parties may prefer). Consideration should therefore be given to reducing this to 56 or even 28 days (but providing for an extension of time with the agreement of both parties). Statutory adjudication in the United Kingdom has demonstrated that detailed and complex disputes can be disposed of within 28 days by one adjudicator who has no prior knowledge of the dispute. Further, those familiar with that statutory adjudication process will no doubt question immediately how effect will be given in an international context to the decision of the DAB. The Silver Book provides that if a party does not honour the decision of the DAB then the other party may refer that failure itself to arbitration. It remains to be seen how arbitrators will deal with such a failure. Will they uphold the decision of the DAB, without enquiry, on a summary basis, as the Technology & Construction Courts in England have done in relation to adjudicators decisions, or will arbitrators (not used to dealing summarily with complex disputes) look into the merits of such decisions and act as a form of appeal tribunal? Clearly they are able to do this where a notice of dissatisfaction is served within 28 days of the DABs decision, but it remains to be seen how such decisions will be enforced where no such notice is given. What if the DAB has made an obvious mistake? Further, would Arbitrators enforce a decision taken by the DAB in breach of the rules of natural justice or in breach of Article 6 of the European Convention on Human Rights which guarantees a party a right to a fair trial and which is now incorporated into English law? There is also scope for abuse, most probably by the employer, who can delay implementing any decision of the DAB by commencing arbitration: by issuing a notice of dissatisfaction within 28 days of the DABs decision, a party will buy itself a further 56 days (during which time the parties shall attempt to settle the dispute amicably) before arbitration may be commenced. This is a total of a further 84 days, some 6 months since the original referral of the dispute to the DAB. During that period, and indeed until any decision of an arbitrator, it seems the decision of the DAB is not (in practice) enforceable, notwithstanding the fact that the other party may (privately) have no intention of proceeding to arbitration. Finally, it is worth noting that, despite all of the above, it appears that there is nothing to stop a party referring a dispute direct to arbitration. It is not entirely clear if this reflects FIDICs intention or is a drafting error. Clause 20.8 of the Silver Book provides that if a dispute arises then it can be referred directly to arbitration if there is no DAB in place. The same wording appears in the Red Book. However, unlike the Red Book (where it is envisaged that the DAB will be set up at the outset of the project and therefore will, presumably, be in place when the first and every successive dispute arises) the Silver

Book provides that a DAB will only be set up after a dispute has arisen and will expire after it has made its decision. Therefore, it is likely that when a dispute arises, there will be no DAB in place, and the parties will be able to refer the dispute direct to arbitration. Quite why FIDIC should make the DAB obligatory in the Red Book and optional in the Silver Book is unclear. Whether or not contractors will consider that it is preferable to go to arbitration rather than the DAB, is a matter which remains to be seen and may depend upon the nature of the dispute and that contractors previous experience of DABs. The Silver Book under English Law a few points to note Given that FIDIC contracts are used on many international projects, the issue of the governing law is an important one. Clause 1.4 provides that the contract should be governed by the law of the country (or other jurisdiction) stated in the Particular Conditions. On many international contracts the choice of governing law is English Law and under this section some general points arise out of the drafting of the Silver Form where the parties choose English law. Fitness for Purpose Although the Silver Book expressly provides that the contractor will provide a design that is fit for the purpose, it should be remembered that under English law, where a contract is for both design and construction there is an implied warranty that the finished product will be fit for its purpose. Of course the implied warranty can be displaced by a contractual provision to the contrary and often, under English design and build contracts, the contractor is expressly obliged to exercise the level of skill and care that would reasonably be expected from an architect or engineer had it been appointed directly by the employer. This is sufficient to displace the implied warranty of fitness for purpose. But contractors should therefore beware simply deleting the fitness for purpose clause may not displace the obligation itself. Limitation of Liability Consequential Loss Of particular note is the limitation of liability clause 17.6 in the Silver Book. It is worth setting this out in full since clauses similar to this have been the subject of recent decisions under English law. The clause states that: Neither party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the contract. The clause provides that neither party shall be liable to the other for loss of profit. It is important to recognise that this will include direct loss of profit, including, presumably, loss of profit on the contract in question notwithstanding the fact that the clause is primarily intended to exclude indirect and consequential loss. One consequence therefore is that should the employer, without the consent of the contractor, omit part of the contract work, for whatever reason, and give this to an alternative contractor, the contractor would not be able to claim loss of profit on that work. Under English law, in the absence of an express contractual right, it would usually be a breach of contract for the employer, without the consent of the contractor, to omit part of the contract works and give it to an alternative contractor. Indeed, the Silver Book expressly provides that a variation may not comprise the omission of work which is to be carried out by others. The usual remedy for the contractor will be a claim for damages for loss of profit on that piece of work. Such loss would be direct loss under English law. However, such a claim would not be possible given the provisions of clause 17.6. Further, parties contracting under English law should be aware that many types of loss which one might consider would be excluded by such a clause as indirect loss are regarded under English law as direct loss. For example, the cost of reconstructing a plant after an explosion, together with loss of profits and wasted overheads incurred while the plant was being reconstructed has been held to be direct loss. Delay Damages Another drafting error which parties unfamiliar with English law often make on contracts of this sort relates to the delay damages. Clause 8.7 provides for delay damages for every day which elapses between the relevant time for completion and the date stated in the taking over certificate. However, under English law although liquidated and ascertained damages (as they are called) are accepted, the level of the damages must represent, at the time the parties enter into the contract, a genuine pre-estimate of the loss which the employer will suffer due to

delayed completion. If the clause is held to be a penalty then it will not be enforceable and the employer will be put to proof of its loss, although on some major infrastructure projects the employers losses may be considerably in excess of the agreed damages which effectively acts as a cap on the contractors liability. Therefore, at the time the delay damages are agreed, at the outset of the contract, proper records should be made by the employer of how the sum is calculated so that, should an arbitrator ever come to consider the question, the sum can be justified by reference to the damage which the employer anticipated, at the outset of the contract, it would suffer should the completion of the project be delayed. Summary FIDIC have clearly achieved their stated intention of placing more risk on the contractor than is traditional. However, it is questionable whether or not the balance of risk actually achieved is likely to be commercially acceptable to many contractors and, at the very least, it may lead to an increase in the overall contract price. Already, in practice, in seems that both employers and contractors may be shying away from use of the Silver Book, notwithstanding the success and popularity of FIDICs other 1999 contracts. Disputes are also more likely to occur, which in an industry where avoiding confrontation has become something of a mantra, is one (potentially) surprising and unwelcome aspect of the contract. In the United Kingdom, where contractors are becoming increasingly familiar with concepts such as partnering, supply chain management and the sharing of risk, reflecting the industrys determination to avoid disputes and foster long term relationships with the ultimate goal of doing away altogether with written forms of contract, the Silver Book will no doubt be viewed with concern. Nicholas D J Henchie

Mayer, Brown, Rowe & Maw is a combination of Mayer, Brown, Rowe & Maw LLP (an English limited liability partnership) and Mayer, Brown, Rowe & Maw (a US general partnership) 11 Pilgrim Street, London EC4V 6RW, England Tel: +44 (0)20 7248 4282 Fax: +44 (0)20 7248 2009 Email: london@mayerbrownrowe.com

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