The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

Nick Henchie
International Construction & Engineering Partner at Mayer Brown Rowe & Maw LLP, London

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?
By Nick Henchie
1

Introduction In March 2003, Orgalime published a Turnkey Contract for Industrial Works (the Orgalime Contract). This is the latest in a long line of contracts which the Orgalime Legal Affairs Working Group has produced over the course of many years. The first Orgalime legal publication was issued in the 1950s. Orgalime is the European Federation of National Industrial Associations and represents the European mechanical, electronic and metal articles industries. It is not an organisation that is as well known as, for example, FIDIC, but for those companies who participate actively in Orgalime, it is every bit as important and, in certain parts of Europe (for example Switzerland, Austria and Germany), perhaps more so. The organisation has three main objectives, namely, to collect information about the activities of the European Union and international bodies of direct relevance to Orgalime, to establish coordinated opinions of the engineering industries and using these opinions, to influence policy-making in the European Union institutions and certain international bodies, and to promote relations between member federations/ 2 associations. Orgalimes Legal Committee has long been tasked with producing practical, balanced model forms of contract for use in different situations. The most popular of these are S2000 for the supply of mechanical, electrical and electronic products, and SE01 for the supply and erection of such products. Following the publication of the new suite of FIDIC contracts in 1999, in particular FIDICs Silver Book, the Legal Committee of Orgalime decided to draft a new turnkey contract for industrial works, which could be used as an alternative to FIDICs Silver Book (the Silver Book), but which provided for a fairer allocation of risk between the 3 parties.

Nick Henchie is a Partner in the Construction and Engineering Group at Mayer, Brown, Rowe & Maw LLP. He was consulted on the drafting of the Orgalime Contract. The author is also a member of the ICCs Taskforce on Turnkey Transactions (Industrial Plant) currently drafting a new form of turnkey contract. The author is also chairman of the IBAs FIDIC Committee. He can be contacted at nhenchie@mayerbrownrowe.com 2 Further information about Orgalime and its activities can be found on its website www.orgalime.org 3 A similar motivation underlies the current drafting of the ICC turnkey contract.

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

The main purpose of this article is to inform a wider audience of the existence of the Orgalime Contract and provide a summary of its key contractual terms and to consider whether it is, as Orgalime profess it to be, a viable alternative to the Silver Book. When should the Orgalime Contract be used? The introduction to the Orgalime Contract suggests that the form should be used for industrial works. The introduction states:By that term is meant any kind of process plant or industrial production unit. Typical examples would be a power plant, a paper machine and an automated production line for industrial products. One of the advantages which the authors profess the Orgalime Contract has over the Silver Book is flexibility. The introduction states that the contract is turnkey in the sense that the contractors obligations include the supply and erection of all machinery and equipment which form part of the works, and testing and commissioning of the finished works. However, it is stated that the contract does not have to be turnkey in the sense that the contractor must perform all of the civil works and provide all the equipment and auxiliary services necessary for the erection work. Flexibility is achieved, so it is said, by completion of the checklist which is part of the contract package, which can be used to make the contract more or less turnkey. The introduction goes on to state that:The flexibility in relation to civil works, erection equipment and auxiliary services is also in marked contrast to the FIDIC suite of contracts where the contractors obligations will include all the means necessary to carry out the work. The FIDIC approach is typically less well suited for industrial works which are more often than not installed at premises where the purchaser is already established, and therefore it is more practical and cost effective for the purchaser to provide a significant part of such work and services. However, whilst it is valid to draw a distinction between the different issues raised by industrial works being carried out at an existing premises, where the purchaser is already established, and a turnkey project on a green field site, at first glance it is difficult to understand what precisely marks the Orgalime Contract as inherently more suitable for such works. It is simplistic to suggest that the filling in of the Orgalime checklist makes the Orgalime Contract any more flexible than those in the FIDIC suite. Whilst the checklist is a useful feature of the Orgalime Contract and provides, not least, an aide memoire for the parties as to matters which are quite often overlooked, it does not make the Orgalime Contract any more suitable. In reality, in most turnkey contracts the scope of works will be well defined in the technical specification, or perhaps the Employers Requirements, as envisaged by the Silver Book, for example.

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

These documents can run to many volumes and set out at great length the scope of works required. Where works are carried out at existing premises there may be potential grey areas where the works will interface with the existing plant, but in such circumstances a clarification schedule is often drawn up by the parties which sets out at some length which party is responsible in each area. The simple ticking of a checklist provided by Orgalime may not suffice and could lead to problems. The checklist simply provides a box to be ticked by the contractor or the purchaser to provide who will be carrying out, for example, brickwork or carpentry. In truth, it is unlikely that this checklist will provide flexibility which Orgalime hopes it will. Balance of Risk Much has been written in ICLR and elsewhere about the balance of risk in the Silver 4 Book. However, many of the accusations have been responded to, persuasively, by 5 Christopher Wade. The truth lies somewhere in between the two arguments. Any engineer or lawyer who has been in the industry for any amount of time, and reviewed bespoke forms of contract regularly proffered by owners and purchasers of industrial works or infrastructure projects, will instantly realise that the Silver Book, when put in its full context, is not a particularly onerous contract for contractors and the balance of risk is not out of the ordinary. Indeed, where private finance is involved in the procurement of major infrastructure projects, the Silver Book represents a position that many EPC contractors would readily accept when compared to some of the bespoke forms of contract which lenders insist upon, and which load virtually all of the risk on the EPC Contractor. Further, when one looks further down the contractual chain at the balance of risk in the major sub-contracts on such projects, one sees contracts that bear no resemblance to the balance of risk set out in the Silver Book. The real complaint about the Silver Book is that, when compared to other FIDIC contracts, it clearly favours the employer in three or four key respects. For example, the principal differences between FIDICs Yellow Book (which is widely regarded as representing a fair balance of risk between employer and contractor) and the Silver Book are simply that the contractor under the Silver Book takes the risk for unforeseen difficulties, including unforeseen physical conditions, and is responsible for the correctness of information and any design provided by the employer. Whilst it is acknowledged that these are key differences which do have the effect of shifting risk

See, for example, FIDIC Conditions of Contract for EPC Projects The Silver Book, Problem in Store? [2001] 18 ICLR 41-55 by Nick Henchie and An Unfortunate Shift From FIDICs Tradition of Being Even Handed and Focusing on the Best Interests of the Project [2000] 18 ICLR 477-503 by AH Gaede. 5 ICLR [2001] The Silver Book: The Reality at pages 497-522.

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

to the contractor, in the context of projects for which the Silver Book is recommended, it is not unusual for contractors to bear such risks. Thus, the Silver Book hardly breaks new ground in this respect. The authors of the Orgalime Contract state that one of the reasons the contract has been issued is to:provide a more balanced alternative to the FIDIC EPC Turnkey Contract, the socalled Silver Book, which in Orgalimes view is less well suited for industrial works contracts. The Silver Book places practically all risks on the contractor, while giving the employer a large influence over the day to day performance of the contract. This combination is likely to lead to complicated and costly disputes, which is not in the interests of either party. But, above all, it contains risks for the contractor which contractors in the engineering sector are not ready to accept The author respectively disagrees with this statement, for the reasons stated above. Of course, lawyers and contracting organisations have been vociferous in their opposition to the Silver Book. The author of this article has indeed criticised some of its provisions previously. However, it must be remembered that FIDIC have alternatives to the Silver Book, most obviously the Yellow Book, which has not received the criticism which the Silver Book has since it is perceived to be in line with the principles of balance between the employer and the contractor. Thus, some of the criticism is, in hindsight, a little perplexing because if what the parties are after is a fair sharing of risk in line with FIDICs principles, then perhaps the Yellow Book is a more logical choice than the Silver Book. The Silver Book is simply proffered by FIDIC as an alternative for a given market, namely, projects financed by private funds, where lenders require, traditionally, greater certainty about project costs and time. Since the Orgalime Contract is not stated to be produced expressly for such a situation, it may be erroneous to compare the Orgalime contract directly with the Silver Book since, a more relevant comparison, might be with FIDICs Yellow Book. Thus, whether in practice the Orgalime Contract will prove to be an alternative to the Silver Book is debateable given they are not necessarily both suitable for the same sort of project. Perhaps two of the most common criticisms of the Silver Book, notwithstanding the above comments, which mark it as immediately different from the Orgalime Contract, are the fact that the contractor takes the risk for unforeseen ground conditions, and the contractor provides that the works will be fit for their purpose. Neither obligation is found in the Orgalime Contract. So far as the fitness for purpose obligation in the Silver Book is concerned, this is an obligation which traditionally contractors have been loathe to accept, and for good reason. A contractors professional indemnity insurance policy rarely insures such an obligation, the usual cover being in respect of a failure to design with reasonable skill and care. If, perhaps, because of the novel, cutting edge nature of a design required on

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

a project, a project fails to meet its operational requirements so that it is, arguably, not fit for its intended purpose, it is certainly possible that the contractor will nevertheless have carried out its duties with reasonable skill and care. In such circumstances whilst the contractor may find itself contractually liable, it may not be insured. In passing it is worth noting that whilst the Orgalime Contract makes the contractor responsible for design (see clause 4.1), the definition of Works does not include design and there is, rather unusually, no express standard to which the contractors design has to be carried out. This is something which the parties may wish to address in the amendments. Arguably, absent an express standard, the contractor under the Orgalime Contract may have an implied duty to produce works that are fit for their purpose, something the authors cannot have intended. The reference to due care and diligence in clause 4.1 does not expressly refer to the contractors responsibility for design. The second major difference between the contracts relates to the liability for unforeseen ground conditions. Traditionally, in engineering contracts, a contractor is entitled to relief for the consequences of unforeseen ground conditions or ground behaving in an unforeseen way. Indeed, substantial and complex disputes as to unforeseen ground conditions are not uncommon on civil engineering projects. This is despite the fact that modern techniques make testing and analysis of ground conditions much more reliable than in the past and therefore, one would expect, that where a contractor has time to properly investigate the ground conditions before signing up to the contract, this is a risk which it would be willing to bear more often, for a price of course. Nevertheless, the reality is that on a project being financed by lenders, with limited recourse to recover their investment, the risk of ground conditions is not one lenders (and hence the employer) are usually willing to bear. In addition to these two notable exceptions, there are some very different provisions in the two contracts and these are highlighted further below. The Engineer Under most traditional forms of civil engineering or building contracts, there is an engineer or architect respectively to administer their terms. Traditionally, for example, under ICE and FIDIC forms of contract, the engineer plays an important role in acting as a decision maker in the first instance. However, the Orgalime Contract, perhaps reflecting a more modern practice, have provided for a two party approach where there is no engineer with the power to make binding decisions on the parties. Instead, there are representatives of both parties (a project representative and a site representative), but they represent their respective parties and do not have the power to make prejudicial decisions binding on the other party. Thus, if a dispute arises between the parties as to their respective rights or their performance under the contract, the matter will be determined in accordance with the dispute resolution provisions of the contract (see below) and there will be no engineers decision.

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

This is, supposedly, in stark contrast to the Silver Book which provides for an Employers Representative. However, the reality is somewhat different since the Employers Representative under the Silver Book is not empowered to make determinations binding on the contractor. Rather, pursuant to Clause 3.5, the Employer itself makes a fair determination in accordance with the contract. If the contractor is dissatisfied with such a decision then within 14 days of receiving the decision, it can give notice referring the matter to the DAB in accordance with Clause 20.4. In truth, thus, the Silver Book is essentially a two party contract and in that respect, no different to the Orgalime Contract. Decision Making The traditional role of the engineer in the Orgalime Contract and the Silver Book having been abandoned, the issue arises as to how decisions are reached which, formerly, an engineer would have made. For example, a dispute over a variation, or an extension of time application. A novel and welcome introduction to the Orgalime Contract provides that in three specified instances, where there is a dispute between the parties, it can be referred to an independent expert. Thus, if the parties disagree on the work necessary to achieve mechanical completion or, if following termination for the purchasers convenience, the parties are unable to agree the percentage of the works completed to that point, or if there is a dispute over a variation, then the dispute may be referred to the decision of an independent expert. The expert has some 28 days to reach its decision from the last document he receives from the parties. The decision is binding on the parties unless and until the matter is subsequently overturned by arbitration. Whilst this seems a sensible introduction for the narrow issues mentioned, and which are often fertile sources of disputes, the procedure itself requires attention. For example, Clause 8.11 provides that the expert shall inform the parties of his decision no later than 28 days after he received the last documents from the parties. Experience in the UK of statutory adjudication would suggest that the parties will continue submitting documentation right up to the day of the decision. It would be preferable if the expert had to reach a decision within a set period from referral of the dispute to him, rather than following the submissions of the parties, to give some certainty to the process. The decision making process under the Silver Book is different, given the presence of the Dispute Adjudication Board (DAB). The DAB may comprise one or three members. Where it comprises one member then it is submitted that the DAB under the Silver Book would perform a similar function as the independent expert under the Orgalime Contract. However, one key difference is the procedure which under the Silver Book provides that the decision does not have to be made by the DAB until 84 days after the dispute has been referred to it. Some confusion is caused by the guidance notes to the Orgalime Contract. Having provided for an independent expert, the guidance notes suggest that there is actually a

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

downside to having an expert decide disputes, since it is suggested that this may deter the parties from reaching compromises. The guidance notes go on to state that:A more flexible solution may be to engage the independent expert to mediate between the parties instead of making binding decisions, even if he may still have the power to make such decisions if mediation fails. The best means for settling possible disputes will much depend on the size and type of contract It is suggested that this is more akin to the role of the dispute review board. If, what Orgalime were after, was a standing panel to assist the parties in resolving disputes and to guide the parties as and when disputes started to arise, then a dispute review board would perhaps be more appropriate. Rather, what Orgalime have provided for in the contract is for an expert to be appointed as and when each dispute arises. Further, it is not at all clear how an expert who had acted as mediator but failed to resolve the dispute, would then be competent to make a binding decision on the same matter, without the consent of the parties. Variations It is rare that where agreement cannot be reached on one or two variations, this leads to a major dispute. However, disputes are more likely where the number of variations in issue increases. A common dispute relates to the impact of a multitude of variations upon the programme for the works, and commonly, whether in fact, the variations are truly variations or actually part of the contract works. Where the number of variations to the works is substantial, this can cause severe problems for the contractor. Hence, in at least one standard form,6 there is provision that variations cannot be ordered once they have reached 15% of the contract price, without the consent of both parties. In the guidance notes to the Orgalime Contract it is pointed out that if the contractor is obliged to carry out all variations required by the purchaser, then the purchaser will have the upper hand in negotiations regarding the effects of the variation. On the other hand, it is argued that if the contractor is not obliged to carry out any variations, then the contractor will have an advantage in the negotiations. In fact, that situation can lead to the contractor effectively holding the employer to ransom. The Orgalime Contract seeks to reach a sensible compromise. Pursuant to clause 8, the contractor is obliged to carry out variations required by the purchaser, unless they are of an extent or character which the contractor could not have reasonably foreseen when entering into the contract. However, it is submitted that this itself is likely to be a source of dispute. It may, in time, prove to be a dangerous clause for employers, who would be well advised to strike the clause or to make it very clear at the outset of the contract that there are likely to be variations to the work.

See Model Form of General Conditions of Contract, 2000 Edition (MF/1), clause 27.2.

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

However, if the employer gives notice of a variation and the contractor is happy to carry it out, then the contractor must effectively provide a quotation for the work pursuant to clause 8.5. The purchaser must reimburse any costs incurred by the contractor in providing the quotation. Thereafter, if the parties fail to agree on the cost of the variation, or disagree as to whether or not the variation is truly part of the original contract works (and hence, not a variation), then the matter can be referred to an independent expert. In theory, an independent expert deciding such issues is sensible, but one can foresee that providing such an option during the course of the contract may lead to delays and could become an unnecessary distraction. Usually, an independent decision maker is an efficient way of resolving disputes over variations where there are a large number of variations in dispute. However, one can see how a contractor could use such a system to effectively dissuade the employer from seeking variations, particularly given the time period mentioned above for the experts decision. Such a system may prove more efficient towards the end of a contract where disputes over a significant number of variations are more common. Contrast the situation under the Silver Book where variations can be issued in any one of three ways:(i) the employer may instruct the variation under sub-clause 13.1, without prior agreement as to feasibility or price; the contractor may initiate his own proposals under sub-clause 13.2 (effectively value engineering) which are intended to benefit both parties; or the employer may request a proposal under sub-clause 13.3, thus seeking agreement as to the time and cost impact, prior to instructing the variation.

(ii)

(iii)

The Silver Book however makes no provision for how variations are to be valued, if they are not agreed. If a variation is not agreed, the contractor is obliged to carry it out pursuant to clause 13.1. It is not clear how such variation is to be valued save that, ultimately, if agreement cannot be reached, then the Employer must make a fair determination under clause 3.5 (which should include profit). Similarly, under the Orgalime Contract, there is no mention as to how variations should be valued. Thus, it is presumed that if the parties are not able to agree on a value for the variation under the Orgalime Contract, the expert must substitute a reasonable sum for the works. Presumably, in doing so, the expert would have reference to the contractual rates used in the tender, but he would not be obliged to. It is not clear whether such sum would include profit and overheads. It is also worth noting that a variation under the Silver Book cannot comprise the omission of any work which is to be carried out by others. This prevents the employer giving part of the contract work to another contractor for a cheaper price. Such a clause is not present in the Orgalime Contract and therefore the possibility remains that

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

the purchaser, recognising that he may have made a bad bargain, could vary the works so as to omit part of the contract work and give it to another contractor who offers to carry out the work for a cheaper price. Presumably, the contractor would argue that such a variation was invalid given that it could not have been foreseen. However, since the contractor itself would not be obliged to carry out the variation (it consisting of omitting work rather than adding work) and given the fact that it is entirely foreseeable that a employer may wish to omit work if he can have it carried out cheaper elsewhere, such an argument is unlikely to prevail. Payment The Orgalime Contract has some interesting payment provisions. Unless otherwise specified in the contract, interim payments are to be made no later than 30 days after the date when the invoice is sent. However, rather bizarrely, payment may not be 7 made before the due date specified in the contract. The reasoning behind this is unclear and is not likely to promote efficient and prompt payment by the employer if it is found to be in breach of contract by doing so. In practice, there will be no real deterrent to doing so since the consequence of the breach of the clause is unclear. Further, the contractor will have suffered no loss if payment is made early. However, the rationale behind the clause is far from clear. The employer should, if anything, be encouraged to make payment early rather than wait to the final day for due payment. The payment provisions in the Orgalime Contract are a lot less detailed than in the Silver Book, where for example, the contents of the contractors application for payment are set out in some detail in clause 14.3. Contrast the position under the Orgalime Contract where there is no obligation on the contractor to make application for payment, or a prescribed form for doing so, save that the contract provides that the means of payment and the amounts to be paid shall be as specified in the contract. Presumably this means in one of the other contract documents as the contract conditions make no reference to applications for payment etc. Both the Silver Book and the Orgalime Contract provide for interest on late payment. The Silver Book provides that interest shall be at the annual rate of 3 percentage points 8 above the discount rate of the central bank in the country of currency of payment. The Orgalime Contract provides that the interest rate shall be at 8 percentage points 9 above the rate of the main refinancing facility of the European Central Bank. Under both forms of contract the contractor has the ability to suspend performance for lack of payment by the employer. Once again, the Orgalime Contract is slightly more favourable to the contractor in that the contractor may suspend after giving 7 days
7 8

See clause 9.1 of the Orgalime Contract. See clause 14.8 of the Silver Book. 9 See clause 9.3 of the Orgalime Contract.

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

notice of suspension for failure to pay whereas, under FIDICs Silver Book, the contractor must give 21 days notice to the employer. There is an interesting position raised by clause 9.2 of the Orgalime Contract. If, for any reason, the contractors performance is delayed by circumstances for which the purchaser is responsible then payment shall nevertheless be made at the agreed time as though the contractor had fulfilled his obligations in accordance with the contract. This raises the prospect that where a contractor is being paid by reference to periodic milestones, it may contend that payment has become due notwithstanding that a particular milestone has not been reached. If a contractor is able to demonstrate that the reason the milestone has not been reached, is because of something for which the employer is responsible, then payment would become due pursuant to clause 9.2. Such a clause, whilst likely to lead to argument between the contractor and employer, is to be welcomed since it is not uncommon for employers to deliberately influence the ability of a contractor to achieve its next milestone in a bid to delay payment, particularly where the contractor may be ahead of programme. Unforeseen Ground Conditions A major difference between the two contracts is the issue of unforeseen ground conditions. Whilst the Silver Book provides that the contractor is deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or effect the works, such that the contract price shall not be adjusted to take account of any unforeseen difficulties or costs, the Orgalime Contract adopts the position that physical conditions or artificial obstructions that the contractor encounters on site, which could not reasonably have been foreseen by an experienced contractor on the basis of data provided by the purchaser, will entitle the contractor to an extension of time and compensation. This is of course a major difference and is one of the main reasons why the Silver Book is regarded as employer friendly. However, one must remember again that the Silver Book is not intended or suitable for use where there is insufficient time or information for tenderers to scrutinise and check the Employers Requirements, or for them to carry out their designs, risk assessment studies and estimating, or where construction will involve substantial work underground or work in other areas which tenderers cannot inspect. Extensions of Time The Silver Book provides that the contractor should be entitled to an extension of time if completion is, or will be, delayed due to a variation, or due to delay, impediment or prevention caused or attributable to the employer, or if there is an event of force majeure, or as a result of the employers risks, or following a suspension of the works by the contractor. In addition to these general grounds, the Orgalime Contract provides an extension of time is also available to the contractor as a result of any physical conditions (other than climatic conditions) or artificial obstructions that the contractor

10

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

encounters on the site which could not reasonably have been foreseen by an experienced contractor. However, apart from this ground, the major difference between the contracts is that whilst under the Silver Book completion must be delayed for the contractor to get an extension of time, under the Orgalime Contract, it is sufficient if he is delayed. Thus, if a contractor is delayed according to its own programme, thus using up the float in the programme, under the Orgalime Contract this would entitle the contractor to an extension of time, even if there had been no actual delay to completion. Thus, one might say that under the Orgalime Contract, the contractor owns the float. The same cannot be said for the Silver Book. A contractor can only get an extension of time if there is a delay to completion, meaning, effectively, that the float is owned by the party (or parties) who use it up first. In both contracts, the consequences of delay to completion are that the contractor shall pay liquidated damages. Strangely, the liquidated damages for delay and performance under the Orgalime Contract are stated in the actual conditions themselves. Clause 16.1 provides that liquidated damages should be payable at a rate of 0.5% of the contract price for each complete period of 7 days of delay and the total amount of liquidated damages for delay should not exceed 7.5% of the contract price. This is strange because, in most jurisdictions, a right to liquidated damages only survives if it is not deemed to be a penalty, but it is considered a genuine pre-estimate of the loss which will be suffered as a result of delay occurring. It is quite clear that the liquidated damages provided in clause 16.1 of the Orgalime Contract could rarely be a genuine pre-estimate of the loss which would be suffered as a result of delay since, by its very nature, no attempt has been made to estimate what loss would result from delay to taking over of the works. The more usual situation is provided in FIDICs Silver Book which states that delay damages should be the sum stated in the particular conditions, leaving the parties to calculate the genuine pre-estimate of the loss which would be suffered as a result of delay at the outset of the contract in the usual way. Therefore, it will be dangerous for parties to rely on the figures stated in the Orgalime Contract without at least some contemporaneous record that the parties have considered what loss will be suffered as a result of delay and agreed that the sums stated in clause 16.1 are a genuine pre-estimate. The Orgalime Contract also provides that liquidated damages may be payable for inadequate performance. Thus, clause 16.2 provides that in the event that the tests on completion, or after completion, show that the works do not fulfil the performance undertaking or guarantee specified in the contract, and the contractor is unable to remedy the deviation, then the purchaser shall be entitled to such liquidated damages for performance as may be specified in the contract. Unlike the delay damages, no figure is provided. If liquidated damages for failure to meet the performance requirements, or delay in completion of the works, are imposed and the maximum liquidated damages provided

11

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

by sub-clauses 16.1 and 16.2 are thus exceeded, the purchaser has the right to terminate the Orgalime Contract. It has to be said that neither contract deals adequately or clearly with the consequences of a failure to reach the performance requirements/pass tests on completion. Bespoke forms of contract are usually drafted very carefully by employers in this particular respect to provide that there is a certain level of performance, (usually called the minimum performance requirements or criteria) which, if the contractor is not able to achieve, then the plant is simply regarded as unviable and no amount of liquidated damages would compensate the employer for the failure of the plant to achieve that level. In such circumstances, the employer usually has the right to terminate the contract and require the contractor to remove any part of the works which cannot be used and recover all sums paid to date. Where the minimum performance requirements are achieved, then liquidated damages for under performance below the guaranteed levels may be applied. However, there is an absence of such a formula in both the Orgalime Contract and the Silver Book. There is no reference to minimum performance requirements or at what stage liquidated damages become payable. Clause 9.4 of the Silver Book, which deals with failure to pass tests on completion, speaks in terms of a reduction in the contract price being agreed by the parties in the event that the tests on completion are not achieved. Although there is reference in this clause to the fact that liquidated damages may have been agreed in the contract, the above mechanism is not expressly provided for. However, clause 11.4 does provide that, if the failure deprives the Employer of substantially the whole benefit, then the Employer may terminate the contract and recover all sums paid for the works, or such part as the case may be, plus financing costs and the costs of dismantling the works. This raises the question of what would constitute depriving the employer of substantially the whole benefit, itself a difficult question, and one of the reasons for the use of the formula outlined above. Limitation of Liability The limitation of liability clause (25.1) in the Orgalime Contract, provides that the remedies for breach of contract specified in the Orgalime Contract are the sole remedies available. Further, neither party is liable for direct or indirect loss or damage, including loss of profit or loss of production (save where provided in the contract). This is clearly a good clause for the contractor. Whilst there is no overall cap on damages under the Orgalime Contract, this is largely because it is unnecessary given the limitations aforesaid. Thus, if there is a delay or a lack of performance, the contractors exposure will be capped by the level of liquidated damages. Contrast the position under the Silver Book which does not provide that the only remedies available are those provided by the contract, but does provide that the

12

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

maximum liability of the contractor to the employer under the contract is capped at the contract price. It is submitted that this is a more usual arrangement in turnkey contracts, and it is likely that clause 25.1 under the Orgalime Contract would be unacceptable to most employers, since it severely restricts their ability to claim against the contractor. Clause 17.6 of the Silver Book provides that loss of profit, loss of any contract price or any other indirect or consequential losses are not recoverable. This is, once again, not such an all-embracing limitation of liability as in the Orgalime Contract, which excludes both direct and indirect losses (except liquidated damages). Liability for damages, insurance, purchasers risk Under both forms of contract, as is usual, the contractor bears the risk of damage to the works before taking over, at which point that risk is transferred to the purchaser. Similarly, under both forms of contract, the contractor is required to take out all risks insurance, although under the Orgalime Contract, that insurance covers the works until taking over, whilst under the Silver Book, the same insurance is to provide cover until the date of issue of the performance certificate, for loss or damage which the contractor is liable for arising from a cause occurring prior to the issue of the taking over certificate. Interestingly, neither form of contract provides that the contractor should have professional indemnity insurance which would normally cover the contractor against claims which arise from any errors in its design of the works. In circumstances where a contractor is responsible for design in a turnkey contract, many employers require professional indemnity insurance to be in place, although premiums for such insurance are often prohibitive and are likely to increase the contract price if requested. Both forms of contract provide that damage caused to the works prior to taking over by the employers/purchasers risks, result in variations/extensions of time to the contractor. The Silver Book provides that the contractor indemnifies and holds harmless the employer, the employers personnel and their respective agents against all claims, damages, losses and expenses in respect of injury, disease or death by reason of the carrying out of the works, unless this is attributable to the negligence of the employer. The same indemnity is provided in relation to damage to, or loss of, property. Similarly, the employer also indemnifies and holds harmless the contractor, the contractors personnel and their agents against bodily injury and death arising from the negligence of the employer. However, the matter is dealt with slightly differently under the Orgalime Contract, which provides that the contractor is only responsible for damage to the purchasers other works where that damage is caused by the contractors negligence. There is, additionally, no obligation to indemnify the purchaser. Similarly, the purchaser is liable to the contractor for damage to the contractors other property where this is caused by the purchasers negligence. Under the Orgalime Contract, personal injury is

13

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

dealt with in accordance with the applicable law and once again there is no indemnity provision providing that the purchaser and the contractor indemnify each other in respect of any losses arising as a result. Neither contract, however, reflects the modern trend in such turnkey contracts of providing reciprocal indemnities. This practice originally developed to take account of the particular features of offshore operations. Personal injury or damage to property can be complicated by the range of various parties that might be partly or wholly responsible for accidents. Often there is contributory negligence by one of the parties. Determining liability and awarding costs can become a lengthy process. Further, companies will often carry their own insurance covering liability of their own employees for damage to property and personal injury. The cost of such insurance to the employer is not necessarily reduced if the other party was required to insure against the same risks. Thus, a practice of reciprocal indemnities has arisen whereby it is normal for the employer and the contractor to assume full liability and give each other mutual indemnities for claims arising out of death or injury to their own employees, and for loss or damage to their own property, regardless of any negligence or fault on the other party or its employees or agents. Thus, it is increasingly common to divide the responsibility for personal injury/death amongst the many employers and contractors according to the identity of the injured employee, rather than according to which partys fault or negligence caused the injuries, with each party assuming the risk of the others negligence and agreeing to be responsible for injuries to its own employees no matter how, or by whom, caused. It is submitted that such an approach should be used more often than not in turnkey situations. Force Majeure The force majeure provisions are quite different. The Silver Book follows the more usual route of providing that force majeure is an exceptional event or circumstance and provides, prior to listing out certain events which may qualify as force majeure events, that such events are only force majeure events if they are beyond a partys control, which such party cannot reasonably have provided against before entering into the contract, and which once arisen, such party cannot reasonably avoid or overcome, and which is not substantially attributable to the other parties. This means that there is quite a high hurdle to overcome, in the first place, for a contractor to successfully claim force majeure under the Silver Book. Whilst matters such as war, hostilities, rebellion and terrorism have traditionally be classed as classic force majeure events, strikes or lock-out and other industrial disputes have always been the subject of debate. Whilst under the Silver Book it is difficult to claim force majeure in respect of a local strike (i.e. at the premises of the contractor), since the contractor will have to overcome the matters set out above in order to claim it. The matter is much more straightforward under the Orgalime Contract for a contractor, since an industrial dispute automatically qualifies as a Force Majeure event, so long as there is impeded performance of the contract. Further, there is no obligation on the contractor to act reasonably, or to seek

14

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

to provide against that industrial dispute arising or, once it has arisen, to try and avoid it. However, there is an obligation on both parties to try and minimise any delay in performance of the contract as a result of force majeure under the Silver Book. Under both contracts, a party may terminate the contract where force majeure lasts 180 days (Orgalime) or 84 days (FIDICs Silver Book). An interesting point to note is that the Orgalime Contract does not provide what the effect of a force majeure event is to be. Whilst notice must be given by a party wishing to claim force majeure, it is not clear what the effect of this is, particularly for the Employer. Whilst the contractor gets an extension of time, it is not clear whether the Employer is also relieved from its obligations. The Orgalime Contract is silent on this point, as compared to the Silver Book which provides that each party is excused performance of its obligations for as long as the force majeure prevents it from 10 performing them. This is another clause which employers may consider amending when negotiating the Orgalime Contract. Summary The foregoing thoughts and comments are summarised below to show some of the key differences between the two contracts at a glance. This is not a definitive list of differences, but does demonstrate quite clearly that the Orgalime Contract is much more contractor friendly than the Silver Book. Issue Decision making Orgalime Contract Independent expert determination for certain issues, followed by ICC Arbitration 30 days 8% above rate of European Central Bank After 7 day notice The Silver Book Employers Determination, followed by Dispute Adjudication Board, followed by ICC Arbitration 28 days 3% above discount rate of relevant bank After 21 day notice

Interim Payments Interest on late payment Suspension for late payment Unforeseen ground conditions
10

Entitles Contractor to extension of time and costs

Does not entitle Contractor to extension of time or costs

See clause 19.2 of the Silver Book.

15

The Orgalime Turnkey Contract for Industrial Works An alternative to FIDICs Silver Book?

Design responsibility

Yes, but no express contractual standard. Contractor not responsible for Employers design errors

Yes, works when completed must be fit for intended purpose. Contractor responsible for Employers design Liability capped at contract price. Some direct and all indirect losses excluded

Liability

All losses whether direct or indirect excluded, same where expressly provided in the contract Any event beyond the control of the parties which could not be foreseen and which impedes performance of the contract After 180 days

Force Majeure Event

Detailed definition - high hurdles (see clause 19) to overcome

Termination for Force Majeure Payment during Force Majeure

After 84 days

Contract is silent

Employer still obliged to make payments due under the contract

Conclusion What can easily be concluded, which will come as no surprise, is that the Orgalime Contract will be preferred by contractors to the Silver Book. However, it is probable that for some projects the Orgalime Contract will not be acceptable to Employers without significant amendment, particularly to such matters as design obligation, limitation of liability, Force Majeure and possibly the extension of time provisions. It is doubtful however whether the Orgalime Contract will prove to be an alternative to the Silver Book. For projects for which the Silver Book was intended, the Orgalime Contract will usually be unacceptable to Employers. Notwithstanding this, the Orgalime Contract is a welcome addition to the ever growing suite of international contracts.

16

London Offices:
11 Pilgrim Street, London EC4V 6RW Tel: +44 (0) 20 7248 4282 Fax: +44 (0) 20 7248 2009 Lloyds, Suite 892/874, One Lime Street, London EC3M 7DQ Tel: +44 (0) 20 7398 4600 Fax: +44 (0) 20 7623 7965

E-mail: london@mayerbrownrowe.com Website: www.mayerbrownrowe.com/london

Mayer, Brown, Rowe & Maw is a combination of two limited liability partnerships, each named Mayer, Brown, Rowe & Maw LLP, one incorporated in England and one established in Illinois, USA.

Brussels Charlotte Chicago Cologne Frankfurt Houston Los Angeles Manchester New York Palo Alto Paris Washington, D.C.
0045con