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B E Y O N D
Contents
Introduction
4
4
6
11
14
14
14
15
16
17
18
18
18
19
19
23
23
26
28
31
31
Dispute resolution
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Introduction
Introduction
Engineering, Procurement and Construction (EPC)
Contracts are a common form of contract used to
undertake construction works by the private sector
on large scale and complex oil and gas projects.1
Under an EPC Contract a contractor is obliged to
deliver a complete facility to a developer who need
only 'turn a key' to start operating the facility, hence
EPC Contracts are sometimes called turnkey
construction contracts. In addition to delivering a
complete facility, the contractor must deliver that
facility for a guaranteed price by a guaranteed date
and it must perform to the specified level. Failure to
comply with any requirements will usually result in
the contractor incurring monetary liabilities.
It is timely to examine EPC Contracts and their use
on oil and gas projects given the bad publicity they
have received, particularly in contracting circles. A
number of contractors have suffered heavy losses
and, as a result, a number of contractors now refuse
to enter into EPC Contracts in certain jurisdictions.
This problem has been exacerbated by a substantial
tightening in the insurance market. Construction
insurance has become more expensive due both to
significant losses suffered on many projects and the
impact of September 11 on the insurance market.
Further, some project proponents believe that the
project delivery methods such as EPCM give them
greater flexibility and that they have the expertise
and experience required to control costs in an
EPCM contract.
Equity Support
Operating
Agreement
Agreement
Agreements
EPC
O&M
Contract
Contract
EPC Contractor
Lenders
Offtake
Agreement
O&M Contractor
Offtaker
Possibly one or more
of the JV participants
Tripartite Agreements
pipeline aspects.
usually contracts between the various entities. For example, where
the proponent will also be the supplier there will often be a supply
agreement put in place so that the new project is properly defeasible
For the purposes of this paper, we have assumed the EPC contract
will be governed by the law of a common law jurisdiction. Where
there are differences between jurisdictions we have adopted the
English law approach. Therefore, if an EPC Contract is governed by
a law other than English law you will need to seek advice from local
counsel to ensure the contract is enforceable in the relevant
10
One common variation, particularly in Asia, on the basic EPC structure illustrated above is a split EPC Contract.
Under a split EPC Contract, the EPC Contract is, as the name implies, split into two or more separate contracts.
The basic split structure (illustrated below) involves splitting the EPC Contract into an Onshore Construction
Contract and an Offshore Supply Contract.6
Example simple split EPC structure
GUARANTOR
Wrap-Around
Guarantee
Onshore
Contract
Project Company
Onshore
Contractor
11
Offshore
Contract
Offshore
Contractor
Wrap-Around
Guarantee
Guarantee
Agreement
Guarantee
Agreement
PROJECT COMPANY B
(only onshore entity)
Offshore Guarantor
Onshore Guarantor
Equipment
Supply Contract
Design
Agreement
C
(an offshore entity)
C
(an offshore entity)
Project Management
Agreement
Construction
Contract
Design Review
Contract
D
(an offshore entity)
E
(an offshore entity)
F
(an offshore entity)
12
13
caps on liability;
14
15
tests/trialling?
Is there consistency between obtaining handover
be undertaken?
What measurement methodology is being used?
16
Footnotes
9
10
11
This sounds basic but it has been a relatively common error. The
same issue arises if the testing, using this example, was contingent
on another related facility being able to accept some or all of
17
the product.
12
13
18
19
20
Technical issues
Ideally, the technical testing procedures should be set
out in the EPC Contract. However, for a number of
reasons, including the fact that it is often not
possible to fully scope the testing program until the
detailed design is complete, the testing procedures
are usually left to be agreed during construction by
the contractor, the project company's representative
or engineer and, if relevant, the lenders' engineer.
However, a properly drafted EPC Contract should
include the guidelines for testing.
15
It can be term that handover will not occur until the performance
guarantees are met there will be a regime by which this may waived.
21
Has any of
the Functional Tests, Emission
Tests or Performance Tests been
interrupted or terminated for
any reason?
Yes
No
Did Owner's
Representative or Contractor
order cessation of functional Tests, Emission
Tests or Performance Tests due to damage to
the Works, other property or personal
injury being likely to result
from continuation?
Yes
No
Yes
No
No
No
AND
No
Contractor to pay
full Delay Liquidated
Damages (cap value).
Yes
Yes
No
Yes
Yes
No
Yes
No
No
Yes
Completion
22
23
company;
suspension of the works by the project company
Concurrent delay
You will note that in the suggested EOT clause, one
of the subclauses refers to concurrent delays. This is
relatively unusual because most EPC Contracts are
silent on this issue. For the reasons explained below
we do not agree with that approach.
24
Contractor Delay 1
Contractor Delay 2
Project Company Delay
6 weeks
1 week
2 weeks
25
Delay
Contractor Delay
Event
6 weeks
2 weeks
Contractor Delay 1
6 weeks
Contractor Delay 2
Project Company Delay
2 weeks
2 weeks
"34.4 Assessment
26
27
parties; and
it was completely beyond the parties' control and
28
29
30
31
Spare parts
The contractor is usually required to provide, as part
of its scope of works, a full complement of spare
parts (usually specified in the appendices (the scope
of work or the specification)) to be available as at
the commencement of commercial operation.
Further, the contractor should be required to replace
any spare parts used in rectifying defects during the
defects liability period, at its sole cost. There should
also be a time limit imposed on when these spare
parts must be back in the store. It is normally
unreasonable to require the spare parts to have been
replaced by the expiry of the defects liability period
because that may, for some long lead time items,
lead to a extension of the defects liability period.
The project company also may wish to have the
option to purchase spares parts from the contractor
on favourable terms and conditions (including price)
during the remainder of the concession period. In
that case it would be prudent to include a term
which deals with the situation where the contractor
is unable to continue to manufacture or procure the
necessary spare parts. This provision should cover
the following points:
written notification from the contractor to the
Footnotes
16
It can arise in civil law countries as well, it will depend on the relevant
provisions of the code in those countries. For example, the PRC
Contract Law contains articles that entitle a contractor to an extension
of time for employer caused delays.
17
The critical path is the path on the construction program that shows
the dates when certain activities must be completed by in order to
achieve completion by the specified date.
18
32
Dispute resolution
33
34
35
Substantial completion
2.5 As soon as the Facility has, in the opinion of
the Contractor, reached the stage of Substantial
Completion, the Contractor must give notice
to the Owner's Representative.
2.6 The Owner's Representative must, promptly,
and no later than 3 days after receipt of the
Contractor's notice under GC 2.5, either issue
a Substantial Completion Certificate in the
form specified in Appendix 13 stating that the
Facility has reached Substantial Completion
or notify the Contractor of any defects
and/or deficiencies.
2.7 If the Owner's Representative notifies the
Contractor of any defects and/or deficiencies,
the Contractor must then correct such defects
and/or deficiencies and must repeat the
procedure described in GC 2.5.
2.8 If the Owner's Representative is satisfied that
the Facility has reached Substantial Completion,
the Owner must, promptly, and no later than 3
days after receipt of the Contractor's repeated
notice, issue a Substantial Completion
Certificate stating that the Facility has reached
Substantial Completion as at the date stated in
that certificate.
2.9 If the Owner's Representative is not so satisfied,
then it must notify the Contractor of any
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41
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