There are some significant differences between Incoterms 2000 and the new Incoterms 2010. Some of the changes will need to be incorporated into new sale of goods contracts entered into before 1 January 2011; other changes simply need to be understood and considered when preparing contracts effective on or after 1 January 2011.

 What needs to be done before 1 January 2010?

Timing is all important. After 1 January 2011, any reference to Incoterms in a contract signed on or after that date will be understood to be a reference to Incoterms 2010, unless the parties expressly agree otherwise.

Both international and domestic users, therefore, should consider what amendments need to be made between now and 1 January to bring new contracts in line with Incoterms 2010. This will involve a thorough audit of standard suites of contracts that refer to Incoterms to ensure that those standard contracts are consistent with Incoterms 2010.

 What will change?

1. Incoterms DAF, DES, DDU and DEQ replaced 

Because of increased point-to-point sales and containerisation, Incoterms 2010 replaces four existing Incoterms with two new Incoterms:

2. Institute cargo clauses updated and insurance obligations clarified 

In 2009, insurance markets adopted the revised Institute Cargo Clauses (LMA/IUA) (2009). Incoterms Cost Insurance and Freight (CIF) and Carriage and Insurance Paid (CIP) have been amended to reflect this. The amendments also clarify information obligations regarding insurance.

3. New security obligations

The seller and the buyer will be compelled to co-operate as they have not done previously. This is because Incoterms 2010 will allocate the obligations to supply the necessary information in order to obtain export and import clearance (eg, chain of custody information).

4. Obligations around terminal handling charges clarified 

Incoterms 2010 seeks to reduce the potential for buyers to be charged twice for terminal handling charges. Pass through of the cost of carriage of goods to an agreed destination, which often resulted in buyers being charged twice, should disappear as a result of amendments to CIP, CPT, CFR, CIF, DAT, DAP and CCP Incoterms.

5. Requirements and obligations associated with string sales recognised 

Incoterms 2010 recognises and clarifies the practice of string sales (ie, multiple sales of goods during transit).

Specifically, FCA, CPT, CIP, FAS, FOB, CFR and CIF Incoterms have been amended to provide that the seller in the middle of a string sale has an obligation to “procure goods shipped” and not to “ship” the goods.

The seller’s obligation to contract for the carriage of goods has been amended to allow the seller to procure a contract of carriage.

Key amendments in Incoterms 2010

Three key areas of amendments do not require any specific action but should be understood and considered when preparing contracts to be given effect on or after 1 January 2011. These are:

1. Using Incoterms for domestic sale of goods contracts 

Incoterms 2010 have been adapted for use in domestic contracts. This will make it easier to incorporate Incoterms in contracts relating to the movement of goods domestically – for example, within a trading bloc such as the EU where the export and import formalities have largely disappeared, and in the US where there has been an increasing preference to use Incoterms rather than the Uniform Commercial Code in domestic sales.

2. Revised term categories

Incoterms 2010 separates its eleven terms into two broad categories:

Previously, confusion occurred when some people misused FOB to indicate any point of delivery. This new categorisation clearly states that the FOB rule is meant to be used solely for sea and inland waterway transport.

3. Maintenance of electronic records 

This amendment imposes the same obligation to keep contractual documentation and records regardless of their form. Interestingly, ‘electronic communication’ is used broadly to encapsulate future technological developments.

What you need to remember

Trading companies that refer to Incoterms in their contracts need to be aware of the effect of the differences between Incoterms 2000 and Incoterms 2010.

Confusion (and potential disputes) may arise where trading companies have not conducted a thorough audit of their existing contracts (or proposed new contracts) that will apply after 1 January 2011 to ensure they understand the effect of the amendments and consequently the terms they have (or will in the future) agreed.

If trading companies have not familiarised themselves with the changes between Incoterms 2000 and Incoterms 2010 before 1 January 2011, users may still choose to be bound by the previous version – provided the parties’ agreement to use those terms is clear.

A subcontract defines, among other things:

• what a subcontractor is required to do,
• the time within which the subcontractor is required to do it,
• the consequences for the subcontractor if it fails to meet the time obligations,
• the assistance the subcontractor is required to provide to the main contractor to assist the main contractor in administering the main contract,
• the interfacing that is to go on between subcontractors, and
• the events entitling additional time and cost.

The subcontract constitutes both the rule book and the map for the subcontractor; defining what is required and the consequences of failing as well as broadly illuminating the manner in which the subcontractor may go about the task. The rules and the path of each project are different, and the requirements for each subcontractor on each project are also likely to be different. If the subcontractor is not provided with a clear and concise rule book and map, but rather a broad and generic indication of what is basically required, the subcontractor is unlikely to precisely perform as the main contractor would like.

Here are two common but dangerous habits in respect of subcontract drafting:

The ‘pro forma’ subcontract

It is quite common for major contractors to hold one or a number of ‘pro forma’ subcontracts, which are then routinely released to all subcontractors on all projects. There is an upfront time and cost saving benefit to this approach, as one subcontract can be drafted in a manner that seeks to allocate all transferrable risk onto the subcontractor, and the document can then be used repeatedly.

The major, and quite obvious, risks that arise from this strategy are that a pro forma subcontract will rarely, if ever, accurately address the relevant risks in the specific project, will rarely identify the subcontractor’s obligations with sufficiently clarity as to aid the subcontractor’s compliance and delivery, and will not take account of any specific or unusual main contract provisions. Indeed, the time and cost saving of pro forma subcontracts can very quickly be eroded by additional contract administration work and subcontractor supervision that can result form the use of a pro forma subcontract that is inappropriate for a specific project and does not effectively serve its function.

Rather, it may be appropriate to hold ‘draft precedent’ subcontracts, which may have been derived from previous projects and which contain the major necessary clauses and a typically suitable risk allocation. Such a document may represent a skeleton structure, around which the project-specific subcontracts can then be created. This will ensure that the end product is a bespoke subcontract suitable for the project, however the time and cost will be minimised by using a pre-existing base document. This is, of course, substantially different to rolling out the same pro-forma agreement to each subcontractor on each project.

The ‘back to back’ subcontract

Another common but potentially disastrous approach to subcontract drafting is to stipulate that the subcontract is ‘back to back’ with the main contract and the subcontractor is required to comply with all relevant obligations of the main contract. Commonly, this brief form of subcontract will include a copy of the main contract as an appendix.

This is fraught with problems and is, in many ways, a completely unreasonable way to contract with subcontractors. Under this strategy, the main contractor is effectively saying that the subcontractor is required to identify all the obligations that may be relevant under the main contract to the performance of its works, and to then comply with the obligations it has identified. There is a significant risk of the subcontractor failing to identify all of its obligations and consequentially failing to meet these obligations. There is also a risk of disputes regarding the interpretation of the main contract with respect to the subcontract works. In circumstances where the main contract is administered by an engineer, there may be issues with the administration of the subcontract, particularly regarding whether the main contractor has the authority to act as the ‘engineer’ when administering the subcontract.

As with ‘pro-forma’ subcontracts, briefly drafted ‘back to back’ subcontracts risk exposing a main contractor to significantly greater administration hassles and pose a threat to the efficient delivery of the subcontract works. In the event of formal dispute in respect of an insufficiently drafted ‘back to back’ subcontract, there is a high likelihood of greater legal fees being incurred and a longer and more complex process for resolving the dispute that would be the case if a clear and accurately drafted bespoke subcontract had been used.

Subcontractors frequently hold the key to successful project delivery. It is therefore critical that main contractors draft appropriate subcontracts, administer subcontracts successfully and manage subcontractor relationships. The time and cost invested in bespoke subcontracts at the commencement of a project can return big dividends in terms of efficiency and smooth project delivery and can often provide some protection to the main contractor in the event that problems arise on the project.

By Sachin Kerur and William Marshall

We are, of course, speaking of subcontractors. Whether through management contracting or more traditional procurement, subcontractors continue to play a major role in project delivery and are often instrumental in on time and on budget completion. One would naturally then assume that the documentation and management of subcontracts would be a matter of prime importance for contractors and for the industry. In practice, however, the drafting and administration of subcontracts is often given insufficient thought and the management of subcontractors is often poor.
While every project and contract is different, we think there are four strategies that can assist in managing subcontractors and maximising successful project delivery.

1. Bespoke subcontracts – ‘back to back’ is not enough

It is perplexing that contractors will often spend significant amounts of time negotiating and understanding the issues within the main contract, and then seek to engage its subcontractors with an inadequate and imprecise reference to ‘back to back’ obligations. ‘Back to back’ has no precise legal meaning, and seeking to impose a wholesale risk transfer of all obligations in the main contract to each of the subcontractors does little to assist the subcontractor in delivering its works in the manner that is actually required by the main contractor.

The allocation of risk in the main contract is, of course, critically important to the main contractor, as is a detailed understanding of the risks and obligations contained therein. It is equally important, however, that the main contractor allocates appropriate and clear risks to each of its subcontractors in a manner that will ensure the subcontractor understands its express obligations and will be bound to deliver in a manner and at a time that will enable the main contractor to comply with its obligations. The only sure-fire way to achieve this is to draft bespoke subcontracts for each project and, in many cases, for each specific subcontracted scope of works. The issue of subcontract drafting will be addressed in detail in part 2 of this blog series.

2. Subcontractor cash flow fear

All but the largest of subcontractors are susceptible to cash flow risks and are painfully aware of their position in the payment hierarchy. In jurisdictions where ‘pay when paid’ clauses are legal and enforceable (such as the UAE), main contractors frequently utilise such clauses to protect their own cash flow position, to the detriment of the subcontractors. The protection of cash flow is a legitimate and necessary imperative for a main contractor, but it is equally important to discuss issues with subcontractors and to explain the reasons for delayed payment and the likely solutions to the subcontractor’s concerns. This managerial ‘hand holding’ can go a long way to reducing subcontractor fear and subcontractor disputes, delivering an appreciable efficiency gain for main contractors in terms of management and administration time. Maintaining a dialogue with subcontractors is important to mitigating the potential fall out from slow payment.

3. Co-ordination and programming

The role of a subcontractor is often quite simple – deliver a precise scope of work within a precise time. While simple in isolation, the interaction of many subcontractors working on the same site and the issues of overall project deliver can affect the practical ability of the subcontractor to deliver its required works. Problems of access often arise and efficiency is often lost when multiple subcontractors are working in a small area on the same site. These issues increase the risk for subcontractors and can create a hostile atmosphere on site. This in turn creates risks for the main contractor due to potential disputation and a likelihood of more adversarial subcontract management from subcontractors, resulting in more claims and the need for an investment of additional administration and management time by the main contractor.

One solution is, of course, to seek to program the performance of subcontractor’s works in a manner that will minimise the concurrent performance of works in the same part of the site but this is often not an available solution. It is important to ensure there is adequate coordination and communication between subcontractors, ideally at project ‘toolbox’ meetings, so that minor hurdles to project delivery can be resolved before they impact on individual subcontractor’s programmes.

4. Relationships

It may be clichéd, but strong, positive relationships with subcontractors can prove to be good insurance for the main contractor when projects turn bad. The ability of the main contractor to deliver the project often rests in the hands of his subcontractors, meaning that the assistance of subcontractors to overcome project delivery problems can reduce the likelihood of ‘up the line’ disputes for the main contractor. Main contractors should for that reason seek to strengthen relationships with subcontractors. Using the same subcontractors on subsequent projects and developing an understanding of the subcontractor’s business can assist in building such relationships.
Subcontractors frequently hold the key to successful project delivery. It is therefore critical that main contractors draft appropriate subcontracts, administer subcontracts successfully and manage subcontractor relationships. In Part 2, we will consider the use of standard form subcontracts or pro-forma subcontracts and the risks involved in this strategy.

By Sachin Kerur and William Marshall

The revisions serve three basic purposes. First, they fill in a few holes that have become apparent over the years. Second, some provisions are added to expedite the arbitration process—like adding a requirement that the tribunal establish a “provisional timetable for the arbitration.” Finally, they update the original rules to account for changes in technology. This recap is from front to back, not in order of significance. Some of the most significant changes are noted at the end, so read on!

Notices and Other Communications

The 1976 Rules (Article 2) required notices to be physically delivered, while the 2010 Rules provide that notices and other communications “may be transmitted by any means of communication that provides or allows for a record of its transmission.” E-mails and facsimiles are subject to two special rules. First, the communication is deemed received only if sent to a person specifically designated for receiving such communications. Second, they are deemed received on the day sent, except for a notice of demand for arbitration, which is deemed received on the day it reaches the recipient’s electronic address. Accordingly, you may wish to add a line to your UNCITRAL arbitration clause to designate an individual for receipt of a notice of arbitration, in addition to designating the place and language of the arbitration.

While Article 3 setting out the requirements for a notice of arbitration did not change, a new provision was added clarifying that the constitution of the arbitral tribunal will not be hindered by any controversy about the sufficiency of the notice, and giving the tribunal jurisdiction over such controversies.

Response to the Notice of Arbitration

A response to the notice of arbitration was not previously required, and Article 19 simply required the respondent to provide a statement of defense by a date determined by the tribunal. Article 4 of the 2010 Rules now requires the respondent to respond within 30 days of receipt of the notice of arbitration, with the response to include the name and contact details of each respondent, and any response to the items in the notice regarding the arbitration agreement, the relevant contract, the claimant’s description of its claim and requested remedy, and proposal with respect to the number of arbitrators.

The response may also include any objections to jurisdiction, a brief description of any counterclaims, and a notice of arbitration with respect to other parties to the agreement (beyond claimant). As the language is permissive instead of mandatory, it appears that counterclaims or crossclaims are permitted but not compulsory.

The Appointing Authority

The 1976 Rules contemplate the parties designating an Appointing Authority to assist with the appointment of arbitrators and any challenges to arbitral appointments. The procedures for determining an Appointing Authority are consolidated in Article 6 of the 2010 Rules with a few modifications. The new rules reduce the amount of time one must wait before making a request that the Secretary-General of the Permanent Court of Arbitration at the Hague resolve disputes regarding the Appointing Authority — from 60 days to 30 days. Additionally, asking the PCA to act as the Appointing Authority is now expressly permitted.

The Number of Arbitrators

The 2010 Rules retain the default position of having three arbitrators if the parties fail to agree on use of a sole arbitrator. However, Article 7.2 now provides more flexibility by allowing the Appointing Authority to appoint a sole arbitrator if one of the parties asks for this, or either party fails to appoint a second arbitrator and using just one is “more appropriate” under the circumstances of the case.

Arbitrator Challenges

The 2010 Rules add two innovations. First, a new annex provides a model statement of independence to be provided by proposed arbitrators. Second, a schedule is added for resolving any challenges (the original rules had a deadline for raising a challenge but no timetable for resolution). Per the new Rules, if the appointing party does not agree to the challenge, or the challenged arbitrator does not withdraw, in either case within 15 days, then the challenging party has 30 days from the date of the challenge to pursue it with the Appointing Authority, and otherwise it is waived.

Arbitrator Liability

Article 16 of the new Rules adds a waiver of liability for the arbitrators “save for intentional wrongdoing.” This waiver also applies to the Appointing Authority and to experts appointed by the panel.

Joinder

Article 17.5 now permits the tribunal to allow other parties to the arbitration agreement to be joined, unless the third party would be prejudiced by joinder. This is a significant advance over the prior rules that were silent on the subject.

Arbitral Fees

The 2010 Rules attempt to address the problem of excessive fees by requiring that the fees be reasonable, requiring the arbitrators to explain how they have fixed the fees and costs, and allowing the parties to appeal the fees and costs to the Appointing Authority. Previously, the tribunal members set their own fees, and there was no real provision for oversight, since UNCITRAL arbitration is non-administered. This addresses one of the most common criticisms of non-administered arbitrations generally.

Andrew Ness
William DeVan

“Thus the future American Business will require the highest degree of sensitivity to the political framework in which it functions and to the great coming changes in the World political process.” KISSINGER, Henry A. (1977). Speech before the Future of Business Project of the Center for Strategic and International Studies. Georgetown, Virginia, Washington, D.C.

“First, it is clear that managers consider political instability and/or political risk, typically quite loosely defined, to be an important factor in the foreign investment decision. Second, It is just as clear that rigorous and systematic assessment and evaluation of the political environment is exceptional. Most political analysis is both superficial and subjective and not integrated formally into the decision making process. It would appear that the resulting subjective perceptions of ‘political instability’ are equated on almost a one to one basis with a poor investment climate. The response frequently is avoidance; firms simply do not get involved in countries or even regions, they perceive to be risky. Last, managers appear to rely primarily on internal (to the firm) sources for environmental information. Wlien they look for outside data, they are most likely to go to their banks or the general and business media.” KOBRIN, Stephen Jay (1978). Political risk : a review and reconsideration. Cambridge, Mass. : Alfred P. Sloan School of Management, Massachusetts Institute of Technology.

In any cross-border financing, parties (banks specially) take a political risk in the sense that a collapse of the existing political order in the borrower’s country or the imposition of new taxes, exchange transfer restrictions, nationalisation or other laws may jeopardise the prospects of repayment and recovery. In project financing, the political risks are more acute for many reasons, including:

a) the project itself may require governmental concessions, licences or permits to be in place and maintained, particularly where the project is for power generation, transport, infrastructure or the exploitation of the country’s natural resources – oil, gas and minerals; and

b) the project may be crucial to the country’s infrastructure or security and accordingly be more vulnerable to the threat of expropriation or requisition – power projects, airports, seaports, roads, railways, bridges and tunnels are obvious examples.

The term political risk is widely used in relation to Project Finance and can conveniently be defined to mean both the danger of political and financial instability within a given country and the danger that government action (or inaction) will have a negative impact either on the continued existence of the project or on the cash flow generating capacity of a project. Different projects and different project structures will obviously encounter different types of political risk. However, examples of events that might be classified as political risks are set out below:

a) expropriation or nationalisation of project assets (including the shares of a project company);

b) failure of a government department to grant a consent or permit necessary for starting, completing, commissioning and/or operating a project or any part of it;

c) imposition of increased taxes and tariffs in connection with the project, including products generated by the project, or, perhaps, the withdrawal of valuable tax holidays and/or concessions;

d) imposition of exchange controls restricting transfer of funds outside of the host country or availability of foreign exchange;

e) changes in law having the effect of increasing the borrower’s or any other relevant party’s obligations with respect to the project, e.g. imposing new safety, health or environmental standards or other changes in law that result in changes being necessary to the design of any equipment or process;

f) politically motivated strikes; and

g) terrorism.

There is no single way in which a lender can eliminate all project risks in connection with a particular project. One of the most effective ways of managing and reducing political risks, however, is to lend through, or in conjunction with, multilateral agencies such as the World Bank, the European Bank for Reconstruction and Development and other regional development banks such as the African Development Bank and the Asian Development Bank.

There is a view that, where one or more of these agencies is involved in a project, then the risk of interference from the host government or its agencies is reduced on the basis that the host government is unlikely to want to offend any of these agencies for fear of cutting off a valuable source of credits in the future. This is a persuasive argument and certainly one that has some historical basis. For example, when countries such as Mexico, Argentina and Brazil were defaulting on their external loans in the early 1980′s, they went to some lengths to avoid defaulting on their multilateral debts, whether project-related or not.

Other ways of mitigating against political risks include:

a) private market insurance – although this can be expensive and subject to exclusions. Further, the term that such insurance is available for will rarely be long enough;

b) obtaining assurances from the relevant government departments in the host country, especially as regards the availability of consents and permits;

c) the Central Bank of the host government may be persuaded to guarantee the availability of hard currency for export in connection with the project; and/or

d) as a last resort, but an exercise which should be undertaken in any event, by a thorough review of the legal and regulatory regime in the country where the project is to be located to ensure that all laws and regulations are strictly complied with and all the correct procedures are followed with a view to reducing the scope for challenge at a future date.

In some countries, host governments (or their agencies) may be prepared to provide firm assurances on some of the above matters to foreign investors and their lenders. Obviously such assurances are still subject to a performance risk on the host government concerned, but at a minimum they can make it very difficult, as well as embarrassing, for a government to walk away from an assurance given earlier in connection with a specific project and on the basis of which foreign investors and banks have participated in a project.

As indicated by ASHLEY and BONNER:  ”Political risk identification, measurement, and management are key to successful international construction contracting. Multinational contractors are particularly sensitive to quick, unexpected change in the political environment that affects principal cash-flow elements of their projects. Traditional political risk analysis used by manufacturing or heavy industrial firms for capital investment decisions does not adequately address contracting risks. An alternate approach is presented to fill this important gap. Essential to this treatment is the identification of the primary political source risks and their impacts on project cash-flow elements. Recognition and planning, rather than gambling, is emphasized as a contractor’s best approach to successful international construction.” Let’s learn with them.

Reference:

AHARONI, Yair (1966). The Foreign Investment Decision Process. Boston, Harvard University Press.

ALFARO, L., KALEMLI-OZCAN, S. and VOLOSOVYCH, V. (2008). Why doesn’t capital flow from rich to poor countries? An empirical investigation, Review of Economics and Statistics, Vol. 90, pp. 347–368.

ASHLEY, David B. and BONNER Joseph J. (1989). Discussion of ‘Political Risks in International Construction’, Journal of Construction Engineering and Management, Vol. 115, Issue No. 1 (March/April, 1989), pp. 161-161.

FITZPATRICK, Mark (1993). The Definition and Assessment of Political Risk in International Business: A Review of the Literature, The Academy of Management Review, Vol. 8, No. 2 (April, 1983), pp. 249-254.

FRYDMAN, R., GRAY, C., HESSEL, M., and RAPACZYNSK, A. (1999). When does privatization work? The impact of private ownership on corporate performance in the transition economies, Quarterly Journal of Economics, Vol. 114, No. 4, pp. 1153-1191.

GLEASON, K. C., MCNULTY, J. E., and PENNATHUR, A. K. (2005). Returns to acquirers of privatizing Financial Services Firms : An International Examination, Journal of Banking and Finance, Vol. 29, pp. 2043-2065.

KOBRIN, Stephen J. (1979). Political risk : A review and reconsideration, Journal of International Business Studies, Vol. 10, pp. 67-80.

KOBRIN, Stephen J. (1980). Foreign enterprise and forced divestment in the LDCs, International Organization, Vol. 34, pp. 65-88.

LEWIS, M. (1979). Does political instability in developing countries affect foreign investment flow?, Management International Review, Vol. 19, No. 3, pp. 59-68.

REEB, D. M., KWOK, C., and BAEK, Y. (1998). Systemic Risk of the Multinational Corporation, Journal of International Business Studies, Vol. 29, No. 2, pp. 263-280.

SCHMIDT, D. A. (1986). Analyzing political risks, Business Horizons, Vol. 29, No. 4, pp. 43-50.

Presently, many companies in the UAE rely heavily on the use of standard form construction contracts (“SFCCs”) as a basis for their contractual obligations, as opposed to using bespoke construction contracts drafted for each project.

There are various types of SFCCs which have been developed by different entities in different regions. Some examples of SFCCs include the Fédération International des Ingénieurs-Conseils or International Federation of Consulting Engineers (“FIDIC”) construction contracts, the Joint Contractors Tribunal (“JCT”) construction contracts, the Australian Standards construction contracts and the list continues.

The FIDIC Red Book 1987 and 1999 editions (which are construct only contracts) are the most commonly used SFCCs in the UAE.

The FIDIC 1987 Red Book is a more employer friendly contract, whereas the newer FIDIC 1999 Red Book is a more balanced contract. As the 1987 edition is an employer friendly contract, it is still used by many companies in the UAE.

Design and build (“D&B”) contracts and engineer, procure and construct (“EPC”) contracts have traditionally been used sparingly in the UAE. However, with the increase in the number of experienced contractors in the region over the past few years and the wide variety of expertise that is now offered by construction contractors, D&B and EPC contracts are finding their way into the market.

SFCCs are very useful instruments for parties seeking to enter into a contract for the performance of construction work. They generally address a majority of the issues which should be considered when entering into a construction contract and are particularly useful where the works to be performed are relatively simple. There are a variety of advantages with using SFCCs, which include the following:

• The terms of SFCCs have an element of certainty to them as they have been tried and tested and many of the provisions have been the subject of litigation in various jurisdictions. Therefore, the parties can ascertain how certain clauses have been interpreted in the past and will generally have familiarity as to their meaning and intent.

• SFCCs are relatively quick to procure (assuming they are not heavily amended) and parties are generally willing to accept the clauses in SFCCs as they are regularly used in the industry.

• The use of SFCCs generally results in reduced legal costs as a party may choose to use a SFCC that has only minor amendments. Furthermore, it is quicker to amend a SFCC rather than draft a bespoke construction contract.

• SFCCs generally cover most of the issues which need to be considered when entering into relatively simple or common construction contracts. Therefore, the parties can be less concerned that key issues are not addressed or considered by the parties when entering into a contract.

Despite being widely used and tried and tested, SFCCs are not appropriate to use for all projects. Parties need to carefully consider the terms of the SFCC and assess whether such a contract is appropriate in the circumstances. Some of the inherent risks with the use of SFCCs include the following:

• SFCCs are generic documents that must be amended to reflect the actual intent of the parties. The key risk areas for each project must be considered and the SFCC should be amended accordingly. Parties often make the error of relying on unamended (or inadequately amended) SFCCs which will not always address the unique risk issues in a project and may result in disputes arising as the contract does not adequately allocate risk.

• SFCCs are not always amended correctly, which can lead to uncertainty when clauses are interpreted. For example, if a party is filling in the blank for interest to be paid on outstanding invoices, the mere insertion of a figure will not be appropriate. Care needs to be taken to specify whether interest is calculated yearly, monthly or daily. This is an example of a very simple error to make, but it is surprising how frequent these errors occur when SFCCs are utilised.

• When amending SFCCs it is important to take care to ensure that the amendments flow through the whole contract and that all related clauses are amended. It is frequently the case that a party will amend a clause, which also affects the operation/interpretation of another clause, which in turn causes an inconsistency in the contract and leads to confusion.

• Certain clauses in SFCCs may be inconsistent with the applicable local law. It is important that parties consider this issue carefully, otherwise the situation may arise where a party is relying on a right in a contract which is not enforceable in a particular jurisdiction. For example, the enforcement of termination for convenience clauses in the UAE is questionable and a party seeking to rely on this right may find that they have no entitlement to do so. The same applies with respect to the applicability of time bar clauses. Therefore, it is important to consider whether the terms of a SFCC are purporting to introduce legal concepts which do not fit within the bounds of the local law.

From the above it can be seen that there are both advantages and disadvantages with using SFCCs. The key is for parties to consider the convenience and cost effectiveness of SFCCs in light of the need to have a more tailored contract which specifically addresses all the pertinent risk issues. Furthermore it is particularly important to assess whether the provisions of the SFCC are consistent with the local laws which govern the contract.

Care needs to be taken when using SFCCs. In an attempt to cut legal costs many companies use SFCCs without appropriate legal advice. Consequently, a SFCC which may appear to be your friend at the outset may well end up being your foe in the long run.

By Sachin Kerur and George Varma

Under both the contractual process and subsequent formal dispute resolution proceedings, contemporary records form a critical part of the evidence to be utilised in evaluating the contractual entitlement. The importance of good record keeping – by both contractors and employer’s agents or engineers—cannot be overstated.

The maintenance of ‘contemporary records’ is an important risk management strategy under any form of contract or subcontract. Under the FIDIC suite of contracts, the failure to maintain contemporary records can severely prejudice or completely extinguish a contractor’s entitlement to additional time or cost.

Sub-clause 53.2 of the FIDIC Conditions of Contract 1987 (the ‘old Red Book’) provides that ‘the Contractor shall keep such contemporary records as may reasonably be necessary to support any claim he may subsequently wish to make.’ Of course, in the event that a contractor subsequently seeks to make a claim, the ‘contemporary records’ are often insufficient or are supplemented by subsequent evidence, such as witness statements from site staff, prepared a long time after the event and in contemplation of the claim.

The issue of what constitutes ‘contemporary records’ and whether or not ‘contemporary records’ can be supplemented by further evidence was considered in the often cited case of Attorney-General for the Falkland Islands v Gordon Forbes Construction (Falklands) Limited (No 2), before the Falklands Islands Supreme Court.

In this case, the court was asked to decide whether or not a witness statement prepared for formal dispute resolution proceedings (significantly after the event giving rise to the claim) could be used to prove a claim under an old Red Book contract where no contemporary records existed. In the judgement on this issue, the court stated that ‘contemporary records’ meant:

‘original or primary documents…prepared at or about the time giving rise to a claim, whether by or for the contractor or employer.’

The court also said that contemporary records does not include witness statements produced after the event, as such documents cannot be said to be original or primary documents prepared at the time. In so doing, the court confirmed the fear of the contractor – no contemporaneous documents means no entitlement.

The judgement in this case stands as a stark reminder of the criticality of ‘contemporary records.’

The situation under the FIDIC Conditions of Contract 1999 (‘the new Red Book’) may not be as desperate as under the old Red Book, but contemporary records remain critically important and the failure to maintain such records still has the capacity to seriously affect the contractor’s rights of recovery.

The new Red Book contains a similar obligation under sub-clause 20.1 as was imposed under sub-clause 53.4 of the old Red Book. Sub-clause 20.1 states, in part, that:

‘the Contractor shall keep such contemporary records as may be necessary to substantiate any claim…’ Sub-clause 20.1 also states that ‘if the Contractor fails to comply with this or any Sub-Clause in relation to any claim, any extension of time and/or additional payment shall take account of the extent (if any) to which the failure has prevented or prejudiced proper investigation of the claim…’

While the Gordon Forbes case is authority for the proposition that failure to maintain contemporary records under the old Red Book may extinguish the contractor’s entitlement, failure to maintain contemporary records under the new Red Book may also prejudice the contractor’s rights or ability to recover. It is worth noting that the emphasis and value of witness evidence will of course be different from jurisdiction to jurisdiction. In civil law jurisdiction such as the UAE, for example, witness evidence may be more compelling than in common law jurisdictions. These differences do not affect the importance of maintaining contemporary records.

So at the risk of labouring the point, the moral is simple – record what happened, when it happened. While the tasks of maintaining a site diary, staying on top of correspondence, and keeping minutes of meetings may appear to be an inefficient use of site staff and managerial resources, such ‘contemporary records’ can be the key to securing contractual entitlements.

By Sachin Kerur and William Marshall

This trend is hopefully coming to an end with the recent enactment of a new law with compulsory requirements on energy saving and efficiency. This marks a clear ambition by Russian policymakers and will probably enhance the nascent interest in green buildings of the main players in the real estate industry, who were severely hit by the current crisis and seek new growth opportunities.

A modest yet growing interest of the Russian real estate industry in green buildings…

Russia has experienced a tremendous construction boom in the last decade, with a clear premium on fast investment returns and the quantity of buildings rather than their quality. Western voluntary green building certification schemes – giving a rating to a specific building on the basis of ecological, social and economic criteria – were then clearly seen as luxury imports and during a long period set aside.

An interesting move towards international standards in general has nevertheless taken place in the last few years, initiated by the growing importance of international financing of Russian real estate projects (this has triggered inter alia the necessity of clean titles for mortgages, offshore contractual schemes, as well as the necessary “bankability” of international models of contracts such as FIDIC for construction, almost nonexistent in Russia ten years ago).

Progressively, this “international” evolution has naturally concerned green building certification, as a clear competitive advantage in a saturated real estate market (decreasing operation costs, insurance rates and legal liabilities, while increasing market differentiation and value). Such international events as the MIPIM have also been instrumental in convincing Russian real estate players of the potential added value of environmental certification.

Part of a global network, the Russian Green building council (RuGBC) http://www.rugbc.org/ created in 2009 is one of the most active advocates of green building certification in Russia, promoting mainly BREEAM schemes (originating from the UK in 1990) and to a lesser extent LEED (US rating scheme introduced in 1998) http://kluwerconstructionblog.com/2010/01/20/going-green-gets-greatly-muddled/. RuGBC is working to adapt these voluntary norms to the Russian context, which is very specific not least climate wise. The creation of a national Russian certification scheme is in this regard envisaged.

Due to the relatively recent Russian interest in green buildings, there are currently less than ten buildings in Russia which have been certified under BREEAM or LEED schemes (one having been developed by a Russian developer, Clearlink). This situation is particularly striking when compared with other emerging markets like China where green building certification schemes are widespread. It appears that this is essentially the result of national priorities, and Russia has recently demonstrated a shift towards such climate-friendly policies.

… Recently stimulated by a bold legislative reform on energy saving and efficiency

Publicly deploring Russia’s inefficient use of energy and its disastrous economic and ecological consequences, President Medvedev has called for an action plan to halve Russia’s energy intensity by 2020. According to the World Bank and IFC, such plan would cost a total of USD 320 billion, but would be paid back in just four years thanks to annual savings of USD 80 billion http://www.ifc.org/ifcext/rsefp.nsf/AttachmentsByTitle/FINAL_EE_report_Engl.pdf/$FILE/Final_EE_report_engl.pdf.

Following these declarations – anticipating somehow the possible alignment of Russian energy prices on the internal market to global market prices and the end of low cost energy – fundamental legislation was passed in 2009. First to implement parts of the Kyoto protocol (ratified by Russia in 2004) and, most importantly here, on energy saving and efficiency with the Federal Law No. 261-FZ dated November 23, 2009 (the “Law”). Certain provisions of the Law directly address energy saving and efficiency measures in the field of construction, these include:

- All new buildings (with few exceptions) will be submitted to Energy efficiency requirements (to be revised every 5 years) and will have to integrate compulsory energy meters to allow energy audits;

- Residential buildings will be rated according to their energy efficiency and such ratings will have to be indicated on the buildings’ facade;

- Public Procurement: energy efficiency of a tender has to be taken into account (considering the lowest lifetime cost of the building, not the lowest cost only);

- Tax incentives and administrative sanctions: while incentives are kept to a minimum, the Law provides for comprehensive administrative sanctions, the most efficient being that a building ignoring the Law requirements cannot be commissioned by the authorities (if the project (design) documentation / construction permit has been submitted to the authorities after November 27, 2009) and as a consequence under Russian law cannot be legally owned by anyone.

It is worth noting that the Law encompasses both construction and operation phases of a building project, and involves most of its actors, from developers and investors to operators and end users, together with designers and contractors. On a practical standpoint, this should permit an efficient implementation of the Law.

In this regard, the Law still lacks certain necessary application decrees and therefore many sensitive issues remain unanswered (e.g. under which SROs http://kluwerconstructionblog.com/2009/11/08/the-end-of-licensing-of-construction-related-activities-in-russia/ should an entity completing energy audits register). Many of these decrees have nevertheless been issued since November 2009 and Russian commentators agree that due to the clear political support of the reform, all of them should be issued within the next two years.

The implementation of this 2009 Law will therefore be an interesting test of Russian policymakers’ new commitment to environmental matters in general and to green buildings in particular.

Xavier Poulet-Mathis
The author thanks Irina Zimina-Lecornu (Attorney at Law, Moscow) for her collaboration.

Neil MacBride, the U.S. Attorney leading the prosecution team, noted, “Bribery isn’t just a cost of doing business overseas. Today’s sentence makes clear that this is a serious crime that the U.S. government is intent on enforcing.” This statement succinctly illustrate the US DOJ’s commitment to prosecute individuals who violate the FCPA.

Assistant Attorney General Lanny Breuer has made no secret that the “prosecution of individuals is a cornerstone of [the DOJ’s FCPA] enforcement strategy.” “Put simply,” Breuer said in a November speech, “the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations.” Thus, the FCPA poses a hazard not just for corporate reputations and profits but also for the individual executive. Companies can be fined, but only individuals can be put in prison, and DOJ well knows that the prospect of a stretch in the Federal pen can have considerably greater deterrent effect than the possibility of your employer having to pay a fine. Look for more such announcements in the months and years to come, as FCPA enforcement efforts continue to escalate.

Fiona Philip
Andrew Ness

“Tests on Completion

The first 30 days shall be a monitoring period during which the Contractor sets up the operation of the plant and conducts his own water quality tests to confirm that the final effluent consent has been met. At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.”

We have met the final 30 consecutive days successfully and want taking over. The Employer says we must complete the 90 days which takes us outside of the construction period and hence delay damages are being threatened.

I say we have satisfied the contract at the end of the 30 consecutive days and we should get Take Over even though it is not 90 days.

Have you any idea if we are right in our assessment?

Answer:
Firstly, a couple of brief provisos. I assume that you have made no amendments to the Yellow Book that affect this issue. I’m also assuming that, as you say, otherwise the works have indeed all been completed in accordance with the Contract.

Have the Tests on Completion been passed and are the Works ready for Taking Over?

Obviously your argument is that having satisfied the first 30 day monitoring period and then completed the further 30 consecutive day period and having notified the Engineer that the plant is complete and meeting the Process Guarantee, you have therefore satisfied the requirements for completion and Take Over.

Clause 10 – which deals with Taking Over – says that the Works must have been completed in accordance with the Contract and that a Taking-Over Certificate must have been issued. The Employer must issue such certificate within 28 days of an application if the Works are substantially complete in accordance with the Contract (i.e. apart from minor outstanding work and defects not substantially affecting the Works); otherwise the certificate is deemed to have been issued.

Crucially, “completion” for these purposes includes:

• achieving the passing of the Tests on Completion; and
• “completing all work which is stated in the Contract as being required for the Works to be considered completed for the purposes of taking over”.

So it all comes down to (1) what is required to achieve passing of the Tests on Completion and (2) what the Contract states needs to be completed to achieve take over.

Under the Yellow Book, “Tests on Completion” means “those tests which are specified in the Contract or agreed by both Parties…and which are carried out under Clause 9 [Tests on Completion] before the Works…are taken over by the Employer”.

Clause 9 goes on to spell out the process for carrying out these tests, which falls into 3 stages – pre-commissioning tests, commissioning tests and trail operation – the latter which is intended to show that the plant is operating reliably.

Ambiguous provisions

I think that the Engineer/Employer will forcefully argue that waiting for the 90th day to elapse is part of the “trial operation” and is required for you to pass the Tests on Completion. I agree that there is some ambiguity in the wording in Volume 3 of the Contract as it states: “At the end of this period the Contractor shall notify the Engineer that the plant is complete and meeting the Process Guarantee which then shall be met by a further 30 consecutive days before Taking Over can take place.” However, my own view is that the drafting of the full testing period is clear and explicit – “The test on completion duration shall be 90 days“. Bearing in mind that FIDIC explicitly states “The documents forming the Contract are to be taken as mutually explanatory of one another” I do not think that this wording is actually inconsistent with the words: “which then shall be met by a further 30 consecutive days before Taking Over can take place”. In my view, all the Contract is saying is that the actual commissioning tests period is 30 days but there is then a further 30 day trial operation period to ensure the plant is operating reliably. This is also consistent with the description of Tests on Completion (and the 3 stages) described in Clause 9.1.
Of course, it is open to you to request clarification on this point from the Engineer. Clause 1.5.2 of the General Conditions provides that: “If an ambiguity or discrepancy is found in the documents, the Engineer shall issue any necessary clarification or instruction.”

You do not mention if the Engineer in this case is an independent engineer or is part of the Employer organisation. Whichever is the case, he may well come to the same view as the Employer and, in my opinion, this would be consistent with:

• the express wording (“The test on completion duration shall be 90 days“);
• interpreting the documents as mutually explanatory of each other; and
• the 3 stage process of Tests on Completion which includes a “trial operation”.

Whether or not the Engineer is truly independent, Clause 3.5 applies when a party asks the Engineer for clarification and provides that he must consult with each party in an endeavour to reach agreement. If agreement is not reached, “the Engineer shall make a fair determination in accordance with the Contract, taking due regard of all relevant circumstances.”

The Engineer must give notice to both parties of the determination with supporting particulars. Each Party shall give effect to each agreement or determination unless and until revised under Clause 20 (Claims, Disputes and Arbitration).

What do you do now?

Whilst I think that the correct interpretation is that the testing period is the full 90 days, I am conscious that complying with this period will put you in delay and at risk of liquidated damages for delay. Therefore in practical terms, I think that you should at least make the argument that you have already substantially completed. I think that there is sufficient ambiguity in the Volume 3 wording to argue that the Tests on Completion have been completed and that you are entitled to issue of the Taking-Over Certificate. Therefore you should apply for issue of this certificate if you haven’t already done so (although if you haven’t already done so you will still have to wait at least 28 days before the Engineer is obliged to issue the certificate or you can argue that it is deemed to be issued).

Under Clause 10.1 [Taking Over of the Works and Sections], the Engineer is deemed to have issued a Taking Over Certificate if he fails either to issue a TO Certificate or rejects the Contractor’s application for a TO Certificate within a period of 28 days after receiving the Contractor’s application.

You have not said whether or not the Engineer has rejected the application. If he has not, and more than 28 days has elapsed since you issued it, then the TO Certificate will be deemed to have been issued on the last day of the 28-day period.

Of course, if you applied for the TO Certificate right before the end of the 30+30 days, then the Engineer has up to 28 days to issue or reject, and you are almost in the same position as if your completion test phase was 90 days. If you applied substantially earlier than that then it will make a bigger difference and might be the difference between completing on time or late.

If you are late, then there probably is no harm in making the application for a Taking-Over Certificate. Note that in accordance with Clause 10.1.3(b) of the General Conditions, if the Engineer wishes to reject the application, he has to give reasons and specify the work that is required to be done by the Contractor to enable the TO Certificate to be issued. Even if the Engineer has purported to reject your application, you might be able to argue that he has not done so in accordance with the contract, because he has not specified the work that is required to be done in order to enable the TO Certificate to be issued. Of course in my view, he is likely to simply point to the further 30 day trail operation period under the Contract.

Delay to Testing

Whilst I do not think you have a basis of claim (as my interpretation of the Contract is that you have not yet fully passed the Tests on Completion), if the Employer’s insistence on you waiting until the end of 90 days after the start of the testing period is not permitted under the Contract, there is potentially the right to claim for delay. Clause 7.4.5 provides that “If the Contractor suffers delay and/or incurs Cost … as a result of a delay for which the Employer is responsible, the Contractor shall give notice to the Engineer and shall be entitled to claim both an extension of time and “payment of any such Cost plus reasonable profit, which shall be included in the Contract Price” (Clause 7.4.5(b)). Equally there is the ground in Clause 8.4.1 (e), being “any delay, impediment or prevention caused by or attributable to the Employer, the Employer’s Personnel, or the Employer’s other contractors on the Site.” The Employer’s Personnel, as defined, includes the Engineer.

Any right to claim will be subject to strict compliance with FIDIC’s notice provisions in Sub-Clause 20.1 (Contractor’s Claims)). I have previously stressed the importance of getting your notice exactly right in the previous Q&A; click here to read more. After receiving this notice, the Engineer shall proceed in accordance with Sub-Clause 3.5 (Determinations) (see above) to agree or determine these matters.

One final note

Finally, do you have any minutes or notes of any discussions with the Employer about completion testing? If you do, have a look at them to see whether they clarify the position. Obviously it will be helpful if you have evidence that you and the Employer intended the tests to consist of the 30-day monitoring period plus the second consecutive 30-day period only. It is worth noting that FIDIC Yellow Book does not include an “entire agreement” clause precluding extra contractual documents/negotiations in interpreting the Contract. If you have clear evidence that the parties both intended the completion tests to last for 30 days plus 30 days (only) then you may be able to claim successfully that the figure 90 was inserted into the contract by mistake instead of 60, in the event that the dispute goes to arbitration.

]]> http://kluwerconstructionblog.com/2010/04/14/tests-on-completion-under-the-fidic-yellow-book/feed/ 0