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May 8, 2010

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FIDIC – engineering a smooth project

May 7, 2010

Another week, another blog post…

I initially wrote this briefing note as an aide memoire for the RICS in November 2009 as part of their series of talks to a visiting Chinese delegation tasked with understand more about FIDIC as a possible procurement tool for the upgrade of their domestic electricity supply infrastructure.

I hope this short-hand note is of wider interest to some of you.

Overview

Since 1999, the FIDIC forms have been popular for all types of engineering projects, in particular those that are project financed. Lenders appreciate the greater certainty afforded in terms of project costs.

The performance of the asset to be built is typically critical to the lender’s security insofar as the loan is normally linked to its ability to operate and generate revenue e.g. selling electricity. Therefore, there is much emphasis in FIDIC on testing, commissioning and handover procedures and the use of key performance indicators to measure time, cost, designed production and output levels. Full completion is not deemed to have been achieved until final performance tests have been carried out and results positive.

The hallmark of FIDIC is balanced risk. In the context of the turnkey version (the Silver Book), the contractor is tasked with achieving the performance of whatever is necessary for a certain purpose. For example, the particular yield of power generation.   But it is not the case that all risk is necessarily transferred to the turnkey contractor in FIDIC, despite assumptions. Many large project involve several specialist turnkey contractors.

This can cause interface problems, as a contractor will not be willing to assume another’s work given the performance tests that it knows it must satisfy. Also, if plant and machinery are brought in on licence from a 3rd party, a contractor will not assure its performance.

Further, contractors are increasingly risk adverse in the current market. This means that they may wish to design first and then enter into a full FIDIC turnkey contract at a later stage. The risk is that the contractor will then seek to re-negotiate the terms of the FIDIC contract unless there is a mechanism at the time of contracting for design and placing of materials, for them to then enter into the FIDIC contract with its obligations.

Traits of FIDIC:

–         fixed price;

–         contractor can organise itself as it sees fit provided it achieves the deliverables;

–         Employer exercises limited control provided informed of programme and progress; and

–         Contractor must prove the reliability and performance of plant and material.

 The guidance published alongside the contract explains that FIDIC is not suitable in the following circumstances; namely where:

–        there is insufficient time for checking relevant information and scrutinising the Employer’s requirements. This is not a contract to ‘bounce’ on contractors to gain a commercial advantage in tendering;

–        the works involve a lot of underground work or areas where the contractor cannot verify the physical conditions;

–         if Employer needs to supervise closely or inspect the drawings closely throught the build and installation; or

–         if interim payments require an official or other intermediary to certify them.

There are cost implications, so the suite may not always be commercially viable for all projects. NEC3 may be better for more straightforward projects.

Specific points in the standard form

Priority of documents – be aware that the standard form may be amended. The terms of any other Contract Agreement always take precedence (clause 1.6).

Non assignable without consent (clause 1.7)

Responsibility for noticing errors or defects on both parties, not just the contractor as in some other standard forms (clause 1.8)

Duty on the Employer with helping the Contractor to obtain consents where the contractor asks the employer to do so (clause 2.2).

Concept of “Determinations” – a process by which the employer and contractor shall consult and endeavour to reach an agreement on any matter arising (clause 3.5). Leave for either party to refer a dispute to a Dispute Adjudication Board’s Decision (DAB).

Fit for purpose obligation (clause 4.1). Rare in other forms but success in FIDIC is measured by performance.

Contractor automatically needs to provide security to assure its performance. Not a matter for negotiation as in other forms. Clause 4.2 lays out the triggers for the employer using that security (normally upon 42 days contractor default).

Can’t subcontract all of the works (clause 4.4), so cannot be used as a management contract.

Implicit in the terms that labour will be of a sufficient standard and paid a sufficient wage according the local rates.

Employer can ask Contractor to search for the cause of defects (clause 11.8).Cost agreed and added to the Contract Price.

Acceptance by the employer of the works not achieved until Performance Certificate issued (clause 11.9), which is normally 28 days after the last Defect Notification Period has expired.

Scope for value engineering but no obligation to achieve savings (clause 13.2).

The main areas of negotiation

Ground conditions

The Employer provides all the relevant data on sub-surface conditions not later than 28 days prior to submission of tender.

Contractor deemed to base contract amount on data.

In the red and yellow book, the Contractor is however only responsible for interpreting the data – the accuracy of that data is warranted by the Employer who carries the risk of any physical conditions that are not reasonably foreseen at the date of the tender.

In the Silver book however, due to its turnkey nature, the Contractor takes all risk including any unforeseen conditions apart from items listed in clause 5.1 which include the purpose of the works and any specific information which the Employer can only verify contained in the Employer’s Requirements.  The contract price will not be amended otherwise.

One way contractors seek to get around the onerous conditions, if not negotiated out, is to obtain all relevant reports before tendering and then to make all assumptions based on that material. The risk stays with the employer in such circumstances if there is any variance between those assumptions and the physical conditions as any incidence is deemed to be unforeseen in such circumstances.

Handover, testing and commissioning

There is problem where the employer wants to start selling electricity as soon as it is being generated following commissioning. This is however prior to performance testing.

The employer can prejudice itself if it takes over before tests are completed. It is wise to wait.

Force majeure

Time and cost impact stays with the Employer unless amended.

FIDIC is a very effective contract provided to know and adapt to its limitations. Hopefully, this short article goes some way to explaining how to avoid its pitfalls.

Adjudication enforcement in context – traps for the unwary

April 30, 2010

Did a seminar last week on adjudication enforcement with Hill International to a group of West Midlands’ contractors. I thought it may be worth replicating some of the main points here for interest:

The general principle that has come out of the TCC for some considerable time now is that adjudication decisions will be summarily enforced save in the most narrowest of cases. We are all very familiar with the adage “pay now, argue later”. Since Carillion v Royal Naval Dockyard, the TCC been quite clear that it will only entertain defences to resist enforcement based on the adjudicator’s breach of natural justice only in the plainest of cases. Pilon Limited v Breyer Group is such a recent example where the adjudicator failed to consider properly a defence and therefore unduly restricted its jurisdiction to hear the dispute.

Nine times out of ten, however, the disgruntled party’s recourse is to seek redress by way of arbitration or litigation – not to come up with flimsy excuses at a summary judgment hearing. It leads to a substantial waste of costs otherwise.

But the reality is quite different.  More and more disgruntled parties are willing to pay up or, at least, without the other side doing some serious legwork. Why is this? From what I can see, this is due to a mixture of three things:

–         the deepest pocket theory: they’ll go away;

–         the “better-in-our-account-than-theirs-for-a-bit-longer” theory: this is a risky strategy with the threat of incurring indemnity costs; and

–         the valid defence theory: fine as long as it is a defence and not merely a sham.

Poor professional advice does, of course, compound a losing party’s position. That is why adjudication enforcement needs to be approached carefully.

Getting a proper assessment of the adjudicator’s decision, an appreciation of the chances of getting a successful judgment and ensuring that there are no credible defences to all or part of the adjudicator’s decision is key. Effectively, you want the green light to go!

But many parties want their cash quickly, quite rightly so, and this stage need not take an age. It is however recommended to avoid getting involved into protracted arguments in court at the enforcement hearing.

What does the initial meeting with your legal counsel look like at this stage?

First things first – understand your own mental state. You are going to be pleased that your efforts have been worthwhile and that an adjudicator has validated what you knew all along; that you are owed your money and/or your declarations as to the real state of affairs. You are also going to be frustrated that the other side have not paid up, despite you having shelled out your non-recoverable costs of running the adjudication. You are going to want to apply as much pressure on them as possible for as little extra legal expenditure as possible…and you will want a quick judgment at court.

Why do we not just issue a statutory demand now and threaten to wind them up?

I have seen people do this and there is no denying that sometimes it works as a threat. The problem arises if the other side, even spuriously, raise alleged defences to the statutory demand within the 21 day period in which case the debt is highly likely to be deemed to be disputed – indeed, it is often fatal to the winding up process if successful. Even if it is not, the process is inevitably stacked against you as it allows the defending party to applying for an injunction to have the advertisement of the petition restrained by the court. This means that you cannot proceed. Compound that by the defending party’s ability at the eleventh hour to appoint an administrator and the whole process is a waste of time. Oakley v Airclear Environmental is a stark warning that if there are issues surrounding the adjudicator’s jurisdiction, the threat of winding up will not necessarily succeed.

What you have to appreciate is that different rules apply in insolvency matters. You have to demonstrate that the other side cannot pay their debts as they fall due or point to some other reason why you believe that they are insolvent. It is not enough that they simply refuse to pay you. As my colleague, Adam Hiscox, (http://www.bpe.co.uk/pages/4720/Hiscox.htm) explained at the breakfast seminar in Birmingham which formed the subject of this blog, unless you can clearly demonstrate these grounds, the court will regard the petition as an abuse of process and throw it out with indemnity costs awarded against you.

The long and short of it is that you could simply be substituting one process for another, without the certainty of success, with procedural challenges along the way and the likelihood that you are no further advanced.

 What sort of risks will you face in adjudication enforcement?

 Challenges to the adjudicator’s award are invariably based on one or more of the following; namely that:

–         the adjudicator exceeded its jurisdiction in some way;

–         the adjudicator breached the rules of natural justice; or

–         there is some other good reason why the decision should not be enforced.

The case of GPS Marine v Ringway Infrastructure has clarified that a party that does not reserve its position to challenge an adjudicator’s award is likely to face an uphill struggle if it then wishes to challenge that award. This can be worded in correspondence or the pleadings themselves as a general reservation.  

What are you actually asking the court to do?

As will be recalled, adjudication awards are binding only until a court decides otherwise. You are therefore asking the court to order that adjudicator is right and that the award should be enforced if the losing party still refuses to pay. As the resisting party, you are asking the court to order that there is some reason why judgment should be stayed (suspended) or that it is more appropriate that matter be settled at trial. Basically, that the enforcing party is not due its money now.

There are many examples of arguments based on excesses of jurisdiction. Here are but a selection.

You may argue that the adjudicator has been biased in some way during the adjudication itself. A&S Enterprises v Kema is an example whereby the adjudicator made adverse comment about the non-availability of a representative at a hearing. It was held by the court that this could be construed as evidence of bias.  A mere observation of non-availability of evidence would have sufficed.

There is also the well-known cases where the adjudicator has held telephone conversations with a party without disclosure of contents to the other side. This was held to be sufficient to  invalidate the adjudicator’s decision in Discain Project Services v Opecprime Developments Ltd

There is nothing wrong with an adjudicator seeking legal advice, provided it discloses that fact to both parties and invites comments on its validity. In BAL (1996) v Taylor Woodrow Construction Ltd the adjudicator asked the parties for permission to take legal advice. Whilst the claimant agreed, the defendant did not reply. It was held by the court that the adjudicator had not shared the advice with the parties or provided them with  an opportunity to comment. The result was that the decision not enforced, which seems fairly harsh in the circumstances.

There is one caveat to all of this – the bias or breach of natural justice must be material and central to the dispute. So, in Kier Regional (t/a Wallis) v City & General (Holborn) the adjudicator disregarded expert evidence not available at the time the dispute crystallised. It was held that, even if it made the decision to disregard evidence in error,  the adjudicator had still decided on an analysis of facts or law that it was irrelevant and was entitled to do so. This is an inherent risk within adjudication but one consistent with decisions dating back to Bouygues v Dahl Jensen.

At the seminar, I discussed when set off would be allowed in some detail. It warranties a topic by itself but the main point is that set off must be real and ascertainable at the time of the enforcement proceedings. Such a defence will not work where the sums remain unquantified or hashed together at the last minute. Also, the set off must relate to the dispute and not to some unrelated contract as happened in Solland v Daraydan Holdings. It is not the  function of the court to stay decisions pending the outcome of other disputes.

 The bottom line is that, if an adjudicator has decided upon the issue of sums to be set off, then a resisting party may do so subject to the issue of proper notices as required. If the issue of set off has not be referred and decided upon. the entitlement depends on the precise contractual terms.

Nor will an award be held as a “hostage of fortune” to be subject to set off of unquantified subsequent payment certificates. That was tried in William Verry Ltd v Camden London Borough Council in the context of LADs to be applied. Whilst not successful, the defendant still retained the right to pursue the claimant at a later date, which is what the Construction Act is all about. A TCC judge will not allow a system of rolling balances however where one adjudicator’s decision is subject to a subsequent one. The Act requires immediate payment: Interserve Industrial Services v Cleveland Bridge UK.

 What may consist of other valid grounds to resist enforcement?

 The answer lies in the claimant’s financial standing. Bearing in mind the maxim “pay now, argue later” could the claimant pay back those sums awarded at a later stage if required to do so? If the answer is no, then the court is unlikely to order the defendant to pay. The rationale is that the sums are not being order to further the claimant’s cashflow, but rather to pay its creditors which is not the purpose of the Act. Also, if the claimant’s position is pretty much the same as it was before contracting with the defendant, then the same rationale applies. This has been the position ever since Wimbledon Construction Company 2000 v Vago. The case of Hart Investments Ltd v Fidler confirmed this that, where there are clear insolvency, the court will not enforce but will defer to the operation of insolvency rules.

This all comes down to one principle, as we all know – ensuring cashflow. ven if a decision is wrong it is still enforceable in the absence of wrong doing by adjudicator. The court is loathed to depart from that basic position.

Good bank holiday weekend, everyone.

TCC wins and a flotation in one week!

March 26, 2010

A jam-packed week with a couple of good wins. The team is really starting to galvanise now.

First came on Tuesday in the TCC in Birmingham infront of HHJ Kirkham with a summary judgment in our favour, netting just under £100,000 for a Northamptonshire house builder. That one has been dragging on for almost 2.5 years due to protocol slippage and non-compliance with court timetables on the other side – crazy!

The other came on Wednesday in the Birmingham District Court – a payment issue with a high net worth individual. She stormed out of the courtroom as my colleague, David Holmes, was discussing the issue of our costs incurred with the judge. If only people would see sense and take the reasonable offers that we put forward in early settlement, life would be a lot easier.

After a fruitful discussion with the RICS, it looks like I am to be co-opted onto a national contracts steering group reviewing JCT, NEC3, ICE, FIDIC and produce a document for international release concerning the relative merits and pitfalls with each in relation to one another. It is a privilege to be asked to be part of such an esteemed group. I hear the ICE has decided to phase out its contracts (NEC is, after all, largely based on the principles of ICE) so that is going to be interesting to discuss with clients. An Israeli delegation also wants to discuss the creation of a government procurement contract for domestic use based on the UK models, so we’ll have to think hard about that one – they don’t seem to need a framework for demolition works though, it seems…

Moving on to more local matters, enforcing adjudications in the TCC is one thing – getting your client’s money is quite another. Looks like we’re going to have to issue a winding up petition against an unsuccessful defendant, which is not that cheap these days – about a grand in disbursements before you even start. HMCS seem to have cottoned on to something here. As my colleague, Adam Hiscox, pointed out that’s a £285 increase in court fees for filing winders in just over 12 months! We’ll be mentioning that as a practical point at our interactive adjudication enforcement seminar with Hill International on 21 April.

Our procurement work is on the increase again – seems the budget dispelled certain ambiguities, even if it did little more, and people are getting active again. Directors guarantees for banks, issuing and reviewing PQQs for airport safety upgrades, retail tenant due diligence and good old collateral warranties.

Finally, the world and his wife now knows about Supergroup’s flotation (the guys behind Cult Clothing and Superdry). The property team have been working night and day to get everything ready, with us filling a few much-needed construction gaps. I suspect the team be catching up on sleep this weekend…

Last meeting of the day, then more training for a charity cycle ride across France in September. I am definitely missing the Friday pub wind down. Lunch with a referrer today was fruitful but mineral water does not hit the spot. All in a good cause, so I am told. I’ll remind my trainee of that fact if I end up growling at him next week…

Dipping the quill in the ink pot for the first time.

March 24, 2010

Well, it comes to us all; the need to make observations on the industry goings on in which construction lawyers advise.  I thought I would have a few grey hairs before I ventured into this world, but I suppose now is as good as ever.

I head up a team of construction lawyers at BPE Solicitors LLP based in Gloucestershire but our work is felt in various parts of the country…and Estonia, quite randomly.

For more information, please visit our website at www.bpe.co.uk to download a brochure, e-mail me at jon.close@bpe.co.uk and/or visit my LinkedIn page at http://uk.linkedin.com/in/jonclosebpeconstruction.

This is my first blog and I hope it’s going to be a successful insight into the world in which I operate as a legal adviser in, what may be perceived to be, a more detached side of the operational realities of being on site .

Hopefully, this will chronicle the goings on of a construction lawyer advising ordinary construction and engineering folk through some difficult economic times. I only hope I can do it justice!

Hello world!

March 24, 2010

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