USING THE GOLD BOOK IN PRACTICE SOME COMMERCIAL / LEGAL ISSUES

1. USING THE GOLD BOOK IN PRACTICE SOME COMMERCIAL / LEGAL ISSUES Mark Roe, Partner – Pinsent Masons LLP Dansk Byggeri/E Pihl & Son AS 5 March 2009

2. Similar to the Yellow Book? • Key features • A design-build-operate ‘green-field’ form • For projects let for an operation period of 20 years • Has 2 phases – • A Design-Build Phase • An Operation Service Phase • The Design-Build Phase is based on the Yellow Book - eg • Cl 9 – EoTs for completion of Design-Build (9.3), Delay Damages for Design-Build delay (9.6) etc are similar to the Yellow Book equivalents • Dual role of the Engineer in the Yellow Book (known as the Employer’s Representative in the Gold Book) remains for the Design-Build Phase, ie: • ‘deemed to act for the Employer’ (3.1(a)) but • duty to make a fair determination in claims (3.5)

3. Likely usage • Wherever projects are to be operated and maintained by the Contractor long-term • Could be ideal for projects being financed by multilateral financing institutions • Avoid ‘white elephant’ projects where a project is handed-over to the Employer following completion of construction and Employer does not have the necessary local skill, expertise and manpower to operate and maintain facility long-term • Procurers will look at tenders’ life-cycle costs • The Gold Book is about procuring a long-term service rather than a facility • Incentive on tenderers to concentrate on performance or functional spec

4. Not suitable for PPP/BOT without amendment • Employer maintains ownership of the production output of the facility and simply pays Contractor for services performed • No allowance for Contractor funding of Design-Build and recovery through operating revenues • Certification of completion and trigger of Operation Service is by Employer’s Representative, not an independent certifier • But note – the role of the Auditing Body which takes over after the completion of Design-Build – undertakes the Independent Compliance Audit (10.3) • Employer takes ultimate risk for financial viability of the facility

5. Key Contractor risk – fitness for purpose • Contractor takes the risk for long-term operation and maintenance of the facility (in Contractor’s interests to ensure maintenance and asset replacement costs are low eg Asset Replacement Fund). • The facility has to be fit for purpose for the duration of the Operation Service Period. • Cl 4.1: “When completed, the Works shall be fit for the purposes for which the Works are intended as defined in the Contract and the Contractor shall be responsible for ensuring that the Works remain fit for such purposes during the Operation Service Period”. • Cl 10.1: “During the Operation Service, the Contractor shall be responsible for ensuring that the Works remain fit for the purposes for which they are intended.”

6. The Pre-Press and First Edition – Major Differences • Following the launch of the ‘Pre-Press’ Edition, FIDIC launched the First Edition in 2008 • Contains a number of changes – many cosmetic/improving the usability of the Book • Others have some substance, eg:- • Fitness for purpose more clearly extended to the Operation Service (4.1/10.1) – in effect at handback in 20 years, the Contractor must return a functioning facility • Contractor has a duty to inform the Employer of “any change in the Contractor’s financial situation which will or could adversely affect his ability to complete or fulfil all his obligations” • Employer to then decide “what action he intends to take” – can lead to termination for Contractor Default where “the Employer reasonably concludes that the Contractor will be unable to fulfil his obligations…” (15.2(e)) – essential protection in a 20 year+ relationship?

7. On the subject of termination… • One termination regime for the full period of the Works (Cl 15 and 16) – including Contractor termination for failure to complete Design-Build by the Cut-Off Date set out in Contract Data (15.2(h)) • Termination at will – a key issue for the drafting committee – but termination for Employer’s convenience is retained – can be at any time – but this termination cannot be used by the Employer to:- • Execute or operate the works himself, or • Arrange for the Works to be executed by another Contractor (15.5)

8. Truly international? (1) • Like other forms the Gold Book may require amendment for use on trans-national projects:- • The dual role of Employer’s Representative as ‘arbitrator’ in claims and as effectively the Employer’s agent, sits uncomfortably in the Middle East where the ‘quasi-arbitrator’ role is not recognised • The role of the Employer’s Representative may have to be substantially amended to re-allocate the claims handling function • The Gold Book allows for Delay Damages for late completion of Design-Build (9.6) – in the Middle East penal damages are acceptable (not so in English law) and courts (eg in UAE and Egypt) have the power to increase or reduce damages depending on actual loss suffered and ‘fairness’

9. Truly International? (2) • Claims for interest (‘financing charges’) for delayed payment (14.9) may be invalid in some Middle Eastern countries which prohibit interest payments generally (eg Saudi Arabia) • The Limitation of Liability (17.8) might be invalid under Belgian law to the extent it limits Contractor’s liability for defects affecting stability of the Works (‘decennial liability’) – therefore would require amendment • However, innovation in drafting at 20.1 seems to have been influenced by Civil Law ‘fairness’ – now the ‘bar’ on Contractor’s late claims can be overturned if the DAB considers it fair

10. Truly international? (3) • Where contracting with government bodies – the contract may be a ‘Public Law’ contract and imply certain overriding provisions: • eg in Dubai - if the Contractor delays, the Government can ‘step-in’ terminate the contract and employ another contractor, even if it conflicts with the ‘termination at will’ provision in the Gold Book, which prohibits termination at will in order to let the works to another Contractor (15.5)

11. Payment regime (1) • Similar to the Yellow Book for Design-Build Phase • One procedure applies for the duration of the Design-Build and Operation Service (Cl 14) • Contractor is simply reimbursed for the services performed during the Contract period (whether Design-Build or Operation) • Advance Payment for Design-Build mobilisation (14.2) • Two Final Certificates – at end of Design-Build and Operation Service Periods

12. Payment regime (2) – price adjustment over 20 years • Price agreed in the Letter of Acceptance is the tendered price for the Design-Build and Operation Service Period and the Contract Price payable (14.1) is subject to the following adjustments regime:- • Letter of Tender – indicates lump sum (in different currencies) for Operation Service Period – annual service fee is more usual • Adjustments to execution of Works or Operation Service necessitated by change in Law (dealt with as Variation) (13.6) • Contract Price and programme can be adjusted for “any increase or decrease in cost resulting from any changes in technology, new materials or products…” (eg where Employer instructs new technology be used, or statutory requirement) (13.7) • Note – nothing for currency risk – maybe an issue for Contractor in a long service term? • Also, remember cost indexation schedules (13.8) – default is that indexation does not apply

13. Payment regime (3) - Operation Service Innovations • Asset Replacement Fund (Cl 14.18) • Employer funds asset replacements – but only if identified in the Asset Replacement Schedule - which are not the Contractor’s responsibility, ie routine maintenance items, replacement of Plant and Material with life expectancy below 5 years, spares between scheduled dates for major Plant replacement (Cl 14.18(a) – (d)) • Amount for ARF to be tendered by Contractor • Not clear whether it is necessary to set up a separate trust fund – there may be jurisdictional issues • Provisions are • Payment only released as authorised by Employer when the replacement has been effected in accordance with the Asset Replacement Schedule • Amounts remaining in the ARF to be shared out equally after the Operation Service Period – incentivises good asset maintenance throughout the term • Maintenance Retention Fund (14.19) • 5% withheld from Contractor from Interim Payments • Money can be used by Contractor to fund maintenance where Contractor defaults – amounts remaining are returned at end of Operation Service after issue of Contract Completion Certificate

14. How are contract risks dealt with • Contractor can limit its total liability (17.8) to the amount stated in the Contract Data or to the Accepted Contract Amount (ie tendered amount for Design-Build and Operation) – vital to agree a limit in the Contract Data • Real departure from Yellow Book in how risk is dealt with:- • Cl 17 sets-out risks in the following categories • Employer’s risks during (1) Design-Build (2) Operation Service • Contractor’s risks during (1) Design-Build (2) Operation Service • See 17.1-17.4 for what these risks are • Note that the risk of service failures is not adequately catered for in 10.6/10.7 – owners of process plants would expect more detailed KPI regime. 10.6/10.7 only provide for: - recovery of Employer loss (hard to calculate?) - continuing failure to meet minimum levels – termination on 56 days notice (10.7) • Also, the broad drafting of 10.6 – Contractor is expressly responsible for consequential losses of Employer (loss of revenue etc) – although subject to a monetary cap (also see 17.8) • Cl 18 - Exceptional Risks – (‘force majeure’) • Cl 19 – Insurance Requirements

15. Disputes/Claims – can the DAB support the long-term relationship? • Key innovations to the Dispute Adjudication Board should assist in preserving long term relationships:- • Only a one-member DAB is appointed for a 5 year term (the ‘Operation Service DAB’) (20.10) • In an attempt to avoid disputes, parties can (at any time) jointly refer a matter to the DAB for informal discussion in an attempt to resolve the matter – parties are not bound by the advice given (20.5) • However a key question will be how the dispute resolution mechanism (DAB, amicable settlement, arbitration) will be used to preserve relationships

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