This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
Anyone familiar with the Conditions of Contract for EPC/Turnkey Projects, published by FIDIC , also known as the “Silver Book”, can no doubt testify that it is a form of contract which envisages a considerable risk transfer on to the Contractor, in its attempt to obtain a high level of certainty over issues like cost and ultimate quality. Indeed its very creation arose from the gap which existed for such a contract, following the trend to heavily amend other forms of contracts to achieve that very objective. It’s billed as a “turnkey” contract, which might loosely be interpreted as meaning that the Employer only needs to turn the key to operate the facility, after the Contractor has engineered, procured and constructed the works so that they are otherwise ready for operation. As such, it should come as no surprise that it places great responsibility and considerable risk on the Contractor, although whether it truly achieves that “turnkey” status is another matter.
One of the key protections afforded to the Employer under such a set-up, is the testing regime that it accommodates, both at the Time for Completion, and potentially also, after Completion. One might expect such testing regimes to be at the very heart of the contract negotiations, and yet I still sometimes get the feeling that they are not always treated as a critical part of the overall deal. Why are they critical? Well, from an Employer’s perspective, because notwithstanding the “fitness for purpose” obligation in the contract (at least in its un-amended form), it’s the Employer’s opportunity to set out the tests which must be completed before a Taking Over Certificate is issued, to ensure that the plant does what the Employer is expecting. Such testing might, for example, envisage certain production outputs being achieved over a specified period, which the parties are free to negotiate, to prove the reliability and performance of the plant. It may be supplemented with Tests after Completion, to demonstrate the same or at least acceptable performance levels under normal operating conditions. Without a clear and measurable testing regime which has been agreed by the parties, how do we capture the Employer’s expectations and then measure the performance against them?
From the Contractor’s perspective, any failure to pass the Test on Completion could mean them having to be repeated at the Contractor’s cost, it could mean that the Taking Over Certificate doesn’t get issued, so the works remain at his risk, it could mean delay damages becoming payable and in a possibly worst case scenario, where there is a continued failure, it could even lead to the Employer having an entitlement to carry out the work needed himself at the Contractor’s cost, to seek a reasonable deduction in the Contract Price or even, to terminate the Contract if the defect or damage deprives him of substantially the whole benefit of the works or any major part of the works. In the latter case, it could also lead to the recovery of all sums paid for the works or such part, plus financing costs and the cost of dismantling the same, clearing the Site and returning plant and materials to the Contractor. Any failure to pass any Tests after Completion could lead to a deduction by way of damages, perhaps to reflect the reduction in output.
These provisions are potentially significant, which makes it all the more surprising on those occasions where the entire focus of the parties seems to be on the commercial terms and there is scant regard seemingly paid to the testing requirements, and in that context, I don’t just mean the fine tuning of them. Where an output requirement is specified, as a condition of the testing regime, I sometimes wonder how much thought has gone into factoring in variables like the quality of the raw materials to be inputted and supplied by the Employer (where appropriate), if the output requirement doesn’t include a range which at least on the face of it takes into account potential variations in quality, which could be dependent on any number of factors, including potentially climate conditions, depending on the nature of the plant and production in question.
On a related theme, it’s not always evident how much thought has been given to the Contractor’s ability to meet such testing requirements in circumstances where he has clearly had to rely on the Employer or others, for certain aspects of the project, but has nevertheless accepted the risk in relation to their input. One might expect the Contractor to be providing his own tried and trusted personnel to deal with all potentially critical issues which he’s taking the risk over, but it’s nevertheless not unusual for the Contractor to be relying on local labour or other such factors as part of the overall project package. The technical team is undoubtedly best placed to take a view on the criticality of such issues and the level of appropriate supervision needed in respect of them, but they’re more likely to address such issues with the care they deserve if the testing regime as a whole, and the issues which could potentially lead to any testing failure, is one of their primary focuses from the outset, not simply treated as an afterthought where a hastily prepared testing regime is compiled by an individual under pressure to ensure that the contract can get signed and the works can commence forthwith. It’s a risk to both parties, so the message should be to make the testing regime a priority from the outset, and to consider it in its wider context.
