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KP 6C:
Understanding contract clauses
contract Clauses
This module is going to review some of the main provisions of a typical contract.
This review individually considers such provisions and does not emphasize their INTERACTIONS.
In a contract, it is necessary to check the consistency of all aspects of the provisions, including in relation with all the Exhibits.
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General Structure of contracts
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The Agreement and its Annexes
Technical dossier
Commercial & Execution procedures
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Articles
The Agreement (sometimes referred to as "Terms and conditions") is the legal basis of the Contract.
The Agreement includes annexes, e.g. of standard documents, due to be executed later:
subcontractors
The e.g. Exhibit A - Scope of work:
(This WBS is also used for the preparation of the contracting strategy and the presentation of the Time Schedule and of the Price).
The scope of work includes descriptions, drawings, specifications, and data sheets.
The e.g. Exhibit E - Project description and Plant Design Dossier provides, in conjunction with the scope of work:
» Environmental Base line and Impact Assessments » Site surveys
The e.g. Exhibit C - Work time schedule specifies:
As well as the liquidated damages to be paid by Contractor, in case he misses the key dates
Guarantees
The e.g. Exhibit D - Performance Guarantees specifies:
LD = (Actual -Reference) x 20,000 USD/d
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Example of a Power plant H = specific consumption (Reference actua
This e.g. Exhibit H - Quality assurance and Quality control
This e.g. Exhibit I - Operator items and early contracts provides the list of:
The equipment and materials to be provided by the Client to the Contractor for their incorporation into the plant, The contracts which have been placed by the Client prior to the award of the development Contract, to be taken over by (assigned to) Contractor.
All with dates and limits of supply.
In the case of EPSCC Contracts, contracts for the supply of the company items and early contracts may be assigned to the Contractor. The assignation documents are then attached.
Solidity of the partnership
Definition of the Contracting Entities (the 'Parties' to the Contract)
> Parent Company Guarantee (Substitution Bond),
for all the obligations of the contract or for a part only (such as payments)
> Performance Bond = Bank guarantee
callable at first demand without challenging by the Bank being allowed, but usage limited to the extent of the actual damage
Third parties to the Contract
Financing
> The external groups, which accept to finance a project may impose clauses, relative e.g. to technical specifications (environment, safety, personnel training, etc.), or payment schedule limitations (maximum drawdown schedule, etc.) and will be part of the major Plant Units acceptance procedures.
Insurers
> Generally, the Client will take and maintain a construction all risks insurance (CAR), which covers under the same umbrella all the contractors and all activities related to the project (other than the Suppliers).
>The insurers may impose some special constraints into the contract, particularly for the situations of occurred damages.
Governments and Administrations
Consultants
Intent of the Parties
Whereas = statement of intents and prevailing conditions
> List of the reasons which brought the Parties into the contract
(e.g. the Contractor declares that he has the means, the experience and the availability to perform the contract obligations; the Client declares that he wishe the Work to be performed and that he can pay for it).
Terminology
> Precise definition of the terms extensively used in the contract, giving them a precise interpretation, specific to the Contract.
Definition of the Work to be performed
> General description of the scope of work, identifying its nature and its magnitude, in terms of targets, responsibilities and boundaries.
>The detailed description will be part of the scope of Work.
Responsibilities and hand over
Responsibilities:
> Definition of the responsibilities associated with the scope of Work Global limitation of liabilities, in case of problems (< 100%).
^►Consequential damages (loss of production, operating expenses, business opportunity loss, etc..) are always excluded.
> Conditions of hand over of the risk from and to the Client.
Verification, testing and transfer to the Client
Acceptance
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Independence of Contractor
The independence of the Contractor in the performance of the Work is essential, in order for him to be solely and fully responsible and able to fulfil all his contractu; obligations.
It could be expressed as follows:
"Contractor shall manage, control and direct the work as an independent contractor and perform all obligations and duties under the Contract at his own cost, risk and responsibility, in due compliance with the work time schedule and with the provisions of the Contract."
Independence means in particular independence from the client, and no active direct interference by the' Client in the execution of the contractor scope of Work. The client is however left with his capacities of control, evaluation and supervision of the Work
However, Contractor's liability is not unlimited (see overall limitation of liabilities), which supports that this independence is submitted to the normal conditions and circumstances of the execution of the contract.
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Agreed constraints incorporated by the Client into the Contract do not affect the independency of Contractor (such as respect of subcontractor, minimum social and safety rules, etc.).
Modifications
difications requests may originate from
all have generally consequences on cost and time schedule ce Majeure
ange in law: A change in law after the signature of the contract may affect the performance and usually, should be compensated by the Client, under certain conditions (of direct effect of significant size, unexpected change, not influenced by the other Party, etc.)
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Force Majeure Ф Hardship
Force Majeure events include:
Hardship events are generally events with economic or financial impact, which have not been anticipated at the conclusion of the Contract and could affect the viability of such Contract: substantial increase in oil prices or in wages, compulsory legal reduction of working hours ...
sequences of hardship and of Force Majeure
The difference in consequences between Force Majeure and hardship is that: Force Majeure:
The performance of one party has become impossible due to the occurrence of the exceptional event.
rdship:
The performance of one party has only become more onerous due to the occurrence of the exceptional event.
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FORCE MAJEURE conditions
Three criteriae have to be met altogether for Force Majeure Events
Unforeseeability: events which can be foreseen at the time of conclusion of the Contract cannot excuse the non performance of an obligation; e.g. an earthquake in the area of Banda Aceh is not a Force Majeure.
Insurmountability: there may be lack of irresistibility or insurmountability, if a Party has itself, either wilfully or by negligence, caused the impossibility to occur; e.g. the Party does not assure a proper surety control of the site, in a period of riots.
Outside of control: there is no force majeure if the event triggering the impossibility is not external to the party seeking relief, but is related to its own spheres of power or influence; e.g. strikes, lock outs within the Party is meant to
be inside the control.
The event must also affect the performance of the Work
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Reliefs of Force Majeur
The reliefs derived from Force Majeure are that:
- The affected party benefits from suspension of its obligation to perform and is relieved from contractual sanctions;
- The time for performance is postponed for the period of Force Majeure, as may be reasonable; but each party bears its own additional expenses;
- Either party shall be entitled to terminate the Contract if the above
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period exceeds a certain duration.
Disputes and resolution of conflicts
Disputes and conflicts resolution
Law of the contract; law for guarantees interpretation Disputes prevention
revention of Disputes
>Alert mechanism
>Mediation
> Mediators are in charge of finding grounds for an agreement and having them accepted by the Parties. Mediators propose a resolution.
> Mediators will endeavor to judge on "equity". (= moral balanced grounds?). Adjudication
>Adjudicators judge on "normal industry practices, contract content and development".
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Arbitration
Arbitration Chambers: Organizations within the Chambers of Commerce (Paris, Geneva, New York, etc.), aimed at resolving commercial conflicts.
Arbitration Tribunals judge, in principle, on the basis of the Contract documents, and common law principles
Each Chamber of Arbitration has issued its own procedural rules, which are then combined with the ones of the place of arbitration.
The most commonly used is the ICC = International Chamber of Commerce, located in Paris. The decision is final and binding, only if it has been agreed before by the Parties.
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Comments: Costly and medium duration procedure (1 to 3 years; 2 to 5 MUSD) Traditionally better adapted than public tribunals for commercial conflicts, but are more and more orientating towards a pure legalistic approach. Confidential
General law
Submission
>it is always possible to list the conflict at common law with the Judicial Authorities, except if explicitly excluded by the Contract.
Judicial tribunals = those of the country where the contract or part of the contract is executed.
Judicial Tribunals only judge at law (beyond contract terms) Comments
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>Not very used in the industry (no confidentiality, etc..)
Suspension ; Termination
> Suspension of the Contract
termination of the Contrat
> Anticipated end of the Contract, except for some surviving clauses, which may
occur:
Surviving clauses, in case of termination
>Obligations to pay the executed portion of the Contract
Applicable laws
Applicable laws under the Contract
1 - The law of the Contract is the law of interpretation of the Contract and must be specified.
- The choice of the interpretation law affects the substance of the Contract:
- the same concept and wordings do not have the same implications depending upon the applicable law.
2 - The applicable public laws of the country(ies) where the project is implemented
3- Additional regulations
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Additional regulatory instruments may be incorporated into the contract, particularly when imposed by financing institutions, and such as WHO, IFC.
Indemnities
Mutually Protective clauses
- Waiver of recourse,
Contract Clauses; Conclus
Contracts
>Contracts are first an Agreement and a Partnership
>To see them as a potential trap or to take an extra-contractual advantage (lack of clarity, understatements, bad faith, no will of compliance, different intent from the expressed one) leads to a failure
>The Contracts documents must be the most complete, clear, and coherent as possible; the expression of the intent must be properly developed.
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>They must written, considering the successful case, but must also be tested for the cases of problems.
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