The level of due diligence carried out by funders has increased in recent years for project financings and construction developments in Ireland. So more than ever, both Employers and Contractors benefit from putting in sufficient time preparing and considering the draft contract and Employer’s Requirements included with the tender documents prior to funder due diligence commencing. The Contractor should also be given adequate time at tender stage to scrutinise and check the tender documents so that it can get comfortable with what design and works it is required to undertake, or adopt as its own, and the overall risk allocation in the contract.
If a Contractor is appointed as a preferred supplier prior to its responsibilities and contractual obligations being substantially finalised, in the long run this can result in lengthier negotiations if there is disagreement in principle on certain points. In this situation a Contractor may then look for an increase in the contract price due to a contractual term it had not allowed for being amended (or introduced) and it also may result in an extended due diligence period if a funder is not satisfied with how the contract deals with a risk item. This could in turn delay the commencement of a project, including having a knock on effect on any commitments and contracts already entered into by an Employer with contractors and suppliers.
While a funder and their lawyers will have their own views as to what is a bankable contract, a one size fits all approach may not be appropriate in a particular project contract. An Employer or Contractor may be willing to accept a higher, or lower, degree of risk on various matters based on their own commercial position, the contract price, knowledge of the site and the circumstances of the project.
The funder will generally want the least amount of risk possible retained by the Employer / borrower, however this may go beyond what an Employer reasonably needs or wants on a project contract and may have implications for the pricing of it which could impose unnecessary cost on the Employer. An example of this might be a risk which is not considered material by an Employer due to its knowledge of the site (such as environmental or hydrological conditions) which a funder may nevertheless seek be imposed on a Contractor who could then price for it as they will not be familiar with the site. To avoid this situation arising during due diligence, an Employer should consider and attempt to anticipate the risk allocation a funder may look for and then be prepared to explain the reasoning for retaining the risk for certain matters, the basis for doing so and the price impact as a result.
Errors in Employer’s Requirements (Sub-Clause 1.9) and General Design Obligations (Sub-Clause 5.1)
Projects using the FIDIC Yellow Book in Ireland are commonly amended so that Sub-Clause 1.9 is deleted and the final two paragraphs in Sub-Clause 5.1 are deleted or amended. This is so that the Contractor has the full design obligation under the contract. The intention is to remove from the Employer any responsibility for documents or design provided by it which form part of the Employer’s Requirements. Furthermore the Contractor effectively takes contractual responsibility by adopting any such design as its own.
While a Contractor may argue that this is closer to a Silver Book position, it is a standard amendment in Ireland for design and build contracts using the Yellow Book. The practical way to deal with this is to allow the Contractor sufficient time at tender stage so that it can adequately review the Employer’s Requirements and carry out any other assessments it considers necessary. By dealing with this at the outset, it can avoid a debate later on during contract negotiations as to whether the Employer retains any residual design responsibility in respect of any material or outline designs it has provided. Generally a funder will want all design responsibility to rest with the Contractor and an Employer should therefore set out this position in the draft contract included with the tender documents and ensure that the FIDCIC Yellow Book Contract is amended accordingly.
Setting Out (Sub-Clause 4.7)
Another common amendment in Yellow Book Contracts is that Sub-Clause 4.7 (Setting Out) is amended so that a Contractor cannot claim time or money in respect of any errors in the positioning or setting out of the works, which is in effect the Silver Book position. Whether this amendment is appropriate in a particular case would depend on what works are being carried out and to a lesser extent the bargaining position of the parties. For example, if the works were to be set out in accordance with an existing planning permission provided by the Employer to the Contractor or in accordance with fixed points as determined by another contractor already working on the site, then the Contractor could reasonably argue that it should be able to claim time and/or cost due to any such errors in the setting out.
Site Data (Sub-Clause 4.10) & Unforeseeable Physical Conditions (Sub-Clause 4.12)
Responsibility for the site is often an important issue for Employer’s and Contractors. The FIDIC Yellow Book is commonly amended so that a Contractor cannot claim time or money due to the condition of the site and that it accepts all risks in respect of it including its subsurface, hydrological and climatic conditions. While an Employer will provide any site surveys, reports or documents it has obtained, it may not wish to give a warranty as to their completeness in the event that further developments arise in the course of the project.
A Contractor should be made aware of this at the outset of the tender process, however in a situation where an Employer is familiar with the site and is comfortable that there is not a material site risk, the Employer may be willing to accept a less onerous risk transfer to the Contractor under Sub-Clause 4.10 (Site Data) or under Sub-Clause 4.12 (Unforeseeable Physical Conditions) if it results in a more competitive price from the Contractor.
When the funder due diligence is starting, it is preferable for an Employer to clearly set out this to a funder’s technical adviser where it may be willing to retain any site risks, prior to the contract being reviewed by the funder’s legal advisers. This should help to avoid a disconnect between what the funder’s technical adviser may consider acceptable and the funder’s legal adviser seeking an amendment to the contract seeking the lowest risk positon for the funder.
Programming (Sub-Clause 8.3)
While amendments to Sub-Clause 8.3 which deals with the programme generally do not involve lengthy negotiations, the implications of including the programme as a contract document needs to be considered by both an Employer and a Contractor. There are benefits and risks associated with doing it, though it is standard practice in a project finance involving multiple contractors that the programme is a contract document. Particular care should be given when any contract is entered into prior to the funder due diligence process starting. If the programme is included as a contract document and the project is delayed due to a longer than anticipated due diligence process or any other reason, then the Employer may be in breach of its obligations to a Contractor to give it access to the site by an agreed date and the Employer may be subject to claims by the Contractor for compensation for any resulting lost time and money, this could get particularly complicated in a multi-party project involving numerous contractors. If the programme is to be included as a contract document, then it is preferable that all project contracts are entered into at the same time on financial close.
Courts in England have also held that where there are clear dates in a contact to complete the works or milestones, then additional interim progress obligations will not be implied into a contract whereby the Contractor must carry out the works regularly and diligently. So where the programme is a contract document, the contract should also state that the Contractor will exercise “diligence” in carrying out the works. In multi-party projects, Sub-Clause 4.6 (Co-Operation) is also commonly amended and expanded upon to provide that a Contractor will co-operate with and co-ordinate its design and construction work with other contractors, and the Engineer, and that it will interface and integrate with the works of other contractors to ensure timely, efficient and cost-effective completion of the various elements of its own work and that of other contractors. This again ties in with the “diligence” requirement whereby meeting the milestones is not the only progress requirement for a Contractor, as it will need to carry out and co-ordinate its work with the other contractors on site so that the project is delivered on time.
While there are certain risk allocations that an Employer and Contractor should accept as standard in Ireland so that financing can be obtained, it also needs to be considered which risks can be shared or retained by an Employer where it is unnecessary to transfer them to a Contractor particularly where this will have a positive effect on the pricing of a contract. Early engagement by an Employer or its Engineer with a funder’s technical adviser and clear communication to the funder’s legal adviser can also help to ensure that a joined up and common sense approach is taken to contract negotiation and the funder due diligence process.