I.Chem.E. International Forms of Contract

The Institution of Chemical Engineers' ("I.Chem.E") forms of contract have been issued since 1968 for domestic UK use and in 2007 were revised and reissued for international use. These contracts are intended for use in relation to the construction of process plants. From initial use in the petrochemical industry, they are now used for many types of manufacturing including chemicals, oil and gas and have even been adopted for railway signalling.

I.Chem.E produces a suite of contracts to cover different approaches to contracting. In the international suite there are four forms as follows:-

  • The Red Book for lump sum contracts although it should be noted that these are likely to be on a design and build basis
  • The Green Book for cost reimbursable contracts
  • The Burgundy Book for target cost contracts
  • The Yellow Book for subcontracts

All these forms refer to subsidiary documents issued by I.Chem.E such as rules for arbitration. The forms also include extensive introductory notes dealing with issues such as the implications of selecting a particular form of contracting. Guidance is included on compiling particular conditions for specific issues such as insurance requirements and also on compiling the agreement, the specification and the extensive schedules which are required to complete the contractual documentation.

The most distinctive features are the elaborate system of take over and performance tests and the wide ranging provisions for exclusion of liability. The testing procedure reflects the need for an extended period of commissioning the plant as well as assessing compliance with performance guarantees. Limitations on liability are commonly employed in the process plant industry in view of the catastrophic nature of losses that may result from failure to meet the criteria specified in the contract which may be too great for contractors or their insurers to be expected to meet.

I.Chem.E describe the construction and testing process under the contract as being split into three phases, namely design and construction, putting to work and commissioning and guarantees of performance. As regards design, it is expected that much of the responsibility will be allocated to the Contractor. The conclusion of the design and construction process leads to a Construction Completion Certificate.

Thereafter, putting to work and commissioning phases lead to a Take Over Certificate if satisfactorily concluded.

It is common for guarantees of performance to be given by the Contractor as specified in Schedule 16 and, if tests are carried out to verify compliance with this Schedule, their successful conclusion will lead to an Acceptance Certificate. However, the Schedule provides for a limit within which any failure to pass performance tests is compensated by the payment of liquidated damages by the Contractor to the Purchaser. If the results remain outside the limits specified in the Schedule then compensation (either agreed between the parties or determined by the Project Manager) is payable.

The last certificate to be issued is the Final Certificate which has conclusive effect as to the Contractor's obligations under the contract so that claims for latent defects will not survive the issue of a final certificate.

As regards limitations on liability, the effect of the relevant clause (43) is that consequential loss, both generally and in specific categories, is excluded insofar as it results from the Contractor carrying out the works including design, engineering and any other services required.

An aggregate cap also applies to all liability of the Contractor save in respect of care of the works and insurance. Claims outside the terms of the contract are prohibited by an "exclusive remedies" clause.

In general terms, many of the features found in contracts for the construction of traditional building and civil engineering works are present in this suite. However, it has a number of features which are not common to all standard forms and in some cases are particular to it. These may be grouped and summarised in detail as follows:-

  1. The construction phase and general provisions
  • The parties to the contract are the Purchaser and the Contractor although the Project Manager is named and has significant functions to perform as to which see below (Clause 1).
  • There is provision for the parties to co-operate and deal fairly, openly and in good faith with each other. They must disclose information which the other might reasonably need in order to exercise its rights and to perform its obligations under the contract (Clause 2.1).
  • Schedule 3 to the contract may refer to work which the Purchaser is to carry out and Clause 4.2 defines the standards for such work.
  • The cost of executing the works is at the risk of the Contractor who is deemed to have obtained all necessary information before agreeing to the contract price (Clause 6.1). However, the Purchaser is responsible for the accuracy of any information provided by him.
  • The Contractor may obtain an extension of time or increase in cost in respect of physical conditions which he could not reasonably have foreseen (Clause 6.3).
  • Certain rights (for example in relation to personal injury to the Purchaser's employees) can be enforced directly against the Purchaser by a subcontractor in whose favour an indemnity applies (Clause 9.8).
  • The Project Manager, when exercising his discretion or making a judgment or forming an opinion must do so impartially and to the best of his skill and judgment as a professional engineer (Clause 11.1).
  • The Contractor may be required to take acceleration measures if his progress falls behind an approved programme (Clause 13.5).
  • The Contractor may object to an instructed variation if it increases or decreases the contract price by more than 25% or requires him to do work or exercise skills which are not of the kind he undertakes in the ordinary course of his business (Clause 16.7).
  • The Project Manager is entitled to access to any place where work is being carried out or materials are being manufactured or fabricated (Clause 22.1). Provision is made for pre-installation tests to be witnessed by the Project Manager or required by him and for repetition of the tests in the event of failure.
  • The Contractor indemnifies the Purchaser against claims associated with environmental pollution or escape of hazardous material arising from his activities at site save where this is the direct result of compliance with the contract or could not reasonably have been foreseen by the Contractor (Clause 26.7).
  • The Contractor makes good loss or damage that may occur to materials and plant save where these arise from the Purchaser's risks (Clause 30.2). The Purchaser's risks include his design or his wrongful or negligent act. The Contractor's liability is capped at the amount recovered under insurance policies taken out by the Purchaser (see below).
  1. Insurance
  • The Purchaser (and not the Contractor as in most other forms) takes out construction all risks insurance covering any loss or damage to the materials and plant (Clause 31.1)
  • The Contractor is not obliged to take out a policy of professional indemnity insurance even though he is likely to be primarily responsible for design (Clause 31.2).
  1. Take over
  • A draft Construction Completion Certificate is sent by the Contractor to the Project Manager when in the Contractor's opinion the plant is substantially complete and ready for inspection (Clause 32.2). Tests are then carried out with provision made for repetition in the event of failure. If tests are satisfactorily completed a Construction Completion Certificate is issued by the Project Manager.
  • Following completion of construction, taking over procedures commence (Clause 33) as specified in Schedule 15. These are observed by the Project Manager and repeated in the event of failure. If they are successfully carried out, the Project Manager issues a Take Over Certificate and the Purchaser becomes responsible for care and maintenance of the plant. If the plant fails the takeover tests a Take Over Certificate may nevertheless be issued by the Project Manager. If the plant subsequently fails to satisfy the requirement of any relevant take over procedure, the Project Manager may cancel an Acceptance Certificate (see below) and sums paid pursuant to the certificate are to be repaid. Thereafter the parties' rights and obligations are as if the Purchaser had never accepted the plant.
  1. Performance testing
  • If the Contractor makes specific guarantees in respect of the performance of the plant, performance tests are carried out (Clause 35). These tests are as specified in Schedule 16 and are carried out subsequent to the issue of the Take Over Certificate by the Purchaser with the Contractor in attendance. If the plant fails to pass a performance test or tests are not completed, the Purchaser can operate the plant but must permit the Contractor to make adjustments and modifications (or shut down) as the Contractor reasonably requires. Thereafter the results of the performance tests are evaluated by the parties. If for reasons which are the responsibility of the Contractor the plant does not pass all relevant performance tests within the performance test period the Purchaser can operate the plant as he sees fit and recover liquidated damages from the Contractor in accordance with Schedule 17 provided that the results of the performance tests are within the limits for the application of liquidated damages specified in that Schedule. An Acceptance Certificate is then issued. If the results remain outside those limits the Contractor compensates the Purchaser for failure of the plant to comply with the guarantees but subject to the limitations on liability in Clause 43.
  • Once the plant has passed the performance tests, the Project Manager issues the Contractor with an Acceptance Certificate (Clause 36) but this may be cancelled as referred to above in the event of failure of take over procedures.
  1. Final certificate
  • A Final Certificate is to be issued by the Project Manager once the Contractor has made good all defects or the defects liability period for the plant has expired whichever is the later. Once the certificate is issued, the Contractor has no right or obligation to do any further work to any part of the plant and the Final Certificate constitutes conclusive evidence that the Contractor has completed the plant and made good all defects in accordance with his obligations under the contract save in respect of fraudulent acts, misrepresentation or concealment (Clause 38.4).
  1. Payment
  • If the Purchaser intends to withhold any amount from or set off any amount against any payment due to the Contractor pursuant to a Project Manager's certificate he must give notice to the Contractor not later than five days before the final date for payment specifying the amount he proposes to withhold and the reason for withholding the payment (Clause 39.6). The final date for payment is the number of days stated in Schedule 19 (or if no number is so stated, 14 days) after receipt of the Contractor's invoice following the Project Manager's certificate. If proper certification is not made or payment in full of an invoice amount (adjusted by any withholding notice) is not made by the final date for payment, the Contractor may give the Purchaser notice of his intention to suspend performance of the works and may suspend seven days after such notice if the failure is still continuing. The Purchaser may audit the Contractor's records for a year after the date of the last final certificate and if any error is discovered in the amount paid to the Contractor then it is corrected in the next payment due under the contract.
  1. Termination
  • The Purchaser may terminate the contract for convenience at any time (Clause 41). If he does so the Contractor receives payment for work he has carried out, commitments to third parties and any other cost plus profit incurred by him in connection with the termination authorised by the Project Manager.
  1. Limitation of liability
  • Liability for usage, loss or contamination of any process consumable is excluded in respect of both parties (Clause 43.1). Loss of profit, revenue, use and production as well as business interruption, consequential or indirect losses of any kind are also excluded where they result from or arise out of or in connection with the works or the performance of them or any act or omission relating to them, however caused. There are exceptions in respect of insurance recovery and liquidated damages for delay or failure to pass performance tests. There is also a cap on total aggregate liability of the Contractor to the Purchaser other than liability in respect of care of the works and insurance. The cap prohibits recovery of sums in excess of the amount stated in the Contract Agreement. The liability of either party to the other for breach of contract is limited to the damages and remedies and reimbursements expressly provided in the contract.
  1. Dispute resolution
  • Any arbitration conducted under the contract is to be in accordance with the Arbitration Rules published by I.Chem.E current at the time of appointment of the Arbitrator (Clause 45.3). There is no reference to either expert determination or litigation.

Conclusion

The I.Chem.E forms of contract are produced for a specific sector of the market, namely process plant production, and their contents reflect this specialised use. Both the lengthy Take Over and performance test procedures as well as wide ranging limitations of liability reflect the particular economic concerns and risks of this sector and they may be unsuitable for use in a wider context where such considerations are not of such paramount importance. The I.Chem.E suite provides versions of three of the most common approaches to contracting (i.e. lump-sum contracting, cost reimbursable and target cost); in particular the Green Book is the only form of cost reimbursable contract available specifically intended for process plant production.