Arbitration Dispute Cross Arguments: Asia NGPipeline -Substance of EPC contracts nature

PROJECTS that
EPC CONTRACTS
ARE NOT INTENDED TO
INTERNATIONAL ARBITRATION dispute
CASE STUDY:
CENTRAL ASIA NG PIPELINE MEGAPROJECT
CLAIMANT-RESPONDANT CROSS ARGUMENTS
Prof.: César del Riego- Attorney at Law-Madrid

(A) THE CAUSE: SUBSTANCE OF THE
EPC CONTRACT LEADING TO
SUBSEQUENT LIMITATIONS
FIDIC Silver Preamble (Notes) Approach- Limits inherent to the EPC definition-
KERZNER triple constraint. Some conclusions on when not to engage in a EPC
Contract

CORE SUBSTANCE to the Definition of
EPC : An EPC is a contract that is
kerzners fully constrained
Main features that makes it not eleagible to certain projects
César del Riego- Arbitration Dispute: Projects not to use EPC
3

Kerzners triple
constraint and
EPC contracts
• A CONTRACT NOT SUBJECT TO
CHANGES (in practice is totally the
contrary) where financers push to
have the most certain return of
investment/public tender
specifications are tightly submited to
the law and makes that
• SCOPE IS (supposedly) CLOSED
not subject to changes
• COST IS (supposedly) CLOSED-
and not subject to changes.
• TIME IS (supposedly) CLOSED-
and not subject to changes

1- FIT FOR PURPOSE: all the necessary:
deliver the plant ready to turn the key and
operate
• Contractor is subject to all the obligations included in the contract
• Contractor is obliged to anything else necessary to deliver the work in
optimate conditions to opérate.
5

2- CONTRACTOR IS THE ONLY POINT OF
LIABILITY
• Contractor is the only liable point for the Works.
• Even the documents delivered by the Employer, including the
geotechnical studies, are asumed.
• Unforeseeable events are included as well.
• Subcontracting does not decrease this liability.
6

3- The Price is closed: Lump sum Price.
(Bill of quantities used to variations)
• The Price is already fixed from the beguinning and not contingent upon
the cost incurred along the construction process.
• The cost to incur is a priori stimated by the Contractor that shall bid
accordingly to the tender.
• In principle no circumstance may change the Price to be paid, including
unfereseen events (see only point of responsability to the Contractor).
7

4- The time is closed “time is of the
essence”: hard liquidated damages for
delay.
• LD should be limited to cover the Benefit mark up (between 5-10%)
• Use to be calculated as a percentage upon the contract price
• LD should stand between a minimun that entitles to resolve the contract
engagement.
• The getting down the contract performance triggers LD.
8

5- Scope is closed. Includes performance:
LD and bid/performance bonds)
• LD are subject to the milestones Schedule for performance.
• Performance milestones may differ from payment milestones.
• LD use to be in between a bottom- normal performance line.
• BID/performance BONDS guarantees (with mínimum/ no resort to the
Contractor) that the scope /performance is met.
9

6- Claims and Variations from the
contractor are hardly accepted
• Public Tender:
As the Price must not vary from the one in the tender documents.
May be chalenged by other tenderers.
• Multilateral Finance Institution Financing:
The representative of the financers shall push not to accept them
10

(B) THE CONSEQUENCE:
PROJECTS/ CIRCUMSTANCES NOT
SUITABLE FOR EPC CONTRACTS

1- FIDIC:EPC CONTRACTS ARE NOT SUITABLE
FOR USE IN THE FOLLOWING CIRCUMSTANCES
• Insufficient time or information to scrutinise and check the ERQs or to
carry out their designs, risk assessment studies and estimating
• Construction involves substantial work underground or in áreas cannot
be inspected (unless unforeseen conditions clause is revised)
• If the Employer intends to supervise closely or control the Works or to
review most of the drawings
12

2-CIRCUMSTANCES TO AVOID:
NO (BIG/LOTS) VARIATIONS FORESEEABLE
• As the scope is closed the cost and duration should be well scrutinased in
advance by the tenderer.
• Changes during the construction phase may result in the economic
unviability of the Project.
• Variation clauses/procedures use not to be well developed.
• Use not to be well stablished a contradictory pricing procedure/Bill of
quantities for variations in adition to the Lump Sum Price use to lead to
confusión.
13

3- CIRCUMSTANCES TO AVOID:
NO CERTAIN INTERIM PAYMENT PROCEDURES
• Payments must be certain upon certification of the completion of each
milestone.
• Payment procedure must be contractual (never by mutual agreement
post contract).
• No difficult proceeding to pay required
• No approval from third parties required to pay.
14

4-CIRCUMSTANCES TO AVOID: DONT BID TO
PROJECTS ARE NOT VERY EXPERIENCED IN
• As the Scope, Price and duration are so closed there is no place for
mistakes.
• Unexperienced contractor makes expectable a number of mistakes.
• Mistakes in number may break the financial viability of the Project.
15

(C) THE DISPUTE: CROSS
ARGUMENTS OF THE PARTIES
CROSS ARGUMENTS ON THE SUBSTANCE OF AN EPC CONTRACT: THE RESPONDANT
(UNINTENDEDLY) LET THE CLAIMANT SEE THE NATURE OF AN EPC CONTRACT.

FLAGSHIP PIPELINE PROJECT: UN CONTRATO EPC NO ESTÁ
INDICADO PARA PROYECTOS SINGULARES, en los que el
contratista no tiene gran experiencia, ni en los que son
intensivos en suelo.
By using this occasion, MR. RESPONDANT-EMPLOYER JONES would like to
emphasize once again that, as also very well known by MR. CLAIMANT-CONTRACTOR
SMITH, Natural Gas Pipeline Project should be distinguished from any other regular
infrastructure construction projects in Central Asia due to its nature (being a
Natural Gas pipeline, which should regard the environmental constraints at the highest
level to avoid any gas spills, consequently any environmental disasters) and the
application of the highest standards arising from the requirements of the MEP
Participants that are included in the Project Agreements, basically Host Government
Agreement and Lump Sum Turnkey Agreement.

FORMA CONTRATO EPC NO DEBE SER USADO CUANDO LA
DOCUMENTACIÓN NO SOLO VA A SER REVISADA SINO
APROBADA POR LA PROPIEDAD
This nature of the Project required establishment of very detailed
manuals, plans, procedures, projects and application forms, where all
such documentation shall be prepared and approved prior to
commencement of any particular task at sites and even at headquarters
of the contractors. Permit to Work and Access to Site Forms are deemed
as good examples to demonstrate how detailed documents are prepared
beforehand.

EL MODELO DE CONTRATO EPC NO ESTÁ INDICADO
CUANDO LA PROPIEDAD TIENE LA PUERTA ABIERTA A
GRAN NUMERO DE VARIACIONES.
In the light of the above explanations, while evaluating the Duplicate
Engineering it should be considered that in contrary to the regular
infrastructure construction projects in Central Asia any change to any of the
specifications, drawings etc. shall be implemented immediately and a
new revision shall be issued. Hence there were numerous revisions to
project documentation. As an example the MR. CLAIMANT-CONTRACTOR
SMITH documents such as “Single Line Diagrams” were revised 6 times after
the award of the EPC Contracts. MR. CLAIMANT-CONTRACTOR SMITH revised
almost all the documents included in the initial Contracts of the EPC
Contractors during the term of the Land Acquisition and Construction Phase.

(Cont.)
Last but not least, it should be unexceptionable that each change
required the EPC Contractors to amend and/or correct their
documentation prepared under the scope of their construction
engineering tasks including but not limited to application projects,
procedures, method statements etc., which uncontrollably increase the
foreseen man-days for the engineering tasks and in which in turn were
reflected to MR. RESPONDANT-EMPLOYER JONES by the EPC
Contractors under the Scope Changes.
20

Prices, Values and Rates included in the Schedule of Prices:
PROBLEMAS EN LA FIJACIÓN DE PRECIOS CONTRADICTORIOS EN CASO DE VARIACIONES/CAMBIOS: AL
NO ESTAR EL CONTRATO EPC INDICADO PARA LOS CAMBIOS, HABITUALMENTE NO INCLUYE UN
PROCEDIMIENTO ADECUADO Y SATISFACTORIO PARA LA FIJACIÓN DE DICHOS PRECIOS
The first paragraph of MR. CLAIMANT-CONTRACTOR SMITH is not correct for the MR.
RESPONDANT-EMPLOYER JONES case. MR. RESPONDANT-EMPLOYER JONES did
not mean or require such a calculation as proposed by MR. CLAIMANT-
CONTRACTOR SMITH that would be the calculation of the Lump Sum Contract Price
during tendering on the basis of the unit rates included in Schedule C and quantities
established during the tendering stage on basis of the available design documents at
the time of tendering.***En el Main Contract figura una lista de precios en la que no
se especifica que sean elegibles para el caso de variaciones. Realmente no está
bien definido el procedimiento de variaciones y no existe un procedimiento de
fijación de precios contradictorios ni una referencia expresa a una lista de precios
para este fin.

(Cont.)Contradictory pricing procedure/ BoQ
list of prices not properly in the contract
But MR. RESPONDANT-EMPLOYER JONES proposed during this arbitration
that, in order to identify whether the Schedule C and Schedule B rates are
analogues (as required in the contract), such a calculation could be exercised.
MR. RESPONDANT-EMPLOYER JONES agrees that, the term analogous, as MR.
CLAIMANT-CONTRACTOR SMITH has pointed out, can be understood as a
similarity of pricing levels for the Lump Sum Price and the unit rates of
Schedule C and/or of scope changes after contract award.

(Cont.) List of prices/contradictory
proceeding not in the contract- may an
instruction from the engineer ammend it?
Regarding with the point that MR. CLAIMANT-CONTRACTOR
SMITH has arose that, “the stipulation of the analogues rates in
the contracts has been inserted into contracts upon MR.
RESPONDANT-EMPLOYER JONES’ instruction (MR.
RESPONDANT-EMPLOYER JONES forwarded a BTC Comment
for incorporation into draft EPC contract documents directly to
MR. CLAIMANT-CONTRACTOR SMITH)”
23

(Cont.)Unfruitfully trying an
unexistent pricing list/procedure
That is not correct, because of two reasons:
1-XXXXXX comments (dated on XXXX) have been submitted to MR. CLAIMANT-
CONTRACTOR SMITH by a letter XXXX-MR. CLAIMANT-CONTRACTOR SMITH-255 dated on
XXXXXX by MR. RESPONDANT-EMPLOYER JONES whereas EPC contract package prepared
by MR. CLAIMANT-CONTRACTOR SMITH covering MR. CLAIMANT-CONTRACTOR SMITH-
BOQ-XXXX for example for Lot A , dated on XX had already foreseen the requirement of the
prices to be analogues under the Clause 3.7.
2-Even though that is a requirement put on the documents anyhow on the EPC tender
package, does not matter who requested that, it was MR. CLAIMANT-CONTRACTOR SMITH’s
responsibility to fulfil that requirement, i.e. being analogues of Schedule C rates with
Schedule B rates in the contract price.

(Cont.)EPC CLOSED SCOPE
In fact MR. CLAIMANT-CONTRACTOR SMITH has provided
Material Take Off’s for EPC Contractors as a part of tender
packages with addendum 3. Therefore MR. CLAIMANT-
CONTRACTOR SMITH arguments stating that, “...The whole of
the works at the stage of tendering were not and could not be
defined in quantitative detail” is not correct.

(Cont.)EPC NOT INTENDED TO
NEW PRICES
The MR. CLAIMANT-CONTRACTOR SMITH’s argument stating that, “The items in Schedule B do
not represent separate lump sums for the performance of the works contained under the
respective title” is not correct, it represents that as clarified in the item 1.2 Pricing of
Schedules...”Lump sum prices or unit rates shall be inserted against all
items in the schedules which have a monetary value. The value of items
left un-priced shall be deemed to be included in the contract price.
Should the Works or obligations given in such items not to be carried out by the contractor,
Employer shall deduct amounts for the works not completed valued in accordance with the
Contract “.
Schedule C rates are to be analogues to the amounts used in
calculating the Contract price (that is Schedule B) as given in 4.6 of Schedule of Prices
and Rates.

5- VARIACIONES: ARGUMENTS
Percentage of Scope Change Values
The CLAIMANT-CONTRACTOR denies the Respondents’ argument. As explained in
section 3.1.2 above, the MR. CLAIMANT-CONTRACTOR SMITH’s approach is not
correct for MR. RESPONDANT-EMPLOYER JONES case.
In addition to that, MR. RESPONDANT-EMPLOYER JONES’ claims are based on the
ones for which MR. RESPONDANT-EMPLOYER JONES considers that Schedule C has
been applied for pricing of scope changes.

6-LUMP SUM AND OVERHEADS INCURRED:
PRICING LIST DOESN’T ENVISAGE CHANGES
Overheads for Management, Engineering and Procurement:
The overheads that were mentioned in contract Schedule of Rates and Prices in Item
1.1.13 that the contract lump sum price (Schedule B) and unit rates (Schedule C)
includes, with others, the costs of profit and overheads, are for the overheads
associated with that priced specific works and does not mean the overheads (such
as management, engineering and procurement as these are main contract items) in
contrary to MR. CLAIMANT-CONTRACTOR SMITH argument.

(Cont.)
The Contract lump sum price has got its individual cost
price for these main items such as management, engineering and procurement
separately. That clause states that, the overheads relevant to management,
engineering and procurement are included in the management, engineering and
procurement lump sum price (Schedule B)
29

(Cont.)
ENGINEERING OVERHEADS
INCLUDED IN THE LUMP SUM
• On the other hand, the inclusion of the engineering works is not correct as
explained by MR. CLAIMANT-CONTRACTOR SMITH.
• In fact it should be as stated in Schedule of Prices and Rates Item 4.3
• “For any fabrication and installation elements of work that are the subject of a
Scope Change Order, the engineering component shall be taken as having been
included in Schedule ‘B’ for the fabrication and installation unit rate applicable to that
element of work.

(Cont.)
For the supply of material for any element of work that is the subject of a Scope Change
Order the engineering component of the supply shall be taken as having been included in
Schedule ‘C’.
If the work that is the subject of a Scope Change Order is such that an appropriate unit rate
cannot be identified, then the engineering element shall be valued according to
engineering rates or by agreement between the Parties.”
***Note: The EPC is not intended for changes. There is not a proper contradictory procedure
to price-on new elements arising upon given Variation Orders.
31

(Cont.)No proper pricing
procedure/BoQ for changes
Schedule C unit rates that are for the construction works (except the ones that the
labour, plant and materials rates used therein) have been used for the comparison
purposes of the schedule C unit rates (for construction) with Schedule B construction
rates. This comparison is logical for the similar extend and type of work (that is
construction to construction).

(Cont.) No
necessity of a
proper pricing
procedure?
Selected comparison prices
by MR. RESPONDANT-
EMPLOYER JONES are
covering almost 80% of the
construction works for all
LOTs. Therefore the average
rate found by using this
comparison is safe to apply
for the calculation of the
whole construction works.

Analyses of Selected
Scope Changes:
priced on a one by
one agreement basis
MR. CLAIMANT-CONTRACTOR SMITH has partially
accepted this as a Scope Change with his letter
XXXXX dated on XXXX.
The entitlement of the SCO is not relevant with the
timing and duration of the negotiations. As per
contract the EPC contractor has got a
contractual basis to request for the
application of the Schedule C rates.
The schedule C rate is used for the
valuation of this scope change as
well.

Analyses of Selected
Scope Changes:
priced on a one by
one agreement basis
The breakdown of the SCO
does not apply to any
duplication on the unit
rates, where appropriate
the unit rates of Schedule
C has been applied as the
scope of the work is a bit
complicated, all the
combinations had been
used for the valuation of
the scope such that, the
unit rate of Schedule C (for
the measurable work), the
supply and procurement
rates and labour and plant
and materials rates have
been all priced as required
separately.

36
✓ Especializado en los aspectos Contractuales,
marco regulatorio y de licitación y Corporativos
de proyectos internacionales de Construcción,
Energía e Ingeniería derivados de Concesiones
y contratos EPC-EPCM en Oriente Medio, Norte
de África (EMEA), Asia Central (CEI) y Europa
del Este. Gestión de proyecto y seguimiento de
variaciones, reclamaciones, DB- DAB art. 20
FIDIC y Arbitraje Internacional.
✓ Track record: firmas jurídicas Turquía- España.
Pekin&Pekin Law Firm (legal 500 tier 1 en
Corporate &Tax en Turquía, socio único de Uría
y Menendez- Lex Mundi. Akinci Law única
representante Turca en GAR Arbitraje, y top
Legal 500 en ADR Construcción y Energía.
Lambal,FIDIC-Arbitration law firm en España.
Subinspector de Hacienda en España.
Secretaría del Consejo de Administración de
sociedad cotizada en España. Legal Counsel
para capital jordano- saudí, oil& gas group of
companies, Luxembourg based investment
group .
CÉSAR DEL RIEGO :
abogado especialista en
contratación, arbitraje y
corporate; en los marcos
regulatorios de Turquía CEI
y EMEA; de los sectores de
Construcción, Energía e
Ingeniería.

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