The document summarizes key points from a presentation on limiting offshore contractor risk and liabilities under EPC contracts. It discusses how EPC contracts allocate significant risk to contractors by requiring fixed completion dates, lump sum pricing, and performance guarantees. It also examines strategies for negotiating contracts and allocating risk between owners and contractors, including using letters of intent and interest-based bargaining.

1. OFFSHORE KOREA TECHNICAL CONFERENCE 2016
LIMITING THE OFFSHORE CONTRACTOR’S
RISK AND LIABILITES
WEDNESDAY 19 OCTOBER 2016, BEXCO, BUSAN KOREA
Presented by:
Primila Edward
Principal Legal Consultant
Straits Consulting Group

2. Common form of contract used to undertake construction
works by the private sector on large scale and complex
construction projects is the EPC / EPCC / EPCIC model.
Under this EPC contract, a contractor is to deliver a complete
facility to a developer / owner who need only ‘turn a key’ to
start operating the facility, hence EPC contracts are sometimes
called turnkey construction contracts.
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OVERVIEW, LEGAL FRAMEWORK & CONTRACT
STRUCTURE & RISK ALLOCATION

3. In addition the EPC contractor must delivering a complete facility, for
a guaranteed price, normally a Lump Sum. So these contracts are
called Lump Sum Turn Key (LSTK) contract.
Contractors must complete the project by the guaranteed date and
It must perform to the specified guaranteed level.
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OVERVIEW, LEGAL FRAMEWORK & CONTRACT
STRUCTURE & RISK ALLOCATION

4. CONTRACTOR’S RIKS & LIABILITIES
Contractor’s needs to manage the risks involved in performing the
contracts according to specifications provided by Owner by the
guaranteed date, within the agreed lump sum price and meeting the
guaranteed levels agreed.
Contractors’ failure to comply with these strict contractual obligations
will usually result in the contractor being liable for breach of contract and
incurring monetary liabilities in the form of damages.

5. EPC / EPCIC CONTRACTS GENERALLY
KEY ELEMENTS IMPACT TIME, COSTS AND QUALITY
• ASSUMPTION OF ALL PROJECT RISK BY CONTRACTOR
LEADS TO 8-15% INCREASE IN ACTUAL COSTS OF THE
WORK . (FRED LYON, PRESIDENT TRICON POWER GROUP, FLORIDA)
• AVOID PAYING A PREMIUM BY OWNER ASSUMING SOME
OF THE RISK AND AGGRESSIVELY MANAGE THE RISK.
• NOT JUST ALLOCATE RISK BUT SHARE RISK AND
ULTIMATELY THE REWARDS
• PARTIES SHOULD ASSUMES RISKS IF IN A POSITION TO
CONTROL
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6. EPC & EPCIC CONTRACT STRUCTURE

7. CONTRACT STRUCTURE FOR P3 PROJECTS

8. EPC CHARACTERISTICS
• INTERFACE WITH OTHER PROJECT CONTRACTS
• ONE INTEGRATED PACKAGE
• SINGLE POINT RESPONSIBILITY
• BANKABILITY
• CLAIMS FOR ADDITIONAL COSTS, EOT
• SECURITY FOR PERFORMANCE, TECHNICAL RISK
• OUTPUT GUARANTEES
• LD FOR BOTH OUTPUT AND DELAY
• FIXED COMPLETION DATE & FIXED PRICE
• NO OR LIMITED TECHNOLOGY RISK
• SECURITY OR PARENT GUARANTEE
• CAPS ON LIABILITY
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9. EPC CONTRACT CULTURE
BLAME GAME
WHO IS TO BLAME ?
EMPLOYER
CONTRACTOR
SUB-CONTRACTOR OR
SUPPLIER
LEADS TO
MORE DISPUTES
MORE CLAIMS
MORE COSTS OVER RUNS

10. SPLIT EPC CONTRACT -OFFSHORE AVOIDS
HOST COUNTRY RESTRICTIONS
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Project Co
Onshore EPC
Contractor
Offshore EPC
Contractor
Parent Co
Wrap Around
Guarantor
Offshore
Contract
Onshore
Contract
Interface Obligations
Coordination Agreement
Administrative Agreement/Umbrella Deed
4 Party Agreement

11. SPLIT EPC
WRAP AROUND GUARANTEE
• NO HORIZONTAL DEFENCE
• TOTAL PERFORMANCE/FIT FOR PURPOSE
• OBLIGATION TO INTERFACE & INTEGRATE
• LAD BORNE FOR BOTH SPLIT CONTRACTORS
REGARDLESS OF WHICH ONE IS TO BE BLAMED
• PERFORMANCE BOND FROM PARENT CO FOR BOTH
SPLIT CONTRACTORS
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12. IDENTIFYING, ALLOCATING & SHARING OF RISK
BASED ON EPCIC CONTRACT TYPE
TYPES OF RISKS - EVALUATION AND ANALYSIS
DESIGN RISKS
CONSTRUCTION RISKS
PROJECT MANAGEMENT
OPERATING RISKS
FINANCIAL AND ECONOMIC RISKS
LEGAL RISKS
 POLITICAL RISKS

13. CONTRACTOR RISKS
RISK ALLOCATION TO CONTRACTORS
 - SINGLE POINT OF RESPONSIBILITY
 - FIXED COMPLETION DATE
 - LIMITED TECHNOLOGY RISKS
 - PERFORMANCE GUARANTEES
 - LIQUIDATED DAMAGES FOR BOTH DELAY & PERFORMANCE
 - SECURITY FROM CONTRACTOR OR ITS PARENT
 - HIGH LIMITS ON LIABILITY OF CONTRACTORS
 - LIMITED GROUND FOR THE CONTRACTOR TO CLAIM
 - EXTENSIONS OF TIME AND ADDITIONAL COSTS

14. EPC CONTRACT STRUCTURE
SINGLE POINT OF RESPONSIBILITY
THE PREFERRED OPTION FOR DELIVERY OF A
CONSTRUCTION PROJECT IS THE CONTRACTOR’S THE
SINGLE POINT RESPONSIBILITY SOLUTION WILL TYPICALLY
MEANS THE CONTRACTOR IS FULLY RESPONSIBLE FOR
THE COMPLETION OF THE PROJECT ON TIME, WITHIN
BUDGET TO THE REQUIRED STANDARD.
THIS LEGAL PRINCIPLE ALLOW THE OWNER TO HOLD THE
CONTRACT ONLY RESPONSIBLE FOR THE DELIVERY OF THE
PROJECT IRRESPECTIVE OF WHICH PARTY THAT IS A SUB-
CONTRACTOR OR SUPPLIER WHO MAY BE RESPONSIBLE.
THIS IS THE TURNKEY EPC CONTRACT MODULE.

15. LEGAL, TECHNICAL AND COMMERCIAL
OF TENDERERS
• ANY LEGAL QUALIFICATIONS PERMITTED ?
• ANY STRUCTURAL REQUIREMENTS - POTENTIAL CONTRACTING
PARTY?
• IS ITB BINDING BID ?
• CONTRACTOR INITIATE NEGOTIATIONS - POTENTIAL LOCAL
PARTNERS?
• CONTRACTOR DECIDE ON ITS OWN LEGAL STRUCTURE AT THIS TIME?
• SHOULD A CONSORTIUM MODEL BE CONSIDERED?
• IS THERE A REFERENCE TO A CERTAIN JURISDICTION?
• DOES ITB INCLUDE STANDARD CONTRACTUAL DOCUMENTS?
• TAX AND IMPORT ISSUES IN THE RELEVANT COUNTRY?
• LOCAL PRESENCE REQUIRED?

16. BEST PRACTICES IN TENDER EVALUATIONS
AND SELECTION OF TENDERER
COMPANIES SHOULD ENCOURAGE INNOVATION AND ALTERNATIVE
SOLUTIONS BY USING PERFORMANCE BASED SPECIFICATIONS
WHERE APPROPRIATE, LEADING TO:
• INCREASED EFFICIENCY IN DESIGN, TENDERING, PROJECT
MANAGEMENT AND FINANCIAL MANAGEMENT;
• SPEEDY RESOLUTION OF COMPLEX DESIGN AND PRODUCTION
PROBLEMS;
• LESS REWORK AND A LOWER COST FINISHED PRODUCT; AND
• IMPROVED DELIVERY OF PROJECTS IN TERMS OF HIGHER QUALITY
OUTCOMES, TIMELY DELIVERY AND ENVIRONMENTALLY
RESPONSIBLE BUILDINGS OR INFRASTRUCTURE.

17. INNOVATION AND TIME FOR TENDERS
PRINCIPALS SHOULD ALSO ENCOURAGE INNOVATION BY;
• ALLOWING SUFFICIENT TIME FOR TENDER RESPONSE
HAVING REGARD TO PROJECT COMPLEXITY AND THE
PAST EXPERIENCE OF TENDERERS; AND
• CONSIDERING ALTERNATIVE APPROACHES TO DELIVERY
OF PROJECTS.

18. INNOVATIVE DELIVERY SYSTEMS
INNOVATIVE APPROACHES AND DELIVERY SYSTEMS, SUCH AS
• JOINT VENTURES,
• ALLIANCE CONTRACTING,
• PARTNERING,
• STRATEGIC ALLIANCES AND THE LIKE,
• THESE DELIVERY SYSTEMS SHOULD BE CONSISTENT WITH THE
STANDARDS OF BEHAVIOUR REQUIRED BY THE COMPANY.
• IT SHOULD BE PURSUED BY THE PARTIES WHERE MEASURABLE
BENEFITS ARE TO BE OBTAINED.
• THIS OBJECTIVE SHOULD FORM A NECESSARY COMPONENT IN
THE EVALUATION OF TENDERS.

19. NEGOTIATING EPC CONTRACTS
POSITIONAL BARGAINING
• POSITIONAL BARGAINING IS A NEGOTIATION STRATEGY
THAT INVOLVES HOLDING ON TO A FIXED IDEA, OR
POSITION, OF WHAT YOU WANT AND ARGUING FOR IT
AND IT ALONE, REGARDLESS OF ANY UNDERLYING
INTERESTS.
• EACH SIDE STARTS WITH AN EXTREME POSITION, WHICH
IN THIS CASE IS A MONETARY VALUE, AND PROCEEDS
FROM THERE TO NEGOTIATE AND MAKE CONCESSIONS.
EVENTUALLY A COMPROMISE MAY BE REACHED.
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20. DIFFERENCE IN BARGAINING POSITIONS
INTEREST-BASED BARGAINING
• THIS IS A METHOD OF NEGOTIATING THAT FOCUSES ON
MEETING THE UNDERLYING CONCERNS, NEEDS OR
INTERESTS OF THE PARTIES INVOLVED IN THE
NEGOTIATION.
• THE PARTIES ARE ENCOURAGED TO COMMUNICATE WHAT
IS IMPORTANT ABOUT AN ISSUE RATHER THAN ARGUING
FOR A SPECIFIC POSITION OR SOLUTION.
• THIS TYPE OF BARGAINING ALLOWS THE PARTIES TO
UNDERSTAND WHERE THE OTHER PARTY IS COMING FROM
AND IS COOPERATIVE.
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21. LETTER OF INTENT & LETTER OF AWARD
• A TRUE 'LETTER OF INTENT' WILL BE SIMPLY A LETTER EXPRESSING AN
INTENTION TO AGREE SOMETHING IN THE FUTURE I.E. IT DOESN'T
FORM A CONTRACT.
• LETTERS OF AWARD OR ACCEPTANCE ARE MORE LIKELY TO CONFIRM
AN AGREEMENT, ALTHOUGH AGAIN THE DETAIL OF THE LETTERS MUST
BE READ TO APPRECIATE THE OBLIGATIONS PLACED ON EACH PARTY.
• IN BROAD TERMS THE DIFFERENCE CONTRACTUALLY BETWEEN A
LETTER OF INTENT, A LETTER OF ACCEPTANCE AND A LETTER OF
AWARD WILL DEPEND UPON THE PARTICULAR DETAILS CONTAINED
WITHIN EACH 'LETTER';
• YOU CANNOT RELY ON THE TITLE OF THE LETTER TO TELL YOU ITS
TRUE NATURE.
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22. LETTER OF INTENT
• COMMITMENT FROM OPERATOR ENABLE CONTRACTOR TO START
PLACING ORDERS TO MEET THE TIME SCHEDULE.
• CANCELLATION FEES SHOULD BE COVERED.
• CONTRACTOR SHOULD AVOID ANY KIND OF RESERVOIR RISK.
• BANK GUARANTEES AND/OR CORPORATE GUARANTEES REQUIRED.
• PROJECTS WHERE SEVERAL PARTNERS ARE DEVELOPING THE
FIELD,, CANCELLATION FESS CAN END UP WORTHLESS IF BACKED
BY A SINGLE PURPOSE COMPANY WHO IS FORMAL CONTRACT PARTY
(MINOR PARTNER )
• INCLUDE REGULATION COVERING THE POSSIBILITY EXTENSION OF
PRE-CONTRACTUAL PHASE FOR ANY REASON.

23. “SUBJECT TO CONTRACT”
IT IS IMPORTANT TO CLEARLY SET FORTH IN THE
LETTER OF INTENT THAT IT IS NOT INTENDED TO BE
A BINDING CONTRACT. BY ADDING THE WORDS
“SUBJECT TO CONTRACT” THIS CAN BE ACHIEVED.
 IN MOST INSTANCES, AN UNSIGNED TERM SHEET
CAN ACCOMPLISH THE SAME PURPOSE AS A SIGNED
LETTER OF INTENT.
TO BE ON THE SAFE SIDE, THE UNSIGNED TERM
SHEET SHOULD STILL INCLUDE A PROVISION THAT
THE TERM SHEET IS NOT A LEGALLY BINDING
CONTRACT.
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24. ASSESSING HOW RISKS CHANGE BY
CURRENT CHALLENGES IN THE ECONOMY
• IN THE CURRENT MARKET PARTIES ARE VERY RISK AVERSE
• CONTRACT TERMS THAT MATTER:-
– PAYMENT TERMS
– DELIVERY COMMITMENTS

25. PROJECT CONTRACTING TRENDS
• ECONOMIC UNCERTAINTIES CURTAIL HIGHER-COST AND
SHORTER-LIFE UNCOMMITTED PROJECTS, AND DELAY
COMMITTED SPEND.
• AND WHILE COMMITTED CAPITAL PROJECTS MAY SLOW, THE
COST OF COMPLETING THEM IS OFTEN LOWER THAN THE
COSTS OF OUTRIGHT ABANDONMENT.
• FURTHERMORE, PROJECT COMMITMENTS AND PLANS MAY BE
SECURED BY LONG-TERM SALES AGREEMENTS AND FINANCIAL
HEDGES.
• THEREFORE, SHORT-LIFE ASSET SPEND RESPONDS THE MOST
QUICKLY.

26. OVERCOMING BUSINESS, OPERATIONAL
AND PROJECT RISK
• COMPANIES THAT CONSISTENTLY ACHIEVE THEIR GOALS
AND DELIVER ON THE PROMISES MADE TO EXECUTIVES
AND BOARD MEMBERS HAVE ONE THING IN COMMON:
• COMPANIES EFFECTIVELY ASSESS PROJECT RISK,
• THEREFORE INVESTING TIME, RESOURCES, AND TALENT
IN SUCCESSFUL ENDEAVOURS THAT FURTHER THE
COMPANY’S STRATEGIC OBJECTIVES.

27. OVERCOMING BUSINESS, OPERATIONAL
AND PROJECT RISK
• PROJECT LEADERS HAVE LONG KNOWN THAT THE
HUMAN MIND ALONE IS INCAPABLE OF ADDRESSING THE
COMPLICATED ARRAY OF ISSUES INVOLVED IN PROJECT
MANAGEMENT.
• INDEED, PROJECT COSTS CONTINUE TO GROW AND
MORE IT IS SAID THAT 40 PERCENT OF PROJECTS GO
OVER BUDGET, IN LARGE PART DUE TO THEIR RELIANCE
ON OUTDATED PROCESSES.
• LARGE-SCALE PROJECTS ARE SIMPLY TOO COMPLEX.

28. ARE PROJECTS PREPARED FOR
MARKET RISKS ?
• PROJECT MANAGERS ARE ALSO VERY AWARE THAT
IDENTIFYING RISK IS NOT AN INTUITIVE PROCESS AND
THAT NO INDIVIDUAL CAN ACCURATELY IDENTIFY THE
INNUMERABLE CONTINGENCIES THAT CAN AND DO ARISE.
• SUCH CONTINGENCIES HAVE THE POTENTIAL TO TAKE
OTHERWISE SOUND EFFORTS OFF TRACK, WHETHER
THEY INCLUDE A LATE THAW OR A LATE DELIVERY OF
DRILLING EQUIPMENT

29. AVOIDING EPCIC CONTRACTING RISKS
• SINGLE SOURCE RESPONSIBILITY
• AVOID HIDDEN RISK ALLOCATIONS
• MINIMUM INVOLVEMENT DUE TO OTHER
OBLIGATIONS
• THE NEED FOR SPEED/FAST TRACK
• REDUCED TIME FROM INCEPTION TO COMPLETION
• SPECIALIST KNOWLEDGE REQUIRED
• SUITABLE SPECIALIST CONTRACTOR AVAILABLE
• COMPETITIVE DESIGN TENDERS
• BETTER BUILD-ABILITY DUE TO HIGH VALUE
ENGINEERING
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30. EPC CONTRACTING RISKS
• PROJECT CO’S RIGHT TO SUSPEND OR ABANDON PROJECT
• EXCLUDE CONSEQUENTIAL CLAIMS
• EXCLUDE LOSS OF PROFIT CLAIM
• EXCLUDE LOSS AND EXPENSES CLAIM
• TERMINATION/DETERMINATION
• RESTRICTED CONTRACTOR’S RIGHTS
• EXCLUDE COMMON LAW TERMINATION (CAN’T EXCLUDE
REPUDIATION)
• CONTRACTOR DEFAULT
• CONTRACTOR INSOLVENCY (DEEMED TERMINATED)
• PROJECT CO’S CONVENIENCE W/O CONSIDERATION
(REASONABLENESS)
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31. ALLOCATION OF CONSTRUCTION RISK
• CONTRACTOR’S RISKS INCLUDE
- DELIVERY, TESTING & COMMISSIONING,
- MEETING PERFORMANCE CRITERIA,
- CERTIFICATION
- DEFECTS LIABILITY PERIOD
• EMPLOYER’S RISKS
- PAYMENT
- RUNNING AND MANAGING OF FACILITY INCLUDING
- PROVISION OF FUELS, SUPPLIES, UTILITIES,
- INFRASTRUCTURE, TITLE TO SITE,
- PROCUREMENT OF PERMITS AND LICENSES
- REMEDIES FOR NON-DELIVERY
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32. ALLIANCE CONTRACTING IN OFFSHORE
THE TIME HAS COME TO PERSUADE OWNERS, DEVELOPERS
AND PROJECT FINANCIERS THAT THE ENGINEER-PROCURE-
CONSTRUCT (EPC) CONTRACT IS NO LONGER THE BEST
DELIVERY SYSTEM FOR OFFSHORE CONTRCATS.
ALLIANCE CONTRACTING REPRESENTS A VIABLE, PROVEN
ALTERNATIVE TO ADVERSARIAL BUSINESS-AS-USUAL
CONTRACTS LIKE EPC CONTRACTS.

33. ALLIANCE CONTRACT
• ALLIANCE CHARTER – STATING PROJECT GOALS
• PARTNERING CHARTER BECOMES PART OF EPC CONTRACT
• DOES NOT OVERRIDE ALLOCATIONS OF RISK, MERELY ALLOWS JOINT
MANAGEMENT OF RISK
• NO DISPUTE OR LITIGATION CLAUSE
• MUTUALLY AGREED TO BUSINESS TERMS INCLUDING PAYMENT
PROVISIONS AND MUTUALLY ESTABLISHED BONUS & PENALTY
STIPULATIONS.
• INCENTIVE FORMULA ON REMUNERATION IF UNDER BUDGET & ON TIME
• OPEN COMMUNICATIONS & JOINT TROUBLE-PREVENTION & TROUBLE-
SHOOTING
• MAINTAIN SAME SITE TEAM THROUGHOUT THE PROJECT
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34. ALLIANCE CONTRACTING
• PROVEN PROJECT DELIVERY MANNER THAT ALIGNS THE INTERESTS OF
THE OWNER AND THE CONTRACTOR TO BUILD THE PROJECT IN A
“COLLABORATIVE” WAY. MUTUAL OBJECTIVES ARE AGREED.
• OPEN BOOK ON BUDGET FROM PROJECT CO & COST FROM
CONTRACTOR
• “NO-BLAME” PROJECT CULTURE WITH NO DISPUTES AND NO MAJOR
CLAIMS
• REINFORCED WITH FINANCIAL INCENTIVES TO ACHIEVE DESIGNATED
PRIMARY PROJECT GOALS.
• GOALS BASED ON PRE-ESTABLISHED PROJECT TARGET COSTS
DEVELOPED TO AND AGREED TO BY ALL PARTIES. A COMMITMENT TO
MAINTAIN COST-EFFICIENCY. ALLOWS WIN-WIN SITUATION BY SHARING
COST SAVINGS
• A COLLABORATIVE APPROACH – INTEGRATED TEAM, CONSTANT
TEAMWORK
• OPEN BOOK ON BUDGET FROM PROJECT CO & COST FROM
CONTRACTOR
• GOOD FAITH PROCEDURES ADOPTED
• SENIOR MANAGEMENT & SITE MANAGEMENT TIED TO A “PARTNERING
CHARTER”
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35. ALLIANCE CONTRACTING IN OFFSHORE

36. ALLIANCE CONTRACTING- NO BLAME PROJECT CULTURE
• THE PROJECT ALLIANCE CONTRACT LANGUAGE PROMOTES A "NO-BLAME"
PROJECT CULTURE AND REINFORCES IT BY ADOPTING FINANCIAL
INCENTIVES TO ACHIEVE DESIGNATED PRIMARY PROJECT GOALS.
• THESE GOALS ARE BASED ON PRE-ESTABLISHED PROJECT TARGET COSTS
DEVELOPED AND AGREED TO BY ALL MEMBERS OF THE ALLIANCE TEAM.
• THE ALLIANCE AGREEMENT TYPICALLY INCLUDES
AN ALLIANCE CHARTER (A SET OF INSPIRATIONAL PROJECT GOALS),
A NO DISPUTE OR LITIGATION CLAUSE,
AND BUSINESS TERMS, INCLUDING PAYMENT PROVISIONS AND
MUTUALLY ESTABLISHED BONUS AND PENALTY STIPULATIONS.
(CHRIS NOBLE, ESQ. PARTNER, NOBLE & WICKERSHAM LLP, CAMBRIDGE, MASSACHUSETTS)

37. LIMITING LIABILITY FOR OFFSHORE CONTRACTORS
LIABILITY CAPS
EXCLUSION OF LIABILITY
LIABILITY TO THIRD PARTIES
EXCLUSION OF LIABILITY FOR INCIDENTAL AND
CONSEQUENTIAL LOSSES
EXCULPATROY CLAUES : NO LIABILITY FOR NEGLIGENCE
DAMAGES LIMITED TO IMSURANCE
LIMITING DAMAGES AND DELAYS DUE TO ADVERSE
WEATHER COMDITIONS
INDEMNITIES

38. LIABILITY CAPS
LIMITING LIABILITY BY CONTRACTOR TO CLIENT.
AMOUNT THE CAP CAN BE FIXED SUM OR PERCENTAGE
OF THE CONTRACT PRICE.
LIMIT LIABILITY TO CLIENT FOR
“ CLAIMS, LOSSES, COSTS, DAMAGES OR CLAIMS EXPENSES FROM
ANY CAUSE OR CAUSES ( INCUDING ATTORNEYS’ FEES AND COSTS
AND EXPERT WITNESS FEES AND COSTS0 SO THAT THE
CONTRACTOR’S TOTAL AGGREGATE LIABILITY TO THE CLIENT
SHALL NOT EXCEED___________________ OR ___ % OF THE
CONTRACTOR’S TOTAL CONTRACT PRICE WHICH EVER IS THE
GREATER. THIS LIMITATION WOULD APPLY TO ANY LIABILITY OR
CAUSE OF ACTION, HOWEVER ALLEGED OR ARISING”.

39. EXCLUSION OF LIABILITY
EXCLUDE OR LIMIT LIABILITY FOR NEGLIGENCE BY USE OF
EXCLUSION OR DISCLAIMER CLAUSE.
EXAMPLE:
“ CONTRACTOR MAKES NO EXPRESS OR IMPLIED
WARRANTY FOR MERCHNATABILITY, FITNESS FOR
PURPOSE FOR A PARTICULAR PURPOSE OR OTHERWISE
OR ALL OTHER WARRANTIES EXPRESSED OR IMPLIED
INCLUDING THE WARRANTY OF MERCHANTIBILITY AND THE
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE ARE
EXPRESSELY EXCLUDED OR DISCLAIMED”.

40. LIABILITY TO THIRD PARTIES
CONTRACTOR’S LIABILITY TO THIRD PARTIES CANNOT BE
LIMITED, EXCLUDED OR DISCLAIMED IN THE ABSENCE OF A
CONTRACT WITNTHE THIRD PARTY.
IN SUCH CASES THE CONTRACTOR’S LIABILITY IS UNLIMITED
EVENTHOUGH LIABILITY TO CLIENT IS CAPPED.
IT IS THEREFORE ADVISABLE TO TAKE INSUARNCE AGAINST
THIRD PARTY CLAIMS

41. EXCLUSION OF LIABILITY FOR INCIDENTAL
AND CONSEQUENTIAL LOSSES
WHEN A CONTRACTOR IS IN BREACH OF CONTRACT HE WILL BE LIANLE FOR
DAMAGES PAYABLE TO THE CLIENT.
DAMAGES CAN BE DIRECT AND INDIRECT DAMAGES.
INDIRECT DAMAGES CAN INCLUDE CONSEQUENTIAL DAMAGES.
CONTRACTOR CAN LIMIT OR EXCLUDE LIABILITY FOR CONSEQUENTIAL
DAMAGES
SAMPLE CLAUSE
“ THE PARTIES AGREE THAT NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGESOF WHATSOEVER NATURE, HOWEVER CAUSED,
WHETHER BY THE NEGLIGENCE OF THE PARTY OR OTHERWISE.
NEITHER PARTY SHALL BE LIABLE FOR ANY SPECIAL, INDIRECT, INCODENTAL OR
CONSEQUENTIAL DAMAGES OF ANY NATURE INCLUDING, WITHOUT LIMITATION, LOSS OF
PROFITS, LOSS BY REASON OF SHUTDOWN AND LOSS OF USE OR INTEREST”.

42. NO DAMAGES RECOVERABLE FOR DELAY
NO DAMAGES FOR DELAY CLAUSE POSSIBLE IF CLIENT AGREES
WHERE
DELAY WAS CAUSED BY THE ACTIVE INTERFERENCE ( OMISSION) OF
THE CLIENT.
DELAY AROSE FROM A CAUSE NOT CONTEMPLATED BY THE PARTIES
WHEN ENTERING INTO THE AGREEMENT
THE DELAY IS NOT WITHIN SPECIFIC WORDING OF THE CLAUSE
“ CONTRACTOR SHALL NOT BE LIABLE TO SUB-CONTRACTOR FOR ANY DELAY TO
SUBCONTRACTOR’S PERFORMANCE OF ITS WORK CAUSED BY THE ACT OR OMISSION OF
THE CLIENT, OR BY ANY ACT BEYOND THE CONTRACTOR’S CONTROL. OR IF
CONTRACTOR’S PERFORMANCE IS DELAYED BY NON-NEGLIGENT ACTS OF THE CLIENT OR
BY EVENTS BEYOND THE CONTRACTOR’S CONTROL, THE CONTRACTOR SHALL BE
ENTITLED, UPON REQUEST, TO A REASONABLE EXTENSION OF TIME FOR PERFORMANCE,
BUT SHALL NOT BE ENTITLED TO AN INCREASE IN COMPENSATION OR TO DAMAGES BY
REASON OF DELAY”.

43. EXCULPATORY CLAUSES: NO LIABILITY
FOR NEGLIGENCE
PARTIES MAY EXCLUDE SIMPLE NEGLIGENCE BUT NOT GROSS
NEGLIGENCE.
THESE CLAUSES ARE SUBJECT TO THE CONTRA PROFERENTUM
RULE.
“ THE PARTIES AGREE THAT NEITHER PARTY SHALL BE LIABLE TO
THE OTHER IN NEGLIGENCE, OR IN ANY OTHER LEGAL THEORY (
EXCEPT FOR BREACH OF CONTRACT AND WILFUL, WANTON OR
INTENTIONAL CONDUCT ) FOR ACTS OR OMISSIONS ARISING OUT
OF THE SUBJECT MATTER OF THIS CONTRACT ”.

44. DAMAGES LIMITED TO IMSURANCE
PARTIES MAY SEEK TO LIMIT THEIR LIABILITY TO THE MAXIMUM
AMOUNT OF THEIR RESPECTIVE INSURANCE COVERAGE.
“ NEITHER THE CONTRACTOR, THE CONTRACTOR’S SUBCONTRACTORS,
NOR THEIR AGENTS OR EMPLOYEES SHALL BE JOINTLY OR INDIVIDUALLY
LIABLE TO THE CLIENT IN ANY AMOUNT IN EXESS OF THE CURRENTLY
MAINTAINED PROFESSIONALLY LIABILITY INSURANCE COVERAGE CARRIED
BY THE CONRTRACTOR ”.

45. INDEMNITIES
What is an indemnity?
• An indemnity is a contractual promise to accept liability for
another's loss.
• It is a primary obligation because it is independent of the
obligation of a third party (principal) to the beneficiary of
the indemnity (beneficiary) under which the loss arose

46. DEFINITION OF INDEMNITY
• INDEMNITY IS DEFINED AS "PROTECTION AGAINST FUTURE LOSS" OR
"LEGAL EXEMPTION FROM LIABILITY FOR DAMAGES". IT ALSO HAS A
MATERIAL MEANING OF A SUM OF MONEY PAID IN COMPENSATION FOR
LOSS OR INJURY.
• A COMMON ELEMENT PRESENT IN THE DEFINITIONS IS THAT THE
INDEMNIFYING PARTY AGREES "TO MAKE GOOD“ ANY LOSS OR DAMAGE
INCURRED BY THE INDEMNIFIED PARTY AND TO "SAFEGUARD" AND "HOLD
HARMLESS" THE PARTY INDEMNIFIED FROM LIABILITY.
• THESE DEFINITIONS POINT AT THE PROTECTIVE MEANING OF INDEMNITY,
WHEREBY THE PARTIES AGREE TO DEFEND EACH OTHER FROM
LIABILITIES.
• THIS MAKES IT DIFFERENT FROM OTHER CONTRACTUAL PROVISIONS AND
DOES NOT ALWAYS COINCIDE WITH THE OFFICIAL POSITION OF THE LAW
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47. 47
CROSS INDEMNITIES
• Under cross-indemnity agreements, the indemnification
obligation is reciprocal in nature, regardless of fault. Therefore,
each party obligates itself to indemnify the other for liabilities
arising out of each other's acts or omissions.
• Knock-for-knock indemnity is reciprocal in nature and is based
on ownership of property and personnel as opposed to
allocating risk based on fault. Each party to an oil and gas
contract agrees to take responsibility for and to indemnify the
other party against injury and loss to its own property and
personnel.

48. KNOCK FOR KNOCK
“KNOCK FOR KNOCK” OR “ MUTUAL HOLD HARMLESS”
INDEMNITIES.
MOVNG AWAY FROM FAULT BASED APPROACH TO EAC PARTY
GREEING TO TAKE THE RISK OF DAMGE TO ITS OWN PROPERTY,
PERSONNEL AND MORE IRRESPECTIVE OF NEGLIGENCE OR
BREACH OF CONTRACT.
“ EACH PARTY WILL INDEMNIFY THE OTHER AGAINST CLAIMS IN
RESPECT OF ANY
• DEATH OF OR PERSONAL INJURY, TO THE PARTY’S OWN
EMPLOYEES
• LOSS OF, OR DAMAGE TO, THE PARTY’S OWN PROPERTY AND
• POLLUTION EMANATING FROM THE PARTY’S OWN PROPERTY.”

49. WHAT IS FORCE MAJEURE ?
• CERTAIN EVENTS, BEYOND THE CONTROL OF THE PARTIES, MAY
INHIBIT THE PARTIES FROM FULFILLING THEIR DUTIES AND
OBLIGATIONS UNDER THE PROJECT AGREEMENTS. TO AVOID THE
RESULTANT BREACH OF CONTRACT, PARTIES MAY PREFER TO EXCUSE
CONTRACTUAL OBLIGATIONS TO THE EXTENT THAT THEY HAVE BEEN
SO INHIBITED.
• DIFFERENT LEGAL SYSTEMS HAVE DEVELOPED DIFFERENT THEORIES
IN RESPONSE TO THIS NEED, INCLUDING THE DOCTRINES OF
IMPOSSIBILITY AND FRUSTRATION IN ENGLAND AND THE UNITED
STATES AND FORCE MAJEURE IN FRANCE. UNDER FRENCH LAW
FORCE MAJEURE IS AN EVENT THAT IS UNFORESEEABLE,
UNAVOIDABLE AND EXTERNAL THAT MAKES EXECUTION IMPOSSIBLE.
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50. FORCE MAJEURE
• IN ORDER TO AVOID THE UNCERTAINTIES AND DELAYS INVOLVED IN
RELYING ON THE APPLICABLE LAW, PARTIES TO CONTRACTS OFTEN
PREFER TO PROVIDE FOR A SPECIFIC REGIME FOR FORCE MAJEURE,
ALONG WITH A DEFINITION OF WHICH EVENTS SHALL QUALIFY FOR
SPECIAL TREATMENT.
• THE TERM FORCE MAJEURE USED IN DRAFTING PROJECT
DOCUMENTS COMES ORIGINALLY FROM THE CODE NAPOLÉON OF
FRANCE, BUT SHOULD NOT BE CONFUSED WITH THE FRENCH
DOCTRINE. GENERALLY, FORCE MAJEURE MEANS WHAT THE
CONTRACT SAYS IT MEANS.
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51. CHECKLIST OF ISSUES TO CONSIDER IN
FORCE MAJEURE
• WHO SHOULD BEAR THE RISK ?
• WHAT ARE THE CONSEQUENCES OF THE FORCE
MAJEURE EVENT ?
• ARE LIQUIDATED DAMAGES TO BE PAID ?
• WILL THERE BE PAYMENT CONTINUITY ?
• WHAT EFFECT WILL IT HAVE ON OTHER PROJECT
DOCUMENTS ?
• TERMINATION FOR EXTENDED FORCE MAJEURE.
51

52. FORCE MAJEURE CLAUSES
• CERTAIN EVENTS, BEYOND THE CONTROL OF THE PARTIES, MAY
PREVENT THE PARTIES FROM FULFILLING THEIR DUTIES AND
OBLIGATIONS UNDER THE CONTRACT.
• TO AVOID A BREACH OF CONTRACT UNDER THESE CIRCUMSTANCES,
PARTIES MAY PREFER TO EXCUSE CONTRACTUAL OBLIGATIONS TO
THE EXTENT THAT THEY HAVE BEEN SO INHIBITED.
• DEFINITION OF FORCE MAJEURE PROVIDE FOR A SPECIFIC REGIME
FOR EVENTS THAT QUALIFY FOR SPECIAL TREATMENT AS A FORCE
MAJEURE EVENT.

53. TERMINATION FOR EXTENDED FORCE
MAJEURE
• A MAXIMUM PERIOD BE IDENTIFIED DURING WHICH THE
EFFECTS OF ONE SINGLE EVENT OR AN AGGREGATE
DURATION OF FORCE MAJEURE EVENTS OVER THE PERIOD
OF THE CONCESSION MAY LAST BEFORE ONE OR BOTH OF
THE PARTIES CAN BE ENTITLED TO TERMINATE THE
CONTRACT.
• A FORCE MAJEURE CLAUSE WILL NORMALLY ALLOW FOR
COMPENSATION DURING FORCE MAJEURE WILL ALLOW THE
PARTIES TO WAIT OUT THE FORCE MAJEURE.
53

54. FORCE MAJEURE EVENTS
• THE PARTIES WILL USUALLY AGREE ON A LIST, WHICH MAY OR MAY NOT BE
EXHAUSTIVE, OF EXAMPLES OF FORCE MAJEURE EVENTS. FORCE MAJEURE
EVENTS GENERALLY CAN BE DIVIDED INTO TWO BASIC GROUPS: NATURAL
EVENTS AND POLITICAL EVENTS.
(A) NATURAL EVENTS. THESE MAY INCLUDE EARTHQUAKES, FLOODS, FIRE,
PLAGUE, ACTS OF GOD (AS DEFINED IN THE CONTRACT OR IN APPLICABLE
LAW) AND OTHER NATURAL DISASTERS
(B) POLITICAL AND SPECIAL EVENTS. THESE MAY INCLUDE TERRORISM,
RIOTS OR CIVIL DISTURBANCES; WAR, WHETHER DECLARED OR NOT;
STRIKES (USUALLY EXCLUDING STRIKES WHICH ARE SPECIFIC TO THE SITE
OR THE PROJECT COMPANY OR ANY OF ITS SUBCONTRACTORS).
54

55. HOW TO DEAL WITH
CONTRACT CHANGES
• IT IS COMMON IN COMMERCIAL CONTRACTS TO INCLUDE A
PROVISION THAT ANY CHANGES MADE TO A CONTRACT ARE
INEFFECTIVE UNLESS MADE IN WRITING AND SIGNED BY OR
ON BEHALF OF BOTH PARTIES.
• THIS IS KNOWN AS A VARIATION CLAUSE, AND IS INTENDED TO
PREVENT INFORMAL OR INADVERTENT ORAL VARIATIONS.
• HOWEVER, COMMON LAW ALLOWS FOR A WRITTEN
CONTRACT TO BE CHANGED BY SUBSEQUENT MUTUAL
AGREEMENT FROM BOTH PARTIES, WHETHER ORAL OR
WRITTEN.
• THIS CAN MAKE THE POSITION COMPLICATED.
55

56. CHANGE IN LAW
CHANGES IN THE RELEVANT LAW CAN AFFECT THE WAY
WORK IS PERFORMED UNDER A CONTRACT.
CONTRACTORS WILL GENERALLY BE OBLIGED TO COMPLETE
THE WORK IN ACCORDANCE WITH LOCAL BUILDING
REGULATIONS AND OTHER LAWS.
 IF THE LAW CHANGES DURING THE TERM OF A
CONSTRUCTION PROJECT, THIS CAN HAVE COST
IMPLICATIONS FOR THE CONTRACTORS.
56

57. CHANGE OF LAW
CHANGES IN LAW – THE COMMON LAW POSITION IN THE ABSENCE OF
EXPRESS PROVISIONS TO THE CONTRARY, THERE IS NORMALLY AN
IMPLIED TERM IN A CONTRACT THAT THE CONTRACTOR WILL NOT
COMPLETE THE WORK IN A MANNER WHICH CONTRAVENES RELEVANT
BUILDING REGULATIONS OR OTHER CONSTRUCTION LAWS.
HOWEVER, WHETHER A CONTRACTOR CAN RECOVER ANY ASSOCIATED
COSTS DEPENDS ON WHETHER: THE WORK FOR WHICH THE CONTRACT
SUM IS PAYABLE IS DEFINED IN TERMS WIDE ENOUGH TO INCLUDE
WORK WHICH IS UNSPECIFIED IN THE CONTRACT.
CONSTRUCTION CONTRACT APPROACH TO CHANGES IN LAW WILL
GENERALLY EXPRESSLY PROVIDE FOR HOW TO DEAL WITH THE
EFFECTS OF CHANGES IN LAW ON A PROJECT.
57

58. MATERIAL ADVERSE CHANGE ( MAC)
• A CLAUSE WHICH HAS BECOME A PROMINENT FEATURE OF
CONTRACTS. MAINLY DUE TO IN RECENT YEARS THE 2001
DOWNTURN IN THE ECONOMY, THE TERRORIST ATTACKS
OF SEPTEMBER 11, 2001, AND THE PROSPECTS OF WAR
WITH IRAQ IN 2003 PROMPTED DEAL PARTIES, AND THE
BUSINESS AND LEGAL COMMUNITIES AS A WHOLE, TO
CONSIDER ANEW ON WHAT BASIS A MAC PROVISION COULD
ALLOW A PARTY TO GET OUT OF A DEAL.
• AN AGREEMENT MAY BE TERMINATED BY BUYER AT ANY
TIME A MATERIAL ADVERSE CHANGE OCCURS.
58

59. MAC EVENT CAN TRIGGER
RENEGOTIATION OF CONTRACT
CALLING A MAC AS A BASIS TO RENEGOTIATE IS
PREVALENT IN SEVERAL RECENT CASES.
 THE DECLARATION OF A MAC WAS THE BASIS FOR
‘TERMINATING” A TRANSACTION WITHOUT THE DISPUTE
EVEN COMING TO TRIAL.

60. PROTECTING THE CONTRACTOR FROM
GOVERNMENT ACTIONS
STABILIZATION CLAUSES AIM AT PROTECTING THE
PRIVATE INVESTOR BY RESTRICTING THE LEGISLATIVE
OR ADMINISTRATIVE POWER OF THE STATE, AS
SOVEREIGN IN ITS COUNTRY AND LEGISLATOR IN ITS
OWN LEGAL SYSTEM, TO AMEND THE CONTRACTUAL
REGULATION OR EVEN TO ANNUL THE AGREEMENT.
 PROTECTING THE INVESTOR AGAINST THE STATE’S
ACTIONS.

61. STABILIZATION CLAUSES
STABILIZATION CLAUSES OF THIS KIND AIM AT
GUARANTEEING THE STABILITY OF ESSENTIAL
CONDITIONS OF THE AGREEMENT.
CONDITIONS OF THE CONTRACT THAT AFFECT THE RETURN
ON THE PRIVATE PARTY’S INVESTMENT, SUCH AS FISCAL
REGIME, LABOUR LEGISLATION, COMPANIES’ AND
EXCHANGE CONTROL REGULATIONS.
61

62. TRIGGER CLAUSE
THE STABILIZATION CLAUSE CAN ALSO TRIGGER A
RENEGOTIATION PROCESS BY A PRE-DEFINED CHANGE OF
CIRCUMSTANCES CAUSED BY THE ISSUANCE BY THE HOST
STATE OF NEW LEGISLATION NEGATIVELY AFFECTING THE
PRIVATE INVESTOR’S INTEREST, AND
IS DIRECTED TO PROTECT ONLY THE LATTER’S INTERESTS
(AS ANY STABILIZATION CLAUSE).
62

63. STABILISATION CLAUSES: EXAMPLE 1
THE STATE WILL TAKE ALL STEPS NECESSARY TO ENSURE
THAT THE COMPANY ENJOYS ALL THE RIGHTS CONFERRED
BY THE CONCESSION. THE CONTRACTUAL RIGHTS
EXPRESSLY CREATED BY THIS CONCESSION SHALL NOT BE
ALTERED EXCEPT BY THE MUTUAL CONSENT OF THE
PARTIES.
63

64. STABILISATION CLAUSES: EXAMPLE 2
THE STATE SHALL NOT BY GENERAL OR SPECIAL
LEGISLATION OR BY ADMINISTRATIVE MEASURES OR BY
ANY OTHER ACT WHATSOEVER ANNUL THIS AGREEMENT.
NO ALTERATION SHALL BE MADE IN TERMS OF THIS
AGREEMENT BY EITHER THE STATE OR THE COMPANY
EXCEPT IN THE EVENT OF THE STATE AND THE COMPANY
JOINTLY AGREEING THAT IT IS DESIRABLE IN THE
INTERESTS OF BOTH PARTIES TO MAKE CERTAIN
ALTERATIONS, DELETIONS OR ADDITIONS TO THIS
AGREEMENT.
64

65. STABILISATION CLAUSES: EXAMPLE 3
1. BY VIRTUE OF THIS AGREEMENT, THE STATE GUARANTEES
THE COMPANY STABILITY OF THE TAX REGIME WITH RESPECT
TO INCOME TAX, AS STIPULATED IN THE TAX CODE IN EFFECT AT
THE TIME THIS AGREEMENT WAS EXECUTED, AND ACCORDING
TO WHICH DIVIDENDS AND ANY OTHER FORM OF DISTRIBUTION
OF PROFITS, ARE NOT TAXED.
2. THE LEGAL STABILITY AGREEMENT SHALL HAVE AN
EFFECTIVE TERM OF TEN YEARS AS FROM THE DATE OF
EXECUTION OF THIS AGREEMENT. AS A CONSEQUENCE, IT MAY
NOT BE AMENDED UNILATERALLY BY ANY OF THE PARTIES
DURING THIS PERIOD, EVEN IN THE EVENT THAT THE STATE’S
LAW IS AMENDED, OR IF THE AMENDMENTS ARE MORE
BENEFICIAL OR DETRIMENTAL TO ANY OF THE PARTIES THAN
THOSE SET FORTH IN THIS AGREEMENT.
65

66. ADAPTATION CLAUSES
A ADAPTATION CLAUSE IS AN ALTERNATIVE TO OR CAN BE
DRAFTED IN COMBINATION WITH A STABILIZATION CLAUSE.
THE ADAPTATION/RENEGOTIATION CLAUSE MAY OFFER
BOTH PARTIES PROTECTION AGAINST THE HARDSHIP
CAUSED TO EITHER OF THEM BY A CHANGE OF THOSE
CIRCUMSTANCES WHICH WERE PRESENT AT THE TIME OF
THE CONCLUSION OF THE AGREEMENT.
BY UNDERTAKING TO RENEGOTIATE IN GOOD FAITH THE
AGREEMENT IN CASE OF ANY SUCH CHANGE THE STATE
(OR THE STATE ENTITY) BINDS ITSELF TO CONDUCT
NEGOTIATIONS WITH THE PRIVATE INVESTOR INSTEAD OF
UNILATERALLY ALTERING THE TERMS OF THE AGREEMENT.

67. ADAPTATION CLAUSES
ADAPTATION CLAUSE ALLOW FOR THE STATE OR THE STATE ENTITY
GIVING AN UNDERTAKING TO COMPENSATE THE PRIVATE PARTY FOR THE
ECONOMIC PREJUDICE SUFFERED BY THE REASON OF ANY NEW LAWS OR
REGULATIONS AFFECTING SPECIFIC CONTRACTUAL TERMS (EG IN THE
FIELD OF TAXATION) OR, MORE GENERALLY, THE TERMS AND CONDITIONS
OF THE AGREEMENT.
THEY DO NOT INFRINGE UPON THE STATE’S SOVEREIGN PREROGATIVES,
WHICH REMAIN UNFETTERED CONSONANT TO THEIR NATURE, BUT OPEN
THE WAY TO THE RENEGOTIATION OF CERTAIN TERMS OF THE
AGREEMENT.
THEY MAY BE AGREED UPON BY THE STATE ENTITY AS SIGNATORY TO THE
PETROLEUM AGREEMENT

68. ADAPTATION CLAUSES
• AN ADAPTATION CLAUSE IS ANOTHER TYPE OF
RENEGOTIATION CLAUSE, LEADING TO THE
RENEGOTIATION OF THE AGREEMENT UPON INITIATIVE
OF EITHER THE STATE (OR THE STATE ENTITY) OR THE
INVESTOR.
• THE TRIGGER IS THE SUPERVENING EVENTS WHICH ARE
BEYOND THE CONTROL OF THE PARTIES AND WHICH
NEGATIVELY AFFECT THE CONTRACTUAL EQUILIBRIUM TO
THE DETRIMENT OF EITHER OF THEM.

69. VARIATIONS OF CONTRACTS
• VARIATIONS - THE COMMON LAW POSITION AS LONG AS THE
LAW OR THE CONTRACT ITSELF DOES NOT SAY OTHERWISE,
PARTIES TO A CONTRACT CAN CHANGE IT BY ORAL OR
WRITTEN AGREEMENT.
• BUT FOR THIS VARIATION TO BE EFFECTIVE THERE MUST BE:
A VALID AGREEMENT BETWEEN THE PARTIES – MERE
NOTIFICATION BY ONE PARTY TO THE OTHER IS NOT
EFFECTIVE; SOME FORM OF CONSIDERATION SUPPORTING
THIS AGREEMENT.
• THIS CONSIDERATION COULD TAKE MANY FORMS, FOR
EXAMPLE: MUTUAL ABANDONMENT OF EXISTING RIGHTS;
NEW BENEFITS BEING GRANTED.
69

70. VARIATIONS
HOW CONSTRUCTION COMPANIES DEAL WITH VARIATIONS
WE HAVE LOOKED AT HOW COMPANIES IN GENERAL DEAL
WITH CHANGES TO THE WORK OUTLINED IN A CONTRACT.
IN CONSTRUCTION, THOUGH, A DISTINCTION IS MADE
BETWEEN: AMENDMENTS TO THE CONTRACTUAL
PROVISIONS; AND VARIATIONS OF THE ACTUAL WORK
INSTRUCTED BY AN EMPLOYER.
AMENDMENTS TO A CONSTRUCTION CONTRACT WILL
GENERALLY BE MADE BY WRITTEN AGREEMENT BETWEEN
THE PARTIES AND WILL BE AMENDMENTS TO THE
CONTRACTUAL PROVISIONS NOT INCLUDING THE SCOPE OF
WORK.
70

71. DEFECTS LIABILITY PERIOD, CONTRACT
CLAIMS AND EMPLOYER REMEDIES
• ONCE A CERTIFICATE OF PRACTICAL COMPLETION IS ISSUED, THIS
SIGNIFIES THE BEGINNING OF THE DEFECTS LIABILITY PERIOD (DLP)
• DLP IS NOT A CHANCE TO CORRECT PROBLEMS APPARENT AT
PRACTICAL COMPLETION, IT IS THE PERIOD DURING WHICH THE
CONTRACTOR MAY BE RECALLED TO RECTIFY THE DEFECTS WHICH
APPEAR.
• IF THERE ARE DEFECTS APPARENT BEFORE PRACTICAL COMPLETION,
THEN THESE SHOULD BE RECTIFIED BEFORE A CERTIFICATE OF
PRACTICAL COMPLETION IS ISSUED.
• HOWEVER, IN SOME INSTANCES PRACTICAL COMPLETION CERTIFICATE
CAN BE ISSUED WHERE THERE ARE VERY MINOR (DE MINIMIS) ITEMS
TO BE COMPLETED 'NOT AFFECTING” THE PROJECT.

72. DEFECT LIABILITY PERIOD (DLP)
( OR RECTIFICATION PERIOD)
• THE DEFECTS LIABILITY PERIOD (DLP) COMMENCES ONCE CLIENT TAKES
POSSESSION OF THE FACILITY.
• THE DLP TYPICALLY LASTS SIX TO TWELVE MONTHS. DURING THIS PERIOD,
THE CLIENT REPORTS ANY DEFECTS THAT EMERGE AND THE CONTRACTOR
MUST RECTIFY THOSE DEFECTS.
• AT THE END OF THE DLP THE CONTRACT ADMINISTRATORS ARRANGES
INSPECTIONS OF THE FACILITY AND PREPARES A SCHEDULE OF REMAINING
DEFECTS WHICH IS ISSUED TO CONTRACTOR.
• THE CONTRACTOR ADMINISTRATOR AGREES A PROGRAMME FOR
RECTIFICATION OF THOSE ITEMS WITH CLIENT AND CONTRACTOR.
• THEN THE CONTRACTOR ADMINISTRATOR ARRANGES FOR FINAL
INSPECTION OF THE FACILITY AND IF SATISFIED ISSUES THE A CERTIFICATE
THAT ALL DEFECTS HAVE BEEN RECTIFIED.

73. END OF CONTRUCTION CONTRACT
• THE FINAL ACCOUNT IS PREPARED BY THE CONTRACTOR OR A
CONSULTANT AND ISSUES IT TO THE CONTRACT ADMINISTRATOR.
• THE CONTRACT ADMINISTRATOR CHECKS THE PREPARATION OF
THE FINAL ACCOUNT AND ISSUES THE FINAL CERTIFICATE.
• THE REMAINING RETENTION SUM ( IF ANY) IS THEN RELEASE TO
THE CONTRACTOR.
• THIS SIGNIFIES THE END OF THE CONSTRUCTION CONTRACT.

74. DEFECTS AFTER END OF CONSTRUCTION CONTRACT
& ISSUE OF FINALCOMPLETION CERTIFICATE
• AFTER THE END OF THE CONSTRUCTION CONTRACT AND ISSUE
OF THE CERTIFICATE OF FINAL COMPLETION SOME FAULTS OR
DEFECTS CAUSED BY FAILURES IN DESIGN OR WORKMANSHIP OR
MAY NOT BECOME APPARENT UNTIL MANY YEARS AFTER
COMPLETION OF THE PROJECT, LONG AFTER THE END OF THE DLP.
• SUCH DEFECTS ARE KNOWN AS LATENT DEFECTS.
• CLIENT’S REMEDY THEN IS TO MAKE A CLAIM FOR BREACH OF
CONTRACT FOR NEGLIGENCE AND CLAIM FOR

75. TERMINATION FOR CONVENIENCE
SUCH A TERMINATION IS NOT DUE TO ANY FAULT ON THE PART OF
THE OTHER PARTY.
IT INTENDS TO PROVIDE ONE PARTY WITH THE OPTION TO
TERMINATE THE REMAINING BALANCE OF THE CONTRACTED FOR
WORK FOR A REASON OTHER THAN THE CONTRACTOR’S DEFAULT.
75

76. DRAFTING OF A TERMINATION
FOR CONVENIENCE CLAUSE
• DRAFTING MUST BE TREATED WITH CAUTION TO AVOID BEING
UNENFORCEABLE.
• THE RIGHT UNILATERALLY TO TERMINATE A CONTRACT MUST BE
CLEAR AND UNAMBIGUOUS AND EXERCISABLE WITHOUT DEFAULT
• NORMALLY THERE SHOULD BE AN ENTITLEMENT TO
COMPENSATION WHERE THE RIGHT OF TERMINATION IS
EXERCISED.
76

77. TERMINATION FOR CONVENIENCE
SAMPLE CLAUSE
“ OWNER MAY AT ANY TIME AND FOR ANY REASON TERMINATE
CONTRACTOR’S SERVICES AND WORK AT OWNER'S
CONVENIENCE. UPON RECEIPT OF SUCH NOTICE,
CONTRACTOR SHALL, UNLESS THE NOTICE DIRECTS
OTHERWISE, IMMEDIATELY DISCONTINUE THE WORK AND
PLACING OF ORDERS FOR MATERIALS, FACILITIES AND
SUPPLIES IN CONNECTION WITH THE PERFORMANCE OF THIS
AGREEMENT.”
77

78. SAMPLE CLAUSE - TERMINATION FOR CONVENIENCE
“ UPON SUCH TERMINATION, CONTRACTOR SHALL BE ENTITLED TO PAYMENT
ONLY AS FOLLOWS:
(1)THE ACTUAL COST OF THE WORK COMPLETED IN CONFORMITY WITH THIS
AGREEMENT; PLUS,
(2)SUCH OTHER COSTS ACTUALLY INCURRED BY CONTRACTOR AS ARE
PERMITTED BY THE PRIME CONTRACT AND APPROVED BY OWNER;
(3) PLUS TEN PERCENT (10%) OF THE COST OF THE WORK REFERRED TO IN
SUBPARAGRAPH (1) ABOVE FOR OVERHEAD AND PROFIT. THERE SHALL BE
DEDUCTED FROM SUCH SUMS AS PROVIDED IN THIS SUBPARAGRAPH THE
AMOUNT OF ANY PAYMENTS MADE TO CONTRACTOR PRIOR TO THE DATE OF
THE TERMINATION OF THIS AGREEMENT. CONTRACTOR SHALL NOT BE ENTITLED
TO ANY CLAIM OR CLAIM OF LIEN AGAINST OWNER FOR ANY ADDITIONAL
COMPENSATION OR DAMAGES IN THE EVENT OF SUCH TERMINATION AND
PAYMENT.”
78

79. CONSTRUCTION AND PROFESSIONAL
INDEMNITY INSURANCE
• INDEMNITY FOR CLAIMS MADE DURING THE PERIOD OF
INSURANCE AS A CONSEQUENCE OF PROFESSIONAL ACTS,
ERRORS OR OMISSIONS
• FIRST PARTY COSTS INCURRED PRIOR TO HANDOVER TO
MITIGATE MATTERS THAT WOULD HAVE OTHERWISE GIVEN
RISE TO A CLAIM
• INCLUDES COVERAGE FOR LIABILITIES DUE TO A SUB-
CONTRACTORS PROFESSIONAL ACTIVITIES
• DEFENCE COSTS

80. Only Professional Activities conducted after the Retroactive
Date and before the Discovery Period are covered
Feasibility / Front End Design Design & Construct Defects Liability Run off / Discovery Period
Retroactive Date
1/04
Policy Start Date
1/05
Practical Completion
1/08
Final Completion
1/09
Policy End Date
1/15
Note: Policy will only cover claims made during the policy period (including Discovery Period).
Maximum Policy Period 10 years
Project PI Time Line

81. WHO ARE PROFESSIONALS?
 University qualification
 Industry bodies (Association of engineers)
 Examples: Architects, Engineers, Quantity Surveyors,
Surveyors, Project Managers
 Not included: Workmanship, Manual Labour

82. COVERED CONTRACTOR ACTIVITIES
• FEASIBILITY STUDIES
• FRONT END DESIGNS
• DETAILED DESIGNS
• TECHNICAL INFORMATION CALCULATION
• GEOTECHNICAL STUDIES
• PROJECT MANAGEMENT
• SURVEYING (QUANTITY AND LAND)
• PROCUREMENT MANAGEMENT

83. COVERED LIABILITIES
• RECTIFICATION COSTS (INCLUDING FIRST PARTY
PRIOR TO HANDOVER)
• CONSEQUENTIAL LOSSES (PROFITS / REVENUE/LDS)
• THIRD PARTY BODILY INJURY AND PROPERTY DAMAGE
(ONLY CONSULTANTS NOT CONTRACTORS)

84. DRIVERS FOR PURCHASING PI
• CLIENT REQUIREMENTS
• FINANCIERS REQUIREMENTS
• BALANCE SHEET PROTECTION
• PART OF GOOD CORPORATE GOVERNANCE (RISK
MANAGEMENT)

85. TYPES OF COVER
• ANNUAL POLICY COVERING ALL CLAIMS MADE FOR ALL
PROJECTS OF THE INSURED
• SINGLE PROJECT POLICY (MULTI YEAR – 10 YEARS MAX)
• SINGLE PROJECT ANNUAL

86. THIRD PARTY LIABILITY INSURANCE
• LIABILITIES FOR:
• THIRD PARTY PROPERTY DAMAGE
• THIRD PARTY BODILY INJURY
• OBSTRUCTION, LOSS OF AMENITIES, TRESPASS,
NUISANCE, INTERFERENCE, DENIAL OF ACCESS OR ANY
LIKE CAUSE
• OCCURRENCE BASED POLICY
• PERIOD: WORKS AND DEFECTS LIABILITY
• COMPLETED OPERATIONS COVERAGE

87. LINKS WITH PI – THIRD PARTY LIABILITY
• THIRD PARTY LIABILITY COVERS LIABILITY FOR THIRD
PARTY PROPERTY DAMAGE AND BODILY INJURY ONLY
• EXCLUDES PROFESSIONAL SERVICES COVERAGE
FOR CONSULTANTS (FEE ONLY WORK)
• ONLY COVERS PROFESSIONAL RISKS OF
CONTRACTING ACTIVITIES
• DOES NOT COVER DEFECTIVE WORKS

88. CAR INSURANCE
• INSURES PHYSICAL LOSS OR DAMAGE TO WORKS
• FIRST PARTY POLICY (NOT A LIABILITY POLICY)
• PERIOD – WORKS AND MAINTENANCE
• VISITS COVERAGE
• LIMITED/EXTENDED MAINTENANCE (ON SITE ONLY)
• FULL GUARANTEE MAINTENANCE

89. CAR INSURANCE – DEFECTS COVERAGE
• DE5 – COVERS ALL DAMAGES EXCEPT BETTERMENT
OF DEFECTIVE PART
• DE4 – EXCLUDES DEFECTIVE COMPONENT PART
• DE3 – EXCLUDES DEFECTIVE PROPERTY
• DE2 – EXCLUDES DEFECTIVE PROPERTY AND THAT
WHICH RELIES UPON IT FOR SUPPORT
• DE1 – TOTAL EXCLUSION FOR DEFECTIVE DESIGN,
PLAN, SPECIFICATION, MATERIALS OR WORKMANSHIP

90. LINKS WITH PI – CAR
• CAR COVERS DEFECTS BUT ONLY WHERE THERE IS
PHYSICAL DAMAGE TO THE WORKS
• CAR ONLY PROVIDES COVERAGE DURING THE
CONSTRUCTION AND DEFECTS LIABILITY PERIOD (MUST
HAVE GUARANTEED MAINTENANCE COVER)
• CAR DOES NOT COVER CONSEQUENTIAL LOSSES (LDS)

91. PI CLAIMS
• DESIGN AND BUILD SHOPPING CENTRE CAR PARK
• SUBBED D&B TO THIRD PARTY CONTRACTOR
• ECV: GBP 6M
• DEFECTIVE DESIGN OF EXPANSION JOINTS
• CRACKING OF CAR PARK
• DEMOLITION AND REBUILD
• CONSEQUENTIAL LOSS (LOSS OF TRADE)
• SUBCONTRACTOR CAPPED LIABILITY

92. CAR CLAIM EXAMPLE 1
• A BUILDING HAS A STRUCTURAL DEFECT IN ONE WALL
WHICH CAUSES AN ENTIRE BUILDING TO COLLAPSE
• COVERED BY CAR DURING CONSTRUCTION AND
MAINTENANCE PERIOD
• NOT COVERED IF DAMAGE AFTER MAINTENANCE
PERIOD. COVERED BY PI IF THE INSURED IS LIABLE
• CONSEQUENTIAL LOSSES NOT COVERED.
COVERED BY PI IF THE INSURED IS LIABLE

93. CAR CLAIM EXAMPLE 2
• A BUILDING HAS A STRUCTURAL DEFECT IN A WALL WHICH
CAUSES DAMAGE IN THAT WALL ONLY. THE REST OF THE
BUILDING HAS STRUCTURAL DEFECTS BUT THESES OTHER
PARTS OF THE STRUCTURE ARE NOT DAMAGED
• DAMAGED WALL COVERED BY CAR DURING
CONSTRUCTION AND MAINTENANCE PERIOD
• NOT COVERED IF DAMAGE AFTER MAINTENANCE PERIOD.
COVERED BY PI IF THE INSURED IS LIABLE.
• RECTIFICATION OF OTHER STRUCTURAL DEFECTS (NOT
DAMAGED) NOT COVERED. COVERED BY PI IF THE
INSURED IS LIABLE
• CONSEQUENTIAL LOSSES NOT COVERED. COVERED BY PI
IF THE INSURED IS LIABLE

94. FACTORS AFFECTING PI PREMIUM
• RELATIONSHIP WITH UNDERWRITER
• CLAIMS RECORD
• TYPE OF WORK
• TYPE OF PROJECT (CONSTRUCTION, EPC / D&B, FEED)
• CONTRACT VALUE / FEES
• TERRITORY
• EXPERIENCE
• RISK MANAGEMENT
• PROGRAMME STRUCTURE

95. CONTRACTUAL PI INSURANCE
REQUIREMENTS
• REQUIREMENT TO MAINTAIN COVERAGE (12 YEARS)
• AVAILABLE AT COMMERCIALLY ACCEPTABLE TERMS
• PROVIDE CERTIFICATES OF INSURANCE / TO WHOM IT MAY
CONCERN LETTERS – NOT POLICY
• LIMITS OF LIABILITY (GBP 10M AGGREGATE)
• NOT ANY ONE CLAIM COVERAGE. AGG LIMIT
• PRINCIPAL NOT INSURED
• ANNUAL COVERAGE PREFERABLE

96. CONCLUSION
RISK SHARING CAN MINIMISE EXPOSURE TO RISKS FOR
CONTRACTORS THAT THEY ARE NOT BE ABLE TO CONTROL
AND LOWER COSTS FOR OWNERS.

97. THANK YOU FOR LISTENING!
PRESENTED BY:
MS. PRIMILA EDWARD
STRAITS CONSULTING GROUP, MALAYSIA
EMAIL :primilaedward@yahoo.com
MOBILE: +6016-672-3576