Forms of Contract: Amend at Your Peril

SINCE the early published editions of IChemE’s Model Forms of Contract, all of the contracts have carried a warning which runs as follows: 

“Anyone contemplating modifications to the General Conditions should take care not to introduce provisions which may conflict with these well-established practices and relationships. They should particularly be aware of the risk of introducing inconsistencies within the Contract Conditions, or provisions that may be unenforceable.

Users are cautioned that IChemE has not authorised or approved any amendments unless they are published by IChemE.”

The above warning is not given lightly and, as is further reinforced by the following:

“The Conditions have been developed by the IChemE Contracts Committee, the members of which represent a broad spectrum of those involved in design, commercial, legal, construction, ownership and operation of process plants both in the UK and in many other parts of the world. The General Conditions in particular have been formulated to reflect best practice and relationships within the process plant sector, which are generally far less adversarial in nature than in other parts of the construction industry. IChemE has always adopted the basic philosophy that the parties should co-operate to achieve the mutual objective of a successful project, rather than regarding the Contract as simply the basis for an adversarial relationship. IChemE believes that it is in the best interests of the parties to deal fairly with each other and with their Subcontractors, specialists and suppliers in an atmosphere of co-operation in order to achieve 'win-win' solutions to the problems that will inevitably arise during the course of a project.”

To amend or not?

IChemE refers to its contracts as being performance based since  the success of any project in the chemical industry is assessed on whether or not pre-determined output performance parameters have been  achieved. The contracts are based on over 50 years of common practice and proven working methods that have been an integral part of the chemical and related process industries and, as a result, the contracts have adopted a similarly integrated approach to the whole sequence of activities that ultimately lead to the execution of various tests. These include those relating to construction completion, take over procedures and performance, which are the means of demonstrating that the Contractor has designed and constructed  a safe and reliable plant that will deliver product to meet the operating company’s requirements

For those unfamiliar with the practical intricacies of process plant design, construction, operation and testing, there are a number of reasons why extreme caution should be adopted when making changes to key clauses in the IChemE contracts. Whatever reasons lie behind the introduction of changes and special conditions, a careful and risk based analysis should take into account technical, commercial, safety and operational issues. A decision to amend the conditions should not simply be taken on legal advice alone.

Process projects and clauses

Historically, process projects have been driven by a number of factors that include but are not necessarily limited to the following:

• the need for the purchasers to work closely with the design and construction contractors in order that highly complex chemical and biochemical processes can be understood in sufficient detail to enable every facet of a plant to be defined particularly from an operational and safety perspective;
• most plants are required to manufacture products to meet a predefined market or reach the market place at the earliest possible time, particularly if there is a competing product or time limitation on patent protection; and
• most chemical plants depend on specific and often complex technical components designed and manufactured by a limited number of specialist companies that often have long-term technical development relationships with plant operators.

As a consequence, the IChemE contracts recognise and emphasise the need for fairness and co-operation since it is only if this approach is adopted that the parties will be able to fully concentrate on the complex technical issues, that will ultimately lead to a safe and successfully operating plant.

 A standard clause included in all IChemE contracts headed “Co-operation” obliges the parties to “each co-operate with each other in the discharge of their various obligations”, that “the parties shall deal fairly, openly and in good faith with each other” and furthermore shall “disclose information which the other party might reasonably need in order to exercise his rights and perform his obligations under the Contract”. It is often when the parties ignore the co-operation clause that failures are likely to occur that can lead to technical, financial or operational problems and as a consequence to unnecessary disputes.

Unfortunately, it is the use of special conditions or changes to the general conditions of contract that often subtly undermine the co-operation clause. It is often claimed that such changes are made in order to prefer the interests of one party over another, but such attitudes pay scant attention to the essential requirement to co-operate if a project is to be brought to a satisfactory conclusion.

In broad terms, the structure of the IChemE forms requires that the Contractor assumes control of the site and responsibility for all operations carried out by him from the date or dates stated in the contract until the completion of construction and subsequent issue of the Take Over certificate following successful completion of the Take Over tests. At that point, the Purchaser takes over responsibility for the operation of the plant and thereafter undertakes performance tests. These are carried out with the aim of establishing whether or not the plant operates in accordance with the performance requirements laid down in the contract. The role of the Contractor after Take Over is largely limited to attending the Performance Tests and providing any necessary instructions and dealing with defects and any uncompleted work.

The reason behind this approach is that for the majority of chemical plants, the chemical and bio-chemical processes are often highly complex needing experienced personnel to undertake safe and successful operations and a suitable management structure to carry out the requirements of the operating company. By contrast, most contractors do not have either the appropriately-trained personnel, insurance cover or the support systems to be able to operate an active chemical plant.

It is therefore a matter of some concern that amendments are made which would have the effect of extending the Contractor’s primary responsibilities beyond the date of the Take Over certificate so that the Contractor remains nominally in control of the site whilst the Plant is in operation. These amendments are produced with the aim of increasing the risks borne by the Contractor and correspondingly reducing those borne by the Purchaser. Such amendments may take the form of deleting altogether any reference in the contract to the Take Over certificate or making Take Over contingent on the successful completion of the Performance Tests.

Taking out take over?

Leaving aside the fact that, as stated above, most contractors lack the expertise and resources to operate the completed plant, such amendments can undermine the effectiveness of a number of provisions in the IChemE forms – particularly those relating to the responsibility for the care of the works, insurance, control of the site, and health and safety. In particular, the removal of the take over clause in the belief that somehow the Purchaser’s rights will be enhanced in the event of any failure of the Plant to pass any performance tests or guaranteed performance levels is, in the view of IChemE,  unnecessary and introduces confusion particularly with regard to the liabilities of the parties. In the majority of cases, it is the Purchaser’s operators that normally have the responsibility for running a chemically active plant; however, it may be the case that if the Contractor has supplied the technology then he may be required to oversee the activities of the Purchaser's on-site team up to the point at which a successful performance test is undertaken. This situation introduces a number of potential problems that can be overlooked:

• What is the relationship between the contractor and the purchaser’s operating team and, specifically, to what extent the Contractor is in control of that team?

• Of the Purchaser and the Contractor, which party is to be liable for any problems that may arise in relation to the operation of the completed plant? Such problems could involve breaches of health and safety legislation, damage to third party property and the availability of insurance cover in relation to the operation of the completed plant.

The situation is further complicated in the event that the parties agree that the responsibility for the execution of any performance test is transferred to the contractor; a situation that is most likely to arise where the technology is provided by the contractor. Even under such circumstances, the Purchaser will often be responsible for feedstock supply, the provision of operating and quality control procedures which potentially may lead to problems with the parties’ liabilities unless there is a clear division of responsibility between the contractor and the Purchaser’s personnel on site. Such matters are often overlooked by the parties on the tacit understanding that each side is aware of its responsibilities, which is all very well until either a mishap or dispute arises between them.

Care of the works

The Care of the Works clause may also lead to disputes between the parties unless it is unambiguously modified and agreed between the parties. Again, if the operation of the plant is being undertaken by operators provided by the Purchaser, yet the Site is still under the control of the Contractor, unless some the control and supervision of the operators is transferred to the contractor, the question of liability for damage to the plant, release of contaminants to the environment and other similar issues may become a grey area which can again lead to disputes. For example, the published version of the contract states that the liability for making good damage to the plant remains with the Contractor until Take Over by the Purchaser. However, if one of the Purchaser’s operators causes damage or the release of polluting or hazardous chemicals when not under the direct supervision of the contractor, who bears the liability and costs?

In principle, the IChemE conditions resolve this issue by providing that the Contractor shall have no liability for damage to the plant, site materials and temporary works due to a Purchaser’s Risk. A Purchaser’s Risk includes any use or occupation of the plant by the Purchaser, his personnel, agents or other contractors not employed by the Contractor. Experience has shown, however, that that principle can be difficult to apply in practice. There can frequently be considerable scope for argument as to whether any damage or other incident is the result of the use or occupation of the plant by the Purchaser or some other factor – for example any instructions or advice given by the Contractor to the operating team or the failure to give such instructions or advice.

Accordingly, in the event that the take over clause is modified, a thorough review of the whole of the care of the works clause will be required including that of the indemnities given by the parties to each other. The IChemE contracts state that the Purchaser shall provide and maintain a policy or policies of insurance in the joint names of the Purchaser, Project Manager, Contractor and Subcontractors, covering all risks (subject to standard exclusions) of loss of or damage to the Plant, Site Materials and Temporary Works and goes on to state that the insurance shall become effective on the commencement of the Works and shall remain in place until the issue of the last Final Certificate. Whilst at first sight this arrangement appears to protect both parties, if the responsibilities regarding the management of the site and/or the operation of the plant are unclear or varied from those stated in the IChemE forms, problems could easily arise with the potential for loss or reduction of insurance cover for one or all of the parties. It would be wise to discuss and agree any changes to the insurance arrangements with the insurance brokers to ensure that they are fully in agreement with any contractual changes that may have been made to the published contracts. There may well be difficulties in obtaining cover in circumstances in which the Contractor remains in control of a fully-operating plant without the necessary resources or expertise.

Knock-on effects

Contractors will be aware that all of the amendments described are obviously adverse to their interests in the way indicated. What may be slightly less obvious is the effect on the Contractor’s liability for defects in the plant after Take Over of the works. That liability will exist during the carrying out of the works on site. Following the issue of the Take Over certificate, the Defects Liability Period will commence, typically ending one year later. Thereafter, subject to having made good any outstanding defects, the Contractor will be in a position to apply for the issue of a Final Certificate. On the issue of that certificate, the Contractor’s liability for defects comes to an end. Accordingly, any postponement of the issue of the Take Over certificate (for example, until after the passing of Performance Tests) will delay the commencement of the Defects Liability Period and therefore, in turn,  the date when the Contractor becomes entitled to the issue of the Final Certificate and release from any  further liability for defects. In these circumstances, contractors need to protect themselves when purchasing plant and materials by ensuring that any warranties or performance guarantees provided by the suppliers match the contractors extended responsibility for defects in the plant.

 It is understandable that, if the process technology is being provided by the contractor or a third party, that arrangements for the timing of any Take Over and responsibilities for general and performance testing may rest with the supplier of that technology and  the responsibility for the management of the site post take over may need to reflect this. Recently there have been instances in which purchasers have deleted the take over clause completely, thus delaying effective take over until completion of performance tests in the mistaken belief that this provides added protection in the event that the contractor were to fail to comply with or fully complete his duties under the contract. This effectively means that the Contractor continues to be responsible for the site and as a result the care of the works. In fact, if a deletion of this nature takes place, it can introduce a range of uncertainties which, if they are not to lead to a dispute, will require a number of detailed consequential amendments.

It is emphasised that these matters have been considered in great depth by IChemE’s Contracts Committee, and this is why the guidance was given recommending caution when considering changes to the printed versions of the IChemE contracts. Regrettably, some parties continue to ignore this guidance despite the facts that the IChemE forms have now been in use for 50 years and that the un-amended IChemE forms are acknowledged as having extremely low instances of dispute compared with the other published forms.

For more information on IChemE's Forms of Contract, visit: www.icheme.org/resources/forms_of_contract