Addressing contractual challenges

Offshore Korea Technical Conference 2016

LIMITING THE OFFSHORE CONTRACTORS RISK AND LIABILITES Wednesday 19 October 2016, BEXCO, BUSAN KoreaPresented by: Primila EdwardPrincipal Legal ConsultantStraits Consulting Group

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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.

2Overview, Legal Framework & Contract Structure & Risk Allocation

The risks of disputes arising and derailing the project is ever present. In a recent survey conducted by Deloitte & Touches Construction and Advisory services showed that there is .2

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.

3Overview, Legal Framework & Contract Structure & Risk Allocation

The risks of disputes arising and derailing the project is ever present. In a recent survey conducted by Deloitte & Touches Construction and Advisory services showed that there is .3

CONTRACTORS RIKS & LIABILITIES

Contractors 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.

EPC / EPCIC CONTRACTS GENERALLY

Key elements impact Time, Costs and QualityAssumption 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 rewardsPARTIES SHOULD Assumes risks if in a position to control

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EPC & EPCIC Contract Structure

CONTRACT STRUCTURE FOR P3 PROJECTS

EPC CHARACTERISTICSInterface with other project contractsOne integrated packageSingle Point ResponsibilityBankabilityClaims for Additional Costs, EOTSecurity for Performance, Technical RiskOutput guaranteesLD for both output and delay Fixed Completion Date & Fixed PriceNo or limited technology RiskSecurity or Parent guaranteeCaps on liability

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The general characteristic of an EPC contract is 8

EPC CONTRACT CULTUREBlame GameWho is to blame ?EmployerContractorSub-Contractor or Supplierleads toMore DisputesMore ClaimsMore Costs Over runs

Having said this the EPC contract remains the most commonly used contract for major engineering and construction projects in the Oil and Gas, Petrochemical industry mainly due to its selling factor which is the single point of responsibility aspect whereby the Contractor is held responsible for the project. This also what makes it bankable.

As Projects get larger so do EPC contracts and it is not uncommon for EPC contracts to be worth billions of US dollars.

For example it was reported that the EPC contract awarded to CTJV a Chiyoda and Technip Joint venture for the onshore construction of two large scale LNG projects for Qatargas was worth USD 4 billion. Therefore it is no small feat to mange the risks associated with such huge contracts. When there is a problem the EPC contract culture looks to see who is to blame basically promoting the mantra always start by blaming the other side. The EPC contract culture is adversarial and the parties look to protect their own turf. But there is a high price to pay for this. As each party tries to pass the risk to the other, the cost of bearing the risk gets higher. This can lead to undue escalation of price for the Owners.

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SPLIT EPC CONTRACT -OFFSHORE AVOIDS HOST COUNTRY RESTRICTIONS

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Onshore EPCContractorOffshore EPCContractor

Parent CoWrap AroundGuarantor

Offshore ContractOnshoreContract

Interface ObligationsCoordination AgreementAdministrative Agreement/Umbrella Deed4 Party Agreement

SPLIT EPCWRAP AROUND GUARANTEENo Horizontal DefenceTotal Performance/Fit for PurposeObligation to Interface & IntegrateLAD borne for both split contractors regardless of which one is to be blamedPerformance Bond from Parent Co for both split contractors

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IDENTIFYING, ALLOCATING & SHARING OF RISK BASED ON EPCIC Contract Type

Types of Risks - Evaluation and Analysis DESIGN RISKSConstruction Risks PROJECT MANAGEMENT Operating Risks Financial and Economic Risks Legal Risks Political Risks

Contractor RisksRisk 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

EPC CONTRACT STRUCTURE

Single Point of ResponsibilityThe preferred option for delivery of a construction project is the contractors 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.

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?

BEST PRACTICES IN TENDER EVALUATIONS AND SELECTION OF TENDERERCompanies 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.

INNOVATION AND TIME FOR TENDERSPrincipals should also encourage innovation by; Allowing sufficient time for tender response having regard to project complexity and the past experience of tenderers; andConsidering alternative approaches to delivery of projects.

INNOVATIVE DELIVERY SYSTEMSInnovative 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.

NEGOTIATING EPC CONTRACTSPositional BargainingPositional bargaining is a negotiation strategy that involves holding onto 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.19

DIFFERENCE IN BARGAINING POSITIONSInterest-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.20

LETTER OF INTENT & LETTER OF AWARDA 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. 21

LETTER OF INTENTCommitment 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.

SUBJECT TO CONTRACTIt 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.23

ASSESSING HOW RISKS CHANGE BY CURRENT CHALLENGES IN THE ECONOMYIn the current market Parties are very risk averse Contract terms that matter:- Payment terms Delivery commitments

PROJECT CONTRACTING TRENDSEconomic 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.

OVERCOMING BUSINESS, OPERATIONAL AND PROJECT RISKCompanies 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 companys strategic objectives.

OVERCOMING BUSINESS, OPERATIONAL AND PROJECT RISKProject 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.

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

AVOIDING EPCIC CONTRACTING RISKS

Single Source ResponsibilityAvoid Hidden Risk AllocationsMinimum Involvement Due to Other ObligationsThe Need for Speed/Fast TrackReduced Time from Inception to Completion Specialist Knowledge RequiredSuitable Specialist Contractor AvailableCompetitive Design TendersBetter Build-ability due to High Value Engineering

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EPC CONTRACTING RISKS

Project Cos right to suspend or abandon projectExclude Consequential ClaimsExclude Loss of Profit ClaimExclude Loss and Expenses ClaimTermination/DeterminationRestricted Contractors RightsExclude Common Law Termination (Cant Exclude Repudiation)Contractor Default Contractor Insolvency (deemed terminated)Project Cos convenience w/o consideration (reasonableness)30

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ALLOCATION OF CONSTRUCTION RISK

Contractors risks include - delivery, testing & commissioning,- meeting performance criteria, - certification- defects liability period

Employers 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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ALLIANCE CONTRACTING IN OFFSHOREThe 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.

ALLIANCE CONTRACT

Alliance Charter stating project goals Partnering Charter becomes part of EPC ContractDoes not Override Allocations of Risk, Merely allows Joint Management of RiskNo Dispute or Litigation clauseMutually 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-shootingMaintain same site team throughout the project

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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 ContractorNo-blame project culture with NO Disputes and NO Major ClaimsReinforced 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 savingsA collaborative approach integrated team, constant teamworkOpen Book on Budget from Project Co & Cost from Contractor Good Faith Procedures AdoptedSenior management & site management tied to a Partnering Charter

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ALLIANCE CONTRACTING IN OFFSHORE

ALLIANCE CONTRACTING- NO BLAME PROJECT CULTUREthe 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)

LIMITING LIABILITY FOR OFFSHORE CONTRACTORS

Liability capsExclusion of liabilityLiability to third partiesExclusion of liability for incidental and consequential lossesEXCULPATROY CLAUES : NO LIABILITY FOR NEGLIGENCEDAMAGES LIMITED TO IMSURANCE LIMITING DAMAGES AND DELAYS DUE TO ADVERSE WEATHER COMDITIONSINDEMNITIES

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 CONTRACTORS TOTAL AGGREGATE LIABILITY TO THE CLIENT SHALL NOT EXCEED___________________ or ___ % of the contractors total contract price which ever is the greater. This limitation would apply to any liability or cause of action, however alleged or arising.

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.

LIABILITY TO THIRD PARTIES

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

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 DAMAGESSAMPLE 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.

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 AGREEMENTTHE DELAY IS NOT WITHIN SPECIFIC WORDING OF THE CLAUSE Contractor shall not be liable to Sub-contractor for any delay to subcontractors performance of its work caused by the act or omission of the client, or by any act beyond the Contractors control. Or if contractors performance is delayed by non-negligent acts of the client or by events beyond the Contractors 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.

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 .

DAMAGES LIMITED TO IMSURANCE

PARTIES MAY SEEK TO LIMIT THEIR LIABILITY TO THE MAXIMUM AMOUNT OF THEIR RESPECTIVE INSURANCE COVERAGE.

NEITHER THE CONTRACTOR, THE CONTRACTORS 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 .

45INDEMNITIESWhat 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

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DEFINITION OF INDEMNITYIndemnity 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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47CROSS INDEMNITIESUnder 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.

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 partys own employeesLoss of, or damage to, the partys own property and Pollution emanating from the partys own property.

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. 49

FORCE MAJEUREIn 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 Napolon 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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CHECKLIST OF ISSUES TO CONSIDER INFORCE 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

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.

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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

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).

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How To Deal With Contract ChangesIt 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

Change in LawChanges 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

Change of LawChanges 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

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.

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MAC EVENT CAN TRIGGER RENEGOTIATION OF CONTRACTCALLING 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.

PROTECTING THE CONTRACTOR FROM GOVERNMENT ACTIONSStabilization 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 States actions.

STABILIZATION CLAUSESStabilization 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 partys investment, such as fiscal regime, labour legislation, companies and exchange control regulations.

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TRIGGER CLAUSEThe 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 investors interest, and is directed to protect only the latters interests (as any stabilization clause).

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STABILISATION CLAUSES: EXAMPLE 1The 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

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

STABILISATION CLAUSES: EXAMPLE 31. 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 States 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

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.

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 States 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

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.

Variations of ContractsVariations - 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

VariationsHow 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

DEFECTS LIABILITY PERIOD, CONTRACT CLAIMS AND EMPLOYER REMEDIESOnce 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 rectifythe defects which appear. If there are defects apparent before practical completion, then these should be rectified before acertificate 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.

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.

END OF CONTRUCTION CONTRACTTheFINAL ACCOUNT is prepared by the contractor or a consultantand 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.

DEFECTS AFTER END OF CONSTRUCTION CONTRACT& ISSUE OF FINALCOMPLETION CERTIFICATEAfter 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 theDLP.Such defects are known as LATENT DEFECTS.Clients REMEDY then is to make a claim for breach of contract for negligence and claim for

TERMINATION FOR CONVENIENCESuch 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 thecontracted for work for a reason other than the contractors default.

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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

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TERMINATION FOR CONVENIENCESAMPLE CLAUSE Owner may at any time and for any reason terminate Contractors 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

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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

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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 claimIncludes coverage for liabilities due to a sub-contractors professional activitiesDefence costs

Only Professional Activities conducted after the RetroactiveDate and before the Discovery Period are covered

Feasibility / Front End DesignDesign & ConstructDefects LiabilityRun off / Discovery Period

Retroactive Date 1/04Policy Start Date 1/05Practical Completion 1/08Final Completion 1/09Policy End Date 1/15Note: Policy will only cover claims made during the policy period (including Discovery Period). Maximum Policy Period 10 years

Project PI Time Line

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Who are Professionals?University qualificationIndustry bodies (Association of engineers)Examples: Architects, Engineers, Quantity Surveyors, Surveyors, Project ManagersNot included: Workmanship, Manual Labour

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Covered Contractor ActivitiesFeasibility studiesFront end designsDetailed designsTechnical information calculationGeotechnical studiesProject managementSurveying (Quantity and Land)Procurement management

Covered LiabilitiesRectification costs (including first party prior to handover)Consequential losses (Profits / Revenue/LDs)Third party bodily injury and property damage (Only consultants not contractors)

Drivers For Purchasing PIClient requirementsFinanciers requirementsBalance sheet protectionPart of good corporate governance (risk management)

Types of CoverAnnual policy covering all claims made for all projects of the InsuredSingle project policy (Multi year 10 years max)Single project annual

Third Party Liability InsuranceLiabilities for:Third party property damageThird party bodily injuryObstruction, loss of amenities, trespass, nuisance, interference, denial of access or any like cause Occurrence based policyPeriod: Works and Defects LiabilityCompleted operations coverage

Links With PI Third Party LiabilityThird party liability covers liability for third party property damage and bodily injury onlyExcludes professional services coverage for consultants (fee only work)Only covers professional risks of contracting activitiesDoes not cover defective works

CAR InsuranceInsures physical loss or damage to worksFirst party policy (not a liability policy)Period Works and MaintenanceVisits coverageLimited/Extended maintenance (On site only)Full guarantee maintenance

CAR Insurance Defects CoverageDE5 Covers all damages except betterment of defective partDE4 Excludes defective component partDE3 Excludes defective propertyDE2 Excludes defective property and that which relies upon it for supportDE1 Total exclusion for defective design, plan, specification, materials or workmanship

Links With PI CARCAR covers defects but only where there is physical damage to the worksCAR only provides coverage during the construction and defects liability period (must have guaranteed maintenance cover)CAR does not cover consequential losses (LDs)

PI ClaimsDesign and Build Shopping Centre Car parkSubbed D&B to third party contractorECV: GBP 6mDefective design of expansion jointsCracking of car parkDemolition and RebuildConsequential Loss (Loss of trade)Subcontractor Capped Liability

CAR Claim Example 1A building has a structural defect in one wall which causes an entire building to collapseCovered by CAR during construction and maintenance periodNot 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

CAR Claim Example 2A 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 damagedDamaged wall covered by CAR during construction and maintenance periodNot 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

Factors Affecting PI PremiumRelationship with underwriterClaims recordType of work Type of project (Construction, EPC / D&B, FEED)Contract value / FeesTerritoryExperienceRisk ManagementProgramme Structure

Contractual PI Insurance Requirements

Requirement to maintain coverage (12 years) Available at commercially acceptable termsProvide certificates of insurance / to whom it may concern letters Not policyLimits of liability (GBP 10m aggregate)Not any one claim coverage. Agg limitPrincipal not insuredAnnual coverage preferable

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CONCLUSION

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

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Thank You for Listening!

Presented by: Ms. Primila EdwardStraits Consulting Group, MalaysiaEmail :primilaedward@yahoo.comMobile: +6016-672-3576

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