International Federation of Consulting Engineers The Importance of

International Federation of Consulting Engineers The Importance of Interpretation on Red Flag Clauses to fulfil parties’ obligations effectively Speaker: Sarwono Hardjomuljadi Dr, Ir, MSc, MSBA, MPA, MDBF, ACIArb, ACPE Special Adviser to the Minister of Public Works, Indonesia FIDIC International Accredited Trainer Country Representative of DRBF

FIDIC MDB Harmonised Construction Contract Conference In order to smoothly reach the goal of the vast management of the construction contracts, the clauses in the construction contracts should provide three basic rules for: 1. Risk sharing; managed by using an acknowledged conditions of contract such as FIDIC Conditions of Contract Multilateral Development Banks Edition 2010 which is incorporated in most of Bank’s Standard Bidding Documents. 2. Variation; managed by providing clauses related to the variation, how to handle it once it happens including the procedure and how to measure it. 3. Dispute Resolution; managed by providing clauses related to the Alternative Dispute Resolution (ADR), where the Dispute Board is part of it. This is very important and it should be kept in mind that if a dispute rises and it mentions nothing about DB in the clauses of construction contract, the parties must then go directly to the court, which may cause the huge expenditure and lengthy process.

FIDIC MDB Harmonised Construction Contract Conference The Red Flag Clauses

FIDIC MDB Harmonised Construction Contract Conference The questionnaires distributed to 20 employer staffs, 20 contractor staffs, who engaged with the construction project using FIDIC Conditions of Contract MDB Harmonised Edition 2010 in Indonesia, resulted that the most frequent clauses used by contractor as the base of their claim submission are as follows (Hardjomuljadi et al, 2012): Sub-Clause 4. 2 Unforeseeable physical conditions Sub-Clause 2. 1. Right of Access to the Site Sub-Clause 1. 9. Delayed Drawings or Instructions. Sub-Clause 13. 7 Adjustment for changes in legislation Sub-Clause 8. 1. Commencement of the Works

FIDIC MDB Harmonised Construction Contract Conference Sub-Clause 4. 12 Unforeseeable Physical Conditions In this Sub-Clause, “physical conditions” means natural physical conditions and manmade and other physical obstructions and pollutants, which the Contractor encounters at the Site when executing the Works, including sub-surface and hydrological conditions but excluding climatic conditions. If the Contractor encounters adverse physical conditions which he considers to have been Unforeseeable, the Contractor shall give notice to the Engineer as soon as practicable. This is the Contractor’s favourite clause and it is more the gateway of claim than the causal factor of claim itself. Not all unforeseeable conditions is claimable

FIDIC MDB Harmonised Construction Contract Conference Based on the Contract: material in the tunnel excavation is rock type A Actual condition: material in the tunnel excavation is rock type B Rock type B is harder than A Question: Could it be considered as an Unforeseeable Physical Condition ? May the contractor submit a claim for this condition? © Dr. Sarwono Hardjomuljadi

FIDIC MDB Harmonised Construction Contract Conference Sub-Clause 2. 1 Right of Access to the ……………. . The Employer shall give the Contractor right of access to, and possession of, all parts of the Site within the time (or times) stated in the Contract Data If no such time is stated in the Contract Data, the Employer shall give the Contractor right of access to, and possession of, the Site within such times as required to enable the Contractor to proceed without disruption in accordance with the programme submitted under Sub-Clause 8. 3 [Programme]. This Sub-Clause 2. 1. is the most often Sub-Clause used by the “The Employer give the Contractor contractor as theshall basis of their claims. right of access to, and possession of, all parts of the Site within the time (or times) stated in the Contract Data”, should be carefully interpreted because it may be interpreted as “the whole Site within a specific time mentioned in the contract data and/or in the tender proposal”. The second paragraph of Sub-Clause 8. 3 mentions about the” time” and “disruption” and also that “The Contractor shall submit a detailed time programme to the Engineer within 28 days after receiving the notice under Sub. Clause 8. 1 [Commencement of Works]”. It means that the action in the Sub. Clause 8. 3. is done after the Sub-Clause 8. 1. has been fulfilled. There are four precedent conditions to be fulfilled before the issuance of the instruction on Commencement of Works.

FIDIC MDB Harmonised Construction Contract Conference Sub-Clause 1. 9 Delayed Drawings or Instructions The Contractor shall give notice to the Engineer whenever the Works are likely to be delayed or disrupted if any necessary drawing or instruction is not issued to the Contractor within a particular time, which shall be reasonable If the Engineer fails to issue the Drawings within a particular time according to the Contractor’s schedule, the Employer should be responsible to give compensation to the Contractor, providing that the Contractor has followed the procedure and fulfilled the requirements by giving notice to the Engineer and within the time frame stipulated in the Contract. This Sub-Clause only mentions “within a time which is reasonable”. Both parties should pay attention to this sentence as this might cause different interpretation lead to dispute.

FIDIC MDB Harmonised Construction Contract Conference Sub-Clause 13. 7 Adjustments for Changes in Legislation The Contract Price shall be adjusted to take account of any increase or decrease in Cost resulting from a change in the Laws of the Country (including the introduction of new Laws and the repeal or modification of existing Laws) or in the judicial or official governmental interpretation of such Laws, made after the Base Date, which affect the Contractor in the performance of obligations under the Contract.

FIDIC MDB Harmonised Construction Contract Conference Sub-Clause 1. 13 Compliance with Laws The Contractor shall, in performing the Contract, comply with applicable Laws. Unless otherwise stated in the Particular Conditions: The parties should have the same interpretation on the “applicable laws” i. e. all regulations established by the law itself instead of the parties obligation under the contract. Parties should not only comply with the laws and regulations issued before the base date, but also to all laws and regulations issued during the course of the project. The FIDIC Contract allocate the risk of change of law to the Employer as far as such law and regulation affect the Contractor in performing their obligation, but the contractor should follow such law and regulation, and submit the notice on the incident (Sub-Clause 1. 13 clearly specify that each party is responsible to comply with the applicable Laws”).

FIDIC MDB Harmonised Construction Contract Conference Sub-Clause 8. 1 Commencement of Works Except otherwise specified in the Particular Conditions of Contract, the Commencement Date shall be the date at which the following precedent conditions have all been fulfilled and the Engineer’s instruction recording the agreement of both Parties on such fulfilment and instructing to commence the Work is received by the Contractor: (a) signature of the Contract Agreement by both Parties, and if required, approval of the Contract by relevant authorities of the Country; (b) delivery to the Contractor of reasonable evidence of the Employer’s Financial arrangements (under Sub-Clause 2. 4 [ Employer’s Financial Arrangement ]); (c) except if otherwise specified in the Contract Data, and possession of the Site given to the Contractor together with such permission(s) under (a) of Sub-Clause 1. 13 [Compliance with Laws ] as required for the commencement of the Works; (d) receipt by the Contractor of the Advance Payment under Sub-Clause 14. 2 [ Advance Payment ] provided that the corresponding bank guarantee has been delivered by the Contractor. If the said Engineer’s instruction is not received by the Contractor within 180 days from his receipt of the Letter of Acceptance, the Contractor shall be entitled to terminate the Contract under Sub-Clause 16. 2 [ Termination by Contractor ].

FIDIC MDB Harmonised Construction Contract Conference The Employer shall give the Contractor right of access to, and possession of, all parts of the Site within the time (or times) stated in the Contract Data. Sub-Clause 2. 1 If no such time is stated in the Contract Data, the Employer shall give the Contractor right of access to, and possession of, the Site within such times as required to enable the Contractor to proceed without disruption in accordance with the programme submitted under Sub-Clause 8. 3 [Programme]. Possession of Site Sub-Clause 8. 1 Except otherwise specified in the Particular Conditions of Contract, the Commencement Date shall be the date at which the following precedent conditions have all been fulfilled. . . . (c) except if otherwise specified in the Contract Data, and possession of the Site given to the Contractor together with such permission(s) under (a) of Sub-Clause 1. 13 [Compliance with Laws ] as required for the commencement of the Works; Sub-Clause 8. 3 The Contractor shall submit a detailed time programme to the Engineer within 28 days after receiving the notice under Sub-Clause 8. 1 [Commencement of Works].

FIDIC MDB Harmonised Construction Contract Conference Sub-Clause 8. 3 Programme The Contractor shall submit a detailed time programme to the Engineer within 28 days after receiving the notice under Sub. Clause 8. 1 [Commencement of Works]. The Contractor shall also submit a revised programme whenever the previous programme is inconsistent with actual progress or with the Contractor’s obligations. Even the working programme is submitted after the contract signing, but usually the Contractor’s programme has been incorporated in the tender submission and then into the contract. The programme submitted along with the bid and incorporated into the contract would then become the obligation for both parties and it means that the Contractor would have to perform in accordance with the programme and the Employer would have to fulfill its obligations.

FIDIC MDB Harmonised Construction Contract Conference When detailed programme is submitted during tender and then incorporated in the contract, it is like two faces of coin, one face, the parties should follow what is stipulated in the contract and the contractor should fulfill the exact sequence and timing of contractor’s operations which is a part of the contract and in case that one party cannot fulfill his obligation and if such breach of contract cause delay to the completion, then one should compensate to other party. Another face, based on Sub-Clause 8. 3, the Contractor should submit the Programme 28 days after the Commencement of Works (Sub-Clause 8. 1), so the Contractor might say that programmes submitted before the Commencement Date are for reference only and he has no obligation to fulfill it. This condition might create dispute, because both parties would use it for his favour. Maybe for that reason most construction contracts do not incorporate the contractor’s programme but restrict the contract terms to dates by which the whole, or parts, of the works have to be completed (Davison et al, 2009).

FIDIC MDB Harmonised Construction Contract Conference The Green Flag Clauses

FIDIC MDB Harmonised Construction Contract Conference Employer’s Construction Claims : Sub-Clause 2. 5 Employer’s Claims If the Employer considers himself to be entitled to any payment under any Clause of these Conditions or otherwise in connection with the Contract, Sub-Clause 8. 7 Delay Damages ……………. These delay damages shall be the only damages due from the Contractor for such default, other than in the event of termination under Sub-Clause 15. 2 [Termination by Employer] prior to completion of the Works. These damages shall not relieve the Contractor from his obligation to complete the Works, or from any other duties, obligations or responsibilities which he may have under the Contract.

FIDIC MDB Harmonised Construction Contract Conference Additional Contract Price could be classified into three groups: • Variation order • Price adjustment with price escalation formulae • Claim Clauses in FIDIC MDB Harmonised Edition 2010 those facilitate additional contract price components: Variation order: Sub-Clause 13. 1 and other related Sub-Clauses which explain detailed procedure of Variation Order in Clause 13. Price adjustment with price escalation formulae: Sub-Clause 13. 8 Claim: all Sub-Clauses in Clause 20

FIDIC MDB Harmonised Construction Contract Conference Contractor’s Construction Claims : Desire or interest is something comes from individual’s inner and cannot be organised from outside; Contractor’s desire/interest to get the fairness in avoiding the loss and contractor’s effort to get bigger profit are human. Contractor’s desire to get the fairness in avoiding the loss and contractor’s effort to get bigger profit are human.

FIDIC MDB Harmonised Construction Contract Conference Contractor’s Construction Claims : Chance is an opportunity to get something and it actually depends on the existing system, chance might motivate somebody who formerly has no intention to use it but will later use by its presence. In the course of a construction contract, occurrences which affected and potentially become the construction claims could be classified as follows: Contractual occurrence: contractual problems due to any different interpretation, ambiguity clauses, etc. Event or circumstance: something occurred due to any physical construction, performance, natural condition, etc

FIDIC MDB Harmonised Construction Contract Conference Clause 20, Claims, Disputes and Arbitration Occurenced 28 days (Clause 20. 1 Para 1) Rejected No Notification Yes 14 days (Clause 20. 1 Para 5) (or period proposed by contractor agreed by engineer) Fully detailed claim with supporting particular 42 days (Clause 20. 1 Para 6) (or period proposed by contractor agreed by engineer) Engineer response © Sarwono Hardjomuljadi

FIDIC MDB Harmonised Construction Contract Conference The Bank’s Clauses

FIDIC MDB Harmonised Construction Contract Conference FIDIC MDB 2010 Sub-Clause 3. 1 Engineer’s Duties and Authority Para 4 However, whenever the Engineer exercises a specified authority for which the Employer’s approval is required, then (for the purposes of the Contract), the Employer shall be deemed to have given approval The Employer: It may become justification that every instructions from the Engineer with or without prior consent from the Employer shall be deemed to have given approval. Whatever the Engineer instruct to the Contractor in relation with the Works as stipulated in the contract, the Employer should be responsible. It is dangerous. The Engineer: It is a must, because the delay on making decision may cause further problems. The Employer should trust the Engineer that they will not harm, the Employer. The Contractor: Even it is written like that, we still feel that the Engineer Instructions with Employer consent are giving us more certainty.

FIDIC MDB Harmonised Construction Contract Conference FIDIC Construction 1999 Sub Clause 3. 1 Engineer’s Duties and Authority Para 3 The Engineer may exercise the authority attributable to the Engineer as specified in or necessarily to be implied from the Contract. If the Engineer is required to obtain the approval of the Employer before exercising a specified authority, the requirements shall be as stated in the Particular Conditions. The Employer undertakes not to impose further constraints on the Engineer’s FIDIC MDB 2010 Sub Clause 3. 1 Engineer’s Duties and authority, except as agreed with the Contractor. Authority Para 3 The Engineer may exercise the authority attributable to the Engineer as specified in or necessarily to be implied from the Contract. If the Engineer is required to obtain the approval of the Employer before exercising a specified authority, the requirements shall be as stated in the Particular Conditions. The Employer shall promptly inform the Contractor of any change to the authority attributed to the Engineer. Under the FIDIC MDB Harmonised Edition (2010), The Employer is allowed to change the authority of the Engineer and then inform the contractor, it is an improvement compare to what under the FIDIC for Construction (1999), the Employer has an obligation not to impose “further constraints on the Engineer’s authority except as agreed with the Contractor. ” This give more authority to the Employer and it also may avoid the lengthy argument.

FIDIC MDB Harmonised Construction Contract Conference FIDIC for Construction and Authority Clause 3. 1 Engineer’s Duties This part is not exist FIDIC MDB 2010 Clause 3. 1 Engineer’s Duties and Authority The Engineer shall obtain the specific approval of the Employer before taking action under the following Sub-Clauses of these Conditions: (A) Sub-Clause 4. 12: agreeing or determining an extension of time and/or additional cost. (B) Sub-Clause 13. 1: instructing a Variation, except; (i) in an emergency situation as determined by the Engineer, or (ii) if such a Variation would increase the Accepted Contract Amount by less than the percentage specified in the Contract Data. (C) Sub-Clause 13. 3: approving a proposal for Variation submitted by the Contractor in accordance withbe. Sub-Clause 13. 1 paragraph or 13. 2. than para 4 This Sub-Clause should in the earlier

FIDIC MDB Harmonised Construction Contract Conference Sub-Clause 2. 4 Employer’s Financial Arrangements Para 1 The Employer shall submit, before the Commencement Date and thereafter within 28 days after receiving any request from the Contractor, reasonable evidence that financial arrangements have been made and are being maintained which will enable the Employer to pay the Contract Price punctually (as estimated at that time) in accordance with Clause 14 [Contract Price and Payment]. Before the Employer makes any material change to his financial arrangements, the Employer shall give notice to the Contractor with detailed particulars. The Employer should pay the additonal cost and extension of time to the contractor because of delay of payment which is caused by third party (in this case, the Bank).

FIDIC MDB Harmonised Construction Contract Conference Sub-Clause 2. 4 Employer’s Financial Arrangements Para 2 In addition, if the Bank has notified to the Borrower that the Bank has suspended disbursements under its loan, which finances in whole or in part the execution of the Works, the Employer shall give notice of such suspension to the Contractor with detailed particulars, including the date of such notification Sub-Clause 14. 7 Payment Para 1 The Employer shall pay to the Contractor: (a) the first instalment of the advance payment within 42 days after issuing the Letter of Acceptance or within 21 days after receiving the documents in accordance with Sub-Clause 4. 2 [Performance Security ] and Sub-Clause 14. 2 [Advance Payment ], whichever is later; (b) the amount certified in each Interim Payment Certificate within 56 days after the Engineer receives the Statement and supporting documents; or, at a time when the Bank’s loan or credit (from which part of the payments to the Contractor is being made) is suspended The Employer should be liable for giving the compensation to the Contractor and should pay to the Contractor such compensation. .

FIDIC MDB Harmonised Construction Contract Conference Sub Clause 14. 8 Delayed Payment If the Contractor does not receive payment in accordance with Sub. Clause 14. 7[Payment], the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay. This period shall be deemed to commence on the date for payment specified in Sub-Clause 14. 7 [Payment], irrespective (in the case of its sub-paragraph (b)) of the date on which any Interim Payment Certificate is issued. This Sub-Clause put the Employer in the difficult position, because if the delay of payment occure because of not their fault, i. e the bank internal procedure, so the Employer in this case as the Bank’s borrower should be responsible and because of that it is become Employer liability to pay.

FIDIC MDB Harmonised Construction Contract Conference Sub-Clause 4. 2 Performance Security Para 2 The Contractor shall deliver the Performance Security to the Employer within 28 days after receiving the Letter of Acceptance, and shall send a copy to the Engineer. The Performance Security shall be issued by a reputable bank or financial institution selected by the Contractor,

FIDIC MDB Harmonised Construction Contract Conference Sarwono Hardjomuljadi Dr, Ir, MSc (Civ), MSBA (Bus), MPA, MDBF, ACIArb, ACPE FIDIC Contract International Accredited Trainer (FIDIC IAT) Federation Internationale des Ingenieurs-Conseils FIDIC - Box 311 - CH-1215 Geneva 15 - Switzerland SKYPE fidic. secretariat - Tl +41 -22 -799 49 00 - Fx +41 -22 -799 49 01 – w ww. FIDIC. org Country Representative for Indonesia (MDRBF) The Dispute Resolution Board Foundation 19550 International Blvd. So Suite 314 Seattle, Washington 98188, USA Tel. (206) 878 -3336, Fax (206) 878 -3338 www. drb. org Corporate Panel Member (MDBF) The Dispute Board Federation 14, rue du Rhone 1204 Geneva, Switzerland Tel: +41 22 819 19 68, Fax: +41 44 732 69 95 www. dbfederation. org Associate Member (ACIArb) Chartered Institute of Arbitrators 12 Bloomsbury Square London, WC 1 A 2 LP, UK Tel: +44 (0)20 7421 7444; Fax: +44 (0)20 7404 4023 www. ciarb. org

International Federation of Consulting Engineers President Geoff French, UK Vice-President Pablo Bueno, Spain Secretariat FIDIC World Trade Center 2 Geneva Airport Box 311 CH-1215 Geneva 15 Switzerland Tel: +41 22 799 49 00 Fax: +41 22 799 49 01 fidic@fidic. org www. fidic. org Managing Director Enrico Vink