Offshore Projects under FIDIC

by | 11. May 2016 | Commercial Law

The offshore windmill industry and the renewable energy sector (including for instance hydro power, biomass, photovoltaik) in general use frequently FIDIC forms of Contract. In particular the FIDIC Yellow Book is obviously quite popular (see https://www.lexology.com/library/detail.aspx?g=32e2b53e-f3b7-49ef-8e52-829009225921; https://uk.practicallaw.thomsonreuters.com/3-549-1845?__lrTS=20200305162750693&transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1 ) in this sector. However, in most cases the industry uses customized FIDIC General Conditions of Contract because, inter alia because

  1. it is frequently assumed that FIDIC standard forms require modifications in order to adapt them to legal requirements (frequently interchangeably used as a reference to Civil Law requirements); and/or
  2. FIDIC forms of Contract undeniably do not provide appropriate weather allocation rules; and/or
  3. FIDIC forms of Contract do not anticipate the role of the “Marine Warranty Surveyor”; and/or
  4. FIDIC forms of Contract confer upon the Engineer major powers which help to hold the balance between the Parties if major change occurs.

Users may find very helpful guidance on how and when to modify FIDIC forms of Contract by consulting the JICA Check List for One Sided Contracts – For use with “Sample Bidding Documents under Japanese ODA Loans – Procurement of Works”, June 2009 Edition.

Below users may find some introductory notes on the use of the FIDIC Yellow Book 1999 in international offshore windmill projects.

Suitability of the FIDIC Rainbow Suite of Contracts

The use of FIDIDC forms of Contract raises questions. In particular there seems to be doubt as to whether the current forms of contract fit in that FIDIC in itself has allegedly identified a need to publish a contract form with regard to renewable energy projects. Notwithstanding some reports (see Annual Report 201/2019) the new FIDIC Task Group 14 did not yet publish Special Conditions to the Yellow Book.

Preparation of Tender Documents

The Employer should carefully establish the purposes of the Works, the basic and most comprehensive Employer´s requirement to be met. Shortcoming in the defintion of “purpose” are likely to result in shortcomings and additional costs. The definition of “purpose” will help the Engineer to decide on whether the Works have been substantially completed and to which extent specific work is indispensably included in the Contract.

Law

The need to customize FIDIC standards for legal reasons is frequently overdone. Less is sometimes more, in that major alterations may result in shortcomings and gaps, discrepancies and ambiguities.

It goes without saying that legal requirements must be complied with unless the law is not mandatory and the Contract clearly modifies the legal standard. FIDIC forms of Contract have adopted the following approach:

  • In accordance with Sub-Clause 1.13 the Parties shall comply with the Laws (as defined)

The governing law of the Contract shall be as agreed in the Appendix to Tender [Contract Data]; it applies as a framework including mandatory and gap filling law (mandatory parts of different legal systems may apply in accordance with special conflict of law rules)

Compliance with mandatory laws is important. However frequently contract and other law is not mandatory. Mandatory legal requirements to be complied with in offshore projects are:

For instance in Germany a permit for an offshore wind farm will only be granted if the safety and efficiency of navigation and the marine environment are not endangered. Extensive investigations and strict conditions to protect the marine environment to minimize the impact of such projects are required prior to approvals.

  • Environmental requirements, like for instance the requirement to use noise reducing methods like the provision of bubble curtain by placing a pipe or hose on the sea floor in order to create a ring around noise pollutants -like a pile-driver.
  • Avoidance of radar reflections must be taken in consideration
  • Zustimmung im Einzelfall (approval on an individual basis): In accordance with German law the execution of works offshore requires to obtain a construction permit from the Bundesamt für Seeschifffahrt und Hydrograpie (BSH). Materials to be used must be certified. Alternatively a Zustimmung im Einzelfall can be obtained which means that BSH approves specific design and methods of working subject to an expert opinion. Such expert opinions may heavily impact design in that the experts may require the designer to increase safety factors with regard to the structural engineering and/or determine weather requirements to be met reading the execution of specific works.
  • Major parts of German standard contract law can be contracted out of the contract. Nevertheless some provisions are mandatory, like Section 648a Civil Code (see Section 648a para. 7 Civil Code).

Some other legal niceties require further consideration, for instance the issue of suspension of prescription of entitlements during negotiations or dispute adjudication proceedings or the concept of third party notice in accordance with Section 204 n° 6 Civil Code. Care ad diligence should be applied in order to avoid misunderstandings:

    • For instance under German law the Taking-Over Certificate to be issued by the Engineer under Clause 10 does not fully conform to the acceptance as described in Section 640 of the German Civil Code.
    • For instance the  Defects Notification Period does not substitute or replace the German “Gewährleistung” in that the Contractor warrants to remedy any defect which had been notified to him during the DNP regardless of whether the defect was attributable to him. Hence, pursuant to Clause 11.9 FIDIC 1999 the German “Gewährleistung” only starts running if and when the Engineer has issued the Performance Certificate.

Weather

Offshore projects involve major weather risk. The construction of offshore windmill farms is usually associated with high risks and resulting costs. Wind speed and wave height are unpredictable. On the other hand also offshore projects require suitable working conditions. Due to these weather dependencies in offshore operations, time slots or windows are required, in which over a defined period of time, the weather conditions do not exceed certain thresholds. Hence, a workability assessment is helpful, which combines the offshore environment, the marine spread hydrodynamic behaviour and the operational procedure into one simulation model, which will give insight in the environmental risk of the operation.

The cost effective use of offshore equipment (e.g. vessels, cranes, etc.) require a realistic forecast, including weather dependencies, of activity and project durations in order to decreases related costs and risks of offshore works. The definition and determination of working conditions involve the discussion of vessel survival criteria, design and working methods. High vessel survival limits increase the available working hours and transportation capacities. However, the lifting, loading and unloading of heavy structures offshore are complex exercises which may involve consideration of weather slots independent of vessel survival criteria. Special grouting activities require stable working conditions during approx. pre-defined slots (which for instance must be determined in respect of operating forces, special working methods and the hardening time in respect of used material). Hence, discussing offshore weather risk involves a lot of facets. The German Fraunhofer Institute has developed and applies the WaTTS – Weather Time Series Simulation – Method, a concept mapping and evaluating activities into weather time series. Allegedly the analysis further considers marine operation rules, e.g. DNV-OS-H101, and weather forecast uncertainties.

An assessment method based on a simulation of the planned operations taking into account realistic weather conditions at each time step is likely to deliver reliable calculation data. The work schedule (or programme in accordance with Sub-Clause 8.3 FIDIC 1999) and its associated weather constraints can be directly mapped onto a probable weather scenario. By doing so, statistical information about the work duration (e.g. work duration with 95% certainty, worst/best case project duration, etc.) in the planning and design phase can be calculated.

It is in the nature of things that the above method may help to calculate losses under FIDIC forms of Contract based on probability factors. FIDIC forms of Contract traditionally allocate risk in a balanced way. The standard weather approach under FIDIC is that the Contractor will bear the usual weather risk; only exceptional adverse weather will be borne by the Employer. However, in offshore projects this remains a helpless statement unless the specific weather risk was made manageable and had been re-allocated in accordance with the project needs. One suitable approach is the use of weather data based planning. However, FIDIC forms of Contract are not fit for such an approach, because probability based planning does not automatically result in assessable situation for the purposes of extension of Time for Completion in accordance with Sub-Clause 8.4 FIDIC 1999. The entitlement to extension of time for Completion under FIDIC requires a critical path method analysis which is a suitable method in order to provide the industry with reliable results for onshore projects but not for offshore ones in that the use of weighting factors (p-factors) may result in the falsification of results. For instance an Employer Risk Event which causes delay in summer may have actual effects in winter where statistically less time is available for the relevant part of the works. It is obvious that Sub-Clause 8.4 may require specific modifications in order to provide for a more balanced and appropriate time assessment.

Pushing weather sensitive work from good weather periods into periods of bad weather, or encountering unusually severe weather, may impact productivity, for instance shipment of equipment and lifting equipment into the windy season (AACE, Estimating Lost Labour Productivity in Construction Claims, Recommended Practice No. 25R-03 (2004), at page 4).

When establishing the compensation for disruption it is necessary to isolate issues that can affect productivity but are unrelated to the Employer´s liability. These issues can include weather, plant breakdown, dilution of supervision, contractor management and acceleration. The Contractor has an obligation to manage its own change efficiently and any failure to do this should not be compensated (SCL Delay and Disruption Protocol, at 1.19.9 (at page 31).

Delays caused by inclement weather in an extended period should therefore be considered as part of the effects of the primary delaying event (i.e an excusable event) for which extensions of time have been or should be granted.

Generally, the principle is that inclement weather in an extended period qualifies for further extensions of time if it was incurred due to the consequential or knock-on effects of an excusable event. Coupled with this is the fact that most standard forms of contract provide that the contract administrator’s assessment of an extension of time should be “fair and reasonable”. An extension of time, which failed to account for all of the effects caused by an excusable event, could not be said to be “fair and reasonable”.

Authority for the principle can be found in the Canadian case of Ellis Don v. The Parking Authority of Toronto (1978) 28 BLR 98. The case concerned work planned to be carried out in the summer (pouring concrete) being delayed into winter due to the employer’s failure to obtain an excavation permit. This delayed the commencement of the project.

The extension of time claimed by the contractor was 171/2 weeks which included 3 weeks consequential delay due to the concreting works being delayed into the winter. The court awarded the contractor the additional time for the consequential delay caused by winter working as well as financial damages to reimburse the extra cost incurred by the contractor due to concreting in the winter. Using probability factors when assessing the effects of delay and disruption should therefore be done in a way which ensures compliance with the above principles.

Hence, the strong likelihood of delays to be caused by inclement weather in an extended period should therefore be considered as part of the effects of the primary delaying event (i.e an excusable event) for which extensions of time have been or should be granted while the low likelihood of delays to be caused by inclement weather in an extended period should also be considered as part of the effects of the primary delaying event (i.e an excusable event) for which extensions of time have been or should be granted: thus it is not appropriate to give weight to weather factors which apply at the time when the delays and/or dispruption event has occurred: For instance an event which occurs in summer having effects in winter could be considered at a higher factor -e.g. 2.8 (meaning that the actual effect is one day of delay resulting in 2.8 days of EOT- than an event which occurs in winter having effects in summer -e.g. 1.3 resulting in EOT totalling 1.3 days.

Marine Warranty Surveyor

In offshore projects the insurance providers require the use of “Marine Warranty Surveyors” and provide insurance coverage only subject to MWS approvals in respect of working methods, loading and unloading procedures, shipment of equipment, etc. The MWS issue Certificates of Approval with regard to the vessel deck design (e.g. the grillage) and individual working activities which require compliance with pre-determined weather conditions.

If the MWS determines more stringent weather restrictions or other parameters impacting the Contractor´s productivity it is again obvious that the question arises who should bear the related risk. The related risk of unpredictable additional costs is extremely high and has caused serious problems. It does not make too much sense to merely allocate the risk to one of the Parties in that if the risk occurs the relevant party must still be able to manage and control the risk. Only if the Contractor is exclusively responsible for the design and construction of the windpark he will actually be able to manage the full risk. However, if the Employer employs more than one contractor the interface management is overlapping and may result in unmanageable situations (for instance the dimensions of mudmats which shall take up forces of the structure before fixing it to the seabed have been determined for the purposes of the manufacturer´s  contract while the installation contractor suffers extra costs due to instruction of the MWS during the installation phase which could have been avoided by a different mudmat design).

Engineer

In accordance with FIDIC contracts the Parties confer upon the Engineer the power to instruct Variations and to assess and determine the effects on Time for Completion and the Contract Price [see Sub-Clause 3.5 FIDIC 1999 or Sub-Clause 3.7 FIDIC 2017]. By giving instructions the Engineer avoids lengthy discussions on the need of Variations and its effects on Time for Completion and the Contract Price. In using the power to make determinations the Engineer must hold the balance between both Parties; however in doing so he shall proceed in accordance with Contract. Since 2017 the relevant Sub-Clause 3.7 carifies that in matters of determination the Engineer shall act neutrally. Hence, Contractors cannot avoid unwelcomed Variations by offering high prices in consideration of it. Rather, the Contractor must proceed in accordance with the instructed Variations even if risk increases and he is likely to make losses. FIDIC forms of Contract are aimed at providing the parties with a manageable contract and by avoiding prolonged discussions and disputes.

Perspectives

in 2015 FIDIC has made a market survey in order to understand whether the offshore industry would be interested in a tailor-made offshore FIDIC form of Contract. Results have not yet been published but were discussed at the past IBC FIDIC Users´ Conference in London 2015.

During the last roughly 20 years the author has been involved in a couple of these offshore projects in the Baltic and the Northern Sea as a DAB member, expert and/or counsel, in particular in cabling, substation and windmill installation contracts. The author is a FIDIC legal advisor, a fully accredited FIDIC Trainer, a DIS expert, and since 2009 a FIDIC approved dispute and listed adjudicator. As such he has operated under FIDIC forms of contract in Afganisthan, Armenia, Bosnia, Ethiopia, Germany, Kazakhstan, Mali, Mexico, Morrocco, Palestine, and Tanzania.

WARNING: the material contained in these notes is a simplified guide to some major topics. It is not intended as a substitute for legal advice on individual transactions, and does not necessarily stand on its own. Whilst the contents are believed to be correct, the authors cannot accept any responsibility for errors or omissions.