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clause 7.2.

Permanent Works designed by Contractor


clause 20.4 Employers Risks
clause 39.1 Removal of improper work, materials or plant
clause 49.3 Cost of remedying defects

A Contractor concerned at the number of references to design by the Contractor


contained in the conditions will find some reassurance in the statement in this
sub-clause that he is not responsible for the design and the references to
express provision in the final sentence of this clause, clause 7.2 (Permanent
work designed by Contractor) and, in relation to nominated subcontractors,
clause 59.3 (Design requirements to be expressly stated). For a comment on the
level of design responsibility imposed, see clause 7.3 (Responsibility unaffected
by approval). A difficult question arises as to the responsibilities of a contractor
without design responsibility. In McQuade v Solchek Pty Limited (1989) B&CL
131, it was held by the Supreme Court of South Australia that there was no
implied warranty by the contractor that a steeply sloping driveway, the design
and location of which was specified by the owner, would be fit for its intended
use. However the Supreme Court of Canada in Brunswick Construction v Nowlan
(1974) 49 DLR(3d) 93 held that where the Employer had obtained a design from
a professional but had not retained the designer to supervise, the contractor was
liable where the design was found to be defective as he should have warned the
Employer of the design defects. The duty to warn principle is not settled or well
established in the English courts. One Official Referee in Edac v Moss (1984) 30
BLR 141 expressed the view that a contractor who finds a defect in the design
given to him is under an implied obligation to warn the Employer of the defect,
whilst another, in University of Glasgow v Whitfield (1988) 42 BLR 66, considered
a duty to warn would only exist if the contractor had voluntarily assumed such a
duty. See also Investors in Industry Commercial Properties v South Bedfordshire
(1986) 1 QB 1034 where the Court of Appeal held that an architect has a duty to
warn in relation to structural design defects even where an engineer had been
appointed.

CLAUSE 9 : Formal Contract Agreement

This clause provides for the preparation and signing of the formal Contract
Agreement which is to be prepared, modified as necessary and completed at the
Employer's cost.

This clause is virtually unchanged from the 3rd Edition.

The parties will have concluded a contract as soon as the offer comprised in the
Tender, which may have been adjusted during negotiations, is unequivocally
accepted by the Employer in his Letter of Acceptance. After a negotiation,
however, the existence and terms of the contract may not be beyond doubt and
the Employer is given the option of requiring the Contractor to enter into the
Agreement. In some countries, however, a formal agreement is required by law

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or highly advisable politically. As pointed out by FIDIC in their Guide, the parties
should also bear in mind the need for counter-signature or ratification, the
obligation to pay stamp duty and other respects in which local law or practice
may impinge upon the signing of the Agreement.

It should also be borne in mind that the Letter of Acceptance is used extensively
as the starting point for various periods of time under the contract. For a list of
the relevant clauses, see under clause 1.1(b)(vi). Conflict and confusion could
therefore be created if the law or practice applicable to the project dictated that a
contract would only come into existence once the Contract Agreement had been
signed if that Contract Agreement was not signed simultaneously with or very
soon after the Letter of Acceptance had been sent. In those cases, the relevant
clauses should perhaps be amended to make the periods of time run from the
signature of the Contract Agreement.

If any modification to the Agreement is required other than the completion of the
blanks, which should not be controversial, there may be scope for disputes. For
example, if the Employer adds a number of documents to the list of documents
which are to comprise the contract, this may give rise to objections.
Furthermore, under English law, an agreement imposing an obligation upon a
party to sign a document, the terms of which are not yet agreed, is
unenforceable: this is because the English courts do not consider it their role to
create agreements between the parties.

If the English courts' dislike of "an agreement to agree" did not nullify the
existence of a contract, a dispute over the necessity for proposed modifications
would fall within the scope of clause 67 (Settlement of disputes). Thus, the
necessity for such modifications could be the subject of a decision by the
Engineer and possibly by an arbitrator. The result of such procedure could be an
award specifying the necessary modifications and a direction to the Contractor to
execute the document.

If the Contractor refused to execute a modified document provided by an


Employer, and the court or arbitrator decided that the refusal was a breach of
clause 9, it is not immediately obvious what loss or damage the Employer would
have suffered as a consequence.

As the Agreement is given the highest priority under clause 5.2 (Priority of
contract documents) its terms and any modifications thereto are very important.
It is envisaged by clause 1.1(b)(i), in the definition of "Contract", that further
documents may be expressly incorporated into the Agreement. For clarity, it may
well be advantageous to list all contract documents under Article 2 but it is not
strictly necessary as such further documents that are expressly incorporated in
the Letter of Acceptance will fall within the definition of Contract. The
incorporation into the Agreement of all the contract documents could potentially
disrupt the intended order of priority of the contract documents: for a discussion
of this point, see the commentary under clause 5.2.

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As "the Employer" and "the Contractor" are defined both in the Agreement and in
clause 1.1 (Definitions), the parties should ensure there is no mismatch between
the two.

The Agreement is in very similar form to the 3rd Edition and ICE 5th.

CLAUSE 10 : Performance Security

If a bond is called for by the contract, the Contractor must supply it to the
Employer at his own cost within 28 days of his receipt of the Letter of
Acceptance, simultaneously informing the Engineer. The amount must be as
stated in the Appendix and the form and bondsman must be agreed by the
Employer.

The bond must be valid until the issue of the Defects Liability Certificate
whereupon it must be returned to the Contractor within 14 days.

Before claiming on the bond, the Employer must inform the Contractor of the
grounds for the claim.

Sub-clause 10.1 is a re-worded version of clause 10 of the 3rd Edition. Sub-


clauses 10.2 and 10.3 are entirely new.

Part II provides two example forms of performance security and provides optional
additional wording to specify the currency or source of the security. The type of
performance guarantee suggested by FIDIC was the subject of scrutiny by the
Hong Kong Court of Appeal in Tins Industrial v Kono Insurance (1987) 42 BLR
110, who held that the bond is indeed conditional on proof of breach and
damage.

10.1 It would normally be preferable for both the form and institution providing
security to be agreed prior to the issue of a Letter of Acceptance. Otherwise, the
Contractor is given a period of 28 days in which to agree these matters and to
negotiate with the institution and provide the bond. Four weeks will often be
insufficient for this exercise. More fundamentally, if the Contractor is informed
after the contract has been entered into that the Employer requires the form of
bond to be, for example, "on-demand", agreement on the form may never be
achieved. As commented in relation to clause 9.1 (Contract Agreement), an
agreement to agree something in the future is not readily enforceable in English
courts and difficult to enforce under any circumstances. Therefore the Employer
runs the risk that if the form is not agreed in advance of the Letter of Acceptance,
he will lose his right to security altogether. It may even be arguable that, as
agreement on an important term has not been achieved, no contract exists at all.

As to the Employer's approval of the institution, clause 1.5 (Notices, consents


etc) states that such approval "shall not unreasonably be withheld or delayed".

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Again, a protracted dispute could arise out of whether a refusal of approval was
unreasonable which would once again endanger the Employer's security. The
sensible course is for the Employer's requirements and indeed the Contractor's
proposed institution, to be defined as far as possible in the tender documents.

An effective sanction is provided by clause 60.2 (Monthly payments) which


prohibits interim certification until the performance security has been duly
provided. The effectiveness of the sanction is negated, however, if the form of
the bond is still the subject of debate when the first interim payment is due. The
Engineer may have no power to certify but the Contractor may have no obligation
to perform due to the absence of a concluded contract. In English law, the
Contractor would be entitled to be paid a reasonable sum for the work done in
the absence of a contract.

The forms of security set out in Part II are a performance and a surety bond.
FIDIC do not encourage the use of on-demand bonds because of the premium
that tenderers add to their bids on account of the risk of abuse of such bonds. As
the English Court of Appeal pointed out in Edward Owen Engineering v Barclays
Bank (1977) 3 WLR 764; 6 BLR 58, a properly documented call on an on-
demand bond must be honoured unless there is clear evidence of fraud. Other
forms of bond that the Employer may seek include:-
- tender or bid bond
- advance payment bond
- retention money bond
- maintenance bond, to ensure compliance with Defects Liability Period
obligations.

Other security provided to the Employer under the contract includes: retention,
whereby up to 10% of the value of the work is not paid for by the Employer until
the project is successfully completed; payment in arrears, whereby the Employer
pays for works at least two months after they have been executed; the ability of
the Employer to make use of the Contractor's equipment, temporary works and
materials following the termination of the Contractor's employment under clause
63.1 (Default of Contractor); the right to deduct damages for delay under clause
47.1 (Liquidated damages for delay); and the insurance provisions to be found in
clauses 21, 23 and 24.

10.2 This clause cannot of itself influence the terms of an existing bond but is
intended to be part of the form to be agreed between the Employer and the
Contractor.

In the event of a default by the Contractor such that he does not complete the
works, this sub-clause would theoretically require the performance security to
remain valid indefinitely. If a performance bond is paid, then it is defunct and,
similarly, if the surety either completes the work itself, or by another contractor or
pays the amount of the bond, the surety bond will also be defunct.

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Performance security is not available to an Employer in respect of defects
emerging after the issue of the Defects Liability Certificate.

The return of the bond within 2 weeks of the issue of the Defects Liability
Certificate is particularly important in relation to on-demand bonds. It is not
unknown for institutions to consider it necessary for the sake of their reputations
to honour on-demand bonds if they remain in the hands of an Employer
regardless of a claim by the Contractor that its validity has expired or that it is too
late under the contract to make a claim under it. The attitude may be that they
will not become party to such disputes but will treat the bond as the equivalent to
a banker's draft. Thus, it is only by securing the return of the bond to the
institution itself that a Contractor can be sure that no claim will be honoured.

10.3 Again, the real significance of this clause is in relation to on-demand


bonds. Given prior notification, the Contractor will be better placed to attempt to
remedy the default, to dissuade the Employer from proceeding or to dissuade the
institution from honouring the demand by demonstrating, for example, that the
bond was invalid or had expired or that any claim against the bond would be
fraudulent. Alternatively, the Contractor could attempt to obtain an injunction to
prevent the payment under the bond on such grounds. However, as no period is
specified or of necessity to be implied, the Employer is entitled to call the bond
immediately upon giving the notice in accordance with clause 68 (Notices).

The failure of the Employer to give the requisite notice would not normally
prevent payment under the bond. Unless the terms of the bond expressly
required the Employer to provide proof of notification, the payer would not be
concerned with the terms of this sub-clause. Such a failure would amount to a
breach of contract on the part of the Employer for which he would be liable in
damages. In the case of a typical on-demand bond, the Contractor would
probably be unable to show any loss as he would not have been able to prevent
payment unless one of the exceptional grounds referred to above existed. With
other forms of security, the bondsman or insurer would consult the Contractor in
any event before paying.

This sub-clause raises the issue of the respective rights and liabilities of the
Contractor and Employer after the Employer has successfully called an on-
demand bond where either the call was unjustified or the sum thereby recovered
exceeded any loss or damage incurred by the Employer. There is no express
term dealing with the matter nor does this sub-clause address the matter directly.
Its relevance may be in the support that it gives to the argument that there is an
implied term that the Employer will only call the bond where there has been a
genuine default and will repay to the Contractor any sum received by the
Employer which exceeds the amount of his loss and damage flowing from the
default. An argument for such an implied term rests on the assumption that the
Contractor is bound by agreement with the institution to indemnify the institution
in respect of the sums paid out, as is normally the case.

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