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International Law

Seminar Paper

Stuttgart University of Applied Science


International Project Management

Lecturer: Dr. Michael Brück

Students: Obiora Kenneth Ibeh


Sven Rache
Saskia Wiedemann

Summer Term 2009


Stuttgart University of Applied Science International Law | Seminar Paper
International Project Management

Table of Contents
Introduction....................................................................................................................3

Exercise 1.1 a)...............................................................................................................4

Exercise 1.1 b) ............................................................................................................5

Exercise 1.2 ................................................................................................................6

Exercise 1.3...................................................................................................................7

Exercise 2.1...................................................................................................................8

Exercise 2.2 ..................................................................................................................9

Exercise 2.3 ................................................................................................................10

Exercise 2.4 ................................................................................................................11

Exercise 2.5.................................................................................................................12

Exercise 3.1 ................................................................................................................14

Exercise 3.2 ................................................................................................................15

Obiora Kenneth Ibeh, Sven Rache, Saskia Wiedemann


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Introduction

For this case study we believe that the FIDIC Red Book is the document on which the Parties base the
entire process from the date of the Submission of the Tender. The mention of the DAB appointment in
the Letter of Tender supports this conclusion.
All Clauses and Sub-Clauses, which we refer to in our answers, are from the FIDIC Red Book. The
only exception is our answer to question 3.2, where we also refer to a Clause and Sub-Clauses from
the ICC Turnkey Contract.

For this case study we assume that the issues at stake are claims which can be resolved by the
Engineer alongside both parties [Sub-Clause 20.1: Contractor’s Claims and Sub-Clause 3.5:
Determinations]. On this basis were most of our conclusions reached.
However, if a dispute arises from the Engineer’s decision the Dispute Adjudication Board (DAB)
comes into play [Sub-Clause 20.2]. Where the DAB fails, the Parties can agree to commence
arbitration within the 56-day period, which can also be extended.

Obiora Kenneth Ibeh, Sven Rache, Saskia Wiedemann


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Exercise 1.1 a)

There are two issues:

Issue I:The Accepted Contract Amount in the Letter of Acceptance varies from the sum in the Letter
of Tender, i.e. the amounts and currencies are not the same.
Letter of Tender: 30,680.223.10 EUR (the sum is provisional)
Letter of Acceptance: 30,500,000.00 USD (the sum is a lump sum)
(Furthermore, the amount in the Letter of Tender is not written in words.)

Issue II: According to the Letter of Acceptance the demolition of an existing building has to be carried
out within 14 calendar days of the Commencement Date and this shall not have any bearing
on the agreed contract amount and time period.

Furthermore the Letter of Acceptance was signed from the Contractor’s side by Mrs. Lifetime.
According to the definition of “Letter of Acceptance” in Sub-Clause 1.1.1 [The Contract] only the
Employer is required to sign the Letter of Acceptance. We assume that the Employer asked the
Contractor to sign in this case to confirm the amendments to the Contractor’s Tender, i.e. the Contract
Amount and the demolition of the existing house. However, as W.W. Schmidt Snr and Jnr are the only
representatives of the company, i.e. they have joint power of representation, Mrs. Lifetime’s signature
is invalid.

Apart from that “The Parties shall enter into a Contract Agreement within 28 days after the Contractor
receives the Letter of Acceptance, unless they agree otherwise” [Sub-Clause 1.6: Contract
Agreement]. For this case study we assume that the Parties agreed to a slightly longer period.

Also the governing law is not determined in the Appendix to Tender, but according to Sub-Clause 1.4
[Law and Language] “The Contract shall be governed by the law of the country or other jurisdiction
stated in the Contract Data”.

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Exercise 1.1 b)

Issue I:

 Solution:

 “If an ambiguity or discrepancy is found in the documents, the Engineer shall issue any
necessary clarification or instruction” [Sub-Clause 1.5: Priority of Documents]

 If we were the Engineer, we would ask the Parties to re-negotiate the Accepted Contract
Amount prior to signing the Contract Agreement. The amended and agreed Accepted Contract
Amount is then to be written into the Contract Agreement.
Should the Employer have an issue with this proposal based on the fact that the Contractor has
already signed the Letter of Acceptance, the Contractor could argue that Mrs Lifetime’s
signature under the Letter of Acceptance is invalid.

 According to Sub-Clause 14.15 [Currencies of Payment] “The Contract Price shall be paid in the
currency or currencies named in the Appendix to Tender.” Thus we suggest that the euro should
be used for the amended Accepted Contract Amount, since the euro is the currency named in
the Appendix to Tender.

Issue II:

 Solution:

 For this case study we assume that the Contractor is supposed to demolish the existing house
which is mentioned in the Letter of Acceptance. Apparently this work was not included in the Bill
of Quantities and we assume that the Contractor therefore asks for an increase in the Contract
Price for carrying out the demolition works. As it is an “additional work” it is a Variation and
Variations “may be initiated by the Engineer” [Sub-Clause 13.1. (e): Right to Vary].
Furthermore it appears as if it is the Employer, not the Engineer, who initiates this Variation in
the Letter of Acceptance, but this does not comply with Sub-Clause 13.1 [Right to Vary].
Since the Accepted Contract Amount needs to be re-negotiated anyway, the Parties should
incorporate the additional Cost for the additional work in the amended amount.

Furthermore we assume that the Contractor may want to modify the Construction Schedule and
the Time for Completion due to the additional work. This should also be discussed and agreed
upon by the Parties prior to signing the Contract Agreement and they should seek the
Engineer’s advice on this matter. The Construction Schedule should be revised accordingly and
the revised schedule should become part of the Contract Agreement.

Obiora Kenneth Ibeh, Sven Rache, Saskia Wiedemann


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Exercise 1.2

 Contractor’s arguments

 “The Contract Price shall be adjusted to take account of any increase (...) in Cost resulting from
a change in the Laws of the Country (...) made after the Base Date” [Sub-Clause 13.7:
Adjustments for Changes in Legislation]
→ The Contractor would have been entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to
an extension of time and payment of the additional Cost.
However, there is no Contract yet due to the discrepancies between the Letter of
Acceptance and the Letter of Tender. A Contract would have been in place if the Letter of
Acceptance was acknowledged and signed by W.W. Schmidt Snr and Jnr.

 Solution

 We assume that the Employer still wants Chaos Ltd. to carry out the project. As no Contract is
in place both Parties negotiate and the Engineer mediates. During the negotiations the
Employer makes two different proposals:

Proposal A:
The State of Nirwana buys the machines required by the Contractor for the construction of the
hotel. These would be brand new machines which the Contractor rents from the State of
Nirwana for the construction period. After completion the machines remain the property of the
State of Nirwana. The Engineer shall determine if this will lead to a decrease or increase in
Cost. Since the Accepted Contract Amount needs to be re-negotiated anyway (refer to our
solution to 1.1 b)), the Parties should incorporate the decrease or increase into the amended
amount. (A decrease could be possible, as the rates which the Contractor included for his
machines in his Tender may be higher than the rates for renting the machines from the
Employer.)

Proposal B:
The Contractor brings machines into the State of Nirwana as originally planned and uses them
for the construction of the hotel. The machines must remain in the State of Nirwana after
Completion. The Contractor is entitled to a financial compensation, which is to be agreed based
on an estimation of the value of the machines provided by the Engineer. Since the Accepted
Contract Amount needs to be re-negotiated anyway (refer to our solution to 1.1 b)), the Parties
should incorporate the compensation into the amended amount.

For this case study we assume that the Contractor chooses Proposal B.

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Exercise 1.3

 Employer’s arguments

 In the letter of Acceptance the Employer requests that the Contractor provides a Performance
Security within 7 days. However, according to Sub-Clause 4.2: [Performance Security] “The
contractor shall deliver the Performance Security to the Employer within 28 days after receiving
the Letter of Acceptance”

 According to Sub-Clause 15.2 [Termination by the Employer] the Employer would be allowed to
terminate the contract.

 Solution:

 For this case study we assume that the Contractor’s bank does not provide the Performance
Security as the bank considers the Contractor’s financial situation not to be sound. Nonetheless,
the Employer wants Chaos Ltd. to carry out the project. There could be two different solutions:

Solution A:
The Parties have chosen Proposal B in our answer to 1.2. For this case study we assume that
the Engineer estimates the future value of the machines to be equivalent with the Amount of the
Performance Security in the Tender Appendix. Based on this assumption, the Employer accepts
the value of the machines as Performance Security. The amount by which the amended Agreed
Contract Amount has been increased for compensating the Contractor for leaving the machines
in the State of Nirwana is this Security. If the Contractor performs, the Contractor will receive the
amount which covers the value of the machines from the Employer. If the Contractor does not
perform, the Employer can make a claim under the Performance Security [Sub-Clause 4.2. (a)-
(d): Performance Security]. The Employer should transfer the amount to a trust account directly
after the Contract will have been signed.

Solution B:
A pre-payment of 10% of the Agreed Contact Amount is made by the Employer into a trust
account directly after the Contract will have been signed. This is the condition under which the
Contractor’s bank gives the Performance Security.

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Exercise 2.1

 Solution:

 We assume that the Contractor has not yet asked the Employer to provide evidence of the
financial arrangements which will enable the Employer to pay the Contract Price. Furthermore,
we assume that the Contractor still wants to carry out the project.

 The Contractor should ask the Employer to “ submit, 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” [Sub-Clause 2.4:
Employer’s Financial Arrangements].
The Contractor would be entitled to terminate the Contract should the Employer fail to provide
“reasonable evidence within 42 days after giving notice under Sub-Clause 16.1 [Contractor’s
Entitlement to Suspend Work] in respect of a failure to comply with Sub-Clause 2.4 [Employer’s
Financial Arrangements]” [Sub-Clause 16.2: Termination by Contractor].
For this case study we assume that the Contractor will receive the requested evidence. Upon
receipt of this evidence the Contractor shall furnish his bank with this information. The bank
scrutinize the evidence and decide if they give the Security.

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Exercise 2.2

In the description which is part of the question it remains unclear whether or not the Contractor had
inspected the sub-soil conditions prior to submitting the Tender.
Thus there could be different scenarios for Contractor’s arguments, for example a) and b):

a) The Contractor carried out such an inspection and found out that the ground water level was 5
metres below the planned bottom slab. In this case the Contractor could base his claim on Sub-
Clause 4.12 [Unforeseeable Physical Conditions].
→ The Contractor is entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to an extension
of time and payment of the additional Cost and gives notice to the Engineer.

b) The Contractor did not carry out such an inspection. In this case the Contractor could base the
claim on Sub-Clause 17.3 (h) [Employer’s Risks] and Sub-Clause 17.4 [Consequences of
Employer’s Risks] and further support the claim by arguing that it was the Employer who provided
the information about the ground water level.
→ The Contractor is entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to an extension
of time and payment of the additional Cost and gives notice to the Engineer.
Prior to giving that notice and promptly after the loss or damage has occurred the Contractor
is required to give a different notice to the Engineer to rectify the loss or damage. [Sub-
Clause 17.4: Consequences of Employer’s Risks]

For our answer we go along with scenario b)

 Employer’s arguments:

 The Contractor should “have inspected and examined the Site (...) and to have been satisfied
before submitting the Tender as to all relevant matters, including (...) the hydrological and
climatic conditions” [Sub-Clause 4.10: Site Data]

 Solution:

 The Engineer shall agree or determine these matters in accordance with Sub-Clause 3.5.

 The Engineer could come to two different conclusions:

 The rise of the ground water is an “operation of the forces of nature which is Unforeseeable”
[Sub-Clause 17.3 (h): Employer’s Risks]. An Extension of Time for Completion is granted
and the Employer has to cover the additional Cost.

 The Contractor ought to have inspected the sub-soil conditions and should have “based the
Accepted Contract Amount on the (...) inspections”. Thus the Contractor is not entitled to
claim.

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(The fact that the expert is a dead loss is irrelevant for answering this question since we can assume
that the Contractor would not admit that they had doubts on the expert’s abilities.)

Exercise 2.3

 Contractor’s arguments:

 The surveyor, who was commissioned by the Employer, has made the mistake. According to
Sub-Clause 17.3 (g) [Employer’s Risks] “the design of any part of the Works (...) by others for
whom the Employer is responsible” is an Employer’s Risk. The surveyor’s mistake “results in
loss or damage to the Works” and the “Contractor suffers delay and (...) incurs Cost from
rectifying this loss or damage”. [Sub-Clause 17.4: Consequences of Employer’s Risks].
→ The Contractor is entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to an extension
of time and payment of the additional Cost and gives notice to the Engineer.
Prior to giving that notice and promptly after the loss or damage has occurred the Contractor
is required to give a different notice to the Engineer to rectify the loss or damage. [Sub-
Clause 17.4: Consequences of Employer’s Risks]

 “If the Contractor suffers delay and/or incurs Cost from executing work which was necessitated
by an error (...) and an experienced contractor could not reasonably have discovered such error
and avoided this delay and/or Cost the Contractor” can make a claim. [Sub-Clause 4.7: Setting Out]
→ The Contractor is entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to an extension
of time and payment of the additional Cost and gives notice to the Engineer.

 Employer’s arguments:

 According to Sub-Clause 4.7 [Setting Out] “the Contractor shall rectify any error in the positions,
levels, dimensions or alignment of the Works”. Also “the Contractor shall use reasonable efforts
to verify” the “accuracy before” the specified or notified items of reference are used.

 Solution:

 The Engineer shall agree or determine these matters in accordance with Sub-Clause 3.5.
The FIDIC Red Book provides both Parties with good arguments. Thus we presume that the
Engineer would suggest that both parties should have a fair share of the additional cost. We
believe that the Employer should bear the bigger part because the Employer is responsible for
the surveyor. In our opinion this Employer’s Risk weighs more than the Contractor’s obligation
to verify the accuracy of the setting-out. It is up to the Engineer to suggest the exact ratio.
Furthermore the Engineer should decide about granting an extension of time.

(Our answer to 2.3 is based on our understanding that the surveyor is not a nominated
subcontractor.)

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Exercise 2.4

 Contractor’s arguments:

 This is Force Majeure since events or circumstances listed under Sub-Clause 19.1 [Force Majeure],
i.e. (a)-(d) and (i)-(ii), have occurred.
→ The Contractor gives notice to the Employer to comply with Sub-Clause 19.2 [Notice of
Force Majeure].

 “the Contractor is prevented from performing any of his obligations under the Contract by Force
Majeure” [Sub-Clause 19.4: Consequences of Force Majeure]
→ The Contractor is entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to an extension
of time and payment of the additional Cost and gives notice to the Engineer.

 Instead of claiming that Force Majeure has occurred, the Contractor could claim for an
extension of Time for Completion only, based on Sub-Clauses 8.4 [Extension of Time for
Completion] and 8.5 [Delays caused by Authorities]. The Contractor’s entitlement would be
subject to Sub-Clause 20.1 [Contractor’s Claims]. However, the Contractor could benefit more,
i.e. also financially, if Force Majeure is the reason for the delay and the additional Cost.

 Solution:

 We presume that the Contractor claims that Force Majeure has occurred.
The Engineer shall agree or determine these matters in accordance with Sub-Clause 3.5.
If we were the Engineer we would grant an extension of the Time for Completion and payment
of the additional Cost.

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Summer Term 2009 11
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Exercise 2.5

There are two issues:

Issue I:Greenpeace Activists wrap the site with banners.


As a consequence the construction measures are impeded for one week.

Issue II: The construction supervisor of Chaos Ltd. locks himself in the cab of the crane.
This does not cause a delay but an additional Cost.

Issue I:

 Contractor’s arguments

 This is Force Majeure since events or circumstances listed under Sub-Clause 19.1 [Force Majeure],
i.e. (a)-(d) and (iii), have occurred.
→ The Contractor gives notice to the Employer to comply with Sub-Clause 19.2 [Notice of
Force Majeure].
→ The Contractor is entitled subject to Sub-Clause 20.1 [Contractor’s Claims] to an extension
of time and payment of the additional Cost and gives notice to the Engineer.

 Instead of claiming that Force Majeure has occurred, the Contractor could argue that
Greenpeace has caused commotion and disorder. Thus the Contractor could claim for an
extension of Time for Completion and payment of the additional Cost. The Contractor could
base the claim on Sub-Clause 17.3 (c) [Employer’s Risks] and Sub-Clause 17.4 [Consequences
of Employer’s Risks].

 Employer’s arguments:

 According to Sub-Clause 4.22 [Security on Site] “the contractor is responsible for keeping
unauthorized persons of the site”

 Solution:

 For this case study we assume that the Contractor bases the claim on Force Majeure
The Engineer shall agree or determine these matters in accordance with Sub-Clause 3.5
[Determinations]

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The FIDIC Red Book provides both Parties with arguments. If we were the Engineer, we would
review the Contractor’s claim that Force Majeure has occurred, but would reject it on the basis
that the Contractor did not provide adequate security on site. Also the construction measures
were only impeded but the Contractor was not totally prevented from performing his obligations.
For this case study we assume that the Contractor will make up for the lost time within the given
Time for Completion. Therefore there will be no delay attributable to the Contractor, which may
lead to the payment of delay damages to the Employer in accordance to Sub-Clause 8.7 [Delay
Damages] and Sub-Clause 2.5 [Employer’s Claims].
2.5 (continued)

Issue II:

 Employer’s arguments:

 “The Contractor shall at all times take all reasonable precautions to prevent any unlawful,
riotous or disorderly conduct by or amongst the Contractor’s Personnel and to preserve peace
and protection of persons and property on and near the site.” [Sub-Clause 6.11: Disorderly
Conduct]

 Solution:

 Even if the Contractor claimed for additional payment, which we assume the Contractor will not,
the Engineer would reject the claim based on Sub-Clause 6.11 [Disorderly Conduct]

 “The Engineer may require the Contractor to remove” the construction supervisor [Sub-Clause
6.9: Contractor’s Personnel]

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Exercise 3.1

What is the purpose of the two clauses?


 The clauses protect the Contractor from losses that are not his own making.

Do they contradict or do they regulate different situations or issues?


 They do not contradict. They regulate different situations or issues. The major differences are:

Sub-Clause 17.3 [Employer’s Risks] Clause 19 [Force Majeure]

Relates to loss and damage to Works, Goods or Refers to a situation where either Party is
Contractor’s documents prevented from performing any of its obligations

An exceptional event or circumstance which is


Sub-Clause 17.3 (f)-(g) relate to Employer
beyond a Party’s control [Sub-Clause 19.1 (a)] has
default
occurred

An exceptional event or circumstance which is


Sub-Clause 17.3 (f)-(g) relate to Employer
not substantially attributable to the other Party
default
[Sub-Clause 19.1 (d)] has occurred

Risks described in Sub-Clause 17.3 (e)-(f) are


Risks described in Sub-Clause 17.3 (e)-(f) are
not listed as exceptional events or circumstances
included
in Sub-Clause 19.1

Forces of nature are not described in detail in Relevant forces of nature are described in more
Sub-Clause 17.3 (h) detail in 19.1 (v)

In contrast to Sub-Clause 17.3 (h) the


Although Sub-Clause 17.3 (h) refers to forces of
Contractor’s responsibility for taking precautions
nature there is room for Contractor’s default
is not mentioned in Sub-Clause 19.1 (v)

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There is no reference to where the exceptional


Risks listed in Sub-Clause 17.3 (b)-(d) refer to
events and circumstances listed in Sub-Clause
risks that occur within the Country
19.1 (ii)-(iv) occur

List of 5 examples containing exceptional events


List of risks is closed
or circumstances is non-exclusive

Exercise 3.2

Comparison between Clause 19 of the FIDIC Red Book and Sub-Clauses 56.2 – 56.4 of the ICC
Turnkey Contract as to the definition of Force Majeure:

Sub-Clauses 56.2-56.4 ICC Turnkey Contract Clause 19 of FIDIC Red Book

Impediment caused failure to perform Impossibility for either party to perform any of its
[Sub-Clause 56.2 (a)] obligations [Sub-Clause 19.2]
An impediment beyond a Party’s reasonable An exceptional event or circumstance beyond a
control [Sub-Clause 56.2 (a)] has occurred Party’s control [Sub-Clause 19.1 (a)] has occurred
Force Majeure can result from third party’s
No mention of a third party’s inability to perform
inability to perform due to impediments
Some impediments are quite different from
circumstances usually associated with Force
Majeure and they have little to do with
Event or circumstance is unanticipated and
unanticipated external events, e.g. “compliance
cannot be influenced by either Party
with any law or governmental order” [Sub-
Clause 56.4 (d) or “prolonged breakdown of (...)
telecommunication” [Sub-Clause 56.4 (g)
List of risks is closed, but it contains more List of 5 examples containing exceptional events
circumstances or circumstances is non-exclusive

Consequences of Force Majeure Consequences of Force Majeure


in ICC Turnkey Contract In FIDIC Red Book
In the Sub-Clauses dealing with the Force Majeure can be invoked by either Party
consequences [Sub-Clauses 56.5 to 56.9] both [Sub-Clause 19.2], but on the consequences of
Parties are mentioned Force Majeure only the Contractor is mentioned
[Sub-Clause 19.4]

The parties are advised to give notice as soon Notice to other party within 14 days [Sub-Clause
as possible but no defined time limitation [Sub- 19.2]
Clauses 56.5] The Contractor is subjected to Sub-Clause 20.1
[Contractors Claim], he must give the notice to
the Engineer within 28 days [Sub-Clause 19.4]

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The Parties are relieved from any liability in The Contractor can only ask for extension of time
damages from the time at which notice of the if it will affect the date of employer take over
impediment that causes the failure to perform [Sub-Clause 8.4: Extension of Time for
reaches the other party Completion]
Nothing was said about insurance policy The Engineer can only determine if and only if
the damages cannot be indemnified through the
insurance policy referred to Sub-Clause 18.2
[Insurance for Works and Contractor’s
Equipment]

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