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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
Banks 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.

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The Red Flag Clauses

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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

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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 Contractors favourite clause and it is
more the gateway of claim than the causal factor
of claim itself.
Not all unforeseeable conditions is claimable

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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 Site


..
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 SubClause 8.3 [Programme]. This Sub-Clause 2.1. is the most often Sub-Clause used by the
contractor as the basis of their claims.
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, 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.

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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 Contractors 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.

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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.

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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).

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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 Engineers 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 Employers Financial
arrangements (under Sub-Clause 2.4 [ Employers 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 Engineers 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 ].

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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

Sub-Clause
8.3

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 SubClause 1.13 [Compliance with Laws ] as
required for the commencement of the
Works;
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].

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Sub-Clause 8.3 Programme


The Contractor shall submit a detailed time programme to the
Engineer within 28 days after receiving the notice under SubClause 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 Contractors
obligations.

Even the working programme is submitted after the contract signing, but
usually the Contractors 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.

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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 contractors 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 contractors 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).

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The Green Flag Clauses

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Employers Construction Claims :


Sub-Clause 2.5 Employers 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.

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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

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Contractors Construction Claims :

Desire or interest

Desire or interest is something comes from individuals inner and


cannot be organised from outside; Contractors desire/interest to get
the fairness in avoiding the loss and contractors effort to get bigger
profit are human.
Contractors desire to get the fairness in avoiding the loss and
contractors effort to get bigger profit are human.

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Contractors Construction Claims :

Chance
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

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Clause 20,
Claims, Disputes and Arbitration
Occurenc
ed

28 days (Clause 20.1Para 1)

Reject
ed

No

Notificati
on
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 Banks Clauses

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FIDIC MDB 2010


Sub-Clause 3.1 Engineers Duties and Authority Para 4
However, whenever the Engineer exercises a specified authority for which the
Employers 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.

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FIDIC Construction 1999
Sub Clause 3.1 Engineers 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

Engineers authority, except as agreed with the Contractor.


FIDIC MDB 2010
Sub Clause 3.1 Engineers 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 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
Engineers authority except as agreed with the Contractor.
This give more authority to the Employer and it also may avoid the lengthy argument.

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FIDIC for Construction

Clause 3.1 Engineers Duties and Authority

This part is not exist

FIDIC MDB 2010

Clause 3.1 Engineers 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 with Sub-Clause 13.1 or 13.2.

This Sub-Clause should be in the earlier paragraph than para 4

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Sub-Clause 2.4 Employers 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).

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Sub-Clause 2.4 Employers 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 Banks 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..

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Sub Clause 14.8 Delayed Payment


If the Contractor does not receive payment in accordance with SubClause 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 Banks
borrower should be responsible and because of that it is become
Employer liability to pay.

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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,

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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, WC1A 2LP, 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