Treatment of Key Risks under EPC Contracts Global EPC Contract & Risk Management Conference London, 6 -7th October Jonathan Hosie Partner Mayer Brown International LLP

Treatment of Key Risks under EPC Contracts What I will cover today: Legislative Change - from tender price to contract award and beyond - key considerations for the employer and the contractor Force Majure - when does it apply - treatment strategies Design Development and Conversion Mechanisms - from Feasibility Study to FEED and contract price - for the conversion of cost - reimbursable to lump sum turnkey price

Legislative Change A change in legislation could potentially affect the contract price and the contract schedule for delivery of the works under the EPC contract A change in legislation that occurs after the EPC contract has been awarded (or some specified “base date”) but before the works are complete Key Question: Who bears the burden of the price increase?

Legislative Change – setting the trigger level Change must affect the EPC contractor’s performance of its obligations but consider: only changes which have a “material” effect and/or which make performance “extremely costly” In deciding types of legislative change, consider: change which is “extraordinary, unforeseen or unforeseeable” changes in “judicial or governmental interpretation”

Legislative Change – FIDIC Contract If FIDIC Silver Book is used: “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. If the Contractor suffers (or will suffer) delay and/or incurs (or will incur) additional Cost as a result of these changes in Laws, made after the Base Date, the Contractor shall give notice to the Engineer and shall be entitled subject to Sub-Clause 20.1 to: (a) an extension of time for any such delay….. (b) payment of any such Cost, which shall be included in the Contract Price.” Base Date: "means the date 28 days prior to the latest date for submission of the Tender."

Legislative Change In the event of a change in law which affects the EPC Contract, consider the following: Specific provisions in the Contract, e.g. FIDIC 13.7 (Adjustments for Changes in Legislation) Arguments to consider where contractor’s tender is qualified The ‘Factual Matrix’ Retrospective effects of contracts Duty of good faith under civil law jurisdictions Reservation of Rights letter Doctrine of Superior Knowledge

Legislative Change – Employer/Contractor considerations Administration of the change in law event Notification and determination Employer able to discuss/disagree with contractor’s position Compromise between the parties employer reducing its own risk contractor being able to price the contract with accuracy allocating risk to the party best able to manage it

Force Majeure A Force Majeure Event: An unanticipated supervening event which is the fault of neither party and which prevents performance of the works. Civil law concept but often expressly by provided for in EPC contracts Clause 19.1 defines force majeure to include (but not limited to): “an exceptional event or circumstance (a) which is beyond a party's control, (b) which such party could not reasonably have provided against before entering into the Contract, (c) which, having arisen, such party could not reasonably have avoided or overcome, and (d) which is not substantially attributable to the other Party.” Qualifying terms but event must be within the (non-exclusive) list

Force Majeure Clause 19.1: sets out a non-exhaustive list of the kinds of events which constitute force majeure. Clause 19.2: the force majeure event must cause a party to be “prevented from performing any of its obligations under the contract”. Sub-Clause 19.6: provides an option for either party to terminate the contract on notice if the progress of the works is prevented for a continuous period of 84 days or multiple periods totalling over 140 days. Sub-Clause 19.7: can also terminate if impossible or unlawful to fulfil obligations, or governing law releases parties from further obligations.

Force Majeure Force Majeure and Local Laws Contract provisions are key but consider importance of local laws Certain civil codes do not permit exclusion of certain provisions National Oil Corp (Libya) v Libyan Sun Oil (US) Overall a Contractor will need to be able to prove that the event was beyond its control, did not arise out of circumstances which were in the contractor's knowledge, was not a circumstance which the contractor should have protected itself against at the time of entering into the agreement and the event prevented or hindered the contractor from complying with its obligations under the contract.

Force Majeure – Treatment in EPC Contracts Key Considerations: Has the event/circumstance “prevented” or “hindered” performance? Has the event/circumstance affected “compliance with a contractual obligation”? Does the event/circumstance fit into a specific Force Majure event? Do any relevant exclusions apply?

Front End Engineering Design (FEED) Design Development Feasibility Study Pre-feasibility and definitive feasibility studies Provision of a price estimate range (+ or – 20%) Front End Engineering Design (FEED) Further evaluation of the feasibility study by a contractor Achieving a more accurate price estimate (+ or – 10-15%) Contract price and EPC Contract Use of the same or different contractor for FEED and EPC stages Competition by use of a tender process or multiple contractors

Design liability vs design development FIDIC Silver Book design obligations (Clause 5) Design risk allocated to the contractor Specific design development clauses Additional considerations Distinguish between design development and approvals Distinguish between design development and variations Clear provisions for employer to reject/comment on changes Clear dispute resolutions provisions

Conversion mechanisms – typical life cycle with Decision Gates The above graph has been extracted from A Theoretical Framework to Enhance the Conversion Process in Convertible Contracts by Mohammad Moazzami, Reza Dehghan, George F Jergeas, Janaka Y Ruwanpura

Conversion Mechanisms Single set of contract conditions covering FEED and EPC contracts Conversion of the contract from a reimbursable cost contract (i.e. one where contractor paid on a fee basis for the work done) to a lump sum turnkey contract or turnkey EPC contract where contractor is paid a lump sum fixed contract price). In practice: Initial estimated price More price specificity as the FEED process continues Contract price proposed to employer at/near end of FEED process Evaluation/recalculation process if not agreed Option to terminate or instruct expert to determine Open book estimate

Conclusion and Re-cap Key risks associated with legislative change, how such changes will be dealt with and what to consider going forward Main elements of force majeure in EPC contracts and how force majeure clauses may be treated in practice The stages of the design development process and how this and design liability may be covered in contracts How conversion mechanisms work in practice.

Treatment of Key Risks under EPC Contracts Q&A