4.2 CONTRACTS INVOLVED IN A BOT -TYPE PROJECT THE VARIOUS COMPLICATE...
The various complicated arrangements that go to make up a BOT-type project
are reflected in the no less complicated range of contracts involved.
The construction contract
Of particular interest to us is the
construction contract between the project
company and the construction contractor. There will typically be a detailed
construction contract, such as the FIDIC Silver Book, setting out the respon-
sibilities of each party, including the risks which each will be expected to bear.
One very important type of risk for the construction contractor is that of
delay to the project and, in particular, delay resulting from matters over which
he has no control. Because BOT projects typically involve complex heavy
engineering construction work over a long period of time, a delay will almost
always have a significant cost consequence. But unlike the more traditional
contracts, the construction contractor in a BOT project will typically bear
many of the risks for delay in construction even when he cannot control such
risks. Some construction contracts, such as the FIDIC Silver Book, give the
contractor a right to an extension of time for certain specified events, such as
war or civil commotion, over which he has no control; but the range of these
events is very limited.
Although risk allocation in any contract is a matter for individual
negotiation, and it is always possible for the parties to negotiate their own
particular allocation of risk, the huge constraints of time and budget that
apply in a BOT project will usually severely limit the extent to which the con-
struction contractor will be able to obtain more time and/or money for delays.
Another type of risk is that of
underperformance of the plant or other
facility. This will nearly always have serious costs consequences.
In any negotiation, whether over risk allocation or otherwise, it will be
essential for the terms of the construction contract to be related to the terms
of the contract between the government agency and the project company. The
promoters will normally try to ensure that the construction contract is, as far
as possible, ‘back-to-back’ with the offtake contract so that if, for example,
certain construction risks are to be borne by the project company under the
construction contract then those risks will also be borne by the government
agency under the offtake agreement.
Another feature of BOT construction contracts is that the contractor ’ s
liability may be limited: for otherwise the contractor could find itself liable for
sums exceeding by many times the value of the contract itself. In the FIDIC
Silver Book, the contractor ’ s liability is, subject to certain exceptions, limited
to 100% of the contract price.
5
Such a limitation seems in principle to be sen-
sible, since otherwise prudent contractors would be heavily discouraged from
tendering for BOT projects.
The following are other important features of the construction contract in
a BOT-type project:
●
There will need to be detailed provision for what is to happen if, for any
specified reason, the contractor ’ s employment under the contract is termi-
nated or the contractor becomes insolvent and incapable of continuing; or
if for any other reason the contractor is required to be replaced. Such
provision will often include procedures for another contractor to ‘step into’
the project, and the terms of the offtake and operation agreements will
need to allow for this accordingly.
●
Changes or variations to the work or the scope of the work will normally
be provided for specifically in the construction contract. These will nor-
mally originate in the government or official agency, whose requirements
might change: for example, the agency might wish to increase the output
capacity of a particular part of the plant, so necessitating additional and
varied design work.
The offtake agreement
The other contract of particular interest to us in a BOT project is the offtake
agreement between the government or official agency and the project company
by which the government agency agrees to purchase the outputs or services of
the plant or structure at a certain price and volume over a certain period.
This agreement will contain performance obligations; the company will war-
rant, or undertake, that the outputs will be of a specified quantity and quality and
be delivered at certain required intervals. There will normally be penalties for
failure to comply with the warranted performance, which might include a fixed
financial penalty; this could be in addition to other rights to seek compensation.
5
See clause 17.6; there is similar provision in the Red and Yellow Books.