Contract Drafting for Major Plant Construction – How it's Done

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Things Turn out to be Different

What happens if the conditional commencement of the project contract gets delayed or even fails? The reasons for this could be multifarious. For example, it may not be possible for the contractor to get a Advance Payment Bond to the employer due to his poor bank rating. Consequently, the employer is exposed to the insecurity whether and when the contractor will build, finish, install and commission the plant.

In this scenario, there is a theoretical possibility that the contractor will get a guarantee from a bank sometime in the future and submit the same to the employer. The employer must then make the payment to the contractor; but does not want to or cannot make the payment. The entire project threatens to become a “never-ending story”.

An exit clause could provide a remedy here, which allows the contract parties to withdraw from the contract, if it becomes clear that one of the two contract parties does not have enough resources to execute the project at this early stage.

An exit clause could be drafted such that the contract parties must fulfil the conditions for coming into full force of the contract within a clearly defined period from the date of contract signing. If they do not do this, it will be presumed that the parties have not signed the contract.

Absolute Versus Relative Fulfilment Deadlines

If the contract parties agree that the plant e.g., must be delivered by the contractor to the employer for acceptance on a fixed date (absolute date of fulfilment), this exposes especially the contractor to risks. The reason is that this fixed date does not take into account a possible delayed commencement of the contract. The contractor is hard-pressed for time and he ends up paying a contract penalty. The solution for this malady is “relative date of fulfilment”.

Relative dates of fulfilment are linked to conditions. Here e.g., to the date of coming into full force of the contract. This means that the clock starts ticking for the contract parties from the date on which the latter of the two conditions mentioned earlier for the commencement of the contract is fulfilled. In practice, one defines that the plant must be handed over by the contractor to the employer for acceptance 630 calendar days after the date on which the contract came into full force.

Find out more about the selection of the time unit when defining the Time for Completion of the Works can tilt the scales ... on page 4!

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