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Feedstock versus Performance in FIDIC

Written by Joanne Clarke | 06/11/2020

Introduction

When a process plant fails to meet performance criteria the dispute may focus on the quality or composition of the feedstock. In this article we consider a recent decision by the English Technology and Construction Court in which this issue arose and how various FIDIC books deal with issues relevant to feedstock.

Feedstock in General

Feedstock, i.e., the raw material that is fed into and then processed by the plant, can be anything from waste (as in the case below) to ore, hydrocarbons, etc.

Since the feedstock is to be processed, its composition or quality is likely to be a key factor in the design and performance of the plant. It is likely that performance tests and performance guarantees will focus on the output the plant can achieve with a particular composition of feedstock.

The composition is often expressed by reference to parameters which reflect the anticipated natural variances in the raw material. These parameters may be expressed as an 'envelope'. The plant may be required to comply with certain performance criteria if the feedstock falls within the envelope but, if it falls outside the envelope, adjustments may be made.

Essex County Council v UBB Waste (Essex) Limited[1]

This dispute arose out of a 25-year contract between Essex and UBB for the design, construction and operation of a treatment plant for household waste. The contract was complex with voluminous schedules.[2] Upon completion, the plant failed to pass acceptance tests. Essex argued that UBB had failed to design and construct the plant properly. UBB argued that Essex had failed to supply contractually compliant feedstock.

The Feedstock and its Relationship with Performance

Essex asked bidders to indicate the performance they would guarantee by reference to: (1) throughput[3], (2) recycling[4], (3) recovery[5], (4) biodegradable municipal waste (BMW) reduction[6] and (5) solid recovered fuel (SRF) quality[7]. In the contract, each of these five criteria was subject to a separate acceptance test.

Essex also asked bidders to specify the composition of waste for which they could guarantee such performance. Although Essex provided a 'base case' specification, this was expressly not guaranteed, and Essex stated that bidders would 'need to use their own judgment/assessment of the Contract Waste composition from the data made available …'.[8]

UBB duly submitted its composition assessment to Essex. The judge found that by virtue of this assessment, UBB agreed to accept the risk of a variation in composition from the 'base case' within certain parameters.[9]

A key assumption for the design of the facility was the density of the waste as it flowed through the plant. Essex did not provide the bidders with data on density. Accordingly, contractual responsibility for assumptions about density fell on UBB but some of the assumptions it made proved to be seriously wrong.[10] The judge considered that they were 'based on little more than calculations on the back of the proverbial fag pack'.[11] As a result of this and other design errors, a major part of the plant was seriously undersized and incapable of processing the guaranteed tonnage of waste and the facility could not pass the acceptance tests.

Feedstock Testing and the Adjustment Mechanism

The contract provided that the composition of the waste should be regularly tested. If the composition fell outside certain parameters, there would be an 'Options Review', pursuant to which adjustments could be made to the plant, its design, the commissioning plan, the process equipment or the operational practices.

The parties disputed whether the 'Options Review' was triggered by the results of a single composition test or a 'rolling annual average' of test results. On the wording of the contract, and a contractual flow diagram, the judge found that the results should be determined on a rolling annual average basis.[12]

Comment

The combination in this case of Essex's unwillingness to take responsibility for the composition of the waste (the composition of household waste can obviously vary hugely) and the very wide-ranging guarantees that it required meant that UBB took on a formidable risk. UBB sought to renegotiate the contract when it became clear that the plant could not pass the acceptance tests. Essex was, however, constrained among other things by environmental standards and funding terms which meant that renegotiation was not possible.[13]

The FIDIC Position

FIDIC publishes standard conditions of contract for use in design and build projects. These include the 1999 Yellow[14] and Silver[15] books and the 2008 Gold[16] book.

These conditions can be used on different types of project, from road construction to hydro-electric power plant to process plant. The concept of 'feedstock' therefore does not feature in them. Although they provide a framework, detailed provision for matters relating to feedstock should be set out elsewhere in the contract documents, and/or the conditions should be amended to provide for these matters.

These matters are likely to include some or all of the following.

First, the composition of the feedstock. In most cases the feedstock will be supplied by the Employer.[17] The Employer may therefore have more information than the Contractor about its expected composition. The Employer has a number of choices. It may provide information about the feedstock to the Contractor and retain responsibility for that information, it may provide information about the feedstock to the Contractor but pass responsibility for that information to the Contractor, or it may require the Contractor to make its own assessment of the feedstock and make the Contractor responsible for that assessment.

These matters are likely to be set out in the Employer's Requirements. There are important differences between the (a) the Yellow and Gold and (b) the Silver books as to which party takes responsibility for the accuracy of the Employer's Requirements and this is discussed in the next section below.

When the Contractor prices its tender, it should be acutely aware of where responsibility for feedstock composition lies. In the Essex case, Essex provided certain information about the composition of the waste but expressly did not guarantee that information and required UBB to make its own assessment. If the Contractor is responsible for assessing the feedstock but fails properly to do so then, like UBB, it risks exposing itself to significant losses.

Second, what happens if the feedstock does not meet the specification? Is an adjustment required? In the Yellow, Silver and Gold books, there is no adjustment mechanism specifically for changes to feedstock, so this would have to be bespoke. In the Essex case, the adjustment related to the density of the feedstock and whether it fell within a certain envelope (or 'band') but there was a dispute about precisely when the adjustment was triggered.

Third, tests for performance, capacity and reliability. The Yellow and Silver books set out a mechanism for Tests on Completion and Tests after Completion and the consequences of them being carried out but do not contain any detail for the tests themselves. The Gold book also sets out test mechanisms.[18] For process plant, the tests should be carefully considered from a technical and commercial perspective and the detail should be clearly and fully set out in the contract.

Fourth, performance guarantees. The Yellow and Gold books refer to the 'Schedule of Guarantees' and the Silver book to the 'Performance Guarantees' but they do not provide any detail on the content of these guarantees. Where feedstock is an issue, the guarantees might include matters such as: the required capacity of the plant, the required composition of the output, the measurement standards to be applied, any assumptions on which the guarantees will be based including composition of the feedstock, and criteria upon which the guarantee may be adjusted, for example, if the feedstock composition falls outside a given envelope.

Fifth, non-performance damages. The Yellow and Silver books do not contemplate the application of non-performance damages to the Tests on Completion. Instead, if the plant fails to pass the Tests on Completion, the Employer has remedies including a reduction in the Contract Price.[19] In the Gold book, the remedies are more limited and do not include this reduction. If the plant fails to pass the Tests after Completion contemplated by the Yellow and Silver books, the Employer may be compensated with non-performance damages but only if a sum is stated in the contract. The Contractor is under no obligation to pay these damages but, if they are paid (during the Defects Notification Period), the Works are deemed to have passed the Tests after Completion.[20]

Responsibility for Feedstock Data: Yellow, Silver and Gold Books Compared[21]

The Yellow, Silver and Gold books each impose significant design obligations on the Contractor. There are, however, important differences between them in respect of responsibility for the accuracy of the Employer's Requirements on which the design will be based.

Yellow and Gold Books

The Contractor is not responsible for any error, fault or defect in the Employer's Requirements to the extent that 'an experienced contractor exercising due care' would not have discovered it by the relevant time as stated in the contract.[22]

Silver Book

The Contractor is deemed to have scrutinised the Employer's Requirements prior to the Base Date and is expressly responsible for the accuracy of the Employer's Requirements.[23] The Employer is expressly not responsible for 'any error, inaccuracy or omission of any kind' in the Employer's Requirements.[24]

There are some exceptions. The Employer is responsible for the correctness of the following portions of the Employer's Requirements and the following data and information provided by (or on behalf of) the Employer: (a) portions, data and information which are stated in the contract as being 'immutable' or the responsibility of the Employer, (b) definitions of intended purposes of the Works, (c) criteria for the testing and performance of the completed Works, and (d) portions, data and information which cannot be verified by the Contractor.[25]

The Employer therefore remains responsible for the key elements at items (b) and (c). It may choose to retain responsibility for some or all data and information (including about feedstock) (item (a)) or the Contractor may successfully argue that it cannot verify certain data and information (for example about feedstock) so that responsibility for its correctness remains with the Employer (item (d)).

Subject to these exceptions, the Contractor bears the risk of errors in the Employer's Requirements. It is important for the Contractor to be alert to this risk and to include sufficient allowance in the tender. The Employer will pay for the risk, whether or not it occurs. The Contractor may benefit if the risk does not occur but, if the risk occurs and the Contractor has underestimated it, the Contractor may lose, possibly badly.

Conclusion

For process plant there is an important link between composition of the feedstock and design and performance of the plant. Matters relating to feedstock therefore merit detailed consideration during contract negotiations and should be clearly set out in the contract. There are important differences between the Yellow (and Gold) and Silver books about the Contractor's responsibility for the accuracy of the Employer's Requirements and this may be a factor for the Employer when considering which FIDIC book to use. The consequences of a contractor accepting risk relating to the composition of the feedstock but getting its assessments wrong can be severe.

[1] Essex County Council v UBB Waste (Essex) Limited [2020] EWHC 1581 (TCC). In addition to the feedstock-related issues highlighted in this article, the case raised other interesting questions including whether the PFI contract was a relational contract (yes), whether a term requiring each party to act in good faith could be implied into the contract (yes) and whether a term should be implied into the contract requiring a contractual termination option to be exercised within a reasonable time (no).

[2] Paragraph 83 of the judgment.

[3] The tonnage of contract waste that could be processed by the facility whilst also meeting the other performance guarantees.

[4] The percentage of the input waste that would be recycled by selected reprocessors as recyclates in accordance with off-take contracts.

[5] The percentage reduction in mass of the treatment outputs after the removal of recyclates.

[6] The percentage reduction in biogas achieved through bio-stabilisation of the BMW.

[7] The quality benchmark for outputs produced in the SRF Mode as Solid Recovered Fuel.

[8] Paragraph 73.

[9] Paragraph 317.

[10] Paragraph 157.

[11] Paragraph 452.1.

[12] Paragraph 334.

[13] See for example paragraphs 280 to 284.

[14] Conditions of Contract for Plant and Design-Build.

[15] Conditions of Contract for EPC/Turnkey Projects.

[16] Conditions of Contract for Design, Build and Operate Projects.

[17] Or a third party contracted by the Employer.

[18] Tests on Completion of Design-Build and Tests Prior to Contract Completion (which are carried out towards the end of the Operation Service Period).

[19] Sub-clause 9.4 [Failure to Pass Tests on Completion].

[20] Sub-clause 12.4 [Failure to Pass Tests after Completion].

[21] The 1999 editions of the Yellow and Silver book and the 2008 edition of the Gold book.

[22] Sub-clause 5.1 [General Design Obligations].

[23] Sub-clause 5.1.

[24] Sub-clause 5.1.

[25] Sub-clause 5.1, paragraphs (a) to (d).

Joanne Clarke

Article Author
Joanne Clarke

Email: joanne.clarke@corbett.co.uk

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