Overview and Boilerplate Clauses in EPC Contracts in the Middle East

21 Apr 2022

Recently, the subsidiary of the Abu Dhabi National Oil Company (ADNOC) granted two (2) Engineering, Procurement and Construction (EPC) contract with a combined value of approximately AED 899.9 M with the principal objective of improving two main oil lines and crude receiving facilities at the Jebel Dhanna terminal in Abu Dhabi. But what is an EPC contract? An Engineering, Procurement, and Construction contract is an agreement framework, which involves the contractor to conclude an agreed scope of work by an agreed conclusion date, in return for an agreed lump-sum agreement price. In this type of contract, it is necessary to consider the provisions about notice periods, liquidated damages, allocation of access permits, labor laws, health, environmental rules, etc. In the EPC contracts are included the boilerplate clauses that are involved in the agreement to deal with those legal themes that are pertinent to most transactions. Some of the Boilerplate provisions are the completion dates, governing law clause, confidentiality clause, hierarchy of documents clause, etc. Then, we will examine the clauses that we can find in an Engineering, Procurement and Construction contract; some of them are boilerplate clauses: 


The Completion Dates and Language of the EPC Contract 

The EPC contract will be necessary to establish a completion date; in case of non-compliance with the date, the owner is entitled to claim delay damages. In the UAE, the EPC Contracts are generally drafted and implemented in English. But dealing with governmental and semi-governmental entities could bring the use of the contracts in Arabic. Another option is to use dual bilingual agreements; however, it is not advisable to avoid any linguistic inconsistencies. When the dual bilingual contract is used, it is preferable to establish a clause that regulates which of the two languages prevails in case of inconsistencies. 


Fixed Contract Price 

There exists the risk of cost overruns. The contract price could only be subject to an increase in specific and narrowly defined conditions, such as variations and prevention by the owner. 


Liquidated Damages

The liquidated damages (LDs) are considered a genuine pre-estimate of the possible loss resulting from the late achievement of a contract. The provisions given in the Common law related to LDs are more substantial in comparison with the requirements of the UAE Law about the LDs, because of that, the UAE Courts can assess the validity of LDs to safeguard that the requested amount of damage is equal to the loss an employer has suffered. Furthermore, under the UAE Law, LDs can be ordered as a right without the necessity to evidence any injury suffered due to the delay. According to the UAE court precedents, the burden of proof is on the side of the contractor. 


Defect’s Liability Period

It is expected to have a defects liability period of between 12 and 24 months. Still, sometimes this period is extended when defects are modified during the defect’s liability period, and the owner must ensure adequate security in place. Owners must also be alert of contractors’ attempts to exempt themselves from all further liability regarding the facility on the expiry of the defect’s liability period, which is opposing statutory limitation periods. 


Single Point Responsibility and the Responsibility of the Total Design

The contractor is responsible for all creation, procurement, engineering, building, testing, and construction of the facility. In the event of a problem or any defect of the facility, the contractor will be liable. In large-scale projects, the contractors could be more than one company; in this case, each company is equally and severally responsible to the owner. The Front-End Engineering Design (FEED) is an initial project planning that is led after the conclusion of Conceptual Design or Feasibility Study. Most of the time, the contractor is in charge of the facility’s entire design and will be responsible for mistakes in any preliminary design. Additionally, the contractor will be required to deliver fitness for purpose, which should be enclosed by professional indemnity insurance. 


Intellectual Property and Performance Security

It is true that the owner will have the right to use the contractor’s design, but it will be only for the facility’s purpose. If any loss is suffered by breach of intellectual property, the contractor should indemnify the owner. Usually, the contractor must deliver an unconditional payable on-demand performance bond; it is a security for the owner should it have an allegation against the contractor, including for delay or performance liquidated damages. 


The Rights of Termination/Suspension 

Both contractor and owner have right in case of termination/suspension of the facility: The Rights of Termination Suspension 


Dispute Resolution 

Most of the EPC contracts introduce the dispute resolution clause, usually having in the heart the arbitration. Before arriving at the arbitration, there is a third-party expert in case of a misunderstanding between the parties; in the case of UAE is the International Chamber of Commerce (ICC). If the expert determination is not considered enough to resolve the dispute, the next step is arbitration. The legal framework depends on the country; for example, in the UAE, there is Federal Law Number 6 of 2018 on arbitration. In conclusion, it is essential to allocate the risks inherent in a construction project in the EPC contracts, such as not finishing the project on time or a project not conforming to specifications and costs exceeding budget. The essential rule in risk allocation is that the party who can manage the risk at optimum cost should undertake that risk. Furthermore, when there is an EPC contract, it is advisable before starting an EPC contract to perform the following actions:

  • Examine the place and incomes for accomplishing successful implementation of the EPC contract.
  • Performance commercial and technical due diligence previously pricing and committing to delivery date.
  • Keep a complete and simultaneous record of the facts that can influence their legal and contractual rights.
  • Request the point of view of experts in limited circumstances.
  • Request production of document orders.