Advantages of Standard Contracts

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• Advantages of Standard Contracts
• Steen Bruun-Nielsen

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Content of presentation

• The functions of contracts in general
• Contract management, risk allocation and risk
  mitigation
• The advantages of standard contracts and examples
  of such contracts

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Functions of contracts

• Contracts as a risk allocation tool
• which party carries the various risks and how
  are the risks dealt with (mitigated)
• Contracts as management tools
• Defining time and quality of performance
• (delivery of goods or services, construction of
  works)
• - Setting procedures for various control and
  verification procedures (especially long-term
  contracts)
• Setting sanctions in case of failure in
  performance
• Dispute-solving/mediation mechanisms (especially
  relevant in long-term contracts)).

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Risk mitigation and allocation

• Types of risks in works and other more complex
  contracts?
• Design risk
• Site risk
• Construction risk
• Financial risk (contracting parties/lenders)
• Operational risk
• Demand/market risk
• Regulatory/political risk
• Force Majeure

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Risk mitigation and allocation

• What is mitigation? Preventing the risk or
  compensating for the effects if the risk
  materializes
• What is allocation? Making one of the parties
  liable for the risk

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Example of risk allocation/mitigation

• Category Operational risk
• Description of risk Insufficient performance,
  such as irregular service, no maintenance, bad
  customer service
• Risk mitigation
• Verifiable contractual performance specs,
  regular monitoring and effective automatic
  sanctions
• Obligation to operate despite unexpected events
• Performance bond
• Risk allocation Private party
• Risk compromise Limits on costs, for example
  unexpected repairs

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Key contractual elements

• Verifiable obligations - delivery of what, where
  and when? long-term contracts concerning
  works/services may include concrete performance
  indicators (a maximum of X failures during period
  Y)
• Rights for the public party to monitor
  performance (reporting, project meetings, testing
  and inspection procedures, ad-hoc inspections and
  queries)

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Key contractual elements

• System of sanctions to address both minor and
  major infringements of performance requirements (
  EX minus points are triggered in each case of
  failure to perform - fines (deductions in
  payments) are triggered when points exceed
  certain levels over a period)
• Other elements, such as billing and payment,
  guarantees, insurance, liability and
  compensation, force majeure, termination
• NB! Requirements according to Ukrainian Civil
  Code

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Advantage of standard contracts

• Established, defined terminology
• Established contractual mechanisms for risk
  mitigation etc.
• Established procedures for contract management
• Risk allocation according to best practices
• Established dispute resolution procedures
  (mediation/arbitration)

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Standard contract sources

• ICC model contracts and commercial terms
  (INCOTERMS)
• Of relevance for sale of goods
• Standard arrangements (INCOTERMS) for allocation
  of costs/risk in connection with delivery of
  goods (transport, customs, insurance)
• Standard provisions on liability and sanctions in
  case of delay in delivery or insufficient quality

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Standard contract sources

• The FIDIC Books, especially
• Yellow Book on design/works,
• Red Book on works and
• Silver Book on projects involving operation as
  well
• Standard contracts and toolkits from for
  example World Bank