Click here to read Part One.
Diageo, the wealthy businessman
Cyrus: Scott, I understand you are building one of Panama’s biggest factories?
Scott: Yes, lately I have been spending a lot of time with the Panamanians. The Republic of Panama is an interesting place with a rich history, and if your history is as good as mine, you will be familiar with the Panama Canal. With the United States’ backing, Panama seceded from Colombia in 1903, allowing the United States Army Corps of Engineers to construct the Panama Canal between 1904 and 1914. In 1977, the US and Panama signed an agreement for the complete transfer of the canal from the US to Panama by the end of the century (the year 2000). The Panama Canal expansion project (completed in 2016) doubled its capacity. But after listening to your interesting conversations with Gregory at Dinner, I know you do not seek a history lesson.
But after listening to your interesting conversations with Gregory at Dinner, I know you do not seek a history lesson.
Cyrus: You are spot on.
Scott: About the factory, the “story” starts with Diageo, a wealthy corn, palm oil and sugarcane farmer.
Diageo is a fifth-generation farmer. His family currently leverages old money purportedly made during the transatlantic slave trade to add value to the products from the corn and sugar cane plantations on which the enslaved people once worked. About a century ago, Diageo’s family moved into the fast-moving consumer goods (FMCG) space.
Recently, Diageo negotiated a deal with the Republic of Panama to set up an FMCG factory at Mangini, some 15 kilometres off the northern coastline, adjacent to the Caribbean Sea. I learnt that after a few quick consultations, Diageo adopted FIDIC’s 2017 Silver Book and contracted with Baltimore PLC, a European outfit, to deliver on this dream. For the uninitiated, the Silver Book is FIDIC’s form of contract for turnkey projects.
Cyrus: Are the contract parties a good fit?
Scott: Well, numerous events unfolded soon after commencement, and some are still brewing, but the following quickly come to mind as they are a reminder of the importance of well-crafted Employer’s Requirements.
Numerous events unfolded soon after commencement, and some are still brewing, but the following quickly come to mind as they are a reminder of the importance of well-crafted Employer’s Requirements
Surplus excavated material and a precious medieval artefact
Surplus excavated material
Scott: In the FIDIC 2017 Silver Book, the Employer (in this case Diageo) is required to accurately define the Site boundaries, and if the Employer anticipates that the works will involve substantial amounts of earthworks, it is recommended that the Employer clearly describes in the Employer’s Requirements the extent to which the Contractor (in this case, Baltimore) may dispose of such surplus material on the Site, the exact areas within the Site that disposal is permitted, and sometimes to the extent possible, the land areas for off-Site disposal of the surplus excavated material.
During the preliminary works, it became clear to all Parties that Baltimore needed to remove surplus material from the Site. But unfortunately, the Parties’ contract neither accurately defined the Site boundaries nor specified the land areas that Baltimore could use to dispose of the surplus excavated material from Mangini, nor whether Baltimore needed to pay royalties for such off-Site disposal.
The Parties’ contract neither accurately defined the Site boundaries nor specified the land areas that Baltimore could use to dispose of the surplus excavated material from Mangini, nor whether Baltimore needed to pay royalties for such off-Site disposal.
On a strict interpretation of the contract, any surplus material disposed of on the Site was royalty-free, meaning Baltimore was not expected to pay Diageo for the use of designated disposal areas within the Site. Whereas, for off-Site disposal, Baltimore would have to pay a royalty fee (like rent) unless the Employer’s requirements stated otherwise.
Cyrus: But why bother with off-Site disposal anyway? It is just soil and tons of crushed rock, which the Contractor should handle at his cost.
Scott: Ordinarily, yes. But the soil at Mangini is very fertile and in demand from numerous nearby palm oil and bean farmers, who are apparently bidding for it.
Furthermore, the Silver Book states that the Employer is not responsible for the accuracy, sufficiency, or completeness of the Site Data and Items of Reference, except for those for which the Employer retained responsibility under the general design obligations in the contract. In the circumstances, Diageo insisted that Baltimore pay a lump-sum fee of circa USD 800,000 as royalties for removing the surplus material. I grudgingly drafted a letter at Diageo’s request and sent it to Baltimore’s representative. Baltimore has ignored the letter and has been selling soil ever since.
Diageo insisted that Baltimore pay a lump-sum fee of circa USD 800,000 as royalties for removing the surplus material. I grudgingly drafted a letter at Diageo’s request and sent it to Baltimore’s representative. Baltimore has ignored the letter and has been selling soil ever since.
Cyrus: Does Diageo know he has a weak case?
Scott: Diageo asked me to draft this letter during one of the dinners we used to update him on the progress of the work. I should not have brought up the topic, as he was quite “high” on a second 750 ml bottle of Dom Pérignon. He was not taking no for an answer and called the morning after to remind me to send the letter to Baltimore. I saw a bigger risk in not sending the letter, and so I did as he asked.
A precious medieval artefact
As if that were not enough, during the shifting of the surplus material, Baltimore unearthed an ancient artefact approximately 50 meters outside what is now the confirmed Site boundary. Upon excavation, a joint inspection team concluded that the artefact occupied approximately 10 cubic metres of earth. On further examination of the artefact, it appeared to be from the ancient pre-Colombian Cueva and Coclé cultures and dated back to around 10,000 BCE. The artefact was predominantly metallic bronze with strips of solid gold and nicely cut diamonds.
Upon excavation, a joint inspection team concluded that the artefact occupied approximately 10 cubic metres of earth. On further examination of the artefact, it appeared to be from the ancient pre-Colombian Cueva and Coclé cultures and dated back to around 10,000 BCE. The artefact was predominantly metallic bronze with strips of solid gold and nicely cut diamonds.
Cyrus: So, which contract clause applied to that scenario?
Scott: Fortunately, FIDIC’s 2017 Silver Book includes a dedicated sub-clause that prescribes how the contract parties can deal with Archaeological and Geological findings.
That clause states that such items found on the Site shall be placed under the Employer’s care and authority. The Contractor shall take all reasonable precautions to prevent the Contractor’s Personnel or other persons from removing or damaging any of these findings, and, as soon as practicable, after the discovery of any such finding, the Contractor shall notify the Employer in good time to give the Employer opportunity to promptly inspect and/or investigate the finding before it is disturbed. Upon such notification, my team and I were required to issue appropriate instructions to Baltimore regarding the artefact.
The problem with Baltimore’s finding was whether Baltimore discovered the artefact within or outside the Site boundaries. By now, you and I both know that the finding was outside the Site. The reality today is that societies place greater cultural and monetary value on such findings, and, usually but not always, such findings are the property of the government of the Country (in this case, the Republic of Panama). Word reached the government, and they dispatched the appropriate entity to address the situation. However, that entity needed the Contractor’s “assistance” to remove and preserve the artefact.
I instructed Baltimore to work with the government entity to carefully remove, preserve, and handover the artefact to the government. Baltimore complied but claimed a share of ownership in the artefact before handing it to the government. They argued that they were a third party and that, had it not been for their efforts, the government would not have discovered the finding. Baltimore further stated that they did not find the artefact within the Site boundaries.
Baltimore complied but claimed a share of ownership in the artefact before handing it to the government. They argued that they were a third party and that, had it not been for their efforts, the government would not have discovered the finding. Baltimore further stated that they did not find the artefact within the Site boundaries.
Cyrus: What did Diageo have to say about this?
Scott: Surprisingly, Diageo has not said much about the finding. He does not want any conflict with the government.
We agreed with Diageo to compensate Baltimore for the cost and time spent dealing with the artefact, even though Baltimore found it outside the Site, on the condition that Baltimore take up the matter of share ownership with the government as a third party and outside the remit of the construction contract.
Diageo insists on a specific OEM, which prefers to adopt alternative test criteria to undertake specific tests after completion.
Diageo’s Original Equipment Manufacturer (OEM)
Cyrus: Alright! Is there anything else that is brewing there?
Scott: Yes.
Diageo owns multiple FMCG factories and has dealt with specific companies to build parts of the production lines – specifically, the bottling and packaging sections. His factory managers prefer specific equipment from a particular OEM because it is easier to manage spare parts and train the factory teams. During the construction of Diageo’s other factories, the OEM sent installation and testing teams at the tail end of construction, and everything went well. It was therefore a no-brainer for Diageo to want to use the same OEM at Mangini.
The 2017 Silver Book mandates that the Employer state whether there will be any Nominated Subcontractors on the Site and the extent of collaboration expected of the Contractor. A nominated subcontractor is a subcontractor named as such at the tender stage, at the time of signing the contract, or a subcontractor that the Employer instructs the Contractor to employ. If the requirement for a nominated subcontractor arises during construction, the instruction to use a nominated subcontractor constitutes an instruction to use a provisional sum, and the Contract price shall be adjusted accordingly.
If the requirement for a nominated subcontractor arises during construction, the instruction to use a nominated subcontractor constitutes an instruction to use a provisional sum, and the Contract price shall be adjusted accordingly.
The drafters of the conditions of contract foresaw a scenario in which a Contractor could claim relief (perhaps cost and time) stemming from such collaboration, especially if the Employer did not make the Contractor aware of this limitation at contract signature. The challenge is that the Employer’s Requirements did not specify Diageo’s preferred OEM, and we have exhausted the provisional sums under the contract.
The challenge is that the Employer’s Requirements did not specify Diageo’s preferred OEM, and we have exhausted the provisional sums under the contract.
Cyrus: So, how are you resolving this?
Scott: Diageo has recognised and accepted the gaps in the contract and is willing to pay Baltimore some money to use his preferred OEM, but Baltimore has claimed an astronomical cost for this, and Diageo has outrightly rejected the claim. We may need a Dispute Board to resolve this stalemate.
Tests on Completion
Scott: The astronomical cost also includes Baltimore’s claim for increased costs associated with new testing and performance criteria for the packaging and bottling section of the completed works.
Cyrus: What is that?
Scott: In the contract, Diageo is responsible for setting the criteria for the testing and performance of the completed works. However, the Employer’s Requirements are vague regarding the criteria, and the bottling and packaging OEM has demanded that they test their part of the work using their own criteria.
Diageo is responsible for setting the criteria for the testing and performance of the completed works. However, the Employer’s Requirements are vague regarding the criteria, and the bottling and packaging OEM has demanded that they test their part of the work using their own criteria
Cyrus: How are you getting out of that one?
Scott: I left Mangini last week to take some time off to process that one. When I return, I hope to have some answers.
Cyrus: Any parting shots?
Scott: In its original form, FIDIC’s 2017 Silver Book has general conditions of contract comprising 21 clauses. These clauses have a total of 160 sub-clauses. The Employer’s Requirements are mentioned at least 80 times throughout these sub-clauses. Some of the mentions that I can recall are as follows:
- Sub-clause 1.10 [Contractor’s use of Employer’s Documents] – As between the Parties, the Employer shall retain the copyright and other intellectual property rights in the Employer’s Requirements and other documents made by (or on behalf of) the Employer.
- Sub-clause 2.1 [Right of Access to the Site] – If, under the Contract, the Employer is required to give (to the Contractor) possession of any foundation, structure, plant or means of access, the Employer shall do so in the time and manner stated in the Employer’s Requirements.
- Sub-clause 2.5 [Site Data and Items of Reference] – The original survey control points, lines and levels of reference (the “items of reference” in these Conditions) shall be specified in the Employer’s Requirements.
- Sub-clause 4.1 [Contractor’s General Obligations] – When completed, the Works (or Section or major item of Plant, if any) shall be fit for the purpose(s) for which they are intended, as defined and described in the Employer’s Requirements or, where no purpose(s) are so defined and described, fit for their ordinary purpose(s).
- Sub-clause 4.5 [Nominated Subcontractors] – In this Sub-Clause, “nominated Subcontractor” means a Subcontractor named as such in the Employer’s Requirements or whom the Employer, under Sub-Clause 13.4 [Provisional Sums], instructs the Contractor to employ as a Subcontractor.
- Sub-clause 5.1 [General Design Obligations] – The Contractor shall be deemed to have scrutinised, prior to the Base Date, the Employer’s Requirements (including design criteria and calculations, if any).
- Sub-clause 5.5 [Training] – If no training of employees of the Employer (and/or other identified personnel) by the Contractor is specified in the Employer’s Requirements, this Sub-Clause shall not apply.
- Sub-clause 9.1 [Contractor Obligations] – Performance tests shall be carried out to demonstrate whether the Works or Section comply with the performance criteria specified in the Employer’s Requirements and with the Schedule of Performance Guarantees.
My favourite mention of Employer’s Requirements in the Silver Book, and which many Employers seem unaware of, states that whilst the Contractor is responsible for the design of the works and for the accuracy of the Employer’s Requirements (including design criteria and calculations), the last paragraph of sub-clause 5.1 [General Design Obligations] reads as follows:
…the Employer shall be responsible for the correctness of the following portions of the Employer’s Requirements and of the following data and information provided by (or on behalf of) the Employer:
- portions, data and information which are stated in the Contract as being immutable or the responsibility of the Employer,
- definitions of intended purposes of the Works or any parts thereof,
- criteria for the testing and performance of the completed Works, and
- portions, data and information which cannot be verified by the Contractor, except as otherwise stated in the Contract.
And so on.
This reinforces my conviction that Employer’s Requirements are a crucial ingredient for the successful execution of a turnkey project and are equally important in design-build and/or design-build-operate projects. If they are poorly crafted, certain disputes can arise and be difficult to resolve. I have not yet seen Employer’s Requirements that have exhaustively covered every aspect of the work, but if they are reasonably well drafted, administering the contract can be a pleasant experience.
Employer’s Requirements are a crucial ingredient for the successful execution of a turnkey project and are equally important in design-build and/or design-build-operate projects. If they are poorly crafted, certain disputes can arise and be difficult to resolve. I have not yet seen Employer’s Requirements that have exhaustively covered every aspect of the work, but if they are reasonably well drafted, administering the contract can be a pleasant experience.
Cyrus: It’s been really lovely talking to you. You deserve your own 750 ml bottle of Dom Pérignon.
Scott: That wine is vintage and pricey. If you can pull that off, I will be very grateful. Otherwise, thanks for listening, and I will let you know how we resolve the OEM issue.
Cyrus: Thanks too and best wishes.