50 years and still going strong
John Challenger, Roger Button, Paul Buckingham, IChemE Contracts Committee
THIS article celebrates 50 years of the success of the Institution of Chemical Engineers Model Form of Conditions of Contract for Process Plant Suitable for Lump Sum Contracts since the first edition of its ground-breaking publication appeared in 1968.
How it all started
In 1964 IChemE appointed a special committee to review the need for contract conditions specifically for the chemical industry. The committee brought together a range of expertise from leading international contractors, major multi-national oil and gas, chemical and pharmaceutical companies including ICI, BP, Shell, The Boots Company, Foster Wheeler and Humphreys & Glasgow.
The committee found that contracts for an increasingly large number of process plants being built were not adequately served by any of the available model forms of contractIn addition, the contribution from the Institution of Civil Engineers contract drafting panel should not be forgotten in helping to frame the initial structure of the first contract based on the experience that had been gained in drafting the first edition of its contract in 1945.
The committee found that contracts for an increasingly large number of process plants being built were not adequately served by any of the available model forms of contract and were often altered extensively to cope with the complexity and requirements of such projects.
First edition
An initial draft was produced in 1966 and distributed to a number of potential users and industry associations, professional institutions and other professional bodies. The constructive criticisms were all carefully analysed and a consensus of views was incorporated in a revised addition which was issued for a legal peer review in 1966.
This led to the publication of the first edition of the lump sum model form of contract, now commonly known as the IChemE ‘Red Book’. This form of contract was one of the first truly specific performance-based contracts which dealt with the full execution of engineering, procurement, construction, commissioning and performance testing of complex chemical plants.
The three contracts broke new ground and were drafted in such a way as to mirror the activities and sequence of chemical plant project execution.A permanent committee was formed to manage and update the contracts and, due to the popularity and success of the Red Book, preparation of an equivalent set of conditions for reimbursable contract applications was initiated resulting in the 1976 publication of the ‘Green Book’. Further pressure from the industry led to the drafting of a much-needed subcontract form, the ‘Yellow Book’, which was introduced in 1992. The Yellow Book offered a ‘back-to-back’ subcontract that was fully integrated with the Red and Green Books.
New ground
The three contracts broke new ground and were drafted in such a way as to mirror the activities and sequence of chemical plant project execution. It is great credit to the foresight of the original drafting committee that, in spite of a gradual expansion of the content over time, the general structure of these contracts has changed little over the intervening 50 years of their application. In fact, the index of the first edition of the Red Book would be instantly recognisable to its counterpart in the later versions of the contract.
One aspect of the contracts that has changed is the expanded number of schedules which have been introduced as a means of segregating and clarifying the activities that need to be addressed for specific projects and applications.
It is an inevitable fact that with any contract disputes will arise and initially, the appointment of arbitrators and experts with chemical industry experience was managed by the contracts committee.
The increasing use of the forms of contract by industry led to the publication of the ‘Orange Book’, a minor works contract, the ‘Brown Book’, a subcontract for civil engineering works, and a target cost contract, the ‘Burgundy Book’. The Burgundy Book in particular has proven to be a popular form particularly in the water, power and related industries.
In response to the growing use of the contracts for projects outside of the UK, international versions of the Red, Green, Burgundy and Yellow Books were published in 2007, written specifically for those contracts where at least one of the parties is contracting outside its home country.
It is an inevitable fact that with any contract disputes will arise and initially, the appointment of arbitrators and experts with chemical industry experience was managed by the contracts committee.
It was decided that this activity should be overseen by a separate group which led to the formation of the disputes resolution committee which now is responsible for the drafting of a range of supporting rules for dispute resolution – the Grey Book (adjudication rules), the White Book (rules for expert determination), the Pink Book (arbitration rules) and the Beige Book (rules for dispute review boards).
Complexity
From the very start the IChemE drafting committee recognised the complex way in which the purchaser and the contractor divided the responsibility for the four phases of the project, namely design, construction, commissioning and performance testing in order to handover a plant that is complete, safe and prepared for operation. Unlike all other published contracts, start-up and performance testing (operating to contractual requirements) of a new process plant are fully dealt with in the IChemE forms.
As a result the professional services contract (known as the Silver Book) was published in 2017, which was the first completely new contract published by the IChemE for over 15 years.
This complexity arises from the unique economic factors, multidisciplinary technology and potentially significant risks associated with the process industry.
Although a number of other publishers have entered the market during the last 50 years, in many respects, the IChemE contracts still display the most thorough and integrated approach to the overall life cycle of performance-based projects in the chemical and manufacturing industry.
The objective was to provide a fair and balanced contractual framework where each party could understand its responsibilities and hence work in a cooperative manner in order to achieve a successful project without confrontation.
The IChemE holds to this viewpoint and continues to publish some of the most balanced forms of contract that recognise that each party should expect a fair reward with balanced liabilities for its contribution in executing a project.
Up to 2013, the IChemE contracts committee devoted itself to the general revisions required to the Red, Green, Burgundy, Yellow and Brown Books resulting from changes UK legislation, in particular the Housing Grants, Construction and Regeneration Act.
Recent publications – the Silver Book
Readers of The Chemical Engineer will be aware that after the publication of the UK suite of contracts, the contracts committee turned its attention to the list of the IChemE’s contract publications and started to plan its future activities. The committee came to the conclusion that there were a number of essential aspects of plant design and construction that were not covered by the current publication list.
A number of novel elements were introduced into this new contract including the key decision to make the form suitable for both UK and international applications.These included contracts for consultancy/ professional services, chemical equipment/ materials supply and the increasingly popular engineering, project management, procurement and construction management methods for project execution. As a result, the professional services contract (known as the Silver Book) was published in 2017, which was the first completely new contract published by the IChemE for over 15 years.
The structure of the form covered the provision of consultancy, project management, design, contract management and other professional services applicable to the process and related industries.
This form was drafted to cover the essential work necessary as a precursor to the main forms of contract, filling a gap in the sequence from project inception, concept development to project definition as well as providing a contractual mechanism for general project management and technical services.
In addition, a number of novel elements were introduced into this new contract including the key decision to make the form suitable for both UK and international applications. This led to the inclusion of example special conditions in two parts (a) part A (projects in the United Kingdom and (b) part B (optional).
Whereas the earlier publication was primarily for small scale site works in which the design and supply of equipment and materials was by a third party, the new form incorporates design, supply of materials and performance testing of small scale works.
It had also been recognised that professional services and consultancy was often required at both small and large scale and hence the Silver Book responds to this need with both long and short forms of the contract. This contract is steadily gaining popularity in the marketplace and is increasingly being used for process industry applications because it contains all the hall marks of the main IChemE forms of contract and easily integrate with them.
The development of the Silver Book led to the upgrade of the minor works contract (Orange Book). Again, this was an example of the contracts committee responding to changes being made by users of this form.
Whereas the earlier publication was primarily for small-scale site works in which the design and supply of equipment and materials was by a third party, the new form incorporates design, supply of materials and performance testing of small scale works.
The experience gained in drafting the Silver Book for international applications was also adopted thus making the latest edition of the Orange Book a highly flexible addition to the IChemE’s suite of contracts. Given the reduction in the construction of large-scale oil, gas and chemical manufacturing plants in the United Kingdom, the Orange Book meets the requirements for small scale upgrades, investments and plant replacement. It also has the advantage that it can be used to provide small scale works that can be coordinated and managed under the contractual arrangements provided by the Silver Book.
Performance in use
Manchester University undertook a study in 2017, titled ‘Confidence in Contracts’ subtitled ‘New Research’ shows the IChemE contracts are among the least disputed’. The findings of the study bear out the experience of the institution’s disputes resolution committee, which routinely monitors the number of disputes referred either for arbitration, adjudication or expert determination.
Of late, there has been an ever-increasing propensity to introduce changes and special conditions to the forms.It should be noted that when the contracts do end up in court, the forms are rarely criticised and they are still regarded by the legal professionals with experience in the chemical industry as being the most suitable and robust contracts available.
Of late, there has been an ever-increasing propensity to introduce changes and special conditions to the forms. Whilst projects sometimes require such adjustments, many of the changes are ill-advised and can adversely affect the rights and liabilities of the parties. This is why the IChemE warns, in its introduction to its contracts, that:
“Anyone contemplating modifications to the general conditions should take care not to introduce provisions that may conflict with these well-established practices and relationships. They should be particularly aware of the risk of introducing inconsistencies within the contract conditions that may be unenforceable”.
Future Developments
Long term, the work undertaken during the development of the Silver and Orange Books is likely to lead to the modification of the main contract forms which are currently published for the UK with a separate suite for international applications. The amalgamation into a multi-jurisdictional format will increase flexibility of use, decrease costs and ensure consistency of contract drafting and execution of projects in the United Kingdom and/or abroad.
The IChemE’s intention is to produce contracts that are both fair and reflect the needs of the process industry for an independently published form of agreement.Prior to the upgrade of the existing suite of contracts, the contracts committee is in the final stages of completing another completely new form of contract to be known as the Blue Book for engineering, procurement and construction management (EPCM) contract. Again, this is in response to a market requirement that is not currently being met by any existing published forms.
The complex relationship between the purchaser, EPCM contractor and the contractors employed to undertake the works has made the drafting a lengthy process but the IChemE aiming to publish in its centenary year.
Over a slightly longer time period a further expansion to the IChemE’s suite of contracts is underway to publish additional contract forms to cover the supply of materials equipment. These activities are generally handled by the use of purchaser, main contractor or supplier terms and conditions of contract which often favour the organisation that provides the form. The IChemE’s intention is to produce contracts that are both fair and reflect the needs of the process industry for an independently published form of agreement.
Conclusion
Historically, the IChemE forms of contract have been extremely successful and recognised as being the most appropriate for performance-based project applications in which there are a very wide range of technological components. The contracts were initially developed by highly experienced engineers, legal and commercial practitioners with in-depth knowledge of the chemical industry.
Their input and foresight has proven itself in over 50 years of successful applications.
John Challenger, Roger Button, Paul Buckingham, IChemE Contracts Committee
jgchallenger@btinternet.com roger.button@corbett.co.uk pbuckingham@keatingchambers.com