Clause 19.6 in FIDIC: Guide to Contract Termination and Settlements

Understanding Clause 19.6: Optional Termination, Payment and Release in FIDIC Yellow Book 1999

Introduction Clause 19.6 in the FIDIC Yellow Book 1999 addresses the conditions under which either party can terminate the contract due to prolonged Force Majeure events. This clause is crucial for understanding the rights and obligations of the parties in the event of extended delays caused by circumstances beyond their control.

Key Components of Clause 19.6

1. Conditions for Termination:
   • The clause allows for contract termination if the execution of substantially all the Works is prevented for a continuous period of 84 days or for multiple periods totaling more than 140 days due to the same notified Force Majeure.
2. Notice of Termination:
   • Either party may issue a notice of termination following the occurrence of the conditions mentioned above. The termination takes effect 7 days after the notice is given.
3. Procedure Post-Termination:
   • Upon termination, the Contractor must proceed in accordance with Sub-Clause 16.3, which involves cessation of work and removal of equipment from the site.

Determinations by the Engineer Upon termination, the Engineer is responsible for determining the value of the work done and issuing a Payment Certificate, which includes:

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• Payment for work carried out as per the contract.
• Cost of Plant and Materials delivered or due for delivery, which become the property of the Employer upon payment.
• Any reasonable cost or liability incurred by the Contractor in expectation of completing the Works.
• Cost of removing Temporary Works and Contractor’s Equipment from the site.
• Cost of repatriating the Contractor’s staff and labor employed in connection with the Works at the date of termination.

Implications and Practical Considerations

• Risk Management: Clause 19.6 provides a mechanism for managing the risk and consequences of prolonged Force Majeure events, ensuring that both parties have a clear exit strategy.
• Financial Settlements: It outlines a fair and transparent process for financial settlements upon termination, safeguarding the interests of both the Contractor and the Employer.
• Project Continuity: The clause ensures that the project can be concluded or transitioned in an orderly manner, minimizing further disruptions.

Diverse Interpretations of Clause 19.6: Optional Termination, Payment, and Release in FIDIC Yellow Book 1999

Purpose and Implications

• Purpose: Clause 19.6 provides a structured mechanism for contract termination due to prolonged Force Majeure events, outlining the financial settlements and procedures post-termination.
• Implications: This clause offers a clear exit strategy for both parties in extended Force Majeure situations, ensuring fair and transparent handling of project cessation and financial settlements.

Primary Aspects and Uses

1. Termination Conditions:
   • Use in Prolonged Delays: Activated when Force Majeure prevents work for 84 continuous days or accumulates to more than 140 days.
   • Risk Management Tool: Serves as a risk mitigation strategy for prolonged disruptions.
2. Notice and Effect of Termination:
   • Contractual Procedure: Outlines the process for issuing and effecting termination notices.
   • Project Closure Strategy: Facilitates orderly project closure or transition.
3. Post-Termination Financial Settlements:
   • Financial Fairness: Ensures fair compensation for work done and costs incurred.
   • Asset and Personnel Management: Addresses the handling of materials, equipment, and staff repatriation.

Expert Opinion

1. Legal Perspective:
   • Contractual Rights and Obligations: Legal experts emphasize the importance of understanding the rights and obligations under this clause to avoid disputes during contract termination.
   • Clarity in Termination Procedures: Stresses the need for clear communication and adherence to the stipulated procedures for termination.
2. Project Management Viewpoint:
   • Strategic Project Closure: Project managers view this clause as crucial for strategic decision-making in the event of insurmountable delays, allowing for an organized exit from the project.
   • Minimizing Disruptions: Highlights the role of this clause in minimizing further disruptions and financial losses.
3. Financial and Risk Management Analysis:
   • Risk Mitigation: Financial and risk analysts focus on the clause’s role in mitigating financial risks associated with prolonged Force Majeure events.
   • Asset Liquidation and Recovery: Emphasizes the importance of asset recovery and financial settlements post-termination.

Interaction of Clause 19.6 with Other Clauses in the FIDIC Yellow Book 1999

Clause 19.6 in the FIDIC Yellow Book 1999, concerning Optional Termination, Payment, and Release, interacts with several other clauses, creating a network of relationships that govern contract termination due to Force Majeure. Let’s explore these interactions with varied phrasings and detailed explanations.

Interaction with Sub-Clause 19.2: Notice of Force Majeure

1. Shared Effects: Clause 19.6 is contingent upon the proper notification of Force Majeure as outlined in Sub-Clause 19.2.
2. Detailed Explanation: The right to terminate the contract under Clause 19.6 is activated only after a Force Majeure event has been duly notified in accordance with Sub-Clause 19.2. This ensures that both parties are adequately informed before any termination action is taken.

Interaction with Sub-Clause 16.3: Cessation of Work and Removal of Contractor’s Equipment

1. Shared Effects: Upon termination under Clause 19.6, the procedures in Sub-Clause 16.3 come into effect.
2. Detailed Explanation: Sub-Clause 16.3 outlines the steps the Contractor must follow regarding the cessation of work and removal of equipment from the site. This clause becomes relevant immediately after the termination notice period under Clause 19.6 expires.

Interaction with Clause 8: Extension of Time for Completion

1. Shared Effects: Clause 19.6 may be considered after the extensions of time under Clause 8 have been exhausted or deemed insufficient.
2. Detailed Explanation: If the Force Majeure event leads to prolonged delays, even after considering possible extensions under Clause 8, Clause 19.6 provides an alternative route for contract termination.

Interaction with Clause 20: Claims, Disputes, and Arbitration

1. Shared Effects: The termination under Clause 19.6 may lead to claims or disputes handled under Clause 20.
2. Detailed Explanation: Termination of the contract can result in disputes over the settlement amounts or the application of Clause 19.6 itself. In such cases, the resolution process outlined in Clause 20 becomes relevant.

Interaction with Clause 14: Contract Price and Payment

1. Shared Effects: Financial settlements upon termination under Clause 19.6 are calculated in line with the provisions of Clause 14.
2. Detailed Explanation: Clause 14 governs the contract price and payment terms, which are crucial when determining the final payment certificate after termination as per Clause 19.6. This includes payments for work done, costs of materials, and other incurred costs.

Key Points to Keep in Mind When Employing Clause 19.6: Optional Termination, Payment, and Release in FIDIC Yellow Book 1999

When employing Clause 19.6 in the FIDIC Yellow Book 1999, it’s crucial to consider several key factors to ensure its effective implementation. These factors guide parties in appropriately managing contract termination due to prolonged Force Majeure events.

1. Understanding the Conditions for Termination

• Duration of Delay: Recognize that termination is an option if the execution of the Works is prevented for a continuous period of 84 days or for multiple periods totaling more than 140 days due to Force Majeure.
• Force Majeure Notification: Ensure that the Force Majeure event has been properly notified as per Sub-Clause 19.2.

2. Issuing the Notice of Termination

• Timely Notice: A party wishing to terminate the contract must issue a notice of termination, which becomes effective 7 days after it is given.
• Clear Communication: The notice should be clear and unambiguous, stating the intention to terminate the contract due to Force Majeure.

3. Post-Termination Procedures

• Following Sub-Clause 16.3: Upon termination, the Contractor must follow the procedures outlined in Sub-Clause 16.3, including the cessation of work and removal of equipment.
• Orderly Cessation: Ensure an orderly and efficient process for winding down the project activities and removing equipment and personnel from the site.

4. Financial Settlements

• Engineer’s Determination: The Engineer will determine the value of the work done and issue a Payment Certificate, which includes various costs as outlined in the clause.
• Fair Compensation: Understand the components of the financial settlement, including payment for work done, costs of materials, and other incurred costs.

5. Legal and Contractual Compliance

• Adherence to Contract Terms: Ensure that the actions taken are in accordance with the terms of the contract and the provisions of Clause 19.6.
• Compliance with Local Laws: The implementation should also align with relevant local laws and regulations.

6. Preparation for Potential Disputes

• Dispute Resolution: Be prepared for potential disputes arising from the termination, which may need to be resolved as per Clause 20.

Essential Factors in Implementing Clause 19.6: Optional Termination, Payment, and Release in FIDIC Yellow Book 1999

Implementing Clause 19.6 effectively in the FIDIC Yellow Book 1999 requires attention to several key factors:

1. Timely and Accurate Assessment of Force Majeure Duration

• Duration Tracking: Closely monitor the duration of the Force Majeure event to determine if it meets the 84 continuous days or accumulates to more than 140 days threshold.
• Documentation: Maintain detailed records of the Force Majeure event’s timeline and impact on the project.

2. Proper Notification as per Sub-Clause 19.2

• Adherence to Notification Procedures: Ensure that the Force Majeure event has been notified in compliance with Sub-Clause 19.2, as this forms the basis for invoking Clause 19.6.
• Clarity in Communication: The notification should clearly articulate the impact of the Force Majeure event on the project.

3. Issuing a Notice of Termination

• Decision to Terminate: Carefully consider the decision to issue a termination notice, understanding its implications for the project and contractual relationships.
• Compliance with Notice Period: Ensure the notice of termination is given at least 7 days before the intended termination date.

4. Understanding Post-Termination Obligations

• Contractor’s Responsibilities: Familiarize with the responsibilities outlined in Sub-Clause 16.3, including cessation of work and removal of equipment.
• Orderly Project Closure: Plan for an orderly closure or handover of the project, minimizing disruptions.

5. Financial Settlements and Engineer’s Role

• Engineer’s Determination: Be aware that the Engineer will determine the value of the work done and issue a Payment Certificate.
• Components of Settlement: Understand the components included in the financial settlement, such as payment for work carried out, costs of materials, and repatriation costs.

6. Legal and Contractual Compliance

• Alignment with Contract Terms: Ensure that all actions are in line with the terms of the contract and Clause 19.6.
• Local Law Considerations: Consider any local legal requirements that may impact the termination process.

7. Preparation for Potential Disputes

• Dispute Resolution Readiness: Be prepared for potential disputes related to the termination, ensuring familiarity with the dispute resolution processes outlined in Clause 20.

Process Flowchart for Implementing Clause 19.6

Detailed Explanation of the Process Flowchart for Implementing Clause 19.6

1. Force Majeure Event Occurs: The process initiates when a Force Majeure event, such as a natural disaster or political unrest, significantly impacts the project.
2. Track Duration of Force Majeure:
   • Monitoring Period: It’s crucial to monitor the duration of the Force Majeure event. The clause becomes applicable if the event prevents work for 84 continuous days or accumulates to more than 140 days.
   • Documentation: Keeping detailed records during this period is essential for substantiating the termination claim.
3. Decision Point – Meets Termination Condition?:
   • Assessment: Evaluate whether the Force Majeure event meets the specified duration criteria for contract termination.
   • Yes: If the criteria are met, move towards preparing a notice of termination.
   • No: If not, continue with standard project management practices.
4. Issue Notice of Termination:
   • Formal Notice: Draft and issue a formal notice of termination, clearly stating the intention to terminate the contract due to the prolonged Force Majeure event.
   • Compliance with Notice Period: Ensure the notice is issued at least 7 days before the intended termination date.
5. Termination Takes Effect:
   • Effective Date: The contract termination becomes effective 7 days after issuing the notice, marking a significant transition in project status.
6. Proceed with Sub-Clause 16.3:
   • Cessation of Work: Follow the procedures outlined in Sub-Clause 16.3 for stopping work and removing equipment and personnel from the site.
   • Orderly Closure: Plan for an orderly and efficient closure or handover of the project.
7. Engineer Determines Settlement:
   • Financial Assessment: The Engineer assesses the work done and other related costs to determine the final settlement.
   • Fair Compensation: This step ensures fair compensation for the contractor for the work completed and costs incurred.
8. Issue Payment Certificate:
   • Final Settlement: A Payment Certificate is issued based on the Engineer’s determination, finalizing the financial aspects of the contract termination.

Sequence Diagram: Implementing Clause 19.6

Detailed Explanation:

1. Event Occurrence: The sequence begins with a Force Majeure event occurring.
2. Notification of Duration: The Contractor notifies the Project Manager (PM) about the duration of the Force Majeure event.
3. Confirmation of Termination Conditions:
   • The PM confirms whether the event meets the termination conditions specified in Clause 19.6 (84 continuous days or a total of 140 days).
4. Preparation of Notice of Termination:
   • If the conditions are met, the Contractor prepares a notice of termination.
5. Review and Approval of Notice:
   • The PM reviews and approves the notice for accuracy and completeness.
6. Issuance of Notice of Termination:
   • The Contractor officially issues the notice of termination to the PM.
7. Request for Settlement Determination:
   • The PM requests the Engineer to determine the financial settlement as per Clause 19.6.
8. Determination of Settlement:
   • The Engineer determines the settlement, including the value of work done and other costs.
9. Communication of Settlement:
   • The PM communicates the settlement details to the Contractor.
10. Cessation of Work:

• The Contractor proceeds with the cessation of work as outlined in Sub-Clause 16.3.

11. Overseeing Removal of Equipment:

• The PM oversees the removal of the Contractor’s equipment from the site.

12. Completion of Removal and Handover:

• The Contractor completes the removal of equipment and any necessary handover procedures.

13. Finalization of Project Closure:

• The PM finalizes the project closure process.

14. Closure Report:

• The Engineer provides a closure report, marking the end of the project and contract under Clause 19.6.

Checklists

1. Checklist for Proficient Execution and Deployment of Clause 19.6

2. Checklist for Applying and Overseeing Clause 19.6

3. Checklist for Guiding and Monitoring the Execution of Clause 19.6

FAQs: Clause 19.6 Optional Termination, Payment, and Release in FIDIC Yellow Book 1999

What is Clause 19.6 in the FIDIC Yellow Book 1999?

Clause 19.6 outlines the conditions under which either party can terminate the contract due to prolonged Force Majeure events. It specifies the procedures for termination and the subsequent financial settlements.

When can a party terminate the contract under Clause 19.6?

A party can issue a notice of termination if the execution of substantially all the Works is prevented for a continuous period of 84 days or for multiple periods totaling more than 140 days due to the same notified Force Majeure.

What happens after a contract is terminated under Clause 19.6?

Upon termination, the Contractor must proceed in accordance with Sub-Clause 16.3, which involves cessation of work and removal of equipment. The Engineer then determines the value of the work done for the final settlement.

What does the final settlement include?

The settlement includes payment for work carried out, cost of plant and materials, any other reasonable costs incurred in expectation of completing the Works, cost of removing temporary works and equipment, and repatriation costs of the staff.

Can a party terminate the contract immediately after a Force Majeure event?

No, termination under Clause 19.6 can only occur after the specified prolonged duration of the Force Majeure event (84 continuous days or a total of 140 days).

Common Misunderstandings Associated with Clause 19.6

1. Immediate Termination: A common misconception is that parties can terminate the contract immediately after a Force Majeure event. However, specific duration conditions must be met.
2. Automatic Financial Compensation: Some may mistakenly believe that termination automatically leads to full compensation for the contractor. The financial settlement is subject to the Engineer’s determination and includes specific cost elements.
3. Scope of Settlement: There is often confusion about what costs are covered in the settlement. It includes costs directly related to the work done, plant and materials, and other reasonable costs, not all project-related expenses.