The EPC Contract in Finland, from the Contractor’s Perspective
Drafting and negotiating an EPC contract primarily follows the needs of the project. Universal rules cannot generally be established. But of course, conventions and customs in the target market - Finland in this case - are a factor. The following article highlights a few key points.
Full responsibility and assumption of risk
The basic idea behind the EPC contract is that the contractor assumes far-reaching, full responsibility for the success of the construction project. A lump sum price is usually agreed on for completion in this process.
The contractor’s project risk depends on the extent of the contractor’s responsibility. This varies quite widely from project to project, and a fierce tug-of-war is not uncommon in contract negotiations.
The following questions in particular are some of the central points of contention for distributing risk:
Can the contractor assume the FEED to be correct, or will everything have to be reviewed from scratch?
Does the contractor have to take care of obtaining permits (building permit, environmental permit, industry-specific permits, etc.), draw up the necessary documentation, and take responsibility for any delays that come up, if necessary?
Is it enough for the contractor to meet the technical objectives identified in the FEED or the contract, or are they responsible for this in a more general form so that the erected plant actually fulfils its purpose, too?
Can the contractor demand additional payment and schedule adjustments in the event of unforeseeable circumstances (e.g., soil contamination, actions of third parties, change in legal framework conditions), or do these fall under contractor risk?
By taking an overly risk-averse position in negotiations, a provider may jeopardise their credibility as an experienced general contractor. Many of these risks can be commercially estimated fairly reliably and priced into the commercial offer, if you are familiar with Finland’s legal and factual framework.
Even if the project owner wishes to transfer full responsibility to the general contractor to the greatest extent possible, they will generally want to have the last word when it comes to what is actually going to be built. The client may order changes to the work to be carried out.
A Finnish client will not allow themselves to be deprived of this right in the contract. You also won’t succeed in making the implementation of a change order dependent on the parties first agreeing on the repercussions for the contract price and the schedule. In Finland, it is common practice in building contracts for the continuation of work and project completion to take priority over all commercial matters.
As a provider, you are well advised to accept this starting point and focus on the matters in which you can realistically gain something:
agreement on feasible amendment procedures in which the contractor has clarity regarding whether a change should be implemented, even if the price is not fixed yet;
agreement on realistic price mechanisms that kick in when changes are to be implemented without agreeing on a price in advance; and
consideration for the repercussions that change orders may have on the EPC contractor’s full responsibility.
And of course, you should plan to maintain comprehensive project documentation throughout the course of the project, which will help track the costs and repercussions of changed orders, and to observe the procedures that the contract provides for enforcing surcharges and adjustments to the schedule.
Guarantee and liability
The matter of which guarantees to assume and for how long depends on the nature of the project. In Finland, a two-year guarantee period is customary. The standard contracts usual in the industry also allow for a subsequent liability for hidden defects, effective for ten years following receipt, if these are due to circumstances such as gross negligence in the quality assurance agreed upon.
Without any contractual limitation of liability, the contractor’s liability - be it for construction defects or the results of any breaches of contract - is legally unlimited according to Finnish law. Even the standard conditions for construction contracts that are usual in the industry, YSE 1998, do not include any limitation of liability.
In contract practice, agreeing on liability limitations, particularly the exclusion of indirect damage and the establishment of liability caps, is not uncommon. Willingness to accept responsibility is naturally just as presumed on the market as proper insurance coverage. Thus providers should avoid sending the wrong signals with exaggerated ideas about liability limitation. However, the EPC contractor has an understandable interest in not becoming the centre of risk in the contractual value chain: Passing on liability risks to subcontractors, planners, and other contracting partners is only possible to a limited extent.
Agreeing on arbitration procedures for settling legal disputes is common practice in Finnish project contracts. This is motivated by a number of circumstances, including the sluggishness of Finnish court proceedings and the parties’ interest in handling proceedings privately (court files are public in Finland as a matter of principle).
For transnational projects, there is also the fact that only in arbitration it is possible to choose English as the language of proceedings, and to appoint arbitrators from neutral jurisdictions.
The Finnish Central Chamber of Commerce operates an institute of arbitration whose proceedings enjoy great popularity in the Finnish construction industry. For proceedings of an international calibre, however, it may also be appropriate to use other arbitration institutes, such as the International Chamber of Commerce (ICC).