the risk would remain upon the Contractor.

As amended, the clause will relieve

the Contractor of responsibility to the extent that the Engineer's design was
causative.

"(h) any operation of the forces of nature...". Whereas the 3rd Edition required
the forces of nature to be such that "an experienced Contractor could not
foresee... or insure against", this edition refers to forces "against which an
experienced Contractor could not reasonably have been expected to take
precautions". Foreseeability has been shown by clause12.2 (Adverse physical
obstructions or conditions) to be a source of much dispute; and insurability is a
difficult test as cover is sometimes available but only at an exorbitant price. The
present wording may represent an improvement. For example, the Contractor's
information concerning a particular site could show that flooding occurs from time
to time for two reasons: firstly, because of a local river breaching its banks at a
particular point and, secondly, due to occasional flash floods following torrential
rain in the region. It may be that an experienced Contractor would build up and
reinforce the bank of the river but that nothing could realistically be done to avoid
the damage that a flash flood would cause. The Employer takes the risk of the
latter. Inevitably, there will be many borderline cases and it is submitted that the
present test will have much in common with the foreseeability test of the 3rd
Edition.

In civil law countries, where administrative law based on the French model
applies, this clause reflects the Theorie de l'imprevision whereby if exceptional
and unforeseen events render the Contractor's obligation excessively onerous
threatening him with exorbitant loss, then the Contractor's excessive losses may
be reduced to reasonable limits by way of compensation by the Employer. In
certain countries, notably Egypt, this doctrine has been extended to private law
contracts as well. This clause is in fact more generous than the administrative
law doctrine as it provides for the Contractor to be completely relieved of
responsibility, whereas the Theorie only provides for the reduction of the
Contractor's losses. For a brief overview of administrative law based on the
French model, see clause 5.1 (Languages and law).

CLAUSE 21 : Insurance of Works

The Contractor is to insure 115% of the full replacement value of the works to
cover reinstatement as well as professional fees, demolition etc and will also
insure the replacement value of his own equipment.

The insurance is to be in the joint names of the Contractor and the Employer and
is to cover all risks other than Employer's risks (a) - (d) from the start of work on
site until taking-over of the works. It must also cover the Contractor's operations
in the Defects Liability Period and when searching.

The Contractor and the Employer will bear losses in relation to their own risks to
the extent that their losses are not paid for by the insurer.

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This clause has been fundamentally reorganised for the 4th Edition including at
sub-clause 21.4 a wholly unnecessary repetition of items (a) to (d) of clause 20.4
(Employer's Risks).

21.1 "(a)...full replacement cost". This may not be necessary where the site is
spread out making total destruction very unlikely. In these circumstances, the
clause should be amended to require insurance to be obtained for a lesser
amount.

"(c) the Contractor's Equipment...". This equipment is not referred to in clause 20

but clause 54.2 (Employer not liable for damage) makes it clear that damage
caused other than by Employer's or Special risks is the Contractor's
responsibility.

Part II provides optional additional wording for sub-clause 21.1 if insurance

payments are to be in a certain currency or if the Employer wishes to specify a
ceiling upon the deductible limits or excess provided for by the policy.

There is as yet no recognition in FIDIC of the increased use of decennial

insurance. Decennial liability is imposed by many civil law countries and renders
architects, engineers and contractors liable for the safety and stability of
structures. Any defect threatening the safety or stability of the structure or its
fitness for its purpose appearing within 10 years would render the designers and
builders liable to the Employer without proof of fault. Insurance of this liability is
now compulsory in France following the Spinetta Law of 1978 and there are
signs, certainly in the UK, that it will become more widespread.

CLAUSE 21.1 (Insurance of Works)

Sub-clause 21.1 (Insurance of Works and Contractor's Equipment)

"The Contractor shall, without limiting his or the Employer's obligations and
responsibilities under clause 20, ensure that:-
(a) The Works together with materials and Plant for incorporation therein, the
full replacement cost (the term "cost" in this context shall include profit), ..."

The additional words are needed because the definition at clause 1.1(g)(i) states
that
""cost" means all expenditure properly incurred or to be incurred, whether on or
off the Site, including overhead and other charges properly allocable thereto, but
does not include any allowance for profit."

If profit was excluded from the amount insured, the Employer could not be
confident that there would be sufficient cover in the event of the total loss of the
project. Even with an additional sum of 15% which might well be absorbed with
demolition costs and professional fees, the obligation upon a Contractor to re-

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build with no profit recovery could be sufficient to drive a Contractor at least to a
consideration of abandoning the project if not into financial difficulties. It would
certainly be difficult to attract an alternative contractor to undertake the re-
building.

It should be recalled that the insurance of the works is in respect of all risks other
than those risks set out at clause 20.4 (Employer's risks) items (a) to (d). The
Employer may try to insure those risks himself if such insurance is available on
the market. Under clause 20.2 (Responsibility to rectify loss or damage), in the
event that there is loss or damage to the works, the Contractor is obliged, at his
own cost, to re-build. He is dependent upon the insurance to pay him to do so.
Whether the insurance policy will pay out any element of profit to the Contractor
undertaking such remedial works, [ is to be doubted].

If for any reason, the Contractor is not prepared to undertake the remedial works,
the Employer will be the claimant under the insurance policy whose claim would
comprise primarily the cost of obtaining an alternative contractor to undertaken
the re-building works. That cost would include paying the alternative Contractor
an amount in respect of profit.

Sub-clause 21.1 is not the only provision requiring amendment in relation to

profit. The main source of the difficulty is that the bar on profit is not limited in the
definition to profit recovery by the Contractor. In arriving at the global definition, it
appears that the draftsmen did not consider each and every use of the term
"cost" to see whether the definition given was actually appropriate. Too much
reliance has been placed on the opening words of clause 1.1 which gives words
and expressions certain meanings "except where the context otherwise
requires". One only has to look at clause 21.1(b) to see the term "costs" referring
to professional fees and demolition. It cannot have been the intention of the
draftsman to exclude the professionals' profit element nor that of the demolition
contractor. Nor is the exclusion of profit appropriate in the indemnity clauses
some of which are listed in the commentary to clause 60.9 in the main work. For
example, in clause 22.2 (Exceptions), a Contractor is not responsible for damage
to persons and property arising from any act or neglect of the Employer "or in
respect of any claims, proceedings, damages, costs, charges and expenses in
respect thereof". This context obviously requires the definition not to apply.

Perhaps the most striking examples of the inappropriateness of the definition of

"costs" are in clauses 39.2 (Default of Contractor in compliance) and 49.4
(Contractor's failure to carry out instructions). In both cases, failure of the
Contractor to carry out certain instructions entitles the Employer to employ and
pay another contractor to execute the works concerned. "All costs consequent
thereon or incidential thereto" are recoverable from the Contractor. Clearly it is
intended that the Employer should recover the element of profit which the
alternative Contractor has charged. Again, in clause 46.1 (Rate of progress), it is
the Employer's additional supervision costs incurred as a result of the Contractor
having to accelerate that are to be deducted from sums otherwise due to the

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Contractor. Without doubt, it is not intended that the supervisor's profit should
not be recoverable.

The purpose of the definition is to resolve a recurrent problem, namely whether a

Contractor entitled to loss and expense under the Contract is entitled to claim a
loss of profit as part of that loss and expense claim. Arbitrators both in England
and internationally have differed on this point. Has it been resolved in the 4th
Edition? It is submitted that a Contractor would find it almost impossible to argue
that a loss of profit on the turn-over

If an attempt is made to reconcile the definition of cost and the clear intention of
the draftsmen in clauses such as 39.2 (Default of Contractor in compliance) and
49.4 (Contractor's failure to carry out instructions), a distinction must be drawn
between profit in the hands of the Contractor or the Employer on the one hand
and their professionals, alternative contractors and sub-contractors on the other.
If that is the case, then those elements of the Contractor's loss and expense
claims which relate to subcontractors could probably include elements by way of
profit. This may indeed be the intention of the draftsman. If so, the definition
should be clarified.

Sub-clause 21.4 (Exclusions)

The first category of causes of loss or damage for which the Contractor has no
obligation to ensure is now :-

"war, hostilities (whether war be declared or not), invasion, act of foreign

enemies..."

The previous wording "(where war be declared or not)" was presumably a

typographical error. Recent events have demonstrated the importance of these
words and the extent to which hostilities can escalate without a formal
declaration of war. The words in parentheses could usefully qualify all four of the
items and not just hostilities.

21.2 There is a mis-match between the requirement in clause 21.2 for the
insurance to run from "the start of work at the site" and the date from which the
Contractor takes full responsibility for the works under clause 20.1 (Care of
Works) which is from the Commencement Date. There may be a period of
several months between the date upon which the Employer gives notice under
clause 41.1 (Commencement of Works) and the date that the Contractor actually
mobilises and commences. The Contractor's obligation is to commence "as soon
as it is reasonably possible" after the notice to commence. There may be a very
considerable procurement and mobilisation period. It may be preferable to have
the insurance run "from the Commencement Date or as soon thereafter as is
practicable". A simple obligation to insure from the Commencement Date might
not be practicable as the Contractor could receive the Engineer's notice under
clause 41.1 (Commencement of Works) at any time after the Letter of
Acceptance, within the period specified.

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The Contractor would normally be present on site after taking-over for one of four
reasons:-

i. in pursuance of his undertaking to finish outstanding work pursuant to

clause 48.1 (Taking-over certificate), clause 48.4 (Surfaces requiring
reinstatement) and clause 49.2 (Completion of outstanding work and remedying
defects);

ii. remedying defects during the Defects Liability Period under clause 49
(Defects Liability);

iii. searching for the cause of defects pursuant to clause 50 (Contractor to

search); or

iv. demobilising and complying with clause 33 (Clearance of site on

completion).

The insurance obligation covers (i) to (iii) but not (iv).

The benefits to the Employer of requiring the insurance to be in joint names

include a greater control over the maintenance of the insurance in relation to
clause 25 (Evidence and terms of insurances), control over the claims process
and, importantly, a right to be paid directly by the insurance company in respect
of the Employer's losses. If the insurance was in the name of the Contractor
alone, the Contractor's insurers could pursue the Employer in relation to loss and
damage for example resulting from the Engineer's design.

21.3 It is in the interests of both parties to the contract to make sure that there
is adequate insurance in place. It is little comfort to an Employer to know that a
Contractor takes responsibility for a risk if, should that risk occur, the Contractor
would be driven out of business by the cost of rectifying the consequent loss.
The priority for both parties is to ensure that in the event that the works are
damaged or destroyed, funds will be available to enable the project to be
completed. As such risks will invariably cause delay to the works, it is also of
importance that the insurance will cover on the one hand the Contractor's
prolongation costs and, on the other, the Employer's losses flowing from the
delay. Although clause 21.3 may state no more than is clear from the preceding
clauses, it serves as a reminder to the parties to ensure that the insurance cover
is adequate. As this clause is equally applicable to the insurances under clauses
23 and 24, it could usefully have been placed in clause 25 (Evidence and terms
of insurances) which applies to all the insurance provisions.

The Employer may obtain some measure of protection from the Contractor's
financial vulnerability to uninsured losses from a bond obtained under clause 10
(Performance security). However, these rarely exceed 10% of the contract value
and it will be a question for interpretation of the wording of each bond whether

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