Muminov Timur Nazirovich
Muminov Timur Nazirovich
Abstract: This thesis will be interesting for lawyers working in company specialized on
construction of infrastructure facilities in Uzbekistan.
During the last 10 years in the Republic of Uzbekistan several projects have been built
based on turnkey principle in the oil and gas, energy and mining industries, in particular, in
construction of gas processing plants, hydroelectric power plants and other infrastructure
projects. In the framework of these projects participants have faced with various
inconstancies and restrictions between the terms and conditions of the EPC contracts and
legal requirements for employers and contractors under the construction laws of
Uzbekistan. The subject of this thesis is to review and identify particular issues in the
implementation of EPC contracts in Uzbekistan.
Keywords: EPC contract, Silver Book, fast-track, construction.
7
W.Hughes, R.Champion, Construction contracts. Law and management, 5th edn, Routledge, (2015), p.128
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projects are willing to pay more sometimes considerably more for their project if they can
be more confident that the agreed final price will not be exceeded. Among such projects
can be found many financed by private funds, where the lenders require greater certainty
about a project’s cost to the Employer than is allowed for under the allocation of risks
provided for by FIDIC’s traditional forms of contracts8. Essential idea behind EPC is that the
government or SOE in a country wants to have a totally finished project but does not wish
to or cannot finance such a project itself. It, therefore, agrees with the contractor that it
would design, build and carry-on commissioning and, in the case of EPCM, render the plant
operational. After the end of construction or the period of operation, the government will
finally obtain ownership or control of the plant.
So-called EPC stands for engineering, procurement and construction contract and is
used more as the brand name of certain types of DB contracts. EPC mainly labels the risk
allocation method, where the contractor has duties to design (engineering), procure the
equipment and materials and build the facility which would fit for purposes prescribed at
the employer’s requirements. It is very similar to DB contracts (Yellow book) where the
Employer can benefit from single-point contractor responsibility for problems arising from
design and construction and have a lump-sum price or fixed price9. Whether the Yellow
book is recommended for the provision of electrical or mechanical plant and the design
and execution of building or engineering works, the EPC is suitable for the provision on a
“turnkey” basis of a process or power plant, of a factory or similar facility, or of an
infrastructure project other types of development, where a higher degree of certainty of
final price and time is required, and the contractor takes total responsibility for the design
and execution of the project, with little involvement of the Employer 10. Minimum
involvement of the Employer under EPC constitutes that only the provision of preliminary
drawings, site data and technical specifications as well as the level of outputs from the
completed plant is requested from the Employer.
The principal “turnkey” basically refers to the moment when after completion of the
works, the project can be turned and everything will be ready for use 11. The definition of
“turnkey” was challenged in the case Cable (1956) Ltd vs Hutcherson Bros Pty Ltd12, where
the judge stated that …” turnkey” expression meant that the builder warranted the
efficacy of the works he had agreed to erect”. The next paragraph describes the main
issues in implementation EPC in Uzbekistan
8
E.Baker, FIDIC contracts: Law and Practice, 5th edn., Routledge, (2009), p.21
9
Ibid, p.21
10
“FIDIC Comparison between Red Book, Yellow Book, Silver Book” available at
https://legalbusinessforms.wordpress.com/2015/05/08/fidic-comparison-between-red-book-yellow-book-silver-book/ accessed on
14.03.2023.
11
Goudsmit, “Legal Liability in Contract Structures” in LLoyd (ed), The Liability of Contractors (Longman, 1986) page 25. See also
Kristensen, “Correspondence” *1986+ ICLR 217; Wabnitz, “Correspondence” *1986+ ICLR 428 cited from Julian Bailey “Construction
st
Law” 1 edn, Routledge, (2011), p. 38
12
(1969), 123 CLR 143, cited from Julian Bailey “Construction Law” 1st edn, Routledge, (2011), p. 38
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EPC is not a separate form of the contract under national legislation. It is a mixed
contract and has elements of a contract for construction works13, a supply agreement14
and a contract for rendering services15 regulated by the Civil code provisions. The parties
should consider the implied terms mandatory for the abovementioned contracts under
national laws while negotiating particular conditions of EPC.
The contractor under EPC usually has the status of non-resident. Therefore, parties
will sign a kind of import contract. According to the Resolution of Cabinet of Ministers of
the Republic of Uzbekistan No.283 dated May 14, 2020 (“Resolution 283”) there is a list of
mandatory clauses that should be included in any import contracts, as well as into EPC
contract16. It should be considered as inconsistence between uzbek laws and the Silver
Book conditions, but cannot be avoided by the parties.
Clause 1.4. of the Silver Book states that the contract shall be governed by the law
of the country (or another jurisdiction) stated in the contract. In accordance with article
1189 of the Civil code of the Republic of Uzbekistan parties are entitled to choose
governing law for a particular contract. These local laws are often either mandatory as a
matter of public policy, such that they cannot be avoided by choosing other governing laws
(e.g. labour laws, construction standards and norms), or apply because of the physical
location where the work is being performed, mainly the site (e.g. planning and building
regulations, taxes, customs regulations)17.
In practice, lenders and contractors prefer to use English as a ruling language
for drafting and communications. However, under Resolution 283 if an import contract is
drafted in a language other than the state language, the EPC shall be translated into the
state uzbek language. At the same time, parties are entitled to express that the ruling
language in our case English will prevail in case of discrepancies.
According to clause 1.7 of the Silver Book party may assign the whole or any part of
the contract with the prior agreement of the other party, at the sole discretion of such
other party. Nevertheless, under article 313 of the Civil Code allows to novate or assign
contract rights and obligations there are some limitations for Employers who should
comply with laws related to governmental procurements, for example state-owned
entities (SOE).
During the bid process potential contractors are checked through the special due
diligence by the employer’s tender committee and by Center of expertise under the
Ministry of economy and finance18, in particular, contractor’s validity to render the services
and works, financial stability, conflict of interests and other criteria are challenged.
Moreover, the EPC with the foreign contractor would be registered in a bunch of
13
Civil code of the Republic of Uzbekistan (1996), article 666
14
Ibid, article 437
15
Ibid, article 703
16
Please see Clause 4 of the Attachment No.1 of the Resolution 283
17
E.Baker, FIDIC contracts: Law and Practice, 5th edn., Routledge, (2009), p. 46
18
Clause 2 of the Presidential Decree No. 332 dated July 26, 2022
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government systems19, where the detail of the parties included. Considering that
assignment or transfer of contractor’s rights and obligations leads to the step-in of third
party who didn’t participate in bidding process, it would be almost impossible to give
consent by the SOE as employer to such an assignment unless there is a special
governmental permission for that.
In performing the Contract, the contractor and the employer shall comply with all
applicable laws (clause 1.12 of EPC). Definition "Laws" in FIDIC mean “any statute all
national (or state) legislation, statutes, ordinances and other laws, and regulations and by-
laws of any legally constituted public authority”20. The Parties are generally required to
comply not only with laws adopted when EPC was awarded, but also with changes that
might be made to laws during the term of EPC.
Compliance with the laws also assumes an additional duty to obtain the relevant
permits, approvals and licenses set out in the country. Under the FIDIC’s form of contracts
distribution of duties for obtaining necessary permits, licenses and approvals is the
following: the Employer should obtain permits for planning, zoning and building, and the
contractor must obtain all other permissions concerning the works. Such allocations are
mainly intended to hold the contractor liable for construction methods. Still, they also can
be used to control the contractor liable for defects arising from conflicts with building
codes and standards21.
Considering that Silver Book provisions have an advisory nature, parties can “tailor”
particular conditions of the parties and reallocate the duties. Such a situation took place in
particular project in our country. The EPC expressly stated that building permits and
related costs should have been obtained and paid by the Contractor respectively.
Obtaining building permits required paying a fee for construction supervision by the State
Inspection under the Ministry of Construction. The amount of fee was too large, which is
why the contractor refused to pay this fee arguing that under the FIDIC’s Silver Book
building permit cost should be covered by the Employer. Consequently, the State
Inspection sued the Employer and Contractor for non-paying of the fee. Nevertheless, that
EPC conditions address the above obligations to the Contractor, the local court dismissed
this provisions and judged that under uzbek legislation building permit can be obtained
only by the Employer even if contract indicates otherwise. Such a situation demonstrate
that parties cannot “tailor” any condition of the EPC and should firstly check the national
laws restrictions.
In Uzbekistan construction products should satisfy the requirements of construction
standards and norms for civil and technological facilities. During the implementation of the
investment projects, many Contractors have faced difficulties in complying with such uzbek
standards because the design of the plant was made pursuant to international standards.
19
Law of the Republic of Uzbekistan “On governmental procurements”, Article 70
20
E.Baker, FIDIC contracts: Law and Practice, 5th edn., Routledge, (2009), p.50
21
Smith, Currie & Hancock, Common sense Construction Law, 5th edn., John Wiley & Sons, (2015), p.50
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Before February 2020, employers and contractors had to obtain exemption through the
relevant legal act from such obligations, but in order to support projects, the government
has adopted a statute permitting to use of foreign norms and standards of the EU, the UK,
China, Korea, Russian Federation, the USA and Japan in the territory of our state until
202822. However, after this period the issue will comeback, hence it would be more useful
to allow adopt the international standards on permanent basis at lease for projects
involved foreign elements.
Following Clause 5.1 of EPC the Contractor shall be deemed to have scrutinized the
Employer’s Requirements and shall carry out, and be responsible for, the design of the
works and for the accuracy of such Employer’s Requirements. In traditional construction
methods, the Employer contracts with design professionals to transform the employer’s
general concept into a complete set of plans and specifications from site preparation until
completion23. The prepared documents are then used to receive proposals from the
general contractor responsible for constructing the plant based on the finished design.
Saving costs and time during the implementation of project is one of the main goals
of the Employer. In this regard under EPC the Employers prefer the fast-track construction
method. This method phases the design and construction so that construction can begin
on preliminary items of work, such as site work, and foundations, while design of the plant
is still prepared.
Under the Presidential Decree No. UP-5445 dated May 22, 2018, investments
projects on a “turnkey” basis should be implemented through a "fast-track" method
(simultaneous design, procurement and construction works) by creating a consortium
between contractors and design companies under the condition of imposing on the
consortium participants joint responsibility for quality and timely implementation of the
project. The parties should be careful with implementing this Decree because it authorised
the Ministry of Construction to allow contractors to implement the project under EPC
conditions with a fast-track method. Hence, the Decree itself does not give overall permit
to use fast track, there should be separate document from Ministry of Construction.
The main issue that fast track considerably is used only in investment or PPP
projects. Our local constructions are still built based on traditional methods – first of all
approving the design of the project and then starting the construction process. Taking into
account positive experience of fast track in international projects, national construction
industry should be legally allowed to employ this method in internal constructions.
Price and payment are core elements of every EPC. These provisions include not
only costs for construction but also how the price will be paid. By contrast to the Red book
22
Attachment No.1 to Presidential Decree No.UP-5963 dated March 13, 2020 “On additional measures to deepen reforms in the
construction industry of the Republic of Uzbekistan”
23
Smith, Currie & Hancock, Common sense Construction Law, 4th edn., John Wiley & Sons, (2009), p.10
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where the remeasurement approach works, the Silver book employ a lump-sum price
approach.
Under lump-sum price-based EPC, the contractor is paid the fixed price which
includes the cost of works, construction materials, cost plus profit (Sub-clause 14.1(a) of
the EPC), all applicable taxes, duties and fees (Sub-clause 14.1(b) of the EPC). The lump
sum cannot be adjusted or changed due to the fluctuations of the prices related to the
labour wages, costs of materials, rates of the taxes. However, the fixed price in EPC can be
adjusted in case of changes in legislation, the construction extension time due to force-
majeure events or variations initiated by the employer or engineer. In Uzbekistan parties
should be aware that any amendments of the price should be made in written form by
execution of relevant supplemental agreement to the EPC, because they are subject to
registration by the official organs24.
There is a limitation to adjusting the price for Employers represented by SOEs or
governmental organizations. In accordance with article 34 of the Law «On governmental
procurements» parties can increase the total cost of the contract only by 10%. The Parties
should obtain exemption by adopting a Presidential Decree or Resolution of the Cabinet of
Ministers to avoid this restriction.
Another issue that causes difficulties in implementing the EPC contracts is the
advance payment. According to the sub-clause 14.2.2 of EPC the employer shall make the
advance payment within 14 days after receiving Performance Security and AP guarantee.
The advance payment is repaid through percentage deductions in interim payments within
the term of the contract. It means that the paid funds will be repatriated only after
completing the works. However, it contradicts to the rules in the Law “On currency
regulation”. Subject to the Article 11 of the said Law, repatriation of funds under the
import contracts means that the importer must ensure goods, works and services are
received and accepted within 180 days after the payment. Taking into account the long-
term of the EPC (up to 3-4 years) and the fact that the full amount of advance payment will
be repatriated after the completion of the contract, the employer would automatically in
breach of the Law “On currency regulation”. Obviously this risk should be readdressed by
adopting the relevant changes to the actual legislation.
In conclusion the recent reforms in the field of construction law illustrate our
government's intention to develop international construction standards by adopting legal
acts for simplifying the implementation of EPC. However, there are still legal limitations
that must be revised and addressed to prevent parties from violating laws and encourage
using of a “turnkey” contract as a delivery method of construction.
Firstly, the EPC should be recognised as a separate type of foreign trade (import)
contract which will legally allow parties to avoid current restrictions under Resolution 283.
24
The Resolution of Cabinet of Ministers No.283 dated May 14, 2020 “On measures to further improve the monitoring of foreign
trade transactions in the Republic of Uzbekistan”, clause 5
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Secondly, the Employers, which have a status of SOEs, should have the right to give
their consent to assign rights and obligations of the Contractor to the third parties as well
as to increase the total price of the EPC by more than 10% if necessary
Thirdly, it is recommended to amend the currency laws of the state by including
exemption clauses related to the rules of repatriations of advance payment paid by the
employer to the contractor under the EPC. Author suggests to use an Advance Payment
bond as a guarantee that paid funds would be repatriated.
Fourth, it should be permitted to EPC contractor to design the projects based on
international standards on permanent basis.
Fifth, under EPC contract the Contractor should be bind to pay all fees necessary to
obtain any permits.
Sixth, parties should be allowed to use fast track method not only in international
constructions projects but also in local projects.
Overall, even if turnkey projects can be rather costly for the owner, this method of
delivery should be more developed in our country considering that it provides an
opportunity for employers to be a little involved in the project and be on the safety side
because the contractor takes the whole responsibility for design, construction,
procurements and outcome of the project.
BIBLIOGRAPHY:
12. Smith, Currie & Hancock, Common sense Construction Law, 5th edn., John Wiley
& Sons, 2015.
ONLINE SOURCES:
13. “FIDIC Comparison between Red Book, Yellow Book, Silver Book” available at
https://legalbusinessforms.wordpress.com/2015/05/08/fidic-comparison-between-red-
book-yellow-book-silver-book/ accessed on 14.03.2023.
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