The Guide To Construction Arbitrator 3rd Edition

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Global Arbitration Review

The Guide to Construction Arbitration General Editors Stavros Brekoulakis and David Brynmor Thomas QC

Third Edition

© Law Business Research

The Guide to Construction Arbitration Third Edition

Editors Stavros Brekoulakis and David Brynmor Thomas QC

Reproduced with permission from Law Business Research Ltd This article was first published in October 2019 For further information please contact [email protected]

gar © Law Business Research

Publisher David Samuels

Account Manager Bevan Woodhouse

Editorial Coordinator Hannah Higgins

Head of Production Adam Myers

Deputy Head of Production Simon Busby

Copy-editor Claire Ancell

Proofreader Rakesh Rajani Published in the United Kingdom by Law Business Research Ltd, Meridian House, 34-35 Farringdon Street, London EC4A 4HL, UK © 2019 Law Business Research Ltd www.globalarbitrationreview.com No photocopying: copyright licences do not apply. The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors’ firms or their clients. Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of September 2019, be advised that this is a developing area. Enquiries concerning reproduction should be sent to Law Business Research, at the address above. Enquiries concerning editorial content should be directed to the Publisher – [email protected] ISBN 978-1-83862-211-4 Printed in Great Britain by Encompass Print Solutions, Derbyshire

Tel: 0844 2480 112

© Law Business Research

Acknowledgements The publisher acknowledges and thanks the following firms for their learned assistance throughout the preparation of this book:

39 ESSEX CHAMBERS 3 VERULAM BUILDINGS ADVOKATFIRMAN RUNELAND AB AKIN GUMP STRAUSS HAUER & FELD LLP ANKURA ARGOS CONSTRUCTION BÄR & KARRER CENTRE FOR COMMERCIAL LAW STUDIES, QUEEN MARY UNIVERSITY OF LONDON CLIFFORD CHANCE CORRS CHAMBERS WESTGARTH COVINGTON & BURLING LLP CROWN OFFICE CHAMBERS DEBEVOISE & PLIMPTON LLP DECHERT (PARIS) LLP HERBERT SMITH FREEHILLS LLP KING & SPALDING

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KPMG SA MATTOS FILHO,VEIGA FILHO, MARREY JR. E QUIROGA ADVOGADOS PAKSOY QUINN EMANUEL URQUHART & SULLIVAN LLP SCHELLENBERG WITTMER LTD THREE CROWNS LLP TOWER CHAMBERS VINSON & ELKINS WHITE & CASE LLP ZHONG LUN LAW FIRM ZULFICAR & PARTNERS LAW FIRM

© Law Business Research

Contents

Introduction�� 1 Stavros Brekoulakis and David Brynmor Thomas QC

Part I: International Construction Contracts 1

The Contract: the Foundation of Construction Projects�� 7

Aisha Nadar

2

Parties to a Construction Contract�� 18

Scott Stiegler

3

Bonds and Guarantees�� 27

Jane Davies Evans

4

Pricing and Payment�� 43

Tony Dymond and Sophia Burton

5

Introduction to the FIDIC Suite of Contracts�� 54

Ellis Baker, Anthony Lavers and Rebecca Major

6

Allocation of Risk in Construction Contracts�� 74

Ellis Baker, Richard Hill and Ibaad Hakim

7

Contractors’ Claims, Remedies and Reliefs�� 94

James Bremen and Leith Ben Ammar

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Contents

8

Employers’ Claims and Remedies��105

James Bremen and Mark Grasso

9 Delay and Quantum: the Role of Delay Analysis Programmes and Financial Methods for the Computation of Costs and Damages in Construction Arbitration��114

Jean-François Djanett and Jean-Luc Guitera

10

Comparative Approaches to Concurrent Delay��127

Hamish Lal, Brendan Casey and Josephine Kaiding

Part II: Dispute Resolution for Construction Disputes 11

Claims Resolution Procedures in Construction Contracts��145

Philip Norman and Leanie van de Merwe

12

Dispute Boards��155

Lindy Patterson QC and Nicholas Higgs

13 Alternative Dispute Resolution in Construction and Infrastructure Disputes��165

Marion Smith QC, Hannah McCarthy and Joe-han Ho

14

Suitability of Arbitration Rules for Construction Disputes��172

David Kiefer and Adrian Cole

15

Agreements to Arbitrate Disputes in Construction Contracts��179

Paul Darling QC and Samar Abbas

16

Subcontracts and Multiparty Arbitration in Construction Disputes��188

Stavros Brekoulakis and Ahmed El Far

17 Interim Relief, Including Emergency Arbitrators in Construction Arbitration��201

Philip Norman and Leanie van de Merwe

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Contents

18 Organisation of the Proceedings in Construction Arbitrations: General Considerations and Special Issues��212

Pierre-Yves Gunter and Anya Marinkovich

19

Expert Evidence in Construction Disputes: Arbitrator Perspective��226

Nathalie Voser and Katherine Bell

20

Expert Evidence in Construction Disputes: Expert Witness Perspective��236

Guy Elkington and Paul Taplin

21

Documents in Construction Disputes��246

Bartosz Kruz˙ewski and Robert Moj

22 Awards��257

Roger ter Haar QC, Crispin Winser and Maurice Holmes

Part III: Select Topics on Construction Arbitration 23

Investment Treaty Arbitration in the Construction Sector��273

Tony Dymond, Gavin Chesney and Laith Najjar

24

Construction Arbitrations in the Nuclear Sector��288

Jane Davies Evans

25

Energy Sector Construction Disputes��301

Scott Stiegler and James L Loftis

26

Construction Arbitration and Concession Contracts��309

Philip Dunham and José Manuel García Represa

27

Construction Arbitration and Turnkey Projects��320

James Doe, David Nitek and Noe Minamikata

28 Construction Arbitration in the Context of China’s Belt and Road Projects��330

Aisha Nadar

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Part IV: Regional Construction Arbitration 29

Construction Arbitration in Australia��345

Andrew Stephenson, Lee Carroll and Lindsay Hogan

30

Construction Arbitration in Turkey��361

Serdar Paksoy and Simel Sarıalioğlu

31

Construction Arbitration in the MENA Region��373

Mohamed S Abdel Wahab

32

Construction Arbitration in Brazil��411

Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira

33

Construction Arbitration in Mainland China and Hong Kong��423

Wei Sun, Adela Mao, Zhao Yingfu and Wang Ziyue

About the Authors��445 Contact Details��469

© Law Business Research

Introduction

Stavros Brekoulakis and David Brynmor Thomas QC1

It is a pleasure to introduce the third edition of The Guide to Construction Arbitration. The Guide has evolved since its first edition to form, we hope, a valuable resource for clients, in-house counsel, experts and external counsel involved in construction arbitration, whether they are dealing with construction arbitration for the first time or have extensive experience in it. The construction industry is a major contributor to economic growth worldwide. In the United Kingdom it has been estimated that every £1 investment in construction output generates £2.84 in total economic activity.2 In India, the BJP, which now forms the government, proposed infrastructure spending of 100 lakh crore rupees (over US$1,300 billion) over the next five years in its 2019 manifesto. The industry covers a wide range of different types of projects, from building offices, factories and warehouses, shopping malls, hotels and homes to major infrastructure projects that involve more complex civil engineering works such as the construction of harbours, railroads, mines, highways and bridges. Other construction projects involve specialist engineering works such as shipbuilding; bespoke plant and machinery such as turbines, generators and aircraft engines; or works that aim to support energy projects such as upstream oil and gas projects or renewables (wind, wave, solar) and nuclear plants. These complex construction projects are rarely completed without encountering risks that lead to changes to the time and cost required for their execution.Those changes in turn give rise to disputes, the majority of which (possibly the vast majority) are submitted to alternative dispute resolution (ADR) processes and eventually arbitration. The reasons that lead construction parties to choose ADR and arbitration owe as much to the (perceived or

1

2

Stavros Brekoulakis is a professor and the director of the School of International Arbitration at Queen Mary University of London and an associate member of 3 Verulam Buildings. David Brynmor Thomas QC is a barrister at 39 Essex Chambers and visiting professor at Queen Mary University of London. Report of Economic Consultants LEK for the UK Contractors Group.

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Introduction

real) inefficiencies of national courts as to the (perceived or real) advantages of out-of-court dispute resolution. For example, with a few notable exceptions such as the Technology and Construction Court in England and Wales, most national courts lack construction specialist departments or judges with construction expertise and experience. Arbitration, on the other hand, allows construction parties to appoint arbitrators with the necessary specialised knowledge and understanding of complex construction projects. Importantly, arbitration allows construction parties to ‘design and build’ (to stay in tune with the theme of The Guide to Construction Arbitration) the dispute resolution procedure in a way that addresses a number of procedural challenges in construction arbitrations, including the typically large volume of documentary evidence, the most effective use of experts to address delay and quantum, as well as complex technical issues, and programme analysis. While the use of some ADR methods such as dispute adjudication boards has spread relatively recently,3 arbitration has traditionally been included as the default dispute resolution mechanism for disputes arising out of international construction contracts.4 A question that often arises is: what is special about international construction disputes that they require specialist arbitration knowledge? In the first place, construction projects are associated with considerably more risk than any other typical commercial transaction, both in terms of the amount of risk allocated under them and the complexity of that risk. Their nature and typically long duration lead to risks including unexpected ground and climate conditions, industrial accidents, fluctuation in the price of materials and in the value of currency, political risks (such as political riots, governmental interventions and strikes) and legal risks (such as amendments in law or failure to secure legal permits and licences). Further, time is very often critical in construction projects. An Olympic Games stadium must be delivered before the hard deadline that is the date of the games. If a shopping mall is not ready for the commercially busy Christmas period, significant amounts may be lost in seasonal retail trade. The late delivery of a power station can disrupt the project financing used to fund it. Moreover, arguments as to causation, especially of delay, in construction projects are typically complex. Many phases of a construction project can run concurrently, which often makes it difficult to identify the origins and causes of delay. Legal concepts such as concurrent delay, critical paths and global claims are unique to construction disputes. Equally, the involvement of a wide number of parties with different capacities and divergent interests adds to the complexity of construction disputes. A typical construction project may involve not only an employer and a contractor, but several subcontractors, a project manager, an engineer and architect, specialist professionals such as civil or structural engineers and designers, mechanical engineers, consultants such as acoustic and energy consultants, lenders and other funders, insurers and suppliers. A seemingly limited dipute arising on one subcontract may lead to disputes under other subcontracts and the main construction contract, and may have financial and legal consequences for many of the above parties, triggering disputes under much wider documentation such as shareholder agreements, joint operating agreements, funding documents and concessions. That often

3 4

Dispute adjudication boards were first introduced in FIDIC contracts (in the Orange Book) in 1995 and in ICE contracts as recently as in 2005. Arbitration has been included in FIDIC contracts since the publication of the first FIDC contract in 1957.

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Introduction

gives rise to issues about multiparty arbitration proceedings and third-party participation in arbitration proceedings. Another important feature of construction disputes is the widespread use of standard forms, such as the FIDIC or the ICE conditions of construction contracts. Efficient dispute resolution requires familiarity and understanding of the, often nuanced, risk allocation arrangements in these standard forms. Good knowledge of construction-specific legislation is necessary too. While the resolution of most construction disputes will depend on the factual circumstances and the provisions of the contractual agreement of the parties, legal issues may often arise in relation to statutory (frequently mandatory) warranty and limitation periods for construction claims, statutory direct claims by subcontractors against the employers,5 statutory prohibition of the pay-when-paid and pay-if-paid provisions6 and, of course, mandatory legislation on public procurement.7 Finally, as already mentioned, construction disputes are technically complex, requiring efficient management of challenging evidentiary processes, including document management, expert evidence, programme analysis and quantification of damages. The evidentiary challenges in construction disputes have given rise to the use of tools, such as Scott Schedules (used to present fact intensive disputes in a more user friendly format), that are unique in construction arbitrations.8 It is for all these reasons that alternative dispute resolution and arbitration of construction disputes require special focus and attention, which is what The Guide to Construction Arbitration aims to provide. The Guide to Construction Arbitration is designed to appeal to different audiences. The authors of the various chapters are themselves market-leading experts, so it can provide a ready resource for specialist construction arbitration practitioners who already have a view of the information they seek. Beyond that, it has been compiled and written to offer practical information to practitioners who are inexperienced in international construction contracts or dispute resolution in construction disputes. For example, in-house lawyers who may be experienced in negotiating and drafting construction contracts but not in running disputes arising from them, or construction professionals who may have experience in managing construction projects but may lack experience in the conduct of construction arbitration, will find The Guide to Construction Arbitration useful. Lawyers in private practice who are familiar with arbitration, but lack experience in construction will also benefit. Last but not least, students who study construction arbitration will find it to be a helpful source of information. While the main focus of The Guide to Construction Arbitration is the resolution, by arbitration, of disputes arising out of construction projects, Part I is devoted to important substantive aspects of international construction contracts.To understand how construction disputes are resolved in international arbitration, one has to understand how disputes arise out of a typical construction contract in the first place, and what are the substantive rights, obligations and remedies of the parties to a construction contract.

5 6 7 8

For example, in France, Law No. 75-1334 of 31 December 1975 on Subcontracting. For example, in the United Kingdom with the UK Housing Grants Construction and Regeneration Act 1996. For example, EU Directive 2014/24. J. Jenkins and K. Rosenberg, ‘Engineering and Construction Arbitration’, in Lew et al. (editors) Arbitration in England, Kluwer (2013).

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Introduction

Thus, this book is broadly divided in four parts. Part I examines a wide range of substantive issues in construction contracts, such as The Contract: the Foundation of Construction Projects, Bonds and Guarantees, an Introduction to the FIDIC Suite of Contracts,Allocation of Risk in Construction Contracts, Contractors’ and Employers’ Claims, Remedies and Reliefs. Chapters valuably address the quantification of delays, the role of programmes and the various methods used for the computation of costs and damages in construction arbitrations, while an entire chapter is devoted to an examination, from a comparative law perspective, of the practically critical topic of concurrent delay. Part II then focuses on dispute resolution processes in construction disputes.The aim of this Part is to look into special features of construction arbitration, and the following chapters are included: Suitability of Arbitration Rules for Construction Disputes, Subcontracts and Multiparty Arbitration in Construction Disputes, Interim Relief, including Emergency Arbitrators in Construction Arbitration, Organisation of the Proceedings in Construction Arbitrations, Documents in Construction Disputes and Awards, and the role and management of expert evidence. Part III examines a number of select topics in international construction arbitration by reference to some key industry sectors and contract structures, including the nuclear sector, energy sector, concession contracts and turnkey projects. Part IV examines construction arbitration in specific jurisdictions of particular interest and with very active construction industries We have taken the opportunity to add to the chapters in this third edition, to address matters identified by users of the first two editions. These include chapters examining dispute boards, ADR in construction contracts, agreements to arbitrate and interim relief in detail. There are chapters on pricing and payment, investment treaty arbitration in the construction sector, a discussion of the typical parties to a construction contract, further discussion of the organisation of expert testimony and a chapter on construction arbitration in Brazil. Overall, the third edition of The Guide to Construction Arbitration builds upon the success of the first two editions and has been further expanded. The structure and organisation of The Guide to Construction Arbitration is broadly based on the LLM course on International Construction Contracts and Arbitration that we teach at Queen Mary University of London. The course was first introduced by HH Humphrey Lloyd in 1987 and was taught by him for more than 20 years. Humphrey has been an exceptional source of inspiration for hundreds of students who followed his classes, and we are personally indebted to him for having conceived the course originally and for his generous assistance when he passed the course on some years ago. We want to thank all the authors for contributing to The Guide to Construction Arbitration. We are extremely fortunate that a group of distinguished practitioners and construction arbitration specialists from a wide range of jurisdictions have agreed to participate in this project. We further want to thank Gemma Chalk, Bevan Woodhouse and Hannah Higgins for all their hard work in the commission, editing and production of this book. They have made our work easy. Special thanks are due to David Samuels and GAR for asking us to conceive, design and edit this book. We thoroughly enjoyed the task, and hope that the readers will find the result to be useful and informative.

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Part I International Construction Contracts

© Law Business Research

1 The Contract: the Foundation of Construction Projects Aisha Nadar1

An introduction through history Construction is one of the oldest industries; it is a pivotal industry2 that has been entrusted throughout the generations with the task of transforming society’s ideas and needs into workable infrastructure solutions. Prior to the Industrial Revolution, each construction project3 was undertaken by a master builder who was tasked with both design and construction;4 and as far back as Babylonian times, the relationship between the owner and the builder was governed by a detailed code.5

1 2

3

4

5

Aisha Nadar is a partner at Advokatfirman Runeland AB. World Trade Organization Council for Trade in Services, ‘Construction and Related Engineering Services, Background Note by the Secretariat’, 8 June 1998 (www.wto.org/english/tratop_e/serv_e/w38.doc) states: With its close link to public works and hence the implementation of fiscal policy, it has always been considered as a strategically important industry for creating employment and sustaining growth. For the developing economies, the construction sector carries particular importance because of its link to the development of basic infrastructure, training of local personnel, transfers of technologies, and improved access to information channels. J.R. Turner, The Handbook of Project-based Management: Improving the Processes for Achieving Strategic Objectives, Second Edition, McGraw-Hill (1999), defines a construction project in the following manner: [A]n endeavor in which human, material and financial resources are organized in a novel way; to undertake a unique scope of work of given specification, within constraints of cost and time, so as to achieve…the delivery of quantified and qualitative objectives. S.G. Bernard, Men at Work: Public Construction, Labor, and Society at Middle Republican Rome, 390–168 B.C. (2012), p.110. And see James O’Brien, ‘Managing Construction Projects’, Project Management Quarterly, March 1975 (www.pmi.org/learning/library/managing-construction-projects-major-roles-5776). N.G. Bunni, Risk and Insurance in Construction, Second Edition, Spoon Press, London (2003). Also, see the Hammurabi records: ‘an entire body of laws, arranged in orderly groups, so that all men might read and know

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The Contract:The Foundation of Construction Projects

The advent of specialisation and freedom of contract, brought about by the Industrial Revolution and documented by economists such as Adam Smith,6 resulted in owners no longer relying solely on the master builder to take their project from concept to completion, but rather on a cadre of specialists.7 This development resulted in the owner having to enter into individual contracts8 with each of the project participants – contracts that governed the specific role each would play in relation to project execution.9 This approach continues today, with the owner10 creating a mosaic of contracts that includes contracts with the financiers, designers, suppliers, insurance providers and, at the heart of this mosaic, the construction contract – the contract between the owner and the contractor.

what was required of them. The code was carved upon a black stone monument, eight feet high, and clearly intended to be reared in public view.’ Source: Charles F. Horne, avalon.law.yale.edu/ancient/hammint.asp. Law Code of Hammurabi (1780 B.C.) relating to construction 228. If a builder build a house for some one and complete it, he shall give him a fee of two shekels in money for each sar of surface. 229. If a builder build a house for some one, and does not construct it properly, and the house which he built fall in and kill its owner, then that builder shall be put to death. 230. If it kill the son of the owner the son of that builder shall be put to death. 231. If it kill a slave of the owner, then he shall pay slave for slave to the owner of the house. 232. If it ruin goods, he shall make compensation for all that has been ruined, and inasmuch as he did not construct properly this house which he built and it fell, he shall re-erect the house from his own means. 233. If a builder build a house for some one, even though he has not yet completed it; if then the walls seem toppling, the builder must make the walls solid from his own means. 234. If a shipbuilder build a boat of sixty gur for a man, he shall pay him a fee of two shekels in money. 235. If a shipbuilder build a boat for some one, and do not make it tight, if during that same year that boat is sent away and suffers injury, the shipbuilder shall take the boat apart and put it together tight at his own expense.The tight boat he shall give to the boat owner. 6 R. Pound, ‘Liberty of Contract’, Yale Law Journal 18 (1909) pp. 454–487. 7 See P.L. Bruner, ‘The Historical Emergence of Construction Law’, William Mitchell Law Review 34(1) (2007) Article 6 (citations omitted): Beginning in 1857, the founding of the American Institute of Architects (AIA), which championed the practice of architecture as a specialised profession distinct from construction contracting, heralded the eclipse of the architect’s historic role as ‘master builder’ – the single person in charge of design and construction. Following the founding of the AIA, engineering associations were formed to promote engineering as a profession, separate from both architectural design and construction contracting. In turn, these associations championed recognition of a number of professional engineering sub-specialties –electrical, mechanical, structural, civil, and geotechnical – to address emerging technical disciplines. Professional specialization accelerated after legislative enactment of state design-professional registration laws, beginning with the state of Illinois in 1897. By the mid-twentieth century, the architectural profession was perceived as having abandoned its age-old role as ‘master builder’. 8 J. Sweet, ‘Standard Construction Contracts: Academic Orphan’, 31 Construction Law 38 (2011). In this piece, the author states: Those who design, usually architects or engineers, make contracts with those for whom they work, such as their clients, as well as those entities who work for them, such as consultants. Builders, usually called contractors, make contracts with those who engage them, called owners; those who work for them, such as subcontractors; and those who provide materials, called suppliers. 9 See, generally,Vera Van Houtte, ‘The Role and Responsibility of the Owner’. 10 Many different terms are used internationally to denote the parties to a construction contract. The owner can be referred to as ‘employer’, ‘client’or ‘purchaser’ and the contractor may be referred to as the ‘constructor’ or the ‘client’s contractor party’, but throughout this work, the parties will be referred to as the owner and the contractor.

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The Contract:The Foundation of Construction Projects

The international construction contract The terms ‘contract’ and ‘construction’ are defined in the United States Federal Acquisition Regulations11 (FAR): • ‘contract’ means a mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them; and • ‘construction’ means construction, alteration or repair of buildings, structures, or other real property. Contracts for construction, alteration or repair of buildings, structure or other real property must clearly articulate both the technical aspects of the construction and the legal relationships between the parties. Construction projects can be differentiated from other projects, such as manufacturing, in that they have unique attributes. Such attributes include the following: • construction projects are unique one-off projects that are often carried out on-site in remote locations, while being exposed to environmental hazards; • taking a construction project from conception to completion brings together a myriad of organisations and individual specialisations through ‘virtual teaming’; and • construction projects have a development and execution life cycle that is generally measured in years. These unique characteristics were clearly noted by an English civil engineer and barrister, E.J. Rimmer, almost 80 years ago: …contract works are to be constructed in or erected and fixed on to land, and cannot be rejected and sent back to the Contractor if they prove to be unsatisfactory; that the works are to be carried out in open air under unstable conditions with material and labour of varying quality; that the conditions of excavation and foundation cannot be entirely foreseen until the ground is opened up; that execution of the works may result in damage to property belonging to other persons; that works of specialists may have to be carried out concurrently with work done by the general contractor; that the period of the contract may extend over several years and the Employer may desire the use of completed parts of the work before final completion of the whole; and that the amount of money involved is often such as to imperil the financial resources of a contractor who has made an unwise tender.12

11 FAR 2.101. The FAR specifically states that for purposes of this definition, the terms ‘buildings, structures, or other real property’ include, but are not limited to, improvements of all types, such as bridges, dams, plants, highways, parkways, streets, subways, tunnels, sewers, mains, power lines, cemeteries, pumping stations, railways, airport facilities, terminals, docks, piers, wharves, ways, lighthouses, buoys, jetties, breakwaters, levees, canals, and channels. Construction does not include the manufacture, production, furnishing, construction, alteration, repair, processing or assembling of vessels, aircraft, or other kinds of personal property (www.acquisition.gov/ far/html/Subpart%202_1.html). 12 As quoted by Christopher R. Seppälä, in his paper delivered at the FIDIC/ICC International Construction Contracts and Dispute Resolution conference in Cairo, Egypt, 17 March 2005.

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The Contract:The Foundation of Construction Projects

These characteristics result in construction projects being particularly sensitive to an extremely large spectrum of risks;13 the spectrum is extended in the international arena.14 Hence, successful project execution dictates that this risk must be managed and that parties settle the issues associated with project risk through contract provisions.15 Management of project risk will require that the owner undertake a comprehensive and systematic approach to identifying, assessing and developing a risk mitigation strategy, which may include the transfer of risk to other parties.16 There is a close relationship between risk management and the characteristics of a construction contract: One of the main areas where risk management can be applied is in developing the conditions of contract. A clear definition for the risks and their allocation provides incentive for the efficient management of risks as they occur during the construction process. Each party to the contract has clear understanding of their rights, duties and liabilities. For this to occur conscious decision must be made in the drafting of any new contract to appraise each party of the consequences of each risk occurring.17

As such, in a comparative look at other types of contracts, one will find that a construction contract contains more wording, provided to deal specifically with the risks that might arise. Although it has been noted that, ideally, risks should be allocated to the party in the best position to handle this risk: 13 N.G. Bunni, The FIDIC Forms of Contract, Third Edition, Blackwell Publishing (2005) pp. 94–95. Also, see Footnote 5, Chapter 3 for a comprehensive review of the risk exposure in a construction project. 14 See P.L. Bruner, ‘Allocation of Risks in International Construction: Revisiting Murphy’s Law, the FIDIC Conditions and the Doctrine of Force Majeure’, International Construction Law Review 259 (1986): International construction presents the greatest business risks (and presumably rewards) in the world. In undertaking to construct massive monuments to mankind’s ingenuity in distant cities, jungles, desserts, mountains and seas, international contractors confront a multitude of risks: (1) management of multi-national parties; (2) language barriers to communication; (3) variations in the availability, productivity, and skill of labor; (4) foreign customs and practices; (5) potential political and economic instability; (6) uncertainties of weather; (7) unexpected geological conditions; (8) extended lines of communications and supply; (9) differing quality and suitability of building materials; (10) currency fluctuations and restrictions; (11) unfamiliar forms of disease, plants, insects and animal life; (12) different civil and criminal laws; (13) possible arbitrary government regulation; (14) difficulties in obtaining adjudication of claims and enforcement of contract rights. 15 See John Burrows, The Principles of the Law of Contract: ‘We must not expect too much of the law of contract, particularly in complex transactions such as those in the construction industry.’ And see the UNCITRAL Legal Guide on Drawing Up International Contracts for the Construction of Industrial Works (1987), p. 1: Contracts for the construction of industrial works are typically of great complexity, with respect both to the technical aspects of the construction and to the legal relationships between the parties.The obligations to be performed by contractors under these contracts normally extend over a relatively long period of time, often several years. In these and other ways, contracts for the construction of industrial works differ in important respects from traditional contracts for the sale of goods or the supply of services. Consequently, rules of law drafted to govern sales or services contracts may not settle in an appropriate manner many issues arising in contracts for the construction of industrial works. It may be desirable or advisable for the parties to settle these issues through contract provisions. 16 Risk Analysis and Management for Projects (RAMP), Third Edition, Institute of Civil Engineers and the Actuarial Profession (2014). 17 P.H. McGowan et al., ‘Allocation and Evaluation of Risk in Construction Contracts (1992, Chartered Institute of Buildings),’ Occasional Paper No. 52 of The Charted Institute of Building, as quoted in K. Pickavance, Delay and Disruption in Construction Contracts, LLP Reference Publishing (1997) pp. 13–14.

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The Contract:The Foundation of Construction Projects

The ideal contract – the one that will be most cost effective – is one that assigns each risk to the party that is best equipped to manage and minimise the risk, recognizing the unique circumstances of the project…. This can be accomplished by assigning each risk addressed in the contract to the party that (1) has a comparative advantage in regard to the risk bearing ability; and (2) has control over the risk.18

Nael Bunni19 states that, in addition to the general principles of control of the risk and ability to bear it, the allocation of the risks between the contracting parties should also consider: ‘(a) which party could best foresee that risk; and (b) which party most benefits or suffers when the risk eventuates’. Thus, a construction contract will set the manner in which the project risks will be handled through provisions that allocate the project risks between the parties, and will offer specific remedies in the event of breach of contract or the occurrence of specified events.20 They also provide for procedures that must be followed by parties wishing to avail themselves of such remedies.21 In addition, in light of the possible change in design and technology, the construction contract may also provide the owner with the right to order changes and the mechanism for achieving them, in advance.22 The owner then selects a project delivery method and a contract type that mirror the risk profile of the project and are congruent with the risk allocation strategy.The construction contract signed between the owner and the contractor will be a reflection of both the project delivery method and contract type (see below).

Project delivery methods and types of construction contract In deciding on both the project delivery method and the contract type, the owner must consider who will undertake the essential functions required to take the project from concept to completion,23 and how the project risk, including the risk inherent in valuing and paying for the work, will be handled. Construction projects are becoming increasingly complex, and this challenge is met with innovation, including a proliferation of project delivery strategies.

18 See, for example, R.J. Smith, ‘Risk Identification and Allocation: Saving Money by Improving Contracts and Contracting Practices’, International Construction Law Review (1995) 40. 19 See Footnote 5, above. 20 N.G. Bunni, ‘A Comparative Analysis of the Claim and Dispute Resolution Provisions of FIDIC’s 1999 Major Forms of Contract Against its Earlier Form’, an unpublished paper delivered dated January 2006. The remedy usually includes time or money, but can also extend to suspension and even termination. 21 Ibid. 22 J. Burrows, The Principles of the Law of Contract: There is of course much practical sense in having a single administrator and decision-maker. But what this also achieves is the advance prescription and objective certainty the law requires.The contract provides in advance for the possibility of variation, and provides a single mechanism removed from the parties for achieving it. 23 Taking a construction project from conception to completion involves a number of essential functions, including planning and feasibility studies, design, construction, management, commissioning, and operation.

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One distinguishing factor between various delivery methods is who will carry the design responsibility. This concerns the level of the contractor’s involvement during the design phase.24 The traditional method of construction contracting (‘design-bid-build’) is the project delivery method in which design and construction are contracted for separately.The owner will carry out the design and only enter into a construction contract subsequent to the completion of the design. This type of project delivery typically involves a sequential process in which the contractor is selected by means of competitive tender that includes a fully detailed design.The resulting construction contract will only include the obligation for the contractor to construct the work designed by the owner in accordance with the owner’s detailed specifications and drawings. Alternatively, the owner may allocate the design function to the contractor.This method of project delivery is commonly referred to as the ‘design-build’, when design and construction are combined in a single contract with a single contractor. Design-build project delivery relies on a performance requirements-based contract – the intention is to tell the contractor what is needed, not how to achieve the desired product. The design is accomplished in accordance with performance requirements after the award of the construction contract, with the contractor given broad leeway to design the job in an efficient manner. The design-build family of project delivery includes the engineering, procurement and construction (EPC)/Turnkey type of project delivery, which endeavours to transfer greater functions, project controls and risk to the contractor. EPC/Turnkey contracting seeks to establish a single point of responsibility, achieving the necessary engineering and design work, procuring the equipment and materials identified within those designs and constructing a facility that is ready to be used by the owner at the ‘turn of a key’. Once the owner has determined the delivery method, they must turn their focus to determining the type of contract. The choice of type of contract is intimately linked to the overall payment and pricing structure that will govern the transaction. Contract types are grouped into two broad categories: fixed-price contracts and cost-reimbursement contracts. When placed on a continuum, the contract types can range from firm-fixed-price to cost-plus-fixed-fee. In fixed-price contracts, the cost risk is transferred to the contractor, with the contractor assuming full responsibility for the performance costs and resulting profit (or loss) in firm-fixed-price contracts. However, in cost-plus-fixed-fee type contracts the owner retains the cost risk, with the contractor assuming minimal responsibility for the performance costs, and the negotiated fee (profit) is fixed. In between are various derivative types of contracts, including the re-measurement type contract. The three basic types of contract that are most commonly encountered in construction are: • fixed-price/lump sum; • re-measurement; and • cost-plus.

24 ‘Design’ is the process of defining the construction requirement, producing the technical specifications and drawings, and preparing the construction cost estimate. See footnote 11.

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Fixed-price or lump sum contracts These are contracts where the contractor is paid a pre-agreed sum of money when he or she has successfully performed all of his or her obligations under the contract. The contract sum is determined and specified in the contract agreement. Payment is made in pre-determined stages and the contractor assumes the risk for both performance and price. Entering a fixed-price contract requires that the contractor commit to complete the whole of the work for a specific sum, which will require that the contractor fully understands all of his or her future obligations and is able to price them during the tender phase. Entering into a fixed-price contract with a high degree of uncertainty at the tender stage will require the contractor to build a significant premium into his or her tender pricing. Fixed-price contracts, while providing the owner with a higher degree of cost certainty, demand a greater investment in preparing a complete tender documentation.

Re-measurement During the tendering phase, the contractor is required to give a fixed price for each item of work in accordance with the owner’s estimated quantities. During contract execution, the work completed by the contractor is measured and the amount that the contractor is paid is determined as a product of the measured quantities and the contractor’s price for each item. With this type of contract, the employer assumes the risk for the quantity and the contractor assumes the risk for the pricing.

Cost-plus Under a cost-plus contract, the owner retains the cost risk and the contractor is paid his or her costs including overheads and profit. Cost-plus is more flexible in that it does not require full information at the time of tender, but this flexibility comes with greater price uncertainty for the owner. This type of contract is particularly useful in cases where the scope of the work is not well defined at tender stage, or where the kinds of labour, material and equipment needed to meet the owners requirements are uncertain. Administration of cost-plus type contracting also comes at a high cost because complete records of all time and materials spent by the contractor on the work must be maintained and must be verifiable.

Standard form contract Globalisation requires optimisation in the allocation of resources and the facilitation of international trade.25

25 While the global construction industry does not enjoy the same economies of scale as does manufacturing, reduction of transaction costs is still paramount. In manufacturing, efficient allocation of resources requires making sure that the right goods are at the right place, at the right time, to support production requirements, while economies of scale are achieved when the production batch size is sufficiently large as to allow distribution of your fixed costs over more products sold – the larger your market, the larger number of products that can be produced in one run without retooling, hence the cheaper the cost of producing each individual item (fixed costs can be divided over a larger number of items). See J.B. ReVelle, Manufacturing Handbook of Best Practices: An Innovation, Productivity, and Quality Focus, CRC press (2002) for an in-depth explanation of supply chain management.

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Standard forms of contracts are used by every industry to aid in reducing costs, both by reducing costs that would result from the development of a contract and the cost of uncertainty as to what their bargain contains. Standard forms of contract have a long history of use in the construction industry.They provide for lower transaction costs, and clarity and consistency of terms.26 Standard form contracts, for use in the domestic construction market, have been published by professional institutions as far back as the 19th century. In 1888, the American Institute of Architects (AIA)27 published their first standard contract; this was followed in 1903 by the Royal Institute of British Architects.28 The first standard form of contract designed for use in international construction transactions was published by the International Federation of Consulting Engineers (FIDIC) in 1957.29 Rameezdeen and Rodrigo30 identify the following as advantages of using a standard form of contract in construction: • it can be used for various types of projects and client requirements; • it embodies industry practices and customs; • parties can be comfortable with the fact that it has been tried and tested over a long period of time; • fair allocation of risks between parties; • in a competitive tendering environment, it provides a uniform basis for pricing without the fear of hidden costs; • the tendered price is likely to be lower as contractors do not have to price additional risks associated with interpretation of bespoke contracts or clauses; • the transaction cost involved in negotiating a contract is reduced; and • it looks at three dimensions together; namely, the wider legal context through statutes and case law, other documents forming the contract and areas of possible disagreement between parties.

26 J. Sweet, ‘Standard construction contracts: academic orphan’, 31 Construction Law 38 (2011). 27 The AIA first published the Uniform Contract for use between an owner and a contractor in 1888. See ‘The history of AIA contract documents’ at www.aiacontracts.org/contract-doc-pages/21531-the-history-ofaia-contract-documents. 28 In 1903, a standard form was produced ‘under the sanction of the RIBA and in agreement with the Institute of Builders and the National Federation of Building Trades Employers of Great Britain and Northern Ireland’. See Joint Contracts Tribunal Website, Our History, at http://corporate.jctltd.co.uk/about-us/our-history/. 29 N. Bunni, The FIDIC Forms of Contract, Third Edition, Blackwell Publishing (2005) p. 6. 30 R. Rameezdeen and A. Rodrigo (2014) ‘Modifications to standard forms of contract: the impact on readability’, Australasian Journal of Construction Economics and Building, 14(2) (2005) pp. 31–40.

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Today, there is a wide spectrum of standard forms available for both domestic31 and international32 transactions that are published by national and international professional associations, including: • FIDIC;33 • the Institution of Civil Engineers;34 • the Institute of Chemical Engineers;35 • the Joint Contracts Tribunal;36 • the Engineering Advancement Association of Japan;37 • the Civil Engineering Contractors Association;38 • the AIA;39 and • the Design Build Institute of America (DBIA).40 Standard contracts provide a risk allocation solution of general purpose for items such as differing site conditions, site investigations, unusually severe weather, permits and responsibilities, and changes. They assign responsibilities and liabilities to each contracting party regarding job performance, organisation, time frames, guarantees, insurance, errors and payment. Each standard contract seeks to reflect a specific philosophy with regard to the allocation of project risk, and to capture best practice with regard to dealing with change, termination, payment and the contract administration role. 41 Professional associations endeavour to update their standard forms of contract at fairly regular intervals in an attempt to keep pace with the developments in the industry, both in terms of best practice and legal concepts. Underpinning the choice of standard form of contract are issues of project delivery method; risk allocation; cost, schedule and performance trade-offs; security arrangements; level of owner involvement in the design and construction process; liberty of owner to

31 In domestic transactions it is not uncommon for parties to select nationally produced standard contracts. For an overview of the forms available in the US domestic market, see J. Sweet, ‘Standard construction contracts: some advice to construction lawyers’, 40 SCL Review (1988) p. 823, available at: http://scholarship.law.berkeley.edu/ facpubs/955. Also, see DLA Piper ‘Industry forms of agreement’ at www.dlapiperrealworld.com/law/index.htm l?t=construction&s=forms-of-contract-procurement-methods&q=industry-forms-of-agreement. 32 World Bank standard bidding documents include the FIDIC standard forms of contract. Also, see African Development Bank and Asian development bank standard bidding documents. Also, the PLC Cross-Border Construction and Projects Handbook 2010/11 looks at the types of contract used for national and international construction and engineering projects in each of the 18 jurisdictions covered by the guide. 33 See www.fidic.org. 34 See www.ice.org.uk. 35 See www.icheme.org. 36 See www.jctltd.co.uk. 37 See www.enaa.or.jp. 38 See www.ceca.co.uk. 39 See www.aiacontracts.org. 40 See www.dbia.org. 41 It is often said by the FIDIC that their contracts are ‘made by engineers for the use of engineers’.

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direct change during contract execution; approach to dispute management; and resolution and familiarity.42

Essential elements of the construction contract Regardless of the owner using standard or bespoke conditions of contract, construction contracts must include the principle documents that identify and allocate the project risk and describe the whole of the works. The principle documents in a construction contact will include: • the conditions of the contract, general and specific; • technical documentation;43 • schedules; • programmes; and • bills of quantities. The contract sets forth the basic terms under which the parties are doing business together – price and payment terms, commencement date, completion date, description of scope of work, allocation of risks of loss, insurance, change order procedure, suspension and abandonment of the project, termination, breach, liquidated damages, alternative dispute resolution and indemnification provisions. The general conditions (including any supplemental conditions) are a set of rules that cover problems – such as claims, disputes, subcontracting, changes, time, warranties, protection of property, insurance, remedies and termination – that routinely arise in construction contracts.44

Drawings The drawings include the plans prepared by the architect, by the surveyor and by the consulting engineers (i.e., site plans, structural plans, mechanical plans and electrical plans), as well as more detailed drawings prepared by the contractor, subcontractor or supplier called ‘shop drawings’ that have been submitted to and approved by the owner or project design professional. A material deviation from these plans will constitute a ‘defect.’

42 It is often assumed that choosing a standard contract form will help to reduce transaction costs, but choosing a form that is unfamiliar to the potential offerors can increase the tendering time and cost as well as creating additional administrative burdens for the parties. 43 The technical documents that are to be included in the tender package will be driven by the project delivery method. In the case of design-bid-build project delivery, the specification is the document in which the consulting engineer will specify the project requirements for all matters not covered by the conditions of contract or shown on the drawings – in the case of a design-build project delivery method, the technical requirements for the completed works in terms of performance. 44 J. Sweet, ‘Standard construction contracts: some advice to construction lawyers’, Construction Law Journal, 7 (1991).

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Specifications The specifications – typically written and supplied by the project design professional with the plans – provide even more detail as to the materials to be used, the performance requirements for aspects of the project and the methods or techniques of construction to be employed. The specifications fill in the necessary information that is not evident from the drawings and includes materials and workmanship clauses, schedules to provide positional information and prime cost and provisional sums if required.

Employer’s requirements45 ‘Employer’s requirements’ is the term used by FIDIC46 to denote the document that defines the purpose, scope and design and technical criteria of the works in design-build contracts. As explained by Nael Bunni,47 the employer’s requirements are the main source of information for the general obligations of the contractor and should be drafted in a balanced manner so as to effectivly specify the employer’s needs, while not limiting the contractor’s flexibility in design to meet those needs, and must clearly state the purpose for which the works are intended.

Bill of quantities The bill of quantities, as used in a remeasurement contract, is a list of the materials and their estimated quantities against which the contractors provide their rates during the tender phase. The agreed prices are then used for periodic valuation of the works that have been executed.

45 ‘Employer’s requirements’ is the term used by FIDIC to denote the technical requirements for design-build project. 46 See subclause 1.1.1.5, ‘Employer’s Requirements’, in FIDIC Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant and for Building and Engineering Works Designed by the Contractor: The Plant and Design-Build Contract (Common known as FIDIC Yellow Book), 1999. 47 Footnote 29, above, p. 476.

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2 Parties to a Construction Contract Scott Stiegler1

Introduction Procurement of construction services has evolved over the years to become a sophisticated and unique part of contract law. No longer can construction contracts be considered as the mere provision of building services. Many modern construction projects involve numerous engineering disciplines, include stringent and perhaps technically sophisticated performance requirements (such as those for processing plants), can involve cross-border arrangements and, more often than not, have a large number of parties and interested parties including government and regulatory bodies. As a result, construction law itself is predominant in the formation and evolution of the substantive contract law in England and Wales. Indeed, the rise in complexity of projects and sophistication of the parties drives not only the development of complex and detailed contracting frameworks, but also can lead to long-term and technically challenging disputes, both in a legal and engineering sense. Added to this is the prevalence of what can only be described as truly international construction projects. The nature of these types of projects is unique, with the prevailing influencing factor being the parties themselves. International construction projects typically involve parties from differing cultural and legal backgrounds who bring with them their own ideas of not only how the works themselves should be performed, but also the way in which the parties are to structure and manage their contracting and project management relationship. They also bring knowledge and experiences from their own domestic construction industry that may or may not be compatible with the domestic construction industry of the other party or parties. This is particularly influential when parties from differing jurisdictions enter into joint venture arrangements for the performance of the works. Further still is the cultural background of the parties that may have an influence on

1

Scott Stiegler is a partner at Vinson & Elkins RLLP.

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the working relationship of the parties or that may need to be taken into account when structuring the project management aspects of the project. This in itself creates interesting challenges that sometimes cannot be resolved by cleverly wordsmithed contracts, particularly so when common law contractors undertake work in civil law jurisdictions and vice versa. It is in this light that the modern construction contract has become a sophisticated instrument.

Construction contract arrangements Construction contracts come in a variety of bespoke and standard forms.They cover a range of differing scopes of works and services from pure consultancy services right through to complete EPC turnkey solutions. Contracting arrangements can include design and build, consultancy services, EPC turnkey, operation and maintenance, project and construction management, front-end engineering design, ‘early contractor involvement’ (single or multiple), alliancing framework agreements, as well as longer-term models such as build, own, operate and transfer, and other similar arrangements. There are also a number of ancillary construction contracts such as those for joint venture arrangements, independent verifier roles and other similar supporting functions. As a consequence of such a broad range of potential scope of works and services, there are a variety of domestic and international institutions that have and maintain their own particular sets of standard form contracts. While there are widely known institutions such as the Joint Contracts Tribunal (JCT) and the International Federation of Consulting Engineers (FIDIC) that produce and maintain their own contract suites, there are also a variety of specialised industry bodies that prepare and maintain more particular suites of construction contracts, such as Oil and Gas UK, which produces the LOGIC suite of contracts, the Institute of Chemical Engineers (IChemE), the Institute of Electrical Engineers (IEE), the Association of Consultant Architects (ACA), the Royal Institute of British Architects (RIBA) and the Institute of Civil Engineers, which produces the widely recognised and regarded NEC3 contract.

Standard building contracts A standard building contract is typically confined to the construction of the works only. The employer is generally assisted by an architect, engineer or other construction professional to translate the employer’s requirements into technical documents upon which prices can be sought. It is common for detailed tender documents to be prepared and for there then to be a competitive tender process from which the employer can select the best contractor for the works. Flexibility also exists around how the contractor can be paid for such works. For example, payment can be based on a simple lump sum for the performance of the defined works only or perhaps on a cost reimbursable basis where the full extent of the scope of works is not clearly defined at the outset of the project.

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Design and build contracts The typical and historically traditional position for standard building contracts is in more recent times less reflective of most modern construction projects. It is not uncommon for employers to seek construction services on a design and build basis, that is, it is for the contractor to review the employer’s requirements and itself develop a suitable and compliant design and to execute the works in accordance with that design. In this situation, the contractor is responsible not only for the design of the works, but also the packaging and letting of the trade packages for the performance of the works itself. This places additional risk on the contractor (for example, time risk with procurement and insolvency risk with the supply chain) that could be seen as passing the risk to the party best placed to manage it, but may also leave the employer facing a higher contract price as a result. This contracting methodology does have a number of benefits, such as the following: • As the design and construction of the works are provided for under a single contract, there is a single point of responsibility. This potentially may have an impact of reducing (or at the very least clearly allocating) the design and construction risks of the project. • By having the contractor develop its own design, it allows the contractor to develop its own means and methods for executing the works. This, in turn, could benefit the parties as the contractor may employ methods that it is more familiar with and reduce the overall cost of the works and the time for its performance for the employer. • Time for procurement can potentially be reduced. Again, as the procurement aspects of the works are all being managed by the contractor who is also developing the design, procurement lead times and other requirements (importation requirements, for example) can be considered early on in the project. • Performance of the works can, in some circumstances, be improved given the overall responsibilities placed on the contractor. The incentives on the contractor are also heightened in situations where liquidated damages can be imposed for delayed performance or where performance bonds or retention bonds are provided by the contractor. However, having overall responsibility for performance can also potentially drive negative behaviours in lump sum arrangements where the contract price agreed does not reflect a proper estimate of the works at tender. With these advantages, there are also a number of potential disadvantages: • As the risk associated with the design and construction of the project is passed to the contractor, it is very likely that the cost of this risk will be reflected in the eventual contract price, resulting in a higher cost to the employer. • The employer may feel a lack of control over the detailed design and construction of the works as this is, again, a matter for the contractor. Furthermore, the employer inputting into these areas may also lead to claims from the contractor for additional costs as a result of what could be instructions from the employer to carry out the works differently to how the contractor had originally planned or to perform additional works outside the original scope. • While performance of the works may arguably be improved, there is also an incentive for the contractor to carry out the works to the minimum compliant standard at the minimum cost, thereby maximising its potential profit.

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• Depending on the scale of the project, there may be risks of lack of competition in the market, especially for more specialised projects. • Contractors could be motivated to make claims against the employer to alleviate themselves from the transfer of risk. • While the transfer of risk may be appropriate in particular circumstances, contractors will quite often demand that there be overall limitations on liabilities and other restrictions on the passing of risk. Design and build contracts are complex contracting arrangements and a careful and thorough understanding of the technical requirements of the project and the risks associated therein is needed by all parties.

Consultancy services A consultancy services agreement is designed for the provision of engineering or design services to an employer or contractor. Insofar as it applies to engagements by an employer, consultants, such as an architect or engineer, are typically engaged early on in the development of the project to assist with matters that could include scope definition, risk identification, preparation of tender documents and other general project issues.When retained by a contractor, the scope of a consultant’s role is generally professional in nature and is more than likely related to the design aspects of the contracted works.

Project management contracts For larger construction projects, there is often a need to have a professional construction manager involved from the employer’s perspective. While this can sometimes be done by way of a consultancy services agreement, more sophisticated arrangements do exist. One such example is the ‘engineering, procurement and construction management’ (EPCM) contract. The benefits of this arrangement include that it may reduce the overall cost of the works in terms of limiting the risk contingency normally applied by contractors as well as potentially having advantages in procurement. There are also advantages in that the employer retains control over design aspects. Conversely, there are added risks, the main being that the risk of design remains with the employer.The key to success in this arrangement is a good understanding of the project and having thorough and detailed project planning and management.

Build, own, operate, transfer A build, own, operate, transfer (BOOT) contract is form of public-private partnership (PPP) project model in which a company undertakes a large development project (usually infrastructure-related projects such as toll roads and bridges) under contract to a public-sector partner, such as a government agency. A BOOT project can be seen as a way of developing a large public infrastructure project with private funding. The BOOT model works by the public-sector partner contracting with a private developer (more often than not a large corporation or consortium of businesses with specific expertise relevant to the project) to design and implement the project. The public-sector

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partner may provide, for example, some limited funding or some other benefit (such as tax-exempt status) but the private-sector partner generally assumes the risks associated with planning, constructing, operating and maintaining the project for a specified period of time. During that time, however, the developer charges customers who use the infrastructure that has been built to realise a profit. Again, a toll road or bridge is a typical example. At the end of the specified period, the private-sector partner transfers ownership to the funding organisation, either freely or for an amount stipulated in the original contract. Such contracts are typically long term and may extend to 40 years or more.

Alliance agreements Traditional construction contracts are generally structured around the consequences of failure and allocation of risk. Alliancing agreements challenge this traditional approach and are incentive-based relationship contracts. Under this contracting arrangement, the parties agree to work together as one integrated team with a culture of cooperative decision-making, risk sharing, ‘no blame and no dispute’ and financial transparency. In an alliance agreement, the owner, contractor and designer are all parties to one project agreement. Project development is driven by a cooperative board of management made up of representatives of the parties, with a mandate to deliver the project in accordance with agreed goals and alliance principles. While risk is said to be shared, the ultimate risk does lie with the project owner.The alliance model is driven by a target contract cost and a target completion date, with the purpose of these targets being to drive pain or gain sharing in the decision making. The contractor is incentivised as its profit margin is dependent on performance. Another unique aspect is the ‘no blame’ culture in that the alliance parties release each other from all liability except, in most cases, for wilful default or gross negligence. The philosophy on disputes is that rather than spending time and energy on apportioning blame and developing costly claims, a more efficient approach is for the parties to work cooperatively to overcome problems and risks that have manifested themselves during the life of a project. With such a wide variety of possible arrangements, it is inevitable that there are a multitude of different potential and interested parties in construction projects. As a result, the particular parties and their roles and responsibilities in these contracting frameworks must be clearly understood and defined.

Parties to a construction contract As explained generally in the sections above, there are a variety of contracting methods and arrangements that the parties may wish to consider when considering the requirements for a construction project. This, in turn, leads to the possibility of various potential parties and interested parties in construction projects. The sections below discuss briefly the most common parties in construction projects.

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The employer The ‘employer’ is the contracting party for whom the work is carried out and is typically the owner of the land upon which the work is carried out. The employer can also be referred to as the ‘owner’, ‘client’, ‘purchaser’ or even the ‘developer’. For the purposes of this chapter, the term ‘employer’ will be adopted. An employer can take many different forms and is largely dependent on the nature and scope of the construction project being undertaken. The employer need not be a professional construction or development organisation. Indeed, in some circumstances the employer is not a professional construction or development organisation and is, rather, represented by a professional team to undertake the role of the employer under a contract.This is not an uncommon situation and is reflective of the need to have competent and appropriately skilled construction contract professionals filling the shoes of an unsophisticated employer. This situation is also reflective of the need to have such a skillset when dealing with sophisticated contracting, building and engineering organisations. The role of the employer varies depending on the nature of the contract entered into. For example, an employer could be expected to play a more passive role under a design and build lump sum contract, whereas it could be expected to play a more active role in a cost reimbursable or, indeed, a front-end engineering design contract.

The contractor The ‘contractor’ is the contracting party responsible for carrying out the works. Depending on the type of construction contract, the contractor can either perform the works itself or elect to subcontract part of the works to specialist subcontractors and designers. The nature and scope of works under the particular construction contract will dictate the role and responsibilities of the contractor. However, where an element of design is involved, it is quite common for the contractor to subcontract this role out to a specialist designer, architect or engineer.

The engineer or employer’s representative For contracts of even moderate value or importance, it is not uncommon for the employer to engage an ‘engineer’ or ‘employer’s representative’ to assist the employer in the management of the contract. For the purposes of this chapter, the term ‘employer’s representative’ will be used. The employer’s representative is precisely as the name implies, the representative of the employer for the purposes of the contract. The employer’s representative is generally a specialised engineering professional such as a project manager or quantity surveyor. More often than not, the role of the employer’s representative, while fulfilled by a named individual, is supported by a team of engineering or construction professionals who have likely been involved in the project prior to the execution of the contract with the contractor.The team supporting the employer’s representative have usually worked with the employer to prepare the specification for the works and the tender documents, may have advised on various issues such as risk, insurance arrangements and contracting methodology, and are likely to have involvement in the letting and review of the tender submissions for the works. As such, by the time the contract is executed with the contractor, the employer’s representative is generally very familiar with the project, the requirements of the works and the contract.

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Following the execution of the contract with the contractor, the duty of the employer’s representative is to, in the broadest sense, supervise the execution of the works by the contractor to ensure that such works are completed in accordance with the requirements of the contract. The role of the employer’s representative therefore includes such tasks as assessing payment claims, reviewing the performance of the works in light of the contractual programme, considering and monitoring the works to ensure compliance with the contract specifications and other quality requirements, identifying any defects in the works, reviewing and assessing claims made by the contractor, such as requests for variations and extension of time and other events specified in the contract that give rise to potential entitlement (such as, for example, claims for force majeure, adverse weather and unforeseeable ground conditions). As the employer’s representative holds such an important position as the employer’s agent, the employer’s representative therefore also owes a contractual duty of professional care to the employer.

Subcontractor Subcontracting the works to trade or design subcontractors is a common feature in modern construction contracts. This may be for reasons attributable to the specialist nature of the works or simply the need for additional resources or labour. Whatever the reasons may be, the requirements and restrictions around subcontracting are typically dealt with in detail in the contract. For example, rarely is the contractor allowed to subcontract the entirety of the works to another contractor. Furthermore, requirements may be placed on the engagement of lower-tier subcontractors, such as flowing through key contract terms, requirements for collateral warranties or additional guarantees, or even a requirement to allow the employer to audit the books of account of the lower-tier subcontractor.

Specialist professionals, including architects, quantity surveyors, project managers and other consultants There are a variety of other professionals who may have involvement in construction projects.The type and nature of the project and contracting framework will define the level of involvement that these professionals may have.

Architects The traditional role of the architect was that of the principal’s representative as well as the designer of the works. The law regarding the obligations on construction professionals has, therefore, developed from this initial position. However, the role has evolved over time and in larger projects, it is usually performed by other construction professionals such as engineers or project managers. While not an exhaustive list of all activities an architect could be expected to undertake, the duties of an architect could be expected to include the following: • undertaking a review and assessment of the site (in particular, geological and geotechnical characteristics of the site) to advise on ground conditions; • advising an employer to the use of the land and any limitations thereon, such as planning and development matters, rights of adjacent owners or restrictive covenants and other access issues that may have an impact on the performance of the works;

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• advising the employer of project execution issues, such as design development, cost planning and indicative programming; • preparing preliminary concept designs and initial specifications for the performance of the works, whether for an approval process, cost planning or for tender purposes; • advising on project risk identification and potential contracting methodology; • preparing documents for and thereafter managing the tender process for the works, including a review of the submitted tenders and providing recommendations and analysis of the submitted tenders; and • monitoring the execution of the works by the contractor and, in some situations, acting as a certifier of the works.

Quantity surveyors The role of a quantity surveyor is to estimate the quantities for the works to be performed (i.e., to survey the quantity of material, equipment etc required in order to execute the works). A quantity surveyor can be engaged at the beginning of a project to assist the employer in preparing the tender documents or to review tender submissions where a bill of quantities has been prepared.This role is particularly important if the employer is seeking a fixed-price, lump-sum contract. A quantity surveyor can also be engaged to assist with the ongoing needs of the project, such as assessing the measurement of payment claims and claims for variations to the scope of works.

Project managers In larger or long-running construction projects, project managers are often retained by both the employer and contractors in order to assist in the day-to-day running of the works and the management of the contract. While a project manager is someone who has originally trained as an engineer or quantity surveyor, the role of a project manager is administrative and managerial. The role of a project manager may cover many of the activities traditionally performed by an architect. For example, project managers may have a greater role in cost planning and analysis from a project feasibility perspective, have a contract management role and may well indeed have a level of input from a procurement aspect. These duties are, of course, variable and are dependent on the contracting framework with the contractor.

Other consultants There are a myriad of other consultants that can provide services in construction projects. For example, the works may require the specialist advice of an electrical, mechanical, structural or hydraulic consultant. Many consultants also exist in the fields of building certification, fire, security, acoustics and safety. The input given by consultants is obviously driven by the specific works, but in many larger projects it is not uncommon for employers to retain the services of consultancy engineering firms who typically have a variety of differing consultants from which to draw upon.

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Other possible interested parties, including funders and insurers The increase in complexity and risk associated with projects, the growth of ‘mega projects’ and the differing and varying roles of parties and third parties in construction projects has led to the importance of appropriate risk identification and insurance coverage. Indeed, the construction industry is subject to higher degrees of uncertainty and risk than many other sectors. In planning projects, employers, insurers and their respective specialist advisers ought to consider, inter alia: • what the nature and likelihood of the risks relevant to the project are; • how risk is to be allocated between the parties – will it be transferred, shared or assumed; • what insurance protection is to be provided by the employer and what is to be provided by the contractor; and • when the insurance programme is to start and finish. There are obviously a range of insurance policies available in the construction market and these can be customised to suit the needs of the particular project. The most common policies are ‘contractor’s all risk’ policies, typically covering physical damage to the works, as well as professional indemnity insurance policies, which are typically intended to cover professional design issues. Other insurance policies cover public liability, workers’ compensation and, in some Middle Eastern countries, decennial liability insurance may also be necessary. The complexity and risk associated with certain projects also impacts on the potential funding that may be available. Typically, the long-term financing of infrastructure and industrial projects is based upon the projected cash flows of the project and is secured by the project assets.The level of funding and how it is provided is again driven by the specific project and its circumstances.

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3 Bonds and Guarantees Jane Davies Evans1

Purpose of security Security in the form of bonds and guarantees is a well-established feature of construction projects. Bonds or guarantees are, with limited exceptions, sought by the employer to secure the contractor’s performance, and to protect advance payments made for mobilisation of the contractor to site and/or the purchase of long-lead or high-value components or materials. In addition, on-demand bonds or guarantees are regularly used in the construction industry to enable the early release of retention monies. Less frequently, the contractor may also require security to ensure there will be sufficient funds available for an impecunious employer to make payments as and when they fall due, or to protect against regime change when working for public entities in potentially unstable jurisdictions.

Types of security Before considering the different forms of security typically given in international construction projects, it is important to note that there are essentially two different types of obligations encompassed by such securities, each with different requirements and consequences. In particular, the security provided may impose on the issuer: • an autonomous contractual obligation to pay a specified sum of money on the occurrence of a specified event or presentation of a particular document; or • an accessory obligation to be answerable in the event that a third party fails to perform a contractual obligation or make a payment owed to the beneficiary under the underlying contract.

1

Jane Davies Evans is a barrister practising as counsel and arbitrator at 3 Verulam Buildings.Versions of this chapter published in the first and second editions of this Guide were co-authored with Christopher Harris QC, also of 3 Verulam Buildings.

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Terminology Unfortunately, there is little consistency in the terminology applied to bonds and guarantees, which causes some confusion and makes it difficult to determine whether a particular security encompasses an autonomous or accessory obligation merely by looking at its title. Generally speaking, security instruments imposing autonomous obligations tend to be referred to as on-demand bonds or guarantees, first-demand bonds or guarantees, demand bonds or guarantees or standby letters of credit, whereas security instruments imposing accessory obligations are often labelled guarantees, default bonds or surety bonds. The greatest confusion in the construction sector probably arises from the fact that where these instruments are used as performance security, both types (representing autonomous and accessory obligations) are often labelled as performance bonds or performance guarantees. The situation is not assisted by the fact that, while standard forms are available, they are rarely used in practice, with most employers and issuers of security insisting on their own bespoke wording. Whether a particular instrument is treated as imposing an autonomous or accessory obligation is a matter of construction of the instrument in question and not dependent on the label attached by the parties.2 In light of the different legal characteristics of the two, and the consequences that flow therefrom (as set out further below), the question of the proper construction of such security instruments frequently gives rise to litigation or arbitration and is the subject of numerous reported decisions of the English courts.3 In this chapter, autonomous contractual obligations will be referred to as ‘on-demand bonds’ or ‘on-demand guarantees’ and accessory contractual obligations will be referred to as ‘conditional guarantees’.

2

3

Contracts of suretyship … are an area of law bedevilled by imprecise terminology and where therefore it is important not to confuse the label given by the parties to the surety’s obligation (although the label may be indicative of what the parties intend) with the substance of that obligation. Because the parties are free to make any agreement they like, each case must depend upon the true construction of the actual words in which the surety’s obligation is expressed.This involves ‘construing the instrument in its factual and contractual context having regard to its commercial purpose’, a task which the court approaches ‘by looking at it as a whole without any preconception as to what it is. Vossloh Aktiengesellschaft v. Alpha Trains (UK) Limited [2010] EWHC 2443 (Ch) at [20]; Moschi v. Lep Air Services Limited [1973] AC 331, 349C. See Andrews and Millett, paragraph 16-002 and the cases referred to therein, including Trafalgar House Construction (Regions) Ltd v. General Surety and Guarantee Co Ltd [1996] 1 A.C. 199; Marubeni Hong Kong and South China Ltd v. Mongolia [2005] EWCA Civ 395; IIG Capital LLC v.Van Der Merwe [2008] EWCA Civ 542; Vossloh Aktiengesellschaft v. Alpha Trains (UK) Limited [2010] EWHC 2443; Carey Value Added SL v. Gruppo Urvasco [2010] EWHC 1905. For more recent examples, see Multiplex Construction Europe Limited v. Dunne [2017] EWHC 3073 (TCC), Authoridad del Canal de Panamá v. Sacyr S.A. & Others [2017] EWHC 2228 (Comm) and Spliethoff’s Bevrachtingskantoor BV v. Bank of China Limited [2015] EWHC 999 (Comm) (cited with approval in Bitumen Invest AS v. Richmond Mercantile Limited FZC [2016] EWHC 2957 (Comm), paragraph 16 and Caterpillar Moteren GmbH & Co KG v. Mutual Benefits Assurance Company [2015] EWHC 2304 (Comm), paragraph 21). In the latter case, Carr J. endorsed (at paragraph 69) the following general principles: ‘(a) the question of whether a document such as each of the Guarantees is a true guarantee or a performance bond is a matter of construction to be determined on a case-by-case basis; (b) there are certain factors which may be indicative of the nature of the instruction, but these are not necessarily decisive; (c) the question that the Court will always be faced with is what, objectively, the parties to the contract intended; (d) in the modern commercial world, parties are capable of drafting agreements that are clear and that oblige the surety to pay regardless of the existence of any underlying liability if that is what they intend’.

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As will be seen below, the distinction between autonomous and accessory obligations is of fundamental importance. The key difference is that an on-demand bond or guarantee is (subject to intervention by the local courts as discussed below) payable against documents, whereas a claim under a conditional guarantee requires proof that there was a breach of the underlying construction contract.

Autonomous obligations – on-demand bonds and guarantees The most common forms of security used on international construction projects are on-demand bonds and guarantees. An on-demand bond or guarantee usually stipulates on the face of the bond or guarantee itself what document will have to be presented to the issuer in order to receive payment. All that the beneficiary will have to do is issue a demand in accordance with the terms of the bond/guarantee and present the required documents. The documents required vary from case to case. The most common forms of on-demand bonds and guarantees simply require the employer to demand payment, combined with a formal declaration from the employer that the contractor has failed to perform its obligation under the construction contract.4 In practice, it is not unusual in the construction industry for on-demand bonds or guarantees to include a pro forma demand letter that the parties negotiate as part of the negotiation of the construction contract and security itself. Additional requirements may include (1) a statement from a specified person that the contractor is in breach of its obligations (for example, the relevant minister or attorney general for public works contracts);5 or (2) a certificate from a third party (for example, the engineer or the dispute adjudication board). Less common requirements can include provision of an arbitration award or judgment in respect of the underlying construction contract. The employer beneficiary of such an on-demand bond or guarantee will generally seek to obtain security with the least onerous documentation requirements, such as, for example, a simple demand or certificate issued by the employer, whereas the contractor will seek the additional protection provided by a third-party certificate or judgment. Ultimately, the terms of the security will depend on the parties’ respective bargaining positions and/or what terms the available issuers6 are prepared to accept. Theoretically, when the issuer of the security receives a demand for payment, it simply checks that the demand and supporting documents comply with the terms of the security and, if so, makes payment to the employer. Again, theoretically, the issuing bank is not concerned with the question whether there has in fact been a default by the contractor under the underlying construction contract, which renders the payment due. In Edward Owen Engineering Ltd v. Barclays Bank International Ltd, Lord Denning MR observed:7 4

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6 7

For example, the pro forma performance security demand guarantee provided with the FIDIC Red Book (1999 Edition) requires a written statement that the contractor is in breach of his or her obligations under the contract, and ‘the respect in which the [Contractor] is in breach’. For example, the FIDIC Red Book (1999 Edition) pro forma proposes that a demand for payment must contain the signature of the relevant minister or the employer’s directors authenticated by the employer’s bankers or a notary public. This reflects that, unlike conditional guarantees, on-demand bonds are usually issued by banks and insurance companies. Edward Owen Engineering Ltd v. Barclays Bank International Ltd [1978] QB 159 at [171].

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All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit. A bank which gives a performance guarantee must honour that guarantee according to its terms. It is not concerned in the least with the relation between the supplier and the customer; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand, if so stipulated, without proof or conditions. The only exception is where there is a clear case of fraud of which the bank has notice.

In practice, depending on the commercial relationship between the issuer of the security and the contractor (or the counter guarantor as the case may be),8 the issuer may notify the contractor (or the counter guarantor) upon receipt of a demand before making payment. The issuer will do so for one of two reasons: (1) if the issuer is concerned that it may not be able to enforce the security it is holding in relation to the bond/guarantee; or (2) to give the contractor the opportunity to make direct payment and avoid an act of default under the terms of the agreement between the contractor and the issuer.9 Where a contractor fears that the employer is about to make a demand, or where the contractor has been informed that a demand has been made by the issuer, the contractor may attempt to block the demand by a court injunction. The traditional approach of the English courts was to limit injunctions to situations where there was clear evidence of fraud. Accordingly, in the 2007 decision in Permasteelisa Japan KK v. Bouyguesstroi and Bank Intesa SpA,10 the English Technology and Construction Court discharged an interim injunction obtained by a subcontractor to prevent the main contractor (a Russian subsidiary of Bouygues Bâtiment International) from making further calls under an on-demand guarantee pending the resolution of the underlying dispute in arbitration, The judge (Ramsey J.) found that there was no basis for maintaining the status quo pending the outcome of the arbitration, in the absence of fraud.11 This approach has to some extent relaxed in recent years both in England and elsewhere. In Simon Carves Limited v. Ensus UK Limited the English Technology and Construction Court had to consider the extent to which the terms of the construction contract pursuant to which the performance security had been issued might prevent the employer from seeking payment under the security.12 In Simon Carves, the underlying construction contract provided that the security would be ‘null and void’ and was to be returned to the contractor immediately once the acceptance certificate was issued save in respect of pending claims. The acceptance certificate was issued, albeit with a list of defects attached; one month later the employer issued a defects notice under the mechanism for notifying defects during the defects liability period. The judge, after reviewing a long line of decisions, held that: ‘fraud is not the only ground upon which a call on the bond can be restrained by injunction’ and that ‘if the underlying contract, in relation to which the bond has been provided by way of 8 See ‘Procuring the security’, infra. 9 Ibid. 10 Permasteelisa Japan KK v. Bouyguesstroi and Bank Intesa SpA [2007] EWCH 3508 (QB). 11 The author notes that, in her experience, status quo injunctions (of the type rejected in Permasteelisa) are frequently granted by courts in many jurisdictions, preventing the beneficiary of the on-demand security from calling, or receiving payment under, the security until the outcome of the underlying arbitration is known. 12 Simon Carves Limited v. Ensus UK Limited [2011] EWHC 657 (TCC).

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security, clearly and expressly prevents the beneficiary party to the contract from making a demand under the bond, it can be restrained by the Court from making a demand under the bond.’The judge found that the security was null and void under the terms of the construction contract as between the employer and the contractor, and injuncted the employer from making a demand under the bond.13 The judge also provided a useful explanation as to the extent to which the commercial consequences of a call on an on-demand bond or guarantee are relevant when an English court is deciding whether to grant an injunction or not: 40. It is well known that bonds are regularly called for on substantial and public procurement projects. These bonds can be conditional bonds or as in this case, unconditional or on-demand bonds. Contractors are required to provide them from an acceptable bank or surety. The banks are not uncommonly the main banks which fund the contractors (albeit that it is not clear that this was the case here); the banks providing the bonds will usually have security and counter-indemnities so that they are secured when and if they have to pay out on the bond to the beneficiaries. It is often the case that banks will not provide more than a certain number of bonds or bonds beyond a certain value to any one contractor. If a bond is called, it may be difficult for the contractor to have that bank provide another equivalent bond for another job at that time. 41. I have formed the view that damages would not be an adequate remedy. My reasons are the same as set out in my earlier judgements on this matter which I will not again set out in detail. Broadly, they are that the calling of the bond as in this case gives rise to a very real risk of damage to the commercial reputation, standing and creditworthiness of [the Contractor] which would be very difficult to quantify; there would be a very real risk that [the Contractor] would not pre-qualify for tenders because often tenderers have to disclose whether there have been recent calls on the bonds and if so on what grounds.There was evidence that there had been an earlier call on the bond but I attach little importance to that in commercial terms because the unchallenged evidence is that it was done by agreement to secure speedy payment; in those circumstances, the call could be readily explained. An added factor is that if, as I have held, [the Contractor] does have a strong case on the continuing validity of the bond as between it and [the Employer], the commercial advantage of not having the bond actually called or the loss of that advantage is unquantifiable.14

The English Technology and Construction Court reached a similar conclusion in Doosan Babcock v. Mabe.15 In Doosan Babcock, the employer had commenced commercial production of electricity from a power plant for which Doosan Babcock had provided two boilers. The on-demand guarantees provided by Doosan Babcock expired on their terms on the earlier of a specified date or the issue of a taking-over certificate. The employer did not issue a taking-over certificate, relying on a contractual provision that permitted use of the boilers without the issuance of the taking-over certificate as a temporary measure. The

13 Ibid, Paragraph 37. 14 Ibid, Paragraphs 40 and 41. 15 Doosan Babcock Limited (formerly Doosan Babcock Energy Limited) v. Comercializadora de Equipos y Materiales Mabe Limitada (previously known as Mabe Chile Limitada) [2013] EWHC 3201 (TCC).

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judge granted an injunction preventing the guarantees being called, finding that there was a strong likelihood that Doosan Babcock would be able to demonstrate that the use of the boilers was not temporary, or that the employer was in breach of the underlying supply contract in not issuing the taking-over certificate. However, the English authorities do not all speak with one voice. More recently, in MW High Tech Projects UK Limited & Another v. Biffa Waste Services Limited,16 Biffa sought to set aside an interim injunction restraining it from calling on a retention bond. The underlying construction contract between Biffa and MW had provided that it was a condition precedent to Biffa’s right to call on the retention bond that Biffa first call on a parent company guarantee in respect of the same matter. MW argued that Biffa should be restrained from pursuing a call on the retention bond because, although Biffa had first made a call on the parent company guarantee, that call was not ‘valid’, such that the condition precedent had not been satisfied. In discharging the interim injunction, Stuart-Smith J. reviewed the decisions in Simon Carves and Doosan Babcock. He held that, ‘if and to the extent that the subsequent decisions of Akenhead J. in [Simon Carves] or Edwards-Stuart J. in [Doosan] suggest that a less rigorous test is to be applied, I respectfully consider that the views of Ramsey J [in Permasteelisa Japan KK v. Bouyguesstroi and Bank Intesa SpA [2007] EWCH 3508 (QB)] prevail as being in accordance with the substance of the decisions of higher authority… It seems to me, both on principle and authority, that the only established exceptions to the rule that the court will not intervene should be where there is a seriously arguable case of fraud, or it has been clearly established that the beneficiary is precluded from making a call by the terms of the contract’.17 It therefore remains to be seen whether the English courts will embrace the wider exceptions endorsed in Simon Carves and Doosan. The English Technology and Construction Court faced a novel attempt to injunct a call on an on-demand performance bond in J. Murphy and Sons Ltd v. Beckton Energy Ltd.18 The underlying construction contract was an amended version of the FIDIC design and build form of contract. The employer issued a notice of intention to call the bond in relation to liquidated damages for delay.The contractor relied on the 2015 UK Privy Council decision in NH International (Caribbean) Ltd v. National Insurance Property Development Co Ltd19 that an employer could not make a claim for payment against the contractor under the contract, unless the claim had been notified ‘as soon as practicable’ under clause 2.5. The contractor argued that demanding paying when no notice had been given in accordance with clause 2.5 engaged the fraud exception, permitting the judge to intervene. The judge refused the injunction finding that on the specific wording on the amended FIDIC contract, the parties had expressly removed the obligation to notify claims for liquidated damages under

16 [2015] EWHC 949 (TCC). 17 Ibid, paragraph 34. See Stuart-Smith J.’s decision, to similar effect, in Lukoil Mid-East Limited v. Barclays Bank Limited [2016] EWHC 166 (TCC). 18 [2016] EWHC 607 (TCC). 19 [2015] UKPC 37.

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clause 2.5.20 The judge held further that the contractor was confusing liability to pay delay damages and the contractual mechanism for enforcing that liability, and the injunction would have been refused even if his analysis of the contract amendment was incorrect.21 Other jurisdictions take different approaches. The authors are currently involved in arbitrations where bonds have been ‘frozen’ by local courts on the basis that ‘freezing’ the bonds – injuncting the employer from making a call or the bank from paying out if a demand is received – pending the outcome of the arbitration preserves the status quo between the parties.22 Quite aside from the legal soundness of this approach and the immediate impact of an injunction on the employer’s cash flow, these injunctions can cause significant difficulties if the court does not require the relevant instrument to be extended for the duration of the arbitration and any subsequent challenge proceedings. Indeed, it is not unknown for contractors to seek an injunction for the purpose of ‘running down’ the remaining duration of the security until it expires. The Singaporean approach to attempts to stop payment under on-demand bonds is of note, with the courts accepting unconscionability – which the Singaporean courts describe as a broader concept than fraud, including abusive calls, bad faith and dishonesty – as a reason for injuncting calls on on-demand bonds and guarantees.23

Accessory obligations – conditional guarantees A less common form of security in the construction context is the conditional guarantee. By contrast to the autonomous obligations found in on-demand bonds and guarantees, in order to make a claim under a conditional guarantee, the employer will first have to prove that the contractor has in fact failed to perform his or her obligations under the construction contract, and thereby caused the employer loss. Accordingly, claiming under a conditional guarantee is no less complicated or cumbersome than suing the contractor himself. It will require a detailed factual investigation to prove that the contractor is liable under the construction contract, and may well result in arbitration or litigation proceedings. If the employer brings a claim under the guarantee, the guarantor will be able to rely on all the defences available to the contractor under the construction contract. Accordingly, the contract of guarantee cannot be viewed in isolation, but must be considered together with the underlying construction contract.To that extent, the liability of the guarantor and the liability of the contractor are co-extensive.

20 J Murphy and Sons Ltd v. Beckton Energy Ltd at paragraph 47. 21 Ibid, at paragraphs 62–68. 22 For a contrasting view, see the Singaporean Court of Appeal in BS Mount Sophia Pte Ltd v. Join-Aim Pte Ltd [2012] 3 SLR 352 / [2012] SGCA 28, where the court found that the status quo is that the bond is allowed to be called. 23 See for example, Bocotra Construction Pte Ltd v. AG [1995] 2 SLR(R) 262 where the judge held that bad faith could include making a call for payment ‘well in excess of … the beneficiary’s actual or potential loss’. Confirmed by the Singaporean Court of Appeal in BS Mount Sophia Pte Ltd v. Join-Aim Pte Ltd [2012] 3 SLR 352/ [2012] SGCA 28, albeit noting that the discretion should be exercised ‘sparingly’ with the court ‘slow … to disruption the allocation of which the parties had decided upon’. See also the recent (July 2018) decision in AES Façade Pte Ltd v.Wyse Pte Ltd [2018] SGHC 163 and the analysis of Singaporean case law on this issue at paragraphs 16–19.

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In addition, and to the extent not otherwise provided by the guarantee itself, the general law of suretyship24 provides additional protection, and possible defences to the guarantor such that the guarantor will be released from liability if there have been any material changes to the terms of the underlying construction contract without his or her consent25 or where the employer has given additional time to the contractor to perform.26 Consequently, it is in most cases considerably more difficult and takes considerably more time for an employer to obtain payment under a conditional guarantee than under an on-demand bond or guarantee and, as a consequence, these instruments perform different functions. Whereas an on-demand bond or guarantee protects the employer’s cash flow and enables him or her to obtain payment on account of his or her loss without delay, the main advantage of a conditional guarantee is that it offers a second source of payment if the contractor is insolvent or does not have sufficient monies to sums awarded in respect of his or her failure to perform. In the authors’ experience, save for parent company guarantees (which often take the form of a conditional guarantee), it is now more usual for major international contractors to provide on-demand guarantees; conditional guarantees are becoming the exception.

Autonomous or accessory obligations? For guarantees governed by English Law, two Court of Appeal decisions may assist in ascertaining whether a guarantee imposes an autonomous or accessory obligation on the guarantor. • In Marubeni Hong Kong v. Mongolian Government27 the English Court of Appeal held that, when interpreting a document that was not a banking instrument, the absence of language in the document itself describing the document as a demand bond or similar, created a strong presumption against the document being an autonomous bond rather than merely as a see-to-it guarantee imposing only secondary liability.28 • In contrast, in Wuhan Guoyu Logistics Group Co Lt v. Emporiki Bank of Greece SA,29 the Court of Appeal held (citing Paget’s Law of Banking) that, where an instrument (1) related to an underlying transaction between parties in different jurisdictions; (2) was issued by a bank; (3) contained an undertaking to pay on demand (with or without

24 A detailed discussion of the law of suretyship is outside the scope of this chapter and readers are recommended to consult specialist texts in this area, such as Andrews and Millet, Law of Guarantees, Seventh Edition, 2015 or Phillips, O’Donovan and Courtney, The Modern Contract of Guarantee,Third Edition, 2016. 25 Holme v. Brunskill (878) 3 QBD 495; Andrews and Millett, Paragraphs 9-023–9-028. The scope of the rule in Holme v. Brunskill was reviewed by the Court of Appeal in Topland Portfolio No. 1 Limited v. Smiths News Trading Limited [2014] EWCA Civ 18; [2014] 1 P & CR 17. 26 Andrews and Millett, Paragraphs 9-029–9-034. 27 Marubeni Hong Kong v. Mongolian Government [2005] EWCA Civ 395, per Carnwath LJ at para. 30. 28 However, see Rubicon Vantage International Pte Ltd v. Krisenergy Ltd [2019] EWHC 2012 (Comm) in which the English High Court rejected a submission that, applying Marubeni by anology, where a non-bank had submitted itself to an autonomous on-demand obligation, these obligations should be construed narrowly. 29 Wuhan Guoyu Logistics Group Co Lt v. Emporiki Bank of Greece SA [2012] EWCA Civ 1629, per Longmore LJ at paras. 26 to 29.

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the words ‘first’ or ‘written’); and (4) did not contain clauses excluding or limiting the defences available to a guarantor, there is a presumption under English Law that the instrument is a demand guarantee.

Procuring the security In the construction industry, security tends to be provided (in ascending order of cost to the contractor) by group companies, banks, and specialist surety or insurance companies: • Guarantees from the parent company or another group company of the party to the original construction contract are the least expensive form of security for the contractor (subject, of course, to the cost to the group if the security is called by the employer); • Guarantees or bonds issued by a bank. These tend to be ‘on-demand’ instruments, as banks are generally reluctant to become involved in investigating or assessing the merits of demands or dispute. The underlying construction contract will often specify what bank (or banks) will be acceptable to the employer, for example, specifying the required location and credit rating of the issuing bank.30 • Guarantees or bonds issued by specialist surety or insurance companies, who will carry out a risk assessment before deciding to underwrite the contractor’s obligations, charging a premium for this service. • Standby letters of credit issued by banks. These are very similar to on-demand bonds and share the key characteristic that they are payable against documents (rather than proof of liability) and impose an autonomous obligation on the bank independent of the underlying transaction. Standby letters of credit are not frequently used in the construction industry; they are sometimes used to secure delivery of key components where significant up-front payments are required, or as a mechanism for making (and securing) payment where the employer is a government in an unstable jurisdiction.31 With the exception of parent company guarantees, when procuring a bond or guarantee, the contractor will need to pay an issuing fee, with further fees payable whenever the bond or guarantee is extended in duration or value. Many international contractors increasingly

30 There is authority for the proposition that there is a presumption in English law that an instrument not given by a bank or financial institution should not be construed as an on demand bond (see Autoridad del Canal de Panama v. Sacyr SA [2017] EWHC 2228 at paragraph 81(4) per Blair J). However, this presumption can be rebutted. See, for example, Ultrabulk A/S v. Jagatramka [2017] EWHC 2792 (Comm) where a personal guarantee provided by a director was found to be an on-demand guarantee. The judge (Teare J.) held the words ‘unconditionally and irrevocably’ were indicative of a primary liability arising on demand. 31 A standby letter of credit will typically require presentation of documents (often signatures from the employer confirming that payment is due) in order to payment to be made under the instrument. An employer who issues a standby letter of credit to make or secure payment may be able to block payment under the standby letter of credit by refusing to provide the required documents or signatures. Where the English courts have jurisdiction over the letter of credit, the contractor may be able to seek judicial assistance. Section 39 of the Senior Courts Act 1981 permits the English High Court to direct a person to execute any conveyance, contract or other document, or indorse any negotiable instrument, and to step in and execute the document or indorse the negotiable instrument if that person fails to comply. This power has been used in relation to payments under letters of credit. See, for example, Astro Exito Navegcaion SA v. Southland Enterprise Co Ld (No. 2) (Chase Manhattan Bank NA intervening) [1983] 2 AC 787; Jack: Documentary Credits (Fourth Edition) at 9.85.

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enter into facility agreements with their bank, pursuant to which the bank will provide a number of commercial banking services, including the provision of bonds and guarantees. The alternative is for the contractor to enter into an ad hoc arrangement with its bank or a commercial provider of bonds and guarantees on a project-by-project basis. In both cases, the contractor will typically have to commit that all sums paid to the contractor under the construction contract will be paid into a specified bank account located at the issuing bank, which ultimately bears the risk on the guarantee or bond.32 In addition, the contractor will have to provide security to the value of the bonds and guarantees. A combination of blocked funds in cash accounts and security over the contractor’s fixed and floating assets is typical.The need to provide security in relation to the value of the bonds and guarantees limits the amount of bonds and guarantees that a contractor can procure at any given time. While it is generally cheaper for the contractor to procure bonds and guarantees under a facility agreement than on an ad hoc basis, the consequence of a demand being made on security procured under a facility agreement can be catastrophic for the contractor. Most facility agreements contain default clauses, whereby a call on an on-demand bond or guarantee constitutes an act of default under the facility agreement unless the contractor is able to make immediate direct payment of the sums demanded to the bank. An act of default may entitle the bank to call in all loans, lines of credit and security provided under the facility agreement whether related to this construction contract or otherwise. Further, cross-default provisions are increasingly common in facility agreements, whereby an act of default under one facility agreement constitutes an act of default under other facility agreements, including facility agreements made with other banks. In short, making a demand on an on-demand guarantee or bond may result in the contractor being unable to continue trading.33 For this reason, calling an on-demand guarantee or bond tends to be the action of last resort for an employer. In an international context the employer will typically require that the contractor procures an on-demand bond or guarantee from a bank in the employer’s home country. This arrangement is advantageous for the employer, who can recover monies quickly in their home country without first having to issue proceedings against the contractor in another jurisdiction, or having to pursue a foreign bank to enforce a demand for payment under the guarantee or bond. Unless an international contractor has a significant presence in the foreign jurisdiction, the contractor will not normally have the commercial relationship in place, or available security, to procure a guarantee or bond from a local bank directly. The normal arrangement is for a chain of back-to-back guarantees and counter guarantees to be set up through a series of SWIFT messages,34 linking the local bank that issues the guarantee to the employer to a bank in the contractor’s home jurisdiction that has the commercial relationship with the contractor. Where a demand is made by the employer, the

32 Some banks will require that the contractor provide in addition an assignment of the proceeds of the construction contract as a condition of issuing the guarantees or bonds. 33 The potentially catastrophic consequence of calling an on-demand guarantee or bond explains why banks may notify the contractor before paying out on the demand. 34 SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication, a cooperative utility of banks headquartered in Belgium.

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demand will be passed up the chain; the bank in the contractor’s home jurisdiction that has the direct relationship with the contractor will provide the funds, which are then fed back down the chain to the employer. In most situations, the flow of funds from counter guarantor to guarantor is seamless. The chain of guarantees and counter guarantees may be broken if the international community places the employer under sanctions prohibiting the passing of financial benefit to the employer. While the local bank may not be subject to these sanctions, the international banks that have provided counter-guarantees may be prohibited permanently from honouring the counter-guarantees.35 In practice, this may result in the local bank (or a bank somewhere in the chain) defaulting on the security.

Forms of security required on international construction projects The most common forms of guarantees or bonds required on international constructions projects are set out below.

Tender security or bid bonds Where a large contract is put out to tender, the employer will spend considerable time and money in choosing a suitable contractor. If the prospective contractor withdraws prior to entering into a binding contract or refuses to accept the award of the contract or fails to procure the performance bond required to support the contract, the employer may have to re-open the tender process, incurring substantial delay and additional expense. Accordingly, invitations to tender will often require tenderers to submit a bid bond or tender guarantee for a specified sum. The bond will be released if the tenderer is not selected, or once the tenderer has entered into the construction contract and provided the required performance bond. A bid bond will almost invariably take the form of an on-demand bond or guarantees.36

35 See the English House of Lords decision in Shanning International Limited v. Lloyds TSB Bank plc; Lloyds TSB Bank plc v. Rasheed Bank (2001) 1 WLR 1462 (HL). EU Regulation No. 3541/92 prevented performance of a supply contract in Iraq. The supplier’s performance was guaranteed by an on-demand guarantee issued by a local bank in Iraq and counter guaranteed by Lloyds Bank in the UK. Article 2 of EU Regulation No. 3541/92 prohibited satisfaction of any claims ‘under or in connection with a contract or transaction the performance of which was affected, directly or indirectly, wholly or in part by the measured decided on pursuant to [the relevant UN Security Council] resolutions’. The House of Lords found (1) a claim under the performance guarantee was a claim ‘under or in connection with’ the supply contract, performance of which was prohibited under EU Regulation No. 3541/92; and (2) Article 2 of EU Regulation No. 3541/92 permanently prohibited a claim being satisfied in relation to the non-performance, including a claim from the issuing bank against the bank who had provided the counter guarantee. 36 For example, the FIDIC Red Book (1999) provides an example proforma of tender security; the security to be provided by all prospective tenderers (referred to as the ‘Principal’ in the proforma) as a condition of submitting a bid. Any demand must be submitted within 35 days after the expiry of the validity of the tenderers’ tender and include signatures of the prospective employer (the ‘beneficiary’) authenticated by the beneficiary’s bankers or a notary public. The tender security can be called in the following situations: (1) if the tenderer withdraws its offer after the latest time specified for submission and before the validity of the offer expires; (2) if the tenderer refuses to accept the correction of errors in his offer in accordance with the conditions of tendering; (3) if the beneficiary awards the contract to the tenderer, and the tenderer fails to sign the contract agreement within 28 days from when it receives the letter of acceptance (or a different

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Advance payment guarantees or bonds In many construction projects the employer will make advance payments to the contractor providing some immediate finance to mobilise to site, purchase materials, or otherwise prepare for the construction works. In exchange, the contractor will often be asked to procure a bond or guarantee to secure the repayment of the advanced funds in the event that the contractor becomes insolvent or fails to perform the contract. The advance is typically ‘clawed back’ by the employer through deductions from the interim payments made to the contractor, with the value of the security reduced in parallel.

Performance bonds The purpose of performance bonds or guarantees is to protect the employer from a failure by the contractor to perform the construction contract. If the contractor acts in breach of contract, the employer is likely to suffer loss (e.g., in the form of delay or through having to order replacement works) and the issuer of the bond or guarantee undertakes to pay the employer a sum of money to compensate him or her for this loss. Even though the purpose of a performance bond or guarantee is frequently described as ‘securing the due performance of the contract’, with the exception of parent company guarantees, the issuer or guarantor does not undertake to compel the contractor to perform the services (which would be out of his or her power in any event). The contractor is incentivised to perform the construction contract by their own autonomous obligations under the same, as well as obligations owed to the issuer under a counter-indemnity. Performance bonds and guarantees are typically provided by way of on-demand bonds or guarantees, save in exceptional circumstances where the balance of negotiating power between the parties is such that the contractor is able to negotiate a conditional guarantee.

Parent company guarantees The purpose of a parent or group company guarantee is to provide the other party to the construction contract with recourse to a group company with a better financial standing than the contracting party. This is particularly relevant for international contracting, when the contractor will often set up a subsidiary within the jurisdiction of the employer for the sole purpose of undertaking the specific project.This subsidiary will typically have no assets save for the income paid under the construction contract, which will likely be insufficient to meet the employer’s claims if there is substantial non-performance. The value of such a guarantee depends on the creditworthiness of that group company and care needs to be taken that the guarantee is provided by a group company that holds (and will continue to hold) substantial assets. For smaller construction groups it is normal for the ultimate parent company guarantee to provide such a guarantee. However, many larger, listed international contractors have internal policies limiting access to guarantees from the ultimate parent company to the most significant projects entered into by the contractor, subject to board approval and clear limits on the parent’s potential liability.

period as may be agreed); or (4) if the beneficiary awards the contract to the tenderer, and the tenderer fails to provide compliant performance security to the beneficiary within 28 days from when it receives the letter of acceptance (or a different period as may be agreed).

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Retention bonds and guarantees In construction contracts, the employer is generally entitled to retain a percentage of the contract price (typically 5 per cent) pending completion of the work to form a retention fund. The retention fund is available to the employer to ensure the contractor completes any snagging works and rectifies defects during the defects liability period. It is normal for 50 per cent of the retention monies to be released on practical completion, with the remainder released at the end of the defects liability period. It is increasingly common for construction contracts to permit the contractor to have an earlier release of the retention monies in exchange for providing an on-demand bond or guarantee. This results in improved cash flow for the contractor without compromising the employer’s security.

Payment guarantee In some cases, where the contractor has concerns regarding the employer’s financial standing, the contractor may seek a payment bond or guarantee to cover a percentage of the contract sum. Since the contractor is generally paid in stages as the work progresses, this should provide sufficient protection to the contractor in respect of payments outstanding for completed works. As noted above, in certain jurisdictions and sectors, security for payments will be made by way of standby letters of credit.

Dispute resolution Security instrument versus construction contract One of the main challenges in a major international construction project involving multiple parties and multiple contracts occurs when the parties to the various contracts do not sign up to consistent dispute resolution procedures. This is typically the norm regarding security instruments and construction contracts, given that most banks require disputes under the security to be resolved by their local courts, while the construction contract will usually specify international arbitration. This can cause considerable problems in the context of conditional guarantees. As set out above, a claim under the guarantee requires the same proof that the contractor is liable as would be required if the employer sued the contractor directly. However, in the absence of an express provision in the guarantee that the guarantor will be bound by the findings in proceedings between the employer and the contractor, an award or judgment in those proceedings will not be binding on the guarantor,37 and in principle, the guarantor would be entitled to demand that the matter be re-litigated. The decision of the Commercial Court in Autoridad del Canal de Panamá v. Sacyr S.A. & Others38 provides a recent example. That case is one of many concerning the major construction and engineering project for the widening of the Panama Canal by a third set of locks. Autoridad del Canal de Panamá (ACP) was the employer under the project. The contractor (GUPC)

37 Re Kitchin Ex p.Young (1881) L.R. 17 Ch. D. 668; Alfred McAlpine Construction Ltd v. Unex Corpn Ltd (1994) 38 Con LR 63, CA. 38 [2017] EWHC 2228 (Comm); cited with approval in China Expert & Credit Insurance Corporation v. Emerald Energy Resources Limited [2018] EWHC 1503 (Comm), paragraph 55.

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was a Panamanian company, owned in varying proportions by the four defendants. The main contract between ACP and GUPC was governed by Panamanian law and prescribed arbitration in Miami under the ICC Arbitration Rules. There were three separate types of guarantee given by the first to fourth defendants to secure advance payments made by ACP to GUPC. These were all governed by Panamanian law with Miami ICC arbitration clauses. In 2015, ACP made further advance payments, and the defendants provided further guarantees governed by English law and subject to the exclusive jurisdiction of the English courts. ACP commenced proceedings in the English courts seeking declarations that it was entitled to payment under six of the advance payment guarantees governed by English law (the APGs). ACP contended that the guarantees were demand bonds and that it was entitled to payment under the APGs as a result of GUPC’s alleged failure to repay advance payments pursuant to the main contract. GUPC and the defendants filed a request for ICC arbitration under the main contract and various other guarantees, seeking declarations that repayments of the advance payments were not due or payable under Panamanian law and the relevant agreements. The defendants sought a mandatory stay of the English proceedings under Section 9 of the English Arbitration Act 1996 on the basis that they concerned matters that should have been referred to arbitration, alternatively a stay under the court’s inherent jurisdiction or case-management powers on the basis that it would be more appropriate for the parties’ disputes to be resolved in the arbitration proceedings. Blair J. rejected both contentions. The mandatory stay was refused because the subject of the parties’ controversy in the English proceedings was a claim under the APGs: while the issue of the liability of the GUPC (as the principal debtor) was necessarily bound up with the nature of the instrument as a guarantee, GUPC’s underlying liability was not the matter that had to be decided by the English court.39 While acknowledging the risk of inconsistent decisions,40 Blair J. also rejected a stay on case-management grounds.41 Blair J. came to the same conclusion in Deutsche Bank AG v. Tongkah Harbour Public Co Limited,42 in which the defendants sought a stay of court proceedings brought under a guarantee pending the outcome of arbitration under the underlying contract. He said:43 The more substantial point argued by [the guarantor] is that since its liability under the Guarantee is of a secondary nature, the court should stay the proceedings under its inherent jurisdiction, and/or under its case management powers, pending the arbitration. I reject that submission also. A claim under a guarantee may raise similar or even the same issues as the claim against the principal debtor, but the covenant to pay is given by a different party, here the parent company. [The Claimant] is entitled to enforce the Guarantee if it can make good its claim, regardless of the claim against the principal debtor. The fact that there may be…substantial overlap between the claims does not affect this conclusion…

39 40 41 42 43

Ibid, paragraph 137. Ibid, paragraph 161. Ibid, paragraph 166. [2011] EWHC 2251 (QB). Ibid, paragraph 30.

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Accordingly, from the employer’s perspective it would be preferable if claims under the underlying contracts and those under the security instruments could be consolidated and heard at the same time to avoid the risk of inconsistent decisions. However, unless all parties agree, such consolidation may be difficult to achieve in the context of conflicting arbitration or jurisdiction clauses. This issue is less pertinent in the context of on-demand bonds. As set out above, an on-demand bond is theoretically independent of the underlying contract and the issuer’s obligation to make payment arises on the presentation of the correct documentation. Accordingly, any proceedings between the employer and the contractor under the main construction contract should be of no or limited relevance to the issuer, and there should not be any need for consolidated proceedings. However, as noted above, courts are increasingly showing a willingness to block payments under on-demand bonds and guarantees pending the outcome of the corresponding dispute under the construction contract.

Claims under the construction contract relating to the security Where the security is blocked by a court, or the employer refuses to return the security to the contractor for some other reason, the contractor will often bring claims in arbitration proceedings under the construction contract seeking immediate return of the bond or guarantee, and damages in relation to the prolonged duration of the bond or guarantee. The damages typically include the cost of maintaining the security beyond the date when the contractor says the security should have been returned, and losses associated with maintaining the security. Regarding the latter, where a bond or guarantee is blocked pending resolution of the underlying disputes, the contractor’s ability to tender for new projects (which themselves require bonds or guarantees) will be restricted, creating the possibility of a claim for loss of opportunity to earn profits on other projects. Similar claims may be made where the project has been prolonged owing to employer-risk events.

Reconciling sums awarded under the construction contract with monies already recovered under the security A practical issue concerning the interaction between an on-demand guarantee and claims under the construction contract arose in Fluor v. Shanghai Zhenhua Heavy Industry Co., Ltd.44 Fluor had engaged the defendant to fabricate steel monopiles for an offshore wind farm, with the defendant’s performance secured by an on-demand warranty bond issued in euros. Fluor called the bond and received the secured sums. In subsequent litigation, Fluor was awarded damages in excess of the monies recovered under the bond. The parties agreed that credit should be given by Fluor for the monies received under the warranty bond, but disagreed as to how the credit was to operate. The judge found that: • the bond monies were to be treated as a payment on account of Fluor’s claim;45 • euro sums awarded to Fluor was simply netted off the bond monies; and

44 [2018] EWHC 490 (TCC). 45 Ibid, paragraph 41.

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• the remaining euro sum was to be converted into sterling at the exchange rate prevailing on the date Fluor received the bond monies, irrespective of when Fluor actually converted the euros into sterling.46

46 Ibid, paragraph 55.

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4 Pricing and Payment Tony Dymond and Sophia Burton1

Price and payment are central to most commercial transactions. In the complex web of reciprocal obligations that comprise sophisticated modern construction contracts, the overarching significance of these matters may not immediately be apparent to the casual reader. However, notwithstanding the relative brevity with which it may be expressed, the principal obligation of an employer under a construction contract is to pay for the work. This chapter addresses how much, when and upon what conditions.

Pricing It is often said that one of the principal functions of a construction contract is to allocate risk. If a risk that has been allocated to the contractor occurs, the contractor will be obliged to execute the works without any additional payment to compensate it for costs incurred as a result of the occurrence.2 Conversely, if the risk is allocated to the employer, the contractor will typically receive additional payment if that risk eventuates. Commonly, the language of provisions in a construction contract is, explicitly, the language of risk. For example, a contract may provide for financial compensation or additional time for completion where a contractor is delayed by unforeseen ground conditions, exceptionally inclement weather and the like. By contrast, the choice of pricing model entails an implicit risk allocation between the parties to the contract. There is no conditional statement providing for payment upon the happening of an event, but the pricing mechanism itself does that work. A bricklayer who agrees a fixed price for building a wall will bear the risk that it requires more bricks (and therefore more labour) to complete than anticipated, whereas if the bricklayer agrees a rate per brick laid, the employer will bear that risk.

1

Tony Dymond is a partner and Sophia Burton is an associate at Debevoise & Plimpton LLP.

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The risk allocation effected by the pricing model may not be immediately obvious because it is implicit, but it needs to be analysed and considered together with all of those risks that are expressly allocated to one or other party (or in some cases shared by the parties) if the risk profile of the contract is to be understood properly. Once the pricing model is seen as a risk allocation device, risk management techniques can be used to inform the choice. An employer choosing a pricing model should consider: • which risks it allocates to the contractor; • whether the contractor can accept those risks; • whether it can manage and bear those risks; • what premium it will charge for accepting the risks; and • what behaviour the retention or transfer of those risks will incentivise. Finally, while under most legal systems many risks can be allocated to either party, the risk of change of scope directed by the employer and the risk of the employer interfering in, delaying or hindering the progress of the works will usually rest with the employer.3 A high probability that such risks will frequently arise may militate in favour of a pricing model that automatically allocates that risk without the need for the engagement of the contractual mechanics of notices, variations, claims, complex valuation rules and the like, which can be cumbersome, time consuming and expensive to operate, and can promote adversarial behaviour.

Lump sum or fixed price contract These are contracts in which the total contract price is pre-agreed. The price can be adjusted pursuant to the change or variation regime if the employer instructs variations to work scope. In addition, the contractor will be entitled to financial compensation4 for the employer’s interference with progress, and may be so entitled for other identified neutral risks that might include the ground and weather conditions examples referred to above. This pricing method provides the employer with the greatest possible certainty as to cost and, correspondingly, exposes the contractor to the greatest possible risk. Subject to the price adjustment mechanism, the contractor takes on all pricing risks, such as quantities, labour efficiency, labour and material costs, plant costs as well as all neutral risks not specifically allocated to the employer under the price-changing mechanism. Fixed price contracts have obvious attractions for employers valuing price certainty above other considerations, for example, where the employer is a project financed special purpose vehicle, or where a public sector employer is highly sensitive to the political repercussions of substantial cost overruns. In some jurisdictions, the fixed price model is the default, particularly for public procurement, while others including the United Kingdom have seen growing interest in models that apportion risks differently. The prudent contractor will seek to identify and quantify the risks.The contractor may decide that the risks are too great or too uncertain to accept and decline to bid for the work. Similarly, an employer may conclude that the risks are too great for the contractor

3 4

There is a limited exception to this principle in contracts containing ‘no damages for delay’ provisions of the kind commonly found in the United States. This may take effect by way of a formal adjustment to the contract price or by a separate additional payment.

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(or any of the potential tenderers) to bear.There are few contractors that can bear the pricing risk on a multibillion dollar fixed price contract. If a contractor accepts a risk that it is unable to bear, the risk transfer is illusory – it reverts to the employer as insolvency risk.The unavailability of contractors who are willing to accept or able to bear the risk of a fixed price may dictate using another pricing model. Price certainty comes at a cost. A prudent contractor will include a contingency in its price to cover the risks it is accepting.That contingency will not always appear as a discrete line item in a tender but may be spread through the various items that make up the tender price. Further, a contractor will accept a risk only where there is a corresponding reward. The profit margin on a fixed price contract will, therefore, ordinarily be higher than it would be had the contract been let on some other basis.Where an employer has some flexibility as to the pricing model to be adopted, it will consider whether the risk premium that would have to be paid for the transfer of risks that may never arise represents good value for money.

Cost reimbursable contracts Cost reimbursable contracts (sometimes called a cost plus contract) sit at the other end of the risk allocation spectrum. The contractor is reimbursed the actual costs they incur in carrying out the works, together with an additional fee that may be fixed, a percentage of the costs, or some combination of the two. The employer will bear all of the pricing risk: the number of man hours, the labour rate, the quantities and costs of materials and of plant and materials, etc. In all but the most straightforward of projects, this is likely to translate to considerable uncertainty as to outturn cost. Since the contractor is bearing very little risk, it will not need to include a substantial contingency in its fee and will ordinarily be prepared to tender on a lower margin than it would for a fixed price contract. Cost reimbursable contracts are often employed where there is a high probability of risks arising that a contractor will not accept, for example, where the employer expects to have a very high degree of involvement in directing the execution of the works or otherwise interfacing with the contractor, or where the works comprise the refurbishment or upgrade of existing ‘grey’ assets, the condition of which is unknown. The principle of cost reimbursement means that it is not necessary to undertake a valuation on each occasion on which the employer gives a direction, or each time the condition of an existing asset differs from that assumed. While the administrative burden is potentially reduced because of the elimination of valuation exercises, cost reimbursable contracts do need to be closely supervised and managed. The contractor’s costs records need to be updated, maintained and made available to the employer (or third-party certifier). Importantly, contractors operating under cost reimbursable contracts may not be commercially incentivised to manage the works to a budget, thus increasing the risks of cost overrun. Employers engaging contractors on this basis may therefore require an increased level of scrutiny of, and involvement in, management, scheduling, procurement and resourcing.

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Unit price contracts In a unit price contract, the price is derived from agreed rates and prices for units of work. This might include prices for cubic metres of excavation, casting tonnes of concrete, laying metres of pipe, pulling and terminating cables, etc. The initial price will be based on an approximate quantity of the units, with the actual payment determined by the number of units actually required and used on the project. Unit pricing allows for the direct comparison of tender prices and benchmark prices. The employer takes the quantities risk but the contractor takes other pricing risks including the efficiency risk, in other words, the risk that it has wrongly assessed the number of man-hours per unit of production and the risk of the unit cost of of the materials.

Target cost contracts Target cost contracts use a mechanism in which a target will be agreed for the scope of works on the project, either for the entire project or for a portion of the works. The target price can be adjusted for changes instructed by the owner or other events using the contractual mechanisms. The contractor is paid on a cost reimbursable basis or according to agreed rates and prices. The difference between the costs incurred and the target cost is shared between the employer and contractor according to a formula that provides for their respective share of any cost saving (‘gain-share’) and their contribution to any cost over-run (‘pain-share’). The formulae can be quite sophisticated. In theory, it enables an employer to incentivise a contractor to control costs in circumstances in which a contractor is unable or unwilling to take the full pricing risk associated with a fixed price contract, or where the employer is unwilling to pay the premium a contractor would charge for accepting that risk. Often the formula is structured so as to provide the contractor with sufficient cash flow so as to complete the project if there is a cost overrun – effectively putting at risk only the contractor’s profit. A guaranteed maximum contract is a variation of a target cost contracts where the contractor is compensated for actual costs incurred plus a fee, subject to a maximum price. The contractor is responsible for cost overruns above the guaranteed maximum price, unless that guaranteed maximum price has been increased via formal change orders using the contractual mechanisms. Any savings resulting from cost underruns may be retained by the employer or may be shared between the parties according to a formula. Again, the use of a gain share formula incentivises the contractor to manage costs.

Fluctuations Some contracts provide a mechanism to deal with the effects of inflation, exchange rate changes affecting the import of materials, changes in unionised labour rates, etc., all of which can be significant on larger projects that span several years. Where such mechanisms are incorporated, contractors base the tender on current prices, which are then subject to adjustment. The fluctuation provisions will identify the costs to which they apply. Typically they provide for changes in the cost of labour, transport and materials. Usually, the fluctuation provisions will provide for the price adjustments to be calculated from nationally

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published price indices rather than calculating actual cost increases. A fluctuations provision is intended to allocate to the employer the risk of potentially volatile costs that a contractor cannot control.

Hybrid models and price conversion In practice, it is very common for a hybrid pricing model to be used. It is not unusual, particularly on large-scale projects, for a contract to be let in which some of the scope is fixed price while the remainder is cost reimbursable.The division may be by physical work scope or by activity: so the construction of a rail line might be fixed price while the construction of the associated stations might be undertaken on a target price; or the construction of a process plant might be fixed price while its commissioning, which entails a far greater degree of employer involvement, might be cost reimbursable. Where a pure pricing model is used, it may or may not be replicated further down the supply chain. So, for example, an employer may choose partially to de-risk a cost reimbursable contract by requiring the contractor to subcontract parts of the works on a fixed price basis (and may take a role in the procurement of the fixed price subcontracts). Another common model is to convert from cost reimbursement to fixed price when the scope can be properly ascertained, for example once the design is fully or at least sufficiently developed, or the precise condition of grey assets is understood. The drawback of this approach is that no competitive tender is held for the fixed price scope, so the employer may not achieve the best price for the work.

Payment Introduction Pricing and payment are linked. The pricing model will, to an extent, constrain the payment mechanism. But one theme runs through any discussion of payment, whatever the precise details of the mechanism: the management of cash flow. A contractor will generally wish to maintain a positive cash flow – that is to say for the payment received to exceed the costs incurred so that it can fund construction without drawing on its own cash reserves or third-party borrowing. Employers, too, have an interest in ensuring that the project is adequately funded. Failure to do so may result in the rate of progress being reduced or even the abandonment of the project. On the other hand, employers will want to ensure that the payments match the progress of the works, or that they have security for any overpayment or advance payment made early in the project delivery. Payment is almost always made on an instalment or interim basis as the works progress, using some kind of measurement, rather than for payment to be made in one lump sum at the end. Additionally, many contracts provide for the retention of sums as security for completion and the rectification of defects. In this section, the payment clauses of the FIDIC Conditions of Contract for Works of Civil Engineering Construction (2017), commonly referred to as the ‘Red Book’, will be used a basis for discussion.The pricing under the FIDIC Red Book is on a re-measurement basis, although there is an option for the contract to be set up on a lump sum basis.

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Advance payment It is common for the employer to make advance payments to the contractor. The advance payments are usually used on preparatory activities such as site mobilisation or purchase of machinery or materials. Ordinarily, the advance payment is recovered by the employer through deductions to the interim payments. Typically, the contractor is required to provide a bond or bank guarantee known as an advance payment guarantee as security for the return of the advance payment. In the FIDIC Red Book, Clause 14.2 provides the mechanism for the advance payment, advance payment guarantee and repayment of the same.The example form of the advance payment guarantee is in the form of an on-demand security instrument.

Payment applications Interim payments are typically made as the works progress, with payments being applied for on periodic basis, often monthly, or when certain stages or milestones of the project are met. The contract will require the contractor to make an application for a payment and will set out what specific information is to be included in the application, including the requirements to identify or demonstrate with specified documentary support the work done in the period or since the previous stage or milestone. If the employer is satisfied that the sum applied for is correct, it will make payment of the amount within a set time of receiving the payment application. The mechanism of payment will be constrained by the pricing mechanism selected. For example, if the contract is cost reimbursable then the payment mechanism will very likely be cost based. Other pricing models will result in other payment mechanisms; for example, a unit price contract will be driven by quantities (using rates and prices) whereas a lump sum contract will likely have payment mechanisms that reflect the progress achieved by the contractor in accordance with progress measurement rules, or by achievement of payment milestones. Nevertheless, there is considerable flexibility in the timing and assessment of payments that parties are free to negotiate though there are practical and commercial limits. For example, payment on a quarterly basis may cause the contractor cash flow difficulties whereas payment on a weekly basis may become too burdensome for the employer to verify and administer effectively. In the FIDIC Red Book, Clause 14.3 provides for periodic payment as agreed between the parties, or if not agreed, on a monthly basis and further sets out what information the payment application should include and what format the payment application should take. Clause 14.4 provides an option for the parties to use a schedule of payments specifying the instalments in which the contract price will be paid that is to be used as an estimate for the purposes of the interim payments. Most construction contracts also provide for some kind of final account and subsequent payment once the works have been completed, and the FIDIC Red Book follows this practice.5 The purpose of the final account is to allow both parties to calculate and agree any adjustments to the contract sum that may need to be adjusted because of variations, liquidated damages, fluctuations or payments relating to testing of the works. Often,

5

Clause 14.11 of the FIDIC Red Book also allows for partially agreed final statement in certain circumstances.

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agreement of the final account will also be accompanied by (or is a precursor to) the issuing of a final certificate. The final certificate is usually treated as conclusive, demonstrating that all patent defects have been remedied, all adjustments to the contract sum have been agreed and all claims settled. When drafting or negotiating the payment mechanisms in construction contracts, local law requirements or considerations have to be taken into account. For example, in the UK, there is a detailed payment scheme for all construction contracts under the Construction Act 1996.6 The Construction Act 1996 provides for a Scheme7 that takes effect as implied terms in a construction contract (as defined by the Construction Act 1996) where the construction contract does not include the necessary payment provisions under the Construction Act 1996. Those necessary provisions mandate that the construction contract must include or provide for: • payments made by ‘instalments, stage payments or other periodic payments for any work’;8 • an adequate mechanism for determining what payments become due under the contract, when those payments become due9 and a final date for payment for any sum that becomes due;10 and • a requirement for the paying party to make payment of the ‘notified sum’ by the final date for payment.11 There are also other prohibitions imposed by the Construction Act 1996, such as the prohibition of pay-when-paid clauses12 and pay-when-certified or other conditional payments.13 The purpose of these requirements and prohibitions is to ensure that regular payments are maintained to, in turn, enable the contractor to maintain the cash flow that is vital to the success of projects. In Australia, the rules governing payment in commercial construction contracts are the relevant Security of Payment legislation in each state and territory (SoPA).14 SoPA aims to ensure that contractors and subcontractors are paid for their work in a timely manner without the need for protracted legal disputes, recognising the importance of maintaining cash flow in the construction industry. The legislation in each jurisdiction differs slightly; however, common features include strict time frames in which an employer must respond

6 7 8 9 10 11 12 13 14

Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009, commonly referred to as the ‘Construction Act 1996’. Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011 (SI 2011/2333), commonly referred to as the ‘Scheme’. Section 109(1) of the Construction Act 2009, which applies if the duration of the contract work is specified or estimated to be more than 45 days. Section 110(1)(a) of the Construction Act 1996. Section 110(1)(b) of the Construction Act 1996. Section 111(1) of the Construction Act 1996. Section 113(1) of the Construction Act 1996. Section 110(1A) of the Construction Act 1996. For example, the Building and Construction Industry Security of Payment Act 2002 (Vic); Building and Construction Industry Security of Payment Act 1999 (NSW); Building and Construction Industry Payments Act 2004 (Qld); Construction Contracts Act 2004 (WA); and Building and Construction Industry Security of Payment Act 2009 (SA).

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to a contractor’s claim for progress payments as failing to do so entitles a contractor to the full amount claimed.15 The legislation also sets out the requirements for a proper or complete payment claim. If the parties disagree as to the amount owing, and provided the contractor’s claim is effective and the employer has responded in time, SoPA in each state and territory allows a contractor to swiftly proceed to adjudication and obtain a determination within a specified number of days (ranging from 10 to 15 days after the employer’s response is served).16 Recently, the state-by-state approach to SoPA has come under scrutiny, with many people advocating for a unified national approach.17 In the United States, at federal level, the Prompt Payment Act 1999 ensures that all contractors on public construction projects receive payments from the government within 30 days, with specified interest rates applying thereafter.18 In line with the federal legislation, many states have now introduced Prompt Payment laws as a means of protecting payments owed to prime contractors and lower-tier subcontractors.19 Many of the state-based Prompt Payment laws also impose interest on late payments.20 In addition, the United States also has state based legislation that allows various parties involved in construction projects (owners, contractors, subcontractors, suppliers and lenders) to encumber real property that is part of the construction project by way of a lien as security for payment (often referred to as ‘mechanic’s lien’).21 Who can apply for a lien and under what circumstances differs in each state.

Variations More often than not during a construction project, the scope of works will be varied. This might arise because the employer wants or needs to change the scope of works, the original scope of works can no longer be carried out, or the contractor may discover something that necessitates a change to the scope of works.Whether or not a change constitutes a variation and, therefore, which party bears the risk of that change, depends upon the terms of the contract. It is typically an issue that is bound up with the procurement methodology – who directed or is responsible for the matter that necessitated the change.

15 For example, under the Building and Construction Industry Security of Payment Act 1999 (NSW), an employer must respond to a contractor’s payment claim within 10 days setting out the amount it proposes to pay. Failing to respond within this time frame entitles the contractor to apply for summary judgment in the full amount of the payment claim. 16 For example, under the Construction Contracts Act 2004 (WA), an employer must provide a written response to a contractor’s adjudication application within 10 business days, following which the adjudicator must determine the dispute within 10 business days. 17 The Australian government commissioned the national Review of Security of Payment Laws, released on 21 May 2018. 18 Prompt Payment Act 1999. 19 For example, California Code, Civil Code – CIV Section 8800; A.R.S. 32-1129.02(B) in Arizona; New York Consolidated Laws, General Business Law – GBS Section 756-a. 20 For example, Section 715.12(4), Fla. Stat; 73 P.S. Section 505(c); Texas Property Code 28.004. 21 For example, California Constitution, Article XIV, Section 3; New York’s Lien Law Article 2.

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There is no requirement to have the same pricing mechanism for a variation as for the original contract price, and it is not uncommon for the pricing mechanism for the base contract to be different from the pricing mechanism for any variation. For example, a fixed price contract might provide for variations valued by reference to rates and prices, or reference to the cost of the variation works or cost plus a certain percentage for profit. Variations are often contentious, in particular the valuation of the work done (or to be done). More sophisticated contracts will contain provisions that regulate how variations are to be valued, but even with those provisions, disputes often arise. Under the FIDIC Red Book, variations are valued in accordance with Clause 12 using measured quantities of the varied work. Clause 12.3 sets out the procedures for the measurement and evaluation of the works, based on the net actual quantities of work that have been executed and variations are also valued in accordance with this clause. The basis for the appropriate rate or price is that which is specified in the Bill of Quantities or if there is no such item specified therein, the rate or price is based on that for ‘similar work’.22 Clause 12.3 also provides for instances where a new rate or price may be required.

Contractor’s costs Another contentious topic relates to the contractor’s costs and what a contractor can or cannot recover. In more sophisticated contracts, there will be a definition of the term ‘cost’ and when cost or cost plus a percentage profit is recoverable. For example, in the FIDIC Red Book, ‘cost’ is defined as: all expenditure reasonably incurred (or to be incurred) by the Contractor in performing the Contract, whether on or off the Site, including taxes, overheads and similar charges, but does not include profit.23

Another example is the NEC4 ECC form of contract using Option C, under which the contractor is entitled to be paid the defined cost of carrying out the works. Clauses 52.2 and 52.4 of Option C require the contractor to make its cost records available to the Project Manager on an open book basis. The definition of ‘defined cost’24 comprises: • the cost of components listed in the Schedule of Cost Components; and • less ‘disallowed cost’, including costs not justified by the accounts and records, costs of correcting defects or cost incurred due to the contractor not following a procedure stated in the scope or not giving an early warning.25 While the above examples of definitions are clearly aimed at trying to prevent disputes arising as to what the contractor can or cannot recover as ‘costs’, there is ambiguity in the provisions that will often lead to a dispute. For example, the FIDIC Red Book definition

22 23 24 25

Clause 12.3 of the FIDIC Red Book 2017. Clause 1.1.19 of the FIDIC Red Book 2017. Clause 11.2(24) of Option C, NEC4 ECC. Clause 11.2(26) of Option C, NEC4 ECC.

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begs the question as to what is meant by a cost that is reasonably incurred, whereas the NEC4 definition of ‘disallowed cost’ might give rise to a dispute about what standard of justification is required by the contractor’s accounts and records.

Other considerations A common issue is whether and to what extent the employer is entitled to withhold or deduct amounts from the contractor. Under the FIDIC Red Book, Clause 14.6.2 sets out how amounts can be withheld from an interim payment if the contractor has failed to perform any work, service or obligation under the contract. Local laws might set out statutory provisions in relation to withholding of payments or payment schemes. In the UK, if an employer wishes to withhold money it must serve a notice in a particular form, referred to as a ‘pay less notice’ to be entitled to do so.26 Another recurring issue is entitlement to interest on late payment. Whether or not a contractor can claim interest or financing charges may depend on the jurisdiction and governing law of the contract. However, assuming that there is no prohibition or over-arching local law, it is common for a contract to contain a contractual rate of interest for late payments. Further, in some jurisdictions, there is also a statutory rate of interest.27 In the FIDIC Red Book, Clause 14.8 applies to delayed payments and the contractor is entitled to financing charges compounded monthly.28 The contactor is entitled to such amounts without the need to submit any formal notice.

Retention Construction contracts typically allow the employer to retain a percentage of the value of the work carried out until completion of the works (or a section thereof) or until the making good of defects. This mechanism provides security to the employer against the risk that the contractor either does not complete the works or fails to remedy any defects. Usually the employer keeps the retained amount, the ‘retention’, either for a specified period or until a specified event has occurred, after which it is released to the contractor. Under the payment terms of the FIDIC Red Book, the amount of retention is agreed upon by the parties.29 That agreed percentage will be deducted from each of the interim payments under Clause 14.3(iii).The FIDIC Red Book follows the usual practice of releasing the retention to the contractor in two equal portions as set out in Clause 14.9: • half when the taking-over certificate has been issued for the whole of the works and the works have passed all specified tests (or if sectional completion is being used when the section is complete a relevant percentage based on the percentage value of that section); and

26 Section 111(3) of the Construction Act 1996. 27 For example, in the UK the Late Payment of Commercial Debts (Interest) Act 1998 may apply and in the US, the Prompt Payment Act 1999 may apply. This is in contrast to countries or jurisdictions that operate under shariah law, in which interest is usually prohibited. 28 To be calculated at the annual rate of 3 per cent above one of three rates set out in Clause 14.8. 29 Other standard forms do contain a percentage for the retention, for example, under the JCT standard for contracts the retention amount is 3 per cent.

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• half after the expiry of the defect notification period (or relevant percentage of the works for sectional completion). The Guidance Notes accompanying the FIDIC Red Book address the option for the parties to include a special provision that allows for the early release of retention money to the contractor in exchange for some other kind of security.30 FIDIC is not alone in so doing; the Joint Contracts Tribunal standard forms also provide for a retention bond as an alternative to the retention of monies from the interim payments.

Payment on termination Termination of a construction contract gives rise to potentially complex payment issues that may turn on which party terminated, for what reasons and whether or not the party terminated under the contract or at law. Sophisticated contracts set out the consequences for the different types of termination, and the FIDIC Red Book does so in Clauses 15 and 16. Clause 15 addresses the consequences of termination by the employer and provides for two options: termination for contractor’s default31 and termination for employer’s convenience.32 Clause 15.4 sets out the payment consequences of a contractor’s default that allows the employer to withhold payment to the contractor of the amounts agreed or determined in line with Clause 15.3 until all the costs, losses and damages under Clause 15.4 have been established. While the specifics of these clauses are particular to the FIDIC Red Book, the principle underlying these clauses is quite common in that termination for default enables the employer to recoup any loss or damage it has suffered before making any payment to the contractor. Termination for convenience provisions are common but are usually only available to the employer. Consideration must be given as to whether local laws prevent or restrict any express contractual right to terminate for convenience or otherwise. Clause 15.7 sets out the payment obligations following a termination for convenience: the employer must pay the amount certified in the payment certificate to the contractor within 112 days after the engineer received the contractor’s submission in accordance with Clause 15.6.33 Clause 16 sets out the consequences for termination by the contractor and Clause 16.4 sets out the consequences for payment after termination by the contractor: The employer must pay the contractor: • the value of the work done;34 and • any loss of profit or other loss or damage suffered or incurred by the contractor as a result of the termination.

30 The FIDIC Conditions of Contract for Works of Civil Engineering Construction (2017), Guidance for the Preparation of Particular Conditions, p.42. 31 Clause 15.2 of the FIDIC Red Book. 32 Clause 15.5 of the FIDIC Red Book . 33 Clause 15.6 of the FIDIC Red Book also sets out how the valuation after termination is to be carried out and what can and cannot be included. 34 What is included in the value of the work is set out in Clause 18.5 of the FIDIC Red Book.

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5 Introduction to the FIDIC Suite of Contracts Ellis Baker, Anthony Lavers and Rebecca Major1

The origins of the FIDIC suite The Fédération Internationale Des Ingénieurs-Conseils2 (FIDIC) was founded in Belgium in 1913. Since then, it has become the foremost representative body for the world’s consulting engineers, with member associations in some 100 countries. Although the Contracts Committee became one of its earliest constituent parts soon after FIDIC’s foundation, it was not until 1957 that the first FIDIC standard form contract was produced. The first contract, known as the Red Book First Edition,3 was not actually drafted by FIDIC but was instead an authorised ‘re-badging’ by FIDIC, of the ICE Conditions of Contract Fourth Edition, published by the Institution of Civil Engineers. This was itself an ‘international’ contract in the sense that it had been adopted by the Association of Consulting Engineers (ACE) as such. Although the modern FIDIC forms have developed very significantly since the 1950s, it is still relevant to note that ‘[t]he Red Book is based on a domestic contract.’4 These common law origins continue to be used as a criticism by some commentators, especially in civil law jurisdictions, who are sceptical of FIDIC’s entitlement to its paramount position, though the Silver Book, for example, owes relatively little to an English heritage. Successive editions of the Red Book were issued in 1969,5 19776 and 1987.7

1 2 3 4 5 6 7

Ellis Baker is a partner, Anthony Lavers is counsel and Rebecca Major is an associate at White & Case LLP. The International Federation of Consulting Engineers. Conditions of Contract for Works of Civil Engineering Construction, 1957. Dr Nael Bunni, The FIDIC Forms of Contract, 3rd ed, Ch.2, Blackwell Publishing (2005). 2nd ed. 3rd ed. 4th ed, as reprinted in 1988 and 1992 with editorial amendments.

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The other long-established FIDIC contract is the Yellow Book,8 first produced in 1963 and with subsequent editions in 19809 and 1987,10 which is the design and build equivalent of the employer design Red Book.

Landmarks in development of the Contracts In the mid-1990s, two significant events occurred in the history of the development of the FIDIC Contracts. These were the introduction of a turnkey contract, the Orange Book,11 and the setting up of a task group to produce a major revision of the Red and Yellow Books. These events led to the launch in 1999 of the so-called ‘Rainbow Suite’ from the colours of the covers of the respective Books: Red,Yellow and Silver.12 In December 2017, 18 years after FIDIC released its First Edition Rainbow Suite in 1999, FIDIC published Second Editions of the Red,Yellow and Silver Books as updates to the First Editions. The introduction of the 2017 Rainbow Suite was the latest significant landmark in the development of international contracting for major infrastructure projects worldwide. The position of the FIDIC contracts, specifically in major development work, has been secured by the signing of a five-year agreement with the World Bank,13 with a commitment to use six FIDIC agreements14 for its projects, and on 10 May 2019 a five-year agreement with the Inter-American Development Bank,15 which will ensure the use of the same contracts for development-financed projects in Latin America and the Caribbean.16 The latest addition to the FIDIC suite is the Conditions of Contract for Underground Works, known as the Emerald Book. This contract, produced in collaboration with the International Tunnelling and Underground Space Association, was released on 7 May 2019.17

8 9 10 11 12 13 14 15 16

17

Conditions of Contract for Plant and Design-Build for Electrical and Mechanical Plant, and for Building and Engineering Works, Designed by the Contractor. 2nd ed. 3rd ed. Conditions of Contract for Design-Build and Turnkey, 1995. As stated below, the Green Book, FIDIC’s short form of contract, also has a claim to be considered as part of the Rainbow Suite, as it was issued in 1999. FIDIC, ‘World Bank signs five-year agreement to use FIDIC standard contracts’, http://fidic.org/world-ban k-signs-five-year-agreement-use-fidic-standard-contracts, accessed 25 July 2019. These are the 2017 Red Book, 2017 Yellow Book, 2017 Silver Book, 2017 White Book, 2008 Gold Book and 1999 Green Book. FIDIC, ‘Inter-American Development Bank signs five-year agreement to use FIDIC standard contracts’, http://fidic.org/node/22327, accessed 25 July 2019. A similar agreement has been reached with the Caribbean Development Bank in July 2019: FIDIC, ‘Caribbean Development Bank signs five-year agreement to use FIDIC standard contracts’, http://fidic. org/node/23548, accessed 25 July 2019. On 18 July 2019, FIDIC also entered into a memorandum of understanding with the China International Contractors Association (CHINCA) to improve collaboration between international and Chinese businesses, facilitate skills and knowledge transfer and increase the understanding and use of FIDIC contracts: FIDIC, ‘FIDIC signs ground-breaking collaboration agreement with China International Contractors Association’, http://fidic.org/node/23602, accessed 25 July 2019. See further details below.

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An Overview of the Leading FIDIC Contracts: Red,Yellow and Silver Books During 2019 and for the immediate future, the principal FIDIC contracts are in a state of transition. The official position is quite straightforward. The current versions of the Red, Yellow and Silver Books are the Second Editions, which were launched by FIDIC in London18 on 5 December 2017. However, the reality is that the contracts in widespread use at the time of writing are those of the 1999 Rainbow Suite, a situation which is likely to continue for some time to come. It is therefore necessary to provide short accounts of the 1999 Red, Yellow and Silver Books, before offering an introduction to their 2017 successors.

The 1999 Rainbow Suite: Red, Yellow and Silver Books One of the strengths of the FIDIC contracts has been consistency of structure. The 1999 Red,Yellow and Silver Books share the same 20-clause format and, so far as possible, the clause numbers correspond to their equivalents in each book. However, the individual contracts reflect quite different approaches to construction procurement and these extend to divergences in detailed provisions. The Contract is formed using the Red or Yellow Books by the exchange of Letter of Tender and Letter of Acceptance: the Silver Book equivalent is the Parties’ execution of the Contract Agreement. The design of the Works is set out as a Specification19 or the basis for the design provided in the Employer’s Requirements.20 Crucially, there will be Particular Conditions, which are specific to the project in question. The explanation of the characteristics and features of the individual contracts below refers to the General Conditions. FIDIC has prepared translations of the 1999 Red,Yellow and Silver Books into selected languages, partly to deal with the problems caused by unofficial, and often very inaccurate, translations.The Red,Yellow and Silver Books have all been translated into Arabic, Chinese, French, Polish, Portuguese, Romanian, Russian, Spanish, Turkish and Vietnamese. A further nine European languages (Bosnian, Croatian, Estonian, Hungarian, Italian, Latvian, Lithuanian, Serbian and Slovak) have at least one contract translated, as do three Asian languages (Bahasa Indonesia, Japanese and Mongolian). There are guidance notes in German. The 2017 Second Editions of the Red, Yellow and Silver Books were launched solely in English versions. However, FIDIC recognises the role of language in facilitating wider usage and in February 2019 Chief Executive Dr Nelson Ogunshakin announced that translations of the 2017 editions would be prepared in Arabic, Chinese, French, Portuguese and Spanish, particularly ‘to aid effective use across the World Bank and other multilateral development banks’ operating countries’.

18 At the 30th FIDIC Users Conference. 19 1999 Red Book. 20 1999 Yellow and Silver Books.

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The 1999 Red Book:The Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer The Red Book is not only the oldest of the FIDIC contracts, celebrating its 60th anniversary in 2017); it is also the most widely used for general construction projects of many kinds. The single most important characteristic of the Red Book is contained in its full title: it is an employer design contract. The design, prepared by the Employer’s staff or by consultants acting on its behalf, is provided to the Contractor in the form of Specifications and Drawings (and any Schedules). The payment mechanism21 is traditional measurement and valuation. However, it is open to the Parties to vary this position. FIDIC advises22 of ‘the possibility of replacing Clause 12 by appropriate Particular Conditions for a lump-sum contract or a cost-plus contract’.23 Also traditional is the role of the Engineer: ‘who shall carry out duties assigned to him by the Contract.’24 It may seem paradoxical that the Engineer’s duties, including such important functions as the making of determinations,25 should be usually much more fully set out in the Contract, to which the Engineer is not a Party, than in the contract for professional services (or employment contract) which governs the relationship between Employer and Engineer. This is regarded as normal in common law jurisdictions, but the ‘dual role’ of the Engineer as agent of the Employer, and as a decision-maker acting fairly between the Parties, is sometimes regarded with misgivings in civil law jurisdictions.26 In other respects, the 1999 Red Book follows in the line of its predecessors as an engineering contract in the common law style. Glover and Hughes provided in their Second Edition a brief outline of the 20-clause structure27 and further analysis of specific aspects of its content is provided in Chapter 5, ‘Allocation of Risk in Construction Contracts’. A departure from that tradition is found in the replacement of the dispute-resolution function of the Engineer by a Dispute Adjudication Board (DAB).28 This mechanism had first been introduced by FIDIC in 1995 in the Orange Book.29 It is found in Clause 20 of the 1999 Red,Yellow and Silver Books, though not in identical form. In the 1999 Red Book, the DAB is appointed30 by the Parties at the outset of the project, allowing its members to become familiar with its progress and challenges.

21 22 23 24 25 26 27 28 29 30

Clause 12. The FIDIC Contracts Guide, p. 205 (2000). Guidance for the Preparation of Particular Conditions pp.12-13. Sub-Clause 3.1. Sub-Clause 3.5. For a civil law perspective of this issue, see Axel-Volkmar Jaeger and Götz-Sebastian Hök, FIDIC – A Guide for Practitioners, Springer, pp. 103-104 (2010). Jeremy Glover and Simon Hughes QC, Understanding the FIDIC Red Book: A Clause-by-Clause Commentary, 2nd ed., Sweet & Maxwell, pp. xvi-xix (2011). Sub-Clauses 20.2-20.4. See n. 11, above. Sub-Clause 20.2.

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The 1999 Yellow Book:The Conditions of Contract for Plant and Design Build for Electrical and Mechanical Plant and for Building and Engineering Works designed by the Contractor The Yellow Book is FIDIC’s second-oldest contract, and almost certainly its second most widely used, for electrical and mechanical plant and also for design and build work more generally. As with the Red Book, the contract’s most important feature is contained within the full title; it is FIDIC’s principal contractor design contract.31 The design is prepared by the Contractor in accordance with the Employer’s Requirements, which specify ‘the purpose, scope and/or design and/or other technical criteria for the Works.’32 The Contractor accepts a fitness for purpose obligation33 for the Works, including the design. The payment mechanism for the Yellow Book is lump sum fixed price, with provision for progress payments on the basis of Engineer certification. Like the Red Book, the Yellow Book contract is administered by the Engineer (see above). A major difference is evident from the Clause 20 dispute resolution provisions of the 1999 Red and Yellow Books.Whereas the 1999 Red Book provides for a ‘standing’ DAB to be appointed ‘by the date stated in the Appendix to Tender,’ under the 1999 Yellow Book,34 the Parties ‘jointly appoint a DAB by the date 28 days after a Party gives notice to the other Party of its intention to refer a dispute to a DAB.’ This is known as an ‘ad hoc’ DAB and can be criticised as losing one of the major advantages of the DAB model, namely, the ability of the members to become familiar with the project and the personnel engaged on it. It has been suggested that the disparity is explained by the difference in the type of projects for which the Red and Yellow Books are respectively used.35 The Yellow Book has long been one of FIDIC’s most important contracts. The content of its earlier editions influenced the Silver Book to some extent and also the Gold Book36 and Emerald Book,37 all of which are based on the contractor design concept. Its risk allocation (see Chapter 5, ‘Allocation of Risk in Construction Contracts’) resembles more the Red Book in terms of the perception of traditional balance between Employer and Contractor.

The 1999 Silver Book:The Conditions of Contract for EPC/Turnkey Projects The 1999 FIDIC Silver Book is the third of the major Rainbow Suite contracts. It was the most controversial upon its launch and to some extent remains so. This is largely attributable to perceptions of its risk allocation. FIDIC’s first turnkey contract was the Orange Book38 but the Silver Book was seen as a greater departure from the traditional FIDIC contracts which preceded the 1999 Rainbow Suite.

31 32 33 34 35

Though not the only one: see also Silver and Gold Books. Sub-Clause 1.1.1.5. Sub-Clause 4.1. Sub-Clause 20.2. See Ellis Baker, ‘Is it all necessary? Who benefits? Provision for multi-tier dispute resolution in international construction contracts’ Society of Construction Law Paper No. 154 p. 12 (2008). 36 Conditions of Contract for Design, Build and Operate Projects 2008. 37 Conditions of Contract for Underground Works 2019. 38 See above.

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Essentially, the Silver Book is a lump sum EPC turnkey contract. As with the Yellow Book, the design is prepared by the Contractor in accordance with the Employer’s Requirements.39 The Contractor assumes full responsibility for the engineering, procurement and construction of the Works and undertakes a fitness for purpose obligation for the Works, including the design.40 Unlike the Red and Yellow Books, the Contract is not administered by an Engineer; there is no such appointment. Instead, decisions are made and other contract administration functions performed, by the Employer, with or without an Employer’s Representative.This form of contracting is typically used on complex engineering facilities, such as process or power plants, where a high degree of certainty as to cost, time and performance is required, often because of ‘bankability’ issues in funding the project.The concept is that the Employer obtains a fully functioning facility, capable of operating immediately to guaranteed standards of performance, i.e., ready at the ‘turn of a key’. In these respects, the Silver Book is typical of its kind. FIDIC justified its 1999 launch, and the perceived break with balanced risk allocation, purely as a pragmatic response to market demand. In the words of the then Chairman of the Contracts Committee, ‘FIDIC felt that the best service it could give to the industry at this time would be to come out into the open with a standard form to satisfy those needing more security of final cost and time than FIDIC’s traditional forms can give.’41 Therefore, ‘the more risks a contractor is required to bear, the higher the ‘premium’ a prudent contractor must add to his price to cover his extra risk taking.’42 FIDIC’s position, then, was that the Silver Book is simply a different vehicle for the procurement of engineering projects and that there is no question of unfairness in the greatly altered balance of risk allocation. Some of the responses from representatives of the contracting industry purported to regard the publication of the 1999 Silver Book as indicative of anti-contractor animus on the part of FIDIC. The European International Contractors43 organisation was consulted by FIDIC in the process of preparing the 1999 Rainbow Suite, but proceeded to publish its very critical Guide, complaining of ‘the Silver Book’s departure from the traditional FIDIC contractual and risk-sharing philosophy’.44 Some of the criticism published by others was more intemperate still; ‘Contractors will seek and likely find ways to recover compensation for risk they should not have been required to assume, litigation will increase, not decrease, and projects will suffer.’45 While the 1999 Silver Book, in keeping with the EPC turnkey concept, allocates much more risk to the Contractor than in more ‘balanced’ contracts, such as the 1999 Red and Yellow Books, it should not be regarded in emotive terms. Contractors routinely do price for the varying degrees of risk allocation in contracts. The omission of

39 Sub-Clause 1.1.1.3. 40 Sub-Clause 4.1. 41 Christopher Wade ‘The Silver Book: The Reality’ International Construction Law Review,Vol. 18, Part 3 p.501 (2001). 42 Christopher Wade (op. cit.), p. 508. 43 A federation of construction industry bodies from 15 European countries. 44 Commentary on the EIC Guide by the Chairman of the EIC Conditions of Contract Working Group: Frank Kennedy, EIC Contractor’s Guide to the FIDIC Conditions of Contract for EPC Turnkey Projects (The Silver Book). International Construction Law Review Part 4, p. 505 (2000). 45 Anthony Gaede Jr., ‘The Silver Book: an unfortunate shift from FIDIC’s tradition of being even-handed and of focusing on the best interests of the project’ International Construction Law Review, Part 4, p. 502 (2000).

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the Engineer from a FIDIC form of contract was inevitably remarked on and the absence of the beneficial effect of the Engineer’s contract administration might often be felt in the conduct of the project. However, the Parties will always have made the choice with their ‘eyes open’ and, like all contracts, a contract under the 1999 Silver Book will have been freely entered into. In the final analysis, it has been no more than an extension of the range of choice in the FIDIC suite and should be seen in this context.

The 2017 Editions of the Red, Yellow and Silver Books The new suite of FIDIC contracts comprises new editions (described by FIDIC as Second Editions) of the Red,Yellow and Silver Books. Conceptually, the new versions are similar to their 1999 predecessors: the 2017 Red Book is FIDIC’s ‘traditional procurement’ employer design contract, the 2017 Yellow Book has the dual function of design-and-build/contractor design and mechanical/electrical plant procurement, and the 2017 Silver Book is FIDIC’s EPC/Turnkey Contract. However, the 1999 Books have been substantially revised and the 2017 Books represent a significantly different proposition for an intending user to consider.

Generally The contracts have been greatly expanded.The 1999 Books were each about 60 pages long, with some 20 pages of guidance notes. Each of the 2017 Books is over 100 pages long with more than 40 pages of guidance notes. The familiar 20-clause structure has been replaced by 21 Clauses in all three Books. A striking new feature of the 2017 Books is the inclusion of a set of criteria known as the Golden Principles (GPs).46 Their purpose is to act as a benchmark which must be met if a contract is to be regarded as a FIDIC contract.This may be in doubt if, for example, the Employer has undertaken heavy amendment of key provisions, whether with or without FIDIC’s licence to do so. The GPs are: GP1 The duties, rights, obligations, roles and responsibilities of all the Contract Participants must be generally as set out in the General Conditions and appropriate to the project. GP2 Particular Conditions must be clear and unambiguous. GP3 The Particular Conditions must not change the balance of risk/reward allocation provided for in the General Conditions. GP4 All specified time periods must be reasonable. GP5 Unless there is a conflict with the governing law of the Contract,47 all formal disputes must be referred to a Dispute Avoidance/Adjudication Board (DAAB)48 (or a DAB, if applicable) as a condition precedent to arbitration.

46 Produced by FIDIC’s Task Group 15, which reported to the FIDIC Contracts Committee. 47 This amendment to GP 5 was introduced in the Errata to the 2017 Books, released by FIDIC in December 2018. 48 DAAB is defined under Sub-Clause 1.1.22 in the 2017 Red and Yellow Books, and Sub-Clause 1.1.19 in the 2017 Silver Book.

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The Golden Principles are contained in the Guidance for the Preparation of Particular Conditions49 of the 2017 Red, Yellow and Silver Books. To the basic list provided there, FIDIC has now added an explanatory document entitled ‘The FIDIC Golden Principles’, First Edition 2019. Launched at its Asia Pacific Users Conference in Hong Kong on 25 June 2019, it sets out the General Considerations underlying the GPs, Reasons for introducing them and Guidance on Drafting Particular Conditions in accordance with them. The Golden Principles are not of legal effect but will no doubt be relied upon by parties in negotiation to support their contention that a contract is or is not to be regarded as a ‘real’ FIDIC contract, as is intended. While GPs 1, 2 and 4 are straightforward, GPs 3 and 5 may be somewhat problematic in this respect, since Particular Conditions frequently change the risk allocation of the General Conditions, while the Parties, especially in the Middle East states, have sometimes wished to dispense with the DAB under the 1999 forms, as unjustified in terms of expense and complexity.

Specific Revisions The major changes in the Red, Yellow and Silver Books can be classified under three main themes: • Product, Risk Allocation and Time; • Contract Administration and Claims; and • Dispute Avoidance and Resolution.

Product, Risk Allocation and Time The 1999Yellow and Silver Books contained50 limited fitness for purpose obligations, which, for example, did not apply if the purpose was not stated in the Employer’s Requirements. The 2017 Yellow and Silver Books contain much stronger fitness for purpose obligations, which apply even where no purpose is expressly stated51 and which are supported by indemnities by the Contractor in respect of acts, errors and omissions in design.52 The Contractor is expected to maintain professional indemnity insurance against liability arising from breach of its obligations in this respect, if required by the Contract Data.53 A deficiency of the 1999 Rainbow Suite was the absence of non-performance damages in the event of a failure of the Tests on Completion; non-performance damages applied instead to the Tests after Completion. The 2017 Books enable the Parties to agree Performance Damages in the Schedule of Performance Guarantees and, if the Works, or a Section, fail to pass the Tests on Completion repeated under Sub-Clause 9.3 [Retesting], the Employer is entitled to payment in full satisfaction of the failure. As with the 1999 Books, Performance Damages are also payable if the Works or any Section fail to pass any Test after Completion.54

49 50 51 52 53 54

2017 Red,Yellow and Silver Books p. 8. Sub-Clause 4.1 in the 1999 Yellow and Silver Books. Sub-Clause 4.1 in the 2017 Yellow and Silver Books. Sub-Clause 17.4 in the 2017 Yellow and Silver Books. Sub-Clause 19.2.3 (b) in the 2017 Yellow and Silver Books. Sub-Clause 12.4 in the 2017 Yellow and Silver Books.

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The most important area of change regarding risk allocation is limitation of liability. In addition to exclusion of indirect and consequential loss (with certain exceptions), in the 2017 Books FIDIC provides a choice between two alternative regimes. The basic position is that under the General Conditions total liability is capped at the sum stated in the Contract Data55 or, if none, the Accepted Contract Amount56 or Contract Price57 (with certain exceptions). However, FIDIC offers an alternative in the Guidance for the Preparation of Particular Conditions,58 providing for separate liability caps for consequential losses and capping of the Contractor’s liability for other losses at the value of insurance cover for each, which is a completely different approach. So far as risk of loss is concerned, the 2017 Books have been something of a surprise. The FIDIC Design Build Operate Gold Book 2008 (see below) had introduced an entirely new system by which all risks were allocated between the Parties, rather than just loss or damage; the Gold Book’s risk allocation Clause59 distinguished between Employer’s commercial risks, Employer’s risks of damage and Contractor’s risks. It had been widely expected that the Gold Book approach would be followed in the preparation of the new editions of the Rainbow Suite forms, a view encouraged by the Pre-Release editions of the Y ellow Book.60 However, the 2017 Books revealed that this approach was abandoned by FIDIC in favour of a conventional care of the works Clause,61 by which the Contractor is made fully responsible for care of the Works, subject to certain express exceptions. One of these express exceptions is the category of ‘Exceptional Events’62 which has replaced ‘Force Majeure’, though the meaning of ‘an event or circumstance’ is somewhat similar to the Force Majeure provisions of the 1999 Books, with the notable addition of ‘tsunami’ to ‘natural catastrophes’. The crucial question of time has received significant new provisions in the 2017 Books. FIDIC now offers the possibility of an additional Sub-Clause63 allowing the Employer to designate Milestones, which would have to be completed by specified dates, failing which, Delay Damages would be payable. A second major departure relates to programming. The 1999 programming provisions were generally regarded as outdated and they have been replaced by a much more detailed and prescriptive programme Clause.64 Some commentators expected that FIDIC would take the opportunity of the new contracts to deal expressly with the issue of concurrent delay, which is a source of uncertainty in many jurisdictions. For example, the Australian standard form AS 4000 gives the contract administrator the power to apportion responsibility for delay as between Employer and Contractor to determine entitlement for an extension of time. There is no such general provision in

55 56 57 58 59 60 61 62 63

Sub-Clause 1.15 in the 2017 Red and Yellow Books and Sub-Clause 1.14 in the 2017 Silver Book. 2017 Red and Yellow Books. 2017 Silver Book. 2017 Red Book pp.16-18, 2017 Yellow Book pp.16-17, 2017 Silver Book pp. 17–18. Clause 17. At the FIDIC Users Conferences in London (December 2016) and Abu Dhabi (February 2017). Sub-Clause 17.1 in the 2017 Red,Yellow and Silver Books. Sub-Clause 18.1 in the 2017 Red,Yellow and Silver Books. In the Guidance for the Preparation of Particular Conditions: 2017 Red Book pp.26-29, 2017 Yellow Book pp.27-28, 2017 Silver Book pp.27-29. 64 Sub-Clause 8.3 in the 2017 Red,Yellow and Silver Books.

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the 2017 General Conditions, leaving the Parties free to agree arrangements as a Particular Condition, otherwise the Contractor’s entitlement is to be assessed ‘as appropriate taking due regard of all relevant circumstances’,65 though the concept of apportionment is found in the Liability for Care of the Works Provisions.66

Contract Administration and Claims In contract administration, there have been very significant developments of the 1999 forms. In the 1999 Red and Yellow Books,67 there was a distinction between situations where the Engineer was ‘deemed to act for the Employer’ and those where, in making determinations,68 the Engineer had a duty to act fairly. This basis is preserved in the 2017 Red and Yellow Books. However, in making a determination now, the Engineer is under a duty to act neutrally and is not deemed to act for the Employer. FIDIC explains this new obligation on the Engineer as a duty to treat both Parties ‘even-handedly, in a fair minded and unbiased manner’.69 The Silver Book embodies a completely different model of contract administration; this has also been the subject of major change. Under the 1999 Silver Book, there was no Engineer; contract administration was undertaken by the Employer, who might appoint an Employer’s Representative to act on its behalf, and the Employer was obliged to act fairly. The 2017 Silver Book requires70 the Employer to appoint an Employer’s Representative, who must act fairly and who is not deemed to act for the Employer. It can therefore be said that contract administration under the 2017 Silver Book will always involve the Employer’s Representative as well as the Employer. Furthermore, the Employer’s Representative will actually make determinations,71 acting fairly, and not acting on behalf of the Employer. In this respect, although the comparison should not be overstated, the determination function of the Employer’s Representative under the 2017 Silver Book resembles more that of the Engineer under the Red and Yellow Books than it does the Employer’s Representative under the 1999 Silver Book. There is, however, no mention of ‘neutrality’, which is a point of difference. One of the most controversial aspects of the 1999 Rainbow Suite contracts was the time-bar provision, by which failure to give notice of a claim within 28 days would result in a Contractor losing its entitlement to an extension of time or additional payment, whereas the Employer had only to make a claim ‘as soon as practicable’. The Multilateral Development Bank (MDB) version of the Red Book (see below) instituted a 28 day time limit for Employers’ claims, but without the sanction of loss of entitlement for non-compliance. FIDIC has tried to address the main criticism of the 1999 claims procedures. The provision72 is over three times as long as its predecessor and is remarkably

65 66 67 68 69 70 71 72

Sub-Clause 8.5 in the 2017 Red,Yellow and Silver Books. Sub-Clause 17.2 in the 2017 Red,Yellow and Silver Books. Sub-Clause 2.6. Sub-Clause 3.5. Guidance for the Preparation of Particular Conditions, 2017 Red and Yellow Books p.21. Sub-Clause 3.5. For example under Sub-Clause 3.5 in the 2017 Silver Book. Sub-Clause 20.1 in the 2017 Red,Yellow and Silver Books.

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complex. Both Contractors’ and Employers’ Claims are now subject to a 28-day time limit, though its enforcement has been assimilated with the power of the Engineer to determine Claims.73 The effect of the rules on submission of Notice, fully detailed Claims and extension is such that up to 168 days may elapse between the original ‘event or circumstance’ and the determination by the contract administrator.

Dispute Avoidance and Resolution A distinctive feature of the 1999 FIDIC contracts was the role of the DAB in the dispute resolution process.This differed between the 1999 Red Book, which provided for a ‘standing’ DAB throughout the currency of the Contract, and the 1999 Yellow and Silver Books, where an ‘ad hoc’ DAB would be appointed only following the occurrence of a dispute. The 2017 Books represent a decisive departure from the ad hoc model.The greater emphasis on dispute avoidance, evidenced in the 1999 DAB becoming a Dispute Avoidance/ Adjudication Board (DAAB) in the 2017 Books, has contributed to the uniform provision in favour of standing boards for all contracts. The Parties can now, following the example of the Gold Book, obtain the assistance of the DAAB throughout the project, both for the avoidance of disputes and in the ‘real-time’ resolution of disputes as and when they arise. FIDIC has also taken the opportunity to address what has become known as the Persero issue, after litigation in the Singapore courts.74 The question was whether failure to comply with a binding (but non-final) DAB decision had to be referred back to the DAB and all the stages of the Clause 20 process.75 This is now dealt with by Sub Clause 21.7 of the 2017 Books, enabling the non-defaulting Party to refer the non-compliance directly to arbitration. It is worthy of note that the fifth of the Golden Principles (see above) is that ‘all formal disputes must be referred to a Dispute Avoidance/Adjudication Board (or a Dispute Adjudication Board, if applicable) for a provisionally binding decision as a condition precedent to arbitration’. This is subject only to the proviso ‘[u]nless there is a conflict with the governing law of the Contract’76 and constitutes further evidence of the importance attached by FIDIC to this element of the dispute resolution mechanism. Following the DAAB stage, the amicable settlement stage of the dispute resolution process was firmly established in the 1999 FIDIC forms.77 It has maintained its position in the 2017 Books, though the reduction of the time period for amicable settlement from 56 days to 28 days was unexpected. More predictable has been the encouragement in the 2017 Guidance for the Preparation of Particular Conditions to consider reference to senior executives, mediation, expert determination or some other form of ADR.

73 Employer’s Representative under the Silver Book. 74 PT Perusahaan Gas Negara (Persero) TBK v CRW Joint Operation [2015] SGCA 30. 75 See Christopher Seppälä ‘Singapore Continues to a Better Understanding of the FIDIC Disputes Clause: The Second Persero Case’. International Construction Law Review,Vol. 32, Part 11 p. 4 (2015). 76 See Errata to the 2017 Books. 77 Sub-Clause 20.5 in the 1999 Red,Yellow and Silver Books.

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The 2017 Red, Yellow and Silver Books can be characterised as comprehensive and robust versions on FIDIC’s most important standard forms. They contain a number of significant improvements as well as some apparent weaknesses. Their complexity is likely to be a major factor in deciding whether the new contracts are widely used, or used only for the largest projects.

The Other FIDIC Construction Contracts The Core FIDIC contracts have been introduced above: the Red,Yellow and Silver Books, in their 1999 Rainbow Suite Editions and their 2017 Second Editions.The following identifies the other FIDIC contracts. This treatment does not mean that they are unimportant – the reverse is true of nearly all – but that their significance is more specific to a particular type of project or sector.

The MDB Pink Book The FIDIC Red Book was used widely, over many years, on development projects funded by banks as part of mandatory bidding documents to which borrowers had to adhere. The Pink Book78 represents a formalisation of the amendments to the Red Book that had been developed by the MDB79 for use in aid-funded projects. The purpose was to ‘simplify the use of the FIDIC Conditions of Contract not only for the MDBs and their borrowers but also for others involved with project procurement including engineers, contractors, and contract specialists. It is intended for use on MDB financed projects only.’80 The 2010 Pink Book is the latest MDB harmonised version of the 1999 Red Book, replacing earlier editions in 2005 and 2006. Essentially, the Pink Book should be regarded as just that – a version of the Red Book, though the amendments should not be underestimated, justifying, as they do, a separate publication. Many of the amendments are additional provisions aimed at achieving financial probity and transparency. For example, the Contractor is obliged to follow ‘Inspections and Audit by the Bank’81 of the Site, and of its accounts and records, and the Contractor is to be notified if the Bank suspends payments to the Borrower.82 The intention of many of the Pink Book amendments to the Red Book is to avoid fraudulent and corrupt practices, and the Employer is given additional explicit powers of termination on such grounds.83 Recognising that many aid-funded projects are in developing countries, there is quite extensive expansion of the provisions84 on Staff and Labour, relating to such specific issues as Foreign Personnel, Supply of Food and Water, Measures against Insect and Pest Nuisances, Arms and Ammunition, Festivals and Religious Customs and

78 Conditions of Contract for Construction for Building and Engineering Works designed by the Employer, Multilateral Development Bank Harmonised Edition 2010. 79 The MDBs, known as the Participating Banks, operating under the auspices of the World Bank, are listed in the Introduction to the Pink Book and include the African Development Bank, the Asian Development Bank and the European Bank for Reconstruction and Development. 80 Jeremy Glover and Simon Hughes QC (op. cit.), p. xxi. The Introduction by Christopher Thomas QC contains a useful account of the development of the Pink Book. 81 Sub-Clause 1.15. 82 Sub-Clause 2.4. 83 Sub-Clause 15.6. 84 In Clause 6.

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Forced and Child Labour. There are modifications to the provisions for Claims, Disputes and Arbitration85 with an option for the parties to choose institutional arbitral rules or UNICITRAL instead of ICC where the Contract is with a foreign contractor86 and a default position in favour of the Singapore International Arbitration Centre for contracts financed by the Asian Development Bank. For the time being, the Pink Book will continue to be used on MDB funded projects let in the last 10 years, as they make their way through the execution process to completion. However, looking to the future, this model will not remain unchanged. It is, of course, a pre-2017 contract. It is therefore inevitable that it will be either replaced by a new edition or superseded by equivalent standard amendments to the 2017 forms, as was the case prior to the institution of the MDB version of the Red Book.

The DBO Gold Book The Gold Book87 is FIDIC’s first attempt at a design-build-operate (DBO) contract intended to be used in the type of project funded by project-financing, for example under a PFI88 scheme. It is treated by some commentators as one of FIDIC’s principal contracts, although it was published in 2008 and so does not form part of the original Rainbow Suite. In terms of extent of usage it cannot, or cannot yet, be regarded as the equivalent of the Red, Yellow or Silver Books, nor even of the MDB. This is not only a function of the fact that it is relatively younger than those contracts. FIDIC’s choice of DBO model is not suitable for all types of DBO project.89 ‘The document, as written, is not suitable for contracts which are not based on the traditional Design-Build-Operate sequence, or where the Operation Period differs significantly from the 20 years adopted.’90 However, the greatest restriction in terms of breadth of appeal was FIDIC’s decision to adopt what it calls the ‘green-field Design-Build-Operate scenario, with a 20-year operation period’ where there is ‘a single contract awarded to a single contracting entity.’91 The Gold Book can therefore only be used in projects where the design-build work and the operation and maintenance work are to be carried out by the same contractor. In simple terms, the Gold Book resembles a design/build contract, which is heavily based on the 1999 Yellow Book, with an agreement attached for operation and maintenance that assumes a 20-year Operation Service Period.92 Obviously, the latter necessitates the inclusion of a number of concepts and technical terms not found in the Yellow Book, such as Asset Replacement Fund,93 Auditing Body,94 Commissioning Certificate and Commissioning Period,95 Operating Licence, Operation Management Requirement,

85 86 87 88 89 90 91 92 93 94 95

In Clause 20. Sub-Clause 20.6 (a) (i). Conditions of Contract for Design, Build and Operate Projects 2008. Private Finance Initiative. Some insight into the reasoning is given in the Foreword and Notes of the DBO Contracts Guide pp. 2-3. Foreword to Gold Book, p. 2. Foreword to Gold Book, p. 2. Gold Book, Particular Conditions Part B – Special Provisions, p. 7. Sub-Clause 1.1.2. Sub-Clause 1.1.4. Sub-Clauses 1.1.8 and 1.1.9.

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Operation and Maintenance Plan, Operation Service, and Operation Service Period.96 Because, self-evidently, the Gold Book was not included in the FIDIC Contracts Guide published in 2000, FIDIC subsequently issued a separate equivalent.97 The commentary reveals that FIDIC was largely able to keep to the established 20-clause structure of the Rainbow Suite and that where possible many provisions are similar, especially to the 1999 Yellow Book.The differences are essentially of two kinds: first, those additions which are a product of the Operation Service Phase, following on from the Design-Build Phase; and second, those changes which FIDIC introduced as improvements. Thus in addition to the Final Payment Certificate Design-Build98 and the Final Statement Design-Build,99 there is a Final Payment Certificate Operation Service100 and a Final Statement Operation Service.101 In some respects, the Gold Book for a time acquired greater importance than could be explained solely by reference to its use on DBO projects; it was seen as an indicator as to the likely future direction of reform of the Rainbow Suite contracts. In the result, this has only partly been confirmed by the 2017 Second Editions. The emphasis on dispute avoidance in the new contracts was certainly foreshadowed by the Gold Book, though the Gold Book approach to time bars was only followed to a limited extent in the 2017 Books, and the risk allocation regime not at all.

The Dredging and Reclamation Works Contract: the Blue-Green Book The FIDIC Dredging and Reclamation Works Contact102 is sometimes known as the Blue Book or Blue-Green Book, though neither name has achieved the wide currency of the Rainbow Suite contracts. It is often excluded altogether from consideration by commentators on the FIDIC forms of contract. This is an unfortunate omission. Prepared in conjunction with the International Association of Dredging Companies, the Dredging and Reclamation Works Contract has been extensively used for coastal and marine works of all kinds, including ports and harbours. It is well known in the Middle East and benefits from an absence of competitors in a highly specialised sector. It bears some resemblance to the Short Form of Contract (see below) in being a straightforward, simplified contract, which can be executed on an Employer-design or design-build basis.This is a matter of agreement; the Contractor agrees to ‘carry out design to the extent specified, as stated in the Contract Data.’103 In the Notes for Guidance104 it is explained that ‘[w]here the Employer procures any part of the design, the responsibility for design will be shared as this Contract makes the Contractor responsible only for design prepared by him.The extent of the Contractor’s design obligation should therefore be clearly stated if disputes are to be avoided.’

96 Sub-Clauses 1.1.54 to 1.1.58. 97 The FIDIC DBO Contract Guide 2011. 98 Sub-Clause 1.1.39. 99 Sub-Clause 1.1.41. 100 Sub-Clause 1.1.40. 101 Sub-Clause 1.1.42. 102 Form of Contract for Dredging and Reclamation Works, 2nd edition 2016. 103 Sub-Clause 5.1. 104 Page G.

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Where the Blue-Green Book is used for Dredging Works, it is worth noting that the Contractor has no obligation to rectify defects after Taking-Over.105 In other respects, the Dredging and Reclamation Works Contract exhibits many of the characteristics of the FIDIC Green Book (see below), and adopts the same 15-clause structure. Contract administration under the Dredging and Reclamation Works Contract is done by the Engineer. Price can be on a remeasurement, lump sum or cost-plus basis; the Contract Data contains a range of pricing options.106 Dispute resolution in the first instance is by a DAB, with final resolution by arbitration. The FIDIC Dredging and Reclamation Works Contract is an example of a sector-specific standard form, which, though not generally well known, has a disproportionately large significance within that specialist industry.

The Emerald Book The Conditions of Contract for Underground Works 2019, to be known as the Emerald Book, was launched on 7 May 2019 at the World Tunnel Congress in Naples. Prepared jointly with the International Tunnelling and Underground Space Association (ITA-AITES),107 it is a rare venture for FIDIC into a particular industry sector; the only obvious equivalent is the Dredging and Reclamation Works Contract (the Blue-Green Book) considered above. At the time of writing, the Emerald Book is only a matter of weeks old and self-evidently no experience of its use could be available. However, it is possible to offer a few initial observations on this new departure. The General Conditions are based on those of the 2017 Yellow Book and the 21-clause structure reflects this. Its contents are in some respects typical of a contractor-design form administered by an Engineer as this would suggest, though with some points of distinction, mainly relating to pricing and risk allocation. FIDIC expressly108 asserts that the Emerald Book embodies ‘balanced risk allocation between the parties to the Contract’. So far as pricing is concerned, the Works are to be paid for on a lump sum basis, like the Yellow Book. The Accepted Contract Amount will cover all Underground Works and other work necessary for the proper execution and completion of the Contract.The exception to this is Excavation and Lining Works. Because these largely depend on ‘subsurface physical conditions and/or ground reaction(s) to such works’,109 they are to be measured and paid for using rates and prices set out in the Bill of Quantities. The measurement will be done by the Contractor and agreed or determined by the Engineer. It should also be noted that measurement plays a further role in questions of adjustment of the Time for Completion, which will be reduced/extended by applying Contractor’s production rates to the measured quantities of Excavation and Lining Works. Although the overall risk allocation may be modelled from the Yellow Book, there are significant new features. These principally relate to the difficulties arising from inability to assess subsurface physical conditions in advance of commencement of work under the

105 Sub-Clause 9.2. 106 Clause 11 and page M. 107 Association Internationale des Tunnels et de l’Espace Souterrain. 108 In the Notes to the Emerald Book. 109 Emerald Book Notes.

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Contract. The Geotechnical Baseline Report (GBR) is expressed to be the ‘single contractual source of risk allocation related to subsurface physical conditions to the Parties’, with all subsurface conditions not addressed in the GBR being treated as Unforeseeable.110 There is also greater emphasis on risk planning and risk management, with a mandatory Contract Risk Register identifying relevant risks and actions to address them, and a Risk Management Plan to be updated and revised as necessary as the project progresses. This is an innovation not found in the 2017 Yellow Book; the concept, if not the format, is somewhat akin to the Risk Register in the NEC3 form of contract.111 It will no doubt be some time before an Emerald Book dispute occurs, but the provisions for dispute avoidance and resolution will be familiar to users of the 2017 Books, offering as they do a multi-tier structure encompassing DAAB, amicable settlement and ICC arbitration in default of earlier resolution.

The Short Form of Contract: the Green Book Although it is not one of FIDIC’s principal contracts, the Green Book would have some claim to be regarded as part of the Rainbow Suite, since it was issued in 1999. FIDIC states that it is ‘for engineering and building works of relatively small capital value’, or for contracts of greater value requiring ‘fairly simple or repetitive work or works of short duration’.112 It has been suggested that ‘USD 500,000 and 6 months should be regarded as reasonable limits on the capital value and duration respectively.’113 Like the Dredging and Reclamation Works Contract (see above), the Green Book has a simplified 15-clause format. Also like the Dredging and Reclamation Works Contract, the Parties can agree the extent, if any, to which the Employer provides input into the design.114 The Contractor has a fitness for purpose duty for its design.115 As with the Dredging and Reclamation Works Contract, pricing is a matter of choice for the Parties116 between a range of options extending from varieties of lump sum to re-measurement and even a cost reimbursable option. The Green Book differs from the Dredging and Reclamation Works Contract in some key respects. First, there is no express provision for the appointment of an Engineer to undertake contract administration. FIDIC invites reconsideration of this position; ‘although there is no reference to an impartial Engineer, the Employer may appoint an Engineer to act impartially, should he wish to do so.’117 Second, the dispute resolution rules are more basic than for other FIDIC Contracts. There is no DAB, but an adjudicator, and no time for amicable dispute resolution. Reflecting the anticipated smaller scale of disputes, there is no reference to ICC arbitration.118 Instead, the parties agree the applicable rules and other arrangements in the Appendix. The Green Book guidance119 advises that ‘[t]

110 Emerald Book Notes. 111 Early Warning Register in NEC4 2017. 112 See Foreword to Green Book. 113 Axel-Volkmar Jaeger and Götz-Sebastian Hök (op. cit.), p. 125, based on FIDIC guidance. 114 Appendix and Clause 5. 115 Sub-Clause 5.2. 116 Appendix and Clause 11. 117 In the Foreword. 118 Sub-Clause 15.3. 119 Notes for Guidance p. 29.

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he UNCITRAL Rules are recommended’, though ICC arbitration is raised as an option if institutional administration is required. The Green Book is, in effect, an international version of domestic minor works contracts and it reflects this perspective throughout. At the time of writing, FIDIC’s Task Group 8 is understood to be working on an update of this contract.

The Subcontract The FIDIC Subcontract has been expressly prepared for use with the 1999 Red Book.120 It can also be used with the Pink Book ‘but only if the necessary amendments are made to reflect the significant differences’121 between the Pink and Red Books. Described as a ‘First Edition,’ the Subcontract replaced the 1994 Subcontract, which had been prepared for use with the FIDIC Red Book Fourth Edition. The General Conditions are prepared to operate ‘back to back’ with the 1999 Red Book in terms of rights and obligations. In the case of the Force Majeure provisions,122 this is literally done with the words ‘[t]he provisions of Main Contract Clause 19 (Force Majeure) shall apply to the Subcontract.’ The form is also noticeable for a series of flow charts.These represent typical sequences of the principal events, of payment events123 and of Subcontractor claims and disputes under alternative versions of the dispute resolution provisions.124 The Subcontract carries a fitness for purpose obligation, to the extent that the Subcontractor is responsible for design.125 Payment is by measurement in accordance with the Main Contract (i.e., Red Book) provisions.126 Obviously, there is no Engineer appointed and contract administration is in the hands of the Contractor. Subcontract disputes are resolved by reference to a Subcontract DAB, followed by time for amicable settlement in the event of reference to arbitration, which provides for ICC Rules with one arbitrator rather than three as the default position.127

Consultancy agreements The remaining current FIDIC contracts are consultancy agreements. They differ from the Rainbow Suite contracts and the other standard forms (as above) in that they are not construction contracts and do not involve the contractor. Most significant of these by far is the White Book.128 First published in 1990, the White Book is probably the most significant agreement for professional services in construction globally. The contract is between the ‘purchaser’ of the services: ‘Client’ rather than ‘Employer,’ and the ‘supplier’ of the services: ‘Consultant’ rather than ‘Contractor.’

120 See Foreword to Conditions of Subcontract for Construction for Building and Engineering Works designed by the Employer 2011. 121 See Foreword to Conditions of Subcontract for Construction for Building and Engineering Works designed by the Employer 2011. 122 Clause 19. 123 Under Clause 14. 124 Clause 20 and Particular Conditions. 125 Sub-Clause 4.1. 126 Sub-Clause 12.1. 127 Sub-Clauses 20.6 and 20.7. 128 The Client/Consultant Model Service Agreement 4th edition 2006 has just been replaced by the 5th edition 2017.

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FIDIC’s intention was to produce an agreement for ‘general use for the purposes of pre-investment and feasibility studies, detail design and administration of construction and project management, both for Employer-led design teams and for Contractor-led design teams on design and build commissions.’129 A feature of the 2006 (and previous editions) of the White Book was the very limited provision concerning the rights and obligations of the Parties. The basic Consultant’s duty of care was stated to be ‘no other responsibility than to exercise reasonable skill, care and diligence in the performance of his obligations under the Agreement.’130 This was consistent with the English law concept of the basic duty of the supplier of a service.131 An attempt has been made in the 2017 Fifth Edition to make this more flexible, by providing132 that the ‘Consultant shall perform the Services with a view to satisfying any function and purpose that may be described in Appendix I [Scope of Services]’. This is still said to be only to the extent achievable using reasonable care and skill, so would constitute an issue in the provision of design services, for example, for a design-and-build contractor required to give a fitness for purpose obligation to the employer for design and so would often not be back-to-back. However, there has been a significant strengthening of the reasonable skill, care and diligence standard itself to ‘that to be expected from a consultant experienced in the provision of such services for projects of similar size, nature and complexity’. The actual substance of the scope of services is very limited. Some more guidance notes have been inserted by the 2017 Fifth Edition, but the Appendices are still largely blank pages, to be filled in by the parties. Consequently, what are in effect further Particular Conditions will usually be much greater in volume than the General Conditions. The Fifth Edition has also added new provisions relating to Client-instructed Variations to the Services.133 A mechanism exists for instructing Variations but ‘[a]ny such Variation shall not substantially change the extent or nature of the Services.’134 The dispute resolution provisions of the White Book have always differed sharply from those found in the construction contracts. Under the 2017 Fifth Edition, disputes are first subject to an amicable dispute resolution stage,135 which is now stated to be mandatory, followed by adjudication136 with a further provision for amicable settlement137 before reference to arbitration,138 either subject to agreement by the Parties or to ICC Rules. In addition to the Fifth Edition of the White Book, in 2017, FIDIC published Second Editions of its Model Joint Venture (Consortium) Agreement and Sub-Consultancy Agreement, both developed for use with the White Book. A Second Edition of the Model Representative Agreement (Purple Book) 2013 has not yet been published.

129 Foreword to White Book 5th edition 2017. 130 Sub-Clause 3.3.1. 131 Supply of Goods and Services Act 1982 s.13. 132 Sub-Clause 3.3.2. 133 Clause 5. 134 Sub-Clause 5.1.1. 135 Sub-Clause 10.1.1. 136 Sub-Clause 10.2. 137 Sub-Clause 10.3. 138 Sub-Clause 10.4.

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Former FIDIC Contracts Still in Use It is a curious fact that FIDIC has continued to market the Orange Book139 after its replacement by the 1999 Silver Book. In some respects, the Orange Book was a forerunner of the Rainbow Suite generally, as well as the Silver Book specifically, with its 20-clause structure, time-bars for Contractor claims140 and role of the DAB,141 though the arbitration provision does not include the ICC. Its continued use, now inevitably diminishing, is due partly no doubt to perceptions of the Orange Book as less aggressive than the still-controversial Silver Book. More generally, its survival is indicative of the inherent conservatism of the construction industry. This too explains the persevering use of the Fourth Edition of the FIDIC Red Book, which was often used as a basis for standard forms in the Middle East, though it is now being replaced by its 1999 successor. For example, in the Sultanate of Oman, the Government launched, in 2019, a new form of construction contract based on the FIDIC 1999 Red Book, replacing its predecessor, which was a heavily amended version of an early Red Book.

Continuing Revision of the FIDIC Contracts 2017 saw a major effort by FIDIC in publishing first the Fifth Edition of the White Book Client/Consultant Model Services Agreement (plus the second revisions of the Model Joint Venture (Consortium) Agreement and the Sub-Consultancy Agreement), and then pre-eminently the Second Editions of the Red,Yellow and Silver Books. Consequent upon the publication of the new construction contracts, there is now a need for a new FIDIC Guide to replace the 2000 Guide to the 1999 Red,Yellow and Silver Books and Task Group 4 has been charged with drafting the ‘Suite of Agreements Guide’. FIDIC also has other work in progress. The Short Form (Green Book) is being revised (see above). A Sub-Contract for use with the 1999 Yellow Book is being finalised by Task Group 9. Presumably the 2011 Red Book Sub-Contract will also require a new edition to ensure consistency with the 2017 Red Book. On the ‘new products’ front, Task Group 14 is producing special Standard Particular Conditions for use with the Yellow Book on renewable energy projects, while Task Group 11 is completing the Operate, Design-Build and Operate Contract, to be known as the Bronze Book.

Conclusion The FIDIC contracts are the pre-eminent standard forms in the international construction market. Although there are individual sectors where other standard forms rival this supremacy, such as the LOGIC142 contracts in the Offshore Oil & Gas industry and the I Chem E143 forms in the water and process industries, no competitor can equal FIDIC’s global reach nor its penetration into so many types of construction and engineering work. The

139 See n. 11, above. 140 Sub-Clause 20.1. 141 Sub-Clauses 20.3 and 20.4, 20.7 and 20.8. 142 LOGIC stands for Leading Oil & Gas Industry Competitiveness; these contracts replaced the CRINE forms. 143 Institution of Chemical Engineers.

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NEC144 suite is said by its proponents to be a potential challenger, but it is still a distant one. An alternative scenario is that FIDIC’s dominance will actually grow; such growth is most likely in countries without well-established domestic forms and in those regions, notably the Middle East, where cross-border construction activity has become a common phenomenon. The extent to which the 2017 Second Editions of the Red,Yellow and Silver Books are adopted in these areas of strength will be a telling indicator of the future in this respect.

144 New Engineering Contract, 4th edition of the Engineering and Construction Contract of the UK’s Institution of Civil Engineers 2017.

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6 Allocation of Risk in Construction Contracts Ellis Baker, Richard Hill and Ibaad Hakim1

Risk in construction contracts ‘Risk’, in a project delivery context, can be defined as ‘an uncertain event or set of circumstances that, should it occur, will have an effect on the achievement of one or more of the project’s objectives’.2 Risk exists as a consequence of uncertainty, and, in any project, the exposure to risk produced by uncertainty must be managed.3 Common risks prevalent in construction projects include weather, unexpected conditions, errors in cost estimating and/or scheduling, delays, financial difficulties, strikes, faulty materials, faulty workmanship, operational problems, inadequate plans and/or specifications, and natural disasters.4 Projects will also have additional specific risks, dependent on their nature and surrounding circumstances. Although the volume and nature of contractual documentation for a construction project will vary as a consequence of the nature of the project, its scale and the procurement methodology adopted,5 a construction contract may be simply described as a contract between a contractor and an employer whereby one person (the contractor) agrees to construct an asset for another person (the employer) for agreed remuneration by an agreed time.6 A construction contract will include a compact of rights and obligations7 between the parties by which the parties allocate responsibilities between themselves in respect of

1 2 3 4 5 6 7

Ellis Baker and Richard Hill are partners and Ibaad Hakim is an associate at White & Case LLP. Peter Simon, David Hillson and Ken Newland, Project Risk Analysis and Management Guide, Association for Project Management, p.17 (1997). See Catriona Norris, John Perry and Peter Simon, Project Risk Analysis and Management Mini-Guide, Association for Project Management, p.4 (2018). See Samuel Laryea and Will Hughes, The Price of Risk in Construction Projects, p.553 (2006). See Julian Bailey, Construction Law,Volume 1, 2nd ed., p.49 (2016). Peter Simon, David Hillson and Ken Newland (op.cit.), p.17 (1997). Julian Bailey (op.cit.), p.1512.

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risks that may transpire during the contract’s execution. In doing so, the parties define the impact of the occurrence of risks on three key elements, namely: the asset that is to be constructed by the contractor, the time at which the asset must be completed by the contractor and the amount the employer is obliged to pay the contractor. The collective allocation of such risks in a construction contract represents its ‘risk allocation’.

Pursuit of a ‘fair and equitable’ allocation of risk Typically, in preparing the contract document bid package, the employer will be in a position to decide on its intended risk allocation. While there may be a temptation to allocate all or most major risks to the contractor, this must be tempered by an understanding of the potentially adverse consequences of allocating risk where doing so may preclude the submission of bids or result in an increase in cost such that the project is no longer financially viable.8 Improper risk allocation may also result in prolongation of construction completion times, wastage of resources and/or increased likelihood of disputes. As Shapiro states, ‘proper risk identification and equitable distribution of risk is the essential ingredient to increasing the effective, timely and efficient design and construction of projects.’9 While it is of course possible for parties to negotiate all the terms of any construction contract, a number of standard form contracts have been developed and it is common for one of these standard forms to be used as the basis for the final construction contract.10 One of the features of standard form contracts is the intent to produce a ‘fair and balanced’ allocation of risk.11 The rationale for pursuing this is that doing so will provide the best chance of successful project delivery. Echoing Shapiro, Lane notes that, ‘[a] contract which balances the risks fairly between a contractor and an employer will generally, in the absence of bad faith, lead to a reasonable price, qualitative performance and the minimisation of disputes.’12 Abrahamson suggests that in order to achieve a fair and equitable allocation of the risks inherent in construction projects, a risk should be allocated to a party if: • the risk is within the party’s control; • the party can transfer the risk, for example, through insurance, and it is most economically beneficial to deal with the risk in this fashion; • the preponderant economic benefit of controlling the risk lies with the party in question; • to place the risk upon the party in question is in the interests of efficiency, including planning, incentive and innovation; and/or • the risk eventuates, the loss falls on that party in the first instance and if it is not practicable, or there is no reason under the above principles, to cause expense and uncertainty by attempting to transfer the loss to another.13

8 9 10 11

Bryan Shapiro QC, ‘Transferring Risks in Construction Contracts’, p.5 (2010). Ibid, p. 17. See Graham Vinter, Project Finance, 4th ed., Sweet and Maxwell, p.1 (2013). In relation to FIDIC, see Ellis Baker, Ben Mellors, Scott Chalmers and Anthony Lavers, FIDIC Contracts: Law and Practice, Informa, p.6 (2009). 12 Patrick Lane SC, ‘The Apportionment of Risk in Construction Contracts’, International Conference on Arbitration and ADR in the Construction Industry, Dubai (2005). 13 See article by Max Abrahamson, Journal of the British Tunnelling Society,Vols 5 and 6, November 1973 and March 1974; and CIRIA Report R 79 ‘Tunnelling – improved contract practices’ (1978).

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While the principle of control of a risk is a powerful factor in the determination of risk allocation, it is not comprehensive and other principles should be utilised to address adequately the allocation of risk in a construction contract.14 For example, events of ‘force majeure’ by their nature cannot be controlled by either party but the consequences of such risks must be assessed and allocated. Bunni proposes that the following four principles are used for allocating risks in construction contracts: • Which party can best control the risk and/or its associated consequences? • Which party can best foresee the risk? • Which party can best bear that risk? • Which party ultimately most benefits or suffers when the risk eventuates? The question of what is a ‘fair and equitable’ risk allocation is, ultimately, a subjective one albeit using objective tests mentioned above by way of assistance; in deciding how to procure a project and to allocate risks, an employer will need to weigh up the theoretical efficiency of the risk allocation with political and market dynamics and the needs of the particular project and its financiers (if any).

Allocating risk in a construction contract There are various procurement methodologies or ‘routes’ by which an employer may wish to procure a construction project. The methodology selected will necessarily have an impact on the allocation of risk in certain respects in the construction contract. A summary of the major methodologies and their primary impacts on risk allocation is set out below:

Traditional procurement In traditional ‘construct only’ procurement, the employer will engage a design consultant or team to prepare the design for a project and then bid and award a construction contract to a contractor to construct the project in accordance with that design. The employer will take responsibility for the design provided by the design consultant or team and the contractor will be entitled to relief (which may be in the form of an extension of the time for completion and/or increase in the agreed remuneration) if there are defects or deficiencies in such design. (See the section on the FIDIC Red Book in Chapter 4, ‘Introduction to the FIDIC Suite of Contracts’ and below.)

Design and build In a design and build contract, the contractor will be responsible for both the design and construction to meet the contractual specification. This offers the employer ‘single point responsibility’ and is an advantage relative to traditional procurement where for example it may be difficult to establish whether a defect was caused by defect(s) in design (and therefore the responsibility of the design consultant) or construction (and therefore the responsibility of the contractor). (See the section on the FIDIC Yellow Book in Chapter 4, ‘Introduction to the FIDIC Suite of Contracts’ and below.)

14 Nael Bunni, ‘The Four Criteria of Risk Allocation in Construction Contracts’, International Construction Law Review,Vol 20, Part 1, p.6 (2009).

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EPC/turnkey In engineering, procurement and construction (EPC) contracts, a single contractor takes responsibility for all elements of design (engineering), construction and procurement of a project on a ‘turn-key’ basis. While similar to design and build contracts, in such EPC contracts the contractor will normally have significant discretion to design the project as it sees fit (so long as requirements of the output based or functional specification are satisfied) and such contracts also typically involve a heavier transfer of risk from the employer to the contractor. (See the section on the FIDIC Silver Book in Chapter 4, ‘Introduction to the FIDIC Suite of Contracts’ and below.)

Allocating specific risks Risks that are typically allocated between the parties in construction contracts include:

Quantities The volume of resources required for a construction project can be a source of uncertainty at the outset of any project. In contracts for a lump sum remuneration, the contractor is paid a fixed amount, regardless of the quantity of resources used. The risk of volumes of resources required therefore sits with the contractor and must be accounted for in the formulation of its bid.15 Conversely, under a re-measurement contract, the parties agree unit rates for the resources required for some or all of the works and remuneration is calculated based on the actual quantities used. In such an arrangement, in effect the employer bears the volume or quantity risk.

Errors in employer-provided information In construction projects, it is common for the employer to provide the contractor with a range of information, including requirements for what is to be constructed (for example, the specification for the works), the location and condition of the site on which the works are to be constructed and other factors related to how the works will be undertaken (for example, the permits required for the works, the means of accessing the site and prevailing weather conditions at the site). Such information may be provided to the contractor for ‘information only’ on a ‘non-reliance’ basis. In such cases, the risk of errors or inaccuracies in such information will sit with the contractor. Alternatively, the employer may assume some or all of such risk, by allowing the contractor time and/or cost relief in circumstances where the information provided by the employer proves to be incomplete or incorrect.

15 This would not apply to a contract based on a full bill of quantities, such as the JCT Standard Building Contract With Quantities 2016.

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Unforeseen ground conditions The risk of unforeseen ground conditions is well known to the construction industry: ‘It frequently occurs in practice, particularly in engineering contracts, that unexpected difficulties are encountered during construction which may not only necessitate a change from the expected method of working, but in extreme cases may mean that completion of the work, at least in accordance with the original design, is impossible.’16 The effects can be felt in terms of time and money: ‘unforeseen site conditions... have an obvious capacity to cause delay and disruption to the performance of works on a construction or engineering project, and to cause an escalation in the contractor’s costs.’17 Certain types of work have a greater propensity for being affected by ground conditions, but most structures have subsoil foundations of some kind so the phenomenon of unforeseen ground conditions is widely applicable. Accordingly, the potential time and cost consequences should be provided for and taken into account in the parties’ forward planning, which includes tender pricing. In the FIDIC suite of contracts, the Red and Yellow Books have traditionally sought a balanced allocation of risk in Unforeseeable Physical Conditions and related provisions, both as to time and cost. Unforeseen ground conditions are dealt with in a radically different way by the Unforeseeable Difficulties provisions of the Silver Book. (See the section on ‘Unforeseen ground conditions’ below.) On 7 May 2019, FIDIC published a new Tunnelling and Underground Works Contract (to be known as the Emerald Book) which was a joint initiative of FIDIC and the International Tunnelling and Underground Space Association. The Emerald Book uses the Yellow Book as a base, but incorporates risk allocation recognising the nature of the works to be undertaken (in particular in relation to subsurface conditions).

Force majeure In the course of a construction project, performance of the parties’ obligations can be delayed, impaired or altogether prevented by events outside the parties’ control. All major legal systems have rules governing the impossibility or inhibition of performance of contractual obligations.The underlying law of the contract selected by the parties, or that which applies in the absence of such selection, is capable of providing remedies and other outcomes to some extent but there is often a significant difference between civil law and common law traditions in this respect. The concept of imprévision has long formed a part of systems deriving from French law and the doctrine of rebus sic stantibus is expressly incorporated into the German Civil Code.18

16 Nicholas Dennys QC and Robert Clay (eds), Hudson’s Building and Engineering Contracts, 13th ed., Sweet & Maxwell, p.402, (2015). 17 Julian Bailey (op.cit.), p.697. 18 Axel-Volkmar Jaeger and Götz-Sebastian Hök, FIDIC - A Guide for Practitioners, Springer, pp.329-330 (2010).

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In the common law systems and notably in English law, there is no general theory of force majeure, which is not a term of art. The effect is that ‘performance of the relevant obligation must have been prevented by an event of force majeure and not merely hindered or rendered more onerous.’19 The difference in approaches between jurisdictions explains why parties to construction contracts routinely make their own express provision for force majeure.The treatment of Force Majeure (and now Exceptional Events) under the FIDIC suite of contracts and some other standard forms of contract is discussed further below.

Change in law The starting or default position under a construction contract is that, in performing its obligations under the contract, each party will do so in compliance with and so as not to cause any breach of the laws applying to such obligations. In the absence of a specific provision dealing with the consequences of a change in law following execution of the contract, such obligations will remain and, in the case of the contractor, absent any entitlement to an extension of time and/or additional costs to the extent any delay is caused and/ or additional costs incurred.

Delay The risk of delay is typically handled by the contract providing for a time for completion by which the contractor is required to complete the works with liquidated damages for delay becoming payable if the contractor fails to do so. However, in order to preserve such an approach, under English law, it is important for the contract to allow for such time for completion to be extended in the event of the contractor being unable to comply due to an act of prevention on the part of the employer. In practice, construction contracts will also allow for the contractor to be entitled to extensions if delay is caused by other events specified in the contract (often subject to notice requirements) as part of the risk allocation process described above and below.

Performance Guarantees Where the contractor is constructing a process plant or other facility that will produce a product, the parties often provide for a set of particular performance related guarantees.The contract will set out a testing and commissioning regime to be complied with before the plant is taken over and, in some cases, afterwards. As part of the testing regime, certain aspects of the performance of the plant will be measured.To the extent that the plant does not meet the relevant performance guarantee(s), there are various ways to deal with the shortfall. Most contracts allow the contractor the opportunity to make good any faults in order to ensure that the relevant performance guarantee(s) is or are met. However, if the contractor fails to meet the relevant performance guarantee(s) even after attempting to make good such faults, the contract may also provide for payment by the contractor to the employer of liquidated damages by way of

19 Hugh Beale, Chitty on Contracts, 33rd ed., Sweet & Maxwell, p.1236 (2018).

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compensation to the employer for any limited shortfall in performance. Some contracts will also specify certain minimum performance levels which, if not met, will allow the employer to reject the plant.

Indemnification The central characteristic of an indemnity clause is that the indemnifier assumes a primary responsibility for the adverse event covered by the clause and undertakes to hold the indemnified party harmless against the consequences of that event.20 The use of indemnity clauses in construction contracts has been described as ‘governing or re-allocating ultimate contractual responsibility for third party claims as between Employer and Contractor.’21

Insurance Insurance is a mechanism by which risk can be insured for payment of a premium by a third-party insurer pursuant to a contract of insurance. In construction contracts, parties may mandate that the counterparties hold certain insurances to protect such party and the project against certain insurable risks. The FIDIC forms of contract, for example, pre-allocate responsibility for insuring against certain risks and for bearing loss if and to the extent it cannot be insured or recovered from insurance.

Allocating specific risks – the FIDIC approach and comparison with certain other standard contract forms As indicated in Chapter 5, Introduction to the FIDIC Suite of Contracts, at present and for the immediate future, utilisation of FIDIC forms of contract is in a transitional phase. Officially, the position is clear. The second editions of the Red, Yellow and Silver Books were published on 5 December 2017 and are the current versions of those FIDIC standard forms. However, although the authors’ firm has received a number of instructions in relation to the 2017 FIDIC forms of contract, the large majority of FIDIC projects under way, and of disputes relating to them, concern the 1999 FIDIC suite of contracts. This text therefore contains commentary on the 1999 contracts with updates on changes in the 2017 editions where these are of sufficient significance. In commenting on and comparing the FIDIC provisions with other standard form contracts, we have also considered certain provisions from the ENAA,22 IChemE,23 NEC424 and LOGIC25 standard forms of contract.

20 21 22 23 24 25

Gerard McMeel, The Construction of Contracts, 3rd ed., Oxford University Press, p.606 (2017). Nicholas Dennys QC and Robert Clay (eds) (op.cit.), p.1110. ENAA Model Form International Contract for Power Plant Construction (2012 edition). IChemE The International Red Book (1st edition, 2007). NEC4 Engineering and Construction Contract (4th edition, June 2017). LOGIC General Conditions of Contract for Construction (3rd edition, November 2018).

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Unforeseen ground conditions The Red/MDB and Yellow Books 1999 In the FIDIC Red and Yellow Books, the issue of ‘unforeseen ground conditions’ is dealt with under the heading ‘Unforeseeable Physical Conditions’, which obviously is not identical. The FIDIC term26 extends to ‘natural physical conditions and man-made and other physical obstructions and pollutants, which the Contractor encounters at the Site when executing the Works, including sub-surface and hydrological conditions but excluding climatic conditions.’27 Although this formulation is wider than ‘ground conditions’, extending beyond geology to hydrology for example, it is also more restricted, referring to ‘unforeseeable’ rather than ‘unforeseen’. Unforeseeability is an objective test for those purposes being defined28 as ‘not reasonably foreseeable by an experienced Contractor by the date for submission of the Tender’.29 The ‘unforeseeability’ test is crucial to the risk allocation for ground conditions and other physical conditions under the FIDIC Red and Yellow Books and three aspects need to be considered in applying it.30 First, the test is not what was actually foreseeable, but what would have been reasonably foreseeable. Second, the foreseeability is not that of the Contractor, but of an experienced contractor (namely an ‘industry standard’). Third, the point in time to which the test refers is the date for submission of the tender (or Base Date for the FIDIC MDB form), which means that it must be seen together with information available to the Contractor (Site Data)31 and the ‘correctness and sufficiency of the Accepted Contract Amount’32 to obtain a full picture. The issue of reasonable foreseeability by an experienced contractor under Sub-Clause 4.12 of the Yellow Book was considered in the case of Obrascon Huarte Lain SA v. Her Majesty’s Attorney General for Gibraltar,33 where the (English) Technology and Construction Court (TCC) held that the contractor ‘did not in fact encounter physical conditions in relation to contaminated soil over and above that which an experienced contractor could reasonably have foreseen by the date of submission of its tender’,34 applying a ‘balance of probabilities’ test. The Court of Appeal35 upheld that analysis of the issue.36

26 Significantly, the FIDIC provision begins by defining ‘physical conditions’. This was a problematic omission from the 4th edition of the Red Book, noted by Jeremy Glover and Simon Hughes QC, Understanding the FIDIC Red Book: A Clause by Clause Commentary, 2nd ed., Sweet & Maxwell, p.108 (2011). 27 Sub-Clause 4.12. 28 Sub-Clause 1.1.6.8. 29 In the MDB (Pink) version of the Red Book, ‘Base Date’ replaces ‘Tender’. 30 Ellis Baker et al. (op.cit.), p.88. 31 Sub-Clause 4.10. 32 Sub-Clause 1.1.4.1. 33 [2014] EWHC 1028 (TCC). 34 Para 227. 35 [2015] BLR 521. 36 A recent discussion of Australian and English cases can be found in Gordon Smith ‘Latent Conditions and the Experienced Contractor Test’, International Construction Law Review, pp.390-412 (2016).

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The FIDIC Contracts 2017 The definition of Unforeseeable Physical Conditions37 is similar to that in the 1999 editions, with the addition of the words ‘excluding climatic conditions at the Site and the effects of those climatic conditions’. The 2017 editions have followed the MDB version of the Red Book in defining ‘unforeseeable’38 as ‘not reasonably foreseeable by an experienced contractor by the Base Date’, which means 28 days before the latest date for submission of the tender,39 instead of not reasonably foreseeable at the date for submission of the tender, as under the 1999 Books.The 1999 Site Data provision40 has been replaced by the Use of Site Data provision,41 which no longer contains the requirement that ‘The Employer shall have made available to the Contractor... all relevant data in the Employer’s possession’ in relation to the Site. That obligation has been re-located to Site Data and Items of Reference42 with the addition of ‘topography of the Site’ and ‘climatic conditions’ at the Site.The Contractor continues to be responsible for interpreting all such data and is still43 deemed to have satisfied itself of the sufficiency of the Accepted Contract Amount, the definition of which has been amended by the 2017 forms of contract.44

Other standard contract forms The IChemE form also incorporates a relatively robust ‘reasonable foreseeability’ test, which provides that the relevant physical condition has to be such that it ‘could not reasonably have been foreseen by properly qualified and competent persons engaged in the same or a similar business to that of the Contractor and having all the information which the Contractor then had or could have obtained by a visual inspection of the Site or by reasonable enquiry’.45 It also contains relatively detailed requirements in relation to the contents of the notification to be provided by the Contractor to the Employer, which include specifying the condition encountered, the steps the Contractor is taking or proposing to take to overcome the condition encountered, estimates of the effect on the programme and the amount of any additional cost, and the Contractor’s proposals for minimising such addition time and/or cost.46 The NEC4 form uses a slightly different test, which provides that the ‘physical conditions’47 have to be something that an experienced contractor would have judged at the contract date to have such a small chance of occurring that it would have been unreasonable to have allowed for them.48

37 38 39 40 41 42 43 44 45 46 47

Sub-Clause 4.12, 2017 Red and Yellow Books (emphasis added). Sub-Clause 1.1.85, 2017 Red Book, Sub-Clause 1.1.87, 2017 Yellow Book. Sub-Clause 1.1.4, 2017 Red and Yellow Books. Sub-Clause 4.10, 1999 Red and Yellow Books. Sub-Clause 4.10, 2017 Red and Yellow Books. Sub-Clause 2.5, 2017 Red and Yellow Books. Sub-Clause 4.11, 2017 Red and Yellow Books. Sub-Clause 1.1.1, 2017 Red and Yellow Books. Sub-Clause 6.3, IChemE The International Red Book. Sub-Clause 6.3, IChemE The International Red Book. While a ‘physical condition’ has not been defined, it is clarified that the contractor cannot claim for a weather condition. 48 Clause 60.1(12), NEC4.

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The meaning of the phrase dealing with the small chance of occurrence of an event was considered in the case of Atkins Ltd v. Secretary of State for Transport [2013] EWHC 139 (TCC). Atkins’ claim was based on encountering a greater number of potholes than it had anticipated at the time it entered into the contract. Mr Justice Akenhead dismissed Atkins’ claim that a higher number of potholes than was expected constituted a compensation event, either as a matter of the language of the clause itself or as a matter of commercial interpretation. While it would be very difficult in practical terms to determine how many potholes would constitute an excessive number and such an exercise would be both difficult and artificial, the real question was whether the likelihood of occurrence of potholes had such a small chance of occurrence that it would be unreasonable to allow for them.

Changing the risk allocation: the 1999 FIDIC Contracts Users of standard form contracts are not bound to accept the risk allocation for unforeseen ground conditions (or anything else). The Building Law Reports commentary on Obrascon49 warns that ‘Contractors may want to consider whether or not they would be comfortable assuming the risk ... or, rather, whether to propose bespoke... specificity as to the nature of the ground conditions which are contemplated.’ In the Guidance Notes to the Red/Yellow Books, FIDIC has provided an alternative on the basis of the risk sharing, by which Sub-Clause 4.12(b) is replaced with a percentage allocation of Cost between the Contract Price and the Contractor respectively. A much more thorough ongoing reallocation of ground risk (as part of Physical Conditions) is found in the FIDIC Silver Book. Under Sub-Clause 4.12, the Contractor is ‘deemed to have obtained all necessary information as to risks, contingencies and other circumstances which may influence or affect the Works’ so that the Contractor ‘accepts total responsibility for having foreseen all difficulties and costs of successfully completing the Works’ and the effect is that no addition to the Contract Price is payable. Generally, the Contractor under the Silver Book bears the risk of unforeseen ground conditions, covered by the expression ‘Unforeseen difficulties’. However, two qualifications must be made. First, the Employer is made responsible for certain data which it provides to the Contractor,50 so that extension of time could be claimable for error in certain circumstances,51 although there is no express entitlement to any additional payment. Second, depending on the governing law selected by the parties, the effect of the provisions may be in doubt.52 For example, strong reservations have been expressed53 as to whether such transfer of risk to the Contractor is enforceable under German law in circumstances where the Employer has provided incorrect information on ground conditions.54 49 50 51 52

[2014] BLR pp.488-489. Sub-Clause 5.1. For commentary, see Ellis Baker et al. (op.cit.), p.92. Peter Fenn ‘Review of international practice on the allocation of risk of ground conditions’, International Construction Law Review, pp.439-453 (2000). 53 Dr Alexander Kus, Dr Jochen Markus and Dr Ralf Steding ‘FIDIC’s new Silver Book under the German Standard Form Contract Act’, International Construction Law Review,Vol 16 Part 4 pp.533-550 (1999). 54 Axel-Volkmar Jaeger and Götz-Sebastian Hök (op.cit.), p.107, provides a commentary on the German law position in relation to these types of risk allocation.

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Changing the risk allocation: the 2017 FIDIC Contracts In the 2017 Red and Yellow Books, FIDIC has continued to provide a risk sharing alternative, by which substitute wording is inserted into Sub-Clause 4.12 allocating risk in relation to sub-surface conditions on a percentage basis. The Guidance55 now recommends that, in order to assist the Engineer in agreeing or determining delay and/or cost in the event that the Contractor encounters adverse sub-surface conditions, the Employer ‘may consider including the physical/geological/sub-surface conditions that are known at the Base Date in the Contract — in the form of a ‘Baseline Report’’. The re-allocation of ground risk in the 1999 Silver Book is preserved with identical wording in the 2017 Silver Book56 on Unforeseeable Difficulties. As under the 1999 Silver Book, any qualifications must be made to the general principle that the Contractor bears the risk of unforeseen ground conditions.

Force Majeure The 1999 FIDIC Contracts The Force Majeure provisions57 in the 1999 FIDIC forms of contract are essentially the same for the Red,Yellow and Silver Books.58 ‘Force Majeure’ is defined59 as ‘an exceptional event or circumstance’ which must be: • beyond a Party’s control; • beyond reasonable provision by a Party before entering into the Contract; • not reasonably capable of being avoided or overcome; and • not substantially attributable to either Party. A non-exhaustive list of possible ‘exceptional events or circumstances’ is given: • war, hostilities, invasion, enemy action; • rebellion, terrorism, insurrection, coup d’état or civil war; • riots and other civil/industrial disorder; • munitions, explosives, radiation or contamination (except as attributable to the Contractor); and • natural catastrophes, such as earthquake, hurricane, typhoon or volcanic activity. A party prevented from performing its contractual obligations60 by a Force Majeure event must give notice to the other party within 14 days of when it became or should have become aware of it.61 The party is excused performance of its obligations while prevented from doing so, and, in the case of the Contractor, may be entitled to further relief in the form of an extension of time and/or (in limited circumstances) additional payment.

55 56 57 58 59 60 61

2017 Red Book p.24, 2017 Yellow Book p.25. Sub-Clause 4.12. Clause 19. Jeremy Glover and Simon Hughes QC (op.cit.). Sub-Clause 19.1. In the MDB (Pink) Book ‘substantial obligations’ rather than ‘obligations’. Sub-Clause 19.2.

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The 2017 FIDIC Contracts The 2017 editions of the Red, Yellow and Silver Books have replaced the Force Majeure provisions in the 1999 editions with a new clause62 entitled ‘Exceptional Events’. However, this is a less profound change than the replacement of a Force Majeure clause would suggest since the 2017 definition of Exceptional Event is similar, though not identical, to the 1999 definition of Force Majeure. Apart from some re-drafting separating ‘riot, commotion and disorder’ from ‘strike or lockout’, the most notable change to the non-exclusive scope of the provision is the addition of ‘tsunami’ to the ‘natural catastrophes’ item. Otherwise, the effect of the occurrence of an Exceptional Event under the 2017 forms likewise resembles the effect of a Force Majeure event under the 1999 forms; the procedures and consequences are similar, with some amendments to the drafting.

Other standard contract forms The ENAA form of contract incorporates a simpler definition of Force Majeure. It provides that Force Majeure shall mean ‘any event beyond the reasonable control of the Owner or the Contractor, as the case may be, and which is unavoidable notwithstanding the reasonable care of the party affected’.63 Unlike FIDIC, it does not need to be an ‘exceptional event or circumstance’. The affected party is only entitled to an extension of time, but not any additional costs (except in certain cases)64 and, in case of prolonged Force Majeure (i.e., an aggregate of more than 120 days), either party may terminate the contract by notice to the other.65 The NEC4 form adopts a different approach. Instead of including a separate Force Majeure regime, it provides for a compensation event that has a similar effect. Clause 60.1(19) allows the Contractor relief in case of a compensation event if it can demonstrate that it is something neither party could prevent, an experienced contractor would have judged to have such a small chance of occurring that it would have been unreasonable to have allowed for it and it is not covered under any of the other compensation events under the contract.66

Change in Law The 1999 FIDIC Contracts The 1999 FIDIC forms of contract provide that the contract price shall be adjusted to take account of any increase or decrease in cost resulting from a change in laws of the country in which the works are situated or in the judicial or official interpretation of the laws, made after the Base Date (being the date for the submission of the tender), which affect the Contractor’s performance of obligations under the contract. In such a case the Contractor is entitled to claim for time and/or cost relief.

62 Clause 18. 63 Sub-Clause 37.1, ENAA Model Form International Contract for Power Plant Construction (2012 edition). 64 Sub-Clause 37.3, ENAA Model Form International Contract for Power Plant Construction (2012 edition). See Sub-Clauses 32.2 (Care of Works), 38.3 and 38.4 (War Risks) for such exceptions. 65 Sub-Clause 37.6, ENAA Model Form International Contract for Power Plant Construction (2012 edition). 66 Clause 60.1(19), NEC4.

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The 2017 FIDIC Contracts The 2017 edition of the FIDIC forms of contract expands the scope of the change in law provision such that any changes in the terms of any permits, permission, licence or approval or the requirement for a particular permit, permission, licence or approval to be obtained after the Base Date entitles the Contractor to relief. Conversely, if there is a decrease in cost due to a change in law, the Employer is entitled to make a claim under the contract for an adjustment to the contract price.

Other standard contract forms All other standard forms, other than the LOGIC contract form, allow the Contractor to claim both time and/or cost. The LOGIC contract form only allows for an adjustment to the contract price but not to the time for completion.67 NEC4 provides for a change in law provision, but it has only been included as a secondary option clause.68 If the relevant option provision is incorporated, it provides that any change in law shall be a compensation event. It also provides that where the impact of a change in law is for the overall costs to decrease, the contract price shall be reduced to reflect such decrease.69

Delay The 1999 FIDIC Contracts The 1999 FIDIC forms of contract provide that a failure by the Contractor to meet the agreed time for completion shall entitle the Employer to claim liquidated damages for delay. Delay liquidated damages are the only damages applicable to the Contractor’s delay in completing the works by the time for completion, but payment thereof does not relieve the Contractor from its obligation to complete the works in accordance with the contract.

The 2017 FIDIC Contracts The 2017 FIDIC forms of contract contain a very similar provision in relation to delay liquidated damages save that they provide that the liquidated damages provisions shall not limit the Contractor’s liability for delay in case of fraud, gross negligence, deliberate default or reckless misconduct by the Contractor. Therefore, a contractor must not deliberately delay the works once it has reached the delay damages cap otherwise it risks uncapped liability.

Other standard contract forms The ENAA, IChemE, NEC4 and LOGIC contract forms all provide for liquidated damages for delay in case of the Contractor’s failure to meet the time for completion.70 However, unlike the other forms, the IChemE and NEC4 forms do not expressly refer to payment of such damages as the sole and exclusive remedy of the Employer for such delay.

67 68 69 70

Clause 20.3, LOGIC. Option X2, NEC4. Option X2, NEC4. Clause 26, ENAA, Clause 15, IChemE, Option X7, NEC4, Clause 35, LOGIC.

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In addition, the NEC4 form expressly provides that if the completion date changes to a later date after the liquidated damages for delay have been paid, the Employer is to repay the overpayment of damages with interest.71 Similarly, if the Employer takes over a part of the works before the completion date, the delay liquidated damages are reduced from the date on which the part is taken over, taking into account the benefit of earlier taking over of such part of the works.72

Performance The 1999 FIDIC Contracts The 1999 FIDIC forms of contract provide for two sets of tests in relation to the performance of the works: tests on completion and tests after completion. The tests on completion are to be carried out in the following sequence: pre-commissioning tests, commissioning tests and trial operation. Following trial operation, performance testing (if any) shall take place to demonstrate whether the works comply with the performance guarantees. If the works fail the tests on completion (i.e. at all or fail to achieve the minimum levels of performance, if specified), the Employer shall be entitled to order further repetition of tests, reject the works if the failure deprives the Employer of substantially the whole benefit of the works or issue a taking-over certificate. If the Employer decides to take-over the works, it shall be entitled to reduce the contract price by such amount as shall be appropriate taking into account the reduced value of the works as a result of the failure. In addition, the 1999 FIDIC forms of contract provide for tests after completion (if specified). A failure of tests after completion is deemed to constitute a pass, where ‘the relevant sum payable as non-performance damages’ stated in the contract is paid by the Contractor.

The 2017 FIDIC Contracts The 2017 FIDIC forms of contract have refined the concept of performance liquidated damages. It is to be noted that in most contracts where performance parameters need to be measured and specific levels achieved in order for taking over to occur (typically power projects and process plants), these types of provisions are already added to the FIDIC clauses. Indeed, participants in such sectors will likely have forms of wording with which they are already comfortable, and that are often more intricate than the new drafting proposed in the Silver Book.

Other standard contract forms Other standard forms also provide for the application of performance liquidated damages.73 Given the nature of power plant construction works, the ENAA form contains guaranteed performance levels as well as minimum levels that need to be met.74 If the minimum performance levels are not met, the Contractor has an obligation to make good the shortfall

71 72 73 74

Option X7.2, NEC4. Option X7.3, NEC4. Sub-Clause 28.3(b), ENAA, Sub-Clause 35.9 IChemE, Option X17, NEC4, Clause 35, LOGIC. Clause 28, ENAA.

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and repeat the performance tests. If the minimum levels are met, but the guaranteed levels are not met, the Contractor may, at its option, either remedy such shortfall and repeat the performance tests or pay performance liquidated damages. The ENAA form does not, however, contain a right for the Employer to reject the plant. The IChemE form provides for a performance test period during which the performance tests are to be carried out.75 If the plant fails to pass any performance tests or if any performance test is stopped before its completion, the Employer shall permit the Contractor to make any adjustment and/or modification to the plant at the Contractor’s cost before the repetition of any performance test (subject to Employer’s prior approval of the same) and shall, if the Contractor reasonably requires, shut down any relevant part of the plant and restart it following any adjustment and/or modification.76 If by the end of the performance test period the plant has failed any performance tests and the results are within any limit for the application of liquidated damages, the Contractor shall pay performance liquidated damages to the Employer.77 However, if the results remain outside the limits by the end of the performance test period, the Contractor shall compensate the Employer for such failure to comply with the relevant guarantees.78 In the event that any performance test(s) has or have not been completed by the end of the defects liability period due to a reason that is not the responsibility of the Contractor, the relevant performance test(s) shall be deemed to have been passed.79

Indemnities The 1999 FIDIC contracts In the 1999 FIDIC suite of contracts, Clause 17 uses indemnities as the medium for risk allocation on a range of issues. The net effect is relatively complex. Indemnities are given by both Employer and Contractor and some but not all of them are reciprocal. For example, in relation to third party claims, the Contractor gives an indemnity to the Employer for personal harm and damage to property arising out of activities or personnel for which it is responsible and the Employer gives a similar, though not identical, indemnity to the Contractor.80 More of Clause 17 is devoted to obligations of the Contractor, including responsibility for Care of the Works,81 which has no equivalent in the case of the Employer. The Contractor is liable for loss or damage during the period from the Commencement Date to the issue of the Taking Over Certificate, except where the cause thereof is classified as an Employer’s Risk.82 However, it would be an over-simplification to say that the indemnity

75 76 77 78 79 80 81 82

Sub-clause 35.4, IChemE. Sub-clause 35.7, IChemE. Sub-clause 35.9, IChemE. Sub-clause 35.10, IChemE. Sub-clause 35.14, IChemE. Sub-Clause 17.1. Sub-Clause 17.2. Sub-Clause 17.3.

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provisions under the FIDIC forms of contract favour the Employer.Wherever loss or damage to the Works results from an Employer’s Risk, the Contractor may be able to claim an extension of time for delay and/or additional cost.83 There are also some differences between the various forms of FIDIC contract. While all forms include as an Employer’s Risk foreign hostilities, civil conflict, riots/disorder, explosions/contaminations/ radiation and sonic damage by aircraft,84 the Silver Book significantly omits three categories of Employer Risks found in the Red and Yellow Books85 namely, use or occupation of the works by the Employer, design of any part of the Works by personnel for whom the Employer is responsible and ‘Unforeseeable86 operation of forces of nature’. The MDB version of the Red Book adds to the first paragraph of Sub-Clause 17.3 the words ‘insofar as they directly affect the execution of the Works in the Country’. When compared with the Red Book itself, ‘the effect of this is to narrow further the nature of the ‘Employer Risks’.87 Much of the remaining indemnities and related provisions can be regarded as fairly balanced in terms of risk allocation. The indemnities for infringement of intellectual property rights88 are essentially reciprocal.The exclusion of liability for ‘any indirect or consequential loss’89 also applies to both parties.There is provision for the Contractor’s total liability to be limited to a stated amount; the amount is the subject of express provision, usually included in the Particular Conditions following negotiation.

The 2017 FIDIC Contracts It was assumed by some observers that the 2017 FIDIC forms of contract would follow the approach of the Gold Book in risk allocation, and this expectation was to some extent encouraged by FIDIC in the pre-release editions of the Yellow Book.90 Under the Gold Book, all risks were allocated between the parties (though differentiating between design-build period risks and operation service period risks) with distinctions made between Employer’s Commercial Risks, Employer’s Risks of Damage91 and Contractor’s Risks.92 In the result, the 2017 FIDIC forms of contract did not follow the Gold Book approach. Instead, there was substantial re-working in the form of a new care of the works and indemnities clause,93 which embodies traditional care-of-the-works obligations making

83 84 85 86 87 88 89 90 91 92 93

Sub-Clause 17.4. Sub-Clause 17.3. See Ellis Baker et al. (op.cit.), p.346. Defined by Sub-Clause 1.1.6.8 as ‘not reasonably foreseeable by an experienced contractor by the date for submission of the Tender’. Jeremy Glover and Simon Hughes QC (op.cit.), p.342. Sub-Clause 17.5. Sub-Clause 17.6. Distributed in London December 2016 and in Abu Dhabi in February 2017. Sub-Clause 17.1. Sub-Clause 17.2. Clause 17.

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the Contractor fully responsible for the Works, subject to exceptions expressly set out.94 Employer’s Risks are no longer listed as they were in the 1999 FIDIC forms of contract,95 and the carve-outs from the Contractor’s liability for care of the works96 are expressed as: • interference with property rights as the unavoidable result of the execution of the Works in accordance with the Contract; • use or occupation by the Employer of any part of the Permanent Works; • faults in design of the Works undertaken by the Employer; • unforeseeable operation of ‘the forces of nature’; • Exceptional Events;97 and • acts or defaults by the Employer’s Personnel or other contractors of the Employer. Although some of the distinctions between the respective FIDIC 1999 editions no longer remain, there are still divergences arising from the different procurement models. Thus the exception to the Contractor’s liability for care of the works due to faults in design of the works undertaken by the Employer is expressed as: • ‘any element of the design of the Works by the Employer or which may be contained in the Specifications and Drawings (Red Book)/Employer’s Requirements (Yellow Book)’ which an experienced contractor exercising due care would not have discovered before submitting the Tender (Red and Yellow Books); or • ‘any element of the design of the Works by the Employer’ (Silver Book). In particular, the 2017 Yellow and Silver Books now feature a substantial strengthening of the Contractor’s design obligations and liabilities using indemnity provisions, so that the Contractor indemnifies the Employer against all ‘acts, errors or omissions’ in carrying out the Contractor’s design obligations resulting in the Works ‘not being fit for the purpose(s) for which they are intended’.98 The 2017 Red Book equivalent applies ‘[t]o the extent, if any, that the Contractor is responsible for the design of part of the Permanent Works’99 which is intended to refer to the situation where a Particular Condition allocates an element or elements of the design to the Contractor.100 Although the 1999 Yellow and Silver Books, and to a very limited extent the 1999 Red Book, contained fitness for purpose obligations in respect of design, none was underpinned by an indemnity on the part of the Contractor to the Employer in respect of any breaches of that obligation. In this respect, the 2017 editions of the FIDIC contract can be said to represent a re-balancing of risk allocation in favour of the Employer.

94 Sub-Clause 17.2. 95 Sub-Clause 17.3. 96 Sub-Clause 17.2. 97 Clause 18. See above. 98 Sub-Clause 17.4, 2017 Yellow and Silver Books. 99 Sub-Clause 17.4, 2017 Red Book. 100 Sometimes referred to in the UK as the Contractor’s Design Portion from the JCT equivalent provision.

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Other standard contract forms Given that the LOGIC forms of contract are drafted mainly to be used for offshore works, the indemnity regime is based on ‘knock-for-knock’ indemnities.101 In its simplest form, under a knock-for-knock indemnity each party to a contract agrees to bear responsibility for and indemnify the other in respect of loss of or damage to their and their group’s (which would include their contractors and subcontractors) property and injury to or death of their and their group’s employees regardless of fault. These cross-indemnities are usually intended to be effective even if the losses arise due to negligence, breach of statutory duty or breach of contract. In light of the nature of the works and the potential extent of pollution related liabilities, for example, the LOGIC form carves out pollution related liability from the knock-for-knock indemnities. Instead, the Employer indemnifies the Contractor in relation to any pollution emanating from the reservoir or from the property of the employer group and the Contractor indemnifies the Employer in relation to any pollution emanating from the premises, property or equipment of the Contractor group.102 The knock-for-knock indemnities also do not extend to any third party liability, which is dealt by way of a fault-based approach.103 The NEC4 form takes the approach of replacing indemnities with liabilities for costs and definitively setting out the risks that the Contractor and the Employer assume.104 The parties will need to be careful in particular when using these provisions to ensure there are no risks that do not clearly fall on either the Contractor’s or the Employer’s list of risks.

Insurance The 1999 FIDIC Contracts The insurances to be effected under the 1999 FIDIC forms of contract are against loss or damage to Works and Contractor’s Equipment,105 personal injury and damage to property of third parties106 and personal injury to the Contractor’s Personnel.107 What cover is actually obtained will depend to some extent on what is available in the market and at what cost. However, the insuring party, whether Contractor or Employer, must insure against loss or damage to Works and Goods ‘for not less than the full reinstatement cost including the costs of demolition, removal of debris and professional fees and profit’. The required scope of this cover needs to be seen in conjunction with the Employer’s Risk provisions, which, as indicated above, ‘shall cover all loss and damage from any cause not listed in Sub-Clause 17.3’.108 Insurance for Contractor’s Equipment109 has to be for ‘not less than the full replacement value, including delivery to Site’.

101 Clause 21. 102 Sub-Clauses 21.3 and 21.4. 103 Sub-clauses 21.1(c) and 21.2(c). 104 Sub-Clauses 80.1 and 81.1. 105 Sub-Clause 18.2. 106 Sub-Clause 18.3. 107 Sub-Clause 18.4. 108 Sub-Clause 18.2(c). 109 Defined in Sub-Clause 1.1.5.1.

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The required scope of the insurance against personal injury and damage to property of third parties is also defined by reference to Sub-Clause 17.3, it being permissible to exclude liability to the extent that it arises from ‘a cause listed in Sub-Clause 17.3 [Employer’s Risks], except to the extent that cover is available at commercially reasonable terms’.110

The 2017 FIDIC Contracts In the 2017 editions, the General Conditions111 simply provide for insurance to be provided by the Contractor (although this could be varied by a Particular Condition). The scope of the cover contemplated has been expanded as compared to the 1999 editions. There is still the obligation to cover the Works,112 Goods,113 against injury to persons and damage to property114 and injury to employees.115 To these have been added116 ‘all other insurances required by the Laws of the countries where (any part of) the Works are being carried out’ and ‘[o]ther insurances required by local practice (if any) shall be detailed in the Contract Data’. The most important addition, however, is the requirement that the Contractor’s indemnity in respect of breach of its fitness for purpose obligation to the Employer in relation to design of the Works shall be covered by professional indemnity insurance if required by the Contract Data.117

Other standard contract forms Given the offshore nature of the works covered by the LOGIC forms, there are specific insurances that are required to be taken out by the Contractor, including Marine Hull and Machinery insurance in respect of all vessels used by the contractor group in the performance of the works and Protection and Indemnity insurance including wreck and debris removal and oil pollution liability in respect of all vessels or floating equipment owned, leased or hired by the contractor group in relation to the performance of the works.118 The Construction All Risks (CAR) insurance is to be taken out by the Employer but any deductible to paid under such insurance shall be the Contractor’s responsibility.119 Under the IChemE form, the Employer is responsible for procuring insurance for all risks relating to the plant, site materials and temporary works in joint names of the Employer, Project Manager, Contractor and Subcontractors. While the insurance shall cover physical damage by defective design, it shall (in line with typical practice) exclude the

110 Sub-Clause 18.3(d)(iii). 111 Sub-Clause 19.2. 112 Sub-Clause 19.2.1. 113 Sub-Clause 19.2.2. 114 Sub-Clause 19.2.4. 115 Sub-Clause 19.2.5. 116 Sub-Clause 19.2.6. 117 Sub-Clause 19.2.3. 118 Sub-Clause 22.2. 119 Sub-Clause 23.3.

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cost of rectifying any defect.120 The Contractor is required to procure insurance covering contractor’s equipment,121 third-party liability insurance,122 and Employer’s liability insurance.123 The Contractor is not specifically required to maintain any professional indemnity insurance.124

The allocation of risks in a construction project – summary Accurate identification and fair and equitable allocation of risks are essential to ensuring the successful delivery of a project. Both the employer and the contractor should work co-operatively to seek an equitable sharing of risk based on an appropriate procurement methodology and to allocate typical risks in an efficient manner, in the light of the nature of the particular project and its specific considerations with the intention that the potential for frustration of the project schedule and the incidence of construction disputes will be reduced to the benefit of all parties. The FIDIC forms of contract have long been ‘international benchmarks’ in terms of risk allocation. However, these vary notably between the different procurement methods offered by the 1999 FIDIC suite. If the Red and Yellow Books are reckoned to offer a more ‘balanced’ risk allocation, the Silver Book places significantly more risk on the Contractor. In any event, the risk allocation in the FIDIC General Conditions can be further modified by the use of Particular Conditions. The 2017 editions of the FIDIC forms of contract broadly maintain the distinctive procurement models in the Red,Yellow and Silver Books, respectively. The risk allocation in the Red and Yellow Books on the one hand is more balanced and in the Silver Book more onerous for the Contractor, as before. However, and despite the weight of Golden Principle 3125 in favour of stability in reward/risk allocation in FIDIC forms, the new editions have introduced significant adjustments which will require careful evaluation before they are used. The other standard forms, such as ENAA, IChemE and LOGIC, are generally targeted towards specific types of works or industries. They are also similar to FIDIC in the way they are structured and drafted.The NEC4 form stands out as being truly different and was updated to target more international use.While the usage of the NEC4 form grows, FIDIC continues to remain the most widely used standard form contract internationally.

120 Sub-Clause 31.1. 121 Sub-Clause 31.2(b). 122 Sub-Clause 31.2(c). 123 Sub-Clause 31.2(a). 124 Sub-Clause 31.2. 125 On the new Golden Principles, released with the 2017 editions, see Chapter 3 above.

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7 Contractors’ Claims, Remedies and Reliefs James Bremen and Leith Ben Ammar1

Introduction The international construction market is highly competitive. Following the financial crisis of 2008 and the steep decline in the prices of oil and gas that followed, with the exception of some government infrastructure projects, in particular in emerging markets, there has been a dramatic decrease in construction work worldwide, in particular for major contractors who specialise in large and complex projects. Employers with scarcer resources are awarding projects on tight budgets and employer friendly contractual terms, often to contractors who undervalue their bids in order to win the project, resulting in cash flow issues, delays and substandard works. In recent years, this increasingly common recipe has led to a very contentious international construction market and numerous construction arbitrations. Contractors are required to complete projects on time, at the required quality and at the agreed cost. Their ability to do that can be affected by a number of factors outside of their control and properly drafted construction contracts, tailored to a project’s specific jurisdictional and logistical risks, provide relief to contractors when such events occur. This chapter will discuss the claims, remedies and reliefs available to contractors in major construction projects, in light of some of the current challenges faced by contractors in the international construction industry, by reference to market practice, and one of the most commonly used suites of standard form construction contracts, FIDIC. Firstly, it will discuss the circumstances in which claims for extensions of time arise, and the procedure to be followed when making such claims. Second, it will set out the conditions that give rise to claims for loss and expense, and the usual requirements that contractors must satisfy for their claim to be successful. Third, it will look at the circumstances in

1

James Bremen is a partner and Leith Ben Ammar is a senior associate at Quinn Emanuel Urquhart & Sullivan LLP.

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which variations, payment and force majeure claims can give rise to extensions of time, loss and expense, and termination. Fourth, it will briefly discuss the other circumstances that give rise to a contractor’s right to terminate the contract, related procedural requirements and consequences. Finally, it will provide tips for contractors when appointing and working with expert witnesses in disputes arising from contractors’ claims.

Extensions of time In most projects, contractors are required to complete the project by a set date. Construction projects are often time-critical and delays to completion of a given project can result in significant monetary losses to the employer. For example, if the completion of a power plant or an oil refinery is delayed, it will have a direct effect on the offtake agreement and the project revenue stream, affecting the ability of the employer to repay the lenders. Accordingly, as will be further discussed in Chapter 7 of this book, construction contracts usually contain liquidated or general damages provisions under which the contractor is liable for delays to the project.2 Large and lengthy projects will generally be divided into milestones that the contractor must achieve by set milestone dates. In such circumstances, contractors are likely to also be liable for liquidated or general damages if they fail to complete the milestones by the milestone dates. A multitude of events can delay a project, some of which are outside of a contractor’s control. Accordingly, contractors cannot always be held responsible for delays and liable for the resulting losses. Depending on the governing law and the provisions of the underlying contract, a contractor may be entitled to claim an extension of time when such events arise. Events that can give rise to an extension of time include: • acts caused by the employer or one of its representatives (including other contractors employed by the employer); • events outside of both parties’ control and that are the employer’s responsibility under the contract, such as force majeure events, material or goods shortages or delays caused by the authorities; and • variations to the scope of works.3 Typically, construction contracts entitle contractors to an extension of time if they can prove that the event caused delay to an activity that is on the project’s or particular milestone’s critical path (the critical path of a project or a milestone is the longest path of logically connected activities such that the sum of the individual durations of each activity equals the overall duration of the project or milestone). Contractors will usually be required to provide notice to the employer, or its representative, of the delaying event. The clock will start ticking either when the delaying event arises, or more often when the contractor becomes aware, or should have become aware, of the delaying event.4

2 3 4

See, for example, Clause 8.8 of the FIDIC Yellow Book. See, for example, Clause 8.5 of the FIDIC Yellow Book. See, for example, Clause 20.2 of the FIDIC Silver Book.

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In construction contracts, compliance with such contractual notices will usually be a condition precedent to any claim for an extension of time.5 These contractual notice requirements are often referred to as guillotine provisions and are enforced strictly in common law jurisdictions, in accordance with one of the underlying principles of contract law, pacta sunt servanda or freedom of contract. Some civil law jurisdictions take a hostile view towards condition precedent clauses and time bars. Contractors should, therefore, always check the legal position in their chosen jurisdiction. In addition to the notice requirements, the contractor will be required to follow the procedure set out in the underlying contract in order to claim an extension of time. While it might vary depending on the contract, it will generally involve submitting detailed particulars and supporting contemporaneous records evidencing the entitlement to an extension of time.6 Contractors should negotiate the costs arising from such exercise with the employer when discussing clauses of this nature. In order to produce particulars and records that satisfy the contractual and evidentiary hurdle for claiming an extension of time, contractors must ensure they have a good planning team. Such particulars and records will generally be submitted to the employer’s representative, who must, in consultation with the parties, make a fair determination of the contractor’s claim.7 Contractors and employers should keep these records in the event either of them disagree with the employer representative’s determination and the entitlement to an extension of time arises as an issue in future arbitration proceedings. During proceedings, such records will be required by the contractor to establish the existence of the alleged delaying event and by its appointed programming experts to provide opinion evidence on the impact that each alleged delaying event had on the contractor’s ability to complete the works. Employers may, by their conduct, waive some of the contractual condition precedents to claiming an extension of time with regard to one or more contractor claims. If such waiver is established, the employer may be estopped from denying an extension of time on the basis that the contractor failed to comply with those contractual condition precedents. In common law jurisdictions, this principle is referred to as estoppel by conduct. It arises if (1) a party by its conduct (2) led the other to believe (3) it had waived or relaxed compliance with an obligation, and (4) the other party acted in accordance with that conduct (5) to its detriment. In both civil law and common law jurisdictions, contracts can be concluded orally or by conduct and accordingly the employer’s conduct leading to the contractor’s belief it had relaxed the procedural condition precedents may constitute a variation to the underlying contract, having a similar effect as estoppel by conduct. The ability to conclude an oral contract or a contract by conduct is limited if the underlying contract contains entire agreement, no waiver or no variations unless in writing provisions, in particular in common law jurisdictions where such provisions would be

5 6 7

See, for example, Clause 20.2 of the FIDIC Silver Book. See, for example, Clause 20.2 of the FIDIC Silver Book. See, for example, Clause 3.5 of the FIDIC Silver Book.

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enforced strictly. In civil law jurisdictions, they would be enforced but may be balanced against overriding considerations of fairness and equity, which could have the same effect as estoppel.

Loss and expense Claims for loss and expense cover all types of financial claims by contractors in construction disputes. Claims for loss and expense arise when contractors can show that: • they suffered loss because of an employer breach of contract; or • they have an entitlement to additional money under the contract. To successfully claim for loss and expense for breach of contract, a contractor needs to prove that (1) there was an obligation, (2) which was breached by the employer or its representatives, (3) therefore causing monetary loss to the contractor, and (4) that loss is not too remote. Under English law, losses will not be too remote if: • a reasonable man would have realised losses of the same kind8 were a not unlikely consequence of the breach9 (referred to as direct losses); or • those losses may reasonably be supposed to have been in the contemplation of the parties at the time they entered into the contract10 (referred to as indirect or consequential losses). The test for remoteness is very similar in other common law jurisdictions. In civil law jurisdictions, however, claimants are usually only entitled to those damages reasonably foreseeable at the time of execution, except in cases of gross negligence or fraud. For example, Articles 263(2) and 263(3) of the Qatari Civil Code set out the test for remoteness under Qatari law. Article 263(2) states: the compensation shall cover damages incurred by the obligee, including loss of profit, provided that such damages or loss of profit are a natural consequence of the obligor’s failure or delay to perform the obligation. Damages shall be deemed a natural result if the creditor could not avoid it by reasonable efforts.

Article 263(3) goes on to state: if the source of the obligation is the contract, the debtor would not be obliged to pay compensation to the creditor if he the debtor did not commit fraud or gross mistake, except for compensation for damage which was foreseeable or within the contemplation of the parties at the time of the conclusion of the contract.

8 Overseas Tankship (UK) Ltd v. Morts Dock & Engineering (The Wagon Mound, No. 1) [1961] AC 388. 9 C Czarnikow Ltd v. Koufos (The Heron II) [1969] 1 AC 350. 10 Hadley v. Baxendale (1854) 9 Exch 341.

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In other words, the loss will not be too remote if: • it flows from the breach of contract; and • in circumstances where the debtor has not committed fraud or gross mistake, and also was ‘within the contemplation of the parties at the conclusion of the contract. The ability to recover certain losses may also be limited by provisions of the contract. For instance, construction contracts often limit the parties’ ability to recover indirect losses,11 except in case of fraud, deliberate default or reckless misconduct. Events that may entitle contractors to additional money under the contract include acts of prevention by the employer or his or her representatives, variations and neutral events for which the employer is responsible under the contract. Contractors will usually be required to follow the same procedure as for claims for an extension of time, and the same contractual condition precedents will apply. The most common heads of claim are prolongation, disruption and acceleration. When a project is delayed because of an event for which the employer is responsible, the contractor is entitled to an extension of time, as discussed above, as well as any losses arising from the delay. These losses are referred to as prolongation costs. Prolongation costs can include site and office overheads, financing charges arising from money borrowed to fund the project and loss of profit. To successfully claim for prolongation costs, contractors need to provide detailed particulars and evidence that each of the claimed costs were caused by employer delay. The contractor’s ability to successfully claim the prolongation costs will also be subject to the rules of remoteness under the governing law of the contract. In complex projects, when contractors experience difficulties proving the causal link between each alleged delay event, the actual delay to the project and the claimed prolongation costs, they are often tempted to combine all the alleged delay events into a global claim, instead of breaking down the delay and prolongation costs and linking them to specific delay events. Because of the lack of causal link, global claims seldom succeed, in particular when heard before an experienced and robust arbitral tribunal. Claims for general disruption arise from the assumption that contractors arrange the activities required to complete a project in an efficient sequence. On that assumption, any event that affects the sequence of the works can lead to inefficient use of plants and manpower, which in turn would increase the costs of completing the project. When the employer is responsible for such events, a contractor is entitled to recover those costs. Claims for disruption are generally difficult to prove. Contractors must show that the additional costs are caused by events the employer is responsible for instead of the contractor’s inefficient practices. The most commonly used method to prove disruption costs is the measured mile method, where the contractor compares the efficiency in the disrupted section of the works with the efficiency in an identical unaffected section. It will only work, however, when the contractor is able to identify an identical unaffected section of the works.

11 See, for example, Clause 1.14 of the FIDIC Silver Book.

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Acceleration claims are also fairly common in construction arbitrations. They can arise when: • the employer instructs the contractor to complete the works within a shorter period than originally required under the contract (referred to as express acceleration); or • because of one or more events for which the employer is responsible, the contractor must perform more work or delayed work within the same period (referred to as implied acceleration). The contractual procedure to instruct acceleration and claim for costs arising from acceleration will generally be the same as for variation claims. Claims for implied acceleration are rare and difficult to prove.They cannot arise in parallel to extension of time and loss and expense claims made because of the same event.They are generally only successful in circumstances where a contractor has incurred costs when successfully mitigating all the delay caused by an event the employer is responsible for.

Variations Employers will often want the ability to make changes in a project. Those changes may arise from potential buyer or end user requirements, changes in technology or aesthetics concerns. Properly drafted construction contracts will provide a sophisticated mechanism allowing: • employers to make changes to the scope of the works after the contract is executed; and • contractors to be awarded an extension of time and payment for costs arising from those changes. In order to claim an extension of time or payment for additional costs, the contractor must follow the procedure set out in the contract. Upon request from the employer, a contractor will generally be required to submit a proposal containing any additional time and costs claimed, together with all supporting documentation.12 As for other claims for time and costs, the time and costs effect of a variation, if not agreed between the parties, will usually be determined by the employer’s representative13 and be subject to any contractual condition precedents, such as notice requirements. In addition to time-related costs, contractors are usually entitled to any additional labour and material related costs that arise from the variation, subject to any contractual or legal limitations on liability. The contractor should, of course, ensure that the supporting documentation includes all documents required contractually and from an evidentiary perspective to prove their entitlement to additional time and costs.

12 See, for example, Clause 13.3 of the FIDIC Silver Book. 13 See, for example, Clauses 3.5 and 13.3 of the FIDIC Silver Book.

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Force majeure Events outside of the parties’ control may arise during a project, affecting the contractor’s ability to perform his or her contractual duties. A force majeure clause excuses non-performance by a contractor of his or her contractual obligations when impossibility results from a cause stated in the contract. Such causes are typically defined as an event or act that: • is beyond the reasonable control of the contractor; • was not reasonably foreseeable at the time of entering the contract; • could not have been avoided; • is not attributable to the employer; and • prevents the contractor from performing its obligations under the contract.14 Often, force majeure clauses may also specify a descriptive list of events such as war, terrorism, civil unrest and severe adverse weather conditions, which will be deemed to be force majeure events if they also comply with the conditions above.15 Force majeure clauses may also exclude particular events from the scope of force majeure in order to allocate liability in advance for such events. To successfully claim force majeure, the contractor must prove that a force majeure event exists and that it is preventing performance,16 temporarily or permanently. What constitutes ‘prevention’ in this context will depend on the wording but also on the governing law of the contract. For instance, under English law, the prevention must be legal or physical. A contractor will not be able to claim that it was ‘prevented’ from performing the contract just because the cost of performance has increased above what was originally anticipated.17 As with other claims, the contractor must also comply with contractual condition precedents, such as notice provisions. Again, failure to comply with such contractual condition precedents may or may not have a debarring effect. If successful, a contractor may be entitled to a graduated range of remedies, including extension of time, loss and expense, suspension of performance, termination of the contract and consequential provisions. A contractor will typically be entitled to an extension of time for delays arising from being ‘prevented’ from performing his or her obligations under the contract. However, he or she will generally be under the obligation to minimise any such delay. While some standard form contracts such as FIDIC18 provide contractors with the ability to also claim for loss and expense (time-related costs, as well as costs of remedying the works due to loss or damage caused by a force majeure event) in some circumstances, in practice, construction contracts generally allocate cost-related risks of force majeure events to contractors.

14 15 16 17 18

See, for example, Clause 18.1 of the FIDIC Red Book. See, for example, Clause 18.1 of the FIDIC Red Book. See, for example, Clause 18.1 of the FIDIC Red Book. Fairclough Dodd & Jones Ltd v. JH Vantol Ltd [1956] 3 All ER 921. See, for example, Clause 18.4 of the FIDIC Red Book.

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In the event of a prolonged force majeure event preventing the execution of substantially all the works, contractors may be entitled to terminate the contract.19 If so, the force majeure clause will set out the length of force majeure before termination becomes available and the payments that must be made if the contract is terminated.Very often, the approach to termination is the same as with termination for convenience. However, any ‘termination payment’ may either exclude or limit greatly the amounts that may be paid or amount of loss of profit for the balance of the contract.

Payment Non-payment or late payment claims are also very common contractor claims that arise in construction projects. In the current market, contractors often price their bids on a very tight margin and non-payment or late payment can quickly eat into their margin, in particular when a contractor has financing obligations. The effect on the contractor’s and subcontractors’ cash flow can strongly hinder their performance and the contractor’s ability to perform its obligations on time and at the planned cost, if at all. Construction contracts usually require employers to make payments to contractors periodically, in accordance with an agreed schedule of payments.20 Before each payment is made, contractors must submit contractually compliant interim payment applications showing in details the amount they consider themselves to be entitled to together with supporting documentation evidencing the progress to the works against which payment is claimed.21 The employer must pay all duly justified payments, subject to any deductions it is entitled to make under the provisions of the contract22 (such as deductions for defective works, for instance). If the employer fails to pay the contractor by the prescribed deadlines without any valid justification, the contractor will typically be entitled to financing charges incurred because of such delay.23 Any prolonged failure may entitle the contractor to suspend work and, in extreme cases, terminate the contract. In order to suspend the works or terminate the contract for non-payment, the contractor must comply with the procedure set out in the contract, including any notice requirements. The suspension and termination provisions of the contract will generally set out the length of notice before suspension and termination become available.24 Contractors will generally be entitled to an extension of time and associated time-related costs for delays arising from such suspension of the works, subject to the requirements set out in the ‘Extensions of time’ and ‘Loss and expense’ sections set out above.

19 20 21 22 23 24

See, for example, Clause 18.5 of the FIDIC Red Book. See, for example, Clause 14.4 of the FIDIC Silver Book. See, for example, Clause 14.3 of the FIDIC Silver Book. See, for example, Clause 14.6 of the FIDIC Silver Book. See, for example, Clause 14.8 of the FIDIC Silver Book. See, for example, Clauses 16.1 and 16.2 of the FIDIC Silver Book.

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Termination Contractors generally have relatively limited termination rights in construction contracts. In addition to the circumstances set out in the ‘Force majeure’ and ‘Payment’ sections above, contractors are typically entitled to terminate a contract: • for a failure by the employer to submit reasonable evidence of financial arrangements demonstrating ability to pay the contract price; • if the employer substantially fails to perform, or materially breaches, its obligations under the contract; • for a failure by the employer to enter into a contract agreement in accordance with the contract or the prohibition on assignment; • if the employer engages in corrupt or fraudulent practice in relation to the contract; • for a prolonged suspension of the works instructed by the employer or his representative; and • for employer insolvency.25 Provided a prescribed reason arises, and the contractual procedure is followed, a contractor will be entitled to terminate the contract. The consequences of termination will be prescribed by the contract and will generally include, on the one hand, payment of sums due and return of performance security to the contractor and, on the other hand, handing over of plants, materials and documents paid for to the employer, and removal of all other goods from site.26 As will be further discussed in Chapter 7 of this book, employers have generally more extensive termination rights. While a valid termination for default may have disastrous consequences for contractors, a wrongful termination may entitle them to payment for all the profit they would have made under the contract but for the wrongful termination and the cost of demobilisation.

Appointing and working with expert witnesses in disputes arising from contractors’ claims Construction projects involve a wide range of technical trades and expertise. Deciding claims arising from construction projects therefore requires evidence from experts in those aspects of the project from which the dispute arises. In addition to the traditional disciplines in which expert evidence is generally required in international commercial arbitrations, such as local law or quantum, construction arbitrations often require programming experts and experts in technical disciplines such as architecture, mechanical engineering, electrical engineering, structural engineering and so on to decide extension of time, variation or defects claims. Therefore, construction arbitrations arising from major projects are inherently expert heavy and will often stand and fall on expert evidence.

25 See, for example, Clause 16.2 of the FIDIC Silver Book. 26 See, for example, Clauses 16.3 and 16.4 of the FIDIC Silver Book.

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The key factors which make a good expert generally come under three umbrellas: (1) the expert’s eminence and experience in their area of expertise; (2) their credibility; and (3) soft skills transferable to the role of an expert witness (such as good oral presentation, organisation or ability to meet strict deadlines). Professional expert witnesses typically have stronger soft skills than ‘actual’ experts who practise their expertise for a living. One can see the attraction in appointing a professional expert as they are likely to have good oral presentation skills, understand the arbitral process and legal jargon and will generally need less supervision. While soft skills are important, it is the weight the arbitral tribunal gives to an expert’s evidence that will be critical to the tribunal’s decision on the issue the expert gives evidence on. When deciding between two conflicting experts’ opinions, a tribunal is likely to give significantly more weight to the opinion of an ‘actual’ expert with extensive day-today experience and credentials in the issue on which the opinions is given than to the opinion of a professional expert with limited or no actual experience of the issue. Experts are expected to be independent in international arbitrations. This requirement is reflected in the IBA Rules on the Taking of Evidence in International Arbitration (Article 5.2(c)). A lack of independence is highly likely to come to light during the arbitration. Properly briefing expert witnesses at the outset is imperative to ensure the expert’s report (or reports) is focused, exhaustive, authoritative, cost-effective and submitted on time. The instructions to the expert should contain all the relevant background information, the nature of the expertise required, the purpose of his or her report, a description of the matters to be investigated and of the issues to be addressed, the statements of case (if any), the relevant witness statements (if any), those documents that form part of disclosure and witness statements that are relevant to the report, an outline programme for the completion and delivery of each stage of the expert’s work, the dates of any hearings, the deadlines for the exchange of experts’ reports and any other relevant deadlines. The instructions should also set out the expert’s duties, in particular independence and owing an overriding duty to the tribunal. A critical point to remember is that instructions to experts are not privileged and often ordered to be disclosed. They should never contain material that would be embarrassing or otherwise undermine the expert’s independence. It is helpful to the expert’s and client’s credibility to set out the instructions fully in the expert’s report or reports. Another potential pitfall to avoid is to ask an expert (other than legal experts, obviously) to give a view on legal issues or issues that are not within the expert’s expertise.The expert must focus exclusively on the factual or technical issues within his or her expertise that underpin the legal case. In addition to issuing clear instructions from the start, the expert must work closely with the project team and legal team and keep an ongoing dialogue throughout the arbitration. There should be a comprehensive ‘teach-in’ at an early stage by project team, all the documentation and information requested by the experts should be provided to the expert as quickly and efficiently as possible (subject to lawyer review for relevance or privilege) and there must be regular communication and discussion on key issues and progress. In addition, contractors should consider with their lawyers and experts whether there is a

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need for further information and factual evidence or other expert evidence (e.g., specific engineering input), and provide it to the expert. Finally, the contractor’s lawyers must check the draft report for completeness and relevance to issues. A good expert report should include a full curriculum vitae of the expert (as discussed above, anything hidden will be found out), the instructions in full, an executive summary, details of the individuals to whom the work has been delegated (and a statement that despite delegation, the expert has checked, understood and endorses all work undertaken by others to prepare the report), identify the sources of all the information relied upon, identify the methods followed, identify all the assumptions made where information is not available, address the specific issues identified in the instructions directly and clearly and set out the expert’s conclusion directly and clearly. Whether a contractor succeeds in a construction arbitration will often fall on the quality, thoroughness and independence of its expert evidence. Selecting the right experts and managing them efficiently is therefore critical.

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8 Employers’ Claims and Remedies James Bremen and Mark Grasso1

Introduction The majority of construction disputes proceeding to arbitration are commenced by contractors.This is not to suggest that it is only contractors that have claims on most projects, as that is clearly not the case. It goes without saying that employers have interests in the projects they are commissioning, in particular, the interest in having their project delivered on time, on budget and in accordance with the contractual specifications.The main difference between a contractor’s position and that of an employer that causes a contractor to refer its claims to arbitration first is that, generally speaking, a contractor will feel financial pressure earlier than an employer in the form of non-payment of sums to which it considers it is entitled, and will turn to arbitration in order to recover such sums. Nevertheless, employers often bring claims against contractors, sometimes as claimant, but more often by way of counterclaim after an arbitration has been commenced against them by a contractor. This chapter begins by considering the range of claims employers most frequently pursue in arbitration, which revolve around four issues: • the time for delivery of a project; • the quality of what is being delivered; • termination; and • payment. Other matters in respect of which an employer might, in theory, have a claim against a contractor are then briefly addressed.

1

James Bremen is a partner and Mark Grasso is of counsel at Quinn Emanuel Urquhart & Sullivan LLP.

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Claims concerning the time for completion In almost every construction contract, even for a simple project, there will be a specified date by which the project must be completed. On larger and more complex projects, the work may be divided into milestones and the contractor may be required to complete each milestone by the associated ‘milestone date’ specified in the contract. There may also be additional milestones and milestone dates for matters, such as testing and commissioning and handover of the whole project. However, even if a contract specifies a completion date or one or more milestone dates, the question arises as to the nature of the remedies available to the employer if the contractor fails to complete part or all of the work by the associated milestone or completion date. As a matter of principle, the employer would have a claim against the contractor for damages for breach of contract. However, it is then necessary to consider the damage which it will have suffered as a result of the delay to the project, or part thereof, and how such delay can be quantified. Consider the case of a construction project where the first milestone is the completion and approval of the design for the project. If the design is not completed or approved by the milestone date specified in the contract, has the employer suffered any loss? In most cases, the answer will probably be no. Even in a scenario where delay has occurred to a milestone that is capable of being used on its own (e.g., part of a shopping centre) or to a project as a whole (e.g., a new road), the monetary loss to an employer as a result of delay may be a relatively small sum or may be very difficult to quantify. In light of this, the usual practice is for construction contracts to provide that the contractor will be liable for liquidated damages (that is, damages in a fixed monetary amount) for each day or some other period for which it is late in completing a milestone or the project as a whole. If the project has been divided into milestones, there may be different liquidated damages rates for each milestone. The liquidated damages payable in respect of each milestone and the project as a whole will also probably be capped. An example of a liquidated damages provision is Clause 8.8 of the FIDIC Silver Book, which provides that: If the Contractor fails to comply with Sub-Clause 8.2 [Time for Completion], the Employer shall be entitled subject to Sub-Clause 20.2 [Claims For Payment and/or EOT] to payment of Delay Damages by the Contractor for this default. Delay Damages shall be the amount stated in the Contract Data, which shall be paid for every day which shall elapse between the relevant Time for Completion and the relevant Date of Completion of the Works or Section. The total amount due under this Sub-Clause shall not exceed the maximum amount of Delay Damages (if any) stated in the Contract Data.

Clause 8.8 goes on to provide that liquidated damages are the employer’s sole remedy for delay on the part of the contractor. Provisions of this nature are also commonly found in construction contracts containing liquidated damages provisions. As is also illustrated by Clause 8.8, most liquidated damages provisions provide, in effect, that the contractor is, prima facie, liable to pay the employer liquidated damages for all delays in completing the project (up to the value of any caps). In other words, the employer is not required to establish that the contractor is at fault before being entitled to recover

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liquidated damages. Put another way, in an arbitration, an employer’s claim for liquidated damages would, at least in the first instance, simply be a mathematical calculation of the number of days (or other period for calculating liquidated damages) from the scheduled milestone or completion date to the date on which the milestone or completion was actually achieved multiplied by the applicable liquidated damages rate. However, the fact that liquidated damages provisions prima facie make contractors liable for delay, however caused, gives rise to two questions: first, how does the contractor obtain relief from this liability for liquidated damages when it has not been responsible for the delay to the project; and second, what are the legal implications of a clause that provides that the contractor is liable for liquidated damages even if the employer is at fault? In relation to the first question, a contractor would be extremely unlikely to sign up to a contract that would make it contractually responsible for all delays, even delays outside its control. While there may be some risks that a contractor is prepared to accept (e.g., risks associated with bad weather), most contractors would refuse to assume responsibility for force majeure events and delay events caused by the employer’s acts or omissions. For these reasons, most construction contracts contain terms that provide that the contractor will be entitled to an extension of a milestone date or the completion date if it establishes that it has been delayed in achieving the milestone or completion of the project by certain events. In the FIDIC Silver Book, such a provision is found in Clause 8.5. Claims concerning extensions of time in construction arbitrations can be very complex. In most jurisdictions, the contractor carries the burden of establishing that it is entitled to an extension of time and associated relief from the employer’s claim for liquidated damages – that is, that the project was delayed by matters that the construction contract specifies are the employer’s responsibility. Strictly speaking, an employer is not obliged to positively demonstrate that the contractor was the cause of delay in order to be able to recover liquidated damages. However, when faced with a claim by a contractor for an extension of time, many employers will proceed to seek to do so as it is the best means of defeating the contractor’s claim for an extension of time. In relation to the second question noted above, the risk associated with a liquidated damages clause that does not provide relief for the contractor when the employer is at fault is that, if the employer causes delay to the project, the employer will not be permitted, under the law governing the contract, to hold the contractor to the contractually agreed milestone dates or completion date as it has prevented the contractor from achieving them. Under English law, the principle is known as the ‘prevention principle’. Similar principles exist in most legal systems. If the prevention principle (or equivalent principle) applies because an employer has caused a contractor delay in achieving a milestone or project completion, the consequence generally is that time will be ‘at large’. The effects of time being at large are that the contractor is no longer obliged to complete the milestones or the project by the associated milestone dates or completion date, but only in a reasonable time, and that the employer will no longer be able to claim liquidated damages if the milestone dates or completion date are not met. In theory, an employer might still have a claim for general damages if the contractor does not achieve a milestone or completion within a reasonable time, but, as discussed above, the employer is likely to have difficulty in establishing or quantifying its actual losses in such circumstances. However, the risk of the prevention principle coming into play is limited if a contract provides that a contractor is entitled to

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an extension of time and associated relief from the employer’s claim for liquidated damages for matters for which the employer is responsible. Liquidated damages clauses that provide no relief when the employer is responsible for delay are extremely rare. Nevertheless, because of the potential advantage of time being set at large, contractors often attempt to argue that time is at large because of alleged failures on the part of the employer in awarding extensions of time as and when they are due as a project is progressing. However, the mere failure to administer an extension of time clause is generally insufficient to set time at large, and arguments by contractors based on any such failings causing time to be at large almost inevitably fail. In summary, where there has been delay to a construction project, an employer will generally have a claim against the contractor for liquidated damages. Such a claim is likely to form a significant part of any claims which an employer brings against a contractor in a construction arbitration. However, any such claim will almost certainly be met with a counterclaim by a contractor for an extension of time, and the employer will need to be prepared to meet the contractor’s counterclaim with evidence showing why the employer is not contractually responsible for the delay. An employer may also want to lead evidence demonstrating that the contractor has caused the delay, although this may not be necessary if the contract provides that the contractor is only entitled to an extension of time in specific circumstances (as is generally the case) as in such circumstances the contractor is prima facie responsible for all delay, and the employer would only obliged to prove that it has no responsibility for any delay. Assuming that a contractor’s claim for an extension of time has failed in whole or in part and the contractor is contractually liable for liquidated damages, it is often thought that in some civil law jurisdictions, the contractor will not be liable for liquidated damages if the employer has suffered no loss as a result of the contractor’s delays or its actual losses are less than the value of the liquidated damages that would be payable under the contract. However, such arguments are based on a misunderstanding of the treatment of liquidated damages clauses under civil law systems.The circumstances in which contractors are able to persuade arbitral tribunals to exercise any power to reduce the contractually agreed amount of liquidated damages are, in practice, extremely rare. Finally, it is also worth noting that many construction contracts provide that if a contractor has not been proceeding with the works with reasonable diligence or some other measure required by the contract, or is otherwise in delay, the employer may instruct the contractor to accelerate the works or take other steps to recover the delay. In practice, however, employers are generally hesitant about exercising such powers as there is a risk that, if the contractor is subsequently found not to have been in breach of contract or not responsible for the delay, the employer’s instruction would be found to amount to a variation and the employer would then be liable to the contractor for the additional costs of the acceleration or other steps it has directed.

Claims concerning the quality of the works Under most construction contracts, the contractor’s primary obligation is to deliver the project in accordance with the employer’s specifications by a specified date. On a strict reading of such contracts, it might be argued that the quality of the works as they are being undertaken is irrelevant, as all that matters is that, when the project is handed over to the

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employer, everything is in accordance with the contractual specifications. This gives rise to a question as to whether there can be defects in a contractor’s works prior to handover.This question has been debated by commentators in several jurisdictions, and the legal position is, perhaps surprisingly, generally unclear. From a practical perspective, it would be unsatisfactory to an employer if, in circumstances in which it has observed a deficiency in the manner in which the contractor is carrying out the works or has identified a serious defect in part of the works, it has no remedy against the contractor until handover. In order to overcome this in circumstances where it may be unclear whether the employer would have a legal remedy against the contractor prior to completion, many construction contracts contain provisions that entitle the employer to inspect the works as they are proceeding (e.g., Clause 7.3 of the FIDIC Silver Book) and to issue a notice to the contractor prior to completion requiring the contractor to remedy a deficiency in the works (e.g., Clauses 7.5 and 7.6 of the FIDIC Silver Book). Clause 7.6 of the FIDIC Silver Book provides that, should the contractor fail to remedy the work following such a notice from the employer, the employer may instruct others to remedy the work at the contractor’s cost. In addition, the generally worded Clause 15.1 of the FIDIC Silver Book provides that: If the Contractor fails to carry out any obligation under the Contract the Employer may, by giving a Notice to the Contractor, require the Contractor to make good the failure and to remedy it within a specified time (‘Notice to Correct’ in these Conditions).

This has the potential to be a powerful remedy for an employer while construction works are progressing. However, it needs to be accompanied by a provision expressly giving the employer a remedy if the contractor does not comply with the employer’s notice as the employer may not otherwise have a claim against the contractor in such circumstances, particularly if the contractor’s failure to comply with the notice does not cause the employer any immediate financial loss. The employer may also have a right to withhold a portion of the payments otherwise due to the contractor until the deficiency in the work is rectified, even before the project is complete. In such circumstances, the amount that the employer will be entitled to withhold will generally be limited to the cost of rectifying the defect (see, e.g., Clause 14.6 of the FIDIC Silver Book). Insofar as the quality of the works at completion is concerned, construction contracts for large projects will generally contain a structured regime concerning completion and handover of a project. Typically, when the contractor considers that it has completed (or, if applicable, substantially completed) the works: • the contractor issues a written notice to that effect (under the FIDIC Red Book, this notice is to be issued to the engineer appointed by the employer); • the works are inspected (by the engineer, in the case of a project governed by the FIDIC Red Book); • if the works are complete (or substantially complete as the case may be), a Taking-Over Certificate is issued (again, this is the responsibility of the engineer under the FIDIC Red Book); and

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• if not, the contractor is notified (by the engineer, under the FIDIC Red Book) of the works it must complete or correct before the Taking-Over Certificate can be issued (see, e.g., Clause 10.1 of the FIDIC Red Book). Similar mechanisms are found in other standard form contracts. Pursuant to Clause 10.1 of the FIDIC Red Book, the Taking-Over Certificate may identify minor aspects of the work that are outstanding or need to be corrected by the contractor, although they do not affect the handing over of the project to the employer. In such circumstances, the contractor will generally be required to complete all snagging items and remedy any outstanding defects at its own cost within a specified period of time, known as the defects liability period, after completion (see Clause 11 of the FIDIC Red Book). Should any other defects be identified during that period, the contractor will also be obliged to remedy them by the end of the defects liability period. The rectification of defects during the defects liability period is the contractor’s right. Unless the contract specifically provides to the contrary, where a contract provides for a defects liability period, the employer is unlikely to have any right to sue the contractor for damages for breach of contract until the end of this period, unless the contractor has failed to carry out any rectification work it is required to carry out during the defects liability period within a reasonable time. If a contract does not provide for a defects liability period, or if defects remain unremedied or other works remain incomplete within a reasonable time of them being identified during the defects liability period or, in the worst case, at the end of the defects liability period, or if the employer subsequently identifies further defects, the employer will have a claim against the contractor for breach of contract. The measure of damages recoverable by the employer will be the costs of rectifying the defects. Depending upon the number and complexity of defects on a project after completion and the costs of rectifying them, a defects claim may not be so significant as to warrant an employer commencing an arbitration against a contractor bearing in mind the costs of arbitration. Of course, there will be exceptions to this. In any event, a defects claim is likely to form a reasonably substantial part of an employer’s counterclaim if an arbitration is commenced against it by a contractor. In order to succeed in a defects claim, the employer will need to identify the relevant contractual specification (which may be a specification relating to the particular works in question, a specification concerning the quality of the works generally or a general fitness for purpose warranty), the reasons why the contractor’s works fail to meet the specification and the costs of rectifying the defect. An employer is not limited to recovering the costs of rectifying the defect in the cheapest manner possible, but would be expected to act reasonably in engaging a third party to undertake the rectification works.

Termination The most powerful remedy that an employer has against a contractor is the right to terminate its contract, particularly when the contractor is in default. An employer will always be well advised to check carefully that it is contractually and legally entitled to terminate a contract before doing so, and that it complies with any notice or other procedures set out in the contract before serving a termination notice. The consequences of a wrongful termination of a contract can be serious and can expose the

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employer to a substantial claim for damages from the contractor, extending to the profit that it claims to have lost as a result of the wrongful termination. In addition, from a practical perspective, termination of a partially completed project may cause disruption to the overall completion of the project, bearing in mind the time required to identify and engage a replacement contractor, and will almost inevitably lead to increased costs because a contractor will charge a premium for taking over a project and accepting liability for another contractor’s partially completed works (although the additional costs of completing should be recoverable from the original contractor if it was properly terminated for default). At the same time, termination is a remedy that is perhaps considered too infrequently by employers. Although it may appear surprising, many construction contracts, even contracts for large projects, provide the employer with broad scope to terminate the contract for any default on the part of the contractor. If a contract provides that it may be terminated for any default, such a provision should be given effect by an arbitral tribunal. Even in jurisdictions in which the parties may be obliged to carry out their contractual obligations in good faith, there is no reason why a clause permitting termination for any default should not be construed according to the ordinary meaning of the words used in the clause so long as the employer is not acting maliciously or capriciously in exercising its termination right. Contracts based on standard forms, however, may not be so favourable to the employer. For example, the FIDIC series of contracts effectively requires the contractor to be in serious breach of the contract before the employer will be entitled to terminate their contract. Nevertheless, the proof required to satisfy the termination provisions of such contracts is not insurmountable. Depending upon the precise wording used in the termination provision, multiple breaches of a smaller scale may together amount to a serious breach justifying termination. If it validly terminates a contract for default on the part of its contractor, an employer will generally be entitled to recover from the contractor the additional costs of completing the contract with another contractor (that is, the costs over and above those it would have incurred if the original contractor had completed the project in accordance with its contractual obligations), which are likely to be substantial, plus any other amounts it would have been entitled to irrespective of the termination, such as liquidated damages for the delays that had occurred up to the time of termination. However, termination will have a significant financial impact upon a contractor. If an employer does not promptly commence an arbitration against a contractor following termination, the employer is likely to find that the aggrieved contractor will institute arbitral proceedings very shortly after termination. In either case, the employer will bear the burden of establishing that the termination was valid under the contract. In some jurisdictions, local law may impose additional preconditions to termination, which must also be satisfied if the termination is to be upheld by an arbitral tribunal. Another remedy available to employers, which has some conceptual overlap with termination, is descoping – that is, removing part of the original scope of works from the contractor. The wording of variation provisions in most contracts will permit an employer to add to or omit from the contractor’s scope of works, effectively at its discretion. On the face of such provisions, it may appear that an employer would have the right to omit substantial portions of the contractor’s works for any reason (e.g., if the employer is dissatisfied with the contractor’s performance generally). However, this may be prohibited by the express

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terms of the variation provisions. Even if it is not, most legal systems limit the ability of an employer to make substantial omissions from a contractor’s scope of works. In common law systems, it is generally held that an employer cannot take work from the original contractor in order to give it to another contractor unless the variation provision of the original contract permits the employer to do so. In some civil law jurisdictions, particularly those in the Middle East, local law prevents government employers from changing a contractor’s scope of works by more than 10 per cent without retendering the works. In practice, this has the effect of preventing a government employer from reducing the contractor’s scope of works by more than 10 per cent.

Payment As noted earlier, an employer will be concerned to see that its project is delivered on budget. Disputes about price often arise as a result of claims made by contractors for additional payment, as considered in Chapter 6. Insofar as such claims are concerned, the employer will generally be the respondent – that is, it will be defending claims made by the contractor and arguing that the contractor is not entitled to the extra costs it is claiming. Leaving contractors’ claims aside, an employer will otherwise generally be required to pay the contractor pursuant to the contract as the contractor is carrying out its works in accordance with the terms of the contract. There are three main exceptions to this. First, an employer may be entitled to withhold amounts claimed by the contractor where the corresponding work has not been completed or has not been carried out in accordance with the contract. Second, many contracts will provide that the employer is entitled to retain a percentage of all payments (usually around 5 per cent) until the project is complete, at which point it must return half of this retention, and that it may continue to hold the remainder of the retention until the defects liability period has come to an end and all outstanding works have been rectified, at which point the remainder of the retention must be paid to the contractor (see, e.g., Clause 14.9 of the FIDIC Red Book).Third, the employer will generally be entitled to set off amounts it is owed by the contractor against payments it would otherwise be required to make to the contractor. If a project is in delay and the contractor has a substantial liability to the employer for liquidated damages, this can significantly reduce the net amounts actually payable by the employer to the contractor. Set-off provisions are therefore a powerful remedy available to employers.

Other potential claims and remedies The difficulties that an employer will often face in establishing that it has suffered actual losses as a result of delay to a project have been discussed above. The same difficulties may arise in other circumstances as well. Consider the scenario where a contractor abandons a project and removes all of its staff and perhaps even materials and equipment the employer has paid for from the site. The loss and damage to an employer in such a scenario is likely to be viewed by a court or arbitral tribunal as (at best) purely economic such that the employer will have virtually no prospects of obtaining an order for specific performance or the like requiring the contractor to resume the works, even if the contractor is in serious default. For this reason, it is uncommon for employers to obtain injunctive relief in connection with construction projects where the dispute relates to time, quality of the works or money.

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A contractor’s breach of other provisions may also leave an employer without any practical remedy. For example, if a contractor fails to employ a specific subcontractor or key personnel named in the contract or identified by the employer, or if it does not make project documents available when an employer exercises its audit rights, the employer is unlikely to be able to do anything about this. A claim against the contractor for damages for breach of contract will fail unless the employer is able to identify a quantifiable financial loss from the contractor’s breach. The final remedy potentially available to an employer that is worth noting is an employer’s right to call on the bank guarantees or other forms of security that a contractor will often be required to provide, particularly on larger projects. Although the practice of providing such security has been questioned by some commentators, it is not uncommon for contractors to be required to provide a bank guarantee, bond or similar security for somewhere between 10 and 20 per cent of the contract price at the beginning of a project. The provision of such security may be as a quid pro quo for the employer making an advance payment of a corresponding amount to the contractor. However, the terms of the construction contract or the security may permit the employer to call on the security if the contractor is in default. In addition, or alternatively, a contractor may be required to post a bond as a form of security against its performance of the contract.The value of such bonds is generally also between 10 and 20 per cent of the contract price. In some contracts, particularly government contracts in the Middle East, an employer has an absolute right to call on the full amount of the contractor’s securities on demand and for any default, and without proving that the contractor is in default. In other jurisdictions, the employer’s right may be limited to making a call for an amount equivalent to the cost of remedying the contractor’s default and after the employer has established that the contractor is in default (e.g., by way of a court judgment or arbitral award). In any case, it is important for employers to bear in mind that the right to call on a contractor’s security is not a right to obtain extra compensation from the contractor even if the contractor is in default. The employer will ultimately need to account for the amount it has recovered from calling on a contractor’s security in any subsequent arbitration and establish that it has suffered losses equal to or exceeding the amount recovered, otherwise it will have to return the excess part of the proceeds of calling on the contractor’s security.

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9 Delay and Quantum: the Role of Delay Analysis Programmes and Financial Methods for the Computation of Costs and Damages in Construction Arbitration Jean-François Djanett and Jean-Luc Guitera1 Delay and disruption are commonplace in construction projects, significantly increasing overall costs and giving rise to numerous arbitrations. Coordination between those involved in the delay and financial experts is key for the accurate computation of damages. This chapter presents an overview of technical and financial methods used in the context of a construction arbitration.

Delay analysis A construction contract places an obligation on the contractor to provide an asset defined in terms of quality and costs (i.e., the contractual price) within a specified time. Time for completion is of great importance both for the employer, as late delivery of the asset may entail loss of profit, and for the contractor, since an extended construction period usually entails additional costs and lower margins. In this context, best practice suggests that contracting parties agree from the beginning (i.e., within the contractual provisions) on the type of records to be kept and on the tools to manage and measure the construction progress, including: • the programming software, in order to share native versions of programmes, logic-linked in order to determine the critical path or paths; • the critical path-based programme-impact methodology to be used for the application for extension of time; and • the documents to be used and kept: programme records; progress records; resources and costs records; correspondence and administration records including technical records regarding transmittal and approval of all design documents; etc.

1

Jean-François Djanett is president of Argos Construction and Jean-Luc Guitera is a partner at KPMG SA.

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When a delay occurs, delay analysis is conducted to understand the root cause or causes of the difference between the initial forecast at contract inception (the ‘as-planned’) and the actual timeline of the construction (the ‘as-built’). The difficulty of the analysis is threefold: • there may be multiple causes (referred to as ‘risk events’) for the delay; • the risk and responsibility for each cause needs to be allocated individually to the employer or to the contractor; and • the impact or consequence of each cause is difficult to isolate as causes could interact with one another.

The as-planned – the baseline programme The as-planned forecast should be agreed between the contracting parties as soon as practicable after entering into the contract (i.e., after the commencement date.) The as-planned forecast should be drafted by the contractor and submitted for the approval of the employer. It should set out a detailed programme, which includes the scheduling of works. Once accepted, this detailed programme is often referred to as the ‘accepted programme’,2 or sometimes as the ‘initial detailed programme’, ‘initial contractual programme’ or ‘baseline programme’. The accepted programme sets out the contractual completion date, which is often determined after taking into account various ‘floats’ (i.e., periods of excess time built into the programme as a precaution should a delay occur), as well as a ‘global float’. Together these floats define the maximum period of delay that can be sustained by the project’s critical path without impacting the completion date. The baseline programme is based on a work breakdown structure (WBS), which organises the works required into manageable sections or tasks (by area, specialism, phase, etc.), and usually contains up to several thousands of activities or tasks. Baseline programmes are prepared using planning software, which usually presents the WBS vertically and time horizontally (Gantt Diagrams). The most commonly used software are Oracle Primavera for large-scale projects (plant and infrastructure) and Microsoft MS Project for building construction projects. For linear infrastructure projects (such as roads, railways, pipelines and tunnels), specialised time-location diagrams, such as TILOS, are used that combine time vertically and location horizontally and represent the activities (workshops) in different colours. A few practical tips when relying on dedicated construction programme software: • If the file is not shared in its native (i.e., original) version, it needs to present the logical linkages between activities and to show the critical path and floats. It is not good practice for the contractor to present the ‘at the latest’ dates (last start, last finish) instead of ‘at the earliest’ dates (early start, early finish), as in the former the floats are not visible.

2

The definitions and glossary used here are mostly the ones used in the Society of Construction Law (SCL) Delay and Disruption Protocol – 2nd edition – February 2017. See www.scl.org.uk.

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• Given that the programme is prepared after the commencement date, it could already take into consideration events that have occurred after the commencement date and that have created delays. Care ought to be taken not to include these events as the programme is meant to present the contractor’s initial forecast,‘as planned’, at the inception of the contract. The accepted programme is a relevant tool for the contractor to manage and organise resources ‘as-planned’ and to determine the initial budget (t0) or initial forecast. The initial budget is a useful point of reference from which actual costs differences can be assessed, as it will usually present an initial detailed costs forecast consistent with the detailed price breakdown presented in the contract.This initial budget will also be the basis for the estimate-atcompletion (EAC),3 which is one of the main tools used to monitor the operational and financial performance of the contract.

The as-built – programme or data In contradiction to the view that some practitioners may continue to hold, it is not acceptable, in a delay analysis, to rely on interim payment certificates to assess a possible delay in the works progress at a given date, even if many contractors present the ‘progress of works’ in percentage in their monthly reports in comparison to the initial forecast. The interim payment certificates mention exclusively the progress of the billing, and are not evidence of the progress of the works. A proper delay analysis relies on the as-built logic-linked programme where available, or, if such a programme is not available, on the as-built data collected by the delay analyst. The collection of relevant as-built data is a time-consuming task for the delay analyst, as there may be relevant information available in thousands of monthly reports, site reports, meeting minutes, site progress photographs or webcam footage, correspondence, costs records, programme records, site tests records, testing and commissioning records including certificates, etc.4 It is usually also useful to consider the design documents database and all the detailed information, organised chronologically, regarding change or variation orders or requests.

Analysis of delays and risk events There are two types of delay analysis: • ‘cause-and-effect’ type analysis, in which the delay expert first considers a risk event as a possible cause for the delay, and then seeks to establish the impact of this identified event on the works schedule; and

3

4

The estimate-at-completion (EAC) is a tool used by the project controllers and by the contractor’s finance department to monitor the performance of a given contract. It shows: the costs (costs incurred to date, remaining cost to be incurred until the end of the project, and the sum of the two being the total project cost); and the revenues (already earned, remaining to be earned, and the total being the sum of the two) relevant for said project until its expected completion date, as forecast at the time the EAC was prepared. See SCL Delay and Disruption Protocol Appendix B Record types and examples, available at: www.scl.org. uk/resources/delay-disruption-protocol.

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• ‘effect-and-cause’ type analysis, where the delay expert first identifies the critical delay (the effect) and then seeks to establish the risk events that might have caused it. The SCL Delay and Disruption Protocol5 states that the effect-and-cause type analyses are generally considered more reliable because they aim to take into account all potential causes of the experienced delay. Such an analysis allows the delay analyst to find multiple causes that might result in cumulative delays or concurrent delays. It is worth noting that the overall impact of two successive causes (risk events) is not always the addition of the time delay caused by each event, even if both impact the project completion date. As an illustration: • event 1 can have an impact of 20 days’ delay on an activity, but a critical impact delay – namely, on the time to completion – of only 10 days; • event 2, occurring after event 1, can have an impact of 20 days’ delay on another activity and also a critical impact delay of 10 days; and • the cumulative critical impact delay of event 1 and event 2 can be different from the sum of the stand-alone impacts of events 1 and 2 (20 days). It could be, for instance, a delay of only 15 days. After having identified the effect-and-causes of the delay, the delay analyst has to determine the risk allocation according to the contractual provisions. The analyst will frequently present his or her technical opinion under certain legal assumptions provided by the instructing lawyers. The causes for a delay can be either employer risk events or contractor risk events, depending on the contract that determines which party is responsible for each event. Some risks and responsibilities are usually borne by the employer, for example the provision of access to the site. The contractor may claim for extension of time, cost and, under certain circumstances, a reasonable profit, if the employer fails to provide appropriate access to the site within the time periods stated in the contract. This allocation of risk is common under both contract for construction, plant design and build (FIDIC) contracts and also engineering procurement and construction (EPC) contracts. The contractor may also usually claim for extension of time and cost if he or she encounters physical conditions that were unforeseeable, but this varies depending on the contractual provisions: under FIDIC contracts for construction and plant design and build this is the case, whereas in EPC contracts this type of risk is usually borne by the contractor. It is worth mentioning that some risk events (such as adverse climatic conditions) might be defined in a contract as ‘neutral’ events, namely, allowing the contractor to be granted an extension of time, and therefore avoid contractual penalties for late delivery (liquidated damages), but providing the contractor with no entitlement for financial compensation.

5

SCL Delay and Disruption Protocol 2nd edition February 2017, Chapter 11, p. 12 and following.

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Delay-to-progress and delay-to-completion A delay-to-progress is caused by a risk event having an impact on the execution of the works without causing the contract completion date to be missed. This delay is therefore non-critical, but the risk event may nevertheless translate into additional costs for the contractor. If the responsibility of this risk event is attributable to the employer under the contract, then the contractor is entitled to financial compensation. Such compensation should correspond to additional costs (also known as ‘disruption costs’), but should not include associated time-related costs (as there is no critical delay impact). A delay-to-completion is caused by a risk event that impacts the project’s critical path and will cause the contract completion date to be missed. When attributed to an employer risk-event, delay-to-completion usually leads to associated time-related costs (in addition to disruption costs), which, depending on applicable law and contractual provisions, should also form part of the contractor’s damages. Critical delays (with an impact on the project completion date) might occur in situations when there is still a remaining ‘float’ in the programme (no impact on the contractual completion date). In this case, it is generally considered that the ‘float belongs to the project’. This means that the float does not belong to the contractor and, even if the event causing a critical delay is at the employer’s risk and responsibility, the contractor is generally not granted an extension of time.6

Methods of analysis As previously mentioned, we consider that the ‘effect-and-cause’ method of delay analysis is the most reliable. Guidance for its implementation can be found in two documents: • the SCL Delay and Disruption Protocol mostly used in Europe; and • the Association for the Advancement of Cost Engineering (AACE) Recommended Practice No. 29R-03 for Forensic Schedule Analysis – 2011, mostly used in the United States. The AACE Recommended Practice presents 10 different ways to implement the effect-andcause method.7 The SCL Delay and Disruption Protocol presents three ways to implement the cause-and-effect method and three different ways to implement the effect-and-cause method, as shown in the table below. Method of analysis Impacted as-planned analysis

Analysis type Cause and effect

Critical path determined

Delay impact determined

Requires • Logic linked baseline programme

Prospectively

Prospectively

• A selection of delay events to be modelled • Logic linked baseline programme

Time impact analysis

Cause and effect

Contemporaneously

Prospectively

• Update programmes or progress information with which to update the baseline programme • A selection of delay events to be modelled

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Method of analysis

Analysis type

Critical path determined

Delay impact determined

Time slice windows analysis

Effect and cause

Contemporaneously

Retrospectively

As-planned versus as-built windows analysis

Effect and cause

Contemporaneously

Retrospectively

Retrospective longest path analysis

Effect and cause

Retrospectively

Retrospectively

Collapsed asbuilt analysis

Cause and effect

Retrospectively

Retrospectively

Requires • Logic linked baseline programme • Update programmes or progress information with which to update the baseline programme • Baseline programme • As-built data • Baseline programme • As-built programme • Logic linked as-built programme • A selection of delay events to be modelled

When determining what method to use, the delay expert will need to keep in mind: • the choice of a specific method will be based primarily on the contract provisions. If the contract specifies a specific schedule delay analysis method, the delay analyst will have to comply with the contract and apply it; • if there is no method imposed in the contract, the delay expert ought to identify the events that occurred and consider if certain issues (such as concurrent delays, pacing delays, delay mitigation, acceleration, etc.) are relevant and may have led to concurrent delays; • if concurrent delay is an issue, the chosen method ought to enable the separate identification and analysis of each delay; • the choice of method will also be largely conditioned by the availability of reliable data; • if there is no logic-linked baseline programme available, it will not be possible to implement the first three methods described in the SCL Delay and Disruption Protocol; • if there is no as-built programme available, the use of the ‘retrospective longest path analysis’ and the ‘collapsed as-built analysis’ will not be possible. If there is only as-built data available, only the ‘as-planned versus as built window analysis’ will be possible.This latter method is commonly used and preferred over the ‘impacted as planned analysis’, which is the simplest method but only relies on the baseline programme (which needs to be assessed and rated as consistent and flawless); and • the dynamic8 methods – times impact analysis and time slice windows analysis – need update programmes to be available or sufficient information with which to update the baseline programme. These methods allow the identification and analysis of concurrent delays as they enable the measurement of the delay impact of individual events independently from other events. The latter method allows the determination of delay impacts retrospectively while the former is a prospective method in which to model delay events.

8

Dynamics as they allow the use of simulation to see the impact of a given risk event.

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Whatever the chosen method, the analyst will have to present a relevant and simple flow diagram of causes and consequences.

Output of the delay analysis Through his or her technical analysis, the delay expert will provide the financial expert with a detailed assessment of the different nature of delay events and a quantification of their impact, in relevant units, which the financial expert can then use to value and determine the costs or damages. The delay expert will have to assess what are the successive delays to completion (or the part of the global delay to completion) resulting from the employer risk events that entitle the contractor to extension of time and to relief through the possible award of damages. The delay expert will also have to carefully identify the actual periods in which said risk events have had their effects and which consequences of risk events give right to a financial compensation for the contractor. Indeed, there is no automatic link between the entitlement to an extension of time and the entitlement to monetary compensation. Financial compensation may be sought under other contractual clauses than the ones providing entitlement to an extension of time. The delay expert will have to carefully examine the increase of time related costs and to allocate it among various components: time for mobilisation or installation, demobilisation or withdrawal/removal and real time-related costs for rental, maintenance, etc. The delay expert will also have to carefully examine the project management costs, as they are often presented globally, and to distinguish between variable people time costs (which depend on the project duration) and people time costs relating to a specific and discrete task (such as testing and commissioning officers or design engineers).

Quantum determination Once the delay expert has identified the delay events, attributed technical responsibility for them to the employer or the contractor and quantified them in physical or temporal units (additional hours spent, tons of concrete poured, etc.), it is the role of the financial expert to quantify the damage in monetary units based on the findings of the delay expert. As a reminder, the award of financial damages aims to place the claimant back in the situation it would have been in the absence of the damaging event. Therefore, and in the absence of specific provisions in the contract, the award of financial damages to the contractor may include, at the tribunal’s discretion: • the costs incurred by the contractor that it would not have incurred in the absence of the damaging event; or • in addition to costs incurred, the loss of profit resulting from the damaging event, this loss being, depending on the specifics of the situation, a lost profit (if the damage is related to supplementary work as defined in the contract) or a loss of opportunity to make a profit (if the employer was deprived of the opportunity to service other potential projects and earn profit on these). We will consider in sequence: • how financial information related to a given project is recorded in the contractor’s financial statements;

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• how the costs of a specific event can be traced in the accounting records (the ‘bottom-up approach’); • if an allocation of overhead costs should form part of the determination of damages; • how the project financial estimate at completion can be used to identify the existence of cost overruns at project level (the ‘top-down approach’); and • what the appropriate basis is for indemnification (costs or costs plus a profit element).

How is financial information related to a given project recorded in the contractor’s financial statements? The accounting information related to construction projects is usually recorded through projects accounts,9 the sum of which correspond to a great extent to the operating margin section of the profit and loss account of the contractor’s financial statements. These statements are prepared under accounting standards such as International Financial Reporting Standards (IFRS), or the US Generally Admitted Accounting Principles (US GAAP), and are generally subjected to an independent audit performed by an accounting firm, which gives them a measure of reliability. For construction contracts under both US GAAP and IFRS, contract related costs and revenue can be recognised throughout the execution of a project, provided that the following conditions are met: • first, the company must have implemented accounting tools and processes so that costs related to a given project are properly allocated to said project; and • second, the company must be in a position to reliably estimate and quantify the remaining effort necessary to complete the project. The basic principle behind project accounts is that the cumulative revenue and expenses recognised for a given project since its inception must always be equal to the total revenue and expenses at the end of the project as estimated by the company, multiplied by the percentage of completion10 of said project as at the financial statements’ date.11 At project level, the cost accounting system (run in parallel to and reconciled to the general accounting system used for the production of the company’s financial statements) provides information in relation to project costs incurred to date. The project manager, with the assistance of the project financial controller, is responsible for the quantification of the remaining effort to complete the project. This quantification needs to be regularly updated during project reviews, which is usually performed at least once a year for the production of the annual financial statements. In addition to cost and revenue estimates at completion, project reviews also generally address the following topics in relation to a given contract:

9 Cost-accounting units in which are recorded the cost and revenue directly linked to a given project. 10 Under IFRS 15, which became mandatory in 2018, the costs-to costs method (i.e., total costs incurred to-date divided by total costs estimated at project completion) is the preferred method for determining such percentage of completion. 11 For example, for a project with a projected margin of US$10 and 60 per cent completed at the end of its second year, the total profit that will have been recognised by the contractor company in its financial statements over the two years will be equal to US$10x0.6 = US$6.

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• overall presentation of the project; • main contractual changes since the previous project review (amendments, change requests, variation orders, etc.); • execution of works during the period under review, including update of execution planning for remaining tasks, completed and remaining milestones, etc. • risks and opportunities foreseen up until completion of works; • significant items of discussion with the employer, the contract administrator and subcontractors; • detailed analysis of project costs incurred to date, including discussions of deviations against previous estimates; and • main assumptions employed for the estimation of remaining efforts necessary to complete the project. There is usually a formal internal review process during which the assumptions employed by the project manager are challenged and financial information (including assessment of remaining effort) is reviewed and validated. During their audit of financial statements, the statutory auditors will, on a sample basis, independently review and challenge the assumptions underlying such project reviews. The approved project review represents the company’s best estimate, as at the date of the review, of the operational execution, and of revenue and project costs up until project completion date. From a financial perspective, the project reviews form the basis for the production of annual financial statements. Therefore, project reviews provide a contemporaneous and reliable view of the operational and financial performance of the contractor with respect to the contract. The projects accounts, on the other hand, show the individual entries booked in relation to the resources being used and the revenue being recognised.

How can the cost of a specific event be traced in the accounting records (the ‘bottom-up approach’) Since the award of damages should compensate additional costs incurred by the contractor resulting from risk events that the employer was responsible for, in most situations the financial expert should be able to rely on the project accounting data to: • confirm the quantification of additional resources as identified by the delay expert; and • to estimate corresponding damages. For instance, if the delay expert concludes that the contractor has incurred 10,000 additional hours because of risk events over a given period, the accounting data should show at least an equivalent number of hours charged to the project over such period. Since project reviews present an accurate assessment of costs incurred to date on the project, they often also provide a reasonable estimate of unit costs for these additional resources. Generally, contractor’s employees charge their hours to projects through timesheets. Internal processes and controls exist at project and company levels to ensure that the hours charged to a given project through timesheets fairly represent the actual effort incurred over a given period. Actual hours charged to the projects are in a second step valued using daily or hourly rates.

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Most accounting standards do not provide a detailed methodology to determine such rates, but in practice the rates usually represent the direct costs of the employees (salary, benefits, and social charges) and their direct ‘environment’ cost, such as the cost of their desk space, the depreciation expense of IT equipment, etc. The contractor usually uses standard labour rates, based on budgeted costs for a category of personnel. Such standard labour rates are compared at least once a year against actual costs, and where significant divergences exist, total project costs are revalued based on actual costs. The financial expert may decide to base his or her quantification of damages on labour rates derived from project reviews, but he or she should nevertheless check the detailed components of such rates in order to avoid double counting, and enquire about any revaluation of such rates based on actual costs incurred by the contractor. Similar processes and controls exist in relation to subcontractors’ costs and materials and equipment costs recorded at project level.This accounting information should represent an appropriate basis to confirm the existence of additional costs incurred by the contractor and to enable their quantification. In addition, in situations where additional resources correspond to the prolonged use of contractor’s own assets (e.g., a project crane kept on project site for three additional months), the depreciation expense for such extended period could, in most cases, represent a reasonable basis for the estimation of the contractor’s damages. Indeed, from an accounting and financial perspective, the depreciation expense corresponds to the cost of the asset allocated over the useful life of said asset.

Should an allocation of overhead costs form part of the determination of damages? There are two categories of overhead costs: site overheads and HQ overhead costs. Site overhead costs directly relate to the realisation of the project and the financial expert should retain such costs when quantifying damages. As mentioned above, when adding such costs to the damage assessment, the financial expert should nevertheless verify that such costs have not already been included in the project direct costs through labour rates. HQ overhead costs represent central or head-office costs that cannot be directly allocated to projects. Certain contracts provide a detailed price breakdown evidencing an explicit percentage of overhead costs and profit. In such situations, contractors and employers usually use these percentages for the price determination of contract change orders. However, from a cost perspective, there is no direct relationship between costs incurred on a project and the total amount of HQ overhead costs incurred at company level. This is particularly true when addressing disruption costs with no prolongation of the contract execution period. Addressing extended negotiation periods with the employer and dealing with additional orders with subcontractors does not imply an automatic increase of contractors’ head office costs. HQ overhead costs exist independently of the realisation of the project, and risk-events at project level are usually unlikely to affect total HQ overhead costs at company level. Therefore, from an economic point-of-view, HQ overhead costs represent a portion of the project margin realised by the contractor, this margin having two components, one related to HQ overheads coverage and the second representing the profit on the contract. We will further develop this issue in the final section of this chapter.

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How can the project financial estimate-at-completion be used to identify the existence of a cost overrun at project level (the ‘top-down approach’)? Project reviews provide estimates of the overall project margin at different points of time throughout the execution of the contract. The first estimate is usually performed after the award of the contract and shortly after the project ‘handover’ to a project manager. This first estimate is usually run in conjunction with the contemporaneous project planning and integrates the technical solutions employed by the contractor for the execution. As mentioned above, project reviews are regularly updated throughout the execution of the project (at least once a year for the production of financial statements). These reviews involve the project team preparing and documenting revised estimates of costs and revenues at completion. To the extent that any claim resulting from risk events is material to the contract, the financial expert should be able to evidence a degradation of margin throughout the various project reviews. In our view, this analysis of the evolution of the overall project margin forms a reasonable cross-check for the financial expert’s conclusions. However, such test, in isolation, is insufficient to conclude on the reasonableness of the claim assessment. There are, indeed, many reasons why the project margin may fluctuate, not all of them related to risk events attributable to the employer. However, when combined with the analysis of contemporaneous explanations of project margin fluctuations provided by the project team to company management (or to its auditors), such test should reinforce the credibility of most material claim estimates. There are sometimes situations where a delay may exist but where the overall project margin was unaffected or not apparently affected. This could result from several situations: • a significant error in the first estimate, which occurred upon project handover. Although this is an easy explanation, it should be thoroughly substantiated because, in principle, any company applying contract accounting is supposed to have implemented tools and processes to accurately forecast its project costs and revenues; • a change in the timing when an expense is incurred (for example engineering labour cost), but where the overall amount of said expense category over the life of the project stays the same as originally planned; • a project margin improvement owing to changes in circumstances or changes in the project execution that the company would have secured even in the absence of the damaging event. Although such situations could exist from a theoretical standpoint, we believe that the financial expert should further investigate and document these situations and ensure that the quantum presented to the tribunal is a fair representation of actual damages incurred by the contractor; and • a project margin improvement, which is the consequence of the damaging event (such as a decrease in raw material costs) that the company could not have secured but for the damaging event. In such situations, the financial expert should liaise with the legal team to determine whether the quantum of the claim ought to be adjusted to account for the positive margin impact of the damaging event.

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What should be the basis for indemnification? Costs or costs plus a profit element? As mentioned earlier, the role of the financial expert is to quantify under certain assumptions (legal as communicated by counsel, and technical as communicated by the delay expert) the sum of money that would be necessary to put the contractor back in the financial position it would have been in the absence of the damaging event. Three situations may exist in this regard: • the damage only consists of additional costs that would not have been incurred by the contractor but for the damaging event. In this case, the quantum is likely to be based on directly attributable costs only (which include site overheads, but not HQ overheads); • the damage involves supplementary work that has not been invoiced. In this case, the quantum is likely to be based on the additional price that the contractor would have charged the employer for such work (which might be set out in the contract in some cases, or might need to be calculated from relevant data); and • the damage relates to the inability of the contractor to carry out services for another project, as the workforce was engaged in the performance of the contract in question. This scenario relates to a ‘loss of opportunity’. In such situations, the contractor could be entitled to damages that include his or her HQ overheads cost, and under certain circumstances, to the profit relating to the lost opportunity. In our view, and with the exception of certain specific situations, HQ overhead costs can only be included as part of damages to the extent that, because of the extended execution period of the project, the contractor was not in a position to obtain and carry out other projects that would have allowed the absorption of such overhead costs. This position is similar to the one expressed by the Society of Construction Law:12 In order to succeed in such a claim [i.e., adding HQ overhead and profits to the directly attributable project costs], the Contractor must demonstrate that there was other revenue and profit earning work available which, in the absence of the Employer Delay, would have been secured by the Contractor.

It therefore follows that there is no basis for a systematic and unsubstantiated inclusion of HQ overheads in damages calculations and that the contractor must be in a position to demonstrate that, but for the damaging event, it would have earned revenue from additional projects. In this situation, and contrary to the Society of Construction Law, we do not believe a formula is necessary to determine the level of unabsorbed overheads. One should refer to the accounting data where such costs are identified, compute the ratio between the direct cost at business unit or company level (depending on the specificities of the case) and the HQ overheads, and apply the same ratio to the additional cost being claimed.

12 Guidance Part C, Section 2.7.

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Moreover, there may be situations where the proper compensation for the contractor will not be limited to unabsorbed overheads but should include the full lost margin (HQ overheads plus profit) that the contractor could reasonably have expected to earn from additional projects that he or she was not able to bid for, multiplied by the probability of winning such contracts.

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10 Comparative Approaches to Concurrent Delay Hamish Lal, Brendan Casey and Josephine Kaiding1

Overview Concurrent delay is one of the most complex substantive issues in international construction law. Delay to completion of the works has commercial consequences for both owners and contractors: owners typically seek liquidated damages for the delay and contractors typically seek an extension of time to adjust the original period allowed to complete the works and additional payment in respect of the extended period. The assessment of delay is complex and there are many methods used in international arbitration to investigate the causes of delay and to evaluate the time and money consequences of delay. There is no uniform or codified approach to the analysis of delay. The majority of the case law and academic writing on concurrent delay originates from England where the ‘Malmaison Approach’ named after the decision in Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd2 (meaning that where there is concurrent delay the contractor is entitled to an extension of time but is not entitled to loss or expense incurred during the extended period) has dominated the jurisprudence. The prevention principle3 has been used by many to explain why the ‘but for’ test of causation for

1 2 3

Hamish Lal is a partner, Brendan Casey is a counsel and Josephine Kaiding is an associate at Akin Gump Strauss Hauer & Feld LLP. (1999) 70 Con LR 32 (TCC). This is widely understood to mean that an employer cannot hold the contractor to a specified completion date if the employer has prevented the contractor from achieving that date, in which case ‘time becomes at large and the obligation to complete by the specified date is replaced by an implied obligation to complete within a reasonable time’: Multiplex Constructions (UK) Ltd v. Honeywell Control Systems Ltd (No.2) [2007] EWHC 447 (TCC); [2007] B.L.R. 195; 111 Con. L.R. 78 at [48]. Although outside the scope of the present discussion, there is now important analysis from The Right Hon Lord Justice Coulson suggesting that application of the prevention principle does not make time at large. See ‘Prevention or Cure? Delay Claims and the Rise of Concurrency Clauses’, Paper 218 published by the Society of Construction Law.

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concurrent delay under English law can be relaxed and why other approaches to the assessment of concurrent delay (such as apportionment and dominant cause) are not feasible and should not be used.4 However, following three first instance decisions5 and comments from the Court of Appeal,6 the answer under English law may now be that the contractor is not entitled to an extension of time and is not entitled to additional loss or expense. This is because such cases support the proposition that the prevention principle does not apply when dealing with concurrent delay. In other jurisdictions, the favoured approaches are apportionment of the delay to completion or the entitlement to time and money because of the ‘good faith’ obligations embedded in the Civil Codes and the importance of persons taking responsibility for any harm they have caused. Apportionment may also be the favoured approach of arbitral tribunals sitting in ‘international’ disputes, particularly those composed of multinational arbitrators. As discussed below, while appearing to be a ‘fair’ approach to concurrent delay, apportionment has been attacked on many occasions. The primary focus of this chapter is concurrent delay, but it is relevant to understand that, in terms of the treatment and analysis of orthodox delay to completion, there is a tangible trend in the courts and arbitral tribunals preferring delay analysis based on a critical path developed commensurate with ‘common sense’ and a discernible shift away from using delay analysis methods that first look at the ‘effects of delay’ and then assess the causes.7

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These include: Ramsey J. ‘Claims for Delay and Disruption: The Impact of City Inn,’ a paper presented at the annual TECBAR conference in January 2011 and in the TECBAR Review for Spring 2011; Professor Doug Jones ‘Can Prevention be Cured by Time Bars?’, The Annual TECBAR Lecture 17 September 2008; John Marrin QC, ‘Concurrent Delay’ (2002) 18(6) Const. L.J. 436 and ‘Concurrent Delay Revisited’, published by The Society of Construction Law February 2013, Paper 179: www.scl.org. Adyard Abu Dhabi v. SD Marine Services [2011] EWHC 848 (Comm); [2011] B.L.R. 384; 136 Con. L.R. 190; Jerram Falkus Construction Ltd v. Fenice Investments Inc [2011] EWHC 1935 (TCC); [2011] B.L.R. 644; 138 Con. L.R. 21; and North Midland Building Ltd v. Cyden Homes Ltd [2017] EWHC 2414 (TCC) where Fraser J. at paragraph 29 stated: If the point were open to me for decision, which it is not in this case, I would apply and follow the same reasoning, and come to the same conclusions, as both Hamblen and Coulson JJ did in those cases, on the very same point. In so far as there may be other disputes where the parties find themselves at odds concerning the dicta in both Adyard and Jerram Falkus on the one hand, and other writing, commentary or articles which suggest such dicta are wrong on the other, cost-effective resolution of those other disputes is more likely if those parties proceed on the basis that the two authorities to which I have referred are correct. In my judgment, I agree with the analysis of each of them and would proceed on the basis that they both clearly are. Coulson L.J. in North Midland Building Ltd v. Cyden Homes Ltd [2018] EWCA Civ.1744. North Midland is the first reported case in which a concurrency clause has been considered by an English court. The principal argument advanced by the contractor, North Midland, was that a concurrency clause was incompatible with the prevention principle. That argument was rejected at first instance by Fraser J. The appeal against that decision was dismissed by the Court of Appeal. This is in contrast to methods that start with the causes of the delays and strive to calculate the effect. The ‘cause and effect’ delay analysis methods (such as ‘time impact analysis’ and ‘collapsed as-built analysis’) are less favoured than the ‘effect and cause’ delay methods (such as ‘retrospective longest path analysis’ and ‘as-planned versus as-built windows analysis’). The latter are considered less dependent on complex planning software; less theoretical; and more reliant on ‘common sense’ assessment of the critical path and the causes of delay to the critical path.

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From a legal perspective, concurrent delay is more complex than orthodox delay. One of the fundamental and threshold problems faced by counsel, experts and tribunals in international arbitration is working out what the terms ‘true concurrent delay’ and ‘concurrent delay’ mean or are intended to be mean when the parties in their contract use such terms expressly. For example, Global Arbitration Review asks:8 If an employer would cause (e.g., by variation) a two-week critical delay to completion of the works (which itself would justify an extension of time under the construction contract) but, independently, culpable delay by the contractor (e.g., defective work) would cause the same delay, is the contractor entitled to an extension [of time]?

This raises various derivative questions: Did the employer delay event start at the same time as the contractor delay event? Did the employer delay event overlap with the contractor delay event? Is the entitlement to an extension of time to be decided prospectively or retrospectively? Does the fact that either delay event would have caused a two-week delay to completion mean that there is no dominant delay event and both delay events are of equal effect? Does the ‘true concurrent delay’ test apply or the ‘concurrent delay’ test? The precise words used by the parties to define compensable delay events and concurrent delay are of primary importance.

What is Concurrent Delay There are a number of learned views as to what concurrent delay means.

England A definition approved or adopted in the more recent first instance decisions and in the Court of Appeal is the following:9 concurrent delay is … a period of project overrun which is caused by two or more effective causes of delay which are of approximately equal causative potency.

8 9

Global Arbitration Review Construction Arbitration Know How, Question 6, Competing causes of delay. This is the definition that was originally proposed by John Marrin QC in the article ‘Concurrent Delay’ (2002) 18(6) Construction Law Journal 436; adopted in obiter as ‘a useful working definition’ by Hamblen J. (as he then was) in Adyard Abu Dhabi v. SD Marine Services [2011] EWHC 848 (Comm); and adopted by Coulson L.J. in North Midland Building Ltd v. Cyden Homes Ltd [2018] EWCA Civ 1744. This definition was not revised by John Marrin QC in ‘Concurrent Delay Revisited’, published by The Society of Construction Law, February 2013, Paper 179: www.scl.org.

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The key factor in the definition is ‘approximately equal causative potency’,10 which was explained in the following terms:11 where there are two competing causes of delay, they often differ in terms of their causative potency. Even where both competing causes are effective causes of delay, in the sense that each taken on its own would be regarded as the cause of the whole delay, the two may be of unequal causative potency. It is a commonplace to find that during the course of the factual enquiry, it becomes obvious as a matter of common sense that the two supposed causes of delay are of markedly different causative potency. One is then regarded as the effective cause and the other as ineffective. In other words, the minor cause is treated as if it were not causative at all.

The above definition does not require a coincidence in time of the occurrence of the delay event as well as their effects. Such a narrower definition was used in Royal Brompton Hospital v. Hammond,12 where HHJ Richard Seymour QC stated: However, it is, I think, necessary to be clear what one means by events operating concurrently. It does not mean, in my judgment, a situation in which, work already being delayed, let it be supposed, because the contractor has had difficulty in obtaining sufficient labour, an event occurs which is a relevant event and which, had the contractor not been delayed, would have caused him to be delayed, but which in fact, by reason of the existing delay, made no difference. In such a situation although there is a relevant event, the completion of the Works is [not] likely to be delayed thereby beyond the Completion Date. The relevant event simply has no effect on the completion date. This situation obviously needs to be distinguished from a situation in which, as it were, the Works are proceeding in a regular fashion and on programme, when two things happen, either of which, had it happened on its own, would have caused delay, and one is a relevant event, while the other is not. In such circumstances there is a real concurrency of causes of delay.13

10 The approximately equal causative potency factor has been challenged by V. Moran QC Causation in ‘Construction Law: The Demise of the ‘Dominant Cause’ Test’, published by The Society of Construction Law November 2014, Paper 190, www.scl.org at paragraph 90: … (ii) the very concept of concurrent effective causes of ‘approximately equal causative potency’ is difficult to understand, unhelpful and unnecessary; (iii ) a new, less restrictive, approach to the test of causation in concurrent delay claims can be justified on a proper construction of the relevant provisions. is more solidly based in analogous claims for damages for breach of contract and can even be detected in recent authority - what I call the ‘effective cause’ test; (iv) an effective cause is one that operates by itself or combines with another to cause critical delay to the completion date of a project: and (iv) an effective concurrent cause for these purposes is simply one that. had it operated in the absence of the delay event(s) that the contractor is responsible for, would have nevertheless caused the same period of critical delay to the Works in the circumstances that the parties would or should have found themselves in under this hypothesis. 11 John Marrin QC, ‘Concurrent Delay’ (2002) 18(6) Construction Law Journal 436; John Marrin QC ‘Concurrent Delay Revisited’ published by The Society of Construction Law, February 2013, Paper 179, www.scl.org. 12 Royal Brompton Hospital NHS Trust v. Hammond (No. 7) [2001] EWCA Civ 206. 13 Royal Brompton Hospital NHS Trust v. Hammond (No. 7) [2001] EWCA Civ 206, 76 Con LR 148 at paragraph 31.

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While the definition of HHJ Richard Seymour QC has been challenged for being too narrow, it is important to note that parties to a construction contract could insert such a definition of concurrent delay. A likely consequence of such drafting would mean that the number of ostensible compensable delay events that could be ‘struck-out’ by virtue of being concurrent would be reduced.14

Scotland In City Inn Limited v. Shepherd Construction Limited,15 Lord Drummond Young16 in the Outer House declined to follow the concurrency of delay events approach advocated by HHJ Richard Seymour QC, commenting: Dyson J.’s opinion in Henry Boot Construction (UK) Ltd v. Malmaison Hotel (Manchester) Ltd was considered by Judge Richard Seymour QC in Royal Brompton Hospital NHS Trust v. Hammond (No 7), (2001) 76 Con LR 148, at paragraph 31. In that passage Judge Seymour gave a further explanation of what is meant by ‘events operating concurrently’. He drew a distinction between on one hand a case where work has been delayed through a shortage of labour and a relevant event then occurs and on the other hand a case where works are proceeding regularly when both a relevant event and a shortage of labour occur, more or less simultaneously. Judge Seymour considered that Dyson J. had only been concerned with the latter situation, and not with the former; in the former situation the relevant event had no effect upon the completion date. I have some difficulty with this distinction. It seems to turn upon the question whether the shortage of labour and the relevant event occurred simultaneously; or at least it assumes that the shortage of labour did not significantly predate the relevant event. That, however, seems to me to be an arbitrary criterion. It should not matter whether the shortage of labour developed, for example, two days before or two days after the start of a substantial period of inclement weather; in either case the two matters operate concurrently to delay completion of the works. In my opinion both of these cases should be treated as involving concurrent causes, and they should be dealt with in the way indicated in clause 25.3.1 by granting such extension as the architect considers fair and reasonable.

14 David Barry, ‘Concurrent Delay in Construction Law’, (2011) Const LJ concludes ‘H.H. Judge Seymour QC’s definition of concurrent delay in Royal Brompton Hospital is so narrow as to be of little effect’. 15 City Inn Limited v. Shepherd Construction Limited [2007] CSOH 190 (Outer House, Court of Session) at paragraph 16; [2008] BLR 269; (2008) 24 Construction Law Journal 590; [2008] CILL 2537. 16 David Barry, ‘Concurrent Delay in Construction Law’, (2011) Construction Law Journal concludes: While it may be argued that H.H. Judge Seymour QC’s definition of concurrent delay in Royal Brompton Hospital is so narrow as to be of little effect, Lord Drummond Young’s definition may be said to have achieved the opposite extreme since it effectively ensures that almost all delaying events encountered on a project will be considered as being a contributory cause of delay to the Completion Date. Moreover, it is submitted that Lord Drummond Young’s construction of the subject (and typical) EOT contract clause, by which he concluded that, when seeking to determine the existence of concurrent delay, the dates upon which the competing delay events arose ‘should not matter’, is incorrect.The subject contract clause in fact makes this a vital factor in the EOT assessment.

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In City Inn Limited v. Shepherd Construction Limited,17 Lord Osborne in the inner House reinforced the point that concurrent delay requires only the effects of the delay events to be concurrent: I have difficulty in understanding the basis on which Judge Seymour drew the distinction which he did. In any event, his observations seem to involve the contemplation of a situation in which two events productive of delay, one a relevant event and the other not, occur simultaneously with chronologically coincident starting points, as the only one in which the effect of the relevant event can be assessed under clause 25, where a non-relevant event is also present. I consider that approach to its interpretation unnecessarily restrictive and one which would militate against the achievement of its obvious purpose of enabling the architect, or other tribunal, to make a judgment on the basis of fairness and a common-sense view of causation.

The Society of Construction Law Delay and Disruption Protocol Second Edition This Delay and Disruption Protocol advocates a narrow definition of ‘true concurrent delay’ (which is aligned with the definition of HHJ Richard Seymour QC in Royal Brompton Hospital v. Hammond). The Protocol also defines ‘true concurrent delay’ and ‘concurrent delay’ as:18 True concurrent delay is the occurrence of two or more delay events at the same time, one an Employer Risk Event, the other a Contractor Risk Event, and the effects of which are felt at the same time. True concurrent delay will be a rare occurrence. A time when it can occur is at the commencement date (where for example, the Employer fails to give access to the site, but the Contractor has no resources mobilised to carry out any work), but it can arise at any time. In contrast, a more common usage of the term ‘concurrent delay’ concerns the situation where two or more delay events arise at different times, but the effects of them are felt at the same time. In both cases, concurrent delay does not become an issue unless each of an Employer Risk Event and a Contractor Risk Event lead or will lead to Delay to Completion. Hence, for concurrent delay to exist, each of the Employer Risk Event and the Contractor Risk Event must be an effective cause of Delay to Completion (not merely incidental to the Delay to Completion).

United States of America Concurrency in the occurrence of the delay events is not a prerequisite for concurrent delay to arise. The Court of Federal Claims evaluated the issue of concurrent delay noting that ‘[t]hornier issues are posed by concurrent or sequential delays’ than by single delays operating alone.19 ‘Concurrent’ is generally defined as ‘operating or occurring at the same

17 City Inn Limited v. Shepherd Construction Limited [2010] CSIH 68 (Inner House, Court of Session) at paragraph 36; [2010] BLR 473; (2008) 24 Construction Law Journal 590; [2010] CILL 2889. 18 See paragraphs 10.3; 10.4; and 10.5. The Protocol’s position on ‘true concurrent delay’ is not explained, which is odd given the comments of the Outer and Inner Houses in City Inn Limited v. Shepherd Construction Limited and the approval of John Marrin QC’s definition by Hamblen J. (as he then was) in Adyard Abu Dhabi v. S.D. Marine Services [2011] EWHC 848 (Comm). 19 R.P.Wallace, Inc. v. U.S., 63 Fed. Cl. 402, 410-11 (2004).

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time.’20 When used in the context of construction delay, the term can refer to both delays occurring at the same time as well as delays that occur at different times provided there is a common effect on the critical path and a delay to completion. A third category is ‘offsetting delays’ that may not occur simultaneously or even effect the same activities but may interact over the project as a whole to impact the completion date.21 The Court of Federal Claims in George Sollitt Construction Co. v. United States developed the following definition of concurrent delays: The exact definition of concurrent delay is not readily apparent from its use in contract law, although it is a term which has both temporal and causation aspects. Concurrent delays affect the same ‘delay period.’ A concurrent delay is also independently sufficient to cause the delay days attributed to that source of delay.22

Summary Unless the parties have expressly defined otherwise, concurrent delay is likely to mean delay to completion of the works caused by two delay events where such delay events are the responsibility of the owner and contractor respectively, and where one delay event is not the dominant cause of the delay to completion. The delay events do not need to take place at the same time but the effect of each delay event must affect the critical path and cause delay to completion at the same time. ‘True concurrent delay’ requires the employer delay event and the contractor delay event to occur at the same time and cause delay to completion of the works at the same time. Furthermore, the precise terms of the express definition used by the parties will determine whether ‘true concurrent delay’ or ‘concurrent delay’ is relevant.

Comparative Approaches to Concurrent Delay England The Malmaison Approach has received widespread attention and judicial and academic support. In Henry Boot Construction (UK) Ltd v. Malmaison Hotel (Manchester) Ltd,23 Dyson J. (as he then was), based on an agreement between the parties, summarised the approach as follows:

20 Webster’s Ninth New Collegiate Dictionary at 273 (1987); see also David W. James, ‘Concurrency & Apportioning Liability & Damages in Public Contract Adjudications’, 20 Public Contract Law Journal 490, 491 (1991) (defining concurrent delay). 21 See PCL Const. Services, Inc v. US, 53 Fed. Cl. 479, 486 (2002). This case provides a detailed discussion of sequential as opposed to simultaneous/concurrent delay. 22 George Sollitt Const Co v. US, 64 Fed. Cl. 229, 239 (2005) (citations omitted); see Essex Electro Engineers, Inc v. Danzig, 224 F.3d 1283, 1295-96 (Fed. Cir. 2000) (distinguishing concurrent from sequential delays). 23 Henry Boot Construction (UK) Ltd v. Malmaison Hotel (Manchester) Ltd (1999) 70 Con. L.R. 32 QBD (TCC) at paragraph 13. See too Hudson’s Building and Engineering Contracts Twelfth Edition at paragraph 6-060, which states the Malmaison Approach is ‘likely in the Editor’s view to reflect the law of England and Wales’.

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It is agreed that if there are two concurrent causes of delay, one of which is a relevant event and the other is not, then the contractor is entitled to an extension of time for the period of delay caused by the relevant event notwithstanding the concurrent effect of the other event. Thus, to take a simple example, if no work is possible on a site for a week not only because of exceptionally inclement weather (a relevant event), but also because the contractor has a shortage of labour (not a relevant event), and if the failure to work during that week is likely to delay the works beyond the completion date by one week, then if he considers it fair and reasonable to do so, the architect is required to grant an extension of time of one week. He cannot refuse to do so on the grounds that the delay would have occurred in any event by reason of the shortage of labour.

In 2006,Keating on Construction Contracts Eighth Edition (having between 1991 and 2006 offered support to the ‘dominant cause approach’) supported the Malmaison Approach, stating: Thus it now appears to be accepted that a contractor is entitled to an extension of time notwithstanding the matter relied upon by the contractor is not the dominant cause of delay, provided only that it has at least equal ‘causative potency’ with all other matters causing delay. The rationale for such an approach is that where the parties have expressly provided in their contract for an extension of time caused by certain events, the parties must be taken to have contemplated that there could be more than one effective cause of delay (one of which would not qualify for an extension of time) but nevertheless by their express words agreed that in such circumstances the contractor is entitled to an extension of time for an effective cause of delay falling within the relevant contractual provision.24

The Malmaison Approach and the above paragraph was adopted by HHJ Stephen Davies in Steria v. Sigma25and supported in the first instance decisions in Royal Brompton Hospital,26 De Beers 27and Walter Lilly.28 In the latter, Mr Justice Akenhead said:

24 Stephen Furst QC and Vivian Ramsey, Keating on Construction Contract (Eighth Edition) Sweet & Maxwell at paragraph 8-021. 25 Steria Ltd v. Sigma Wireless Communications Ltd [2008] BLR 79 (TCC), 118 Con LR 177, [2008] CILL 2544 at paragraph 131: It appears from the relevant part [§13] of the judgment in Henry Boot Construction v. Malmaison Hotel Manchester that Dyson J. (as he then was) was recording an agreement by counsel to the effect stated above, rather than deciding a point which was at issue between the parties. Nonetheless the fact that he, as a judge with such wide experience in the field, noted the agreement without adverse comment is a strong indication that he considered that it correctly stated the position. Furthermore, the rationale suggested by the editors of Keating appears to me, with respect, to be compelling, and to apply as much to this case as it does to the particular clause in the Henry Boot case and indeed to extension of time clauses generally. Accordingly, I propose to adopt that approach as correctly representing the proper approach to extensions of time under clause 6.1 of the sub-contract. 26 Royal Brompton Hospital NHS Trust v. Hammond (No. 7) [2001] EWCA Civ 206, 76 Con LR 148. 27 De Beers UK Ltd v. Atos Origin IT Services UK Ltd [2010] EWHC 3276 (TCC), [2011] BLR 274, 134 Con LR 151 where Edwards-Stuart J. explained that ‘[t]he general rule in construction and engineering cases is that where there is concurrent delay to completion caused by matters for which both employer and contractor are responsible, the contractor is entitled to an extension of time but he cannot recover in respect of the loss caused by the delay.’ 28 Walter Lilly & Co Ltd v. Mackay [2012] EWHC 1773 (TCC); [2012] B.L.R. 503.

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In any event, I am clearly of the view that, where there is an extension of time clause such as that agreed upon in this case and where delay is caused by two or more effective causes, one of which entitles the Contractor to an extension of time as being a Relevant Event, the Contractor is entitled to a full extension of time. Part of the logic of this is that many of the Relevant Events would otherwise amount to acts of prevention and that it would be wrong in principle to construe Clause 25 on the basis that the Contractor should be denied a full extension of time in those circumstances. More importantly however, there is a straight contractual interpretation of Clause 25 which points very strongly in favour of the view that, provided the Relevant Events can be shown to have delayed the Works, the Contractor is entitled to an extension of time for the whole period of delay caused by the Relevant Events in question.29

Put simply, where an employer delay event and a contractor delay event both cause delay to completion, the Malmaison Approach entitles the contractor to an extension of time but not additional money in respect of the extended period.30 The legal basis for this result is the ‘but for’ test of causation. It is said that the Malmaison Approach requires a relaxation of the ‘but for’ test of causation (because in the case of concurrent delay the contractor is never in a position to show that he or she would have completed on time ‘but for’ the employer delay event relied upon), but that there is a ‘robust justification for such a relaxation’.31 The justification put forward is that the relaxation is needed to avoid a result that is contrary to what the parties intended. The prevention principle underpins this analysis,32 namely, that the owner cannot benefit from its act of prevention. In essence, the Malmaison Approach takes this concept further by assuming that the parties must have intended not to conflict with the prevention principle.The fact that the prevention principle does not apply to prolongation means that the ‘but for’ test of causation cannot be relaxed and so the contractor is not entitled to additional money for the extended period. The application of the prevention principle where there is concurrent delay has been attacked, and following the comments of Coulson LJ in North Midland Building Ltd v. Cyden Homes Ltd,33 it is likely that the ‘but for’ test of causation cannot be relaxed on the basis of

29 Walter Lilly & Co Ltd v. Mackay [2012] EWHC 1773 (TCC); [2012] B.L.R. 503 at paragraph 370. 30 A similar approach is followed in Australia where a common sense is advocated and where it is assumed that the purpose of an extension of time clause is to relieve the contractor from the obligation to pay liquidated damages for delay to completion for periods of delay where the employer is responsible. Put another way, the prevention principle plays a major role in the legal analysis. 31 John Marrin QC ‘Concurrent Delay Revisited’, published by The Society of Construction Law, February 2013, Paper 179, www.scl.org, at p.16. 32 John Marrin QC ‘Concurrent Delay Revisited’, published by The Society of Construction Law, February 2013, Paper 179, www.scl.org, at p.7, makes clear that ‘for the purposes of this paper, it is assumed that the prevention principle does apply even in cases of concurrent delay’. John Marrin QC continues: On that basis, it is necessary to have regard to the prevention principle in considering the correct approach. If the approach under consideration involves no departure from the prevention principle because the contractor receives a full extension of time for any act of prevention, all well and good. But if, on the approach under consideration, the contractor does not receive an extension of time (or does not receive a full extension) there is a difficulty.The extension of time machinery will have failed to insulate the contractor against the employer’s act of prevention and the prevention principle will or may be brought into play. In those circumstances, it will be necessary to consider whether the principle does come into play or whether the terms of the contract are such as to express a contrary intention. 33 [2018] EWCA Civ 1744 at paragraph 17.

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the prevention principle. This would tend to the conclusion that, under English law where there is concurrent delay, the contractor is unable to rely on the prevention principle and thus is not entitled to an extension of time and is not entitled to additional money. Put starkly, the position on concurrent delay appears to have evolved from dominant delay, to the Malmaison Approach to no entitlement at all. Apportionment may now need to be used to relax the ‘but for’ test (i.e., assessing and apportioning the responsibility for the delay to completion of the works on the basis of the respective fault of the parties, recognising that this may require expert evidence). In this context, the main attack on apportionment34 under English law is that it would conflict with the prevention principle. John Marrin QC citing other learned authors states: A second and related difficulty with the apportionment approach concerns the prevention principle. It is implicit in a finding of concurrent delay that two or more causes have given rise to delay during the same period. If one of those causes is an act of prevention on the part of the employer, the extension of time machinery will not be effective to avoid the application of the prevention principle unless the contractor is granted an extension of time for the whole period. However, if the delay during the period is apportioned between the parties, perhaps on a 50:50 basis, the contractor will not receive a full extension of time and the prevention principle will come into play. It is for this reason that several commentators have suggested that the apportionment approach should be rejected.35

However, as discussed above, there is jurisprudence that supports the proposition that the prevention principle is not engaged at all when one is dealing with concurrent delay to completion. The comments of Coulson LJ in North Midland Building Ltd v. Cyden Homes Ltd are repeated below:

34 The prevention principle is also cited as a significant reason for not using the dominant cause approach. John Marrin QC ‘Concurrent Delay Revisited’, published by The Society of Construction Law, February 2013, Paper 179, www.scl.org, at p.14 states: The third difficulty with the dominant cause approach is that it is liable to come into conflict with the prevention principle. Taking the facts of the chosen example, let it be supposed that the architect decides to treat the contractor’s delay in carrying out remedial works as the dominant cause of delay during the month of January 2012.The assumed facts nevertheless imply that the employer’s act of prevention in instructing extra work was a concurrent cause of the entire month of delay. If the extension of time clause is implemented on the basis that contractor-default is the dominant cause of delay, it will not afford the contractor relief for delay caused by the act of prevention and the result will be that the prevention principle will come into play.Time will be set at large, unless the contract expressly provides otherwise.’ 35 Paul Tobin, ‘Concurrent and Sequential Causes of Delay’, (2007) 24 ICLR 142, p.151; Sir Vivian Ramsey, ‘Claims for Delay and Disruption: The Impact of City Inn’, a paper presented at the annual TECBAR conference in January 2011 and in the TECBAR Review for Spring 2011 who made it clear that apportionment (1) would be unworkable and unpredictable in practice; (2) if adopted would risk triggering the prevention principle and thereby placing time at large; (3) apportionment in common law claims for damages is not generally available (absent a right under Statute); (4) it is unclear why contractor culpable delay should be relevant to the assessment of delay to completion; Hudson on Building and Engineering Contracts, 12th Edition, paragraphs 6-060 and 6-062; Walter Lilly & Co Ltd v. Mackay [2012] EWHC 1773 (TCC), [2012] BLR 503, 143 Con LR 79, (2012) 28 Const LJ 622, [2012] CILL 3229 at paragraph 370.

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Under the JCT standard forms (i.e., without the bespoke amendments added here), a contractor’s entitlement to an extension of time in circumstances of concurrent delay is not entirely free from doubt.There is no Court of Appeal authority on the issue. In Walter Lilly and Co Limited v. Giles Mackay and Another [2012] EWHC 1773 (TCC); [2012] 28 Const. L.J. Issue 8, page 622, Akenhead J said that a contractor was entitled to an extension of time for concurrent delay. In reaching that conclusion he referred to a number of first-instance decisions, including Henry Boot Construction (UK) Limited v. Malmaison Hotel (Manchester) Limited [1999] 70 Con LR 32 (where the point was conceded) and the Scottish case of City Inn Limited v. Shepherd Construction Limited [2010] BLR 473 (where a different approach was adopted). Keating on Construction Contracts, 10th Ed., paragraph 8-014 takes the opposite view. It states: “However, where there are concurrent causes of delay (one the contractor’s responsibility and the other the employer’s) the prevention principle would not be triggered because the delay would have occurred anyway absent the employer delay event.” Two more first instance decisions are cited in support of that proposition: Adyard and Jerram Falkus Construction Limited v. Fenice Investments Incorporated (No. 4) [2011] EWHC 1935 (TCC). In Adyard, Hamblen J said, at paragraph 279, that “there is only concurrency if both events in fact cause delay to the progress of the works and the delaying effect of the two events is felt at the same time”. For reasons which will become apparent below, it is unnecessary to resolve this potential difference of opinion on this appeal. For present purposes, these authorities are relevant only of the possibility that a contractor may be entitled to an extension of time for the whole period of concurrent delay (even where the work could not have been completed any earlier than it actually was because of the contractor’s default), which has led employers to introduce the sort of bespoke amendment on which this appeal turn.

The ostensible unfairness for a contractor who recovers nothing (and instead pays liquidated damages for delay) if there is concurrent delay to completion was also considered by Coulson LJ in ‘Prevention or Cure? Delay Claims and the Rise of Concurrency Clauses’ where he states:36 A period of concurrent delay, properly arose because a delay had occurred for two separate reasons, one being the responsibility of the contract or/and one the responsibility of the employer. Each could argue that it would be wrong for the other to benefit from a period of delay from which the other is equally responsible. In this case the parties had sought to reverse the Malmaison approach to say that, rather than the contractor, it would be the employer who would benefit from the concurrency difficulties. The court said that ‘either result may be regarded as harsh on the other party; neither could be said to be uncommercial or unworkable.

36 The Rt Hon Lord Justice Coulson, ‘Prevention or Cure? Delay Claims and the Rise of Concurrency Clauses’, Pinsent Masons Lecture given in Hong Kong on 15 November 2018 and presented to the Society of Construction Law at a meeting in London on 5 February 2019, Paper 219 published by the Society of Construction Law at paragraph 41.

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Scotland In Scotland, apportionment was first put forward by Lord MacLean in John Doyle37 where he said: ...we are of the opinion that apportionment of loss between the different causes is possible in an appropriate case. Such a procedure may be appropriate in a case where the causes of the loss are truly concurrent, in the sense that both operated together at the same time to produce a single consequence. For example, work on a construction project might be held up for a period owing to the late provision of information by the architect, but during that period bad weather might have prevented work for part of the time. In such a case responsibility for the loss can be apportioned between the two causes, according to their relative significance.

In the City Inn case at first instance, Lord Drummond Young, referring to the JCT Standard form of Building Contract, Private Edition with Quantities 1980 edition, said: Where there is true concurrency between a relevant event and a contractor default, in the sense that both existed simultaneously, regardless of which started first, it may be appropriate to apportion responsibility for the delay between the two causes; obviously, however, the basis for such apportionment must be fair and reasonable. Precisely what is fair and reasonable is likely to turn on the exact circumstances of the particular case.38

This view was affirmed by a majority of the Inner House of the Court of Session on the appeal. The apportionment approach has been followed in Hong Kong where in W. Hing Construction Company Ltd v. Boost Investments Limited39 the judge stated: Much case law has developed on this thorny question of concurrent delay, which turns on the wording of each particular EOT clause, as well as considerations of, e.g., what is the ‘dominant’ delay.The relevant case law has been helpfully reviewed by Lord DrummondYoung in the recent Scottish case of City Inn Limited v. Shepherd Construction Limited [2007] Scottish Court of Sessions CSOH 190 (30 November 2007) at paragraphs 10-21, in which he reached the following principal conclusions, with which I respectfully agree – (1) the Architect ought not to assess delay using a ‘coldly logical approach’, but instead should use a ‘practical common sense approach’, bearing in mind that the over- riding objective under the EOT clause is to grant a ‘fair and reasonable’ EOT. (2) the fact that the contractor is already in delay himself is not, in itself, a sound reason not to grant an EOT; what is fair and reasonable is a question of fact to be determined according to the judgment or discretion of the Architect on the particular facts of each case. (3) where there is true concurrency in delaying events it may, in some cases, be appropriate to apportion responsibility for the delays between the two parties so as to arrive at a fair and reasonable assessment.’

37 John Doyle Construction Ltd v. Laing Management (Scotland) Ltd [2004] BLR 295 paragraph 16. 38 City Inn, note 4 at paragraph 19. 39 [2009] BLR 339 High Court of Hong Kong.

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Similarly, apportionment appears to be favoured by the courts in France.40 Put simply, apportionment is premised on the requirements of good faith in the performance of contracts as set out in Article 1104 of the French Civil Code and the principle of full compensation as set out in Articles 1231 and 1232 of the French Civil Code whereby a party is ‘compensated for the loss he has suffered – no more and no less – and for the gain of which he has been deprived’.

The Society of Construction Law Delay and Disruption Protocol Second Edition Where concurrent delay has been established, the contractor should be entitled to an extension of time for the employer delay to completion, dealt with in accordance with Core Principle 5. The contractor delay should not reduce the extension of time entitlement due to the contractor as a result of the employer delay. As discussed above, the Protocol’s position on concurrent delay is influenced by the English law prevention principle, by virtue of which an employer cannot take advantage of the nonfulfilment of a condition (for example, to complete the works by a certain date), the performance of which the employer has hindered. The Protocol’s approach to the treatment of concurrent delay (once established) prevents arguments about whether an employer delay occurring concurrently with a contractor delay actually hinders the Contractor’s progress in any way. Where an employer delay to completion and a contractor delay to completion are concurrent, the contractor may not recover compensation in respect of the employer risk event unless it can separate the loss or expense that flows from the employer risk event from that which flows from the contractor risk event. If it would have incurred the additional costs in any event as a result of concurrent contractor delay, the contractor will not be entitled to recover those additional costs. In most cases, this will mean that the contractor will be entitled to compensation only for any period by which the employer delay exceeds the duration of the contractor delay.

United Arab Emirates If the contract is silent or ambiguous on the issue of concurrent delay, the position under UAE law is not clear as the issue of competing causes of delay and concurrency are not expressly addressed in the UAE Civil Code. However, it is generally understood that various principles of UAE law favour an apportionment approach, where liability for the delay is apportioned between the parties in accordance with their respective degrees of fault. This approach is consistent with Articles 246, 290 and 291 of the UAE Civil Code, which emphasise ‘good faith’ and the principle that persons should take responsibility for any harm they have themselves caused. Article 390 of the UAE Civil Code is also relevant because this allows a tribunal full discretion to ensure that compensation reflects the actual loss and could be argued to allow downwards adjustment of liquidated damages where there is concurrency.

40 The prevention principle also features in French law. Article 1147 of the Civil Code provides that, ‘a debtor shall be ordered to pay damages, if appropriate, either by reason of the non-performance of the obligation, or by reason of delay in performance, in circumstances where the non-performance does not result from an external cause which is non-attributable to the debtor, so long as there is no lack of good faith on his part,’ on the basis that external cause (cause étrangère) would include, according to case law, acts by the principal.

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Switzerland Swiss law is far from settled on the topic of concurrent delay. The Swiss general damages regime – which provides for apportionment – also govern claims to damages and entitlement for concurrent delay. Article 44(1) of the Code of Obligations states: Where the injured party consented to the action which caused the loss or damage, or circumstances attributable to it helped give rise to or compound the loss of damage or otherwise exacerbated the position of the party liable for it, the court may reduce the compensation due or even dispense with it entirely.41

Generally, where there are two (or more) independent causes of delay that at least partially overlap, and one is a contractor delay and one is an employer delay, the general rule is that the contractor is entitled to an extension of time notwithstanding his or her own delay but not to additional costs due to the employer’s delay. This ‘time-no-money approach’ is the Malmaison Approach.

Conclusions Absent any express definitions of concurrent delay to completion, tribunals are likely to treat the term ‘concurrent delay’ to mean the occurrence of delay to completion of the works caused by two or more delay events that are the responsibility of the employer and the contractor respectively. Parties are free to define both concurrent delay and address how concurrent delay ought to be evaluated (including apportionment if that was the agreed preferred option). The prevention principle is not an absolute rule of law and can be circumvented by express wording. Tribunals will not readily ignore the allocation of risk in the construction contract. Concurrent delay is of fundamental importance in characterising ostensible compensable delay events and thus in the assessment of overall delay to completion of the works. Put another way, if, at the point at which delay events impinge the critical path there is concurrent delay and if the contractor has no entitlement when there is concurrent delay (either under the terms of the contract or the applicable law), then both delay events become contractor risk events such that the concurrent delay affects the subsequent and overall delay analysis. This practical aspect of concurrent delay and prospective delay analysis is overlooked and may explain why it often said that cases of ‘true concurrency’ are extremely rare.42 Many jurisdictions give entitlement to the contractor when there is concurrent delay to completion. As at July 2019, the position under English law appears to be moving and the favoured approach is now likely to be that concurrent delay to completion means that a contractor is not entitled to an extension of time or to additional money.

41 Swiss Code of Obligations, Article 44(1). 42 The Rt Hon Lord Justice Coulson, ‘Prevention or Cure? Delay Claims and the Rise of Concurrency Clauses’, Pinsent Masons Lecture given in Hong Kong on 15 November 2018 and presented to the Society of Construction Law at a meeting in London on 5 February 2019, Paper 219 published by the Society of Construction Law at paragraph 28: ‘In my experience, true cases of concurrent delay are extremely rare. But, because they are so often asserted, the problems to which concurrency gives rise need to be addressed’.

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The Malmaison Approach has been undermined by judicial support (from two judges now in the Court of Appeal) for the proposition that the prevention principle is not applicable where there is concurrent delay and thus provides no basis to relax the ‘but for’ test of causation. It is feasible that English law now develops apportionment as a basis to provide relief for contractors. There has been little substantive discussion about this specific issue,43 and there would need to be a reconsideration of the 1993 Law Commission Report ‘Contributory Negligence as a Defence in Contract’, which stated that:44 Apportionment of the plaintiff’s damages on the ground of contributory negligence should be available in actions in contract where the defendant is in breach of an express or implied contractual duty to take reasonable care but not where he is in breach of a contractual term which imposes a higher level of duty (which we refer to as ‘strict’).

Given the direction of travel and the fact that the ‘time not money’ approach may be disappearing, ultimately, parties are able to best protect themselves by drafting contracts to reflect the commercial deal in respect of concurrent delay.45 Coulson LJ puts the position clearly and conclusively:46 it seems likely that the popularity of concurrency clauses will continue to grow. On their face, they represent an attempt by the parties expressly to apportion responsibility for concurrent delay, and North Midland is authority for the proposition that such clauses do not offend

43 David Barry, ‘Concurrent Delay in Construction Law’, (2011) Const LJ concluded: While Lord Drummond Young’s second stage (the apportionment of liability and damages when a dominant cause is not discernible) is attractive from the perspectives of reasonableness and practicability, it is submitted that this approach is not well founded in law, because it is unsupported by either statute or authority, and it requires an unnatural interpretation of the subject EOT contract clause. However, it is recommended that those responsible in the industry for the drafting of contracts ought to consider giving legal effect to Lord Drummond Young’s suggested apportionment approach through the re-drafting of the standard EOT clauses. Alternatively, the legislature might wish to provide the necessary legal foundation for the use of apportionment in construction contracts through statute. See also Mischa Balen, ‘Concurrent Delay, Over-Determination and the Problem of Default Rules’, (2016) 32 Construction Law Journal, Issue 3, 2016 who provides support for apportionment stating: This rule has developed to preserve that the employer’s right to levy liquidated damages in cases of concurrent delay. But the prevention principle can be excluded by the parties’ agreement.The parties may have intended the period of delay to be apportioned between the employer and the contractor, allowing proportionate recovery of liquidated damages.The apportionment approach has been criticised on the basis that it promotes uncertainty, but the current default rule of time but not money is just as uncertain because, to avoid the injustice of the all-or-nothing rule, it relies on difficult concepts of ‘effective’ or ‘dominant’ causation to explain the real cause of the delay. 44 Law Commission, ‘Contributory Negligence as a Defence in Contract’ (HMSO 1993), Law Com No.219. 45 For example parties could follow the wording used in North Midland Building Ltd v. Cyden Homes Ltd discussed above or the wording used in the Australian standard form AS2124-1992, Cl. 35.5, fifth paragraph, which states that: ‘Where more than one event causes concurrent delays and the cause of at least one of those events, but not all of them, is not a cause referred to in the preceding paragraph, then to the extent that the delays are concurrent, the Contractor shall not be entitled to an extension of time for Practical Completion.’ 46 The Rt Hon Lord Justice Coulson, ‘Prevention or Cure? Delay Claims and the Rise of Concurrency Clauses’, Pinsent Masons Lecture given in Hong Kong on 15 November 2018 and presented to the Society of Construction Law at a meeting in London on 5 February 2019, Paper 219, published by the Society of Construction Law at paragraph 45.

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against the prevention principle. There is no reason in principle why a workable concurrency clause could not be agreed which worked the other way to the one in North Midland: in other words, one which provided that, if there was concurrent delay, the contractor would be entitled to an extension of time, and loss and expense.

The triad thesis, antithesis, synthesis amalgamated with the complexity of judicial and arbitral tribunal thinking is an apt way to signpost the direction of travel with concurrent delay to completion.

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Part II Dispute Resolution for Construction Disputes

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11 Claims Resolution Procedures in Construction Contracts Philip Norman and Leanie van de Merwe1

Introduction Large-scale construction and engineering projects rarely run according to plan or budget. Contractors commonly assert claims for additional time and money for delays, disruption, variations, force majeure or other events that have caused them to suffer loss. Likewise, employers often claim for contractor delays, defective works or back charges for works they have performed for the contractor. This chapter outlines the most common types of contractual claims procedures by reference to the FIDIC Red Books 1999 and 2017.2 It considers the FIDIC procedures and how they have evolved from the 1999 to 2017 versions. It then considers how such procedures are understood and applied differently under common law and civil law systems.

Why and what types of claims arise, and are they the same as disputes? Construction projects are complex, unique endeavours that are developed through the interaction of a multitude of participants, including, among others, designers, financiers, engineers, civils contractors, as well as those providing materials, equipment and manpower. Throughout the construction process, both employers and contractors have to manage the interface between all of these participants, as well as government authorities and stakeholders. They have to plan their works in a logical manner to ensure that the different resources and expertise needed for construction are coordinated and provided on time and within budget.

1 2

Philip Norman is a partner and Leanie van de Merwe is an associate at Covington & Burling LLP. ‘Conditions of Contract for Construction to Building and Engineering Works Designed by the Employer’, first edition, 1999 and ‘Conditions of Contract for Construction’, second edition, 2017.

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With so many moving parts, there are nearly always deviations from the original construction plan. Therefore, construction contracts (and parties), acknowledging that deviations occur, make provisions for dealing with those deviations through defined claims procedures. The FIDIC forms of contracts anticipate the most likely scenarios in which contractors or employers make claims. Examples of contractor claims are (using FIDIC definitions and clauses): • late access or possession of site (Sub-Clause 2.1); • adverse unforeseeable physical conditions (Sub-Clause 4.12); • extensions of time for completion (Sub-Clause 8.4/8.5); • variations to the contractor’s scope of work (Sub-Clause 13.3); and • the contractor’s entitlement to suspend work (Sub-Clause 16.1). Examples of employer claims are: • rejection and retesting of works (Sub-Clause 7.5); • delay or liquidated damages (Sub-Clause 8.7/8.8); and • a contractor’s failure to remedy work within a reasonable additional time (Sub-Clause 11.5).3 Given the frequency of these types of claims, the contractual claims procedures are set up to try to resolve them expediently, in the hope that formal dispute resolution processes, such as litigation in national courts or arbitration, are avoided. Claims procedures are not intended to be adversarial (though in reality this is how they are viewed), but are aimed at resolving claims efficiently. FIDIC contracts, for example, provide for an intermediary (the engineer) to assist the parties to resolve claims and to be the first instance arbiter of those claims where the parties cannot agree upon a solution. FIDIC 2017 makes a distinction between a ‘claim’ and a ‘dispute’.4 A ‘claim’ is a ‘request or assertion by one Party to the other Party for an entitlement to relief under any Clause of these Conditions or otherwise in connection with, or arising out of, the Contract or the execution of the Works’.5 A ‘dispute’ 6 is where a claim has initially been made, but eventually rejected by the other party or the engineer (or is not determined in the required time). If a claim is rejected, the claiming party must, within 28 days from the date of determination or deemed rejection,7 serve a notice of dissatisfaction, which then allows the parties to commence the formal ‘disputes and arbitration’ process defined in Clause 21 of FIDIC 2017. If no notice of dissatisfaction is served, then the engineer’s determination or deemed rejection becomes final and binding.

3 4 5 6 7

‘Sub-Clause’ refers to the provision of the FIDIC Red Books 1999 and 2017 (showing deviations in numbering in the different editions). There was no definition in FIDIC 1999. See Sub-Clause 1.1.6 of the General Conditions. See Sub-Clause 1.1.29 of the General Conditions. See Sub-Clause 3.7.3 of the General Conditions, which states that if the engineer does not respond within the prescribed time to issue a final determination (or confirm the parties’ agreement), the claim is deemed to be rejected.

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The claims procedures also require the prompt notification and description of the claim event, so it can be tracked in real time and decisions on how to resolve or mitigate it can be made contemporaneously.

The claims procedure FIDIC 1999 has two separate processes for making claims: the employer’s procedure is under Sub-Clause 2.5; and the contractor’s procedure is under Sub-Clause 20.1. FIDIC 2017 combines the procedures for both employer and contractor claims under Clause 20. This section describes the steps in those claims processes.

Contractor claims in FIDIC 1999 To comply with Sub-Clause 20.1, once a claim event arises for which a contractor seeks a remedy, the contractor must give notice of the claim event to the engineer ‘as soon as practicable’ and not later than 28 days after the contractor became aware, or should have become aware, of the claim event or circumstance. If the contractor fails to give notice in time, it will preclude itself contractually of any remedy, whether that be for an extension of time or additional payment and the ‘Employer shall be discharged from all liability in connection with the claim’. For example, if a contractor asserts it was delayed from getting on to the site to start works on the agreed date, it may argue that delayed access will delay completion of the works. If it serves its claim notice ‘as soon as practicable’ and within 28 days from the date it should have been given access, then it can pursue its entitlement for time, money or both. If it does not, then it may lose its right to claim for a remedy (though, as described below, principles of law may mitigate against such a consequence). Following the timely submission of a claim notice, the contractor must submit a fully detailed claim within 42 days after it became aware, or should have become aware, of the event or circumstance giving rise to the claim.8 The fully detailed claim must include supporting particulars. This 42-day time period is not stated to be a time bar, but if the failure to provide a fully detailed claim in time has prevented a proper investigation (and potentially mitigation) of the claim, that delay can be factored into a determination of the contractor’s entitlement to additional time, money or both. The engineer must determine the claim in accordance with Sub-Clause 3.5, which requires him or her to consult with the parties to see if a resolution can be agreed, or absent agreement for the engineer to make a fair and reasonable determination of the claim with detailed comments and reasons within 42 days or such other period as may be agreed. If the contractor is satisfied with the engineer’s determination, that is the end of the matter. If it is not, then the claim is escalated to the status of a dispute, but the contractor is bound by, and must give effect to, the engineer’s determination until the claim (now a dispute) is finally resolved in accordance with Clause 20.

8

Where the claim has a continuing effect, the fully detailed claim still has to be served within 42 days but will be considered as interim and the contractor is required to send further interim claims on a monthly basis providing further details and a final claim within 28 days after the effects of the event have ended.

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Throughout this process, the contractor is required to keep contemporary records to substantiate its claim. The engineer may monitor the contractor’s records and the contractor must give the engineer access to them.

Employer claims in FIDIC 1999 Employer’s claims are dealt with differently under FIDIC 1999.9 Sub-Clause 2.5, requires the employer or the engineer to give notice and particulars ‘as soon as practicable’ after it became aware of the event or circumstance giving rise to the claim. This notice must contain the particulars of the clause or basis of the claim and substantiation of the amount being claimed.10 An employer’s claim does not have to be notified within a fixed number of days and there is no waiver of remedy if the employer’s notice is given after it was ‘practicable’ to notify it. However, once an employer notifies its claim, the same process is followed as for contractor’s claims (see above, mutatis mutandis).

Claims procedure in FIDIC 2017 FIDIC 2017 introduced a number of significant changes from FIDIC 1999. Employer and contractor claims are now addressed in the same provision and are subject to the same procedure. The changes also highlight the engineer’s increased role in the process, particularly where it concerns the engineer’s administration of claims notices. The claims procedure is more rigorous and includes fixed time limits within which the claiming party must issue its notice of claim and its fully detailed claim. The 28-day time limit for giving a claim notice is maintained, but the time limit for submitting a fully detailed claim has been increased from 42 days (FIDIC 1999) to 84 days (FIDIC 2017). Non-compliance with these time limits (for both the initial claim notice and the fully detailed claim) may result in the invalidation of these notices, and in effect possibly bar any remedy for the claim. Sub-Clause 20.1 splits claims into three categories and prescribes different procedures for their resolution. The categories are: • employer’s claims for additional payment from the contractor (or a reduction in the contract price) or an extension of the defects notification period; • contractor’s claims for an extension of time or additional payment from the employer; and • other relief that is not covered in the previous two categories. The procedure for the third category is marginally different to that applied to the first two. It requires the claiming party to assert its application for a remedy, and if that remedy is rejected by the engineer or other party (or not dealt with in a reasonable time), the claiming party must then serve a notice of claim, which will be resolved in accordance with

9 This has changed in FIDIC 2017. 10 Though a notice for an extension of the defects notification period shall be given before the expiry of such period.

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Sub-Clause 3.7 (agreement or engineer’s determination).The time limits and requirements for detailed submissions that apply to the first two categories of claim are not specified for this third category. For the first two categories of claim, Sub-Clause 20.2.1 requires the claiming party to give notice of its claim ‘as soon as practicable’ and no later than 28 days after it became aware, or should have become aware, of the event or circumstance giving rise to the claim. Failure to comply with this time limit means that the claiming party shall not be entitled to the relief claimed and the other party ‘shall be discharged from all liability in connection with the event or circumstance giving rise to the Claim’. If the engineer considers that the claiming party has failed to comply with the 28-day time period, the engineer is required by Sub-Clause 20.2.2 to give notice within 14 days from the date he or she received the notice of claim, stating that the claim is out of time.11 This places a positive obligation on the engineer to act promptly and state with reasons when a claiming party has, in the engineer’s opinion, failed to provide timely notice. If the engineer does not issue such a notice, the original notice of claim shall be deemed valid.The other party can still object to its deemed validity by giving notice to the engineer of its disagreement together with reasons. The engineer must consider this and make findings on the disagreement in the engineer’s determination. Where the claiming party receives a notice from the engineer indicating that it has failed to comply with the time limit for giving notice, the claiming party will be required to include details of its disagreement or justification for the late submission in its fully detailed claim. Whether the initial notice is valid or its invalidity is being challenged, the claiming party is required to submit a fully detailed claim within 84 days. This time period can be amended by agreement between the engineer and the claiming party. If the claiming party fails to submit its fully detailed claim within this time limit, its notice of claim shall be deemed to have lapsed (assuming it was originally served in time) and the notice shall be treated as invalid. The engineer is (again) required by Sub-Clause 20.2.4, to give notice to the claiming party that the claim is no longer valid. This further notice must be given within 14 days after the time limit for submission of the detailed claim has expired. It is always open to the claiming party to disagree with the engineer’s further notice. Such disagreement or justification of the late submission shall be included in the claiming party’s fully detailed claim. In the event that the engineer does not give notice within the 14-day period, this further notice is deemed valid.Where the other party disagrees with the validity of the further notice, it shall give notice to the engineer of such disagreement. The same process as above applies, and while no time limit is stipulated for the submission of such a notice of disagreement, the engineer’s determination must include findings on such a disagreement, implying that the notice of disagreement has to be given prior to the engineer’s determination. Where the claiming party receives a notice from the engineer indicating that the notice of claim is deemed to have lapsed and is no longer valid, the claiming party will be required to include details of its disagreement with the engineer’s notice, or justification for the late submission in its fully detailed claim. 11 Sub-Clause 20.2.2 of the General Conditions.

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In circumstances where the engineer has given a notice under Sub-Clause 20.2.2 (failure to give notice within the time period) or Sub-Clause 20.2.4 (lapsing of claim notice), the engineer is still required to agree or determine the claim in accordance with the procedure under Sub-Clause 3.7. In this instance, the engineer’s determination must consider the claiming party’s disagreement. Once the engineer receives the fully detailed claim (final or interim where the claim has or had a continuing effect), Sub-Clause 20.2.5 requires him or her to agree or determine the claim in accordance with the procedure outlined in Sub-Clause 3.7. Where there is an interim claim, the engineer must issue a response setting out the contractual or other legal basis of the first interim fully detailed claim within the time limit prescribed in Sub-Clause 3.7.3. The claiming party shall continue to submit further interim detailed claims on a monthly basis and shall submit a final fully detailed claim within 28 days after the end of the effects resulting from the event giving rise to the claim. Sub-Clause 3.7.5 provides that if either party is dissatisfied with the engineer’s determination, such party may, within 28 days after receiving the engineer’s determination, give a notice of dissatisfaction (the notice must state it is a notice of dissatisfaction and contain reasons). After giving a notice of dissatisfaction, either party may then proceed to obtain a decision of the dispute from the dispute avoidance or adjudication board, but must comply with the engineer’s determination in the interim, until it is replaced by a final determination obtained under the dispute procedure contained in Clause 21. If no notice is given, the engineer’s determination becomes final and binding. As with FIDIC 1999, the claiming party has to keep contemporary records to substantiate its claim (Sub-Clause 20.2.3). The engineer may monitor the contractor’s records and the contractor must give access to these records. In relation to the engineer’s audit or information rights, the difference between FIDIC 1999 and 2017 is that the new Sub-Clause 20.2.3 provides that if the engineer monitors or inspects such records it shall not imply the engineer’s acceptance of the accuracy or completeness of the records.

Challenges to the operation of the claims procedures and time bars In theory, whether the FIDIC form or other form of contract is used, the contractual procedures for asserting claims should be clear. When parties follow those procedures, then it is unlikely that complaints will arise on the implementation of those procedures (albeit the outcome may still be challenged on substantive grounds). It may be argued that the FIDIC claim provisions operate as conditions precedent, because they specify the precise time within which a claim notice is to be served and expressly state the consequences of failing to serve notice within that time (here, that the contractor will lose its right to obtain remedy for the claim event). However, these provisions are often still challenged as to their meaning and effect, because of the draconian consequences. Therefore, complexity or challenge can arise where one party alleges that the contractual procedure has not been followed and consequently that the claiming party is precluded from pursuing its claim further or is debarred from obtaining any remedy. In this case, the contractual claims procedure has to be investigated to understand what the parties intended and particularly what the effects of non-compliance would be.

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Challenges to meaning The method used for contractual interpretation should shed light on whether, by the use of the words chosen by the parties, they intended to debar claims made out of time, or whether the provision was aimed at ensuring that problems on the project were identified and communicated as soon as possible, so that decisions on resolving or mitigating them could be made contemporaneously. Jurisprudential principles of contractual interpretation are not subject to a single, uniform theory that applies around the world. Parties will be guided to the appropriate set of rules for contract interpretation by the applicable governing law. Different contractual interpretation outcomes can arise depending on the governing law that applies to the contract. Not only are there conceptual and methodological differences in rules for contract interpretation between common law and civil law jurisprudence, but even within those broad descriptions of legal systems, the law of different countries will have their own idiosyncrasies in approach. That said, most systems of law start with the proposition that contractual interpretation must be loyal to the text used by the parties.12 Words will be given their ordinary meaning and the text of the entire agreement must be considered to give the proper context to describe the parties’ intentions. If needed, interpretation will consider the language of the trade for which the contract is executed and the trade or commercial context. It is when the text in question is open to two or more alternative interpretations that an interpretation exercise needs to be carried out and this is where different systems of law depart in their approach. Where there are two alternative interpretations of a provision, both being equally valid, deciding which interpretation should apply depends on the method of interpretation prescribed by the governing law. In this situation, English law will likely determine the meaning by applying contra proferentem, which operates to interpret the intention against the draftsman of the provision, whereas in the United Arab Emirates the contractual provision will be interpreted in favour of the obligor, irrespective of who drafted that part of the contract.13 Where there are more than two potential interpretations of a provision, then a more detailed enquiry as to the meaning needs to be conducted. Subject to the governing law, this may result in different emphases being placed on the contextual or historical information, such as whether information surrounding the time of the negotiation of the contract is relevant or not.

12 For example, under English law: ‘The primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage.’ (Bank of Credit and Commerce International SA (in compulsory liquidation) v. Ali [2001] UKHL 8, Lord Hoffmann at paragraph 39.) Article 265 of the UAE Civil Code (Federal Law (5) of 1985, as amended) provides: ‘If the wording of a contract is clear, it may not be departed from by way of interpretation to ascertain the intention of the parties.’ This is a similar context to Article 169 of the Qatar Civil Code (Law (22) of 2004), which provides: ‘If the terms of a contract are clear, it will not be permitted to deviate from them by interpreting them in order to ascertain the will of the parties.’ 13 The approach common law takes is to penalise the person drafting the contract, as they could have been clearer in the manner they expressed themselves and thus could have avoided the ambiguity, whereas the civil law approach is one of minimising the burden on the party who is required to perform the obligation in question.

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Thus, depending on the governing law, a failure to give notice in time under FIDIC 1999 does not necessarily debar the claiming party from a remedy or absolve the other from liability. Common types of ambiguity that are found in the interpretation of construction contracts include: • When does time actually start running? In the case of Obrascon Huarte Lain SA v. HM Attorney General for Gibraltar,14 Akenhead J held that the provisions of Clause 20 of FIDIC 1999 should be construed together with Sub-Clause 8.4 in relation to a claim for an extension of time, and that in interpreting Sub-Clause 8.4 it allowed for the notice period under Clause 20 to commence running where the project completion ‘is or will be delayed’, thereby allowing the contractor to notify a delay at later point in time than when the delay event occurred. • If the claim is based on a failure by the employer to provide site access on the expressly stated date and the contractor is thus aware of the claim event on that date, but waits 14 days before submitting the notice of claim – is it out of time for not providing the notice as ‘soon as practicable’, or can the contractor argue that the notice is within time, relying on the 28-day long-stop period? • If a contractor is engaged to undertake superstructure works on foundations laid by others, but six months into its works discovers that those foundations were defective and had to be repaired, thereby causing a delay to the completion of the superstructure works – is the contractor’s claim notice served on that date out of time in circumstances where it might have been able to discover those defects six months earlier, had it inspected the foundations prior to starting its works? • What about the method in which notice is given? If notice is not set out in a document headed ‘Notice’ is there notice at all? FIDIC 1999 only requires notice to be made in writing. It then begs the question of whether contractors can rely on any type of statement recorded in writing that identifies a claim and its circumstances, such as in minutes of meetings or progress reports.15 These examples are a few of the contractual interpretation issues that arise where different governing laws may produce different answers.

Challenges based on principles of the governing law Even if the contractual claims procedure is clear and its operation is unequivocal, the governing law of the contract can still provide relief to a party that has not strictly complied with the defined procedure and thus save it from being debarred from its remedy. The governing law may view non-compliance with a ‘technical’ procedure for asserting a claim that results in a full bar to recovery as being an excessive or unfair.

14 [2014] EWCH 1028 (TCC). 15 Sub-Clause 4.20 of FIDIC 2017 appears to prevent such an argument being made, as it states in its provisions relating to progress reports that: ‘nothing stated in any progress report shall constitute the notice under the Sub-Clause of these Conditions.’ In essence, this is likely to operate against assertions of constructive notice.

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In common law jurisdictions, legal arguments have been deployed to avoid against the serious consequences of non-compliance. For example, in Australia, the prevention principle has been applied to preclude an employer benefitting from its own breach (causing the delay event), by relying on the contractor’s technical failure to issue a claim notice in accordance with the contract and where the contract debarred late claims.16 Other common law principles have provided relief to non-compliant claim notices, such as the principles of waiver and estoppel, where (assuming the facts support it) an employer may be fully aware of the claim event and has engaged in communications on the claim event, but where the contractor has not issued a notice at the correct time and in the correct format. By its conduct, that employer may be prevented from relying on the contractor’s technical failure of not providing a notice in the correct form and, therefore, cannot rely on that failure to absolve itself of liability. Civil law jurisdictions also have principles that mitigate against non-compliance with notice provisions. For example, a claiming party who has submitted its notice of claim late under the contract might make an alternative claim based on principles of unjust enrichment (where it would be inequitable to deprive the contractor of its remedy), or that an employer’s reliance on the strict requirements of the claims procedure would constitute a breach of the obligations of good faith.This is similar to the concept that contractual provisions should not be used excessively to bring about an unfair outcome. There are some systems of law, for example, those in the Arab world where principles of shariah inform how the laws are made. These shariah principles include the concept that ‘a just claim never expires’ and the concept that a contractor should not be precluded from receiving fair and just compensation for its works in cases where there has been an unforeseen occurrence impacting those works (for example, a delay event). An example of this is under the Qatar Civil Code, where in some cases there is a statutory prohibition on any agreement to reduce time periods for asserting claims to periods shorter than the statutory limitation period.17 Of course, relying on these principles to avoid strict compliance with a contractually agreed claim’s procedure may not always be an optimal strategy. In particular, different legal systems treat such matters differently and, more often than not, deploying such principles are highly fact-specific (often each case is sui generis) and previously decided cases may not provide sufficient authority to reassure a party that its non-compliance with the contractual procedural failures will be absolved.

16 See Gaymark Investments v.Walter Construction Group (1999) NTSC 143, though English courts have taken a different view by preserving the strength of conditions precedent and not detracting from them on the basis of the prevention principle, in circumstances where a contractor could avail itself of an extension of time provision, but failed to do so in time. 17 For example, Article 418 of the Qatar Civil Code (Law No. 22 of 2004). This is not a universal principle in the Arab world, as there is no equivalent in UAE law, demonstrating that even neighbouring countries whose civil code comes from the same genesis retain national idiosyncrasies.

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Conclusions The trend in contractual claims procedures has moved towards a more balanced process, where time periods and adverse consequences of failing to comply with the scheme apply equally to both contracting parties. It requires more proactive contract management from the parties and a concerted effort by them and the engineer towards dispute avoidance. For example, the enhanced contractual notice regime in FIDIC 2017 causes parties to identify issues as soon as possible, allowing both, with assistance from the engineer, to find solutions and make better informed contemporaneous decisions. This is a worthy aim and the penalty for not complying with notices is significant. The process also ensures that claims are less likely to be bundled together, which means that they are more likely to be properly managed in a cost-effective dispute avoidance or dispute resolution process. Nevertheless this trend towards greater contract management means that parties will have to factor in additional or greater costs to support these processes.This will impact both the employer, who will want to keep construction costs down, and the contractor who wants to keep prices down to win work, in a highly competitive market. Finally, the increased time for contractual resolution or determination of claims from 42 to 84 days in FIDIC 2017 will inevitably put pressure on cash flow and how decisions to mitigate adverse time impacts are made. However, it may be that the increased time will result in more detailed investigations of claims and better considered engineer’s determinations, which are less likely to be challenged.

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12 Dispute Boards Lindy Patterson QC and Nicholas Higgs1

Concept and purpose of dispute boards Dispute boards are a regular feature of international construction and infrastructure contracts. They are one of the alternative dispute resolution options within such contracts and are intended to provide contemporaneous determinations, or recommendations, in disputes. Such decisions are binding unless or until revised by the ultimate dispute resolution forum, namely, arbitration or litigation. The theory is that parties ‘comply now, argue later’, so allowing the contract to proceed without undue interruption while preserving parties’ right to seek an ultimate determination of the dispute through the usual channels of court or arbitration. As the aim of this process is to avoid, if possible, the time and expense of arbitration, most contracts with dispute board provisions require a board decision or recommendation as a necessary precondition to arbitration. Many of these boards also have a dispute avoidance role, as explained further below.

History of dispute boards Modern dispute boards were first developed in the United States in the 1970s as a replacement for engineer’s adjudication. An independent dispute board was seen by contractors as preferable to the engineer, who is invariably appointed and remunerated by the employer, being the penultimate arbiter of disputes prior to arbitration and litigation. The success of dispute boards on major infrastructure projects such as the Eisenhower Tunnel Contract in Colorado in the 1970s and on the World Bank-funded El Cajon Dam in Honduras in the 1980s encouraged both the World Bank and FIDIC to introduce them as the first stage of

1

Lindy Patterson QC and Nicholas Higgs are barristers at 39 Essex Chambers.

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dispute resolution in their contract documents in the 1990s.2 Notable early examples of their use included the Channel Tunnel project,3 Hong Kong International Airport and the Ertan Hydroelectric Power project in Sichuan, China. The 1999 editions of the FIDIC conditions of contract for Construction (the Red Book); Plant & Design and Build (the Yellow Book) and EPC /Turnkey (the Silver Book) all provide for dispute boards in one form or another.4 The 2017 editions of the FIDIC ‘rainbow suite’ maintain and expand the dispute board provisions, as explained further below.5 The New Engineering Contract Fourth Edition (NEC4) provides for dispute boards that issue recommendations.6

The dispute board within the contract The dispute board is a creature of contract. Accordingly, the dispute board only has those powers that are expressly given to it by agreement. There is no place for implied powers. The process is not underpinned by legislation or conventions, unlike arbitration or statutory adjudication.7 The contractual provisions will be contained within the dispute resolution section of the underlying contract. It will state how and when the dispute board is to be formed. It may also provide that the board’s powers are contained within either separate dispute board rules or the template agreement that each member must sign with the parties. This is the dispute board member’s agreement, which each dispute board member enters into with both parties to the contract. Certain institutions have templates or styles for each of these three contractual sources, namely, the dispute board contract clause; the dispute board rules and the dispute board member’s agreement.8

Different forms of dispute board The standing board Many contracts provide that the board is to be appointed at the beginning of the contract – for example, within a prescribed time from contract signature or contract commencement – and that it is to operate throughout the lifetime of the contract. Such boards are described

2 3

4 5 6 7

8

FIDIC Conditions of Contract for Design Build and Turnkey (Orange Book) 1995. The Channel Tunnel used a version of dispute board: a panel of five experts and one lawyer chair where each of the disputes was decided by selected number of the panel members according to discipline and nature of dispute. Described by the umbrella term of the ‘rainbow suite’. Some of the changes in the 2017 editions were presaged in the FIDIC ‘Gold Book’ for Design Build and Operate Projects 2008. See dispute resolution Option W3 in the NEC4 suite of contracts published by the Institution of Civil Engineers, London. Except for Honduras and Peru where there is some supporting legislation, see Dante Figueroa, ‘Dispute Boards for Infrastructure Projects in Latin America: A New Kid on the Block’, Dispute Resolution International Vol. 11, No 2, October 2017, p.151. Examples of institutional dispute board rules commonly incorporated by reference or used as a base are the ICC Dispute Board Rules 2015 (ICC Rules), which are not limited to construction projects; FIDIC dispute board rules, see below; the Chartered Institute of Arbitrators Dispute Board Rules 2014; and the American Arbitration Association Dispute Resolution Board Hearing Rules and Procedures 2000.

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as ‘standing’ boards. A standing board will receive regular progress updates and visit the site at intervals to be agreed with the parties. The powers of a standing board often include a dispute avoidance role, as well as adjudicating disputes.

The ad hoc board The ad hoc board is where the board is appointed upon a dispute arising. The sole role of such a board is to deal with that dispute or disputes referred to it. The appointment of the board will expire on the board giving its decision unless the parties agree otherwise.The ad hoc board is often perceived to be cheaper.9

The different types of dispute board There are several different types of dispute board and accompanying acronyms. If the board is to adjudicate disputes by issuing decisions,10 it is a dispute adjudication board (DAB). The DAB will issue a decision that will be binding unless or until it is overturned by the ultimate dispute resolution forum, usually arbitration. The FIDIC 1999 standard forms provide for a DAB.11 If the board is to issue recommendations, it is described as a dispute review board (DRB). The acronym DRB is also used as the umbrella term for dispute boards. There is also a hybrid known as the ‘combined dispute board’, which can issue both recommendations and decisions. The ICC Rules provide options for all three types.

Constituting the dispute board The dispute board clause will provide, if dispute board members are not already named in the contract, in the case of a three person board,12 that each contracting party nominates one individual, and when those two individuals are agreed they shall appoint a chairperson. The party nominees will often be engineers or other construction professionals experienced in construction projects. The chair will often be a lawyer. Parties require to agree one another’s nominees and the chair. In the case of a one-person board, both parties must agree the identity of that individual. The dispute board clause will usually name a default appointing body for either the chair or all three board members, where one party refuses to appoint or agree the board or the board appointment process has broken down.

9

However, the reported average cost of a standing board with the potential benefits that go with it is between 0.06 per cent and 0.5 per cent of the outturn price, and as such may be considered value for money if it avoids the costs of lengthy disputes – see Peter M. Wolrich, Nael G. Bunni and Pierre M. Genton, ‘Drafters’ Insights into the 2015 ICC Dispute Board Rules’, ICC Dispute Resolution Bulletin 2016 No. 1, p.48, available at http://library.iccwbo.org/ and Chris Wilford, ‘ADR and civil justice reform: Chartered Institute of Arbitrators White Paper’, Construction Law Journal 2017, 33(6), pp.379–388. 10 Under ICC Dispute Board Rules (2015) (the ICC Rules) this is described as a ‘Conclusion’. 11 The 2017 editions of FIDIC rename this the dispute avoidance and adjudication board (DAAB). 12 On some significant projects, boards are made up of a greater number of individuals with different skills from whom sub-boards are drawn to deal with particular disputes. Examples include CERN’s Hadron Collider; ITER/Fusion for Energy and the Channel Tunnel, which had five-member and upwards boards, and the Hong Kong International Airport board, which had seven members.

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The dispute board is constituted by each board member entering into a member’s agreement with the contracting parties.This will refer to the underlying contract provisions and identify by reference or set out the rules under which the board is to operate. The member’s agreement will also set out the member’s remuneration, usually a daily fee for time spent. With standing boards there may be provision for a monthly retainer to secure the board’s commitment and availability. Most contracts require an advance on payment of members’ fees and/or expenses before they embark on site visits or determine disputes.

Impartiality and independence of dispute board members and natural justice The concept of natural justice is important in the dispute board process, as a breach of natural justice may result in any decision being unenforceable. The dispute board clause or the member’s agreement or the rules will provide that a board member should be impartial and independent of the parties.13 It is advisable, even where the rules or member’s agreement do not expressly provide for this, that a member or prospective member apply the same rules of disclosure regarding any possible conflicts of interest as it would when acting as an arbitrator. As far as procedural fairness is concerned, for example, affording each party a reasonable opportunity to present its case, this must be looked at in the context of the procedure as a whole. Although not as fast-track as domestic adjudication, a board may be limited in the time that it has for its decision,14 and in the volume of evidence it can consider. Parties often agree to extended periods for the decision where the nature of the dispute or the location of the project require this. The decision of a board that has previously played a role in dispute avoidance could in certain jurisdictions be subject to challenge on natural justice grounds. As a result, boards are generally extremely careful as to how this dispute avoidance role is exercised.15,16 Since September 2018, a challenge made against a dispute board member for alleged lack of independence or impartiality ‘or otherwise’ under the FIDIC 2017 Contracts shall be determined by the ICC.17

13 ICC rules refer only to impartiality. 14 The timetable for a board decision or recommendation will vary from contract to contract but is typically round three months. FIDIC provides for 84 days. 15 This duel role is very topical given the spread of Med-Arb in several jurisdictions. See, for example, the HKIAC 2018 Administered Arbitration Rules and the SIAC-SIMC ARB-MED-ARB Protocol. 16 It is believed there has been no reported challenge to enforcement of a dispute board decision on these grounds. 17 See General Condition 11 of the Dispute Avoidance/Adjudication Agreement, Appendix to the FIDIC 2017 Editions and the appendices to ICC Dispute Board Rules.

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Who pays for the dispute board? The contract, the member’s agreement or the rules will determine parties’ liability for the dispute board members’ fees and expenses. The default is that each party is liable for one half. Many contracts provide that the contractor pay the fees in full and then include one half in its applications for payment.18 One of the complaints of employers regarding inclusion of dispute boards in their contracts on the insistence of external funders is that this funding often does not include its share of the cost of a board. However, one funder states in its standard bidding documents that the cost of a DAB is an eligible cost for inclusion in a loan application19 and it is understood that other multilateral development banks may well follow. In practice, where one party is reluctant to be involved in the dispute board process, the other may pay the board’s fees in their entirety so that the board can operate, and then that party recovers one half from the other.20

Practice and procedures of the dispute board Where it is a standing board, there will be provision for the board: • to identify what information it should or wishes to receive to keep it up to date with the operation of the contract; and • to establish the frequency of site visits. This will normally be agreed and minuted at the first meeting between the board and the parties. There may be a stipulated minimum frequency of site visits. This may be adjusted depending upon the stage the works have reached. Should disputes arise, hearings on these disputes will usually be dealt with as part of a site visit. Such visits, as well as viewing the works themselves, will involve an update on progress and any issues arising. Where such visits or meetings identify issues between the parties, the rules may provide that the board can give informal advice or assistance. The aim in those situations is for a matter to be resolved before it becomes a full-blown dispute. The contract or rules may provide that this can only be given if both parties agree.21 Sometimes the mere act of bringing together the parties for a regular visit of the dispute board can assist in avoiding disputes.

18 See General Condition 9 of FIDIC 2017 Editions. 19 Japanese International Co-operation Agency (JICA) Standard Bidding documents. See: https://www.jica. go.jp/english/our_work/types_of_assistance/oda_loans/oda_op_info/guide/tender/c8h0vm0000aoesst-att/ civil_01.pdf. 20 Although the arbitration clause in FIDIC 2017 provides that a tribunal may have regard to the extent to which a party failed to cooperate in establishing a board when dealing with arbitration costs, it is not known how this will work unless any costs of that non cooperation can be identified and quantified. 21 See below regarding FIDIC informal assistance that requires agreement of both parties.

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The rules contain details of the procedure, including how to refer a dispute, the time scale for the defence or response and the need for and nature of any hearing. A normal contractual timescale for determining a referred dispute is around three months.22 One or both parties may require a hearing. The dispute board will issue its decision or recommendation and will normally be required to provide reasons. The rules will provide for a majority decision.

Binding nature of a dispute board decision A typical dispute board clause will provide that parties shall comply with a dispute board decision. It will also normally provide a period within which a party that is dissatisfied with the decision issues a notice of dissatisfaction. In the event that such notice is not issued within the specified time, the clause will provide that the decision is final and binding. Where a notice of dissatisfaction is issued in accordance with the contract or rules, then the next stage is for the dispute to go to arbitration for final determination.

Where a dispute board decision is a condition precedent to arbitration Most contracts that incorporate dispute boards provide that a dispute requires first to be referred to a dispute board before it proceeds to arbitration.23 Issues can arise where one party obstructs or delays the process for obtaining such a decision or goes straight to arbitration. In such circumstances, an arbitration tribunal or court may be called upon to determine whether it can deal with the dispute without a dispute board decision. The question is whether this is an issue of jurisdiction or admissibility. This depends upon the approach taken by the arbitral tribunal. If treated as an issue of jurisdiction, the tribunal should dismiss the case. If treated as an issue of admissibility (i.e., procedural), the tribunal may suspend arbitration proceedings until the dispute board has been constituted if not in place and/or until it has issued a decision or recommendation on the dispute.24 When judicial support has been sought, the approach of the courts in some jurisdictions has been to prevent a party from benefiting from its own delay or failure to engage in the contractual dispute mechanisms. Thus, the English courts refused to allow a party to avoid following the dispute board provisions in the contract and proceed straight to litigation. The litigation was stayed pending a dispute board decision.25 By contrast, in a case where a party deliberately delayed the appointment of a board and then challenged the jurisdiction of an arbitral tribunal, the Swiss federal court upheld the arbitral tribunal’s jurisdiction.26

22 FIDIC has an 84-day period: see Sub-Clause 20.4 in the 1999 editions and Sub-Clause 21.4 in the 2017 editions. ICC determination is due within 90 days of statement of case being received by chairman of the DRB. 23 See FIDIC 2017 Sub-Clause 21.1: ‘Disputes shall be decided by a DAAB in accordance with …’ and Option Clause W3.2 of NEC4. 24 See Swiss Case No. 4A_124/2014 and Peterborough City Council v. Enterprise Managed Services Ltd [2014] EWHC 3193 (TCC) where the admissibility approach has been preferred, contrasted with ICC Cases 6535 (1992) and 16262 (2010). 25 Peterborough No. 24. 26 Swiss Case No. 24.

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Enforcement of a dispute board decision As a creature of contract, enforcing a dispute board decision without any underpinning of legislative support means that it cannot be enforced in the same way as, for example, an arbitration award. A party must go to the court or to arbitration. What is being enforced is, in effect, a contractual agreement. The ordinary recourse for failing to abide by the dispute board’s decision would be an action for breach of contract against the defaulting party. The failure of a party to comply with a dispute board decision is, therefore, a dispute under the underlying contract that requires to be referred to arbitration and an arbitral award sought. That assumes that the issue of non-compliance does not itself need to be referred first for another dispute board decision as a pre-requisite to arbitration.27 At enforcement stage, the question is whether an arbitral tribunal or court will review the merits of the dispute board decision or enforce it on its terms, either in a final award or as an interim measure. A number of courts and arbitral tribunals have dealt with these issues. Enforcement is made more difficult when the decision that it is sought to enforce is challenged and therefore is potentially only temporarily binding. This is especially the case in jurisdictions that are unused to processes that produce similar-type decisions that are only temporarily binding.28 Lack of specificity in the 1999 FIDIC editions as to a remedy for non-compliance with a temporarily binding decision contributed to the difficulties of enforcement. FIDIC initially issued a memorandum to clarify that the failure itself could be directly referred to arbitration,29 with revised drafting in the 2017 editions. The well-known example in Singapore is the Persero case,30which concerned a DAB decision for the payment of S$17 million arising out of a gas pipeline project in Indonesia. Initially, the Singapore Court of Appeal set aside an arbitral award that solely considered the failure to pay under the DAB decision and required payment of the amount determined by the DAB.This court decision was the subject of much criticism by commentators.31 The contractor launched a second arbitration, this time on the substantive merits of the dispute, and asked the tribunal to issue an interim award requiring payment of the S$17 million. The employer’s challenge to this award was unsuccessful, with the Court of Appeal stating that there was a ‘distinct contractual obligation on a paying party to comply promptly with a DAB decision.’32

27 This illustrates the difficulty with enforcing a dispute board decision where the underlying contract does not set out what is its contractual effect and parties’ obligations re compliance. 28 Those jurisdictions that now have adjudication incorporated within their domestic building contracts have adopted legislation to enable the decisions of adjudicators to be directly enforced by the courts, despite their temporarily binding nature. The Housing Grants, Construction and Regeneration Act 1996 in England and Wales is one such example. 29 FIDIC Guidance Memorandum to Users of the 1999 Conditions of Contract dated 1 April 2013. 30 The first instance decision: PT Perusahaan Gas Negara (Persero) TBK v. CRW Joint Operation [2010] SGHC 202, 137 Con L.R. 69; and the Court of Appeal judgment: CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33. 31 Chris Seppala, ‘Construction: ICC award should not have been set aside’, Global Arbitration Review 2011, 6(6), p.34. 32 In the final Court of Appeal judgment in the case: PT Perusahaan Gas Negara (Persero) TBK v. CRW Joint Operation [2015] SGCA 30 [88].

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The issue of enforceability continues to be a major issue in certain jurisdictions, in particular where contracts with government bodies are categorised as administrative or public procurement contracts.33

Referral to arbitration The dispute resolution clause will typically provide that the arbitral tribunal looks at the dispute anew, regardless of the existence of a dispute board decision. The clause will be silent as to the weight, if any, that should be given to a decision, although the dispute board decision will likely be produced.

Dispute boards under FIDIC contracts All FIDIC forms of contract contain provisions for dispute boards. As a result, much of the case law and guidance on dispute boards concerns the interpretation and application of the FIDIC dispute board provisions. The FIDIC 2017 ‘rainbow suite’ editions all provide for standing boards. Such boards can provide informal assistance, as they could under the First Edition Red Book, but only if both parties agree. To emphasise the avoidance element, the boards have been renamed ‘dispute avoidance and adjudication boards’ (DAABs). The dispute provisions are to be found in: (1) Clause 21 of the General Conditions; (2) the General Conditions of the DAAB Agreement incorporating the DAAB Procedural Rules; and (3) the DAA Agreement (the member’s agreement) – with (2) and (3) annexed to the General Conditions. Particular features of dispute boards under FIDIC Contracts include the following.

Constituting the DAAB A referral of a dispute to a DAAB is a prerequisite to arbitration or litigation.34 There is a stated exception to this where ‘there is no DAAB in place or no DAAB being constituted, whether by reason of the expiry of the DAAB’s appointment or otherwise.’35 Although not express, this has been interpreted in the English courts as only offering a direct route to arbitration where the mechanism has failed, not simply because one party chooses not to use the procedure.36 Parties have the option of a sole member or a three-person board, with the latter being the default position. The contract data allows parties to stipulate at tender stage the name of their proposed nominees to avoid the delay that often ensues when parties try to agree nominees later.

33 See ‘Applying Dispute Resolution Concepts and Dispute Boards in the CEE Region’ by Maciej Jamka, ICC Dispute Resolution Bulletin 2019 No. 1. 34 See Sub-Clause 21.6. 35 See Sub-Clause 21.8. 36 Peterborough City Council No. 22 above at paragraph 32 referring to the same provision in the First Edition Silver Book at Sub-Clause 20.8.

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Clause 21 provides for the named body within the contract to appoint where parties cannot agree the dispute board members or delay in doing so. In those circumstances, this clause states that parties acknowledge they are deemed to have signed and are bound by the member’s agreement.37 This provides a route for the constitution of the board when one party refuses to participate in, or delays, their appointment.

Issuing a DAAB decision The board has 84 days within which to issue a decision or recommendation on a dispute as so defined, or longer as agreed with the parties. A claim does not become a dispute, and therefore capable of referral to the board, until it has been made to the other party or the employer’s representative as appropriate and that party has rejected it or delayed in dealing with it.38 As most countries do not have legislation that recognises the dispute board process, one must assume referral of a dispute to a dispute board will not interrupt the limitation period of a claim. The FIDIC 2017 Edition seeks to deal with this in Sub-Clause 21.4.1, where it provides that the reference of a dispute to a DAAB shall ‘unless prohibited by law be deemed to interrupt the running of any applicable statute of limitation or prescription period’. Given the consequences if this is unenforceable under the governing law of the contract, it may be inadvisable to rely on such a provision. Parties can jointly request in writing that the board give assistance or informally discuss and attempt to resolve any issue or disagreement that may have arisen between them (informal assistance).39 Unless the parties agree otherwise, they must both be present at any discussions and are not bound by any advice that the DAAB may give. Similarly, the DAAB is not bound by any views expressed in this informal stage when making any future determination of a dispute. In order to be valid, a board decision must be given in writing to both parties, must be reasoned and must state it is given under the particular FIDIC Sub-Clause (Sub-Clause 21.4).

Enforcing a DAAB decision The decision is stated to be binding on both parties, and parties shall prompt comply with it whether or not the dissatisfied party has given a notice of dissatisfaction. Sub-Clause 21.4 provides that a notice of dissatisfaction must be given within the period stated in the contract or, if no period is given, within 28 days after receiving the decision. Otherwise the board’s decision becomes final and binding on both parties. Following issue of a notice of dissatisfaction there is a period of amicable settlement (the default is 21 days) before arbitration can be commenced. The Sub-Clause provides that a party may refer the non-compliance with a DAB decision directly to arbitration without following the dispute escalation provisions.This resolves the question as to whether a party must obtain a further DAB decision or undertake 37 This is to avoid an issue of the member not being in contract with the parties and unable to enforce payment of its fee. 38 See Sub-Clause 1.1.26 of Silver Book and 1.1.29 of Red Book. 39 See Sub-Clause 21.4.4 of Silver Book and 21.4 of Red Book.

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amicable settlement discussions before enforcing a decision. It gives the arbitral tribunal express power to order that the decision is enforced and provides that this can be done by interim or provisional measures or an award. Concerns about enforceability of a decision that is binding but not final are addressed by expressly providing that such an interim or provisional measure or award is subject to an express term that the rights of parties as to the merits of the award are reserved until finally resolved by an arbitral award.

The dispute board decision and arbitration When a dispute that has been the subject of a DAAB decision is referred to arbitration, the arbitrator has full power to ‘open up, review, revise any … decision of the DAAB (other than a final and binding decision)’. It is, however, the Dispute that is referred to arbitration, not the decision of the DAAB.40 Neither party is limited to the arguments it puts before the arbitrator, to those it advanced before the DAAB or to its grounds for dissatisfaction as contained in the notice of dissatisfaction.41

40 There is specific provision that the dispute board decision is admissible as evidence – see Sub-Clause 21.6. 41 See Sub-Clause 21.6.

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13 Alternative Dispute Resolution in Construction and Infrastructure Disputes Marion Smith QC, Hannah McCarthy and Joe-han Ho1

Introduction The term ‘alternative dispute resolution’ (ADR) refers to a range of techniques and processes used to resolve a dispute short of the normal trial process. They are not new – they can be traced back some 3,000 years. However, the past 50 years has seen the global adoption of ADR, in part as a reaction to the perceived delay in obtaining a decision through arbitration and litigation and the high costs of both. In this chapter we look at the use of ADR to resolve disputes in the global construction and infrastructure industry. We give an overview of the main options available and assess their strengths and weaknesses individually, and in comparison with arbitration and litigation. We start with the non-binding processes that assist the parties in reaching agreement: negotiation, mediation, early neutral evaluation and the mini-trial. We then consider the main temporary binding process: contractual and statutory adjudication. The use of dispute boards in their many guises are a form of contractual adjudication and are dealt with in Chapter 12. Finally, we consider one ADR process that produces a binding decision: expert determination.

Negotiation This is the simplest method of ADR. Parties to a dispute can try to negotiate a settlement at any time, whether or not it is provided for in any contract between them. Negotiation can be informal: by email, telephone or face-to-face. It can also be more formal, undertaken with the assistance of lawyers and other third parties such as experts. It can take place at any stage of the dispute, and be as quick as the parties want. Negotiation can be between two parties or many parties. Typically, negotiation is private and confidential. In situations

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Marion Smith QC, Hannah McCarthy and Joe-han Ho are barristers at 39 Essex Chambers.

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where English law applies, the negotiations are subject to the ‘without prejudice’ doctrine.2 The parties retain control of the outcome as they decide whether the proposed terms are acceptable, and give instructions and approve any agreement reached. Many standard-form construction contracts and other construction contracts for long-term or large-scale projects provide for negotiation to escalate through various levels of management. This is a useful way of raising awareness of the dispute at more senior management levels. It creates the opportunity for a more objective assessment of the position by senior decision makers, thereby increasing the opportunity of settlement. A successful negotiation increases the chances of maintaining the relationship between the parties. However, negotiation can be used as a stalling tactic. The absence of a neutral party to manage the process may reduce the chances of reaching agreement, particularly in complex disputes or those involving many parties. In a sophisticated industry sector such as construction and infrastructure where the participants are well placed to identify and manage risks, there is every reason to expect parties to be able to reach a settlement through simple negotiation.

Mediation Mediation is a process whereby the parties attempt to reach an amicable settlement with the assistance of an independent and impartial third party.3 The mediator has no authority to impose a solution on the parties.4 Mediation can be arranged at anytime, anywhere and at short notice. A mediator is appointed by the parties.There is no need for the mediator to be legally qualified. There are a number of initiatives attempting to develop global, professional standards for mediators and advocates in mediation.5 There is no set procedure for a mediation. It can take place online or by telephone, but in many cases takes place in a face-to-face meeting. The framework usually is established by the relevant provisions in the underlying contract, and in the mediator’s appointment. All mediation is broadly private and confidential, and in England subject to the ‘without prejudice’ doctrine.6 Mediation can be used in cases involving two parties and those involving multiple parties. There are two main types of mediation: facilitative and evaluative. In both, the parties are given the opportunity to voice their point of view. In a facilitative mediation, the mediator simply facilitates agreement between the parties. The mediator helps the parties to focus on the real issues in the dispute and find their own solution. She gives no view on the merits of each party’s position nor of the likely outcome if the matter is ultimately decided by a judge or other final determiner. In an evaluative mediation the mediator provides the parties with an assessment of the merits or the likely outcomes. These views

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3 4 5 6

This is a reference to the principle of English law that written or oral communications that are made for the purpose of a genuine attempt to compromise a dispute between the parties may generally not be admitted in evidence, Phipson on Evidence, 19th Edition, (Phipson), paragraph 24-13. The term ‘conciliation’ is frequently used interchangeably with mediation. United Nations Convention on International Settlement Agreements Resulting from Mediation. One such is the International Mediation Institute: https://www.imimediation.org/about/, last accessed 10 August 2019. The mediation community has sought to suggest that mediation is entitled to a self-standing privilege that is greater than that accorded to without prejudice discussions, Phipson, paragraphs 24–39.

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are not binding unless the parties agree that they will be. The parties agree which of these two types of mediation should apply.They can change that approach during the mediation. Facilitative mediations are far more common than evaluative. Mediation in many jurisdictions is not mandatory. Judges in England and Wales have no statutory or other power to order parties in a construction dispute to mediation.7 However, its use is strongly encouraged. An unreasonable refusal to mediate will be taken into account when determining costs, even in situations where a party is otherwise entitled to recover their own costs.8 Mediation is used to resolve domestic and international disputes, as demonstrated by the number of global providers of mediation services such as the International Chamber of Commerce (ICC), World Intellectual Property Organization and American Arbitration Association/International Centre for Dispute Resolution, together with more regionally based institutions such as the Hong Kong International Arbitration Centre, Singapore Mediation Centre and Centre for Effective Dispute Resolution. The European Union actively promotes mediation. The principal objective of the EU Mediation Directive is to encourage recourse to mediation in the Member States.9 It applies to cross-border disputes in civil and commercial matters. The main advantage of mediation is that it can produce a quick and cost-effective settlement. Insofar as there is data available, it seems to have a good success rate.10 Referring a matter to mediation reduces the instances where a dispute leads to the termination of a commercial relationship. Mediation allows the parties to find their own solution, and to accept a range of outcomes broader than any court or arbitrator has the power to grant. The main disadvantage of mediation is that the resulting settlement agreement is only binding contractually and is not directly enforceable in the courts. Its enforceability relies on the parties to honour the deal they have made. Where this does not happen, the parties remain in dispute and litigation may be necessary to enforce the settlement agreement or resolve the dispute entirely. This perceived weakness is now addressed by the United Nations Convention on International Settlement Agreements Resulting from Mediation, named the Singapore Mediation Convention. It was signed by 46 countries on 7 August 2019, including the world’s two largest economies, the United States and the People’s Republic of China, as well as several of the largest economies in Asia.11 The Convention (and the related Model Law) aim to provide an efficient and harmonised framework for cross-border enforcement of mediated commercial settlement agreements.12

7

This is not the universal position. See http://mediationblog.kluwerarbitration.com/2018/11/19/to-compe l-or-not-to-compel-is-mandatory-mediation-becoming-popular/, last accessed 10 August 2019. 8 See Halsey v. Milton Keynes General NHS Trust [2004] EWCA Civ 576. 9 Directive 2008/52/EC. 10 CEDR Eighth Mediation Audit of 10 July 2018 reports that: ‘The overall success rate of mediation remains very high, with an aggregate settlement rate of 89 per cent (2016: 86 per cent)’. This is a survey of commercial mediator attitudes and experience in the United Kingdom. 11 Report from the Singapore International Mediation Centre. This can be compared with the New York Convention, which had 10 signatories when it opened for signature in 1958. 12 The final text of both are available on UNCITRAL’s website.

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Other problems with mediation are that, although less expensive than litigation, it can be expensive, particularly for smaller parties or projects. Parties may take advantage of the mediation process to uncover the other side’s case with no real intention to settle.

Early neutral evaluation Early neutral evaluation (ENE) is a process whereby the parties instruct a neutral third party to provide a non-binding assessment of the merits of their claims.There is no set procedure for ENE, and the key elements of the process are likely to be set out in the underlying construction contract. ENE is usually conducted on a ‘without prejudice’ basis.13 It may relate to factual disputes, technical issues, legal merits or a combination of these.The evaluator may be a judge, lawyer or expert. Many professional bodies maintain lists of approved evaluators.14 The evaluation is privileged and non-binding, unless the parties agree otherwise. ENE may be used as a means to bring the parties directly to settlement, or may be followed by further forms of ADR. ENE can provide a quick, authoritative and objective assessment of the merits of a claim without incurring the costs of arbitration or litigation. It can be particularly useful where the parties have very differing views of the prospect of success and an inadequate understanding of the risks of litigation itself.15 It can focus the parties’ expectations of litigation, and offer a realistic indication of the likely outcomes. It narrows the issues to facilitate other forms of ADR. However, ENE may be less suited to disputes involving issues of fact where oral evidence needs to be heard. It is less likely to be useful in large complex disputes, where the necessary preparations may result in a process that is disproportionately expensive for a non-binding result. It may entrench the dispute and compromise further negotiation.

Mini-trial A mini-trial, sometimes known as an executive tribunal, is a non-binding, flexible form of ADR. Each party presents its case, usually by legal advisors, to a mini-trial panel. The panel normally consists of a company executive from each party, as well as a neutral third party who may act as a mediator or advisor. The executives who appear on behalf of the parties will not usually have been involved in the dispute, and should have sufficient authority to settle the dispute. The object of a mini-trial is to identify the strengths and weaknesses of each side’s case as quickly as possible. The parties, or their legal advisors, make short and often informal presentations to the panel, all of whom are free to ask questions. Documents, including witness statements and expert evidence, can be exchanged in advance. Following submissions from each party, the panel will negotiate. The role of the neutral on the panel is usually to provide advice on matters of law and evidence during the presentations, and to advise of the outcome in litigation if the parties fail to reach agreement in the course of the mini-trial. The neutral may also act as a mediator between the two senior executives. The mini-trial process gives senior executives an opportunity to consider the legal arguments of both sides and to then negotiate settlement from an informed position, without relying on 13 See footnote 2 above. 14 For example: Chartered Institute of Arbitrators, Royal Institute of Chartered Surveyors, or the Academy of Experts. 15 Seals v.Williams [2015] EWHC 1829 (Ch) per Norris J, at paragraph 3.

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further legal procedures or remedies. It remains an uncommon form of alternative dispute resolution, even in the United States, where it originated in the 1990s. It is seen as being more suitable than mediation in very large cases or where it is desirable to bring in senior executives who have not previously been involved with the case.

Adjudication Adjudication is particularly used in construction and infrastructure industry disputes. Parties have always been able to agree to use an adjudication process – statutory adjudication was introduced in England and Wales in 1996.16 The process has been adopted in other jurisdictions although not in identical form.17 In England and Wales, statutory adjudication gives the parties to a construction contract the right to adjudicate a dispute ‘at any time’ if a referral is made. It is a quick process. Unless the time limit is extended by the referring party or by agreement the adjudicator must provide a decision with 28 days. It is a confidential process unless enforcement action is taken.The process involves an adjudicator reaching a decision that is temporarily binding. The vast majority of adjudicators’ decisions in England and Wales are enforced by the court using a summary procedure. The underlying policy is ‘pay now argue later’.18 The parties, however, remain free to have their dispute finally determined in the courts or by arbitration. Anecdotal evidence suggests that in many cases the adjudicator’s decision is accepted or the parties negotiate a final settlement of the dispute. Its advantages are that it is quick, relatively cheap and provides an interim decision. Referring a dispute to adjudication gives the referring party a number of tactical advantages. The referring party has the time to prepare for the adjudication, and to choose the issue to be decided.The receiving party can be vulnerable to ambush. It may have no notice of any intention to adjudicate and is faced with the need to respond within a very short period of time. It is regarded as a rough and ready form of justice that can lead to decisions being made that are wrong. Given its temporary binding nature, in England the Technology and Construction Court will not refuse to enforce an adjudicator’s decision on the grounds that it is wrong in fact or law.

16 Housing Grants, Construction and Regeneration Act 1996 Part II. 17 New South Wales in 1999 by the Building and Construction Industry Security of Payment Act 1999. This was followed by most other Australian states and territories: Building and Construction Industry Security of Payment Act 2002 (Victoria, Australia); Building and Construction Industry Payments Act 2004 (Queensland, Australia); Building and Construction Industry Security of Payment Act 2009 (Tasmania, Australia); Building and Construction Industry Security of Payment Act 2009 South Australia. New Zealand introduced a statutory scheme in 2002 by the Construction Contracts Act 2002. Singapore followed suit in 2005 by the Building and Construction Industry Security of Payment Act (Cap. 30B) (Act). Malaysia introduced a statutory regime in 2012: CIPAA. The Republic of Ireland in 2013 by Construction Contracts Act 2013, although the adjudication provisions have yet to come into force. Most recently, Ontario has adopted statutory adjudication for all contracts entered into after 1 October 2019: Construction Act 2017. 18 Pegram Shopfitters Ltd v.Tally Weijl (UK) Ltd [2003] EWCA Civ 1750 May LJ at paragraph 12.

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Expert determination Expert determination is a process in which a dispute is submitted by the agreement of the parties to one (or more) independent experts who make a determination on the matter. Typically, the parties agree that the expert’s decision will be final and binding save for in a limited number of circumstances such as fraud, partiality or a material departure by the expert from her instructions. The expert is permitted and entitled to use her own expert knowledge. Unlike a judge or an arbitrator, the expert does not decide matters solely on the basis of submissions and evidence put before him or her. Unless required by the parties, the expert does not have to provide reasons for his or her decision. An expert determination is a confidential process. It is particularly suited to disputes involving matters of valuation or those that involve technical issues. Expert determinations are entirely dependent and controlled by the agreement between the parties. There is no statutory basis or control of the process. There are a range of institutions that provide their own rules that can be incorporated into the contract such as the ICC. The main advantages of the process are that it is usually a quicker and cheaper process than litigation or arbitration, and the parties can create their own procedure. It allows parties to go straight to the expert and cut out the involvement of a judge or arbitrator who would turn to the expert for assistance in reaching their decision. The main pitfalls are that if the expert gets it wrong the parties are usually stuck with the result. There is no appeal. It is not usually suitable for factual disputes, as so many construction disputes tend to be.

ADR compared with arbitration and litigation in construction disputes Irrespective of the industry sector, settlement requires communication and a willingness to compromise. ADR can assist with both. The processes set out above give the parties in any commercial dispute the opportunity to communicate their understanding of the dispute to each other, and to seek if they want an objective evaluation by an independent party of the strengths and weaknesses of their respective positions. Save for adjudication and expert determination, these consensual processes can produce creative commercial solutions that are not available through litigation and arbitration. ADR is private, confidential, quick and flexible, as well as generally inexpensive. Even if ADR does not generate a settlement, it can help the parties refine and define the dispute, making it ultimately less costly to resolve. ADR permits the parties to collaborate to find a solution and to thereby preserve the commercial relationship. One of the simplest ways to demonstrate an acknowledgment of the advantages of ADR is the fact that many courts around the world offer ADR as an adjunct to their own trial processes. Court annexed mediation is prevalent, and the courts in a number of countries offer judicial early neutral evaluation. However, ADR does not suit all disputes. Certain complex disputes will need a full trial process with disclosure, witness statements and expert reports. There are others in which an important point of legal principle needs to be resolved in order to address the underlying dispute. Construction and infrastructure disputes in particular can be factually and technically complex. They can generate difficult points of law involving specialised forms of contract. They also frequently involve multiple parties, making it more difficult to reach agreement to use ADR effectively. These disputes may still need to be finally decided by judges and arbitrators, and both litigation and arbitration respond to the challenge of resolving

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construction and infrastructure disputes. Both litigation and arbitration have introduced procedural innovations to provide shorter and earlier hearings at reasonable and proportionate cost. Recognising the need for judges and arbitrators with industry experience, specialist commercial courts are opening across the world such as in Singapore, Amsterdam, Paris, Frankfurt, Brussels, Dubai and throughout China. However, ADR should be more attractive to the construction and infrastructure industry as a means of risk management. Disputes in this sector can be particularly costly to litigate and arbitrate as they require many more documents to be examined and the use of expert evidence, in many cases across a number of disciplines. Typically, those involved with a construction project at the outset do consider the appropriate dispute avoidance and resolution mechanisms for the particular project. Once identified, these processes are incorporated within the contract between the parties. Many of the widely used standard forms used in this sector provide for ADR. The 2018 ICC Dispute Resolution statistics show that, in 2018, 35 per cent of the ICC total mediation caseload in 2018 was in the construction and engineering sector.19 With the exception of adjudication, however, ADR is less popular in the construction and infrastructure industry than would be expected.20 It is likely a question of education, bringing the undoubted benefits of ADR to the attention of the decision makers in the industry.

19 The value of disputes ranged from US$250,000 to US$860 million. 20 The QMUL/W&C 2018 International Arbitration Survey records most interviewees stating that in the context of using ADR in conjunction with international arbitration, ADR is generally resorted to only in cases where there is a contractual mandate to do so, i.e., through multi-tiered escalation clauses.

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14 Suitability of Arbitration Rules for Construction Disputes David Kiefer and Adrian Cole1

Introduction The construction industry is a frequent user of both domestic and international arbitration to finally resolve its construction disputes. With many large infrastructure projects being financed, developed, supplied and constructed by companies from countries other than the one where the project sits, international arbitration is the most attractive option for resolving disputes among the interested parties. The driving reason behind this preference is that international companies involved in construction and engineering would rather look to arbitration to resolve their disputes, as opposed to subjecting themselves to the idiosyncrasies of local court systems and their inherent risks. As a result, construction and engineering projects consistently generate the largest percentage of commercial disputes before international arbitral bodies. For example, in 2017, they made up 23 per cent of all cases before the International Chamber of Commerce, which was the largest percentage of any subject matter by a significant margin.2 With respect to construction disputes involving parties from the same country, domestic arbitration remains an attractive option. The use of arbitration, whether domestic or international, provides parties with a large degree of privacy, as most elements of the arbitration process are kept between the parties and are not subject to public scrutiny. It also allows the parties to select and present the merits of their dispute to seasoned arbitrators with significant experience of construction-related issues. With such a large number of construction disputes being arbitrated on regular basis, it seems appropriate to ask a threshold question: are arbitration rules well-suited for construction disputes? After all, construction disputes distinguish themselves from other commercial disputes in a number of ways. They can be exceptionally large in scope, involving multiple interested parties with independent contractual relationships and amounts in dispute

1 2

David Kiefer and Adrian Cole are partners at King & Spalding. 2017 ICC Dispute Resolution Statistics.

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reaching into the hundreds of millions of dollars, even eclipsing a billion dollars at times. The timelines of these projects – from initial development through engineering, construction and commissioning – span years, with key documentation created daily by dozens of witnesses. This often leads to an enormous amount of data to be reviewed and evaluated as evidence. Disputes concerning issues of time, cost and quality frequently give rise to the need to analyse and assess the cause of project delays through complex schedule analyses and expert testimony. Technical evaluation and testimony from experts is also often needed to address defects arising from the design and construction of complicated equipment. Complex issues of loss and of quantum of claim are common, requiring the input of expert quantity surveyors or quantum specialists. The arbitral institutions recognise the challenges that arbitrating construction disputes can pose with the ICC for example, issuing guidance notes on construction industry arbitrations. Overall, the rules and accepted practices in arbitration are well-suited for the nuances of construction disputes and allow the parties to prepare and present their cases effectively. That said, parties to construction arbitrations need to be aware of the applicable rules and norms, so they can strategically streamline and present their cases within the boundaries of these constraints.

Joinder of necessary parties Cost overruns on a construction project can arise from a number of causes, such as delays, inefficiencies and defects, which can be the responsibility of a number of participants in the process. These participants, which include owners, contractors, subcontractors and equipment suppliers, typically enter into a number of separate contractual agreements, each with their own dispute resolution provision. In order to achieve a universal resolution of the entire dispute, parties may want to join all the interested parties into a single proceeding, so an award can be apportioned appropriately and inconsistent decisions avoided. Arbitration rules generally allow claims arising out of more than one contract to be brought forth and decided in a single arbitration and for multiple arbitrations to be consolidated into one.3 Consolidation is only appropriate with the consent of the parties or when the disputes arise from the same legal relationship and the arbitration agreements are compatible. While consolidation of all issues arising from the same project presents considerable efficiencies, there are a number of caveats to keep in mind before embracing this approach. First, each of the separate agreements must provide for an arbitration before the same arbitral body. If not, the parties will have to negotiate and agree to a separate dispute resolution agreement that provides for arbitration before the same body or a common ad hoc arrangement if an arbitral institution is not adopted. Second, arbitrating all disputes among all of the parties should make sense strategically and not compromise a party’s ability to effectively present its case. For example, if an engineering, procurement and construction (EPC) contractor is in an arbitration with an owner over alleged defects in equipment supplied by the EPC contractor, the EPC contractor may not want to join the original equipment manufacturer (OEM) in the arbitration with the owner, but instead pursue a separate arbitration with the OEM under their equipment supply agreement.The

3

See ICC Arbitration Rules, Article 9 (allowing joinder of parties from multiple contracts); ICDR Rules, Article 7 (discussing joinder of parties to an arbitration); ICC Arbitration Rules, Article 10 (providing for the consolidation of arbitrations); and ICDR Rules, Article 8 (allowing consolidation of two or more arbitrations).

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reason for avoiding joinder in this case is that the EPC contractor might find itself in the unenviable position of defending the equipment in order to rebut the owner’s claim, while simultaneously pursuing a defect claim related to this same equipment against the OEM. This would allow the owner to ‘divide and conquer’ – a situation which could be avoided if the EPC contractor waited to bring an arbitration against OEM until after obtaining the results of the arbitration against the owner. This same dynamic could be at work where an EPC contractor is a consortium made up of two different companies (e.g., an engineering firm responsible for design in a consortium with a contractor responsible for construction). These consortium partners may want to air their grievances against one another in a forum to which the owner is not privy in order to avoid making allegations that could help the owner’s case against the consortium.

Discovery and document exchange Construction arbitrations are often won or lost based on the availability and significance of documents contemporaneously created at the time the issues in the case arose. Examples of such documents and data include cost accounting records, schedules, meeting minutes and site reports. The party requesting these documents will often need the production of all of these documents in order to recreate a timeline of events for a schedule analysis or to decipher how extra costs were tracked and categorised at the time they were incurred. Requesting all of a type of document can be seen as a ‘fishing expedition’ by some arbitrators, with the preferred method being requests for the production of specific documents. There is a basis for making broader requests, however, with the ICDR Rules allowing requests for ‘specific documents or classes of documents’ and the IBA Rules on the Taking of Evidence in International Arbitration (the IBA Rules), which are typically incorporated in the Terms of Reference in many arbitrations, allowing requests for a ‘narrow and specific requested category of Documents’.4 Therefore, practitioners can pursue these documents by requesting them by category, but will bolster their chances of successfully receiving the documents if they keep the categories specific tailored to issues in the dispute and satisfy the tests of relevance and materiality. For example, a request for all of a contractor’s accounting records may be rejected as too broad, while a request for the cost accounting records related to a differing site condition claim being advanced by the contractor is more likely to bear fruit. Of course, the most voluminous type of document sought in discovery are emails. With project management personnel from all of the parties sending and receiving dozens of emails daily, the pool of potentially relevant emails can easily number into the millions. Unlike the previous set of documents discussed, most parties do not want the production of all of the emails sent and received by the opposing parties. Instead, each party wants only those emails that are germane to the issues it sees as relevant. In order to get those relevant emails, each party must cast a net wide enough to allow for scenarios and circumstances it may only suspect existed, while being focused enough to prevent the reception of data that is wholly irrelevant to its case. It is here that the rules governing most arbitrations fall silent and fail to provide helpful guidance. Therefore, it is up to the parties to come to an

4

ICDR Rules, Article 21; IBA Rules, Article 3.

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agreement on a protocol for the production of electronically stored data, such as emails, and the arbitrators to oversee and insist on a process that is both fair and efficient. Such a protocol should recognise the need for metadata showing the provenance of the evidence to be preserved. Preferred methods of culling out irrelevant data include the use of search terms whereby the requesting party formulates its requests and then comes to an agreement with the producing party on a set of search terms to be run against the universe of data to find responsive ‘hits’. A newer method is the use of predictive coding, which uses an algorithm to cull out emails relevant to the issues most important to the parties. Because they are largely silent on the issue of electronic discovery, arbitration rules allow the parties and arbitrators to come to an agreement on methods such as these that will allow for the production of key evidence in way that is commensurate with the overarching goal of ‘maintaining efficiency and economy’.5

Experts It is difficult to overstate the importance of experts in the proper resolution of construction disputes. Thorough and convincing expert testimony can help a party prevail on any of the host of issues that typically arise in construction disputes. Experts in construction matters are often used to decipher engineering standards, analyse schedule delays, perform forensic accounting and find the root causes of defects. Expert opinions are not limited to these core issues, however, and can speak to everything from market conditions for loss of revenue claims to weather patterns for claims of force majeure. At bottom, a single arbitration can find itself dealing with the opinions of a number of experts, each of which will be expected to testify at the eventual hearing. Fortunately, arbitration rules have been developed to accommodate and fully utilise expert witnesses. The IBA Rules provide that the arbitrators may require experts opining on the same issue to meet and confer and report on the areas on which they agree and disagree.6 Indeed, it is becoming the accepted practice for experts of like discipline to receive common instructions so as to ensure that their evidence is relevant and comparable to that of the opposing expert. This is only one tool that arbitrators may employ to bring efficiency and clarity to what can be a morass of expert opinion. Others include requiring experts to meet on a ‘without prejudice’ basis to discuss their respective positions and to prepare a statement of what its agreed and disagreed allowing for an earlier crystallisation of contested evidence. It is also not uncommon for arbitrators to ask parties to have the experts on the same issues testify together in a panel in front of the arbitrators at the hearing. This practice, which is sometimes referred to as witness conferencing or ‘hot tubbing’, can also help the arbitrators to make efficient use of the experts in a matter by cutting through posturing and building a degree of consensus. Finally, arbitration rules also allow for the tribunal itself to appoint an independent expert to advise it on issues in the case.7 This option, perhaps more common in civil law jurisdictions, allows an arbitral tribunal

5

6 7

ICDR Rules, Article 21; see also ICC Rules, Article 22(1) (‘The arbitral tribunal and the parties shall make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity an value of the dispute.’). IBA Rules, Article 5(4). IBA Rules, Article 6; ICDR Rules, Article 25.

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to be independently educated on issues and form the basis for its decision on a source of information untainted by party bias. A common occurrence with this approach, however, is that parties will still seek to engage their own expert advisors to assist them in making their submissions to the tribunal, which can lead to a proliferation of experts and additional cost. One criticism of expert testimony in arbitrations is that the applicable rules do not provide tribunals with an adequate ‘gatekeeping’ function to prevent experts from testifying as to issues beyond their expertise and qualifications. Arbitrators typically do not perform the sort of robust, pre-hearing screening process judges do to ensure that an expert’s testimony is not only relevant, but based on a reliable foundation. As a result, experts in construction arbitrations have been known to drift into the realm of contract interpretation and provide their ‘expert opinion’ on how to interpret the commercial terms agreed to by the parties. Discerning tribunals will limit such testimony by instructing counsel to focus his or her questioning on more useful topics or by simply ignoring the testimony when it comes time to write the award. Even in such cases, however, the gatekeeping does not occur until the hearing at the earliest. This inefficient approach can create an incentive for experts and counsel to push the boundaries of expert opinion in ways that they would not if their case were in a court before a judge.

Witness statements A defining feature of international arbitration is the use of prepared witness statements in lieu of live direct testimony. The witness statements provide a written recitation of the witnesses’ account of their testimony and are provided to the tribunal and the opposing party well in advance of the hearing. Attached to the statements are the exhibits to which the witness is referring and will, presumably, support the points he or she is making. In construction cases, these exhibits can include voluminous and technical project documents, such as monthly reports and root cause analyses.This method of providing direct testimony presents real benefits to the parties and the tribunal. To the extent permitted by applicable laws, the presenting party can prepare and perfect the statement of the witness as it relates to the exhibits without having to worry about rehearsing a flawless live performance at the hearing, which can be difficult and awkward when a witness is speaking to large and confusing documents.The opposing party will have ample time to review the witness statements and prepare an efficient cross-examination that does not need to be crafted in the brief moments between direct and cross-examination in a courtroom. Finally, the tribunal will have the benefit of an organised presentation of the evidence provided by the witness and can come into the hearing with its own thoughts and questions it wants answered by the witness. Overall, the use of witness statements makes for an efficient, comprehensive and orderly process that it is tailored to accommodate the type of evidence introduced in construction disputes.

Interim measures Recognising that parties cannot always wait the years it will take for an eventual final award to have an exigent issue addressed, arbitration rules allow for interim or conservatory measures. The International Chamber of Commerce and International Centre for Dispute Resolution Rules both provide for such relief and both allow for parties to also seek

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interim relief from a judicial authority as well.8 These rules also provide that the requesting party can be made to furnish the appropriate security, as would be typically required by a court of law in the event an injunction was issued. There are times when parties to construction cases will have the need for such interim measures to maintain the status quo until the tribunal provides the award based on the full hearing on the merits. This need can arise when a contractor seeks to block a draw on a performance bond or letter of credit by an owner. A draw on a letter of credit can harm a contractor’s credit rating and put it in the position of having to wait until the final award to attempt to recoup the amount from what may or may not be an insolvent owner. Therefore, a contractor will often want a determination that the owner should be prevented from making the draw before it happens. A contractor may also want to block an owner from terminating its contract. In either scenario, the parties can get an interim ruling that addresses the exigent issue while the remainder of the case moves towards the full hearing. Where interim measures are required at the outset of a case before a tribunal has been appointed, emergency arbitrator procedures promoted by the leading arbitration centres may be of assistance. It should be pointed out, however, that while these rules can assist the arbitration, there can be many times when they are not as effective as a party may wish. Parties are often unable to enforce the interim or conservatory measures obtained and national courts in some jurisdictions will not enforce partial awards.

Case presentation Most arbitration rules afford tribunals and the parties considerable flexibility in how they present their cases. This flexibility can facilitate efficient case management and avoid unnecessary delay or expense. This is especially so if notice is taken of available guidance on techniques for controlling time and cost in arbitration. For example, the use of Scott Schedules for tabularising the positions of parties or experts on multiple headed claims (such as defects, variations or quantum issues) can provide a structured framework for readily assimilating the case as presented and for recording the tribunal’s decisions upon it. This sort of flexibility would most likely not be found in the courts of most judicial systems. Practitioners before arbitral tribunals should also expect arbitrators to ask witnesses questions directly.9 This practice also helps to focus the presentation on the issues the tribunal believes are important to its eventual decision and award. Although tribunals will allow for flexibility, practitioners will also be held to commonly accepted standards of fairness in presenting evidence. Privileged communication between clients and attorneys will be maintained, although the degree of recognition of this privilege will vary depending on the law governing the dispute.10 Tribunals are also expected to

8 ICC Rules, Article 28; ICDR Rules, Article 24. 9 See, e.g., IBA Rules, Article 8(3)(g) (‘the Arbitral Tribunal may ask questions to a witness at any time.’). 10 See ICDR Rules, Article 22 (‘The arbitral tribunal shall take into account applicable principles of privilege, such as those involving the confidentiality of communications between a lawyer and client.’); IBA Rules, Article 9(2)(b) (providing that the Tribunal shall exclude evidence based on ‘legal impediment or privilege under the legal or ethical rules determined by the Arbitral Tribunal to be applicable.’).

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consider concepts of relevancy,11 burden,12 general admissibility,13 weight of the evidence14 and fairness15 in determining what evidence to allow into the hearing. These rules give tribunals considerable leeway as gatekeepers to determine exactly what evidence they will consider. For example, there are no provisions expressly calling for the exclusion of hearsay, however, a tribunal could rightfully exclude such evidence on the grounds of admissibility and fairness. Furthermore, while practitioners should demonstrate the behaviour expected of professionals, new rules and guidance are emerging to sanction those that engage in guerrilla tactics and other unacceptable conduct.

National law Notwithstanding the considerable freedom that national laws grant to parties to resolve their disputes in arbitration rather than in state litigation, care must be taken to ensure that applicable arbitration rules are not inconsistent with or contravene provisions of applicable national law. In the Middle East, for example, there are a number of national law requirements, some unstated, with which compliance is mandatory if an award is to be enforceable. Some of these requirements are not addressed or are inconsistent with the rules of some of the international arbitration institutions. These requirements impact, among others, the giving of evidence of witnesses, the taking of oaths and the timing and signing of arbitration awards. Fortunately, over time, esoteric local requirements are being superseded by new arbitration laws, often based on the UNCITRAL model law as states recognise the commercial benefits that a modern arbitration law can bring.

Conclusion In conclusion, arbitration has become the preferred method of resolving construction disputes for good reason. Arbitral institutions and their rules generally allow parties and tribunals the flexibility needed to accommodate the unique nature of these disputes, within the overarching goal of achieving economy and efficiency. Furthermore, such rules may be amended or supplemented by agreement to reflect the needs of a particular dispute or the jurisdiction in which it is seated. In short, the construction industry is well served by arbitration and it follows that construction disputes will remain a significant portion of the caseloads of all major arbitral institutions in the years to come.

11 See ICDR Rules, Article 20(6); IBA Rules, Article 9(2)(a). 12 IBA Rules, Article 9(2)(c). 13 ICDR Rules, Article 20(6). 14 id. 15 IBA Rules, Article 9(2)(g).

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15 Agreements to Arbitrate Disputes in Construction Contracts Paul Darling QC and Samar Abbas1

Introduction Regardless of their field of specialisation, most lawyers have some familiarity with the refrain that ‘before you can have an arbitration you must have an agreement to arbitrate’, together with the notion that ‘party autonomy’ and ‘party consent’ are central to the idea of arbitration. However, the contours of an arbitration agreement and the boundaries of a party’s consent to arbitration are not always clear-cut. This is frequently the case in large-scale construction or infrastructure contracts (particularly, but not exclusively, of the bespoke variety) where the dispute resolution clauses, if not borrowed wholesale from a boilerplate used in the past by transactional lawyers, are often among the last clauses to be considered by the commercial and technical teams leading the negotiations. Such clauses also happen to be among the first stopping points for any lawyer tasked with resolving a subsequent dispute. The resulting mismatch between the importance given to these ‘midnight clauses’ by transactional lawyers on the one hand and disputes lawyers on the other provides fertile ground for satellite litigation and ancillary disputes on the meaning and effect of the underlying dispute resolution clause. The risk of such difficulties arising is particularly acute in instances where: • the dispute resolution clause provides (not always clearly) that, instead of taking their disputes to the national courts of country X, the parties agree to a series of steps culminating in arbitration; or, conversely, • the parties disagree as to whether such an agreement exists and, if so, on what terms.

1

Paul Darling QC and Samar Abbas are barristers at 39 Essex Chambers. The authors would like to expressly acknowledge with gratitude the research support provided by Sacchit Joshi.

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This chapter looks at some of the issues that arise in relation to agreements to arbitrate and considers the position adopted by various jurisdictions.

The nature of an arbitration agreement In an essay written in 1974, Frédéric Eisemann, a leading light of international arbitration not least because of his role as Secretary General of the ICC International Court of Arbitration, articulated four minimum requirements that an arbitration agreement must meet: (1) The first, which is common to all agreements, is to produce mandatory consequences for the parties; (2) The second, is to exclude the intervention of state courts in the settlement of the disputes, at least before the issuance of the award; (3) The third, is to give powers to the arbitrators to resolve the disputes likely to arise between the parties; (4) The fourth, is to permit the putting in place of a procedure leading under the best conditions of efficiency and rapidity to the rendering of an award that is susceptible of judicial enforcement.2

While these requirements are not, strictly speaking, mandatory legal or statutory requirements, they provide a useful shorthand for the core parameters of an arbitration agreement. An arbitration agreement, quite frequently a midnight clause in a large and complex contract, which fails to achieve any or all of these requirements is considered defective or, in arbitration parlance, ‘pathological’. In modern practice, almost all arbitration agreements are set out in writing, either by way of an express dispute resolution clause in a contract or by way of some other mechanism that provides a written basis for the agreement. Modern legislation in most arbitration-friendly jurisdictions adopts an expansive approach of what constitutes an agreement in writing. For instance, Sections 5(2)–(6) of the English Arbitration Act 1996, read together, provide that an arbitration agreement is made in writing if any of the following conditions apply: • it is made in writing (whether or not it is signed by the parties); • it is made by an exchange of communications in writing; • it is evidenced in writing (including circumstances where an agreement made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties); • it is not made in writing but is made by reference to terms that are in writing; or • the parties exchange written submissions in arbitration or legal proceedings and an arbitration agreement is alleged by one party and not denied by the other party.3

2

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Benjamin G. Davis, ‘Pathological Clauses: Frédéric Eisemann’s Still Vital Criteria’, Arbitration International, Volume 7, Issue 4, 1 December 1991, pp.365–388, citing Frédéric Eisemann, ‘La clause d’arbitrage pathologique’, Commercial Arbitration Essays in Memoriam Eugenio Minoli (Torino: Unione Tipografico-editrice Torinese, 1974). Such an agreement need not even specify on its face that it is an arbitration agreement; it will be treated as such if it bears the hallmarks of an arbitration agreement: England & Wales Cricket Board v. Danish Kaneria [2013] EWHC 1074 (Comm).

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Therefore, if a contractor and an employer agree by an exchange of email correspondence (or even orally) to be bound by a standard form of contract that contains an arbitration agreement then they will have made an agreement in writing for the purposes of the Arbitration Act 1996. One of the unique features of an arbitration agreement is that it is treated as distinct and separable from the substantive agreement of the parties (even when it is nothing more than a clause in a long and complex contract): unless otherwise agreed by the parties, it is not regarded as invalid, non-existent or ineffective simply because the substantive agreement has been so rendered; the arbitration agreement itself would have to be directly impeached for it to be invalid.4 In the words of the English High Court in Westacre Investments Inc v. Jugoimport-SDPR Holdings Co: These characteristics of an arbitration agreement…are in one sense independent of the underlying or substantive contract [and] have often led to the characterization of an arbitration agreement as a ‘separate contract.’… [An arbitration agreement] is ancillary to the underlying contract for its only function is to provide machinery to resolve disputes as to the primary and secondary obligations arising under that contract.5

Consequently, when considering international contracts, particular care needs to be given to the question of the governing law of the arbitration agreement: the law governing the substantive agreement is not necessarily the law governing the arbitration agreement. For instance, in Reliance Industries v. Union of India,6 the Supreme Court of India recognised that three sets of laws may apply to any given arbitration: • the proper law of the contract; • the proper law of the arbitration agreement; and • the proper law of the conduct of the arbitration. As discussed further below, in most jurisdictions, the question of the scope of the jurisdiction of an arbitral tribunal is left to the tribunal to determine, and courts tend not to intervene in the process. Further, if court proceedings are issued or threatened in breach of an arbitration agreement, courts are often happy to stay such proceedings or grant anti-suit restraining such proceedings – particularly in jurisdictions like England and Wales, where the court may not refuse such an application unless it is satisfied that the arbitration agreement is void, inoperative or incapable of being performed.7

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English Arbitration Act 1996, Section 7. See, also, Jivraj v. Hashwani [2011] UKSC 40 at paragraphs 76–77 and Fiona Trust & Holdings Corporation and Ors v. Privalov and Ors [2007] UKHL 40 in relation to the unique nature of an arbitration agreement. [1998] 3 W.L.R. 770 at p.775. This approach is adopted in many jurisdiction, either by way of case law or by way of being reflected in the relevant national legislation. For instance, all jurisdictions that have adopted the UNCITRAL Model Law have given it statutory footing. (2014) 7 SCC 603. English Arbitration Act 1996, Section 9(4). The burden of establishing the existence of a valid relevant arbitration agreement falls on the party seeking the stay. The burden shifts once that party has done so and the party resisting the stay must then satisfy the court that the apparently existing arbitration agreement is null

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Seat versus venue versus governing law An issue that often arises in construction and infrastructure arbitration involving parties from different jurisdictions is a dispute over the meaning and effect of terms like ‘seat’, ‘venue’ and ‘governing law’. These disputes can have important practical consequences for the scope, conduct and the ultimate enforcement of the award rendered by a tribunal. In terms of scope, these questions can have a considerable impact on what issues are considered arbitrable and proper before the tribunal. Some jurisdictions might restrict arbitrability of certain kinds of disputes. In India, for instance, only disputes that can be characterised as disputes over ‘rights in personam’ and not ‘rights in rem’ are generally considered arbitrable;8 Pakistan, like many other jurisdictions, restricts questions of public policy from being decided by arbitration but adopts a relatively wide definition of what is considered public policy.9 In terms of conduct, an arbitration seated in an arbitration-friendly jurisdiction will benefit from procedural rules designed to support the process; an arbitration seated in jurisdictions that adopt an interventionist approach may struggle to get off the ground. Coming to enforcement, an award sought to be enforced in a jurisdiction that is also the seat of the arbitration would be considered a domestic award by the enforcing court and will often be subject to a set of rules different from those applicable to a foreign-seated award being enforced under the New York Convention (provided that both seat of the arbitration and the place of enforcement are signatories to the New York Convention). Different approaches adopted by different jurisdictions can lead to drastically different outcomes at the all-important stage of enforcement. The distinction between seat and venue is conceptually relatively easy to tackle. Simply put, the ‘venue’ is the geographically convenient place in which the parties have elected to hold their arbitration; on the other hand, the ‘seat’ of the arbitration is the juridical place of the arbitration and determines which courts supervise the arbitration, the scope of such supervision and the manner of enforcement of an arbitration award. Issues can arise where the parties do not use clear language to denote whether a place named in the arbitration agreement is intended as a venue or as a seat. For instance, in Shashoua v. Sharma,10 the agreement simply provided that the ‘venue of the arbitration shall be London, United Kingdom’ without saying anything explicitly about the intended seat of the arbitration. While recognising that venue is not in itself synonymous with seat, the English High Court held that: ‘London arbitration’ is a well-known phenomenon which is often chosen by foreign nationals with a different law, such as the law of New York, governing the substantive rights of the parties. This is because of the legislative framework and supervisory powers of the courts here which many parties are keen to adopt. When therefore there is an express designation of the

and void: Aeroflot Russian Airlines v. Berezovsky [2013] EWCA Civ 784, per Aiken LJ at paragraphs 73–78; Nori Holding Ltd v. Public Joint-Stock Co Bank Otkritie Financial Corp [2018] EWHC 1343 (Comm) at paragraph 66. 8 Booz Allen Hamilton Inc v. SBI Home Finance Ltd & Ors (2011) 5 SCC 532. 9 Ali Muhammad et al. v. Basheer Ahmad 1991 SCMR 1928. 10 [2009] EWHC 957 (Comm).

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arbitration venue as London and no designation of any alternative place as the seat, combined with a supranational body of rules governing the arbitration and no other significant contrary indicia, the inexorable conclusion is, to my mind, that London is the judicial seat and English law is the curial law.

More complex issues arise when considering governing law, especially as to whether the governing law of the substantive agreement is the same as the law governing the arbitration agreement.The English Court of Appeal addressed this issue in C v. D,11 where the substantive agreement was to be ‘governed by and construed in accordance with the internal laws of the State of New York’ but where any dispute arising under the agreement was to be ‘finally and fully determined in London’. It held, unanimously, that: the inquiry must always be to discover the law with which the [agreement to arbitrate] has the closest and most real connection ...[A]n agreement to arbitrate will normally have a closer and more real connection with the place where the parties have chosen to arbitrate than with the place of the law of the underlying contract in cases where the parties have deliberately chosen to arbitrate in one place disputes which have arisen under a contract governed by the law of another place.12

As observed earlier, in most arbitration-friendly jurisdictions, courts do not intervene in a determination of the question of a tribunal’s jurisdiction. The underlying doctrine of kompetenz-kompetenz holds, in simple terms, that every arbitral tribunal has the power to determine its own jurisdiction.13 Once it does so, even if it declares the substantive contract as null or void or void ab initio, the finding will not defeat the validity of the arbitration clause itself.

Multi-tier dispute resolution clauses Dispute resolution clauses often stipulate that in the event a dispute arises, parties have to undertake certain steps such as negotiation and mediation to resolve the dispute amicably before commencing arbitration. Before discussing how domestic courts approach these multi-tiered clauses, it is useful to consider the advantages and the disadvantages of such clauses. Some advantages of a multi-tiered approach: • it saves the parties the expense of an arbitration if the dispute is settled with high-level talks or negotiations; • it acts as a ‘second opportunity’ for both the parties and their advisers to re-evaluate the expense of an arbitration with regard to outcome and the net profit or goodwill of the business;

11 [2007] EWCA Civ 1282. 12 ibid at [23]–[26]. See, also, Sulamérica Cia Nacional de Seguros SA v. Enesa Engelharia SA [2013] 1 WLR 102. 13 See, for instance, Hong Kong: Chee Cheung Hing & Company Limited v. Zhong Rong International (Group) Limited [2016] HKEC 656; Singapore: AQZ v. ARA [2015] SGHC 49; England and Wales: Dallah Estate and Tourism Holding Company v.The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46.

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• it helps to preserve long-term relationships between employers, contractors, engineers and other professionals, and does not jeopardise future business opportunities; and • it reduces the aggregate number of issues to be resolved in an actual arbitration.Through negotiation or early meditation, frivolous or trivial claims can be settled or written off at the outset. Some disadvantages of a multi-tiered approach: • where the dispute has reached a deadlock, or where only a third-party verdict on the merits of the issues will suffice, the exercise of going through the motions of a negotiation or mediation may constitute a wastage of resources; • in time-sensitive and urgent matters, the opportunity of obtaining interim measures may be lost, resulting in an asset being be disposed of or funds being siphoned; • it increases the risk of the arbitration clause being rendered a pathological clause. In particular, where there are no well-defined stages of negotiation, mediation or high-level talks a multi-tiered clause can lead to ambiguity in determining the beginning and termination of each of these stages; and • its interplay with the domestic limitation act can lead to a bar in commencing arbitration owing to the time taken in negotiation, mediation and high-level talks. In instances where different preliminary steps in a multi-tier clause are considered conditions precedent to the commencement of arbitration, difficult issues can arise that are often treated differently by domestic courts in different jurisdictions. As a result, there is no single internationally recognised ‘best practice’ position in this regard. Some examples are considered below.

England and Wales Courts generally adopt a liberal stance on the basis that a bare agreement to negotiate is unenforceable as it is a mere agreement to agree.14 However, there is authority to the effect that negotiation was a condition precedent to the right to refer to arbitration.15

United States In the context of an investment treaty arbitration,16 the US Supreme Court first considered the nature of multi-tier clauses, drawing a distinction between ‘procedural’ and ‘substantive’ conditions precedent to arbitration. It took the view that if a clause was procedural in nature then it would be the discretion of the arbitral tribunal to determine the consequences. On the other hand, if it was substantive then a failure to comply would imply a bar on commencing arbitration.17

14 15 16 17

Walford v. Miles [1992] 2 AC 128. Emirates Trading Agency LLC v. Prime Mineral Export Private Limited [2014] EWHC 2104 (Comm). BG Group Plc v. Republic of Argentina 572 2014. However, there may be instances where there has been a waiver of a condition precedent or where insistence upon it would be practically pointless. See, e.g., Fuller Co. v. Albin Gustafson Co. 390 N.Y.S. 2d 416 (1977).

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Switzerland The Swiss Supreme Court has struck a balance between, on the one hand, holding the parties to their agreement of following through with various steps and, on the other, ensuring that non-compliance with such steps cannot be or abused to derail an arbitration that has already been commenced.18

Singapore The Singapore Court of Appeal gives that strict compliance with multi-tier clauses is mandatory, holding that ‘substantial’ compliance with them is not enough.19

Incorporation by reference While an express arbitration agreement would be considered ideal, there are often instances in the construction industry where an arbitration clause is incorporated by reference. There are a number of degrees of complexity of incorporation. On the simpler end of the spectrum are instances where two parties have contracted on the basis of general standard terms, including an arbitration clause. On the more complex end of the spectrum, one finds instances where two parties deal on a basis of terms agreed by them previously, by two other parties in the same group of companies, or by entities up and down the chain. Conventionally, incorporation by express or implied reference to arbitration was characterised into relatio perfecta and relatio imperfecta. The former is an express reference that the main contract makes to a separate contract containing an arbitration clause. In the latter, the main contract makes a general reference to a separate document with no specific mention of an arbitration clause therein. A number of jurisdictions have held that general words of incorporation are capable of incorporating an arbitration agreement even where no specific reference to it has been made. For instance, the English High Court in Habas sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL held that general wording would be sufficient in a context where some of the previous 14 contracts between the parties had contained a clear arbitration agreement whereas the others had just used wording to the effect that ‘all the rest will be same as our previous contracts’.20 On the whole, however, incorporation remains a tricky issue – especially in multi-party or non-signatory instances – and difficulties can arise in jurisdictions that are less familiar with, or permissive of, international arbitration. Given the preponderance of construction projects in such jurisdictions, care needs to be taken to ensure that a valid arbitration clause is expressly included in the parties’ agreement as reliance on incorporation might lead to protracted satellite litigation.

18 X Ltd v.Y SpA 4A_628/2015. Instead of rendering extant arbitral proceedings invalid, the Court ordered a stay on them pending completion of mandatory pre-arbitration steps, taking into account (among other things) the expenses incurred in re-constituting the arbitration tribunal. The modalities of the stay were left to be determined by the already-constituted tribunal. 19 International Research Corporation Plc v. Lufthansa Systems Asia Pacific Pte Ltd & Anr. [2013] SGCA 55. 20 [2010] EWHC 29 (Comm). For other examples, see French Cour de Cassation in Societe Bomar Oil N.V. v. Enterprise tunisienne d’activites petrolieres; and the Italian Corte di Cassazione in Del Medico v. Iberprotein.

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Common mistakes The discussion above has highlighted some of the general themes to bear in mind when drafting arbitration agreements. Some of the common specific mistake include: • inchoate agreement to arbitrate indicating the mere intention of the parties to have a binding arbitration: an agreement simply to have the option of referring a dispute to arbitration can lead to uncertainty as to whether the parties intended for arbitration to be mandatory – for example, ‘any dispute of whatever nature …may be referred to arbitration’; • unclear multi-tier clauses: failure to use precise words to define the scope of each tier can lead to disputes as to whether a mandatory milestone has been crossed or what kind of steps are envisaged within that milestone – for example, ‘the parties should mediate/negotiate as long as they believe settlement is possible’ or ‘disputes which may be resolved by conciliation shall be first submitted to conciliation’; • non-existent institution: reference to the rules of an arbitral institution that does not exist runs the risk of protracted satellite proceedings – for example, ‘the tribunal must be appointed in accordance with the rules of arbitration of the Singapore Chamber of Commerce’; and • failure to specify the governing rules: reference to a set of institutional rules without specifying which version or edition of them is applicable can lead to disputes over whether the intention was to adopt the rules in force at the time of the contract or at the time of the dispute – for example, simply saying ‘under the rules of Institution X’. This can be significant where the rules have undergone significant change.

The FIDIC arbitration agreement The FIDIC Suite of Contracts is extensively discussed in other chapters of this work. A few observations on its arbitration element follow. As readers will be aware, one of the key elements of the FIDIC Suite of Contracts is the Dispute Adjudication Board (DAB) provided for within Clause 20 and the ‘pay now, argue later’ approach underpinning it. However, jurisdiction-specific complexities can arise after the decision of the DAB: for instance, in jurisdiction X, how is a DAB decision to be enforced; in jurisdiction Y, what weight, if any, can an arbitral tribunal give to the decision of the DAB in making its award, etc.? Many jurisdictions have limited to no jurisprudence in relation to such questions; in instances where there has been some judicial treatment of the issues, the answers can vary considerably and can have a real impact on the extent to which the underlying ‘pay now, argue later’ principle is respected in principle. The Singapore case of PT Perusahaan Gas Negara (Persero) v. CRW Joint Operation (Indonesia) serves as a useful example.21 Between 2009 and 2015, no fewer than two arbitration proceedings and four court judgments were needed to resolve the question of the interplay between the findings of the DAB and subsequent arbitration proceedings.

21 [2015] SGCA 30.

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Ultimately, the Court of Appeal upheld the (second) arbitral tribunal’s interim award, which permitted the enforcement of the DAB’s decision. A different jurisdiction may well have reached a different (and less helpful) decision. Even though the FIDIC Clause 20 is a cogently-drafted, clear and perfectly sensible provision aimed at speedy and cost-effective resolution, the example illustrates the importance of electing the appropriate applicable law and seat – preferably one which, like Singapore, has already clarified its approach on the matter. As such, even when using a well-known and respected standard form of contract, the precise relationship between the arbitration agreement contained within that contract and the law applicable to the arbitration is a crucial consideration. Therefore, it would be prudent to be not too ‘spoilt for choice’ and opt for jurisdictions with a proven track record of upholding adjudication decisions and supporting arbitration.

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16 Subcontracts and Multiparty Arbitration in Construction Disputes Stavros Brekoulakis and Ahmed El Far1

Given the large number of parties and interrelated agreements, including subcontracts, involved in construction projects, any dispute that arises in a main contract may have repercussions in the subcontract and can give rise to parallel arbitration proceedings. In this chapter we discuss the use and importance of subcontracts in construction law, as well as their relationship to the main contracts. We then discuss the circumstances that give rise to multiparty arbitration in construction disputes. In doing so, particular attention is given to the FIDIC conditions of contract and subcontract for construction.

The importance and function of subcontracts in construction International construction contracts have become invariably more complex. In practice, it is not easy for one contractor to have the technical expertise to undertake the whole of works. Thus, it is technically and financially more efficient for contractors to employ subcontractors to provide material or to execute parts of the works.2 The use of subcontracts is also important for the employer, who only needs to enter into a single contract and obtain a single price for the whole works, including the price for subcontracts.3

1 2 3

Stavros Brekoulakis is a professor at the Centre for Commercial Law Studies, Queen Mary University of London, and an associate member at 3 Verulam Buildings. Ahmed El Far is an associate at Three Crowns LLP. J. Bailey, Construction Law, Routledge (2011), p. 1294; J. Florian Pulkowski, ‘The Subcontractor’s Direct Claim in International Business Law’, (2004) 21 International Construction Law Review, 31. Laurence McIntosh Ltd v. Balfour Beatty Group Ltd [2006] CSOH 197 45–46.

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The main contract and subcontract in a construction project are typically interrelated, and in essence, a subcontract is concluded in view and in the light of the main contract.4 In a typical build-only contract, for example, the subcontractor will have to work on the basis of drawings submitted by the employer, whereas in a design-and-build contract, the subcontractor will have to work on the basis of the specifications given by the employer. Moreover, changes affecting the main contract will usually affect the subcontract and vice versa. For example, any delay in the performance of the subcontract may give rise to liability of the contractor under the main contract. Similarly, if the employer requests a variation, this may affect the scope of works for the subcontractor.5 Such interrelation can also be evidenced by explicit references in the subcontract to the main contract. In a subcontract, there are typically references to the main contract as well as the role of the engineer and the employer from the main contract and vice versa.6 However, despite their close interrelation, the main contract and the subcontract for construction are typically separate. No multiparty contractual relationship is established between the employer, the contractor and the subcontractor. Similarly, no direct liability between the employer and the subcontractor arises, unless the contractual arrangements of the parties or the national law provide for it.7 In effect, the several parties, namely the employer, contractor and subcontractor or subcontractors, form a notional ‘contractual chain’ whereby each party is bound by rights, duties and liabilities with regard to the party that it is linked with. The two parties at the end of this chain have no contractual relationship. However, every chain is as strong as its weakest link. Thus, if the two sets of contracts (employer–contractor and contractor–subcontractor) are not properly aligned in terms of contractual rights, duties and risks, the contractor may be exposed in risks and liabilities under the main contract, which it may not be able to pass on to the subcontractor under the subcontract.8

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J. Bailey, Construction Law, Routledge (2011), p. 1295. D. Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, Wiley Blackwell (2017), p. 32. For example, see Sub-Clauses: 5.1 and 5.2.3 of the 2017 FIDIC Conditions of Contract for Construction (Sub-Clauses 4.4 and 5.3 of the 1999 Edition). Also see Sub-Clauses: 1.1) 1.8, 2.1, 2.5, 4.2 and 8.6 of the FIDIC Conditions of Subcontracts of 2011. J. Florian Pulkowski, ‘The Subcontractor’s Direct Claim in International Business Law’, (2004) 21 International Construction Law Review, 31, 36 (2004); J. Bailey, Construction Law, Routledge (2011), pp. 1295–1297. French law allows direct recourse between the employer and the subcontractor; see Article 12 of the Law on Sub-contracting No. 75-1334 of 1975; Article 1597 of the Spanish Civil Code; Article 1798 of the Belgian Civil Code; MAB Chao-Duivis, ‘Subcontracting in Europe: the Results of a Questionnaire’, (2013) 30 International Construction Law Review, 318, 319; F. Chaix and S. Marchand, ‘The Right of Recourse of an Employer Against a Subcontractor’, (1998) 1 The International Construction Law Review, 211, p. 221; B. Hanotiau, Complex Arbitrations: Multiparty, Multicontract, Multi-issue and Class Actions, (Kluwer Law International 2006), pp. 213–214; ICC Case No. 6230 of 1990, in J. Arnaldez,Y. Derains and D. Hascher, Collection of ICC Arbitral Awards (1991–1995), (Swiss law governed the main contract and the subcontract) pp. 91–92. L. Di Paola, ‘Back-to-back Contracts’, (2009) 26 International Construction Law Review, 489, pp. 489–490.

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For example, in the Canadian case of Smith v. Johnson Bros,9 the main contract provided for the right of the employer to suspend the works, in which case the main contractor would be entitled to claim extension of time, although not additional costs for suspension.10 The subcontract equally provided for the right of the main contractor to suspend works, but provided that in such a case the subcontractor would be entitled to both extension of time and costs for suspension.When the employer suspended the works, the contractor claimed extension of time from the employer under the main contract, but was faced with a claim for both extension of time and additional costs and expenses from the subcontractor under the subcontract. There are two different types of subcontractors: domestic subcontractors and nominated subcontractors. A domestic subcontractor is chosen by the main contractor, whereas a nominated subcontractor is selected by, or agreed with, the employer under nomination agreements in the main contract. Opting for a nominated subcontractor may be advantageous to the employer as well as to the contractor. From the employer’s point of view, nominated subcontractors allow the employer or the engineer to be involved in the choice of a specialist subcontractor and, thus, offer better control on the quality of the subcontractor’s work or the materials used.11 A nominated subcontractor may also save time, as the employer may identify the subcontractor before the conclusion of the main contract and inform the main contractor at the time of tender about the suggested choice of the subcontractor. If the employer intends to use nominated subcontractors, this should be made clear in the tender documents to give the contractor the opportunity to take this into account when pricing for the project.12 From the contractor’s point of view, the contractor may want to involve the employer in the selection of the subcontractor in order to minimise its risk and liability from the subcontractor’s work.13 Whether this would be possible will depend on the factual circumstances surrounding the process of selection of the subcontractor and any direct contact that the employer may have had directly with the subcontractor. A new provision in the 2017 FIDIC Red Book is Sub-Clause 5.1, which requires the contractor to obtain the engineer’s prior consent to all proposed subcontractors, except for suppliers of materials or (obviously) for nominated subcontractors. As is further stated in the provision, if the engineer does not respond within 14 days after receiving the contractor’s request, including details of the proposed subcontractor, objecting to the proposed subcontractor, the engineer shall be deemed to have given its consent. In all cases, a nominated subcontractor cannot be selected by the employer against the contractor’s wishes. Clause 5.2.2 of the 2017 FIDIC Red Book, for example, provides that the contractor shall not be under any obligation to employ a nominated subcontractor

9 See Smith v. Johnson Bros [1954] 1 DLR 392. 10 This is unlike Sub-Clauses 8.9 and 8.10 of the 2017 FIDIC Conditions of Contract for Construction, which stipulates that if the engineer suspends the works, the contractor may claim an extension of time and payment of additional costs. 11 J. Bailey, Construction Law, Routledge (2011), p. 1307; D. Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry Wiley Blackwell (2017), p. 48. 12 J. Glover and S. Hughes, Understanding the FIDIC Red Book: A Clause-By-Clause Commentary, Second Edition, Sweet & Maxwell (2011), paragraph 5-003. 13 Ibid, at 1308; J. Adriaanse, Construction Contract Law:The Essentials Third Edition, Palgrave Macmillan (2010), pp. 252–256.

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against whom the contractor raises a reasonable objection by notice to the engineer no later than 14 days after receiving the engineer’s instructions, with supporting particulars.14 Reasonable objections include where the subcontractor lacks sufficient competence, resources or financial strength; or where the subcontractor insists on terms of the subcontract that are not aligned with the main contract, and that may leave the contractor exposed to liability against the employer, which the contractor cannot pass on to the subcontractor; or where the subcontractor does not agree to indemnify the contractor in case of negligence or misuse of goods by the nominated subcontractor, its agents and employees.15 If the contractor objects to the nominated subcontractor, the employer may be able to overcome such objection by agreeing to provide an indemnity to the contractor with respect to the contractor’s grounds for objection.16 As mentioned above, there is no direct liability between the employer and the subcontractor and there is no multiparty contractual relationship in a typical contract–subcontract scenario.Thus, the contractor is usually liable to the employer and the subcontractor is liable to the contractor.17 These types of distinct liabilities under the two contracts are usually achieved by well-drafted back-to-back contracts.18 An example is the FIDIC Conditions of Subcontract for Construction, which were first published in 2011 to be used in conjunction with the 1999 FIDIC Conditions of Contract for Construction and now the 2017 edition. The 1999 FIDIC Contract and the FIDIC Subcontract have 20 clauses each. 19 While the 2017 FIDIC Contract has 21 Clauses, they are very similar in content and structure to the FIDIC Subcontract clauses.20 Instead of being drafted in back-to-back terms, some contracts and subcontracts purport to be aligned by importing provisions of the main contract into the subcontract by reference. However, incorporation by reference requires clear and express language as to what are the specific rights and duties incorporated in the subcontract.21 For example, in the case of

14 See Clause 5.2.2 of the 2017 FIDIC Conditions of Contract for Construction. 15 To that effect, see Clause 5.2.2(a)–(c) of the 2017 FIDIC Conditions of Contract for Construction; E. Baker, B. Mellors, et al., FIDIC Contracts: Law and Practice Informa (2009), p. 133. 16 J. Glover and S. Hughes, Understanding the FIDIC Red Book: A Clause-By-Clause Commentary, Second Edition, Sweet & Maxwell (2011) paragraph 5-008. 17 J. Bailey, Construction Law, Routledge (2011), pp. 1296 and 1300. 18 L. Di Paola, ‘Back-to-back Contracts’, (2009) 26 International Construction Law Review, p. 489; M. Dubisson, ‘Arbitration in Subcontracts for International Projects’, (1984) 1 Journal of International Arbitration, p. 198. 19 The majority of clauses in the FIDIC Subcontract mirror the equivalent clauses in the FIDIC Contract; for example, Clause 8 provides about Commencement, Clause 9 about Tests on Completion, Clause 10 about Taking Over, Clause 11 about Defects Liability, Clause 12 about Measurement and Evaluation, Clause 14 about Price and Payment, Clause 15 and 16 about Termination and Suspension, Clause 17 about Risk, Clause 18 about Insurance, Clause 19 about Force Majeure and Clause 20 about Claims, Disputes and Arbitration. 20 The main differences in the 2017 FIDIC Contract is that Clause 18 is on Exceptional Events (as opposed to Clause 18 in the Subcontract, which is on Insurance) and Clause 19 is on Insurance (as opposed to Clause 19 the Subcontract, which is on Force Majeure). The previous Clause 20 in the 1999 Edition now breaks down to two Clauses on Employer’s and Contractor’s Claims (Clause 20) and Disputes and Arbitration (Clause 21). 21 J. McGuinness, The Law and Management of Building Subcontracts, Second Edition, Blackwell Publishing (2007), pp. 54–55; for the arbitration clause to be incorporated by reference, it is generally required at common law that the parties clearly state that, see L. Di Paola, ‘Back-to-back Contracts’, (2009) 26 International Construction

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Lafarge Redland Aggregate Ltd v. Shephard Hill Civil Engineering, the subcontract made extensive references to the main contract, including an obligation of the subcontractor to read and note the provisions of the main contract.The question before the English court was whether such references might establish direct liability of the subcontractor with regard to the employer. The court held that there was no privity between the employer and the subcontractor, and that while the provisions in the main contract may have had an important bearing on the contractual relationship between the contractor and the subcontractor, they did not establish a contractual relationship of any kind between the employer and the subcontractor.22 While back-to-back contracts ensure that the rights and obligations of the parties under the main contract and the subcontract are aligned, no direct liability will arise between the employer and the subcontractor. As is now provided in Clause 5.1 of the 2017 FIDIC Conditions of Contract for Construction (Red Book), ‘the Contractor shall be responsible for the work of all Subcontractors, for managing and coordinating all the Subcontractors’ works, and for the acts and defaults of any Subcontractors, any Subcontractors’ agents or employees as if they were the acts or defaults of the Contractor’.23 The provision does not distinguish between domestic and nominated subcontractors, and is applicable to both.24 Such wide and strict liability under FIDIC is not the case under some national laws. For example, English law provides that a contractor is not necessarily responsible for any design carried out by a nominated subcontractor, or for whether the subcontractor has complied with the performance specifications of the goods and materials.25 Given such strict liability, any breach by the subcontractor of the contract may lead to a breach of the contractor under the main contract. This is why the subcontract will invariably include a clause providing that the subcontractor in such circumstances will indemnify the contractor.26 Other clauses in the FIDIC Subcontract for Construction aim to align the rights and duties of the parties under the subcontract with those of the parties under the main contract.27 For example: • Sub-Clause 1.8 of the FIDIC subcontract ensures that the same laws and language will govern both contracts;28 • Sub-Clause 1.10 ensures that there is no privity between the employer and the subcontractor;29

Law Review pp. 489, 492 and 497–499; C. Seppala, ‘The New FIDIC International Civil Engineering Subcontract’ (1995) 5 International Construction Law Review p. 11. 22 See Lafarge Redland Aggregates Ltd v. Shephard Hill Civil Engineering Ltd [2000] 1 WLR. 23 See Clause 5.1 of the 2017 FIDIC Conditions of Contract for Construction. It was previously provided in Clause 4 of the 1999 FIDIC Edition. 24 See E. Baker, B. Mellors, et al., FIDIC Contracts: Law and Practice Informa (2009), p. 130. 25 J. Glover and S. Hughes, Understanding the FIDIC Red Book: A Clause-By-Clause Commentary, Second Edition, Sweet & Maxwell (2011), pp. 88–89. 26 See Clause 5.2 of the 2017 FIDIC Conditions of Contract for Construction, which provides that the failure of the subcontractor to include a provision to that effect may entitle the contractor to object to a nominated subcontractor. 27 E. Kratochvilova and M. Mendelblat, ‘Testing the Water – a New FIDIC Subcontract’, (2011) 28 International Construction Law Review, pp. 1, 4. 28 Sub-Clause 1.8 of the FIDIC Conditions of Sub-Contracts for Construction of 2011. 29 Sub-Clause 1.10 of the FIDIC Conditions of Sub-Contracts for Construction of 2011.

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• Sub-Clause 2.2 provides that the subcontractor shall perform and assume all obligations of the contractor under the main contract other than where the provisions of the subcontract otherwise require, and execute the subcontract works and remedy any defects in such a manner that does contribute to any breach by the contractor of his obligations under the main contract;30 • Sub-Clause 2.3 provides that instructions and determinations of the engineer must be notified to the subcontractor ‘as contractor’s instructions’;31 • Sub-Clause 2.4 provides that the subcontractor shall have the same rights and remedies that the main contractor has under the main contract;32 • Clause 8 coordinates the progress of the main contract and the subcontract and is aligned with the provisions in the main contract;33 • Clause 14 passes the risk for delay in payments by the employer to the subcontractor;34 and • Sub-Clause 14.6 endorses the ‘pay when paid’ method.35 Similarly, the 2017 FIDIC Conditions of Contract for Construction (Red Book) include some provisions pertaining to the subcontract, notably Sub-Clause 5.2.4, which entitle the engineer to require the contractor to provide evidence that it has paid the nominated subcontractor the sums due under the payment certificates. If the contractor fails to submit such evidence, the employer is entitled under FIDIC to directly pay the nominated subcontractor and request the contractor to repay such amount.36 As previously mentioned, direct claims or remedies between the employer and the subcontractor may be possible where the applicable national law provides for direct remedies.37 Direct claims or remedies are also possible if (under certain factual circumstances) the subcontractor can be held liable against the employer on the basis of an implied warranty with regard to the employer, or a direct collateral agreement between the employer and the subcontractor can be established.38 Thus, for example, in the case of Shanklin Pier

30 31 32 33 34 35

Sub-Clause 2.2 of the FIDIC Conditions of Sub-Contracts for Construction of 2011. Sub-Clause 2.3 of the FIDIC Conditions of Sub-Contracts for Construction of 2011. Sub-Clause 2.4 of the FIDIC Conditions of Sub-Contracts for Construction of 2011. Clause 8 of the FIDIC Conditions of Sub-Contracts for Construction of 2011. Clause 14 of the FIDIC Conditions of Sub-Contracts for Construction of 2011. However, the contractor cannot withhold payment that the engineer has withheld because of the contractor’s fault or because of employer’s bankruptcy. In some jurisdictions, such as the UK, the pay-when-paid method is not enforceable. To that effect, see Section 113(1) of the Housing Grants, Construction and Regeneration Act; and MAB Chao-Duivis, ‘Subcontracting in Europe: the Results of a Questionnaire’ (2013) 30 International Construction Law Review 318, pp. 323–324. Other Clauses include: Sub-Clause 3.3, which is equivalent to Clause 2.5 of the main contract; Sub-Clause 3.4; Sub-Clause 3.5, which makes the contractor responsible for the coordination of the main works and the subcontract works, and with the works under any other Subcontract.; and Clause 17, which extends the subcontractor’s responsibility for the damage of the subcontract works until the final taking over by the employer. 36 See Clause 5.2.4 of the 2017 FIDIC Conditions of Contract for Construction. 37 MAB Chao-Duivis, ‘Subcontracting in Europe: the Results of a Questionnaire’, (2013) 30 International Construction Law Review, pp. 318, 325–327 (2013); ICC Case No. 6230 of 1990, XVII Yearbook Commercial Arbitration pp. 164, 169–170 (1992). 38 However, see the South African case of Concrete Construction v. Keidan [1955] 4 SA 315, which denied privity between the employer and the subcontractor despite direct contact; J. Bailey, Construction Law, Routledge (2011), pp. 1295–1297.

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v. Detel Products, where the owners entered into a contract with the contractors to repair and repaint a pier that was demolished during the war. The subcontractor met with the employer for the purpose of obtaining the contract for the repainting of the pier. During the meeting the subcontractor made certain warranties, including that it should have a life of at least seven to 10 years. The issue before the court was whether an enforceable warranty could arise between parties other than the parties to the main contract. The English court held that the employer was entitled to recover against the subcontractor for breach of an express warranty, notwithstanding that the contract was concluded between the contractors and the subcontractors.39 Finally, direct claims may be possible if a duty of care is established by certain representations on the part of the subcontractor, as was the case, for example, in IBA v. EMI.40 In this case, EMI agreed to construct a television mast for IBA. EMI employed BICC as their subcontractors to design and execute the construction of the mast itself. Upon the collapse of the mast, IBA alleged breach of contract against EMI and BICC and alleged a breach of warranty directly against the subcontractor, BICC. Based on certain representations made by BICC in a letter it had sent to IBA, the court found that such communication between the employer and the subcontractor had established a duty of care to the employer and made the subcontractor directly liable with regard to the employer.

Multiparty arbitration in construction disputes The completion of a construction project may involve several parties and interrelated agreements and any dispute between the employer and the contractor, for example, may often be based on the same facts and may raise similar legal issues in a dispute between the contractor and the subcontractor. in the same project. While multiparty arbitration proceedings involving an employer, a contractor and a subcontractor may be difficult to have because of the distinct and, typically, bilateral nature of the main construction contract and the subcontract,41 it may be (under certain circumstances) in the contractor’s interest to make sure that one single tribunal decides all disputes that it has against the employer and the subcontractor.42 This is because it is the contractor who has the risk, for example, to recover in a subsequent arbitration from the subcontractor any amount of liquidated damages it may have been awarded in favour of the employer in a previous arbitration. By contrast, the employer will generally have little interest in multi-party arbitration that involves subcontractors and will be able to hold the main contractor fully liable without concern of whether the main contractor will be able to pass on its claims to any other responsible party. As is rightly noted:

39 See the English case of Shanklin Pier Ltd v. Detel Products Ltd [1951] 2 K.B. 854; also see Welsh Health Technical Services Organisation v. Haden Young Ltd [1988] 37 B.L.R. 130. 40 See Independent Broadcasting Authority v. EMI Electronics Ltd [1980] 14 B.L.R. 1. 41 S. Brekoulakis, Third Parties in International Commercial Arbitration Oxford University Press (2010), paragraphs 1.09–1.13. 42 B. Hanotiau, Complex Arbitrations: Multiparty, Multicontract, Multi-issue and Class Actions, (Kluwer Law International 2006), paragraph 226.

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[I]f [the employer] is to defend claims, he would prefer to defend claims from a single source, namely the main contractor.The employer may fear that a multiparty arbitration procedure will be open to abuse by a recalcitrant party, given that it increases the opportunity for procedural objections. Furthermore, should he need to advance claims, he may well hope to be able to hold the main contractor fully liable, leaving him to pursue claims against the other parties involved.43

Having said that, the employer may want to bring an arbitration claim against the subcontractor directly if, for example, the contractor has become insolvent,44 or if the employer can establish a direct duty of care or a direct claim against the subcontractor.45 While a party may want a single tribunal to decide all disputes between an employer, contractor and subcontractor, multiparty arbitration will only be possible if all parties consent to it, either before the dispute arises or after it has arisen.46 Consent for multiparty arbitration before the dispute arises may be established if the arbitration clauses in the main construction contract and the subcontract expressly allow for multiparty arbitration, or if the applicable arbitration rules provide for multiparty arbitration.47 In non-construction arbitrations, tribunals under certain circumstances may ascertain implied consent for multiparty arbitration on the basis of different legal doctrines such as agency, assignment, third-party beneficiary, incorporation by reference, alter ego or equitable or arbitral estoppel.48 Under these doctrines, an arbitration agreement between two parties can be ‘extended’ to bind a non-signatory party. However, under typical construction contracts and subcontracts, it is unlikely that an arbitration agreement in the main construction contract between the employer and the contractor can be ‘extended’ to bind the non-signatory subcontractor under any of the above legal doctrines. Unless exceptional factual circumstances exist, arbitral tribunals will not usually find a subcontractor to be, for example, the principal of the main contractor, or the assignee49 or the third party beneficiary of the main contractor, or the alter ego for the main contractor.50

43 J. Marrin, Multiparty Arbitration in the Construction Industry, in Permanent Court of Arbitration, Multiparty Actions in International Arbitration, Oxford University Press (2009), pp. 398–399; D. Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, Wiley Blackwell (2017), p. 47; B. Hanotiau, Complex Arbitrations: Multiparty, Multicontract, Multi-issue and Class Actions, Kluwer Law International (2006), paragraph 226. 44 D. Kondev, ‘Do Recent Overhauls of Arbitration Rules Respond to the Need for Multi-party Arbitration in the Construction Industry?’, (2015) 32 International Construction Law Review pp. 63, 66. 45 See previous section. See also D. Kondev, Multi-Party and Multi-Contract Arbitration in the Construction Industry, Wiley Blackwell (2017), p. 48 46 A. Steingruber, Consent in International Arbitration, Oxford University Press (2012), paragraph 9.01. 47 D. Kondev, ‘Do Recent Overhauls of Arbitration Rules Respond to the Need for Multi-party Arbitration in the Construction Industry?’, (2015) 32 International Construction Law Review pp. 63, 64. 48 W.W. Park, ‘Non-signatories and International Contracts: an Arbitrator’s Dilemma’, in Permanent Court of Arbitration, Multiple Party Actions in International Arbitration, Oxford University Press (2009), paragraph 1.12. 49 Unless the contractor expressly assigns the benefit of the subcontract to the subcontractor, see Sub-Clause 5.1 of the 2017 FIDIC Conditions of Contract for Construction (Guidance for the Preparation of Particular Conditions); it was previously provided in Clause 4.5 of the 1999 Edition. 50 On a different note, in exceptional cases, tribunals may decide to pierce or lift the corporate veil of a company (e.g., for a contractor) to reach its parent company. For example, see ICC Case No.14208/14236 of 2008, in ICC International Court of Arbitration Bulletin,Vol. 24 (2013), pp. 62–70. The issue before the arbitral tribunal was whether it may pierce the corporate veil of the contractor to reach its parent company. By

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If all the relevant parties (employer, contractor and subcontractor) wish to resolve their dispute in multiparty arbitration proceedings, it is safer to enter into a single (umbrella) arbitration agreement, or to enter into two identical arbitration clauses (one between the employer and the contractor and one between the contractor and the subcontractor) that expressly provide for multiparty proceedings under certain circumstances. While umbrella arbitration agreements are not typically used in construction contracts, identical arbitration clauses providing for multiparty proceedings are not uncommon. If the employer, the contractor and the subcontractor wish to enter into two identical arbitration clauses, they should be aware that unclear drafting may lead to confusion or disagreements.51 For example, in City & General v. AYH,52 the main contractor, Kier, agreed to carry out works of refurbishment and rebuilding. City & General (CG) entered into a building contract with Kier (the main contractor) for the refurbishment and building of the former Patent Office Library in London, and appointed AYH to act as a project manager. The contract between CG and AYH included an arbitration clause providing that any dispute would be referred to arbitration by a single arbitrator, and that if the dispute raised issues that are the same as, or connected with, issues raised in related disputes between either party and a third person, already referred to arbitration, the parties agreed that the dispute under the deed would be referred to the arbitrator appointed to determine the related dispute. When a dispute arose between CG and AYH, an arbitrator had been appointed in relation to arbitration between CG and Kiev. CG and AYH disagreed as to whether their dispute raised issues that ‘were the same as, or connected with, issues’ raised in the arbitration between CG and Kiev and therefore whether it should be referred to the arbitrator appointed to determine the dispute between CG and Kiev. Relying on Judge Humphrey Lloyd’s decision in Trafalgar House Construction (Regions) Limited v. Railtrack,53 Justice Jackson noted that the arbitration clause was unclear and that, accordingly, it was proper to have regard to the commercial purpose of the arbitration clause – namely, to avoid multiplicity of proceedings. Noting that if a material portion in both disputes is connected, it makes commercial sense for both disputes to be dealt with by the same tribunal, Justice Jackson found that a number of issues in the arbitration against AYH were substantially the same as, or connected with, issues arising in the arbitration with Kier. He therefore ordered that the arbitrator who was appointed in the arbitration between CG and AYE be appointed in respect of the arbitration between CG and AYH.54

51 52 53 54

applying transnational norms, the tribunal decided that the corporate veil may be pierced if: (1) the dominant shareholder has complete control over the subsidiary; and (2) there is evidence of fraud or an abuse of right. The tribunal decided to extend the arbitration clause to the non-signatory given that the parent company dominated and controlled its subsidiary, and abused the corporate structure of the subsidiary to protect its own interests. Trafalgar House Construction v. Railtrack [1995] 75 BLR 55. City & General (Holborn) v. AYH Plc [2005] EWHC 2494 (TCC). [1995] 75 BLR 55. City & General (Holborn) v. AYH Plc [2005] EWHC 2494 (TCC).

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The FIDIC Conditions of Contract and Subcontract include compatible dispute resolution clauses to achieve coordination between disputes that may arise under the main contract and the subcontract. For example, Sub-Clause 20.1 of the FIDIC Conditions of Subcontract provides that whenever the contractor is required under the FIDIC conditions of the main contract to give any notice or information to the engineer or the employer or to keep contemporary records, the subcontractor shall also give a similar notice or other information in writing to the contractor and keep the contemporary records that will enable the contractor to comply with the terms of the main contract. Similarly, Sub-Clause 20.2 of the FIDIC Conditions of Subcontract provides that if the subcontractor considers itself entitled to any extension of the subcontract time and any additional payment under the terms of the subcontract, the equivalent provision of Sub-Clause 20.2 of the main contract will apply, save that the period of notice for the subcontractor’s claims shall be no later than 21 days after the subcontractor became aware or should have become aware of the relevant event or circumstance giving rise to the claim. Such periods (and the period for the subcontractor to substantiate its claim) are deliberately shorter than the periods for the main contractor to give notice (and substantiate its claim) to the engineer under the main contract.55 However, while under Clause 21 of the 2017 FIDIC Conditions of Contract and Clause 20 of FIDIC Conditions of Subcontract the dispute resolution processes under the two contracts are coordinated, they remain separate and distinct. Thus, under Clause 20 of the FIDIC Conditions of Subcontract, if the subcontractor has a claim against the contractor, the contractor will make a fair determination of the claim.56 If the subcontractor is not satisfied with the determination, the dispute will be referred to the dispute adjudication board (DAB) of the subcontract.57 The contractor must then decide whether the dispute is related or unrelated to the main contract. If, according to the main contractor, the dispute under the subcontract is unrelated to the main contract, either party (i.e., the main contractor or the subcontractor) shall be entitled to refer the subcontract dispute to the DAB under the subcontract.58 If either party issues a notice of dissatisfaction against the decision of DAB under the subcontract, the main contractor and the subcontractor shall attempt to amicably settle the dispute and then proceed to bilateral arbitration.59 If the contractor considers that the dispute under the subcontract involves an issue that is related to a dispute under the main contract, then in any notice of dispute given by the contractor or within 14 days of receiving a notice of dispute from the subcontractor, the contractor may notify the subcontractor, with reasons, that the dispute is related to a dispute under the main contract. In such a case, the parties shall not be able to refer a dispute to the DAB under the subcontract for a period of at least 112 days or as agreed between the

55 Sub-Clauses 20.1 and 20.2 of the 2017 FIDIC Conditions of Contract for Construction and Sub-Clause 20.2 of FIDIC Conditions of Sub-Contracts for Construction of 2011. 56 Sub-Clause 20.2 of FIDIC Conditions of Sub-Contracts for Construction of 2011; E. Kratochvilova and M. Mendelblat, ‘The FIDIC Subcontract, first edition’, (2012) 29 International Construction Law Review, 104, 109. 57 Sub-Clause 20.4 of FIDIC Conditions of Sub-Contracts for Construction of 2011. 58 See Sub-Clause 20.4 of FIDIC Conditions of Sub-Contracts for Construction of 2011. 59 See Sub-Clauses 20.6 and 20.7 of FIDIC Conditions of Sub-Contracts for Construction of 2011.

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parties. If the subject of the subcontract dispute has not been previously referred to the DAB under the main contract, the contractor shall refer such dispute to it, and the subcontractor shall afford the contractor all information that may be reasonably required to enable the contractor to pursue it, which includes the subject of the subcontract dispute.60 After the DAB under the main contract issues its decision (or if the period that the parties have agreed to defer any referral to DAB under the subcontract expires), each party has different options: the contractor is entitled to refer the subcontract dispute to the DAB under the subcontract, while the subcontractor has the option of either referring the subcontract dispute to the DAB under the subcontract or go straight to arbitration.61 While the decision of the DAB under main contract will not be binding on the subcontractor or the DAB under the subcontract,62 the latter will invariably take it into account to decide the dispute between the contractor and the subcontractor. However, if the two disputes proceed to arbitration (under the main contract and under the subcontract), they will not be consolidated or otherwise harmonised, even if they are ‘related’. Overall, the default Clause 20 under the FIDIC Conditions of Subcontract provides for a harmonised dispute resolution process only during the DAB phase. The referral of a dispute to the engineer (or contractor) and the arbitration procedure remain parallel procedures under the two contractors without any possibility of multiparty proceedings. Prominent commentators have criticised this approach noting that ‘If the sole goal were saving time and cost and avoiding inconsistent results, all disputes between the employer and/or the contractor and/or the subcontractor should be decided by a single DAB and a single arbitration procedure in which all three parties could participate.’63 In addition to the default provision of Clause 20, the Appendix of the FIDIC Conditions of Subcontract provides for two alternative dispute resolution processes that the parties may agree to follow. In such case, the parties will have to amend default Clause 20 and incorporate one of the two alternative options.64 Under the first option, the dispute resolution process under the subcontract does not include a subcontract DAB: where a dispute arises, the contractor and the subcontractor will attempt to amicably settle the dispute and, failing any amicable solution, will refer their dispute to arbitration.65 If parties opted for this alternative dispute resolution process, there will be no harmonisation or coordination of the two processes at any stage. Alternatively, the Appendix provides for a complex procedure with an aim of binding the subcontractor to the decision of both the DAB and the arbitration award under the main contract.

60 61 62 63

See Sub-Clause 20.4 of FIDIC Conditions of Sub-Contracts for Construction of 2011. See Sub-Clause 20.4 of FIDIC Conditions of Sub-Contracts for Construction of 2011. See Sub-Clause 20.4 of FIDIC Conditions of Sub-Contracts for Construction of 2011. Christopher Seppälä, Presentation in the Milan Chamber of Arbitration Annual Conference, 1 December 2011. 64 D. Kondev, ‘Do Recent Overhauls of Arbitration Rules Respond to the Need for Multi-party Arbitration in the Construction Industry?’, (2015) 32 International Construction Law Review 63, 69. 65 E. Kratochvilova and M. Mendelblat, ‘Testing the Water – a new FIDIC Subcontract’, (2011) 28 International Construction Law Review 1, 12.

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Specifically, within seven days after receipt of a subcontractor’s notice of claim, the contractor must notify the subcontractor of whether the subcontractor’s claim will be treated as related or unrelated to the main contract claim. Any disputes about whether the claim is related or unrelated will be resolved under the ICC Rules for a Pre-Arbitral Referee Procedure. If the claim is treated as related, the contractor will submit a notice of the claim to the engineer under the main contract with the subcontractor’s support. If the contractor becomes entitled to extension of time and additional payment under the main contract, the contractor will have to pass on an appropriate share of the benefit to the subcontractor. If the contractor wants to challenge the decision of the engineer, it may refer it to the main contract DAB and give the subcontractor a reasonable opportunity to be involved in the resolution of the dispute, including in the preparation of submissions, attending the hearing before the DAB and making oral submissions. When the DAB issues its decision, the contractor must notify the subcontractor within seven days, and unless the subcontractor issues a notice of dissatisfaction, the DAB decision will be deemed binding on the subcontractor. However, if the subcontractor is not satisfied with the DAB decision, the contractor may either give a notice of dissatisfaction under the main contract or disagree with the subcontractor. In this case, the dispute will be considered as being unrelated to the main contract and will be decided between the contractor and the subcontractor through amicable settlement and ICC arbitration. After the contractor issues a notice of dissatisfaction, the contractor and the employer will attempt to resolve the dispute amicably under the main contract, with the involvement of the subcontractor. Failing an amicable settlement, the dispute will be referred to arbitration under the main contract, in which case the contractor will have to keep the subcontractor informed and, crucially, give the subcontractor a reasonable opportunity to participate. In all cases, the contractor will notify the subcontractor of an award within seven days, and the award will be binding on the subcontractor as it is binding on the contractor. Overall, while the third alternative aims to produce an efficient means to resolve related disputes, it is highly complex and is likely to give rise to many issues, with anecdotal experience so far showing that it is not generally preferred by parties.

Arbitration rules allowing for third-party claims Multiparty arbitration may be allowed where the applicable arbitration rules provide for third-party claims. Not all arbitration rules contain multiparty provisions. While some rules merely provide that multiparty proceedings are allowed where the parties consent to such joinder,66 Articles 7–10 of the ICC Rules of 2012 include detailed provisions that may allow: • the joinder of a third party; • claims based on multiple contracts; and • the consolidation of multiple arbitrations.

66 For example, see Article 17(5) of the UNCITRAL Arbitration Rules (2013); Article 22(viii) of the LCIA Arbitration Rules (2014). But see Articles 4(1) and 4(2) of Swiss Rules (2012) where there is no need for all the parties to consent to the joinder.

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Thus, the ICC Rules allow the joinder of an additional party, such as a subcontractor, if a request is made to the Secretariat before the confirmation of the tribunal, and the request must indicate the legal basis for the joinder. Joinder will be allowed if the Secretariat is prima facie satisfied that there is an arbitration clause that may be binding on all parties.67 If the Secretariat refuses the joinder, the party may ask a national court to determine whether the arbitration clause is binding on the non-signatory third party.68 If joinder is allowed, claims may be made by any party against any other party, provided that they are made before the terms of reference are signed.69 Moreover, claims arising out of or in connection with several contracts may be made in a single arbitration, regardless of whether such claims are made under one or more than one arbitration agreement under the ICC Rules.70 This may apply where, for example, an employer has signed several contracts with different contractors and the contracts include an ICC arbitration clause. Finally, the ICC Court may allow the consolidation of multiple arbitrations where: • all the parties have agreed to consolidation; • all of the claims in the arbitrations are made under the same arbitration agreement; or • where the claims are made under more than one arbitration agreement if the arbitrations are between the same parties, the disputes arise in connection with same legal relationship and the arbitration agreements are compatible.71 On a related note, multiparty arbitration may raise problems in relation to the constitution of the arbitral tribunal. The right to appoint an arbitrator is a sacrosanct right in international arbitration and remains instrumental in multiparty arbitration.72 This was confirmed in the well-known Dutco case where the French Court of Cassation invalidated an award where two respondents jointly nominated an arbitrator while reserving their right to challenge such appointment, and provided that parties should be treated equally in the constitution of arbitral tribunals. Arbitral institutions, including the ICC, have amended their rules in order to comply with this principle.73 Where consent is not ascertained, it is generally difficult to have multiparty arbitration. In such cases, the parties may opt for appointing the same arbitral tribunal in the related proceedings74 or request concurring hearings75 in order to avoid inconsistent decisions regarding intertwined issues.

67 68 69 70 71 72

See Article 6(4)(i) of the ICC Rules (2012). To that effect, see Article 6(6) of the ICC Rules (2012). Article 8 of the ICC Rules (2012). Article 9 of the ICC Rules (2012). Article 10 of the ICC Rules (2012). Siemens AG and BKMI Industrienlagen GmbH v. Dutco Consortium Constr. Co., Cass. Civ. 7 January 1992 (French Cour de Cassation); B. Hanotiau, Complex Arbitrations, Multiparty, Multicontract, Multi-issue and Class Actions Kluwer Law International (2005), paragraphs 443–457. 73 Article 12(6) of the ICC Rules of Arbitration of 2012. 74 Abu Dhabi Gas Liquefaction Co v. Eastern Bechtel Corp [1982] 2 LIoyd’s Rep. 425, where the court provided that it was desirable that there should be one arbitrator to avoid inconsistent findings. 75 For example, see Section 35 of the English Arbitration Act 0f 1996; and see Rule 14.b of the Rules of the London Maritime Arbitrators Association of 2006.

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17 Interim Relief, Including Emergency Arbitrators in Construction Arbitration Philip Norman and Leanie van de Merwe1

Introduction Parties in dispute sometimes require urgent legal support prior to the final determination of their case to ensure that justice can be done and that the integrity of the arbitral process is maintained.2 The solution to this need for urgent assistance is for arbitral tribunals or courts to order interim relief (also called interim measures or conservatory measures). This chapter considers the nature and most common types of interim relief applied for in construction arbitrations and the basis and procedures for those applications. It then considers the use of Emergency Arbitrators (EAs) to grant interim relief in advance of the formal arbitration panel being constituted.

Defining interim measures and interim relief Article 17 of the UNCITRAL Model Law on International Commercial Arbitration 1985, as amended (the Model Law), refers to interim relief as ‘interim measures’ and defines them as being temporary measures that are granted prior to the final arbitration award, which orders a party to: • maintain or restore the status quo; • take or desist from action that may or is causing harm or prejudice to the arbitral process; • preserve assets that may be used to satisfy the future final award; or • preserve evidence that may be material to the arbitration.

1 2

Philip Norman is a partner and Leanie van de Merwe is an associate at Covington & Burling LLP. In the Privy Council case of National Commercial Bank Jamaica Ltd.V. Olint Corp Ltd (Practice Note) [2009] UKPC 16, Lord Hoffmann stated in relation to court injunctions and which are analogous to interim measure in arbitration: ‘The purpose of such an injunction is to improve the chances of the court being able to do justice after a determination of the merits at the trial. At the interlocutory stage, the court must therefore assess whether granting or withholding an injunction is more likely to produce a just result.’

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The Model Law is one of a few sources where an express definition of interim measures is given. Most statutes, institutional rules and court rules have not provided a definition or adopted the one in the Model Law. The more common approach to understanding what interim measures are is by reference to the powers granted to an arbitral tribunal or court to award such measures. The nature and type of these statutorily conferred powers vary from country to country. French legislation allows an arbitral tribunal to award any interim measures, except for conservatory attachments or judicial security,3 whereas the English Arbitration Act of 1996 is narrower and gives default powers to arbitral tribunals to order security for costs and to make orders for the inspection, preservation, custody and sampling or production of property or evidence related to the dispute.4 The English Act then requires parties to expressly opt in to provisions allowing arbitral tribunals to make provisional orders for payment of money or disposition of property.5 However, most countries’ legislation is permissive about what interim relief powers parties can give to arbitrators. Most parties tend to confer broad powers by adopting published arbitration rules. These rules define the extent of the powers differently: Article 26 of the UNCITRAL Arbitration Rules (2013) gives arbitral tribunals the same powers as described in the Model Law; Rule 30.1 of the Singapore International Arbitration Centre Rules (2016) gives arbitral tribunals the power to grant ‘an injunction or any other interim relief it deems appropriate’; and Article 25 of the London Court of International Arbitration Rules (2014) allows arbitral tribunals to grant interim relief, including orders requiring a party to provide security for the amount in dispute, preserving or disposing of goods, property and documents, or granting any other relief it could have granted as final relief in an award. The International Chamber of Commerce Arbitration Rules (the ICC Rules), which arguably have become the most widely used arbitration rules in construction arbitrations (in part due to their inclusion in the FIDIC standard forms of contract) does not define what interim measures are and does not list the types of interim measures that an arbitral tribunal may order. Article 28 of the ICC Rules contains default powers given to an arbitral tribunal to order ‘conservatory and interim measures’ and describes these powers as being to: order any interim or conservatory measure it deems appropriate. The arbitral tribunal may make the granting of any such measure subject to appropriate security being furnished by the requesting party.

Types of interim relief that have been applied for in construction arbitrations Notwithstanding a lack of definition, practice has shown that the most common interim or conservatory measures sought in ICC (construction) arbitrations are for the preservation of the status quo, preservation of evidence and assets, provision of security for costs, measures to secure the enforcement of any final award and orders for interim payments.6

3 4 5 6

See Article 1468 of French Decree No. 2011-48, incorporated into the Code of Civil Procedure. See Section 38 of the English Arbitration Act 1996. See Section 39 of the English Arbitration Act 1996. See Secretariat’s Guide to ICC Arbitration (2012), paragraph 3-1036.

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Below are a few non-exhaustive examples of the most common types of applications for interim relief.

Keeping the status quo to ensure parties continue to perform their obligations An arbitral tribunal may order a party to continue performing its obligations on a construction project pending resolution of the dispute to ensure that there are no delays to the completion of the project. For example, the contractor may want interim payment applications to be processed without delay so that it has cash flow to continue its works pending a final award, or an employer may wish to prevent suspension of works so as not to cause further delays to completion. Another example is where a party seeks an interim order to compel a joint venture partner to make financial contributions in circumstances where the non-defaulting partner cannot afford to make those contributions, and payment defaults will put the project, and potentially the solvency of the non-defaulting partner, at risk.

Reinstating and preventing the removal of personnel engaged in the project Some construction contracts, particularly in the Middle East, give the employer the right (without a need to show cause) to instruct a contractor to remove personnel from working on the project. This right tends to be exercised against a contractor’s senior personnel. This right is sometimes, cynically, exercised to undermine the arbitration process by ensuring that a primary witness for the contractor is made unemployed, thereby potentially causing a contractor to have to decide whether to continue employing that member of staff (unproductively), or dismissing them and potentially losing a witness. In this scenario, a contractor may wish to apply for an interim remedy, requiring the prevention of removal of its staff.

Preserving evidence In cases where a contractor has been terminated and information (documentary or stored on servers or external drives) detained or removed from site, parties might apply for an order to preserve evidence and to provide access to that information.That evidence may be relevant and possibly material to the matters in dispute, such as site logs, diaries or journals kept by site personnel, site instructions, manpower record and cost information.

Preserving property Where a party has been terminated, or suspended and prevented from gaining access to the project site, it may wish to obtain an order that preserves its materials, equipment and facilities and prevents them from being used by others.

Stopping parties making bond calls or to order parties to deposit proceeds of bond calls in a particular account In different parts of the world, the purpose of the performance bond or advance payment security given under a construction contract is viewed differently. Some employers consider that that security can be liquidated for any perceived breach, no matter how trivial, whereas others may liquidate that security as part of a negotiation strategy to put pressure

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on a contractor to agree to less favourable settlement terms. A contractor may seek an order to stop the bond call, or more likely, to freeze the proceeds of a call, where such a call is shown not to be justified or, in extreme cases, is fraudulent.

Freezing assets If there is a threat that assets may be dissipated or hidden, which may therefore render any arbitration award worthless, an order may be sought to freeze those assets.This may be a real issue where international parties are involved or complex corporate structures are put in place by one party. In these circumstances it may be easy to hide money or assets in foreign bank accounts and/or divert them to different corporate entities. If granted, such an order will ensure those assets are preserved, but it is likely that the applicant will have to provide security for obtaining that order, if ultimately the final award concludes that the freezing order was not justified.

Providing for interim payment where it would be unfair or detrimental to keep a party out of its money This type of relief is sought when matters of liability are not in issue (or not seriously in issue) and quantum is the main point of contention. In that case, a partial payment could be made if there are good reasons for that payment to be made early, for example, if a contractor needs cash to pay its sub-contractors and suppliers on the project.

Providing security for costs Where a party has reason to believe that the other party may not have sufficient funds to satisfy an adverse cost order or award, it may apply for security for costs. These applications usually arise in the context of frivolous claims or claims brought by bankrupt parties. An application for security for costs generally represents the applicant’s anticipated arbitration costs, such as tribunal fees, legal, expert and counsel fees, the cost of the arbitral institution and other non-legal costs (such as the cost of hearing venues, printing, stenographers, etc.). This money is then held in an escrow account until the tribunal issues its final award, which includes the cost award.

How is the discretion to be exercised? The 2006 amendments of the Model Law (and consequently amendments to the UNCITRAL Arbitration Rules) added parameters on how an arbitral tribunal should exercise its discretion. Article 17A places the burden on the applicant to satisfy the arbitral tribunal that the interim measures applied for: • are required to prevent harm that is not adequately reparable by an award of damages, and that such harm outweighs the harm caused to the counterparty by the award of the interim measure (the balance of convenience); and • that the applicant has a reasonable possibility to succeed on the merits of its claim (a prima facie case).7

7

Article 17A(2) modifies these requirements for application relating to the preservation of evidence.

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Institutional rules do not contain similar parameters on how the discretion should be exercised. A reason for this could be that, as Lord Diplock opined in the English case of American Cyanamid:8 It would be unwise to attempt even to list all the various matters which may need to be taken into consideration in deciding where the balance lies, let alone to suggest the relative weight to be attached to them.

That said, there appears to be a practical acceptance that: ‘provisional measures should only be granted in situations of necessity and urgency in order to protect rights that could, absent such measures, be definitively lost.’9 This approach is consistent with how some national courts apply their discretion in determining whether to grant interim remedies or injunctions.10

Applying for interim measures under the ICC rules The process Article 28 of the ICC Rules, which provides power to grant conservatory or interim measures, does not define a procedure to be adopted by an applicant. However, Article 22.2 of the ICC Rules, which gives arbitral tribunals general powers in relation to procedures, applies and requires the arbitral tribunal to consult with the parties and adopt procedures it considers appropriate. In this sense, given the urgency associated with some types of interim relief, the procedural timetable for submissions and determination is likely to be short (and in the case of an Emergency Arbitrator under the ICC Rules, the period from transmitting the file to the arbitrator to a reasoned order being issued is 15 days). Any application for conservatory or interim measures should generally be made as soon as possible. The very nature of the application suggests that there is an urgency in obtaining protection prior to a final award and an arbitral tribunal may consider any delay as an indication of there being no real urgency for the relief sought. More importantly, any delay may result in the subject matter of the interim measure being lost, such as evidence being destroyed, assets being dissipated or bonds being called.

8 American Cyanamid Co v. Ethicon Ltd [1975] AC 396, p.408. 9 Redfern and Hunter on International Arbitration, Sixth edition, paragraph 5.31. 10 See footnote 2 above. Lord Hoffmann continued in relation to whether a court should grant an injunction/ interim measure: As the House of Lords pointed out in American Cyanamid Co v. Ethicon Ltd [1975] AC 396, that means that if damages will be an adequate remedy for the plaintiff, there are no grounds for interference with the defendant’s freedom of action by the grant of an injunction. Likewise, if there is a serious issue to be tried and the plaintiff could be prejudiced by the acts or omissions of the defendant pending trial and the cross-undertaking in damages would provide the defendant with an adequate remedy if it turns out that his freedom of action should not have been restrained, then an injunction should ordinarily be granted. In practice, however, it is often hard to tell whether either damages or the cross-undertaking will be an adequate remedy and the court has to engage in trying to predict whether granting or withholding an injunction is more or less likely to cause irremediable prejudice (and to what extent) if it turns out that the injunction should not have been granted or withheld, as the case may be.The basic principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other.

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Applications are usually made in writing with a copy to the responding party and the ICC Secretariat. The application should contain the applicant’s submissions, which will identify in clear terms the nature of the interim relief being claimed,11 together with legal authority and the factual basis for such an application. In particular, the application should define the harm that will occur if the conservatory or interim measure is not granted and make submissions as to the balance of convenience. It should also state why the applicant considers it will succeed on the merits of the case. The application must be supported by evidence: this can be a mix of documentary, technical/expert and witness evidence. The respondent will then be given an opportunity to reply. During its deliberation, the arbitral tribunal can consider a variety of factors, including: • whether the interim relief claimed is of the type available in the courts at the seat of the arbitration; • whether the relief sought is too wide; • whether the manner in which the draft order has been prepared has the effect intended; • whether the relief is being sought for tactical advantage during the arbitration process or whether there is a genuine interest to be preserved; and • what the duration of that relief should be. It is for the applicant to establish the legal and evidential basis for its application, and it bears the burden of proof. An arbitral tribunal will have to consider the nature of that burden of proof that has to be discharged in the context of the relevant law and the type of relief being applied for: is it to be assessed on the balance of probabilities, or on the more demanding standard of ‘beyond reasonable doubt’? An arbitral tribunal will also consider whether the applicant should provide some form of security in support of the grant of any order. If the application is for the conservation of a significant amount of hard copy documents, then an arbitral tribunal might seek an undertaking that the applicant pays for the cost of storing those documents. Alternatively, if the application is for an injunction requiring the other party to desist from doing something, then the arbitral tribunal might ask for an undertaking as to damages from the applicant. This typically involves the payment of an amount of money into escrow, or the provision of some other security instrument that will provide some compensation if the interim relief was found later to be unnecessary and caused harm. After the arbitral tribunal has determined the application, it must grant or decline the application in a reasoned order or award (see Article 28.1 of the ICC Rules).

Enforcement of an order or interim award Pursuant to Article 22.5 of the ICC Rules, the parties to the arbitration agree to comply with any order or award made by the arbitral tribunal and generally parties tend to comply. However, if they do not, the ICC Rules are silent on the remedy and an arbitral tribunal does not have the same coercive powers as a court to compel compliance with its order.

11 Parties will often describe this in a draft order attached to its application for interim measures.

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Article 17H of the Model Law proposes that, absent voluntary compliance, interim measures that have been ordered should be enforced by a competent court, irrespective of the country in which the order was made. The legislation of various countries provides arbitral tribunals with various powers of sanctions if a party does not comply with its orders.The English Arbitration Act 1996 gives express powers to the arbitral tribunal (unless these powers are excluded by the parties) to issue peremptory orders that repeat the interim measures granted and include a final deadline for compliance.12 The Act lists sanctions for failing to comply with such peremptory orders, which include a dismissal of the claim or counterclaim if a security for costs order is not complied with, or in the case of other types of interim relief to, among others, draw adverse inferences, exclude evidence or make a cost order that takes into account such non-compliance.13

Court support of interim measures Notwithstanding the ability of arbitral tribunals to impose sanctions pursuant to statutes that might apply, competent courts retain concurrent jurisdiction in relation to interim relief. Competent courts can also act where an arbitral tribunal is not yet constituted and there are no provisions for the appointment of an Emergency Arbitrator (see below), or where the nature of the interim relief sought is urgent, or may need to be applied for ex parte, or may need a court’s coercive powers of enforcement. Those applications can be made to the courts14 without undermining the parties’ agreement to arbitrate. Competent courts will also be the more appropriate forum for seeking interim relief that will impact third parties. On the basis that arbitration is a creature of contract that only binds the contracting parties, there is no obvious authority by which an arbitral tribunal can compel non-contracting parties to obey its interim orders. For example, a contractor may wish to obtain information from a consultant engaged by the same employer to support its case. Where the employer is not in possession of the consultant’s information and where there is no direct contractual link between the contractor and consultant, the contractor may be better served by making an application to the court to order production of that information.

Ex parte applications It may also be appropriate for a party to apply to a court when it seeks an ex parte application (without notice to, or participation of, the other party) for conservatory or interim measures. If there is a real risk that a party is likely to dissipate or divest itself of assets, or destroy information necessary to the arbitration quickly, then secrecy and urgency are key to the preservation of the information.

12 Section 41(5) of the Arbitration Act 1996. 13 See Sections 41(6) and (7) of the Arbitration Act 1996. 14 As anticipated by Article 28.2 of the ICC Rules.

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The very nature of ex parte interim measures is that they are initially made without complying with two tenets of due process: • notification of the application; and • a right to be heard. Consequently, most arbitral tribunals will not want to accept applications on an ex parte basis. However, there is some support for the proposition that arbitral tribunals can, in exceptional circumstances, act on an ex parte application. Article 17B(2) of the Model Law provides the arbitral tribunal with the power to make a ‘preliminary order’ without disclosure of the application to the party to whom it is directed. Those preliminary orders are temporary in nature, lasting for 20 days,15 but can be modified after their notification to the party against who it is directed and that party has had an opportunity to present its case. In term of institutional rules, the Swiss Rules of International Arbitration allow arbitral tribunals to make ex parte preliminary orders16 in a similar way to that contemplated in the Model Law. A different approach is taken in the Arbitration Rules of the Arbitrator and Mediators Institute of New Zealand, which allows for the appointment of an Emergency Arbitrator to issue preliminary orders without notification to the other party where advance notice of the application for interim measures would ‘defeat the entire purpose of the application’.17 However, an ICC Task Force in 2019 concluded that: true ex parte emergency Orders, where the respondent was not notified, was not given the opportunity to be heard and in which the EA issues a final EA Order are incompatible with the ICC EA Provisions.18

In that situation and assuming the ICC Rules have been adopted by the parties, an application should be made to a competent court.

Emergency arbitrator proceedings under the ICC Rules As described above, there is, on occasion, a need to obtain an interim remedy in advance of an arbitral tribunal being constituted. Prior to the adoption of emergency arbitrator procedures, parties would have to rely on competent courts and this would require them to work their way through a court procedure and make matters public that they may have hoped to keep private.

15 Article 17C(4) of the Model Law. 16 See Rules 26(3) and 44 of the Swiss Rules of International Arbitration. 17 Article 50.2 of the AMINZ Arbitration Rules, which deals with the application for an appointment of an Emergency Arbitrator to award interim measure or provisional orders, states that such an application ‘should be made electronically and in the case of an application for preliminary orders must, save where to give notice would defeat the entire purpose of the application, be copied to the other Parties at the same time as it is submitted to AMINZ’. 18 See paragraph 106 of the ICC Commission Report on Emergency Arbitrator Proceedings, April 2019.

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This need has been addressed in Article 29 of the ICC Rules, which provides that, where a party requires urgent interim or conservatory measures in advance of the arbitral tribunal being constituted and the arbitration file being transmitted, that party can apply for an emergency arbitrator to be appointed to consider its application. The Emergency Arbitrator Procedure is now a standard provision in the ICC Rules, and will be available unless the parties have opted out or have chosen different pre-arbitral procedures, or the arbitration agreement was executed prior to 1 January 2012,19 or the relief sought is against a party that has not signed the arbitration agreement.20 Together, these criteria are known as the ‘applicability test’.

Applicability test An application for an emergency arbitrator should be made to the president of the ICC Court,21 who will determine if the applicability test is met. It is rare for the president to decline applicability,22 save for obvious cases of in-applicability. In ambiguous cases the question of applicability has been left to the emergency arbitrator. An example in the construction context is whether a dispute board established under the construction contract, and which has powers to make conservatory and interim orders, operates as an implied opt-out of the Emergency Arbitrator Procedures.23 If the president is satisfied that the Emergency Arbitrator Procedure is applicable, an emergency arbitrator will be appointed and the file transmitted. At that point the emergency arbitrator assumes responsibility for jurisdictional and admissibility issues.

Jurisdiction challenges The emergency arbitrator has first to consider if he or she has jurisdiction to act. Jurisdiction is considered on the same basis as it would be by a fully constituted arbitral tribunal. In one ICC case,24 the emergency arbitrator held that a multi-tier dispute resolution clause, which contained a 90-day negotiation period, was a condition precedent to commencement of arbitration proceedings and a ‘limitation on the parties’ consent to arbitrate’. He determined that the Emergency Arbitrator Procedure was an inherent part of arbitration and not something that is separate or distinct, and thus a failure to comply with the conditions precedent deprived the emergency arbitrator of jurisdiction in that case.

Admissibility challenges The Emergency Arbitrator has to determine whether the interim relief sought can be admitted into the Emergency Arbitrator Procedure. Article 29(1) of the ICC Rules stipulates the admissibility threshold as being:

19 20 21 22 23

See Article 29(6) of the ICC Rules. This is the ‘applicability test’. See Article 29(5) of the ICC Rules. Article 1.5 of Appendix V of the ICC Rules. See paragraph 71 of the ICC Commission Report on Emergency Arbitrator Proceedings, April 2019. See paragraphs 77 and 87(e) of the ICC Commission Report on Emergency Arbitrator Proceedings, April 2019. 24 ICC EA Case No. 26, referred to in paragraph 87(c) of the ICC Commission Report on Emergency Arbitrator Proceedings, April 2019.

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• the need for the interim measure being urgent; and • that it cannot wait for the arbitral tribunal to be constituted. Emergency arbitrators have considered these two questions as being separate. Further, they have considered them as being a threshold enquiry as to admissibility, as well as being a substantive enquiry as to the merits of the application (i.e., whether the application was justified on its merits as being urgent, so that the application could not wait to be made to the arbitral tribunal).25

Merits of the application Assuming that an emergency arbitrator accepts jurisdiction and admissibility of the application, then he or she will have to consider the merits of the application. Interestingly, in the first 80 ICC Emergency Arbitrator cases,26 very few disputes have arisen over what applicable law should apply to the Emergency Arbitrator Procedure or on the issue of burden and standard of proof.The general proposition arising from those decisions is that the party asserting facts, must prove those facts to a prima facie standard. An emergency arbitrator can establish a procedure for submissions that is consistent with his or her obligation to publish a reasoned order within 15 days from the date the file was transmitted to him or her.27 Whatever the procedure adopted, he or she must act as an arbitral tribunal, by being fair and impartial and ensuring each party has an opportunity to present its case, albeit within an abridged time period.

Compliance and enforcement of the order Once the order is made, parties typically comply with it on a voluntary basis, but if not, issues of enforcement may arise. At that stage, it will be open to seek enforcement via a competent court and possibly also through an arbitral tribunal if it has been constituted by then. However, there may be challenges as to the status and effect of that order and as to whether an emergency arbitrator is in fact an arbitrator for the purposes of national laws. The ICC Commission Report on Emergency Arbitrator Proceedings notes that as part of its analysis into these proceedings, national reports from 45 countries revealed that: a wide range of interpretations emerge from expressing an unequivocal view that the EA is an arbitrator and that provisions applicable to the arbitral tribunal should apply to EAs, to others that consider that EA proceedings cannot be equated to proceedings before an arbitral tribunal.28 The doubts that have been expressed regarding the purported lack of enforceability of an EA’s decision also stem from the fact that i) the EA’s decision may be given as an order rather than an award, and ii) the decision of an EA may be viewed as lacking the finality requirement under the New York Convention.29

25 26 27 28 29

See paragraph 83 of the ICC Commission Report on Emergency Arbitrator Proceedings, April 2019. See paragraphs 130–133 of the ICC Commission Report on Emergency Arbitrator Proceedings, April 2019. Article 6 Appendix V to the ICC Rules. See paragraph 185 of the ICC Commission Report on Emergency Arbitrator Proceedings, April 2019. See paragraph 192 of the ICC Commission Report on Emergency Arbitrator Proceedings, April 2019.

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Over time, as the Emergency Arbitrator Procedure becomes more widely used and tested, further jurisprudence will emerge. It may be that more national laws will also provide supportive powers to the Emergency Arbitrator Procedure or more clearly defined mechanisms to enforce orders made by the emergency arbitrator.

Conclusions It is now well established through legislation and arbitration rules that arbitral tribunals have the power to grant interim relief, and practice suggests that parties will make those applications to arbitral tribunals and not only rely on competent courts for that support. Parties will obviously have to make strategic decisions whether they make their applications to an arbitral tribunal, an Emergency Arbitrator or a court. There are advantages and disadvantages in each forum. An arbitral tribunal will have access to greater detail about the underlying case, the process will be confidential, and it will be engaged throughout the arbitration process and able to track the parties’ conduct. However, an arbitral tribunal may not have the full powers to grant the relief sought (for example, granting ex parte relief) and may not be able to appropriately sanction a defaulting party or engage with third parties that are not contractually bound to the arbitration proceedings. An emergency arbitrator is able to consider applications on a confidential basis and, in the first instance, means parties do not have to engage with courts that may have convoluted or difficult procedures associated with applications for interim measures. However, the procedure is relatively new and the status of an emergency arbitrator’s order is still to be clarified in various jurisdictions. Further, the ICC Emergency Arbitrator Procedure is subject to a US$40,000 (in addition to party legal costs and disbursements), whereas a court procedure may be more cost-effective. Courts may be powerful in compelling enforcement of interim orders or binding and compelling third parties (to the arbitration agreement) to comply with its order. A court will have broader powers and court fees are likely to be lower than fees payable to an arbitral tribunal or emergency arbitrator. However, a court will not be seized with the determination of the dispute as this will be a matter for the arbitral tribunal and thus may be reluctant to act. Moreover, proceedings are likely to be public and in accordance with a fixed procedure, not the procedure chosen by the parties. Finally, the appointed judge may not be familiar with the underlying trade context as chosen arbitrators might be, and this may require parties to engage in more detailed explanations of the underlying issues and how a prima facie case is shown to exist.

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18 Organisation of the Proceedings in Construction Arbitrations: General Considerations and Special Issues Pierre-Yves Gunter and Anya Marinkovich1

Introduction This chapter will address the general question of how to conduct arbitration proceedings for construction disputes, with particular focus on organisational issues that commonly arise in this type of dispute. The chapter is divided into two parts.The first part (‘Organization of the proceedings’) addresses those organisational issues to be dealt with in the initial stages of an arbitration, prior to the first submissions on the merits, such as the first case management conference and the setting of the terms of reference. The second part (‘Conduct of the proceedings’) addresses the typical issues that arise during the course of the arbitral proceedings, for instance in regard to document disclosure, evidentiary hearings, and the drafting of an award. As a preliminary remark, and from the authors’ experience, most construction arbitrations are referred to international arbitration institutions, which can be explained by the truly international nature of the underlying contracts that concern large and high-profile construction projects that often involve contracting parties – including subcontractors, insurers, reinsurers, and financial institutions, as well as states and state entities – from multiple foreign jurisdictions. In addition to the arbitration law applicable at the seat of the arbitration, attention should therefore always be given to any institutional rules that the parties have chosen to govern their arbitration. In this context, the standard FIDIC forms of contract call for arbitration under the International Chamber of Commerce (ICC) Rules and with the FIDIC contracts being probably the most widely-used standard engineering and construction contract forms, it is safe to say that the majority of international construction

1

Pierre-Yves Gunter is a partner and Anya Marinkovich is a senior associate at Bär & Karrer.

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arbitrations are probably referred to ICC arbitration.2 Thus, the authors’ experience that forms the basis for this chapter is derived mainly from construction arbitrations under the ICC Rules, but also draws upon experience from international arbitrations under other leading arbitration institutions (the London Court of International Arbitration, the International Centre for Dispute Resolution, the Stockholm Chamber of Commerce, the Swiss Chambers’ Arbitration Institution, the Hong Kong International Arbitration Centre and the Singapore International Arbitration Centre, to name a few).

Organisation of the proceedings Construction arbitrations typically entail highly technical issues, large amounts of evidence and complex series of claims and counterclaims. For this reason, early and robust case management is essential to achieving an efficient resolution of the dispute. In this section, the authors will address the initial organisational steps to be undertaken by the arbitral tribunal to ensure the proper and efficient resolution of the dispute. Most of these practices are common to all international commercial arbitrations, but may require additional attention in the context of a construction dispute owing to the volume and complexity of the parties’ claims. Once it has received the preliminary written submissions (such as the request for arbitration and the answer to the request for arbitration), the arbitral tribunal must carry out an initial review of the file in order to gain an understanding of the nature of the parties’ claims, as well as to identify any preliminary issues that may need to be dealt with such as jurisdictional objections, compliance with pre-arbitral steps, notice requirements, requests for interim measures, and the consideration of parallel proceedings (before dispute adjudication boards (DABs), other arbitral tribunals or even state courts). The arbitral tribunal should then contact the parties in view of organising a first case management conference (CMC).3 The main purpose of this first CMC will be to agree to the terms of reference, procedural timetable, and any specific procedural rules to be applicable to the proceedings. It will also provide an opportunity for the parties and the arbitral tribunal to discuss the need for any special procedures, such as the bifurcation of the arbitration into multiple phases (i.e., jurisdiction/merits or liability/quantum). Where the arbitration is being heard by an arbitral tribunal (as opposed to a sole arbitrator), the members of the tribunal should identify the soonest possible dates where all members would be available for the CMC so that these dates can be proposed to the parties. The arbitral tribunal should also prepare a proposed agenda for the CMC, and invite the parties to amend the agenda with any additional issues that they consider appropriate for discussion this stage. 2

3

Queen Mary University of London is currently carrying out its annual arbitration survey, which happens to be on international construction arbitration for the 2019 edition. It will be interesting to see the results of the survey in terms of the users’ preferences for arbitral seats and institutions for construction disputes. More information is available at www.arbitration.qmul.ac.uk/research/2019/. An initial case management conference is required under certain arbitration rules (see, e.g., Article 24 ICC Rules; Article 28.1 SCC Rules), and encouraged under others (see, e.g., Article 14.1 LCIA Rules). Such a meeting is advisable in all cases, even where not provided for in the applicable arbitration rules, as it allows the arbitral tribunal to become familiar with the parties and their counsel, to raise any preliminary issues, and to set up an organisational framework for the arbitration.

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While it is preferable to hold the first case management conference in person, as this allows for better interaction and can facilitate agreement (for instance, by making it possible for the parties and the arbitrators to break out to separate rooms and discuss before taking a final position), it can also be held by telephone or video conference, which is a more cost-effective solution when parties, their counsel, and the members of the arbitral tribunal are all located on different continents. From the authors’ experience, it is also preferable, where possible, to have the parties’ representatives attend the first CMC. This allows for the parties to have a better understanding of the process and the particular time constraints that were taken into account when adopting the procedural timetable. For instance, while it is one of the arbitral tribunal’s duties to conduct the arbitral proceedings expeditiously, it happens rather frequently that the counsel themselves request long time limits for the filing of the written submissions, in light of the complexity of construction arbitration cases. Having the parties take part in these discussions permits them to have a better understanding of the process.

Terms of reference As mentioned, one of the main goals of the first CMC should be to agree upon the terms of reference4 for the arbitration (if not already agreed). To this end, the arbitral tribunal should first request that each party submit a summary of its position for inclusion in the terms of reference, and should then prepare a draft terms of reference, circulate this to the parties prior to the CMC, and fix a deadline for the parties to submit their comments or suggested amendments to the draft. This allows for a streamlined discussion during the CMC that focuses only on any points of disagreement between the parties, so that agreement on the terms of reference can be reached more easily. As to the content of the terms of reference, Article 23(1) of the ICC Rules sets out the required content to be included in ICC arbitrations, which can also be useful as a guideline in non-ICC arbitrations. For ICC arbitration cases, due consideration must be paid by the arbitral tribunal to the Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration dated 1 January 2019, which also contains elements to be taken into account and is more frequently updated than the ICC Rules themselves. More specifically, the arbitral tribunal may wish to include a provision setting out a data protection protocol (in line with any applicable data protection laws such as GDPR),5 as well as a provision concerning the confidentiality of the proceedings and award (if not addressed in the applicable arbitration rules).

4

5

Terms of reference are required under Article 23 of the ICC Rules, but not under most other arbitration rules. They are a particularly helpful case management tool in large and complex cases, as they allow the parties’ agreement as to the scope of the issues to be decided in the arbitration to be clearly established, and are therefore advisable in all construction arbitrations. See Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration dated 1 January 2019, paragraph 84.

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Specific procedural rules At the same time, the arbitral tribunal should also prepare draft procedural rules on specific issues such as: • the format of the parties’ written submissions, including the supporting exhibits, legal authorities, witness statements and expert reports; • the translation of documents; • proper notification of filings and communications; • the procedures to be followed for document production requests; • the setting of time limits and extensions; • a cut-off date prior to the merits hearing after which no new evidence should be filed without prior authorisation; and • the application of any soft-law procedural guidelines such as the 2010 IBA Rules on the Taking of Evidence in International Arbitration (the IBA Rules). Most arbitration rules allow for such specific procedural rules to be established by the arbitral tribunal either explicitly6 or impliedly through the wide discretion granted to the arbitral tribunal to conduct the proceedings as it deems fit (within the usual limits of procedural fairness, cost-effectiveness, and efficiency).7 One organisational aspect to be addressed early on in the proceedings, and that is particularly important in construction arbitrations, is document management. As the international arbitration community becomes increasingly comfortable with the use of various computer and online applications, efforts should be made to rely solely on electronic filings whenever possible and avoid the costs – both financial and environmental – that result from requiring hard copies of the parties’ submissions. One possible solution is to have the parties’ main submissions (such as their main brief, witness statements and expert reports) filed electronically on a secure file share platform at the time of the deadline (i.e., by midnight on the day the filing is due) and to have the full submission (including exhibits and legal authorities) provided on an external hard drive or USB key within one or two days. Software such as ExhibitManager can also be used so that submissions are filed as eBriefs (i.e., in a .pdf file in which references are directly hyperlinked to the supporting document). In construction arbitrations with large volumes of exhibits, eBriefs can be a convenient way to consolidate all of the information for the tribunal’s use. Case management software that allows for hyperlinking and annotating documents, creating factual chronologies, searching document content, as well as uploading real-time hearing transcripts, and that is accessible to users through an online platform, can also be a helpful document management tool in complex construction arbitrations. If the parties wish to use such a platform, it is best that this be agreed at the outset of the proceedings and that it be regularly updated with the parties’ filings, so that each user can access, search, and make notes on the case file throughout the course of the proceedings, including at hearings. The protocol to be followed for using such software should be set out in the specific procedural rules.

6 7

See, e.g., Article 19 ICC Rules. See, e.g., Article 15(1) Swiss Rules, Article 14.5 LCIA Rules and 17(1) UNCITRAL Arbitration Rules.

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Procedural timetable Another essential document to be established during the first CMC is the procedural timetable. In order to increase the efficiency of the first CMC, it is advisable to have the parties liaise and attempt to agree on a joint draft procedural timetable to be submitted to the arbitral tribunal prior to the CMC. The procedural timetable should indicate each filing or event in the course of the proceedings, the person or persons involved, and the date. The usual steps to be included are: • the statement of claim; • the statement of defence (and counterclaim, if any); • document production (requests, objections, and the decision of the arbitral tribunal); • the statement of reply; • the statement of rejoinder; • the rejoinder to counterclaim (if any); • cut-off date for evidence; • pre-hearing conference call; • hearing on the merits; • post-hearing briefs or closing arguments; • submissions on costs; and • issuance of the award. In large construction disputes, it is also advisable to eventually hold a second case management conference in order to take account of the progress of the proceedings and any evolution of the parties’ dispute. This is a step that is most logically inserted after the first round of written submissions but before the filing of document production requests, since the parties’ positions will at that point be fully set out. This will allow the parties to ensure that the arbitral tribunal has well understood the issues and will allow the arbitral tribunal to draw the attention of the parties to any issues to be clarified or developed in the second round of written submissions. One consideration that may have an effect on the steps to be included in the procedural timetable is bifurcation of the proceedings.8 Bifurcation is most common where jurisdictional objections have been raised and the parties agree to have a first partial award on the issue of the arbitral tribunal’s jurisdiction, but can also be used where a preliminary decision on certain legal issues (for example, risk allocation under the contract, liability for defects, or time-bar defences) would render the remainder of the issues (i.e., damages) moot. Bifurcation, where appropriate, therefore has the potential of saving the parties significant time and money by disposing of unmeritorious, inadmissible, or time-barred claims at an early stage. However, bifurcation must be used judiciously, as certain issues may be so intertwined with others that their separation would be problematic. This can happen, for example, where the arbitral tribunal’s jurisdiction over a third party to the contract may be intimately connected with the party’s conduct that also forms the basis for alleged liability, or where issues of causation are essential to both liability and quantum, such that it would

8

The term ‘bifurcation’ is here referring to any separation of the proceedings into multiple phases, which can in fact be three or more phases (trifurcation, etc.).

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make more sense for the arbitral tribunal to hear the parties’ full position on those issues before taking a decision on the merits of the claim or claims. It should also be borne in mind that, in complex construction disputes concerning many claims and multiple parties, it is also possible to separate the proceedings by grouping certain claims and then hearing each group of claims in sequence. In light of the highly technical nature of many construction disputes, it also makes sense to discuss at the outset of the proceedings whether the arbitral tribunal should participate in a site visit or whether any testing will be necessary, and where such activities should be set in the procedural timetable. Depending on the issues at stake and the status of the project, such site visits or testing may need to be carried out quickly before construction progresses. In the context of these discussions on the technical evidence that will be presented in support of the claims, some arbitrators will raise the issue of expert evidence and potential joint meetings between the parties’ experts already at the first CMC. From experience, however, the possible utility of joint expert meetings can be better assessed after the first round of submissions, and thus this is a discussion better left for a second CMC. The first CMC is also the ideal time to discuss whether the parties should create a schedule of claims or any agreed working documents (such as a list of key persons, a basic factual chronology, a glossary of terms, or diagrams such as those depicting the site layout). As there can be a high number of claims in construction disputes, a schedule of claims (in short, a table setting out a description of the claim, the amount in dispute, and each party’s position on that claim) can be a very useful tool for the arbitrators when drafting their decision.9 Agreed working documents can also save a lot of time on uncontentious factual issues, allowing the parties to focus their arguments on the true issues in dispute. Finally, while the issue of costs and the parties’ submissions in this respect usually comes at the final stage of the proceedings, the question of whether the parties intend to claim reimbursement of their internal costs incurred for the arbitration should also be raised at an early stage (such as at the first CMC), so that the parties are aware of the need to keep careful internal records of their costs throughout the course of the proceedings.

Conduct of the proceedings This section will address common issues that arise in the course of construction arbitration proceedings, after the first CMC has been held and the terms of reference signed by the parties.

Document production Large construction and infrastructure projects generate large amounts of data, in the form of design drawings, daily activity logs, transport records, invoices, photos and videos of the project site, and all other sorts of planning, supply and building records. These projects also

9

Helpful examples can be found in the Annex to the ICC Commission Report on Construction Industry Arbitrations: Recommended Tools and Techniques for Effective Management (2019), available on the ICC website at https://cdn.iccwbo.org/content/uploads/sites/3/2019/02/icc-arbitration-adr-commissio n-report-on-construction-industry-arbitrations.pdf.

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tend to entail voluminous records of contemporaneous correspondence at all levels, namely, between the employer and the contractor, with sub-contractors and suppliers, and internally within the employer’s and contractor’s teams. The large volume of contemporaneous data that is often available in relation to a construction project means that document disclosure requests are an important procedural step in construction arbitrations and can be extensive. Good planning and efficient management of the document production process is therefore key to ensuring the effective use of document production requests in construction arbitrations. It should first be noted that parties (and their lawyers) may have differing expectations of the scope of permissible discovery, depending on whether they come from a common law or civil law jurisdiction, as document production is a practice that has its roots traditionally in the US and the UK and is therefore used more extensively by those with common law backgrounds, while parties and counsel coming from civil law jurisdictions tend to have a more restrictive view. For this reason, it is a good idea to agree on the use of guidelines specifically tailored to international arbitration, such as the IBA Rules, at the outset of the proceedings. Indeed, Article 3 of the IBA Rules, which contains the guidelines concerning document production, was specifically drafted to reflect the accepted document production practice in international arbitration that strikes a balance between US-style discovery and the more restrictive civil law approach.10 It is common practice to have the parties submit their document production requests in the form of a Redfern Schedule,11 setting out a description of the individually identified documents or a specific and narrow category of documents being requested and the reasons for the request (more specifically, why the requested documents are relevant and material to the issues in dispute). The Redfern Schedule also provides space for the opposing party to set out any objections it has to the requests, and for the arbitral tribunal’s decision. As mentioned above, the dates and modalities of the document production phase should be discussed at the first CMC and set out in the procedural timetable and specific procedural rules (for instance, that requests first be made on a party-to-party basis, following which the party being requested to produce documents can either produce them or object to the request, and finally that the outstanding requests are submitted to the arbitral tribunal). In setting the dates for each step, it is important to keep in mind that large construction disputes can involve hundreds of disclosure requests, and therefore the arbitral tribunal will need sufficient time to review and analyse them before issuing a decision.

10 Zuberbühler, Hofmann, Oetiker, Rohner, IBA Rules of Evidence: Commentary on the IBA Rules on the Taking of Evidence in International Arbitration (Schultess, 2010), Article 3, paragraph 83. The newly issued Prague Rules on the Efficient Conduct of Proceedings in International Arbitration takes a very different approach, stating in Article 4.2 that ‘[g]enerally, the arbitral tribunal and the parties are encouraged to avoid any form of document production, including e-discovery’, subject to some exceptions. In construction arbitrations, where access to the opposing party’s project records is essential, the use of the Prague Rules might therefore be inappropriate, or at least require some adjustments. However, the ‘proactive’ approach to case management by the arbitral tribunal advocated for in the Prague Rules could be very well suited to other procedural aspects in a construction arbitration, such as the tribunal’s active involvement in fact-finding described in Article 2.4 of the Prague Rules. 11 A useful template is available at https://icsid.worldbank.org/en/Documents/process/Redfern.doc.

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As a final note on document disclosure, technological advancements that are being adopted in the construction industry will certainly have an effect on the types of disclosure requests that are made in construction arbitrations. Indeed, increased capacities for data storage and innovative means of handling data, for instance in Building Information Models or even with the use of blockchain technology, will likely result in new forms of disclosure requests aimed at gaining access to information about project costs and delays, and also project management and sound record-keeping. While the technical aspects of such innovations are the domain of experts in the data management field, who will assist the arbitral tribunal in understanding the conclusions to ultimately be drawn from such data, arbitrators are well-advised to stay up-to-date and informed on these technological advances to be in a position to properly judge such disclosure requests.

Site visits Depending on the nature of the claims and the timing of the arbitration, having the members of the arbitral tribunal visit the project site can be very valuable for their understanding of the issues and their fact-finding mission. However, such site visits should be carefully planned and follow a strict protocol in order to avoid any disagreements between the parties as to how the visit is carried out. This means that the parties should be required to agree ahead of time to a site visit protocol defining, inter alia: what elements of the site will be seen, who will be present (including, of course, legal counsel for both sides), whether any technical experts will participate in the visit and what their role should be, in what order the parties will be allowed to speak, and how any questions from the tribunal will be handled.

Expert evidence As already mentioned, construction disputes are often concerned with highly technical issues of civil engineering, as well as complex quantum calculations and delay analyses. Therefore, it is standard practice for both sides to present evidence by way of technical, quantum and delay experts. In international arbitration more generally, parties also tend to rely on evidence from legal experts, since the parties’ freedom to choose the law governing their contract means that the applicable substantive law may not be familiar to all of the involved parties. One problem that arises through the use of party-appointed experts is that the expert evidence in support of either sides’ respective case can present widely divergent opinions. Requiring the parties’ experts to meet and attempt to issue a joint report setting out their points of agreement and disagreement can be useful in this regard, but has the best results when the experts meet without the participation of the parties’ legal counsel. Arbitrators should indeed push the experts to agree on as much as possible in order to make such meetings worthwhile.

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Another option available to the arbitral tribunal is to appoint its own expert. This is expressly allowed under the majority of institutional arbitration rules12 and soft-law guidelines,13 but is, in the view of the authors, too infrequently used. It is important to stress that, whereas civil law arbitration practitioners are very familiar with this mechanism, this is not the case with common law arbitration practitioners who consider that the parties’ appointment of their own experts is a fundamental right. Moreover, concerns about tribunal-appointed experts becoming the ‘fourth arbitrator’ are often cited, but in the authors’ view unjustified, as the evidence of tribunal-appointed experts will in all cases be open to scrutiny from the parties, and the tribunal-appointed experts will not take part in the tribunal’s deliberations or any party of the decision-making process. To this end, the parties should of course be included in all communications between the tribunal and the tribunal-appointed expert. In some complex construction cases, the parties file their own party expert reports in the first stage of the proceedings and a tribunal-appointed expert comes into play in the second stage of the proceedings, namely, after the first round of submissions. Indeed, there are many arrangements that can be considered when it comes to expert evidence, and the parties, as well as the arbitral tribunal, are encouraged to create the most appropriate expert process for the particular case at hand. From experience, the arbitral tribunal will be best positioned to ascertain whether it would like to appoint its own expert after at least one round of written submissions has taken place; however, having the tribunal-appointed expert involved as early as possible is ideal. This will allow the tribunal and its expert to identify key technical issues and the specific factual evidence (for example, additional testing) that the parties should produce as the case proceeds, and not only prior to the hearing. Moreover, in the case that a site visit is foreseen, it can be extremely helpful to the arbitral tribunal to already have its own expert present at that stage.

Impact of parallel proceedings Owing to the complex web of parties and claims that is characteristic of construction disputes, an issue that arises rather frequently in construction arbitrations is the impact of parallel proceedings related to the same project. This question can arise in a variety of circumstances, including where the parties are involved in ongoing DAB referrals, in multiple arbitrations, or in related proceedings before state courts. The question may arise at the outset of the arbitration if the parties are already involved in other arbitration proceedings, in which case they may wish to consolidate the arbitrations. Under the ICC Rules, consolidation is dealt with by the ICC Court and not the arbitral tribunal,14 whereas under other arbitration rules a request for consolidation can be made to the arbitral tribunal itself.15 Whether it is the institution or the tribunal deciding upon a request for consolidation, the most relevant factors to consider will be whether the

12 See, e.g., Article 25(4) ICC Rules, Article 29 UNCITRAL Arbitration Rules, Article 34 SCC Rules, Article 21 LCIA Rules and Article 27 Swiss Rules. 13 See, e.g., Article 6 of the IBA Rules, Article 6.1–6.4 of the Prague Rules. 14 See Article 10 ICC Rules. 15 See, e.g., Article 21.1, sub-paras (ix) and (x) LCIA Rules.

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arbitrations are being conducted under the same rules, between the same parties, and concern the same legal relationship, and whether the arbitrations can be consolidated without derailing the progress of the ongoing proceedings. Another issue that can arise in the context of parallel proceedings, and in particular where there are ongoing DAB referrals, is whether additional claims can be added to the arbitration once any pre-arbitral steps have been completed. In an ICC arbitration, the question of adding new claims to the arbitration is governed by Article 23(4) of the ICC Rules, and will largely depend on the scope of the terms of reference.Therefore, if the parties already foresee at the beginning of the arbitration that they may wish to add claims that will become ripe for arbitration at a later stage, this should be taken into account in the terms of reference either through an express reservation of rights to add certain, identifiable claims at a later stage, or through a broader statement as to the scope of the arbitration that leaves open the possibility of additional claims. In either case, there should be some limits imposed on the scope of the arbitration so as to avoid the introduction of new claims in an abusive and dilatory manner. Finally, where claims under related contracts (for instance, payment guarantees or construction bonds) are being heard before state courts, it may happen that a party requests a stay of the arbitration proceedings until those related claims are resolved. However, in most cases a stay of the arbitration can be avoided as long as the parties keep the tribunal informed as to any developments in the court proceedings that may have an impact on the arbitration.

Procedural incidents and interim measures As part of their wide discretion over the conduct of the proceedings, arbitral tribunals have the power to issue procedural orders on procedural questions that may arise for which the parties seek the tribunal’s guidance. Procedural orders should contain a reference to the relevant correspondence or applications submitted by the parties, a brief summary of the issue to be decided and the parties’ positions, and an operative part setting out the tribunal’s order. In certain cases, the arbitral tribunal may be seized with a request for interim or provisional measures. Such requests may relate to, for example, the need to preserve evidence, to secure payment pending the final outcome of the arbitration, or to block a party from calling upon a payment guarantee. As the subject of interim measures is discussed in detail in Chapter 17 of this book, we will simply mention that the power of an arbitral tribunal to order interim measures is widely accepted and provided for under most arbitration rules,16 and that the arbitral tribunal must always be prepared to receive urgent requests for provisional measures that may arise at any point in the course of the arbitration and will have to be dealt with expeditiously. This is particularly true if the arbitration is being conducted prior to the completion of the project, in which case the question of progressing the project to completion is an ongoing concern for the parties.

16 See Article 28 ICC Rules, Article 26 Swiss Rules, Article 25 LCIA Rules, Article 26 UNCITRAL Arbitration Rules, Article 37 SCC Rules.

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Preparation for hearings and pre-hearing conference When setting the procedural timetable, a date should be chosen a few weeks prior to the hearings for the exchange of the parties’ lists of witnesses and experts that they wish to have appear at the hearing, as well as their proposed hearing agenda. The parties should be encouraged to make a joint proposal for the hearing agenda, even if this is not always possible in reality. On a date shortly thereafter, a pre-hearing conference call should be planned. While the dates and location of the merits hearing will have already been set at the outset of the proceedings, this pre-hearing conference will be used to discuss any organisational issues such as the hearing agenda, the possible need for video-conferencing with witnesses, witness translation issues, and the use of demonstrative exhibits. Best practice for the conduct of the hearings themselves is discussed further below. In addition to these pre-hearing organisational matters, arbitrators hearing construction disputes should set aside a substantial period of time before the hearings to review the case file, as the submissions and supporting documents are more often than not extremely voluminous. It is also advisable for the members of the arbitral tribunal to exchange preliminary views regarding the issues to be decided and to identify the specific questions that they may have for the witnesses and experts that will appear. In this regard, even if the parties have declined to call a witness or expert to appear at the hearings, the arbitral tribunal has the power under the ICC Rules to call any person that it wishes to hear.17 Thus, the arbitral tribunal should consider notifying the parties of any additional witnesses it wishes to hear enough in advance to ensure that parties are able to make the necessary arrangements for that person to be present at the hearing.

Hearings on the merits The merits hearing (or hearings, in some cases) give the opportunity to the arbitral tribunal to hear the parties’ factual witnesses and experts, and for the parties to test the witness and expert evidence through cross-examination. In order for the hearings to progress smoothly, a clear agreement as to the hearing schedule should be set during the pre-hearing conference call.This will include not only the actual hours that the tribunal will sit each day, but also the order of appearance of witnesses and the time set aside for opening statements, questions from the arbitral tribunal, and possibly even for closing arguments. In large construction disputes that concern multiple claims, it is usually best to have the hearing agenda organised claim-by-claim, or issue-by-issue (i.e., the applicable law, alleged breaches of contract, delay and quantum), with each party giving their opening statement on the claim or issue, followed by the questioning of the relevant witnesses and experts on that particular claim or issue, before moving to the next topic. When conducting hearings related to international construction projects, it is not uncommon to have witnesses or experts that wish to testify in a language other than the language of the arbitration. In such circumstances, arrangements will have to be made for

17 See Article 25(3) ICC Rules, which allows the arbitral tribunal to call ‘witnesses, experts appointed by the parties or any other person’ to give testimony (emphasis added) (cf. Article 20.4 LCIA Rules, which is more restrictive and only allows the arbitral tribunal to call ‘a witness, on whose written testimony a party relies’).

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translators to be present in the hearing room. For efficiency’s sake, simultaneous translation should be preferred to subsequent translation, with both the original and the translation being recorded for later verification by the parties. Another issue that requires attention during the hearing is that of time-keeping. Parties will usually agree to use the ‘chess-clock approach’, meaning that each party is granted equal time and the time spent by each party in presenting its arguments and conducting witness examinations will be kept track of (usually by an administrative secretary to the arbitral tribunal) and added up at the end of each hearing day. When using the chess-clock system, attention should be given to the question of additional time used when a hearing day goes beyond the scheduled end time, to ensure that each party does end up having an equal amount of time over the full course of the hearings to present its case. Finally, the arbitral tribunal is advised to verify – on record – at the end of the hearing whether the parties have any objections to the way in which the hearings were conducted, and whether there are any outstanding procedural requests. Having this information on record in the hearing transcript allows for any objections or procedural issues to be dealt with before a final award is issued.

Closing submissions Closing submissions can be presented either by way of closing oral arguments (at the end of the merits hearing or at a separate hearing session), post-hearing briefs, or – in very large cases – both. Regardless of the form in which they are presented, the parties’ closing arguments should not be a repetition of their entire case, but rather should highlight the evidence that was heard during the hearings, with references made, as necessary, to the positions already set out in the parties’ written submissions. To encourage the parties to focus on the new evidence, page or word limits should be imposed on any written closing submissions (i.e., post-hearing briefs and, if requested, rebuttal post-hearing briefs). It is also recommended to have the arbitral tribunal provide the parties with a list of questions or specific points that they wish to have addressed in the closing submissions, as this ensures that the tribunal has all of the information that it needs to render a decision and also aids the parties in focussing on the salient issues. Where the parties have chosen to make oral closing arguments at the end of the merits hearing, it will be more difficult for the arbitral tribunal to provide a list of questions or issues to the parties prior to such closing arguments, but it is nevertheless helpful for the arbitral tribunal to give some instructions or guidance to the parties at the close of the evidence so that the parties are aware of the issues on which the tribunal would like them to focus. Otherwise, where the parties choose to present post-hearing briefs or closing arguments at a later date, the arbitral tribunal will have time to compile its list and provide it to the parties in advance of the final submissions. Moreover, it can be extremely helpful, especially in complex and voluminous cases, to have the parties agree on a list of the key documents in the file that the parties consider to be the most important, to the extent that such documents have not already been identified by the parties, for example in a joint hearing bundle.

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Deliberations and award In complex construction arbitrations, the members of the arbitral tribunal are encouraged to actively discuss the case and exchange preliminary views throughout the course of the arbitration, as this allows for more efficient decision-making as to the proper course of the proceedings. Deliberations on the parties’ claims are, however, reserved for after the close of evidence-taking.18 Although it is rare that in large construction disputes the parties present their closing submissions at the end of the merits hearing, if this is the case then the arbitral tribunal should set aside time directly after the close of the hearings to carry out its deliberations. It is more likely that the parties will choose to have post-hearing briefs or closing oral arguments at a later date. The arbitral tribunal should be prepared to carry out its deliberations in any case as soon as possible after the final submission on the merits or final closing arguments, in accordance with its duty to conduct the proceedings efficiently. Indeed, it is always best that deliberations be held when the issues and evidence are fresh in the minds of the arbitrators. In complex arbitrations, it is helpful to draw up a deliberations roadmap that can be followed by the arbitrators during their deliberations session to logically assess the parties’ claims and counterclaims. As a general rule, issues of law and contract interpretation should be dealt with first, and only once these issues have been decided should the facts be assessed within the applicable legal and contractual framework, followed by the calculation of delay and costs. It may be necessary to hold multiple deliberation sessions depending on the number and complexity of the issues, and if this is the case then the deliberations sessions should be held close enough in time to ensure that the deliberations can be easily picked up where they were left off. However, it is also possible in very complex cases that the arbitrators deliberate on foundational issues, and then the president of the arbitral tribunal drafts a first portion of the award already on those issues, before proceeding to the next session of deliberations.This approach can assist in identifying which issues remain to be resolved and which issues may have already been dismissed. The drafting of the award is indeed usually led by the president of the arbitral tribunal, who will present a first draft to the co-arbitrators. The co-arbitrators will then take turns reviewing and commenting on the draft. However, where one of the co-arbitrators is specialised either in certain legal or technical matters that are to be addressed in the award, it can make sense for that person to provide the first draft of the tribunal’s decision on those specific issues with which the co-arbitrator is more familiar. It is always possible that the members of the arbitral tribunal are unable to agree on the proper outcome of the dispute. The decision will follow that of the majority position on any particular issue, and it is possible for the minority arbitrator to include a dissenting opinion at the end of the award. However, where the arbitrators all agree on the outcome of the case but perhaps disagree on certain discrete issues, it should suffice to indicate in the award that the tribunal’s position on that particular issue is a majority position. By

18 Some arbitration rules require that the arbitral tribunal announce the close of the proceedings once the evidence-taking phase is complete. See, e.g., Article 27 ICC Rules.

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experience, arbitrators taking a minority position and who are appointed by states or state entities, or coming from certain jurisdictions, have a greater tendency to request the issuance of a separate dissenting opinion. Finally, in ICC arbitrations, arbitral tribunals are in theory expected to render their awards within six months from the signing of the terms of reference. In practice, however, this is almost inevitably impossible in construction arbitrations, and thus this deadline will be regularly extended by the ICC Court. A related but separate issue is the time limit expected by the ICC for the issuance of the draft award, following the filing of the last procedural step on the merits (namely, the final hearing if there are no post-hearing submissions, or the post-hearing briefs or closing oral arguments). Pursuant to paragraph 119 of the Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration Under the ICC Rules of Arbitration dated 1 January 2019, a three-member arbitral tribunal is expected to file the draft award within three months, whereas a sole arbitrator is expected to do so within two months, failing which the ICC Court may decide to reduce the fees of the arbitrators. Whereas the ICC Court is usually very reasonable and understands the constraints of voluminous and complex construction cases, it is strongly advised for the arbitral tribunal to attempt to agree with the parties (for instance, at the end of the merits hearing) on a reasonably longer time limit for the issuance of the draft award and to inform the ICC accordingly. Such agreement should be reflected in an updated procedural timetable. By experience, the parties understand that in construction arbitration it is extremely difficult for an arbitral tribunal to comply with the above-mentioned time limits, in the same way that the arbitral tribunal understands the need for the parties to have sufficient time to prepare their submissions, in particular their post-hearing submissions.

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19 Expert Evidence in Construction Disputes: Arbitrator Perspective Nathalie Voser and Katherine Bell1

Introduction The primary methods of presenting factual evidence in international arbitration are contemporaneous documents, testimony of fact witnesses and testimony of expert witnesses. Whereas contemporaneous documents tend to have the highest probative value when it comes to facts in general, expert witness testimony is the predominant means of evidence when it comes to technical matters. International construction disputes frequently raise a variety of complex technical issues and other factual issues requiring expertise. The parties will therefore almost invariably have to adduce expert evidence in support of their case and to support the tribunal’s decision-making process. In practice, parties to large-scale international construction arbitrations often appoint not one but several experts to give testimony in a variety of technical fields. Expert evidence is typically required on the topics of delay, quantum, geotechnics, defects or forensic accounting. Against this background, it is unsurprising that experts have become a routine feature in international construction arbitration, with the role of the expert witness being continuously refined by arbitration practitioners. Most arbitration rules, such as the International Chamber of Commerce (ICC) Rules or the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, contain provisions dealing with expert evidence.2 However, these institutional rules offer hardly any guidance as to how experts should be managed effectively.

1 2

Nathalie Voser is a partner and Katherine Bell is a senior associate at Schellenberg Wittmer Ltd. Articles 25(3) and (4) ICC Rules of Arbitration, in force as from 1 March 2017 (ICC Rules); Articles 17(3), 27(2), 28(2), and 29(1) and (5) UNCITRAL Arbitration Rules (whereby Article 29 only mentions tribunal-appointed experts).

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The International Bar Association (IBA) Rules generally reflect arbitral practice and expressly provide for the use of experts.3 The most elaborate rules on the use of experts in arbitral proceedings are set forth in the Chartered Institute of Arbitrators (CIArb) Protocol, which aim at supplementing the IBA Rules.4 Last but not least, construction experts and engineers are frequently members of professional associations. Many of these professional organisations have established codes of conduct that set out ethical rules for their members serving as witnesses in dispute resolution proceedings.5 Expert evidence is generally a significant cost driver in international arbitration. This makes it all the more important that expert evidence is managed properly to ensure that it is of utmost benefit to a party’s proof of its case as well as the arbitral tribunal’s understanding of the technical issues in dispute. Determining the most efficient and successful methods for submitting and handling expert evidence is therefore essential. This chapter is based on the authors’ experience and considers legal and practical aspects of managing expert evidence throughout the arbitration, focusing on expert evidence submitted by the parties.

Party-appointed versus tribunal-appointed experts Common law and civil law traditionally take different approaches when it comes to expert evidence. In the common law tradition of the adversarial system, expert evidence is introduced into the proceedings by the parties. In the civil law tradition, experts are appointed by the court and are considered independent ‘assistants’ to the judiciary. Modern international arbitration has combined these two approaches: parties may appoint and present their own experts in support of their case, and the arbitral tribunal also has the power to appoint an independent expert, whether at the request of a party or on its own initiative. Article 5.1 IBA Rules expressly provides that parties may rely on party-appointed experts as a means of evidence on specific issues. The statements, opinions and conclusions put forward by a party-appointed expert are simply a means of evidence. The arbitral tribunal must still assess the admissibility of expert evidence and its probative value according to the same rules applicable to other forms of evidence.

3 4 5

See regarding party-appointed experts Article 5 and regarding tribunal-appointed experts Article 6 IBA Rules on the Taking of Evidence in International Arbitration, 2010 ed. (IBA Rules). See CIArb Protocol for the Use of Party-Appointed Expert Witnesses in International Arbitration, 2007 ed. (CIArb Protocol). See M. Kantor, ‘A Code of Conduct for Party-Appointed Experts in International Arbitration – Can One be Found?’, 26(3) Arbitration International 323, pp. 343, 353 and 359, with references to organisations and codes of conduct in the United States (e.g., the Code of Ethics of the American Society of Civil Engineers, last updated on 29 July 2017), the United Kingdom (e.g., the Code of Conduct Regulation of the Institution of Mechanical Engineers, as amended on 15 March 2017), and Australia (e.g., the Codes of Ethics of the Institution of Engineers Australia); see R. Horne and J. Mullen, The Expert Witness in Construction (2013), pp. 124 et seq. regarding professional institute rules in the United Kingdom (i.e., the Code of Professional Conduct of the Institution of Civil Engineers, with last modifications taking effect from 7 November 2017; the practice statement and guidance note ‘Surveyors acting as expert witnesses’ of the Royal Institution of Chartered Surveyors, 4th ed. effective from 2 July 2014). For Switzerland, see Articles 3 and 4 of the ‘Standesordnung [code of conduct]’ of the Swiss Society of Engineers and Architects.

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With regard to technical issues in particular, one would assume that there is a scientific ‘right’ or ‘wrong’. However, in practice each side will almost inevitably appoint competing experts presenting conflicting expert evidence. Even after the experts have been tested during cross-examination at the hearing, it is usually a challenging task for the arbitral tribunal to make a reasoned judgment between two diverging professional opinions. Where the arbitral tribunal is confronted with conflicting expert evidence, or from the outset in the absence of reports by party-appointed experts, the tribunal may wish to appoint an additional expert of its choosing to obtain technical assistance based on a source of expertise untainted by party bias. It is generally accepted that arbitral tribunals have the power to appoint experts, and most arbitration rules expressly grant the tribunal such authority.6 Article 6.1 IBA Rules provides that the arbitral tribunal, after consulting with the parties, may appoint one or more independent experts to report on specific issues designated by the arbitral tribunal.7 The costs of the tribunal-appointed expert are not part of the general costs of the arbitration and the requesting party will likely have to pay an advance on such costs prior to commencement of the expert’s work.8 If the tribunal decides without a party request that it wishes to appoint an expert, the tribunal will usually request the parties to advance the expected costs in equal shares. It is understood and crucial that the arbitral tribunal does not delegate the decision-making to its expert. Nevertheless, parties and counsel regularly have concerns when it comes to tribunal-appointed experts and sometimes fear that their dispute is essentially decided by the tribunal-appointed expert rather than the arbitral tribunal itself. Parties are also often afraid of a lack of control with regard to how the tribunal-appointed expert’s evidence – potentially the element most critical to their case – will be presented. Further, although the tribunal-appointed expert is subject to the same standards of impartiality and independence as the members of the tribunal, he or she is not the individual chosen by the parties to resolve their dispute. Finally, another – and in the view of the present authors, justified – concern, particularly relevant where cutting-edge technical issues are concerned, is that a single tribunal-appointed expert may have a tendency to promote his or her own published theory without taking into account or presenting to the arbitral tribunal other valid opinions in the field, including those presented by the party-appointed experts. Despite the appointment of an expert by the tribunal, parties will often retain their own expert or experts in order to assist with the preparation of the questions to the tribunal-appointed expert, the assessment of the tribunal-appointed expert’s report, and to prepare for the questioning of the tribunal-appointed expert at the evidentiary hearing. Hence, the appointment of an expert by the tribunal does not necessarily result in considerably fewer expenses for the parties.

6 7 8

See e.g., Article 25(4) ICC Rules, Article 29 UNCITRAL Arbitration Rules or Article 21 LCIA Arbitration Rules. See also Article 25(4) ICC Rules, Article 29 (1) UNCITRAL Arbitration Rules, Article 21(1) LCIA Arbitration Rules or Article 25(1) ICDR International Arbitration Rules. See e.g., Article 1(12) of Appendix III ICC Rules.

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From the point of view of the arbitral tribunal, the selection, instruction, and administration of a tribunal-appointed expert is very time consuming, thus arbitral tribunals will generally refrain from assuming this additional task unless the mandating of a tribunal-appointed expert seems essential to the resolution of the case. Furthermore, as a rule, arbitral tribunals have sufficient experience when it comes to assessing technical issues and are capable of extracting the answers to the relevant technical questions from the expert reports, possibly also by relying on expert conferencing at the hearing. In light of all of the above, it is not surprising that, in practice, expert evidence in construction disputes is habitually submitted by the parties, and tribunal-appointed experts remain the exception. Generally, the arbitral tribunal will appoint an expert only if requested by one or both parties, or if the tribunal lacks the necessary expertise to decide around a certain technical issue relevant to its decision. Suffice it to note that in the rare cases where a tribunal-appointed expert is appointed, the parties’ procedural rights are safeguarded by means of their involvement in the selection process and in compiling the questions to be put to the expert.9

Finding and selecting the right party-appointed expert Considering the significance of expert evidence, finding and choosing the right expert is one of the most important decisions to be made by the parties in the course of a construction arbitration. In technical fields where there are few people sufficiently qualified to give an expert opinion, it may be wise to identify and appoint an expert as soon as possible. Moreover, an early involvement of the expert allows counsel to identify and understand the key technical issues in dispute, assess the client’s chances of success, and plead the client’s case from the start in the knowledge that the expert’s evidence will be fully supportive.10 Counsel may pursue various avenues when searching for an expert. Most law firms practising international arbitration keep databases of their ‘go-to’ experts in the prevalent fields of construction-related expertise. If expertise of a more obscure nature is required, the client will likely be able to suggest appropriate candidates. Another option is to contact international construction and engineering consultancy organisations that can draw from a large pool of experts in various fields and broker between counsel and expert candidates.11 Counsel may also reach out to the leading arbitration institutions.12 Regardless of how an expert candidate is found, it is important to conduct an interview with the potential expert, typically via telephone, before the decision is made whether to retain him or her. The main purpose of the expert interview is to enable a detailed discussion on the content of the expert witness’s curriculum vitae, to provide the expert with 9 See also Article 6 IBA Rules. 10 See D. O’Leary, The use of experts in construction disputes in the UAE, www.tamimi.com/law-updatearticles/the-use-of-experts-in-construction-disputes-in-the-uae-2/ (last accessed 31 July 2018). 11 See, e.g., The Academy of Experts (www.academyofexperts.org/) or the Expert Witness Institute (www.ewi. org.uk/). 12 Pursuant to Article 1 (1) ICC Rules for the Proposal of Experts and Neutrals, in force as from 1 February 2015, any person may submit a request to the ICC International Centre for ADR for the proposal of an expert in a particular field. The ICC currently charges a flat fee of US$5,000 per expert for this service (see Article 1 of Appendix II ICC Rules for the Proposal of Experts and Neutrals).

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more detail as to the issues in dispute, for the expert to ask further questions to confirm his or her expertise and availability, and for counsel to assess the candidate’s abilities as an expert witness and how he or she will fit into the team. There may also be some discussion regarding the expert’s preliminary view on certain aspects of the case. If the expert has concerns about his or her expertise in certain areas, he or she should be forthcoming about them. A number of factors will influence the decision regarding the choice of experts. The expert must have a solid reputation in the relevant field and, ideally, he or she has experience in acting as an expert witness, by giving both written and oral testimony. In order to come across as a reliable and credible expert, the expert should have good communication skills and have the ability to communicate complicated technical issues in a comprehensible way that allows laymen, and in particular the members of the arbitral tribunal, to understand the salient technical points of the case. Another important factor to discuss is the expert’s availability. Counsel should ensure that the expert has sufficient capacity to carry out the various steps of his or her mission, namely, fact-finding, compiling the report, assisting during the document production phase, and attending the evidentiary hearing.

Impartiality and independence of the party-appointed expert Although appointed by the parties, experts are expected to perform an independent assessment of the case, with their ultimate duty being to the arbitral tribunal.The more objective and independent the expert appears, the more credible he or she is and the more weight the arbitral tribunal will give to the expert’s evidence. Article 5.2.c IBA Rules requires the expert to include in the report a statement of his or her independence from the parties, their legal advisors and the arbitral tribunal.13 The main purpose of this provision is not to exclude experts with any connection to the participants or the subject-matter of the case, but rather to emphasise the duty of the party-appointed expert to evaluate the case in an independent and neutral manner.14 In particular, a person would disqualify as party-appointed expert if he or she has a financial interest in the outcome of the case, or otherwise has relationships preventing him or her from providing his or her honest and frank opinion.15 Accordingly, Article 5.2.a IBA Rules contains a duty of the expert to disclose any existing or past relationship with any of the parties, their legal advisors or the arbitral tribunal. However, the value of such self-assessment by the expert might be criticised as limited, and party-appointed experts might be reproached for their apparent lack of independence, tailoring their evidence for the primary purpose of supporting the case of the appointing party.

13 Certain guidelines go further, see Article 4 CIArb Protocol. 14 See 1999 IBA Working Party and 2010 IBA Rules of Evidence Review Subcommittee (IBA), Commentary on the revised text of the 2010 IBA Rules on the Taking of Evidence in International Arbitration, p. 19. 15 See IBA, p. 19.

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Counsel as well as the expert should therefore seek to ensure that he or she does not come across as biased. Experts are generally regarded as convincing if they can refrain from acting as an advocate for the party that retains them and show a willingness to concede points where appropriate to do so.16 If a party deems that the expert appointed by the other party lacks the required independence or impartiality, the question arises whether such expert may be formally challenged, or whether the expert’s independence and impartiality is primarily a matter to be considered by the tribunal in its assessment of evidence. The issue generally appears to boil down to a matter of assessment of evidence by the arbitral tribunal.

Instructions to the party-appointed expert Following the appointment of the expert, the party, its counsel and the expert should work together to establish the expert’s mission.The instructions to the expert should be executed in writing and clearly set out the scope of the expert’s work. The instructions should further contain the details of the matter and the involved parties, the expert’s contact details, a timetable for deliverables as well as the expert’s remuneration and payment conditions. The expert should be provided with all relevant documents including, if already existing, the relevant parts of the parties’ legal submissions and fact witness statements. The expert has a duty to carry out a forensic investigation of the relevant facts and should be proactive in requesting additional information or documents required to perform his or her task. Accordingly, the expert will likely be closely involved in guiding and directing disclosure requests from the other party. The documents should be provided alongside instructions regarding their use. In particular, the instructions should contain a confidentiality clause. Counsel might wonder whether their written communications with an expert, including drafts and markups of the expert’s report, may be subject to document production.The production of such communications is rarely sought and case law or guidelines on the discoverability of counsel-expert communications are rare.17 Prevailing practice in international arbitration is a presumption of non-discoverability of counsel-expert communications.18

Written expert evidence: the expert report Expert evidence is typically introduced into the arbitral proceedings in form of a report. The expert report is often submitted together with a party’s first legal submission, with the opportunity to submit a rebuttal expert report in the second round of submissions (see

16 See also Jenkins, pp. 208–209, with further references. 17 See, e.g., Article 5 CIArb Protocol, which presumes that counsel-expert communications as a general matter are privileged and not subject to production. 18 P. Friedland and K. Brown de Vejar, ‘Discoverability of Communications between Counsel and Party-Appointed Experts in International Arbitration’, in A.J. van den Berg (ed.), Arbitration Advocacy in Changing Times, ICCA Congress Series No. 15 (2011), pp. 162–164; G.B. Born, International Commercial Arbitration (Volume II, 2nd ed., 2014), Section 2281.

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Article 5.3 IBA Rules). Rebuttal reports are limited to responses to matters contained in another party’s witness statements, expert reports or other submissions that have not been previously presented in the arbitration.19 The report’s format and content will depend on the particularities of the case and the instructions given to the expert. Article 5.2 IBA Rules sets out the constituent elements of the expert report, which include, inter alia, the instructions, the facts underlying the report, the expert’s opinions and conclusions including a description of the methodology, evidence and information used in arriving at the conclusions, and documents on which the expert relies that are not already on file. This information is required in order to enable the other party to appropriately evaluate the content of the expert report.20 In addition, the expert report must contain an affirmation of the expert’s genuine belief in the expressed opinions. Such statement is intended to commit the expert to his or her report and emphasise that the expert should be prepared to take responsibility for the contents of the report during the course of the arbitration.21 Finally, the report should include the expert’s curriculum vitae. The report should follow a logical structure and contain a table of contents. Large volumes of information should be depicted in a comprehensible and digestible manner. It may be wise to move bulky or voluminous documentation, calculations or methodologies to the appendices rather than including them in the body of the report. Building information modeling (BIM) is becoming a more common feature of construction projects and hence the data is available to use BIM as part of the dispute resolution process. BIM is therefore gaining traction as a tool to assist in the presentation of expert evidence in construction arbitration.22 BIM can be used to demonstrate an engineering analysis or expert programming evidence. As a rule, BIM snapshots are included in the report with the full version being provided electronically.23 Documents underlying the expert report are typically referenced in the body text and listed in a subsection of the report or in an appendix, and – if not already on file – annexed to the report. A recurring issue in this context is whether the expert must designate only the documents which he or she relied on in the report, or all documents which he or she consulted when preparing the report. It is important to consider this at the outset when instructing the expert, as a party that provides the expert with full access to its digital data room may be severely disadvantaged if the expert is subsequently ordered to disclose such information. There appears to be no prevailing practice regarding whether or not the expert is obligated to disclose the entirety of the information and documents received or that were made accessible to him or her. As a rule, it should be sufficient to list only the documents that were used to prepare the report. This creates a level playing field between the parties. Furthermore, additional documents should only be handed over based on the principles applicable to document production requests in the arbitration.

19 20 21 22 23

IBA, p. 20. IBA, p. 19. IBA, p. 19. See Jenkins, pp. 209–210. See Jenkins, pp. 209–210.

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Expert witness meetings; joint reports In order to make the expert evidence more accessible and to gain a better understanding of the issues in dispute, an increasingly popular method of dealing with party-adduced expert evidence is for the arbitral tribunal to order expert conclaves or joint expert meetings. During such meetings, which are expressly provided for in Article 5.4 IBA Rules, the experts – in the absence of the tribunal, the parties and their counsel – conduct discussions in order to narrow down the issues in dispute. Experts from the same discipline can relatively quickly identify the reasons for their diverging conclusions and work towards finding areas of agreement.The experts then prepare a joint report setting out the outcome of their meeting and the areas of agreement and disagreement. The joint expert report therefore significantly contributes to the arbitral tribunal’s understanding of where the points of divergence lie. Such reports often consist of a table setting out the issues in the left column and the respective experts’ positions in the following columns.24

Oral expert evidence: expert testimony at the evidentiary hearing The party-appointed expert is required to give testimony at an evidentiary hearing if requested by a party or the arbitral tribunal.25 Expert witnesses in construction arbitrations are routinely required to testify. If an expert who is called to give evidence at a hearing fails to appear, the tribunal will, as a rule, disregard the expert’s report, unless there are exceptional circumstances.26 If a party does not request an expert appointed by the opposing party to appear at the hearing, such party shall not be deemed to have accepted the content of the expert’s report.27 Where the experts prior to the hearing attended a joint expert meeting and established a joint report, their oral evidence at the hearing may be limited to the identified areas of disagreement.28 At the hearing, the expert will not only be regularly present for his or her testimony, but will usually attend the entire hearing, as it is important for the expert to hear the fact evidence as well as other experts’ testimonies. Traditionally, expert witnesses give their evidence separately and in turn, first during direct examination by counsel of the appointing party followed by a cross-examination by the opposing counsel. The expert’s report will usually serve as his or her direct testimony. However, in recent years it has become more and more customary for each expert to give a presentation summarising the main points of his or her report. The expert will then be subjected to cross-examination, possibly followed by re-direct examination limited to the scope of the cross-examination. Experts are questioned much like fact witnesses with focus on their credentials, independence, the material reviewed, methodology, and the basis for their opinions. In addition, the arbitral tribunal will likely put questions to the expert during or after their examination.

24 See also Rosen, pp. 403–404 and Annex IV with practical tips and template regarding joint expert meeting and joint report. 25 See Article 8.1 IBA Rules. 26 See Article 5.5 IBA Rules. 27 See Article 5.6 IBA Rules. 28 See also IBA, p. 20.

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An expedient and popular method of dealing with oral expert testimony is expert witness conferencing, colloquially dubbed ‘hot-tubbing’. The expert witnesses give evidence concurrently rather than sequentially, with the arbitral tribunal leading the debate. The experts take questions first from the arbitral tribunal, and thereafter from counsel at the same time.The arbitral tribunal may order such conferencing upon request of a party or on its own motion (see Article 8.3.f IBA Rules). Expert witness conferencing is recognised as an effective technique for the arbitral tribunal to elicit clearer evidence on the relevant technical issues and shorten the procedure at the hearing. Placed next to their professional peers, experts may be compelled to present their opinions more independently and objectively.29 Without being subjected to cross-examination, expert witnesses are more likely to take a constructive approach, to express their opinions with confidence, and to make concessions where they feel it is right to do so.30 For conferencing to be successful, the arbitral tribunal must be well-prepared, understand the technical issues at stake, and properly manage the process. Counsel should only agree to expert conferencing if they are confident that their expert is sufficiently resilient and engaging to ensure that his or her opinions and findings will be suitably presented in the process.31

Expert evidence and setting aside of the award: what to look out for An arbitral award may be challenged and potentially set aside on grounds related to expert evidence relied upon by the arbitral tribunal when rendering its decision. In light of the importance of an expert’s independence and impartiality, an arbitral award may be challenged for example based on the argument that the arbitral tribunal relied on the findings of a biased expert. Depending on the seat of the arbitration, the challenge may be put forward on the grounds of incompatibility with public policy. In any case, the party in question must have promptly challenged the expert’s lack of independence in the arbitral proceedings.32 Another potential ground for the setting aside of an award may be put forward based on the right to be heard, where the arbitral tribunal rejected a party’s request for the appointment of a tribunal-appointed expert. The success of a challenge based on such argument will largely depend on whether the applicable arbitration law grants the parties a right to the appointment of an expert by the tribunal. While many jurisdictions do not grant the parties such right,33 according to the Swiss Supreme Court’s case law the parties have a

29 30 31 32

See Sachs and Schmidt-Ahrendts, p. 143. Horne and Mullen, p. 303. Snider and Adams, p. 19. See, e.g., for Switzerland, Article 190(2) IPRG and Berger and Kellerhals, Section 1350; for The Netherlands, Article 1065(1)(e) Rv and V. Lazić and G.J. Meijer, Netherlands, in F.-B. Weigand (ed.), Practitioner’s Handbook on International Commercial Arbitration (2nd ed., 2009), Section 9.198; and for Austria C. Liebscher, The Austrian Arbitration Act 2006: Text and Notes (2006), annotated text to Section 601(3) ZPO. 33 Born, pp. 2279–2280; E. Gaillard and J. Savage, Fouchard Gaillard Goldman on International Arbitration (1999), Section 1290. Regarding the arbitral tribunal’s obligation to pursue requests for evidence in Germany, see OLG Frankfurt a.M. decision of 17 February 2011, 26 Sch 13/10, at II. 3, with further references.

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right to the appointment of an expert by the tribunal if certain rather restrictive conditions, such as an express request by a party and the relevancy of the requested expertise to the tribunal’s decision, are met.34 Finally, it is paramount for the arbitral tribunal and counsel to ensure that expert reports are submitted in compliance with the agreed procedural rules, as non-compliance may too serve as grounds for a challenge to the award. In a landmark decision of 2011, the Higher Regional Court of Frankfurt am Main set aside an arbitral award due to the failure by a party and its expert to adhere to the agreed procedural rules. The arbitral tribunal had issued a procedural order containing detailed directions for the taking of expert evidence. The directions required the parties to disclose all information that the experts had reviewed in the process of drafting their respective expert reports. This provision had been subject to extensive prior negotiations between the parties and the tribunal, and was referred to in the procedural order as an ‘agreement by the parties’. One of the parties subsequently failed to disclose all of the information its experts had reviewed when preparing their report. The court confirmed the setting aside of the award and held that the parties’ agreement on procedural issues takes priority over the tribunal’s procedural discretion and could not be overridden by the tribunal’s decision.35

34 See Swiss Supreme Court decision 4A_277/2017 of 28 August 2017. The Supreme Court did not however consider that the petitioning party’s right to be heard had been violated, and did not set aside the award, as the further conditions had not been met. See also M.E. Schneider, Technical Experts in international Arbitration, 11(3) ASA Bull 446, Section 18. 35 See OLG Frankfurt am Main decision of 17 February 2011, 26 Sch 13/10. The German Supreme Court, in its judgment of 2 October 2012, III ZB 8/11, dismissed the appeal against this decision.

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20 Expert Evidence in Construction Disputes: Expert Witness Perspective Guy Elkington and Paul Taplin1

Introduction Some issues can be determined only by the arbitral tribunal deciding on differences that are essentially matters of opinion. Thus, in a construction dispute, the contemporary documents, comprising correspondence, progress reports and other memoranda, and the evidence of witnesses who were present on site may enable the arbitral tribunal to determine what actually happened. There may then be a further question to be determined - namely, whether or not what actually happened was the result of, for example, a design error or defective construction practices. The determination of such an issue can be made by the arbitral tribunal only with the assistance of experts, unless it possesses the relevant expertise itself.2

The construction industry is a relatively unique, albeit everyday, activity. Apart from some aspects of, for example, residential construction (particularly factory-built modules), most construction projects involve the development of a bespoke design to construct an asset in a physical location that is unique to some degree. If the project is a large process plant, a significant piece of national infrastructure, or a ‘one of a kind’ trophy project, it may involve the complex interaction of tens or hundreds of thousands of activities involving many different disciplines, parties, and materials coming together under a ‘prototype’ design. The project will usually have to be completed within a fixed timescale, work perfectly on completion, and any shortcomings in time or quality may involve some form of sanction or discount. If any other industry was expected to deliver a series of one-off prototypes (only) under similar constraints or pressures, for a fixed price, it would more than decline.

1 2

Guy Elkington and Paul Taplin are senior managing directors at Ankura. Redfern and Hunter on International Arbitration, 6th Edition, 6.133.

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Invariably something – or more frequently a number of things – go awry. Some of these may be foreseeable and some may not. They may involve breaches of contract, acts by third parties, changes in circumstance, human failings or the manifestation of risks that may or may not be suitably allocated to the parties to the contract. The consequences are often expensive and complicated to unravel, particularly when different parties may have liability for the events that have occurred, and where the effects of different events combine. For those not familiar with construction disputes, the popular view would be that a construction arbitration would revolve around heady issues of law and contractual analysis. In reality, it is often a painstaking forensic analysis of large amounts of data and evidence and the actual outcome is often more to do with facts than with law and contract. Invariably, elements of that forensic analysis will need to be undertaken (or validated) by an expert. It is not uncommon for large and complex construction disputes to involve several experts in various disciplines. On a typical construction or engineering dispute involving completion delays, disputed variations and defects the costs of experts can easily range between 30 per cent and 60 per cent of the total costs of the arbitration. While tribunals often tend to be more reserved in their criticism of any perceived failings of an expert than the judiciary would be, it is unfortunately not uncommon to see the words in an award that ‘the evidence of Mr/Ms Xxx was of little assistance to the Tribunal’. This can be for a variety of reasons ranging from a perception that a failure in an expert’s duty had occurred to the adoption of a flawed methodology or a failing to undertake enough checks on factual and evidential issues that underpinned a conclusion. If this is a tribunal’s conclusion, given the level of cost typically involved, it may have a significant effect on the outcome. The effective use and management of expert evidence is therefore an issue of some importance to the parties and to the tribunal. Expert costs can be affected by a wide variety of issues and those issues need to be identified and managed as early in the arbitral process as possible.

Duties of an expert This chapter focuses more on the role of an expert, and the management of that role, as opposed to the duties of an expert. In most legal systems rules of evidence and codes of practice require that an expert has an (overriding) duty to present independent and impartial opinion to a tribunal and to enclose some form of declaration of independence and truth with their report.3 Many of these codes of practice also require an expert to state the extent of his or her instructions and care should be taken to ensure that those instructions are wholly consistent with the expert’s duties. For a party entering the formal dispute arena for the first time, the concept that the expert or experts whose fees they are paying are duty-bound to give independent evidence that may not necessarily support their case may be a strange concept, but the risks

3

e.g., Article 4 of the Protocol for the use of Party-Appointed Expert Witnesses in International Arbitration (Chartered Institute of Arbitrators); Article 5 of the IBA Rules on the Taking of Evidence in International Arbitration; PS2.1,2.2, 5.3, 5.4(p) Surveyors Acting as Expert Witnesses, 4th Edition (Royal Institution of Chartered Surveyors); The Code of Practice for Experts (the Academy of Experts).

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of attempting to unduly influence an expert’s evidence or opinions need to be understood. The pitfalls are clearly visible in several recent judgments from the Technology and Construction Court of England and Wales, and incur a risk that an expert’s entire evidence could be discarded.4 The litmus test for an expert in terms of independence is whether his or her opinion would be the same if he or she were instructed by the other party. Similarly, an expert’s instructions should be sufficiently all-encompassing such that an expert is not restricted to providing an opinion that relates to his or her instructing party’s liability position and ignores any alternative positions or methodologies being advanced in the arbitration. There will be cost implications in providing an opinion on alternatives, and this may need to be caveated as subject to approval (on fees).

Types of experts Firstly, there are experts who assist the tribunal in understanding what went wrong and why. These experts could be, for example, planning or scheduling experts who will opine on the causes and extent of delays to a project, or technical experts (usually from a design or engineering background) who may opine on issues of defective design, materials or workmanship, and changes to design or design standards.Where negligence is alleged, there may be experts advising on whether a specific standard of care or performance had been met. The issue of who is liable under the contract or at law for the consequences of those issues is in most jurisdictions a matter for the tribunal (and not an expert), but a tribunal may need assistance on discrete legal issues from a legal expert if the dispute involves laws or jurisdictions that are unfamiliar to the tribunal. On the above issues there may be significant divergence in opinion between party appointed experts, often because there may be a range of differing methodologies or forms of analysis available to experts or conflicting data. If these differences are extreme, a tribunal may feel it has to appoint its own expert to advise it on the competing expert evidence, which, to a fee-paying party, will add a further layer of expense. Secondly, there may be experts who will opine on the (often financial) consequences of the above issues who will tend to be quantity surveyors, cost engineers, property experts, or accountants. This evidence is often provided on an ‘if ’ basis, namely, if the tribunal decides that a variation or breach has occurred. This could involve opining on the valuation of variations, the audit and applicability of costs to compute the amount of damages arising from delays or disruption including changes in property values or defects (on a diminution of value or rectification basis), losses of profit (in the event of the termination of a contract), business interruption costs and losses of opportunity. There are fewer areas of controversy and differing methodologies in the analysis of quantum or consequences and therefore a higher likelihood that competent experts should be able to agree ‘figures as figures’ on a range of liability positions or, where there are differing methodologies, then on those alternatives.

4

An extreme example is at Van Oord UK Ltd & Anor v. Allseas UK Ltd [2015] EWHC 3074 (TCC) [93]–[94].

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Cultural and jurisdictional differences In many parts of the world, and particularly in the developing world, arbitration is often the only realistic option for the resolution of large and complex construction disputes. In addition to issues of confidentiality and the ability to select a specialist tribunal, the procedure and the seat, arbitration is often utilised in jurisdictions where, in addition to issues of confidentiality and flexibility, the local courts may be perceived as being unused to dealing with large and complex technical disputes. In these situations, the conduct of a large construction arbitration often falls to individuals selected from a relatively small (in global terms) group of people comprising arbitrators, lawyers and counsel from a limited number of jurisdictions. For historical reasons, a larger proportion of these individuals currently come from a common law background rather than a civil law background.This can result in arbitrations in civil law jurisdictions being conducted by tribunals from a mix of civil and common law backgrounds and occasionally wholly from a common law background. Equally, parties and their advisers may also come from differing jurisdictions. This can lead to a variety of expectations as to the nature and use of expert evidence and can also lead to procedural differences as to whether expert evidence is presented as part of a party’s pleaded case (memorial pleadings) or whether expert evidence is adduced after the parties have pleaded their case and after (or concurrent with) factual witness evidence. This is discussed further below but can have implications for expert evidence. There can be differing views as to the role and boundaries of expert evidence between civil and common law jurisdictions. These are not universal but often stem from the experience of both lawyers and experts in construction litigation in that jurisdiction, which can manifest itself in the conduct of an arbitration either in that location or involving tribunal members or lawyers from those jurisdictions. In some civil law jurisdictions (notably the Middle East), construction cases may be pleaded in a brief format where a series of written allegations are made with relevant documents attached. The court will then appoint an expert who will undertake an investigation into the claims and defences and possibly hold meetings with the parties on an individual basis, based on a pre-issued questionnaire in some cases. In other jurisdictions, it may be a requirement that both parties attend and are privy to all meetings and communications between the parties, the expert and the court.The expert may also gather additional evidence during the investigation phase. Some laws require that a party is duty-bound to provide the expert with the evidence requested.5 The expert will then submit a report to the court that may be quite wide-ranging in its scope and that will contain recommendations.The court can then choose whether to adopt the expert’s report, and where it does so the report effectively forms its judgments on the issue. In many European jurisdictions, the court will appoint its own expert.There is a natural suspicion in some jurisdictions that party appointed experts are subject to manipulation by those instructing them and are biased and less reliable with the inevitable result that the court is presented with two opposing opinions. There is a view that the only credible expertise is neutral expertise (which a party appointed expert is assumed not to provide)

5

Article 82.3 of UAE Law No. 10 of 1992.

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and as such the appointment of experts is a matter for the court and not the parties.6 In addition, there is a perceived cost and time saving that goes with that approach. Conversely, in a common law jurisdiction there may be a greater tendency for parties to appoint their own ‘backroom’ experts to allow them to cross-examine and interrogate the evidence of a court appointed expert (albeit they may not recover the costs of doing so), which may lead to the cost of three experts instead of one. In some geographies it is customary for an expert to undertake a more hands-on role, and in arbitrations that adopt a civil jurisdiction procedure (in every sense) there may be a tendency to allow a party more latitude to quantify or advance their claims through expert evidence.This can cause tensions when a tribunal or counsel are from a common law jurisdiction where they may view an expert’s evidence where the claim is being presented via its expert (or prepared by its expert) with a degree of suspicion. However, leaving the experts to work out what the client’s case is, and then to present it in a report, is a complete distortion of the role of independent expert evidence. In fact such an approach is likely to lead to the judge or tribunal concluding that the expert is not independent, as he is simply confirming what he has previously said, or is acting as an advocate for his client, rather than expressing an unbiased opinion on both the parties’ factual cases.This can lead to the complete rejection of his evidence, and serious costs consequences.7

Where opposing experts in an arbitration (absent directions from the tribunal) are from opposing schools of thought, this can also lead to a mismatch in expert evidence, particularly if one expert undertakes more of an investigatory function. Regarding the issue of single experts (whether jointly appointed or tribunal appointed) or party appointed experts, the nature of the expertise may also have some relevance.There are some areas of expert evidence (e.g., delay experts) where there may be a considerable range or divergence of opinion. This may be born out of methodology issues, the interpretation of data, or where subjectivity is involved where ‘weight’ has to be attached to an event or item of evidence. The tribunal may justifiably want the benefit of that range of opinion. Alternatively, there may be some areas of expert evidence, including aspects of quantum or accounting evidence, where there are fewer controversies of methodology and where party appointed experts often achieve a higher degree of agreement. In such instances, the appointment of a single expert may present fewer issues. There is a growing number of experienced construction arbitrators from both common law and civil jurisdictions who have experienced the pros and cons that both jurisdictions have to offer in terms of the approach to and scope of expert evidence. A key advantage of arbitration is that it can be flexible and can blend the approaches available. If parity of evidence is desirable, particularly where participants and experts are from a variety of jurisdictions, it is advisable that appropriate directions are given as early as is reasonably practicable as to where the boundaries and limits of expert evidence should lie.

6 7

See Dr Andreas Respondek, ‘How Civil Law Principles Could Help to Make International Arbitration Proceedings More Time and Cost Effective’, Singapore Law Gazette February 2017. Richard Harding QC, ‘Expert Evidence in Construction Disputes: Its use and abuse’, 2014.

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Memorial versus pleadings – issues for experts Some procedural rules stipulate that a memorial style process be adopted. This is where a party must submit all the evidence that it intends to rely upon (factual, witness evidence and expert evidence) at the outset with its statement of claim or defence.8 The perceived advantage of a memorial approach is that it gets all the evidence out earlier and the tribunal get greater visibility on the case and sees the evidence earlier. It also means that the parties must spend more money earlier in the process than it would under a common law pleading style, which may encourage settlement, avoid ambushes, and discourage a claimant from ‘trying it on’. If there are evidential shortcomings with a case, a memorial approach may highlight these earlier and this may force a reappraisal of a party’s true position. However, construction disputes are usually evidentially heavy and complex, and if a memorial approach is to be followed, sufficient time and planning must be allowed for what can be complex ‘choreography’. Ideally what needs to be submitted is: • a pleaded statement of claim; • documentary evidence that provides all the necessary backup to support that claim; • factual witness evidence that is relevant to the issues being claimed; and • expert evidence. If an expert is to provide a proper report based on all the available evidence, then, at least, developed drafts of the first three points above need to be provided to the expert in sufficient time for him or her to be able to analyse the relevant evidence and conclude his or her opinion. Those instructing the expert will want the expert’s report some time in advance of the finalisation of the statement of claim and witness statements. In reality, all of the above must proceed within the same time frame and the identification and assembly of evidence usually takes longer than planned. This results in the expert or experts being provided with evidence in a piecemeal manner or the expert being relied upon to say what evidence is required (to produce an opinion) and to identify gaps where additional evidence has to be located. What can then evolve is a ‘chicken and egg’ scenario as expert opinion develops with the flow of the factual evidence, often involving some element of partial analysis or re-work as the pressures of the arbitral timetable make themselves felt. Claimants understandably want the process to proceed as quickly as possible and may be under considerable commercial pressure to do so, but this can force a timetable that is challenging, which may manifest itself in a statement of claim and factual and expert witness evidence that is not completely aligned. Equally, it may also result in a claimant adopting the findings of its experts’ opinion reports as its claim (in terms of claimed sums or extensions of time). This can create issues later. A claimant’s expert, in a memorial process, has to issue his or her opinion based solely on the claimant’s evidence or statement of claim. Once the respondent issues its statement of defence with its accompanying factual witness and expert evidence, it may be that the claimant’s expert finds that this new information and evidence amends its opinions in its

8

e.g., Uncitral Arbitration Rules, Articles 20.4 and 21.2.

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reply report or has to undertake further analysis (particularly if alternative factual scenarios are advanced) and provide alternative opinions. Where the claimant’s expert does amend his or her opinion and the claimant had adopted the expert’s original report as its pleaded case, the claimant will need to consider whether it should re-plead its claim. Therefore, the amendment of an opinion by an expert to take account of new evidence (which it will need to do to comply with its declaration) may have additional consequences. In the case of delay analysis, if a respondent serves conflicting as-built data (or a claimant has withheld a less favourable body of data from its own expert), this may involve a claimant’s expert having to either re-do his or her analysis or undertake an alternative analysis. Where an expert discipline has several alternative methodologies that could be utilised, early agreement between experts (if both are appointed) as to whether they can subscribe to a common methodology in advance of costs being expended is to be encouraged. Reaching agreement is less likely at the outset of a memorial process as often the choice of methodology may be determined by the quantity and quality of the available data and evidence.That may not be known at that point or until after the claimant’s expert has selected his or her methodology (often on the basis of the evidence made available to it by the claimant) and then expended costs on that methodology – at which point he or she may be entrenched or not have the budget to undertake an analysis on an alternative methodology. Through the prism of an expert lens, memorial pleadings can present challenges if the objective of expert evidence is to present a full range of independent opinion to a tribunal and to have the greatest opportunity to narrow issues in dispute. There is also a sense (to an expert from a common law background) that memorial pleadings engender more of an environment whereby expert opinion becomes aligned with or, in fact, is the client’s case. In those circumstances there may be a tendency for an expert to become entrenched and reaching agreement in joint meetings may become problematic. For a claimant’s expert there is also the increased prospect that re-work and reanalysis will need to be undertaken as further evidence comes to light, either through document disclosure processes or the evolution of the case, after the expert has completed his or her main analysis in the first round of pleadings. There is a view that, from an expert perspective, memorial pleadings are more expensive and time consuming than the common law pleading approach. This is by definition a self-centred view, and there may be other imperatives that determine that a memorial approach is, in overall terms, to be preferred in certain circumstances, but in a large and complex ‘expert-heavy’ arbitration, those imperatives should come under some scrutiny.

Early expert advice It is a fallacy that the late appointment of an expert saves costs. Often the best value advice that can be obtained is either pre-action advice or advice at the point of strategising a statement of claim or defence. Care will need to be taken to ensure that all involved understand what the status of that expert advice should be. If it is intended to appoint an expert to act in due course as an expert witness, it is important to ensure that the advice received is objective and impartial and would not cause the integrity of that expert to be later challenged or called into doubt.

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It is at this stage, more than any other, that an expert should tell a party what it needs to know and not what that party wants to hear. Should a party dislike or disagree with that advice, it can select an alternative expert. However, it needs to bear in mind that if it engages in ‘expert shopping’ it may encounter a potential range of opinion that may ultimately prove hostile to its position. Early expert advice need not be expensive or lengthy. It is an opportunity for a party to understand the principles and methodologies that an expert would or would not support (and why). Similarly, in terms of the evidence that would be required to support or test the veracity of a claim, an expert can provide advice on the nature, granularity and robustness of factual evidence that will be required to support a position.The expert may also provide insight as to the types of difficulties and challenges that a claim may need to overcome or that are commonly encountered within that expert’s area of expertise. This can often provide a reality check to a party as to the tasks that will face them and the resources that they may need to locate and deploy to assemble their case, and assist them in understanding the likely costs they may need to expend.

What do tribunals need? Ideally, tribunals want experts: • to be appointed with parity of instructions and scope; • to be provided access to the same information and evidence; • to provide comparable and concise opinion evidence such that the tribunal can assess their opinion evidence on a common basis; • who will separate statements of fact, assumptions and opinion in their written report; • who provide straightforward opinions and who will explain their reasoning; • who limit their opinions and comments to those issues that are not within the expertise of the tribunal and that are within the experts’ own expertise; • who provide a tribunal with the appropriate range of opinion evidence and provide alternative opinions where there are alternative factual and liability positions; • who can simply explain the nub of any differences they may have with their counterpart; and • who will concede issues where appropriate and understand that it is not about ‘winning’ against the other expert.

Costs and proportionality As set out above, expert evidence in a construction arbitration can be a significant part of the total cost of an arbitration.There is naturally and correctly a need for the costs of expert evidence to be under control and to ensure that activities and evidence remains focused, relevant and proportionate. Experts can be appointed on the following bases: • time (an hourly rate); • milestone payments (lump sums or budget estimates); • capped fees; • lump sums; and • any combination of the above.

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Experts should not be appointed on a contingency or success fee basis or with their fees in any way conditional on the outcome of the case as this will mean they have a financial interest in the case, which could imply that their evidence is not impartial and should be discarded. Some procedural rules or professional codes of conduct forbid an expert to be appointed on any sort of conditional fee basis. The costs of expert evidence can be affected by a number of factors such as: • the procedure of the arbitration (memorial or pleading); • the number and timing of expert reports: • main; • joint schedules and meetings; • reply; and • rejoinder; • the number and timing of hearings or bifurcation; • the quality of evidence both in terms of substance and form, for example, whether it can be searched electronically or manually or whether native copies of data are available or have to be recreated; • whether various forms of evidence are consistent or contain inconsistencies that need to be reconciled before they can be processed; • the quantity of evidence (e.g., whether that evidence is logically structured or is just many gigabytes of ‘data dump’); • the timing of the issue of evidence; • the number of items in dispute (both claim and counterclaim); • the number of alternative factual scenarios and liability positions on which the expert may need to opine; • the quality and professionalism of the opposing expert; • the degree to which an opposing expert will agree joint activities such as data sampling and audits; • whether the parties employ ‘tactics’ in the conduct of the arbitration and the ability of the tribunal to control those tactics; and • changes to the timetable that result in delays (to evidence) or compression of periods within which expert evidence can be prepared. Most of the above issues are usually not foreseeable by an expert at the outset of an arbitral process nor are risks that are within the control or management of an expert. Several of the above are within the control of the parties or their legal advisers. However, experts are frequently requested to commit to lump sum or capped fee arrangements and to take the risk of issues that are often beyond the experts’ control or influence. Every case is different and there may be some of the above that an expert may be given the opportunity to inspect or quantify, but some reasonableness needs to be attached to this. Providing an expert with a hard drive containing 80GB of raw project data and expecting a lump sum agreement forthwith may not be realistic. Early expert advice, however, may be suitable to be conducted on a lump sum basis as the extent of the work involved may be quantifiable.

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Most experts should, however, be able to provide some sort of range of fees, broken down into the various stages of the arbitral process, and while every case may differ, if the fee is based on previous cases it should account for most of the variabilities that can be encountered. Some sort of staged fee arrangement may be also overcome some of the above risk, namely, a budget estimate that is firmed up or converted to a different fee arrangement as and when risks and issues are overcome or become tangible.

Conclusion For most experts, an area of continual difficulty is the availability and quality of evidence. Occasionally this is the result of tactical games or because the parties and their advisers have been distracted by other issues or are uncertain what to provide and so err on the side of caution. A party and its advisers should think long and hard about advancing high-value claims that are defective or that are ‘sympathy’ claims where they involve significant expert costs. This is even more relevant in jurisdictions where the loser pays costs. While claimants will want to reach the end of the process as quickly as possible, bifurcation (where permissible) of liability from quantum with the with quantum expert process taking place after liability hearings may have a significant effect on reducing expert costs, particularly where there are starkly different liability positions, albeit this may be offset by the need for two hearings. Experts will welcome a hands-on tribunal that takes early control of evidence disclosure and provides guidance to the parties as to what they expect to receive from the experts. This can often have the effect of limiting tactic and scope for disagreement and will allow the experts to focus on identifying and then narrowing the issues of difference within their expertise.

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21 Documents in Construction Disputes Bartosz Kruz˙ewski and Robert Moj1

Introduction Documents are the most reliable evidence in construction arbitration. Each party to the dispute relies on documents to prove its claims or rebut the other party’s arguments. Documents are the main source of accurate and contemporaneous information, allowing the arbitrators to recreate the factual circumstances of the case and consequently decide on its merits. It is especially applicable to construction arbitration, where the execution of long-lasting projects requiring continuous cooperation between owners, general contractors, subcontractors, designers and other parties in a changing environment usually generates a complex factual background, recorded by the parties in various documents on a daily basis. If these circumstances lead to a dispute, they can be precisely unravelled only by deriving data from contemporaneous documents. Therefore, before entering into a construction dispute, especially before commencing arbitration, parties to the arbitration have to diligently review the vast quantities of available documents, including letters, contemporaneous records and emails, in order to identify the documents relevant to their case, as well as any missing documents that may be in the possession of the opposite party or even a third party not involved in the dispute. In the latter case, it might be worth considering obtaining the documents through the disclosure procedure. Even if these stages are prudently executed, the number of documents required to support the parties’ cases in construction arbitration usually amounts to thousands. Consequently, it is also vital for the parties to effectively manage the documents filed in the arbitration and convincingly present them to the arbitrators during the hearings on the merits of the case.

1

Bartosz Kruz˙ewski is a partner/advocate and Robert Moj is a counsel/legal adviser at Clifford Chance.

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This chapter provides guidance on handling documents in construction arbitration. It presents the types of documents commonly filed in arbitration that should draw the party’s attention during the document review process, the procedure of disclosure in international arbitration, and the management of documents during arbitration.

Documents as evidence When it comes to international arbitration, there is no clear definition as to what a document or documentary evidence is. The evidence is anything in the form of material or information that a party can present to the tribunal to support its arguments.2 By presenting evidence such as witness statements, expert reports and documents, the parties will attempt to discharge their burden of proof.3 The burden of proof is a commonly accepted rule providing that a party relying on a particular fact has the burden of establishing that fact.4 In general, documentary evidence may be any form of written data such as letters, emails, contracts, reports and any other written communication. Moreover, it can include photographs, films, audio and video tapes, and drawings.5 The IBA Rules on the Taking of Evidence in International Arbitration (the IBA Rules) define a document as ‘a writing, communication, picture, drawing, program or data of any kind, whether recorded or maintained on paper or by electronic, audio, visual or any other means.’6 The term ‘document’ relates not only to physical media, but also to any type of electronic media such as emails, text messages, word processing documents, digital images or even metadata.

Typical documents in construction disputes Different types of construction claims establish different requirements as to the burden of proof, both in relation to the claimant and the respondent.7 Consequently, different documents might be required to prove different claims.

2 3 4

5 6 7

J. Cook, ‘Factual and Expert Evidence in Arbitration’, Asian Dispute Review Hong Kong International Arbitration Centre (HKIAC) 2014,Volume 2014, Issue 1, p. 30. J. Cook, ‘Factual and Expert Evidence in Arbitration’, Asian Dispute Review Hong Kong International Arbitration Centre (HKIAC) 2014,Volume 2014, Issue 1, p. 29. J. Waincymer, Procedure and Evidence in International Arbitration Kluwer Law International, 2012, p. 761; S. Rosenne,Y. Ronen, The Law and Practice of the International Court 1920–2005, Fourth Edition, Leiden: Martinus Nijhoff Publishers, 2006, pp. 1040–1042. J. Cook, ‘Factual and Expert Evidence in Arbitration’, Asian Dispute Review, Hong Kong International Arbitration Centre (HKIAC) 2014,Volume 2014, Issue 1, p. 30. See: IBA Rules on the Taking of Evidence in International Arbitration, adopted by a resolution of the IBA Council on 29 May 2010, International Bar Association. J. Permesly, T. Cohen, International Arbitration Involving Construction: Best Practices for Documenting Claims and Defenses, available at: www.chaffetzlindsey.com/wp-content/uploads/2016/05/ International-Arbitration-Involving-Construction-Best-Practices-for-Docu....pdf.

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Construction contracts also require the parties to create and exchange miscellaneous documents.8 The diversity of documentation that might serve as evidence is increased by the complexity of construction projects and the variety of record-keeping practices used by companies, especially from different jurisdictions.9 Therefore, there is no universal list of documents that will be adequate to discharge the burden of proof in relation to each particular construction claim. However, there are some types of documents typically submitted by parties in arbitration to support their construction claims.These documents include pre-contractual and contractual documents; variation orders and schedule documentation; correspondence; contemporary records; and cost documentation. Parties involved in construction projects may consider producing these types of documents in order to accurately record the events occurring throughout the execution of the project, to effectively manage the project, and to settle any potential disputes during its execution or, in the worst case scenario, to prepare evidentiary material for arbitration. A party preparing for arbitration may also revert first to these types of documents in order to find the documents relevant to the case. These types of documents are: • pre-contractual documentation, including specifications, drawings, geotechnical data or clarifications of the tender requirements provided by the owner on one side and the contractor’s calculations, labour productivity assumptions, internal reports and worksheets on the other side, may be used to prove the parties’ assumptions, expectations and intentions as to the execution of the contract; • contractual documentation, including the contract, final specification and drawings, which may vary from the pre-contractual versions, as well as annexes to the contract and variation orders; these documents evidence the scope of the parties’ obligations; • schedules (original versions and updates), supplemented by charts and reports presenting any changed assumptions as to the resources envisaged to complete particular works, which are crucial in evidencing the liability for delays or entitlement to an extension of time and related monetary claims; • correspondence, including letters, notices and emails, which contain information ranging from daily technical issues to legal statements impacting the execution of the project; • other contemporaneous records, such as minutes of meetings, site logs, progress reports, daily reports on the man-hours and equipment hours worked, which might be helpful in evidencing the actual impact of any obstacles occurring during the execution of the works on the parties’ assumptions, including loss of productivity or acceleration measures; and • cost documentation, including invoices, receipts and proofs of payment. Generally, the party seeking reimbursement of the actual cost incurred should submit this primary evidence to prove the quantum of the pursued claims. As this is usually a time-consuming and expensive exercise, in particular in large construction disputes, in practice the parties try to substitute the filing of the primary evidence with presenting an expert report

8 9

See: Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer, Text of FIDIC First Edition, 1999 (see especially: clauses 20.1, 2.5, 15.1). Footnote 7.

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on the accuracy of the sums claimed, accompanied by an invitation addressed to the other party or the expert appointed by the tribunal to review the calculations on a sample basis. Such measures are sometimes accepted by the tribunals.10

Document review and disclosure Before entering into a dispute, especially into construction arbitration, it is recommended to perform a document review. Document review is a process in which a party verifies the documents it possesses in order to eliminate those that are irrelevant or immaterial to the case.11 This process is usually expensive and time-consuming, as an immense number of documents are produced during the life of a construction project. However, this process is also crucial for the successful outcome of a dispute, mainly due to the following reasons. Firstly, the party aiming to win the arbitration has to meet its burden of proof. That means that this party has to provide the tribunal with evidence proving that the facts on which it relies actually occurred. The party must therefore conduct a document review in order to find the relevant documents to support its assertion as to the facts and to separate the pertinent documents from those of lesser importance. Document review may also help identify any missing documents that may be in possession of the other party or a third party, and may lead to a filing for disclosure early on in the arbitration process. Secondly, providing the tribunal with only the relevant documents accelerates and simplifies the case, which in most cases may increase the chances of winning in arbitration. Providing the tribunal with thousands of documents without showing their importance or explaining their relevance to the case will increase the costs and may dilute the parties’ argumentation. Moreover, the tribunals have means of stopping such conduct of the parties by issuing procedural orders, and are indeed encouraged to do so by several institutional rules and guidelines on arbitration.12 Furthermore, document review makes it possible to prevent any documents that are privileged or confidential from being filed in the arbitration. During the document review, the parties have the opportunity to exclude the documents that are confidential due to commercial or technical reasons or that are subject to legal privilege. Even though a party to the dispute will not always be allowed to withhold such documents from submitting them to the tribunal, after identifying such documents, it can argue that those specific documents cannot be submitted as they are confidential. The IBA Rules determine commercial or technical confidentiality as one of the grounds for the tribunal to exclude such evidence.13

10 J. Jenkins, International Construction Arbitration Law, Second Edition, Arbitration in Context Series,Volume 3, Kluwer Law International, 2013, p. 189; for more information on the types of documents required to prove construction claims see footnote 7. 11 J. Jenkins, International Construction Arbitration Law, Second Edition, op cit, pp. 178–179. 12 See: ICC Rules of Arbitration (as of 1 March 2017); IBA Rules on the Taking of Evidence in International Arbitration, adopted by a resolution of the IBA Council on 29 May 2010, International Bar Association; International Dispute Resolution Procedures of International Centre for Dispute Resolution (as of 1 June 2014). 13 See: Article 9.2. of IBA Rules on the Taking of Evidence in International Arbitration.

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Finally, it is important to conduct a document review before commencing arbitration, as establishing the actual course of events in the project helps build the case strategy and properly structure the claims or defence, and makes it possible to mitigate any potential risks. Therefore, conducting at least a limited document review is recommended before commencing arbitration. Once the party has conducted the review and established the relevant documents in its possession, it can then assess what documents it needs to support its claims or defence. Those documents, if possessed by the opposing party or by a third party, can be subject to document disclosure. Document disclosure has at its core the party’s right to request the production of documents by the opposing party14 or third parties.15 The problem in international arbitration is, however, how broad that right is, and to what extent the parties will be entitled to request the production of documents from another party. Document production is available in most legal systems. However, there are significant differences between the common and the civil law systems in terms of the approach and scope of document production. In common law systems, the disclosure is much broader than in civil law systems. The scope of disclosure in common law systems is compared to the ‘all cards on the table’ rule – without regard to whether the party has to provide the opposing party with favourable or unfavourable documents.16 In the US, there is therefore a general duty of the parties to produce and present any documents that may be relevant to the case, no matter in which party’s interests.17 English law limits discovery that is now known as document disclosure and is narrower than the discovery was.The scope of document disclosure nowadays depends upon the tests of reasonableness and proportionality.18 On the other hand, civil law systems are less stringent and considered ‘less ambitious in search for truth than the common law approach.’19 The general rule is that each party produces only the documents on which it relies. No general obligation exists as to the production of documents, in particular those that are unfavourable to the party’s contentions.20 There are rules that permit the party to request certain documents from the opposing party or third parties, but those rules require the requesting party to specify the documents and thus significantly limit the document production possibilities. In view of such differences between legal systems when it comes to document disclosure, arbitration had to somehow strike a balance between the common law and the civil law rules – and it seems that it was successful. Numerous arbitration rules and guidelines

14 P. Tercier, andT. Bersheda, Document Production in Arbitration: A Civil Law Viewpoint, in: The Search for ‘Truth’ in Arbitration – ASA Special Series No. 35, JurisNet, LLC 2011, p. 79. 15 See: IBA Rules on the Taking of Evidence in International Arbitration. 16 P. Tercier and T. Bersheda, Document Production in Arbitration: A Civil Law Viewpoint, op cit, p. 81. 17 G. Kaufmann-Kohler, ‘Globalization of Arbitral Procedure’, Vanderbilt Journal of Transnational Law Volume 36, p. 1325. 18 www.justice.gov.uk/courts/procedure-rules/civil/rules/part31#31.2. 19 P. Tercier and T. Bersheda, Document Production in Arbitration: A Civil Law Viewpoint, op cit, p. 83. 20 G. Kaufmann-Kohler, Globalization of Arbitral Procedure, op cit, p. 1326.

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on documentary evidence set up the general rules on document disclosure. The document production in arbitration is described as ‘one of the most remarkable examples of a merger between different national civil procedure approaches.’21 The guidance as to document disclosure in international arbitration was provided in the IBA Rules in 1999.22 The IBA Rules are not a binding document but the parties may agree to adopt them or they can be used by the tribunal as guidance.The IBA Rules seem to find a balance between common and civil law rules on document disclosure. The IBA Rules are influenced by four principles.23 Firstly, there is no room for pre-trial discovery and fishing expeditions in international arbitration. Secondly, the arbitral tribunal has the power to order the production of documents by one party, requested by another party.Thirdly, the decision to order the document disclosure lies within the absolute discretion of the arbitral tribunal. And lastly, the requested party has a right to object to such an order, with the objections listed in the IBA Rules (Article 9.2).24 Following these principles, Article 3 of the IBA Rules established the requirements the party has to fulfil if it wants the tribunal to order document disclosure. First of all, the request to produce documents must be submitted to the tribunal within the prescribed time limit set by the tribunal. The request has to contain a description of the document that is sufficient to identify it, or a description of categories of documents that is sufficiently narrow and specific. The requesting party has to explain how the requested documents are relevant to the case and material to its outcome, and confirm that the requested documents are not in its possession, and also explain why the requesting party assumes that the documents are in possession of the opposing party or a third party.25 Similar restrictions are provided for in other rules and guidelines.The ICC Commission Report on Techniques for Controlling Time and Costs in Arbitration suggests limiting the number of possible requests for document production and establishing time limits. Moreover, the ICC Commission Report describes providing the tribunal with documents that are not relevant and material to the case as wasteful.26 However, the requested party is not defenceless against the request for the production of documents. The IBA Rules provide that the requested party can put forward an objection to the disclosure of documents based on the circumstances listed in Article 9.2 of the IBA Rules. Those circumstances include: • lack of sufficient relevance or materiality; • legal impediment or privilege under legal or ethical rules; • unreasonable burden to produce the requested evidence; • loss or destruction of the document that has been reasonably shown to have occurred;

21 G. Kaufmann-Kohler, Globalization of Arbitral Procedure, op cit, p. 1325. 22 IBA Rules on the Taking of Evidence in International Commercial Arbitration, adopted by a resolution of the IBA Council in June 1999. The IBA Rules were subsequently amended and the new version of the IBA Rules on the Taking of Evidence in International Commercial Arbitration was adopted in 2010. 23 H. Raeschke-Kessler, ‘The Production of Documents in International Arbitration – A Commentary on Article 3 of the New IBA Rules of Evidence’, Arbitration International, Volume 18, No. 14, LCIA, 2002, p. 415. 24 H. Raeschke-Kessler, ‘The Production of Documents in International Arbitration – A Commentary on Article 3 of the New IBA Rules of Evidence’, Arbitration International, Volume 18, No. 14, LCIA, 2002, pp. 415, 416. 25 See: Article 3 of IBA Rules on the Taking of Evidence in International Arbitration. 26 See: ICC Commission Report on Techniques for Controlling Time and Costs in Arbitration, ICC, Paris, 2012.

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• grounds of commercial or technical confidentiality; • grounds of special political or institutional sensitivity; or • consideration of fairness or equality of the parties.27 If the requested party files any objections, the requesting party will have the right to address them, and subsequently the tribunal will have the power to resolve the issue of document production by a procedural order. If the tribunal orders a party to produce documents and the party does not comply with such order and refuses to provide the opposing party with the documents, it can face sanctions. Firstly, arbitrators can be authorised ‘to draw adverse inferences from the parties’ non-production of discoverable evidence.’28 It means that the tribunal can draw a legal inference, adverse to the party concerned, as a consequence of that party’s silence or the absence of requested evidence.29 The adverse inferences are aimed at ensuring the efficacy and fairness of the arbitral proceeding. Furthermore, the arbitral tribunal may discharge from the burden of proof the party that provided insufficient proof due to the opposing party’s failure to comply with the order to produce documents. However, such sanctions should be expressly provided for in the arbitration rules governing the case.30 Lastly, Article 9.7 of the IBA Rules provides that: if the Arbitral Tribunal determines that a Party has failed to conduct itself in good faith in the taking of evidence, the Arbitral Tribunal may, in addition to any other measures available under these Rules, take such failure into account in its assignment of the costs of the arbitration, including costs arising out of or in connection with the taking of evidence.31

These sanctions may not be applied if the request for disclosure concerns a third party that does not produce the requested documents.32 The parties must remain aware that the procedural law of the seat of arbitration may provide for more stringent sanctions.

Managing documents during the review, disclosure and arbitration proceedings Since the scale of documents produced during the life of a construction project is usually large, there is an increased need to find proper document management tools, which may simplify and accelerate the review of documents, their disclosure and even their management in the arbitration.

27 See: Article 9.2 of IBA Rules on the Taking of Evidence in International Arbitration. 28 P. Tercier and T. Bersheda, Document Production in Arbitration: A Civil Law Viewpoint, op cit, p.101. 29 https://definitions.uslegal.com/a/adverse-inference/. 30 P. Tercier and T. Bersheda, Document Production in Arbitration: A Civil Law Viewpoint, op cit, p. 101. 31 See: Article 3 of IBA Rules on the Taking of Evidence in International Arbitration. 32 H. Raeschke-Kessler, ‘The Production of Documents in International Arbitration – A Commentary on Article 3 of the New IBA Rules of Evidence’, Arbitration International, Volume 18, No. 14, LCIA, 2002, p. 426.

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Nowadays, the technology allows parties to use electronic document management systems (EDMS), which can assist in the process of searching, organising, producing and managing documents. The EDMS ‘are considered to be more accurate and less expensive than paper-based methods of document management.’33 The first and most obvious advantage of the EDMS is storage. Although it seems impossible to imagine that the need of keeping the paper documents in one place will disappear, storing documents in an electronic form reduces the costs of having to store and print all the paper documents. Moreover, the EDMS may be able to capture additional data from electronically stored documents since those documents contain the metadata. Documents stored in the EDMS are coded with objective and subjective data fields.34 ‘Objective’ data fields ‘capture information such as the date, author and subject matter of the document, whereas “subjective” fields capture information such as the relative relevance of a document, or the issue to which a document relates’.35 Furthermore, the documents stored electronically in the EDMS can be accessed by several users at the same time and users can access them from different devices.The information from the EDMS can also be quickly transmitted to other users, including the other party or the arbitral tribunal.36 Nonetheless, the EDMS have their flaws, such as costs of purchasing the appropriate hardware or software and training the users. Moreover, with the electronic search tools come certain limitations, especially regarding date restriction and key word search, where the risk is that not all the relevant documents will appear. To mitigate this risk, the parties are encouraged to use more advanced searching techniques, such as the ‘Boolean’ searches or ‘fuzzy’ searches created especially for accurate electronic document searches.37 The ICC Commission Report on Managing E-Document Production also indicates that the parties may use the technique of data sampling, which: entails the retrieval, review and production of only a portion of the repositories potentially containing relevant and material documents in order to assess whether the benefits of further review and production justify the costs and burdens of such review and productions.38

A predictive coding tool should also gain the attention of the arbitration practitioners. Predictive coding is a learning technology that makes it possible to review documents and find the relevant ones on the basis of the tags and marks that were input by the person who reviewed the samples. It is a mixture of keyword search, filtering and sampling to automate portions of the e-discovery document review.The goal of predictive coding is to reduce the number of irrelevant and non-responsive documents that need to be reviewed manually.39

33 J. Jenkins, International Construction Arbitration Law, Second Edition, Arbitration in Context Series,Volume 3, Kluwer Law International, 2013, p. 182. 34 J. Jenkins, International Construction Arbitration Law, Second Edition, op cit, p. 183. 35 J. Jenkins, International Construction Arbitration Law, Second Edition, op cit, p. 183. 36 J. Jenkins, International Construction Arbitration Law, Second Edition, op cit, p. 183. 37 See: ICC Commission Report on Managing E-Document Production, ICC, Paris, 2012. 38 See: ICC Commission Report on Managing E-Document Production, ICC, Paris, 2012. 39 http://searchcompliance.techtarget.com/definition/predictive-coding.

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By means of these techniques, it is possible for the party to limit the scale of documents that need to be reviewed. Consequently, these techniques allow the parties to conduct proceedings in a more cost- and time-effective manner. To reduce the costs and increase the effectiveness of document review, it is recommended to involve in the document review process those persons who were also involved in the construction project. In order to simplify the presentation of crucial documents during the arbitration proceedings, the parties may submit a timeline (chronology) of events to the tribunal. The Final Report on Construction Industry Arbitrations issued by the International Chamber of Commerce (ICC) (the ICC Construction Report) goes as far as to indicate that the timeline is required in all disputes concerning delays and disruption.40 The timeline typically consists of three columns containing the date of the event, its description and evidence proving its occurrence.41 A tool that might simplify the presentation of large amounts of information during the proceedings and resolution of complex construction cases is Building Information Modelling (BIM). BIM technology makes it possible to gather and process complex data concerning the object being built and present them in an interactive model. BIM is commonly used by engineers during the project design and construction stages. However, models created using BIM could also be used as visualization and communication tools in the dispute resolution process. Despite that, BIM is still not popular among professionals working on claims.42

Managing and using documents during the hearing Documents should be properly managed and prepared not only for the purposes of written submissions, but the parties should also consider a convenient method for managing the documents during the hearings. The ICC Construction Report states that it is the tribunal that will need to ascertain: whether it is practicable to work from printouts or whether it would be better if the material were accessed directly by the tribunal, in which case it will be necessary for the tribunal and every other party to be provided with the necessary software.43

Such software may be an expensive tool; however, its benefits cannot be overestimated. One only has to imagine how the ability for the tribunal and the parties to comfortably access the instantly needed documents stored in a database would simplify and accelerate the hearings. At the same time, it would eliminate the need to ensure that everyone is literally

40 Final Report on Construction Industry Arbitration, ICC International Court of Arbitration Bulletin Volume 12, No. 2, Paragraph 21. 41 J. Jenkins, International Construction Arbitration Law, Second Edition, Arbitration in Context Series,Volume 3, Kluwer Law International, 2013, p. 179–180. 42 Z. Soltani, S. Anderson and J. Kang, The Challenges of Using BIM in Construction Dispute Resolution Process, http://ascpro0.ascweb.org/archives/cd/2017/paper/CPRT212002017.pdf. 43 ‘Final Report on Construction Industry Arbitration’, ICC International Court of Arbitration Bulletin, Volume 12, No. 2, Paragraph 53.

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on the same page, which may be a frustrating process in cases where large volumes of documents are involved.44 One of the examples of such a tool is a limited access secure website that will be accessible only to the approved persons. During the hearings, that website will be accessible to all the involved persons.45 The parties or the tribunal may thereafter decide whether each party and the tribunal should search for the relevant documents itself or whether they should be projected onto a screen. Nevertheless, if the tribunal decides that it prefers to work with printouts, it is still possible and necessary to properly organise the documents in order to simplify and speed up the hearings. So far, there are no rules on managing the documents during the hearing in any particular way; however, the tribunal has the power to decide on that matter.46 The ICC Construction Report proposes that the documents should be assembled into ‘working’ files, divided, for example, into complete sets of site minutes, programmes, instructions and ‘issue’ files, where each file will contain documents relevant to each issue.47 The parties may also agree to assemble the most relevant documents to which the parties would like to refer during the hearing into the hearing bundles. Presenting files or bundles relating to each issue or ‘working’ files not only streamlines the proceedings but also eliminates the issue of duplication of documents. The ICC Construction Report also indicates the importance of document identification systems. The parties must number the documents according to the agreed numbering system and ideally should highlight the relevant section of each of those documents for ease of reference.48 The parties can also colour-code the documents according to their content.49 For example, the ‘working’ files, witness statements and issue files would each have an assigned colour. Even if the arbitral tribunal does not decide on any particular way of managing the documents, it is in the parties’ interest to suggest that the tribunal do so. It is also important to be aware of how to properly manage the documents during the examination of witnesses. During the examination, the parties may wish to consider showing to the witnesses the most relevant documents in order to flag these documents to the arbitrators. That way, the party can ensure that the tribunal will not overlook such a document. Documents may also be presented during the opening and closing statements of the parties’ counsel. In order to effectively convey the arguments during such presentations, the documents may be projected onto a screen.

J. Jenkins, International Construction Arbitration Law, Second Edition, op cit, p. 185. J. Waincymer, Procedure and Evidence in International Arbitration, Kluwer Law International, 2012, pp. 881–882. J. Jenkins, International Construction Arbitration Law, Second Edition, op cit, p. 185. ‘Final Report on Construction Industry Arbitration’, ICC International Court of Arbitration Bulletin, Volume 12, No. 2, Paragraphs 52–53. 48 ‘Final Report on Construction Industry Arbitration’, ICC International Court of Arbitration Bulletin, Volume 12, No. 2, Paragraph 52.; J Jenkins, p. 185 49 J. Jenkins, International Construction Arbitration Law, Second Edition, op cit, p. 185. 44 45 46 47

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In 2017, ICC issued a report on information technology in international arbitration, which describes the most common issues that may arise when using information technology in arbitration. The report describes, among other things, problems related to the use of EDMS or presentation of documents during the hearing and provides practical solutions to overcome these problems.50

Conclusion On one hand, documents are the most accurate and reliable evidence serving the parties, experts and finally the tribunals to decide on the merits of the case. On the other hand, the number of documents in construction disputes is overwhelming and might still increase in the future with the increase in the complexity of the construction projects and the development of the parties’ awareness of the role of documents as evidence in arbitration. Therefore, efficient management of documents in the construction disputes is important to the parties’ success in arbitration, and its role will grow in the future.

50 ‘ICC Commission Report Information Technology in International Arbitration’, https://iccwbo.org/ publication/information-technology-international-arbitration-report-icc-commission-arbitration-adr/.

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22 Awards Roger ter Haar QC, Crispin Winser and Maurice Holmes1

Absent compromise, while court cases end in judgments, arbitrations end in awards. It is important to keep in mind the distinction between the two.2 Leaving aside investment treaty arbitrations, arbitrations concerning construction projects are essentially private affairs, even where one party is a state organisation.While different jurisdictions take somewhat different approaches, in general, arbitrations are regarded as being protected by a degree of privacy. Thus, the contents of the vast majority of arbitral awards are known only to the disputing parties, the arbitral tribunal and the institution under whose auspices an arbitration may be being conducted. While, particularly in common law countries, courts are conscious that their decisions will be relied upon by parties outside the particular dispute being determined to regulate their affairs (in common law countries because of the doctrine of precedent, in civil law countries because judgments give guidance as to how similar disputes may be resolved in future), such considerations are generally absent in arbitrations. In arbitrations, tribunals are primarily concerned with deciding issues placed before them in a way that can be the subject of successful enforcement by the winning party.

1 2

Roger ter Haar QC, Crispin Winser and Maurice Holmes are barristers at Crown Office Chambers. An interesting paper on this distinction was written by the late Lord Bingham: ‘Reasons and reasons for reasons: differences between a court judgment and an arbitration award’, 4 Arbitration International (1988), p.441. See also Andrew Tweeddale, ‘The need for reasons – O, reason not the need’, 85 Arbitration (2019), p.153.

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Procedural orders In the course of an arbitration the tribunal will issue directions regulating the conduct of the arbitration. Some arbitrators will describe these as ‘directions’ and some as ‘orders’: the distinction is mere nomenclature and of no significance. What is important is that such directions or orders are not ‘awards’, as they do not formally determine matters of substance in issue between the parties. This is not in any way to diminish the significance of such orders, which may be of great complexity, may determine difficult issues that involve legal concepts and may have a crucial effect upon the success of one party or the other to the arbitration. A decision that takes the form of a procedural order may not be final: thus, a tribunal that determines in a first procedural order that a substantive evidential hearing will take place on 1 January may decide in a later order that justice requires that hearing to be heard at a later date. Other decisions expressed in the form of a procedural order may have substantive effect; for example, a decision refusing to permit an amendment to introduce a new claim may mean that the claim is ruled out for ever if a statutory limitation period prevents that claim from being brought in another arbitration or in court proceedings. Distinguishing between a procedural order and a final dispositive decision that amounts to an award, even if not described that way by the tribunal, can be difficult, although in the vast majority of cases the distinction is clear enough. In broad terms, if the decision is a management decision as to how the arbitration is to proceed, it is a procedural order. Important consequences can flow from the distinction. As pointed out below, there are often formal requirements relating to the issue of awards – sometimes emanating from the institution under whose auspices an arbitration is being conducted and sometimes arising out of the law of the country in which the seat of the arbitration is situated. If those formalities are not observed, an award may not be legally enforceable. By contrast, if the decision is merely procedural then it is unlikely that any formalities will be applicable. Awards are also sometimes capable of challenge through annulment or other procedures but should, in most cases, be capable of recognition through the courts, whereas such procedures are not applicable to procedural orders.3

Interim, partial and final awards Unlike procedural orders, subject to certain qualifications all awards are final and binding, as is made clear by the express terms of many of the standard forms of construction contract (see, e.g., Clause 20.6 of the FIDIC Red Book (finally settled), Clause 66(9) of ICE 7th Edition (finally determined) and Clause W1.4 of NEC3 (the tribunal settles the dispute referred to it)) and institutional rules (see, e.g., Article 34.2 of the 2010 UNCITRAL Arbitration Rules (final and binding), Article 35.6 of the 2017 International Chamber of Commerce (ICC) Arbitration Rules (binding on the parties), Article 30.1 of the ICDR International Arbitration Rules (final and binding), Article 26.8 of the 2014 LCIA

3

The English High Court has grappled with the distinction between procedural orders and awards in the context of attempts to challenge such rulings in a number of cases, recently summarised in ZCCM Investments Holdings Plc v. Kansanshi Holdings Plc [2019] EWHC 1285 (Comm).

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Arbitration Rules (final and binding) and Rule 32.11 of the SIAC Arbitration Rules (final and binding)). In the present context, a ‘final’ award is contrasted with an ‘interim’ or ‘partial’ award. In that context, the reference to a final award is a reference to the last award in a particular arbitration, that is the award by which the tribunal completes its task (there are qualifications to this generalisation, as explained below). Once the final award has been issued, the tribunal’s role is at an end (the tribunal is functus officio). Thus, before issuing the final award, the tribunal should satisfy itself that it has indeed completed its task. In this sense, there is an important distinction between a final award in arbitration and a final judgment in a court case. In the latter instance, the court may issue a final judgment dealing with all matters other than the form of an order or as to costs of the proceedings. This is certainly the case in many common law jurisdictions such as the UK. In this form of procedure, the form of the order or the order as to costs may be regarded as ancillary matters that would still be within the jurisdiction of the court to determine. By contrast, a final award in an arbitration should (on its own or taken with earlier partial awards) deal with all the matters arising out of the reference to arbitration including any dispositive orders, whether monetary or other, by way of remedy or relief and any order for the payment by one party or the other of the costs of the arbitration, including the parties’ legal costs, the remuneration of the tribunal and any charges payable to an arbitral institution. If the tribunal does not do so, it may be too late for the tribunal to put right any omission after the final award has been issued. There are qualifications to the finality of a final award. Firstly, many institutional rules provide for correction of an award after it has been issued. To quote from Article 36 of the 2017 ICC Arbitration Rules as an example: 1. On its own initiative, the arbitral tribunal may correct a clerical, computational or typographical error, or any errors of similar nature contained in an award, provided such correction is submitted for approval to the Court within 30 days of the date of such award. 2. Any application of a party for the correction of an error of the kind referred to in Article 36(1), or for the interpretation of an award, must be made to the Secretariat within 30 days of the receipt of the award by such party, in a number of copies as stated in Article 3(1). After transmittal of the application to the arbitral tribunal, the latter shall grant the other party a short time limit, normally not exceeding 30 days, from the receipt of the application by that party, to submit any comments thereon.The arbitral tribunal shall submit its decision on the application in draft form to the Court not later than 30 days following the expiration of the time limit for the receipt of any comments from the other party or within such other period as the Court may decide.

Examples of similar provisions can be found in Articles 27.1 and 27.2 of the 2014 LCIA Arbitration Rules and Article 38 of the 2010 UNCITRAL Arbitration Rules. Secondly, some institutional rules, in particular the 2014 LCIA Arbitration Rules, contain provisions that allow for the tribunal to decide claims not decided in an issued award. These provisions provide relief for oversights on the part of a tribunal that might otherwise provide grounds for annulment of an award.The LCIA provisions are Articles 27.3 and 27.4:

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27.3 Within 28 days of receipt of the final award, a party may by written notice to the Registrar (copied to all other parties), request the Arbitral Tribunal to make an additional award as to any claim or cross-claim presented in the arbitration but not decided in any award. If the Arbitral Tribunal considers the request to be justified, after consulting the parties, it shall make the additional award within 56 days of receipt of the request. 27.4 As to any claim or cross-claim presented in the arbitration but not decided in any award, the Arbitral Tribunal may also make an additional award upon its own initiative within 28 days of the date of the award, after consulting the parties.

These are salutary provisions, designed to do justice and to increase the prospects of enforcement of an award, but experience shows that they are susceptible to abuse by more or less thinly disguised attempts by unsuccessful parties to undermine an adverse award. Such attempts usually fail. Thirdly, some jurisdictions require formal registration or confirmation of an award before enforcing an award, placing a procedural hurdle to be overcome that may provide the opportunity for an award to prove neither final nor binding. Finally, both the New York Convention and jurisdiction-specific laws and procedures may allow for the validity of an award to be challenged, either by denying enforcement of an award, by annulling an award or (less usually) providing for grounds of appeal against the contents of an award. The matters referred to above are considered further below. In many cases, leaving resolution of disputes referred to arbitration until the issue of a single final award may be inconvenient, time-consuming, expensive or unjust to the parties. In such cases the tribunal may issue an interim or partial award. In this context, an interim or partial award means an award that decides one or more, but not all, of the issues in dispute between the parties – the award is ‘partial’ because it decides some but not all of the substantive issues in an arbitration. Such an award is sometimes described as an ‘interim’ award. However, increasingly, an award dealing with substantive issues is described as a ‘partial’ award, and the expression ‘interim’ award is used when its subject is the issue by the tribunal of interim relief such as an order for the preservation of evidence. Interim awards are discussed further below. In this chapter, ‘partial award’ is used in the sense referred to above: that is, an award dealing finally with one or more of the substantive issues in dispute, but not all of those issues, leaving the remaining issues to be determined in a later award or awards. A partial award is useful in many circumstances. At the outset of proceedings, objections to the jurisdiction of a tribunal are often raised. It is the usual practice of tribunals to resolve such objections under the principle of ‘competence-competence’. If the tribunal has no jurisdiction to decide a particular dispute, it is often convenient for the tribunal to so decide before the parties spend time and money debating substantive issues before a tribunal that has no jurisdiction to determine those issues. However, in many cases that course may not be convenient, perhaps because the case as a whole is simple and this will stretch out the proceedings uneconomically or perhaps because the tribunal feels that it will be better able to understand the jurisdictional issues when it is better informed about the substantive issues in dispute.

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A particular form of problem in construction disputes relates to whether notice of claims has been given sufficiently early (e.g., under Clause 20 of the FIDIC Red Book contract). Sometimes tribunals will determine such disputes, which are not strictly jurisdictional disputes, in the same way as jurisdictional disputes (i.e., as preliminary issues leading to a partial award), but in practice most arbitrators prefer to resolve notice issues when they are better informed as to the substance of the claims made. Bifurcation of proceedings is often convenient to first determine issues of liability, before moving on to issues of quantum that may be irrelevant if claims are rejected by the tribunal on the basis, for example, that no breach of contract has occurred, or that a claim is barred because of the expiry of a limitation period. In construction disputes, it is often convenient to deal with issues concerning the valuation of works before factually complex claims for extensions of time and associated claims for time-related prolongation costs. In this situation, a partial award relating to valuation of works (particularly issues as to variations and their value) is often issued before the tribunal hears disputes concerning extensions of time. Partial awards are often issued when the tribunal has determined all issues save for the allocation of costs. It is often convenient for the tribunal to invite submissions as to who should bear the costs of the proceedings once it is known who is the winner and who is the loser; or, perhaps, the extent to which each party is winner or loser. In deciding whether to issue one or more partial awards followed by a final award, or simply to issue one final award, the tribunal will principally be concerned with the time and cost consequences of splitting the decision-making process. Another important factor is the assessment of the risk that facts or matters that have a bearing on the decision or decisions contained in a partial award may become evident in a later part of the arbitration. An extreme case might be that in a partial award the tribunal might accept the reliability of the evidence of a particular witness, only to discover that later evidence placed before it after the issue of the partial award casts considerable doubt upon the earlier evidence or upon the integrity of the witness. The power to issue partial awards may derive from the law of the seat of arbitration. Thus, for example, the UK Arbitration Act 1996 provides in Section 47: 1. Unless otherwise agreed by the parties, the tribunal may make more than one award at different times on different aspects of the matters to be determined. 2.The tribunal may, in particular, make an award relating to: (a) an issue affecting the whole claim, or (b) a part only of the claims or cross-claims submitted to it for decision. 3. If the tribunal does so, it shall specify in its award the issue, or the claim or part of a claim, that is the subject-matter of the award.

Some, but by no means all, institutional rules provide for the issue of interim or partial awards – see, for example, Article 26.1 of the 2014 LCIA Arbitration Rules and Article 2(v) of the 2017 ICC Arbitration Rules (which defines an ‘award’ as including ‘inter alia, an interim, partial or final award’).

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Where neither the law of the seat of the arbitration nor governing institutional rules expressly provide for the issue of interim or partial awards, the parties may agree terms of reference conferring the power to issue such awards.

Interim awards and emergency awards As already explained, sometimes the expression ‘interim award’ is used in respect of awards determining some, but not all, of the substantive issues in dispute in an arbitration. It is also an expression often used to describe the decision of a tribunal granting interim relief, such as an injunction or other restraining order. Such an order is usually not final in that it is only intended to hold the ring pending the determination of the substantive issues in the case. One particular form of such awards is the award of an ‘emergency arbitrator’.The establishment of an arbitral tribunal through an institution can take several weeks, if not months. During that period, there is a substantial risk where there is an unscrupulous respondent of significant evidence being destroyed or assets being dissipated. In order to hold the position, many institutions have introduced an emergency arbitrator procedure where an arbitrator who will probably not be a member of the tribunal determining the final substantive issues decides whether or not to grant protective relief (see, e.g., Article 28 of the 2017 ICC Arbitration Rules, Article 9B of the 2014 LCIA Arbitration Rules and Schedule 1 of the 2016 SIAC Arbitration Rules). Interim awards and emergency awards are similar in that there is uncertainty in many jurisdictions as to whether such interim or emergency awards, not being ‘final’ awards, are unenforceable.4 As a result, many parties will prefer to seek interim relief from domestic courts. However, there is a potential problem in some jurisdictions where the court will refuse to grant relief if effective emergency relief is available from the relevant arbitral tribunal.5

Awards supporting DAB decisions6 An increasing number of construction contracts in international projects using one of the FIDIC suite of contracts, or other forms of contract, incorporate Dispute Adjudication Boards (DABs) as a form of dispute resolution procedure to take place before resort to arbitration is permitted.Where a DAB has considered and ruled on an issue, the arbitration is a form of appeal from the DAB decision. Frequently, a DAB will rule on an issue that has only temporary significance, albeit that the issue may be of great importance. An example is where a monthly interim payment certificate is (in the view of the contractor) measurably below the amount due for the work valued in that certificate.

4 5 6

See the discussion by W.G. Bassler in ‘The enforceability of emergency awards in the United States: or when interim means final’, 32 Arbitration International (2016), p. 559. See, for example, the English case of Gerald Metals SA v.Timis [2016] EWHC 2327 (Ch). A useful paper on arbitral awards following DAB decisions is Christopher Seppala’s paper ‘Commentary on recent ICC arbitral awards dealing with dispute adjudication awards under FIDIC contracts’, International Construction Law Review (2016), p. 185.

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In that situation, it is possible that the shortfall may be made good in a later interim payment certificate: in that situation, the cash flow problem suffered by the contractor may be limited in time. If an arbitration tribunal considers what should be included in a particular interim payment certificate, its decision will be final as to what should be in that interim certificate, but will be interim in the sense that the tribunal will not necessarily be determining what the contractor will finally be entitled to for the work done. This conundrum has caused difficulties in arbitrations considered by the courts in Singapore.7 The problem arose because in Singapore, as in other jurisdictions, provisional awards are not recognised and enforced: the courts enforce awards stating the final rights and obligations of the parties in respect of the matters with which they deal. The solution adopted was to uphold an interim award declaring the amount due in an interim payment certificate, and a direction to the employer to make the payment promptly, and to grant recognition of that award as being final. Thus the court of appeal gave effect to a binding but non-final DAB decision. The problem does not arise where the DAB has decided an issue that will not call for reconsideration later under the contract machinery. Thus, a decision that a particular instruction was a variation is a final decision on that issue, which could be the subject of a final award by an arbitral tribunal, even if the project is ongoing. It is important to understand that the problem is to do with enforcement under legislative provisions in particular jurisdictions. The power of a tribunal to deal with such issues derives from the arbitration agreement appointing the tribunal, and any applicable arbitration rules.

Default awards From time to time one party (usually the respondent) will decline to participate in an arbitration, or may withdraw from proceedings. Where this happens in a court case, the court (if satisfied of due service of the proceedings upon the absent party) will simply issue a default judgment, perhaps without the necessity of any judicial consideration of the case. In court proceedings there is usually an available process for default judgments to be set aside if (for example) it later transpires that the proceedings were not duly served. Arbitrations present different problems, because enforcement is not in the control of the body determining liability. In respect of default awards, as with other awards but perhaps even more so, the tribunal should be astute to ensure that the award is enforceable. To that end, the tribunal will have particular regard to the extent of its jurisdiction and to setting out the basis upon which it concludes that it has jurisdiction to enter upon a dispute and issue an award.

7

CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK [2011] SGCA 33; [2015] SGCA 30, discussed by N. Bunni, C. Ong and M. O’Reilly: ‘The Enforcement of Dispute Adjudication Board Decisions: Persero and the FIDIC Standard Form of Contract’, 81 Arbitration (2015), p. 367.

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Again, in contrast to how a court might often proceed, tribunals generally regard it as appropriate to scrutinise with care the merits of claims put before them by the party appearing before them. It is not the role of the tribunal to rubber stamp the claim because the respondent has declined to participate. (Of course, the absent respondent may have an answer to the claim that is not apparent to the tribunal.)

Consent awards8 Where parties come to terms by agreement, they will often seek a consent award from the tribunal. Article 33 of the 2017 ICC Arbitration Rules expressly makes provision for a consent award: If the parties reach a settlement after the file has been transmitted to the arbitral tribunal in accordance with Article 16, the settlement shall be recorded in the form of an award made by consent of the parties, if so requested by the parties and if the arbitral tribunal agrees to do so.

The advantage to the parties is that such an award may ease enforcement of a settlement agreement if one party does not honour its part of that agreement. Asked to issue such an award, a tribunal will normally scrutinise it to see if there are any problems or manifest errors that might affect its enforceability, and will also wish to ensure that any administrative details have been dealt with, not least ensuring that the financial aspects of the arbitration concerning the tribunal and any arbitral institution have been considered.

Time for issue of awards Some institutional rules place a time limit within which the arbitral tribunal must issue its award. For example, Article 31.1 of the 2017 ICC Arbitration Rules imposes a six-month time limit. However, where there is such a time limit there is usually the option of it being extended. In practice, few construction arbitrations are concluded within six months. Construction arbitrations tend to be document-heavy, and to involve significant amounts of factual and expert witness evidence, making such a time limit very hard to achieve. The time taken by arbitrators to produce awards is often a matter of adverse comment, but the volume and nature of the evidence to be considered does make producing awards arduous. There is also an undoubted tendency for the appointment of arbitrators to be confined to selection from a small coterie whose workload is so heavy that delay in issue of awards is a frequent cause of complaint, but this problem has been recognised and the arbitral institutions are introducing methods to ameliorate the problem including requiring potential arbitrators to declare their existing commitments and reducing the amount paid to arbitrators whose awards are unacceptably delayed.

8

For discussion of some of the issues raised by consent awards, see G. Marchisio, ‘A Comparative Analysis of Consent Awards: Accepting Their Reality’, 32 Arbitration International (2016), p. 331.

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Contents of awards When preparing an award, an essential task of the tribunal is to strive to the best of its ability to produce an award that will be enforceable. The requirements set out below are some of the requirements generally required for an award to be enforceable. Particular jurisdictions may have other additional requirements.9 In modern practice, it is generally expected that awards will be in writing (unlike a court judgment), signed by each member of the tribunal (again, unlike a court judgment) and dated. An award will normally record the names and addresses of the parties and of their representatives, which in construction arbitrations normally means their legal representatives. The award will normally record the matters conferring authority upon the tribunal, that is to say the arbitration agreement and the particulars of appointment of the member or members of the tribunal. The award will usually record at least the principal procedural stages of the arbitration. The award should record the issues that the tribunal is called upon to decide. This is partly to make it clear that the tribunal has properly understood what those issues are, in order to ensure that there is no later challenge to the award upon the basis that the tribunal did not understand the issues before it, or has not resolved issues that it was required to resolve. The award should contain reasons for its resolution of issues, but unlike a judgment in a common law court, findings of fact and the basis for findings of fact are seldom set out at length. And while legal conclusions are usually recorded (because awards do not have the same formal effect as legal precedents, and indeed are generally confidential and therefore not published), they are not set out in the depth and with the analytical reasoning that is expected, for example, of UK judges whose decisions are liable to be scrutinised by an appellate court and relied upon by third parties as statements of the law (this latter point is not relevant in the same way in civil law jurisdictions). In a paper published in 1988, the late Lord Bingham suggested the following reasons for giving reasons in an award:10 • the parties are entitled to know why they have won or lost; • a reasoned award is a safeguard against arbitrariness, private judgment or an irrational splitting of the difference; • a reasoned award allows the parties to be guided by it in respect of their future commercial conduct between one another; • a reasoned award can allow an appellate or supervisory court to review the decision effectively; and • the giving of a reasoned judgment is a valuable intellectual discipline for the decision maker (he described this as a ‘half reason’).

9

For an interesting paper on writing awards, see M. Gleeson, ‘Writing awards in international commercial arbitrations’, 81 Arbitration (2015), p. 73. 10 Lord Bingham, ‘Reasons and reasons for reasons: differences between a court judgment and an arbitration award’, 4 Arbitration International (1988), p. 441. See also A. Beaumont, ‘Reasons and Reasons for Reasons Revisited: has the Domestic Arbitral Award Moved Away from the Fundamental Basis Behind the Reasoned Award, and is it Now Time for Realignment?’, 32 Arbitration International (2016), p. 523.

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The award (or where there is more than one award, at least one of the awards) should state clearly and unambiguously what remedies the tribunal is granting, if any. A useful checklist for the contents of an award has been given by a distinguished international arbitrator:11 • the parties and their representatives; • the contract and the arbitration agreement; • an overview of the dispute; • the arbitral tribunal; • procedural history; • the issues raised in respect of the claim (and any counterclaim); • relevant contractual provisions; • relevant background or contextual matters; • summary of the arguments of the parties; • evidence and findings on factual issues; • legal issues; • conclusions on substantive issues; • claims and arguments on relief; • interest; • costs; and • disposition.

The decision-making process: dissenting awards? Where a tribunal consists of three members rather than one, different tribunals have different methods of reaching their decision. Obviously, consultation is important, but with modern communications that does not necessarily involve face-to-face meetings. It is customary for the chair or president of the tribunal either to write the whole of the award or the greater part of it, but in complex construction arbitrations this would very often place an unrealistic and unjust burden upon the chair or president. In public law arbitrations such as investment treaty arbitrations, dissenting awards are not infrequent, but they are rare in construction arbitrations. Not only are dissenting awards outside the ambit of expectation of most institutional rules, they are contrary to one of the expectations of the parties to commercial arbitrations, namely that the award or awards should be clear and unambiguous.

Institutional scrutiny Some institutional arbitration rules, most importantly in the context of construction disputes, the ICC Arbitration Rules, require awards to be scrutinised and approved by the institution before issue. While such scrutiny is liable to cause delay, it can be extremely useful. Institutions such as the ICC have enormous experience of jurisdictions around the world as to what is required of an award for it to be enforceable.

11 M. Gleeson, ‘Writing Awards in International Commercial Arbitrations’, 81 Arbitration (2015), p. 73.

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Challenges to an award There are two overlapping concepts to be considered: a challenge to an award on the one hand and resistance to enforcement of an award on the other. A challenge to an award will usually take place in the courts of the jurisdiction that is the seat of the arbitration. The grounds upon which a court will uphold a challenge will depend upon the laws of the jurisdiction in which it is situated. There is not space here to set out a comparison of the different approaches in different countries. What can be said is that, generally, grounds that will justify resistance to enforcement of an award under the New York Convention (discussed below) will be grounds for a successful challenge to the award in a local court.The converse is by no means necessarily the case: local laws may justify the setting aside or annulment of an award on grounds that would not justify refusal to enforce an award. This can produce conflicts between jurisdictions, as noted below.

Enforcement of awards Each country is likely to have its own jurisprudence as to the available methods of enforcement of domestic awards. As far as the enforcement of international arbitration awards is concerned, by far the most important consideration is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed in New York on 10 June 1958. There are now over 150 states that have contracted into the New York Convention. There are other significant treaties relating to the enforcement of awards, not least the International Centre for Settlement of Investment Disputes Convention and certain regional conventions – the Moscow Convention, the Panama Convention and the Riyadh Convention, among others. However, of the conventions concerning construction arbitration, the New York Convention is by far the most important. Article I(1) is in very wide terms, and read on its own has the effect that an award made in any state, even if that state were not a party to the Convention, would be recognised and enforced by any other state that was a party, as long as the award satisfied the basic conditions set down in the Convention. However, Article I(3) has two reservations that states are permitted to adopt. The first is to limit the scope of the Convention to awards made in another state that is a party to the Convention (the reciprocity reservation). Roughly 50 per cent of states acceding to the Convention have availed themselves of the reciprocity reservation. The second is to declare that the Convention will only be applied to legal relationships that are considered as commercial under the national law of the state making such reservation (the commercial relationships reservation). Approximately one-third of states have availed themselves of this reservation. There are formal requirements in the Convention: firstly that either the duly authenticated original award or a duly certified copy of the award is produced to the relevant court and that the original arbitration agreement or a duly certified copy of that agreement is also produced.12 However, there have been examples of some latitude being shown by some

12 Article IV.

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courts to these formalities.13 If the award or the arbitration agreement is not in the official language of the court in which recognition and enforcement is sought, certified translations are required.14 Once the necessary documents have been supplied, the court will grant recognition and enforcement unless one or more of the grounds for refusal set out in the Convention are present. There are seven separate grounds on which recognition and enforcement of a Convention award may be refused.15 The first five are triggered by the party opposing recognition and enforcement.16 The opposing party (the party against whom the Convention is invoked) needs to prove that: (a) The parties to the arbitration agreement … were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made; or (b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or (c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decision on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognised and enforced; or (d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or (e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made.

It will be seen that each of these grounds is essentially concerned with the procedure: • Was the tribunal properly constituted in accordance with a valid arbitration agreement? • Was the arbitration conducted in accordance with due process? • Did the tribunal answer all the questions put to it? • Did it answer questions not put to it? The Convention does not permit any review as to the merits of an award.

13 See Hewlett-Packard Inc v. Berg [1994] 867 F. Supp. 1126, 1130 note 11 (Massachusetts); Shaanxi Provincial Medical Health Products I/E Corporation v. Olpesa SA (2003) Tribunal Supremo, Case No. 112/2002 (Spain); Lombard-Knight v. Rainstorm Pictures Inc [2014] EWCA Civ 356; [2014] Bus LR 1196; [2014] 2 Lloyd’s Rep 74 (England). 14 Article IV(2). 15 These are echoed in the UNCITRAL Model Law on International Commercial Arbitration at Article 36. 16 See Article V(1).

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Even if one or more of the grounds are made out, the Convention does not require refusal of enforcement. Some countries are more likely than others to uphold awards.Thus, for example, the United States and the United Kingdom have a ‘pro-enforcement bias’,17 but this bias is not universal. Two separate heads of refusal are vested in the ‘competent authority’ of the country where recognition and enforcement is sought. These are where the competent authority finds:18 • the subject matter of the difference is not capable of settlement by arbitration under the law of that country; or • the recognition or enforcement of the award would be contrary to the public policy of that country. English Courts have considered the public policy exception on a number of occasions. In a recent decision of the English Court of Appeal, RBRG Trading (UK) Ltd v. Sinocure International Co Ltd,19 the following points were set out as being the approach of the English Courts to the public policy exception: • the public policy ground should be given a restrictive interpretation; • where the arbitration tribunal had jurisdiction to determine an issue of illegality and had determined that there was no illegality on the facts, an English court should not allow the facts to be reopened, save possibly in exceptional circumstances; • where there was no illegality under the governing law, but there was illegality under English law, public policy would only be engaged where the illegality reflected considerations of international public policy rather than purely domestic public policy; • in considering whether and, if so, to what extent public policy was engaged, the degree of connection between the claim sought to be enforced and the relevant illegality would be important; and • English law principles of illegality of contracts did not affect the principles to be applied when considering recognition and enforcement under the Convention. In countries with a ‘pro-enforcement bias’, courts are slow to refuse enforcement on either of these grounds20.

17 See in the case of the United States, Parsons Whittemore Overseas Co v. Societé Générale de L’Industrie de Papier (RAKTA) [1974] 508 F.2d 969; and in the case of the United Kingdom Sir Stephen Tomlinson’s address to the London branch of the Chartered Institute of Arbitrators reported under the heading ‘The Enforcement of Foreign Arbitral Awards’ at (2015) 81 Arbitration 398; IPCO (Nigeria) Ltd v. Nigerian National Petroleum Corpn [2005] EWHC 726 (Comm); [2005] 2 Lloyd’s Rep 326; Sinocore International Co Ltd v. RBRG Trading (UK) Ltd [2017] EWHC 251 (Comm); [2017] 1 Lloyd’s Rep 375. See also the same case in the Court of Appeal: RBRG Trading (UK) Ltd v. Sinocure International Co Ltd [2018] EWCA Civ 838; [2018] 2 Lloyd’s Rep 133. As to the position in Australia, see Mango Boulevard Pty Ltd v. Mio Art Pty Ltd [2018] QCA 39. For an interesting discussion of the issue generally, see George Bermann, ‘What does it mean to be ‘pro-arbitration’?’, 34 Arbitration International (2018), p. 341. 18 Article V(2). 19 [2018] EWCA Civ 838; [2018] Lloyd’s Law Rep. Plus 49. 20 However, even in countries with a pro-enforcement bias, the courts will allow an award to be challenged on the grounds of violation of international public policy, particularly in cases of fraud. See, for example, the decision of the Paris Court of Appeal in MK Group v. Onix, Paris, 16 January 2018, No. 15/21703.

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Enforcement of awards that have been annulled or set aside It might be thought that where an award has been set aside or annulled in the courts of the seat of an arbitration it would be difficult to enforce that award elsewhere. While that is generally the case where the set-aside has been upon grounds equating to Convention grounds for refusing recognition and enforcement, there are many cases where an annulled or set-aside award has been enforced elsewhere. This is a large and complicated subject.21

21 For useful discussions of this topic, see R. Jogani, ‘The Role of National Courts in the Post-arbitral Process: the Possible Issues with the Enforcement of a Set-Aside Award’, 81 Arbitration (2015), p. 254; F. Gonzalez de Cossio, ‘Enforcement of annulled awards: towards a better analytical approach’, 32 Arbitration International (2016), p. 17; and the chequered history of the Maximov litigation in Russia, France, Netherlands and England: Maximov v. Open Joint Stock Company ‘Novolipetsky Metallurgichesky Kombinat’ [2017] EWHC 1911 (Comm); [2017] 2 Lloyd’s Rep 519, where courts in Amsterdam and London refused to enforce an award that had been set aside in Moscow, while the courts in Paris, in contrast, did enforce the award.

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Part III Select Topics on Construction Arbitration

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23 Investment Treaty Arbitration in the Construction Sector Tony Dymond, Gavin Chesney and Laith Najjar1

Introduction Perhaps more so than ever before, construction projects are cross-border in nature. Complex infrastructure and building requirements, particularly in rapidly expanding and developing economies, frequently draw upon expertise from around the world as contractors and sub-contractors. Funding for the projects comes from a range of domestic and international investors. The complexity of the projects themselves means that they run for many months or years. Over that period, the projects will be exposed to many risks. One area of risk that is potentially of concern to international players in the sector is the risk that the project will be affected by actions taken by the state, its government or authorities in the jurisdiction in which the project is being or has been built, both where the state is a party to the project and where it is not. Construction projects, by their very nature, cannot be relocated elsewhere if the local environment becomes unfriendly. Contractors and investors in such cases can feel particularly exposed to the risk that the state will favour its own interests and those of its nationals over those of foreign parties. Since the state is sovereign within its own territory, there may also be concerns that a contractor or investor will not be able to obtain adequate relief against harm it suffers. Protections may be found for such contractors and investors in the form of investment treaties, entered into between states for the purpose of promoting and protecting foreign investment. Under the provisions of those treaties, foreign investors who qualify for protection may be able to seek redress against the state by bringing claims to an independent international arbitration tribunal, whose awards can order compensation or other remedies for investors who have been harmed.

1

Tony Dymond is a partner, Gavin Chesney is an international counsel, and Laith Najjar is an associate at Debevoise & Plimpton LLP.

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That these protections are relevant to the construction sector is reflected in the current abundance of international arbitration cases registered in connection with construction disputes. Statistics published by the International Centre for the Settlement of Investment Disputes show that disputes in the construction sector have continuously represented 7–8 per cent of the total number of international investment arbitration cases registered by that institution. In 2018, 56 of its pending cases out of a total of 706 were construction disputes.2 Statistics published by the United Nations Conference on Trade and Development also indicate that the number and range of investment disputes in the construction sector is growing, with 69 pending cases in 2016 rising to 96 pending cases in 2018,3 and more new cases being registered in the construction sector than in any other. This chapter provides an overview of what investment treaties are, of what a person or entity must do in order to take advantage of their protections, of the protections that they offer, and of the entities against whom they can be enforced. It does not provide a comprehensive analysis of each element discussed. Its intention instead is to provide a general overview of the main issues that parties in the construction sector should bear in mind when entering into international projects, or when investments in foreign projects encounter difficulties.

Investment treaties Investment treaties are, broadly speaking, agreements made between states as to each state’s treatment of investments made by individuals or companies that are nationals of the other states. They can be standalone treaties or they can be part of broader free trade agreements. Their intention is to promote cross-border investment by providing protections for international investments and reassurance against political risk. They come in two forms: bilateral investment treaties, entered into between two states (BITs), and multilateral investment treaties, negotiated and agreed between more than two states (MITs).4 Examples of MITs include: the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico; the Energy Charter Treaty, which has 56 members and 42 observers5 and which aims to promote ‘energy security through the operation of more open and competitive energy markets’;6 and the ASEAN Comprehensive Investment Agreement, signed by the ASEAN member states and aiming to promote investment among them.7

2 3 4 5 6 7

https://icsid.worldbank.org/en/Documents/resources/ICSID%20Web%20Stats%202019-1(English).pdf, last accessed 5 September 2019. https://investmentpolicy.unctad.org/investment-dispute-settlement/advanced-search, last accessed 5 September 2019. C. McLachlan QC, L. Shore and M. Weiniger QC, International Investment Arbitration, Substantive Principles, 2nd Edition (2017) Oxford University Press, paragraph 2.02-2.03. Members and Observers of the Energy Charter Conference, as of 18 February 2019, https://energycharter. org/fileadmin/DocumentsMedia/AR/AR_2018.pdf, last accessed 5 September 2019. The Energy Charter Treaty, https://energycharter.org/process/energy-charter-treaty-1994/energy-chartertreaty/, last accessed 5 September 2019. ASEAN Member States, https://asean.org/asean/asean-member-states/, last accessed 5 September 2019.

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BITs are comparatively much more numerous, and are one of the most important sources of international law. Germany, the Netherlands, Egypt, the United Kingdom and China have each concluded over 100 BITs with other states,8 and in total there are some 2,354 BITs currently in force worldwide.9 Although the terms of these BITs vary and each must be considered individually, BITs are frequently based on models established by a particular state, and so contain similar provisions as to protections offered and the criteria for determining who qualifies for those protections. The majority of existing MITs and BITs also provide for any disputes between member states and investors to be resolved through investor-state dispute settlement mechanisms (referred to as ‘ISDS’), frequently requiring some period of negotiation followed by international arbitration. The precise form of international arbitration required depends upon the investment treaty in question, but most treaties provide either for arbitration under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) established in accordance with the ICSID Convention, to which there are at present 163 contracting states,10 or for arbitration in accordance with the UNCITRAL Rules.11 However, the embrace of MITs and BITs, or of international arbitration to resolve investment disputes, is not universal. Several states have avoided concluding international treaties that provide for any form of investor-state dispute resolution. Brazil is a notable example, whose preferred approach to investment agreements in recent years has instead been to agree ‘Cooperation and Facilitation Investment Agreements’.12 These do not provide for the protection of investments, but rather focus on state-to-state measures for facilitating investment in accordance with certain standards.13 Similarly, even in states in which MITs and BITs are accepted models for international investment agreements, questions have been raised about the continued use of international arbitration to resolve investor-state disputes. The Commission of the European Union has adopted the position that all BITs between Member States of the Union should

8 9

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11 12

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See Mapping BITs, http://mappinginvestmenttreaties.com/country, last accessed 5 September 2019. International Investment Agreements Navigator, accessed from: https://investmentpolicy.unctad.org/ international-investment-agreements/by-country-grouping, last accessed 5 September 2019. See also Database of Bilateral Investment Treaties, https://icsid.worldbank.org/en/Pages/resources/Bilateral-Investmen t-Treaties-Database.aspx, last accessed 5 August 2019; Bilateral Investment Treaties, https://oxia.ouplaw.com/se arch?ct=aea00be3-35c1-44af-b59e-e73cdae33391, last accessed 5 September 2019. See About ICSID, https://icsid.worldbank.org/en/Pages/about/default.aspx, last accessed 5 September 2019; the Database of ICSID Member States, accessed from: https://icsid.worldbank.org/en/Pages/about/ Database-of-Member-States.aspx, last accessed 5 September 2019. The United Nations Commission on International Trade Law Arbitration Rules 1976, as revised in 2010 and again in 2013. In 2015, Brazil signed CFIAs with Mozambique, Angola, Malawi, Mexico, Columbia and Chile. See The Cooperation and Facilitation Investment Agreement, http://www.mdic.gov.br/arquivos/CFIA-PresentationEN.pdf, last accessed 5 September 2019. The Cooperation and Facilitation Investment Agreement, http://www.mdic.gov.br/arquivos/ CFIA-Presentation-EN.pdf, last accessed 5 August 2019; IISD, Brazil’s Innovative Approach to International Investment Law, https://www.iisd.org/library/brazils-innovative-approach-international-investment-law, last accessed 5 September 2019.

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be terminated and no longer regarded as a source of law,14 with the aim of promoting the exclusive application of EU law instead.15 Recent case law from the European Court of Justice, in the 2018 Achmea decision and subsequently, has found references to arbitration in such intra-EU BITs to be incompatible with EU law,16 with the consequence that relevant investors have been unable to enforce arbitral awards in the courts of EU Member States. Careful consideration therefore needs to be given to any MIT or BIT under which an investor might seek protection. A party wishing to obtain the protection of a treaty should consider not only whether a relevant MIT or BIT exists, but whether it has come into force, whether it remains in force and whether there are any foreseeable circumstances in which it might cease to have effect. If an investment treaty offering protections is available, the questions that follow are: • who is entitled to the benefit of those protections; • against whom can the protections be enforced; and • what protections are available?

Who can be an investor? An investment treaty offers protections to ‘investors’.17 To determine who is an investor, the relevant MIT or BIT has to be considered.Typically, however, the test has two requirements: that the individual or entity be a national of one of the state parties, and that it has made an investment into the other state party. If the treaty provides for disputes to be resolved through ICSID arbitration, the requirements of Article 25 of the ICSID Convention must also be satisfied. The person or entity claiming to be an investor bears the burden of proving their entitlement.

Nationality When discussing nationality, it is important to distinguish between the state party into which the investment was made, referred to here as the ‘host’ state, and the state party from which the investment was made, referred to here as the ‘home’ state. Investment treaties typically only offer protections to investors from the home state, and exclude nationals of the host state (who are left instead with domestic remedies against their own state). In international construction projects, where it is common to find joint ventures between nationals of both the home and host states, this can lead to some investors in the project being protected while others are not.18

14 Capital Markets Union: Commission provides guidance on protection of cross-border EU investments, 19 July 2018, http://europa.eu/rapid/press-release_IP-18-4528_en.htm, last accessed 5 August 2019. 15 L. Carpentieri and F. Gillion, ‘Construction Arbitration and BITs: Is There Still A Future for Intra-EU Investment Arbitration?’ International Construction Law Review (2018) 167–181, p.168. 16 Slovak Republic v. Achmea B.V., Case C-284/16, Judgment of the Grand Chamber, 6 March 2018, paragraphs 58–59, See also, L. Carpentieri and F. Gillion, ‘Construction Arbitration and BITs: Is There Still A Future for Intra-EU Investment Arbitration?’ (2018) International Construction Law Review 167–181, p.173. 17 C. McLachlan QC, L. Shore and M. Weiniger QC, International Investment Arbitration, Substantive Principles, 2nd Edition (2017) Oxford University Press, paragraph 5.01. 18 Tulip Real Estate and Development (Netherlands) BV v. Republic of Turkey, ICSID Case No. ARB/11/28, Award 10 March 2014, where a Dutch investor was protected under the Netherlands–Turkey BIT, but its Turkish joint venture partners were not.

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For natural persons, the nationality requirement is usually that the person is a national of the home state. Where a person holds more than one nationality, they are generally entitled to rely upon any of those nationalities to satisfy the criteria. Some BITs, however, disqualify an individual from being an ‘investor’ if they are a national of both the home and the host state. Article 25(2)(a) of the ICSID Convention, for example, expressly disqualifies an individual from being an ‘investor’ where they are a national of both state parties.19 For legal persons, nationality is typically determined by the place of incorporation. In many cases, this requirement can be satisfied simply by having a holding company incorporated within the relevant jurisdiction. Singapore’s BITs, for example, do not impose any requirement beyond that a corporation is incorporated in Singapore, and there is no requirement that the corporation have any real economic presence or any staff, nor that it act as any form of administrative headquarters – a ‘letter-box’ corporation will generally suffice.20 Other treaties, by contrast, require that the corporation be involved in real economic activity before it can invoke the treaty protections – Switzerland, for example, does not recognise ‘letter-box’ companies for its BITs.21 How much economic activity is required in those cases depends upon the terms of the particular BIT. It is also usually the case that neither the identity of the shareholders of a corporation nor the place where majority control is in fact exercised make any difference to its nationality.22 However, some investment treaties include provisions that disqualify a company from being an investor when its shareholders are all nationals of the host state. Conversely, it is possible for BITs to permit an entity incorporated in the host state to be an investor if it is under the control of nationals of the home state,23 as expressly recognised in Article 25(2)(b) of the ICSID Convention.24 A question arises as to when the relevant corporation must have been incorporated within the home state, and in particular whether it is acceptable for a new corporation to be created and interposed into an existing investment holding structure in order to benefit from a BIT. Generally, this is an acceptable practice. Corporations may restructure their holdings for the purpose of benefiting from treaty protections, and this is a step that all parties involved in large international construction projects should consider. This freedom is, however, subject to requirements that, at the time of the restructuring, there is no foreseeable dispute between the investor and the host state, and accordingly the investor is not seeking to create a BIT claim in abuse of rights or in bad faith.25 While restructuring to take advantage of a

19 Article 25(2) of the ICSID Convention. 20 L. Carpentieri and F. Gillion, ‘Construction Arbitration and BITs: Is There Still A Future for Intra-EU Investment Arbitration?’ International Construction Law Review (2018) pp.167-181, p.180. 21 id. 22 See Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004, paragraph 69; Wena Hotels Limited v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Decision on Jurisdiction, 29 June 1999; KT Asia Investment Group B.V. v. Republic of Kazakhstan, ICSID Case No. ARB/09/8, Award, 17 October 2013, paragraph 222 (this case was dismissed on jurisdiction because the investor did not have a qualifying investment). 23 For example, the Netherlands–Kuwait BIT (2002). 24 Article 25(2) of the ICSID Convention. 25 C. McLachlan QC, L. Shore and M. Weiniger QC, (2017) International Investment Arbitration, Substantive Principles, 2nd Edition, Oxford University Press, paragraph 5.198

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treaty for future purposes is a legitimate goal, a restructuring that takes place after a dispute has arisen, for the purpose of taking advantage of a BIT that would not otherwise apply, is regarded as ‘an abusive manipulation of the system of international investment protection’.26

Investment If an investor meets the nationality requirement, the next question is whether they have made a qualifying investment in the host state. The main criteria are found in the relevant MIT or BIT. Investment treaties typically contain lists of the types of investments that will be protected by the host state. Such lists tend to be broadly drawn, and investments can be either tangible or intangible property. Under the US Model BIT, for example, an ‘investment’ means: Every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: (a) an enterprise; (b) shares, stock, and other forms of equity participation in an enterprise; (c) bonds, debentures, other debt instruments, and loans; (d) futures, options, and other derivatives; (e) turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts; (f) intellectual property rights; (g) licences, authorisations, permits, and similar rights conferred pursuant to domestic law; and (h) other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges.27

Where a BIT refers disputes to ICSID arbitration, Article 25 of the ICSID Convention has been interpreted by ICSID tribunals as requiring that an investment must also meet additional objective criteria. The extent of these additional criteria is, however, a matter of some debate. The first award fully to consider the meaning of ‘investment’ was Fedax NV v. Republic of Venezuela,28 which was considered and applied subsequently in the construction context in Salini Costruttori SPA v. Kingdom of Morocco,29 a dispute arising out of the construction of part of the Rabat-Fez highway in Morocco. Finding that the contractors’ commitment to construct the highway was sufficient to constitute an ‘investment’, the Salini tribunal concluded that:

26 Mobil Cerro Negro Holding, Ltd., Mobil Cerro Negro, Ltd., Mobil Corporation and others v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction, 10 June 2010, paragraph 205, citing Phoenix Action, Ltd. v The Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, paragraph 144. 27 Article 1 of the 2012 US Model Bilateral Investment Treaty. 28 Fedax NV v. Republic of Venezuela (Jurisdiction) 5 ICSID Rep 183 (ICSID 1997). 29 Salini Costruttori SpA and Italstrade SpA v. Kingdom of Morocco (Jurisdiction) 6 ICSID Rep 398 (ICSID 2001).

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The doctrine generally considers that investment infers: contributions, a certain duration of performance of the contract and a participation in the risks of the transaction... In reading the Convention’s preamble, one may add the contribution to the economic development of the host State of the investment as an additional condition. In reality, these various elements may be interdependent. Thus, the risks of the transaction may depend on the contributions and the duration of performance of the contract. As a result, these various criteria should be assessed globally…30

This decision has come to be referred to as the ‘Salini test’, and has been noted in many subsequent awards. However, there is some debate about its status. Where it has been applied, the tendency has been not to follow it slavishly, but rather to regard the Salini criteria as indicative of the general characteristics that an investment will have.31 In other cases, the Salini decision has been criticised as being too narrow32 and tribunals have declined to follow it,33 even going as far as to say that its importance is ‘very doubtful’.34 What does appear clear, however, is that to the extent the Salini test is not followed, the tendency is for a lower set of criteria to be applied. In the construction sphere, there has been some debate as to whether a contract to build something in a host state can legitimately be regarded as an investment. Critics note that generally contractors provide only materials and services in return for a fixed sum, including profit, with no ongoing commitment to the host state once the construction is complete.35 However, it now appears to be settled that, at least where the construction project involves the contribution by the contractor of large sums, know-how and personnel over a significant period of time,36 that will often be sufficient to constitute an investment in the host state.37

30 Salini, op. cit. 29 at paragraph 52. 31 Malaysian Historical Salvors, SDN, BHD v.The Government of Malaysia (ICSID Case No. ARB/05/10), Decision on the Application for Annulment, 16 April 2009. 32 Biwater Gauff (Tanzania) Limited v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award, 24 July 2008; Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, paragraph 110 where the tribunal considered the only necessary criteria were a contribution, a certain duration and an element of risk. 33 Toto Costruzioni Generali S.p.A. v.The Republic of Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, 11 September 2009, paragraphs 82–86. 34 Philip Morris Brands Sàrl, Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Decision on Jurisdiction, 2 July 2013, paragraph 204. 35 K.V. Nathan, ‘Submissions to the International Centre for the Settlement of Investment Disputes in Breach of the Convention.’ Journal of International Arbitration (1995) 12(1) 27. 36 Jan de Nul NV and Dredging International NV v. Arab Republic of Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008 considered that 23 months was a sufficiently long contract duration to constitute an ‘investment’. 37 Bayindir Insaat Turizm Ticaret Ve Sanayi, AS v. Islamic Republic of Pakistan, ICSID Case No. Arb/03/29, Decision on Jurisdiction, 14 November 2005.

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Arbitral tribunals have accordingly found that the following construction projects amounted to an investment: • dredging of a canal;38 • construction of a highway;39 • construction of bridges;40 • construction of an airport;41 • building and launching satellites;42 • building a golf course;43 • construction of power plants powered by renewable sources;44 • construction and operation of blood plasma fractionation facilities;45 • construction of roads;46 • construction of infrastructure and services for gold and copper mining exploitation;47 • building a hazardous waste landfill;48 • construction of an hotel;49 • building a self-sufficient satellite city;50 • construction of a real estate development;51 and • reconstruction of an hotel and renovation of an hotel.52

Against whom can the protections be enforced? Investment treaty protections do not apply to commercial disputes between two private parties. Only an action taken in exercise of the sovereign authority of the state is sufficient to constitute a breach of the protections offered by an investment treaty: a mere contractual breach that could be committed by any non-state contracting party will not be enough.53

38 Jan de Nul NV and Dredging International NV v. Arab Republic of Egypt, ICSID Case No. ARB/04/13, Award, 6 November. 39 Salini op. cit 29. 40 Garanti Koza LLP v.Turkmenistan, ICSID Case No. ARB/11/20, Award, 19 December 2016. 41 Beijing Urban Construction Group Co. Ltd. v. Republic of Yemen, ICSID Case No. ARB/14/30, Decision on Jurisdiction, 31 May 2017. See also, ADC Affiliate Limited and ADC & ADMC Management Limited v. the Republic of Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006. 42 Deutsche Telekom v. India, PCA Case No. 2014-10, Interim Award, 13 December 2017. 43 Ansung Housing Co. Ltd v. People’s Republic of China, ICSID Case No. ARB/14/25, 9 March 2017. 44 Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic, ICSID Case No. ARB/14/3, Award, 27 December 2016. 45 David Minnotte and Robert Lewis v. Republic of Poland, ICSID Case No. ARB(AF)/10/1, Award, 16 May 2014. 46 Desert Line projects LLC v. the Republic of Yemen, ICSID Case No. ARB/05/17, 6 February 2008. 47 Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/01, Award, 22 September 2014. 48 Metalclad Corporation v. the United Mexican States, Case No. ARB(AF)/97/1, Award, 30 August 2000. 49 Sistem Mühendislik Insaat Sanayi ve Ticaret A.S. v. Kyrgyz Republic, ICSID Case No. ARB(AF)/06/1, Award, 9 September 2009. 50 MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, Case No. ARB/01/7, Award, 25 May 2004. 51 Tulip Real Estate Investment and Development Netherlands B.V. v. Republic of Turkey, ICSID Case No. ARB/11/28, Award, 10 March 2014. 52 Alpha Projektholding GMBH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010. 53 Toto Costruzioni Generali SPA v. Republic of Lebanon, ICSID Case No. ARB/07/12, Award, 7 June 2012; Impregilo SpA v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction,

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Accordingly, a claim under a BIT or MIT can only be brought against a host state or against an entity that is an emanation or organ of the state, to which the entity’s acts can be attributed. With respect to attribution, the host state will typically be liable where an action has been taken by an entity under the effective control of the state, or where the state has significant involvement in the commission of the act. In Jan de Nul NV v. Egypt, the tribunal developed a two-limbed test for ‘effective control’: the state should have general control over the person or entity; and the state should have specific control over the act in question.54 In addition, in certain cases (particularly claims that the host state has breached a duty to provide full protection and security), the state may be liable for failure to prevent acts by third parties even if those third parties are not themselves necessarily attributable to the state.55 In the construction context, claims under investment treaties are most likely to arise where the owner or employer is a state or a state emanation, or in circumstances where the state is independent of the construction contract but has taken actions which negatively impact upon the project.

Types of protection and claims The precise protections available vary from treaty to treaty, but many treaties include the same or similar protections. The most common ones are discussed briefly in turn below.

Expropriation Expropriation is the act of a state of taking property from its owner. Under international law, expropriation is not unlawful or wrongful per se. Consistent with the principle of territorial sovereignty, host states have the right to expropriate property for economic, political, social or other reasons. Importantly, however, any expropriation must be carried out on a lawful basis.56 An expropriation is only legal if: • it serves a public purpose; • it is not arbitrary or discriminatory; • the procedure follows principles of due process; and • it is accompanied by prompt, adequate, and effective compensation.57 Most investment treaties prohibit expropriations that do not meet these criteria. A wrongful expropriation can be direct or indirect.

22 April 2005. 54 Jan de Nul NV and Dredging International NV v. Arab Republic of Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008, paragraph 173. See also Chapter II, Articles 4–11 of the International Law Commission’s ‘Articles on Responsibility of States for Internationally Wrongful Acts’. 55 Asian Agricultural Products Ltd. v. Republic of Sri Lanka, ICSID Case No. ARB/87/3, Award, 27 June 1990 paragraph 33(a), 86; American Manufacturing & Trading, Inc. v. Republic of Zaire, Award, ICSID Case No. ARB/93/1, Award, 21 February 1997, paragraphs 6.07, 6.13. 56 C. Schreuer and R. Dolzer, Principles of International Investment Law, 2nd Edition (2012) Oxford University Press, p.99. 57 C. Schreuer and R. Dolzer, Principles of International Investment Law, 2nd Edition (2012), Oxford University Press, p.99.

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Direct expropriation is relatively easy to recognise, but also relatively rare. The central element of direct expropriation is deprivation of property by the state.58 It arises, for example, when ‘governmental authorities take over a mine or factory, depriving the investor of all meaningful benefits of ownership and control’.59 This can be the result of any action by a state body or authority to seize, or to deprive the investor of, property.60 Indirect expropriation is more subtle, requiring not a single seizure, but actions that result in a substantial deprivation that renders the investor’s property rights useless.61 The test is whether the effect of the state’s actions is to deprive the investor ‘in whole, or in significant part, of the use or reasonably-to-be-expected economic benefit of property’.62 This can arise, for example, through increases in regulation that substantially deprive the investor of the ability to use its property.63 In the construction context, expropriation can arise through the direct taking of land, premises or machinery; through revocation of necessary permits, licences or agreements;64 or through the removal or effective termination of contractual rights.65

Fair and equitable treatment The fair and equitable treatment (FET) standard is one of the most common treaty protections.66 FET does not have a set definition, but generally it is applied to protect the legitimate expectations of investors against unfair actions by the state. As such, it can apply in a broad range of circumstances.67 Examples from previous cases include circumstances in which the host state has unexpectedly changed its legislation in a manner detrimental to the investor; 68 where the state sought to coerce the investor into agreeing to an unfavourable settlement agreement;69 where the state unfairly failed to ensure that a contract

58 C. Schreuer and R. Dolzer, Principles of International Investment Law, 2nd Edition (2012) Oxford University Press, p.104. 59 Marvin Roy Feldman Karpa v. United Mexican States, ICSID Case No. ARB(AF)/99/1, Award, 16 December 2002, paragraph 100. 60 In Saipem S.p.A. v.The People’s Republic of Bangladesh, ICSID Case No. ARB/05/07, Award, 30 June 2009, paragraph 129, it was found that Bangladesh had directly expropriated an investor’s contractual right through inappropriate interference by the Bangladeshi courts. 61 Starrett Housing Corp v. the Government of the Islamic Republic of Iran, Award No. ITL 32-24-1, 4 Iran–US C.T.R. 162, 1983, p.115. 62 Metalclad Corporation v. the United Mexican States, ICSID Case No. Arb (AF)/97/1, Award, 30 August 2000, paragraph 103. 63 For example, Compañía del Desarrollo de Santa Elena, S.A. v. Republic of Costa Rica, ICSID Case No. ARB/96/1, Award, 17 February 2000, 5 ICSID Rep. 153. 64 For example, Alpha Projektholding GmbH v. Ukraine, ICSID Case No. ARB/07/16, Award, 8 November 2010. 65 Siemens AG v.The Argentine Republic, ICSID Case No. ARB/02/8, Award, 6 February 2007. 66 R. Walker and J. Randhawa, ‘The Resolution of Construction Claims Through Investor-State Dispute Settlement: Alternative Opportunities for Relief for International Contractors’, International Construction Law Review (2019) 255–283, p.262. 67 C. Schreuer and R. Dolzer, Principles of International Investment Law,2nd Edition (2012) Oxford University Press, p.130. 68 MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award, 25 May 2004, paragraph 107. 69 Desert Line Projects LLC v.The Republic of Yemen, ICSID Case No. ARB/05/17, IIC 319 (2008), Award, 6 February 2008.

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signed by the state with an investor would be compatible with local laws;70 or where a state processed and rejected an application for a necessary permit in a manner that breached legitimate expectations of a fair and predictable legal process. 71 It could also be available where a contract has been terminated as a result of the host state’s unwillingness or inability to continue to pay to complete the project; where the state has applied unfair or improper financial penalties; or where it has not administered a contract in good faith.72

Denial of justice A particular form of FET claim concerns ‘denial of justice’, which occurs when the host state fails to provide ‘adequate judicial protection for the rights of aliens’.73 It can arise where the host state’s courts refuse to entertain a legitimate claim, subject it to unnecessary delays, or administer justice in a seriously inadequate way, including through the malicious misapplication of the law.74 A denial of justice can occur in both civil and criminal legal proceedings.75 A denial of justice is usually fact-specific, but the principles as such have been generally recognised.76 However, a denial of justice claim typically may only be brought under a MIT or BIT if the investor has first exhausted all local remedies in the courts of the host state. As said in Loewen, a case that arose under NAFTA: no instance has been drawn to our attention in which an international tribunal has held a State responsible for a breach of international law constituted by a lower court when there was available an effective and adequate appeal within the State’s legal system.77

Only once all possible avenues of appeal against an unfair court judgment have been pursued can a denial of justice claim under an investment treaty be considered.78

70 MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award, 25 May 2004, paragraph 138. 71 Metalclad Corporation v. the United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000, paragraph 74 et seq. 72 R. Walker and J. Randhawa, ‘The Resolution of Construction Claims Through Investor-State Dispute Settlement: Alternative Opportunities for Relief for International Contractors’, International Construction Law Review (2019) pp.255–283, p.263. 73 J. Paulsson, Denial of Justice in International Law (2005) Cambridge University Press, p.60, citing A.V. Freeman, ‘The International Responsibility of States for Denial of Justice’, (1938) pp.182–183. 74 Robert Azinian, Kenneth Davitian, & Ellen Baca v.The United Mexican States, ICSID Case No. ARB (AF)/97/2, Award, 1 November 1999, paragraph 103. 75 Tokios Tokelés v. Ukraine, ICSID Case No. ARB/02/18, Award, 26 July 2007, paragraph 133. 76 A.V. Freeman, ‘The International Responsibility of States for Denial of Justice’, (1938), in C. Schreuer and R. Dolzer, Principles of International Investment Law, 2nd Edition, (2012) Oxford University Press, p.180. 77 Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award, 26 June 2003, paragraph 154. 78 J. Paulsson, Denial of Justice in International Law (2005) Cambridge University Press, p.100, citing the International Law Commission (Crawford), Second Report on State Responsibility, UN Doc. A/CN.4/498 (1999), paragraph 75 (‘an aberrant decision by an official lower in the hierarchy, which is capable of being reconsidered, does not in itself amount to an unlawful act’.).

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Full protection and security A ‘full protection and security’ obligation typically is concerned with the failure by the state to exercise due diligence to protect the investor from property damage, physical violence or harassment, whether by state actors or third parties. This is not a guarantee of constant and complete security, but a commitment to provide reasonable and proportionate security for investors.79 As such, it is a standard that is of potential relevance to construction projects in jurisdictions where there may be civil unrest or another significant security risk. The full protection and security standard has been considered in three prominent cases. In AAPL v. Sri Lanka, the local security forces destroyed the investment in the course of a counter-insurgency operation. The tribunal held that these actions were attributable to the state, excessive, and that the investor was entitled to compensation.80 In Wena Hotels v. Egypt, the tribunal found the host state liable under the full protection and security standard because a state entity had seized the investor’s hotel. The police authorities had been made aware of the seizure but had not acted to protect the investor either before or after the seizure, and the tribunal considered this a breach of the standard.81 In AMT v. Zaire, the host state was held liable under a protection and security clause in the applicable BIT after looting incidents by armed forces.82

Umbrella clauses An umbrella clause is a provision in an investment treaty that guarantees the host state will perform any obligations assumed to the investor, including obligations assumed under a contract.83 It potentially has the effect of elevating a breach of contract to the level of a breach of the relevant treaty.84 In a construction treaty claim context, umbrella clauses will be particularly relevant to parties contracting directly with the host state. The effect of turning a contract breach into a treaty breach is, however, controversial. Some tribunals considering umbrella clauses have declined to find that a ‘mere’ contractual breach can be elevated to a treaty breach in this way, unless there is very clear language in the relevant investment treaty to that effect.85

79 See Pantechniki SA Contractors & Engineers (Greece) v. the Republic of Albania, ICSID Case No ARB/07/21, Award, 30 July 2009. 80 Asian Agricultural Products Ltd v. Republic of Sri Lanka, Award, 27 June 1990, paragraph 45 et seq, 78 et seq. 81 Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, Award, 8 December 2000, paragraph 84. 82 American Manufacturing & Trading Inc. v. Republic of Zaire, Award, 21 February 1997, paragraph 6.02 et seq. 83 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, paragraphs 186–187. 84 C. McLachlan QC, L. Shore and M. Weiniger QC, International Investment Arbitration, Substantive Principles, 2nd Edition, (2017) Oxford University Press, paragraph 4.132. 85 See SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction, 6 August 2003, paragraph 167, and, SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, Decision of the Tribunal on Objections to Jurisdiction, 29 January 2004, paragraph 125.

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Other tribunals have taken alternative approaches, finding that: • an umbrella clause can elevate a contract breach to a treaty breach, but only where the contractual breach arises out of the exercise of sovereign acts by the host State; • the umbrella clause transforms the contractual obligations into a treaty obligation, subjecting them to international law and the jurisdiction of investment arbitral tribunals; or • an umbrella clause is considered apt to confer jurisdiction upon a treaty tribunal, but that such clause does not change the parties or the proper law of the contract.86 The extent of the protections offered by umbrella clauses, therefore, is not settled. In cases involving a host state directly as a party to any contracts on construction projects, however, they are likely to remain an important protection that investors would be well-advised to seek out.

Stabilisation clauses A stabilisation clause is a provision in a contract between an investor and the host state in which the state undertakes not to take certain actions that would negatively affect the investor. Although not themselves provisions of any treaty, they can be important in the investment treaty context by giving an investor a basis to argue that the host state has breached the FET standard, or has breached an umbrella clause. They can appear in the form of freezing clauses, economic equilibrium clauses and hybrid clauses. A freezing clause, as the name suggests, requires the host state not to change certain legislation that affects the investor, frequently tax or royalty legislation. This is often in the form of a commitment that the state will ensure that new legislation will not apply to the investor, unless otherwise agreed.87 Alternatively, an economic equilibrium clause usually does not prohibit the host state from changing its legislation, but provides that the state will indemnify the investor against the costs associated with complying with new laws. A hybrid clause is a combination of both the freezing and economic equilibrium clauses. Here, foreign investors may be, but are not automatically granted an exemption from the new laws. Hybrid clauses may also provide for compensation of costs associated with compliance with new laws by the investor. Stabilisation clauses are potentially important in the construction context where the relevant contract is with the host state or one of its organs. The potential power of the protection offered to the investor by such clauses has been confirmed in several cases.88

86 C. McLachlan QC, L. Shore and M. Weiniger QC, International Investment Arbitration, Substantive Principles, 2nd Edition, (2017) Oxford University Press, paragraphs 4.132–4.134. 87 C. Schreuer and R. Dolzer, Principles of International Investment Law, 2nd Edition, (2012) Oxford University Press, p.82. 88 Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, paragraph 332. See also, EDF (Services) Ltd v. Romania, ICSID Case No. ARB/05/13, IIC 392, Award, 8 October 2009.

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Non-discrimination BITs often prohibit discrimination by the host state against investors from the home state. Such provisions generally require the host state to treat the foreign investors no less favourably than its own nationals.

Remedies Awards issued by tribunals in international investment arbitration are final and binding on all parties to the dispute.The remedies ordered are usually damages intended to compensate the investor for the losses that it can prove it has suffered as a result of the breach of the relevant treaty. Primacy is given in many investment treaties to damages as a remedy. Article 1135 of NAFTA, for example, provides that a tribunal may award only monetary damages or the restitution of property, in which case the state concerned may elect to pay monetary damages in lieu of restitution.89 Similarly, Article 26(8) of the Energy Charter Treaty provides that an award concerning an action of a government or authority shall provide that the state pay monetary damages in lieu of any other remedy granted.90 Some cases have found that non-compensatory or moral damages may be available where the state’s actions are found to be particularly wrongful.91 Where not expressly prohibited by the relevant investment treaty, it is also thought that it is possible in principle for tribunals to award non-pecuniary relief, such as orders requiring states to do or refrain from doing something.92 In practice, however, most investors seek only pecuniary relief, and questions may be raised as to whether non-pecuniary relief could effectively be enforced against a state. An arbitral award will typically be enforceable against any assets of the host state in a large number of jurisdictions around the world. Article 54(1) of the ICSID Convention provides: each Contracting State shall recognise an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.93

Conclusion Investment treaties are an important part of the international legal framework. By offering protection to parties who meet the necessary ‘nationality’ and ‘investment’ criteria, they provide reassurance for investors engaged in cross-border projects and protect against political risk. The ability to bring arbitration proceedings against any state that breaches the protections is an important potential tool for any investor, bringing the advantages that

89 Article 1135 of the North American Free Trade Agreement. 90 Article 26(8) of the Energy Charter Treaty. 91 Desert Line Projects LLC v.The Republic of Yemen, ICSID Case No. ARB/05/17, IIC 319, Award, 6 February 2008, paragraph 289; C. McLachlan QC, L. Shore and M. Weiniger QC, International Investment Arbitration, Substantive Principles, 2nd Edition, (2017) Oxford University Press, paragraph 9.147. 92 C. McLachlan QC, L. Shore and M. Weiniger QC, International Investment Arbitration, Substantive Principles, 2nd Edition, (2017) Oxford University Press, paragraph 9.147. 93 Article 54(1) of the ICSID Convention.

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such claims will not be barred by any time limitation provisions; the proceedings will be public, which may affect the actions of the parties; and it may give an investor a viable claim in circumstances where a contractual claim under domestic law would be frustrated.94 The nature and size of many modern construction projects, which see very significant investments of time and money, frequently draw upon contractors and sub-contractors from across the world, and are liable to be affected by the actions of the host state even if the state is not itself a party to the project, mean that parties in the construction sector would be well-advised to consider whether investment protection may be available, and to take steps to structure investments appropriately.

94 R. Walker and J. Randhawa, ‘The Resolution of Construction Claims Through Investor-State Dispute Settlement: Alternative Opportunities for Relief for International Contractors’, International Construction Law Review (2019), pp.255–283, p.274.

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24 Construction Arbitrations in the Nuclear Sector Jane Davies Evans1

The nuclear sector has given rise to some of the most high-profile construction arbitration in recent years. The nature of nuclear power plant (NPP) projects means that many of these arbitrations take place in the full gaze of the nuclear industry press and environmental campaigning media. These arbitrations are often long running, and involve large teams of lawyers2 and technical nuclear experts, in addition to the ‘usual’ delay and quantum experts.The sums at stake (frequently in the multiple billions of dollars) and the technical complexities of the issues in dispute can test even the most experienced construction counsel and arbitrators.

International arbitration in the nuclear sector Four examples provide a good starting point to understand the nature of construction arbitration in the nuclear sector. An International Chamber of Commerce (ICC) arbitration concerning the delayed completion and increased cost of the Olkiluoto 3 NPP in Finland ran from 2008 until 2018, when the parties reached a widely publicised global settlement. The NPP itself was originally planned to be operational in 2009; as of writing, regular electricity generation is anticipated to start in September 2020.3 The press reporting of this arbitration was at times more akin to that of an investment treaty arbitration than a construction dispute; be it increases in sums claimed and counterclaimed,4 failed attempts at settlement, hearing dates,

1 2

3 4

Jane Davies Evans is a barrister practising as counsel and arbitrator at 3 Verulam Buildings. By way of example, see https://globalarbitrationreview.com/article/1150574/finnishnuclear-dispute-approaches-final-round and https://www.whitecase.com/news/press-release/whitecase-advises-tvo-global-settlement-agreement (accessed 21 August 2018). See www.tvo.fi/OL3- (accessed 14 August 2019). See for example, http://world-nuclear-news.org/Articles/TVO-increases-claimagainst-Areva-Siemens-in-arbit and http://world-nuclear-news.org/Articles/Claims-updated-in-Olkiluot o-3-delay-arbitration (accessed 21 August 2018).

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the issuing of partial awards,5 final settlement,6 etc., the minutia of the arbitration is readily available for public consumption. In parallel, the Finnish nuclear regulator STUK has been producing regular reports on the project, setting out its detailed findings on a broad range of issues potentially relevant to the delay and financial claims before the tribunal.7 In contrast, a London Court of International Arbitration (LCIA) tribunal was reported as taking just three years to decide a dispute between a Hyundai-Samsung joint venture and the South Korean state-owned entity, Korea Electric Power Corporation, concerning variations, changes and disruption to the Barakah nuclear plant in the UAE.8 Another widely reported ICC arbitration concerned the San Onofre Nuclear Generating Station (SONGS) in California, USA. SONGS contains three reactor units, only two of which were operational at the relevant time (Units 2 and 3), Unit 1 having been permanently shut down in 1992. Mitsubishi Heavy Industries (MHI) designed and fabricated a number of replacement steam generators for Units 2 and 3 as part of a 10-year upgrade programme. In January 2012, after only 11 months of operation, one of the Unit 3 replacement steam generators experienced a radioactive coolant leak. Unit 3 was taken out of service in order to prevent further leakage and allow investigations as to the cause of the failure. Unit 2 (which was offline at the time due to planned maintenance) was also inspected. Investigations revealed that the replacement steam generators in both units were failing. In June 2013, the owner of SONGS, Southern California Edison (SCE), announced that it would permanently shut down the units, and begin decommissioning SONGS. In September 2013, the US Nuclear Regulatory Commission (NRC) issued its findings; NRC identified that the computer codes used by MHI to design the replacement steam generators were flawed, inaccurately predicting thermal hydraulic conditions in the steam generators, leading to tube vibration and wear, and ultimately to stem generator tube leak. One month later, SCE filed a Request for Arbitration against MHI seeking damages of not less than US$4 billion, subsequently increased to US$7.57 billion. In March 2017, the tribunal issued its award. MHI did not dispute the allegation that replacement steam generators in Unit 3 experienced unacceptable wear, but relied on a limitation of liability in the Purchase Order. The tribunal (by a majority) upheld the limitation provision and ordered MHI to pay the owners only US$125 million.9 In addition, the owners were ordered to pay US$58 million to MHI in costs.

5

6 7 8 9

See for example, https://globalarbitrationreview.com/article/1031463/areva-and-siemenswin-early-round-of-nuclear-dispute; https://globalarbitrationreview.com/article/1073329/ finnish-nuclear-dispute-not-finished; www.world-nuclear-news.org/Articles/TVO-gains-furtheraward-in-Olkiluoto-arbitration; https://globalarbitrationreview.com/article/1144868/another-award-infinnish-nuclear-power-plant-dispute (accessed 21 August 2018). See for example, https://globalarbitrationreview.com/article/1166538/finnish-nuclear-powerdispute-ends-in-settlement (accessed 21 August 2018). See www.stuk.fi/web/en/topics/nuclear-facility-projects/olkiluoto-3/news-concerning-olkiluoto-3. See for example, https://globalarbitrationreview.com/article/1192518/lcia-decides-dispute-over-uae-nuclearplant (accessed 14 August 2019). See www.mhi.com/notice/notice_170314.html (accessed 21 August 2018). The redacted version of the dissenting opinion now published records (at paragraph 192) that the dissenting arbitrator (Johnathan D. Schiller) would have awarded the owners more than US$1 billion in damages. See http://www3.sce.com/ sscc/law/dis/dbattach5e.nsf/0/B9B973AD8D299B3588258140006E98A1/$FILE/I1210013-Final%20 Redacted%20Corrected%20Dissent%20(Public%20Version).pdf (accessed 21 August 2018).

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A third ICC arbitration in the sector determined liability as between the Bulgarian state energy firm NEK and the Russian NPP supplier, Atomstroyexport, following the cancellation of the Belene NPP project. The supplier sought more than €1 billion in compensation. In an award that was over 700 pages, the tribunal awarded the supplier €550 million in compensation, with the parties to discuss whether the NPP would be built or sold on to a third party.10 One year later, Atomstroyexport supplied the reactor vessels for the abandoned project to NEK. Two years later, and Bulgaria is expected to lift the moratorium on construction of the Belene NPP, with Atomstroyexport one of the four potential suppliers who have registered interest to complete the project.11 Not only were these arbitrations played out in the public view, but in each case the arbitration was only one part of the story. Public scrutiny, criticism and court action from environmental groups, together with investigations and public reporting by the nuclear regulators, were running in parallel. Probity and cost audits, assessing the extent to which the financial consequences of these disputes can be passed through to consumers often follow. Further, the limited pool of owners and suppliers12 (both Tier 1 and lower tiers) active in this sector means that in many cases, whatever the outcome of the arbitration, the participants will have little or no option but to work together over the coming decades. This is typical of arbitration in the nuclear sector, requiring counsel (and arbitrators) – to a far greater extent than in many construction arbitrations – to pay attention to the wider picture.

Nuclear safety – the overriding requirement In conventional power projects, owners and suppliers juggle the competing constraints of time, cost and quality, with priorities driven by the commercial objectives as reflected in the underlying construction or supply contract. For a nuclear project, nuclear safety – overseen by the local nuclear regulator – is superimposed over these constraints. Quality is non-negotiable, limiting the parties’ ability to compromise on time and cost. Every aspect of the project must comply with the relevant nuclear safety requirements, irrespective of how long or how costly it is to achieve compliance. This overriding requirement generates three risk streams, one or more of which will be in issue in any construction dispute in the nuclear sector: • the licensing risk; • the risk of constructing in a nuclear environment; and • nuclear liability.

10 See Reuters 16 June 2016 and www.world-nuclear-news.org/C-Russia-wins-half-of-compensation-cla imed-in-Belene-lawsuit-16061601.html (accessed 21 August 2018). 11 See www.balkaninsight.com/en/article/bulgarian-parliament-to-drop-belene-nuclear-plant-mora torium-06-04-2018 (accessed 21 August 2018). 12 In this chapter, the term ‘supplier’ is used to denote the Tier 1 supplier who contracts directly with the owner unless otherwise stated.

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The licensing risk Any nuclear project carries with it a substantial licensing risk: • Will the nuclear facility be licensed at all? • If so, how long will it take for the nuclear facility to be licensed? • What conditions will be attached to the licence? Most nuclear regimes provide a two-track process: a high level licensing procedure, and day-to-day detailed regulation. Understanding these two separate processes, and knowing what are the ‘hold points’ – points beyond which the project cannot progress without approval from the regulator – is key when presenting or determining disputes in the nuclear sector.

High-level licensing The high-level licensing process is often very political and public. While the terminology varies from regime to regime, most regimes include the following four gateways: • an initial licence to build a NPP;13 • a construction licence (typically the ‘hold point’ for the pouring of First Concrete14 or safety classified manufacture, for example, forging of the reactor pressure vessel or other components within the primary circuit); • the licence to permit the transportation to and loading of nuclear fuel, at the NPP; and • the operating licence required to commence operation of the NPP. The first gateway will often have been passed before the supplier is committed to the project. The remaining gateways will typically be key milestones in the project schedule, often linked to the payment of liquidated damages for delay. As such, they will likely feature prominently in any construction arbitration where a supplier, key component vendors or subcontractors, are claiming additional time or money, or the owner is seeking to deduct liquidated damages. Nuclear experts (often retired regulators from other states, who have experience of the particular or equivalent nuclear regimes)15 will usually be needed to explain the licensing process to the tribunal, and provide opinions as to the cause of delayed achievement of each gateway, or the foreseeability of any pre-conditions imposed by the regulator.

Detailed regulation The less public, but no less important, licensing process relates to the oversight, supervision of and intervention into the day-to-day workings of the full supply chain by the nuclear regulator. While the most onerous regulations apply to contractors and suppliers whose work carries a high safety classification, the reality is that the nuclear regulator will take

13 In some states this will involve a public referendum. 14 ‘First Concrete’ is the term used in the nuclear construction sector in relation to the first pour of safety classified concrete, typically the base slab under the reactor. 15 There is significant collaboration between many state regulators, together with the international bodies who oversee nuclear activities on an international basis, meaning that many regulators will have substantial personal experience of the regulatory regime of other states.

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an interest (and potentially intervene) in all the tiers of the supply chain, supervising each phase of the project, from basic through to detailed design, procurement, manufacturing, factory testing, construction/erection and installation through to commissioning. Common claim events arising from the implementation of the detailed regulatory regime include: • delayed approvals or extended and repeated approval cycles; • additional or revised requirements imposed during the approval process. For example, the regulator may require additional engineering studies to be carried out to justify the proposed design prior to approval; • additional testing required to demonstrate the quality of components, materials and as-built works; • the imposition of different ways of working during manufacture, construction or commissioning, which may cause delay, reduced productivity and/or additional cost; and • the imposition of changes to the NPP design as a pre-condition to approval of the works. In a highly regulated environment, it is unrealistic for the parties to anticipate no changes or unforeseen regulator requirements. In addition, the nuclear regulator – charged with achieving the overriding objective of nuclear safety – will typically supervise and intervene on nuclear works to a much greater degree than an owner’s representative supervising conventional projects. Further, the regulator does not bear the cost of these interventions; the regulator’s only concern is (and should be) nuclear safety. However, changes, interventions and additional or different requirements can have substantial impacts on the project schedule and cost, giving rise to claims in arbitration as to who must bear the financial consequences between the owner and supplier or through the supply chain. The relatively limited recent activity in NPP construction in many parts of the world means that it can be difficult for owners and the supply chain to predict what the regulators will require from them. On the one hand, while the nuclear regulations may not have changed substantially from the last NPP construction, the individuals who interpret and implement the regulations will likely be different and have their own views as to what compliance requires, which may, or may not, coincide with the views of their predecessors. Alternatively, the regulations may have been updated but not implemented since the last NPP construction in the jurisdiction, leaving the owner and supply chain with little guidance as to what the new regulations actually require of them. Parties will often seek to mitigate this risk through the use of existing NPP as ‘reference plants’ against which regulator-imposed change can be measured. However, unless the existing NPP is a ‘twin’ the comparison may not be straightforward. Indeed, where the new NPP involves significant developments from the earlier NPP, is a ‘first of a kind’, or is being constructed in a different state with a different regulator, or for a different owner with their own set of ‘owner preferences’, the utility of a reference plant as a benchmark can be of limited benefit, and may generate considerable technical and legal argument during an arbitration. In practice, it is often this daily oversight and supervision of the project that gives rise to the majority of claims during the construction phase. Expert evidence from experienced nuclear experts as to the foreseeability and consequences of the regulator’s conduct will form an essential part of the supplier’s case, together with the usual evidence from delay, disruption and quantum experts as to the time and financial impacts.

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The risk of constructing in a nuclear environment Constructing in a nuclear environment poses additional risks to contractors beyond those found on any conventional major project. It is essential that counsel, experts and tribunals fully appreciate these risks, in order to be able to quantify the full impact of claim events on the project schedule and the supplier’s costs. In particular, the limited ability for the supply chain to work ‘at risk’, and the limits on the supplier’s ability to use normal project management techniques to mitigate potential delays and cost overruns, mean that when a nuclear project encounters difficulties, these can result in substantial delay and additional cost compared to equivalent difficulties on a conventional project. These constraints are addressed in turn.

Limited ability to work at risk Many construction contracts will permit a contractor working on a conventional project to work ‘at risk’. The contractor can choose, for example: • to place long lead item procurement contracts before the component vendor (or even the contractor) has been approved in order to guarantee a manufacturing slot and delivery date, or fix a favourable price; • to start construction before engineering drawings have been issued ‘for construction’ in order to gain time; or • to undertake a major concrete pour before concrete test results are available, in order to take advantage of good weather. The contractor does so knowing that if the vendor, drawings or test results are not approved, the owner will inevitably require opening up and investigation of the works at the contractor’s expense to check that the physical works conform with the contractual specifications. Where these investigations show that the work is non-compliant, the contractor may be instructed to remove and rework at the contractor’s time and cost. However, the contractor may well take the view that it has confidence in its own internal quality controls and the quality of its supply chain, engineers and supervisors, such that there is minimum risk in practice or that the risk is worth taking given the liquidated damages for delay that may be due if the contractor does not keep to the project schedule. In the nuclear sector, many nuclear regulations prevent or severely restrict the ability of the supplier to work ‘at risk’, prohibiting suppliers (at Tier 1 and the lower tiers) from placing contracts or progressing work without prior formal approval. This is a particular issue where the works concern safety classified features of the NPP.With the supply chain unable to work ‘at risk’ (or constrained as to when this is possible), it can be very difficult (if not impossible) for delays or additional costs to be mitigated. As a result, any delay in approval by the owner or the regulator can have a very significant impact on the project schedule (and create substantial additional cost).These ‘hold’ points must be understood by the delay experts engaged by the parties, in order that they can properly assess the full impact of even small delays on the overall project.

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Limited ability to manage internal processes A further significant difference between conventional and nuclear projects is the extent to which the applicable nuclear regulations limit both the owner and the supplier’s ability to manage their internal processes. In a conventional major project there will, of course, be project procedures in place that govern how the contractor manages the project. However, typically, these procedures are provided by the contractor, and can be amended or deviated from as the contractor sees fit. The situation is quite different when constructing in a nuclear environment, with the owner and supplier’s internal processes often requiring approval from the regulator, and limited to no ability to amend or deviate from the processes without prior approval.Where the regulator requires the supplier to work in a non-usual way, or is slow (or refuses) to approve proposed changes, this can create inefficiencies in the supplier’s workforce, or limit the supplier’s project team from improving productivity through changed work practices. For example, in a conventional project the contractor can typically manage late design developments on the construction site, through a site-based engineering team who deal with buildability issues as and when they arise on the shop drawings. In a nuclear project, where limited work is possible without formal approved construction drawings, the supplier may be prohibited from adopting this approach. A small construction issue can therefore cause large areas of site works to stop while the design is reworked and approvals processed, rather than the supplier implementing a suitable workaround on-site. Another example concerns welding; a significant part of any NPP project. On a conventional project, the contractor is free to reallocate welders around the site as and when work is available. In contrast, under many nuclear regimes, the approval of welders is highly regulated, with different welds requiring different certifications and approvals. Accordingly, the supplier is unable to reallocate welders freely, and must match specific welders to specific tasks. This is an important issue when considering loss of productivity claims, increasingly one of the most significant financial claims put forward in construction arbitration. Welding productivity is closely monitored on both conventional and nuclear projects, with experts normally able to assess with some accuracy the actual and anticipated productivity of welding teams, and quantify the loss of productivity. On nuclear projects, the greater variability of weld types, and the inflexibility of the workforce, makes the analysis much more complex than for conventional projects. The intensive supervision of the works by the nuclear regulator – and in particular, the supervision of safety classified works – will also limit the supplier’s ability to revise construction, erection and commissioning sequencing in order to progress the works. For the same reason, the owner’s freedom on conventional projects to agree substitutes and compromises in order to keep the project on schedule (or to mitigate delays) is restricted, with almost any change requiring review and approval by the regulator before it can be implemented. As for working at risk, the experts and counsel must understand each of these components of constructing in a nuclear environment, and be able to explain to the tribunal how the regulatory environment impacts on the owner and supply chain, and who bears the risk.

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Nuclear liability16 Civil liability for nuclear damage The third risk stream for participants in nuclear projects relates to their potential liability for nuclear damage.17 This liability can arise only after nuclear material has been brought on-site: during or after fuel loading, commissioning, operation, maintenance or upgrade projects. The Chernobyl disaster provided the clearest reminder that nuclear damage does not respect international borders; notwithstanding the significant emphasis on nuclear safety at every stage of a nuclear project, a nuclear incident18 has greater potential to cause damage across a widespread geographical area than almost any other form of energy production or industrial process. Liability for nuclear damage suffered within the same jurisdiction as the civil nuclear installation is governed by domestic legislation. In addition, many states have signed up to a series of international conventions addressing civil liability for nuclear damage suffered in a state other than the state where the nuclear incident occurred.

The international nuclear liability regimes The four most significant international conventions are: • the Paris Convention on Third Party Liability in the Field of Nuclear Energy 1960 (the Paris Convention) produced under the auspices of the Nuclear Energy Agency within the Organisation for Economic Co-operation and Development; • the Brussels Supplementary Convention 1963 to the Paris Convention (the Brussels Supplementary Convention); • the Vienna Convention on Civil Liability for Nuclear Damage 1963 (the Vienna Convention) produced under the auspices of the United Nations International Atomic Energy Agency; and • the Joint Protocol Relating to the Application of the Vienna Convention and the Paris Convention 1988 (the Joint Protocol).19

16 A full description of nuclear liability is outside the scope of this book, but counsel appearing in construction arbitrations in this sector should be familiar with the basics of the international nuclear liability regime. See, for example, ‘Liability for Nuclear Damage’ (updated August 2018), World Nuclear Association, www. world-nuclear.org/information-library/safety-and-security/safety-of-plants/liability-for-nuclear-damage.aspx (accessed 21 August 2018). 17 ‘Nuclear damage’ is defined in the Vienna Convention on Civil Liability for Nuclear Damage (the Vienna Convention) as: (i) loss of life, any personal injury or any loss of, or damage to, property which arises out of or results from the radioactive properties or a combination of radioactive properties with toxic, explosive or other hazardous properties of nuclear fuel or radioactive products or waste in, or of nuclear material coming from, originating in, or sent to, a nuclear installation; (ii) any other loss or damage so arising or resulting if and to the extent that the law of the competent court so provides; and (iii) if the law of the Installation State so provides, loss of life, any personal injury or any loss of, or damage to, property which arises out of or results from other ionizing radiation emitted by any other source of radiation inside a nuclear installation. 18 ‘Nuclear incident’ is defined in the Vienna Convention as ‘any occurrence or series of occurrences having the same origin which causes nuclear damage’. 19 All three conventions have been supplemented by subsequent protocols. www.iaea.org/Publications/ Documents/Conventions/liability_status.pdf.

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The Paris Convention and the Brussels Supplementary Convention are in force in most Western European countries;20 the Vienna Convention has a broader geographical reach, in force in 40 states including some signatories to the Paris Convention.21 While the detail of the conventions differ, the conventions are founded on the same basic principles: • liability for nuclear damage is channelled exclusively to the operator of the nuclear installation; • the operator’s liability is absolute irrespective of fault; • the operator’s financial liability per incident is subject to certain limits; • compensation claims must be brought within the state courts of the place where the nuclear incident occurred (normally the location of the nuclear facility) within a set period of time; • the operator must maintain insurance or other financial security commensurate to the liability. If this security proves insufficient to meet the specified liability, the state where the nuclear facility is located must make up the difference; and • the state court of the contracting state where the nuclear incident has exclusive jurisdiction over claims. The Joint Protocol was introduced in 1988, following the Chernobyl disaster, which had exposed the difficulties in having two similar (but not identical) conventions. The Joint Protocol (in force in 28 states) seeks to extend the application of the Paris and Vienna Conventions as between the signatories, while avoiding duplication or inconsistencies.22 A fourth convention – albeit one that is currently in force in 10 states only23 – is the Convention on Supplementary Compensation for Nuclear Damage. This convention supplements the Paris and Vienna conventions, bringing into the international liability regime notable absences (in particular, Canada, the United States and Japan) and establishing provisions for enhanced cover to be provided by the contracting states.

Nuclear liability and construction arbitrations Given the channelling of liability to the operator, the supply chain for nuclear facilities located within a contracting state should not face direct claims in relation to nuclear damage. However, nuclear damage claims may still feature in construction arbitrations if the supply contract between the operator and the supplier allows the operator to pass liability for nuclear damage down to the supplier, or does not expressly exclude it.24

20 See www.oecd-nea.org/law/multilateral-agreements/participation.html (accessed 21 August 2018). 21 As at 1 June 2017. See www-legacy.iaea.org/Publications/Documents/Conventions/liability_status.pdf (accessed 21 August 2018). 22 See www-legacy.iaea.org/Publications/Documents/Conventions/jointprot_status.pdf (accessed 21 August 2018) for current status. 23 The convention is in force in Argentina, Canada, Ghana, India, Japan, Montenegro, Morocco, Romania, the United Arab Emirates and the United States. See www-legacy.iaea.org/Publications/Documents/ Conventions/supcomp_status.pdf (accessed 21 August 2018). 24 Alternatively, the supplier may seek to pass down liability to lower tiered suppliers in arbitrations under subcontracts.

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Practical issues to consider when arbitrating in the nuclear sector Arbitrating in the nuclear sector gives rise to a number of practical issues that must be addressed in order to ensure an efficient construction arbitration.

The scale of the project and potential issues in dispute The first issue is the need to appreciate the scale of NPP projects. Even a project that proceeds from start to finish without any unforeseen difficulties will likely take more than 10 years from conception to operation.25 Where a dispute arises in the early years of the project, there is every possibility that the arbitration may last for 10 years or more as it tracks the progress of the project itself. This has practical issues when staffing the arbitration, in particular, when choosing fact witnesses, experts and arbitrators. The volume of documentation generated through the licensing, design, procurement, construction and commissioning of a NPP is unequalled in the construction industry. Hundreds of thousands of flow diagrams and isometrics, civil, mechanical, electrical and I&C drawings will be created, in addition to technical design justifications, work methodologies, procurement documentation, QC records, etc., to say nothing of correspondence, meeting minutes and reports.The volume of documentation – and server capacity required to store and access this quantity of technical documentation – will be impossible with any standard litigation software, and will likely require bespoke document management systems to be developed and maintained. Filtering the documentation into manageable quantities of relevant material for the arbitration team to work with, and the tribunal to review and base their decisions on, is a project in itself.

Traditional methods for analysing the impact of events on time and cost may not be appropriate The complexity of a project to develop a NPP cannot be overstated. Every stage of the process will likely involve thousands of engineers, manufacturing and construction personnel in an iterative process that cannot fully be reflected in a traditional project schedule. Project schedules for NPP projects can easily include over 100,000 separate activities in each phase; the logic links between these activities cannot possibly reflect every iteration that will occur during the life of the project. While the schedules provide an essential tool to the project managers, they must be used with care by the delay experts. An expert who adopts a very schedule-based approach to delay analysis will quickly find themselves struggling to provide a meaningful opinion. Another difficulty is caused by the fact that the scheduling software used on most construction projects (and by most delay experts) models the project on a linear basis. This is broadly representative of how a simple project responds to change and delay. However, a major project – and in particular, a project as complex as a NPP project – does not respond

25 To take an extreme example, the ITER project – an international 35-year collaboration to design and construct the first magnetic nuclear fusion plant currently under construction in France – commenced site works in 2007. Construction of the Tokamak Building commenced in 2014 with a seven-year build phase, First Plasma is planned for 2025 and Deuterium-Tritium Operation currently planned for 2035. See www. iter.org/proj/inafewlines (accessed 21 August 2018).

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to change and delay in a linear fashion; it responds dynamically.The same is true of productivity and cost.The supplier or contract will require additional expert opinion on the actual consequences of change and delay, which will often far exceed the consequences assessed by reference to traditional linear analysis. While not often seen in conventional construction arbitration, reference to experts in systems dynamics may be required. A developing science in litigation or arbitration, systems dynamics has been widely used by management within the energy and other sectors for many years to predict outcomes when making significant investment decisions, etc. It is possible to create a systems dynamics model for the purposes of arbitration supported by appropriate independent expert evidence. However, in the author’s experience, many companies engaged in complex mega projects will have their own preferred modelling system used on a day to day basis to model risk and business decisions as part of its normal business management. Where such a model already exists, this model can be used by the relevant factual witness evidence (for example, a senior risk manager or similar) from the organisation, who can explain the build-up and historical reliability of the model. In the author’s view, a ‘tried and tested’ model that was in use long before a dispute arose and that can be explained by a well-informed fact witness, will likely be better received by a tribunal than a model created (or tailored) by an expert after the event and solely for the purposes of arbitration.26

Sampling and extrapolation It is not uncommon for contractors on conventional projects to attempt to quantify multiple claim events by reference to sampling and extrapolation. The approach most frequently presented in construction arbitrations uses non-statistical sampling. Most often due to constraints of time, resources or money, the contractor’s arbitration team will review in detail a limited sample of claim events that the contractor says caused a loss.This sample will be presented supported by factual witnesses or contemporary records, with technical experts opining on the technical aspects, and the quantum experts opining as to the resulting loss.The contractor’s fact witnesses or the experts will opine that the sample was representative, and the contractor will ask the tribunal to infer the overall loss from the sample.While this approach can result in a large claim number, it is frequently easy to undermine the analysis by demonstrating that the sample is unrepresentative. For a nuclear project, the supplier may have literally hundreds of thousands of claim events. It is clearly impossible to present each of these claim events – and no tribunal would thank the arbitration counsel who put forward its client’s case on this basis. Engaging an expert statistician to develop and supervise a statistically robust sampling and extrapolation

26 Non-linear analysis may also be appropriate for construction arbitrations outside the nuclear sector where the project involves multiple interactions that are not properly reflected in the traditional analyses. For example, systems dynamics is a tool relatively common within the oil majors. Until such time as non-linear analysis is widely accepted by construction arbitrators, the author recommends that this evidence is presented in conjunction with traditional delay and quantum analysis.

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process can allow the financial impacts of a large number of claim events to be presented in a comparatively cost-efficient and digestible format, suitable for the tribunal to determine within a reasonable period of time.27

Export regulations A further practical issue that arises on construction arbitrations in the nuclear sector is the need to comply with domestic and international regulations concerning the transfer of nuclear technology. Nuclear technology often lies at the heart of a construction arbitration, with claims for additional time and money founded on alleged changes to existing technology or the time and cost incurred in developing new or enhanced technologies. Determination of these issues requires detailed information regarding the technologies to be transferred to the independent experts, counsel and the tribunal. Where that technology involves a transfer across an international border, the transfer may require advance permission from a regulator or export authority. Counsel must be aware of these regulations, and ensure compliance across their internal and expert teams. The tribunal and arbitral institution (if applicable) must also be made aware of applicable regulations and terms of any permissions granted. For example, many international law firms and expert witness providers staff matters across offices, or hold data on servers in multiple jurisdictions to manage the risk of data loss in a given jurisdiction. However, the synching of data between servers in multiple jurisdictions may constitute the transfer of technology requiring advance permission from the relevant regulators. The use of cloud storage may also constitute a transfer of technology, as may a member of the legal or expert team (or the tribunal) travelling internationally with data about the technology on their laptop. Similarly, the filing of expert reports and submissions, or taking bundles to a hearing, may constitute the exporting of restricted nuclear technology.

Security issues Every nuclear facility will incorporate security measures protecting the facility from both physical attack and cyberattack. The development, approval and incorporation of these measures into the facility is a matter of extreme sensitivity. Information regarding these measures is strictly controlled and often classified, with only a limited number of individuals within the supplier and the owner authorised to know what the measures are, let alone the status of the measures and the extent to which these measures may be a cause of (or impacted by) delay, disruption and additional cost. Where a security measure gives rise to a claim, this will create additional practical difficulties in arbitration. Counsel, experts and arbitrators will likely require security approval from the relevant security agencies in order to be able to receive information regarding the measures. All information regarding the security measures will be subject to strict safeguarding requirements, and a failure to comply with the prescribed procedures may result in criminal sanctions against the individuals. These restrictions will permeate through the

27 In the author’s view, statistical sampling is also suitable for use on many construction arbitrations concerning conventional projects as a mechanism for saving time and cost.

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entire arbitration; for example, thought must be given when appointing the tribunal and staffing the counsel and expert teams to whether certain individuals may be prohibited from having access to information due to their nationality. Practicalities, such as whether a transcript can be taken of the part of the hearing where the measures are discussed, and if so, by whom, and on what terms, need to be considered. Where the arbitration is supervised by an institution that would normally receive a copy of the award (and in particular, for ICC arbitrations, where awards are scrutinised by the ICC Secretariat and ICC Court), discussions will need to take place at an early stage to agree with the relevant authorities how the arbitration can proceed.

‘Lessons learned’ Transparency is a fundamental part of the nuclear sector, with the nuclear sector investigating and publishing ‘lessons learned’ regarding every aspect of nuclear projects that did not proceed as planned. It is therefore entirely possible, and indeed, likely, that the nuclear regulator will not be alone in publishing findings as to the cause of problems on the project. Counsel on a construction arbitration in the nuclear sector may well find that senior personnel from its own client are publishing papers setting out ‘lessons learned’ on the very issues that are before the tribunal.

Conclusion This brings this discussion back full circle to the start of the chapter. The nature of nuclear power is such that any nuclear project will be developed – and disputes determined – in the full gaze of the industry and, on occasion, the world’s press. Nuclear safety takes priority over everything, including arbitration strategy, however much money is at stake. The key skills for counsel working in this area are (1) to know what to expect; (2) be prepared to distil an unprecedented volume of material into manageable parts that can be understood and determined by the tribunal; and (3) present the public findings regarding the cause of your client’s claim events as a virtue, not a weakness. And remember, once you have presented or determined a construction arbitration in the nuclear sector, every non-nuclear construction arbitration you are involved with thereafter (however complicated) will seem straightforward!

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25 Energy Sector Construction Disputes Scott Stiegler and James L Loftis1

Disputes in the energy sector present a range of challenges for stakeholders in the industry, which can be particularly acute given their inherent complexity and the financial (and frequently, political) consequences of delay and disruption in production. Such complexity is often compounded by the highly regulated environment in which these projects are developed. Notable recent examples include the 1.6GW Olkiluoto 3 nuclear plant dispute, which has been described as ‘one of Europe’s longest-running and most bitter corporate disputes’, and the disputes arising from the cancellation of the South Stream project to pipe Russian gas to Europe. Both of these projects, while significant in terms of the sums in dispute, also bring with them increased degrees of financial pressure and political tension. In addition to the typical construction issues – delay, disruption, workmanship and design liability – energy construction disputes also often feature attendant disputes arising out of either the integrated nature of such projects or the nature of the materials involved. The owner of a delayed power plant project, for example, is likely to face penalties under its offtake arrangements for delayed power production. Furthermore, defective work, particularly in offshore and undersea operations, may bring with them the potential for regulatory and environmental consequences. Such disputes are also complicated by the high likelihood of the project being financed (whether on a sole-recourse or project finance basis or otherwise) and the involvement consortiums of owners (energy projects often being both on such a scale and so risky that even the biggest oil major is reluctant to go it alone). Evolving technologies (particularly in the renewables sector), frequently harsh environments and political pressure to deliver projects and avoid environmental damage also raises the stakes in this area.

1

Scott Stiegler and James L Loftis are both partners at Vinson & Elkins.

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Typical projects Energy sector disputes are typically linked with common themes of complex and sometimes new technology, low tolerance of defects and high thresholds for contractual and regulatory compliance. Projects in the energy sector, as one would imagine, include: • laying pipeline (buried sub-surface, sunk in hundreds of metres of water, and across land, including pristine wildernesses) – see, for example, the South Stream cross-Black Sea pipeline; • constructing power transmission infrastructure (see, for example, Peru’s cross-Andes high-voltage transmission network); • power plants (ranging from traditional coal through to nuclear power projects, but also more sustainable options such as hydroelectric and ‘energy from waste’ plants); • refineries; • LNG liquidation and regasification facilities; • port facilities for the loading and unloading of oil and LNG; • offshore platforms and supporting facilities (storage tanks, processing facilities, pipes, etc.); and • solar and wind farms. Given the variety of types of projects, each present their own individual technical challenges. However, given the scale of some of the projects, they often involve other unique challenges such as those crossing international borders, or involving construction in harsh conditions such as in remote areas or offshore. The regulated and political environment coupled with changes in technology also provide additional challenges. In the United Kingdom, for example, the energy from waste industry has successfully contributed to reduction in the amount of biodegradable household waste sent to landfill over the past 20 years or so. However, cuts to local funding as well as increased environmental pressure, particularly given the debates over incineration versus gasification, may indicate a slowdown in the industry.

The key players: the significance of the state Although the contractors, engineering, procurement and construction (EPC) managers and material suppliers often stem from the same organisations regardless of whether the project is the energy sector or not, those sitting on the owner’s side of the table can be different from in many other construction projects. In relation to large projects (for instance, the Kashagan development in Kazakhstan, featuring the building of multiple offshore facilities and the construction of a sub-surface 92-kilometre offtake pipe), frequently there is no one sole owner but rather a consortium of owners. There may or may not be an operating company, but even if such a company does exist, it will still be impacted with the dynamic that comes as a result of having to answer to multiple masters, who often have competing agendas, or at least differing stakes depending on their level of investment and the number of roles they may be taking in the overall project. This can lead to added levels of bureaucracy, slowing down progress or resulting in unexpected changes of direction and scope, which is particularly so given the long-running nature of energy projects generally.

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Profit and energy generation are generally the key motivators for new projects. Accordingly, owners are faced with the challenge of trying to design and build in an environment where the justification for doing so very quickly evaporates, in this instance, with a change in a commodities index. In a world of US$100-barrel oil, projects can afford grand designs, ‘nice-to-haves’, multiple levels of redundancy and the use of the very best materials. However, a collapse in the oil price can lead to an entirely different dynamic, causing owners to seek to engage in ‘value engineering’, or to vary the timing (either by accelerating or delaying) in order to catch an anticipated market upcycle or to get out of capital costs as quickly as possible. This can radically alter the dynamic between owner and employer, changing a successful project relationship to one under extreme pressure. Recent years have shown strong trends towards ever more interventionist host states in this regard, with projects being audited to ensure that no ‘gold plating’ is occurring, often by unleashing audit bodies designed to root out corruption and checking for black and white compliance with procurement regimes. While this can be particularly so with projects undertaken in developing nations, it is also applicable in first world developments, particularly where margins are tight.This approach can sometimes ignore the consequences of the real world dynamics of how construction decisions are taken during the course of a project, or what normal industry practice is in the energy sector (with its belt and braces approach to safety and reliability, and the constant conflict between using ex-patriot expertise and complying with ‘local content’ requirements). The eye of the state is frequently not only focused on initial cost recovery, but contradictorily also on ensuring that the facilities represent a good bargain for it. One most notable and recent example was the finding that Spain acted in breach of the fair and equitable treatment standard under Article 10(1) of the Energy Charter Treaty regarding certain changes made to decrees on tariffs in the renewable energy sector.2 Spain had set out to stimulate investment in the renewable energy sector by establishing a premium (a feed-in-tariff) above the wholesale market price for certain renewable energy generators for the lifetime of installations registered and commissioned by 1 January 2012. However, through a number of measures introduced between 2012 and 2014, Spain had effectively introduced a much less favourable regime. Spain was ordered in this particular case to pay damages in the region of €65 million. Whether in the area of upstream oil and gas development (where facilities are typically used by the international investor for 20 or 25 years and are then handed over to the host state for the remainder of the field life at no cost to the state) or in the construction of power plants on a build, operate, own, transfer or build, operate, transfer basis where it is normal for the owner to have a certain number of years to earn an operating tariff before handing the power generation facility over to the state, the state party wants to ensure that it is getting value for its money. The inevitable tension between the desire to build something that will last and the desire to not depress short-term profits is inherent in these kinds of projects. Contractors are, however, more astute than ever as to their contractual and legal rights, particularly in emerging and developing markets. Indeed, contractors are becoming more sophisticated with their understanding of local laws and how such laws may impact or drive 2

Masdar Solar & Wind Cooperatief U.A. v.The Kingdom of Spain, ICSID Case No. ARB/14/1.

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their ability to make claims against an owner. For example, the rise of claims for ‘equitable rebalancing’ is becoming more prevalent in these markets and presents particular concerns for owners who typically operate in common law jurisdictions. Furthermore, the nature of large energy projects means that contractors, designers, subcontractors and suppliers more often than not come from varying nationalities and backgrounds, which brings an added legal and social complexity to the working environment.

The propensity for claims beyond typical construction disputes Disputes in energy construction projects typically give rise to many of the same types of claims that other construction projects encounter.The differentiating factor of energy construction disputes is that such disputes can often have knock-on consequences that can be significantly greater than the basic problem of the project not being delivered as specified. Taking an example: a consortium of companies is working together to develop an oil and gas field. In addition to specialist drilling works, they require the construction of numerous processing and initial storage facilities, along with the means to move the product to their markets.The consortium agrees that it will construct a pipeline to a local refinery company and enters into a crude oil supply agreement with the refiner (who then will on-sale refined products to its own customers). At the same time, it is decided that the associated gas produced with the oil will be sold to a local power station, which in turn enters into a power purchase agreement with the government, with a guaranteed level of dispatch. The consortium hires a major EPC contractor, who in turn hires multiple subcontractors. The project is delivered late. As an additional consequence, when the oil pipeline is commissioned it is found to be leaking due to defective welding, causing significant environmental damage. It has to be immediately shut in pending repairs. Given the limited storage tanks on site, this quickly has the effect of suspending oil and gas production for several weeks. The likely issues that could arise from this scenario include: • the levying of environmental fines for contamination by the host state on the consortium; • potential public interest litigation by concerned environmentalists seeking to block further work on the projects; • claims from the refiner against the consortium, who has lost substantial profits as it has been unable to produce refined products while the pipeline is shut in for repair, a particular issue where commodities prices are falling; • claims by the power producer, who has had fines imposed under its own contract with the state for failing to dispatch enough power as it did not have enough gas to burn; • the consortium’s own lost profits in not being able to sell the hydrocarbons they would otherwise have produced; • potential moves by the host state to revoke the consortium’s right to continue to develop the hydrocarbon resources at all (which in turn might lead to a bilateral investment treaty claim by the investors against the state); and • claims within the consortium about whether the lead consortium member selected the right EPC contractor and managed it properly.

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While this is an overly dramatic example, it serves as a demonstration of the scope of potential disputes given the interlinking nature of the development of an energy facility with the wider energy market, key stakeholders and environment.

Technology drives the energy industry It comes as no surprise that developments in technology drive changes in the energy industry. Developments in power production from coal to nuclear, for example, show how technology and energy production processes have changed in recent decades. These processes, however, bring about issues as to how technology is managed in construction contracts. Owners and contractors are, quite rightly, concerned about valuable rights in process and production technology, particularly where competing states are involved. For example, the new Hinkley Point C Nuclear Plant planned for the United Kingdom brings together two competing state nuclear entities to develop nuclear infrastructure in a third state. How technology will be managed in this relationship is something that we can only watch as time progresses and will, no doubt, be closely guarded. While there are technological developments in energy processing itself, developments in other ancillary fields also change the way energy is sourced. For example, the increase in battery technology, particularly in the automotive industry as well as in the potential for long-term power storage, has driven growth in sourcing and processing of minerals such as lithium and cobalt. Some commentators see that electrification and storage is the beginning of an era away from the traditional fossil fuels and as such, demand for such minerals could represent the ‘new oil’. The importance and reliance on new and developing technology means that disputes over design responsibility, often a key feature in large energy disputes, becomes ever-more complex. Furthermore, when determining design responsibility, it is more often than not that the experts who are constructing the facility are the only available experts who can determine the causative reasons for fault, making the search for an independent view on liability troublesome.This, coupled with the closely guarded and the commercially sensitive nature of technology development, makes these kinds of disputes novel.

Issues beyond employer–contractor disputes Construction disputes in the energy sector can also be at the mercy of international and domestic politics, owing to the importance of natural resources to sovereign and other international actors. One reason is that determining the entitlement to natural resources often requires the involvement of international law, since many reserves lie in areas to which claims are disputed – this is particularly the case for offshore assets – including production facilities and pipelines. By way of example, in August 2014, Somalia filed an application seeking an International Court of Justice ruling based on the United Nations Convention on the Law of the Sea. The question was essentially whether the maritime border should follow the land border (as Somalia wanted) or simply cut east. At stake are 64,000 square kilometres of what are currently Kenya’s territorial waters, including part of the Lamu oil exploration basin. The oil exploration blocks were leased to Total and Eni, which Somalia contests contravenes Somali Law No. 37, which defines Mogadishu’s continental shelf and territorial seas at 200 nautical miles. In response to Somalia’s actions, Kenya voluntarily halted its (or rather Total and Eni’s) oil exploration in the disputed part

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of the Indian Ocean as an ‘expression of its good faith’, according to Professor Muigai, Kenya’s Attorney-General. But where does that leave the international oil companies and the facilities they are developing? As already noted, construction projects in the energy sector are also distinguished from general construction projects by their sheer scale and scope, which invariably warrants international cooperation. Pipe-laying, for example, often requires passage through multiple nations or seas. When a project is contemplated, the initiating country may have a choice of routes through different states – a decision with a considerable effect on international relations. For example, Uganda has been planning a US$4 billion oil pipeline that would connect landlocked Uganda to foreign markets. Both Kenya and Tanzania had been lobbying for the pipeline to cross their territory, with Kenya pushing for the Lamu pipeline, which would go through its oil-rich Turkana region, while Tanzania was competing with the Kabaale– Tanga port route. In October 2015, Uganda and Tanzania signed an agreement to explore the possibility of building a crude oil pipeline between the two countries, while Kenya believed it had already agreed to a deal with Kampala, thus setting the stage for fierce competition between the countries. Uganda has ultimately elected to export its planned crude oil production via a pipeline through Tanzania and estimates that it could have reserves of around 6.5 billion barrels of oil in place, with recoverable oil estimated at 1.8–2.2 billion barrels, and 0.5 trillion cubic feet of gas. Clearly the presence of energy construction projects is of great importance to national leaders, owing to the international recognition and associated foreign investment. It is, therefore, important to see construction projects in the energy sector against the backdrop of turbulent international relations, since such projects may assume a pivotal role in the maintenance, progression or deterioration of relations between sovereign actors – a factor out of the control of the contractor, and which may also be outside of the influence of the employer, unless investments have been carefully structured to give access to protection under a bilateral or multilateral investment treaty (such as the Energy Charter Treaty), which may give access to a remedy via an international tribunal. Additionally, recognition of the reliance on, and significance attributed to, natural resources can present other complications for construction projects in the energy sector. Indeed, the energy sector itself is an obvious target when there is disagreement among nations. Construction projects in the energy sector may, therefore, be subject to a greater risk of complications since the energy sector may be ‘taken hostage’, as a means of trying to coerce another nation to adopt, or cease, a particular course of action. For example, it is no secret that the relations between Russia and the European Union have deteriorated in recent years. In particular, the destabilisation of eastern Ukraine has resulted in sanctions against Russia, many of which are directed against its energy sector, upon which it is largely reliant. As a commodity holding so much financial and political clout, the ability to deal with natural resources freely is not guaranteed, as these sanctions demonstrate. Taking this example slightly further, even a new governing political party in a nation can bring about significant change. For example, the widespread adoption of fracking in the United States has opened the potential for billions of barrels of oil and trillions of cubic feet of natural gas to production, and is likely to have significant impact on the global

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energy sector in the upcoming years. This will undoubtedly impact the incumbent OPEC producers such as Saudi Arabia and other significant producers like Russia. While many will claim this as a political and policy change victory resulting from the change from the Obama to the Trump administration, some analysts consider that the growth in US production is not driven by policy, but by other factors such as increased demand from China and India, and the likely increase for demand in petrochemicals used in plastic. Future trade relations between Europe (and the United Kingdom) with the United States, therefore, also presents potentially a new era moving away from heavy dependency on Russia for oil and natural gas.

Construction and energy specialists in dispute resolution As to the conduct of these disputes themselves, many of the same issues arise as in any construction arbitration. It is clearly desirable (depending, perhaps, on the strength of your case) to find arbitrators who have experience in both construction and energy matters. Potential sources of information on such individuals include the Permanent Court of Arbitration (who maintains lists of experienced energy arbitrators and energy expert witnesses) and the International Center for Dispute Resolution’s ‘Energy Arbitrator List’, which is freely available online.3 As ever, market reputation remains an invaluable resource. In addition to experience, (long-term) availability will be a factor worth particular consideration. Energy construction disputes are typically highly document-heavy, involve multiple sub-issues and often are resolved over the course of years rather than months. Good availability, running far into the future is obviously key, but a common problem for the most sought after and desirable candidates. The multiplicity of parties and multiple related disputes (with interlocking contracts) also gives rise to the issue of whether or not consolidation of disputes is possible, or indeed even desirable. While always a case-specific question, anecdotal evidence suggests that despite ever greater access to consolidation mechanisms via the latest editions of the various institutional rules, parties in this sphere often prefer to keep each step in the dispute chain separate. This can, and does, of course lead to the danger and reality of inconsistent results and contractual gaps. However, there often appears to be a preference for preserving a second bite at the cherry, and, as observed by Lord Justice Longmore in Sun Life,4 such a result is an inevitable and inbuilt feature of arbitration. Given the political and environmental dimensions of these cases, energy construction disputes can also see attempts by third parties to intervene. This is particularly the case where arbitrations are being fought in the World Bank’s ICSID mechanism, where there are trends to permit both greater visibility in what is normally a confidential world as well as active intervention by way of amicus curiae briefing and interjection. At best, such interventions delay awards and increase cost. At worst, they take otherwise private disputes in different directions from those which either of the original parties would intend or desire.

3 4

At www.energyarbitratorslist.com. Sun Life Assurance Co of Canada & Ors v. Lincoln National Life Insurance Co [2004] EWCA Civ 1660.

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Second bites of the cherry Among the reasons why arbitration is popular in energy disputes is the perceived finality of the process – typically, appeals are not permitted unless something can be shown to have gone fundamentally wrong with the arbitration process itself. ‘Wrong’ results are tolerated as part of the process, in favour of avoiding multiple levels of appeal and dragging cases on still longer. This narrow approach has been re-enforced in the England courts that have typically heard applications to challenge arbitration awards rendered in England, and who have respected the pro-arbitration, anti-interventionist approach envisioned by the drafters of the Arbitration Act 1996, as well as identifying the high threshold in establishing a serious irregularity, reflecting the reluctance of the courts to interfere with the conduct of arbitration. Indeed, the courts have gone so far as to now punish attempts to reopen the merits of arbitrations with awards of indemnity costs, which has had a cooling effect on attempts to encourage the courts to reverse awards. However, a recent high-profile case has shown that in construction cases that door is less closed. In a 2015 decision of the English Technology & Construction Court, the UK government managed to achieve what came suspiciously close to such a reversal, in the cases of Raytheon I 5 and Raytheon II.6 Although couched to fall within the scope of the existing procedural unfairness grounds of challenge, the decision of Mr Justice Akenhead came (in the eyes of many commentators) very close to a reversal on merits grounds. The decision was appealed, although a settlement was reached before the appeal was heard.The question remains though as to whether the judges of the TCC will be more willing as a general matter to second-guess arbitral tribunals in matters that fall within their ambit. This may well offer those involved in disputes in the energy sector an opportunity to fight on where previously they would have conceded defeat.

Summary Energy sector disputes are the pinnacle of construction and engineering disputes in terms of complexity, commerciality and political intervention and persuasion. Generally when energy construction projects go wrong, there is the potential for massive, headline-grabbing disputes that need to be approached with specialist knowledge of the industry, the players and the political environment. More than anything, however, there must be an awareness that nothing happens in isolation. Every design error, or badly welded joint, risks leading to a cascade of claims.The allocation of the risk of such claims as between employer and contractor, and contractor and subcontractor, will be key to the issue of who is dragged into the fight, and who will be left carrying the can – and that is before the impact of third-party interventions from states, public interest groups and other concerned parties is felt.

5 6

Secretary of State for the Home Department v. Raytheon Systems Limited [2014] EWHC 4375 (TCC). Secretary of State for the Home Department v. Raytheon Systems Limited [2015] EWHC 311 (TCC).

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26 Construction Arbitration and Concession Contracts Philip Dunham and José Manuel García Represa1

In the prior editions of this contribution, we defined concession contracts as instruments for the construction, financing and management of infrastructure and services of public interest,2 such as, for example, residential development, roads, ports, airports, mines, power plants, refineries and other energy-related projects. Among the main characteristics of concessions, we noted that they: • imply a long-term relationship between a public entity and a private person; • entail, by definition, the exposure of the project to changes in circumstances over the long term; • have the key purpose of facilitating the access of sovereign states to private financing for public service projects; and • are usually subject to significant state scrutiny and monitoring. We then proceeded to address a number of issues and challenges in the relationship between the conceding entity and the concessionaire, arising out of these characteristics.3 These issues and challenges notwithstanding, we concluded that there was a trend in the increased and increasing tendency of private entities to resolve disputes arising out of concession

1 2 3

Philip Dunham and José Manuel García Represa are partners at Dechert (Paris) LLP. The authors extend their thanks to Ruxandra Esanu for her assistance with the research leading to this contribution. R. Jaidane, ‘La gestion des contrats internationaux de concession’, 3 Revue de droit des affaires internationales 289, 2005, p. 290. P. Dunham and J.M. García Represa, ‘Construction Arbitration and Concession Contracts’, Global Arbitration Review –The Guide to Construction Arbitration (2017).

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contracts (both in the construction and other sectors) through treaty-based arbitration against the state hosting the concession.4 We take this conclusion as the starting point of the third edition of our contribution. At the date of writing, such conclusion is consistent with the recently released yearly statistics of some of the main institutions administering international arbitrations. By way of example, the International Centre for Settlement of Investment Disputes (ICSID) has disclosed that, for the fiscal year 2018, it has registered a total of 56 new cases, that is, 6 per cent more than for the 2017 fiscal year.5 In 2018, 14 per cent of the new cases registered at ICSID came from the construction sector, while in 2017 some 11 per cent had come from this sector. This translates as an increase of over 3 per cent in the weight of construction arbitrations in the likewise increasing total caseload of ICSID. In comparison, the increase in cases arising in connection with a concession contract was of 20 per cent between 2017 and 2018, with eight new cases registered in the former year and 10 in the latter.6 A similar trend is confirmed by the statistics published by the International Chamber of Commerce (ICC). In 2018, the ICC registered 842 cases, bringing its current caseload to 1,603 pending cases. Of these, some 40 per cent were construction/engineering and energy disputes.7 In fact, the ICC has disclosed that a new record had been achieved in 2018, ‘with the number of construction and engineering cases now reaching 224 new cases (i.e., 27 per cent of the caseload in 2018).’8 In these circumstances of increased resort to investment treaty arbitration to resolve such disputes, in this updated contribution we consider, first, the circumstances that might justify resorting to this method of dispute resolution instead of accessing local courts or even triggering a potential arbitration clause included in the contract between the state or state-owned conceding entity (SOE) and the private entity concessionaire. We then proceed to consider the impact that investment treaty arbitration may have on the sovereign freedom to regulate, from the perspective of two short case analyses.

P. Dunham and J. M. García Represa, ‘Construction Arbitration and Concession Contracts’, Global Arbitration Review – The Guide to Construction Arbitration (2018). 5 ICSID, The ICSID Caseload – Statistics , issue 2019-1, available online at https://icsid.worldbank.org/en/ Documents/resources/ICSID%20Web%20Stats%202019-1(English).pdf. 6 The ICSID statistics do not allow for a classification based on the nature of the contract (if any) between the private investor and the state or state-owned entity. Nonetheless, ICSID’s website indicates that eight cases involving concessions in various sectors were registered in 2018 and are currently pending, whereas an additional two have been discontinued. Likewise, six cases were registered in 2017 and are still pending, while two have since concluded. See ‘ICSID Pending Cases’, available at https://icsid.worldbank.org/en/pages/ cases/pendingCases.aspx?status=p and ‘ICSID Concluded Cases’, available at https://icsid.worldbank.org/en/ Pages/cases/ConcludedCases.aspx?status=c. 7 The ICC statistics do not allow for a classification based on the nature of the contract (if any) between the private investor and the state or state-owned entity. 8 ICC, 2018 Dispute Resolution Statistics, available online at http://www.iccwbo.org/dr-stat2018. 4

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An easily justifiable increase in the choice of investment treaty arbitration as a dispute resolution mechanism As we described in the previous edition of this contribution, at least four key elements justify the increasing tendency to resort to investment treaty arbitration in construction and concession-related disputes. First, treaty-based arbitration offers an attractive dispute resolution avenue to stakeholders (with direct or indirect interest) in a project who may not have access to the contractually agreed-upon dispute resolution mechanism. Indeed, the latter requires privity.9 For example, the World Bank’s draft concession contract for the design, construction and operation of a toll highway includes a multi-tiered dispute resolution clause allowing for amicable resolution, followed by escalation to a dispute panel, and, ultimately, submission to international arbitration for contractual claims.10 The World Bank proposes the following model language: If any Dispute […] has not been resolved between the Parties through an amicable settlement or the Dispute Panel procedure within [thirty (30) calendar] days of the receipt of the notice provided in clause (2), which shall each be a condition precedent, the Parties agree that the Dispute shall be referred to and finally settled by international arbitration as provided below. All arbitration proceedings with respect to the foregoing shall be conducted pursuant to the Rules of Arbitration of the International Chamber of Commerce (‘ICC Arbitration Rules’) which are deemed incorporated by reference into this PPP Contract.The following terms shall apply to the arbitration.The arbitration shall take place before a tribunal of three (3) arbitrators appointed in accordance with the said ICC Arbitration Rules (the ‘Arbitral Tribunal’).11

Given that ‘the Parties’ are defined, in this context, as ‘[t]he Contracting Authority and the Private Partner […] collectively,’12 the cited contractual dispute resolution provision restricts access to these two contracting entities. Other stakeholders in the project, such as, for instance, shareholders or financers of the ‘Private Partner’ may be left without recourse against the ‘Contracting Authority’ in the event of a dispute. One alternative to this, as mentioned in the prior version of this contribution, is to seek the extension of the arbitration agreement to a non-signatory. This can be done through the application of legal theories such as alter ego, the group of companies (or contracts) or piercing of the corporate veil. The arbitral tribunal constituted on the basis of the

See, for instance, Permanent Court of Arbitration (ed.), Multiple Party Actions in International Arbitration, Oxford University Press (2009). 10 World Bank Group, Report on the Recommended PPP Contractual Provisions (2015), available at https://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/ppp_testdumb/ documents/150808_wbg_report_on_recommended_ppp_contractual_provisions.pdf. 11 World Bank Group, Report on the Recommended PPP Contractual Provisions (2015), Section 8.2, available at https://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/ppp_testdumb/ documents/150808_wbg_report_on_recommended_ppp_contractual_provisions.pdf. 12 World Bank Group, Report on the Recommended PPP Contractual Provisions (2015), p.8, available at https://ppp.worldbank.org/public-private-partnership/sites/ppp.worldbank.org/files/ppp_testdumb/ documents/150808_wbg_report_on_recommended_ppp_contractual_provisions.pdf. 9

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contractual dispute resolution clause will decide on its own jurisdiction, and, in particular, on whether or not the non-signatory party may be validly bound by such clause, whether as claimant (through a motion for joinder) or respondent. Another alternative is treaty-based arbitration, which ordinarily does not require that the claimant be a party to the concession contract. In order to access this type of arbitration, the claimant must instead be a national of a state having concluded an international treaty for the protection of investments with the state hosting the concession. Most such treaties generally include both states’ consent to submit disputes with investors of the other state to arbitration (for example, under the auspices of ICSID, or of the Permanent Court of Arbitration and pursuant to the Arbitration Rules of the United Nations Commission on International Trade Law), in addition to setting out standards of protection that such investors are to be afforded by the host state. Upon commencing such an arbitration, the claimant in fact accepts the state’s offer to arbitrate and is able to invoke such standards of protection. The claimant must also have a protected investment. It is today widely recognised in international investment arbitration that activities related to a construction contract (and even more so a concession contract) may constitute such an investment,13 and thus qualify for the protection of a multilateral or bilateral investment protection treaty or a similar instrument. Indeed, recent case law has agreed that at least the following three elements are required to characterise an investment: (i) a contribution or allocation of resources; (ii) a duration; and (iii) risk, which includes the expectation (albeit not necessarily fulfilled) of a commercial return.14

13 To date, at least 12 ICSID investment arbitration tribunals have held that such activities constitute an investment. See Jan de Nul NV and Dredging International NV v. Arab Republic of Egypt, ICSID Case No. ARB/04/13, Award of 6 November 2008; Saipem SpA v. Bangladesh, ICSID Case No. ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures dated 21 March 2007; Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction dated 23 July 2001; ADC Affiliate Ltd and ADC & ADMC Management Ltd v. the Republic of Hungary, ICSID Case No. ARB/03/16, Award of 2 October 2006; Beijing Urban Construction Group Co Ltd (BUCG) v. Republic of Yemen, ICSID Case No. ARB/14/30, Decision on Jurisdiction dated 31 May 2017; Malicorp Limited v.The Arab Republic of Egypt, ICSID Case No. ARB08/18, Award of 7 February 2011; Garanti Koza v.Turkmenistan, ICSID Case No. ARB/11/20, Award of 19 December 2016; Toto Costruzioni Generali S.p.A. v. Republic of Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction dated 11 September 2009; Bayindir Insaat Turizm Ticaret Ve Sanayi A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Decision on Jurisdiction dated 14 November 2005; Desert Line Projects LLC v.The Republic of Yemen, ICSID Case No. ARB/05/17, Award of 6 February 2008; Pantechniki S.A. v. Albania, ICSID Case No. ARB/07/21, Award of 30 July 2009; Consortium RFCC v. Kingdom of Morocco, ICSID Case No. ARB/00/6, Award of 22 December 2003. 14 Orascom TMT Investments S.a.r.l. v. People’s Democratic Republic of Algeria, ICSID Case No. ARB/12/35, Award of 31 May 2017, Paragraph 370. See also Nova Scotia Power Incorporated (Canada) v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/1, Award of 30 April 2014, Paragraph 84; Lundin Tunisia B.V. v.Tunisian Republic, ICSID Case No. ARB/12/30, Award of 22 December 2015, Paragraphs 139-140; Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability of 30 November 2012, Paragraph 5.43; Vestey Group Limited v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/06/4, Award of 15 April 2016, Paragraph 187; Mr. Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20, Award of 14 July 2010, Paragraph 110; AHS Niger and Menzies Middle East and Africa SA v. Republic of Nigeria, ICSID Case No. ARB/11/11, Decision on Jurisdiction of 15 July 2013, Paragraph 210; Quiborax S.A., Non Metallic

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It would be difficult to contend that a construction contract or a concession would not satisfy these minimal requirements. To the extent that the investor is able to prove that the host state has indeed breached the treaty standards invoked, it may thus be entitled to restitution or, alternatively, to the reparation of the harm actually suffered. Second, claimants will seek to direct their claims for damages at a respondent that is likely to be able to satisfy a potential award on damages, and against which enforcement will be possible in the event that the entity does not voluntarily comply with such adverse award. A state will be more likely than a state-conceding-entity to have sufficient resources to satisfy such an award. Likewise, enforcing a monetary award against a state is likely to be easier, given the wide variety and significantly higher number of assets that a state will generally own worldwide, as compared to a state entity. Finally, but not of least importance, arbitral awards rendered under the ICSID Convention are binding on all 163 signatories of the Convention, and enforceable against them, pursuant to Articles 53 to 55 of the Convention.15 Third, it may be the case that the contractual dispute resolution mechanism contained in the concession contract is inadequate – either because, as discussed in the first edition of this contribution, the conceding entity may not have had the capacity to enter into an arbitration agreement or because the subject matter of the dispute may be inarbitrable under the applicable law to the concession contract or the laws applicable to the arbitration agreement. That dispute resolution provision might, in some cases, also be pathological – for instance, if it provides for ICSID arbitration, but the potential respondent state entity has not been designated by the state under Article 25 of the ICSID Convention. Fourth and finally, it may be that, as discussed in the first edition of this contribution, the dispute arises out of actions or omissions of the state, and not of the state entity. In this case, contract-based arbitration against the latter would likely be unavailing in obtaining satisfaction from the former, whereas investment treaty arbitration provides a remedy to stakeholders in the project. In the circumstances, states may be faced with disputes relating to the effect that measures taken in the exercise of their sovereignty may have on private businesses. Investment treaty arbitration is, in this regard, no stranger to the criticism that it may pose a threat to states’ freedom to regulate, including (and, perhaps, in particular) in situations of crisis.

Minerals S.A. and Allan Fosk Kaplún v. Plurinational State of Bolivia, ICSID Case No. ARB/06/2, Decision on Jurisdiction of 27 September 2012, Paragraph 227. 15 ICSID, ICSID Convention, Regulation and Rules (2006), available at https://icsid.worldbank.org/en/ Documents/icsiddocs/ICSID%20Convention%20English.pdf.

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Investment treaty arbitration – hampering the freedom of states to regulate? In 2001, Argentina underwent a severe economic crisis, the result of which was the devaluation of the local currency down to 25 per cent of its previous value and a rampant inflation of as much as 41 per cent. At the same time, GDP per capita fell by around 20 per cent, while unemployment increased to 25 per cent of the labour force and poverty levels reached around 55 per cent of the population.16 Argentina took a series of measures aimed at containing the crisis, including renouncing the parity between the peso and the American dollar, which had been in place since the enactment of the Convertibility Law in 1991. Through an emergency law enacted in January 2002, Argentina (1) converted into pesos all obligations expressed in foreign currencies; (2) abrogated adjustment clauses denominated in American dollars or other foreign currencies as well as indexation clauses and mechanisms based on the price indexes of foreign countries; and, for private contracts, (3) provided that: all considerations [would] be paid in Argentine pesos at an exchange rate of one Argentine peso = one US dollar, as payment for the amount to be ultimately agreed upon by the parties, or such amount as might be determined through court proceedings if the parties failed to reach an agreement.17

In addition, the emergency law also called for the renegotiation of private and public contracts so as to adapt them to the new foreign exchange system.18 In these circumstances, a construction company incorporated in the Federal Republic of Germany, by the name of Hochtief Aktiengesellschaft (Hochtief) commenced arbitration proceedings against Argentina on the basis of the 1991 bilateral investment treaty between Argentina and the Federal Republic of Germany. The dispute arose out of a 25-year concession awarded by the state to a consortium of construction companies (which included Hochtief) for the construction, maintenance and operation of a toll road and several bridges. The consortium incorporated a local company with the purpose of performing the concession contract, in which the consortium members were shareholders. Subsequently, the consortium members assigned all of their rights and obligations under the concession contract to the local company. Hochtief ’s interest in the concession was thus indirect, through the local company. Hochtief claimed that Argentina had breached its obligation under the Germany– Argentina investment treaty to afford it fair and equitable treatment, inter alia by enacting the January 2002 emergency law. According to Hochtief, such law had eliminated the guarantees contained in the concession contract and significantly altered its commercial balance. In other words, Hochtief sought to argue that a disturbance had occurred in the

16 M. Kiguel, ‘Argentina’s 2001 Economic and Financial Crisis: Lessons for Europe’, in Think Tank 20: Beyond Macroeconomic Policy Coordination Discussions in the G-20, November 2011, available at https://www.brookings. edu/wp-content/uploads/2016/06/11_argentina_kiguel.pdf. 17 Hochtief AG v.The Argentine Republic, ICSID Case No. ARB/07/31 (Hochtief v. Argentina), Decision on Liability of 29 December 2014, Paragraph 98. 18 id..

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economic equilibrium of its contract, which was attributable to the state and amounted to a breach of its legitimate expectations, and thus of the fair and equitable treatment standard. It claimed some US$ 54 million in compensation. The tribunal analysed the terms of the concession contract and found that ‘neither the Bidding Terms nor the Concession Contract stipulated that there could be no departure from dollar–peso parity’19 and thus that ‘no specific promise or undertaking to maintain that parity was explicitly made by Respondent to Claimant.’ However, the tribunal found that ‘the position of the Concessionaire was protected by provisions that in effect tied the Concessionaire’s revenues to US dollars and the US economy.’20 There was, in other words, ‘a clear expectation that the commercial balance of the Contract would be maintained by the continuation of peso–dollar parity.’21 The concessionaire was thus entitled to the preservation of the commercial balance of the concession contract (put differently, ‘the maintenance of the value, in dollar terms, of the revenues under the Contract’),22 though the precise means for such preservation were not explicitly defined. The pesification law did not, in and of itself, violate any expectations that the investor could have legitimately held. Argentina’s subsequent failure to restore the claimant to the position in which it would have been absent the law, in terms of the commercial balance of the concession contract, amounted to a breach of the state’s international obligations.23 Thus, while Argentina’s regulatory freedom was preserved as a matter of principle,24 the effects of the changes it made to its regulatory framework in a time of severe crisis was considered to have altered the commercial balance of a contract it had concluded with a foreign investor, to the detriment of the latter. The investor had a legitimate expectation under the treaty with Germany that such balance would be restored through other means, and the state’s failure to act accordingly triggered its international responsibility. As Professors Dolzer and Schreuer advise, ‘the host state must at all times be aware that its legal order forms the basis of legitimate expectations, which must be taken into account in future reforms.’25 This may be a tall order of business, especially for states that may be highly dependent on foreign direct investment into key public services. It may be difficult to track all the legitimate expectations of all the investors in all the ongoing concession contracts in a state – all the more so when such legitimate expectations do not even (necessarily) derive from clear contractual clauses to that effect.

19 id., Paragraphs 236, 239 (‘While there was a clear expectation that the commercial balance of the Contract would be maintained by the continuation of peso–dollar parity, no specific promise or undertaking to maintain that parity was explicitly made by Respondent to Claimant. Neither the Bidding Terms nor the Concession Contract, nor any other instrument presented to the Tribunal, contains any specific and absolute undertaking not in any circumstances to pesify the Contract.’). 20 id., Paragraph 236. 21 id., Paragraph 239. 22 id., Paragraph 238. 23 id., Paragraphs 241–242. 24 In this connection, the tribunal in Parkerings v. Lithuania explicitly emphasised ‘each State’s undeniable right and privilege to exercise its sovereign legislative power.’ See Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8 (Parkerings v. Lithuania), Award of 11 September 2007, Paragraph 332. 25 R. Dolzer and C. Schreuer, Principles of International Investment Law, Oxford University Press (2008), p. 135.

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As a final comment on Hochtief, we note that the claimant’s situation might have been different if investment treaty arbitration had not been available to it. Though we cannot speculate as to the chances of success of any claims that Hochtief could have brought before local courts or in a contract-based arbitration, we can consider some of the hurdles that such proceedings may have presented. For instance, as a minority shareholder in the consortium and having no direct rights of its own under the concession, Hochtief may not have had standing to commence proceedings against Argentina at all. Alternatively, at least some of its claims could have been inadmissible, given that the concession contract expressly excluded any claims by the lenders or creditors of the concessionaire against the state, arising in connection with loans taken by the concessionaire to fund the project.26 To the extent that capital injections made by the consortium partners into the concessionaire could be construed to fall under that category, a portion of Hochtief ’s claims would have fallen away. Further, the claims would have been governed by the terms of the contract, and by Argentinian law as opposed to international law. Hochtief ’s successful claim for breach of fair and equitable treatment would thus have had to be submitted as a pure claim for breach of contract. This would not have been without its difficulties, given that, as the Hochtief tribunal noted, neither the bidding terms nor the contract itself alone gave the investor an unqualified right to parity between the Argentinian peso and the American dollar. Though not arising from a dire economic crisis, Peru’s recent disputes with at least two foreign investors raise similar questions regarding the state’s freedom to regulate. In 2014, Peru awarded a concession contract for the construction and operation of a 1100 km-long gas pipeline (the Gasoducto Sur Peruano or ‘GSP’), connecting the southern highlands and the Pacific coast of the country, to a consortium composed of Brazilian construction giant Odebrecht (55 per cent), Spanish Enagas (25 per cent) and Peruvian Graña y Montero (20 per cent). In 2015, Odebrecht became embroiled in a severe corruption scandal originating in Brazil, which eventually spread throughout Latin America.27 The company admitted to paying hundreds of millions of dollars in kickbacks in order to secure contracts around the continent over a period of 15 years, and came under scrutiny from the authorities. In 2016, Odebrecht reached a plea deal in the United States, as well as agreements to similar effect with the Brazilian and Swiss authorities, agreeing to pay global penalties of some US$3.5 billion.28 The scandal breaking out had a severe impact on Odebrecht’s ability to secure financing, and, in light of Odebrecht’s majority stake in the consortium, on the latter’s ability to finance the GSP.The banks funding the GSP reportedly refused to provide further loans to the consortium until Odebrecht sold its stake in the consortium, which the company was unable to achieve in time. Thus, the consortium was, in turn, unable to meet a financing deadline,29 which led Peru to cancel the concession, and call a US$293 million bank guar-

26 Hochtief v. Argentina, id., Paragraph 188. 27 See, for instance, France24, ‘After Brazil, Odebrecht corruption scandal spreads to Peru’, press report of 24 June 2019; Bonds & Loans, ‘Peru’s Infrastructure: Life after Odebrecht’, press article of 21 April 2017. 28 See, for instance, United States Department of Justice, ‘Odebrecht and Braskem Plead Guilty and Agree to Pay at Least $3.5 Billion in Global Penalties to Resolve Largest Foreign Bribery Case in History’, press release of 27 December 2016. 29 See, for instance, LatinFinance, ‘Peru cancels Odebrecht pipeline contract’, press article of 23 January 2017.

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antee that Odebrecht had provided.30 In parallel, with the stated purpose of safeguarding the state’s interest in relation to companies convicted of corruption and ensuring the continuity of public service, Peru enacted Emergency Decree 003 of 13 February 2017. This piece of legislation suspended, inter alia, the transfer of investment-related capital (i.e., returns on investment, proceeds generated by the sale of assets or shares) and dividends abroad, for a duration of one year.31 The duration of Emergency Decree 003 was subsequently extended for one month, and the decree was ultimately replaced by Law 30.737 of 9 March 2018. The GSP gave rise to two investment treaty arbitrations, only one of which has been confirmed as ongoing to date. On the one hand, Spanish consortium member Enagas has commenced an ICSID arbitration against Peru, under the Spain-Peru bilateral investment treaty. The claimant argues that Peru has disregarded a clause of the concession contract providing that, in the event of a cancellation, the concession would be auctioned within 12 months, and the proceeds would be contributed towards compensating the investment made by the previous concessionaire.32 Enagas estimates its investment in the GSP concession to amount to some US$500 million.The details of Enagas’ specific claims against Peru are, to date, unknown, but the claimant is likely to contend that its investment has not been afforded fair and equitable treatment (perhaps by arguing that its legitimate expectations have not been upheld). It may even go as far as claiming that such investment has been, in whole or in part, deprived of its value, in other words, expropriated. The Spain-Peru treaty does not contain an observance of undertakings clause (also known as an umbrella clause), allowing the investor to elevate a claim for breach of contract to the level of a claim for breach of treaty (as we discussed in the previous version of this contribution). However, it remains possible for such a provision to be imported into the treaty by way of a most-favoured nation clause.33 On the other hand, two subsidiaries of Odebrecht are reported to have served a notice of dispute on Peru under the Peru-Luxemburg treaty.34 While the notice itself is not public, it is reported to relate to specific measures taken by the state in the wake of the Odebrecht corruption scandal, including the cancellation of the GSP concession and the enactment

30 Global Arbitration Review, ‘Peru faces new claim over pipeline project in wake of Odebrecht scandal’, press article of 5 July 2018, available at https://globalarbitrationreview.com/article/1171447/peru-faces-new-clai m-over-pipeline-project-in-wake-of-odebrecht-scandal. 31 Emergency Decree 003-2017 of 13 February 2017, available at https://busquedas.elperuano.pe/ download/url/decreto-de-urgencia-que-asegura-la-continuidad-de-proyectos-decreto-de-urgenc ia-n-003-2017-1485019-1. 32 IA Reporter, ‘Another investor files notice of BIT claim in further fallout from Odebrecht scandal’, press article of 20 December 2017, available at https://www.iareporter.com/articles/another-investor-files-notic e-of-bit-claim-in-further-fallout-from-odebrecht-scandal/; Global Arbitration Review, ‘Peru faces new claim over pipeline project in wake of Odebrecht scandal’, press article of 5 July 2018, available at https:// globalarbitrationreview.com/article/1171447/peru-faces-new-claim-over-pipeline-project-in-wake-of-ode brecht-scandal. 33 See, for instance, EDF International SA, Saur International SA and Leon Participaciones Argentinas SA v. Republic of Argentina, ICSID Case No. ARB/03/23, Award of 11 June 2012; Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award of 8 April 2013. 34 IA Reporter, ‘Corruption-engulfed Brazilian contractor puts Peru on notice of a breach of Peru-Luxembourg investment treaty’, press article of 9 August 2017, available at https://www.iareporter.com/articles/ corruption-engulfed-brazilian-contractor-puts-peru-on-notice-of-a-breach-of-peru-luxembourg-bit/.

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of Emergency Decree 003-2017. The claimants are said to argue that the latter would have violated the treaty clause providing for freedom of transfer of the company’s capital, dividends and profits. The fallout from the Odebrecht scandal in Peru will be worth following in the near future, as other arbitrations may arise out of the measures that the state has taken or is yet to take in this regard. It may also be worth monitoring the continuing criminal investigations in Peru (and elsewhere). For international arbitral tribunals applying international law, such investigations yield matters of fact that may be material to their understanding of the facts of the case before them. Such tribunals would not be bound by the decisions or reasoning of local courts. In contrast, for arbitral tribunals bound to apply domestic law – for instance, in the case of a contract-based arbitration governed by such law – the decisions and reasoning of the domestic courts are matters of law and must be upheld as such. Seen from the perspective of states, the Odebrecht scandal furthers the concern that investment treaty arbitration may pose an impediment to their freedom to regulate, or, at the very least, may expose them to potentially substantial payments of compensation as a direct consequence of such regulation being found to infringe on the rights of a foreign investor. This ‘financial impact of regulation’ is compounded, in the case of construction and concession projects, by the losses caused by the collapse of these projects (including diminished economic growth, and loss of profits derived from the future operation thereof). However, this concern may be somewhat assuaged by the knowledge that, in principle, at least, the sovereign freedom to regulate is itself uncontested in international arbitration. In this regard, the victory achieved by Uruguay in the arbitration brought against it by tobacco giant Philip Morris is a testament to the wide margin of appreciation of states in adopting measures concerning public health.35 It seems only reasonable that a similarly wide margin of appreciation would be afforded to a state seeking to ensure the continuity of public service in the face of an international corruption scandal of the magnitude of the one involving Odebrecht. Further, case law recognises that the legitimate expectations of an investor, which may, if infringed, give rise to a cause of action under a treaty, arise not out of the ‘provisions of general legislation applicable to a plurality of persons or a category of persons’, but rather out of the specific commitments undertaken and representations made by a state or an SOE to the investor itself, in order to induce it to make the investment in the first place.36 Thus, it will be key for states and SOEs to monitor such representations and pay particular attention to the wording of the contractual commitments they undertake, so as to minimise potential future litigation to the extent possible. From the perspective of investors, equal care is advisable in the pre-investment contacts with the state or state entities as well as the drafting of the contract terms, given that the specific terms of the concession contract may provide the sole (in certain cases) basis for a

35 Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award of 8 July 2016. The arbitration arose out of the anti-tobacco legislation enacted by Uruguay, and was mirrored by a similar arbitration against Australia. The latter, however, was dismissed at the jurisdictional stage. See Philip Morris Asia Limited v.The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility of 17 December 2015. 36 Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award of 8 July 2016, Paragraph 426.

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legitimate expectation claim. In this regard, in the previous edition of our contribution, we emphasised the importance of contractual language for the preservation of the economic equilibrium of the contract. We advised that concessionaires may even consider going one step further, and establishing specific mechanisms under the contract for the restoration of said equilibrium.

Conclusion It is expected that the percentage of construction- (and concession) related arbitrations with states or state-owned entities will continue to increase in the coming years. This increase will be due, in particular, to the projects of the Belt and Road Initiative. Launched in 2013 by the People’s Republic of China, the programme is estimated to entail between US$1.2 and 1.3 trillion37 in investments across Asia, Europe, the Middle East and Africa. Investments will target projects for road, rail and pipeline construction (known as the Silk Road Economic Belt), and port and coastal infrastructure projects (known as the 21st Century Maritime Silk Road). The Belt and Road Initiative comprises projects of a scale and complexity that are sure to present complications that, in certain instances, may lead to disputes. Such disputes are likely to test the principle of sovereign regulatory freedom again, and in new ways, particularly if the need for foreign capital in the development of infrastructure and basic public services will be pitted against the protection of the environment or of public health. These will be interesting times for investment treaty arbitration.

37 Morgan Stanley, ‘Inside China’s plan to create a modern silk road’, research note of 14 March 2018, available at https://www.morganstanley.com/ideas/china-belt-and-road.

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27 Construction Arbitration and Turnkey Projects James Doe, David Nitek and Noe Minamikata1

Introduction A ‘turnkey’ project is so called because (in theory at least), the employer, after taking over the project, has only to ‘turn the key’ to activate the plant or other project that has been constructed. It is a frequently used model of procurement for power stations, processing plants and where the works are funded by way of project financing. The contractor takes the vast majority of responsibility in terms of design, engineering, procurement and construction. The owner specifies the output or performance that it requires of the facility or plant but rarely provides detailed specifications. It is for the contractor to determine how it intends to achieve the required output or performance. The contract price is almost always lump sum and there is a fixed completion date which can only be adjusted in a limited number of circumstances (e.g., acts of prevention by the owner). The performance of the plant will be assessed against a range of detailed criteria specified in the contract documentation (normally in a lengthy schedule). In practice, completion will only be achieved after extensive rounds of taking over and performance tests. As well as claims concerning delay and cost overruns, which are a common feature of arbitrations concerning construction projects, arbitrations concerning turnkey projects frequently involve issues concerning fitness for purpose, non-compliance with owner requirements and disputed variations to the specification. While contractors are likely to price higher for taking on the increased risk as compared to more traditional forms of procurement, extreme competition in some international markets (most notably but not exclusively the Middle East) has led contractors to

1

James Doe and David Nitek are partners, and Noe Minamikata is a professional support lawyer at Herbert Smith Freehills LLP.

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bid lower prices, which can in turn lead to more claims resulting in disputes. The size and complexity of turnkey projects often means these disputes (and the arbitrations required to resolve them) are also large and complex.

Standard forms While some turnkey projects are procured on bespoke forms of contract, frequently parties will use a modified version of a standard form. A form commonly encountered is the FIDIC Silver Book, which reached its second edition in 2017.2 Consistent with the philosophy of turnkey procurement, the terms of this standard form place a heavy burden on the contractor in terms of design responsibility and risk. Fitness for purpose is a contractual requirement.The intended effect is to achieve, so far as possible, certainty of final price and completion date. However, there are exceptions to the extent of risks that the contractor takes on and these often form the basis of disputes that can lead to arbitration. These are discussed below. Other forms of turnkey contracts include the Japanese ENAA contract, ICC Model Turnkey Contract, the American AIA Contract, the British I.ChemE International Contract Suite (although this needs some adaptation to make it properly ‘turnkey’) and the Belgian Orgalime Turnkey Contract. While the terms of these contracts vary in some respects, the FIDIC Silver Book is discussed below on the basis that it is a typical example of a turnkey contract standard form that is commonly used as a basis for contracting on international turnkey projects. The contractor’s key obligations, as set out in the 2017 Silver Book, are as follows: • when completed the works are to be fit for the intended purposes defined in the Employer’s Requirements; • the works are to include any work that is necessary to satisfy the Employer’s Requirements, or is implied by the contract and all works that (although not mentioned in the contract) are necessary for stability or for the completion, or safe and proper operation, of the works; • the contractor is deemed to have scrutinised the Employer’s Requirements and is responsible for the design of the works and for the accuracy of the Employer’s Requirements; • the employer is not responsible for any error, inaccuracy or omission of any kind in the Employer’s Requirements and any data or information received by the contractor, from the employer or otherwise, does not relieve the contractor from its responsibility for the design and execution of the works; • there are limited exceptions to the above where the employer is responsible for the correctness of certain portions of the Employer’s Requirements and data and information provided by it. These are portions, data and information stated in the contract as being immutable or the responsibility of the employer; definitions of intended purposes of the

2

Notwithstanding the release of the second edition, the first edition of the FIDIC Silver Book, which was released in 1999, continues to be used on turnkey projects and adoption of the second edition remains slow. This chapter therefore considers the position under both editions. Although many of the principles and procedures of the 1999 Silver Book have been adopted in the 2017 Silver Book, material changes have been introduced to the latter. To the extent that any deviations between the two editions are relevant to the topics covered in this article, these have been highlighted as appropriate.

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works or any parts thereof; criteria for the testing and performance of the completed works, and portions, data and information that cannot be verified by the contractor, except as otherwise stated in the contract. The parties may agree to mitigate the above terms by, for example, providing for the contractor only to assume risk following a specified period for inspection or adopting existing ground condition reports as a benchmark to apportion risks between the employer and contractor. The precise scope and application of these exceptions can be areas of dispute between the parties.

The contract sum The above does not mean that the final contract sum will not vary from that specified at the time the contract was executed. The contract sum will usually be fixed price. However, an employer will usually have the right to issue variation instructions, although it must recognise that substantial extra costs may be incurred, both as to the cost of the variation works themselves and disruption to the contractor’s regular progress. The undesirable phenomenon known as ‘scope creep’ may also arise where the scope of a project is not properly defined at the outset and unplanned variations become necessary, notwithstanding the initial definition of what is required in the Employer’s Requirements. Such a process will inevitably lead to substantial increased cost which in turn can lead to disputes over whether these costs should be borne by the contractor or the employer. Often these disputes can be characterised as the difference between design development (which is usually at the contractor’s risk) and variations (for which the employer is usually responsible). Another form of increased cost that may not be fully budgeted for will be the interface with other works being carried out by or on behalf of the employer on other sites (or even the same site).The turnkey contract may be part of a wider project for which work is being carried out under other contracts at several different sites adjoining each other. Site and workspace boundaries may not be well defined and there may be works being carried out for the employer that are unconnected (or not directly connected) with those within the turnkey contract, but that affect its regular progress, again causing more expense. Yet another basis for claiming additional cost may be the employer’s failure to comply with the requirements in the contract for it to give possession of the site or to supply feedstock or other materials or components. If these are not provided at the times specified in the contract, then the contractor may have further scope to claim for increased cost. In all the above cases, a contractor may also claim for extra time so as to extend the completion date and reduce its liability for liquidated damages for delay. As with other forms of construction contract, allocating responsibility for delay in the context of turnkey projects can be factually and technically complex, giving rise to significant disputes.

Testing and completion Turnkey contracts typically impose a complex regime for takeover and performance testing. Before the plant can be taken over by the employer, tests will have to be carried out to demonstrate its compliance with the contract documentation and this may itself be a

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lengthy process. Following takeover, performance tests may also be required in order to observe the performance of the plant in action. The contractor’s compliance with the output specification will be assessed and any failure will give rise to retesting. If it emerges that the plant cannot be operated at the levels required in the contract, then the contractor may have to pay liquidated damages in respect of such a failure (representing the losses suffered by the employer as a result) and it will be for the employer to take on other contractors to bring the plant up to specification if he chooses to do so. Given the severe consequences of failing these tests, the reasons for failure can often be contentious issues ultimately resulting in arbitration. For example, with processing plants and power stations there can be disagreements over the feedstock or fuel that the employer was obliged to provide. Normally a turnkey contract will specify that it must be of a particular quality or composition and provided in sufficient quantities. The contractor will usually be liable for liquidated damages should it be in delay as regards the completion date, unless it can demonstrate that it has an excuse for late completion that is allowable within the contract.

Liability It is rarely the case that turnkey contractors will accept unlimited liability for any breaches of contract they commit. Liability may be limited in nature, for example, so as to exclude some or all of the consequential economic loss resulting from a defect, as opposed to its cost of repair. Other limitations may relate to the total amount of damages that may be payable as a result of breach. These may be limited to a percentage of the contract sum or capped as a specific figure or both. FIDIC provides for a range of limitations both as to consequential loss and total liability. Sometimes these contractual liability limits are in addition to any sums payable by way of liquidated damages for delay or lack of performance, and turnkey contracts often include separate caps on the contractor’s liability for delay or performance-related liquidated damages. The scope of these limitations and their effect (including, in some jurisdictions, their enforceability) are also common areas for dispute in turnkey projects.

Profitability An employer’s margins (and indeed the contractor’s) may be relatively slim. In some cases, the employer may be using project, as opposed to corporate, finance and therefore relying largely on borrowed money which adds a layer of finance costs to what may already be an expensive contract package. Even if the employer does not obtain finance on this basis, a contractor will usually price heavily for the risks it is assuming on a turnkey basis, in particular because it will be adopting the employer’s design as its own in addition to the design the contractor supplied, and must develop those designs to satisfy the Employer’s Requirements. It may also add a premium for having to tender within a limited time scale, especially where this has allowed it little time to carry out a comprehensive site assessment and it will be largely accepting responsibility for site conditions, even if these are unforeseeable in the circumstances.

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All the above factors have a significant effect on the content and process of a typical construction arbitration concerning a turnkey contract. Both parties may be reluctant to give ground to protect slim margins.

Typical claims In most arbitrations the contractor will be the claimant seeking an extension of time or loss and expense. In the Silver Book the scope for claiming an extension of time is relatively limited. As is the case in virtually all construction contracts, the contractor can claim for time as a result of variations (changes in the scope of work). In addition, the Silver Book (both the 1999 and 2017 editions) provides further grounds on which a contractor can make a claim. While the 2017 Silver Book sets out similar grounds to those in the 1999 Silver Book, there are a number of key differences between the two, including the addition of several new grounds in the 2017 Silver Book, given in the table below. Grounds for extension of time

1999 Silver Book

2017 Silver Book

Employer’s failure to obtain permits

Not included

Clause 1.12 (new to 2017 edition)

Employer’s delay in giving possession

Clause 2.1

Clause 2.1

Unforeseeable instruction to cooperate

Not included

Clause 4.6 (new to 2017 edition)

Changes to access route

Not included

Clause 4.15 (new to 2017 edition)

Discovery of fossils

Clause 4.24

Clause 4.23

Delayed testing due to employer’s instructions

Clause 7.4

Clause 7.4

Remedial work not due to contractor’s fault

Not included

Clause 7.6 (new to 2017 edition)

Any act of prevention by the employer

Clause 8.4

Clause 8.5

Delays caused by authorities

Clause 8.5

Clause 8.6

Employer's suspension

Clause 8.9

Clause 8.10

Interference with tests on completion

Clause 10.3

Clause 10.3

Changes in legislation after the base date

Clause 13.7

Clause 13.6

Contractor's suspension

Clause 16.1

Clause 16.1

Contractor's termination

Not included

Clause 16.2 (new to 2017 edition)

Employer's risks (in 1999 edition)/liability for care Clause 17.4 of the works (in 2017 edition)

Clause 17.2

Force majeure (in 1999 edition)/exceptional events (in 2017 edition)

Clause 18.4

Clause 19.4

Under the Silver Book (as is frequently the case in turnkey projects), there is no relief or recovery for the contractor if it is delayed or incurs additional cost as a result of unfavourable site conditions, whether or not these were unforeseeable, or in respect of inaccuracies in data provided to it by the employer. Any deficiency in the Employer’s Requirements is at the contractor’s risk with only limited exceptions. Claims may also arise as a result of inconsistency between contract documents. Differing standards (e.g., as to level of output required) may appear in documents produced by one or other of the parties, leading to disputes as to the correct standard and which party bears the risk of any extra work necessary for compliance.While there is a priority of documents clause in the Silver Book, this may not assist when the relevant documents are at an equal level of priority so that an arbitrator must interpret the contract documents as a whole to

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identify the parties’ intentions. An example of the difficulties this can cause is to be found in the MT Højgaard case,3 in which the Supreme Court held that a provision warranting that part of the works would have a particular design life prevailed over less onerous terms requiring compliance with standards and the exercise of reasonable skill and care, even though the former was contained in a technical specification. In response to the contractor’s claims, the employer may seek liquidated damages for delay or failure to meet performance tests. The employer may also seek general damages in respect of defects in the works where these are not covered by the performance testing regime (or where liquidated damages are found to be unenforceable). Issues may arise as to the contractor’s responsibility for defects where they arise from failures of proprietary items, as the contract may contain limited exclusions for failures in this regard. Both parties may contend that the justification for serving a notice of termination has arisen. In the case of the contractor, common grounds are the employer’s failure to make payment on the due date, the continuation of a force majeure event (or, in the case of the 2017 Silver Book, an exceptional event) or failure to submit reasonable evidence that proper financial arrangements have been made for the contract price. The latter argument succeeded in the Trinidad case, even though the employer was a public authority. The employer may contend that it is entitled to terminate by reason of the contractor being materially in breach, in particular, in failing to proceed with the works with due expedition and without delay. It may also contend that a performance security has not been provided or that a force majeure event (or, in the case of the 2017 Silver Book, an exceptional event) has arisen. The employer will typically claim for the additional costs and any loss or damage suffered in completing the works. The contractor will claim loss of profit on uncompleted works. Such a claim is preserved at Clause 16.4 in both the 1999 and 2017 editions of the Silver Book, notwithstanding the general exclusion of loss of profit claims.

Procedure In most turnkey contracts, the contractor must give proper notice of any claim for extension of time or additional payment describing the event or circumstance giving rise to the claim. In the Silver Book, such notification must be given as soon as practicable and not later than 28 days after it became aware, or should have become aware, of the event or circumstance. Failing such notice, it will not be entitled to additional time or payment. Experience suggests that contractors often fail to give adequate notice, which unnecessarily hinders their ability to recover what would otherwise have been a legitimate claim. Under the Silver Book, the contractor must, within 42 days (in the case of the 1999 Silver Book) or 84 days (in the case of the 2017 Silver Book) of becoming aware of a claim, submit a fully detailed claim which the employer proceeds to determine. Therefore, unlike FIDIC’s other books, there is no independent determination at this stage, thus increasing the likelihood of claims being taken to arbitration. Notable changes introduced in the 2017 Silver Book are that the time limits previously applicable only to the contractor under

3

MT Hojgaard A/S v. E.ON Climate and Renewables and another [2015] EWCA Civ 407.

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the 1999 edition now also apply to employers’ claims for a reduction in the contract price or extension of the Defects Notification Period; and a late notice of claim may be treated as valid if so decided by the employer’s representative.

Common issues The battleground on which the contractor must base its claim may therefore be as to whether it can take advantage of the very limited grounds available to it to seek recompense. While the contract contains no exclusive remedies clause, so that the contractor is entitled to resort to claims at common law where the contract does not preclude such claims, it may have to produce pleadings of some ingenuity in order to succeed on a claim for, say, misrepresentation as to site conditions. However, extra-contractual claims are not uncommon in turnkey projects. As a result of the limited scope for claims, it will often be the case that the contractor will need to analyse events surrounding the tender process and subsequent progress of the contract in minute detail in order to put together its pleadings. It follows that any resultant arbitration will be document-heavy and inevitably involve extensive expert evidence on delay and quantum issues as well as technical matters such as engineering and design.

Choice of arbitrator As with most forms of arbitration, the choice of arbitrator is a key decision. Given the size and complexity of disputes involving turnkey contracts, it is often advisable to choose a tribunal with extensive experience of these types of projects. An arbitrator faced with a contention from a contractor that it had been unfairly disadvantaged by a short tender period combined with the onerous terms of the turnkey contract may be tempted to consider favourably any argument (even extra-contractual) to mitigate the harshness of the situation, such as misrepresentation or quantum meruit. This is where knowledge of the international construction industry, its procurement processes and the execution of projects becomes invaluable to an arbitrator.

Pre-arbitration It is likely that the parties will have agreed on some means of interim dispute resolution prior to a full-blown arbitration. In the 1999 Silver Book, the dispute adjudication board (DAB) is selected as and when a dispute arises in the same way as an arbitrator. The default position differs, however, under the 2017 Silver Book, which provides for a dispute avoidance/adjudication board (DAAB) appointed at the outset of the project. In other forms of contract, it may be that the parties have agreed a tiered dispute resolution mechanism involving negotiations or a mediation prior to commencing arbitration. An arbitrator may be invited to make an award enforcing the decision of a DAB (in the case of the 1999 Silver Book) or DAAB (in the case of the 2017 Silver Book). If the contract is under FIDIC 1999, the receiving party would be well advised to consider the Singapore decision known as Persero. There, the court decided that a DAB’s decision could only be enforced on the wording of the FIDIC form if an application to enforce by way of interim award was made within an arbitration where all issues before the DAB were raised. To remedy this situation, FIDIC incorporated an amendment to its 2017 suite, but there

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will be many contracts where the original wording of the 1999 form has been used. Care must therefore be taken when attempting to enforce a DAB’s decision by way of arbitrator’s award.

Choice of law Arbitration will generally be the final method of dispute resolution chosen in turnkey contracts as many, if not most, of them involve parties from more than one country. Parties frequently contract on the basis that the procedural law of the arbitration and its seat (location) will be that of a neutral jurisdiction, thus avoiding possible adverse consequences of proceeding in the courts of one or other party. In turnkey contracts of an international nature, the choice of substantive law and the seat of the arbitration will often be different.

Procedural issues In most cases, the contractor is the claimant as matters referred to arbitration will generally involve its entitlement to an extension of time and (usually) loss and expense. Given that most of the risk and responsibility for the works lies with the contractor, the bulk of site records and other information in relation to the progress of the project will be held by the contractor, in particular, those documents related to design and engineering matters, suppliers and subcontractors. This may put the employer at a disadvantage in the early stages of any arbitration as it may only have had a small team on site, without the capacity to keep abreast of every development as to the contractor’s progress.The contractor, by contrast, will often be ready to ‘hit the ground running’ and its initial statement of case will have been subject of extensive preparation. The employer’s time to respond before arbitration commences may have been limited and such documents as it has been provided with during the project may not be comprehensive. There is a distinct issue with regards to turnkey contracts that employers’ disclosure will probably be limited compared to that produced by contractors, given the employer’s input into the project as well as limited supervision on site. For this reason, sequential disclosure is not uncommon, as well as orders for disclosure in phases to suit the progress of the arbitration. Disputes over the extent of the contractor’s disclosure are not uncommon. The IBA rules on the Taking of Evidence in International Arbitration4 may be adopted or even expressly referred to in the arbitration clause. These provide a framework and guidelines for the approach to document disclosure for the arbitrator to consider. Given the potential complexity of disclosure issues in turnkey projects, using the IBA rules is recommended. While the IBA rules contemplate that either party may submit a request to produce, the employer may continue to be at a disadvantage in this respect until relatively late in the arbitration by reason of its relative lack of familiarity with the contractor’s, and particularly the subcontractors’, activities. This problem may be especially acute where a contractor seeks permission to amend its statement of case to take account of developing subcontractors’ claims against it, which it is then ‘passing on’ to the employer.

4 www.ibanet.org/Publications/publications_IBA_guides_and_free_materials.aspx.

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The employer will need to engage outside experts and, unless it has had a ‘watching brief ’ throughout the project (which is unusual), it will have a substantial learning curve when preparing its response and any counterclaim. By contrast, the contractor is likely to have begun assembling an expert team once it became apparent to it that claims were likely to result in arbitration.

Preliminary points It is common for preliminary points to be taken in an arbitration in order to resolve matters that, in some cases, can be determinative of the issue as a whole (and, as a result, can also lead to more meaningful settlement discussions). A common example is whether the contractor complied with the claim notification time limits, such as those found in Clause 20.1 (in the case of the 1999 Silver Book) or Clause 20 (in the case of the 2017 Silver Book). Other common issues subject to preliminary determination concern matters of contractual interpretation, the existence and effect of any collateral agreements and the extent of any limitations of liability.

Bifurcation As well as preliminary issues, the complexity of turnkey project disputes often results in tribunals having to bifurcate issues to make submissions and hearings more manageable. Usually this bifurcation is between liability and quantum, but sometimes the project is so complex that tribunals decide to divide between different issues of liability. For example, the causes of delay to distinct sections of the project.

Other issues In many cases contractors will largely be passing through subcontractors’ claims, not necessarily adapting them to suit the terms of the main contract as opposed to the various subcontracts. Ideally, these contracts should be ‘back to back’ but it is not uncommon for there to be a mismatch between the main contract and subcontracts. Although some of the standard form producing bodies (for example FIDIC) produce subcontracts intended to integrate with their main contracts, they are not always adopted and bespoke forms may be encountered. Some subcontracts may even have been procured on the basis of simple purchase orders with little regard to the terms of the main contract. If the main contractor does not ‘disentangle’ differing provisions of the subcontract from the claims it puts forward to the employer, the arbitration is likely to be prolonged with the need for additional rounds of pleadings and requests for further information. Employers will generally resist any proposal by the contractor to join subcontractors into the main contract arbitration, primarily because the contractor assumes single point responsibility under the turnkey contract, which means there is little incentive for the employer to pursue subcontractors in addition to the contractor. Employers will generally refuse on grounds of increased cost and delay. It is unusual for turnkey contracts to contain provision for multiparty arbitration although the possibility is referred to by FIDIC in its discussion of particular conditions annexed to the Silver Book. Multiparty arbitration will only be available if all parties concerned agree, whether before or after the dispute has arisen. In complex turnkey projects with numerous contractors and suppliers with an

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integrated scope of work, it is sometimes the case that all participants are required to sign a dispute resolution deed that acts as consent for them to be joined in multiparty arbitrations. Provisions in the applicable arbitral rules, such as articles 7 to 10 of the ICC Rules of Arbitration, may also be useful in certain circumstances.

Conclusion Turnkey projects differ from other construction projects in terms of the high level of risk assumed by the contractor. In particular, the risks associated with design, engineering and fitness for purpose can cause major disputes to arise. In addition, the limited grounds on which a contractor is able to seek relief and recompense can result in the deployment of complex legal arguments surrounding the interpretation of the contract documents, in particular, the specification and scope of work to be performed. Any inconsistencies between the contract documents or gaps in the specification that have had to be reconciled or filled by performing more work may give rise to a claim for additional time and money by the contractor. Overall, this allocation of risks can give rise to a range of large and complex disputes that can, in turn, impact on the way in which an arbitration has to be conducted in order to resolve them. For example, they often require significant amounts of factual and technical expert evidence. This evidence needs to be marshalled and presented in an efficient way. The conduct of these arbitrations often benefits from having a tribunal experienced in these types of disputes.

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28 Construction Arbitration in the Context of China’s Belt and Road Projects Aisha Nadar1

Introduction Paramount to the success of a global economy is the efficient cross-border exchange of goods and services. The design and implementation of infrastructure and legal systems facilitate trade by enhancing connectivity and removing legacy systems that may have served as trade barriers. One such system that was recently launched by China, with the stated aim of promoting connectivity, cooperation, trade and development within the context of a multilateral framework among the participating countries, is the Belt and Road Initiative (BRI), which was unveiled by President Xi Jinping in 2013.2 In the BRI, the ‘Belt’ refers to the overland economic corridors connecting China to Central Asia and Europe and the ‘Road’ refers to a network of maritime trade routes connecting Asia with the Middle East, Africa and Europe. Key to meeting the stated objectives of the BRI is construction of the physical network connecting the participating countries.3 In support of the realisation of this network, Chinese companies are said, during the period from January 2015 to August 2017, to have

1 2

3

Aisha Nadar is a partner at Advokatfirman Runeland AB. See, ‘Ministry of the Foreign Affairs of the People’s Republic of China, President Xi Jingping Delivers Important Speech and Proposes to Build a Silk Road Economic Belt with Central Asian Countries’, delivered at Kazakhstan’s Nazarbayev University on 7 September 2013 www.fmprc.gov.cn/mfa_eng/topics_665678/ xjpfwzysiesgjtfhshzzfh_665686/t1076334.shtml and Xinhuannet, Chronology of China’s Belt and Road Initiative, 28 March 2015, www.xinhuanet.com/english/2015-03/28/c_134105435.htm. The Belt and Road Initiative has also been commonly known as the ‘One Belt, One Road (OBOR) Initiative’. According to the ‘Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st-Century Maritime Silk Road’, the Belt and Road covers – but is not limited to – the area of the ancient Silk Road. It is open to engagement with all countries, and international and regional organisations. The countries currently listed as participating by the Hong Kong Trade and Development Council (HKTDC) are: Afganistan, Albania, Antigua and Barbuda, Armenia, Austria, Azerbaijan, Bahrain, Bangladesh, Belarus, Bhutan, Bosnia and Herzegovina, Brunei, Bulgaria, Cambodia, Croatia, the Czech Republic, Egypt, Estonia, Ethiopia, Georgia,

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signed more than 15,300 new construction contracts in BRI countries, with an aggregate project value of more than US$300 billion,4 and China has signed cooperation agreements with over 40 countries and international organisations.5 As with any complex cross-border infrastructure transactions, disputes can and will ensue. They may be international commercial disputes, investor–state disputes, or state-tostate disputes. The potential, scope and scale of the disputes may be exacerbated by the fact that many of the BRI projects will be taking place in countries rated as ‘high risk’ by Transparency International’s Corruption Perception Index (CPI).6 The efficient handling of disputes, in a manner that is expeditious and perceived to be fair by the parties, will influence the success in meeting the overarching objectives of the BRI. Will the currently available international dispute resolution machinery, which China has played little or no role in shaping,7 be sufficient? Or will this machinery need to be modified or replaced?

The BRI in the context of world trade Throughout history, world events and technological advances have impacted on the patterns of trade and have given rise to structural adjustments to foster and facilitate trade.8 In the 20th century, in which the rate of growth in world trade experienced during the last part of the century was unprecedented,9 technological advances in transportation, communication and logistics had an effect on the volume10 and pattern of trade by expanding

Hungary, India, Indonesia, Iran, Iraq, Israel, Jordan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Laos, Latvia, Lebanon, Lithuania, Macedonia, Madagascar, Malaysia, Maldives, Moldova, Mongolia, Montenegro, Morocco, Myanmar, Nepal, New Zealand, Oman, Pakistan, Palestine, Panama, Philippines, Poland, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, South Africa, Sri Lanka, Syrian Arab Republic, Tajikistan, Thailand, East Timor, Trinidad and Tobago, Turkey, Turkmenistan, Ukraine, United Arab Emirates, Uzbekistan,Vietnam and Yemen (http://china-trade-research.hktdc.com/business-news/article/The-Belt-and-Road-Initiative/The-Bel t-and-Road-Initiative-Country-Profiles/obor/en/1/1X000000/1X0A36I0.htm). 4 ‘A thousand miles begin with a single step: tax challenges under the BRI’, International Tax Review 28 November 2017. 5 Xinhua, ‘Full text of President Xi’s speech at opening of Belt and Road forum’, 14 May 2017, www. xinhuanet.com/english/2017-05/14/c_136282982.htm. 6 Over 25 per cent of the countries participating in the BRI ranked over 100 on Transparency International’s 2017 CPI. See www.transparency.org/news/feature/corruption_perceptions_index_2017#table. 7 Jeffrey A. Bader, ‘How Xi Jinping Sees the World…and Why in Order From Chaos: Foreign Policy In A Troubled World’, Asia Working Papers, the Brookings Institute, Washington, DC, February 2016. 8 In an effort to capitalise on the benefits associated from the changing trade patterns that resulted from the invention of the camel saddle in the sixth century, which allowed traders from India, East Africa,Yemen and Bahrain to employ more direct routes through the previously unforgiving dessert environment to Byzantium and Syria, Bedouin tribes, drifting from their traditional value system, began developing a strictly commercial ethos that would facilitate and support this trade. See Karen Armstrong, Mohamed a Prophet for Our Time, New York, Atlas Books and Harper Collins, (2006), 28–30. 9 Between 1720 and 1971, world trade increased at an annual rate of 2.7 per cent, but between 1948 and 1997, trade grew at an annual rate of 6 per cent. See Multilateral Trade Negation of Agriculture: A Resource Manual, 2000 www.fao.org/docrep/003/x7351e/x7351e00.htm. 10 Yon Fernández de Larrinoa Arcal and Materne Maetz, Multilateral Trade Negotiations on Agriculture: A Resource Manual. Module 1—Trends in World and Agriculture Trade:Some Basic Theories and Concepts, 2000, www.fao.org/ docrep/003/x7352e/X7352E01.htm#TopOfPage.

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the breadth of trading possibilities11 – making trade possible not only in raw materials and finished goods, but also in intermediate goods in the form of vertical intra-industry trade.12 This resulted in an increasingly integrated global economy, in which trade was being accomplished by companies13 and caused some, such as the noted Harvard professor Michael Porter, to suggest that nations had to adopt policies that facilitate the creation of competitive companies.14 The efficient functioning of a company in the global economy can be hindered by a world order that is built on the concepts of ‘nation state’ and ‘national sovereignty’15 as the optimisation of corporate returns is linked to the efficient allocation of resources, and economies of scale.16 This renders the control of national borders and the governance of markets not only matters of local concern,17 but matters of global concern. As such, systems of rules were put in place to support the efficient allocation of resources in a global business environment by eradicating impediments to cross-border trade. These systems were supported by a system of global (private) dispute resolution in the form of international arbitration. The General Agreement on Tariffs and Trade (GATT) of 194718 and its succes-

11 Peter Holmes, Leonardo Iacovone, Rungroge Kamondetdacha and Lara Newson, ‘Capacity-Building to Meet International Standards as Public Goods’, UNIDO,Vienna 2006, https://open.unido.org/api/ documents/4818374/download/Capacity-Building%20to%20Meet%20International%20Standards%20as%20 Public%20Goods. 12 The main thrust of vertical intra-industry trade is the concept of subdividing the production process into intermediate steps that are to be performed by very specialised companies, thus allowing for efficiency through both specialisation and economy of scale. Outsourcing is a readily recognised example of intra-industry trade. See generally Peter Holmes, et al., ibid. 13 In 1998, transnational companies accounted for an estimated 40 per cent of the exchanges taking place in the world. See ibid. 14 Michael Porter, The Competitive Advantage of Nations, The Free Press, New York, (1998). 15 For a clear presentation of how the concept of nation state facilitates intra-state transactions but hinders inter-state transactions see Peter Drahos and John Braithwaite, ‘The Globalisation of Regulation’, Journal of Political Philosophy 9(1) (2001), 103–128. In this piece, the authors state that ‘The sovereign of a nation state, it came to be accepted, had the right to enact laws for a particular territory. Sovereignty came to mean a right of command over the inhabitants of a territory rather than simply a people. Territorial sovereignty was complemented by the development of an important legal principle, the principle of territoriality – the principle that the laws of a sovereign applied absolutely within the territory that constituted the sovereign’s state but did not apply in the territories of other sovereigns. The principle of territoriality brought unity of law within a state. It enabled the intra-state harmonisation of law. It was not a principle that worked in favour of the cross-border harmonisation of a given set of rules, because under the principle, the sovereign’s commands stopped at the borders of his nation state.’ 16 Efficient allocation of resources requires making sure that the right goods are at the right place, at the right time, to support production requirements, while economies of scale are achieved when the production batch size is sufficiently large as to allow distribution of your fixed costs over more products sold – the larger your market, the larger number of products that can be produced in one run without retooling, hence the cheaper the cost of producing each individual item [fixed costs can be divided over a larger number of items]. For an in-depth explanation of supply chain management see Jack B. ReVelle, Manufacturing Handbook of Best Practices: An Innovation, Productivity, and Quality Focus, CRC press, United States, (2002). 17 Peter Holmes, et al., supra note 3. 18 GATT Final Act, dated October 1947, adopted at the conclusion of the Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment. See David Palmeter and Petros C. Mavroidis, Dispute Settlement in the World Trade Organization: Practice and Procedure, Second Edition, Cambridge University Press, United Kingdom, (2004), p.3.

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sor, the World Trade Organization (WTO),19 which came into force on 1 January 1995,20 were the post-World War II agreements focused on the facilitation of international trade through the reduction of tariffs and other barriers to trade.21 Notwithstanding the unprecedented depth and breadth of the integration of the world economies22 and the economic growth realised through integration of the world economy, the failure to translate this economic growth into raised living standards and full employment for the entire population has caused many to look inward to address their nation’s individual situation.23 While many in the world may be looking inward, China, now more than ever, is looking outward to enhance its connectivity with the world by taking lessons from history:24 Over 2,000 years ago, our ancestors, trekking across vast steppes and deserts, opened the transcontinental passage connecting Asia, Europe and Africa, known today as the Silk Road. Our ancestors, navigating rough seas, created sea routes linking the East with the West, namely, the maritime Silk Road. These ancient silk routes opened windows of friendly engagement among nations, adding a splendid chapter to the history of human progress. Spanning thousands of miles and years, the ancient silk routes embody the spirit of peace and cooperation, openness and inclusiveness, mutual learning and mutual benefit. The Silk Road spirit has become a great heritage of human civilization . . . Generation after generation, the silk routes travellers have built a bridge for peace and East-West cooperation. History is our best teacher. The glory of the ancient silk routes shows that geographical distance is not insurmountable. If we take the first courageous step towards each other, we can embark on a path leading to friendship, shared development, peace, harmony and a better future.

Before identifying potential implications for the system of dispute resolution that will be required to support the BRI, this chapter first explores the BRI and the strides China has made since its 2013 launch.25

19 Preamble, ‘Marrakesh Agreement Establishing The World Trade Organization’ in The Legal Texts:The Results of the Uruguay Round of Multilateral Trade Negotiations, Cambridge University Press, United Kingdom, (2005), 4–14 (hereinafter WTO Agreement). 20 Supra note 12, 13. 21 Ibid., 5. 22 The ratio of imports and exports to GDP in developed and developing countries increased from 17 per cent to 24 per cent and from 23 per cent to 38 per cent respectively between 1985 and 1997. Trade also increased at a faster annual average rate than the world economy. The latter grew annually at a rate of 3.1 per cent and 2.0 per cent during 1980–1990 and 1990–1995 respectively while trade increased by 5.3 per cent and 6.8 per cent over the same periods. See supra note 5. 23 A case in point is President Trump’s America First Policy and his withdrawal of the United States from the Trans Pacific Partnership (TPP). 24 Xinhua, ‘Full text of President Xi’s speech at opening of Belt and Road forum’, 14 May 2017, www. xinhuanet.com/english/2017-05/14/c_136282982.htm. 25 Xinhuannet, ‘Chronology of China’s Belt and Road Initiative’, 28 March 2015, http://www.xinhuanet.com/ english/2015-03/28/c_134105435.htm.

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The BRI As mentioned, the BRI was launched in 2013 by President Xi of China, during a speech in Kazakhstan, proposing to jointly build a Silk Road Economic Belt with Central Asian Countries26 and further proposing, during a speech to the Indonesian Parliament, to build a 21st Century Maritime Silk Road.27 President Xi underlined that the realisation of this objective required the construction of a transportation network to connect Asia with Europe and the Middle East by rail, sea and air.28 In March 2015, China’s National Development and Reform Commission, together with its Ministries of Foreign Affairs and Commerce, published the first official document setting out the vision, guiding principles and defining routes with an action plan for the BRI (the Action Plan):29 The Silk Road Economic Belt focuses on bringing together China, Central Asia, Russia and Europe (the Baltic); linking China with the Persian Gulf and the Mediterranean Sea through Central Asia and West Asia; and connecting China with Southeast Asia, South Asia and the Indian Ocean. The 21st-Century Maritime Silk Road is designed to go from China’s coast to Europe through the South China Sea and the Indian Ocean in one route, and from China’s coast through the South China Sea to the South Pacific in the other. On land, the Initiative will focus on jointly building a new Eurasian Land Bridge and developing China–Mongolia–Russia, China–Central Asia–West Asia and China–Indochina Peninsula economic corridors by taking advantage of international transport routes, relying on core cities along the Belt and Road and using key economic industrial parks as cooperation platforms. At sea, the Initiative will focus on jointly building smooth, secure and efficient transport routes connecting major sea ports along the Belt and Road. The China–Pakistan Economic Corridor and the Bangladesh–China–India-Myanmar Economic Corridor are closely related to the Belt and Road Initiative…

As noted above, both the Maritime Silk Road and the Land Economic Belt encompass a number of economic corridors: • the China–Mongolia–Russia economic corridor; • the New Eurasian Land Bridge;

26 Ministry of the Foreign Affairs of the People’s Republic of China, ‘President Xi Jingping Delivers Important Speech and Proposes to Build a Silk Road Economic Belt with Central Asian Countries’, delivered at Kazakhstan’s Nazarbayev University on 7 September 2013, http://www.fmprc.gov.cn/mfa_eng/ topics_665678/xjpfwzysiesgjtfhshzzfh_665686/t1076334.shtml. 27 Xinhuannet, ‘Chronology of China’s Belt and Road Initiative’, 28 March 2015, http://www.xinhuanet.com/ english/2015-03/28/c_134105435.htm. 28 Ministry of the Foreign Affairs of the People’s Republic of China, ‘President Xi Jingping Delivers Important Speech and Proposes to Build a Silk Road Economic Belt with Central Asian Countries’, delivered at Kazakhstan’s Nazarbayev University on 7 September 2013, http://www.fmprc.gov.cn/mfa_eng/ topics_665678/xjpfwzysiesgjtfhshzzfh_665686/t1076334.shtml. 29 The State Council of the Peoples Republic of China, ‘Action plan on the Belt and Road Initiative’, 30 March 2015, http://english.gov.cn/archive/publications/2015/03/30/content_281475080249035.htm.

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• • • •

the China–Central Asia–Western Asia Corridor; the China–Pakistan Economic Corridor; the Indochina Peninsula Economic Corridor; and the Bangladesh–China–India–Myanmar Economic Corridor.

The Action Plan also highlights the building of the physical infrastructure network to re-connect Asia, Europe and Africa over land and link East and West via a network of sea routes, as a key objective of the first phase of the implementation of the BRI.That network is intended to comprise railways, highways, sea routes and air routes, electric power transmission and telecommunication grids, and oil and gas pipelines:30 Facilities connectivity is a priority area for implementing the Initiative. On the basis of respecting each other’s sovereignty and security concerns, countries along the Belt and Road should improve the connectivity of their infrastructure construction plans and technical standard systems, jointly push forward the construction of international trunk passageways, and form an infrastructure network connecting all subregions in Asia, and between Asia, Europe and Africa step by step. At the same time, efforts should be made to promote green and low-carbon infrastructure construction and operation management, taking into full account the impact of climate change on the construction. With regard to transport infrastructure construction, we should focus on the key passageways, junctions and projects, and give priority to linking up unconnected road sections, removing transport bottlenecks, advancing road safety facilities and traffic management facilities and equipment, and improving road network connectivity. We should build a unified coordination mechanism for whole-course transportation, increase connectivity of customs clearance, reloading and multimodal transport between countries, and gradually formulate compatible and standard transport rules, so as to realise international transport facilitation. We should push forward port infrastructure construction, build smooth land-water transportation channels, and advance port cooperation; increase sea routes and the number of voyages, and enhance information technology cooperation in maritime logistics. We should expand and build platforms and mechanisms for comprehensive civil aviation cooperation, and quicken our pace in improving aviation infrastructure. We should promote cooperation in the connectivity of energy infrastructure, work in concert to ensure the security of oil and gas pipelines and other transport routes, build cross-border power supply networks and power-transmission routes, and cooperate in regional power grid upgrading and transformation. We should jointly advance the construction of cross-border optical cables and other communications trunk line networks, improve international communications connectivity, and create an Information Silk Road.We should build bilateral crossborder optical cable networks at a quicker pace, plan transcontinental submarine optical cable projects, and improve spatial (satellite) information passageways to expand information exchanges and cooperation.

30 The State Council of the Peoples Republic of China, ‘Action plan on the Belt and Road Initiative’, 30 March 2015, http://english.gov.cn/archive/publications/2015/03/30/content_281475080249035.htm.

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The BRI is a brand, rather than a master plan with specific criteria for project inclusion.31 It has generated Chinese investment in large-scale rail, road, port, airport, energy and telecommunications projects in BRI-participating countries, but has also resulted in some projects that were started before 2013 also being classified as BRI projects. Example of the projects, old and new, that are being classified as BRI projects include:32 • the China–Myanmar crude oil and liquified natural gas (LNG) pipeline; • the Padma Bridge (Bangladesh) Tunnel construction under Karnaphuli River (Bangladesh); • the China–Kazakhstan passenger train; • the Manas airport modernisation (Kyrgyzstan); • the Turkey east–west high-speed rail; • the China–Laos Railway; • the Upgrade of Lancang–Mekong ship route; • the Altai LNG pipeline (linking Xinjiang and Siberia); • the Altanbulag–Ulaanbaatar-Zamiin-Uud highway; • the Gwadar free zone development; • the Karakoram Highway, Phase II (Thakot–Havelian); • the Peshawar–Karachi Motorway; • the China–Europe freight trains (39 routes linking China with nine European countries); • the Hungary–Serbia railway; • the China–Belarus Industrial Park; • the China–Kazakhstan Khorgos; and • the Port of Pireaus (Greece). Beijing puts the investment required to build infrastructure supporting its BRI strategy at US$890 billion,33 while the Asian Development Bank estimates that the required investment in the infrastructure needs for Asia alone for the period between 2016 and 2030 would amount to US$26 trillion.34 So China will not be the only financier across the super-Eurasian continent.35

31 Jonathan E. Hillman, ‘Statement before the US-China Economic and Security Review Commission for a Hearing on ‘China’s Belt and Road Initiative: Five Years Later’, 25 January 2018. Jonathan E. Hillman is Director, Reconnecting Asia Project at the Center for Strategic and International Studies (CSIS). 32 Joel Wuthnow, ‘Chinese Perspectives on the Belt and Road Initiative: Strategic Rationales, Risks, and Implications, China Strategic Perspectives’, No. 12, Center for the Study of Chinese Military Affairs, Institute for National Strategic Studies, at the National Defense University, October 2017, http://inss.ndu.edu/ Portals/68/Documents/stratperspective/china/ChinaPerspectives-12.pdf. 33 James Kynge, ‘How the Silk Road plans will be financed’, Financial Times, 9 May 2016, https://www.ft.com/ content/e83ced94-0bd8-11e6-9456-444ab5211a2f. 34 ‘Meeting Asia’s Infrastructure Needs’, ADB, February 2017, https://www.adb.org/sites/default/files/ publication/227496/special-report-infrastructure.pdf. 35 See footnote 31. ‘In southeast Asia, Japan is outspending china in several countries. In Central Asia, the Asian Development Bank (ADB) and other multilateral Development banks (MDBs) have significant Activities underway. In Eastern and Central Europe, European funders remain dominant in many countries. …and there are numerous projects with both Chinese and MDB funding.’

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To implement infrastructure projects related to the BRI, the Action Plan proposes ‘joint efforts to establish the Asian Infrastructure Investment Bank and BRICS New Development Bank, conduct negotiation among related parties on establishing Shanghai Cooperation Organization (SCO) financing institution, and set up and put into operation the Silk Road Fund.’ 36 In line with this proposal, China established the Silk Road Fund, with an initial contribution of US$40 billion, in December 2014,37 and the Asia Infrastructure Investment Bank (AIIB) in 2016, with an initial contribution from China of US$50 billion, in January 2016.38 It is reported that between 2013 and 2017 China invested more than US$50 billion in economies along the Belt and Road route,39 and that number was reported to be up to US$90 billion by July 2018.40 AIIB has approved investment for BRI associated projects worth over US$5.3 billion since starting its operations, and41 the Export-Import Bank of China, which promotes foreign trade and investment, lent more than US$80 billion in 2015.42 In addition to Chinese investment in BRI-related infrastructure projects, six multilateral development banks (MDBs), including AIIB and the World Bank, entered into an agreement to enhance cooperation under the BRI;43 General Electric Financial Services is partnering with the Silk Road Fund to establish an energy infrastructure investment platform;44 and the Japanese government has promised to provide financial support to private Japanese banks for the financing of BRI projects.45 Much of the Chinese investment is reported to be provided through financing, often on commercial terms,46 but not all of it is driven by commercial logic, but rather by geo-political interests.47 Projects that illustrate this are the port in Sri Lanka, for which China was willing

36 The State Council of the Peoples Republic of China, ‘Action plan on the Belt and Road Initiative’, 30 March 2015, http://english.gov.cn/archive/publications/2015/03/30/content_281475080249035.htm. 37 The Silk Road Fund was set up at the end of 2014 and is backed by China’s foreign exchange reserves, China Investment Corp, the Export-Import Bank of China and the China Development Bank, http://www. silkroadfund.com.cn/enwap/27363/index.html. 38 Asian Infrastructure Bank website, https://www.aiib.org/en/about-aiib/governance/senior-management/ index.html#. 39 Sarah Grimmer and Christina Charemi, ‘Dispute Resolution along the Belt and Road,’ Global Arbitration Review, 22 May 2017. 40 Sputnik International, ‘Belt and Road Dispute Settlement Mechanism Discussed at Beijing Forum’, 5 July 2018, https://sputniknews.com/asia/201807051066050995-china-beijing-belt-dispute-forum/. 41 Xinhau News Agency, ‘AIIB approves over 5.3 bln USD in project investment since operation’, 2 July 2018, http://www.xinhuanet.com/english/2018-07/02/c_137296307.htm. 42 See footnote 33. 43 See footnote 41. 44 Reuters, General Electric, ‘China’s Silk Road Fund to Launch Energy Investment Platform’, 9 November 2017, https://www.reuters.com/article/us-trump-asia-china-deals-ge/general-electric-chinas-sil k-road-fund-to-launch-energy-investment-platform-idUSKBN1DA057. 45 Reuters, ‘Japan to help finance China’s Belt and Road projects: Nikkei’, 6 December 2017, https://www. reuters.com/article/us-japan-china-beltandroad/japan-to-help-finance-chinas-belt-and-road-projects-nikkeiidUSKBN1E003M. 46 Citing a study from William and Mary, Mr Hillman notes that Chinese lending during 2000–2014 totaled US$354.4 billion, with lending highest in the transport and power sectors. Of these loans, about three quarters had commercial terms, drawing the conclusion that China is successful at locking in higher rates because it agrees to assume risks that other lenders will not. See footnote 31. 47 See footnote 33.

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to provide a US$1.3 billion loan, after the MDBs declined, and then agreed to take equity in the port when Sri Lanka could not pay the interest on the debt;48 and the US$46 billion plan to finance an ‘economic corridor’ through Pakistan, linking the port of Gwadar on the Arabian Sea to north-west China.49 China’s loans to Sri Lanka now exceed US$8 billion. 50 Those participating in project delivery are also multinational, albeit to varying degrees, when funding is not purely Chinese. The Centre for Strategic and International Studies (CSIS) recently calculated that, out of the contractors participating in BRI projects, 40.8 per cent were local to the host BRI nation, 30.2 per cent are non-Chinese companies from a country other than the one where the project was taking place and 29 per cent were Chinese. But of the projects that received Chinese financing, 89 per cent of those in the CSIS database were contracted out to Chinese companies.51 Chinese state-owned enterprises (SOEs) are also playing a leading role, with findings indicating that some 50 Chinese SOEs have invested or participated in nearly 1,700 projects in countries along the BRI over the period between 2014 and 2017.52 This finding is in line with the fact that, in 2017 Fortune’s list of world’s largest companies by revenue, 107 are Chinese firms, 75 of which were SOEs and seven of the 10 largest construction companies in the world by revenue are Chinese.53 The above serves to illustrate that BRI has encouraged and facilitated significant investment in large-scale energy, rail, road and telecommunications infrastructure projects, including Chinese outbound investment. Although these projects are varied, they all have one thing in common – the potential for disputes and the requirement to resolve these disputes.The subject of the BRI and its implications for dispute resolution is addressed below.

The BRI and dispute resolution As with most construction projects today, BRI projects are exposed to an extremely large spectrum of risks during the project life-cycle,54 linking the success of a project to the management of such risks. Owners of BRI projects will have to enter into the usual mosaic of contracts to allocate such risks, which may include separate contracts with the financiers, designers, suppliers, insurance providers, contractors and operators. 55 These agreements

48 49 50 51 52

See footnote 31. It is reported that China expects to lose 80 per cent of their investment in Pakistan. See footnote 33. See footnote 31. See footnote 31. CAIXIN, SOEs Lead Infrastructure Push in 1,700 ‘Belt and Road’ Projects, 9 May 2017, www.caixinglobal. com/2017-05-10/101088332.html. 53 See footnote 31. 54 Nael G. Bunni, The FIDIC Forms of Contract 3rd ed, Blackwell Publishing, London, pp. 94–95. Also see Nael G. Bunni, Risk and Insurance in Construction 2nd ed, Spoon Press, London 2003,Chapter 3, for a comprehensive review of the risk exposure in a construction project. 55 See John Burrows, ‘The Principles of the Law of Contract’: ‘We must not expect too much of the law of contract, particularly in complex transactions such as those in the construction industry.’ And see UNCITRAL Legal Guide on Drawing Up International Contracts for the Construction of Industrial Works (1987), p.1: ‘Contracts for the construction of industrial works are typically of great complexity, with respect both to the technical aspects of the construction and to the legal relationships between the parties. The obligations to be performed by contractors under these contracts normally extend over a relatively long period of time, often several years. In these and other ways, contracts for the construction of industrial works differ in important

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may be state-to-state, investor-state or commercial in nature, calling for suitable methods of dispute resolution. The available dispute resolution tools range from unassisted party negotiation to litigation and arbitration. Cost and risk for each party can increase exponentially when a dispute crosses the line from a situation where the parties resolve the dispute themselves, or a third-party neutral facilitates, to determination by a judge or arbitrator. While many construction contracts provide for multi-tiered settlement of disputes, employing a sequence of dispute resolution tools, intending to promote early identification and resolution of issues and providing the parties a means of recourse, if disputes cannot be resolved, or avoided, at the first instance, generally the final dispute resolution mechanism is arbitration. Over the past 60 years, since the signing of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, international commercial arbitration has proved capable of delivering enforceable justice under disputed international construction contracts.56 The fundamental characteristics of international arbitration comprise:57 • cultural openness and neutrality in the approach to the settlement of the dispute or in the making of any determinations related to it; • the premise of free will of the parties and a design that aims to satisfy the dispute resolution needs of business circles in connection with their international deals; and • flexibility in the choice of the applicable procedural and the substantive laws. Arbitration is also viewed as the mechanism of choice for the resolution of investor–state disputes under the 1965 Washington Convention.58 Without yet reaching a conclusion, China and other international actors are engaging on multiple fronts to address the question if the currently available international dispute resolution machinery is sufficient and suitable to address the needs of the participants in the BRI, or may need to be modified or replaced. In support of strengthening the currently available systems and the use of alternative dispute resolution tools and arbitration, the International Academy of the Belt and Road (IABR)59 has published the Blue Book Dispute Resolution Mechanism for the Belt and

56 57 58 59

respects from traditional contracts for the sale of goods or the supply of services. Consequently, rules of law drafted to govern sales or services contracts may not settle in an appropriate manner many issues arising in contracts for the construction of industrial works. It may be desirable or advisable for the parties to settle these issues through contract provisions.’ The remedy usually includes time, money or both but can also extend to suspension and even termination. The FIDIC Red Book, which is seen by many to be the global standard, continues to provide for arbitration as the final dispute resolution mechanism and has done so since it was first published in 1957. Horacio Griegera Naon, ‘The Role of International Commercial Arbitration’, J Chartered Inst Arbitrators, 4 (1999) 266–277. ‘The Convention on the Settlement of Investment Disputes between States and Nationals of Other States’, https://icsid.worldbank.org/en/Documents/icsiddocs/ICSID%20Convention%20English.pdf. The International Academy of the Belt and Road (IABR, http://interbeltandroad.org/en/about-us), founded in 2016, is a research institution concerning the Belt and Road Initiative in Hong Kong. It serves as an international platform for academic and professional exchanges and invites experts from various countries along the Belt and Road route who specialise in the fields of law, economics, finance, investment, politics and international relations to work with them.

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Road, in which it proposes a universal tiered dispute resolution clause in which conciliation is to be followed by arbitration.60 The IABR proposal includes an appeal procedure in the case of state-to-state and investor-state arbitration, which would not apply in the case of commercial arbitration. 61 Further, the China International Economic and Trade Arbitration Commission (CIETAC) released its International Investment Arbitration Rules in September 201762 and held a Forum on the Prevention of OBOR63 Investment and Trade Risks in June 2018.64 The China Council for the Promotion of International Trade (CCPIT)65 intends to establish a Belt and Road International Dispute Management Centre.66 Also in September 2017, signalling their willingness to support the use of arbitration and mediation in the resolution of BRI-related disputes, Hong Kong’s Minister of Justice, herself a renowned arbitrator, presented e-BRAM.hk (Belt and Road Arbitration and Mediation Center),67 and the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) elected nine Chinese experts as mediators and arbitrators.68 Further, early in 2018, two of the leading global arbitral institutions have launched BRI-related initiatives. In March 2018, the International Chamber of Commerce (ICC) announced that it had established a commission to review dispute resolution in relation to the BRI.69 In April 2018, the Hong Kong International Arbitration Center (HKIAC) announced the formation of an industry-focused Belt and Road Advisory Committee and the launch of an online resource platform dedicated to the BRI.70 Signalling that more significant change may be required, in January 2018, the Leading Group for Deepening Overall Reform of the 19th Central Committee of the Communist Party of China approved a plan to establish a mechanism to legally resolve trade and investment disputes arising from issues related to the BRI, stating:71

60 Guiguo Wang ‘The Belt and Road Initiative in quest for a dispute resolution mechanism’, Asia Pacific Law Review, 25:1, (2017), 1-16, DOI: 10.1080/10192557.2017.1321731. 61 See footnote 60. 62 CIETAC International Investment Rules. 63 BRI is also known as OBOR (One Belt, One Road). 64 See CIETAC News, http://www.cietac.org/index.php?m=Article&a=show&id=15480&l=en. 65 http://www.ccpit.org. 66 Jacob Mardell, ‘Dispute settlement on China’s terms: Beijing’s new Belt and Road courts’, MERICS Blog – European Voices on China, 14 February 2018, https://www.merics.org/en/blog/dispute-settlement -chinas-terms-beijings-new-belt-and-road-courts. 67 Teresa Cheng, Minister of Justice of Hong Kong, Belt and Road e-arbitration and e-mediation, presented at Belt and Road Summit in Hong Kong, 11 September 2017, http://www.beltandroadsummit.hk/pdf/ Programme/DOJ_Ms_Teresa_Cheng.pdf. 68 Yicai Global, ‘China Plans International Commercial Courts for Belt and Road Dispute Resolution’, 25 January 2018, https://www.yicaiglobal.com/news/exclusive-china-plans-international-commercialcourts-belt-and-road-dispute-resolution. 69 ICC, ‘The International Court of Arbitration of the International Chamber of Commerce (ICC Court) has announced the establishment of a commission to address dispute resolution potential in relation to China’s Belt and Road Initiative’, 5 March 2018, https://iccwbo.org/media-wall/news-speeches/?type=news. 70 HKIAC Press Release, ‘HKIAC announces Belt and Road Programme’, 26 April 2018, http://www.hkiac. org/news/hkiac-announces-belt-and-road-programme. 71 China Daily, ‘Process eyed to solve Belt, Road disputes’, 24 January 2018, https://eng.yidaiyilu.gov.cn/qwyw/ rdxw/45613.htm.

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The goal is to lawfully settle commercial, trade and investment disputes regarding the Belt and Road Initiative, protect the lawful rights and interests of Chinese and foreign individuals on equal footing and create a stable, fair and transparent business environment with the rule of law, those at the meeting decided. Efforts to set up the procedure and the organisation to handle disputes should follow the principles of extensive consultation, joint contribution and shared benefits and should be based on China’s existing judicial, arbitration and mediation institutions, the leaders agreed.

In line with this goal, the Supreme People’s Court will set up international commercial courts, with the first international commercial court being in Shenzhen for disputes related to the Maritime Silk Road, the second in Xi’an to settle cross-border commercial disputes related to the Silk Road Economic Belt, and the headquarters located in Beijing.72 September 2017 also saw China signing the Hague Convention on the Choice of Courts, which allows parties to choose the exclusive court in which any disputes arising under a commercial agreement will be resolved.73 It is viewed that, initially, the courts would mostly handle the cases involving Chinese investors in BRI projects. One reason for this is that China may be looking for better protection for its international BRI investments because, as noted in a recently published paper ‘For all of the thirty-five BITs China has already signed with countries along the Belt and Road, the ISDS provision is only applicable to disputes regarding particular amounts for expropriation compensation.’74 Further showing a potential for more robust change, in July 2018, ‘China’s Ministry of Foreign Affairs and law society called on countries involved in the Belt and Road initiative (BRI) to improve international rules-based systems and establish dispute settlement mechanisms to fairly protect the rights of all parties.’ Their joint statement also ‘proposed the establishment of treaty-based mechanisms or institutions to prevent and resolve disputes and to strengthen mutual recognition and enforcement of judgments in civil and commercial matters.’75 To date, there is no multilateral dispute resolution mechanism in place for resolving disputes that may arise between countries participating in the BRI. 76 So maybe it is true that the BRI does not require a new global dispute regime – as indicated in a February 2018 Global Times article,77 but certainly adjustments are needed. They are yet to be defined, and may need to address the significant geopolitical issues that may arise in relation to BRI disputes. Now that the financing can be predominately

72 ‘China to set up international courts to settle Belt and Road disputes’, Global Times, 28 June 2018, http:// www.globaltimes.cn/content/1108794.shtml and, New Courts for the Belt and Road Initiative, One Belt One Road Europe, 2 February 2018, http://www.oboreurope.com/en/bri-courts/. 73 Gareth Thomas, Dominic Geiser and Rachel Yu, ‘PRC signs the Hague Convention on Choice of Court Agreements: a step forward in the resolution of cross-border litigation’, Lexology, 12 September 2017, https:// www.lexology.com/library/detail.aspx?g=f35549c2-29ed-45a0-b5bb-04e752f9a51c. 74 Dahlan, M.R., ‘Dimensions of the New Belt & Road International Order: An Analysis of the Emerging Legal Norms and a Conceptionalisation of the Regulation of Disputes’, Beijing Law Review, 2018, 9, 87–112, https://doi.org/10.4236/blr.2018.91007. (‘ISDS’ means ‘investor stock dispute settlement’.) 75 Sputnik International, ‘Belt and Road Dispute Settlement Mechanism Discussed at Beijing Forum’, 5 July 2018, https://sputniknews.com/asia/201807051066050995-china-beijing-belt-dispute-forum/. 76 See footnote 74. 77 ‘Belt and Road requires new global dispute regime’, Global Times, 1 February 2018, http://www.globaltimes. cn/content/1087858.shtml.

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Chinese, Chinese outbound investors and contractors seek to retain more control over where the dispute should be resolved if offshore projects go wrong.78 As stated in the Action Plan, the ‘development of the Belt and Road should mainly be conducted through policy communication and objectives coordination. It is a pluralistic and open process of cooperation which can be highly flexible, and does not seek conformity.’ The objectives should be satisfied in regard to dispute settlement, if it is to be regarded as ‘fair’ in an international context. This conclusion appears to be supported by Bai Ming, a research fellow at the Chinese Academy of International Trade and Economic Cooperation, when he said ‘an international arbitration institution needs to win respect and acknowledgement from the international community, otherwise it would be useless. The courts that China plans to establish are not Chinese institutions, but China-proposed international organisations.They will be independent.’79

78 Summit on Commercial Dispute Resolution in China, Stockholm, June 2018. 79 ‘China to set up international courts to settle Belt and Road disputes’, Global Times, 28 June 2018, http:// www.globaltimes.cn/content/1108794.shtml.

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29 Construction Arbitration in Australia Andrew Stephenson, Lee Carroll and Lindsay Hogan1

Introduction In Australia, two regimes exist that regulate arbitration, depending upon whether the arbitration is characterised as international or domestic. Prior to 2010, significantly different policy settings applied to the two regimes. Therefore, when considering cases before 2010, it is important to consider whether the arbitration in question is international or domestic. Some of these earlier Australian cases relating to domestic arbitration were criticised internationally but this criticism failed to appreciate the different policy settings for domestic and international arbitration that existed at the time and assumed principles expounded in these cases were relevant to international arbitration. There was, however, some legitimate criticism of cases that related to international arbitration where the Australian courts had failed to understand the policy setting stipulated by the New York Convention,2 and the Model Law (as at 1985),3 both of which had been incorporated into the law of Australia for the purposes of international arbitration. By 2010, there was a ground swell of support for significant reform of the law relating to both international and domestic arbitration. Both regimes are now based on the Model Law (as at 2006).4 However, there are subtle differences between the two regimes that are discussed below.

1 2 3 4

Andrew Stephenson is a partner and Lee Carroll is a special counsel at Corrs Chambers Westgarth. Lindsay Hogan is a barrister at the Victorian Bar. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature 10 June 1958, 330 UNTS 3 (entered into force 7 June 1959) (‘New York Convention’). UNCITRAL Model Law on International Commercial Arbitration (as adopted by the United Nations Commission on International Trade Law on 21 June 1985). UNCITRAL Model Law on International Commercial Arbitration (as adopted by the United Nations Commission on International Trade Law on 21 June 1985, and as amended by the United Nations Commission on International Trade Law on 7 July 2006) (‘Model Law’).

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The 2010 reforms involved amendments of the existing International Arbitration Act 1974 (IAA),5 and the repeal of the mid-1980s version of the Commercial Arbitration Act (the Old CAA) of each state and territory and enactment of a new Commercial Arbitration Act by each state and territory (collectively the CAA).6 The principal reforms relate to: • confidentiality; • stays (for domestic arbitration); • the capacity to contract out of the Model Law for international arbitration; and • recourse against the award. Before embarking on a detailed discussion of these issues, it is appropriate to first consider how Australian law distinguishes between international and domestic arbitration.

Characterisation of arbitration agreements – international versus domestic Pursuant to Section 1(3) of the CAA an arbitration is domestic if at the time of the conclusion of the arbitration agreement the parties had their places of business in Australia and the Model Law (as given effect by the IAA) does not apply. Article 1(3) of the Model Law provides that an arbitration is international (and therefore not domestic) if: (a) the parties to an arbitration agreement have, at the time of conclusion of that agreement, their places of business in different States;7 or (b) one of the following places is situated outside the State in which the parties have their places of business: (i) the place of arbitration if determined in, or pursuant to, the arbitration agreement; (ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected; or (c) the parties have expressly agreed that the subject matter of the arbitration agreement relates to more than one country.

Accordingly, it is possible for an arbitration between two Australian entities to be regulated by the international regime.

Confidentiality In other common law countries, confidentiality has been a hallmark of arbitration, rooted in principles of self-determination and the parties’ ability to choose to keep both their dispute and its resolution private and confidential. The confidentiality associated with a

5 6

7

International Arbitration Act 1974 (Cth). Commercial Arbitration Act 2010 (NSW); Commercial Arbitration (National Uniform Legislation) Act 2011 (NT); Commercial Arbitration Act 2011 (SA); Commercial Arbitration Act 2011 (TAS); Commercial Arbitration Act 2011 (VIC); Commercial Arbitration Act 2012 (WA); Commercial Arbitration Act 2013 (QLD); Commercial Arbitration Act 2017 (ACT). Meaning in this context, countries, and not to be confused with Australian states.

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private arbitration in those countries has meant that commercially sensitive information or awards will not be in the public domain. The risk of reputational damage associated with publicly airing a dispute in open court is also avoided if the dispute is kept confidential. Prior to the enactment of the CAA in Australia, there was no presumption of confidentiality in Australia. In the 1995 case Esso Australia Resources Ltd v. Plowman (Minister for Energy and Minerals) (‘Esso’),8 the High Court of Australia held that there was no implied obligation of confidentiality in arbitration agreements. Confidentiality was an obligation only if expressly specified in the arbitration agreement. In Esso, Plowman sought to disclose information Esso had provided during the course of the arbitration. Esso argued that the arbitration agreement contained an implied term of confidentiality, which meant that documents obtained during the course of the arbitration could not be disclosed to third parties.The High Court held by majority that while arbitration proceedings are private, they attract no greater confidentiality than a court proceeding, and that confidentiality is not a necessary attribute of such privacy. In practice, parties could circumvent Esso by expressly agreeing that the arbitration was confidential as well as private. The Australian position following Esso was out of step with international commercial arbitration. Accordingly, some argued that this was an important reason why foreign disputants chose not to arbitrate in Australia.9 The CAA brought Australian domestic arbitration law back in line with international best practice by imposing a statutory duty of confidence. Section 27E of the CAA prohibits the parties and the tribunal from disclosing confidential information, subject to certain exceptions. Pursuant to Section 27E(1) the parties may agree to opt-out of the statutory duty. The IAA, which deals with international arbitration, provided for confidentiality on an opt-in basis. However, in October 2015, the IAA was amended to mirror the duty of confidence required in respect of domestic arbitration, by making confidentiality available on an opt-out basis. So unless the parties stipulate otherwise, proceedings arising from all arbitration agreements will remain confidential.

Stays As discussed above, the IAA gives effect to both the New York Convention and the Model Law (2006 version). The Model Law has, by virtue of Section 16 of the IAA, the force of law in Australia. Section 7 of the IAA enforces ‘foreign’ arbitration agreements,10 and provides that a court must, upon application by a party to the proceedings, stay any court proceedings within the ambit of the arbitration clause and refer the parties to arbitration.

8 9

(1995) 183 CLR 10. J. Galatas, ‘The Role and Attitude of the Courts in Australian in Relation to International Commercial Arbitration’ (2005) 1 The International Construction Law Review 27, 49. 10 Being agreements where the procedure of the arbitration is governed by the law of a convention country; the procedure of the arbitration is governed by a non-convention country and a party to that agreement is a person who, at the time of the arbitration agreement, was ordinarily resident in Australia; a party to the arbitration agreement is a convention country; or a party to the arbitration agreement was, at the time of the arbitration agreement, ordinarily resident in a convention country.

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Article 8 of the Model Law relates to international arbitration as defined in the Model Law (as discussed above), which also stipulates that a court must, on application by a party to the proceedings, refer the parties to arbitration if an action is brought in a matter that is the subject of an arbitration amount. This article has been adopted in the domestic regime. Both the international and domestic regimes are subject to the usual exception that a reference to arbitration will not be made if the arbitration agreement is ‘null and void, inoperative or incapable of being performed’. The issues that arise in respect of stays are twofold: • Is the dispute the subject of the proceedings within the scope of the arbitration clause? • Is the arbitration clause null and void, inoperative or incapable of being performed?

Is the dispute the subject of the proceedings within the scope of the arbitration clause? This issue is to be resolved by a proper interpretation of the arbitration clause. Like in England and Wales, prior to Fiona Trust & Holding Corp v. Privalov,11 Australian courts read arbitration clauses strictly, including making distinctions between clauses that referred to arbitration disputes ‘arising under’, ‘connected with’ or ‘relating to’ the contract. This gave rise to serious inconvenience where a court stayed part of the proceedings that were held to fall within the scope of the arbitration clause, while allowing the balance of the dispute to proceed to litigation.12 However, by the 1990s, a line of authority developed that arbitration clauses should be construed widely,13 so as to allow claims based on the contract and claims based on non-contractual remedies (arising from the same or similar facts) to be determined together in arbitration. The House of Lords decision in the Fiona Trust case arguably went further than this line of authority, and was accepted by the Western Australian Court of Appeal.14 The approach taken in the Fiona Trust case by Lord Hoffman was put succinctly as follows:15 In approaching the question of construction, it is therefore necessary to inquire into the purpose of the arbitration clause. As to this, I think there can be no doubt.The parties have entered into a relationship, an agreement or what is alleged to be an agreement or what appears on its face to be an agreement, which may give rise to disputes.They want those disputes decided by a tribunal

11 [2007] 4 All ER 951 (Fiona Trust). 12 See for example Allergan Pharmaceuticals Inc v. Bausch Lomb Inc [1985] FCA 507 and Hi-Fert Pty Ltd v. Kuikiang Maritime Carriers Inc (1998) 159 ALR 142. 13 See for example, the decision of Gleeson CJ (subsequently Chief Justice of the High Court of Australia – the final court of appeal in Australia) in Francis Travel Marketing v.Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 at [165]; Comandate Corp v. Pan Australian Shipping Pty Ltd (2006) 157 FCR 45 at [164]; Walter Rau Neussel Oelund Fett AG v. Cross Pacific Trading [2005] FCA 1102 at [41]–[42]; Global Partners Fund Ltd v. Babcock & Brown Ltd (in liq) [2010] NSWCA 196 at [60]–[65] per Spigelman CJ, Giles and Tobias JJA agreeing – interestingly, Spigelman CJ expressly referred to Fiona Trust at [63] in support of the liberal interpretation proposed in that case; Lipman Pty Ltd v. Emergency Services Superannuation Board [2011] NSWCA 163 at [6] to [8]. 14 See Paharpur Cooling Towers Ltd v. Paramount (WA) Ltd [2008] WASCA 110 at [39]. 15 [2007] 4 All ER 951, [6]–[8].

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which they have chosen, commonly on the grounds of such matters as its neutrality, expertise and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law. Particularly in the case of international contracts, they want a quick and efficient adjudication and do not want to take the risks of delay and, in too many cases, partiality, in proceedings before a national jurisdiction. If one accepts that this is the purpose of an arbitration clause, its construction must be influenced by whether the parties, as rational businessmen, were likely to have intended that only some of the questions arising out of their relationship were to be submitted to arbitration and others were to be decided by national courts. Could they have intended that the question of whether the contract was repudiated should be decided by arbitration but the question of whether it was induced by misrepresentation should be decided by a court? If, as appears to be generally accepted, there is no rational basis upon which businessmen would be likely to wish to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another, one would need to find very clear language before deciding that they must have had such an intention. A proper approach to construction therefore requires the court to give effect, so far as the language used by the parties will permit, to the commercial purpose of the arbitration clause. But the same policy of giving effect to the commercial purpose also drives the approach of the courts (and the legislature) to the second question raised in this appeal, namely, whether there is any conceptual reason why parties who have agreed to submit the question of the validity of the contract to arbitration should not be allowed to do so.

The second paragraph quoted above is of particular importance to Lord Hoffman’s reasoning, specifically the question: Could they [the businessmen who entered into the arbitration agreement] have intended that the question of whether the contract was repudiated should be decided by arbitration but the question of whether it was induced by misrepresentation should be decided by a court?

He concludes that it is not rational to read the clause narrowly. That is, having regard to the purpose of the clause, it is extremely unlikely that rational businesspersons would have wanted the resolution of a dispute to be dealt with by two different tribunals. The Fiona Trust case was considered by the New South Wales Court of Appeal in Rinehart v.Welker.16 In that case, the relevant arbitration clause provided that disputes ‘under this deed’ were to be referred to arbitration. Bathurst CJ referred to the decision of the High Court of Australia in Toll (FGCT) Pty Ltd v. Alphapharm Pty Ltd,17 which stands for (inter alia) the proposition that the correct interpretation of a contract is to be determined objectively, by reference to what a reasonable person would have understood the words to mean. However, he went on to observe:18

16 [2012] NSWCA 95 (Rinehart v.Welker). 17 (2004) 219 CLR 165. 18 [116].

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That does not mean that the court is entitled to disregard clear and unambiguous language used by the parties to produce results which the surrounding circumstances may indicate are more commercial or business-like:Western Export Services Inc v. Jireh International Pty Ltd [2011] HCA 45; (2011) 86 ALJR 1. Resort may only be had to surrounding circumstance where the words in question exhibit uncertainty or ambiguity: Codelfa Construction Pty Ltd v. State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 352.

He then referred to the line of authority that had developed since the mid-1990s, which supported a liberal interpretation of arbitration clauses, and stated:19 That is not to say that the words of the clause can be given a meaning they do not have to satisfy a perceived commercial purpose. Such an approach would be inconsistent with the approach to construction of contracts to which I have referred above. As stated by French J in Paper Products the scope of disputes covered by an arbitration clause must depend on the language of the clause. Similar statements were made by Allsop P whilst a judge of the Federal Court, in Walter Rau and Comandate Marine Corp and in this court in Lipman Pty Ltd. Rather, the words of an arbitration clause should be, to the extent possible, consistent with the ordinary meaning of the words, liberally construed. It follows that it is not appropriate for this court to adopt what Lord Hoffman described in Fiona Corporation as a ‘fresh start’ and construe clauses irrespective of the language in accordance with the presumption that the parties are likely to have intended any dispute arising out of the relationship into which they have entered to be decided by the same tribunal unless the language makes it clear certain questions were intended to be excluded.Whilst the presumption that parties intended the same tribunal to resolve all their disputes may justify a liberal approach consistent with the plain meaning of the words in question, the approach suggested by Lord Hoffman is contrary, in my opinion, to the approach laid down by the High Court as to the construction of commercial contracts.

Since Rinehart v. Welker was decided, the High Court has again considered the correct approach to contractual interpretation. In Mount Bruce Mining Pty Ltd v. Wright Prospecting Pty Ltd,20 French CJ, Nettle and Gordon JJ observed:21 In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean.That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects secured by the contract.

With all due respect to the New South Wales Court of Appeal, the decision in Rinehart v. Welker puts too much emphasis on what it contends is the plain meaning of the words (construed by lawyers having regard to old authority) rather than the likely (objective)

19 [120]–[121] (references omitted). 20 (2015) 256 CLR 104. 21 [47].

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meaning of the same words used by businesspersons, not schooled in the law. Accordingly, it is respectfully suggested that, in time, Rinehart v. Welker will be regarded as an anomaly, inconsistent with the modern authority that had been developing since the mid-1990s. Indeed, the issue was considered by the Full Court of the Federal Court of Australia in Hancock Prospecting Pty Ltd v. Rinehart (2017) 350 ALR 658 (Hancock Prospecting). The Full Court of the Federal Court disagreed with the New South Wales Court of Appeal.The Full Court observed (at [193]): We respectfully cannot agree that Fiona Trust says that arbitration clauses should be construed irrespective of the language used or that it says anything different in substance from Francis Travel and Comandate. We agree with Martin CJ in Cape Lambert in that respect. Lord Hoffmann and Lord Hope were refusing (just as Longmore LJ preferred to approach the matter) to engage in semantic debates about relational prepositional phrases capable of throwing up fine distinctions, often based on the temporal or visual metaphor from the language ‘under’, ‘arising under’, ‘out of’, ‘arising out of’, ‘in relation to’ and ‘in connection with’. Context will almost always tell one more about the objectively intended reach of such phrases than textual comparison of words of a general relational character. None of the phrases is linguistically stable or fixed. It may be that past cases decided in recognised markets with stable standard forms admit of, and may demand, necessary textual consistency: Federal Commerce and Navigation Co Ltd v. Tradax Export SA (The Maratha Envoy) [1978] AC 1 at 7–8. Far more important, however, is the correct general approach referred to by Gleeson CJ in Francis Travel — that sensible parties do not intend to have possible disputes that may arise heard in two places. Effect is given to that assumption by interpreting words liberally when they permit that to be done. As some of the cases discussed in Fiona Trust (in the Court of Appeal and the House of Lords) reveal, the phrase ‘under this agreement’ is amply able to encompass a dispute concerned with a claim to rescission of the agreement. Seeking to give the phrase some amplitude one would construe the phrase as including a dispute that contained a substantial issue that concerned the exercise of rights or obligations in the agreement, or a dispute that concerned the existence, validity or operation of the agreement as a substantial issue, or a dispute the resolution of which was governed or controlled by the agreement. That is not meant to be a prescriptive definition, but rather an illustration of a liberal reading of an arbitration clause using the correct general approach as an aspect of context in conventional contractual construction that can be found in Francis Travel, Comandate, United Group Rail, Global Partners Fund, Lipman and Cape Lambert Resources, and, in our respectful view, Fiona Trust. Disputes governed or controlled by the deed and its operation can be seen as part of the meaning of the phrase, but it is difficult to see why the meaning should be so limited.

The Australian High Court recently affirmed the decision in Hancock Prospecting and, in doing so, made some salient observations concerning the interpretation of arbitration clauses, which may affect the continuing relevance of Fiona Trust in Australia.22 The High Court noted that while a large part of the Full Court’s reasons were taken up with the approach taken in Fiona Trust (because this was how the case was argued), appeals of this nature can be resolved by the application of orthodox principles of interpretation, in light 22 Rinehart v. Hancock Prospecting Pty Ltd [2019] HCA 13.

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of the context and purpose of the clause, without reference to Fiona Trust.23 Accordingly, the High Court eschewed the opportunity to consider the correctness of the approach taken in Fiona Trust.24 By applying orthodox principles of interpretation, the High Court determined that it was ‘inconceivable’ for the parties, who had entered into two deeds of release containing arbitration clauses, to challenge the validity of those deeds in a public forum,25 given that one of the primary purposes of the deeds was to keep disputes between the parties confidential, and further, that the validity of one of those deeds had already been the subject of challenge.26 The approach of construing arbitration clauses in this manner (i.e., by reference to the orthodox principles that govern commercial contracts) has already been followed in the Supreme Court of Victoria.27 Even though the High Court did not take the opportunity to endorse the approach taken in Fiona Trust, the decision will likely still have relevance in Australia in cases where the context and purpose of an arbitration clause are not readily apparent, and a textual approach to interpretation is required. The Court did note, however, that Fiona Trust is likely to have less relevance given the trend by commercial parties to include wider arbitration clauses in agreements.

Is the arbitration clause null and void, inoperative or incapable of being performed? This exception was considered by the Supreme Court of New South Wales in Siemens Ltd v. Origin Energy Uranquinty Power Pty Ltd.28 In this case, Siemens sought to recover amounts the subject of payment claims made under the Building and Construction Industry (Security of Payment) Act 1999 (NSW) (the SOP Act). Origin sought a stay under Section 8(1) of the NSW CAA arguing that the matter was the subject of an arbitration agreement. The parties fell into dispute about the payment claims in early 2009. At that time, under the terms of their existing contract, either party could refer an unresolved dispute to arbitration. However, in late 2010, they expressly agreed that all pre-existing disputes had to be resolved by arbitration. The facts of this case are complex. However, in summary, the defendant sought a stay of proceedings brought pursuant to Section 15(2)(a)(i) of the SOP Act. That legislation stipulated that the plaintiff could issue a payment claim pursuant to the legislation. The defendant had a limited time to respond to such a claim. If it did not do so, the plaintiff could recover the amount claimed as a debt due in any court of competent jurisdiction. The defendant failed to respond within time, but contended that its failure was induced by misleading or deceptive conduct, which, pursuant to other legislation29 and authority,30

23 [18]. 24 [21]. 25 [48], [49]. 26 [48]. 27 RW Health Partnership Pty Ltd v. Lendlease Building Contractors Pty Ltd [2019] VSC 353. 28 Siemens Ltd v. Origin Energy Uranquinty Power Pty Ltd (2011) 80 NSWLR 398. 29 Trade Practices Act 1974 (Cth) Section 52. 30 Bitannia Pty Ltd v. Parkline Constructions Pty Ltd (2006) 67 NSWLR 9.

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entitled it to defend the claim made pursuant to the SOP Act. The defence was a matter which could not be dealt with by the adjudication regime prescribed by the legislation. Accordingly, the dispute could only be dealt with by a court or arbitration. Ball J concluded that while the dispute fell within the ambit of the arbitration clause, it was not arbitrable. His conclusion is best explained by the contention that Section 15(2) is part of the mechanism which leads to adjudication, a quick interim decision which can be reversed by a court or arbitrator subsequently. While the dispute in the case related to whether the right of the plaintiff to sue in court for a statutory debt created by Section 15(2) had been adversely affected by misleading or deceptive conduct, his Honour had regard to the overall scheme of the legislation in concluding that the dispute was not arbitrable. While the reasoning in this case can be criticised, it is unique. As the reasons in this case establish, for an arbitration clause to be held null and void, inoperative or incapable of being performed, a serious issue of public policy must arise. The meaning of the term ‘inoperative’ was also the subject of discussion in Broken Hill City Council v. Unique Urban Built Pty Ltd [2018] NSWSC 825. Hammerschlag J held that the term ‘inoperative’ means ‘having no field of operation or to be without effect’. Hammerschlag J relied on a Hong Kong decision (Lucky-Goldstar International (HK) Ltd v. NG Moo Kee Engineering Ltd [1993] 1 HKC 404). In that decision, Kaplan J said ‘inoperative’ covers ‘those cases where the arbitration agreement has ceased to have effect’. For example, where the parties have revoked the arbitration agreement or the same dispute has already been decided.

The capacity to contract out of the Model Law for International Arbitration In an unfortunate 2001 decision, the Queensland Court of Appeal held in Australian Granites v. Eisenwerk that where parties choose to have their disputes determined according to institutional rules, they implicitly choose to exclude the operation of the Model Law.31 The decision created several difficulties, the most significant being that the lex arbitri became the relevant Old CAA. The important differences between the IAA and the Old CAA included: • the granting of a stay of court proceedings was a matter of discretion for the courts; and • there was, subject to leave being granted, a general right of appeal in respect of the merits of an award. While Eisenwerk was rejected by the Supreme Court of New South Wales in Cargill International SA v. Peabody Australia Mining Ltd,32 it was followed in other cases.33 The effect of Eisenwerk was not consistent with the policy settings evident from the IAA. Accordingly, the federal parliament amended Section 21 of the IAA to provide that if the Model Law applies to an arbitration, the law of a state or territory does not apply to that arbitration. The amendment did not end the controversy, however, because the question remained

31 Australian Granites Ltd v. Eisenwerk Hensel Bayreuth Dipl.-ing Burkhardt GmbH [2001] 1 Qd R 461 (Eisenwerk). 32 Cargill International SA v. Peabody Australia Mining Ltd (2010) 78 NSWLR 533. 33 See for example Lightsource Technologies Australia Pty Ltd v. Pointsec Mobile Technologies AB (2011) 250 FLR 63.

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about whether Eisenwerk applied to arbitration agreements struck before the amendment to Section 21.34 To put the controversy beyond all doubt, the federal parliament gave the amended Section 21 retrospective effect in 2015.35

Recourse against the award Prior to the law reform in 2010, the policy settings for domestic arbitration were very different to those for international arbitration. In domestic arbitration there was a general right of appeal. That right was subject to the court granting leave. The legislation contained the criteria for granting leave, which were similar in effect to the ‘Nema Rules’ established pursuant to the Arbitration Act 1979 in England and Wales.36 Under the Old CAA it was not possible to contract out of the right of appeal until after the dispute had arisen. This was rarely, if ever, agreed. Accordingly, the default position was that there was a general right to have the merits of an award reviewed, if leave was granted. In addition, the award could be challenged pursuant to Section 42 of the Old CAA if the arbitrator had engaged in misconduct. Misconduct related to both extreme behaviour (such as fraud) and non-blameworthy conduct, such as falling into some technical jurisdictional error. Pursuant to the new legislation an appeal is only possible in respect of a domestic arbitration if the parties so agree (which can be done at any time). Even where there is such an agreement, the right of appeal is subject to leave being granted by a court. The criteria for granting leave have been tightened.37 Where the parties to a domestic agreement have not agreed to make the award the subject of an appeal, recourse against the award is limited to those matters prescribed by the Model Law. Therefore, in this circumstance the position is the same as that for international arbitration. In the context of international arbitration it is relevant to consider the extent to which: • an Australian international award can be challenged in Australia; and • an Australian court will refuse to enforce an international award from a non-Australian seat (i.e., a foreign award).

Setting aside an award made in Australia When choosing a seat of arbitration it is important to understand the extent to which an award may, at the seat, be annulled or set aside by the local courts. This issue is not dealt with by the New York Convention, as it relates to enforcement of foreign awards (i.e., enforcement in a state that is not the seat). Some jurisdictions have sought to distinguish themselves from others by allowing a merits review (i.e., an appeal), however, Australia has not adopted this approach. Instead, Article 34 of the Model Law entitles a party to seek to have an award set aside in limited circumstances, which largely mirror the grounds for refusing to enforce a foreign award in Article V of the New York Convention.

34 See for example Castel Electronics Pty Ltd v.TCL Air Conditioner Co Ltd (2012) 201 FCR 209 cf Rizhao Steel Holding Group v. Koolan Iron Ore (2012) 43 WAR 91. 35 Civil Law and Justice Legislation Amendment Act 2015 (Cth). 36 Established in Pioneering Shipping Ltd v. BTP Tioxide, the Nema [1981] 2 All ER 1030. 37 See Section 34A CAA.

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Article 34 of the Model Law provides that an award may only be set aside where:38 (a) the [applicant] furnishes proof that: (i) a party to the arbitration agreement ... was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or ... the law of this State; or (ii) the [applicant] was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present [its] case; or (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration ...; or (iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement [conflicted with a mandatory term of, or was not in accordance with, the Model Law]; or (b) the court finds that: (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State; or (ii) the award is in conflict with the public policy of this State.

Internationally, in the context of Article V of the New York Convention, the most controversial issue has been the circumstances in which a court will refuse to enforce an award because it is against public policy. Public policy may also result in the setting aside of an Australian international arbitration award and it is therefore important to consider that ground in further detail.

Setting aside an award on the grounds of public policy In TCL Air Conditioner (Zhongshan) Co Ltd v. Castel Electronics Pty Ltd,39 the defendant, an Australian company, commenced an arbitration against the plaintiff, a Chinese company, claiming breaches of a distribution agreement between them. An arbitral tribunal seated in Australia awarded Castel over $3 million, which was calculated by reference to the financial impact of the breaches on Castel’s sales. TCL sought to set aside the award under Article 34 of the Model Law, and resist enforcement under Article 36 (as Castel had sought to enforce the award under Article 35) on two grounds: first, the arbitrators failed to provide it with procedural fairness such that the rules of natural justice were breached in connection with the making of the award, and second, the award was in conflict with, or contrary to, Australian public policy. TCL failed on both counts, with the Full Federal Court (Allsop CJ, Middleton and Foster JJ in agreement) making important findings concerning the nature of the application made by TCL, and what is required to prove a successful claim. Their Honours held:40

38 Model Law Article 34(1)–(2). 39 TCL Air Conditioner (Zhongshan) Co Ltd v. Castel Electronics Pty Ltd (2014) 232 FCR 361. 40 [54].

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If the rules of natural justice encompass requirements such as the requirement of probative evidence for the finding of facts or the need for logical reasoning to factual conclusions, there is a grave danger that the international commercial arbitral system will be undermined by judicial review in which the factual findings of a tribunal are re-agitated and gone over in the name of natural justice, in circumstances where the hearing or reference has been conducted regularly and fairly. That danger is acute if natural justice is reduced in its application to black-letter rules, if a mindset appears that these rules can be ‘broken’ in a minor and technical way and if the distinction between factual evaluation of available evidence and a complete absence of supporting material is blurred.

In this particular case, the application made by the plaintiff was:41 a disguised attack on the factual findings of the arbitrators dressed up as a complaint about natural justice.

From a practical view, the court identified what is required to trigger the requirement, noting that:42 An international commercial arbitration award will not be set aside or denied recognition or enforcement under Arts 34 and 36 of the Model Law (or under Art V of the New York Convention) unless there is demonstrated real unfairness or real practical injustice in how the international litigation or dispute resolution was conducted or resolved, by reference to established principles of natural justice or procedural fairness. The demonstration of real unfairness or real practical injustice will generally be able to be expressed, and demonstrated, with tolerable clarity and expedition. It does not involve the contested evaluation of a fact-finding process or ‘fact interpretation process’ or the factual analysis of asserted ‘reasoning failure’, as was argued here.

In Emerald Grain v. Agrocorp, the plaintiff asked the Federal Court to set aside an award under Article 34(2)(b)(ii) of the Model Law on the ground that the award conflicted with Australian public policy.43 Section 19 of the IAA clarifies that an award will conflict with public policy for the purpose of Article 34(2)(b)(ii) if a breach of the rules of natural justice occurred in the making of the award. The parties fell into dispute over a delivery of canola. Agrocorp commenced and won at arbitration. Emerald sought to have the award set aside for a breach of the rules of natural justice. It argued there was no evidence of probative value before the tribunal to make the findings made (‘no evidence rule’) and the tribunal based its findings on its own opinions and ideas without giving Emerald adequate notice to argue its case (‘no hearing rule’).44

41 [54]. 42 [55]. 43 Emerald Grain Australia Pty Ltd v. Agrocorp International Pte Ltd (2014) 314 ALR 299. 44 [5].

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The applicant failed on both counts with Pagone J confirming that the court must be vigilant not to allow a party to run a merits review through the backdoor.45 His Honour further confirmed that an arbitral award will not be viewed in the same way as a reasoned court decision, as a court’s role to ensure compliance with the rules of natural justice is supervisory only – there is no expectation that an arbitral award must analyse every argument put before the tribunal and identify all facts by reference to the supporting evidence.46 The ‘curial caution’, which must be applied when assessing natural justice and public policy arguments, was recognised in a recent decision of the Supreme Court of Western Australia in Spaseski v. Mladenovski.47 In that case, a builder sought to resist the enforcement of two arbitral awards,48 and have them set aside,49 on the basis that, inter alia, the recognition or enforcement of the awards would be against the public policy of Western Australia. In rejecting the builder’s application, the Supreme Court cautioned against ‘so-called natural justice or procedural fairness arguments … fashioned to pass through the narrow dimensions of a local public policy gateway’. Further, it highlighted that the requirement under Article 18 of the Model Law, which provides that a party must be given a reasonable opportunity to present its case, ‘is clearly not unqualified, open ended or unlimited’.To that end, the Supreme Court identified that:50 … what will amount to a ‘reasonable’ opportunity to present a party’s case must depend upon the invariably unique presenting circumstances of each and every distinct arbitral dispute.

Enforcing foreign arbitration awards in Australia Section 8(1) of the IAA provides that a foreign arbitral award is binding on the parties to the arbitration agreement in pursuance of which it is made. The IAA provides that a foreign award may be enforced in a court of a state or territory or in the Federal Court, as if the award were a judgment or order of those courts.51 Section 8(3A) further provides that an Australian court may only refuse to enforce a foreign arbitral award where a ground to resist enforcement is proved under Section 8(5) or Section 8(7). These grounds largely reflect those in Article V of the New York Convention and Article 36 of the Model Law (which, in the context of setting aside an award, are the same as those in Article 34 of the Model Law, set out above). There have now been numerous cases concerning the grounds to refuse enforcement. The logic from these cases will be applied equally in the context of setting aside an award because the basis for challenging the enforcement of an award and setting an award aside have effectively been the same since 2011.

45 [10]. 46 [16]. 47 [2019] WASC 65, [59] and [61]. 48 Pursuant to ss 36(1)(a)(ii) and 36(1)(b)(ii) of the WA CAA. 49 Pursuant to ss 34(2)(a)(ii) and 34(2)(b)(ii) of the WA CAA. 50 [58]. 51 International Arbitration Act 1974 (Cth) Section 8(2)–(3).

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Third parties to the arbitration agreement Under Article V of the New York Convention and Section 8(5) of the IAA, a court may refuse to enforce a foreign award if a party proves (inter alia), to the satisfaction of the court, that it was not able to present its case or the award did not deal with a difference falling within the submission to arbitrate.52 These grounds were the focus of the Victorian Court of Appeal in IMC Aviation Solutions Pty Ltd v. Altain Khuder LLC,53 a case concerning the enforceability of a foreign award against an Australian company who was not a party to the arbitration agreement. However, this case was ultimately decided by reference to an issue which was considered a precondition to determining whether one of the grounds in Article V of the New York Convention had been made out, namely whether the awarded debtor was a party ‘to the arbitration agreement in pursuance of which it was made’ (Section 8(1) of the IAA). The case also considered the onus of proof which the award creditor needed to satisfy in respect of this precondition. The respondent was incorporated in Mongolia.54 It entered into an operations management agreement (OMA) with IMC Mining Inc (IMCM), a company incorporated in the British Virgin Islands. IMCM executed a consulting agreement with a related Australian company, IMC Mining Solutions Pty Ltd (IMCS) to perform some of its obligations under the OMA. Altain terminated the OMA and commenced an arbitration in Mongolia under the OMA. An arbitral tribunal awarded in excess of $6 million to Altain with IMCM (a party to the arbitration agreement and arbitration) and IMCS (a non-party to the arbitration agreement and arbitration) named as entities responsible to pay the award to Altain. Altain successfully enforced the award against both companies in the Supreme Court of Victoria.55 During the hearing IMCS, which was not a party to the arbitration agreement or arbitration, argued that before it needed to address whether enforcement should be refused under Article V of the New York Convention (being Section 8(5) and (7) of the IAA and Article 36 of the Model Law), the award creditor had to prove that it was a party to the arbitration agreement. At first instance, the judge held that the onus of proving that there was a ground justifying a refusal to enforce rested with the award debtor.56 This burden, he noted, was a ‘heavy’ one, particularly in light of the pro-enforcement and pro-arbitration environment the IAA and New York Convention exemplify.57 IMCS, which was not a party to the arbitration agreement or the arbitration, appealed. The other award debtor, IMCM, did not. One of the key grounds of appeal concerned the question of onus.58 IMCS argued that the legal onus fell on the award creditor to prove that it was a party to the arbitration agreement. If this was not established then there was no entitlement to enforce and therefore it was unnecessary to consider whether any of

52 53 54 55 56 57 58

An equivalent ground is contained in Article 36(1)(a)(iii) of the Model Law. (2011) 38 VR 303. The facts are set out in the joint judgment of Hansen JA and Kyrou AJA at [79]–[115]. Altain Khuder LLC v. IMC Mining Inc (2011) 276 ALR 733. (2011) 276 ALR 733, [60]–[61] (at first instance). (2011) 276 ALR 733, [61]–[62], [88] (at first instance). (2011) 38 VR 303, [125].

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the grounds for a refusal to enforce had been made out. Altain argued that once the award creditor had produced to the Court duly authenticated originals or certified copies of the award and arbitration agreement (a precondition to enforcement stipulated by Section 9 of the IAA, consistent with Article IV(1) of the New York Convention), the onus shifted to the award debtor. The majority confirmed that the award creditor, in its capacity as the party invoking the court’s jurisdiction, bears the evidential onus of satisfying the court, on a prima facie basis, that the court has jurisdiction to make the order to enforce the foreign arbitral award.59 Once this precondition is met, the court may only refuse to enforce an award where the award debtor proves a ground stipulated in Article V of the New York Convention exists.60 Further, there could be no prima facie proof that IMCS was a party to the arbitration agreement if, on the face of the arbitration agreement and award, the person against whom the award was made was not a party to the agreement.61 This is consistent with the House of Lords decision in Dallah.62 In a dissenting judgment, the Chief Justice determined that Section 8(3A) circumscribes the defences open to an award debtor once the ‘preliminary burden’ has been met;63 that is, the threshold question under Section 8(1). Her Honour was not persuaded by the overseas decisions on point (which supported the majority) and construed the IAA according to the strict rules of statutory interpretation to arrive at a different position. While the court was split, the reasoning of the majority seems more appealing: it is based on similar approaches taken internationally, and consistent with the purpose of both the IAA and international arbitration generally. It is therefore likely to be followed, or at least be persuasive, in future cases heard in the region. The majority also made interesting findings in relation to onus. At first instance, Croft J held that the award debtor faces a heavy onus to prove that one of the grounds for refusing enforcement was made out.64 The majority held that the reasoning was incorrect; in the absence of express words to the contrary, the appropriate onus is the balance of probabilities.65 Croft J, their Honours held, unnecessarily imposed a higher burden than that required under these provisions.

Resisting enforcement on the grounds of public policy As is addressed above, a party can apply to have an award set aside on the ground that it offends public policy under Article 34(2)(b)(ii) of the Model Law. In addition, Section 8(7) (b) of the IAA provides the same ground to resist enforcement of a foreign arbitral award. It is the equivalent to Article V(2)(b) of the New York Convention. While the exception

59 60 61 62

(2011) 38 VR 303, [134]. (2011) 38 VR 303, [134]. (2011) 38 VR 303, [138]. Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs of the Government of Pakistan [2011] 1 AC 763. 63 (2011) 38 VR 303, [40]. 64 (2011) 276 ALR 733, [61]–[62], [88] (at first instance). 65 (2011) 38 VR 303, [192].

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under the New York Convention was only intended to apply in narrow and exceptional circumstances, unfortunately it has been applied in wider circumstances than expected in some non-Australian jurisdictions. To clarify the operation of the public policy exception in the IAA, the federal legislature inserted Section 8(7A) into the IAA. This section provides, non-exhaustively, that the enforcement of a foreign award is against public policy if the making of the award is induced or affected by fraud or corruption, or a breach of the rules of natural justice occurred in the making of the award. In 2014, the Full Federal Court in TCL Air Conditioner (Zhongshan) Co Ltd v. Castel Electronics Pty Ltd determined that, in the context of Article V of the New York Convention, Article 34 and Article 36 of the Model Law, and lastly, Section 8(7A) of the IAA, the public policy is very much restricted to fundamental issues of justice and morality.66 This sets a high bar to relief and rests comfortably with the approach adopted in the leading United States decision of Parsons.67 It has been, and will continue to be, a persuasive case for decisions that follow.68

66 (2014) 232 FCR 361. 67 Parsons & Whittemore Overseas Co Inc v. Societe Generale de l’Industrie du Papier (RAKTA) 508 F 2d 969 (2d Cir 1974). 68 See for example Sauber Motorsport AG v. Giedo Van Der Garde BV and Others (2015) 317 ALR 786.

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30 Construction Arbitration in Turkey Serdar Paksoy and Simel Sarıalioğlu1

Turkey’s construction industry The construction industry is the driving force for many economies across the world, and in Turkey its impact is even more significant. Despite the recent slowdown in economy, the country remains an important regional power and is active in bilateral relations and at international platforms. Being a G20 Member State, Turkey has the 21st largest economy, the 31st largest export economy and the 52nd most complex economy in the world, according to the Economic Complexity Index. Among a variety of prominent industries that boost the economy such as textile, agriculture, manufacturing and tourism, the field of constriction has long been the powerhouse of Turkey and sustains its position as the locomotive of the economy. Contributions from the construction field are apparent from the figures as the industry’s employment ratio is 8 per cent and its gross domestic product ratio is 10.9 per cent pursuant to most recent indexes. The Turkish construction industry is not only influential locally, it is also one of the most competitive and dynamic industries worldwide. Thirty-eight Turkish construction companies are ranked on the list of Engineering News Record 2018 Top 250 International Contractors – eight of them ranked among the top 100. Such rankings put Turkey in second place only behind China in terms of the number of contracting companies, which are building projects with the largest volume across the world. Operations of Turkish contractors are spread widely, over 100 countries, the majority of which are in Russia and CIS countries, the Middle East and North Africa. The Turkish government provides full support to the industry by introducing various incentives with the aim of improving international competitiveness and integrating regional potential to the national economy. Within this scope, a number of incentives such as VAT

1

Serdar Paksoy is senior partner and Simel Sarıalioğlu is a counsel at Paksoy.

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exemption, exemption from customs duty, tax reduction, social security premium support for contract giver’s share, interest support, social security premium support (employee’s share), income tax withholding, allocation of the place for investment and VAT refund are granted by the Turkish government. The infrastructural transformation of major cities in Turkey is also one of the reasons for the rise of the construction industry. During 2006–2017, the amount of infrastructure investments totalled US$144 billion in Turkey. The Republic of Turkey Prime Ministry Investment Support & Promotion Agency of Turkey (ISPAT) foresees a rapid increase in the infrastructure and public private partnerships until 2023. According to project calculations by ISPAT, the estimated value of the infrastructure and PPP projects are almost US$325 billion.2 In the light of the statistics of the General Directorate for Infrastructure Investment of the Ministry of Transport, Maritime Affairs and Communication, five major railway projects, 21 port projects and 16 airport projects have been completed in the past 11 years; 21 railway projects and 14 airport projects are pending; and 15 port projects are in tender processes. One of the most recent and largest projects completed is the new Istanbul Airport, which became partially active at the end of 2018 and aims to be the largest airport hub in Europe when fully activated. Other major infrastructure projects in the line in Istanbul are: • Canal Istanbul Project at a cost of US$15 billion; • Haydarpas¸a Port Project at a cost of US$5 billion; • Istanbul Finance Centre Project at a cost of US$4.5 billion; • Three-Level Subsea Tunnel Project at a cost of US$3.5 billion; • Ataköy Marina Project at a cost of US$1.5 billion; and • Haliç Port Project at cost of US$1.4 billion. Similar projects are being carried out all around Turkey by various governmental authorities. Further to these, the Ministry of Health is supervising 31 hospital projects, which are to be implemented under the PPP model as well. As one can derive, the achievements gained in the construction sector are not of spontaneous nature. As well as the government’s support to the industry, the legal framework in relation to construction contracts is also being adapted to the rapidly changing dynamics of the industry. In addition, there is a relatively established case law as to construction disputes, especially owing to the decisions by the 15th Chamber of the Court of Cassation, which has handled the appellate review of construction disputes of all kinds for many years regardless of whether they are contractual disputes or construction arbitration-related issues. The same goes for the arbitration regime. Although issues such as public policy and national courts’ overstep in enforcement proceedings come to the surface in intervals, overall arbitration is always developing in Turkey. Turkey is also showing the utmost effort to align itself with the rest of the world and become a more pro-arbitration jurisdiction. As the most prominent development the Istanbul Arbitration Centre (ISTAC) has been significantly active in both the domestic and international fields since its establishment in 2015. Furthermore, the government also promotes arbitration as a dispute resolution 2 www.invest.gov.tr/en-US/infocenter/publications/Documents/INFRASTRUCTURE.INDUSTRY.pdf.

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mechanism by encouraging governmental authorities to choose arbitration in their contracts. In line with the government’s efforts, the Turkish Public Procurement Authority amended the standard contracts annexed to the Regulations on the Implementation of Public Procurements, and, effective as of 19 January 2018, public administrations are now entitled to choose between national courts and arbitration to resolve the disputes arising out of the execution of public procurement agreements regardless of foreign element.

Legal framework for construction contracts in Turkey Relevant legislation There are no standalone regulations with respect to construction contracts. The legal framework for construction contracts and other relevant legal issues are set forth under numerous pieces of legislation: • the main legislation is the relevant provisions of the Turkish Code of Obligations No. 6098 (TCO), namely, Articles 470–486 under the ‘Agreement for Work’ Section. While these provisions are being applied to all types of agreements for work, they are applicable for construction contracts that fall under the scope of agreement for work. Most of these provisions are not mandatory, and the freedom of contract principle governs the implementation. Usually, construction contracts are drafted in a detailed way and are not silent in relation to the contractual terms. However, in circumstances where the contract is silent, the relevant provisions of the TCO, as the general legislation, and other relevant laws shall apply; • issues such as the right of construction (superficies right) and ownership following the completion of the construction are regulated under Turkish Civil Code No. 4721; • Zoning Law No. 3194 regulates all planning activities and structures to be constructed inside and outside municipal boundaries, urban land project areas, cadastral records and boundary conflicts; • Environment Law No. 2872 governs general binding factors in construction contracts, such as licences and permits, environmental standards and rules that should be obeyed in construction plans and projects; • in construction works of government institutions, the following laws may also apply depending on the nature of the construction project and contracting governmental authority: • Public Procurement Law No. 4734 and State Bidding Law No. 2886, which govern tenders of governmental authorities; • Law No. 3996 on Commissioning Certain Investments and Services within the Framework of Build-Operate-Transfer Model, which is applicable for build-operatetransfer projects and construction works that are based on special know-how and high expense; and • Law No. 6428 on Construction, Renovation and the Purchase of Services by the Ministry of Health by way of the Public–Private Partnership Model and Amendments to Certain Laws and Decrees with the Force of Law, which is applicable for Ministry of Health’s public private partnership construction and renovation projects.

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General characteristics of a construction contract (form requirements and parties) A construction contract is an onerous, consensual, instantly executional and innominate agreement. Under Turkish law, there are no specific form requirements for the validity of a construction contract; yet, in practice, in particular for large-scale construction projects, the parties often execute written contracts and sometimes in official form.3 Parties may either incorporate into their contract internationally recognised forms such as International Federation of Consulting Engineers (FIDIC), the New Engineering Contract (NEC) terms, or agree on their own conditions and terms based on the necessities of the project. Only certain agreements require specific form requirements or specific requirements for validity of certain clauses, such as an arbitration clause. The parties to a construction contract are the contract giver and the contractor. Under Turkish law, consortiums and joint ventures may also be a party to a construction contract. In general, the contractor is free to subcontract the construction. In situations where the construction contract restricts subcontracting or the work is based on the personal skills of the contractor, such as in cases where the contract giver has special benefit in construction work that will be specifically done by the contractor and not by a third person, or the work includes properties that depend on the contractor itself, the contractor may not subcontract the construction.4

Obligations of the parties Obligations of the contractor (TCO Articles 471–474) In general, the contractor has the obligation and responsibility of performance of the work undertaken. Along with its contractual obligations to perform in compliance with the construction contract, the contractor has the following obligations arising from the TCO: • the contractor shall comply with the delivery schedule while performing the work; • damages and expenses that might arise due to delays are under the responsibility of the contractor; • the performance shall also be in compliance with the required permits and land rights, as well as with relevant health and safety regulations and social security obligations. Liability of the contractor persists for failures regarding breach of such permits and rights; • the principle of care is essential along with the principle of loyalty while fulfilling this duty. A reasonable standard of care is expected from the contractor, and the contractor shall protect and regard the interests of the contract giver and shall not act against the contract giver’s benefit; and

Eren, Fikret, Borçlar Kanunu Açısından İnşaat Sözleşmeleri, İnşaat Sözleşmeleri (Construction Contracts in respect of the Code of Obligations), Banka ve Ticaret Hukuku Araştırma Enstitüsü, Third Edition (1996), p. 57. 4 Selimoğlu,Yaşar Engin, Eser Sözleşmesi (Contract for Work), Ankara (2016), pp.101–103.

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• according to Article 471/3 of the TCO, unless agreed otherwise, the contractor shall provide its own equipment and supplies, and the expense to accrue therefrom cannot be added to the price determined in the agreement. When it comes to the issue of subcontracts, essentially it should be noted that subcontractors are not a third party of the main construction contract. Unless provided otherwise in the main agreement, the contract giver does not have any obligation arising from the contract between the contractor and the subcontractor. However, in case of a failure to pay social security payments of the employees, the related amount might be directly claimed from the contract giver in accordance with Article 12/6 of Social Security Act No. 5510. The contract giver may give recourse to the contractor for the reimbursement of the payment. The contractor has the liability of services, equipment and material payment to each subcontractor, and the contractor should notify the contract giver at the occurrence of any dispute. It is the contractor’s duty to ensure that the subcontract is consistent with the terms and conditions of the main contract.

Obligations of the contract giver (TCO Articles 479–481) The main duty of the contract giver is the payment of the price. The parties may freely determine the payment method of the contract price, for example, as lump sum or as unit price under the agreement. For the lump sum, the payment is previously fixed as an exact amount. Even if the work costs more than the agreed fixed price, or more work is required to complete the project, the contractor has to complete the work undertaken and cannot request more than the amount agreed. In order to balance the parties’ rights and obligations,Turkish law provides that in case of unanticipated and unforeseeable conditions, upon a request by the contractor, the court might exceptionally decide to raise the lump-sum price or terminate the contract depending on the specifics of each case. The contract price may also be determined as a unit price, or in other words as a bill of quantity. The TCO states that in circumstances where the consideration price is not previously determined, it will be fixed based on the work and expenses undertaken by the contractor. In cases of partial performance, as a rule, pursuant to Article 484 of the TCO, provided that the consideration of the partial work is paid and all the damages of the contractor are compensated, the contract giver may terminate the contract. In return of the partial payment, the contract giver may request delivery of partial work performed by the contractor.5

General conditions for validity of an arbitration clause under Turkish law, and arbitrability of construction contracts Conditions for validity of an arbitration clause Under Turkish law, validity of arbitration clauses are regulated under Turkish Civil Procedure Law No. 6100 (CPL), which applies to domestic arbitration proceedings and Turkish International Arbitration Law (IAL) for disputes involving a foreign element. Both

5

Eren Fikret, ‘İnşaat Sözleşmesinin Sona Ermesi’ (Termination of Construction Contract), BATIDER No. 381, Ankara (1996), p. 95.

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laws are mostly based on the UNCITRAL Model Law on International Commercial Arbitration. According to Article 412 of the CPL and Article 4 of the IAL, as a condition for validity, arbitration agreements must be in writing and an agreement shall be deemed in writing if it is contained in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of telecommunication, or in an exchange of statements of claim and defence in which the existence of an agreement is alleged by one party and not denied by another. Another essential element for the validity of an arbitration clause is the parties’ clear and precise intention to arbitrate their disputes. According to established practice of the Court of Cassation, an arbitration clause must be clear and precise; in other words, the parties’ consent to arbitrate must be clear and most specifically there must not be an optional choice of court proceeding.6 The 15th Civil Law Division of the Court of Cassation has established this approach by the rendering consistent decision for years and recently rendered a judgment to consolidate its previous decisions in 2017.7 The other conditions for the validity of an arbitration clause under Turkish law are that: • the arbitration clause should relate to an existing relationship;8 and • if a contract containing an arbitration clause is signed by a representative of a party, the proxy given to the representative should include an express authority for the representative to sign an arbitration clause on behalf of such party.9 Further to the above, regarding general conditions for the validity of an arbitration clause under Turkish law, additional conditions may be required in relation to an arbitration clause contained in a contract executed by a governmental authority. This is because, in principle, all the contracts of a governmental authority are considered as administrative contracts and administrative contracts cannot contain an arbitration clause unless otherwise provided by laws. Therefore, disputes arising from administrative contracts may only be resolved by administrative courts.To this effect, it is important to check whether any relevant legislation allows a governmental authority to execute a contract that contains an arbitration clause.

Arbitrability There are limits to arbitrability under Turkish law. According to Article 1 of the IAL and Article 408 of the CPL, disputes regarding rights in rem (real rights) on immovable properties in Turkey and disputes that are not subject to the will of both parties are not arbitrable. In principle, disputes arising from construction contracts are arbitrable under Turkish law. Nevertheless, the Court of Cassation decided that, although relevant to a construction contract, disputes in relation to cancellation and registration of title deed are not

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Court of Cassation 15th Civil Law Division, 22 May 2015, No. 2015/2198-2758; 15th Civil Law Division, 1 July 2014, No. 2014/3330-4607; 19th Civil Law Division, 29 May 2012, No. 2012/4065-9080; 11th Civil Law Division, 13 April 2006, No. 2005/4053-4040; 11th Civil Law Division, 12 April 2005, No. 2004/6686-3600; 11th Civil Law Division, 10 June 2002, No. 2002/2228–5894. Court of Cassation 15th Civil Law Division, 23 January 2017, No. 2016/4735-259. Article 4 of IAL. Article 503 of TCO.

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arbitrable.10 In another dispute regarding division of flats in a construction that has been done on the basis of a construction contract in return for flats, the Court of Cassation decided that the dispute was not arbitrable because it related to title deed registration.11 Consequently, as it is established by the practice of the Court of Cassation, construction disputes that relate to land registry (i.e., registration, revocation of a right, etc.) are likely to be considered as subject to exclusive jurisdiction of the national courts.

Multi-tier arbitration clauses in construction contracts Construction contracts are, by nature, complex contracts and tend to be made even more complex by the involvement of additional parties, especially government authorities and depending on the scale of the project. As one can anticipate, the more complex a construction contract becomes, the more multifaceted disputes arise throughout the implementation and after the finalisation of the project. In large-scale construction projects that are built in Turkey, parties often have disputes but only a small number of these disputes end up in arbitration. In practice, Turkish contract givers and contractors have familiarised themselves with pre-arbitration procedures such as engineer, dispute adjudication board (DAB), mediation, etc., and the successful exhaustion of these procedures, as well as the parties’ efforts to avoid disputes, positively affect the number of disputes that proceed to court or arbitration proceedings. The Turkish Court of Cassation has dealt with the issue of multi-tier arbitration clauses on different occasions. The High Court approached the issue from validity perspective and examined the effect of multi-tier dispute resolution clauses on the validity of the arbitration clause, and as a result decided that multi-tier dispute resolution clauses are valid under Turkish law. It is the parties’ right arising from their contract to first wait for the exhaustion of the pre-arbitration procedures.12 In a decision dated 17 December 1987, the 15th Civil Law Division of the Court of Cassation discussed the effect of a multi-tier path on the validity of the arbitration clause. The Court came to the conclusion that if parties apply to mediation, reconciliation, engineer or another expert to settle their disputes but fail to find an amicable way, then they may commence arbitration as a last resort. The fact that the parties apply to pre-arbitration procedures before arbitration does not impede the validity of the arbitration clause. In principle, the Court of Cassation looks for an undisputable will of the parties to refer their disputes to arbitration. As stated above, the clauses that provide the parties with the options to litigate or arbitrate are deemed invalid by the Court of Cassation. On the other hand, according to the Court of Cassation, multi-tier arbitration clauses that enable the parties to apply to mediation, engineer, etc., before arbitration do not jeopardise the will of the parties to arbitrate.13

10 11 12 13

Court of Cassation 15th Civil Law Division, 18 June 2007, No. 2680/4137. Court of Cassation 15th Civil Law Division, 13 December 1990, No. 4306/5400. Akıncı, Ziya, Milletlerarası Tahkim (International Arbitration), Fourth Edition, Istanbul 2016, p. 105. Court of Cassation 15th Civil Law Division, 17 December 1987, No. 3643/4505; Ekşi, Nuray, Tahkim Öncesi Uyuşmazlık Çözüm Usulleri ve Bu Usuller Tüketilmeden Tahkime Başvurulmasının Sonuçları (Pre-Arbitration Procedures and Consequences of Commencing Arbitration Without Exhausting These Procedures), Istanbul (2015), p. 47.

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In a Commercial Court decision that was approved by the Court of Cassation, the Commercial Court stated that: as stated in the agreement, the dispute shall firstly be referred to the engineer before initiating arbitration proceedings and settled by the engineer. After the engineer delivers his decision, the parties can apply to arbitrator if they desire to do so. However, this provision does not invalidate the arbitration clause. Regardless of the parties’ application to the engineer, the dispute shall be ultimately resolved by arbitrators.The pre-arbitral procedure [recourse to engineer before arbitrator] and the decision given by the engineer are not binding for the parties.The dispute should be resolved by the arbitrator as the relevant clause [application to the engineer] does not invalidate the arbitration clause.14

In a case regarding extending the duration of a construction contract executed as per the FIDIC Red Book (1987), where the Turkish courts had competence to hear disputes arising from such contract, the Court of Cassation decided as follows: it is a known fact that under FIDIC Contracts claims for time extension are subject to strict form requirements and the request for time extension can be examined in case the form requirements are complied with. Besides, as per Article 287 of Code of Civil Procedure, the Clauses 44, 53 and 67 of the contract are accepted as an evidence agreement between the parties … This being the case, the first claims of the plaintiff should be examined and evaluated as per Articles 44 and 53.3 of the contract, and the claims where one submission was made should be considered as per Articles 53.4 and 67 of the contract.15

In this case, the Court of Cassation acknowledges that in the event the parties agreed to finally settle their disputes by arbitration, the relevant clauses for referring to the decision of engineer are considered as conclusive evidence for the judicial authority rather than a step before arbitration or litigation.This is because the engineer, who is provided for by the FIDIC conditions of contract, undertakes a task to try to overcome technical and similar difficulties that may arise due to construction, as an official mediator or intervener incumbent without the title of arbitrator.16

Enforcement of arbitral awards Foreign arbitral awards The main piece of legislation on the enforcement of arbitral awards in Turkey is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards dated 1958 (NY Convention). An arbitral award resolved in a contracting state would be enforceable in Turkey under the NY Convention. In addition, International Civil and Procedural Law No. 5718 (Law No. 5718), provisions of which are parallel to those of the NY Convention, applies if the award is issued in a non-contracting state of the NY Convention. 14 Istanbul 5th Commercial Court of First Instance, 12 October 1994, No. 1994/571 E., 1994/1212 K. (approved by Court of Cassation 15th Civil Law Division, 7 February 1995, No. 295/578). 15 Court of Cassation 15th Civil Law Division, 17 September 2002, No. 2001/5595 E., 2002/3931 K. 16 Köksal, Tunay, International Construction Law, Ankara (2013), p.180.

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In order to enforce a foreign arbitral award in Turkey under the NY Convention, the claimant party must seek an enforcement decision from a Turkish court. Principle of revision au fond is accepted by the national courts, in other words the court’s examination of the application is limited to the procedural issues, or requirements, set forth in the NY Convention; thus, the court is not allowed to review or re-examine the merits of the case. Such pro-arbitration approach of national courts has been consolidated with a recent decision rendered by the Regional Court of Appeal. In a recognition and enforcement claim, where the application of law by the arbitrators was in question, the Court stated that no review of the merits could be made, and that no arguments could be heard as to whether the arbitrators had correctly applied Turkish law concepts. The court further reiterated that the action to enforce a foreign arbitral award permits no evaluation or determination as to the merits of the dispute, and that only those grounds enumerated in the 1958 New York Convention can be invoked.17 Moreover, since Turkey is also party to Convention on the Settlement of Investment Disputes Between States and Nationals of other States (the ICSID Convention) the arbitral awards that are rendered under the ICSID Convention may be enforced in Turkey without the necessity of obtaining an enforcement decision from Turkish courts.18

Domestic arbitral awards The enforcement of arbitral awards issued by an arbitral tribunal sitting in Turkey is subject to two different laws. Provisions of the IAL apply to arbitral awards issued in Turkey with a foreign element or in cases where the provisions of the IAL have been adopted by the parties or the arbitral tribunal. For arbitral awards without a foreign element within the meaning of the IAL, the provisions of the CPL shall be applicable. As per Article 15 of IAL, only an annulment action (action to set aside) can be initiated against an arbitral award rendered in Turkey. The grounds to set aside the arbitral award mostly resemble those set forth in the UNCITRAL Model Law on International Commercial Arbitration and the NY Convention. Accordingly, an arbitral award can be set aside if the requesting party proves that: • the counterpart to the arbitration agreement does not have the capacity to sue or the arbitration agreement is not valid according to the law chosen by the parties to apply to the arbitration agreement, or according to Turkish law if the parties did not choose any applicable law; • the procedure of appointment of arbitrators agreed by the parties has not been followed; • the award has not been given within the time frame determined for proceedings; • the arbitral tribunal lacked jurisdiction, or wrongfully declined its jurisdiction; • the award is not related to the subject matter of the arbitration agreement or the award does not embrace all issues that referred to arbitration, or was made in excess of powers;

17 The Regional Court of Appeal 14th Civil Chamber, 11 October 2018, No. 2018/130 E., 2018/1042 K. 18 Ekşi, Nuray, Recognition and Enforcement of ICC Arbitral Awards in Turkey under the Judgments of the Court of Cassation, 25 November 2008, International Seminar on the International Chamber of Commerce-ICC Arbitration, held in the Istanbul Chamber of Industry.

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• the arbitration proceedings were not conducted according to the agreement of the parties, or, in absence of such an agreement, with the provisions of the IAL, and this default affects the substance of the award; • the rule of equality of the parties was not complied with; or • if the court ascertains that: • under Turkish law, the dispute is not arbitrable; or • the award is in breach of public policy. Among the conditions cited above, experience shows that parties often rely on public policy issues in actions for setting aside. Public policy is a controversial issue in Turkish arbitration practice, as it is in many other jurisdictions, since there is no precise definition of public policy under Turkish arbitration laws. According to the prevailing opinion in the legal writings, the breach of public policy should be explicit19 and while determining whether or not there is a breach of public policy, the judge should use his or her discretion to prevent irreparable harm. The judge should use his or her discretion by taking into consideration the specifics of each case. To that effect, the breach of public policy should be explicit and should be evaluated as a norm that is beyond systematic differences.20 In general, public policy is defined as the set of rules that determines the fundamentals of a society in respect of political, social, economic, moral and legal issues and that protects fundamental interests of the society.21 When it comes to international arbitration, the judge should apply criteria that would suit the practice of international arbitration rather than domestic litigation.22 The decision of the General Assembly on the Unification of Judgments of Court of Cassation, which is a binding decision for all levels of Turkish courts, dated 10 February 2012, 2010/1 E, 2012/1 K, sets important guidelines for the courts in determining a breach of public policy and states that: whether or not the actual consequences of enforcing a foreign court decision would breach Turkish policy public should be evaluated, one should not evaluate the law applied in the foreign court decision and the criteria taken into account in the application of such law ...The enforcement of foreign court decision should be rejected if the consequences that will arise as a result of enforcement would breach Turkish public policy. One cannot examine whether the law applied to the merits of the foreign court decision breaches Turkish public policy ... In most cases, it would be deemed that a breach of a mandatory rule of Turkish law would constitute a breach of Turkish public policy; however, it is not possible to say that all foreign court decisions which violate a mandatory Turkish law rule would also violate Turkish public policy.

19 Gökyayla, Cemile Demir,Yabancı Mahkeme Kararlarının Tanınması ve Tenfizde Kamu Düzeni (Public Policy in Recognition and Enforcement of Foreign Court Decisions), First Edition, Ankara (2001), p. 135. 20 Tanrıver, Süha, Makalelerim (My Articles) (1985–2005), First Edition, Ankara (2005), pp. 111–112. 21 Tanrıver, pp. 110–111; S¸anlı, Cemal, Uluslararası Ticari Akitlerin Hazırlanması ve Uyus¸mazlıkların Çözüm Yolları (Preparation of International Contracts and Settlement of Disputes), fifth edition, Istanbul 2013, p. 394; Şanlı, Cemal, Milletlerarası Ticari Tahkimde Esasa Uygulanacak Hukuk (Law Applicable to Merits of the Dispute in International Arbitration), Istanbul 1986, p. 379; Çelikel, Aysel, Milletlerarası Özel Hukuk (Genel Kurallar) (International Private Law, General Rules), Istanbul (1984), p. 175. 22 Akıncı, p. 281.

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In a much-debated decision of the 13th Civil Chamber of the Court of Cassation,23 the high court evaluated an appeal that was lodged in accordance with Article 15 of the IAL, and examined an arbitral award that was against the favour of three Turkish governmental authorities.This decision is relevant to parties that sign a contract with Turkish governmental authorities because: • the arbitral award that was examined in this decision was between a Turkish global system for mobile communications (GSM) operator and three Turkish governmental authorities; • the place of arbitration was Istanbul. The arbitration was governed by International Chamber of Commerce (ICC) Rules and the IAL; • the underlying dispute arose from a concession agreement signed between the GSM operator and a governmental authority; • the arbitral award dealt with whether or not certain income items of the GSM operator fall within the base of the monthly payment that the GSM operator had to make to the state entities in accordance with the concession agreement; • the arbitrators awarded that the disputed income items did not fall within the base of the monthly payment that the GSM operator had to make to the state entities; • the state entities filed an action for setting aside the arbitral award on the grounds that the award breached Turkish public policy; • the local court dismissed the requests of the state entities and decided that there was no breach of public policy; and • the Court of Cassation, which reviewed the file upon the appeal application, decided that ‘the arbitral award is against Turkish public policy because it is against the characteristics of the concession agreement, the Turkish State’s purpose of generating a continuous income, mandatory rules of law and public interest.’ In reaching this conclusion, the Court of Cassation stated that: in case there are objections raised by one of the parties in relation to a breach of public policy, it may be necessary to analyse the merits of the arbitral award in part in order to evaluate the public policy issues.

This decision has been severely criticised in the legal writings. It is stated by one of the eminent scholars on Turkish international arbitration practice that: the issues discussed within the decision relate to the merits of the arbitral award and they are out of scope of the action to set aside. In addition, the use of breach of public policy to review the merits of the arbitral award does not fit the interest which is sought to be protected with the concept of public policy.24

23 13th Civil Law Division of the Court of Cassation dated 23 February 2016, No. 2013/16287 E., 2016/5292 K. 24 Akıncı, pp. 282–285.

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This was not the first time the 13th Division relied on the same reasoning to examine the merits of an arbitral award in part. In the decision dated 9 July 2015, No. 2014/27460 E, 2015/23707 K, in relation to enforcement of a foreign arbitral award (ICC award), 13th Division reversed the decision of the first instance court on the basis that: in order to determine whether or not the foreign arbitral award, enforcement of which is sought, breaches Turkish public policy, and therefore, to determine whether the award can be enforced in Turkey, the concrete case should be analysed from a tax law perspective.Therefore, the local court had to obtain an expert report from a panel of three tax law specialists.

The Court of Cassation quoted the above-mentioned reasoning in this decision as well. Therefore, the explanations above in relation to public policy in annulment actions also prevail for the public policy criteria in enforcement of foreign arbitral awards as the Court of Cassation applies more or less the same public policy criteria for both proceedings.

Conclusion Construction is a significant driving force for the Turkish economy and the government puts the utmost effort into maintaining growth in the construction industry, and into fostering it further. Applicable legislation is being adapted in order to keep up with the ever-changing dynamics of the industry. As arbitration is by far the preferred dispute resolution mechanism of both domestic and international actors of construction industry, providing an arbitration-friendly jurisdiction, which is in line with the global trends, is the main objective of both the government and the lawmakers. Despite the controversial decisions referred to above, their number is negligible in comparison to pro-arbitration decisions and the Court of Cassation’s positive approach grows stronger. All in all, it is safe to say that Turkey is rapidly evolving into an international hub for not just construction disputes but for general commercial disputes.

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31 Construction Arbitration in the MENA Region Mohamed S Abdel Wahab1

Introduction The MENA region, from the Arabian Gulf to the Atlantic Ocean, has witnessed progression and development in the construction industry and infrastructure projects over the past two decades.2 Statistics show that foreign direct investment in the region is growing fast,3 with disputes reaching US$91 million in 2017.4 Construction disputes commonly rank at the top of the disputes arbitrated before arbitral institutions. Various commonalities exist among the legal systems of Arab countries throughout the MENA region, owing to them having a similar constitutional and legal framework, where Islamic shariah forms the basis for legislation in the region. Having the oldest existing and most influential legal system in the MENA region, Egypt has impacted and influenced the laws of other civil law Arab countries, including Algeria, Bahrain, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Qatar, Syria, Tunisia and the UAE. Given the importance of the construction industry in the MENA region, it would be useful to briefly scrutinise certain legal principles pertinent to construction contracts that regularly surface in construction disputes in the MENA region.These principles, which are

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Mohamed S Abdel Wahab is a founding partner at Zulficar & Partners Law Firm. The region is witnessing large-scale infrastructure projects and international events such as Qatar’s 2022 World Cup and Dubai World Expo 2020, Egypt’s New Administrative Capital City, megapower generation plants, the Grand Egyptian Museum set to be the largest archaeological museum in the world, and Egypt’s Rod al-Farag Axis Bridge, ranked as the world’s widest cable-stayed bridge. See M. Allen, ‘Global Construction Disputes: A Longer Resolution’, Global Construction Dispute Report (2013), p.2: ‘the Middle East still experienced the largest disputes at of an average US$65 million’; M.A.M. Ismail, R.A. Koura, ‘International Construction Contracts Arbitration in the MENA Region’, (2015), p. xiii. See Arcadis, ‘Global Construction Disputes Report 2017: Don’t Get Left Behind’, p.24, available at: www. arcadis.com/media/C/9/C/%7BC9C32C0C-34CD-4D6D-8B12-083EE0349170%7DGlobal%20 Construction%20Disputes%202018.pdf.

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largely influenced and shaped by Egyptian law and practice, include good faith,5 implied terms,6 suspensive conditions, abuse of right,7 estoppel, prohibition of taking advantage of one’s own wrongdoings, liquidated damages,8 concurrent delays, principles of interpretation, interest, the duty of mitigation, exceptional circumstances (imprévision),9 force majeure,10 contractual liability11 and decennial liability.12

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See, for example, Article 148/1 Egyptian Civil Code (ECC) (1948), Article 107/1 Algerian Civil Code (1975), Article 129 Bahraini Civil Code (2001), Article 197 Kuwaiti Civil Code (1980), Article 148 Libyan Civil Code (1953), Article 172 Qatari Civil Code (2004), Article 149 Syrian Civil Code (1949), Article 202 Jordanian Civil Code (1976), Article 246 UAE Civil Code (1985), Article 231 Moroccan Code of Obligations and Contracts (1913), Article 221 Lebanese Code of Obligations and Contracts (1932) and Article 243 Tunisian Code Obligations and Contracts (1907). 6 See, for example, Article 148/2 ECC, Article 107 Algerian Civil Code (1975), Article 127 Bahraini Civil Code (2001), Article 195 Kuwaiti Civil Code (1980), Article 148 Libyan Civil Code (1953), Article 156 Omani Civil Code (2013), Article 172 Qatari Civil Code (2004), Article 149 Syrian Civil Code (1949), Article 202 Jordanian Civil Code (1976), Article 246 UAE Civil Code (1985), Article 231 Moroccan Code of Obligations and Contracts (1913) and Article 243 Tunisian Civil Code (1907). 7 See, for example, Article 5 ECC, Article 124 bis Algerian Civil Code (1975), Article 28 Bahraini Civil Code (2001), Article 30 Kuwaiti Civil Code (1980), Article 5 Libyan Civil Code (1953), Article 59 Omani Civil Code (2013), Article 63 Qatari Civil Code (2004), Article 6 Syrian Civil Code (1949), Article 66 Jordanian Civil Code (1976), Article 106 UAE Civil Code (1985), Article 49 Moroccan Code of Obligations and Contracts (1913), Article 123 Lebanese Code of Obligations and Contracts (1932) and Article 103 Tunisian Code of Obligations and Contracts (1907). 8 See, for example, Article 224 ECC, Article 184 Algerian Civil Code (1975), Article 226 Bahraini Civil Code (2001), Article 303 Kuwaiti Civil Code (1980), Article 226 Libyan Civil Code (1953), Article 267 Omani Civil Code (2013), Article 266 Qatari Civil Code (2004), Article 225 Syrian Civil Code (1949), Article 364 Jordanian Civil Code (1976), Article 390 UAE Civil Code (1985) and Article 266 Lebanese Code of Obligations and Contracts (1913). 9 See, for example, Article 147/2 ECC, Article 107 Algerian Civil Code (1975), Article 130 Bahraini Civil Code (2001), Article 198 Kuwaiti Civil Code (1980), Article 147(2) Libyan Civil Code (1953), Article 159 Omani Civil Code (2013), Article 171 Qatari Civil Code (2004), Article 148 Syrian Civil Code (1949), Article 249 UAE Civil Code (1985) and Article 282 Tunisian Code of Obligations and Contracts (1907). 10 See, for example, Article 373 ECC, Article 307 Algerian Civil Code (1975), Article 364 Bahraini Civil Code (2001), Article 437 Kuwaiti Civil Code (1980), Article 360 Libyan Civil Code (1953), Article 339 Omani Civil Code (2013), Article 402 Qatari Civil Code (2004), Article 371 Syrian Civil Code (1949), Article 472 UAE Civil Code (1985), Article 341 Lebanese Code of Obligations and Contracts (1932) and Article 282 Tunisian Code of Obligations and Contracts (1907). 11 See for example, Article 157 ECC; Article 119 Algerian Civil Code (1975), Article 140 Bahraini Civil Code (2001), Article 192 Kuwaiti Civil Code (1980), Article 159 Libyan Civil Code (1953), Article 171 Omani Civil Code (2013), Article 272 UAE Civil Code (1985), Article 254 Moroccan Code of Obligations and Contracts (1913), Article 260 Lebanese Code of Obligations and Contracts and Article 268 Tunisian Code of Obligations and Contracts (1907). 12 See for example, Article 651 ECC, Article 554 Algerian Civil Code (1975), Article 615 Bahraini Civil Code (2001), Article 692 Kuwaiti Civil Code (1980), Article 650 Libyan Civil Code (1953), Article 634 Omani Civil Code (2013), Article 711 Qatari Civil Code (2004), Article 617 Syrian Civil Code (1949), Article 788 Jordanian Civil Code (1976), Article 880 UAE Civil Code (1985), Article 769 Moroccan Code of Obligations and Contracts (1913), Article 668 Lebanese Code of Obligations and Contracts (1932) and Article 876 Tunisian Code of Obligations and Contracts (1907). However, Tunisia and Lebanon only provide for a five-year term liability.

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It is also common knowledge that the construction industry is dispute-rich and claims-oriented. Construction projects seldom end without dispute; disputes are common and not unexpected. Usually, such disputes revolve around time, cost, variations, liability or quality issues. Construction disputes are complex, multi-faceted, time-consuming and dynamic depending on the nature of the project (as delivered, as planned, as built), the type of contract (fixed lump sum or re-measured) and the specific sector involved (energy, telecommunications, hospitality, real estate, etc.) Construction disputes also involve multiple parties (employers, contractors, subcontractors, suppliers, insurers, funders, etc.) with divergent interests, risks and expectations. Such disputes may have adverse consequences on not only the specific project but the status of foreign investment from the region and beyond on the long run.13 Arbitration remains the MENA region’s effective and preferred dispute resolution process for the entangled web of intricate legal issues and risks arising from construction contracts. However, a framework of international principles and standards that allow for more certainty and visibility is much desired. It is in this context that the FIDIC forms of contract offer a working model utilised by employers and contractors throughout the region for diverse projects across all sectors involving construction works. That said, this chapter aims to provide an overview of certain legal principles invoked in construction-related disputes in the MENA region, so that the specificities of these legal principles and their application can be properly addressed and considered in construction arbitrations governed by the laws of certain MENA region countries.

The role of FIDIC in the construction industry in the MENA region The FIDIC forms of contract have been used in the MENA region since 1970.14 While these forms are English common law-based texts, they have, nonetheless, been widely adopted and applied in Arab states in the MENA region, where legal systems are primarily civil law and Islamic shariah-based. The public sector has led the way for the adoption of FIDIC forms of contract in the region in response to tendering laws and the requirements set by governmental entities.15 However, owing to the codification of civil legal principles throughout the MENA region, certain tension or concerns may arise regarding the application of the FIDIC conditions of contract and the legal principles prevailing under civil law in certain jurisdictions. Among the disputes that regularly arise in this context and in relation to projects proliferating throughout the MENA region are:

13 Richard Ward, Nasser Ali Khasawneh, Gurmeet Kaur, Mohamed Khanaty and Fahad AlDehais, ‘Construction Arbitration in the Middle East’, available at https://globalarbitrationreview.com/chapter/1139765/ construction-arbitration-in-the-middle-east, published on 19 April 2017. 14 M. Grose, Construction Law in the United Arab Emirates and the Gulf. W iley, (2016) p.6. 15 www.fidic.org/sites/default/files/FIDIC%20in%20the%20Middle-East.pdf. The public sector has adopted and modified to some extent the FIDIC forms of contract in countries such as Algeria, Tunisia, Iraq, Oman, Qatar, Saudi Arabia and Kuwait. Furthermore, international institutions such as the World Bank have adopted the FIDIC conditions when entering into contracts with MENA countries to fund engineering and infrastructure projects. See generally www.worldbank.org. See also M. Bell, ‘Will the Silver Book become the World Bank’s new gold standard? The interrelationship between the World Bank’s procurement policies and FIDIC construction contracts’, International Construction Law Review (2004), p.164.

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• the engineer’s administration of works and specifically the likelihood of late approvals, incorrect or insufficient instructions; • lack or delayed determination on extension of time (EOT); • cost; • changes and variations to the stipulated obligations, contractual breaches by the employer or contractor; • non-payment; • defective construction and performance; • non-conformity of materials; • warranties and representations; • concurrent delay; • force majeure and hardship (imprévision); • termination; • liquidated damages; and • fulfilment of conditions precedent. It is in this context that FIDIC offers an effective contractual regime that has been tested and applied with success throughout the region. Nevertheless, it is not always the case that the agreed contractual model offers a framework that is consistent with the applicable law and norms, hence the need to ascertain and distill the applicable legal principles and how they apply in the context of construction contracts and disputes throughout the MENA region.

Construction contracts and disputes in the MENA region – civil law principles The French Civil Code has influenced the civil codes of many MENA countries including Egypt, which in turn is viewed as the source and model on the basis of which many Arab countries have modelled their laws. Construction contracts often involve issues arising from the interpretation of the various documents forming part of the contract.16 As previously stated, the most common type of FIDIC form of contract used in the MENA region is the Red Book,17 and it is submitted that among the legal issues and principles at the heart of construction disputes governed by MENA region civil laws are: good faith, abuse of rights, estoppel, prohibition of taking advantage of one’s own wrongdoing, force majeure and imprévision, global claims, accelerated claims, delay damages, concurrent delay, principles of interpretation, implied terms, the duty of mitigation, suspensive conditions, interest and decennial liability, which are addressed below.

16 J. Bailey, Construction Law. Routledge (2011), p.131 [3.20]. 17 On 5 December 2017, the International Federation of Consulting Engineers (FIDIC) published the second edition of its Rainbow Suite of contracts. See http://fidic.org/sites/default/files/press%20release_rainbow%20 suite_2018_03.pdf.

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Good faith Good faith is a sacrosanct principle of law recognised all throughout the MENA region.18 It is a prevailing principle in the laws of Arab states,19 where it governs all aspects of a contractual relationship starting from the negotiation phase, through the conclusion of the contract, its performance, and to its termination. The importance of the principle of good faith lies in the consequences of the breach thereof, where a party’s liability is usually aggravated whenever it is established that its acts or omissions were not undertaken in good faith or were proven to be undertaken in bad faith.20 Moreover, courts in the MENA region frequently add and imply obligations to contracts on the basis of good faith.21 It is submitted that the duty of good faith is generally not limited to the performance of contracts but extends to the pre-contractual negotiations.22 Indeed, once the parties agree to enter into negotiations, such agreement to negotiate must be performed in good faith. The duty of negotiation in good faith has several variants including, an obligation to negotiate transparently,23 as well as an obligation not unilaterally revoke what has been agreed.24 A person is presumed to be acting in good faith unless proven otherwise, hence the rebuttable presumption of innocence and good faith performance. Nevertheless, establishing gross fault or negligence is sufficient to evidence bad faith and shift the burden of proof to the party claiming good faith performance.25

18 The principle of good faith forms part of the Islamic shariah principles, where the maxim that ‘no harm and no reciprocated harm’ unequivocally remains a fundamental tenet in a contractual and non-contractual relationships. 19 See, for example, Article 148 ECC, which provides that: ‘1. A contract shall be performed in accordance with its content and in a manner consistent with the requirements of good faith.’ This provision has been reproduced and included in the law of other Arab States such as Article 246 UAE Civil Code, Article 172 Qatari Civil Code and Article 197 Kuwaiti Civil Code. 20 See, for example, Article 217 ECC, which provides that: ‘[…] 2. It is also permissible to agree to exempt a debtor from any liability arising out of his non-performance of his contractual liability except those that arise out of fraud [bad faith] or gross negligence […],’ see also, for example, Article 259 Qatari Civil Code (2004), Article 290 Kuwaiti Civil Code (1980), Article 224 Libyan Civil Code (1953) and Article 261 Omani Civil Code (2013). 21 See Mahmoud Khayal, The General Theory of Obligation under Qatari Law,Volume 1 (2015), pp.248–249. 22 See R. Karim, Negotiating the Contract, First Edition, (2000), pp.416–417, also see R.R. Abdel Rahman Sheikh, The Consequences of Bad Faith in Bilateral Contracts in Civil Law (2015), p.65. 23 See R. Karim, Negotiating the Contract, First Edition, (2000), pp. 424, 426, 428, where he states: ‘In order to act in good faith, the negotiating party shall disclose information to the other party in full transparency without any dissimulation, and without keeping the latter deceived by a matter known by the former. He/She shall inform the other party of all acquired information without concealment or hiding as long as such information is important for the purpose of contracting in order to ensure that the negotiations are based on transparency and sincerity.’ 24 Most importantly, the duty to negotiate in transparency and to offer advice is derived from Islamic shariah, which binds a negotiating party to enlighten [inform] the other party of the reality of the subject matter of negotiation and disclose its vices before its benefits: See R. Karim, Negotiating the Contract, First Edition, (2000), pp.474–475. 25 See S. Morkos, El Wafi in the Explanation of Civil Law,Volume 2 (1992), p.236.

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Acting in good faith, inter alia, involves certain constraints and positive duties including: • an obligation of cooperation among the parties for the proper execution of a contract;26 • an obligation to transparently disclose any matter or event that may impact or influence the performance of the contract; • an implied obligation to avert any act or omission that may adversely impact the performance of the contract;27 • an obligation to pursue the most suitable method of performance when there are two or more alternative methods;28 • an obligation to act reasonably and avert abuse of discretionary power or rights;29 • an obligation not to misrepresent any fact pertaining to the performance of the contract;30 • an obligation to notify the other contracting party within a reasonable period of time; • an obligation to avert dilatory and surreptitious behaviour; • an obligation to act consistently with prudence31 and observe commercial standards of dealing;32 • an obligation to act in accordance with the objective or objectives of the contract and the justified [legitimate] expectations of the parties; • an obligation to avert deviation from the purpose the right was prescribed for 33 (i.e., achievement of a serious and legitimate interest);34 • an obligation to abandon strict adherence to a literal interpretation if the latter leads to absurd results contrary to the spirit of the contract, its proper performance and the parties’ common intention; • an obligation to mitigate damage or harm if sustained by either party; • an obligation to avoid any third-party communications and dealings that jeopardise or adversely impact the existing contract;35 and

26 See the principle set by the Arbitral Award dated 2 November 2014, CRCICA Case No. 732 of judicial year 2011, Journal of Arab Arbitration,Vol. XXIII December 2014, p.379. 27 More specifically, acting in good faith necessitates the consideration of honesty, moderation and care so that the performance of the contracts does not adversely impact the interests of the other party. See S. Morkos, Explanation of the Civil Law,Volume 2, Fourth Edition, (1987) p.509. 28 For example, where a contractor has a choice to perform a task in simpler and more cost-effective manner (without compromising on quality and standards) but choses to engage in a more costly performance; and where a contractor is expected to connect the power cords from a nearby place, but elects to connect same from a more farther place. See M.A. Bakry, The Encyclopaedia of Doctrine, Judiciary, and Legislations in the New Civil Code,Volume 2 (1985), p.622. 29 See Egyptian Court of Cassation, Challenge No. 3473 of judicial year 75, hearing session dated 27 April 2006. 30 Under Egyptian law, a party who had committed, in the performance of its contract, an act of wilful misconduct or fraud is considered to be acting in bad faith, regardless of its real intentions. See A. Tolba, Explanation of Civil Law,Volume 1 (2010), p.747. 31 See Tunisian Court of Cassation, Challenge No. 7461 of judicial year 2005, hearing session dated 4 April 2005. 32 See footnote 30. 33 See ibid. 34 See M.K. Abdelaziz, The Civil Code in light of the Jurisprudence and Doctrine,Volume 1 (1985), pp.79–80. 35 See Egyptian Court of Cassation, Challenges Nos. 4726 and 4733 of judicial year 71, hearing session dated 15 April 2004.

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• an obligation to avoid reaping the greatest advantage from the contract at the expense or to the detriment of the other party by choosing to implement its right in a prejudicial way to its counterparty.36 The variants of the principle of good faith have been further considered by an arbitral tribunal applying Egyptian law in the specific context of a construction contract, where the tribunal ruled that: It is accepted in all international construction contracts that: (a) whereas it is the duty of the contractor to do what the contract requires to be done (as designed and specified by the employer, the employer shall allow the contractor to do that which is to be done without hindrance; and a party cannot benefit of its breach to the detriment of the injured party … (b) Whereas a contract provides for a date for completion of the works, but the employer through its acts or omissions prevents the contractor from achieving that date and there is no entitlement to extensions of time under the contract in such event the time for completion is nullified. This in turn means that the employer loses his right to levy liquidated damages and, while the contractor’s obligation to complete the Works remains, he must do so only within a reasonable time.37

Good faith extends to administrative contracts (including public works construction contracts), where the Egyptian Supreme Administrative Court concluded that good faith requirements equally apply to administrative contracts. The Court held that: It is also established that a performance of the contract in accordance with its content and in a manner conforming to good faith requirements, is a general principle which applies to administrative contracts, same as it applies to all civil contracts … 38

It is submitted that good faith involves both acts and omissions (passive and active duties), and necessitates the absence of bad faith.39 In the specific context of construction contracts, an arbitral tribunal has tackled good faith, essential mistake and fraudulent misrepresentation in the conclusion of the contract and stated that if one party knew of a mistake per-

36 By way of illustration, this would be the case of a contractor who chooses to perform its obligations by using unnecessary expensive material within its possession in order to dispose of the same at the expense of the employer. See footnotes 20 and 26. 37 See Case No. 310/2003. Extract from final award dated 8 August 2005, cited by Mohi-Eldin Ismail Alam-Eldin, ‘Construction Arbitral Awards Rendered Under the Auspices of CRCICA’, (2010), p.5. 38 See Egyptian Supreme Administrative Court, Challenge No. 1226 of judicial year 35, hearing session dated 23 April 1996. See also, Egyptian Supreme Administrative Court, Challenge No. 303 of judicial year 48 for hearing session dated 7 March 2006. See also, State Council, General Assembly for Advice and Legislation, Opinion No. 793, dated 26 April 2017. Moreover, the General Assembly of Advice and Legislation of the Egyptian State Council concluded in one of its opinions that good faith is a prevailing principle in all contracts whether in the context of determination of its subject matter or the manner of its performance. See State Council, General Assembly for Advice and Legislation, Opinion No. 402, dated 07 June 2007. See also, State Council, General Assembly for Advice and Legislation, Opinion No. 11, dated 11 January 2014. See also, Libyan Supreme Court, Challenge No. 19 of judicial year 23, hearing session dated 26 October 1978. 39 Walid S. Morsey, The Binding Power of a Contract and the Exceptions therewith a comparative study between Islamic jurisprudence and Civil Law, (2009), p.265.

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taining to the conclusion of the contract and refrained from communicating it to the other party, the former shall be deemed to be acting in bad faith.40 As previously alluded to, good faith does not solely concern refraining from acts or omissions of bad faith, but supposes in addition, respecting a cooperation obligation when it comes to the implementation the contract. The question of identifying the criteria of good and bad faith is left to judicial discretion,41 to verify whether each party’s conduct was in good or bad faith.42 In the performance of construction contracts, a party will be considered to be acting in bad faith if it is determined to perform or terminate the contract with a bad intention or for a bad purpose. In this context, one may distinguish between three types of situations: • The first situation is the case where a party to the contract is determined to take a positive action or to refrain from acting in a certain manner while being absolutely aware that such action or omission will cause detriment to its counterparty. In such circumstances, such person is acting in bad faith. • The second situation is the case where a party to the contract is determined to take a positive action or to refrain from acting in a certain manner, while being unaware that such action or omission may be detrimental to its counterparty. In this case, it may be difficult to discern that the said party was acting in bad faith, as this will largely depend on whether such party was acting with an understanding that this constitutes a breach of the contract or not, irrespective of whether such breach will cause a detriment to the other contracting party. • The third situation concerns the case where a party to the contract acts or refrains from acting in a certain manner, while it is foreseen that such action or omission may cause the other contracting party certain detriment, yet the former chooses to act in this way. In that case, while the acting party had no intention or purpose to cause any detriment to its counterparty, it actually foresaw the possibility of detriment and accepted, in view of the benefit that it may reap, that such detriment may materialise. Accordingly, that party may (depending on the facts and circumstances) have contravened good faith, since it knowingly proceeded while foreseeing the likely prejudice that may ensue and which outweighs the benefit it desires to reap. In manifestation of the duty of good faith, it is submitted that an employer is expected to exert all possible efforts to allow the contractor to complete the works without impediment.43 If the works require the intervention of the employer, it shall do so within the contractually agreed period or within the period customarily required for that specific type

40 See Mohi-Eldin Ismail Alam-Eldin, ‘Construction Arbitral Awards Rendered under the Auspices of CRCICA,’ Case No. 43/1995 dated 15 November 1995, p.228 et seq. 41 See Egyptian Court of Cassation, Challenge No. 3473 of judicial year 75, hearing session dated 27 April 2006 and Challenge No. 163 of judicial year 32, hearing session dated 15 November 1966. See also, Dubai Cassation Court, Challenge No. 298 of judicial year 2008, hearing session dated 5 April 2009. 42 See Egyptian Cassation Court, Challenge No. 811 of judicial year 43, hearing session dated 16 June 1977, and Challenge No. 323 of judicial year 37, hearing session dated 9 May 1972, and Challenge No. 210 of judicial year 70, hearing session dated 18 April 2012. See also, Kuwaiti Court of Cassation, Challenge No. 914 of judicial year 2011, hearing session dated 10 December 2012. 43 See A. Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 7, (2010), pp.122–123.

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of work.44 That is why the parties remain under a positive obligation of cooperation during the performance of the contract (as a variant of good faith), even if the contract does not specifically include all its manifestations.

Principles of contractual interpretation Subject to the applicable mandatory rules and any other overriding applicable legal principles, the parties are free to regulate their contractual relationship in accordance with the principle of pacta sunt servanda, and the rules of contractual interpretation allow tribunals and courts to ascertain the common intention of the parties as to the content of their contract. The rules of contractual interpretation within MENA region jurisdictions largely mirror or resemble their Egyptian counterparts.45 Insofar as ambiguity does not taint a contract, no deviation, by way of interpretation, from the intended meaning of the clear terms of the contract is warranted, noting that this applies in accordance with the expressed intention of the parties.46 Thus, clarity of the contract denotes the clarity of the parties’ unequivocal intention and not just the clarity of the words used. In other words, even if the wording of a contractual term is clear on its face, the nature of the contract or the circumstances of its conclusion may reveal that the said term’s intended meaning differs from the words used. In such event, courts and tribunals must discern the parties’ common intention through the rules of interpretation.47 There is a rebuttable presumption that the expressed intention of the parties is identical to their unequivocal intention.48 A clear text is an indication of the expressed intention of the parties; however, this does not mean that the literal wording of a text is reflective of an expressed intention of the parties.49 Rather, a tribunal or court may deviate from the

44 Furthermore, it is established that the employer shall issue the required licences within a reasonable time so that completion is not delayed. If the employer is required to submit the construction material or equipment, it shall do same within reasonable time in order to allow the contractor to complete the works. If the works shall be performed according to the drawings or data provided by the employer, the latter shall submit the same within the contractually agreed period, or within reasonable time. See footnote 33, p.123. 45 Articles 148, 150 and 151 ECC, Articles 111 and 112 Algerian Civil Code (1975), Articles 59, 125 and 126 Bahraini Civil Code (2001), Articles 82, 193 and 194 Kuwaiti Civil Code (1980), Articles 152 and 153 Libyan Civil Code (1953), Article 165 and 166 Omani Civil Code (2013), Articles 169 and 170 Qatari Civil Code (2004), Articles 151 and 152 Syrian Civil Code (1949), Article 213 to Article 240 Jordanian Civil Code (1976), Articles 257 to 267 UAE (1985), Articles 461 to 473 Moroccan Code of Obligations and Contracts (1913), (1913), Articles 366 to 371 Lebanese Code of Obligations and Contracts (1932) and Articles 513 to 531 Tunisian Code of Obligations and Contracts (1907). 46 See, for example, Egyptian Court of Cassation, Challenge No. 498 of judicial year 4, hearing session dated 29 June 1963, Omani Court of Cassation Challenge No. 147 of judicial year 1995, hearing session dated 14 January 1996, Kuwaiti Court of Cassation Challenge No. 1093 of judicial year 2002, hearing session dated 6 March 2007. 47 See, for example, Egyptian Court of Cassation No. 1735 of judicial year 80, hearing session dated 10 July 2012; Bahraini Court of Cassation Challenge No. 129 of judicial year 2014, hearing session dated 10 January 2017; Kuwaiti Court of Cassation Challenge No. 1016 of judicial year 2005, hearing session dated 7 January 2007; Qatari Court of Cassation Challenge No. 323 of judicial year 2014, hearing session dated 17 February 2015. 48 See A. Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010 ed.), p.504–505. 49 See, for example, Egyptian Court of Cassation Challenge No. 2220 of judicial year 69, hearing session dated 26 June 2018; Egyptian Court of Cassation, Challenge No. 394 of judicial year 31, hearing session

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literal meaning of texts in view of the wider context of the contractual terms.50 The laws of Morocco, Lebanon, and Tunisia, which are directly influenced by French law, explicitly provide that a contract shall be read in light of the whole context of the contractual terms.51 This is also the case in Egypt, where the Egyptian Court of Cassation upheld the ejusdem generis principle of interpretation.52 The mere disagreement between the parties as to the intended meaning of a contractual provision does not, in and of itself, taint a contractual provision with ambiguity. As such, it is the court or tribunal that is vested with the authority to ascertain whether a term or provision of the contract is ambiguous or not, after assessing the parties’ positions in relation to the wording of same Should a court or tribunal find that the parties’ common intention differs from the expressed words, it shall resort to interpretation to ensure that the parties’ unequivocal common intention prevails. That said, it was held that: The court may deviate from the expressed meaning of the text of the contract, to what it deems more accurate in reflecting the intention of the parties as an application to its absolute [discretionary] power in understanding the provisions of the contract, and what the parties intended by [such provisions], and preserving the common intention of the parties.53

Moreover, a court or tribunal is at liberty to apply the correct legal characterisation of a legal relationship, irrespective of the wording used by the parties.54 Nonetheless, the court or tribunal must reason such deviation from the clear wording of a text, in case the latter is not reflective of the parties’ common intention.55 To ascertain the common intention of the parties, several elements must be taken into account, including: • the language of the contract; • the nature of the transaction;

50

51

52 53

54 55

dated 9 June 1966, Qatari Court of appeal Challenge No. 14 of judicial year 1989, hearing session dated 2 June 1989. See, for example, Egyptian Court of Cassation, Challenge No. 169 of judicial year 37, hearing session dated 7 May 1974, see also, Qatari Court Cassation Challenge No. 5 of judicial year 2012, hearing session dated 20 March 2012; Qatari Court Cassation Challenge 237 of judicial year 2011, hearing session dated 20 March 2012; Qatari Court Cassation Challenge 81 of judicial year 2011, hearing session dated 16 June 2011. See Article 464 Moroccan Code of Obligations and Contracts (1913), Article 368 Lebanese Code of Obligations and Contracts (1932) and Articles 516-517 Tunisian Code Tunisian Code of Obligations and Contracts (1907). Egyptian Court of Cassation, Challenge No. 169 of Judicial Year 37, hearing session dated 7 May 1974 where the Court held that contractual provisions supplement and interpret each other. See Qatari Court Cassation Challenge No. 41 of judicial year 2011, hearing session dated 25 October 201; Egyptian Court of Cassation Challenge No. 5660 of judicial year 65, hearing session dated 27 June 2006; Kuwaiti Court of Cassation Challenge No. 1093 of judicial year 2002, hearing session dated 6 March 2007. See, for example, Qatari Court Cassation Challenge 36 of judicial year 2008, hearing session dated 13 May 2008. See A. Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010 ed.), p.520; Qatari Court Cassation Challenge No. 323 of judicial year 2014, hearing session dated 17 February 2015.

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• prevailing customary practice; and • the good faith element reflected in the honesty and trust that ought to prevail between contracting parties.56 These elements are not exhaustive and the court or tribunal may refer to other factors in ascertaining the parties’ common intention,57 such as the manner of performance of the contract58 and the purpose underlying a contractual provision. Furthermore, interpretation of construction contracts should be consistent with commercial common sense and business efficacy.59 While some MENA Civil Codes do not expressly refer to common sense or business efficacy as guiding indicators, this is inferred from the references to the ‘nature of the transaction’, ‘honesty and trust/good faith’ and the ‘prevailing customary practices’.60 In light of the above, to the extent the expressed common intention of the parties to a contract is clear and unambiguous it shall be upheld and applied. However, if there is ambiguity or doubt as to such intention, good faith and the prevailing principles of interpretation militate against absurd or prejudicial interpretation, and any ambiguity shall be interpreted in favour of the debtor as per the applicable principles of interpretation.

Implied terms Consistent with the good faith obligations, Arab laws include legislative provisions dealing with implied terms, where a contract is not exclusively limited to its express terms, but extends to cover implied terms.61 Article 148(2) ECC, which inspired many similar provisions proliferating throughout the MENA region,62 states: ‘A contract must be performed

56 See for example, Article 150 ECC, Article 111 Algerian Civil Code (1975), Article 125 Bahraini Civil Code (2001), Article 193 Kuwaiti Civil Code (1980), Article 152 Libyan Civil Code (1953), Article 165 Omani Civil Code (2013), Article 169 Qatari Civil Code (2004), Article 151 Syrian Civil Code (1949), Article 239 Jordanian Civil Code (1976), Article 265 UAE Civil Code (1985), Article463 Moroccan Code of Obligations and Contracts (1913) and Article 371 Lebanese Code of Obligations and Contracts (1932). 57 See Soliman Morkos, Al Wafy on Explanation of Civil Law. Obligations – Theory of Contract and Individual Will,, Volume 2, (1987 edition), p.492. 58 See Soliman Morkos, Al Wafy on Explanation of Civil Law. Obligations – Theory of Contract and Individual Will, Volume 2, (1987 edition), p.492. 59 See, for example, Article 225 Jordanian Civil Code (1976), Article 264 of the UAE Civil Code (1985) and Article 463 Moroccan Code of Obligations and Contracts (1913). 60 Article 150 ECC, Article 111 Algerian Civil Code (1975), Article 125 Bahraini Civil Code (2001), Article 193 Kuwaiti Civil Code (1980), Article 152 Libyan Civil Code (1953), Article 165 Omani Civil Code (2013), Article 169 Qatari Civil Code (2004), Article 151 Syrian Civil Code (1949) and Article 371 Lebanese Code of Obligations and Contracts (1932). 61 See S. Morkos, El Wafi in the Explanation of Civil Law,Volume 2, (1987), pp.502–503. See Mohamed Kamal Abd AlAziz, The Civil Codification in light of the Judiciary and Doctrine,Volume 1, (1985), p.428. 62 See Article 107 Algerian Civil Code (1975), Article 127 Bahraini Civil Code (2001), Article 195 Kuwaiti Civil Code (1980), Article 148 Libyan Civil Code (1953), Article 156 Omani Civil Code (2013), Article 172 Qatari Civil Code (2004), Article 149 Syrian Civil Code (1949), Article 246 UAE Civil Code (1985), Article 231 Moroccan Code of Obligations and Contracts (1913) and Article 243 Tunisian Code of Obligations and Contracts (1907).

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in accordance with its content, and does not only bind the contracting party to its content, but also to all that which is a necessary sequel thereof, in accordance with the law, custom and equity.’ Since pacta sunt servanda is overarching fundamental principles, it is worth noting that the doctrine of implied terms is not inconsistent with pacta sunt servanda, as the sequels of a contract remain subject to the parties’ agreement and are intended to complement and supplement the same. This means that implied terms may not amend, contradict or override the express terms of a contract agreed by the parties.63 Nevertheless, it should be noted that even a detailed and sophisticated construction contract may possibly be silent on a certain matter or circumstances and even the nature of the obligations and their proper performance, in good faith, may warrant the inclusion of certain implied terms as a matter of law, custom or equity. Thus, if the parties’ agreement is silent on a certain provision, whether because the parties have failed to agree thereon or did not envisage the same, then the necessary sequels of a contract could intervene to fill the gap. That said, it is not uncommon to imply terms in construction contracts, such as the duty of cooperation, which is also a variant of good faith. Similarly, even if it is not expressed in the contract, a contractor is expected to perform the works as deemed fit for the intended purpose, and the employer is subject to an implied obligation not to impede or interfere with the contractor in the performance of its obligations under the contract or the progress of the works. An illustration of another implied term is the obligation of the contractor to maintain and protect the materials provided to him or her by the employer for performing the works and to exert his or her best efforts in doing so.64 Generally, there are factors that are taken into consideration when deciding whether a given term is implied in the contract or not, which are: • the nature of the contract or obligation (e.g., a contract for the construction of a residential tower would imply different terms than those concerning the construction of a power plant); • any supplementary legal provisions; • custom; and • equity and justice.65

The prohibition of taking advantage of one’s own wrongdoings Most of the MENA Civil Codes prohibit a party from taking advantage of their own breach or wrongdoing. For example, Article 216 of the ECC provides that: The court may reduce the amount of compensation or reject any request for compensation where the fault of the creditor contributed to or aggravated the damage.66

63 64 65 66

See S. Morkos, El Wafi in the Explanation of Civil Law,Volume 2, (1987), p.503. Egyptian Cassation Court, Challenge No. 3099 of judicial year 72, hearing session dated 24 December 2003. See A. Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010), p.533. See also, for example, Article 177 Algerian Civil Code (1975), Article 217 Bahraini Civil Code (2001), Article 234 Kuwaiti Civil Code (1980), Article 219 Libyan Civil Code (1953), Article 177 Omani Civil Code (2013), Article 257 Qatari Civil Code (2004), Article 217 Syrian Civil Code (1949), Article 264 Jordanian Civil

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This grants a court or tribunal an express discretionary power to either reduce the amount of compensation or not to grant damages (whether agreed upon or not) altogether, as deemed reasonable, where a party has, as a factual matter, caused or contributed to the damage. An Egyptian Court of Cassation judgment held that: … the right of the creditor to damages lapses, [in the sense] that he is not entitled [to damages] at all, if he solely committed the fault, if his fault prevailed over the fault of the debtor or if his fault is the cause resulted in the damage. [In this case] the creditor shall not have the right to demand the entirety of the damages if he contributed to the occurrence of the damage and it was proven that he himself failed to perform his obligation 67

The prohibition of taking advantage of one’s own fault is indeed a general principle of law. A court or a tribunal will have to take in consideration the fault committed by the creditor (regular, gross, intentional) and how much it contributed to the overall damage (partially or fully) then weigh same with the fault and damage caused by debtor.Thus, a debtor’s liability would be wholly extinguished if the creditor’s fault outweighs and overwhelms that of the former or if the former’s fault was only an inevitable consequence of the latter’s. In other cases, the debtor’s liability may be proportionately reduced by the magnitude of fault it committed compared to that of the creditor.68 The Egyptian Court of Cassation has also applied the principle of the prohibition of taking advantage of one’s own wrongdoings or fault in the context of construction contracts, while addressing decennial liability. In the said judgment, the court ruled that: A contractor’s obligation is an obligation to achieve a result, which is ensuring durability and safety of the building that he has built for a period of 10 years after its handover, which means that merely proving the non-fulfilment of the result establishes the breach of this obligation without the need to establish any fault. However, a contractor who works under the supervision of the employer, is not liable for the collapse or the defects that impose a threat to the durability of the building and its safety, if this was due to a fault in the design provided by the employer, unless the contractor is aware of this fault and approved it, or the fault is manifest to the extent that it would not be hidden from the perspective of the experienced employer.69

Code (1976), Article 290 UAE Civil Code (1985), Article 282 Tunisian Code of Obligations and Contracts (1907), Article 268 Moroccan Code of Obligations and Contracts (1913) and Article 135 Lebanese Code of Obligations and Contracts (1932). 67 See Egyptian Court of Cassation Challenges No. 1859, 2444 & 2447 of judicial year 70, hearing session dated 12 June 2001; Qatari Court of Cassation Challenge No.8 for the year 2012, hearing session dated 27 March 2012; Egyptian Court of Cassation Challenge No. 152 of judicial year 41, hearing session dated 26 April 1980: ‘A wrongdoer may neither shift to others the consequences of his wrongdoing, whether his fault was fraud or negligence, nor may he benefit from his fault vis-à-vis others, even if the other was in return a wrongdoer.’ 68 See A. Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (1998), pp.809–822 69 See Egyptian Court of Cassation, Challenge No. 443, judicial year 51, hearing session dated 12 June 1989.

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Abuse of right A person is entitled to use his or her rights as mandated by the law or as agreed in a contract. However, a person is not entitled to use its right in an illicit or abusive manner.70 Naturally, the person invoking abuse of right must not be acting in bad faith. While not expressly included in legal provisions regulating contracts, nothing prevents utilising abuse of right, where necessary, in the context of contractual arrangements, especially that it is arguable that non-abusive use of rights can only be characterised as an application of the overarching principle of good faith.71 Article (5) ECC72 sets the criteria for abuse of right. The first criterion deals with the illegitimacy of the pursued interests. This denotes the absence of a legitimate and serious interest.73 Every right is validly created to achieve a certain legitimate objective, if one utilises his/her right to achieve an illicit objective, this may be characterised as an abuse of right.74 Indeed, the prevailing views confirm that the provisions of Islamic Shariah may have a role to play in assessing the illicit nature of the pursued interests.75 The second criterion deals with the existence of an intention of aggression. This would be the case if a person’s main intention is to inflict harm, even if its act or omission is associated with a secondary intention to achieve a benefit.76 The third criterion denotes significant disproportionality between the benefits and prejudices resulting from the exercise of the right. This is the case whether the person who exercised the right was recklessly inconsiderate of the damage others may suffer for the sake of a minor benefit, or had a hidden intent to inflict harm under a pretext of a fictitious or minor benefit that is clearly outweighed

70 See Qatari Court of Cassation, Challenge No. 176 of judicial year 2013, hearing session dated 7 January 2014. See Egyptian Cassation Court, Challenge No. 253 of judicial year 74, hearing session dated 25 December 2012. 71 Article 4 ECC provides that: ‘Whoever legitimately exercises its rights is not responsible for the harm resulting therefrom.’ 72 Article 5 ECC provides that: ‘The exercise of a right shall be illicit in the following cases: (a) if it is only intended to harm a third party, (b) if the pursued interests pursued are of minor importance, so that they are significantly disproportionate to the harm sustained by the other(s) as a result thereof, (c) if the pursued interests are illegitimate.’ Article 63 Qatari Civil Code (2004) and Article 30 Kuwaiti Civil Code (1980) added to the ECC’s criteria: ‘if the exercise of a right would cause outrageous unfamiliar harm’. Article 66 Jordanian Civil Code (1976) and Article )59) Omani Civil Code (2013) added to the ECC’s criteria: ‘if the exercise of a right exceeds customs and habit’. Article 104 UAE Civil Code (1985) considers the exercise of a right is abusive if it contradicts Islamic shariah principles, laws, public policy or morals. Article (103) Tunisian Code of Obligations and Contracts (1907) and Article (49) Moroccan Code of Obligations and Contracts (1913) provides for only one criterion: ‘[…] if exercising that right may cause outrageous harm to a third party whilst it is possible to avoid such injury or remedy same without causing significant injury to the right holder, civil liability would arise if the person does not do what needs to be done to prevent or stop the injury from happening’. Article 123 Lebanese Code of Obligations and Contracts (1932) provides two criteria: ‘compensation is also payable by whomever injures others by exceeding, while exercising one’s right, the boundaries of good faith or the purpose for which the right was granted.’ 73 See M.K. Abdelaziz, The Civil Code in light of the Jurisprudence and Doctrine,Volume 1, (1985), pp.79–80. 74 See A. Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010), pp.761–762. 75 M.K. Abdelaziz, The Civil Code in Light of the Jurisprudence and Doctrine,Volume 1, (1985), p.83, citing the Preparatory Works of the ECC. 76 See A. Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 2, (1998), pp.758–759.

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by the damage sustained by another person.77 The person exercising such right would be deviating from the usual conduct of an ordinary person, and is committing a breach for which he or she must be held liable.78

Estoppel While the principle of estoppel is not be legislatively captured in most civil codes throughout the MENA region, estoppel, or ‘allegans contraria non est audiendus’, is a well-established legal principle derived from fundamental tenets of Islamic Shariah and forms part of the legal systems of several countries in the MENA region.79 Nevertheless, Articles 70 UAE Civil Code (1985), 239 Jordanian Civil Code (1976) and 547 Tunisian Code of Obligations and Contracts (1907) explicitly capture the principle of estoppel. According to this sacrosanct principle, he or she who seeks to revoke what has been agreed, or engages in contradictory behaviour, shall be barred from doing so. Moreover, estoppel is explicitly endorsed and upheld by the judgments of Arab courts,80 and it is validly argued that estoppel is a variant of good faith.81 In the specific context of construction contracts, if the employer or contractor engage in contradictory behaviour or either seeks to revoke what has been agreed or endorsed, estoppel and good faith will militate against validating such actions or omissions. For example, it was held that ‘there is no place for issuing a judgment awarding a delay penalty where

77 See footnote 42, p.761. 78 See Egyptian Court of Cassation, Challenge No. 22 of judicial year 46, hearing session dated 25 April 1981. See also, Egyptian Cassation Court, Challenge No. 1238 of judicial year 56, hearing session dated 24 March 1991. 79 See Egyptian Court of Cassation, Challenge No. 76 of judicial year 73, hearing session dated 13 March 2007. See also, Egyptian Court of Cassation, Challenge No. 171 of judicial year 20, hearing session dated 17 April 1952. See also, Kuwaiti Court of Appeal, Appeal No. 14 of judicial year 87, hearing session dated 16 November 1987. See also, Dubai Court of Cassation, Challenge No. 66 of judicial year 2007, hearing session dated 20 May 2007. 80 See Kuwaiti Court of Cassation, Challenges Nos. 59, 64, 65 and 71 of judicial year 1995, hearing session dated 12 December 1995. In this regard, the Kuwaiti Court of Cassation held that: ‘the principle of fraus omnia corrumpit … is founded on moral and social considerations combating fraud, deceit and cheating, as well as considerations of non-deviation from the principle of good faith that should be generally upheld in transactions and dealings in order to safeguard the interests of people and the society. The court deciding the dispute enjoys the discretion to infer satisfaction of elements of fraud from the facts supporting it. … In this regard, the Explanatory Memorandum has elaborated that good faith and honorable dealing invalidate a contract not only with regard to its content, but also with regard to its means of performance. This is indeed in application of the principle entailing that ‘a person attempting to revoke what has been endorsed thereby shall be barred from succeeding in this attempt’. See also Cairo Court of Appeal, Challenge Nos. 35, 41, 44 and 45 of judicial year 129, hearing session dated 5 February 2013: ‘In Arbitration practice, in compliance with the overarching principle of good faith, prevailing in the commercial arena, the ‘Estoppel’ doctrine has become fortified and well-vested. According to the said doctrine, it is possible to frustrate an opponent’s efforts to benefit from its contradicting statements, behavior, and legal positions in order to acquire privileges to the disadvantage of its counterparty. The aforementioned principle – noting the different classification according to the legal system in application – has become explicitly and directly applied, and even a rule of thumb, as one of the primary legal principles, which may not be disregarded or denied, or else this shall be a serious encroachment on the values of justice, which any community considers indispensable.’ 81 ibid.

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the stoppage of work before the end of the contractual period is attributed to the appellant himself, in addition he who seeks to contradict his own previous actions is estopped from doing so.’82 In Saudi Arabia, in relation to disputes concerning the contractor’s remuneration, it was held that an employer is estopped from claiming a refund from the contractor for the works done, whether within the lump sum or extra works, if he or she has accepted the works and paid the entitlements thereto after examining the said works.83

Force majeure and imprévision The laws of Arab countries in the MENA region, as well as Islamic shariah,84 recognise and regulate the concepts of ‘force majeure’ and ‘exceptional circumstances’ (imprévision or rebus sic stantibus). Both concepts deal with events that are unforeseen at the time of contract conclusion and inevitable and beyond the control of a contracting party. However, while force majeure leads to impossibility of performance, imprévision, which only operates with respect to contracts whose performance is stretched over time, renders the performance of obligations excessively onerous (but not impossible) and threatens the debtor with exorbitant loss, if forced to specifically perform the exorbitant obligations. Moreover, on one hand, force majeure generally leads to extinguishing the obligations that become impossible to perform,85 unless the parties agree to regulate the ramifications of force majeure differently by allocating the risk of impossibility among themselves as they deem fit.86 On the other hand, imprévision does not lead to extinguishing obligations, but to the possible moderation thereof by restoring the excessively onerous obligations to reasonable limits through a court judgment or an arbitral award. This could be achieved by awarding compensation or reasonably reducing the limit and scope of the cumbersome obligations. Imprévision also requires the unforeseen and inevitable supervening events to be of a general character (i.e., not exclusive to the debtor) unlike force majeure, which only requires that the unforeseen event to be due to an external cause that leads to the impossibility of performance. In addition, unlike force majeure, imprévision is generally subject to an overriding mandatory legislative regulation that does not allow the parties to a contract to derogate from such mandatory regulation by agreement.87

82 See UAE Court of Cassation, Challenge No. 87 of judicial year 27, hearing session dated 26 June 2006. 83 See Saudi Court of Cassation, Challenge No. 112 of judicial year 3, hearing session dated 7 December 2009. 84 Walid S. Morsey, The Binding Power of a Contract and the Exceptions therewith a comparative study between Islamic jurisprudence and Civil Law, (2009), p.570 and p.653. 85 e.g., A contractor who undertakes to cover the road with asphalt would be totally released from liability if the defect in the asphalt was owing to a sudden drop to the ground. See A. Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 7, (2010), p.115. 86 Article 373 ECC states: ‘An obligation is extinguished if the debtor establishes that its performance has become impossible by reason of causes beyond his control.’ Similar provisions can be found under Article 307 Algerian Civil Code (1975), Article 364 Bahraini Civil Code (2001), Article 437 Kuwaiti Civil Code (1980), Article 360 Libyan Civil Code (1953), Article 339 Omani Civil Code (2013), Article 402 Qatari Civil Code (2004), Article 371 Syrian Civil Code (1949), Article 472 UAE Civil Code (1985) and Article 282 Tunisian Code of Obligations and Contracts (1907). 87 Article 147(2) ECC states: ‘If, however, as a result of exceptional and unforeseen events of a general character, the performance of the contractual obligation, though not impossible, becomes excessively onerous in such a way as to threaten the debtor with exorbitant loss, the judge may, according to the circumstances, and after

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It is of utmost importance to note that, in the context of construction contracts, both force majeure and imprévision are subject to specific legislative provisions. By way of illustration, Article 664 ECC regulates force majeure and states: ‘A contract for works [construction contract] is extinguished if the performance of the work for which the contract was concluded becomes impossible.’88,89 With respect to imprévision, Article 658(4) ECC, which exclusively applies to ‘lump sum’ construction contracts (not re-measured contracts such as the FIDIC forms) states: However, if the economic equilibrium between the obligations of the employer and the contractor collapses, due to exceptional events of general character, which were unforeseen at the time of contracting, causing the basis for the monetary valuation of the contract to fizzle, the Court may order an increase in payment to the contractor or the rescission of the contract.90

Obviously, Article 658/4 ECC is a special application of the general principle enshrined in Article 147/2 ECC.They share the same conditions of application, yet the court or arbitral tribunal is not entitled to rescind the contract under Article 147/2, but can so order under Article 658/4 ECC in the specific context of lump sum construction contracts. Finally, the threat of a conventional loss cannot trigger imprévision, even if such conventional loss is large in value; only a threat of an exorbitant loss (naturally exceeding loss of profit) can trigger imprévision. The loss in question must also be measured according to the contract itself irrespective of the assets and solvency of the debtor.91 It is also worth mentioning that both theories equally apply to administrative contracts.92

Global claims An exceedingly pertinent question in relation to construction disputes subject to the civil laws in the MENA region is whether global claims are recognised under Arab laws. While global claims are well-established and regulated in common law countries, the terminology

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weighing the interests of both parties, reduce the onerous obligation to reasonable limits. Any agreement to the contrary is void.’ Similar provisions could be found under Article 107 Algerian Civil Code (1975), Article 130 Bahraini Civil Code (2001), Article 198 Kuwaiti Civil Code (1980), Article 147(2) Libyan Civil Code (1953), Article 159 Omani Civil Code (2013), Article 171 Qatari Civil Code (2004), Article 148 Syrian Civil Code (1949) and Article 249 UAE Civil Code (1985). See Article 567 Algerian Civil Code (1975), Article 608 Bahraini Civil Code (2001), Article 685 Kuwaiti Civil Code (1980), Article 663 Libyan Civil Code (1953), Article 646 Omani Civil Code (2013), Article 704 Qatari Civil Code (2004), Article 630 Syrian Civil Code (1949) and Article 892 UAE Civil Code (1985). The FIDIC Red Book, which had its origin in the common law system used the doctrine of ‘Frustration’ until its fourth edition when Clause 66 was renamed ‘Release from Performance’. In its 1999 Edition, FIDIC shifted to the civil law concept of force majeure. In 2008, FIDIC abandoned both concepts in favour of having these events identified as exceptional risks in its Gold Book. In its new 2017 Edition, and in line with the development introduced under the Gold Book, FIDIC changed the terminology to ‘Exceptional Event’, enshrined under Clause 18. See http://fidic.org/sites/default/files/press%20release_rainbow%20 suite_2018_03.pdf. See Article 561 Algerian Civil Code (1975) and Article 657(4) Libyan Civil Code (1953). See A. Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010), p.556. See Egyptian Supreme Administrative Court, Challenge No. 689 of judicial year 4, hearing session dated 12 December 1959.

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‘global claim’ is alien to MENA region arbitrations subject to civil law principles. However, the inexistence of a specific terminology or specific legislative rules to address global claims does not mean that such claims are not capable of being analysed and assessed under the prevailing civil law principles. Global claim occurs when the claimant alleges two or more breaches and says that those breaches cumulatively caused the loss or losses, but does not specify the proportion of that loss that is attributable to each breach. As mentioned above, Arab laws and provisions governing construction contracts make no express reference to global claims. However, this does not mean that they are inadmissible outright. The matter ought to be carefully scrutinised under the prevailing principles of contractual liability and specifically causation. That said, a global claim may be permissible and may succeed as a matter of law under the generally applicable legal principles of contractual liability,93 if the employer’s breaches were interdependent, interconnected and inseparable to an extent that it is impossible or impractical to segregate or separate same. In such event, if the contractor is able to prove that such interdependent and intertwined breaches had a cumulative effect and contributed altogether to the occurrence of the damage, without any separation, then the contractor’s claim may be accepted, provided that the contractor can show that the breaches claimed are all attributable to the employer. In such case, the burden of proof would shift to the employer to avoid liability and disprove what the contractor established. Accordingly, global claims in construction may be admissible as a matter of civil law, if the all three elements of contractual liability are satisfied, namely: the fault (breach), the damage and the causation,94 and if it is established that the breaches attributable to the employer are inseparable.

Constructive acceleration ‘Constructive acceleration’ is a common construction claim derived from the common law jurisprudence, and involves, in essence, the speeding up of the progress of the works on the inferred or tacitly expressed instruction of the employer.95 As to the law regarding acceleration, there are implied grounds for assertion of a claim. This has become known as ‘constructive acceleration’.

93 Articles 163 and 169 ECC deal with the situation where multiple tortfeasors are jointly and severally liable in compensating the loss or harm sustained. Liability shall be apportioned equally between them, unless the judge can attribute the contribution of each to the loss or harm. The same logic can apply in the context of contractual liability. If the judge cannot finally estimate the final amount of compensation, he or she can preserve the right for the aggrieved party to ask, within a prescribed period, for a recalculation of compensation. For an overview of all pertinent legislative provisions regarding the joint liability of tortfeasors and allocation of compensation, see Articles 163, 169 and 170 ECC; Articles 46, 176, 200 and 180 Omani Civil Code; Articles 50, 51, 166, 167 and 172 Libyan Civil Code; Articles 47, 48, 124, 126 and 131 Algerian Civil Code; Articles 77, 78, 94 and 99 Moroccan Civil Code; Articles 192, 227–29, 303-4 Kuwaiti Civil Code; Articles 124, 140, 160 and 166 Bahraini Civil Code; Articles 272, 282–85, 290-91 UAE Civil Code. 94 In some civil law jurisdictions, such as Egypt, the aggrieved party need only prove the existence of the breach and the damage or harm and causation would be presumed. The burden then shifts to the other party to prove the inexistence of the breach, damage or harm, or causation. 95 R.W.W. Ray, ‘Constructive acceleration’, available at www.corporate.findlaw.com/litigation-disputes/ constructive-acceleration.html.

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The doctrine of constructive acceleration is well recognised in the United States, and is gaining traction in other legal jurisdictions around the world, including England and Canada. The trend in addressing constructive acceleration is to look solely to whether: • delays were excusable; • the contractor was ordered to accelerate; and • that actual acceleration caused the contractor to incur extra costs. Most civil law jurisdictions do not recognise the term ‘constructive acceleration’ and Arab laws do not have legislative provisions addressing such claims. However, terminology does not matter and alternative routes to recovery exist, where the contractor is in excusable delay, but is not given corresponding schedule relief and is ordered to accelerate, and so incurs additional costs. In these situations, the contractor may recover damages under different legal principles, such as breach of contract, implied terms, mitigation of delay and damages. In principle, it is established that a FIDIC contract does not necessarily oblige the contractor to accelerate and make up for the delay, if the delay is an act of, and caused by, the employer. Nevertheless, as a manifestation of good faith and cooperation in the performance of construction contracts, the contractor may effect ‘constructive acceleration’. Furthermore, if the contractor fears (notwithstanding a valid EoT claim) being penalised through the imposition of liquidated damages, the calling of its security bonds or termination, it will have to accelerate and then attempt to claim the costs of acceleration from the employer, assuming that the latter is wholly or overwhelmingly responsible for the delay. In such case, the contractor may have a claim for breach of contract provided that: • the employer breached its obligations of good faith in the performance of contracts by not granting an EoT;96 • the contractor suffered damages (i.e., additional costs incurred due to accelerating the works); and • a direct causality exists between the breach and damage. Again, it is worth noting that the sheer inexistence of express legislative provisions on a specific matter such as ‘constructive acceleration’ does not necessarily imply that such matter is inexistent or illegal under the applicable Arab law; the matter ought to be carefully scrutinised under the prevailing principles of contractual liability and other pertinent civil law principles to ascertain whether it, or an equivalent thereof, can be recognised under the applicable law.

96 An employer’s breach of good faith would be established by the fact that: (1) the delay was excusable (i.e., caused by the employer or otherwise not attributable to the contractor); (2) the contractor should have been granted its extention of time under the contract but was denied such right; and (3) the contractor was forced to take acceleration measures, in a version of the employer’s threatened sanctions or penalties.

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Maintaining the economic equilibrium in administrative public works contracts A large part of constructions contracts in the MENA region come in the form of public works administrative contracts that may be subject to specific principles and norms not necessarily encountered in a standard civil law context. Given the proliferated use of FIDIC in state contracts and the inherent difficulty associated with characterising a contract as administrative (noting that not all state contracts are administrative contracts), it is worth shedding some light on the specificity of administrative construction contracts as a feature of the MENA region. Generally, it is submitted that the classification of a contract as administrative relies on the collective fulfillment of three conditions, namely: • the administration (public entity) must be a party to the contract; • the contract must relate to a public utility; and • the contract must include exceptional conditions anomalous to private law contracts. In this context, the Egyptian Supreme Administrative Court held that a contract is administrative if the administration’s intention to apply public law principles appears by the inclusion of one or several anomalous conditions to private law contracts.97 In principle, there are two types of exceptional conditions: • conditions reflective of public authority privileges; and • conditions in application of public law principles.98 In brief, the contract must reflect the state’s intention to showcase its jus imperii powers and to uphold public law principles in its contract.99 In the context of construction (public works) contracts,100 several legal principles may come into play, especially in the context of maintaining the economic equilibrium of the contract. It is in this specific situation that the administrative theories of fait du prince and imprévision gain importance.

97 See Egyptian Supreme Administrative Court, Challenge No. 576 of judicial year 11, hearing session dated 30 December 1967. 98 Exceptional and anomalous conditions include: the administration’s right to unilaterally amend or terminate the contract, the administration’s stringent monitoring and supervisory rights, the administration’s right to impose contractual penalties (fines) or perform certain obligations at the expense of the other contracting party, the administration’s right to revoke the contract without notifying the other contracting party, the administration’s right to inspect the contractor’s works anytime, the administration’s exclusive and unilateral right to amend the contract’s provisions or granting the administrative courts the power to amend the contract to best suit the public utility. 99 For example, in Challenge No. 3128 for judicial year 35, hearing session dated 24 January 1995, the Egyptian Supreme Administrative Court held that ‘It is established in the practice of this Court that an administrative contract is concluded by public law entities with an intention of administering a public utility, or in the course of operating same, and the intention of such entities in upholding public law methods is demonstrated by the inclusion of contractual condition(s), which are anomalous to private law contracts. It is well established in administrative law doctrines that the implementation of public law methods is the key condition in distinguishing administrative contracts. While the pertinence of the contract concluded by the administration to a public utility is a prerequisite for its administrative nature, it does not solely suffice to characterise the contract as such.’ 100 Egyptian Supreme Administrative Court, Challenge Nos. 1320, 1340 of judicial year 12, hearing session dated 15 February 1969 defines an administrative public works contract as ‘Since the contract […] is a contract

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As a general rule, fait du prince is defined as an act or measure, whether public or private (targeting only the opposing contracting party), issued or undertaken by a contracting public authority without fault or breach on its part, and which results in increasing the contractual burden of a contracting party in an administrative contract. In such case, the contracting authority is bound to compensate the other party for the damage sustained (loss suffered).101 The Egyptian Supreme Administrative Court upheld this doctrine, in its judgment of 11 May 1968, and ruled that ‘the interference of the Administrative Court to achieve the financial equilibrium of the administrative contract for the application of the doctrine of ‘fait du prince’ presupposes/requires the satisfaction of its conditions’.102 These conditions that must be collectively fulfilled are: • the existence of an administrative contract; • the act is issued from the contracting authority and it is presumed that the contracting authority is not in default or breach by undertaking such act; • a harm results from the act and is suffered by the contracting party (i.e., without need for a specific degree of gravity of harm); • the act is unforeseen; and • the damage suffered by the contracting party is specific so that others (third parties) are not affected. Additionally, the Egyptian Supreme Administrative Court upheld the doctrine of imprévision in the context of administrative contracts,103 where imprévision remains subject to the same conditions discussed herein above. However, in an administrative public works contract, the remedy would be compensation, whereas, in civil law, the courts have broader powers to restore the cumbersome obligation to reasonable limits. Nevertheless, imprévision is not intended to compensate a contractor for all its losses; it only aims to restore the excessively onerous obligation to reasonable limits, so that the employer’s utility is not affected and the contractor is not severely harmed.

concluded between respondents whom are administrative body units and claimant to build real-estates to the benefit of a public law person and for the purpose of public interest, it would be considered as a Public Works contract.’ 101 See S. El Tamawy, The General Principles of Administrative Contracts (2008), pp. 598, 602. 102 See Egyptian Supreme Administrative Court in Challenges No. 1562 of judicial year 10 and 67 of the judicial year 11, hearing session dated 11 May 1968. See also, Egyptian Cassation Court, Challenge No. 4424 of judicial year 61, hearing session dated 15 November 1997. 103 See Egyptian Supreme Administrative Court, Challenges No. 549 and 801 of judicial year 35, hearing session dated 4 April 1993. See also, Egyptian Supreme Administrative Court, Challenge No. 22367 of judicial year 53, hearing session dated 30 November 2010.

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Delay damages It is common knowledge that delay damages or liquidated damages are the employer’s strong tool and remedy for the contractor’s breaches, and they are regularly invoked and flagged in construction-related arbitrations. Liquidated damages are also an area where common law and civil law principles collide, and where administrative law principles intervene to distinguish penalties from delay damages.104 Generally, in civil law contracts, a party may avoid damages by proving: • it committed no breach; • the breach is attributable to an alien cause or the other party’s acts or omissions; • the inexistence of a causal link; and • no loss or harm was suffered or sustained by the aggrieved party; A liquidated damages clause is an agreed compensation for either non-performance, delay in performance, or both. Mostly, liquidated damages clauses are drafted as an agreed compensation for delay; it is seldom drafted as a compensation for non-performance in construction contracts. Generally, a contractor is under an obligation to achieve completion of the works by the agreed time and his or her obligation to complete the works is an obligation to achieve a result.105

104 The Abu Dhabi Cassation Court in Challenge No. 426 of judicial year 18, hearing session dated 17 February 1998, stated that delay damages in private moqawala [construction] contracts are different from: ‘[T]he amount specified in moqawala contracts concluded by the administration, which is payable by the contractor in case of delay, which is in fact, one of the monetary penalties to which the administration resorts, as a penalty imposed on the other contracting party in case of default and negligence, irrespective of any damage suffered by the administration, and does not require a prior notification, because in administrative contracts, damage materialises upon occurrence of the delay, as it deprives the beneficiaries of those utilities from the intended benefit’. Thus, the Abu Dhabi Court of Cassation carefully differentiates between ‘delay damages in private contracts’ and ‘delay penalties in administrative contracts’, where the damage or loss is irrebuttably presumed. This does not apply if the contractor’s delay has not prevented the use of public utility by the beneficiaries. The above distinction made by the Abu Dhabi Court of Cassation may be slightly different from the approach taken by the Egyptian Supreme Administrative Court. While the Egyptian Supreme Administrative Court equally differentiated between delay penalties in administrative contracts and delay damages in private construction contracts, the Court still denied liability if the party (in a contract with the administration) was able to prove that he or she has not committed a breach or fault. The Supreme Administrative Court in Challenge No. 1226 for Judicial Year 35, hearing session dated 23 April 1996, stated: ‘It is established in the doctrine of administrative law that the delay penalty in administrative contracts is prescribed to guarantee performance of such contracts during the agreed duration to ensure the uninterrupted and systemic operation of public utilities. Legal characterisation of delay penalty as a form of agreed compensation is different from an agreed compensation in private law, owing to the existence of special terms, the most important of which is that damage is presumed upon occurrence of the delay. However, the other party may prove the absence of breach or fault, and once one of the conditions of liability is negated, there is no room to exercise the administration’s right to receive compensation owing to the lack of the legal basis thereof.’ See also, Egyptian Supreme Administrative Court, Challenge No. 1333 of judicial year 49, hearing session dated 18 April 2017, and Egyptian Supreme Administrative Court, Challenge No. 21215 of judicial year 57, hearing session dated 28 November 2017. 105 Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code, Part 7,Volume 1 (2010), p. 64.

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Thus, on one hand, the fault element of the contractor’s liability for delay in completion cannot simply be obviated by establishing that the contractor has exercised the due care of a reasonable person. Nevertheless, a contractor may avoid liability for delay by proving that the reason for such delay was beyond the contractor’s control, such as force majeure, supervening events beyond the contractor’s control, an act of a third party or the employer’s own fault. On the other hand, the harm element of liability is rebuttably presumed by virtue of the liquidated damage clause. While the employer needs only to prove the contractor’s delay (fault element) to apply liquidated damages, the harm element is readily presumed and the burden of proof is shifted to the contractor to refute the said presumption and avoid liquidated damages.106 Liability for liquidated damages would also be avoided if the delay in performance is attributed to the contractor’s lawful exercise of its right of exceptio non adimpleti contractus.107 In addressing damages or harm in general, Article (170) ECC grants courts a broad authority in quantifying damages,108 and empowers courts and tribunals to quantify compensation, through the mechanism set out in Articles (221) and (222) ECC.109 Moreover, it is also common in construction contracts that capped liquidated damages are agreed in respect of a contractor’s failure to achieve the contractually specified and agreed performance standards.110,111 Capped liquidated damages clauses work to save the employer the need to prove loss in events of delay by the contractor, and also to keep

106 Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 2, (2010 ed.), Dar Alsherouk, p.817. See also Egyptian Court of Cassation Challenge No.743 for judicial year 49, hearing session dated 11 January 1983. 107 e.g., Egyptian Court of Cassation Challenge No. 5287 for judicial year 83, hearing session dated 17 February 2014. 108 Article (170) states: ‘The judge shall quantify compensation for the damage(s) suffered by the aggrieved party in accordance with Articles (221) and (222) taking into consideration the circumstances. If the judge was unable, at the time of judgment, to finally quantify the compensation, he may reserve for the aggrieved party the right to request revisiting the quantification within a specified period.’ 109 Article 221 ECC stipulates that: ‘(1) if compensation was not quantified in the contract or by a provision in the law, the judge shall quantify it. Compensation shall include the loss suffered, and profit lost by the creditor, provided that they are a natural result of the non-fulfillment or delay in fulfilment of the obligation. A damage shall be considered a natural result if the creditor could not have avoided it by exerting reasonable efforts. (2) However, if the obligation originates from the contract, a debtor not involved in fraud or gross negligence shall not be liable save for compensation of damage commonly foreseeable at the time of contracting.’ Moreover, Article 222/1 ECC states that: ‘(1) Compensation shall include moral damages, however, in such case it may not be transferred to a third party unless specified by an agreement or claimed by the creditor before courts.’ 110 J. Jenkins and S. Stebbings, International Construction Arbitration Law,Volume 1, (2006), p.43. 111 Clause 8.7 of the FIDIC Red Book 1999 edition (Red Book) provides for the contractor to pay delay damages to the employer if it fails to complete the works, or each section of the works, by the time for completion (subject to any extensions of time). The clause also states that such ‘delay damages shall be the only damages due from the contractor for such default.’ The rate of such delay damages is quantified in the Appendix to Tender: www.fidic.org/node/911, accessed on 22 Feb 2017. Moreover, in the new 2017 Edition, the FIDIC Red Book defined delay damages as: ‘The damages for which the Contractor shall be liable under Sub-Clause 8.8 [Delay Damages] for failure to comply with Sub-Clause 8.2 [Time for Completion]’.

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contractors informed about the magnitude of their potential exposure resulting from delay in performance. Accordingly, the general principle would be that courts or tribunals would uphold the agreed liquidated damages clause and will not reduce same in insofar as: • liability is not avoided; • the harm or damage presumption is not refuted; • the amount of liquidated damages is not proven to be excessively exaggerated; and • the contractor has not performed part of the obligation. This condition is not required if the obligation in question is indivisible.112 Liquidated damages also work as a limitation of liability clause. For instance, an employer cannot claim damages for delay in excess of the amount stipulated in a liquidated damages clause unless gross fault or fraud is established and attributed to the contractor.113 Save for Tunisia and Morocco, the majority of Arab laws recognise and incorporate provisions regulating capped delay damages or liquidated damages, and such laws are largely influenced by Egyptian law. Article 224 ECC states: (1) Damages fixed by agreement are not due, if the debtor establishes that the creditor has not suffered any loss. (2) The judge may reduce the amount of these damages, if the debtor establishes that the amount fixed was grossly exaggerated or that the principal obligation has been partially performed. (3) Any agreement contrary to the provisions of the two preceding paragraphs is void.

While most Arab laws114 provide for equivalently similar provisions of equal overriding mandatory nature, the Jordanian Civil Code of (1976), the UAE Civil Code (1985) and the new Omani Civil Code of (2013) offers a wider discretion to local courts. For instance, Article (267) Omani Civil Code, also encapsulating an overriding mandatory norm, stipulates:115 (1) If the object of the obligation was not an amount of money, the contracting parties may determine in advance the value of compensation by stipulating same in the contract or a subsequent agreement. (2) The Court may, in all events, based on a request by one of the parties, amend such agreement to make the quantification equal to the damage. Any agreement to the contrary shall be null and void.

112 Egyptian Court of Cassation, Challenge No. 5980, judicial year 65, hearing session dated 15 May 2007. 113 Article 225 ECC (1948), Article 267 Lebanese Code of Obligations and Contracts (1913) and Article 226 Syrian Civil Code (1949). 114 See, for example, Article 184 Algerian Civil Code (1975), Article 226 Bahraini Civil Code (2001), Article 303 Kuwaiti Civil Code (1980), Article 226 Libyan Civil Code (1953), Article 266 Qatari Civil Code (2004), Article 225 Syrian Civil Code (1949), Article 390 UAE Civil Code (1985) and Article 266 Lebanese Code of Obligations and Contracts (1913). 115 See also Article 364/2 Jordanian Civil Code (1976) and Article 390/2 UAE Civil Code (1985).

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Consequently, as a matter of Omani, Jordanian and UAE laws, a party can apply to the court or arbitral tribunal to override contractually agreed compensatory arrangements and adjust the specified compensation to equate it to the actual damage or harm suffered.116 The court’s moderation of the obligation to pay liquidated damages can also be sought on different grounds such as exceptional general events, where partial or total discharge of the obligation may be also sought on grounds of force majeure causing partial or complete impossibility of performance, where applicable.

Concurrent delays Concurrent delay refers to a period of delay in a construction contract caused by one or more factors, where some of those factors are attributed to the contractor while others are attributed to the employer, which affect the project’s completion date,117 or occur simultaneously or share a common point in time.118,119 On one hand, such case of concurrent delay might be utilised by contractors as a shield and a sword; a shield from the application of liquidated damages, and a sword to claim entitlement to an EOT. On the other hand, employers may attempt to invoke same to undermine and moderate contractor’s claims for prolongation costs. The problem concerning this situation is who exactly should bear the consequences of such delay? Under common law jurisprudence, different notions of causation were deployed to allocate the risk in a case of concurrent delay (the Malmaison approach, but-for causation, apportionment, and dominant cause).120

116 D. Courtney-Hatcher, S. Tee, D. Hamilton and J. Barton, Dentons & Co, Construction and projects in Oman: Overview. Available at: www.uk.practicallaw.com/7-519-6003?source=relatedcontent#. 117 See, for example, Society of Construction Law Delay and Distribution, 2nd edition, February 2017, p.6. Available at: www.scl.org.uk/sites/default/files/SCL_Delay_Protocol_2nd_Edition.pdf. 118 See Erin Miller Rankin, Kim Rosenberg and Sarah-Jane Fick, ‘Comparative Approaches to Concurrent Delay’, November 2018, Available at: https://globalarbitrationreview.com/chapter/1175332/ comparative-approaches-to-concurrent-delay#footnote-083 119 In the FIDIC Red Book fourth Edition Clause 8.5 addresses the principle of concurrent delay and reads ‘If a delay caused by a matter which is the Employer’s responsibility is concurrent with a delay caused by a matter which is the Contractor’s responsibility, the Contractor’s entitlement to EOT shall be assessed in accordance with the rules and procedures stated in the Particular Conditions (if not stated, as appropriate taking due regard of all relevant circumstances).’ 120 On one hand, the Malmaison approach entitles the contractor to a full extension of time notwithstanding the fault attributed to the contractor itself given that the delay attributed to or falls within the responsibility of the employer has at least equal causative potency with all other matters causing delay. On the other hand, the but for causation test is usually invoked by employers, arguing that, notwithstanding the employer’s own fault, contractor’s acts on their own would have delayed the works beyond the completion date. The apportionment and dominant cause are explained bellow. See John Marrin QC, ‘Concurrent Delay Revisited’, 2013, Published in the Society of Construction Law in London and the Society of Construction Law, available at: https://tecbar.org/wp-content/uploads/2016/05/2014-Concurrent-Delay-Revisited-John-Marrin-QC.pdf.

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Under most MENA region Civil Codes,121 the causation theory expressly deployed in matters of concurrent liability, whether contractual or tortious is a mixture of the theory of apportionment and the theory of dominate cause. For instance, on the issue of apportionment of liability, Article 169 ECC, such as the case in most of the MENA region,122 stipulates: if there’s a number of persons liable for a wrongful act, they would be jointly liable to compensate the damage, and the liability would be divided between them equally, unless the judge decides the portion of liability attributed to each of them.123

This Article applies to cases where (1) there is more than one person liable for a wrongful act that causes damage; and (2) the injured party is among those who contributed to the harm (e.g., a case of concurrent delay).124 Notwithstanding Article 169 ECC, Article 216 ECC, as is the case in many MENA region countries,125 has also provided a special application to both the theories of apportionment and dominant cause where an injured party contributes to his or her own loss: The court may reduce the amount of compensation or not award same at all where the fault of the creditor contributed to or aggravated the damage.126

121 See, for example, Articles 126 and 177 Algerian Civil Code (1975), Articles 160 and 217 Bahraini Civil Code (2001), Articles 228 and 234 Kuwaiti Civil Code (1980), Articles 172 and 219 Libyan Civil Code (1953), Article 180 Omani Civil Code (2013), Article 257 Qatari Civil Code (2004), Articles 170 and 217 Syrian Civil Code (1949), Articles 264 and 265 Jordanian Civil Code (1976), Articles 290 and 291 UAE Civil Code (1985), Articles 99 and 100 Moroccan Code of Obligations and Contracts (1913), Articles 135 and 137 Lebanese Code of Obligations and Contracts (1932) and Articles 108 and 109 Tunisian Code of Obligations and Contracts (1907). 122 Article 126 Algerian Civil Code (1975), Article 160 Bahraini Civil Code (2001), Article 228 Kuwaiti Civil Code (1980), Article 172 Libyan Civil Code (1953), Article 170 Syrian Civil Code (1949), Article 265 Jordanian Civil Code (1976), Article 291 UAE Civil Code (1985), Article 99 Moroccan Code of Obligations and Contracts (1913), Article 137 Lebanese Code of Obligations and Contracts (1932) and Article 108 Tunisian Code of Obligations and Contracts (1907). 123 Unlike other MENA region Civil Codes, the Qatari Civil Code (2004) does not include a similar provision to that effect. Also, Article 180 of the Omani Civil Code (2013) explicitly excludes joint liability of debtors. 124 See Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010), p.817. 125 Article 109 Tunisian Code of Obligations and Contracts (1907), Article 100 Moroccan Code of Obligations and Contracts (1913), Article 135 Lebanese Code of Obligations and Contracts (1932), Article 217 Syrian Civil Code (1949), Article 219 Libyan Civil Code (1953), Article 177 Algerian Civil Code (1975), Article 234 Kuwaiti Civil Code (1980), Article 290 UAE Civil Code (1985), Article 217 Bahraini Civil Code (2001), Article 257 Qatari Civil Code (2004) and Article 264 Jordanian Civil Code (1976). 126 Unlike other MENA region Civil Codes mentioned above, Article 180 Omani Civil Code (2013), Article 234 Kuwaiti Civil Code (1980), Article 109 Tunisian Code of Obligations and Contracts (1907) and Article 100 Moroccan Code of Obligations and Contracts (1913) does not expressly incorporate the theory of dominant cause because these provisions have not expressly given the court/tribunal the ability dismiss a claim of damages in toto even where there exists a dominant fault. However, Article 180 Omani Civil Code (2013) gives the court/tribunal discretion to rule in a different manner than that stipulated in the provisions. Thus, the dominant cause theory might be applied by a court/tribunal under Omani law (see Prof. Dr. Mohamed I. Bendari, Alwajeez in the Sources of Obligations, (2014), pp.353–356.)

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Thus, courts and tribunals have the discretion to apportion liability among the wrongdoers (apportionment theory) or, according to some MENA region jurisdictions,127 dismiss it altogether (where the dominant cause theory applies).128 Similarly, the UAE Federal Supreme Court has held that:129 A judge may reduce the amount of damages or dismiss same at all if the injured party has participated by its own action in effecting the damage or aggravating same. This provision addresses the rule applied in the case of joint fault, which applies equally to both contractual and tortious liabilities.

The Egyptian Court of Cassation has applied the theory of apportionment in many cases, for instance, it was held that:130 Whereas the challenged judgment […] has dismissed both appellants’ claims pertinent to the defendant company‘s fault in using the leased property [of the appellants] in a way that prejudices the integrity of the building on the basis that the defects that affected the building, subject of the dispute, have resulted from the owners’ [appellants] use of low quality types of reinforcing steel, other used materials, and iron bars, which lead to the defects and cracks in the building. […] while the judgment ignored that the company [defendant] has contributed to the prejudice concerning the integrity of the building due to its employees and clients abusive use of the bathrooms, where they [the defendant] did not care to repair the trays and sewage pipelines, which lead the ground to be filled with humidity and dribbling, which affected the reinforcement steel and caused the cracks, thawing to the concrete roof roofing […] Hence, the challenged judgment’s reliance, in its ruling, [only] on the fault of the owner [appellants] in causing damage to the integrity of the building and dismissing the claim […] even though the company’s liability to those damages is proven to be 40 per cent […] makes the judgment erroneous and necessitates its cassation

This leads to the following conclusions:

127 MENA region laws that adopt the ‘dominant cause theory’ are: Article 135 Lebanese Code of Obligations and Contracts (1932), Article 217 Syrian Civil Code (1949), Article 219 Libyan Civil Code (1953), Article 177 Algerian Civil Code (1975), Article 290 UAE Civil Code (1985), Article 217 Bahraini Civil Code (2001), Article 257 Qatari Civil Code (2004) and Article 264 Jordanian Civil Code (1976). 128 Prof Dr Al Sanhoury stated, while commenting on Article 216 ECC, that ‘we observe that […] Article [216 ECC] says [‘or reject any request for compensation’], which is the case where one fault dominates the other.’ (see Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010), p.819), see also, S. Morkos, El Wafi in the Explanation of Civil Law,Volume 2, part 2, (1988), pp.492–495. 129 See UAE Federal Supreme Court Challenge No. 1 of judicial year 26, hearing session dated 27 June 2005. 130 See Egyptian Court of Cassation Challenge No. 4110 of judicial year 66, hearing session dated 18 December 2008.

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• Principally, the theory of apportionment applies, being dominant in many Arab Civil Codes. 131 In this regard, the court or tribunal shall discern the amount of delay attributable to each party so that they would be able to apportion liability between the contractor and the employer, each according to the degree of fault it committed in relation to the other.132 • If, however, the court or tribunal is unable to discern the amount of delay attributable to each party according to their faults, the liability for delay would be equally divided between the employer and the contractor,133 which is the general solution adopted under Article 169 ECC and similar Arab Civil Codes provisions.134 • In certain MENA region jurisdictions,135 if one of the causes of delay highly outweighs the other to the point that one dominates or consumes the other,136 or where one cause is merely consequent upon the other,137 the effective cause therewith would be considered the dominant cause and the person whom the dominant cause is attributed to would bear 100 per cent of liability.138 Under the ECC (and many MENA region laws as mentioned above) a court or tribunal also has an authority to moderate the amount of liquidated damages if the harm is proven to be highly exaggerated or if the debtor proves that he or she has performed part of the obligation

131 See Article 216 ECC (1948), Article 177 Algerian Civil Code (1975), Article 217 Bahraini Civil Code (2001), Article 234 Kuwaiti Civil Code (1980), Article 219 Libyan Civil Code (1953), Article 177 Omani Civil Code (2013), Article 257 Qatari Civil Code (2004), Article 217 Syrian Civil Code (1949), Article 264 Jordanian Civil Code (1976), Article 290 UAE Civil Code (1985), Article 268 Moroccan Code of Obligations and Contracts (1913), Article 135 Lebanese Code of Obligations and Contracts (1932) and Article 282 Tunisian Code of Obligations and Contracts (1907). 132 See Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010), p.820. See also, S. Morkos, El Wafi in the Explanation of Civil Law,Volume 2, part 2, (1988), p.495. 133 See Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010), p.822. See also, S. Morkos, El Wafi in the Explanation of Civil Law,Volume 2, part 2, (1988), p.495. 134 Qatari Civil Code (2004) and Article 180 Omani Civil Code (2013) do not expressly adopt the 50:50 approach of apportionment where discerning the degree of fault attributed to each party is not possible. 135 See Article 169 ECC (1948), Article 135 Lebanese Code of Obligations and Contracts (1932), Article 217 Syrian Civil Code (1949), Article 219 Libyan Civil Code (1953), Article 177 Algerian Civil Code (1975), Article 290 UAE Civil Code (1985), Article 217 Bahraini Civil Code (2001), Article 257 Qatari Civil Code (2004) and Article 264 Jordanian Civil Code (1976). 136 This is foreseen in two cases: (1) If one fault is intentional and the other is not; and (2) if one party consented to the fault of the other while being totally aware of the consequences (See Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010), pp.813–815. 137 See Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010), p.816. See S. Morkos, El Wafi in the Explanation of Civil Law,Volume 2, part 2, (1988), p.493. 138 Prof Dr Al Sanhoury stated, while commenting on Article 216 ECC that ‘we observe that […] Article [216 ECC] says [‘or reject any request for compensation’], which is the case where one fault dominates the other.’ (see Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 1, (2010), p.819).

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Professor Soliman Morkos opines that, as a preliminary issue, if one of the faults is of a ‘highly probable’ but not certain causative potency while the other is of an ‘assured’ and ‘certain’ causative potency, it is likely that only the latter would be deemed the relevant cause of the harm.139 The Egyptian Supreme Administrative Court generally applies the principle of apportionment.140 In the specific context of construction contracts, the Egyptian Administrative Court also recognises the principles of apportionment and dominant cause,141 and even Saudi law recognises the same.142

Decennial liability Decennial liability is a mandatory strict regulation of a certain construction-specific liability. In the context of construction contracts, MENA region construction-related regulation includes mandatory strict decennial liability in the civil codes of countries such as Algeria, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Oman, Qatar, Syria and the UAE.143 Contractors, according to the prevailing view, have an obligation to achieve a specific result, which is to duly perform the works without defects.144 Decennial liability also imposes the joint and several liability of contractors, architects and engineers regarding any defects affecting the structural integrity of the building or causing total or partial collapse. This decennial liability operates as a mandatory overriding provision that may not be derogated from by agreement or choice of a foreign law, if such choice of foreign law (in relation to construction contracts relating to immovables) is legally permissible in the pertinent jurisdictions. Under decennial liability, architects, engineers and contractors are jointly liable for partial failure or total collapse of constructions or other installations for a period of 10 years from the date of handover.145 While most Arab laws provide for a 10-year decennial liability period, Article 876 Tunisian Code of Obligations and Contracts (1907) and Article 668 Lebanese Civil Code (1932) provide for a five-year liability. The burden of proving that the collapse resulted from an external event beyond the jointly liable persons lies with such persons.

139 See S. Morkos, El Wafi in the Explanation of Civil Law,Volume 2, part 2, (1988), p.492. 140 See Egyptian Supreme Administrative Court, Challenge No. 4663 of judicial year 47, hearing session dated 2 September 2007. 141 See Egyptian Court of Administrative Adjudications, Challenge No. 73358 of judicial year 69, hearing session dated 31 March 2018. 142 See Saudi Court of Cassation challenge No. 3400 of judicial year 1, hearing session dated 31 August 2010. 143 See, for example, Article 651 of the ECC, Article 554 Algerian Civil Code (1975), Article 870 Iraqi Civil Code (1951), Article 788 Jordanian Civil Code (1976), Article 692 Kuwaiti Civil Code (1980), Article 668 Lebanese Civil Code (1932), Article 650 Libyan Civil Code (1953), Article 634 Omani Civil Code (2013), Article 711 Qatari Civil Code (2004), Article 615 Bahraini Civil Code (2001), Article 876 Tunisian Code of Obligations and Contracts (1907), Article 769 Moroccan Code of Obligations and Contracts (1913), Article 788 Jordanian Civil Code (1976), Article 617 Syrian Civil Code (1949) and Article 880 UAE Civil Code (1985). 144 See Egyptian Court of Cassation, Challenge No. 443, judicial year 51, hearing session dated 12 June 1989. 145 Before handover, the liability of the contractor, architects or engineers is subject to the general rules of contractual liability; see, for example, Dr Mohamed Shokry Sorour, ‘Responsibility of the Engineers and the Contractors of Buildings and Other Fixed structures in Egyptian and French Civil Law’, p.28 and p.29.

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The liability period generally extends to 10 years, unless the parties intend to keep the building for a shorter period,146 or the pertinent civil law provides for a shorter period, such as the former Bahraini rule providing for a five-year period.147 Following the enactment of the Bahrain Civil Code in 2001, the liability period was extended to 10 years, as is the case in other Arab states.148 Furthermore, any clause intending to limit or exclude the decennial liability shall be null and void. The MENA jurisdictions share the following features of decennial liability: • it runs from handover and lasts for a period of five or 10 years or such lesser period, depending on the jurisdiction and whether the building is intended to last for a shorter period; • it arises notwithstanding that the collapse or defect resulted from a defect in the land; • it is joint and several, where the employer can proceed against the contractor, the engineer or the architect for the full amount of the claim; and • it is considered of an overriding mandatory nature and so cannot be excluded or limited by contractual arrangements or possibly choice of foreign law (assuming such choice is permissible).

Suspensive conditions Parties to construction contracts uneventfully add suspensive conditions to one or more of the obligations in the contract. An obligation is deemed conditional if the obligation’s existence or extinction depends on a future uncertain event. Conditions can either be ‘suspensive’ or ‘resolutory’. A ‘suspensive condition’ is that which has the effect of suspending the effect of an obligation until the agreed uncertain event occurs or is realised.149 Examples of suspensive conditions include: • suspending the issuance of completion certificate by the employer on the completion of a successful performance test by the contractor; • suspending the commencement of the works on the handing over the site; and • suspending the performance of the works on securing any agreed financing, etc.

146 See Article 651 ECC. 147 See Article 13(b) repealed Bahraini Buildings Organization Law No.13 of 1977. 148 See Article 615 Bahraini Civil Code (2001). 149 See Articles 265–267 ECC (1948), Articles 116–121 Tunisian Code of Obligations and Contracts (1907), Articles 107–112 Moroccan Code of Obligations and Contracts (1913), Articles 81–84 Lebanese Code of Obligations and Contracts (1932), Articles 265–267 Syrian Civil Code (1949), Articles 252–254 Libyan Civil Code (1953), Articles 285–287 Qatari Civil Code (2004), Articles 203–205 Algerian Civil Code (1975), Articles 323–325 Kuwaiti Civil Code (1980), Articles 420–423 UAE Civil Code (1985), Articles 245–247 Bahraini Civil Code (2001), Articles 393–396 Jordanian Civil Code (1976) and Articles 293–295 Omani Civil Code (2013).

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In specific reference to suspensive conditions, it was held that if the debtor intervenes and contributes to the nonfulfillment of the suspensive condition, the debtor would be liable and the obligation may well be deemed fulfilled, even if the suspensive condition has not actually materialised.150 That said, there are three types of suspensive conditions: fortuitous, voluntaryand mixed conditions.151 Both fortuitous and mixed conditions are valid.152 As to the voluntary condition, it is either (1) a simple voluntary condition; or (2) an absolute voluntary condition. The ‘simple voluntary condition’ is not simply conditional on the will of one of the parties, but is also constrained by the surrounding circumstances. For example, obtaining an approval from an independent third party (not subject to the control of the employer) as a suspensive condition for the acceptance of the works by the employer may well be a simple voluntary condition. Simple voluntary conditions are legally valid.153 Concerning the ‘absolute voluntary condition’, it is either dependent on the will of the creditor or the will of the debtor. If such condition is dependent on the will of the creditor, it is valid and binding. However, if such condition is subject to the will of the unilateral debtor, the obligation becomes inexistent ab initio (i.e., the obligation is considered as never having been created).154

The duty of mitigation The duty of mitigation is known in both civil and common law systems. Article (221/1) of the ECC, as is the case with many MENA region Civil Codes,155 states: The judge shall fix the amount of compensation, if it has not been fixed in the contract or by law. The amount of damages includes losses suffered by the creditor and profits of which it has been deprived, provided that they are the normal result of the failure to perform the obligation or of delay in such performance.These losses shall be considered to be a normal result, if the creditor is not able to avoid them by exerting reasonable effort.156

150 See Egyptian Court of Cassation, Challenge No. 5414 of judicial year 63, hearing session dated 13 February 2001. 151 See Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 3, (2010 edition), p.19, paragraph 12. 152 See Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 3, (2010 edition), pp.19–20, paragraph 12. 153 See Prof Dr Al Sanhoury, Al Wasit in the Explanation of the Civil Code,Volume 3, (2010 edition), p.20, paragraph 12. 154 See Al Sanhory, Al Wasit Fi Sharh Al Qanun Al Madani (A Treatise on the Explanation of the Civil Code),Volume 3, (2010 edition), pp.20–22, paragraph 12. 155 Article 182 Algerian Civil Code (1975), Article 161 Bahraini Civil Code (2001), Article 230 Kuwaiti Civil Code (1980), Article 224 Libyan Civil Code (1953), Article 181 Omani Civil Code (2013), Article 201 Qatari Civil Code (2004),Article 222 Syrian Civil Code (1949), Article 266 Jordanian Civil Code (1976), Article 292 UAE Civil Code (1985) and Article 264 Moroccan Code of Obligations and Contracts (1913). 156 Similarly, and in confirmation of the overarching global nature of the duty of mitigation as a general principle of law, Article (7.4.8) of the UNIDROIT principles provides that: ‘(1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party’s taking reasonable steps.(2) The aggrieved party is entitled to recover any expenses reasonably incurred in attempting to reduce harm.’

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Commenting on the said Article, Al Sanhoury stated that: If the injured party did not perform reasonable efforts to avoid the damage, he would be deemed as having committed a fault; thus, there exists a common fault, and the injured party would have to bear the consequences of his fault by bearing the damage caused by that fault.157

This evidences, from a civil law perspective, the existence of a general duty of mitigation by the aggrieved party, or it may risk moderation and reduction of the compensation due to its own fault, which contributed to the loss sustained. The duty of mitigation can be seen as subordinate to the obligation of cooperation dictated by the general duty of good faith. This duty exists whether in the context of the contractual or tortious liability.158 Courts throughout the MENA region have also confirmed that the damages for which the aggrieved party can seek compensation are those that could have not been avoided by taking reasonable steps by such party.159 While there are no strict criteria for determining what constitutes reasonable mitigation efforts, it is commonly agreed that these efforts should not be burdensome on the aggrieved party. According to the UNIDROIT principles, these efforts can either be directed to limit the extent of the harm ‘where there is a risk of it lasting for a long time if such steps are not taken’ or to avoid any increase in the initial harm. Once the reasonable mitigation efforts are undertaken, there exists no prohibition that prevents an aggrieved party from seeking to recover mitigation costs on the basis of the principles of contractual liability as well as the general principle that a party may not benefit from its own wrongdoing. Under Egyptian law, compensation (inclusive of incurred costs and expenses that form part of the losses) is not due if the aggrieved party did not suffer any harm. In case of a sustained harm, the amount of compensation, subject to any limitation of liability clause, would include all direct losses incurred including mitigation expenses. The Egyptian Court of Cassation has held that the determination of compensation is a factual matter that falls within the jurisdiction of the trial court. However, such determination must be proportionate to the sustained harm.160 Thus, an arbitral tribunal would be at liberty to assess the value and scope of compensation, as inclusive of the costs and expenses of mitigation and their characterisation as direct and foreseen losses or not.

157 See Al Sanhory, Al Wasit Fi Sharh Al Qanun Al Madani (A Treatise on the Explanation of the Civil Code),Volume 1, (2010 edition), pp.839–840. 158 See, for example, Omani Court of Cassation Challenge No. 29 of judicial year 2004, hearing session dated 23 June 2004, Egyptian Court of Cassation Challenge No.1070 of judicial year 53, hearing session dated 6 June 1984. 159 See, for example, Egyptian Court of Cassation Challenge No. 3956 of judicial year 68, hearing session dated 28 May 2000, Bahraini Court of Cassation Challenge No. 842 of judicial year 2014, hearing session dated 10 May 2015, Qatari Court of Cassation Challenge No. 13 of judicial year 2010, hearing session dated 16 March 2010. 160 Egyptian Court of Cassation Challenge No. 7085 of judicial year 63, hearing session dated 30 November 1995.

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Finally, this chapter shall briefly address two scenarios related to recovery of mitigation costs. These scenarios specifically pertain to the situation where mitigation costs were incurred prior to a contractual breach by the employer, if at all possible. Under such scenario, the aggrieved party may have anticipated or envisaged a forthcoming breach by the other party and so acted prudently to mitigate the damage that would likely ensue as a result of the anticipatory breach materialising. Under the first scenario, the breach happens and the damage is sustained despite the mitigation efforts. In such case, the aggrieved party would have incurred costs prior to the actual breach and damage. From a purely legal perspective, a potential breach of contract cannot be considered an actual default or breach to form the basis for recovery. However, a court or tribunal may treat this as a manifestation of good faith,161 and if the damage unfolds, compensation may likely include mitigation costs that directly contributed to the reduction of the damage or loss sustained. Under the second scenario, if the breach does not occur and the damage does not materialise, even though the aggrieved party had incurred mitigation costs, then one ought to distinguish between two possibilities: (1) the breach and damage have not occurred owing to the mitigation efforts undertaken by the aggrieved party; and (2) the breach and damage have not occurred for unknown reasons or reasons other than the mitigation efforts undertaken by aggrieved party. While there is no direct Arab authority or judgment on the point, yet if under (1) the aggrieved party managed to prove that the breach and damage have not materialised, in whole or in part, because of the mitigation efforts or actions, then to the extent that such actions were the direct cause for the non-materialisation of such breach or damage, a court or tribunal should order recovery of the costs on the premise that such efforts and actions led to a clear avoidance of contractual breach and harm that would have otherwise materialised. However, under (2), the aggrieved party will not be entitled to recover costs of mitigation simply because that scenario (2) confirms the lack of a causal link; hence no liability can be established.

Interest Interest remain a hot topic in the MENA region legal systems and specifically in the context of construction disputes. Generally speaking, interest can be claimed for delay or as compensation. However, there are certain specificities when claiming interest in certain MENA region legal systems. This includes the legality and illegality of claiming interest, the applicable rate or rates,162

161 For instance, good faith entails a duty by the employer to inform the contractor of his breach of contract because the contractor might not be aware of his breach; thus, if the employer intentionally fails to inform the contractor of the breach, the employer would not be entitled to compensation for the damages that he could have avoided by informing the contractor (see Prof Dr Mohamed Labeeb Shanab, ‘Explanation of Contract For Works’ Rules’, (2015), p.151.) 162 See for example, Articles 226 and 227 ECC, Article 228 Bahraini Civil Code (2001), Article 305 Kuwaiti Civil Code (1980), Article 229 Libyan Civil Code (1953), Article 268 Qatari Civil Code (2004), Article 227 Syrian Civil Code (1949) and Article 389 UAE Civil Code (1985).

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whether interest can be compounded, whether interest can be claimed for any debt, the time at which interest starts to accrue and whether the contracting parties are legally permitted to derogate from any applicable statutory regulation of interest. While an analysis of the specificities referred to above goes beyond the purpose and scope of this article and this section with focuses exclusively on the applicable statutory interest rates, it suffices to state that the legality, scope and conditions of interest differ significantly across the MENA region jurisdictions. For example, interest is altogether prohibited under Saudi law. Specifically, in relation to interest rates, the Egyptian and Syrian laws statutory interest rates (in non-banking transactions) vary from 4 per cent per annum in civil matters to 5 per cent per annum in commercial matters,163 noting that an agreement on an interest rate in excess of 7 per cent is prohibited under the ECC, 164 and in excess of 9 per cent is prohibited under the Syrian Civil Code.165 Moreover, under Syrian law, if the interest rate is not agreed, then its determination shall be according to the custom and trade usages in commercial matters.166 Moreover, the Kuwaiti and Bahraini Civil Codes prohibit agreements on interest in civil law matters.167 Furthermore, the Qatari, UAE and Omani Civil Codes uphold the same principles existent in the Kuwaiti and Bahraini Civil Codes, with the exception that they do not impose the condition of extraordinary harm.168 In commercial law matters, the Kuwaiti Commercial Code allows for a 7 per cent interest rate on the non-payment of or delay in the payment of commercial debts.169 It also allows parties to agree to an interest rate that does not exceed the rates published by the Central Bank of Kuwait.170 The Bahraini Commercial Code also allows for interest rate in commercial matter.171 The Qatari Commercial Code does not explicitly provide a different statutory approach in commercial matter, yet judgments indicate that interest rate might be upheld in the case of commercial matters by virtue of the commercial custom.172 The Omani Commercial Code provides that parties may agree on interest subject to the ceiling specified in the pertinent Ministerial decrees.173 In addition, the UAE Commercial Code

163 Articles 226 and 227 ECC, Articles 227 Syrian Civil Code (1949) 164 By way of exception, Article 50 of the Egyptian Commercial Code (1999) provides that interest on the loans made by a trader for the purpose of his or her trading activities is determined according to the rate set by the Central Bank of Egypt, unless the parties agree to a rate that is less than that determined by the Central Bank. 165 Article 227 Syrian Civil Code (1949). 166 Article 108 Syrian Commercial Code (2006). 167 Article 305 Kuwaiti Civil Code (1980), Article 228 Bahraini Civil Code (2001) and Article 389 UAE Civil Code (1985). 168 Article 268 Qatari Civil Code (2004), Article 389 UAE Civil Code (1985) and Article 267 Omani Civil Code (2013). 169 Article 110 Kuwaiti Commercial Code (1980). 170 Article 111 Kuwaiti Commercial Code (1980). 171 Article 81 Bahraini Commercial law (1987) and its amendments. 172 Qatari Court of Cassation Challenge No.66 of judicial year 2014, hearing session dated 13 May 2014; Qatari Court of Cassation Challenge No.40 of judicial year 2013, hearing session dated 14 May 2013; Qatari Court of Cassation Challenge No.208 of judicial year 2014, hearing session dated 25 November 2014. 173 Article 80 of the Omani Commercial Code (1990) states that the interest rate shall not exceed the ceiling determined by both the Ministry of Commerce and Industry and the Omani Commercial Chamber.

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provides that in commercial matters, the parties may agree on interest rate, and, in the absence of an agreement, such rate shall be determined according to the rate prevailing in the market during the time of the transaction, which shall not exceed 12 per cent.174

Concluding remarks The construction industry in the MENA region is booming and constructions contracts and associated disputes are on the rise,175 and the majority of construction projects burgeoning throughout the MENA region adopt the FIDIC form of contracts with noticeable proliferation of the FIDIC Red Book form of contract. However, the business, economic and legal reality confirms the existence of a direct relationship between the proliferation of construction contracts in the MENA region and the increase in construction disputes arising from said contracts. It has been suggested that the top causes of construction disputes in the MENA region include:176 • failure to properly administer a contract; • failure to make interim determination of EOT and compensation; • employer-imposed change; • contract selection was not a ‘best fit’ when compared to the project’s characteristics; and • third-party events (force majeure, imprévision, etc.). Construction contracts are complex agreements and require special expertise to negotiate, draft, prosecute and hear disputes arising therefrom. This complexity is further compounded in the MENA region owing to: • certain gaps and possible friction between the agreed terms and conditions and certain applicable civil law principles; • the top causes of construction disputes, given above; • the outdated legislative regulation of construction contracts in Arab laws; • relative (unwarranted) avoidance of the needed in-depth scrutiny of the applicable legal principles; • the existence of a bipolar (civil law–administrative law) system existing in certain Arab jurisdictions, which largely affects the characterisation and performance of construction agreements; and • prevailing misconceptions on the specificities of the MENA region laws. It is in this context that the present contribution invites scholars, counsel, judges and arbitrators to carefully scrutinise the applicable civil law principles, so as to ensure that they are capable of proper implementation and adaption to the specificities of construction contracts and disputes. It remains for courts and arbitral tribunals to innovate and safeguard

174 Article 88 UAE Commercial Code (1993). 175 See ‘The Middle East and Africa (MEA) region’s construction industry will grow by 6.9 per cent annually in 2016-20, according to Timetric’s Construction Intelligence Center (CIC)’; See www.venturesonsite. com/news/the-middle-east-and-africa-mea-regions-construction-industry-will-grow-by-6-9-annuallyin-2016-20/, accessed on 22 March 2017. Presentation on Middle East and North Africa Regional Economic Outlook; 19 October 2016, accessed on 22 March 2017. 176 See E.C. Harris Global Construction Dispute Report 2013.

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the application of the pertinent legal principles under the governing law regime that may not be ignored, overlooked or weighed under a totally alien legal system that may not be relevant to the applicable laws. Legal principles in the civil laws of the MENA region are capable of accommodating the specificities and intricacies of the construction industry and catering for the disputes arising thereunder, in due consideration of the fact that arbitration is the prominent dispute resolution mechanism and the most favoured option for settlement of construction-related disputes in the region. It has indeed been seen that the principles of good faith, implied terms, abuse of right, estoppel, global claims, constructive acceleration, force majeure and imprévision, delay damages and decennial liability are among the concepts that are regularly invoked in arbitral proceedings, and so careful consideration as to their possible application and scope is required. For ease of reference, the summary table below captures the specific construction law sections in Arab laws, as well as the pertinent arbitration legislation. Egypt

Libya

Morocco

Oman

Kuwait

1907

29/2013

67/1980

5/1985

723–729 759–780

828–834 866–887

626–650

661–697

872–896

1974†

42/1993

47/1997‡

38/1980§ 11/1995¶

6/2018||

Civil Law (Code)

131/1948

1953

1913

Construction provisions

646–673

645–666

Arbitration law/civil procedures

27/1994

1953*

Qatar

Lebanon

Tunisia

Algeria

Jordan

Syria

Iraq

UAE

Bahrain

Civil Law (Code)

22/2004

1932

58/1975

43/1976

84/1949

40/1951

19/2001

Construction provisions

682–715

624–628 657–689

549–570

780–804

612–633

864–890

584–620

Arbitration law/civil procedures

2/2017

90/1983**

9/2008††

31/2001‡‡

4/2008

83/1969§§

9/2015

*

Civil Procedures Law, Articles 739–777

†

Civil Procedures Law, Articles 306–327.

‡

Amended by Law No. 3 of 2007.

§

Civil Procedures Law, Articles 173–188.

¶

The Judicial Arbitration Law.

|| The new Federal Arbitration Law No. 6 of 2018 revoked Articles 203–218 of the Civil Procedures Law No. 11 of 1992. ** Civil Procedures Law, Articles 762–821 amended by Law No. 440 of 2002. †† Civil and Administrative Procedures Law, Articles 1006–1061. ‡‡ Amended by Law No. 16 of 2018; §§Civil Procedures Law, Articles 251–276.

In specific reference to construction disputes, it is also clear that the International Chamber of Commerce and the London Court of International Arbitration remain the leading arbitral institutions that administer, inter alia, large-scale construction disputes and arbitrations in the MENA region. Other notable regional arbitral institutions are the Bahrain Chamber for Dispute Resolution (BCDR), the Cairo Regional Centre for International

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Commercial Arbitration (CRCICA), the Dubai International Financial Centre-London Court of International Arbitration (DIFC-LCIA), the Dubai International Arbitration Centre (DIAC), the Abu Dhabi Commercial Conciliation and Arbitration Centre (ADCCAC), Qatar International Centre for Conciliation and Arbitration (QICCA) and the up-and-coming newly established Casablanca International Mediation and Arbitration Centre (CIMAC). Finally, and in light of the above, given the complex and competitive environment of the construction industry, it is common knowledge that construction projects and contracts offer recipes for disputes no matter how well-drafted such contracts are. In such environment, since differences in perception exist among the participants of the projects, conflicts are inevitable.177 As explained above, in practice, there are a certain number of common causes for dispute in the construction industry; these are classified into six main categories, as follows:178 Category of disputes

Causes of disputes Variations initiated by the owner Excessive change of scope Late giving of possession

Owner-related

Acceleration or suspension of works Payment delays Decision-making delays Financial failure Site conditions Errors and omission in design Differing site conditions

Consultant

Defective design Excessive quantity variations Inadequate or incomplete specifications Delays in work progress Time extensions Financial failure of the contractor Technical inadequacy of the contractor

Contractor-related

Excessive change orders Defects in maintenance Incompetency Defective construction and quality of works Subcontractor‘s inefficiency

177 Emre Cakmak, Pinar Irlayici Cakmak, ‘An analysis of causes of disputes in the construction industry using analytical network process’, available at https://www.sciencedirect.com/science/article/pii/ S1877042813050738. 178 ibid. See also, Sigitas Mitkus, Tomas Mitkus, ‘Causes of Conflicts in a Construction Industry: A Communicational Approach’, available at https://www.researchgate.net/publication/275543098_Causes_of_ Conflicts_in_a_Construction_Industry_A_Communicational Approach.

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Category of disputes

Causes of disputes Ambiguities in contract documents

Contract-related

Different interpretations of the contract provisions Risk allocation Adversarial or controversial culture

Human behaviour-related

Lack of communication Lack of team spirit Unrealistic expectations Environmental hazards Unforeseen changes

External factors

Market inflation Labour disputes Legal and economic factors Fragmented structure of the sector

Consequently, it is always preferable in the context of construction to adopt measures and techniques for dispute avoidance. In this respect, it is advisable that the contracting parties do the following: • carefully select the best-fit contract with proper drafting; • acknowledge the need for contractual balance; • engage in proper and careful choice of law and forum; • maintain a high-level team with sensible contract administration and implementation; • maintain efficient policies for documentation, correspondences, records and claims; • scrutinise legal and factual rights and follow procedures; • evaluate and share risks; • consider the proper utilisation of dispute avoidance and adjudication boards; and • opt for amicable settlement options prior to proceeding with fully fledged arbitration proceedings.

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32 Construction Arbitration in Brazil Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira1

Introduction The Brazilian construction market has had a turbulent political and economic climate since 2015, mainly due to Operation Car Wash, an investigation led by the federal police and federal prosecutors that focused on the involvement of companies and political leaders in corruption. Brazil’s major construction companies have been at the centre of these investigations and have suffered from a significant reduction in public financing for construction initiatives. To foster investments in the sector, in the face of a decrease in public financing, the government has created the Programme of Investment Partnerships (PPI) to increase the contribution of private capital to infrastructure projects in Brazil.The purpose of the PPI is to expand and strengthen the relationship between the state and the private sector through partnership contracts (including concessions, public-private partnerships, permissions or leasing of public assets and any other public private arrangements that have a similar legal structure). Currently, PPIs have been a part of 101 infrastructure projects across many sectors (airports, power, generation, transmission, railroads, highways, mining, military and ports), amounting to over 1.4 trillion reais in investments.2 Also, owing to the deterioration of major construction companies involved in Operation Car Wash, there has been an increase in activity of medium-sized construction companies and foreign players in the construction and project development markets.These

1

2

Flávio Spaccaquerche Barbosa and Thiago Fernandes Moreira are partners at Mattos Filho,Veiga Filho, Marrey Jr. e Quiroga Advogados. We would like to acknowledge the contribution to this article of our colleagues, associates Caio Lucas Gabra and Bruno Barreto de Azevedo Teixeira. Information provided by the official website of the PPI. Available at: https://www.ppi.gov.br/conselho-d o-ppi-qualifica-projetos-de-infraestrutura-que-somam-r-14-trilhao-em-investimentos.

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new players have secured some stability in the construction market despite the economic and political crisis – the sector is still one of the most relevant industry branches in the Brazilian economy.3 The Brazilian construction industry can be divided into private construction projects and public construction projects.There are different sets of rules and standards that apply to these two very different categories.

Private construction contracts In general, private agreements are governed by the Brazilian Civil Code (BCC). The BCC is divided in two sections: • a general part, dealing with issues involving personhood, assets, legal transactions, statute of limitations and prescription; and • a special part, where one can find rules on obligations (which include contract law), corporations, property, family and succession. The sections related to legal transactions and obligations are generally applicable to all contracts – including construction contracts.

General aspects of Brazilian contract law In general, Brazilian contract law is founded on the principles of freedom of contract and pacta sunt servanda, meaning that, as long as parties fulfil basic legal requirements of contract formation and unless otherwise provided by a mandatory rule, they are allowed to regulate their relationship by means of binding terms and conditions agreed between them. However, the BCC requires the parties to exercise their rights in accordance with the standards of good faith, as provided by Articles 113, 187 and 422 of the BCC.4 This duty is applicable to all contracts, imposing on parties a duty to act in fair dealings, during conclusion, interpretation and performance of any contract. Further to that, parties should conduct their business taking into consideration the social purpose of the contract as commanded by Article 421 of the BCC,5 by dealing and performing their obligations in view of the final outcome intended by the contract and

3

4 5

‘Construction’s GDP (Gross Domestic Product) will grow by 2 per cent in 2019, according to estimates by Sinduscon-SP (Union of the Civil Construction Industry of the State of São Paulo) and FGV (Fundação Getúlio Vargas). The projection considers that the country’s GDP will expand by 2.5 per cent in the term’. Article available at: https://www.valor.com.br/empresas/6105205/pib-do-setor-de-construcao-ter a-expansao-de-2-em-2019-diz-sindicato. Accessed on 6 July 2019. Article 113: ‘The legal transactions must be interpreted according to good faith and customs of the location of its execution.’ Article 187: ‘Also commits a wrongful act the holder of a right who, while exercising it, evidently exceeds the limitation imposed by their economic or social purpose, good faith or customs.’ Article 422: ‘The contracting parties are obliged to maintain, at the conclusion of the contract, as well as during its performance, the principles of probity and good faith.’ Article 421: ‘The freedom of contract shall be exercised by reason of and within the limits of the social function of the contract, in compliance with the provisions of the Declaration of Economic Freedom Rights.’

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in a manner fruitful to society as a whole. Both the principle of good faith and the social purpose of contract principles seek to avoid the abusive behaviour from contracting parties, in a way to protect parties from bad-faith conduct. Moreover, as per Article 112 of the BCC, contracts are interpreted according to the parties’ will.6 Hence, there is no parole evidence rule under Brazilian law; the conduct of the parties and the circumstances of the case are often considered when interpreting not only the will of the parties, but the reasonability of their conduct during performance and of the applicable contractual or legal remedies.

Specific rules concerning construction contracts in Brazil In addition to general rules of contract law, construction contracts in Brazil are generally regulated by Articles 610 to 626 of the BCC. In accordance with the BCC, a contract is considered a construction contract when the contractor’s scope include: (1) the works for the implementation of the project; or (2) the supply of works and materials. In this sense, even though engineering procurement construction contracts are not specifically regulated by law, they are treated and regulated, for the most part, as construction contracts. There is no specific formality required by law for the execution of a construction contract, but it is highly recommended to do it in writing. Most of the projects developed in Brazil use bespoke contracts (that is, contracts specifically drafted for a particular project) rather than standard form contracts. However, international standard forms such as the Fédération Internationale des Ingénieurs-Conseils (FIDIC) contracts and the new engineering contract standard forms have gained some popularity over the past decade, especially in projects involving foreign parties (including foreign sponsors, partners or lenders). It may be too soon to say that FIDIC-based whole contracts are common, but it is somehow usual to see parties and counsels placing isolated clauses into their own drafts. In any event, if the provisions of Articles 610 to 626 of the BCC are not derogated by the parties, they constitute implied terms to construction contracts. These provision establish some basic rules regarding: • transfer of risk; • payment terms; • acceptance and inspection of works; • change orders; and • suspension and termination scenarios. As a general rule, the provisions of the BCC regarding construction contracts may be derogated by the agreement of the parties. However, there are some mandatory rules that must be observed. For instance, Article 618 of the BCC provides that the contractor shall be liable for the soundness and safety of the works for a period of five years. This warranty

6

Article 112: ’In the declaration of will, the intention rather than the literal sense of the language shall be observed.’

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was designed to protect not only the employer but any party that may be affected by the works and is, as a consequence, irrevocable and not subject to waiver by contract. This is considered a mandatory rule under Brazilian law.

Public procurement contracts Brazil is a federation composed by a federal government, 26 states and the Federal District, and a high number of local municipalities – each with very different rules applicable to public procurement contracts in their sphere of jurisdiction. As a general rule, though, public procurement is governed by the Federal Constitution, which has strict rules on the activity of public entities, by Law No. 8,666/93 (the Public Procurement Act) and by Law No. 13,303/16 (the State-Owned Companies Act), which applies to all levels of government.

Public bidding Article 37, XXI, of the Federal Constitution provides for government entities to conduct public bidding procedures before awarding the procurement of construction, engineering works, services, purchases and sales. To regulate such provision, the federal government enacted the Public Procurement Act in 1993. The Public Procurement Act regulates public procurement procedures and contracts entered into by federal, state and municipal governments. In theory, the Public Procurement Act is meant to provide general rules that would be complemented by state or municipal legislation based on local circumstances. However, in practice, the Public Procurement Act is relatively detailed, leaving little margin for the states and municipalities to further legislate on the matter. General rules of private contract law apply when rules of public procurement are silent. According to Article 1, Sole Paragraph of the Public Procurement Act, all public entities, including state-owned companies (or companies where the state has a direct or indirect controlling interest), autocracies and public foundations, among others, are subject to the rules contained in the Public Procurement Act. Additional Federal rules on public procurement include the following: • Law No. 9,472/97 provides for the National Communications Agency and authorises the agency to create its own public procurement rules; • Law No. 9,478/97 established the National Oil Agency and authorises the agency to create its own public procurement rules, while also allowing Petrobras (a state-owned oil company) to comply with a simplified tender procedure; and • Law No. 12,598/12 provides special rules for the purchase and development of defence systems. Besides the Federal regulation – which applies to all levels of government – states and local authorities also have local procurement regulations, which must abide by the Federal Constitution and the Public Procurement Act. Owing to the fundamental principles of public tendering as provided in the Federal Constitution and in Article 3 of the Public Procurement Act, all tendering rules and regulation shall aim to seek the best

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value-for-money offer, meanwhile respecting the isonomy between competitors. This is the main goal of the provisions included in all public procurement rules, including the Public Procurement Act.

General features of public construction contracts The Public Procurement Act and other legal provisions concerning public contracts allow the employer (the public entity) to provide for clauses that would not be possible in a private relationship. For example, the government entity has the right to unilaterally amend the contract in order to increase the works in up to 25 per cent (50 per cent in cases of restauration works for buildings and equipment). Subject to a proportional increase of the contract price, the contractor shall be obliged to undertake the works under the same conditions originally contracted. Moreover, in accordance with Articles 58, XII and 79, Section 2, the employer terminates the contract in cases where there is considerable public interest, being subject only to indemnifying the contractor for the works performed until the termination and demobilisation costs, but without any termination fee or loss profits being due to contractor, as would happen in a private construction contract. In sum, considering the complexity of public procurement rules in Brazilian law, it is important to always confirm the existence of specific provisions before applying rules of private contract law.

Disputes involving construction contracts Most private construction disputes in Brazil are solved via arbitration – especially in big projects, where stakes (and risks) are higher. In the private sector, very few cases are settled via court proceedings; usually only claims related to home or small-businesses renovations go to court. Owing to the large ramification of state entities in Brazil, most of public construction disputes are still settled in court. However, owing to recent increase of the use of arbitration by public entities, larger projects and public contracts are being sent to arbitration. Recently, though, there has been a spike in the use of other alternative dispute resolution methods (especially mediation and dispute boards) to solve construction disputes in Brazil.

Arbitration in Brazil Since 1996, with the enactment of the Brazilian Arbitration Act (BAA), and especially after 2002, when the Supreme Court declared the constitutionality of the statute, arbitration has become a mainstay in Brazil. The BAA has been recognised as one of the most progressive arbitration statutes in the world. Additionally, Brazilian courts have since shown a pro-arbitration stance on its decision regarding the matter. All of these elements have led the use of arbitration to soar in the country. Evidence of this fact is that, according to the 2017 statistics report of the International Court of Arbitration of the International Chamber of Commerce (ICC) – the leading arbitral institution in the world – Brazil occupied the fourth place in number of parties

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involved in ICC arbitrations around the world,7 behind only the United States, Germany and France.Also, Brazil’s largest arbitral institution, the Centre for Arbitration and Mediation of the Chamber of Commerce Brazil–Canada (CAM–CCBC), received 547 requests for arbitration from 2014 to 2018, amounting to a total of 62 billion reais in dispute.8 According to Article 1 of Brazilian Arbitration Act, disputes related to freely-transferable patrimonial rights are subject to arbitration. Owing to the increase of arbitrations involving government bodies and administrative matters, a recently-enacted statute amended the BAA in order to allow the submission of disputes involving government bodies to arbitration. The BAA also states that an arbitration agreement is valid in Brazil if it contains an express declaration of the parties’ intent to submit disputes arising from a contract to arbitration. Moreover, an effective arbitration agreement should also contain, among other provisions: • indication of an institution to administer the arbitration (and the proper reference to its arbitration rules), or, in case of an ad hoc proceedings, the indication of which rules will serve to guide the arbitration (the UNCITRAL Arbitration Rules are usually a good choice for ad hoc arbitrations); • the number of arbitrators (usually either one or three), and the procedure for their appointment; • the seat of arbitration; • the language of the proceedings and applicable law; and • the venue for judicial measures (including injunctive and preliminary relief).

Arbitral institutions in Brazil Under Brazilian law, arbitrations may be administered by an institution or ad hoc (i.e., without the supervision of an administering institution).There are several reputable arbitral institutions in Brazil, most of them located in São Paulo, Rio de Janeiro and Minas Gerais. The ICC and CAM–CCBC are the most relevant institutions operating in the country – the ICC recently inaugurated its São Paulo office in 2018. The city also houses the Chamber for Arbitration and Mediation of São Paulo, administered by two of the most important trade associations in Brazil, CIESP and FIESP (CAM-CIESP-FIESP), and the Arbitration and Mediation Centre attached to the American Chamber of Commerce (AMCHAM). The most relevant institutions located in Rio de Janeiro are the Brazilian Centre for Mediation and Arbitration (CBMA) and the FGV Mediation and Arbitration Chamber (FGV). In Minas Gerais – a state known for its prominence in the construction industry – the most relevant institution is the Business Arbitration Chamber – Brazil (CAMARB). Institutions are not constricted to a particular city or territory – most of the largest institutions operating in Brazil are able to administer arbitration proceedings in most cities in Brazil and even abroad. Nor are they usually specialised in a particular set of disputes,

7 8

https://cdn.iccwbo.org/content/uploads/sites/3/2018/07/2017-icc-dispute-resolution-statistics.pdf, accessed on 4 July 2019. https://ccbc.org.br/cam-ccbc-centro-arbitragem-mediacao/sobre-cam-ccbc/estatisticas-gerais/, accessed on 4 July 2019.

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except for in very specific cases where the institution serves as a trade association and regulates parts of the trade. In this sense, construction disputes represent a significant number of the arbitrations administered by the leading arbitral institutions operating in Brazil. According to statistics reports of the arbitral institutions operating in Brazil, construction arbitrations filed in Brazil between 2014 and 2018 represent approximately: • 98 cases administered by CAM-CCBC; • 25 cases administered by CAM-CIESP-FIESP; • five cases administered by AMCHAM; • 53 cases administered by CBMA; • 21 cases administered by FGV; and • 38 cases administered by CAMARB. With regard to ICC Brazil, considering that the ICC Hearing Centre was only inaugurated in São Paulo on March 2018, construction cases involving Brazilian parties represent approximately 25 cases –86 per cent – of the total cases filed before ICC Brazil between 2018 and 2019.

Mediation and dispute boards Other alternative dispute resolution mechanisms (ADR) are increasingly becoming features in Brazil. Specifically, mediation and dispute boards – usually in connection with arbitration – are constantly used by companies heavily involved in ADR, particularly construction companies. These methods have also attracted significant legislative support. Regarding mediation, the country enacted the Mediation Act in June 2015.The statute regulates the use of mediation in both judicial and extrajudicial proceedings. It governs matters such as penalties for parties that fail to appear in mediation and the appointment and qualification of mediators. Dispute boards first appeared in Brazil in 2000, having been used in the project for the construction of parts of the São Paulo subway network. The inclusion of dispute board provisions in the contracts was the result of the demands of the International Bank for Reconstruction and Development.9 Use of dispute boards spiked recently, especially in major infrastructure projects in Brazil. For instance, dispute boards were included as a standard procedure in the contracts executed for the preparation of the Rio 2016 Olympic Games.10 Following the growth in support of this ADR mechanism, most Brazilian arbitral institutions drafted their own rules for dispute board proceedings.11

Brasil Engenharia ‘Dispute Boards, uma nova opção para conflitos na construção’, (2014) www.brasilengenharia.com/ portal/images/stories/revistas/edicao_621/621_div_04.pdf, accessed 7 August 2017. 10 Christopher Miers, ‘Real Time Dispute Resolution in Rio de Janeiro…Since you Cannot Delay the Olympic Games’, Kluwer Arbitration Blog, 25 May 2015, http://arbitrationblog.kluwerarbitration.com/2015/05/25/ real-time-dispute-resolution-in-rio-de-janeiro-since-you-cannot-delay-the-olympic-games/, accessed 8 July 2019. 11 CBMA – Centro Brasileiro de Mediação e Arbitragem: www.cbma.com.br/novo_dispute_board, accessed 8 July 2019. 9

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On 23 February 2018, the City of São Paulo enacted Municipal Law No. 16,873/2018 (the São Paulo Dispute Board Act), which recognises and regulates the creation of dispute boards for the prevention and resolution of disputes in long-term government contracts entered into by the City of São Paulo. The initiative of the Municipality of São Paulo to regulate mechanism grants credibility and incentivises the use of dispute boards, which has great potential for practical application within public and private contracts in Brazil. According to the São Paulo Dispute Board Act, dispute boards shall be composed of three members, preferably two engineers and one lawyer. All board members shall be jointly appointed by the contracting parties. Moreover, the São Paulo Dispute Board Act allows public procurement bids and government contracts to establish that the board’s proceedings shall be governed by the rules of specialised institutions, such as arbitral institutions that already have specific regulations for dispute board procedures. One of the great advantages and innovations of the dispute board procedure is the possibility of establishing a permanent administration board, which will monitor the entire development of the project, including by leading regular visits, organising inspections and scheduling periodical meetings with the parties to discuss any claims pending between them. This constant interaction not only allows the board to have deeper knowledge about the project and sensitive points, but also allows disputes to be duly prevented or even remedied before they become a formal claim brought to arbitration. In fact, the statistics of the Dispute Resolution Board Foundation indicate that 99 per cent of the disputes arising in a project and submitted to the board are settled in less than 90 days, and do not evolve into court or arbitral proceedings, saving, therefore, time and resources of the involved parties.12 Unlike the decision rendered by an arbitral tribunal, the determination of the dispute board does not have a final character and is not equivalent to a judicial or arbitral decision, being subject to an arbitral tribunal or state courts’ review. In this sense, the Brazilian Superior Court of Justice – the second-highest court in the country, and the highest with jurisdiction over private law matters – recently issued a decision affirming that dispute boards differ from arbitration because a dispute board’s decision is not meant to be final. In that case,13 the parties had agreed on the appointment of an advising committee that should issue opinions on specific matters and, if one of the parties did not agree with the opinion, a third party was to be appointed, which should issue a final and biding decision. Therefore, the Superior Court stated that, since the parties had agreed that the appointed third party should grant a final and binding decision, it would be acting as an arbitrator and the advising committee as a dispute resolution board.

CAM-CCBC – Centro de Arbitragem e Mediação da Câmara de Comércio Brasil-Canadá: https://ccbc. org.br/cam-ccbc-centro-arbitragem-mediacao/resolucao-de-disputas/dispute-boards/regulamento-2018/, accessed 8 July 2019. Ciesp/Fiesp – Câmara de Conciliação, Mediação e Arbitragem Ciesp/Fiesp: www.camaradearbitragemsp.com. br/pt/dispute-boards/regulamento.html, acessed 8 July 2019. ICC Brasil – International Chamber of Commerce Brasil: https://iccwbo.org/dispute-resolution-services/ dispute-boards/rules/, accessed 8 July 2019. 12 https://ccbc.org.br/cam-ccbc-centro-arbitragem-mediacao/resolucao-de-disputas/dispute-boards/, accessed 4 July 2019. 13 Brazilian Superior Court of Justice. Special Appeal No. 1.569.422/RJ, Reporting Justice Marco Aurélio Belizze. 7 May 2016.

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Main construction claims Construction projects are complex, and represent more risks to the parties than other types of commercial contracts.This is true, particularly, because of their long-term nature and the existence of unexpected elements related to climatic and ground conditions, fluctuations of prices, government interventions, among others, that impair the completion of works. Therefore, construction disputes commonly involve questions of delays and disruptions, changes of scope, subcontractors’ liabilities, etc.

Hidden defects Under Brazilian law, a hidden defect is a type of defect that is concealed from the person (or entity) acquiring a certain property. They can be summarised as those defects that are manifested after acquisition and that may not be discovered through reasonable inspection. Rules regarding hidden defects may be applicable to turnkey contracts, where the owner is purchasing a complete work from the contractor, or if the contractor was obliged to deliver goods together with the construction services. According to Article 442 of the BCC,14 if a hidden defect is found, the owner may reject delivery and claim reimbursement of amounts paid or a proportionate price reduction, plus damages. In order to be able to reject the goods or claim any the price reduction, the owner has to notify the contractor of its intention within the time limitations provided by law (30 days for movable goods; one year for real-estate property).15 The term is usually counted from effective delivery, pursuant to Article 445 BCC. However, according to the Article 445, Section 1, when the defect, by its nature, could only be known on a later stage, the term is counted as from the moment in which the owner became aware of the defect, provided that such period shall be limited to a maximum period of 180 days in the case of movable property, and 1 year in case of real-estate property, both counted as from the time of delivery. Although confusing, the provision actually establishes an additional time for the owner to become aware of the hidden defects, which, due to its nature, may only be diagnosed later.Then, once the hidden defect is revealed, the purchaser has 30 days (for movable property) or one year (for real-estate property) to notify the seller.16 Additionally, Article 446 of the BCC sets forth that the terms provided for in Article 445 shall only be counted as from the expiration of any applicable contractual warranty periods. Hence, this provision applies only after contractual warranties have expired.

14 Article 442: ‘Instead of rejecting the goods and avoiding the contract (Article 441), the acquirer may claim price reduction.’ 15 Article 445: ‘The acquirer loses the right to avoid the contract or obtain price reduction within 30 (thirty) days if the good is movable asset, and within 1 (one) year if it is immovable, in both cases, the term is counted from effective delivery; if the acquirer already has possession of it, the term is reduced by half and calculated as of the entry into possession.’ Section 1: ‘When the defect, due to its nature, could only be known on a later stage, the time of the statutes is counted from the moment in which the acquirer became aware of the defect, provided that, such period shall be limited to a maximum period of 180 (one hundred and eighty) days, in the case of movable goods, and 1 (one) year if they are immovable.’ 16 Brazilian Superior Court of Justice. Special Appeal No. 1.095.882/SP, Reporting Justice Maria Isabel Galloti. Date of Judgment: 9 December 2014.

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Change orders Under normal circumstances, and unless the contract provides otherwise, the contractor shall not have the right to price increases for changes implemented in the project, unless they are expressly commanded in writing by the employer, as per Article 619 of the BCC.17 However, according to Article 619, Sole Paragraph of the BCC,18 the employer shall be obliged to pay increases of scope performed by the contractor if the employer is constantly present and supervising the works and could not have been unware of modifications or increases of scope performed by the contractor.

Delays and disruptions Brazilian law does not specifically address claims for time and cost relief in virtue of employer-caused delays. For such purposes, although Article 625 of the BCC deals with suspension and termination of the construction contract, when the contract is otherwise silent, it is also applied as grounds for extensions of time or reimbursement of costs for delays and disruptions,19 since it provides for the circumstances and events that fall outside contractor’s scope of responsibility. Article 625 of the BCC allows the contractor to suspend the works without paying an indemnity to the employer owing to: • employer’s fault (such as delay in obtaining the applicable licences or authorisations); • occurrence of force majeure events; • changes resulting from unforeseeable events (such as geological, hydraulic or similar events) that affect the economic balance of the contract resulting in excessively onerous obligations on the contractor; and • disproportional change orders requested by the employer with respect to the project already approved, even if the employer agrees to pay the additional costs. With regards to public procurement contracts, Article 57, Section 1 of the Public Procurement Act provides for the following scenarios of extensions of time to contractor: • alteration of the project or specifications by the employer; • unforeseeable events that fundamentally impact the condition of the contract; • interruption of the works by order of the employer; • increase in the quantities initially provided for in the contract, under the limits fixed by law; • third-party circumstances recognised by the employer that impair the performance of the works; and • failure or delay of the employer.

17 Article 619: ‘Unless otherwise stipulated, the contractor who undertakes to perform the works, as accepted by the person who ordered it, shall not be entitled to demand any changes and accretions to the price, even if modifications are made to the design, unless required by the owner’s written instructions.’ 18 Sole paragraph. ‘Even if there is no written authorisation, the owner is obliged to pay the changes and accretions to the contractor, according to what is determined, if he is always monitoring the works, by continuous visits, could not ignore what was happening, and never protested.’ 19 Grebler, Eduardo. ‘Reflexões sobre os aspectos jurídicos da improdutividade no contrato de construção. In: Direito da Construção: estudos sobre as várias áreas do direito aplicadas ao mercado da construção.’ São Paulo: Pini, 2014.

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Liquidated damages and penalty clauses Article 408 of the BCC20 allows for parties to agree on a liquidated damages for the non-performance or delays in the performance of contract obligations. Brazilian law does not refute the concept of penalty clauses for breach of contract. Therefore, there is no distinction between penalty clauses and liquidated damages that are presumed to have both a pre-estimation of damages and a deterring functionality. If liquidated damages are considered to be excessive (owing to the nature of the contract or to partial performance by the contractor), they may be equitably reduced in accordance to Article 413 of the BCC,21 but this does not grant the court the authority to completely set them aside, as happens in certain jurisdictions.22 Also, liquidated damages provisions may not set higher amounts than the total value of construction contract, pursuant to Article 412 of the BCC.23 With regard to the possibility to claim damages in addition to liquidated damages, Article 416, Sole Paragraph sets forth that, unless otherwise stated in the contract, the contractual penalty represents the maximum indemnification due to the innocent party, even if the actual damage incurred exceeds what was provided for in the penalty clause. Therefore, as a rule, a claim for damages in addition to the liquidated damages depends on parties carving out the penalty clause by contemplating such possibility. As a result, if proven, the innocent party will be entitled to receive indemnification for damages further to the liquidated damages established in the contract.

Termination As a general rule, and besides mutual consent, contracts can only be terminated as the result of a breach, pursuant to Article 475 BCC.24 In this cases, termination demands judicial or arbitral intervention, namely, a court of an arbitral tribunal must order termination of the agreement, which cannot be made unilaterally by any of the parties. However, Article 474 of the BCC25 allows the parties to agree on an express termination clause, by which the parties will provide for the circumstances which the non-breaching party may terminate the contract unilaterally, without the need of judicial

20 Article 408: ‘The debtor shall be subject to the penalty clause, provided that he is at fault for the non-performance or delays in the performance of contract obligations.’ 21 Article 413: ‘The penalty shall be equitably reduced by the court if the primary obligation has been partially fulfilled or if the amount of the penalty is manifestly excessive, in view of the nature and purpose of the transaction.’ 22 Moreira, Thiago Fernandes; Gabra, Caio. Penalty Clauses under Brazilian Law: Is there a common ground with the criteria set forth by Cavendish Square v. Makdessi? Construction Law International Vol. 12, Issue 4, December 2017. 23 Article 412: ‘The amount of the penalty imposed in the penalty clause may not exceed the amount of the primary obligation.’ 24 Article 475: ‘In case of breach of contract, the aggrieved party may either request the contract´s termination or its performance and, in any case, award of damages.’ 25 Article 474: ‘Where there is an express termination clause, the non-breaching party may terminate the contract automatically, without the need of judicial/arbitral intervention; where there is a tacit termination clause, a judicial notification is needed.’

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or arbitral intervention. For this reason, it is common to establish: (1) an obligation to notify the breaching party; and (2) a cure period for the breaching party to remedy the breach, leaving less margin for the breaching party to challenge the termination. Moreover, pursuant to Article 623 of the BCC,26 the employer can chose to suspend the construction even when the performance of the works or services has already started, provided that the contractor is compensated for the expenses, the work done, costs incurred and profits in relation to the services already provided, plus a reasonable indemnification calculated in light of the gains that contractor would receive if the works have been concluded. Finally, according to Article 478 of the BCC,27 if the contract becomes excessively burdensome to one of the parties owing to extraordinary, unforeseeable and unavoidable circumstances, the affected party may claim the termination of the contract. In order to avoid termination, the other party may offer to modify the conditions of the contract and re-establish its economic balance. In this sense, such termination does not operate automatically and must be declared by the competent court or arbitrator.

26 Article 623: ‘Even when the performance of the works or services has already started, the employer can chose to suspend the construction, provided that the contractor is compensated for the expenses, the work done, costs incurred and profits in relation to the services already provided, plus a reasonable indemnification calculated in light of the gains that contractor would have received if the works had been concluded.’ 27 Article 478: ‘In case the contract becomes excessively burdensome to one of the parties, and advantageous to the other, due to extraordinary, unforeseeable and unavoidable circumstances, the affected party may claim the termination of the contract. The effects of the judgment relate back to the date of service of process.’

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33 Construction Arbitration in Mainland China and Hong Kong Wei Sun, Adela Mao, Zhao Yingfu and Wang Ziyue1

Construction Arbitration in Mainland China Introduction According to the official data from China’s National Bureau of Statics, the added value of China’s construction industry in 2018 reached 6,180.8 billion yuan with growth of 4.5 per cent. General contracting and professional contracting construction enterprises with national qualifications have contributed a profit of 810.4 billion yuan.2 With the booming development of the construction industry, construction disputes took up a large portion of the overall cases filed in 2018. As calculated by the Supreme People’s Court (SPC), there were over 110,000 cases arising out of construction contracts heard before people’s courts in the Mainland.3 Beijing Arbitration Commission (BAC) released its Report on the Work for 2018, stating that, out of 4,872 cases it had registered, 618 were construction disputes that constituted 12.7 per cent of its year’s caseload.4 Similarly, accord-

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Wei Sun is a partner, Zhao Yingfu is an associate and Wang Ziyue is a paralegal at Zhong Lun Law Firm. Adela Mao is a barrister in Tower Chambers. See Statistical Communique of the People’s Republic of China on National Economic and Social Development in 2018, available at www.stats.gov.cn/tjsj/zxfb/201902/t20190228_1651265.html, last accessed on 3 July 2019. See Answers to the Reporters by the Person in Charge of the Supreme People’s Court concerning the Interpretation of the Supreme People’s Court on Issues concerning the Application of Law in the Trial of Cases Regarding Disputes over Construction Contracts for Construction Projects (II), available at www. chinacourt.org/article/detail/2019/01/id/3641356.shtml, last accessed 3 July 2019. See Report on the Work for 2018, available at www.bjac.org.cn/news/view?id=3375, last accessed 3 July 2019.

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ing to the Report on the Work for 2018 and Plan of the Work for 2019 issued by China International Economic and Trade Arbitration Commission, 228 cases were construction disputes with the overall registered cases being 2,962.5 In order to meet the increasing needs of parties to construction disputes, in recent years arbitration institutions in the mainland have attached greater importance to the amelioration of dispute resolution services specialised in and tailored to construction disputes. Early in 2019, Shanghai Arbitration Commission and Jinan Arbitration Commission respectively established specialised construction arbitration sub-commissions.6

Release of the Second Interpretation on disputes over construction contracts On 29 December 2018, the SPC issued the Interpretation of the Supreme People’s Court on Issues concerning the Application of Law in the Trial of Cases Regarding Disputes over Construction Contracts for Construction Projects (II) (the Second Interpretation), which came into effect on 1 February 2019. Prior to the promulgation of the Second Interpretation, the people’s courts and arbitral tribunals when rendering the judgments and awards would follow the provisions of the Interpretation of the Supreme People’s Court on Issues concerning the Application of Law in the Trial of Cases Regarding Disputes over Construction Contracts for Construction Projects (the First Interpretation), which was published in 2004. However, over a decade, regulations and practice in construction industry have developed a great deal, resulting in inconsistent or even divergent decisions among adjudicators. Therefore, the Second Interpretation was published with the purpose of providing a set of specific and unified rules on the major issues including the validity of a construction contract, cost of a construction project and protection of the actual constructor.7 The Second Interpretation will play a decisive role for arbitrators when hearing cases over construction disputes and making arbitral awards, and is therefore worth a detailed analysis.

Validity of a construction contract The validity of a construction contract was previously addressed in Article 2 and Article 4 of the First Interpretation, under which a construction contract shall be null and void if: • the contractor has not acquired the qualifications for a construction enterprise or is in excess of its level of qualification; • an unqualified actual constructor works in the name of a qualified construction enterprise; • the construction project belongs to the one that must undergo the bidding process but fails to do so or the bid is invalid; and • the contractor assigns the construction contract to a third party or illegally sublets the construction contract.

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See Report on the Work for 2018 and Plan of the Work for 2019, available at www.ccpit.org/Contents/ Channel_4132/2019/0218/1127033/content_1127033.htm, last accessed 3 July 2019. See www.legaldaily.com.cn/Arbitration/content/2019-04/17/content_7833703.htm and http://finance. dzwww.com/zt/2018sdjc1/, last accessed 3 July 2019. See Protection of the Legal Rights of the Parties and Promoting the Development of the Construction Industry – the Supreme People’s Court Releasing the Second Interpretation on Disputes over Construction Contract, available at www.court.gov.cn/zixun-xiangqing-137951.html, last accessed 3 July 2019.

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However, parties in dispute often raised the claim to void a construction contract in circumstances beyond the scope of the First Interpretation, and in particular to void the contract when the employer fails to acquire the construction project planning permit. The reason is that, according to Article 40 of the Urban and Rural Planning Law of the People’s Republic of China (2019 Revision) (the Urban and Rural Planning Law),8 the construction project planning permit is a precondition to lawfully construct a project while the First Interpretation was silent on the consequence to the validity of a construction contract if the employer did not acquire such permit. Absent specific rules at the level of interpretation of laws, some high people’s courts such as Beijing High People’s Court, Jiangsu High People’s Court and Guangdong High People’s Court issued guidance that stipulated that the contract should be invalid if the employer fails to acquire the construction project planning permit.9 However, these guidelines shall not be treated as having the same legal effect as the interpretation of laws and cannot be applied nationwide.The Second Interpretation put an end to the uncertainty of the validity of a construction contract, stipulating in Article 2 that a construction contract shall be invalid if the employer fails to get the construction planning permit or to undergo other approval formalities. The SPC explained that Article 40 of the Urban and Rural Planning Law was a compulsory provision because the planning of construction projects concerned the reasonable use and the overall planning of land, which was of public and national interest.10 Violation of this article was a violation of Article 52(2) of the Contract Law of the People’s Republic of China,11 rendering the invalidity of the construction contract. The duty to acquire the construction project planning permit is on the employer. Therefore, Article 2 of the Second Interpretation further provides that if the employer alleges that the construction contract is invalid owing to the lack of construction project planning permit or the planning approvals when it is able to acquire such permit or undergo such approval formalities but fails to do so, the people’s court shall reject the claim.

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Article 40 of the Urban and Rural Planning Law of the People’s Republic of China (2019 Revision) provides that ‘To build any structure, fixture, road, pipeline or other engineering project within a city or town planning area, the construction entity or individual shall apply to the competent department of urban and rural planning under the people’s government of the city or county or the town people’s government specified by the people’s government of the province, autonomous region or municipality directly under the Central Government for a planning permit on construction project.’ 9 See Article 1 of the Answers of the Beijing High People’s Court on Questions concerning the Trial of Cases Regarding Disputes over Construction Contracts for Construction Projects, Article 3 of the Opinions of the Jiangsu High People’s Court on Questions concerning the Trial of Cases Regarding Disputes over Construction Contracts for Construction Projects, and Article 18 of the Minutes of Meeting of the Guangdong High People’s Court on the Trial of Civil Cases in 2012. 10 See First Civil Division of the SPC: Interpretation and Application of the Supreme People’s Court’s Second Interpretation on Disputes over Construction Contracts, People’s Courts Press, 2019, p.67. 11 Article 52(5) of the Contract Law of the People’s Republic of China provides that ‘A contract shall be null and void under any of the following circumstances: … (5) violating the compulsory provisions of laws and administrative regulations.’

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Cost of a construction project The determination of the cost of a construction project has aroused heated discussion when the employer and contractor enter into two substantially different contracts, namely, the Yin and Yang contracts (or the Black and White contracts), for a single construction project that is subject to compulsory bidding in order to evade bidding supervision. The Yang (or White) contract is used for filing with the competent authority while the Yin (or Black) contract is the one that the parties intend to follow. According to Article 46(1) of the Bidding Law of the People’s Republic of China (2017 Revision) (the Bidding Law) and Article 21 of the First Interpretation,12 the cost of a construction project shall be determined in accordance with the Yang (or White) contract if there is a substantial change of content in the Yin (or Black) contract. However, neither the Bidding Law nor the First Interpretation provided a clear definition as to what constituted a substantial change of content, and the standards of review were different among courts. The Second Interpretation clarified this issue, stipulating in Article 1 that the scope and cost of a construction project, construction period and project quality shall be deemed as the substantial content of a construction contract. In the case of any discrepancy on the substantial content between the White contract and the Black contract, the people’s courts shall determine the rights and obligations according to the White contract, which is the one recorded by the competent authority. Another issue that is frequently debated is the determination of the cost of a construction project if the parties conclude two substantially different contracts for a single construction project that is not subject to the compulsory bidding. One view is that because the employer voluntarily chooses to undergo the bidding process for a project that is not required by law to do so, the provisions under the Bidding Law shall not apply. Therefore, the Black contract, although not recorded by the competent authority, is the one that reflects the true intent of the parties and should be the basis to calculate the cost of the construction project. The other view is that, according to Article 2 of the Bidding Law,13 as long as the employer decides to undergo the bidding process, it should be subject to the rules on bidding. Consequently, the cost of the construction project shall be determined by the White contract. Article 9 of the Second Interpretation put an end to the debate by providing that if the parties sign two substantially different contracts (one for filing and one for actual performance) for a construction project that is not subject to compulsory bidding, the people’s court shall determine the cost of the construction project based on the recorded contract

12 Article 46(1) of the Bidding Law provides that ‘A written contract shall be concluded between the tenderee and bid winner within 30 days after the issuance of the bid-winning notice according to the Invitation to Bid and bidding documents. The tenderee and bid winner shall not conclude other agreements deviating from any substantial provision of the contract.’ Article 21 of the First Interpretation provides that ‘Where the contract on undertaking construction of a project, which was separately concluded between the parties regarding the same construction project, is inconsistent with the substantive contents in an archived bid-winning contract, the archived bid-winning contract shall be deemed as the basis for settling the construction cost.’ 13 Article 2 of the Bidding Law provides that ‘This law shall be applicable to the bidding activities within the territory of the People’s Republic of China.’

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(the White contract), unless the employer and the contractor otherwise enter into a construction contract (the Black contract) owing to changes caused by objective conditions that are unforeseeable at the time of bidding.

Protection of the actual constructor The concept of actual constructor was put forward in Article 26 of the First Interpretation. Where an actual constructor brings a lawsuit against the employer in the case that the construction contract is assigned or illegally sublet to it, the people’s court shall accept the lawsuit. Considering that there is no contractual relationship between the actual constructor and the employer, this concept allows a breach of the privity of contract in order to protect the right of actual constructor who are mainly composed of off-farm workers (refer to migrant workers from rural areas to cities). Article 24 of the Second Interpretation strengthened the concept and prescribed that where an actual constructor claims against an employer, the people’s court shall join the assignor of the construction contract or the party that illegally sublet the contract as a third party. The Arbitration Law of the People’s Republic of China (the Arbitration Law) does not recognise the notion of third party to arbitration. The jurisdiction of an arbitral tribunal comes from the arbitration clause or arbitration agreement between the parties, and the arbitral tribunal cannot join a third party into an ongoing arbitral proceeding unless all parties involved agree. Therefore, as was ruled in Xiong Daohai v. Qinghai Senko Salt Industry Group by the SPC,14 absent arbitration agreement between the actual constructor and the employer, the actual constructor cannot request for arbitration against the employer by relying on the arbitration agreement between the employer and the contractor.

Arbitrability of public–private partnership disputes in China The year 2014 witnessed heavy law-makings in the mainland encouraging the use of the public-private partnership (PPP) model for public construction projects, facilities and services. By the end of December 2018, there were 8,654 projects in the management database of the National PPP Integrated Information Platform with an investment of 13.2 trillion yuan.15 Cases are not rare where private parties in PPP projects are discouraged from resorting to litigation owing to concerns of local protectionism. In contrast, arbitration institutions are generally more distanced from government authorities and arbitrators usually have a stronger business sense and can better embrace the need to maintain a level playing field for private participants. Therefore, the private players are strongly motivated to submit the disputes arising from PPP contracts to arbitration. However, the current judicial practice in the mainland splits as to whether the disputes arising from PPP projects can be submitted to arbitration. This is largely due to the unspecific nature of PPP contracts.

14 See Supreme People’s Court Ruling (2015) Min Shen Zi No. 919. 15 China Public Private Partnership Center, ‘Annual Report of the Project Database of the National PPP Integrated Information Platform (2018)’, www.cpppc.org/en/Quarterly/7940.jhtml, last accessed 3 July 2019.

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There are three categories of views on the nature of PPP contracts in the mainland. The first is that a PPP contract is in fact a civil and commercial contract, while the second view holds that it is of purely administrative nature. The difference between the two is that parties to civil and commercial contracts have equal legal status while parties to administrative contracts are not. According to Article 2 and Article 3 of the Arbitration Law, disputes between parties of unequal status and administrative disputes that should be settled by administrative organs are not arbitrable in the mainland.16 Therefore, if a PPP contract is considered as an administrative contract, parties to the PPP contract cannot submit their disputes to arbitration. There is also a third view, which holds that PPP contracts are of hybrid nature.Whether a dispute arising from a certain PPP contract is arbitrable shall be decided on a case-by-case basis. This is said to be the mainstream opinion in the mainland.17 Courts in the mainland will look to the content of a PPP contract to determine the arbitrability issue.When a PPP contract does not concern government regulation, approval, licence or the dispute arising from a PPP contract that does not concern governmental acts, the relevant disputes can be submitted to arbitration. For example, in Henan Xinlin Highway Construction Co. Ltd v. the Government of Huixian City,18 the SPC held that a contract to which a governmental authority was a party was not per se an administrative contract. Rather, the nature of a PPP contract needed to be determined by taking into account several factors, such as whether the private party was of an equal footing with the governmental authority when the contract was concluded, whether the private party had full autonomy and was not compelled by administrative power, and whether the contract contained equitable consideration and the parties’ mutual consent. Similarly, in a case tried by the Beijing Second Intermediate People’s Court in 2017, the court ruled that the arbitration clause in the PPP contract was valid because in view of the purpose of the contract and the rights and obligations of the parties and other factors, the PPP contract apparently had the characteristics of a civil and commercial contract.19 In contrast, in Jinan Yuqing Water Making Co. Ltd v. Government of Shangqiu City,20 the SPC ruled that the joint venture contract between the private party and the government was of administrative nature because the contract was concluded on the basis that the government would grant the private party a 30-year concession to supply water in the city without the need to pay concession fees. Thus, the rights and obligations under the joint venture contract should be governed by the Administrative Procedure Law of the People’s Republic of China and the dispute was an administrative dispute.

16 Article 2 of the Arbitration Law provides that ‘Contractual disputes and other disputes over rights and interests in property between citizens, legal persons and other organisations that are equal subjects may be arbitrated.’ Article 3 prescribes that ‘The following disputes may not be arbitrated: (1) marital, adoption, guardianship, support and succession disputes; (2) administrative disputes that shall be handled by administrative organs as prescribed by law.’ 17 See Tan Jinghui: ‘Legal nature and arbitrability of PPP contracts’, available at http://www.bjac.org.cn/news/ view?id=3206, last accessed 3 July 2019. 18 See (2015) Min Yi Zhong Zi No. 244. 19 See (2017) Jing 02 Min Te No.11. 20 See (2018) Zui Gao Fa Min Zhong No. 829.

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The SPC is suggested to promulgate specific interpretations on the unification of standard of review on the nature of PPP contracts and provide guidance to the arbitrability issue for PPP contracts.

Dispute over independent guarantee in construction projects With the ever-deepening implementation of the Belt and Road Initiative and Chinese enterprises going global, the volume of infrastructure construction is continuously expanding, and the number of independent guarantees issued by banks and other financial institutions are surging. As a result, disputes arising from independent guarantees are also increasing with time both in litigation and in arbitration. To keep abreast of international practice, the SPC issued the Provisions on Several Questions regarding Trial of Independent Guarantee Letter Dispute Cases (the Independent Guarantee Interpretation), which came into force on 1 December 2016, aiming to unify the standard of review on major issues such as the jurisdiction, applicable law and rights and obligations of the parties in disputes over independent guarantee. The Independent Guarantee Interpretation holds fast to the principle of independence and abstraction of independent guarantees. Upon presentation of documents specified in the guarantee by the beneficiary, the issuer’s role is to examine whether the documents comply with the guarantee on its appearance and where they comply, make payment without raising any arguments or the need to seek the guarantee applicant’s approval.21 These principles have simplified the process of getting paid for the beneficiary, but may also facilitate their bad faith claims. In view of the above, the Independent Guarantee Interpretation provides for fraud as the exception to the independence principle. In the case of fraud, the issuer is entitled to withhold payment, and the court may render an order to suspend payment or a judgment to stop payment at the request of the applicant, issuer or instructor.22 The mechanism of suspending payment under independent guarantee is quite self-contained. The sections below will focus on major procedural and substantive issues within the mechanism.

Jurisdiction Objection to jurisdiction is not uncommon in proceedings of fraudulent demand disputes, which call for unification and predictability in the courts’ standard of ascertaining jurisdiction. Pursuant to Article 21 of the Independent Guarantee Interpretation, the jurisdiction of disputes related to independent guarantees should be differentiated between disputes

21 Article 1(1) of the Independent Guarantee Interpretation provides, ‘Article 1 For the purpose of these Provisions, an ‘independent guarantee’ means any undertaking given in writing by a bank or a non-banking institution as the issuer to the beneficiary for the payment of a certain amount or an amount within the maximum guaranteed amount at the request of the beneficiary when submitting documents in conformity with the guarantee.’ 22 Article 13 of the Independent Guarantee Interpretation provides, ‘Upon finding any of the circumstances as specified in Article 12 hereof, the applicant, the issuer or the instructing party to the independent guarantee may, before filing an action or applying for arbitration or during the litigation or arbitration process, apply for suspending payment under the independent guarantee to the people’s court at the place of the issuer’s domicile or any other people court with jurisdiction over cases involving disputes over independent guarantee fraud.’

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over the guarantee itself and disputes over independent fraudulent demand.23 The parties to an independent guarantee are the issuer and the beneficiary, and the jurisdiction of dispute between them arising from the guarantee should be subject first to the dispute resolution clause contained in the guarantee. However, the applicant is not a party to the guarantee, and thus the dispute between the applicant, the beneficiary, and the issuer over fraudulent demand are not bound by the dispute resolution clause in the guarantee. Unless the parties expressly agreed otherwise, the fraud dispute should be heard by the people’s court located in the domicile of the issuer or the defendant.

Ex parte procedure Before the official issuance of the Independent Guarantee Interpretation, the SPC released a draft version to invite public comments. Article 22 of the draft provided that the people’s courts shall make a ruling on the application of suspending payment within 48 hours of acceptance of the application, and may inquire of a party or all parties if the court deemed necessary within the specified time limit. However, the provision on inquiry of the parties by the court before rendering the decision is not reflected in the final text. The Independent Guarantee Interpretation only provides that the court shall inquire of the parties when examining the application for reconsideration of the order of suspension.24 Accordingly, commentators believe that application for suspension of payment is an ex parte procedure. The rulings of the court on suspension applications that are made public did not mention that the defendant had been given the opportunity to state its defence either.25

Circumstances constituting fraudulent demand Article 12 of the Independent Guarantee Interpretation sets forth five grounds on which a demand raised under an independent guarantee may be considered to be fraudulent: • the transaction is fraudulent; • the documents presented by the beneficiary are false;

23 Article 21 of the Independent Guarantee Interpretation provides, ‘A case involving disputes between the beneficiary and the issuer over the independent guarantee shall be under the jurisdiction of the people’s court at the place of the domicile of the issuer or the defendant, unless the independent guarantee specifies that any other people’s court has jurisdiction over the case or the case should be settled through arbitration. Where a party claims that the court having jurisdiction is determined or the case is settled through arbitration in accordance with the dispute resolution clause of the underlying transaction contract, such claim shall not be supported by the people’s court. A case involving disputes over independent guarantee fraud shall be within the jurisdiction of the people’s court at the place of the domicile of the issuer of the independent guarantee under which the application for suspension of payment is filed or the domicile of the defendant, unless the parties has agreed in writing that any other court has jurisdiction over it or it is settled through arbitration. Where a party claims that the court having jurisdiction over the case is determined or the case is settled through arbitration in accordance with the dispute resolution clause of the underlying transaction contract, such claim shall not be supported by the people’s court.’ 24 Article 17(2) of the SPC Interpretation provides, ‘The people’s court shall conduct an examination within 10 days after the receipt of the application for reconsideration and question the party.’ 25 See, e.g., (2018) Jing 0105 Min Chu No. 65291, (2017) Jin 02 Cai Bao No.1.

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• there is a court decision or arbitration award holding that the debtor is not liable to payment; • confirmation from beneficiary that debtor’s obligation is fulfilled or not triggered; and • beneficiary’s deliberate abuse of rights where the beneficiary clearly knows it does not have rights to demand payment. These types of situations that constitute fraudulent demand conform to the definition of fraud under the civil law of China, which is false statement and deliberate concealment of facts.26 They also bear similarities to the grounds of exception to payment obligation in the United Nations Convention on Independent Guarantee and Stand-by Letters of Credit (the Convention). Article 19(1) and 19(2) of the Convention refer to the exception as situations in which it is manifest and clear that any document is not genuine or has been falsified, that no payment is due on the basis asserted in the demand or that the demand has no conceivable basis. The fifth circumstance, ‘beneficiary’s deliberate abuse of rights where the beneficiary clearly knows it does not have rights to demand payment’, is a miscellaneous clause, the main consideration of which is that the fact patterns related to fraudulent demand are complicated and diverse and cannot be exhaustively enumerated.

Conditions for order of suspending payment According to Article 14 of the Independent Guarantee Interpretation, the court will order the suspension of payment if all of the following three preconditions have been met: • the suspension applicant has proved a high possibility of an independent fraudulent demand; • the circumstances are urgent so that if no suspension of payment is ordered, the legitimate rights and interests of the suspension applicant will be irremediably damaged; and • the suspension applicant has provided adequate security to compensate the damage that might be sustained by the respondent caused by a ruling of suspension. The fraud exception is carved out by the issuer’s payment in good faith. Where the issuer has made payment in good faith under the independent guarantee issued on the instructions, the people’s court shall not rule to suspend payment under the independent guarantee that maintains the issuer’s right of recourse.

Case overview Through comprehensive case research on major case databases in China,27 up to 2 July 2019, there have been 15 publicly announced cases related to application of suspending payment under the independent guarantee since the promulgation of the Independent Guarantee Interpretation. Among them, there are only two cases where the court refused

26 Article 68 of the Opinions of the Supreme People’s Court on Certain Issues Concerning the Implementation of the General Principles of the Civil Law of the People’s Republic of China (Trial) provides, ‘Where one party induces the other party to make a manifestation of wrong intention by deliberately informing the other party of false information or deliberately concealing any fact, that party’s conduct may be determined as fraud.’ 27 e.g., China Judgments Online: http://wenshu.court.gov.cn/, Wu Song: http://www.itslaw.com/.

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the application. In the 13 cases where the court ordered suspending payment, six rulings were based on abuse of right, two on false documents and no liability to pay as held by the court judgment, and the other five court rulings did not state the specific reason for ordering suspension of payment. It can be concluded from these statistics that, first, the threshold for Chinese courts to order suspending payment under independent guarantee is not very high; second, abuse of right is a most frequently cited ground for ruling on suspension; and third, a large percentage of the rulings did not comply with the requirement to state reasons under Article 16 of the Independent Guarantee Interpretation. In one of the two cases where the court did not support the application, the applicant alleged that the beneficiary had breached the underlying contract, so that its demand was an abuse of right that was dismissed by the court.28 The court held that because of the fundamental principle of independence, the dispute arising from the underlying contract should be distinguished from dispute over the guarantee and breach of underlying contract did not constitute fraudulent demand. The reasoning of the court was consistent with Article 14(2) of the SPC Interpretation.29 In the other case, where application was not upheld, the applicant, which was also the applicant of the guarantee, alleged that the demand was raised by the beneficiary after the validity period of the guarantee, and thus requested the court to order suspending payment.30 The court held that only in case of fraud can the applicant applied for suspending payment, thus refusing its application.

Construction Arbitration in Hong Kong Introduction Unique position of Hong Kong Special Administrative Region Under the ‘One Country, Two Systems’ doctrine, Hong Kong has a high degree of autonomy and enjoys executive, legislative and independent judicial power.31

28 See (2018) E 01 Cai Bao No.63. 29 Article 14 (2) of the Independent Guarantee Interpretation provides, ‘The people’s court shall not uphold the cessation claimant’s claim for cessation of payment on the ground that the beneficiary has defaulted the agreement under the underlying transaction.’ 30 See (2019) Su 02 Min Zhong No.1058. 31 The Basic Law of the Hong Kong Special Administrative Region, Article 2.

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Hong Kong is the only common law jurisdiction within China.32,33 The Court of Final Appeal is the highest local court exercising the power of final adjudication.34,35 Hong Kong prospers as a free port, a separate customs territory and an international financial centre, with a free flow of capital and under the policy of free trade.36

Construction industry in Hong Kong A few figures suffice to demonstrate the socio-economic importance of the construction industry in Hong Kong. According to the latest available statistics, the construction industry accounted for 5.1 per cent of the gross domestic product in 2017.37 The gross value of construction works performed by main contractors in nominal terms was HK$56.9 billion for the first quarter of 2019.38 Among that, residential buildings projects amounted to HK$14.9 billion and transport projects HK$6.8 billion.39

Compliance and management There is no consolidated code of laws regulating the construction industry. Instead, various ordinances and subsidiary regulations govern different aspects of a construction project. Among them, the Buildings Ordinance (Cap 123), Building (Minor Works) Regulation (Cap 123N), Fire Service (Installation and Equipment) Regulations (Cap 95B) and Waterworks Ordinance (Cap 102) are the most relevant. The Building Management Ordinance (Cap 344) is the primary legislation that regulates building management.40

32 The laws previously in force in Hong Kong, that is, the common law, rule of equity, ordinances, subordinate legislation and customary law are maintained, except for any that contravenes the Basic Law and subject to any amendment by the local legislature (ibid, Article 8). 33 Chinese national laws are not applied in Hong Kong except for those listed in Annex III to the Basic Law relating to defence and foreign affairs as well as other matters outside the limits of the autonomy of the special administrative region (ibid, Article 18). 34 ibid, Article 82. 35 The case law adjudicated by the UK courts or other common law courts are only persuasive where appropriate: A Solicitor v. the Law Society of Hong Kong, FACV No. 24 of 2007, [2008] 2 HKLRD 576. 36 The Basic Law, Articles 109, 112, 114–116. 37 Gross Domestic Product (GDP) by major economic activity – percentage contribution to GDP at basic prices, the Census and Statistics Department of HKSAR, last accessed https://www.censtatd.gov.hk/hkstat/sub/ sp250.jsp?tableID=036&ID=0&productType=8 on 7 July 2019. 38 Report on the Quarterly Survey of Construction Output, first quarter of 2019 (published in June 2019), Census and Statistics Department of HKSAR, https://www.statistics.gov.hk/pub/ B10900022019QQ01B0100.pdf, last accessed 7 July 2019. 39 ibid, Table 3. 40 See Building Management in Hong Kong, Third ed. (2016), LexisNexis and A Guide on Building Management Ordinance (Cap 344), ninth ed. (Jan 2017), published by the Home Affairs Department of the Government at https://www.buildingmgt.gov.hk/en/bmo_guide/bmo_guide.htm, last accessed 10 July 2018.

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Contract documents Standard forms of contract are widely in use in the construction industry in Hong Kong,41 such as the Agreement and Schedule of Conditions of Building Contract (Standard Form of Building Contract) for Use in Hong Kong42 (the Standard Form of Building Contract) frequently adopted in private projects. For the public sector, the past few years have seen a shift away from the Government’s General Conditions of Contract for Building Works (1999) since the introduction of the New Engineering Contracts43 in 2009,44 in line with the trend towards collaborative management of construction projects. Apart from the conventional building contracts, there are also standard form design-andbuild contracts such as the Government’s General Conditions of Contract for Design and Build Contracts (1999),45 and a number of projects used them. The Drainage Services Department first used the design build operate form of contract in an upgrading project commenced in mid-2014.46 In contrast, and unlike the situation in Mainland China, the FIDIC series of contracts including the EPC Turnkey Projects version are not commonly in use in the construction projects in Hong Kong. Some stakeholders in private and public sectors adopt their own standard forms of contract.47 Subcontracting is sometimes facilitated with back-to-back contracts, which are prone to ambiguity.48 There are also standard-form subcontracts in use, such as the Government’s Subcontract for Building Works (2000),49 the Agreement and Schedule of Conditions of Nominated Subcontract for Use in HKSAR (2005)50 (the Standard Form of Nominated Subcontract) and the Hong Kong Construction Association’s Standard Form of Domestic Subcontract (2008).

41 For an outline, see Chapter 19: ‘Standard Form of Contract’, Construction Law and Practice in Hong Kong, Third ed. (2013) Sweet & Maxwell. 42 With quantities (2005) or without quantities (2006) editions published by the Hong Kong Institute of Architects, the Hong Kong Institute of Construction Managers and the Hong Kong Institute of Surveyors. 43 Promulgated by the Institution of Civil Engineers in the United Kingdom; now in the fourth edition, i.e., NEC4 as revised in 2017. 44 For a summary of the latest statistics, www.devb.gov.hk/filemanager/en/content_1057/NEC_ Journey_201712_Single_Page.pdf, last accessed 7 July 2019. 45 Supplemented by the Government’s Administrative Procedures 2015 for Use with General Conditions of Contract for Design and Build Contracts 1999, www.devb.gov.hk/en/publications_and_press_ releases/publications/standard_contract_documents/administrative_procedures_2015/administrative_ procedures_2015_content/index.html, last accessed 7 July 2019. 46 LC Paper No. PWSC143/15-16(01), the Drainage Services Department of HKSAR Government, www. legco.gov.hk/yr15-16/english/fc/pwsc/papers/pwsc20160217pwsc-143-1-e.pdf, last accessed 7 July 2019. 47 For example, the Conditions of Contract for Civil Engineering and Building Works Construction and Conditions of Contract for Engineering Works (Minor) of the MTR Corporation Limited, as well as the General Conditions of Contract, Building and Civil Works, Issue No. 11 (August 2015) and various forms of contracts published by the Hong Kong Airport Authority, https://extranet.hongkongairport.com/pds/, last accessed 7 July 2019. 48 For an illustration, see Brington Engineering Ltd v. Cheerise Asia Ltd [2011] HKCFI 567; HCCT 2/2010 (18 August 2011). 49 To be used in conjunction with the General Conditions of Contract for Building Works (1999). 50 Published by the Hong Kong Institute of Architects, the Hong Kong Institute of Construction Managers and the Hong Kong Institute of Surveyors.

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Dispute resolution Standard forms of contract often contain a multi-tiered dispute resolution mechanism where one party has to give timely notice of the disputed matter for an internal arbiter to decide.51 When the internal mechanism fails, parties are ultimately required to submit their dispute for arbitration.52 When a simplistic back-to-back subcontract is used, an issue frequently arises as to whether the dispute resolution mechanism under the main contract would apply as between the parties to the subcontract (or sub-subcontract).53 In contrast, a standard-form subcontract may have a well-drafted dispute resolution clause that resembles its counterparty under the corresponding main contract. For instance, the Standard Form of Nominated Subcontract provides for referral of the dispute to the parties’ designated representatives and for mediation, failing which either party may refer the dispute to arbitration.54

Hong Kong’s arbitration regime The current Hong Kong legislation governing arbitration-related matters is the Arbitration Ordinance (Cap 609) (the Ordinance), whereby the predecessor legislation (Cap 341) was repealed in 2011. The Ordinance has undergone a number of amendments since its enactment to keep up with the latest international practice.55 The Ordinance is based on the UNCITRAL Model Law (as amended in 2006), in which a majority of the Model Law provisions are given the force of law verbatim or with minor amendments56. Unlike the predecessor legislation that provided for separate regimes for international and domestic arbitration, the Ordinance contains a unified regime regulating Hong Kong-seated and foreign-seated arbitration.57

51 For instance, Clause 25 of the Standard Form of Building Contract (2005 ed., with quantities) where the Architect first decides the extension of time. 52 ibid, Clause 41 provides by default for a ‘domestic arbitration’ in accordance with the repealed Cap 341 under the Domestic Arbitration Rules of HKIAC. 53 See below. 54 Clause 42. 55 Order No. 28 of 2012 (consequential changes pursuant to the enactment of a new Companies Ordinance), Order No. 7 of 2013 (including provisions for enforcement of emergency relief and introduction of provisions for enforcement of Macau awards), Order No. 11 of 2015 (including changes to provisions for application of Schedule 2), Order No. 5 of 2017 (introduction of provisions in relation to IPRs), Order No. 6 of 2017 (introduction of provisions in relation to third party funding). 56 Schedule 1 of the Ordinance sets out in full the UNCITRAL Model Law (as amended in 2006) and underlines the provisions that were not adopted verbatim. 57 With the caveat that only some of the provisions apply to an arbitration if the place of arbitration is outside Hong Kong: Section 5(2), the Ordinance. Those provisions relate to ancillary powers of the Court to render a ruling, direction or order in aid of the foreign arbitral proceedings and to render enforcement.

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As noted above, standard forms of contract provide by default for domestic arbitration under the HKIAC Domestic Arbitration Rules,58 which is a short and convenient set of arbitration rules for ad hoc arbitration in Hong Kong.59 The latest rules were revised in 2014. Unlike Mainland China, Hong Kong allows for ad hoc arbitration.60 The enforcement of arbitral awards under the Ordinance mostly follows the New York Convention, with four similarly-worded regimes for enforcing arbitral awards, Convention awards, Mainland awards and Macau awards respectively.61 Construction arbitration is by no means an entirely different species from a commercial arbitration. However, as the construction industry has its own trade usages as mentioned above, issues peculiar to construction arbitration may arise.

Incorporating arbitration agreements in back-to-back subcontracts In construing a subcontract, general principles of contract law such as contextual construction of the terms at the time of the contract62 are applicable. Whether a term has been incorporated into the subcontract by reference is a question of construction, namely a task to ‘ascertain the parties’ intention when they entered into the contract by reference to the words used’.63 ‘Back-to-back’ is not a legal or technical term and can have different meanings.64 It depends on the circumstances of an individual case whether a specific clause in the main contract applies to the subcontract made on a back-to-back basis. Take two cases that arrived at different conclusions for illustration. In WH-SCG JV Limited v. Hong Kong Construction (Holdings) Limited [2006] HKCFI 912, the Court derived little help from the use of the phrase ‘back-to-back’ in background materials in construing an express clause that the subcontractor ‘shall assume, observe, perform and comply with all obligations and liabilities of the Main Contract between [the Employer] and [the Main Contractor] on the … project’ and refused a stay application to refer to arbitration on the ground that ‘obligations and liabilities’ did not normally include the dispute resolution mechanism of arbitration.65 In this case, another specific

58 See also the Government’s General Conditions of Contract (1999), Clause 86(5). 59 2014 HKIAC Domestic Arbitration Rules, www.hkiac.org/arbitration/rules-practice-notes/ domestic-arbitration-rules, last accessed 21 June 2018. 60 ‘Arbitration’ is defined as ‘any arbitration, whether or not administered by a permanent arbitral institution’: Section 2, the Ordinance. 61 Divisions 1-4, Part 10, the Ordinance. 62 Fully Profit (Asia) Ltd v. Secretary for Justice (2013) 16 HKCFAR 351, 361 (per Ma CJ), as recently cited in Kim Hung Construction & Engineering Co Ltd v. Standard Refrigeration & Engineering Co Ltd, CACV 90/2015 (7 January 2016) (Hong Kong Court of Appeal), paragraph 4.7. 63 Ho Fat Sing t/a Famous Design Engineering Co v. Hop Tai Construction Co Ltd, DCCJ 3600/2007 (23 December 2008) (per Mimmie Chan J as Her Hon HC Judge in charge of the construction and arbitration list then was). 64 WH-SCG JV Limited v. Hong Kong Construction (Holdings) Limited [2006] HKCFI 912, paragraphs 28–29. 65 ibid, paragraphs 14–16.

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clause entitling the subcontractor to use the main contractor’s name in relation to the latter’s rights and obligations under the main contract against the employer featured as an important counter-factor for a simplistic substitution-of-name argument.66 In Ho Fat Sing t/a Famous Design Engineering Co v. Hop Tai Construction Co Ltd, DCCJ 3600/2007 (23 December 2008), the Court found that where the benefits and obligations of the employer and the main contractor were expressly vested in the subcontractor and the sub-subcontractor on a back-to-back basis, the benefits of the employer including the benefit of the agreed mechanism for settlement of dispute, namely, an arbitration agreement, were likewise vested in the subcontractor. At first glance, the two cases seem to differ on a point of the classification of the dispute resolution mechanism as ‘obligation’ or ‘benefit’. We suggest that the distinction should by no means be mechanic. As illustrated above, the whole contractual instrument should be analysed as to the parties’ intention on a case-by-case basis.

Stay for arbitration under construction contract The general principles governing an application for stay of court proceedings to refer to arbitration under Section 20 of the Ordinance are well settled in Hong Kong.67 The onus is on the applicant for stay to demonstrate that there is a prima facie case that the parties were bound by the arbitration clause, and unless the point is clear the court should not attempt to resolve the issue but should stay the matter in favour of arbitration.68 Each case should be decided on its own facts. Where an arbitration clause is deleted from the standard form of contract, the insertion of a new arbitration clause that the parties ‘may’ submit to arbitration may be held as permissive only, thus not binding the parties to submit to arbitration.69 Where a multi-tiered dispute resolution mechanism is provided for in the contract, compliance with the mechanism is generally a precondition for arbitration.70 The arbitration agreement must not be null, void, inoperative or incapable of being performed, and the onus is on the opposing party to prove on a high standard.71

66 ibid, paragraph 20. 67 Tommy CP Sze & Co v. Li & Fung (Trading) Ltd [2003] 1 HKC 418, 425 (per Ma J as the Hon Chief Justice then was), namely there are four questions: (1) whether there is an arbitration agreement between the parties; (2) whether the clause in question is capable of being performed; (3) whether there is in reality a dispute or difference between the parties; and (4) whether the dispute or different between the parties within the ambit of the arbitration agreement. 68 PCCW Global Ltd v. Interactive Communications Service Ltd [2007] 1 HKLRD 309 (Hong Kong Court of Appeal). 69 ibid, in respect of a standard form service agreement. 70 Lim Choon Hock otherwise known as William Lim and Anor v. Hung Ka Hai Clement and Ors, HCA 1282/2016 (24 August 2016), paragraph 19 where the court seemed to have considered pre-arbitral steps as a pre-condition without express indication of such; in contrast, in Sulamerica CIA Nacional de Seugros S.A. v. Enesa Enenharia S.A. [2012] EWCA Civ 638, the pre-arbitral mediation requirement did not constitute a binding obligation and hence no condition precedent to arbitration as the clause was not sufficiently precise. 71 Schindler Lifts (Hong Kong) Ltd v. Sui Chong Construction and Engineering Co Ltd, DCCJ 2784/2014 (26 November 2014), paragraph 26, citing Klockner Pentaplast GmbH v. Advance Technology [2011] 4 HKLRD paragraph 19.

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The matter in the action must fall within an arbitration agreement, not ‘related’ to it or ‘involved’ in it, and the Court should consider the substance of the controversy as it appears from the circumstances as revealed by the evidence but not just the particular terms in which the claimant has sought to formulate its claim.72 Under certain circumstances, a non-contractual claim falls in the ambit of the arbitration clause.73 For instance, a claim by a contractor seeking reimbursement of a labour tribunal’s award against its subcontractor may fall into the wide wording of an arbitration clause in the subcontract.74 The time limit for requesting a stay of proceedings for arbitration is set to be no later than when submitting the defendant’s first statement on the substance of the dispute, either in the arbitral process or in the action sought to be stayed.75 For a related argument of a waiver of the right to arbitrate, it seems that there can be no unilateral waiver as the arbitration is intended for the benefit of both parties.76 Finally, the Court has an inherent jurisdiction by virtue of Section 16 of the High Court Ordinance (Cap 4) or Order 1B r1 of RHC to grant a discretionary stay even if a mandatory stay under Section 20 of the Ordinance is precluded.77

HKIAC Domestic Arbitration Rules As noted above, the HKIAC Domestic Arbitration Rules (2014) seek to solve domestic disputes in ad hoc arbitrations in Hong Kong, where the provisions make express reference to and are construed in accordance with the Ordinance.78 The duty of confidentiality in the HKIAC Domestic Arbitration Rules is:

72 Bluegold Investment Holdings Ltd v. Kwan Chun Fun Calvin, HCA 1492/2015, 4 March 2016 (Mimmie Chan J). 73 Fili Shipping Co Ltd v. Premium Nafta Products Ltd [2007] UKHL 40 (Fiona Trust) where the court held that ‘… the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to have entered to be decided by the same tribunal’ (paragraph 13). 74 Chevalier (Construction) Co Ltd v. Universal Aluminium Industries Ltd, HCA 2338/2013 (18 June 2014); see also Pollard Construction Co Ltd v. Lee Kwong Kong and To Chun Yin t/a Hung Chong (Foundation) Construction Ltd, DCCJ 5635/2016 (27 October 2017). 75 Section 20(1), the Ordinance; Schindler Lifts (Hong Kong) Ltd, ibid, paragraphs 28–30, citing Bab Systems v. McLurg [1994] Carswell Ont 4426 (Canada) and Paladin Agricultural v. Excelsior [2001] 2 HKC 215 at 222F-223D where the Court found the applicant’s defence filed in a small claim tribunal proceeding that was subsequently discontinued for the present District Court action did not constitute a ‘statement’ within Section 20, the Ordinance. 76 Schindler Lifts (Hong Kong) Ltd, ibid, paragraphs 60–62, citing Aggressive Construction v. Data-Form Engineering, HCA 2143/2008 (4 August 2009). 77 Chok Yick Interior Design & Engineering Ltd v. Fortune Works Enterprises Ltd [2010] 2 HKC 360 (at paragraph 8) and Marshall-Karson v. Kowloon Canton Railway, HCCT 38/1994 (9 June 1995), as cited by Schindler Lifts (Hong Kong) Ltd, ibid. 78 Preamble

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subject to the exception, [inter alia], that disclosure is permitted when, and to the extent to which it is reasonably necessary for the protection of the legitimate interest of an arbitrating party, and that means reasonably necessary for the establishment or protection of an arbitrating party’s legal rights vis-à-vis a third party in order to found a cause of case against that third party or to defend a claim (or counterclaim) brought by the third party.79

In Hong Kong Housing Authority v. Sui Chong Construction & Engineering Co Ltd & Anor, HCCT 47/2007 (28 November 2007), the Court found that the whole scheme of the sale and purchase agreement made by the shareholder of one party to arbitration contemplated that the right to claim under the main contract would remain with that party, and thus the shareholder and other professionals were acting as that party’s agent committing no breach of the duty of confidentiality.

Schedule 2 as applied to construction contracts As noted above, standard forms of contract provide by default for domestic arbitration. Local users with their places of business in Hong Kong thus used to, by default, commence a domestic arbitration under the predecessor legislation,80 subject to any opt-out agreement.81 Under the Ordinance, some features of the domestic arbitration regime with a wider scope of court intervention are retained in Schedule 2, whereby Section 99 allows for opt-in. Subject to express agreement to the contrary,82 Section 100 prescribes automatic application of Schedule 2 to an arbitration agreement, which has provided or provides that ‘arbitration under the agreement is a domestic arbitration’,83 that was entered into before or within six years after the commencement of the current Ordinance (1 June 2011). Hence, Schedule 2 remains relevant if the main contract or the subcontract84 included an arbitration agreement for domestic arbitration entered into on or before 2 June 2017.

79 Article 20.1; Hong Kong Housing Authority v. Sui Chong Construction & Engineering Co Ltd & Anor, HCCT 47/2007 (28 November 2007) (at paragraph 18) under the then Rule 26 of HKIAC Domestic Arbitration Rules (1993). 80 Under the repealed Cap 341; the corresponding notion of ‘domestic arbitration agreement’ was defined in contrast with ‘international arbitration agreement’, that is ‘an arbitration agreement pursuant to which an arbitration is, or would if commenced be, international within the meaning of Article 1(3) of the UNCITRAL Model Law’ (see Section 2, Cap 341). 81 Section 2L, Cap 341. 82 Section 102, the Ordinance. 83 The Court in A and Ors v. D, HCMP 1014/2016 (22 December 2016) interpreted this requirement (at paragraphs 17–24) as referring to an express provision in the arbitration agreement that such arbitration would be a domestic arbitration or that Schedule 2 would apply, but that any arbitration under the arbitration agreement would or might have been a domestic arbitration under the repealed Cap 341 would not suffice. 84 Section 101(2), the Ordinance.

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Schedule 2 is deemed to apply to an arbitration agreement under a subcontract of a construction contract where it automatically applies to that main contract,85 unless the express agreement provides otherwise,86 or where the subcontractor or the operation under subcontract lacks connection with Hong Kong.87 This deeming provision applies mutatis mutandis to a further subcontract.88 Schedule 2 has seven sections, providing for: • sole arbitrator; • consolidation of arbitrations; • the Court’s decision of preliminary question of law; • challenge arbitral award on ground of serious irregularity; • appeal against arbitral award on question of law; • application for leave to appeal against arbitral award on question of law; and • supplementary provisions on challenge or appeal against arbitral award. Under Section 3, an application may not be made except with all parties’ agreement or the tribunal’s permission in writing.89 The court must satisfy itself that the decision of the question might produce substantial savings in costs to the parties before it can entertain the application.90 An application of challenge on the ground of serious irregularity under Section 4 or for leave to appeal on a question of law under Section 6 must be made and the originating summons or summons must be served within 30 days ‘after the award is delivered’.91 If the challenge is found, the Court can remit the award for reconsideration, and only if remit is inappropriate set aside the award or, in the case of a challenge on ground of serious irregularity declare the award ineffective and in the case of an appeal vary the award.92 For all applications intervening in substance of the tribunal’s award or decision, leave is required for an appeal from a decision.93

85 Section 101(1), the Ordinance; ‘construction contract’ means ‘a contract between an employer and a contractor under which the contractor carries out construction operations but does not include a contract of employment’ under Section 2(1), and ‘construction operations’ is defined under Schedule 1, respectively, of the Construction Industry Council Ordinance (Cap 587). 86 Section 102, the Ordinance. 87 Such as that the subcontractor is resident, incorporated or managed outside Hong Kong, does not have a place of business in Hong Kong, or a substantial part of the subcontracted operation is performed outside Hong Kong; see Section 101(2), the Ordinance. 88 Section 101(3), the Ordinance. 89 Section 3(2), Schedule 2, the Ordinance. 90 Section 3(3), Schedule 2, the Ordinance. 91 Order 73, Rule 5(1)&(2), the Rules of the High Court (Cap 4A) (RHC); the Court in Po Fat Construction Co Ltd v. IO of Kin Sang Estate [2014] 2 HKC 254, HCCT 15/2013 & 23/2013 (6 November 2013) decided that ‘delivered’ had the same meaning with the terms ‘made and published’ under the former O 73 r5(2) applicable to the repealed Cap 341, that is, when the arbitrator informed the parties that the award had been made and was ready for collection, with or without the prior payment of fees. 92 Section 4(3)&(5), Section 5(5)&(7), Schedule 2, the Ordinance. 93 Section 3(5), 4(6), 5(8) & 6(5), Schedule 2, the Ordinance.

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Serious irregularity ‘Serious irregularity’ is statutorily defined and set out in full: an irregularity of one or more of the following kinds which the Court considers has caused or will cause substantial injustice to the applicant – (a) Failure by the arbitral tribunal to comply with section 46;94 (b) The arbitral tribunal exceeding its powers (otherwise than by exceeding its jurisdiction); (c) Failure by the arbitral tribunal to conduct the arbitral proceedings in accordance with the procedure agreed by the parties; (d) Failure by the arbitral tribunal to deal with all the issues that were put to it; (e) Any arbitral or other institution or person vested by the parties with powers in relation to the arbitral proceedings or the award exceeding its powers; (f) Failure by the arbitral tribunal to give, under section 69,95 an interpretation of the award the effect of which is uncertain or ambiguous; (g) The award being obtained by fraud, or the award or the way in which it was procured being contrary to public policy; (h) Failure to comply with the requirements as to the form of the award; or (i) Any irregularity in the conduct of the arbitral proceedings, or in the award which is admitted by the arbitral tribunal or by any arbitral or other institution or person vested by the parties with powers in relation to the arbitral proceedings or the award.96

Internal inconsistency between two awards or rulings of the tribunal may potentially constitute a ground for serious irregularity,97 although it might be said to go to the tribunal’s substantive jurisdiction or the substantive merits of the claim. The Court will not accede to a challenge if the conduct of the tribunal in allowing some issues to be raised and making findings against a party on these issues is not ‘so serious or egregious’ as to justify the award being set aside.98 Even if a party was unable to present its case or there had been some serious procedural irregularity that undermined the due process, the Court retains a discretion not to set aside the arbitral award if it is not satisfied that the outcome of the dispute would have been affected by such irregularity or breach of due process, or if it is satisfied that the arbitral tribunal could not have reached a different conclusion.99

94 Section 46 deals with equal treatment of parties, as required under Article 18 of the UNCITRAL Model Law. 95 Section 69 deals with correction and interpretation of award or issuance of additional award, as required under Article 33 of the UNCITRAL Model Law. 96 Section 4(2), Schedule 2, the Ordinance; cf. Section 68, the English Arbitration Act 1996. 97 A and Ors v. D, ibid, footnote 86; the Court proceeded to consider the issue of serious irregularity but did not find the alleged inconsistency proved on the facts. 98 Po Fat Construction Co Ltd, ibid, at paragraph 28, applying Grand Pacific Holdings Ltd v. Pacific China Holdings Ltd (in liq) (No 1) [2012] 3 HKC 498; [2012] 4 HKLRD 1; the setting aside application was not expressly made on the ground of serious irregularity but on the arbitrator’s alleged breach of due process (at paragraph 3). 99 ibid, at paragraph 29, applying Brunswick Bowling & Billiards Corp v. Shanghai Zhonglu Industrial Co Ltd & Anor [2009] 5 HKC 1; [2011] 1 HKLRD 707 etc.; the Court similarly retains a residual discretion even if sufficient grounds are made out either to refuse enforcement or to set aside under the general provisions of the Ordinance, see KB v. S & Ors HCCT 13/2015, [2016] 2 HKC 325, 328-329.

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In N v.W [2018] HKCFI 2405; HCCT 39/2018 (30 October 2018), in dealing with a challenge to an arbitral award on ground of inter alia misconduct of the arbitrator under the repealed predecessor legislation, the Court noted that: bearing in mind the objectives of the Ordinance and the policy of the Court to uphold the validity of arbitration agreements and the finality of arbitral awards, the Court would only exercise its discretion to set aside an award for the arbitrator’s misconduct under section 25 of [Cap 341] if there was likewise serious, even egregious, conduct of the arbitrator which offends the Court’s most basic notions of justice, morality and fairness, and which results in a denial of due process and serious prejudice to a party. Generally speaking, the Court is only concerned with the structural integrity of the arbitration proceedings.The remedy of setting aside is not an appeal, and the Court will not address itself to the substantive merits of the dispute, or to the correctness or otherwise of the award, whether concerning errors of fact or law.

Appeal on a question of law Before a party can appeal under Section 5, Section 6 requires the leave of the Court or the agreement from all parties, the latter of which is rarely forthcoming in practice. Order 73 Rule 5(5) of RHC allows the appeal under Section 5 to be included in the application for leave to appeal. The threshold for granting leave to appeal on question of law is high, namely only if the Court is satisfied that, on the basis of the findings of fact in the award, either the decision of the arbitral tribunal on the question is ‘obviously wrong’100 or the question is one of general importance and the decision of the tribunal is ‘at least open to serious doubt’.101 The law applies different tests to a one-off dispute102 and a question of general importance, but the distinction is not solely based on whether the subject clause of the construction is a provision in a standard form of contract.103

100 Dicta in Pioneer Shipping Ltd v. BTP Tioxide Ltd (The Nema) [1982] AC 724 was cited with approval in Swire Properties v. Secretary for Justice (2003) 6 HKCFAR 236: ‘where, as in the instant case, a question of law involved is the construction of a ‘one off ’ clause the application of which to the particular facts of the case is an issue in the arbitration. Leave should not normally be given unless it is apparent to the judge upon a mere perusal of the reasoned award itself without the benefit of the adversarial argument, that the meaning ascribed to the clause by the arbitrator is obviously. But if on such perusal it appears to the judge that it is possible that argument might persuade him, despite first impression to the contrary, that the arbitrator might be right, he should not grant leave; the parties should be left to accept, for better or for worse, the decision of the Tribunal that they had chosen to decide the matter in the first instance.’ 101 Section 6(4), Schedule 2, the Ordinance. 102 Swire Properties, Ibid (under the repealed Cap 341), paragraph 31: ‘Leave should not normally be given in ‘one-off ’ disputes unless the arbitral tribunal’s construction is ‘obviously wrong’; but leave can sometimes be given in ‘standard clause’ disputes as long as there is at least ‘a strong prima facie case’ that the arbitral tribunal’s construction is wrong.’ 103 A and Ors v.The Housing Authority [2018] HKCFI 147, HCCT 54/2017 (26 January 2018) where the court held that the award concerned construction of ‘specific words in provisions of the Contracts, in the context of the facts and particular work procedures of this case’ (at paragraph 26) where the defendant adduced evidence that the special conditions of the contracts in dispute were amended in early 2014 and thus had no relevance to subsequent contracts and that the number of contestants was small.

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In addition, the Court must be satisfied that the decision of the question will ‘substantially affect the rights of one or more of the parties’ and that the question is one that the arbitral tribunal was asked to decide.104 Further leave is required for an appeal from the decision of the Court to grant or refuse leave to appeal,105 and leave will be granted only if the question is one of general importance or for some other special reason should be heard.106 Section 14AA of the High Court Ordinance (Cap 4) imposes additional conditions for an interlocutory appeal107 from an interim award.

Recent developments Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region On 2 April 2019, the HKSAR government and the mainland authorities signed the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region.108 Under the Arrangement, Hong Kong becomes the first and only jurisdiction outside the mainland where, as a seat of arbitration, parties to arbitral proceedings administered by its arbitral institutions would be able to apply to the mainland courts for interim measures. The commencement date of the Arrangement will be decided after the promulgation of a judicial interpretation by the Supreme People’s Court and completion of relevant procedures in the HKSAR.

Third-party funding Hong Kong has passed its legislative amendments allowing for third party funding in arbitration.109 As rightly observed by a professional body in the Law Reform Commission Report: As most construction disputes are commercial in nature, whether Third Party Funding for arbitration is available would naturally form part of the commercial consideration when parties pursue their claims in arbitration. Hong Kong is known for its multi-tiered subcontracting arrangements in the construction industry. Many of the smaller subcontractors may not necessarily have the financial means or flexibility in resource allocation to pursue their claims against

104 Section 6(4), Schedule 2, the Ordinance. 105 Section 6(5), Schedule 2, the Ordinance. 106 Section 6(6), Schedule 2, the Ordinance. 107 Leave may be granted subject to conditions as the court considers necessary in order to secure the just, expeditious and economical disposal of the appeal (Section 144A(3)(b)) and only if the appeal has a reasonable prospect of success or there is some other reason in the interest of justice why the appeal should be heard (Section 14AA(4)); Maeda Kensetsu Kogyo Kabushiki Kaisha (also known as Maeda Corporation) and Another v. Bauer Hong Kong Ltd, HCMP 1342/2017 (Hong Kong Court of Appeal) (4 September 2017). 108 https://gia.info.gov.hk/general/201904/02/P2019040200782_307637_1_1554256987961.pdf, last accessed 7 July 2019. 109 Part 10A, the Ordinance; Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017, Ordinance No. 6 of 2017.

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the larger, more resourceful contractors or project employers despite having meritorious claims. A third party may also have a vested interest in a dispute.Take the example when progress of work is disrupted when a small scale subcontractor is having a dispute with his supplier. It would be of genuine interest to the main contractor if he could fund the subcontractor’s case. Third party funding for arbitration in Hong Kong should provide these less resourceful contractors or subcontractors with alternative options when considering whether they should pursue their claims.110

The remaining sections under the new Part 10A of the Ordinance came into effect on 1 February 2019.111 The Code of Practice for Third Party Funding of Arbitration under Part 10A has been issued.112

Security for payment The proposed Security for Payment Legislation for the Construction Industry spearheaded by the Development Bureau was released in June 2015, with the Report on public consultation compiled in April 2016.113 The proposed legislation included the provisions such as that ‘pay when paid’ clause and similar clauses are ineffective and unenforceable under the law, that interim and final payments must be paid within 60 and 120 calendar days counting from receipt of the payment applications, that interim amounts decided by an adjudicator must be paid pending litigation or arbitration. While there is not yet a detailed schedule, initiatives might be taken to introduce a new legislation in this regard.

110 The Law Reform Commission of Hong Kong, Report on Third Party Funding for Arbitration (October 2016), paragraph 3.13. 111 Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (Commencement) Notice 2018, L.N. 260 of 2018 (3 December 2018). 112 Arbitration Ordinance (Cap 609) (Notice under Section 98P), G.N. 9048 (7 December 2018) https://gia.info. gov.hk/general/201812/07/P2018120700601_299064_1_1544169372716.pdf, last accessed 7 July 2019. 113 www.devb.gov.hk/filemanager/en/content_880/SOPL_consultation_report.pdf, last accessed 7 July 2019.

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Appendix 1 About the Authors

Samar Abbas 39 Essex Chambers Samar Abbas specialises in construction and commercial disputes, with a particular emphasis on international arbitration (in relation to which he is regularly ranked in legal directories as a leading junior). He has experience in undertaking advisory and pleading work for a wide variety of domestic and international clients, with a focus on matters arising from or seated in the Asia Pacific region. As an advocate, he focuses on energy, infrastructure and joint venture disputes, and has considerable expertise in technically complex matters. Before coming to the English Bar, Samar graduated from Yale University. He then spent a number of years working as a management consultant and strategy professional and brings to the Bar extensive knowledge of market constraints, supply chain concerns and regulatory pressures in the pharmaceutical, telecommunications and consumer packaged goods industries. Samar has a particular interest in international work, having worked in APAC, Caribbean, Middle East and North America.

Mohamed S Abdel Wahab Zulficar & Partners Law Firm Mohamed S Abdel Wahab is a founding partner and head of international arbitration and construction at Zulficar & Partners Law Firm. He is professor and chair of private international law and international arbitration at the Faculty of Law – Cairo University. Prof Dr Abdel Wahab is vice president of the ICC International Court of Arbitration; former court member of the LCIA (2014–2019); court member of the CIMAC, vice chair of the IBA Arab Regional Forum; member of the CIArb’s Board of Trustees; member of the CRCICA Advisory Committee; member of AAA-ICDR International Advisory Committee; member of the SIAC African Users’ Council’s Committee; and CEDR Accredited Mediator. He has served as arbitrator, presiding arbitrator, counsel and expert

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About the Authors in more than 190 cases, including complex, high value ad hoc arbitral and institutional proceedings involving parties (including states and state owned entities) from Africa, Asia, Canada, Europe, the Middle East and the United States and administered under the auspices of the AAA, BCDR-AAA, CRCICA, DIAC, DIFC-LCIA, ICC, ICSID, LCIA, LMAA, SCC, SIAC, as well as ad hoc UNCITRAL proceedings. He is recognised as a world-leading international arbitration practitioner and expert on Arab and African laws, Islamic shariah, construction law and practice, oil & gas and online dispute resolution. He has acted in proceedings governed by Bahraini, Egyptian, English, French, Jordanian, Kuwaiti, Libyan, New York, Omani, Pakistani, Qatari, Saudi, Spanish, Swiss, Syrian, Italian and United Arab Emirates laws, as well as the general principles of law. Prof Dr Abdel Wahab features in Who’s Who Legal: Arbitration and Who’s Who Legal: Construction, the GAR Global Guide for Future Leaders in International Arbitration (2017-2018) and the GAR Guide on Thought Leaders in International Arbitration (2017–2018). Who’s Who Legal: Construction describes Mohamed Abdel Wahab as ‘a leading heavyweight construction law specialist whose analytical skills are second to none’ and Who’s Who Legal (2017-2018) describes him as ‘one of the best practitioners in the world today’ thanks to his ‘sharp mind and excellent legal knowledge’.

Ellis Baker White & Case LLP Head of the firm’s construction practice, Ellis Baker is a leading authority on construction law. Ellis advises clients on all aspects of the delivery of construction and engineering projects, from procurement and the drafting and negotiation of contracts, to contract administration and the avoidance and resolution of disputes. Ellis has advised developers, contractors, consultants and lenders on projects in 31 countries across five continents, including power stations, oil and gas installations, metals and mining facilities, process plants, transport infrastructure and commercial developments. Ellis has been recognised by independent legal directories as a leading lawyer for construction law since 2005, and, in 2018, was highlighted ‘in particular for his deep knowledge of the FIDIC suite of contracts’ by Chambers UK and as a ‘leading expert on the FIDIC suite’ by Legal 500. He is one of the few individuals ranked Band 1 for Construction: Purchaser; Band 1 for Construction: International Arbitration by Chambers UK; and a Leading Individual for Construction by Legal 500. Ellis is lead author of ‘FIDIC Contracts: Law and Practice’, published by Informa, the principal construction text covering the whole suite of major FIDIC forms of contract.

Katherine Bell Schellenberg Wittmer Ltd Katherine Bell is a senior associate in Schellenberg Wittmer’s Dispute Resolution group in Zurich. Her main areas of practice are domestic and international commercial litigation and arbitration. She has acted as counsel and legal secretary to arbitral tribunals in complex international arbitrations involving an array of matters, including large construction and engineering projects around the globe. Katherine also represents parties in commercial

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About the Authors litigation proceedings before Swiss courts and assists clients in the drafting and negotiation of construction contracts. Examples of Katherine’s expertise in construction matters include: representing a multinational company in an ICC arbitration against a shipyard operator in a dispute over a contract regarding the delivery of technical equipment; representing a German party in ICC arbitration proceedings against an Eastern European party in a dispute under a series of supply and engineering contracts related to a metals processing plant; and acting as sole arbitrator in an arbitration under the Swiss Rules between an Austrian company and a Turkish company related to a dispute over the engineering and supply of electro-mechanical equipment. Katherine regularly publishes in her areas of expertise. She is a member of several professional institutions, including the Swiss Arbitration Association, the Arbitral Women Association, the ICC Young Arbitrators Forum and YConstruction. In 2019, Katherine was recognised as a Future Leader by Who’s Who Legal in construction. Prior to joining Schellenberg Wittmer, Katherine was a contract manager for an international healthcare company based in Zug, Switzerland. Katherine was also a legal intern at the High Prosecutor’s Office of the Canton of Berne. Thereafter she served as a law clerk with the District Court of Horgen, Zurich, where she was also chair of the conciliation authority for disputes relating to the tenancy and lease of property.

Leith Ben Ammar Quinn Emanuel Urquhart & Sullivan, LLP Leith Ben Ammar is a senior associate in Quinn Emanuel’s Doha office. His practice focuses on complex, high value international arbitration and commercial litigation. Leith also advises clients on project documentation. He acted for state entities, developers, contractors and multinational companies, primarily in the construction, infrastructure, mining and energy sectors. He also has experience in general commercial disputes and complex multi-jurisdictional trust disputes. Leith read law at SOAS, University of London, where he graduated top of his class in contract law. He then completed the Legal Practice Course (with distinction) at BPP Law School in London.

Stavros Brekoulakis Queen Mary University of London and 3 Verulam Buildings Stavros Brekoulakis is a professor and the director of the School of International Arbitration at Queen Mary University of London, as well as a member at 3 Verulam Buildings. He is a member of the LCIA Court, a member of the ICC Commission on Arbitration, an assistant rapporteur in the International Law Association Committee on International Commercial Arbitration, the general editor of the Journal of International Dispute Settlement and the editor-in-chief of the (CIArb’s) International Journal of Arbitration, Mediation and Dispute Management. Professor Brekoulakis has been involved in international arbitration for more than 20 years as counsel, arbitrator and expert. Having practised commercial law, arbitration and litigation as in-house counsel and private practitioner, he currently serves as arbitrator and

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About the Authors expert. He is regularly listed in Who’s Who Legal: Arbitration and was also listed in Who’s Who Future Leaders: Arbitration 2017 as one of the 10 most highly regarded future leaders, described as ‘very thorough and professional’ and ‘held in the highest regard’. He was named as a Who’s Who Legal: Thought Leader – Arbitration 2018, which includes an exclusive list of ‘the most highly regarded arbitrators who truly stand out in their field as being leaders and who are held in the highest esteem by their clients and fellow practitioners’. He was nominated for the ‘Best Prepared and Most Responsive Arbitrator’ Award of the Global Arbitration Review in 2016 and 2017. Professor Brekoulakis has been appointed in more than 30 arbitrations, as chairman, sole arbitrator, co-arbitrator and emergency arbitrator under the rules of the International Chamber of Commerce, the London Court of International Arbitration, the Stockholm Chamber of Commerce, the Danish Institute of Arbitration, the Court of Arbitration for Sports as well as in ad hoc arbitrations under the UNCITRAL Arbitration Rules. His professional expertise focuses on arbitrations in the context of major construction and complex infrastructure projects, energy and natural resources projects, as well as international business and trade transactions, including sales of goods, financial transactions, indemnity and distribution shareholders’ agreements, IP contracts and sports disputes.

James Bremen Quinn Emanuel Urquhart & Sullivan UK LLP James Bremen is chair of Quinn Emanuel’s construction and engineering practice and has almost 20 years of experience in the world’s largest and most complex construction projects and most difficult disputes. He has worked in over 25 countries on both project documentation and claim resolution (including as counsel in some of the world’s largest construction arbitrations) in the oil and gas, power and major infrastructure sectors. He is considered one of the world’s leading lawyers in major project disputes in the emerging markets, and has over a decade’s experience in representing the State of Qatar and the Kingdom of Saudi Arabia on construction disputes.

David Brynmor Thomas QC 39 Essex Chambers David Brynmor Thomas QC is a Queens Counsel who specialises in the conduct of complex, high-value, international commercial litigation and arbitration. He has extensive experience in handling disputes arising from long-term commercial relationships and construction projects across a range of industries, including energy and natural resources, transport and other infrastructure, manufacturing, ship-building and aviation. He has been counsel on cases involving projects and other assets in the United Kingdom, India, Asia, Australia, the Middle East, Africa and the Americas. David also appears in arbitration applications for injunctive relief in support of arbitrations, on challenges to awards on jurisdictional and procedural grounds, and on the enforcement of international arbitration awards. David is an honorary professor in the Centre for Commercial Law Studies, Queen Mary University of London, where he teaches International Construction Contracts and

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About the Authors Arbitration. He has been appointed as an arbitrator in institutional and ad hoc arbitrations on more than 50 occasions. David is a former chair of the Board of Trustees of the Chartered Institute of Arbitrators, having represented the Chartered Institute at the United Nations Commission on International Trade Law (UNCITRAL) Working Group on International Commercial Arbitration for its work on amendments to the UNCITRAL Model Law and the UNCITRAL Arbitration Rules. He is also a member of the International Chamber of Commerce’s (ICC) Commission on Arbitration. David was a partner in Herbert Smith, specialising in International Arbitration and Construction disputes, before practising at the independent Bar. He was appointed Queen’s Counsel in 2019, only eight years after being called to the Bar. David is recommended by The Legal 500 for international arbitration, both as counsel and as arbitrator; Chambers & Partners for international arbitration: English Bar (Worldwide) and most in-demand arbitrators; and Who’s Who Legal as one of their Thought Leaders in Arbitration, and for work as counsel and arbitrator for construction and litigation.

Sophia Burton Debevoise & Plimpton LLP Sophia Burton is an associate based in Debevoise & Plimpton’s London office and is a member of the international dispute resolution group. Ms Burton has extensive experience in advising clients in the energy, infrastructure and construction sectors on high-value and complex international disputes. Ms Burton has supported her clients with all main dispute resolution procedures: arbitration (ICC and LCIA); litigation; domestic UK construction adjudication; dispute adjudication boards and mediation. Ms Burton also has experience in non-contentious construction matters having advised clients on a range of standard and bespoke construction agreements. Ms Burton joined the firm in September 2018 from another US law firm in London, having trained and practised at a magic circle law firm prior to that. She graduated from Magdalene College, University of Cambridge in 2008 with a BA (Hons). Ms Burton was admitted as a solicitor of the Senior Courts of England & Wales in 2011. She is also admitted as a solicitor advocate, with rights of audience before the higher courts.

Lee Carroll Corrs Chambers Westgarth Lee Carroll is a special counsel in the projects and international arbitration groups of Corrs Chambers Westgarth Melbourne. She has experience in arbitrations conducted under the ICC, ACICA, SIAC, DIAC, BCDR-AAA and UNCITRAL rules, advising clients and assisting arbitral tribunals. She regularly advises local and international clients on the drafting of arbitration agreements. She also advises on the potential enforcement of bilateral investment treaties and corporate structuring with a view to optimising investment protection, and has published on the CPTPP. Lee was associate to The Hon. Justice Hayne of the High Court of Australia from 2005 to 2006. She holds a BCL from Oxford University, and bachelors of laws (first class honours) and arts from the University of Western Australia. She also has a diploma in international commercial arbitration from the Chartered Institute of

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About the Authors Arbitrators. Lee previously practised at a leading international law firm in London, and in 2017 was seconded to Bredin Prat in Paris, where she worked in their arbitrage team. She is a fellow at Melbourne University Law School and a sessional lecturer in the JD programme.

Brendan Casey Akin Gump Strauss Hauer & Feld LLP Brendan Casey is an international arbitration specialist based in the Geneva office of Akin Gump Strauss Hauer & Feld. He represents clients in high-value, technical and complex arbitrations and has significant experience of construction and infrastructure disputes. Brendan has handled international arbitrations worth billions of US dollars conducted under a variety of arbitral rules (including ICC, LCIA, SCC, UNCITRAL, SIAC and DIAC) and a broad spectrum of substantive and procedural laws (New York, Texas, English, Swiss, Japanese) in both common and civil law jurisdictions (Geneva, Stockholm, Singapore, London, Paris). Brendan works closely with the firm’s arbitration and litigation practitioners in London, Houston and Washington DC. He resided in the London office in 2015 and 2016. Prior to joining Akin Gump, he practised in the London office of another leading international law firm.

Gavin Chesney Debevoise & Plimpton LLP Gavin Chesney is an international counsel in the firm’s London office. He is a solicitor advocate with full rights of audience in the English civil courts, and his practice focuses on international commercial disputes, both in international arbitration and in court litigation. Mr Chesney has represented a wide variety of clients including major corporations, high net worth individuals and sovereign states in a range of complex, high-value disputes across sectors including construction, mining, power, oil and gas, defence and financial services. He has appeared in ICSID, UNCITRAL, ICC, LCIA, SIAC and AAA arbitration proceedings, as well as in ad hoc arbitrations and litigation proceedings in the English and other common law courts. He has been recognised as a ‘next generation lawyer’ by The Legal 500 UK for his work in the construction sector.

Adrian Cole King & Spalding Adrian Cole is a partner in King & Spalding’s international arbitration group and leads the Middle East Dispute Resolution Practice. He is a construction law specialist advising on disputes relating to energy and infrastructure development. Prior to becoming a lawyer, Mr Cole qualified as an engineer/quantity surveyor and has first-hand experience of the practical issues in the engineering and construction industries. Mr Cole has been listed by Who’s Who Legal as one of the top 25 construction dispute resolution lawyers in the world. He is an experienced arbitrator, adjudicator and mediator and is a Fellow of the Chartered Institute of Arbitrators and a member of the Chartered Institute of Building.

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About the Authors

Paul Darling QC 39 Essex Chambers Paul Darling OBE QC has established a formidable reputation as an advocate in all types and levels of tribunals all over the world. He specialises in complex cases that feature multiple parties, large teams, and high volumes of material, and is often brought in by clients at short notice, late in proceedings. An ability to work with colleagues from any jurisdiction, and to grasp detail, strategy, and tactics quickly has allowed Paul to develop a practice that has taken him to every major jurisdiction, appearing in a wide variety of construction, energy, and commercial matters. Adaptability and focus have contributed to Paul’s reputation as a game changer, brought in to direct some of the construction and commercial world’s most difficult cases. Paul has represented diverse clients in tribunals such as the Commercial Court, the Technology and Construction Court, and the Court of Appeal in London, the High Court and the Supreme Court in Dublin, the High Court in Northern Ireland and Arbitration Tribunals globally. Since the early 1990s, he has conducted many arbitrations in Hong Kong, Singapore, and the Middle East. He has acted in ICC, LCIA HKIAC, SIAC and DIAC Arbitrations and regularly sits as adjudicator and arbitrator.

Jane Davies Evans 3 Verulam Buildings A barrister and chartered accountant, Jane practises international arbitration as counsel and arbitrator from 3 Verulam Buildings in London. Jane is ranked for energy, construction and international arbitration (Legal 500, and Chambers & Partners) and recognised as a Thought Leader in Who’s Who Legal: Construction. Jane focuses on commercial disputes arising in the energy, natural resources and infrastructure sectors in Africa, Asia, the Middle East, Latin America and Russia/CIS, with particular expertise in arbitrations concerning complex major and mega projects. Jane is described in the Legal 500 as ‘Devastatingly good for complex cases’ and ‘The most competent construction advocate; very experienced in international disputes’ who is ‘Absolutely first rate’ and ‘A superb lawyer and an excellent litigator’. Chambers & Partners describes Jane as ‘A sophisticated advocate’ who is ‘Very good in cross-examination’ and whose ‘eloquence and grasp of the technical and financial elements of complex cases is remarkable’. Jane is a Fellow of the Chartered Institute of Arbitrators, the Institute of Chartered Accountants in England & Wales and a member of the Society of Construction Arbitrators. Jane was managing editor of the IBA journal Construction Law International from 2016 to 2018, is vice co-chair of the IBA International Construction Projects DR subcommittee and chairs the annual Construction Law Summer School, Cambridge.

Jean-François Djanett Argos Construction Jean-François Djanett is the president and founding partner of Argos Construction, an independent firm of consulting engineers specialised in project management and disputes in engineering and construction and in restructuring.

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About the Authors He started his career at Bouygues (building division). In 1992, he joined Coopers & Lybrand (now PwC) as a director before becoming a partner at KPMG in 1999. He founded Argos Construction in 2004 in a perfect team and commercial continuity. Since 1992, he has gained significant experience in engineering and construction disputes. He has acted as an expert as well as a consultant or technical advisor in several international arbitrations. He runs numerous training sessions each year on contracts and claims management in France and in Europe. Additionally, he has served and continues to serve as a court-appointed expert before more than 60 French commercial courts in restructuring cases involving contracting authorities, employers, banks, guarantors, contractors and subcontractors.

James Doe Herbert Smith Freehills LLP James is a disputes specialist with over 18 years’ experience advising energy and infrastructure clients in the United Kingdom and internationally. James is head of the UK construction, engineering and infrastructure disputes group and is based in London. James advises international oil companies, international contractors and project sponsors on their most complex disputes involving major infrastructure, oil and gas field development, drilling rigs, processing facilities and power stations. As well as over 14 years’ experience working in the Herbert Smith Freehills London office, James has considerable experience in the Middle East and Asia having headed up the firm’s disputes practices in Qatar and in South Korea.

Philip Dunham Dechert (Paris) LLP Philip Dunham has concentrated his practice on international arbitration since 1992, having worked in London and then Paris. His principal activity has been acting as counsel in numerous international disputes, whether ad hoc (including under the UNCITRAL Rules), or under the rules of the ICC, the LCIA, the SCC or the ICSID. He has particular experience advising on construction cases, as well as engineering, joint venture, oil and gas, energy and military procurement disputes in respect of which he has regularly acted for or against state entities. He has also served as arbitrator in several significant arbitrations. Mr Dunham is a regular speaker at various conferences and seminars on international arbitration in Europe, Asia and the United States. He has also published numerous articles on international arbitration.

Tony Dymond Debevoise & Plimpton LLP Tony Dymond is co-chair of Debevoise’s Asia arbitration practice and a partner in the firm’s London and Hong Kong offices. His practice focuses on complex, multi-jurisdictional disputes in both litigation and arbitration. He has advised clients in a wide range of jurisdictions, having spent the past 20 years in London, Hong Kong and Seoul. He is widely acknowledged as a leading lawyer in high-value disputes arising from large-scale projects,

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About the Authors particularly in the energy and infrastructure sectors, where Mr Dymond has advised on some of the largest, most complex, market-shaping disputes. Mr Dymond is consistently recognised by the legal directories as a leader in his field. He is included in The Legal 500’s inaugural International Arbitration Powerlist, and in The Legal 500 UK he has been recommended for commercial litigation, international arbitration and construction disputes. The guide has hailed him as a ‘prolific, top-class strategic thinker’. Chambers UK also recommends Mr Dymond for his construction disputes work. The guides have previously described him as ‘an excellent communicator and advocate who is an excellent problem-solver’ and as ‘a “clever and commercially astute” practitioner. Clients find him “very sound and a safe pair of hands”’. The Legal 500 UK has stated ‘Tony Dymond is “excellent at the overall strategy of a dispute”’. He is named by Who’s Who Legal among its Thought Leaders in construction, and by Expert Guides as one of the UK’s leading construction law practitioners.

Ahmed El Far Three Crowns LLP Ahmed El Far is an international arbitration lawyer, an associate at Three Crowns LLP in London and is also the associate editor of the International Journal of Arbitration, Mediation and Dispute Management, published by the Chartered Institute of Arbitrators. Dr El Far previously worked in the international arbitration group at Zulficar & Partners law firm in Cairo, Egypt. He developed a broad expertise in international arbitration spanning the economic and business spectrums with an emphasis on investment, energy, construction and sale of goods. He regularly advises clients on diverse areas of law such as conflict of laws, international commercial and investment arbitration, international investment law and international commercial law. He holds a PhD from the School of International Arbitration, Queen Mary University of London. His PhD is for a dissertation entitled ‘Abuse of Rights in International Arbitration’. Dr El Far obtained his LLM from New York University in 2012, where he specialised in international commercial and investment arbitration, and private international law. He also obtained his LLB with honours from Cairo University, Egypt.

Guy Elkington Ankura Guy Elkington is a senior managing director in Ankura and leads Ankura’s global construction practice in the Middle East. He is a chartered quantity surveyor and a member of the Royal Institution of Chartered Surveyors with over 32 years’ experience of the construction industry in the UK, Europe, Asia and the Middle East. He has lived and worked in Dubai for 22 years. He has experience of civil engineering projects (rail, road and other infrastructure including aviation), building projects (commercial and residential) and process projects (oil & gas, power and waste treatment) under a variety of procurement methods and forms of contract. He has been engaged on projects and disputes in the UK, the UAE, Oman, Qatar, Hong Kong, Kuwait, Iran, South Africa, Iraq, India and Singapore. He has been appointed as a quantum expert in Middle East-related arbitrations (ICC, DIAC, LCIA, ADCCAC, SCC, ad hoc) since 2004 and has

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About the Authors testified on many occasions both conventionally and concurrently. He is a founding member of the Society of Construction Law (Gulf) and is its current vice chairman. Guy is regularly listed in Who’s Who Legal: Construction and has been described as ‘our top rated practioner in the UAE’ who ‘stands out as an exceptional expert witness’ and who ‘knows his stuff and is very unbiased and straightforward’. He was listed as a Global Elite Thought Leader: Construction Expert in 2019.

Thiago Fernandes Moreira Mattos Filho,Veiga Filho, Marrey Jr. e Quiroga Advogados Thiago Fernandes Moreira concentrates his practice on construction and complex contracts, including onshore and offshore contracts, equipment supply contracts, contracts typical to the oil and gas industry (e.g., charter agreements, O&M agreements, FPSOs, DPUs and platform construction contracts, and gas supply contracts), take-or-pay contracts, contracts related to the hotel industry (e.g., construction of hotels, built to suit, hotel management agreements and franchising), as well as project development and infrastructure-related transactions. His experience includes advice to owners and contractors on preparation, negotiation, pre-litigation and arbitration involving complex contracts. He has substantial experience in sectors such as energy, ports, airports, subways, railways, shipbuilding and oil & gas. Prior to joining Mattos Filho, Thiago worked for the Inter-American Investment Corporation in Washington, DC. He is a member of the Society of Construction Law in London and is currently the Co-Vice Chair of the Project Execution Subcommittee of the International Construction Projects Committee of the International Bar Association.

José Manuel García Represa Dechert (Paris) LLP José Manuel García Represa is a specialist in international commercial and investment arbitration, with a particular focus on cases involving Europe and Latin America. He has represented parties in disputes arising out of contracts and investments in the electricity sector (generation and distribution), construction, oil and gas, mining, post-M&A purchase price adjustments, joint ventures, telecommunications, insurance and risk coverage, sales and distribution contracts and investment disputes. He has experience in cases involving multiple jurisdictions and procedural rules and has appeared before ICC, ICSID and ad hoc UNCITRAL arbitral tribunals. Mr García Represa also serves as arbitrator. He is also a regular speaker at numerous conferences and seminars in Europe, the United States and Latin America.

Mark Grasso Quinn Emanuel Urquhart & Sullivan UK LLP Mark Grasso is a specialist construction litigation and arbitration lawyer advising on disputes arising out of large engineering and construction projects around the world. He has acted for owners, employers, contractors, designers and insurers on a range of high-profile projects, including rail, social infrastructure, oil and gas, petrochemicals and mining. He has particular expertise in disputes involving construction projects in the Middle East.

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About the Authors

Jean-Luc Guitera KPMG SA Jean-Luc Guitera heads the KPMG forensic team in Paris and is a partner of KPMG SA. He is also head of KPMG’s Dispute Advisory Service for the EMA region and is in charge of relations with Paris-based law firms and general counsel. He has 30 years of experience with KPMG, having been an auditor before specialising first in transaction services (M&A), and then, since 2003, in forensic (fraud investigations, M&A and commercial disputes, international arbitration). He has led engagements in France and in more than 20 countries across all continents. In a transaction advisory role, Mr Guitera has been involved in more than 40 engagements and has worked on major transactions such as the creation of EADS (the leading aerospace and defence manufacturer in Europe) and Airbus. He has also acted as independent expert appointed by both parties to determine the final transaction price in M&A operations in 10 transactions. He has been involved in more than 60 valuations of all types acting either as auditor, transaction services partner leading a due diligence team, court or tribunal appointed-expert (arbitral tribunals, Monaco appellate court), expert witness (arbitral tribunals and French state courts), member of an arbitral tribunal or independent expert. As a financial expert, Mr Guitera has been involved in 30 international arbitration and has given oral evidence more than 20 times, in French or English, acting as expert either for claimant, respondent or as tribunal -appointed expert, in Paris, New-York, London, Geneva, Cayman Islands and Bucarest, under ICC, CIRDI, UNCITRAL, OHADA, and ad-hoc arbitration rules. He also has strong experience in the financial assessment of complex industrial and construction contracts. Mr Guitera has also extensive experience of fraud investigations (misappropriation of assets, fraudulent financial reporting, corruption). He has led more than 100 investigations in the operations of foreign subsidiaries of French-based groups in 20 countries. A chartered accountant, Mr Guitera graduated in economics and finance (Felicitations du Jury, 1988) from Sciences-Po Paris, one of the leading French business schools, and holds a master’s degree in business law and a diploma in tax law from University Paris-II Assas. He is fluent in French and English and also reads Spanish and Portuguese.

Pierre-Yves Gunter Bär & Karrer Pierre-Yves Gunter is a partner and co-head of the arbitration practice at Bär & Karrer, a leading Swiss law firm with offices in Zurich, Geneva, Lugano and Zug. He has been acting since 1991 in the field of international commercial arbitration and has extensive experience as counsel and arbitrator in the fields of construction and complex projects, joint-venture, oil & gas, telecommunications and IT, pharmaceutical, commodity and international trade as well as corporate and post M&A. He also regularly acts before state courts for litigation cases. For several years he was a member of the Board of Directors at the SIAC and co-chair of the International Arbitration Committee of the ABA (Section of International Law and Practice).

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About the Authors

Roger ter Haar QC Crown Office Chambers Roger ter Haar QC is an English QC who has practised as a barrister, adjudicator and arbitrator for 40 years at what is now Crown Office Chambers, Temple, London. He has a wide practice that is recognised by such directories as Chambers Directory, which list him as a leading silk (i.e., Queen’s Counsel) for international arbitration, construction and engineering, commercial dispute resolution, insurance, property damage, professional negligence, and energy and natural resources. He has been nominated as Silk of the Year for construction in the United Kingdom twice and also for professional negligence. He was selected as International Arbitration Silk of the Year in 2012. His publications include Construction Insurance & UK Construction Contracts (co-editor), Emden’s Construction Law (contributor) and Remedies in Construction Law (author). He is editor-in-chief of the IBA’s publication Construction Law International. He acts as counsel in arbitration and litigation (current cases include a US$3 billion dispute concerning a construction project in Qatar, a US$2.4 billion dispute concerning a pipeline project in Kuwait, a US$750 million construction dispute concerning an airport in the Middle East and a US$250 million ICSID expropriation arbitration). He also acts as arbitrator and adjudicator, and sits as a deputy high court judge in the Queen Bench Division,Technology and Construction Court, and Administrative Court within the English High Court of Justice. His current workload as arbitrator includes a US$400 million dispute about a LNG project in Australia.

Ibaad Hakim White & Case LLP Ibaad Hakim is an associate in the construction and engineering group based in the UAE and is a specialist in the development and financing of international construction projects. Ibaad has considerable experience advising on major, high-end, petrochemical, oil and gas (offshore and onshore), infrastructure, and power projects, in the Middle East, Europe, Africa and Asia. He provides strategic advice and risk analysis on a wide variety of construction procurement arrangements, including traditional, design and build, EPC/turnkey, construction management and collaborative contracting, as well as drafting and negotiation of construction contracts. He has extensive experience advising sponsors, government agencies, contractors and consultants on contract documentation of all kinds, from purely bespoke to agreements based on FIDIC, NEC, JCT and other standard forms. He also has experience of advising on claims and dispute resolution. Ibaad is dual-qualified in England and Wales and in Pakistan.

Nicholas Higgs 39 Essex Chambers Nicholas is a dual-qualified barrister and chartered engineer. He undertakes instructions in all areas of civil practice with a focus on construction and engineering disputes and international commercial arbitration. Prior to joining the English Bar, Nicholas was an associate at Ove Arup & Partners where he had a career as bridge designer and, latterly, as

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About the Authors commercial and procurement manager. He has considerable experience in all the major construction contract forms with a speciality in FIDIC Silver Book contracts and has led work on projects including the Queensferry Crossing in Scotland, the Garden Bridge in London, the Brunei-Temburong Link in Brunei and the HS2 high-speed rail project in England.

Richard Hill White & Case LLP Richard Hill has over 25 years’ experience of working on construction and construction-related contracts as well as other commercial contracts within the energy, infrastructure and property development sectors. He advises governments, developers and corporates on procurement strategies, processes and contracts as well as investors, lenders and contractors on projects while in development or operation. Most recently, he has worked on energy projects in the UK, Europe and North and Sub-Saharan Africa ranging from transmission and distribution assets and the construction or refurbishment of large hydro and thermal power stations to solar projects using various technologies and wind farms both onshore and offshore. He has also been heavily involved in advising on successful strategies for settling issues and implementing contract restructurings for projects that have run into difficulties during their construction or operation. He is a member of the City of London Solicitors construction law committee and, as well as drafting template and bespoke forms of contract, has written various articles and given various seminars on legal topics relating to construction and energy.

Joe-han Ho 39 Essex Chambers Joe-han has a busy commercial practice focusing on a range of commercial matters involving both litigation and arbitration, including construction, insolvency and civil fraud. Before transferring to the English Bar, Joe-han qualified and practised as a solicitor at Cleary Gottlieb Steen & Hamilton LLP. He holds law degrees from Durham University, Harvard Law School and the University of Oxford. He is a Jarman Scholar of the Inner Temple and also speaks Mandarin Chinese.

Lindsay Hogan Victorian Bar Lindsay Hogan is a barrister at the Victorian Bar. Before being called to the Bar, he was a senior associate at Corrs Chambers Westgarth. As a solicitor, Lindsay acted on a range of commercial disputes, including large-scale litigation and arbitral proceedings, with a primary focus on construction claims. He also advised some of Australia’s largest and well-known construction and energy and mining companies on construction law and arbitration matters. Lindsay has continued his interest in construction law and arbitration at the Bar and appeared in a number of jurisdictions in building and construction disputes. Lindsay has a Master of Construction Law degree from the University of Melbourne and continues to

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About the Authors lecture in the Master of Construction Law programme. He is a published author on construction and arbitration issues in a number of journals and is a member of the Society of Construction Law Australia and Asia-Pacific Forum for International Arbitration.

Maurice Holmes Crown Office Chambers Maurice Holmes is an English barrister who practises at Crown Office Chambers, Temple, London. The focus of his practice is commercial dispute resolution, particularly arising within the context of insurance and reinsurance, financial services, civil fraud, professional liability, and sport. He is instructed in both domestic and international arbitrations, and is familiar with many of the varying institutional rules. Maurice’s recent instructions in arbitral proceedings include: an ICC arbitration concerning a US$3.2 billion design and construction project overseas; a multi-million euro dispute regarding alleged breaches of a sponsorship agreement; and advising as to the doctrine of proximate cause under English insurance law for the purposes of an international arbitration in a foreign jurisdiction.

Josephine Kaiding Akin Gump Strauss Hauer & Feld LLP Josephine Kaiding is an international construction arbitration specialist based in the London office of Akin Gump Strauss Hauer & Feld. She focuses on disputes in connection with construction and engineering projects in the global energy and infrastructure sectors. Josephine has acted on arbitrations under a variety of arbitration rules and has experience of procedural laws of a number of different countries (including England, Stockholm, Singapore, Switzerland, Kazakhstan and the United Arab Emirates). Josephine’s expertise includes disputes arising out of EPC contracts and service agreements involving claims relating to liquidated damages, extensions of time and additional costs, concurrent delay, defects and design obligations.

David Kiefer King & Spalding David Kiefer is a partner in King & Spalding’s International Arbitration Group in New York. Mr Kiefer’s practice is focused on construction disputes, primarily arising from energy and infrastructure projects. Mr Kiefer routinely counsels clients on avoiding disputes, resolving claims and, when necessary, preparing for litigation or arbitration. In his nearly 20 years as a litigator, Mr Kiefer has successfully prosecuted and defended large and complex claims before federal and state courts, as well as domestic and international arbitration panels. He has been named one of New York’s Best Lawyers in America for Commercial Litigation. Mr Kiefer holds a JD from The George Washington University Law School.

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About the Authors

Bartosz Krużwski Clifford Chance Bartosz Krużewski is a qualified Polish advocate. He is a partner, heading the Warsaw litigation and dispute resolution department and co-heading the Clifford Chance Warsaw restructuring and insolvency department as well as Central Europe Litigation and Dispute Resolution Regional Practice Area Leader. He has extensive experience covering commercial litigation as well as local and international arbitration. He is also a member of the international commercial arbitration practice, and is chairman of the arbitration committee at ICC Poland. In the 2018 ranking by Rzeczpospolita (one of the most influential Polish dailies), Bartosz was named Top Litigator (for the sixth year in a row) and his team was ranked as having the leading litigation, dispute resolution and arbitration practices in Poland.

Hamish Lal Akin Gump Strauss Hauer & Feld LLP Dr Hamish Lal is ranked Band 1 in both construction and international construction arbitration in Chambers & Partners UK, and in the top tier in the UK Legal 500. He is adjunct professor at University College Dublin Sutherland School of Law, fellow of the Chartered Institute of Arbitrators, a Fulbright Scholar and author of the Manual of Construction Agreements published by LexisNexis. Dr Lal is a specialist in international construction arbitration and deals with prospective and retrospective delay analysis, disruption, cumulative impact claims, FEED errors, nonconformance reports, design codes (such as DNV-OS-J101), pipeline weld defects, bad-weather windows, vessel-standby, unforeseen ground conditions, professional negligence, taking over/completion, liquidated damages, incentive payments, variations, bond calls (based on URDG758) and termination under various forms of contract under the International Federation of Consulting Engineers (FIDIC), CRINE/LOGIC and NEC3/4.

Anthony Lavers White & Case LLP Anthony Lavers has been with White & Case since 2001 and is counsel in the construction and engineering practice of the London office. A barrister (Lincoln’s Inn, 1997) he provides research and advice on legal issues relating to major international construction projects and construction disputes. He has worked on matters in over 20 countries worldwide. Anthony Lavers is also Visiting Professor of Law at King’s College, London, where he teaches construction law on the postgraduate programme.

James L Loftis Vinson & Elkins LLP Partner at Vinson & Elkins, James heads the firm’s international dispute resolution practice, and focuses his practice on the arbitration and litigation of international commercial and investor-state disputes, and counseling in matters involving public international law and treaties. He acts both as counsel and as arbitrator.

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About the Authors His practice includes disputes involving all aspects of energy, construction, and infrastructure development; disputes under investment laws and treaties; and boundary disputes, cross-border technology disputes, and sovereign debt. He also represents and advises clients in reviews under US national security law. Since 2009, James has been an adjunct professor at the University of Texas School of Law, where he teaches investor-state and international commercial arbitration. From 1997 to 2000, James served in Geneva, Switzerland, as chief counsel for the Oil Sector (E1) and Construction and Engineering (E3) Panels of the United Nations Compensation Commission (the Gulf War claim tribunal). He maintains offices in London and Houston, and is admitted in Texas, in the Dubai International Financial Centre Courts, and in the Senior Courts of England and Wales.

Adela Mao Tower Chambers Ms Adela Mao is a barrister in Hong Kong specialising in arbitration and commercial litigation. Apart from counsel work, she regularly takes up appointment as tribunal secretary in large-scale and complex arbitrations. Her expertise includes construction, international sale of goods, equity investment and joint venture. She holds degrees in law and civil engineering.

Rebecca Major White & Case LLP Rebecca Major is a senior associate in White & Case’s construction and engineering group and is based in London. Rebecca advises owners and contractors on contentious international construction and engineering projects across a variety of industries, including oil and gas (exploration, drilling, processing (e.g., construction of refineries) and distribution), hydropower and solar thermal energy. Rebecca is experienced in international arbitration, as well as in alternative methods of dispute resolution. Her experience includes acting for clients in complex arbitrations under a variety of institutional rules, including ICC, LCIA and VIAC.

Anya Marinkovich Bär & Karrer Anya Marinkovich is a senior associate with Bär & Karrer’s arbitration team in Geneva. She has acted as counsel, arbitrator and arbitral secretary in a number of international commercial arbitrations concerning construction, oil & gas, sales, and corporate and post-M&A disputes. She is admitted to the California Bar and has training and practical experience in both common and civil law systems, as well as in the field of public international law.

Hannah McCarthy 39 Essex Chambers Hannah specialises in construction and engineering, energy, and professional negligence, as well as general commercial work. She is regularly instructed by domestic and international

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About the Authors clients in English court proceedings as well as arbitration and adjudication. She has substantial experience as junior counsel, as well as sole counsel of a wide range of construction, engineering and infrastructure disputes, with particular experience of nuclear and energy matters. She has worked with numerous standard-form and bespoke contracts, including FIDIC, NEC3 and JCT forms.

Noe Minamikata Herbert Smith Freehills LLP Noe is a professional support lawyer for the construction, engineering and infrastructure group at Herbert Smith Freehills. Noe is a construction law specialist who provides technical advice to clients and colleagues on complex issues relating to both UK and international construction disputes. Prior to becoming a professional support lawyer, Noe was a senior associate in the firm’s construction practice, where she advised leading construction and engineering clients on a range of contentious and non-contentious construction matters across various sectors including conventional power, renewables, energy, infrastructure, shipbuilding and manufacturing. Noe has worked with clients from across the globe, including the Middle East, Japan and Southeast Asia, and has also been on client secondments to an offshore wind company and a leading international construction and development firm.

Robert Moj Clifford Chance Robert Moj is a qualified Polish legal adviser. Robert specialises in the resolution of complex construction and engineering disputes, especially in the infrastructure and energy sectors. Robert has represented clients in numerous arbitration and litigation proceedings that concerned, in particular, claims for extensions of time and additional cost, alleged defects as well as terminations of the contracts. Robert also advises on the management of claims, in particular arising out of EPC and turnkey contracts. Robert’s areas of expertise also include corporate and bankruptcy law.

Aisha Nadar Advokatfirman Runeland AB Aisha Nadar is specialised in infrastructure procurement and dispute management at Advokatfirman Runeland AB, Stockholm, Sweden. For over 30 years, Aisha has been actively involved in all phases of the negotiation and implementation of large-scale cross-border infrastructure and defence programmes. Her procurement and international contract management experience includes holding seniorlevel positions in the United States, the Middle East and Europe. Aisha joined Advokatfirman Runeland as a contract and dispute resolution consultant in September 2012, where she regularly advises clients on strategic procurement planning, contract drafting, contract management and dispute resolution. She acts as arbitrator, mediator and adjudicator and is retained regularly by parties and party counsel in matters involving dispute boards, international arbitration and mediation. Her arbitration

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About the Authors experience includes ICC, LCIA, SCC, DIAC, AAA and UNCITRAL rules. Aisha has carried out assignments related to dispute resolution for organisations such as the World Bank, USAID and the US DOD, and is a regularly invited speaker at universities and specialised conferences on construction contracts and dispute resolution. Aisha is a member of FIDIC’s board of directors, the chair of FIDIC’s procurement policy sub-committee and is listed on FIDIC President’s List of Accredited Adjudicators. She is an officer of the international construction projects committee of the International Bar Association, and has previously served as a member of the standing committee of the ICC International Centre for ADR. Aisha holds a BS in electrical engineering from University of Nebraska, an MBA from University of Texas-Austin and an LLM in international commercial dispute resolution from Queen Mary, University of London.

Laith Najjar Debevoise & Plimpton LLP Laith Najjar is an associate based in the London office. He is a member of the international dispute resolution group, where his practice focuses on international arbitration, both commercial and investor-state. Mr Najjar has a particular focus on disputes arising in the energy and natural resources and infrastructure sectors, and has acted for a broad range of clients, including oil & gas majors, mining companies, contractors, agribusinesses, independent trading houses, financial institutions and state-owned entities, under most of the major arbitral rules, as well as in the English High Court. His representations include acting for clients in a number of different jurisdictions and in disputes that have been governed by a variety of substantive laws. Mr Najjar joined the firm in 2018 from another US law firm in London. Mr Najjar was admitted as a solicitor of the Senior Courts of England and Wales in 2012. He is also admitted as a solicitor advocate, with rights of audience before the higher courts.

David Nitek Herbert Smith Freehills LLP David specialises in the resolution of complex construction and engineering disputes, in particular in the infrastructure and energy sectors. He has in-depth experience of major standard form construction contracts, including the FIDIC suite, and the key forms of dispute resolution in the construction sector, including adjudication, dispute boards, arbitration and litigation. David has represented clients in numerous arbitration proceedings arising out of EPC and turnkey contracts, including claims for extensions of time and additional cost, and claims arising from alleged defective plant performance and contested terminations. He also advises on the management of claims, in particular the establishment of robust processes for processing and resolving claims without the need for formal dispute resolution proceedings. David has performed this role on a number of substantial projects, often in conjunction with the client’s consultants and advisers.

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About the Authors

Philip Norman Covington & Burling LLP Philip Norman has been in practice for nearly 25 years, first as a barrister in independent practice and then as a partner in a firm specialising in international arbitration and dispute resolution. He has significant experience in mediation, expert determination and adjudication and extensive experience advising on matters in the construction, engineering, infrastructure, project finance, energy, oil and gas, and power sectors, as well as TMT infrastructure. Mr Norman also sits as an arbitrator. Mr Norman’s practice extends across many jurisdictions, including Saudi Arabia, United Arab Emirates, Egypt, Turkey, Iraq, Qatar, UK, Ireland, Italy, Greece, Spain, France, Romania, Russia, Nigeria, Kenya, Uganda, South Africa, Japan, Hong Kong, Vietnam and Singapore. In addition, he has spent time in-house with Black & Veatch in the UK, acting as general counsel for the EMEA region. Chambers Global has described Philip Norman as ‘very well established in the region [Middle East] and a very confident litigator … he is excellent and possesses good client awareness’ and acknowledges his extensive experience in a wide range of disputes, servicing clients in sectors such as finance, energy and infrastructure. He is also ranked in The Legal 500 and has received a number of other accolades.

Serdar Paksoy Paksoy Serdar Paksoy is the founding and senior partner of Paksoy and the head of the firm’s litigation and dispute resolution practice. For over 30 years, he has been actively advising foreign investors and assisting them in their transactions and disputes work in Turkey and abroad. Mr Paksoy’s practice focuses on corporate governance, mergers and acquisitions, white collar crimes, investigations and dispute resolution. He extensively advises clients on matters involving cross-border acquisitions, joint ventures, private equity investments, strategic investments, investigations and litigation across a wide range of sectors from financial services, banking, retail, transportation, logistics and manufacturing to energy, insurance, healthcare and pharmaceuticals. Mr Paksoy has extensive experience in acting for many clients as an advocate in court actions including commercial litigation, administrative lawsuits, corporate governance, insolvency, investigations, white-collar crimes and crisis advice. He has represented investors and sovereigns in international arbitrations before various arbitral institutions, including under the Istanbul Arbitration Centre, Istanbul Chamber of Commerce, The Union of Chambers and Commodity Exchanges of Turkey, ICC, LCIA and ICSID rules. Mr Paksoy has acted for parties in Turkish court actions relating to enforcement actions, shareholder conflicts, construction law, investigations, internal controls, securities disputes, company law, contractual conflicts, product liability, concessionary disputes, tax litigation and administrative law proceedings.

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About the Authors

Lindy Patterson QC 39 Essex Chambers Lindy Patterson QC specialises in international arbitration, adjudication and other forms of ADR. She operates in the construction, energy and natural resources and general commercial sectors. She acts regularly as arbitrator and adjudicator and has extensive experience as counsel and as tribunal member and chair. She operates in many jurisdictions, both civil and common law, and with a variety of governing laws. She has chaired a number of dispute boards, both ad hoc and standing, across the world and plays an active role in promoting dispute avoidance by these means. She is past president of the Dispute Resolution Board Federation (Region 2). Lindy was previously a partner in a major law firm specialising in commercial, construction and energy disputes. She is also qualified in Scots law and has significant experience in civil as well as common law systems.

Simel Sarıalioğlu Paksoy Simel Sarıalioğlu specialises in commercial litigation, international arbitration and dispute resolution and arbitration-related court proceedings. Prior to joining Paksoy, she practised at an international law firm in Istanbul and did an internship in London at another international law firm. She has experience in conducting institutional and ad hoc arbitrations under a variety of different rules and acting for clients in complex, high-value disputes, with a cross-border element. Ms Sarıalioğlu’s clients have included government entities, major Turkish telecom operators and multinationals from a number of sectors such as construction, telecommunication, insurance, customs, pharmaceuticals, manufacturing and retail. Ms Sarıalioğlu is a Fellow of the Chartered Institute of Arbitrators, London (FCIArb) (2010) and one of the ICC YAF Middle East and Africa Regional Representatives for the 2017–2019 mandate. Who’s Who Legal Litigation Listing named Ms Sarıalioğlu as a ‘future leader’ in the non-partners category two years in a row in 2018 and 2019.

Marion Smith QC 39 Essex Chambers Marion Smith QC specialises in complex, high-value commercial and construction disputes for UK and international clients. She has extensive experience litigating matters before domestic courts and tribunals as well as in international arbitration where she has appeared before institutional and ad hoc tribunals, including under the Rules of the ICC, LCIA, LMAA and the UNCITRAL Arbitration Rules. She has significant expertise in arbitrations where the law of the contract is not the law of England and Wales. She has been appointed as sole and co-arbitrator, adjudicator and as an expert determiner. She has provided expert evidence in foreign proceedings on English law. Marion is a visiting senior lecturer at Queen Mary University of London and a Professional Fellow of Aston University. She is noted as a leading silk by the leading legal directories. Marion is a Fellow of the Chartered Institute of Arbitrators and is presently Deputy Chair of the Chartered Institute’s Board of Trustees.

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About the Authors

Flávio Spaccaquerche Barbosa Mattos Filho,Veiga Filho, Marrey Jr. e Quiroga Advogados Flávio Spaccaquerche Barbosa concentrates his practice on pre-ligation, settlement negotiations and dispute resolution mechanisms involving complex disputes. He has experience in litigation and arbitration, advising and representing clients in court proceedings and on domestic and international arbitrations. He advises clients from a variety of economic sectors, focusing on oil & gas and construction disputes, among other infrastructure-related matters. He has advised on disputes involving different types of projects, such as paper mills, windfarms, solar power plants, hydroelectric plants, nuclear power plants and FPSOs. He has also advised on construction disputes involving the public sector and government authorities. As an arbitration specialist, he is the former regional representative of the ICC Young Arbitrators Forum for the Latin America Chapter, and former member of the ICC arbitrator appointing committee for the Brazilian National Committee. He is a member of the Advisory Council of the Arbitration and Mediation Center of the American Chamber of Commerce for Brazil and arbitration director of the Brazilian Arbitration and Mediation Center.

Andrew Stephenson Corrs Chambers Westgarth Andrew Stephenson is a partner in the projects and international arbitration group of Corrs Chambers Westgarth Melbourne. Andrew has over 30 years’ experience in contentious and non-contentious matters relating to all types of major projects. Andrew’s practice relates to both national and international projects. He has given advice or otherwise acted in respect of projects situated in all Australian states and territories, New Zealand, Papua New Guinea, United Kingdom, Iran, Kuwait, Singapore, Thailand, People’s Republic of China, Malaysia, India, Bangladesh, Central African Republic, Ireland and Dubai. He is a senior fellow of Melbourne University Law School lecturing in project risk and dispute resolution. He has also lectured at Monash University, Queensland University of Technology and Queensland University and regularly presents at industry conferences. He is a past co-chair of the Project Execution Sub-committee of the International Construction Projects Committee of the International Bar Association. He is also the Australian correspondent for the International Construction Law Review, published in London and a board member of the Australian Centre of International Commercial Arbitration and the International Academy of Construction Lawyers.

Scott Stiegler Vinson & Elkins RLLP Recognised as a ‘Rising Star’ by Legal 500 UK, senior associate Scott Stiegler is an experienced international construction lawyer with a diversified practice and broad geographic reach.With notable experience in energy and infrastructure, he has played a role in some of the largest construction disputes in the world. He provides results-driven, pragmatic legal advice and representation to owners, contractors, consultants and government entities, on a wide range of technical and legal issues in court proceedings, international arbitration and other ad hoc dispute resolution forums. Working collaboratively with clients and advisors

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About the Authors allows Scott to ensure his client’s legal objectives are fully realised. Scott is dual qualified in England and Wales and Australia, which gives depth to his practice and the benefit of global exposure. He has also spent a number of years in-house as commercial counsel for a renowned global construction and engineering consultancy firm where he oversaw all legal matters within his jurisdiction.

Wei Sun Zhong Lun Law Firm Mr Sun is a renowned dispute resolution lawyer whose expertise includes construction, corporate equity, finance, real estate and international sale of goods. He has extensive experience in providing legal services to both domestic and multinational enterprises on local and international matters. He frequently acts as presiding, sole, or party-appointed arbitrator before CIETAC and arbitration institutions in Beijing, Shanghai, Guangzhou and Shenzhen. He was the emergency arbitrator in the first emergency arbitrator proceeding in Mainland China. Mr Sun is also the convener of the construction dispute expert group of CIETAC; panel arbitrator of HKIAC and TIAC; member of the ICC China Commission on Arbitration and ADR; member of the Supervisory Board of Tashkent International Arbitration Center; on the list of practitioners of Vienne International Arbitration Center; representative of the observer to UNCITRAL Working Group II; adjunct professor of law at China University of Political Science and Law; member of the editorial board of the CIArb’s Academic Journal; chief editor of China Construction Law Review and member of the Youth Federation of Central State Organs and Secretary-General of the Permanent Forum of China Construction Law . Mr Sun is a prolific author and has published several books and articles in his field of expertise, including Arbitration in China – A Practitioner’s Guide, China Commercial Arbitration: Law and Practice, the United Nations Convention on International Settlement Agreements Resulting from Mediation – Legislative Background and Articles Interpretation, Guidance on Appraisal in Disputes over Construction Contracts, and Construction Lien Under PRC Law.

Paul Taplin Ankura Paul Taplin is a senior managing director based in Ankura’s Dubai office, having been resident in the UAE since 2013. Paul has more than 30 years’ experience in the construction sector and as a Fellow of the Royal Institution of Chartered Surveyors (FRICS) is a highly experienced chartered quantity surveyor, chartered construction manager and quantum expert witness specialising in the evaluation and analysis of complex construction claims on major domestic and international projects including infrastructure, building, power, civil engineering, industrial, water and oil and gas pipelines. As well as working in the UK, Paul has extensive international experience covering mainland Europe, the Middle East, Asia Pacific and the USA. Paul is regularly appointed as a quantum expert witness and has given evidence many times in the UK, Bahrain and the UAE. He has been cross examined by Queens Counsel

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About the Authors and has extensive experience of witness conferencing often termed ‘hot tubbing’. He is also an accredited mediator and panel-registered adjudicator.

Leanie van de Merwe Covington & Burling LLP Leanie van de Merwe specialises in international arbitrations and transnational litigation with a particular focus on construction, engineering and energy matters. Ms van de Merwe qualified as an attorney in South Africa in February 2011 and started her career as legal counsel and analyst for the Competition Commission of South Africa, where she was responsible for investigating and prosecuting anti-competitive business practices. In 2014, Ms van de Merwe moved to the Middle East to take on a lecturing position at a university and then in 2015 joined a private practice to focus on international arbitration. Since then, Ms van de Merwe has been engaged on large and complex disputes in a number of jurisdictions, including the UAE, Saudi Arabia, Iraq, Qatar, Hong Kong, China and the UK.

Nathalie Voser Schellenberg Wittmer Ltd Prof Dr Nathalie Voser is a partner in Schellenberg Wittmer’s dispute resolution group in Zürich. She has acted as counsel and arbitrator in a vast number of cases under all major institutional rules. She also advises clients involved in complex multi-jurisdictional disputes before state courts. Her practice focuses on construction, civil engineering and (renewable) energy-related projects, oil and gas projects, pharmaceutical and automotive industries. She has experience in both commercial arbitration and investment-treaty arbitration. Nathalie currently advises and represents a large international company with regard to several disputes and arbitrations relating to a large-scale solar power plant. She also represents a manufacturer of a ferrochrome plant in an arbitration involving complex legal and technical issues. Nathalie is president of the London Court of International Arbitration’s (LCIA’s) European Users Council, where she has been vice president of the LCIA Court since May 2017, and a member of the Court since 2016. She is a board member of the Swiss Arbitration Association and Swiss delegate in the ICC Arbitration and ADR Commission in Paris. In 1988, Nathalie graduated summa cum laude from the University of Basel and was admitted to the Swiss Bar in 1990. In 1994 she earned an LLM with honours from Columbia University, New York. In 2014, she was awarded the title of professor in private law, arbitration law, private international law and comparative law by the University of Basel.

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About the Authors

Crispin Winser Crown Office Chambers Crispin Winser is an English barrister practising from Crown Office Chambers, Temple, London. He specialises in construction, engineering, energy, insurance, professional indemnity and general commercial litigation, arbitration and dispute resolution both in the UK and internationally. He is recommended as a leading practitioner by The Legal 500, Who’s Who Legal, Chambers UK and Chambers Global. His publications include Emden’s Construction Law (contributor). He is a fellow of the Chartered Institute of Arbitrators. He acts as counsel in domestic and international arbitrations, particularly in connection with construction, engineering, infrastructure and energy projects and related insurance disputes. Current cases include a multi-billion dollar LCIA arbitration arising from an oil and gas project and a US$1 billion ICC arbitration relating to an international airport.

Wang Ziyue Zhong Lun Law Firm. Ms Wang Ziyue is a member of the PRC Bar, and holds an LLM degree and a Bachelor of Arts degree. Her practice sectors are commercial litigation and arbitration, focusing on areas including construction and engineering, corporate equity and finance.

Zhao Yingfu Zhong Lun Law Firm Mr Zhao Yingfu graduated from Beijing Foreign Studies University (Bachelor of Law and Bachelor of Arts in English Literature) and Georgetown University (LLM). Mr Zhao is qualified to practise in PRC and the State of New York. His practice includes commercial litigation, arbitration and enforcement and he has represented clients in several large-scale domestic and international disputes.

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Appendix 2 Contact Details

3 Verulam Buildings

Advokatfirman Runeland AB

Gray’s Inn London WC1R 5NT United Kingdom Tel: +44 20 7831 8441 Fax: +44 20 7831 8479 [email protected] [email protected] www.3vb.com

Sturegatan 12 114 36 Stockholm Sweden Tel: +46 8 22 18 10 [email protected] www.advokatsamfundet.se

Akin Gump Strauss Hauer & Feld LLP 54 Quai Gustave Ador 1207 Geneva Switzerland Tel: +41 22 888 2000 [email protected]

39 Essex Chambers 81 Chancery Lane London WC2A 1DD United Kingdom Tel.: +44 20 7832 1111 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] www.39essex.com

10 Bishop’s Square London E1 6EG United Kingdom Tel: +44 207 012 9740 [email protected] [email protected] www.akingump.com

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Contact Details

Ankura

Clifford Chance

Floor 7, Office 7B Rolex Tower Sheikh Zayed Road PO Box 413705 Dubai United Arab Emirates Tel: +971 4 381 9000 [email protected] [email protected] www.ankura.com

19 Lwowska Street 00-660 Warsaw Poland Tel: +48 22 627 1177 Fax: +48 22 627 1466 [email protected] [email protected] www.cliffordchance.com

Corrs Chambers Westgarth Level 25 567 Collins Street Melbourne Victoria 3000 Australia Tel: +61 3 9672 3000 Fax: +61 3 9672 3010 [email protected] [email protected] [email protected] www.corrs.com.au

Argos Construction 174 boulevard Haussmann 75008 Paris France Tel: +33 1 41 27 25 00 Fax: + 33 1 41 27 08 98 [email protected] www.argosconstruction.com

Bär & Karrer 12, quai de la Poste 1204 Geneva Switzerland Tel: +41 58 261 5700 Fax: +41 58 261 5701 [email protected] [email protected] www.baerkarrer.ch/

Covington & Burling LLP Office No. 703, Level 7 Gate Precinct Building 3 Dubai International Financial Centre PO Box: 507082 Dubai United Arab Emirates Tel: +971 4 247 2100 [email protected] [email protected] www.cov.com

Centre for Commercial Law Studies Queen Mary University of London 67–69 Lincoln’s Inn Fields London WC2A 3JB Tel: +44 7958471980 [email protected] www.law.qmul.ac.uk/staff/brekoulakis.html

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Contact Details

Crown Office Chambers

Herbert Smith Freehills LLP

2 Crown Office Row Temple London EC4Y 7HJ United Kingdom Tel: +44 207 797 8100 Fax: +44 207 797 8101 [email protected] [email protected] [email protected] www.crownofficechambers.com

Exchange House Primrose Street London EC2A 2EG United Kingdom Tel: +44 207 374 8000 Fax: +44 207 7374 0888 [email protected] [email protected] [email protected] www.herbertsmithfreehills.com

Debevoise & Plimpton LLP

King & Spalding

65 Gresham Street London EC2V 7NQ United Kingdom Tel: +44 20 7786 9000 Fax: +44 20 7588 4180 [email protected] [email protected] [email protected] [email protected] www.debevoise.com

1185 Avenue of the Americas New York NY 10036 United States Tel: +1 212 556 2100 Fax: +1 212 556 2222 [email protected] Level 15, Al Sila Tower Abu Dhabi Global Market Square Abu Dhabi United Arab Emirates Tel: +971 2 596 7013 Fax: +971 2 596 7077 [email protected]

Dechert (Paris) LLP 32 rue de Monceau 75008 Paris France Tel: +33 1 5757 8080 Fax: +33 1 5757 8081 [email protected] [email protected] www.dechert.com

www.kslaw.com

KPMG SA Tour EQHO, 2 Avenue Gambetta 60055 Paris La Défense France Tel: +33 1 5568 6962 / +33 6 1840 8443 [email protected] home.kpmg.com

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Contact Details

Schellenberg Wittmer Ltd

Mattos Filho,Veiga Filho, Marrey Jr. e Quiroga Advogados Praia do Flamengo, 200 – 11º andar RJ 22210-901 Rio de Janeiro Tel: +55 21 3231 8200 Fax: +55 21 2262 6675 [email protected] [email protected] www.mattosfilho.com.br

Löwenstrasse 19 PO Box 2201 8021 Zurich Switzerland Tel: +41 44 215 5252 Fax: +41 44 215 5200 [email protected] [email protected] www.swlegal.ch

Paksoy

Three Crowns LLP

Orjin Maslak Eski Büyükdere Caddesi No. 27 K11 Maslak 34485 Istanbul Turkey Tel: +90 212 366 47 00 Fax: +90 212 290 2355 [email protected] [email protected] www.paksoy.av.tr

New Fetter Place 8–10 New Fetter Lane London EC4A 1AZ [email protected] www.threecrownsllp.com

Tower Chambers 15/F New World Tower II 18 Queen’s Road Central Hong Kong Tel: +852 2521 7288 Fax: +852 2810 6087 [email protected] www.towerchambers.com

Quinn Emanuel Urquhart & Sullivan UK LLP 90 High Holborn LondonWC1V 6LJ United Kingdom Tel: +44 20 7653 2000 Fax: +44 20 7653 2100 [email protected] [email protected] [email protected] www.quinnemanuel.com Zone 60, Room 01D03, Mezzanine Floor Tornado Tower Majlis Al Taawon Street, Building 17 West Bay Area, Doha Qatar [email protected] www.quinnemanuel.com

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Vinson & Elkins

Zhong Lun Law Firm

Vinson & Elkins RLLP 20 Fenchurch Street, 24th Floor London EC3M 3BY United Kingdom Tel: +44 20 7065 6000 Fax: +44 20 7065 6001 [email protected]

28/31/33/36/37F, SK Tower 6A Jianguomenwai Avenue Chaoyang District Beijing 100022 China Tel: +86 10 5957 2176 Fax: +86 10 6568 1022/18 [email protected] www.zhonglun.com

Vinson & Elkins LLP 1001 Fannin Street, Suite 2500 Houston Texas 77002 United States Tel: +1 713 758 2222 Fax: +1 713 758 2346 [email protected]

Zulficar & Partners Law Firm Nile City Building South Tower, Eighth Floor 2005A Corniche El Nil Street Ramlet Beaulac Cairo Egypt Tel: +20 24612 161/2/3/4 [email protected] www.zulficarpartners.com

www.velaw.com

White & Case LLP 5 Old Broad Street London EC2N 1DW United Kingdom Tel: +44 20 7532 1000 Fax: +44 20 7532 1001 [email protected] [email protected] [email protected] [email protected] 16th Floor, Al Sila Tower Abu Dhabi Global Market Square PO Box # 128616 Abu Dhabi United Arab Emirates Tel: +971 2 611 3487 Fax: +971 2 611 3499 [email protected] www.whitecase.com

473 © Law Business Research

Edited by the academics who run a course on construction contracts and arbitration at the School of International Arbitration, Global Arbitration Review’s The Guide to Construction Arbitration brings together both substantive and procedural sides of the subject in one volume. Across four parts, it moves from explaining the mechanics of FIDIC contracts and particular procedural questions that arise at the disputes stage, to how to organise an effective arbitration, before ending with a section on the specifics of certain contracts and of key countries and regions. It has been written by leaders in the field from both the civil and common law worlds and other relevant professions. This third edition is fully up to date with the new FIDIC suites, and has new chapters on parties, pricing, expert witnesses, claims resolution, dispute boards, ADR, agreements to arbitrate, investment treaty arbitration, and Brazil. It is a must-have for anyone seeking to improve their understanding of construction disputes or construction law.

Visit globalarbitrationreview.com Follow @garalerts on Twitter Find us on LinkedIn

ISBN 978-1-83862-211-4

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The Guide To Construction Arbitrator 3rd Edition

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