international best practice in project and construction agreements

286 Pages·2011·7.29 MB·English

August 2011
TABLE OF CONTENTS
Article1Alliancing.................................................................................................4
Article2Alternativecontractingstructures.............................................................7
Article3Boilerplateclauses..................................................................................13
Article4Concurrentdelay....................................................................................16
Article5ContractingwithChineseconstructioncompanies.................................20
Article6Defectsliabilityperiod-anintroduction................................................22
Article7DoIreallyneedadisputeresolutionclause?.........................................25
Article8Emailandcontractualnotices.................................................................27
Article9EPCcontractsintheoilandgassector...................................................30
Article10EPCcontractsinthepowersector........................................................58
Article11EPCcontractsintheprocessplantsector.............................................87
Article12EPCcontractsintherenewableenergysector-windfarms..............117
Article13EPCMcontracts..................................................................................152
Article14Exportcreditfinancing.......................................................................158
Article15Forcemajeureclauses.........................................................................160
Article16Forcemajeureclauses-revisited........................................................163
Article17Indirectandconsequentialloss...........................................................166
Article18Infrastructureprojectsandthetriplebottomline................................168
Article19Legalriskinthetenderprocess..........................................................171
Article20Lettersofintent...................................................................................174
Article21Liquidateddamages-delayandperformance....................................177
Article22Liquidatedandunliquidateddamages................................................180
Article23Materialadversechangeclauses.........................................................183
Article24Memorandumofunderstanding..........................................................186
Article25O&Magreement-checklist................................................................189
Article26Offtakeandconstructioninterfaceissues...........................................194
Article27Performancebondsandbankguarantees............................................198
Article28Performancetestingregime................................................................202
Article29Positionpaperonliability...................................................................205
Article30Positionpaperoncontractingdeliverymodels...................................214
Article31Positionpaperonexclusiveremedies.................................................220
Article32Positionpaperonperformanceliquidateddamages-powerprojects.....229
Article33Preparingtheemployer'srequirementsforaconstructionproject..........251
Article34Preparingtheprincipal'srequirementsforaconstructionproject...........258
Article35Preventionandtheenforceabilityofexclusiveremedyclauses..............263
Article36SplittinganEPCcontract....................................................................266
Article37Sponsorchecklist................................................................................269
Article38Unilateraldiscretioninconstructioncontracts...................................272
Article39Utilitiesassets-concessionvDBOmodel.........................................274
Article40Utilitiesassets-optionsforadevelopertoparticipate.......................280
Article41Whatisgrossnegligence?..................................................................284
Thesepapersreflectrecentlessonslearntandcurrentcaselaw(albeitintermsof
caselawtheyaremeanttobemoreofapracticalguide)asofFebruary2012.
Wherecaselawhasbeenincluded,thedocumentsgenerallylookatarangeof
commonlawpositions,albeitprimarilyanEnglishlawposition. Pleasecontactus
forspecificadviceontheissuesraisedratherthanrelyingonthesepapers.
Forfurtherinformation,pleasecontact:
DamianMcNair,Partner,HeadofAsiaPacificFinanceandProjectsGroup
T+61392745379
[email protected]
Finance & Projects Update
ALLIANCING

 Fiduciary duties. A performance or incentive basis of
INTRODUCTION remuneration which will include payment of costs and
This paper considers the nature and features of alliancing an agreed division of margin (profit) taking into
and when alliancing should be used. It is important to account performance levels measured against clearly
understand the decision whether to use alliancing as the defined indicators.
framework for delivery of a project is dependant on the  An integrated project team.
size, nature and complexity of the project as well as the
 An environment which encourages innovation and
participants involved. This is extremely important as there
breakthroughs.
are significant dangers if alliancing is used as the
framework for delivery of a project without appropriate  Unanimous agreement by the alliance representatives,
particularly for the division of responsibilities and the
consideration of these factors and the other issues
type.
identified in this update.
 Quality of works and services required to meet the
WHAT IS ALLIANCING? objectives of the alliance.
Alliancing is a co-operative form of contracting where the  Commitment to a “best for project” approach which
participants enter into a relationship (alliance) which is means that the alliance representatives will need to
designed to align the commercial interests of the choose between any competing proposals put forward
participants. Each participant in the alliance will share in by a number of participants in the alliance.
the success or failure of the project and in decision
 Open and honest communications, trust, integrity and
making and risk management.
respect.
Under an alliance, the participants will structure their
 Depending on the type of alliance, a “no-blame” and
relationship to share commercial risk and reward.
“no dispute” culture.
Therefore, it is in the interests of all participants to work
co-operatively and openly.  The use of a facilitator to guide the alliance
participants and help create an alliance „environment‟.
WHAT ARE THE KEY FEATURES OF
HOW IS ALLIANCING DIFFERENT TO
ALLIANCING?
TRADITIONAL CONTRACTING?
An alliance generally has the following key features:
Alliancing is often described as a “risk embrace” culture
 Commonly aligned objectives. under which the parties seek to better manage risks by
 Joint and several liability between the participants. embracing them (rather than trying to transfer them) and
 Fair and equitable sharing of risk between the then work together to manage them within a flexible
participants designed to avoid any “win-lose” project delivery environment. It is an agreement between
outcomes. two or more entities who undertake to work cooperatively,
4
on the basis of a sharing of project risk and reward, for the  A facilitator is essential to the implementation and
purpose of achieving agreed outcomes based on principles management of these changes and often provides the
of good faith and trust and an open-book approach stimulus for the necessary cultural change which needs
towards costs. to be embraced by the alliance participants, the
alliance management committee and the project
In contrast, traditional contracting is often described as
management team.
“risk transfer” where the parties seek to transfer as much
risk as possible to others under a range of separate
WHEN SHOULD ALLIANCING BE USED?
contracts. Under a traditional contracting arrangement, the
owner and the main contractor would enter into a The drivers for establishing an alliance as the framework
master/servant style contract for the performance of the for delivery of a project include the:
works and the main contractor would then flowdown as  Ability to efficiently pool together knowledge, skills
many risks as possible by using a series of master/servant and resources from across a number of parties with
style subcontracts. differing skill sets.
WHAT IS THE ROLE OF A FACILITATOR?  Ability to select the “best team” for delivery of the
works and services.
In order to promote the culture and objectives of
alliancing, it is common for alliance participants to  Alignment of objectives.
appoint an independent facilitator to assist them during the  Increased possibility of exceeding required
workshop and documentation phase and then the performance levels and obtaining a greater reward.
implementation phase of a project.  Opportunities for economies of scale and increased
profit margins.
WORKSHOP AND DOCUMENTATION PHASE
Therefore, if a project is technically complex an alliance
During the workshop and documentation phase of a
should be considered. Alternatively, an alliance should be
project, the main role of the facilitator is usually to assist
considered when it is difficult to accurately define the
the alliance participants by:
finished „product‟. For example, when design is a key
 Helping create an environment of trust, co-operation, element and it is not feasible to complete the design prior
open and honest communication and flexibility. to going to tender.
 Implementing workshops for developing a group Alliances may also appropriate when there is likely to be a
approach to identification of goals and objectives, long term relationship. An alliance environment may
stakeholder interests, functional performance better equip the parties to deal with inevitable problems
requirements and risks and constraints. that arise over the course of the relationship than a more
traditional contract. This is because the parties will have
IMPLEMENTATION PHASE the freedom and ability, and indeed the obligation, to
During the implementation phase of a project, the alliance develop pro-active solutions to those problems. A more
management committee would normally ask the facilitator traditional structure may lead to disputes and the
to focus on the following key issues: breakdown of the relationship.
 Developing an environment of trust, co-operation, The key determinative factor should be are the parties
open and honest communication and flexibility. willing and capable of working in the co-operative way
required for a successful alliance. If not, an alliance
 Building best practice behaviours and focusing on
should not be considered.
common project goals.
 Monitoring results and making recommendations to WHEN SHOULD ALLIANCING NOT BE USED?
keep the project on track.
The obvious answer is whenever the pre-requisites
 Encouraging innovation and breakthroughs. discussed above are not present. If a project is
straightforward an alliance is probably inappropriate.
WHY IS IT IMPORTANT TO USE A Similarly, if there is any concern that the parties involved
FACILITATOR? will not be able to adopt an alliance „mindset‟ an alliance
Alliancing requires a substantial and dramatic change in: should not be used because the integration and motivation
of the parties will determine the success or failure of the
 The way works and services are provided.
alliance
 The manner in which the parties relate to each other
during the life of a project.
2 Alliancing
5
ALLIANCING IS FIRST AND FOREMOST
ABOUT PEOPLE AND RELATIONSHIPS
The other key consideration is, does the project sponsor
want to finance the project? If so, an alliance structure
may not be suitable because lenders may be reluctant to
finance an alliance on a nonrecourse basis especially
during the construction phase. This is because the lenders
will not have the certainty of a guaranteed contract price
and completion dates with the standard protections eg:
step in rights, liquidated damages and performance bonds.
As a result of these risks, we understand that a pure
alliancing arrangement has not yet been used in a project
financed on a project financing basis.
Alliancing challenges the way parties have structured their
business relationships in the past. It will not work for all
projects, particularly if the individuals involved do not
quickly adapt to the culture of alliancing.
CONCLUSION
The commercial, bankability, financial, taxation and
practical issues must be considered, in their entirety,
before any decision is made as to the most appropriate and
effective contracting structure for the delivery of a project.
For the reasons outlined in this update, alliancing is a
project delivery arrangement which can be considered for
complex projects or for long term relationships.

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3 Alliancing
6
Finance & Projects Update
ALTERNATIVE CONTRACTING
STRUCTURES
Alternative 3 – project management structure
INTRODUCTION
The project management structure is a compromise
A key issue for project sponsors at the outset of any between the EPC structure and the work packages
project is to decide the type of contracting structure which structure. Under this structure, the project company can
will be used to deliver the project. take advantage of the expertise of each contractor while
This paper provides a summary of the key features of making the project manager responsible for much of the
some alternative contracting structures and then sets out a risk. The role of project manager is to negotiate and let
diagram of each structure together with a list of contracts and manage the performance of the works. If the
advantages and disadvantages. project manager assumes an appropriate level of risk this
structure is probably more bankable than the work
ALTERNATIVE STRUCTURES packages structure.
Alternative 1 – EPC structure This structure may be adopted in complex projects with
easily definable parts. It is important to consider the
The EPC structure will be most familiar to project
identity of the project managers – selecting equity partners
sponsors. Under this structure, the project company enters
as the project manager may make the lenders more
into a contract with the EPC contractor which will then
comfortable.
enter into various subcontracts with its sub-contractors for
performance of discrete portions of work. The EPC Alternative 4 – novated structure
contractor provides the project company with a single Under the novated structure, the project company initially
point of responsibility for ensuring the project is enters into a design contract with a specialist design
completed on time and meets the performance contractor. When the construction contractor is appointed,
requirements. the design contract is novated so that the construction
Alternative 2 – work packages structure contractor replaces the project company as the contracting
party in the design contract.
Under the work packages structure, the project company
enters into separate contracts with expert contractors for From the perspective of the project company, the
each type of work or package. This structure allows the construction contractor becomes totally responsible for
project company to have more involvement and greater design as under the EPC structure.
control over performance of the works than under the EPC This structure is particularly useful if the project company
structure. For this reason, it is most appropriate when it is needs to commence the works quickly. However, it is
necessary for the project company to closely monitor or probably only applicable for simpler, non-operating
control at least one critical part of the works. projects ie hospitals and road projects.
It is common for the contractors to be minority equity
participants in the project company but it is rare for
majority shareholders to also be a contractor.
7
ALTERNATIVE 1 – EPC STRUCTURE

Tripartite Agreement
Project Company
Lenders EPC Contract
EPC Contractor
Subcontractor A Subcontractor B Subcontractor C

Advantages
 Single point of responsibility for performance of the
works
 Bankable as lenders are familiar with the contract
structure
 Guaranteed completion date and fixed contract price
 Clear division of obligations and liabilities
 Easier to assess creditworthiness of the EPC contractor
Disadvantages
 Contract price may be inflated as the EPC contractor is
assuming most of the risk
 Limited ability of project company to be involved in
the performance of the works
 Inefficient use of resources because no pooling of
knowledge and skills
 Risks may be placed on those unable to influence or
manage them
2  Alternative Contracting Structures
8
ALTERNATIVE 2 – WORK PACKAGES
STRUCTURE

Project Company
Lenders
Civil Works Installation Technology Commissioning
Contractor Contractor Contractor Contractor
Tripartite
Agreement 1
Tripartite
Agreement 2
Tripartite
Agreement 3
Tripartite
Agreement 4

 Aggregate delay liquidated damages which may be
imposed on contractors are probably less than under
Advantages
EPC structure
 Expert contractors engaged for each part of the works
 Greater ability of the project company to control the
progress of the works
 Contingencies charged by contractors may be reduced
because scope of work is more familiar to each
contractor
 Overall capital expenditure may be less than under the
EPC structure
Disadvantages
 No single point of responsibility for performance of
the works
 Project company will be responsible for performance
and interfacing between the various work packages
(which will involve coordinating the design process)
 Lenders not as familiar with structure as it is not
typical market practice
 Complexity of structure may mean higher financing
charges
 Technology provider and licensor not ultimately
responsible for performance
3  Alternative Contracting Structures
9
ALTERNATIVE 3 – PROJECT MANAGEMENT
STRUCTURE

Project Company
Project Management Agreement
Lenders Project Manager
Civil Works Installation Technology Commissioning
Contractor Contractor Contractor Contractor
Tripartite
Agreement 1
Tripartite
Agreement 2
Tripartite
Agreement 3
Tripartite
Agreement 4

Advantages
 Equity participants with relevant experience
responsible for coordinating works
 Project managers can be incentivised to bring the
project in on time, on budget and with the required
level of performance
 Project more bankable if project manager assumes an
appropriate level of risk
Disadvantages
 No single point of responsibility for performance of
the works
 Lenders may require greater sponsor support if the
project manager is not an equity participant
 Probably no performance liquidated damages (depends
on the works package)
 Documentation complexity - potential gaps in risk
allocation
 Potentially higher transaction costs given the number
of parties and contracts and more complex lenders due
diligence
4  Alternative Contracting Structures
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