Common issues on international projects
There are a number of issues that may impact a cross-border construction project that parties should consider from the outset and throughout the lifecycle of a project.
These include:
1. Labour: What labour is available in the location of the project? Can foreign labour be used and, if so, what laws and rules govern the employment of labour in the relevant jurisdiction? Is the labour qualified to produce the project as specified? Are there any labour issues (for example, strikes) planned or likely in the relevant jurisdiction?
2. Supply chain: What is the nature of the local or international supply chain? Are there custom requirements for transporting materials/resources cross-border? What are the likely timescales for the movement of labour and resources? Is the supply chain financially stable? What are the local requirements/laws for the supply chain (such as anti-corruption/bribery)?
3. Weather: What are the expected weather conditions in the jurisdiction of the project? Have these been factored into the programme and price? What happens if there is an unexpected weather event?
4. Political stability: What is the political environment in the location of the project? Is there expected unrest? Are there any elections planned in the duration of the project?
5. Endemics, epidemics and pandemics: Are there local endemic diseases? How might these be mitigated against? What contingency measures are in place in the event of an outbreak, epidemic or pandemic?
6. Differences in party approaches: How do the parties expect to resolve issues arising on the project? There may be differences dependent on the party’s background, for example, parties who attempt to collaborate and avoid disputes against parties who utilise the contract terms and are familiar with the dispute process, and this could lead to issues in getting problems resolved. How might these issues be overcome?
Issues encountered on construction projects could have a number of effects, including:
1. Delay: Delay relates to delay to completion of the project. Delay to completion may not have occurred simply because the works have become more expensive or less efficient (for example, because of local restrictions or a lack of available resource/materials thereby increasing cost). Delay must have occurred to the activities that are on the critical path to completion of the project.
Contractors may have experienced delay and be seeking to claim for an extension of time and associated cost and employers may be seeking to levy liquidated damages for delayed completion.
Delay must be distinguished from disruption (that is, working less efficiently/productively), which is dealt with below.
2. Disruption: Disruption is a distinct concept from delay. Disruption is a disturbance, hindrance or interruption to the contractor’s normal working methods, resulting in lower productivity and efficiency. Disruption is concerned with the analysis of productivity of work activities, irrespective of whether those activities were on the critical path. While disruption may overlap with delay, they are different concepts and measured differently.
For example, local restrictions (such as working hours, movement of labour and goods) might affect the manner in which the works can be completed, resulting in less efficient progress than planned.
3. Payment/cost: Any issues that affect progress or resources is likely to affect the cost of the project.
However, it is important to check your contract to ensure the cause of the delay entitles the contractor to recover any associated costs. Just because a delaying event arises does not mean the contractor is automatically entitled to claim loss and/or expense (a claim for money). The different standard forms deal with costs differently. Maintaining accurate records and documents is important in making a cost claim.
Employers may be entitled to liquidated damages or general damages for delay caused by the contractor in completing the works.
4. Quality of works: Certain issues may also affect the quality of the works that are carried out. For example, is the labour/supply chain skilled to construct the project to the standards required? Do the materials available meet the specification required?
5. Insolvency: Low margins and high risk profiles mean that insolvency is common in the construction industry. Parties need to be alive to the risk of insolvency in their supply chain and the resulting impact on their project of any such insolvency.
6. Sanctions: A sanction is a penalty levied on another country or individual entities or citizens of a country. Those most relevant to international construction projects are economic sanctions, for example, tariffs, embargoes, quotas and restrictions on financial transactions.
The impact on the construction industry is most often felt in supply chains and production. For instance, a company that is used to importing a certain good from a country that is suddenly subject to a higher tariff, quota or ban may find its manufacturing capacity or ability to sell the good onwards limited or more costly. Similarly, a company that had planned to develop a plant in, or attend a site in, a certain location may find itself hampered by a travel ban or restrictions.
In a worst-case scenario, a sanction could prevent a company from performing a contract. The other contractual party may then seek to claim for non-performance or breach of contract.
Sanctions are dependent upon the political climate. Therefore, for construction companies doing business overseas it is important to continually monitor the sanctions landscape and ensure that there is a well-drafted contract which can best protect the company’s interests.
7. Non-performance: Certain issues may even affect the ability of the parties to perform the contract. For example, as recent events have demonstrated, political instability and pandemics can result in shutdowns and restrictions on whole industries.
8. Protracted disputes: If potential issues and the differences between parties are not properly managed, they have the potential to lead to protracted and costly disputes.
1. Contract management: The best approach a party can take to protect its position and minimise risk is to ensure it is properly managing the contract in accordance with its terms. Issues tends to arise when parties have ignored the terms of the contract or not followed them correctly. Good contract management includes ensuring notices are issued as required, contract deadlines are met and keeping appropriate records, particularly to support any claims a party wishes to pursue.
2. Supply chain monitoring/due diligence: Appropriate due diligence should be carried out on the supply chain at the procurement stage and regularly throughout the course of the project to ensure solvency and ability to perform the contract. This should help to ensure that any issues are identified at an early stage and appropriate mitigation can be put in place (such as procuring alternative materials) before the project is affected.
3. Vesting agreements: Typically, title to goods will only transfer to the purchaser (usually the employer) once the goods are delivered to site, regardless of whether the purchaser has already paid for them. In circumstances where the supplier becomes insolvent and those goods are never delivered to site, the purchaser is exposed to the risk of effectively losing the purchase price paid. Vesting agreements, either taking the form of clauses within a contract or a separate vesting certificate, provide a solution to this issue through the inclusion of express provisions that state title in the goods, plant or materials will transfer from the supplier to the purchaser upon payment. The vesting agreement should also contain express obligations requiring the supplier to store the goods safely and securely, to take responsibility for any damage to the goods and to put in place appropriate insurances.
4. Negotiations: When issues do arise, one way to resolve them is through commercial discussions and negotiations between the counterparties. Often, this can help minimise the time and cost impact of a particular issue and avoid the need for a formal dispute.
5. Force Majeure/frustration/prevention: If an event arises which prevents performance of the contract (for instance, an unforeseen weather event, a pandemic or political unrest), the contract and/or law may provide for relief from performance in certain circumstances. The contract and/or the law may provide that certain events are events of force majeure or prevention or that the contract is frustrated, which provides relief in the form of an extension of time, loss and expense or relief from performance.
6. ADR/DAABs: Dispute boards have become increasingly popular on international projects. These boards often provide a quicker, cheaper alternative to arbitration or litigation through an informal dispute process that is final and binding unless challenged. Other forms of alternative dispute resolution may assist in unlocking potential issues on projects, including mediation and expert determination.
7. Bonds calls: Bonds are common in construction projects. The most common is a performance bond which protects the client (employer) against non-performance of obligations by the contractor. The scope of the issuer’s responsibility depends on the type of bond issued, either an on-demand or a conditional bond.
• On-demand bonds: the issuer must make payment to the client on demand. That is, the client does not need to demonstrate loss or that the contractor has breached the contract.
• Conditional bonds: payment is dependent on the client establishing the contractor’s liability.
The contracting parties may also wish to consider the use of advance payment bonds. These are a type of performance bond that are commonly used in a construction and engineering context. It may be used where the client/employer has concerns about whether the contractor will perform the contract, and is usually intended to deal with circumstances where the client/employer has paid the contractor an advance payment under the terms of the relevant contract.
8. Emergency relief:
Injunction
A injunction is an order from the court that a party either does a specific act (mandatory) or refrains from doing an act (prohibitive). An injunction is a discretionary remedy and the court typically requires parties to meet a high threshold in order to grant an injunction.An injunction can also be sought to prevent a party from pursuing proceedings in the incorrect jurisdiction.
Freezing Order
A freezing order is an interim order in the form of an injunction that prevents a party from disposing of, or dealing with, its assets whilst the injunction is in place. It does not give the claimant any proprietary or security interest in the frozen assets. It can bind assets and parties worldwide, under threat of imprisonment if the terms of the order are breached. A freezing order can be granted over assets within England and Wales but also over assets situated anywhere in the world.They are usually applied for where a claimant wants to ensure a defendant’s assets are preserved until a judgment can be obtained and/or enforced.
9. Disputes: If an issue cannot be resolved, a formal dispute in order to obtain a determination may be required. This may take the form of litigation, arbitration (either commercial or investment treaty) or adjudication.
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