Legal Considerations in International Construction

Contracting

Michael C. Loulakis, Esq., DBIAPresident/CEO

Capital Project Strategies, LLCmloulakis@cp-strategies.com

January 14, 2013

What Makes a Contract “International”• Services performed or goods delivered outside of “home country”

• Contract subject to laws of another country

• Contracts subject to laws applicable to transactions outside of home country (e.g., Foreign Corrupt Practices Act)

• Mixed domestic and international law (e.g., U.S. embassy projects)

Who is the Client?

• Existing client (e.g., federal government or private sector domestic company)

• Joint venture between existing client and foreign national

• New foreign client– Public sector– Private company– Mixture of both

International Contracting: The View of the Major E/C Firms• “This is a hard (but necessary) way to make money”

• Common attributes of these organizations:– Sophisticated understanding of the challenges

– Established infrastructure for risk management, contracting and project execution

– Practices developed from real-life experiences

– Strong understanding of their clients and cultural differences

International Contracting: The View of “Wannabes”• “If they can do it, so can we”• Common perspectives:

– Markets are wide-open to American ingenuity and expertise

– Intrigue, excitement and prestige• They often ignore basic commercial considerations:– Who is the client and what is their culture?– How will clients make decisions?– What is our source of subcontracting and labor?– What are the unique execution risks with the work?

– Is our culture compatible with our client and the host country?

International Contracting: The View of “Wannabes” (cont’d)• The industry is littered with stories of failures caused by firms that:– Serviced the work from home– Spent substantial money in pursuit of vapor projects

– Teamed with the wrong agents and partners– Lost money by placing their emphasis on the contract•Getting the right one in place at the outset•Relying upon it to help them if there is a problem

Contracts Often Play Only a Marginal Role in Project Success• Realities of international contracting– Contracts are often poorly written– International counterparties often do not follow the contract

– Unsophisticated local subcontractors – Application of the “golden rule” trumps a good contract

– Difficulties in legal enforcement – Contract is not as helpful or important as it would be in the U.S.

• Risks often transcend contracts

Identification and Management of Risk• The difference between project risk and jurisdictional risk

• Variances from country-to-country and region-to-region

• Risk assessment as an art masquerading as a science– Jurisdictional risk often affected by skill, objectivity and understanding of evaluator

– Need for thoughtful process– Corporate governance and philosophy

Key Risks Unique to International Construction

Key Points to Understand About International Contracting• Differences in terminology• Differences between common and civil law

• Forms of international contracts

• Significant commercial/contract terms

• Dispute resolution techniques

Terminology Differences

• Tender• Employer• Temporary and Permanent Works• Programme • Variations• Taking Over• Defects Liability Period

Common and Civil Law• Common law

– Based on judicial precedent and reasoning applied to specific case and facts

– Used in U.S., England, India, Australia, New Zealand and Malaysia

• Civil law– Based on general principles applied to each case without the benefit of precedent

– Codes and scholarly principles

An Example of a Civil Law Principle:Decennial Liability• Responsibility for structural defects that arise in a building for 10 years from completion– Covers both latent and patent defects– Imposed on both designers and contractors

• Article 880 of United Arab Emirates Civil Code– Both architect and contractor jointly liable for any defects that threaten stability or safety of building

– If architect does not have supervision/inspection duties, liability is limited to design defects

– No defense for contractor if it shows it did work per industry standards

– Longer periods can be specified in contract– Obligation to take out insurance– Limitations of liability are not allowed

Forms of Contract• FIDIC – International Federation of Consulting Engineers

• JCT – Joint Contracts Tribunal • ICE – Institute of Civil Engineers (recently replaced by Association for Consultancy and Engineering (ACE) and the Civil Engineering Contractors Association (CECA)

• Construction Owners Association of Alberta (COAA)

Some FIDIC Basics

• Contracts published since 1957• Objective of promoting the interests of consulting engineers globally

• Most widely used forms– World Bank– Many governmental bodies– Not as frequently used on project financed deals

Some FIDIC Basics (cont’d)• Rainbow Suite of Contracts

– First published in 1999– Updated and added to regularly

• Red Book (Building and Engineering Works Designed by Employer)– Re-measurement type of contract– Rates agreed upon in contract for certain work and quantities

– Employer has risk of estimated quantities• Yellow Book (Plant and Design-Build)

Some FIDIC Basics (cont’d)

• Silver Book (EPC/Turnkey)• Green Book (Short Form of Contract• Blue Book (Dredging and Reclamation)

• White Book (Client/Consultant Model Services Agreement

• Gold Book (Design, Build and Operate)

Some FIDIC Basics (cont’d)• Role of the Engineer

– Agent of Employer•Issues instructions and notices•Monitors the Works•Acts as certifier

– Not considered impartial• Responsibilities of Contractor

– Fitness for purpose relative to its design

– Normal means and methods

Some FIDIC Basics (cont’d)

• Strict notice requirements• Use of Dispute Adjudication Board (DAB)– Created at start of project or when dispute occurs

– Final and binding decision 28 days after decision is issued if no notice of dissatisfaction

Significant Commercial/Contract Terms• Payment terms

– Mobilization payments– “Last” payment (retention)– Currency (split contracts)

• Definition of Force Majeure and foreseeability

• Liquidated damages and penalties– Common law vs. civil law– Adjusting damages up or down to match actual damages

• Securing performance through bonds/letters of credit

• Choice of law

Dispute Resolution • Need something other than local courts

• Common processes– DAB and Dispute Review Boards– International arbitration

• ICC• London Court of International Arbitration• AAA• UNCITRAL

• Differences between processes• New York Convention on Enforcement of Arbitration Awards

Foreign Corrupt Practices Act• Unlawful for a U.S. person to make or authorize a payment or anything of value:– knowing that all or a portion of it will be offered, given or promised, directly or indirectly, to a foreign official

– to influence the foreign official in his or her official capacity

– to induce the foreign official to do or omit to do an act in violation of his or her lawful duty

– to secure any improper advantage• Examples:

– Walmart (construction permits in Mexico)– Marubeni, as agent for KBR and Technip, on $6B of power projects in Nigeria

Project Case Studies• Mideast petrochemical megaprojects

– Failures of Letters of Intent– Draws on letters of credit

• Chinese coal-fired power plant• Pakistani gas-fired power plant

– Liquidated damages arising from sinking of an unseaworthy vessel

– Expropriation• Mexican developer of homes• Afghanistan government contracts

Legal Considerations in International Construction

Contracting

Michael C. Loulakis, Esq., DBIAPresident/CEO

Capital Project Strategies, LLCmloulakis@cp-strategies.com

January 14, 2013