The good news – all of our fantastic contributions will remain here on the blog for the next 6 months, giving you plenty of time to search, peruse and re-read your favourite posts.

On behalf of Kluwer we would like to extend a huge thank you to all involved, especially Sarah Thomas, Pinsent Masons (editor), and our much valued team of regular contributors. But, we would also like to thank all of you out there who have been following the blog over the last 14 months.

Should you wish to stay abreast of developments in the international arbitration world, we would be delighted if you would sign up for our Arbitration Blog at www.wolterskluwerblogs.com. The blog works in the same way, by entering your email address posts will be delivered straight to your inbox as they go live.

Equally if you would like to keep abreast of developments in construction law or trends in international construction, please feel free to sign up to receive Pinsent Mason’s e-newsletter. You can do this by clicking the link: www.pinsentmasons.com/myprofile then clicking the ‘create new profile link’. If you have any queries regarding this facility please feel free to contact Sarah Thomas of Pinsent Masons at sarah.thomas@pinsentmasons.com.

It just remains for us to thank you for following the blog over the past few months: thank you.

Kluwer Law International

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A) The Angra 3 Nuclear Power Project

Nuclear energy provides about 3% of Brazil’s electricity. In 2007, gross production was 445 billion kWh, with net imports of 39 billion kWh being required. Of the total generated in the country, 84% of power was from hydro, 3.5% from gas, 4% from biomass, just over 5% from coal and oil, and 3% (12.4 million kWh) from nuclear. In 2009, nuclear power generated 13 billion kWh of electricity. Per capita electricity consumption in Brazil has grown strongly since 1990 – from under 1500 kWh/yr in 1990 to nearly 2200 kWh/yr in 2007.

The high dependence on hydro gives rise to some climatic vulnerability which is driving policy to diminish dependence on it. Despite this, in February 2010 the government approved $9.3 billion investment in the new 11.2 GWe Belo Monte hydro scheme, which will flood 500 sq km of the Amazon basin and supply about 11% of the country’s electricity. About 40% of Brazil’s electricity is produced by the national Eletrobrás Systema. About 20% of electricity is from state-owned utilities, and the rest is from privately-owned companies.

Angra 1 suffered continuing problems with its steam supply system and was shut down for some time during its first few years. Its lifetime load factor over the first 15 years was only 25%, but since 1999 it has been much better. Civil works on Angra 2 started in 1976 and, due to a lack of financial resources and a lower than expected growth in demand, only commenced operation at the end of 2000. Angra 3 was designed to be a twin of unit 2, with a 1,400MW generating capacity. Work started on the project in 1984 but was suspended in 1986 before full construction began. Around 70% of the equipment is on site, full construction did not begin and work on the project was suspended in 1986.

In November 2006 the government announced plans to complete Angra 3 and also build four further 1000 MWe nuclear plants from 2015 at a single site. Angra 3 construction approval was confirmed by Brazil’s National Energy Policy Council in June 2007 and received Presidential approval in July. Environmental approval was granted in March and all other approvals by July 2009. In December 2008, Eletrobrás Termonuclear S/A (Eletronuclear) signed an industrial cooperation agreement with Areva, confirming that Areva will complete Angra 3 and be considered for supplying further reactors. Areva also signed a services contract for Angra 1. First concrete for Angra 3 was due in 2009. A construction licence was granted by the National Nuclear Energy Commission (CNEN) at the end of May 2010, and construction resumed two days later, in June. The plant is expected in operation at the end of 2015 after 66 months.

B) Financial challenges

Economically, power from existing nuclear plants is about 1.5 times more expensive than that from established hydro, and power from Angra 3 is expected to be slightly over twice as expensive as old hydro, about the same as that from coal and cheaper than that from gas. Overall, including Angra 3 in projections reduces network prices slightly. Plans to build two new nuclear plants in the northeast and two more near Angra in the southeast are underway1. At the end of 2009, Eletronuclear commenced initial siting studies at four potential locations in the northeast2, and is aiming to present a list of 40 possible sites to the Mines & Energy Ministry by mid-2011. Eletronuclear is looking at the Westinghouse AP1000 (which is reported to be favoured), the Areva-Mitsubishi Atmea-1 and Atomstroyexport’s VVER-1000.

In December 2010, The Brazilian Development Bank (BNDES) approved BRL 6.1 billion (US$ 3.6 billion) in financing for Angra 3, covering almost 60% of the BRL 9.9 billion estimated cost. This month Eletronuclear received an offer for a EUR1.5bn (US$2.02bn) loan from a pool of five French banks led by Société Générale to develop its Angra III nuclear power plant in Rio de Janeiro state. This is only one of many recent developments in the country’s nuclear sector. Sustained by strong economic and demographic growth, Brazil’s power demand is indeed expected to increase significantly in the coming years and the country is planning to boost nuclear generation along with its more developed hydro generation. Brazil’s Senate still has to approve the loan, and a decision on the matter is not expected until the second half of 2011. Construction of Angra 3is currently underway and the new nuclear power plant is expected to start production by 2015. The total investment for the project has been estimated at BRL9.9bn (US$5.91bn).

C) About Eletronuclear and BNDES

Eletronuclear was established in 1997 for the purpose of operating and building thermal nuclear power plants in Brazil. A subsidiary of Eletrobrás, Eletronuclear is a government-controlled company that accounts for the generation of approximately 3% of electric power consumed in Brazil. By the interconnected electric power system, such power reaches the main consumer centers in Brazil and corresponds, for example, to more than 50% of electric power consumption in the State of Rio de Janeiro, a proportion to be considerably expanded on completion of the third unit of Admiral Álvaro Alberto Nuclear Power Station (CNAAA). At present, nuclear power plants Angra 1 – with a generating capacity of 657  electric megawatts, and Angra 2 – rated at 1350 electric megawatts are in operation. Angra 3, to practically be a replica of Angra 2, (incorporating the technological advances made since the construction of the latter) is also planned

BNDES is the main financing agent for development in Brazil. Since its foundation, in 1952, the BNDES has played a fundamental role in stimulating the expansion of industry and infrastructure in the country. Over the course of the Bank’s history, its operations have evolved in accordance with the Brazilian socio-economic challenges, and now they include support for exports, technological innovation, sustainable socio-environmental development and the modernization of public administration. The Bank offers several financial support mechanisms to Brazilian companies of all sizes as well as public administration entities, enabling investments in all economic sectors. In any supported undertaking, from the analysis phase up to the monitoring, the BNDES emphasizes three factors it considers strategic: innovation, local development and socio-environmental development. The BNDES’ disbursements reached R$ 168.4 billion in 2010, a 23% increase when compared to the previous year. The result takes into consideration Petrobras’ R$ 24.7 billion capitalization operation. When this operation – a one-off and non-recurring – is not considered, the Bank’s disbursements ended 2010 at R$ 143.7 billion, a 5% increase when compared to 2009, growth which is compatible with previously made projections. Industry accounted for 47% of the Bank’s total disbursements, followed by Infrastructure, with 31% presence, and by Trade and Services, at 16%. In all areas of activity (agriculture, industry, infrastructure, trade and services) disbursements grew in 2010, resulting mostly from the successful Investment Maintenance Program (PSI). Launched in July 2009 and expected to last until next March 31, 2011, PSI guaranteed the return of investment to the country amidst the global financial and economic crisis.

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At an estimated cost of S$1.33 billion, the new Sports Hub will boast a 55,000-seater retractable roof stadium, a 6,000-capacity Indoor Aquatic Centre, a 3,000-capacity Multi-Purpose Arena and a Water Sports Centre.

Despite the tender being awarded by the Singapore government in 2008, the PPP project commenced construction only in September 2010 – the result of delays from the 2008-2009 global financial crisis and high construction costs. It is now expected to complete in 2014.

Other major infrastructure projects soon to get underway include the Tuas desalination plant, Singapore’s second and largest such plant. Local water authority PUB closed its open tender late last year and the outcome of the tender is expected in first quarter 2011. The Tuas desalinated water plant is expected to complete by 2013.

This is already PUB’s fourth Design, Build, Own and Operate (DBOO) project. The first three were desalination and recycled water projects. The purpose of such arrangements include helping local water companies build their track records towards eventually exporting such expertise overseas.

Another notable launch is Tuas Power’s Tembusu Complex comprising a waste re-utilisation facility, a biomass-clean coal co-generation plant and a desalination plant, costing an estimated US$1.5 billion.

The project has already garnered several local awards for innovation and research with part of the biomass-clean coal cogeneration plant’s processes converting ash into synthetic aggregates for use in the construction industry.

FIDIC Red Book – A hiccup?

In a rare decision, the Singapore High Court in PT Perusahaan Gas Negara (“PGN”) v CRW Joint Operation (“CRW”) [2010] 4 SLR 672 refused to uphold an ICC arbitration award arising from a contract using the FIDIC Red Book 1999 Edition.

Disputes between the parties over variation orders and payment requests were referred to a Dispute Adjudication Board (DAB) by the contract. The parties accepted several of the DAB’s decisions, save one involving a disputed sum of over US$17 million.

The DAB decision was referred to arbitration and the Tribunal upheld it in its award. When CRW applied to register the arbitration award in a Singapore court, PGN sought to set it aside.

The Singapore High Court set aside the award on the basis that the arbitration tribunal exceeded its powers in rendering a final award in contravention of the parties’ agreement. The High Court interpreted the dispute resolution provisions in the FIDIC Red Book to mean that CRW was first required to refer the disputed DAB decision back to the DAB for review and confirmation, before involving arbitration.

Notably, the Court observed a possible gap in the 1999 FIDIC Red Book as it did not expressly allow a counter party’s failure to comply with a DAB decision to be referred directly to arbitration.

This is a rare instance of the Singapore High Court setting aside an arbitral award. It highlights the importance of parties understanding the clauses in their contract, especially how the reference to arbitration is to be properly invoked.

Mohan R Pillay
Partner & Joint Head of Office
Pinsent Masons MPillay LLP
Chartered Arbitrator
Adj. Assoc. Prof., Faculty of Law, Nat. Univ. of Singapore
Visiting Professor, Centre of Construction Law, King’s College London
16 Collyer Quay #22-02
Singapore 049318
E: mohan.pillay@pinsentmasons.com

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As the ninth largest economy in the world – expected to reach fifth place in the next decade – and the largest of Latin America, Brazil is today one of the best markets for foreign investment and an increasingly important operator in the international geopolitical stage. Despite that, three recent reports have described the quality of Brazil’s transport infrastructure – including the airport system – as ranking among some of the worst in the world, despite growing demand from international manufacturers for goods produced in the country.

a) The first report, by the Brazilian economic consultancy LCA Consultores – which analyzed results from a competitiveness poll conducted among attendees at the 2009/2010 World Economic Forum in Geneva – indicates that compared to another 20 countries with which it competes on a global scale, Brazil hangs on to the 17th slot in infrastructure quality in general. On a 1-7 rating scale, Brazil scored 3.4, below the world average of 4.1.

b) The second report, by Brazil’s Applied Economics Research Institute (IPEA), indicates that a number of airports are on the edge of an operational collapse, meaning there is a considerable threat of a logistics blackout in the airport sector unless investment is initiated immediately. The IPEA report said demand for air travel is expected to triple in the next 20 years, especially with the World Cup and 2016 Olympics putting additional pressure on the country’s transport infrastructure, making the situation all the more pressing.

c) The third report, by consultancy company McKinsey, indicates that investment of BRL25-34bn (US$15-20bn) is needed to meet growing demand in the airport sector over the next 20 years. The study found that Brazil’s 20 main airports need massive investments in upgrades to enable them cater for the growing passenger traffic demand up to 2030. The study further concludes that airports such as the Viracopos international airport in Sao Paolo may need up to BRL4-6bn (US$2-3bn) reals to enhance its capacity to handle passenger traffic in its metropolitan area, the most congested in the country. On the other hand, the state’s Congonhas airport was said to be in dire condition, with capacity levels already exceeded, revealed the study. Only tow Brazilian airports were found to be in better condition, the Galeão airport in Rio de Janeiro, and the Curitiba airport in Paraná state.

With these findings in mind, President Dilma Rouseef wants to make a firm position that the country’s airport system will indeed improve in a fast track model. In her 3rd day in Office the new President has decided to privatize the construction and operation of 2 new airport terminals in the State of São Paulo. President Dilma also decided to open up the capital of INFRAERO (the Brazilian Airport Infrastructure Company) and create an special Secretariat – directly attached to the the Presidency’s Office – to oversight civil aviation business in Brazil.

President’s Office has already started meeting with companies interested in the construction and operation of the 2 new terminals in the State of São Paulo. Those companies have been informed that concession agreements for the new terminals will be of at least 20 years and will have BNDES’ (the Brazilian Development Bank) participation in the financing. The BNDES Credit Lines comprise long-term financing, at competitive interest rates, for the development of investment projects, the commercialization of machinery and equipment, and the growth of Brazilian exports. Credit lines and programs provided by the BNDES serve the investment needs of companies of any size and sector set up in Brazil.

Other investments recently announced shall be placed in the airports at Belo Horizonte, Brasília, Cuiabá, Curitiba, Fortaleza, Manaus, Natal, Porto Alegre, Recife, Rio de Janeiro and Salvador, the other 11 host cities of the 2014 World Cup. The Government expectation is that all work shall be completed between June 2013 and April 2014, so that the airports shall be ready to welcome the large number of tourists that should visit the country in this period.

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As noted in my July 2010 blog ‘A return to Arbitration?’, Australia’s domestic arbitration regime is currently the subject of legislative reform with each state and territory agreeing to adopt the Model Law. 

This raises the questions:

• will adoption of the Model Law improve the effectiveness of arbitration as an ADR process and make it a more attractive ADR option, or
• will its success depend on arbitrators taking full advantage of the new legislative framework in managing the process.

Declining popularity of arbitration

In the 1970s and 1980s construction disputes were commonly resolved by arbitration.  Increasingly, arbitral awards were challenged on the basis of ‘technical misconduct’.  The technical misconduct umbrella opened to include requiring arbitrators to write detailed decisions to a standard similar to a judge’s judgment.

The arbitration process became more cumbersome and time consuming as arbitrators managed the process more cautiously, mirroring procedures used in civil litigation (although ironically not the fast tracking procedures adopted in case management regimes in commercial lists) in order to avoid challenge on the basis of technical misconduct. 

New Law – New opportunities

In May 2010, the states and territories agreed to overhaul the current domestic arbitration regime and adopt the Model Law.  New South Wales has lead the way with its Commercial Arbitration Act 2010 (NSW) (NSW Act) commencing operation on 1 October 2010.  

The new legislative framework, which is expected to be adopted by the remaining states and territories, enhances the arbitrator’s role as the master of the process.  It opens up an opportunity for arbitrators to restore arbitration to its former glory as a efficient, informal and cost effective ADR process.

Examples of amendments that should instil confidence in arbitrators to manage the process effectively include:

• clarification that the parties are to be given a ‘reasonable’ opportunity to state their case; including power to order a stop clock arbitration;
• imposing a direct obligation on the parties to do all things necessary for the proper and expeditions conduct of the proceedings;
• the power to dismiss proceedings in the face of inexcusable delay
• powers to grant interim measures such as disclosure, security of costs, costs and damages and preservation orders; and
• most significantly the removal of the court’s power to set aside an award for technical misconduct and the provision of limited appeal rights. 

End result?

Changing the domestic arbitration procedural rules alone may not be enough to make arbitration a more attractive ADR option.  The onus is on parties, their advisors and ultimately arbitrators to utilise the tools provided by the Model Law.  Whether the Model Law delivers on its promise to provide a fast, fair, cost-effective and less formal option for resolving disputes remains to be seen. 

Perhaps Australia should draw on other nation’s experiences in the application of the Model Law?

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Engineering, Procurement and Construction (EPC) and Engineering, Procurement and Construction Management (EPCM) contracts are two project delivery methods commonly used in the mining, mineral processing and power industries. Despite the widespread use of these contract models, there remains a general level of mystification associated with EPCM contracts, and the distinction between EPC and EPCM contracts is not particularly well documented or understood.

In acronym alone, the two contract models appear to be similar. So what’s in an ‘M’?

EPC contracting

Under an EPC contract, the EPC contractor develops the project from its inception to final completion. The principal provides the EPC contractor with technical and functional specifications for the project, and the EPC contractor subsequently designs, builds and delivers the project in an operational state so that it can be operated at the ‘turn of a key’ (resulting in the common reference to EPC contracts as ‘turnkey’ contracts).

EPC contracts are almost always ‘lump-sum’, where the EPC contractor is limited to receiving a fixed price irrespective of the actual cost of performing the work. The EPC contractor generally takes the benefit of any savings (and the risk of any cost over-runs). In addition, in an EPC contract, the EPC contractor usually provides a performance guarantee (subject to agreed liability caps).

An EPC contract provides a suitable framework for projects where significant engineering expertise is required, and the principal does not need to retain design control or flexibility in execution. EPC contracts are commonly used for large scale resource developments, such as oil and gas plant projects.

EPCM contracting – How is it different?

In contrast to an EPC contract, an EPCM contract is a sophisticated project management or agency arrangement where the EPCM contractor:

–  is responsible for the detailed engineering and design for the project; 

–  administers and manages the project as the principal’s agent or representative, including by providing programming and strategic management services; and 

–  is typically responsible for breaking down the procurement and construction work into packages, managing their tender, overseeing the principal’s entry into the trade/supply  contracts and managing those trade/supply contracts on the principal’s behalf to achieve completion of the project.

Unlike EPC contracts, EPCM contracts are almost always ‘cost plus’ (or ‘cost-reimbursable’). The principal pays the subcontractors directly for materials, equipment and on-site works, and only pays the EPCM contractor its actual direct costs (mostly labour) for performing engineering and supervisory services, plus an agreed margin. The margin charged by EPCM contractors varies depending on the risk assumed (which is usually low), the size of the project (small projects usually have higher margins) and supply/demand position in the economy.

An EPCM contract provides a suitable framework where the nature of the project requires continual design development either due to the complex nature of the project (or its interface with other assets or projects) or because the outputs of the project have not yet been finally determined. So long as the principal has the expertise, experience and resources to manage the progress of the project and can afford to retain the cost and time risk of the project, the principal can avoid payment of a hefty premium to put the risk on a head contractor under an EPC contract.

An EPCM contract may be appropriate where the inherent advantages of other procurement models (largely time and cost certainty) are not able in a practical sense to be delivered, perhaps due to lack of market appetite or capability to accept the risk transfer of traditional models. This is particularly relevant where the principal is unable or unlikely to obtain a suitable contractor and price using an EPC contract model.

EPCM contracts are commonly used for the construction or expansion of large scale heavy engineering facilities or manufacturing plants in the petrochemical oil and gas, mining and power sectors, where engineering and project management skills are more likely to be separate to construction and supply capability. EPCM contracts are not generally used for civil projects, except where the project can be delivered by relatively small, self-contained packages awarded to multiple contractors.

So what’s in an ‘M’?

There are, of course, many other differences between EPC and EPCM contracts. The fundamental difference, however, lies in the ‘M’. The ‘Construction Management‘ component of the project delivery method means that the EPCM contractor does not perform construction work and does not usually take full responsibility for delivering the completed project. The principal is able to take a more ‘hands on’ approach, with greater flexibility to modify project specifications and effect changes to the scope of the works throughout the project. However, as with any project delivery method, if you elect to use an EPCM contract model for your project, it should be moulded to fit the needs of the project and the principal to give your project the best chance for success.

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However, a project for the construction of a 400 MW gas-fired combined cycle plant on the site of an existing plant in the alpine canton of Wallis has taken a large step forward. The plans to offset the 600,000 to 700,000 tons of CO2 expected to be emitted by the Chavalon plant once completed (which will represent roughly 2 to 3 per cent of total Swiss emissions) have been found to be financially feasible.

The offsetting measures, which have been the subject of studies and will soon be submitted for the approval of the Swiss Federal Ministry of Environment, include advances such as the use of heat pumps and improved energy use of sewage and water infrastructure. The projected measures will allow for the plant’s emissions to be offset in their entirety.

In addition, the Chavalon project was made possible by a recent ordinance of the Swiss government exempting new fossil-fuel power plants built on the site of an existing plant from the requirement of waste heat recovery. Such waste heat recovery would not have been feasible for the Chavalon project given the projected plant’s isolated location high above the Rhone valley.

While the waste heat recovery exception carved out by the Swiss Government for the Chavalon plant was controversial given Switzerland’s energy policy, which is focused on nuclear and hydro-electric power, the Government adopted the exception in order to keep the option of building gas-fired plants open, and because of the advanced nature of the Chavalon project’s carbon-offsetting plans. Electricity companies have been pushing for the right to build such plants since the middle of the decade in order to satisfy demand until new nuclear power plants, which would have higher production capacities of up to 1600 MW, become operational.

The Chavalon plant, which could be operational by 2016, will give a significant boost to Swiss electricity production in the coming years.

The electricity generated in Chavalon will not only compete with relatively low cost hydro-electrical and nuclear power, but also with the more expensive imported power produced with gas-fired combined cycle plants. The higher prices for such imported power will be decisive to the profitability of the Chavalon plant, and the development of a Europe-wide offsetting system will further enhance the plant’s cost-effectiveness.

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The 2010 survey sees a much broadened territorial scope to include emerging venues such as Singapore together with the established venues of London, Paris, Switzerland and New York.

The key factors influencing international arbitration identified by the survey are not surprising – governing law, seat of arbitration, choice of arbitral institution, and appointment of an arbitrator.

A. Governing Law

The survey revealed a preference for a company’s home jurisdiction as the governing law.

When this was not possible, the next choice was for the widely accepted laws of England, New York, or Switzerland.

B. Seat of Arbitration

The survey identified a clear emphasis by corporates for arbitration seats to have “formal legal infrastructure”. This included the national arbitration law and a track record in enforcing arbitration agreements and arbitral awards.

Survey results on the preferred seat of arbitration reveal Singapore’s emergence as a regional leader in Asia. Singapore garnered 7% of votes in line with Paris (7%), Tokyo (7%) and New York (6%) but behind the historically well established centres of London (30%) and Geneva (9%).

The survey respondents were also asked to rate the arbitration seats which they had used before. Of these, London, Paris, New York were well regarded while Singapore was the next most commonly referred to seat.

47% of survey respondents rated Singapore as very good or excellent. This certainly reflects well on Singapore’s push in recent years to be a regional hub for arbitration. As the 2010 survey recognised, Singapore is a new entry from the 2006 survey as the most popular Asian seat.

C. Choice of Arbitral Institution

When choosing an arbitral institution, the survey showed that corporations look for neutrality, “internationalism” and a strong reputation. This was important as an institution with broad acceptance increased the likelihood that the counterparty would accept the institution.

This has important practical repercussions – as one survey respondent noted, such institutions would be readily accepted without having to trade-off some other element of the contract negotiation.

The emergence of Singapore as the choice of seat in Asia is also reflected in corporate perceptions of arbitral institutions. In the 2010 survey, the majority of votes for preferred arbitral institutions went to ICC (50%), LCIA (14%) and AAA/ICDR (8%) and SIAC (5%).

D. Singapore Efforts

The survey results are evidence of Singapore’s successful and well documented efforts at positioning itself as an international arbitration centre:

• Singapore offers an attractive “neutral” seat in Asia for impartial resolution of disputes

• As a signatory to the New York Convention, Singapore arbitration awards are enforceable in over 140 countries

• Singapore’s International Arbitration Act (which adopts the UNCITRAL Model Law regime,) was revised as recently as 1 January 2010 to remain current with developments in international arbitration;

• Singapore’s Courts have designated arbitration judges and are supportive of arbitration;

• Singapore’s laws allow foreign lawyers to conduct arbitration in Singapore (including those governed by Singapore Law)

• As reflected in the 2010 International Arbitration Survey, the SIAC is a leading regional arbitral institution. In 2009, the SIAC saw the highest increase in arbitration case-load (60%) among the major arbitral institutions in the world;

• Maxwell Chambers (launched in January 2010) offers parties state-of-the-art dispute resolution complex, with dedicated arbitration hearing rooms and related support facilities. It currently houses the SIAC and leading institutions such as the American Arbitration Association, the Permanent Court of Arbitration, the ICC, the Arbitration and Mediation Centre of the World Intellectual Property Organization and the International Centre for the Settlement of Investment Disputes

Mohan R Pillay
Partner & Joint Head of Office
Pinsent Masons MPillay LLP
Chartered Arbitrator
Adj. Assoc. Prof., Faculty of Law, Nat. Univ. of Singapore
Visiting Professor, Centre of Construction Law, King’s College London
16 Collyer Quay #22-02
Singapore 049318
E: mohan.pillay@pinsentmasons.com

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Auction date has been defined

The meeting held between Dilma Roussef, the Brazilian President-elect and members of the State Office and the Government transport sector sealed the date for the auction for the bullet train that will connect Campinas-São Paulo-Rio de Janeiro. According to Dilma’s decision, it will take place on November 29, 2010.

Requests had been made by businessmen to postpone this date, and in view of this, the meeting was held yesterday been the President-elect and the members of the government responsible for the auction.

According to allegations of interested parties, the administration had delayed in disclosing the rules due to the electoral process, which allegedly had impaired companies from taking this decision and from concluding feasibility studies on the project.

Notwithstanding these complaints, the decision was made to maintain the date set on the invitation to bid. Bids will be delivered by the November 29 and the winner will be disclosed 18 days afterwards.

The works, which are now estimated to cost US$ 20 billion awakened the interest of South Korea, China, Japan, Germany, France and Spain.

Funding

The Government published a provisional measure to guarantee funding of up to US$ 12 billion for Banco Nacional de Desenvolvimento Econômico e Social – BNDES financing for the project.

Provisional Measure 511 included a clause that permits the Federal Government cover up to US$ 3 billion should income for the project fall below what has been forecast for the first 10 years of operation.  This measure seeks to guarantee the interests of foreign investors in the project.

BNDES has held discussions with Japanese, Korean, Chinese, Spanish, German and French investors. The cap for the tariff has been set at US$ 115 for the segment between Rio and São Paulo.  The trip will take one hour and thirty minutes (1:30) and the extension of the bullet train is 511 km.

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There are some significant differences between Incoterms 2000 and the new Incoterms 2010. Some of the changes will need to be incorporated into new sale of goods contracts entered into before 1 January 2011; other changes simply need to be understood and considered when preparing contracts effective on or after 1 January 2011.

 What needs to be done before 1 January 2010?

Timing is all important. After 1 January 2011, any reference to Incoterms in a contract signed on or after that date will be understood to be a reference to Incoterms 2010, unless the parties expressly agree otherwise.

Both international and domestic users, therefore, should consider what amendments need to be made between now and 1 January to bring new contracts in line with Incoterms 2010. This will involve a thorough audit of standard suites of contracts that refer to Incoterms to ensure that those standard contracts are consistent with Incoterms 2010.

 What will change?

1. Incoterms DAF, DES, DDU and DEQ replaced 

Because of increased point-to-point sales and containerisation, Incoterms 2010 replaces four existing Incoterms with two new Incoterms:

2. Institute cargo clauses updated and insurance obligations clarified 

In 2009, insurance markets adopted the revised Institute Cargo Clauses (LMA/IUA) (2009). Incoterms Cost Insurance and Freight (CIF) and Carriage and Insurance Paid (CIP) have been amended to reflect this. The amendments also clarify information obligations regarding insurance.

3. New security obligations

The seller and the buyer will be compelled to co-operate as they have not done previously. This is because Incoterms 2010 will allocate the obligations to supply the necessary information in order to obtain export and import clearance (eg, chain of custody information).

4. Obligations around terminal handling charges clarified 

Incoterms 2010 seeks to reduce the potential for buyers to be charged twice for terminal handling charges. Pass through of the cost of carriage of goods to an agreed destination, which often resulted in buyers being charged twice, should disappear as a result of amendments to CIP, CPT, CFR, CIF, DAT, DAP and CCP Incoterms.

5. Requirements and obligations associated with string sales recognised 

Incoterms 2010 recognises and clarifies the practice of string sales (ie, multiple sales of goods during transit).

Specifically, FCA, CPT, CIP, FAS, FOB, CFR and CIF Incoterms have been amended to provide that the seller in the middle of a string sale has an obligation to “procure goods shipped” and not to “ship” the goods.

The seller’s obligation to contract for the carriage of goods has been amended to allow the seller to procure a contract of carriage.

Key amendments in Incoterms 2010

Three key areas of amendments do not require any specific action but should be understood and considered when preparing contracts to be given effect on or after 1 January 2011. These are:

1. Using Incoterms for domestic sale of goods contracts 

Incoterms 2010 have been adapted for use in domestic contracts. This will make it easier to incorporate Incoterms in contracts relating to the movement of goods domestically – for example, within a trading bloc such as the EU where the export and import formalities have largely disappeared, and in the US where there has been an increasing preference to use Incoterms rather than the Uniform Commercial Code in domestic sales.

2. Revised term categories

Incoterms 2010 separates its eleven terms into two broad categories:

Previously, confusion occurred when some people misused FOB to indicate any point of delivery. This new categorisation clearly states that the FOB rule is meant to be used solely for sea and inland waterway transport.

3. Maintenance of electronic records 

This amendment imposes the same obligation to keep contractual documentation and records regardless of their form. Interestingly, ‘electronic communication’ is used broadly to encapsulate future technological developments.

What you need to remember

Trading companies that refer to Incoterms in their contracts need to be aware of the effect of the differences between Incoterms 2000 and Incoterms 2010.

Confusion (and potential disputes) may arise where trading companies have not conducted a thorough audit of their existing contracts (or proposed new contracts) that will apply after 1 January 2011 to ensure they understand the effect of the amendments and consequently the terms they have (or will in the future) agreed.

If trading companies have not familiarised themselves with the changes between Incoterms 2000 and Incoterms 2010 before 1 January 2011, users may still choose to be bound by the previous version – provided the parties’ agreement to use those terms is clear.

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A subcontract defines, among other things:

• what a subcontractor is required to do,
• the time within which the subcontractor is required to do it,
• the consequences for the subcontractor if it fails to meet the time obligations,
• the assistance the subcontractor is required to provide to the main contractor to assist the main contractor in administering the main contract,
• the interfacing that is to go on between subcontractors, and
• the events entitling additional time and cost.

The subcontract constitutes both the rule book and the map for the subcontractor; defining what is required and the consequences of failing as well as broadly illuminating the manner in which the subcontractor may go about the task. The rules and the path of each project are different, and the requirements for each subcontractor on each project are also likely to be different. If the subcontractor is not provided with a clear and concise rule book and map, but rather a broad and generic indication of what is basically required, the subcontractor is unlikely to precisely perform as the main contractor would like.

Here are two common but dangerous habits in respect of subcontract drafting:

The ‘pro forma’ subcontract

It is quite common for major contractors to hold one or a number of ‘pro forma’ subcontracts, which are then routinely released to all subcontractors on all projects. There is an upfront time and cost saving benefit to this approach, as one subcontract can be drafted in a manner that seeks to allocate all transferrable risk onto the subcontractor, and the document can then be used repeatedly.

The major, and quite obvious, risks that arise from this strategy are that a pro forma subcontract will rarely, if ever, accurately address the relevant risks in the specific project, will rarely identify the subcontractor’s obligations with sufficiently clarity as to aid the subcontractor’s compliance and delivery, and will not take account of any specific or unusual main contract provisions. Indeed, the time and cost saving of pro forma subcontracts can very quickly be eroded by additional contract administration work and subcontractor supervision that can result form the use of a pro forma subcontract that is inappropriate for a specific project and does not effectively serve its function.

Rather, it may be appropriate to hold ‘draft precedent’ subcontracts, which may have been derived from previous projects and which contain the major necessary clauses and a typically suitable risk allocation. Such a document may represent a skeleton structure, around which the project-specific subcontracts can then be created. This will ensure that the end product is a bespoke subcontract suitable for the project, however the time and cost will be minimised by using a pre-existing base document. This is, of course, substantially different to rolling out the same pro-forma agreement to each subcontractor on each project.

The ‘back to back’ subcontract

Another common but potentially disastrous approach to subcontract drafting is to stipulate that the subcontract is ‘back to back’ with the main contract and the subcontractor is required to comply with all relevant obligations of the main contract. Commonly, this brief form of subcontract will include a copy of the main contract as an appendix.

This is fraught with problems and is, in many ways, a completely unreasonable way to contract with subcontractors. Under this strategy, the main contractor is effectively saying that the subcontractor is required to identify all the obligations that may be relevant under the main contract to the performance of its works, and to then comply with the obligations it has identified. There is a significant risk of the subcontractor failing to identify all of its obligations and consequentially failing to meet these obligations. There is also a risk of disputes regarding the interpretation of the main contract with respect to the subcontract works. In circumstances where the main contract is administered by an engineer, there may be issues with the administration of the subcontract, particularly regarding whether the main contractor has the authority to act as the ‘engineer’ when administering the subcontract.

As with ‘pro-forma’ subcontracts, briefly drafted ‘back to back’ subcontracts risk exposing a main contractor to significantly greater administration hassles and pose a threat to the efficient delivery of the subcontract works. In the event of formal dispute in respect of an insufficiently drafted ‘back to back’ subcontract, there is a high likelihood of greater legal fees being incurred and a longer and more complex process for resolving the dispute that would be the case if a clear and accurately drafted bespoke subcontract had been used.

Subcontractors frequently hold the key to successful project delivery. It is therefore critical that main contractors draft appropriate subcontracts, administer subcontracts successfully and manage subcontractor relationships. The time and cost invested in bespoke subcontracts at the commencement of a project can return big dividends in terms of efficiency and smooth project delivery and can often provide some protection to the main contractor in the event that problems arise on the project.

By Sachin Kerur and William Marshall

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We are, of course, speaking of subcontractors. Whether through management contracting or more traditional procurement, subcontractors continue to play a major role in project delivery and are often instrumental in on time and on budget completion. One would naturally then assume that the documentation and management of subcontracts would be a matter of prime importance for contractors and for the industry. In practice, however, the drafting and administration of subcontracts is often given insufficient thought and the management of subcontractors is often poor.
While every project and contract is different, we think there are four strategies that can assist in managing subcontractors and maximising successful project delivery.

1. Bespoke subcontracts – ‘back to back’ is not enough

It is perplexing that contractors will often spend significant amounts of time negotiating and understanding the issues within the main contract, and then seek to engage its subcontractors with an inadequate and imprecise reference to ‘back to back’ obligations. ‘Back to back’ has no precise legal meaning, and seeking to impose a wholesale risk transfer of all obligations in the main contract to each of the subcontractors does little to assist the subcontractor in delivering its works in the manner that is actually required by the main contractor.

The allocation of risk in the main contract is, of course, critically important to the main contractor, as is a detailed understanding of the risks and obligations contained therein. It is equally important, however, that the main contractor allocates appropriate and clear risks to each of its subcontractors in a manner that will ensure the subcontractor understands its express obligations and will be bound to deliver in a manner and at a time that will enable the main contractor to comply with its obligations. The only sure-fire way to achieve this is to draft bespoke subcontracts for each project and, in many cases, for each specific subcontracted scope of works. The issue of subcontract drafting will be addressed in detail in part 2 of this blog series.

2. Subcontractor cash flow fear

All but the largest of subcontractors are susceptible to cash flow risks and are painfully aware of their position in the payment hierarchy. In jurisdictions where ‘pay when paid’ clauses are legal and enforceable (such as the UAE), main contractors frequently utilise such clauses to protect their own cash flow position, to the detriment of the subcontractors. The protection of cash flow is a legitimate and necessary imperative for a main contractor, but it is equally important to discuss issues with subcontractors and to explain the reasons for delayed payment and the likely solutions to the subcontractor’s concerns. This managerial ‘hand holding’ can go a long way to reducing subcontractor fear and subcontractor disputes, delivering an appreciable efficiency gain for main contractors in terms of management and administration time. Maintaining a dialogue with subcontractors is important to mitigating the potential fall out from slow payment.

3. Co-ordination and programming

The role of a subcontractor is often quite simple – deliver a precise scope of work within a precise time. While simple in isolation, the interaction of many subcontractors working on the same site and the issues of overall project deliver can affect the practical ability of the subcontractor to deliver its required works. Problems of access often arise and efficiency is often lost when multiple subcontractors are working in a small area on the same site. These issues increase the risk for subcontractors and can create a hostile atmosphere on site. This in turn creates risks for the main contractor due to potential disputation and a likelihood of more adversarial subcontract management from subcontractors, resulting in more claims and the need for an investment of additional administration and management time by the main contractor.

One solution is, of course, to seek to program the performance of subcontractor’s works in a manner that will minimise the concurrent performance of works in the same part of the site but this is often not an available solution. It is important to ensure there is adequate coordination and communication between subcontractors, ideally at project ‘toolbox’ meetings, so that minor hurdles to project delivery can be resolved before they impact on individual subcontractor’s programmes.

4. Relationships

It may be clichéd, but strong, positive relationships with subcontractors can prove to be good insurance for the main contractor when projects turn bad. The ability of the main contractor to deliver the project often rests in the hands of his subcontractors, meaning that the assistance of subcontractors to overcome project delivery problems can reduce the likelihood of ‘up the line’ disputes for the main contractor. Main contractors should for that reason seek to strengthen relationships with subcontractors. Using the same subcontractors on subsequent projects and developing an understanding of the subcontractor’s business can assist in building such relationships.
Subcontractors frequently hold the key to successful project delivery. It is therefore critical that main contractors draft appropriate subcontracts, administer subcontracts successfully and manage subcontractor relationships. In Part 2, we will consider the use of standard form subcontracts or pro-forma subcontracts and the risks involved in this strategy.

By Sachin Kerur and William Marshall

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In May 2008, the Swiss Federal Government commenced a consultation process with a view to the full revision of the Federal Law on Public Procurement. During the process, however, it became clear that a full revision was not advisable due to delays of the WTO Government Procurement Agreement of 15 April 1994 to which the Federal Law has to conform. The Federal Government therefore decided to put the full revision on hold and to focus on certain elements of the Law that required urgent attention.

In May 2010, the Government submitted to the Parliament a proposal for an amendment of the Federal Law on Public Procurement (Message to the Parliament of 19 May 2010, 10.051, http://www.admin.ch/ch/d/ff/2010/4051.pdf). The amendment would, in respect of Federal procurement processes for certain types of projects, preclude unsuccessful bidders from seeking a stay of the entire process when challenging a decision of the adjudicatory authority. According to the Government, the current public procurement regulations do not achieve one of their stated main goals, namely the efficient use of public funds.

Pursuant to the legislation in force, challenges of a tender process by unsuccessful bidders, as a rule, do not automatically stay the process. However, courts may grant a stay of the tender process. Bidders bringing a challenge often file a request for such a stay, and these requests are often granted by the courts. This is the opposite of other areas of Swiss public and administrative law, in which challenges, as a rule, automatically have the effect of a stay, and in which the relevant agency or the courts may lift the stay if warranted by the circumstances.

The Government’s experiences in two highly publicized procurement processes in particular are at the origin of its amendment proposal. Both processes came to a grinding halt when certain decisions of the adjudicating authority were challenged:

• The dispute arising out of the procurement for the construction project of the Erstfeld tunnel, which is part of the NEAT project (the world’s longest railway tunnel; see our blog of 6 July 2010), delayed the commencement of the works for 18 months and caused an approximately 50 million Swiss Franc increase of the costs of the project.

• Also in the framework of the NEAT project, the award of the 1.7 billion Swiss Franc contract for the installation of technical railway equipment in the Saint-Gotthard base tunnel was challenged by an unsuccessful bidder. The court in charge of handling the challenge took six months to decide on the request for a stay of the works, which resulted in a de facto stay of the same length. It ultimately rejected the request, but estimates are that every month of stay entailed additional project costs of approximately 10 million francs. Fortunately, the adjudicator and the bidder subsequently reached a settlement.

The Federal Government’s proposed amendment to the Federal Law on Public Procurement would first provide for an automatic stay of a procurement process where a decision of the adjudicatory authority is challenged. Most importantly, however, the amendment provides that if important supra-regional procurement projects are urgent or if their postponement would cause disproportionate delays or damage, a challenge would not prevent the procuring entity from entering into a contract with the successful bidder.

Critics of the proposal consider that it is difficult to reconcile with Switzerland’s treaty obligations and with the fundamental right to court review of adjudicators’ procurement decisions (Peter Galli, Kein Verzicht auf aufschiebende Wirkung, Neue Zürcher Zeitung, 6 August 2010, p. 10; Marc Steiner, Der Rechtsschutz im öffentlichen Beschaffungswesen – ein Baustellenbericht kurz vor dem Durchbruch am falschen Ort, http://www.sgvw.ch/d/fokus/Seiten/100727_lexleuenberger_steiner.aspx).

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It is natural, therefore, that parties in contract negotiations would rely on technology to find changes in the document being negotiated, particularly where proposing amendments and developing clauses.

In the past, we would rely on the other side to direct us to amended clauses in a contract or to relay the substance of the proposed or incorporated amendment. In some instances, we would have to read the document from top to bottom to identify each and every change.

Today, thanks to technology, we rely on ‘track changes’ or compare software which raises the question: “What is accepted practice now that we conveniently use track changes?”

Earlier this year, the Queensland Supreme Court considered two important question in the case Thiess Pty Ltd v FLSMIDTH Minerals Pty Limited [2010] QSC 6: (i) what is a lawyer’s duty when making changes to draft deeds; and (ii) when should the Court intervene to rectify a document.

The facts of the case

Queensland Aluminium Limited (QAL) had engaged Thiess Pty Ltd (Thiess) to design and construct three high temperature processing plants, known as calciners, at QAL’s operation in Gladstone. Thiess subcontracted a large part of the design work to FLSMIDTH.

In mid-2003, the calciners, built to FLSMIDTH’s design, were found to have structural problems and by the end of 2004 Thiess had commenced proceedings against FLSMIDTH to recover its overruns and lost bonuses under the head contract with QAL.

In early 2005, QAL, Thiess and FLSMIDTH began negotiations toward a settlement. After months of negotiations, the parties entered into a settlement deed (Main Deed). As part of these negotiations, Thiess and FLSMIDTH agreed to enter into a separate Side Deed that, amongst other things, dealt with the ongoing liability of Thiess and FLSMIDTH and, in particular, reserved Thiess’ rights and FLSMIDTH’s liability in relation to the proceedings on foot.

Initially, the Main Deed between QAL, Thiess and FLSMIDTH included a limitation clause that sought to limit FLSMIDTH’s liability to the limit of the indemnity under the Project Specific PI Policy in accordance with the Consultancy Agreement. The parties believed that this included the primary policy of insurance provided by QBE and the excess policy provided by Liberty.

FLSMIDTH’s solicitors moved the limitation clause from the Main Deed to the Side Deed and at the same time amended it in a material way.

When the amendment appeared in the next version of the Side Deed, the whole of the clause was marked up on the basis that it was a new clause in the Side Deed. The covering email sent by FLSMIDTH’s solicitors identified some of the changes to the document but not the material changes to the limitation clause.

Negotiations between FLSMIDTH and Thiess continued for another five weeks before the documents were finally executed.

After the execution of the deeds, Thiess claimed that the changes to the version of the limitation clause in the Main Deed were intentionally not identified and did not reflect their understanding of the commercial deal.

Thiess consequently commenced proceedings against FLSMIDTH seeking rectification of the Side Deed on the basis of common or alternatively unilateral mistake. Thiess also made submissions that FLSMIDTH’s solicitor’s failure to identify the changes to the Side Deed was intentionally deceptive and misleading.

What the court decided

The judge (His Honour McMurdo J) conducted a detailed examination of:

• all the dealings between the parties and, in particular, of their lawyers, the drafts and correspondence accompanying the amendments; and

• the evidence called by both sides regarding proper practice of solicitors in the process of drafting and redrafting of such documents.

According to the expert called by Thiess, a careful and competent solicitor of good repute would direct their opponent’s attention specifically to such a change within their previous draft of the clause.

On the view of the expert called by FLSMIDTH, that was not required, because a competent solicitor in receipt of such an email would not rely simply on the covering email. They would read its attachment, in this case the draft Side Deed, and it would be sufficient for them to mark the whole of the proposed clause 8, as FLSMIDTH’s solicitors did.

The judge held that the new limitation clause contained a markedly different commercial element to the overall settlement. In those circumstances, Thiess’ solicitor “could have expected” that the amending solicitor would have drawn attention to such a material change.

In addition, the judge found that the drafting of the new clause would have a result that was quite different from that which the parties and their solicitors had been discussing. While the judge excused the amendment to some extent, noting that it appeared that FLSMIDTH’s solicitors were not aware of the effect of the change made, the court acknowledged that it was the continued common intention of the parties that the deeds would not affect the proceedings that were on foot. The court ordered that the Side Deed reflect the initial intent of the parties.

Things to consider

It would seem that the judge in this case excused the masked amendment as misunderstanding of the legal effect. However, had the judge held the parties strictly to the words they had agreed to, the amount Thiess may have been able to recover under the first proceedings would have been significantly reduced.

So, even though ‘track changes’ is convenient, you should always check what you receive from the other side because it will not be an easy process to have an error rectified.

Moreover, lawyers should draw attention to any material change they make. Otherwise, they may fall foul of ethical standards if, unlike in the Thiess case, a judge forms the view they were well aware of the impact of a change and communicated the change in a way that it might go unnoticed by the other side.

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The construction industry, like the food and beverage business, shows considerable partiality to foreign workers. The most common reason – lower labour costs. Thus, the construction industry is filled with foreign workers running the gamut from India, Sri Lanka, China, Thailand, Indonesia, Philippines and even Myanmar.

Things however look set to change with the 2010 budget announcement including a call to increase local productivity as foreign workers now comprise almost a third of the total workforce. This has led to government moves to reduce dependence on foreign workers by hikes in the foreign worker levy and reducing the “man-year” entitlement which directly restricts the number of foreign workers on a site.

This is clearly designed to encourage businesses to restructure and upgrade their operations through innovation and training of their local workers.

Productivity is expected to rise, but so are construction costs, possibly by as much as 6 per cent when these restrictions to foreign labour kick in next year.

Comparing the Singapore increase with construction costs in key Asian cities, prices are generally expected to rise with economic recovery and the increase in building needs. The Singapore Building and Construction Authority statistics for 2nd quarter 2010 showed standard high rise office building costs of US$1,910/m2 in Hong Kong, US$760/m2 in Beijing, US$832/m2 in Shanghai, US$1,835/m2 in Singapore.

In perspective, Beijing and Shanghai are some of the cheapest cities to build but prices for these cities could rise 3 per cent this year and Hong Kong could register the biggest percentage increase in costs.

Rising levels of construction (and construction costs) are likely to herald more rather than less disputes.

A recent conference organised by the Singapore International Arbitration Centre discussed the development of business in India and the availability of arbitration. The booming Indian economy, set to hit 8 per cent growth this year, has created tremendous business opportunities for investors. As Singapore’s law minister Mr K. Shanmugam who spoke at the conference noted, the best-laid investment plans can turn awry and more are increasingly looking at arbitration in lieu of court proceedings to settle disputes.

Singapore is already the top Indian destination for investments abroad by Indian companies between 2008 and 2009 and more than 4,000 Indian firms operate here today. Singapore’s attractiveness as an arbitration hub for Indian companies is also reflected in SIAC’s announcement that it handled arbitration cases from India involving $173 million for 2010 to date, up from disputes involving $156 million for the whole of 2009.

Investors in the major countries in the region seek a neutral venue for arbitration and Singapore presents a easily accessible, neutral and effective arbitration venue.

Having world class facilities helps as well as Singapore then becomes the ideal venue for firms that might need help if their investments hit trouble. As Sir Vivian Ramsey QC observed on Friday last week at the SIAC-SCL Conference on “Construction Disputes Asia” in Singapore, arbitration in Singapore has the support of the government as seen with the building of a “state-of-the-art” arbitration centre at Maxwell Chambers.

At the same time, India has recognised the need to institutionalise its arbitral process and is now seeking to revamp the Indian Arbitration and Conciliation Act. Generally, the proposed changes reflect a shift towards institutional arbitration in lieu of the prevalent practice of ad hoc arbitration in India.

These amendments also underline a determined effort to reduce the role of Courts by severely limiting the scope of the public policy exception.

One unusual and interesting proposal is the introduction of a deemed arbitration clause for commercial contracts worth 50 million rupees (about £7 million at today’s rates) or more unless the parties agree otherwise. In such cases where parties fail to refer the dispute to an approved arbitral institution, the Indian High Court is then empowered to authorize the appointment of an approved arbitral tribunal within 30 days of a reference made by a party.

The proposals are very much at an early stage in the form of a Consultation Paper. It will be interesting to see what progress it makes in the coming months.

Mohan R Pillay
Partner & Joint Head of Office
Pinsent Masons MPillay LLP
Chartered Arbitrator
Adj. Assoc. Prof., Faculty of Law, Nat. Univ. of Singapore
Visiting Professor, Centre of Construction Law, King’s College London
16 Collyer Quay #22-02
Singapore 049318
E: mohan.pillay@pinsentmasons.com

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1. Clause 13.5 Provisional sum: this Clause contains two sub-clauses 13.5(a) and 13.5(b). We (Consultant) think that 13.5(a) applies to works which are undertaken by the main Contractor and that 13.5(b) applies to works which are undertaken by third party sub-contractors or suppliers.

The Contractor disputes our interpretation and says that 13.5(a) applies to work (any kind of works executed by anybody (main contractor or sub contractor)) and 13.5(b) applies to supplies (supply by suppliers (plant, material, services)).

2. Clause 13.3.4 states that “reasonable profit” shall be paid to the Contractor. We are unsure how to determine “reasonable profit”?

• What does “reasonable profit” mean?

• How is it determined and what does it include (overheads, profit etc)?

• If it means pure profit only, how does the Contractor recover his overheads?

• The Appendix to the form of Tender includes 12.5% for OHP for Provisional Sums. Is this applicable to both Clauses (13.5(a) and 13.5(b)) or to (b)? If (b) only, do we establish a new % or use the tendered OHP?

Could you please give us your interpretation of the above?

Suggested Answer:

Clauses 13.5.1(a) and (b): Your first query is about the meaning of Clauses 13.5.1(a) and (b) and what is covered by the Provisional Sum. I tend to favour your view. I think the correct interpretation is that (a) covers direct costs – i.e. work being provided directly by the Contractor and (b) refers to subcontractor or supplier costs i.e. for plant materials or services that the Contractor has to procure (“purchase”) from third parties. Essentially, 13.5.1(a) covers works (with a small “w”, including any Plant, Materials or supplies involved in those works) to be executed by the Contractor. 13.5.1(b) covers anything required for the Works (“Plant, Materials or services“) that is to be “purchased by” the Contractor.

Reasonable profit: Your second query is about the reference to “reasonable profit” in Clause 13.3.4. You will notice that this term used in the Yellow Book (or indeed in any of the FIDIC contracts) is not a defined term and is therefore to be given its natural, ordinary meaning. However, what I think is clear is that it relates to pure profit (and not overhead and profit or “OHP” as it is often termed). This is because “overhead” is separately expressly accounted for within the definition of “Cost” in the Yellow Book (and FIDIC contracts generally) (“Cost” means all expenditure reasonably incurred……..whether on or off the Site, including overhead and similar charges but does not include profit”). Equally, clauses that entitle the Contractor to profit separately use the words “Cost plus reasonable profit”.

What is “reasonable” will depend upon the particular context and circumstances of your contract. A starting-point for setting a reasonable profit might be to look at what rates of profit are charged in comparable contracts in your market. You may need to take into account factors such as availability of materials, supplies and manpower, and the level of any skill and risk involved in the works which are being costed. Sums which are wildly above or below the market norm might not be regarded as “reasonable”.

The Yellow Book standard form contract does not fix what a rate of reasonable profit is, but the FIDIC Contracts Guide provides guidance. The Guide suggests that if parties wish to specify in their contract the rate of what is a reasonable profit they could add an amendment stating that where the expression “Cost plus reasonable profit” is used, “reasonable profit” is a set percentage of that Cost. The Guide suggests this percentage as 5% of the Cost, which gives you an idea of the sort of rate of profit that FIDIC considers may be deemed reasonable. However, I still think that the reasonableness will depend on the particular market, type of contract, risks involved etc with which you are dealing. To avoid these kinds of arguments and uncertainty, I always advise both contractors and clients alike to agree the profit percentage up front before entering into FIDIC contracts.

Bear in mind that any abnormally high rate of profit claimed by the Contractor in its proposal for an adjustment to the Contract Price (discussed below) is likely to be questioned by the Engineer when he/she considers that proposal.

As the term “reasonable profit” only covers “pure” profit and not the Contractor’s overheads and other costs, the Contractor claims for its overheads and other costs by including them in its proposal for the adjustment to the Contract Price which he submits to the Engineer in accordance with Clause 13.3.1.

Your final question is about the sum for overhead charges and profit referred to in Clause 13.5.1(b)(ii) and how it applies to 13.5.1(a) and (b). You will remember from the answer to the first question above that (a) is work executed or supplied direct by the Contractor and (b) is Plants, Materials or services purchased by the Contractor. The price for these two items is calculated differently and is summarised below; the 12.5% applies to (b).

The price for (b) is calculated by adding together the actual amounts paid or payable by the Contractor for the Plants, Materials or services plus a sum for overhead charges and profit. The amount of overhead charges and profit is calculated as a “relevant percentage” of the actual amounts paid or payable by the Contractor. The relevant percentage is stated in the appropriate schedule; if there is no rate specified, the percentage to be applied is the rate stated in the Appendix to Tender which in your contract is 12.5%.

The price for (a) is calculated in accordance with Sub-Clause 13.3. Under the procedure in Sub- Clause 13.3 the Contractor submits a proposal for the adjustment to the Contract Price to cover the relevant work to be performed. The adjustment includes a reasonable profit (discussed above). The Engineer responds with approval, disapproval or comments. If the Engineer proceeds to authorise the relevant works he will agree the cost proposal made by the Contractor or, if he does not agree with the Contractor’s price proposal, determine the adjustment to the Contract Price in accordance with Sub-Clause 3.5. This clause requires the Engineer to consult with each party to the Contract in an endeavour to reach agreement. If agreement is not achieved, the Engineer makes a “fair determination” in accordance with the Contract, “taking due regard of all relevant circumstances”. Any disputes are settled in accordance with Clause 20 (Claims, Disputes and Arbitration).

Therefore, the short answer to your final question is that the 12.5% applies to (b) but in relation to (a) it is the Contractor who makes a proposal about the amount (which could be 12.5%, or a greater or lesser rate).

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The answer may be as simple as alternative dispute resolution. Sensible commercial parties have always engaged in ADR and more and more jurisdictions around the world are promoting a culture where you can’t expect your day in court until you have tried to sort out your dispute yourself.

But can ADR really be forced on to potential litigants?

Although ADR has been promoted in different ways in different countries, the aim has always been the same – to reduce legal costs, increase efficiency, bring about a cultural change and free up limited court resources.

Each jurisdiction’s policies and procedures have had a common theme – to try to force parties to resolve their own disputes, including by:

• filing statements that outline what steps the parties have taken to resolve the dispute;
• limiting the circumstances in which a party can reject an invitation to mediate;
• requiring parties to disclose critical documents early; and
• ordering parties to participate in non-binding ADR.

Places like Hong Kong, the United Kingdom and, indeed, various Australian state courts have followed a ‘practice directions’ approach. Australia’s Federal Government, on the other hand, has decided to adopt a legislative option.

In response to key recommendations made by the National Alternative Dispute Resolution Advisory Council in its 2009 report The Resolve to Resolve , Australia’s Federal Government introduced the Civil Dispute Resolution Bill into the Parliament on 16 June 2010.

The Bill proposes that any applicant commencing proceedings in the Federal Court or Federal Magistrates Court in relation to a civil dispute (with some exceptions) and any respondents to those proceedings must file a ‘Genuine Steps Statement’.

The applicant’s Statement must include the steps taken to try to resolve the dispute, or why no steps have been taken. The respondent’s Statement must either agree with what applicant has stated, or disagree and provide reasons.

While the Bill does not explicitly define what constitutes a ‘genuine step’, it does set out a number of examples, including notifying the other party of the dispute, offering to discuss the dispute, providing information and documents, considering ADR and attending ADR.

Lawyers who do not advise their client of the requirement to file a Statement may have a costs order awarded against them.

Mandated ADR has been around for a long time, but it still hasn’t been universally adopted. There is always the argument that there will be no genuine change, no cultural shift, and that the parties will simply ‘go through the motions’ because the law says that they must. There is also the risk that costs will be ‘front-loaded’ rather than result in a genuine cost savings.

Australia’s Civil Dispute Resolution Bill has not been enacted yet, and given the current ‘hung’ Parliament we are facing, it may be some time before we know if legislation can be used effectively to address perceived inefficiencies in the civil justice system.

But then again, perhaps we will know sooner than we think, because the Australian state of Victoria is set to go down the legislated path. Its Civil Procedure Bill 2010 (Vic) is more prescriptive than Federal Government’s proposed Civil Dispute Resolution Bill and its pre-litigation requirements include, as a bare minimum, exchanging critical documents early and considering options for ADR.

The Victorian Bill also introduces a new ‘overarching purpose’ for Victorian Courts – to ‘facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute’. Furthermore, new standards of conduct, called ‘overarching obligations’, aim to further the administration of justice in relation to civil proceedings.

In the end, so-called ‘pre-action protocols’ are just another step along the continuum of forcing parties to resolve disputes themselves. The real question is: can legislation and practice directions change the cultural behaviour of litigation, or are we barking up the wrong tree?

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The revisions serve three basic purposes. First, they fill in a few holes that have become apparent over the years. Second, some provisions are added to expedite the arbitration process—like adding a requirement that the tribunal establish a “provisional timetable for the arbitration.” Finally, they update the original rules to account for changes in technology. This recap is from front to back, not in order of significance. Some of the most significant changes are noted at the end, so read on!

Notices and Other Communications

The 1976 Rules (Article 2) required notices to be physically delivered, while the 2010 Rules provide that notices and other communications “may be transmitted by any means of communication that provides or allows for a record of its transmission.” E-mails and facsimiles are subject to two special rules. First, the communication is deemed received only if sent to a person specifically designated for receiving such communications. Second, they are deemed received on the day sent, except for a notice of demand for arbitration, which is deemed received on the day it reaches the recipient’s electronic address. Accordingly, you may wish to add a line to your UNCITRAL arbitration clause to designate an individual for receipt of a notice of arbitration, in addition to designating the place and language of the arbitration.

While Article 3 setting out the requirements for a notice of arbitration did not change, a new provision was added clarifying that the constitution of the arbitral tribunal will not be hindered by any controversy about the sufficiency of the notice, and giving the tribunal jurisdiction over such controversies.

Response to the Notice of Arbitration

A response to the notice of arbitration was not previously required, and Article 19 simply required the respondent to provide a statement of defense by a date determined by the tribunal. Article 4 of the 2010 Rules now requires the respondent to respond within 30 days of receipt of the notice of arbitration, with the response to include the name and contact details of each respondent, and any response to the items in the notice regarding the arbitration agreement, the relevant contract, the claimant’s description of its claim and requested remedy, and proposal with respect to the number of arbitrators.

The response may also include any objections to jurisdiction, a brief description of any counterclaims, and a notice of arbitration with respect to other parties to the agreement (beyond claimant). As the language is permissive instead of mandatory, it appears that counterclaims or crossclaims are permitted but not compulsory.

The Appointing Authority

The 1976 Rules contemplate the parties designating an Appointing Authority to assist with the appointment of arbitrators and any challenges to arbitral appointments. The procedures for determining an Appointing Authority are consolidated in Article 6 of the 2010 Rules with a few modifications. The new rules reduce the amount of time one must wait before making a request that the Secretary-General of the Permanent Court of Arbitration at the Hague resolve disputes regarding the Appointing Authority — from 60 days to 30 days. Additionally, asking the PCA to act as the Appointing Authority is now expressly permitted.

The Number of Arbitrators

The 2010 Rules retain the default position of having three arbitrators if the parties fail to agree on use of a sole arbitrator. However, Article 7.2 now provides more flexibility by allowing the Appointing Authority to appoint a sole arbitrator if one of the parties asks for this, or either party fails to appoint a second arbitrator and using just one is “more appropriate” under the circumstances of the case.

Arbitrator Challenges

The 2010 Rules add two innovations. First, a new annex provides a model statement of independence to be provided by proposed arbitrators. Second, a schedule is added for resolving any challenges (the original rules had a deadline for raising a challenge but no timetable for resolution). Per the new Rules, if the appointing party does not agree to the challenge, or the challenged arbitrator does not withdraw, in either case within 15 days, then the challenging party has 30 days from the date of the challenge to pursue it with the Appointing Authority, and otherwise it is waived.

Arbitrator Liability

Article 16 of the new Rules adds a waiver of liability for the arbitrators “save for intentional wrongdoing.” This waiver also applies to the Appointing Authority and to experts appointed by the panel.

Joinder

Article 17.5 now permits the tribunal to allow other parties to the arbitration agreement to be joined, unless the third party would be prejudiced by joinder. This is a significant advance over the prior rules that were silent on the subject.

Arbitral Fees

The 2010 Rules attempt to address the problem of excessive fees by requiring that the fees be reasonable, requiring the arbitrators to explain how they have fixed the fees and costs, and allowing the parties to appeal the fees and costs to the Appointing Authority. Previously, the tribunal members set their own fees, and there was no real provision for oversight, since UNCITRAL arbitration is non-administered. This addresses one of the most common criticisms of non-administered arbitrations generally.

Andrew Ness
William DeVan

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In this regard, the recent adoption on July 27, 2010 of Federal Laws 193-FZ and 194-FZ improving the legal regime of Mediation (the Mediation Laws) can be seen as a bold and satisfying legislative move to complete the legal framework of ADR in Russia and stimulate the use of these methods (the arbitration legal regime has indeed been settled for long already by Federal Laws of July 7, 1993 and July 24, 2002). These Mediation Laws will come into force on January 1, 2011.

Initiated several years ago by the Chamber of Commerce and Industry of the Russian Federation (CCIRF – http://www.tpprf-arb.ru/en/2010-01-13-20-37-26en/centerabouten) on the basis of the United Nations Commission on International Trade Law (UNCITRAL) 2002 model, the original mediation bill has been revamped earlier this year under the authority of the Russian President Dmitri Medvedev himself, bringing further enhancements (http://wolterskluwerblogs.com/blog/2010/03/19/russian-president%E2%80%99s-bill-draft-law-on-mediation-%E2%80%93-is-a-new-epoch-of-adr-beginning-in-russia/comment-page-1/).

The most critical improvements of the Mediation Laws to the existing state of legislation are the following:

– anything said by a party during the mediation process cannot be used in litigation or arbitration at a later stage. This fundamental principle of mediation is now clearly provided for by the Mediation Laws;

– a framework for mediation proceedings is defined, with inter alia a tight maximum timeframe of 60 days for such proceedings (with certain exceptions);

– in order to insure their independence, neutrality and competence, the Mediation Laws provide for specific qualification requirements for mediators (whilst that kind of formal requirements does not exist yet in jurisdictions such as France). There are no provisions for licensing of mediators but they will have to get affiliated to self-regulated organizations (SROs) to be created.

In addition, the Mediation Laws consolidate the current state of legislation on a number of issues. Mediation can thus be initiated before or after a dispute has been submitted to a court or arbitral tribunal. Further, the settlement agreement reached as a result of the mediation can be confirmed by a court or arbitral tribunal, allowing compulsory execution orders. Failing such confirmation, the settlement agreement is considered as a simple civil contract.

Interestingly, ADR methods were imported to Russia earlier in the construction sector than in most other industries. Indeed, the growing involvement of international lenders in large construction projects has triggered the increasing use of international models of contracts such as FIDIC. Such models being structured to avoid disputes to a maximum largely rely on a panel of ADR methods encompassing mediation, dispute boards and arbitration. While dispute boards have rarely been set up in practice to date, independent experts have occasionally been called as mediators on specific construction projects, fulfilling to a certain extent the role of the Engineer under the FIDIC Books prior to 1995.

Although a clear legal framework is now set for mediation in Russia, there is still a strong need for additional factors and catalysers to make mediation become a common practice in Russian business culture, such as:

– a strong network of qualified mediators to allow successful mediation to take place. It is worth noting that many experienced professionals are already present in the Russian construction sector;

– a lobbying from institutions such as the CCIRF to promote mediation in Russia through a proven track record of successful precedents and statistics demonstrating that mediation brings tremendous added value to dispute resolution, such as rapidity, cost effectiveness, and last but not least a chance to pursue business relations – an attractive point for contractors when employers constitute a scarce commodity as in the current context.

It will be therefore interesting to follow the development of mediation in Russia in the next few years. And as the saying goes, an ideal situation in the field of dispute resolution will be achieved only when litigation itself will be considered as an alternative to mediation. Not necessarily a happy perspective for litigation lawyers – but this is still far from sight in Russia!

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IT supplier EDS is to pay a total of GB£318 million to settle a dispute over a contract which it entered into 10 years ago with the broadcaster BSkyB . This payment marks the end of one of the IT industry’s longest-running and most expensive court cases. The original contract was worth £48 million and contained a limitation of liability cap set at £30 million. As some Governments wield the axe on public-spending budgets, creating even greater pressures on the Construction sector to win mandates to build a reducing number of projects, the case serves as a very painful reminder that the law of misrepresentation is alive and that senior management need to have processes in place in order that they can take immediate action if there is any suggestion of fraudulent practices during the sales process.

The case is reported as BSkyB Limited (“BSkyB”) (and others) v HP Enterprise Services UK Limited (formerly Electronic Data Systems Limited) (“EDS”) and others [2010] EWHC 86 (TCC).

BSkyB hired EDS to build it a £48 million customer relationship management (CRM) system in 2000. The project ran into difficulties at an early stage and re-planning amendments were made to the Prime Contract in July 2001. The first major stage of the project was completed late and further serious performance issues led to relations between the parties breaking down. Relations between the companies broke down in 2002 and BSkyB assumed responsibility for implementing the CRM system itself, and ultimately completed delivery in March 2006 at a cost of £265 million. BSkyB and Sky sued EDS, claiming that the company had lied about the development and timescale of the project during the sales process. BSkyB alleged that EDS had made fraudulent misrepresentations in relation to the availability of resources, time, cost, ‘proven technology’ and methodologies. It also sought damages for negligent misrepresentation and for breach of contract. In total, it originally sought more than £700 million from EDS. The contract signed by the two companies contained a £30m limitation of liability which would apply if the project faced difficulties. That cap would not apply, though, in the event that fraud was established.

In January, the High Court upheld one of BSkyB’s five fraud claims. EDS’s claim that the project would deliver “on time and budget” was fraudulent, ruled Sir Vivian Ramsey in a judgment which ran to almost 500 pages. A key witness for EDS was the Managing Director of its CRM business at the time of the contract. Sir Vivian found that he had masterminded the bid for the contract and said he displayed an “astonishing ability to lie.” One month after issuing its judgment on the facts, the High Court ordered that EDS should make an interim payment of £270m to BSkyB pending a final ruling on damages.

The judge found that only one of BSkyB’s five claims of fraudulent misrepresentation, relating to the anticipated timescale of the project, was established. Ramsay J. also found that EDS was liable for negligent misrepresentations in respect of statements made during the 2001 re-planning negotiations and that EDS was liable for certain breaches of contract for failure to exercise reasonable skill and care or conform to good industry practice by:

failing to properly resource the project;
being seriously in delay in performing the works; and
carrying out little work due to either failing to properly capture requirements, manage that process or through general lack of progress.

During the bid phase, the MD had told BSkyB that the system could go live within nine months and be completed within 18 months (in accordance with the timescale set out in the Prime Contract). Ramsay J. decided the statement was made without any basis or assessment of the actual time it would take and was made purely to ensure that EDS won the contract. As such, the MD was reckless as to the truth of the representation and, as BSkyB had relied on it in selecting EDS above its competitors, the cause of action for fraudulent misrepresentation was established:

“In my judgment his conduct went beyond carelessness or gross carelessness and was dishonest. I consider that he acted deliberately in putting forward the timescales knowing that he had no proper basis for those timescales. At the very least he was reckless, not caring whether what he said was right or wrong.”

The emphasis in the judgment is on the dishonesty of one man, since dismissed from EDS, and there were no findings of systemic or widespread internal failures or recklessness in relation to EDS’s wider sales processes. The extreme nature of the individual’s deception tainted the balance of his evidence, including evidence about the relevant representations. The judge’s approach may have differed if EDS’s employee had purely been reckless in putting forward the timescale, and had otherwise proven credible in the witness box. As it was, a key point in discrediting the EDS employee arose when BSkyB’s lead Counsel exposed the witness’ perjury in claiming that he had completed an MBA at Concordia College, St. John, when he had actually bought the qualification ‘online’ – much apparently as Counsel’s dog ‘Lulu’ was able to do… though apparently with slightly better grades!

Assurances as to the achievability of challenging technical solutions, demanding programmes and of course lump sum prices for significant work packages, are not uncommon in the Construction sector. This case serves as a timely caution to construction companies and consultants of the very serious consequences of a rogue employee securing a bid through dishonest means, and reflects an earlier finding of the Court as to the circumstances in which fraudulent misrepresentation may be established, where an architectural practice was found to have failed to inform a client of the resignation of a key individual prior to entering into written professional appointments, in Fitzroy Robinson Ltd v Mentmore Towers Ltd [2009] EWHC 1552 (TCC).

Clearly, sound corporate governance requires that companies plan and estimate their work in the bid and sales process and reduce any tolerance they may have for “cowboy” sales practices. Bid and pitch documentation should be robust and verified – and verifiable. Estimates and statements as to capabilities should be closely scrutinised. Any such statements should accord with the provisions of the contract when it comes to be signed. It is also imperative that companies preserve records of their bid calculation e.g. resource needed and timescales for delivery. EDS fell foul of the fact that much of its calculation was said to have taken place on ‘whiteboards’ – the actual working product not having been recorded in any meaningful way.

Construction contracts often encounter difficulties and of course there are risks attached to any project of scale. Robust change management procedures and certainty around timetables can help to contain such problems for both contractors/consultants and employers alike. Ultimately, companies looking to avoid being caught in the same position as EDS should also ensure that they have confidence in their procurement procedures and, of course the honesty of their employees – great care must be taken when recruiting sales staff and of course, while tightening recruitment processes to protect against rogue employees is of course important, so too is ongoing training to ensure that the BSkyB case lessons are known to sales teams – so that, unlike EDS following Lulu’s surprising contribution to their case, Construction sector players can avoid any future cases of – ahem – ‘ruff’ justice!

Vincent Connor
Pinsent Masons

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