For an international construction project, there are many risks that are particular to the project location. Although the responsibility for risk management largely falls to the project manager, legal solutions – best provided at the time of project development and subsequent contract formation are essential. By mapping out all of the geographical locations for the project (including corporate locations and equipment manufacturing facilities) to get the complete scope of the legal framework, the following are some of the key location related risks which will inevitably present.
Proper Law of the Contract
Both parties to an international construction contract have a critical interest to ensure that the proper law of the contract is that which satisfies themselves and the project. Parties are generally free to choose the proper law of the contract by an express clause, however as parties tend to prefer their home country law, sometimes a third country is chosen. This has risks for both parties should they not be familiar with the laws of that country. If a choice of law is not specifically made nor implied in the contract through terms or provisions of a particular legal system, then a court would determine that the proper law of the contract will be the one that has the closest and most real connection to contract made by the parties.[1] For an international construction contract this is likely to be where the project is located. Neither party will likely be satisfied if that is a small dictator state in Africa for example.
Disputes
Whilst no-one signs a contract expecting it to end in dispute, it is best for both parties to agree on methods of dispute resolution before a dispute arises – ideally incorporated into the contract. This should include the various processes to be used such as dispute boards, mediation, adjudication and most commonly arbitration. The arbitration clause in particular should be detailed sufficiently to define the seat and language of arbitration, and the arbitral rules to be used.
Politics
For foreign companies who typically do not have a strong understanding of local politics, political risk can be high, resulting in delay or death of a project – often hinged on an election result. A recent notable case in Australia involving several international contractors was that of the East West Link toll road project in Melbourne in which the first stage A$5 billion contract was cancelled following a change of state government.[2]
Changes in domestic laws in the project location are also common during the long period of development and implementation of large construction projects. In recent times in Australia for example, political turbulence has seen significant changes in laws associated with mining project taxation, carbon emissions pricing and renewable energy targets.
To mitigate such risks, project participants should not only maintain a detailed awareness of the political/legal landscape but should attempt to have the treatment of such risks detailed in their respective project contracts. For a project sponsor, this might mean negotiating exemptions for changes in a particular law in a government concession agreement or consideration of the effects of the change in the project financing agreement. A contractor should ensure that the contract appropriately allows for a variation for time and cost associated with the change in law. The FIDIC[3] Conditions of Contract for EPC/Turnkey Projects (Silver Book) for example details in section 13.7 that changes in legislation will allow for a change in contract price and/or extension of time.[4]
National Employment
Employment or labour law significantly varies across the world. Domestic employment law often not only has particular restrictions on the ability for foreign companies to import migrant labour but there is often a socio-political dimension to ensuring a broader local employment and financial benefit. Domestic laws or the specific project approval may contain particular requirements for ensuring local employment and procurement participation. Other aspects such as professional registration requirements, union membership, working hours, and health and safety legislation all need to be considered.
The principal, contractor and the government (local people usually being voters) have a collective interest in ensuring all local labour laws are addressed in the various construction, procurement and employment contracts and that management procedures are put in place and followed. A failure to do so can mean that critical resources are unavailable for the project resulting in delays or in a worst case scenario, that work at the site is suspended due to industrial action or government order.
By Kevin Pascoe
This article is based on my exam response in the Melbourne Law Masters in Construction Law subject ‘International Construction Law’ in August 2015.
[1] Philip Loots, Donald Charrett, Practical Guide to Engineering and Construction Contracts, (CCH Australia Ltd, 2009) [5.3]. [2] http://www.theage.com.au/victoria/victorian-government-settles-east-west-link-claim-for-339m-20150414-1ml9bz [3] International Federation of Consulting Engineers (commonly known as FIDIC, acronym for its French name Fédération Internationale Des Ingénieurs-Conseils).
[4] FIDIC Conditions of Contract for EPC/Turnkey Projects, 13.7.