Why disputes often emerge from energy construction projects

Large energy projects are notorious for difficult designs. Often, the energy generation solutions are innovative, the materials and technologies involved are new and the local geography is challenging.

The technology earmarked for the project also frequently moves on during the construction phase, necessitating changes to the project plan.

Dan Preston is construction partner at law firm Fieldfisher in London and Marily Paralika is international arbitration partner at Fieldfisher in Paris

The specialist equipment needed to complete projects is also particularly vulnerable to supply chain disruption, compounded by the projects' numerous interfaces, such as grid connections, water supply and waste disposal – depending on the nature of the project in question.

The potential for things to go wrong in major energy projects is therefore higher than in other areas of the construction market, and disputes tend to follow.

Contractor claim clauses

There are a number of key clauses in construction contracts that commonly lead to disputes – these so-called "contractor claim clauses" relate to variations, extensions of time and loss and expense provisions.

Almost all standard construction contracts require variations to be instructed, or confirmed, in writing, within a period specified in the contract.

Employers will generally look to shorten the standard time periods and set prescriptive requirements for how variations must be notified.

There is an understandable need to control variations in construction projects, as this prevents contractors from making wide and unlimited changes, with the employer oblivious to the cost consequences until the end.

Disputes tend to arise when project managers accept contractor claim clauses without reviewing them carefully, and then departing from the agreed process once the works have begun.

The bases for disputes in these circumstances tend to fall into one or more of three categories:

  • That parties were not aware, or did not fully understand, what they had signed up to
  • The parties are unable to comply either with the complexity of the clause covering the variation or with the sheer volume of instructions they receive from the other side
  • Sometimes in combination with the above, the agreed process for notifying variations is too rigid and time consuming to allow the project to proceed as it should

When these situations arise, the parties will often agree to disregard the contract and proceed on a mutually collaborative basis – adding a further layer of complication to any resulting dispute.

The lesson from experience is that parties who spend a significant amount of time negotiating complicated contractor claim clauses are advised to comply with them; or opt for simpler clauses, which in theory will result in fewer procedural problems if they are ignored.

Treaty protection

Contractors investing in another country may wish to take advantage of relevant investment treaty provisions when setting out their contracts.

This is an area where opportunities are often missed, as parties commonly fail to establish whether there is a bilateral investment treaty (BIT) between the host country and their home jurisdiction, or whether the project qualifies as an “investment” under the relevant BIT.

Contractors should, but often do not, explore whether they can benefit from Most Favoured Nation clauses of other international treaties.

Contradictions in terms

A frequent source of problems is contradictory provisions within technical specifications, which are not always picked up by lawyers who are not generally technical experts.

Sometimes, technical specifications in contracts cannot be 100% complied with, and even if the end result functions as required, employers may argue the contract has not been fulfilled.

Parties sometimes assume they are restricting their liability under a main contract by including a cap on liability or relying on a reasonable skill and care obligation. However, if there is a service life or fitness for purpose obligation hidden in the technical documents, these attempts to avoid liability will generally fail.

A more successful approach is to carefully review an employer's technical requirements and where these are likely to cause problems, contractors should try to negotiate a position where all parties agree on what is expected.

However, the imbalance of power between employers and contractors and commercial pressures on contractors mean that negotiating terms can be extremely difficult.

Getting what you pay for

Another common area of disputes is when the use of 'value engineering' processes are not reflected in the risk profile of contracts.

Employers may request value engineering or the use of novel materials to reduce the project budget but fail to accept the risks associated with lower-cost activities.

A related cost cutting measure is the removal of roles for external experts, such as engineers and project managers, with employers trying to bring these functions in house and consequently ending up with project problems due to a lack of expertise and/or a truly independent approach.

Sometimes, the time frames specified in standard contracts are not suitable for the projects involved, particularly in the energy sector, where designs often take longer to deliver than the contracts cater for.

Alternatives to litigation

While energy construction projects often give rise to disputes, in most cases parties will seek to avoid full-blown litigation.

Dispute Adjudication Boards (DABs) have proved a useful way to resolve claims without going to arbitration, however there is a reluctance to use this option due to a sometimes misplaced preference for direct negotiation.

Adjudications can resolve disputes relatively quickly, usually within 28 days, and their decisions are temporarily binding on parties and enforced by the courts. Generally, parties will accept adjudicators' decisions in the interest of progressing the project.

Mediation is also an option for resolving disputes that is cheaper and more efficient than some alternatives. While mediation is not widely used, it is often successful in resolving at least some of the issues in dispute.

Where arbitration is considered inevitable, having a standing arbitration panel constituted at the beginning of the project can prevent disputes from mushrooming and causing delays.

However parties decide to resolve them, disputes should be considered as a normal part of large, complicated construction projects and planned for accordingly.

  • Dan Preston is construction partner at law firm Fieldfisher in London and Marily Paralika is international arbitration partner at Fieldfisher in Paris


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