International Bar Association Annual Conference 2016
It was a truly a privilege to be given this rare opportunity to attend the IBA Annual Conference 2016 in Washington DC. The entire experience was simply incredible and for me personally happened at a critical juncture in my legal career.
Dinner Reception at World Bank HQ, with Daniel Koh (left), Eldan Law
The IBA 2016 as it was fondly referred to was attended by close to 6,000 lawyers from across all five continents. The learning took place both during the talks, plenary sessions and over coffee as you learnt about how different legal systems worked, the key social concerns and the political challenges in each country. It was easy to be daunted by the prospect of being on your own in the midst of 6000 but there was a certain camaraderie that sweeps as you swap “war stories” with fellow lawyers. It was truly an eye-opening experience to meet passionate legal practitioners from around the world and to be excited by the many possibilities within the legal fraternity.
The Conference kick started with an opening address from Christine Lagarde, Managing Director of the International Monetary Fund which was followed by a gorgeous private reception at the National Air and Space Museum, Smithsonian Institution.
This was only start, over the course of the week I got to hear from several leaders, it ranged from General Colin Powell, US Secretary of State 2001–2005, US Attorney-General Loretta Lynch (2015-2017), Jack Straw, Former British Foreign Secretary 2001–2006 and Arlene Foster, First Minister of Northern Ireland amongst others.
Opening Ceremony of IBA 2016, Keynote Speaker Christine Lagarde, Managing Director of International Monetary Fund
In 2016, Singapore legal fraternity flew the flag high with Chief Justice Sundaresh Menon speaking on the panel session on Combatting judicial corruption: the keys to an effective judicial system which was attended widely by legal professionals from around the world.
Remy Choo, Director at Peter Low LLC also brought home the 2016 Outstanding Young Lawyer of the Year Award for his excellent work and great achievements in his career and going the extra mile with his commitment to professional and ethical standards. He firmly believes doing well and doing good need not be mutually exclusive.
I attended a variety of sessions ranging from “Lobbying: the intersection of business, politics and the legal profession,” “Criminalisation of homosexual activity around the world, are we going forwards or backwards?”, “Effective Advocacy for all modes of dispute resolution” and “Digital Life after Death. Now is the time to think about your post mortem digital assets” to name a few.
The opportunity to explore such a wide range of topics over just one week and to hear and learn about how similar issues are being dealt with in other jurisdictions was a very rare opportunity. My head would not stop buzzing with new ideas. One particular session that struck me was the Low Bono, entrepreneurship and society session about enabling access to justice through alternative business models such as a low bono social enterprise. It drove home the message that doing well and doing good need not be mutually exclusive and eventually necessitated my move to Eden Law, a low bono practice which allows me to use my skills to enable access to justice.
The week-long conference came to a close with an insightful keynote by the Honourable Justice Anthony M Kennedy (US Supreme Court) at the Rule of Law Symposium.
Risk Management Module on Design-Build/EPC Contracts: Legal and Practical Issues Encountered
This three-hour session on Design-Build/Engineering Procurement Construction (“EPC”) Contracts had the following speakers: (a) Shelly Ewald from Watt Tieder, Hoffar & Fitzgerald, McLean LLP; (b) Dr Patricia Galloway, international arbitrator and mediator and President and CEO of Pegasus Global Holdings Inc; (c) Rory Kirrane from Mason Hayes & Curran; and (d) Dr Thomas Stickler from Redeker Sellner & Dahs and Paul Cowan from 4 New Square.
By way of background, EPC Contracts are a contracting method widely used around the world for construction projects to mitigate the uncertainties that exist. EPC Contracts are usually entered into by the Owner of the project and the Contractor. In the EPC model, the Owner typically retains an engineer to develop the design criteria, in-service date requirements, performance targets, and other operational criteria for the project. The Owner then contracts with a single entity, often a consortium, to provide all aspects of detailed engineering, procurement, scheduling, and construction of the project. The EPC model typically involves around a “fast track” project, in which major equipment procurement and civil construction precedes final design completion. The EPC contract is typically a fixed price, target price, guaranteed maximum price, or some other variant of a lump-sum contracting methodology.1
It is laden with incentives for the Contractor, but for which the Owner generally insists that the Contractor accept the risks of executing the project as per the standards and conditions set forth in the contract.2
The EPC contract presents advantages and disadvantages to both the Owner and the Contractor.
Advantages to the Owner include:
1. Shifts risk to the Contractor for integrating the performance of all package contractors, including designers;
2. Shifts the risk to the Contractor for supply chain solvency risk;
3. Provides early cost certainty;
4. Sizes remedies such as liquidated damages, liability caps and bond amount to the total cost of the works, thus covering a significant portion of the Owner’s losses;
5. Minimises the administration burden on the Owner; and
6. Provides for flexible financing options.
Selfie with Rt Hon Arlene Foster MLA, First Minister of Northern Ireland
Disadvantages to the Owner include:
1. Inheriting a risk premium paid to the Contractor for its contingency and risk;
2. Limiting the Owner’s ability to make design changes without an onerous change order process;
3. Minimising the Contractor’s incentive to aim for a higher than minimum compliant standard for quality;
4. Limiting the Owner’s ability to intervene or influence how the Contractor will execute the works;
5. Limiting risk transfer due to express liability limits imposed by caps and by balance sheet and bonding limitations of Contractors; and
6. Increasing the probability of Contractor claims to alleviate risk transfer.
The advantages to the Contractor include the potential to receive high margins commensurate with the risk it assumes, ability to reduce its competition due to the limited number of Contractors that can assume that risk and avoids Owner intervention in how it wants to prosecute the work. However, as with the Owner, the disadvantages to the Contractor is it assumes the maximum risk strategy and is exposed to market demand and escalation which is difficult to predict and outside of the Contractor’s control. An EPC contract transfers more risk to Contractors than do other project procurement methodologies. This fact and the possible consequences are likely to result in high contract prices which include contingencies and mark-ups to hedge again risks such as performance, cost increase, time extension and potential loss.3
Even though EPC contracts are typically prepared and negotiated for specific projects claims still persist in various areas such as where there is differing site conditions, owner caused delays, owner changes and force majeure events. Hence it is critical to understand what the risks are and how to allocate these risks and avoid risk shedding between the Owners and the EPC Contractors so as to ensure successful execution of projects.
Risk Allocation
Risks are best identified prior to the development of the contract through a risk profile exercise at the feasibility stage of the project. Once risks are identified it is critical to ask the following questions when deciding to whom the risk should be allocated to.
Risk Allocation: Ask four basic questions4:
1. Which party can best control the risk and/or its associated consequences?
2. Which party can best foresee that risk?
3. Which party can best bear that risk?
4. And which party ultimately most benefits/suffers if the consequences of the risk manifest itself?
With these four questions, there are four essential basic principles that apply to the risk allocation methodology5.
1. Control: Risk should be allocated to the party in the best position to control and manage the variables relevant to the identified risk. Allocating risk to a project participant who is not in a position to technically, legally, or otherwise control and manage the occurrence or impact of that risk will lead to significant frustrations, conflicts, and disputes from a fundamental sense of unfairness.
2. Clarity: The allocation decisions should be clearly articulated and defined in the relevant project contract and contract documents. The contractual arrangements, the legal rules of the governing law of the contract between the parties, and the technical documentation, including the specifications and drawings must be clearly stated and explicitly stated so that they can be fully understood. As a matter of general principle, all parties will be held to the actual words of the contract if the terms are clear and unambiguous.
3. Consistency: Risk allocation decisions need to be expressed in all relevant contract documents in a consistent manner.
4. Fairness: Achieving the first three principles will go a long way in achieving the fourth, fairness, which simply means risk allocation should be conducted in a balanced, clear and consistent manner.
Hence Innovative contract drafting can assist in how risk is allocated in the various contract clauses, especially as it pertains to the following situations,
1. Differing Ground Conditions,
2. Severe Weather Conditions,
3. Unusual or technically challenged portions of the work,
4. Change of Law or Regulations,
5. Currency Fluctuations,
6. Cost of Materials,
7. Cost and Availability of Labour,
8. Force Majeure, and
9. Failure to Perform Obligations.
Every risk has an associated price, whether that be visible or hidden. Visible risk cost appears in the project tenders as contingency or insurance costs and can be compared. It is the onerous contract clauses that promote hidden costs. How risk is allocated will have a significant determination on how a project is financed. Owners can certainly transfer risk to the Contractor but need to recognise that in doing so, there is a cost to that risk premium. Allocating risk to the party most able to control and manage it is always a starting point, but there are caveats in doing so.
Hence, Innovative risk sharing arrangements have become the best method of allocating risk and reducing the total contract price. Carefully thought out contract clauses relative to risk allocation and risk exposure limitation as so discussed herein that do not grossly and inequitable allocate all the risk to the Contractor positively impacts overall project performance and the Owner Contractor working relationship. In return, disputes can be minimised.
► Sujatha Selvakumar
Eden Law Corporation
Recipient of YLC Sponsorship Scheme
Sujatha was one of the four recipients of the Law Society’s sponsorship for young lawyers to attend overseas conferences in 2016. As part of the sponsorship, the recipient must submit a paper on the conference that he or she attended.
White House, Washington DC
Notes
1 The Art of Allocating Risk in an EPC Contract to Minimize Disputes by Dr Patricia Galloway, Page 1
2 24 April 2008, Repositioning the ‘Risk Pendulum”, Oil Service Contracts, Deutsche Bank in conjunction with Pegasus Global Holdings Inc, page 6.
3 Carolin Schramm, Alexander MeiBner, Gerhard Weiddinger, “Contracting Strategies in the Oil and Gas Industry”, 3R International, Special Edition, January 2010, page 33
4 Nael Bunni, “The Four Criteria of Risk Allocation in Construction Contracts”, International Construction Law Review, 2009 Pt 1, p.6
5 David J. Hatem, “Risk Allocation”, Mega Projects, Challenges and Recommended Practices, American Council of Engineering Companies, Part II, Ch. 15, pp. 328-329