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R.V.Seckar - My Blog
R.V.Seckar - My Blog


Can Parent Company be held responsible for liabilities of the subsidiary Company in Europe?

A limited liability company's shareholders are nevertheless not automatically held liable for the liabilities of the subsidiary. For instance , in Kodak Ltd v Clark ,it was held that even-though parent is having about 98% stake in its subsidiary , it does not give rise to give an agency type of relationship under English law.

A particular risk arises when a parent company is being sued for the actions of the board members of the its subsidiary. If parent company has appointed majority of the directors of subsidiary to look after the interest of parent company , and if a third party sustains loss due to actions of board of subsidiary , then in such scenarios , a parent company may be sued to recover the losses sustained with their subsidiary as described in Grantham R , " Liability of Parent Companies for the Actions of the Directors of the Subsidiaries , Company Lawyer , 18 (5) (1997) p.138.

Thus , if the majority of subsidiary company's board consists of the parent company's nominee directors and if loss is sustained by a third party , then in such scenario , a third party can sue the parent company for the actions of a subsidiary company.

Further ,Italy , Germany and France are now the members of the EU and they are bound by the European Company law now.

In Akzo Nobel v European Commission ( C-97 /08 ) , it was held by ECJ that there is a rebuttable liability resumption of parent companies for their subsidiary's cartel offenses in the case of 100 % shareholding.

Further , piercing of corporate veil, under EU law , ECJ can consider subsidiary companies as a single unit for competition objectives. If the parent is a monopoly which set up ten different subsidiaries to deem it to demonstrate as if there is a competition , then ECJ could consider all companies to be a single economic unit.

Hence , ECJ would never hesitate to pierce the corporate veil when a third party sustains a loss in a subsidiary due to actions of parent company in EU.

As now Italy , France , Germany is the member nations of the EU and falls under EU Single Market , any appeal( even court in Italy or Germany may held that parent company is not liable) on query relating to Parent company liable to subsidiary debts goes to ECJ , then ECJ will give such views given by it earlier in Akzo Nobel v European Commission ( C-97 /08 ) and in Wibru / Swissair and such decisions will be binding on the member nations of EU like Italy or France.

For instance , there has been a lot of controversies in UK as regards to Human rights violation under UK law as some provisions were inconsistent with the EU Human Rights Law. There were conflicts of opinion by UK courts and ECJ.

Later , UK has completed installed the ECJ Human Rights Regulations in its Act ( now UK Human Rights Act ) so as to avoid conflict with ECJ Human Rights Act.


May 29, 2010 | 5:46 PM Comments  0 comments



Conceiving and Drafting Terms of EPC Contracts














CONCEIVING AND DRAFTING OF TERMS OF EPC CONTRACTS

R.V.Seckar, F.C.S, I.C.S.A (UK), LLB.


This article has been published in the April 2010 Issue of Institute of Company Secretaries of India official magazine "Chartered Secretary". The web link is as follows:


http://www.icsi.edu/cs/April2010/Articles/ConceivingandDraftingtheTermsofEpcContractsbyR.V.Seckar4.pdf

INTRODUCTION
In drafting the EPC contracts, legal practitioners may use standard form contracts as a basis for their contract document. These template or boiler contracts offer a familiar starting point to lessen the drafting trouble and to make easy negotiation.

Of late, FIDIC ( The Federation Internationale des Ingenieurs Conseils) released a new form of contract that can be used in design and construction of projects thereby employing the same to the engineering ,procurement and construction contract or turnkey contracting basis. Under this contract, the FIDIC Conditions of Turnkey or EPC Projects (famously known as the silver book) is designed to handle scenarios where bids are invited on an international basis. It has been specifically designed for use in EPC and BOT contracts. However, law firms and big contractors will have their own in-house standard EPC contract and for these parties, silver book may act as a solid reference to update and review their in-house standard forms. For those law firms and contractors, who do not have standard EPC, contract forms may use the Silver Book for drafting their EPC contract terms. (Huse 2002:48).

However, there are obvious tensions between a project company and a contractor where a turnkey EPC contract is used. The drafters of EPC contract has to pay special attention to the allocation of project risks and with specific reference to the drafting of common terms in EPC contracts. Else, the contractor’s interest will be affected, and he may have to incur pecuniary losses. This research essay analyses the points to be taken into consideration while drafting the terms of international EPC contract and allocation of risks in the EPC contract so that interests of both the contracting parties
are secured.

Analysis

An EPC Contract is also known as the fast-track contract. It combines three stages of construction contract under the ambit of one contract. It combines the construction, procurement and engineering aspects into one single contract. It facilitates the growth on a project to proceed on an overlapping basis than if the three stages haven been taken over in series.

The “package deal” or “turnkey arrangement” or “design or build “, “cle-en-main” or “EPC” imposes the duty to construct and design solely on the contractor. There is no standard explanation for each of these terms in the construction sector. The phrase ‘turnkey” connotes the most extreme structure of placing the design and construction obligation on the contractor , such that after completion, the employer will be given the key to project to start the operation of the constructed project. The term ‘turnkey’ or “EPC” are being explained the more in general global arrangement of placing all procurement, all design, construction responsibilities on a single contractor.
There are potential complex contractual structures in any BOT (Build, Operate and Transfer) contract. In majority cases, the BOT projects will employ either an EPC or a turnkey contract for the actual construction and design aspect of the contract. Hence, a BOT is not a separate style of construction contracting but rather a technique of financing the project. In case of BOT contract, the lenders will have considerable sway on the condition of the underlying construction contract including the prerequisites that such a contract be on a turnkey basis or in the guise of an EPC contract.

In BOT contract, the operation period between finishing and transfer also offers the transferee a chance to authenticate the quantity and quality of the productivity of the completed project work. Accordingly, in a BOT contract, a contractor may be obliged to give training of the transferee’s employees before the actual transfer of the project is completed thereby easing any possible tension that may arise in the contract.

The contract provision should be drafted by taking into consideration the accelerated deterioration of the work at the time of transfer of the project. Thus, a transferee will be required to pay attention to maintain the operator’s incentive to maintain the workflow properly and to circumvent any deterioration in the final phase of the contract just before the transfer to the transferee. The operator may in an effort to save on costs and at the terminal phase of the operating period, the contractor may indulge in a slowdown in the maintenance and operating expenditures resulting in accelerated worsening of the work scenario. Thus, contract provision in some BOT contract is drafted in such a manner by placing the responsibility on the operator to assume liability for defects for a shorter period subsequent to the transfer.

Various types of Construction Contracts
Procurement Contract
It offers for the methodical sourcing of work and supplies for a project. This contract includes stipulations that demand the architect or an engineer to perform the following functions:
 To frame bidding guidelines for equipment, machinery and supplies
 To carry out an economic evaluation of the bids received.
 To arrange for export licenses and other governmental permissions, which are essential for the import or export of supplies, materials, equipments and machinery to the project site.
 To organise financial functions such as reviewing of invoices, forecasting the cash flow needs and overseeing of accounting records.
In a majority of contracts, often no separate procurement contract is employed especially in project financing and for the obvious reasons, a separate engineering contract is not employed. Instead, the turnkey construction contract is made to include all procurement work until the financial closure is successfully completed. (Hoffman 2008:170).

Construction Contract:
This contract oversees the complete construction activities of the project. Thus, in a construction contract, the contractor undertakes to offer all constructions –associated services including organisation of labour, supervision of the construction, management of tools, supplies, construction facilities, field engineering and site investigation. (Hoffman 2008:170).
“EPC Contract”

In an EPC contract, the contract structure will be much complicated as many numbers of participants are involved in the implementation of the project. Thus, either an EPC or a BOT contract is often is not as simple as its definition connotes. There may be the large number of parties involved under complex contract structure. For instance, in a hydroelectric project, the concerned government has granted a concession to the project development company. This project development company has in turn entered into separate contracts for the construction of the facility, its operation and maintenance during such concession phase and to enter into a power purchase agreement (PPA) with an electrical supply utility. A consortium of contractors was assigned with the turnkey contract for the construction of the facility. Again, each of the turnkey contractors was also an equity stakeholder of the EPC contracting company as they will have to subscribe some portion of the equity of the project development company. Further, one of the subsidiaries of the turnkey contractor was assigned with the operation of the facility after the completion of the project. Thus, in an EPC or a BOT project which involves a typical power plant construction contract, contract has to be drafted by taking into account of this complex structure.

Where a project is undertaken by a State or by a political entity, the EPC contractor assumes further risks in that project as the project may be affected due to future happenings. A successor government gaining to the power, whether it may be a federal, state or local may try to dishonour either the some part or the whole part of an EPC project contract entered into by the predecessor government. A best illustration of this type of action by a successor government to modify or change an EPC contract entered into by an earlier government is the Enron-Dabhol power project in India. In such cases, it is wise to incorporate termination payments and termination provisions in an EPC contract in favour of Project Company. If the government failed to honour its legal commitments, then these damage payments is due by the defaulting government to the project company. It is sound to add a so-called statement of binding impact to other agreements or an implementation with the host nation. (Hoffman 2008:158).
Further it is prudent to add a waiver of sovereign immunity clause in the EPC contract if it is entered with a host nation’s government or with an entity owned by a host nation. For instance , in “Texaco Overseas Oil Petroleum Co / California Asiatic Oil Co v Libyan Arab Republic “, it was held that the government cannot employ its sovereignty to ignore obligations and cannot cancel the privileges of the contracting party who has executed its multiple duties under the contract through an internal order of the government .( Hoffman 2008:158).

In case of sovereign immunity, a government may waive such immunity either through explicit or implicit actions. In Morgan Guaranty Trust Co v. Republic of Palau, the Republic’s sovereign immunity was waived by the President of the Republic while entering into loan agreements with companies of U.S.A origin in respect of construction of power plants. Later, the financing company sued the Republic when it failed to make payment under a guarantee and defaulted on its payment obligations. It was held by the court that Republic was under obligation to reimburse the guarantors. According to court, the President of the Republic by signing the agreement and by supporting the financing with the “full faith and credit of the Republic” has the obligation to honour the commitments made already. (Hoffman 2008:159).


In Saudi Arabia v Arabian Oil Co (Armco) , it was held by an International Arbitration tribunal that laws of Saudi Arabia had to be supplemented or construed by the general principles of law, by the practice and customs and usage in the oil business and by thoughts of untainted jurisprudence and the defendant rights could not be “protected in an authentic style by the legislation in force in Saudi Arabia..


In “Mobil Oil Iran Inc v. Islamic Republic of Iran” , as regards to applicable law in a contract, the Iran-United States Claims Tribunal has often corroborated its stand on applicability of law by having recourse to its own international nature. An issue of confiscation will always look at in the background of applicable international law only irrespective of the fact of the law preferred by the parties.

Financial institutions and banks will offer a further stipulation while granting finance to the project as to offer them some certainty as to their financial risk. Thus, lenders may be placed with a significant amount of certainty if lump-sum bidding or if much risk is placed on the contractor for completion of the project.

EPC, Turnkey and design –bid contract

There are a lot of dissimilarities exists between these contracts. Under an EPC contract, the contractor offers all the engineering, procurement and construction. In a design-bid contract, the employer offers the design, which often includes the description of materials to be used and other major construction parameters. Under a turnkey contract, it is the obligation of the contractor to supply the final design of the project.

Thus, under EPC contract, the contractor will be held responsible for any defect in the construction, design or performance of the works. The employer has to demonstrate to what degree resultant damage was caused by defective design or by the faulty construction under a design-bid –build contract. (Huse 2002: ix).

Under EPC contract, both the design and construction are placed on the contractor along with a harsh standard of performance. The standard of performance applicable will be contained in the contract or in the non-existence of any explicit provision, by the applicable law. Under the Silver Book, the standard is “fitness for purpose.” As laid down in English case law namely IBA v EMI and BICC , a turnkey key contractor is under strict liability to deliver the work ‘fit for the purpose” for which it was constructed. . (Huse 2002:18).

To choose the best design and quality of work, in EPC contract, the bidding process will be consisting of five stages; pre-feasibility, feasibility, bidding, evaluation of bids and award of the contract and the negotiation. Such phased bidding will help the employer to first evaluate the quality of the design at first and then only the bid price.
The fitness for purpose standard can be explained a stricter standard than a “professional “duty of care as it places onerous on the contractor for any defect or failure of design to perform to the standards needed.

The drafters of EPC contract shall give more significance to the following issues while drafting an EPC contract.
The Scope and Definition of the Works:

The scope of work has to be clearly drafted and requirement of an employer should de drafted preciously to define the liability of the contractor for design, construction and performance.

Any Increase in the price

The real issue for suppliers and EPC contractors working in current’s unpredictable materials price inflation scenario such as cement, steel is that forecasting, quoting and executing chief construction contracts becomes a confront and many contractors incur major pecuniary losses or attrition of expected incomes since the most of the construction contractors are bound by predetermined-priced EPC contracts where they have to accept the risk of increases in both supplier and material costs.
Devoid of a distinctly worded price appreciation provision that permits for a modification to the price of the contract due to the occurrence of an unforeseen event or, an unforeseen increase in the whole-sale prices of major construction related materials, a contractor may have to bear the unbearable pecuniary loss. Further, an EPC contractor may not get a relief as, even if the contract has turned to be onerous, which will not normally be adequate legal stances for execution of the contract to be exempted by the courts. (Kerur 2005).

Since, EPC contract is a fixed price or lump-sum price contract, unless the contract specifically provides for a price increase due to the occurrence of some modifications or events. It is wise to add a price increase clause in the EPC contract to safeguard the interest of the contractor against price volatility in the near future. For instance, the courts in U.S.A hold parties responsible for their contractual agreements. For instance, in Iowa Electric Light and Power Co v. Atlas Corp , the court ordered that the uranium supplier had to honour his contractual obligation to supply the uranium to the utility though the price of the Uranium to the supplier had increased considerably later. This case stresses the significance to include “price escalation clause “in an EPC contract to safeguard against the incurring of financial loss due to price escalation in the later date. Further, in an EPC contract, contractual provisions can be included in the contract to pardon performance upon the happening of discussed events like price increases. In Eastern Airlines v. McDonnell Douglas Corp, the court held that the doctrine of force majeure clause will not be applicable where a future event was particularly mentioned in the contract. (Hoffman 2008:192).

Since the contractor assumes overall control over the project, the employer may desire to restrict the capacity of the contractor to obtain such increases. Generally, courts are unrelenting that a contractor must carry out the construction work at the rate agreed especially in predetermined-priced EPC contracts, which assign risk and, which do not contain a precise clause permitting for modification in prices. In the present economic scenario, EPC contract’s tender prices are towering and service providers insist that if the project owners are ready to share more risk, then they will get more competitive bids. For instance, EPC contract awarded by Dubai municipality are footed on FIDIC contract stipulations but so far, do not mirror the suggestion by FIDIC that terms for modifications in bids for variations in cost should be introduced where it might be unjust for a service provider to assume the whole of the risk of increasing costs associated with inflation. From the perspective of a project owner, the notion of conveyancing a price-increase provision in a contract may appear like issuing a blank cheque, albeit he might be profit out of it. If the contract is allowing the contractor to charge his rate on current prices and any real enhancement, rather than a standard-price quotation with tentative eventualities, in such cases, the project owners might save some handsome money and may avoid any unwanted delay and overrun in the timely construction of the project.

In any EPC contract, price-escalation provisions should have the clause which should recognise the exact materials regarded to be unstable and the prices per unit for such project materials is to be charged that prevailed at the time when the contract is completed. Normally, these provisions should illustrate unambiguously that the project owner will be responsible for any increases in price in those basic construction materials like cement, steel and the total price of contract to be augmented by a settled percentage to offset the loss due to price escalation. A rational provision will lay out periods of notice for recognition of price augmentation and to shun disagreements at later dates, to audit and verify the category of documentation demonstrating the price increase, the incident that activated such a boost in price of contract, what is the proper assessment of the market price, what are the time periods covered and how frequent the increase in the contract price can be made.

Onus for the design supplied by the employer
In an EPC contract, it should be wise to allocate the risk pertaining to design supplied by the employer between the parties by way of specific provision.

Employer Risks:

An EPC contract has to specify the risks associated with the employer.

Performance Guarantee

There should be provision in the EPC contract for the performance guarantee by the contractor by way of providing bank guarantee or other guarantee or by way of retention money.

Completion

An EPC contract should contain a provision as regards to extent and nature of completion needed before the employer takes over the works. It is to be ascertained whether any performance tests are to be made before or after such completion. Thus, under the customary design-bid –build contract, the designer and construction contractor will be held liable for varied yardsticks of performance for the completion of the works. It is to be noted that designers in many countries are not needed to undertake for results, but rather method. It is expected from them that they have higher supreme knowledge on the subject, competent enough and can finish the design with a rational magnitude of technical skill. For instance, Surf Realty Corp v. Standing , U.S court held that the designer, while preparing the drawings and design, should exercise his ability and skill, taste and judgement rationally and without neglect. Thus, this principle needs a professional duty of care. (Huse 2002: 18).

Liability for Defects

An EPC contract should include a provision as to decide the period of time up to which the contractor will be held responsible for rectifying any defect that may occur in the works.

Consortium or a Joint Venture

In case , if a contractor uses a consortium or a joint venture for the project , a specific provision will need to be included that it is essential to elect a representative among consortium with adequate decision-taking authority to facilitate interaction with the employer.

Other matters
Provisions relating to contractor's duty to safety and protection, to adhere to local laws and regulations have to be drafted.

A drafter of an EPC contract should take all the above points into consideration while drafting the contract. (Huse 2002:24).

Allocation of Risk in EPC Contract;

In an EPC contract, the risk allocation will be made in the following manner. The project company will assume the market risk and in a power project, the power purchaser will accept the risk to a limited extent. The EPC contractor will assume the design, construction and commissioning risks. The risks arising out of operation and maintenance will be borne by the O& M contractor. The overall political risk like rebellion, war and delays by authorities will be borne by the respective government, mainly through concession agreement. It is recommended that the respective government should accept these political risks as they are the sole party who could either influence or control it and can lessen its impacts.

Provisions that concerned with risk allocation have to be drafted so that it would reflect the language of the agreement and other concession. Further, it has to take into account the considerations like identical language for extension of time and force majeure events. Such back-to-back language minimises the extent of gaps and vagueness between various agreements.

A dispute resolution clause in the EPC contract will not only save the time but also cost and helps to find a fast solution to any issue between the parties. (Huse 2002: 48).
There are four fundamental risk-of-loss methodologies that an owner can impose in his EPC contract.

a) Demand the EPC contractor to wholly responsible and to totally indemnify the owner, all for all, possible losses.
b) Discharge the EPC contractor from indemnity and responsibility and to fully reimburse or indemnify the owner for all damages or losses.

c) Impose an overall ceiling limit on the EPC contractor’s responsibility and indemnify for selected or for all losses.
d) Adjust or modify one or more of the approaches mentioned in tune with the owner’s predestined risk management program. (Bramble & West 1999:105)
The other parameters are as follows:

1. EPC contractor should be imposed with the sufficient risk to motivate them to execute the contract in a professional style. However, imposing of unreasonable or excessive risk will hinder innovation and maybe yield negative results.

2. Risk allocation should be footed on the profit or return that the party espousing risks that may actually have anticipated from its participation in the project.

3. The extent of control over the risk to be distributed must be taken into account in establishing a suitable allocation of responsibility.

4. It should be seen that the party is having the ability to cover the risk through insurance or by other methods, which are a crucial element in risk allocation. ( Bramble and West 1999 :101)

5. Full indemnity and responsibility are obtained from EPC contractors by owners for all equipments and tools either owned or rented by the contractor used in the project site.

6. For all equipments and tools supplied or loaned by the owner to the contractor, full responsibility is placed on the EPC contractor for use in carrying out the work and many owners contractually negate such representation or fitness for such an equipment and tool.

7. In some scenarios, the owner and the contractor may agree to share losses and responsibilities equally or jointly. Here, only to the degree of a proportionate share of negligence, each party would agree to indemnify each other. Thus, by agreement or through a court or through a commercial arbitration, each party’s liability will be determined in case of loss due to negligence.

In the case of EPC hydro contracts, contractors always reluctant to forward their bid unless they are short listed in a prequalification bid due to expenses and time involved in this process. Minimal design particulars are offered by the project companies in the prequalification bid document. This will put the tenderer with the onus of developing the design to the point where he can confidently submit a firm price. In hydro electric EPC contract, more than four or more companies are to be involved in a consortium to offer the overall services to be provided, which habitually set hurdles to the bidding process. (Head 2000:5).

In hydro electric project, the management of risks due to flooding during construction of the project is effectively a commercial decision, thereby balancing the incremental expenses of augmented flood safeguard against the chances and outcomes of particular floods happening. This is mainly a concern of risk allocation between the contractor, the owner and the insurer and normally would not involve the host government. (Head 2000:19)

For instance, in a Turkey contract, geological risk in a hydro project is passed to the contractor from the project company. This is an obvious departure from the usual contract EPC terms. When the availability of work is very limited, some contractors dare to accept such risks, although it is highly debatable whether it is in either party’s interest.

For instance, in Philippine’s Casecnan power project, which includes about twenty-six kilometer tunnel and an underground power manufacturing unit, for which there was virtually no site investigation was possible and the contractor undertook the whole risk of unpredictable ground scenarios within his fixed price quote. However, he failed to carryout the contract and had to be replaced. Thus, assuming of unforeseen risk may cost an EPC contractor his job and his resources.

Likewise, in Malaysia’s Bakun hydroelectric project, an EPC contractor made a lump sum price bidding with no price escalation for unforeseen risks. In that project, excavation of tunnels has disclosed weaker rock conditions than expected, needing an addition of the steel liner. This is a common issue, but it cannot be anticipated in advance and may materialise only during the construction stage and will have huge cost implications that cannot be borne by the contractor due to its magnitude, especially in a lump sum EPC contract where if there is any absence of provision of price inflation for such an eventuality. In such scenarios, the EPC contractor may be able to restructure the cost effect by making some changes in design, but it may have an impact on the final quality of the project. Further, such design change may end in a debate over whether the proposed changes can be acceptable under the contract. (Head 2000:57).

In an EPC or turnkey project, competitive price bidding can be made possible with the certain kind of sharing of risks as mentioned below.

 EPC contract containing both a lump sum and re-measurable portion and re-measurement is mainly applicable to civil works and unexpected geological risks, especially in case of flooding, weaker rock conditions or other unforeseeable events.

 Restricting the re-measurable portion of contract hence the owner undertakes lesser risk leaving the contractor to assume an unlimited risk.

 A stratum approach where the employer, insurance company and the contractor bear some portion of risk in a predefined order.

 Cost overrun has to be shared on a predetermined percentage basis.

 Specific geological associated risk in the construction is to be passed on to the owner or the contractor but with reimbursement of additional expenses to avoid what had happened in Casecnan power project and in Bakun hydroelectric project.

Thus, an EPC contract may have risk-sharing formulas and in case of any additional cost of risk due to happening of an unforeseen incident has to be met by sponsors of the project through pumping in contingent equity, mainly to cater for the possible cost overruns. (Head 2000:57).
For instance, India was less successful in attracting private finance for its hydropower projects, mainly due to some risk allocation, which is hazardous to any project contractor. Hence, it revised power policy to encourage private foreign investment in its hydroelectric projects. The new pragmatic policies perused by the Indian government acknowledged the necessity to offer the private developer safeguard against wide varieties of natural risk over which such contractor has no sway. Thus, for risk arising out of an unforeseen natural predicament, EPC contractor will not be held liable. This may encourage a large number of international bidders to participate in a contract and may result in cost savings and timely completion of the project (Head 2000:62).

Ground Conditions:

Sub-clause 4.12 of the Silver Book acts as a reference for several reasons. Reading together with the sub-clause 4.10, it imposes all obligations on the contractor for unforeseen site scenarios. Thus, the contractor runs this risk despite whether the employer offered the information on the original site conditions or where the site conditions were, in fact, unpredictable. In fact, the aftermath of this clause is to make the contractor responsible for unpredictable or conditions, which are wholly out of the control of a contractor. Thus, under Silver Book, the contractor is imposed with the responsibility to bear the risk associated with unforeseen site conditions. In fact, the sub-clause 4.12 of the Silver Book spells out that there shall be no modification in the contract price to take account of any unforeseen costs or difficulties. For instance, countries like Malaysia and Hong Kong allocates risk for differing conditions solely on the contractor in the government contracts. (Huse 2002:144).

Sub –Contractor
Though an EPC contractor is authorised to entrust the wk to sub-contractors, the Silver Book sub-clause 4.4 spells out some mandatory provisions as regards to sub-contractors. The above sub-clause imposes the following:

 An EPC contractor cannot sub-contract the whole of the work to sub-contractors.

 It makes the EPC contractor liable for the activities of his agents, sub-contractors and employees.

Force Majeure Clauses

When the contracts have become frustrated or impossible, many contractors encountered with exhaustion all of their profit or poorer claim. Though, a legal drafter might have used terms in EPC contract such as "business impracticability", "impossibility", "force majeure" "aggravation of purpose", all these phrases have much in general, demand the truths to conform to well-demonstrated parameters.

Due to the occurrence of an unexpected event, if performance becomes "impossible”, a party may be condoned from carrying out a commitment under an EPC contract under the most legal system. However, there exists many numbers of legal precedents where courts were of the opinion that the doctrine of impossibility cannot be extended just because completion of the contract will happen to be more costly than earlier expected.

Majority of contractors is under the wrong impression that the availability of the force majeure clause will help them to succeed in their claim. It is to be noted that a force majeure clause is deployed into a contract as a way to safeguard parties if a section of the contract could not be completed due to the occurrence of some extraordinary incidence, which falls outside the control of the parties and which could not have been forbidden using rational care. Force majeure clause will ordinarily be seen in all the construction contracts but normally such provisions to grant a contractor some extra period to complete the contract. Hence, whereas a force majeure clause may facilitate a contractor some additional time to acquire materials that are in acute shortage, it is doubtful of help to him if he is compelled to bear much escalated prices of material than he formerly forecasted. The reality is that judges normally do not incline to permit somebody to get away from an obligation under a contract under the pre-text of force majeure clause. (Kerur 2005).

Conclusion

Thus, we have seen that drafting the provisions of an EPC contract is cumbersome and problematic. A drafter has to bear in various legal aspects while drafting the conditions and allocation of risks in an EPC contract.

Of late, FIDIC has released a new form of contract that can be used with design and construction of projects employing the engineering, procurement and construction contract or turnkey contracting basis. Under this contract, the FIDIC conditions of turnkey or EPC projects (famously known as the silver book) are designed to handle scenarios where bids are invited on an international basis. It has been specifically designed for use in EPC and BOT contracts. However, law firms and big contractors will have their own in-house standard EPC contract and for these parties, silver book may act as a solid reference to update and review their in-house standard forms. For those law firms and contractors, who do not have standard EPC, contractor or firms may use the Silver Book for drafting their EPC contract terms. (Huse 2002: 48).


Thus ,a legal drafter has to use not only standard terms as mentioned in the silver book but also to use his legal experience to cover force majeure , price escalation , sovereign immunity , unforeseen ground scenarios to safeguard the interest of the contracting parties . A well planned and conceived and methodologically drafted EPC contract will pay special attention to the allocation of project risks and with specific reference to the drafting of common terms in EPC contracts. Else, the contractor’s interest will be affected, and he may have to incur pecuniary losses. Thus, while drafting the terms of international EPC contract and allocation of risks in the EPC contract, serious considerations should be given while drafting of terms so that interests of both the contracting parties are properly secured.



List of Reference

Bramble Barry B & West Joseph D. (1999). Design Build Contracting Claims. Illinois: Aspen Publishers Online.

Head, Chris R. (2000). Financing of Private Power Projects. New York: World Bank Publications.

Hoffman Scott L. (2008). The Law and Business of International Project Finance. Cambridge: Cambridge University Press.

Huse, Joseph A. (2002). Understanding and negotiating turnkey and EPC contracts. New York: Sweet & Maxwell.

Kerur Sachin [June 16 2005]. Sharing the Risks. (Online) available from http://www1.fidic.org/resources/contracts/national/dubai_jun05.asp [accessed 30 October 2009).

Wilpert Bernhard & Fahlbruch Babette. (2002). System Safety: Challenges and Pitfalls of Intervention. New York: Emerald Group Publishing.

April 15, 2010 | 1:21 AM Comments  0 comments



FINANCING YOUR PROJECT THROUGH INTERNATIONAL FINANCE CORPORATION
Related to country: India

Translations available in: English (original) | French | Spanish | Italian | German | Portuguese | Swedish | Russian | Dutch | Arabic

FINANCING YOUR PROJECT THROUGH INTERNATIONAL FINANCE CORPORATION

This article has been published in the 'Chartered Secretary " of the Institute of Company Secretaries of India" .

This article has been rated as one of the best article to be read by professionals by the Institute of Chartered Accountants of India , New Delhi.


AFTER the introduction of economic reforms in India in
the Year 1991, foreign investments started to flow into the
Indian market. Though economic liberalization witnessed
many structural changes in Indian Economy, the flow of foreignfunds has not been up to the expected level as in the case ofChina. India is still very cautious in allowing the foreign fundswith full-capital account convertibility because of the economicturmoil that was witnessed: in some Southeast Asian countriesin the year 1998.

There were considerable relaxations in foreign investment policy by allowing 100% foreign investment with repatriation benefits up to Rs. 15J30 crores 'in the equity capital of companies engaged in the infrastructure activities, allowing foreign institutional investors to invest in the Indian Stock Markets, allowing investments by NRI's in the Indian companies and in the partnership firms etc The procedural bottlenecks have been removed to attract more foreign funds. Further Indian companies are: allowed; to source their debt funds in International: markets by allowing external commercial borrowings at cheaper interest rates. Procedure for collaborations and sharing of technical know-how has been made easy now. Still Indian companies are reluctant to tap the international markets for sourcing the equity and debt funds.

Many private power projects, port projects and development of roads are highly capital intensive and they require substantial foreign funds for the import .of machineries, tools and spares. Many infrastructural companies' are trying to raise foreign funds either from foreign banks or foreign financial institutions or foreign Governments or foreign collaborators or from EPC Contractors.

The International Finance Corporation, a member, of World Bank group, which is composed of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA) and Multilateral International Guarantee Agency (MIGA) ;is the* largest multilateral source of loan and equity financing, for private sector projects in the developing world. The main aim of IFC is to finance private sector projects, helping companies in the developing world to mobilize financing in the International financial markets and providing advice and technical assistance to business and governments.
The IFC offers an array of financial products and services to companies in its developing member countries like -
• Long-term loans in major currencies at fixed or variable rates.
• Equity investments.
• Quasi-equity instruments (subordinate loans, preferred stock, income notes).
• Guarantees and standby financing. a
• • Risk management (intermediation of currency and interest
rate swaps, provision of hedging facilities). •
IFC also help to structure ‘financial packages, coordinating financing from foreign and Iqcal.banks and companies and export agencies. To be eligible for IFC financing, project must be profitable for investors, benefit the economy of the host-country -country and comply with stringent environmental guidelines, IFC Is able to act as a catalyst for private investment and its participation in a project enhances investor confidence and attracts other lenders and shareholders.
.
CRITERIA FOR IFC INVESTMENT DECISION
In order to receive IFC funding, a project must meet a number
of I.FC guidelines like - -
• the project must be in the private sector,
• it must be technically sound,
• it must have a good prospect of being profitable,
• it must benefit the local economy.
To ensure the participation of .other private investors, IFC'sinvestment in usually limited to 25% of the total project cost.

Investment in small and medium project ranges from $'1,00,000to $ 1 Million and in standard sized projects from $ 1 million to$100 million.

Even the healthiest companies in developing countries often have difficulty in raising long-term project finances on reasonable terms, IFC offers a variety of financial products to fill this gap like long term loans major currencies at fixed or variable rates, equity and quasi-equity investments, guarantees and stand-by financing. Packages of long-term finance ranging from $10 million to $ 400 million can be provided by IFC.

ELIGIBILITY FOR IFC INVESTMENTS

There is no standard application for IFC financing. A company, or entrepreneur, foreign or domestic seeking to establish a new venture or expand an existing enterprise can approach IFC

2. Sponsorship, management and technical assistance:

• History and business of sponsors, including financial. information
• Proposed management arrangement and names and curricula vitae of managers.
• Description of technical arrangements and other external assistance (management, production, marketing and finance, etc.)
3. Market and sales
• Basic market orientation: local, national, regional or export.
• Projected production volumes, unit prices, sales objectives and market share of proposed, venture. !f
• Potential users of products and distribution channels to be used. Present source of supply for products.
• Future. Competition and possibility that market may be satisfied by substitute products.

• Tariff protection or import-restrictions affecting products.
• Critical factors that determine market potential.
4: Technical feasibility; manpower, raw material resources and environment.
• Brief description of manufacturing process.
• Comments on special technical complexities and need for
know-now and special skills, _-; -.
• Possible suppliers of equipment.
B .Availability of man power and of infrastructure facilities (transport, communications, power, water etc.)
• Break-down of projected operating costs by major categories of expenditures.
• Source, cost and quality of raw-material supply and relationswith support industries. '"
• Import restrictions on required raw materials.
• Proposed plant size in comparison with other known plants.
• Potential environmental issues and how these issues are addressed.
5. Investment requirements, project financing and returns!
• Estimate of total project cost, broken down into land, construction, installed equipments and working capital, indicating-foreign exchange component.
• Proposed financial structure^ venture, indicating expected sources and terms of equity and debt financing.
• Type of IFC financing loan, equity or both and amount.
• , Projected financial statement, information on profitability and
return on investment.


Project in context of government economic development and investment programme.

• Specific government incentives and support available to the
project
• Outline of Government regulations on exchange controls ... and conditions of capital entry, and repatriations.

7. Time table envisaged for project preparation and completion.

Other than participation in the project, IFC also offers a wide range of financial products to its clients. This allows IFC to offer a mix of financing that is tailored to meet the needs of each project. These can be classified broadly under the following heads:

1. Loans

Loans are IFC's largest product. IFC provides fixed and variable rate loans in any of the leading currencies-These loans/ typically have maturities of 8 of 12 years, with a grace period and repayment schedules determined on a case to case. Basis in accordance with the borrower's cash flow needs: If warranted by the project, IFC provides longer-term loans and longer grace periods.

2. Equity

IFC is considered a passive investor. IFC usually maintains equity investments for a period of 8 to 15 years and is considered a long-term investor.

3. Quasi-Equity

IFC provides a full range of quasi-equity finance including convertible debentures; subordinated loans, loans with warrants and other instruments.

4. Other financial products

IFC also offers other financial products such as currency and interest rate swaps, options, forward contracts and other derivative products.

IFC risk management services focus on advising on hedging strategies, intermediating the purchase of. hedging instruments, mobilizing the participation of international banks in such transactions on a risk sharing basis and promoting the development of local capital markets by bringing these techniques to local' financial institutions:
Other financial products* offered by IFC include credit and equity lines, venture capital and leasing.
!,
APPRAISAL OF THE PROJECT BY IFC

• Typically, an appraisal team comprises an investment officer with financial -expertise and knowledge of the country in which the project is located and an engineer with the relevant
, technical expertise.
• The team is responsible for fully evaluating the technical, financial and economic aspects of the; project. This process entails visits to the proposed site of the project and extensive discussions with the project sponsors.
• After returning to head quarters, the team submits its recommendations to senior management. ^
• If financing the project is approved1, IFC's legal department, with assistance from outside counsel as appropriate, drafts appropriate documents.
• Outstanding issues are negotiated with the company Government, or financial institutions involved and the project is submitted to IFC's Board of Directors for their approval.

LOAN DISBURSEMENT AND SUPERVISION
• Following Board approval, disbursements are made under the terms of the legal documents agreed by all parties,
• IFC supervises its investments closely, consults periodically with the Management. Sends field missions to visit the enterprise and requires progress report together with information on factor that might materially affect the enterprise in which it has invested.
• It also requires annual financial statements audited by independent public accountants.

IFC'S RISK MANAGEMENT PROGRAMME

IFC is allowing private sector clients in the developing world to access the international derivative markets in order to hedge .currency, interest rate or commodity price exposure, it enables these companies to enhance their credit worthiness and long-term profitability.

HEDGING CURRENCY EXPOSURE

For example, an Egyptian steel manufacturing company may have an existing Japanese Yen liability, which represents attractive funding from a development-financing source. If the company's export revenues and input costs are primarily denominated in US dollars, the company will have a currency ' mismatch exposing in to Yen/US $ exchange rate movements. IFC can provide a swap that enables the institution to effectively convert its fixed rate non, US $ currency obligation in to a US $ obligation. This currency swap permits the steel company to convert the Yen debt service cash flows into the currency basis of its US $ revenues. Consequently, future volatility in income resulting from the currency mismatch on this particular loan is eliminated.

HEDGING INTEREST RATE EXPOSURE

In another example, a power project in Guatemala may need to arrange a fixed-rate contract with the local government based on expected future revenues. If the majority of its financing bears a floating rate of interest based upon LIBOR (London inter bank offered rate) again this will expose its future income stream to fluctuations which mirror movements on the LIBOR base rate. The project can therefore protect itself against interest movements on the LIBOR base rate. The project can therefore protect itself against interest rate volatility by executing an interest rate swap with IFC where the project pays a fixed rate of interest to IFC and receives a floating rate of interest. The cash flows on this swap can be structured to exactly match the outstanding principal amounts of the underlying loan (based on the amortization schedule). Since the project's debt service on its, floating rate loan is matched-by the floating rate cash flow received from IFC swap, the project is left with a fixed rate obligation.

HEDGING COMMODITY-PRICE EXPOSURE

Many companies in emerging markets, particularly those involved in the production of basic commodities (e.g. gold, of, minerals) are exposed to commodity-specific price risk. Depending on the nature of the commodity and the market for that commodity, this exposure can be hedged through commodity swaps and over-the-counter options.
For example, an African gold producer may not have access to the commodity markets to hedge its gold price risk. This put him under a competitive disadvantage in relation to developed country gold producers. To avoid this problem, IFC can set up a facility whereby it will intermediate between that company and the gojd hedging markets to make longer-term hedging structures available to that client.

SHARE OF INDIAN INDUSTRIES UTILISING THE FINANCIAL PACKAGE FROM IFC

Three Indian projects received debt the equity assistance from the IFC, Washington, totaling $ 72.23 million (Rs. 317.81 Crores) according to just released annual report of the IFC for the Year ended 30th June, 1999. Till June 30, 1999 IFC has assisted 120 Indian enterprises involving an amount of $ 1.71 billion including loan and equity syndication organized by the IFC, the total assistance to. Indian enterprises work out to $ 2.17 billions. The Annual report notes that for fiscal 1999, IFC increased commitment of its own resources to $ 2.8 billions and mobilized another $ 800 millions in syndicated loans to projects in 79 developing countries. In 1998, IFC had committed less fir its own account, $ 2.7 billions, but syndicated loans were higher at $ 2.4 billions. The decline in syndicated loans - "reflects the difficult world financial environment which led many commercial banks to cut back their exposure to developing countries, says the report. Last year, IFC's investments earned a net profit of $ 249 millions, a slight increase over 1998's $ 246 millions.




October 24, 2009 | 2:12 AM Comments  0 comments



KODAK HAS TO REORGANISE ITS PRODUCTS TO CHANGING TECHNOLOGY !
Translations available in: English (original) | French | Spanish | Italian | German | Portuguese | Swedish | Russian | Dutch | Arabic

George Eastman will be remembered for ever by the mankind for his invention of the roll film. His invention has revolutionalized the film industry. A flexible, roll-type, celluloid camera film was the great invention of George Eastman [1879-1932] in the field of photography and motion picture films.

The family was financially in trouble when Eastman's father died in 1862, and he also lost his only sister due to Polio in 1870. Hence, Eastman had to say goodbye to his school education and was forced to work as an office boy in an insurance company in Rochester at the age of 15.

In 1875, Eastman changed his career and worked as a junior book-keeper for the Rochester Savings Bank. He ventured into as a real estate agent with the help of money saved from his career as a part-time job.

He fell in love with the photography technology, and it had motivated him to learn more about the photography business. He started to take training in photography from two maestros namely George Selden and George Monroe. He then subscribed to the “British Journal of Photography” which had given him a lot of new ideas and stimulated him to craft improvement in dry photography technology. He understood that British photographers were using gelatin emulsions, which remained sensitive after it got dried. Eastman began to make his own emulsion which he developed it from the formula he studied in a British magazine.

His inventiveness and inquisitiveness resulted in inventing a formula for manufacturing gelatin based paper film and a machine for dry plate coating. In 1880, he started to sell his improved dry plates in the market and he also patented his dry plate machine that paved the way for manufacturing the plates in large numbers. He also obtained a British patent for his dry plate machine in 1879.

In 1888, Eastman invented the Kodak Camera and the Eastman Kodak Company was founded in 1892, and it was one of the first U.S. companies that pioneered to mass-produce a standard product.

The Eastman’s end came in 1932 but his era continues. The contemporary development of photography and motion picture industry is strongly based on the Eastman’s invention of the celluloid roll film. Eastman had demonstrated that an inventor could also be a philanthropist as in all, Eastman donations for the above mentioned institutions have exceeded almost $ 100 million dollars. To attain a success factor in the cut throat competitive industry, Kodak’s slow response to the digital imaging is creating apprehensions. Kodak should concentrate on digital technology to keep itself with the industry’s changing phase by phasing out traditional technologies while keeping Kodak’s stronghold area’s like Photo –finishing services and supply of paper and ink sectors intact.



October 15, 2009 | 8:05 AM Comments  0 comments



React to Changes in the Industry to Avoid Corporate Failures
Translations available in: English (original) | French | Spanish | Italian | German | Portuguese | Swedish | Russian | Dutch | Arabic

Corporate Failures

Why some corporate files bankruptcy. What is the reason for their failure. Reasons may vary from corporate to corporate but if a company fail to recognise the ongoing market changes and fail to change its functions , it may face issues in the near future.

Sydney Finkelstein of Dartmouth’s Tuck School of Business has studied about 51 companies that had collapsed and sustained losses about hundreds of millions of dollars and some forced to file bankruptcy .The companies that were took up for the research were from all industries from Johnson & Johnson to Samsung and from Boston Red Sox to Motorola.

In his research study of corporate failures, Finkelstein categorised failed companies into four categories.

1) Breakdowns of new business.

2) Failures due to change and innovation .

3) Breakdowns due to merger and acquisitions .

4) Failures due to collapses of plans.

He also described the causes of corporate failures including having hallucination of a dream company, having a wrong vision, following the foot prints of lost signals and engaged in bad habits.

Finkelstein researched the three companies namely Motorola, Rubbermaid and Johnson & Johnson which witnessed heavy losses not because they did something wrong but due to their failure not to do certain things.

They remained dormant and never tried to adapt to change in technologies that is transforming. These companies failed to take cognisance of competitive challenges and ever changing customer preferences and suitably failed to retort to these changes.

Johnson & Johnson was once the market leader in the stent which is being used in angioplasty which replaced the need for surgery for cardiac surgeons in case of blocs in arteries . However, despite of heavy demand , Johnson & Johnson failed to make some improvements of its product and it also blamed for price gauging strategy as it was very rigid in pricing the product thereby declining to offer discount for bulk orders.

Taking the advantage of Johnson & Johnson failure to take into account the competitor’s risk, Guidant, a European company penetrated into the U.S market by heeding the customer's and dealer's wishes and captured about 70% of the market of Johnson & Johnson in U.S alone.

Motorola is a manufacturer of walkie-talkie, television and space programs and introduced the pagers and cell phones for the first time in the market and had a market share about 60% of the cell phone market in 1994.
Motorola preferred to remain with analog technology whereas wireless carriers preferred Motorola to switch to digital. Though, Motorola owned some patents on wireless technology, it rather interested in licensing the same to its competitors like Ericsson and Nokia. Motorola was happy with the royalties received but never took into the cognisant the ever increasing digital market. Motorola’s lack of vision, impassiveness and not realising the changing technology ultimately landed it to loose its market share to its competitors.

In Rubbermaid’s case, company failed to react to the changes in distribution channel technology in appropriate time. When they retorted, it was too late. Thus, Rubbermaid introduced crash programs to manage a change and due to years of inaction, it never yielded any positive results.

Finkelstein examination of above three companies and their inability to visualise, adapt to change in the scenario has lessons for any organisation including IT companies. Thus, if companies do not identify its risks, prioritize the same and initiate corrective actions in time, no doubt it will be filing bankruptcy under chapter 11 later on.

Thus, failure of these companies may be attributed to their inertia and having remained wooden-headedness thereby harping on preconceived fixed ideas while rejecting or neglecting any opposite signs.

Therefore , for survival , watch the market constantly and adopt to changes rapidly to safeguard your market share.

R.V.Seckar M.COM, F.C.S , A.I.C.A (UK) LLB.

June 12, 2009 | 6:21 AM Comments  0 comments





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