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23 May 2019
Construction contracts are commonly part of a wider suite of project contracts, involving multiple, overlapping parties. Depending on the project, this suite can include concession and licence agreements, joint venture agreements, offtake agreements, financing agreements, direct agreements, guarantees and agreements with subcontractors. This intertwined suite of contracts often means that when a dispute arises, it arises under multiple project contracts. Each of those contracts may have a well-drafted dispute resolution clause that was negotiated and agreed by the specific parties to that contract, and which reflects how those parties wish to resolve any dispute under that particular contract. However, such clauses often differ and are incompatible.
This disparity in dispute resolution procedures across multi-contract projects can lead to a series of concurrent arbitrations and court proceedings relating to the same or similar issues arising in connection to the project, potentially resulting in conflicting decisions. The costs and time burden of dealing with multiple disputes on multiple fronts can be significant, and the difficulties of enforcing conflicting decisions will inevitably delay the satisfactory resolution of such disputes.
In some circumstances, this is the commercial reality of such projects and may not be a priority for different parties. However, if mitigating these risks is a priority, such mitigation may be achieved through arbitration and the consolidation of arbitral proceedings. Although difficult to accomplish, steps can be taken to give parties the best chance of achieving consolidation, and therefore avoid some of the issues associated with multi-contract projects. This article answers some FAQs regarding these issues.
What are the key issues faced in drafting dispute resolution clauses for multi-party and multi-contract projects?
Large projects will inevitably have many moving parts – multiple parties in different jurisdictions, financiers, sponsors and contractors and large volumes of interlinking contracts. The contracts will often be drafted across different internal and external legal teams, including situations where multiple firms are advising on contractual terms. Various parties to these contracts, especially government entities and lenders, will push for particular dispute resolution procedures, based on their internal policies or commercial drivers. Other parties may have differing experience with dispute resolution procedures, or particular arbitral bodies or seats of arbitration, which lead them to prefer a particular procedure. This inconsistency can cause issues when a dispute arises under multiple contracts, including concurrent proceedings and conflicting decisions.
What is the key to mitigating these risks?
Consistency across dispute resolution clauses is key. This could be achieved by choosing the courts of a particular location to have exclusive jurisdiction over disputes arising under any project document. However, if the project has several parties from different jurisdictions, this may not be commercially palatable.
Choosing arbitration as the dispute resolution procedure for each project contract – and ensuring that the arbitration agreement in each project contract is consistent – will likely be a more palatable option and will give the parties a good chance of achieving consolidation of future disputes under different project contracts. Including specific drafting relating to consolidation will also be helpful.
What is meant by 'consolidation' and how is it different to 'joinder'?
'Consolidation' is where two or more separate arbitral proceedings are merged into a single arbitration. The merged arbitration can be presided over by one of the existing arbitral tribunals or a new arbitral tribunal can be appointed for the merged arbitration. The two separate arbitral proceedings can relate to disputes under the same contract or under different contracts but arising from similar facts. However, for the purposes of this article, the focus is on situations where disputes arise under different project contracts but in relation to the same facts.
'Joinder' is where, on the request of an existing party to an arbitration, a third person not yet involved in the arbitration is brought in to participate in the proceedings, or where the third party is allowed to intervene in an existing proceeding.
What are the recommended initial steps?
If possible, a holistic review of the proposed dispute resolution procedures for all project contracts should be taken. The proposed dispute resolution clauses should be compared to see if consistency is possible and negotiations should be conducted with this in mind. If a project contract has already been executed, the parties to the other project contracts should consider whether the dispute resolution procedure adopted by the executed contract can be mirrored in the remaining contracts. If not, an amendment to the signed contract can be considered.
Further, an analysis of where disputes are likely to arise should be conducted. If total consistency cannot be achieved across all project contracts, it may still be helpful to achieve consistency across a set of contracts under which similar disputes may arise.
What role does arbitration play?
For many different reasons, it is common to see arbitration as the preferred dispute resolution procedure in multi-party project contracts, especially for those projects that involve international parties. Arbitration is often seen as a more neutral forum than a local court alternative, and in many circumstances can be beneficial for enforcement. Many of the most commonly used rules of arbitral institution, including the International Chamber of Commerce and the London Court of International Arbitration, have provisions dealing with joinder and consolidation, and give the court of the respective arbitral institution the discretion to make appropriate orders in certain circumstances. Such rules differ in their content, but the key to taking advantage of them, particularly in respect of consolidation, is to ensure that the essential parts of the arbitration agreement in each project contract are consistent. These essential parts will include the seat of arbitration, the arbitral rules and the number of arbitrators. However, they may also include any specific procedural requirements written into the arbitration agreement.
What effect does differing governing laws between contracts have?
Parties often believe that consolidation cannot be achieved where proceedings are brought under different contracts providing for different governing laws. However, while it may affect a tribunal's discretion in deciding whether to consolidate, it is not necessarily the case that different governing laws in all cases will prevent consolidation. Arbitral tribunals regularly determine points of law under different legal systems, and this would be no different in a consolidated arbitration. Accordingly, if, say, it was necessary to determine whether a particular fact scenario gave rise to a breach of an engineering, procurement and construction contract governed by New York law, and then also whether that same factual scenario gave rise to a breach of a concession agreement governed by English law, the arbitral tribunal in a consolidated arbitration can make such determinations.
What effect do stepped or split clauses have on consolidation?
Split clauses – clauses which provide that at the point when the dispute arises one or more parties has the option to choose the dispute resolution mechanism (whether court or arbitration) – can mean that consistency across project documents, and therefore the ability to consolidate disputes, is lost.
Similarly, stepped clauses, which provide that several dispute resolution processes must be gone through before proceedings can be commenced (eg, first negotiation, then mediation and then finally arbitration), can also mean that consolidation is not possible.
The perceived advantage of such clauses may outweigh the desire to achieve consolidation. However, this is something that should be considered by the parties upfront.
Should a consolidation clause be included and what should it contain?
While notoriously difficult to draft, thought should be given to including a consolidation clause within the dispute resolution clause of each project contract, which expressly evidences the parties' agreement to consolidation. The specific drafting of such clauses will depend on the arbitral rules chosen (as there may be different requirements relating to agreements to consolidate), and also the contracts to which the agreement to consolidate will apply. Again, consistency of such consolidation clauses across project contracts is key.
For further information on this topic please contact Katie McDougall at Norton Rose Fulbright's London office by telephone (+44 207 283 6000) or email (firstname.lastname@example.org). Alternatively, contact Hector Sharp at Norton Rose Fulbright's Dubai office by telephone (+971 4 369 6300) or email (email@example.com). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.
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