Tendering, affiliate companies bidding for the same project, acceptable or not?

An article, copied here below regarding affiliate companies bidding, attracted my attention. It concerns the question whether companies of the same group can participate to and compete against each other in the same public tendering. It also gives some practical guidelines. But let us first look at the general context.

General context

Companies from the same group, often named affiliate companies, are companies (mother, daughter or sister companies) that have the same majority shareholders (50% +1) and control.

Intuitively, one would be against multiple bids from group companies.

What is the opinion from the World Bank?

The following quote from World Bank (WB) guidelines shows the general principle applied by WB and other Multilateral Development Banks (MDBs):

4.1 A Bidder shall not have a conflict of interest. Any Bidder found to have a conflict of interest shall be disqualified. A Bidder may be considered to have a conflict of interest for the purpose of this Bidding process, if the Bidder:

(a) directly or indirectly controls, is controlled by or is under common control with another Bidder;

(Source: “World Bank, Standard Procurement Document, Request for Bids, Works [without prequalification]”)

Therefore, WB doesn’t allow several bidders from the same group of companies to participate to the same tender. It is currently not the case – but I would personally prefer – that WB and other MDBs apply the same rule for state owned companies. This would avoid that several state-owned companies participate to the same tender and differentiate their bidding strategy (coordinated at ministerial level) to maximize the chances of success for the country (typical “low price/high price” bid strategies).

The reality for large multinational companies

On the other hand, I’ve seen situations where big multinational companies have entities with distinct specializations that may wish to team up with third party companies to prepare a complete bid. They had no internal rule establishing who could participate on priority basis to a specific tender. And, no active direct management oversight to allocate participation on a case-by-case basis nor establish a joint strategy. At best, a corporate risk management team could notice both entities were participating to the same tender. But such corporate risk team looked at each tender separately in interaction with the relevant entity only and did not interfere with bid/no-bid decisions. If a “Chinese wall” principle is applied and no commercially sensitive information is exchanged, one could consider this acceptable. The problem is for the contracting entity (and other companies participating to the same tender) to be entirely sure that no information is shared within the relevant group.

The relevant article

(Source: “https://www.lexology.com/library/detail.aspx?g=6b244399-4dd0-411d-9160-ba0ba685f51d“)

If two companies that are in same group both participate in a public procurement procedure with their own tenders, are they allowed to exchange information? Is it all right for them to use the same people and the same sources of information when preparing their tenders, or do they have to genuinely compete against each other?

These questions may sound surprising. After all, the prohibition of bidding cartels under competition law does not apply to companies that are part of the same group and that are in a relationship of control. For example, a group’s parent company may exchange information or allocate customers with its subsidiaries in the daily course of its business without this being considered a competition infringement.

Public procurement is a different ball game, though. According to the Court of Justice of the European Union, companies participating in a public procurement procedure must compete against each other and make their tenders independently even if they are part of the same group.

The CJEU has lately charted the territory between competition law and procurement law. It recently handed down judgments in two cases, Lloyd’s of London and Specializuotas transportas, in which it held that tenderers in a relationship of control must not be excluded from procurement procedures, but their tenders must be autonomous and independent of each other.

If in doubt, the contracting entity must ascertain whether the relationship between the group companies had a specific effect on the tenders they submitted in the procedure. This is required by the principles of transparency and non-discrimination. The contracting entity must ask for additional clarification if it knows, for example, that the same persons are involved in the decision-making bodies of both companies or that the two tenders make use of the same resources.

Asked about connections, be prepared to clarify

How does the CJEU’s new case-law translate into practice? Contracting entities seek to generate as much competition as possible. It is important for them to ascertain that tenders are actually in competition against each other, especially in the case of framework agreements with multiple tenderers or if tenderers are allowed to submit partial tenders. Group companies, in turn, must be able to show that they have not cooperated when preparing their tenders. Finally, it is in everyone’s interest to avoid messy appeal procedures after the procurement decision is made.

The following simple checklists will help contracting entities and group companies avoid pitfalls.

Checklist for Contracting Entities

  1. Ask the tenderers to declare their group connections in your tender documents.
  2. When reviewing the tenders, look out for tenders with a large number of similarities. This may indicate that the tenders are not competing genuinely against each other.
  3. Ask for further clarifications if you have an obvious reason to suspect that the tenders have not been prepared autonomously.
  4. If the tenderers cannot present a sufficient and credible clarification showing that their tenders are autonomous and independent, reject the tenders and explain your decision.

Checklist for Tenderers

  1. If two companies from your group are participating in the same public procurement procedure as tenderers, introduce a bidding cartel prohibition within your group. In other words, act like you would with your main competitor.
  2. Check that the tenderers do not liaise and cannot access each other’s tender materials. Make sure that the preparation of tenders is not discussed in meetings between the two companies. Have adequate confidentiality agreements in place where necessary.
  3. Prepare to give clarifications to the contracting entity: maintain sufficiently detailed records of the tendering procedure and group actions in advance.

Click here for other articles on tendering on this blog.

About AfiTaC

AfiTAC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “advice@afitac.com”. 

Construction Contract Splitting, to split or not to split ?

This article is selected on the internet by AfiTaC because of its interest for the readers of this blog. In future posts, we will dig in deeper on taxation issues.

It has become common practice in many jurisdictions for parties to split construction contracts with an international element. The split structure is intended to provide a reduced tax exposure for the contractor and a resulting pricing benefit for the employer.

The archetypal contract split will see a single, turnkey contract split into onshore (or in-country) and offshore (or out-of-county) agreements. The contractor entity is usually different in each agreement. The various parties will then enter into a single umbrella agreement, which might also be called a bridging agreement, linkage agreement, coordination agreement or similar. This agreement will regulate the relationship between the onshore and offshore agreements. The primary purpose of the umbrella agreement is to ensure that the split structure offers the same contractual protection to the employer as a single, turnkey contract.

There is a commonly held view that the splitting of a construction contract can be concluded quickly and easily. It rarely turns out this way in practice. This is partly because the mechanics of the split will be driven by local law tax advice. It is also because the effect of the split on scope, pricing, liability and interface can be difficult for the parties to establish.

Historically, practitioners have not received a great deal of assistance from the courts in terms of how a tax split should be structured and drafted. For this reason, the recent decision in Petroleum Company of Trinidad and Tobago Ltd v Samsung Engineering Trinidad Co Ltd is very interesting reading. The decision in the case was ostensibly startling: in a claim for delay liquidated damages, Samsung would have the benefit of a lower cap in the onshore agreement. The overall liquidated damages in the linkage agreement would be ignored.

Parties might usually expect a higher aggregate cap in a linkage agreement to override any lower liability cap set out in the onshore and offshore agreements. The rationale is that any delay is typically attributable to the consolidated scope, rather than to the individual onshore or offshore elements. These elements are somewhat artificial, existing only to give effect to the tax split. That being the case, the case also validated a number of the protections that well-advised parties would typically include in a split contract structure.

Petronin v Samsung

The circumstances of the case concern a fairly typical dispute over competing entitlements to additional time and liquidated damages. Petroleum Company of Trinidad and Tobago Ltd (“Petronin”) engaged Samsung for the procurement, construction and commissioning of a CCR Platformer Complex and substation in Trinidad.

The contract was split between an onshore agreement and an offshore agreement. A different Samsung entity entered into each agreement. The parties, including both Samsung entities, entered into a linkage agreement to regulate the relationship between the onshore and offshore agreements. The intention of the parties (which was not in dispute) was solely to achieve tax efficiency and the purpose of the linkage agreement was to ensure that there would be no derogation from the turnkey principle.

Samsung failed to achieve the required mechanical completion date and brought an arbitration for an extension of time, damages and sums. The claim was brought under the onshore agreement. Petronin counterclaimed for delay liquidated damages. An issue arose regarding whether the liquidated damages would be subject to a cap in the onshore agreement (sized at 10% of the onshore agreement price) or a cap in the linkage agreement (sized at 10% of the aggregate of the onshore agreement price and the offshore agreement price). The difference between the respective positions was a liability of almost US$2.3 million.

Which cap applied?

The arbitral tribunal held that the cap set out in the onshore agreement applied and found in favour of Samsung. Petronin challenged the finding in the English High Court. The Court agreed that the lower cap was correct and rejected Petronin’s argument to the contrary. The key reasons for the decision were as follows.

  • Samsung brought the arbitration proceedings under the onshore agreement.The claimant was the onshore entity.
  • Petronin’s counterclaim was stated to be brought against the onshore entity.Petronin did not indicate that the counterclaim was brought pursuant to either the offshore agreement or the linkage agreement.
  • The terms of reference of the arbitration were drafted by reference to the onshore agreement.
  • Petronin’s counterclaim referred to ‘a cap at 10% of the Contract Price’.The ‘Contract Price’ was a defined term describing the price in the onshore agreement.The overall price for both the onshore and offshore elements was defined in the linkage agreement as the ‘Total Agreement Amount’.
  • As a matter of construction, if the tribunal were to import the linkage agreement cap into the onshore agreement, the effect would be to render the lower cap completely ineffectual.

What went wrong for Petronin?

The judgment must have been a bitter pill to swallow for Petronin, given that the sole reason for the split was apparently to achieve tax efficiency. Presumably, Petronin did not anticipate bearing any additional risk as a consequence of the split.

According to the judgment, the linkage agreement contained a number of the protections we would expect to see to protect the employer from assuming any residual risk. These include:

  • an interface obligation to integrate the onshore and offshore scopes;
  • provision to make sure one contractor could not obtain time or cost relief due to default by the other contractor; and
  • wording to confirm the precedence of the linkage agreement for the purposes of interpreting any inconsistency.

However, these protections were redundant because the claim and counterclaim were pursued (initially at least) in relation to the onshore agreement only.

Petronin attempted, belatedly, to invoke the entirety of the contractual framework. Their reply to defence to counterclaim emphasised the interrelationship of the agreements, arguing that the required mechanical completion date was identical in each of the onshore and offshore agreements. The implication was that any delay to mechanical completion would be a function of delay in respect of both scopes. However, the tribunal, and subsequently the Court, rejected this narrative as being inconsistent with the mechanism by which the claim and counterclaim had been brought (namely by reference to the onshore agreement).

Implications for tax splits

The most evident lessons of the judgment are:

  • a linkage agreement should contain robust protection against any adjustment of the risk profile of the construction contract which may arise as a consequence of the split;
  • any claim or counterclaim should be made pursuant to the entirety of the contract framework; and
  • the dispute provisions in the constituent agreements should enable the joinder of related disputes.

This last point is important to enable a respondent to ensure that any claim brought in relation to a single agreement can be determined by reference to the overall contract structure.

To split or not to split?

There is also a broader moral which parties should consider given the outcome of this case. Parties, and particularly employers, should spend time to determine whether a tax split will actually offer a discernible, worthwhile benefit. Typically, this would be a significant cost-saving. Often, international contractors will propose a split simply on the basis of accepted practice in other jurisdictions. However, it is not always advisable or even necessary. Certain jurisdictions offer tax exemptions which obviate the need for a tax split. In other cases, any financial saving may be minimal when considering the additional time and cost implications of negotiating and agreeing the split contracts (which, it is as well to remember, includes splitting scope and pricing schedules as well as legal terms).

In addition, the case provides a useful reminder to parties (particularly employers) of the additional burdens of a tax split. If the parties are well-advised, this should not amount to additional risk exposure. However, it will necessitate a greater degree of oversight to ensure that the contract is administered as a consolidated whole.

The original article can be found at the following location: https://www.lexology.com/library/detail.aspx?g=9c30584e-206e-4af1-bbb1-3de518eb56b2 

AfiTaC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “advice@afitac.com”. 

Negative cash flow for construction companies

This article has been selected on the internet by AfiTaC because of its interest for the readers of this blog. In future posts, we will dig in deeper on cash flow issues.

Negative cash flow probably causes more construction companies to run into financial trouble (leading to their closure) than any other cause.

Even a profitable construction project can cause a company financial problems if the cash flow is negative.

Negative cash flow is when the construction company is paying money to suppliers, equipment hire companies and subcontractors, or in wages and salaries, before the client has paid for the work that has been completed.

Unfortunately most construction projects are usually cash negative to some extent. Many clients hold 10% cash retention until the end of the project when this is reduced by half. Consequently if the project is tendered at anything less than a 10% profit the project is usually cash negative until the end.

In addition, most clients only pay the contractor thirty days after the contractor submits an invoice. These invoices are normally submitted at the end of each month. Many contractors pay their workers fortnightly or in some cases weekly. This could mean the contractor has paid out up to seven weeks of wages before the client pays for the work that these personnel have completed. Smaller contractors sometimes have to pay suppliers before they will release materials.

What Makes Cash Flow Even Worse?

There are, however, a number of other factors that make the cash flow situation even worse:

  • Many construction projects have payment terms longer than thirty days.
  • In addition some clients habitually pay progress claims late or not in full.
  • Of course, the ultimate knockout blow for many construction companies is when clients don’t pay at all. This could be a result of the client disputing the value of work, defaulting on the contract or going into liquidation.

Yet, even with the odds stacked against construction companies, they often make their cash flow situations worse by submitting their progress valuations late, accepting payments late or not claiming fully for completed work.

How To Improve Cash Flow Situation

To improve the cash flow situation construction companies must submit their monthly progress valuations on or before the due date. Some clients only run progress payments on a particular day in the week, or month, so missing a submission date could cause the client to delay payment by up to a month. The valuations must be submitted in the required format and with the required supporting documentation since many clients will use any excuse to delay or reject a monthly claim.

It’s important to track the progress of the payment through the client’s payment system. With major clients there may be several people that check and approve the valuation and payment. Sometimes, the process is disrupted when someone is absent, or the claim simply gets ‘lost’. I’ve had more than one client who consistently paid progress claims late, always with some excuse about our valuation being late, the claim being incorrect (either arithmetic errors, insufficient supporting documentation or disagreement with our progress) and people in the approval process being absent. Of course many of these problems were only reported to us when the payment was due, despite the client having had the claim for thirty days.

Some contracts are structured such that payments are only made when the contractor achieves particular milestones. It’s important that Project Managers understand what these milestones entail and ensure they are met. It’s obviously pointless to achieve 99% completion if payment is only made for 100%. Often contractors take several weeks to complete the last few items (which may just be completing documentation), which delays payment.

Click here to learn about the negotiation of the payment terms.

About the source

Written by Paul Netscher the author of the acclaimed books ‘Successful Construction Project Management: The Practical Guide’ and ‘Building a Successful Construction Company: The Practical Guide’.

Both books are available in paperback and e-book from Amazon and other retail outlets. This article is adapted from information included in these books. To read more visit http://www.pn-projectmanagement.com )

About AfiTaC

AfiTaC.com is the blog on commercial and contractual subjects for the Project Businesses (Construction, Infrastructure, Oil & Gas, Power & Renewable, Water Supply & Sanitation, etc). Its objective is to stimulate reflection, learning, convergence to balanced contracts and positive dispute resolution. You can subscribe to our newsletter by writing to “newsletter@afitac.com”. You can also connect to our LinkedIn page. Engagement with the readers is what keeps us going. So, don’t hesitate to exchange with us by commenting here below, liking our publication on LinkedIn and writing to us “advice@afitac.com”. 

New ICC Rules of arbitration effective since 1 March 2017

This article is selected on the internet by AfiTaC because of its interest for the readers of this blog (source: www.wolftheiss.com) :

Arbitration is becoming more efficient and transparent and less expensive thanks to recent revisions to the ICC Rules of Arbitration. The ICC Court has introduced rules for expedited arbitration procedures for small claims.

SCOPE OF APPLICATION

The ICC Court introduced revisions, into force since 1 March 2017. While the general provisions will apply to all arbitration proceedings commenced on or after this day, the rules for expedited procedures will automatically only apply to claims with a value of up to USD 2,000,000 arising out of arbitration agreements concluded on or after 1 March 2017.
The expedited rules can also apply to disputes worth more than USD 2,000,000 or arbitration agreements concluded before 1 March 2017 if the parties choose to opt in. Alternatively, it is also possible to opt out of the new rules. If the parties wish to do so, a suitable ICC model clause is available.

KEY FEATURES OF EXPEDITED PROCEDURE

In brief, the expedited procedure amendments bring about the following changes:

  • The dispute will be referred to a sole arbitrator, even if the arbitration agreement provides for a three-member tribunal. Before, the parties’ agreement on the number of arbitrators and the procedure governing their appointment has prevailed over the ICC Rules (which provide for a sole arbitrator as a general default rule subject to particular circumstances of the case which allow the ICC Court to decide otherwise). Either the ICC Court or the parties will appoint the sole arbitrator (within a time limit set by the ICC), depending on the particular arbitration agreement.
  • The Terms of Reference, which have always been a traditional feature of ICC proceedings, are no longer required.
  • After the tribunal has been constituted, the parties will not be able to make new claims unless expressly authorized by the tribunal.
  • Within 15 days after the transmission of the file to the tribunal, the case management conference must be held. The tribunal will be required to render its award within 6 months of the case management conference, unless this deadline is extended by the ICC Court.
  • The tribunal may exclude the production of documents. It may also limit the number, length and scope of submissions, witness statements and expert reports, and decide the dispute solely on the basis of documents. Alternatively, it will have the authority to hold hearings not only in person, but also via telephone or video conference.
  • In order to increase cost efficiency, the arbitrators’ fee range will be reduced by 20 percent.

FURTHER AMENDMENTS

As for proceedings that do not fall under the expedited procedure rules, the most important modifications are these:

  • The time limit for issuing the Terms of Reference will be reduced to 30 days (instead of 3 months);
  • Reasons for the decisions by the ICC Court concerning the appointment, confirmation, replacement or challenge of arbitrators will no longer be confidential, but can be communicated upon the request of any party;
  • A request for arbitration will require a filing fee of USD 5,000 (instead of USD 3,000); and
  • There is a revised fee scale for the ICC administrative expenses, effective as of 1 January 2017.

OUTLOOK

With regard to the expedited procedure, nothing will change in respect to arbitration agreements that have been concluded before 1 March 2017 unless otherwise agreed to by the parties. However, starting from that date, it will be essential to carefully consider whether or not to opt out of the new expedited procedure rules. Undoubtedly, the revision of the ICC Rules will increase the efficiency and transparency of ICC arbitrations while simultaneously lowering their overall cost and duration.

ICC MODEL CLAUSE, RECOMMENDED PROVISIONS

Parties wishing to resort to arbitration under the ICC Rules are recommended to agree to the following standard ICC arbitration clause:
“All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”
It is also recommended to include the following provisions:
“The place of arbitration shall be [city, country].”
“The language of the proceedings shall be [language].”
If the parties wish to opt out of the emergency arbitrator provisions, they should include as follows:
“The Emergency Arbitrator Provisions shall not apply.”

If the parties wish to opt out of expedited procedure provisions (which would be applicable to a case where the amount in dispute is up to USD 2,000,000), they should include as follows:
“The Expedited Procedure Provisions shall not apply.”
If the parties wish to apply the expedited procedure provisions in any case (i.e. irrespective of the amount in dispute), they should include as follows:
“The parties agree, pursuant to Article 30(2)(b) of the Rules of Arbitration of the International Chamber of Commerce, that the Expedited Procedure Rules shall apply irrespective of the amount in dispute.”
If the parties wish to determine their own threshold amount for the application of the expedited procedure provisions, they should include as follows:
“The parties agree, pursuant to Article 30(2)(b) of the Rules of Arbitration of the International Chamber of Commerce, that the Expedited Procedure Rules shall apply, provided the amount in dispute does not exceed US$ [specify amount] at the time of the communication referred to in Article 1(3) of the Expedited Procedure Rules.”

The original article can be found at this location: 

https://www.wolftheiss.com/fileadmin/content/6_news/clientAlerts/2017/2017_Q1/17_02_24_WolfTheiss_CA_New_ICC_Rules.pdf

ICC Rules of Arbitration

This article is selected on the internet by AfiTaC because of its interest for the readers of this blog (source: out-law.com) :

The ICC Rules of Arbitration are the most widely-used institutional arbitral rules in the world, especially in relation to international construction and energy disputes. A new version of the Rules came into force on 1 January 2012. The 2012 Rules apply to all ICC arbitrations that commenced on or after that date, unless the parties have agreed that the previous version of the Rules will apply. [Note from AfiTaC: since the publication of the original article, a new version of ICC Rules of Arbitration has become available in 2017: ICC-2017-Arbitration-and-2014-Mediation-Rules-english-version.pdf]

The previous version of the Rules was published in 1998. To a large extent the new Rules simply codify the solutions and approaches that the ICC Secretariat has followed since the last revision of the Rules.

Most of the changes are aimed at increasing the efficiency of the arbitration process.

The 2012 Rules explicitly require both the arbitrators and the parties to “make every effort to conduct the arbitration in an expeditious and cost-effective manner”.

The changes will force participants to define more aspects of their claims and outline the merits of the dispute earlier on in the process.

The Rules also contain new penalties for behaving in a way that undermines the process’s efficiency. The new Rules permit the tribunal, when making allocating costs, to take into account “the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner”.

Entirely new provisions relate to the emergency arbitrators, case management, and multi-party arbitrations.

Main changes introduced by the 2012 Rules

Emergency arbitrator: the emergency arbitrator provisions are probably the most innovative provisions in the 2012 Rules. A party which needs urgent interim or conservatory measures that cannot await the constitution of an arbitral tribunal may apply for such measures in accordance with Article 29 and the provisions in Appendix V.

The party applying for the emergency arbitrator must file its Request for Arbitration no later than 10 days after the Secretariat receives the application. If it does not, the President will terminate the emergency arbitrator proceedings unless the emergency arbitrator determines that a longer period of time is necessary. This is quite a tight timescale.

The emergency arbitrator’s decision will take the form of an order. The order will not be binding on the arbitral tribunal and it is unclear whether or not an emergency arbitrator’s order would be enforceable under the New York Convention, which refers to “awards”. Interim orders and measures are enforceable under national laws in some jurisdictions but not in others.

The emergency arbitrator provisions contained in Article 29 and Appendix V of the 2012 Rules will not apply if the parties’ arbitration agreement was concluded before 1 January 2012. In addition the emergency arbitrator provisions will not apply if the parties have elected to opt out of those provisions or have agreed to follow another pre-arbitral procedure that provides for the granting of conservatory and interim measures.

Case Management: the Rules require the tribunal to convene a case management conference to define procedural matters at the start of the arbitration. Further case management conferences may take place if necessary to ensure that the arbitration is efficiently conducted. The arbitral tribunal is encouraged to take a proactive role in order to determine an efficient conduct of the procedure by using the management techniques set out in Appendix IV and in the ICC publication “Techniques for Controlling Time and Costs in International Arbitration”.

Arbitrators have to inform the parties and the Secretariat of the date they expect to submit their draft award. According to the previous version of the Rules the arbitrators were supposed to communicate an “approximate” date (to the Secretariat only). Furthermore, the ICC Court is required to take the efficiency of the arbitrators and the timeliness of submission of the draft award into account when setting the arbitrators’ fees.

Constitution of the Arbitral Tribunal: the powers of the ICC Court have been expanded in order to allow the Court to appoint a suitable arbitrator in the event that a national Committee fails to make the appointment within the deadline fixed by the Court or the president of the National Committee certifies that a direct appointment is “necessary and appropriate”. The Court can also appoint arbitrators in proceedings involving States or State entities.

Independence and impartiality of arbitrators: whereas under the 1998 Rules arbitrators had to be independent of the parties involved in the arbitration, they must now be impartial as well as independent. Accordingly they must disclose any circumstances that could give rise to reasonable doubts as to their impartiality as well as anything that might call into question their independence. In addition, prospective arbitrators must sign a statement of acceptance, indicating their availability. Such a declaration is aimed at reducing the procedural delays due to the over-commitment of arbitrators.

Challenges to jurisdiction: while the old version of the ICC Rules allowed parties to raise jurisdictional challenges to the Court on the validity of the arbitration agreement, under the new Rules such challenges will be addressed by the arbitral tribunal unless the ICC Secretary General refers the issue to the Court. Article 6 of the ICC Rules has been revised to speed up the procedure.

Multiple Parties and Multiple Contracts: the 2012 Rules include entirely new provisions on multiple parties and contracts. According to Article 7, a party may request that an additional party be joined to the arbitration by submitting a Request for Joinder to the ICC Secretariat. Article 9 confirms that claims arising out of or in connection with more than one contract may be made in a single arbitration, irrespective or whether such claims are made under more than one arbitration agreement under the Rules.

Finally, the 2012 Rules expand the powers of the ICC Court of Arbitration to consolidate arbitral proceedings under Article 10.

Technology: The new Rules explicitly allow the arbitral tribunal and the Secretariat to communicate with the parties by e-mail, as they already had in fact been doing for some time, while the previous version of the Rules referred to obsolete methods of communication, such as telex and telegram. References to these obsolete methods of communication have been deleted. Tribunals are encouraged to consider the use of video conferencing at hearings where attendance in person is not essential.

 

The original article can be found at this location: https://www.out-law.com/en/topics/dispute-resolution-and-litigation/arbitration-and-international-arbitration/2012-icc-rules-of-arbitration/

Contract Risk Scoring, how can it help you in your decision process?

Introduction

This post analyses the decisions you can take with your Contract Risk Scoring methodology & tool. The objective is to maximize your chances to achieve your desired business results.

What is Contract Risk Scoring ?

Contract Risk Scoring is a methodology to identify risks in contracts, to attribute a representative risk score to each relevant subject (with the help of a tool) and to generate an overall score for the contract. Usually, specific risks on the relevant subjects are rated from 0 (low) to 5 (high) with an overall contract score on a scale of 100. The higher the score, the more riskier the project.

This methodology is specifically suited for the project businesses: infra, construction, turn-key equipment supplies, power, renewable energy, oil & gas etc. Typically, all the subjects in the image below are covered:

You can also click on the image to access an example free-use tool: TRaCRs – Tender Risk and Contract Review system.  

Why should you use Contract Risk Scoring ?

Unbalanced contracts can become a hurdle for the achievement of your business targets. A general differentiation between “balanced vs unbalanced contract” is too vague, too qualitative as a concept. Contract Risk Scoring tools compute an overall score for the contract/project and include also detailed scores per topic (20 representative questions & answers).

If you are unfamiliar with the concept of Contract Risk Scoring, we recommend you to read the following article first: Contract Risk Scoring, 10 questions answered

4 decisions that can be made with a Contract Risk Scoring system

You can take the following decisions with the support of a Contract Risk Scoring system (and TRaCRs specifically):

1. Deciding whether you should go, or not, for a project.

The Go-No Go decision can be based on the overall Contract Risk Scoring. Typically, scores above 60 or 70 should strongly make you consider a “No Go” decision. Also, a combination of several high scores on specific topics can trigger a “No Go” decision. This is because the project would have too many hurdles so that you can no longer realistically expect to achieve your outcomes.

2. Deciding what are your target improvements during negotiation.

The subjects where a high risk-level answer (4 or 5) is applicable as per the RfQ (Request for Quotation), should get your attention. Either, you can accept the risks and mitigate / control them. Or, you identify them as a negotiation target to improve your position. If you don’t succeed, you can still take a “No Go” decision and get out of the project.

3. Deciding on what level of provisions you want to include in your pricing.

You are exposed to a risk when, in a certain number of scenarios, your company is going to lose money. Taking risk “for free” is not a good long-term strategy. And, believe me, companies do it more often than one imagines. This, due to a lack of acknowledgment and valuing of risks. Adverse scenarios will occur, sooner or later, as per their statistical probability. You can be lucky on a single contract. On a series of projects/contracts luck is not even an option and you have to make a provision to cope with the problems when they occur. You will keep unused provisions on projects where the risk doesn’t materialize for future projects. Like this, you can amortize the cost of overcoming specific risks over a project portfolio.

4. Deciding on what level of profit you want to have on a contract.

Of course, there is a correlation between risk taking and profit. If risky projects would not be more profitable, why would anyone go for them? Less risky projects are very attractive. Consequently, price competition is higher and profit margins go down. To tender successfully for a project, you need to be aware of the Contract Risk Scoring. With that information you can lower your margin for balanced contracts and increase it when you are taking higher risks.

Conclusion

Risk analysis is moving back to where it belongs, the decision process. Contract Risk Scoring tools help you to support the identification of the commercial & contractual hurdles that may stop you from achieving your desired outcomes. They help you to focus on the following:

  • implementation of mitigation actions,
  • establishment of acceptable risk and liability levels,
  • determination of provisions & margin levels etc.

TRaCRs is a free Contract Risk Scoring tool suitable for the construction business, for infrastructure projects, for power plants etc. The tool can be adapted for your specific business and expanded to focus on specific hurdles. Don’t hesitate to contact us so that we can discuss this in further detail for your specific case.

For further reading on Contract Risk Scoring, we recommend you the following publications:

Subcontractor, how to claim for delay in start-up of site works?

Back in the early days of my career, I was quite impressed by the following situation: I was working for the Main Contractor on a big shopping center & office tower construction project in Cairo. We had a waterproofing Subcontractor that was in fact more a supplier. Because of the size of this subcontract, he had accepted, for the first time, to take the much wider responsibility to also install his supplies. As Main Contractor, we were struggling to get the lowest basement floor dry (four levels below and close to the Nile river), probably due to an underdimensioned dewatering system. The work conditions for the Subcontractor were very poor (delays to start up, quite wet conditions etc). So, he made a claim for delay in site works. Our Project Director was furious. How could a small Subcontractor claim so “easily” to the Main Contractor? He was in for revenge. And, soon after, he got his opportunity. This Subcontractor got out of stock on his waterproofing material… putting part of the Main Contractor’s staff in standby mode and delaying the overall project. Not the best start to a happy Subcontractor career?

So, what is the best way for a Subcontractor to handle a delay in the start-up of its site works? Let’s analyse this step-by-step:

1. Negotiate a balanced Subcontract

The starting point of a healthy contractual relationship is a balanced contract. This is especially true between a powerful, but at the same time dependent, Main Contractor and a much smaller Subcontractor. The latter can harm in a disproportionate way to its actual stake in the project.

What do you need for a balanced subcontract?

  • Have a clear time schedule with interface milestones. You need to be able to identify, without ambiguity, when certain areas of the site must become available for the Subcontractor to work.
  • Have entitlements to EOT (extension of time) and clear rules for what happens if a party doesn’t timely fulfil its obligations (including suspension rights). Far too often, Main Contractors try to write subcontract agreements from their point of view only. Omitting all rights of the Subcontractor is not wise especially when worst comes to worst, dispute resolution.
  • Have early warning provisions and other reasonable contract language that some lawyers try to omit. A duty to mitigate for both parties, for example.

When Subcontractors offer the most valuable solution to the Main Contractor and are selected, they must have the confidence to negotiate. If not-enough inhouse capabilities are available, they should not hesitate to invest a bit in a safer future and engage advisors.

2. Follow-up site progress carefully and… communicate.

The Subcontractor should take an interest in the progress (and delay) of site works even before arriving there. A situation like the above can be anticipated when the interface milestone gets nearer. By efficient and honest communication between Main and Subcontractor, in the example above, there is no need for Subcontractor’s staff to stand by, looking at a desperate Main Contractor trying to get the site dry. A lot of these cases are lack of anticipation and parties “sticking their heads in the sand like an ostrich”.

3. Mitigate the consequences of a delay in start-up of site works and… communicate.

When the Subcontractor is informed (or becomes aware) that his site works will be delayed, rather than putting his “claim machine” in action, he should reflect on every way he can mitigate. Not all activities are on the critical path. Some delay in site works can be absorbed by free float, thus not delaying the overall project completion. Not all delay leads to stand-by costs. Anticipation and good-will can do miracles and the Subcontractor should positively communicate about all the mitigation actions he is putting into place. Avoid being supported by “claim hungry” advisers (internal or external).

4. Claim for what cannot be avoided and… communicate.

When true efforts have been put into the previous steps, anyone will understand that the Subcontractor may suffer from the situation and has a good basis for a claim. Anyone includes the Main Contractor, the Engineer and, god forbid, the Dispute (Avoidance and) Adjudication Board and the arbitration tribunal.

Conclusion:

Anticipation is the first ingredient for a healthy relationship between a Subcontractor and the Main Contractor: a balanced contract, clear milestones, good communication on progress etc. The second ingredient is true and honest mitigation of the consequences of the other party’s shortcomings (often resulting in delay in site works). Communicate, communicate, communicate… Do this on the status, the mitigation actions and the consequences that cannot be avoided. Only thereafter, a claim can be formulated in a reasonable and productive way.

By acting as described above, I am pretty sure that the Subcontractor serving as an example in this post would have been in a better situation. When the going gets tough… the smart get going.

Read other posts about claims and negotiation by clicking here.

Good results in April for AfiTaC.com, the blog on international Tenders & Contracts

Thank you all for your interest in our blog!

In the first real month for our blog AfiTaC.com (after 3 months’ of starting-up), we have obtained the following results:

  • 9 new publications in April in four languages (English, French, Portuguese and Dutch)
  • About 1100 different users
  • Visiting 2700 pages
  • From almost 100 countries, mostly concentrated in the “NW-SE band” (Canada to New Zealand): the blue countries in the above map
  • With the biggest audiences from the Netherlands (130), United States (108) and France (91)

The most successful post was “Thank you FIDIC for explaining changes introduced with FIDIC Rainbow Suite (ed. 2017)”, attracting 543 page views and more than 100 “likes” in the FIDIC groups.

Several series of publications covered the following subjects:

  • International standard contracts like FIDIC and World Bank
  • Risk review and Contract Risk Scoring
  • Contract negotiation, techniques and best practices (e.g. win-win)

In April, the series around “Contract Risk Scoring” was particularly popular with the following publications (totalling 481 page views):

The tool TRaCRs – Tender Risk and Contract Review system – was widely accessed (177x) for analysing tenders’ and projects’ commercial & contract conditions based on 20 questions with, as an outcome, the Contract Risk Scoring and a ranking of the tender/project risks per topic.

LinkedIn was the most important external interface. Our LinkedIn company page has steadily grown to 59 followers. A special thanks to these followers for their interest to receive more.

There is still a lot of margin to improve on our Q&A (Questions & Answers) section where only few questions were raised so far. We encourage all of you to also take benefit of this part of our website.

Conclusion: April has brought massive growth for this blog on international Tenders and Contracts. It exists in four languages: In English many similar sources of information exist. Also in French, there are several, our favourite one being www.contractence.fr. In Portuguese and Dutch, we seem to be filling a void, which is an extra motivation to serve these language communities (Brazil, Portugal, Mozambique, Angola, the Netherlands, Belgium etc).

Please keep reading us! Bookmark us in your browser; follow us on our LinkedIn page or on Twitter; and, if you appreciate an article, please let us know by providing a “like” or a “comment” or “share” it with others.  You may also contact us to become a guest blogger.

World Bank rules on Abnormally Low Bids – a new era?

Abnormally Low Bids definition

We are currently seeing a paradigm shift from (i) pure price based decisions (“Lowest Evaluated Bidder”) to (ii) a more complete analysis (“Most Advantageous Bid”). The World Bank (WB) recognizes that accepting Abnormally Low Bids and Proposals (ALB) can put the contract in jeopardy. It can lead to increased overall costs, contract delays or even the collapse of a contract. WB has given its guidance regarding Abnormally Low Bids and Proposals (ALB), which are defined as follows:

“An Abnormally Low Bid/Proposal is one in which the Bid/Proposal price, in combination with other elements of the Bid/Proposal, appears so low that it raises material concerns with the Borrower as to the capability of the Bidder/Proposer to perform the contract for the offered price.”

General principles

It is preferable for the Borrower (Owner/Employer) to avoid receiving Abnormally Low Bids. This can be achieved through:

  • adequate market research,
  • high quality documentation (RfQ),
  • engagement with the market,
  • a sufficiently long bid period,
  • a pre-qualification phase etc.

In the case of a suspected ALB, there is a requirement to undertake enhanced due diligence on the Bid. The comparison of the price can either be against the Borrower’s  budget or in comparison with other bids; we will further explain this below. Due to the complexity of establishing Abnormally Low Bids, the Client may require the input of independent consultants with technical knowledge and experience relevant to the specifications.

If the Bidder is unable to show he can complete the contract for the Bid price, the Bid must be rejected. Clearly, in case of suspected ALB, the burden of proof is on the Bidder. The due diligence regarding potential ALB price must happen before submission of the Bid evaluation report to WB for no-objection.

5 stages of evaluation

If we look more in detail to the process, we see identify 5 stages:

1. Identification of potential Abnormally Low Bids.

In any case, identification of ALB should be undertaken on Substantially Responsive Bids only (other Bids should be rejected on beforehand). An objective calculation can establish potential ALB, either with:

(i) the ‘absolute’ approach when fewer than 5 bids were received: We have a potential ALB if Bidder’s price is more than 20% below Borrower’s cost estimate; or

(ii) the ‘relative’ approach: We have a potential ALB, based on a statistical calculation, if the Low Bid is more than one standard deviation below the average of the Substantially Responsive Bids.

2. Clarification with the Bidder.

The Bidder’s capability to perform the contract within its total evaluated Bid price must be established. This is done based on detailed price analysis and on a correlation with the following factors:

  • scope,
  • methodology,
  • schedule, and
  • risk allocation.

A preliminary assessment shall first be performed:

  • Has the cost of materials minimal divergence between Bidders, as is usual?
  • Are items omitted from the price or consistently under-priced?

The Bidder shall not be asked, nor be allowed, to change its Bid during the evaluation process. The Borrower shall request clarifications to produce a detailed price analysis depending on the issues identified during the preliminary evaluation. The Borrower shall clearly state these issues. Some examples:

  • very low overhead & profit; or
  • a specific part of the contract with very low prices.

Any misrepresentation by the Bidder shall be subject to WB’s anti-fraud and corruption guidelines and may lead to sanctions. The Bidder shall provide a typical Bid price breakdown identifying separately:

  • the cost of Goods/Works (equipment, materials and labor),
  • Overhead,
  • Contingency, and
  • Profit.

3. The Bidder prepares a justification.

The Bidder’s justification should include all information requested by the Borrower. The Bidders shall also provide any documentary evidence used for determining its Bid price. Failure to provide the justifications shall lead to bid rejection. No Bidder shall be permitted to withdraw its Bid or add any cost element during the Bid validity period. The explanations may concern the following :

  • economics of manufacturing processes & services,
  • the technical solution,
  • the originality of the works / supplies or services,
  • the compliance with applicable standards etc.

4. The Borrower analyzes and verifies.

Suitably qualified personnel from, or working on behalf of, the Borrower shall fully analyze the information and evidence given by the Bidder. They shall check the consistency of prices in combination with other elements of the Bid. And also the consistency of resource inputs. The Borrower may evaluate previous satisfactory performance by the Bidder and contract implementation at similar prices.

The Borrower shall determine if the Bid price, in combination with other elements of the Bid, is unreasonably low. If the Borrower is not satisfied with Bidders demonstration of his capability to perform the contract successfully for the price submitted, then the Bid must be rejected, subject to WB no-objection.

5. The Borrower decides and obtains WB’s no-objection.

The Bid evaluation report shall include full details of the basis of Borrower’s decision, including the following:

  • unrealistic resource estimates by the Bidder,
  • Borrower’s estimates and any shortfall,
  • the recommended decision,
  • copies of all clarification exchanges and
  • Bidders objections to Borrower’s estimates (if applicable). 

If the Bidder has failed to demonstrate its capacity, it will lead to Bid rejection. If the Bidder fully demonstrates its capability to deliver the contract for the offered price, its Bid should be accepted.

Conclusion

World Bank’s new methodology regarding the identification of ALBs (Abnormally Low Bids and Proposals) provides Borrowers with a structured approach to address this issue. Projects financed by World Bank and Multilateral Development Banks will be in a better position to achieve maximum value for money.

You can find other publications on World Bank by clicking here.

Click here for publications regarding FIDIC contracts.

For the entire guideline, please find herewith the reference document from the World Bank’s website:

ProcurementGuidanceidentificationandtreatmentofAbnormallyLowBidsandProposals

What to expect from your FIDIC dispute adjudication board members

This article is selected on the internet by AfiTaC because of its interest for the readers of this blog (source: out-law.com) :

 

A dispute adjudication board (DAB) aims to stop disputes over FIDIC contracts ending up in commercial arbitration.

FIDIC is the International Federation of Consulting Engineers, known by its French acronym. It was formed in 1913, with the objective of promoting the interests of consulting engineering firms globally. It is best known for its range of standard conditions of contract for the construction, plant and design industries. The FIDIC forms are the most widely used forms of contract internationally, including by the World Bank, the Asian Development Bank, and the African Development Bank for their projects.

The DAB is the first step in the dispute resolution process for these contracts, and aims to resolve disputes before they go on to more formal arbitration. If it does its job well, a DAB can help both sides to see the truth of a situation and to accept its decision, so that arbitration is no longer needed.

That’s only going to happen if the DAB has the right panel members, with the right mix of skills, experience and empathy to understand the situation, make an informed decision and communicate that well to both parties.

This guide outlines the qualities that a DAB member should have.

Each DAB will have either one member or three, nominated by the parties involved in the dispute. To do the job well, these members must have:

  • experience in the specific field being investigated;
  • legal knowledge; and
  • language fluency.

A member with significant in-field experience in the type of construction contract being discussed is going to have a much better chance of understanding the practical, commercial and technical issues involved. This will give them a better chance of understanding both parties’ positions.

A good working knowledge of the relevant contract law as it applies to construction contracts is also needed, along with the ability to understand the often complex interactions of rights and obligations, and the ability to interpret a contract. This does not mean that the panel member needs to be a lawyer, but some knowledge of the relevant laws, and the ability to assess potentially contradictory interpretations of law, will lead to better decisions being made.

Language fluency is also essential, as the role will involve reading and analysing large quantities of information, including detailed contractual provisions, project records, plus written and oral submissions from the parties, witnesses, and legal authorities. An understanding of contractual language and of DAB proceedings is also needed.

Experience in resolving disputes in the industry is also useful, including familiarity with recognised techniques of dispute resolution.

Behaviour of members

A member of a DAB has to act fairly and impartially if the process is to work successfully. They can’t act as an advocate for, or represent, the party that nominated them, and parties should make sure that they nominate truly independent experts to the DAB.

Members are expected to disclose any facts or circumstances that might affect their independence or impartiality, and any conflicts of interest. In particular, they must not advise the parties or their employees on the contract.

Each party should be given a reasonable chance to put their case, and to respond to the other party’s case, and members must not express their opinions on the merits of either party’s argument.

Reasoned decisions

After considering the case the DAB has to present the parties with a well-organised, reasoned decision showing that all applicable rules and procedures have been followed. This should guide the parties through the legal principles involved, and explain all grounds for the final decision.

Well-argued decisions with rational explanations can speed the resolution of a claim, persuading both parties that the DAB has considered all aspects and come to a sensible conclusion.

The better and more convincing the reasons given, the more likely it is that parties will accept the decision and avoid going forward to arbitration. The DAB’s decision should make the strength of the winning party’s case clear to both parties.  If a member of a three-member DAB does not agree with the conclusions of the other two members then that member can be invited to publish a minority report. This prevents confusing or inconsistent decisions, or long deliberations to reach agreement.

Binding decision

The DAB’s decision is binding on both parties, and final if neither party submits a ‘notice of dissatisfaction’ within 28 days.

If the DAB members are experienced, fair, logical and independently-minded, and explain their (or the majority’s) decision well, they stand a better chance of instilling confidence that the dispute has properly considered and that the decision is fair and acceptable.

The original article can be found at this location: https://www.out-law.com/en/topics/dispute-resolution-and-litigation/arbitration-and-international-arbitration/what-to-expect-from-your-fidic-dispute-adjudication-board-members/

We can also recommend you the attached presentation by FIDIC:

PresentationCSeppFIDICandDisputeAdjudicationBoards