CONSTRUCTION FINANCING contractor ; ( ii ) a sponsor and an affiliated construction subcontractor ; ( iii ) lender and an affiliated construction contractor ; and ( iv ) an export credit agency ( ECA ) and a construction contractor .
• Sponsor and construction contractor – The most common potential conflict of interest is where the construction contractor is affiliated to one of the sponsors . The construction contractor ’ s group is an obvious candidate to invest equity in a project , given their extensive involvement in it . In addition , given the equity investment , the construction contractor might be more willing to agree to favourable contractual terms that are conducive to securing project financing .
To avoid conflicts of interest , the shareholder or joint venture agreement will usually restrict the construction contractor ’ s sponsor affiliate from making decisions about the construction contract , especially in the context of disputes . However , these restrictions are rarely full-proof . The construction contractor ’ s sponsor affiliate will usually still be privy , directly or indirectly , to the project company ’ s dispute management strategy , it will have copies of the sponsors ’ completion obligations and access to the financial model .
If the construction contractor gains access to this information , it could be used to weaken the project company ’ s dispute strategy . Moreover , during the course of complex construction disputes , the decisions required from the sponsors will extend beyond the dispute itself and may encapsulate matters such as taking actions to mitigate the impact of the construction delay or disruption , or securing additional funding . The construction contractor ’ s sponsor affiliate is unlikely to be excluded from these decisions , and may use veto or other powers in relation to these decisions to influence the outcome of the dispute with the construction contractor .
• Sponsor and construction subcontractor – Many of the works involved in the construction of a major project are subcontracted by the main construction contractor . Delay or disruption during the construction phase is likely to be related to , or even the direct result of , acts or omissions of construction subcontractors . Construction disputes between a project company and a construction contractor are therefore likely to be accompanied by disputes between the construction contractor and its subcontractors .
Where the subcontractor is affiliated to a sponsor , that sponsor may be tempted to intervene in the contractor-subcontractor dispute or even influence the terms of the project company-contractor dispute to improve the position of its affiliated subcontractor . A savvy construction contractor may also try to use the dispute with the subcontractor to improve its position in the dispute with the project company . In addition , to the extent a sponsor or the project company intervenes in the contractorsubcontractor relationship , this can negatively impact the legal rights and remedies of the project company under the construction contract .
• Lender and construction contractor – When there is no sponsor-construction contractor relationship , it is less common for the construction contractor to become a direct lender to the project . However , the construction contractor may in some cases and sectors , such as the oil and gas sector , decide to lend to the project company even in these circumstances , for example in the form of contingent loans to help manage potential cost overruns and ensure the bankability of the project .
These loans should be fully subordinated to the senior loans and the construction contractor ’ s enforcement rights heavily restricted , especially during the construction phase , to avoid the construction contractor leveraging its rights as a lender in case of a construction dispute . However , if the settlement of a construction dispute necessitates a restructuring of the financing of the project and the terms of the contractor ’ s loan also need to be amended as part of that restructuring , the construction contractor may use its leverage in that situation to help improve its position in the construction dispute .
• ECA and construction contractor – The other relationship to be aware of under this heading is that of the construction contractor and its home-country ’ s ECA . The ECA will often be an influential senior lender and , as an independent lender , will not be subject to restrictions on the exercise of its voting rights , including in relation to construction disputes . However , in most cases the ECA will have an existing relationship with the construction contractor across multiple projects and will have only participated in the project because of the construction contractor ’ s involvement .
ECAs generally have strict policies that require them to exercise discretions independently and not to support other project parties , either directly or indirectly , in case of a dispute between the project company and that project party . However , even where such formal measures exist , the potential impact of the ECA-construction contractor relationship cannot be discounted . The ECA ’ s opinion on what constitutes a fair settlement of the construction dispute will be an important consideration for the project company , especially where the outcome of the dispute may pose an existential threat to the construction contractor and the ECA would not want to be seen to contribute to the insolvency of a national champion .
Mitigation and management Notwithstanding these challenges , affiliated project parties are often essential to a successful project financing and are not likely to disappear any time soon . The starting point for mitigating the impact of these relationships in the construction context will be to minimise the potential for construction disputes . Measures such as ensuring the front-end engineering
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