and design ( FEED ) is comprehensive and realistic , implementing effective oversight of the construction contractor , incorporating early warning signs into the construction contract to help address issues before they become material and a clear and simple contractor liability regime , including liquidated damages and performance bonds , can help reduce the number and extent of construction disputes . However , the potential conflicts should also be addressed in the broader context of the project financing , including :
• Contractual measures outside the construction contract – during the structuring phase it is important to evaluate how these relationships might impact the project company , discuss them with counterparties and address them in the relevant documents . This may include restricting a party from voting or influencing the outcome of decisions where a direct conflict of interest arises , providing that related discretions should be exercised “ acting reasonably ” and preparing bespoke mechanisms to deal with specific scenarios that are likely to arise in case of a dispute . In the finance documents , giving the lenders ’ technical adviser a prominent role in guiding the lender group ’ s decisions in case of construction disputes can help establish an objective yardstick .
• Due diligence – The relationship between affiliated project parties should be part of due diligence undertaken at the structuring phase . For example , what information barriers ( if any ) exist between the affiliates , do they operate independently of each other or ultimately report to the same decision-maker , for example the CEO , and how have other conflicts of interest been managed by these affiliates in the past .
• Balanced risk allocation – Ensuring a balanced allocation of risk between the different project parties can also help minimise disputes and conflicts of interest . For example , imposing disproportionately strict obligations on the construction contractor may seem like a good idea for the project company initially . However , it could backfire if the construction contractor agreed to those obligations because it believed its affiliation with a sponsor would mean those obligations would not be enforced ( or not be enforced in full ) in practice . This belief may be held notwithstanding that project financing agreements will typically contain provisions requiring project companies to enforce their rights under the project documents .
Once a dispute arises , the potential conflict of interest relationships should be evaluated early on , including the contractual terms applicable in the circumstances , how these conflicts might impact the dispute and what tools are available to the project company to ensure that it can act in its own best interests . This evaluation should be revisited regularly and addressed on a case-by-case basis .
In conclusion , it is very difficult in practice to completely avoid having affiliated project parties . However , with proper planning at the structuring phase of the project and effective management during a dispute , many of the negative impacts can be successfully mitigated . These lessons are also relevant to project parties other than the project company , including sponsors , finance parties , contractors , suppliers and offtakers . Each party should conduct its own analysis and ensure that its interests are fairly protected . •
Footnote
1 – 2017 ICC Dispute Resolution Statistics https :// library . iccwbo . org / content / dr / STATISTICAL _ REPORTS / SR _ 0040 . htm ? l1 = Statistical + Reports 2018 ICC Dispute Resolution Statistics https :// library . iccwbo . org / content / dr / STATISTICAL _ REPORTS / SR _ 0041 . htm ? l1 = Statistical + Reports 2019 ICC Dispute Resolution Statistics https :// file-eu . clickdimensions . com / iccwboorg-avxnt / files / 2019statistics _ icc _ disputeresolution _ 901 . pdf ? m = 11 / 24 / 2020 % 2011:42:12 % 20AM &_ cldee = YWxpc3R haXIuY2FsdmVydEBicmFjZXdlbGwuY29t & recipientid = co ntact-e4445749196deb11a812000d3ad967f1-d93ce35011a 74d5f99b79356c6c77916 & esid = 6312365e-8304-4f9a-8926- 471a27eab232
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72 Project Finance International May 6 2021