PROJECT FINANCE STRUCTURES COMMONLY INVOLVE PROJECT PARTIES , SUCH AS CONSTRUCTION CONTRACTORS , SUPPLIERS , OFFTAKERS AND OPERATIONS AND MAINTENANCE CONTRACTORS , WHO ARE AFFILIATED TO A SPONSOR OR HELP SECURE DEBT FOR THE PROJECT FROM THEIR HOME-COUNTRY ’ S EXPORT CREDIT AGENCY , OR EVEN PROVIDE LOANS DIRECTLY TO THE PROJECT COMPANY . BY RO LAZAROVITCH , PARTNER , AND ALISTAIR CALVERT , PARTNER , BRACEWELL ( UK ) LLP .

These relationships are often essential to a successful project financing and are even perceived as beneficial , since they encourage multiple project parties to pursue the common goal of a successful and profitable project . However , when the project doesn ’ t go to plan , the potential or actual conflicts of interest inherent in these relationships can harm the project and restrict the project company ’ s ability to fully exercise its rights . These challenges are particularly pertinent during the construction phase of a project , when the project company is subject to large expenses and does not have a source of income . This article will examine these relationships from the perspective of the project company in the context of construction disputes .

Construction disputes It will be the project company ’ s aim to have its project delivered on time , on budget and in accordance with agreed specifications . However , complex construction projects do not always run smoothly . Very rarely will a project be completed without encountering issues that lead to delays and changes in scope and cost . Delays and changes have real financial consequences and , therefore , disputes are a fact of life .

Contractual milestone dates and times for completion will be missed and may lead to project company claims for delay damages unless a contractor can argue that it should be entitled to an extension of time . It is also common for disputes to arise about the quality of a contractor ’ s work – which might be resolved during a project by correction or remedy , or afterwards in claims for breach of contract – and for payment disputes to arise in relation to variation , change or set-off . One likely effect of the global coronavirus ( Covid-19 ) pandemic will be to increase the number of disputes in the sector as parties seek extensions of time or suspensions of works .

Parties to construction contracts commonly agree to resolve their disputes by forms of alternative dispute resolution and , ultimately , arbitration . Disputes from the construction sector make up a significant percentage of reported arbitrations . For example , in each of 2017 , 2018 and 2019 – the most recent years for which such statistics are currently available – disputes from the construction sector made up around a quarter of the total number of cases filed with the ICC International Court of Arbitration . 1

Typically , construction contracts will contain provisions allowing the parties to make claims for extensions of time or additional payments . These often fall to be resolved by fair determination of the project company prior to escalation through a contractual dispute resolution process , if necessary . The majority of construction contracts will require forms of alternative dispute resolution prior to arbitration . Tiered dispute resolution clauses often include management discussions and / or expert resolution . At each stage of a dispute resolution process conflicts of interest may arise between stakeholders .

Other remedies may also be available to a project company . Contractors will often be obliged to provide security against their performance of the contract , upon which a project company can call . The most powerful remedy that a project company has against a contractor is the right to terminate a contractor ’ s contract , although it is a step that requires careful consideration as the consequences of a wrongful termination can be serious .

In the context of a project financing , the project company should also be aware of its obligations under the finance documents . For example , taking certain actions during the dispute resolution process may require lender consent , which could also give rise to potential conflicts of interest .

Whether or not a dispute between the project company and contractor progresses to adversarial proceedings or can be resolved before that stage , any dispute is likely to raise tensions between the various stakeholders within a project finance structure containing affiliated parties . Given the likelihood of disputes arising during the construction phase of a project , it is important to be aware of the various conflicts of interest that can exist within a stakeholder group and to seek upfront to mitigate the problems these conflicts of interest can give rise to .

Conflict of interest relationships In the context of project financing construction disputes , the key relationships to consider are : ( i ) a sponsor and an affiliated construction

70 Project Finance International May 6 2021